SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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
(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[ ]
As of November 13, 1998, there were outstanding 55,118,330 shares of the
Registrant's Common Stock, no stated value.
<PAGE> 2
PARACELSUS HEALTHCARE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1998
INDEX
PAGE REFERENCE
FORM 10-Q
--------------
FORWARD-LOOKING STATEMENTS 3
- --------------------------
PART I. FINANCIAL INFORMATION
- ------
Item 1. Financial Statements-- (Unaudited)
Condensed Consolidated Balance Sheets--
September 30, 1998 and December 31, 1997 4
Consolidated Statements of Operations--
Three Months and Nine Months Ended September 30,
1998 and 1997 5
Condensed Consolidated Statements of Cash Flows--
Nine Months Ended September 30, 1998 and 1997 6
Notes to Interim Condensed Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION 24
- -------
SIGNATURE 25
<PAGE> 3
FORWARD-LOOKING STATEMENTS
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: the outcome of
litigation pending against the Company and certain affiliated persons;
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; revisions to amounts recorded for losses associated
with the impairment of assets; liabilities and other claims asserted
against the Company; competition; the loss of any significant customer;
changes in business strategy, divestiture or development plans; the
ability to attract and retain qualified personnel, including physicians;
the impact of Year 2000 issues; fluctuations in interest rates on the
Company's variable rate indebtedness; and the availability and terms of
capital to fund working capital requirements and 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
($ in 000's)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
(Unaudited) (Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,102 $ 28,173
Restricted cash 631 6,457
Accounts receivable, net 76,676 70,675
Deferred income taxes 15,138 25,818
Other current assets 43,772 42,884
-------- --------
Total current assets 144,319 174,007
Property and equipment 518,984 438,792
Less: Accumulated depreciation and amortization (161,825) (130,728)
-------- --------
357,159 308,064
Investment in Dakota Heartland Health System (Note 3) - 48,499
Goodwill 148,407 123,104
Other assets 72,286 81,150
-------- --------
Total assets $ 722,171 $ 734,824
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 36,843 $ 46,722
Accrued liabilities and other 66,451 83,698
Current maturities of long-term debt 6,345 6,209
-------- --------
Total current liabilities 109,639 136,629
Long-term debt 524,268 491,914
Other long-term liabilities 44,149 64,278
Stockholders' Equity:
Common stock 224,542 224,475
Additional paid-in capital 390 390
Unrealized gains on marketable securities 12
Accumulated deficit (180,817) (182,874)
-------- --------
Total stockholders' equity 44,115 42,003
-------- --------
Total Liabilities and Stockholders' Equity $ 722,171 $ 734,824
======== ========
</TABLE>
See accompanying notes.
<PAGE> 5
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000's, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------------
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue $ 157,169 $ 166,661 $ 520,744 $ 502,407
Costs and expenses:
Salaries and benefits 68,955 67,781 216,846 205,041
Other operating expenses 63,831 67,689 209,813 203,162
Provision for bad debts 10,368 12,688 30,248 33,449
Interest 13,108 13,236 38,782 34,715
Depreciation and amortization 9,490 7,067 27,616 23,047
Equity in earnings of Dakota
Heartland Health System (2,598) (7,824)
Unusual items (6,967) (6,989) 5,978
(Gain) loss on sale of facilities 275 (6,825)
--------- --------- -------- --------
Total costs and expenses 159,060 165,863 509,491 497,568
--------- --------- -------- --------
Income (loss) before minority
interest, income taxes,
discontinued operations and
extraordinary charge (1,891) 798 11,253 4,839
Minority interests 113 (440) (3,173) (1,421)
--------- --------- -------- --------
Income (loss) before income
taxes, discontinued operations
and extraordinary charge (1,778) 358 8,080 3,418
Income tax provision (benefit) (111) 220 2,424 1,129
--------- --------- -------- --------
Income (loss) before discontinued
operations and extraordinary
charge (1,667) 138 5,656 2,289
Loss on discontinued operations (2,424) (2,424)
--------- --------- -------- --------
Income (loss) before
extraordinary loss (4,091) 138 3,232 2,289
Extraordinary charge on
extinguishment of debt, net (1,175)
--------- --------- -------- --------
Net income (loss) $ (4,091) $ 138 $ 2,057 $ 2,289
========= ========= ======== ========
Income (loss) per share - basic
and assuming dilution (Note 1):
Income (loss) before
discontinued operations and
extraordinary charge $ (0.03) $ 0.00 $ 0.10 $ 0.04
Net income (loss) per share $ (0.07) $ 0.00 $ 0.04 $ 0.04
</TABLE>
See accompanying notes.
<PAGE> 6
PARACELSUS HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000's)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,057 $ 2,289
Non-cash expenses and changes in operating assets
and liabilities (9,704) (9,309)
-------- --------
Net cash used in operating activities (7,647) (7,020)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of DHHS, net of cash acquired (59,278)
Proceeds from sales of facilities, net of expenses 36,398 12,201
Sale of marketable securities 19,284
Additions to property and equipment, net (14,428) (12,617)
Increase in other assets, net (6,928) (2,282)
-------- --------
Net cash provided by (used in) investing activities (44,236) 16,586
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 67
Borrowings under Revolving Credit Facility 74,528 38,000
Repayments under Revolving Credit Facility (34,485) (34,593)
Repayments of debt, net (4,314) (4,922)
Deferred financing costs (3,984)
-------- --------
Net cash provided by (used in) financing activities 31,812 (1,515)
-------- --------
(Decrease) increase in cash and cash equivalents (20,071) 8,051
Cash and cash equivalents at beginning of period 28,173 17,771
-------- --------
Cash and cash equivalents at end of period $ 8,102 $ 25,822
======== ========
Supplemental Cash Flow Information:
Interest paid $ 45,265 $ 45,262
Income taxes refunded $ (440) $ (23,911)
Noncash Investing Activities:
Notes receivable from sale of hospitals $ (13,698) -
Debt assumed by purchaser of hospitals $ 3,239 -
</TABLE>
See accompanying notes.
<PAGE> 7
PARACELSUS HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
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. The Company presently operates 17 hospitals with 1,957 licensed
beds and four skilled nursing facilities with 232 licensed beds in 9
states, of which 12 are owned and five are 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 balance sheet at December 31, 1997,
has been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by
generally accepted accounting principles for a complete set of financial
statements. The Company's business is seasonal in nature and subject to
general economic conditions and other factors. Accordingly, operating
results for the quarter and nine months ended September 30, 1998, are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto for the year ended December 31, 1997, included in the Company's
1997 Form 10-K.
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,
the 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 as of December 31, 1997, have been
reclassified to conform to the Company's current presentation.
<PAGE> 8
EARNINGS PER SHARE - The following table sets forth the computation of
basic and diluted earnings per share before extraordinary charge (dollars
in thousands, except per share amounts). Per share amounts for the three
and nine months ended September 30, 1997, have been restated in
accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share":
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator(a):
Income (loss) before discontinued
operations and extraordinary charge $ (1,667) $ 138 $ 5,656 $ 2,289
Loss on discontinued operations (2,424) (2,424)
Extraordinary charge (1,175)
-------- -------- -------- --------
Net income (loss) $ (4,091) $ 138 $ 2,057 $ 2,289
======== ======== ======== ========
Denominator:
Weighted average shares used for
basic earnings per share 55,116 55,016 55,104 54,892
Effect of dilutive securities:
Employee stock options 2,428 2,694 2,440 2,769
-------- -------- -------- --------
Dilutive potential common shares 2,428 2,694 2,440 2,769
-------- -------- -------- --------
Shares used for diluted
earnings per share 57,544 57,710 57,544 57,661
======== ======== ======== ========
Earnings per share - basic and
assuming dilution:
Income (loss) before discontinued
operations and extraordinary charge $ (0.03) $ 0.00 $ 0.10 $ 0.04
Loss on discontinued operations (0.04) (0.04)
Extraordinary charge (0.02)
-------- -------- -------- --------
Net income (loss) $ (0.07) $ 0.00 $ 0.04 $ 0.00
======== ======== ======== ========
</TABLE>
- -------------------------
(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 4,883,469 shares of the Company's common stock
at a weighted average exercise price of $7.43 per share were outstanding
during the three and nine months ended September 30, 1998, 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.
<PAGE> 9
COMPREHENSIVE INCOME - Effective January 1, 1998, the Company adopted
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS 130 establishes standards for the reporting and disclosure
of comprehensive income and its components in the financial statements.
Comprehensive income as defined by SFAS No. 130 is net income (loss) plus
direct adjustments from non-stockholder sources to stockholders' equity.
Unrealized gains or losses on marketable securities are the only direct
adjustments recorded by the Company. Total comprehensive loss for the
quarter ended September 30, 1998 is the same amount as net loss for that
period or $4.1 million as compared to total comprehensive income of
$130,000 for the comparable period in the prior year. For the nine months
ended September 30, 1998 and 1997, total comprehensive income amounted to
$2.0 million and $2.1 million, respectively.
NOTE 2. UNUSUAL ITEMS
In September 1998, the Company announced that it has taken a series
of strategic actions designed to lower cost structures of its hospitals
as the result of the deteriorating reimbursement environment. These
actions included a combination of staff and wage reductions and other
cost cutting measures. As a result of these initiatives, the Company
recognized a charge of $300,000 for severance costs. Additionally,
unusual items included $233,000 relating to a settlement of litigation
(see Note 4).
On August 31, 1998, the Company reached a settlement with PacifiCare
regarding a dispute over administration of a 1996 capitation agreement.
