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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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 500, 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(g) of the Act:
COMMON STOCK, NO STATED VALUE
-----------------------------
(Title of Class)
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[ ] No[X]
As of June 22, 2001, there were outstanding 59,143,721 shares of the
Registrant's Common Stock, no stated value.
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PARACELSUS HEALTHCARE CORPORATION
DEBTOR-IN-POSSESSION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 2001
INDEX
PAGE REFERENCE
FORM 10-Q
--------------
Forward-Looking Statements 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements-- (Unaudited)
Condensed Consolidated Balance Sheets--
March 31, 2001 and December 31, 2000 4
Consolidated Statements of Operations--
Three Months ended March 31, 2001
and 2000 5
Condensed Consolidated Statements of Cash Flows--
Three Months ended March 31, 2001 and 2000 6
Notes to Interim Condensed Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market
Risks 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Change in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 6. Exhibit and Reports on Form 8-K 16
SIGNATURE 18
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FORWARD-LOOKING STATEMENTS
Paracelsus Healthcare Corporation ("PHC") and its subsidiaries,
collectively, are herein referred to as the "Company." 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. All
statements regarding the Company's expected future financial position, results
of operations, cash flows, liquidity, financing plans, business strategy,
budgets, projected costs and capital expenditures, competitive position, growth
opportunities, plans and objectives of management for future operations and
words such as "anticipate," "believe," "plan," "estimate," "expect," "intend,"
"may" and other similar expressions are forward-looking statements. Such
forward-looking statements are inherently uncertain, and stockholders must
recognize that actual results may differ materially from the Company's
expectations as a result of a variety of factors, including, without limitation,
those discussed below.
Factors which may cause the Company's actual results in future periods
to differ materially from forecast results include, but are not limited to:
o Uncertainties related to PHC's voluntary petition under
Chapter 11 of the Bankruptcy Code including, but not limited
to, (i) the Company's ability to consummate, in substantial
terms, the Plan of Reorganization, as proposed, (ii) actions
which may be taken by creditors and the outcome of various
administrative matters in the Chapter 11 proceeding and (iii)
the possibility of delays in the effective date of the
proposed Plan of Reorganization, as amended;
o The Company's ability to comply with the terms of the
subsidiary level credit facility;
o The Company's inability to access capital markets given the
Company's current financial condition;
o The excessive amount of time and effort the Company's senior
management must devote to dealing with the Company's financial
condition, thereby reducing time spent directly on the
operations of its businesses;
o The Company may be unable to retain top management and other
key personnel, including physicians;
o Competition, including the impact of a new competing hospital
in the Fargo, North Dakota market, and general economic,
demographic and business conditions, both nationally and in
the regions in which the Company operates;
o Existing government regulations and changes in legislative
proposals for healthcare reform, including changes in Medicare
and Medicaid reimbursement levels;
o The ability to enter into managed care provider arrangements
on acceptable terms;
o Liabilities and other claims asserted against the Company;
o The loss of any significant customer, including but not
limited to managed care contracts;
o The Company's ability to achieve profitable operations after
the confirmation of the proposed Plan of Reorganization, as
amended;
o The Company's ability to generate sufficient cash from
operations to meet its obligations; and
o The Company's ability to comply with the terms of the
corporate integrity agreement.
The Company is generally not required to, and does not undertake to,
update or revise its forward-looking statements.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARACELSUS HEALTHCARE CORPORATION
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in 000's)
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 14,778 $ 17,140
Restricted cash ............................................. 7,237 8,807
Accounts receivable, net .................................... 64,196 66,165
Supplies .................................................... 8,498 8,735
Income taxes receivable ..................................... 6,321 6,321
Other current assets ........................................ 9,856 8,171
------------ ------------
Total current assets .................................... 110,886 115,339
Property and equipment .......................................... 344,048 342,748
Less: Accumulated depreciation and amortization ................. (147,220) (142,551)
------------ ------------
196,828 200,197
Goodwill ........................................................ 70,306 71,068
Other assets .................................................... 19,777 19,895
------------ ------------
Total assets ............................................ $ 397,797 $ 406,499
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ............................................ $ 30,243 $ 34,113
Accrued liabilities and other ............................... 18,899 19,955
Long-term debt due within one year .......................... 477 471
Long-term debt in default classified as current (Note 2) .... 3,085 3,085
------------ ------------
Total current liabilities ............................... 52,704 57,624
Long-term debt .................................................. 34,432 33,537
Liabilities subject to compromise (Note 2) ...................... 373,256 373,012
Other long-term liabilities ..................................... 12,409 12,526
Stockholders' equity (deficit):
Common stock ................................................ 216,047 216,047
Additional paid-in capital .................................. 11,910 11,892
Accumulated deficit ......................................... (302,961) (298,139)
------------ ------------
Total stockholders' equity (deficit) .................... (75,004) (70,200)
------------ ------------
Total Liabilities and Stockholders' Equity (Deficit) ............ $ 397,797 $ 406,499
============ ============
See accompanying notes.
