-----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, WozOOvgvlhhQdzdCfrdRmdDofAem8n70Tm5E3vVA4MxjqvqPhfl3ag0zzQAEXAfs ZGQ/9koHWAE6VqCTekMeOg== 0000950129-96-002040.txt : 19960903 0000950129-96-002040.hdr.sgml : 19960903 ACCESSION NUMBER: 0000950129-96-002040 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960816 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960830 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12055 FILM NUMBER: 96624012 BUSINESS ADDRESS: STREET 1: 515 W GREENS RD STREET 2: STE 800 CITY: HOUSTON STATE: TX ZIP: 77067 BUSINESS PHONE: 8187928600 8-K 1 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report ( Date of earliest event reported): August 16, 1996 PARACELSUS HEALTHCARE CORPORATION (Exact name of registrant as specified in its charter) California 1-12055 95-3565943 (State or other ( Commission (IRS Employer Jurisdiction File Number) Identification No.) 515 W. Greens Road, Suite 800, Houston, Texas 77067 (Address of principal executive offices) Registrant's telephone number, including area code: (713) 873-6623 155 North Lake Avenue, Suite 1100, Pasadena, California 91101 (Former name or former address, if changed since last report This report contains 44 pages. The exhibit index is included at page 12 of this report. 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On August 16, 1996, Paracelsus Healthcare Corporation (the "Company") completed its acquisition of Champion Healthcare Corporation ("Champion) and all its subsidiaries, pursuant to an Amended and Restated Agreement and Plan of Merger, dated as of May 29, 1996, by and among the Company, PC Merger Sub, Inc., a wholly owned subsidiary of the Company, and Champion. The acquisition was effected through the merger (the "Merger") of PC Merger Sub, Inc. with and into Champion, pursuant to which Champion, as the successor company, became a wholly owned subsidiary of the Company, and the shares of Champion's common and preferred stock were converted into an aggregate of approximately 19,755,009 shares of the Company's common stock. In addition, the Company assumed all of Champion's outstanding stock options, subscription rights, warrants and convertible securities, which as of August 16, 1996, represented the right to acquire approximately 1,337,204 shares, 80,000 shares, 422,286 shares and 60,067 shares of the Company's common stock, respectively. As a result of the Merger, the Company also assumed approximately $173.9 million in debt, consisting primarily of $94.3 million of Champion's 11% Senior Subordinated Notes and $59.7 million of amount borrowed under Champion's Revolving Credit Facility. For additional information concerning the business and acquisition of Champion, see the Company's Registration Statement on Form S-4 (Commission File No. 333-8521) filed on July 19, 1996. ITEM 5. OTHER EVENTS. On August 16, 1996, simultaneously with the consummation of the merger transaction as described under Item 2, the Company completed its public equity offering of 5,200,000 shares of its common stock, including 600,000 over-alloted shares, at $8.50 per share, realizing net proceeds to the Company of approximately $41.6 million. On such date, the Company also completed a public debt offering of $325.0 million of its 10% Senior Subordinated Notes due 2006, realizing net proceeds to the Company of approximately $316.9 million. The Company has also commenced a tender offer to purchase up to $75.0 million aggregate principal amount of the outstanding 9.875% Senior Subordinated Notes (the "Notes") for $1,027.50 per $1,000 principal amount. The debt tender offer expired on August 22, 1996, with all Notes having been tendered. For additional information concerning the equity and debt offerings and the tender offer, see the Company's Registration Statements on Form S-1 (Commission File No. 333-07289 and 333-06713). 3 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial statements of business acquired. The following financial statements of Champion are incorporated herein by reference to the Company's Registration Statement on Form S-4 (Commission File No. 333-8521): - Report of independent public accountants, dated February 27, 1996 - Consolidated balance sheet at December 31, 1994 and 1995 - Consolidated statement of operations for the years ended December 31, 1993, 1994 and 1995 - Consolidated statement of stockholders' equity for the years ended December 31, 1993, 1994 and 1995 - Consolidated statement of cash flows for the years ended December 31, 1993, 1994 and 1995 - Notes to consolidated financial statements The following financial statements of Champion are filed with this report: - Condensed consolidated balance sheet as of June 30, 1996 (Unaudited) - Condensed consolidated statement of operations for the six months ended June 30, 1996 and 1995 (Unaudited) - Condensed consolidated statement of cash flows for the six months ended June 30, 1996 and 1995 (Unaudited) - Notes to condensed consolidated financial statements (Unaudited) (b) Pro forma financial information. As of the date of filing this Current Report on Form 8-K, it is impracticable for the Company to provide the pro forma financial information required by this Item 7(b). Such financial statements shall be filed by amendment to this Form 8-K no later than 60 days after August 31, 1996. (c) Exhibits. 2.1(a) Amended and Restated Agreement and Plan of Merger, dated as of May 29, 1996, by and among Paracelsus, PC Merger Sub, Inc. and Champion. 99.1 Audited financial statements of Champion for the three years ended December 31, 1995. ___________________ (a) Incorporated herein by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-4( Commission File No. 333-8521). 4 CHAMPION HEALTHCARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET As of June 30, 1996 (Dollars in thousands) (Unaudited)
ASSETS Current assets: Cash and cash equivalents $ 13,273 Patient accounts receivable, net of allowance for doubtful accounts 34,725 Supplies 3,906 Other current assets 7,741 ------ Total current assets 59,645 Property and equipment 182,014 Less: Accumulated depreciation and amortization (14,272) ------ Net property and equipment 167,742 Investment in Dakota Heartland Health System 52,469 Other assets 34,983 ------ Total assets $ 314,839 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital lease obligations $ 2,581 Accounts payable 10,216 Other current liabilities 22,045 ----- Total current liabilities 34,842 Long-term debt and capital lease obligations 175,710 Other long-term liabilities 10,135 Redeemable preferred stock 46,127 Stockholders' equity: Common stock 144 Common stock subscribed 40 Common stock subscription receivable (40) Paid in capital 61,403 Accumulated deficit (13,522) ------ Total stockholders' equity 48,025 Total liabilities and stockholders' equity $314,839 =======
See notes to condensed consolidated financial statements. 5 CHAMPION HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Dollars in thousands, except per share data) (Unaudited)
Six Months Ended June 30, -------------------------- 1996 1995 ------ ---- Net patient service revenue $ 99,968 $ 69,561 Other revenue 1,525 2,485 ------- ------ Net revenue 101,493 72,046 ------- ------ Cost and expenses: Salaries and benefits 43,693 31,260 Other operating expenses 37,849 28,316 Provision for bad debts 6,886 5,753 Interest 9,164 5,917 Depreciation and amortization 6,290 3,614 Equity in earnings of Dakota Heartland Health System (7,762) (3,745) Merger costs 1,122 - ------ ------ Total costs and expenses 97,242 71,115 ------ ------ Income before income taxes and extraordinary loss 4,251 931 Provision (benefit) for income taxes 1,880 (75) ------ ------ Income before extraordinary loss 2,371 1,006 Extraordinary loss on early extinguishment of debt - (1,118) ------ ----- Net income (loss) $ 2,371 $ (112) ====== ===== Income (loss) applicable to common stock $ 2,273 $(3,092) ====== ===== Income (loss)per common share: Primary - Before extraordinary loss $ 0.16 $ (0.47) Extraordinary loss - (0.26) ------ ----- $ 0.16 $ (0.73) ====== ===== Fully Diluted - Before extraordinary loss $ 0.12 n/a Extraordinary loss - n/a ------ ----- $ 0.12 n/a ====== ===== Weighted average common and common equivalent shares outstanding: Primary 13,778 4,236 Fully Diluted 19,089 n/a
See notes to condensed consolidated financial statements. 6 CHAMPION HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) (Unaudited)
