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 SEPTEMBER 30, 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 November 12, 1997, there were outstanding 55,093,417 shares of the
Registrant's Common Stock, no stated value.
2
PARACELSUS HEALTHCARE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 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--
September 30, 1997 and December 31, 1996 4
Consolidated Statements of Operations--
Three Months and Nine Months Ended
September 30, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows--
Nine Months Ended September 30, 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 16
PART II. OTHER INFORMATION 28
SIGNATURE 30
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"). Certain adjustments to the financial data for the three months
and nine months ended September 30, 1996 reflect items originally
recorded in those reporting periods that have now been reclassified or
reallocated to earlier periods as a result of the Special Committee's
investigation. 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.
On August 12, 1997, the Company filed amended quarterly reports on
Form 10-Q/A for the transition period ending December 31, 1995 and each
of the first two calendar quarters of 1996 to reflect the restated
results for each respective period. On November 10, 1997, the Company
filed an amended quarterly report on Form 10-Q/A for the quarter ended
September 30, 1996.
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;
continued satisfactory relations 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; revisions to amounts recorded for losses associated
with the impairment of assets; 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 working
capital requirements and 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)
SEPTEMBER DECEMBER
30, 31,
1997 1996
---------- --------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 25,822 $ 17,771
Restricted cash 3,135 2,358
Accounts receivable, net 86,853 64,687
Deferred income taxes 28,309 28,739
Refundable income taxes 7,174 31,003
Other current assets 35,428 53,072
--------- -------
Total current assets 186,721 197,630
Property and equipment 434,645 420,697
Less: Accumulated depreciation and amortization (125,263) (109,862)
------- -------
309,382 310,835
Long-term assets of discontinued operations 7,129 18,499
Assets held for sale 22,635 22,095
Goodwill 115,345 118,168
Other assets 112,112 105,605
------- -------
Total assets $ 753,324 $ 772,832
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 49,626 $ 40,408
Accrued liabilities and other 94,912 118,781
Current maturities of long-term debt 2,571 4,679
------ -------
Total current liabilities 147,109 163,868
Long-term debt 494,449 491,057
Other long-term liabilities 61,168 69,420
Stockholders' Equity:
Common stock 224,472 224,472
Additional paid-in capital 390 390
Unrealized (losses) gains on marketable securities (78) 100
Accumulated deficit (174,186) (176,475)
------- -------
Total stockholders' equity 50,598 48,487
Total Liabilities and Stockholders' Equity $ 753,324 $ 772,832
======= =======
See accompanying notes.
5
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000's, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1997 1996 1997 1996
------- ------- -------- -------
(Restated- (Restated-
Note 2) Note 2)
Net revenue $166,661 $126,008 $502,407 $ 361,194
Costs and expenses:
Salaries and benefits 67,781 58,767 205,041 165,272
Other operating expenses 67,689 55,763 203,162 156,571
Provision for bad debts 12,688 10,039 33,449 24,003
Interest 13,236 9,397 34,715 18,411
Depreciation and amortization 7,067 7,539 23,047 15,818
Equity in earnings of Dakota
Heartland Health System (2,598) (895) (7,824) (895)
Impairment charge - 13,349 - 13,349
Merger costs - 46,818 - 46,818
Unusual charges - - 5,978 2,438
------ ------ ----- ------
Total costs and expenses 165,863 200,777 497,568 441,785
Income (loss) from continuing
operations before minority interests,
income taxes and extraordinary loss 798 (74,769) 4,839 (80,591)
Minority interests (440) (362) (1,421) (1,767)
------ ------ ----- ------
Income (loss) from continuing
operations before income taxes
and extraordinary loss 358 (75,131) 3,418 (82,358)
Provision (benefit) for income taxes 220 (29,783) 1,129 (32,846)
------ ------ ----- ------
Income (loss) from continuing
operations before extraordinary loss 138 (45,348) 2,289 (49,512)
Discontinued operations:
Loss from operations of
discontinued operations, net - (4,294) - (19,641)
Loss on disposal of discontinued
operations, net - (14,902) - (14,902)
------ ------ ----- ------
Income (loss) before extraordinary loss 138 (64,544) 2,289 (84,055)
Extraordinary loss from early
extinguishment of debt, net - (4,557) - (4,557)
------ ----- ----- ------
Net income (loss) $ 138 $(69,101) $ 2,289 $(88,612)
====== ====== ===== ======
(continued)
6
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000's, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1997 1996 1997 1996
------- ------- -------- -------
(Restated- (Restated-
Note 2) Note 2)
Income (loss) per share:
Continuing operations $ - $ (1.08) $ 0.04 $ (1.46)
Discontinued operations - (0.45) - (1.01)
Extraordinary loss - (0.10) - (0.14)
------ ------ ---- -----
Income (loss) per share $ - $ (1.63) $ 0.04 $ (2.61)
====== ====== ==== =====
Weighted average common and
common equivalent shares
outstanding 57,710 42,290 56,752 33,975
See accompanying notes.
