-----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, TvTYU0UE01XBGLgAZCKq3kuOR/wJeGmxOdg006BBh7cm8tlMrJYFjV4CDJagb0DS Qxg/2GZitR8ORe4wHQSW8g== 0000758722-97-000022.txt : 19970813 0000758722-97-000022.hdr.sgml : 19970813 ACCESSION NUMBER: 0000758722-97-000022 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960630 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: 97656552 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 June 30, 1996 Commission file number 1-12055 PARACELSUS HEALTHCARE CORPORATION (Exact name of registrant as specified in its charter) California 95-3565943 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 515 W. Greens Road, Suite 800, Houston, Texas 77067 (Address of principal executive offices) (Zip Code) (281) 774-5100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES_X_ NO__ As of June 30, 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 June 30, 1996 INDEX Page Reference FORM 10-Q/A ----------- PRELIMINARY STATEMENT 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - June 30, 1996 and September 30, 1995 4 Consolidated Statements of Operations - Three and nine months ended June 30, 1996 and 1995 5 Condensed Consolidated Statements of Cash Flows - Nine months ended June 30, 1996 and 1995 6 Notes to Interim Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 PART II. OTHER INFORMATION 21 SIGNATURE 23 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 June 30, 1996, filed with the Securities and Exchange Commission (the "Commission") on August 14, 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 nine months ended June 30, 1996 and 1995, the Company has provided a description of the restatement entries and a reconciliation of historical results for the three months and nine months ended June 30, 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-K 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 ------------------------ June September 30, 30, 1996 1995 --------- ---------
ASSETS Current Assets: Cash and cash equivalents $ 1,903 $ 2,949 Marketable securities 15,590 10,387 Accounts receivable, net 65,728 46,247 Other current assets 29,043 27,437 Deferred income taxes 60,757 32,580 ------ ------ Total current assets 173,021 119,600 Property and equipment 343,389 268,412 Less: Accumulated depreciation and amortization (97,661) (102,746) ------ ------ 245,728 165,666 Other assets 68,711 40,533 ------ ------ Total Assets $ 487,460 $ 325,799 ======= ======= LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Accounts payable and other current liabilities $ 76,030 $ 69,401 Current maturities of long-term debt 439 8,658 ------ ------ Total current liabilities 76,469 78,059 Long-term debt 284,642 113,070 Other long-term liabilities 25,762 25,176 Deferred income taxes 36,139 24,619 Minority interest 147 126 Stockholder's equity Common stock 4,500 4,500 Additional paid-in capital 390 390 Unrealized (losses)gains on marketable securities (27) 137 Retained earnings 59,438 79,722 ------ ------ Total stockholder's equity 64,301 84,749 ------ ------ Total Liabilities and Stockholder's Equity $ 487,460 $ 325,799 ======= =======
See accompanying notes. 5 PARACELSUS HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands) (Unaudited) Restatement - See Note 2 ----------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, --------------------- ------------------- 1996 1995 1996 1995 ---------- --------- -------- --------
Net Revenue $130,530 $117,866 $389,175 $372,999 Costs and expenses: Salaries and benefits 56,772 52,471 169,934 160,585 Other operating expenses 56,719 47,359 164,103 151,400 Provision for bad debts 14,879 9,172 35,070 28,455 Interest 5,216 3,952 12,901 11,604 Depreciation and amortization 4,684 4,251 12,656 12,985 Settlement costs - - 22,356 - ------ ----- ------ ------ Total costs and expenses 138,270 117,205 417,020 365,029 Income (loss) before minority interests and income taxes (7,740) 661 (27,845) 7,970 Minority interests (1,065) (592) (1,974) (1,796) ------ ---- ------ ----- Income (loss) before income taxes (8,805) 69 (29,819) 6,174 Provision (benefit) for income taxes (3,643) 28 (12,326) 2,532 ----- ---- ------ ----- Net income (loss) $ (5,162) $ 41 $(17,493) $ 3,642 ===== ==== ====== =====
See accompanying notes. 6 PARACELSUS HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Restatement - See Note 2 ------------------------- Nine Months Ended June 30, ------------------------- 1996 1995 ----------- ---------