Six Months Ended June 30, ------------------------ 1996 1995 ------- ----- Operating activities: Net income $ 2,371 $ (112) Equity in Dakota Heartland Health System's earnings, net of partnership distributions (4,324) (3,745) Non-cash expenses and changes in operating assets and liabilities (194) 11,383 ------- ------ Net cash provided by (used in) operating activities (2,147) 7,526 ------- ----- Investing activities: Additions to property and equipment, net of disposition (5,937) (17,389) Purchase of facilities (10,746) (58,768) Investment in Dakota Heartland Health System - (2,000) Other (624) (1,252) ------- ------- Net cash used in investing activities (17,307) (79,409) ------- ------- Financing activities: Proceeds from exercise of stock warrants and options 9,034 696 Proceeds from issuance of long-term debt 29,900 117,905 Payments on long-term debt and capital lease obligations (13,489) (93,096) Release of restricted funds - 5,000 Other (301) - ------ ------ Net cash provided by financing activities 25,144 30,505 ------ ------ Increase (decrease) in cash and cash equivalents 5,690 (41,378) Cash and cash equivalents at beginning of year 7,583 48,424 ------ ------ Cash and cash equivalents at end of period $ 13,273 $ 7,046 ====== ======
See notes to condensed consolidated financial statements. 7 CHAMPION HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 -- BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The Company's business is seasonal in nature and subject to general economic conditions and other factors. Accordingly, operating results for the six months ended June 30, 1996, are not indicative of the results that may be expected for the year ended December 31, 1996. These financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 1995, included in the Company's Annual Report on Form 10-K, as amended, for such period. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's adoption of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of" on January 1, 1996 did not have a material effect on its financial statements. NOTE 2 -- PARACELSUS MERGER On August 9, 1996, the Company's stockholders, at a special meeting of stockholders (the "Special Meeting"), adopted and approved an Amended and Restated Agreement and Plan of Merger dated May 29, 1996 (the "Merger Agreement") between the Company and Paracelsus Healthcare Corporation ("Paracelsus"), pursuant to which a wholly owned subsidiary of Paracelsus will be merged into the Company, resulting in the Company becoming a wholly owned subsidiary of Paracelsus. The Company expects the merger to be consummated on or about August 16, 1996, after satisfying certain other terms and conditions of the Merger Agreement. The Company expensed approximately $1.1 million in merger costs during the second quarter of 1996. Upon the consummation of the merger, each share of the Company's common stock and preferred stock will convert into one share and two shares of Paracelsus' common stock, respectively. Dr. Manfred George Krukemeyer, currently the Chairman of the Board and sole shareholder of Paracelsus, and members of Paracelsus' management will own approximately 60% of the combined company, with current Company's security holders owning the remaining 40%. 8 CHAMPION HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 3 -- FINANCIAL INFORMATION OF EQUITY AFFILIATE The Company, through a wholly owned subsidiary, owns 50% of a partnership operated as Dakota Heartland Health System ("DHHS"). DHHS owns and operates two general acute care hospitals with a total of 341 beds in Fargo, North Dakota. The Company accounts for its investment in DHHS under the equity method. The following table summarizes certain income statement information of DHHS (in thousands). Six Months Ended June 30, ----------------------------- 1996 1995 ------- ------ Net revenue $55,204 $ 53,665 Operating margin 16,258 8,719 Net income 14,113 6,810 NOTE 4 -- LONG-TERM DEBT On April 12, 1996, in contemplation of the merger between the Company and Paracelsus, holders of the Company's 11% Senior Subordinated Notes (the "Notes") entered into an agreement with the Company, among other things, to (i) waive any rights to cause the Company to purchase the Notes from such holders as a result of a change in control caused by the merger and (ii) tender the Notes to the Company for prepayment at certain specified premium amounts. NOTE 5 -- ACQUISITIONS On March 1, 1996, the Company acquired the 50-bed Jordan Valley Hospital ("Jordan") in West Jordan, Utah, from Columbia/HCA Healthcare Corporation ("Columbia"). In exchange, Columbia received the Company's 85-bed Autauga Medical Center and adjacent skilled nursing facility in Prattville, Alabama, plus approximately $10,750,000 in cash. Cash consideration included approximately $3,750,000 for a net working capital differential, which is subject to final settlement, and reimbursement of certain capital expenditures made previously by Columbia. The following unaudited pro forma consolidated results of operations for the six months ended June 30, 1996 and 1995, assumes that the acquisition of Jordan and Salt Lake Regional Medical Center ("SLRMC"), which was acquired on April 13, 1995, occurred on January 1, 1995. The pro forma financial information does not purport to be indicative of the results that would have been attained had the transactions described above occurred on January 1, 1995. 9 CHAMPION HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Six months ended -------------------- June 30 ---------- 1996 1995 ------ ----- (Dollars in thousands, except per share data) Net revenue $102,731 $97,890 Income before extraordinary loss 2,291 2,031 Net income 2,291 913 Income (loss) applicable to common stock 2,193 (2,067) Income (loss) per common share: Primary- Before extraordinary loss $ 0.16 $(0.23) Extraordinary loss - (0.26) ----- ----- $ 0.16 $(0.49) ===== ===== Fully diluted- Before extraordinary loss $ 0.12 n/a Extraordinary loss - n/a ----- ----- $ 0.12 n/a ===== ===== NOTE 6 -- INCOME (LOSS) PER SHARE Primary income (loss) per common share is computed by dividing income (loss) applicable to common stock (net income less preferred stock dividend requirements and accretion of preferred stock issuance costs) by the weighted average number of common and common equivalent shares outstanding. Fully diluted income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common and common equivalent shares outstanding, including additional shares of common stock resulting from the assumed conversion of shares of convertible preferred stock. NOTE 7 -- STOCKHOLDERS' EQUITY During the six months ended June 30, 1996, warrants were exercised to purchase approximately 2,458,000 shares of common stock, resulting in cash proceeds to the Company of approximately $8,717,000 and the tender of approximately $4,895,000 of the Notes in lieu of cash. At the Special Meeting held on August 9, 1996, the Company's stockholders approved certain amendments to the various stock option plans. With respect to the Directors' Stock Option Plan, the authorized shares for issuance was increased from 60,000 to 10 CHAMPION HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 100,000. The plan provisions now allow options held by directors whose services cease after a merger of the Company to remain exercisable until the date specified in such options, rather than expiring 90 days following such merger. With respect to the Selected Executive Stock Option Plan No. 5, the plan was amended to allow stock options or rights granted thereunder to be assumed by the surviving company to a merger or consolidation with the Company. With respect to certain stock option agreements between the Company and each of Messrs. Charles R. Miller and James G. VanDevender, a cashless exercise procedure was added to allow the Company to withhold shares issuable upon exercise of options outstanding thereunder as a means for such option holder to pay the option exercise price and/or any tax withholding obligations incurred upon such exercise. NOTE 8 -- SUBSEQUENT EVENT On July 23, 1996, the Company's common stock commenced trading on the New York Stock Exchange ("NYSE") under the symbol "CHC". Prior to that, its shares had been traded on the American Stock Exchange. Upon the consummation of the merger with Paracelsus (see Note 2), the Company will delist from the NYSE and cease to be a separate public reporting entity. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Paracelsus Healthcare Corporation (Registrant) /s/ JAMES G. VANDENDER Dated: August 29, 1996 By: ____________________________ James G. VanDevender Executive Vice President, Chief Financial Officer & Director 12 INDEX TO EXHIBITS EXHIBIT DESCRIPTION - ------- ----------- 2.1(a) Amended and Restated Agreement and Plan of Merger, dated as of May 29, 1996, by and among Paracelsus, PC Merger Sub, Inc. and Champion. 99.1 Audited financial statements of Champion for the three years ended December 31, 1995. _________________ (a) Incorporate herein by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-4 (Commission File No. 333-8521). EX-99 2 13 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Champion Healthcare Corporation We have audited the accompanying consolidated balance sheet of Champion Healthcare Corporation as of December 31, 1994 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Champion Healthcare Corporation as of December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Houston, Texas February 27, 1996 14 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 ---------- ------- ---------- -------
