<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 June 30, 1996
Commission file number 1-12055
PARACELSUS HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
California 95-3565943
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
515 W. Greens Road, Suite 800, Houston, Texas 77067
(Address of principal executive offices) (Zip Code)
(281) 774-5100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES_X_ NO__
As of June 30, 1996, there were 450 shares of the Registrant's Common Stock,
no stated value, outstanding.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE> 2
PARACELSUS HEALTHCARE CORPORATION
FORM 10-Q/A
For the Quarterly Period Ended
June 30, 1996
INDEX
Page
Reference
FORM 10-Q/A
-----------
PRELIMINARY STATEMENT 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1996 and September 30, 1995 4
Consolidated Statements of Operations -
Three and nine months ended June 30, 1996 and 1995 5
Condensed Consolidated Statements of Cash Flows -
Nine months ended June 30, 1996 and 1995 6
Notes to Interim Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II. OTHER INFORMATION 21
SIGNATURE 23
<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 June 30, 1996, filed with the Securities and Exchange Commission
(the "Commission") on August 14, 1996.
In October 1996, the Board of Directors appointed a Special Committee
consisting of non-management members, to supervise and direct the conduct of an
inquiry by outside legal counsel regarding, among other things, the Company's
accounting and financial reporting practices and procedures for the periods
prior to the quarter ended September 30, 1996. As a result of the inquiry, the
Company restated its financial information for periods commencing with January
1, 1992 through the nine months ended September 30, 1996, as reflected in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996,
filed with the Commission on April 15, 1997. Adjustments and reclassifications
were necessary to correct errors and irregularities relating to (i) receivables
due from Medicare and other government programs (ii) use of corporate reserves,
(iii) provisions for bad debt expense relating principally to two of the
Company's psychiatric hospitals in the Los Angeles area and (iv) deferral of
facility closure costs which only affected the 1996 quarterly information
(collectively, the "restatement entries"). The following financial statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended December 31, 1996 included in
the Company's Annual Report on Form 10-K for such period, which include
restated financial results for calendar years 1992 through 1995 and for the
quarterly 1995 and 1996 periods.
To show the impact of the restatement entries with respect to previously
reported amounts for the three months and nine months ended June 30, 1996 and
1995, the Company has provided a description of the restatement entries and a
reconciliation of historical results for the three months and nine months ended
June 30, 1996 and 1995, as previously reported in the filed quarterly report on
Form 10-Q, to the restated results.
Certain statements in this Form 10-K are "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve a number of risks and
uncertainties. Factors which may cause the Company's actual results in future
periods to differ materially from forecast results include, but are not limited
to: general economic and business conditions, both nationally and in the
regions in which the Company operates; industry capacity; demographic changes;
existing government regulations and changes in, or the failure to comply with
government regulations; legislative proposals for healthcare reform; the
ability to enter into managed care provider arrangements on acceptable terms;
changes in Medicare and Medicaid reimbursement levels; liability and other
claims asserted against the Company; competition; the loss of any significant
customer; changes in business strategy or development plans; the ability to
attract and retain qualified personnel, including physicians; the significant
indebtedness of the Company; and the availability and terms of capital to fund
the expansion of the Company's business, including the acquisition of
additional facilities.
<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
------------------------
June September
30, 30,
1996 1995
--------- ---------
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,903 $ 2,949
Marketable securities 15,590 10,387
Accounts receivable, net 65,728 46,247
Other current assets 29,043 27,437
Deferred income taxes 60,757 32,580
------ ------
Total current assets 173,021 119,600
Property and equipment 343,389 268,412
Less: Accumulated depreciation and
amortization (97,661) (102,746)
------ ------
245,728 165,666
Other assets 68,711 40,533
------ ------
Total Assets $ 487,460 $ 325,799
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable and other current liabilities $ 76,030 $ 69,401
Current maturities of long-term debt 439 8,658
------ ------
Total current liabilities 76,469 78,059
Long-term debt 284,642 113,070
Other long-term liabilities 25,762 25,176
Deferred income taxes 36,139 24,619
Minority interest 147 126
Stockholder's equity
Common stock 4,500 4,500
Additional paid-in capital 390 390
Unrealized (losses)gains on marketable securities (27) 137
Retained earnings 59,438 79,722
------ ------
Total stockholder's equity 64,301 84,749
------ ------
Total Liabilities and Stockholder's Equity $ 487,460 $ 325,799
======= =======
</TABLE>
See accompanying notes.
