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): SEPTEMBER 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
Effective September 30, 1998, Paracelsus Healthcare Corporation ("the
Company")completed the sale of substantially all of the assets of the eight
hospitals (one of which had been previously closed) located in metropolitan Los
Angeles (collectively, "LA Metro") to Alta Healthcare System LLC, a California
limited liability company and certain subsidiaries thereof. The purchase price
of approximately $33.7 million, which included the purchase of net working
capital, was arrived at through an arms length negotiation and was paid by a
combination of $16.5 million in cash, the assumption of approximately $3.2
million in debt, and issuance by the purchaser of $9.9 million of secured
promissory notes and an additional secured second lien subordinated note in the
principal amount of $3.8 million. This subordinated note may be adjusted for
any increase or decrease of net working capital and certain other adjustments.
The transaction resulted in a $4.2 million reduction in amounts outstanding
under the Company's Amended and Restated Reducing Revolving Credit Facility
(the "Credit Facility"), a $9.3 million reduction in the Company's off balance
sheet receivable financing program, and the assumption by the purchaser of
approximately $3.2 million in other secured debt. The Company does not expect
to record a significant gain or loss on the sale. The facilities sold are as
follows:
Licensed
Facility/Location/Type Beds
- -------------------------------------------------------------------------------
Bellwood General Hospital, Bellflower, California (Medical/Surgical) 85
Orange County Hospital of Buena Park, Buena Park, California (Psychiatric) 53
Hollywood Community Hospital of Hollywood, Los Angeles, California (Medical
Surgical) 100
Los Angeles Community Hospital, Los Angeles, California (Medical/Surgical) 130
Los Angeles Community Hospital, Norwalk, California (Medical/Surgical) 50
Monrovia Community Hospital, Monrovia, California (Medical/Surgical) 49
Hollywood Community Hospital of Van Nuys, Van Nuys, California (Psychiatric)60
Orange County Hospital of Orange, Orange, California (Psychiatric) previously
closed
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
In addition to reflecting the sale of LA Metro, the pro forma financial
information required by Item 7b also reflects the Company's 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. Accordingly, the
financial statements of DHHS as of and for the six months ended June 30, 1998,
have been provided herein.
3
(a) Financial Statements (attached following the signature page):
For the six months ended June 30, 1998 (Unaudited) for Dakota Heartland
Health System
1. Consolidated Balance Sheets as of June 30, 1998 and December 31,
1997
2. Consolidated Statements of Income for the three months and six
months ended June 30, 1998 and 1997
3. Consolidated Statement of Partners' Equity for the six months
ended June 30, 1998
4. Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1997
(b) Unaudited Pro Forma Financial Information:
Unaudited Pro Forma Condensed Combining Statement of Operations
For the Six Months Ended June 30, 1998
Unaudited Pro Forma Condensed Combining Statement of Operations
For the Year Ended December 31, 1997
Unaudited Pro Forma Condensed Combining Balance Sheet - June 30, 1998
Notes to Unaudited Pro Forma Condensed Combining Financial Statements
(c) Exhibits
10.70 Asset Purchase Agreement, dated September 30, 1998, by and among
Alta Healthcare System LLC, Alta Bellwood Hospitals, Inc., Alta Hollywood
Hospitals, Inc., Alta Los Angeles Hospitals, Inc., Alta Monrovia Hospital,
Inc., Alta Orange Hospital, Inc., Alta Healthcare Building Corporation and
Paracelsus Healthcare Corporation, Paracelsus Real Estate Corporation,
Paracelsus Medical Building Corporation, Lincoln Community Medical Corporation,
Bellwood Medical Corporation, Hollywood Community Hospital Medical Center,
Inc., Paracelsus Los Angeles Community Hospital, Inc., Monrovia Hospital
Corporation.
