UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JUNE 30, 1998
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)
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On June 30, 1998, Paracelsus Healthcare Corporation (the "Company") completed
the sale of substantially all of the assets of Chico Community Hospital, Inc.,
which included a 123 licensed bed acute care hospital and a 60 licensed bed
rehabilitation hospital, both located in Chico, California, to N.T. Enloe
Memorial Hospital and Enloe Health System, both California nonprofit public
benefit corporations, for $25.0 million in cash plus working capital and the
termination of a facility operating lease and an associated letter of credit
obligation. The working capital component of the transaction is subject to a
post-closing settlement. The purchase price was arrived at through an arms
length negotiation. Net proceeds of the transaction were applied to reduce
amounts outstanding under the Company's Amended and Restated Reducing Revolving
Credit Facility (the "Credit Facility"), the agent bank of which is Paribas,
and to reduce off - balance sheet commercial paper outstanding under the
Company's receivable financing program. The Company expects to report a gain of
approximately $4.2 million (net of tax) on the transaction.
On July 1, 1998, the Company (through its subsidiary, Paracelsus Healthcare
Corporation of North Dakota, Inc.) completed the purchase of Dakota Medical
Foundation's 50% partnership interest in a general partnership operating as
Dakota Heartland Health System ("DHHS" or the "Partnership") for $64.5 million
dollars, thereby giving the Company 100% ownership of DHHS. The purchase price
was pursuant to a right of the Dakota Medical Foundation to require the Company
to purchase its 50% interest. Such right was negotiated on an arms length
basis and was part of the original partnership agreement entered into as of
December 31, 1994, which also established the formula for the purchase price.
The Company funded the acquisition from borrowings under its Credit Facility.
Prior to the purchase, the Company owned 50% of DHHS and accounted for its
investment under the equity method. DHHS owns and operates a 218 licensed bed
tertiary care hospital in Fargo, North Dakota.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The historical financial statements for DHHS for the years ended December 31,
1996 and 1997, were previously reported in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
(a) Financial Statements (attached following the signature page):
For the three months ended March 31, 1998 (Unaudited)
1. Consolidated Balance Sheet dated March 31, 1998
2. Consolidated Statements of Income for the three months ended
March 31, 1998 and 1997
3. Consolidated Statement of Partner's Equity for the three months
ended March 31, 1998
4. Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997
3
For the years ended December 31, 1995 and 1994
1. Report of PricewaterhouseCoopers, L.L.P., Independent
Accountants, Dated February 16, 1996.
2. Balance Sheet dated December 31, 1995 and 1994
3. Statement of Income for the year ended December 31, 1995
4. Statement of Partners' Equity for the years ended December 31,
1995 and 1994
5. Statement of Cash Flows for the year ended December 31, 1995.
6. Notes to Financial Statements.
(b) Unaudited Pro Forma financial information:
Unaudited Pro Forma Condensed Combining Statement of Operations
For the Three Months Ended March 31, 1998
Unaudited Pro Forma Condensed Combining Statement of Operations
For the Year Ended December 31, 1997
Unaudited Pro Forma Condensed Combining Balance Sheet -
March 31, 1998
Notes to Unaudited Pro Forma Condensed Combining Financial Statements
(c) Exhibits
10.67 The Second Amended and First Restated Asset Purchase Agreement for
Chico Community Hospital, dated December 15, 1997, and as amended dated June
12, 1998, among Paracelsus Healthcare Corporation, Chico Community Hospital,
Inc., N.T. Enloe Memorial Hospital, and Enloe Health System.
10.68 Asset Purchase Agreement For Chico Community Rehabilitation
Hospital, dated December 15, 1997, and as amended dated June 10, 1998, among
Paracelsus Healthcare Corporation, Chico Community Hospital, Inc., N.T. Enloe
Memorial Hospital, and Enloe Health System.
10.69 Agreement For Purchase and Sale of Partnership Interest, dated June
1, 1998, by and between Dakota Medical Foundation and Paracelsus Healthcare
Corporation of North Dakota, Inc.
23.1 Consent of PricewaterhouseCoopers L.L.P.
4
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: July 9, 1998 By: /S/ JAMES G. VANDEVENDER
----------------------------------
James G. VanDevender
Senior Executive Vice President,
Chief Financial Officer
& Director
5
PARACELSUS HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
The following table presents the Unaudited Pro Forma Condensed Combining
Statements of Operations for the three months ended March 31, 1998, and the
year ended December 31, 1997, to illustrate the effect of the sale of Chico
Community Hospital and Chico Community Rehabilitation Hospital on June 30,
1998, and the Company's acquisition of Dakota Medical Foundation's (the
"Foundation") 50% partnership interest in a general partnership operating as
Dakota Heartland Health System ("DHHS")on July 1, 1998. The Unaudited Pro
Forma Condensed Combining Statements of Operations assume the above
transactions occurred at the beginning of each period. The Pro Forma Condensed
Combining Balance Sheet assumes the above transactions occurred on March 31,
1998.