That agreement had resulted in losses to the Company in 1996 and 1997 and
the eventual closure of PHC Regional Hospital and Medical Center ("PHC
Regional") in June 1997, as discussed further below. On August 20, 1997,
PacifiCare and the Company agreed to a specific mechanism to determine
amounts owed to each other as the result of amending the agreement
effective July 1, 1997. Following the completion of this process in
August 1998, the Company paid PacifiCare $5.5 million as a final
settlement under the capitation agreement. The Company had previously
recorded a loss contract charge based on a study conducted by the Company
and independent third party consultants. Unusual items for the quarter
and nine months ended September 30, 1998 include a $7.5 million gain,
which represents the excess of the loss contract accrual over the
settlement payment.
In June 1998, the Company recognized unusual charges of $731,000 to
restructure home health operations, at certain of its hospitals,
including in some cases the closure of these operations, and a $1.1
million charge to settle a 1995 dispute over certain contract services at
Dakota Heartland Health Systems ("DHHS"). Such charges were offset by a
$1.8 million gain to settle litigation related to an unconsummated
hospital acquisition by Champion Healthcare Corporation prior to its
merger with the Company in August 1996.
In May 1997, the Company recognized unusual charges totaling $6.0
million, consisting of $3.5 million related to the closure of the 125-bed
PHC Regional Hospital in Salt Lake City, Utah, and $2.5 million related
to a corporate reorganization. Such charges consisted primarily of
employee severance and related costs, and to a lessor extent, certain
other contractual termination costs.
<PAGE> 10
NOTE 3. ACQUISITIONS AND DISPOSITIONS
On September 30, 1998, the Company completed the sale of
substantially all of the assets of the eight hospitals (one of which had
been previously closed) located in metropolitan Los Angeles
(collectively, "LA Metro") to Alta Healthcare System LLC, a California
limited liability company and certain subsidiaries thereof (collectively
"Alta Healthcare"). The purchase price of approximately $33.7 million,
which included the purchase of net working capital, was arrived at
through an arms length negotiation and 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. This subordinated note may be adjusted for any
increase or decrease of net working capital and certain other
adjustments. The transaction resulted in a $4.2 million reduction in
amounts outstanding under the Company's Amended and Restated Reducing
Revolving Credit Facility (the "Credit Facility"), a $9.3 million
reduction in amounts outstanding under the Company's off balance sheet
receivable financing program, and the assumption by the purchaser of
approximately $3.2 million in other secured debt. The Company had
previously recorded impairment charges related to the LA Metro
facilities; accordingly, the Company recorded no gain or loss on the
sale.
On July 1, 1998, the Company completed the purchase of Dakota
Medical Foundation's 50% partnership interest in a general partnership
operating as Dakota Heartland Health System 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 this change in control,
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 results of
operations for the nine months ended September 30, 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 preliminary
allocation of purchase price, as the purchase price allocation has not
been finalized pending the results of a third-party appraisal. The excess
of the purchase price over the net assets acquired approximated $28.1
million and is being amortized over twenty years. The Company does not
expect the final purchase price allocation to have a material impact on
the consolidated financial statements.
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
recognized a pretax gain of $7.1 million on the disposition.
The following unaudited pro forma financial information for the nine
months ended September 30, 1998 and 1997 (dollars in thousands, except
per share amounts) assumes the disposition of the LA Metro and Chico
hospitals and the acquisition of DHHS occurred on January 1, 1997.
Accordingly, the pro forma information excludes the $7.1 million gain
recognized by the Company in connection with the disposition of the Chico
hospitals. 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 dates 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 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
<PAGE> 11
measure of liquidity, cash flow or operating income under generally
accepted accounting principles.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------------------------------------
Chico
Hospital DHHS LA Metro
As Pro Forma Pro Forma Pro Forma Company
Reported(a) Adj.(b) Adj.(c) Adj.(d) Pro Forma
---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net revenue $ 520,744 $ (18,850) $ - $ (57,972) $ 443,922
========= ========= ========= ======== =========
Adjusted EBITDA $ 60,664 $ (3,560) $ 4,141 $ 1,189 $ 62,434
========= ========= ========= ======== =========
Income before
income taxes,
discontinued
operations and
extraordinary charge $ 8,080 $ (8,645) $ 1,036 $ 1,943 $ 2,414
========= ========= ========= ======== =========
Income before
extraordinary loss
and discontinued
operations $ 5,656 $ (6,673) $ 829 $ 1,555 $ 1,367
========= ========= ========= ======== =========
Net income $ 2,057 $ (6,673) $ 829 $ 3,979 $ 192
========= ========= ========= ======== =========
Income per share
basic and assuming
dilution:
Income before
discontinued
operations and
extraordinary charge $ 0.10 $ 0.02
========= =========
Net income per share $ 0.04 $ 0.00
========= =========
</TABLE>
- -------------------------
(a) Excluding the $7.1 million gain on sale of facilities, income before
extraordinary loss and discontinued operations was $135,000, or break-even per
share.
(b) Pro forma adjustments to reflect the disposition of the Chico hospitals,
including the removal of the $7.1 million gain on sale of such facilities.
(c) As reported amounts reflect DHHS on the consolidated method of accounting
as though the acquisition had occurred at the beginning of the year. Pro
forma adjustments to adjusted EBITDA reflect the reversal of minority
interest.
(d) Pro forma adjustments to reflect the disposition of the LA Metro hospitals,
including $1.0 million in interest income on notes receivable and the removal
of the $2.4 million loss from discontinued operations from certain of those
facilities (see Note 4).
<PAGE> 12
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------------------------
Chico
Hospital DHHS LA Metro
As Pro Forma Pro Forma Pro Forma Company Pro
Reported Adj.(a) Adj.(b) Adj.(c) Forma
---------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net revenue $ 502,407 $ (25,783) $ 74,877 $ (70,827) $ 480,674
======== ======== ========= ======== ========
Adjusted EBITDA $ 67,158 $ (1,930) $ 10,501 $ (3,357) $ 72,372
======== ======== ========= ======== ========
Income before income
taxes $ 3,418 $ 745 $ 2,426 $ (2,554) $ 4,035
======== ======== ========= ======== ========
Net income $ 2,289 $ 610 $ 1,987 $ (2,092) $ 2,794
======== ======== ========= ======== ========
Net income per
share - basic and
assuming dilution: $ 0.04 $ 0.05
======== ========
</TABLE>
- -----------------------
(a) Pro forma adjustments to reflect the dispositions of the Chico hospitals.
(b) Pro forma adjustments to reflect DHHS acquisition.
(c) Pro forma adjustments to reflect the dispositions of the LA Metro
hospitals, including $1.0 million in interest income on notes receivable.
NOTE 4. LOSS FROM DISCONTINUED OPERATIONS
Loss from discontinued operations reflects a $2.4 million charge (net of
tax benefit of $1.7 million) relating to a settlement of litigation
concerning alleged violations of certain Medicare rules filed by two former
employees ("the relators") in October 1995. Concurrent with the settlement
of this litigation, previously reported in the Company's 1997 Annual Report
filed on Form 10-K, the United States Government intervened in the case as
to certain of the claims against the Company and other related entities and
individuals. The claims primarily concerned LA Metro psychiatric hospital
facilities and one LA Metro acute care facility. The United States
dismissed the claims with prejudice and released the Company, its
subsidiaries, its current and former directors and employees, and related
others from civil or administrative monetary actions related to the claims.
In return, the Company agreed to pay the Government $7.3 million, $4.0
million of which was paid on the execution of the settlement agreement and
the balance of which will be paid over a one-year period. The Company also
reached a complete and final resolution of all issues in a settlement with
the relators, which included a dismissal with prejudice by the relators of
the entire complaint to the Company and others. See Part II. Item 1- Legal
Proceedings for further discussion on the terms of the settlement. The
Company reported the excess of the settlement over the related liability
accrued at December 31, 1997, as loss from discontinued operations.
<PAGE> 13
NOTE 5. CONTINGENCIES
IMPACT OF YEAR 2000 - As with most other industries, hospitals and health
care systems use information systems that may misidentify dates beginning
January 1, 2000, and result in system or equipment failures or
miscalculations. Information systems include computer programs, building
infrastructure components and computer-aided biomedical equipment. The
Company has a Year 2000 strategy for its hospitals that includes phases
for education, inventory and assessment of applications and equipment at
risk, analysis and planning, testing, conversion/remediation/replacement
and post-implementation. The Company can provide no assurances that
applications and equipment the Company believes to be Year 2000 compliant
will not experience difficulties, or that the Company will not experience
difficulties obtaining resources needed to make modifications to correct
or replace the Company's affected systems and equipment. Failure by the
Company or third parties on which it relies to resolve Year 2000 issues
could have a material adverse effect on the Company's results of
operations and its ability to provide health care services. Consequently,
the Company can give no assurances that issues related to Year 2000 will
not have a material adverse effect on the Company's financial condition
or results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further discussion.
PENDING LITIGATION - The Company is a party to pending litigation in
connection with several stockholder related matters and a suit involving
insurance carriers. See "Item 2 - Pending Litigation."
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
"Same hospitals" as used in the following discussion exclude (i) the
Company's LA Metro hospitals, which were sold on September 30, 1998, and
otherwise consist of acute care hospitals owned and operated throughout
the periods for which comparative results are presented and corporate
expenses. Accordingly, such designation excludes DHHS (acquired June
1998), Chico hospitals sold in June 1998 and PHC Regional Hospital, which
the Company closed in June 1997 (see Notes 2 and 3).
