-----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, MgXzrjwwrBAVvOw2w5yFqgt620QBdze/jIphIKJILfAjtc05WEl4itmi5Xp7TCXY JdWioFeAWMWigA7/BsdRUQ== 0000950129-00-001552.txt : 20000331 0000950129-00-001552.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950129-00-001552 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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-K405 SEC ACT: SEC FILE NUMBER: 001-12055 FILM NUMBER: 588550 BUSINESS ADDRESS: STREET 1: 515 W GREENS RD STREET 2: STE 800 CITY: HOUSTON STATE: TX ZIP: 77067 BUSINESS PHONE: 2817745100 MAIL ADDRESS: STREET 1: 515 W GREENS RD STREET 2: STE 800 CITY: HOUSTON STATE: TX ZIP: 77067 10-K405 1 PARACELSUS HEALTHCARE CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 001-12055 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 500, 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The number of shares of Registrant's Common Stock outstanding on March 27, 2000 was 57,667,721. The aggregate market value of voting stock held by non-affiliates of the Registrant, based upon the closing price of the Registrant's Common Stock on March 27, 2000 was $6,910,473.* - -------------------------- * Excludes 26,076,988 shares deemed to be held by directors and officers, and stockholders whose ownership exceeds five percent of the shares of Common Stock outstanding at March 27, 2000. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that such person is controlled by, or under common control with, the Registrant. 1 2 PARACELSUS HEALTHCARE CORPORATION FORM 10-K ANNUAL REPORT YEAR ENDED DECEMBER 31, 1999 TABLE OF CONTENTS
PAGE REFERENCE PRELIMINARY STATEMENT FORM 10-K - --------------------- -------------- Part I Item 1. Business 4 Item 2. Properties 19 Item 3. Legal Proceedings 19 Item 4. Submission of Matters to a Vote of Security Holders 20 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 20 Item 6. Selected Financial Data 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Item 7A. Quantitative and Qualitative Disclosures About Market Risks 36 Item 8. Financial Statements and Supplementary Data 38 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 69 Part III Item 10. Directors and Executive Officers of the Registrant 69 Item 11. Executive Compensation 71 Item 12. Security Ownership of Certain Beneficial Owners and Management 75 Item 13. Certain Relationships and Related Transactions 77 Part IV Item 14. Exhibits, Financial Statement Schedule and Reports 79 on Form 8-K
2 3 FORWARD-LOOKING STATEMENTS 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. All statements regarding the Company's expected future financial position, results of operations, cash flows, liquidity, financing plans, business strategy, budgets, projected costs and capital expenditures, competitive position, growth opportunities, plans and objectives of management for future operations and words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "may" and other similar expressions are forward-looking statements. Such forward-looking statements are inherently uncertain, and stockholders must recognize that actual results may differ materially from the Company's expectations as a result of a variety of factors, including, without limitation, those discussed below. Factors which may cause the Company's actual results in future periods to differ materially from forecast results include, but are not limited to: o Competition and general economic, demographic and business conditions, both nationally and in the regions in which the Company operates; o Existing government regulations and changes in legislative proposals for healthcare reform, including changes in Medicare and Medicaid reimbursement levels; o The ability to enter into managed care provider arrangements on acceptable terms; o Liabilities and other claims asserted against the Company; o The loss of any significant customer, including but not limited to managed care contracts; o The ability to attract and retain qualified personnel, including physicians; o The continued listing of the Company's common stock on the New York Stock Exchange; o The Company's ability to develop and consummate an acceptable and sustainable alternative financial structure, considering the Company's liquidity and limited financial resources; o The Company's ability to consummate acceptable financing arrangements, under reasonable terms, to replace its existing interim facility and off-balance sheet receivable financing agreement; and o The possibility that the Company may be forced to file for protection under Chapter 11 of the Federal Bankruptcy Code or that its creditors could file an involuntary petition seeking to place the Company in bankruptcy. The Company is generally not required to, and does not undertake to, update or revise its forward-looking statements. 3 4 PART I ITEM 1. BUSINESS GENERAL Paracelsus Healthcare Corporation, a California corporation ("PHC"), was incorporated in November 1980. PHC, both directly or through its subsidiaries (collectively, the "Company" or the "Registrant"), owns and operates acute care and related healthcare businesses in selected markets. In August 1996, the Company acquired Champion Healthcare Corporation ("Champion") by exchanging one share of the Company's Common Stock for each share of Champion's Common Stock and two shares of the Company's Common Stock for each share of Champion's Preferred Stock (the "Merger"). The Company's hospitals offer a broad array of general medical and surgical services on an inpatient, outpatient and emergency basis. In addition, certain hospitals and their related facilities offer home health, skilled nursing care, rehabilitation and psychiatric services. As of December 31, 1999, the Company owned or operated 10 acute care hospitals in seven states with 1,287 licensed beds. Of the 10 hospitals, eight are owned and two are leased. ISSUES AFFECTING LIQUIDITY The Company incurred significant operating losses in 1999 and had a working capital deficit at December 31, 1999. These matters and certain developments described below have raised substantial doubt as to the Company's ability to continue operations as a going concern. The report of the Company's independent auditors, Ernst & Young, LLP, includes an explanatory paragraph for a going concern uncertainty. On February 15, 2000, the Company did not make the interest payment of approximately $16.3 million due on the Company's $325.0 million 10% Senior Subordinated Notes (the "Notes") due 2006, which upon the expiration of a 30-day grace period on March 16, 2000, constituted an event of default under the Note indenture. The Notes represent unsecured obligations of PHC and are not guaranteed by any of the Company's subsidiaries; accordingly, the Note holders have no direct claim on the assets of any of the Company's hospital operating subsidiaries. Given the Company's financial condition and liquidity, the Company cannot repay in full its obligations under the Notes, nor does the Company have access to equity sources or other commitments necessary to refinance or otherwise satisfy in full its obligations under the Notes. The Company is currently engaged in negotiations with the Note holders to develop an alternative, sustainable capital structure for the Company. The Company has retained an investment banking firm and legal counsel to review its strategic alternatives. Considering the Company's limited financial resources, there can be no assurance that the Company will succeed in formulating an alternative capital structure acceptable to the Note holders, in which case the Note holders are entitled, at their discretion, to accelerate all principal and interest due on the Notes. Either as a result of negotiations with the Note holders--or if such negotiations fail--the Company could file under Chapter 11 of the Bankruptcy Code (the "Bankruptcy Code") or be subject to an involuntary petition. A reorganization would likely result in a significant dilution of the ownership interest of the existing holders of the Company's common stock. There can be no assurance that a bankruptcy proceeding would result in a reorganization of the Company rather than a liquidation. If a liquidation or a protracted reorganization were to occur, there is a substantial risk that there would be 4 5 insufficient cash or property available for distribution to the Company's creditors and/or the holders of the Company's common stock. Relating to the matters discussed above, on March 15, 2000, a wholly-owned, second-tier subsidiary of PHC, PHC Finance, Inc., filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of Texas in Houston. The subsidiary, whose principal assets are several medical office buildings, does not own or operate any hospital facilities, and neither PHC nor any of the Company's hospital operating subsidiaries are guarantors for any obligations of PHC Finance, Inc. Given the Company's default on the Notes and the uncertainty surrounding the ultimate resolution of the Company's negotiations with its Note holders, the principal amount of the Notes and certain other debt obligations have been presented as current liabilities in the Company's Consolidated Balance Sheet at December 31, 1999, which has resulted in a working capital deficit of $309.2 million. The 1999 Consolidated Financial Statements included in Item 8 have been prepared assuming the Company will continue as a going concern and do not include further adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of the uncertainties described above. As the result of the default of interest payment on the Notes, the Company is also in default with certain provisions under its off-balance sheet receivable financing agreement (the "Commercial Paper" program) (see Item 8. Note 9) under which a wholly-owned subsidiary of the Company has sold $32.3 million of eligible receivables as of March 27, 2000. As a result of this default, the subsidiary is unable to sell additional receivables under the Commercial Paper program. On March 30, 2000, the Company received a commitment for a $62.0 million secured financing facility (the "New Facility") from a lending group which will replace the Company's Commercial Paper program and existing letters of credit outstanding. The Company anticipates that the outstanding letters of credit will be secured by cash collateral held by the lenders. The New Facility will be used primarily to fund normal working capital of the Company's hospitals. The New Facility will be an obligation of certain of the Company's subsidiaries and will be secured by all patient accounts receivable of the Company's hospitals and a first lien on two of its hospitals. Accordingly, the New Facility will not be an obligation of PHC. The lender under the Company's current Commercial Paper program has agreed to extend the program until April 17, 2000 while the Company and the proposed lenders under the New Facility complete due diligence and documentation necessary for the New Facility. There can be no assurance that the Company will ultimately consummate the New Facility. The Company is in a highly leveraged financial position. Should the Company fail to consummate the New Facility, the Company would have no available credit lines and therefore would be required to finance its cash needs from operations. Furthermore, in the event the Commercial Paper program is not extended beyond April 17, 2000, a wind down of the program would commence with the Company's current lender retaining a significant portion of the Company's operating cash flows until all amounts outstanding under the Commercial Paper program are repaid in full. In the event of a wind down, operating cash flows would likely be insufficient to meet the Company's operational and capital expenditure needs. On October 12, 1999, the Company repaid all borrowings outstanding under its senior credit facilities of $223.5 million in conjunction with the sale of its Utah operations. Prior to repayment, the senior credit facilities provided total commitments of $255.0 million (see Item 8. Note 7). Concurrent with the repayment, most of the commitments under the facilities were permanently cancelled. The Company entered into an interim financing arrangement with one of its original bank lenders, which has reduced its original commitment under the senior bank credit agreement to $11.6 million. As of March 27, 2000, the Company had $11.6 million in outstanding letters of credit under its interim credit facility, all of which were fully secured by cash collateral held by the lender, and no outstanding borrowings. As the result of the default of interest payment on the Notes, the Company is also in default under its interim credit facility. 5 6 DIVESTITURES AND CLOSURES OF HOSPITALS Pursuant to a recapitalization agreement completed on October 8, 1999, the Company sold 93.9% of the outstanding common stock of a wholly owned subsidiary ("HoldCo") to JLL Healthcare, LLC, an affiliate of the private equity firm of Joseph Littlejohn & Levy, Inc., for $280.0 million in cash, inclusive of working capital. The Company retained a minority interest in the outstanding common stock of HoldCo, which owned substantially all of the assets of five hospitals, with 640 licensed beds, and related facilities located in the Salt Lake City area (the "Utah Facilities"). Subsequent to the closing of the recapitalization agreement, IASIS Healthcare Corporation, a Tennessee corporation, was merged with and into a wholly owned subsidiary of HoldCo, with the HoldCo subsidiary as the surviving entity. Following the merger, HoldCo changed its name to IASIS Healthcare Corporation, in which the Company retains a 5.8% minority interest. The recapitalization agreement was arrived at through an arms length negotiation. Net cash proceeds were used to eliminate all indebtedness then outstanding under the Company's senior credit facilities totaling $223.5 million and to reduce $12.8 million in borrowings under the Commercial Paper program. The Company also eliminated $7.8 million in annual operating lease payments related to one of the Utah Facilities. On September 30, 1999, the Company completed the sale of the stock of Paracelsus Senatobia Community, Inc. ("Senatobia"), which owned and operated a 76-bed acute care hospital located in Mississippi. The sales price of approximately $4.7 million, which included the sale of net working capital, was paid by a combination of $100,000 in cash, $1.6 million in second lien promissory notes, and the assumption by the buyer of approximately $3.0 million in capital lease obligations and related lease guaranty payments. Effective June 30, 1999, the Company sold substantially all of the assets of four skilled nursing facilities (collectively, the "Convalescent Hospitals"). The facilities had 232 licensed beds. The sales price of approximately $6.9 million, which excluded net working capital, was paid by a combination of $3.0 million in cash and a $3.9 million second lien promissory note, which is subject to prepayment discounts. In connection with the sale, the Company paid $1.0 million to terminate a lease agreement at one of the facilities and used the remaining cash proceeds of $2.0 million from the sale to reduce its outstanding indebtedness under its senior revolving credit facility Effective March 31, 1999, the Company sold the stock of Paracelsus Bledsoe County Hospital, Inc. ("Bledsoe"), which operated a 32 licensed bed facility located in Tennessee. The sales price of approximately $2.2 million, including working capital, was paid by a combination of $100,000 in cash and the issuance by the buyer of $2.1 million in promissory notes. BUSINESS STRATEGY The Company generally seeks to operate hospitals in small to mid-sized markets. The Company focuses on increasing its market share by implementing operating strategies to position each of its hospitals as a preeminent provider of healthcare services on a quality, cost-effective basis that meets the needs of the communities that the facilities serve. The Company continually analyzes whether each of its hospitals fits within its strategic plans and will continue to evaluate ways in which its assets may be used to maximize shareholder value. To that end, the Company may from time to time elect to close, sell, exchange or convert to alternate use certain of its facilities in order to respond to changing market conditions. When appropriate and to the extent financial resources permit, the Company will pursue growth opportunities through selective acquisition of additional hospitals in markets where the Company 6 7 can develop a preeminent market position. In light of the uncertainties discussed in "Issues Affecting Liquidity," the Company is uncertain as to its acquisition and disposition plan in 2000 and beyond. HOSPITAL OPERATING STRATEGY The Company seeks to provide quality healthcare services on a cost-effective basis while being responsive to the needs of each community in which the Company operates. The Company believes that the delivery of healthcare services is a local business. Accordingly, each hospital's operating strategy and business plan are designed to meet the healthcare needs of the local market through local management initiative, responsibility and accountability, combined with corporate support and oversight. Incentive compensation programs are offered to reward local managers for accomplishing predetermined goals. The significant components of the Company's hospital operating strategy are as follows: MARKET PENETRATION - The Company seeks to increase its market share (i) by offering a full range of hospital and related healthcare services, (ii) by providing quality services on a cost effective basis and (iii) through appropriate physician development efforts. The Company selectively adds new services such as orthopedic surgery, psychiatric, cardiology and pain management programs at its hospitals and, where appropriate, invests in new technologies. The Company also develops complementary healthcare businesses such as primary care clinics to augment the service capabilities and create a larger service network for its existing hospitals, thereby providing care in a cost effective and medically appropriate setting. In some cases, the Company may also acquire, merge or establish alliances with other providers through affiliation agreements, joint venture arrangements or partnerships. Historically, the Company's investment in its hospitals, primarily through capital expenditures, were financed through additional borrowings and internally generated funds. Due to the liquidity issues previously discussed, there can be no assurance that the Company will have sufficient resources to finance its capital expenditure plan in 2000. Various factors, such as technological developments permitting more procedures to be performed on an outpatient basis, pharmaceutical advances and pressures to contain healthcare costs, have led to a shift from inpatient care to ambulatory or outpatient care. The Company has responded to this trend by restructuring existing surgical and diagnostic capacity to allow a greater number and range of procedures to be performed on an outpatient basis. The Company has implemented a care defect reduction program to measure the quality of patient care and to reduce errors in the patient care process. The program focuses on improving patient care processes through staff involvement and education and uses certain indicators to measure the quality of patient care. The Company believes the focus on the quality of care in its hospitals will improve its customer satisfaction rate and reduce its liability risk. The Company has implemented a proprietary customer service program in each of its hospitals to ensure that hospital employees are responding to patient needs. This program achieves its objective through employee training programs and by focusing management's attention on areas needing improvement on a timely basis. A key element of the Company's hospital operating strategy is to establish and maintain a cooperative relationship with its physicians. The Company focuses on supporting and retaining existing physicians and attracting additional qualified physicians in existing or under-served medical specialties. The Company's hospitals often provide newly recruited physicians with various services to assist them in opening and commencing their practices, including financial support and office rental. The Company 7 8 may affiliate, joint venture or partner with physician practices or, in selected cases, manage or acquire such physician practices through appropriate subsidiaries and affiliated organizations. While physicians may terminate their association with a hospital at any time, the Company believes that by improving the level of care at its hospitals, equipping its hospitals with up-to-date medical technology and forging strong relationships with physicians, it will attract and retain qualified physicians. COST CONTROLS - The Company seeks to position each of its hospitals as a cost effective healthcare provider in its market. To achieve this objective, the Company utilizes a disciplined cost control system to (i) implement staffing standards and manage resources to optimize staffing efficiency, (ii) utilize national purchasing contracts and monitor supply usage, (iii) renegotiate or eliminate purchased service contracts, where appropriate, (iv) evaluate and eliminate on an ongoing basis underutilized or unprofitable services and (v) implement utilization management programs to help monitor and manage clinical resources to render medically appropriate and cost effective care. Corporate staff support is available for key operating and cost decisions, as well as for reimbursement, insurance/risk management, purchasing and other significant accounting and support functions. In 1999, the Company instituted further initiatives to cut costs not directly related to patient care, including reducing corporate overhead and eliminating nonessential programs and office space. As healthcare payors seek to reduce their healthcare expenditures, the ability to reduce and control operating costs will become more important to the Company's results of operations and future growth. NETWORKS - One factor of ever-increasing importance in the competitive position of the Company's hospitals is the ability of those facilities to obtain, retain and renegotiate managed care contracts. A health care provider's ability to compete for managed care contracts is affected by, among other factors, whether the hospital is part of an integrated health care delivery network and, if so, the scope, breadth and quality of services offered by such network and by competing networks. The Company evaluates changing circumstances in each geographic area on an ongoing basis and attempts to position itself to compete in the managed care market by forming its own, or joining with others to form, integrated health care delivery networks, where appropriate. STANDARDIZED POLICIES AND PROCEDURES AND MANAGEMENT INFORMATION SYSTEMS - The Company's hospitals are managed by experienced hospital administrators and financial personnel. To assist them, the Company has sought to maintain financial control and to improve operating practices at the hospitals through standardization. To that end, the Company has developed a comprehensive financial reporting system and implemented standardized policies and procedures. The Company uses the financial reporting system to monitor certain key financial data and operating statistics at each facility, to establish the annual budget and to measure hospitals' financial and operational performance. The Company has also standardized systems for patient billings, general accounting and payroll, as well as clinical applications and is installing systems to automate staffing utilization and to monitor the profitability of managed care contracts. In addition, the Company has implemented policies and procedures to guide its facilities in areas such as quality and customer service, physician relations and arrangements, human resources, billings and collections, regulatory and ethical compliance and accounting and financial reporting. OPERATIONS The Company seeks to create a local healthcare system in each of its markets that offers a continuum of inpatient, outpatient, emergency and alternative care options. In many such markets, the Company will establish its acute care hospitals as the hub of a local provider system that can include home health agencies, clinics, physician practices and medical office buildings. 8 9 ACUTE CARE HOSPITALS - The Company owns and operates 10 acute care hospitals with a total of 1,287 licensed beds in seven states. Each of the Company's acute care hospitals provides a broad array of general medical and surgical services on an inpatient, outpatient and emergency basis, including some or all of the following: intensive and cardiac care, diagnostic services, radiology services and obstetrics on an inpatient basis and ambulatory surgery, laboratory and radiology services on an outpatient basis. HOME HEALTH AGENCIES - The Company provides home health services through six of its hospitals in four states. These services include home nursing, infusion therapy, physical therapy, respiratory services and other rehabilitative services. PHYSICIAN PRACTICES - The Company owns and operates a number of physician practices in rural and urban settings. Most of these practices are primary care physician offices where the physicians are employed by or are under contract with one of the Company's hospitals or a related entity. The physician practices serve to complement the Company's acute care hospitals in their respective markets by allowing the Company to provide a wider range of services in optimal settings and provide the opportunity to attract patients to the Company's hospitals. PHYSICIAN ARRANGEMENTS - The Company owns a majority interest in and/or operates three physician joint ventures. In most cases, a physician or a group of physicians holds the minority interests in the joint ventures directly or indirectly. Additionally, several of the Company's hospitals have assisted with the formation of and participation in physician hospital organizations or management services organizations. The Company believes that its physician arrangements are in compliance with applicable Federal and state laws. However, there can be no assurance that such arrangements will not be challenged by governmental agencies. MEDICAL OFFICE BUILDINGS - The Company owns, leases or manages 15 medical office buildings located adjacent to certain of its hospitals. COMPETITION Competition for patients among hospitals and other healthcare providers has intensified in recent years. During this period, hospital occupancy rates have declined as a result of cost containment pressures, changes in technology, changes in government regulations and reimbursement and a shift from inpatient to outpatient utilization. Such factors have prompted new competitive strategies by hospitals and other healthcare providers as well as an increase in the consolidation of such providers. In certain areas in which the Company operates, there are other hospitals or facilities that provide services comparable to those offered by the Company's hospitals. Many of these hospitals may have greater financial resources and may offer a wider range of services than the Company's hospitals. In addition, hospitals owned by government agencies or other tax-exempt entities benefit from endowments, charitable contributions and tax-exempt financing, none of which are available to the Company. On July 1, 1998, the Company completed the purchase from its partner the remaining 50% partnership interest in Dakota Heartland Health System ("DHHS") thereby giving the Company 100% ownership of DHHS. DHHS owns and operates a 218-bed general acute care hospital in Fargo, North Dakota. In this market where DHHS is one of two primary healthcare providers, construction is underway on a third competing hospital, which is owned in part by a physicians group who has admitted a number of patients to DHHS. While the Company expects that the new hospital will not have a significant impact on the Company's patient volume in admissions and visits in 2000, competition for patients from the new hospital, once completed, will likely be unfavorable to DHHS' operating results 9 10 thereafter. The Company is currently evaluating various business alternatives to preserve DHHS' position in this market. The competitive position of the Company's hospitals also has been, and in all likelihood will continue to be, affected by the increased initiatives undertaken during the past several years by Federal and state governments and other major purchasers of healthcare, including insurance companies and employers, to revise payment methodologies and monitor healthcare expenditures in an effort to contain healthcare costs. As employers, private and government payors and others turn to the use of managed care in an attempt to control rising health care costs, the importance of obtaining managed care contracts has increased over the years and is expected to continue to increase. In many of the Company's existing markets, the competitive position of its hospital is dependent on its ability to obtain managed care contracts at reasonable terms. Under such contracts, health care providers agree to provide services on a discounted-fee or capitated basis in exchange for the payors agreeing to send some or all of their members/enrollees to those providers. The profitability of such contracts depends upon the provider's ability to negotiate payments per patient that, in the aggregate, are adequate to cover the cost of meeting the health care needs of the covered persons. The Company currently has no material contracts to provide services on a capitated basis. The Company's hospitals are dependent upon the physicians practicing in the communities served by the hospitals. A small number of physicians accounts for a significant portion of patient admissions at some of the Company's hospitals. The competition for physicians in some specialty areas, including primary care, is intense. While the Company seeks to retain physicians of varied specialties on its hospitals' medical staffs and to attract other qualified physicians, there can be no assurance that the Company's hospitals will succeed in doing so. In addition, certain physicians are affiliated with managed care providers that may preclude them from utilizing the Company's facilities for their patients, or referring patients to doctors using the Company's facilities, if the facility or referred doctors are not currently contracting with such managed care providers. In certain geographic markets, there is a shortage of nurses and other healthcare professionals in certain specialties, which has resulted in increased costs at those facilities. The availability of nursing personnel and other healthcare professionals fluctuates from year to year, and the Company cannot predict the degree to which it will be affected by the future availability and cost of nursing and other healthcare personnel. SOURCES OF REVENUE The Company receives payment for services rendered to patients from private payors (primarily private insurance), managed care providers, the Federal government under the Medicare and TriCare (formerly the Civilian Health and Medical Program of the Uniformed Services or CHAMPUS) programs and state governments under their respective Medicaid programs. See "Hospital Accreditation and Government Regulation - Medicare, Medicaid." The Company's revenue primarily depends on the level of inpatient census, the volume of outpatient services, the acuity of patients' conditions and charges for services. Reimbursement rates for inpatient routine services vary significantly depending on the type of service and the geographic location of the hospital. The table below sets forth the percentages of acute care gross patient revenue for each category of payor during each of the periods indicated. 10 11
YEAR ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 -------- ------- -------- Medicare................................................. 41.1% 42.6% 43.1% Medicaid................................................. 7.4% 11.0% 13.8% Managed care, private insurance, and other payors........ 51.5% 46.4% 43.1% ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== =====
Amounts received from most payors are less than the hospitals' customary charges for the services provided. All of the Company's hospitals (as do most acute care hospitals) derive a substantial portion of their revenue from the Medicare and Medicaid programs, which pay participating health care providers for covered services rendered and items provided to qualified beneficiaries. Both of these programs are government programs, which are heavily regulated and use complex methods for determining payments to providers. These programs are subject to frequent changes, which in recent years have reduced and in the future years are expected to continue to reduce payments to hospitals. In light of the high percentage of Medicare and Medicaid patients, the Company's ability in the future to operate its business successfully will depend in large measure on its ability to adapt to changes in these programs. See "Hospital Accreditation and Governmental Regulation." The importance of obtaining managed care contracts has increased over the years and is expected to continue to increase as employers, private and government payors and others turn to the use of managed care in an attempt to control rising health care costs. The Company's hospitals have experienced an increasing shift in payor mix from traditional Medicare/Medicaid to managed care consistent with the industry trends. The revenues and operating results of most of the Company's hospitals are significantly affected by the hospitals' ability to negotiate favorable contracts with managed care payors. The Company is experiencing demands from managed care payors for increasing discounted fee structures. Inpatient utilization, average lengths of stay and occupancy rates continue to be negatively affected by payor-required preadmission authorization and utilization review and by payor pressure to maximize outpatient and alternative healthcare delivery services for less acutely ill patients. The Company is responding to this trend by dedicating resources and managed care professionals to evaluate and negotiate contracts with these payors and obtain better rates and by avoiding entering into capitation arrangements. Also, the Company is installing information systems to improve the information available to management to monitor compliance of hospital billing and collection practices with the negotiated rates. The trend toward managed care has and may continue to adversely affect the Company's ability to grow net operating revenue and improve operating margins. HOSPITAL ACCREDITATION AND GOVERNMENT REGULATION All hospitals, and the healthcare industry generally, are subject to compliance with various Federal, state and local regulations relating to licensure, operations, billing, reimbursement, relationships with physicians, construction of new facilities, expansion or acquisition of existing facilities and offering of new services. All facilities receive periodic inspection by state and local licensing agencies, as well as by non-governmental organizations acting under contract or pursuant to Federal law, to review compliance with standards of medical care and requirements concerning facilities, equipment, staffing, cleanliness and related matters. Failure to comply with applicable laws and regulations could result in, among other things, the imposition of fines, temporary suspension of the ability to admit new patients to the facility or, in extreme circumstances, exclusion from participation in government healthcare reimbursement programs such as Medicare and Medicaid (from which the Company derives substantial revenues) or the revocation of facility licenses. While all of the Company's hospitals have obtained the 11 12 licenses that the Company believes are necessary under applicable law for the operation of the hospitals, there can be no assurance that its hospitals will be able to comply in the future or that future regulatory changes will not have an adverse impact on the Company. At December 31, 1999, all of the Company's hospitals were accredited by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"), allowing them to participate in the Medicare/Medicaid programs. CERTIFICATE OF NEED - In four of the states in which the Company's hospitals operate, certificate of need ("CON") regulations control the development and expansion of healthcare services and facilities. Those regulations generally require proper government approval for the expansion or acquisition of existing facilities, the construction of new facilities, the addition of new beds, the acquisition of major items of equipment and the introduction of certain new services. Failure to obtain necessary approval can result in the inability to complete a project, the imposition of civil and, in some cases, criminal sanctions, the inability to receive Medicare and Medicaid reimbursement and/or the revocation of a facility's license. Of the seven states in which the Company operates, a CON is required in Florida, Georgia, Tennessee and Virginia. MEDICARE - The Federal Medicare program provides medical insurance benefits, including hospitalization, principally to persons 65 and older and to certain disabled persons. Each of the Company's hospitals is certified as a provider of services under the Medicare program. A substantial portion of the Company's revenue is derived from patients covered by this program. See "Sources of Revenue" above. The Medicare program has undergone significant changes during the past several years to reduce overall healthcare costs, which have resulted in reduced rates of growth in reimbursement payments for a substantial portion of hospital procedures and charges. In addition, the requirements for certification in the Medicare program are subject to change. In order to remain qualified for the program, it may be necessary for the Company to make changes from time to time in its facilities, equipment, personnel and services. Although the Company intends to continue its participation in the Medicare program, there is no assurance that it will continue to qualify for participation. Pursuant to the Social Security Act Amendments of 1983 and subsequent budget reconciliation and modifications, Congress adopted a prospective payment system ("PPS"). PPS is a fixed payment system in which illnesses are classified into Diagnostic Related Groups ("DRGs") which do not consider a specific hospital's costs, but are adjusted for an area wage differential. Each DRG is assigned a fixed payment amount that forms the basis for calculating the amount that the hospital is reimbursed for each Medicare patient. Generally, under PPS, if the costs of meeting the health care needs of the patient are greater than the predetermined payment rate, the hospital must absorb the loss. Conversely, if the cost of the services provided is less than the predetermined payment, the hospital retains the difference. Since DRG rates are based upon a statistically normal distribution of severity, a hospital may receive additional payments if a patient falls outside the normal distribution. Historically, DRG rates were increased each year to take into account the increased cost of goods and services purchased by hospitals and non-hospitals (the "Market Basket"). With the exception of federal fiscal year 1997 (which ended September 30, 1997), in which the increase in DRG rates was equal to the 2.5% Market Basket, the percentage increases to the DRG rates for the past several years have been lower than the Market Basket and, as a result, payments received by hospitals under DRG-PPS have not kept up with the cost of goods and services. Additionally, the Balanced Budget Act of 1997 ("1997 Budget Act") froze DRG rates at their 1997 levels through federal fiscal year 1998 (which ended September 30, 1998). The 1997 Budget Act also limits the rate of increase in DRG rates thereafter. Payments to be received by general hospitals under DRG-PPS continue to be below the increases in the cost of goods and services purchased by hospitals. The update for the federal fiscal year beginning October 1, 1999, has been set at 1.1 percent (2.9 percent Market Basket minus 1.8 percent). 