EXHIBIT 99.12
Unaudited pro forma financial statements
Acquisition - On March 8, 2005, Integrated Healthcare Holdings, Inc. ("IHHI")
completed its asset acquisition (the "Acquisition") of four Orange County,
California hospitals and associated real estate, including: (i) 282-bed Western
Medical Center--Santa Ana, CA; (ii) 188-bed Western Medical Center--Anaheim, CA;
(iii) 178-bed Coastal Communities Hospital in Santa Ana, CA; and (iv) 114-bed
Chapman Medical Center in Orange, CA (collectively, the "Hospitals") from Tenet
Healthcare Corporation ("Tenet"). The Hospitals were assigned to four
wholly-owned subsidiaries of IHHI (the "Subsidiaries") formed for the purpose of
completing the Hospital Acquisition. IHHI also acquired the following real
estate, leases and assets associated with the Hospitals: (i) a fee interest in
the Western Medical Center at 1001 North Tustin Avenue, Santa Ana, CA 92705, a
fee interest in the administration building at 1301 North Tustin Avenue, Santa
Ana, CA 92705, certain rights to acquire condominium suites located in the
medical office building at 999 North Tustin Avenue, Santa Ana, CA, and the
business known as the West Coast Breast Cancer Center; (ii) a fee interest in
the Western Medical Center at 1025 South Anaheim Blvd., Anaheim, CA 92805; (iii)
a fee interest in the Coastal Communities Hospital at 2701 South Bristol Street,
Santa Ana, CA 92704, and a fee interest in the medical office building at 1901
North College Avenue, Santa Ana, CA; (iv) a lease for the Chapman Medical Center
at 2601 East Chapman Avenue, Orange, CA 92869, and a lease for the medical
office building at 2617 East Chapman Avenue, Orange, CA; and (v) the furniture,
fixtures and contract rights associated with the Hospitals. The purchase price,
after all purchase price adjustments, of the Acquisition amounted to
$66,164,700.
Sale-Leaseback - Concurrent with the close on the Acquisition, Dr. Chaudhuri and
Dr. Shah exercised their option to purchase all of the real property of the
Hospitals (except for Chapman medical office building) pursuant to an Option
agreement dated September 28, 2004, as amended and restated on November 16, 2004
("LLC Option Agreement"). The option was exercised by the option holders
purchasing from IHHI all of the equity interests in Pacific Coast Holdings, Inc.
("PCHI"), which holds title to the real property. IHHI received $5 million and
PCHI guaranteed IHHI's acquisition debt of $50 million.
IHHI remains primarily liable under the $50 million acquisition note
notwithstanding its guarantee by PCHI, and this note is cross-collateralized by
substantially all of IHHI's assets and all of the real property of the
Hospitals. All of IHHI's operating activities are directly affected by the real
property that was sold to PCHI. Given these factors, IHHI has indirectly
guaranteed the indebtedness of PCHI. In substance, IHHI is standing ready to
perform on the acquisition debt should PCHI not be able to perform and has
undertaken a contingent obligation to make future payments if those triggering
events or conditions occur.
In connection with the sale of the real property of the Hospitals, IHHI entered
into a triple net lease with PCHI to leaseback this real property for an initial
term of 25 years and renewable for an additional 25 year term. IHHI's initial
rent expense will substantially equal the amount of the interest payment on the
$50 million acquisition note at a rate of 14% per annum. At the earlier of two
years or a refinancing of the acquisition note, IHHI's rent expense will also
include amortization of the principal of the acquisition note. If the interest
rate of the acquisition note is refinanced below a rate of 12% per annum, IHHI's
rent expense will include a guaranteed spread of up to 2.5%.
PCHI is a related party entity that is affiliated with IHHI through common
ownership and control. It is owned 51% by West Coast Holdings, LLC (Dr. Shah and
investors) and 49% by Ganesha Realty, LLC (Dr. Chaudhuri and William Thomas).