7
PARACELSUS HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000's)
(Unaudited)
Nine Months Ended
September 30,
--------------------
1997 1996
-------- ------
(Restated -
See Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,289 $ (88,612)
Non-cash expenses and changes in operating
assets and liabilities (9,309) 58,664
----- ------
Net cash used in operating activities (7,020) (29,948)
----- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of facilities 12,201 -
Acquisitions of facilities, net - (123,072)
Sale (purchase) of marketable securities 19,284 (4,104)
Additions to property and equipment, net (12,617) (3,260)
Increase in other assets, net (2,282) (2,035)
----- -----
Net cash provided by (used in) investing activities 16,586 (132,471)
----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Revolving Credit Facility 38,000 441,500
Repayments under Revolving Credit Facility (34,593) (342,000)
Proceeds from issuance of debt - 320,342
Repayments of debt (4,922) (262,193)
Sale of common stock, net - 39,841
Dividends to stockholder - (24,878)
----- -------
Net cash (used in) provided by financing activities (1,515) 172,612
----- -------
Increase in cash and cash equivalents 8,051 10,193
Cash and cash equivalents at beginning of year 17,771 4,418
----- -------
Cash and cash equivalents at end of period $ 25,822 $ 14,611
====== =======
Supplemental Cash Flow Information:
Interest paid $ 45,262 $ 15,713
Income taxes (refunded) paid (23,911) 1,971
Purchase of businesses, net:
Fair value of assets acquired - $(478,173)
Liabilities assumed - 207,859
Stock and stock options issued - 147,242
See accompanying notes.
8
PARACELSUS HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
September 30, 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
hospitals and related healthcare businesses in selected
markets. The Company presently operates 27 hospitals
with 2,790 licensed beds in nine states (including two
psychiatric hospitals with 113 licensed beds), of which
20 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 and nine months ending September 30, 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.
9
Certain account balances for the three months and
nine months ended September 30, 1996 have been
reclassified to conform to the Company's current
presentation.
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 approximated primary
net income per share or was anti-dilutive. Weighted
average number of common shares outstanding for the
three months and nine months ended September 30, 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.
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 income (loss) per share for the three
months and nine months ended September 30, 1997 and
1996. The impact of SFAS No. 128 on the calculation of
fully diluted income (loss) per share for these periods
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
10
costs which only affected the 1996 quarterly
information. Certain adjustments to the financial data
for the three months and nine months ended September
30, 1996 reflect items originally recorded in those
reporting periods that have now been reclassified or
reallocated to earlier periods as a result of the
Special Committee's investigation. See Part I - Item 2
"Management's Discussion and Analysis of Financial
Condition and Results of Operations" for further
detailed analysis of items (i) through (iv) above,
which equal to the total net loss revision amounts for
the applicable periods. Certain reclassifications
between reporting line items and between continuing
operations and discontinued operations are also being
reflected under the "Adjustments" column.
On August 12, 1997, the Company filed amended
quarterly reports on Form 10-Q/A for the transition
period ending December 31, 1995 and each of the first
two calendar quarters of 1996 to reflect the restated
results for each respective period. On November 10,
1997, the Company filed an amended quarterly report on
Form 10-Q/A for the quarter ended September 30, 1996.
11
QUARTER ENDED SEPTEMBER 30, 1996
---------------------------------------
As Originally
(IN 000'S, EXCEPT PER SHARE DATA) Reported Adjustments As Restated
------------ ----------- -----------
Net revenue $ 109,855 $ 16,153 $ 126,008
Costs and expenses:
Salaries and benefits 58,718 49 58,767
Other operating expenses 47,334 7,534 54,868
Provision for bad debts 10,489 (450) 10,039
Interest 9,383 14 9,397
Depreciation and amortization 7,416 123 7,539
Impairment charge 13,349 - 13,349
Merger costs 46,818 - 46,818
------ ------ ------
Total costs and expenses 193,507 7,270 200,777
Loss from continuing
operations before minority
interests, income taxes and
extraordinary loss (83,652) 8,883 (74,769)
Minority interests 52 (414) (362)
------ ----- ------
Loss from continuing
operations before income
taxes and extraordinary loss (83,600) 8,469 (75,131)
Income tax benefit (33,355) 3,572 (29,783)
------ ----- ------
Loss from continuing operations
before extraordinary loss (50,245) 4,897 (45,348)
Discontinued operations:
Loss from operations of
discontinued operations, net (10,419) 6,125 (4,294)
Loss on disposal of discontinued
operations, net (14,902) - (14,902)
------- ----- ------
Loss before extraordinary loss (75,566) 11,022 (64,544)
Extraordinary loss from
early extinguishment of debt, net (4,557) - (4,557)
------- ----- -----
Net loss $ (80,123) $ 11,022 $ (69,101)
======= ====== ======
Loss per share:
Continuing operations $ (1.19) $ 0.11 $ (1.08)
Discontinued operations (0.60) 0.15 (0.45)
Extraordinary loss (0.10) - (0.10)
------- ----- -----
Loss per share $ (1.89) $ 0.26 $ (1.63)
======= ===== =====
Weighted average shares
outstanding 42,290 42,290 42,290
12
NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------
As Originally
(IN 000'S, EXCEPT PER SHARE DATA) Reported Adjustments As Restated
------------- ----------- -----------
Net revenue $ 350,200 $ 10,994 $ 361,194
Costs and expenses:
Salaries and benefits 165,223 49 165,272
Other operating expenses 137,937 17,739 155,676
Provision for bad debts 24,453 (450) 24,003
Interest 18,433 (22) 18,411
Depreciation and amortization 15,529 289 15,818
Impairment charge 13,349 - 13,349
Merger costs 46,818 - 46,818
Unusual charge 2,438 - 2,438
------- ------ ------
Total costs and expenses 424,180 17,605 441,785
Loss from continuing
operations before minority
interests, income taxes and
extraordinary loss (73,980) (6,611) (80,591)
Minority interests (1,595) (172) (1,767)
------- ---- ------
Loss from continuing
operations before income
taxes and extraordinary loss (75,575) (6,783) (82,358)
Income tax benefit (30,066) (2,780) (32,846)
------ ----- ------
Loss from continuing operations
before extraordinary loss (45,509) (4,003) (49,512)
Discontinued operations:
Loss from operations of
discontinued operations, net (21,896) 2,255 (19,641)
Loss on disposal of discontinued
operations, net (14,902) - (14,902)
------ ----- ------
Loss before extraordinary loss (82,307) (1,748) (84,055)
Extraordinary loss from
early extinguishment of debt, net (4,557) - (4,557)
------- ----- ------
Net loss $ (86,864) $ (1,748) $ (88,612)
====== ===== ======
Loss per share:
Continuing operations $ (1.34) $ (0.12) $ (1.46)
Discontinued operations (1.08) 0.07 (1.01)
Extraordinary loss (0.14) - (0.14)
----- ----- ------
Loss per share $ (2.56) $ (0.05) $ (2.61)
===== ===== =====
Weighted average shares
outstanding 33,975 33,975 33,975
13
NOTE 3. UNUSUAL CHARGES
In May 1997, the Company recognized unusual
charges totaling $6.0 million, consisting of $3.5
million relating to the closure of the 125-bed PHC
Regional Hospital and Medical Center ("PHC Regional
Hospital") in Salt Lake City, Utah and $2.5 million
relating to a corporate reorganization. Such charges
consisted primarily of employee severance and related
costs, and to a lesser extent, certain other contract
termination costs.
