1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
Commission file number 1-12055
PARACELSUS HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3565943
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
515 W. GREENS ROAD, SUITE 800, HOUSTON, TEXAS
(Address of principal executive offices)
77067 (281) 774-5100
(Zip Code) Registrant's telephone number, including
area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, NO STATED VALUE NEW YORK STOCK EXCHANGE
(Title of Class) (Name of each exchange on which
registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes[X] No[ ]
As of May 14, 1997, there were outstanding 54,813,417 shares of the
Registrant's Common Stock, no stated value.
2
PARACELSUS HEALTHCARE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 1997
INDEX
PAGE REFERENCE
FORM 10-Q
--------------
PRELIMINARY STATEMENT........................................ 3
FORWARD-LOOKING STATEMENTS................................... 3
PART I.
Item 1. FINANCIAL INFORMATION
Financial Statements-- (Unaudited)
Condensed Consolidated Balance Sheets--
March 31, 1997 and December 31, 1996......... 5
Consolidated Statements of Operations--
Three Months Ended March 31, 1997 and 1996... 6
Condensed Consolidated Statements of Cash Flows--
Three Months Ended March 31, 1997 and 1996... 7
Notes to Interim Condensed Consolidated
Financial Statements......................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......... 12
PART II. OTHER INFORMATION.................................. 17
SIGNATURE................................................... 18
3
PRELIMINARY STATEMENT
In October 1996, the Board of Directors appointed a Special
Committee consisting of non-management members, to supervise and direct
the conduct of an inquiry by outside legal counsel regarding, among other
things, the Company's accounting and financial reporting practices and
procedures for the periods prior to the quarter ended September 30, 1996.
As a result of the inquiry, the Company restated its financial
information for periods commencing with January 1, 1992 through the nine
months ended September 30, 1996, as reflected in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 (the "1996 Form
10-K"), filed with the Securities and Exchange Commission (the
"Commission") on April 15, 1997. Adjustments and reclassifications were
necessary to correct errors and irregularities relating to (i)
receivables due from Medicare and other government programs (ii) use of
corporate reserves, (iii) provisions for bad debt expense relating
principally to two of the Company's psychiatric hospitals in the Los
Angeles area and (iv) deferral of facility closure costs which only
affected the 1996 quarterly information (collectively, the "restatement
entries"). The following financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto for the year ended December 31, 1996 included in the Company's
1996 Form 10-K.
To show the impact of the restatement entries with respect to
previously reported amounts for the quarter ended March 31, 1996, the
Company has provided a description of the restatement entries and a
reconciliation of historical results for the quarter ended March 31,
1996, as previously reported in the filed quarterly report on Form 10-Q,
to the restated results for such quarterly period.
The Company intends to file after the filing of this report, amended
quarterly reports on Form 10-Q/A for each of the first three quarters in
1996 and the transition period ending December 31, 1995, restating the
condensed financial statements previously reported and filed with the
Commission.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements
involve a number of risks and uncertainties. Factors which may cause the
Company's actual results in future periods to differ materially from
forecast results include, but are not limited to: the outcome of
litigation pending against the Company and certain affiliated persons;
the outcome of negotiations with the Company's Senior Lenders; general
economic and business conditions, both nationally and in the regions in
which the Company operates; industry capacity; demographic changes;
existing government regulations and changes in, or the failure to comply
with government regulations; legislative proposals for healthcare reform;
the ability to enter into managed care provider arrangements on
acceptable terms; changes in Medicare and Medicaid reimbursement levels;
liability and other claims asserted against the Company; competition; the
loss of any significant customer; changes in business strategy or
development plans; the ability to attract and retain qualified personnel,
including physicians; the significant indebtedness of the Company; and
the availability and terms of capital to fund the expansion of the
Company's business, including the acquisition of additional facilities.