<PAGE> 5
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
Restatement - See Note 2
-----------------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------- -------------------
1996 1995 1996 1995
---------- --------- -------- --------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net Revenue $130,530 $117,866 $389,175 $372,999
Costs and expenses:
Salaries and benefits 56,772 52,471 169,934 160,585
Other operating expenses 56,719 47,359 164,103 151,400
Provision for bad debts 14,879 9,172 35,070 28,455
Interest 5,216 3,952 12,901 11,604
Depreciation and amortization 4,684 4,251 12,656 12,985
Settlement costs - - 22,356 -
------ ----- ------ ------
Total costs and expenses 138,270 117,205 417,020 365,029
Income (loss) before minority
interests and income taxes (7,740) 661 (27,845) 7,970
Minority interests (1,065) (592) (1,974) (1,796)
------ ---- ------ -----
Income (loss) before
income taxes (8,805) 69 (29,819) 6,174
Provision (benefit) for
income taxes (3,643) 28 (12,326) 2,532
----- ---- ------ -----
Net income (loss) $ (5,162) $ 41 $(17,493) $ 3,642
===== ==== ====== =====
</TABLE>
See accompanying notes.
<PAGE> 6
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Restatement - See Note 2
-------------------------
Nine Months Ended
June 30,
-------------------------
1996 1995
----------- ---------
<TABLE>
<CAPTION>
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (17,493) $ 3,642
Non-cash expenses and changes in operating assets
and liabilities (17,331) 8,522
------- ------
Net cash (used in) provided by operating
activities (34,824) 12,164
------- ------
Cash Flows from Investing Activities:
Acquisitions of facilities, net (109,385) -
Purchase of marketable securities (3,225) (4,592)
Additions to property and equipment, net (8,727) (10,432)
Decrease in minority interests (2,195) (1,845)
Increase in other assets (5,030) (4,387)
------- ------
Net cash used in investing activities (128,562) (21,256)
------- ------
Cash Flows from Financing Activities:
Borrowings under Credit Facility 232,000 36,000
Repayments under Credit Facility (61,500) (20,500)
Repayment of long-term debt, net (5,369) (1,120)
Dividends to stockholder (2,791) (4,521)
------ -----
Net cash provided by financing activities 162,340 9,859
------ -----
Increase (decrease) in cash and cash equivalents (1,046) 767
Cash and cash equivalents at beginning of period 2,949 1,452
----- -----
Cash and cash equivalents at end of period $ 1,903 $ 2,219
===== =====
Supplementary cash flow information:
Interest paid $ 13,786 $ 13,077
Income taxes paid 5,531 9,728
Unrealized (losses) gains on marketable
securities:
Marketable securities (278) 5
Deferred taxes 114 2
---- ----
Increase (decrease) in stockholder's equity $ (164) $ 3
==== ====
</TABLE>
See accompanying notes.
<PAGE> 7
PARACELSUS HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1996
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
- ------------
Paracelsus Healthcare Corporation (the "Company") was incorporated in November
1980 for the principal purpose of owning and operating acute care and related
healthcare businesses in selected markets. As of June 30, 1996, the Company
operated 22 hospitals with 1,957 licensed beds in seven states (including three
psychiatric hospitals with 218 licensed beds), of which 15 were owned and seven
were leased.
Basis of Presentation
- ---------------------
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for annual financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. The Company's business is seasonal
in nature and subject to general economic conditions and other factors.
Accordingly, operating results for the quarterly and nine month periods ended
June 30, 1996 are not necessarily indicative of the results that may be
expected for the annual period. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto for the year ended December 31, 1996 included in the Company's Annual
Report on Form 10-K for such period, which include restated financial results
for calendar years 1992 through 1995 and for the quarterly 1995 and 1996
periods.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain account balances for the 1995 periods have been reclassified to conform
to the Company's current presentation.
NOTE 2. RESTATEMENT OF FINANCIAL STATEMENTS
In October 1996, the Board of Directors appointed a Special Committee
consisting of non-management members, to supervise and direct the conduct of an
inquiry by outside legal counsel regarding, among other things, the Company's
accounting and financial reporting practices and procedures for the periods
prior to the quarter ended September 30, 1996. Such inquiry resulted in the
Company restating its financial statements for the periods commencing January
1, 1992 through the nine months ended September 30, 1996.
<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 nine month periods ended June 30, 1996 and 1995 is
summarized in the following tables. A reconciliation has been included to
reconcile to the reported amounts as shown in the Consolidated Statements of
Operations for each respective period.