Generally accepted accounting principles require that a company consolidate the
financial statements of any entity that cannot finance its activities without
additional subordinated financial support, and for which one company provides
the majority of that support through means other than ownership. Effective March
8, 2005, IHHI determined that it provided the majority of financial support to
PCHI through various sources including lease payments, remaining primarily
liable under the $50 million debt, and cross-collateralization of IHHI's
non-real estate assets to secure the $50 million debt. Accordingly, IHHI has
included in its consolidated financial statements, the net assets of PCHI, net
of consolidation adjustments.
Common Stock Warrants - IHHI entered into a Rescission, Restructuring and
Assignment Agreement with Dr. Chaudhuri and William Thomas on January 27, 2005
(the "Restructuring Agreement"). Previously, IHHI had obtained financing from
Dr. Chaudhuri and Mr. Thomas and had issued to them a $500,000 secured
convertible promissory note that was convertible into approximately 88.8% of
IHHI's issued and outstanding common stock on a fully-diluted basis, a $10
million secured promissory note, and a Real Estate Purchase Option agreement
originally dated September 28, 2004 to purchase 100% of substantially all of the
real property in the Acquisition for $5 million (the "Real Estate Option"), all
of which together with related accrued interest payable pursuant to the terms of
the notes were rescinded and cancelled. Pursuant to the Restructuring Agreement,
IHHI released its initial deposit of $10 million plus accrued interest on the
Tenet Hospital Acquisition back to Dr. Chaudhuri, issued non-convertible secured
promissory notes totaling $1,264,014 to Dr. Chaudhuri and Mr. Thomas, and issued
warrants to purchase up to 74,700,000 shares of IHHI's Common Stock (but not to
exceed 24.9% of IHHI's Fully-Diluted capital stock) (the "Warrants"). In
addition, IHHI amended the Real Estate Option to provide that Dr. Chaudhuri's
option shall be to purchase 49% of substantially all of the real property in the
Acquisition for $2,450,000. Concurrent with the close of the Acquisition, IHHI
repaid the non-convertible secured promissory notes of $1,264,014 to Dr.
Chaudhuri and Mr. Thomas.
The Warrants are exercisable beginning January 27, 2007 and expire in 3.5 years
from the date of the issuance. The exercise price for the first 43 million
shares purchased under the Warrants is $0.003125 per share, and the exercise or
purchase price for the remaining 31.7 million shares is $0.078 per share if
exercised between January 27, 2007 and July 26, 2007, $0.11 per share if
exercised between July 27, 2007 and January 26, 2008, and $0.15 thereafter.
IHHI has recognized an expense of $17,215,000 related to the issuance of the
Warrants during the three months ended March 31, 2005. IHHI computed the expense
of the Warrants based on the fair value of the Warrants at the date of grant and
the estimated maximum number of shares that will become exercisable of
43,254,715 shares.
Unaudited Pro Forma Financial Statements- The following Unaudited Pro Forma
Condensed Consolidated Financial Information of IHHI and its wholly-owned
subsidiaries give effect to the Acquisition and the Sale-Leaseback transactions.
The historical financial information of IHHI set forth below has been derived
from the historical audited consolidated financial statements of IHHI included
in its annual report on Form 10-KSB for the year ended December 31, 2004. The
historical financial information of the Tenet Hospitals set forth below has been
derived from the historical audited combined financial statements of the
acquired hospitals, Western Medical Center - Anaheim, Western Medical Center -
Santa Ana, Coastal Communities Hospital and Chapman Medical Center, including
certain other healthcare businesses related to the operations of these hospitals
(collectively, the "Tenet Hospitals") for the year ended December 31, 2004. The
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31, 2004
includes the pro forma adjustments giving effect to the Acquisition,
Sale-Leaseback, and the Warrant transactions as if they had occurred on that
date. The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 2004 include pro forma adjustments giving effect to
the Acquisition and Sale-Leaseback transactions, excluding the Warrant
transaction, as if they occurred as of January 1, 2004.
The Unaudited Pro Forma Condensed Consolidated Financial Information is provided
for informational purposes only and does not purport to present the consolidated
financial position or results of operations of IHHI had the Acquisition and
Sale-Leaseback transactions occurred on the dates specified, nor is it
necessarily indicative of the consolidated financial position or results of
operations of IHHI that may be expected in the future. The Unaudited Pro Forma
Condensed Consolidated Financial Information should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes thereto included
in IHHI's annual report on Form 10-KSB for the year ended December 31, 2004 and
its quarterly report on Form 10-Q for the quarter ended March 31, 2005.
