1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO THE SECTION 13 OF 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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 77067
(Address of principal executive offices) (Zip Code)
(281) 774-5100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES_X_ NO__
As of September 30, 1996, there were 54,813,417 shares of the Registrant's
Common Stock, no stated value, outstanding.
================================================================================
2
On September 12, 1996, the Company elected to change its fiscal year end from
September 30 to December 31. Accordingly, the Quarterly Report of the Form 10-Q
for the three and nine months ended September 30, 1996 is hereby filed for the
third quarter of the new calendar year ending on December 31, 1996.
The Board of Directors has appointed a Special Committee consisting of non-
management members, to supervise and direct the conduct of an inquiry by
outside legal counsel regarding, among other things, the Company's accounting
and financial reporting practices and procedures for the quarterly periods
before the quarter ending September 30, 1996. As of the date of filing this
report, such inquiry has not been completed. Accordingly, depending on the
results of the Special Committee inquiry, the Quarterly Report on Form 10-Q
hereby filed and other previously filed reports may have to be amended to
reflect adjustments and items reported in the current financial period that may
need to be reclassified or attributed to earlier periods. Such adjustments or
reclassifications may involve amounts currently recorded as contractual
allowance, which might require additional provision for bad debts or receivable
adjustments.
Certain statements in this Form 10-Q are forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve a number of risks and
uncertainties. Factors which may cause the Company's actual results in future
periods to differ materially from forecasted results include, but are not
limited to: the results of the Special Committee inquiry described herein, the
outcome of litigation pending against the Company and certain affiliated
person, changes in government or private payors' reimbursement practices for
health care services, competition in the Company's markets, and such other
factors as might reasonably affect a provider of health care services.
3
PARACELSUS HEALTHCARE CORPORATION
FORM 10-Q
Three and Nine Months Ended
September 30, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements - (Unaudited)
Condensed Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 4
Consolidated Statements of Income -
Three and Nine months ended September 30, 1996 and 1995 5
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1996 and 1995 6
Notes to Interim Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
PART II. OTHER INFORMATION 24
SIGNATURE 28
4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARACELSUS HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 14,611 $ 4,545
Marketable securities 16,713 12,643
Accounts receivable, net 93,159 85,988
Other current assets 31,126 27,732
Deferred income taxes 72,861 15,508
Current assets of discontinued operations, net 5,097 -
-------- --------
Total current assets 233,567 146,416
Property and equipment 442,894 273,730
Less: Accumulated depreciation and amortization (64,647) (106,328)
-------- --------
378,247 167,402
Long-term assets of discontinued operations, net 28,398 -
Assets held for sale, net 24,527 -
Marketable securities 9,950 10,066
Investment in Dakota Heartland Health System 48,586 -
Goodwill 113,531 2,398
Other assets 31,008 27,190
-------- --------
Total Assets $867,814 $353,472
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities $109,833 $ 62,276
Current maturities of long-term debt 2,245 5,132
-------- --------
Total current liabilities 112,078 67,408
Long-term debt 490,202 130,250
Other long-term liabilities 37,715 25,498
Deferred income taxes 24,263 23,320
Stockholders' equity
Common Stock 213,465 4,500
Additional paid-in capital 390 390
Unrealized gains on
marketable securities 62 212
Retained earnings (Accumulated deficit) (10,361) 101,894
-------- --------
Total stockholders' equity 203,556 106,996
-------- --------
Total Liabilities and Stockholders' Equity $867,814 $353,472
======== ========
See notes to interim condensed consolidated financial statements.
5
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
Net revenue $109,855 $111,056 $350,200 $332,836
Costs and expenses:
Salaries and benefits 58,718 45,596 165,223 143,129
Provision for bad debts 10,489 7,700 24,453 19,758
Other operating expenses 47,334 48,303 137,937 133,976
Interest 9,383 4,142 18,433 12,002
Depreciation and amortization 7,416 4,111 15,529 12,092
Impairment charge 13,349 - 13,349 -
Merger costs 46,818 - 46,818 -
Unusual charges - 4,177 2,438 4,177
-------- -------- -------- --------
Total costs and expenses 193,507 114,029 424,180 325,134
Gain from sale of a hospital - 9,026 - 9,026
Income (loss) from continuing
operations before minority
interests and income taxes (83,652) 6,053 (73,980) 16,728
Minority interests 52 (131) (1,595) (1,234)
-------- -------- -------- --------
Income (loss) from continuing
operations before income taxes
and extraordinary losses (83,600) 5,922 (75,575) 15,494
Provision for income taxes(benefit) (33,355) 2,429 (30,066) 6,351
-------- -------- -------- --------
Income (loss) from continuing
operations before extraordinary
losses (50,245) 3,493 (45,509) 9,143
Discontinued operations:
Income (loss) from operations of
discontinued psychiatric
hospitals, net (10,419) (170) (21,896) 1,362
Loss on disposal of discontinued
psychiatric hospitals, net (14,902) - (14,902) -
-------- -------- -------- --------
Income (loss) before extraordinary
losses (75,566) 3,323 (82,307) 10,505
Extraordinary losses from early
extinguishment of debt, net (4,557) - (4,557) -
-------- -------- -------- --------
Net Income (Loss) (80,123) $ 3,323 $(86,864) $ 10,505
======== ======== ======== ========
Income (loss) per share:
Continuing operations $ (1.19) $ 0.12 $ (1.34) $ 0.31
Discontinued operations (0.60) (0.01) (1.08) 0.04
Extraordinary losses (0.10) - (0.14) -
-------- -------- -------- --------
Income (loss) per share $ (1.89) $ 0.11 $ (2.56) $ 0.35
======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding 42,290 29,772 33,975 29,772
See notes to interim condensed consolidated financial statements.
6
PARACELSUS HEALTHCARE CORPORATION CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)(Unaudited)
Nine Months Ended
September 30,
-------------------
1996 1995
--------- --------
Operating Activities:
Net income (loss) $(86,864) $ 10,505
Non-cash expenses and changes in
operating assets and liabilities, excluding
acquisitions 56,652 7,662
-------- --------
Net cash (used in) provided by operating activities (30,212) 18,167
-------- --------
Investing Activities:
Purchase of marketable securities (4,104) (4,392)
Acquisitions, net of cash acquired (123,072) (3,010)
Proceeds from disposal of facilities - 18,564
Purchase of property and equipment, net (3,260) (14,165)
Decrease in minority interests (2,747) (1,315)
(Increase)decrease in other assets 712 (2,062)
-------- --------
Net cash used in investing activities (132,471) (6,380)
-------- --------
Financing Activities:
Net proceeds from issuance of common stock 40,081 -
Borrowings under Credit Facility 441,500 33,000
Repayments under Credit Facility (342,000) (37,500)
Net proceeds from issuance of debt 320,342 -
Repayment of long-term debt (262,193) (1,064)
Dividends to stockholder (24,981) (5,278)
-------- --------
Net cash provided by (used in) financing activities 172,749 (10,842)
-------- --------
Increase in cash and cash equivalents 10,066 945
Cash and cash equivalents at beginning of period 4,545 2,004
------ -------
Cash and cash equivalents at end of period $14,611 $ 2,949
======== ========
Supplementary cash flow information:
Cash paid during the period for:
Income taxes $ 100 $11,484
Interest 15,713 10,438
Purchase of businesses, net:
Working capital, other than cash $(24,030) $ (616)
Property, plant and equipment (288,810) (67)
Other assets (165,333) (2,327)
Long-term debt 182,492 -
Noncurrent liabilities 25,367 -
Value of stock issued 147,242 -
See notes to interim condensed consolidated financial statements.