QUARTER ENDED JUNE 30, 1996
As
Previously Adjustments As
Reported to Restated
Quarter Quarter Quarter
Ended Ended Ended
June 30, June 30, June 30,
1996 1996 1996
--------- ---------- ----------
(IN 000'S)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net revenue $133,136 $ (2,606) $ 130,530
Costs and expenses:
Salaries and benefits 56,772 56,772
Other operating expenses 51,916 4,803 56,719
Provision for bad debts 8,994 5,885 14,879
Interest 5,216 5,216
Depreciation and amortization 4,684 4,684
------- ----- ------
Total costs and expenses 127,582 10,688 138,270
Income (loss) before minority
interests and income taxes 5,554 (13,294) (7,740)
Minority interests (1,144) 79 (1,065)
------- ------ ------
Income (loss) before income taxes 4,410 (13,215) (8,805)
Provision (benefit) for income
taxes 1,808 (5,451) (3,643)
----- ------ -----
Net income (loss) $ 2,602 $ (7,764) $ (5,162)
===== ====== =====
</TABLE>
<PAGE> 9
QUARTER ENDED JUNE 30, 1995
As
Previously Adjustments As
Reported to Restated
Quarter Quarter Quarter
Ended Ended Ended
June 30, June 30, June 30,
1995 1995 1995
--------- ---------- ----------
(IN 000'S)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net revenue $123,545 $ (5,679) $ 117,866
Costs and expenses:
Salaries and benefits 52,652 (181) 52,471
Other operating expenses 47,178 181 47,359
Provision for bad debts 9,172 9,172
Interest 3,952 3,952
Depreciation and amortization 4,251 4,251
-------- ------ -------
Total costs and expenses 117,205 - 117,205
Income before minority
interests and income taxes 6,340 (5,679) 661
Minority interests (592) (592)
----- ----- -----
Income before income taxes 5,748 (5,679) 69
Provision for income taxes 2,356 (2,328) 28
----- ----- -----
Net income $ 3,392 $ (3,351) $ 41
===== ===== =====
</TABLE>
<PAGE> 10
NINE MONTHS ENDED JUNE 30, 1996
As
Previously Adjustments As
Reported to Restated
Nine Months Nine Months Nine Months
Ended Ended Ended
June 30, June 30, June 30,
1996 1996 1996
--------- ---------- ----------
(IN 000'S)
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
Net revenue $393,726 $ (4,551) $ 389,175
Costs and expenses:
Salaries and benefits 169,934 169,934
Other operating expenses 152,359 11,744 164,103
Provision for bad debts 29,185 5,885 35,070
Interest 12,901 12,901
Depreciation and amortization 12,656 12,656
Settlement costs 22,356 22,356
------- ------ -------
Total costs and expenses 399,391 17,629 417,020
Loss before minority
interests and income taxes (5,665) (22,180) (27,845)
Minority interests (2,216) 242 (1,974)
------- ------ ------
Loss before income taxes (7,881) (21,938) (29,819)
Income tax benefit (3,232) (9,094) (12,326)
----- ----- ------
Net loss $ (4,649) $ (12,844) $ (17,493)
====== ====== ======
</TABLE>
<PAGE> 11
NINE MONTHS ENDED JUNE 30, 1995
As
Previously Adjustments As
Reported to Restated
Nine Months Nine Months Nine Months
Ended Ended Ended
June 30, June 30, June 30,
1995 1995 1995
--------- ---------- ----------
(IN 000'S)
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
Net revenue $375,901 $ (2,902) $ 372,999
Costs and expenses:
Salaries and benefits 159,955 630 160,585
Other operating expenses 144,729 6,671 151,400
Provision for bad debts 28,455 28,455
Interest 11,604 11,604
Depreciation and amortization 12,985 12,985
-------- ----- -------
Total costs and expenses 357,728 7,301 365,029
Income before minority
interests and income taxes 18,173 (10,203) 7,970
Minority interests (1,796) (1,796)
-------- ------ ------
Income before income taxes 16,377 (10,203) 6,174
Provision for income taxes 6,713 (4,181) 2,532
-------- ------ ------
Net income $ 9,664 $ (6,022) $ 3,642
======= ===== ======
</TABLE>
<PAGE> 12
NOTE 3. MARKETABLE SECURITIES
In November 1995, in concurrence with the adoption of "A Guide to
Implementation of Statement of Financial Accounting Standards No. 115 on
Accounting for Certain Investments in Debt and Equity Securities," the Company
transferred certain of its held-to-maturity debt securities to the available-
for-sale category. The amortized cost of those securities at the time of
transfer was $2.0 million and the gross unrealized loss on those securities
was immaterial.