In March 1996, the Company recognized a charge for
settlement costs totaling $22.4 million in connection
with 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, after giving
effect to income tax benefit, as "Loss from operations
of discontinued operations, net," with the remaining
$2.5 million reflected as an unusual charge in the
Consolidated Statement of Operations.
NOTE 4. 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 ("Buena Park"). On May 15, 1997,
a wholly owned subsidiary of the Company entered into a
joint venture with a group of physicians, in which the
subsidiary leased Buena Park and the 85-bed Bellwood
General Hospital in Bellflower, California to a limited
liability company formed by the joint venture. The
subsidiary owns a 51% interest in the joint venture.
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.
On May 15, 1997, the Company closed the inpatient
services at PHC Regional Hospital and all remaining
services in June 1997. The Company closed the hospital
as a result of continuing losses under the capitated
contract with FHP International Inc. (now owned by
Pacificare of Utah). In August 1997, the Company
executed an Amended and Restated Provider Agreement
with Pacificare of Utah, retroactive to July 1, 1997,
to (i) receive payment for services provided to FHP
enrollees on a per diem basis instead of a capitation
basis; (ii) revise the contract term from 15 years to 5
years ending in June 2002; (iii) no longer provide
exclusive service to FHP enrollees; and (iv) agree on a
mechanism to resolve disagreement regarding the
administration of the capitation agreement prior to
14
July 1, 1997.
NOTE 5. DAKOTA HEARTLAND HEALTH SYSTEM PARTNERSHIP
On August 20, 1997, Dakota Medical Foundation (the
"Foundation"), the Company's partner in Dakota
Heartland Health System ("DHHS"), exercised its right
to require the Company to purchase the Foundation's 50%
partnership interest in DHHS. DHHS owns and operates
two general acute care hospitals with a total of 345
beds in Fargo, North Dakota. The purchase price will be
based on a 5.5 multiple of DHHS' historical cash flow,
but in no event to be less than $50.0 million
commencing January 1998. Under the agreement, the
Company has until August 20, 1998 to complete its
purchase. The Company is currently considering various
options to finance this acquisition. If the purchase is
not completed within the allowable period, the
Foundation can exercise various options, including
seeking remedies available at law against the Company
for breach of its obligation.
The Company currently accounts for its investment
in DHHS under the equity method. Upon completion of the
purchase of the Foundation's interest in the
partnership, the Company will account for DHHS under
the consolidation method. Pro forma net revenue and
earnings from continuing operations
before interest, taxes and depreciation and
amortization ("EBITDA") for the nine months ended
September 30, 1997, respectively, assuming the Company
owned 100% of DHHS on January 1, 1997, would have been
as follows ($ in 000's):
AS CURRENTLY
REPORTED PRO FORMA INCREASE
---------- --------- --------
Net Revenue $ 502,407 $ 577,284 $ 74,877
EBITDA (a) 67,158 77,659 10,501
____________________
(a) Excludes unusual charges of $5,978,000. See Note 3.
NOTE 6. LONG-TERM DEBT
The Company entered into the First Amendment to
the existing five-year Reducing Revolving Credit
Facility (the "Credit Facility")(the "Credit
Agreement") on April 14, 1997 and the Second and Third
Amendments on August 14, 1997, which provide among
other things: (i) a reduction in the credit commitment
from $400.0 million to $200.0 million effective April
15
14, 1997 and to $165.0 million effective August 14,
1997; (ii) interest rates which (a) effective June 1,
1997 through August 13, 1997, increased by .50% on a
monthly basis as compared to rates otherwise in effect
prior thereto, (b) effective August 14, 1997 through
June 30, 1998, at the Company's option, equal to LIBOR
plus a margin of 3.25% or the prime rate plus a margin
of 2.25% and (c) effective July 1, 1998 and thereafter,
equal to LIBOR plus a margin of 3.75% or the prime rate
plus a margin of 2.75%; (iii) future reductions in the
credit commitment and debt outstanding under the Credit
Facility by: (a) 60% of the proceeds from permitted
dispositions of certain hospitals in the Los Angeles
metropolitan area (the "LA Metro Hospitals") (including
dispositions of stock of subsidiaries whose only assets
are LA Metro Hospitals) and of certain other specified
stock and assets, (b) 100% of the proceeds from any
other dispositions and (c) 60% of income tax refunds
received after August 14, 1997; (iv) a first priority
lien in certain of the Company's real and personal
properties; and (v) additional restrictive financial
covenants as compared to those at December 31, 1996. At
September 30, 1997, the Company had $149.4 million
outstanding under its Credit Facility and approximately
$15.1 million committed under letter of credit
arrangements. As of September 30, 1997, there was $.5
million available for borrowings under the Credit
Facility.