INTEGRATED HEALTHCARE HOLDINGS, INC.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of December 31, 2004
Pro-Forma Adjustments
Historical ----------------------------------
Historical Tenet Tenet Tenet Assets Pro Forma
ASSETS IHHI Hospitals Elimination Purchased IHHI
------------ ------------ ---------------------------------- ------------
Current assets:
Cash and cash equivalents $ 69,454 $ 244,146 $ (244,146)(6) $ 1,731,311(15) $ 1,800,765
Accounts receivable, net -- 37,769,344 (37,769,344)(6) --
Inventories of supplies, at cost 5,913,638 (5,913,638)(6) 6,018,995(1) 6,018,995
Prepaid expenses and other assets 18,519 8,579,284 (8,579,284)(6) 2,460,874(1) 2,479,393
------------ ------------ ------------
87,973 52,506,412 10,299,153
Property and equipment, net 57,423 43,556,983 (43,556,983)(6) 59,493,353(3) 59,550,776
Notes receivable from affiliate and
other assets 3,398,701 (3,398,701)(6) --
Investment in hospital asset purchase 11,142,145 (11,142,145)(2) --
Deferred loan fees, net 44,970 6,623,718 (6,623,718)(6) 1,933,000(5) 1,977,970
------------ ------------ ------------
Total assets $ 11,332,511 $106,085,814 $ 71,827,899
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of debt & capital $ 11,264,013 $ 204,141 $ 50,000,000(3) $ 53,204,141
leases (10,000,000)(2)
(1,264,013)(4)
3,000,000(12)
Accounts payable 156,142 21,430,493 (21,430,493)(6) 156,142
Accrued compensation and benefits 800,313 9,997,093 (9,997,093)(6) 800,313
Medical claims incurred but not
reported 3,748,369 (3,748,369)(6) --
Accrued restructuring costs 3,917,768 (3,917,768)(6) --
Other current liabilities -- 2,488,838 (2,488,838)(6) --
------------ ------------ ------------
Total current liabilities 12,220,468 41,786,702 54,160,596
Capital lease obligations, net -- 3,455,260 3,455,260
Due to affiliate 10,362,970 (10,362,970)(6) --
Minority interest in variable
interest entity -- 5,000,000(3) 5,000,000
Stockholders' equity:
Common stock 20,780 102,600(1) 123,380
Common stock warrants 17,215,000(14) 17,215,000
Additional paid in capital 1,189,621 9,997,400(1) 11,187,021
Accumulated (deficit) earnings (2,098,358) 50,480,882 (50,480,882)(6) (17,215,000)(14) (19,313,358)
------------ ------------ ------------
Total stockholders' equity (887,957) 50,480,882 9,212,043
------------ ------------ ------------
Total liabilities and stockholders' equity $ 11,332,511 $106,085,814 $ 71,827,899
============ ============ ============
See accompanying notes to unaudited pro forma condensed consolidated
financial information
INTEGRATED HEALTHCARE HOLDINGS, INC.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
As of December 31, 2004
Pro-Forma Adjustments
Historical ------------------------------------
Historical Tenet Tenet Tenet Assets Pro forma
IHHI Hospitals Elimination Purchased IHHI
------------- ------------- ------------------------------------ -------------
Net operating revenues $ -- $ 341,752,741 $ $ 341,752,741
Operating expenses:
Salaries and benefits 1,247,098 174,626,636 175,873,734
Supplies 10,628 47,704,610 47,715,238
Provision for doubtful accounts -- 42,038,130 42,038,130
Other operating expenses 528,446 97,873,324 1,461,179(7) 99,862,949
Depreciation and amortization 62,114 4,542,155 (4,542,155)(8) 3,534,613(8) 3,596,727
Restructuring charges -- 3,917,768 (9) 3,917,768
------------- ------------- -------------
1,848,286 370,702,623 373,004,546
Operating loss (1,848,286) (28,949,882) (31,251,805)
Interest expense, net -- 404,814 7,420,000(10) 8,791,314
966,500(5)
------------- ------------- -------------
Loss including minority interest and
before provision for income taxes (1,848,286) (29,354,696) (40,043,119)
Provision (benefit) for income taxes -- (5,672,000) 5,672,000(11) --
Minority interest in variable
interest entity -- -- (1,947,491)(7) (1,947,491)
------------- ------------- -------------
Net loss $ (1,848,286) $ (23,682,696) $ (38,095,628)
============= ============= =============
Basic loss per share from continuing