RESULTS OF OPERATIONS - QUARTER ENDED SEPTEMBER 30, 1998
COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1997
Net revenue for the quarter ended September 30, 1998, was $157.2
million, a decrease of $9.5 million, or 5.7%, from $166.7 million for the
same period of 1997. Net revenue for the 1998 quarter increased $25.0
million as a result of the July 1, 1998 acquisition of DHHS with such
increase offset by (i) a $9.5 million decrease in net revenue
attributable to the Chico hospitals (ii) a $4.4 million decrease in net
revenue at the Company's LA Metro hospitals and (iii) $1.5 million
decrease in net revenue attributable to the closure of PHC Regional.
DHHS was accounted for under the equity method for the quarter ended
September 30, 1997. The remaining decline in net revenue occurred at the
Company's "same hospitals," as discussed below.
Net revenue at "same hospitals" for the quarter ended September 30,
1998 was $112.8 million compared to $132.0 million, a decrease of $19.2
million, or 14.6%, over the comparable period in 1997 due to (i) a
decline in utilization and reimbursement rates for home health and other
healthcare operations related to the enactment of the Balanced Budget Act
of 1997 (the "1997 Budget Act"), (ii) the restructuring of home health
operations at certain of the Company's hospitals in the second quarter of
1998, including in some cases the closing of such operations (see Note
2), (iii) an overall decline in volume at the hospitals and continued
tightening of payment levels by managed care plans. Net revenue at the
Company's Tennessee market hospitals, which have significant home health
operations, decreased $5.1 million, or 38.1%, from $13.4 million in 1997
to $8.3 million in 1998. Excluding Tennessee, "same hospital" revenue
declined by $14.0 million, or 11.9%, from $118.5 million in 1997 to
$104.5 million in 1998. The reductions in net revenue resulting from the
enactment of the 1997 Budget Act, the Company's restructuring of certain
of its home health operations and downward payment pressures from third
party payors are likely to continue throughout 1998 and into 1999.
The Company's "same hospitals" experienced a 4.9% decrease in
inpatient admissions from 12,470 in 1997 to 11,853 in 1998. Same
hospital patient days decreased 5.6% from 54,873 in 1997 to 51,790 in
1998. The decrease in admissions and patient days are due to volume
declines at the hospitals and to a lesser extent, improved utilization
review procedures at certain facilities. Outpatient visits in "same
hospitals" decreased 34.2% from 396,587 in 1997 to 261,040 in 1998,
primarily as a result of a significant decline in home health visits.
Excluding home health visits, outpatient visits in "same hospitals"
increased 4.5% from 139,647 in 1997 to 145,960 in 1998. The decline in
home health visits was primarily due to stricter utilization standards
under the 1997 Budget Act effective October 1, 1997, the closure of home
health operations at certain facilities, and to a lesser extent, the
cancellation of a contract for home health services at one of the
Company's Tennessee hospitals. Over one half of the Company's decline in
home health visits occurred in the Tennessee market hospitals.
<PAGE> 15
Operating expenses (salaries and benefits, other operating expenses
and provision for bad debts) decreased $5.0 million from $148.2 million
in 1997 to $143.2 million in 1998. The quarter ended September 30, 1998,
included DHHS operating expenses of $20.2 million, which offsets
decreases in operating expenses directly related to declines in net
revenue and from closed/ sold facilities. Excluding DHHS, operating
expenses for the quarter ended September 30, 1998, decreased $25.2
million as compared to the same period in 1997. This decrease was
attributable to (i) $7.6 million decrease from the sale of the Chico
hospitals, (ii) a $3.2 million reduction in general and medical
professional liability costs as a result of revisions of actuarial
estimates and (iii) management's effort to reduce costs in response to
reductions in net revenue resulting from the 1997 Budget Act. On a "same
hospital" basis, operating expenses expressed as a percentage of net
revenue increased from 88.0% in 1997 to 91.0% in 1998, and operating
margin decreased from 12.0% to 9.0%, respectively. The increase in
operating expenses as a percent of net revenue is due to the impact of
the aforementioned stricter utilization standards and reductions in
reimbursement rates under the 1997 Budget Act. Thus, the decline in net
revenue has outpaced management's efforts to reduce costs. In the fourth
quarter of 1998, the Company undertook a series of strategic actions
designed to lower the Company's cost structure as the result of the
deteriorating reimbursement environment (see Note 2). These actions
included a combination of staff and wage reductions as well as other cost
cutting measures. Management believes that the cost savings associated
with these initiatives will impact the Company's results of operations
starting in the fourth quarter of 1998. However, there can be no
assurance that the Company will achieve its desired cost structure or
that any cost reductions will be sufficient to offset present and/or
future government initiatives or reduction in current levels of
utilization.
Depreciation and amortization increased 34.3% to $9.5 million in
1998 from $7.1 million for the same period of 1997, primarily due to the
acquisition of DHHS, which was accounted for under the equity method of
accounting in the comparable period in 1997, and from current year
additions to property and equipment.
Income (loss) before income taxes, discontinued operations and
extraordinary charge for the quarter ended September 30, 1998, included
$3.1 million attributable to income from DHHS on a consolidated basis
(see Note 3), compared to $2.6 million of reported equity in earnings in
the prior period. Income before income taxes, discontinued operations
and extraordinary charge also included a $7.5 million gain from the
settlement of a contract dispute with PacifiCare (see Note 2), a $233,000
unusual charge relating to a settlement of litigation and a $275,000 loss
from sale of home health operations at one of the Company's facilities.
The Company's effective tax benefit was 6.2% for the quarter ended
September 30, 1998, as compared to effective tax rate of 61.5% for the
comparable period in 1997. The reduced tax benefit for 1998 resulted from
an increase in the valuation allowance related to unrealized tax assets
and from nondeductible goodwill amortization expense.
The Company recorded a loss from discontinued operations of $2.4
million (net of tax 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 the Company adopted a plan to exit the
psychiatric hospital business in 1996. See Part II. Item1. Legal
Proceedings, for additional discussion of the terms of the litigation
settlement.
<PAGE> 16
Net loss for the quarter ended September 30, 1998, was $4.1 million,
or $0.07 per diluted share, compared to a net income of $138,000, or
$0.00 per diluted share, for the same period of 1997. Weighted average
common and common equivalent shares outstanding decreased to 55.1 million
in 1998 from 57.7 million in 1997, primarily due to the exclusion of
dilutive securities from the calculation of net loss per share in 1998.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1997
Net revenue for the nine months ended September 30, 1998, was $520.7
million, an increase of $18.3 million, or 3.6%, from $502.4 million for
the same period of 1997. Net revenue for 1998 increased $77.0 million as
a result of the July 1, 1998 acquisition of DHHS. The Company recast its
1998 consolidated statement of operations to reflect DHHS under the
consolidated method of accounting as though the acquisition occurred on
January 1, 1998 (See Note 3). DHHS was accounted for under the equity
method for the nine months ended September 30, 1997. The increase from
DHHS net revenue was offset by (i) a $6.9 million decrease in net revenue
attributable to the sale of the Chico facilities (ii) a $12.7 million
decrease in net revenue at the Company's LA Metro due primarily to volume
declines, and (iii) $6.7 million decrease in net revenue attributable 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 nine months ended September
30, 1998, was $366.2 million compared to $398.5 million, a decrease of
$32.3 million, or 8.3%, primarily as a result of the 1997 Budget Act, the
Company's restructuring of home health operations and continued pricing
pressures from third party payors, as discussed above, and to a lesser
extent, an overall decline in volumes at certain hospitals. Net revenue
at the Company's Tennessee market hospitals, which have significant home
health operations, decreased $14.5 million, or 31.4%, from $46.2 million
in 1997 to $31.7 million in 1998. Excluding Tennessee from the "same
hospital" comparison, net revenue declined by $17.8 million, or 5.1%,
from $352.3 million in 1997 to $334.5 million in 1998. This decline was
largely due to a decrease of 156,378 home health visits in 1998 as
compared to 1997. The reductions in net revenue associated with the
enactment of the 1997 Budget Act, the Company's restructuring of certain
of its home health operations and downward payment pressures from third
party payors are likely to continue throughout 1998 and into 1999.
The Company's "same hospitals" experienced a 4.3% decrease in
inpatient admissions from 38,901 in 1997 to 37,232 in 1998. Patient days
decreased 5.5% from 174,746 in 1997 to 165,131 in 1998. The decreases in
admissions and patient days are due primarily to volume declines at the
Company's Tennessee market hospitals and the closings of home health
operations at certain other facilities. Outpatient visits in "same
hospitals" decreased 26.1% from 1,228,069 in 1997 to 907,757 in 1998,
primarily as a result of a significant decline in home health visits.
Excluding home health visits, outpatient visits in "same hospitals"
increased 2.1% from 427,684 in 1997 to 436,576 in 1998. The decline in
home health visits was due primarily to stricter utilization standards
under the 1997 Budget Act effective October 1, 1997, the closure of home
health operations at certain facilities, and to a lesser extent, the
cancellation of a contract for home health services at one of the
Company's Tennessee hospitals.
<PAGE> 17
Excluding the Tennessee market hospitals from the "same hospitals"
comparison, inpatient admissions decreased 2.4% from 33,759 in 1997 to
32,964 in 1998. Patient days decreased 2.8% from 148,002 in 1997 to
143,816 in 1998. Outpatient visits decreased 17.2% from 819,691 in 1997
to 678,505 in 1998, primarily as a result of the significant decline in
home health visits discussed above. Excluding home health visits,
outpatient visits increased 4.0% from 378,418 in 1997 to 393,610 in 1998.