12 13 Prior to 1988, Medicare reimbursed hospitals for 100% of their share of capital related costs, which included depreciation, interest, taxes and insurance related to plant and equipment for inpatient hospital services. The reimbursed rate was reduced thereafter to 90% of costs. Federal regulations, effective October 1, 1991, created a PPS for inpatient capital costs to be phased in over a ten-year transition period from a hospital-based rate to a fully Federal payment rate or a per-case rate, which is likely to result in further reductions in the rate of growth in reimbursement payments. Beginning with cost reporting periods on or after October 1, 2001, all hospitals are to be paid at the standard Federal rate. Additionally, pursuant to the 1997 Budget Act, capital rates were reduced by an additional 2.1%. This change in capital cost payment could have a negative impact on the operating revenues of the Company. Psychiatric and rehabilitation hospitals, as well as psychiatric or rehabilitation units that are distinct parts of a hospital, are exempt from PPS and continue to be reimbursed on a reasonable cost basis, with limits placed upon the annual rate of increase in operating costs per discharge. For fiscal years 1999 through 2002, the annual update factor is dependent upon where the hospital's costs fall in relation to the limits set by the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). The annual update factor will range from 0% to the Market Basket percentage increase, depending upon whether the hospital's costs are at, below or above the TEFRA target limits or the Federal national target limits, whichever are lower. Many outpatient services continue to be reimbursed, subject to certain regulatory limitations, on a modified cost-reimbursement basis, at the lower of customary charges or a percentage of actual costs. Congress has established additional limits on reimbursement of the following outpatient services: (i) clinical laboratory services, which are reimbursed based upon a fee schedule and (ii) ambulatory surgery procedures and certain imaging and other diagnostic procedures, which are reimbursed based upon the lower of the hospital's specific costs or a blend of the hospital's specific costs and the rate paid by Medicare to non-hospital providers for such services. The 1997 Budget Act required the payment method for most outpatient services provided at hospitals to be converted from the cost-based system to PPS effective January 1, 1999, and phased-in over a three-year period. Congress has approved postponing the implementation of outpatient PPS due to Year 2000 issues. The implementation date is expected to be July 2000. The financial effect of such change in payment methodology may have a negative impact on the Company. Home health services historically have been exempt from PPS and have been paid by Medicare at cost, subject to certain limits. The 1997 Budget Act mandates that home health care reimbursement must transition to a prospective payment system on October 1, 2000, as well as a 15% reduction in the cost limits and per beneficiary limits effective September 30, 2000. Subsequent legislation has deferred enactment of the 15% reduction until one year after implementation of PPS for homehealth. During a transition period of not longer than 4 years, home health care reimbursement rates in effect under the current system have been reduced and will be a blend of agency-specific costs and the regional-specific costs, until a fully prospective payment rate is achieved. The Company currently has six hospitals that provide home health care services. The financial effect of such a change in payment methodology may have a negative impact on the Company. The 1997 Budget Act mandated numerous other adjustments and reductions to the Medicare system that may adversely impact the Company's operations. With respect to the valuation of capital assets as a result of a change in hospital ownership, the 1997 Budget Act eliminates the allowance for return on equity capital, and bases reimbursement on the book value of the assets, recognizing no gain or recapture of depreciation. In addition, the 1997 Budget Act mandated the following changes: (i) a reduction in reimbursement for Medicare enrollee deductible and coinsurance bad debts of 25% for fiscal year 1998, 40% for fiscal year 1999 and 45% for fiscal year 2000 and periods thereafter, (ii) a reduction 13 14 in the bonus payments made to hospitals whose costs are below the target amounts from 5% of the target amount to 2% and (iii) the transition of skilled nursing home reimbursement to PPS, based upon 1995 allowable costs, with a three year transition period beginning on or after July 1, 1998. In 1999, Congress passed the Balanced Budget Refinement Act of 1999 ("BBRA") which was designed to provide relief to healthcare providers from certain of the requirements of the 1997 Budget Act by delaying or modifying the implementation of certain provisions and increasing or restoring payments for certain services thereunder. There are a number of other initiatives before Congress that would provide relief to payment reductions brought about by the 1997 Budget Act. However, there is no assurance that such initiatives will be enacted or, if enacted, that they would have any significant favorable impact on the Company. MEDICAID - Medicaid is a Federally mandated medical assistance program that is administered and funded in part by each state pursuant to which hospital benefits are available to indigent persons. Each of the Company's hospitals is certified for participation in the various state Medicaid programs. A substantial portion of the Company's revenue is derived from patients covered by this program. See "Sources of Revenue." Medicaid payment methodology varies from state to state, with most payments being made on a prospective payment system or under programs that negotiate payment levels with individual hospitals. Many states have adopted broad-based hospital-specific taxes to help fund the state's share of its Medicaid program. In addition, certain states have obtained or are applying for waivers from by the Health Care Financing Administration ("HCFA") to replace their Medicaid programs with managed care programs. The 1997 Budget Act repealed the Boren Amendment to the Medicaid Act to give states greater flexibility in establishing Medicaid payment methods and rates. The Boren Amendment previously required states to undertake a financial analysis and provide assurance to the Federal government that the Medicaid rates were reasonable in meeting the costs incurred by healthcare providers in providing care to Medicaid patients. In lieu thereof, Congress has mandated that states employ a rate setting process that requires prior publication and an opportunity for provider comment on the rates, effective for rates of payment on and after January 1, 1998. Many states have enacted or are considering enacting measures that are designed to reduce their Medicaid expenditures and to make certain changes to private health care insurance. Various states have applied, or are considering applying, for a Federal waiver from current Medicaid regulations to allow them to serve some of their Medicaid participants through managed care providers. Texas was denied a waiver under Section 1115 of the 1997 Budget Act but is in the process of implementing regional managed care programs under a more limited waiver. California has created a voluntary health insurance purchasing cooperative that seeks to make health care coverage more affordable for businesses with five to 50 employees and, effective January 1, 1995, changed the payment system for participants in its Medicaid program in certain counties from fee-for-service arrangements to managed care plans. Florida also has legislation, and other states are considering adopting legislation, imposing a tax on net revenues of hospitals to help finance or expand the provision of health care to the uninsured and underinsured persons. The Virginia Medicaid program has contracted with managed care payors and effectively has assigned to these payors the ability to determine the composition of the provider network. A number of other states are considering the enactment of managed care initiatives designed to provide universal low-cost coverage. These proposals also may attempt to include coverage for some people who currently are uninsured. The Medicare and Medicaid programs make additional payments to those healthcare providers that serve a disproportionate share of low-income patients. The qualification and funding for disproportionate share payments vary by year and by state as applicable to Medicaid. Disproportionate share payments for future years could vary significantly from historical payments. 14 15 Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to administrative rulings, interpretations and discretion that may affect payments made under these programs. Funds received from these programs are subject to audit. These audits can result in retroactive adjustments of such payments. It often takes many years to make a final determination about the amounts earned under the programs because of audits by the program representatives, providers' rights of appeal and the application of numerous technical reimbursement provisions. Management believes that adequate provision has been made for such adjustments. There can be no assurance that future audits will not result in material retroactive adjustments. Federal and state legislators continue to consider legislation that could significantly impact Medicare, Medicaid and other government funding of healthcare costs. Initiatives currently before Congress, if enacted, would reduce the rate of growth in reimbursement payments under various government programs including, among others, payments to disproportionate share and teaching hospitals. A reduction in these payments would adversely affect net revenue and operating margins at certain of the Company's hospitals. The Company is unable to predict what legislation, if any, will be enacted at the Federal and state levels in the future or what effect such legislation may have on the Company's financial position, results of operations or liquidity. UTILIZATION REVIEW COMPLIANCE - To ensure efficient utilization of facilities and services, Federal regulations require that admission to and utilization of facilities by Medicare and Medicaid patients must be reviewed by a Peer Review Organization ("PRO"). A PRO may address the appropriateness of patient admissions and discharges, the quality of care provided, the validity of DRG classifications and appropriateness of cases with extraordinary length of stay or cost. The PRO may deny admission or payment. Such review may be conducted either prospectively or retroactively and is subject to administrative and judicial appeal. ANTI-KICKBACK AND SELF-REFERRAL REGULATIONS - Federal law prohibits the knowing and willful payment, receipt or offer of remuneration by healthcare providers to any person, including physicians, to induce referrals of Medicare and Medicaid patients or in exchange for such referrals (the "Anti-Kickback Law"). Federal law also prohibits a physician from referring Medicare and Medicaid patients to certain designated health services in which the physician has ownership or certain other financial arrangements, unless an exception is available (the "Stark II Law"). Many states have adopted or are considering similar legislative proposals to extend the prohibition to referrals of all patients regardless of payor. Violations of the Anti-Kickback Law and Stark II Law may result in certain civil sanctions, such as civil monetary penalties, and exclusion from participating in the Medicare and Medicaid programs. Violations of the Anti-Kickback Law can also result in the imposition of criminal sanctions. The Office of the Inspector General of Health and Human Services ("OIG") has promulgated regulations that define certain safe harbors to offer protection to certain common business arrangements under the Anti-Kickback Law. The failure of an arrangement to meet the requirements of a safe harbor does not render the arrangement illegal. Those arrangements, however, are subject to scrutiny by the OIG's office and other enforcement agencies. None of the Company's joint ventures with physician investors fall within any of the defined safe harbors. Under the Company's joint venture arrangements, physician investors are not under any obligation to refer or admit their patients, including Medicare or Medicaid beneficiaries, to receive services at the Company's facilities, nor are distributions to those physician investors contingent upon or calculated with reference to referral by the physician investors. On the basis thereof, the Company does not believe the ownership of interests in or receipt of distributions from its joint ventures would be construed to be knowing and willful payments to the physician investors to induce them to refer patients in violation of the Anti-Kickback Law. In addition, 15 16 the Company has entered into various other relationships and arrangements with physicians, including the acquisition of physician practices. There can be no assurance that such arrangements will not be challenged by government enforcement agencies. In addition, in certain circumstances, private citizens may bring a civil action to recover sums paid in violation of Federal law. Federal and state government agencies have announced heightened and coordinated civil and criminal enforcement efforts. The Company cannot predict the effect on the Company's financial position, results of operations or liquidity from possible judgments, if any, that may result from any inquiry, or the impact of new Federal or state laws and regulations that could require the Company to restructure certain of its arrangements. THE EMERGENCY MEDICAL TREATMENT AND ACTIVE LABOR ACT - Congress adopted the Federal Emergency Medical Treatment and Active Labor Act ("EMTALA") in response to reports of a widespread hospital emergency room practice of "patient dumping." At the time of the enactment, patient dumping was considered to have occurred when a hospital capable of providing the needed care sent a patient to another facility or simply turned the patient away based on such patient's inability to pay for his or her care. The law imposes requirements upon physicians, hospitals and other facilities that provide emergency medical services. These requirements pertain to what care must be provided to anyone who comes to such facilities seeking care before they may be transferred to another facility or otherwise denied care. Sanctions, which may be imposed on a physician, hospital or other facility failing to fulfill these requirements, include termination of a hospital's Medicare provider agreement, exclusion of a physician from participation in Medicare and Medicaid programs and civil monetary penalties. In addition, the law creates private civil remedies that enable (i) an individual who suffers personal harm as a direct result of a violation of the law and (ii) a medical facility that suffers a financial loss as a direct result of another participating hospital's violation of the law to sue the offending hospital for damages and equitable relief. Two of the Company's hospitals were notified by HCFA of potential violations of the requirements of EMTALA. The hospitals have conducted internal investigations and have responded to HFCA. The Company believes that the ultimate outcome of these matters should have no material impact to the Company's financial condition and results of operations. The Company also believes that hospital practices are otherwise in compliance with EMTALA. ENVIRONMENTAL MATTERS The Company is subject to various Federal, state and local statutes and ordinances regulating the discharge of materials into the environment. The Company's management does not believe that the Company will be required to expend any material amounts in order to comply with these laws and regulations or that compliance will materially affect its capital expenditures, earnings or competitive position. SEASONALITY The hospital industry is seasonal, with the strongest demand for hospital services generally occurring during January through April and the weakest during the summer months. Accordingly, the Company's revenues and earnings are generally highest during the first quarter and lowest during the third quarter. Seasonal variations are caused by a number of factors, including, but not necessarily limited to, seasonal cycles of illness, climate and weather conditions, vacation patterns of both patients and physicians and other factors relating to the timing of elective procedures. MEDICAL STAFF AND EMPLOYEES At December 31, 1999, the Company had approximately 4,200 full-time and part-time employees. The Company also had 868 licensed physicians who were members of the medical staffs of 16 17 the Company's hospitals. Physician staff members may also serve on the medical staffs of other hospitals and each may terminate his or her affiliation with the Company's hospital at any time. The Company is subject to Federal and state employment laws and the Federal minimum wage and hour labor laws. The Company also maintains employee benefit plans, which are subject to reporting and operational compliance with the Internal Revenue Code and the U.S. Department of Labor. Labor relations at the Company's hospitals have been satisfactory. LIABILITY INSURANCE The Company is subject to claims and suits in the ordinary course of business, including those arising from care and treatment provided at its facilities. The Company maintains insurance and, where appropriate, reserves with respect to the possible liability arising from such claims. The Company is self-insured for the first $1.0 million per occurrence of general and professional liability claims. Excess insurance amounts up to $50.0 million are covered by third party insurance carriers. The Company records an estimated liability for its uninsured exposure and self-insured retention based on historical loss patterns and actuarial projections. 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. ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT The following is certain information regarding the executive officers of the Company. ROBERT L. SMITH, age 48, joined the Company as Chief Executive Officer and director effective March 27, 2000. Since March 1999, Mr. Smith was Divisional Vice President of Christus Health, a Dallas-based not-for-profit healthcare system. Prior to Christus Health, he was Chief Executive Officer and Regional President of the Southeast Texas Operating Division of the Sisters of Charity of the Incarnate Word Health Care System since 1995. Prior thereto, Mr. Smith spent 14 years with National Medical Enterprises, Inc. ("NME"), predecessor company to Tenet Healthcare Corporation, where he held a number of divisional senior management positions. JAMES G. VANDEVENDER, age 52, interim Chief Executive Officer and director since July 1, 1999 until his resignation from the Company on February 29, 2000. He served as Senior Executive Vice President, Chief Financial Officer and director of the Company from June 1997 to July 1, 1999, and as Executive Vice President, Chief Financial Officer and director since August 1996. From 1990 to 1996, he was Executive Vice President, Chief Financial Officer, Secretary and a director of Champion, which he co-founded. From 1987 to 1989, Mr. VanDevender pursued private investments. From 1981 to 1987, he was Senior Vice President of Republic Health Corporation ("Republic") where he was primarily responsible for acquisitions and development, and held other senior management positions in the areas of accounting and finance. Prior thereto, he was employed in various management positions for four years by Hospital Affiliates International. LAWRENCE A. HUMPHREY, age 44, Chief Financial Officer since August 1999 and has served as Executive Vice President - Finance since June 1997, and as Senior Vice President, Corporate Finance since August 1996. Effective February 1996, Mr. Humphrey was promoted to Senior Vice President - Corporate Finance. From 1993 to 1994, he was Operations Controller, and from September 1994 to 1996, he was Vice President - Operations Finance of Champion. Prior thereto, he was employed in various management positions for 12 years by NME. Mr. Humphrey is a Certified Public Accountant. 17 18 MICHAEL M. BROOKS, age 51, served as Senior Vice President - Development from August 1996 until his resignation from the Company on February 29, 2000. From 1992 to 1993, he was Operations Controller and from September 1993 to 1996, he was Vice President - Administration and Development of Champion. Effective February 1996, Mr. Brooks became Senior Vice President - Development. From 1989 to 1992, he was a healthcare consultant and was associated with Champion in that capacity during 1991. From 1987 to 1988, he co-owned and operated an acute care hospital in El Paso, Texas. From 1983 to 1986, he was employed in various senior management positions by Republic. STEVEN D. PORTER, age 50, Senior Vice President of Operations since August 1999 and Regional Vice President since January 1999. Prior to joining the Company, he was with Texas Health Resources (formerly Harris Methodist Health System) since 1987, where he served in various roles with increasing responsibilities from hospital administrator to senior vice president of health care management until his departure in 1999. DEBORAH H. FRANKOVICH, age 52, Senior Vice President and Treasurer since June 1997, has served as Vice President and Treasurer since August 1996. From 1994 to 1996, she was Vice President and Treasurer of Champion. From 1990 to 1994, she was a healthcare financing consultant. Prior thereto, she was Vice President and Treasurer of Healthcare International, Inc. from 1985 to 1989, and Vice President and Treasurer of HealthVest, which she co-founded, from 1986 to 1990. Prior to joining Healthcare International, she worked in the New York healthcare lending group of Citibank for seven years. ROBERT M. STARLING, age 40, a Senior Vice President and Controller since June 1997, has served as Vice President and Controller since August 1996. From 1995 to 1996, he was Vice President and Controller of Champion. Prior thereto, he was Director of Finance for Columbia/HCA Healthcare Corporation from July 1994 to December 1994 and an Audit Manager with Coopers and Lybrand LLP (now PriceWaterhouseCoopers LLP) from 1986 to 1994. Mr. Starling is a Certified Public Accountant. TOD B. MITCHELL, age 39, Senior Vice President - Operations Finance since January 2000. Prior thereto, he served as Senior Vice President - Medicare/Medicaid Reimbursements since October 1999 and as Vice President - Medicare/Medicaid Reimbursements since 1996. From 1994 to 1996, he was the Director of Medicare/Medicaid Reimbursements with Champion. Mr. Mitchell is a Certified Public Accountant. During 1999, the following executive officers resigned from the Company: Charles R. Miller, President, Chief Operating Officer and director; Ronald R. Patterson, Executive Vice President and President, Healthcare Operations; Ronald L. Watson, Senior Vice President, Operations Finance and Systems Support; W. Warren Wilkey, Senior Vice President, Operations; and Gary L. Chandler, Senior Vice President, Managed Care, Networks and Strategic Development. 18 19 ITEM 2. PROPERTIES The following table sets forth the name and location of facility, date of acquisition and number of licensed beds for each of the hospitals operated by the Company as of December 31, 1999. Unless otherwise indicated, all hospitals are owned by the Company.
DATE OF LICENSED LICENSED FACILITY LOCATION ACQUISITION BEDS ----------------- -------- ----------- -------- CALIFORNIA Lancaster Community Hospital Lancaster 2/01/81 117 FLORIDA Santa Rosa Medical Center (1) Milton 5/17/96 129 GEORGIA Flint River Community Hospital (1) Montezuma 1/01/86 49 NORTH DAKOTA Dakota Heartland Health System Fargo 8/16/96 218 TENNESSEE Cumberland River Hospital Celina 10/01/85 36 Fentress County General Hospital Jamestown 10/01/85 85 TEXAS BayCoast Medical Center Baytown 8/16/96 191 The Medical Center of Mesquite Mesquite 10/01/90 176 Westwood Medical Center Midland 8/16/96 107 VIRGINIA Capitol Medical Center (2) Richmond 8/16/96 179 ----- Total Licensed Beds 1,287 =====
- ------------------------- (1) Hospital facility is leased. (2) The Company owns an 88.7% general partnership interest in a limited partnership that owns the hospital. The Company owns, leases or manages medical office buildings located adjacent to certain of its hospitals. Most of the space in each medical office building is leased or subleased, primarily to local physicians. The remaining space is used by the Company for hospital administration and clinical purposes or held for future development. The Company leases its corporate offices in Houston, Texas. The Company subleases to a third party its leased offices in Pasadena, California. The Company believes that its existing facilities are adequate to carry on its business as presently conducted. ITEM 3. LEGAL PROCEEDINGS SHAREHOLDER LITIGATION - The global settlement of the putative class and derivative actions against the Company arising out of the Merger (collectively, the "Shareholder Litigation") became effective in 1999. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Litigation," for a more comprehensive discussion of the terms of the settlement. 19 20 OTHER LITIGATION - The Company is subject to claims and legal actions by patients and others in the ordinary course of business. The Company believes that all such claims and actions are either adequately covered by insurance or will not have a material adverse effect on the Company's financial condition, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's annual meeting of stockholders on October 20, 1999, the stockholders approved the election of Ms. Joan S. Fortune to serve as a Class III director for a three-year term expiring at the 2002 annual meeting of stockholders, with 50,732,691 votes "FOR" and 86,265 votes "WITHHELD." There were 4,299,374 non-votes. See Part III. Item 10 for the names and terms of office of all other directors whose term continued after the meeting. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is trading on the New York Stock Exchange ("NYSE") under the symbol "PLS." At March 27, 2000, there were approximately 1,581 holders of record of the Company's common stock. The following table sets forth the high and low sale prices per share of the Company's common stock for the periods indicated:
HIGH LOW --------- ------- Fiscal Year Ended December 31, 1999 First Quarter ................... $ 1 9/16 $ 1 Second Quarter .................. 1 3/8 1 Third Quarter ................... 1 3/8 3/4 Fourth Quarter .................. 1 5/16 1/4 Fiscal Year Ended December 31, 1998 First Quarter ................... $ 4 13/16 $ 3 Second Quarter .................. 5 1/16 2 1/2 Third Quarter ................... 3 1/2 1 3/4 Fourth Quarter .................. 3 5/16 1 3/8
The Company did not declare a cash dividend in 1999 and 1998 and does not anticipate the payment of any cash dividends in the foreseeable future. Restrictions imposed by the Company's existing debt obligations also limit the ability of the Company to pay dividends. Except as set forth below, the Company did not issue any unregistered securities during 1999 and 1998. In connection with the settlement of the Shareholder Litigation, the Company issued 1.5 million shares of common stock for purposes of distribution to class members and 1.0 million shares of common stock to terminate a service and advisory contract with a former chairman of the Board of Directors. The securities issued were exempt from registration with the U.S. Securities and Exchange Commission (the "SEC") pursuant to Section 3(a)(10) of the Securities Act of 1933. 20 21 The NYSE informed the Company that it remains below the NYSE's required minimum share price of $1 over a 30 trading-day period. Based on the Company's 1999 Consolidated Financial Statements in this Form 10-K, the Company no longer meets the NYSE minimum criteria for stockholders' equity of not less than $50 million. The Company is currently pursuing alternatives that include negotiating with the Note holders to develop an alternative, sustainable capital structure that it believes may enable the Company to regain compliance. There can be no assurance that such actions will be successful or that the Company's common stock will continue to be listed on a national securities exchange. If the Company's securities are delisted, the delisting would have a material adverse effect on the liquidity and trading price of the Company's securities. ITEM 6. SELECTED FINANCIAL DATA The following table summarizes certain selected financial data of the Company and should be read in conjunction with the related Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements (See Item 8). The 1999 Consolidated Financial Statements have been prepared on the basis of accounting principles applicable to going concerns and contemplate the realization of assets and the settlement of liabilities and commitments in the normal course of business. The financial statements do not include further adjustments, if any, reflecting the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of uncertainties discussed herein. The report of the Company's independent auditors, Ernst & Young, LLP, includes an explanatory paragraph for a going concern uncertainty. 21 22
(IN 000'S, EXCEPT PER SHARE DATA AND RATIOS) --------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- INCOME STATEMENT DATA Net revenue ................................ $ 516,537 $ 664,058 $ 659,219 $ 493,106 $ 434,179 Operating expenses ......................... (474,108) (584,594) (587,559) (496,782) (399,019) Capital costs (a) .......................... (89,830) (90,189) (77,551) (54,761) (31,719) Equity in earnings of Dakota Heartland Health System ........................... -- -- 9,794 3,207 -- Impairment charges (b) ..................... -- (1,417) (7,782) (72,322) -- Merger costs ............................... -- -- -- (40,804) -- Unusual items (c) .......................... (4,248) 6,637 6,531 (60,521) -- Gain on sale of facilities ................. 77,454 6,825 -- -- 9,026 Minority interests ......................... (54) (3,180) (1,996) (1,806) (1,803) --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes and extraordinary loss ............ 25,751 (1,860) 656 (230,683) 10,664 Provision (benefit) for income taxes (d) ... 54,207 693 1,812 (76,186) 4,375 --------- --------- --------- --------- --------- Income (loss) from continuing operations before extraordinary loss .... (28,456) (2,553) (1,156) (154,497) 6,289 Loss from discontinued operations (d) ...... (1,019) (2,424) (5,243) (70,995) (2,852) --------- --------- --------- --------- --------- Income (loss) before extraordinary loss .... (29,475) (4,977) (6,399) (225,492) 3,437 Extraordinary loss (d) (e) ................. (4,168) (1,175) -- (7,724) -- --------- --------- --------- --------- --------- Net income (loss) .......................... $ (33,643) $ (6,152) $ (6,399) $(233,216) $ 3,437 ========= ========= ========= ========= ========= Income (loss) per share - basic and assuming dilution: Continuing operations ................... $ (0.51) $ (0.05) $ (0.02) $ (3.94) $ 0.21 Net income (loss) ....................... $ (0.60) $ (0.11) $ (0.12) $ (5.95) $ 0.12 Weighted average common shares outstanding (f) ......................... 55,957 55,108 54,946 39,213 29,772 BALANCE SHEET DATA Cash and cash equivalents .................. $ 22,723 $ 11,944 $ 28,173 $ 17,771 $ 4,418 Working capital (deficit) .................. (309,157) 22,526 37,378 33,762 57,011 Total assets ............................... 437,058 716,102 734,824 772,832 333,386 Long-term debt (g) ......................... 3,685 533,048 491,914 491,057 130,352 Long-term debt in default classified as current liabilities ..................... 335,445 -- -- -- -- Stockholders' equity ....................... 5,197 34,341 42,003 48,487 86,721 Book value per share ....................... 0.09 0.62 0.76 0.88 2.91 RATIOS Adjusted EBITDA (h) ....................... $ 42,375 $ 76,284 $ 79,458 $ (2,275) $ 33,357 Adjusted EBITDA margin ..................... 8.2% 11.5% 12.1% (0.5)% 7.7% Debt to total debt and equity .............. 98.5% 93.9% 92.1% 91.0% 60.0%
- ---------------------------------- a) Includes interest, depreciation and amortization. b) Consists of (i) a $1.4 million ($0.02 per share) write-down of certain Tennessee facilities in 1998, (ii) a $7.8 million ($0.09 per share) write-down of certain of the Company's Los Angeles Metropolitan hospitals ("LA Metro") in 1997 and (iii) in 1996, the write down of PHC Regional Medical Center ("PHC Regional") for $52.5 million ($0.90 per share), certain LA Metro hospitals 22 23 for $11.9 million ($0.20 per share) and two other facilities and estimated disposal costs of $7.9 million ($0.13 per share). c) Consists in 1999 of (i) a $5.5 million corporate restructuring charge ($0.10 per share), (ii) a $2.2 million charge ($0.04 per share) associated with the execution of an executive agreement (the "Executive Agreement"), (iii) a $2.0 million charge ($0.04 per share) in the fourth quarter associated with litigation expenses and the write down to net realizable value of a note receivable and other assets, all of which were related to sold facilities, offset by (iv) a $5.5 million gain ($0.10 per share) from the settlement of the Shareholder Litigation. Unusual items in 1998 consist of (i) a $7.5 million gain ($0.08 per share) from the settlement of a 1996 capitation agreement offset by (ii) a net charge of $863,000 ($0.01 per share) resulting from the execution of the Executive Agreement, the restructuring of certain home health operations, severances and the settlement of a contract dispute and litigation. Unusual items in 1997 consist of (i) a reversal of a loss contract accrual of $15.5 million ($0.17 per share), (ii) a charge of $3.5 million ($0.03 per share) relating to the closure of PHC Regional, (iii) a charge of $2.5 million ($0.03 per share) for a corporate reorganization and (iv) a charge of $3.0 million ($0.04 per share) for the settlement of certain litigation. Unusual items in 1996 consist of charges of $38.1 million ($0.65 per share) for a loss contract and $22.4 million ($0.38 per share) for expenses relating to certain investigation and other litigation matters. d) The provision for income taxes in 1999 includes an increase in income tax provision of $26.8 million ($0.48 per share) from the recording of a valuation allowance, which offsets the Company's net deferred tax assets. Of this amount, $24.7 million was applied to increase income tax provision on income from continuing operations and $2.1 million was applied to eliminate income tax benefits on losses from discontinued operations and an extraordinary loss. The benefit for income taxes in 1996 includes a reduction in income tax benefits of $50.0 million ($1.27 per share) from the recording of a valuation allowance. Of this amount, $17.7 million was applied to reduce income tax benefits on losses from continuing operations and the remaining $32.3 million to reduce income tax benefits on losses from discontinued operations and an extraordinary loss. As a result, no income tax benefits have been recognized on the losses from discontinued operations and the extraordinary losses recorded in 1999 and 1996. e) Reflects loss associated with the early extinguishment of debt. f) Reflects the effect of the 66,159,426-for-one stock split in conjunction with the Merger. g) Excludes long-term debt due within one year and long-term debt in default classified as current liabilities. h) Adjusted EBITDA represents income (loss) from continuing operations before income taxes and extraordinary loss, depreciation and amortization, interest, impairment charges, merger costs, unusual items and gain from sale of facilities. While EBITDA is not a substitute for operating cash flows determined in accordance with generally accepted accounting principles, it is a commonly used tool for measuring a company's ability to service debt. Adjusted EBITDA is not an acceptable measure of liquidity, cash flow or operating income under generally accepted accounting principles and may not be comparable to similarly titled measures of other companies. 23 24 SELECTED OPERATING STATISTICS The following table sets forth selected operating statistics for the Company's consolidated hospitals for the periods and dates indicated.
