-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TXHK1Fwe0TBTxFmhLsQPPmf28srTd2DEXpxGiF19VOpucgjVjn5Ej2vFc2dtlfoW k4nw219yOG4jh489LW6mBw== 0000912057-96-016936.txt : 19960812 0000912057-96-016936.hdr.sgml : 19960812 ACCESSION NUMBER: 0000912057-96-016936 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19960809 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARACELSUS HEALTHCARE CORP CENTRAL INDEX KEY: 0000758722 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-GENERAL MEDICAL & SURGICAL HOSPITALS, NEC [8062] IRS NUMBER: 953565943 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-07289 FILM NUMBER: 96607596 BUSINESS ADDRESS: STREET 1: 155 N LAKE AVE STE 1100 CITY: PASADENA STATE: CA ZIP: 91101 BUSINESS PHONE: 8187928600 S-1/A 1 S-1A AMENDMENT #2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 9, 1996 REGISTRATION NO. 333-07289 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PARACELSUS HEALTHCARE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 8062 95-3565943 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification Number)
-------------------------- 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: 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
-------------------------- 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
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 Common Stock, no stated value per share... 6,243,350 shares(2) $10.25 $63,994,338 $22,068(3)
(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933. (2) Includes 814,350 shares that the Underwriters have the option to purchase to cover over-allotments, if any. (3) $36,004 of the fee has been paid previously. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PARACELSUS HEALTHCARE CORPORATION CROSS REFERENCE SHEET REQUIRED BY ITEM 501(B) OF REGULATION S-K
REGISTRATION STATEMENT ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS - ---------------------------------------------------------------- ----------------------------------------------------- 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 and Operating Data; Paracelsus Management's Discussion and Analysis of Financial Condition and Results of Operations; Champion Selected Historical Consolidated Financial and Operating Data; Champion Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Executive Compensation; Certain Relationships and Related Transactions; Principal Shareholders; Description of Capital Stock; Available Information; Financial Statements. 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities...................... Not applicable.
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. SUBJECT TO COMPLETION, DATED AUGUST 9, 1996 PROSPECTUS , 1996 5,429,000 SHARES [LOGO] PARACELSUS HEALTHCARE CORPORATION COMMON STOCK Of the 5,429,000 shares of Common Stock being offered hereby, 5,200,000 shares are being sold by Paracelsus Healthcare Corporation (the "Company") and 229,000 shares are being sold by the Selling Shareholders. See "Selling Shareholders." The Company will not receive any of the proceeds from the sale of shares by the Selling Shareholders. 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 49,447,167 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 New York Stock Exchange under the symbol "CHC." The last reported trading price for Champion Common Stock on August 8, 1996 was $10 1/8 per share. See "Underwriting." The Common Stock has been approved for listing on the New York Stock Exchange under the symbol "PLS," subject to official notice of issuance. Concurrently with the Equity Offering, the Company is offering $325,000,000 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.
PRICE UNDERWRITING PROCEEDS PROCEEDS TO TO THE DISCOUNTS AND TO THE THE SELLING PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS Per Share.................. $ $ $ $ Total(3)................... $ $ $ $
(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 $794,446. (3) THE UNDERWRITERS HAVE BEEN GRANTED AN OPTION, EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF UP TO 814,350 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, PROCEEDS TO THE COMPANY AND PROCEEDS TO THE SELLING SHAREHOLDERS WILL BE $ , $ , $ AND $ , RESPECTIVELY. SEE "UNDERWRITING." The shares of Common Stock are being offered by the several Underwriters when, as and if delivered to and accepted by the 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 BEAR, STEARNS & CO. INC. SMITH BARNEY INC. THE CHICAGO CORPORATION [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 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND THE DOCUMENTS REFERRED TO HEREIN. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN TO "PARACELSUS" REFER TO PARACELSUS HEALTHCARE CORPORATION PRIOR TO THE MERGER OF CHAMPION HEALTHCARE CORPORATION ("CHAMPION") WITH AND INTO A WHOLLY OWNED SUBSIDIARY OF PARACELSUS (THE "MERGER"). REFERENCES TO THE "COMPANY" REFER TO PARACELSUS AFTER THE MERGER AND INCLUDE THE COMBINED OPERATIONS OF PARACELSUS AND CHAMPION. IN ADDITION, ALL REFERENCES TO PROCEEDS FROM THE NOTES OFFERING OR THE OFFERINGS (EACH AS DEFINED BELOW) AND, EXCEPT AS OTHERWISE PROVIDED, THE OTHER INFORMATION IN THIS PROSPECTUS ASSUME (I) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION WITH RESPECT TO SHARES OF COMMON STOCK BEING OFFERED BY THE COMPANY AND (II) THE PURCHASE OF $75.0 MILLION PRINCIPAL AMOUNT OF PARACELSUS' 9 7/8% SENIOR SUBORDINATED NOTES DUE 2003 (THE "EXISTING SENIOR SUBORDINATED NOTES") IN THE DEBT TENDER OFFER (AS DEFINED BELOW). CERTAIN STATEMENTS UNDER THIS CAPTION "PROSPECTUS SUMMARY" CONSTITUTE "FORWARD-LOOKING STATEMENTS" UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT (THE "REFORM ACT"). SEE "RISK FACTORS -- FORWARD-LOOKING STATEMENTS." THE COMPANY Paracelsus is a leading healthcare company that owns and operates acute care and specialty hospitals and related healthcare businesses serving selected markets in the United States. Paracelsus currently owns and operates 18 acute care hospitals with a total of 1,685 licensed beds in California, Utah, Tennessee, Texas, Florida, Georgia and Mississippi. Paracelsus' acute care hospitals provide a broad array of general medical and surgical services on an inpatient, outpatient and emergency basis. In addition, certain hospitals and their related facilities offer rehabilitative medicine, substance abuse treatment, psychiatric care and Acquired Immune Deficiency Syndrome ("AIDS") care. In California, Paracelsus also owns and operates three psychiatric hospitals with 218 licensed beds, four skilled nursing facilities with 232 licensed beds and a 60-bed rehabilitative hospital. In addition, Paracelsus owns and operates 11 home health agencies and 16 medical office buildings adjacent to certain of its hospitals. For the 12 months ended March 31, 1996 on a pro forma basis after giving effect to acquisitions and dispositions, Paracelsus would have had total operating revenues of $516.9 million, Adjusted EBITDA (as defined below) of $55.8 million and a net loss of $3.1 million. The net loss includes an unusual charge recorded in March 1996 of $22.4 million related to the settlement of two lawsuits ($13.2 million, net of income tax benefit). On April 12, 1996, Paracelsus entered into an Agreement and Plan of Merger, as amended and restated on May 29, 1996 (the "Merger Agreement"), with Champion pursuant to which Champion will become a wholly owned subsidiary of the Company. Champion currently owns and operates five acute care hospitals with a total of 722 licensed beds in Utah, Texas and Virginia and owns a 50% interest in, and operates, a partnership that owns two additional acute care hospitals with a total of 341 licensed beds in North Dakota under the name "Dakota Heartland Health System" ("DHHS"). Champion's acute care hospitals generally offer the same types of services provided by Paracelsus' acute care hospitals. Champion also owns and operates two psychiatric hospitals with a total of 219 licensed beds in Missouri and Louisiana. For the 12 months ended March 31, 1996 on a pro forma basis after giving effect to acquisitions and dispositions, Champion would have had net revenue of $198.2 million, Adjusted EBITDA of $32.2 million and net income of $3.9 million. Following the Merger, the Company will operate 31 hospitals in 11 states, including 25 acute care hospitals with 2,748 licensed beds, five psychiatric hospitals with 437 licensed beds and a rehabilitative hospital with 60 licensed beds. On a pro forma combined basis for the 12 months ended March 31, 1996, after giving effect to the Offerings, the Company would have had total operating revenues of $714.8 million, Adjusted EBITDA of $88.1 million and a net loss of $6.9 million. The net loss includes the unusual charge related to the settlement of two lawsuits. These pro forma combined results do not give effect to any cost savings that management believes will be realized as a result of the Merger due to the combination of the corporate operations of Paracelsus and Champion and the elimination of 3 certain corporate consulting contracts of Paracelsus. In addition, the combined entity should benefit from economies of scale in such areas as purchasing, marketing, information systems, risk management, acquisitions and development, accounting, reimbursement, corporate finance and quality assurance. The Company believes that the Merger represents a unique opportunity to integrate the operations of two companies that have a complementary portfolio of hospitals. Upon completion of the Merger, 22 of the 31 hospitals owned or operated by the Company will be located in markets where a hospital or hospital network operated by the Company is a preeminent provider. On a pro forma combined basis (excluding the PHC Salt Lake Hospital (as defined below) and the two hospitals owned by DHHS), the remaining 19 hospitals would have accounted for approximately 71% and 89% of the 28 remaining hospitals' operating revenues and Adjusted EBITDA, respectively, for the 12 months ended March 31, 1996. Following the Merger, the Company believes that it will be better positioned to implement its business strategy due to its greater scale and diversity of operations, expanded geographic presence and enhanced access to the public capital markets and other financing sources. The Company also believes that it will benefit from the addition to Paracelsus' management team of three key Champion executives who, following the Merger, will have primary responsibility for day to day management of the Company. These Champion executives have an average of 29 years of hospital industry experience and a proven track record in operating and growing publicly held hospital companies. Over the past five years, these executives grew Champion's net revenue at a compounded annual growth rate of 62.0%, from $24.3 million in 1991 to $167.5 million in 1995, while improving its Adjusted EBITDA margins from 9.4% in 1991 to 15.8% in 1995 and 19.2% for the three months ended March 31, 1996. After the Merger, the Company's principal executive offices will be located at 515 West Greens Road, Suite 800, Houston, Texas 77067. Its telephone number will be (713) 873-6623. BUSINESS STRATEGY The Company's strategic objective is to establish each of its hospitals or hospital networks as the provider of choice in its market. To accomplish this, the Company first seeks to establish a presence in geographic locations that are best suited to developing a preeminent market position. These locations primarily include small to mid-sized markets with more favorable demographics and lower levels of penetration by managed care plans and alternative niche competitors than larger metropolitan areas. Moreover, the competing hospitals in the Company's target markets frequently will be not-for-profit facilities that the Company believes have higher cost structures than its hospitals. Second, the Company focuses on implementing operating strategies developed by the Company for positioning each of its hospitals or hospital networks as providers of measurably higher quality and lower cost healthcare services than competing providers. The key elements of the Company's operating strategies are as follows: EXPAND STRATEGICALLY THROUGH SELECTED ACQUISITIONS The Company plans to continue to pursue expansion opportunities through the strategic acquisition of hospitals and complementary healthcare businesses in existing or new markets. The Company has demonstrated this strategy most recently by successfully acquiring four hospitals and a home health agency in the Salt Lake City market. The Company believes that its primary sources of acquisitions will be unaffiliated not-for-profit hospitals and facilities being divested by hospital systems for strategic, regulatory or performance reasons. INCREASE MARKET PENETRATION The Company seeks to increase the market penetration of its hospitals by offering a full range of hospital and related healthcare services and by gaining market share from local competitors by providing measurably higher quality and lower cost services. For example, this strategy has been successfully demonstrated by the addition of obstetrics programs at each of The Medical Center of 4 Mesquite and Westwood Medical Center during the past 12 months. In addition, over the past 24 months the Company has acquired or established five home health agencies that cover 26 counties in Tennessee, providing a large referral base for the Company's four hospitals in that market. ESTABLISH A COMPETITIVE COST ADVANTAGE The Company seeks to position each of its hospitals as the low cost provider in its market by monitoring and controlling fixed and variable operating expenses. Champion's executives have demonstrated an ability to reduce costs as indicated by the improvement in Champion's Adjusted EBITDA margins from 9.4% in 1991 to 15.8% in 1995 and 19.2% for the three months ended March 31, 1996. Labor costs are a primary focus of such efforts, and Champion's executives have reduced salaries, wages and benefits as a percentage of net revenue at Champion's hospitals (including DHHS) from 38.2% in 1994 to 37.9% in 1995 and 35.4% for the three months ended March 31, 1996. The Company believes that a low cost provider is better able to succeed in the current healthcare environment by aggressively pricing its managed care contracts and direct employer arrangements and by maintaining profitability under fixed payment systems. IMPLEMENT A COMPETITIVE QUALITY ADVANTAGE The Company believes that preventing errors in the treatment process can improve quality and lower the cost of care by reducing the risk of adverse events to patients and the consequential costs of such events. For the past two years, the Company has piloted a proprietary program in four of its hospitals designed to identify and measure the incidence of patient treatment errors in 225 separate clinical categories. The Company believes the capability to quantify data regarding the quality of care in its hospitals will enable the Company to reduce the cost of care and will enhance the ability of its hospitals to win and profit from managed care contracts. DEVELOP A COMPETITIVE SERVICE ADVANTAGE The Company believes that bureaucratic and impersonalized customer service is a historical structural deficiency within the hospital industry caused by service systems, policies and procedures that are designed for the convenience of physicians and hospitals rather than patients, payors and employers. The Company is developing a proprietary customer service system that it believes will differentiate its hospitals and facilities from those of its competitors and provide a competitive advantage. REQUIRE LOCAL MANAGEMENT ACCOUNTABILITY The provision of high quality healthcare services is primarily a local business, and the Company's business strategy and operating programs emphasize local management initiative, responsibility and accountability combined with corporate support and oversight. REFINANCINGS IN CONNECTION WITH THE MERGER The Company has filed a registration statement with respect to $325,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006 (the "Notes") that it plans to offer (the "Notes Offering") concurrently with the offering (the "Equity Offering" and, together with the Notes Offering, the "Offerings") of the shares of the Company's common stock, no stated value per share (the "Common Stock"), made hereby. The Company currently intends that a portion of the estimated aggregate net proceeds to the Company from the Offerings of $364.6 million (consisting of $49.8 million from the Equity Offering and $314.8 million from the Notes Offering) will be used by Champion to prepay an estimated $170.6 million of outstanding Champion indebtedness (plus $6.6 million of prepayment premiums) as of June 30, 1996. The remaining net proceeds to the Company from the Offerings will be used to reduce outstanding indebtedness under either the existing Paracelsus credit facility (the "Existing Paracelsus Credit Facility") or the new credit facility (the "New Credit Facility") that the Company intends to establish as soon as practicable at or after the effective time of the Merger (the "Effective Time"), as applicable. In addition, the Company has commenced a tender offer to purchase up to $75.0 million aggregate principal amount of outstanding Existing Senior Subordinated Notes for $1,027.50 per $1,000 principal amount of Existing Senior Subordinated Notes (the "Debt Tender Offer"). The 5 Debt Tender Offer will expire on August 22, 1996 and, as of August 8, 1996, $66.7 million aggregate principal amount of the Existing Senior Subordinated Notes has been tendered in the Debt Tender Offer. A portion of the remaining net proceeds of the Offerings will be used to purchase Existing Senior Subordinated Notes tendered pursuant to the Debt Tender Offer and to pay consent payments of up to $1.5 million in the aggregate to be made in connection with the related consent solicitation to amend the terms of the indenture relating to the Existing Senior Subordinated Notes. 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 at or after the Effective Time, through borrowings under the New Credit Facility, all amounts outstanding under the Existing Paracelsus Credit Facility (the "Credit Facility Refinancing"). The New Credit Facility will provide for borrowings of up to $400.0 million, of which $135.9 million would have been outstanding as of June 30, 1996 on a pro forma basis after giving effect to the Offerings and the Credit Facility Refinancing and the application of the net proceeds therefrom. THE EQUITY OFFERING COMMON STOCK OFFERED BY THE COMPANY (1)............. 5,200,000 shares COMMON STOCK OFFERED BY THE SELLING SHAREHOLDERS(1).................................... 229,000 shares TOTAL........................................... 5,429,000 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 $364.6 million (consisting of $49.8 million from the Equity Offering and $314.8 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 $170.6 million of outstanding Champion indebtedness (plus $6.6 million of prepayment premiums) as of June 30, 1996. The remaining estimated net proceeds of $187.4 million will be used to purchase up to $75.0 million of Existing Senior Subordinated Notes in the Tender Offer (plus approximately $3.9 million of tender and consent fees and other related expenses) and to reduce outstanding indebtedness under the Existing Paracelsus Credit Facility or the New Credit Facility, as applicable. See "Risk Factors -- Significant Leverage," "The Merger and Financing" and "Use of Proceeds." NEW YORK STOCK EXCHANGE ("NYSE") SYMBOL............. "PLS"
- ------------------------ (1) Does not include up to 814,350 shares of Common Stock subject to the Underwriters' over-allotment option. The over-allotment option may be granted by the Selling Shareholders or the Company. (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 July 10, 1996. RISK FACTORS 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 COMMON STOCK OFFERED HEREBY. 6 SUMMARY UNAUDITED PRO FORMA FINANCIAL AND OPERATING DATA The Summary Unaudited Pro Forma Financial and Operating Data set forth below have been derived from the Company Unaudited Pro Forma Condensed Combining Financial Statements included elsewhere in this Prospectus. The Summary Unaudited Pro Forma Financial and Operating Data reflect the effect of the consummation of the Offerings, in each case as if such transactions had occurred at the beginning of each period presented for purposes of the pro forma income statement and operating data and on March 31, 1996 for purposes of the pro forma balance sheet data. The Summary Unaudited Pro Forma Financial and Operating Data set forth below also give effect to the Merger and the acquisitions and dispositions completed by Paracelsus and Champion since the beginning of each of the periods presented. The Summary Unaudited Pro Forma Financial and Operating Data set forth below and the Company Unaudited Pro Forma Condensed Combining Financial Statements included elsewhere herein do not purport to present the financial position or results of operations of the Company had the transactions and events assumed therein occurred on the dates specified, nor are they necessarily indicative of the results of operations that may be expected in the future. The Summary Unaudited Pro Forma Financial and Operating Data set forth below is qualified in its entirety by reference to, and should be read in conjunction with, the Company Unaudited Pro Forma Condensed Combining Financial Statements included elsewhere in this Prospectus. The Company currently intends to adopt a December 31 year end. Paracelsus currently reports its financial information on the basis of a September 30 fiscal year. Champion currently reports its financial information on the basis of a December 31 year. The Summary Unaudited Pro Forma Financial and Operating Data for the fiscal year ended September 30, 1995 includes Paracelsus' historical results of operations for the fiscal year ended September 30, 1995 and Champion's historical results of operations for the year ended December 31, 1995. The Summary Unaudited Pro Forma Financial and Operating Data for the six months ended March 31, 1995 and 1996 includes Paracelsus' and Champion's historical results of operations for the same six month periods. The Summary Unaudited Pro Forma Balance Sheet Data includes the historical balance sheets of Paracelsus and Champion as of March 31, 1996. See "The Merger and Financing," "Company Unaudited Pro Forma Condensed Combining Financial Statements," "Paracelsus and Champion Unaudited Pro Forma Condensed Combining Financial Statements," "Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements" and "Champion Unaudited Pro Forma Condensed Combining Statements of Income and Unaudited Historical Condensed Balance Sheet." 7 SUMMARY UNAUDITED PRO FORMA FINANCIAL AND OPERATING DATA
SIX MONTHS ENDED MARCH 31, FISCAL YEAR ENDED ------------------------------ SEPTEMBER 30, 1995 1995 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA) 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.................................. 32,362 15,703 17,502 Interest....................................................... 37,989 19,310 19,644 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..................................... 684,067 340,680 378,253 ---------- --------------- ------------- Income (loss) before minority interests and income taxes......... 12,832 6,560 (9,698) Minority interests............................................... (1,927) (1,204) (1,072) ---------- --------------- ------------- Income (loss) before income taxes................................ 10,905 5,356 (10,770) Income taxes (benefit)........................................... 4,561 3,181 (3,873) ---------- --------------- ------------- Net income (loss)................................................ $ 6,344 $ 2,175 $ (6,897) ---------- --------------- ------------- ---------- --------------- ------------- Income (loss) per share.......................................... $ 0.11 $ 0.04 $ (0.13) ---------- --------------- ------------- ---------- --------------- ------------- Weighted average number of common and common equivalent shares outstanding..................................................... 55,524 55,527 52,201 ---------- --------------- ------------- ---------- --------------- ------------- OPERATING DATA: Adjusted EBITDA (5).............................................. $ 85,433 $ 40,369 $ 48,732 Adjusted EBITDA margin........................................... 12.3% 11.6% 13.2% Capital expenditures (6)......................................... $ 62,553 $ 18,170 $ 21,388 Ratio of Adjusted EBITDA to interest expense..................... 2.2x 2.1x 2.5x Ratio of net debt to Adjusted EBITDA (7)......................... -- -- 4.3x
AS OF MARCH 31, 1996 BALANCE SHEET DATA: Cash and cash equivalents................................. $ 8,819 Working capital........................................... 112,167 Total assets.............................................. 842,388 Total debt................................................ 389,016 Shareholders' equity...................................... 260,197
- ------------------------------ (1) Includes pro forma interest income of $2,375, $1,429 and $1,144 for the fiscal year ended September 30, 1995 and the six months ended March 31, 1995 and 1996, respectively. (2) Champion operates DHHS pursuant to an operating agreement and accounts for its investment in DHHS under the equity method. DHHS began operations on December 31, 1994. (3) Restructuring and unusual charges consisted of special bonuses of $4,177 (or $0.04 per share, net of taxes) paid to certain executive officers of Paracelsus. (4) Settlement costs of $22,356 (or $0.25 per share, net of taxes) consisted of settlement payments, legal fees and the write-off of certain accounts receivable in connection with the settlement of two lawsuits. (5) "Adjusted EBITDA" represents income before income taxes, depreciation and amortization, interest, cumulative effect of accounting change, restructuring and unusual charges, settlement costs, gains (losses) from disposal of facilities and extraordinary items. While Adjusted EBITDA is not a substitute for operating cash flows determined in accordance with generally accepted accounting principles, it is a commonly used tool for measuring a company's ability to service debt. (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 12 months ended March 31, 1996. 8 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 ability to increase the number of its facilities and services offered. Part of the Company's business strategy is to expand its facilities and services through the acquisition of hospitals, other healthcare businesses and ancillary healthcare providers and recruitment of additional physicians. There can be no assurance that suitable acquisitions, for which other healthcare companies (including those with greater financial resources than the Company) may be competing, can be accomplished on terms favorable to the Company or that financing, if necessary, can be obtained for such acquisitions. See "-- Significant Leverage." In addition, there can be no assurance that the Company will be able to operate profitably any hospital facility, business or other asset it may acquire, effectively integrate the operations of such acquisitions or otherwise achieve the intended benefits of such acquisitions. LIMITS ON REIMBURSEMENT The Company's hospitals are licensed under applicable state law and certified as providers under the Federal Medicare program and state Medicaid programs, from which the Company derived in total approximately 58% and 60% of its combined historical gross operating revenues for the fiscal year ended September 30, 1995, and the six months ended March 31, 1996, respectively. Such programs are highly regulated and subject to frequent and substantial changes. In recent years, basic changes in Medicare reimbursement programs have resulted, and are expected to continue to result, in reduced levels of reimbursement for a substantial portion of hospital procedures and costs. In addition, further changes are anticipated that are likely to result in further limitations on reimbursement levels. There can be no assurance that reimbursement will continue to be available for those procedures and costs of the Company currently reimbursed by Medicare and Medicaid. See "Business -- Medicare, Medicaid and Other Revenue." In addition, private payors, including managed care payors, increasingly are demanding discounted fee structures or the assumption by healthcare providers of all or a portion of the financial risk of delivering healthcare to their members through prepaid capitation arrangements. Inpatient utilization, admissions and occupancy rates continue to be negatively affected by payor-required pre- admission authorization and utilization review and by payor pressure to substitute less expensive outpatient and alternative healthcare services for inpatient procedures for less acutely ill patients. See "-- Competition." In addition, efforts to impose reduced allowances, greater discounts and more stringent cost controls by government and other payors are expected to continue. These changes could adversely affect the Company's financial condition and results of operations. In particular, as the number of patients covered by managed care payors increases, significant limits on the scope of services reimbursed and on reimbursement rates and fees could have a material adverse effect on the Company's financial condition and results of operations. EXTENSIVE REGULATION The healthcare industry is subject to extensive Federal, state and local regulation relating to licensing, conduct of operations, ownership of facilities, addition of facilities and services and prices for services. In particular, Medicare and Medicaid antifraud and abuse amendments codified under Section 1128B(b) of the Social Security Act (the "Antifraud Amendments") prohibit certain business practices and relationships that might affect the provision and cost of healthcare services reimbursable under Medicare and Medicaid. Sanctions for violating the Antifraud Amendments include criminal penalties and civil sanctions, including fines and possible exclusion from the Medicare and Medicaid programs. Pursuant to the Medicare and Medicaid Patient and Program Protection Act of 1987, the Department of Health and Human Services ("HHS") has issued regulations that describe some of the conduct and business relationships permissible under the Antifraud Amendments (the "Safe Harbors"). The fact that a given business arrangement does not fall within a Safe Harbor does not render the arrangement PER SE illegal. Business arrangements of healthcare service providers that fail to satisfy the applicable Safe Harbor criteria, however, risk increased scrutiny by enforcement authorities. 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 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 The Company cannot predict whether any of the above proposals or any other proposals will be adopted, and, if adopted, no assurance can be given that the implementation of such legislation will not have a material adverse effect on the Company's financial condition or results of operations. DEPENDENCE ON KEY PERSONNEL AND PHYSICIANS The Company's operations are dependent on the efforts, ability and experience of its key executive officers. In addition, the Company's continued growth depends on its ability to attract and retain skilled employees, on the ability of its officers and key employees to manage growth successfully and on the Company's ability to attract and retain quality physicians and management teams at its facilities. Further, since physicians generally control the majority of hospital admissions, the success of the Company is, in part, dependent upon the number, specialties and quality of physicians on its hospitals' medical staffs, most of whom have no long-term contractual relationship with the Company and may terminate their association with the Company's hospitals at any time. No assurance can be given that the loss of some or all of these key executive officers or an inability to attract or retain sufficient numbers of qualified physicians or hospital management teams will not have a material adverse effect on the Company's financial condition or results of operations. CONCENTRATION OF OPERATIONS Of the 31 hospital facilities to be operated by the Company after consummation of the Merger, five will be located in the Salt Lake City metropolitan area. On a pro forma combined basis, excluding the effect of the Company's acquisition of assets relating to FHP Hospital, a 125-bed acute care hospital, and its surrounding campus, in Salt Lake City (the "PHC Salt Lake Hospital"), these hospitals would have accounted for 25% and 34% of the Company's total hospital operating revenues and Adjusted EBITDA, respectively, for the 12 months ended March 31, 1996. The Company expects that total hospital operating revenues and Adjusted EBITDA anticipated to be received by the Company in connection with the operation of PHC Salt Lake Hospital will further increase the contribution of the Utah operations to the Company's total hospital operating revenues and Adjusted EBITDA. See "Business -- Recent Transactions." The Company's management believes that its strategy of acquiring hospitals in the Salt Lake City area will enhance its ability to compete for managed care contracts and organize and structure an integrated healthcare delivery system in that market, although there can be no assurance that such strategy will be successful. In addition, the Company has eight hospitals in the Los Angeles metropolitan area, a competitive and overbedded environment. On a pro forma combined basis, these hospitals would have accounted for 23% and 9% of the Company's total hospital operating revenues and Adjusted EBITDA, respectively, for the 12 months ended March 31, 1996. The Company may be particularly sensitive to economic, competitive and regulatory conditions in these metropolitan areas, and the future success of the Company may be substantially affected by its ability to compete effectively in these markets. 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 approximately 54% 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. 12 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" and "-- Right of First Refusal Agreement." 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 Shareholder 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 June 30, 1996, as adjusted on a pro forma basis to give effect to the Merger and the Offerings, the Company's total indebtedness, including the current portion of long-term indebtedness and capital lease obligations, would have been $484.5 million, which represents 65% of its total capitalization. See "Capitalization." In addition, upon consummation of the Offerings and the Credit Facility Refinancing, the Company expects to have $264.1 million available credit under the New Credit Facility (before reduction of $9.7 million for commitments outstanding under letters of credit), all of which will be permitted to be borrowed under the New Credit Facility and the Indenture governing the Notes (the "New Indenture") in accordance with their terms. On a pro forma basis, after giving effect to the Merger and the Offerings and the application of the net proceeds therefrom, the Company's earnings would have been insufficient to cover fixed charges by $9.7 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 and the New Indenture, which in turn could have a material adverse effect on the Company's financial condition and results of operations. 13 The degree to which the Company is leveraged and the covenants described above may adversely affect the Company's ability to finance its future operations and could limit its ability to pursue business opportunities that may be in the interest of the Company and its security holders. In particular, changes in medical technology, existing, proposed and future legislation, regulations and the interpretation thereof, and the increasing importance of managed care contracts and integrated healthcare delivery systems may require significant investment in facilities, equipment, personnel or services. Although the Company expects that cash generated from operations and amounts available under the New Credit Facility will be sufficient to allow it to make such investments, there can be no assurance that the Company will be able to obtain the funds necessary to make such investments. Furthermore, tax-exempt or government-owned competitors have certain financial advantages such 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 Issuance and Sale." Upon consummation of the Merger (without giving effect to the Equity Offering), 49,447,167 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 outstanding 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, as amended (the "Securities Act"), under registration rights agreements with the Company. After giving effect to the Equity Offering, and assuming all Selling Shareholders sell the shares of Common Stock as indicated in "Selling Shareholders," the shares of Common Stock covered by these registration rights will include 29,771,742 shares beneficially owned by the Paracelsus Shareholder and approximately 11,527,000 shares beneficially owned by certain Champion stockholders and warrant holders prior to the Merger (the "Champion Investors"). In addition, the Company currently intends to register up to 10,087,137 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 120 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 14 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." 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." The Common Stock has been approved for listing on the NYSE upon consummation of the Merger under the symbol "PLS," subject to official notice of issuance. 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 THE MERGER AND FINANCING THE MERGER; PARACELSUS STOCK SPLIT On April 12, 1996, Paracelsus, PC Merger Sub, Inc., a Delaware corporation and a newly formed wholly owned subsidiary of Paracelsus, and Champion entered into the Merger Agreement pursuant to which Champion will become a wholly owned subsidiary of Paracelsus. Prior to the Effective Time, each of the 450 issued and outstanding shares of Common Stock will be split into, and each share will become and thereafter represent, 66,159.426 shares of Common Stock (the "Paracelsus Stock Split"). At the Effective Time, as a result of the Merger, (i) each share of Champion common stock (the "Champion Common Stock") will automatically be converted into the right to receive one share of Common Stock and (ii) each share of Champion preferred stock (the "Champion Preferred Stock" and, together with the Champion Common Stock, the "Champion Capital Stock") will automatically be converted into the right to receive two shares of Common Stock. Approval of the Merger requires (i) the affirmative vote of the holders of a majority of the total voting power represented by the outstanding shares of Champion Capital Stock, voting together as a single class, (ii) the affirmative vote of the holders of at least 90% of the outstanding shares of Champion Series C Cumulative Convertible Preferred Stock, voting as a separate class and (iii) the affirmative vote of the holders of at least 90% of the outstanding shares of Champion Series D Cumulative Convertible Preferred Stock, voting together as a separate class. The holders of all of the outstanding shares of Champion Preferred Stock, which in the aggregate represent approximately 26% of the total voting power of the outstanding shares of Champion Capital Stock, have entered into an agreement with Champion to vote all shares of Champion Preferred Stock beneficially owned by them in favor of the Merger. PARACELSUS DIVIDEND PRIOR TO EFFECTIVE TIME Prior to the Effective Time, Paracelsus will declare a dividend (the "Dividend") in the amount of approximately $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 indenture with respect to the Existing Senior Subordinated Notes (including without limitation the New Credit Facility); (ii) the Existing Senior Subordinated Notes, to the extent outstanding; (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 has received commitments for the New Credit Facility with Bank of America National Trust and Savings Association ("Bank of America NT&SA"), as Administrative Agent, Banque Paribas, as Documentation Agent, and NationsBank of Texas, N.A., as Managing Agent, and a syndicate of other lenders and intends to consummate the Credit Facility Refinancing 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 June 30, 1996, the balance outstanding under the Existing Paracelsus Credit Facility was approximately $198.0 million. Although the Merger 16 is not conditioned upon the closing of the Credit Facility Refinancing, if the Credit Facility Refinancing is not consummated Champion and Paracelsus may be required to obtain certain consents and waivers under their respective existing credit facilities in order to consummate the Merger. The failure to obtain such consents and waivers may be deemed to give rise to a default thereunder and perhaps cause other defaults under the outstanding obligations of Champion and Paracelsus. There can be no assurance that such consents and waivers, if required, would be obtained. Although the Company currently intends to consummate the Credit Facility Refinancing concurrently with or promptly following the consummation of the Notes Offering, all references in this Prospectus to the Company's indebtedness, unless the context otherwise requires, assume that the Credit Facility Refinancing has not occurred and that the Existing Paracelsus Credit Facility is in effect. See "Risk Factors -- Significant Leverage." FINANCING PLAN The following sets forth as of June 30, 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 $10.25 per share and (ii) $325,000,000 aggregate principal amount of Notes are sold by the Company in the Notes Offering at 100% of their principal amount.
(IN THOUSANDS) SOURCES OF FUNDS Equity Offering................................................................................... $ 53,300 Notes Offering.................................................................................... 325,000 -------------- Total..................................................................................... $ 378,300 -------------- -------------- USE OF FUNDS Existing Paracelsus Credit Facility/New Credit Facility (1)....................................... $ 108,599 Existing Senior Subordinated Notes................................................................ 75,000 Tender and consent fees and other related expenses for Existing Senior Subordinated Notes............................................................... 3,938 Champion Credit Facility (as defined below)....................................................... 65,600 Champion Series D Notes (as defined below)........................................................ 59,258 Champion Series E Notes (as defined below)........................................................ 35,000 Certain other Champion indebtedness............................................................... 10,697 Prepayment premiums on Champion indebtedness...................................................... 6,555 Estimated fees and expenses (2)................................................................... 13,653 -------------- Total..................................................................................... $ 378,300 -------------- --------------
- ------------------------ (1) After giving effect to the Offerings and the application of net proceeds therefrom, $131.9 million would have been outstanding under the Existing Paracelsus Credit Facility as of June 30, 1996 on a pro forma basis. After giving effect to the consummation of the Credit Facility Refinancing, this amount would be $135.9 million (assuming fees and expenses to effect the Credit Facility Refinancing of $4.0 million). (2) Includes estimated underwriting discounts and commissions and other estimated expenses of the Company in connection with the Offerings. 17 USE OF PROCEEDS The Company intends that a portion of the estimated aggregate net proceeds to the Company of $49.8 million ($ million if the over-allotment option is exercised) from the Equity Offering and $314.8 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 June 30, 1996: (i) $65.6 million outstanding under Champion's existing credit facility (the "Champion Credit Facility") (which currently bears interest at the weighted average rate of 8.6% per annum and matures on March 31, 1999); (ii) $59.3 million outstanding principal amount of Champion's 11% Series D Subordinated Notes due December 31, 2003 (the "Champion Series D Notes"), plus prepayment premiums equal to 6% of the face value of such notes; (iii) $35.0 million outstanding principal amount of Champion's 11% Series E Senior Subordinated Notes due December 31, 2003 (which currently bears interest at the rate of 11.5% per annum) (the "Champion Series E Notes" and, together with the Champion Series D Notes, the "Champion Notes"), plus prepayment premiums equal to 6% of the face value of such notes; and (iv) $10.7 million principal amount of certain other outstanding Champion indebtedness (which currently bears interest at the rate of 13.05% per annum and matures on November 1, 2008), plus aggregate prepayment premiums equal to approximately $900,000. The estimated remaining aggregate net proceeds to the Company of $187.4 million from the Offerings will be used (i) to purchase up to $75.0 million aggregate principal amount of outstanding Existing Senior Subordinated Notes pursuant to the Debt Tender Offer and pay consent fees and other related expenses of approximately $3.9 million and (ii) to reduce outstanding indebtedness under the Existing Paracelsus Credit Facility or the New 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 CAPITALIZATION The following table sets forth the cash and cash equivalents, short-term debt and capitalization of the Company at March 31, 1996 (i) as adjusted to give effect to the Merger and (ii) as further adjusted to give effect to the Offerings and the application of the net proceeds therefrom, in each case as if such transactions had occurred on March 31, 1996. The Equity Offering is not contingent upon the consummation of the Notes Offering. See "The Merger and Financing" and "Use of Proceeds."