Operating expenses (salaries and benefits, other operating expenses
and provision for bad debts) increased $15.2 million from $441.7 million
in 1997 to $456.9 million in 1998. The increase is primarily attributable
to the inclusion of DHHS operating expenses of $59.4 million for the nine
months ended September 30, 1998, which offsets decreases in operating
expenses directly related to declines in net revenue and from closed/sold
facilities. Excluding DHHS, operating expenses for the nine months ended
September 30, 1998 decreased $44.2 million as compared to the same period
in 1997. This decrease was attributable to (i) $8.6 million decrease from
the sale of the Chico hospitals, (ii) a $9.4 million decrease from the
closing of PHC Regional in 1997, (iii) a $3.2 million reduction in
general and medical professional liability costs as a result of revisions
of actuarial estimates and (iv) management's effort to reduce costs in
response to reductions in net revenues resulting from the 1997 Budget
Act. On a "same store" basis, operating expenses expressed as a
percentage of net revenue increased from 86.7% in 1997 to 87.9% in 1998,
and operating margin decreased from 13.3% to 12.1%. Excluding the
Tennessee market hospitals, "same hospital" operating margin decreased
from 13.1% in 1997 to 12.6% in 1998.
Depreciation and amortization increased 19.8% to $27.6 million in
1998 from $23.0 million for the same period of 1997, primarily due to the
acquisition of DHHS, which was accounted for under the equity method of
accounting in the comparable period in 1997, and from current year
additions to property and equipment.
Interest expense increased $4.1 million from $34.7 million in 1997
to $38.8 million in 1998, due in part to $2.7 million of interest charges
in 1997 taken against a loss contract established in December 1996, with
respect to the now closed PHC Regional Hospital and increased amounts
outstanding under the Credit Facility and other debt. Amounts taken
against the loss contract represented interest charges on borrowings to
finance the acquisition of PHC Regional Hospital.
Income before income taxes, discontinued operations and
extraordinary charge included $8.2 million (net of $4.1 million of
minority interest) attributable to income from DHHS as consolidated for
the nine months ended September 30, 1998 (see Note 3), compared to $7.8
million of reported equity in earnings in the prior period. DHHS earnings
for 1998 included a $1.1 million payment to settle a 1995 dispute over
certain contract services. The following table presents pro forma impact
on the Company's net revenue and Adjusted EBITDA for the nine months
ended September 30, 1998 and 1997, as if the acquisition of DHHS had
occurred on January 1, 1997 ($ in thousands).
<PAGE> 18
<TABLE>
<CAPTION>
PRO FORMA
DHHS
AS CURRENTLY RESULTS OF PRO FORMA
REPORTED(a) OPERATIONS(a) INCREASE
------------ ------------ -----------
<S> <C> <C> <C>
1998
Net revenue $ 76,981 $ 76,981 $ - -
Adjusted EBITDA 13,394 17,535 4,141
1997
Net revenue $ 0 $ 74,877 $ 74,877
Adjusted EBITDA 7,824 18,325 10,501
</TABLE>
- ----------------------
(a) Adjusted EBITDA for the nine months ended September 30, 1998,
excludes a $1.1 million charge to settle a 1995 dispute over certain
contract services.
Income before income taxes, discontinued operations and
extraordinary charge for the nine months ended September 30, 1998,
included a net gain of $6.8 million on sale of the Chico hospitals and
other unrelated operations and unusual items totaling $7.0 million.
Unusual items included a $7.5 million gain on the settlement of a
contract dispute with PacifiCare and a $1.8 million gain to settle
litigation related to an unconsummated hospital acquisition by Champion
Healthcare Corporation prior to its merger with the Company. These gains
were offset by severance charges of $300,000 from the cost reduction
initiatives implemented in the fourth quarter of 1998, a $1.1 million
charge in connection with the settlement of a contract dispute at DHHS as
discussed above, a $233,000 charge relating to the settlement of
litigation and a $731,000 charge to restructure home health operations at
certain of the Company's hospitals (see Note 2).
Results of operations for the nine months ended September 30, 1997,
included $6.0 million in unusual charges relating to the closure of PHC
Regional Hospital in May 1997 and to a corporate reorganization also
completed in May 1997. Results of operations for the nine months ended
September 30, 1997, excluded a $10.9 million loss attributable to PHC
Regional Hospital, which was charged to the loss contract accrual
established at December 31, 1996.
The Company's effective tax rate was 30.0% for the nine months ended
September 30, 1998, as compared to 33.0% for the comparable period in
1997. The reduced tax rates for 1998 and 1997 resulted primarily from
reductions in the valuation allowance related to the recognition of
previously devalued tax assets offset by nondeductible goodwill
amortization expense.
Loss from discontinued operations of $2.4 million (net of tax of
$1.7 million), $0.04 per diluted share, in 1998 reflects the settlement
of the 1995 litigation concerning alleged violations of certain Medicare
rules by the LA Metro psychiatric facilities. See Part II. Item1. Legal
Proceedings, for additional discussion of the terms of the litigation
settlement.
Net income for the nine months ended September 30, 1998, was $2.1
million, or $0.04 per diluted share, compared to net income of $2.3
million, or $0.04 per diluted share, for the same period in 1997. The
1998 net income includes an extraordinary charge on extinguishment of
debt of $1.2 million (net of tax benefits of $817,000), or $0.02 per
diluted share. Weighted average common and common equivalent shares
outstanding were 57.5 million and 57.7 million for the nine months ended
September 30, 1998 and 1997, respectively.
<PAGE> 19
OPERATING PERFORMANCE OF LA METRO HOSPITALS
On September 30, 1998, the Company completed the sale of
substantially all of the assets of the LA Metro hospitals (see Note 3).
The LA Metro acute care hospitals recorded an EBITDA deficit of $637,000
and $144,000 for the quarter and nine months ended September 30, 1998,
respectively, as compared to EBITDA of $566,000 and $4.5 million for the
quarter and nine months ended September 30, 1997, respectively. Losses
before interest, income taxes, depreciation and amortization for the LA
metro psychiatric hospitals, which were offset against the disposal loss
accrual previously established in September 1996, were $2.7 million and
$4.4 million for the quarter and nine months ended September 30, 1998,
respectively, as compared to $565,000 and $859,000 for the quarter and
nine months ending September 30, 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the nine months ended
September 30, 1998, was $7.6 million, compared to $7.0 million for the
same period in 1997. Net cash used in investing activities was $44.0
million during 1998, as compared to net cash provided by investing
activities of $16.6 million during 1997. The $60.8 million decrease in
cash was primarily attributable to the Company's $59.3 million purchase
(net of cash acquired) of its partner's 50% interest in DHHS (see Note 3)
in 1998 and a decrease in $19.3 million of proceeds from sale of
marketable securities in 1997 offset by a net increase of $24.2 million
in net proceeds from the sales of hospitals (see Note 3). Net cash
provided by financing activities during 1998 was $31.8 million, compared
to cash used of $1.5 million during 1997. The $33.3 million increase in
cash provided by financing activities was primarily attributable to
borrowings under the Company's Amended Credit Agreement to finance the
purchase of its partner's 50% interest in DHHS partially offset by
repayments under the Credit Facility and other borrowings and deferred
financing costs of $4.0 million associated with the Credit Facility
entered into in March 1998.
Net working capital was $34.7 million at September 30, 1998, a
decrease of $2.7 million from $37.4 million at December 31, 1997. The
decrease was primarily due to the repayment of amounts outstanding under
the Credit Facility from available cash, as well as the reclassification
of $2.0 million in principal amounts outstanding under the term loans
from long term to current pursuant to an amendment to the Credit Facility
effective March 1998. Working capital also decreased as a result of the
sale of working capital associated with the Chico and LA Metro hospitals,
from which proceeds were used to reduce amounts outstanding under the
Company's off balance sheet receivable financing program (see Note 3).
The Company's long-term debt as a percentage of total capitalization was
92.2 % at September 30, 1998, compared to 92.1% at December 31, 1997.
As of November 13, 1998, the Company had $38.1 million available
under the revolver portion of its Credit Facility to fund future capital
expenditures, working capital requirements and the issuance of letters of
credit. The Company anticipates that internally generated cash flows from
earnings, proceeds from divestiture of certain assets, proceeds from the
sale of hospital accounts receivable under the Company's off balance
sheet receivable financing program, Federal and state income taxes
refunds, and available borrowings under its Credit Facility will be
sufficient to meet funding requirements through 1999. 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. See "Pending Litigation" of
this Item for a discussion regarding certain pending litigation, the
resolution of which could adversely affect the Company's liquidity and
its future operating results.
<PAGE> 20
YEAR 2000 COMPLIANCE
The Securities and Exchange Commission (the "SEC") recently
published additional guidance on Year 2000 disclosures. In order to
comply with that guidance, the Company is supplementing the Year 2000
disclosures made in previously filed annual and quarterly reports.
The Company has implemented a seven-phase project plan at each of
its hospitals and corporate office to assess and address the Year 2000
issue. Additionally, the Company has contracted with a company that
specializes in Year 2000 issues to assist in implementing the Company's
Year 2000 plan. As part of the program, the Company is contacting its
principal suppliers, vendors and payors to assess whether their Year 2000
issue, if any, will affect the Company. The first phase of the plan,
which has been completed, focused on raising awareness among senior
management, hospital executives and managers, and external business
partners on the potential Year 2000 impact on the Company. Phase one also
included forming of the Year 2000 team, defining roles and
responsibilities, and establishing the project timing and deliverables.