On June 30, 1998, Paracelsus Healthcare Corporation (the "Company")
completed the sale of substantially all of the assets of Chico Community
Hospital, Inc., which included a 123 licensed bed acute care hospital and
a 60 licensed bed rehabilitation hospital, both located in Chico,
California, (collectively "Chico") to N.T. Enloe Memorial Hospital and
Enloe Health System, both California nonprofit public benefit
corporations, for $25.0 million in cash plus working capital and the
termination of a facility operating lease and an associated letter of credit
obligation. The working capital component of the transaction is
subject to a post-closing settlement. The purchase price was arrived at
through an arms length negotiation. Net proceeds of the transaction
were applied to reduce amounts outstanding under the Company's Amended and
Restated Reducing Revolving Credit Facility (the "Credit Facility"), the
agent bank of which is Paribas, and to reduce off-balance sheet commercial
paper outstanding under the Company's receivable financing program.
On July 1, 1998, the Company (through its subsidiary, Paracelsus Healthcare
Corporation of North Dakota, Inc.) completed the purchase of the Foundation's
50% partnership interest in a general partnership operating as Dakota Heartland
Health System ("DHHS" or the "Partnership") for $64.5 million dollars, thereby
giving the Company 100% ownership of DHHS. The purchase price was pursuant to a
right of the Dakota Medical Foundation to require the Company to purchase its
50% interest. Such right was negotiated on an arms length basis and was part
of the original partnership agreement entered into as of December 31, 1994,
which also established the formula for the purchase price. The Company funded
the acquisition from borrowings under its Credit Facility. Prior to the
purchase, the Company owned 50% of DHHS and accounted for its investment under
the equity method. DHHS owns and operates a 218 licensed bed tertiary care
hospital in Fargo, North Dakota.
These Unaudited Pro Forma Condensed Financial Statements do not purport to
present the financial position or results of operations of the Company had the
above transactions occurred on the dates specified, nor are they necessarily
indicative of results of operations that may be expected in the future. The
Unaudited Pro Forma Condensed Combining Financial Statements are qualified in
their entirety by reference to, and should be read in conjunction with, the
Company's audited consolidated financial statements for the year ended December
31, 1997, included in the Company's Annual Report on Form 10-K, the Company's
unaudited condensed consolidated financial statements for the quarter ended
March 31, 1998, included in the Company's Quarterly Report on Form 10-Q, the
audited historical financial statements of DHHS for the years ended December
31, 1995 and 1994, and the unaudited historical financial statements for DHHS
6
for the quarter ended March 31, 1998, included elsewhere herein. The
historical financial statements for DHHS for the years ended December 31, 1996
and 1997, were previously reported in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
7
PARACELSUS HEALTHCARE CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINING
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(Dollars in thousands, except per share data)
Paracelsus Chico Pro Forma DHHS
Healthcare Pro Forma Chico Pro Forma Pro Forma
Corporation Adjustments Rf Disposition DHHS Adjustments Rf Paracelsus
----------- ----------- -- ----------- ------- ----------- -- ----------
(1) (1)
Net revenue $ 160,410 $(9,389) (2) $151,021 $ 26,473 $177,494
Costs and expenses:
Salaries and
benefits 65,430 (4,010) (2) 61,420 9,686 71,106
Other operating
expense 65,478 (3,420) (2) 62,058 9,265 71,323
Provision for
bad debts 9,692 (287) (2) 9,405 825 10,230
Interest 12,379 (621) (3) 11,758 $ 1,371 (3) 13,129
Depreciation &
amortization 8,188 (334) (2) 7,854 1,089 136 (5) 9,079
Equity in earnings
of DHHS (3,085) (3,085) 3,085 (6)
--------- ------- -------- --------- ------- --------
Total cost &
expenses 158,082 (8,672) 149,410 20,865 4,592 174,867
--------- ------- -------- --------- ------- --------
Income before minority
interest and
income taxes 2,328 (717) 1,611 5,608 (4,592) 2,627
Minority interest (61) (61) (61)
--------- ------- -------- --------- ------- --------
Income before
income taxes 2,267 (717) 1,550 5,608 (4,592) 2,566
Provision for
income taxes 642 (143) (4) 499 203 (4) 702
--------- ------- -------- --------- ------- --------
Net income $ 1,625 $ (574) $ 1,051 $ 5,608 $(4,795) $ 1,864
========= ======= ======== ========= ======= ========
Income per share
- - basic and
assuming
dilution $ 0.03 $ 0.02 $ 0.03
========= ======== ========
Weighted average
number of common
and common
equivalent
shares 57,539 57,539 57,539
========= ======== ========
See notes to unaudited pro forma condensed combining financial statements.