Cash Flows from Operating Activities: Net income (loss) $ (17,493) $ 3,642 Non-cash expenses and changes in operating assets and liabilities (17,331) 8,522 ------- ------ Net cash (used in) provided by operating activities (34,824) 12,164 ------- ------ Cash Flows from Investing Activities: Acquisitions of facilities, net (109,385) - Purchase of marketable securities (3,225) (4,592) Additions to property and equipment, net (8,727) (10,432) Decrease in minority interests (2,195) (1,845) Increase in other assets (5,030) (4,387) ------- ------ Net cash used in investing activities (128,562) (21,256) ------- ------ Cash Flows from Financing Activities: Borrowings under Credit Facility 232,000 36,000 Repayments under Credit Facility (61,500) (20,500) Repayment of long-term debt, net (5,369) (1,120) Dividends to stockholder (2,791) (4,521) ------ ----- Net cash provided by financing activities 162,340 9,859 ------ ----- Increase (decrease) in cash and cash equivalents (1,046) 767 Cash and cash equivalents at beginning of period 2,949 1,452 ----- ----- Cash and cash equivalents at end of period $ 1,903 $ 2,219 ===== ===== Supplementary cash flow information: Interest paid $ 13,786 $ 13,077 Income taxes paid 5,531 9,728 Unrealized (losses) gains on marketable securities: Marketable securities (278) 5 Deferred taxes 114 2 ---- ---- Increase (decrease) in stockholder's equity $ (164) $ 3 ==== ====
See accompanying notes. 7 PARACELSUS HEALTHCARE CORPORATION NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 1996 NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION Organization - ------------ Paracelsus Healthcare Corporation (the "Company") was incorporated in November 1980 for the principal purpose of owning and operating acute care and related healthcare businesses in selected markets. As of June 30, 1996, the Company operated 22 hospitals with 1,957 licensed beds in seven states (including three psychiatric hospitals with 218 licensed beds), of which 15 were owned and seven were 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 Company's business is seasonal in nature and subject to general economic conditions and other factors. Accordingly, operating results for the quarterly and nine month periods ended June 30, 1996 are not necessarily 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 the quarterly 1995 and 1996 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 nine month periods ended June 30, 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. QUARTER ENDED JUNE 30, 1996 As Previously Adjustments As Reported to Restated Quarter Quarter Quarter Ended Ended Ended June 30, June 30, June 30, 1996 1996 1996 --------- ---------- ---------- (IN 000'S)
Net revenue $133,136 $ (2,606) $ 130,530 Costs and expenses: Salaries and benefits 56,772 56,772 Other operating expenses 51,916 4,803 56,719 Provision for bad debts 8,994 5,885 14,879 Interest 5,216 5,216 Depreciation and amortization 4,684 4,684 ------- ----- ------ Total costs and expenses 127,582 10,688 138,270 Income (loss) before minority interests and income taxes 5,554 (13,294) (7,740) Minority interests (1,144) 79 (1,065) ------- ------ ------ Income (loss) before income taxes 4,410 (13,215) (8,805) Provision (benefit) for income taxes 1,808 (5,451) (3,643) ----- ------ ----- Net income (loss) $ 2,602 $ (7,764) $ (5,162) ===== ====== =====
9 QUARTER ENDED JUNE 30, 1995 As Previously Adjustments As Reported to Restated Quarter Quarter Quarter Ended Ended Ended June 30, June 30, June 30, 1995 1995 1995 --------- ---------- ---------- (IN 000'S)
Net revenue $123,545 $ (5,679) $ 117,866 Costs and expenses: Salaries and benefits 52,652 (181) 52,471 Other operating expenses 47,178 181 47,359 Provision for bad debts 9,172 9,172 Interest 3,952 3,952 Depreciation and amortization 4,251 4,251 -------- ------ ------- Total costs and expenses 117,205 - 117,205 Income before minority interests and income taxes 6,340 (5,679) 661 Minority interests (592) (592) ----- ----- ----- Income before income taxes 5,748 (5,679) 69 Provision for income taxes 2,356 (2,328) 28 ----- ----- ----- Net income $ 3,392 $ (3,351) $ 41 ===== ===== =====
10 NINE MONTHS ENDED JUNE 30, 1996 As Previously Adjustments As Reported to Restated Nine Months Nine Months Nine Months Ended Ended Ended June 30, June 30, June 30, 1996 1996 1996 --------- ---------- ---------- (IN 000'S)