4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARACELSUS HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in 000's)
MARCH 31, DECEMBER 31,
1997 1996
--------- -----------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 17,443 $ 17,771
Restricted cash 3,397 2,358
Accounts receivable, net 62,589 64,687
Deferred income taxes 27,957 28,739
Refundable income taxes 31,003 31,003
Other current assets 34,316 53,072
Current assets of discontinued operations 4,667 -
------ ------
Total current assets 181,372 197,630
Property and equipment 426,070 420,697
Less: Accumulated depreciation and amortization (115,571) (109,862)
------- -------
310,499 310,835
Long-term assets of discontinued operations 16,587 18,499
Assets held for sale 22,218 22,095
Goodwill 117,227 118,168
Other 107,973 105,605
------- -------
Total assets $ 755,876 $ 772,832
======= =======
5
PARACELSUS HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in 000's)
(Unaudited)
MARCH 31, DECEMBER 31,
1997 1996
-------- ----------
(Unaudited) (Note 1)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 44,476 $ 40,408
Accrued liabilities and other 96,843 118,781
Current maturities of long-term debt 4,704 4,679
------ -------
Total current liabilities 146,023 163,868
Long-term debt 490,916 491,057
Other long-term liabilities 65,468 69,420
Stockholders' Equity:
Common stock 224,472 224,472
Additional paid-in capital 390 390
Unrealized (losses) gains on marketable
securities (86) 100
Accumulated deficit (171,307) (176,475)
------- -------
Total stockholders' equity 53,469 48,487
------- -------
Total Liabilities and Stockholders' Equity $ 755,876 $ 772,832
======= =======
See accompanying notes.
6
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000's, except per share data)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1996
------------ -----------
(Restated-See
Note 2)
Net revenue $ 168,490 $ 115,323
Costs and expenses:
Salaries and benefits 69,012 53,513
Other operating expenses 66,432 49,588
Provision for bad debts 10,164 6,911
Interest 10,855 3,819
Depreciation and amortization 7,704 3,789
Equity in earnings of Dakota Heartland
Health System (2,559) -
Unusual charge - 2,438
------- ------
Total costs and expenses 161,608 120,058
Income (loss) from continuing operations
before minority interest and
income taxes 6,882 (4,735)
Minority interests (341) (340)
------- -------
Income (loss) from continuing operations
before income taxes 6,541 (5,075)
Provision (benefit) for income taxes 1,373 (2,148)
------- -------
Income (loss) from continuing operations 5,168 (2,927)
Loss from operations of discontinued
operations, net - (11,422)
------- -------
Net income (loss) $ 5,168 $ (14,349)
======= =======
Income (loss) per share:
Continuing operations $ 0.09 $ (0.10)
Discontinued operations - (0.38)
------- -------
Income (loss) per share $ 0.09 $ (0.48)
======= =======
Weighted average common and common
equivalent shares 57,668 29,772
See accompanying notes.
7
PARACELSUS HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000's)
(Unaudited)
Three Months Ended
March 31,
-----------------------------
1997 1996
------------ ------------
(Restated -
See Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,168 $ (14,349)
Non-cash expenses and changes in
operating assets and liabilities (15,817) 12,266
------- ------
Net cash used in operating activities (10,649) (2,083)
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities - (2,168)
Sale of marketable securities 19,284 -
Additions to property and equipment, net (5,200) (1,870)
Increase in other assets, net (3,420) (3,190)
------ ------
Net cash provided by (used in)
investing activities 10,664 (7,228)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Revolving Credit Facility - 15,000
Repayments under Revolving Credit Facility - (5,500)
Repayments of debt, net (343) (341)
Dividends to stockholder - (1,117)
------ ------
Net cash (used in) provided by financing
activities (343) 8,042
------ ------
Decrease in cash and cash equivalents (328) (1,269)
Cash and cash equivalents at beginning of year 17,771 4,418
------ ------
Cash and cash equivalents at end of period $ 17,443 $ 3,149
====== ======
Supplemental Cash Flow Information:
Interest paid $ 19,124 $ 1,984
Income taxes paid 198 4,094
See accompanying notes.
8
PARACELSUS HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1997
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION - Paracelsus Healthcare Corporation (the "Company") was
incorporated in November 1980 for the principal purpose of owning and
operating acute care and related healthcare businesses in selected
markets. The Company presently operates 28 hospitals with 2,915
licensed beds in 9 states (including two psychiatric hospitals with
113 licensed beds), of which 21 are owned, including two through a 50%
owned partnership interest, and seven are leased.
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 information 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 considered
necessary for a fair presentation have been included (see Note 2). The
balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. The Company's business is seasonal in nature
and subject to general economic conditions and other factors. Accordingly,
operating results for the three months ending March 31, 1997 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1997. These financial statements should be read
in conjunction with the audited consolidated financial statements and
notes thereto for the year ended December 31, 1996 included in the
Company's 1996 Form 10-K.