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: October 15, 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 six months ended June 30, 1998, and the year
ended December 31, 1997, to illustrate the effect of the sale of eight of the
Company's hospitals located in metropolitan Los Angeles (collectively, "LA
Metro") on September 30, 1998, 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 on January 1,
1997. The Pro Forma Condensed Combining Balance Sheet assumes the above
transactions occurred on June 30, 1998.
Effective September 30, 1998, the Company completed the sale of substantially
all of the assets of its LA Metro hospitals (one of which had been previously
closed) to Alta Healthcare System LLC, a California limited liability company,
and certain subsidiaries thereof. The purchase price of approximately $33.7
million, which included the purchase of net working capital, was arrived at
through an arms length negotiation and was paid by a combination of $16.5
million in cash, the assumption of approximately $3.2 million in debt, and
issuance by the purchaser of approximately $9.9 million of secured promissory
notes and an additional secured second lien subordinated note in the principal
amount of approximately $3.8 million. This subordinated note may be adjusted
for any increase or decrease of net working capital and certain other
adjustments. The transaction resulted in a $4.2 million reduction in amounts
outstanding under the Company's Amended and Restated Reducing Revolving Credit
Facility (the "Credit Facility"), a $9.3 million reduction in the Company's off
balance sheet receivable financing program, and the assumption by the purchaser
of approximately $3.2 million in other secured debt. The Company does not
expect to record a significant gain or loss on the sale.
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 is a 218 licensed bed tertiary care hospital in
Fargo, North Dakota.
On June 30, 1998, 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. The transaction resulted in a $24.6 million reduction in amounts
outstanding under the Credit Facility, and a $3.1 million reduction in the
Company's off balance sheet receivable financing program.
6
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
June 30, 1998, included in the Company's Quarterly Report on Form 10-Q, and the
unaudited historical financial statements for DHHS for the six months ended
June 30, 1998, included elsewhere herein. The historical financial statements
for DHHS for the year ended December 31, 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 SIX MONTHS ENDED JUNE 30, 1998
(Dollars in thousands, except per share data)
Paracelsus Chico Pro Forma DHHS Pro Forma
Healthcare Pro Forma Chico Pro Forma Chico/DHHS/
Corporation Adjustments Rf Disposition DHHS Adjustments Rf Paracelsus
----------- ----------- -- ----------- ------- ----------- -- ----------
(1) (1)
Net revenue $ 311,558 $(18,850) (2) $292,708 $ 52,017 $344,725
Costs and expenses:
Salaries and
benefits 127,893 (8,217) (2) 119,676 19,998 139,674
Other operating
expense 128,161 (6,718) (2) 121,443 17,821 139,264
Provision for
bad debts 18,431 (355) (2) 18,076 1,449 19,525
Interest 25,674 (1,257) (3) 24,417 $ 2,983 (3) 27,400
Depreciation &
amortization 15,844 (758) (2) 15,086 2,282 122 (5) 17,490
Equity in earnings
of DHHS (5,061) (5,061) 5,061 (6)
Unusual items (1,072) (1,072) 1,050 (22)
Gain on sale of
facilities (7,100) 7,100 (2)
--------- ------- -------- --------- ------- -------
Total costs &
expenses 302,770 (10,205) 292,565 42,600 8,166 343,331
--------- ------- -------- --------- ------- -------
Income before minority
interest and
income taxes 8,788 (8,645) 143 9,417 (8,166) 1,394
Minority interest 855 855 855
--------- ------- -------- --------- ------- -------
Income before
income taxes 9,643 (8,645) 998 9,417 (8,166) 2,249
Provision for
income taxes 2,320 (2,015) (4) 305 215 307 (4) 827
--------- ------- -------- --------- ------- -------
Net income $ 7,323 $(6,630) $ 693 $ 9,202 $(8,473) $ 1,422
========== ======= ======== ========= ======= ========
Income per share
- - basic and
assuming
dilution $ 0.13 $ 0.01 $ 0.02
========= ======== ========
Weighted average
number of common
and common
equivalent
shares 57,544 57,544 57,544
======== ======= ========
See notes to Unaudited Pro Forma Condensed Combining Financial Statements.