ADJUSTED FOR ADJUSTED THE MERGER FOR AND THE THE MERGER OFFERINGS (DOLLARS IN THOUSANDS) Cash and cash equivalents (1).......................................................... $ 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 (2).............................................. $ 137,109 $ 34,036 Champion Credit Facility............................................................. 66,200 -- Mortgages payable, notes and capitalized leases...................................... 37,596 27,516 Existing Senior Subordinated Notes (3)............................................... 75,000 -- Notes offered through the Notes Offering............................................. -- 325,000 Champion Series D Notes (4).......................................................... 63,705 -- Champion Series E Notes (5).......................................................... 34,371 -- ----------- ----------- Total long-term debt............................................................... 413,981 386,552 ----------- ----------- Shareholders' equity: Preferred Stock, $0.01 par value (6)................................................. -- -- Common stock, no stated value (7).................................................... 173,370 223,205 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 36,560 ----------- ----------- Total shareholders' equity......................................................... 218,368 260,197 ----------- ----------- Total capitalization............................................................. $ 632,349 $ 646,749 ----------- ----------- ----------- -----------
- -------------------------- (1) As of June 30, 1996, combined historical cash and cash equivalents was $15,175. (2) Does not reflect an aggregate of $103,373 of net additional borrowings by the Company between March 31, 1996 and June 30, 1996 under the Existing Paracelsus Credit Facility, $86,750 of which was incurred to fund a portion of the $22,356 in settlement costs and the acquisition of the PHC Salt Lake Hospital assets for $70,000 in cash. There are no operating results relating to the acquired PHC Salt Lake Hospital assets included in this Prospectus. The remaining $11,017 of net additional borrowings included $10,441 to reduce amounts outstanding under the accounts receivable financing program. Such additional borrowings will be refinanced as part of the Credit Facility Refinancing. See "Paracelsus Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations" and "Business -- Recent Transactions." (3) To the extent Existing Senior Subordinated Notes are not tendered or purchased pursuant to the Debt Tender Offer, the Company will reduce its borrowings under the Existing Paracelsus Credit Facility or the New Credit Facility, as applicable. (4) Does not reflect a $4,447 reduction in borrowings as a result of certain warrant holders tendering Champion Series D Notes to exercise such warrants. (5) Net of discount of $629. (6) As adjusted for the Merger, 25,000,000 shares authorized and 1,500,000 shares designated as "Participating Preferred Stock." (7) 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 COMPANY UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS The Company Unaudited Pro Forma Condensed Combining Financial Statements set forth below have been derived from the Paracelsus and Champion Unaudited Pro Forma Condensed Combining Financial Statements included elsewhere in this Prospectus. The Company Unaudited Pro Forma Condensed Combining Financial Statements reflect the effect of the consummation of each of the Offerings, in each case as if such transactions had occurred at the beginning of each period presented for purposes of the pro forma income statements and on March 31, 1996 for purposes of the pro forma balance sheet data. The Company Unaudited Pro Forma Condensed Combining Financial Statements also give effect to the Merger and the acquisitions and dispositions by each of Paracelsus and Champion completed since the beginning of each of the periods presented. The Company currently intends to adopt a December 31 year end. Paracelsus currently reports its financial information on the basis of a September 30 fiscal year. Champion currently reports its financial information on the basis of a December 31 year. The Company Unaudited Pro Forma Condensed Combining Statement of Income for the fiscal year ended September 30, 1995 includes Paracelsus' historical results of operations for the fiscal year ended September 30, 1995 and Champion's historical results of operations for the year ended December 31, 1995. The Company Unaudited Pro Forma Condensed Combining Statement of Income for the six months ended March 31, 1995 and 1996 includes Paracelsus' and Champion's historical results of operations for the same six-month periods. The Company Unaudited Pro Forma Condensed Combining Balance Sheet includes the historical balance sheets of Paracelsus and Champion as of March 31, 1996. The Company Unaudited Pro Forma Condensed Combining Financial Statements set forth below and the Paracelsus and Champion Unaudited Pro Forma Condensed Combining Financial Statements, the Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements and the Champion Unaudited Pro Forma Condensed Combining Statements of Income included elsewhere herein do not purport to present the financial position or results of operations of Paracelsus and Champion had the transactions and events assumed therein occurred on the dates specified, nor are they necessarily indicative of the results of operations that may be expected in the future. The Company Unaudited Pro Forma Condensed Combining Financial Statements set forth below are qualified in their entirety by reference to, and should be read in conjunction with, the Paracelsus and Champion Unaudited Pro Forma Condensed Combining Financial Statements, the Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements and the Champion Unaudited Pro Forma Condensed Combining Statements of Income and Unaudited Historical Condensed Balance Sheet included elsewhere in this Prospectus. See "Risk Factors -- Significant Leverage," "The Merger and Financing," "Paracelsus Management's Discussion and Analysis of Financial Condition and Results of Operations," "Champion Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Recent Transactions." 20 COMPANY UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA)
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 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 $ 727(1) 32,362 32,362 Interest..................................... 36,803 2,150(2) 38,953 $ (964)(4) 37,989 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 2,877 685,031 (964) 684,067 ----------- ------------- ------------- ------ ------------- Income before minority interests and income taxes......................................... 14,745 (2,877) 11,868 964 12,832 Minority interests............................. (1,927) (1,927) (1,927) ----------- ------------- ------------- ------ ------------- Income before income taxes..................... 12,818 (2,877) 9,941 964 10,905 Income taxes................................... 5,346 (1,180)(3) 4,166 395(3) 4,561 ----------- ------------- ------------- ------ ------------- Net income..................................... $ 7,472 $ (1,697) $ 5,775 $ 569 $ 6,344 ----------- ------------- ------------- ------ ------------- ----------- ------------- ------------- ------ ------------- Income per share............................... $ 0.15 $ 0.11 $ 0.11 ----------- ------------- ------------- ----------- ------------- ------------- Weighted average number of common and common equivalent shares outstanding................. 50,324 50,324 5,200(4) 55,524 ----------- ------------- ------ ------------- ----------- ------------- ------ -------------
See notes to Company unaudited pro forma condensed combining financial statements. 21 COMPANY UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME FOR THE SIX MONTHS ENDED MARCH 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA)
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 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 $ 365(1) 15,703 15,703 Interest..................................... 17,099 2,211(2) 19,310 19,310 Equity in earnings of DHHS................... (2,363) (2,363) (2,363) ----------- ------------- ------------- ------------- Total costs and expenses....................... 338,104 2,576 340,680 340,680 ----------- ------------- ------------- ------------- Income before minority interests and income taxes.............................. 9,136 (2,576) 6,560 6,560 Minority interests............................. (1,204) (1,204) (1,204) ----------- ------------- ------------- ------------- Income before income taxes..................... 7,932 (2,576) 5,356 5,356 Income taxes................................... 4,237 (1,056)(3) 3,181 3,181 ----------- ------------- ------------- ------------- Net income..................................... $ 3,695 $ (1,520) $ 2,175 $ 2,175 ----------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- 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 ----------- ------------- ------ ------------- ----------- ------------- ------ -------------
See notes to Company unaudited pro forma condensed combining financial statements 22 COMPANY UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME FOR THE SIX MONTHS ENDED MARCH 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
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 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 $ 365(1) 17,502 17,502 Interest........................................... 19,686 1,602(2) 21,288 $ (1,644)(4) 19,644 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 1,967 379,897 (1,644) 378,253 ----------- ------------- ------------- ------------- ------------- Loss before minority interests and income taxes.................................... (9,375) (1,967) (11,342) 1,644 (9,698) Minority interests................................... (1,072) (1,072) (1,072) ----------- ------------- ------------- ------------- ------------- Loss before income taxes............................. (10,447) (1,967) (12,414) 1,644 (10,770) Income tax benefit................................... (3,741) (806)(3) (4,547) 674(3) (3,873) ----------- ------------- ------------- ------------- ------------- Net loss............................................. $ (6,706) $ (1,161) $ (7,867) $ 970 $ (6,897) ----------- ------------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- ------------- 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 ----------- ------------- ------------- ------------- ----------- ------------- ------------- -------------
See notes to Company unaudited pro forma condensed combining financial statements. 23 COMPANY UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET MARCH 31, 1996 (IN THOUSANDS)
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 ASSETS Current assets: Cash and cash equivalents................... $ 8,819 $ 325,000(5) $ 8,819 $ 49,835(4) $ 8,819 (325,000)(5) (49,835)(4) Marketable securities....................... 10,051 10,051 10,051 Accounts receivable, less allowance for uncollectibles............................. 136,422 136,422 136,422 Supplies.................................... 13,524 13,524 13,524 Deferred income taxes....................... 47,630 5,564(6) 53,194 53,194 Other current assets........................ 7,687 7,687 7,687 ----------- ----------------- -------------- -------------- -------------- Total current assets...................... 224,133 5,564 229,697 -- 229,697 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 8,008(1) 159,745 159,745 ----------- ----------------- -------------- -------------- -------------- Total assets.............................. $ 828,816 $ 13,572 $ 842,388 $ -- $ 842,388 ----------- ----------------- -------------- -------------- -------------- ----------- ----------------- -------------- -------------- -------------- 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 22,406(5) 436,387 $ (49,835)(4) 386,552 Deferred income taxes......................... 47,590 47,590 47,590 Other long-term liabilities................... 30,519 30,519 30,519 Shareholders' equity.......................... 218,368 (8,006)(6) 210,362 49,835(4) 260,197 ----------- ----------------- -------------- -------------- -------------- Total liabilities and shareholders' equity................................... $ 828,816 $ 13,572 $ 842,388 $ -- $ 842,388 ----------- ----------------- -------------- -------------- -------------- ----------- ----------------- -------------- -------------- --------------
See notes to Company unaudited pro forma condensed combining financial statements. 24 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 $325,000,000 Notes Offering. The Notes are assumed to have a term of 10 years, with deferred financing costs and estimated expenses assumed to equal approximately $10,188,000. Deferred financing costs are assumed capitalized in long-term assets and amortized over the term of the Notes. The pro forma increase in long-term assets is net of approximately $2,180,000 in deferred financing cost associated with the Existing Senior Subordinated Notes, which are assumed written off in connection with the repurchase of such Existing Senior Subordinated Notes pursuant to the Debt Tender Offer (see Note 6). The following table summarizes the pro forma change in amortization of deferred financing costs:
SIX MONTHS ENDED MARCH 31, FISCAL YEAR ENDED -------------------- SEPTEMBER 30, 1995 1995 1995 Notes......................................... $ 1,019 $ 510 $ 510 Less Existing Senior Subordinated Notes....... (292) (145) (145) ------- --------- --------- Pro forma adjustment to amortization expense...................................... $ 727 $ 365 $ 365 ------- --------- --------- ------- --------- ---------
See "Risk Factors -- Significant Leverage" and "The Merger and Financing." (2) To record a pro forma net increase in interest expense in connection with the Notes Offering. The Unaudited Pro Forma Condensed Combining Statements of Income assume that the Notes have an annual interest rate of 10% and that net proceeds from the Notes Offering are used to pay the following: (i) the Champion Notes, including prepayment premiums equal to 6% of the face value of the Champion Notes; (ii) amounts outstanding under the Champion Credit Facility; (iii) the pro forma increases in the Champion Credit Facility as reflected in Champion Unaudited Pro Forma Condensed Combining Statements of Income included elsewhere herein; (iv) amounts outstanding under certain other Champion indebtedness; (v) the Existing Senior Subordinated Notes, including consent and tender fees and other related expenses estimated to total approximately 5.25% of the face value of the Existing Senior Subordinated Notes; and (vi) 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 (vi), the "Old Debt Amounts"). The Old Debt Amounts averaged approximately $327,012,000 for the fiscal year ended September 30, 1995, and approximately $308,366,000 and $382,082,000 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 $812,500 for the fiscal year ended September 30, 1995 and $406,250 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) To reflect the consummation of the Equity Offering and the application of the estimated net proceeds of $49,835,000 therefrom to reduce outstanding indebtedness under the Existing Paracelsus Credit Facility. On a pro forma basis, after application of estimated net proceeds of $314,812,000 from the issuance of the Notes, amounts outstanding under the Existing Paracelsus Credit Facility averaged approximately $12,200,000 and $67,270,000 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 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):
PRO FORMA PRO FORMA ADJUSTMENTS ADJUSTMENTS TO CASH TO DEBT Notes offered through the Notes Offering.......................... $ 325,000 $ 325,000 ----------- ------------ ----------- Uses: Existing Paracelsus Credit Facility, including pro forma amounts........................................................ $ 53,238 $ (53,238) Existing Senior Subordinated Notes.............................. 75,000 (75,000) Estimated fees and expenses -- Existing Senior Subordinated Notes............................. 3,938 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......................................... 10,188 Prepayment premiums on Champion Notes and other Champion indebtedness................................................... 6,823 Unamortized Discount on Champion Notes.......................... 629 ----------- ------------ Pro forma adjustment -- total uses................................ 325,000 (303,422) ----------- ------------ ----------- Net pro forma adjustment to long-term debt ($(828) -- Current; $22,406 -- Long-term)............................................ $ 21,578 ------------ ------------
(6) To record the effect on shareholders' equity for the extraordinary loss from early extinguishment of debt and the related deferred tax assets at the effective rate (41%) resulting from the following Notes Offering-related events (in thousands): Prepayment premiums on Champion Notes and other Champion debt....................................... $ 6,823 Estimated fees and expenses -- Existing Senior Subordinated Notes.................. 3,938 Deferred financing costs -- Existing Senior Subordinated Notes.................. 2,180 Unamortized discount on Champion Notes............... 629 ----------- Total.............................................. 13,570 $ 13,570 Income tax benefit at the effective rate............. 41% ----------- Pro forma adjustment to current deferred tax assets............................................ $ 5,564 (5,564) ----------- ----------- ----------- Pro forma adjustment to shareholders' equity for the extraordinary loss from early extinguishment of debt (a)....................................... $ 8,006 ----------- -----------
- ------------------------ (a) Extraordinary loss from early extinguishment of debt has not been reflected in the Unaudited Pro Forma Condensed Statements of Income for the periods presented. After giving effect to the Merger and the Offerings, pro forma loss per share would have been as follows if such loss had been reflected in the Company Unaudited Pro Forma Condensed Combining Statements of Income:
SIX MONTHS ENDED MARCH 31, FISCAL YEAR ENDED -------------------- SEPTEMBER 30, 1995 1995 1996 Loss per share............................................... $ (0.03) $ (0.11) $ (0.29) ------ --------- --------- ------ --------- ---------
26 PARACELSUS SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA The following tables set forth selected historical financial data and other operating information for Paracelsus for the five fiscal years ended September 30, 1995 and for the six months ended March 31, 1995 and 1996. The selected historical financial data for the five fiscal years ended September 30, 1995 has been derived from the audited consolidated financial statements of Paracelsus and from the underlying accounting records of Paracelsus. The selected historical financial information for the six months ended March 31, 1995 and 1996 has been derived from the unaudited condensed consolidated financial statements of Paracelsus and reflects all adjustments (consisting of normal recurring adjustments) that, in the opinion of the management of Paracelsus, are necessary for a fair presentation of such information. Operating results for the six months ended March 31, 1996 are not necessarily indicative of the results that may be expected for fiscal 1996. All information set forth below should be read in conjunction with "Paracelsus Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the consolidated financial statements and related notes of Paracelsus included elsewhere in this Prospectus.
SIX MONTHS FISCAL YEARS ENDED SEPTEMBER 30, ENDED MARCH 31, ----------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 (IN THOUSANDS) 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
AS OF SEPTEMBER 30, AS OF MARCH 31, ----------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 (IN THOUSANDS) 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
27 (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, 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. 28 PARACELSUS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN STATEMENTS UNDER THIS CAPTION "PARACELSUS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONSTITUTE "FORWARD-LOOKING STATEMENTS" UNDER THE REFORM ACT. SEE "RISK FACTORS -- FORWARD-LOOKING STATEMENTS." The following should be read in conjunction with the Consolidated Financial Statements of Paracelsus and the related notes thereto included elsewhere in this Prospectus. RESULTS OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1996 COMPARED TO SIX MONTHS ENDED MARCH 31, 1995 The results of operations discussed below compare the operating results for the six months ended March 31, 1996 to the operating results for the six months ended March 31, 1995. Paracelsus closed Bellwood Health Center on April 24, 1995 (the "Closed Facility"). All Paracelsus healthcare facilities outside California are referred to as the "Eastern Region Facilities." Operating revenues increased 3.3% to $260,590,000 for the six months ended March 31, 1996 from $252,356,000 for the comparable period in the prior year. After excluding operating revenues of the Closed Facility, operating revenues on a same-hospital basis increased $13,574,000, or 5.5%. This increase was principally due to an increase of $7,856,000 in the home health agency operating revenues generated by the Eastern Region Facilities, resulting from an increase of 125,953, or 52.2%, in home health agency visits. The remaining increase in operating revenues is attributed to the increase in outpatient visits, principally in the Eastern Region Facilities. Salaries and benefits increased 4.2% to $113,162,000 for the six months ended March 31, 1996 from $108,575,000 for the comparable period in the prior year. After excluding salaries and benefits of the Closed Facility, salaries and benefits increased $6,289,000, or 5.9%, offset by decreased salaries and benefits relating to the subcontracting of pharmacy purchases and management activities described below. This increase was principally due to an 11.1% increase in the employee workforce at the Eastern Region Facilities to service the expansion of the home health agency programs. In addition, the employee workforce was increased at the Eastern Region Facilities to service the increased volume of outpatient services. As a percentage of operating revenues, salaries and benefits increased to 43.4% for the six months ended March 31, 1996 from 43.0% for the comparable period in the prior year. Supplies decreased 9.7% to $19,363,000 for the six months ended March 31, 1996 from $21,432,000 for the comparable period in the prior year. The decrease was principally due to a reduction in pharmacy supplies expense for the six months ended March 31, 1996 of $2,835,000 as a result of the subcontracting in June 1995 of Paracelsus' pharmacy purchases and management activities to a pharmacy management company. Paracelsus also reduced its non-pharmacy supplies expense due to improved purchasing terms and price reductions received under its group purchasing contract. As a percentage of operating revenues, supplies decreased to 7.4% for the six months ended March 31, 1996 from 8.5% for the comparable period in the prior year. Purchased services increased 21.5% to $34,174,000 for the six months ended March 31, 1996 from $28,118,000 for the comparable period in the prior year due to the pharmacy management company contract, which increased purchased services by $3,665,000, and an increase in the home health agency programs' purchased services of $927,000 in the Eastern Region Facilities. As a percentage of operating revenues, purchased services increased to 13.1% for the six months ended March 31, 1996 from 11.1% for the comparable period in the prior year. Provision for bad debts increased 4.7% to $20,191,000 for the six months ended March 31, 1996 from $19,283,000 for the comparable period in the prior year, due primarily to an increase in provision for bad debts at two of the psychiatric facilities as a result of reductions in payments received for psychiatric services. As a percentage of operating revenues, provision for bad debts increased to 7.7% for the six months ended March 31, 1996 from 7.6% for the comparable period in the prior year. 29 During March 1996, Paracelsus recognized a charge for the settlement of two lawsuits totaling $22,356,000. The charge included the settlement payments, the payment of legal fees associated with the lawsuits and the write-off of certain psychiatric accounts receivable. FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994 The results of operations discussed below compare the operating results for the fiscal year ended September 30, 1995 to the operating results for the fiscal year ended September 30, 1994. Paracelsus sold Womans Hospital on September 30, 1995 and Advanced Healthcare Diagnostics Services, a mobile diagnostics business, in August 1995 (collectively, the "Sold Facilities"), and acquired Jackson County Hospital on September 5, 1995 and Keith Medical Group on August 1, 1995 (collectively, the "Acquired Facilities"). Operating revenues increased to $509,729,000 in 1995 from $507,864,000 in 1994, an increase of $1,865,000, or 0.4%. Included in the $509,729,000 operating revenues in 1995 is a net gain from the sale of the Sold Facilities of $9,026,000. After excluding the operating revenues of the Acquired Facilities, the Closed Facility and the Sold Facilities, and the net gain from the sale of the Sold Facilities, operating revenues on a same-hospital basis increased to $478,659,000 in 1995 from $471,808,000 in 1994, an increase of $6,851,000 or 1.5%. This increase in operating revenues was caused by growth in same-hospital outpatient volume. On a same-hospital basis, outpatient visits increased by 7.6% in 1995, while inpatient admissions decreased by 1.0% in 1995. The significant increase in outpatient visits in 1995 was primarily a result of Paracelsus' expansion into the home health services business, especially in its Eastern Region Facilities, and also the further introduction of additional outpatient services at several of Paracelsus' facilities. The decrease in admissions was primarily a result of the effect of managed care contracts and the shifting of inpatient care to outpatient services, especially at the California hospitals, where admissions, on a same-hospital basis, decreased by 4.9%. Total costs and expenses as a percentage of operating revenues, after excluding the net gain from the sale of the Sold Facilities from operating revenues, increased to 97.0% in 1995 from 95.4% in 1994. The primary reasons for this increase were the effect of the 1995 restructuring and an unusual charge of $5,150,000, which included severance benefits and contract termination costs of $973,000 for the closure of the Closed Facility and certain executives' special bonuses of $4,177,000 for services provided to Paracelsus. The closure costs and special bonuses increased operating costs and expenses as a percentage of operating revenues by 1.0%. Salaries and benefits decreased to $209,672,000 in 1995 from $209,772,000 in 1994, a decrease of $100,000. As a percentage of operating revenues, after excluding the net gain from the sale of the Sold Facilities, salaries and benefits increased to 41.9% in 1995 from 41.3% in 1994. This increase was mainly a result of annual merit pay increases, offset in part by reductions in staffing at several of the facilities. Supplies decreased to $40,780,000 in 1995 from $42,890,000 in 1994, a decrease of $2,110,000, or 4.9%. The decrease in supplies is mainly a result of Paracelsus' emphasis on reducing inventory levels, more favorable terms resulting from Paracelsus' group purchasing contract and price reductions negotiated directly with vendors. Purchased services increased to $58,113,000 in 1995 from $55,078,000 in 1994, an increase of $3,035,000, or 5.5%, and as a percentage of operating revenues, after excluding the net gain from the sale of the Sold Facilities, increased to 11.6% in 1995 from 10.9% in 1994. Of the $3,035,000 increase, $2,349,000, or 77.4%, was caused by increases in purchased medical services mainly resulting from the increase in outpatient volume. The provision for bad debts increased to $39,277,000 in 1995 from $33,110,000 in 1994, an increase of $6,167,000, or 18.6%, and increased as a percentage of operating revenues, after excluding the net gain from the sale of the Sold Facilities, to 7.8% in 1995 from 6.5% in 1994. Of the $6,167,000 30 increase in 1995, $5,037,000, or 81.7%, was attributed to the three psychiatric facilities. The increase in the provision for bad debts at the three psychiatric facilities is attributed to the reductions in payments received for psychiatric services. Other operating expenses as a percentage of operating revenues decreased to 19.9% in 1995 from 22.5% in 1994. This reduction is mainly a result of lower medical malpractice liability costs and reductions in non-medical supplies, property insurance, rental/lease expense and consulting expenses. Depreciation and amortization increased to $17,276,000 in 1995 from $16,565,000 in 1994, an increase of $711,000, or 4.3%. This increase is mainly the result of capital expenditures made during 1995. Interest expense increased to $15,746,000 in 1995 from $12,966,000 in 1994, an increase of $2,780,000, or 21.4%. This increase was mainly caused by an increase in Paracelsus' average outstanding borrowings under the then existing credit facility and an increase in interest rates on the then existing credit facility and the commercial paper program. Minority interests decreased to $1,927,000 in 1995 from $2,517,000 in 1994, a decrease of $590,000, or 23.4%. This decrease was caused mainly by a decrease in the volume of business at two of Paracelsus' podiatry joint ventures, one of which was terminated during 1995, and an obesity surgery joint venture that was also terminated during 1995. FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993 The results of operations discussed below compare the operating results for the fiscal year ended September 30, 1994 to the operating results for the fiscal year ended September 30, 1993. Paracelsus acquired Desert Palms Community Hospital on August 31, 1993, Halstead Hospital on June 30, 1993 and Elmwood Medical Center on March 1, 1993 (collectively, the "1993 Acquisitions"). Operating revenues increased to $507,864,000 in 1994 from $435,102,000 in 1993, an increase of $72,762,000, or 16.7%. Of this increase, $57,694,000 or 79.3% was attributable to the 1993 Acquisitions for which there was a full 12 months of operations in 1994. Excluding the 1993 Acquisitions, operating revenues on a same-hospital basis increased $15,068,000, or 3.7%. This increase in operating revenues was due primarily to an increase in gross outpatient revenues to $209,849,000 in 1994 from $187,646,000 in 1993, an increase of $22,203,000, or 11.8%. The growth in outpatient services continues to result in part from the introduction of additional outpatient services at several of Paracelsus' facilities. Paracelsus' management believes the decline in inpatient occupancy rates to 42.6% in 1994 from 42.9% in 1993 resulted primarily from increased efforts by payors to reduce inpatient hospitalization, and to shift medical services to lower cost outpatient settings whenever possible. However, the reduction in occupancy rates between 1994 and 1993 is not as significant as was experienced between 1993 and 1992. Total costs and expenses as a percentage of operating revenues increased to 95.4% in 1994 from 94.2% in 1993. Through a continued effort to reduce other operating expenses, Paracelsus made reductions during 1994 in its insurance costs, including malpractice and workers' compensation. As a percentage of operating revenues, other operating expenses decreased to 22.5% in 1994 from 23.1% in 1993. Purchased services increased to $55,078,000 in 1994 from $48,951,000 in 1993, an increase of $6,127,000, or 12.5%. However, as a percentage of operating revenues, purchased services decreased to 10.9% in 1994 from 11.3% in 1993. The provision for bad debts increased to $33,110,000 in 1994 from $26,629,000 in 1993, an increase of $6,481,000, or 24.3%. After excluding the 1993 Acquisitions, the provision for bad debts increased by $2,574,000, or 10.1%. The increase was due primarily to higher provisions for bad debts at the three psychiatric facilities. As a percentage of operating revenues, the provision for bad debts increased to 6.5% in 1994 from 6.1% in 1993. Salaries and benefits increased to $209,772,000 in 1994 from $174,849,000 in 1993, an increase of $34,923,000, or 20.0%. Salaries and benefits as a percentage of operating revenues increased to 41.3% in 1994 from 40.2% in 1993. This increase was due primarily to additional staffing requirements at 31 certain existing facilities and increases in Paracelsus' self-insured health insurance program. Effective October 1, 1994, Paracelsus replaced the self-insurance program at its California facilities, where health insurance costs are the highest, with an outside HMO/PPO program. Depreciation and amortization increased to $16,565,000 in 1994 from $14,587,000 in 1993, an increase of $1,978,000, or 13.6%. This increase is due primarily to having a full year of depreciation in 1994 for the 1993 Acquisitions and capital expenditures Paracelsus made in 1994. Interest expense increased to $12,966,000 in 1994 from $10,213,000 in 1993, an increase of $2,753,000, or 27.0%. This increase was attributable to interest on the Existing Senior Subordinated Notes issued in October 1993, and increases in interest rates applicable to Paracelsus' borrowings under its then existing credit facility and the commercial paper program. LIQUIDITY AND CAPITAL RESOURCES Paracelsus' working capital as of March 31, 1996 was $73,415,000, an increase of $13,034,000 from September 30, 1995. The increase in working capital is primarily attributable to decreases in current maturities of long-term debt obligations and capital lease obligations, and an increase in accounts receivable. The increase in accounts receivable is attributable mainly to an increase in psychiatric and home healthcare services, which take longer to collect than Paracelsus' acute care receivables. The decrease in current maturities of long-term debt and capital lease obligations is attributable to the refinancing of mortgage debt on one of Paracelsus' partnerships. Other significant changes in working capital included an increase in deferred tax assets and accrued expenses related to the settlement of two lawsuits. On December 8, 1995, Paracelsus entered into the Existing Paracelsus Credit Facility, which provides up to $230,000,000 of revolving credit. The Existing Paracelsus Credit Facility has been used to finance acquisitions, to refinance existing credit facility borrowings and for general corporate purposes, including working capital and capital expenditures. Credit facility borrowings were increased from $27,500,000 at September 30, 1995 to $51,000,000 at March 31, 1996. The additional borrowings were used to refinance mortgage debt on one of Paracelsus' partnerships, to finance acquisitions of property and equipment and for working capital purposes. Paracelsus anticipates that existing capital resources and internally generated cash flows will be sufficient to fund capital expenditures, debt service and working capital requirements. The accounts receivable financing program (the "Accounts Receivable Program") implemented in 1993 provides Paracelsus with up to $65,000,000 in accounts receivable financing. Pursuant to the Accounts Receivable Program, Paracelsus' hospitals sell accounts receivable that meet certain requirements specified under the Accounts Receivable Program ("Eligible Receivables") to a special purpose subsidiary of Paracelsus, which in turn resells the Eligible Receivables to an unaffiliated trust (the "Trust") at a discount to reflect reserves for uncollectible receivables and interest expense. A special purpose subsidiary of a major lending institution provides the Trust with up to $65,000,000 in commercial paper financing to purchase the Eligible Receivables, secured by an interest in certain of the Eligible Receivables held by the Trust. Interest expense related to commercial paper and investment participations issued under the Accounts Receivable Program is passed through to Paracelsus and included as interest expense on Paracelsus' consolidated financial statements. At March 31, 1996, the maximum financing of $65,000,000 available under the program was outstanding. RECENT PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS 121 also addresses the accounting for long-lived assets that are expected to be disposed of. Paracelsus will adopt SFAS 121 on October 1, 1996, and, based on current circumstances, does not believe the effect of the adoption will be material. 32 IMPACT OF INFLATION AND CHANGING PRICES A significant portion of Paracelsus' operating expenses is subject to inflationary increases, the impact of which Paracelsus has historically been able to substantially offset through price increases, by expanding services and by increasing operating efficiencies. However, price increases alone have not kept up with increases in costs. To the extent that inflation occurs in the future, Paracelsus may not be able to pass on the increased costs associated with providing healthcare services to patients with government or managed care payors unless such payors correspondingly increase reimbursement rates. EFFECT OF PROPOSED LEGISLATION Federal and state legislators continue to consider legislation that could significantly impact Medicare, Medicaid and other government funding of healthcare costs. Initiatives currently before Congress, if enacted, would significantly reduce payments under various government programs, including, among others, payments to teaching hospitals and hospitals providing a disproportionate amount of care to indigent patients. A reduction in these payments would adversely affect operating revenues and operating margins at certain of Paracelsus' hospitals. Paracelsus is unable to predict what legislation, if any, will be enacted at the Federal and state level in the future or what effect such legislation might have on Paracelsus' financial position, results of operations or liquidity. 33 CHAMPION SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA The following tables set forth selected historical financial data and other operating information for Champion for the five years ended December 31, 1995 and for the three months ended March 31, 1995 and 1996. The selected historical financial data for the five years ended December 31, 1995 has been derived from the audited consolidated financial statements of Champion and from the underlying accounting records of Champion. The selected historical financial information for the three months ended March 31, 1995 and 1996 has been derived from the unaudited condensed consolidated financial statements of Champion and reflects all adjustments (consisting of normal recurring adjustments) that, in the opinion of the management of Champion, are necessary for a fair presentation of such information. Operating results for the three months ended March 31, 1996 are not necessarily indicative of the results that may be expected for 1996. All information set forth below should be read in conjunction with "Champion Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the consolidated financial statements and related notes of Champion included elsewhere in this Prospectus. Certain amounts derived from the consolidated statements of operations have been reclassified to conform with the presentation below.
THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------------------------------- ---------------- 1991 1992 1993 1994 1995 1995 1996 (IN THOUSANDS) 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
AS OF DECEMBER 31, AS OF MARCH 31, ------------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents............. $ 919 $ 6,204 $ 66,686 $ 48,424 $ 7,583 $ 32,908 $ 5,670 Working capital....................... 1,665 9,420 69,138 51,275 9,841 40,772 15,750 Total assets.......................... 15,444 57,574 118,947 216,553 291,260 212,839 308,022 Total debt............................ 7,431 26,246 62,084 110,065 164,914 108,807 184,046 Redeemable preferred stock............ 3,726 21,746 56,861 76,294 46,029(7) 77,918 46,078 Stockholders' equity (deficit)........ 293 (2,352) (16,157) (2,167) 31,869(7) (3,450) 33,798
34 (1) Net revenue was comprised of patient revenue (net of contractual adjustments) and other revenue. (2) In 1992, Champion expensed approximately $1,300 in fees and other costs related to its unsuccessful attempt to acquire twelve hospitals from Humana, Inc. (3) On September 1, 1992, Champion acquired Gulf Coast Hospital ("GCH"), a competing hospital located approximately three miles from Champion's Baytown, Texas facility. Subsequent to the purchase, Champion consolidated the operations of GCH onto the campus of its existing Baytown hospital and, in June 1994, sold the former GCH property with restrictions limiting its use to non-competitive activities without Champion's permission. As a result of the consolidation, Champion incurred a charge of approximately $15,456 against earnings in 1993. (4) In 1994, Champion incurred approximately $300 in fees and other costs related to its efforts to acquire Methodist Medical Center ("MMC") in Jacksonville, Florida. On March 6, 1995, Champion notified MMC's management that it would cease all actions related to this transaction; accordingly, such amounts were expensed in the fourth quarter of 1994. (5) The extraordinary gain in 1991 relates to the utilization of net income tax benefits arising from the carryforward of net operating losses. Champion recognized extraordinary losses of $1,230 and $1,118 in 1993 and 1995, respectively, on early extinguishment of debt. The extraordinary loss for 1993 was net of a tax benefit of $634, and no tax benefit was allocated to the extraordinary losses in 1995. (6) Adjusted EBITDA represents income before income taxes, depreciation and amortization, interest, cumulative effect of accounting change, restructuring and unusual charges, settlement costs, gains (losses) from disposal of facilities and extraordinary items. While Adjusted EBITDA is not a substitute for operating cash flows determined in accordance with generally accepted accounting principles, it is a commonly used tool for measuring a company's ability to service debt. (7) Effective December 31, 1995, Champion entered into a recapitalization agreement which provided for the conversion of certain redeemable preferred stock to Champion Common Stock and eliminated the accrual of future dividends on its remaining Champion Preferred Stock. See "Champion Management's Discussion and Analysis of Financial Condition and Results of Operations." 35 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. 36 Interest expense increased to $4,587,000 in the first quarter of 1996, compared to $2,630,000 for the comparable period in 1995, due principally to (i) the increase in amounts outstanding under the Champion Credit Facility as a result of its acquisition of SLRMC and Jordan Valley Hospital ("Jordan Valley") and (ii) the issuance of the Champion Series E Notes on June 12, 1995. The increase in interest expense was offset, in part, by a decline in the interest rate applicable to the Champion Credit Facility (a weighted average of approximately 8.71% and 9.12% for the quarters ended March 31, 1996 and 1995, respectively). Depreciation and amortization expense was $3,016,000 in 1996, compared to $1,532,000 in 1995, an increase of $1,484,000, or 96.9%. This increase is due primarily to Champion's acquisition of SLRMC and the completion of construction at WMC as well as Champion's ongoing capital improvement programs at its existing hospitals. Income before income taxes for the quarter ended March 31, 1996 includes approximately $3,973,000 attributable to Champion's equity in the earnings of DHHS, compared to approximately $1,478,000 for the same period a year earlier, or an increase of 168.8%. The increase was due to (i) a $1,535,000, or 5.9%, increase in DHHS net revenue for the quarter ended March 31, 1996, compared to the same period a year earlier, primarily as a result of an expanded and improved service mix, and (ii) a $3,175,000, or 14.1%, decrease in current period operating expenses, compared to the prior period. The reduction in operating expenses is due primarily to the elimination of duplicative services and overhead costs and reflects Champion's ongoing efforts to integrate the operations of the two hospitals that comprise DHHS. 1995 COMPARED TO 1994 Champion's net revenue was $167,520,000 for the year ended December 31, 1995, compared to $104,193,000 for 1994, an increase of $63,327,000, or 60.8%. The increase was due primarily to hospital acquisitions in the fourth quarter of 1994 and the second quarter of 1995 (collectively referred to as the "Champion Acquisitions"), and was offset, in part, by the contribution of Heartland Medical Center ("Heartland") to DHHS. Net revenue for 1994 included approximately $40,061,000 attributable to Heartland. The occupancy rate of Champion's consolidated hospitals was substantially unchanged at 38% in 1995 and 1994, due primarily to the acquisition of two psychiatric hospitals in the fourth quarter of 1994. In general, psychiatric hospitals derive a greater percentage of their revenue from inpatient services than do acute care hospitals. The occupancy rate at Champion's general acute care hospitals declined to 33% in 1995 compared to 35% in 1994, due primarily to Champion's contribution of Heartland to DHHS effective December 31, 1994, and due to an industry-wide trend of decreased inpatient utilization at acute care hospitals. Champion expects this trend to continue as Medicare, Medicaid, HMOs, PPOs and other third-party payors continue to exert pressure on healthcare providers to reduce hospital stays and to provide services, when appropriate, on a less expensive outpatient basis. Heartland had an occupancy rate of 41% in 1994. Gross outpatient revenue increased 45.8% from $63,387,000 in 1994 to $92,392,000 in 1995. Outpatient revenue as a percentage of gross patient service revenue declined from 38.1% in 1994 to 33.9% in 1995, due to Champion's acquisition of two psychiatric hospitals in the fourth quarter of 1994. Excluding these two facilities, outpatient revenue comprised 39.5% of gross patient revenue in 1995. Gross patient revenue attributable to Medicare increased to 42% in 1995, compared to 39% in 1994, due to the inclusion of certain of Champion's acquisitions for the full 12-month period ended December 31, 1995. These facilities generally derived a greater portion of their gross patient revenue from the Medicare program than did the hospitals owned and consolidated by Champion for the 12 months ended December 31, 1994. Gross revenue attributable to Medicaid increased to 19% in 1995 37 compared to 18% in 1994, due primarily to Champion's acquisition of two psychiatric hospitals in the fourth quarter of 1994. Approximately 50% of gross patient revenue at these facilities is attributable to the Medicaid program. Net patient service revenue is presented in the Consolidated Statement of Operations net of the provision for contractual allowances. Such provision was 40% in 1995 and 1994. The provision for contractual allowances as a percentage of gross patient service revenue is likely to increase in the future (i) as rate increases at Champion's hospitals exceed increases, if any, in fixed reimbursement rates, (ii) from increased discounts on standard rates due to pressure from third-party payors, such as HMOs, PPOs and private insurance companies and (iii) from increased inpatient utilization by Medicare and Medicaid patients. Payments received under these programs are generally less than established billing rates. The trend toward managed care may affect hospitals' ability to maintain their current rate of net revenue growth and operating margins. Net revenue for 1995 and 1994 included approximately $744,000 and $2,196,000, respectively, in interest income earned on cash balances during the year. Champion's operations are labor intensive with salaries and benefits comprising the single largest item in operating expenses. Salaries and benefits increased 75.9% to $72,188,000 in 1995, compared to $41,042,000 in 1994, as a result primarily of the Champion Acquisitions. In addition, corporate salaries increased due to the increase in hospitals, new public reporting requirements and preparation for additional acquisitions. As a percentage of net revenue, salary and benefits increased to 43.1% in 1995, compared to 39.4% in 1994. This trend is largely a result of Champion's strategy of acquiring underperforming hospitals that often incur labor and other operating costs in excess of what Champion believes is necessary for the efficient operation of a facility. Champion attempts to reduce these costs over time by implementing various operating efficiencies and cost-cutting strategies. However, Champion can give no assurance that its efforts will ultimately result in significant cost reductions at these facilities. The major components of other operating expenses were professional fees, taxes (other than income), insurance, utilities and other services. In absolute terms, other operating and supplies expense increased by 54.6% to $65,707,000 in 1995, compared to $42,511,000 in 1994, as a result of the Champion Acquisitions. However, overall other operating and supplies expense declined to 39.2% of net revenue in 1995, compared to 40.8% in 1994. Provision for bad debts was $12,016,000 in 1995, or 7.3% of net patient service revenue, compared to $7,812,000, or 7.8%, in 1994. The prior year included approximately $700,000 in charges due to problems resulting from the installation of an information management system at one facility. Excluding this charge, provision for bad debts was approximately 7.1% of net patient service revenue in 1994. Interest expense increased from $6,375,000 in 1994 to $13,618,000 in 1995, due principally to (i) the increase in amounts outstanding under the Champion Credit Facility as a result of its acquisition of SLRMC and funding of ongoing construction projects; (ii) the issuance of the Champion Series D Notes on December 30, 1994 and the Champion Series E Notes on June 12, 1995 and (iii) debt assumed and/or issued in connection with Champion's acquisition of AmeriHealth, Inc. ("AmeriHealth") on December 6, 1994, through a merger (the "AmeriHealth Merger") and the acquisition of Psychiatric Healthcare Corporation ("Psychiatric Healthcare") in the fourth quarter of 1994. Interest expense also increased due to an increase in the interest rate applicable to its senior bank credit facility (a weighted average of approximately 9.3% and 7.7% for the years ended December 31, 1995 and 1994, respectively). Depreciation and amortization expense was $9,290,000 in 1995, compared to $4,010,000 in 1994, an increase of $5,280,000, or 131.7%. This increase is due primarily to the Champion Acquisitions, the completion of a hospital and medical office building in Midland, Texas and an ambulatory care center in Baytown, Texas, as well as Champion's ongoing capital improvement programs at its existing hospitals. 38 Champion capitalized approximately $1,462,000 and $294,000 in interest costs associated with the construction of a hospital and other medical-related facilities at December 31, 1995 and 1994, respectively. With the completion of the hospital and medical office building in Midland, Texas and the ambulatory care center in Baytown, Texas, Champion expects capitalized interest to be minimal in 1996. Operating income for 1995 included approximately $8,881,000 attributable to Champion's equity in the earnings of DHHS. Champion contributed Heartland to DHHS effective December 31, 1994 and accounts for its investment in DHHS under the equity method. Previously, Champion had consolidated Heartland for financial reporting purposes. Operating income for 1994 included approximately $6,201,000 attributable to Heartland. 