-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HkD32orwQ32ARan5LVYUCnaHu7DGjpM1SsIuLFGuB1P0/RxGrwS9d7/Uc6insbot 1bKLx+spTcxrXc5nwzq1pQ== 0000758722-98-000040.txt : 19980817 0000758722-98-000040.hdr.sgml : 19980817 ACCESSION NUMBER: 0000758722-98-000040 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARACELSUS HEALTHCARE CORP CENTRAL INDEX KEY: 0000758722 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-GENERAL MEDICAL & SURGICAL HOSPITALS, NEC [8062] IRS NUMBER: 953565943 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12055 FILM NUMBER: 98690260 BUSINESS ADDRESS: STREET 1: 515 W GREENS RD STREET 2: STE 800 CITY: HOUSTON STATE: TX ZIP: 77067 BUSINESS PHONE: 7138736623 MAIL ADDRESS: STREET 1: 515 W GREENS RD STREET 2: STE 800 CITY: HOUSTON STATE: TX ZIP: 77067 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 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 JUNE 30, 1998 Commission file number 1-12055 PARACELSUS HEALTHCARE CORPORATION (Exact name of registrant as specified in its charter) CALIFORNIA 95-3565943 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 515 W. GREENS ROAD, SUITE 800, HOUSTON, TEXAS (Address of principal executive offices) 77067 (281) 774-5100 (Zip Code) (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, NO STATED VALUE NEW YORK STOCK EXCHANGE ----------------------------- ------------------------------ (Title of Class) (Name of each exchange on which registered) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No[ ] As of August 14, 1998, there were outstanding 55,118,330 shares of the Registrant's Common Stock, no stated value. 2 PARACELSUS HEALTHCARE CORPORATION FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 INDEX PAGE REFERENCE FORM 10-Q -------------- FORWARD-LOOKING STATEMENTS 3 - -------------------------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements-- (Unaudited) Condensed Consolidated Balance Sheets-- June 30, 1998 and December 31, 1997 4 Consolidated Statements of Operations-- Three Months and Six Months Ended June 30, 5 1998 and 1997 Condensed Consolidated Statements of Cash Flows-- Six Months Ended June 30, 1998 and 1997 6 Notes to Interim Condensed Consolidated 7 Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II. OTHER INFORMATION 21 SIGNATURE 23 3 FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-Q are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks and uncertainties. Factors which may cause the Company's actual results in future periods to differ materially from forecast results include, but are not limited to: the outcome of litigation pending against the Company and certain affiliated persons; general economic and business conditions, both nationally and in the regions in which the Company operates; industry capacity; demographic changes; existing government regulations and changes in, or the failure to comply with government regulations; legislative proposals for healthcare reform; the ability to enter into managed care provider arrangements on acceptable terms; changes in Medicare and Medicaid reimbursement levels; revisions to amounts recorded for losses associated with the impairment of assets; liabilities and other claims asserted against the Company; competition; the loss of any significant customer; changes in business strategy, divestiture or development plans; the ability to attract and retain qualified personnel, including physicians; costs to make the Company's information systems Year 2000 compliant; fluctuations in interest rates on the Company's variable rate indebtedness; and the availability and terms of capital to fund working capital requirements and the expansion of the Company's business, including the acquisition of additional facilities. 4 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PARACELSUS HEALTHCARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS ($ in 000's)
JUNE 30, DECEMBER 31, 1998 1997 ------------ ----------- (Unaudited) (Note 1) ASSETS Current assets: Cash and cash equivalents $ 10,291 $ 28,173 Restricted cash 9,855 6,457 Accounts receivable, net 57,952 70,675 Deferred income taxes 24,999 25,818 Other current assets 43,664 42,884 ------- ------- Total current assets 146,761 174,007 Property and equipment 414,027 438,792 Less: Accumulated depreciation and amortization (123,789) (130,728) ------- ------- 290,238 308,064 Investment in Dakota Heartland Health System (Note 3) 116,708 48,499 Goodwill 112,522 114,404 Other assets 84,184 89,850 ------- ------- Total assets $ 750,413 $ 734,824 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 35,054 $ 46,722 Accrued liabilities and other 76,803 83,698 Current maturities of long-term debt 7,276 6,209 ------- ------- Total current liabilities 119,133 136,629 Long-term debt 521,916 491,914 Other long-term liabilities 61,158 64,278 Stockholders' Equity: Common stock 224,542 224,475 Additional paid-in capital 390 390 Unrealized gains on marketable securities 12 Accumulated deficit (176,726) (182,874) ------- ------- Total stockholders' equity 48,206 42,003 ------- ------- Total Liabilities and Stockholders' Equity $ 750,413 $ 734,824 ======= =======
See accompanying notes. 5 PARACELSUS HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS ($ in 000's, except per share data) (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------------------ 1998 1997 1998 1997 -------- -------- -------- -------- Net revenue $151,148 $167,256 $311,558 $335,746 Costs and expenses: Salaries and benefits 62,463 68,248 127,893 137,260 Other operating expenses 62,683 68,967 128,161 135,274 Provision for bad debts 8,739 10,597 18,431 20,761 Interest 13,295 10,698 25,674 21,678 Depreciation and amortization 7,656 8,276 15,844 15,980 Equity in earnings of Dakota Heartland Health System (1,976) (2,667) (5,061) (5,226) Unusual items (1,072) 5,978 (1,072) 5,978 Gain on sale of facilities (7,100) (7,100) ------- ------- ------- ------- Total costs and expenses 144,688 170,097 302,770 331,705 ------- ------- ------- ------- Income (loss) before minority interest, income taxes and extraordinary charge 6,460 (2,841) 8,788 4,041 Minority interests 916 (640) 855 (981) ------- ------- ------- ------- Income (loss) before income taxes and extraordinary charge 7,376 (3,481) 9,643 3,060 Provision (benefit) for income taxes 1,678 (464) 2,320 909 ------- ------- ------- ------- Income (loss) before extraordinary charge 5,698 (3,017) 7,323 2,151 Extraordinary charge on extinguishment of debt, net (1,175) ------- ------- ------- ------- Net income (loss) $ 5,698 $ (3,017) $ 6,148 $ 2,151 ======= ======= ======= ======= Income (loss) per share - basic and assuming dilution: Income (loss) before extraordinary charge $ 0.10 $ (0.05) $ 0.13 $ 0.04 Extraordinary charge on extinguishment of debt (0.02) ------- ------- ------- ------- Net income (loss) per share $ 0.10 $ (0.05) $ 0.11 $ 0.04 ======= ======= ======= =======
See accompanying notes. 6 PARACELSUS HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in 000's) (Unaudited) Six Months Ended June 30, ----------------- 1998 1997 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,148 $ 2,151 Non-cash expenses and changes in operating assets and liabilities (1,929) (10,572) ------ ------ Net cash provided by (used in) operating activities 4,219 (8,421) ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Investment in DHHS (64,816) Proceeds from sale of facilities, net of expenses 22,998 12,201 Sale of marketable securities 19,284 Additions to property and equipment, net (9,198) (8,352) Decrease (increase) in other assets, net 1,763 (954) ------ ------ Net cash provided by (used in) investing activities (49,253) 22,179 ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of common stock 67 Borrowings under Revolving Credit Facility 64,528 Repayments under Revolving Credit Facility (30,275) (10,000) Repayments of debt, net (3,184) (763) Deferred financing costs (3,984) ------ ------ Net cash provided by (used in) financing activities 27,152 (10,763) ------ ------ (Decrease) increase in cash and cash equivalents (17,882) 2,995 Cash and cash equivalents at beginning of period 28,173 17,771 ------ ------ Cash and cash equivalents at end of period $ 10,291 $ 20,766 ====== ====== Supplemental Cash Flow Information: Interest paid $ 24,568 $ 22,995 Income taxes (refunded) paid $ (415) $ 702