NOTE 7. CONTINGENCIES
The Company is a party to pending stockholders'
litigation as previously discussed in the Company's
1996 Form 10-K and another litigation matter. See "Item
2 - Pending Litigation."
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESTATEMENT OF FINANCIAL INFORMATION FOR QUARTER AND NINE
MONTHS ENDED SEPTEMBER 30, 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 on the quarterly and nine
months periods ended September 30, 1996. Certain
adjustments to the 1996 financial data reflect items
originally recorded in these reporting periods that
have been reclassified or reallocated to earlier
periods as a result of the Special Committee's
investigation and are summarized under the
"Reallocation to prior periods" column in the following
tables. The restated financial information should be
read in conjunction with the Company's 1996 Form 10-K.
QUARTER ENDED SEPTEMBER 30, 1996
Reallocated
As Originally to prior
(IN 000'S, EXCEPT PER SHARE DATA) Reported periods As Restated
------------- ------------ -----------
Net revenue $ 109,855 $ 16,153 $ 126,008
Net loss (80,123) 11,022 (69,101)
Loss per share $ (1.89) $ 0.26 $ (1.63)
NINE MONTHS ENDED SEPTEMBER 30, 1996
Reallocated
(In 000's, except As Originally to prior
per share data) Reported Adjustments periods As Restated
------------ ----------- ---------- ----------
Net revenue $350,200 $ (3,064) $ 14,058 $ 361,194
Net loss (86,864) (13,012) 11,264 (88,612)
Loss per share $ (2.56) $ (0.38) $ 0.33 $ (2.61)
17
Net revision to previously reported net loss consisted
primarily of:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1996
------------- --------------
ADJUSTMENTS:
(i) Increase in deductions from revenue
for receivables from Medicare and
other government program $ - $ (4,205)
(ii) Increase in operating expenses from the
reversal of corporate reserves - (7,635)
(iii)Recording of bad debt expense that was
deferred at two of the psychiatric
hospitals
- Increase in deductions from net revenue - (1,833)
- Increase in provision for bad debts - (5,885)
(iv) Increase in operating expenses for
deferred facility closure costs - (2,497)
--------- ------
Pre-tax adjustments - (22,055)
Income tax benefit at 41% - (9,043)
--------- ------
Net adjustments - (13,012)
Reallocation to prior periods 11,022 11,264
--------- ------
Net revision to previously reported net loss $ 11,022 $ (1,748)
========= ======
The Company does not believe that the adjustments
regarding the Medicare receivables resulted from improper
patient billing procedures under that program.
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 and entered into a new Credit Agreement.
Accordingly, the Company's financial position and portfolio
of operating hospitals during the quarter and nine months
ended September 30, 1997 were significantly different from
those of the comparable 1996 periods. "Same hospitals" as
used in the following discussion, where appropriate, consist
of acute care hospitals owned throughout the periods for
which comparative operating results are presented. Operating
results of the Company's psychiatric hospitals have been
18
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 SEPTEMBER 30, 1997
COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1996
Net revenue for the quarter ended September 30, 1997 was
$166.7 million, an increase of $40.7 million, or 32.3%, from
$126.0 million for the same period of 1996. The $40.7 million
increase was primarily attributable to an increase of $27.7
million contributed by hospitals acquired, net of divested
hospitals, since August 1996 and an increase of $13.0 from
"same hospitals." The $13.0 million increase in "same
hospitals" was primarily attributable to (i) incremental
revenue contributed by a joint venture formed in May 1997
involving two hospitals located in the Los Angeles
metropolitan ("LA metro") area (see Note 4), (ii) additional
services offered at certain hospitals and (iii) favorable
settlement adjustments under certain governmental programs in
1997, as compared to negative settlement adjustments in 1996.
Such increase was partially offset by a decrease in net
revenue attributable to a decline in reimbursement at
hospitals located primarily in Tennessee and the closure of
underperforming operating units.
The Company's acute care volumes experienced a 4.5%
increase in inpatient admissions from 15,394 in 1996 to
16,080 in 1997. Patient days increased from 68,389 in 1996
to 75,608 in 1997. Outpatient visits (including home health)
increased 18.4% from 323,809 in 1996 to 383,290 in 1997.
Admissions in "same hospitals" decreased from 12,523 in 1996
to 11,744 in 1997, partially as a result of management's
decision to close underperforming operating units.
Expressed as a percentage of net revenue, operating
expenses (salaries and benefits, other operating expenses and
provision for bad debts) decreased from 98.9% in 1996 to
88.9% in 1997 as operating margin increased from 1.1% to
11.1%. General factors contributing to the improvement in
operating margin percentage include (i) management's efforts
to control costs, including a corporate reorganization
completed in May 1997 to reduce corporate overhead costs,
(ii) efficiency and productivity gains resulting from the
implementation of improved operating standards and
benchmarks, (iii) divestiture or closure of underperforming
facilities and (iv) negotiation of new contracts under more
favorable terms that resulted in lower operating costs. Such
increase in operating margin was further due to the write off
of working capital assets in 1996 related to the hospitals
exchanged in May 1996 and a hospital closed in March 1996.