1994 COMPARED TO 1993 Champion's net revenue was $104,193,000 for the year ended December 31, 1994, compared to $89,832,000 for 1993, an increase of $14,361,000, or 16.0%. This increase was due primarily to the inclusion of P&S for a full year in 1994, compared to eight months in 1993 (the year P&S was acquired) and Champion's acquisition of Psychiatric Healthcare and the AmeriHealth Merger in the fourth quarter of 1994. On a same hospital basis, net revenue decreased approximately $2,550,000, or 3.2%, in 1994 due to the elimination of a psychiatric program at Baycoast Medical Center ("BMC") and a decline in outpatient surgery cases due to capacity constraints following the consolidation of the operations of GCH onto the BMC campus in December 1993. The average occupancy rates at Champion's hospitals declined from 40.1% in 1993 to 38.3% in 1994. This decline is consistent with the industry trend of decreased inpatient utilization at acute care hospitals and is due primarily to increased pressure from Medicare, Medicaid, HMOs, PPOs and other third-party payors to reduce hospital stays and to provide services, where possible, on a less expensive outpatient basis. Gross outpatient revenue increased 6.1% from $59,738,000 in 1993 to $63,387,000 in 1994. Outpatient revenue as a percent of gross patient service revenue declined from 41.9% in 1993 to 38.1% in 1994, due primarily to Champion's acquisition of Psychiatric Healthcare effective October 1, 1994. In general, psychiatric hospitals derive a greater percentage of their gross revenue from inpatient services than do acute care hospitals. Exclusive of acquisitions, outpatient revenue comprised 41.3% of gross patient revenue in 1994. Provision for contractual allowances was 40.2% of gross patient service revenue for 1994, compared to 39.2% in 1993. This increase is consistent with industry expectations as discussed above. Approximately 39% of gross patient revenue was attributable to Medicare in 1994 and 1993. Gross revenue attributable to Medicaid increased to 18% in 1994 compared to 12% in 1993, due primarily to Champion's acquisition of Psychiatric Healthcare, which derives approximately 53% of its gross patient revenue from the Medicaid program, and due to a decline in revenue attributable to private and other payor sources at hospitals owned by Champion for the year ended December 31, 1994. Salaries and benefits increased 11.8% to $41,042,000 in 1994, compared to $36,698,000 in 1993, due primarily to the inclusion of P&S for a full year in 1994 and Champion's acquisition of Psychiatric Healthcare and the AmeriHealth Merger in the fourth quarter of 1994. As a percentage of net revenue, salary and benefits decreased to 39.4% in 1994, compared to 40.9% in 1993, as a result of Champion's ongoing efforts to improve staffing efficiencies in its acquired hospitals. For hospitals owned for the year ended December 31, 1994, salary and benefits were 37.7% of net revenues in 1994, compared to 39.4% in 1993. The major components of other operating expenses were professional fees, taxes (other than income), insurance, utilities and other services. Other operating and supplies expense increased by 19.2% to $42,511,000 in 1994, compared to $35,674,000 in 1993. Other operating and supplies expense 39 increased to 40.8% of net revenue in 1994, compared to 39.7% in 1993. The increase in the percentage of net revenue is due primarily to non-capitalizable costs associated with Champion's acquisition activity. Provision for bad debts was $7,812,000 in 1994, or 7.8% of net patient service revenue, compared to $5,669,000, or 6.5%, in 1993. This 37.8% increase is due in part to the installation of a new computer system at one of Champion's hospitals that disrupted the hospital's billing procedures and accounts receivable detail. The hospital determined that approximately $700,000 in accounts receivable produced by the new system should have been charged to allowance for uncollectible accounts. Excluding this charge, provision for bad debts was approximately 7.1% of net patient service revenue in 1994. Depreciation and amortization expense was $4,010,000 in 1994, compared to $ 3,524,000 in 1993, an increase of $486,000, or 13.8%. The increase in depreciation and amortization expense was due primarily to Champion's acquisitions in 1994, Champion's ongoing capital improvement programs at its existing hospitals and the amortization of costs associated with Champion's issuance of the Champion Series D Notes. Interest expense increased from $2,725,000 in 1993 to $6,375,000 in 1994, due principally to Champion's issuance of $37,833,000 of the Champion Series D Notes effective December 31, 1993 and its establishment of a $20,000,000 senior bank credit facility on November 3, 1993, as well as interest expense associated with debt assumed and/or issued in the AmeriHealth Merger and the Psychiatric Healthcare acquisition. Interest expense also increased due to an increase in the interest rate applicable to its senior bank credit facility (a weighted average of approximately 7.7% and 6.5% at December 31, 1994 and 1993, respectively). RECENT ACQUISITIONS AND OTHER INVESTMENTS On March 1, 1996, Champion acquired Jordan Valley from Columbia. Jordan Valley is a 50-bed acute care hospital located in West Jordan, Utah, a suburb of Salt Lake City. Jordan Valley was acquired in exchange for Autauga Medical Center, an 85-bed acute care hospital, and Autauga Health Care Center, a 72-bed skilled nursing facility, both in Prattville, Alabama (collectively, "Autauga"), plus preliminary cash consideration paid to Columbia of approximately $10,750,000. Cash consideration included approximately $3,750,000 for certain net working capital components, which are subject to further adjustment and final agreement by the parties, and reimbursement for certain capital expenditures made previously by Columbia. The transaction did not result in a gain or loss. The Alabama facilities were acquired as a part of the AmeriHealth Merger on December 6, 1994. On April 13, 1995, Champion acquired SLRMC from Columbia for approximately $61,042,000, which included approximately $11,783,000 for certain working capital components, resulting in a net purchase price of approximately $49,259,000. Champion funded the asset purchase from available cash and approximately $30,000,000 in borrowings under its senior bank credit facility. SLRMC is comprised of a 200-bed tertiary care hospital and five clinics and is located in Salt Lake City, Utah. On December 21, 1994, a wholly owned subsidiary of Champion that owned Heartland entered into the DHHS partnership with Dakota Hospital ("Dakota"), a not-for-profit corporation that owned a 199-bed acute care hospital, in Fargo, North Dakota. Champion and Dakota contributed their respective hospitals debt and lien free (except for capitalized lease obligations), including certain working capital components, and Champion contributed an additional $20,000,000 in cash, each in exchange for 50% ownership in the partnership. Champion will receive 55% of the net income and distributable cash flow ("DCF") of the partnership until such time as it has recovered on a cumulative basis an additional $10,000,000 of DCF in the form of an "excess" distribution. Because the partners through the partnership agreement and an operating agreement have delegated substantially all management of DHHS to Champion, the authority of the partnership's governing board is limited. Under the terms of the partnership agreement, Champion is obligated to advance funds to the partnership to cover any and all operating deficits of the partnership. Beginning July 1996, Dakota has the right to require Champion to purchase its partnership interest free of debt or liens for a cash purchase price equal to 5.5 times Dakota's pro rata 40 share of earnings before depreciation, interest, income taxes and amortization, as defined in the partnership agreement, less Dakota's pro rata share of the partnership's long-term debt. DHHS had earnings before depreciation, interest, income taxes and amortization of approximately $19,000,000 for the year ended December 31, 1995. Beginning January 1998, the purchase price for Dakota's partnership interest shall not be less than $50,000,000. Should Dakota elect to exercise its option, Champion would likely finance the purchase through bank or other borrowings. Under the terms of the option, Champion has 12 months to consummate its obligations thereunder. As of December 31, 1995, Champion has received $825,000 in cash distributions from DHHS. INFLATION The healthcare industry is labor intensive. Wages and other expenses are subject to rapid escalation, especially during periods of inflation and when shortages occur in the marketplace. In addition, suppliers attempt to pass along increases in their costs by charging Champion higher prices. In general, Champion's revenue increases through price increases or changes in reimbursement levels have not kept up with cost increases. However, by expanding services and by increasing operating efficiencies, Champion has historically been able to substantially offset increases in such costs. In light of cost-containment measures imposed by government agencies, private insurance companies and managed-care plans, Champion is likely to experience continued pressure on operating margins in the future. 41 BUSINESS CERTAIN STATEMENTS UNDER THIS CAPTION "BUSINESS" CONSTITUTE "FORWARD-LOOKING STATEMENTS" UNDER THE REFORM ACT. SEE "RISK FACTORS -- FORWARD-LOOKING STATEMENTS." GENERAL Paracelsus is a leading healthcare company that owns and operates acute care and specialty hospitals and related healthcare businesses serving selected markets in the United States. Paracelsus currently owns and operates 18 acute care hospitals with a total of 1,685 licensed beds in California, Utah, Tennessee, Texas, Florida, Georgia and Mississippi. Paracelsus' acute care hospitals provide a broad array of general medical and surgical services on an inpatient, outpatient and emergency basis. In addition, certain hospitals and their related facilities offer rehabilitative medicine, substance abuse treatment, psychiatric care and AIDS care. In California, Paracelsus also owns and operates three psychiatric hospitals with 218 licensed beds, four skilled nursing facilities with 232 licensed beds and a 60-bed rehabilitative hospital. In addition, Paracelsus owns and operates 11 home healthcare agencies and 16 medical office buildings adjacent to certain of its hospitals. For the 12 months ended March 31, 1996 on a pro forma basis after giving effect to acquisitions and dispositions, Paracelsus would have had total operating revenues of $516.9 million, Adjusted EBITDA of $55.8 million and a net loss of $3.1 million. The net loss includes an unusual charge recorded in March 1996 of $22.4 million related to the settlement of two lawsuits ($13.2 million, net of income tax benefit). As a result of the Merger, Champion will become a wholly owned subsidiary of the Company. Champion currently owns and operates five acute care hospitals with a total of 722 licensed beds in Utah, Texas and Virginia and owns a 50% interest in, and operates, DHHS, a partnership that owns two additional acute care hospitals with a total of 341 licensed beds in North Dakota. Champion's acute care hospitals generally offer the same types of services provided by Paracelsus' acute care hospitals. Champion also owns and operates two psychiatric hospitals with a total of 219 licensed beds in Missouri and Louisiana. For the 12 months ended March 31, 1996 on a pro forma basis giving effect to acquisitions and dispositions, Champion would have had net revenue of $198.2 million, Adjusted EBITDA of $32.2 million and net income of $3.9 million. Following the Merger, the Company will operate 31 hospitals in 11 states including 25 acute care hospitals with 2,748 licensed beds, five psychiatric hospitals with 437 licensed beds and a rehabilitative hospital with 60 licensed beds. On a pro forma combined basis for the 12 months ended March 31, 1996, after giving effect to the Offerings, the Company would have had total operating revenues of $714.8 million, Adjusted EBITDA of $88.1 million and a net loss of $6.9 million. The net loss includes the unusual charge related to the settlement of two lawsuits. These pro forma combined results do not give effect to any cost savings that management believes will be realized as a result of the Merger due to the combination of the corporate operations of Paracelsus and Champion and the elimination of certain corporate consulting contracts of Paracelsus. In addition, the combined entity should benefit from economies of scale in such areas as purchasing, marketing, information systems, risk management, acquisitions and development, accounting, reimbursement, corporate finance and quality assurance. The Company believes that the Merger represents a unique opportunity to integrate the operations of two companies that have a complementary portfolio of hospitals. Upon completion of the Merger, 22 of the 31 hospitals owned or operated by the Company will be located in markets where a hospital or hospital network operated by the Company is a preeminent provider. On a pro forma combined basis (excluding the PHC Salt Lake Hospital and the two hospitals owned by DHHS), the remaining 19 hospitals would have accounted for approximately 71% and 89% of the 28 remaining hospital operating revenues and Adjusted EBITDA, respectively, for the 12 months ended March 31, 1996. Following the Merger, the Company believes that it will be better positioned to implement its business strategy due to its greater scale and diversity of operations, expanded geographic presence and enhanced access to the public capital markets and other financing sources. The Company also 42 believes that it will benefit from the addition to Paracelsus' management team of three key Champion executives who, following the Merger, will have primary responsibility for day to day management of the Company. These Champion executives have an average of 29 years of hospital industry experience and a proven track record in operating and growing publicly held hospital companies. Over the past five years, these executives grew Champion's net revenue at an annual growth rate of 62.0% from $24.3 million in 1991 to $167.5 million in 1995 while improving its Adjusted EBITDA margins from 9.4% in 1991 to 15.8% in 1995 and 19.2% for the three months ended March 31, 1996. BUSINESS STRATEGY The Company's strategic objective is to establish each of its hospitals or hospital networks as the provider of choice in its market. To accomplish this, the Company first seeks to establish a presence in geographic locations that are best suited to developing a preeminent market position. These locations primarily include small to mid-sized markets with more favorable demographics and lower levels of penetration by managed care plans and alternative niche competitors than larger metropolitan areas. Moreover, the competing hospitals in the Company's target markets frequently will be not-for-profit facilities which the Company believes have higher cost structures than its hospitals. Second, the Company focuses on implementing operating strategies developed by the Company for positioning each of its hospitals or hospital networks as providers of measurably higher quality and lower cost healthcare services than competing providers. The key elements of the Company's operating strategies are as follows: EXPAND STRATEGICALLY THROUGH SELECTED ACQUISITIONS The Company plans to continue to pursue expansion opportunities through the strategic acquisition of hospitals and complementary healthcare businesses in existing or new markets. The Company has demonstrated this strategy most recently by successfully acquiring four hospitals and a home health agency in the Salt Lake City market. The Company's primary criteria for its target markets include: (i) a service area population of between 30,000 and 500,000; (ii) favorable demographics in terms of population growth, age profile, employment rates, business climate, economic activity and family income levels; (iii) low levels of managed care penetration; and (iv) limited competition from other hospitals and alternative healthcare providers. The Company targets for acquisition those hospitals that have the following characteristics: (a) a stable market position with potential for improvement; (b) an appropriate range and depth of medical services or the capacity to add needed services; (c) a favorable reputation in the community; (d) current financial underperformance due to an excessive cost structure; (e) a sufficient base of capable, high quality physicians; and (f) no required extraordinary capital investment. The Company believes that its primary sources of acquisitions will be unaffiliated not-for-profit hospitals and facilities being divested by hospital systems for strategic, regulatory or performance reasons. INCREASE MARKET PENETRATION The Company seeks to increase the market penetration of its hospitals by offering a full range of hospital and related healthcare services and by gaining market share from local competitors by providing measurably higher quality and lower cost services. The Company will selectively add new services such as obstetrics, open-heart surgery and skilled nursing beds at its hospitals and, when appropriate, invest in new technologies. For example, this strategy has been sucessfully demonstrated by the addition of obstetrics programs at each of The Medical Center of Mesquite and Westwood Medical Center during the past 12 months. The Company will also develop complementary healthcare businesses such as primary care clinics, home health agencies and rehabilitative clinics to augment the service capabilities of its existing hospitals and enable the delivery of care in the most cost effective and medically appropriate setting. In addition, over the past 24 months, the Company has acquired or established five home health agencies that cover 26 counties in Tennessee, providing a large referral base for the Company's four hospitals in that market. In some cases, the Company may also acquire or merge with other providers or establish alliances with such providers through affiliation agreements, joint venture arrangements or partnerships. Furthermore, since physicians still direct the majority of 43 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 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 44 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 that are designed for the convenience of physicians and hospitals rather than patients, payors and employers. For the past year, the Company has assembled a task force of hospital and corporate personnel who have been devoted to developing a proprietary customer service system that will become a prototype for all the Company's hospitals. The Company believes this customer service system will differentiate its hospitals and facilities from those of its competitors and provide a competitive advantage. The objectives of this initiative are to (i) identify those aspects of customer service most in need of streamlining and revamping to create "user-friendly" systems in areas such as billing information and admission and emergency room registration and processing; (ii) review existing hospital policies, procedures and practices that serve as barriers to personalized customer service; (iii) establish quantitative performance targets and develop monitoring systems for measuring and reporting results and progress toward targets; (iv) develop a customer service questionnaire to quantify levels of customer satisfaction and areas of dissatisfaction; and (v) conduct training of hospital personnel in the customer service system. The Company currently expects that it will begin introducing its customer service system on a pilot basis in several of its hospitals during the first quarter of 1997. REQUIRE LOCAL MANAGEMENT ACCOUNTABILITY The provision of high quality healthcare services is primarily a local business, and the Company's business strategy and operating programs emphasize local management initiative, responsibility and accountability combined with corporate support and oversight. The Company establishes targets for various categories of operating expenses for each hospital and tracks operating efficiency on a daily basis. The Company also requires each of its hospitals to provide forecasts on financial and operating performance for the month and conducts in-depth monthly operating reviews with each local management team to establish and ensure management discipline and accountability. In addition, bonuses for key operating executives of the Company are in part based upon margin improvement and performance. These actions are intended to focus operating management on optimizing operating efficiencies. OPERATIONS The Company seeks to create a local healthcare system in each of its markets that offers a continuum of inpatient, outpatient, emergency and alternative care options. In many such markets, the Company will establish its acute care hospitals as the hub of a local provider system that can include skilled nursing facilities, home health agencies, clinics, physician practices and medical office buildings. These operations are described below. ACUTE CARE HOSPITALS The Company owns and operates 25 acute care hospitals (including those owned by DHHS) with a total of 2,748 licensed beds in nine states. Each of the Company's acute care hospitals provides a broad array of general medical and surgical services on an inpatient, outpatient and emergency basis, including some or all of the following: intensive and cardiac care, diagnostic services, radiological services and obstetrics on an inpatient basis and ambulatory surgery, laboratory and radiology services on an outpatient basis. Certain hospitals also provide comprehensive psychiatric services. The Company owns a 50% interest in and is responsible for the operations of DHHS, which owns two acute care hospitals in Fargo, North Dakota. 45 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 15 of its hospitals (including the two DHHS hospitals) in five states. These services include home nursing, infusion therapy, physical therapy, respiratory services and other rehabilitative services. CLINICS The Company owns and operates a number of stand-alone clinics, particularly in rural areas. Most of these clinics are primary care clinics that operate as physician offices where the physicians are employed by or are under contract with one of the Company's hospitals in that market. The clinics serve to complement the Company's acute care hospitals in their respective markets by allowing the Company to provide a wider range of services in optimal settings and providing an opportunity to attract patients to the Company's hospitals. PHYSICIAN ARRANGEMENTS The Company owns a majority interest in and operates five physician joint ventures. Three of the joint ventures have nonexclusive use of office space and equipment in certain hospitals which they use to provide specialized medical and surgical services to patients. In all cases, the minority interests in the joint ventures are held directly or indirectly by a physician or a group of physicians. Additionally, several of the Company's hospitals have assisted with the formation of and participate in physician hospital organizations or management services organizations. MEDICAL OFFICE BUILDINGS The Company owns, leases or manages 22 medical office buildings located adjacent to certain of its hospitals. SELECTED MARKET STRATEGIES Key to the success of the Company is its ability to adjust the implementation of its various operating strategies to the unique features of each market it enters. The following are four examples of how the Company is currently implementing its strategies under diverse market conditions. CONTRACTING WITH MANAGED CARE PROVIDERS IN A MAJOR URBAN MARKET The broad market in Utah encompasses a population of 1,800,000 across the 90-mile corridor known as the Wasatch Front. The Company has focused it efforts around Salt Lake County, which has a population base of approximately 800,000, or 43% of the state's population, where four of the Company's five Utah hospitals are located. This area has favorable demographics in terms of employment, age and family income levels. Managed care plans have achieved one of the highest levels of penetration in the United States in providing healthcare coverage to the target population base. To be successful in this market requires that providers be able to demonstrate to managed care payors the ability to deliver a continuum of healthcare services on a cost competitive basis that is geographically accessible to the covered lives. Through its network of five hospitals, a home health agency, a skilled nursing facility and a number of outpatient and physician clinics, the Company is creating an integrated provider system 46 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 that it could extend its presence as well as realize additional cost savings by forging a partnership with another hospital in the market. The resulting DHHS partnership, which the Company manages, is now a preeminent provider and has strengthened its competitive position against the remaining hospital, which is the largest provider in the market. Through this partnership, the Company has been able to achieve further cost savings by eliminating burdensome contracts, consolidating certain services and eliminating duplicative or otherwise marginal services. In order to further develop an integrated healthcare delivery system in this market, the Company has acquired a home health agency and opened a skilled nursing facility. CONSTRUCTING A NEW FACILITY TO ENTER A LESS COMPETITIVE MARKET The Midland, Texas market includes a population of approximately 120,000 with favorable demographics and a very low level of managed care penetration. The Company viewed the Midland market as an opportunity to compete against a large not-for-profit hospital that was not responsive to changing market forces and generally had not been faced with significant competition from other providers. Although Midland had been served by two hospitals for several years, the not-for-profit hospital was by far the dominant provider. In 1992, the Company acquired the other, smaller 60-bed facility, which had an outdated and deteriorating physical plant and offered a limited range of services, with the intention of closing the smaller facility and building a new state of the art replacement hospital that could more effectively compete with the not-for-profit hospital. The Company's newly constructed 101-bed 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. 47 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 the PHC Salt Lake Hospital with borrowings under the Existing Paracelsus Credit Facility. Prior to the acquisition, the PHC Salt Lake Hospital was operated by FHP, an HMO, principally to provide care to its HMO members. Accordingly, FHP operated the PHC Salt Lake Hospital as a captive cost center for the sole benefit of FHP and not as a business managed separately for profit. In connection with the acquisition of the PHC Salt Lake Hospital, Paracelsus entered into a 15-year exclusive provider agreement (the "FHP Exclusive Provider Agreement") under which FHP will pay Paracelsus stated percentages of its monthly HMO member premiums to guarantee FHP HMO members access to inpatient care at all Paracelsus-operated hospitals in Salt Lake City, Utah, including the PHC Salt Lake Hospital. Based upon information provided to Paracelsus by FHP, as of March 31, 1996, FHP had approximately 102,000 covered lives who would be subject to the FHP Exclusive Provider Agreement. In addition, the PHC Salt Lake Hospital will continue to provide access to approximately 13,000 additional covered lives under an FHP PPO contract under which FHP will make a fee-for-service payment to Paracelsus. The Company intends to change significantly the patient base of the PHC Salt Lake Hospital. In addition to the FHP HMO and PPO members, the PHC Salt Lake Hospital will enter into contracts with other insurance carriers and managed care organizations and otherwise seek to serve the patients in its market. In addition, the PHC Salt Lake Hospital will provide reference lab services and emergency room services which are anticipated to generate additional revenues. To date, Paracelsus has entered into non-capitated provider contracts to provide services at the PHC Salt Lake Hospital with CIGNA, United Health and Blue Cross ("other payors"). Under those contracts, based on public disclosures made by such other payors as of March 31, 1996, the Company believes that the PHC Salt Lake Hospital will provide services to approximately 220,000 additional covered lives. As a result of the expansion and diversification of the patient base, the Company anticipates that over time a substantially reduced portion of the PHC Salt Lake Hospital's total inpatient care will be comprised of services provided to FHP members, with additional revenues generated through admissions by independent practicing physicians and patients covered by other insurance carriers, managed care organizations and the Medicare and Medicaid program. The Company believes that the PHC Salt Lake Hospital acquisition and the revenues anticipated to be received under the FHP Exclusive Provider Agreement will complement the hospitals owned by Champion and the Columbia Hospitals (as defined below) recently acquired by Paracelsus from Columbia. The Company does not believe that the historical financial statements of the PHC Salt Lake Hospital are relevant because the future operations will include services provided to the general public as compared to its previous operations as a captive cost center, which served only FHP members. As a result, the PHC Salt Lake Hospital acquisition has been accounted for as an acquisition of assets. ACQUISITION OF COLUMBIA HOSPITALS On May 17, 1996, Paracelsus acquired Pioneer Valley Hospital ("Pioneer"), a 139-bed hospital in West Valley City, Utah; Davis Hospital and Medical Center ("Davis") a 120-bed hospital in Layton, Utah; and Santa Rosa Medical Center ("Santa Rosa"), a 129-bed hospital in Milton, Florida (Pioneer, 48 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.
DATE OF LICENSED LICENSED FACILITY LOCATION TYPE OF FACILITY ACQUISITION(1) BEDS CALIFORNIA Bellwood General Hospital Bellflower Acute Care 2/08/82 85 Chico Community Hospital Chico Acute Care 4/28/85 123 Chico Community Rehabilitation Hospital(2) Chico Rehabilitative 6/30/94 60 Hollywood Community Hospital of Hollywood Los Angeles Acute Care 12/22/82 100 Hollywood Community Hospital of Van Nuys Van Nuys Psychiatric 11/01/82 59 Lancaster Community Hospital Lancaster Acute Care 2/01/81 131 Los Angeles Community Hospital Los Angeles Acute Care 8/08/83 136 Monrovia Community Hospital(3) Monrovia Acute Care 2/01/81 49 Norwalk Community Hospital Norwalk Acute Care 2/01/81 50 Orange County Community Hospital of Orange Orange Psychiatric 11/01/91 104 Orange County Hospital of Buena Park(4) Buena Park Psychiatric 2/01/81 55
49
DATE OF LICENSED LICENSED FACILITY LOCATION TYPE OF FACILITY ACQUISITION(1) BEDS 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(5) Midland Acute Care 10/25/95 101 NORTH DAKOTA Heartland Medical Center(6) Fargo Acute Care 9/01/93 141 Dakota Hospital(6) Fargo Acute Care 12/31/94 200 TENNESSEE Cumberland River Hospital North(2) Celina Acute Care 10/01/85 36 Cumberland River Hospital South Gainesboro Acute Care 9/05/95 44 Fentress County General Hospital Jamestown Acute Care 10/01/85 84 Bledsoe County Hospital(2) Pikeville Acute Care 10/01/85 32 VIRGINIA Metropolitan Hospital(7) Richmond Acute Care 12/06/94 180 MISSOURI Lakeland Regional Hospital Springfield Psychiatric 10/01/94 149 FLORIDA Santa Rosa Medical Center(2) Milton Acute Care 5/17/96 129 MISSISSIPPI Senatobia Community Hospital(2) Senatobia Acute Care 1/01/86 76 LOUISIANA Crossroads Regional Hospital Alexandria Psychiatric 10/01/94 70 GEORGIA Flint River Community Hospital(2) Montezuma Acute Care 1/01/86 50 -------- Total licensed beds 3,245 -------- --------
- ------------------------ (1) Reflects date facility was initially acquired by Paracelsus or Champion, as applicable. (2) Hospital facility is leased. (3) Monrovia Community Hospital is operated as a joint venture with a physician investor. Paracelsus owns a 51.0% interest in this joint venture. 50 (4) Orange County Hospital of Buena Park is owned subject to a mortgage securing borrowings in the amount of $283,473 as of March 31, 1996. (5) Constructed by Champion and placed in service October 25, 1995. (6) Champion owns a 50.0% interest in and operates DHHS, a partnership that owns the hospital. (7) Champion owns an 89.0% general partnership interest in a limited partnership that owns the hospital. 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.
FISCAL YEAR ENDED SIX MONTHS ENDED SEPTEMBER 30, 1995 (1) MARCH 31, 1996 ----------------------- ----------------------- CONSOLIDATED CONSOLIDATED HOSPITALS DHHS HOSPITALS DHHS Number of hospitals at period end.............................. 29 2 28 2 Licensed beds at period end.................................... 2,964 341 2,845 341 Admissions..................................................... 67,154 10,096 35,822 4,676 Adjusted admissions(2)......................................... 97,553 15,628 52,811 7,358 Average length of stay (days): All beds..................................................... 6.2 5.5 5.9 5.7 Medical-surgical............................................. 5.2 4.4 5.1 4.5 Psychiatric.................................................. 11.7 9.6 11.3 8.5 Patient days................................................... 415,882 55,476 212,851 26,618 Adjusted patient days(3)....................................... 604,141 85,876 313,797 41,884 Occupancy rate(4).............................................. 40% 45% 41% 43% Deliveries..................................................... 4,642 1,449 2,777 630 Total surgeries................................................ 39,272 9,769 19,688 4,569 Outpatient visits(5)........................................... 1,189,797 126,211 741,378 59,721 Gross outpatient revenues as a percent of gross operating revenues...................................................... 31% 35% 32% 36%
- ------------------------ (1) Includes Champion data for its year ended December 31, 1995. (2) Total admissions for the period multiplied by the ratio of total patient revenue divided by total inpatient revenue. (3) Total patient days for the period multiplied by the ratio of total patient revenue divided by total inpatient revenue. (4) Average daily census for the period divided by licensed beds. (5) Includes emergency room and home health agency visits. COMPETITION The competition for patients among hospitals and other healthcare providers has intensified in recent years as hospital occupancy rates have declined. This decline is attributable to several factors, including cost containment pressures, changing medical technology, changing government regulations and utilization management. Such factors have prompted new competitive strategies by hospitals and other healthcare providers. Among these strategies is an increasing emphasis on outpatient healthcare delivery procedures (E.G., outpatient surgery, diagnostic centers and home healthcare), which tend to eliminate or reduce the length of hospital stays. The Company believes that one of the most significant factors in the competitive position of a hospital is the number and quality of the physicians affiliated with such hospital, because physicians determine the majority of hospital admissions. Although physicians may at any time terminate their 51 affiliation with a hospital operated by the Company, the Company seeks to retain physicians of varied specialties on its hospitals' medical staffs and to attract other qualified physicians. The Company believes that physicians refer patients to a hospital primarily on the basis of the quality of services it renders to patients and physicians, the quality of other physicians on the medical staff, the location of the hospital and the quality of the hospital's facilities, equipment and employees. However, physicians affiliated with certain managed care providers may be precluded from utilizing the Company's facilities for their patients, or referring patients to doctors using the Company's facilities, if the facility or referred doctors are not currently contracting with such managed care providers. The competitive position of a hospital is also affected by its management's ability to negotiate service contracts with purchasers of group healthcare services, including employers, PPOs and HMOs. PPOs and HMOs attempt to direct and control the use of hospital services through "managed care" programs and to obtain discounts from hospitals' established charges, and, in return, hospitals acquire access to a large number of potential patients. In addition, employers and traditional health insurers are increasingly interested in containing costs through negotiations with hospitals for managed care programs and discounts from established charges. Of importance to a hospital's competitive position is its ability to obtain contracts with PPOs and HMOs and other organizations that finance healthcare. Managed care providers are increasingly contracting with hospitals or networks of hospitals that can provide a full range of services in a particular market. Accordingly, the Company is attempting to join or establish hospital networks and to increase services to compete for contracts in such markets. MEDICARE, MEDICAID AND OTHER REVENUE GENERAL The Company receives payment for services rendered to patients from private insurers, managed care providers, the Federal government under the Medicare program, state governments under their respective Medicaid programs and directly from patients. The table below sets forth the approximate percentages of the historical gross operating revenues derived by the facilities of the Company and of DHHS from Medicare, Medicaid and private insurance and all other payors for the periods indicated.
FISCAL YEAR ENDED SIX MONTHS ENDED SEPTEMBER 30, 1995(1) MARCH 31, 1996 --------------------- --------------------- CONSOLIDATED CONSOLIDATED HOSPITALS DHHS HOSPITALS DHHS Medicare.................................................... 45% 46% 46% 46% Medicaid.................................................... 13% 9% 14% 9% Private insurance and all other payors...................... 42% 45% 40% 45%
- ------------------------ (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:
FISCAL YEAR ENDED SIX MONTHS ENDED SEPTEMBER 30, 1995(1) MARCH 31, 1996 --------------------- --------------------- CONSOLIDATED CONSOLIDATED HOSPITALS DHHS HOSPITALS DHHS Inpatient services.......................................... 69% 65% 68% 64% Outpatient services......................................... 31% 35% 32% 36%
- ------------------------ (1) Includes Champion data for its year ended December 31, 1995. 52 MEDICARE The Medicare program is a Federal healthcare program created by the Social Security Act Amendments of 1965. Each of the Company's hospitals is certified as a provider of services under the Medicare program. Revenues attributable to Medicare patients represented 45% and 46% of the Company's historical gross operating revenues in fiscal 1995 and in the six months ended March 31, 1996, respectively. The Medicare program has changed significantly during the past several years, and these changes have had and will continue to have a significant effect on the Company's hospitals. In addition, the requirements for certification in the Medicare program are subject to change, and, in order to remain qualified for the program, it may be necessary for the Company to make changes from time to time in its facilities, equipment, personnel and services. Although the Company intends to continue its participation in the Medicare program, there is no assurance that it will continue to qualify for participation. Pursuant to the Social Security Act Amendments of 1983 and subsequent budget reconciliations and modifications, Congress adopted a prospective payment system ("PPS") under which a hospital is paid a predetermined amount for each Medicare inpatient discharge, depending on the patient's diagnosis and related procedures. Generally, under the PPS, if the costs of meeting the health needs of the patient are greater than the predetermined payment rate, the hospital must absorb the loss. Conversely, if the cost of the services provided is less than the predetermined payment, the hospital retains the difference. Prior to 1988, Medicare reimbursed hospitals for 100% of their share of capital related costs, which included depreciation, interest, taxes and insurance related to plant and equipment for inpatient hospital services. The reimbursed rate was reduced thereafter to 85% of costs. Federal regulations effective October 1, 1991 created a PPS for inpatient capital costs to be phased in over a 10-year transition period from a hospital-based rate to a fully Federal payment rate or a per-case rate. Such a method of capital cost payment could have a material adverse effect on the operating revenues of the Company. Recent legislation has reduced projected increases for Medicare payments to providers for hospital outpatient services. The payment rate for hospital outpatient surgery and hospital radiology services is limited to a blend of 42% of reasonable costs and 58% of Medicare's prospective rates. The payment rate for other outpatient diagnostic services is limited to a blend of 50% of reasonable costs and 50% of the prospective rates. Furthermore, studies are currently in process at the Health Care Financing Administration (the "HCFA") that propose converting payment for all outpatient services (including home health services), inpatient psychiatric services and skilled nursing care to a prospective payment system. Congress is presently considering further significant reductions in projected increases in Medicare payments to providers. The financial effect of these changes may have a negative impact on the Company, although the exact method of implementing these reductions and whether a prospective payment system for outpatient services or inpatient psychiatric and home health services and skilled nursing care will be adopted are not yet known. Pursuant to the Omnibus Budget Reconciliation Act of 1990, Congress revised the Gramm-Rudman budget and sequestration process and established a "pay-as-you-go" system for entitlement programs, including Medicare. Legislation increasing entitlements and/or reducing revenues must be deficit-neutral (I.E., it must pay for itself by a reduction in entitlement spending elsewhere or additional revenues). Legislation violating the pay-as-you-go principle would trigger a sequestration of entitlement program funds in the same amount that such legislation added to the deficit. Up to a maximum of 4% of Medicare program funds would be included among those sequestered. Medicaid program funds, however, continue to be exempt from sequestration. Payment reductions under the revised sequestration process were not implemented in fiscal years 1993, 1994 or 1995. If implemented in future years, these reductions could have a material adverse effect on the Company's 53 operating revenues. However, because the actual amount of the reduction for any fiscal year may vary according to the Federal deficit, the financial impact of the revised process on the Company cannot be predicted. The Medicare program makes additional payments to those healthcare providers that serve a disproportionate share of low income patients. The qualification and funding for disproportionate share payments can vary by fiscal year. Disproportionate share payments for future years could vary significantly from historical payments. Within the statutory framework of the Medicare program, there are substantial areas subject to administrative rulings, interpretations and discretion that may affect payments made under the program. In addition, the Federal government might, in the future, reduce the funds available for, or require more stringent utilization of, hospital facilities, either of which could have a material adverse effect on the Company's future income. 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 pay either a fixed, pre-determined daily rate or a fixed payment for each type of service. The Medicaid program also makes additional payments to those healthcare providers that serve a disproportionate share of low income patients. The methodology used to determine qualification and funding will vary by state. The qualification and funding for disproportionate share payments can vary by fiscal year. Disproportionate share payments for future years could vary significantly from historical payments. REGULATION AND OTHER FACTORS GENERAL All hospitals are subject to compliance with various Federal, state and local statutes, regulations and ordinances, and receive periodic inspection by state and local licensing agencies, as well as by nongovernmental organizations acting under contract or pursuant to Federal law, to review compliance with standards of medical care and requirements concerning facilities, equipment, staffing, cleanliness and related matters. The Company's hospitals must comply with the licensing requirements of state and local health agencies, as well as the requirements of municipal building codes, health codes and local fire departments. All of the Company's hospitals have obtained the licenses that the Company believes are necessary under applicable law for the operation of the hospitals. In addition, all of the Company's hospitals are presently accredited by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") except for one rural hospital in Georgia, which is surveyed annually by state regulatory authorities. CERTIFICATE OF NEED REQUIREMENTS In recent years, many states have enacted legislation regulating the establishment or expansion of hospital facilities and services. In certain states, prior to the construction of new hospitals, the expansion of old hospitals or the introduction of certain new services in existing hospitals, one must obtain a CON by demonstrating to either state or local authorities, or both, that it is in compliance with plans adopted by such authorities, or receive an exemption from CON requirements by demonstrating that the project is covered by statutory and regulatory exemption provisions. This requirement can increase the cost (in time and money) of a project, and may affect the feasibility of some projects. Of the eleven states in which the Company operates, a CON is required in Florida, Georgia, Louisiana, Mississippi, Missouri, Tennessee and Virginia. 54 HOSPITAL INSPECTIONS AND REVIEWS JCAHO regularly conducts an on-site review and inspection of every hospital seeking to obtain or maintain its accreditation. Hospitals accredited by JCAHO are deemed to be in compliance with the standards for participation in the Medicare program, although Medicare can conduct its own compliance reviews. During fiscal 1995, three Paracelsus facilities had full JCAHO reviews. All such facilities maintained full three-year accreditation. In addition to the JCAHO inspections and inspections conducted by certain state and local regulatory authorities, the HCFA, generally in response to specific complaints from patients but also occasionally on a random basis, causes hospitals participating in the Medicare program to be inspected. Since fiscal 1995, three facilities had state regulatory surveys, some of which may have been done on behalf of the HCFA, and all of those facilities remained eligible to participate in the Medicare program. In addition, all of Champion's hospitals are accredited by JCAHO, including Champion's newly constructed hospital in Midland, Texas, which received its provisional accreditation in the first quarter of 1996. REGULATORY COMPLIANCE The operation of healthcare facilities is subject to Federal, state and local regulations. Facilities are subject to periodic inspection by state licensing agencies to determine whether the standards of medical care provided therein comply with licensing standards. The Company believes that all of its healthcare facilities are in substantial compliance with such Federal, state and local regulations and licensing requirements. OTHER FEDERAL STATUTES AND REGULATIONS Effective January 1, 1995, the so-called Stark II law bars physicians from referring Medicare and Medicaid patients to 11 designated health services in which the physicians have an investment or compensation arrangement. The HCFA has not set a target date for proposing the Stark II regulations, but it finally issued the so-called Stark I regulations on August 14, 1995. (Stark I bans physicians from referring Medicare and Medicaid patients to clinical laboratories in which they have a financial interest.) The HCFA has stated that the Stark I regulations will also be applicable to Stark II. The HCFA plans to require healthcare entities, including hospitals, to sign a declaration form in which they promise not to bill Medicare for patients referred by a physician who has a prohibited financial relationship with the entity. The HCFA will keep those forms on file. Physicians who own an interest in a designated health service will also be asked to sign a declaration form saying they will not refer Medicare patients to that service. The entity will keep the physician forms on file, and the HCFA will check to see that entities are keeping the forms. In addition, the Antifraud Amendments provide criminal penalties for individuals or entities participating in the Medicare or Medicaid programs who knowingly and willfully offer, pay, solicit or receive remuneration in order to induce referrals for items or services reimbursed under such programs. In addition to felony criminal penalties, the Social Security Act also establishes the intermediate sanction of excluding violators from Medicare or Medicaid participation. The HHS has promulgated regulations that define certain Safe Harbors for arrangements that would not violate the Antifraud Amendments. Any venture that meets all the conditions of an applicable Safe Harbor will be exempt both from prosecution and exclusion under the Antifraud Amendments. None of the Company's joint ventures with physician investors falls within any of the defined Safe Harbors. The fact that the terms of a venture do not satisfy applicable Safe Harbor criteria, however, does not mean that the venture is illegal but does mean that the venture may be subject to review. Under the Company's joint venture arrangements, physician investors are not and will not be under any obligation to refer or admit their patients, including Medicare or Medicaid beneficiaries, to receive services at the Company's facilities, nor are distributions to those physician investors contingent upon or calculated with reference to referral by the physician investors. On the basis thereof, the Company does not believe the ownership of interests in or receipt of distributions from its joint ventures would 55 be construed to be knowing and willful payments to the physician investors to induce them to refer patients in violation of the Antifraud Amendments. There can be no assurance, however, that government officials charged with responsibility for enforcing the prohibitions of the Antifraud Amendments will not assert that one or more of the Company's joint ventures are in violation of the Antifraud Amendments. To date, none of the Company's current joint ventures has been reviewed by any governmental authority for compliance with the Antifraud Amendments. STATE STATUTES AND REGULATIONS Each of the states in which the Company does business has a state medical practice act that prohibits unprofessional conduct of physicians, including failure to conform to the ethical standards of the profession. A physician who is found to have violated a state medical practice act may be subject to disciplinary action up to and including loss of the physician's license to practice medicine. Certain 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. 56 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 capacities. None of DHHS' employees is covered by a collective bargaining agreement. LIABILITY INSURANCE Paracelsus is self-insured for the first $500,000 per occurrence of general and professional liability risks occurring after October 1, 1987 and the first $250,000 per occurrence of workers' compensation liability risks occurring after October 1, 1992. Paracelsus formed Hospital Assurance Company, Ltd., a wholly owned subsidiary ("HAC"), in order to insure the general and professional and workers' compensation risks beginning October 1, 1992. In addition, Paracelsus owns approximately 10% of Hospital Underwriters Group ("HUG"), which insures the first $2.5 million per occurrence of claims in excess of $500,000, and reinsures amounts over $3.0 million per occurrence with unrelated third-party commercial insurance carriers, up to $100.0 million per occurrence. Upon consummation of the Merger, the Company intends for Champion and its subsidiaries to be insured by HAC and HUG in the same manner and to the same extent as the current subsidiaries of the Company. Prior to the Merger, Champion and its subsidiaries maintained a program of insurance that Champion believed was adequate to cover the claims and legal actions to which it and its subsidiaries were subject in the ordinary course of business. LITIGATION RELATING TO THE MERGER Certain holders of Champion Common Stock have filed a purported class action lawsuit in the Chancery Court of the State of Delaware, naming as defendants certain members and a former member of the Champion Board of Directors, Messrs. Charles R. Miller, James G. VanDevender, James A. Conroy, Manuel M. Ferris, David S. Spencer, Nolan Lehmann, Paul B. Queally, Scott F. Meadow, William G. White and Richard D. Sage (collectively, the "Individual Defendants"), and Champion and Paracelsus. The plaintiffs claim, among other things, that the Merger and the exchange ratio for the Champion Common Stock pursuant thereto are unfair and inadequate, that the Individual Defendants violated their fiduciary duties to Champion and its public stockholders by failing to actively pursue the acquisition of Champion by other companies or conduct an adequate market check, and that Paracelsus knowingly aided and abetted the breaches of fiduciary duty committed by the Individual Defendants. Plaintiffs seek preliminary and permanent injunctions against the proposed Merger. In addition, plaintiffs seek an accounting of all profits realized by the defendants, as well as monetary damages for an unspecified amount, and costs and attorneys' and experts' fees. CERTAIN OTHER LEGAL PROCEEDINGS During March 1996, Paracelsus settled two lawsuits in connection with the operation of its psychiatric programs. Paracelsus recognized an unusual charge for settlement costs totaling $22.4 million in the six months ended March 31, 1996 which consisted of settlement payments, legal fees and the write off of certain psychiatric accounts receivables in connection with the settlement of the two lawsuits. Paracelsus did not admit liability in either case but resolved the disputes through the 57 settlements in order to reestablish a business relationship and/or avoid further legal costs in connection with the disputes. Paracelsus and the plaintiff insurance company have reestablished their business relationship. See "Paracelsus Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Paracelsus Selected Historical Consolidated Financial and Operating Data." The Company is subject to claims and suits in the ordinary course of business, including those arising from care and treatment afforded at the Company's acute care, psychiatric and rehabilitative hospitals and skilled nursing facilities, and maintains insurance and, where appropriate, reserves with respect to the possible liability arising from such claims. The Company believes that the ultimate resolution of the proceedings presently pending against Paracelsus or Champion (or any of the Company's other subsidiaries) will not have a material adverse effect on the Company's consolidated financial position or results of operations. 58 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS At the Effective Time, the authorized number of directors on the Board will be nine. After the Effective Time, the Board will be divided into three classes, as nearly equal in number as possible, with the initial term of office of Class I directors to expire at the 1997 annual meeting of shareholders, the initial term of office of Class II directors to expire at the 1998 annual meeting of shareholders and the initial term of office of Class III directors to expire at the 1999 annual meeting of shareholders, with each class of directors to hold office until their successors have been duly elected and qualified. The Class III directors will be Dr. Krukemeyer and Messrs. Messenger and Miller. The Class II directors will be Messrs. VanDevender and Lange and Mr. Angelo R. Mozilo. The Class I directors will be Messrs. Conroy and Hofmann and Mr. Daryl J. White. As contemplated by the Shareholder Agreement, Dr. Krukemeyer and Messrs. Messenger, Lange and Hofmann will each be the initial representative of the Paracelsus Shareholder and Messrs. Conroy, Mozilo and White will each be an Independent Director (as defined below). After the Effective Time, the Shareholder Agreement, the 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:
NAME AGE PROJECTED POSITION WITH THE COMPANY Dr. Manfred G. Krukemeyer 34 Chairman of the Board R.J. Messenger 51 Vice Chairman of the Board and Chief Executive Officer Charles R. Miller 57 President, Chief Operating Officer and Director James G. VanDevender 48 Executive Vice President, Chief Financial Officer and Director Ronald R. Patterson 54 Executive Vice President and President, Healthcare Operations Robert C. Joyner 49 Senior Vice President, Secretary and General Counsel David R. Topper 48 Senior Vice President, Development George Asbell 47 Senior Vice President, Operations W. Warren Wilkey 51 Senior Vice President, Operations Michael M. Brooks 47 Senior Vice President, Acquisitions James T. Rush 49 Senior Vice President Lawrence A. Humphrey 40 Senior Vice President, Corporate Finance Michael D. Hofmann 56 Director Christian A. Lange 57 Director James A. Conroy 35 Director Angelo R. Mozilo 57 Director Daryl J. White 48 Director