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PARACELSUS HEALTHCARE CORPORATION
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000's, except per share data)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
--------- ---------
Net revenue .................................... $ 90,325 $ 95,084
Costs and expenses:
Salaries and benefits ........................ 39,541 40,700
Other operating expenses ..................... 33,054 36,159
Provision for bad debts ...................... 11,333 6,958
Interest (excludes contractual interest of
$9.2 million on pre-petition debt
obligations in the three months ended
March 31, 2001) ........................... 1,025 9,010
Depreciation and amortization ................ 6,612 8,213
Unusual item (Note 3) ........................ 1,119 --
--------- ---------
Total costs and expenses ............... 92,684 101,040
--------- ---------
Loss before reorganization costs and
income taxes ................................ (2,359) (5,956)
Reorganization costs ........................... (2,463) (2,547)
--------- ---------
Loss before income taxes ....................... (4,822) (8,503)
Provision for income taxes ..................... -- --
--------- ---------
Net loss ....................................... $ (4,822) $ (8,503)
========= =========
Loss per share - basic and assuming
dilution ............................... $ (0.08) $ (0.15)
========= =========
See accompanying notes.
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PARACELSUS HEALTHCARE CORPORATION
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000's)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................. $ (4,822) $ (8,503)
Non-cash expenses and changes in operating assets
and liabilities .................................... 4,878 5,160
------------ ------------
Net cash used in (provided by) operating activities
before reorganization costs ........................ 56 (3,343)
Reorganization costs paid to date ..................... (1,202) (2,369)
------------ ------------
Net cash used in operating activities ................. (1,146) (5,712)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net .............. (1,300) (1,733)
Increase in other assets, net ......................... (817) (591)
------------ ------------
Net cash used in investing activities ................. (2,117) (2,324)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility, net ....... 1,000 --
Repayments of debt, net ............................... (99) (399)
Deferred financing costs .............................. -- (638)
------------ ------------
Net cash provided by (used in) financing activities ... 901 (1,037)
------------ ------------
Decrease in cash and cash equivalents ................. (2,362) (9,073)
Cash and cash equivalents at beginning of period ...... 17,140 22,723
------------ ------------
Cash and cash equivalents at end of period ............ $ 14,778 $ 13,650
============ ============
Supplemental Cash Flow Information:
Interest paid ...................................... $ 1,005 $ 911
Income taxes paid .................................. $ -- $ 715
See accompanying notes.
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PARACELSUS HEALTHCARE CORPORATION
DEBTOR-IN-POSSESSION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2001
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION - Paracelsus Healthcare Corporation ("PHC") was incorporated in
November 1980 for the principal purpose of owning and operating acute care and
related healthcare businesses in selected markets. PHC and its subsidiaries (the
"Company") presently operate 10 acute care hospitals with 1,287 licensed beds in
seven states, of which eight are owned and two are leased.
BASIS OF PRESENTATION - On September 15, 2000, PHC filed a voluntary petition
for protection under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") with the United States Bankruptcy Court for the Southern
District of Texas (Houston Division) (the "Bankruptcy Court") (Case no.
00-38590-H5-11). The bankruptcy filing is limited to PHC, the parent company,
and does not include any of PHC's hospital subsidiaries. During the Chapter 11
proceeding, PHC is operating as a debtor-in-possession under the authority of
the Bankruptcy Code. PHC elected to seek Bankruptcy Court protection in order to
facilitate the restructuring of its debt while continuing to maintain normal
business operations at PHC's hospital subsidiaries. PHC's hospital subsidiaries
did not file for bankruptcy protection and are expected to continue paying, in
the ordinary and normal course of business, all wages, benefits and other
employee obligations, as well as all outstanding and ongoing accounts payable to
their contractors and vendors.