Interest expense increased $3.8 million from $9.4
million in 1996 to $13.2 million in 1997, primarily due to
(i) an increase in outstanding indebtedness from the issuance
of the Notes in August 1996, (ii) an increase in interest
19
rate on the Credit Facility during 1997, net of (iii) the
redemption in August 1996 of $75.0 million of senior
subordinated notes.
Depreciation and amortization expense decreased $.4 million to
$7.1 million in the third quarter of 1997 from $7.5 million
for the same period of 1996. The decrease was primarily
attributable to recording the acute care LA metro hospitals
held for sale at their net realizable value as of September
30, 1996, in accordance with Statement of Financial
Accounting Standards ("SFAS") 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
for the quarter ended September 30, 1997 excluded a loss of
$.4 million attributable to PHC Regional Hospital, which was
charged to the loss contract accrual previously established
at December 31, 1996.
Loss before income taxes of the discontinued psychiatric
hospitals was $.6 million in 1997, as compared to $7.3
million for the comparable period of 1996. The loss recorded
in 1996 was primarily attributable to additional provision
for bad debt recorded on uncollectible accounts receivable.
The loss recorded in 1997 was significantly reduced as a
result of management's decision to close an underperforming
facility and consolidate services of certain other
facilities. After income taxes, the loss from operations of
discontinued operations for the quarter ended September 30,
1996 was $4.3 million. The Company also recorded in September
1996 an after-tax disposal loss of $14.9 million on these
facilities to reduce the related assets to their estimated
net realizable value and to accrue for estimated after-tax
operating losses of approximately $1.5 million during the
phase out period. In accordance with Accounting Principles
Board Opinion ("APB") No. 30, the operating loss from
discontinued operations during 1997 of $.6 million was
charged to the disposal loss accrual previously established
in September 1996. Accordingly, such amount was not reflected
in the 1997 Consolidated Statement of Operations.
The Company's effective tax rate was 61.5% for 1997, as
compared to 39.6% for the comparable period in 1996. The
increase in income tax rate for 1997 resulted primarily from
nondeductible goodwill amortization expense recorded during
1997, offset by a $.3 million reduction in the valuation
allowance related to the use of previously unrealized tax
assets.
Net income for the quarter ended September 30, 1997 was
$.1 million, compared to a net loss of $69.1 million, or
$1.63 per share, for the same period of 1996. Weighted
average common and common equivalent shares outstanding
increased 36.5% from 42.3 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
20
offering of 5.2 million shares of the Company's common stock,
both completed in August 1996. Included in the 1996 loss from
continuing operations before income taxes and extraordinary
loss, net loss and net loss per share were nonrecurring
charges of $60.2 million, $59.3 million and $1.40 per share,
respectively, which consisted of the following items ($ in
thousands, except per share amounts):
PRE-TAX NET LOSS EPS
------- -------- ----
Impairment charge $(13,349) $ (7,876) $(0.19)
Merger costs (46,818) (27,623) (0.66)
Discontinued operations - (19,196) (0.45)
Extraordinary loss - (4,557) (0.10)
------- ------ -----
Total impact of nonrecurring
items $(60,167) $ (59,252) $(1.40)
======= ====== ====
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1997
COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1996
Net revenue for the nine months ended September 30, 1997
was $502.4 million, an increase of $141.2 million, or 39.1%,
from $361.2 million for the same period of 1996. The $141.2
million increase was attributable to an increase of $132.0
million contributed by hospitals acquired, net of divested
hospitals, since March 1996 and an increase of $9.2 from
"same hospitals." The $9.2 million increase in "same
hospitals" was primarily attributable to incremental
contribution by a joint venture formed in May 1997 involving
two hospitals located in the LA metro area (see Note 4) and
additional services offered at certain hospitals. Such
increase was partially offset by a decrease in net revenue
attributable to a decline in reimbursement at hospitals
located primarily in Tennessee and the closure of
underperforming operating units.
The Company's acute care volumes experienced a 31.5%
increase in inpatient admissions from 40,330 in 1996 to
53,031 in 1997. Patient days increased from 196,487 in 1996
to 248,567 in 1997. Outpatient visits (including home
health) increased 33.0% from 879,543 in 1996 to 1,169,581 in
1997. Admissions in "same hospitals" decreased from 28,295
in 1996 to 27,563 in 1997, primarily as a result of
management's decision to close underperforming operating
units.
Expressed as a percentage of net revenue, operating
expenses (salaries and benefits, other operating expenses and
provision for bad debts) decreased from 95.8% in 1996 to
87.9% in 1997 as operating margin increased from 4.2% to
12.1%. General factors contributing to the improvement in
21
operating margin percentage include (i) management's efforts
to control costs, including a corporate reorganization
completed in May 1997 to reduce corporate overhead costs,
(ii) efficiency and productivity gains resulting from the
implementation of improved operating standards and
benchmarks, (iii) divestiture or closure of underperforming
facilities and (iv) negotiation of new contracts under more
favorable terms that resulted in lower operating costs. Such
increase in operating margin was further due to the write
off of working capital assets in 1996 related to the
hospitals exchanged in May 1996 and a hospital closed in
March 1996.