15 CHAMPION HEALTHCARE CORPORATION CONSOLIDATED BALANCE SHEET LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, --------------------- 1994 1995 --------- --------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 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. 16 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. 17 CHAMPION HEALTHCARE CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK COMMON STOCK ADDI- --------------- ------------- TIONAL ACCUM- SUBS- RECEI- PAID-IN ULATED SHARES AMOUNT CRIBED VABLE 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. 18 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)
19 CHAMPION HEALTHCARE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------ 1993 1994 1995 --------- --------- ----------- (DOLLARS IN THOUSANDS) 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. 20 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATIONAL BACKGROUND Champion Healthcare Corporation (the "Company"), a Delaware corporation,is engaged in the ownership and management of general acute care and specialty hospitals and related healthcare facilities. At December 31, 1995, including hospital partnerships, the Company owns and/or operates seven acute care hospitals, two psychiatric hospitals and a skilled nursing facility.See Note 16 "Subsequent Events" for a discussion of recent acquisition activity. Including hospital partnerships, the seven general acute care hospitals owned and/or operated by the Company provide a range of medical and surgical services typically available in general acute care hospitals. These services include inpatient care such as intensive and cardiac care, diagnostic services, radiological services and emergency services. All of the hospitals provide an extensive range of outpatient services, including ambulatory surgery,laboratory and radiology.The Company's two psychiatric hospitals provide child, adolescent and adult comprehensive psychiatric and chemical dependency treatment programs, with inpatient, day hospital, outpatient and other ambulatory care. Effective December 31, 1995, the Company and its preferred shareholders entered into the 1995 Recapitalization Agreement to reduce the complexity ofthe Company'scapital structure and eliminate the accrual of future dividends on its outstanding preferred stock and the resulting impact on earnings per share.As a result of the Recapitalization Agreement, common shares outstanding increased from 4,262,386 to 11,868,230 and preferred shares outstanding decreased from 10,452,370 to 2,605,714. The transactions comprising the 1995 Recapitalization Agreement are herein collectively referred to as the "Recapitalization." See Note 8 "Stockholders'Equity" for a discussion of the terms of the Recapitalization. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company, all wholly-owned and majority-owned subsidiaries and majority-owned partnerships.The Company uses the equity method of accounting when it has a 20% to 50% interest in other companies and partnerships. Under the equity method, the Company records its original investment at cost and adjusts its investment for its undistributed share of the earnings or losses of the equity investee. All significant intercompany transactions and accounts have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of net revenue and expenses during the period. Actual results could differ from those estimates. The most significant areas which require the use of management's estimates relate to the determination of estimated third-party payor settlements, allowance for uncollectable accounts receivable, income tax valuation allowance and reserves for professional liability risk. 21 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NET PATIENT SERVICE REVENUE The Company's facilities have entered into agreements with third-party payors, including US government programs and managed care health plans, under which the Company is paid based upon established charges, cost of services provided, predetermined rates by diagnosis, fixed per diem rates or discounts from established charges. Net patient service revenues are recorded at estimated amounts due from patients and third party payors for health care services provided, including anticipated settlements under reimbursement agreements with third party payors. Payments for services rendered to patients covered by the Medicare and Medicaid programs are generally less than billed charges. Provisions for contractual adjustments are made to reduce charges to these patients to estimated receipts based upon each program's principle of payment/reimbursement (either prospectively determined or retrospectively determined costs). Settlements for retrospectively determined rates are estimated in the period the related services are rendered and are adjusted in future periods as final settlements are determined. In management's opinion, adequate allowance has been provided for possible adjustments that might result from final settlements under these programs. Allowance for contractual adjustments under these programs are deducted from accounts receivable in the accompanying consolidated balance sheet. OTHER REVENUE Other revenue includes income from non-patient hospital activities such as cafeteria sales and interest income, among others. CASH AND CASH EQUIVALENTS Cash and cash equivalents include all highly liquid debt instruments, primarily US government backed securities and certificates of deposit,purchased with an original maturity of three months or less. The Company maintains its cash in bank deposits which, at times, may exceed federally insured limits. The Company adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities," on January 1, 1995. All investments accounted for under SFAS No. 115 are classified as available-for-sale, and the implementation of this statement had no impact on net income. ACCOUNTS RECEIVABLE Accounts receivable consist primarily of amounts due from the Medicare and Medicaid programs, other government programs, managed care health plans, commercial insurance companies and individual patients. Current earnings are charged with an allowance for doubtful accounts based on experience and other circumstances that may affect the ability of patients to meet their obligation. Accounts deemed uncollectable are charged against that allowance. SUPPLIES INVENTORY Inventory consists primarily of pharmaceuticals and supplies and is stated at the lower of cost (first-in, first-out) or market. 22 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED STATEMENTS PROPERTY AND EQUIPMENT Property and equipment are recorded at cost.Expenditures for new facilities and equipment and those that substantially increase the useful life of existing property and equipment are capitalized. Ordinary maintenance and repairs are charged to expense when incurred. Upon disposition, the assets and related accumulated depreciation are removed from the accounts, and the resulting gain or loss is included in the statement of operations. Depreciation is computed using the straight-line method at rates calculated to amortize the cost of assets over their estimated useful lives ranging from 3 to 40 years. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents costs in excess of net assets acquired and is amortized on a straight-line basis over a period of 20 years.Intangible assets consist of deferred financing costs, non-compete agreements and various other intangible assets.Deferred financing costs are amortized on a straight-line basis over the term of the applicable debt. Costs related to non-compete agreements and other intangibles are amortized on a straight-line basis over two to five years. Amortization expense for 1993, 1994 and 1995 was approximately $1,209,000, $1,000,000, and $2,724,000, of which approximately $139,000, $395,000, and $845,000 relate to deferred financing costs. CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK Through December 31, 1995, the Company reflected accumulated unpaid and undeclared dividend on its cumulative redeemable preferred stock as an increase in the related issue with corresponding charges to additional paid-in capital, to the extent available, and accumulated deficit. Pursuant to the Recapitalization, all accrued preferred dividends at December 31, 1995 (approximately $12,614,000) were paid by the issuance of common stock at an agreed price of $7.00 per share. Additionally, the holders of Series C and D preferred stock have waived all dividends accruing after December 31, 1995. See Note 8 "Stockholders' Equity" for a discussion of the terms of the Recapitalization. INCOME TAXES The Company uses the liability method of accounting for income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequence on future years oftemporary differences between the tax basis of the assets and liabilities and their financial amounts at year-end. LOSS PER SHARE Loss per common and common equivalent share amounts are calculated by dividing loss applicable to common stock by the weighted average number of common shares outstanding during each period, as restated for the two-for-one stock split on July 7, 1993, and assuming the exercise, when dilutive, of all stock options and warrants having an exercise price less than the average stock market price of the common stock using the treasury stock method. Common stock equivalents and other potentially dilutive securities have not been considered 23 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS because their effect was antidilutive in all years. Weighted average shares outstanding used to determine earnings per common and common equivalent share were 1,122,000,1,457,000, and 4,255,000 in 1993, 1994 and 1995, respectively. RECLASSIFICATIONS Certain reclassifications have been made in prior year financial statements to conform to the 1995 presentation. These reclassifications had no effect on the results of operations previously reported. RECENT PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121, which is effective for fiscal years beginning after December 15, 1995,requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company does not believe that the adoption of this statement will have a material effect on its financial statements. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which is effective for fiscal years beginning after December 15, 1995. SFAS 123 establishes new financial accounting and reporting standards for stock-based compensation plans. Entities will be allowed to measure compensation expense for stock-based compensation under SFAS 123 or APB Opinion No. 25,"Accounting for Stock Issued to Employees." Entities electing to account for such compensation under APB Opinion No. 25 will be required to make pro forma disclosures of net income and earnings per share as if SFAS 123 had been applied. The Company is presently evaluating which alternative it will adopt under SFAS 123 and has not yet quantified the potential impact on the Company of adopting this new standard. NOTE 3. ACQUISITIONS AND OTHER INVESTMENTS PHYSICIANS AND SURGEONS HOSPITAL The Company acquired Physicians and Surgeons Hospital ("P&S") in Midland, Texas on May 1,1993 for approximately $5,800,000 in cash and the assumption of $1,200,000 in debt. The acquisition was accounted for as a purchase transaction with operations reflectedin the consolidated financial statements beginning May 1,1993. The Company replaced P&S in the fourth quarter of 1995 with the newly constructed 101 bed Westwood Medical Center.Total construction cost for the new facility was approximately $39,017,000. PSYCHIATRIC HEALTHCARE CORPORATION On October 21, 1994,the Company acquired Psychiatric Healthcare Corporation ("PHC"), a privately held corporation headquartered in Birmingham, Alabama, by the merger of PHC with and into a wholly-owned subsidiary of the Company. PHC owned and operated two freestanding psychiatric hospitals with a combined total of 219 beds located in Springfield, Missouri and Alexandria, Louisiana, and owned a third freestanding psychiatric hospital located in Sherman, Texas, that 24 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS was closed and held for sale at the date of acquisition.The net purchase price, including contingent consideration of$2,000,000 paid in 1995 and the assumption of long-term debt, was approximately $24,600,000. The Company paid no cash to PHC shareholders. Total consideration paid by the Company consisted of the assumption of approximately $14,880,000 in long-term debt and the issuance of the following securities to PHC shareholders: (i) 264,306 shares of Series D preferred stock, (ii) $7,123,000 of 11% Senior Subordinated Notes with 213,690 detachable warrants to acquire common stock and (iii) options, which were subsequently exercised, to acquire an additional 7,561 shares of Series D Preferred Stock and $202,000 principal amount of 11% Senior Subordinated Notes with 6,060 detachable warrants.The payment of contingent consideration had been subject to the Company's receipt of up to $2,000,000 from a combination of the sale of the Sherman, Texas facility, a recovery from a lawsuit and certain specified Medicaid payments. All conditions for the payment of contingent consideration were substantially met in 1995, including the sale of Sherman Hospital for approximately $1,300,000 in March 1995. The acquisition was accounted for as a purchase transaction with operations reflected in the consolidated financial statements effective October 1, 1994. The Company has completed its analysis of the assets acquired and liabilities assumed and has allocated approximately $8,800,000 in excess purchase price to goodwill, which is currently being amortized over a 20 year period. On December 6, 1994, the Company merged with AmeriHealth, Inc. ("AHH"), a Delaware corporation,with AHH being the surviving corporation resulting from the merger (the "Combined Company"). The merger was accounted for as a recapitalization of the Company with the Company as the acquiror (a reverse acquisition). Concurrent with the merger, the name of the Combined Company was changed to Champion Healthcare Corporation, and the Combined Company adopted the Company's certificate of incorporation provisions. Pursuant to the merger, the Combined Company: (a) paid a cash distribution of $0.085 cents per share to all common stockholders of AHH,(b) issued one share of its Combined Company common stock for each 5.70358 shares of the approximately 17.2 million outstanding shares of AHH's Common Stock,(c) issued one share of Combined Company common stock for each of the approximately 1.2 million then outstanding shares of the Company common stock, and (d) issued one share of newly authorized Combined Company preferred stock for each of the then outstanding shares of the Company's preferred stock.The terms of the new voting shares of Combined Company preferred stock are identical to those of the Company's preferred stock outstanding prior to the merger. In addition, the outstanding shares of AHH's $2.125 Increasing Rate Cumulative Convertible Preferred Stock were canceled inexchange for cash equal to the redemption price of such shares plus all unpaid dividends, which totaled approximately $47,000. The net purchase price,including the assumption of approximately $17,700,000 in debt, was approximately $38,876,000. The acquisition was accounted for as a purchase transaction with operations reflected in the consolidated financial statements effective December 1, 1994.The Company has completed its analysis of the assets acquired and liabilities assumed and has allocated approximately $8,946,000 in excess purchase price to goodwill, which is currently being amortized over a 20 year period. PARTNERSHIP WITH DAKOTA HOSPITAL On December 21, 1994, a wholly owned subsidiary of the Company that owned Heartland Medical Center,a 142 bed general acute care facility in Fargo, North 25 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Dakota, entered into a partnership with Dakota Hospital ("Dakota"), a not-for-profit corporation that owned a 199bed general acute care hospital also in Fargo, North Dakota. The partnership is operated as Dakota Heartland Health System ("DHHS"). Also on December 21, 1994, the Company entered into an operating agreement with the partnership and Dakota to manage the combined operations of the two hospitals. Under the terms of the partnership agreement, the Company is obligated to advance funds to DHHSto cover any and all operating deficits of DHHS. DHHS began operations on December 31, 1994. The Company and Dakota contributed their respective hospitals debt and lien free (except for capitalized lease obligations), including certain working capital components, and the Company contributed an additional $20,000,000 in cash, each in exchange for 50% ownership in the partnership. A $20,000,000 special distribution was made to Dakota after capitalization of the partnership in accordance with the terms of the partnership agreement. The Company will receive 55% of the net income and distributable cash flow ("DCF") of the partnership until such time as it has recovered on a cumulative basis an additional $10,000,000 of DCF in the form of an "excess" distribution. As of December 31,1995, the Company has received $825,000 in cash distributions from DHHS. The partnership is administered by a Governing Board comprised of six members appointed by Dakota, three members appointed by the Company and three members appointed by mutual consent of the Dakota members and the Company members. Certain Governing Board actions require the majority approval of each of the Company and Dakota members. Because the partners through the partnership agreement have delegated substantially all management of the partnership to the Company through the operating agreement,the authority of the Governing Board is limited. Beginning July 1996,Dakota has the right to require the Company to purchase its partnership interest free of debt or liens for a cash purchase price equal to 5.5 times Dakota's pro rata share of earnings before depreciation, interest, income taxes and amortization, as defined in the partnership agreement, less Dakota's pro-rata share of the partnership's long-term debt. DHHS had earnings before depreciation, interest, income taxes and amortization of approximately $19,000,000 for the year ended December 31, 1995. Beginning January 1998, the purchase price for Dakota's partnership interest shall not be less than $50,000,000. After receipt of written notice of Dakota's intent to sell its partnership interest,the Company would have 12 months to complete the purchase. Should the Company not complete the purchase during this period, Dakota has the right to, among others, (i) terminate the operating agreement and engage an outside party to manage the hospital,(ii) replace the Company's designees to the Governing Board and (iii)enter into a fair market value transaction to sell substantially all of the partnership's assets. The Company accounts for its investment in DHHSunder the equity method. The following table summarizes certain financial information of DHHS as of December 31, 1994 and 1995, and for the year ended December 31, 1995 (dollars in thousands). DHHS began operations on December 31, 1994. 