NOTE 4. EXCHANGE, ACQUISITION & CLOSURE
On August 9, 1996, the stockholders of Champion Healthcare Corporation
("Champion") adopted and approved the Amended and Restated Agreement and Plan
of Merger dated as of May 29, 1996 (the "Merger Agreement"), by and among the
Company, Champion and PC Merger Sub, Inc., a wholly owned subsidiary of the
Company, pursuant to which such wholly owned subsidiary will be merged with and
into Champion (the "Merger"). The Company expects the Merger to consummate on
or about August 16, 1996 after satisfying certain other terms and conditions of
the Merger Agreement. Upon consummation of the Merger, each share of Champion's
Common Stock and Preferred Stock will convert to one share and two shares of
the Company's Common Stock, respectively. Dr. Manfred George Krukemeyer,
currently the Chairman of the Board of Directors and sole stockholder of the
Company, will own approximately 60% of the combined company, with current
Champion security holders owning the remaining 40%. Among other things, the
consummation of the Merger is conditioned upon the Company and Dr. Krukemeyer
entering into a Dividend and Note Agreement, pursuant to which a dividend of
$21.1 million plus accrued interest will be paid to Dr. Krukemeyer no later
than 60 days after the consummation of the Merger. Dr. Krukemeyer will in turn
loan the Company $7.2 million and receive a $7.2 million 6.51% subordinated
note from the Company. The Merger will be accounted for using the purchase
method of accounting.
On May 17, 1996, the Company acquired the 139-bed Pioneer Valley Hospital in
West Valley City, Utah, the 120-bed Davis Hospital and Medical Center in
Layton, Utah and the 129-bed Santa Rosa Medical Center in Milton, Florida from
another healthcare company (collectively, the "Acquired Hospitals"). In
exchange, the other party received the Company's 119-bed Peninsula Medical
Center in Ormond Beach, Florida, the 135-bed Elmwood Medical Center in
Jefferson, Louisiana, the 190-bed Halstead Hospital in Halstead, Kansas, and
$38.5 million in cash, net of a working capital differential, which is subject
to final agreement of the parties. The Company also purchased the real property
of Elmwood and Halstead from a real estate investment trust ("REIT"), exchanged
the Elmwood and Halstead real property for the Pioneer real property and then
sold the Pioneer real property to the REIT. The acquisition of the Acquired
Hospitals was accounted for as a purchase transaction. The Company financed
the acquisition with borrowings under its revolving line of credit. The Company
recorded goodwill of $15.2 million, which is being amortized on a straight line
basis over an estimated useful life of 20 years. The results of the Acquired
Hospitals have been included in the operations of the Company since May 17,
1996. No material gain or loss was recorded on the disposition of the Exchanged
Hospitals.
On May 17, 1996, the Company acquired the 125-bed PHC Regional Hospital and
Medical Center in Salt Lake City, Utah ("PHC Regional Hospital") for
approximately $71.0 million in cash. The Company financed the acquisition with
amounts borrowed under the Credit Facility. The Company recorded goodwill of
<PAGE> 13
$15.8 million in connection with the acquisition, which is being amortized on a
straight line basis over an estimated useful life of 20 years. The results of
PHC Regional Hospital have been included in the operations of the Company since
May 17, 1996.
On March 15, 1996, the Company closed the 123-bed Desert Palms Community
Hospital in Palmdale, California.
The following unaudited pro forma consolidated results of operations for the
nine months ended June 30, 1996 and 1995 assume that the following transactions
were consummated on October 1, 1994: (i) the acquisition and disposition of the
Acquired Hospitals and the Exchanged Hospitals in May 1996, (ii) the sale of
Womans Hospital in Jackson, Mississippi in September 1995 and (iii) the closure
of Bellwood Health Center, a psychiatric facility in Bellwood, California in
April 1995. PHC Regional Hospital has not been included in the pro formas
because the predecessor owner operated the hospital as a captive cost center;
accordingly, the inclusion of its historical operations would not be
meaningful. The pro forma financial information does not purport to be
indicative of the result that would have been attained had the transactions
described above occurred on October 1, 1994 ($ in 000's).
Nine Months Ended
June 30,
-------------------------
1996(a) 1995
---------- ---------
<TABLE>
<CAPTION>
<S> <C> <C>
Net revenue $ 397,702 $ 376,295
Income(loss) from continuing
operations (23,805) 9,957
Net income (loss) (13,944) 5,874
</TABLE>
(a) Results for the nine months ended June 30, 1996 include a settlement charge
of $22.4 million ($13.2 million after-tax) relating to two lawsuits (see
Item 1 - Note 6).
