-----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, CyTX+DeZpIPBSyCfQgZL6ig9gJN+0oB+bi08iwXz8H96feorJ/HS12rOjRTk3rdw J/HDYFJ+pZzd9/5nR1r3bw== 0000758722-97-000021.txt : 19970813 0000758722-97-000021.hdr.sgml : 19970813 ACCESSION NUMBER: 0000758722-97-000021 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19970812 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARACELSUS HEALTHCARE CORP CENTRAL INDEX KEY: 0000758722 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-GENERAL MEDICAL & SURGICAL HOSPITALS, NEC [8062] IRS NUMBER: 953565943 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-12055 FILM NUMBER: 97656550 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/A 1 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ___________ FORM 10-Q/A AMENDMENT NO. 1 TO QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 Commission file number 1-12055 PARACELSUS HEALTHCARE CORPORATION (Exact name of registrant as specified in its charter) California 95-3565943 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 515 W. Greens Road, Suite 800, Houston, Texas 77067 (Address of principal executive offices) (Zip Code) (281) 774-5100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES_X_ NO__ As of March 31, 1996, there were 450 shares of the Registrant's Common Stock, no stated value, outstanding. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 2 PARACELSUS HEALTHCARE CORPORATION FORM 10-Q/A For the Quarterly Period Ended March 31, 1996 INDEX Page Reference FORM 10-Q/A ----------- PRELIMINARY STATEMENT 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - March 31, 1996 and September 30, 1995 4 Consolidated Statements of Operations - Three and six months ended March 31, 1996 and 1995 5 Condensed Consolidated Statements of Cash Flows - Six months ended March 31, 1996 and 1995 6 Notes to Interim Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 PART II. OTHER INFORMATION 21 SIGNATURE 22 3 PRELIMINARY STATEMENT Paracelsus Healthcare Corporation (the "Company") is filing this report on Form 10-Q/A to amend and restate the Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, filed with the Securities and Exchange Commission (the "Commission") on May 15, 1996. In October 1996, the Board of Directors appointed a Special Committee consisting of non-management members, to supervise and direct the conduct of an inquiry by outside legal counsel regarding, among other things, the Company's accounting and financial reporting practices and procedures for the periods prior to the quarter ended September 30, 1996. As a result of the inquiry, the Company restated its financial information for periods commencing with January 1, 1992 through the nine months ended September 30, 1996, as reflected in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, filed with the Commission on April 15, 1997. Adjustments and reclassifications were necessary to correct errors and irregularities relating to (i) receivables due from Medicare and other government programs (ii) use of corporate reserves, (iii) provisions for bad debt expense relating principally to two of the Company's psychiatric hospitals in the Los Angeles area and (iv) deferral of facility closure costs which only affected the 1996 quarterly information (collectively, the "restatement entries"). The following financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 1996 included in the Company's Annual Report on Form 10-K for such period, which include restated financial results for calendar years 1992 through 1995 and for the quarterly 1995 and 1996 periods. To show the impact of the restatement entries with respect to previously reported amounts for the three months and six months ended March 31, 1996 and 1995, the Company has provided a description of the restatement entries and a reconciliation of historical results for the three months and six months ended March 31, 1996 and 1995, as previously reported in the filed quarterly report on Form 10-Q, to the restated results. 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: 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; liability and other claims asserted against the Company; competition; the loss of any significant customer; changes in business strategy or development plans; the ability to attract and retain qualified personnel, including physicians; the significant indebtedness of the Company; and the availability and terms of capital to fund 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 (Dollars in thousands) (Unaudited) Restatement - See Note 2 ------------------------ March September 31, 30, 1996 1995 --------- ---------
