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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 001-12055
PARACELSUS HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-3565943
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
515 W. GREENS ROAD, SUITE 800, HOUSTON, TEXAS
(Address of principal executive offices)
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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
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(Title of Class) (Name of each exchange on which registered)
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes[X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The number of shares of Registrant's Common Stock outstanding on March 26, 1999
was 55,118,330. The aggregate market value of voting stock held by
non-affiliates of the Registrant, based upon the closing price of the
Registrant's Common Stock on March 26, 1999 was $28,775,878*.
DOCUMENT INCORPORATED BY REFERENCE
The information required by Part III of this Report will be included in an
amendment to this Form 10-K to be filed with the Securities and Exchange
Commission no later than April 30,1999.
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* Excludes 32,097,628 shares deemed to be held by directors and officers, and
stockholders whose ownership exceeds ten percent of the shares of Common
Stock outstanding at March 26, 1999. Exclusion of shares held by any person
should not be construed to indicate that such person possesses the power,
direct or indirect, to direct or cause the direction of the management or
policies of the Registrant, or that such person is controlled by, or under
common control with, the Registrant.
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PARACELSUS HEALTHCARE CORPORATION
FORM 10-K ANNUAL REPORT
YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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PAGE REFERENCE
FORM 10-K
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PRELIMINARY STATEMENT
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Part I
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Item 1. Business 4
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 20
Part II
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Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 20
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market
Risks 36
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 71
Part III
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Item 10. Directors and Executive Officers of the Registrant 71
Item 11. Executive Compensation 71
Item 12. Security Ownership of Certain Beneficial Owners
and Management 71
Item 13. Certain Relationships and Related Transactions 71
Part IV
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Item 14. Exhibits, Financial Statement Schedule and Reports
on Form 8-K 71
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FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K are "forward-looking statements"
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve a number of risks and
uncertainties. 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; 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; the continued listing of the Company's common stock on the New
York Stock Exchange; the Company's ability to divest assets to reduce
indebtedness and realize its tax assets; the availability and terms of capital
to fund working capital requirements and the expansion of the Company's
business; and the final resolution to certain proposed settlement to litigation
including the court approval of the settlement terms and the fulfillment of the
conditions contained therein. The Company is generally not required to, and does
not undertake to, update or revise its forward-looking statements.
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PART I
ITEM 1. BUSINESS
GENERAL
Paracelsus Healthcare Corporation, a California corporation ("PHC"),
was incorporated in November 1980. PHC, both directly or through its
subsidiaries (collectively, the "Company" or the "Registrant"), owns and
operates acute care and related healthcare businesses in selected markets. In
August 1996, the Company acquired Champion Healthcare Corporation ("Champion")
by exchanging one share of the Company's Common Stock for each share of
Champion's Common Stock and two shares of the Company's Common Stock for each
share of Champion's Preferred Stock (the "Merger"). The Company's hospitals
offer a broad array of general medical and surgical services on an inpatient,
outpatient and emergency basis. In addition, certain hospitals and their related
facilities offer home health, skilled nursing care, rehabilitative medicine and
psychiatric services. See "Divestitures and Closures of Hospitals" below. As of
December 31, 1998, the Company owned or operated 16 acute care hospitals in nine
states with 1,916 licensed beds. Of the 16 hospitals, 11 are owned and five are
leased. The Company also operates four skilled nursing facilities with a total
of 232 licensed beds in California, one of which is leased.
ACQUISITION OF DAKOTA HEARTLAND HEALTH SYSTEM
On August 20, 1997, Dakota Medical Foundation (the "Foundation"), the
Company's partner in Dakota Heartland Health System ("DHHS"), exercised its
right to require the Company to purchase the Foundation's 50% partnership
interest in DHHS. On July 1, 1998, the Company completed the purchase of DHHS
for $64.5 million, inclusive of working capital, thereby giving the Company 100%
ownership of DHHS. DHHS owns and operates a 218-bed general acute care hospital
in Fargo, North Dakota.
DIVESTITURES AND CLOSURES OF HOSPITALS
On December 29, 1998, the Company terminated the lease and closed
Cumberland River Hospital South, a 41-bed acute care facility in Gainesboro,
Tennessee.
On September 30, 1998, the Company completed its plan to exit the
psychiatric hospital business and the Los Angeles metropolitan market with the
sale of the eight hospitals (collectively, "LA Metro"). See Item 7 -"Disposition
of the Psychiatric and Other LA Metro Hospitals." The facilities sold were as
follows:
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Facility/Location/Type Licensed Beds
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Bellwood General Hospital, Bellflower, California (Acute Care)......................................85
Orange County Hospital of Buena Park, Buena Park, California (Psychiatric)..........................53
Hollywood Community Hospital of Hollywood, Los Angeles, California (Acute Care)....................100
Los Angeles Community Hospital, Los Angeles, California (Acute Care)...............................130
Los Angeles Community Hospital, Norwalk, California (Acute Care)....................................50
Monrovia Community Hospital, Monrovia, California (Acute Care)......................................49
Hollywood Community Hospital of Van Nuys, Van Nuys, California (Psychiatric)........................60
Orange County Hospital of Orange, Orange, California (Psychiatric)...................previously closed
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On June 30, 1998, the Company completed the sale of Chico Community
Hospital, Inc., a 123-bed acute care hospital and a 60-bed rehabilitation
hospital, both located in Chico, California, (collectively, the "Chico
hospitals").
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DEBT REDUCTION AND DIVESTITURES
In addition to the Company's disposition of the LA Metro and Chico
hospitals, the Company intends to dispose of certain non-core assets and use the
net proceeds of such dispositions to reduce the Company's indebtedness.
Additionally, the Company has retained a strategic advisor and is considering
various financing alternatives including recapitalization of the Company.
Realization of these objectives will allow the Company to further concentrate
its efforts on core markets, as well as create additional debt capacity to
expand and further integrate its presence in existing markets and to pursue
acquisitions in markets compatible with the Company's overall acquisition
strategy. The Company will, from time to time, consider divesting certain core
assets if such disposition meets the Company's strategic objectives. The Company
is currently evaluating a number of inquiries concerning its hospitals from
qualified buyers. However, there can be no assurance that the Company will
consummate any or all of these transactions, or that the net proceeds of any
transactions consummated will result in a significant reduction of the Company's
indebtedness.
In light of the above initiative, the Company does not expect to make
significant acquisitions in 1999. The Company is uncertain as to its acquisition
plan beyond 1999.
BUSINESS STRATEGY
The Company generally seeks to operate hospitals in small to mid-sized
markets with favorable demographics and lower levels of penetration by managed
care plans. The Company focuses on increasing its market share by implementing
operating strategies to position each of its hospitals as providers of
measurably higher quality healthcare services at lower cost than its
competitors. The Company continually analyzes whether each of its hospitals fits
within its strategic plans and will continue to evaluate ways in which its
assets may be used to maximize shareholder value. To that end, the Company may
from time to time elect to close, sell or convert to alternate use certain of
its facilities in order to eliminate excess capacities from changing market
conditions. When appropriate, the Company grows through selective acquisition of
additional hospitals in markets where the Company can develop a preeminent
market position.
ACQUISITION AND JOINT VENTURE STRATEGY
Continuing cost containment measures imposed by the Medicare and
Medicaid programs, managed care organizations and private payors have placed
economic strains on many hospitals as they have attempted to operate within an
increasingly competitive environment. The Company believes these pressures have
caused many acute care hospitals to consider other management and ownership
alternatives. In addition to its acquisition strategy discussed below, the
Company also pursues other business development alternatives such as forming
strategic alliances or joint ventures with other local healthcare service
providers.
The Company uses the following primary criteria to identify its target
markets: (i) a service area population of between 30,000 and 500,000; (ii)
favorable demographics including a diversified economic and business base; (iii)
low levels of managed care penetration; and (iv) limited competition.
Additionally, it may consider acquisition candidates that are the preeminent
healthcare service providers in their markets. The Company assesses possible
acquisitions based on the potential to increase market penetration, expected
improvement in operating efficiencies, future capital requirements and
historical cash flow. Acquisition targets are generally unaffiliated
not-for-profit hospitals and facilities being divested by hospital systems for
strategic, regulatory or performance reasons.
Given the Company's current emphasis on reducing indebtedness and
divesting certain non-core assets, the Company does not anticipate significant
acquisitions in 1999. The Company is uncertain as to its acquisition plan beyond
1999.
HOSPITAL OPERATING STRATEGY
The Company seeks to provide measurably higher quality healthcare
services at lower costs than its competitors while being responsive to the needs
of each community in which the Company operates.
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The Company believes that the delivery of healthcare services is a local
business. Accordingly, each hospital's operating strategy and business plan are
designed to meet the healthcare needs of the local market through local
management initiative, responsibility and accountability, combined with
corporate support and oversight. Incentive compensation programs are offered to
reward local managers for accomplishing predetermined goals. The significant
components of the Company's hospital operating strategy are as follows:
MARKET PENETRATION - The Company seeks to increase its market share (i)
by offering a full range of hospital and related healthcare services, (ii) by
providing high quality and low cost services and (iii) through appropriate
physician development efforts.
The Company selectively adds new services such as obstetrics,
rehabilitation, open-heart surgery and skilled nursing beds at its hospitals
and, where appropriate, invests in new technologies. The Company also develops
complementary healthcare businesses such as primary care and rehabilitative
clinics to augment the service capabilities and create a larger service network
for its existing hospitals, thereby providing care in the most cost effective
and medically appropriate setting. In some cases, the Company may also acquire,
merge or establish alliances with other providers through affiliation
agreements, joint venture arrangements or partnerships.
Various factors, such as technological developments permitting more
procedures to be performed on an outpatient basis, pharmaceutical advances and
pressures to contain healthcare costs, have led to a shift from inpatient care
to ambulatory or outpatient care. The Company has responded to this trend by
enhancing its hospital's ambulatory service capabilities, including (i)
establishing freestanding outpatient surgery centers at or near certain of its
hospitals and (ii) restructuring existing surgical and diagnostic capacity to
allow a greater number and range of procedures to be performed on an outpatient
basis.
The Company has implemented a care defect reduction program (the "PRIDE
program") in seven of its hospitals to measurably improve quality care and lower
costs by eliminating or significantly reducing errors in the patient care
process. The PRIDE program was originally developed by Champion in conjunction
with an outside firm to identify and measure the incidence of patient treatment
errors in 225 separate clinical categories, which were subsequently refined to
117 categories. By focusing on improving patient care processes through staff
involvement and education, the Company experienced a significant reduction in
patient care process errors during 1998 in hospitals in which the program was
fully implemented. Additionally, the Company believes the capability to quantify
data regarding the quality of care in its hospitals may enhance its ability to
obtain managed care contracts, improve its customer satisfaction rate and reduce
its liability risk. The Company plans eventually to implement the PRIDE program
in each of the Company's core hospitals.
A proprietary customer service program, ServiceAdvantage, developed
with the objective to ensure that hospital employees are responding to patient
needs, has been implemented in all of the Company's hospitals. The objective is
being achieved through employee training programs and through management
addressing the issues identified as needing improvement.
A key element of the Company's hospital operating strategy is to
establish and maintain a cooperative relationship with its physicians. As
physicians still direct the majority of hospital admissions, the Company focuses
on supporting and retaining existing physicians and attracting additional
qualified physicians in existing or under served medical specialties. The
Company may affiliate, joint venture or partner with physician practices or, in
selected cases, manage or acquire such physician practices through appropriate
subsidiaries and affiliated organizations.
COST CONTROLS - The Company seeks to position each of its hospitals as
a low cost provider in its market. To achieve this objective, the Company
utilizes a disciplined cost control system to (i) implement staffing standards
and manage resources to optimize staffing efficiency, (ii) utilize national
purchasing contracts and monitor supply usage, (iii) renegotiate or eliminate
purchased service contracts, where appropriate, (iv) evaluate and eliminate on
an ongoing basis underutilized or unprofitable services and (v) implement
utilization management programs to help monitor and manage clinical resources to
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render medically appropriate and cost effective care. Corporate staff support is
available for key operating and cost decisions, as well as for reimbursement,
insurance/risk management, purchasing and other significant accounting and
support functions. As Medicare and other payors seek to reduce their health care
expenditures, the ability to reduce and control operating costs will become more
important to the Company's results of operations and future growth.