Phase two entails a complete inventory assessment to identify and
document all affected systems and equipment and to prioritize all
inventoried items by criticality to patient care and business operations.
In phase two, all hospitals are required to identify all principal
suppliers and to estimate costs and timing for all non-compliant systems
and equipment. Phase two is substantially completed. Phase three involves
obtaining vendor certification of compliance and developing contingency
plans for vendors who are no longer in business or who do not respond.
Phase three has begun and should be substantially completed in the fourth
quarter of this year. Phase four, scheduled to be completed in the first
quarter of fiscal 1999, includes developing test plans and compliance
criteria for all patient care critical and operations critical items. The
fifth phase, which includes testing and identifying non-compliant items,
is scheduled for completion in the second quarter of fiscal 1999. Patient
care and operations critical non-compliant systems and equipment will be
converted and/or taken out of service, and contingency plans for
potential system failure will be developed in the sixth phase of the
project plan targeted for completion in the third quarter of next year.
Phase seven focuses on identifying and correcting any malfunction in the
systems and equipment. In this phase, which will be conducted throughout
the fourth quarter of 1999, the Company will establish a disaster
recovery team and prepare and assist system users to initiate contingency
plans in the event of malfunctions. While the Company's Year 2000 plan is
a multiphase project, the plan does allow for different phases to
progress simultaneously.
Based on the information currently available, the Company is in the
process of estimating the total cost for addressing all Year 2000 issues
and plans to complete its initial estimate in the first quarter of 1999.
This estimate will include projected costs associated with capital
projects that would have been undertaken not withstanding the Year 2000
compliance project plan but the timing was accelerated in light of the
plan. Year 2000-related remediation costs incurred in 1998 have not been
material to the Company's results of operations.
The Company relies heavily on third parties in operating its
business. In addition to its reliance on software, hardware and other
equipment vendors to verify Year 2000 compliance of their products, the
Company also depends on (i) fiscal intermediaries which process claims
and make payments for the Medicare/ Medicaid programs, (ii) insurance
companies, HMOs and other private payors, (iii) utilities which provide
electricity, water, natural gas and telephone services (iv) local
community services such as "911" emergency, police, fire, and sewage
treatment, (v) vendors of medical supplies and pharmaceuticals used in
patient care and (vi) other service providers such as banks, insurance
companies and transfer agents. As a part of its Year 2000 strategy, the
Company intends to seek assurances from these parties that their services
and products will not be interrupted or malfunction due to the Year 2000
<PAGE> 21
problem. If third parties fail to resolve their Year 2000 issues, such
failure could have a material adverse effect on the Company's financial
condition and results of operations.
The Company will develop contingency plans to address any Year 2000
issues that may arise and anticipates completing its initial contingency
plans in the third quarter of 1999. Such plans will entail, but are not
limited to, outlining procedures for compliance certification from
vendors who are no longer in business or who refuse to respond,
developing manual procedures for all patient care critical and operations
critical processes, and reviewing and supplementing existing disaster
plans at each of the hospitals. However, there is no assurance that the
Company will be able to develop all contingency plans timely or that when
developed such plans will successfully mitigate all Year 2000 issues.
Accordingly, failure of such contingency plans could have a material
adverse effect on the Company.
The SEC's recent guidance for Year 2000 disclosure also calls on
companies to describe their most likely worst case Year 2000 scenarios.
While a scenario in which medical equipment fails as a result of a Year
2000 problem could lead to serious injury or death, the Company does not
believe that such a scenario is likely to occur. As noted above, any
piece of patient care and operations critical equipment that is not Year
2000 compliant will be made compliant, replaced or taken out of service.
Furthermore, there will be a back-up plan for patient and operations
critical equipment in case it unexpectedly fails. The most likely worst
case scenario is that the Company will have to add additional staff
and/or reassign existing staff during the time period leading up to and
immediately following December 31, 1999, in order to address any Year
2000 issues that unexpectedly arise.
The foregoing assessment is based on information currently available
to the Company. The Company will revise its assessment as it implements
its Year 2000 strategy. The Company can provide no assurances that
applications and equipment the Company believes to be Year 2000 compliant
will not experience difficulties or that the Company will not experience
difficulties obtaining resources needed to make modifications to or
replace the Company's affected systems and equipment. Failure by the
Company or third parties on which it relies to resolve Year 2000 issues
could have a material adverse effect on the Company's results of
operations and its ability to provide health care services. Consequently,
the Company can give no assurances that issues related to Year 2000 will
not have a material adverse effect on the Company's financial condition
or results of operations.
PENDING LITIGATION
The Company has previously reported the filing of a number of
putative class and derivative action complaints relating to the August
1996 merger of the Company and Champion Healthcare Corporation. As
previously reported, two of these actions have been active: IN RE
PARACELSUS CORP. SECURITIES LITIGATION, Master File No. H-96-3464, in
which a number of federal class action complaints were consolidated, and
CAVEN V. MILLER No. H-96-4291, in which two derivative action complaints
have been consolidated. The federal class action complaint asserts
claims against the Company under sections 11 and 12(a)(2) of the
Securities Act of 1933, and claims against certain existing and former
officers and directors of the Company under sections 11 and 15 of the
Securities Act of 1933. In addition, the complaint was amended to add a
claim against the Company under section 10(b) of the Securities Exchange
Act of 1934. The Court recently dismissed that claim, allowing
plaintiffs an opportunity to replead. The derivative action asserts
various state law claims against the Company, certain of its existing and
former officers and directors or their affiliates, and other persons.
Since the Company reported on this litigation on its Form 10-K for
the fiscal year ended December 31, 1997, one of the California state
<PAGE> 22
court actions, GAONKAR V. KRUKEMEYER ET AL., Case No BC158899, was
dismissed without prejudice on motion of the plaintiffs, and the other
California state court action previously consolidated with GAONKAR,
PRESCOTT V. PARACELSUS HEALTHCARE CORP., Case No. BC158979, has been
ordered to proceed separately.
As previously reported, in light of the Company's restatement of
financial information contained in the various registration statements
and prospectuses relating to the merger, the Company believes an
unfavorable outcome is probable for at least some of the claims asserted
in the stockholder class action. Efforts to settle the stockholder and
derivative claims are ongoing. Absent such a settlement within the
Company's financial resources, the Company will continue to defend the
litigation vigorously. Many factors will ultimately affect and determine
the results of the litigation, and the Company can provide no assurance
that the results will not have a material adverse effect on the Company.
The Company previously reported on its Form 10-K an action filed on
September 10, 1997, by twelve health care insurers and/or administrators
encaptioned BLUE CROSS AND BLUE SHIELD UNITED OF WISCONSIN ET AL. V.
PARACELSUS HEALTHCARE CORPORATION, Case No. 97-6760 SVW (RCx), in the
United States District Court for the Central District of California
against the Company and two of its subsidiaries. Plaintiffs alleged that
over many years the Company fraudulently induced them to make payments
under their members' plans through a variety of allegedly improper
practices, principally in connection with certain psychiatric treatment
programs previously operated at certain of the Company's psychiatric
hospitals in the Los Angeles area. Plaintiffs asserted claims under the
Racketeer Influenced and Corrupt Organizations Act ("RICO") and the
Employee Retirement Income Security Act ("ERISA"), as well as for fraud,
negligent misrepresentation, unjust enrichment, and conversion. On March
10, 1998, Plaintiffs filed their First Amended Complaint restating each
of their causes of action seeking damages exceeding $30.5 million, treble
damages under RICO, restitution under ERISA, together with reasonable
attorneys' fees and various costs and expenses.
Since the Company reported on this litigation on its Form 10-K for
the fiscal year ended December 31, 1997, the Company and the Plaintiffs
have reached a settlement to the litigation. The Company has agreed to
pay the Plaintiffs a total of $995,000 on or before November 17, 1998, in
full settlement of all claims. The Plaintiffs have agreed to dismiss the
suit with prejudice and to release the Company from any and all claims
arising out of or based upon the subject matter of the suit. The Company
denied the allegations asserted in the complaint but elected to settle
the case to avoid the costs and burdens of protracted litigation. The
Company previously recorded a liability relating to this litigation and
expects that the settlement will have no impact on the Company's results
of operations.
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In September 1998, the Company reached a final settlement of
litigation concerning alleged violations of certain Medicare rules. As
the Company has previously reported in its 1997 Annual Report filed on
Form 10-K , the Medicare litigation concerned a civil complaint filed
under seal in federal court in Los Angeles in October 1995 by two former
hospital employees (the "relators"). The relators filed the case on
behalf of the United States Government and the State of California
against the Company and others (the "defendants") alleging that the
defendants violated the U.S. and California False Claims Acts by failing
to comply with certain Medicare and Medicaid regulations.
Concurrent with the settlement, the United States Government
intervened in the case as to certain of the claims against the Company
and other related entities and individuals. The claims primarily
concerned psychiatric hospital facilities and one acute care facility
operated by the Company in Southern California and involved allegations
narrower than those in the relators' initial complaint. The United States
dismissed the claims with prejudice and released the Company, its
subsidiaries, its current and former directors and employees, and related
others from civil or administrative monetary actions related to the
claims. In turn, the Company agreed to pay the Government $7.3 million,
$4.0 million of which was paid on the execution of the settlement
agreement and the balance of which will be paid over a one-year period.