See accompanying notes. 7 PARACELSUS HEALTHCARE CORPORATION NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 1998 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. The Company presently operates 24 hospitals with 2,484 licensed beds and four skilled nursing facilities with 232 licensed beds in 9 states (including two psychiatric hospitals with 113 licensed beds), of which 19 are owned and five are leased. BASIS OF PRESENTATION - The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The balance sheet at December 31, 1997, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The Company's business is seasonal in nature and subject to general economic conditions and other factors. Accordingly, operating results for the quarter and six months ending June 30, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 1997, included in the Company's 1997 Form 10-K. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain account balances for the three and six months ended June 30, 1997, have been reclassified to conform to the Company's current presentation. 8 EARNINGS PER SHARE - The following table sets forth the computation of basic and diluted earnings per share before extraordinary charge (dollars in thousands, except per share amounts). Per share amounts for the three and six months ended June 30, 1997, have been restated in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share":
THREE THREE SIX SIX MONTHS MONTHS MONTHS MONTHS ENDED ENDED ENDED ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1998 1997 1998 1997 -------- ------- ------- ------- Numerator (a): Income(loss) before extraordinary charge $ 5,698 $(3,017) $ 7,323 $ 2,151 ====== ====== ====== ====== Denominator: Weighted average shares used for basic earnings per share 55,103 54,879 55,098 54,846 Effect of dilutive securities: Employee stock options 2,445 - 2,446 1,428 ------ ------ ------ ------ Dilutive potential common shares 2,445 - 2,446 1,428 ------ ------ ------ ------ Shares used for diluted earnings per share 57,548 54,879 57,544 56,274 ====== ====== ====== ====== Basic earnings per share before extraordinary charge $ 0.10 $ (0.05) $ 0.13 $ 0.04 ====== ====== ====== ====== Diluted earnings per share before extraordinary charge $ 0.10 $ (0.05) $ 0.13 $ 0.04 ====== ====== ====== ======
______________________ (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 4,988,000 shares of the Company's common stock at a weighted average exercise price of $7.37 per share were outstanding during the three and six months ended June 30, 1998, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. COMPREHENSIVE INCOME - Effective January 1, 1998, the Company adopted Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS 130 establishes standards for the reporting and disclosure of comprehensive income and its components in the financial statements. Comprehensive income as defined by SFAS No. 30 is net income (loss) plus direct adjustments from non stockholder sources to stockholders' equity. Unrealized gains or losses on marketable securities are the only direct adjustments recorded by the Company. During the quarters ended June 30, 1998 and 1997, total comprehensive income (loss) amounted to $5.7 million 9 and ($3.0) million, respectively. During the six months ended June 30, 1998 and 1997, total comprehensive income amounted to $6.2 million and $2.0 million, respectively. NOTE 2. UNUSUAL ITEMS In June 1998, the Company recognized an unusual charge of $731,000 to restructure home health operations at certain of its hospitals, including in some cases the closure of these operations. The restructuring charge consisted primarily of employee severance and related costs, and to a lessor extent, costs associated with certain non- cancelable operating leases. Additionally, in April 1998, the Company recorded a $1.8 million gain to settle litigation related to an unconsummated hospital acquisition by Champion Healthcare Corporation prior to its merger with the Company in August 1996. In May 1997, the Company recognized unusual charges totaling $6.0 million, consisting of $3.5 million related to the closure of the 125-bed PHC Regional Hospital and Medical Center ("PHC Regional Hospital") in Salt Lake City, Utah, and $2.5 million related to a corporate reorganization. Such charges consisted primarily of employee severance and related costs, and to a lessor extent, certain other contractual termination costs. NOTE 3. ACQUISITIONS AND DISPOSITIONS On June 30, 1998, the Company completed the sale of substantially all of the assets of Chico Community Hospital, Inc., which included a 123-bed acute care hospital and a 60-bed rehabilitation hospital, both located in Chico, California, (collectively, the "Chico hospitals") for $25.0 million in cash plus working capital and the termination of a facility operating lease. Proceeds of the transaction (net of transaction costs of $2.0 million) were used to reduce amounts outstanding under the Company's revolving credit facility and its off balance sheet receivable financing program. The working capital component of the transaction is subject to a post-closing settlement. The Company recognized a pretax gain of $7.1 million on the disposition. Effective July 1, 1998, the Company completed the purchase of Dakota Medical Foundation's 50% partnership interest in a general partnership operating as Dakota Heartland Health System ("DHHS") for $64.5 million, inclusive of working capital, thereby giving the Company 100% ownership of DHHS. DHHS owns and operates a 218-bed tertiary care hospital in Fargo, North Dakota. Although the Company did not assume control of DHHS until July 1, 1998, the Company funded the purchase of DHHS with borrowings under its revolving credit facility on June 30, 1998. The Company has reflected such amount as an increase in its investment in DHHS at June 30, 1998. Prior to the purchase, the Company owned 50% of DHHS and accounted for its investment under the equity method. Beginning July 1, 1998, the Company will account for DHHS under the consolidated method of accounting. The following selected unaudited pro forma financial information for the six months ended June 30, 1998 and 1997, assumes the disposition of the Chico hospitals and the acquisition of DHHS occurred on January 1, 1998 and 1997, respectively. Accordingly, the pro forma information excludes the $7.1 million gain recognized by the Company in connection with the disposition of the Chico hospitals. The unaudited pro forma 10 financial information below does not purport to present the financial position or results of operations of the Company had the above transactions occurred on the dates specified, nor are they necessarily indicative of results of operations that may be expected in the future. Earnings before extraordinary charge, interest, taxes, depreciation, amortization, unusual items and gain on the sale of facilities ("Adjusted EBITDA") has been included because it is a widely used measure of internally generated cash flow and is frequently used in evaluating a company's performance. Adjusted EBITDA is not an acceptable measure of liquidity, cash flow or operating income under generally accepted accounting principles.