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.
Certain account balances for the three months ended March 31, 1996 have
been reclassified to conform to the Company's current presentation,
including the reclassification of operating results of the discontinued
psychiatric hospitals to "Loss from operations of discontinued
operations, net" in the Consolidated Statements of Operations.
NET INCOME (LOSS) PER SHARE - Net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of common and
common equivalent shares outstanding. Fully diluted net income (loss) per
share is not presented because it was anti-dilutive. Weighted average
number of common shares outstanding for the quarter ended March 31, 1996
have been adjusted to reflect the 66,159.426-for-one stock split in
conjunction with the merger with Champion Healthcare Corporation
("Champion") in August 1996.
9
In February 1997, the Financial Accounting Standards Board issued
Statement of Accounting Standards ("SFAS") No. 128, "Earnings per Share,"
which is required to be adopted on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact will not result in a material
change in primary earnings (loss) per share for the quarters ended March 31,
1997 and 1996. The impact of SFAS No. 128 on the calculation of fully
diluted earnings (loss) per share for these quarters is also not expected
to be material.
NOTE 2. RESTATEMENT OF FINANCIAL STATEMENTS
In October 1996, the Board of Directors appointed a Special
Committee consisting of non-management members, to supervise and direct
the conduct of an inquiry by outside legal counsel regarding, among other
things, the Company's accounting and financial reporting practices and
procedures for the periods prior to the quarter ended September 30, 1996.
Such inquiry resulted in the Company restating its financial statements
for the periods commencing January 1, 1992 through the nine months ended
September 30, 1996, as reflected in the Company's 1996 Form 10-K, filed
with the Commission on April 15, 1997.
The need for prior period restatements was the result of accounting
errors and irregularities at pre-merger Paracelsus in four areas: (i)
overstatement of receivables due from Medicare and other government
programs; (ii) use of corporate reserves; (iii) provisions for bad debt
expense relating principally to two of the Company's psychiatric
hospitals in the Los Angeles area; and (iv) deferral of facility closure
costs which only affected the 1996 quarterly information.
The impact of the restatement entries on the Company's financial
results for the three months ended March 31, 1996 is summarized in the
following table. Due to the reclassification of operating results of the
psychiatric hospitals from continuing operations to discontinued
operations, a reconciliation has been included in the following table to
reconcile to the reported amounts as shown in the Consolidated Statements
of Operations for such period.
10
Restated
As Previously Adjustments (a) Discontinued As Restated
Reported to As Restated Operations and Adjusted
(In 000's, except per Quarter Ended Quarter Ended Quarter Ended Quarter Ended Quarter Ended
share data) Mar. 31, 1996 Mar.31, 1996 Mar.31, 1996 Mar.31, 1996 Mar.31,1996
------------------------ ---------- ------------ ------------ ------------- ----------
Net revenue $ 131,916 $ (3,432) $ 128,484 $ (13,161) $ 115,323
Costs and expenses:
Salaries and benefits 57,617 57,617 (4,104) 53,513
Other operating expenses 48,879 5,329 54,208 (4,620) 49,588
Provision for bad debts 10,579 10,579 (3,668) 6,911
Interest 3,834 3,834 (15) 3,819
Depreciation and amortization 3,984 3,984 (195) 3,789
Unusual charge 22,356 22,356 (19,918) 2,438
------- ------ ------ ------ -----
Total costs and expenses 147,249 5,329 152,578 (32,520) 120,058
Loss from continuing operations
before minority interests
and income taxes (15,333) (8,761) (24,094) 19,359 (4,735)
Minority interests (503) 163 (340) - (340)
------ ------ ------ ----- ------
Loss from continuing operations
before income taxes (15,836) (8,598) (24,434) 19,359 (5,075)
Income tax benefit (6,493) (3,592) (10,085) 7,937 (2,148)
------ ------ ----- ----- ------
Loss from continuing operations (9,343) (5,006) (14,349) 11,422 (2,927)
Loss from operations of
discontinued psychiatric
hospitals, net - - - (11,422) (11,422)
------ ----- ----- ------ ------
Net Loss $ (9,343) $ (5,006) $ (14,349) $ - $ (14,349)
====== ===== ====== ====== ======
Loss per share:
Continuing operations $ (0.31) $ (0.17) $ (0.48) $ 0.38 $ (0.10)
Discontinued operations - - - (0.38) (0.38)
----- ----- ----- ----- -----
Loss per share $ (0.31) $ (0.17) $ (0.48) $ - $ (0.48)
===== ===== ===== ===== =====
Weighted average shares
outstanding 29,772 29,772 29,772 29,772 29,772
(a) Reflects impact of restatement entries before reclassification of discontinued operations.