The Company also agreed that it would not contest or appeal certain cost
report adjustments related to the claims asserted by the Government. In
addition, the Office of the Inspector General of the Department of Health
and Human Services ("OIG") agreed not to seek permissive exclusion from
the Medicare, Medicaid, and other federal health care programs of those
entities and individuals relating to these claims. The Company also
entered into a separate corporate integrity agreement with the OIG
applicable to the affected facilities. The sale of the LA Metro hospitals
to Alta Healthcare (see Note 3) included the affected facilities and an
agreement by Alta to abide by the corporate integrity agreement. Alta
Healthcare rather than the Company therefor has the principal
responsibility for complying with the agreement.
Finally, the settlement includes a separate agreement with the
relators reaching a complete and final resolution of all issues with them
and a dismissal with prejudice by the relators of the entire complaint as
to the Company and other related entities and individuals.
See Part I - Item 2 "Pending Litigation" for an update of
developments on the pending stockholders' litigation and other litigation
involving insurance carriers previously disclosed in the Company's 1997
Form 10-K.
<PAGE> 24
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) Exhibits
10.71 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, Lincoln Community
Medical Limited Liability Company, Lincoln Community Medical Corporation, dba
Orange County Community Hospital and Bellwood Medical Corporation, dba Bellwood
General Hospital; and (d) individual defendant Joseph Sharp.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed on October 15, 1998, a Current Report on Form 8-K,
dated September 30, 1998, reporting pursuant to Item 2, the sale by the
Company effective September 30, 1998, of substantially all of the assets
of eight hospitals (one of which had been previously closed) located in
metropolitan Los Angeles to Alta Healthcare System LLC, a California
limited liability company and certain subsidiaries thereof.
<PAGE> 25
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)
Dated: November 13, 1998 By: /s/James G. VanDevender
--------------------------
James G. VanDevender
Senior Executive Vice President,
Chief Financial Officer
& Director
<PAGE> 1
SETTLEMENT AGREEMENT
I. PARTIES
This Settlement Agreement ("Agreement") is entered into between the (a)
United States of America, acting through the United States Department of Justice
and on behalf of the Office of Inspector General ("OIG-HHS") of the Department
of Health and Human Services ("HHS") (collectively the "United States"); (b)
Timothy Hill and Alan Leavitt ("the Relators"); (c) Paracelsus Healthcare
Corporation ("Paracelsus"), Lincoln Community Medical Limited Liability Company
("Lincoln"), Lincoln Community Medical Corporation, dba Orange County Community
Hospital ("OCCH") and Bellwood Medical Corporation, dba Bellwood General
Hospital ("BGH") (together "the Paracelsus Companies"); and (d) individual
defendant Joseph Sharp ("the Individual Defendant"). The Paracelsus Companies
and the Individual Defendant are referred to collectively as "the Paracelsus
Defendants."
All of the foregoing are referred to collectively as "the Parties."
II. PREAMBLE
As a preamble to this Agreement, the Parties agree to the following:
A. Paracelsus, through one or more subsidiaries, has operated OCCH and
BGH.
B. OCCH and BGH, through Paracelsus, submitted claims for payment to the
Medicare Program ("Medicare"), Title XVIII of the Social Security Act, 42
U.S.C. Sections 1395-1395ggg.
<PAGE> 2
C. The United States contends that it has certain civil claims against
the Paracelsus Defendants under the False Claims Act, 31 U.S.C. Sections
3729-3733, other federal statutes, and common law doctrines for engaging in the
following conduct at OCCH and BGH:
(1) The United States contends that at various times between 1993
and 1997, some of the Paracelsus companies
(a) had management agreements or directorship agreements at OCCH with
Daybreak, Inc., a California Corporation ("Daybreak"), Renaissance, a
California General Partnership ("Renaissance"), Pride Institute at
Solutions, a California General Partnership (Pride I), Pride Institute
at Solutions II, a California General Partnership ("Pride II"), and
Management Team Networks, Inc., a California corporation (together "the
Management Companies");
(b) were involved with psychiatric programs called Daybreak, Renaissance
and Pride at OCCH ("the Programs");
(c) had contracts with and made payments to physicians and medical
directors, made payments for patient travel expenses, and waived
payments owed by patients in connection with the Programs; and
(d) had relationships in connection with the Programs with persons named
Chaz Pritchard, Michael Ralke, and Frank Boudewyns,
all of which were intended to induce patient referrals to OCCH in violation of
the Anti-Kickback Statute, 42 U.S.C. Section 1320a-7b(b), and
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<PAGE> 3
some of which were improperly claimed on Medicare cost reports for OCCH.
(2) The United States contends that at various times from 1993
through 1997, some of the Paracelsus Companies submitted claims to Medicare for
medically unnecessary services, services not rendered, and non-billable
services to patients in the Programs at OCCH.
(3) The United States contends that between 1990 and 1997 the
Paracelsus Companies had directorship, joint venture, and other agreements with
physicians and physician groups at BGH that were intended to induce patient
referrals to BGH in violation of the Anti-Kickback Statute, 42 U.S.C. Section
1320a-7b(b).
The foregoing alleged conduct is hereinafter referred to as the "Covered
Conduct".
D. The United States also contends that it has certain administrative
claims against the Paracelsus Defendants under the provisions for permissive
exclusion from the Medicare, Medicaid, and other Federal health care programs,
42 U.S.C. Section 1320a-7(b), and the provisions for civil monetary penalties,
42 U.S.C. Section 1320a-7a, for the Covered Conduct.
E. The Relators have filed a qui tam action, United States ex rel. Hill
and Leavitt v. Paracelsus Healthcare Corp. et al., CV 95-6653 TJH(JRx) in the
United States District Court for the Central District of California ("the
Action"). In the Action, the Relators
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<PAGE> 4
seek damages for violation of the False Claims Act, 31 U.S.C. Sections
3729-3733, from the Paracelsus Defendants and others.
F. The Paracelsus Defendants deny the contentions of the United States
as set forth in Paragraphs C and D above and the allegations of the Relators as
set forth in their complaint in the Action.
G. To avoid the delay, uncertainty, inconvenience, and expense of
protracted litigation of these claims, the Parties reach a full and final
settlement as set forth below.
III. TERMS AND CONDITIONS
NOW, THEREFORE, in consideration of the mutual promises, covenants, and
obligations set forth below, and for good and valuable consideration as stated
herein, the Parties agree as follows:
1. Payment. Paracelsus, on behalf of itself, the other Paracelsus
Defendants, and other released parties, shall pay to the United States
$7,300,000 (the "Principal Settlement Amount") as follows:
(a) $4,000,000 within three (3) days of the full execution of this
Agreement;
(b) $1,000,000 plus interest within six months of the full execution of
this Agreement;
(c) $2,300,000 plus interest within twelve months of the full execution
of this Agreement.
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<PAGE> 5
All sums unpaid after three (3) days from the date of full execution of this
Agreement by the Parties shall bear interest at the six-month T bill rate in
effect on the third day following such execution.
All payments will be made by electronic funds transfer in accordance
with instructions to be provided by the United States.
2. Additional Payment. If, based upon or because of this Agreement, the
Action, or any contentions concerning the Covered Conduct, the Paracelsus
Defendants receive any Related Payments as that term is defined in Schedule
1.1(f) attached to the Agreement dated March 30, 1998 related to the Paracelsus
Healthcare Corporation Amended and Restated Credit Agreement dated as of March
30, 1998 with Banque Paribas as Agent, Toronto Dominion (Texas), Inc., as
Documentation Agent, and Bank of Montreal, as Administrative Agent ("the Credit
Agreement"), including but not limited to insurance proceeds or recoveries in
the nature of contribution or indemnity from any other defendants named in the
Action, the Paracelsus Defendants will pay the United States the amount of such
Related Payments up to $700,000 ("the Additional Settlement Amount"). The
Paracelsus Defendants shall promptly notify the United States and the Relators
of the receipt of any such Related Payment. Payment to the United States shall
be made within five (5) days of the Paracelsus Defendants' receipt of any such
Related Payment and will be made by wire transfer in accordance with shall use
reasonable efforts to obtain Related
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<PAGE> 6
Payments from insurers under any applicable Paracelsus directors and officers
liability policy excluding Excess Insurance Policy No. DFX0009397 issued by
Great American Insurance Companies. The reasonable efforts will include making
a demand for payment from the relevant insurers and may, but are not required
to, include initiating litigation or arbitration against the relevant insurers.
Paracelsus shall cooperate with the Individual Defendant in his efforts to
obtain Related Payments. Its cooperation shall include assigning rights, if
necessary, and signing documents to enable the Individual Defendant to seek the
payments. Six months and twelve months from the Execution of this Agreement,
the Individual Defendant shall provide the United States and the Relators with
a brief written statement of such efforts.
3. Release of Paracelsus Defendants. In consideration of the obligations
of the Paracelsus Defendants set forth in this Agreement, conditioned on
Paracelsus making the payments as described in Paragraph 1 above and subject to
Paragraph 18 below (concerning bankruptcy proceedings commenced within 91 days
of the effective date of this Agreement), the United States (on behalf of
itself, its officers, agents, agencies, and departments) and the Relators (on
behalf of themselves, their heirs, successors, family members, attorneys, and
assigns) fully and finally release, waive, and forever discharge the Paracelsus
Defendants, and each of their current or former parent corporations,
affiliates, subsidiaries, shareholders, officers, directors, employees, heirs,
successors,
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<PAGE> 7
family members, attorneys, and assigns, from any civil or administrative
monetary claim, action, suit, or proceeding that the United States has or may
have, existing on or before the Effective Date of this Agreement for the
Covered Conduct, including but not limited to those under the False Claims Act,
31 U.S.C. Sections 3729-3733, the Civil Monetary Penalties Law, 42 U.S.C.
Section 1320a-7a, the Program Fraud Civil Remedies Act, 31 U.S.C. Sections
3801-3812, administrative recoupment of overpayment under the Medicare or
Medicaid programs, 42 U.S.C. Section 1395gg, 42 C.F.R. Sections 405.370-405.378,
42 C.F.R. Sections 447.30, 447.31, subject to Paragraphs 10 and 12 below; or the
common law theories of payment by mistake, unjust enrichment, breach of
contract and fraud.