ASSETS Current Assets: Cash and cash equivalents $ 3,149 $ 2,949 Marketable securities 10,051 10,387 Accounts receivable, net 52,105 46,247 Other current assets 26,610 27,437 Deferred income taxes 45,978 32,580 -------- ------ Total current assets 137,893 119,600 Property and equipment 275,577 268,412 Less: Accumulated depreciation and amortization (109,848) (102,746) -------- ------- 165,729 165,666 Other assets 46,524 40,533 -------- ------- Total Assets $350,146 $ 325,799 ======== ======= LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Accounts payable and other current liabilities $ 82,849 $ 69,401 Current maturities of long-term debt 5,186 8,658 ------ ------ Total current liabilities 88,035 78,059 Long-term debt 139,475 113,070 Other long-term liabilities 25,827 25,176 Deferred income taxes 25,583 24,619 Minority interest 141 126 Stockholder's equity Common stock 4,500 4,500 Additional paid-in capital 390 390 Unrealized gains on marketable securities 42 137 Retained earnings 66,153 79,722 ------ ------ Total stockholder's equity 71,085 84,749 ------- ------ Total Liabilities and Stockholder's Equity $ 350,146 $ 325,799 ======= =======
See accompanying notes. 5 PARACELSUS HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands) (Unaudited) Restatement - See Note 2 ----------------------------------------------- Three Months Ended Six Months Ended March 31, March 31, --------------------- ------------------- 1996 1995 1996 1995 ---------- --------- -------- --------
Net Revenue $128,484 $128,002 $258,645 $255,133 Costs and expenses: Salaries and benefits 57,617 54,843 113,162 108,114 Other operating expenses 54,208 47,650 107,384 104,041 Provision for bad debts 10,579 10,479 20,191 19,283 Interest 3,834 3,936 7,685 7,652 Depreciation and amortization 3,984 4,394 7,972 8,734 Settlement costs 22,356 - 22,356 - ------- ------ ------- ------- Total costs and expenses 152,578 121,302 278,750 247,824 Income (loss) before minority interests and income taxes (24,094) 6,700 (20,105) 7,309 Minority interests (340) (511) (909) (1,204) ------- ------- ------ ----- Income (loss) before income taxes (24,434) 6,189 (21,014) 6,105 Provision (benefit) for income taxes (10,085) 2,538 (8,683) 2,504 ------- ------- ----- ----- Net income (loss) $(14,349) $ 3,651 $(12,331) $ 3,601 ======= ======= ====== =====
See accompanying notes. 6 PARACELSUS HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Restatement - See Note 2 ------------------------- Six Months Ended March 31, ------------------------- 1996 1995 ----------- ---------
Cash Flows from Operating Activities: Net income (loss) $ (12,331) $ 3,601 Non-cash expenses and changes in operating assets and liabilities 5,565 1,006 ------ ----- Net cash (used in) provided by operating activities (6,766) 4,607 ------ ----- Cash Flows from Investing Activities: Purchase of marketable securities (2,246) (2,470) Purchase of property and equipment, net (7,123) (5,322) Decrease in minority interests (894) (739) Increase in other assets (4,466) (2,003) ------ ----- Net cash used in investing activities (14,729) (10,534) ------ ------ Cash Flows from Financing Activities: Borrowings under Credit Facility 31,500 23,500 Repayments under Credit Facility (8,000) (14,500) Repayment of long-term debt, net (567) (778) Dividends to stockholder (1,238) (1,640) ----- ----- Net cash provided by financing activities 21,695 6,582 ------ ----- Increase in cash and cash equivalents 200 655 Cash and cash equivalents at beginning of period 2,949 1,452 ------ ----- Cash and cash equivalents at end of period $ 3,149 $ 2,107 ====== ===== Supplementary cash flow information: Interest paid $ 7,534 $ 7,041 Income taxes paid 5,048 5,977 Unrealized (losses) gains on marketable securities: Marketable securities (145) 5 Deferred taxes (50) 2 ----- ---- Increase (decrease) in stockholder's equity $ (95) $ 3 ====== ====