NETWORKS - In each of its markets, the Company seeks to develop an
integrated healthcare delivery network in which the Company's hospital serves as
the nucleus of healthcare services offered. In selected markets, such as
metropolitan Salt Lake City, Utah, with a population base of approximately
800,000 and a high level of managed care penetration, the Company has created an
integrated provider network to provide both extensive geographic coverage and a
full range of healthcare services. Through a comprehensive network of four
hospitals, two surgery center joint ventures, one skilled nursing facility,
seven clinics, and MountainNet HealthCare, L.L.C. (a network with more than 500
physicians), the Company has established a preeminent competitive position that
will enhance its capabilities for increased contracting in this heavily managed
care market. In order to increase its profitability under its managed care
contracts, the Company is implementing several cost saving strategies, including
sharing and combining services among hospitals and renegotiating existing
contractual arrangements with a variety of service providers.
OPERATIONS
The Company seeks to create a local healthcare system in each of its
markets that offers a continuum of inpatient, outpatient, emergency and
alternative care options. In many such markets, the Company will establish its
acute care hospitals as the hub of a local provider system that can include
skilled nursing facilities, home health agencies, clinics, physician practices
and medical office buildings.
ACUTE CARE HOSPITALS - The Company owns and operates 16 acute care
hospitals with a total of 1,916 licensed beds in nine states. Each of the
Company's acute care hospitals provides a broad array of general medical and
surgical services on an inpatient, outpatient and emergency basis, including
some or all of the following: intensive and cardiac care, diagnostic services,
radiology services and obstetrics on an inpatient basis and ambulatory surgery,
laboratory and radiology services on an outpatient basis.
SKILLED NURSING FACILITIES - The Company owns and operates four skilled
nursing facilities with a total of 232 licensed beds in California. These
facilities provide 24-hour nursing care, principally for the elderly, by
registered or licensed nurses and related medical services prescribed by the
patient's physician.
HOME HEALTH AGENCIES - The Company provides home health services
through seven of its hospitals in five states. These services include home
nursing, infusion therapy, physical therapy, respiratory services and other
rehabilitative services.
PHYSICIAN PRACTICES - The Company owns and operates a number of
physician practices in rural and urban settings. Most of these practices are
primary care physician offices where the physicians are employed by or are under
contract with one of the Company's hospitals or a related entity. The physician
practices serve to complement the Company's acute care hospitals in their
respective markets by allowing the Company to provide a wider range of services
in optimal settings and provide the opportunity to attract patients to the
Company's hospitals.
PHYSICIAN ARRANGEMENTS - The Company owns a majority interest in and/or
operates five physician joint ventures. In all cases, a physician or a group of
physicians holds the minority interests in the joint ventures directly or
indirectly. Additionally, several of the Company's hospitals have assisted with
the formation of and participate in physician hospital organizations or
management services organizations. The Company believes that its physician
arrangements are in compliance with applicable Federal and state laws. However,
there can be no assurance that such arrangements will not be challenged by
governmental agencies.
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MEDICAL OFFICE BUILDINGS - The Company owns, leases or manages 30
medical office buildings located adjacent to certain of its hospitals.
COMPETITION
Competition for patients among hospitals and other healthcare providers
has intensified in recent years. During this period, hospital occupancy rates
have declined as a result of cost containment pressures, changes in technology,
changes in government regulations and reimbursement and utilization management.
Such factors have prompted new competitive strategies by hospitals and other
healthcare providers as well as an increase in the consolidation of such
providers. In certain areas in which the Company operates, there are other
hospitals or facilities that provide services comparable to those offered by the
Company's hospitals. Many of these hospitals may have greater financial
resources and may offer a wider range of services than the Company's hospitals.
In addition, hospitals owned by government agencies or other tax-exempt entities
benefit from endowments, charitable contributions and tax-exempt financing, none
of which are available to the Company.
The competitive position of the Company's hospitals also has been, and
in all likelihood will continue to be, affected by the increased initiatives
undertaken during the past several years by Federal and state governments and
other major purchasers of healthcare, including insurance companies and
employers, to revise payment methodologies and monitor healthcare expenditures
in an effort to contain healthcare costs. In certain markets, the competitive
position of a hospital is affected by its ability to negotiate provider
contracts with purchasers of group healthcare services, including employers,
Preferred Provider Organizations ("PPOs"), Health Maintenance Organizations
("HMOs") and managed care plans. These organizations attempt to direct and
control the use of hospital services through "managed care" programs and to
obtain discounts from hospitals' established charges. In return, hospitals
acquire access to a large number of potential patients.
The Company's hospitals are dependent upon the physicians practicing in
the communities served by the hospitals. A small number of physicians accounts
for a significant portion of patient admissions at some of the Company's
hospitals. The competition for physicians in some specialty areas, including
primary care, is intense. While the Company seeks to retain physicians of varied
specialties on its hospitals' medical staffs and to attract other qualified
physicians, there can be no assurance that the Company's hospitals will succeed
in doing so. In addition, certain physicians are affiliated with managed care
providers that may preclude them from utilizing the Company's facilities for
their patients, or referring patients to doctors using the Company's facilities,
if the facility or referred doctors are not currently contracting with such
managed care providers.
LINES OF BUSINESS
Historically, the Company's operations have been classified into two
lines of business: acute care and psychiatric care. In connection with the sale
of the LA Metro facilities, the Company completed its exit from the freestanding
psychiatric hospital business. Prior to disposition, operating results of the
psychiatric hospitals for all periods presented were reported separately as
"Discontinued operations - Loss from operations of discontinued psychiatric
hospitals, net" in the Consolidated Statements of Operations and net assets of
the discontinued operations were segregated in the Consolidated Balance Sheet
under the caption "Long-term assets of discontinued operations, net" (See Item 8
- - Financial Statements). Information regarding net revenue and operating loss of
the psychiatric care line of business for each of the three years ended December
31, 1998, 1997 and 1996 is disclosed under Item 8 - Note 4.
SOURCES OF REVENUE
The Company receives payment for services rendered to patients from
private payors (primarily private insurance), managed care providers, the
Federal government under the Medicare and TriCare (formerly the Civilian Health
and Medical Program of the Uniformed Services or CHAMPUS) programs and state
governments under their respective Medicaid programs. See "Hospital
Accreditation and Government Regulation - Medicare, Medicaid." During 1996, the
Company entered into a capitated
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contract arrangement at PHC Regional Hospital in Salt Lake City, Utah to provide
healthcare services for approximately 94,000 capitated enrollees. Under the
capitated contract, the Company was financially committed to provide healthcare
services to members under the contract in return for a fixed premium per member
per month. During 1997, the Company modified such contract to provide services
to a lesser number of enrollees on a per diem basis.
The Company's revenue primarily depends on the level of inpatient
census, the volume of outpatient services, the acuity of patients' conditions
and charges for services. Reimbursement rates for inpatient routine services
vary significantly depending on the type of service and the geographic location
of the hospital. The table below sets forth the percentages of acute care gross
patient revenue from each category of payor during each of the periods
indicated. The following table excludes psychiatric gross patient revenue, which
was 0.5%, 2.2% and 8.1% of consolidated gross patient revenue in 1998, 1997 and
1996, respectively.
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YEAR ENDED DECEMBER 31,
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1998 (a) 1997 1996
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Medicare............................................... 42.6% 43.1% 45.0%
Medicaid............................................... 11.0% 13.8% 13.4%
Private insurance, capitation and other payors......... 46.4% 43.1% 41.6%
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100.0% 100.0% 100.0%
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(a) 1998 includes DHHS on a consolidated basis. Prior to 1998, DHHS was
accounted for under the equity method of accounting (See Item 8 - Note 3).
Amounts received from most payors are less than the hospitals'
customary charges for the services provided. All of the Company's hospitals (as
do most acute care hospitals) derived a substantial portion of their revenue
from the Medicare and Medicaid programs, which pay participating health care
providers for covered services rendered and items provided to qualified
beneficiaries. Both of these programs are government programs, which are heavily
regulated and use complex methods for determining payments to providers. These
programs are subject to frequent changes, which in recent years have reduced and
in the future years are expected to continue to reduce payments to hospitals. In
light of the high percentage of Medicare and Medicaid patients, the Company's
ability in the future to operate its business successfully will depend in large
measure on its ability to adapt to changes in these programs. See "Hospital
Accreditation and Governmental Regulation."
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SELECTED OPERATING STATISTICS
The following table sets forth selected operating statistics for the
Company's consolidated hospitals for the periods and dates indicated.
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YEAR ENDED DECEMBER 31,
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1998 1997 1996
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ACUTE CARE HOSPITALS(1):
Total number of hospitals ............................. 16 23 24
Licensed beds at end of period ........................ 1,916 2,337 2,461
Patient days .......................................... 311,144 328,331 277,553
Inpatient admissions .................................. 65,746 69,997 58,693
Average length of stay (days) ......................... 4.7 4.7 4.7
Outpatient visits (excluding home health) ............. 689,192 658,806 490,621
Home health visits ................................... 503,944 870,930 765,503
Deliveries ............................................ 9,602 9,728 6,694
Surgery cases ......................................... 46,902 48,488 37,136
Occupancy rate ........................................ 35.8% 36.9% 38.5%
Outpatient utilization (2) ............................ 37.6% 39.3% 36.0%
PSYCHIATRIC HOSPITALS(3):
Total number of hospitals ............................. -- 2 5
Licensed beds at end of period ........................ -- 114 437
Patient days .......................................... 4,099 19,554 42,949
Inpatient admissions .................................. 322 1,462 4,432
Average length of stay (days) ......................... 12.7 13.4 9.7
Outpatient visits ..................................... 4,736 16,998 31,840
Occupancy rate ........................................ 25.0% 35.9% 40.4%
Outpatient utilization (2) ............................ 18.3% 15.8% 11.9%
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(1) 1998 includes DHHS from January 1, 1998 and the LA Metro and Chico hospitals
through their respective dates of disposition.
(2) Gross Outpatient Revenue as a percent of Total Gross Patient Revenue.
(3) 1998 includes the LA Metro psychiatric facilities though disposition date.
Commencing on May 15, 1997, Orange County Hospital of Buena Park, a
psychiatric hospital, was leased, along with Bellwood General Hospital, an
acute care hospital, to a joint venture entered into between a subsidiary of
the Company and a group of physicians. All statistical data for Buena Park
have been included under the acute care statistical information since such
date as part of the joint venture's operations.
HOSPITAL ACCREDITATION AND GOVERNMENT REGULATION
All hospitals, and the healthcare industry generally, are subject to
compliance with various Federal, state and local regulations relating to
licensure, operations, billing, reimbursement, relationships with physicians,
construction of new facilities, expansion or acquisition of existing facilities
and offering of new services. All facilities receive periodic inspection by
state and local licensing agencies, as well as by non-governmental organizations
acting under contract or pursuant to Federal law, to review compliance with
standards of medical care and requirements concerning facilities, equipment,
staffing, cleanliness and related matters. Failure to comply with applicable
laws and regulations could result in, among other things, the imposition of
fines, temporary suspension of the ability to admit new patients to the facility
or, in extreme circumstances, exclusion from participation in government
healthcare reimbursement programs such as Medicare and Medicaid (from which the
Company derives substantial revenues) or the revocation of facility licenses.
While all of the Company's hospitals have obtained the licenses that the Company
believes are necessary under applicable law for the operation of the hospitals,
there can be no assurance that its hospitals will be able to comply in the
future or that future regulatory changes will not have an adverse impact on the
Company. At December 31, 1998, all of the Company's
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hospitals were accredited by the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO") except for one rural hospital in Georgia, which received
its accreditation in January 1999. Prior to receiving its JCAHO accreditation,
this hospital was surveyed annually by state regulatory authorities. Hospitals
accredited by JCAHO or state regulatory authorities are allowed to participate
in the Medicare/Medicaid programs.
CERTIFICATE OF NEED - In many of the states in which the Company's
hospitals operate, certificate of need ("CON") regulations control the
development and expansion of healthcare services and facilities. Those
regulations generally require proper government approval for the expansion or
acquisition of existing facilities, the construction of new facilities, the
addition of new beds, the acquisition of major items of equipment and the
introduction of certain new services. Failure to obtain necessary approval can
result in the inability to complete a project, the imposition of civil and, in
some cases, criminal sanctions, the inability to receive Medicare and Medicaid
reimbursement and/or the revocation of a facility's license. Of the nine states
in which the Company operates, a CON is required in Florida, Georgia,
Mississippi, Tennessee and Virginia.
