-----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, VO4ZnnxZLXe17nTzaecFf1SPy3gXsnsVJxMOPOZltaXRCLwJ7O4CPaVjnn7c08CG tRL1K3bNxWaeNF1xozivHQ== 0000758722-98-000054.txt : 19981118 0000758722-98-000054.hdr.sgml : 19981118 ACCESSION NUMBER: 0000758722-98-000054 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98751038 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 SEPTEMBER 30, 1998 Commission file number 1-12055 PARACELSUS HEALTHCARE CORPORATION (Exact name of registrant as specified in its charter) CALIFORNIA 95-3565943 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 515 W. GREENS ROAD, SUITE 800, HOUSTON, TEXAS (Address of principal executive offices) 77067 (281) 774-5100 (Zip Code) (Registrant's telephone number, including area code) 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 November 13, 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 SEPTEMBER 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-- September 30, 1998 and December 31, 1997 4 Consolidated Statements of Operations-- Three Months and Nine Months Ended September 30, 1998 and 1997 5 Condensed Consolidated Statements of Cash Flows-- Nine Months Ended September 30, 1998 and 1997 6 Notes to Interim Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 PART II. OTHER INFORMATION 24 - ------- SIGNATURE 25 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; the impact of Year 2000 issues; 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)
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------ ----------- (Unaudited) (Note 1) ASSETS Current assets: Cash and cash equivalents $ 8,102 $ 28,173 Restricted cash 631 6,457 Accounts receivable, net 76,676 70,675 Deferred income taxes 15,138 25,818 Other current assets 43,772 42,884 -------- -------- Total current assets 144,319 174,007 Property and equipment 518,984 438,792 Less: Accumulated depreciation and amortization (161,825) (130,728) -------- -------- 357,159 308,064 Investment in Dakota Heartland Health System (Note 3) - 48,499 Goodwill 148,407 123,104 Other assets 72,286 81,150 -------- -------- Total assets $ 722,171 $ 734,824 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 36,843 $ 46,722 Accrued liabilities and other 66,451 83,698 Current maturities of long-term debt 6,345 6,209 -------- -------- Total current liabilities 109,639 136,629 Long-term debt 524,268 491,914 Other long-term liabilities 44,149 64,278 Stockholders' Equity: Common stock 224,542 224,475 Additional paid-in capital 390 390 Unrealized gains on marketable securities 12 Accumulated deficit (180,817) (182,874) -------- -------- Total stockholders' equity 44,115 42,003 -------- -------- Total Liabilities and Stockholders' Equity $ 722,171 $ 734,824 ======== ========
See accompanying notes. 5 PARACELSUS HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS ($ in 000's, except per share data) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------------------------------------------- 1998 1997 1998 1997 ---------- --------- --------- --------- Net revenue $ 157,169 $ 166,661 $ 520,744 $ 502,407 Costs and expenses: Salaries and benefits 68,955 67,781 216,846 205,041 Other operating expenses 63,831 67,689 209,813 203,162 Provision for bad debts 10,368 12,688 30,248 33,449 Interest 13,108 13,236 38,782 34,715 Depreciation and amortization 9,490 7,067 27,616 23,047 Equity in earnings of Dakota Heartland Health System (2,598) (7,824) Unusual items (6,967) (6,989) 5,978 (Gain) loss on sale of facilities 275 (6,825) --------- --------- -------- -------- Total costs and expenses 159,060 165,863 509,491 497,568 --------- --------- -------- -------- Income (loss) before minority interest, income taxes, discontinued operations and extraordinary charge (1,891) 798 11,253 4,839 Minority interests 113 (440) (3,173) (1,421) --------- --------- -------- -------- Income (loss) before income taxes, discontinued operations and extraordinary charge (1,778) 358 8,080 3,418 Income tax provision (benefit) (111) 220 2,424 1,129 --------- --------- -------- -------- Income (loss) before discontinued operations and extraordinary charge (1,667) 138 5,656 2,289 Loss on discontinued operations (2,424) (2,424) --------- --------- -------- -------- Income (loss) before extraordinary loss (4,091) 138 3,232 2,289 Extraordinary charge on extinguishment of debt, net (1,175) --------- --------- -------- -------- Net income (loss) $ (4,091) $ 138 $ 2,057 $ 2,289 ========= ========= ======== ======== Income (loss) per share - basic and assuming dilution (Note 1): Income (loss) before discontinued operations and extraordinary charge $ (0.03) $ 0.00 $ 0.10 $ 0.04 Net income (loss) per share $ (0.07) $ 0.00 $ 0.04 $ 0.04
See accompanying notes. 6 PARACELSUS HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in 000's) (Unaudited)
Nine Months Ended September 30, ------------------------ 1998 1997 --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,057 $ 2,289 Non-cash expenses and changes in operating assets and liabilities (9,704) (9,309) -------- -------- Net cash used in operating activities (7,647) (7,020) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of DHHS, net of cash acquired (59,278) Proceeds from sales of facilities, net of expenses 36,398 12,201 Sale of marketable securities 19,284 Additions to property and equipment, net (14,428) (12,617) Increase in other assets, net (6,928) (2,282) -------- -------- Net cash provided by (used in) investing activities (44,236) 16,586 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of common stock 67 Borrowings under Revolving Credit Facility 74,528 38,000 Repayments under Revolving Credit Facility (34,485) (34,593) Repayments of debt, net (4,314) (4,922) Deferred financing costs (3,984) -------- -------- Net cash provided by (used in) financing activities 31,812 (1,515) -------- -------- (Decrease) increase in cash and cash equivalents (20,071) 8,051 Cash and cash equivalents at beginning of period 28,173 17,771 -------- -------- Cash and cash equivalents at end of period $ 8,102 $ 25,822 ======== ======== Supplemental Cash Flow Information: Interest paid $ 45,265 $ 45,262 Income taxes refunded $ (440) $ (23,911) Noncash Investing Activities: Notes receivable from sale of hospitals $ (13,698) - Debt assumed by purchaser of hospitals $ 3,239 -
See accompanying notes. 7 PARACELSUS HEALTHCARE CORPORATION NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 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 17 hospitals with 1,957 licensed beds and four skilled nursing facilities with 232 licensed beds in 9 states, of which 12 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 a complete set of 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 nine months ended September 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, the 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 as of December 31, 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 nine months ended September 30, 1997, have been restated in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share":
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ------------------------------------------------------ Numerator(a): Income (loss) before discontinued operations and extraordinary charge $ (1,667) $ 138 $ 5,656 $ 2,289 Loss on discontinued operations (2,424) (2,424) Extraordinary charge (1,175) -------- -------- -------- -------- Net income (loss) $ (4,091) $ 138 $ 2,057 $ 2,289 ======== ======== ======== ======== Denominator: Weighted average shares used for basic earnings per share 55,116 55,016 55,104 54,892 Effect of dilutive securities: Employee stock options 2,428 2,694 2,440 2,769 -------- -------- -------- -------- Dilutive potential common shares 2,428 2,694 2,440 2,769 -------- -------- -------- -------- Shares used for diluted earnings per share 57,544 57,710 57,544 57,661 ======== ======== ======== ======== Earnings per share - basic and assuming dilution: Income (loss) before discontinued operations and extraordinary charge $ (0.03) $ 0.00 $ 0.10 $ 0.04 Loss on discontinued operations (0.04) (0.04) Extraordinary charge (0.02) -------- -------- -------- -------- Net income (loss) $ (0.07) $ 0.00 $ 0.04 $ 0.00 ======== ======== ======== ========
- ------------------------- (a) Amount is used for both basic and diluted earnings per share computations since there is no earnings effect related to dilutive securities. Options to purchase 4,883,469 shares of the Company's common stock at a weighted average exercise price of $7.43 per share were outstanding during the three and nine months ended September 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. 9 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. 130 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. Total comprehensive loss for the quarter ended September 30, 1998 is the same amount as net loss for that period or $4.1 million as compared to total comprehensive income of $130,000 for the comparable period in the prior year. For the nine months ended September 30, 1998 and 1997, total comprehensive income amounted to $2.0 million and $2.1 million, respectively. NOTE 2. UNUSUAL ITEMS In September 1998, the Company announced that it has taken a series of strategic actions designed to lower cost structures of its hospitals as the result of the deteriorating reimbursement environment. These actions included a combination of staff and wage reductions and other cost cutting measures. As a result of these initiatives, the Company recognized a charge of $300,000 for severance costs. Additionally, unusual items included $233,000 relating to a settlement of litigation (see Note 4). On August 31, 1998, the Company reached a settlement with PacifiCare regarding a dispute over administration of a 1996 capitation agreement. That agreement had resulted in losses to the Company in 1996 and 1997 and the eventual closure of PHC Regional Hospital and Medical Center ("PHC Regional") in June 1997, as discussed further below. On August 20, 1997, PacifiCare and the Company agreed to a specific mechanism to determine amounts owed to each other as the result of amending the agreement effective July 1, 1997. Following the completion of this process in August 1998, the Company paid PacifiCare $5.5 million as a final settlement under the capitation agreement. The Company had previously recorded a loss contract charge based on a study conducted by the Company and independent third party consultants. Unusual items for the quarter and nine months ended September 30, 1998 include a $7.5 million gain, which represents the excess of the loss contract accrual over the settlement payment. In June 1998, the Company recognized unusual charges of $731,000 to restructure home health operations, at certain of its hospitals, including in some cases the closure of these operations, and a $1.1 million charge to settle a 1995 dispute over certain contract services at Dakota Heartland Health Systems ("DHHS"). Such charges were offset by 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 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. 