See accompanying notes. 7 PARACELSUS HEALTHCARE CORPORATION NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 1996 NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION Organization - ------------ Paracelsus Healthcare Corporation (the "Company") was incorporated in November 1980 for the principal purpose of owning and operating acute care and related healthcare businesses in selected markets. As of March 31, 1996, the Company operated 21 hospitals with 1,888 licensed beds in 8 states (including three psychiatric hospitals with 218 licensed beds), of which 14 were owned and seven were leased. Basis of Presentation - --------------------- The accompanying unaudited condensed consolidated financial statements 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 Company's business is seasonal in nature and subject to general economic conditions and other factors. Accordingly, operating results for the quarterly and six month periods ended March 31, 1996 are not indicative of the results that may be expected for the annual period. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 1996 included in the Company's Annual Report on Form 10-K for such period, which include restated financial results for calendar years 1992 through 1995 and for 1995 and 1996 quarterly periods. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain account balances for the 1995 periods have been reclassified to conform to the Company's current presentation. NOTE 2. RESTATEMENT OF FINANCIAL STATEMENTS In October 1996, the Board of Directors appointed a Special Committee consisting of non-management members, to supervise and direct the conduct of an inquiry by outside legal counsel regarding, among other things, the Company's accounting and financial reporting practices and procedures for the periods prior to the quarter ended September 30, 1996. Such inquiry resulted in the Company restating its financial statements for the periods commencing January 1, 1992 through the nine months ended September 30, 1996. 8 The need for prior period restatements was the result of accounting errors and irregularities in four areas: (i) overstatement of receivables due from Medicare and other government programs; (ii) use of corporate reserves; (iii) provisions for bad debt expense relating principally to two of the Company's psychiatric hospitals in the Los Angeles area; and (iv) deferral of facility closure costs which only affected the 1996 quarterly information. The impact of the restatement entries on the Company's financial results for the quarterly and six month periods ended March 31, 1996 and 1995 is summarized in the following tables. A reconciliation has been included to reconcile to the reported amounts as shown in the Consolidated Statements of Operations for each respective period. 9 QUARTER ENDED MARCH 31, 1996 As Previously Adjustments As Reported to Restated Quarter Quarter Quarter Ended Ended Ended March 31, March 31, March 31, 1996 1996 1996 --------- ---------- ---------- (IN 000'S)
Net revenue $131,916 $ (3,432) $ 128,484 Costs and expenses: Salaries and benefits 57,617 57,617 Other operating expenses 48,879 5,329 54,208 Provision for bad debts 10,579 10,579 Interest 3,834 3,834 Depreciation and amortization 3,984 3,984 Settlement costs 22,356 22,356 ------ ----- ------ Total costs and expenses 147,249 5,329 152,578 Loss before minority interests and income taxes (15,333) (8,761) (24,094) Minority interests (503) 163 (340) ------ ----- ------ Loss before income taxes (15,836) (8,598) (24,434) Income tax benefit (6,493) (3,592) (10,085) ------ ----- ------ Net loss $ (9,343) $ (5,006) $ (14,349) ====== ===== ======
10 QUARTER ENDED MARCH 31, 1995 As Previously Adjustments As Reported to Restated Quarter Quarter Quarter Ended Ended Ended March 31, March 31, March 31, 1995 1995 1995 --------- ---------- ---------- (IN 000'S)
Net revenue $128,233 $ (231) $ 128,002 Costs and expenses: Salaries and benefits 54,929 (86) 54,843 Other operating expenses 47,564 86 47,650 Provision for bad debts 10,479 10,479 Interest 3,936 3,936 Depreciation and amortization 4,394 4,394 -------- ---- ------- Total costs and expenses 121,302 - 121,302 Income before minority interests and income taxes 6,931 (231) 6,700 Minority interests (511) (511) ------- ---- ------- Income before income taxes 6,420 (231) 6,189 Provision for income taxes 2,631 (93) 2,538 ------- ---- ------- Net income $ 3,789 $ (138) $ 3,651 ======= ==== =======
11 SIX MONTHS ENDED MARCH 31, 1996 - ------------------------------- As Previously Adjustments As Reported to Restated Six Months Six Months Six Months Ended Ended Ended March 31, March 31, March 31, 1996 1996 1996 --------- ---------- ---------- (IN 000'S)