MEDICARE - The Federal Medicare program provides medical insurance
benefits, including hospitalization, principally to persons 65 and older and to
certain disabled persons. Each of the Company's hospitals is certified as a
provider of services under the Medicare program. A substantial portion of the
Company's revenue is derived from patients covered by this program. See "Sources
of Revenue" above. The Medicare program has undergone significant changes during
the past several years to reduce overall healthcare costs, which have resulted
in reduced rates of growth in reimbursement payments for a substantial portion
of hospital procedures and charges. In addition, the requirements for
certification in the Medicare program are subject to change. In order to remain
qualified for the program, it may be necessary for the Company to make changes
from time to time in its facilities, equipment, personnel and services. Although
the Company intends to continue its participation in the Medicare program, there
is no assurance that it will continue to qualify for participation.
Pursuant to the Social Security Act Amendments of 1983 and subsequent
budget reconciliation and modifications, Congress adopted a prospective payment
system ("PPS"). PPS is a fixed payment system in which illnesses are classified
into Diagnostic Related Groups ("DRGs") which do not consider a specific
hospital's costs, but are adjusted for an area wage differential. Each DRG is
assigned a fixed payment amount that forms the basis for calculating the amount
that the hospital is reimbursed for each Medicare patient. Generally, under PPS,
if the costs of meeting the health care needs of the patient are greater than
the predetermined payment rate, the hospital must absorb the loss. Conversely,
if the cost of the services provided is less than the predetermined payment, the
hospital retains the difference. DRG payments include reimbursement for capital
costs. Since DRG rates are based upon a statistically normal distribution of
severity, patients falling outside the normal distribution may afford additional
payments, which are defined as "outliers."
Prior to 1988, Medicare reimbursed hospitals for 100% of their share of
capital related costs, which included depreciation, interest, taxes and
insurance related to plant and equipment for inpatient hospital services. The
reimbursed rate was reduced thereafter to 90% of costs. Federal regulations,
effective October 1, 1991, created a PPS for inpatient capital costs to be
phased in over a ten-year transition period from a hospital-based rate to a
fully Federal payment rate or a per-case rate, which is likely to result in
further reductions in the rate of growth in reimbursement payments. Beginning
with cost reporting periods on or after October 1, 2001, all hospitals are to be
paid at the standard Federal rate. Additionally, pursuant to the Balanced Budget
Act of 1997 ("1997 Budget Act"), capital rates were reduced by an additional
2.1%. Such change in capital cost payment could have a material adverse effect
on the operating revenues of the Company.
Psychiatric and rehabilitation hospitals, as well as psychiatric or
rehabilitation units that are distinct parts of a hospital, are exempt from PPS
and continue to be reimbursed on a reasonable cost basis, with limits placed
upon the annual rate of increase in operating costs per discharge. Pursuant to
the 1997 Budget Act, the annual update for fiscal year 1998 is set at 0%. For
fiscal year 1999 through fiscal year 2002, the annual update factor is dependent
upon where the hospital's costs fall in relation to the limits set
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by the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). The annual
update factor will range from 0% to the market basket percentage increase,
depending upon whether the hospital's costs are at, below or above the TEFRA
target limits or the federal national target limits, whichever is lower.
Many outpatient services continue to be reimbursed, subject to certain
regulatory limitations, on a modified cost-reimbursement basis, at the lower of
customary charges or a percentage of actual costs. Congress has established
additional limits on reimbursement of the following outpatient services: (i)
clinical laboratory services, which are reimbursed based upon a fee schedule and
(ii) ambulatory surgery procedures and certain imaging and other diagnostic
procedures, which are reimbursed based upon the lower of the hospital's specific
costs or a blend of the hospital's specific costs and the rate paid by Medicare
to non-hospital providers for such services. The 1997 Budget Act requires the
development of a prospective payment system for outpatient services beginning
after January 1, 2000. The financial effect of such change in payment
methodology may have a negative impact on the Company.
The 1997 Budget Act mandates that home health care reimbursement must
transition to a prospective payment system on October 1, 2000, as well as a 15%
reduction in the cost limits and per beneficiary limits effective September 30,
2000. During a transition period of not longer than 4 years, home health care
reimbursement rates will be a blend of agency-specific costs and the
regional-specific costs, until a fully prospective payment rate is achieved. The
Company currently has seven hospitals that provide home health care services.
The financial effect of such change in payment methodology may have a negative
impact on the Company.
The 1997 Budget Act mandated numerous other adjustments and reductions
to the Medicare system that may adversely impact the Company's operations. With
respect to the valuation of capital assets as a result of a change in hospital
ownership, the 1997 Budget Act eliminates the allowance for return on equity
capital, and bases reimbursement on the book value of the assets, recognizing no
gain or recapture of depreciation. In addition, the 1997 Budget Act mandated the
following changes: (i) a reduction in reimbursement for Medicare enrollee
deductible and coinsurance bad debts of 25% for fiscal year 1998, 40% for fiscal
year 1999 and 45% for fiscal year 2000 and periods thereafter, (ii) a reduction
in the bonus payments made to hospitals whose costs are below the target amounts
from 5% of the target amount to 2% and (iii) the transition of skilled nursing
home reimbursement to PPS, based upon 1995 allowable costs, with a three year
transition period beginning on or after July 1, 1998.
Congressional action to lower or control the growth in the Federal
budget deficit could have an adverse effect on the Company's Medicare revenues.
The Company anticipates that the rate of growth in reimbursement payments to
hospitals will be reduced as a result of future legislation but is unable to
project the actual amount of any such reductions and their impact on the
Company.
MEDICAID - Medicaid is a federally mandated medical assistance program
that is administered and funded in part by each state pursuant to which hospital
benefits are available to indigent persons. Each of the Company's hospitals is
certified for participation in the various state Medicaid programs. A
substantial portion of the Company's revenue is derived from patients covered by
this program. See "Sources of Revenue." Medicaid payment methodology varies from
state to state, with most payments being made on a prospective payment system or
under programs that negotiate payment levels with individual hospitals. Many
states have adopted broad-based hospital-specific taxes to help fund the state's
share of its Medicaid program. In addition, certain states have obtained or are
applying for waivers from HCFA to replace their Medicaid programs with managed
care programs.
The 1997 Budget Act repealed the Boren Amendment to the Medicaid Act to
give states greater flexibility in establishing Medicaid payment methods and
rates. The Boren Amendment previously required states to undertake a financial
analysis and provide assurance to the Federal government that the Medicaid rates
were reasonable in meeting the costs incurred by healthcare providers in
providing care to Medicaid patients. In lieu thereof, Congress has mandated that
states employ a rate setting process that requires prior publication and an
opportunity for provider comment on the rates, effective for rates of payment on
and after January 1, 1998.
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<PAGE> 13
The Medicare and Medicaid programs make additional payments to those
healthcare providers that serve a disproportionate share of low-income patients.
The qualification and funding for disproportionate share payments vary by year
and by state as applicable to Medicaid. Disproportionate share payments for
future years could vary significantly from historical payments.
Within the statutory framework of the Medicare and Medicaid programs,
there are substantial areas subject to administrative rulings, interpretations
and discretion that may affect payments made under these programs. Funds
received from these programs are subject to audit. These audits can result in
retroactive adjustments of such payments. There can be no assurance that future
audits will not result in material retroactive adjustments.
To ensure efficient utilization of facilities and services, Federal
regulations require that admission to and utilization of facilities by Medicare
and Medicaid patients must be reviewed by a Peer Review Organization ("PRO"). A
PRO may address the appropriateness of patient admissions and discharges, the
quality of care provided, the validity of DRG classifications and
appropriateness of cases with extraordinary length of stay or cost. The PRO may
deny admission or payment. Such review may be conducted either prospectively or
retroactively and is subject to administrative and judicial appeal.
Federal and state legislators continue to consider legislation that
could significantly impact Medicare, Medicaid and other government funding of
healthcare costs. Initiatives currently before Congress, if enacted, would
reduce the rate of growth in reimbursement payments under various government
programs including, among others, payments to disproportionate share and
teaching hospitals. A reduction in these payments would adversely affect net
revenue and operating margins at certain of the Company's hospitals. The Company
is unable to predict what legislation, if any, will be enacted at the Federal
and state levels in the future or what effect such legislation may have on the
Company's financial position, results of operations or liquidity.
ANTI-KICKBACK AND SELF-REFERRAL REGULATIONS - Federal law prohibits the
knowing and willful payment, receipt or offer of remuneration by healthcare
providers to any person, including physicians, to induce referrals of Medicare
and Medicaid patients or in exchange for such referrals (the "Anti-Kickback
Law"). Federal law also prohibits a physician from referring Medicare and
Medicaid patients to certain designated health services in which the physician
has ownership or certain other financial arrangements, unless an exception is
available (the "Stark II Law"). Many states have adopted or are considering
similar legislative proposals to extend the prohibition to referrals of all
patients regardless of payor. Violations of the Anti-Kickback Law and Stark II
Law may result in certain civil sanctions, such as civil monetary penalties, and
exclusion from participating in the Medicare and Medicaid programs. Violations
of the Anti-Kickback Law can also result in the imposition of criminal
sanctions.
The Office of the Inspector General of Health and Human Services
("OIG") has promulgated regulations that define certain safe harbors to offer
protection to certain common business arrangements under the Anti-Kickback Law.
The failure of an arrangement to meet the requirements of a safe harbor does not
render the arrangement illegal. Those arrangements, however, are subject to
scrutiny by the OIG's office and other enforcement agencies. None of the
Company's joint ventures with physician investors fall within any of the defined
safe harbors. Under the Company's joint venture arrangements, physician
investors are not under any obligation to refer or admit their patients,
including Medicare or Medicaid beneficiaries, to receive services at the
Company's facilities, nor are distributions to those physician investors
contingent upon or calculated with reference to referral by the physician
investors. On the basis thereof, the Company does not believe the ownership of
interests in or receipt of distributions from its joint ventures would be
construed to be knowing and willful payments to the physician investors to
induce them to refer patients in violation of the Anti-Kickback Law. In
addition, the Company has entered into various other relationships and
arrangements with physicians, including the acquisition of physician practices.
There can be no assurance that such arrangements will not be challenged by
government enforcement agencies. In addition, in certain circumstances, private
citizens may bring a civil action to recover sums paid in violation of Federal
law. Federal and state government agencies have announced heightened and
coordinated civil and criminal enforcement efforts. The Company cannot predict
the effect on the Company's financial position, results of operations or
liquidity
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<PAGE> 14
from possible judgments, if any, that may result from any inquiry, or the impact
of new Federal or state laws and regulations that could require the Company to
restructure certain of its arrangements.
ENVIRONMENTAL MATTERS
The Company is subject to various Federal, state and local statutes and
ordinances regulating the discharge of materials into the environment. The
Company's management does not believe that the Company will be required to
expend any material amounts in order to comply with these laws and regulations
or that compliance will materially affect its capital expenditures, earnings or
competitive position.
SEASONALITY
The hospital industry is seasonal, with the strongest demand for
hospital services generally occurring during January through April and the
weakest during the summer months. Accordingly, in the absence of acquisitions,
the Company's revenues and earnings are generally highest during the first
quarter and lowest during the third quarter.
MEDICAL STAFF AND EMPLOYEES
At December 31, 1998, the Company had approximately 7,000 full-time and
part-time employees. The Company also had 1,300 licensed physicians who were
members of the medical staffs of the Company's hospitals. Physician staff
members may also serve on the medical staffs of other hospitals and each may
terminate his or her affiliation with the Company's hospital at any time.
LIABILITY INSURANCE
The Company is subject to claims and suits in the ordinary course of
business, including those arising from care and treatment provided at its
facilities. The Company maintains insurance and, where appropriate, reserves
with respect to the possible liability arising from such claims. For periods
from October 1992 to December 1996, the Company, excluding the former Champion
entities, insured the first $500,000 of general and professional liability
claims through its wholly owned subsidiary, Hospital Assurance Company Ltd.
("HAC"). The Company had third-party excess insurance coverage over the first
$500,000 per occurrence up to $100.0 million.