10 NOTE 3. ACQUISITIONS AND DISPOSITIONS On September 30, 1998, the Company completed the sale of substantially all of the assets of the eight hospitals (one of which had been previously closed) located in metropolitan Los Angeles (collectively, "LA Metro") to Alta Healthcare System LLC, a California limited liability company and certain subsidiaries thereof (collectively "Alta Healthcare"). The purchase price of approximately $33.7 million, which included the purchase of net working capital, was arrived at through an arms length negotiation and was paid by a combination of $16.5 million in cash, the assumption of approximately $3.2 million in debt, and issuance by the purchaser of $9.9 million of secured promissory notes and an additional secured second lien subordinated note in the principal amount of $3.8 million. This subordinated note may be adjusted for any increase or decrease of net working capital and certain other adjustments. The transaction resulted in a $4.2 million reduction in amounts outstanding under the Company's Amended and Restated Reducing Revolving Credit Facility (the "Credit Facility"), a $9.3 million reduction in amounts outstanding under the Company's off balance sheet receivable financing program, and the assumption by the purchaser of approximately $3.2 million in other secured debt. The Company had previously recorded impairment charges related to the LA Metro facilities; accordingly, the Company recorded no gain or loss on the sale. On 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 for $64.5 million, inclusive of working capital, 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. The transaction was accounted for as a step purchase acquisition. As the result of this change in control, the Company has recast its consolidated statements of operations to account for DHHS under the consolidated method of accounting as though the transaction had occurred at the beginning of the year. The results of operations for the nine months ended September 30, 1998, reflect minority interest of $ 4.1 million for the six-month period prior to the change in control. The accompanying financial statements reflect the preliminary allocation of purchase price, as the purchase price allocation has not been finalized pending the results of a third-party appraisal. The excess of the purchase price over the net assets acquired approximated $28.1 million and is being amortized over twenty years. The Company does not expect the final purchase price allocation to have a material impact on the consolidated financial statements. 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 and related letter of credit. The Company recognized a pretax gain of $7.1 million on the disposition. The following unaudited pro forma financial information for the nine months ended September 30, 1998 and 1997 (dollars in thousands, except per share amounts) assumes the disposition of the LA Metro and Chico hospitals and the acquisition of DHHS occurred on January 1, 1997. 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 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 11 measure of liquidity, cash flow or operating income under generally accepted accounting principles.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 ------------------------------------------------------------------------ Chico Hospital DHHS LA Metro As Pro Forma Pro Forma Pro Forma Company Reported(a) Adj.(b) Adj.(c) Adj.(d) Pro Forma ---------- ---------- ---------- --------- ---------- Net revenue $ 520,744 $ (18,850) $ - $ (57,972) $ 443,922 ========= ========= ========= ======== ========= Adjusted EBITDA $ 60,664 $ (3,560) $ 4,141 $ 1,189 $ 62,434 ========= ========= ========= ======== ========= Income before income taxes, discontinued operations and extraordinary charge $ 8,080 $ (8,645) $ 1,036 $ 1,943 $ 2,414 ========= ========= ========= ======== ========= Income before extraordinary loss and discontinued operations $ 5,656 $ (6,673) $ 829 $ 1,555 $ 1,367 ========= ========= ========= ======== ========= Net income $ 2,057 $ (6,673) $ 829 $ 3,979 $ 192 ========= ========= ========= ======== ========= Income per share basic and assuming dilution: Income before discontinued operations and extraordinary charge $ 0.10 $ 0.02 ========= ========= Net income per share $ 0.04 $ 0.00 ========= =========
- ------------------------- (a) Excluding the $7.1 million gain on sale of facilities, income before extraordinary loss and discontinued operations was $135,000, or break-even 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. (c) As reported amounts reflect DHHS on the consolidated method of accounting as though the acquisition had occurred at the beginning of the year. Pro forma adjustments to adjusted EBITDA reflect the reversal of minority interest. (d) Pro forma adjustments to reflect the disposition of the LA Metro hospitals, including $1.0 million in interest income on notes receivable and the removal of the $2.4 million loss from discontinued operations from certain of those facilities (see Note 4). 12
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 ------------------------------------------------------------------------- Chico Hospital DHHS LA Metro As Pro Forma Pro Forma Pro Forma Company Pro Reported Adj.(a) Adj.(b) Adj.(c) Forma ---------- --------- --------- --------- ----------- Net revenue $ 502,407 $ (25,783) $ 74,877 $ (70,827) $ 480,674 ======== ======== ========= ======== ======== Adjusted EBITDA $ 67,158 $ (1,930) $ 10,501 $ (3,357) $ 72,372 ======== ======== ========= ======== ======== Income before income taxes $ 3,418 $ 745 $ 2,426 $ (2,554) $ 4,035 ======== ======== ========= ======== ======== Net income $ 2,289 $ 610 $ 1,987 $ (2,092) $ 2,794 ======== ======== ========= ======== ======== Net income per share - basic and assuming dilution: $ 0.04 $ 0.05 ======== ========
- ----------------------- (a) Pro forma adjustments to reflect the dispositions of the Chico hospitals. (b) Pro forma adjustments to reflect DHHS acquisition. (c) Pro forma adjustments to reflect the dispositions of the LA Metro hospitals, including $1.0 million in interest income on notes receivable. NOTE 4. LOSS FROM DISCONTINUED OPERATIONS Loss from discontinued operations reflects a $2.4 million charge (net of tax benefit of $1.7 million) relating to a settlement of litigation concerning alleged violations of certain Medicare rules filed by two former employees ("the relators") in October 1995. Concurrent with the settlement of this litigation, previously reported in the Company's 1997 Annual Report filed on Form 10-K, the United States Government intervened in the case as to certain of the claims against the Company and other related entities and individuals. The claims primarily concerned LA Metro psychiatric hospital facilities and one LA Metro acute care facility. The United States dismissed the claims with prejudice and released the Company, its subsidiaries, its current and former directors and employees, and related others from civil or administrative monetary actions related to the claims. In return, the Company agreed to pay the Government $7.3 million, $4.0 million of which was paid on the execution of the settlement agreement and the balance of which will be paid over a one-year period. The Company also reached a complete and final resolution of all issues in a settlement with the relators, which included a dismissal with prejudice by the relators of the entire complaint to the Company and others. See Part II. Item 1- Legal Proceedings for further discussion on the terms of the settlement. The Company reported the excess of the settlement over the related liability accrued at December 31, 1997, as loss from discontinued operations. 13 NOTE 5. CONTINGENCIES IMPACT OF YEAR 2000 - As with most other industries, hospitals and health care systems use information systems that may misidentify dates beginning January 1, 2000, and result in system or equipment failures or miscalculations. Information systems include computer programs, building infrastructure components and computer-aided biomedical equipment. The Company has a Year 2000 strategy for its hospitals that includes phases for education, inventory and assessment of applications and equipment at risk, analysis and planning, testing, conversion/remediation/replacement and post-implementation. The Company can provide no assurances that applications and equipment the Company believes to be Year 2000 compliant will not experience difficulties, or that the Company will not experience difficulties obtaining resources needed to make modifications to correct or replace the Company's affected systems and equipment. Failure by the Company or third parties on which it relies to resolve Year 2000 issues could have a material adverse effect on the Company's results of operations and its ability to provide health care services. Consequently, the Company can give no assurances that issues related to Year 2000 will not have a material adverse effect on the Company's financial condition or results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion. PENDING LITIGATION - The Company is a party to pending litigation in connection with several stockholder related matters and a suit involving insurance carriers. See "Item 2 - Pending Litigation." 