YEAR ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ------- ------- ------- ACUTE CARE HOSPITALS(1): Total number of hospitals ................... 10 16 23 Licensed beds at end of period .............. 1,287 1,916 2,337 Patient days ................................ 246,203 311,144 328,331 Inpatient admissions ........................ 53,655 65,746 69,997 Average length of stay (days) ............... 4.6 4.7 4.7 Outpatient visits (excluding home health) ... 572,593 689,192 658,806 Home health visits .......................... 274,758 503,944 870,930 Deliveries .................................. 7,652 9,602 9,728 Surgery cases ............................... 34,431 46,902 48,488 Occupancy rate .............................. 38.6% 35.8% 36.9% Outpatient utilization (2) .................. 38.5% 37.6% 39.3% PSYCHIATRIC HOSPITALS(3): Total number of hospitals ................... -- -- 2 Licensed beds at end of period .............. -- -- 114 Patient days ................................ -- 4,099 19,554 Inpatient admissions ........................ -- 322 1,462 Average length of stay (days) ............... -- 12.7 13.4 Outpatient visits ........................... -- 4,736 16,998 Occupancy rate .............................. -- 25.0% 35.9% Outpatient utilization (2) .................. -- 18.3% 15.8%
- -------------------------------------------------------------------------------- (1) Includes the sold facilities through their respective dates of disposition and DHHS from January 1, 1998. (2) Gross Outpatient Revenue as a percent of Total Gross Patient Revenue. (3) Includes the LA Metro psychiatric facilities though disposition date. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The healthcare industry as a whole faces increasing uncertainty from governmental and private industry efforts to reform healthcare delivery and payment systems. As a result, the Company continues to experience significant changes on several fronts, including 1) a general reduction of payment rates by government and other payors, 2) an increasing shift in payor mix from traditional Medicare/Medicaid and indemnity payors to managed care and 3) increasing competition for patients and technological advances which require increased capital investments. The Company has taken steps to address these challenges, such as divesting of selected hospitals and certain unprofitable businesses, implementing cost control measures on a hospital-by-hospital basis, reducing the overall corporate cost structure, renegotiating payor contracts and service arrangements, actively recruiting physicians and expanding facilities and services in selected markets. The Company also actively monitors and analyzes the potential impact of proposed healthcare legislation to formulate its business strategies. However, the 24 25 Company cannot predict whether new healthcare legislation will be passed at the Federal or state level and what resulting response the Company may take. The Consolidated Financial Statements in Item 8 set forth certain data with respect to the financial position, results of operations and cash flows of the Company and should be read in conjunction with the following discussion and analysis. The 1999 Consolidated Financial Statements have been prepared on the basis of accounting principles applicable to going concerns and contemplate the realization of assets and the settlement of liabilities and commitments in the normal course of business. The financial statements do not include further adjustments, if any, reflecting the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of uncertainties discussed herein. The report of the Company's independent auditors, Ernst & Young, LLP, includes an explanatory paragraph for a going concern uncertainty. FORWARD-LOOKING STATEMENTS 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. All statements regarding the Company's expected future financial position, results of operations, cash flows, liquidity, financing plans, business strategy, budgets, projected costs and capital expenditures, competitive position, growth opportunities, plans and objectives of management for future operations and words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "may" and other similar expressions are forward-looking statements. Such forward-looking statements are inherently uncertain, and stockholders must recognize that actual results may differ materially from the Company's expectations as a result of a variety of factors, including, without limitation, those discussed below. Factors which may cause the Company's actual results in future periods to differ materially from forecast results include, but are not limited to: o Competition and general economic, demographic and business conditions, both nationally and in the regions in which the Company operates; o Existing government regulations and changes in legislative proposals for healthcare reform, including changes in Medicare and Medicaid reimbursement levels; o The ability to enter into managed care provider arrangements on acceptable terms; o Liabilities and other claims asserted against the Company; o The loss of any significant customer, including but not limited to managed care contracts; o The ability to attract and retain qualified personnel, including physicians; o The continued listing of the Company's common stock on the New York Stock Exchange; o The Company's ability to develop and consummate an acceptable and sustainable alternative financial structure, considering the Company's liquidity and limited financial resources; o The Company's ability to consummate acceptable financing arrangements, under reasonable terms, to replace its existing interim facility and off-balance sheet receivable financing agreement; and o The possibility that the Company may be forced to file for protection under Chapter 11 of the Federal Bankruptcy Code or that its creditors could file an involuntary petition seeking to place the Company in bankruptcy. The Company is generally not required to, and does not undertake to, update or revise its forward-looking statements. 25 26 ISSUES AFFECTING LIQUIDITY The Company incurred significant operating losses in 1999 and had a working capital deficit at December 31, 1999. These matters and certain developments described below have raised substantial doubt as to the Company's ability to continue as a going concern. On February 15, 2000, the Company did not make the interest payment of approximately $16.3 million on the Notes, which upon the expiration of a 30-day grace period on March 16, 2000, constituted an event of default under the Note indenture. The Notes represent unsecured obligations of PHC and are not guaranteed by any of the Company's subsidiaries; accordingly, the Note holders have no direct claim on the assets of any of the Company's hospital operating subsidiaries. Given the Company's financial condition and liquidity, the Company cannot repay in full its obligations under the Notes, nor does the Company have access to equity sources or other commitments necessary to refinance or otherwise satisfy in full its obligations under the Notes. The Company is currently engaged in negotiations with the Note holders to develop an alternative, sustainable capital structure for the Company. The Company has retained an investment banking firm and legal counsel to review its strategic alternatives. Considering the Company's limited financial resources, there can be no assurance that the Company will succeed in formulating an alternative capital structure acceptable to the Note holders, in which case the Note holders are entitled, at their discretion, to accelerate all principal and interest due on the Notes. Either as a result of negotiations with the Note holders--or if such negotiations fail--the Company could file for protection under Chapter 11 of the Bankruptcy Code or be subject to an involuntary petition. A reorganization would likely result in a significant dilution of the ownership interest of the existing holders of the Company's common stock. There can be no assurance that a bankruptcy proceeding would result in a reorganization of the Company rather than a liquidation. If a liquidation or a protracted reorganization were to occur, there is a substantial risk that there would be insufficient cash or property available for distribution to the Company's creditors and/or the holders of the Company's common stock. Relating to the matters discussed above, on March 15, 2000, a wholly-owned, second-tier subsidiary of PHC, PHC Finance, Inc., filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of Texas in Houston. The subsidiary, whose principal assets are several medical office buildings, does not own or operate any hospital facilities, and neither PHC nor any of the Company's hospital operating subsidiaries are guarantors for any obligations of PHC Finance, Inc. Given the Company's default on the Notes and the uncertainty surrounding the ultimate resolution of the Company's negotiations with its Note holders, the principal amount of the Notes and certain other debt obligations have been presented as current liabilities in the Company's Consolidated Balance Sheet at December 31, 1999, which has resulted in a working capital deficit of $309.2 million. The 1999 Consolidated Financial Statements included in Item 8 have been prepared assuming the Company will continue as a going concern and do not include further adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of the uncertainties described above. As the result of the default of interest payment on the Notes, the Company is also in default with certain provisions under the Commercial Paper program (see Item 8. Note 9) under which a wholly-owned subsidiary of the Company has sold $32.3 million of eligible receivables as of March 27, 2000. As a result of this default, the subsidiary is unable to sell additional receivables under the Commercial Paper program. On March 30, 2000, the Company received a $62.0 million commitment under the New Facility from a lending group which will replace the Company's Commercial Paper program and existing letters of credit outstanding. The Company anticipates that the outstanding letters of credit will be 26 27 secured by cash collateral held by the lenders. The New Facility will be used primarily to fund normal working capital of the Company's hospitals. The New Facility will be an obligation of certain of the Company's subsidiaries and will be secured by all patient accounts receivable of the Company's hospitals and a first lien on two of its hospitals. Accordingly, the New Facility will not be an obligation of PHC. The lender under the Company's current Commercial Paper program has agreed to extend the program until April 17, 2000 while the Company and the proposed lenders under the New Facility complete due diligence and documentation necessary for the New Facility. There can be no assurance that the Company will ultimately consummate the New Facility. The Company is in a highly leveraged financial position. Should the Company fail to consummate the New Facility, the Company would have no available credit lines and therefore would be required to finance its cash needs from operations. Furthermore, in the event the Commercial Paper program is not extended beyond April 17, 2000, a wind down of the program would commence with the Company's current lender retaining a significant portion of the Company's operating cash flows until all amounts outstanding under the Commercial Paper program are repaid in full. In the event of a wind down, operating cash flows would likely be insufficient to meet the Company's operational and capital expenditure needs. On October 12, 1999, the Company repaid all borrowings outstanding under its senior credit facilities of $223.5 million in conjunction with the sale of the Utah Facilities. Prior to repayment, the senior credit facilities provided total commitments of $255.0 million (see Item 8. Note 7). Concurrent with the repayment, most of the commitments under the facilities were permanently cancelled. The Company entered into an interim financing arrangement with one of its original bank lenders, which has reduced its original commitment under the senior bank credit agreement to $11.6 million. As of March 27, 2000, the Company had $11.6 million in outstanding letters of credit under its interim credit facility, all of which were fully secured by cash collateral held by the bank, and no outstanding borrowings. As the result of the default of interest payment on the Notes, the Company is also in default under its interim credit facility. The NYSE informed the Company that it remains below the NYSE's required minimum share price of $1 over a 30 trading-day period. Based on the Company's 1999 Consolidated Financial Statements in this Form 10-K, the Company no longer meets the NYSE minimum criteria for stockholders' equity of not less than $50 million. The Company is currently pursuing alternatives that include negotiating with the Note holders to develop an alternative, sustainable capital structure that it believes may enable the Company to regain compliance. There can be no assurance that such actions will be successful or that the Company's common stock will continue to be listed on a national securities exchange. If the Company's securities are delisted, the delisting would have a material adverse effect on the liquidity and trading price of the Company's securities. RESULTS OF OPERATIONS The Company previously segregated its hospitals into two operating segments: Core Markets and Non Core Markets. The Company designated certain hospitals as "Core Facilities" with the goal of expanding and further integrating the hospitals' presence in their respective markets. As the designation implies, the Core Facilities comprised the operational and financial core of the Company's business. "Non Core" Markets consisted of all other hospital operations owned by the Company, which were being evaluated for possible disposition. This designation was made in conjunction with the Company's efforts to reduce its debt through the disposition of certain hospitals, an objective that was largely accomplished with the disposition of the Utah operations in the fourth quarter of 1999 and the resulting repayment of all borrowings outstanding under the Company's senior credit facility. Accordingly, the Company ceased making the Core and Non Core distinction for its reportable segments. 27 28 The comparison of operating results to prior years is difficult given the numbers of divestitures, closures and acquisition by the Company in the affected periods. "Same Hospitals" as used in the following discussion, where appropriate, consist of acute care hospitals owned throughout both periods for which comparative operating results are presented. OPERATIONS DATA The following table summarizes, for the periods indicated, changes in selected operating percentages for the Company's facilities. The discussion that follows should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto included elsewhere herein.
YEAR ENDED DECEMBER 31, ------------------------- 1999 1998 1997 ----- ----- ----- Percentage of Net Revenue Net revenue ....................................... 100.0% 100.0% 100.0% ----- ----- ----- Salaries and benefits ............................. (42.4) (41.6) (41.2) Other operating expenses .......................... (41.3) (40.0) (40.8) Provision for bad debts ........................... (8.1) (6.4) (7.1) ----- ----- ----- Operating costs ................................... (91.8) (88.0) (89.1) ----- ----- ----- Operating margin .................................. 8.2 12.0 10.9 Capital costs (a) ................................. (17.4) (13.6) (11.8) Equity in earnings of DHHS ........................ -- -- 1.5 Impairment charges ................................ -- (0.2) (1.2) Unusual items ..................................... (0.8) 1.0 1.0 Gain on sale of facilities ........................ 15.0 1.0 -- Minority interests ................................ -- (0.5) (0.3) ----- ----- ----- Income (loss) from continuing operations before Income taxes and extraordinary loss ........... 5.0% (0.3)% 0.1% ===== ===== =====
- -------------------- (a) Includes interest, depreciation and amortization. YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998 Net revenue for year ended December 31, 1999, was $516.6 million, a decrease of $147.5 million, or 22.2%, from $664.1 million for the same period in 1998. The decline in net revenue is largely due to the sale of eight acute care hospitals in 1998 and the sale of Bledsoe, the Convalescent Hospitals, Senatobia and the Utah Facilities in 1999. Net revenue at "Same Hospitals" decreased by $8.4 million, or 2.3%, to $357.6 million for the year ended December 31, 1999, compared to $366.0 million in 1998. This decrease resulted primarily from an $8.0 million charge to net revenue in the fourth quarter to revise estimates of amounts due to the Company from managed care payors ($7.0 million) and from the Medicare/Medicaid programs ($1.0 million). The increase in managed care allowances reflects the impact of increased managed care penetration at several of the Company's hospitals, the effect of the increasing discounted fee structures demanded by the managed care payors and the improvement in information available which has allowed 28 29 the Company's to better estimate amounts due under managed care contracts. In response, management is currently reviewing all material managed care contracts and when permitted, either renegotiating or canceling contracts it deems unfavorable to the Company. The Company is also installing information systems at certain of it hospitals to improve management's ability to ensure that billing and collection practices accurately reflect negotiated rates. The trend of payors shifting to managed care plans has and may continue to adversely affect the Company's ability to grow net operating revenue and improve operating margins. The Company's "Same Hospitals" experienced a 3.1% increase in inpatient admissions from 37,288 in the year ended December 31, 1998 to 38,435 in the comparable period in 1999. Same Hospital patient days increased 0.7% from 188,889 in 1998 to 190,117 in 1999. The increase in admissions and patient days resulted from (i) an increase in the number of physicians and services at several of the Company's hospitals and (ii) increased volume generated from certain hospital benchmarking and service awareness programs implemented in 1998. Excluding home health visits, outpatient visits at "Same Hospitals" declined 2.9% from 316,397 in 1998 to 307,314 in 1999 due primarily to the consolidation and/or selective reduction of services at certain hospitals. Home health visits in "Same Hospitals" decreased 29.6% from 370,223 in 1998 to 260,689 in 1999 primarily due to the 1998 closure or sale of home health operations in response to the 1997 Budget Act. Operating expenses (salaries and benefits, other operating expenses and provision for bad debts), expressed as a percentage of net revenue, were 91.8% of net revenue in 1999 and 88.0% in 1998, and operating margins were 8.2% and 12.0%, respectively. Operating expenses in 1998 were favorably impacted by a $5.5 million reduction in general and medical professional liability costs. Additionally, operating expenses in 1999 were unfavorably impacted by a $2.9 million increase in bad debt expense at the Company's Same Hospitals, as discussed below, and a $4.7 million increase in workers compensation reserves. The fourth quarter charge for workers compensation was the result of revised actuarial estimates, which were negatively impacted by unfavorable claims experience. Substantially all of this charge related to prior years and approximately half of this charge was incurred at the sold/closed facilities. The aforementioned factors ($2.3 million of the workers compensation charge and all of the increase in bad debt expense) contributed to the decline in Same Hospitals operating margins. Operating expenses at the Company's Same Hospitals were 87.2% of net revenue in 1999 as compared to 84.2% in 1998, and operating margins were 12.8% and 15.8%, respectively. The Company believes that the increase in bad debt expense resulted from (i) the shift in payor mix from traditional Medicare and indemnity healthcare coverage, which has minimal bad debts, to managed care, (ii) a general trend in payment delays and denial of claims by managed care payors, which increased the allowance for doubtful accounts, (iii) the residual effect of the computer system conversion at certain facilities in the early part of the year and (iv) business office turnover at certain facilities. While the Company is unable to predict whether the current trend in bad debt expense will continue, the Company has undertaken a number of actions to mitigate the increase in bad debts. These actions include strengthening hospital business office operations, pursuing litigation on past due accounts, particularly with respect to certain managed care payors, and modifying admittance policies at selected hospitals. Interest expense decreased $1.6 million from $51.8 million in 1998 to $50.2 million in 1999, due to the repayment of all amounts outstanding under the senior credit facilities in October 1999, offset by increased borrowings under such facilities during the year. The increased borrowings were used primarily to fund facility expansion, Year 2000 expenditures and working capital. Depreciation and amortization expense increased $1.3 million from $38.3 million in 1998 to $39.6 million in 1999, primarily due to the acquisition of DHHS on July 1, 1998 and additions to property and equipment. This increase was partially offset by a decrease in depreciation and amortization from facilities sold in 1999. 29 30 Income before income taxes, discontinued operations and extraordinary charge was $25.8 million for the year ended December 31, 1999 and included a net gain on sale of facilities of $77.5 million and a net unusual charge of $4.2 million. The gain on sale of facilities resulted from the sale of the Utah Facilities, Senatobia and the Convalescent Hospitals, which was partially offset by a loss from the final working capital adjustment and prepayment discount on notes receivable related to the sale in 1998 of LA Metro (see Item 8. Note 4). The net unusual charge, as more fully discussed in Item 8. Note 3, consisted of (i) a $5.5 million corporate restructuring charge relating to employee termination costs, service contract cancellation and the write-down of certain deferred costs, leasehold improvements and redundant equipment, (ii) a $2.2 million charge associated with the execution of the Executive Agreement, (iii) a $2.0 million charge in the fourth quarter associated with litigation expenses and the write down to net realizable value of a note receivable and other assets, all of which were related to sold facilities, offset by (iv) a $5.5 million gain from the settlement of the Shareholder Litigation. Loss before income taxes, discontinued operations and extraordinary charge for the year ended December 31, 1998, was $1.9 million and reflected (i) an impairment charge of $1.4 million to write down certain long lived assets to fair value, (ii) minority interest of $4.1 million, attributable to DHHS offset by (iii) a net unusual gain of $6.6 million primarily from the settlement of a capitation contract ($7.5 million) partially offset by net charges from the execution of the Executive Agreement, the restructuring of home health operations, severances and settlement of litigation ($863,000) and (iv) a net gain of $6.8 million on sale of facilities. The Company recorded an income tax provision for income from continuing operations of $54.2 million in 1999 and $693,000 in 1998. The total provision for income taxes in 1999 includes an increase in income tax provision of $26.8 million from the recording of additional valuation allowance to reserve all remaining net deferred tax assets as of December 31, 1999. See more discussion in "Valuation Allowance on Deferred Tax Assets." Of the $26.8 million, $24.7 million was applied to increase the income tax provision on income from continuing operations and $2.1 million was applied to eliminate income tax benefits on losses from discontinued operations and an extraordinary loss. As a result, no income tax benefits have been recognized on the losses from discontinued operations and the extraordinary loss recorded in 1999. The income tax provision in 1999 differed from the statutory rate due to (i) the aforementioned increase in the valuation allowance (ii) nondeductible goodwill associated with the sale of the Utah Facilities, (iii) nondeductible expenses from the settlement of Shareholder Litigation and from goodwill amortization, which were partially offset by (iv) a non-taxable gain related to the execution of the Executive Agreement. Income tax expense in 1998 differed from the statutory rate due to nondeductible goodwill amortization and expenses related to the Shareholder Litigation, partially offset by a decrease in valuation allowance. In 1999, the Company recorded a loss from discontinued operations of $1.0 million (no tax benefits), or $0.02 per share, resulting from certain Medicare contractual adjustments related to the discontinued psychiatric operations sold in 1998. In 1998, the Company recorded a loss from discontinued operations of $2.4 million (net of tax of $1.7 million), or $0.04 per share, to reflect the settlement of litigation concerning alleged violations of certain Medicare rules. Net loss was $33.6 million, or $0.60 per diluted share, in 1999, compared to $6.2 million, or $0.11 per diluted share, in 1998. Net loss included an extraordinary charge for the write-off of deferred loan costs of $4.2 million (no tax benefits), or $0.07 per share, in 1999 and $1.2 million (net of tax benefits of $816,000), or $0.02 per share, in 1998, relating to the early extinguishment of debt in those respective years. Weighted average common and common equivalent shares outstanding were 56.0 million and 55.1 million in 1999 and 1998, respectively. The increase in common and common equivalent shares reflects the weighted average effect of shares of common stock issued in connection with the settlement of the Shareholder Litigation. 30 31 YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997 The "Same Hospitals" designation used in the following discussion includes all hospitals owned and operated by the Company as of December 31, 1998, for which full year comparative results are included the Company's 1998 and 1997 Consolidated Statements of Operations. Some of these hospitals were subsequently sold in 1999. Consequently, the following Same Hospital discussion does not necessarily reflect amounts reported in Item 8. Note 13 - Operating Segments. Net revenue for the year ended December 31, 1998, was $664.0 million, an increase of $4.8 million, or 0.7%, from $659.2 million for the same period of 1997. As the result of the acquisition of DHHS, 1998 net revenue included DHHS for the twelve months ended December 31, 1998. DHHS was accounted for under the equity method for the year ended December 31, 1997. Net revenue for 1998 increased $103.7 million from the acquisition of DHHS and was offset by a $48.5 million decrease in net revenue primarily attributable to the dispositions of the two hospitals located in Chico, California (the "Chico Hospitals"), the LA Metro Hospitals and the closure of 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 year ended December 31, 1998 was $472.8 million compared to $523.2 million in 1997, a decrease of $50.4 million, or 9.6%. The decrease in net revenue at the Company's Same Hospitals is due to (i) a decline in utilization and reimbursement rates for home health and other healthcare operations as a consequence of the 1997 Budget Act, (ii) the restructuring of home health operations at certain of the Company's hospitals in 1998, including in some cases the closing of such operations, (iii) an overall decline in volume at the hospitals and (iv) continued tightening of payment levels by managed care plans. The Company's Same Hospitals experienced a 6.1% decrease in inpatient admissions from 52,060 in 1997 to 48,903 in 1998. Same Hospital patient days decreased 7.4% from 233,011 in 1997 to 215,786 in 1998. The decline in volumes was principally related to the termination of unfavorable managed care contracts, the closure of skilled nursing units in response to revenue reductions under the 1997 Budget Act and an overall decline in volumes from the deterioration of the home health operations. Excluding home health visits, outpatient visits in Same Hospitals increased 2.8% from 565,369 in 1997 to 581,142 in 1998. Home health visits in Same Hospitals decreased 45.7% from 866,604 in 1997 to 470,595 in 1998 primarily due to stricter utilization standards under the 1997 Budget Act effective October 1, 1997, and the closure of home health operations at certain facilities. Operating expenses (salaries and benefits, other operating expenses and provision for bad debts) decreased $3.0 million from $587.6 million in 1997 to $584.6 million in 1998. The year ended December 31, 1998, included DHHS operating expenses of $80.3 million, which was offset by a $51.9 million decrease from closed/sold facilities and a $5.5 million reduction in general and medical professional liability costs as a result of revisions of actuarial estimates based on improvement in claim settlement experience. The balance of the reduction in operating expenses occurred primarily at the Company's Same Hospitals as a result of management's effort to reduce costs in response to reductions in net revenue. Operating expenses at the Company's Same Hospitals increased from 83.5% of net revenue in 1997 to 86.0% in 1998, and operating margins decreased from 16.5% to 14.0%, respectively. The deterioration in operating margins occurred primarily as a result of the aforementioned stricter utilization standards and reductions in reimbursement rates under the 1997 Budget Act. Although the 1997 Budget 31 32 Act became effective October 1, 1997, certain key provisions of the Act were not finalized until the latter part of 1998, particularly with respect to the Company's home health operations; and in response, the Company undertook a series of strategic actions in the fourth quarter of 1998 to lower its cost structure. These actions, which included a combination of staff and wage reductions and other cost cutting measures, did not keep pace with declines in net revenue. Interest expense increased $4.5 million from $47.4 million in 1997 to $51.9 million in 1998, primarily due to a net increase in outstanding indebtedness under the senior credit facilities resulting from the acquisition of DHHS, net of proceeds from the dispositions of the LA Metro and the Chico Hospitals. Additionally, approximately $2.7 million of interest expense incurred in 1997, which related to borrowings to finance the acquisition of PHC Regional, was charged to the loss contract accrual previously established at December 31, 1996. Accordingly, such amount was not reflected as interest expense in the 1997 Consolidated Statement of Operations. Depreciation and amortization expense increased $8.1 million to $38.3 million in 1998 from $30.2 million for the same period in 1997. An increase of $5.9 million in depreciation and amortization expense resulted from the acquisition of DHHS, which was accounted for under the equity method of accounting in 1997. The remainder of the increase is primarily related to current year additions to property and equipment. Loss before income taxes, discontinued operations and extraordinary charge for the year ended December 31, 1998 was $1.9 million and included $12.1 million, net of minority interest of $4.1 million, attributable to income from DHHS on a consolidated basis. Loss before income taxes, discontinued operations and extraordinary charge also included (i) an impairment charge of $1.4 million to write down certain long lived assets to fair value offset by (ii) $6.6 million of unusual items (including a $7.5 million gain from the settlement of a capitation contract dispute offset by a net charge of $863,000 resulting from the execution of the Executive Agreement, the restructuring of certain home health operations, severances and the settlement of a contract dispute and litigation) and (iii) a net gain of $6.8 million on sale of facilities. Income before income taxes and discontinued operations in 1997 was $656,000 and included (i) equity in earnings of DHHS of $9.8 million, (ii) a net unusual gain of $6.5 million from the reversal of $15.5 million related to a loss contract accrual offset by charges, which totaled $9.0 million relating to hospital closure, corporate reorganization and settlement of litigation and (iii) impairment charges of $7.8 million relating to the LA Metro hospitals. The Company recorded income tax expense of $693,000 on pre-tax loss of $1.9 million in 1998 and income tax expense of $1.8 million on pre-tax income of $656,000 in 1997. Income tax expense in 1998 differed from the U.S. statutory rate due to goodwill and nondeductible costs related to the Shareholder Litigation. These increases in the income tax provision were partially offset by the decrease in valuation allowance. Income tax expense in 1997 differed from the U.S. statutory rate due to nondeductible goodwill amortization. The Company recorded a loss from discontinued operations of $2.4 million (net of tax benefit 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 September 1996. During 1997, the Company recorded a loss on disposal of the discontinued psychiatric facilities of $5.2 million (net of tax benefits of $3.7 million), which consisted of an impairment charge of $1.9 32 33 million to reduce the psychiatric hospital assets to their estimated net realizable value and a charge of $3.3 million relating to outstanding litigation matters. Net loss for the year ended December 31, 1998 was $6.2 million, or $0.11 per diluted share, compared to net loss of $6.4 million, or $0.12 per diluted share, for the same period of 1997. Weighted average common and common equivalent shares outstanding increased from 54.9 million in 1997 to 55.1 million in 1998 due to the 1998 exercise of stock options and warrants. LIQUIDITY AND CAPITAL RESOURCES The introductory information to this Item as set forth in "Issues Affecting Liquidity" discusses the important issues affecting the Company's liquidity and capital resources. Net cash used in operating activities for the year ended December 31, 1999 was $43.5 million, compared to $5.3 million for the same period in 1998. The $38.2 million increase in cash used in operating activities resulted from (i) the pay down of the Commercial Paper program related to the sale of the Utah Facilities, (ii) cash collateral used to secure letters of credit outstanding under the interim credit facility, (iii) payments made in connection with the Executive Agreement, (iv) payments made to third-party intermediaries for amounts due under the Medicare/Medicaid programs and (v) 1999 losses from operations. Net cash provided from investing activities was $253.3 million during 1999, as compared to net cash used in investing activities of $50.3 million during 1998. The $303.6 million increase was primarily attributable to net cash received from the disposition of hospitals in 1999 of $282.1 million compared to net cash expenditures of $21.1 million in 1998 from the acquisition of DHHS net of proceeds from the disposition of hospitals. Net cash used in financing activities during 1999 was $199.1 million, compared to net cash provided by financing activities of $39.4 million during 1998. This decrease was due primarily from the repayment in 1999 of all amounts outstanding under the senior credit facilities. In connection with the sale of the Utah Facilities, Senatobia, the Convalescent Hospitals and Bledsoe, the Company reduced its long-term debt by $228.5 million, which included the repayment of all indebtedness under the senior credit facilities of $225.5 million and the assumption of $3.0 million of hospital debt assumed by a purchaser of the hospitals. The Company further reduced amounts of eligible receivables sold under the Commercial Paper program by $12.8 million with the net proceeds from the divestitures and eliminated approximately $7.8 million in annual facility lease commitments. On November 25, 1998, the Company and its former senior executives, Mr. Miller, Mr. VanDevender and Mr. Patterson (the "Senior Executives") executed the Executive Agreement superseding their existing employment contracts and certain other stock option and retirement agreements with the Company. Pursuant to the Executive Agreement, the Company paid the Senior Executives $4.6 million in April 1999. See Item 8. Note 15 for more discussion on the effect of the Executive Agreement on the Company's financial condition and results of operations. Capital expenditures during the last three years were financed primarily through additional borrowings and internally generated funds. Due to the liquidity issues previously discussed, there can be no assurance that the Company will have sufficient resources to finance its capital expenditure program in 2000. 