8
PARACELSUS HEALTHCARE CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINING
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(Dollars in thousands, except per share data)
Pro Forma LA Metro
Chico/DHHS/ Pro Forma Pro Forma
Paracelsus Adjustments Rf Paracelsus
----------- ----------- -- -----------
Net revenue $ 344,725 $(38,855) (7)(8) $305,870
Costs and expenses:
Salaries and
benefits 139,674 (17,266) (7) 122,408
Other operating
expense 139,264 (21,408) (7) 117,856
Provision for
bad debts 19,525 (1,178) (7) 18,347
Interest 27,400 (648) (3)(7) 26,752
Depreciation &
amortization 17,490 17,490
Unusual items (22) (22)
--------- ------- --------
Total costs &
expenses 343,331 (40,500) 302,831
--------- ------- --------
Income before minority
interest and
income taxes 1,394 1,645 3,039
Minority interest 855 (937) (7) (82)
--------- ------- --------
Income before
income taxes 2,249 708 2,957
Provision for
income taxes 827 142 (4) 969
--------- ------- --------
Net income $ 1,422 $ 566 $ 1,988
========= ======= ========
Income per share
- - basic and
assuming
dilution $ 0.02 $ 0.03
========= ========
Weighted average
number of common
and common
equivalent
shares 57,544 57,544
========= =======
See notes to Unaudited Pro Forma Condensed Combining Financial Statements.
9
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 Pro Forma
Healthcare Pro Forma Chico Pro Forma Chico/DHHS/
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 37,028 292,651
Provision for
bad debts 46,606 (1,390) (2) 45,216 3,407 48,623
Interest 47,372 (2,305) (3) 45,067 $ 5,965 (3) 51,032
Depreciation and
amortization 30,179 (1,270) (2) 28,909 4,595 203 (5) 33,707
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 costs
& expenses 656,567 (35,081) 621,486 81,539 15,962 718,987
--------- ------- -------- --------- ------- --------
Income before
minority interest
and income taxes 2,652 1,330 3,982 18,388 (15,962) 6,408
Minority interest (1,996) (1,996) (1,996)
--------- ------- -------- --------- ------- --------
Income before
income taxes 656 1,330 1,986 18,388 (15,962) 4,412
Provision for
income taxes 1,812 546 (4) 2,358 580 414 (4) 3,352
-------- ------- -------- --------- ------- --------
Net (loss) income $ (1,156) 784 $ (372) $ 17,808 $(16,376) $ 1,060
========= ======= ======== ========= ======= ========
(Loss) income per
share- basic
and assuming
dilution $ (.02) $ (.01) $ .02
========= ======== ========
Weighted average
number of common
and common
equivalent
shares 54,946 54,946 1,392 (9) 56,338
========= ======== ======= ========
See notes to Unaudited Pro Forma Condensed Combining Financial Statements.
10
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)
Pro Forma LA Metro
Chico/DHHS/ Pro Forma Pro Forma
Paracelsus Adjustments Rf Paracelsus
----------- ----------- -- -----------
Net revenue $ 725,395 $(94,474) (7)(8) $630,921
Costs and expenses:
Salaries and
benefits 291,723 (37,168) (7) 254,555
Other operating
expense 292,651 (49,124) (7) 243,527
Provision for
bad debts 48,623 (2,050) (7) 46,573
Interest 51,032 (1,283) (3) 49,749
Depreciation &
amortization 33,707 (90) (7) 33,617
Impairment charges 7,782 (7,782) (7)
Unusual items (6,531) (6,531)
--------- ------- --------
Total costs &
expenses 718,987 (97,497) 621,490
--------- ------- --------
Income before minority
interest and
income taxes 6,408 3,023 9,431
Minority interest (1,996) 1,795 (7) (201)
--------- ------- --------
Income before
income taxes 4,412 4,818 9,230
Provision for
income taxes 3,352 1,976 (4) 5,328
--------- ------- --------
Net income $ 1,060 $ 2,842 $ 3,902
========= ======= ========
Income per share
- - basic and
assuming
dilution $ 0.02 $ 0.07
========= ========
Weighted average
number of common
and common
equivalent
shares 56,338 56,338
========= =======
See notes to Unaudited Pro Forma Condensed Combining Financial Statements.