14 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 exclude (i) the Company's LA Metro hospitals, which were sold on September 30, 1998, and otherwise consist of acute care hospitals owned and operated throughout the periods for which comparative results are presented and corporate expenses. Accordingly, such designation excludes DHHS (acquired June 1998), Chico hospitals sold in June 1998 and PHC Regional Hospital, which the Company closed in June 1997 (see Notes 2 and 3). RESULTS OF OPERATIONS - QUARTER ENDED SEPTEMBER 30, 1998 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1997 Net revenue for the quarter ended September 30, 1998, was $157.2 million, a decrease of $9.5 million, or 5.7%, from $166.7 million for the same period of 1997. Net revenue for the 1998 quarter increased $25.0 million as a result of the July 1, 1998 acquisition of DHHS with such increase offset by (i) a $9.5 million decrease in net revenue attributable to the Chico hospitals (ii) a $4.4 million decrease in net revenue at the Company's LA Metro hospitals and (iii) $1.5 million decrease in net revenue attributable to the closure of PHC Regional. DHHS was accounted for under the equity method for the quarter ended September 30, 1997. The remaining decline in net revenue occurred at the Company's "same hospitals," as discussed below. Net revenue at "same hospitals" for the quarter ended September 30, 1998 was $112.8 million compared to $132.0 million, a decrease of $19.2 million, or 14.6%, over the comparable period in 1997 due to (i) 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"), (ii) the restructuring of home health operations at certain of the Company's hospitals in the second quarter of 1998, including in some cases the closing of such operations (see Note 2), (iii) an overall decline in volume at the hospitals and continued tightening of payment levels by managed care plans. Net revenue at the Company's Tennessee market hospitals, which have significant home health operations, decreased $5.1 million, or 38.1%, from $13.4 million in 1997 to $8.3 million in 1998. Excluding Tennessee, "same hospital" revenue declined by $14.0 million, or 11.9%, from $118.5 million in 1997 to $104.5 million in 1998. The reductions in net revenue resulting from the enactment of the 1997 Budget Act, the Company's restructuring of certain of its home health operations and downward payment pressures from third party payors are likely to continue throughout 1998 and into 1999. The Company's "same hospitals" experienced a 4.9% decrease in inpatient admissions from 12,470 in 1997 to 11,853 in 1998. Same hospital patient days decreased 5.6% from 54,873 in 1997 to 51,790 in 1998. The decrease in admissions and patient days are due to volume declines at the hospitals and to a lesser extent, improved utilization review procedures at certain facilities. Outpatient visits in "same hospitals" decreased 34.2% from 396,587 in 1997 to 261,040 in 1998, primarily as a result of a significant decline in home health visits. Excluding home health visits, outpatient visits in "same hospitals" increased 4.5% from 139,647 in 1997 to 145,960 in 1998. The decline in home health visits was primarily due to stricter utilization standards under the 1997 Budget Act effective October 1, 1997, the closure of home health operations at certain facilities, and to a lesser extent, the cancellation of a contract for home health services at one of the Company's Tennessee hospitals. Over one half of the Company's decline in home health visits occurred in the Tennessee market hospitals. 15 Operating expenses (salaries and benefits, other operating expenses and provision for bad debts) decreased $5.0 million from $148.2 million in 1997 to $143.2 million in 1998. The quarter ended September 30, 1998, included DHHS operating expenses of $20.2 million, which offsets decreases in operating expenses directly related to declines in net revenue and from closed/ sold facilities. Excluding DHHS, operating expenses for the quarter ended September 30, 1998, decreased $25.2 million as compared to the same period in 1997. This decrease was attributable to (i) $7.6 million decrease from the sale of the Chico hospitals, (ii) a $3.2 million reduction in general and medical professional liability costs as a result of revisions of actuarial estimates and (iii) management's effort to reduce costs in response to reductions in net revenue resulting from the 1997 Budget Act. On a "same hospital" basis, operating expenses expressed as a percentage of net revenue increased from 88.0% in 1997 to 91.0% in 1998, and operating margin decreased from 12.0% to 9.0%, respectively. The increase in operating expenses as a percent of net revenue is due to the impact of the aforementioned stricter utilization standards and reductions in reimbursement rates under the 1997 Budget Act. Thus, the decline in net revenue has outpaced management's efforts to reduce costs. In the fourth quarter of 1998, the Company undertook a series of strategic actions designed to lower the Company's cost structure as the result of the deteriorating reimbursement environment (see Note 2). These actions included a combination of staff and wage reductions as well as other cost cutting measures. Management believes that the cost savings associated with these initiatives will impact the Company's results of operations starting in the fourth quarter of 1998. However, there can be no assurance that the Company will achieve its desired cost structure or that any cost reductions will be sufficient to offset present and/or future government initiatives or reduction in current levels of utilization. Depreciation and amortization increased 34.3% to $9.5 million in 1998 from $7.1 million for the same period of 1997, primarily due to the acquisition of DHHS, which was accounted for under the equity method of accounting in the comparable period in 1997, and from current year additions to property and equipment. Income (loss) before income taxes, discontinued operations and extraordinary charge for the quarter ended September 30, 1998, included $3.1 million attributable to income from DHHS on a consolidated basis (see Note 3), compared to $2.6 million of reported equity in earnings in the prior period. Income before income taxes, discontinued operations and extraordinary charge also included a $7.5 million gain from the settlement of a contract dispute with PacifiCare (see Note 2), a $233,000 unusual charge relating to a settlement of litigation and a $275,000 loss from sale of home health operations at one of the Company's facilities. The Company's effective tax benefit was 6.2% for the quarter ended September 30, 1998, as compared to effective tax rate of 61.5% for the comparable period in 1997. The reduced tax benefit for 1998 resulted from an increase in the valuation allowance related to unrealized tax assets and from nondeductible goodwill amortization expense. The Company recorded a loss from discontinued operations of $2.4 million (net of tax of $1.7 million), or $0.04 per diluted share, in 1998 to reflect the settlement of the 1995 litigation concerning alleged violations of certain Medicare rules. The claims related substantially to the LA Metro psychiatric facilities which have been reported as discontinued operations since the Company adopted a plan to exit the psychiatric hospital business in 1996. See Part II. Item1. Legal Proceedings, for additional discussion of the terms of the litigation settlement. 16 Net loss for the quarter ended September 30, 1998, was $4.1 million, or $0.07 per diluted share, compared to a net income of $138,000, or $0.00 per diluted share, for the same period of 1997. Weighted average common and common equivalent shares outstanding decreased to 55.1 million in 1998 from 57.7 million in 1997, primarily due to the exclusion of dilutive securities from the calculation of net loss per share in 1998. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1997 Net revenue for the nine months ended September 30, 1998, was $520.7 million, an increase of $18.3 million, or 3.6%, from $502.4 million for the same period of 1997. Net revenue for 1998 increased $77.0 million as a result of the July 1, 1998 acquisition of DHHS. The Company recast its 1998 consolidated statement of operations to reflect DHHS under the consolidated method of accounting as though the acquisition occurred on January 1, 1998 (See Note 3). DHHS was accounted for under the equity method for the nine months ended September 30, 1997. The increase from DHHS net revenue was offset by (i) a $6.9 million decrease in net revenue attributable to the sale of the Chico facilities (ii) a $12.7 million decrease in net revenue at the Company's LA Metro due primarily to volume declines, and (iii) $6.7 million decrease in net revenue attributable PHC Regional. The remaining decline in net revenue occurred at the Company's "same hospitals," as discussed below. Net revenue at "same hospitals" for the nine months ended September 30, 1998, was $366.2 million compared to $398.5 million, a decrease of $32.3 million, or 8.3%, primarily as a result of the 1997 Budget Act, the Company's restructuring of home health operations and continued pricing pressures from third party payors, as discussed above, and to a lesser extent, an overall decline in volumes at certain hospitals. Net revenue at the Company's Tennessee market hospitals, which have significant home health operations, decreased $14.5 million, or 31.4%, from $46.2 million in 1997 to $31.7 million in 1998. Excluding Tennessee from the "same hospital" comparison, net revenue declined by $17.8 million, or 5.1%, from $352.3 million in 1997 to $334.5 million in 1998. This decline was largely due to a decrease of 156,378 home health visits in 1998 as compared to 1997. The reductions in net revenue associated with the enactment of the 1997 Budget Act, the Company's restructuring of certain of its home health operations and downward payment pressures from third party payors are likely to continue throughout 1998 and into 1999. The Company's "same hospitals" experienced a 4.3% decrease in inpatient admissions from 38,901 in 1997 to 37,232 in 1998. Patient days decreased 5.5% from 174,746 in 1997 to 165,131 in 1998. The decreases in admissions and patient days are due primarily to volume declines at the Company's Tennessee market hospitals and the closings of home health operations at certain other facilities. Outpatient visits in "same hospitals" decreased 26.1% from 1,228,069 in 1997 to 907,757 in 1998, primarily as a result of a significant decline in home health visits. Excluding home health visits, outpatient visits in "same hospitals" increased 2.1% from 427,684 in 1997 to 436,576 in 1998. The decline in home health visits was due primarily to stricter utilization standards under the 1997 Budget Act effective October 1, 1997, the closure of home health operations at certain facilities, and to a lesser extent, the cancellation of a contract for home health services at one of the Company's Tennessee hospitals. 