4. Additional Release by OIG-HHS. In consideration of the obligations of
the Paracelsus Defendants set forth in this Agreement, conditioned on
Paracelsus making the payments as described in Paragraph 1 above and subject to
Paragraph 18 below (concerning bankruptcy proceedings commenced within 91 days
of the effective date of this Agreement), the OIG-HHS fully and finally
releases, waives, discharges, and will refrain from instituting, directing, or
maintaining any administrative claim or any action seeking exclusion from the
Medicare, Medicaid, or other Federal health care programs (as defined in 42
U.S.C. Section 1320a-7b(f)) for the Covered Conduct against the Paracelsus
Defendants, and each of their current or former parent corporations,
affiliates, subsidiaries, shareholders, officers, directors, employees, heirs,
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<PAGE> 8
attorneys, successors, and assigns, under 42 U.S.C. Section 1320a-7a (the Civil
Monetary Penalties Law), 42 U.S.C. Section 1320a-7(b) (permissive exclusion), 42
U.S.C. Section 1320c-5(a)(1), 42 C.F.R. Sections 1001.201-1001.1701 (except to
the extent that convictions referred to in these regulations would require a
mandatory exclusion pursuant to 42 U.S.C. Section 1320a-7(a)), or 42 C.F.R.
Section 1003.105, except as reserved in Paragraph 6 below and as reserved in
this Paragraph. The OIG-HHS expressly reserves all rights to comply with any
statutory obligations to exclude the Paracelsus Defendants, together with their
current and former parent corporations, each of their direct or indirect
subsidiaries, sister corporations, divisions, current or former owners,
officers, directors, affiliates, and the successors and assigns of any of them
from the Medicare, Medicaid, or other Federal health care program under 42
U.S.C. Section 1320a-7(a) (mandatory exclusion) based upon the Covered Conduct.
Nothing in this Paragraph precludes the OIG-HHS from seeking to exclude
Paracelsus from participation in the Medicare, Medicaid, and Federal health care
programs if Paracelsus fails to make any payment as described in Paragraph 1
above or from taking action against entities or persons, or for conduct and
practices, for which civil claims have been reserved in Paragraph 6 below.
5. Intervention and Dismissal. Upon receipt of the first payment
described in Paragraph 1 above, the United States shall promptly and within
three business days sign and file a Notice of Intervention and the United
States and the Relators shall promptly
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<PAGE> 9
and within three business days sign and file a Joint Stipulation of Dismissal
in the form attached hereto as Exhibit A, dismissing claims against the
Paracelsus Defendants for the Covered Conduct with prejudice consistent with
the terms of this Settlement Agreement and the release set forth in paragraph 3
above.
6. Exceptions to Releases. Notwithstanding any term of this Agreement,
specifically reserved and excluded from the scope and terms of this Agreement
as to any entity or person, including the Paracelsus Defendants, are any and
all of the following
(a) Any civil, criminal, or administrative claims arising under Title
26, U.S. Code (Internal Revenue Code);
(b) Any criminal liability;
(c) Except as explicitly stated in this Agreement, any administrative
liability, including mandatory exclusion from Federal health care programs;
(d) Any liability to the United States (or its agencies) for any
conduct other than the Covered Conduct;
(e) Any claims based upon such obligations as are created by this
Agreement;
(f) Any express or implied warranty claims or other claims for
defective or deficient products or services, including quality of goods and
services, provided by the Paracelsus Companies to the United States or Medicare
beneficiaries;
(g) Any claims based on a failure to deliver items or services due to
the United States or Medicare beneficiaries;
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<PAGE> 10
(h) The Relators' claim for attorney's fees, expenses, and costs
pursuant to 31 U.S.C. Section 3730(d)(1).
7. Corporate Integrity Agreement. Paracelsus and Lincoln have entered
into a Corporate Integrity Agreement with HHS, attached as Exhibit B, which is
incorporated into this Agreement by reference. Paracelsus and Lincoln shall
comply with their obligations under the Corporate Integrity Agreement.
8. Release of United States by the Paracelsus Defendants. The Paracelsus
Defendants fully and finally release the United States, its agencies,
employees, servants, and agents from any claims (including attorneys' fees,
costs, and expenses of every kind and however denominated) which the Paracelsus
Defendants have or may have existing on or before the Effective Date of this
Agreement, against the United States, its agencies, employees, servants,
attorneys, and agents for their actions in connection with the Covered Conduct
and their investigation, litigation, and resolution thereof.
9. Limitations in Credit Agreement. Paracelsus has provided the United
States with (a) a copy of the Credit Agreement, which states that an event
resulting in a Material Adverse Effect is a default (Section 11.1); (b) a
related Agreement dated March 30, 1998, which attaches Schedule 1.1(f), which
states that a Material Adverse Effect results if Paracelsus pays more than $7.5
million or more in excess of total "Related Payments," as defined therein, to
resolve certain litigation pending against Paracelsus; and (c) part
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<PAGE> 11
of Schedule 7.6, showing that the Action and certain stockholders' litigation
are among the litigation actions included in Schedule 1.1(f). Paracelsus
represents that it has provided the United States with all documents material
to the terms of Schedule 1.1(f); that these documents evidence a valid and
binding legal obligation of Paracelsus, and that neither Paracelsus, nor its
subsidiaries, nor any of its Directors or Officers has received any Related
Payment as defined in Schedule 1.1(f) in connection with or because of this
Agreement, the Action, or contentions concerning the Covered Conduct.
10. Cost Report Disallowances. In auditing cost reports for OCCH, Blue
Cross of California, the Medicare fiscal intermediary for OCCH, has disallowed
or reclassified management fees and certain other costs and revenues associated
with the Programs. These audit adjustments are identified as Audit Adjustment
Numbers 4, 11, 12, 18 and 19 for the fiscal year ended September 30, 1995. The
Paracelsus Companies agree not to contest those adjustments for 1995 or
equivalent adjustments and treatment for subsequent fiscal years, and waive any
rights to appeal such disallowances and treatment, including but not limited to
their appeal rights under 42 C.F.R. Sections 405.1801-405.1890. Upon execution
of this Agreement, the Paracelsus Companies will withdraw or dismiss any
pending appeal of such disallowance and treatment.
Except as set forth in the preceding paragraph and in Paragraph 12
below, nothing in this Agreement shall be deemed to
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<PAGE> 12
affect the rights of the fiscal intermediary, on behalf of Medicare, to make
any other cost report audit adjustments it deems appropriate or to affect the
rights of the Paracelsus Companies to contest or appeal any such other
adjustments.
11. Denied Claims. The Amount that Paracelsus must pay pursuant to this
Agreement by electronic wire transfer pursuant to Paragraphs 1 and 2 above will
not be decreased as a result of the denial of any claims for payment now being
withheld from payment by any Medicare carrier or fiscal intermediary related to
the Covered Conduct. The Paracelsus Companies agree not to resubmit to any
Medicare carrier or fiscal intermediary any previously denied claims related to
the Covered Conduct and agree not to appeal any such denials of claims.
12. Unallowable Costs. The Paracelsus Companies agree that all costs (as
defined in the Federal Acquisition Regulations ("FAR") 48 C.F.R. Section
31.205-47 and in Titles XVIII and XIX of the Social Security Act, 42 U.S.C.
Sections 1395-1395ggg and 1396-1396v, and the regulations promulgated
thereunder) incurred by or on behalf of the Paracelsus Companies, their
predecessors or any of their present or former officers, directors, employees,
shareholders, and agents, in connection with: (a) the matters covered by this
Agreement, (b) the audit(s) and civil and any criminal investigation(s) by the
United States of the matters covered by this Agreement, (c) the Paracelsus
Companies' or their predecessors' investigation, defense, and corrective
actions
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<PAGE> 13
undertaken in response to the audit(s) and civil and any criminal
investigation(s) by the United States in connection with the matters covered by
this Agreement (including the Corporate Integrity Agreement and attorney's
fees), (d) the negotiation of this Agreement, and (e) the payment made pursuant
to this Agreement, are unallowable costs on Government contracts and under the
Medicare Program, Medicaid Program, TRICARE (or CHAMPUS) Program, FEHBP, and
Veterans Affairs Program (hereafter, "unallowable costs"). These unallowable
costs will be separately estimated and accounted for by the Paracelsus
Companies, and the Paracelsus Companies will not charge such unallowable costs
directly or indirectly to any contracts with the United States or any state
Medicaid program, or seek payment for such unallowable costs through any cost
report, cost statement, information statement, or payment request submitted by
the Paracelsus Companies or any of their subsidiaries to the Medicare,
Medicaid, TRICARE, VA, or FEHBP programs.