Net revenue $393,726 $ (4,551) $ 389,175 Costs and expenses: Salaries and benefits 169,934 169,934 Other operating expenses 152,359 11,744 164,103 Provision for bad debts 29,185 5,885 35,070 Interest 12,901 12,901 Depreciation and amortization 12,656 12,656 Settlement costs 22,356 22,356 ------- ------ ------- Total costs and expenses 399,391 17,629 417,020 Loss before minority interests and income taxes (5,665) (22,180) (27,845) Minority interests (2,216) 242 (1,974) ------- ------ ------ Loss before income taxes (7,881) (21,938) (29,819) Income tax benefit (3,232) (9,094) (12,326) ----- ----- ------ Net loss $ (4,649) $ (12,844) $ (17,493) ====== ====== ======
11 NINE MONTHS ENDED JUNE 30, 1995 As Previously Adjustments As Reported to Restated Nine Months Nine Months Nine Months Ended Ended Ended June 30, June 30, June 30, 1995 1995 1995 --------- ---------- ---------- (IN 000'S)
Net revenue $375,901 $ (2,902) $ 372,999 Costs and expenses: Salaries and benefits 159,955 630 160,585 Other operating expenses 144,729 6,671 151,400 Provision for bad debts 28,455 28,455 Interest 11,604 11,604 Depreciation and amortization 12,985 12,985 -------- ----- ------- Total costs and expenses 357,728 7,301 365,029 Income before minority interests and income taxes 18,173 (10,203) 7,970 Minority interests (1,796) (1,796) -------- ------ ------ Income before income taxes 16,377 (10,203) 6,174 Provision for income taxes 6,713 (4,181) 2,532 -------- ------ ------ Net income $ 9,664 $ (6,022) $ 3,642 ======= ===== ======
12 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 August 9, 1996, the stockholders of Champion Healthcare Corporation ("Champion") adopted and approved the Amended and Restated Agreement and Plan of Merger dated as of May 29, 1996 (the "Merger Agreement"), by and among the Company, Champion and PC Merger Sub, Inc., a wholly owned subsidiary of the Company, pursuant to which such wholly owned subsidiary will be merged with and into Champion (the "Merger"). The Company expects the Merger to consummate on or about August 16, 1996 after satisfying certain other terms and conditions of the Merger Agreement. Upon consummation of the Merger, each share of Champion's Common Stock and Preferred Stock will convert to one share and two shares of the Company's Common Stock, respectively. Dr. Manfred George Krukemeyer, currently the Chairman of the Board of Directors and sole stockholder of the Company, will own approximately 60% of the combined company, with current Champion security holders owning the remaining 40%. Among other things, the consummation of the Merger is conditioned upon the Company and Dr. Krukemeyer entering into a Dividend and Note Agreement, pursuant to which a dividend of $21.1 million plus accrued interest will be paid to Dr. Krukemeyer no later than 60 days after the consummation of the Merger. Dr. Krukemeyer will in turn loan the Company $7.2 million and receive a $7.2 million 6.51% subordinated note from the Company. The Merger will be accounted for using the purchase method of accounting. On May 17, 1996, the Company acquired the 139-bed Pioneer Valley Hospital in West Valley City, Utah, the 120-bed Davis Hospital and Medical Center in 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 received the Company's 119-bed Peninsula Medical Center in Ormond Beach, Florida, the 135-bed Elmwood Medical Center in Jefferson, Louisiana, the 190-bed Halstead Hospital in Halstead, Kansas, and $38.5 million in cash, net of a working capital differential, which is subject to final agreement of the parties. The Company also purchased the real property of Elmwood and Halstead from a real estate investment trust ("REIT"), exchanged the Elmwood and Halstead real property for the Pioneer real property and then sold the Pioneer real property to the REIT. The acquisition of the Acquired Hospitals was accounted for as a purchase transaction. The Company financed the acquisition with borrowings under its revolving line of credit. The Company recorded goodwill of $15.2 million, which is being amortized on a straight line basis over an estimated useful life of 20 years. The results of the Acquired Hospitals have been included in the operations of the Company since May 17, 1996. No material gain or loss was recorded on the disposition of the Exchanged Hospitals. On May 17, 1996, the Company acquired the 