17 Excluding the Tennessee market hospitals from the "same hospitals" comparison, inpatient admissions decreased 2.4% from 33,759 in 1997 to 32,964 in 1998. Patient days decreased 2.8% from 148,002 in 1997 to 143,816 in 1998. Outpatient visits decreased 17.2% from 819,691 in 1997 to 678,505 in 1998, primarily as a result of the significant decline in home health visits discussed above. Excluding home health visits, outpatient visits increased 4.0% from 378,418 in 1997 to 393,610 in 1998. Operating expenses (salaries and benefits, other operating expenses and provision for bad debts) increased $15.2 million from $441.7 million in 1997 to $456.9 million in 1998. The increase is primarily attributable to the inclusion of DHHS operating expenses of $59.4 million for the nine months ended September 30, 1998, which offsets decreases in operating expenses directly related to declines in net revenue and from closed/sold facilities. Excluding DHHS, operating expenses for the nine months ended September 30, 1998 decreased $44.2 million as compared to the same period in 1997. This decrease was attributable to (i) $8.6 million decrease from the sale of the Chico hospitals, (ii) a $9.4 million decrease from the closing of PHC Regional in 1997, (iii) a $3.2 million reduction in general and medical professional liability costs as a result of revisions of actuarial estimates and (iv) management's effort to reduce costs in response to reductions in net revenues resulting from the 1997 Budget Act. On a "same store" basis, operating expenses expressed as a percentage of net revenue increased from 86.7% in 1997 to 87.9% in 1998, and operating margin decreased from 13.3% to 12.1%. Excluding the Tennessee market hospitals, "same hospital" operating margin decreased from 13.1% in 1997 to 12.6% in 1998. Depreciation and amortization increased 19.8% to $27.6 million in 1998 from $23.0 million for the same period of 1997, primarily due to the acquisition of DHHS, which was accounted for under the equity method of accounting in the comparable period in 1997, and from current year additions to property and equipment. Interest expense increased $4.1 million from $34.7 million in 1997 to $38.8 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 and increased amounts outstanding under the Credit Facility and other debt. Amounts taken against the loss contract represented interest charges on borrowings to finance the acquisition of PHC Regional Hospital. Income before income taxes, discontinued operations and extraordinary charge included $8.2 million (net of $4.1 million of minority interest) attributable to income from DHHS as consolidated for the nine months ended September 30, 1998 (see Note 3), compared to $7.8 million of reported equity in earnings in the prior period. DHHS earnings for 1998 included a $1.1 million payment to settle a 1995 dispute over certain contract services. The following table presents pro forma impact on the Company's net revenue and Adjusted EBITDA for the nine months ended September 30, 1998 and 1997, as if the acquisition of DHHS had occurred on January 1, 1997 ($ in thousands). 18
PRO FORMA DHHS AS CURRENTLY RESULTS OF PRO FORMA REPORTED(a) OPERATIONS(a) INCREASE ------------ ------------ ----------- 1998 Net revenue $ 76,981 $ 76,981 $ - - Adjusted EBITDA 13,394 17,535 4,141 1997 Net revenue $ 0 $ 74,877 $ 74,877 Adjusted EBITDA 7,824 18,325 10,501
- ---------------------- (a) Adjusted EBITDA for the nine months ended September 30, 1998, excludes a $1.1 million charge to settle a 1995 dispute over certain contract services. Income before income taxes, discontinued operations and extraordinary charge for the nine months ended September 30, 1998, included a net gain of $6.8 million on sale of the Chico hospitals and other unrelated operations and unusual items totaling $7.0 million. Unusual items included a $7.5 million gain on the settlement of a contract dispute with PacifiCare and 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. These gains were offset by severance charges of $300,000 from the cost reduction initiatives implemented in the fourth quarter of 1998, a $1.1 million charge in connection with the settlement of a contract dispute at DHHS as discussed above, a $233,000 charge relating to the settlement of litigation and a $731,000 charge to restructure home health operations at certain of the Company's hospitals (see Note 2). Results of operations for the nine months ended September 30, 1997, included $6.0 million in unusual charges relating to the closure of PHC Regional Hospital in May 1997 and to a corporate reorganization also completed in May 1997. Results of operations for the nine months ended September 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 30.0% for the nine months ended September 30, 1998, as compared to 33.0% 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 offset by nondeductible goodwill amortization expense. Loss from discontinued operations of $2.4 million (net of tax of $1.7 million), $0.04 per diluted share, in 1998 reflects the settlement of the 1995 litigation concerning alleged violations of certain Medicare rules by the LA Metro psychiatric facilities. See Part II. Item1. Legal Proceedings, for additional discussion of the terms of the litigation settlement. Net income for the nine months ended September 30, 1998, was $2.1 million, or $0.04 per diluted share, compared to net income of $2.3 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 57.7 million for the nine months ended September 30, 1998 and 1997, respectively. 19 OPERATING PERFORMANCE OF LA METRO HOSPITALS On September 30, 1998, the Company completed the sale of substantially all of the assets of the LA Metro hospitals (see Note 3). The LA Metro acute care hospitals recorded an EBITDA deficit of $637,000 and $144,000 for the quarter and nine months ended September 30, 1998, respectively, as compared to EBITDA of $566,000 and $4.5 million for the quarter and nine months ended September 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 $2.7 million and $4.4 million for the quarter and nine months ended September 30, 1998, respectively, as compared to $565,000 and $859,000 for the quarter and nine months ending September 30, 1997, respectively. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities for the nine months ended September 30, 1998, was $7.6 million, compared to $7.0 million for the same period in 1997. Net cash used in investing activities was $44.0 million during 1998, as compared to net cash provided by investing activities of $16.6 million during 1997. The $60.8 million decrease in cash was primarily attributable to the Company's $59.3 million purchase (net of cash acquired) of its partner's 50% interest in DHHS (see Note 3) in 1998 and a decrease in $19.3 million of proceeds from sale of marketable securities in 1997 offset by a net increase of $24.2 million in net proceeds from the sales of hospitals (see Note 3). Net cash provided by financing activities during 1998 was $31.8 million, compared to cash used of $1.5 million during 1997. The $33.3 million increase in cash provided by financing activities was primarily attributable to borrowings under the Company's Amended Credit Agreement to finance the purchase of its partner's 50% interest in DHHS partially offset by repayments under the Credit Facility and other borrowings and deferred financing costs of $4.0 million associated with the Credit Facility entered into in March 1998. Net working capital was $34.7 million at September 30, 1998, a decrease of $2.7 million from $37.4 million at December 31, 1997. The decrease was primarily due to the repayment of amounts outstanding under the Credit Facility from available cash, as well as the reclassification of $2.0 million in principal amounts outstanding under the term loans from long term to current pursuant to an amendment to the Credit Facility effective March 1998. Working capital also decreased as a result of the sale of working capital associated with the Chico and LA Metro hospitals, from which proceeds were used to reduce amounts outstanding under the Company's off balance sheet receivable financing program (see Note 3). The Company's long-term debt as a percentage of total capitalization was 92.2 % at September 30, 1998, compared to 92.1% at December 31, 1997. As of November 13, 1998, the Company had $38.1 million available under the revolver portion of its Credit Facility 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 Credit Facility 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. 20 YEAR 2000 COMPLIANCE The Securities and Exchange Commission (the "SEC") recently published additional guidance on Year 2000 disclosures. In order to comply with that guidance, the Company is supplementing the Year 2000 disclosures made in previously filed annual and quarterly reports. The Company has implemented a seven-phase project plan at each of its hospitals and corporate office to assess and address the Year 2000 issue. Additionally, the Company has contracted with a company that specializes in Year 2000 issues to assist in implementing the Company's Year 2000 plan. As part of the program, the Company is contacting its principal suppliers, vendors and payors to assess whether their Year 2000 issue, if any, will affect the Company. The first phase of the plan, which has been completed, focused on raising awareness among senior management, hospital executives and managers, and external business partners on the potential Year 2000 impact on the Company. Phase one also included forming of the Year 2000 team, defining roles and responsibilities, and establishing the project timing and deliverables. Phase two entails a complete inventory assessment to identify and document all affected systems and equipment and to prioritize all inventoried items by criticality to patient care and business operations. In phase two, all hospitals are required to identify all principal suppliers and to estimate costs and timing for all non-compliant systems and equipment. Phase two is substantially completed. Phase three involves obtaining vendor certification of compliance and developing contingency plans for vendors who are no longer in business or who do not respond. Phase three has begun and should be substantially completed in the fourth quarter of this year. Phase four, scheduled to be completed in the first quarter of fiscal 1999, includes developing test plans and compliance criteria for all patient care critical and operations critical items. The fifth phase, which includes testing and identifying non-compliant items, is scheduled for completion in the second quarter of fiscal 1999. Patient care and operations critical non-compliant systems and equipment will be converted and/or taken out of service, and contingency plans for potential system failure will be developed in the sixth phase of the project plan targeted for completion in the third quarter of next year. Phase seven focuses on identifying and correcting any malfunction in the systems and equipment. In this phase, which will be conducted throughout the