Interest expense increased $16.3 million from $18.4
million in 1996 to $34.7 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
certain lawsuit settlement costs, Champion merger costs,
working capital requirements and capital expenditures, (ii)
an increase in 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 $2.7
million of interest expense incurred in 1997, which related
to borrowings to finance the acquisition of PHC Regional
Hospital, was charged to 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 expense increased to $23.0 million
in 1997 from $15.8 million for the same period of 1996. The
increase consisted of $9.6 million primarily attributable to
the facilities acquired, net of divested facilities, since
March 1996, offset by a decrease of $2.4 million at the acute
care LA metro hospitals held for sale, as a result of
recording these facilities at their net realizable value as
of September 30, 1996 in accordance with SFAS No. 121.
Income from continuing operations before income taxes
for the nine months ended September 30, 1997 included $6.0
million in unusual charges, consisting of $3.5 million
relating to the closure of PHC Regional Hospital and $2.5
million relating to a corporate reorganization completed in
May 1997 (see Note 2). It excluded a loss of $11.2 million
attributable to PHC Regional Hospital, which was charged to
the loss contract accrual previously established at December
31, 1996. Loss from continuing operations before income taxes
and extraordinary loss for the comparable 1996 period
included nonrecurring charges of $62.6 million consisting of
items listed in the table below.
Loss before income taxes of the discontinued psychiatric
hospitals was $.6 million in 1997, as compared to a loss of
$13.4 million (excluding a charge of $19.9 million for
settlement costs related to a lawsuit settled in March 1996)
for the comparable period of 1996. The loss recorded in 1996
22
was primarily attributable to additional provision for bad
debts on uncollectible accounts receivable. The loss recorded
in 1997 was significantly reduced as a result of management's
decision to close an underperforming facility and consolidate
services of certain other facilities. After income taxes, the
loss from operations of discontinued operations for the
nine months ended September 30, 1996 was $19.6 million, of
which $11.8 million was related to a lawsuit settlement
charge. The Company also recorded an after-tax disposal loss
of $14.9 million in September 1996 on these facilities to
reduce the related assets to their estimated net realizable
value and to accrue for estimated after-tax operating losses
of approximately $1.5 million during the phase out period. In
accordance with APB No. 30, the operating loss from
discontinued operations during 1997 of $.6 million was
charged to the disposal loss accrual previously established
in September 1996. Accordingly, such amount was not reflected
in the 1997 Consolidated Statement of Operations.
The Company's effective tax rate was 33.0% for 1997, as
compared to 39.9% for the comparable period in 1996. The
decrease in income tax rate for 1997 resulted primarily from
a $1.4 million reduction in the valuation allowance related
to the use of previously unrealized tax assets, offset by
nondeductible goodwill amortization expense recorded during 1997.
Net income for the nine months ended September 30, 1997
was $2.3 million, or $0.04 per share, compared to a net loss
of $88.6 million, or $2.61 per share, for the same period of
1996. Weighted average common and common equivalent shares
outstanding increased 67.0% from 34.0 million in 1996 to 56.8
million in 1997, primarily from the issuance of 19.8 million
shares in connection with the merger with Champion and from
the public offering of 5.2 million shares of the Company's
common stock, both completed in August 1996. Included in 1997
income before income taxes, net income and net income per
share were nonrecurring charges of $6.0 million, $4.0 million
and $0.07 per share, respectively, relating to the unusual
charges described at Note 3. Included in the 1996 loss from
continuing operations before income taxes and extraordinary
loss, net loss and net loss per share were nonrecurring
charges of $62.6 million, $76.0 million and $2.24 per share,
respectively, which consisted of the following items ($ in
thousands, except per share amounts):
PRE-TAX NET LOSS EPS
------- -------- ---
Impairment charge $(13,349) $ (7,876) $(0.23)
Merger costs (46,818) (27,623) (0.82)
Unusual charges (2,438) (1,438) (0.04)
Discontinued operations - (34,543) (1.01)
Extraordinary loss - (4,557) (0.14)
------- ------ -----
Total impact of nonrecurring items $(62,605) $(76,037) $(2.24)
======= ====== =====
23
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the nine
months ended September 30, 1997 was $7.0 million, compared to
$29.9 million for the same period of 1996. The $22.9
million decrease in net cash used in operating activities was
mainly attributable to (i) net income recorded for the nine
months ended September 30, 1997 as compared to net loss
recorded for the nine months ended September 30, 1996, which
was primarily attributable to Merger-related costs, a
settlement charge for certain lawsuits and a deterioration in
the operating condition at the LA metro hospitals and (ii) a
related increase in deferred tax assets at September 30, 1996
resulting from such loss, offset by (iii) payments made in
1997 for (a) increased interest expense, (b) the loss
contract at PHC Regional Hospital and (c) the Special
Committee's investigation. Net cash provided by investing
activities was $16.6 million during 1997, as compared to net
cash used in investing activities of $132.5 million during
1996. The $149.1 million increase was primarily attributable
to (i) a use of cash of $123.1 million to acquire hospitals
during 1996, as compared to $12.2 million in cash received
from a sale of certain hospitals during 1997 and (ii) cash of
$19.3 million received from the liquidation of marketable
securities held by the Company's wholly-owned subsidiary,
Hospital Assurance Company Ltd., during 1997, as compared to
purchases of marketable securities of $4.1 million made
during 1996, offset by (iii) an increase in capital
expenditures during 1997. Net cash used in financing
activities during 1997 was $1.5 million, compared to net
cash provided by financing activities of $172.6 million
during 1996. Such decrease was due to significant financing
transactions completed in 1996 consisting of the issuance of
the Notes, the issuance of the 5.2 million shares of the
Company's common stock and net incremental borrowings under
the Credit Facility, net of amounts used therefrom to repay
$75.0 million of senior subordinated notes, certain
indebtedness assumed from the merger with Champion and
amounts outstanding under the previous $230.0 million
revolving line of credit.