125-bed PHC Regional Hospital and Medical Center in Salt Lake City, Utah ("PHC Regional Hospital") for approximately $71.0 million in cash. The Company financed the acquisition with amounts borrowed under the Credit Facility. The Company recorded goodwill of 13 $15.8 million in connection with the acquisition, which is being amortized on a straight line basis over an estimated useful life of 20 years. The results of PHC Regional Hospital have been included in the operations of the Company since May 17, 1996. On March 15, 1996, the Company closed the 123-bed Desert Palms Community Hospital in Palmdale, California. The following unaudited pro forma consolidated results of operations for the nine months ended June 30, 1996 and 1995 assume that the following transactions were consummated on October 1, 1994: (i) the acquisition and disposition of the Acquired Hospitals and the Exchanged Hospitals in May 1996, (ii) the sale of Womans Hospital in Jackson, Mississippi in September 1995 and (iii) the closure of Bellwood Health Center, a psychiatric facility in Bellwood, California in April 1995. PHC Regional Hospital has not been included in the pro formas because the predecessor owner operated the hospital as a captive cost center; accordingly, the inclusion of its historical operations would not be meaningful. The pro forma financial information does not purport to be indicative of the result that would have been attained had the transactions described above occurred on October 1, 1994 ($ in 000's). Nine Months Ended June 30, ------------------------- 1996(a) 1995 ---------- ---------
Net revenue $ 397,702 $ 376,295 Income(loss) from continuing operations (23,805) 9,957 Net income (loss) (13,944) 5,874
(a) Results for the nine months ended June 30, 1996 include a settlement charge of $22.4 million ($13.2 million after-tax) relating to two lawsuits (see Item 1 - Note 6). NOTE 5 - LONG-TERM DEBT On December 8, 1995, the Company entered into a Second Amended and Restated Credit Agreement (the "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. 14 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 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. The Company funded payment of such settlement costs through borrowings under its Credit Facility during the quarter ended June 30, 1996. 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 nine months periods ended June 30, 1996 and 1995 ($ in 000's). QUARTER ENDED JUNE 30, 1996 - ----------------------------
As Previously Reported As Restated Quarter Quarter Ended Ended June 30, June 30, 1996 Adjustments 1996 ------------ ----------- ----------- Net Revenue $133,136 $ (2,606) $130,530 Income(loss) before minority interests and income taxes 5,554 (13,294) (7,740) Net income (loss) 2,602 (7,764) (5,162)
16 QUARTER ENDED JUNE 30, 1995 - ----------------------------
As Previously Reported As Restated Quarter Quarter Ended Ended June 30, June 30, 1995 Adjustments 1995 ----------- ----------- ----------- Net Revenue $123,545 $ (5,679) $117,866 Income(loss) before minority interests and income taxes 6,340 (5,679) 661 Net income (loss) 3,392 (3,351) 41
NINE MONTHS ENDED JUNE 30, 1996 - -------------------------------
As Previously Reported As Restated Nine Months Nine Months Ended Ended June 30, June 30, 1996 Adjustments 1996 ----------- ----------- ----------- Net Revenue $393,726 $ (4,551) $389,175 Loss before minority interests and income taxes (5,665) (22,180) (27,845) Net loss (4,649) (12,844) (17,493)
NINE MONTHS ENDED JUNE 30, 1995 - -------------------------------
As Previously Reported As Restated Nine Months Nine Months Ended Ended June 30, June 30, 1995 Adjustments 1995 ----------- ----------- ----------- Net Revenue $375,901 $ (2,902) $372,999 Income(loss) before minority interests and income taxes 18,173 (10,203) 7,970 Net income (loss) 9,664 (6,022) 3,642
17 The adjustments consisted primarily of: Three Months Ended June 30, --------------------- 1996 1995 -------- ------
(i) Increase in deductions from revenue for receivables from Medicare and other government programs $ (1,924) $ (6,483) (ii) Increase in operating expenses from the reversal of corporate reserves (3,003) - (iii) Recording of bad debt expense that was deferred at two of the psychiatric hospitals - Increase in deductions from net revenue (682) 804 - Increase in provision for bad debts (5,885) -(iv) Increase in operating expenses for deferred facility closure costs (1,800) - ------- ------- Total pre-tax adjustments before minority interests $(13,294) $ (5,679) ======= =======