26 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 clinicsand is located in Salt Lake City, Utah. Total acquisition cost for SLRMC was approximately $61,042,000,which consisted of approximately $56,816,000 in cash and additional consideration due to Columbia of approximately $1,767,000, as well as the assumption of approximately $2,459,000 in capital lease obligations. Cash consideration included approximately $11,783,000 for certain working capital components, resulting in a net purchase price of approximately $49,259,000. The Company funded the asset purchase from available cash and approximately $30,000,000 in borrowings under its then outstanding credit facility. The acquisition was accounted for as a purchase transaction with operations reflected in the consolidated financial statements beginning April 14, 1995. JORDAN VALLEY HOSPITAL On March 1, 1996, the Company acquired Jordan Valley Hospital ("Jordan") from Columbia. Jordan is a 50 bed acute care hospital located in West Jordan, Utah, a suburb of Salt Lake City. The Company acquired Jordan in exchange for Autauga Medical Center, an 85 bed acute care hospital, and Autauga Health Care Center, a 72 bed skilled nursing facility, both in Prattville, Alabama, plus preliminary cash consideration paid to the seller of approximately $10,750,000, which included approximately $3,750,000 for certain net working capital components, subject to adjustment, and reimbursement of certain capital expenditures made previously by the seller.The transaction did not result in a gain or loss. The Alabama facilities were acquired as part of the Company's acquisition of AmeriHealth, Inc. on December 6, 1994. 27 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PRO FORMA FINANCIAL INFORMATION The following selected unaudited pro forma financial information for the years ended December 31, 1994 and 1995 assumes that the acquisition of SLRMC occurred on January 1, 1994. The selected unaudited pro forma financial information for the year ended December 31, 1994, assumes that the acquisitions of AHH and PHC,and the formation of the DHHS partnership occurred on January 1, 1994. The pro forma financial information below does not purport to be indicative of the results that actually would have been obtained had the operations been combined during the periods presented,and is not intended to be a projection of future results or trends.
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 28 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS concessions previously granted the tenants. The book value of GCH prior to the write-down was $16,681,000. The remaining net historical cost of $1,225,000 represented the equipment moved to the other Baytown campus. In June 1994, the Company sold the former HCA facility to a physician group for nominal consideration.The Company believes that assets associated with its other campus in Baytown have not been impaired as the result of this change in operations. NOTE 5. ACCRUED AND OTHER LIABILITIES Accrued and other liabilities consisted of the following at December 31, 1994 and 1995 (dollars in thousands):
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 --------- --------- --------- ---------
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 29 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS rate of 11.35% (11% stated rate). Interest is payable quarterly,and the stated rate increases from 11% to 11.5% on March 31, 1996.The Notes include detachable warrants for the purchase of 525,000 shares of common stock. The Notes are subject to redemption on or after December 31, 1995, at the Company's option,at prices declining from 112.5% of principal amount at December 31, 1995,to par at December 31, 2002. Additionally, there is a requirement to repurchase all outstanding Notes in the event of a change in control of the Company, at the holder's option, based on a declining redemption premium ranging from 112.5% to 103% of principal. Proceeds from the issuance of Notes were used to paydown approximately $31,500,000 principal amount outstanding under the Revolving Loan with the remainder retained for general corporate purposes. The Notes are uncollateralized obligation and are subordinated in right of payment to certain senior indebtedness of the Company. Approximately $668,000 of the proceeds from the issuance of the Notes were allocated to the warrants. On May 31, 1995, the Company refinanced and paid a $50,000,000 term and revolving credit facility("old credit facility") obtained in November 1993 with a $100,000,000 revolving credit facility (the "Revolving Loan") with Banque Paribas, as agent, AmSouth Bank of Alabama, Bank One of Texas, N.A., CoreStates Bank, N.A.,and NationsBank of Texas, N.A. Amounts available under the Revolving Loan are subject to certain limitations, and the total amount available under the Revolving Loan declines to $80,000,000 on the third anniversary date. The Revolving Loan also provides for short-term letters of credit of up to $5,000,000. The Revolving Loan matures no later than March 31, 1999, and bears interest at a lender defined incremental rate plus,at the Company's option, the LIBOR or Prime rate. The incremental rate to be applied is based upon the Company meeting certain operational performance targets, as defined, and ranges from 2.5% to 3.0% with respect to the LIBOR rate option and from 1.0% to 1.5% with respect to the Prime rate option. The interest rates on the Revolving Loan and old credit facility were 8.85% and 9.12%,respectively, at December 31, 1995 and 1994. The Company currently has approximately $649,000 outstanding under letters of credit. Proceeds from the refinancing were used to pay approximately $48,000,000 principal amount outstanding underthe Company's old credit facility and approximately$9,533,000 principal amount of debt held by Wilmington Savings Fund Society ("WSFS").The interest rate on the WSFS Loan was 11.5% and 10.5% at May 31, 1995(the date of payment) and December 31, 1994, respectively. With the exception of certain assets collateralizing debt assumed in the Company's 1994 acquisition of PHC,the Revolving Loan is collateralized by substantially all of the Company's assets.The terms of the Revolving Loan eliminated the requirement under the Company's previous bank credit facility to maintain a cash collateral account with the lender in the amount of $5,000,000. The Company's future acquisitions and divestitures may require, in certain circumstances, consent by lenders under this agreement. In connection with the Company's refinancing and payment of its old credit facility, the Company wrote off unamortized deferred financing costs of $1,118,000, which had no tax effect. This amount has been recorded as an extraordinary loss in the accompanying consolidated statement of operations.The Company also prepaid the WSFS Loan with no material financial impact. On December 30, 1994, pursuant to commitments obtained from the original purchasers of the 11% Senior Subordinated Notes issued on December 31,1993, the Company issued an additional $19,133,000 of Notes with detachable warrants for the purchase of 573,990 shares of common stock. No value was allocated to the 30 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS warrants at the time of issuance because the interest rate on the Notes was considered a market rate and the exercise price was greater than the estimated fair value of the common stock. The Notes bear interest at an effective annual rate of 11%. All other terms of the Notes are substantially the same as those discussed above. In connection with the Company's acquisition of PHC, the Company issued approximately $7,123,000 principal amount of Notes, and assumed approximately $12,970,000 of mortgage