Commencing January 1, 1997, in conjunction with the Company's plan to
cease all underwriting activity of HAC, the Company became self-insured for the
first $1.0 million per occurrence of general and professional liability claims,
with excess insurance amounts up to $100.0 million covered by a third party
insurance carrier, including all claims incurred but not reported ("IBNR") as of
December 31, 1996 for all subsidiaries, including Champion. The Company is
self-insured for reported claims related to former Champion facilities for
periods prior to 1997 up to $1.0 million per occurrence and $4.0 million in the
aggregate, with amounts in excess of $1.0 million but less than $10 million
covered by a third party insurance carrier.
Effective October 1, 1997, the Company changed its general and
professional liability insurance carrier. The Company continues to self-insure
the first $1.0 million per occurrence of general and professional liability
claims and $4.0 million in the aggregate; however, excess insurance amounts up
to $50.0 million are now covered by third party insurance carriers. The Company
records an estimated liability for its uninsured exposure and self-insured
retention based on historical loss patterns and actuarial projections. Although
the Company believes that its insurance and loss reserves are adequate, there
can be no assurance that such insurance and loss reserves will cover all
potential claims that may be asserted.
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ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following is certain information regarding the executive officers of the
Company.
CHARLES R. MILLER, age 60, has served as President, Chief Operating
Officer and a director of the Company since August 1996. From 1990 to 1996, he
was Chairman, President and Chief Executive Officer of Champion, which he
co-founded. From 1987 to 1988, he co-owned and operated an acute care hospital
in El Paso, Texas, which he sold in 1988. From 1981 to 1986, he co-founded
Republic Health Corporation ("Republic") and served as President and director
until his resignation as a result of his election not to participate in a
leveraged buy-out of Republic, which was then the fifth largest publicly-held
hospital management company. Prior thereto, he was employed in various
management positions for seven years by Hospital Affiliates International
("HAI").
JAMES G. VANDEVENDER, age 51, a Senior Executive Vice President since
June 1997, has served as Executive Vice President, Chief Financial Officer and a
director of the Company since August 1996. From 1990 to 1996, he was Executive
Vice President, Chief Financial Officer, Secretary and a director of Champion,
which he co-founded. From 1987 to 1989, Mr. VanDevender pursued private
investments. From 1981 to 1987, he was Senior Vice President of Republic,
primarily responsible for acquisitions and development, and held other senior
management positions in the areas of accounting and finance. Prior thereto, he
was employed in various management positions for four years by HAI.
RONALD R. PATTERSON, age 57, has served as Executive Vice President and
President, Healthcare Operations of the Company since August 1996. He was
Executive Vice President and Chief Operating Officer of Champion from 1994 to
1996 and Senior Vice President-Operations from 1992 to 1994. From 1990 to 1991,
he was Senior Vice President of Harris Methodist Health System, a not-for-profit
healthcare system. From 1988 to 1990, he was a healthcare consultant,
specializing in private turnaround management. From 1982 to 1988, he was with
Republic, initially as Operations Vice President and subsequently as Senior Vice
President of one of its major operating divisions. Prior thereto, he was
employed in various management positions for six years by HAI.
LAWRENCE A. HUMPHREY, age 43, an Executive Vice President - Finance
since June 1997, has served as Senior Vice President, Corporate Finance since
August 1996. From 1993 to 1994, he was Operations Controller, and from September
1994 to 1996, he was Vice President - Operations Finance of Champion. Effective
February 1996, Mr. Humphrey was promoted to Senior Vice President - Corporate
Finance. Prior thereto, he was employed in various management positions for 12
years by National Medical Enterprises. Mr. Humphrey is a Certified Public
Accountant.
MICHAEL M. BROOKS, age 50, has served as Senior Vice President -
Development since August 1996. From 1992 to 1993, he was Operations Controller
and from September 1993 to 1996, he was Vice President Administration and
Development of Champion. Effective February 1996, Mr. Brooks became Senior Vice
President Development. From 1989 to 1992, he was a healthcare consultant and was
associated with Champion in that capacity during 1991. From 1987 to 1988, he
co-owned and operated an acute care hospital in El Paso, Texas. From 1983 to
1986, he was employed in various senior management positions by Republic.
GARY L. CHANDLER, age 53, a Senior Vice President, Managed Care,
Networks and Strategic Development since June 1997 and President of PHC Practice
Management Corporation since July 1998, has served as Vice President, Managed
Care and Strategic Development since August 1996. From 1995 to 1996, he was Vice
President, Managed Care and Strategic Development of Champion. Prior thereto, he
was Vice President of the Austin operations for New York Life/Sanus from 1994 to
1995 and a development officer for the Austin Diagnostic Clinic and Chief
Operating Officer of an affiliated individual practice association/management
services organization from 1987 to 1994.
DEBORAH H. FRANKOVICH, age 51, a Senior Vice President and Treasurer
since June 1997, has served as Vice President and Treasurer since August 1996.
From 1994 to 1996, she was Vice President and Treasurer of Champion. From 1990
to 1994, she was a healthcare financing consultant. Prior thereto,
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<PAGE> 16
she was Vice President and Treasurer of Healthcare International, Inc. from 1985
to 1989, and Vice President and Treasurer of HealthVest, which she co-founded,
from 1986 to 1990. Prior to joining Healthcare International, she worked in the
New York healthcare lending group of Citibank for seven years.
ROBERT M. STARLING, age 39, a Senior Vice President and Controller
since June 1997, has served as Vice President and Controller since August 1996.
From 1995 to 1996, he was Vice President and Controller of Champion. Prior
thereto, he was Director of Finance for Columbia/HCA Healthcare Corporation from
July 1994 to December 1994 and an Audit Manager with Coopers and Lybrand LLP
(now PriceWaterhouseCoopers LLP) from 1986 to 1994. Mr.
Starling is a Certified Public Accountant.
RONALD L. WATSON, age 46, a Senior Vice President, Operations Finance
and Systems Support since June 1997, has served as Vice President, Operations
Finance and Systems Support since August 1996. From 1995 to 1996, he was
Regional Controller of Champion, and effective February 1996, was promoted to
Vice President of Operations - Finance. Prior thereto, Mr. Watson was Director
of Operations - Finance for Health Management Associates, Inc. for five years.
From 1985 to 1990, Mr. Watson was a Senior Audit Manager with Arthur Young (now
Ernst & Young LLP). Mr. Watson is a Certified Public Accountant.
W. WARREN WILKEY, age 54, has served as Senior Vice President,
Operations since August 1996. He is responsible for hospital operations of the
Company in the Western Division. From 1995 to 1996, he was Vice President -
Operations of Champion, and effective February 1996, was promoted to Senior Vice
President - Market Operations. Prior thereto, Mr. Wilkey was Vice President and
Director of Group Operations for EPIC Healthcare Group for six years.
On November 25, 1998, the Company and its senior executives, Mr.
Miller, Mr. VanDevender and Mr. Patterson executed a senior executive agreement
(the "Executive Agreement") superseding their existing employment contracts and
certain other stock option and retirement agreements (See Item 8 - Note 15).
Under the Executive Agreement, as amended by a proposed global settlement of
shareholder litigation further discussed in Item 3 "Legal Proceedings," the
senior executives agreed to remain in their current management positions with
the Company at least until June 30, 1999. Mr. Miller will resign as director
shortly and is the only senior executive who has currently expressed an intent
to leave the Company immediately after June 30, 1999. Mr. VanDevender will be
designated interim Chief Executive Officer ("CEO") effective July 1, 1999.
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ITEM 2. PROPERTIES
The following table sets forth the name, location, type of facility,
date of acquisition and number of licensed beds for each of the hospitals
operated by the Company as of December 31, 1998. Unless otherwise indicated, all
hospitals are owned by the Company.
<TABLE>
<CAPTION>
TYPE OF DATE OF LICENSED
LICENSED FACILITY LOCATION FACILITY ACQUISITION BEDS
----------------- -------- -------- ----------- ----
<S> <C> <C> <C> <C>
CALIFORNIA
- ----------
Lancaster Community Hospital Lancaster Acute Care 2/01/81 123
FLORIDA
- -------
Santa Rosa Medical Center (1) Milton Acute Care 5/17/96 129
GEORGIA
- -------
Flint River Community Hospital (1) Montezuma Acute Care 1/01/86 49
MISSISSIPPI
- -----------
Senatobia Community Hospital (1) Senatobia Acute Care 1/01/86 76
NORTH DAKOTA
- ------------
Dakota Heartland Health System (2) Fargo Acute Care 8/16/96 218
TENNESSEE
- ---------
Cumberland River Hospital Celina Acute Care 10/01/85 36
Fentress County General Hospital Jamestown Acute Care 10/01/85 85
Bledsoe County Hospital (1) Pikeville Acute Care 10/01/85 32
TEXAS
- -----
BayCoast Medical Center Baytown Acute Care 8/16/96 191
The Medical Center of Mesquite Mesquite Acute Care 10/01/90 176
Westwood Medical Center Midland Acute Care 8/16/96 107
UTAH
- ----
Davis Hospital and Medical Center Layton Acute Care 5/17/96 126
Jordan Valley Hospital West Jordan Acute Care 8/16/96 50
Pioneer Valley Hospital (1) West Valley City Acute Care 5/17/96 139
Salt Lake Regional Medical Center Salt Lake City Acute Care 8/16/96 200
VIRGINIA
- --------
Capitol Medical Center (3) Richmond Acute Care 8/16/96 179
------
Total Licensed Beds 1,916
=====
</TABLE>
- -------------------------
(1) Hospital facility is leased.
(2) In July 1998, the Company purchased the remaining 50% interest in DHHS, a
partnership that owns the hospital, thereby giving the Company 100%
ownership of DHHS (See Item 8 - Note 3).
(3) The Company owns an 88.7% general partnership interest in a limited
partnership that owns the hospital.
The Company also owns PHC Regional Hospital and Medical Center ("PHC
Regional"), which has been closed since June 1997. The Company is considering a
number of alternatives for PHC Regional, including plans to sell or reopen the
facility and, with the retrofit and expansion of the facility, to accommodate
the transfer of certain acute care services presently performed at the Company's
Salt Lake Regional Medical Center.
The Company owns, leases or manages medical office buildings located
adjacent to certain of its hospitals. Most of the space in each medical office
building is leased or subleased, primarily to local physicians. The remaining
space is used by the Company for hospital administration and clinical purposes
or held for future development.
The Company leases its corporate offices in Houston, Texas. The Company
subleases to a third party its leased offices in Pasadena, California.
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The Company believes that its existing facilities are adequate to carry
on its business as presently conducted.
ITEM 3. LEGAL PROCEEDINGS
SHAREHOLDER LITIGATION - As previously reported, the Company is a
defendant in multiple class and derivative actions arising out of or related to
the August 1996 Merger between the Company and Champion (See Item 8 - Note 1 for
discussion of the ownership of the Company prior to the Merger). The actions
currently pending are In re Paracelsus Corp. Securities Litigation, Master File
No. H-96-3464 (S. D. Tex.) (EW); Essex Imports v. Paracelsus Healthcare Corp. et
al., No. 96-51864 (Dist. Ct. Harris Cty. Texas); Caven v. Miller et al., No.
H-96-4291 (S.D. Tex.) (EW); Orovitz v. Miller, No. H-97-2752 (S.D. Tex.) (EW);
Caven v. Ernst & Young, LLP et al., No. 98-38338 (Dist. Ct. Harris Cty. Texas);
and Molinari v. Miller et al., No. 14945 (Del. Ch. Ct.) (collectively, the
"Shareholder Litigation").
With the exception of the two Caven cases, Orovitz, and Molinari, these
complaints assert putative class actions on behalf of current and former holders
of the Company's securities for claims under federal and state statutes and the
common law relating to the exchange offer for Champion stock in connection with
the Merger, the August 1996 public offerings by the Company of common stock and
subordinated notes, and trading in the Company's securities in the period
between the Merger and October 9, 1996. In summary, the complaints allege that
the Merger and public offerings proceeded on the basis of materially misleading
disclosures and omissions by the Company and Champion, as well as certain of the
Company's and Champion's officers, directors, and underwriters. The claims
asserted include claims under section 11 of the Securities Act of 1933 and under
section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
In March 1998, the federal district court (the "Court") dismissed claims
relating to the subordinated notes. The Caven, Orovitz, and Molinari cases
assert claims derivatively on behalf of the Company or Champion against the
Company, Champion, various current or former officers and directors of the
Company and Champion, Park-Hospital GmbH (the "Majority Shareholder"), and the
Company's independent auditors.