Nine Months Ended June 30, --------------------- 1996 1995 -------- ------
(i) Increase in deductions from revenue for receivables from Medicare and other government programs $ (2,440) $ (5,435) (ii) Increase in operating expenses from the reversal of corporate reserves (9,234) (7,301) (iii) Recording of bad debt expense that was deferred at two of the psychiatric hospitals - Increase in deductions from net revenue (2,111) 2,533 - Increase in provision for bad (5,885) - (iv) Increase in operating expenses for deferred facility closure costs (2,510) - ------- ------- Total pre-tax adjustments before minority interests $(22,180) $(10,203) ======= =======
18 The following discussion analyzes the results, as restated, for the quarterly and nine month periods ended June 30, 1996, as compared to the quarterly and nine month periods ended June 30, 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 periods prior thereto. Results of Operations - --------------------- Quarter ended June 30, 1996 compared with Quarter ended June 30, 1995 - --------------------------------------------------------------------- Net revenue for the three months ended June 30, 1996 was $130.5 million, an increase of $12.7 million, or 10.7%, over $117.9 million for the same period of 1995. Of the $12.7 million increase, $11.7 million was contributed by "same hospitals" located outside of the Los Angeles metropolitan ("LA metro") area, $5.5 million by hospitals acquired net of hospitals divested since April 1995, offset by a decrease of $4.5 million attributable to "same hospitals" located in the LA metro area. The $11.7 million increase in net revenue at "same hospitals" located outside of the LA metro area was attributable to an increase of $10.4 million resulting primarily from additional services offered and medical staff development efforts, with the remaining $1.3 million increase from additional home health business at hospitals located primarily in Tennessee. The $4.5 million decrease in net revenue at the LA metro hospitals consisted of a (i) $2.5 million decrease at the psychiatric hospitals as a result of the the negative impact on admission resulting from a lawsuit that was settled in March 1996 (see Item 1- Note 6) and insurance companies in general becoming more stringent in their payments to providers of psychiatric care and (ii) a $2.0 million decrease at the remaining acute care hospitals despite an increase in volume, largely as a result of a change in payor mix from private insurance to managed care and Medicare/Medicaid, which increased deductions from revenue, 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 92.5% in 1995 to 98.3% in 1996 and operating margin decreased from 7.5% to 1.7%. The 5.8% decrease in operating margin in 1996 was primarily due to an increase in provision for bad debt at the psychiatric hospitals and general deterioration of operating margins at the LA metro hospitals, both psychiatric and acute care, due to the reasons noted above. Depreciation and amortization increased to $4.7 million in 1996 from $4.3 million for the same period of 1995. The $400,000 increase was primarily attributable to facilities acquired during 1996, net of divested hospitals. Interest expense increased $1.3 million over the same period of 1995, due principally to additional borrowings during 1996 under the Credit Facility to finance the purchases of hospitals, the settlement costs of two lawsuits, capital expenditures and fund working capital requirements. Net loss for the quarter ended June 30, 1996 was $5.2 million, as compared to net income of $41,000 for the quarter ended June 30, 1995. The $5.2 million decrease was due primarily to a deterioration in the operating performance at the LA metro hospitals. 