fourth quarter of 1999, the Company will establish a disaster recovery team and prepare and assist system users to initiate contingency plans in the event of malfunctions. While the Company's Year 2000 plan is a multiphase project, the plan does allow for different phases to progress simultaneously. Based on the information currently available, the Company is in the process of estimating the total cost for addressing all Year 2000 issues and plans to complete its initial estimate in the first quarter of 1999. This estimate will include projected costs associated with capital projects that would have been undertaken not withstanding the Year 2000 compliance project plan but the timing was accelerated in light of the plan. Year 2000-related remediation costs incurred in 1998 have not been material to the Company's results of operations. The Company relies heavily on third parties in operating its business. In addition to its reliance on software, hardware and other equipment vendors to verify Year 2000 compliance of their products, the Company also depends on (i) fiscal intermediaries which process claims and make payments for the Medicare/ Medicaid programs, (ii) insurance companies, HMOs and other private payors, (iii) utilities which provide electricity, water, natural gas and telephone services (iv) local community services such as "911" emergency, police, fire, and sewage treatment, (v) vendors of medical supplies and pharmaceuticals used in patient care and (vi) other service providers such as banks, insurance companies and transfer agents. As a part of its Year 2000 strategy, the Company intends to seek assurances from these parties that their services and products will not be interrupted or malfunction due to the Year 2000 21 problem. If third parties fail to resolve their Year 2000 issues, such failure could have a material adverse effect on the Company's financial condition and results of operations. The Company will develop contingency plans to address any Year 2000 issues that may arise and anticipates completing its initial contingency plans in the third quarter of 1999. Such plans will entail, but are not limited to, outlining procedures for compliance certification from vendors who are no longer in business or who refuse to respond, developing manual procedures for all patient care critical and operations critical processes, and reviewing and supplementing existing disaster plans at each of the hospitals. However, there is no assurance that the Company will be able to develop all contingency plans timely or that when developed such plans will successfully mitigate all Year 2000 issues. Accordingly, failure of such contingency plans could have a material adverse effect on the Company. The SEC's recent guidance for Year 2000 disclosure also calls on companies to describe their most likely worst case Year 2000 scenarios. While a scenario in which medical equipment fails as a result of a Year 2000 problem could lead to serious injury or death, the Company does not believe that such a scenario is likely to occur. As noted above, any piece of patient care and operations critical equipment that is not Year 2000 compliant will be made compliant, replaced or taken out of service. Furthermore, there will be a back-up plan for patient and operations critical equipment in case it unexpectedly fails. The most likely worst case scenario is that the Company will have to add additional staff and/or reassign existing staff during the time period leading up to and immediately following December 31, 1999, in order to address any Year 2000 issues that unexpectedly arise. The foregoing assessment is based on information currently available to the Company. The Company will revise its assessment as it implements its Year 2000 strategy. The Company can provide no assurances that applications and equipment the Company believes to be Year 2000 compliant will not experience difficulties or that the Company will not experience difficulties obtaining resources needed to make modifications to or replace the Company's affected systems and equipment. Failure by the Company or third parties on which it relies to resolve Year 2000 issues could have a material adverse effect on the Company's results of operations and its ability to provide health care services. Consequently, the Company can give no assurances that issues related to Year 2000 will not have a material adverse effect on the Company's financial condition or results of operations. 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 amended to add a claim against the Company under section 10(b) of the Securities Exchange Act of 1934. The Court recently dismissed that claim, allowing plaintiffs an opportunity to replead. 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 22 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 and derivative 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. The Company previously reported on its Form 10-K an action filed on September 10, 1997, by twelve health care insurers and/or administrators encaptioned BLUE CROSS AND BLUE SHIELD UNITED OF WISCONSIN ET AL. V. PARACELSUS HEALTHCARE CORPORATION, Case No. 97-6760 SVW (RCx), in the United States District Court for the Central District of California against the Company and two of its subsidiaries. Plaintiffs alleged that over many years the Company fraudulently induced them to make payments under their members' plans through a variety of allegedly improper practices, principally in connection with certain psychiatric treatment programs previously operated at certain of the Company's psychiatric hospitals in the Los Angeles area. Plaintiffs asserted claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO") and the Employee Retirement Income Security Act ("ERISA"), as well as for fraud, negligent misrepresentation, unjust enrichment, and conversion. On March 10, 1998, Plaintiffs filed their First Amended Complaint restating each of their causes of action seeking damages exceeding $30.5 million, treble damages under RICO, restitution under ERISA, together with reasonable attorneys' fees and various costs and expenses. Since the Company reported on this litigation on its Form 10-K for the fiscal year ended December 31, 1997, the Company and the Plaintiffs have reached a settlement to the litigation. The Company has agreed to pay the Plaintiffs a total of $995,000 on or before November 17, 1998, in full settlement of all claims. The Plaintiffs have agreed to dismiss the suit with prejudice and to release the Company from any and all claims arising out of or based upon the subject matter of the suit. The Company denied the allegations asserted in the complaint but elected to settle the case to avoid the costs and burdens of protracted litigation. The Company previously recorded a liability relating to this litigation and expects that the settlement will have no impact on the Company's results of operations. 23 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In September 1998, the Company reached a final settlement of litigation concerning alleged violations of certain Medicare rules. As the Company has previously reported in its 1997 Annual Report filed on Form 10-K , the Medicare litigation concerned a civil complaint filed under seal in federal court in Los Angeles in October 1995 by two former hospital employees (the "relators"). The relators filed the case on behalf of the United States Government and the State of California against the Company and others (the "defendants") alleging that the defendants violated the U.S. and California False Claims Acts by failing to comply with certain Medicare and Medicaid regulations. Concurrent with the settlement, the United States Government intervened in the case as to certain of the claims against the Company and other related entities and individuals. The claims primarily concerned psychiatric hospital facilities and one acute care facility operated by the Company in Southern California and involved allegations narrower than those in the relators' initial complaint. The United States dismissed the claims with prejudice and released the Company, its subsidiaries, its current and former directors and employees, and related others from civil or administrative monetary actions related to the claims. In turn, the Company agreed to pay the Government $7.3 million, $4.0 million of which was paid on the execution of the settlement agreement and the balance of which will be paid over a one-year period. The Company also agreed that it would not contest or appeal certain cost report adjustments related to the claims asserted by the Government. In addition, the Office of the Inspector General of the Department of Health and Human Services ("OIG") agreed not to seek permissive exclusion from the Medicare, Medicaid, and other federal health care programs of those entities and individuals relating to these claims. The Company also entered into a separate corporate integrity agreement with the OIG applicable to the affected facilities. The sale of the LA Metro hospitals to Alta Healthcare (see Note 3) included the affected facilities and an agreement by Alta to abide by the corporate integrity agreement. Alta Healthcare rather than the Company therefor has the principal responsibility for complying with the agreement. Finally, the settlement includes a separate agreement with the relators reaching a complete and final resolution of all issues with them and a dismissal with prejudice by the relators of the entire complaint as to the Company and other related entities and individuals. See Part I - Item 2 "Pending Litigation" for an update of developments on the pending stockholders' litigation and other litigation involving insurance carriers previously disclosed in the Company's 1997 Form 10-K. 24 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. EXHIBIT AND REPORTS ON FORM 8-K (a) Exhibits 10.71 Settlement Agreement between the (a) United States of America, acting through the United States Department of Justice and on behalf of the Office of Inspector General of the Department of Health and Human Services; (b) Timothy Hill and Alan Leavitt; (c) Paracelsus Healthcare Corporation, Lincoln Community Medical Limited Liability Company, Lincoln Community Medical Corporation, dba Orange County Community Hospital and Bellwood Medical Corporation, dba Bellwood General Hospital; and (d) individual defendant Joseph Sharp. 