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. 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 59 and Switzerland. Dr. Krukemeyer is a graduate of the University of Vienna School of Medicine and practiced medicine in Europe before assuming full time business responsibilities in 1992. Mr. Messenger joined the Company in March 1984, as President, Chief Operating Officer and Secretary of the Company. He was promoted to Chief Executive Officer in 1992. Mr. Messenger has been a director since joining the Company in 1984. Prior to joining the Company, Mr. Messenger was the Regional Vice President of the National Medical Enterprises, Inc. ("NME") (now Tenet Healthcare) Southwestern and Eastern regions, and the Senior Vice President, Acquisitions and Development/Hospital Group, where he was responsible for all acquisitions and development projects on a national basis. Mr. Messenger has over 27 years of experience in the hospital industry. Mr. Messenger serves on the Board of Directors of the Federation of American Health Systems, the California Hospital Association and the Health Resources Institute, Inc. Mr. Messenger also serves as an advisory member on the Board of Directors of Liberty Mutual Insurance Company and on the Board of Councilors of the University of Southern California ("USC"). Mr. Messenger received a BS degree in Industrial Engineering in 1967 and a Masters degree in Healthcare Administration in 1969, both from USC. Mr. Miller has been the Chairman, President and Chief Executive Officer of Champion since its founding in February 1990. Mr. Miller has over 37 years of experience in the hospital industry. In 1981, he co-founded Republic Health Corporation ("Republic"), serving as President and a director of the company. In less than three years, Republic had revenues of $540 million and was the fifth largest publicly-held hospital management company, owning 23 acute care hospitals, 20 psychiatric and substance abuse facilities and managing 18 hospitals and 3 specialty units. In 1986, Republic was acquired in a leveraged buy-out for $800 million. Mr. Miller, who declined to participate in the leveraged buyout of Republic, resigned as an officer and director of Republic in 1986. After leaving Republic, Mr. Miller and Mr. Brooks acquired in 1987 a general acute care hospital in El Paso, Texas and subsequently sold that facility in late 1988. During 1989, Mr. Miller did limited healthcare consulting and developed the business plan for Champion. Prior to co-founding Republic, Mr. Miller was employed for seven years by Hospital Affiliates International ("HAI"). Mr. Miller received a BBA in Personnel Management from Texas Tech University in 1968 and a Masters degree in Public Health Administration from the University of Texas in 1974. Mr. VanDevender has been the Executive Vice President, Chief Financial Officer, Secretary and Director of Champion since its formation in February 1990. Mr. VanDevender has approximately 24 years of experience in the hospital industry, including management positions in accounting and finance at the hospital level, and senior executive positions in accounting, finance, acquisitions and development and operations at the corporate level of multi-hospital companies. Mr. VanDevender was employed with Republic from 1981 until 1987 and was a Senior Vice President primarily responsible for Republic's acquisition and development function. Before joining Republic, Mr. VanDevender was employed for four years by HAI. From 1987 until 1990, Mr. VanDevender pursued private investments. He received his undergraduate degree in Accounting from Mississippi State University in 1970. Mr. Patterson has been Executive Vice President and Chief Operating Officer of Champion since 1994 after joining Champion in 1992 as Senior Vice President - -- Operations. Mr. Patterson has 26 years of experience in the healthcare industry. His operational responsibilities have included community hospitals, large university teaching hospitals, psychiatric hospitals, contract management of hospitals and specialty units and mobile diagnostic services. Prior to joining Champion, he was a Senior Vice President with Harris Methodist Health System, a Fort Worth, Texas not-for-profit healthcare system from 1990 until 1991. From 1988 until 1990, Mr. Patterson did private turnaround management consulting in the healthcare industry. From 1982 to 1988, Mr. Patterson was employed by Republic, serving initially as an Operations Vice President and subsequently as Senior Vice President with responsibility for a major operating division. From 1975 to 1981, Mr. Patterson was employed in various management positions by HAI. Mr. Patterson is a Fellow in the American College of Health Care Executives. He received his undergraduate degree from the University of Houston in 1965 and a Masters degree in Health Care Administration from Trinity University in 1973. 60 Mr. Joyner joined the Company as Vice President, Corporate Counsel and Assistant Secretary in 1986. Prior to joining the Company, Mr. Joyner served as Senior Vice President and Assistant General Counsel for NME. Mr. Joyner is a member of the California and Florida Bars, has practiced law since 1972 and has approximately 20 years of experience in the healthcare industry. In addition to his responsibilities as General Counsel, he is responsible for the Paracelsus departments of Human Resources and Insurance and Risk Management. Mr. Joyner graduated with a BSBA degree in 1969 and a JD in 1972, both from the University of Florida. Mr. Topper joined the Company in February 1981, and in January 1985 became its Vice President, Development. He was promoted to Senior Vice President in 1993. Prior to joining the Company, Mr. Topper was with Community Psychiatric Centers in various senior management positions. Mr. Asbell joined the Company in September 1985 as Senior Financial Officer for the Eastern Region. He was promoted to Regional Vice President, Operations and Development in 1988 and served in that capacity until 1995 when he was promoted to Senior Vice President, Operations. He is responsible for all hospital operations of the Company. Prior to joining the Company, Mr. Asbell served for five years in various capacities with American Medical International. Mr. Wilkey joined Champion in 1995 and has served as Senior Vice President - -- Market Operations of Champion since February 1996. From January 1995 to January 1996, Mr. Wilkey served as Vice President, Operations. Mr. Wilkey has approximately 26 years of experience in the healthcare industry, including group hospital operations, hospital administration and ancillary service management. For the six years prior to joining Champion, Mr. Wilkey was a Vice President and Director of Group Operations for Epic Healthcare Group, a publicly-held hospital ownership and management company. Mr. Brooks has served as Senior Vice President -- Development since February 1996, and Senior Vice President -- Operations Controller/Administration of Champion since January 1992. From 1989 until 1992, Mr. Brooks did private consulting within the healthcare industry and was associated with Champion in this capacity from February 1991 to December 1991. Mr. Rush joined the Company as Vice President, Finance and Chief Financial Officer in February 1985. Prior to joining the Company, Mr. Rush was the Senior Vice President and Chief Financial Officer for over eight years at Summit Health Ltd., a healthcare company similar in size and operations to the Company. Mr. Rush is a Certified Public Accountant. Mr. Humphrey has served as Senior Vice President -- Corporate Finance of Champion since February 1996 and prior to that as Vice President of Operations - -- Finance of Champion. Prior to joining Champion in September 1993, Mr. Humphrey worked for NME from 1981. Mr. Humphrey has over 15 years of experience in healthcare finance and operations. Mr. Humphrey is a Certified Public Accountant. Mr. Hofmann has been a director of the Company since 1983. He has been an international consultant in finance and banking, with his own consulting practices in London, England and Fribourg, Switzerland for more than the last five years. In addition, between 1990 and 1992, Mr. Hofmann was Chief Executive Officer of Swiss Bank Corporation in Germany. Mr. Lange has been a director of the Company since 1983. He has been President of European Investors, Inc. since 1983, and has served as Chairman of the Board of European Investors Corporate Finance, Inc. Prior to 1983, he was a senior executive with Friedrich Flick Industrieverwaltung KgaA of Dusseldorf, Germany. Mr. Conroy has been a general partner of OGP Partners, L.P., the general partner of The Olympus Private Placement Fund, L.P. ("Olympus"), since 1990. Mr. Conroy is also a general partner of OGP II, L.P., the general partner of Olympus Growth Fund II, L.P. Olympus invests in growth companies, acquisitions and restructurings through the purchase of private equity and equity-linked securities. 61 Mr. Mozilo has been President of Countrywide Mortgage Inc. since its inception in 1985 and a director since October 1987. He is co-founder of Countrywide Credit Industries, Inc. and has been Vice Chairman of the Board of Directors and Executive Vice President since its formation in March 1969. Mr. Mozilo has served since 1978 as President of Countrywide Home Loans, Inc. Mr. White has been Chairman of Pinnacle Micro, Inc. since May 1996. He was Senior Vice President, Finance and Chief Financial Officer for Compaq Computer Corp. ("Compaq") from May 1989 to May 1996. He joined Compaq in January 1983 as Director of Information Management and was named Corporate Controller in May 1984, Vice President and Corporate Controller in January 1986 and Vice President, Finance and Chief Financial Officer in October 1988. COMMITTEES OF THE BOARD EXECUTIVE COMMITTEE Under the Articles and the Bylaws, the Board may, by resolution passed by the affirmative vote of at least 75% of the Board, appoint from its membership, annually, an executive committee of two or more directors, which shall include the Chief Executive Officer and the President of the Company. The Board may designate in such resolution one or more directors as alternate members of the Executive Committee, who may replace any absent or disqualified member at any meeting of the committee. The Executive Committee, during the intervals between meetings of the Board, will have authority and power to act on behalf of the Board as provided in the Bylaws. After the Merger, the initial members of the Executive Committee will be Messrs. Messenger, Miller and VanDevender. OTHER COMMITTEES OF THE BOARD The Board may, by resolution adopted by a majority of the authorized number of directors, designate one or more other committees, each consisting of two or more directors, to serve at the pleasure of the Board. The Board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any such committee shall have authority to act in the manner and to the extent provided in the resolution of the Board and may have all the authority of the Board, except with respect to the limitations as set forth in the Bylaws. After the Merger, the Board will have the following committees, in addition to the Executive Committee, and the following respective initial members: (i) the Audit Committee (Messrs. Conroy, Mozilo and White), (ii) the Finance and Strategic Planning Committee (Messrs. Hofmann and Lange and one Independent Director to be named) and (iii) the Compensation Committee (Dr. Krukemeyer and two Independent Directors to be named). MEETINGS AND ACTIONS OF COMMITTEES Meetings and actions of committees permitted by the provisions of the Articles will be governed by, and held and taken in accordance with, each of the provisions of the Bylaws, with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the Board and its members; PROVIDED, HOWEVER, that the time of regular meetings of committees may be determined either by resolution of the Board or by resolution of the committee, that special meetings of committees may also be called by resolution of the Board, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board may adopt rules for the governance of any committee not inconsistent with the provisions of the Bylaws and the Articles. AGREEMENT REGARDING COMPOSITION OF COMMITTEES The Shareholder Agreement provides that, for so long as such agreement remains in effect, each committee of the Board (other than the Audit Committee and the Compensation Committee) will contain such numbers of Shareholder Directors or Transferee Directors so that the number of Shareholder Directors or Transferee Directors, when taken together, on each such committee shall be as nearly as possible proportional to the total number of Shareholder Directors and Transferee 62 Directors on the Board. The Shareholder Agreement and Bylaws provide that the Audit Committee will be comprised solely of Independent Directors and, for so long as the Paracelsus Shareholder is entitled to nominate any Shareholder Directors, the Compensation Committee will be comprised of one non-employee Shareholder Director, one Independent Director and one additional non-employee director. The parties have agreed to the initial composition of the Executive Committee as described under "-- Executive Committee" and the initial composition of the Finance and Strategic Planning Committee and have waived such composition requirements with respect to the initial composition of the Finance and Strategic Planning Committee. EXECUTIVE COMPENSATION The following table sets forth the compensation paid by Paracelsus to its then Chief Executive Officer and its then four other most highly compensated executive officers (the "Named Executive Officers") during the fiscal years ended September 30, 1995, 1994 and 1993. It is expected that Messrs. Messenger, Miller, VanDevender, Patterson and Joyner will serve, respectively, as the Company's Chief Executive Officer and four other most highly compensated executive officers following the Merger. See "Management." Information regarding the compensation paid by Champion to Messrs. Miller, VanDevender and Patterson in the fiscal years ended December 31, 1995, 1994 and 1993 is provided in footnotes to the following tables. Historical information regarding Dr. Krukemeyer, Mr. Harold E. Buck, who served as the Chief Operating Officer of Paracelsus until his retirement in April 1995, and Mr. Topper is provided pursuant to requirements of the Securities and Exchange Commission (the "Commission"). SUMMARY COMPENSATION TABLE
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 ($) ($) ($) (#) ($) ($) - -------------------- --------- ----------- --------- -------------- ------------- --------- -------------------- Dr. Manfred George 1995 999,996 900,000 -- -- -- -- 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
- ------------------------------ (1) For the fiscal years ended December 31, 1995, 1994 and 1993, Champion paid a salary to Mr. Miller of $437,500, $295,000 and $234,167, respectively; to Mr. VanDevender, of $295,000, $235,417 and $181,667, respectively; and to Mr. Patterson, of $295,000, $235,000 and $176,007, respectively. (2) For the fiscal year ended December 31, 1995, Champion paid bonuses to Mr. Miller and Mr. Patterson of $225,000 and $150,000, respectively. For the fiscal years ended December 31, 1995 and 1993, Champion paid bonuses to Mr. VanDevender of $162,500 and $100,000, respectively. (3) For the fiscal year ended December 31, 1994, Champion awarded to Messrs. Miller, VanDevender and Patterson options to purchase 13,876, 128,000 and 150,690 shares of Champion Common Stock, respectively. 63 (4) Messrs. Miller, VanDevender and Patterson held, as of June 21, 1996, unexercised options representing the right to purchase 211,876, 350,000 and 270,690 shares of Champion Common Stock, respectively. As of such date, such options were exercisable as to 207,250, 307,333 and 220,460 shares, respectively, for an aggregate value of $1,582,594, $1,742,249 and $933,363, respectively, based upon a closing stock price of $10.875 per share on June 21, 1996. As of such date, such options were unexercisable as to 4,626, 42,667 and 50,230 shares, respectively, for an aggregate value of $8,674, $80,001 and $94,181, respectively, based upon a closing stock price of $10.875 per share on June 21, 1996. None of such options were granted or exercised in 1995. (5) For the fiscal year ended September 30, 1995, represents matching contributions by Paracelsus under its Employee Retirement Savings (401(k)) Plan and term life insurance premiums paid by Paracelsus. (6) For the fiscal years ended December 31, 1995 and 1994, Champion paid other compensation to Mr. Patterson of $2,310 and $2,250, respectively, representing in each case matching contributions under its Marathon 401(k) Plan. For the fiscal year ended December 31, 1993, Champion paid other compensation of $76,782 to Mr. Patterson as reimbursement of relocation expenses. (7) Represents perquisites and personal benefits, including, among other things, club dues in the amounts of $20,199, $43,767 and $31,449, respectively, in 1995, 1994 and 1993, and automobile-related expenses of $35,408 in 1995. (8) Retired in April 1995. The following table sets forth grants of phantom stock appreciation rights ("PSARs") in the fiscal year ended September 30, 1995 to the Named Executive Officers under the Paracelsus Healthcare Corporation Phantom Equity Long-Term Incentive Plan (the "Phantom Equity Plan"). LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE BASED PLANS NUMBER OF ---------------------------------------- NAME PSARS (1) PERIOD UNTIL PAYOUT THRESHOLD (2) TARGET (3) MAXIMUM (4) - ----------------------------- ------------- ------------------- ------------ ----------- ------------- 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
- ------------------------------ (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 $20.5 million will be made to all participants in the Phantom Equity Plan, including the Named Executive Officers, based on the value of their terminated PSARs and/or Preferred Stock Units ("PSUs"). (2) The threshold amounts shown are calculated based on an assumed annual net income growth rate of 0%. If the actual annual net income growth rate were negative, the threshold amount payable under the Phantom Equity Plan could reach zero. (3) The Phantom Equity Plan does not contemplate specific performance targets. If the percentage increase in annual net income for fiscal year 1995 were the same as that achieved in fiscal year 1994, the amounts payable would equal the amounts shown under the maximum payout column. 64 (4) The maximum amounts shown are calculated based on an assumed annual net income growth rate of 20%, the annual net income growth rate at which the maximum number of PSARs become available to all participants under the Phantom Equity Plan. The Phantom Equity Plan does not impose any limit on the value of a PSAR, which would continue to increase with further increases in the annual net income growth rate. 1996 STOCK INCENTIVE PLAN The Company has adopted the Paracelsus Healthcare Corporation 1996 Stock Incentive Plan (the "1996 Stock Incentive Plan"), which following the Merger will be administered by the 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 the Common Stock. Under the 1996 Stock Incentive Plan, stock options, restricted stock, performance shares or SARs covering no more than 80% of the shares reserved for issuance under the 1996 Stock Incentive Plan may be granted to any participant in any one year. A total of 8,749,933 shares of Common Stock have been reserved for issuance under the 1996 Stock Incentive Plan. The 1996 Stock Incentive Plan may be amended, suspended or terminated at any time. However, the maximum number of shares that may be sold or issued under the 1996 Stock Incentive Plan may not be increased, nor may the class of persons eligible to participate in the 1996 Stock Incentive Plan be altered, without the approval of Paracelsus' shareholders; PROVIDED, HOWEVER, that adjustments to the number of shares subject to the 1996 Stock Incentive Plan and to individual awards thereunder and/or to the exercise price of awards previously granted are permitted without shareholder approval upon the occurrence of certain events affecting the capital structure of the Company. With respect to any other amendments to the 1996 Stock Incentive Plan, the Board may, in its discretion, determine that such amendment will become effective only upon approval by the shareholders of the Company if the Board determines that such shareholder approval may be advisable, such as for the purpose of obtaining or retaining any statutory or regulatory benefits under Federal or state securities laws, Federal or state tax laws or any other laws or for the purpose of satisfying applicable stock exchange listing requirements. In connection with the termination of PSARs and/or PSUs previously granted under the Phantom Equity Plan, the Company has granted options under the 1996 Stock Incentive Plan to the 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.
NUMBER OF SECURITIES EXERCISE OR UNDERLYING OPTIONS BASE GRANTED (#)(1) PRICE ($/SH) ------------------- --------------- R.J. Messenger 513,000(2) $ 0.01 487,000(3) 0.01 1,000,000(4) 12.00(5) David R. Topper 200,000(2) 0.01 Robert C. Joyner 160,933(2) 0.01
- ------------------------ (1) Pursuant to their respective Employment Agreements (as defined below), the Company has granted to Messrs. Miller, VanDevender and Patterson under the 1996 Stock Incentive Plan Value Options (as defined below) representing the right to purchase 336,000, 180,000 and 180,000 shares of 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. 65 (2) Indicates options granted in exchange for cancellation of PSARs and/or PSUs under the Phantom Equity Plan. Options are vested and exercisable immediately upon consummation of the Merger and have a term of ten years from the date of grant. (3) Options are vested and exercisable immediately upon consummation of the Merger and have a term of ten years from the date of grant (the "Value Options"). (4) Options vest and become exercisable in 25% installments on each of the first four anniversaries of the consummation of the Merger and have a term of ten years from the date of grant (the "Market Options"). (5) Based on an estimate of the fair market value of the Common Stock on the date the Merger is consummated. PERFORMANCE BONUS PLAN The Board has adopted the Paracelsus Healthcare Corporation Executive Officer Performance Bonus Plan (the "Performance Bonus Plan") covering eligible officers of the Company. The Performance Bonus Plan will be administered by the Compensation Committee, which each year, beginning on January 1, 1997, will select the officers of the Company who will be eligible to receive awards under the Performance Bonus Plan. Upon achievement by the Company of certain targeted operating results or other performance goals, such as operating income, pre-tax income or earnings per share, the Company will pay performance bonuses, the aggregate amounts of which will be determined annually based upon an objective formula. The Employment Agreements (as defined below) provide for the payment of certain minimum bonuses upon the achievement of targeted performance criteria under the Performance Bonus Plan. See "-- Employment Contracts and Termination of Employment Agreements." SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The matrix below sets forth benefits payable to the Named Executive Officers under the Paracelsus Healthcare Corporation Supplemental Executive Retirement Plan (the "SERP"). 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.
YEARS OF SERVICE AVERAGE ANNUAL ------------------------------------- COMPENSATION 5 10 15 ----------- ----------- ----------- $ 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
SERP benefits for the Named Executive Officers are determined, subject to certain vesting requirements, as (i) the product of (x) number of years of service with the Company, (y) 3.67% for officer participants (2.33% for non-officer participants) and (z) average earnings for the final 36 months of employment, less (ii) a percentage of the participating officer's Social Security benefits. SERP benefits for the Named Executive Officers generally accrue and vest ratably over a 15-year period. However, upon a change in control of the Company, each Named Executive Officer will 66 immediately become fully vested and entitled to full benefits under the SERP, regardless of his actual number of years of service with the Company, in the event of a termination by such person of his employment or a termination of such person by the Company without cause after such change in control. Prior to the Merger, the term "change in control" was defined under the SERP to include, among other things, certain offerings of equity securities pursuant to a registration statement, including the registration statement filed in connection with the Merger. Accordingly, consummation of the Merger constituted a change in control for the Named Executive Officers. Following the Merger, with respect to new participants in the SERP, the term "change in control" is defined as discussed in "-- Employment Contracts and Termination of Employment Agreements." Pursuant to their Employment Agreements, Messrs. Miller, VanDevender and Patterson will each receive credit for eligibility, vesting and benefit accrual purposes under the SERP for their prior service with Champion. Immediately following the Effective Time of the Merger, Messrs. Messenger, Topper, Joyner, Miller, VanDevender and Patterson will each have, respectively, 15, 15, 15, 6, 6 and 4 years of credited service under the SERP. Mr. Buck retired in April 1995 with 11 years of service and is currently receiving benefits under the SERP. Dr. Krukemeyer does not participate in the SERP. COMPENSATION OF DIRECTORS Following the Merger, it is anticipated that non-employee directors of the Company will each receive an annual fee of $30,000 and a fee of $2,500 for each meeting of the Board or any committee thereof attended, up to a maximum of $50,000 per year. Directors of the Company who are also employees of the Company will not receive any additional compensation for their service as directors. All directors will be reimbursed for expenses incurred in the performance of their duties. For information regarding a services agreement pursuant to which Dr. Krukemeyer will provide consulting services to the Company (other than in his capacity as Chairman of the Board), see "Certain Relationships and Related Transactions -- Services Agreement." EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AGREEMENTS In connection with the consummation of the Merger, Messrs. Messenger and Joyner's existing employment agreements with Paracelsus and Messrs. Miller, VanDevender and Patterson's existing employment agreements with Champion will be terminated and replaced with new employment agreements (the "Employment Agreements") as described below. Such officers' respective Employment Agreements provide that they will serve in the following capacities: Mr. Messenger as Chief Executive Officer and, for so long as he is a Shareholder Director, Vice Chairman of the Board and Chairman of the Executive Committee; Mr. Miller as President and Chief Operating Officer, a director on the Board and, for so long as he is a director, a member of the Executive Committee; Mr. VanDevender as Executive Vice President and Chief Financial Officer, a director on the Board and, for so long as he is a director, a member of the Executive Committee; Mr. Patterson as Executive Vice President and President, Healthcare Operations; and Mr. Joyner as Senior Vice President, Secretary and General Counsel. Each of such officers is required to devote substantially all of his business time to the affairs of the Company, provided, that to the extent such activities do not materially interfere with the performance of his duties with the Company, Mr. Messenger is permitted to devote some portion of his time to other business and charitable endeavors. Each of the Employment Agreements of Messrs. Messenger, Miller and VanDevender will have an initial term of five years, and each of the Employment Agreements of Messrs. Patterson and Joyner will have an initial term of three years. Each of the Employment Agreements of Messrs. Messenger, Miller and VanDevender will be renewed automatically upon expiration of its initial term and any subsequent five-year term unless the Company or any of Messrs. Messenger, Miller or VanDevender, as applicable, gives 12 months prior notice that such agreement will not be renewed. Upon expiration of their initial terms, each of the Employment Agreements of Messrs. Patterson and Joyner will be 67 renewed automatically one time only for three and two additional years, respectively, unless the Company or either of Messrs. Patterson or Joyner, as applicable, gives 12 months prior notice that such agreement will not be renewed. Under the Employment Agreements, each such officer will be entitled to receive a base salary and an annual bonus and will be entitled to participate in the compensation and employee benefits plans of the Company that are generally available to the executives of the Company. In addition, each such officer will be entitled to receive certain fringe benefits as provided for in his Employment Agreements. The initial base salary of each such officer under his respective Employment Agreement is as follows: Mr. Messenger: $750,000; Mr. Miller: $500,000; Mr. VanDevender: $350,000; Mr. Patterson: $350,000; and Mr. Joyner: $240,000. The maximum bonuses payable upon the achievement of targeted performance criteria under the Performance Bonus Plan, expressed as a percentage of base salary, will be as follows: Mr. Messenger: 100%; Mr. Miller: 85%; Mr. VanDevender: 70%; Mr. Patterson: 70%; and Mr. Joyner: 60%. Messrs. Messenger, Miller, VanDevender, Patterson and Joyner will each be granted Paracelsus Options as described in "-- 1996 Stock Incentive Plan." Messrs. Miller, VanDevender and Patterson each will also receive credit for eligibility, vesting and benefit accrual purposes under the SERP with respect to their respective years of prior service with Champion. See "-- Supplemental Executive Retirement Plan." In addition, Messrs. Miller, VanDevender and Patterson will receive bonuses in the respective amounts of $1,200,000, $750,000 and $500,000 in connection with the termination of their prior employment agreements with Champion. The Employment Agreements provide that Messrs. Messenger, Miller, VanDevender, Patterson and Joyner each is generally prohibited from competing with the Company while employed by the Company. The Employment Agreements also provide that, in the event of termination of his employment by the Company for "Cause" or by such officer other than for "Good Reason" (each as defined in his Employment Agreement) during the initial term of his employment agreement, Messrs. Miller, VanDevender and Patterson each will be prohibited from so competing for a period of two years following such termination, and Messrs. Messenger and Joyner each will be prohibited from so competing for one year following such termination. The Employment Agreements for all such officers will also provide that each such officer will be prohibited from so competing for a period of one year following such a termination during successive terms of his agreement. The employment of Messrs. Messenger, Miller and VanDevender cannot be terminated by the Company without the prior approval of 80% of the Board and 2/3 of the Independent Directors . If any of Messrs. Messenger, Miller or VanDevender is terminated without Cause or resigns for Good Reason, such officer's outstanding options will immediately vest and become exercisable and such officer will be entitled to receive a lump sum payment equal to the greater of (x) his current base salary and annual target bonus payable over the remaining term of employment or (y) three times his current base salary plus annual target bonus. If Mr. Patterson is terminated by the Company without Cause or resigns for Good Reason, his outstanding options will immediately vest and become exercisable and he will be entitled to receive a lump sum payment equal to the greater of (x) his current base salary and annual target bonus payable over the remainder of his contract term or (y) 2.5 times his current annual salary plus annual target bonus. If Mr. Joyner is terminated by the Company without Cause or resigns for Good Reason, his outstanding options will immediately vest and become exercisable and he will be entitled to receive a lump sum payment equal to the greater of (x) his current base salary and annual target bonus payable over the remainder of his contract term or (y) two times his current annual salary plus annual target bonus. Upon termination of the employment of any of Messrs. Messenger, Miller, VanDevender, Patterson or Joyner by the Company without Cause or by such officer for Good Reason, such officer would be entitled to receive an additional lump sum in an amount sufficient to offset the effect of any excise and other taxes to which such officer may become subject by reason of section 4999 of the Code. 68 The definition of Good Reason in the Employment Agreements generally includes a reduction in compensation, titles, duties, authority and reporting relationships, as well as notice by the Company that it does not wish to extend the terms of the Employment Agreements for the periods described above. In addition, for purposes of the Employment Agreements for Messrs. Messenger, Miller and VanDevender, Good Reason includes their failure to be nominated and elected to serve as members of the Board of Directors and the Executive Committee. The definition of Good Reason for Messrs. Messenger and Miller further includes the failure of either of them to abide by the managerial rights provisions as set forth in their Employment Agreements. Mr. Miller's Employment Agreement also provides that he will have Good Reason to terminate his employment if, in the event Mr. Messenger shall at any time cease to serve as Chief Executive Officer, Mr. Miller is not chosen to serve as his successor. In addition, the Employment Agreements will provide each of the senior officers with the right, exercisable within the 12-month period following a "change in control" of the Company, to terminate their employment without Good Reason and receive the benefits described above that are otherwise payable upon termination of their employment with Good Reason. The term "change in control" is defined in the Employment Agreements to include, INTER ALIA, (i) the acquisition by any person of 25% or more of the undiluted total voting power of Paracelsus' then outstanding voting securities (the "Paracelsus Voting Securities"); (ii) certain changes in the majority of the Board within any two-year period; (iii) a merger resulting in the holders of Paracelsus Voting Securities immediately prior to such merger retaining less than 60% of the voting securities of the surviving corporation or a reorganization or reincorporation of the Company in which any person acquires 25% or more of the voting securities of the surviving corporation; and (iv) the liquidation of the Company or the sale of all or substantially all its assets. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to July 1996, the Company did not have a formal compensation committee. Dr. Krukemeyer and Mr. Messenger each participated in deliberations of the Board concerning executive officer compensation during fiscal 1995. Following the Merger, the Compensation Committee is expected to consist of Dr. Krukemeyer and two Independent Directors. See "Certain Relationships and Related Transactions," immediately below, for information regarding certain agreements involving the members of the Company's Compensation Committee. 69 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, together with 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 Securities Exchange Act of 1934, as amended (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 70 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. 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 their 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 71 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 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, the 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 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 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 the 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 on another nationally recognized investment banking firm which will make a final and binding determination within 10 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 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 or Transferee Directors, as the case may be, 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 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 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 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 (as defined in the Shareholder Agreement) and any related actions (including voting against any action or agreement that may impede, interfere with or adversely affect any such approved Shareholder Proposal) and (b) as the Paracelsus Shareholder is required to vote with respect to any such Shareholder Proposal pursuant to the Shareholder Agreement and any Approved Acquisition Proposal 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 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. The Voting Agreement will remain in effect for so long as the provisions of the Shareholder Agreement relating to Shareholder Proposals or Approved Acquisition Proposals are in effect with respect to the Paracelsus Shareholder. RIGHT OF FIRST REFUSAL AGREEMENT At or prior to the Effective Time, Dr. Krukemeyer and Messrs. Messenger, Miller, VanDevender and Patterson will enter into an agreement (the "Right of First Refusal Agreement") pursuant to which Dr. Krukemeyer will have certain rights to purchase shares of Common Stock beneficially owned by each such person that he may from time to time determine to sell. PARACELSUS SHAREHOLDER REGISTRATION RIGHTS AGREEMENT Pursuant to the Merger Agreement, prior to the Effective Time, the Paracelsus Shareholder Registration Rights Agreement will be entered into by the Company and the Paracelsus Shareholder. For a 10-year period, the Paracelsus Shareholder will generally have the right to require the Company, on up to five separate occasions, to register for sale under the Securities Act shares of Common Stock owned beneficially or of record by the Paracelsus Shareholder (each a "Demand Registration"). Subject to certain limitations, any Demand Registration may be for a shelf registration under Rule 415 under the Securities Act. The Paracelsus Shareholder Registration Rights Agreement will also grant the Paracelsus Shareholder customary "piggyback" registration rights with respect to registrations by the Company or pursuant to registration rights of other parties. The Company will be required to pay all costs, fees and expenses incident to its performance of the Paracelsus Shareholder Registration Rights Agreement, other than any commissions, fees or discounts payable to brokers, dealers or underwriters. CHAMPION INVESTORS REGISTRATION RIGHTS AGREEMENTS Pursuant to the Merger Agreement, as of the Effective Time, certain Champion Investors will enter into their respective Champion Investors Registration Rights Agreement with the Company as follows: (i) with the holders of warrants issued in connection with the Champion Series D 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 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 78 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 the shares of Common Stock owned beneficially or of record 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 of equity securities that results in proceeds of at least $50.0 million, including without limitation the Equity Offering. Subject to certain limitations, any Champion Investors Demand Registration may be for a shelf registration under Rule 415 of the Securities Act. The Champion Investors party to each such Champion Investors Registration Rights Agreement will also have in the aggregate one customary piggyback registration right with respect to registrations by the Company, which "piggyback" right will expire upon consummation of the Equity Offering, and PARI PASSU "piggyback" registrations with respect to registrations by the Company and certain selling shareholders, subject to customary underwriters' cutbacks. The Company will be required to pay all costs, fees and expenses incident to its performance of each of the Champion Investors Registration Rights Agreements, other than any commissions, fees or discounts payable to brokers, dealers or underwriters. SERVICES AGREEMENT The consummation of the Merger is conditioned upon the Company entering into an agreement (the "Services Agreement") with Dr. Krukemeyer, pursuant to which Dr. Krukemeyer will provide management and strategic advisory services to the Company following the Merger. The Company will pay Dr. Krukemeyer a consulting fee of $1.0 million per year, commencing upon the execution of the Services Agreement, for a term not to exceed ten years. The Services Agreement may be terminated only by mutual consent of the parties. INSURANCE AGREEMENT The consummation of the Merger is conditioned upon the Company and Dr. Krukemeyer entering into an insurance agreement (the "Insurance Agreement") pursuant to which the Company will provide insurance benefits in the event of Dr. Krukemeyer's death or permanent disability during the 10-year term of the Insurance Agreement in an amount equal to $1.0 million per year from the date of such permanent disability or death until the end of the term of the Insurance Agreement. NON-COMPETE AGREEMENT The consummation of the Merger is conditioned upon Dr. Krukemeyer and the Company entering into the Non-Compete Agreement. The Non-Compete Agreement will provide that, from the date of the Shareholder Agreement to the date of termination of the Shareholder Agreement with respect to Dr. Krukemeyer or any affiliates or associates of Dr. Krukemeyer, neither Dr. Krukemeyer nor any of his affiliates or associates shall, 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. 79 Nothing in the Non-Compete Agreement will prohibit Dr. Krukemeyer from (x) owning, directly or indirectly, control of a person (the "Subject Company") if the Subject Company is not primarily engaged, directly or indirectly, in the Business in the Restricted Area and, within 12 months after such acquisition, he causes the Subject Company to divest any business or assets of the Subject Company that engage in the Business in the Restricted Area or (y) owning, directly or indirectly, not more than 5% of any class of voting securities of a publicly traded person that is engaged, directly or indirectly, in the Business in the Restricted Area. The Non-Compete Agreement will also provide that if the length of time or geographical area set forth in it is deemed too restrictive by a court, then such time or area shall be reduced to a time or area that such court may deem reasonable under the circumstances. Under the Non-Compete Agreement, Dr. Krukemeyer will further agree that following the Effective Time, neither he nor any of his affiliates will, without the prior written consent of the Company, directly or indirectly, solicit for employment any current key employee or officer of the Company or any of its subsidiaries; PROVIDED, that the foregoing restriction shall not apply to employees no longer employed by the Company or its subsidiaries or to employees who respond to general solicitations of employment not specifically directed toward such key employees or officers of the Company or its subsidiaries or, in the case of certain international projects, to Mr. Messenger. DIVIDEND; DIVIDEND AND NOTE AGREEMENT The consummation of the Merger is conditioned upon the Company and the Paracelsus Shareholder entering into the Dividend and Note Agreement. Pursuant to the Dividend and Note Agreement, the Paracelsus Shareholder will agree to purchase the Shareholder Subordinated Note from the Company for $7.2 million promptly after receipt of the Dividend. The Shareholder Subordinated Note will have a term of 10 years, will bear interest at the rate of 6.51% per year and will provide for payments of principal and accrued interest in an aggregate annual amount of $1.0 million. Prior to the Effective Time, Paracelsus will declare the Dividend, 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 $100.0 million that also meets certain other conditions, the Company or Champion will have the right to repay, and such noteholders will have the right to demand repayment, of their Champion Notes at specified prices; (iii) holders of warrants attached to certain of such Champion Notes will agree to the assumption by the Company of Champion's obligations with respect to such warrants; and (iv) a stockholders' agreement among certain of Champion's stockholders will be terminated. The Notes Offering will be a qualified debt offering under the Participants Agreement, and, upon completion of the Notes Offering, the Company intends to loan all of the proceeds therefrom to Champion to prepay all of the outstanding Champion Notes in accordance with the terms thereof, as amended by the Participants Agreement. See "The Merger and Financing." OTHER TRANSACTIONS A sole proprietorship doing business as Paracelsus Klinik, currently owned by Dr. Krukemeyer, is a party to the Amended and Restated Know-how Contract, dated as of October 1, 1988, as amended, with Paracelsus (the "Know-how Contract"). The Know-how Contract provides for the transfer of specified know-how to the Company. The Know-how Contract provides for an annual payment of the 80 lesser of $400,000 or 0.75% of Paracelsus' net operating revenue, as defined in the Know-how Contract. The Know-how Contract will be terminated upon consummation of the Merger. The Company's rights under the Know-how Contract will be replaced with a royalty-free license from Paracelsus Klinik. In November 1993, the Company lent Dr. Krukemeyer $3.2 million under a promissory loan agreement. In April 1994, the Company lent Dr. Krukemeyer an additional $1.8 million under a new $5.0 million promissory loan agreement that replaced the existing $3.2 million promissory loan agreement. The note balance and accrued interest are due in annual payments of $1.0 million each May 1, commencing May 1, 1995 through May 1, 1999 with interest at 8% per annum. The balance outstanding under the note at May 31, 1996 was $3.0 million. This loan will be repaid in full contemporaneously with the payment by the Company of the Dividend. In August 1994, Dr. Krukemeyer and Internationale Nederlanden (U.S.) Capital Corporation ("INCC") entered into certain arrangements relating to the extension of credit by INCC to Dr. Krukemeyer. In connection with such extension of credit to Dr. Krukemeyer, the Company entered into certain agreements with INCC agreeing to pay to Dr. Krukemeyer, to the extent permitted by the provisions of certain senior debt of the Company (i) transfer payments, such as dividends and know-how payments in an amount equal of the consolidated net income of the Company on a quarterly basis and (ii) salary and bonus payments equal to a minimum of $2.0 million per year. The $10.5 million outstanding under this loan will be repaid in full contemporaneously with the payment by Paracelsus of the Dividend. The Paracelsus Shareholder, which is wholly owned by Dr. Krukemeyer, and certain Champion Investors, including an associated entity of Mr. Conroy, will have rights to both require and participate in the filing of registration statements by the Company with the Commission. See "-- Paracelsus Shareholder Registration Rights Agreement" and "-- Champion Investors Registration Rights Agreements." Messrs. Hofmann and Lange serve as directors of the Company and also as financial consultants under a contract entered into with the Company on July 4, 1983. The consulting services provided involve the coordination of the Company's policies and strategies and, to a lesser extent, the financial affairs of the Company. The consultants also advise the Company as to certain matters involving the healthcare industry. These contracts provide for aggregate annual payments of $250,000 each and reimbursement for certain out-of-pocket expenses. The Company believes that the terms of the Company's arrangements with Messrs. Hofmann and Lange are at least as favorable as could have been obtained from unaffiliated third parties. These consulting arrangements will be terminated upon consummation of the Merger. 81 PRINCIPAL SHAREHOLDERS The following table sets forth as of July 15, 1996, the number of shares of Common Stock expected to be beneficially owned upon consummation of the Merger, prior to and after the Equity Offering, by (i) each person expected by the Company to beneficially own more than 5% of the shares of Common Stock, (ii) each of the Company's 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. Unless otherwise indicated, the shareholders have sole voting and investment power with respect to shares of Common Stock to be beneficially owned by them after the Effective Time. In addition, unless otherwise indicated each such person's business address is 515 West Greens Road, Suite 800, Houston, Texas 77067.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED PRIOR TO THE EQUITY OFFERING AFTER THE EQUITY OFFERING ---------------------------- -------------------------- NUMBER PERCENT (1) NUMBER PERCENT ------------- ------------- ------------- ----------- Park Hospital GmbH (2)................................ 29,771,742 60.2 29,771,742 54.5 AM Natruper Holz 69 D-49076 Osnabruck Federal Republic of Germany Dr. Manfred George Krukemeyer (2)..................... 29,771,742 60.2 29,771,742 54.5 R.J. Messenger (3).................................... 1,000,000 2.0 1,000,000 1.8 Charles R. Miller (4)................................. 1,075,026 2.1 1,075,026 2.0 James G. 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 (7)(8)............................. 56,000 * 56,000 * Christian A. Lange (7)(8)............................. 56,000 * 56,000 * Angelo R. Mozilo (8).................................. -- -- -- -- Daryl J. White (8).................................... -- -- -- -- James A. Conroy (9)................................... 2,077,292 4.2 2,077,292 3.8 Harold E. Buck........................................ -- -- -- David R. Topper....................................... 200,000 * 200,000 * First Interstate Bank of California, as Trustee (10)(11)..................................... 2,681,972 5.4 2,681,972 4.9 707 Wilshire Boulevard, W-11-2 Los Angeles, CA 90017 Donaldson, Lufkin & Jenrette, Inc. (11)(12)........... 2,785,453 5.6 2,785,453 5.1 277 Park Avenue New York, NY 10172 The Equitable Companies Incorporated (11)(12)......... 2,785,453 5.6 2,785,453 5.1 277 Park Avenue New York, NY 10172 All directors and executive officers as a group (35 persons)............................................. 36,151,190 72.9 36,151,190 66.2
- ------------------------ * 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. 82 (2) Park Hospital GmbH, a German corporation wholly owned by Dr. Krukemeyer, is the record owner of such shares. (3) Shares issuable with respect to stock options exercisable within 60 days. (4) Includes 543,250 shares issuable with respect to stock options exercisable within 60 days. (5) Includes 567,334 shares issuable with respect to stock options exercisable within 60 days. (6) Includes 400,460 shares issuable with respect to stock options exercisable within 60 days. (7) Shares issuable with respect to stock options exercisable within 60 days. (8) Director. (9) Mr. Conroy is a general partner of Olympus Private Placement Fund, L.P. ("Olympus") and disclaims beneficial ownership of Champion's securities owned by that fund. Olympus is the beneficial owner of 2,077,292 shares of Champion Common Stock through its direct ownership of (i) 1,703,078 shares of Champion Common Stock, (ii) 103,773 shares of Series C Preferred Stock, which may be converted at any time at the option of the holder into 207,546 shares of Champion Common Stock, and (iii) 83,334 shares of Champion Series D Preferred Stock, which may be converted at any time at the option of the holder into 166,668 shares of Champion Common Stock. OGP Partners, L.P., James A. Conroy, and Robert S. Morris may be deemed to beneficially own the shares of Champion Common Stock beneficially owned by Olympus. (10) Voting power only. Trustee under a ten-year voting trust agreement dated August 31, 1995, granting it sole voting power of the securities it holds on behalf of Sprout Growth, L.P. ("Growth"), Sprout Capital VI, L.P. ("Sprout VI"), DLJ Venture Capital Fund II, L.P. ("DLJ II"), Sprout Growth II, L.P. ("Growth"), and DLJ Capital Corporation ("DLJCC") (each as defined below). (11) DLJ II may be deemed to be the beneficial owner of 37,606 shares held by First Interstate Bank of California ("First Interstate") as trustee (the "DLJ II Shares"). DLJ Fund Associates II ("Associates II"), as the general partner of DLJ II, may be deemed to beneficially own indirectly the DLJ II Shares. Growth may be deemed to be the beneficial owner of 773,909 shares held by First Interstate, as trustee (the "Growth Shares"). DLJ Growth Associates ("Associates"), as a general partner of Growth, may be deemed to beneficially own indirectly the Growth Shares. Sprout VI may be deemed to be the beneficial owner of 170,109 shares held by First Interstate, as trustee (the "Sprout VI Shares"). Growth II may be deemed to be the beneficial owner of 635,652 shares by First Interstate, as trustee (the "Growth II Shares"). DLJCC may be deemed to be the beneficial owner of 64,693 shares held by First Interstate, as trustee. DLJCC, because of its relationships with DLJ II, Associates II, Growth and Associates, and as the managing general partner of each of Sprout VI and Growth II, also may be deemed to 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. 83 As the sole stockholder of DLJCC and DLJ, Donaldson, Lufkin & Jenrette, Inc. ("Donaldson, Lufkin") may be deemed to beneficial own indirectly the DLJCC Shares and the DLJ Shares. In addition, as the sole stockholder of LBO, Donaldson Lufkin may be deemed to beneficially own indirectly the shares that are beneficially owned indirectly by LBO. Accordingly, Donaldson, Lufkin may be deemed to beneficially own indirectly an aggregate of 2,785,450 shares of Common Stock (the "Donaldson, Lufkin Shares"). As the sole stockholder of Donaldson, Lufkin, The Equitable Companies Incorporated ("Equitable") may be deemed to beneficially own indirectly the Donaldson, Lufkin Shares. In addition, the following entities, by reason of their relationship with Equitable or Donaldson, Lufkin may be deemed to beneficially own indirectly the Donaldson, Lufkin Shares: AXA, FINAXA, AXA Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle, Uni Europe Assurance Mutuelle, Alpha Assurances Vie Mutuellle, Alpha Assurances I.A.R.D. Mutuelle, Claude Be Bear, as voting trustee, Patrice Garnier, as Voting Trustee, Henri de Clermont-Tonnerre, as voting trustee. (12) Not held of record, but may be deemed beneficially owned. 84 SELLING SHAREHOLDERS Of the 5,429,000 shares of Common Stock to be sold in the Equity Offering, 229,000 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 July 15, 1996 certain information regarding (i) the number of shares of Common Stock expected to be beneficially owned upon consummation of the Merger by each Selling Shareholder, (ii) the number of shares of Common Stock being offered by such Selling Shareholder and (iii) the number of shares expected to be beneficially owned by the Selling Shareholders following the Equity Offering.