FOR THE SIX MONTHS ENDED JUNE 30, 1998 -------------------------------------------------- Chico Pro Forma Hospital Chico DHHS As Pro forma Dispo- Pro Forma Company Reported(a) Adj.(b) sition Adj.(c) Pro Forma -------- --------- -------- ------- -------- Net revenue $311,558 $(18,850) $292,708 $52,017 $344,725 ======== ======== ======== ======= ======== Adjusted EBITDA $ 42,989 $ (3,560) $ 39,429 $ 6,638 $ 46,067 ======== ======== ======== ======= ======== Income before income taxes and extraordinary loss $ 9,643 $ (8,645) $ 998 $ 1,251 $ 2,249 ======== ======== ======== ======= ======== Income before extraordinary loss $ 7,323 $ (6,630) $ 693 $ 729 $ 1,422 ======== ======== ======== ======= ======== Net income (loss) $ 6,148 $ (6,630) $ (482) $ 729 $ 247 ======== ======== ======== ======= ======== Income per share - basic and assuming dilution: Income before extraordinary charge $ 0.13 $ 0.01 $ 0.02 ======== ======== ======== Net income per share $ 0.11 $ (0.01) $ - ======== ======== ========
11
FOR THE SIX MONTHS ENDED JUNE 30, 1997 -------------------------------------------------- Chico Pro Forma Hospital Chico DHHS As Pro forma Dispo- Pro Forma Company Reported Adj.(b) sition Adj.(c) Pro Forma -------- --------- -------- ------- -------- Net revenue $335,746 $(16,281) $319,465 $49,525 $368,990 ======== ======== ======== ======= ======== Adjusted EBITDA $ 46,696 $ 8 $ 46,704 $ 6,992 $ 53,696 ======== ======== ======== ======= ======== Income before income taxes $ 3,060 $ 1,739 $ 4,799 $ 1,605 $ 6,404 ======== ======== ======== ======= ======== Net income $ 2,151 $ 1,422 $ 3,573 $ 894 $ 4,467 ======== ======== ======== ======= ======== Net income per share - basic and assuming dilution: $ 0.04 $ 0.06 $ 0.08 ======== ======== ========
_____________________ (a) Excluding the $7.1 million gain on sale of facilities, income before extraordinary loss was $1.7 million, or $0.3 per share. (b) Pro forma adjustments to reflect the disposition of the Chico hospitals, including the removal of the $7.1 million gain on sale of such facilities for the six months ended June 30, 1998. (c) Pro forma adjustments to reflect DHHS acquisition. Adjusted EBITDA for the six months ended June 30, 1998, includes a $1.1 million payment to settle a 1995 dispute over certain contract services. NOTE 4. LONG-TERM DEBT On June 15, 1998, the Company entered into the First Amendment of the Amended and Restated Credit Agreement (the "Amended Credit Agreement"), whereby it increased principal amounts outstanding under its Term Loan Facilities from $75.0 million to $115.0 million and reduced amounts outstanding under the five-year Reducing Revolving Credit Facility by $40.0 million (collectively, the "Facilities"). The total commitment under the Reducing Revolving Credit Facility was reduced from $180.0 million to $140.0 million (the "$140.0 million Facility"). The $115.0 million in Term Loan Facilities (the "$115.0 million Facilities") consist of a five-year $45.0 million Term Loan Facility ("Tranche A Facility") and a six-year $70.0 million Term Loan Facility ("Tranche B Facility"). The $140.0 million Facility is available for general corporate purposes, including funding working capital needs, permitted acquisitions and capital expenditures and the issuance of letters of credit up to $25.0 million. It is subject to mandatory quarterly reductions of $9.5 million, commencing on March 31, 2001, and a limit of $50.0 million available for working capital needs. The Tranche A Facility is payable in quarterly installments ranging from $600,000 to $2.5 million with a final balloon payment of $22.5 million due on March 31, 2003. The Tranche B Facility is payable in annual installments of $500,000 with a final balloon payment of $67.5 million due on March 31, 2004. The Company is further required to make mandatory prepayments under 12 the Facilities equal to 100% of (i) net cash proceeds from permitted asset sales, (ii) debt issuances and (iii) equity issuances, subject to certain allowable exclusions for debt and equity as described in the Amended Credit Agreement. Such prepayments are generally to be applied ratably to the $140.0 million Facility, the Tranche A Facility and the Tranche B Facility, but in certain circumstances may be applied solely as prepayments of the $140.0 million Facility. Prepayments under the $140.0 million Facility do not result in a mandatory reduction in borrowing capacity under such facility, but prepayments under the $115.0 million Facilities do result in a mandatory permanent reduction. The Company is subject to certain fees in the event targeted levels of asset dispositions are not achieved by November 30, 1998. Borrowings under the $140.0 million Facility and the Tranche A Facility bear interest at the Company's option, at (i) LIBOR plus a margin ranging from 1.25% to 2.75% or (ii) the prime rate plus a margin ranging from 0.0% to 1.25%. Borrowings under the Tranche B Facility bear interest at LIBOR plus 2.75% and may be reduced in certain circumstances. The Company is required to pay annual commitment fees ranging from .25% to .50% of the unused portion of the $140.0 million Facility. Letters of credit issued under the $140.0 million Facility require annual fees equal to the effective LIBOR margin and are to be paid quarterly in arrears. NOTE 5. CONTINGENCIES The Company is a party to pending litigation in connection with several stockholder related matters. See "Item 2 - Pending Litigation." 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS "Same hospitals" as used in the following discussion, where appropriate consist of acute care hospitals operated throughout the periods for which comparative operating results are presented. Operating results of the Company's psychiatric hospitals are charged to a disposal loss accrual established in September 1996; accordingly, such results are not reflected in the Consolidated Statement of Operations. RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 1998 COMPARED WITH QUARTER ENDED JUNE 30, 1997 Net revenue for the quarter ended June 30, 1998, was $151.1 million, a decrease of $16.2 million, or 9.6%, from $167.3 million for the same period of 1997. In general, this decline was attributable to (i) volume declines at the Company's LA Metro hospitals, (ii) a decline in utilization and reimbursement rates for home health and other healthcare operations related to the enactment of the Balanced Budget Act of 1997 (the "1997 Budget Act"), (iii) the closure of certain under performing operating units and (iv) the closure of PHC Regional Hospital in May 1997. Net revenue at the Company's Los Angeles area hospitals ("LA Metro") decreased $7.4 million from $25.0 million in 1997 to $17.6 million in 1998, primarily as a result of reduced volumes at certain facilities. Net revenue at the Company's Tennessee market hospitals, which have significant home health operations, decreased $5.4 million from $16.3 million in 1997 to $10.9 million in 1998. The closure of PHC Regional Hospital in May 1997 resulted in a $1.4 million decline in net revenue as compared to the current period. The reductions in net revenue associated with the enactment of the 1997 Budget Act are likely to continue throughout 1998. Furthermore, in June 1998, the Company restructured the home health operations of certain of its hospitals, including in some cases the closing of such operations (see Note 2). These actions will likely result in additional reductions in home health net revenue in future periods. The