7
PARACELSUS HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
Note 1. Organization and Basis of Presentation
Organization
Paracelsus Healthcare Corporation (the "Company") was incorporated in November
1980 for the principal purpose of owning and operating acute care and related
healthcare businesses in selected markets. On August 16, 1996, the Company
acquired Champion Healthcare Corporation ("Champion") (the "Merger")and
completed an initial public equity offering . The results of Champion have been
included in the operations of the Company since August 16, 1996. As of
September 30, 1996, the Company operated 31 hospitals with 3,245 licensed beds
in 11 states (including five psychiatric hospitals with 437 licensed beds (see
Note 4)).
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for annual financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included (see Note 2). The Company's
business is seasonal in nature and subject to general economic conditions and
other factors. Accordingly, operating results for the three and nine months
ended September 30, 1996 are not indicative of the results that may be expected
for the year ending December 31, 1996. These financial statements should be
read in conjunction with the audited consolidated financial statements and
notes thereto for the year ended September 30, 1995 included in the Company's
Annual Report on Form 10-K for such period.
On September 12, 1996, the Company changed its fiscal year end from September
30 to December 31. Accordingly, this Quarterly Report on Form 10-Q for the
three and nine months ended September 30, 1996 is hereby filed for the third
quarter of the new calendar year ending on December 31, 1996.
Concurrent with the change in fiscal year end, the Company has adopted
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," effective for the third quarter of the calendar year ending December 31,
1996 (see Note 5).
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain account balances for the three and nine months ended September 30, 1995
have been reclassified to conform to the Company's current presentation.
8
Net Income (Loss) Per Share
Net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common and common equivalent shares outstanding.
Fully diluted net income (loss) per share is not presented since it equals
primary net income (loss) per share.
Weighted average number of common and common equivalent shares outstanding for
the quarter and nine months ended September 30, 1995 have been adjusted to
reflect the 66,159.426-for-one stock split in conjunction with the Merger.
Note 2. Significant Adjustments
In September 1996, the Company recorded adjustments to increase the after- tax
loss from continuing operations by $10.4 million and from discontinued
operations by $8.8 million for the quarter and nine months ended September 30,
1996. The impact of these adjustments on loss per share from continuing
operations for the quarter and nine months ended September 30, 1996 were
$(0.25) and $(0.31), respectively. The impact of these adjustments on loss per
share from discontinued operations for the same periods were $(0.21) and
$(0.26), respectively. The adjustments to continuing operations related to a
change in recording estimated amounts due from government programs of $23.6
million and charges related to bad debts and closure costs at certain exchanged
or closed facilities of $2.4 million, reduced by related tax benefits and the
reversal of certain excess liabilities of $15.6 million. The adjustments to
discontinued operations also related to revised estimates of government program
receivables of $10.1 million and charges for bad debts and closure costs at
certain psychiatric hospitals of $4.8 million, reduced by related tax benefits
of $6.1 million.
Presently, a Special Committee of the Board of Directors is supervising and
directing an investigation regarding, among other things, certain accounting
and financial reporting practices of the Company for the quarterly periods
prior to the quarter ended September 30, 1996. The results of that
investigation may require the Company to amend this Form 10-Q for the quarter
ended September 30, 1996 hereby filed and other previously filed reports to
reflect adjustments and items reported in the current financial period that may
need to be reclassified or attributed to earlier periods. Such adjustments or
reclassfications may involve amounts currently recorded as contractual
allowance, which might require additional provision for bad debts or receivable
adjustments.
Note 3. Marketable Securities
On November 15, 1995, the Financial Accounting Standards Board staff issued a
Special Report, A Guide to Implementation of SFAS No. 115 on Accounting for
Certain Investments in Debt and Equity Securities. In accordance with the
provisions in that Special Report, the Company chose to reclassify securities
from held-to-maturity to available-for-sale (or trading). The amortized cost of
those securities when transferred was $2.0 million and the unrealized loss on
those securities was $13,000, which was included in stockholders' equity in
December 1995. The Company's wholly owned insurance subsidiary maintains the
marketable securities for statutory purposes.
Note 4. Discontinued Operations
In September 1996, the Company approved a plan to exit the psychiatric hospital
business through the disposition of all of its five psychiatric hospitals (the
"discontinued operations"). Management anticipates that the sale or closure of
all such operations will be completed on or before September 30, 1997. The
Company recorded an estimated net loss on disposal of the discontinued
operations of $14.9 million (net of tax benefit of $10.4 million) to reduce the
related assets to estimated realizable value and for estimated after-tax
operating losses of approximately $1.5 million during the phase out period.
9
Current and long-term net assets of $5.1 million and $28.4 million,
respectively, of the discontinued operations have been segregated in the
Condensed Consolidated Balance Sheet at September 30, 1996 under the captions
"Current assets of discontinued operations, net" and "Long-term assets of
discontinued operations, net", respectively.
During the quarter ended March 31, 1996, the Company recognized a charge for
settlement costs totaling $22.4 million regarding two lawsuits, of which $20.0
million ($11.8 million net of tax) was related to a case involving the
operation of its psychiatric programs. Such charge consisted primarily of legal
fees, settlement payments and the write off of certain psychiatric accounts
receivable. The Company did not admit liability in either case but resolved its
dispute through the settlements in order to facilitate the Champion
acquisition, re-establish a business relationship and/or avoid further legal
costs in connection with the disputes. Operating results of the discontinued
operations through the 1996 third quarter, including the after-tax settlement
charge of $11.8 million but excluding the estimated disposal loss, have been
reported separately as "Discontinued operations - Loss from operations of
discontinued psychiatric hospitals" in the Consolidated Statements of Income
and are as follows:
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
1996 1995 1996 1995
-------- ------- -------- -------
(Dollars in thousands)
Net revenue (a) $ (4,866) $ 13,746 $ 19,841 $ 45,721
Operating expenses 12,794 14,034 56,952 43,412
(Loss) income before income taxes (a) (17,660) (288) (37,111) 2,309
Income tax (benefit) (7,241) (118) (15,215) 947
Net (loss) income from
discontinued operations (a) (10,419) (170) (21,896) 1,362
_________________
(a) Includes pretax and after-tax charges in 1996 amounts of $14.9 million
($10.1 million as a reduction of net revenue) and $8.8 million,
respectively, for items discussed at Note 2.