operations $ (0.09) (13) $ (0.31)
Diluted loss per share from continuing
operations $ (0.09) (13) $ (0.31)
Number of shares used in per
share computation:
Basic 19,986,750 (13) 124,539,000
Diluted 19,986,750 (13) 124,539,000
See accompanying notes to unaudited pro forma condensed consolidated
financial information
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
Pro forma adjustments for the unaudited pro forma condensed consolidated
financial information are as follows:
(1) Reflects IHHI's completion of its acquisition on March 8, 2005 of four
Orange County, California hospitals and associated real estate (the
"Acquisition"), including: (i) 282-bed Western Medical Center--Santa Ana,
CA; (ii) 188-bed Western Medical Center--Anaheim, CA; (iii) 178-bed
Coastal Communities Hospital in Santa Ana, CA; and (iv) 114-bed Chapman
Medical Center in Orange, CA (collectively, the "Hospitals") from Tenet
Healthcare Corporation ("Tenet"). IHHI financed the Acquisition through
the issuance of debt of $53 million, the sale of 102,600,000 shares of
IHHI's common stock for proceeds of $10.1 million, proceeds of $5 million
from the sale of all of the real property of the acquired hospitals to
Pacific Coast Holdings, Inc., a related party, ("PCHI") and the assumption
of capital lease obligations of $3,659,401 (current portion of $204,141).
IHHI's debt consists of two promissory notes that bear interest at 14% and
have terms of two years. The purchase price, after all purchase price
adjustments, of the Acquisition amounted to $66,246,821. The fair value of
the tangible assets acquired and liabilities assumed consisted of the
following:
Property and equipment $ 59,493,353
Inventories of supplies 6,018,995
Prepaid expenses and other assets 2,460,874
Deferred loan fees 1,933,000
Capital lease obligations (3,659,401)
-------------
$ 66,246,821
=============
(2) Reflects the return of IHHI's $10 million initial deposit on the
Acquisition and accrued interest to Dr. Chaudhuri and the cancellation of
the $10 million secured promissory note with IHHI in connection with the
Rescission, Restructuring and Assignment Agreement entered into on January
27, 2005 (the "Restructuring Agreement"). In addition, amount reflects the
reclassification of direct acquisition costs of $1,142,145 to property and
equipment upon the close of the Acquisition.
(3) In connection with the sale of all of the real property of the Hospitals,
the Company entered into a triple net lease with PCHI to leaseback this
real property for an initial term of 25 years. PCHI is a related party
entity that is affiliated with the Company through common ownership and
control. It is owned 51% by West Coast Holdings, LLC (Dr. Shah and
investors) and 49% by Ganesha Realty, LLC (Dr. Chaudhuri and Mr. Thomas).
Generally accepted accounting principles require that a company
consolidate the financial statements of any entity that cannot finance its
activities without additional subordinated financial support, and for
which one company provides the majority of that support through means
other than ownership. Effective March 8, 2005, the Company determined that
it provided the majority of financial support to PCHI through various
sources including lease payments, remaining primarily liable under the $50
million debt, and cross-collateralization of the Company's non-real estate
assets to secure the $50 million debt. Accordingly, the pro forma
adjustment reflects the consolidation of the net assets of PCHI, which
include property and equipment and the $50 million acquisition note. In
addition, the consolidation of PCHI reflects the equity accounts of PCHI
as minority interest in variable interest entity.
See accompanying notes to unaudited pro forma condensed consolidated
financial information
(4) Reflects the repayment of $1,264,013 of secured promissory notes to Dr.
Chaudhuri and Mr. Thomas concurrent with the close of the Acquisition and
in connection with the Restructuring Agreement.