Company's "same hospitals" experienced a 9.5% decrease in inpatient admissions from 17,060 in 1997 to 15,444 in 1998. Same hospital patient days decreased 11.2% from 81,026 in 1997 to 71,947 in 1998. The decrease in admissions and patient days are primarily due to volume declines at the Company's LA Metro and Tennessee market hospitals. Outpatient visits in "same hospitals" decreased 27.0% from 407,220 in 1997 to 297,155 in 1998, primarily as a result of a significant decline in home health visits. This decrease was due primarily to stricter utilization standards as a result of new regulations under the 1997 Budget Act effective October 1, 1997, and to a lesser extent, the cancellation of a contract for home health services at one of the Company's Tennessee hospitals. Excluding home health visits, outpatient visits in "same hospitals" increased 4.1% from 163,738 in 1997 to 170,522 in 1998. Excluding the LA Metro and Tennessee market hospitals from the "same hospitals" comparison, inpatient admissions were 11,729 in 1998 and 11,952 in 1997, a decline of 1.9%. Patient days decreased 2.4% from 54,140 in 1997 to 52,823 in 1998, and outpatient visits decreased 18.0% from 258,116 in 1997 to 211,630 in 1998, primarily due to the significant decline in home health visits discussed above. Excluding home health 14 visits, outpatient visits increased 9.0% from 135,842 in 1997 to 148,087 in 1998. Operating expenses (salaries and benefits, other operating expenses and provision for bad debts) decreased $13.9 million from $147.8 million in 1997 to $133.9 million in 1998. Expressed as a percentage of net revenue, operating expenses increased from 88.4% in 1997 to 88.6% in 1998, and operating margin decreased from 11.6% to 11.4%, respectively. The increase in operating expenses as a percent of net revenue is due to the impact of the aforementioned reductions in reimbursement rates under the 1997 Budget Act, particularly with respect to the Company's home healthcare businesses in Tennessee, and a decline in volumes at certain LA Metro hospitals. Excluding the LA Metro and Tennessee market hospitals, "same hospital" operating margins improved to 14.7% in 1998 as compared to 12.4% in 1997. The increase in operating margin was due principally to (i) efficiency and productivity gains resulting from the implementation of operating standards and benchmarks on a hospital department level and (ii) management's efforts to control overhead costs. Interest expense increased $2.6 million from $10.7 million in 1997 to $13.3 million in 1998, due in part to $1.3 million of interest charges in 1997 taken against a loss contract established in December 1996, with respect to the now closed PHC Regional Hospital. Such amount represented interest charges on borrowings to finance the acquisition of PHC Regional Hospital. Additionally, interest expense was higher due to an increase in interest rates and amounts outstanding under the Company's senior bank credit facility and other debt. Depreciation and amortization decreased 7.5% to $7.7 million in 1998 from $8.3 million for the same period of 1997, primarily due to a change in estimated asset lives made in the third quarter of 1997 with respect to certain assets acquired in the August 1996 merger with Champion Healthcare Corporation. Income (loss) before income taxes and extraordinary charge included $2.0 million attributable to the Company's equity in the earnings of Dakota Heartland Health System for the quarter ended June 30, 1998, compared to $2.7 million for the prior period. The decline in earnings was due primarily to a $1.1 million payment to settle a 1995 dispute over certain contract services. Effective July 1, 1998, the Company purchased Dakota Medical Foundation's 50% partnership interest in DHHS for $64.5 million, inclusive of working capital, thereby giving the Company 100% ownership of DHHS (see Note 3). Commencing in the third quarter of 1998, the Company will account for DHHS under the consolidated method of accounting. The following table presents pro forma net revenue and earnings before extraordinary charge, interest, taxes, depreciation, amortization, unusual items and gain on the sale of facilities ("Adjusted EBITDA") for the quarters ended June 30, 1998 and 1997, as if the acquisition of DHHS had occurred on January 1, 1998 and 1997, respectively ($ in thousands). 15
Reverse Equity in DHHS As Currently Earnings of Results of Reported (a) DHHS Operation(b) Pro Forma -------- ---------- ----------- --------- 1998 Net revenue $151,148 $ 0 $ 25,544 $176,692 Adjusted EBITDA 20,155 (1,976) 6,017 24,196 1997 Net revenue $167,256 $ 0 $ 24,842 $192,098 Adjusted EBITDA 21,471 (2,667) 6,287 25,091
(a) Adjusted EBITDA for the quarter ended June 30, 1998, excludes a $7.1 million gain on sale of facilities and the positive impact of $1.1 million in unusual items (see Note 2). Adjusted EBITDA for the quarter ended June 30, 1997, excludes $6.0 million in unusual charges. (b) Adjusted EBITDA for the quarter ended June 30, 1998, excludes a $1.1 million payment to settle a 1995 dispute over certain contract services. Income before income taxes and extraordinary charge for the quarter ended June 30, 1998, included a $7.1 million gain on sale of the Chico hospitals (See Note 3) and unusual items of $1.1 million, consisting of a $1.8 million gain to settle litigation related to an unconsummated hospital acquisition by Champion Healthcare Corporation prior to its merger with the Company in August 1996, offset by a $731,000 charge to restructure home health operations at certain of the Company's hospitals (see Note 2). Results of operations for the quarter ended June 30, 1997, included $6.0 million in unusual charges, consisting of $3.5 million relating to the closure of PHC Regional Hospital in May 1997, and $2.5 million relating to a corporate reorganization also completed in May 1997. Results of operations for the quarter ended June 30, 1997, excluded a $5.2 million loss attributable to PHC Regional Hospital, which was charged to the loss contract accrual established at December 31, 1996. The Company's effective ongoing tax rate was 22.7% for the quarter ended June 30, 1998, as compared to a 13.3% benefit rate in 1997. The reduced tax rates for 1998 resulted from a $1.7 million reduction in the valuation allowance related to the recognition of previously devalued tax assets. The income tax benefit rate for 1997 was reduced by a $600,000 increase in the valuation allowance and nondeductible goodwill amortization expense. Net income for the quarter ended June 30, 1998 was $5.7 million, or $0.10 per diluted share, compared to a net loss of $3.0 million, or $0.05 per diluted share, for the same period of 1997. Weighted average common and common equivalent shares outstanding increased to 57.5 million in 1998 from 54.9 million in 1997, primarily due to the exclusion of dilutive securities from the calculation of net loss per share in 1997. 