11
The Company intends to file after the filing of this report, amended
quarterly reports on Form 10-Q/A for the 1996 quarters and the transition
period ending December 31, 1995, restating the condensed consolidated
financial statements previously reported and filed with the Commission.
NOTE 2. UNUSUAL CHARGE
In March 1996, the Company recognized a charge for settlement costs
totaling $22.4 million regarding two lawsuits, of which $19.9 million was
related to a case involving the operation of its psychiatric programs.
The $19.9 million is reflected as "Loss from operations of discontinued
operations, net," with the remaining $2.5 million as an unusual charge
in the Consolidated Statement of Operations.
NOTE 3. DISPOSITION AND CLOSURE OF HOSPITALS
On January 31, 1997, the Company closed the 104-bed Orange County
Community Hospital of Orange and consolidated services into the 53-bed
Orange County Hospital of Buena Park.
On April 28, 1997, the Company completed the sale of two of its six
psychiatric facilities, the 149-bed Lakeland Regional Hospital in
Springfield, Missouri and the 70-bed Crossroads Regional Hospital in
Alexandria, Louisiana. No gain or loss was recognized in connection with
such divestiture.
NOTE 4. LONG-TERM DEBT
Effective April 14, 1997, the Company entered into an amendment to
the existing five-year Reducing Revolving Credit Facility (the "Credit
Facility")(the "Credit Agreement"), which provides among other things (i)
a reduction in the credit commitment from $400.0 million to $200.0
million, (ii) interest rates which generally increase effective April 14,
1997 by .50% on a monthly basis until such increase reflects an 8.00%
increase as compared to rates otherwise in effect prior to April 14,
1997, (iii) a limitation of $20.0 million in unrestricted additional
borrowings under the amended Credit Agreement for purposes other than
Permitted Acquisitions, as defined in the agreement, (iv) a limitation of
$20.0 million in additional borrowings for Permitted Acquisitions, (v)
the right by lenders to a first priority lien in the Company's real and
personal properties; however, total collateral value based upon appraised
fair market value cannot exceed 133.0% of the aggregate principal amount
of the commitments, (vi) proceeds of asset dispositions must be applied
as a permanent reduction of the debt outstanding under the Credit
Agreement and (vii) additional restrictive financial covenants.
NOTE 5. CONTINGENCIES
The Company is a party to pending litigation in connection with
several stockholder related matters. See "Item 2 - Pending Litigation."
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESTATEMENT OF FINANCIAL INFORMATION FOR QUARTER ENDED MARCH 31, 1996
As a result of the Special Committee's investigation of the
accounting and financial reporting practices and procedures in periods
prior to September 30, 1996, the Company restated its financial
information for periods commencing with January 1, 1992 through the nine
months ended September 30, 1996, as reflected in the Company's 1996 Form
10-K, filed with the Commission on April 15, 1997. The need for the
restatement of prior period financial statements was the result of
accounting errors and irregularities at pre-merger Paracelsus as
discussed in Item 1 - Note 2.
The following table presents a summary of the impact of the
restatement. See Item 1 - Note 2 for a more expanded presentation of the
impact of the restatement and the reclassification of operating results
of the discontinued psychiatric hospitals to "Loss from operations of
discontinued operations, net." The restated financial information should
be read in conjunction with the Company's 1996 Form 10-K.
As Previously (a)
Reported As Restated
Quarter Ended Quarter Ended
Mar. 31, Mar. 31,
1996 Adjustments 1996
------------ ----------- --------------
(IN 000'S, EXCEPT PER SHARE DATA)
Net Revenue $ 131,916 $ (3,432) $ 128,484
Loss from continuing
operations before
minority interests and
income taxes (15,333) (8,761) (24,094)
Net loss (9,343) (5,006) (14,349)
Loss per share $ (0.31) $ (0.17) $ (0.48)
______________
(a) Reflects impact of restatement entries before
reclassification of discontinued operations.