financing on the PHC facilities,$257,000 in capitalized leases, $159,000 in notes payable and a working capital credit facility with a balance of approximately $1,494,000, which was repaid from available cash ofthe Company and PHC.The Notes bear interest at an effective annual rate of 11%. All other terms of the Notes are substantially the same as those discussed above. The mortgage notes are payable to Health Care REIT, Inc. and bear interest at an annual rate that increases yearly from 13.44% at December 31, 1995, to 15.4% at November 1, 2001. Thereafter, the mortgage bears interest at an annual rate equal to the seven year US Treasuries rate plus 500 basis points. Approximately $10,125,000 principal balance of the mortgage matures on December 1, 2008, with principal payments on that portion commencing in December 1995, based on 25 year amortization. The remaining balance of the mortgage requires quarterly principal payments of $200,000 through 1997. The Company sold the Sherman, Texas facility for approximately $1,300,000 on March 22, 1995. In connection with the sale, the Company made a required principal payment of $850,000 on the mortgage collateralized by this facility and obtained a release of collateral from the lender. The remaining principal balance is now collateralized by the Company's hospital in Alexandria, Louisiana. Other notes payable bear interest at rates ranging from 5.1% to 11.8% and are generally collateralized by the underlying assets to which they relate. On November 5, 1993, the Company refinanced its subsidiary term and revolving credit loans obtained in August 1991, with a $50,000,000 credit facility comprised of a $20,000,000 term loan and a$30,000,000 revolving credit facility (collectively, the "old credit facility," as referred to above). In connection with the refinancing, a prepayment premium and unamortized deferred financing costs of $1,230,000, net of an income tax benefit of $634,000, were written off and recorded as an extraordinary loss. The Company capitalized approximately $1,462,000 and $294,000 in interest costs associated with the construction of a hospital and other medical related facilities at December 31, 1995 and 1994, respectively. The Company had no capitalized interest for the year ended December 31, 1993. The Revolving Loan,Notes and Mortgages referenced above contain restrictive covenants which include,among others, restrictions on additional indebtedness, the payment of dividends and other distributions, the repurchase of common stock and related securities under certain circumstances,and the requirement to maintain certain financial ratios. The Company was in compliance with or has obtained permanent waivers for all loan covenants to which it was subject as of December 31, 1994 and 1995. 31 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 --------- --------- --------- ---------
32 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SERIES D The Series D cumulative convertible redeemable preferred stock ("Series D") is convertible, at the holder's option, into the common stock at a price of $9.00 per share until redemption date. The conversion price is subject to adjustment upon the sale or issuance of additional common stock,including stock rights, options and convertible securities, for consideration less than the conversion price in effect immediately prior to the sale or issuance in question. Redemption of Series D shares will occur only on the redemption date of June 1, 2000, at the redemption price of $18.00 per share.If all outstanding shares of Series D and Series C can not be redeemed at the same time, then redemption of such shares will be prorated with preference given to Series D,as defined. Series D shares are entitled to liquidation payments of $18.00 per share. If the Company is unable to pay fully the Series D and Series C stockholders, then liquidation of such shares will be prorated with preference given to Series D,as defined. Series D will participate in any dividends declared on common stock on an as converted basis.At December 31, 1995, the Series D shares were convertible into 4,313,806 shares of common stock. The Company issued 51,645 shares of Series D preferred stock to PHC shareholders in 1995 pursuant to the exercise of options and the issuance of contingent consideration due under the terms of the PHC purchase agreement. On October 21, 1994, the Company issued 212,661 shares of Series D preferred stock to PHC shareholders in connection with its acquisition of PHC. On December 30, 1994,the Company issued 623,453 shares of Series D preferred stock pursuant to existing commitments for the original purchasers of Series D.Cash proceeds from the December 30, 1994 issuance were $11,222,000. SERIES C The Series C cumulative convertible redeemable preferred stock ("Series C") is convertible, at the holder's option, into common stock at a price of $9.00 per share until the redemption date.The conversion price is adjustable upon the same terms and conditions as Series D preferred stock. Redemption of Series C shares will occur only on the redemption date of June 1,2000, at the redemption price of $18.00 per share. Series C will participate in any dividends declared on common stock on an as converted basis. If all outstanding shares of Series D and Series C can not be redeemed at the same time, then redemption of such shares will be prorated with preference given to Series D, as defined. Series C shares are entitled to liquidation payments of $18.00 per share. If the Company is unable to pay fully the Series D and Series C stockholders, then liquidation of such shares will be prorated with preference given to Series D, as defined. At December 31, 1995, Series C shares were convertible into 897,622 shares of common stock. The Company has the right to convert all or any shares of Series D and C into common stock upon the anticipated completion ofa public offering of common stock for net proceeds of not less than $25,000,000 at a per share offering price of not less than $10.00 per share. VOTING RIGHTS FOR SERIES C AND D PREFERRED STOCK. Series C and D preferred stock have voting rights on all matters according tothe number of common shares into which each Series is convertible at the time of any shareholders'vote. The 33 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS issuance of a new class of stock or the increase of shares within an existing class of stock that either ranks on parity with oris superior to a given series of preferred stock as to dividends, redemption and liquidation requires the following approvals by the then outstanding class or classes: (1) 75% of Series C voting together as a class, and (2) 75% of Series D voting as a class. No amendment of voting powers, designations, preferences or rights and no amendments of Articles or Bylaws that materially adversely affect the rights of Series C and D preferred stock shall occur without the following approvals by the then outstanding class or classes: (1)90% of Series C voting together as a class and (2) 90% of the Series D voting as a class. Upon the occurrence of an event of default, the preferred stock shareholders will have the right to enlarge the Board of Directors and elect a controlling number of directors. Pursuant to the Recapitalization, all outstanding shares of Series A, A-1, and BB preferred stock, under their existing terms, were converted into common stock at December 31, 1995, along with all accrued dividends as of December 31, 1995.In total, including additional consideration for the actions taken pursuant to the Recapitalization,the holders of Series A, A-1, and BB preferred stock received 5,889,523 shares of common stock. See Note 8 "Stockholders' Equity" for a discussion of the terms of the Recapitalization. The Series BB cumulative convertible redeemable preferred stock ("Series BB") was convertible, at the holder's option, into common stock at a price of $5.90per share until redemption date and was mandatorily redeemable on June 30, 2000,at $11.80 per share plus any accrued and unpaid dividends. Dividends had accrued at a rate of 8% of the stated value of $11.80per share and were payable in cash under certain events, including, among others,a change in control or a successful secondary public offering of the Company's common stock. SERIES A-1 Series A-1 cumulative convertible redeemable preferred stock ("Series A-1") was convertible, at the holder's option, into common stock at a conversion rate of one share of common stock for each four shares of Series A-1preferred stock. Series A-1 shares were mandatorily redeemable, at the holder's option, at $1.00 per share within 90 days of receipt of written notice of a change of control or a default event (as defined). Dividends on Series A-1 accrued at a rate of $.08 per share per annum. Dividends were payable in common stock and/or cash in the event of a change of control, as defined, subject to the Company's existing agreement with senior secured lenders and the approval of two-thirds of all outstanding Series BB, C and D preferred stock. The Series A-1 preferred stockholders were entitled to liquidation payments of $1.00 per share plus all accrued but unpaid dividends, or ratable payments among all Series A and A-1 preferred stockholders if such amounts were not available for payment by the Company. Liquidation payments were subject to the prior liquidation rights of the Series BB through D preferred stockholders. SERIES A Series A cumulative convertible redeemable preferred stock ("Series A") was convertible, at the holder's option, into common stock at a conversion rate of one share of common stock for each 3.685 shares of Series A Preferred Stock.All other rights and preferences that apply to Series A-1 preferred stock apply to Series A preferred stock. 34 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The changes in redeemable preferred stock for the years ended December 31, 1993, 1994 and 1995 were as follows (dollars in thousands, except share data):