Net revenue $260,590 $ (1,945) $ 258,645 Costs and expenses: Salaries and benefits 113,162 113,162 Other operating expenses 100,443 6,941 107,384 Provision for bad debts 20,191 20,191 Interest 7,685 7,685 Depreciation and amortization 7,972 7,972 Settlement costs 22,356 22,356 ------ ----- ------ Total costs and expenses 271,809 6,941 278,750 Loss before minority interests and income taxes (11,219) (8,886) (20,105) Minority interests (1,072) 163 (909) ------ ----- ------ Loss before income taxes (12,291) (8,723) (21,014) Income tax benefit (5,040) (3,643) ( 8,683) ------ ----- ------ Net loss $ (7,251) $ (5,080) $ (12,331) ====== ===== ======
12 SIX MONTHS ENDED MARCH 31, 1995 - ------------------------------- As Previously Adjustments As Reported to Restated Six Months Six Months Six Months Ended Ended Ended March 31, March 31, March 31, 1995 1995 1995 --------- ---------- ---------- (IN 000'S)
Net revenue $252,356 $ 2,777 $ 255,133 Costs and expenses: Salaries and benefits 108,575 (461) 108,114 Other operating expenses 96,280 7,761 104,041 Provision for bad debts 19,283 19,283 Interest 7,652 7,652 Depreciation and amortization 8,734 8,734 ------- ----- ------ Total costs and expenses 240,524 7,300 247,824 Income before minority interests and income taxes 11,832 (4,523) 7,309 Minority interests (1,204) (1,204) ------ ----- ----- Income before income taxes 10,628 (4,523) 6,105 Provision for income taxes 4,357 (1,853) 2,504 ------ ----- ----- Net income $ 6,271 $ (2,670) $ 3,601 ====== ===== =====
13 NOTE 3. MARKETABLE SECURITIES In November 1995, in concurrence with the adoption of "A Guide to Implementation of Statement of Financial Accounting Standards No. 115 on Accounting for Certain Investments in Debt and Equity Securities," the Company transferred certain of its held-to-maturity debt securities to the available- for-sale category. The amortized cost of those securities at the time of transfer was $2.0 million and the gross unrealized loss on those securities was immaterial. NOTE 4. EXCHANGE, ACQUISITION & CLOSURE On November 28, 1995, the Company entered into an Asset Exchange Agreement and a Stock Purchase Agreement to acquire the 139-bed Pioneer Valley Hospital in West Valley City, Utah, the 120-bed Davis Hospital and Medical Center in Layton, Utah and the 129-bed Santa Rosa Medical Center in Milton, Florida from another healthcare company (collectively, the "Acquired Hospitals"). In exchange, the other party will receive the Company's 119-bed Peninsula Medical Center in Ormond Beach, Florida, the 135-bed Elmwood Medical Center in Jefferson, Louisiana, the 190-bed Halstead Hospital in Halstead, Kansas, and $38.5 million in cash, net of a working capital differential. The Company also will purchase the real property of Elmwood and Halstead from a real estate investment trust ("REIT"), exchange the Elmwood and Halstead real property for the Pioneer real property and then sell the Pioneer real property to the REIT. The acquisition of the Acquired Hospitals will be accounted for as a purchase transaction, with no material gain or loss to be recognized therefrom. The Company will finance the acquisition from borrowings under its revolving line of credit. On April 11, 1996, the Company entered into an Asset Purchase Agreement to acquire the 125-bed PHC Regional Hospital and Medical Center in Salt Lake City, Utah for approximately $70.0 million in cash. The transaction is expected to close in May 1996. On April 12, 1996, the Company entered into an Agreement and Plan of Merger ("the Merger Agreement") with Champion Healthcare Corporation ("Champion"). The Merger Agreement provides for, among other things, the merger (the "Merger") of PC Merger Sub., Inc., a wholly owned subsidiary of the Company, with and into Champion. Prior to the effective date of the Merger, the Company's Common Stock will be split. At the effective date of the Merger, the holders of Champion's Common Stock and Preferred Stock will receive the right to receive one share and two shares of the Company's Common Stock, respectively. Following the Merger, the Company's sole stockholder will own approximately 60% of the Company's Common Stock, and Champion's stockholders will own the remaining 40%. The Merger must be approved by Champion's stockholders. Concurrent with the Merger Agreement, the Company will enter into a Dividend and Note Agreement which will provide a dividend distribution to the Company's sole stockholder, who will in turn loan to the Company a portion of the proceeds from the dividend distribution. The Merger will be accounted for using the purchase method of accounting and is expected to close in August 1996. On March 15, 1996, the Company closed the 123-bed Desert Palms Community Hospital in Palmdale, California. 