The 1996 adjustments consisted primarily of (i) additional
deductions from revenue of $2.3 million for receivables from Medicare and
other government programs, (ii) an increase in operating expenses of $4.6
million from the reversal of corporate reserves, (iii) a charge to net
revenue of $1.2 million for certain bad debt expense that was deferred at
two of the psychiatric hospitals and (iv) an increase in operating
expenses of $697,000 for certain deferred closure costs. The Company does
not believe that the adjustments regarding the Medicare receivables
resulted from improper patient billing procedures under that program.
13
RESULTS OF OPERATIONS
The Company made numerous acquisitions and divestitures since
April 1996, including the merger with Champion. Additionally, in August
1996, the Company completed its public offering of the $325.0 million
senior subordinated notes (the "Notes") and a sale of 5.2 million shares
of its common stock. Accordingly, the Company's financial position and
portfolio of operating hospitals during the quarter ended March 31, 1997
was significantly different from that of the comparable 1996 period.
"Same hospitals" as used in the following discussion, where appropriate,
consist of acute care hospitals owned throughout the periods of which
comparative operating results are presented. Operating results of the
Company's psychiatric hospitals have been segregated from those of the
acute care hospitals and are reflected under the caption "Loss from
operations of discontinued operations, net" in the Consolidated
Statements of Operations.
RESULTS OF OPERATIONS - QUARTER ENDED MARCH 31, 1997
COMPARED WITH QUARTER ENDED MARCH 31, 1996
Net revenue for the quarter ended March 31, 1997 was $168.5 million,
an increase of $53.2 million, or 46.1%, from $115.3 million for the same
period of 1996. The $53.2 million increase was primarily attributable to
an increase of $54.3 million contributed by hospitals acquired since
April 1996, net of divested hospitals, and a decrease of $1.1 million
from "same hospitals." Of the $1.1 million decrease in "same hospital"
net revenue, $1.6 million was attributable to the Los Angeles
metropolitan ("LA metro") hospitals as a result of management's closing
underperforming operating units and eliminating or reducing unprofitable
services at certain hospitals, in addition to a continuing change in payor
mix from private insurance to managed care and Medicare/Medicaid.
The Company's acute care hospitals experienced a 50.4 % increase in
inpatient admissions from 12,753 in 1996 to 19,178 in 1997. Patient days
increased from 66,738 in 1996 to 89,724 in 1997. Outpatient visits
(including home health) increased 43.5% from 271,900 in 1996 to 390,280
in 1997. Admissions in "same hospitals" decreased from 10,213 in 1996 to
9,713 in 1997, as a result of management's closing underperforming
operating units and eliminating or reducing unprofitable services at
certain hospitals.
Expressed as a percentage of net revenue, operating expenses
(salaries and benefits, other operating expenses and provision for bad
debts) decreased from 95.4 % in 1996 to 86.4 % in 1997 and operating
margin increased from 4.6% to 13.6%. Such increase was due to higher
operating margins at hospitals acquired since April 1996 as well as
improved operating margins at "same hospitals," as a result of (i)
management's efforts to control costs, (ii) efficiency and productivity
gains resulting from the implementation of operating standards and
benchmarks on a hospital department level, (iii) management's closing of
underperforming operating units and eliminating or reducing unprofitable
services, specifically at the LA metro hospitals and (iv) divestiture or
closure of underperforming facilities. Management expects to further
reduce operating costs through a corporate reorganization which will
result in reduced corporate overhead costs.
14
Interest expense increased $7.1 million from $3.8 million in 1996 to
$10.9 million in 1997, primarily due to (i) an increase in outstanding
indebtedness from the issuance of the Notes in August 1996 and additional
borrowings under the Credit Facility to finance acquisitions and to fund
Champion merger costs, working capital requirements and capital
expenditures, (ii) an increase in the interest rate on the Credit
Facility during 1997, net of (iii) the redemption in August 1996 of $75.0
million of senior subordinated notes. Approximately $1.3 million of
interest expense incurred in 1997, which related to borrowings to finance
the acquisition of PHC Regional Hospital and Medical Center ("PHC Regional
Hospital"), was offset against the loss contract accrual previously
established at December 31, 1996. Accordingly, such amount was not
reflected as interest expense in the 1997 Consolidated Statement of
Operations.