NOTE 5 - LONG-TERM DEBT
On December 8, 1995, the Company entered into a Second Amended and Restated
Credit Agreement (the "Agreement")(the "Credit Facility") which provides for a
revolving line of credit in the amount of $230.0 million. The Credit Facility
is available for working capital purposes, to fund acquisitions and for the
issuance of letters of credit. Borrowings under the Credit Facility bear
interest at a base rate or an offshore dollar rate, as defined in the
Agreement, plus a margin ranging from 0.25% to 0.75% or 0.75% to 1.125%,
respectively. The Credit Facility requires annual fees ranging from 0.75%
to 1.25% of the outstanding amount of the letters of credit. The Company
is also required to pay commitment fees ranging from 0.20% to 0.375% of the
unused portion of the Credit Facility.
<PAGE> 14
The Credit Facility expires on November 1998, at which time, the Company can
elect to convert the then outstanding balance into a four-year term loan,
payable in 16 equal quarterly installments, commencing in December 1998.
NOTE 6. SETTLEMENT COSTS
During March 1996, the Company settled two lawsuits in connection with the
operation of its psychiatric programs. The Company recognized a charge for
settlement costs totaling $22.4 million in the quarter ended March 31, 1996,
consisting primarily of settlement payments, legal fees and the write off of
certain psychiatric accounts receivable. The Company did not admit liability in
either case but resolved its dispute through the settlements in order to
facilitate the Champion acquisition, re-establish a business relationship and
avoid further legal costs in connection with the disputes. The Company funded
payment of such settlement costs through borrowings under its Credit Facility
during the quarter ended June 30, 1996.
NOTE 7. CONTINGENCIES
The Company is subject to claims and suits in the ordinary course of business,
including those arising from care and treatment afforded at the Company's
facilities. It maintains insurance and, where appropriate, reserves with respect
to the possible liability arising from such claims. Although the Company
believes that its insurance and loss reserves are adequate, there can be no
assurance that such insurance and loss reserves will cover all potential claims
that may be asserted and that the outcome of such claims will not have a
material effect on the Company's financial position, results of operations and
cash flows.
<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 nine months periods ended June 30, 1996 and 1995 ($ in 000's).
QUARTER ENDED JUNE 30, 1996
- ----------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
As Previously
Reported As Restated
Quarter Quarter
Ended Ended
June 30, June 30,
1996 Adjustments 1996
------------ ----------- -----------
Net Revenue $133,136 $ (2,606) $130,530
Income(loss) before
minority interests
and income taxes 5,554 (13,294) (7,740)
Net income (loss) 2,602 (7,764) (5,162)
</TABLE>
<PAGE> 16
QUARTER ENDED JUNE 30, 1995
- ----------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
As Previously
Reported As Restated
Quarter Quarter
Ended Ended
June 30, June 30,
1995 Adjustments 1995
----------- ----------- -----------
Net Revenue $123,545 $ (5,679) $117,866
Income(loss) before
minority interests
and income taxes 6,340 (5,679) 661
Net income (loss) 3,392 (3,351) 41
</TABLE>
NINE MONTHS ENDED JUNE 30, 1996
- -------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
As Previously
Reported As Restated
Nine Months Nine Months
Ended Ended
June 30, June 30,
1996 Adjustments 1996
----------- ----------- -----------
Net Revenue $393,726 $ (4,551) $389,175
Loss before
minority interests
and income taxes (5,665) (22,180) (27,845)
Net loss (4,649) (12,844) (17,493)
</TABLE>
NINE MONTHS ENDED JUNE 30, 1995
- -------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
As Previously
Reported As Restated
Nine Months Nine Months
Ended Ended
June 30, June 30,
1995 Adjustments 1995
----------- ----------- -----------
Net Revenue $375,901 $ (2,902) $372,999
Income(loss) before
minority interests
and income taxes 18,173 (10,203) 7,970
Net income (loss) 9,664 (6,022) 3,642
</TABLE>
<PAGE> 17
The adjustments consisted primarily of:
Three Months Ended
June 30,
---------------------
1996 1995
-------- ------
<TABLE>
<CAPTION>
<S> <C> <C>
(i) Increase in deductions from
revenue for receivables from Medicare and
other government programs $ (1,924) $ (6,483)
(ii) Increase in operating expenses from the
reversal of corporate reserves (3,003) -
(iii) Recording of bad debt expense that
was deferred at two of the psychiatric hospitals