33 34 YEAR 2000 COMPLIANCE The Company had implemented its plan to address possible exposures related to the impact of Year 2000 computer issues on its computer systems, its equipment and third parties with which the Company's systems interface. Since entering the year 2000 and passing the February leap year date, the Company has not experienced any significant adverse consequences from disruptions to its business nor is it aware of any significant Year 2000-related disruptions impacting its third party payors or vendors. The Company will continue to monitor its patient care and operation critical systems over the next several months but does not anticipate any significant impacts due to Year 2000 exposures from its internal systems as well as from third parties. The Company's total cost for addressing all Year 2000 issues was approximately $8.0 million, which included approximately $6.5 million of capital expenditures related to replacement systems and $1.5 million of expenses. LITIGATION SHAREHOLDER LITIGATION - In 1999, the global settlement of the Shareholder Litigation became effective. The following discussion is limited to the material terms of the settlement. More comprehensive discussions of the global settlement were made in the Company's previously filed 1998 Form 10-K and 1999 Form 10-Q's. In accordance with the terms of the global settlement, the Company paid $14.0 million, which was funded from insurance proceeds, to the class settlement fund for distribution to class members and issued 1.5 million shares of common stock for purposes of distribution to class members. Park Hospital GmbH (the "Former Majority Shareholder") also transferred 8.7 million shares of the Company's common stock to certain former Champion shareholders and 1.2 million shares of the Company's common stock for purposes of distribution to class members. In addition, the Company made a payment of $1.0 million in cash and issued 1.0 million shares of common stock to terminate a contract with Dr. Manfred G. Krukemeyer, who is the ultimate legal owner of the Former Majority Shareholder and a former Chairman of the Board of Directors of the Company (the "Former Chairman"). The settlement reduced the Company's existing and future obligations to certain former officers and directors and terminated options to purchase approximately 1.3 million shares of the Company's common stock at $0.01 per share ("Value Options") granted in connection with the Merger. The settlement modified the Executive Agreement with the Company's three former senior executives (Mr. Charles R. Miller, Mr. James G. VanDevender, and Mr. Ronald R. Patterson) and following the completion of such agreement in June 1999, Mr. Miller and Mr. Patterson resigned from the Company. Mr. VanDevender served as interim CEO effective July 1, 1999 until his resignation on February 29, 2000. The settlement also gave the Former Majority Shareholder and the former Champion shareholders, who could be deemed to be acting as a group under Section 13 (d) of the Securities Exchange Act of 1934, each the right to designate three members of the Company's Board of Directors. In connection with the settlement, the Company entered into a new shareholder agreement containing provisions governing restrictions on the Former Majority Shareholder's transfer of shares, limiting the Former Majority Shareholder's response to acquisition proposals, governing the composition of the Board of Directors and outlining the Former Majority Shareholder's registration rights with respect to its shares. Concurrently, the Company terminated a previously existing shareholder protection rights agreement, an anti-takeover device, and the shareholder agreement adopted at the time of the Merger. 34 35 As the result of the settlement, the Company, all class members, the derivative plaintiffs, the separately represented former Champion shareholders, the Former Majority Shareholder, the underwriter, and the affected current and former officers and directors provided mutual releases of all claims arising out of or related to the Merger and the related public offerings. All pending actions against all released parties were dismissed. Additionally, the Company, the separately represented Champion shareholders, and the members of the class have agreed to assign any claims they have against the Company's independent auditors to the Former Majority Shareholder. The settlement requires the Company to indemnify current and former officers and directors, the Former Majority Shareholder, and certain separately represented former Champion shareholders against (i) liability, costs and expenses arising from any Merger-related claims brought by current or former Company security holders who are not parties to the settlement or members of a class certified for settlement purposes and (ii) reasonable costs and expenses, excluding monetary sanctions, incurred in connection with any ongoing or future governmental investigation relating to the Merger and public offerings. OTHER LITIGATION - The Company is subject to claims and legal actions by patients and others in the ordinary course of business. The Company believes that all such claims and actions are either adequately covered by insurance or will not have a material adverse effect on the Company's financial condition, results of operations or liquidity. VALUATION ALLOWANCE ON DEFERRED TAX ASSETS The Company considers prudent and feasible tax planning strategies in assessing the need for a valuation allowance. As of December 31, 1998, the Company recorded a valuation allowance of $48.2 million based on its previously existing tax strategies, which assumed the utilization of net operating loss carryforwards to reduce estimated taxable gains generated from the sale of selected hospitals and no benefit related to future taxable income. The Company's tax planning strategies assumed proceeds from divestitures based on previously existing market conditions. As of December 31, 1999, a valuation allowance for the full amount of the net deferred tax asset was recorded due to issues affecting liquidity and related uncertainties discussed herein, which, if unfavorably resolved, will adversely affect the Company's future operations on a continuing basis. In the event that the Company is forced to file for protection under Chapter 11 of the Bankruptcy Code, the realization of the tax assets may be substantially and permanently impaired. The future realization of the deductible temporary differences and net operating loss carryforwards depends, among other things, on the Company's ability to develop and consummate an acceptable and sustainable financial structure and the existence of sufficient taxable income within the carryforward period. At December 31, 1999, the Company had net operating loss carryforwards of $136.7 million for U.S. Federal income tax purposes that will expire in varying amounts from 2010 to 2013, if not utilized. Additionally, U.S. Federal income tax law limits a corporation's ability to utilize net operating losses if it experiences an ownership change of greater than 50% over a three-year period. In the event of such a future ownership change, the Company's net operating loss carryforward may be subject to an annual limitation on its use. INDUSTRY OUTLOOK The general hospital industry in the United States and the Company's hospitals continue to have significant unused capacity, and thus there is substantial competition for patients. Inpatient utilization continues to be negatively affected by payor-required pre-admission authorization and by payor pressure to maximize outpatient and alternative healthcare delivery services for less acutely ill patients. Increased competition, admission constraints and payor pressure are expected to continue. 35 36 The ongoing challenge facing the Company and the healthcare industry as a whole is to continue to provide quality patient care in an environment of rising costs, strong competition for patients and a general reduction of reimbursement rates by both private and government payors. Because of national, state and private industry efforts to reform healthcare delivery and payment systems, the healthcare industry as a whole faces increased uncertainty. The Company is unable to predict whether any new healthcare legislation at the federal and/or state level will be passed in the future and what action it may take in response to such legislation, but it continues to monitor all proposed legislation and analyze its potential impact in order to formulate the Company's future business strategies. OTHER REGULATORY MATTER On March 9, 1998, the SEC entered a formal order authorizing a private investigation, In re Paracelsus Healthcare Corp., FW-2067. Pursuant to the formal order, the staff of the SEC's Fort Worth District Office is investigating the accounting and financial reporting issues that were the subject of the internal inquiry described in the Company's 1996 Form 10-K filed in April 1997. The Company is cooperating with the staff of the SEC. IMPACT OF INFLATION The healthcare industry is labor intensive. Wages and other expenses increase during periods of inflation and when shortages of qualified personnel in the marketplace occur. The Company has attempted to abate increases in other operating costs by increasing charges, expanding services and implementing cost control measures to curb increases in operating costs. The Company's ability to increase prices is limited by various Federal and state laws that establish payment limitations for hospital services rendered to Medicare and Medicaid patients and by other factors. The Company's ability to increase prices may also be affected by its need to remain competitive. There can be no assurance that the Company will be able to continue to offset such future cost increases. RECENT PRONOUNCEMENTS In 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which will require companies to recognize all derivatives on the balance sheet at fair value. In July 1999, the FASB issued Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which requires the adoption of SFAS 133 in fiscal years beginning after June 15, 2000. The Company expects SFAS No. 133 to have no material impact on the Company's financial position or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's only exposure to market risk is changes in the general level of U.S. interest rates. All of the Company's debt obligations of approximately $339.8 million as of December 31, 1999 (see Item 8. Notes 7 and 10), had fixed interest rates ranging from 6.51% to 10.5% and accordingly have no earnings exposure to changes in interest rates. The Company does not hold or issue derivative instruments for trading purposes and is not a party to any instruments with leverage features. 36 37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- Paracelsus Healthcare Corporation Consolidated Financial Statements: Report of Independent Auditors..................................................................... 39 Consolidated Balance Sheets - December 31, 1999 and 1998........................................... 40 Consolidated Statements of Operations - for the years ended December 31, 1999, 1998 And 1997...................................................................................... 42 Consolidated Statements of Stockholders' Equity - for the years ended December 31, 1999, 1998 and 1997........................................................................... 43 Consolidated Statements of Cash Flows - for the years ended December 31, 1999, 1998 and 1997................................................................................. 44 Notes to Consolidated Financial Statements......................................................... 46
37 38 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Paracelsus Healthcare Corporation We have audited the accompanying consolidated balance sheets of Paracelsus Healthcare Corporation as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the index at Item 14(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Paracelsus Healthcare Corporation at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2 to the consolidated financial statements, the Company incurred significant operating losses in 1999 and had a working capital deficiency at December 31, 1999. In addition, the Company is in default under its senior subordinated indenture agreement and certain other financing agreements. These conditions raise substantial doubt about the Company's ability to continue as a going concern. (Management's plans in regard to these matters are also described in Note 2.) The consolidated financial statements do not include adjustments, if any, to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties. /s/ Ernst & Young LLP ERNST & YOUNG LLP Houston, Texas March 30, 2000 38 39 PARACELSUS HEALTHCARE CORPORATION CONSOLIDATED BALANCE SHEETS ($ in 000's)
DECEMBER 31, ---------------------- 1999 1998 --------- --------- ASSETS Current assets: Cash and cash equivalents .................................... $ 22,723 $ 11,944 Restricted cash .............................................. 12,991 1,029 Accounts receivable, net of allowance for doubtful accounts: 1999- $27,553; 1998- $40,551 ................... 30,796 67,332 Supplies ..................................................... 8,655 12,172 Deferred income taxes (Note 6) ............................... -- 9,641 Refundable income taxes ...................................... 6,152 7,365 Prepaid expenses and other current assets .................... 14,212 19,386 --------- --------- Total current assets ...................................... 95,529 128,869 Property and equipment (Notes 1 and 8): Land and improvements ........................................ 14,704 31,783 Buildings and improvements ................................... 189,544 301,398 Equipment .................................................... 132,901 186,998 Construction in progress ..................................... 2,379 11,729 --------- --------- 339,528 531,908 Less: Accumulated depreciation and amortization ................... (113,052) (168,009) --------- --------- 226,476 363,899 Deferred income taxes (Note 6) .................................... -- 43,096 Goodwill, net of accumulated amortization: 1999 - $9,828; 1998 - $10,637 (Notes 1 and 4) ........................................ 87,684 136,994 Other assets ...................................................... 27,369 43,244 --------- --------- Total Assets ...................................................... $ 437,058 $ 716,102 ========= =========
39 40 PARACELSUS HEALTHCARE CORPORATION CONSOLIDATED BALANCE SHEETS ($ in 000's)
DECEMBER 31, ---------------------- 1999 1998 --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ................................................... $ 35,563 $ 41,301 Due to government third parties .................................... -- 5,950 Accrued liabilities: Accrued salaries and benefits .................................. 8,877 15,896 Accrued interest ............................................... 12,598 13,670 Other .......................................................... 11,549 23,242 Deferred income taxes .............................................. -- -- Long-term debt due within one year ................................. 654 6,284 Long-term debt in default classified as current (Note 7) ........... 335,445 -- --------- --------- Total current liabilities ...................................... 404,686 106,343 Long-term debt (Note 7) ............................................. 3,685 533,048 Other long-term liabilities (Notes 12 and 14) ....................... 23,490 42,370 Commitments and contingencies (Note 14) Stockholders' equity (Note 11): Preferred stock, $.01 par value per share, 25,000,000 shares authorized, none outstanding ................................ -- -- Common stock, no stated value, 150,000,000 shares authorized, 57,667,721 shares outstanding in 1999 and 55,118,330 in 1998 ......................................... 215,761 222,977 Additional paid-in capital ..................................... 12,105 390 Accumulated deficit ............................................ (222,669) (189,026) --------- --------- Total stockholders' equity ................................. 5,197 34,341 --------- --------- Total Liabilities and Stockholders' Equity .......................... $ 437,058 $ 716,102 ========= =========
See accompanying notes. 40 41 PARACELSUS HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS ($ in 000's, except per share data)
YEAR ENDED DECEMBER 31, ----------------------------------- 1999 1998 1997 --------- --------- --------- Net revenue ................................................ $ 516,537 $ 664,058 $ 659,219 Costs and expenses: Salaries and benefits ................................... 219,012 276,200 271,300 Other operating expenses ................................ 213,404 265,735 269,653 Provision for bad debts ................................. 41,692 42,659 46,606 Interest ................................................ 50,235 51,859 47,372 Depreciation and amortization ........................... 39,595 38,330 30,179 Equity in earnings of Dakota Heartland Health System (Note 4) ................................. -- -- (9,794) Impairment charges (Note 3) ............................. -- 1,417 7,782 Unusual items (Note 3) .................................. 4,248 (6,637) (6,531) --------- --------- --------- Total costs and expenses ................................... 568,186 669,563 656,567 --------- --------- --------- Income (loss) from continuing operations before gain on sale of facilities, minority interests, income taxes and extraordinary loss ................................. (51,649) (5,505) 2,652 Gain on sale of facilities (Note 4) ........................ 77,454 6,825 -- Minority interests ......................................... (54) (3,180) (1,996) --------- --------- --------- Income (loss) from continuing operations before income taxes and extraordinary loss ........................... 25,751 (1,860) 656 Provision for income taxes (Note 6) ........................ 54,207 693 1,812 --------- --------- --------- Loss from continuing operations before extraordinary loss ..................................... (28,456) (2,553) (1,156) Discontinued operations (Note 5): Loss on disposal of discontinued psychiatric hospitals ........................................... (1,019) (2,424) (5,243) --------- --------- --------- Loss before extraordinary loss ............................. (29,475) (4,977) (6,399) Extraordinary loss from early extinguishment of debt (Note 7) ........................................... (4,168) (1,175) -- --------- --------- --------- Net loss ................................................... $ (33,643) $ (6,152) $ (6,399) ========= ========= ========= Net loss per share - basic and assuming dilution: Continuing operations ................................. $ (0.51) $ (0.05) $ (0.02) Discontinued operations ............................... (0.02) (0.04) (0.10) Extraordinary loss .................................... (0.07) (0.02) -- --------- --------- --------- Net loss per share ......................................... $ (0.60) $ (0.11) $ (0.12) ========= ========= =========
See accompanying notes. 41 42 PARACELSUS HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ($ and shares in 000's)
OTHER COMMON STOCK ADDITIONAL COMPREHEN- ----------------------- PAID-IN SIVE INCOME ACCUMULATED SHARES AMOUNT CAPITAL (LOSS) DEFICIT TOTAL ------- --------- ---------- ----------- ------------ -------- Balance at December 31, 1996 ........... 54,814 $ 224,472 $ 390 $ 100 $(176,475) $ 48,487 Exercise of stock options .............. 280 3 -- -- -- 3 Change in unrealized gains on marketable securities, net of taxes ............................... -- -- -- (88) -- (88) Net loss ............................... -- -- -- -- (6,399) (6,399) ----- --------- -------- Comprehensive loss ..................... (88) (6,399) (6,487) ------- --------- -------- ----- --------- -------- Balance at December 31, 1997 ........... 55,094 224,475 390 12 (182,874) 42,003 Exercise of stock options .............. 17 61 -- -- -- 61 Exercise of warrants ................... 7 7 -- -- -- 7 Forfeiture of value options (Note 15)... -- (1,566) -- -- -- (1,566) Change in unrealized gains on marketable securities, net of taxes ............................... -- -- -- (12) -- (12) Net loss ............................... -- -- -- -- (6,152) (6,152) ----- --------- -------- Comprehensive loss ..................... (12) (6,152) (6,164) ------- --------- -------- ----- --------- -------- Balance at December 31, 1998 ........... 55,118 222,977 390 -- (189,026) 34,341 Common stock issued/ transferred in connection with the settlement of Shareholder Litigation (Notes 3 and 11) ......... 1,549 1,840 11,715 -- -- 13,555 Issuance of common stock in connection with termination of certain advisory and service agreement (Notes 3 and 11) .......... 1,000 1,188 -- -- -- 1,188 Forfeiture of value options (Notes 3 and 11) .................... (10,244) -- -- -- (10,244) Net loss ............................... -- -- -- -- (33,643) (33,643) ----- --------- -------- Comprehensive loss ..................... -- (33,643) (33,643) ------ --------- -------- ----- --------- -------- Balance at December 31, 1999 ........... 57,667 $ 215,761 $ 12,105 $ -- $(222,669) $ 5,197 ======= ========= ======== ===== ========= ========
See accompanying notes. 42 43 PARACELSUS HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in 000's)
YEAR ENDED DECEMBER 31, --------------------------------------- 1999 1998 1997 --------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ................................................................... $ (33,643) $ (6,152) $ (6,399) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization ............................................. 39,595 38,330 30,179 Impairment charges ........................................................ -- 1,417 7,782 Unusual items ............................................................. 4,248 (6,637) (6,531) Disposal loss on discontinued operations .................................. 1,019 2,424 5,243 Gain on sale of facilities ................................................ (77,454) (6,825) -- Deferred income taxes ..................................................... 52,737 609 (4,016) Extraordinary loss ........................................................ 4,168 1,175 -- Minority interests ........................................................ 54 3,180 1,960 Changes in operating assets and liabilities, net of effects of acquisitions and divestitures: Accounts receivable .................................................... 1,274 17,363 (5,988) Federal income tax refunds, net ........................................ 1,213 333 24,077 Supplies, prepaid expenses and other current assets .................... (5,834) 1,928 (10,203) Accounts payable and other accrued liabilities ......................... (30,846) (52,402) (32,109) --------- -------- -------- Net cash provided by (used in) operating activities ........................ (43,469) (5,257) 3,995 --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Sale of marketable securities .............................................. -- 2,145 19,967 Acquisitions of facilities, net of cash acquired ........................... -- (59,278) -- Proceeds from disposal of facilities ....................................... 282,050 38,219 12,201 Additions to property and equipment, net ................................... (29,203) (21,965) (16,524) Increase (decrease) in minority interests .................................. 509 (4,355) 291 (Increase) decrease in other assets ........................................ (49) (5,106) (5,945) --------- -------- -------- Net cash provided by (used in) investing activities ........................ 253,307 (50,340) 9,990 --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under Revolving Credit Facility ................................. 43,100 84,528 38,000 Repayments under Revolving Credit Facility ................................. (126,382) (35,485) (34,593) Repayments of debt ......................................................... (115,777) (5,759) (5,388) Deferred financing costs ................................................... -- (3,984) (1,602) Sale of common stock, net .................................................. -- 68 -- --------- -------- -------- Net cash provided by (used in) financing activities ........................ (199,059) 39,368 (3,583) --------- -------- -------- Increase (decrease) in cash and cash equivalents ........................... 10,779 (16,229) 10,402 Cash and cash equivalents at beginning of year ............................. 11,944 28,173 17,771 --------- -------- -------- Cash and cash equivalents at end of year ................................... $ 22,723 $ 11,944 $ 28,173 ========= ======== ========
See accompanying notes. 43 44 PARACELSUS HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in 000's) Supplemental schedule of noncash investing and financing activities:
YEAR ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 -------- -------- ------- Settlement of Shareholder Litigation (Note 3): Issuance of common stock ............................... $ 3,028 $ -- $ -- Forfeitures of Value Options ........................... (10,244) -- -- Common stock contributed by the Former Majority Shareholder ............................................ 11,715 -- -- -------- -------- ---- $ 4,499 $ -- $ -- ======== ======== ==== Details of businesses acquired in purchase transactions: Fair value of assets acquired .......................... $ -- $ 71,217 $ -- Liabilities assumed .................................... -- (11,939) -- Stock and stock options issued ......................... -- -- -- -------- -------- ---- Cash paid for acquisitions ................................. $ -- $ 59,278 $ -- ======== ======== ==== Notes receivable from sale of hospitals .................... $ 7,304 $ 13,698 $ -- ======== ======== ==== Debt assumed by purchaser of hospitals ..................... $ 2,952 $ 3,239 $ -- ======== ======== ==== Capital lease obligations .................................. $ 4,018 $ 1,653 $915 ======== ======== ====
See accompanying notes. 44 45 PARACELSUS HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION - Paracelsus Healthcare Corporation ("PHC") was incorporated in November 1980 for the principal purpose of owning and operating acute care and related healthcare businesses in selected markets. PHC and its subsidiaries are collectively referred to herein as the "Company". Prior to August 16, 1996, the Company was wholly owned by Park Hospital GmbH (the "Former Majority Shareholder"), a German Corporation wholly owned by Dr. Manfred G. Krukemeyer, the Company's former Chairman of the Board of Directors, (the "Former Chairman"). On August 16, 1996, the Company acquired Champion Healthcare Corporation ("Champion") (the "Merger") and completed an initial public equity offering. The results of Champion have been included in the operations of the Company since August 16, 1996. As of December 31, 1999, the Company operated 10 hospitals with 1,287 licensed beds in seven states. BASIS OF PRESENTATION - Certain reclassifications to the prior years' financial statements have been made to conform with the current year presentation. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its wholly-owned or majority owned subsidiaries and partnerships. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliates, of which the Company owns more than 20% but not in excess of 50%, are recorded on the equity method. Minority interests represent income allocated to the minority partners' investment. USE OF ESTIMATES - 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. CASH EQUIVALENTS - The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. RESTRICTED CASH - The Company had restricted cash of $13.0 million and $1.0 million at December 31, 1999 and 1998, respectively, as collateral for outstanding letters of credit and for payments of fees and interest related to the commercial paper financing program. SUPPLIES - Supplies, principally medical supplies, are stated at the lower of cost (first-in, first-out basis) or market. PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the land improvements (5-25 years), buildings and improvements (5-40 years) and equipment (3-20 years). Leaseholds are amortized on a straight-line basis over the lesser of the terms of the respective leases or their estimated useful lives. Expenditures for renovations and other significant improvements are capitalized; however, maintenance and repairs, which do not improve or extend the useful lives of the respective assets, are charged to operations as incurred. Depreciation expense was $28.9 million, $27.7 million and $22.1 million for the years ended December 31, 1999, 1998 and 1997, respectively. 45 46 GOODWILL AND OTHER LONG-TERM ASSETS - Goodwill, representing costs in excess of net assets acquired, is amortized on a straight-line basis over a period of 20 to 35 years. Debt issuance costs are amortized on a straight-line basis (which approximates the interest method) over the term of the related debt. Amortization expense was $10.7 million, $10.6 million and $8.1 million for the years ended December 31, 1999, 1998 and 1997, respectively. The Company regularly reviews the carrying value of goodwill and other long-term assets in relation to the operating performance and future undiscounted cash flows of the underlying hospitals. The Company records to expense on a current basis any diminution in values of goodwill and other long-term assets based on the difference between the sum of the future discounted cash flows and net book value. NET REVENUE - Net revenue includes amounts estimated by management to be reimbursable by Medicare under the Prospective Payment System and by Medicare and Medicaid programs under the provisions of cost-reimbursement and other payment formulas. Payments for services rendered to patients covered by such programs are generally less than billed charges. Deductions from revenue are made to reduce the charges to these patients to estimated receipts based on each program's principles of payment/reimbursement. Final settlements under these programs are subject to administrative review and audit by third parties. Approximately 48.5%, 53.6% and 56.9% of gross patient revenue for the years ended December 31, 1999, 1998 and 1997, respectively, related to services rendered to patients covered by Medicare and Medicaid programs. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any material pending or threatened investigations involving allegations of potential wrongdoing. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties and exclusion from the Medicare and Medicaid programs. In the ordinary course of business, the Company renders services free of charge to patients who are financially unable to pay for hospital care. The value of these services rendered is not material to the Company's consolidated results of operations. INCOME TAXES - The Company records its income taxes under the liability method. Under this method, deferred income tax assets and liabilities are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. 46 47 NET LOSS PER SHARE - The following table (in 000's except per share data) sets forth the computation of basic and diluted loss per share from continuing operations as required by Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share."