8
PARACELSUS HEALTHCARE CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINING
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(Dollars in thousands, except per share data)
Paracelsus Chico Pro Forma DHHS
Healthcare Pro Forma Chico Pro Forma Pro Forma
Corporation Adjustments Rf Disposition DHHS Adjustments Rf Paracelsus
----------- ----------- -- ----------- ------- ----------- -- ----------
(1) (1)
Net revenue $ 659,219 $(33,751) (2) $625,468 $ 99,927 $725,395
Costs and expenses:
Salaries and
benefits 271,300 (16,086) (2) 255,214 36,509 291,723
Other operating
expenses 269,653 (14,030) (2) 255,623 37,608 293,231
Provision for
bad debts 46,606 (1,390) (2) 45,216 3,407 48,623
Interest 47,372 (2,305) (3) 45,067 $ 5,482 (3) 50,549
Depreciation and
amortization 30,179 (1,270) (2) 28,909 4,595 304 (5) 33,808
Equity in earnings
of DHHS (9,794) (9,794) 9,794 (6)
Impairment charges 7,782 7,782 7,782
Unusual items (6,531) (6,531) (6,531)
--------- ------- -------- --------- ------- --------
Total cost
& expenses 656,567 (35,081) 621,486 82,119 15,580 719,185
--------- ------- -------- --------- ------- --------
Income before
minority interest
and income taxes 2,652 1,330 3,982 17,808 (15,580) 6,210
Minority interest (1,996) (1,996) (1,996)
--------- ------- -------- --------- ------- --------
Income before
income taxes 656 1,330 1,986 17,808 (15,580) 4,214
Provision for
income taxes 1,812 546 (4) 2,358 913 (4) 3,271
--------- ------- -------- --------- ------- --------
Net loss $ (1,156) $ 784 $ (372) $ 17,808 $(16,493) $ 943
========= ======= ======== ========= ======= ========
Loss per share
- basic and
assuming
dilution $ (.02) $ (.01) $ .02
========= ======== ========
Weighted average
number of common
and common
equivalent
shares 54,946 54,946 1,392 (7) 56,338
========= ======== ======= ========
See notes to unaudited pro forma condensed combining financial statements.
9
PARACELSUS HEALTHCARE CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINING
BALANCE SHEET
PRO FORMA CONDENSED COMBINING BALANCE SHEET
MARCH 31, 1998
(Dollars in thousands)
Paracelsus Chico Pro Forma DHHS
Healthcare Pro Forma Chico Pro Forma Pro Forma
Corporation Adjustments Rf Disposition DHHS Adjustments Rf Paracelsus
----------- ----------- -- ----------- ------- ----------- -- ----------
ASSETS: (1) (1)
Current assets:
Cash and cash
equivalents $ 14,117 $ (1,820) (8) $ 12,297 $ 4,359 $ 16,656
Restricted cash 6,636 6,636 6,636
Accounts
receivable, net 70,702 (3,197) (2) 67,505 17,744 85,249
Deferred income
taxes 25,906 (879) (9) 25,027 25,027
Other 43,892 (1,220) (2) 42,672 5,135 47,807
--------- ------- -------- --------- --------
Total current assets 161,253 (7,116) 154,137 27,238 181,375
--------- ------- -------- --------- --------
Property and (2)
equipment, net 306,402 (15,964) (9) 290,438 60,764 $ 7,443 (10) 358,645
Goodwill 113,463 113,463 29,770 (10) 143,233
Other assets 138,345 (2,005) (9) 136,340 3,350 (50,501)(10) 89,189
--------- ------- -------- --------- ------- --------
Total assets $719,463 $(25,085) $ 694,378 $ 91,352 $(13,288) $ 772,442
========= ======= ======== ========= ======= ========
See notes to unaudited pro forma condensed combining financial statements
10
PARACELSUS HEALTHCARE CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINING
BALANCE SHEET
PRO FORMA CONDENSED COMBINING BALANCE SHEET
MARCH 31, 1998
(Dollars in thousands)
Paracelsus Chico Pro Forma DHHS
Healthcare Pro Forma Chico Pro Forma Pro Forma
Corporation Adjustments Rf Disposition DHHS Adjustments Rf Paracelsus
----------- ----------- -- ----------- ------- ----------- -- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 45,034 $ (3,106) (2) $ 41,928 $ 5,970 $ 47,898
Accrued liabilities
and other 70,060 (1,547) (2) 68,513 7,116 75,629
Current maturities
of long-term debt 6,495 (6) (2) 6,489 6,489
--------- ------- -------- --------- --------
Total current
liabilities 121,589 (4,659) 116,930 13,086 130,016
--------- ------- -------- --------- --------
Long term debt 490,856 (24,576) (8) 466,280 $64,978 (3) 531,258
Other long-term
liabilities 64,565 64,565 64,565
Partners' equity 78,266 (78,266) (11)
Stockholders' equity
Common stock 224,475 224,475 224,475
Additional
paid-in capital 390 390 390
Unrealized gains on
marketable
securities 12 12 12
Accumulated
deficit (182,424) 4,150 (9) (178,274) (178,274)
--------- ------- -------- --------
Total stockholders'
equity 42,453 4,150 46,603 46,603
--------- ------- -------- --------
Total liabilities
& shareholders'
equity $ 719,463 $(25,085) $ 694,378 $ 91,352 $(13,288) $ 772,442
========= ======== ========= ======== ======= ========
See notes to unaudited pro forma condensed combining financial statements
11
PARACELSUS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
The following is a summary of the pro forma adjustments by line item.
Reference to
Notes to
Pro Forma
Financial
Statements Explanations
- ----------- -----------------------------------------------------------------------------
(1) The statements of operations and balance sheet for Paracelsus
Healthcare Corporation are summarized from its quarterly and annual reports
on Form 10-Q and Form 10-K, respectively. DHHS' financial statements as of
and for the three months ended March 31, 1998, are summarized from the
unaudited consolidated historical financial statements included elsewhere
herein. DHHS' statement of operations for the year ended December 31, 1997,
are summarized from the Company's annual report on Form 10-K.