11
PARACELSUS HEALTHCARE CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINING
BALANCE SHEET
JUNE 30, 1998
(Dollars in thousands)
Paracelsus DHHS Pro Forma LA Metro
Healthcare Pro Forma DHHS Pro Forma Pro Forma
Corporation DHHS Adjustments Rf Acquisition Adjustments Rf Paracelsus
----------- ----------- ----------- --- ----------- ----------- -- ----------
ASSETS: (1) (1)
Current assets:
Cash and cash
equivalents $ 10,291 $ 5,250 $ 15,541 $ (250) (12)$ 15,291
Restricted cash 9,855 9,855 9,855
Accounts
receivable,
net 57,952 18,961 76,913 (2,255)(7)(12) 74,658
Deferred income
taxes 24,999 24,999 (10,695) (13) 14,304
Other 43,664 5,880 49,544 (3,169)(7)(14) 46,375
--------- ------- -------- --------- --------
Total current assets 146,761 30,091 176,852 (16,369) 160,483
--------- ------- -------- --------- --------
Property and
equipment, net 290,238 60,445 $ 7,076 (10) 357,759 357,759
Investment in Dakota
Heartland Health
System 116,708 (116,708) (10)
Goodwill 112,522 28,306 (10) 140,828 140,828
Other assets 84,184 3,263 (534) (10) 86,913 1,488 (7)(14) 88,401
--------- ------- ------- -------- --------- (13) --------
Total assets $750,413 $ 93,799 $(81,860) $ 762,352 $(14,881) $ 747,471
========= ======= ======= ======== ========= ========
See notes to Unaudited Pro Forma Condensed Combining Financial Statements.
12
PARACELSUS HEALTHCARE CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINING
BALANCE SHEET
JUNE 30, 1998
(Dollars in thousands)
Paracelsus DHHS Pro Forma LA Metro
Healthcare Pro Forma DHHS Pro Forma Pro Forma
Corporation DHHS Adjustments Rf Acquisition Adjustments Rf Paracelsus
----------- ---------- ----------- -- ----------- ----------- -- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 35,054 $ 5,084 $ 40,138 $ (6,790) (7) $ 33,348
Accrued liabilities
and other 76,803 6,855 83,658 (507) (7) 83,151
Current maturities
of long-term debt 7,276 7,276 (95) (7) 7,181
--------- ------- -------- -------- --------
Total current
liabilities 119,133 11,939 131,072 (7,392) 123,680
--------- ------- -------- -------- --------
Long term debt 521,916 521,916 (7,489)(12)(7) 514,427
Other long-term
liabilities 61,158 61,158 61,158
Partners' equity 81,860 $(81,860) (11)
Stockholders' equity
Common stock 224,542 224,542 224,542
Additional
paid-in capital 390 390 390
Accumulated
deficit (176,726) (176,726) (176,726)
--------- -------- --------
Total stockholders'
equity 48,206 48,206 48,206
--------- -------- --------
Total liabilities
& shareholders'
equity $ 750,413 $ 93,799 $(81,860) $ 762,352 $(14,881) $ 747,471
========= ======== ======== ========= ======== ========
See notes to Unaudited Pro Forma Condensed Combining Financial Statements.
13
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 six months ended June 30,
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 and the gain
on sale of the Chico facilities.
(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 LA Metro, and (ii) the pro forma decrease in
amounts outstanding under the Company's off balance sheet
receivable financing program as a result of the sale of Chico and
LA Metro accounts receivable, certain accounts of which served as
collateral under the program.