Note 5 - Facilities Held for Disposition / Impairment Charge
- ------------------------------------------------------------
In September 1996, the Company approved a plan to dispose of certain of its
remaining hospitals in the Los Angeles metropolitan ("LA metro") area. At
September 30, 1996, net assets of $ 24.5 million related to these facilities
were segregated from the remaining assets of the Company and classified in the
Condensed Consolidated Balance Sheet as "Assets held for sale, net." Operating
results of the LA metro hospitals included in the Consolidated Statements of
Income are as follows:
10
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
1996 1995 1996 1995
-------- ------- -------- -------
(Dollars in thousands)
Net revenue (a) $ 19,177 $26,259 $ 68,890 $76,333
Operating Income (loss)(a)(b) (5,070) 2,412 (1,986) 7,469
____________________
(a) Includes charges in 1996 amounts of $4.3 million for items discussed at
Note 2.
(b) Operating income (loss) was derived by subtracting from net revenue,
salaries and benefits, provision for bad debts and other operating
expenses.
In conjunction with the disposition plan of these hospitals and the Company's
adoption of SFAS No. 121, in the third quarter of 1996, the Company recorded an
after-tax impairment charge of $ 7.9 million, or $(0.19) and $(0.23) per share,
for the three and nine months ended September 30, 1996, respectively, to reduce
the net assets of these facilities to their estimated fair value. The estimated
impairment loss may be subject to further adjustments following completion of
valuations by independent appraisers and ultimate disposition of the hospitals.
In the opinion of management, there were no other events or circumstances which
warrant impairment assessment for the Company's other assets.
Note 6. Acquisitions / Closures / Merger Costs
On August 16, 1996, the Company acquired Champion, through the merger of a
wholly owned subsidiary of the Company with and into Champion. The Company
issued approximately 19.7 million shares of its common stock in exchange for
all of the issued and outstanding shares of Champion's common stock and
preferred stock, and assumed all of Champion's outstanding liabilities totaling
approximately $236.2 million. Additionally, outstanding options, subscription
rights, warrants and convertible notes to acquire Champion's common stock were
converted to similar rights to acquire approximately 1.9 million shares of the
Company's common stock. The total purchase price, including all costs
associated with the transaction and liabilities assumed, was approximately
$399.8 million. The Merger was accounted for using the purchase method of
accounting. The Company has allocated the purchase price to the estimated fair
value of the assets acquired and liabilities assumed. The excess of purchase
price over the net assets acquired of approximately $83.0 million has been
recorded as goodwill and is being amortized over an estimated composite useful
life of 25 years. The purchase price allocation is preliminary, and management
is presently evaluating fair values assigned to assets acquired and liabilities
assumed. Management is awaiting appraisals from third party consultants on
values assigned to fixed assets and certain intangible assets.
The Company incurred approximately $63.2 million in Merger-related costs, of
which $46.8 million was expensed in the quarter ended September 30, 1996 and
$16.4 million was capitalized as part of the purchase price of Champion.
11
On May 17, 1996, the Company acquired the 125-bed PHC Salt Lake Regional
Hospital (the "PHC Hospital") in Salt Lake City, Utah, including certain
current assets, for approximately $71.0 million. The Company financed the
acquisition with amounts borrowed under the then existing Credit Facility. The
Company recorded goodwill of $16.0 million, which is being amortized on a
straight line basis over an estimated useful life of 20 years.
On May 17, 1996, the Company acquired the 139-bed Pioneer Valley Hospital in
West Valley City, Utah, the 120-bed Davis Hospital and Medical Center in
Laydon, Utah and the 129-bed Santa Rosa Medical Center in Milton, Florida from
Columbia/HCA Healthcare Corporation ("Columbia")(the "Columbia Hospitals"). In
exchange, Columbia received the Company's 119-bed Peninsula Medical Center in
Ormond Beach, Florida, the 135-bed Elmwood Medical Center in Jefferson,
Louisiana, the 190-bed Halstead Hospital in Halstead, Kansas (the "Exchanged
Hospitals")and $38.5 million in cash, net of a working capital differential,
which is subject to final agreement of the parties. The Company also purchased
the real property of Elmwood and Halstead from a real estate investment trust
("REIT"), exchanged the Elmwood and Halstead real property for Pioneer real
property and then sold the Pioneer real property to the REIT. The acquisition
of the Columbia Hospitals was accounted for as a purchase transaction. The
Company financed the cash portion of the acquisition from borrowings under the
then existing Credit Facility. The Company recorded goodwill of $12.3 million,
which is being amortized on a straight line basis over an estimated useful life
of 20 years.
On March 15, 1996, the Company closed Desert Palms Community Hospital, an acute
care hospital located in Palmdale, California.
The following unaudited pro forma consolidated results of operations for the
nine months ended September 30, 1996 and 1995, assume that the following
transactions were consummated on January 1, 1995: (i) the acquisition of
Champion (ii) the acquisition and disposition of the Columbia Hospitals and the
Exchanged Hospitals, (iii) the completion of a public debt offering and the
redemption of the $75 million Senior Subordinated Notes (see Note 7) and (iv)
the completion of an equity offering (see Note 8). In addition, the operating
results of the five psychiatric hospitals (see Note 4), have been restated for
all periods presented to reflect as a loss from operations of discontinued
operations. PHC Hospital has not been included in the pro formas because the
predecessor owner operated the hospital as a captive cost center; accordingly,
the inclusion of its historical operations would not be meaningful. The pro
forma financial information does not reflect nonrecurring expenses of $46.8
million related to the Merger. It does not purport to be indicative of the
results that would have been attained had the transactions described above
occurred on January 1, 1995.
12
Nine months ended
September 30
------------------
1996(a) 1995
-------- -------
(Dollars in thousands,
except per share data)
Net revenue $551,433 $417,845
======== ========
Income(loss) from continuing operations $(8,477) $4,718
Income(loss) from discontinued
operations, net (36,798) 1,362
-------- -------
Income (loss)
before extraordinary losses (45,275) 6,080
Extraordinary losses, net (4,557) -
-------- -------
Net income (loss) $(49,832) $6,080
========= ========
Income (loss) per common share:
Continuing operations $(0.15) $0.08
Discontinued operations (0.68) 0.02
Extraordinary losses (0.08) -
-------- ------
Net income (loss) per common share $(0.91) $0.10
========= ========
Weighted average common and common
equivalent shares outstanding 54,813 57,981
- -------------------
(a) Results for the nine months ended September 30, 1996, include, among
others, after-tax impairment charge of $7.9 million and adjustments to
increase after-tax loss from continuing operations by $10.4 million and
from discontinued operations by $8.8 million (see Note 2).