On May 25, 2001, the Bankruptcy Court approved PHC's First Amended
Chapter 11 Plan of Reorganization (the "Amended Plan"). The effectiveness of the
Amended Plan is subject to certain conditions, as defined in the Amended Plan.
(See Note 2).
The Company's continuing operating losses and liquidity issues and
PHC's Chapter 11 proceeding raise substantial doubt about the Company's ability
to continue as a going concern. The ability of the Company to continue as a
going concern is dependent upon, among other things, (i) the Company's ability
to comply with the terms of the subsidiary level credit facility, (ii) timely
effectiveness of the Amended Plan, (iii) the Company's ability to achieve
profitable operations after the Effective Date, and (iv) the Company's ability
to generate sufficient cash from operations to meet its obligations.
The condensed consolidated financial statements of the Company have
been prepared in accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7") and generally accepted
accounting principles applicable to a going concern, which assumes that assets
will be realized and liabilities will be discharged in the normal course of
business. The financial statements do not include further adjustments, if any,
reflecting the possible future effects on the recoverability and classification
of assets or the amount and classification of liabilities that may result from
the outcome of the uncertainties discussed herein. The Amended
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Plan and other actions during the Chapter 11 proceeding could change materially
the amounts recorded in the condensed consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements
of the Company have been prepared in accordance 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 a complete set of financial
statements. These financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the year ended
December 31, 2000, included in the Company's 2000 Form 10-K. Management believes
that the financial information included herein reflects all adjustments
necessary for a fair presentation of interim results and that all such
adjustments are of a normal and recurring nature. Operating results for the
three months ended March 31, 2001, are not necessarily indicative of the results
that may be expected for the year ending December 31, 2001.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
EARNINGS PER SHARE - The following table sets forth the computation of basic and
diluted net loss per share (dollars in thousands, except per share amounts).
THREE MONTHS ENDED MARCH 31,
-------------------------------
2001 2000
------------ ------------
Numerator (a):
Net Loss ............................................. $ (4,822) $ (8,503)
============ ============
Denominator:
Weighted average shares used for basic earnings per
share ............................................... 59,144 57,668
Effect of dilutive securities:
Employee stock options ............................. -- --
------------ ------------
Dilutive potential common shares ..................... -- --
------------ ------------
Shares used for diluted earnings per share ........... 59,144 57,668
============ ============
Net loss per share:
Basic ................................................ $ (0.08) $ (0.15)
============ ============
Diluted .............................................. $ (0.08) $ (0.15)
============ ============
- ----------
(a) Amount is used for both basic and diluted earnings per share computations
since there is no earnings effect related to the dilutive securities.
Options to purchase 1.4 million shares of the Company's common stock at
a weighted average exercise price of $3.40 per share and warrants to purchase
414,690 shares at a weighted average exercise price of $9.00 per share were
outstanding during the three months ended March 30, 2001, but were not included
in the computation of diluted EPS due to their anti-dilutive effect on net loss.
Under PHC's Amended Plan, all of the Company's warrants, stock option plans and
all options outstanding thereunder will be canceled and rendered null and void
upon the effective date of the Amended Plan, and the holders of such options
will neither receive nor retain any property on account of such interests. (See
Note 2).
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COMPREHENSIVE LOSS - Comprehensive loss for the three months ended March 31,
2001 and 2000 equaled the net loss reported for each of the respective periods.
RESTRICTED CASH - The Company had restricted cash of $7.2 million and $8.8
million at March 31, 2001 and December 31, 2000, respectively, as collateral for
outstanding letters of credit and other commitments.