With respect to the Chico sale, the Unaudited Pro Forma
Condensed Combining Statements of Operations assume $24.6 million
in net sales proceeds were used to reduce amounts outstanding
under the Credit Facility and $3.1 million in net sales proceeds
were used to reduce amounts outstanding under the Company's off
balance sheet receivable financing program. With respect to sale
of LA Metro, the Unaudited Pro Forma Condensed Combining
Statements of Operations assume $4.2 million in net sales proceeds
were used to reduce amounts outstanding under the Credit Facility
and a $9.3 million in net sales proceeds were used to reduce
amounts outstanding under the Company's off balance sheet
receivable financing program (see Note 12). The average interest
rate in effect under the Credit Facility was 9.2% for the six
months ended June 30, 1998, and 8.3% for the year ended December
31, 1997. The average interest rate in effect under the commercial
paper program was 6.7% for the six months ended June 30, 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. The interest rate currently in effect under the
revolver portion of the Credit Facility is 9.2%
14
PARACELSUS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
Reference to
Notes to
Pro Forma
Financial
Statements Explanations
- ----------- -------------------------------------------------------------------
(4) To record the pro forma provision for income taxes after taking
into effect the sale of LA Metro and 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 six
months ended June 30, 1998, and the year ended December 31, 1997,
respectively.
(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 $122,000 and $203,000 on a pro forma basis for the
six months ended June 30, 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 remove LA Metro's historical results of operations, an
impairment charge of $7.8 million taken in the fourth quarter of
1997 on certain LA Metro facilities, assets sold, and liabilities
assumed by the purchaser in conjunction with the sale of LA Metro.
The unaudited pro forma condensed combining statements of
operations assume LA Metro was sold on January 1, 1997;
accordingly, the subsequent $7.8 million impairment charge would
have been reflected in the gain or loss on disposal and is
therefore removed from the pro forma presentation. Working capital
balances are as of June 30, 1998. Actual working capital proceeds
are to be based on balances at September 30, 1998, subject to
adjustment and final settlement by the parties. The Company does
not expect to record a significant gain or loss on the sale of LA
Metro.
15
PARACELSUS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
Reference to
Notes to
Pro Forma
Financial
Statements Explanations
- ----------- -------------------------------------------------------------------
(8) To record pro forma interest income of $695,000 and $1,390,000
for the six months ended June 30, 1998, and the year ended
December 31, 1997, respectively, on $9.9 million of secured
promissory notes and an secured second lien subordinated note in
the principal amount of $3.8 million issued by the purchaser in
conjunction with the LA Metro sale. The principal amounts and
terms of the notes are as follows:
(a) Non-Negotiable Secured Promissory Note in the principal
sum of $3,500,000 with interest at a per annum rate of 11%.
The principal balance and aggregate accrued interest are due
and payable on March 30, 1999.
(b) Non-Negotiable Secured Promissory Note in the principal sum
of $6,410,000 with interest at a per annum rate increasing
annually from 11% to 19% over the term of the note. Interest
only payments are payable quarterly the first four quarters
following the note's issue date. Thereafter interest and
principal payments are payable monthly based on a 15 year
amortization of principal balance with all unpaid principal
and accrued and unpaid interest due in full on September 30,
2003.
(c) Non-Negotiable Subordinated Secured Promissory Note in the
principal sum of $3,788,078, subject to further adjustment for
final settlement of working capital and certain other
adjustments, with interest at a per annum rate equal to the
interest rate effective on the Non-Negotiable Secured
Promissory Note discussed in Note 8(b) above plus 2%, provided
that interest in no event shall be less than 12% per annum.
Interest is due and payable quarterly. The principal balance
of this note and aggregate accrued interest are due and
payable on the earlier of (i) March 30, 2000 or the date the
Non-Negotiable Secured Promissory Note discussed in Note 8(b)
is repaid or refinanced with a third party lender.