1999 1998 1997 --------- --------- --------- Numerator (a): Loss from continuing operations before extraordinary loss ................... $ (28,456) $ (2,553) $ (1,156) Loss on discontinued operations ............... (1,019) (2,424) (5,243) Extraordinary charge .......................... (4,168) (1,175) -- --------- --------- --------- Net loss ...................................... $ (33,643) $ (6,152) $ (6,399) ========= ========= ========= Denominator: Weighted average shares used for basic Earnings per share ......................... 55,957 55,108 54,946 Effect of dilutive securities: Employee stock options ...................... -- -- -- --------- --------- --------- Dilutive potential common shares .............. -- -- -- --------- --------- --------- Shares used for diluted earnings per share ...... 55,957 55,108 54,946 ========= ========= ========= Loss per share - basic and assuming dilution: Loss from continuing operations before extraordinary loss ................... $ (0.51) $ (0.05) $ (0.02) Loss on discontinued operations ............... (0.02) (0.04) (0.10) Extraordinary charge .......................... (0.07) (0.02) -- --------- --------- --------- Net loss ...................................... $ (0.60) $ (0.11) $ (0.12) ========= ========= =========
- ----------------------------------- (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 2,231,403 shares of the Company's common stock at a weighted average exercise price of $4.17 per share and warrants to purchase 414,690 shares at a weighted average exercise price of $9.00 per share were outstanding during the year ended December 31, 1999, 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. EMPLOYEE STOCK OPTIONS - The Company has elected to continue following the existing accounting rules under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" in accounting for its employee stock options. See Note 11 for certain pro forma disclosures required under SFAS No. 123, "Accounting for Stock Issued to Employees." ACCOUNTING PRONOUNCEMENTS - Beginning in 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components. Comprehensive income is defined as the change in net assets of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those from investments by owners and distributions to owners. The adoption of SFAS 130 had no material impact on the Company's stockholders' equity or net loss in each of the years presented. 47 48 In March and in April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued two Statements of Position ("SOPs") that are effective for financial statements for fiscal years beginning after December 15, 1998. SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," provides guidance on the circumstances under which the costs of certain computer software should be capitalized and/or expensed. SOP 98-5, "Reporting on the Costs of Start-Up Activities," requires such costs to be expensed as incurred instead of capitalized and amortized. The Company's adoption of the SOPs, effective January 1, 1999, did not have a material effect on its results of operations. NOTE 2. ISSUES AFFECTING LIQUIDITY The Company incurred significant operating losses in 1999 and had a working capital deficit at December 31, 1999. These matters and certain developments described below have raised substantial doubt as to the Company's ability to continue operations as a going concern. Accordingly, the accompanying 1999 Consolidated Financial Statements have been prepared on the basis of accounting principles applicable to going concerns and contemplate the realization of assets and the settlement of liabilities and commitments in the normal course of business. The financial statements do not include further adjustments, if any, reflecting the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties. On February 15, 2000, the Company did not make the interest payment of approximately $16.3 million due on the Company's $325.0 million 10% Senior Subordinated Notes (the "Notes") due 2006, which upon the expiration of a 30-day grace period on March 16, 2000, constituted an event of default under the Note indenture. The Notes represent unsecured obligations of PHC and are not guaranteed by any of the Company's subsidiaries; accordingly, the Note holders have no direct claim on the assets of any of the Company's hospital operating subsidiaries. Given the Company's financial condition and liquidity, the Company cannot repay in full its obligations under the Notes, nor does the Company have access to equity sources or other commitments necessary to refinance or otherwise satisfy in full its obligations under the Notes. The Company is currently engaged in negotiations with the Note holders to develop an alternative, sustainable capital structure for the Company. The Company has retained an investment banking firm and legal counsel to review its strategic alternatives. Considering the Company's limited financial resources, there can be no assurance that the Company will succeed in formulating an alternative capital structure acceptable to the Note holders, in which case the Note holders are entitled, at their discretion, to accelerate all principal and interest due on the Notes. Either as a result of negotiations with the Note holders--or if such negotiations fail--the Company could file for protection under Chapter 11 of the Bankruptcy Code or be subject to an involuntary petition. A reorganization would likely result in a significant dilution of the ownership interest of the existing holders of the Company's common stock. There can be no assurance that a bankruptcy proceeding would result in a reorganization of the Company rather than a liquidation. If a liquidation or a protracted reorganization were to occur, there is a substantial risk that there would be insufficient cash or property available for distribution to the Company's creditors and/or the holders of the Company's common stock. Relating to the matters discussed above, on March 15, 2000, a wholly-owned, second-tier subsidiary of PHC, PHC Finance, Inc., filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of Texas in Houston. The subsidiary, whose principal assets are several medical office buildings, does not own or operate any hospital facilities, and neither PHC nor any of the Company's hospital operating subsidiaries are guarantors for any obligations of PHC Finance, Inc. Given the Company's default on the Notes and the uncertainty surrounding the ultimate resolution of the Company's negotiations with its Note holders, the principal amount of the Notes and certain other debt obligations have been presented as current liabilities in the Company's Consolidated Balance Sheet at December 31, 1999, which has resulted in a working capital deficit of $309.2 million. 48 49 As the result of the default of interest payment on the Notes, the Company is also in default with certain provisions under its off-balance sheet receivable financing agreement (the "Commercial Paper" program) (see Note 9) under which a wholly-owned subsidiary of the Company has sold $32.3 million of eligible receivables as of March 27, 2000. As a result of this default, the subsidiary is unable to sell additional receivables under the Commercial Paper program. On March 30, 2000, the Company received a commitment for a $62.0 million secured financing facility (the "New Facility") from a lending group which will replace the Company's Commercial Paper program and existing letters of credit outstanding. The Company anticipates that the outstanding letters of credit will be secured by cash collateral held by the lenders. The New Facility will be used primarily to fund normal working capital of the Company's hospitals. The New Facility will be an obligation of certain of the Company's subsidiaries and will be secured by all patient accounts receivable of the Company's hospitals and a first lien on two of its hospitals. Accordingly, the New Facility will not be an obligation of PHC. The lender under the Company's current Commercial Paper program has agreed to extend the program until April 17, 2000, while the Company and the proposed lenders under the New Facility complete due diligence and documentation necessary for the New Facility. There can be no assurance that the Company will ultimately consummate the New Facility. The Company is in a highly leveraged financial position. Should the Company fail to consummate the New Facility, the Company would have no available credit lines and therefore would be required to finance its cash needs from operations. Furthermore, in the event the Commercial Paper program is not extended beyond April 17, 2000, a wind down of the program would commence with the Company's current lender retaining a significant portion of the Company's operating cash flows until all amounts outstanding under the Commercial Paper program are repaid in full. In the event of a wind down, operating cash flows would likely be insufficient to meet the Company's operational and capital expenditure needs. On October 12, 1999, the Company repaid all borrowings outstanding under its senior credit facilities of $223.5 million in conjunction with the sale of its Utah operations. Prior to repayment, the senior credit facilities provided total commitments of $255.0 million (see Note 7). Concurrent with the repayment, most of the commitments under the facilities were permanently cancelled. The Company entered into an interim financing arrangement with one of its original bank lenders, which has reduced its original commitment under the senior bank credit agreement to $11.6 million. As of March 27, 2000, the Company had $11.6 million in outstanding letters of credit under its interim credit facility, all of which were fully secured by cash collateral held by the lender, and no outstanding borrowings. As the result of the default of interest payment on the Notes, the Company is also in default under its interim credit facility. NOTE 3. IMPAIRMENT CHARGES AND UNUSUAL ITEMS UNUSUAL ITEMS - In 1999, the Company recorded a net unusual charge of $4.2 million, which included (i) a $2.2 million net charge associated with the execution of a senior executive agreement (the "Executive Agreement") with certain former officers (the "Senior Executives") of the Company, see Note 15, (ii) a $5.5 million corporate restructuring charge, discussed below, (iii) a $2.0 million charge in the fourth quarter associated with litigation expenses and the write down to net realizable value of a note receivable and other assets, all of which were related to sold facilities offset by (iv) a net gain of $5.5 million related to the settlement of litigation (the "Shareholder Litigation") as discussed below. 49 50 The restructuring charge was recorded in June 1999 as a result of the Company's efforts to further reduce corporate overhead through the consolidation and/or elimination of various corporate functions and contracts and a reduction of corporate office space under lease. Such charge included $2.2 million for employee termination costs, $1.3 million for the cancellation of certain lease and maintenance contracts and $2.0 million for the write-down of certain deferred costs, leasehold improvements and redundant equipment. Costs totaling $1.5 million, which primarily related to the cancellation of a service contract, remained in accrued expenses in the accompanying Consolidated Balance Sheet as of December 31, 1999. In September 1999, the global settlement of the putative class and derivative actions, collectively the Shareholder Litigation, arising out of the Merger and two related public offerings became effective. In accordance with the terms of the global settlement, the Company paid $14.0 million, which was funded from insurance proceeds, to the class settlement fund for distribution to class members and issued 1.5 million shares of common stock for purposes of distribution to class members. The Former Majority Shareholder also transferred 8.7 million shares of the Company's common stock to certain former Champion shareholders and 1.2 million shares of the Company's common stock for purposes of distribution to class members. In addition, the Company made a payment of $1.0 million in cash and issued 1.0 million shares of common stock to the Former Chairman to terminate a service and advisory contract with him. With respect to the issuance/transfer of the Company's common stock, the values assigned to the shares issued/transferred were determined based on the quoted market value at the time global settlement was executed. The settlement reduced the Company's existing and future obligations to certain former officers and directors and terminated options, granted in connection with the Merger, to purchase the Company's common stock of approximately 1.4 million shares at $0.01 per share ("Value Options") and 2.8 million shares at $8.50 per share ("Market Options"). The Company, all class members, the derivative plaintiffs, the separately represented former Champion shareholders, the Former Majority Shareholder, the underwriter, and the affected current and former officers and directors provided mutual releases of all claims arising out of or related to the Merger and the related public offerings. During 1998, the Company recorded unusual items of $6.6 million consisting primarily of (i) a gain of $7.5 million resulting from the settlement with PacifiCare of Utah ("PacifiCare") regarding a dispute over administration of a 1996 capitation agreement offset by (ii) a net charge of $863,000 resulting from the execution of the Executive Agreement, the restructuring of certain home health operations, severances and the settlement of a contract dispute and litigation. During 1997, the Company recorded unusual items totaling $6.5 million, consisting of (i) a reduction of $15.5 million in the loss contract accrued at PHC Regional Hospital and Medical Center ("PHC Regional") associated with a 1996 capitation agreement, offset by charges of (ii) $3.5 million relating to the closure of PHC Regional in June 1997, (iii) $3.0 million for settlement costs associated with a lawsuit and (iv) $2.5 million for a corporate reorganization completed in May 1997. Such charges consisted primarily of employee severance and related costs, and to a lesser extent, certain other contract termination costs. The $15.5 million reduction in the loss contract and $3.0 million charge for settlement costs were recorded in the fourth quarter of 1997. IMPAIRMENT CHARGES - During the fourth quarter of 1998, the Company recorded an impairment charge of $1.4 million on two of its facilities in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of," to reduce the book value of these facilities to their estimated fair value. The charge occurred as the result of the deterioration of the home health operations at these facilities. 50 51 During the fourth quarter of 1997, the Company recorded an impairment charge of $7.8 million on certain of its Los Angeles metropolitan hospitals ("LA Metro") held for sale to reduce the book value of those assets to their estimated fair value based upon the latest available offers received from third party purchasers. On September 30, 1998, the Company sold substantially all the assets of the LA Metro hospitals. NOTE 4. ACQUISITIONS, DISPOSITIONS AND CLOSURES OF HOSPITALS Acquisitions On July 1, 1998, the Company completed the purchase of Dakota Medical Foundation's 50% partnership interest in a general partnership operating as DHHS 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 the change in control of DHHS, 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 audited consolidated financial statements of DHHS as of and for the year ended December 31, 1997 are included in the Company's 1997 Form 10-K. The Company's results of operations for the year ended December 31, 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 allocation of purchase price based on the results of a third-party appraisal. Based on this appraisal, the Company recorded goodwill of $24.7 million, which is being amortized on a straight-line basis over an estimated useful life of 20 years. Dispositions and Closures Pursuant to a recapitalization agreement completed on October 8, 1999, the Company sold 93.9% of the outstanding common stock of a wholly owned subsidiary ("HoldCo") to JLL Healthcare, LLC, an affiliate of the private equity firm of Joseph Littlejohn & Levy, Inc., for $280.0 million in cash, inclusive of working capital. The Company retained a minority interest in the outstanding common stock of HoldCo, which owned substantially all of the assets of five hospitals, with 640 licensed beds, and related facilities located in the Salt Lake City area (the "Utah Facilities"). Subsequent to the closing of the recapitalization agreement, IASIS Healthcare Corporation, a Tennessee corporation, was merged with and into a wholly owned subsidiary of HoldCo, with the HoldCo subsidiary as the surviving entity. Following the Merger, HoldCo changed its name to IASIS Healthcare Corporation, in which the Company retains a 5.8% minority interest. The recapitalization agreement was arrived at through an arms length negotiation. Net cash proceeds were used to eliminate all indebtedness then outstanding under the Company's senior credit facilities totaling $223.5 million and to reduce borrowings under the Commercial Paper program by $12.8 million. The Company also eliminated $7.8 million in annual operating lease payments at one of the Utah Facilities. The Company recorded a pretax gain of approximately $77.8 million, net of allocated goodwill of $43.1 million, on the sale of the Utah Facilities. On September 30, 1999, the Company completed the sale of the stock of Paracelsus Senatobia Community, Inc. ("Senatobia"), which owned and operated a 76-bed acute care hospital located in Mississippi. The sales price of approximately $4.7 million, which included the sale of net working capital, was paid by a combination of $100,000 in cash, $1.6 million in second lien promissory notes, 51 52 and the assumption by the buyer of approximately $3.0 million in capital lease obligations and related lease guaranty payments. The Company recorded a pretax gain of approximately $2.0 million on the sale of Senatobia. Effective June 30, 1999, the Company sold substantially all of the assets of four skilled nursing facilities (collectively, the "Convalescent Hospitals"). The facilities had 232 licensed beds. The sales price of approximately $6.9 million, which excluded net working capital, was paid by a combination of $3.0 million in cash and a $3.9 million second lien promissory note, which is subject to prepayment discounts. In connection with the sale, the Company paid $1.0 million to terminate a lease agreement at one of the facilities. The Company recorded a pretax gain of approximately $1.3 million on the disposition. Effective March 31, 1999, the Company sold the stock of Paracelsus Bledsoe County Hospital, Inc. ("Bledsoe"), which operated a 32 licensed bed facility located in Tennessee. The sales price of approximately $2.2 million, including working capital, was paid by a combination of $100,000 in cash and the issuance by the buyer of $2.1 million in promissory notes. The notes are secured by all outstanding common stock and assets of Bledsoe. The Company recorded no material gain or loss on the Bledsoe disposition. On December 29, 1998, the Company terminated the lease and closed Cumberland River Hospital South, a 41-bed acute care facility in Gainesboro, Tennessee. The closure had no significant impact on the Company's financial position or results of operations. On September 30, 1998, the Company completed the sale of substantially all of the assets of the eight LA Metro hospitals (527 licensed beds and one previously closed hospital). The purchase price of approximately $33.7 million, which included the purchase of net working capital, 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. In June 1999, the Company recorded a loss of $3.6 million in connection with the sale of LA Metro. The charge resulted from the final settlement of working capital and the recognition of a prepayment discount on certain promissory notes, which were repaid in full during the second quarter of 1999. 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 recorded a pretax gain of $7.1 million on the disposition. In June 1997, the Company closed PHC Regional as a result of continuing losses under the capitation agreement with PacifiCare. The Company recorded unusual charges of $3.5 million relating to the closure of PHC Regional. On April 28, 1997, the Company completed the sale of two psychiatric facilities, the 149-bed Lakeland Regional Hospital in Springfield, Missouri and the 70-bed Crossroads Regional Hospital in Alexandria, Louisiana. No gain or loss was recognized in connection with this divestiture. 52 53 Unaudited Pro Forma Financial Data The following unaudited pro forma financial information for the years ended December 31, 1999 and 1998 (dollars in thousands, except per share amounts) assumes the above acquisition and dispositions occurred on January 1, 1998. Accordingly, the pro forma information excludes the net gain on the disposition of hospitals of $77.5 million and $7.1 million in 1999 and 1998 respectively. The 1999 pro forma information also excludes the extraordinary charge related to the write-off of deferred financing costs of $4.2 million from the early extinguishment of debt outstanding under the senior credit facilities as the result of the sale of the Utah Facilities. 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 date 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, impairment charges and gain on the sale of facilities ("Adjusted EBITDA") has been included because it is a widely used measure of internally generated cash flow and is frequently used in evaluating a company's performance. Adjusted EBITDA is not an acceptable measure of liquidity, cash flow or operating income under generally accepted accounting principles and may not be comparable to similarly titled measures of other companies.
YEAR ENDED DECEMBER 31, --------------------------- 1999 (a) 1998 --------- --------- Net Revenue $ 362,268 $ 377,194 ========= ========= Adjusted EBITDA 27,370 46,667 ========= ========= Loss before extraordinary loss (95,814) (10,320) Extraordinary loss -- (1,175) --------- --------- Net loss $ (95,814) $ (11,495) ========= ========= Loss per common share: Continuing operations $ (1.71) $ (0.19) Discontinued operations -- -- Extraordinary loss -- (0.02) --------- --------- Net loss per common share $ (1.71) $ (0.21) ========= ========= Weighted average common shares outstanding 55,957 55,108 ========= =========
- ----------------------------------- (a) Pro forma adjustments reflect the disposition of hospitals, including the removal of gain on sale of such facilities and related income tax effect. Accordingly, a pro forma increase to the income tax provision of $46.6 million was recorded to increase the valuation allowance to reduce all incremental unutilized net operating losses. NOTE 5. DISCONTINUED OPERATIONS With the sale of the LA Metro facilities in September 1998, the Company completed its previously announced plan to exit the psychiatric hospital business. Such operations had been reported as discontinued operations since September 1996. During 1998 and 1997, in accordance with APB No. 30, losses of $4.4 million and $1.1 million, respectively, from operations of the discontinued psychiatric hospitals were charged to the disposal loss accrual previously established in September 1996. Accordingly, such losses were not reflected in the Consolidated Statement of Operations. 53 54 Loss from discontinued operations for the year ended December 31, 1999 reflected a charge of $1.0 million (no tax benefits) from certain Medicare contractual adjustments related to the completion of prior year cost reports for the discontinued psychiatric operations. Loss from discontinued operations of $2.4 million (net of tax benefit of $1.7 million) for the year ended December 31, 1998 reflected the settlement of litigation concerning alleged violations of certain Medicare rules at the discontinued psychiatric facilities. NOTE 6. INCOME TAXES The provision for income taxes consists of the following ($ in 000's):
YEAR ENDED DECEMBER 31, -------------------------------------- 1999 (a) 1998 1997 -------- ------- ------- Continuing operations: Current: Federal .......................................... $ 1,437 $ -- $ -- State ............................................ 33 84 813 Deferred: Federal .......................................... 45,603 520 853 State ............................................ 7,134 89 146 ------- ------- ------- Total income tax provision from continuing operations......................................... 54,207 693 1,812 Discontinued operations ............................. -- (1,685) (3,644) Extraordinary losses ................................ -- (816) -- ------- ------- ------- Total income tax provision (benefit) ................ $54,207 $(1,808) $(1,832) ======= ======= =======
- ------------------------------------ (a) The provision for income taxes in 1999 includes an increase of $26.8 million from the recording of a valuation allowance, which offsets the Company's net deferred tax assets. Of this amount, $24.7 million was applied to increase the income tax provision on income from continuing operations and $2.1 million was applied to eliminate income tax benefits on losses from discontinued operations and an extraordinary loss. As a result, no income tax benefits have been recognized on the losses from discontinued operations and the extraordinary loss recorded in 1999. The following table reconciles the differences between the statutory Federal income tax rate and the effective tax rate for continuing operations ($ in 000's):
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 1999 % 1998 % 1997 % ------- ----- ------- ----- ------ ----- Federal statutory rate ........................... $ 9,013 35.0 $ (651) (35.0) $ 230 35.0 State income taxes, net of Federal income tax benefit ........................... 1,545 6.0 (112) (6.0) 39 6.0 Non-deductible merger and litigation settlement costs (a) ......................... 14 -- 5,068 272.5 -- -- Non-deductible goodwill amortization ............. 1,278 5.0 1,488 80.0 1,543 235.3 Non-deductible goodwill related to the sale of the Utah facilities (b) ...................... 17,657 68.6 -- -- -- -- Adjustment to valuation allowance (c) ............ 24,700 95.9 (5,100) (274.2) -- -- ------- ----- ------- ----- ------ ----- Effective income tax rate ........................ $54,207 210.5 $ 693 37.3 $1,812 276.3 ======= ===== ======= ===== ====== =====
54 55 (a) Certain liabilities relating to the Shareholder Litigation were recharacterized as non-deductible for federal income tax purposes as a result of the global settlement. (b) Non-deductible goodwill related to certain sold Utah facilities which were acquired in connection with the Merger. (c) See discussion on adjustment to valuation allowance below. The tax effects of temporary differences that give rise to significant portions of the Federal and state deferred tax assets and liabilities are comprised of the following ($ in 000's):
DECEMBER 31, ------------------------ 1999 1998 --------- --------- DEFERRED TAX LIABILITIES: Accelerated depreciation ................................. $ 21,249 $ 13,318 --------- --------- Total deferred tax liabilities .......................... $ 21,249 13,318 --------- --------- DEFERRED TAX ASSETS: Allowance for bad debts .................................. (7,109) (8,548) Accrued expenses ......................................... (11,699) (17,180) Net operating losses ..................................... (56,063) (68,467) Other - net .............................................. (21,386) (20,041) --------- --------- Total deferred tax assets ............................... (96,257) (114,236) Valuation allowance against deferred tax assets .......... 75,008 48,181 --------- --------- Net deferred tax assets ................................. (21,249) (66,055) --------- --------- Net deferred tax assets .................................... -- (52,737) Less: Current deferred tax assets .......................... -- (9,641) --------- --------- Long-term deferred tax assets .............................. $ -- $ (43,096) ========= =========
The Company considers prudent and feasible tax planning strategies in assessing the need for a valuation allowance. As of December 31, 1998, the Company recorded a valuation allowance of $48.2 million based on its previously existing tax strategies, which assumed the utilization of net operating loss carryforwards to reduce estimated taxable gains generated from the sale of selected hospitals. The Company also assumed no benefit related to future taxable income. The Company's tax planning strategies assumed proceeds from divestitures based on previously existing market conditions. As of December 31, 1999, a valuation allowance for the full amount of the net deferred tax asset was recorded due to issues affecting liquidity and related uncertainties discussed in Note 2, which, if unfavorably resolved, will adversely affect the Company's future operations on a continuing basis. In the event that the Company is forced to file for protection under Chapter 11 of the Bankruptcy Code, the realization of the tax assets may be substantially and permanently impaired. Accordingly, the provision for income taxes in 1999 includes an increase in income tax provision of $26.8 million from the recording of a valuation allowance, which offsets the Company's net deferred tax assets. The future realization of the deductible temporary differences and net operating loss carryforwards depends on the Company's ability to develop and consummate an acceptable and sustainable financial structure and the existence of sufficient taxable income within the carryforward period. At December 31, 1999, the Company has net operating loss carryforwards of $136.7 million for U.S. Federal income tax purposes that will expire in varying amounts from 2010 to 2013, if not utilized. Additionally, U.S. Federal income tax law limits a corporation's ability to utilize net operating losses if it experiences an ownership change of greater than 50% over a three-year period. In the event of such a future ownership change, the Company's net operating loss carryforward may be subject to an annual limitation on its use. 55 56 The Company received income tax refunds, net of payments, of $492,000, $333,000 and $24.1 million in 1999, 1998 and 1997 respectively. NOTE 7. LONG TERM DEBT The Company's long-term debt consists of the following ($ in 000's):
DECEMBER 31, ------------------------ 1999 1998 --------- --------- Revolving Credit Facility ............................................ $ -- $ 83,282 Term Loan Facilities ................................................. -- 113,200 10% Senior Subordinated Notes ........................................ 325,000 325,000 6.51% Subordinated Note .............................................. 7,185 7,185 Capital lease obligations (See Note 8) ............................... 7,599 9,500 Other ................................................................ -- 1,165 --------- --------- 339,784 539,332 Less long-term debt in default classified as current liabilities ..... (335,445) -- Less long-term debt due within one year .............................. (654) (6,284) --------- --------- Total long-term debt ................................................. $ 3,685 $ 533,048 ========= =========
SENIOR CREDIT FACILITIES - On October 12, 1999, the Company repaid all borrowings outstanding of $223.5 million on its senior credit facilities in conjunction with the sale of the Utah Facilities. The senior credit facilities provided total commitments of $140.0 million under a Revolving Credit Facility and $115.0 million in term loans (the "Term Loan Facilities"). The Term Loan Facilities consisted of a five-year $45.0 million commitment ("Tranche A") and a six-year $70.0 million commitment ("Tranche B"). The weighted average borrowing rates for the year ended December 31, 1999 were 8.02%, 7.94% and 8.10% under the Revolving Credit Facility, Tranche A and Tranche B, respectively. Concurrent with the repayment of all indebtedness under the senior credit facilities, most of the commitments under such facilities were permanently cancelled. The Company entered into an interim financing arrangement with one of its original bank lenders, which has reduced its original commitment under the senior bank credit agreement to $11.6 million. As the result of the default of interest payment on the Notes, the Company is also in default under its interim credit facility. As of December 31, 1999, the Company had $11.6 million in outstanding letters of credit under its interim credit facility, all of which were fully secured by cash collateral held by the bank, and no outstanding borrowings. The cash collateral securing the letters of credit is reflected in the Company's Consolidated Balance Sheet as restricted cash. In the fourth quarter ended December 31, 1999, the Company recorded an extraordinary charge of $4.2 million, no tax benefits, from the write-off of deferred financing costs due to early extinguishment of debt under the senior credit facilities. During the first quarter ended March 31, 1998, the Company recognized an extraordinary charge for the write-off of deferred financing costs of $1.2 million, net of tax benefits of $816,000, relating to the credit facility in existence prior to March 30, 1998. SENIOR SUBORDINATED NOTES - On August 16, 1996, the Company completed a $325.0 million registered offering of 10% Senior Subordinated Notes, which are general unsecured senior subordinated obligations of the Company and are not guaranteed by any of its subsidiaries. The Notes mature 56 57 on August 15, 2006. The Notes are not subject to any mandatory redemption and may not be redeemed prior to August 15, 2001. As a result of the default of interest payment on the Notes (see Note 2), the principal amount of the Notes ($325.0 million) is presented as a current liability on the Company's Consolidated Balance Sheet as of December 31, 1999. 6.51% SUBORDINATED NOTE - Pursuant to an agreement made in conjunction with the Merger, the Former Majority Shareholder received a $7.2 million 6.51% subordinated unsecured note from the Company. The note, which is not guaranteed by any of the Company's subsidiaries, provides for payments of principal and interest in an aggregate annual amount of $1.0 million over a term of 10 years. The Former Majority Shareholder had previously waived its right to receive principal payments under the note until all obligations of the Company under the senior bank credit agreement have been satisfied. In connection with the global settlement of the Shareholder Litigation and as the result of the repayment of the senior credit facilities, the Company is obligated to resume payments of principal on the stated terms of the note and use its reasonable best efforts to repay outstanding amounts in arrears. As the result of the default of interest payment under the Notes, the Company is prohibited from making principal or interest payments due on the note. Additionally, the Former Majority Shareholder has the ability to accelerate the debt, to increase the interest rate on the note to 8.5% per annum and seek other remedies from the Company. Accordingly, the principal amount of the note ($7.2 million) is presented as a current liability on the Company's Consolidated Balance Sheet as of December 31, 1999. OTHER DEBT - Other debt at December 31, 1999 and 1998 consists primarily of mortgage notes and capital lease obligations. These obligations mature in various installments through 2011 at interest rates ranging from 8.65% to 10.5% as of December 31, 1999 and 1998. Due to the uncertainty related to the default and corresponding remedies described in Note 2, the principal amounts of a certain capital lease obligation ($3.3 million), which contain cross-default provisions, are presented as current liabilities on the Company's Consolidated Balance Sheet as of December 31, 1999. Maturities of long-term debt outstanding, excluding amounts in default classified as current liabilities, as of December 31, 1999 for the next five years and thereafter are ($ in 000's): 2000 ................................... $ 654 2001 ................................... 433 2002 ................................... 404 2003 ................................... 200 2004 ................................... 107 Thereafter ............................. 2,541 ------- Total .................................. $ 4,339 =======
The Company paid interest of $50.2 million, $51.7 million and $46.4 million during 1999, 1998 and 1997, respectively. 57 58 NOTE 8. LEASES The Company leases property and equipment under cancelable and non-cancelable leases. Future minimum operating and capital lease payments as of December 31, 1999, including amounts relating to leased hospitals, for the next five years and thereafter are ($ in 000's):
YEARS ENDED DECEMBER 31, OPERATING CAPITAL ----------------------- --------- ------- 2000 (a) ............................... $ 2,471 $ 890 2001 ................................... 1,967 814 2002 ................................... 1,204 740 2003 ................................... 483 619 2004 ................................... 296 370 Thereafter ............................. 1,098 6,415 ------- ------- Total minimum future payments .......... $ 7,519 9,848 ======= Less amount representing interest ...... (5,509) ------- 4,339 Less current portions .................. (654) ------- Long-term capital lease obligations .... $ 3,685 =======
- ---------------------- (a) Excludes $4.3 million, including interest of $1.0 million, of future minimum lease payments under a capital lease obligation in default. The following summarized amounts relate to assets leased by the Company under capital leases ($ in 000's):
DECEMBER 31, ---------------------- 1999 1998 -------- -------- Property & equipment $ 10,331 $ 8,316 Accumulated depreciation (3,406) (3,129) -------- -------- Net book value $ 6,925 $ 5,187 ======== ========
Depreciation of assets under capital leases is included in depreciation and amortization in the Consolidated Statements of Operations. Rental expense was $15.6 million, $23.2 million and $25.6 million for 1999, 1998 and 1997, respectively. NOTE 9. SALE OF ACCOUNTS RECEIVABLE A subsidiary of the Company has an agreement with an unaffiliated trust (the "Trust") to sell the Company's hospital eligible accounts receivable (the "Eligible Receivables") on a nonrecourse basis to the Trust, hereafter referred to as the Commercial Paper program. A special purpose subsidiary of a major lending institution provides up to $65.0 million in commercial paper financing to the Trust to finance the purchase of the Eligible Receivables from the Company's subsidiary, with the Eligible Receivables serving as collateral. The commercial paper notes have a term of not more than 120 days. Eligible receivables sold at book value to the Trust at no gain or loss at December 31, 1999 and 1998 were $31.0 million and $32.6 million, respectively. Interest expense charged to the Trust related to the commercial paper financing is passed through to the Company and included as interest expense in the Company's Consolidated Statement of Operations. Interest expense incurred by the Company related to this program was $2.2 million, $2.0 million and $2.5 million for the years ended December 31, 1999, 1998 and 1997, respectively. 58 59 As the result of the default of interest payment on the Notes, the Company is also in default with certain provisions under the Commercial Paper program. As a result of this default, the subsidiary is unable to sell additional eligible receivables under the Commercial Paper program. On March 30, 2000, the Company received a commitment for a $62.0 million New Facility, which will replace the Company's Commercial Paper program. The lender under the Company's current Commercial Paper program has a agreed to extend the program until April 17, 2000, while the Company completes due diligence and documentation necessary for the New Facility. There can be no assurance that the Company will ultimately consummate the New Facility. NOTE 10. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS CREDIT RISK - Financial instruments that potentially subject the Company to concentration of credit risk consist principally of accounts receivable. Credit risk on accounts receivable is limited because a majority of the receivables are due from governmental agencies, commercial insurance companies and managed care organizations. The Company continually monitors and adjusts its reserves and allowances associated with these receivables. FAIR VALUES OF FINANCIAL INSTRUMENTS - All financial instruments are held for purposes other than trading. The estimated fair values of all financial instruments, other than long-term debt, approximated their carrying amounts due to the short-term maturity of these instruments. The carrying amount and fair value of long-term debt are as follows ($ in 000's):