- Increase in deductions from net revenue (682) 804
- Increase in provision for bad debts (5,885) -(iv) Increase in operating expenses for
deferred facility closure costs (1,800) -
------- -------
Total pre-tax adjustments before minority
interests $(13,294) $ (5,679)
======= =======
</TABLE>
Nine Months Ended
June 30,
---------------------
1996 1995
-------- ------
<TABLE>
<CAPTION>
<S> <C> <C>
(i) Increase in deductions from
revenue for receivables from Medicare and
other government programs $ (2,440) $ (5,435)
(ii) Increase in operating expenses from the
reversal of corporate reserves (9,234) (7,301)
(iii) Recording of bad debt expense that
was deferred at two of the psychiatric hospitals
- Increase in deductions from net revenue (2,111) 2,533
- Increase in provision for bad (5,885) -
(iv) Increase in operating expenses for
deferred facility closure costs (2,510) -
------- -------
Total pre-tax adjustments before minority
interests $(22,180) $(10,203)
======= =======
</TABLE>
<PAGE> 18
The following discussion analyzes the results, as restated, for the quarterly
and nine month periods ended June 30, 1996, as compared to the quarterly and
nine month periods ended June 30, 1995, respectively. "Same hospitals" as used
in the following discussion consist of hospitals owned throughout the periods
of which comparative operating results are presented. The following
information should be read in conjunction with the consolidated financial
statements of the Company, and the related notes thereto, included in the
Annual Report on Form 10-K for the year ended December 31, 1996, which included
restated financial results for periods prior thereto.
Results of Operations
- ---------------------
Quarter ended June 30, 1996 compared with Quarter ended June 30, 1995
- ---------------------------------------------------------------------
Net revenue for the three months ended June 30, 1996 was $130.5 million, an
increase of $12.7 million, or 10.7%, over $117.9 million for the same period of
1995. Of the $12.7 million increase, $11.7 million was contributed by "same
hospitals" located outside of the Los Angeles metropolitan ("LA metro") area,
$5.5 million by hospitals acquired net of hospitals divested since April 1995,
offset by a decrease of $4.5 million attributable to "same hospitals" located
in the LA metro area. The $11.7 million increase in net revenue at "same
hospitals" located outside of the LA metro area was attributable to an increase
of $10.4 million resulting primarily from additional services offered and
medical staff development efforts, with the remaining $1.3 million increase
from additional home health business at hospitals located primarily in
Tennessee. The $4.5 million decrease in net revenue at the LA metro hospitals
consisted of a (i) $2.5 million decrease at the psychiatric hospitals as a
result of the the negative impact on admission resulting from a lawsuit that
was settled in March 1996 (see Item 1- Note 6) and insurance companies in
general becoming more stringent in their payments to providers of
psychiatric care and (ii) a $2.0 million decrease at the remaining acute care
hospitals despite an increase in volume, largely as a result of a change in
payor mix from private insurance to managed care and Medicare/Medicaid,
which increased deductions from revenue, and a decline in acuity level.
Expressed as a percentage of net revenue, operating expenses (salaries and
benefits, other operating expenses, and provision for bad debts) increased from
92.5% in 1995 to 98.3% in 1996 and operating margin decreased from 7.5% to
1.7%. The 5.8% decrease in operating margin in 1996 was primarily due to an
increase in provision for bad debt at the psychiatric hospitals and general
deterioration of operating margins at the LA metro hospitals, both psychiatric
and acute care, due to the reasons noted above.
Depreciation and amortization increased to $4.7 million in 1996 from $4.3
million for the same period of 1995. The $400,000 increase was primarily
attributable to facilities acquired during 1996, net of divested hospitals.
Interest expense increased $1.3 million over the same period of 1995, due
principally to additional borrowings during 1996 under the Credit Facility to
finance the purchases of hospitals, the settlement costs of two lawsuits,
capital expenditures and fund working capital requirements.
Net loss for the quarter ended June 30, 1996 was $5.2 million, as compared to
net income of $41,000 for the quarter ended June 30, 1995. The $5.2 million
decrease was due primarily to a deterioration in the operating performance at
the LA metro hospitals.