On March 24, 1999, the Company, the affected current and former
officers and directors, the underwriters, the Majority Shareholder, the
representatives of the plaintiff class, the derivative plaintiffs, and a number
of separately represented former Champion shareholders that received the
Company's stock in connection with the Merger entered into three separate but
interrelated agreements providing for a proposed global settlement of
substantially all claims in these class and derivative actions. These former
Champion shareholders could be deemed to be a group for purposes of Section
13(d) of the Securities Exchange Act of 1934.
The settlement agreements require the parties to draft certain
settlement documents for submission to the Court. Once completed, and after the
Court grants preliminary approval of these documents, notice of the settlements
will be given to class members and shareholders to enable putative class members
to opt out of the class and to allow all others to comment on or object to the
terms of the proposed settlements. Depending on the number of opt-outs, the
Court then will hold a hearing to consider the settlements, which will not be
final until a Court order granting approval of the settlements becomes final and
not subject to appeal. The Company currently is not aware of a reason to
indicate that the Court will not approve the settlements; however there can be
no assurance that the Court will do so.
The terms of the settlements will be set forth fully in the notice
provided to class members and shareholders after the Court has preliminarily
approved the settlement documents. A summary of the main terms follows.
Based on the agreements, the Company will be required to pay in cash
$14.0 million and issue approximately 1.5 million new shares of the Company's
common stock to a class settlement fund for purposes of the class action
settlement. Additionally, the Company will pay expenses and legal fees incurred
by the separately represented former Champion shareholders and by the lawyers
for the derivative plaintiffs. The Company expects all or nearly all of these
cash contributions to be covered by
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directors and officers liability insurance. The agreements also require the
Majority Shareholder to transfer approximately 1.2 million shares of the
Company's common stock that it currently owns to the class members and
approximately 8.7 million shares to the former Champion shareholders. The lead
underwriter in the Company's equity offering completed at the time of the Merger
will make a $1.0 million cash contribution to the class settlement fund.
In addition, the Company will be required to make a payment of $1.0
million in cash and 1.0 million newly issued shares of common stock to terminate
a contract with Dr. Manfred G. Krukemeyer, who is the ultimate legal owner of
the parent of the Majority Shareholder and a former Chairman of the Board of
Directors of the Company, (the "Former Chairman"). The settlement agreement also
provides for the recommencement of payment of principal in accordance with the
stated terms of a note payable by the Company to the Majority Shareholder. The
agreements include terms reducing the Company's existing and future obligations
to certain former officers and directors by approximately $12.0 million and
terminating options held by certain current and former officers and directors to
purchase approximately 1.3 million shares at $0.01 per share granted in
connection with the Merger (the "Value Options").
The proposed global settlement modifies the Executive Agreement with
the Company's three senior executives (Mr. Charles R. Miller, Mr. James G.
VanDevender, and Mr. Ronald R. Patterson). The senior executives have agreed to
remain in their current management positions with the Company at least until
June 30, 1999 and have waived their rights to certain additional payments under
the Executive Agreement upon the settlement of the Shareholder Litigation. See
Item 8 - Note 15 for discussion of the Executive Agreement. Mr. Miller will
resign his position as a director shortly and is the only executive who has
expressed an intent to leave the Company immediately after June 30, 1999. Mr.
VanDevender will be designated as interim CEO effective July 1, 1999.
The proposed global settlement also gives the Majority Shareholder and
the former Champion shareholders each the right to designate three members of
the Company's Board of Directors. As part of that arrangement, on March 24,
1999, the current directors elected Mr. Peter Schnitzler as director. His
appointment will become effective on the earlier of the Board of Directors
meeting on May 13, 1999 or the resignation of a current director. The Company
has entered into a new shareholder agreement, to become effective upon the final
settlement of the Shareholder Litigation, containing provisions governing
restrictions on the Majority Shareholder's transfer of shares, limiting the
Majority Shareholder's response to acquisition proposals, governing the
composition of the Board of Directors and outlining the Majority Shareholder's
registration rights with respect to its shares. The Company will terminate the
Shareholder Protection Rights Agreement, an anti-takeover device adopted at the
time of the Merger and the current shareholder agreement with the Majority
Shareholder, as of the date that all the settlements become effective.
When the proposed global settlement is approved by the Court and
becomes final, the Company, all class members who do not opt out, the derivative
plaintiffs, the separately represented former Champion shareholders, the
Majority Shareholder, the underwriter, and the affected current and former
officers and directors will provide mutual releases of all claims arising out of
or related to the Merger and the related public offerings. All pending actions
against all released parties will be dismissed. Additionally, the released
parties have agreed to assign any claims they have against the Company's
independent auditors to the Majority Shareholder. The settlement requires the
Company to indemnify current and former officers and directors, the Majority
Shareholder, and certain separately represented former Champion shareholders
against (i) liability, costs and expenses arising from any Merger-related claims
brought by current or former Company security holders who are not parties to the
settlement or members of a class certified for settlement purposes and (ii)
reasonable costs and expenses, excluding monetary sanctions, incurred in
connection with any ongoing or future governmental investigation relating to the
Merger and public offerings.
The Company's current Board of Directors unanimously approved the
settlement agreements. All five of the directors remaining after the recent
resignation of two independent directors could be deemed to be interested in the
settlement agreements because they are direct participants in the settlement or
because they have a relationship with one of the settling parties. The effect of
the proposed global
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settlement on the Company's financial condition and results of operations is
discussed in Item 8 - Note 18.
OTHER LITIGATION - The Company is subject to claims and legal actions
by patients and others in the ordinary course of business. The Company believes
that all such claims and actions are either adequately covered by insurance or
will not have a material adverse effect on the Company's financial condition,
results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is trading on the New York Stock Exchange
("NYSE") under the symbol "PLS". At March 26, 1999, there were approximately
1,136 holders of record of the Company's common stock. The following table sets
forth the high and low sale prices per share of the Company's common stock for
the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year Ended December 31, 1998
First Quarter.................................. $4 13/16 $3
Second Quarter................................. 5 1/16 2 1/2
Third Quarter.................................. 3 1/2 1 3/4
Fourth Quarter................................. 3 5/16 1 3/8
Fiscal Year Ended December 31, 1997
First Quarter.................................. $5 3/4 $2 7/8
Second Quarter................................. 5 1/4 2 7/8
Third Quarter.................................. 8 1/2 4 5/8
Fourth Quarter................................. 7 1/2 2 13/16
</TABLE>
The Company has not declared any cash dividends in 1998 and 1997 and
does not anticipate the payment of any cash dividends in the foreseeable future.
See Item 8 - Note 8 for information regarding certain restrictions on the
Company's ability to pay cash dividends. The Company did not make any sale of
registered securities during 1998 and 1997.
20
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data of the
Company and should be read in conjunction with the related Consolidated
Financial Statements and accompanying Notes to Consolidated Financial Statements
(See Item 8).
<TABLE>
<CAPTION>
(IN 000'S, EXCEPT PER SHARE DATA AND RATIOS)
- ---------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net revenue ................................. $ 664,058 $ 659,219 $ 493,106 $ 434,179 $ 438,625
Operating expenses .......................... (584,594) (587,559) (496,782) (399,019) (393,550)
Capital costs (a) ........................... (90,189) (77,551) (54,761) (31,719) (28,846)
Equity in earnings of Dakota Heartland
Health System ............................. -- 9,794 3,207 -- --
Impairment charges (b) ...................... (1,417) (7,782) (72,322) -- --
Merger costs ................................ -- -- (40,804) -- --
Unusual items (c) ........................... 6,637 6,531 (60,521) -- --
Gain on sale of facilities .................. 6,825 -- -- 9,026 --
Minority interests .......................... (3,180) (1,996) (1,806) (1,803) (2,449)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income
taxes and extraordinary loss ............ (1,860) 656 (230,683) 10,664 13,780
Provision (benefit) for income taxes (d) .... 693 1,812 (76,186) 4,375 5,818
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before extraordinary loss .... (2,553) (1,156) (154,497) 6,289 7,962
Loss from discontinued operations (d) ....... (2,424) (5,243) (70,995) (2,852) (106)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary loss ..... (4,977) (6,399) (225,492) 3,437 7,856
Extraordinary loss (d) (e) .................. (1,175) -- (7,724) -- (33)
--------- --------- --------- --------- ---------
Net income (loss) ........................... $ (6,152) $ (6,399) $(233,216) $ 3,437 $ 7,823
========= ========= ========= ========= =========
Income (loss) per share - basic and
assuming dilution:
Continuing operations ................... $ (0.05) $ (0.02) $ (3.94) $ 0.21 $ 0.26
Net income (loss) ....................... $ (0.11) $ (0.12) $ (5.95) $ 0.12 $ 0.26
Weighted average common shares
outstanding (f) ......................... 55,108 54,946 39,213 29,772 29,772
BALANCE SHEET DATA
Cash and cash equivalents ................... $ 11,944 $ 28,173 $ 17,771 $ 4,418 $ 2,004
Working capital ............................. 22,526 37,378 33,762 57,011 66,410
Total assets ................................ 716,102 734,824 772,832 333,386 324,650
Long-term debt (g) .......................... 533,048 491,914 491,057 130,352 122,252
Stockholders' equity ........................ 34,341 42,003 48,487 86,721 88,337
Book value per share ........................ 0.62 0.76 0.88 2.91 2.97
RATIOS
Adjusted EBITDA (h) ........................ 76,284 79,458 (2,275) 33,357 42,626
Adjusted EBITDA Margin ...................... 11.5% 12.1% (0.5)% 7.7% 9.7%
Current ratio ............................... 1.21:1 1.27:1 1.21:1 1.82:1 2.10:1
Debt to total debt and equity ............... 93.9% 92.1% 91.0% 60.0% 58.1%
</TABLE>
- ----------------------------------
a) Includes interest, depreciation and amortization.
b) Consists of (i) a $1.4 million ($0.02 per share) write-down of certain
Tennessee facilities in 1998, (ii) a $7.8 million ($0.09 per share)
write-down of certain of the Company's former LA Metro hospitals in 1997 and
(iii) in 1996, the write down of PHC Regional for $52.5 million ($0.90 per
share) and certain hospitals in the LA metro area for $11.9 million ($0.20
per share) and two other facilities and estimated disposal costs of $7.9
million ($0.13 per share) (See Item 8 - Note 2).
21
<PAGE> 22
c) Consists in 1998 of (i) a $7.5 million gain ($0.08 per share) from the
settlement of a 1996 capitation agreement offset by (ii) a net charge of
$863,000 ($0.01 per share) resulting from the execution of the Executive
Agreement, the restructuring of certain home health operations, severances
and the settlement of a contract dispute and litigation. Unusual items in
1997 consists of (i) a reversal of a loss contract accrual of $15.5 million
($0.17 per share), (ii) a charge of $3.5 million ($0.03 per share) relating
to the closure of PHC Regional, (iii) a charge of $2.5 million ($0.03 per
share) for a corporate reorganization and (iv) a charge of $3.0 million
($0.04 per share) for the settlement of certain litigation. Unusual items in
1996 consists of charges of $38.1 million ($0.65 per share) for a loss
contract and $22.4 million ($0.38 per share) for expenses relating to the
Special Committee's investigation and other litigation matters (See Item 8 -
Note 2).
d) Includes a reduction in income tax benefits of $50.0 million ($1.27 per
share) in 1996 from the recording of a valuation allowance, which offsets
the Company's net deferred tax assets. Of this amount, $17.7 million was
applied to reduce income tax benefits on losses from continuing operations
and the remaining $32.3 million to reduce income tax benefits on losses from
discontinued operations and an extraordinary loss. As a result, no income
tax benefits have been recognized on the losses from discontinued operations
and the extraordinary loss recorded in 1996.
e) Reflects loss associated with the early extinguishment of debt.
f) Reflects the effect of the 66,159.426-for-one stock split in conjunction
with the Merger.
g) Excludes current maturities of long-term debt.
h) Adjusted EBITDA represents income (loss) from continuing operations before
income taxes and extraordinary loss, depreciation and amortization,
interest, impairment charges, merger costs, unusual items and gain from sale
of facilities. While EBITDA is not a substitute for operating cash flows
determined in accordance with generally accepted accounting principles, it
is a commonly used tool for measuring a company's ability to service debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K are "forward-looking statements"
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve a number of risks and
uncertainties. 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; the continued listing of the Company's common stock on the New
York Stock Exchange; the Company's ability to divest assets to reduce
indebtedness and to realize its tax assets; the availability and terms of
capital to fund working capital requirements and the expansion of the Company's
business; and the final resolution to certain proposed settlement to litigation
including the court approval of the settlement terms and the fulfillment of the
conditions contained therein. The Company is generally not required to, and does
not undertake to update or revise its forward-looking statements.