Depreciation and amortization increased to $7.7 million in 1997 from
$3.8 million for the same period of 1996. Of the $3.9 million increase,
$4.7 million was primarily attributable to the facilities acquired or
divested since April 1996, including amortization of goodwill of
$941,000, offset by a decrease of $790,000 at the acute care LA metro
hospitals held for sale, as a result of not recording depreciation
expense on these facilities, commencing on October 1, 1996, in accordance
with Statement of Financial Accounting Standards No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of."
Income from continuing operations before income taxes in 1997
included $2.6 million attributable to the Company's equity in the
earnings of Dakota Heartland Health System but excluded a loss of $5.7
million attributable to PHC Regional Hospital. Such loss was offset
against the loss contract accrual previously established at December 31,
1996.
Income before income taxes of the discontinued psychiatric hospitals
was $274,000 in 1997, as compared to $559,000 (excluding a charge of
$19.9 million for settlement costs related to a lawsuit settled in March
1996) for the comparable period of 1996. In accordance with Accounting
Principles Board Opinion No. 30, operating income from discontinued
operations during 1997 was offset against the disposal loss accrual
previously established in September 1996. Accordingly, such amount was
not reflected in the 1997 Consolidated Statement of Operations. After
income taxes, loss from operations of discontinued operations for the
quarter ended March 31, 1996 was $11.4 million, of which $11.8 million
was related to a lawsuit settlement charge.
The Company's effective ongoing tax rate was 21.0% for the three
months ended March 31, 1997, as compared to 42.3% for the comparable
period in 1996. The reduced tax rate for 1997 resulted primarily from a
$1.7 million reduction in the valuation allowance related to the use of
previously unbenefited tax assets.
Net income for the quarter ended March 31, 1997 was $5.2 million, or
$0.09 per share, compared to a net loss of $14.3 million, or $0.48 per
share, for the same period of 1996. Weighted average common and common
equivalent shares outstanding increased 93.7% from 29.8 million in 1996
to 57.7 million in 1997, primarily from the issuance of 19.8 million
shares in connection with the merger with Champion and from the public
15
offering of 5.2 million shares of the Company's common stock, both
completed in August 1996. Net loss for the three months ended March 31,
1996 included settlement costs of $ 13.2 million relating to two lawsuits
settled in March 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the quarter ended March
31, 1997 was $ 10.6 million, compared to $2.1 million for the same period
of 1996. The $8.5 million decrease in net cash used in operating
activities was mainly attributable to incremental cash payments during
1997 for (i) interest expense on outstanding indebtedness (ii) accrued
1996 health claims related to PHC Regional Hospital (iii) costs and fees
related to the Special Committee's investigation, and (iv) Champion
merger costs. Net cash provided by investing activities was $10.7 million
during 1997, as compared to net cash used in investing activities of $7.2
million during 1996. The $17.9 million increase was primarily
attributable to the liquidation of marketable securities held by the
Company's wholly-owned subsidiary, Hospital Assurance Company Ltd.,
during 1997, offset by an increase in capital expenditures during 1997.
Net cash used in financing activities during 1997 was $343,000, compared
to net cash provided by financing activities of $8.0 million during 1996.
The $8.3 million decrease was primarily attributable to net borrowings of
$9.5 million during 1996 under the Company's then revolving line of
credit, offset by cash dividends of $1.1 million paid to the former sole
stockholder.
Net working capital was $35.3 million at March 31, 1997, an increase
of $1.5 million from $ 33.8 million at December 31, 1996. The Company's
long-term debt as a percentage of total capitalization was 90.2% at
March 31, 1997, compared to 91.0% at December 31, 1996.
As of May 14, 1997, the Company had $39.9 million available under
its Credit Facility to fund future capital expenditures, working capital
requirements and the issuance of letters of credit. The Company
anticipates that internally generated cash flows from earnings, proceeds
from the sale of hospital accounts receivable under the Company's
commercial paper program, the Federal and state income taxes refunds, and
available borrowings under its Credit Agreement will be sufficient to
meet funding requirements through 1997. There can be no assurance that
future developments in the hospital industry or general economic trends
will not adversely affect the Company's operations or its ability to meet
such funding requirements. See "Pending Litigation" of this Item for a
discussion regarding certain pending litigation, the resolution of which
could adversely affect the Company's liquidity and its future operating
results.