19 Nine Months ended June 30, 1996 compared with Nine Months ended June 30, 1995 - ----------------------------------------------------------------------------- Net revenue for the nine months ended June 30, 1996 was $389.2 million, an increase of $16.2 million, or 4.3%, over $373.0 million for the same period of 1995. The increase consisted of $22.3 million from "same hospitals" located outside of the LA metro area, $808,000 by hospitals acquired net of hospitals divested since April 1995, offset by a decrease of $6.9 million attributable to "same hospitals" located in the LA metro area. The $22.3 million increase in net revenue of "same hospitals" located outside of the LA metro area was attributable to an increase of $17.1 million resulting primarily from additional services offered and medical staff development efforts, with the remaining $5.2 million increase from additional home health business at hospitals located primarily in Tennessee. Of the $6.9 million decrease in net revenue at the LA metro hospitals, $4.8 million was from the psychiatric hospitals largely 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. The remaining $2.1 million decrease was attributable to the acute care hospitals, largely as a result of a change in payor mix from private insurance to managed care and Medicare/Medicaid, which increased deductions from revenue, 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 91.3% in 1995 to 94.8% in 1996 and operating margin decreased from 8.7% to 5.2%. The 3.5% decrease in operating margin in 1996 was primarily due to general deterioration of operating margins at the LA metro hospitals, both psychiatric and acute care, and specifically to an increase in provision for bad debt at the psychiatric hospitals, due to reasons noted above. In addition, such decrease in operating margin was further impacted by additional home health business, which was profitable but produced lower margins than other types of services. Depreciation and amortization decreased to $12.7 million in 1996 from $13.0 million for the same period of 1995. The $300,000 decrease was primarily attributable to facilities and healthcare related business sold or closed since April 1995, net of hospitals acquired during 1996. Interest expense increased $1.3 million over the same period of 1995, due principally to additional borrowings during 1996 under the Revolving Credit Facility to finance the purchases of hospitals, the settlement costs of two lawsuits and capital expenditures and to fund working capital requirements. During March 1996, the Company recognized a charge totaling $22.4 million for the settlement of two lawsuits. 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 nine months ended June 30, 1996 was $17.5 million, as compared to net income of $3.6 million for the nine months ended June 30, 1995. The $21.1 million decrease was due primarily to a settlement charge recorded in March 1996 relating to two lawsuits and a deterioration in the operating performance at the LA metro hospitals. 20 Liquidity and Capital Resources - ------------------------------- Net cash used in operating activities for the nine months ended June 30, 1996 was $34.8 million, compared to net cash provided by operating activities of $12.2 million for the same period of 1995. The $47.0 million decrease in cash was primarily attributable to net losses recorded for the nine months ended June 30, 1996, an increase in deferred tax assets resulting from such losses and an increase in accounts receivable which was primarily attributable to the four acquired hospitals in May 1996. Net cash used in investing activities increased $107.3 million to $128.6 million during 1996 from $21.3 million in 1995, primarily from an increase in use of cash to finance the purchases of hospitals in May 1996. Net cash provided by financing activities increased $152.5 million to $162.3 million during 1996 from $9.8 million for the same 1995 period, due primarily to incremental borrowings of $155.0 million under the Revolving Credit Facility to finance the purchases of hospitals, the settlement costs of two lawsuits, capital expenditures and fund working capital requirements. Net working capital was $96.6 million, an increase of $55.1 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 nine months ended June 30, 1996 and (ii) an increase in accounts receivable primarily attributable to the four hospitals acquired in May 1996. The Company's long- term debt as a percentage of total capitalization was 81.6% at June 30, 1996, compared to 57.2% at September 30, 1995. The increase was primarily attributable to net borrowings of $170.5 million under the Revolving Credit Facility to finance the purchases of hospitals, the settlement costs of two lawsuits, capital expenditures and fund working capital requirements during the nine months ended June 30, 