Note 7 - Long Term Debt
Credit Facility
On August 16, 1996, the Company entered into a new $400.0 million Reduced
Revolving Credit Facility (the "Credit Facility"), which provides for a $400.0
million five-year reducing revolving line of credit. The Credit Facility is
available for (i) general corporate purposes, including funding working capital
needs, acquisitions and capital expenditures, (ii) issuance of letters of
credit up to $40.0 million, (iii) refinancing of existing indebtedness
including the previous $230.0 million revolving line of credit and (iv) funding
of Merger expenses. The Credit Facility is subject to mandatory reductions of
$50.0 million on August 15, 1999 and an additional $50.0 million on August 15,
2000. Borrowings under the Credit Facility bear interest at the Company's
option, at (i) LIBOR plus a margin ranging from .875% to 2.0% or (ii) the prime
rate plus a margin ranging from zero to .75%. The Company is required to pay
annual commitment fees ranging from .25% to .50% of the unused portion of the
Credit Facility. Letters of credit issued under the Credit Facility require
annual fees ranging from .875% to 2.0% of the outstanding amount of the letters
of credit.
13
The Company recognized an extraordinary loss for the write-off of deferred loan
costs relating to the previous line of credit of $1.0 million (net of income
tax benefit of $.7 million).
As of September 30, 1996, the Company had outstanding borrowings of $141.0
million and outstanding letters of credit of $9.7 million under the Credit
Facility. The Credit Facility is secured by a first priority interest in the
capital stock of substantially all of the Company's present and future
subsidiaries and upstream guarantees of these subsidiaries.
Senior Subordinated Notes
On August 16, 1996, the Company completed a $325.0 million registered offering
of 10% Senior Subordinated Notes (the "Notes"). Of the $315.3 million net
proceeds received from the offering, $81.6 million was used to repay the 9.875%
Senior Subordinated Notes, including $3.9 million in tender and consent fees,
$172.6 million to repay certain Champion existing debt assumed upon the
consummation of the merger, and the remaining $61.1 million to repay amounts
outstanding under the Company's previous revolving line of credit. The Company
recognized an extraordinary loss for the tender and consent fees and the write
off of deferred financing costs relating to the 9.875% Senior Subordinated
Notes of $3.6 million (net of income tax benefit of $2.5 million).
The Notes are general unsecured senior subordinated obligations of the Company
and will mature on August 15, 2006. The Notes are not subject to any mandatory
redemption and may not be redeemed prior to August 15, 2001.
Other Debt
Pursuant to the terms of the Merger, the Company assumed approximately $179.1
million of Champion existing indebtedness, of which $172.6 million was repaid
on August 16, 1996, using net proceeds from the Notes offering. The remaining
assumed liabilities consisted primarily of capital lease obligations and
miscellaneous notes payable. Pursuant to an agreement in conjunction with the
Merger, Dr. Manfred G. Krukemeyer, the Company's Chairman of the Board,
received a $7.2 million 6.51% subordinated note from the Company. The note
provides for payments of principal and interest in an aggregate annual amount
of $1.0 million over a term of 10 years.
The terms of the various debt agreements include certain restrictive covenants.
Among other restrictions, the covenants include limitations on investments,
borrowings, liens, acquisitions and dispositions of assets and transactions
with affiliates, and require maintenance of certain ratios regarding interest
coverage and leverage. As of September 30, 1996, the Company was in compliance
with all covenants contained within its debt agreements.
Note 8 - Stockholders' Equity
Pursuant to the Amended and Restated Articles of Incorporation adopted on
August 13, 1996, the Company has 150.0 million authorized shares of common
stock no stated value per share. Each share is entitled to one vote and does
not have any cumulative voting rights. The Company is also authorized to issue
25.0 million shares of preferred stock at $.01 par value per share, which may
be issued in such series and have such rights, preferences and other provisions
as may be determined by the Board of Directors without approval by the holders
of common stock.
14
In connection with the adoption of a Shareholder Protection Rights Agreement on
August 16, 1996, the Company designated 1.5 million of its 25.0 million
authorized preferred shares as Participating Preferred Stock ("Preferred
Share") and paid a dividend of one Preferred Share purchase right ("Right") for
each outstanding share of the Company's common stock to stockholders of record
as of August 15, 1996. Similar rights will be issued in respect of common stock
subsequently issued. Each Preferred Share will be entitled to an aggregate
quarterly dividend equal to the greater of 25% of each Right's exercise price
or 100 times the quarterly dividend declared on the Company's common stock. In
the event of liquidation, the holder of each Preferred Share will be entitled
to receive a liquidation payment of $100 per share plus any accrued but unpaid
dividends. Each Preferred Share will have 100 votes, voting together with the
common stock. No Preferred Shares are currently outstanding. Each Right
entitles the registered holder to purchase from the Company, one one-hundredth
of a Preferred Share at a price of $42.50, subject to adjustment. The Rights
currently are not exercisable and will be exercisable only if a person or group
acquires beneficial ownership of 25% or more of the Company's outstanding
shares of common stock (i.e. becomes an "Acquiring Person" as defined in the
related Rights Agreement). The Rights, which expire on August 16, 2006, are
redeemable in whole, but not in part, at the Company's option at any time prior
to such time as any person or group becomes an Acquiring Person, at a price of
$.01 per Right.
In connection with the Merger, in August 1996, all 450 outstanding shares of
the Company's common stock, which were solely owned by Dr. Krukemeyer, were
split into an aggregate of 29.8 million shares as a result of a 66,159.426-
for-one stock split. Upon the consummation of the Merger, each share of
Champion common and preferred stock was exchanged for one and two shares of the
Company's common stock, respectively. Accordingly, the Company issued 19.7
million shares of its common stock in connection with such exchange. On August
16, 1996, the Company's common stock began trading on the New York Stock
Exchange under the symbol "PLS."
Prior to the Merger, the Company declared a dividend of $21.2 million, which
was paid on August 30, 1996 to its former sole shareholder, Dr. Krukemeyer.
After receipt of the dividend and pursuant to a related agreement, Dr.
Krukemeyer paid approximately $3.0 million plus accrued interest in
full satisfaction of a note payable to the Company. Additionally,
Dr. Krukemeyer loaned the Company $7.2 million and received a $7.2 million
6.51% subordinated note from the Company (see Note 7) .
On August 16, 1996, the Company completed a sale of 5.2 million shares of its
common stock at $8.50 per share. Net proceeds of $40.1 million were used along
with proceeds from the Notes offering (see Note 7) to repay existing and
acquired indebtedness as well as pay for Merger related costs (see Note 6).
On July 15, 1996, the Company adopted the 1996 Stock Incentive Plan (the
"Incentive Plan") to provide stock-based incentive awards, including incentive
stock options, non-qualified stock options, restricted stock, performance
shares, stock appreciation rights and deferred stock, to key employees,
consultants and advisors. A total of 8.7 million shares has been reserved for
15
issuance under the Incentive Plan. Pursuant to the termination of the Company's
Phantom Equity Long-Term Incentive Plan in connection with the Merger, options
to purchase 1.6 million shares of the Company's common stock at an exercise
price of $.01 per share ("Value Options") were granted to certain directors and
officers of the Company in addition to aggregated cash payments of $20.5
million, which if combined, approximated the accrued value of the canceled
phantom stock appreciation rights and/or preferred stock units thereunder.