SERIES D SERIES C -------------------- ---------------------- SHARES AMOUNTS SHARES AMOUNT --------- ---------- --------- ----------- BALANCE, JANUARY 1, 1993........ Exercise of stock warrants...... Issuance of preferred stock -- Series C (net of $46 in issue costs).... 448,811 $ 8,033 Issuance of preferred stock -- Series D (net of $837 in issue costs)... 1,269,144 $ 22,008 Preferred dividends accrued, including accretion of issuance costs.... 56 --------- --------- ---------- ----------- BALANCE, DECEMBER 31, 1993...... 1,269,144 22,008 448,811 8,089 Issuance of preferred stock -- Series D (net of $327 in issue costs)... 836,114 14,723 Preferred dividends accrued, including accretion of issuance costs................. 2,023 651 --------- ----------- --------- ----------- BALANCE, DECEMBER 31, 1994..... 2,105,258 38,754 448,811 8,740 Issuance of preferred stock -- Series D...... 51,645 930 Preferred dividends accrued, including accretion of issuance costs... 3,222 653 Dividends declared pursuant to the Recapitalization.............. 3,610 751 Recapitalization............... (8,534) (2,097) ---------- --------- ---------- ------------ BALANCE, DECEMBER 31, 1995..... 2,156,903 $ 37,982 448,811 $ 8,047 ---------- --------- ---------- ----------- ---------- --------- ---------- ------------ SERIES BB SERIES A-1 --------------------- ------------------------- SHARES AMOUNT SHARES AMOUNT ---------- -------- ----------- ------------ BALANCE, JANUARY 1, 1993....... 1,287,597 $ 15,272 2,769,109 $ 2,876 Exercise of stock warrants.... 289,950 3,422 Issuance of preferred stock-- Series C (net of $46 in issue costs)................ Issuance of preferred stock-- Series D (net of $837 in issue costs)................
35 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SERIES BB SERIES A-1 ---------------------- -------------------- SHARES AMOUNT SHARES AMOUNT ---------- -------- ---------- -------- Preferred dividends accrued, including accretion of issuance costs............. 1,301 128 ---------- -------- ----------- ---------- BALANCE, DECEMBER 31, 1993... 1,577,547 19,995 2,769,109 3,004 Issuance of preferred stock-- Seried D (net of $327 in issue cost)................ Preferred dividends accrued, including accretion of issuance costs............. 1,556 202 ---------- -------- ------------ --------- BALANCE, DECEMBER 31, 1994.... 1,557,547 21,551 2,769,109 3,206 Issuance of preferred stock-- Series D................... Preferred dividends accrued, including accretion of issuance costs............. 1,559 234 Dividends declared pursuant to the Recapitalization....... 739 110 Recapitalization............. (1,557,547) (23,849)(2,769,109) (3,550) ----------- -------- ---------- --------- BALANCE, DECEMBER 31, 1995 -- $ -- -- $ -- ----------- ------- ---------- --------- ----------- ------- ---------- ---------
36 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SERIES A ------------------------ SHARES AMOUNTS ----------- ----------- BALANCE, JANUARY 1, 1993..................... 3,500,000 $ 3,598 Exercise of stock warrants................... Issuance of preferred stock -- Series C (net of $46 in issue costs)................. Issuance of preferred stock -- Series D (net of $837 in issue costs)................ Preferred dividends accrued, including accretion of issuance costs................. 167 ----------- ----------- BALANCE, DECEMBER 31, 1993................... 3,500,000 3,765 Issuance of preferred stock -- Series D (net of $327 in issue costs)................ Preferred dividends accrued, including accretion of issuance costs................. 278 ----------- ----------- BALANCE, DECEMBER 31, 1994................... 3,500,000 4,043 Issuance of preferred stock -- Series D...... Preferred dividends accrued, including accretion of issuance costs................. 314 Dividends declared pursuant to the Recapitalization............................ 139 Recapitalization............................. (3,500,000) (4,496) ----------- ----------- BALANCE, DECEMBER 31, 1995................... -- $ -- ----------- ----------- ----------- -----------
37 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8. STOCKHOLDERS' EQUITY RECAPITALIZATION Effective December 31, 1995, the Company, pursuant to the 1995 Recapitalization Agreement, entered into several transactions to reduce the complexity of the Company's capital structure and eliminate the accrual of future dividends on its outstanding preferred stock and the resulting impact on earnings per share. As a part of these transactions (i) all outstanding shares of Series A, A-1, and BB preferred stock, pursuant to their terms, converted into 4,797,161 shares of common stock, (ii) all accrued dividends at December 31, 1995, totaling approximately $12,614,000 on all classes of the Company's outstanding preferred stock were paid by issuing 1,801,900 shares of common stock at an agreed upon price of $7.00 per share, and (iii) the holders of Series C and D preferred stock agreed to waive the future accrual of preferential dividends. As a further part of these transactions, the Company issued an additional 1,006,783shares of common stock to all holders of its then outstanding preferred stock as consideration for actions taken and agreed to reduce the exercise prices of one series of warrants totaling 680,104from $5.90 to $5.25 per share and two series of warrants totaling 2,447,670 from $9.00 to $7.00 per share until May 13, 1996, after which the exercise prices revert to their prior amounts. Warrant holders have the right to tender subordinated debt in lieu of cash, where applicable. Shareholders approved the Recapitalization and an Amended Certificate of Incorporation at a special shareholders meeting held on February 12, 1996. As a result of the Recapitalization, common shares outstanding at December 31, 1995, increased from 4,262,386 to 11,868,230, and preferred shares outstanding decreased from 10,452,370 to 2,605,714.Other than for fractional shares, no cash consideration was paid under the terms of the Recapitalization. On a pro forma basis, assuming the Recapitalization had occurred on January 1, 1995,primary and fully diluted earnings per share would have been $0.27 and $0.19, respectively,for the year ended December 31, 1995. Under the terms of the Company's amended Certificate of Incorporation, the Company is authorized to issue 25,000,000 shares of common stock, and 2,700,000 shares of preferred stock, divided into two series as follows: (i) 500,000 shares of Series C, and (ii) 2,200,000 shares of Series D. COMMON STOCK In connection with the Company's merger with AmeriHealth, Inc. ("AHH") on December 6, 1994, the Company issued one share of $0.01 par value common stock in exchange for each share of Company common stock outstanding prior to the consummation of the merger. The stockholders'equity accounts were retroactively restated to reflect the issuance of $0.01 par value common stock (See Note 3 "Acquisitions and Other Investments"). Additionally, the Company paid a cash distribution of $0.085 per share to all AHH common stockholders. Currently, payment of any cash dividends or other distributions or repurchases of any capital stock of the Company are prohibited. STOCK OPTION PLANS The Company has six nonstatutory stock option plans in which certain officers and/or directors are eligible to participate: Employee Stock Option 38 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Plan, dated December 31, 1991("Plan No. 1"), Employee Stock Option Plan No. 2, dated May 27, 1992 ("Plan No. 2"), Employee Stock Option Plan No. 3, dated September 1992 ("Plan No. 3"), Senior Executive Stock Option Plan No. 4, dated January 5, 1994 ("Plan No. 4"), Selected Executive Stock Option Plan No. 5, dated May 25, 1995 ("Plan No. 5"), and Directors' Stock Option Plan, dated 1992 (the "Directors' Plan") (collectively, the "Plans"). Additionally, the Company has options issued and outstanding to certain executive officers and key employees under other authorized plans from which additional options