(9) To adjust the common and common equivalent shares to reflect the
effect of dilutive securities on pro forma net income for the year
ended December 31, 1997.
16
PARACELSUS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
Reference to
Notes to
Pro Forma
Financial
Statements Explanations
- ----------- -------------------------------------------------------------------
(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. 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 $ 64,528
Estimated transaction costs 450
Company's prior investment in DHHS 51,730
--------
Total cost to be allocated 116,708
Less net working capital acquired (18,152)
Less DHHS' investment in equity investees (3,262)
Plus intangible assets not allocated value (a) 533
Less DHHS' historical property and equipment value, net (60,445)
--------
Purchase price in excess of DHHS' cost 35,382
Purchase price allocated to property and equipment(b) (7,076)
--------
Purchase price allocated to Goodwill $ 28,306
========
(a) Pro forma reduction in other long term assets.
(b) Calculated as follows:
Total purchase price allocated to property
and equipment $ 74,598
Less DHHS' historical property and equipment
value, net (60,445)
--------
Step up in basis of property and equipment 14,153
Ownership percentage acquired 50%
--------
Purchase price allocated to property and
equipment in excess of the DHHS' cost $ 7,076
========
17
PARACELSUS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
Reference to
Notes to
Pro Forma
Financial
Statements Explanations
- ----------- -------------------------------------------------------------------
(11) To remove partnership equity.
(12) To reflect the pro forma sources and uses of cash in connection
with the sale of LA Metro (in thousands).
Sources:
Cash proceeds from the sale $16,500
Uses:
Estimated transaction costs 2,750
Repayment of Credit Facility (a) 4,210
Repayment of amounts outstanding
under off balance sheet receivable
financing program (a)(b) 9,300
Other 490
------
Total uses 16,750
------
Net use of funds $ (250)
======
(a) Based on actual amounts paid at closing of the LA Metro sale.
(b) Total accounts receivable sold exceeded amounts outstanding
under the Company's off balance sheet receivable financing
program.
(13) To reflect the recognition of current net tax assets and the
impact on net operating loss carryforwards as a result of the LA
Metro sale.
(14) To record notes receivable issued by the purchaser consisting of
approximately $9.9 million of secured promissory notes and an
additional secured second lien subordinated note in the principal
amount of approximately $3.8 million (See Note 8). The
subordinated note may be adjusted for any increase or decrease of
net working capital and certain other adjustments. Summarized as
follows (in thousands):
Current portion $ 3,500
Long term portion 10,198
-------
$13,698
=======
18
DAKOTA HEARTLAND HEALTH SYSTEM
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998
CONTENTS
Consolidated Balance Sheets 19
Consolidated Statements of Income 20
Consolidated Statements of Partners' Equity 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 23
19
Dakota Heartland Health System
Consolidated Balance Sheets
June 30, Decenber 31,
1998 1997
------------------------------------
(Unaudited) (Note 1)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,250,372 $ 7,276,675
Patient receivables, net of allowance for
uncollectible accounts of $2,255,639 and
$1,278,500 at June 30, 1998, and
December 31, 1997, respectively 18,961,106 14,374,894
Supplies inventory 3,278,114 2,197,815
Prepaid expenses and other current assets 2,601,776 1,833,996
------------ -----------
Total current assets 30,091,368 25,683,380
Property and equipment, net 60,445,028 60,663,177
Other assets:
Investment in and advances to affiliates 2,495,122 2,316,137
Organizational costs, less accumulated
amortization of $542,850 and $435,300 in
June 30, 1998 and December 31, 1997,
respectively 532,636 640,186
Other 234,896 234,915
------------ ------------
Total assets $ 93,799,050 $ 89,537,795
============ ============
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable $ 5,084,199 $ 5,017,075
Estimated third-party payor settlements 1,945,373 2,905,822
Accrued salaries and benefits 3,113,934 2,999,265
Other current liabilities 1,795,357 2,923,616
------------ ------------
Total current liabilities 11,938,863 13,845,778
Partners' equity 81,860,187 75,692,017
------------ ------------
Total liabilities and partners' equity $ 93,799,050 $ 89,537,795
============ ============
See accompanying notes.