16 RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997 Net revenue for the six months ended June 30, 1998, was $311.6 million, a decrease of $24.1 million, or 7.2%, from $335.7 million for the same period of 1997. In general, the decline in net revenue was attributable to (i) volume declines at the Company's LA Metro hospitals, (ii) a decline in utilization and reimbursement rates for home health and other healthcare operations related to the enactment of the 1997 Budget Act, (iii) the closure of certain under performing operating units and (iv) the closure of PHC Regional Hospital in May 1997. Net revenue at the Company's LA Metro hospitals decreased $8.4 million from $48.0 million in 1997 to $39.6 million in 1998, primarily as a result of reduced volumes at certain facilities. Net revenue of the Company's Tennessee market hospitals, which have significant home health operations, decreased $9.4 million from $32.8 million in 1997 to $23.4 million in 1998. The closure of PHC Regional Hospital on May 1997, accounted for $5.1 million of the decline in net revenue. Furthermore, in June 1998, the Company restructured the home health operations of certain of its hospitals, including in some cases the closing of such operations (see Note 2). The Company's "same hospitals" experienced a 8.3% decrease in inpatient admissions from 34,819 in 1997 to 31,937 in 1998. Patient days decreased 10.0% from 167,621 in 1997 to 150,824 in 1998. The decreases in admissions and patient days are primarily due to volume declines at the Company's LA Metro and Tennessee market hospitals. Outpatient visits in "same hospitals" decreased 23.1% from 811,706 in 1997 to 624,250 in 1998, primarily as a result of a significant decline in home health visits. This decrease was due primarily to stricter utilization standards as a result of new regulations under the 1997 Budget Act effective October 1, 1997, and to a lesser extent, the cancellation of a contract for home health services at one of the Company's Tennessee hospitals. Excluding home health visits, outpatient visits in "same hospitals" increased 4.2% from 326,168 in 1997 to 339,985 in 1998. Excluding the LA Metro and Tennessee market hospitals from the "same hospitals" comparison, inpatient admissions decreased 2.1% from 24,487 in 1997 to 23,961 in 1998. Patient days decreased 3.7% from 113,583 in 1997 to 109,413 in 1998. Outpatient visits decreased 15.2% from 508,568 in 1997 to 431,274 in 1998, primarily as a result of the significant decline in home health visits discussed above. Excluding home health visits, outpatient visits increased 8.5% from 270,046 in 1997 to 292,978 in 1998. Operating expenses (salaries and benefits, other operating expenses and provision for bad debts) decreased $18.8 million from $293.3 million in 1997 to $274.5 million in 1998. Expressed as a percentage of net revenue, operating expenses increased from 87.4% in 1997 to 88.1% in 1998, and operating margin decreased from 12.6% to 11.9%. The increase in operating expenses as a percent of net revenue is due to the impact of the aforementioned reductions in reimbursement rates under the 1997 Budget Act, particularly with respect to the Company's home healthcare businesses in Tennessee, and a decline in volumes at certain LA Metro hospitals. Excluding the LA Metro and Tennessee market hospitals, "same hospital" operating margins improved to 14.2% in 1998 as compared to 12.7% in 1997. The increase in operating margins was due principally to (i) efficiency and productivity gains resulting from the implementation of operating standards and benchmarks on a hospital department level and (ii) management's efforts to control overhead costs. 17 Interest expense increased $4.0 million from $21.7 million in 1997 to $25.7 million in 1998, due in part to $2.7 million of interest charges in 1997 taken against a loss contract established in December 1996, with respect to the now closed PHC Regional Hospital. Such amount represented interest charges on borrowings to finance the acquisition of PHC Regional Hospital. Additionally, interest expense was higher due to an increase in interest rates and amounts outstanding under the Company's senior bank credit facility and other debt. Income before income taxes and extraordinary charge included $5.1 million attributable to the Company's equity in the earnings of Dakota Heartland Health System for the six months ended June 30, 1998, compared to $5.2 million for the prior period. DHHS earnings for 1998 included a $1.1 million payment to settle a 1995 dispute over certain contract services. Effective July 1, 1998, the Company purchased Dakota Medical Foundation's 50% partnership interest in DHHS for $64.5 million, inclusive of working capital, thereby giving the Company 100% ownership of DHHS (see Note 3). Commencing in the third quarter of 1998, the Company will account for DHHS under the consolidated method of accounting. The following table presents pro forma net revenue and Adjusted EBITDA for the six months ended June 30, 1998 and 1997, as if the acquisition of DHHS had occurred on January 1, 1998 and 1997, respectively ($ in thousands).
Reverse Equity in DHHS As Currently Earnings of Results of Reported (a) DHHS Operations(b) Pro Forma -------- ---------- ----------- --------- 1998 Net revenue $311,558 $ 0 $52,017 $363,575 Adjusted EBITDA 42,989 (5,061) 12,749 50,677 1997 Net revenue $335,746 $ 0 $49,525 $385,271 Adjusted EBITDA 46,696 (5,226) 12,218 53,688
(a) Adjusted EBITDA for the six months ended June 30, 1998, excludes a $7.1 million gain on sale of facilities and the positive impact of $1.1 million in unusual items (see Note 2). Adjusted EBITDA for the six months ended June 30, 1997, excludes $6.0 million in unusual charges. (b) Adjusted EBITDA for the six months ended June 30, 1998, excludes a $1.1 million payment to settle a 1995 dispute over contract services. Income before income taxes and extraordinary charge for the six months ended June 30, 1998, included a $7.1 million gain on sale of the Chico hospitals (see Note 3) and unusual items totaling $1.1 million, consisting of a $1.8 million gain to settle litigation related to an unconsummated hospital acquisition by Champion Healthcare Corporation prior to its merger with the Company in August 1996, offset by a $731,000 charge to restructure home health operations at certain of the Company's hospitals (see Note 2). Results of operations for the six months ended June 30, 1997, included $6.0 million in unusual charges, consisting of $3.5 million relating to the closure of PHC Regional Hospital in May 1997, and $2.5 million relating to a corporate reorganization also 18 completed in May 1997. Results of operations for the six months ended June 30, 1997, excluded a $10.9 million loss attributable to PHC Regional Hospital, which was charged to the loss contract accrual established at December 31, 1996. The Company's effective tax rate was 24.1% for the six months ended June 30, 1998, as compared to 29.7% for the comparable period in 1997. The reduced tax rates for 1998 and 1997, resulted primarily from reductions in the valuation allowance related to the recognition of previously devalued tax assets of $2.4 million and $1.1 million, respectively, offset by nondeductible goodwill amortization expense. Net income for the six months ended June 30, 1998 was $6.1 million, or $0.11 per diluted share, compared to net income of $2.2 million, or $0.04 per diluted share, for the same period in 1997. The 1998 net income includes an extraordinary charge on extinguishment of debt of $1.2 million (net of tax benefits of $817,000), or $0.02 per diluted share. Weighted average common and common equivalent shares outstanding were 57.5 million and 56.3 million for the six months ended June 30, 1998 and 1997, respectively. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for the six months ended June 30, 1998, was $4.2 million, compared to net cash used of $8.4 million for the same period in 1997. The $12.6 million increase in net cash provided by operating activities was mainly attributable to non- recurring cash payments during 1997 for accrued (i) 1996 health claims related to PHC Regional Hospital (ii) costs and fees related to the Special Committee's investigation, and (iii) Champion merger costs. Net cash used in investing activities was $49.3 million during 1998, as compared to net cash provided by investing activities of $22.2 million during 1997. The $71.5 million decrease was primarily attributable to the Company's $64.8 million purchase (including transaction costs) of its partner's 50% interest in DHHS (Note 3) in 1998, and to a net decrease in proceeds from sales of marketable securities and facilities. In addition to the DHHS purchase, investing activities for the six months ended June 30, 1998, included $23.0 million in net proceeds from the sale of the Chico hospitals (see Note 3). Investing activities for the six months ended June 30, 1997, included $12.2 million in net proceeds received from the sale of certain hospitals and $19.3 million received from the liquidation of marketable securities held by the Company's wholly-owned subsidiary, Hospital Assurance Company, Ltd. Net cash provided by financing activities during 1998 was $27.1 million, compared to cash used of $10.8 million during 1997. The $37.9 million increase in cash provided by financing activities was primarily attributable to borrowings under the Company's Amended Credit Agreement to finance the purchase its partner's 50% interest in DHHS, partially offset by repayments under the Amended Credit Agreement of $30.3 million and deferred financing costs of $4.0 million associated with the Amended Credit Agreement entered into in March 1998. Net working capital was $27.6 million at June 30, 1998, a decrease of $9.8 million from $37.4 million at December 31, 1997. The decrease was primarily due to the repayment of amounts outstanding under the Amended Credit Facility from available cash, as well of the reclassification of $2.0 million in principal amounts outstanding under the Term Loan 19 Facilities from long term to current pursuant to the Amended Credit Facility entered into in March 1998. Working capital also decreased as a result of the sale of working capital associated with the Chico hospitals, of which $3.1 million in proceeds were used to reduce amounts outstanding under the Company's off balance sheet receivable financing program. Such amount was reflected in restricted cash at June 30, 1998, and paid on July 1, 1998. The Company's long-term debt as a percentage of total capitalization was 91.5% at June 30, 1998, compared to 92.1% at December 31, 1997. As of August 14, 1998, the Company had $54.8 million available under the revolver portion of its Amended Credit Agreement to fund future capital expenditures, working capital requirements and the issuance of letters of credit. The Company anticipates that internally generated cash flows from earnings, proceeds from divestiture of certain assets, proceeds from the sale of hospital accounts receivable under the Company's off balance sheet receivable financing program, Federal and state income taxes refunds, and available borrowings under its Amended Credit Agreement will be sufficient to meet funding requirements through 1999. 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. See "Pending Litigation" of this Item for a discussion regarding certain pending litigation, the resolution of which could adversely affect the Company's liquidity and its future operating results. OPERATING PERFORMANCE OF LA METRO HOSPITALS The Company's LA Metro acute care hospitals recorded an EBITDA deficit of $645,000 for the quarter ended June 30, 1998, and EBITDA of $492,000 for the six months ended June 30, 1998, as compared to EBITDA of $1.4 million and $3.9 million for the quarter and six months ended June 30, 1997, respectively. Losses before interest, income taxes, depreciation and amortization for the LA metro psychiatric hospitals, which were offset against the disposal loss accrual previously established in September 1996, were $1.6 million and $1.7 million for the quarter and six months ended June 30, 1998, respectively, as compared to $142,000 and $175,000 for the quarter and six months ending June 30, 1997, respectively. Management does not believe the LA Metro hospitals will have a material adverse effect on the Company's liquidity through their estimated disposition date. YEAR 2000 COMPLIANCE As discussed in the Company's Form 10-K for the fiscal year ended December 31, 1997, the Company has initiated a comprehensive assessment of all equipment, systems and services, as well as embedded systems and other applications that control medical and related equipment to determine whether such items are Year 2000 compliant. As part of this effort, the Company engaged an outside consultant to assist in implementing an extensive pilot program at one of its hospitals to compile a data base for use in evaluating Year 2000 compliance at all of its hospitals. As a result of this pilot program, the Company and its outside consultant have implemented a multiphase plan at all of its hospitals to determine and execute the necessary actions to make their various embedded systems, medical devices, related facility equipment, and other third party supplied equipment and services Year 2000 compliant. The Company expects to complete an assessment by year end. 20 At this time, the Company is not able to determine whether the costs of bringing such embedded systems and other applications into compliance will have a material impact on the Company's liquidity or results of operations. As previously reported, the Company expects its core information systems to be Year 2000 compliant as a result of ongoing efforts to standardize and upgrade such systems. PENDING LITIGATION The Company has previously reported the filing of a number of putative class and derivative action complaints relating to the August 1996 merger of the Company and Champion Healthcare Corporation. As previously reported, two of these actions have been active: IN RE PARACELSUS CORP. SECURITIES LITIGATION, Master File No. H-96-3464, in which a number of federal class action complaints were consolidated, and CAVEN V. MILLER No. H-96-4291, in which two derivative action complaints have been consolidated. The federal class action complaint asserts claims against the Company under sections 11 and 12(a)(2) of the Securities Act of 1933, and claims against certain existing and former officers and directors of the Company under sections 11 and 15 of the Securities Act of 1933. In addition, the complaint was recently amended to add a claim against the Company under section 10(b) of the Securities Exchange Act of 1934. The Company has moved to dismiss the claim. The derivative action asserts various state law claims against the Company, certain of its existing and former officers and directors or their affiliates, and other persons. Since the Company reported on this litigation on its Form 10-K for the fiscal year ended December 31, 1997, one of the California state court actions, GAONKAR V. KRUKEMEYER ET AL., Case No BC158899, was dismissed without prejudice on motion of the plaintiffs, and the other California state court action previously consolidated with GAONKAR, PRESCOTT V. PARACELSUS HEALTHCARE CORP., Case No. BC158979, has been ordered to proceed separately. As previously reported, in light of the Company's restatement of financial information contained in the various registration statements and prospectuses relating to the merger, the Company believes an unfavorable outcome is probable for at least some of the claims asserted in the stockholder class action. Efforts to settle the stockholder claims are ongoing. Absent such a settlement within the Company's financial resources, the Company will continue to defend the litigation vigorously. Many factors will ultimately affect and determine the results of the litigation, and the Company can provide no assurance that the results will not have a material adverse effect on the Company. 