BENEFICIAL OWNERSHIP 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 ------------- ----------- ----------------- ----------- ----------- Virginia Retirement System (2)................ 1,700,040 3.4 190,803 1,509,237 2.8 Equity-Linked Investors, L.P. (3)(a)(b)....... 497,726 1.0 38,197 459,529 0.8
- ------------------------ * Less than 0.1%. (a) Shared voting power. (b) Shared investment power. (1) Assumes the Underwriters' over-allotment option will not be exercised. (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, 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. Equity is a limited partnership, the general partner of which is Rohit M. Desai Associates (the "General Partner"). Rohit M. Desai is the managing general partner of the General Partners. Mr. Desai is also the sole stockholder, Chairman of the Board and President of Desai Capital Management Incorporated ("DCMI"), which acts as an investment advisor to Equity and Equity II. Under the investment advisory agreement between DCMI and Equity, DCMI has the power to vote and dispose of these securities. DCMI and Mr. Desai each disclaim beneficial ownership of the securities. 85 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 July 10, 1996, there were approximately 774 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. The Common Stock has been approved for listing on the NYSE upon consummation of the Merger under the symbol "PLS," subject to official notice of issuance. 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 $0.01 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 1,500,000 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 25% of the Exercise Price (as defined below) 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 86 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 hereinafter 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 Board, pursuant thereto a dividend (a "Rights Distribution") of one Right will be declared for each outstanding share of Common Stock held of record at the close of business on the record date set by the Board (the "Rights Record Time"), or issued thereafter and prior to the Separation Time (as defined below), including those shares to be issued in the Merger, 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 Board (the "Exercise Price"). As a result of the Rights Distribution, one Right will be distributed in respect of each share of Common Stock then outstanding or thereafter as issued by the Company, including the shares of Common Stock to be issued to holders of Champion Capital Stock in the Merger. EVIDENCE OF RIGHTS The Rights will be evidenced by the 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 87 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. Dr. Krukemeyer, as the owner of all of the outstanding shares of the Common Stock prior to the Effective Time, will not be an Acquiring Person under the Rights Agreement as a result of such ownership immediately after the Merger. 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. 88 "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 Stock 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 Common Stock at an exchange ratio of one share of 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 Common Stock equal to the Flip Ratio. The Rights Agreement will provide that whenever the Company may become obligated to issue shares of Common Stock upon exercise of or in exchange for Rights as described in the preceding paragraph, at its option, it may substitute therefor shares of Participating Preferred Stock at a ratio of one one-hundredth of a share of Participating Preferred for each share of 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 $15.0 million 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's (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 89 by the Company or any of its subsidiaries involving an aggregate principal amount in excess of $5.0 million or an aggregate cost or transfer of benefits from the Company or any of its subsidiaries in excess of $5.0 million 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 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 $0.01 per Right (the "Redemption Price"), as provided in the Rights Agreement. Immediately upon the action of the 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. 90 PRICE RANGE OF CHAMPION COMMON STOCK 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 Common Stock has been approved for listing on the NYSE upon consummation of the Merger under the symbol "PLS," subject to official notice of issuance. 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 on the price at which holders will be able to sell their Common Stock. The Champion common stock, par value $0.01 per share (the "Champion Common Stock"), is listed on the NYSE under the symbol "CHC" since July 23, 1996 (on the American Stock Exchange (the "AMEX") prior to that). Upon the consummation of the Merger, the Champion Common Stock will be delisted from the NYSE. Champion acquired AmeriHealth on December 6, 1994, through 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, and Champion Common Stock on the AMEX through July 22, 1996 and the NYSE thereafter, 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.
HIGH LOW 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....................................................... 12.25 9.50 Third Quarter (through August 8, 1996)............................... 11.625 10.125
91 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, 49,447,167 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 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 and approximately 11,527,000 shares beneficially owned by the Champion Investors. In addition, the Company currently intends to register up to 10,087,137 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 120 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 on the date of this Prospectus) except for the shares of Common Stock offered and sold in connection with the Equity Offering. 92 UNDERWRITING Subject to the terms and conditions contained in the Underwriting Agreement (the "Underwriting Agreement"), the underwriters named below (the "Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), Bear, Stearns & Co. Inc., Smith Barney Inc. and The Chicago Corporation are acting as representatives (the "Representatives"), have severally agreed to purchase 5,200,000 shares of Common Stock from the Company and 229,000 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.
NUMBER OF UNDERWRITERS SHARES Donaldson, Lufkin & Jenrette Securities Corporation........................................ Bear, Stearns & Co. Inc. .................................................................. Smith Barney Inc........................................................................... The Chicago Corporation.................................................................... ----------- Total.................................................................................... 5,429,000 ----------- -----------
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 Representatives 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 Representatives. The Underwriters have been granted an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 814,350 additional shares of Common Stock at the public offering price, less underwriting discounts and commissions, solely for the purpose of covering over-allotments, if any, made in connection with the sale of the shares of Common Stock offered hereby. The over- allotment option may be granted by the Selling Shareholders or the Company. To the extent that the Underwriters exercise such option, each of the Underwriters will become obligated, subject to certain conditions, to purchase the same proportion of such additional shares as the number of shares set forth opposite such Underwriter's name in the above table bears to 5,429,000 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 for a period of 120 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 93 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 Company and the Selling Shareholders have been advised by the Representatives that the Underwriters do not intend 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 public offering price will be determined by negotiations between the Company and the Representatives. Among the principal factors that will be considered in such negotiations are 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 $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. The Equity Offering is being conducted pursuant to Rule 2710(c)(7)(C) of the NASD Rules of Conduct. In accordance with this provision, The Chicago Corporation has agreed to act as "qualified independent underwriter" and the price at which the Shares are issued will be not higher than that recommended by The Chicago Corporation in compliance with the requirements of Rule 2710(c)(7)(C)(i) of the NASD Rules of Conduct. In connection with the Equity Offering, The Chicago Corporation in its role as qualified independent underwriter has performed due diligence investigations and reviewed and participated in the preparation of this Prospectus. VALIDITY OF COMMON STOCK The validity of the Common Stock offered hereby will be passed upon for the Company by Skadden, Arps, Slate, Meagher & Flom, Los Angeles, California. 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 of Dakota Heartland Healthcare System as of December 31, 1994 and 1995 and the statements of income, partners' equity, and cash flows of Dakota Heartland Healthcare System for the year ended December 31, 1995; (iii) the balance sheet of Jordan Valley Hospital as of September 30, 1995 and the statements of income and changes in owner's equity and cash flows of Jordan Valley Hospital for the period from January 1, 1995 through September 30, 1995; and (iv) the consolidated balance sheets of Salt Lake Regional Medical Center as of May 31, 1994 and April 13, 1995 and the consolidated statements of income, equity, and cash flows of Salt Lake Regional Medical 94 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 Common Stock 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 Common Stock, reference is made to the Registration Statement, including the exhibits thereto, and the financial statement schedules filed as a part thereof. Statements made in this Prospectus concerning the contents of any contract, agreement or other document referred to herein are not necessarily complete. With respect to each such contract, agreement or other document filed with the Commission as an exhibit, reference is made thereto for a complete description thereof, and each such statement shall be deemed qualified in its entirety by such reference. The Company and Champion are subject to the informational requirements of the Exchange Act and, in accordance therewith, file reports, proxy statements (in the case of Champion only) and other information with the Commission. Such reports and other information filed with the Commission may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at Seven World Trade Center, Suite 1300, New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material also may be obtained by mail from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such material may also be accessed electronically at the Commission's site on the World Wide Web located at http://www.sec.gov. The shares of Champion Common Stock are currently listed on the NYSE under the symbol "CHC," and such material may also be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005. After consummation of the Merger, Champion will no longer file reports, proxy statements or other information with the Commission. Instead, such information would be provided, to the extent required, in filings made by Paracelsus. The Common Stock has been approved for listing on the NYSE upon consummation of the Merger under the symbol "PLS," subject to official notice of issuance. Accordingly, after consummation of the Merger such material may also be inspected at the offices of the NYSE at 20 Broad Street, New York, New York 10005. 95 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES 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
F-1 Dakota Heartland Health System Financial Statements as of December 31, 1994 and 1995 and for the year ended December 31, 1995 Report of Coopers & Lybrand L.L.P. Independent Accountants........................ F-61 Balance Sheet -- December 31, 1994 and 1995....................................... F-62 Statement of Income -- Year Ended December 31, 1995............................... F-63 Statement of Partners' Equity -- Years Ended December 31, 1994 and 1995........... F-64 Statement of Cash Flows -- Year Ended December 31, 1995........................... F-65 Notes to Financial Statements..................................................... F-66 Jordan Valley Hospital Financial Statements as of September 30, 1995 and for the period from January 1, 1995 through September 30, 1995 Report of Coopers & Lybrand L.L.P. Independent Accountants........................ F-69 Balance Sheet -- September 30, 1995............................................... F-70 Statement of Income and Changes in Owners' Equity -- For the Period from January 1, 1995 through September 30, 1995............................................... F-71 Statement of Cash Flows -- For the Period from January 1, 1995 through September 30, 1995......................................................................... F-72 Notes to Financial Statements..................................................... F-73 Salt Lake Regional Medical Center Financial Statements as of and for the years ended May 31, 1993 and 1994 and as of April 13, 1995 and for the period from June 1, 1994 through April 13, 1995 Report of Coopers & Lybrand L.L.P. Independent Accountants........................ F-77 Consolidated Balance Sheets -- May 31, 1994 and April 13, 1995.................... F-78 Consolidated Statements of Income -- Years Ended May 31, 1993 and 1994 and for the Period from June 1, 1994 through April 13, 1995.................................. F-79 Consolidated Statements of Equity -- Years Ended May 31, 1993 and 1994 and for the Period from June 1, 1994 through April 13, 1995.................................. F-80 Consolidated Statements of Cash Flows -- Years Ended May 31, 1993 and 1994 and for the Period from June 1, 1994 through April 13, 1995.............................. F-81 Notes to Consolidated Financial Statements........................................ F-82 Champion Financial Statements as of and for the Three Months ended March 31, 1995 and 1996 (Unaudited) Unaudited Condensed Consolidated Balance Sheet -- December 31, 1995 and March 31, 1996............................................................................. F-89 Unaudited Condensed Consolidated Statement of Operations -- Three Months Ended March 31, 1995 and 1996.......................................................... F-90 Unaudited Condensed Consolidated Statement of Cash Flows -- Three Months Ended March 31, 1995 and 1996.......................................................... F-91 Notes to Condensed Consolidated Financial Statements.............................. F-92 Paracelsus and Champion Unaudited Pro Forma Condensed Combining Financial Statements Paracelsus and Champion Unaudited Pro Forma Condensed Combining Statement of Income -- Fiscal Year Ended September 30, 1995................................... PF-2 Paracelsus and Champion Unaudited Pro Forma Condensed Combining Statement of Income -- Six Months Ended March 31, 1995........................................ PF-3 Paracelsus and Champion Unaudited Pro Forma Condensed Combining Statement of Income -- Six Months Ended March 31, 1996........................................ PF-4 Paracelsus and Champion Unaudited Pro Forma Condensed Combining Balance Sheet -- March 31, 1996................................................................... PF-5 Notes to Paracelsus and Champion Unaudited Pro Forma Condensed Combining Financial Statements....................................................................... PF-6
F-2 Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements Paracelsus Unaudited Pro Forma Condensed Combining Statement of Income -- Fiscal Year Ended September 30, 1995.................................................... PF-14 Paracelsus Unaudited Pro Forma Condensed Combining Statement of Income -- Six Months Ended March 31, 1995...................................................... PF-15 Paracelsus Unaudited Pro Forma Condensed Combining Statement of Income -- Six Months Ended March 31, 1996...................................................... PF-16 Paracelsus Unaudited Pro Forma Condensed Combining Balance Sheet -- March 31, 1996............................................................................. PF-17 Notes to Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements.. PF-18 Champion Unaudited Pro Forma Condensed Combining Statement of Income and Unaudited Historical Condensed Balance Sheet Champion Unaudited Pro Forma Condensed Combining Statement of Income -- Year Ended December 31, 1995................................................................ PF-23 Champion Unaudited Pro Forma Condensed Combining Statement of Income -- Six Months Ended March 31, 1995............................................................. PF-24 Champion Unaudited Pro Forma Condensed Combining Statement of Income -- Six Months Ended March 31, 1996............................................................. PF-25 Champion Unaudited Historical Condensed Balance Sheet -- March 31, 1996........... PF-26 Notes to Champion Unaudited Pro Forma Condensed Combining Statements of Income.... PF-27
F-3 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 PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
SEPTEMBER 30 ---------------------------------- 1994 1995 ---------------- ---------------- 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 ---------------- ---------------- ---------------- ---------------- LIABILITIES AND SHAREHOLDER'S EQUITY 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 ---------------- ---------------- ---------------- ----------------
See accompanying notes. F-5 PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED SEPTEMBER 30 ---------------------------------------------------- 1993 1994 1995 ---------------- ---------------- ---------------- 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 ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
See accompanying notes. F-6 PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995
COMMON STOCK UNREALIZED ------------------------- ADDITIONAL GAINS ON OUTSTANDING PAID-IN MARKETABLE RETAINED SHARES AMOUNT CAPITAL SECURITIES EARNINGS TOTAL ----------- ------------ ---------- ----------- ------------- --------------- 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 --- ------------ ---------- ----------- ------------- --------------- --- ------------ ---------- ----------- ------------- ---------------
See accompanying notes. F-7 PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30 ------------------------------------------------ 1993 1994 1995 -------------- ---------------- -------------- 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 -------------- ---------------- -------------- -------------- ---------------- --------------
F-8 PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Supplemental schedule of noncash investing and financing activities:
YEAR ENDED SEPTEMBER 30 -------------------------------------------- 1993 1994 1995 -------------- ------------- ------------- 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 -------------- ------------- ------------- -------------- ------------- -------------
See accompanying notes. F-9 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 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 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:
YEAR ENDED SEPTEMBER 30 ---------------------------------------------- 1993 1994 1995 -------------- -------------- -------------- 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 -------------- -------------- -------------- -------------- -------------- --------------
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 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:
SEPTEMBER 30 ------------------------------ 1994 1995 -------------- -------------- 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 -------------- -------------- -------------- --------------
A reconciliation of the differences between federal income taxes computed at the statutory rate and the total provision is as follows:
YEAR ENDED SEPTEMBER 30 ------------------------------------- 1993 1994 1995 ----------- ----------- ----------- 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% --- --- --- --- --- ---
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 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:
SEPTEMBER 30 ---------------------------------- 1994 1995 ---------------- ---------------- 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 ---------------- ---------------- ---------------- ----------------
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 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:
YEAR ENDING SEPTEMBER 30 - ---------------------------------------------------------------------------- 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 ---------------- ----------------
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:
YEAR ENDING SEPTEMBER 30 - ---------------------------------------------------------------------------- 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 ---------------- ----------------
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 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:
GROSS GROSS UNREALIZED UNREALIZED ESTIMATED FAIR AMORTIZED COST GAINS LOSSES VALUE -------------- ----------- ----------- -------------- 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 -------------- ----------- ----------- -------------- -------------- ----------- ----------- --------------
The maturity distribution of the Company's marketable securities at September 30, 1995, is as follows:
AVAILABLE-FOR-SALE HELD-TO-MATURITY ------------------------------ ------------------------------ ESTIMATED FAIR ESTIMATED FAIR AMORTIZED COST VALUE AMORTIZED COST VALUE -------------- -------------- -------------- -------------- 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 -------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
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 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:
YEAR ENDING SEPTEMBER 30 REAL ESTATE EQUIPMENT TOTAL - -------------------------------------------------------- -------------- ------------- -------------- 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 -------------- ------------- -------------- -------------- ------------- --------------
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 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 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.
YEAR ENDED SEPTEMBER 30 ------------------------ 1994 1995 ----------- ----------- 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
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 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:
1994 1995 ------------------------------ ------------------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------------- -------------- -------------- -------------- 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
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 PARACELSUS HEALTHCARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
SEPTEMBER 30, MARCH 31, 1995 1996 ------------- ----------- (UNAUDITED) 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 ------------- ----------- ------------- ----------- LIABILITIES AND SHAREHOLDER'S EQUITY 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 ------------- ----------- ------------- -----------
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 PARACELSUS HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED MARCH 31, ------------------------ 1995 1996 ----------- ----------- 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) ----------- ----------- ----------- -----------
See accompanying notes F-22 PARACELSUS HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED MARCH 31, ---------------------- 1995 1996 ---------- ---------- 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) ---------- ---------- ---------- ----------
See accompanying notes F-23 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 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 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 DAVIS HOSPITAL AND MEDICAL CENTER PIONEER VALLEY HOSPITAL SANTA ROSA MEDICAL CENTER COMBINED BALANCE SHEETS
DECEMBER 31 -------------------- 1994 1995 --------- --------- (IN THOUSANDS) 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 --------- --------- --------- ---------
See accompanying notes. F-27 DAVIS HOSPITAL AND MEDICAL CENTER PIONEER VALLEY HOSPITAL SANTA ROSA MEDICAL CENTER COMBINED STATEMENTS OF INCOME AND CHANGES IN RETAINED EARNINGS
YEAR ENDED DECEMBER 31 ---------------------- 1994 1995 --------- ----------- (IN THOUSANDS) 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 --------- ----------- --------- -----------
See accompanying notes. F-28 DAVIS HOSPITAL AND MEDICAL CENTER PIONEER VALLEY HOSPITAL SANTA ROSA MEDICAL CENTER COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 -------------------- 1994 1995 --------- --------- (IN THOUSANDS) 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
See accompanying notes. F-29 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 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 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:
DECEMBER 31 -------------------- 1994 1995 --------- --------- (IN THOUSANDS) 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 --------- --------- --------- ---------
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 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):
1996........................................ $ 3,133 1997........................................ 3,069 1998........................................ 3,048 1999........................................ 2,666 2000........................................ 1,774 Thereafter.................................. 9,098 --------- Total minimum rental commitments............ $ 22,788 --------- ---------
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 DAVIS HOSPITAL AND MEDICAL CENTER PIONEER VALLEY HOSPITAL SANTA ROSA MEDICAL CENTER UNAUDITED COMBINED BALANCE SHEET
MARCH 31, 1996 -------------- (IN THOUSANDS) 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 -------------- --------------
See accompanying notes. F-34 DAVIS HOSPITAL AND MEDICAL CENTER PIONEER VALLEY HOSPITAL SANTA ROSA MEDICAL CENTER UNAUDITED COMBINED STATEMENTS OF INCOME AND CHANGES IN RETAINED EARNINGS
THREE MONTHS ENDED MARCH 31 -------------------- 1995 1996 --------- --------- (IN THOUSANDS) 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 --------- --------- --------- ---------
See accompanying notes. F-35 DAVIS HOSPITAL AND MEDICAL CENTER PIONEER VALLEY HOSPITAL SANTA ROSA MEDICAL CENTER UNAUDITED COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31 -------------------- 1995 1996 --------- --------- (IN THOUSANDS) 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
See accompanying notes. F-36 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 CHAMPION HEALTHCARE CORPORATION CONSOLIDATED BALANCE SHEET ASSETS
DECEMBER 31, ---------------------- 1994 1995 ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 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 ---------- ---------- ---------- ----------
See notes to consolidated financial statements. F-38 CHAMPION HEALTHCARE CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------- 1993 1994 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 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) ----------- ----------- ----------- ----------- ----------- -----------
See notes to consolidated financial statements. F-39 CHAMPION HEALTHCARE CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK COMMON STOCK ADDITIONAL -------------------------- ---------------------------- PAID-IN ACCUMULATED SHARES AMOUNT SUBSCRIBED RECEIVABLE CAPITAL DEFICIT ------------- ----------- ------------- ------------- ----------- ------------ 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) ------------- ----- --- --- ----------- ------------ ------------- ----- --- --- ----------- ------------
See notes to consolidated financial statements. F-40 CHAMPION HEALTHCARE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------- 1993 1994 1995 ----------- ---------- ---------- (DOLLARS IN THOUSANDS) 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 ----------- ---------- ---------- ----------- ---------- ----------
See notes to consolidated financial statements. F-41 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 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 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 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 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 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.
YEAR ENDED DECEMBER 31, 1995 ----------------- INCOME STATEMENT DATA Net revenue.......................................... $ 106,011 Net income........................................... 16,148 Company's equity in the earnings of DHHS............. 8,881 DECEMBER 31, 1994 DECEMBER 31, 1995 ----------------- ----------------- 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
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 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.
1994 1995 ----------- ----------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 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 ----------- ----------- ----------- -----------
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):
1994 1995 --------- --------- 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 --------- --------- --------- ---------
F-48 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):
1994 1995 ----------- ----------- 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 ----------- ----------- ----------- -----------
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 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 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): 1996............................................................. $ 1,166 1997............................................................. 2,514 1998............................................................. 885 1999............................................................. 47,785 2000............................................................. 79 Thereafter....................................................... 108,407 --------- $ 160,836 --------- ---------
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):
1994 1995 --------- --------- (DOLLARS IN THOUSANDS) 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 --------- --------- --------- ---------
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 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 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 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):
SERIES D SERIES C SERIES BB ------------------ ------------------ -------------------- SHARES AMOUNTS SHARES AMOUNTS SHARES AMOUNTS --------- ------- --------- ------- ---------- -------- 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 -- $ -- --------- ------- --------- ------- ---------- -------- --------- ------- --------- ------- ---------- -------- SERIES A-1 SERIES A ------------------- ------------------- SHARES AMOUNTS SHARES AMOUNTS ---------- ------- ---------- ------- 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........................ -- $ -- -- $ -- ---------- ------- ---------- ------- ---------- ------- ---------- -------
F-54 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 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:
NUMBER OF OPTION PRICE SHARES PER SHARE ----------- ------------------ 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 -----------
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 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:
1993 1994 1995 --------- --------- --------- (DOLLARS IN THOUSANDS) 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 --------- --------- --------- --------- --------- ---------
The reconciliation of the statutory federal income tax rate to the provision for income taxes was as follows:
1993 1994 1995 --------- --------- --------- (DOLLARS IN THOUSANDS) 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 --------- --------- --------- --------- --------- ---------
The components of the deferred tax assets and (liabilities) at December 31, 1994 and 1995 were as follows:
1994 1995 ---------- ---------- (DOLLARS IN THOUSANDS) 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) ---------- ---------- ---------- ----------
F-57 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
DECEMBER 31, ------------------------------- 1993 1994 1995 --------- --------- --------- (DOLLARS IN THOUSANDS) Income taxes paid....................................................... $ 478 $ 878 $ 95 Interest paid........................................................... 2,762 5,582 12,528
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): 1996.............................................................. $ 2,649 1997.............................................................. 2,266 1998.............................................................. 1,842 1999.............................................................. 1,544 2000.............................................................. 1,230 Thereafter........................................................ 2,379 --------- $ 11,910 --------- ---------
F-58 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).
FIRST SECOND THIRD FOURTH 1994 QUARTER QUARTER QUARTER QUARTER - ------------------------------------------------------------------ --------- ----------- --------- --------- 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)
FIRST SECOND THIRD FOURTH 1995(1) QUARTER QUARTER(2) QUARTER QUARTER - ------------------------------------------------------------------ --------- ----------- --------- --------- 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)
- ------------------------ (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 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 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 DAKOTA HEARTLAND HEALTH SYSTEM BALANCE SHEET DECEMBER 31, 1994 AND 1995 ASSETS
1994 1995 -------------- -------------- 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 -------------- -------------- -------------- --------------
The accompanying notes are an integral part of the financial statements. F-62 DAKOTA HEARTLAND HEALTH SYSTEM STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 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 ------------- -------------
The accompanying notes are an integral part of the financial statements. F-63 DAKOTA HEARTLAND HEALTH SYSTEM STATEMENT OF PARTNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
CHAMPION DAKOTA TOTAL EQUITY -------------- --------------- --------------- 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 -------------- --------------- --------------- -------------- --------------- ---------------
The accompanying notes are an integral part of the financial statements. F-64 DAKOTA HEARTLAND HEALTH SYSTEM STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995 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
The accompanying notes are an integral part of the financial statements. F-65 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 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:
1994 1995 -------------- -------------- 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 -------------- -------------- -------------- --------------
F-67 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:
INVESTMENTS AND ADVANCES OWNERSHIP ---------------------------- CORPORATION PERCENTAGE 1994 1995 - ----------------------------------------------------------------------- --------------- ------------- ------------- 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 ------------- ------------- ------------- -------------
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 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Jordan Valley Hospital: We have audited the accompanying balance sheet of Jordan Valley Hospital (the "Hospital"), (formerly known as Holy Cross Jordan Valley Hospital), as of September 30, 1995 and the related statements of income and change in owner's equity and cash flows for the period from January 1, 1995 through September 30, 1995. These financial statements are the responsibility of the Hospital's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Jordan Valley Hospital as of September 30, 1995 and the results of its operations and its cash flows for the period from January 1, 1995 through September 30, 1995 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Houston, Texas December 28, 1995 F-69 JORDAN VALLEY HOSPITAL BALANCE SHEET SEPTEMBER 30, 1995 (IN THOUSANDS) ASSETS 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 --------- ---------
The accompanying notes are an integral part of the financial statements. F-70 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) 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 --------- ---------
The accompanying notes are an integral part of the financial statements. F-71 JORDAN VALLEY HOSPITAL STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH SEPTEMBER 30, 1995 (IN THOUSANDS) 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 --------- ---------
The accompanying notes are an integral part of the financial statements. F-72 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 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:
(IN THOUSANDS) Buildings and improvements........................................... $ 14,765 Equipment............................................................ 9,417 ------------- 24,182 Less accumulated depreciation........................................ (10,505) ------------- 13,677 Land................................................................. 497 Construction in progress............................................. 23 ------------- $ 14,197 ------------- -------------
3. ACCRUED AND OTHER LIABILITIES: Details of accrued and other liabilities at September 30, 1995 were as follows:
(IN THOUSANDS) Accrued salaries and wages........................................... $ 563 Accrued vacation..................................................... 179 Property and sales tax............................................... 254 ------------- Total accrued and other liabilities................................ $ 996 ------------- -------------
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 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:
FISCAL YEAR (IN THOUSANDS) - --------------------------------------------------------------------- 1996............................................................... $ 155 1997............................................................... 123 1998............................................................... 119 1999............................................................... 114 2000............................................................... 434 ----- Total............................................................ $ 945 ----- -----
5. INCOME TAXES: The provision for income taxes consisted of the following for the period from January 1, 1995 through September 30, 1995:
(IN THOUSANDS) Current: Federal............................................................ $ 364 State.............................................................. 32 ----- Total current provision.......................................... 396 Deferred: Federal............................................................ 117 State.............................................................. 10 ----- Total deferred expense........................................... 127 ----- Provision for income taxes........................................... $ 523 ----- -----
The reconciliation of the statutory federal income tax rate to the provision for income taxes is as follows:
(IN THOUSANDS) Federal income tax benefit at statutory rate of 34%............................ $ 480 State income taxes, net of federal benefit..................................... 43 ------ Total provision for income taxes............................................. $ 523 ------ ------
The components of the deferred taxes were as follows: 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) ------ ------
F-75 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 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 SALT LAKE REGIONAL MEDICAL CENTER CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
APRIL 13, MAY 31, 1994 1995 ------------ ------------- Current assets: Cash and cash equivalents......................................................... $ 3,277 $ 535 Investments Operating....................................................................... 1,839 Held by trustees................................................................ 418 ------------ ------------- 5,534 535 Accounts receivable, less allowance for doubtful accounts of $3,098 and $2,076, respectively....................................................................... 13,501 14,116 Other accounts receivable........................................................... 1,185 694 ------------ ------------- 14,686 14,810 Supplies inventories................................................................ 1,100 1,123 Prepaid expenses and other current assets........................................... 89 1,094 ------------ ------------- Total current assets.......................................................... 21,409 17,562 Investment assets limited as to use, net of current portion Held by trustees.................................................................. 902 Board designated.................................................................. 5,902 Donor restricted and other........................................................ 1,578 ------------ 8,382 Property and equipment: Land.............................................................................. 1,193 737 Buildings and improvements........................................................ 31,213 32,099 Equipment......................................................................... 42,779 45,017 Construction in progress.......................................................... 619 658 ------------ ------------- Total property and equipment.................................................. 75,804 78,511 Less allowances for depreciation and amortization................................. 40,426 43,819 ------------ ------------- Total property and equipment, net............................................. 35,378 34,692 Other assets........................................................................ 2,398 115 ------------ ------------- Total assets.................................................................. $ 67,567 $ 52,369 ------------ ------------- ------------ ------------- LIABILITIES AND EQUITY Current liabilities: Current portion of capitalized lease obligation................................... $ 233 $ 545 Accounts payable.................................................................. 3,004 1,946 Due to third-party payors......................................................... 4,045 438 Accrued and other liabilities..................................................... 5,137 6,910 Due to HTI........................................................................ 6,015 ------------ ------------- Total current liabilities..................................................... 12,419 15,854 Capitalized lease obligation, net of current portion................................ 16,857 1,914 Other long-term liabilities......................................................... 58 228 Due to HCHSC........................................................................ 2,072 Commitments and contingencies (Note 4) Fund Balance: General........................................................................... 34,583 Donor restricted.................................................................. 1,578 Owner's Equity: Contributed capital............................................................... 32,663 Retained earnings................................................................. 1,710 ------------ ------------- Total liabilities and equity.................................................. $ 67,567 $ 52,369 ------------ ------------- ------------ -------------
The accompanying notes are an integral part of the consolidated financial statements. F-78 SALT LAKE REGIONAL MEDICAL CENTER CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS)
PERIOD FROM JUNE 1, 1994 THROUGH YEAR ENDED YEAR ENDED APRIL 13, MAY 31, 1993 MAY 31, 1994 1995 ------------ ------------ ------------- 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 ------------ ------------ ------------- ------------ ------------ -------------
The accompanying notes are an integral part of the consolidated financial statements. F-79 SALT LAKE REGIONAL MEDICAL CENTER CONSOLIDATED STATEMENTS OF EQUITY (IN THOUSANDS)
PERIOD FROM JUNE 1, 1994 THROUGH YEAR ENDED YEAR ENDED APRI1 13, MAY 31, 1993 MAY 31, 1994 1995 ------------ ------------ ------------- 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 ------------ ------------ ------------- ------------ ------------ -------------
The accompanying notes are an integral part of the consolidated financial statements. F-80 SALT LAKE REGIONAL MEDICAL CENTER CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM JUNE 1, 1994 THROUGH YEAR ENDED YEAR ENDED APRIL 13, MAY 31, 1993 MAY 31, 1994 1995 ------------ ------------ ------------- 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 ------------ ------------ ------------- ------------ ------------ -------------
The accompanying notes are an integral part of the consolidated financial statements. F-81 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 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 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:
MARKET COST VALUE --------- --------- (IN THOUSANDS) 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 --------- --------- --------- ---------
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:
1994 1995 --------- --------- (IN THOUSANDS) 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 --------- --------- --------- ---------
F-84 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:
MATURITY 1994 1995 --------- --------- --------- (IN THOUSANDS) 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 --------- --------- --------- ---------
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 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:
1994 --------------- (IN THOUSANDS) Debt service reserve fund........................................... $ 902 Bond fund........................................................... 40 Interest fund....................................................... 378 ------- 1,320 Less current portion.............................................. (418) ------- $ 902 ------- -------
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:
FISCAL YEAR CAPITAL OPERATING --------- ----------- - -------------------------------------------------------------- (IN THOUSANDS) 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 --------- ---------
F-86 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.
PERIOD ENDED APRIL 13, 1995 --------------- (IN THOUSANDS) 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 ------- -------
The reconciliation of the statutory federal income tax rate to the provision for income taxes is as follows:
PERIOD ENDED APRIL 13, 1995 --------------- (IN THOUSANDS) 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 ------- -------
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:
PERIOD ENDED APRIL 13, 1995 --------------- (IN THOUSANDS) 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) ------ ------
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 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 CHAMPION HEALTHCARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) ASSETS
DECEMBER 31, MARCH 31, 1995 1996 ------------ ----------- (DOLLARS IN THOUSANDS) 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 ------------ ----------- ------------ -----------
See notes to condensed consolidated financial statements. F-89 CHAMPION HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, -------------------- 1995 1996 --------- --------- (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 --------- --------- --------- ---------
See notes to condensed consolidated financial statements. F-90 CHAMPION HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------- 1995 1996 ---------- ---------- (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 ---------- ---------- ---------- ----------
See notes to condensed consolidated financial statements. F-91 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 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).
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 1995 MARCH 31, 1996 ------------------- ------------------- 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 DECEMBER 31, 1995 MARCH 31, 1996 ------------------- ------------------- 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
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):
DECEMBER 31, MARCH 31, 1995 1996 ------------ ----------- 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 ------------ ----------- ------------ -----------
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 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.
THREE MONTHS ENDED MARCH 31, -------------------- 1995 1996 --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 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 --------- ---------
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:
THREE MONTHS ENDED MARCH 31, -------------------------- 1995 1996 ----------- ------------- Primary.......................................................... 4,277,975 12,835,211 ----------- ------------- ----------- ------------- Fully Diluted.................................................... N/A 18,183,900 ------------- -------------
F-94 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 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 PARACELSUS AND CHAMPION UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS The Paracelsus and Champion Unaudited Pro Forma Condensed Combining Financial Statements set forth below have been derived from the Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements and the Champion Unaudited Pro Forma Condensed Combining Statements of Income and Unaudited Historical Condensed Balance Sheet included elsewhere in this Prospectus. The Paracelsus and Champion Unaudited Pro Forma Condensed Combining Financial Statements reflect the effect of the Merger and certain related transactions, in each case as if such transactions had occurred at the beginning of each period presented for purposes of the pro forma income statements and operating data and on March 31, 1996 for purposes of the pro forma balance sheet. The Paracelsus and Champion Unaudited Pro Forma Condensed Combining Financial Statements also give effect to certain acquisitions and dispositions by each of Paracelsus and Champion completed since the beginning of each of the periods presented. The Paracelsus and Champion Unaudited Pro Forma Condensed Combining Statement of Income for the fiscal year ended September 30, 1995 includes Paracelsus' historical results of operations for the fiscal year ended September 30, 1995 and Champion's historical results of operations for the year ended December 31, 1995. The Paracelsus and Champion Unaudited Pro Forma Condensed Combining Statement of Income for the six months ended March 31, 1995 and 1996 include Paracelsus' and Champion's historical results of operations for the same six-month periods. The Unaudited Pro Forma Condensed Combining Balance Sheet includes the historical balance sheets of Paracelsus and Champion as of March 31, 1996. The Paracelsus and Champion Unaudited Pro Forma Condensed Combining Financial Statements set forth below and the Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements and the Champion Unaudited Pro Forma Condensed Combining Statements of Income included elsewhere herein do not purport to present the financial position or results of operations of Paracelsus and Champion had the transactions and events assumed therein occurred on the dates specified, nor are they necessarily indicative of the results of operations that may be expected in the future. The Paracelsus and Champion Unaudited Pro Forma Condensed Combining Financial Statements set forth below are qualified in their entirety by reference to, and should be read in conjunction with, the Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements and the Champion Unaudited Pro Forma Condensed Combining Statements of Income and Unaudited Historical Condensed Balance Sheet included elsewhere in this Prospectus. See "Risk Factors -- Significant Leverage," "Refinancings in Connection with the Merger," "Paracelsus Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Champion Management's Discussion and Analysis of Financial Condition and Results of Operations." PF-1 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)
ADJUSTMENTS PARACELSUS CHAMPION FOR THE PRO FORMA FOR PRO FORMA PRO FORMA MERGER THE MERGER Total operating revenues........................................ $ 501,633 $ 195,633 $ (367)(1) $ 696,899 Costs and expenses: Salaries and benefits......................................... 206,035 82,040 288,075 Supplies...................................................... 44,816 26,012 70,828 Purchased services............................................ 59,302 26,688 85,990 Provision for bad debts....................................... 41,054 14,562 55,616 Other operating expenses...................................... 92,828 25,483 (400)(2) 117,911 Depreciation and amortization................................. 17,167 10,344 4,912(3) 31,635 (788)(4) Interest...................................................... 17,241 15,738 3,824(5) 36,803 Equity in earnings of DHHS.................................... (8,881) (8,881) Restructuring and unusual charges............................. 4,177 4,177 ----------- ----------- ------------- ------------- Total costs and expenses........................................ 482,620 191,986 7,548 682,154 ----------- ----------- ------------- ------------- Income before minority interests and income taxes............... 19,013 3,647 (7,915) 14,745 Minority interests.............................................. (1,927) (1,927) ----------- ----------- ------------- ------------- Income before income taxes...................................... 17,086 3,647 (7,915) 12,818 Income taxes.................................................... 7,005 277 (1,936)(6) 5,346 ----------- ----------- ------------- ------------- Net income...................................................... 10,081 3,370 (5,979) 7,472 Preferred dividends accrued..................................... 11,331 (11,331)(7) ----------- ----------- ------------- ------------- Income (loss) applicable to common stock........................ $ 10,081 $ (7,961) $ 5,352 $ 7,472 ----------- ----------- ------------- ------------- ----------- ----------- ------------- ------------- Income (loss) per share....................................... $ (1.87) $ 0.15 ----------- ------------- ----------- ------------- Weighted average number of common and common equivalent shares outstanding.................................................... 4,255 46,069(8) 50,324 ----------- ------------- ------------- ----------- ------------- -------------
See notes to Paracelsus and Champion unaudited pro forma condensed combining financial statements. PF-2 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)
ADJUSTMENTS PARACELSUS CHAMPION FOR THE PRO FORMA FOR PRO FORMA PRO FORMA MERGER THE MERGER 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 ----------- ------------- ------------- ----------- ------------- -------------
See notes to Paracelsus and Champion unaudited pro forma condensed combining financial statements. PF-3 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)
ADJUSTMENTS PRO FORMA PARACELSUS CHAMPION FOR THE FOR THE PRO FORMA PRO FORMA MERGER MERGER 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 ----------- ----------- ----------- -----------
See notes to Paracelsus and Champion unaudited pro forma condensed combining financial statements. PF-4 PARACELSUS AND CHAMPION UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET MARCH 31, 1996 (IN THOUSANDS)
ADJUSTMENTS PRO FORMA PARACELSUS CHAMPION FOR THE FOR THE PRO FORMA HISTORICAL(A) MERGER MERGER ASSETS Current assets: Cash and cash equivalents............................................... $ 3,149 $ 5,670 $(53,667)(9) $ 8,819 53,667(9) Marketable securities................................................... 10,051 -- 10,051 Accounts receivable, less allowance for uncollectibles.................. 100,015 36,407 136,422 Supplies................................................................ 9,652 3,872 13,524 Deferred income taxes................................................... 26,463 2,521 18,646(10) 47,630 Other current assets.................................................... 4,918 3,769 (1,000)(11) 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(12) 400,828 Investment in DHHS........................................................ 52,118 52,118 Other assets.............................................................. 57,854 36,668 60,215(12) 151,737 (3,000)(11) --------- ------------- ------------- --------- Total assets.......................................................... $ 407,911 $308,022 $112,883 $ 828,816 --------- ------------- ------------- --------- --------- ------------- ------------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and other current liabilities.......................... $ 77,411 $ 33,655 $ 4,000(13) $ 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(9) 413,981 Deferred income taxes..................................................... 24,607 7,394 15,589(12) 47,590 Other long-term liabilities............................................... 25,968 3,051 1,500(13) 30,519 Redeemable preferred stock................................................ 46,078 (46,078)(12) Shareholders' equity...................................................... 96,365 33,798 (21,113)(14) 218,368 (9,604)(15) 5,478(12) 147,242(12) (33,798)(12) --------- ------------- ------------- --------- Total liabilities and shareholders' equity............................ $ 407,911 $308,022 $112,883 $ 828,816 --------- ------------- ------------- --------- --------- ------------- ------------- ---------
- ------------------------ (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 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 12). 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 9) 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.