(2) To remove Chico's historical results of operations, assets sold,
liabilities assumed by the buyer, and liabilities paid by the Company in
conjunction with the sale of Chico.
(3) To record interest expense on (i) the net pro forma increase in the Credit
Facility resulting from the Company's acquisition of the Foundation's 50%
interest in DHHS, less net proceeds from the sale of Chico, and (ii)
the pro forma decrease in amounts outstanding under the Company's commercial
paper program as a result of the sale of Chico accounts receivable, certain
accounts of which served as collateral under the program.
With respect to Chico, the Unaudited Pro Forma Condensed Combining
Statements of Operations assume application of $24.6 million in net proceeds
from the Chico sale to reduce the Credit Facility (see Note 8) and a $3.1
million reduction in amounts outstanding under the Company's commercial
paper program. The average interest rate in effect under the Credit Facility
was 9.0% for the quarter ended March 31, 1998, and 8.3% for the year ended
December 31, 1997. The average interest rate in effect under the commercial
paper program was 6.8% for the quarter ended March 31, 1998, and 6.9% for the
year ended December 31, 1997.
With respect to DHHS, the Unaudited Pro Forma Condensed Combining
Statements of Operations assume the Company increased the principal amount
outstanding under the Credit Facility by $65.0 million (See Note 10). The
interest rate currently in effect under the revolver portion of the Credit
Facility is 8.4%
(4) To record the pro forma provision for income taxes after taking into
effect the sale of Chico and the consolidation of DHHS pursuant to the
Company's acquisition of the Foundation's 50% interest in DHHS, thereby giving
the Company 100% ownership of DHHS. Previously, the Company accounted for its
investment in DHHS under the equity method. The incremental effective tax
rate on income from continuing operations was 20% and 41% for the quarter
ended March 31, 1998, and the year ended December 31, 1997, respectively.
12
PARACELSUS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
Reference to
Notes to
Pro Forma
Financial
Statements Explanations
- ----------- -----------------------------------------------------------------------------
(5) To adjust depreciation and amortization expense for the step up in basis
for the depreciable assets of DHHS and the increase in goodwill in
connection with the allocated purchase price (see Note 10). The acquired
assets are estimated to have an average remaining useful life of approximately
20 years based on management's assumptions that DHHS's assets consist of
65% building and 35% equipment with the useful life of such assets
determined in accordance with the Company's depreciation policy (35 years, 20
years and 10 years for buildings, improvements and equipment, respectively).
Cost in excess of fair market value of net assets acquired ("Goodwill") is
amortized on a straight line basis over a 20-year period. Based on this
preliminary allocation, depreciation and amortization expense increased
approximately $136,000 and $304,000 on a pro forma basis for the quarter
ended March 31, 1998, and the year ended December 31, 1997, respectively.
(6) To remove equity in the earnings of DHHS previously recorded by the Company.
(7) To adjust the common and common equivalent shares to include the effect of
dilutive securities on pro forma net income for the year ended
December 31, 1997.
(8) To reflect the pro forma sources and uses of cash in connection with the sale
of Chico (in thousands).
SOURCES:
Proceeds from the sale of:
Property and equipment $25,000
Pro forma net working capital(a) 3,904
-------
Total sources 28,904
-------
USES:
Estimated transaction costs 2,002
Repayment of Credit Facility (b) 24,576
Repayment of amounts outstanding
under commercial paper program(b) 3,115
Accrued employee benefits (a) 1,031
-------
Total uses 30,724
-------
Net use of funds $(1,820)
=======
(a) Based on working capital balances as of March 31, 1998. Actual proceeds to
be based on balances as of June 30, 1998, subject to adjustment and
final settlement by the parties.
(b) Based on actual amounts paid at or prior to the closing of the Chico sale.
13
PARACELSUS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
Reference to
Notes to
Pro Forma
Financial
Statements Explanations
- ----------- -----------------------------------------------------------------------------
(9) To record the pro forma gain on the sale of property and equipment of
Chico. No gain or loss is anticipated on the sale of net working capital.
(in thousands)
Proceeds from the sale of property and equipment $25,000
Estimated transaction costs (2,002)
-------
Net proceeds 22,998
Basis of property and equipment sold (15,964)
-------
Pro forma gain before income taxes 7,034
Provision for income taxes (41%) 2,884
-------
Pro forma gain on sale $ 4,150
=======
ALLOCATION OF TAX LIABILITY:
Current $ 879
Long term 2,005
-------
$ 2,884
=======
(10) To record the acquisition of DHHS using the purchase method of
accounting, including the adjustment of DHHS's balance sheet to reflect
the estimated fair market value of property and equipment acquired in excess
of the DHHS' historical cost. The purchase price allocation reflected in the
Pro Forma Condensed Combining Balance Sheet is based upon the best
information currently available without a final independent appraisal of the
net assets of DHHS. For the purpose of allocating net acquisition costs among
the various assets acquired, the Company has tentatively allocated 20% of
the net excess acquisition cost over DHHS' carrying value of the acquired
assets to property and equipment and 80% to Goodwill. It is the Company's
intention to more fully evaluate the net assets acquired and, as a result, the
allocation of acquisition cost may change.