14 NOTE 5 - LONG-TERM DEBT On December 8, 1995, the Company entered into a Second Amended and Restated Credit Agreement (the "Credit Facility") which provides for a revolving line of credit in the amount of $230.0 million. The Credit Facility is available for working capital purposes, to fund acquisitions and for the issuance of letters of credit. Borrowings under the Credit Facility bear interest at a base rate or an offshore dollar rate, as defined in the Agreement, plus a margin ranging from 0.25% to 0.75% or 0.75% to 1.125%, respectively. The Credit Facility requires annual fees ranging from 0.75% to 1.25% of the outstanding amount of the letters of credit. The Company is also required to pay commitment fees ranging from 0.20% to 0.375% of the unused portion of the Credit Facility. The Credit Facility expires on November 1998, at which time, the Company can elect to convert the then outstanding balance into a four-year term loan, payable in 16 equal quarterly installments, commencing in December 1998. NOTE 6. SETTLEMENT COSTS During March 1996, the Company settled two lawsuits in connection primarily with the operation of its psychiatric programs. The Company recognized a charge for settlement costs totaling $22.4 million in the quarter ended March 31, 1996, consisting primarily of settlement payments, legal fees and the write off of certain psychiatric accounts receivable. The Company did not admit liability in either case but resolved its dispute through the settlements in order to facilitate the Champion acquisition, re-establish a business relationship and avoid further legal costs in connection with the disputes. NOTE 7. CONTINGENCIES The Company is subject to claims and suits in the ordinary course of business, including those arising from care and treatment afforded at the Company's facilities. It maintains insurance and, where appropriate, reserves with respect to the possible liability arising from such claims. Although the Company believes that its insurance and loss reserves are adequate, there can be no assurance that such insurance and loss reserves will cover all potential claims that may be asserted and that the outcome of such claims will not have a material effect on the Company's financial position, results of operations and cash flows. 15 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General - ------- Following changes in the Company's management which became effective as of the merger with Champion Healthcare Corporation on August 16, 1996 (the "Merger"), management determined that there were financial performance and accounting issues with the pre-merger operating results of the Company. In October 1996, the Company announced that its third quarter results would be substantially lower than expected. At the same time, the Board of Directors formed a Special Committee of non-management members to supervise the conduct of an inquiry by outside legal counsel as to the nature and reasons for the earnings shortfall and investigate the accounting and financial reporting practices and procedures in periods prior to September 30, 1996. As a result of its investigation, the Special Committee recommended to the Board that the Company restate its prior period financial statements. The need for the restatement of prior period financial statements was the result of accounting errors and irregularities at pre-merger Paracelsus as discussed in Item 1 - Note 2. The following table presents a summary of the impact of the restatements on the quarterly and six months periods ended March 31, 1996 and 1995 ($ in 000's). QUARTER ENDED MARCH 31, 1996 - ----------------------------
As Previously Reported As Restated Quarter Quarter Ended Ended March 31, March 31, 1996 Adjustments 1996 ------------ ----------- ----------- Net Revenue $131,916 $ (3,432) $128,484 Income(loss) before minority interests and income taxes (15,333) (8,761) (24,094) Net income (loss) (9,343) (5,006) (14,349)
16 QUARTER ENDED MARCH 31, 1995 - ----------------------------
As Previously Reported As Restated Quarter Quarter Ended Ended March 31, March 31, 1995 Adjustments 1995 ----------- ----------- ----------- Net Revenue $128,233 $ (231) $128,002 Income(loss) before minority interest and income taxes 6,931 (231) 6,700 Net income (loss) 3,789 (138) 3,651