Net working capital was $39.6 million at September 30,
1997, an increase of $5.8 million from $33.8 million at
December 31, 1996. The Company's long-term debt as a
percentage of total capitalization was 90.7% at September
30, 1997, compared to 91.0% at December 31, 1996.
The Company entered into the First Amendment to
the Credit Agreement on April 14, 1997 and the Second and
Third Amendments on August 14, 1997, which provide among
other things: (i) a reduction in the credit commitment from
$400.0 million to $165.0 million effective August 14, 1997;
(ii) a revision in the borrowing rates as disclosed at Note
6; (iii) future reductions in the credit commitment and debt
outstanding under the Credit Facility by: (a) 60% of the
proceeds from permitted dispositions of certain hospitals in
the LA metro area (including dispositions of stock of
24
subsidiaries whose only assets are LA Metro Hospitals) and of
certain other specified stock and assets, (b) 100% of the
proceeds from any other dispositions and (c) 60% of income
tax refunds received after August 14, 1997; (iv) a first
priority lien in certain of the Company's real and personal
properties; and (v) additional restrictive financial
covenants as compared to those at December 31, 1996. On
August 14, 1997, the Company drew approximately $13.4 million
from its Credit Facility to fund future capital expenditures
and working capital requirements. As of November 12, 1997,
there was $.5 million available for borrowings under the
Credit Facility.
In July 1997, the Company received approximately $24.6
million in refunds of previously paid Federal and state
income taxes. Such refunds were used to pay interest costs
and for general working capital needs. The Company expects to
receive additional Federal and state income tax refunds of
approximately $7.2 million in 1998.
In August 1997, the Company received notice from Dakota
Medical Foundation (the "Foundation") exercising its right to
require the Company to purchase the Foundation's 50% interest
in Dakota Heartland Health System ("DHHS"). Based on the
agreement, the purchase price will be based on a 5.5 multiple
of DHHS' historical cash flow, but in no event to be less
than $50.0 million commencing January 1998. The Company has
until August 20, 1998 to complete its purchase of DHHS. The
Company is currently considering various options to finance
such acquisition. If the purchase is not completed within
the allowable period, the Foundation can exercise various
options, including seeking remedies available at law against
the Company for breach of its obligation.
The Company anticipates that internally generated cash
flows from earnings, existing cash balances, proceeds from
the sale of hospital accounts receivable under the Company's
commercial paper program, income tax refunds receivable and
permitted equipment leasing arrangements will be sufficient
to fund future capital expenditures and working capital
requirements through 1998. Additionally, the Company believes
that it will be able to obtain additional funding through
bank or other borrowings to finance the purchase of DHHS.
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 liquidity.
See "Pending Litigation" for a discussion regarding certain
pending litigation, the resolution of which could adversely
affect the Company's liquidity in general, including the
necessary funding for DHHS.
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 $7.6 million and $24.0 million, or
36.7% and 35.7% of the Company's consolidated hospitals'
25
EBITDA, for the three months and nine months ended September
30, 1997, respectively, after excluding operating losses of
$.4 million and $8.5 million associated with the loss
contract at PHC Regional Hospital during each respective
period and closure costs of $3.5 million in connection with
the closing of that hospital in May 1997. Operating losses
relating to the loss contract, in addition to interest
expense of $2.7 million for the nine months ended September
30, 1997, attributable to borrowings to finance the
acquisition of PHC Regional Hospital, were charged to the
loss contract accrual previously established in 1996.
Excluding the impact of the loss contract at PHC Regional
Hospital and associated closure costs, the performance of the
Company's Utah facilities for the three months and nine
months ended September 30, 1997 was as expected.
In August 1997, the Company executed an Amended and
Restated Provider Agreement with Pacificare of Utah (formerly
FHP International Corp.) retroactive to July 1, 1997 (the
"Agreement") to (i) receive payment for services provided to
FHP enrollees on a per diem basis instead of a capitation
basis, (ii) revise the contract term from 15 years to 5 years
ending in June 2002, (iii) no longer provide exclusive
service to FHP enrollees and (iv) agree on a mechanism to
resolve disagreements regarding the administration of the
capitation agreement prior to July 1, 1997. Management
believes the revised agreement will eliminate further losses
under the Agreement while maintaining an ongoing relationship
with PacifiCare at the Company's Utah facilities.
The Company is presently considering possible uses
for PHC Regional Hospital and is working with local
physicians in evaluating the transfer of medical/surgical
services from Salt Lake Regional Medical Center to PHC
Regional Hospital.
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 $.6 million and $4.5 million on the LA
metro acute care hospitals for the three months and nine
months ended September 30, 1997, as compared to a loss
of $2.5 million and $5.2 million for the comparable 1996
periods. Management expects the LA metro hospitals to
generate positive cash flows through their disposition date.