14
PARACELSUS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
Reference to
Notes to
Pro Forma
Financial
Statements Explanations
- ----------- -----------------------------------------------------------------------------
(10) Note 10 (continued)
The Company does not expect the final allocation of acquisition cost to be
materially different from that assumed in the Pro Forma Condensed Combining
Balance Sheet. The following table summarizes the calculation of the
preliminary purchase price allocation(in thousands):
Total cash consideration (a) $ 64,528
Estimated transaction costs (a) 450
Company's prior investment in DHHS (b) 49,915
--------
Total cost to be allocated 114,893
Less net working capital acquired (14,152)
Less DHHS' investment in equity investees (3,350)
Plus intangible assets not allocated value (b) 586
Less DHHS' historical property and equipment value, net (60,764)
--------
Purchase price in excess of DHHS' cost 37,213
Purchase price allocated to property and equipment(c) 7,443
--------
Purchase price allocated to Goodwill $ 29,770
========
(a) Pro forma increase in credit facility, or $64,978.
(b) Pro forma reduction in other long term assets.
(c) Calculated as follows:
Total purchase price allocated to property
and equipment $ 75,649
Less DHHS' historical property and equipment
value, net (60,764)
--------
Step up in basis of property and equipment 14,885
Ownership percentage acquired 50%
--------
Purchase price allocated to property and
equipment in excess of the DHHS' cost $ 7,443
========
(11) To remove the Foundation's partnership equity.
15
DAKOTA HEARTLAND HEALTH SYSTEM
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
16
DAKOTA HEARTLAND HEALTH SYSTEM
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
CONTENTS
Consolidated Balance Sheet 17
Consolidated Statements of Income 18
Consolidated Statements of Partners' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21
17
Dakota Heartland Health Center
Consolidated Balance Sheets
MARCH 31, DECEMBER 31,
1998 1997
------------------------------------
(Unaudited) (Note 1)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,358,737 $ 7,276,675
Patient receivables, net of allowance for
uncollectable accounts of $1,814,661 and
$1,278,500 at March 31, 1998, and
December 31, 1997, respectively 17,743,628 14,374,894
Supplies inventory 2,435,058 2,197,815
Prepaid expenses and other current assets 2,700,343 1,833,996
------------ ------------
Total current assets 27,237,766 25,683,380
Property and equipment, net 60,764,444 60,663,177
Other assets:
Investment in and advances to affiliates 2,496,668 2,316,137
Organizational costs, less accumulated
amortization of $489,075 and $435,300 in
March 31, 1998 and December 31, 1997,
respectively 586,411 640,186
Other 266,990 234,915
------------ ------------
Total assets $ 91,352,279 $ 89,537,795
============ ============
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable $ 5,969,733 $ 5,017,075
Estimated third-party payor settlements 2,846,413 2,905,822
Accrued salaries and benefits 2,555,344 2,999,265
Other current liabilities 1,714,444 2,923,616
------------ ------------
Total current liabilities 13,085,934 13,845,778
Partners' equity 78,266,345 75,692,017
------------ ------------
Total liabilities and partners equity $ 91,352,279 $ 89,537,795
============ ============
See accompanying notes.
18
Dakota Heartland Health System
Consolidated Statements of Income
(Unaudited)
THREE MONTHS ENDED MARCH 31,
1998 1997
-----------------------------------------
Revenue:
Net patient service revenue $ 25,455,748 $ 23,882,534
Other revenue 1,016,757 800,176
------------- -------------
Net revenue 26,472,505 24,682,710
Expenses:
Salaries and benefits 9,686,615 8,910,903
Professional fees 2,534,854 3,287,530
Supplies 4,747,666 3,868,959
Depreciation and amortization 1,088,686 1,128,075
Provision for uncollectable accounts 824,836 858,328
Repairs and maintenance 409,007 227,553
Utilities 328,051 333,016
Rent and leases 296,702 366,322
Property taxes 271,198 285,914
Other 676,575 763,601
------------- -------------
Total expenses 20,864,190 20,030,201
------------- -------------
Net income $ 5,608,315 $ 4,652,509
============= =============
See accompanying notes.
19
Dakota Heartland Health System
Consolidated Statements of Partners' Equity
(Unaudited)
PARACELSUS DAKOTA
HEALTHCARE MEDICAL
CORPORATION FOUNDATION TOTAL
------------ ------------ ------------
Partners' equity at December 31, 1997 $ 48,621,776 $ 27,070,241 $ 75,692,017
Net income 3,084,573 2,523,742 5,608,315
Partners' distributions (1,668,693) (1,365,294) (3,033,987)
------------ ------------ ------------
Partners' equity at March 31, 1998 $ 50,037,656 $ 28,228,689 $ 78,266,345
============ ============ ============
See accompanying notes.