27 Financial Data Schedule. (b) Reports on Form 8-K The Company filed on October 15, 1998, a Current Report on Form 8-K, dated September 30, 1998, reporting pursuant to Item 2, the sale by the Company effective September 30, 1998, of substantially all of the assets of eight hospitals (one of which had been previously closed) located in metropolitan Los Angeles to Alta Healthcare System LLC, a California limited liability company and certain subsidiaries thereof. 25 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: November 13, 1998 By: /s/James G. VanDevender -------------------------- James G. VanDevender Senior Executive Vice President, Chief Financial Officer & Director EX-10.71 2 SETTLEMENT AGREEMENT 1 SETTLEMENT AGREEMENT I. PARTIES This Settlement Agreement ("Agreement") is entered into between the (a) United States of America, acting through the United States Department of Justice and on behalf of the Office of Inspector General ("OIG-HHS") of the Department of Health and Human Services ("HHS") (collectively the "United States"); (b) Timothy Hill and Alan Leavitt ("the Relators"); (c) Paracelsus Healthcare Corporation ("Paracelsus"), Lincoln Community Medical Limited Liability Company ("Lincoln"), Lincoln Community Medical Corporation, dba Orange County Community Hospital ("OCCH") and Bellwood Medical Corporation, dba Bellwood General Hospital ("BGH") (together "the Paracelsus Companies"); and (d) individual defendant Joseph Sharp ("the Individual Defendant"). The Paracelsus Companies and the Individual Defendant are referred to collectively as "the Paracelsus Defendants." All of the foregoing are referred to collectively as "the Parties." II. PREAMBLE As a preamble to this Agreement, the Parties agree to the following: A. Paracelsus, through one or more subsidiaries, has operated OCCH and BGH. B. OCCH and BGH, through Paracelsus, submitted claims for payment to the Medicare Program ("Medicare"), Title XVIII of the Social Security Act, 42 U.S.C. Sections 1395-1395ggg. 2 C. The United States contends that it has certain civil claims against the Paracelsus Defendants under the False Claims Act, 31 U.S.C. Sections 3729-3733, other federal statutes, and common law doctrines for engaging in the following conduct at OCCH and BGH: (1) The United States contends that at various times between 1993 and 1997, some of the Paracelsus companies (a) had management agreements or directorship agreements at OCCH with Daybreak, Inc., a California Corporation ("Daybreak"), Renaissance, a California General Partnership ("Renaissance"), Pride Institute at Solutions, a California General Partnership (Pride I), Pride Institute at Solutions II, a California General Partnership ("Pride II"), and Management Team Networks, Inc., a California corporation (together "the Management Companies"); (b) were involved with psychiatric programs called Daybreak, Renaissance and Pride at OCCH ("the Programs"); (c) had contracts with and made payments to physicians and medical directors, made payments for patient travel expenses, and waived payments owed by patients in connection with the Programs; and (d) had relationships in connection with the Programs with persons named Chaz Pritchard, Michael Ralke, and Frank Boudewyns, all of which were intended to induce patient referrals to OCCH in violation of the Anti-Kickback Statute, 42 U.S.C. Section 1320a-7b(b), and Settlement Agreement Between United States and Paracelsus Healthcare Corporation -2- 3 some of which were improperly claimed on Medicare cost reports for OCCH. (2) The United States contends that at various times from 1993 through 1997, some of the Paracelsus Companies submitted claims to Medicare for medically unnecessary services, services not rendered, and non-billable services to patients in the Programs at OCCH. (3) The United States contends that between 1990 and 1997 the Paracelsus Companies had directorship, joint venture, and other agreements with physicians and physician groups at BGH that were intended to induce patient referrals to BGH in violation of the Anti-Kickback Statute, 42 U.S.C. Section 1320a-7b(b). The foregoing alleged conduct is hereinafter referred to as the "Covered Conduct". D. The United States also contends that it has certain administrative claims against the Paracelsus Defendants under the provisions for permissive exclusion from the Medicare, Medicaid, and other Federal health care programs, 42 U.S.C. Section 1320a-7(b), and the provisions for civil monetary penalties, 42 U.S.C. Section 1320a-7a, for the Covered Conduct. E. The Relators have filed a qui tam action, United States ex rel. Hill and Leavitt v. Paracelsus Healthcare Corp. et al., CV 95-6653 TJH(JRx) in the United States District Court for the Central District of California ("the Action"). In the Action, the Relators Settlement Agreement Between United States and Paracelsus Healthcare Corporation -3- 4 seek damages for violation of the False Claims Act, 31 U.S.C. Sections 3729-3733, from the Paracelsus Defendants and others. F. The Paracelsus Defendants deny the contentions of the United States as set forth in Paragraphs C and D above and the allegations of the Relators as set forth in their complaint in the Action. G. To avoid the delay, uncertainty, inconvenience, and expense of protracted litigation of these claims, the Parties reach a full and final settlement as set forth below. III. TERMS AND CONDITIONS NOW, THEREFORE, in consideration of the mutual promises, covenants, and obligations set forth below, and for good and valuable consideration as stated herein, the Parties agree as follows: 1. Payment. Paracelsus, on behalf of itself, the other Paracelsus Defendants, and other released parties, shall pay to the United States $7,300,000 (the "Principal Settlement Amount") as follows: (a) $4,000,000 within three (3) days of the full execution of this Agreement; (b) $1,000,000 plus interest within six months of the full execution of this Agreement; (c) $2,300,000 plus interest within twelve months of the full execution of this Agreement. Settlement Agreement Between United States and Paracelsus Healthcare Corporation -4- 5 All sums unpaid after three (3) days from the date of full execution of this Agreement by the Parties shall bear interest at the six-month T bill rate in effect on the third day following such execution. All payments will be made by electronic funds transfer in accordance with instructions to be provided by the United States. 2. Additional Payment. If, based upon or because of this Agreement, the Action, or any contentions concerning the Covered Conduct, the Paracelsus Defendants receive any Related Payments as that term is defined in Schedule 1.1(f) attached to the Agreement dated March 30, 1998 related to the Paracelsus Healthcare Corporation Amended and Restated Credit Agreement dated as of March 30, 1998 with Banque Paribas as Agent, Toronto Dominion (Texas), Inc., as Documentation Agent, and Bank of Montreal, as Administrative Agent ("the Credit Agreement"), including but not limited to insurance proceeds or recoveries in the nature of contribution or indemnity from any other defendants named in the Action, the Paracelsus Defendants will pay the United States the amount of such Related Payments up to $700,000 ("the Additional Settlement Amount"). The Paracelsus Defendants shall promptly notify the United States and the Relators of the receipt of any such Related Payment. Payment to the United States shall be made within five (5) days of the Paracelsus Defendants' receipt of any such Related Payment and will be made by wire transfer in accordance with shall use reasonable efforts to obtain Related Settlement Agreement Between United States and Paracelsus Healthcare Corporation -5- 6 Payments from insurers under any applicable Paracelsus directors and officers liability policy excluding Excess Insurance Policy No. DFX0009397 issued by Great American Insurance Companies. The reasonable efforts will include making a demand for payment from the relevant insurers and may, but are not required to, include initiating litigation or arbitration against the relevant insurers. Paracelsus shall cooperate with the Individual Defendant in his efforts to obtain Related Payments. Its cooperation shall include assigning rights, if necessary, and signing documents to enable the Individual Defendant to seek the payments. Six months and twelve months from the Execution of this Agreement, the Individual Defendant shall provide the United States and the Relators with a brief written statement of such efforts. 3. Release of Paracelsus Defendants. In consideration of the obligations of the Paracelsus Defendants set forth in this Agreement, conditioned on Paracelsus making the payments as described in Paragraph 1 above and subject to Paragraph 18 below (concerning bankruptcy proceedings commenced within 91 days of the effective date of this Agreement), the United States (on behalf of itself, its officers, agents, agencies, and departments) and the Relators (on behalf of themselves, their heirs, successors, family members, attorneys, and assigns) fully and finally release, waive, and forever discharge the Paracelsus Defendants, and each of their current or former parent corporations, affiliates, subsidiaries, shareholders, officers, directors, employees, heirs, successors, Settlement Agreement Between United States and Paracelsus Healthcare Corporation -6- 7 family members, attorneys, and assigns, from any civil or administrative monetary claim, action, suit, or proceeding that the United States has or may have, existing on or before the Effective Date of this Agreement for the Covered Conduct, including but not limited to those under the False Claims Act, 31 U.S.C. Sections 3729-3733, the Civil Monetary Penalties Law, 42 U.S.C. Section 1320a-7a, the Program Fraud Civil Remedies Act, 31 U.S.C. Sections 3801-3812, administrative recoupment of overpayment under the Medicare or Medicaid programs, 42 U.S.C. Section 1395gg, 42 C.F.R. Sections 405.370-405.378, 42 C.F.R. Sections 447.30, 447.31, subject to Paragraphs 10 and 12 below; or the common law theories of payment by mistake, unjust enrichment, breach of contract and fraud. 