The Paracelsus Companies further agree that within 60 days of the
effective date of this Agreement they will identify to applicable Medicare and
TRICARE fiscal intermediaries, carriers and/or contractors, and Medicaid, VA,
and FEHBP fiscal agents, any unallowable costs (as defined in this paragraph)
included in payments previously sought from the United States, or any State
Medicaid Program, including, but not limited to, payments sought in any cost
reports, cost statements, information reports, or payment
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<PAGE> 14
requests already submitted by the Paracelsus Companies, and will request, and
agree, that such cost reports, cost statements, information reports, or payment
requests, even if already settled, be adjusted to account for the effect of the
inclusion of the unallowable costs. The Paracelsus Companies agree that the
United States will be entitled to recoup from the Paracelsus Companies any
overpayment as a result of the inclusion of such unallowable costs on
previously-submitted cost reports, information reports, cost statements, or
requests for payment. Any payments due after the adjustments have been made
shall be paid to the United States pursuant to the direction of the Department
of Justice and/or the affected agencies. The United States reserves its rights
to disagree with any calculations submitted by the Paracelsus Companies or any
of their subsidiaries on the effect of inclusion of unallowable costs (as
defined in this paragraph) on the Paracelsus Companies' cost reports, cost
statements, or information reports. Nothing in this Agreement shall constitute
a waiver of the rights of the United States to examine or reexamine the
unallowable costs described in this Paragraph.
13. No Offsets from Beneficiaries. The Paracelsus Companies agree that
they will not seek payment for any of the health care services to Medicare
beneficiaries in the Programs from any of the beneficiaries or their parents or
sponsors. The Paracelsus companies waive any causes of action against these
beneficiaries or their parents or sponsors based upon these services.
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<PAGE> 15
14. Waiver of Excessive Fines Defense. The Paracelsus Defendants waive
and will not assert any defenses they may have to any criminal prosecution or
administrative action relating to the Covered Conduct, which defenses may be
based in whole or in part on the Double Jeopardy or Excessive Fines Clause of
the United States Constitution and agree that the Settlement Amount is not
punitive in nature or effect for purposes of such criminal prosecution or
administrative action.
15. No Agreement Re Tax Treatment. Nothing in this Agreement constitutes
an agreement by the United States concerning the characterization of the
Settlement Amount for purposes of any proceeding under Title 26 of the Internal
Revenue Code.
16. Cooperation. The Paracelsus Companies covenant to cooperate fully
and truthfully with the United States in any investigation concerning the
Covered Conduct of individuals and entities not specifically released in this
Agreement. Upon reasonable notice, the Paracelsus Companies will make
reasonable efforts to facilitate access to, and encourage the cooperation of,
their directors, officers, and employees for interviews and testimony,
consistent with the rights and privileges of such individuals, and will furnish
to the United States, upon reasonable request, all non-privileged documents and
records in their possession, custody, or control relating to the Covered
Conduct.
17. Financial Condition. Paracelsus expressly warrants that it has
reviewed its financial situation and that it currently is
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<PAGE> 16
solvent within the meaning of 11 U.S.C. Section 547(b)(3), and that its payment
to the United States hereunder will not render it insolvent. Further, the
Parties expressly warrant that, in evaluating whether to execute this
Agreement, the Parties (a) have intended that the mutual promises, covenants
and obligations set forth herein constitute a contemporaneous exchange for new
value given to Paracelsus, within the meaning of 11 U.S.C. Section 547 (c)(1),
and (b) have concluded that these mutual promises, covenants and obligations
do, in fact, constitute such a contemporaneous exchange.
18. Bankruptcy. In the event Paracelsus commences, or a third party
commences, within 91 days of the effective date of this Agreement, any case,
proceeding, or other action (a) under any law relating to bankruptcy,
insolvency, reorganization, or relief of debtors seeking to have any order for
relief entered as to Paracelsus, or seeking to adjudicate Paracelsus as
bankrupt or insolvent, or (b) seeking appointment of a receiver, trustee,
custodian, or other similar official for Paracelsus or for all or any
substantial part of Paracelsus' assets, Paracelsus agrees as follows:
a. Paracelsus' obligations under this Agreement may not be avoided
pursuant to 11 U.S.C. Section 547, and Paracelsus will not argue or otherwise
take the position in any such case, proceeding, or action that: (i) Paracelsus'
obligations under this Agreement may be avoided under 11 U.S.C. Section 547;
(ii) Paracelsus was insolvent at
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<PAGE> 17
the time this Agreement was entered into, or became insolvent as a result of
the payment made to the United States hereunder; or (iii) the mutual promises,
covenants, and obligations set forth in this Agreement do not constitute a
contemporaneous exchange for new value given to Paracelsus.
b. In the event that Paracelsus' obligations hereunder are avoided
pursuant to 11 U.S.C. Section 547, the United States, at its sole option, may
rescind this Agreement and bring any civil and/or administrative claim, action,
or proceeding against Paracelsus for the claims that would otherwise be covered
by the releases provided above, except that Paracelsus shall receive credit as
an offset for any amount paid to and retained by the United States and the
Relators. If the United States chooses to do so, Paracelsus agrees that (i) any
such claims, actions, or proceedings brought by the United States (including
any proceedings to exclude Paracelsus from participation in Medicare, Medicaid,
or other Federal health care programs) are not subject to an "automatic stay"
pursuant to 11 U.S.C. Section 362(a) as a result of the action, case, or
proceeding described in the first clause of this Paragraph, and that Paracelsus
will not argue or otherwise contend that the United States' claims, actions or
proceedings are subject to an automatic stay; (ii) that Paracelsus will not
plead, argue, or otherwise raise any defenses under the theories of statute of
limitations, laches, estoppel, or similar theories, to any such civil or
administrative claims, actions, or proceedings which are brought by
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<PAGE> 18
the United States within sixty (60) calendar days of written notification to
Paracelsus that the releases herein have been rescinded pursuant to this
Paragraph, except to the extent such defenses were available on the date of
execution of this Agreement; and (iii) the United States may pursue its claim,
inter alia, in the case, action, or proceeding referenced in the first clause
of this Paragraph, as well as in any other case, action, or proceeding.
c. Paracelsus acknowledges that its agreements in this Paragraph are
provided in exchange for valuable consideration provided in this Agreement.
19. Costs. The United States and the Paracelsus Companies will bear
their own legal and other costs incurred in connection with this matter,
including the preparation and performance of this Agreement.
20. No Admission. This Agreement and the terms of it are not evidence or
an admission by any Party as to any issue of fact or law and are not admissible
into evidence for any purpose except to enforce the terms of the Agreement.
21. Adequacy of Settlement. The Relators agree that this Settlement is
fair, adequate, and reasonable under all the circumstances known to them.
22. Voluntary Agreement. The Paracelsus Defendants represent that
this Agreement is freely and voluntarily entered into without
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<PAGE> 19
any degree of duress or compulsion whatsoever and they have each been advised
with respect hereto by counsel.
23. Governing Law. This Agreement is governed by the laws of the United
States. The Parties agree that the exclusive jurisdiction and venue for any
dispute arising between and among the Parties under this Agreement will be the
United States District Court for the Central District of California.
24. Entire Agreement. This Agreement constitutes the complete agreement
between the Parties with respect to the subject matter hereof. This Agreement
may not be amended except by written consent of the Parties, except that only
Paracelsus, Lincoln, and OIG-HHS must agree in writing to modification of the
Corporate Integrity Agreement.
25. Capacity to Execute. The undersigned individuals signing this
Agreement on behalf of the Paracelsus Companies represent and warrant that they
are authorized by their respective Companies to execute this Agreement. The
undersigned United States signatories represent that they are signing this
Agreement in their official capacities and that they are authorized to execute
this Agreement.
26. Counterparts. This Agreement may be executed in counterparts, each
of which constitutes an original and all of which constitute one and the same
agreement.
27. Effective Date. This Agreement is effective on the date of signature
of the last signatory to the Agreement.
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<PAGE> 20
THE UNITED STATES OF AMERICA
DATED: BY:
------------------------ -------------------------------
CONSUELO S. WOODHEAD
Assistant United States Attorney
Deputy Chief, Civil Frauds
Central District of California
DATED: BY:
------------------------ -------------------------------
LEWIS MORRIS
Assistant Inspector General
Office of Counsel to the
Inspector General
Office of Inspector General
United States Department of
Health and Human Services
RELATORS
DATED: BY:
------------------------ -------------------------------
TIMOTHY HILL
Relator
DATED: BY:
------------------------ -------------------------------
ALAN LEAVITT
Relator
REVIEWED BY:
CALDWELL, LESLIE, NEWCOMBE &
PETTIT
DATED: BY:
------------------------ -------------------------------
MICHAEL R. LESLIE, ESQ.
Attorney for the Relators
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<PAGE> 21
THE PARACELSUS COMPANIES
PARACELSUS HEALTHCARE
CORPORATION
DATED: BY:
------------------------ -------------------------------
Its:
LINCOLN COMMUNITY MEDICAL
LIMITED LIABILITY COMPANY
DATED: BY:
------------------------ -------------------------------
Its:
LINCOLN COMMUNITY MEDICAL
CORPORATION, DBA ORANGE
COUNTY COMMUNITY HOSPITAL
DATED: BY:
------------------------ -------------------------------
Its:
BELLWOOD MEDICAL CORPORATION
DBA BELLWOOD GENERAL HOSPITAL
DATED: BY:
------------------------ -------------------------------
Its:
REVIEWED BY:
WILMER, CUTLER & PICKERING
DATED: BY:
------------------------ -------------------------------
ANDREW N. VOLLMER
Attorneys for the Paracelsus
Companies
Settlement Agreement Between
United States and Paracelsus
Healthcare Corporation -21-
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