SIX MONTHS ENDED MARCH 31, 1996 - -------------------------------
As Previously Reported As Restated Six Months Six Months Ended Ended March 31, March 31, 1996 Adjustments 1996 ----------- ----------- ----------- Net Revenue $260,590 $ (1,945) $258,645 Income(loss) before minority interest and income taxes (11,219) (8,886) (20,105) Net income (loss) (7,251) (5,080) (12,331)
SIX MONTHS ENDED MARCH 31, 1995 - -------------------------------
As Previously Reported As Restated Six Months Six Months Ended Ended March 31, March 31, 1995 Adjustments 1995 ----------- ----------- ----------- Net Revenue $252,356 $ 2,777 $255,133 Income(loss) before minority interest and income taxes 11,832 (4,523) 7,309 Net income (loss) 6,271 (2,670) 3,601
17 The adjustments consisted primarily of: Three Months Ended March 31, --------------------- 1996 1995 -------- ------
(i) Increase in deductions from revenue for receivables from Medicare and other government programs $ (2,281) $ (1,095) (ii) Increase in operating expenses from the reversal of corporate reserves (4,632) - (iii) Decrease in net revenue for certain bad debt expense that was deferred at two of the psychiatric hospitals (1,151) 864 (iv) Increase in operating expenses for deferred facility closure costs (697) - ------- ------- Total pre-tax adjustments before minority interests $ (8,761) $ (231) ======= =======
Six Months Ended March 31, --------------------- 1996 1995 -------- ------
(i) (Increase) decrease in deductions from revenue for receivables from Medicare and other government programs $ ( 516) $ 1,049 (ii) Increase in operating expenses from the reversal of corporate reserves (6,231) (7,300) (iii) Decrease in net revenue for certain bad debt expense that was deferred at two of the psychiatric hospitals (1,429) 1,728 (iv) Increase in operating expenses for deferred facility closure costs (710) - ------- ------- Total pre-tax adjustments before minority interests $ (8,886) $ (4,523) ======= =======
18 The following discussion analyzes the results, as restated, for the quarterly and six month periods ended March 31, 1996, as compared to the quarterly and six month periods ended March 31, 1995, respectively. "Same hospitals" as used in the following discussion consist of hospitals owned throughout the periods of which comparative operating results are presented. The following information should be read in conjunction with the consolidated financial statements of the Company, and the related notes thereto, included in the Annual Report on Form 10-K for the year ended December 31, 1996, which included restated financial results for certain periods prior thereto. Results of Operations - --------------------- Quarter ended March 31, 1996 compared with Quarter ended March 31, 1995 - ----------------------------------------------------------------------- Net revenue for the three months ended March 31, 1996 was $128.5 million, an increase of $500,000, or 0.4%, over $128.0 million for the same period of 1995. The increase included $9.4 million from "same hospitals" not located in the Los Angeles metropolitan ("LA metro") area, offset by a decrease of $2.8 million attributable to the LA metro "same hospitals" and a decrease of $6.1 million attributable to hospitals and healthcare related businesses that were closed or sold since April 1995. The $9.4 million increase in non-LA metro "same hospitals" net revenue was attributable to an increase of $3.7 million from additional home health business at hospitals located primarily in Tennessee, with the remaining $5.7 million increase resulting primarily from additional services offered and medical staff development efforts. The $2.8 million decrease in net revenue at the LA metro hospitals consisted of a (i) $2.1 million decrease at the psychiatric hospitals as a result of the negative impact on admission resulting from a lawsuit that was settled in March 1996 (see Item 1- Note 6) and increasing difficulties in collecting psychiatric accounts receivable and (ii) an $800,000 decrease at the remaining LA metro acute care hospitals as a result of a change in payor mix from private insurance to managed care and Medicare/Medicaid and a decline in acuity level. Expressed as a percentage of net revenue, operating expenses (salaries and benefits, other operating expenses, and provision for bad debts) increased from 88.3% in 1995 to 95.3% in 1996 and operating margin decreased from 