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