PENDING LITIGATION
STOCKHOLDERS' LITIGATION
Since the Company filed its 1996 Form 10-K on April 15,
1997, there have been two amended complaints filed in the
stockholder class and derivative litigation described in
26
that filing. A Consolidated Class Action Complaint was filed
in the U.S. District Court for the Southern District of
Texas, captioned IN RE PARACELSUS CORP. SECURITIES
LITIGATION, Master File No. H-96-3464, which consolidates and
amends several stockholder class action complaints described
in the 1996 Form 10-K. The state court actions described in
the Form 10-K have since been suspended in deference to the
Federal class action. A First Amended Derivative Complaint
was filed in the same Federal court, which amends the
previously filed class and derivative action captioned CAVEN
V. MILLER No. H-96-4291. In addition, another derivative
action was filed in the Southern District of Texas, captioned
OROVITZ V. MILLER, No. H-97-2752, making substantially
similar claims to those asserted in CAVEN V. MILLER. Each of
the pending complaints now reflects certain facts disclosed
in the 1996 Form 10-K that were not alleged in the original
complaints. The stockholder 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
Company has entered into an agreement with representatives of
certain stockholder claimants tolling the statute of
limitations as to certain other unasserted claims. 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 and
the lead underwriter for various securities offerings.
There are now pending before the court motions to
dismiss some of the claims asserted in the stockholder class
action and all claims asserted in the derivative actions. As
discussed in the Company's 1996 Form 10-K, in light of the
Company's restatement of financial information contained in
the various registration statements and prospectuses, the
Company believes an unfavorable outcome is probable for at
least some of the claims asserted in the stockholder class
action. Efforts to settle the stockholder claims are ongoing.
Absent such a settlement within the Company's financial
resources, the Company will continue to defend the litigation
vigorously. Many factors will ultimately affect and determine
the results of the litigation, and the Company can provide no
assurance that the results will not have a significant
adverse effect on the Company.
OTHER LITIGATION
In October 1995, two former hospital employees of the
Company (the "relators") filed a civil complaint under seal
on behalf of the United States and the State of California
against Paracelsus, certain of its subsidiaries, and others
in the United States District Court for the Central District
of California. The relators asserted violations of the U.S.
and California False Claims Acts, alleging that the
defendants, among other things, submitted false claims to
obtain payments from Medicare and MediCal, paid for patient
27
referrals, improperly admitted Medicare and MediCal patients,
improperly waived co-payments and deductibles, and billed for
treatments not rendered. Without identifying any specific
amounts, the complaint demanded three times the damages the
United States sustained from the violations, a civil penalty
for each violation, attorneys' fees, and costs and expenses
Although the relators filed the complaint in October
1995, the Company did not learn of the case until late July
1997 after the Court permitted the United States to provide a
copy of the complaint to the defendants solely for purposes
of settlement negotiations. Shortly after the Company learned
of the complaint, the Company received a subpoena from the
Office of the Inspector General of the Department of Health
and Human Services seeking documents relating to certain of
the same matters. In early November 1997, the Court
authorized the Company to disclose certain information about
the complaint and the case, but not the relators or other
defendants, in its public reports and filings required by the
federal securities laws. Otherwise, a Court order continues
to maintain the case under seal and to prohibit the Company
from making any disclosure of the complaint or the case
without a further order. The Company has not been formally
served with the complaint, and the United States has not
intervened in the case.
Without relinquishing its rights to assert a vigorous
defense, the Company is engaged in discussions with counsel
for the United States to determine whether the parties can
reach a mutually acceptable settlement. Those discussions
have been devoted to a substantially narrower set of issues
than those alleged in the complaint and have related
exclusively to certain alleged practices at three Los Angeles
area hospitals that are currently closed and/or held for
sale. The relators have various rights in this type of case,
including a right to object to a settlement and continue
litigating any issues not resolved by it. The Court must
determine the fairness and adequacy of any settlement.
The Company is not currently able to predict whether the
litigation will settle or whether the outcome, by settlement
or litigation, will have a material adverse effect on the
Company.
REGULATORY MATTERS
Healthcare reform legislation has been proposed at
both Federal and state levels. In August 1997, the President
signed into law the Balanced Budget Act of 1997 (the "1997
Act"), which projects to produce a net savings of $115
billion for Medicare and $13 billion for Medicaid over five
years. The changes in Medicare reimbursement mandated by the
1997 Act include, among others, (i) no increases in the rates
paid to acute care hospitals for inpatient care through
September 30, 1998, (ii) a reduction in capital reimbursement
rate, (iii) a conversion of payments for certain Medicare
outpatient services from a cost-based approach, subject to
28
certain limits, to a prospective payment system and (iv)
phase-in reduction in reimbursement for disproportionate
share and bad debt. While such changes in the Medicare
program will generally result in lower payments to the
Company, management expects to negate any material adverse
financial impact of such changes through further cost
reduction efforts and other means. As a result, management
does not believe the reduced payments mandated by the 1997
Act will likely have a material adverse effect on the
Company's results of operations, financial position or
liquidity. However, management cannot predict the effect that
future 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.
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 and
other litigation matters in 1997.
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. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.10 Second Amendment to Credit Agreement, dated as of
August 14, 1997, among Paracelsus, Bank
America National Trust and Savings Association,
as agent, and other lenders named therein.
10.11 Third Amendment to Credit Agreement, dated as of
August 14, 1997, among Paracelsus, Bank
America National Trust and Savings Association,
as agent, and other lenders named therein.
11.1 Statement regarding computation of per share
earnings of Paracelsus.
29
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
30
SIGNATURE
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: November 12, 1997 By: /S/ JAMES G VANDEVENDER
----------------------
James G. VanDevender
Senior Executive Vice President,
Chief Financial Officer & Director