11.7% to 4.7%. The 7.0% decrease in operating margin in 1996 was primarily due to (i) a deterioration in the operating performance at the LA metro hospitals due to the reasons noted above,(ii) an increase during 1996 in salaries and benefits and purchased services, as a percentage of net revenue, as a result of additional home health business which was profitable but produced lower margins than other types of services and (iii) a deterioration in the operating performance of a hospital closed in March 1996, as well as additional costs incurred during 1996 to close this facility. Depreciation and amortization decreased to $4.0 million in 1996 from $4.4 million for the same period of 1995. The $400,000 decrease was primarily attributable to facilities and healthcare related businesses sold or closed since April 1995. During March 1996, the Company recognized a charge for the settlement of two lawsuits totaling $22.4 million. Such charge consisted primarily of settlement payments, legal fees and the write off of certain psychiatric accounts receivable. See Item 1 - Note 6 for additional information. 19 Net loss for the quarter ended March 31, 1996 was $14.3 million, as compared to net income of $3.7 million for the quarter ended March 31, 1995. The $18.0 million decrease was due primarily to the settlement charge recorded in March 1996 and a deterioration in operating performance at the LA metro hospitals. Six Months ended March 31, 1996 compared with Six Months ended March 31, 1995 - ----------------------------------------------------------------------------- Net revenue for the six months ended March 31, 1996 was $258.6 million, an increase of $3.5 million, or 1.4%, over $255.1 million for the same period of 1995. The increase included $15.6 million from "same hospitals" not located in the Los Angeles metropolitan ("LA metro") area, offset by a decrease of $2.4 million attributable to the LA metro "same hospitals" and a decrease of $9.7 million attributable to hospitals or healthcare related businesses that were closed or sold since April 1995. The $15.6 million increase in non-LA metro "same hospital" net revenue was attributable to an increase of $7.8 million from additional home health business at hospitals located primarily in Tennessee, with the remaining $7.8 million increase resulting primarily from additional services offered and medical staff development efforts. The $2.4 million decrease in net revenue at the LA metro hospitals was primarily attributable to the psychiatric hospitals as a result of the negative impact on admission resulting from a lawsuit that was settled in March 1996 (see Item 1- Note 6) and increasing difficulties in collecting psychiatric accounts receivable. Expressed as a percentage of net revenue, operating expenses (salaries and benefits, other operating expenses, and provision for bad debts) increased from 90.7% in 1995 to 93.1% in 1996 and operating margin decreased from 9.3% to 6.9%. The 2.4% decrease in operating margin in 1996 was primarily due to (i) a deterioration in the operating performance at the LA metro psychiatric hospitals due to the reasons noted above,(ii) an increase during 1996 in salaries and benefits and purchased services, as a percentage of net revenue, as a result of additional home health business which was profitable but produced lower margins than other types of services and (iii) a deterioration in the operating performance of a hospital closed in March 1996, as well as additional costs incurred during 1996 to close this facility. Depreciation and amortization decreased to $8.0 million in 1996 from $8.7 million for the same period of 1995. The $700,000 decrease was primarily attributable to facilities and healthcare related businesses sold or closed since April 1995. During March 1996, the Company recognized a charge for the settlement of two lawsuits totaling $22.4 million. Such charge consisted primarily of settlement payments, legal fees and the write off of certain psychiatric accounts receivable. See Item 1 - Note 6 for additional information. Net loss for the six months ended March 31, 1996 was $12.3 million, as compared to net income of $3.6 million for the six months ended March 31, 1995. The $15.9 million decrease was due primarily to the settlement charge recorded in March 1996 relating to two lawsuits and a deterioration in operating performance at the LA metro hospitals. 