21 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Part I - Item 2 "Pending Litigation" for an update of developments on the pending stockholders' litigation previously disclosed in the Company's 1997 Form 10-K. ITEM 2. CHANGE IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's annual meeting of stockholders on May 14, 1998, the stockholders approved the following: 1. The election of Messrs. James G. VanDevender, Daryl J. White and Dr. Heiner Meyer zu Losebeck to serve as Class II directors for a three-year term, and the election of Mr. Nolan Lehmann to serve as a Class I director for a two-year term and the election of Mr. Christian A. Lange to serve as a Class III director for a one-year term. Each nominee received the following votes: FOR WITHHELD ---------- -------- Nolan Lehmann 47,854,654 666,961 James G. VanDevender 48,375,053 146,562 Daryl J. White 47,751,854 769,761 Dr. Heiner Meyer zu Losebeck 48,395,295 126,319 Christain A. Lange 48,392,885 128,730 2. The ratification of the appointment of Ernst & Young LLP as the Company's auditors for 1998. For 18,712,768 Against 28,172 Abstain 29,780,674 22 ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K (a) Exhibits 10.7 The First Amendment to Amended and Restated Credit Agreement, effective June 15, 1998, by and among Paracelsus Healthcare Corporation, Paribas, Toronto Dominion (Texas), Inc. and Bank of Montreal. 27 Financial Data Schedule. (b) Reports on Form 8-K The Company filed on July 10, 1998, a Current Report on Form 8-K, dated June 30, 1998, reporting pursuant to Item 2 (i) the sale by the Company effective June 30, 1998, of substantially all of the assets of Chico Community Hospital, Inc., which included a 123 licensed bed acute care hospital and a 60 licensed bed rehabilitation hospital, both located in Chico, California, and (ii) the Company's purchase effective July 1, 1998 (through its subsidiary, Paracelsus Healthcare Corporation of North Dakota, Inc.) of Dakota Medical Foundation's 50% partnership interest in a general partnership operating as Dakota Heartland Health System ("DHHS"), thereby giving the Company 100% ownership of DHHS. Prior to the purchase, the Company owned 50% of DHHS and accounted for its investment under the equity method. DHHS owns and operates a 218 licensed bed tertiary care hospital in Fargo, North Dakota. 23 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Paracelsus Healthcare Corporation (Registrant) Dated: August 14, 1998 By: /S/ JAMES G.VANDEVENDER -------------------------------- James G. VanDevender Senior Executive Vice President, Chief Financial Officer & Director EX-10.7 2 FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGR FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT ("THIS AMENDMENT") is made and entered into effective as of June 15, 1998 (the "EFFECTIVE DATE") by and among PARACELSUS HEALTHCARE CORPORATION, a California corporation (the "Borrower"), PARIBAS, a bank organized and existing under the laws of the Republic of France (f/k/a Banque Paribas; "PARIBAS"), TORONTO DOMINION (TEXAS), INC., a Delaware corporation ("TD") and BANK OF MONTREAL, a Canadian chartered bank ("BMO" and collectively with Paribas and TD, the "LENDERS"). W I T N E S S E T H: WHEREAS, the Borrower, Paribas, as lead agent for the Lenders (in such capacity, together with its successors in such capacity, the "AGENT") and as the Issuing Bank, TD, as documentation agent for the Lenders (in such capacity, the "DOCUMENTATION AGENT") and BMO, as administrative agent for the Lenders (in such capacity, the "ADMINISTRATIVE AGENT"), are parties to that certain Amended and Restated Credit Agreement, dated as of March 30, 1998 (the "CREDIT AGREEMENT"); WHEREAS, the Borrower and the Lenders desire to amend the Credit Agreement in the manner hereinafter set forth; NOW THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements hereinafter contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower and the Lenders, each intending to be legally bound, hereby mutually agree as follows: 1. CAPITALIZED TERMS. All capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed to such terms in the Credit Agreement. 2. AMENDMENT OF ARTICLE I OF THE CREDIT AGREEMENT. SECTION 1.1 of the Credit Agreement is hereby amended by amending the following Definitions: "APPLICABLE TRANCHE B MARGIN" is amended by substituting the date "December 31, 1998" for the date "March 31, 1999". "REVOLVING CREDIT LOANS COMMITMENT" is amended (i) by substituting the dollar amount "$9,500,000" for the dollar amount "$12,000,000" and (ii) by substituting the date "March 31, 2001" for the date "March 31, 2000". "SPECIFIED ASSET DISPOSITION" is amended by substituting the words "those certain Asset Dispositions listed on SCHEDULE 9.12" for the words "as specified in Section 9.12A". "TOTAL DEBT" is amended by inserting the following at the end thereof: "MINUS the amount of the Borrower's unrestricted Cash Equivalents in excess of $10,000,000". 3. AMENDMENT OF ARTICLE II OF THE CREDIT AGREEMENT. (a) SECTION 2.3(B) of the Credit Agreement is hereby amended by substituting the number "22,500,000" for the number "2,500,000" where it appears opposite the date "March 31, 2003". (b) SECTION 2.3(C) of the Credit Agreement is hereby amended by substituting the number "67,500,000" for the number "47,500,000" where it appears opposite the date "March 31, 2004". (c) SECTION 2.7(C) of the Credit Agreement is hereby amended and restated in its entirety as follows: "(c) Notwithstanding either of the foregoing CLAUSE (A) or CLAUSE (B), unless there shall have occurred and be continuing a Default (in which case CLAUSE (B) above shall govern), all Net Proceeds of Specified Asset Dispositions received prior to July 1, 1999 shall be applied as a prepayment of the Revolving Credit Loans, unless and until the Revolving Credit Loans are paid in full, in which case the Net Proceeds otherwise required to be applied as a prepayment thereof shall be retained by the Borrower". (d) SECTION 2.9 of the Credit Agreement is hereby amended by inserting the following at the beginning of the sentence beginning with the words "In the event," which appears in the 10th line of the second full paragraph: "In the case of prepayments pursuant to SECTION 2.6, the Borrower shall have the right to specify the Loans and in the case of prepayments pursuant to SECTION 2.6 or 2.7, the Borrower shall have the right to specify the Type of Loans to be prepaid, unless there shall have occurred and be continuing a Default, in which case, or". 4. AMENDMENT OF SECTION 9.5 OF THE CREDIT AGREEMENT. SECTION 9.5 of the Credit Agreement is hereby amended by inserting the following sentence immediately before the penultimate sentence of such SECTION 9.5, which sentence begins with the words "Any Acquisition permitted": "Notwithstanding the foregoing, in connection with an Acquisition, in no event shall the Borrower or any of its Subsidiaries be required to grant to the Agent or the Lenders any Lien or Security Interest in respect of any real Property or personal Property which is leased by the Borrower or such Subsidiary of the Borrower (other than any such property leased by the Borrower to a Subsidiary, or leased by a Subsidiary (other than an Excluded Subsidiary) to the Borrower or another Subsidiary)". 