are not actively being issued. At the Company's annual stockholders meeting on May 25, 1995, the stockholders approved the adoption of Plan No. 5, which authorized 144,500 shares of common stock for issuance under the Plan. As a result of the Company's merger with AmeriHealth, Inc. on December 6, 1994, all AmeriHealth options then outstanding became fully vested. At December 31, 1994, 244,017 options granted to certain former AmeriHealth directors, officers and key employees were outstanding and fully vested. The Plans are presently administered by the Option and Compensation Committee(the "Committee") of the Board of Directors, Officers, other key employees and, under limited circumstances, members of the Board of Directors are eligible to participate in Plan No.1. Officers and executive personnel of the Company are eligible to participate in Plans No.2 through 5. The Directors' Plan is available to members of the Board of Directors who are not members of management or elected as representatives of the Company'spreferred stockholders pursuant to a voting agreement. With the exception of Plan No.1, options granted under the Plans can not be less than 80%of the fair market value of common stock on the date of the grant. Under Plan No.1, the per share price can not be less than 100% of the fair market value of the common stock on the date of grant.The Plans provide that no stock option shall be exercisable later than 10 years and one day from the date of grant. The following table summarizes the activity under these stock option plans and any special grants authorized by the Board of Directors:
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 ----------- -----------
39 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 1995, options for the purchase of 1,044,852 common shares were exercisable. SHARES RESERVED. Shares covered by stock options that expire or otherwise terminate unexercised become available for awards under the respective Plans.At December 31, 1995,the Company had reserved 1,811,147 shares of common stock for awards under its various stock option plans,of which 358,918 were available for new grants. WARRANTS As of December 31, 1995, the Company had issued and outstanding a total of 2,858,541 warrants to purchase 3,244,412 shares of common stock at exercise prices ranging from $0.01 per share to $9.00 per share. Such warrants expire December 31, 1997 through December 31, 2003. Pursuant to the Recapitalization approved by the shareholders on February 12, 1996, the exercise prices on certain of the warrants were reduced until May 13, 1996, after which the exercise prices revert to their prior amounts (see Recapitalization above). NOTE 9. INCOME TAXES The provision for income taxes consisted of the following for the years ended December 31, 1993, 1994 and 1995:
1993 1994 1995 --------- --------- --------- (DOLLARS IN THOUSANDS) Current: Federal. ...................................$ 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 --------- --------- --------- --------- --------- ---------
40 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The reconciliation ofthe statutory federal income tax rate to the provision for income taxes was as follows:
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) ---------- ---------- ---------- ----------
41 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The current deferred tax asset was included in prepaid expenses and other current assets in 1995 and 1994. The noncurrent deferred tax liability in 1994 and 1995 was included in other long-term liabilities. At December 31, 1995, the Company had net operating losses and tax credit carryforwards for income tax purposes of approximately$18,587,000 and $388,000, respectively, which will expire in years 1999 through 2009. The tax credit carryforwards consist of several business credits and alternative minimum tax ("AMT") credits of approximately $68,000 and $320,000, respectively. For federal income tax purposes, due to certain changes in ownership of AmeriHealth, Inc.,its net operating loss carryforward of $7,727,000 (included in the Company's net operating loss carryforward) may be limited to approximately $1,900,000 per year under the Internal Revenue Service Code. If the available amount is not used to reduce taxes in any year,the unused amount increases the allowable limit in subsequent years. These loss carryforwards expire in years 1999 through 2008. AmeriHealth, Inc. also has General Business Credit and AMT Credit carryforwards of approximately $68,000 and $100,000, respectively, which may also be limited because of the change in ownership. NOTE 10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
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. 42 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13. COMMITMENTS AND CONTINGENCIES The Company has entered into various operating lease agreements related to buildings and equipment. Future annual minimum lease payments under noncancelable operating leases with initial or remaining terms of one year or more were as follows at December 31, 1995 (dollars in thousands): 1996.............................................................. $ 2,649 1997.............................................................. 2,266 1998.............................................................. 1,842 1999.............................................................. 1,544 2000.............................................................. 1,230 Thereafter........................................................ 2,379 --------- $ 11,910 --------- ---------
Rent expense for 1993, 1994 and 1995 was approximately $2,348,000, $2,648,000 and $3,530,000, respectively. LITIGATION. The Company is from time to time subject to claims and suits arising in the ordinary course of operations. In the opinion of management, the ultimate resolution of such pending legal proceedings will not have a material effect on the Company'sfinancial position, results of operations or liquidity. PROFESSIONAL LIABILITY. The Company is self-insured up to $1,000,000 per occurrence for the payment of claims arising from professional liability risks. The Company has accrued liabilities for potential professional liability risks based on estimates for losses limited to $1,000,000 per occurrence and $4,000,000 in the aggregate. The Company is further insured by a commercial insurer for claims in excess of these limits up to an additional $10,000,000 over its self-insured retention. At December 31,1994 and 1995, the Company had accrued approximately $2,681,000 and $3,171,000, respectively, related to such claims. In the opinion of management, any unaccrued damages awarded will not have a material adverse effect on the Company's financial position, results of operations or liquidity. NOTE 14. QUARTERLY RESULTS (UNAUDITED) The following tables summarize the Company's quarterly financial data for the years ended December 31, 1994 and 1995 (dollars in thousands, except per share data). 43 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 44 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS CREDIT RISK The Company's revenues consist primarily of amounts due from the Medicare and Medicaid programs in addition to amounts due from insurance carriers and individuals. The Company determines the adequacy of a patient's third-party payor coverage upon admission. However, it generally does not require any collateral prior to performing services. The Company maintains reserves for contractual allowances and potential credit losses based on past experience and management's current expectations.Medicare and Medicaid gross revenue accounted for approximately 39% and 12% in 1993, 39% and 18% in 1994, and 42% and 19% in 1995, respectively, of the Company's total gross revenue. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying of cash and cash equivalents approximate fair value due to the short term maturities of these instruments. The carrying amounts of the Company's fixed rate long-term borrowings at December 31, 1994 and 1995 approximate their fair value. The carrying value of the Company's revolving credit agreement approximates fair value because the interest rate on such agreement is variable and based on current market rates. NOTE 16. SUBSEQUENT EVENTS On January 31, 1996, the Company entered into a letter of intent to sell the 149 bed Lakeland Regional Hospital in Springfield, MO, to Columbia in exchange for the 100 bed Poplar Springs Hospital in Petersburg, VA. Both facilities are psychiatric hospitals. The Company anticipates receiving additional cash consideration as a result of the sale,net of certain working capital components and the respective facilities' long term debt. This transaction is subject to numerous contingencies,including adequate due diligence and various regulatory approvals; accordingly, the Company is presently unable to conclude whether consummation of this transaction is more likely than not to occur. -----END PRIVACY-ENHANCED MESSAGE-----