4. Additional Release by OIG-HHS. In consideration of the obligations of the Paracelsus Defendants set forth in this Agreement, conditioned on Paracelsus making the payments as described in Paragraph 1 above and subject to Paragraph 18 below (concerning bankruptcy proceedings commenced within 91 days of the effective date of this Agreement), the OIG-HHS fully and finally releases, waives, discharges, and will refrain from instituting, directing, or maintaining any administrative claim or any action seeking exclusion from the Medicare, Medicaid, or other Federal health care programs (as defined in 42 U.S.C. Section 1320a-7b(f)) for the Covered Conduct against the Paracelsus Defendants, and each of their current or former parent corporations, affiliates, subsidiaries, shareholders, officers, directors, employees, heirs, Settlement Agreement Between United States and Paracelsus Healthcare Corporation -7- 8 attorneys, successors, and assigns, under 42 U.S.C. Section 1320a-7a (the Civil Monetary Penalties Law), 42 U.S.C. Section 1320a-7(b) (permissive exclusion), 42 U.S.C. Section 1320c-5(a)(1), 42 C.F.R. Sections 1001.201-1001.1701 (except to the extent that convictions referred to in these regulations would require a mandatory exclusion pursuant to 42 U.S.C. Section 1320a-7(a)), or 42 C.F.R. Section 1003.105, except as reserved in Paragraph 6 below and as reserved in this Paragraph. The OIG-HHS expressly reserves all rights to comply with any statutory obligations to exclude the Paracelsus Defendants, together with their current and former parent corporations, each of their direct or indirect subsidiaries, sister corporations, divisions, current or former owners, officers, directors, affiliates, and the successors and assigns of any of them from the Medicare, Medicaid, or other Federal health care program under 42 U.S.C. Section 1320a-7(a) (mandatory exclusion) based upon the Covered Conduct. Nothing in this Paragraph precludes the OIG-HHS from seeking to exclude Paracelsus from participation in the Medicare, Medicaid, and Federal health care programs if Paracelsus fails to make any payment as described in Paragraph 1 above or from taking action against entities or persons, or for conduct and practices, for which civil claims have been reserved in Paragraph 6 below. 5. Intervention and Dismissal. Upon receipt of the first payment described in Paragraph 1 above, the United States shall promptly and within three business days sign and file a Notice of Intervention and the United States and the Relators shall promptly Settlement Agreement Between United States and Paracelsus Healthcare Corporation -8- 9 and within three business days sign and file a Joint Stipulation of Dismissal in the form attached hereto as Exhibit A, dismissing claims against the Paracelsus Defendants for the Covered Conduct with prejudice consistent with the terms of this Settlement Agreement and the release set forth in paragraph 3 above. 6. Exceptions to Releases. Notwithstanding any term of this Agreement, specifically reserved and excluded from the scope and terms of this Agreement as to any entity or person, including the Paracelsus Defendants, are any and all of the following (a) Any civil, criminal, or administrative claims arising under Title 26, U.S. Code (Internal Revenue Code); (b) Any criminal liability; (c) Except as explicitly stated in this Agreement, any administrative liability, including mandatory exclusion from Federal health care programs; (d) Any liability to the United States (or its agencies) for any conduct other than the Covered Conduct; (e) Any claims based upon such obligations as are created by this Agreement; (f) Any express or implied warranty claims or other claims for defective or deficient products or services, including quality of goods and services, provided by the Paracelsus Companies to the United States or Medicare beneficiaries; (g) Any claims based on a failure to deliver items or services due to the United States or Medicare beneficiaries; Settlement Agreement Between United States and Paracelsus Healthcare Corporation -9- 10 (h) The Relators' claim for attorney's fees, expenses, and costs pursuant to 31 U.S.C. Section 3730(d)(1). 7. Corporate Integrity Agreement. Paracelsus and Lincoln have entered into a Corporate Integrity Agreement with HHS, attached as Exhibit B, which is incorporated into this Agreement by reference. Paracelsus and Lincoln shall comply with their obligations under the Corporate Integrity Agreement. 8. Release of United States by the Paracelsus Defendants. The Paracelsus Defendants fully and finally release the United States, its agencies, employees, servants, and agents from any claims (including attorneys' fees, costs, and expenses of every kind and however denominated) which the Paracelsus Defendants have or may have existing on or before the Effective Date of this Agreement, against the United States, its agencies, employees, servants, attorneys, and agents for their actions in connection with the Covered Conduct and their investigation, litigation, and resolution thereof. 9. Limitations in Credit Agreement. Paracelsus has provided the United States with (a) a copy of the Credit Agreement, which states that an event resulting in a Material Adverse Effect is a default (Section 11.1); (b) a related Agreement dated March 30, 1998, which attaches Schedule 1.1(f), which states that a Material Adverse Effect results if Paracelsus pays more than $7.5 million or more in excess of total "Related Payments," as defined therein, to resolve certain litigation pending against Paracelsus; and (c) part Settlement Agreement Between United States and Paracelsus Healthcare Corporation -10- 11 of Schedule 7.6, showing that the Action and certain stockholders' litigation are among the litigation actions included in Schedule 1.1(f). Paracelsus represents that it has provided the United States with all documents material to the terms of Schedule 1.1(f); that these documents evidence a valid and binding legal obligation of Paracelsus, and that neither Paracelsus, nor its subsidiaries, nor any of its Directors or Officers has received any Related Payment as defined in Schedule 1.1(f) in connection with or because of this Agreement, the Action, or contentions concerning the Covered Conduct. 10. Cost Report Disallowances. In auditing cost reports for OCCH, Blue Cross of California, the Medicare fiscal intermediary for OCCH, has disallowed or reclassified management fees and certain other costs and revenues associated with the Programs. These audit adjustments are identified as Audit Adjustment Numbers 4, 11, 12, 18 and 19 for the fiscal year ended September 30, 1995. The Paracelsus Companies agree not to contest those adjustments for 1995 or equivalent adjustments and treatment for subsequent fiscal years, and waive any rights to appeal such disallowances and treatment, including but not limited to their appeal rights under 42 C.F.R. Sections 405.1801-405.1890. Upon execution of this Agreement, the Paracelsus Companies will withdraw or dismiss any pending appeal of such disallowance and treatment. Except as set forth in the preceding paragraph and in Paragraph 12 below, nothing in this Agreement shall be deemed to Settlement Agreement Between United States and Paracelsus Healthcare Corporation -11- 12 affect the rights of the fiscal intermediary, on behalf of Medicare, to make any other cost report audit adjustments it deems appropriate or to affect the rights of the Paracelsus Companies to contest or appeal any such other adjustments. 11. Denied Claims. The Amount that Paracelsus must pay pursuant to this Agreement by electronic wire transfer pursuant to Paragraphs 1 and 2 above will not be decreased as a result of the denial of any claims for payment now being withheld from payment by any Medicare carrier or fiscal intermediary related to the Covered Conduct. The Paracelsus Companies agree not to resubmit to any Medicare carrier or fiscal intermediary any previously denied claims related to the Covered Conduct and agree not to appeal any such denials of claims. 12. Unallowable Costs. The Paracelsus Companies agree that all costs (as defined in the Federal Acquisition Regulations ("FAR") 48 C.F.R. Section 31.205-47 and in Titles XVIII and XIX of the Social Security Act, 42 U.S.C. Sections 1395-1395ggg and 1396-1396v, and the regulations promulgated thereunder) incurred by or on behalf of the Paracelsus Companies, their predecessors or any of their present or former officers, directors, employees, shareholders, and agents, in connection with: (a) the matters covered by this Agreement, (b) the audit(s) and civil and any criminal investigation(s) by the United States of the matters covered by this Agreement, (c) the Paracelsus Companies' or their predecessors' investigation, defense, and corrective actions Settlement Agreement Between United States and Paracelsus Healthcare Corporation -12- 13 undertaken in response to the audit(s) and civil and any criminal investigation(s) by the United States in connection with the matters covered by this Agreement (including the Corporate Integrity Agreement and attorney's fees), (d) the negotiation of this Agreement, and (e) the payment made pursuant to this Agreement, are unallowable costs on Government contracts and under the Medicare Program, Medicaid Program, TRICARE (or CHAMPUS) Program, FEHBP, and Veterans Affairs Program (hereafter, "unallowable costs"). These unallowable costs will be separately estimated and accounted for by the Paracelsus Companies, and the Paracelsus Companies will not charge such unallowable costs directly or indirectly to any contracts with the United States or any state Medicaid program, or seek payment for such unallowable costs through any cost report, cost statement, information statement, or payment request submitted by the Paracelsus Companies or any of their subsidiaries to the Medicare, Medicaid, TRICARE, VA, or FEHBP programs. The Paracelsus Companies further agree that within 60 days of the effective date of this Agreement they will identify to applicable Medicare and TRICARE fiscal intermediaries, carriers and/or contractors, and Medicaid, VA, and FEHBP fiscal agents, any unallowable costs (as defined in this paragraph) included in payments previously sought from the United States, or any State Medicaid Program, including, but not limited to, payments sought in any cost reports, cost statements, information reports, or payment Settlement Agreement Between United States and Paracelsus Healthcare Corporation -13- 14 requests already submitted by the Paracelsus Companies, and will request, and agree, that such cost reports, cost statements, information reports, or payment requests, even if already settled, be adjusted to account for the effect of the inclusion of the unallowable costs. The Paracelsus Companies agree that the United States will be entitled to recoup from the Paracelsus Companies any overpayment as a result of the inclusion of such unallowable costs on previously-submitted cost reports, information reports, cost statements, or requests for payment. Any payments due after the adjustments have been made shall be paid to the United States pursuant to the direction of the Department of Justice and/or the affected agencies. The United States reserves its rights to disagree with any calculations submitted by the Paracelsus Companies or any of their subsidiaries on the effect of inclusion of unallowable costs (as defined in this paragraph) on the Paracelsus Companies' cost reports, cost statements, or information reports. Nothing in this Agreement shall constitute a waiver of the rights of the United States to examine or reexamine the unallowable costs described in this Paragraph. 