<PAGE> 19
Nine Months ended June 30, 1996 compared with Nine Months ended June 30, 1995
- -----------------------------------------------------------------------------
Net revenue for the nine months ended June 30, 1996 was $389.2 million, an
increase of $16.2 million, or 4.3%, over $373.0 million for the same period of
1995. The increase consisted of $22.3 million from "same hospitals" located
outside of the LA metro area, $808,000 by hospitals acquired net of hospitals
divested since April 1995, offset by a decrease of $6.9 million attributable to
"same hospitals" located in the LA metro area. The $22.3 million increase in
net revenue of "same hospitals" located outside of the LA metro area was
attributable to an increase of $17.1 million resulting primarily from
additional services offered and medical staff development efforts, with the
remaining $5.2 million increase from additional home health business at
hospitals located primarily in Tennessee. Of the $6.9 million decrease in net
revenue at the LA metro hospitals, $4.8 million was from the psychiatric
hospitals largely as a result of the negative impact on admission resulting
from a lawsuit that was settled in March 1996 (see Item 1- Note 6) and
increasing difficulties in collecting psychiatric accounts receivable. The
remaining $2.1 million decrease was attributable to the acute care
hospitals, largely as a result of a change in payor mix from private insurance
to managed care and Medicare/Medicaid, which increased deductions from revenue,
and a decline in acuity level.
Expressed as a percentage of net revenue, operating expenses (salaries and
benefits, other operating expenses, and provision for bad debts) increased from
91.3% in 1995 to 94.8% in 1996 and operating margin decreased from 8.7% to
5.2%. The 3.5% decrease in operating margin in 1996 was primarily due to
general deterioration of operating margins at the LA metro hospitals, both
psychiatric and acute care, and specifically to an increase in provision for
bad debt at the psychiatric hospitals, due to reasons noted above. In addition,
such decrease in operating margin was further impacted by additional home
health business, which was profitable but produced lower margins than other
types of services.
Depreciation and amortization decreased to $12.7 million in 1996 from $13.0
million for the same period of 1995. The $300,000 decrease was primarily
attributable to facilities and healthcare related business sold or closed since
April 1995, net of hospitals acquired during 1996.
Interest expense increased $1.3 million over the same period of 1995, due
principally to additional borrowings during 1996 under the Revolving Credit
Facility to finance the purchases of hospitals, the settlement costs of two
lawsuits and capital expenditures and to fund working capital requirements.
During March 1996, the Company recognized a charge totaling $22.4 million for
the settlement of two lawsuits. Such charge consisted primarily of settlement
payments, legal fees and the write off of certain psychiatric accounts
receivable. See Item 1 - Note 6 for additional information.
Net loss for the nine months ended June 30, 1996 was $17.5 million, as compared
to net income of $3.6 million for the nine months ended June 30, 1995. The
$21.1 million decrease was due primarily to a settlement charge recorded in
March 1996 relating to two lawsuits and a deterioration in the operating
performance at the LA metro hospitals.
<PAGE> 20
Liquidity and Capital Resources
- -------------------------------
Net cash used in operating activities for the nine months ended June 30, 1996
was $34.8 million, compared to net cash provided by operating activities of
$12.2 million for the same period of 1995. The $47.0 million decrease in cash
was primarily attributable to net losses recorded for the nine months ended
June 30, 1996, an increase in deferred tax assets resulting from such losses
and an increase in accounts receivable which was primarily attributable to the
four acquired hospitals in May 1996. Net cash used in investing activities
increased $107.3 million to $128.6 million during 1996 from $21.3 million in
1995, primarily from an increase in use of cash to finance the purchases of
hospitals in May 1996. Net cash provided by financing activities increased
$152.5 million to $162.3 million during 1996 from $9.8 million for the same
1995 period, due primarily to incremental borrowings of $155.0 million under
the Revolving Credit Facility to finance the purchases of hospitals, the
settlement costs of two lawsuits, capital expenditures and fund working capital
requirements.
Net working capital was $96.6 million, an increase of $55.1 million from $41.5
million at September 30, 1995. The increase mainly resulted from (i)an increase
in deferred tax assets resulting from net losses recorded for the nine months
ended June 30, 1996 and (ii) an increase in accounts receivable primarily
attributable to the four hospitals acquired in May 1996. The Company's long-
term debt as a percentage of total capitalization was 81.6% at June 30, 1996,
compared to 57.2% at September 30, 1995. The increase was primarily
attributable to net borrowings of $170.5 million under the Revolving Credit
Facility to finance the purchases of hospitals, the settlement costs of two
lawsuits, capital expenditures and fund working capital requirements during the
nine months ended June 30, 1996.
On December 8, 1995, the Company amended and restated its existing Credit
Facility to increase the amount available for borrowings from $125.0 million to
$230.0 million. The Credit Facility is available for working capital purposes,
to finance capital expenditures, to fund acquisitions and for the issuance of
letters of credit. As of June 30, 1996, the Company had $198.0 million of
borrowings outstanding under its Credit Facility.