20
Dakota Heartland Health Center
Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED MARCH 31,
1998 1997
-------------------------------
OPERATING ACTIVITIES
Net income $ 5,608,315 $ 4,652,509
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,088,686 1,128,075
Provision for uncollectable accounts 824,836 858,328
Changes in operating assets and liabilities:
Patient receivables, net (4,193,570) 415,147
Supplies inventory (237,243) 3,868
Prepaid expenses and other current assets (866,347) (811,396)
Other assets (32,075) (79,649)
Accounts payable 952,658 (1,788,813)
Estimated third-party payor settlements (59,409) 232,429
Accrued salaries and benefits (443,921) (1,015,685)
Other current liabilities (1,209,172) (415,048)
----------- ------------
Net cash provided by operating activities 1,432,758 3,179,765
INVESTING ACTIVITIES
Purchase of property and equipment (1,136,178) (2,548,085)
Increase in investments and advances to affiliates (180,531) (144,631)
----------- ------------
Net cash used in investing activities (1,316,709) (2,692,716)
FINANCING ACTIVITIES
Partners' distributions (3,033,987) (3,713,142)
----------- ------------
Decrease in cash and cash equivalents (2,917,938) (3,226,093)
Cash and cash equivalents at beginning of year 7,276,675 6,718,589
----------- ------------
Cash and cash equivalents at end of year $ 4,358,737 $ 3,492,496
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for taxes $ 35,000 $ 150,301
See accompanying notes.
21
Dakota Heartland Health Center
Notes to Consolidated Financial Statements
March 31, 1998
1. ORGANIZATION AND BASIS OF PRESENTATION
On December 21, 1994, Dakota Heartland Health System (the "Partnership"), a
general partnership, was formed by a wholly-owned subsidiary of Champion
Healthcare Corporation ("Champion") that owned Heartland Medical Center, a 140-
bed general acute facility in Fargo, North Dakota, and Dakota Medical
Foundation (the "Foundation"), a not-for-profit corporation that owned Dakota
Hospital, a 199-bed general acute care hospital also in Fargo, North Dakota.
Champion and the Foundation contributed certain assets and liabilities,
excluding long-term debt except capital leases, of their respective hospitals,
and Champion contributed an additional $20 million in cash, each in exchange
for 50% ownership in the Partnership. The Partnership then made a $20 million
cash distribution to the Foundation. On December 21, 1994, Champion entered
into an operating agreement with the Partnership to manage the combined
operations of the two hospitals. Champion will receive 55% of the net income
and distributable cash flow ("DCF") of the Partnership until such time as it
has recovered, on a cumulative basis, an additional $10 million of DCF in the
form of an "excess" distribution. In 1996, Paracelsus Healthcare Corporation
("Paracelsus") became the sole owner of Champion.
BASIS OF PRESENTATION - The accompanying unaudited condensed consolidated
financial statements of the Partnership 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. The balance
sheet at December 31, 1997, 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 Partnership'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, 1998, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. These financial statements should be read in conjunction
with the Partnership's audited consolidated financial statements and notes
thereto for the year ended December 31, 1997, included in Paracelsus Healthcare
Corporation's 1997 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.
INCOME TAXES - The Partnership's income is attributed to its partners for
income tax purposes. Accordingly, it has not accrued any liability for income
taxes. An entity owned by the Partnership has paid income taxes of $35,000 and
$150,301 for the quarters ended March 31, 1998 and 1997, respectively.
22
Dakota Heartland Health Center
Notes to Consolidated Financial Statements
March 31, 1998
2. SUBSEQUENT EVENT
On August 20, 1997, the Foundation exercised its right to require Paracelsus to
purchase the Foundation's 50% ownership interest in the Partnership. On July 1,
1998, Paracelsus (through its subsidiary Paracelsus Healthcare Corporation of
North Dakota, Inc.) completed the purchase of the Foundation's 50% ownership in
the Partnership for a negotiated purchase price of $64.5 million, inclusive of
working capital, thereby giving Paracelsus 100% ownership of Dakota Heartland
Health System. Paracelsus has sole power and authority to wind up the
Partnership's business after July 1, 1998, and the Partnership shall terminate
as of the date Paracelsus completes the wind up of the Partnership's business.
23
DAKOTA HEARTLAND HEALTH SYSTEM
REPORT ON AUDIT OF FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
24
C O N T E N T S
PAGE
Report of Independent Accountants 25
Financial Statements:
Balance Sheet 26
Statement of Income 27
Statement of Partners' Equity 28
Statement of Cash Flows 29
Notes to Financial Statements 30
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Governing Board of
Dakota Heartland Health System:
We have audited the accompanying balance sheet of Dakota Heartland Health
System (the Partnership) as of December 31, 1995 and 1994, and the related
statements of income, partners' equity and cash flows for the year ended
December 31, 1995. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dakota Heartland Health
System as of December 31, 1995 and 1994, and the results of its operations,
partners' equity and cash flows for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
/S/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 16, 1996
3
26
Dakota Heartland Health System
BALANCE SHEET
DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994
------------ ------------
Current assets:
Cash and cash equivalents $ 19,062,865 $ 397,300
Patient receivables, net of allowance for
uncollectible accounts of $3,396,655 and
$3,439,911 in 1995 and 1994, respectively 17,339,282 21,530,288
Due from partners 4,000,000
Supplies inventory 1,602,786 1,724,706
Prepaid expenses and other current assets 1,003,019 568,052
------------ ------------
Total current assets 39,007,952 28,220,346
Property and equipment, at cost 52,940,547 42,333,642
Other assets:
Investment in and advances to affiliates 1,835,223 1,964,073
Organizational costs, less accumulated
amortization of $45,291 1,057,215 --
Other 20,943 --
------------ ------------
Total assets $ 94,861,880 $ 72,518,061
============ ============
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable $ 12,380,016 $ 3,788,183
Estimated third-party payor settlements 2,008,176 3,426,079
Accrued salaries, wages and employee benefits 3,548,505 4,754,690
Other current liabilities 2,043,794 242,563
------------ ------------
Total current liabilities 19,980,491 12,211,515
Other liabilities -- 91,404
Minority interest 56,877 38,478
Partners' equity 74,824,512 60,176,664
------------ ------------
Total liabilities and partners' equity $ 94,861,880 $ 72,518,061
============ ============
The accompanying notes are an integral part of the financial statements.