20
Dakota Heartland Health System
Consolidated Statements of Income
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
---------------------------- ---------------------------
Revenue:
Net patient service revenue $ 24,474,622 $ 23,660,634 $ 49,930,370 $ 47,543,168
Other revenue 1,069,646 1,181,902 2,086,403 1,982,078
------------ ----------- ----------- -----------
Net revenue 25,544,268 24,842,536 52,016,773 49,525,246
Expenses:
Salaries and benefits 10,311,069 8,904,814 19,997,684 17,815,717
Professional fees 2,342,391 3,186,577 4,877,245 6,474,107
Supplies 4,354,968 4,013,108 9,102,634 7,882,067
Depreciation and amortization 1,192,853 1,170,231 2,281,539 2,298,306
Provision for uncollectible
accounts 624,394 672,906 1,449,230 1,531,234
Repairs and maintenance 441,500 312,465 850,507 540,018
Utilities 309,555 279,690 637,606 612,706
Rent and leases 268,963 254,210 565,665 620,532
Property taxes 273,255 270,241 544,453 556,155
Unusual item (Note 2) 1,050,000 - 1,050,000 -
Other 781,472 928,221 1,458,053 1,691,822
------------ ----------- ----------- -----------
Total expenses 21,950,420 19,992,463 42,814,616 40,022,664
------------ ----------- ----------- -----------
Net income $ 3,593,848 $ 4,850,073 $ 9,202,157 $ 9,502,582
============ ============ =========== ===========
See accompanying notes.
21
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 5,061,186 4,140,971 9,202,157
Partners' distributions (1,668,693) (1,365,294) (3,033,987)
------------ ------------ ------------
Partners' equity at June 30, 1998 $ 52,014,269 $ 29,845,918 $ 81,860,187
============ ============ ============
See accompanying notes.
22
Dakota Heartland Health System
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
1998 1997
-------------------------------
OPERATING ACTIVITIES
Net income $ 9,202,157 $ 9,502,582
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,281,539 2,298,306
Provision for uncollectible accounts 1,449,230 1,531,234
Changes in operating assets and liabilities:
Patient receivables, net (6,035,442) 2,142,353
Supplies inventory (1,080,299) (160,428)
Prepaid expenses and other current assets (767,780) (892,990)
Other assets (178,966) (226,384)
Accounts payable and other
liabilities (1,906,915) (3,392,857)
----------- ------------
Net cash provided by operating activities 2,963,524 10,801,816
INVESTING ACTIVITIES
Purchase of property and equipment (1,955,840) (3,458,023)
FINANCING ACTIVITIES
Partners' distributions (3,033,987) (8,961,986)
----------- ------------
Decrease in cash and cash equivalents (2,026,303) (1,618,193)
Cash and cash equivalents at beginning of year 7,276,675 6,718,589
----------- ------------
Cash and cash equivalents at end of year $ 5,250,372 $ 5,100,396
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for taxes $ 215,000 $ 417,000
See accompanying notes.
23
Dakota Heartland Health System
Notes to Consolidated Financial Statements
June 30, 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 notes
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 and six months ended June 30, 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 $180,000 and
$266,700 for the quarters ended June 30, 1998 and 1997, respectively, and
$215,000 and $417,000 for the six months ended June 30, 1998 and 1997,
respectively.
24
Dakota Heartland Health System
Notes to Consolidated Financial Statements
June 30, 1998
2. UNUSUAL ITEMS
In April 1998, the Partnership recognized an unusual charge of $1.1 million in
connection with the settlement of a 1995 dispute over certain contract
services.
3. 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.