DECEMBER 31, ----------------------------------------------- 1999 1998 --------------------- --------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Long-term Debt: Revolving Credit Facility ........ $ -- $ -- $ 83,282 $ 83,282 Term Loan Facilities ............. -- -- 113,200 113,200 10% Senior Subordinated Notes .... 325,000 188,500 325,000 289,250 6.51% Subordinated Note .......... 7,185 4,400 7,185 6,283
The fair values of the Revolving Credit Facility and the Term Loan Facilities approximated the carrying amounts since the interest rate was based on a current market rate. The fair value of the Notes is based on the quoted market price. The fair value of the remaining debt was estimated using discounted cash flow analyses based on the Company's current incremental borrowing rate for similar types of borrowing arrangements. As of March 17, 2000, the fair value of the Notes based on the quoted market price was $146.3 million. NOTE 11. STOCKHOLDERS' EQUITY COMMON AND PREFERRED STOCK - The Company has 150.0 million authorized shares of common stock, no stated value per share. Each share is entitled to one vote and does not have any cumulative voting rights. The Company is also authorized to issue 25.0 million shares of preferred stock at $0.01 par value per share, which may be issued in such series and have such rights, preferences and other provisions as may be determined by the Board of Directors without approval by the holders of common stock. No preferred shares are currently outstanding. 59 60 In connection with the global settlement of Shareholder Litigation effective September 2, 1999, the Company issued 1.5 million shares of common stock for purposes of distribution to class members and 1.0 million shares of common stock to the Former Chairman to terminate a service and advisory contract with him. The Company recorded unusual charges of $3.0 million related to the shares issued based upon the quoted market value of the Company's common stock at the time the global settlement was executed. STOCK OPTION PLAN - On July 15, 1996, the Company adopted the 1996 Stock Incentive Plan (the "Incentive Plan") to provide stock-based incentive awards, including incentive stock options, non-qualified stock options, restricted stock, performance shares, stock appreciation rights and deferred stock, to directors, key employees, consultants and advisors. In connection with the Merger, the Company granted 1.6 million Value Options to certain directors and officers of the Company in addition to aggregate cash payments of $20.7 million to terminate all phantom stock appreciation rights and/or preferred stock units under a previously existing stock incentive plan. Additionally, pursuant to the various employment agreements, the Company also granted 1.2 million Value Options and 2.8 million Market Options to certain senior executive officers. In connection with the global settlement of Shareholder Litigation, 1.4 million Value Options and all of the Market Options were cancelled (see Note 3). The issuance of the Value Options was originally recorded as a merger expense in connection with the Merger. Accordingly, the Company recorded a benefit of $10.2 million which was included as a component of the $5.5 million net gain related to the settlement of the Shareholder Litigation in unusual items, and a corresponding reduction in common stock from the cancellation of the Value Options based upon the quoted market value of the Company's common stock at the time the global settlement was executed. The cancellation of the Market Options had no impact on the Company's stockholders' equity or 1999 results of operations. As more fully discussed in Note 15, in connection the execution of the Executive Agreement and subsequent resignation of the Senior Executives, 696,000 Value Options were cancelled. At December 31, 1999, there were 9.9 million shares of common stock reserved for exercise of options. Except for the Value Options as noted above, stock options were generally granted at an exercise price equal to or in excess of the estimated fair market value of the shares on the date of grant and expire ten years from the grant date. The Value Options and options granted to directors were fully vested on the date of grant, with the remaining options vesting generally over a period of 3 to 4 years from the date of grant. Options generally expire upon certain events (such as termination of employment with the Company), except for Value Options, which remain exercisable until the end of the 10-year option term. The following table presents the number of shares covered by options outstanding and the related number of options granted, assumed, exercised and canceled for each period in the three years ended December 31, 1999 (in 000's): 60 61
WEIGHTED NUMBER EXERCISE AVERAGE OF PRICE EXERCISE OPTIONS PER SHARE PRICE ------- -------------- --------- Outstanding at December 31, 1996 .. 6,865 $0.01 to $9.00 $ 4.60 Granted ......................... 1,105 $ 5.19 $ 5.19 Exercised ....................... (280) $ 0.01 $ 0.01 Canceled ........................ (135) $0.01 to $9.00 $ 2.18 ------ Outstanding at December 31, 1997 .. 7,555 $0.01 to $9.00 $ 4.90 Granted ......................... -- -- -- Exercised ....................... (17) $ 3.56 $ 3.56 Canceled ........................ (156) $3.92 to $9.00 $ 4.96 Forfeited ....................... (696) $ 0.01 $ 0.01 ------ Outstanding at December 31, 1998 .. 6,686 $0.01 to $9.00 $ 5.41 Granted ......................... 1,105 $0.63 to 2.20 $ 2.11 Canceled ........................ (5,127) $0.01 to $9.00 $ 5.66 ------ Outstanding at December 31, 1999 .. 2,664 $0.01 to $9.00 $ 3.51 ======
The number of options exercisable at December 31, 1999, 1998 and 1997 were 1.8 million, 4.1 million and 4.2 million, respectively. The following table summarizes information concerning currently outstanding and exercisable options as of December 31, 1999 (in 000's):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------ -------------------------------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Outstanding Life Price Exercisable Price - ----------- ----------- ----------- --------- ----------- --------- $0.01 373 6.61 years $0.01 373 $0.01 $0.63-$9.00 2,291 6.75 years $4.10 1,433 $4.70
The Company has elected to follow APB No. 25 and related interpretations in accounting for its employee stock options. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The weighted average grant-date fair values were $0.78 for options granted during 1999 and $3.66 for options granted during 1997, using the Black-Scholes option pricing model with the following weighted-average assumptions for 1999 and 1997 respectively: risk-free interest rates of 5.97%and 5.60%; dividend yields of 0.0%; volatility factors of the expected market price of the Company's stock of 96.4% and 97.4%; and a weighted-average expected life of the options of 4 years. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 61 62 For purpose of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information for 1999, 1998 and 1997 is as follows and includes compensation expense of $751,000 (no tax effect), $4.1 million ($2.4 million after-tax) and $5.6 million ($3.3 million after-tax), respectively, ($ in 000's, except for earnings per share data):
1999 1998 1997 ----------- ----------- ----------- Pro forma net loss ..................... $ (34,394) $ (8,597) $ (9,687) Pro forma net loss per share: Basic and assuming dilution ......... $ (0.61) $ (0.16) $ (0.18)
WARRANTS AND CONVERTIBLE SECURITIES - As of December 31, 1999, the Company had outstanding warrants to purchase 414,690 shares of Common Stock at an exercise price of $9.00 per share expiring December 31, 2003. NOTE 12. EMPLOYEE BENEFIT PLANS The Company has a defined contribution 401(k) retirement plan covering all eligible employees at its hospitals and the corporate office. Participants may contribute up to 20% of pretax compensation, not exceeding a limit set annually by the Internal Revenue Service. The Company matches $.25 for each $1.00 of employee contributions up to 6% of employees' gross salary and may make additional discretionary contributions. Total expense for employer contributions to the plan for 1999, 1998 and 1997 was $1.2 million, $2.0 million and $1.6 million, respectively. The Company has a supplemental executive retirement plan ("SERP") to provide additional post-termination benefits to a selected group of management and highly compensated employees. As a result of a change in control from the Merger, officers and employees of the Company who were participants in the SERP prior to the Merger became fully vested in all benefits thereunder. In April 1997, the Board of Directors elected to terminate the provision of future benefits for certain participants under the plan, which resulted in a plan curtailment. As a result, the Company incurred minimal expenses in 1999 and 1998 related to the plan. Total expenses for the plan were $141,000 (net of curtailment gain of $1.6 million) for the year ended December 31, 1997. In connection with the execution of the Executive Agreement and the global settlement of the Shareholder Litigation, the Company is released from SERP obligations to certain former senior executives. The effect of this release is included as a component of the $5.5 million net gain related to the settlement of the Shareholder Litigation included in unusual items. NOTE 13. OPERATING SEGMENTS Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 also establishes standards for reporting information about operating segments and related disclosures about product and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect the Company's results of operations or financial position. The Company previously segregated its hospitals into two operating segments: Core Markets and Non Core Markets. The Company designated certain hospitals as "Core Facilities" with the goal of expanding and further integrating the hospitals' presence in their respective markets. As the designation 62 63 implies, the Core Facilities comprised the operational and financial core of the Company's business. "Non Core" Markets consisted of all other hospital operations owned by the Company, which were being evaluated for possible disposition. This designation was made in conjunction with the Company's efforts to reduce its debt through the disposition of certain hospitals, an objective that was largely accomplished with the disposition of the Utah operations in the fourth quarter of 1999 and the resulting repayment of all borrowings outstanding under the Company's senior credit facility. Accordingly, the Company ceased making the Core and Non Core distinction for its reportable segments. "Same Hospitals," as a reportable segment, consist of acute care hospitals currently owned and operated by the Company. "All Other" is comprised of closed/sold facilities and overhead costs. The accounting policies of "Same Hospitals" are the same as those described in the summary of significant accounting policies. The Company does not allocate income taxes and interest to Same Hospitals. Additionally, "Same Hospitals" do not have significant non-cash items in reported profit or loss other than depreciation and amortization. The Company evaluates performance based on numerous criteria, the most significant of which is Adjusted EBITDA. The following table summarizes selected financial data for the Company's reportable segments, which have been restated for all years presented to reflect the change in the Company's reportable segments, ($ in 000's):
YEAR ENDED DECEMBER 31, 1999 ---------------------------------------- Same Hospitals All Other Total -------------- --------- --------- Net revenue ............................ $ 357,601 $ 158,936 $ 516,537 Adjusted EBITDA ........................ 45,614 (3,239) 42,375 Property and equipment, net ............ 219,043 7,433 226,476 Capital expenditures ................... 14,082 15,121 29,203
YEAR ENDED DECEMBER 31, 1998 ---------------------------------------- Same Hospitals All Other Total -------------- --------- --------- Net revenue ............................ $365,992 $298,066 $664,058 Adjusted EBITDA ........................ 53,807 22,477 76,284 Property and equipment, net ............ 219,050 144,849 363,899 Capital expenditures ................... 10,264 11,701 21,965
YEAR ENDED DECEMBER 31, 1997 ---------------------------------------- Same Hospitals All Other Total -------------- --------- --------- Net revenue ............................ $301,602 $357,617 $659,219 Adjusted EBITDA ........................ 60,183 19,275 79,458 Property and equipment, net ............ 149,213 158,851 308,064 Equity investment in DHHS (Note 4) ..... 48,499 -- 48,499 Capital expenditures ................... 12,169 4,355 16,524
The Company's revenue primarily depends on the level of inpatient census, the volume of outpatient services, the acuity of patients' conditions and charges for services. Reimbursement rates for inpatient routine services vary significantly depending on the type of service and the geographic location of the hospital. The Company receives payment for services rendered to patients from private payors (primarily private insurance), managed care providers, the Federal government under the Medicare and TriCare (formerly the Civilian Health and Medical Program of the Uniformed Services or CHAMPUS) programs and state governments under their respective Medicaid programs. Approximately 48.5%, 63 64 53.6% and 56.9% of gross patient revenue for the years ended December 31, 1999, 1998 and 1997, respectively, related to services rendered to patients covered by Medicare and Medicaid programs. NOTE 14. COMMITMENTS AND CONTINGENCIES LITIGATION - The Company is subject to claims and legal actions by patients and others in the ordinary course of business. The Company believes that all such claims and actions are either adequately covered by insurance or will not have a material adverse effect on the Company's financial condition, results of operations or liquidity. REGULATORY INVESTIGATION - On March 9, 1998, the U.S. Securities and Exchange Commission (the "SEC") entered a formal order authorizing a private investigation, In re Paracelsus Healthcare Corp., FW-2067. Pursuant to the formal order, the staff of the SEC's Fort Worth District Office is investigating the accounting and financial reporting issues that were the subject of the internal inquiry described in the Company's 1996 Form 10-K filed in April 1997. The Company is cooperating with the staff of the SEC. PROFESSIONAL AND LIABILITY RISKS - The Company is subject to claims and suits in the ordinary course of business, including those arising from care and treatment provided at its facilities. The Company maintains insurance and, where appropriate, reserves with respect to the possible liability arising from such claims. The Company is self-insured for the first $1.0 million per occurrence of general and professional liability claims. Excess insurance amounts up to $50.0 million are covered by third party insurance carriers. The Company accrues an estimated liability for its uninsured exposure and self-insured retention based on historical loss patterns and actuarial projections. The Company believes that its insurance and loss reserves are adequate to cover potential claims that may be asserted and that the outcome of such claims will not have a material effect on the Company's financial position, results of operations or liquidity. NOTE 15. CERTAIN RELATED PARTY TRANSACTIONS THE EXECUTIVE AGREEMENT - On November 25, 1998, the Company and the Senior Executives, Mr. Charles R. Miller, Mr. James G. VanDevender and Mr. Ronald R. Patterson executed the Executive Agreement superseding their existing employment contracts and certain other stock option and retirement agreements with the Company. Under the Executive Agreement, as amended, Messrs. Miller and Patterson remained in their management positions with the Company until their resignation on June 30, 1999. Mr. VanDevender entered into a separate employment agreement with the Company and served as interim Chief Executive Officer effective July 1, 1999 until his resignation from the Company on February 29, 2000. Pursuant to the Executive Agreement, the Company paid the Senior Executives $501,000 in 1998 for amounts due under the SERP, and the Senior Executives released the Company from any obligations under the SERP or any similar retirement plan. In April 1999, the Company also paid the Senior Executives $4.6 million, of which approximately $4.0 million was recorded ratably to expense through June 30, 1999, the required-stay period. The remaining amount of $645,000, which is associated with a non-compete arrangement provided for in the Executive Agreement, was recorded as other assets and amortized to expense over the non-compete period (one year) upon the Senior Executives' separation of service. The Company and the Senior Executives provided each other with mutual releases of any and all obligations either party may have under the respective employment agreements or otherwise arising out of the Senior Executives' employment. 64 65 Pursuant to the Executive Agreement, the Senior Executives gave up all rights to exercise or dispose of 696,000 Value Options that they received at the time of the Merger. The Value Options were cancelled upon the Senior Executives' resignation from the Company. The quoted market value of the Value Options upon the execution of the Executive Agreement of approximately $1.6 million was recorded as a reduction to common stock. A corresponding liability of $1.6 million was amortized ratably to income over the required-stay period ended June 30, 1999. The Company recorded approximately $2.2 million and $352,000 of net expenses related to the Executive Agreement, which was included in unusual items, for the year ended December 31, 1999 and 1998, respectively. 6.51% SUBORDINATED NOTE - The Former Majority Shareholder received a $7.2 million 6.51% subordinated note from the Company (See Note 7). The Company paid interest on such note of $467,000 in 1999 and 1998 and $533,000 in 1997. In connection with the global settlement of the Shareholder Litigation and as the result of the repayment of the senior credit facilities, the Company is obligated to resume payments of principal on the stated terms of the note and use its reasonable best efforts to repay outstanding amounts in arrears. As the result of the default of interest payment under the Notes, the Company is prohibited from making principal or interest payments on the note. Additionally, the Former Majority Shareholder has the ability to accelerate the debt, to increase the interest rate on the note to 8.5% per annum and seek other remedies from the Company. CONSULTING AGREEMENT - Effective August 1996, the Company was a party to an agreement with the Former Chairman, pursuant to which he provided management and strategic advisory services to the Company for an annual consulting fee for a term not to exceed ten years. The Company paid the Former Chairman consulting fees of $187,500 in 1999 and 1998 and $500,000 in 1997. In connection with the global settlement of the Shareholder Litigation, the Company paid the Former Chairman $1.0 million in cash and issued to him 1.0 million shares of common stock to terminate the agreement. The Company recorded unusual charges of $2.2 million relating therewith based on the value of the cash payment and the quoted market value of the Company's common stock at the time the global settlement was executed. INSURANCE AGREEMENT - The Company is also a party to an insurance agreement, which provides insurance benefits to the Former Chairman in the event of his death or permanent disability in an amount equal to $1.0 million per year during the 10-year term of such agreement, which expires 2006. 65 66 NOTE 16. QUARTERLY DATA (UNAUDITED) The following table summarizes the Company's quarterly financial data for the years ended December 31, 1999 and 1998 ($ in 000's, except per share data):
INCOME (LOSS) PER SHARE INCOME -------------------------------------- (LOSS) FROM NET NET NET CONTINUING DISCONTINUED INCOME CONTINUING DISCONTINUED INCOME QUARTERS REVENUE OPERATIONS OPERATIONS (LOSS) OPERATIONS OPERATIONS (LOSS) -------- -------- ---------- ------------ -------- ---------- ------------ --------- First Quarter - 1999(a) .................. $150,944 $ (1,586) $ -- $ (1,586) $ (0.03) $ -- $ (0.03) 1998(b) .................. 186,882 1,625 -- 450 0.03 -- 0.01 Second Quarter - 1999(c)(d) ............... 143,267 (7,609) -- (7,609) (0.14) -- (0.14) 1998(c) .................. 176,693 5,698 -- 5,698 0.10 -- 0.10 Third Quarter - 1999(e) ................. 138,161 (3,376) (601) (3,977) (0.06) (0.01) (0.07) 1998(f)(g) .............. 157,169 (1,667) (2,424) (4,091) (0.03) (0.04) (0.07) Fourth Quarter - 1999(h)(i) ............... 84,165 (15,885) (418) (20,471) (0.28) (0.01) (0.36) 1998(j) .................. 143,314 (8,209) -- (8,209) (0.15) -- (0.15) - ----------------------
(a) Includes an unusual charge of $1.1 million resulting from the execution of the Executive Agreement. (b) Includes extraordinary loss from early extinguishment of debt, net of tax, of $1.2 million ($0.02 per share). (c) Includes a loss of $2.4 million in 1999 and $7.1 million in 1998 on the sale of hospitals. (d) Includes unusual charges of (i) $1.1 million resulting from the execution of the Executive Agreement and (ii) $5.5 million relating to corporate restructuring charges. (e) Includes (i) an unusual gain of $5.5 million resulting from the settlement of the Shareholder Litigation and (ii) a gain of $2.0 million on the sale of a hospital. (f) Includes a gain of $7.5 million relating to the settlement of a capitation agreement. (g) Includes (i) an after tax charge of $601,000 ($0.01 per share) related to Medicare contractual adjustment at the discontinued psychiatric facilities in 1999 and (ii) an after-tax charge of $2.4 million ($0.04 per share) relating to the settlement of litigation concerning alleged violations of certain Medicare rules at certain of the Company's discontinued psychiatric facilities in 1998. (h) Includes a gain of $77.8 million on the sale of the Utah Facilities and an increase in income tax provision of $26.8 million from the recording of a valuation allowance, which offsets the Company's net deferred tax assets. Of the $26.8 million, $24.7 million was reflected as an increase in the income tax provision on income from continuing operations and $2.1 million was applied to eliminate income tax benefits on losses from discontinued operations and an extraordinary loss. (i) Includes extraordinary loss from the early extinguishment of debt, (no tax effect) of $4.2 million ($0.7 per share). (j) Includes (i) impairment charges, net of tax, of $1.4 million relating to the write-down of long-lived assets to fair value at certain facilities and (ii) $196,000 resulting from the execution of the Executive Agreement. Quarterly operating results are not necessarily representative of operations for a full year for various reasons including levels of occupancy, fluctuations in interest rates, acquisitions and divestitures. 66 67 NOTE 17. RECENT PRONOUNCEMENTS In 1998, the Financial Accounting Standards Board ("FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which will require companies to recognize all derivatives on the balance sheet at fair value. In July 1999, the FASB issued Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which requires the adoption of SFAS 133 in fiscal years beginning after June 15, 2000. The Company expects SFAS No. 133 to have no material impact on the Company's financial position or results of operations. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item regarding the Company's executive officers is set forth under "Executive Officers of the Registrant" in Part I of this Report. The directors of the Company, their positions and offices, their respective terms of office as directors, their respective ages and background are as follows: JOAN S. FORTUNE, age 52, a director since 1999 whose term expires at the 2002 annual meeting of stockholders. From 1995 until 1999, she was retired with no other position. Ms. Fortune was General Partner of Frontenac Company, a venture capital firm from 1987 until her retirement in 1995. She was a director of Frontenac from 1984 to 1987. At Frontenac, Ms. Fortune specialized in investments in healthcare products and services. Prior to her time at Frontenac, she was a management consultant with Hayes/Hill, Inc. and worked for more than 10 years in the healthcare industry at American Hospital Supply Corporation, G.D. Searle & Co. and a research facility associated with the University of Wisconsin. NOLAN LEHMANN, age 55, a director since 1998 whose term expires at the 2000 annual meeting of stockholders. Mr. Lehmann is the President and director of Equus Capital Management Corporation, an investment advisor firm located in Houston, Texas, since 1983. Mr. Lehmann is also President and a director of Equus II Incorporated, a registered investment company traded on the New York Stock Exchange. Mr. Lehmann also serves as a director of Allied Waste Industries, Inc. and Drypers Corporation. Mr. Lehmann holds graduate and undergraduate degrees in accounting and economics from Rice University and is a Certified Public Accountant. ROBERT W. MILLER, age 58, a director since 1999 whose term expires at the 2000 annual meeting of stockholders. Mr. Miller was a partner with the law firm of King & Spalding from 1985 until his retirement at the end of 1997. He currently serves as non-executive Chairman of the Board of Magellan Health Services, Inc., a behavioral managed care company listed on the New York Stock Exchange, and is a past president of the American Academy of Healthcare Attorneys. 67 68 HEINER MEYER ZU LOSEBECK, age 47, a director since 1998 whose term expires at the 2001 annual meeting of stockholders. Dr. Meyer zu Losebeck is the Managing Director of Paracelsus-Kliniken-Deutschland GmbH ("PKD"), Park, and other affiliates of PKD. PKD owns and operates 26 hospitals ranging in size from 42 to 350 beds in Germany and Switzerland. Park owns approximately 34.5 percent of the shares of the Company, and PKD owns all the shares of Park. From 1989 through August 1997, Dr. Meyer zu Losebeck was a tax consultant, auditor, and chartered accountant at Dr. Mertens and Partners, Osnabruck, Germany. PETER SCHNITZLER , age 32, a director since 1999 whose term expires at the 2000 annual meeting of stockholders. Mr. Schnitzler is the Corporate Accountant of PKD. He has been employed by PKD (and its respective legal predecessor) since 1993. Mr. Schnitzler has a graduate degree in finance, auditing and hospital administration. LAWRENCE P. ENGLISH, age 59, a director since 1999 whose term expires at the 2001 annual meeting of stockholders. Mr. English is President of Lawrence P. English, Inc., a consulting and turnaround management firm. He was the founder, Chairman and Chief Executive Officer ("CEO") of Aesthetics Medical Management, Inc., a physician management company from 1997 to 1998. From 1992 to 1996, he was the president of Cigna Healthcare, a healthcare management organization and a division of Cigna Corporation. Mr. English currently serves as a director of Spacefitters, Inc., a Windsor, Connecticut based technology company, and Dental Benefit Providers, a Bethesda, Maryland based dental HMO. Mr. English has over 36 years of experience in the insurance and health care industries. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Based solely upon confirmations provided by the directors and executive officers of the Company reporting transactions involving the Company's securities during the most recent fiscal year, the Company believes that all transactions by reporting persons were reported on a timely basis. Based on shareholder filings, the Company does not believe any other shareholders are subject to Section 16(a) filing requirements. 68 69 ITEM 11. EXECUTIVE COMPENSATION The following table summarizes the compensation for the Company's former Chief Executive Officer, four most highly compensated executive officers and two other senior executives, Messrs. Miller and Patterson, who resigned from the Company effective June 30, 1999 (collectively the "Named Executives") with respect to all services rendered to the Company during the calendar years indicated. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------- ------------ ALL SECURITIES OTHER UNDERLYING COMPEN- NAME AND PRINCIPAL SALARY BONUS OPTIONS SATION POSITION YEAR ($) ($) (#) ($)(b)(c) ------------------ ---- ---------- ---------- ----------- ---------- James G. VanDevender (a) Senior Executive Vice 1999 $ 457,500 $ 125,000 -- $1,324,466 President & Chief 1998 370,313 -- -- 108,005 Executive Officer 1997 360,000 -- -- -- Lawrence A. Humphrey 1999 $ 276,898 $ 160,900 100,000 $ 3,989 Executive Vice President 1998 268,427 -- -- 2,375 & Chief Financial Officer 1997 245,416 -- 100,000 2,551 Michael M. Brooks (a) 1999 $ 238,890 $ 156,671 100,000 $ 3,785 Senior Vice President, 1998 232,062 100,000 -- 3,690 Development 1997 224,253 -- 100,000 8,962 Deborah H. Frankovich 1999 $ 197,428 $ 75,998 75,000 $ 2,883 Senior Vice President & 1998 190,396 -- -- 2,375 Treasurer 1997 184,996 -- 75,000 2,345 Robert M. Starling 1999 $ 195,987 $ 75,998 75,000 $ 3,329 Senior Vice President & 1998 190,105 -- -- 2,165 Controller 1997 184,996 -- 75,000 1,954 Charles R. Miller (a) 1999 $ 270,000 $ -- -- $1,972,836 President & Chief Operating 1998 548,167 -- -- 315,460 Officer 1997 500,000 -- -- -- Ronald R. Patterson (a) Executive Vice President & 1999 $ 187,500 $ -- -- $1,347,958 President, Healthcare 1998 370,313 -- -- 92,920 Operations 1997 360,000 -- -- 2,375
- --------------------- (a) Messrs. Miller and Patterson resigned from the Company effective June 30, 1999. Messrs. VanDevender and Brooks resigned from the Company effective February 29, 2000. (b) 1999 included payments of $2.0 million to Mr. Miller and $1.3 million each to Messrs. VanDevender and Patterson made in connection with the Executive Agreement. 69 70 (c) Represents relocation reimbursements, life insurance premiums and matching contributions paid by the Company under its Employee Retirement Savings 401(k) Plan and includes payments in 1998 for vested benefits under the supplemental executive retirement plan to Messrs. Miller, VanDevender and Patterson of $310,510, $104,969 and $85,793, respectively. The following table summarizes stock option grants made during 1999 to the Named Executives and the potential realizable values of the options, based on certain assumptions. All options were granted in April 1999 under the Company's 1996 Stock Incentive Plan. The exercise prices on stock options previously granted were not amended or adjusted. The Company has no outstanding stock appreciation rights. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ------------------------------------------------------------------------------------ NUMBER OF SECURITIES % OF TOTAL GRANT UNDERLYING OPTIONS MARKET DATE OPTIONS GRANTED TO EXERCISE PRICE ON PRESENT GRANTED EMPLOYEES IN PRICE DATE OF VALUE NAME (#) FISCAL YEAR ($/SHARE) GRANT EXPIRATION DATE ($)(b) ---- ----------- ------------- --------- -------- --------------- --------- C. Miller -- -- -- -- -- -- J. VanDevender -- -- -- -- -- -- R. Patterson -- -- -- -- -- -- L. Humphrey 100,000(a) 9.6% $ 2.20 $ 1.375 April 1, 2009 $ 80,000 M. Brooks 100,000(a) 9.6% $ 2.20 $ 1.375 April 1, 2009 $ 80,000 D. Frankovich 75,000(a) 7.2% $ 2.20 $ 1.375 April 1, 2009 $ 60,000 R. Starling 75,000(a) 7.2% $ 2.20 $ 1.375 April 1, 2009 $ 60,000
- ------------- (a) Options have a ten-year term and vest as follows: (i) 25% on April 1, 1999, (ii) 25% on April 1, 2000, (iii) 16-2/3% on April 1, 2001, (iv) 16-2/3% on April 1, 2002 and (v) 16-2/3% on March 31, 2003. Vesting of all options accelerate in the event of a change in control. (b) The fair value of these options was estimated at the date of grant or the assumption date using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 5.97%, dividend yield of 0%, volatility factor of the expected market price of the Company's stock of 96.4%, and a weighted-average expected life of the option of 4 years. There can be no assurance that the hypothetical grant date present values of the options reflected in this table will be realized. AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES No options were exercised by the Named Executives during 1999. The following table sets forth the number of options held by the Named Executives and their value at December 31, 1999. 70 71
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT FY-END (#) OPTIONS AT FY-END($)(a) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Charles R. Miller 108,000 -- $ -- -- James G. VanDevender 350,000(b) -- -- -- Ronald R. Patterson -- -- -- -- Lawrence A. Humphrey 117,500 112,500 -- -- Michael M. Brooks 177,500(c) 112,500 -- -- Deborah H. Frankovich 85,625 84,375 -- -- Robert M. Starling 85,625 84,375 -- --
- --------------- (a) Market value of underlying securities at December 31, 1999 was below the option exercise price for all options outstanding. (b) Excludes 180,000 Value Options, which Mr. VanDevender gave up all rights to exercise or dispose of and which were cancelled upon his subsequent resignation from the Company on February 29, 2000. Reported shares included 278,000 options, which expire, if not exercised within 90 days following Mr. VanDevender's resignation from the Company, and 72,000 options, which expire on December 31, 2000. (c) All reported options expire if not exercised within 90 days following Mr. Brooks' resignation from the Company. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The Company has a supplemental executive retirement plan ("SERP") to provide additional post-termination benefits to selected members of management and certain highly compensated employees. As a result of a change in control from the Merger, officers and employees of the Company who were participants in the SERP prior to the Merger became fully vested in all benefits thereunder. Pursuant to their respective employment agreements, certain Champion executives became participants in the SERP and received retroactive benefits for their years of service with Champion. In April 1997, the Board of Directors elected to terminate the provision of future benefits for certain participants under the plan. Pursuant to the Executive Agreement, the Company was released from SERP obligations to Messrs. Miller, VanDevender and Patterson. In turn, the Company paid the senior executives $501,272 during 1998 (as reported in footnote (c) to the Summary Compensation Table), which represented amounts due such individuals for vested benefits under the SERP. In connection with the global settlement of the Shareholder Litigation, the Company was also released from certain existing contractual obligations under the SERP to certain former officers when the settlement became effective. Messrs. Brooks, Humphrey, Starling and Ms. Frankovich do not participate in the SERP. No other officers of the Company participate in the SERP. ANNUAL BONUS PLAN The 1999 Bonus Plan (the "Bonus Plan") is designed to reward certain employees of the Company for achieving corporate performance objectives. The Bonus Plan is intended to provide an incentive for superior work and to motivate participating employees toward higher achievement and business results, to link their goals and interests more closely with those of the Company and its shareholders, and to enable the Company to attract and retain highly qualified employees. With respect to those officers holding the title of executive officer and above, the Bonus Plan is administered and approved by the Compensation and Stock Option Committee each year. Upon achievement by the 71 72 Company of certain targeted operating results or other performance goals, such as operating income, earnings per share or quality standards, the Company will pay performance bonuses, the aggregate amounts of which will be determined annually based upon an objective formula. EMPLOYEE RETIREMENT SAVINGS 401(k) PLAN The Company has a defined contribution 401(k) retirement plan covering all eligible employees at its hospitals and the corporate office. Participants may contribute up to 20% of pretax compensation, not exceeding a limit set annually by the Internal Revenue Service. The Company matched $.25 for each $1.00 of employee contributions up to 6% of employees' gross pay. The Company may make additional discretionary contributions. In 1999, the Company contributed $1.2 million to the plan. CHANGE OF CONTROL SEPARATION PAY PLAN Effective August 1, 1997 and amended April 1, 1999, the Company established the Change of Control Separation Pay Plan (the "Separation Pay Plan") to retain key employees and to provide, under certain circumstances, severance to participants whose employment with the Company ends after a Change of Control, as defined. Messrs. Miller, VanDevender and Patterson did not participate in the Separation Pay Plan. Messrs. Humphrey, Brooks, Starling and Ms. Frankovich and other officers and certain employees of the Company participated in the Separation Pay Plan which was administered by the Compensation and Stock Option Committee and provided participants with severance benefits, under certain circumstances, ranging from twelve to twenty-four months of base salary, as defined. The Separation Pay Plan expired on December 31, 1999. EMPLOYMENT, SERVICES AND OTHER AGREEMENTS On July 1, 1999, the Company entered into an employment agreement, which was extended through February 29, 2000, with Mr. VanDevender. Pursuant therewith, Mr. VanDevender's compensation included (i) a base salary of not less than $45,000 per month, (ii) a bonus of $125,000, plus a variable component based on the completion of certain events before December 31, 1999 and (iii) certain benefits, including, but not limited to, life insurance and long-term disability. The agreement also included certain non-compete provisions, which will remain in effect for a period of 12 months following Mr. VanDevender's resignation from the Company on February 29, 2000. On November 25, 1998, the Company and the Senior Executives executed the Executive Agreement superseding their then existing employment contracts and certain other stock option and retirement agreements with the Company. See Item 8. Note 15 for a more comprehensive discussion of the terms of the agreement. The Company entered into Indemnity and Insurance Coverage Agreements, effective August 16, 1996, with the certain Named Executives, members of the Board of Directors and certain other officers of the Company, to advance reasonable defense costs in connection with litigation, investigations and other proceedings, subject to their undertakings to repay such costs in certain circumstances. Pursuant to these agreements, the Company incurred defense costs of approximately $205,000 in 1999 on behalf of Messrs. Miller, VanDevender and Patterson, collectively. COMPENSATION OF DIRECTORS Beginning in October 1999, each non-employee director of the Company receives an annual fee of $25,000 (reduced from $30,000 prior thereto), a fee of $2,500 for each meeting (or $1,000 for each 72 73 telephonic conference) of the Board or any committee thereof attended and annual grant of fully-vested stock options at each annual meeting of stockholders after which the director continues to serve. Directors of the Company who are also employees of the Company will not receive any additional compensation for their service as directors. All directors will be reimbursed for reasonable expenses incurred in the performance of their duties. Directors are also eligible to receive options to purchase shares of Common Stock under the 1996 Stock Incentive Plan (the "Incentive Plan"). In 1999, the Company granted each non-employee director named herein, 10,000 shares of fully-vested options with option price equal to the closing price of the Company's common stock on the date of grant ($0.63 per share). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information concerning the shares of Common Stock beneficially owned as of March 27, 2000 by (i) each stockholder known by the Company to be a beneficial owner of more than five percent of Common Stock, (ii) each director of the Company, (iii) Mr. James G. VanDevender, the Company's former chief executive officer, and four of the most highly compensated executive officers and (iv) all directors and executive officers of the Company as a group. The table below also does not reflect the aggregate shares of common stock held by the former Champion shareholders. If these shareholders were treated as a group under Section 13(d) of the Securities Exchange Act of 1934 for the purposes of holding their shares, the group would hold in excess of five percent of the issued and outstanding shares of common stock, and the shareholdings of each of the Champion shareholders would need to be disclosed in the table. Although the former Champion shareholders could be deemed to be a group for purposes of holding shares of the Company's common stock, they have not filed the disclosure that would be required if they were considered a group.