20 Liquidity and Capital Resources - ------------------------------- Net cash used in operating activities for the six months ended March 31, 1996 was $6.8 million, compared to net cash provided by operating activities of $4.6 million for the same period of 1995. The $11.4 million decrease in cash was primarily attributable to net losses recorded for the six months ended March 31, 1996 and an increase in deferred tax assets resulting from such losses, as compared to net income recorded for the comparable 1995 period. Net cash used in investing activities increased $4.2 million to $14.7 million during 1996 from $10.5 million in 1995, primarily from an increase in a use of cash to finance capital expenditures, purchases of clinics and expanded services. Net cash provided by financing activities increased $15.1 million to $21.7 million during 1996 from $6.6 million for the same 1995 period, due primarily to incremental borrowings of $14.5 million under the Revolving Credit Facility to finance capital expenditures and working capital requirements. Net working capital was $49.9 million, an increase of $8.4 million from $41.5 million at September 30, 1995. The increase mainly resulted from (i) an increase in deferred tax assets resulting from net losses recorded for the six months ended March 31, 1996, (ii) an increase in accounts receivable from additional revenue generated during the quarter ended March 31, 1996, net of (iii) an increase in accounts payable and accrued expenses related to the settlement of two lawsuits. The Company's long-term debt as a percentage of total capitalization was 66.2% at March 31, 1996, compared to 57.2% at September 30, 1995. The increase was primarily attributable to net borrowings of $23.5 million under the Credit Facility to finance capital expenditures and fund working capital requirements during the six months ended March 31, 1996. On December 8, 1995, the Company amended and restated its existing Credit Facility to increase the amount available for borrowings from $125.0 million to $230.0 million. The Credit Facility is available for working capital purposes, to finance capital expenditures, to fund acquisitions and for the issuance of letters of credit. As of March 31, 1996, the Company had $51.0 million of borrowings outstanding under its Credit Facility. The Company anticipates that internally generated cash flows from earnings, proceeds from the sale of hospital accounts receivable under the Company's commercial paper program and borrowings under its Credit Facility will be sufficient to fund future acquisition, capital expenditure and working capital requirements through fiscal year 1996. 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. In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which requires impairment losses to be recorded on long- lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. The statement also addresses the accounting for long-lived assets that are expected to be disposed of. The Company will adopt SFAS No. 121 on October 1, 1996, and, based on current circumstances, does not believe the effect of the adoption will be material. 21 Regulatory Matters - ------------------ Various other legislative proposals for healthcare reform at both federal and state levels have been introduced or have been under consideration. The Company cannot predict the effect that such reforms may have on its business and there can be no assurance that any such reforms will not have a material adverse effect on the Company's future revenues or liquidity. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS During March 1996, the Company settled two lawsuits in connection with the operation of its psychiatric programs previously disclosed in the Company's Form 10-K for the year ended September 30, 1995. See Item 1 - Note 6 of this Form 10-Q. 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) Exhibit 10.25 Asset Purchase Agreement, dated as of March 29, 1996 between Paracelsus and FHP, Inc.(filed as Exhibit 10.25 to Paracelsus' Registration Statement on Form S-4, Registration No. 333-08521, filed on July 19, 1996, and incorporated herein by reference). (b) Reports on Form 8-K None. 22 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Paracelsus Healthcare Corporation (Registrant) /s/ JAMES G. VANDEVENDER Dated: August 11, 1997 By: ____________________________ James G. VanDevender Senior Executive Vice President, Chief Financial Officer & Director -----END PRIVACY-ENHANCED MESSAGE-----