Additionally, pursuant to the various employment agreements, Value Options to
purchase 1.2 million shares and options to purchase 2.8 million shares of the
Company's common stock at an exercise price of $8.50 per share were granted to
certain senior executive officers. The Company recognized merger expenses
totaling $36.9 million related to the cancellation of the Phantom Equity
Long-Term Incentive Plan and the issuance of certain Value Options.
In connection with the Merger, the Company also assumed and converted all
Champion outstanding options, subscription rights, warrants and convertible
notes to similar rights to acquire approximately 1.9 million shares of the
Company's common stock, of which none is available for reissuance once
canceled.
Note 9 - Supplemental Executive Retirement Plan ("SERP")
As a result of a change in control from the Merger, officers and employees of
the Company who were participants in the SERP prior to the Merger became fully
vested in all benefits thereunder. The Company recognized Merger expenses of
$5.1 million related to the vesting of such benefits. Pursuant to their
respective employment agreements, certain Champion executives became
participants in the SERP and received retroactive benefits for their years of
service with Champion. The Company capitalized approximately $1.9 million of
such non-cash charges as part of the purchase price of Champion.
Note 10 - Contingencies
The Company is a party to pending litigation in connection with several
stockholder related matters. See "Item 1. Legal Proceedings" in Part II of this
report for a description of such litigation. Due to the recent nature of such
litigation, management is unable to determine the ultimate outcome of such
lawsuits.
The Company maintains insurance policies related to Directors and Officers
liability which it believes to be adequate.
The Company is subject to claims and suits in the ordinary course of business,
including those arising from care and treatment afforded at its facilities. The
Company maintains insurance and, where appropriate, reserves with respect to
the possible liability arising from such claims. The Company believes that its
insurance and loss reserves are adequate to cover potential claims that may be
asserted and that the outcome of such claims will not have a material effect on
the Company's financial position, results of operations or cash flows.
16
PART 1. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Result of Operations
Paracelsus has made numerous acquisitions and divestitures during the three and
nine months ended September 30, 1996. Accordingly, the Company's portfolio of
operating hospitals during 1996 is substantively different from that which the
Company operated during the three and nine months ended September 30, 1995. To
more fully understand the comparability of the results of operations,
management has included a discussion of same hospital results.
Same hospitals as used in the following discussion consisted of hospitals owned
throughout both quarters and nine months ended September 30, 1996 and 1995.
"Same hospitals" exclude (i) Bellwood Health Center, Womans Hospital and Desert
Palms Community Hospital which were closed or disposed in April 1995, September
1995 and March 1996, respectively, (ii) PHC Salt Lake Hospital which was
acquired in May 1996, (iii) the "Exchanged Hospitals" and the "Columbia
Hospitals" which were part of the exchange transaction completed in May 1996
and (iv) the Champion hospitals acquired in August 1996 pursuant to the Merger.
Operating results of the Company's five psychiatric hospitals, including two of
which were acquired through the Merger with Champion, for the periods prior to
September 30, 1996 have been reclassified and presented under the caption "
Discontinued Operations - Loss from operations of psychiatric hospitals" in the
Consolidated Statements of Income.
17
Quarter ended September 30, 1996
Compared with Quarter ended September 30, 1995
Net revenue for the three months ended September 30, 1996 was $ 109.9
million, a decrease of $1.2 million , or 1.1%, from $111.1 million for the same
period of 1995. The $1.2 million decrease was primarily attributable to (i) an
adjustment of $23.6 million to amounts due from government programs (see Note
2), offset by (ii) an increase of $20.3 million contributed by hospitals
acquired since October 1995, net of disposed hospitals and (iii) an increase of
$2.1 million from "same hospitals." The $2.1 million increase in "same
hospital" net revenue was attributable to an increase of $5.0 million, or
9.1%, at hospitals located outside of the LA metro area, offset by a decrease
of $2.9 million, or 11.1%, at hospitals located inside the LA metro area (the
"LA metro hospitals"). The $5.0 million increase was due primarily to an
increase in services offered, physician relationship development efforts,
addition of new physicians through recruitment, acquisition of physician
practices and clinics and an increase in home health agency business. The $2.9
million decrease was due mainly to the continued decline in net revenue as as
result of a change in payer mix from private insurance to managed care and
Medicare/Medicaid and a change in acuity level.
Expressed as a percentage of net revenue, operating expenses (salaries and
benefits, provision for bad debts and other operating expenses) increased from
91.5% in 1995 to 106.1% in 1996 and operating margin decreased from 8.5% to a
negative margin of 6.1%. Excluding the adjustments in 1996 described at Note 2,
operating margin was 8.6% in 1996, compared to 8.5% in 1995. "Same hospital"
operating margin decreased from 15.6% in 1995 to 13.8% in 1996, primarily as a
result of lower margins associated with the LA metro hospitals.
Depreciation and amortization increased to $7.4 million in 1996 from $4.1
million for the same period of 1995. Of the $3.3 million increase, $2.4
million was attributable to the facilities acquired, net of those that were
sold since October 1995, and the remaining increase of $.9 million from
purchases of medical equipment, facility improvements, purchase of physician
practices and clinics.
Interest expense increased $5.2 million over the same period of 1995, primarily
due an increase in outstanding indebtedness from the issuance of the Notes in
August 1996 and additional borrowings under the Credit Facility to finance
acquisitions and to fund Merger costs, working capital requirements and capital
expenditures, net of the redemption of the $75.0 million 9.875% Senior
Subordinated Notes.
Loss from operations of the discontinued psychiatric hospitals for the three
months ended September 30, 1996 was $10.4 million, compared to $.2 million for
the same period in 1995. The $10.2 million increase in loss was attributable to
(i) the deterioration in operating conditions at the psychiatric hospitals
attributable to collection problems and a shift from inpatient business to less
profitable outpatient business (ii) the closure of the inpatient unit at the
Buena Park facility in July 1996 and (iii) an after-tax charge of $8.8 million
in September 1996 relating to amounts due from third party intermediaries and
the write off of certain uncollectible accounts (see Note 2).