(5) Reflects deferred loan fees incurred in connection with the issuance of
the $50 million acquisition note and the $30 million non-revolving Line of
Credit in connection with the close of the Acquisition. IHHI has accounted
for the debt issuance costs as deferred loan fees and is amortizing such
fees to interest expense over the two year term of the notes.
(6) Reflects the elimination of the certain assets, liabilities, and retained
earnings of the Tenet Hospitals that IHHI did not acquire in the
Acquisition. The Acquisition consisted of an asset purchase of property
and equipment, inventories of supplies, prepaid expense and other current
assets, and the assumption of certain capital leases and other
liabilities.
(7) Reflects the consolidation of PCHI's net losses, which consists of rental
income from IHHI of $7,976,420, interest expense related to the $50
million acquisition note and amortization of deferred loan fees totaling
$7,723,911, and depreciation expense of $1,713,688.
(8) In connection with the sale of all of the real property of the Hospitals
to PCHI, a related party entity that is affiliated with the Company
through common ownership and control, the Company has consolidated the
financial statements of PCHI. As a result, the Company has reflected the
depreciation and amortization of the real property sold to PCHI in the
accompanying unaudited pro forma condensed consolidated statement of
operations. For financial reporting purposes the Company has determined to
depreciate the hospital buildings over 25 years, building improvements
over 9 years, equipment over 7 and 15 years, and a capital lease over its
remaining term of 9 years. In addition, the Company has recorded a pro
forma adjustment for the elimination of Tenet's historical deprecation
expense.
(9) The historical restructuring charges of $3,917,768 related to the Tenet
Hospitals have not been eliminated in the accompanying Unaudited Pro Forma
Condensed Consolidated Statement of Operations. IHHI does not expect the
historical restructuring charges to have a continuing impact on its future
operating results.
(10) Reflects accrued interest expense on the $50 million acquisition note and
$3 million outstanding on IHHI's non-revolving Line of Credit. The pro
forma interest was calculated using the notes stated interest rate of 14%.
IHHI's non-revolving Line of Credit allows for a maximum of $30 million in
borrowings.
(11) Reflects the elimination of the Tenet Hospitals benefit from income taxes.
IHHI is not eligible to recognize a benefit from income taxes due to its
limited operating history of losses and its limited ability to carryback
any losses. IHHI included the Acquisition and Sale-leaseback transactions
in its pro forma income tax provision, which resulted in a deferred tax
asset of approximately $4,800,000. IHHI recognized a full valuation
allowance of its deferred tax asset of approximately $4,800,000 for the
year ended December 31, 2004.
(12) Reflects IHHI's $3 million draw on its $30 million non-revolving Line of
Credit, which it used to complete the Acquisition.
(13) Pro forma net loss per share is based upon the number of shares of common
stock outstanding after the Acquisition and Sale-leaseback transactions as
if they occurred as of January 1, 2004. The pro forma net loss per share
does not account for the nonrecurring Common Stock Warrant transaction,
which was recorded by IHHI during the three months ended March 31, 2005.
(14) Reflects IHHI's issuance of warrants to purchase up to 74,700,000 shares
of its common stock (but not to exceed 24.9% of IHHI's fully-diluted
capital stock) pursuant to the Restructuring Agreement dated January 27,
2005. The Warrants are exercisable beginning January 27, 2007 and expire
in 3.5 years from the date of the issuance. IHHI has recognized an expense
of $17,215,000 related to the issuance of the Warrants. IHHI computed the
expense of the Warrants based on the fair value of the Warrants at the
date of grant and the estimated maximum number of shares that will become
exercisable of 43,254,715 shares.
(15) Reflects IHHI's net cash proceeds from the completion of the Acquisition,
which consists of cash inflows of $53 million from the issuance of debt,
$10.1 million from the issuance of common stock, $5 million from the sale
of the real property of the acquired hospitals, net of cash outflows of
$61.5 million to Tenet, debt issuance costs of $1.9 million, repayment of
secured debt to Dr. Chaudhuri and Mr. Thomas of $1.3 million, direct
acquisition costs of $1 million, and prepaid property taxes of $.7
million.