NOTE 2. PROCEEDING UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On September 15, 2000, PHC filed a voluntary petition for protection
under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court
for the Southern District of Texas (Case no. 00-38590-H5-11). The bankruptcy
filing is limited to PHC, the parent company, and does not include any of PHC's
hospital subsidiaries. PHC elected to seek Bankruptcy Court protection in order
to facilitate the restructuring of its debt while continuing to maintain normal
business operations at PHC's hospital subsidiaries. PHC's decision to
restructure its debt was due to its highly leveraged capital structure. Despite
positive earnings before interest, taxes, depreciation, amortization and unusual
charges, the high interest burden severely restricted the Company's reinvestment
opportunities. In an effort to conserve capital and to preserve the normal
operations of the hospital subsidiaries, PHC did not make interest payments of
$33.5 million (including penalty interest) on the 10% Senior Subordinated Notes
(the "Notes") due February 15 and August 15, 2000, nor did PHC make an interest
payment of $468,000 due on the 6.51% subordinated note ("Park Note") on August
30, 2000. Both the Notes and the Park Note are subject to compromise as a result
of PHC's Chapter 11 bankruptcy filing.
PHC's hospital subsidiaries did not file for bankruptcy protection and
have continued paying, in the ordinary and normal course of business, all wages,
benefits and other employee obligations, all debt and lease obligations, as well
as all outstanding and ongoing accounts payable to their contractors and
vendors. A $62.0 million credit facility (the "Credit Facility"), collateralized
at the subsidiary level, is not directly affected by PHC's bankruptcy filing.
The Company expects cash on hand, cash generated from operations and asset sales
to be sufficient to meet the net working capital and capital expenditure needs
of the hospital subsidiaries during the restructuring process.
On October 2, 2000, PHC received approval from the Bankruptcy Court to
pay pre-petition and post-petition PHC's employee wages, salaries and benefits.
The Bankruptcy Court also approved orders granting authority, among other
things, to pay pre-petition claims of certain utilities. All other PHC
pre-petition liabilities are classified in the consolidated balance sheet as
liabilities subject to compromise. PHC continues to pay post-petition claims of
all vendors and providers in the ordinary course of business.
On May 25, 2001, the Bankruptcy Court approved the Amended Plan. The
effectiveness of the Amended Plan is subject to certain conditions, as defined
in the Amended Plan. Upon the effective date (the "Effective Date") of the
Amended Plan, shares of PHC's common stock held by existing equity holders will
be canceled and rendered null and void, and current equity holders will not
receive stock or warrants. PHC's current equity holders will not receive or
retain any property under the Amended Plan on account of such equity interests.
Also upon the Effective Date, PHC will merge into a wholly owned subsidiary
incorporated in Delaware and will cease to exist as a separate company, and the
wholly owned subsidiary will emerge from bankruptcy as reorganized PHC and will
be known as Clarent Hospital Corporation. Additionally, all principal
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and interest outstanding on the Notes and allowed general unsecured claims will
be exchanged for (i) 11.5% Senior Notes (due on August 15, 2005) (the "New
Notes") in the aggregate principal amount of $130.0 million (ii) a cash payment,
as defined in the Amended Plan, and (iii) 100.0% of the new common stock to be
issued by the reorganized PHC under the Amended Plan. Interest on the New Notes
shall accrue commencing on the Effective Date.
Upon the Effective Date, reorganized PHC will take the steps necessary
to cease being subject to the periodic reporting requirements of the federal
securities law. Additionally, reorganized PHC will have a limited number of
stockholders and does not plan to list the New Notes on an exchange. Therefore,
PHC will not be required to file periodic public reports, although the new board
of directors may seek to voluntarily register the Company's new common stock
with the SEC or to list the New Notes on an exchange at a future date and thus
have the Company become a publicly traded entity.
Pursuant to the terms of a settlement agreement executed in connection
with the global settlement of shareholder litigation that became effective in
September 1999, the Park Note and accrued interest must convert to PHC's common
stock in the event PHC files a voluntary petition in bankruptcy. No shares of
common stock have been issued to Park at this time. See "Liabilities Subject to
Compromise" discussed below. Under the Amended Plan (i) the Park Note will be
deemed to have been converted to approximately 1.9 million shares of PHC's
common stock upon the filing of the Bankruptcy, (ii) the Park Note holder (Park
Hospital GmbH or "Park") will be deemed to have been issued the common stock in
accordance with the terms of the settlement and (iii) the Park Note will be
deemed to be canceled. On the Effective Date, the 1.9 million shares of PHC
common stock will be deemed canceled and rendered null and void, and Park will
neither receive nor retain any property on account of such equity interests.