18
Net loss for the three months ended September 30, 1996 was $80.1 million, or
$(1.89) per share, compared to net income of $3.3 million, or $0.11 per share,
for the same period in 1995. Included in 1996 income from continuing operations
before income taxes, net income and net income per share were net aggregate
adjustments (see Note 2) and nonrecurring charges of $77.7 million, $75.7
million and $(1.79) per share, respectively. Included in 1995 income from
continuing operations before income taxes, net income and net income per share
were net aggregate nonrecurring gains of $4.8 million, $2.7 million and $0.09
per share, respectively. Aggregate adjustments and nonrecurring gains (charges)
for the three months ended September 30, 1995 and 1996 were comprised of the
following items (in thousands, except per share amounts):
Three months ended September 30,
------------------------------------------------------------
1996 1995
--------------------------- --------------------------------
Pre-Tax Net Income EPS Pre-Tax Net Income EPS
------- ---------- ------- ------- ---------- -----
Significant
adjustments on
continuing operations
(see Note 2) $(17,566) $(10,364) $(0.25) $ - $ - $ -
Impairment charge (13,349) (7,876) (0.19) - - -
Merger costs (46,818) (27,623) (0.65) - - -
Unusual charges - - - (4,177) (2,464) (0.08)
Gain from sale of
a hospital - - - 9,026 5,325 0.18
Discontinued operations - (25,321) (0.60) - (170) (0.01)
Extraordinary losses - (4,557) (0.10) - - -
-------- -------- ------ ------ ------- -------
Total impact of
significant
adjustments and
nonrecurring items $(77,733) $(75,741) $(1.79) $4,849 $ 2,691 $ 0.09
-------- -------- ------ ------ ------- -------
19
Nine Months ended September 30, 1996
Compared with Nine Months ended September 30, 1995
Net revenue for the nine months ended September 30, 1996 was $350.2 million, an
increase of $17.3 million, or 5.2%, from $ 332.8 million for the same period of
1995. The $17.3 million increase was primarily attributable to (i) an increase
of $24.6 million contributed by hospitals acquired since October 1995, net of
disposed hospitals and (ii) an increase of $16.3 million from "same hospital",
offset by (iii) an adjustment of $23.6 million to amounts due from government
programs (see Note 2). The $16.3 million increase in "same hospital" net
revenue was attributable to an increase of $20.7 million, or 12.5%, at
hospitals located outside of the LA metro area, offset by a decrease of $4.4
million, or 5.7%, at the LA metro hospitals. The $20.7 million increase was due
primarily to an increase in services offered, physician relationship
development efforts, addition of new physicians through recruitment,
acquisition of physician practices and clinics and an increase in home health
agency business. The $4.4 million decrease was due mainly to a continued
decline in net revenue as a result of a change in payer mix from private
insurance to managed care and Medicare/Medicaid and change in acuity level.
Expressed as a percentage of net revenue, operating expenses (salaries and
benefits, provision for bad debts and other operating expenses) increased from
89.2% in 1995 to 93.6% in 1996 and operating margin decreased from 10.8% to
6.4%. Excluding the adjustments in 1996 described at Note 2, operating margin
was 10.7%, compared to 10.8% in 1995. "Same hospital" operating margin
decreased slightly from 15.9% in 1995 to 15.7% in 1996, primarily as a result
of an increase in provision for bad debts and the deterioration of operating
margins at the LA metro hospitals during the nine-month period.
Depreciation and amortization increased to $15.5 million in 1996 from $12.1
million for the same period of 1995. Of the $3.4 million increase, $ 2.7
million was attributable to the facilities acquired, net of those that were
disposed since October 1995, and the remaining increase of $.7 million from
purchases of medical equipment, facility improvements, purchase of physician
practices and clinics.
Interest expense increased $ 6.4 million over the same period of 1995,
primarily due an increase in outstanding indebtedness from the issuance of the
Notes in August 1996 and additional borrowings under the Credit Facility to
finance acquisitions and to fund Merger costs, working capital requirements and
capital expenditures, net of the redemption of the $75.0 million 9.875% Senior
Subordinated Notes.
Loss from operations of the discontinued psychiatric hospitals for the nine
months ended September 30, 1996 was $21.9 million, compared to net income of
$1.4 million for the same period in 1995. The $23.3 million decrease was
attributable to (i) a deterioration in operating conditions at the
psychiatric hospitals during the nine-month period, attributable to accounts
receivable collection problems and a shift from inpatient business to less
profitable outpatient business, (ii) an after-tax charge of $8.8
20
million in September 1996 relating to amounts due from third party
intermediaries and the write off of certain uncollectible accounts (see Note 2)
and (iii) an after-tax charge of $11.8 million relating to a lawsuit settled in
March 1996 (see Note 4).
Net loss for the nine months ended September 30, 1996 was $86.9 million, or
$(2.56) per share, compared to net income of $10.5 million, or $0.35 per share,
for the same period of 1995. Included in 1996 income from continuing operations
before income taxes, net income and net income per share were net aggregate
adjustments (see Note 2) and nonrecurring charges of $80.2 million, $88.7
million and $2.61 per share, respectively. Included in 1995 income from
continuing operations before income taxes, net income and net income per share
were net aggregate nonrecurring gains of $4.8 million, $4.2 million and $0.14
per share, respectively. Aggregate adjustments and nonrecurring gains (charges)
for the nine months ended September 30, 1995 and 1996 were comprised of the
following items (in thousands, except per share amounts):
Nine months ended September 30,
---------------------------------------------------------
1996 1995
--------------------------- -----------------------------
Pre-Tax Net Income EPS Pre-Tax Net Income EPS
------- ---------- ----- --------- ---------- -----
Significant
adjustments on
continuing operations
(see Note 2) $(17,566) $(10,364) $(0.31) $ - $ - $ -
Impairment charge (13,349) (7,876) (0.23) - - -
Merger costs (46,818) (27,623) (0.81) - - -
Unusual charges (2,438) (1,438) (0.04) (4,177) (2,464) (0.08)
Gain from sale
of a hospital - - - 9,026 5,325 0.18
Discontinued
operations - (36,798) (1.08) - 1,362 0.04
Extraordinary losses - (4,557) (0.14) - - -
-------- -------- ------ ------- --------- ------
Total impact of
significant
adjustments and
nonrecurring items $(80,171) (88,656) $(2.61) $ 4,849 $ 4,223 $ 0.14
======== ======== ====== ======= ========= ======
21
Liquidity and Capital Resources
Net cash used in operating activities for the nine months ended September 30,
1996 was $30.2 million, compared to net cash provided by operating activities
of $18.2 million for the same period of 1995. The $30.2 million decrease in
cash was mainly attributable to cash used during 1996 to pay for Merger-related
costs and settlement of certain lawsuits. Net cash used in investing activities
increased $126.1 million to $132.5 million from $6.4 million during 1995,
primarily from an increase in use of cash to finance acquisition of hospitals.
Net cash provided by financing activities during 1996 was $172.8 million,
compared to net cash used in financing activities of $10.8 million during 1995.
The $183.6 million increase during 1996 was due to the issuance of the $325.0
million Notes, the issuance of the 5.2 million shares of the Company's common
stock and net incremental borrowings under the Credit Facility, net of amounts
used therefrom to repay the $75.0 million 9.875% Senior Subordinated Notes,
certain indebtedness assumed from the purchase of Champion and amounts
outstanding under the previous $230.0 million revolving line of credit.