FISCAL YEAR SIX MONTHS ENDED ENDED MARCH 31, SEPTEMBER 30, -------------------- 1995 1995 1996 (IN THOUSANDS) 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 ------------- --------- --------- ------------- --------- ---------
PF-6 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.
FISCAL YEAR SIX MONTHS ENDED ENDED MARCH 31, SEPTEMBER 30, -------------------- 1995 1995 1996 (IN THOUSANDS) 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 ------------- --------- --------- ------------- --------- ---------
(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 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:
FISCAL YEAR SIX MONTHS ENDED ENDED MARCH 31, SEPTEMBER 30, -------------------- 1995 1995 1996 (IN THOUSANDS) Paracelsus Stock Split of each share of Paracelsus Common Stock outstanding prior to the Effective Time of the Merger into 66,159.426 shares of Paracelsus Common Stock.......................................... 29,772 29,772 29,772 Dilutive effect of shares of Champion Common Stock issued during the period in connection with (i) the exercise of Champion Options and Champion Warrants and (ii) the conversion of Champion Preferred Stock into Champion Common Stock in connection with Champion's 1995 recapitalization................................. 7,613 2,809 3,892 Dilutive effect of Champion Common Stock equivalents, based on the treasury stock method using the historical stock prices of Champion Common Stock...... 729 837 -- (a) Conversion of each share of Champion Preferred Stock into two shares of Paracelsus Common Stock in the Merger................................................ 5,211 9,920 5,216 Dilutive effect of Paracelsus Options to be outstanding upon consummation of the Merger, based on the treasury stock method using the historical stock prices of Champion Common Stock................................. 2,744 2,745 -- (a) ------------- --------- --------- Pro forma adjustment................................... 46,069 46,083 38,880 ------------- --------- --------- ------------- --------- ---------
------------------------------- (a) Not applicable due to anti-dilutive impact. PF-8 NOTES TO PARACELSUS AND CHAMPION UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS (CONTINUED) (9) 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):
PRO FORMA PRO FORMA ADJUSTMENT ADJUSTMENT TO CASH TO DEBT (IN THOUSANDS) 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 ----------- -----------
(10) To record current deferred tax assets at the effective rate (41%) resulting from the following Merger-related events (in thousands): 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 --------- ---------
PF-9 NOTES TO PARACELSUS AND CHAMPION UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS (CONTINUED) (11) 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 9)). (12) To record the Merger using the purchase method of accounting, including the adjustment of Champion's balance sheet to reflect the estimated fair market value of its property and equipment, based on the per share market price of Champion Common Stock on April 12, 1996, the last trading day prior to the announcement of the Merger ($10.50), less a 25% discount to reflect the limited number of shares of Champion Common Stock that were freely tradable at the date of the Merger. The Merger Agreement does not specify the Champion Common Stock market price to be used in the calculation of the purchase price. The purchase price allocation reflected in the Unaudited Pro Forma Condensed Combining Balance Sheet is based upon the best information currently available without a final independent appraisal of Champion's facilities. For the purpose of allocating net acquisition costs among the Champion assets acquired, Paracelsus has tentatively allocated 35% of the excess acquisition cost over the carrying value of Champion's assets to property and equipment and 65% to Goodwill. It is the intention of Paracelsus and Champion to more fully evaluate the net assets acquired and, as a result, the allocation of acquisition cost may change. Paracelsus and Champion do not expect the final allocation of acquisition cost to be materially different from that assumed in the Unaudited Pro Forma Condensed Combining Balance Sheet. The following table summarizes the calculation of the preliminary purchase price allocation (in thousands, except market price data): 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 10)..................................... (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 --------- ---------
PF-10 NOTES TO PARACELSUS AND CHAMPION UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS (CONTINUED) - -------------------------- (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 --------- ---------
(13) 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. (14) To reflect the pro forma payment of the Dividend in the amount of $21,113,000. (15) To reflect the pro forma reduction in shareholders' equity for the following Merger-related events (in thousands): Cash compensation paid in connection with the cancellation of the Phantom Equity Plan (see Note 9)................................. $ 20,500 Record vesting of Paracelsus employees in SERP upon consummation of the Merger (see Note 13)...................................... 4,000 Estimated severance and relocation costs (see Note 9)............. 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 --------- ---------
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): Total charges excluded from the Unaudited Pro Forma Condensed Combining Statements of Income (see Note 10).................... $ 43,650 Income tax benefit at the effective rate of 41%.................. (17,896) --------- Net reduction to income (loss) applicable to common stock........ $ 25,754 --------- ---------
PF-11 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:
SIX MONTHS ENDED MARCH 31, FISCAL YEAR ENDED -------------------- SEPTEMBER 30, 1995 1995 1996 Loss per share.............................. $ (0.39) $ (0.47) $ (0.69) ------ --------- --------- ------ --------- ---------
PF-12 PARACELSUS UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS The following tables present the Paracelsus Unaudited Pro Forma Condensed Combining Balance Sheet as of March 31, 1996, and the Paracelsus Unaudited Pro Forma Condensed Combining Statements of Income for the six months ended March 31, 1996 and 1995 and the fiscal year ended September 30, 1995, to reflect the effect of the acquisition by Paracelsus of the Columbia Hospitals (Pioneer, a 139-bed hospital in West Valley City, Utah, Davis, a 120-bed hospital in Layton, Utah, and Santa Rosa, a 129-bed hospital in Milton, Florida) on May 17, 1996, the sale by Paracelsus of Womans Hospital, a 111-bed hospital in Jackson, Mississippi on September 30, 1995 and the closure of the Closed Facility, Bellwood Health Center, a psychiatric facility in Bellwood, California, on April 24, 1995. The Paracelsus Unaudited Pro Forma Condensed Combining Balance Sheet assumes that the acquisition of the Columbia Hospitals occurred on March 31, 1996, and the Paracelsus Unaudited Pro Forma Combining Statements of Income assume that the acquisition of the Columbia Hospitals occurred at the beginning of each period and the sale of Womans Hospital and the closure of the Closed Facility occurred on October 1, 1994. Paracelsus acquired the Columbia Hospitals from Columbia for consideration consisting of $38,500,000 in cash and the exchange of the Exchanged Hospitals (Peninsula, a 119-bed hospital in Ormond Beach, Florida, Elmwood, a 135-bed hospital in Jefferson, Louisiana, and Halstead, a 190-bed hospital in Halstead, Kansas). The acquisition was accounted for as a purchase transaction. Paracelsus financed the cash portion of the acquisition of the Columbia Hospitals from borrowings under the Existing Paracelsus Credit Facility. Paracelsus also engaged in the Real Property Purchase and Sale Transaction whereby it purchased the real property of Elmwood and Halstead from a REIT, exchanged the Elmwood and Halstead real properties with Columbia for Pioneer's real property, and sold Pioneer's real property to the REIT. Paracelsus sold Womans Hospital to the facility's lessee for $17,800,000 in cash, which resulted in a gain of $9,189,000. In August of 1994, Paracelsus had divested the operations of Womans Hospital and entered into an operating lease agreement with the lessee, which granted the lessee the option to purchase the facility at an amount defined in the lease agreement. In connection with the closure of the Closed Facility, Paracelsus recorded a restructuring charge of $973,000 for employee severance benefits and contract termination costs. The Paracelsus Unaudited Pro Forma Condensed Combining Statement of Income for the fiscal year ended September 30, 1995 includes Paracelsus' historical results of operations for the fiscal year ended Septembe 30, 1995 and the Columbia Hospitals' historical results of operations for the year ended December 31, 1995. The Paracelsus Unaudited Pro Forma Condensed Combining Statement of Income for the six months ended March 31, 1995 and 1996 include Paracelsus' and the Columbia Hospitals' historical results of operations for the same six-month period. The Paracelsis Unaudited Pro Forma Condensed Combining Balance Sheet includes the historical balance sheet of Paracelsus and the Columbia Hospitals as of March 31, 1996. The Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements do not purport to present the financial position or results of operations of Paracelsus had the acquisitions occurred on the dates specified, nor are they necessarily indicative of the results of operations that may be expected in the future. The Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements following are qualified in their entirety by reference to, and should be read in conjunction with, the historical consolidated financial statements of Paracelsus and the historical combined financial statements of the Columbia Hospitals included elsewhere herein. PF-13 PARACELSUS UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 (IN THOUSANDS)
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 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 ---------- --------- ------------ ----------- ------------ --------- ---------- --------- ------------ ----------- ------------ ---------
See notes to Paracelsus unaudited pro forma condensed combining financial statements. PF-14 PARACELSUS UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME FOR THE SIX MONTHS ENDED MARCH 31, 1995 (IN THOUSANDS)
PARACELSUS COLUMBIA WOMANS BELLWOOD PRO FORMA PARACELSUS HISTORICAL HOSPITALS HOSPITAL HEALTH CENTER ADJUSTMENTS PRO FORMA 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 ----------- ----------- ----------- ------------- ------------- ----------- ----------- ----------- ----------- ------------- ------------- -----------
See notes to Paracelsus unaudited pro forma condensed combining financial statements. PF-15 PARACELSUS UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME FOR THE SIX MONTHS ENDED MARCH 31, 1996 (IN THOUSANDS)
PARACELSUS COLUMBIA PRO FORMA PARACELSUS HISTORICAL HOSPITALS ADJUSTMENTS PRO FORMA 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) ----------- --------- -------------- ----------- ----------- --------- -------------- -----------
See notes to Paracelsus unaudited pro forma condensed combining financial statements. PF-16 PARACELSUS UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET MARCH 31, 1996 (IN THOUSANDS)
PARACELSUS COLUMBIA PRO FORMA PARACELSUS HISTORICAL HOSPITALS ADJUSTMENTS PRO FORMA ASSETS Current assets: Cash and cash equivalents.............................. $ 3,149 $ 206 $ (206)(6) $ 3,149 Marketable securities.................................. 10,051 -- 10,051 Accounts receivable, less allowance for uncollectibles........................................ 100,121 15,664 (15,770)(6)(7) 100,015 Supplies............................................... 10,634 2,019 (3,001)(6)(7) 9,652 Deferred income taxes.................................. 26,463 -- 26,463 Other current assets................................... 4,798 1,040 (920)(6)(7) 4,918 ----------- --------- -------- ----------- Total current assets................................. 155,216 18,929 (19,897) 154,248 Property and equipment, net of accumulated depreciation and amortization........................................ 165,729 47,561 (17,481)(8) 195,809 Other assets............................................. 47,271 12,781 (2,198)(6)(8) 57,854 ----------- --------- -------- ----------- Total assets......................................... $ 368,216 $ 79,271 $ (39,576) $ 407,911 ----------- --------- -------- ----------- ----------- --------- -------- ----------- LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable and other current liabilities......... $ 76,615 $ 8,750 $ (7,954)(6)(7) $ 77,411 Current maturities of long-term debt and capital lease obligations........................................... 5,186 -- (4,728)(4) 458 ----------- --------- -------- ----------- Total current liabilities............................ 81,801 8,750 (12,682) 77,869 Long-term debt and capital lease obligations............. 139,475 -- 43,627(4) 183,102 Deferred income taxes.................................... 24,607 -- 24,607 Other long-term liabilities.............................. 25,968 36,324 (36,324)(6) 25,968 Shareholder's equity..................................... 96,365 34,197 (34,197)(6) 96,365 ----------- --------- -------- ----------- Total liabilities and shareholder's equity........... $ 368,216 $ 79,271 $ (39,576) $ 407,911 ----------- --------- -------- ----------- ----------- --------- -------- -----------
See notes to Paracelsus unaudited pro forma condensed combining financial statements. PF-17 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):
SIX MONTHS ENDED MARCH 31, FISCAL YEAR ENDED --------------------- SEPTEMBER 30, 1995 1995 1996 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) -------- --------- ---------- -------- --------- ----------
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):
SIX MONTHS ENDED MARCH 31, FISCAL YEAR ENDED -------------------- SEPTEMBER 30, 1995 1995 1996 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) ------- --------- --------- ------- --------- ---------
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 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):
SIX MONTHS ENDED MARCH 31, FISCAL YEAR ENDED -------------------- SEPTEMBER 30, 1995 1995 1996 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) ------- --------- --------- ------- --------- ---------
(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 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): 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) --------- ---------
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 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 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 CHAMPION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA)
CHAMPION JORDAN SLRMC (3 HISTORICAL VALLEY MONTHS AND PRO FORMA CHAMPION (1) HOSPITAL 13 DAYS) ADJUSTMENTS PRO FORMA Net revenue................................ $ 167,520 $ 20,973 $ 22,438 $ (15,298)(2)(3) $ 195,633 Costs and expenses: Salaries and benefits.................... 72,188 8,000 8,090 (6,238)(2) 82,040 Supplies................................. 21,113 2,751 4,012 (1,864)(2) 26,012 Purchased services....................... 23,595 2,570 2,296 (1,773)(2) 26,688 Provision for bad debts.................. 12,016 1,929 1,527 (910)(2) 14,562 Other operating expenses................. 20,999 3,531 3,611 (2,658)(2)(4) 25,483 Depreciation and amortization............ 9,290 1,128 1,372 (1,446)(2)(5) 10,344 Interest................................. 13,618 -- 45 2,075(6) 15,738 Equity in earnings of DHHS............... (8,881) -- -- (8,881) ------------ --------- ----------- -------- ----------- Total costs and expenses................... 163,938 19,909 20,953 (12,814) 191,986 ------------ --------- ----------- -------- ----------- Income before income taxes................. 3,582 1,064 1,485 (2,484) 3,647 Income taxes............................... 150 394 557 (824)(7) 277 ------------ --------- ----------- -------- ----------- Net income................................. 3,432 670 928 (1,660) 3,370 Preferred dividends accrued................ 11,331 -- -- 11,331 ------------ --------- ----------- -------- ----------- Loss applicable to common stock............ $ (7,899) $ 670 $ 928 $ (1,660) $ (7,961) ------------ --------- ----------- -------- ----------- ------------ --------- ----------- -------- ----------- Loss per share............................. $ (1.86) $ (1.87) ------------ ----------- ------------ ----------- Weighted average number of common and common equivalent shares outstanding...... 4,255 4,255 ------------ ----------- ------------ -----------
See notes to Champion unaudited pro forma condensed combining statements of income. PF-23 CHAMPION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME FOR THE SIX MONTHS ENDED MARCH 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA)
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 Net revenue........ $ 61,623 $ 4,683 $ (10,497)(8)(9) $ 55,809 $ 11,035 $ 37,144 $ (6,879)(2)(3) Cost and expenses: Salaries and benefits........ 26,951 3,662 (3,962)(9) 26,651 4,149 14,261 (2,893)(2) Supplies......... 6,818 1,071 (1,304)(9) 6,585 1,300 6,895 (1,077)(2) Purchase services........ 8,804 1,195 (2,871)(9)(10) 7,128 1,006 5,030 (1,051)(2) Provision for bad debts........... 5,183 1,713 (529)(9) 6,367 1,263 1,979 (1,666)(2) Other operating expenses........ 8,886 894 (1,335)(9) 8,445 884 4,323 (829)(2) Depreciation and amortization.... 3,023 366 (197)(9)(11) 3,192 718 2,402 (1,899)(2)(5) Interest......... 4,204 331 (145)(9)(12) 4,390 307 2,251(6) Equity in earnings of DHHS............ (1,478) (885)(9)(13) (2,363) ------------- ------------- --------------- --------------- ----------- ----------- ------- Total costs and expenses.......... 62,391 9,232 (11,228) 60,395 9,320 35,197 (7,164) ------------- ------------- --------------- --------------- ----------- ----------- ------- Income (loss) before income taxes............. (768) (4,549) 731 (4,586) 1,715 1,947 285 Income taxes (benefit)......... 70 (274) 274(7) 70 635 731 (1,366)(7) ------------- ------------- --------------- --------------- ----------- ----------- ------- Net income (loss).. (838) (4,275) 457 (4,656) 1,080 1,216 1,651 Preferred dividends accrued........... 2,727 2,727 ------------- ------------- --------------- --------------- ----------- ----------- ------- Income (loss) applicable to common stock...... $ (3,565) $ (4,275) $ 457 $ (7,383) $ 1,080 $ 1,216 $ 1,651 ------------- ------------- --------------- --------------- ----------- ----------- ------- ------------- ------------- --------------- --------------- ----------- ----------- ------- Loss per share..... $ (1.10) $ (0.25) $ (1.74) ------------- ------------- --------------- ------------- ------------- --------------- Weighted average number of common and common equivalent shares outstanding....... 3,244 16,924 (15,924)(14) 4,244 ------------- ------------- --------------- --------------- ------------- ------------- --------------- --------------- CHAMPION PRO FORMA Net revenue........ $ 97,109 Cost and expenses: Salaries and benefits........ 42,168 Supplies......... 13,703 Purchase services........ 12,113 Provision for bad debts........... 7,943 Other operating expenses........ 12,823 Depreciation and amortization.... 4,413 Interest......... 6,948 Equity in earnings of DHHS............ (2,363) ----------- Total costs and expenses.......... 97,748 ----------- Income (loss) before income taxes............. (639) Income taxes (benefit)......... 70 ----------- Net income (loss).. (709) Preferred dividends accrued........... 2,727 ----------- Income (loss) applicable to common stock...... $ (3,436) ----------- ----------- Loss per share..... $ (0.81) ----------- ----------- Weighted average number of common and common equivalent shares outstanding....... 4,244 ----------- -----------
See notes to Champion unaudited pro forma condensed combining statements of income. PF-24 CHAMPION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME FOR THE SIX MONTHS ENDED MARCH 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
JORDAN CHAMPION VALLEY PRO FORMA CHAMPION HISTORICAL(1) HOSPITAL ADJUSTMENTS PRO FORMA Net revenue.............................................. $ 100,366 $ 8,830 $ (6,107)(2) $ 103,089 Cost and expenses: Salaries and benefits.................................. 43,296 3,472 (2,828)(2) 43,940 Supplies............................................... 12,730 1,174 (791)(2) 13,113 Purchased services..................................... 13,079 1,288 (610)(2) 13,757 Provision for bad debts................................ 6,701 362 (205)(2) 6,858 Other operating expenses............................... 12,560 2,380 (1,805)(2)(4) 13,135 Depreciation and amortization.......................... 6,335 303 267 (2)(5 6,905 Interest............................................... 8,799 -- 388(6) 9,187 Equity in earnings of DHHS............................. (6,609) -- (6,609) ------------ --------- -------- ----------- Total costs and expenses................................. 96,891 8,979 (5,584) 100,286 ------------ --------- -------- ----------- Income (loss) before income taxes........................ 3,475 (149) (523) 2,803 Income taxes (benefit)................................... 447 (55) 645(7) 1,037 ------------ --------- -------- ----------- Net income (loss)........................................ 3,028 (94) (1,168) 1,766 Preferred dividends accrued.............................. 6,899 -- 6,899 ------------ --------- -------- ----------- Loss applicable to common stock.......................... $ (3,871) $ (94) $ (1,168) $ (5,133) ------------ --------- -------- ----------- ------------ --------- -------- ----------- Loss per share........................................... $ (0.48) $ (0.63) ------------ ----------- ------------ ----------- Weighted average number of common and common equivalent shares outstanding...................................... 8,121 8,121 ------------ ----------- ------------ -----------
See notes to Champion unaudited pro forma condensed combining statements of income. PF-25 CHAMPION UNAUDITED HISTORICAL CONDENSED BALANCE SHEET MARCH 31, 1996 (IN THOUSANDS)
ASSETS Current assets: Cash and cash equivalents...................................................... $ 5,670 Accounts receivable, less allowance for uncollectibles......................... 36,407 Supplies....................................................................... 3,872 Deferred income taxes.......................................................... 2,521 Other current assets........................................................... 3,769 --------- Total current assets......................................................... 52,239 Property and equipment, net of accumulated depreciation and amortization......... 166,997 Investment in DHHS............................................................... 52,118 Other assets..................................................................... 36,668 --------- Total assets................................................................. $ 308,022 --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and other current liabilities................................. $ 33,655 Current maturities of long-term debt and capital lease obligations............. 2,834 --------- Total current liabilities.................................................... 36,489 Long-term debt and capital lease obligations..................................... 181,212 Deferred income taxes............................................................ 7,394 Other long-term liabilities...................................................... 3,051 Redeemable preferred stock....................................................... 46,078 Stockholders' equity............................................................. 33,798 --------- Total liabilities and stockholders' equity................................... $ 308,022 --------- ---------
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 NOTES TO CHAMPION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF INCOME (1) Summarized from Champion's historical financial statements. (2) To remove the historical operating results of Autauga. (3) To reflect a decrease in interest earnings for the pro forma decrease in cash. This adjustment assumes that approximately $26,248,000 of SLRMC acquisition costs were paid from available cash at January 1, 1995. Interest earnings are computed at 3.35% for the six months ended March 31, 1995 and 5.63% for the period January 1, 1995 through April 13, 1995. Such percentages represent Champion's average investment rate for the period. (4) To record a pro forma decrease of approximately $1,091,000 and $1,255,000 in management fees charged to Jordan Valley by Columbia for the year ended December 31, 1995, and the six months ended March 31, 1996, respectively. Champion does not believe that overhead and other costs allocable to the facility will be materially different from costs incurred historically by Champion with respect to its management of Autauga. (5) To adjust depreciation expense for the step up in basis for the depreciable assets of Jordan Valley and SLRMC. The allocation with respect to SLRMC was based on an independent appraisal obtained by Champion and resulted in a pro forma decrease in depreciation expense of approximately $665,000 for the year ended December 31, 1995 and $1,150,000 for the six months ended March 31, 1995. With respect to Jordan Valley, the acquired assets are estimated to have an average remaining useful life of approximately 17 years based on management's assumption that an acute care hospital's assets consist of 50% buildings and 50% equipment with a 30-year life and a five-year life, respectively. Based on this preliminary allocation, depreciation expense increased approximately $190,000 and $244,000 on a pro forma basis for the year ended December 31, 1995 and the six months ended March 31, 1996, respectively and decreased approximately $59,000 for the six months ended March 31, 1995. (6) To record interest expense on the pro forma increase in the Champion Credit Facility, the Champion Notes and notes payable as a result of its acquisitions' of Jordan Valley and SLRMC. With respect to Jordan Valley, the Pro Forma Condensed Combining Statement of Income assumes Champion increased the principal amount outstanding under its revolving credit facility by $10,750,000 as of January 1, 1995 and October 1, 1995. Such amount is comprised of $7,000,000 in cash consideration attributable to property and equipment and approximately $3,750,000 for certain net working capital components, which are subject to adjustment and final settlement by the parties. The average interest rates in effect under the Champion Credit Facility were 9.33% for the year ended December 31, 1995 and 8.91% and 8.81% for the six months ended 1995 and 1996, respectively. With respect to SLRMC, the Pro Forma Condensed Combining Statement of Income for the year ended December 31, 1995 assumes Champion financed the acquisition of SLRMC through (i) the issuance of $30,000,000 principal amount of Series E Notes at an effective annual interest rate of 11.35% and (ii) a note payable to Columbia in the amount of approximately $1,767,000 bearing interest at an effective annual rate of 10%. Such debentures and notes are assumed to have been issued on January 1, 1995. Interest expense with respect to the above increased approximately $2,094,000 on a pro forma basis for the year ended December 31, 1995 and approximately $2,270,000 and $393,000 for the six months ended March 31, 1995 and 1996, respectively, less $19,000, $19,000 and $5,000, respectively, associated with Autauga capital lease obligations. PF-27 NOTES TO CHAMPION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF INCOME (CONTINUED) (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: 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) --------- ---------
PF-28 - ------------------------------------------------ ------------------------------------------------ - ------------------------------------------------ ------------------------------------------------ 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 COMMON STOCK 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 PAGE Prospectus Summary............................. 3 Risk Factors................................... 9 The Merger and Financing....................... 16 Use of Proceeds................................ 18 Dividend Policy................................ 18 Capitalization................................. 19 Company Unaudited Pro Forma Condensed Combining Financial Statements.......................... 20 Paracelsus Selected Historical Consolidated Financial and Operating Data.................. 27 Paracelsus Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 29 Champion Selected Historical Consolidated Financial and Operating Data.................. 34 Champion Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 36 Business....................................... 42 Management..................................... 59 Executive Compensation......................... 63 Certain Relationships and Related Transactions.................................. 70 Principal Shareholders......................... 82 Selling Shareholders........................... 85 Description of Capital Stock................... 86 Price Range of Champion Common Stock........... 91 Shares Eligible for Future Issuance and Sale... 92 Underwriting................................... 93 Validity of Common Stock....................... 94 Experts........................................ 94 Available Information.......................... 95 Index to Financial Statements and Certain Pro Forma Financial Statements.................... F-1
5,429,000 SHARES [LOGO] PARACELSUS HEALTHCARE CORPORATION COMMON STOCK ----------------- PROSPECTUS ----------------- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BEAR, STEARNS & CO. INC. SMITH BARNEY INC. THE CHICAGO CORPORATION - ------------------------------------------------ ------------------------------------------------ - ------------------------------------------------ ------------------------------------------------ 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: SEC registration fee............................................. $ 36,004 NASD filing fees................................................. 10,942 Printing and engraving expenses.................................. 250,000 Legal fees and expenses.......................................... 325,000 Accounting fees and expenses..................................... 145,000 Blue Sky expenses................................................ 17,500 Miscellaneous.................................................... 10,000 --------- Total........................................................ $ 794,446 --------- ---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 317 of the California Corporations Code authorizes a court to award, or a corporation's Board of Directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act. Article IV of the Registrant's Amended and Restated Articles of Incorporation (Exhibit 3.1 hereto) and Article V of the Registrant's Amended and Restated Bylaws (Exhibit 3.2 hereto) provide for indemnification of its directors, officers, employees and other agents to the maximum extent permitted by the California Corporations Code. In addition, the Registrant has entered into Indemnification Agreements (Exhibit 10.56 hereto) with certain of its officers and directors. Reference is also made to Section 6 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 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 Form of Amended and Restated Articles of Incorporation of Paracelsus (filed as Exhibit 3.5 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 3.2 Form of Amended and Restated Bylaws of Paracelsus (filed as Exhibit 3.6 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 4.1 Form of Indenture between the Company and AmSouth Bank of Alabama, as Trustee (including the form of certificate representing the % Senior Subordinated Notes due 2006) (filed as Exhibit 4.1 to Amendment No. 1 to the Registration Statement on Form S-1 filed by Paracelsus July 18, 1996 (Commission File Number 333-06713) and incorporated herein by reference)
II-1 4.2 Indenture, dated as of October 15, 1993, between Paracelsus and NationsBank of Tennessee, N.A., as Trustee (filed as an exhibit to Paracelsus' Annual Report on Form 10-K on December 23, 1993 and incorporated herein by reference) 4.3 Form of Shareholder Protection Rights Agreement between Paracelsus and the Rights Agent (filed as Exhibit 4.2 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 4.4 Series D Note and Stock Purchase Agreement, dated December 31, 1993, as amended, between Champion and the parties listed therein (filed as Exhibit 10.5 to Champion's Current Report on Form 8-K dated December 6, 1994 and incorporated herein by reference) 4.5 Series E Note Purchase Agreement dated May 1, 1995, as amended, between Champion and the parties listed therein (filed as Exhibit 4.01(d) to Champion's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference) 4.6 Form of Warrant issued pursuant to Champion Series E Note Purchase Agreement, dated May 1, 1995, as amended (filed as Exhibit 10.23(g) to Champion's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference) 4.7 Form of Warrant issued pursuant to Champion Series D Note and Stock Purchase Agreement dated December 31, 1993, as amended (filed as Exhibit 10.23(f) to Champion's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference) 4.8 Amended and Restated Loan Agreement dated as of May 31, 1995, among Champion, Banque Paribas, as agent, and the banks named therein (filed as Exhibit 4.01(c) to Champion's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference) 4.9 Form of certificate representing Common Stock 5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom 10.1 Promissory Note Agreement, dated May 1, 1994, between Paracelsus and Dr. Hartmut Krukemeyer in the amount of $5,000,000 (filed as Exhibit 4.1 to Paracelsus' Quarterly Report on Form 10-Q filed by Paracelsus on May 16, 1994 and incorporated herein by reference) 10.2 Indenture, dated as of October 15, 1993, between Paracelsus and NationsBank of Tennessee, N.A., as Trustee (filed as Exhibit 4.2 to the Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993 (Commission File No. 33-67040) and incorporated herein by reference) 10.3 Note, dated as of August 23, 1994, by Dr. Manfred George Krukemeyer in favor of INC Capital Corporation (filed as Exhibit 4.2 to Paracelsus' Current Report on Form 8-K filed by Paracelsus on September 6, 1994 and incorporated herein by reference) 10.4 Pledge Agreement, dated as of August 23, 1994, by and between Dr. Manfred George Krukemeyer and INC Capital Corporation (filed as Exhibit 4.2 to Paracelsus' Current Report on Form 8-K filed by Paracelsus on September 6, 1994 and incorporated herein by reference) 10.5 Agreement and Consent, dated as of August 23, 1994, by and between Paracelsus and INC Capital Corporation (filed as Exhibit 4.3 to Paracelsus' Current Report on Form 8-K filed by Paracelsus on September 6, 1994 and incorporated herein by reference) 10.6 Agreement, dated as of August 23, 1994, by and among Dr. Manfred George Krukemeyer, Paracelsus, Bank of America and NationsBank (filed as Exhibit 4.4 to Paracelsus' Current Report on Form 8-K filed by Paracelsus on September 6, 1994 and incorporated herein by reference)
II-2 10.7 Second Amended and Restated Guaranty and Pledge Agreement, dated as of August 23, 1994, by and among Dr. Manfred George Krukemeyer and Bank of America (filed as Exhibit 4.6 to Paracelsus' Current Report on Form 8-K filed by Paracelsus on September 6, 1994 and incorporated herein by reference) 10.8 Pooling Agreement, dated as of April 16, 1993, among PHC Funding Corp. II ("PFC II"), Sheffield Receivables Corporation and Bankers Trust Company, as trustee (the "Trustee") (filed as Exhibit 10.1 to the Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993 (Commission File Number 33-67040) and incorporated herein by reference) 10.9 Servicing Agreement, dated as of April 16, 1993, among PFC II, Paracelsus and the Trustee (filed as Exhibit 10.2 to the Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993 (Commission File Number 33-67040) and incorporated herein by reference) 10.10 Guarantee, dated as of April 16, 1993, by Paracelsus in favor of PFC II (filed as Exhibit 10.3 to the Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993 (Commission File Number 33-67040) and incorporated herein by reference) 10.11 Form of Sale and Servicing Agreement between subsidiaries of Paracelsus (the "Hospitals") and PFC II (filed as Exhibit 10.4 to the Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993 (Commission File Number 33-67040) and incorporated herein by reference) 10.12 Form of Subordinate Note by PFC II in favor of Hospitals (filed as Exhibit 10.5 to the Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993 (Commission File Number 33-67040) and incorporated herein by reference) 10.13 Lease, dated as of March 1, 1993, between AHP of New Orleans, Inc., as lessor, and Paracelsus Elmwood Medical Center, Inc., as lessee (filed as Exhibit 10.6 to the Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993 (Commission File Number 33-67040) and incorporated herein by reference) 10.14 Lease, dated as of June 30, 1993, between AHP of New Orleans, Inc., as lessor, and Paracelsus Halstead Hospital, Inc., as lessee (filed as Exhibit 10.7 to the Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993 (Commission File Number 33-67040) and incorporated herein by reference) 10.15 Service and Consulting Agreement, dated as of July 4, 1983, between Paracelsus and European Investors Inc. and Incofinas Limited (filed as Exhibit 10.14 to the Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993 (Commission File Number 33-67040) and incorporated herein by reference) 10.16 The Restated Paracelsus Healthcare Corporation Supplemental Executive Retirement Plan (filed as Exhibit 10.16 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.17 Form of Amendment No. 1 to the Supplemental Executive Retirement Plan (filed as Exhibit 10.17 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.18 Paracelsus Healthcare Corporation Phantom Equity Long-Term Incentive Plan (filed as Exhibit 10.16 to the Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993 (Commission File Number 33-67040) and incorporated herein by reference) 10.19 Paracelsus Healthcare Corporation Annual Incentive Plan (filed as Exhibit 10.17 to the Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993 (Commission File Number 33-67040) and incorporated herein by reference)
II-3 10.20 Promissory Note, dated as of December 1, 1993, of Dr. Hartmut Krukemeyer d/b/a Paracelsus Klinik in favor of Paracelsus in the amount of $3,200,000 (filed as Exhibit 4.11 to the Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993 (Commission File Number 33-67040) and incorporated herein by reference) 10.21 Facility Lease dated as of June 7, 1991, between Bell Atlantic Tricon Leasing Corporation (Landlord) and Chico Rehabilitation Hospital, Inc. (Tenant) (filed as Exhibit 10.1 to Paracelsus' Quarterly Report on Form 10-Q filed by Paracelsus on August 11, 1994 and incorporated herein by reference) 10.22 Amendment to Lease dated June 30, 1994, between Tricon Capital (Landlord) and Chico Rehabilitation Hospital, Inc. (Tenant)(filed as Exhibit 10.2 to Paracelsus' Quarterly Report on Form 10-Q filed by Paracelsus on August 11, 1994 and incorporated herein by reference) 10.23 Amendment to Lease dated June 30, 1994, between Tricon Capital (Landlord) and Beaumont Rehab Associates Limited Partnership (Tenant) (filed as Exhibit 10.3 to Paracelsus' Quarterly Report on Form 10-Q filed by Paracelsus on August 11, 1994 and incorporated herein by reference) 10.24 Amended and Restated Know-How Contract, dated as of October 1, 1994, between Paracelsus Klinik and Paracelsus (filed as Exhibit 10.35 to Paracelsus' Annual Report on Form 10-K filed by Paracelsus on December 23, 1994 and incorporated herein by reference) 10.25 Asset Purchase Agreement, dated as of March 29, 1996, between Paracelsus and FHP, Inc. (filed as Exhibit 10.25 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.26 Stock Purchase Agreement by and between Paracelsus and General Hospitals of Galen, Inc., dated as of November 28, 1995 (filed as Exhibit 10.40 to Paracelsus' Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference) 10.27 Asset Exchange Agreement by and between Paracelsus Halstead Hospital Inc., Paracelsus Elmwood Medical Center, Inc., Paracelsus Peninsula Medical Center, Inc., and Paracelsus Real Estate Corporation and Pioneer Valley Hospital, Inc. and Medical Center of Santa Rosa, Inc., dated November 28, 1995 (filed as Exhibit 10.41 to Paracelsus' Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference) 10.28 Amended and Restated Partnership Agreement of Dakota/Champion Partnership dated December 21, 1994 (filed as Exhibit 10 to Champion's Form 8-K dated December 21, 1994 and incorporated herein by reference) 10.29 Operating Agreement between Dakota/Champion Partnership and Champion, dated December 21, 1994 (filed as Exhibit 10.1 to Champion's Current Report on Form 8-K filed by Champion on January 5, 1995 and incorporated herein by reference) 10.30 Asset Purchase Agreement, dated January 25, 1995, as amended, among Medical Services of Salt Lake City, Inc., HealthTrust, Inc. -- The Hospital Company, CHC -- Salt Lake City, Inc. and Champion (filed as Exhibit 10.1 to Champion's Current Report on Form 8-K dated April 13, 1995 and incorporated herein by reference)
II-4 10.31 Second Amended and Restated Credit Agreement, dated as of December 8, 1995, among Paracelsus, Bank of America National Trust and Savings Association ("B of A"), NationsBank of Texas, N.A., The Bank of New York, Mellon Bank, N.A., Toronto- Diminion (Texas), Inc., Wells Fargo Bank, N.A., and the Bank of California, N.A., as lenders, B of A, as lead agent for lenders, and NationsBank, as co-agent (filed as Exhibit 4.1 to Paracelsus' Current Report on Form 8-K filed by Paracelsus on December 12, 1995 and incorporated herein by reference) 10.32 Agreement in Contemplation of Merger, dated April 12, 1996, between Champion and the Champion investors listed therein (filed as Exhibit 10.1 to Champion's Current Report on Form 8-K dated April 15, 1996 and incorporated herein by reference) 10.33 Form of Restated Champion Healthcare Corporation Founders' Stock Option Plan (filed as Exhibit 10.33 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.34 Form of License Agreement between Dr. Manfred George Krukemeyer and Paracelsus (filed as Exhibit 10.34 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.35 Asset Exchange Agreement dated November 9, 1995, by and between Champion Healthcare Holdings, Inc., CHC-Prattville, Inc. and CHC-Nursing Center, Inc. and West Jordan Hospital Corporation (filed as Exhibit 10.1 to Champion's Current Report on Form 8-K dated March 1, 1996 and incorporated herein by reference) 10.36 Form of Registration Rights Agreement between the Company and Park Hospital GmbH (filed as Exhibit 10.36 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.37 Form of Voting Agreement between Park Hospital GmbH and Messrs. Miller and VanDevender (filed as Exhibit 10.37 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.38 Form of Services Agreement between the Company and Dr. Manfred George Krukemeyer (filed as Exhibit 10.38 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.39 Form of Insurance Agreement between the Company and Dr. Manfred George Krukemeyer (filed as Exhibit 10.39 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.40 Form of Non-Compete Agreement between the Company and Dr. Manfred George Krukemeyer (filed as Exhibit 10.40 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.41 Form of Shareholder Agreement between the Company and Park Hospital GmbH, as guaranteed by Dr. Manfred George Krukemeyer (filed as Exhibit 10.41 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.42 Form of Dividend and Note Agreement between the Company and Park Hospital GmbH (filed as Exhibit 10.42 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference)
II-5 10.43 Form of Employment Agreement between Charles R. Miller and the Company (filed as Exhibit 10.43 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.44 Form of Employment Agreement between R.J. Messenger and the Company (filed as Exhibit 10.44 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.45 Form of Employment Agreement between James G. VanDevender and the Company (filed as Exhibit 10.45 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.46 Form of Employment Agreement between Ronald R. Patterson and the Company (filed as Exhibit 10.46 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.47 Form of Employment Agreement between Robert C. Joyner and the Company (filed as Exhibit 10.47 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.48 Form of Paracelsus Healthcare Corporation 1996 Stock Incentive Plan (filed as Exhibit 10.48 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.49 Form of Paracelsus Healthcare Corporation Executive Officer Performance Bonus Plan (filed as Exhibit 10.49 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.50 Form of First Refusal Agreement Among Park Hospital GmbH, Dr. Manfred George Krukemeyer, R.J. Messenger, Charles R. Miller, James G. VanDevender and Ronald R. Patterson (filed as Exhibit 10.50 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.51 Form of Champion Healthcare Corporation 1996 Annual Bonus Plan (filed as Exhibit 10.51 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.52 Subscription Agreement between Champion and James G. VanDevender dated February 10, 1990, as amended (filed as Exhibit 10.13 to Champion's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference) 10.53 Clarification Letter to the Subscription Agreement between Champion and James G. VanDevender dated July 12, 1996 (filed as Exhibit 10.53 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.54 Form of Registration Rights Agreement among Paracelsus and certain Champion Investors (filed as Exhibit 10.54 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.55 Donaldson, Lufkin & Jenrette Securities Corporation Engagement Letter with Champion, dated April 10, 1996 (filed as Exhibit 10.55 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 10.56 Form of Indemnity and Insurance Coverage Agreement (filed as Exhibit 10.56 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference)
II-6 10.57 AmeriHealth Amended and Restated 1988 Non-Qualified Stock Option Plan (filed as Exhibit 10.06 to AmeriHealth's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference) 10.58 Champion Employee Stock Option Plan dated December 31, 1991, as amended (filed as Exhibit 10.14 to Champion's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference) 10.59 Champion Employee Stock Option Plan No. 2 dated May 27, 1992, as amended (filed as Exhibit 10.15 to Champion's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference) 10.60 Champion Employee Stock Option Plan No. 3, dated September 1992, as amended (filed as Exhibit 10.16 to Champion's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference) 10.61 Champion Employee Stock Option Plan No. 4, dated January 5, 1994, as amended (filed as Exhibit 10.17 to Champion's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference) 10.62 Champion Selected Executive Stock Option Plan No. 5, dated May 25, 1995 (filed as Exhibit 4.12 to Champion's Current Report on Form S-8 filed on or about August 3, 1995 and incorporated herein by reference) 10.63 Champion Directors' Stock Option Plan, dated 1992 (filed as Exhibit 10.18 to Champion's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference) 10.64 Champion Healthcare Corporation Physicians Stock Option Plan (filed as Exhibit 4.2 to Champion's Current Report on Form S-8 filed on or about August 3, 1995 and incorporated herein by reference) 10.65 Form of Paracelsus' 6.51% Subordinated Note Due 2006 (filed as Exhibit 10.64 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 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 (included in Exhibit 5.1 hereto) 23.4 Consent of James A. Conroy (filed as Exhibit 23.5 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 23.5 Consent of Charles R. Miller (filed as Exhibit 23.6 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 23.6 Consent of James G. VanDevender (filed as Exhibit 23.7 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 23.7 Consent of Angelo R. Mozilo (filed as Exhibit 23.8 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference) 23.8 Consent of Daryl J. White (filed as Exhibit 23.9 to the Registration Statement on Form S-4 filed by Paracelsus on July 19, 1996 (Commission File Number 333-08521) and incorporated herein by reference)
II-7 24.1* Power of Attorney
- ------------------------ * Previously filed. (b) Financial Statement Schedules Report of Independent Auditors
SCHEDULE DESCRIPTION - ------------- -------------------------------------------------------------------------------------------------------- II Valuation and Qualifying Accounts
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-8 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 9th day of August, 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. SIGNATURE TITLE DATE - --------------------------------------------------- ---------------------------------------- ------------------ * ---------------------------------------- Chairman of the Board and Director August 9, 1996 Dr. Manfred George Krukemeyer * President, Chief Executive Officer, ---------------------------------------- Secretary and Director (principal August 9, 1996 R.J. Messenger executive officer) /s/ JAMES T. RUSH Vice President, Finance and Chief ---------------------------------------- Financial Officer (principal financial August 9, 1996 James T. Rush officer) * ---------------------------------------- Assistant Vice President and Corporate August 9, 1996 Scott Barton Controller (controller) * ---------------------------------------- Director August 9, 1996 Michael D. Hofmann * ---------------------------------------- Director August 9, 1996 Christian A. Lange *By /s/ JAMES T. RUSH ------------------------------------- James T. Rush ATTORNEY-IN-FACT
II-9 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 PARACELSUS HEALTHCARE CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
ADDITIONS ------------------------ BALANCE AT CHARGED TO CHARGED BEGINNING COSTS AND TO OTHER BALANCE AT OF YEAR EXPENSES ACCOUNTS(1) DEDUCTIONS(2) END OF YEAR ----------- ----------- ----------- ----------- ----------- 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 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