AMOUNT AND NATURE OF BENEFICIAL PERCENTAGE OF NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNERSHIP (2)(3) CLASS (3) ---------------------------------------- ------------------------------- ------------- Park-Hospital GmbH(4,5) 19,906,742 34.5% Paracelsus-Kliniken-Deutschland GmbH(4,5) 19,906,742 34.5% Dr. Heiner Meyer zu Losebeck(4,5) 19,916,742(7) 34.5% Peter Frommhold(5,6) 19,906,742 34.5% Peter Schnitzler(4) 10,000(7) * James G. VanDevender 450,000(8) * Nolan Lehmann(9,10,11) 2,585,409 4.5% Equus II Incorporated(9,10) 2,018,213 3.5% Equus Capital Partners, L.P.(9,10) 540,481 1.0 Joan S. Fortune 10,000(7) * Robert W. Miller 15,000(7) * Lawrence P. English 10,000(7) * Olympus Private Placement, L.P.(12, 13) 3,319,261 5.8% Robert S. Morris(12, 13) 3,335,239 5.8% James A. Conroy(12, 13) 3,335,239 5.8% Lawrence A. Humphrey 195,910(14) * Michael M. Brooks 212,916(15) * Deborah H. Frankovich 167,035(16) * Robert M. Starling 135,606(17) * All directors and officers as a group (17 persons) 23,960,183(18) 40.7%
73 74 - ------------ * Percentage is less than 1% of the total outstanding shares of the Company. (1) The address of each named director and officer, unless otherwise indicated, is c/o Paracelsus Healthcare Corporation, 515 W. Greens Road, Suite 500, Houston, Texas 77067. (2) Unless otherwise indicated, such shares of Common Stock are owned directly with sole voting and investment power. (3) Includes shares issuable upon exercise of stock options or warrants that are exercisable as of, or exercisable 60 days after March 27, 2000. Such shares, for the purpose of computing the percentage of outstanding Common Stock, are deemed owned by each named individual and by the group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (4) The address is Sedanstrasse 109, D-49076 Osnabruck, Federal Republic of Germany. (5) Park is the record owner of such shares. PKD, as the owner of all of Park shares, may be deemed to beneficially own the shares of the Company's common stock owned by Park. Pursuant to the Schedule 13D (Amendment No. 2) filed by Park, PKD, Dr. Heiner Meyer zu Losebeck, and Mr. Peter Frommhold on December 8, 1999, Dr. Meyer zu Losebeck and Mr. Frommhold, as co-executors of the Estate of Professor Dr. Hartmut Krukemeyer, and the Managing Directors of Park and PKD share indirect voting and investment power over the shares of Common Stock owned by Park. Therefore, they may be deemed to beneficially own the shares of Common Stock owned by Park. (6) The address is Drubbel 17/18, D-48143 Munster, Federal Republic of Germany. (7) Includes 10,000 shares issuable upon exercise of options that are currently exercisable. (8) Includes 350,000 shares issuable upon exercise of options that are currently exercisable. Options to purchase 278,000 shares expire if not exercised upon 90 days following Mr. VanDevender's resignation from the Company and options to purchase 72,000 shares expire if not exercised on or before December 31, 2000. (9) Mr. Lehmann is President of Equus Capital Management Corporation, the financial advisor and manager of Equus II Incorporated and Equus Capital Partners, L.P. Mr. Lehmann is also President and Director of Equus II Incorporated. (10) Address is 2929 Allen Parkway, Suite 2500, Houston, TX 77019. (11) By reason of his status as President of Equus Capital Management Corporation and as President and Director of Equus II Incorporated, Mr. Lehmann may be deemed to be the beneficial owner of the common shares owned by Equus II Incorporated and Equus Capital Partners, L.P. In addition, Mr. Lehmann owns directly 16,715 shares of Common Stock and 10,000 shares issuable upon exercise of options that are currently exercisable. Accordingly, Mr. Lehmann may be deemed to be the beneficial owner of 2,585,409 shares of Common Stock. Mr. Lehmann disclaims beneficial ownership of Common Stock owned by Equus II Incorporated and Equus Capital Partners, L.P. Both Equus II Incorporated and Equus Capital Partners, L.P. (as well as other entities with which Mr. Lehmann is associated) are former Champion shareholders. The number of shares beneficially owned by Mr. Lehmann does not include any shares owned by other former Champion shareholders. (12) Address of principal business office for each reporting person is c/o Olympus Partners, Metro Center, One Station Place, Stamford, Connecticut 06902 (13) Pursuant to the Schedule 13D filed on September 17, 1999, by the indicated reporting persons, Messrs. Morris and Conroy share control and may be deemed beneficial owners of the 3,319,261 shares owned by Olympus Private Placement, L.P. and 15,978 shares owned by Olympus Executive Fund, L.P. by virtue of their positions as general partners or officers of general partners of these entities or other entities that control these entities. Olympus Private Placement, L. P. and Olympus Executive Fund, L.P. are former Champion shareholders and may be part of a group of former Champion shareholders. The number of shares beneficially owned by Olympus Private Placement, L. P. and Olympus Executive Fund, L.P. does not include any shares owned by other former Champion shareholders. (14) Includes 152,916 shares issuable upon exercise of options that are currently exercisable, or exercisable within 60 days. 74 75 (15) Includes 212,916 shares issuable upon exercise of options that are currently exercisable, or exercisable within 60 days. If not exercised all reported options expire upon 90 days following Mr. Brooks' resignation from the Company. (16) Includes 112,187 shares issuable upon exercise of options that are currently exercisable, or exercisable within 60 days. (17) Includes 112,187 shares issuable upon exercise of options that are currently exercisable, or exercisable within 60 days. (18) Includes 1,218,434 shares issuable upon exercise of options that are currently exercisable, or exercisable within 60 days. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS THE EXECUTIVE AGREEMENT - On November 25, 1998, the Company and the Senior Executives, Mr. Charles R. Miller, Mr. James G. VanDevender and Mr. Ronald R. Patterson executed the Executive Agreement superseding their existing employment contracts and certain other stock option and retirement agreements with the Company. Under the Executive Agreement, as amended, Messrs. Miller and Patterson remained in their management positions with the Company until their resignation on June 30, 1999. Mr. VanDevender entered into a separate employment agreement with the Company and was designated interim Chief Executive Officer effective July 1, 1999 until his resignation from the Company on February 29, 2000. Pursuant to the Executive Agreement, the Company paid the Senior Executives $501,000 in 1998 for amounts due under the SERP, and the Senior Executives released the Company from any obligations under the SERP or any similar retirement plan. In April 1999, the Company also paid the Senior Executives $4.6 million, of which approximately $4.0 million represented consideration for the required stay-period which expired June 30, 1999 and $645,000 was related to a non-compete arrangement provided in the Executive Agreement. Pursuant to the Executive Agreement, the Senior Executives also gave up all rights to exercise or dispose of 696,000 Value Options that they received at the time of the Merger. The Value Options were cancelled upon the Senior Executives' resignation from the Company. The Company and the Senior Executives provided each other with mutual releases of any and all obligations either party may have under the respective employment agreements or otherwise arising out of the Senior Executives' employment. 6.51% SUBORDINATED NOTE - The Former Majority Shareholder received a $7.2 million 6.51% subordinated note from the Company (See Note 7). The Company paid interest on such note of $467,000 in 1999 and 1998 and $533,000 in 1997. In connection with the global settlement of the Shareholder Litigation and as the result of the repayment of the senior credit facilities, the Company is obligated to resume payments of principal on the stated terms of the note and use its reasonable best efforts to repay outstanding amounts in arrears. As the result of the default of interest payment under the Notes, the Company is prohibited from making principal or interest payments on the note. Additionally, the Former Majority Shareholder has the ability to accelerate the debt, to increase the interest rate on the note to 8.5% per annum and seek other remedies from the Company. CONSULTING AGREEMENT - Effective August 1996, the Company was a party to an agreement with the Former Chairman, pursuant to which he provided management and strategic advisory services to the Company for an annual consulting fee for a term not to exceed ten years. The Company paid the Former Chairman consulting fees of $187,500 in 1999 and 1998 and $500,000 in 1997. In connection with the global settlement of the Shareholder Litigation, the Company paid the Former Chairman $1.0 million in cash and issued to him 1.0 million shares of common stock to terminate the agreement. INSURANCE AGREEMENT - The Company is also a party to an insurance agreement, which provides insurance benefits to the Former Chairman in the event of his death or permanent disability in an amount equal to $1.0 million per year during the 10-year term of such agreement, which expires 2006. 75 76 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (A)(1) FINANCIAL STATEMENTS See Part II. Item 8 of this Report. (A)(2) FINANCIAL STATEMENT SCHEDULE PARACELSUS HEALTHCARE CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ($ in 000's)
BALANCE AT CHARGED TO BEGINNING COSTS AND BALANCE AT DESCRIPTION OF YEAR EXPENSES WRITE-OFFS OTHER END OF YEAR ----------- ---------- ---------- ---------- ----- ----------- Year ended December 31, 1999 Allowance for doubtful accounts $40,551 41,692 (54,690) -- $27,553 Year ended December 31, 1998 Allowance for doubtful accounts $54,442 42,659 (56,550) -- $40,551 Year ended December 31, 1997 Allowance for doubtful accounts $36,469 46,606 (28,633) -- $54,442
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable or have been disclosed in the consolidated financial statements and notes thereto and therefore have been omitted. (A)(3) EXHIBITS 3.1(s) Amended and Restated Bylaws of Paracelsus Healthcare Corporation dated March 24, 1999. 3.4(a) Amended and Restated Articles of Incorporation of Paracelsus. 4.1(a) Indenture, dated August 16, 1996 between Paracelsus and Bank of New York (as successor to AmSouth Bank of Alabama) as Trustee (including the form of certificate representing the 10% Senior Subordinated Notes due 2006). 4.2(b) Shareholder Protection Rights Agreement between Paracelsus and ChaseMellon Shareholder Services, L.L.C, as Rights Agent. 4.5(c) Form of Warrant issued pursuant to Champion Series E Note Purchase Agreement, dated May 1, 1995, as amended. 76 77 4.6(d) Form of Warrant issued pursuant to Champion Series D Note and Stock Purchase Agreement dated December 31, 1993, as amended. 4.9(e) Certificate representing Common Stock. 10.1(e) Pooling Agreement, dated as of April 16, 1993 among PHC Funding Corp. II ("PFC II"), Sheffield Receivables Corporation and Bankers Trust Company, as trustee (the "Trustee"). 10.2(e) Servicing Agreement, dated as of April 16, 1993, among PFC II, Paracelsus and the Trustee. 10.3(e) Guarantee, dated as of April 16, 1993, by Paracelsus in favor of PFC II. 10.4(e) Sale and Servicing Agreement between subsidiaries of Paracelsus and PFC II. 10.5(e) Subordinate Note by PFC II in favor of Hospitals. 10.12(q) Stock Purchase Agreement for Bledsoe County General Hospital, dated March 12, 1999, among Paracelsus Healthcare Corporation, Paracelsus Bledsoe County General Hospital, Inc., and Associates Capital Group, LLC. 10.13(q) First Amendment to Stock Purchase Agreement for Bledsoe County General Hospital, dated March 31, 1999, among Paracelsus Healthcare Corporation, Paracelsus Bledsoe County General Hospital, Inc., and Associates Capital Group, LLC. 10.16(f) The Restated Paracelsus Healthcare Corporation Supplemental Executive Retirement Plan. 10.17(a) Amendment No. 1 to the Supplemental Executive Retirement Plan. 10.19(e) Paracelsus Healthcare Corporation Annual Incentive Plan (10.17). 10.20(r) Asset Purchase Agreement dated March 15, 1999, by and among Paracelsus Convalescent Hospitals, Inc., Paracelsus Real Estate Corporation and Sunland Associates, Inc. 10.21(r) Amendment One to Asset Purchase Agreement, dated April 14, 1999, by and among Paracelsus Convalescent Hospitals, Inc., Paracelsus Real Estate Corporation and Sunland Associates, Inc. 10.22(r) Rheem Valley Asset Purchase Agreement, dated March 15, 1999, by and among Paracelsus Convalescent Hospitals, Inc., Paracelsus Real Estate Corporation and Sunland Associates, Inc. 10.23(r) Amendment One to Rheem Valley Asset Purchase Agreement, dated April 14, 1999, by and among Paracelsus Convalescent Hospitals, Inc., Paracelsus Real Estate Corporation and Sunland Associates, Inc. 77 78 10.24(s) Stock Purchase Agreement dated September 14, 1999, by and among Paracelsus Healthcare Corporation, Paracelsus Senatobia Community Hospital, Inc. and Associates Capital Group, LLC. 10.26(t) Recapitalization Agreement, dated August 16, 1999, by and among Paracelsus Healthcare Corporation, PHC/CHC Holdings, Inc., as parents, and PHC/Psychiatric Healthcare Corporation, PHC-Salt Lake City, Inc., Paracelsus Pioneer Valley Hospital, Inc., Pioneer Valley Health Plan, Inc., PHC-Jordan Valley, Inc., Paracelsus PHC Regional Medical Center, Inc., Paracelsus Davis Hospital, Inc., PHC Utah, Inc., and Clinicare of Utah, Inc., as sellers, and JLL Hospital, LLC, as buyer. 10.33(f) Restated Champion Healthcare Corporation Founders' Stock Option Plan. 10.34(a) License Agreement between Dr. Manfred George Krukemeyer and Paracelsus. 10.36(a) Registration Rights Agreement between Paracelsus and Park-Hospital GmbH. 10.39(a) Insurance Agreement between Paracelsus and Dr. Manfred G. Krukemeyer. 10.40(a) Non-Compete Agreement between Paracelsus and Dr. Manfred G. Krukemeyer. 10.42(a) Dividend and Note Agreement between Paracelsus and Park-Hospital GmbH. 10.48(a) Paracelsus 1996 Stock Incentive Plan. 10.49(a) Paracelsus Healthcare Corporation Executive Officer Performance Bonus Plan. 10.54(a) Registration Rights Agreement among Paracelsus and certain Champion Investors. 10.56(a) Indemnity and Insurance Coverage Agreement between Paracelsus and certain Champion and Paracelsus executive officers. 10.57(m) AmeriHealth Amended and Restated 1988 Non-Qualified Stock Option Plan. 10.58(k) Champion Employee Stock Option Plan dated December 31, 1991, as amended (10.14). 10.59(k) Champion Employee Stock Option Plan No. 2 dated May 29, 1992, as amended (10.15). 10.60(k) Champion Employee Stock Option Plan No. 3 dated September 1992, as amended (10.16). 10.61(k) Champion Employee Stock Option Plan No. 4, dated January 5, 1994, as amended (10.17). 10.62(n) Champion Healthcare Corporation Physicians Stock Option Plan (4.2). 10.63(k) Champion Selected Executive Stock Option Plan No. 5, dated May 25, 1995 (4.12). 78 79 10.64(k) Champion Directors' Stock Option Plan, dated 1992. 10.65(a) Paracelsus' 6.51% Subordinated Notes Due 2006 (10.64). 10.67(g) The Second Amended and First Restated Asset Purchase Agreement for Chico Community Hospital, dated December 15, 1997, and as amended on June 12, 1998. 10.68(g) Asset Purchase Agreement for Chico Community Rehabilitation Hospital, dated December 15, 1997, and as amended on June 10, 1998. 10.69(g) Agreement for Purchase and Sale of Partnership Interest, dated June 1, 1998, by and between Dakota Medical Foundation and Paracelsus Healthcare Corporation of North Dakota, Inc. 10.70(h) Asset Purchase Agreement, dated September 30, 1998, by and among Alta Healthcare System LLC, and Paracelsus Healthcare Corporation. 10.71(i) 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; and (d) individual defendant Joseph Sharp. 10.72(j) $180 Million Reducing Revolving Credit Facility and $75 Million Term Loan Facilities dated as of March 30, 1998, among Paracelsus, Banque Paribas, as agent, and other lenders named therein. 10.73(j) Change in Control Separation Pay Plan. 10.74(k) The First Amendment to Amended and Restated Credit Agreement, effective June 15, 1998, by and among Paracelsus Healthcare Corporation, Paribas, Toronto Dominion (Texas), Inc. and Bank Montreal. 10.75(o) Memorandum of Understanding among Paracelsus Healthcare Corporation, Charles R. Miller, James G. VanDevender, Ronald R. Patterson, Park-Hospital GmbH, and the members of the Ad Hoc Committee of Former Shareholders of Champion Healthcare Corporation. 10.76 Employment agreement effective July 1, 1999 between James G. VanDevender and Paracelsus Healthcare Corporation. * 10.77(p) Third Amendment to Amended and Restated Credit Agreement and Approval of Asset Dispositions effective June 30, 1999. 10.78(p) Shareholder Agreement dated March 19, 1999, between Park-Hospital GmbH and Paracelsus Healthcare Corporation. 10.79(p) Settlement Agreement dated March 24, 1999, by and among the former shareholders of Champion Healthcare Corporation, Park-Hospital GmbH, Dr. Manfred Georg Krukemeyer, and Paracelsus Healthcare Corporation. 79 80 10.80(p) Stipulation of Settlement dated May 11, 1999, by and among plaintiffs, individually and as representatives of the Class, as defined, Paracelsus Healthcare Corporation, Manfred G. Krukemeyer, R.J. Messenger, James T. Rush, Charles R. Miller, James G. VanDevender, the Champion Shareholders, as defined, Park-Hospital GmbH, Donaldson Lufkin & Jenrette Securities Corporation, Bear Stearns & Co., Inc., Smith Barney, Inc., and ABN AMRO Chicago Corporation in connection with the litigation captioned In re Paracelsus Corp. Securities Litigation, Master File No. H-96-3464 (EW) filed with the United States District Court for the Southern District of Texas. 10.81(p) Settlement Agreement dated March 17, 1999, by and between James G. Caven and Robert Orovitz, derivatively on behalf of Champion Healthcare Corporation and double derivatively on behalf of Paracelsus Healthcare Corporation; Paracelsus Healthcare Corporation; the former shareholders of Champion Healthcare Corporation; Park-Hospital GmbH; Donaldson Lufkin & Jenrette Securities Corporation; Bears Stearns & Co.; Smith Barney, Inc.; and ABN AMRO Chicago Corporation; Manfred Georg Krukemeyer; Charles R. Miller; James G. VanDevender; Ronald R. Patterson; R.J. Messenger; James T. Rush; Robert C. Joyner; Michael D. Hofmann; Christian A. Lange; and Scott K. Barton. 10.82 Amendment No. 1 to Employment Agreement effective July 1, 1999 between James G. VanDevender and Paracelsus Healthcare Corporation. 21.1 List of subsidiaries of Paracelsus. 23.1 Consent of Ernst & Young LLP. 27 Financial Data Schedule. - ---------------------- * Portions of the indicated exhibit have been omitted pursuant to a request for confidentiality treatment, which was filed separately with the Securities and Exchange Commission on March 30, 2000. (a) Incorporated by reference from Exhibit of the same number (or if otherwise noted, Exhibit number contained in parenthesis which refers to the exhibit number in such Quarterly Report) to the Company's Quarterly Report on Form 10-Q for quarter ended September 30, 1996. (b) Incorporated by reference from Exhibit of the same number to the Company's Registration Statement on Form 8-A, filed on August 12, 1996. (c) Incorporated by reference from Exhibit 10.23(g) to Champion's Annual Report on Form 10-K for the year ended December 31, 1995. (d) Incorporated by reference from Exhibit 10.23(f) to Champion's Annual Report on Form 10-K for the year ended December 31, 1995. (e) Incorporated by reference from Exhibit of the same number to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 80 81 (f) Incorporated by reference from Exhibit of the same number to the Company's Registration Statement on Form S-4, Registration No. 333-08521, filed on July 19, 1996. (g) Incorporated by reference from Exhibits of the same numbers to the Company's Current Report on Form 8-K, dated June 30, 1998. (h) Incorporated by reference from Exhibit of the same number to the Company's Current Report on Form 8-K, dated June 30, 1998. (i) Incorporated by reference from Exhibit of the same number to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. (j) Incorporated by reference from Exhibits 10.6 and 10.15 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. (k) Incorporated by reference from Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. (l) Incorporated by reference from Exhibit of the same number (or if otherwise noted, Exhibit number contained in parenthesis which refers to the exhibit number in such Annual Report) to Champion's Annual Report for the year ended December 31, 1994. (m) Incorporated by reference from Exhibit 10.06 to AmeriHealth's Annual Report on Form 10K for the year ended December 31, 1992. (n) Incorporated by reference from Exhibit of the same number (or if otherwise noted, Exhibit number contained in parenthesis which refers to the exhibit number in such Registration Statement) to Champion's Registration Statement on Form S-8, filed on August 3, 1995. (o) Incorporated by reference from Exhibit of the same number to the Company's Annual Report on Form 10-K, dated December 31, 1998. (p) Incorporated by reference from Exhibit of the same number to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. (q) Incorporated by reference from Exhibit of the same number to the Company's Current Report on Form 8-K, dated April 15, 1999. (r) Incorporated by reference from Exhibit of the same number to the Company's Current Report on Form 8-K, dated July 2, 1999. (s) Incorporated by reference from Exhibit of the same number to the Company's Current Report on Form 8-K, dated September 30, 1999. (t) Incorporated by reference from Exhibit of the same number to the Company's Current Report on Form 8-K, dated October 8, 1999. (u) Incorporated by reference from Exhibit of the same number to the Company's Quarterly Report on Form 10-Q for the quarter dated June 30, 1999. 81 82 (a) REPORTS ON FORM 8-K The Company filed on October 15, 1999, a Current Report on Form 8-K, dated September 30, 1999, reporting pursuant to Item 2, the sale of the stock of Paracelsus Senatobia Community Hospital, Inc. The Company filed on October 25, 1999, a Current Report on Form 8-K, dated October 8, 1999, reporting pursuant to Item 2, the sale of 93.9% of the outstanding common stock of a wholly owned subsidiary which owned substantially all of the assets of five hospitals and related facilities located in Salt Lake City, Utah. 82 83 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARACELSUS HEALTHCARE CORPORATION (Registrant) Date: March 30, 2000 By: /s/ ROBERT L. SMITH ----------------------------------------- Robert L. Smith Chief Executive Officer & Director Pursuant to the requirement of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROBERT L. SMITH Chief Executive Officer & March 30, 2000 - ----------------------------------- Director Robert L. Smith /s/ LAWRENCE A. HUMPHREY Executive Vice President, Chief March 30, 2000 - ----------------------------------- Financial Officer Lawrence A. Humphrey /s/ ROBERT M. STARLING Senior Vice President and March 30, 2000 - ----------------------------------- Controller Robert M. Starling /s/ HEINER MEYER ZU LOSEBECK Director March 30, 2000 - ----------------------------------- Dr. Heiner Meyer Zu Losebeck /s/ NOLAN LEHMANN Director March 30, 2000 - ----------------------------------- Nolan Lehmann /s/ PETER SCHNITZLER Director March 30, 2000 - ----------------------------------- Peter Schnitzler /s/ LAWRENCE P. ENGLISH Director March 30, 2000 - ----------------------------------- Lawrence P. English /s/ JOAN S. FORTUNE Director March 30, 2000 - ----------------------------------- Joan S. Fortune /s/ ROBERT W. MILLER Director March 30, 2000 - ----------------------------------- Robert W. Miller
83 84 EXHIBIT INDEX
Exhibit No. Description ----------- ----------- 3.1(s) Amended and Restated Bylaws of Paracelsus Healthcare Corporation dated March 24, 1999. 3.4(a) Amended and Restated Articles of Incorporation of Paracelsus. 4.1(a) Indenture, dated August 16, 1996 between Paracelsus and Bank of New York (as successor to AmSouth Bank of Alabama) as Trustee (including the form of certificate representing the 10% Senior Subordinated Notes due 2006). 4.2(b) Shareholder Protection Rights Agreement between Paracelsus and ChaseMellon Shareholder Services, L.L.C, as Rights Agent. 4.5(c) Form of Warrant issued pursuant to Champion Series E Note Purchase Agreement, dated May 1, 1995, as amended.
85
Exhibit No. Description ----------- ----------- 4.6(d) Form of Warrant issued pursuant to Champion Series D Note and Stock Purchase Agreement dated December 31, 1993, as amended. 4.9(e) Certificate representing Common Stock. 10.1(e) Pooling Agreement, dated as of April 16, 1993 among PHC Funding Corp. II ("PFC II"), Sheffield Receivables Corporation and Bankers Trust Company, as trustee (the "Trustee"). 10.2(e) Servicing Agreement, dated as of April 16, 1993, among PFC II, Paracelsus and the Trustee. 10.3(e) Guarantee, dated as of April 16, 1993, by Paracelsus in favor of PFC II. 10.4(e) Sale and Servicing Agreement between subsidiaries of Paracelsus and PFC II. 10.5(e) Subordinate Note by PFC II in favor of Hospitals. 10.12(q) Stock Purchase Agreement for Bledsoe County General Hospital, dated March 12, 1999, among Paracelsus Healthcare Corporation, Paracelsus Bledsoe County General Hospital, Inc., and Associates Capital Group, LLC. 10.13(q) First Amendment to Stock Purchase Agreement for Bledsoe County General Hospital, dated March 31, 1999, among Paracelsus Healthcare Corporation, Paracelsus Bledsoe County General Hospital, Inc., and Associates Capital Group, LLC. 10.16(f) The Restated Paracelsus Healthcare Corporation Supplemental Executive Retirement Plan. 10.17(a) Amendment No. 1 to the Supplemental Executive Retirement Plan. 10.19(e) Paracelsus Healthcare Corporation Annual Incentive Plan (10.17). 10.20(r) Asset Purchase Agreement dated March 15, 1999, by and among Paracelsus Convalescent Hospitals, Inc., Paracelsus Real Estate Corporation and Sunland Associates, Inc. 10.21(r) Amendment One to Asset Purchase Agreement, dated April 14, 1999, by and among Paracelsus Convalescent Hospitals, Inc., Paracelsus Real Estate Corporation and Sunland Associates, Inc. 10.22(r) Rheem Valley Asset Purchase Agreement, dated March 15, 1999, by and among Paracelsus Convalescent Hospitals, Inc., Paracelsus Real Estate Corporation and Sunland Associates, Inc. 10.23(r) Amendment One to Rheem Valley Asset Purchase Agreement, dated April 14, 1999, by and among Paracelsus Convalescent Hospitals, Inc., Paracelsus Real Estate Corporation and Sunland Associates, Inc.