SHAREHOLDER LITIGATION
As discussed in Item 3 - "Legal Proceedings," on March 24, 1999, the
Company entered into a proposed global settlement of the Shareholder Litigation.
As a result of the proposed global settlement, approximately $11.7 million of
previously recorded liabilities will be satisfied through a contribution of
Company common stock by the Majority Shareholder with a corresponding increase
in the Company's additional paid-in capital. This resulted in a $5.1 million
increase in the Company's provision for income taxes for the year ended December
31, 1998 because the $11.7 million of accrued expenses is not deductible for
federal income tax purposes as a result of the satisfaction of the liability by
the contribution of common stock. The proposed settlement had no material impact
on the Company's liquidity for the year ended December 31, 1998. Furthermore,
the Company expects the proposed global settlement will not have a material
adverse impact on the Company's
22
<PAGE> 23
financial condition, results of operations or liquidity in 1999. There can be
no assurance that the Court will approve the proposed settlement or that the
conditions contained in such agreement will be satisfactorily fulfilled. See
Item 8 - Note 18 for a more complete discussion of the terms of the proposed
settlement.
RESULTS OF OPERATIONS
The comparison of operating results for 1998 with prior years is
difficult given the numerous acquisitions, divestitures and closures by the
Company in the affected periods. "Same hospitals" as used in the following
discussion, where appropriate, consist of acute care hospitals owned throughout
the periods for which comparative operating results are presented. Accordingly,
such designation excludes DHHS acquired in July 1998, the Chico hospitals sold
in June 1998, the LA Metro hospitals sold in September 1998 and PHC Regional
Hospital, which the Company closed in June 1997. Also see Item 8 - Note 3 for a
description of acquisitions, dispositions and closures of hospitals. Operating
results of the Company's psychiatric hospitals are reflected under the caption
"Discontinued operations - Loss from operations of discontinued psychiatric
hospitals, net" and "Discontinued operations - Loss on disposal of discontinued
psychiatric hospitals, net" in the Consolidated Statements of Operations for all
periods presented.
The Company segregates its hospitals into two operating segments: Core
Markets and Non Core Markets. The Company has designated certain hospitals as
"Core Facilities" with the goal of expanding and further integrating the
hospitals' presence in their respective markets. The Company believes it can
compete most effectively in these markets on the basis of cost, customer
service, and quality of care. As the designation implies, the Company believes
these hospitals comprise the operational and financial core of the Company's
business. Typical Core Market attributes include, but are not limited to, a
service area population of between 30,000 and 500,000, growing populations,
improving median incomes, limited competition from large scale hospital
franchises, and lower managed care penetration than is typically found in larger
metropolitan areas. The Company's current Core Markets consist of all of its
operations in metropolitan Salt Lake City, Utah; Fargo, North Dakota; Mesquite,
Texas; Midland, Texas; Lancaster, California; Milton, Florida and Richmond,
Virginia. The Company will, from time to time, consider divesting certain core
assets if such disposition meets the Company's strategic objectives.
"Non Core" Markets consist of all other hospital operations currently
owned by the Company and some of these are being evaluated for possible
disposition. There can be no assurance that any of these facilities will be
ultimately sold as a result of this process. The Company's Non Core Facilities
comprise all of its operations in Tennessee, Georgia, Mississippi and Baytown,
Texas, as well as its convalescent hospitals in California. With the exception
of the Baytown, Texas facility, these Non Core Facilities are located in rural
areas with limited growth potential. The Company's Baytown, Texas facility is
located in metropolitan Houston, Texas, and faces substantial competition from a
number of large health care providers, many of which have substantially greater
resources than the Company.
23
<PAGE> 24
OPERATIONS DATA
The following table summarizes, for the periods indicated, changes in
selected operating percentages for the Company's facilities, excluding the
discontinued psychiatric hospitals. The discussion that follows should be read
in conjunction with the Company's Consolidated Financial Statements and the
notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---- ---- ----
Percentage of Net Revenue
- -------------------------
<S> <C> <C> <C>
Net revenue ........................................... 100.0% 100.0% 100.0%
----- ----- -----
Salaries and benefits ................................. (41.6) (41.2) (48.3)
Other operating expenses .............................. (40.0) (40.8) (44.6)
Provision for bad debts ............................... (6.4) (7.1) (7.8)
----- ----- -----
Operating costs ....................................... (88.0) (89.1) (100.7)
----- ----- -----
Operating margin ...................................... 12.0 10.9 (0.7)
Capital costs (a) ..................................... (13.6) (11.8) (11.1)
Equity in earnings of DHHS ............................ -- 1.5 0.6
Impairment charges .................................... (0.2) (1.2) (14.7)
Merger costs .......................................... -- -- (8.3)
Unusual items ......................................... 1.0 1.0 (12.3)
Gain on sale of facilities ............................ 1.0 -- --
Minority interests .................................... (0.5) (0.3) (0.3)
----- ----- -----
Income (loss) from continuing operations before
income taxes and extraordinary loss ............... (0.3)% 0.1% (46.8)%
===== ===== =====
</TABLE>
- -----------------
(a) Includes interest, depreciation and amortization.
YEAR ENDED DECEMBER 31, 1998
COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Net revenue for the year ended December 31, 1998, was $664.0 million,
an increase of $4.8 million, or 0.7%, from $659.2 million for the same period of
1997. As the result of the acquisition of DHHS, 1998 net revenue included DHHS
for the twelve months ended December 31, 1998. DHHS was accounted for under the
equity method for the year ended December 31, 1997. Net revenue for 1998
increased $103.7 million from the acquisition of DHHS with such increase offset
by a $48.5 million decrease in net revenue primarily attributable to the
dispositions of the Chico and LA Metro hospitals and the closure of PHC
Regional. The remaining decline in net revenue occurred at the Company's "same
hospitals," as discussed below.
Net revenue at "same hospitals" for the year ended December 31, 1998
was $472.8 million compared to $523.2 million, a decrease of $50.4 million, or
9.6%, over the comparable period in 1997. Same hospital net revenue at Core
Facilities decreased $21.4 million, or 5.3%, from $402.5 million in 1997 to
$381.1 million in 1998. Same hospital net revenue at Non Core Facilities
decreased $29.0 million, or 24.0%, from $120.7 million in 1997 to $91.7 million
in 1998. Among the Non Core Facilities, the Tennessee market hospitals, which
have significant home health operations, decreased $22.5 million, or 38.0%, from
$59.2 million in 1997 to $36.7 million in 1998. The decrease in net revenue at
the Company's "same hospitals" is due to (i) a decline in utilization and
reimbursement rates for home health and other healthcare operations as a
consequence of the 1997 Budget Act, (ii) the restructuring of home health
operations at certain of the Company's hospitals in 1998, including in some
cases the closing of such operations (See Item 8 - Note 2), (iii) an overall
decline in volume at the hospitals and (iv) continued tightening of payment
levels by managed care plans. The reductions in net revenue resulting from the
24
<PAGE> 25
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 into 1999.
The Company's "same hospitals" experienced a 6.1% decrease in inpatient
admissions from 52,060 in 1997 to 48,903 in 1998. Same hospital patient days
decreased 7.4% from 233,011 in 1997 to 215,786 in 1998. The decline in volumes
was principally related to the termination of unfavorable managed care
contracts, the closure of skilled nursing units in response to revenue
reduction under the 1997 Budget Act and an overall decline in volumes at Non
Core Facilities. Excluding home health visits, outpatient visits in "same
hospitals" increased 2.8% from 565,369 in 1997 to 581,142 in 1998. Home health
visits in "same hospitals" decreased 45.7% from 866,604 in 1997 to 470,595 in
1998 primarily due to stricter utilization standards under the 1997 Budget Act
effective October 1, 1997, and the closure of home health operations at certain
facilities.
The following table presents "same hospitals" operating statistics for
the Company's Core and Non Core Facilities for the years ended December 31, 1998
and 1997.
<TABLE>
<CAPTION>
"SAME HOSPITALS"
----------------
1998 1997 % CHANGE
---- ---- --------
<S> <C> <C> <C>
Core Facilities
- ---------------
Patient Days .......................................... 166,950 174,931 (4.6)%
Inpatient Admissions .................................. 38,667 40,132 (3.7)
Outpatient Visits, excluding Home Health .............. 460,402 435,382 5.7
Home Health Visits .................................... 213,780 370,250 (42.3)
Non Core Facilities
- -------------------
Patient Days .......................................... 48,836 58,080 (15.9)
Inpatient Admissions .................................. 10,236 11,928 (14.2)
Outpatient Visits, excluding Home Health .............. 120,740 129,987 (7.1)
Home Health Visits .................................... 256,815 496,354 (48.3)
</TABLE>
Operating expenses (salaries and benefits, other operating expenses and
provision for bad debts) decreased $3.0 million from $587.6 million in 1997 to
$584.6 million in 1998. The year ended December 31, 1998, included DHHS
operating expenses of $80.3 million, which was offset by a $51.9 million
decrease from closed/sold facilities and a $5.5 million reduction in general and
medical professional liability costs as a result of revisions of actuarial
estimates based on improvement in claim settlement experience. The balance of
the reduction in operating expenses occurred primarily at the Company's "same
hospitals" as a result of management's effort to reduce costs in response to
reductions in net revenue mandated by the 1997 Budget Act.
Operating expenses at the Company's "same hospitals" increased from
83.5% of net revenue in 1997 to 86.0% in 1998, and operating margins decreased
from 16.5% to 14.0%, respectively. The deterioration in operating margins
occurred primarily at the Non Core Facilities, which declined from 13.0% in 1997
to 0.4% in 1998, primarily as a result of the aforementioned stricter
utilization standards and reductions in reimbursement rates under the 1997
Budget Act. On a "same hospital" basis, Core Facility operating margins remained
relatively constant at 17.3% in 1998 and 17.6% in 1997. Although the 1997 Budget
Act became effective October 1, 1997, certain key provisions of the Act were not
finalized until mid 1998, particularly with respect to the Company's home health
operations, and in response, the Company undertook a series of strategic actions
in the fourth quarter of 1998 to lower its cost structure. These actions
included a combination of staff and wage reductions as well as other cost
cutting measures and have contributed to the stability of operating margins at
the Company's Core Facilities. Cost reduction efforts at Non Core Facilities,
however, have not kept pace with declines in net revenue, principally because
these facilities tend to be in smaller markets and are less capable of
downsizing or increasing alternative services to offset deteriorating
reimbursement levels. Management believes that the cost savings associated with
these initiatives will favorably impact the Company's results of operations.
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 reductions in current levels of
utilization.
25
<PAGE> 26
Interest expense increased $4.5 million from $47.4 million in 1997 to
$51.9 million in 1998, primarily due to a net increase in outstanding
indebtedness under the Revolving Credit Facility (See Item 8 - Note 8) resulting
from the acquisition of DHHS less the net proceeds from the dispositions of LA
Metro and the Chico hospitals (See Item 8 - Note 3). Additionally, approximately
$2.7 million of interest expense incurred in 1997, which related to borrowings
to finance the acquisition of PHC Regional, was charged to the loss contract
accrual previously established at December 31, 1996. Accordingly, such amount
was not reflected as interest expense in the 1997 Consolidated Statement of
Operations.
Depreciation and amortization expense increased 27.0% to $38.3 million
in 1998 from $30.2 million for the same period in 1997. An increase of $5.9
million in depreciation and amortization expense resulted from the acquisition
of DHHS, which was accounted for under the equity method of accounting in 1997.
The remainder of the increase is primarily related to current year additions to
property and equipment.
Loss before income taxes, discontinued operations and extraordinary
charge for the year ended December 31, 1998, included $12.1 million, net of
minority interest of $4.1 million, attributable to income from DHHS on a
consolidated basis. Loss before income taxes, discontinued operations and
extraordinary charge also included (i) an impairment charge of $1.4 million to
write down certain long lived assets to fair value offset by (ii) $6.6 million
of unusual items (including a $7.5 million gain from the settlement of a
contract dispute with PacifiCare offset by a net charge of $863,000 resulting
from the execution of the Executive Agreement, the restructuring of certain home
health operations, severances and the settlement of a contract dispute and
litigation) and (iii) a net gain of $6.8 million on sale of facilities
(including $7.1 million gain on sale of the Chico hospitals). The Company
expects to record additional charges of $2.7 million under the Executive
Agreement in 1999.