- ------------------------ (1) Reflects recoveries of amounts previously written off. (2) Reflects write-offs of uncollectible accounts. S-2 EX-1.1 2 EXHIBIT 1.1 FORM OF UNDERWRITING AGREEMENT Draft of August 6, 1996 [7,709,000] Shares PARACELSUS HEALTHCARE CORPORATION Common Stock, no par value per share UNDERWRITING AGREEMENT August ___, 1996 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BEAR, STEARNS & CO. INC. SMITH BARNEY INC. THE CHICAGO CORPORATION As Representatives of the several underwriters named in Schedule I hereto c/o Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 THE CHICAGO CORPORATION 208 S. LaSalle Street Chicago, Illinois 60604 Dear Sirs: Paracelsus Healthcare Corporation, a California corporation (the "Company"), and the shareholders of the Company named in Schedule II hereto (collectively, the "Selling Shareholders"), severally propose to sell an aggregate of [7,709,000] shares of Common Stock, no par value per share, of the Company (the "Firm Shares"), to the several underwriters named in Schedule I hereto (the "Underwriters"). The Firm Shares consist of 5,200,000 shares to be issued and sold by the Company and [2,509,000] shares to be sold by the Selling Shareholders. The Selling Shareholders also propose to issue and sell to the several Underwriters not more than [1,156,350] additional shares of Common Stock, no par value per share, of the Company (the "Additional Shares"), if requested by the Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional Shares are herein collectively called the Shares. The shares of common stock of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the Common Stock. The Company and the Selling Shareholders are hereinafter collectively called the Sellers. The Shares are being issued and sold in connection with the acquisition (the "Acquisition") of Champion Healthcare Corporation, a Delaware corporation ("Champion"), by the Company. The Acquisition is being effected pursuant to an Agreement and Plan of Merger, as amended and restated on May 29, 1996 (the "Merger Agreement"), by and among the Company, PC Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (the "Merger Sub"), and Champion. Pursuant to the Merger Agreement, the Company will acquire all of the issued and outstanding capital stock of Champion (the "Merger"). At the time the Merger is consummated (the "Effective Time of the Merger") and pursuant to the Merger Agreement, Merger Sub will be merged with and into Champion with Champion as the surviving corporation. The Merger Agreement, this Agreement and the Shares are collectively referred to herein as the "Transaction Documents." The Company and the Underwriters, in accordance with the requirements of Rule 2710(c)(8) of the Rules of Conduct of the National Association of Securities Dealers, Inc. (the "NASD") and subject to the terms and conditions stated herein also hereby confirm the engagement of the services of The Chicago Corporation (the "Independent Underwriter") as a "qualified independent underwriter" within the meaning of Rule 2720(b)(15) of such Rules of Conduct in connection with the offering and sale of the Shares. 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively called the "Act"), a registration statement on Form S-1 (File No. 333-07289) including a preliminary prospectus, subject to completion, relating to the Shares. The registration statement as amended at the time when it becomes effective, including a registration statement (if any) filed pursuant to Rule 462(b) under the Act increasing the size of the offering registered under the Act and information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Act, is hereinafter referred to as the "Registration Statement"; and the prospectus in the form first used to confirm sales of Shares is hereinafter referred to as the "Prospectus". 2. AGREEMENTS TO SELL AND PURCHASE. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, (i) the Company agrees to issue and sell 5,200,000 Firm Shares, (ii) each Selling Shareholder agrees, severally and not jointly, to sell the number of Firm Shares set forth opposite such Selling Shareholder's name in Schedule II hereto and (iii) each Underwriter agrees, severally and not jointly, to purchase from each Seller at a price per share of $______ (the "Purchase Price") the number of Firm Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) which bears the same proportion to the total number of Firm Shares to be sold by such Seller as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto bears to the total number of Firm Shares. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, (i) the Selling Shareholders agree to issue and sell up to 1,156,350 Additional Shares and (ii) the Underwriters shall have the right to purchase, severally and not jointly, up to an aggregate 1,156,350 Additional Shares from the Selling Shareholders at the Purchase Price. Additional Shares may be purchased solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. The Underwriters may exercise their right to purchase Additional Shares in whole or in part from time to time by giving written notice thereof to the Selling Shareholders within 30 days after the date of this Agreement. The Representatives shall give any such notice on behalf of the Underwriters and such notice shall specify the aggregate number of Additional Shares to be purchased pursuant to such exercise and the date for payment and delivery thereof. The date specified in any such notice shall be a business day (i) no earlier than the Closing Date (as hereinafter defined), (ii) no later than ten business days after such notice has been given and (iii) no earlier than two business days after such notice has been given. If any Additional Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from the Selling Shareholders the number of Additional Shares (subject to such adjustment to eliminate fractional shares as the Representatives may determine) which bears the same proportion to the total number of Additional Shares to be purchased from the Company as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I bears to the total number of Firm Shares. The Sellers hereby agree, severally and not jointly, and the Company shall, concurrently with the execution of this Agreement, deliver an agreement executed by (i) each of the directors and officers of the Company who is not a Selling Shareholder and (ii) each shareholder listed on Annex I hereto, pursuant to which each such person agrees not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose of any common stock of the Company or any securities convertible into or exercisable or exchangeable for such common stock, except to the Underwriters pursuant to this Agreement, for a period of [120] days after the date -2- of the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). Notwithstanding the foregoing, during such period (i) the Company may grant stock options pursuant to the Company's existing stock option plans and (ii) the Company may issue shares of its common stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof. 3. DELIVERY AND PAYMENT. Delivery to the Underwriters of and payment for the Firm Shares shall be made at 10:00 A.M., New York City time, on the third or, if the pricing occurs after 4:30 p.m., New York City time, fourth business day unless otherwise permitted by the Commission (the "Closing Date") following the date of the initial public offering, at such place as the Representatives and the Company shall agree. The Closing Date and the location of delivery of payment for the Firm Shares may be varied by agreement between the Representatives and the Sellers. Delivery to the Underwriters of and payment for any Additional Shares to be purchased by the Underwriters shall be made at such place as the Representatives shall designate at 10:00 A.M., New York City time, on the date specified in the applicable exercise notice given by the Representatives pursuant to Section 2 (an "Option Closing Date"). Any such Option Closing Date and the location of delivery of and the form of payment for such Additional Shares may be varied by agreement between the Representatives and the Selling Shareholders. Certificates for the Shares shall be registered in such names and issued in such denominations as the Representatives shall request in writing not later than two full business days prior to the Closing Date or an Option Closing Date, as the case may be. Such certificates shall be made available to the Representatives at the offices of DLJ (or at such other place as shall be acceptable to the Representatives) for inspection not later than 9:30 A.M., New York City time, on the business day next preceding the Closing Date or Option Closing Date, as the case may be. Certificates in definitive form evidencing the Shares shall be delivered to the Representatives on the Closing Date or Option Closing Date, as the case may be, with any transfer taxes thereon duly paid by the respective Sellers, for the respective accounts of the Several Underwriters, against payment of the Purchase Price therefor by wire or certified or official bank checks payable in Federal funds to the order of the applicable Sellers. 3A. ENGAGEMENT OF INDEPENDENT UNDERWRITER. (a) The Company hereby confirms its engagement of the services of the Independent Underwriter as, and the Independent Underwriter hereby confirms its agreement with the Company to render services as, a "qualified independent underwriter" within the meaning of Rule 2720(b)(15) of the NASD Rules of Conduct with respect to the offering and sale of the Shares. (b) The Independent Underwriter hereby represents and warrants to, and agrees with, the Company and the Underwriters that with respect to the offering and sale of the Shares as described in the Prospectus: (i) The Independent Underwriter constitutes a "qualified independent underwriter" within the meaning of Rule 2720(b)(15) of the NASD Rules of Conduct; (ii) The Independent Underwriter has participated in the preparation of the Registration Statement and the Prospectus and has exercised the usual standards of "due diligence" in respect thereto; (iii)The Independent Underwriter has undertaken the legal responsibilities and liabilities of an underwriter under the Act specifically including those inherent in Section 11 thereof; -3- (iv) Based upon (A) a review of the Company, including an examination of the Registration Statement, information regarding the earnings, assets, capital structure and growth rate of the Company and other pertinent financial and statistical data, (B) inquiries of and conferences with the management of the Company and independent public accountants regarding the business and operations of the Company, (C) consideration of the prospects for the industry in which the Company competes, estimates of the business potential of the Company, assessments of its management, the general condition of the securities markets, market prices of the capital stock and debt securities of, and financial and operating data concerning, companies believed by the Independent Underwriter to be comparable to the Company and the demand for securities of comparable companies and (D) such other studies, analyses and investigations as the Independent Underwriter has deemed appropriate, and assuming that the offering and sale of the Shares is made as contemplated herein and in the Prospectus, the Independent Underwriter recommends, as of the date of the execution and delivery of this Agreement, that the price of the Shares be not less than $___ per share, which price should in no way be considered or relied upon as an indication of the value of the Shares; and (v) Subject to the provisions of Section 8 hereof, the Independent Underwriter will furnish to the Underwriters at the Closing Date a letter, dated the Closing Date, in form and substance satisfactory to the Underwriters, to the effect of clauses (i) through (iv) above. (c) The Independent Underwriter hereby agrees with the Company and the Underwriters that, as part of its services hereunder, in the event of any amendment or supplement to the Prospectus, the Independent Underwriter will render services as a "qualified independent underwriter" within the meaning of Rule 2720(b)(15) of the NASD Rules of Conduct with respect to the offering and sale of the Shares as described in the Prospectus as so amended or supplemented that are substantially the same as those services being rendered with respect to the offering and sale of the Shares as described in the Prospectus (including those described in subsection (b) above). (d) The Company, the Underwriters and the Independent Underwriter agree to comply in all material respects with all of the requirements of Rule 2710(c)(8) of the NASD Rules of Conduct applicable to them in connection with the offering and sale of the Shares. The Company agrees to use its reasonable efforts to cooperate with the Underwriters and the Independent Underwriter to enable the Underwriters to comply with Rule 2710(c)(8) of the NASD Rules of Conduct and the Independent Underwriter to perform the services contemplated by this Agreement. (e) The Company agrees promptly to reimburse the Independent Underwriter for all out-of-pocket expenses reasonably incurred in connection with this Agreement and the services to be rendered hereunder. 4. AGREEMENTS OF THE COMPANY. The Company agrees with the Representatives [and with the Selling Shareholders]: (a) It will, if necessary, file an amendment to the Registration Statement including, if necessary, a post-effective amendment to the Registration Statement, in each case as soon as practicable after the execution and delivery of this Agreement, and will use its best efforts to cause the Registration Statement or such post-effective amendment to become effective at the earliest possible time. The Company will comply and in a timely manner with the applicable provisions of Rule 424 and Rule 430A under the Act. -4- (b) To advise DLJ promptly and, if requested by DLJ, to confirm such advice in writing, (i) when the Registration Statement has become effective and when any post-effective amendment to it becomes effective, (ii) of the receipt of any comments from the Commission or any state securities commission or regulatory authority that relate to the Registration Statement or of any request by the Commission or any state securities commission or regulatory authority for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for such purposes by the Commission or any state securities commission or other regulatory authority, and (iv) of the happening of any event during the period referred to in paragraph (e) below which makes any statement of a material fact made in the Registration Statement (as amended or supplemented from time to time) untrue or which requires the making of any additions to or changes in the Registration Statement (as amended or supplemented from time to time) in order to make the statements therein not misleading or that makes any statement of a material fact made in the Prospectus (as amended or supplemented from time to time) untrue or which requires the making of any addition to or change in the Prospectus (as amended or supplemented from time to time) in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company shall use commercially reasonable efforts to prevent the issuance of any stop order or order suspending the qualification or exemption of the Shares under any Federal or state securities or Blue Sky laws, and, if at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or any other regulatory authority shall issue an order suspending the qualification or exemption of the Shares under any state securities or Blue Sky laws, the Company shall use every reasonable effort to obtain the withdrawal or lifting of such order at the earliest possible time. (c) To furnish to DLJ, without charge, 3 signed copies of the Registration Statement as first filed with the Commission and of each amendment to it, including all exhibits, and will furnish such number of conformed copies of the Registration Statement as so filed and of each amendment to it, without exhibits, as DLJ may reasonably request. (d) Not to file any amendment or supplement to the Registration Statement, whether before or after the time when it becomes effective, or to make any amendment or supplement to the Prospectus of which the Representatives shall not previously have been advised and provided a copy or to which the Representatives shall reasonably object unless, in the opinion of counsel to the Company, such amendment or supplement is necessary to comply with applicable law; and to prepare and file with the Commission, promptly upon the reasonable request of the Representatives, any amendment to the Registration Statement or supplement to the Prospectus which may be necessary or advisable in connection with the distribution of the Shares by the Representatives, and to use its best efforts to cause the same to become promptly effective. (e) Promptly after the Registration Statement becomes effective, and from time to time thereafter for such period, but not in excess of six months, in the reasonable judgment of DLJ as a prospectus is required by law to be delivered in connection with sales by an Underwriter or a dealer, to furnish to each Underwriter and dealer as many copies of the Prospectus (and of any amendment or supplement to the Prospectus) as such Underwriter or dealer may reasonably request, and in case any Underwriter is required by law to deliver a prospectus in connection with any offers or any sales of the Shares at any time six months or more after the effective date of the Registration Statement, upon the request of such Underwriter but at the expense of such Underwriter, to deliver to such Underwriter as many copies of the Prospectus (and of any amendment or supplement to the Prospectus) as such Underwriter may request. The Company consents to the use of the Prospectus and any amendment or supplement thereto by the Underwriters or any dealer in accordance with the provisions of the Act and -5- of the securities or Blue Sky laws of the jurisdictions in which the Shares are being offered, both in connection with the offering or sale of the Shares by an Underwriter or dealer and for such period of time thereafter as the Prospectus is required by law to be delivered in connection therewith. (f) If during the period specified in paragraph (e) any event shall occur as a result of which it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if it is necessary to amend or supplement the Prospectus to comply with any law, it will promptly prepare and file with the Commission an appropriate amendment or supplement to the Prospectus so that the statements in the Prospectus, as so amended or supplemented, will not, in the light of the circumstances existing as of the date the Prospectus is so delivered, be misleading, and will comply with applicable law, and will furnish to each Underwriter and dealer without charge such number of copies thereof as such Underwriters and dealers may reasonably request. (g) Prior to any public offering of the Shares, to cooperate with the Representatives and counsel for the Underwriters in connection with the registration or qualification of the Shares for offer and sale by the several Underwriters and by dealers under the state securities or Blue Sky laws of such United States jurisdictions as DLJ may reasonably request (provided that the Company shall not be obligated to qualify as a foreign corporation in any jurisdiction in which it is not so qualified or to take any action that would subject it to general service of process or taxation in any jurisdiction in which it is not now so subject). The Company will continue such qualification in effect so long as required by law for the distribution of the Shares and file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification. (h) To mail and make generally available to its security holders as soon as reasonably practicable an earnings statement covering a period of at least twelve months after the effective date of the Registration Statement (but in no event commencing later than 90 days after such date) which shall satisfy the provisions of Section 11(a) including, at the option of the Company, Rule 158 under the Act. (i) So long as any of the Shares are outstanding, to mail to each of the Underwriters, without charge, as soon as available a copy of each report mailed to the security holders of the Company generally. (j) Whether or not the transactions contemplated hereby are consummated or this Agreement is terminated, to pay all costs, expenses, fees and taxes incident to (i) the preparation, printing, processing, filing, distribution and delivery under the Act of the Registration Statement, each preliminary prospectus, the Prospectus and all amendments or supplements thereto, (ii) the printing and delivery of this Agreement, (iii) the registration with the Commission and the issuance and delivery of the Shares, (iv) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states (including in each case the reasonable fees and disbursements of counsel for the Underwriters relating to such registration or qualification and memoranda relating thereto), (v) filings and clearance with the NASD in connection with the offering (including the reasonable fees and disbursements of counsel relating thereto), (vi) the listing of the Shares, if any, on the New York Stock Exchange ("NYSE"), (vii) furnishing such copies of the Registration Statement, the Prospectus and all amendments and supplements thereto as may be reasonably requested for use in connection with the offering or sale of the Shares by the Underwriters or by dealers to whom Shares may be sold and (viii) the performance by the Company of its other obligations under this Agreement, including (without limitation) the cost of its personnel and other internal costs, the cost of printing the certificates representing the Shares and all expenses incident to the sale and delivery of the Shares to the Underwriters. -6- (k) To use its best efforts to maintain the inclusion of the Common Stock on the NYSE for a period of five years after the effective date of the Registration Statement. (l) To use the proceeds from the sale of the Shares in the manner described in the Prospectus under the caption "Use of Proceeds." (m) To use commercially reasonable efforts to do and perform all things required or necessary to be done and performed under this Agreement by the Company prior to or after the Closing Date and to satisfy all conditions precedent to the delivery of the Shares. 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each Underwriter that: (a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and, to the best of the Company's knowledge, no proceedings for such purpose are pending before or threatened by the Commission. (b) (i) The Registration Statement, when it became effective, did not contain and as amended, if applicable, will not, at the date of any such amendment, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Act and (iii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not, at the date of the Prospectus, at the date of any such amendment or supplement and at the Closing Date or Option Closing Date, as the case may be, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph (b) do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by or on behalf of such Underwriter through DLJ expressly for use therein. The Company acknowledges for all purposes under this Agreement that the statements set forth in the first sentence of the last paragraph on the cover page and in the third and seventh paragraphs under the caption "Underwriting" in the Prospectus (or any amendment or supplement) constitute the only written information furnished to the Company by any Underwriter expressly for use in the Registration Statement or the Prospectus (or any amendment or supplement to them). (c) Each preliminary prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 or 430A under the Act, and each Registration Statement filed pursuant to Rule 462(b) under the Act, if any, complied when so filed in all material respects with the Act; and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (d) The Company and each of its Significant Subsidiaries (as defined below) has been duly organized or formed, as the case may be, is validly existing as a corporation or partnership, as the case may be, in good standing under the laws of its jurisdiction of incorporation or formation and has the power and authority to carry on its business as it is currently being conducted and to own, lease and operate its properties, and the Company and each of its Significant Subsidiaries is duly qualified and is in good standing as a foreign corporation or partnership, as the case may be, authorized to do business in each jurisdiction where the operation, ownership or leasing of property or the conduct of its business requires such qualification, except where the failure to be so qualified would not reasonably be -7- expected to have a material adverse effect on the properties, business, results of operations or financial condition of the Company and its subsidiaries, taken as a whole (a "Material Adverse Effect"); the Company has the corporate power and authority to authorize the offering of the Shares, to execute, deliver and perform this Agreement and to issue, sell and deliver the Shares; "Significant Subsidiary" means any subsidiary of the Company that would constitute a "Significant Subsidiary" under Rule 1-02 of Regulation S-X of the Commission, including, upon consummation of the Merger, Champion and any of its subsidiaries, on a pro forma basis after giving effect to the Merger, that meet the foregoing criteria; (e) All of the issued and outstanding shares of capital stock of, or other ownership interests in, each Significant Subsidiary of the Company have been duly and validly authorized and issued, and, except as described in the Prospectus, all of the shares of capital stock of, or other ownership interests in, each Significant Subsidiary are owned, directly or through subsidiaries, by the Company. Except as set forth in the Paracelsus Disclosure Letter, dated April 12, 1996, all such shares of capital stock are fully paid and nonassessable, and, except as described in the Prospectus, all such shares of capital stock or other ownership interests are owned free and clear of any security interest, mortgage, pledge, claim, lien or encumbrance (each, a "Lien"). Except as described in the Prospectus, there are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or Liens related to or entitling any person to purchase or otherwise to acquire any shares of the capital stock of, or other ownership interest in, any Significant Subsidiary. (f) All the outstanding shares of capital stock of the Company (including the Shares to be sold by the Selling Shareholders) have been duly authorized and validly issued and are fully paid, nonassessable and not subject to any preemptive or similar rights; and the Shares to be issued and sold by the Company hereunder have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and nonassessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (g) The authorized capital stock of the Company, including the Common Stock, conforms as to legal matters to the description thereof contained in the Prospectus. (h) Neither the Company nor any of its subsidiaries is in violation of, or in default under (nor has any event occurred which with notice, lapse of time or both would constitute a breach of or default under) its respective charter or bylaws or in the performance of any bond, debenture, note or any other evidence of indebtedness or any indenture, mortgage, deed of trust or other contract, lease or other instrument to which the Company or any of the subsidiaries is a party or by which any of them is bound, or to which any of the property or assets of the Company or any of the subsidiaries is subject, except as would not reasonably be expected to have, singly or in the aggregate, a Material Adverse Effect. (i) This Agreement has been duly authorized and validly executed and delivered by the Company, and this Agreement constitutes a legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except to the extent that: (i) enforcement thereof may be limited by (A) bankruptcy, insolvency, reorganization, fraudulent conveyance, or other similar laws now or hereafter in effect relating to creditors' rights generally and (B) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity); and (ii) rights to indemnity and contribution hereunder may be limited by state or Federal securities laws or the policies underlying such laws. -8- (j) The execution and delivery of this Agreement and the Shares by the Company, the issuance and sale of the Shares, the execution and delivery of each of the Transaction Documents by each of the Company, Merger Sub and Champion (each a "Merger Party" and collectively, the "Merger Parties"), to the extent each is a party thereto, the performance of this Agreement and the Transaction Documents, the compliance by the Company, Merger Sub and Champion with all of the provisions of this Agreement and the other Transaction Documents and the consummation of the transactions contemplated by this Agreement and the other Transaction Documents will not conflict with or result in a breach or violation (or constitute an event that with notice or the lapse of time, or both, would constitute a breach or violation) of any of the respective charters or bylaws of the Company or any of its subsidiaries, or any partnership agreement to which the Company or any of its subsidiaries is a party, or any of the terms or provisions of, or constitute a default under, or cause an acceleration of any obligation under, or result in the imposition or creation of (or the obligation to create or impose) a Lien (or an event that with notice or the lapse of time, or both, would constitute a default, cause an acceleration or result in a Lien) with respect to, any bond, note, debenture or other evidence of indebtedness or any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them is bound, or to which any properties of the Company or any of its subsidiaries is or may be subject, or contravene any order of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties, or violate or conflict with any statute, rule or regulation or administrative or court decree applicable to the Company or any of its subsidiaries, or any of their respective properties, except, with respect to all matters covered by this paragraph (j), as would not reasonably be expected to have, singly or in the aggregate, a Material Adverse Effect. (k) Except as disclosed in the Prospectus, there is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, pending against or affecting the Company or any of the subsidiaries, or any of their respective properties, which is required to be disclosed in the Registration Statement or the Prospectus, or which is reasonably likely to result, singly or in the aggregate, in a Material Adverse Effect or which is reasonably likely to materially and adversely affect the consummation of this Agreement or the transactions contemplated hereby, and to the best of the Company's knowledge, no such proceedings are contemplated or threatened. Neither the Company nor any of the subsidiaries is subject to any judgment, order, decree, rule or regulation of any court, governmental authority or arbitration board or tribunal which has had or which can reasonably be expected to have a Material Adverse Effect. No contract or document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement is not so described or filed. (l) The Company and each of its subsidiaries has such permits, consents, licenses, franchises, exemptions, orders, authorizations or other approvals (including, without limitation, certificate of need approvals) (collectively, "Authorizations") of and from, and has made all declarations and filings with, all Federal, state, local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals, necessary or required to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus, except those the absence of which would not have a Material Adverse Effect. All such Authorizations are valid and in full force and effect and the Company and each of its subsidiaries (i) has fulfilled and performed all of its material obligations with respect to, and is in compliance in all material respects with the terms and conditions of, such Authorizations and with the rules and regulations of the regulatory authorities and governing bodies having jurisdiction with respect thereto, and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or result in any other material impairment of the rights of the holder of any such Authorization, except where the effect would not have a Material Adverse Effect and (ii) has no reason to believe that any governmental body or agency is considering limiting, suspending or revoking any such Authorization. -9- (m) The firms of accountants that have certified the applicable consolidated financial statements and supporting schedules of (i) the Company, (ii) Champion, (iii) Davis Hospital and Medical Center, Pioneer Valley Hospital and Santa Rosa Medical Center, (iv) Dakota Heartland Health System, (v) Jordan Valley Hospital and (vi) Salt Lake Regional Medical Center, filed with the Commission as part of the Registration Statement and the Prospectus are, to the best of the Company's knowledge, independent public accountants with respect to the Company and the subsidiaries and Champion and its subsidiaries, respectively, as required by the Act. The consolidated historical financial statements, together with related schedules and notes, set forth in the Prospectus and the Registration Statement, comply as to form in all material respects with the requirements of the Act. Such historical financial statements fairly present the consolidated financial position of the Company and the subsidiaries at the respective dates indicated and the results of their operations and their cash flows for the respective periods indicated, in accordance with generally accepted accounting principles ("GAAP") consistently applied throughout such periods. Such PRO FORMA financial statements have been prepared in conformity with the standards set forth in Rule 11-02 of Regulation S-X and on a basis consistent with such historical statements and give effect to assumptions made on a reasonable basis and present fairly the historical and proposed transactions contemplated by the Prospectus and this Agreement. The other financial and statistical information and data included in the Prospectus and in the Registration Statement, historical and PRO FORMA, are, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company and the subsidiaries. (n) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and up to the Closing Date or Option Closing Date, as the case may be, except as set forth or contemplated in the Prospectus, neither the Company nor any of the subsidiaries has incurred any liabilities or obligations, direct or contingent, which are material to the Company and the subsidiaries taken as a whole, nor entered into any transaction not in the ordinary course of business, and there has not been, singly or in the aggregate, any material adverse change in the properties, business, results of operations or financial condition of the Company and its subsidiaries, taken as a whole (a "Material Adverse Change"), or, to the best knowledge of the Company, any development which may reasonably be expected to involve a Material Adverse Change. (o) No authorization, approval or consent or order of, or filing with, any court or governmental body or agency is necessary in connection with the transactions contemplated by this Agreement, except such as may be required by the NASD or have been obtained and made under the Act or state securities or Blue Sky laws or regulations. The Company has complied with all provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida) relating to the disclosure of business with Cuba. (p) The Company is not (i) an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or (ii) a "holding company" or a "subsidiary company" of a holding company, or an "affiliate" thereof within the meaning of the Public Utility Holding Company Act of 1935, as amended. (q) Except as set forth in the Prospectus or as would not, based upon advice from the Commission, result in a violation of the Exchange Act and the rules and regulations of the Commission thereunder, the Company has not (i) taken, directly or indirectly, any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company or Champion to facilitate the sale or resale of the Shares or (ii) since the initial filing of the Registration Statement (A) sold, bid for, purchased or paid anyone any compensation for soliciting purchases of, the Shares or (B) paid or agreed to pay to -10- any person other than DLJ any compensation for soliciting another to purchase any other securities of the Company or Champion. (r) Each Merger Party has, to the extent each is or will be a party thereto, all requisite corporate power and authority to execute, deliver and perform their respective obligations under each of the Transaction Documents; each of the Transaction Documents has been duly and validly authorized, executed and delivered by the Merger Parties, to the extent each is a party thereto, and each constitutes a valid and legally binding agreement of the Merger Party enforceable against each Merger Party in accordance with its terms (assuming due authorization, execution and delivery of each Transaction Document by any other party thereto); and neither the Company nor Merger Sub nor, to the best knowledge of the Company, Champion is in default in the performance or observance of any obligation, agreement, covenant or condition contained in any of the Transaction Documents, which default would have a Material Adverse Effect. (s) The Merger has been duly authorized by the Merger Parties and the Merger has been approved by stockholders of Champion holding the requisite number of shares required to approve the Merger; insofar as the Prospectus contains summaries of the Merger Agreement, the Merger and the other transactions and agreements ancillary thereto, such summaries are in all material respects accurate. (t) Immediately after the consummation of the Merger and the transactions contemplated by the Transaction Documents, the fair value and present fair salable value of the assets of the Company will exceed the sum of its stated liabilities and identified contingent liabilities; neither the Company nor Champion will be, after giving effect to the execution, delivery and performance of the Transaction Documents, to the extent each is a party thereto, and the consummation of the transactions contemplated thereby, (i) left with unreasonably small capital with which to carry on its business as it is proposed to be conducted, (ii) unable to pay its debts (contingent or otherwise) as they mature or (iii) otherwise insolvent. (u) The Company has delivered to the Underwriters a true and correct copy of each of the Transaction Documents that have been executed and delivered prior to the date of this Agreement and each other Transaction Document in the form substantially as it will be executed and delivered on or prior to the Closing Date, together with all related agreements and all schedules and exhibits thereto, and there have been no amendments, alterations, modifications or waivers of any of the provisions of any of the Transaction Documents since their date of execution or from the form in which it has been delivered to the Underwriters; there exists as of the date hereof (after giving effect to the transactions contemplated by the Transaction Documents) no event or condition which would constitute a default or an event of default (in each case as defined in the New Credit Facility) under the New Credit Facility and no event or condition which would constitute a default or an event of default (in each case as defined in each of the Transaction Documents) under any of the Transaction Documents which would reasonably be expected to result in a Material Adverse Effect or materially adversely effect the ability of each of the Merger Parties to consummate the Merger and the transactions contemplated by the Merger Agreement. (v) The Company has filed a registration statement pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to register the Common Stock, has filed an application to list the Shares on the NYSE and has received notification that the listing has been approved, subject to notice of issuance. 6. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each Selling Shareholder severally and not jointly represents and warrants to each Underwriter that as to itself: -11- (a) Such Selling Shareholder is the lawful owner of the Shares to be sold by such Selling Shareholder pursuant to this Agreement and has, and on the Closing Date or Option Closing Date, as the case may be, will have, good and clear title to such Shares, free of all restrictions on transfer, liens, encumbrances, security interests and claims whatsoever. (b) Upon delivery of and payment for such Shares pursuant to this Agreement, such Selling Shareholder will convey to the Underwriters good and clear title to such Shares, free of all restrictions on transfer, liens, encumbrances, security interests and claims whatsoever. (c) Such Selling Shareholder has, and on the Closing Date or Option Closing Date, as the case may be, will have, full legal right, power and authority to enter into this Agreement and the Custody Agreement between the Selling Shareholders and __________________, as Custodian (the "Custody Agreement") and to sell, assign, transfer and deliver such Shares in the manner provided herein and therein, and this Agreement and the Custody Agreement have been duly authorized, executed and delivered by such Selling Shareholder and each of this Agreement and the Custody Agreement is a valid and binding agreement of such Selling Shareholder enforceable in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by applicable law. (d) The power of attorney (the "Power of Attorney") signed by such Selling Shareholder appointing _______________ and __________________, or either one of them, as his attorney-in-fact to the extent set forth therein with regard to the transactions contemplated hereby and by the Registration Statement and the Custody Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Shareholder and is a valid and binding instrument of such Selling Shareholder enforceable in accordance with its terms, and, pursuant to such Power of Attorney, such Selling Shareholder has authorized _______________ and _______________, or either one of them, to execute and deliver on his behalf this Agreement and any other document necessary or desirable in connection with transactions contemplated by this Agreement, the Custody Agreement or the Power of Attorney and to deliver the Shares to be sold by such Selling Shareholder pursuant to this Agreement. (e) Such Selling Shareholder has not taken, and will not take, directly or indirectly, any action designed to, or which might reasonably be expected to, cause or result in stabilization or manipulation of the price of any security of the Company or Champion to facilitate the sale or resale of the Shares pursuant to the distribution contemplated by this Agreement, except for the lock-up arrangements described in Sections 2 and 6(h) hereof and in the Registration Statement and other than as permitted by the Act, the Selling Shareholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares. (f) The execution, delivery and performance of this Agreement and the Custody Agreement by such Selling Shareholder, the compliance by such Selling Shareholder with all the provisions of this Agreement, the Custody Agreement and the Power of Attorney and the consummation of the transactions contemplated herein and therein will not require any consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body (except as such may be required under the Act, state securities laws or Blue Sky laws, as to which the undersigned makes no representation or warranty hereunder) and will not conflict with or constitute a breach of any of the terms or provisions of, or a default under, organizational documents of such Selling Shareholder, if not an individual, or any agreement, indenture or other instrument to which such Selling Shareholder is a party or by which such Selling Shareholder or property of such Selling Shareholder is bound, or violate or conflict with any laws, administrative regulation or ruling or court decree applicable to such Selling Shareholder or property of such Selling Shareholder. -12- (g) Such parts of the Registration Statement under the caption "Selling Shareholders" that specifically relate to statements or omissions made in reliance on and in conformity with written information furnished to the Company by the undersigned expressly for use therein do not, and will not on the Closing Date or Option Closing Date, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of circumstances under which they were made, not misleading. (h) During the period beginning from the date hereof and continuing to and including the date [120] days after the date of the Prospectus, not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose of, except as provided hereunder, any common stock of the Company or any securities convertible into or exchangeable for such common stock, except to the Underwriters pursuant to this Agreement, without the prior written consent of DLJ. (i) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 with resect to the transactions herein contemplated, such Selling Shareholder will deliver to the Representatives prior to or at the Closing Date or Option Closing Date, as the case may be, a properly completed and executed United States Treasury Department Form W- 9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). (j) At any time during the period described in paragraph 4(e) hereof, if there is any change in the information referred to in paragraph 6(g) above, such Selling Shareholder will immediately notify the Representatives of such change; PROVIDED, HOWEVER, that nothing in this paragraph 6(j) shall be construed as imposing upon the undersigned an affirmative duty to investigate or inquire as to any change in the Company's condition (financial or other), business, prospects, properties, net worth or results of operations or any other information relating to any matter stated in the Registration Statement or Prospectus or any amendment or supplement thereto. 7. INDEMNIFICATION. (a) (i) The Company agrees to indemnify and hold harmless each Underwriter and the Independent Underwriter and each person, if any, who controls any Underwriter or the Independent Underwriter, as the case may be, within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities and judgments caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, PROVIDED, HOWEVER, that (i) except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriters or the Independent Underwriter, as the case may be, furnished in writing to the Company by or on behalf of any Underwriter through DLJ or the Independent Underwriter, respectively, expressly for use therein and (ii) the foregoing indemnity agreement with respect to any untrue statement contained in or omission from a preliminary prospectus shall not inure to the benefit of an Underwriter from whom the person asserting any such losses, liabilities, claims, damages or expenses purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented, if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if such is required by law, at or prior to the written confirmation of the sale of such Shares to such person and the untrue statement contained in or omission from such preliminary prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented). The Company also agrees to indemnify and hold harmless the Independent Underwriter and each person, if any, who controls such Independent Underwriter within the meaning of Section 15 of the Act or -13- Section 20 of the Exchange Act from and against all losses, claims, damages, liabilities and judgments incurred as a result of the Independent Underwriter's participation as a "qualified independent underwriter" within the meaning of Rule 2720(b)(15) of the NASD Rules of Conduct in connection with the offering of the Shares; PROVIDED, HOWEVER, that to the extent that any such losses, claims, damages, liabilities or judgments are found in a final judgment by a court of competent jurisdiction, not subject to further appeal, to have resulted from the willful misconduct or gross negligence of the Independent Underwriter, the Company shall not be liable to that extent. (ii) Each Selling Shareholder severally agrees to indemnify and hold harmless each Underwriter and the Independent Underwriter and each person, if any, who controls any Underwriter or the Independent Underwriter, as the case may be, within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities and judgments caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information furnished in writing to the Company by or on behalf of the Selling Shareholder expressly for use therein. Notwithstanding the foregoing, the aggregate liability of any Selling Shareholder pursuant to the provisions of this paragraph (ii) shall be limited to an amount equal to the aggregate purchase price received by such Selling Shareholder from the sale of such Selling Shareholder's Shares hereunder. (b) In case any action shall be brought against any Underwriter or the Independent Underwriter, as the case may be, or any person controlling such Underwriter or the Independent Underwriter, as the case may be, based upon any preliminary prospectus, the Registration Statement or the Prospectus or any amendment or supplement thereto and with respect to which indemnity may be sought against the Company or any Selling Shareholder, as the case may be, such Underwriter or the Independent Underwriter, as the case may be, shall promptly notify the Company or such Selling Shareholder, as the case may be, in writing; PROVIDED, that the failure of any Underwriter or the Independent Underwriter, as the case may be, to give notice shall not relieve the Company or a Selling Shareholder of their obligations pursuant to paragraph (a) of this Section 7 unless and to the extent that such delay or omission materially adversely affects the ability of the Company or such Selling Shareholder to defend or assume the defense of such action and, in case indemnity shall be sought against the Company, the Company shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such indemnified party and payment of all reasonable fees and expenses, subject to repayment to the Company if it is determined that such Underwriter or the Independent Underwriter, as the case may be, is not entitled to indemnification hereunder. Any Underwriter, the Independent Underwriter or any such controlling person, as the case may be, shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Underwriter, the Independent Underwriter or such controlling person, as the case may be, unless (i) the employment of such counsel shall have been specifically authorized in writing by the Company or the Selling Shareholder, as the case may be, (ii) the Company or such Selling Shareholder shall have failed, within a reasonable time, to assume the defense and employ counsel or (iii) the named parties to any such action (including any impleaded parties) include both such Underwriter, the Independent Underwriter or such controlling person, as the case may be, and the Company or any Selling Shareholder, as the case may be, and such Underwriter, the Independent Underwriter or such controlling person, as the case may be, shall have been advised in writing by such counsel that there may be one or more legal defenses available to it which are different from or additional to and, in either case, in conflict with those available to the Company or such Selling Shareholder, as the case may be, (in which case the Company or such Selling Shareholder, as the case may be, shall not have the right to assume the defense of such action on behalf of such Underwriter, the Independent Underwriter or such controlling person, as the case may be, it being understood, however, that the -14- Company or any Selling Shareholder shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all such Underwriters, the Independent Underwriter and controlling persons, which firm shall be designated in writing by DLJ and that all such fees and expenses shall be reimbursed as they are incurred); PROVIDED, HOWEVER, that if indemnity is sought pursuant to the second paragraph of Section 7(a)(i), then the Company shall be liable for the reasonable fees and expenses of not more than one separate counsel (in addition to any local counsel) for the Independent Underwriter in its capacity as "qualified independent underwriter" if in the opinion of the Independent Underwriter there may exist a conflict of interest between the Independent Underwriter and the Company or other indemnified parties. In the case of any such separate counsel for the Independent Underwriter, such counsel shall be designated in writing by the Independent Underwriter. A Seller shall not be liable for any settlement of any such action effected without the written consent of such Seller but if settled with the written consent of such Seller, such Seller agrees to indemnify and hold harmless any Underwriter and any such controlling person from and against any loss or liability by reason of such settlement, subject, in the case of a Selling Shareholder, to the limitations in Section 7(a)(ii). Notwithstanding the immediately preceding sentence, if in any case where the fees and expenses of counsel are at the expense of the indemnifying party and an indemnified party shall have requested the indemnifying party to reimburse the indemnified party for such fees and expenses of counsel as incurred, such indemnifying party agrees that it shall be liable, subject, in the case of a Selling Shareholder, to the limitations in Section 7(a)(ii), for any settlement of any action effected without its written consent if (i) such settlement is entered into more than ten business days after the receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall have failed to reimburse the indemnified party in accordance with such request for reimbursement prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, the Independent Underwriter, any person controlling the Company or the Independent Underwriter, as the case may be, within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each Selling Shareholder and each person, if any, controlling such Selling Shareholder, within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent as the foregoing indemnity from the Sellers to each Underwriter and the Independent Underwriter but only with reference to information relating to such Underwriter furnished in writing by or on behalf of such Underwriter expressly for use in the Registration Statement, the Prospectus or any preliminary prospectus. In case any action shall be brought against the Company, any of its directors, any such officer, the Independent Underwriter or any person controlling the Company or the Independent Underwriter, as the case may be, or any Selling Shareholder or any person controlling such Selling Shareholder based on the Registration Statement, the Prospectus or any preliminary prospectus and in respect of which indemnity may be sought against any Underwriter, the Underwriter shall have the rights and duties given to the Company (except that if any Seller or the Independent Underwriter, as the case may be, shall have assumed the defense thereof, such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof but the fees and expenses of such counsel shall be at the expense of such Underwriter), and the Company, its directors, any such officers, the Independent Underwriter, any person controlling the Company or the Independent Underwriter, as the case may be, and any Selling Shareholder and any person controlling such Selling Shareholder shall have the rights and duties given to the Underwriter by Section 7(b) hereof. (d) The Independent Underwriter agrees to indemnify and hold harmless the Company, its directors and officers who sign the Registration Statement, each Underwriter, any person controlling the Company or any such Underwriter, as the case may be, within the meaning of Section 15 of the Act or Section -15- 20 of the Exchange Act, each Selling Shareholder and each person, if any, controlling such Selling Shareholder, within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to each Underwriter and the Independent Underwriter but only with reference to information relating to the Independent Underwriter furnished in writing by or on behalf of the Independent Underwriter expressly for use in the Registration Statement, the Prospectus or any preliminary prospectus. In case any action may be brought against the Company, any of its directors, any such officer, any Underwriter or any person controlling the Company or such Underwriter, as the case may be, or any Selling Shareholder or any person controlling such Selling Shareholder based on the Registration Statement, the Prospectus or any preliminary prospectus and in respect of which indemnity may be sought against the Independent Underwriter, the Independent Underwriter shall have the rights and duties given to the Company (except that if the Company, any of its directors, any such officer, any Underwriter, any person controlling the Company or any Underwriter, as the case may be, any Selling Shareholder or any person controlling such Selling Shareholder shall have assumed the defense thereof, the Independent Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof but the fees and expenses of such counsel shall be at the expense of the Independent Underwriter), and the Company, its directors, any such officers, any Underwriter and any person controlling the Company or such Underwriter, as the case may be, any Selling Shareholder and any person controlling such Selling Shareholder shall have the rights and duties given to the Underwriter by Section 7(b) hereof. (e) If the indemnification provided for in this Section 7 is applicable in accordance with its terms but is finally determined by a court to be unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and judgments (i) in such proportion as is appropriate to reflect the relative benefits received by each party to this Agreement from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each party to this Agreement in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Sellers, the Underwriters and the Independent Underwriter shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Sellers, the total underwriting discounts and commissions received by the Underwriters [and the fee payable to the Independent Underwriter pursuant to the first sentence of Section 3A(e) hereof], respectively, bear to the total price to the public of the Shares, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to written information supplied by the Company, any of the Selling Shareholders, the Underwriters or the Independent Underwriter expressly for use in the Registration Statement, the Prospectus or any preliminary prospectus or any amendment or supplement thereto and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Shareholders and the Underwriters agree that The Chicago Corporation will not receive any additional benefits hereunder for serving as the Independent Underwriter in connection with the offering and sale of the Shares. The Sellers, the Underwriters and the Independent Underwriter agree that it would not be just and equitable if contribution pursuant to this Section 7(e) were determined by pro rata allocation (even if the Underwriters and the Independent Underwriter were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of -16- this Section 7, (i) no Underwriter shall be required to contribute any amount in excess of the amount by which the total underwriting discount applicable to the Shares purchased by such Underwriter exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, (ii) the Independent Underwriter as Independent Underwriter shall not be required to contribute in excess of the amount by which the total underwriting discount applicable to the Shares purchased by the Independent Underwriter exceeds the amount of any damages which the Independent Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission and (iii) no Selling Shareholder shall be required to contribute any amount in excess of the amount by which the product of the number of Shares sold by such Selling Shareholder and the initial public offering price of the Shares as set forth in Section 2 hereof exceeds the amount of any damages which such Selling Shareholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding anything to the contrary herein, no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7(e) are several in proportion to the respective number of Shares purchased by each of the Underwriters hereunder and not joint. (f) Each Seller hereby designates [NAME OF COMPANY], [ADDRESS OF COMPANY], (a ____________ corporation) as its authorized agent, upon which process may be served in any action, suit or proceeding which may be instituted in any state or Federal court in the State of New York by any Underwriter or person controlling an Underwriter asserting a claim for indemnification or contribution under or pursuant to this Section 7, and each Seller will accept the jurisdiction of such court in such action, and waives, to the fullest extent permitted by applicable law, any defense based upon lack of personal jurisdiction or venue. A copy of any such process shall be sent or given to such Seller, at the address for notices specified in Section 11 hereof. 