OPERATING PERFORMANCE OF SALT LAKE CITY, UTAH HOSPITALS
With respect to the Utah hospitals, The Company recorded earnings
before interest, income taxes, depreciation and amortization ("EBITDA")
of $8.4 million, or 30.6% of the Company's consolidated hospitals' EBITDA,
for the three months ended March 31, 1997, after excluding an operating
loss of $4.4 million associated with the loss contract at PHC Regional
Hospital. Such loss, in addition to interest expense of $1.3 million
attributable to borrowings to finance the acquisition of PHC Regional
Hospital, was offset against the loss contract accrual previously
<PAGE > 16
established in 1996. Excluding the impact of the loss contract at PHC
Regional Hospital, the performance of the Salt Lake area hospitals for
the three months ended March 31, 1997 was as expected. The Company has
developed a consolidation plan that will likely result in closing PHC
Regional Hospital based on the option to redistribute the patient volume
from PHC Regional Hospital to the Company's remaining four hospitals.
OPERATING PERFORMANCE OF LA METRO HOSPITALS
As a result of actions taken by management subsequent to the merger
with Champion to stabilize the operating conditions and curtail losses at
the LA metro hospitals, including closing underperforming operating units
and eliminating or reducing unprofitable services, the Company recorded
EBITDA of $2.5 million on the LA metro acute care hospitals for the
three months ended March 31, 1997, as compared to a loss of
$697,000 for the comparable 1996 period. Loss before interest, income
taxes, depreciation and amortization for the LA metro psychiatric hospitals,
which was offset against the disposal loss accrual previously
established in September 1996, was $33,000 in 1997. Management expects
the LA metro hospitals to generate positive cash flows through their
estimated disposition date.
PENDING LITIGATION
Since the Company filed its 1996 Form 10-K with the Commission on
April 15, 1997, there have been two amended complaints filed in the
stockholder class and derivative litigation described in that Form
10-K. A Consolidated Class Action Complaint, captioned IN RE PARACELSUS
CORP. SECURITIES LITIGATION, Master File No. H-96-3464, was filed
which consolidates and amends several class action complaints described
in the 1996 Form 10-K. A First Amended Derivative Complaint was
filed which amends the previously filed class and derivative action
captioned CAVEN V. MILLER No. H-96-4291. Both complaints now reflect
certain facts disclosed in the 1996 Form 10-K that were not alleged in
the previous complaints. The class action complaint asserts claims
against the Company under sections 11 and 12(a)(2) of the
Securities Act of 1933, and claims against certain existing and former
officers and directors of the Company under sections 11 and 15 of the
Securities Act of 1933. The derivative action, which purports to be filed
on behalf of Champion Healthcare Corporation, asserts various state law
claims against the Company, certain of its existing and former officers
and directors or their affiliates, its outside auditor, and the lead
underwriter for various securities offerings.
As discussed in the Company's 1996 Form 10-K, the Company believes
that the outcome of certain of the claims will probably be unfavorable to
the Company. The Company also believes that the stockholder class actions
asserted against the Company are likely to settle rather than to proceed
to trial, judgment, and appeal and that, given the circumstances of these
cases, the terms of a settlement would be structured in a manner to avoid
causing the Company to seek protection under the Federal bankruptcy
reorganization laws. In any circumstances where the Company could not
structure a settlement of all claims within its financial resources, it
would vigorously defend any attempt to establish the amount of liability
or to require payment beyond its resources. Many factors will ultimately
affect and determine the results of the litigation, however, and the
Company can provide no assurance that the results will not have a
significant adverse effect on it.
17
REGULATORY MATTERS
Healthcare reform legislation has been proposed at both Federal and
state levels. The Company cannot predict the effect that such reforms may
have on its business and there can be no assurance that any such reforms
will not have a material adverse effect on the Company's future revenues
or liquidity.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I - Item 2 "Pending Litigation" for an update of
developments on the pending stockholders' litigation previously disclosed
in the Company's 1996 Form 10-K.
ITEM 2. CHANGE IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits
10.9 First Amendment to Credit Agreement, dated as of April 14,
1997, among Paracelsus, Bank of America National Trust and Savings
Association, as agent, and other lenders named therein.
10.66 Letter Agreement between R. J. Messenger and Paracelsus
Healthcare Corporation dated April 11, 1997.
11.1 Statement regarding computation of per share earnings of
Paracelsus.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
18
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)
Dated: May 15, 1997 By: /s/ JAMES G. VANDEVENDER
-------------------------
James G. VanDevender
Executive Vice President,
Chief Financial Officer
& Director