5. AMENDMENT OF SCHEDULE 1.1(D) OF THE CREDIT AGREEMENT. SCHEDULE 1.1(D) to the Credit Agreement is hereby amended and restated in its entirety by substituting therefor SCHEDULE 1.1(D) attached hereto. 6. REPLACEMENT NOTES. In furtherance of the foregoing transaction, the Borrower shall execute and deliver to each of the Lenders its replacement promissory notes dated the Effective Date in the form of Annexes A-1 through A-3 hereto attached (the "REPLACEMENT NOTES"). The principal amount of each Replacement Note delivered to each Lender shall equal such Lender's Commitment, giving effect to the execution and delivery hereof. The Replacement Notes shall, upon acceptance by the Lenders, as of the Effective Date constitute replacements and substitutions for the Notes dated March 30, 1998 in the aggregate principal amount of $255,000,000 issued by the Borrower to the order of the Lenders pursuant to the Credit Agreement. All references in the Credit Agreement to the Notes shall, from and after the Effective Date, be deemed to refer to the Replacement Notes, the same as if such Replacement Notes were the Notes defined, described and referred to in the Credit Agreement. Upon acceptance of the Replacement Notes, the Lenders agree to return to the Borrower the Notes marked "Replaced as of June 15, 1998". 7. FURTHER REPRESENTATIONS OF THE BORROWER. (a) The execution, delivery and performance by the Borrower of this Amendment and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate or other entity action on the part of the Borrower and do not and will not (i) violate or conflict with, or result in a breach of, or require any consent, except as may have been obtained under (x) the Borrower's articles of incorporation or bylaws, the violation of, conflict with, or breach of, which could reasonably be expected to have a Material Adverse Effect, (y) any Governmental Requirement or any order, writ, injunction or decree of any arbitrator the violation of, conflict with, or breach of, which could reasonably be expected to have a Material Adverse Effect, or (z) any material agreement, document or instrument to which the Borrower is a party or by which the Borrower or any of its Property is bound or subject, the violation of, conflict with, or breach of, which could reasonably be expected to have a Material Adverse Effect, or (ii) constitute a default under any such material agreement, document or instrument which default could reasonably be expected to have a Material Adverse Effect, or result in the creation or imposition of any Lien (except for those in favor of Agent pursuant to the Security Documents as provided in ARTICLE 5 of the Credit Agreement and except for Permitted Liens) upon any of the revenues or Property of the Borrower. (b) This Amendment has been duly and validly executed and delivered by the Borrower and constitutes the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors' rights and general principles of equity. (c) No authorization, approval or consent of, and no filing or registration with or notice to, any Governmental Authority is or will be necessary for the execution, delivery or performance by the Borrower of this Amendment or for the validity or enforceability thereof in respect of the Borrower, except for such consents, approvals and filings as have been validly obtained or made and are in full force and effect. The Borrower has not failed to obtain any governmental consent, Permit or franchise necessary for the ownership of any of its Properties or the conduct of its business except where the failure to do so could not reasonably be expected to have a Material Adverse Effect. (d) The Borrower further represents and warrants that (i) all of the representations and warranties made by the Borrower in ARTICLE VII of the Credit Agreement, and in each other Loan Document, are true and correct on and as of the date hereof, as though made on the date hereof except for any such representation and warranties as are expressly stated to be made as of a particular date; and (ii) no Default or Event of Default shall have occurred and be continuing as of the Effective Date. 8. CONDITIONS. The obligations of the Lenders under this Amendment are subject to the condition precedent that this Amendment and the Replacement Notes shall have been duly executed by the Borrower and delivered to the Lenders, and each Lender shall have executed and delivered a counterpart hereof. 9. RATIFICATION OF CREDIT AGREEMENT. All terms and provisions of the Credit Agreement not expressly amended hereby are hereby ratified and reaffirmed and shall remain in full force and effect without interruption, change, or impairment of any kind. 10. GENERAL. (a) APPLICABLE LAW. This Amendment has been delivered and accepted in, and shall be a contract made under and governed by the laws of the State of New York. (b) BINDING EFFECT. This Amendment shall be binding upon and inure to the benefit of the Borrower and the Lenders and their respective successors and assigns. (c) HEADINGS. The Section and subsection headings of this Amendment are for convenience and shall not affect, limit or expand any term or provision hereof. (d) COUNTERPARTS. This Amendment may be executed in as many counterparts as may be deemed necessary or convenient, and each counterpart shall be deemed an original. No one counterpart need be signed by all parties hereto, but all such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Amended and Restated Credit Agreement to be executed and delivered by their duly authorized officers, to be deemed effective as of the Effective Date. BORROWER: PARACELSUS HEALTHCARE CORPORATION By: Deborah H. Frankovich Senior Vice President and Treasurer ADDRESS FOR NOTICES: 515 West Greens Road, Suite 800 Houston, Texas 77067 Telephone No.: 281-774-5100 Telecopy No.: 281-774-5110 Attn: James G. VanDevender Senior Executive Vice President and Chief Financial Officer LENDERS: PARIBAS, as the Agent, as the Issuing Bank and as a Lender By: Timothy A. Donnon Managing Director By: Glenn E. Mealey Director ADDRESS FOR NOTICES: Paribas The Equitable Tower 787 Seventh Avenue New York, New York 10019 Telephone No.: 212-841-2000 Telecopy No.: 212-841-2146 Attn: Corporate Banking Group with a copy to: Paribas 1200 Smith Street, Suite 3100 Houston, Texas 77002 Telephone No.: 713-659-4811 Telecopy No.: 713-659-3832 Attention: Corporate Banking Group TORONTO DOMINION (TEXAS), INC., as Documentation Agent and as a Lender By: Authorized Signatory Title: ADDRESS FOR NOTICES: 909 Fannin, Suite 1700 Houston, Texas 77010 Telephone: 713-653-8281 Telecopy: 713-951-9921 Attn: 1 BANK OF MONTREAL, as Administrative Agent and as a Lender By: Ronald A. Launsbach Director ADDRESS FOR NOTICES: 601 S. Figueroa Street Suite 4900 Los Angeles, California 90017 Telephone: (213) 239-0602 Telecopy: (213) 239-0680 Attn: Ronald A. Launsbach 2 EX-27 3
5 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 10,291 0 105,729 47,777 12,753 146,761 414,027 123,789 750,413 119,133 521,916 224,542 0 0 (176,336) 750,413 0 311,558 0 0 257,810 18,431 25,674 9,643 (2,320) 7,323 0 (1,175) 0 6,148 0.13 0.11
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