Net working capital was $121.5 million, an increase of $42.5 million from $79.0
million at December 31, 1995. The increase was mainly attributable to an
increase in current portion of deferred income taxes and a reclassification to
current assets of property and equipment and other long term assets relating to
the LA metro hospitals which are being held for sale. The Company's long-term
debt as a percentage of total capitalization was 70.7% at September 30, 1996,
compared to 54.9% at December 31, 1995. The increase was primarily attributable
to the issuance of the $325.0 million Notes, net incremental borrowings under
the Credit Facility and a reduction in retained earnings for a net loss and
dividend paid during 1996. Such increase was offset by the issuance of 19.7
million shares of the Company's common stock related to the Champion
acquisition, the equity offering of 5.2 million shares of the Company's common
stock and the repayment of certain indebtedness using the proceeds from the
above financing activities.
On August 16, 1996, the Company entered into a new Credit Agreement which
provides for a revolving line of credit in the amount of $400.0 million. The
Credit Facility is available for working capital purposes, to finance capital
expenditures, to fund acquisitions and for the issuance of letters of credit.
As of September 30, 1996, the Company had $249.3 million available under its
Credit Facility.
The Company anticipates that internally generated cash flows from earnings,
proceeds from the sale of hospital accounts receivable under the Company's
commercial paper program and borrowings under its Credit Facility will be
sufficient to fund future acquisitions, capital expenditures and working
capital requirements through fiscal year 1997. There can be no assurance that
future developments in the hospital industry or general economic trends will
not adversely affect the Company's operations or its ability to meet such
funding requirements.
Disposition of the psychiatric hospitals
In September 1996, the Company approved a plan to exit the psychiatric hospital
business through the disposition of all of its five psychiatric hospitals.
This disposition will enable the Company to remain focused on operating its
acute care hospitals. The Company experienced deterioration in operating
22
conditions at its three psychiatric hospitals located in the LA metro area
during the nine months ended September 30, 1996. Such deterioration was caused,
generally, as a result of insurance companies becoming more stringent in their
payments to service providers of psychiatric care, and particularly, as a result
of the dispute and settlement of the Aetna lawsuits. Additionally, managed care
organizations recently have increased their requirement that members receive
care on a less costly outpatient basis. Management expects that the
deterioration of the psychiatric hospital business will continue although at a
slower pace through the foreseeable future.
To curtail further losses, the Company closed the inpatient unit at its Buena
Park facility in July 1996 and may close other facilities. The Company
recorded in September 1996 an estimated disposal loss of $14.9 million related
to these facilities, including operating losses during the phase out period. It
expects to complete the disposition of its psychiatric hospitals by September
30, 1997.
Disposition of other LA metro hospitals
In September 1996, the Company adopted a plan to dispose of certain of its
remaining hospitals in the LA metro area. This disposition will allow the
Company to exit a market that (i) is highly competitive and increasingly
penetrated by managed care organizations and (ii) does not conform to the
Company's business plan.
Included in the Company's net income for the quarter and nine months ended
September 30, 1996 was a loss of $3.9 million and $3.6 million, or $(0.09) and
$(0.11) per share, respectively, associated with the LA metro hospitals, caused
primarily by a change in payer mix from private insurance to managed care and
Medicare/Medicaid and change in acuity level. Loss for each respective period
included after-tax charges of $2.5 million for a change in the amounts due from
government programs.
In conjunction with the disposition of these hospitals, the Company will
reevaluate by December 31, 1996, the realizability of the net book value of
these operations based on final third party appraisals.
Stockholders' litigations and Special Committee's investigation
The Company is a party to pending litigations in connection with several
stockholder related matters. Because these lawsuits are in their initial
stages, the Company cannot predict these outcome or the length of time it will
take to resolve these litigations. The Company maintains Directors and Officers
liability insurance in amounts it believes to be adequate.
23
The Board of Directors has appointed a Special Committee consisting of non-
management members, to supervise and direct the conduct of an inquiry by
outside legal counsel regarding, among other things, the Company's accounting
and financial reporting practices and procedures for quarterly periods before
the quarter ending September 30, 1996. As of the date of filing this report,
such inquiry has not been completed. Accordingly, depending on the results of
the Special Committee inquiry, the Quarterly Report on Form 10-Q hereby filed
and other previously filed reports may have to be amended to reflect
adjustments and items reported in the current financial period that may need to
be reclassified or attributed to earlier periods. Such adjustments or
reclassfications may involve amounts currently recorded as contractual
allowance, which might require additional provision for bad debts or receivable
adjustments.
Regulatory Matters
Healthcare reform legislation has been proposed at both federal and state
levels. The Company cannot predict the effect that such reforms may have on its
business and there can be no assurance that any such reforms will not have a
material adverse effect on the Company's future revenues or liquidity.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
STOCKHOLDERS' LITIGATION
On April 17, 1996, the Company and Champion were served with a lawsuit filed in
the Court of Chancery of the State of Delaware in and for New Castle County by
a Champion stockholder against certain directors and officers of Champion,
Champion and the Company. This lawsuit, which among other things seeks class
certification, alleges that the Merger and the consideration to be paid to
Champion's stockholders are unfair and grossly inadequate and that the named
defendants have violated their fiduciary duties to Champion and the
stockholders of Champion. In this action, the plaintiff seeks to rescind the
Merger transaction or award Champion stockholders rescissory damages, plus
costs and attorneys' fees. The Company disputes the factual and legal premises
upon which the plaintiff's lawsuit is based and denies that the plaintiff is
entitled to any recovery on her claim. Because the lawsuit is in the initial
stages, the Company cannot predict the outcome of this litigation, the length
of time it will take to resolve this litigation or the effect of any such
outcome on the Company's financial condition or results of operations.
Since October 11, 1996, six complaints have been filed against the Company, of
which four have been served, by current or former stockholders of the Company,
allegedly on behalf of all persons who received the Company's common stock
through the Merger with Champion and who purchased common stock or a portion of
the Notes between August 13, 1996 and October 9, 1996. Two of these complaints
were filed in the Superior Court of the State of California, County of Los
Angeles, one in the District Court of Harris County, Texas and two in the United
States District Court for the Southern District of Texas, Houston Division. The
named defendants in these lawsuits are the Company and certain current and
former officers and directors of the Company.
In these lawsuits, the plaintiffs have alleged violations of federal,
California and Texas securities laws . In this connection, the plaintiffs
alleged that during the class period, the named defendants disseminated
materially misleading statements and omitted disclosing material facts about
the Company and its business, specifically in the reporting and disclosure of
reserves, bad debt expenses, collection expenses and facility closure costs and
that the price of the Company's common stock was artificially inflated. The
plaintiffs also alleged that the named defendants failed to make a reasonable
investigation and did not possess reasonable grounds for the belief that the
statements contained in the various Registration Statements and Prospectuses
filed during the class period were true, or that there was an omission of
material facts necessary to make the statements contained therein not
misleading. The plaintiffs seek damages in an unspecified amount and
extraordinary, equitable or injunctive relief, plus costs and attorneys' fees.