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 June 30, 1996, the Company had $198.0 million of borrowings outstanding under its Credit Facility. The Company anticipates that borrowings under its Credit Facility, proceeds from the sale of hospital accounts receivable under the Company's commercial paper program and internally generated cash flows from earnings will be sufficient to fund future acquisitions, capital expenditures 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 The Company has filed a registration statement on Form S-1, dated June 28, 1996, as amended, for a proposed offering of the Company's Common Stock (the "Equity Offering"). The Company expects to sell 5.2 million shares, and selling stockholders of the Company are expected to offer an additional 229,000 shares. Additionally, the underwriters have the option to purchase an additional 814,350 shares to cover over-allotments, if any. The Company's current registration statement contemplates a proposed maximum offering price of $10.25 per share, which would result in net proceeds to the Company after estimated underwriting discounts and commissions of approximately $49.8 million. The Equity Offering is expected to be consummated on or about August 16, 1996. The final offering price and total number of shares to be offered by the Company and the selling stockholders are subject to finalization and may differ from those amounts currently contemplated. The Company has filed a registration statement on Form S-1 dated June 24, 1996, as amended, for a proposed offering of $325.0 million aggregate principal amount of Senior Subordinated Notes due 2006 (the "Notes Offering"). The Company expects the Notes to bear interest at approximately 10% per annum. The Notes Offering is expected to be consummated on or about August 16, 1996. The final terms of the Notes Offering are subject to finalization and may differ from the terms currently contemplated. If consummated, the Company expects to use a portion of the net proceeds from the Notes Offering and the Equity Offering to prepay certain outstanding indebtedness and reduce other outstanding indebtedness. 22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 2.1 Amended and Restated Agreement and Plan of Merger dated as of May 29, 1996, by and among Paracelsus, champion and PC Merger Sub, Inc. (filed as Exhibit 2.1 to Paracelsus' Current Report on Form 8-K, dated May 29, 1996, and incorporated herein by reference). (b) Reports on Form 8-K - The Company filed on April 19, 1996 a Current Report on Form 8-K, dated April 12, 1996, reporting pursuant to Item 5 thereof, that the Company and Champion Healthcare Corporation had entered into a definitive Agreement and Plan of Merger, dated April 12, 1996. The Company had also entered into a definitive 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 Company filed on May 30, 1996 a Current Report on Form 8-K, dated May 17, 1996, reporting pursuant to Items 2 and 7 thereof, the acquisition of Davis Hospital and Medical Center, Pioneer Valley Hospital and Santa Rosa Medical Center from Columbia/HCA Healthcare Corporation for $38.5 million in cash and in exchange for the Company's Elmwood Medical Center, Peninsula Medical Center and Halstead Hospital. Financial statements of businesses acquired and pro forma financial information as required by Item 7 will be filed on Form 8-K/A no later than July 31, 1996. - The Company filed on July 24, 1996 a Current Report on Form 8-K, dated May 29, 1996, reporting pursuant to Item 5 thereof, the Amended and Restated Agreement and Plan of Merger, which amended and restated the Agreement and Plan of Merger, dated April 12, 1996, among the Company, Champion and Merger Sub. - The Company filed on July 24, 1996 an Amendment No. 1 on Form 8-K/A to a Current Report on Form 8-K, dated May 17, 1996, reporting pursuant to Item 7 thereof, the historical financial statements for Davis Hospital and Medical Center, Pioneer Valley Hospital and Santa Rosa Medical Center and the Company's pro forma financial statements for the period through March 31, 1996. 23 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Paracelsus Healthcare Corporation (Registrant) /s/ JAMES G. VANDEVENDER Dated: August 11, 1997 By: ____________________________ James G. VanDevender Senior Executive Vice President, Chief Financial Officer & Director -----END PRIVACY-ENHANCED MESSAGE-----