8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of the Underwriters to purchase the Firm Shares under this Agreement on the Closing Date and any Additional Shares under this Agreement on any Option Closing Date are subject to the satisfaction or waiver in the sole discretion of the Underwriters of each of the following conditions: (a) All the representations and warranties of the Company contained in this Agreement shall be true and correct on the Closing Date or Option Closing Date, as the case may be, with the same force and effect as if made on and as of the Closing Date or Option Closing Date, as the case may be. The Company shall have performed or complied in all material respects with all of its obligations and agreements herein contained and required to be performed or complied with by it at or prior to the Closing Date or Option Closing Date, as the case may be. (b) The Registration Statement shall have become effective (or, if a post-effective amendment is required to be filed, such post-effective amendment shall have become effective) not later than 10:00 A.M. (and in the case of a Registration Statement filed under Rule 462(b) of the Act, not later than 10:00 P.M.), New York City time, on the date of this Agreement or at such later date and time as DLJ may approve in writing, and at the Closing Date or Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before or threatened by the Commission and every request for additional information on the part of the Commission shall have been complied with in all material respects; and no stop order suspending the sale of the Shares in any jurisdiction referred to in Section 4(g) shall have been issued and no proceeding for that purpose shall have been commenced or shall be pending or threatened. (c) No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any governmental agency which would, as of the Closing Date or Option -17- Closing Date, as the case may be, prevent the issuance of any of the Shares; and no injunction, restraining order or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date or Option Closing Date, as the case may be, which would prevent the issuance of any of the Shares. (d) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date or Option Closing Date, as the case may be, there shall not have been any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any of the Company's securities by any "nationally recognized statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Act. (e)(i) Except as reflected in or contemplated by the Registration Statement and the Prospectus, since the earlier of the date hereof or the dates as of which information is given in the Registration Statement and the Prospectus, there shall not have been any Material Adverse Change or, to the best knowledge of the Company, any development involving a prospective Material Adverse Change, (ii) since the date of the latest balance sheet included in the Registration Statement and the Prospectus there shall not have been any change in the capital stock or in the long-term debt of the Company and the subsidiaries, taken as a whole, and (iii) the Company and the subsidiaries shall have no liability or obligation, direct or contingent, which is material to the Company and the subsidiaries, taken as a whole. (f) All the representations and warranties of each of the Selling Shareholders contained in this Agreement shall be true and correct on the Closing Date or Option Closing Date, as the case may be, with the same force and effect as if made on and as of the Closing Date or Option Closing Date, as the case may be, and the Underwriters shall have received a certificate to such effect, dated the Closing Date, from each Selling Shareholder. Each of the Selling Shareholders shall have performed or complied with all of its obligations and agreements herein contained and required to be performed or complied with by it at or prior to the Closing Date or Option Closing Date, as the case may be. (g) The Representatives shall have received on the Closing Date or Option Closing Date, as the case may be, a certificate dated the Closing Date or Option Closing Date, as the case may be, signed by the President and the Chief Financial Officer of the Company, confirming the matters set forth in paragraphs (a), (b), (c), (d) and (e) of this Section 8 (the "Company Certificate"). (h) The Representatives shall have received on the Closing Date or Option Closing Date, as the case may be, an opinion (satisfactory to the Representatives and counsel for the Underwriters), dated the Closing Date or Option Closing Date, as the case may be, of Skadden Arps, Slate, Meagher & Flom, counsel for the Company, to the effect that: (i) the Company is validly existing and in good standing as a corporation under the laws of the State of California and has the requisite corporate power and corporate authority to carry on its business as it is currently being conducted and to own, lease and operate its properties; (ii) all the outstanding shares of Common Stock (including the Shares to be sold by the Selling Shareholders) have been duly authorized and validly issued and are fully paid, nonassessable and not subject to any preemptive or similar rights; (iii) the Shares to be issued and sold by the Company hereunder have been duly authorized, and when issued and delivered to the Underwriters against payment therefor as -18- provided by this Agreement, will have been validly issued and will be fully paid and nonassessable, and the issuance of such Shares is not subject to any preemptive or similar rights; (iv) the Company has the requisite corporate power and authority to execute, deliver and perform this Agreement and to authorize, issue and sell the Shares as contemplated by this Agreement; (v) this Agreement has been duly authorized, executed and delivered by the Company; (vi) the authorized capital stock of the Company, including the Common Stock, conforms as to legal matters to the description thereof contained in the Prospectus; (vii) the Company is not (A) an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or (B) a "holding company" or a "subsidiary company" of a holding company, or an "affiliate" thereof within the meaning of the Public Utility Holding Company Act of 1935, as amended; (viii) the staff of the Commission has orally advised such counsel that the Registration Statement has become effective under the Act; any required filing of the Prospectus, and any supplements thereto, pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and to the knowledge of such counsel no stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued and no proceedings therefor have been instituted or are pending or contemplated under the Act; (ix) no authorization, approval, consent or order of, or filing with, any court or governmental body or agency is required for the issuance and sale of the Shares, under Applicable Laws (as hereinafter defined). "Applicable Laws" shall mean those laws, rules and regulations of the States of California and New York and of the United States of America which, in the experience of such counsel, are normally applicable to transactions of the type contemplated by this Agreement and the other Transaction Documents and are not the subject of a specific opinion with such opinion referring expressly to a particular law or laws; (x) the execution and delivery by the Company of this Agreement and the issuance and sale of the Shares pursuant to this Agreement do not (i) conflict with the articles of incorporation or bylaws of the Company, (ii) constitute a violation of or a default under or result in the creation of any Lien upon any of the property of the Company or any of its subsidiaries pursuant to any Applicable Contracts or (iii) violate any Applicable Law or any Applicable Order (as defined). "Applicable Contracts" mean those agreements or instruments set forth on Schedule __ to the Officer's Certificate of the Company and which have been identified as all the agreements and instruments which are material to the business or financial condition of the Company and its subsidiaries. For purposes of this paragraph (x), the term "Applicable Orders" means those orders or decrees of Governmental Authorities (as defined below) identified on Schedule __ to the Officers' Certificate of the Company; (xi) to the best of such counsel's knowledge, the Company is not in violation of its charter or by-laws; (xii) at the time it became effective and on the Closing Date, the Registration Statement (except for financial statements, the notes thereto and related schedules and other financial data -19- included therein, as to which no opinion need be expressed) complied as to form in all material respects with the Act; and (xiii) except as set forth in the Prospectus, no holder of any security of the Company has any right to require registration of shares of Common Stock or any other security of the Company. In giving their opinion required by subsection (h) of this Section 8, such counsel also shall state that such counsel has participated in conferences with officers and other representatives of the Company and Champion, representatives of the independent public accountants for the Company and Champion, the representatives of the Underwriters and counsel to the Underwriters at which the contents of the Registration Statement and the Prospectus and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus on the basis of the foregoing, no fact has come to the attention of such counsel that leads it to believe that the Registration Statement, at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of its date and as of the Closing Date or Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, it being understood that such counsel is not expressing any opinion or belief as to the financial statements, schedules and other financial, numerical, accounting or statistical data included in or excluded from the Registration Statement or the Prospectus. (i) The Representatives shall have received an opinion (satisfactory to the Representatives and counsel for the Underwriters), dated the Closing Date or Option Closing Date, as the case may be, of the general counsel for the Company to the effect that: (i) The Company and each of the Company's Significant Subsidiaries has been duly incorporated or formed as the case may be, and is validly existing as a corporation or partnership, as the case may be, in good standing under the laws of its jurisdiction or incorporation or formation; and the Company and each of its Significant Subsidiaries is duly qualified and is in good standing as a foreign corporation or partnership, as the case may be, except where the failure to be so qualified would not reasonably be expected to have a Material Adverse Effect; (ii) to the best of such general counsel's knowledge, after reasonable investigation, except as otherwise set forth in the Prospectus, there is no action, suit or proceeding before or by any court of governmental agency or body, domestic or foreign, pending against or affecting the Company of any of its subsidiaries, or any of their respective assets or properties, which is reasonably likely to have, singly or in the aggregate, a Material Adverse Effect, and to the best of such general counsel's knowledge, after reasonable investigation, no such proceedings are threatened; (iii) to the best of such general counsel's knowledge, after reasonable investigation, no restraining order or injunction has been issued by, and no investigation, action, claim, suit or proceeding has been initiated or, to the best of such general counsel's knowledge, threatened by or before any United States, California or New York executive, legislative, judicial, administrative or regulatory body, including, without limitation, the Commission (each a "Governmental Authority") with respect to (A) the issuance and sale of the Shares or (B) the execution, delivery or performance by the Company of this Agreement; -20- (iv) the issuance and sale of the Shares, the consummation of the transactions contemplated by the Transaction Documents, the execution, delivery and performance by the Company of this Agreement and the Transaction Documents and the compliance by the Company with all the provisions of this Agreement and the Transaction Documents will not conflict with or result in a breach of any of the terms or provisions or, or constitute a default or cause an acceleration of any obligation under, any bond, note, debenture or any other evidence of indebtedness or any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them is bound, except as would not have, singly or in the aggregate, a Material Adverse Effect; and (v) the descriptions in the Registration Statement and the Prospectus of statutes, legal and governmental proceedings and contracts and other documents are accurate in all material respects; and such general counsel does not know of any legal or governmental proceedings required to be described in the Registration Statement or Prospectus which are not described as required or of any contracts or documents of a character required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement which are not described and filed as required; it being understood that such general counsel need express no opinion as to the financial statements, notes or schedules or other financial data included therein. (j) The Underwriters shall have received on the Closing Date or Option Closing Date, as the case may be, an opinion (satisfactory to the Representatives and counsel for the Underwriters), dated the Closing Date or Option Closing Date, as the case may be, of the respective counsels for each of the Selling Shareholders, to the effect that: (i) this Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Shareholder and is a valid and binding agreement of such Selling Shareholder; (ii) the Custody Agreement has been duly authorized, executed and delivered by such Selling Shareholder and is a valid and binding agreement of such Selling Shareholder enforceable in accordance with its terms; (iii) the Power of Attorney signed by such Selling Shareholder has been duly authorized, executed and delivered by or on behalf of such Selling Shareholder and is a valid and binding instrument of such Selling Shareholder enforceable in accordance with it terms, and pursuant to such Power of Attorney, such Selling Shareholder has authorized _____________ and _____________, or either of them, to execute and deliver on their behalf this Agreement and any other document necessary or desirable in connection with transactions contemplated hereby and to deliver the Shares to be sold by them pursuant to this Agreement. (iv) to the best of such counsel's knowledge, no authorization, approval, consent or order of, or filing with, any United States Federal, New York or [insert additional appropriate state(s)] court or governmental body or agency is required for the consummation by such Selling Shareholder of the transactions contemplated by this Agreement, except such as have been obtained and made under the Act and such as may be required under the rules and regulations of the National Association of Securities Dealers, Inc. or under state or foreign securities or Blue Sky laws; (v) to the best of such counsel's knowledge, the execution and delivery of this Agreement, the Custody Agreement and the Power of Attorney by such Selling Shareholder, -21- the sale of the Shares, the compliance by such Selling Shareholder with all of the provisions of this Agreement, the Custody Agreement and the Power of Attorney and the consummation of the transactions contemplated by this Agreement, the Custody Agreement and the Power of Attorney will not conflict with or result in a breach or violation (or constitute an event that with notice or the lapse of time, or both, would constitute a breach or violation) of the charters or bylaws or other organizational documents of such Selling Shareholder that is not an individual, or any partnership agreement to which such Selling Shareholder is a party, or any of the terms or provisions of, or constitute a default under, or cause an acceleration of any obligation under, or result in the imposition or creation of (or the obligation to create or impose) a Lien (or an event that with notice or the lapse of time, or both, would constitute a default, cause an acceleration or result in a Lien) with respect to, any bond, note, debenture or other evidence of indebtedness or any indenture, mortgage, deed of trust or other agreement or instrument to which such Selling Shareholder is a party or by which it or any of them is bound, or to which any properties of such Selling Shareholder is or may be subject, or contravene any order of any court or governmental agency or body having jurisdiction over such Selling Shareholder or any of its respective properties, or violate or conflict with any statute, rule or regulation or administrative or court decree applicable to such Selling Shareholder, or any of its properties; (vi) such Selling Shareholder has full legal right, power and authority, and any approval required by law (other than any approval imposed by the applicable state securities and Blue Sky laws) to sell, assign, transfer and deliver the Shares to be sold by him in the manner provided in this Agreement and the Custody Agreement; and (vii) upon delivery of the certificates for the Shares to be sold by such Selling Shareholder, pursuant hereto and payment therefor, good and marketable title will pass to the Underwriters who have purchased such Shares in good faith and without notice of any adverse claim within the meaning of the Uniform Commercial Code as currently in effect in the State of New York, severally, free of all restrictions on transfer, liens, encumbrances, security interests, equities and claims whatsoever, other than restrictions on transfer under applicable securities laws, claims under this Agreement and any claims, security interests, voting trusts or other restrictions created by the Underwriters. (k) The Representatives shall have received on the Closing Date or Option Closing Date, as the case may be, an opinion (satisfactory to the Representatives and counsel for the Underwriters), dated the Closing Date or Option Closing Date, as the case may be, of _____________, [regulatory counsel for the Company], to the effect that: (i) the descriptions in the Registration Statement and the Prospectus of statutes, legal and governmental proceedings, contracts and other documents and regulatory matters described in the Prospectus under the captions "Risk Factors--Limits on Reimbursement," "-- Extensive Regulation" and "--Healthcare Reform Legislation," and "Business--Medicare, Medicaid and Other Revenues" and "--Regulation and Other Factors," insofar as such statements constitute summaries of legal matters, documents or proceedings referred to therein, are accurate in all material respects and fairly present the information shown as of the dates thereof; and (ii) the Company and each of its subsidiaries has such Authorizations of and from, and has made all declarations and filings with, all Federal, state, local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals, necessary or required to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus, except those the absence of which would not have a -22- Material Adverse Effect. To the best knowledge of such counsel (after reasonable inquiry) all such Authorizations are valid and in full force and effect and the Company and each of its subsidiaries has fulfilled and performed all of its material obligations with respect to, and is in compliance in all material respects with the terms and conditions of, such Authorizations and with the rules and regulations of the regulatory authorities and governing bodies having jurisdiction with respect thereto, and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or result in any other material impairment of the rights of the holder of any such Authorization, except where the effect would not have a Material Adverse Effect, and such counsel has no reason to believe that any governmental body or agency is considering limiting, suspending or revoking any such Authorization. (l) The Representatives shall have received on the Closing Date or Option Closing Date, as the case may be, an opinion, dated the Closing Date or Option Closing Date, as the case may be, of Sullivan & Cromwell, counsel for the Underwriters, in form and substance reasonably satisfactory to the Representatives. (m) The Representatives shall have received letters on and as of the date hereof as well as on and as of the Closing Date or Option Closing Date, as the case may be, in the latter case constituting an affirmation of the statements set forth in the earlier letters, in form and substance satisfactory to the Representatives, from Ernst & Young LLP and Coopers & Lybrand L.L.P., independent public accountants to the Company and Champion, respectively, with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus as the Representatives shall reasonably require. (n) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the Shares, the Registration Statement and the Prospectus, and all other legal matters relating to this Agreement and the transactions contemplated hereby shall be reasonably satisfactory in all respects to Sullivan & Cromwell, and such counsel shall have been furnished with such documents and opinions, in addition to those set forth above, as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in this Section 8, in order to evidence the accuracy, completeness and satisfaction in all material respects of any of the representations, warranties or conditions herein contained and to render the opinion referred to in Section 8(l). (o) The Company and the Selling Shareholders shall have performed or complied in all material respects with the agreements herein contained and required to be performed or complied with by the Company or the Selling Shareholders, as the case may be, at or prior to the Closing Date or Option Closing Date, as the case may be. (p) There shall have been no amendments, alterations, modifications or waivers of any provisions of the Transaction Documents since the date of the execution and delivery thereof by the parties thereto other than those which are disclosed in the Registration Statement or the Prospectus or any supplement thereto or which under the Act are not required to be disclosed in the Prospectus or any supplement thereto and which have been disclosed to the Underwriters prior to the date hereof. (q) Each of the Merger Parties shall, to the extent each is a party thereto, have complied in all respects with all agreements and covenants in the Transaction Documents and performed all conditions specified therein that the terms thereof require to be complied with or performed at or prior to the Effective Time of the Merger, except to the extent that such compliance or performance has been waived by the other parties to the applicable Transaction Documents. -23- (r) The certificate of merger with respect to the Merger shall have been filed with the Secretary of State of the State of Delaware and shall have become effective, the Merger shall have occurred and all other transactions contemplated by the Transaction Documents to be consummated at or prior to the Effective Time of the Merger shall have been consummated prior to the consummation of the purchase and sale of the Shares hereunder at the Closing Date. (s) Except as is disclosed to the Underwriters in writing, the representations and warranties of the Company set forth in the Transaction Documents shall be true, accurate and complete in all respects. (t) The Representatives shall have received on the Closing Date a certificate of each Selling Shareholder who is not a U.S. Person to the effect that such Selling Shareholder is not a U.S. Person (as defined under applicable U.S. Federal tax legislation), which certificate may be in the form of a properly completed and executed United States Treasury Department Form W-8 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). 9. EFFECTIVE DATE OF AGREEMENT AND TERMINATION. This Agreement shall become effective upon the later of (i) execution of this Agreement and (ii) if a post-effective amendment is required, when notification of the effectiveness of such post-effective amendment to the Registration Statement has been released by the Commission. This Agreement may be terminated at any time prior to the Closing Date by the Representatives by written notice to the Company if any of the following has occurred: (i) subsequent to the date the Registration Statement is declared effective or the date of this Agreement, any Material Adverse Change or development involving a prospective Material Adverse Change which would, in the judgment of the Representatives, make it impracticable or inadvisable to market the Shares on the terms and in the manner contemplated in the Prospectus, (ii) any outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic conditions or in the financial markets of the United States or elsewhere or any other substantial national or international calamity or emergency that, in the judgment of the Representatives, is material and adverse and would, in the judgment of the Representatives, make it impracticable or inadvisable to market the Shares on the terms and in the manner contemplated in the Prospectus or to enforce contracts for the sale of the Shares, (iii) the suspension or material limitation of trading in securities generally on the NYSE or limitation on prices for securities on such exchange, (iv) the suspension or material limitation of trading in any of the Company's securities on the NYSE, (v) the declaration of a banking moratorium by either Federal or New York State authorities or (vi) the taking of any action by any Federal, state or local government or agency in respect of its monetary or fiscal affairs which in the opinion of the Representatives has a material adverse effect on the financial markets in the United States. If on the Closing Date or on an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase the Firm Shares or Additional Shares, as the case may be, which it or they have agreed to purchase hereunder on such date and the aggregate number of Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters, as the case may be, agreed but failed or refused to purchase is not more than one-fifth of the total number of Shares to be purchased on such date by all Underwriters, each non-defaulting Underwriter shall be obligated severally, in the proportion which the number of Firm Shares or Additional Shares, as the case may be, set forth opposite its name in Schedule I bears to the total number of Firm Shares or Additional Shares, as the case may be, which all the non-defaulting Underwriters, as the case may be, have agreed to purchase, or in such other proportion as the Representatives may specify, to purchase the Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters, as the case may be, agreed but failed or refused to purchase on such date; PROVIDED that in no event shall the number of Firm Shares or Additional Shares which any Underwriter has agreed to purchase pursuant to Section 2 hereof be increased pursuant to this Section 9 by an amount in -24- excess of one-fifth of such number of Firm Shares or Additional Shares, as the case may be, without the written consent of such Underwriter. If on the Closing Date or an Option Closing Date, as the case may be, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares, or Additional Shares, as the case may be, and the aggregate number of Firm Shares or Additional Shares, as the case may be, with respect to which such default occurs is more than one-fifth of the aggregate number of Shares to be purchased on such date by all Underwriters and arrangements satisfactory to the Representatives and the Sellers for purchase of such Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter and the applicable Sellers. In any such case which does not result in termination of this Agreement, either the Underwriters or the Sellers shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of any such Underwriter under this Agreement. 10. AGREEMENTS OF THE SELLING SHAREHOLDERS. Each Selling Shareholder severally, and not jointly, agrees with the Underwriters and the Company as to itself: (a) To pay or cause to be paid all transfer taxes with respect to the Shares to be sold by such Selling Shareholder; and (b) To take all reasonable actions in cooperation with the Company and the Underwriters to cause the Registration Statement to become effective at the earliest possible time, to do and perform all things to be done and performed under this Agreement prior to the Closing Date and to satisfy all conditions precedent to the delivery of the Shares pursuant to this Agreement. 11. MISCELLANEOUS. Notices given pursuant to any provision of this Agreement shall be addressed as follows: (a) if to the Company, to it at _____________, (b) if to a Selling Shareholder, to it at the address set forth in Schedule II, (c) if to any Underwriter or to the Representatives, to the Representatives c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, and (d) if to the Independent Underwriter, to it at 208 S. LaSalle Street, Chicago, Illinois 60604, Attention: _______________, or in any case to such other address as the person to be notified may have requested in writing. The respective indemnities, contribution agreements, representations, warranties and other statements of the Selling Shareholders, the Company, its officers and directors, the several Underwriters and the Independent Underwriter set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Shares, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter or by or on behalf of the Sellers, the officers or directors of the Company or any controlling person of the Sellers, (ii) acceptance of the Shares and payment for them hereunder and (iii) termination of this Agreement. If this Agreement shall be terminated by the Underwriters pursuant to clause (i) or (iv) of the second paragraph of Section 9 or because of any failure or refusal on the part of the Sellers to comply with the terms or to fulfill any of the conditions of this Agreement, the Company agrees to reimburse the several Underwriters and the Independent Underwriter for all out-of-pocket expenses (including the reasonable fees and disbursements of counsel) incurred by them. Notwithstanding any termination of this Agreement, the Company shall be liable for all expenses which it has agreed to pay pursuant to Section 4(k) or the second sentence of Section 3A(e) hereof. Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Sellers, the Underwriters, any controlling persons referred to herein and their -25- respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Sellers from any of the several Underwriters merely because of such purchase. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO LAWS PERTAINING TO CONFLICTS OF LAWS). This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. -26- Please confirm that the foregoing correctly sets forth the agreement between the Company and the several Underwriters. Very truly yours, PARACELSUS HEALTHCARE CORPORATION By______________________________ Name: Title: VIRGINIA RETIREMENT SYSTEM EQUITY-LINKED INVESTORS, L.P. EQUITY-LINKED INVESTORS-II WILLIAM BLAIR VENTURE PARTNERSHIP III RFE INVESTMENT PARTNERS IV, L.P. RFE CAPITAL PARTNERS, L.P. THE LINCOLN NATIONAL LIFE INSURANCE COMPANY LINCOLN NATIONAL INCOME FUND, INC. SECURITY-CONNECTICUT COMPANY By:______________________________ As Attorney-in-Fact acting on behalf of each of the Selling Shareholders named in Schedule II to this Agreement DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BEAR, STEARNS & CO. INC. SMITH BARNEY INC. THE CHICAGO CORPORATION Acting severally on behalf of themselves and the several Underwriters named in Schedule I hereto By: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By__________________________ Name: Title: THE CHICAGO CORPORATION By__________________________ Name: Title: -27- SCHEDULE I Number of Additional Shares Total Number to be Purchased of Firm Shares if Maximum Underwriters to be Purchased Option Exercised ------------ --------------- ------------------ Donaldson, Lufkin & Jenrette Securities Corporation. . . . . . . Bear, Stearns & Co. Inc.. . . . . . . Smith Barney Inc. . . . . . . . . . . The Chicago Corporation . . . . . . . Total . . . . . . . . . . . . . . [7,709,000] [1,184,250] =========== =========== -28- SCHEDULE II
Number of Additional Shares Total Number to be Sold if of Firm Shares Maximum Option to be Sold Exercised --------------- ----------------- The Company . . . . . . . . . . . . .. . . . . . . 5,200,000 0 The Selling Shareholders: Virginia Retirement System. . . . . . . . . . . 1,163,558 536,261 Equity-Linked Investors, L.P. . . . . . . . . . 85,165 39,251 Equity-Linked Investors-II. . . . . . . . . . . 61,269 28,236 William Blair Venture Partnership III . . . . . 269,072 124,009 RFE Investment Partners IV, L.P.. . . . . . . . 102,664 47,316 RFE Capital Partners, L.P.. . . . . . . . . . . 68,443 31,544 The Lincoln National Life Insurance Company . . 47,910 22,081 Lincoln National Income Fund, Inc.. . . . . . . 1,711 789 Security-Connecticut Company. . . . . . . . . . 1,711 789 --------------- ----------------- Total. . . . . . . . . . . . . . . . [1,801,503] [830,276] =============== =================
(a) This Selling Shareholder is represented by [NAME AND ADDRESS OF COUNSEL] and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of them, as the Attorneys-in-Fact for such Selling Shareholder. (b) This Selling Shareholder is represented by [NAME AND ADDRESS OF COUNSEL] and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of them, as the Attorneys-in-Fact for such Selling Shareholder. (c) This Selling Shareholder is represented by [NAME AND ADDRESS OF COUNSEL] and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of them, as the Attorneys-in-Fact for such Selling Shareholder. (d) This Selling Shareholder is represented by [NAME AND ADDRESS OF COUNSEL] and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of them, as the Attorneys-in-Fact for such Selling Shareholder. (e) This Selling Shareholder is represented by [NAME AND ADDRESS OF COUNSEL] and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of them, as the Attorneys-in-Fact for such Selling Shareholder. -29- ANNEX I Required Shareholder Lock-ups -30- EX-4.9 3 EXHIBIT 4.9 FORM OF STOCK CERTIFICATE PARACELSUS HEALTHCARE CORPORATION INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA COMMON STOCK CUSIP 698891 10 8 THIS CERTIFICATE IS TRANSFERABLE IN DALLAS, TEXAS AND NEW YORK, NEW YORK SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFIES THAT is the owner of FULLY PAID AND NON-ASSESSABLE COMMON SHARES OF Paracelsus Healthcare Corporation transferable in person or by duly authorized attorney on the books of the Corporation upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned and registered by the Transfer Agent and the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. CERTIFICATE OF STOCK Dated: COUNTERSIGNED AND REGISTERED: President and CHASEMELLON SHAREHOLDER SERVICES, L.L.C. Chief Operating Officer TRANSFER AGENT By AND REGISTRAR Secretary AUTHORIZED SIGNATURE PARACELSUS HEALTHCARE CORPORATION The Company will furnish upon request and without charge to each stockholder the powers, privileges, restrictions, designations, preferences and relative, participating, optional and other special rights of each class of stock and series within a class of stock of the Company authorized to be issued and upon the holders thereof, as well as the qualifications, limitations and restrictions relating to those preferences and/or rights. A stockholder may make the request to the Secretary of the Company or to its Transfer Agent and Registrar. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - ____Custodian _____ TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right under Uniform Gifts to Minors of survivorship and not as Act _________________________ tenants in common [State] Additional abbreviations may also be used though not in the above list. For value received, ______________________hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _______________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Please print or typewrite name and address including postal zip code of assignee ______________________________________________________________________________ ______________________________________________________________________________ _______________________________________________________________________ Shares of the Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ______________________________________________________________________________ Attorney to transfer the said stock on the books of the within-named Company with full power of substitution in the premises. Dated_________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. X ___________________________________________________________ (SIGNATURE) X ___________________________________________________________ (SIGNATURE) CHASEMELLON SHAREHOLDER SERVICES LLC Until the Separation Time (as defined in the Rights Agreement referred to below), this certificate also evidences and entitles the holder hereof to certain Rights as set forth in a Rights Agreement, dated as of August 16, 1996 (as such may be amended from time to time, the "Rights Agreement", between Paracelsus Health Corporation (the "Company") and ChaseMellon Shareholders Service, L.L.C., as Rights Agents, the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of the Company. Under certain circumstances, as set forth in the Rights Agreement, such Rights may be redeemed, may become exercisable for securities assets of the Company or of another entity, may be exchanged for shares of Common Stock or other securities or assets of the Company, may expire, may become void (if they are "Beneficially" Owned by an "Acquiring Person" or an Affiliate or Associate thereof, as such terms are defined in the Rights Agreement, or by any transferee of any of the foregoing) or may be evidenced by separate certificates and may no longer be evidenced by this certificate. The Company will mail or arrange for mailing of a copy of the Rights Agreement to the holder of this Agreement without charge after the receipt of a written request therefor. THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM) PURSUANT TO G.E.O. RULE 1724-15. ___________________________________________________________________________ SIGNATURE(S) GUARANTEED BY: AMERICAN BANKNOTE COMPANY 680 BLAIR MILL ROAD HORSHAM, PA 19044 215-657-3480 SALESPERSON M. GARRETT. 214-823-2700 /home/joew/inprogress/home 14/Paracelsus45101 PRODUCTION COORDINATOR--JOYCE STRADLING-210-430-2100 PROOF OF AUGUST 2. 1996 PARACELSUS HEALTHCARE H 45101bk Opr. JW/hj/lr rev1 /net/banknote/home 14/P EX-5.1 4 EXHIBIT 5.1 SKADDEN ARPS OPINION Exhibit 5.1 Skadden, Arps, Slate, Meagher & Flom 300 South Grand Avenue Los Angeles, CA 90071 August 9, 1996 Paracelsus Healthcare Corporation 155 North Lake Avenue, Suite 1100 Pasadena, California 91101 Re: Paracelsus Healthcare Corporation Registration Statement on Form S-1 (Registration No. 333-07289) -------------------------------------------------- Ladies and Gentlemen: We have acted as special counsel to Paracelsus Healthcare Corporation, a California corporation (the "Company"), in connection with the preparation of the above-referenced Registration Statement (as hereinafter defined). The Registration Statement relates to the registration under the Securities Act of 1933, as amended (the "Act"), of up to 6,243,350 shares of the Company's common stock, no stated value per share (the "Common Stock"). Of the shares of Common Stock covered by the Registration Statement, (i) 5,200,000 shares (the "Company Shares") are being issued and sold by the Company and (ii) up to 1,043,350 shares (the "Shareholder Shares" and, together with the Company Shares, the "Shares") are being offered and sold by certain shareholders of the Company (the "Selling Shareholders") (including 814,350 shares subject to an over-allotment option granted to the Underwriters (as hereinafter defined) by the Selling Shareholders). This opinion is furnished in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Act. In connection with this opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of (i) the Registration Statement on Form S-1 (File No. 333-07289) as filed with the Securities and Exchange Commission (the "Commission") on June 28, 1996 under the Act, Paracelsus Healthcare Corporation August 9, 1996 Page 2 Amendment No. 1 thereto filed with the Commission on July 17, 1996 and Amendment No. 2 thereto filed with the Commission on the date hereof (such Registration Statement, as so amended, being hereinafter referred to as the "Registration Statement"); (ii) the form of the Underwriting Agreement (the "Underwriting Agreement") proposed to be entered into by and among the Company, the Selling Shareholders and Donaldson, Lufkin & Jenrette, Bear, Stearns & Co., Inc., Smith Barney Inc. and The Chicago Corporation, as representatives of the several underwriters named therein (together, the "Underwriters"), filed as an exhibit to the Registration Statement; (iii) the Company's Articles of Incorporation, as presently in effect; (iv) the form of Amended and Restated Articles of Incorporation of the Company (the "New Articles") filed as an exhibit to the Registration Statement, to become effective after the date hereof in connection with the merger (the "Merger") and the other transactions contemplated by the Amended and Restated Agreement and Plan of Merger, dated as of May 29, 1996, by and among the Company, Champion Healthcare Corporation and PC Merger Sub, Inc. (the "Merger Agreement"); (v) the Company's Bylaws, as presently in effect; (vi) the form of Amended and Restated Bylaws of the Company filed as an exhibit to the Registration Statement, to become effective after the date hereof in connection with the Merger and the other transactions contemplated by the Merger Agreement; and (vii) the form of a specimen certificate representing shares of Common Stock. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and others, and such other documents, certificates and records as we have deemed necessary or appropriate as a basis for the opinions set forth herein. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or photostatic copies and the authenticity of the originals of such latter documents. In making our examination of documents executed or to be executed by parties other than the Company, we have assumed that such parties had or will have the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such parties of such documents and the validity and binding effect thereof. As to any facts material to the opinions expressed herein which we have not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company and others. Paracelsus Healthcare Corporation August 9, 1996 Page 3 Members of our firm are admitted to the bar in the State of California, and we do not express any opinion as to the laws of any other jurisdiction. Based upon and subject to the foregoing, we are of the opinion that when (i) with respect to the Company Shares, the issuance of the Company Shares has been duly authorized by the Board of Directors of the Company, (ii) the New Articles have been duly adopted and filed with the Secretary of State of the State of California and became effective in accordance with applicable law, (iii) with respect to the Shareholder Shares, a certificate of merger has been duly adopted and filed with the Secretary of State of the State of Delaware in accordance with the terms of the Merger Agreement and becomes effective in accordance with applicable law, (iv) the Underwriting Agreement has been duly executed and delivered, and (v) certificates representing the Shares in the form of the specimen certificates examined by us have been signed by an authorized officer of the transfer agent and registrar for the Common Stock and registered by such transfer agent and registrar, and delivered to and paid for by the Underwriters as contemplated by the Underwriting Agreement, the Shares will be validly issued, fully paid and nonassessable. We hereby consent to the reference to our firm in the Registration Statement under the caption "Legal Matters" and to the filing of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not thereby admit that we are included in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission thereunder. Very truly yours, Skadden, Arps, Slate, Meagher & Flom EX-23.1 5 EXHIBIT 23.1 CONSENT E & Y EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of (i) our report dated December 14, 1995, with respect to the consolidated financial statements of Paracelsus Healthcare Corporation as of September 30, 1994 and 1995 and for each of the three years in the period ended September 30, 1995, (ii) our report dated December 14, 1995 with respect to the financial statement schedule of Paracelsus Healthcare Corporation for the years ended December 31, 1993, 1994 and 1995, and (iii) our report dated May 17, 1996, with respect to the combined financial statements of Davis Hospital and Medical Center, Pioneer Valley Hospital and Santa Rosa Medical Center as of December 31, 1994 and 1995 in the registration statement (Form S-1 No. 333-07289) and related Prospectus of Paracelsus Healthcare Corporation for the registration of 9,079,250 shares of its common stock. /s/ ERNST & YOUNG LLP -------------------------------------- ERNST & YOUNG LLP Los Angeles, California August 9, 1996 EX-23.2 6 EXHIBIT 23.2 CONSENT C & L EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (No. 333-07289) and related Prospectus of Paracelsus Healthcare Corporation of (i) our report dated February 27, 1996, with respect to the consolidated financial statements of Champion Healthcare Corporation as of December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995, (ii) our report dated February 16, 1996, with respect to the financial statements of Dakota Heartland Health System as of December 31, 1994 and 1995 and for the year ended December 31, 1995, (iii) our report dated December 28, 1995, with respect to the financial statements of Jordan Valley Hospital as of September 30, 1995 and for the period from January 1, 1995 through September 30, 1995, (iv) our report dated June 11, 1995, with respect to the financial statements of Salt Lake Regional Medical Center as of May 31, 1994 and April 13, 1995 and for each of the two years in the period ended May 31, 1994 and the period from June 1, 1994 through April 13, 1995. We also consent to the reference of our firm under the caption "Experts." COOPERS & LYBRAND L.L.P. Houston, Texas August 9, 1996 -----END PRIVACY-ENHANCED MESSAGE-----