The Company is carefully considering the allegations made in these lawsuits and
intends to respond to them at the appropriate time.
25
ITEM 2. CHANGE IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 (a) Amended and Restated Agreement and Plan of Merger dated as of May 29,
1996, by and among Paracelsus, Champion and PC Merger Sub. Inc.
3.4 Amended and Restated Articles of Incorporation of Paracelsus.
3.5 Amended and Restated Bylaws of Paracelsus.
4.1 Indenture, dated August 16, 1996 between Paracelsus and AmSouth Bank
of Alabama, as Trustee (including the form of certificate
representing the 10% Senior Subordinated Notes due 2006).
4.2 (b) Shareholder Protection Rights Agreement between Paracelsus and
ChaseMellon Shareholder Services, L.L.C, as Rights Agent.
4.5 (c) Form of Warrant issued pursuant to Champion Series E Note Purchase
Agreement, dated May 1, 1995, as amended.
4.6 (d) Form of Warrant issued pursuant to Champion Series D Note and Stock
Purchase Agreement dated December 31, 1993, as amended.
4.9 Certificate representing Common Stock.
10.1 $400 Million Reducing Revolving Credit Facility, dated as of August
16, 1996, among Paracelsus, Bank of America National Trust and
Savings Association, as agent, and other lenders named therein.
10.16 (e) The Restated Paracelsus Healthcare Corporation Supplemental Executive
Retirement Plan.
10.17 Amendment No. 1 to the Supplemental Executive Retirement Plan.
10.28 (f) Amended and Restated Partnership Agreement of Dakota/Champion
Partnership dated December 21, 1994.
10.29 (f) Operating Agreement between Dakota/Champion Partnership and
Champion, dated December 21, 1994.
10.34 License Agreement between Dr. Manfred George Krukemeyer and
Paracelsus.
10.36 Registration Rights Agreement between Paracelsus and Park Hospital
GmbH.
10.37 Voting Agreement between Park Hospital GmbH and Messrs. Miller and
VanDevender.
10.38 Services Agreement between Paracelsus and Dr. Manfred George
Krukemeyer.
10.39 Insurance Agreement between Paracelsus and Dr. Manfred George
Krukemeyer.
10.40 Non-Compete Agreement between Paracelsus and Dr. Manfred George
Krukemeyer.
26
10.41 Shareholder Agreement between Paracelsus and Park Hospital GmbH,
as guaranteed by Dr. Manfred George Krukemeyer.
10.42 Dividend and Note Agreement between Paracelsus and Park Hospital GmbH.
10.43 Employment Agreement between Charles R. Miller and Paracelsus
including the Management Rights Agreement.
10.44 Employment Agreement between R.J. Messenger and Paracelsus, including
the Management Rights Agreement.
10.45 Employment Agreement between James G. VanDevender and Paracelsus.
10.46 Employment Agreement between Ronald R. Patterson and Paracelsus.
10.47 Employment Agreement between Robert C. Joyner and Paracelsus.
10.48 Paracelsus 1996 Stock Incentive Plan.
10.49 Paracelsus Healthcare Corporation Executive Officer Performance Bonus
Plan.
10.50 First Refusal Agreement among Park Hospital GmbH, Dr. Manfred George
Krukemeyer and Messrs. Messenger, Miller, VanDevender and Patterson.
10.54 Registration Rights Agreement among Paracelsus and certain Champion
Investors.
10.56 Indemnity and Insurance Coverage Agreement between Paracelsus and
certain Champion and Paracelsus executive officers.
10.64 Paracelsus' 6.51% Subordinated Notes Due 2006.
11.1 Statement regarding computation of per share earnings of Paracelsus
27 Financial Data Schedule.
- --------------------------
(a) Incorporated by reference from Exhibit of the same number to the Company's
Current Report on Form 8-K, dated May 29, 1996.
(b) Incorporated by reference from Exhibit of the same number to the Company's
Registration Statement on Form 8-A, filed on August 12, 1996.
(c) Incorporated by reference from Exhibit 10.23(g) to Champion's Annual Report
on Form 10-K for the year ended December 31, 1995.
(d) Incorporated by reference from Exhibit 10.23(f) to Champion's Annual Report
on Form 10-K for the year ended December 31, 1995.
(e) Incorporated by reference from Exhibit of the same number to the Company's
Registration Statement on Form S-4, Registration No. 333-8521.
(f) Incorporated by reference from Exhibit 10 to Champion's Current Report on
Form 8-K, dated December 21, 1994.
(b) Reports on Form 8-K
- The Company filed on September 13, 1996 a Current Report on Form 8-K,
dated September 12, 1996, reporting pursuant to Item 8 thereof, that the
Company had elected to change its fiscal year end from September 30 to
December 31.
- The Company filed on August 30, 1996 a Current Report on Form 8-K, dated
August 16, 1996, reporting pursuant to Items 2, 5, and 7 thereof, the
acquisition through merger of Champion, the completion of a public equity
offering of 5.2 million shares (including 600,000 over-allotted shares )
of the Company's common stock at $8.50 per share and the completion of a
public debt offering of $325.0 million of the Company's 10% Senior
Subordinated Notes due 2006. In addition, the Company completed a tender
offer to purchase all of the outstanding $75.0 million 9.875% Senior
Subordinated Notes. Champion financial statements for the three years
ended December 31, 1995 were incorporated by reference to the Company's
Registration Statement on Form S-4 (Commission File No. 333-8521), with
financial statements for period ending through June 30, 1996 filed
therein.
27
- The Company filed on August 21, 1996 a Current Report on Form 8-K, dated
August 14, 1996, reporting pursuant to Item 5 thereof, the declaration of
a dividend of one right for each outstanding share of the Company's
common stock, no stated value per share, held of record at the close of
business on August 15, 1996, payable on August 16, 1996.
- The Company filed on July 24, 1996 an Amendment No. 1 on Form 8-K/A to a
Current Report on Form 8-K, dated May 17, 1996, reporting pursuant to
Item 7 thereof, the historical financial statements for Davis Hospital
and Medical Center, Pioneer Valley Hospital and Santa Rosa Medical Center
and the Company's pro forma financial statements for the period through
March 31, 1996.
- The Company filed on July 24, 1996 a Current Report on Form 8-K, dated
May 29, 1996, reporting pursuant to Item 5 thereof, the Amended and
Restated Agreement and Plan of Merger, which amended and restated the
Agreement and Plan of Merger, dated April 12, 1996, among the Company,
Champion and Merger Sub.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Paracelsus Healthcare Corporation
(Registrant)
/s/ JAMES G. VANDEVENDER
Dated: November 19, 1996 By: ____________________________
James G. VanDevender
Executive Vice President,
Chief Financial Officer
& Director