The Amended Plan also contains a management retention plan (the
"Retention Plan") to enhance the ability of the Company to retain key management
employees during the restructuring period. Under the Retention Plan, bonuses
aggregating $1.0 million will be awarded, subject to certain conditions, to
certain key management employees. The Retention Plan provides that the retention
bonuses will be awarded in two equal amounts upon: (i) the Effective Date and
(ii) ninety days following the Effective Date. The Amended Plan and PHC's
Disclosure Statement are on file with the Bankruptcy Court and are available for
review and copying during the Bankruptcy Court's normal business hours.
"Liabilities Subject to Compromise" on the Company's consolidated
balance sheet reflect PHC liabilities incurred prior to the commencement of the
Chapter 11 proceeding and do not reflect liabilities of any of PHC's
subsidiaries. These liabilities, consisting primarily of long-term debt,
including the principal amounts of the Notes and the Park Note and accrued
interest through September 15, 2000, certain accounts payable, accrued
liabilities and post-termination benefit obligations to former officers and key
employees, represent the Company's estimate of known or potential claims to be
resolved in connection with the Chapter 11 proceedings. Such claims remain
subject to future adjustments based on negotiations, actions of the Bankruptcy
Court, further developments with respect to disputed claims, future rejection of
executory contracts or unexpired leases, determination as to the value of any
collateral for claims, treatment under the Amended Plan and other events.
Payment terms for these amounts as proposed in the Amended Plan are discussed
above.
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Below is a summary of the principal categories of claims classified as
"Liabilities Subject to Compromise" at March 31, 2001 as a result of the Chapter
11 proceeding (in thousands):
10% Senior Subordinated Notes ................. $ 325,000
Unamortized deferred financing costs .......... (5,300)
Accrued interest through September 15, 2000 ... 36,833
6.51% Subordinated Note ....................... 7,185
Post-termination benefit obligations .......... 3,255
Vendor accounts payable ....................... 183
Accrued litigation liabilities ................ 6,100
---------
Total liabilities subject to compromise ... $ 373,256
=========
The financial statements do not include further adjustments, if any,
reflecting the possible future effects on the recoverability and classification
of assets or the amount and classification of liabilities that may result from
the outcome of the uncertainties associated with the Chapter 11 proceeding. If
the Chapter 11 proceeding had not been filed, the Company would have reported a
net working capital deficit of approximately $315.1 million at March 31, 2001.
During the pendency of the Chapter 11 proceeding, the Company is not recording
the contractual amount of interest expense related to the Notes and the Park
Note after September 15, 2000. Contractual interest obligations excluded from
interest expense reported on the accompanying condensed consolidated statements
of operations were $9.2 million for the three months ended March 31, 2001.
Due to cross default provisions, a hospital subsidiary's capital lease
obligation has been included in current liabilities in the Company's condensed
consolidated balance sheets at March 31, 2001 and December 31, 2000.
For the three months ended March 31, 2001 and 2000, the Company
recorded approximately $2.5 million, respectively, of reorganization costs for
professional fees and incremental insurance costs incurred in connection with
its reorganization activities.
NOTE 3. UNUSUAL CHARGE
The Company recorded an unusual charge of $772,000 for the three months
ended March 31, 2001 for employee termination costs incurred as part of the
Company's efforts to reduce corporate overhead.
As reported in the Company's Form 10-K for the year ended December 31,
2000, on April 26, 2001 the Company learned that a private person acting on
behalf of the United States had filed a civil damages action under seal in
February 1996 against many defendants throughout the United States, including a
subsidiary of the Company, Paracelsus Fentress County General Hospital, Inc.
("Fentress"), in the United States District Court for the Eastern District of
Pennsylvania. The Company had previously accrued $800,000 for potential
settlement costs associated with this matter. Based on continuing discussions
with the Federal government, the Company has accrued an additional $347,000 for
potential settlement costs associated with this matter, which has been reflected
as an unusual charge in the accompanying consolidated statement of operations
for the three months ended March 31, 2001.