27
DAKOTA HEARTLAND HEALTH SYSTEM
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
Net patient service revenue $ 99,098,598
Other revenue 6,912,796
-------------
Net revenue 106,011,394
-------------
Expenses:
Salaries and benefits 38,796,941
Professional fees 20,446,296
Supplies 16,299,957
Depreciation and amortization 2,405,978
Repairs and maintenance 1,079,489
Utilities 1,224,450
Insurance 789,648
Rents and leases 2,003,288
Provision for uncollectible accounts 3,797,944
Property taxes 910,264
Other 2,109,291
-------------
Total expenses 89,863,546
-------------
Net income $ 16,147,848
=============
The accompanying notes are an integral part of the financial statements.
28
DAKOTA HEARTLAND HEALTH SYSTEM
STATEMENT OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
CHAMPION DAKOTA TOTAL EQUITY
------------ ------------ ------------
Net assets contributed $ 16,511,768 $ 39,664,896 $ 56,176,664
Cash contribution 20,000,000 20,000,000
Working capital contributions due from partners 2,000,000 2,000,000 4,000,000
Equalization of capital accounts 1,576,564 (1,576,564) - -
------------ ------------ ------------
Initial capital 40,088,332 40,088,332 80,176,664
Special distribution - - (20,000,000) (20,000,000)
------------ ------------ ------------
Partners' equity, December 31, 1994 40,088,332 20,088,332 60,176,664
Net income 8,881,316 7,266,532 16,147,848
Partners' distribution (825,000) (675,000) (1,500,000)
------------ ------------ ------------
Partners' equity, December 31, 1995 $ 48,144,648 $ 26,679,864 $ 74,824,512
============ ============ ============
The accompanying notes are an integral part of the financial statements.
29
DAKOTA HEARTLAND HEALTH SYSTEM
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
Cash flows from operating activities:
Net income $ 16,147,848
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 2,405,978
Gain on sale of property, plant and equipment (1,388)
Provision for uncollectible accounts 3,797,944
Minority interest 18,399
Changes in operating assets and liabilities:
Patient receivables, net 393,062
Supplies inventory 121,920
Prepaid expenses and other current assets (434,967)
Other assets (20,943)
Accounts payable 8,591,833
Estimated third-party payor settlements (1,417,903)
Accrued expenses (1,206,185)
Other liabilities 1,709,827
-------------
Net cash provided by operating activities 30,105,425
-------------
Cash flows from investing activities:
Purchase of property and equipment (12,967,592)
Payment for organizational costs (1,102,506)
Contribution from partners 4,000,000
Other 130,238
-------------
Net cash used in investing activities (9,939,860)
-------------
Cash flows from financing activities:
Partners' draws (1,500,000)
-------------
Net cash used in financing activities (1,500,000)
-------------
Increase in cash and cash equivalents 18,665,565
-------------
Cash and cash equivalents, beginning of year 397,300
-------------
Cash and cash equivalents, end of year $ 19,062,865
=============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 15,236
Cash paid for taxes 447,207
The accompanying notes are an integral part of the financial statements.
30
DAKOTA HEARTLAND HEALTH SYSTEM
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND ACCOUNTING POLICIES:
On December 21, 1994, Dakota Heartland Health System, a general partnership
(the Partnership), was formed by a wholly owned subsidiary of Champion
Healthcare Corporation (Champion) that owned Heartland Medical Center, a
140-bed general acute care facility in Fargo, North Dakota, and Dakota
Hospital (Dakota), a not-for-profit corporation that owned Dakota Hospital,
a 199-bed general acute care hospital also in Fargo, North Dakota.
Champion and Dakota contributed certain assets and liabilities, excluding
long-term debt except capital leases, of their respective hospitals, and
Champion contributed an additional $20,000,000 in cash, each in exchange
for 50% ownership in the Partnership. The Partnership then made a
$20,000,000 cash distribution to Dakota. Also on December 21, 1994,
Champion entered into an operating agreement with the Partnership to manage
the combined operations of the two hospitals. Champion will receive 55% of
the net income and distributable cash flow (DCF) of the Partnership until
such time as it has recovered, on a cumulative basis, an additional
$10,000,000 of DCF in the form of an "excess" distribution (see also
Note 4).
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of net income during the
reporting period. Actual results could differ from those estimates. The
most significant areas which require the use of management's estimates
relate to the determination of the estimated third-party payor settlements,
the allowance for uncollectible accounts receivable and obsolete inventory.
CASH AND CASH EQUIVALENTS:
The Partnership considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PATIENT RECEIVABLES:
Payments for services rendered to patients covered by third-party payor
programs are generally less than billed charges. Provisions for
contractual adjustments are made to reduce the charges to these patients to
estimated receipts based upon the third-party payor's principles of
payment/ reimbursement (either prospectively determined or retrospectively
determined costs).