The Company recorded income tax expense of $693,000 on pre-tax loss of
$1.9 million in 1998 and income tax expense of $1.8 million on pre-tax income of
$656,000 in 1997. Income tax expense in 1998 differed from the U.S. statutory
rate due to goodwill and non-deductible costs related to the Shareholder
Litigation. These increases in the income tax provision were partially offset
by the decrease in the valuation allowance. Income tax expense in 1997 differed
from the U.S. statutory rate due to goodwill.
The Company recorded a loss from discontinued operations of $2.4
million (net of tax benefit of $1.7 million), or $0.04 per diluted share, in
1998 to reflect the settlement of the 1995 litigation concerning alleged
violations of certain Medicare rules. The claims related substantially to the LA
Metro psychiatric facilities, which have been reported as discontinued
operations since September 1996.
Net loss for the year ended December 31, 1998 was $6.2 million, or
$0.11 per diluted share, compared to net loss of $6.4 million, or $0.12 per
diluted share, for the same period of 1997. Weighted average common and common
equivalent shares outstanding increased from 54.9 million in 1997 to 55.1
million in 1998 due to the 1998 exercise of stock options and warrants.
Aggregate non-recurring gains (charges) for the years ended December 31, 1998
and December 31, 1997 were comprised of the following items ($ in 000's, except
per share data):
26
<PAGE> 27
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1998 1997
------------------------------------- ----------------------------------------
PRE-TAX AFTER TAX EPS PRE-TAX AFTER TAX EPS
------- --------- --- ------- --------- ---
<S> <C> <C> <C> <C> <C> <C>
Impairment charges
(Item 8 - Note 2) $ (1,417) $ (836) $ (0.02) $ (7,782) $ (4,591) $ (0.09)
Unusual items
(Item 8 - Note 2) 6,637 4,008 0.07 6,531 3,853 0.07
Discontinued operations
(Item 8 - Note 4) -- (2,424) (0.04) -- (5,243) (0.10)
Extraordinary loss
(Item 8 - Note 8) -- (1,175) (0.02) -- --
-------- -------- ------- -------- -------- -------
Total impact of
non-recurring items $ 5,220 $ 427 $ (0.01) $ (1,251) $ (5,981) $ (0.12)
======== ======== ======= ======== ======== =======
</TABLE>
YEAR ENDED DECEMBER 31, 1997
COMPARED WITH YEAR ENDED DECEMBER 31, 1996
The comparison of operating results for 1997 to 1996 is difficult given
the numerous acquisitions, divestitures and closures by the Company in both
years. Furthermore, seven of the Company's ten Core Facilities were acquired
either in May 1996 (three facilities) or August 1996 (four facilities).
Accordingly, an analysis of Core and Non Core results as presented above is not
appropriate for the following discussion.
Net revenue for the year ended December 31, 1997 was $659.2 million, an
increase of $166.1 million, or 33.7%, from $493.1 million for the same period of
1996. The $166.1 million increase was attributable to an increase of $137.6
million contributed by hospitals acquired, net of hospitals divested or closed
in 1996, and an increase of $28.5 million from "same hospitals." The $28.5
million increase in "same hospitals" was primarily attributable to incremental
contribution by a joint venture formed in May 1997 involving two hospitals
located in the LA Metro area and additional services offered at certain
hospitals. The increase for the year was partially offset by a $4.8 million
charge to net revenue in the fourth quarter to revise estimates of amounts due
to the Company with respect to Medicare/Medicaid receivables, a majority of
which relates to prior years, and a decline in reimbursement rates and other
charges totaling $2.4 million attributable to the 1997 Budget Act and other
recently announced initiatives by the Federal government with respect to
reimbursement practices and policies. The increase was also offset by a decline
in reimbursement at hospitals located primarily in Tennessee and the closure of
under performing operating units.
The Company's acute care volumes experienced a 19.3% increase in
inpatient admissions from 58,693 in 1996 to 69,997 in 1997. Patient days
increased 18.3% from 277,553 in 1996 to 328,331 in 1997. Outpatient visits
(including home health) increased 21.8% from 1,256,124 in 1996 to 1,529,736 in
1997. Admissions in "same hospitals" decreased 2.6% from 37,669 in 1996 to
36,683 in 1997, primarily as a result of management's decision to close under
performing operating units. Outpatient visits in "same hospitals" decreased 3.5%
from 864,137 in 1996 to 834,264 in 1997, primarily as a result of a 6.5%
decrease in home health visits.
Expressed as a percentage of net revenue, operating expenses (salaries
and benefits, other operating expenses and provision for bad debts) decreased
from 100.7% in 1996 to 89.1% in 1997 as operating margin increased from (0.7)%
to 10.9%. General factors contributing to the improvement in operating margin
percentage include (i) management's efforts to control costs, including a
corporate reorganization completed in May 1997 to reduce corporate overhead
costs, (ii) efficiency and productivity gains resulting from the implementation
of improved operating standards and benchmarks, (iii) divestiture or closure of
under performing facilities and (iv) negotiation of new contracts under more
favorable terms that resulted in lower operating costs. Such increase in
operating margin was further due to the write off
27
<PAGE> 28
of working capital assets in 1996 related to the hospitals exchanged in May 1996
and a hospital closed in March 1996.
Interest expense increased $16.4 million from $31.0 million in 1996 to
$47.4 million in 1997, primarily due to (i) an increase in outstanding
indebtedness from the issuance of $325.0 million 10% Senior Subordinated Notes
and additional borrowings under the $400.0 million revolving credit facility
issued in August 1996 in conjunction with the Merger to finance acquisitions and
to fund certain lawsuit settlement costs, Champion merger costs, working capital
requirements and capital expenditures, (ii) an increase in interest rate on the
revolving credit facility during 1997, net of (iii) the redemption in August
1996 of $75.0 million of senior subordinated notes. Approximately $2.7 million
of interest expense incurred in 1997, which related to borrowings to finance the
acquisition of PHC Regional, was charged to the loss contract accrual previously
established at December 31, 1996. Accordingly, such amount was not reflected as
interest expense in the 1997 Consolidated Statement of Operations.
Depreciation and amortization expense increased to $30.2 million in
1997 from $23.7 million for the same period of 1996. The $6.5 million increase
consisted of $9.1 million primarily attributable to the Merger and other
facilities acquired, net of divested facilities, since May 1996, offset by a
decrease of $2.6 million at the acute care LA Metro hospitals held for sale as a
result of recording these facilities at their fair value as of September 30,
1996 in accordance with Statement of Financial Accounting Standards ("SFAS") No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of."
Loss from operations of the discontinued psychiatric hospitals was $1.1
million in 1997, as compared to $13.6 million (excluding a charge of $19.9
million for settlement costs related to a lawsuit settled in March 1996) in
1996. The significant loss recorded in 1996 as compared to 1997 was primarily
attributable to additional provision for bad debts on uncollectible accounts
receivable. The loss recorded in 1997 was significantly reduced as a result of
management's decision to close an under performing facility and consolidate
services of certain other facilities. In accordance with Accounting Principles
Board Opinion No. 30, the 1997 operating loss was charged to the disposal loss
accrual previously established in September 1996. Accordingly, such amount was
not reflected in the 1997 Consolidated Statement of Operations. During 1997, the
Company recorded an additional after-tax disposal loss of $5.2 million (net of
tax benefits of $3.7 million) on these facilities, consisting of an impairment
charge of $1.9 million to reduce psychiatric hospital assets to their estimated
net realizable value based upon the most recent offers from third party
purchasers and a charge of $3.3 million relating to certain outstanding
litigation matters.
During 1997, the Company recorded income tax expense of $1.8 million on
pre-tax income of $656,000 as a result of nondeductible goodwill amortization
expense. During 1996, the Company recognized a reduction in income tax benefits
of $50.0 million, $17.7 million of which was applied to continuing operations.
The remaining $32.3 million was applied to reduce the tax benefits of the losses
from discontinued operations and the extraordinary loss.
Net loss for the year ended December 31, 1997 was $6.4 million, or
$0.12 per share, compared to a net loss of $233.2 million, or $5.95 per share,
for the same period of 1996. Weighted average shares outstanding increased 40.1%
from 39.2 million in 1996 to 54.9 million in 1997 from the issuance of 19.8
million shares in connection with the Merger and from the public offering of 5.2
million shares, both completed in August 1996. Aggregate non-recurring gains
(charges) for the years ended December 31, 1997 and 1996 were comprised of the
following items ($ in 000's, except per share amounts):
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<PAGE> 29
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1997 1996
-------------------------------------- ------------------------------------------
PRE-TAX AFTER TAX EPS PRE-TAX AFTER-TAX EPS
------- --------- --- ------- --------- ---
<S> <C> <C> <C> <C> <C> <C>
Impairment charges
(Item 8 - Note 2) $ (7,782) $ (4,591) $ (0.09) $ (72,322) $ (48,456) $ (1.23)
Merger costs
(Item 8 - Note 3) -- -- -- (40,804) (27,339) (0.70)
Unusual items
(Item 8 - Note 2) 6,531 3,853 0.07 (60,521) (40,549) (1.03)
Discontinued operations
(Item 8 - Note 4)(a) -- (5,243) (0.10) -- (70,995) (1.81)
Extraordinary loss
(Item 8 - Note 8)(a) -- -- -- -- (7,724) (0.20)
--------- --------- ------- --------- --------- -------
Total impact of
non-recurring items $ (1,251) $ (5,981) $ (0.12) $(173,647) $(195,063) $ (4.97)
========= ========= ======= ========= ========= =======
</TABLE>
- --------------------------------
(a) In 1996, no income tax benefits were recognized on the losses associated
with the discontinued operations and the extraordinary loss as a result of
recording a valuation allowance on deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company had net working capital of $22.5 million at December 31,
1998, a decrease of $14.9 million from $37.4 million at December 31, 1997. The
Company's long-term debt as a percentage of total capitalization was 93.9% at
December 31, 1998, compared to 92.1% at December 31, 1997. Factors contributing
to the changes in net working capital and long-term debt as a percentage of
total capitalization are discussed below.
Net cash used in operating activities for the year ended December 31,
1998 was $5.3 million, compared to net cash provided by operations of $4.0
million for the same period of 1997. The increase in cash used in operating
activities of $9.3 million resulted from (i) a reduction in income tax refunds
in 1998 as compared to 1997 and (ii) payments made in 1998 in connection with
the settlement of various litigation and disputes as discussed below, offset by
(iii) reductions in accounts receivable and other current assets. Excluding the
impact in 1997 of income tax refunds, cash generated from operating activities
increased by $14.5 million. Net cash used in investing activities was $50.3
million during 1998, as compared to net cash provided by investing activities of
$10.0 million during 1997. The $60.3 million increase was primarily attributable
to (i) net cash expenditures of $59.3 million to acquire DHHS during 1998 less
$38.2 million in net proceeds from the sale of facilities, as compared to $12.2
million in cash received from the sale of certain hospitals during 1997, (ii)
cash of $2.1 million received in 1998 from the liquidation of marketable
securities as compared to $20.0 million received during 1997 and (iii) an
increase in additions to property and equipment of $5.4 million. Net cash
provided by financing activities during 1998 was $39.4 million, compared to net
cash used in financing activities of $3.6 million during 1997. Such increase was
due to a net increase in borrowings, primarily to finance the purchase of DHHS
in 1998.
On March 30, 1998, the Company entered into an Amended and Restated
Credit Agreement, which was subsequently amended on June 15, 1998 ("the Amended
Credit Agreement"), to provide total commitments of $140.0 million under a
Revolving Credit Facility and $115.0 million in term loans (the "Term Loan
Facilities") consisting of a five-year $45.0 million Term Loan Facility
("Tranche A Facility") and a six-year $70.0 million Term Loan Facility ("Tranche
B Facility"). The Revolving Credit Facility is available for general corporate
purposes, including funding working capital needs, permitted acquisitions and
capital expenditures and the issuance of letters of credit up to $25.0 million.