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NOTE 4. INCOME TAXES
All net deferred tax assets resulting from net operating losses for the
three months ended March 31, 2001 and 2000 were offset by the recognition of
additional valuation allowances due to issues affecting liquidity and the
related uncertainties discussed herein, which, if unfavorably resolved, will
adversely affect the Company's future operations. Consequently, the Company did
not recognize an income tax benefit for the three months ended March 31, 2001
and 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On May 25, 2001, the Bankruptcy Court approved the Amended Plan. The
effectiveness of the Amended Plan is subject to certain conditions, as defined
in the Amended Plan. See Note 2 for a more comprehensive discussion of this
matter
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2001
COMPARED WITH THREE MONTHS ENDED MARCH 31, 2000
Net revenue for the three months ended March 31, 2001, was $90.3
million, a decrease of $4.8 million, or 5.0%, from $95.1 million for the same
period in 2000. The decline occurred primarily at the Company's Fargo, North
Dakota facility due to the opening of a competing hospital in November 2000.
Excluding the North Dakota facility, the net revenue for 2001 increased by 9.6%,
or $6.6 million, compared to 2000, due primarily to a combination of increased
patient volumes in certain markets and improved pricing for certain hospital
services.
The competing hospital in the Fargo, North Dakota market is a
not-for-profit facility and is supported by a physician group that formerly
admitted a significant number of patients to the Company's North Dakota facility
(Heartland Health System, or "HHS"). Consequently, HHS experienced a substantial
drop in patient volumes and financial performance in the first quarter of 2001
compared to 2000, and EBITDA was essentially break even for the three months
ended March 31, 2001. The Company expects patient volumes and financial
performance at this facility to remain significantly below historical levels in
the months ahead, which will have a material adverse impact on both the
hospital's and the Company's financial performance. While management is unable
to predict the ultimate impact of this new facility on the Company's results of
operations, it believes that HHS will continue to generate positive operating
cash flow on a year-to-year basis.
Patient volumes for the three months ended March 31, 2001 were down
sharply compared to 2000 due to the decline in volumes at HHS discussed above.
Excluding HHS, the remaining hospitals reported increases in every category
except surgeries and home health visits. For all hospitals, inpatient admissions
decreased 6.3% from 10,195 in 2000 to 9,555 in 2001; patient days decreased
10.5% from 50,509 in 2000 to 45,229 in 2001. Average length of stay decreased
4.5% from 5.0 days in 2000 to 4.7 days in 2001. Excluding home health visits,
outpatient visits were substantially unchanged at 79,585 in 2000 and 79,613 in
2001. Surgeries decreased 17.6% from 5,395 in 2000 to 4,443 in 2001 largely due
to increased competition at the Company's Fargo, North Dakota and Lancaster,
California hospitals. Home health visits decreased 32.8% from 63,645 in 2000 to
42,783 in 2001 due, in part, to a de-emphasis of some types of services, as well
as a restructuring of the mix of services, in response to changes in
reimbursement methodologies, a trend that will likely continue. Excluding HHS,
admissions, patient days and
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outpatient visits increased by 5.7%, 3.4% and 2.0%, respectively, and surgeries
and home health visits decreased by 5.6% and 35.4%, respectively.
Operating expenses (salaries and benefits, other operating expenses and
provision for bad debts) increased $111,000 from $83.8 million in the three
months ended March 31, 2000 to $83.9 million in 2001, due primarily to a $4.4
million increase in bad debt expense, which was substantially offset by a $4.3
million decrease in other operating expenses and salaries and benefits.
Approximately 58% of the increase in bad debt expense occurred at one hospital
and was due largely to poor accounts receivable management, an increase in
emergency room visits and an overall increase in self-pay patients.
Additionally, this hospital and certain other of the Company's hospitals have
experienced significant turnover in business office personnel, which also had an
adverse impact on cash collections. The Company has filled all of its business
office manager vacancies and has implemented business office incentive programs
designed to reward the achievement of cash collection targets and improve staff
continuity. Consequently, the Company expects to see improved business office
performance in the months ahead. The Company has also implemented a
comprehensive revenue cycle management initiative in all of its hospitals, a
significant component of which is aimed at reducing bad debt expense through
improved business office processes. This initiative involves the implementation
of systems and processes to track, benchmark and improve the hospitals'
admission, billing and collection cycles. While this initiative has shown
improved trends in collections and accounts receivable days outstanding, a full
revenue cycle is generally required before substantial improvements are
realized. Accordingly, the full impact of the Company's efforts will not be
realized until the latter half of 2001.
As a result of the aforementioned items, operating expenses, expressed
as a percentage of net revenue, increased from 88.2% in 2000 to 92.9% in 2001,
and operating margins decreased from 11.8% to 7.1%, respectively.