The Company anticipates that borrowings under its Credit Facility, proceeds
from the sale of hospital accounts receivable under the Company's commercial
paper program and internally generated cash flows from earnings will be
sufficient to fund future acquisitions, capital expenditures and working
capital requirements through fiscal year 1996. There can be no assurance that
future developments in the hospital industry or general economic trends will
not adversely affect the Company's operations or its ability to meet such
funding requirements.
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," which requires impairment losses to be recorded on long-
lived assets used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. The statement also addresses the accounting
for long-lived assets that are expected to be disposed of. The Company will
adopt SFAS No. 121 on October 1, 1996, and, based on current circumstances,
does not believe the effect of the adoption will be material.
<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
The Company has filed a registration statement on Form S-1, dated June 28,
1996, as amended, for a proposed offering of the Company's Common Stock (the
"Equity Offering"). The Company expects to sell 5.2 million shares, and selling
stockholders of the Company are expected to offer an additional 229,000 shares.
Additionally, the underwriters have the option to purchase an additional
814,350 shares to cover over-allotments, if any. The Company's current
registration statement contemplates a proposed maximum offering price of $10.25
per share, which would result in net proceeds to the Company after estimated
underwriting discounts and commissions of approximately $49.8 million. The
Equity Offering is expected to be consummated on or about August 16, 1996. The
final offering price and total number of shares to be offered by the Company
and the selling stockholders are subject to finalization and may differ from
those amounts currently contemplated.
The Company has filed a registration statement on Form S-1 dated June 24, 1996,
as amended, for a proposed offering of $325.0 million aggregate principal
amount of Senior Subordinated Notes due 2006 (the "Notes Offering"). The
Company expects the Notes to bear interest at approximately 10% per annum. The
Notes Offering is expected to be consummated on or about August 16, 1996. The
final terms of the Notes Offering are subject to finalization and may differ
from the terms currently contemplated.
If consummated, the Company expects to use a portion of the net proceeds from
the Notes Offering and the Equity Offering to prepay certain outstanding
indebtedness and reduce other outstanding indebtedness.
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
2.1 Amended and Restated Agreement and Plan of Merger dated as of May 29,
1996, by and among Paracelsus, champion and PC Merger Sub, Inc.
(filed as Exhibit 2.1 to Paracelsus' Current Report on Form 8-K, dated
May 29, 1996, and incorporated herein by reference).
(b) Reports on Form 8-K
- The Company filed on April 19, 1996 a Current Report on Form 8-K, dated
April 12, 1996, reporting pursuant to Item 5 thereof, that the Company and
Champion Healthcare Corporation had entered into a definitive Agreement
and Plan of Merger, dated April 12, 1996. The Company had also entered
into a definitive agreement to acquire the 125-bed PHC Regional Hospital
and Medical Center in Salt Lake City, Utah for approximately $70.0 million
in cash.
- The Company filed on May 30, 1996 a Current Report on Form 8-K, dated May
17, 1996, reporting pursuant to Items 2 and 7 thereof, the acquisition of
Davis Hospital and Medical Center, Pioneer Valley Hospital and Santa Rosa
Medical Center from Columbia/HCA Healthcare Corporation for $38.5 million
in cash and in exchange for the Company's Elmwood Medical Center,
Peninsula Medical Center and Halstead Hospital. Financial statements of
businesses acquired and pro forma financial information as required by
Item 7 will be filed on Form 8-K/A no later than July 31, 1996.
- The Company filed on July 24, 1996 a Current Report on Form 8-K, dated May
29, 1996, reporting pursuant to Item 5 thereof, the Amended and Restated
Agreement and Plan of Merger, which amended and restated the Agreement and
Plan of Merger, dated April 12, 1996, among the Company, Champion and
Merger Sub.
- The Company filed on July 24, 1996 an Amendment No. 1 on Form 8-K/A to a
Current Report on Form 8-K, dated May 17, 1996, reporting pursuant to Item
7 thereof, the historical financial statements for Davis Hospital and
Medical Center, Pioneer Valley Hospital and Santa Rosa Medical Center and
the Company's pro forma financial statements for the period through March
31, 1996.
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Paracelsus Healthcare Corporation
(Registrant)
/s/ JAMES G. VANDEVENDER
Dated: August 11, 1997 By: ____________________________
James G. VanDevender
Senior Executive Vice President,
Chief Financial Officer
& Director