SUPPLIES INVENTORY:
Supplies inventory is stated at the lower of cost or market, with cost
determined substantially on the first-in, first-out basis.
31
DAKOTA HEARTLAND HEALTH SYSTEM
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND ACCOUNTING POLICIES, CONTINUED:
PROPERTY AND EQUIPMENT:
Property and equipment acquisitions are recorded at cost at the date of
receipt. Depreciation is provided using the straight-line method over the
estimated useful lives of the respective assets, ranging from 4 to 25
years. Maintenance and repairs are charged to expense as incurred while
renewals and betterments are capitalized. The costs and related
accumulated depreciation on asset disposals are removed from the accounts
and any gain or loss is included in income.
INCOME TAXES:
The Partnership's income is attributed to its partners for income tax
purposes. Accordingly, it has not accrued any liability for income taxes.
Entities owned by the Partnership have paid income taxes during 1995
totaling $447,207.
RECLASSIFICATIONS:
Certain reclassifications have been made in the 1994 financial statements
to conform to the 1995 presentation.
2. NET PATIENT SERVICE REVENUE:
The Company's facilities have entered into agreements with third-party
payors, including US government programs and managed care health plans,
under which the Company is paid based upon established charges, cost of
services provided, predetermined rates by diagnosis, fixed per diem rates
or discounts or discounts from established charges.
Net patient service revenues are recorded at estimated amounts due from
patients and third-party payors for health care services provided,
including anticipated settlements under reimbursement agreements with
third-party payors. Payments for services rendered to patients covered by
the Medicare and Medicaid programs are generally less than billed charges.
Provisions for contractual adjustments are made to reduce charges to these
patients to estimated receipts based upon each program's principle of
payment/reimbursement (either prospectively determined or retrospectively
determined costs). Final settlements under these programs are subject to
administrative review and audit. The Company records adjustments, if any,
resulting from such review or audits during the period in which these
adjustments become known. Allowance for contractual adjustments under
these programs are netted in accounts receivable in the accompanying
Balance Sheet. It is management's opinion that adequate allowance has been
provided for possible adjustments that might result from final settlements
under these programs.
32
DAKOTA HEARTLAND HEALTH SYSTEM
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. PROPERTY AND EQUIPMENT:
A summary of property and equipment as of December 31, 1995 and 1994 is as
follows:
1995 1994
-------------- --------------
Land and land improvements $ 2,360,412 $ 2,387,095
Buildings and improvements 21,624,868 20,087,268
Fixed equipment 4,899,749 4,724,125
Major movable equipment 13,863,470 12,516,205
Minor movable equipment 1,003,318 1,101,633
Construction in progress 10,638,351 606,250
Property held for expansion 911,066 911,066
-------------- --------------
55,301,234 42,333,642
Less accumulated depreciation 2,360,687 --
-------------- --------------
$ 52,940,547 $ 42,333,642
============== ==============
4. INVESTMENTS IN AND ADVANCES TO AFFILIATES:
The Partnership owns portions of several entities. The investments in these
entities are recorded on the equity method. The investments in and advances
to affiliated companies on the accompanying balance sheet consisted of the
following:
Investments and Advances
Ownership ---------------------------------
Percentage 1995 1994
-------------- --------------
Orthopro, Inc. 50% $ 203,155
Country Health, Inc. 49% $ 805,632 665,629
Health Care Incinerators, Inc.
/Thorn Linen 33% 210,701 193,235
Dakota Outpatient Center 50% 356,016 311,604
Dakota Day Surgery 50% 462,874 590,450
---------- -----------
$1,835,223 $ 1,964,073
========== ===========
During 1995, the Partnership sold its 50% interest in Orthopro, Inc.
33
DAKOTA HEARTLAND HEALTH SYSTEM
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENTS IN AND ADVANCES TO AFFILIATES, CONTINUED:
The Partnership has a 50% interest in Dakota Outpatient Center (DOC), a
general partnership which owns and operates a medical and office building.
As a general partner, the Partnership is contingently liable on the
outstanding debt of DOC. As of December 31, 1995, the balance of the note
was $2,416,564.
DOC also leases its real property to Dakota Hospital, Dakota Day Surgery
(DDS) and Dakota Clinic, Ltd. (an unrelated corporation), under
noncancelable 10-year net operating leases. Future minimum annual lease
payments to be paid by the Hospital and DDS are $1,414,500 through 1998.
The Partnership also has a 50% interest in DDS, a general partnership which
provides outpatient surgical services. As a general partner, the
Partnership is contingently liable to cover any operating losses of DDS.
DDS had operating income in 1995.
5. CREDIT RISK
The Partnership's revenues consist primarily of amounts due from the
Medicare and Medicaid programs in addition to amounts due from insurance
carriers and individuals. The Partnership determines the adequacy of a
patient's third-party payor coverage upon admission. However, it generally
does not require any collateral prior to performing services. The
Partnership maintains reserves for contractual allowances and potential
credit losses based on past experience and management's current
expectations. Medicare and Medicaid gross revenue accounted for
approximately 46% and 9% of the Partnership's total gross revenue.
..