Interest expense decreased $8.0 million from $9.0 million in the three
months ended March 31, 2000 to $1.0 million in 2001, primarily as a consequence
of PHC's Chapter 11 bankruptcy filing. The Company ceased accruing interest on
the Notes and other debt obligations subject to compromise on September 15,
2000, the date of the bankruptcy filing. Consequently, interest expense excludes
contractual interest obligations of $9.2 million on debt subject to compromise,
$9.1 million of which is attributable to the Notes. Interest expense in 2001 is
primarily attributable to borrowings under the Credit Facility and capital
leases. No borrowings were outstanding under the Credit Facility for the three
months ended March 31, 2000.
Depreciation and amortization expense decreased $1.6 million from $8.2
million in the three months ended March 31, 2000 to $6.6 million for the same
period in 2001 due primarily to the impairment of hospital assets and associated
goodwill in the fourth quarter of 2000.
Loss before income taxes was $4.8 million for the three months ended
March 31, 2001, and included (i) reorganization costs of approximately $2.5
million for professional fees and incremental insurance costs incurred in
connection with the Company's reorganization efforts and (ii) an unusual charge
of $1.1 million comprised of a $772,000 charge for employee termination costs
incurred as part of the Company's efforts to reduce corporate overhead and a
$347,000 charge for potential settlement costs associated with the Fentress
investigation (See Note 3). Loss before income taxes was $8.5 million for the
three months ended March 31, 2000 and included reorganization costs of
approximately $2.5 million for professional fees.
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The Company did not record an income tax benefit for the three months
ended March 31, 2001 and 2000 due to the recognition of a valuation allowance to
reserve all net deferred tax assets generated during the quarter.
Net loss for the three months ended March 31, 2001 was $4.8 million, or
$0.08 per diluted share, compared to $8.5 million, or $0.15 per diluted share,
for the same period of 2000. Weighted average common and common equivalent
shares outstanding increased to 59.1 million in 2001 from 57.7 million in 2000
due primarily to a restricted stock grant of 1.3 million shares to the Company's
Chief Executive Officer in 2000 and the exercise of employee stock options in
2000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities before payments of
reorganization costs was $56,000 for the three months ended March 31, 2001,
compared to net cash used in operations of $3.3 million for the same period of
2000. Including reorganization costs, net cash used in operating activities was
$1.1 million in 2001 and $5.7 million in 2000. The Company expects that future
reorganization costs will be paid as incurred from internally generated cash
from operations and existing cash balances. Net cash used in investing
activities was $2.1 million during 2001 compared to $2.3 million during 2000,
and reflected primarily a decrease in capital expenditures. Net cash provided by
financing activities during 2001 was $901,000 compared to net cash used in
financing activities of $1.0 million in 2000.
As of March 31, 2001, the Company had $31.0 million in outstanding
borrowings under its subsidiary-level Credit Facility and $7.2 million in
outstanding letters of credit, which were fully secured by cash collateral. As
of June 20, 2001, the Company had $4.3 million in borrowing capacity under the
Credit Facility. The Company anticipates that internally generated cash from
operations and existing cash balances will be sufficient to fund the hospitals'
working capital requirements through 2001. Due to the liquidity issues
previously discussed, there can be no assurance that the Company will have
sufficient resources to finance its capital expenditure program in 2001.
LITIGATION
As reported in the Company's Form 10-K for the year ended December 31,
2000, on April 26, 2001 the Company learned that a private person acting on
behalf of the United States had filed a civil damages action under seal in
February 1996 against many defendants throughout the United States, including a
subsidiary of the Company, Paracelsus Fentress County General Hospital, Inc.
("Fentress"), in the United States District Court for the Eastern District of
Pennsylvania. The Company had previously accrued $800,000 for potential
settlement costs associated with this matter. Based on continuing discussions
with the Federal government, the Company has accrued an additional $347,000 for
potential settlement costs associated with this matter, which has been reflected
as an unusual charge in the accompanying consolidated statement of operations
for the three months ended March 31, 2001.
The Company is subject to claims and legal actions by patients and
others in the ordinary course of business. The Company believes that all such
claims and actions are either adequately covered by insurance or will not have a
material adverse effect on the Company's financial condition, results of
operations or liquidity.