86
Exhibit No. Description ----------- ----------- 10.24(s) Stock Purchase Agreement dated September 14, 1999, by and among Paracelsus Healthcare Corporation, Paracelsus Senatobia Community Hospital, Inc. and Associates Capital Group, LLC. 10.26(t) Recapitalization Agreement, dated August 16, 1999, by and among Paracelsus Healthcare Corporation, PHC/CHC Holdings, Inc., as parents, and PHC/Psychiatric Healthcare Corporation, PHC-Salt Lake City, Inc., Paracelsus Pioneer Valley Hospital, Inc., Pioneer Valley Health Plan, Inc., PHC-Jordan Valley, Inc., Paracelsus PHC Regional Medical Center, Inc., Paracelsus Davis Hospital, Inc., PHC Utah, Inc., and Clinicare of Utah, Inc., as sellers, and JLL Hospital, LLC, as buyer. 10.33(f) Restated Champion Healthcare Corporation Founders' Stock Option Plan. 10.34(a) License Agreement between Dr. Manfred George Krukemeyer and Paracelsus. 10.36(a) Registration Rights Agreement between Paracelsus and Park-Hospital GmbH. 10.39(a) Insurance Agreement between Paracelsus and Dr. Manfred G. Krukemeyer. 10.40(a) Non-Compete Agreement between Paracelsus and Dr. Manfred G. Krukemeyer. 10.42(a) Dividend and Note Agreement between Paracelsus and Park-Hospital GmbH. 10.48(a) Paracelsus 1996 Stock Incentive Plan. 10.49(a) Paracelsus Healthcare Corporation Executive Officer Performance Bonus Plan. 10.54(a) Registration Rights Agreement among Paracelsus and certain Champion Investors. 10.56(a) Indemnity and Insurance Coverage Agreement between Paracelsus and certain Champion and Paracelsus executive officers. 10.57(m) AmeriHealth Amended and Restated 1988 Non-Qualified Stock Option Plan. 10.58(k) Champion Employee Stock Option Plan dated December 31, 1991, as amended (10.14). 10.59(k) Champion Employee Stock Option Plan No. 2 dated May 29, 1992, as amended (10.15). 10.60(k) Champion Employee Stock Option Plan No. 3 dated September 1992, as amended (10.16). 10.61(k) Champion Employee Stock Option Plan No. 4, dated January 5, 1994, as amended (10.17). 10.62(n) Champion Healthcare Corporation Physicians Stock Option Plan (4.2). 10.63(k) Champion Selected Executive Stock Option Plan No. 5, dated May 25, 1995 (4.12).
87
Exhibit No. Description ----------- ----------- 10.64(k) Champion Directors' Stock Option Plan, dated 1992. 10.65(a) Paracelsus' 6.51% Subordinated Notes Due 2006 (10.64). 10.67(g) The Second Amended and First Restated Asset Purchase Agreement for Chico Community Hospital, dated December 15, 1997, and as amended on June 12, 1998. 10.68(g) Asset Purchase Agreement for Chico Community Rehabilitation Hospital, dated December 15, 1997, and as amended on June 10, 1998. 10.69(g) Agreement for Purchase and Sale of Partnership Interest, dated June 1, 1998, by and between Dakota Medical Foundation and Paracelsus Healthcare Corporation of North Dakota, Inc. 10.70(h) Asset Purchase Agreement, dated September 30, 1998, by and among Alta Healthcare System LLC, and Paracelsus Healthcare Corporation. 10.71(i) 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; and (d) individual defendant Joseph Sharp. 10.72(j) $180 Million Reducing Revolving Credit Facility and $75 Million Term Loan Facilities dated as of March 30, 1998, among Paracelsus, Banque Paribas, as agent, and other lenders named therein. 10.73(j) Change in Control Separation Pay Plan. 10.74(k) The First Amendment to Amended and Restated Credit Agreement, effective June 15, 1998, by and among Paracelsus Healthcare Corporation, Paribas, Toronto Dominion (Texas), Inc. and Bank Montreal. 10.75(o) Memorandum of Understanding among Paracelsus Healthcare Corporation, Charles R. Miller, James G. VanDevender, Ronald R. Patterson, Park-Hospital GmbH, and the members of the Ad Hoc Committee of Former Shareholders of Champion Healthcare Corporation. 10.76 Employment agreement effective July 1, 1999 between James G. VanDevender and Paracelsus Healthcare Corporation. * 10.77(p) Third Amendment to Amended and Restated Credit Agreement and Approval of Asset Dispositions effective June 30, 1999. 10.78(p) Shareholder Agreement dated March 19, 1999, between Park-Hospital GmbH and Paracelsus Healthcare Corporation. 10.79(p) Settlement Agreement dated March 24, 1999, by and among the former shareholders of Champion Healthcare Corporation, Park-Hospital GmbH, Dr. Manfred Georg Krukemeyer, and Paracelsus Healthcare Corporation.
88
Exhibit No. Description ----------- ----------- 10.80(p) Stipulation of Settlement dated May 11, 1999, by and among plaintiffs, individually and as representatives of the Class, as defined, Paracelsus Healthcare Corporation, Manfred G. Krukemeyer, R.J. Messenger, James T. Rush, Charles R. Miller, James G. VanDevender, the Champion Shareholders, as defined, Park-Hospital GmbH, Donaldson Lufkin & Jenrette Securities Corporation, Bear Stearns & Co., Inc., Smith Barney, Inc., and ABN AMRO Chicago Corporation in connection with the litigation captioned In re Paracelsus Corp. Securities Litigation, Master File No. H-96-3464 (EW) filed with the United States District Court for the Southern District of Texas. 10.81(p) Settlement Agreement dated March 17, 1999, by and between James G. Caven and Robert Orovitz, derivatively on behalf of Champion Healthcare Corporation and double derivatively on behalf of Paracelsus Healthcare Corporation; Paracelsus Healthcare Corporation; the former shareholders of Champion Healthcare Corporation; Park-Hospital GmbH; Donaldson Lufkin & Jenrette Securities Corporation; Bears Stearns & Co.; Smith Barney, Inc.; and ABN AMRO Chicago Corporation; Manfred Georg Krukemeyer; Charles R. Miller; James G. VanDevender; Ronald R. Patterson; R.J. Messenger; James T. Rush; Robert C. Joyner; Michael D. Hofmann; Christian A. Lange; and Scott K. Barton. 10.82 Amendment No. 1 to Employment Agreement effective July 1, 1999 between James G. VanDevender and Paracelsus Healthcare Corporation. 21.1 List of subsidiaries of Paracelsus. 23.1 Consent of Ernst & Young LLP. 27 Financial Data Schedule.
- ---------------------- * Portions of the indicated exhibit have been omitted pursuant to a request for confidentiality treatment, which was filed separately with the Securities and Exchange Commission on March 30, 2000. (a) Incorporated by reference from Exhibit of the same number (or if otherwise noted, Exhibit number contained in parenthesis which refers to the exhibit number in such Quarterly Report) to the Company's Quarterly Report on Form 10-Q for quarter ended September 30, 1996. (b) Incorporated by reference from Exhibit of the same number to the Company's Registration Statement on Form 8-A, filed on August 12, 1996. (c) Incorporated by reference from Exhibit 10.23(g) to Champion's Annual Report on Form 10-K for the year ended December 31, 1995. (d) Incorporated by reference from Exhibit 10.23(f) to Champion's Annual Report on Form 10-K for the year ended December 31, 1995. (e) Incorporated by reference from Exhibit of the same number to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 89 (f) Incorporated by reference from Exhibit of the same number to the Company's Registration Statement on Form S-4, Registration No. 333-08521, filed on July 19, 1996. (g) Incorporated by reference from Exhibits of the same numbers to the Company's Current Report on Form 8-K, dated June 30, 1998. (h) Incorporated by reference from Exhibit of the same number to the Company's Current Report on Form 8-K, dated June 30, 1998. (i) Incorporated by reference from Exhibit of the same number to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. (j) Incorporated by reference from Exhibits 10.6 and 10.15 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. (k) Incorporated by reference from Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. (l) Incorporated by reference from Exhibit of the same number (or if otherwise noted, Exhibit number contained in parenthesis which refers to the exhibit number in such Annual Report) to Champion's Annual Report for the year ended December 31, 1994. (m) Incorporated by reference from Exhibit 10.06 to AmeriHealth's Annual Report on Form 10K for the year ended December 31, 1992. (n) Incorporated by reference from Exhibit of the same number (or if otherwise noted, Exhibit number contained in parenthesis which refers to the exhibit number in such Registration Statement) to Champion's Registration Statement on Form S-8, filed on August 3, 1995. (o) Incorporated by reference from Exhibit of the same number to the Company's Annual Report on Form 10-K, dated December 31, 1998. (p) Incorporated by reference from Exhibit of the same number to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. (q) Incorporated by reference from Exhibit of the same number to the Company's Current Report on Form 8-K, dated April 15, 1999. (r) Incorporated by reference from Exhibit of the same number to the Company's Current Report on Form 8-K, dated July 2, 1999. (s) Incorporated by reference from Exhibit of the same number to the Company's Current Report on Form 8-K, dated September 30, 1999. (t) Incorporated by reference from Exhibit of the same number to the Company's Current Report on Form 8-K, dated October 8, 1999. (u) Incorporated by reference from Exhibit of the same number to the Company's Quarterly Report on Form 10-Q for the quarter dated June 30, 1999. EX-10.76 2 EMPLOYMENT AGREEMENT - JAMES G. VANDEVENDER 1 EXHIBIT 10.76 [ ] Employee's Copy [ ] Company's Copy PARACELSUS HEALTHCARE CORPORATION EMPLOYMENT AGREEMENT To JAMES G. VANDEVENDER This Agreement establishes the terms of your continued employment with Paracelsus Healthcare Corporation, Inc., a California corporation (the "Company") and reflects your new position as the Company's interim chief executive officer ("CEO"). EMPLOYMENT AND DUTIES You and the Company agree to your employment as interim CEO. In such position, you will report directly to the Company's Board of Directors (the "Board"). You agree to perform whatever duties the Board may assign you from time to time that are consistent with those of the CEO of a public company. During your employment, you agree to devote your full business time, attention, and energies to performing those duties (except as the Board otherwise agrees from time to time). On termination of this Agreement, you agree that you resign as an officer and director and from all other officer and director positions at the Company and subsidiaries. You agree that, if the Company hires or promotes a new CEO during the Term but retains your services in some other capacity, your change in position by itself does not constitute termination without Cause and does not entitle you to any Severance, whether under this Agreement or otherwise. However, the hiring or promotion of a new CEO does not alter the Company's obligations to you under this Agreement, including those obligations described under the Salary, Benefits, Bonus, Payments on Termination, and Severance sections. TERM OF EMPLOYMENT Your employment under this Agreement begins as of July 1, 1999 (the "Effective Date") and, unless sooner terminated or extended, ends on December 31, 1999. The period running from the Effective Date to the applicable date in the preceding sentence is the "Term." 2 COMPENSATION Salary The Company will pay you a salary (the "Salary") from the Effective Date at the rate of not less than $45,000 per month in accordance with its generally applicable payroll practices. Benefits During the Term, you will continue to be eligible to participate in employee benefit and fringe benefit plans and programs generally available to the Company's executive officers and such additional benefits as the Board may from time to time provide. In addition, during the Term, you will continue to be entitled to the following life insurance and disability coverages and fringe benefits: Life The Company will maintain for your benefit Insurance life insurance coverage with a face amount equal to three times the amount of your annual Salary as in effect from time to time; provided, however, that if the Company cannot obtain the full amount of such life insurance coverage at a reasonable cost, the Company may instead provide you with a lump sum death benefit, payable within 90 days following your death, in such amount as will, when added to any life insurance coverage the Company actually obtains, provide your beneficiary or beneficiaries with a net amount, after payment of any Federal and state income taxes, equal to the net, after-tax amount such beneficiary or beneficiaries would have received had the Company obtained the full amount of life insurance coverage provided for above. You will have the right to name and to change from time to time the beneficiary or beneficiaries under such life insurance coverage (and death benefits, if any). Such life insurance coverage (and death benefits, if any) will be in addition to any death benefits that may be payable under any accidental death and dismemberment plan, any separate business travel accident coverage, or any pension plan in which you may participate, and such coverage will also be in addition to any life insurance that you purchase for yourself. Long-Term If you become disabled (as defined in the Disability long-term disability plan the Company presently maintains), you are to receive disability benefits in an amount equal to 60% of your then annual Salary. Any amount payable under any Employment Agreement with James G. VanDevender Page 2 of 9 3 salary continuation plan (including any salary continuation provided under this Agreement) or disability plan maintained by the Company, and any amount payable to you or to your immediate family as a Social Security disability benefit or similar benefit will be counted towards the Company's fulfillment of such obligation. Disability benefits will be payable monthly beginning 30 days following disability and will continue until you are no longer disabled, or if earlier, until you reach age 65. Vacations You will be entitled to such paid vacation and time as you may reasonably take in your Holidays discretion so long as such vacation time does not interfere with the efficient discharge of your duties and responsibilities. You will be entitled to all holidays as listed annually in the Company's official holiday schedule. Tax Return The Company will provide you with the Preparation; assistance of its regular auditors for the Financial preparation of your Federal and state tax Advice returns without charge to you. In addition, the Company will reimburse you up to $5,000 per year for the costs you incur for financial planning services . Annual The Company will reimburse you 100% of the Physical costs you incur in obtaining an annual comprehensive physical examination to be conducted by your choice of physician, clinic, or medical group located within a reasonable distance from your place of employment. Reimbursement for business expenses, including travel and entertainment, will be limited to reasonable and necessary expenses you incur on the Company's behalf in connection with performing duties on the Company's behalf and subject to (i) timely submission of a properly executed Company expense report form accompanied by appropriate supporting documentation, and (ii) compliance with Company policies and procedures governing business expense reimbursement and reporting based upon principles and guidelines established from time to time by the Board's Audit Committee, including periodic audits by the Company's Internal Audit Department and/or the Audit Committee. Employment Agreement with James G. VanDevender Page 3 of 9 4 Bonus You will receive one but only one of the bonus payments described below if the related event set forth below (a "Bonus Determination") is completed before December 31, 1999, with payment on the date of completion: o Upon a sale of the Salt Lake facilities (Pioneer Valley Hospital, Salt Lake City Regional Medical Center, State Street Hospital, Davis Hospital Medical Center, Jordan Valley Hospital, and related operating Utah assets), a bonus of $125,000, plus 1% of the gross sales proceeds in excess of $306 million (excluding any payments for working capital included in the gross sales proceeds), o Upon a sale of XXXXXXXXXXX, a bonus of $125,000, plus 1% of the gross sales proceeds in excess of XXXXXXX (excluding any payments for working capital included in the gross sales proceeds), * o Upon a sale of all of the shares or assets of the Company, a bonus of $125,000, plus 1% of the total enterprise value (gross sales proceeds plus assumed funded indebtedness) in excess of $700 million, o Upon a recapitalization and sale of at least $25 million of additional common stock in a private transaction (i.e., other than through a public offering), a bonus of $125,000, plus 1% of the total amount received in excess of $1.50 per common share sold (with appropriate adjustments for stock splits). - ------------ TERMINATION Subject to the provisions of this section, you and the Company agree that it may terminate your employment, or you may resign, except that, if you voluntarily resign, you must provide the Company with 30 days' prior written notice (unless the Board has previously waived such notice in writing or authorized a shorter notice period). For Cause The Company may terminate your employment for "Cause" if you: * Represents material that has been redacted pursuant to a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. Omitted material for which Confidential treatment has been requested has been filed separately with the Securities and Exchange Commission. Employment Agreement with James G. VanDevender Page 4 of 9 5 (i) commit an act of gross negligence or otherwise act with willful disregard for the Company's best interests; (ii) fail or refuse to perform any duties delegated to you that are consistent with the duties of similarly-situated executives or are otherwise required under this Agreement; (iii) seize a corporate opportunity for yourself instead of offering such opportunity to the Company; or (iv) are convicted of or plead guilty or no contest to a misdemeanor (other than a traffic violation) or felony, or, with respect to your employment, commit either a material dishonest act or common law fraud or intentionally violate any federal or state securities or tax laws. Your termination for Cause will be effective immediately upon the Company's mailing or transmission of notice of such termination. Before terminating your employment for Cause under clauses (i) - (iii) above, the Company will specify in writing to you the nature of the act, omission, refusal, or failure that it deems to constitute Cause and, if the Board considers the situation to be correctable, give you 30 days after you receive such notice to correct the situation (and thus avoid termination for Cause), unless the Company agrees to extend the time for correction. You agree that the Board will have the reasonable discretion to determine whether the situation is correctable and whether your correction is sufficient. Without Cause Subject to the provisions below under Payments on Termination, the Company may terminate your employment under this Agreement before the end of the Term without Cause. The termination will take effect 15 days after the Company gives you written notice. Payments on If you resign or the Company terminates your Termination employment with or without Cause or because of disability or death or this Agreement expires, the Company will pay you any unpaid portion of your Salary pro-rated through the date of actual termination (and unless your termination is for Cause, any bonus payments (i) already determined by such date but not yet paid or (ii) whose Bonus Determination occurs within 30 days of your actual termination), reimburse any substantiated but unreimbursed business expenses, pay any accrued and unused vacation time (to Employment Agreement with James G. VanDevender Page 5 of 9 6 the extent consistent with the Company's policies), and provide such other benefits as applicable laws or the terms of the benefits require. Except to the extent the law requires otherwise or as provided in the Severance paragraph, neither you nor your beneficiary or estate will have any rights or claims under this Agreement or otherwise to receive severance or any other compensation, or to participate in any other plan, arrangement, or benefit, after such termination or resignation. Severance In addition to the foregoing payments, if before the end of the Term, the Company terminates your employment without Cause, the Company will pay you severance equal to the Salary due between the date of termination and December 31, 1999, in a single lump sum, on your actual date of termination. The Company will also, to the extent permissible by the terms of its benefit plans, insurance contracts, and applicable law and except as provided in the next sentence, cover you for a period of 36 months under the medical, accident, disability, and life insurance programs of the Company, or, if shorter, until you are provided a substantially equivalent benefit by a new employer. You acknowledge that such continued coverage may not be possible or practical and agree to accept in lieu of such coverage (i) payment by the Company of the premiums for the period indicated above on individual insurance policies either you or the Company obtain that provide substantially equivalent benefits or (ii) if you are unable to obtain such coverage (because you are uninsurable at commercially reasonable rates or, as with disability, because coverage may be unavailable if you are not working), one or more payments totaling 150% of the combined premium cost the Company paid on your behalf in 1999 (annualized) for any of those coverages under which you cannot participate after employment ends. You are not required to mitigate amounts payable under the Severance paragraph by seeking other employment or otherwise. Expiration of this Agreement, whether because of notice of non-renewal or otherwise, does not constitute termination without Cause and does not entitle you to Severance. NONCOMPETITION You specifically agree that the noncompetition and AND SECRECY confidentiality obligations referenced in ""10 and 12 of the Memorandum of Understanding among the Company, you, and certain others dated as of November 25, 1998 ("MOU") bar you from competition and Employment Agreement with James G. VanDevender Page 6 of 9 7 disclosure or use of confidential information for the periods stated or incorporated by reference and according to the terms of those paragraphs. You further specifically agree that, for 36 months after your employment ends, you will not become employed by or a consultant to the Dakota Clinic. You agree that you were separately and adequately compensated for the noncompetition obligations, that they are ancillary to the MOU and other agreements, and that they reasonably reflect the need for the Company to protect its business interests. ASSIGNMENT The Company may assign or otherwise transfer this Agreement and any and all of its rights, duties, obligations, or interests under it to any of the affiliates or subsidiaries of the Company. Upon such assignment or transfer, any such business entity will be deemed to be substituted for the Company for all purposes. You agree that assignment or transfer does not entitle you to Severance. This Agreement binds and benefits the Company and its assigns and your heirs and the personal representatives of your estate. Without the Board's prior written consent, you may not assign or delegate this Agreement or any or all rights, duties, obligations, or interests under it. SEVERABILITY If the final determination of an arbitrator or a court of competent jurisdiction declares, after the expiration of the time within which judicial review (if permitted) of such determination may be perfected, that any term or provision of this Agreement is invalid or unenforceable, the remaining terms and provisions will be unimpaired, and the invalid or unenforceable term or provision will be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. AMENDMENT; WAIVER Neither you nor the Company may modify, amend, or waive the terms of this Agreement other than by a written instrument signed by you and a director of the Company duly authorized by the Board. Either party's waiver of the other party's compliance with any provision of this Agreement is not a waiver of any other provision of this Agreement or of any subsequent breach by such party of a provision of this Agreement. Employment Agreement with James G. VanDevender Page 7 of 9 8 WITHHOLDING The Company will reduce its compensatory payments to you for withholding and FICA taxes and any other withholdings and contributions required by law. GOVERNING LAW The laws of the State of Texas (other than its conflict of laws provisions) govern this Agreement. NOTICES Notices must be given in writing by personal delivery, by certified mail, return receipt requested, by telecopy, or by overnight delivery. You must send or deliver your notices to the Company's corporate headquarters. The Company will send or deliver any notice given to you at your address as reflected on the Company's personnel records. You and the Company may change the address for notice by like notice to the others. You and the Company agree that notice is received on the date it is personally delivered, the date it is received by certified mail, the date of guaranteed delivery by the overnight service, or the date the fax machine confirms effective transmission. SUPERSEDING EFFECT Except as set forth below, this Agreement supersedes any prior oral or written employment, severance, or fringe benefit agreements between you and the Company, other than with respect to your eligibility for generally applicable employee benefit plans and supersedes any other prior or contemporaneous negotiations, commitments, agreements, and writings, with respect to this Agreement, relating to the subject matter of this Agreement, except as specified in this Agreement. All such other negotiations, commitments, agreements, and writings, with respect to this Agreement, will have no further force or effect; and the parties to any such other negotiation, commitment, agreement, or writing will have no further rights or obligations thereunder. Notwithstanding the previous paragraph, this Agreement does not supersede or render invalid the following agreements into which you previously entered: (1) the MOU, as amended by the Derivative Settlement Agreement dated March 17, 1999, should that agreement become effective, except to the extent a matter specifically addressed in this Agreement conflicts with the MOU, in which event, this Agreement will control; (2) the Derivative Settlement Agreement dated March 17, 1999, except with respect to those conflicts referenced in subparagraph (1) of this paragraph; (3) the Class Action Memorandum of Understanding dated Employment Agreement with James G. VanDevender Page 8 of 9 9 March 24, 1999; (4) the Stipulation of Settlement dated May 11, 1999; (5) the Settlement Agreement referencing the Great American Insurance Company Policy bearing policy number DFX0009397; and (6) the VanDevender to Paracelsus Release of SERP Benefits dated as of December 3, 1998. This Agreement must not be construed to deprive you of any of your rights created or preserved in any agreement or order entered into after the Effective Date and relating to the settlement of the In re: Paracelsus Securities Corp., the Caven, or the Orovitz litigation, unless such agreement or order specifically provides that this Agreement will control. This Agreement must not be construed to abrogate or render invalid any obligation or right of indemnification or advancement of costs or expenses that may be owed to you under any contract, the Company's Articles of Incorporation or Bylaws, California law, or Texas law or to alter any right created or preserved as part of the pending settlement of the In re: Paracelsus Securities Corp., the Caven, or the Orovitz litigation, unless such right is specifically altered by this Agreement. This Agreement does not impair the effectiveness of the release between the parties to this Agreement delivered to you on April 14, 1999, by Bank One as escrow agent. If you accept the terms of this Agreement, please sign in the space indicated below. We encourage you to consult with any advisors you choose. PARACELSUS HEALTHCARE CORPORATION By: ---------------------------------------- Name: -------------------------- Title: ------------------------- I accept and agree to the terms of employment set forth in this Agreement: - --------------------------------- James G. VanDevender Dated: -------------------------- Employment Agreement with James G. VanDevender Page 9 of 9 EX-10.82 3 AMEND. #1 TO EMP. AGMT. - JAMES G. VANDEVENDER 1 EXHIBIT 10.82 [ ] Employee's Copy [ ] Company's Copy AMENDMENT NUMBER ONE TO PARACELSUS HEALTHCARE CORPORATION EMPLOYMENT AGREEMENT TO: James G. VanDevender This Amendment Number One to Paracelsus Healthcare Corporation Employment Agreement (this "Amendment") amends that certain Paracelsus Healthcare Corporation Employment Agreement between Paracelsus Healthcare Corporation, Inc., a California corporation (the "Company") and James G. VanDevender as the Company's interim chief executive officer ("CEO" or "Executive") dated June 25, 1999 (the "Agreement"), and amends such Agreement as set forth below. Except as amended hereby, all terms and provisions of the Agreement shall remain in full force and effect. 1. Employment and Duties. That section of the Agreement headed "Employment and Duties" is hereby amended by adding a new third paragraph thereto which shall read in its entirety as follows: The Company agrees that if the Company hires or promotes a new CEO during the Term, the Company will retain the Executive's services in the capacity of an executive officer of the Company with the primary duty of advising such new CEO. The Executive shall retain all rights to compensation, benefits and other rights, as set forth in this Agreement, in his new capacity. 2. Term of Employment. The first sentence of that section of the Agreement headed "Term of Employment" is hereby amended by replacing such sentence in its entirety with the following sentence: Your employment under this Agreement begins as of July 1, 1999 (the "Effective Date") and, unless sooner terminated or extended, ends on February 29, 2000 (the "End of Term Date"). 3. Special Lodging and Travel Reimbursement. The final paragraph of that section of the agreement headed "benefits" is hereby amended by adding to the end of such paragraph the following sentence: 2 Subject to the preceding conditions, effective January 1, 2000, the Company will reimburse reasonable and necessary lodging expenses in the Houston area until February 29, 2000, and reasonable and necessary travel expenses for weekly trips between Houston and your Alabama residence. 4. Severance. The first sentence of the section of the Agreement headed "Severance" is hereby amended by replacing such sentence in its entirety with the following sentence: In addition to the foregoing payments, if before the end of the Term, the Company terminates your employment without Cause, the Company will pay you severance equal to the Salary due between the date of termination and the End of Term Date, in a single lump sum, on your actual date of termination. 5. Superseding Effect. The second paragraph of the section of the Agreement headed "Superseding Effect" is hereby amended by adding thereto the following items at the end of such paragraph: ;(7) the Order and Final Judgment entered July 23, 1999, in In re: Paracelsus Securities Corp.; (8) the Final Judgment and Bar Order entered on July 23, 1999, in the Caven and Orovitz litigation; and (9) the Agreement between the Company, VanDevender and others signed on or about July 22, 1999. This Amendment is executed by the Company and the Executive to be effective the 8th day of December, 1999. Except as amended hereby, all terms and provisions of the Agreement shall remain in full force and effect. PARACELSUS HEALTHCARE CORPORATION By: ------------------------------------------ Name: Nolan Lehmann Title: Director I accept and agree to the terms of employment as set forth in the Agreement as amended by this Amendment: - ------------------------------------ James G. VanDevender EX-21.1 4 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
STATE OR OTHER JURISDICTION CORPORATION OR PARTNERSHIP OF INCORPORATION ---------------------------- ----------------------------- Baytown Medical Center, Inc. (d/b/a BayCoast Medical Center) TX Lancaster Hospital Corporation (d/b/a Lancaster Community Hospital) CA Metropolitan Hospital, LP (d/b/a Capitol Medical Center) VA Paracelsus Clay County Hospital, Inc. (d/b/a's Cumberland River Hospital) CA Paracelsus Convalescent Hospitals, Inc. (d/b/a's Lafayette Convalescent Hospital, Oak Park Convalescent Hospital, Rheem Valley Convalescent Hospital and University Convalescent Hospital)* CA PHC-DH, Inc. (f/k/a Paracelsus Davis Hospital, Inc. and d/b/a Davis Hospital and Medical Center)* UT Paracelsus Fentress County General Hospital, Inc. (d/b/a Fentress County General Hospital) CA Paracelsus Healthcare Corporation of North Dakota, Inc. ND Paracelsus Healthcare Holdings, Inc. DE Paracelsus Macon County Medical Center, Inc. (d/b/a Flint River Community Hospital) CA Paracelsus Medical Building Corporation CA Paracelsus Mesquite Hospital, Inc. (d/b/a The Medical Center of Mesquite) TX Paracelsus of Virginia, Inc. VA PHC-RMC, Inc. (f/k/a Paracelsus PHC Regional Medical Center, Inc. and d/b/a PHC Regional Hospital and Medical Center)* UT PHC-PVH, Inc. (f/k/a Paracelsus Pioneer Valley Hospital, Inc. and d/b/a Pioneer Valley Hospital)* UT Paracelsus Real Estate Corporation CA Paracelsus Santa Rosa Medical Center, Inc. (d/b/a Santa Rosa Medical Center) CA PHC Funding Corp. II CA PHC-B of Midland, Inc. (d/b/a Westwood Medical Center) TX PHC-JVH, Inc. (f/k/a PHC-Jordan Valley, Inc. and d/b/a Jordan Valley Hospital)* UT PHC-SLC, Inc. (f/k/a PHC-Salt Lake City, Inc. and d/b/a Salt Lake Regional Medical Center)* UT PHC Utah, Inc.* UT PHC/CHC Holdings, Inc. DE (d/b/a Paracelsus)
* Assets sold in 1999 EX-23.1 5 CONSENT OF ERNST & YOUNG LLP 1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements pertaining to the Paracelsus Healthcare Corporation 1996 Stock Incentive Plan, as amended (Form S-8 No. 33-10299) and pertaining to various stock option plans of Paracelsus Healthcare Corporation (Form S-8 No. 33-12331) of our report dated March 29, 2000, with respect to the consolidated financial statements and schedule of Paracelsus Healthcare Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ Ernst & Young LLP Houston, Texas March 30, 2000 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 22,723 0 58,349 27,553 8,655 95,529 339,528 113,052 437,058 404,686 3,685 0 0 215,761 (210,564) 437,058 0 516,537 0 219,012 179,847 41,692 50,235 25,751 54,207 (28,456) (1,019) (4,168) 0 (33,643) (0.51) (0.60)
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