13. No Offsets from Beneficiaries. The Paracelsus Companies agree that they will not seek payment for any of the health care services to Medicare beneficiaries in the Programs from any of the beneficiaries or their parents or sponsors. The Paracelsus companies waive any causes of action against these beneficiaries or their parents or sponsors based upon these services. Settlement Agreement Between United States and Paracelsus Healthcare Corporation -14- 15 14. Waiver of Excessive Fines Defense. The Paracelsus Defendants waive and will not assert any defenses they may have to any criminal prosecution or administrative action relating to the Covered Conduct, which defenses may be based in whole or in part on the Double Jeopardy or Excessive Fines Clause of the United States Constitution and agree that the Settlement Amount is not punitive in nature or effect for purposes of such criminal prosecution or administrative action. 15. No Agreement Re Tax Treatment. Nothing in this Agreement constitutes an agreement by the United States concerning the characterization of the Settlement Amount for purposes of any proceeding under Title 26 of the Internal Revenue Code. 16. Cooperation. The Paracelsus Companies covenant to cooperate fully and truthfully with the United States in any investigation concerning the Covered Conduct of individuals and entities not specifically released in this Agreement. Upon reasonable notice, the Paracelsus Companies will make reasonable efforts to facilitate access to, and encourage the cooperation of, their directors, officers, and employees for interviews and testimony, consistent with the rights and privileges of such individuals, and will furnish to the United States, upon reasonable request, all non-privileged documents and records in their possession, custody, or control relating to the Covered Conduct. 17. Financial Condition. Paracelsus expressly warrants that it has reviewed its financial situation and that it currently is Settlement Agreement Between United States and Paracelsus Healthcare Corporation -15- 16 solvent within the meaning of 11 U.S.C. Section 547(b)(3), and that its payment to the United States hereunder will not render it insolvent. Further, the Parties expressly warrant that, in evaluating whether to execute this Agreement, the Parties (a) have intended that the mutual promises, covenants and obligations set forth herein constitute a contemporaneous exchange for new value given to Paracelsus, within the meaning of 11 U.S.C. Section 547 (c)(1), and (b) have concluded that these mutual promises, covenants and obligations do, in fact, constitute such a contemporaneous exchange. 18. Bankruptcy. In the event Paracelsus commences, or a third party commences, within 91 days of the effective date of this Agreement, any case, proceeding, or other action (a) under any law relating to bankruptcy, insolvency, reorganization, or relief of debtors seeking to have any order for relief entered as to Paracelsus, or seeking to adjudicate Paracelsus as bankrupt or insolvent, or (b) seeking appointment of a receiver, trustee, custodian, or other similar official for Paracelsus or for all or any substantial part of Paracelsus' assets, Paracelsus agrees as follows: a. Paracelsus' obligations under this Agreement may not be avoided pursuant to 11 U.S.C. Section 547, and Paracelsus will not argue or otherwise take the position in any such case, proceeding, or action that: (i) Paracelsus' obligations under this Agreement may be avoided under 11 U.S.C. Section 547; (ii) Paracelsus was insolvent at Settlement Agreement Between United States and Paracelsus Healthcare Corporation -16- 17 the time this Agreement was entered into, or became insolvent as a result of the payment made to the United States hereunder; or (iii) the mutual promises, covenants, and obligations set forth in this Agreement do not constitute a contemporaneous exchange for new value given to Paracelsus. b. In the event that Paracelsus' obligations hereunder are avoided pursuant to 11 U.S.C. Section 547, the United States, at its sole option, may rescind this Agreement and bring any civil and/or administrative claim, action, or proceeding against Paracelsus for the claims that would otherwise be covered by the releases provided above, except that Paracelsus shall receive credit as an offset for any amount paid to and retained by the United States and the Relators. If the United States chooses to do so, Paracelsus agrees that (i) any such claims, actions, or proceedings brought by the United States (including any proceedings to exclude Paracelsus from participation in Medicare, Medicaid, or other Federal health care programs) are not subject to an "automatic stay" pursuant to 11 U.S.C. Section 362(a) as a result of the action, case, or proceeding described in the first clause of this Paragraph, and that Paracelsus will not argue or otherwise contend that the United States' claims, actions or proceedings are subject to an automatic stay; (ii) that Paracelsus will not plead, argue, or otherwise raise any defenses under the theories of statute of limitations, laches, estoppel, or similar theories, to any such civil or administrative claims, actions, or proceedings which are brought by Settlement Agreement Between United States and Paracelsus Healthcare Corporation -17- 18 the United States within sixty (60) calendar days of written notification to Paracelsus that the releases herein have been rescinded pursuant to this Paragraph, except to the extent such defenses were available on the date of execution of this Agreement; and (iii) the United States may pursue its claim, inter alia, in the case, action, or proceeding referenced in the first clause of this Paragraph, as well as in any other case, action, or proceeding. c. Paracelsus acknowledges that its agreements in this Paragraph are provided in exchange for valuable consideration provided in this Agreement. 19. Costs. The United States and the Paracelsus Companies will bear their own legal and other costs incurred in connection with this matter, including the preparation and performance of this Agreement. 20. No Admission. This Agreement and the terms of it are not evidence or an admission by any Party as to any issue of fact or law and are not admissible into evidence for any purpose except to enforce the terms of the Agreement. 21. Adequacy of Settlement. The Relators agree that this Settlement is fair, adequate, and reasonable under all the circumstances known to them. 22. Voluntary Agreement. The Paracelsus Defendants represent that this Agreement is freely and voluntarily entered into without Settlement Agreement Between United States and Paracelsus Healthcare Corporation -18- 19 any degree of duress or compulsion whatsoever and they have each been advised with respect hereto by counsel. 23. Governing Law. This Agreement is governed by the laws of the United States. The Parties agree that the exclusive jurisdiction and venue for any dispute arising between and among the Parties under this Agreement will be the United States District Court for the Central District of California. 24. Entire Agreement. This Agreement constitutes the complete agreement between the Parties with respect to the subject matter hereof. This Agreement may not be amended except by written consent of the Parties, except that only Paracelsus, Lincoln, and OIG-HHS must agree in writing to modification of the Corporate Integrity Agreement. 25. Capacity to Execute. The undersigned individuals signing this Agreement on behalf of the Paracelsus Companies represent and warrant that they are authorized by their respective Companies to execute this Agreement. The undersigned United States signatories represent that they are signing this Agreement in their official capacities and that they are authorized to execute this Agreement. 26. Counterparts. This Agreement may be executed in counterparts, each of which constitutes an original and all of which constitute one and the same agreement. 27. Effective Date. This Agreement is effective on the date of signature of the last signatory to the Agreement. Settlement Agreement Between United States and Paracelsus Healthcare Corporation -19- 20 THE UNITED STATES OF AMERICA DATED: BY: ------------------------ ------------------------------- CONSUELO S. WOODHEAD Assistant United States Attorney Deputy Chief, Civil Frauds Central District of California DATED: BY: ------------------------ ------------------------------- LEWIS MORRIS Assistant Inspector General Office of Counsel to the Inspector General Office of Inspector General United States Department of Health and Human Services RELATORS DATED: BY: ------------------------ ------------------------------- TIMOTHY HILL Relator DATED: BY: ------------------------ ------------------------------- ALAN LEAVITT Relator REVIEWED BY: CALDWELL, LESLIE, NEWCOMBE & PETTIT DATED: BY: ------------------------ ------------------------------- MICHAEL R. LESLIE, ESQ. Attorney for the Relators Settlement Agreement Between United States and Paracelsus Healthcare Corporation -20- 21 THE PARACELSUS COMPANIES PARACELSUS HEALTHCARE CORPORATION DATED: BY: ------------------------ ------------------------------- Its: LINCOLN COMMUNITY MEDICAL LIMITED LIABILITY COMPANY DATED: BY: ------------------------ ------------------------------- Its: LINCOLN COMMUNITY MEDICAL CORPORATION, DBA ORANGE COUNTY COMMUNITY HOSPITAL DATED: BY: ------------------------ ------------------------------- Its: BELLWOOD MEDICAL CORPORATION DBA BELLWOOD GENERAL HOSPITAL DATED: BY: ------------------------ ------------------------------- Its: REVIEWED BY: WILMER, CUTLER & PICKERING DATED: BY: ------------------------ ------------------------------- ANDREW N. VOLLMER Attorneys for the Paracelsus Companies Settlement Agreement Between United States and Paracelsus Healthcare Corporation -21- EX-27 3
5 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 8,102 0 120,165 43,489 13,375 144,319 518,984 161,825 722,171 109,639 524,268 224,542 0 0 (180,427) 722,171 0 520,744 0 0 443,634 30,248 38,782 8,080 (2,424) 5,656 (2,424) (1,175) 0 2,057 0.10 0.04
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