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There have been no material developments in legal proceedings since the
Company filed its Annual Report on Form 10-K for the year ended December 31,
2000.
OTHER REGULATORY MATTERS
As previously reported, on March 9, 1998, the Securities and Exchange Commission
(the "SEC") entered a formal order authorizing a private investigation, In re
Paracelsus Healthcare Corp., FW-2067. Pursuant to the formal order, the staff of
the SEC's Fort Worth District Office initiated an investigation of the
accounting and financial reporting issues that were the subject of the internal
inquiry described in the Company's 1996 Form 10-K filed in April 1997. In June
2001, the SEC indicated that it would not initiate any enforcement action
against the Company in connection with the 1997 restatement of the Company's
financial statements for fiscal years 1992 through 1995 and for the quarters
ended March 31, 1996, June 30, 1996 and September 30, 1996. In describing the
SEC's decision not to bring enforcement action against the Company, a
representative of the SEC cited the Company's extensive cooperation with the
SEC's investigation and the way the Company handled the problems associated with
the accounting issues leading to the restatement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's only exposure to market risk is changes in the general
level of market interest rates. The Company does not hold or issue derivative
instruments for trading purposes and is not a party to any instruments with
leverage features.
With respect to the Company's interest-bearing liabilities, borrowings
of $31.0 million under the subsidiary-level Credit Facility at March 31, 2001
are subject to variable rates of interest and are affected by the general level
of market interest rates. The Company's variable rate debt bears interest at
prime plus 1.5% or LIBOR plus 3.75%. Based on a hypothetical 1% increase in
interest rates, the potential annualized impact on future pretax earnings would
be approximately $310,000.
All other debt obligations of the Company have fixed interest rates
ranging from 8.65% to 10.5% and accordingly have no earnings exposure to changes
in interest rates. Additionally, under the Bankruptcy Code, actions to collect
certain of the pre-petition indebtedness against PHC are subject to an automatic
stay and other contractual obligations against PHC may not be enforced.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in legal proceedings since the
Company filed its Annual Report on Form 10-K for the year ended December 31,
2000.
ITEM 2. CHANGE IN SECURITIES
Upon the Effective Date of the Amended Plan, shares of PHC's common
stock held by existing equity holders will be canceled and rendered null and
void, and current equity holders will not receive stock or warrants. PHC's
current equity holders will not receive or retain any property under the Amended
Plan on account of such equity interests. Also upon the Effective Date, PHC will
merge into a wholly owned subsidiary incorporated in Delaware and will cease to
exist as a separate company, and the wholly owned subsidiary will emerge from
bankruptcy as reorganized PHC and will be known as Clarent Hospital Corporation.
Upon the Effective Date, reorganized PHC will take the steps necessary
to cease being subject to the periodic reporting requirements of the federal
securities law. Additionally, reorganized PHC will have a limited number of
stockholders and does not plan to list the New Notes on an exchange. Therefore,
PHC will not be required to file periodic public reports, although the new board
of directors may seek to voluntarily register the Company's new common stock
with the SEC or to list the New Notes on an exchange at a future date and thus
have the Company become a publicly traded entity.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company defaulted on the interest payments of approximately $33.5
million due on February 15, and August 15, 2000 on the Company's $325.0 million
10% Senior Subordinated Notes due 2006. Relating thereto, on September 15, 2000,
PHC filed a voluntary petition for protection under Chapter 11 of the Bankruptcy
Code as further discussed elsewhere in this Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibit
None.
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(b) Report on Form 8-K
The Company filed a Current Report on Form 8-K on March 15, 2001
reporting pursuant to Item 4 that Ernst & Young LLP ("EY") had resigned as the
auditor of the Company's financial statements. EY resigned because of statements
made by a representative of the Creditors Committee in PHC's bankruptcy that
could in the future create the appearance that EY lacked the necessary
independence to remain as the auditors for the Company. On March 15, 2001, the
Company engaged PricewaterhouseCoopers LLP ("PwC") as its new accounting firm to
audit the Company's financial statements. The decision to engage PwC was
approved by the Company's Board of Directors and the Bankruptcy Court.
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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)
/s/ LAWRENCE A. HUMPHREY
Dated: June 26, 2001 ----------------------------------
Lawrence A. Humphrey
Executive Vice President &
Chief Financial Officer
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