It is subject to mandatory quarterly reductions of $9.5 million, commencing on
March 31, 2001, and a limit of $50.0 million available for working capital
needs. The Term Loan Facilities replaced existing indebtedness of the Company
under its prior Credit Facility. The Tranche A Facility principal is payable in
quarterly
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<PAGE> 30
installments ranging from $600,000 to $2.5 million with a final balloon payment
of $22.5 million due on March 31, 2003. The Tranche B Facility principal is
payable in annual installments of $500,000 with a final balloon payment of $67.5
million due on March 31, 2004. The Company is further required to make mandatory
prepayments equal to 100% of (i) net cash proceeds from permitted asset sales,
(ii) debt issuances and (iii) equity issuances, subject to certain allowable
exclusions for debt and equity as described in the Amended Credit Agreement.
Such prepayments are generally to be applied ratably to the Revolving Credit
Facility, the Tranche A Facility and the Tranche B Facility, but in certain
circumstances may be applied solely as prepayments of the Revolving Credit
Facility. Prepayments under the Revolving Credit Facility do not result in a
mandatory reduction in borrowing capacity under such facility, but prepayments
under the Term Loan Facilities do result in a mandatory permanent reduction. The
Company paid $4.0 million of deferred financing costs in connection with the
Amended Credit Agreement. See Item 8 - Note 8 for interest rate terms, fees and
collateralized structure. As of March 31, 1999, there was $29.4 million
available for borrowing under the Facilities.
The terms of the Amended Credit Agreement include certain restrictive
covenants. Among other restrictions, the covenants include limitations on
investments, borrowings, liens, change of control, acquisitions and dispositions
of assets and transactions with affiliates, and require maintenance of certain
ratios regarding fixed charge coverage, leverage, minimum EBITDA, net worth and
maintenance of the commercial paper financing program. The Company was in
compliance with all loan covenants to which it was subject as of December 31,
1998. The Company's continued compliance with its loan covenants is predicated
on its ability to maintain certain levels of profitability and on its ability to
sell certain non-core assets. If the Company is unable to meet these objectives,
it will be required to seek waivers from its lenders in the future. However,
there can be no assurance that the Company will be able to obtain such waivers,
if needed.
In connection with the sale of the LA Metro and Chico hospitals and
certain other closed facilities, the Company reduced its long-term debt by $33.6
million, $30.4 million from payments on the Revolving Credit Facility and $3.2
million from debt assumed by a purchaser of the hospitals. The Company further
reduced its borrowings under the commercial paper financing program by $12.4
million with the net proceeds from the divestitures, reduced its outstanding
letters of credit by $1.7 million and eliminated approximately $2.0 million in
annual facility lease commitments.
On August 31, 1998, the Company reached a settlement with PacifiCare of
Utah ("PacifiCare") regarding a dispute over administration of a 1996 capitation
agreement. The Company paid PacifiCare $5.5 million as a final settlement. In
September 1998, the Company also entered into a settlement of litigation
concerning alleged violations of certain Medicare rules. In return for the
dismissal of related claims and the release of the Company from further civil or
administrative monetary actions, the Company agreed to pay the Government $7.3
million, $4.0 million of which was paid on the execution of the settlement
agreement on September 30, 1998 and $1.0 million of which was paid in March
1999. The balance of the settlement amount is to be paid before September 30,
1999. During 1998, the Company also settled various other disputes and
litigation from which the Company received $1.8 million related to an
unconsummated hospital acquisition by Champion prior to the Merger and paid $1.1
million to resolve a DHHS contract dispute and $995,000 to settle a suit
involving certain insurance carriers.
On November 25, 1998, the Company and its senior executives, Mr.
Miller, Mr. VanDevender and Mr. Patterson executed the Executive Agreement
superseding their existing employment contracts and certain other stock option
and retirement agreements with the Company. The Executive Agreement was amended
in certain respects, including the elimination of certain additional payments,
in connection with the proposed global settlement of the Shareholder Litigation.
Under the Executive Agreement, as amended, the senior executives agreed to
remain in their current management positions with the Company at least until
June 30, 1999. Mr. Miller is the only senior executive who has currently
expressed an intent to leave the Company immediately after June 30, 1999. Mr.
VanDevender will be designated as interim CEO effective July 1, 1999.
Pursuant to the Executive Agreement, the Company paid the senior
executives $501,000 during 1998, which represented amounts due such individuals
for vested benefits under the supplemental executive retirement plan ("SERP"),
and the senior
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<PAGE> 31
executives released the Company from any obligations under the SERP or any
similar retirement plan. The Executive Agreement also commits the Company to pay
the senior executives $4.6 million upon the earlier to occur of certain
specified events, including the filing of the Company's 1998 Form 10-K, but no
later than April 30, 1999. See Item 8 - Note 15 for more discussion on the
effect of the agreement on the Company's financial condition and results of
operations.
On March 24, 1999, the Company executed a proposed global settlement
comprised of three separate but interrelated agreements that will resolve
substantially all outstanding class action and derivative lawsuits related to
the Shareholder Litigation. See Part I. Item 3 - "Legal Proceedings." The
settlement agreements are subject to final approval by the Court. Under the
proposed settlement, among other conditions set forth involving certain other
parties to the suits, the Company will contribute to a settlement fund $14.0
million in cash and approximately 1.5 million shares of common stock and
reimburse certain parties' legal fees. The Company expects to fund all or nearly
all of the cash portion of its contribution with proceeds from certain insurance
policies. The proposed agreement will also relieve the Company of approximately
$12.0 million of existing and future obligations under certain employment and
consulting agreements and the supplemental executive retirement plan. In
connection with a $7.2 million note payable to the Majority Shareholder wherein
the Company is presently required to pay interest only on the outstanding
balance, the proposed agreement provides that beginning with the annual payment
due in August 2000, the Company will recommence the payment of principal in
accordance with the stated terms of the note. Additionally, the Company will use
its reasonable best efforts to repay outstanding amounts in arrears. The Company
will also prepay the outstanding balance in certain circumstances. Lastly, the
Company will pay $1.0 million in cash and 1.0 million newly issued shares of the
Company's common stock in connection with the termination of a management and
strategic advisory services agreement with the Former Chairman. The Company does
not anticipate the settlement of the Shareholder Litigation to have a material
adverse impact on the Company's liquidity. There can be no assurance that the
Court will approve the settlement agreements or that the conditions contained in
any such agreements will be satisfactorily fulfilled. See Item 8 - Note 18 for
more complete discussion of the terms of the proposed settlement.
The Company has an agreement with an unaffiliated trust (the "Trust")
to provide up to $65.0 million in accounts receivable financing. Under such
arrangement, the Company sells its eligible accounts receivable (the "Eligible
Receivables") on a nonrecourse basis to the Trust. A special purpose subsidiary
of a major lending institution provides up to $65.0 million in commercial paper
financing to the Trust to finance the purchase of the Eligible Receivables from
the Company's subsidiary, with the Eligible Receivables serving as collateral.
The commercial paper notes have a term of not more than 120 days. Eligible
Receivables sold to the Trust at December 31, 1998 and 1997 were $32.6 million
and $38.3 million, respectively. As of March 31, 1999, approximately $18.2
million remained available for borrowings under the commercial paper financing
program. The commercial paper financing program has been extended through
October 31, 1999, and the Company expects the program to be renewed beyond 1999.
The Company has implemented a seven-phase project plan to address the
Year 2000 issue. See "Year 2000 Compliance" discussion to follow. The Company
has incurred approximately $250,000 of expenses to date in connection with its
Year 2000 compliance program. Based on currently available information, the
Company estimates its Year 2000 total costs to range from $8.0 million to $10.0
million. The Company currently does not expect the Year 2000 costs to have a
material adverse effect on its operations, liquidity, or financial condition.
However, many factors are not fully known at this time and as additional
information becomes available, any resulting change in the Company's initial
assessment, if significant, could have a material impact on the Company's
estimate.
The Company intends to dispose of certain non-core assets and use the
net proceeds of such dispositions to reduce the Company's indebtedness.
Additionally, the Company has retained a financial advisor and is considering
various financing alternatives including recapitalization of the Company.
Realization of these objectives will allow the Company to further concentrate
its efforts on core markets, as well as create additional debt capacity to
expand and further integrate its presence in existing markets and to pursue
acquisitions in markets compatible with the Company's overall acquisition
strategy. The Company will, from time to time, consider divesting certain core
assets if such disposition meets the Company's strategic objectives. The Company
is currently evaluating a number of inquiries concerning its hospitals from
qualified buyers. However, there can be no assurance that the Company will
consummate any or all of these transactions, or that the net proceeds of any
transactions consummated will result in a significant reduction of the Company's
indebtedness.
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<PAGE> 32
The Company anticipates that internally generated cash flows from
earnings, existing cash balances, borrowings under the Facilities, proceeds from
the sale of facilities, proceeds from the sale of hospital accounts receivable
under the Company's commercial paper financing program, income tax refunds and
permitted equipment leasing arrangements will be sufficient to fund future
capital expenditures and working capital requirements through 1999. There can be
no assurance of the Company's that the above sources will sufficiently fund the
Company's liquidity needs or that future developments in the hospital industry
or general economic trends will not adversely affect the Company's operations or
its liquidity.
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
The Company's interest expense is sensitive to changes in the general
level of U.S. interest rates. The Company does not hold or issue derivative
instruments for trading purposes and is not a party to any instruments with
leverage features. To mitigate the impact of fluctuations in U.S. interest
rates, the Company generally maintains 60% to 70% of its debt as fixed rate in
nature by borrowing on a long-term basis.
The table below presents information about the Company's
market-sensitive financial instruments which included primarily long-term debt
and borrowings. The table presents principal cash flows ($ in 000's) and related
weighted-average interest rates by expected maturity dates. The fair values of
long-term debt were determined based on quoted market prices at December 31,
1998 for the same or similar debt issues.
<TABLE>
<CAPTION>
MATURITY DATE, YEAR ENDING DECEMBER 31,
----------------------------------------------------------------------------------------------
THERE- FAIR
1999 2000 2001 2002 2003 AFTER TOTAL VALUE
---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
VARIABLE RATE DEBT -
Revolving Credit Facility
And Term Loan
Facilities $ 3,500 $ 4,900 $ 43,900 $ 46,400 $ 30,282 $ 67,500 $ 196,482 $ 196,482
Average interest rates 8.34% 8.33% 8.88% 8.84% 8.47% 8.54%
FIXED RATE DEBT -
10% Senior Subordinated
Notes -- -- -- -- -- 325,000 325,000 289,250
Average interest rates -- -- -- -- -- 10.00%
Other fixed rate debt(a) -- -- -- -- -- 7,185 7,185 6,283
Average interest rates -- -- -- -- -- 6.51%
</TABLE>
- --------------------------------------------------------------------------------
(a) See Part I. Item 3 - "Legal Proceedings" and Item 8 - Note 18 for
Shareholder Litigation settlement
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
Year 2000.
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 issues, 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 the formation of a Year 2000 team to define roles and
responsibilities and to establish the
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<PAGE> 33
project timing and deliverables. Phase two entailed a comprehensive 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 and the corporate office were required
to identify all principal suppliers and to estimate costs and timing for all
non-compliant systems and equipment. Phase two has been 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
four includes developing test plans and compliance criteria for all patient care
critical and operations critical items. Phases three and four are substantially
complete. The fifth phase, which includes testing and identifying non-compliant
items, is scheduled for completion in the second quarter of fiscal year 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 1999. Phase seven focuses on identifying
and correcting any unpredictable malfunction in the systems and equipment. In
this phase, which will be conducted in the third and fourth quarters 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.
The Company continues to assess and revise the scope of the Year 2000
plan and has incurred approximately $250,000 in expenses to date in connection
with its Year 2000 compliance program. Based on the information currently
available to it, the Company estimates that total cost to be incurred, including
costs incurred through December 31, 1998, for addressing all Year 2000 issues
will range from $8.0 million to $10.0 million. This estimate includes
approximately $6.0 million to $8.0 million of costs associated with capital
projects that would have been undertaken notwithstanding the Year 2000
compliance program, but the timing of which was accelerated by one to three
years in light of the program. The Company's estimate of the costs is likely to
change as the Company receives more complete information. The total cost of the
Company's Year 2000 compliance program is presently not expected to have a
material adverse effect on its operations, liquidity or financial condition. In
many cases, vendors have remediated their products at little or no cost.
However, many factors, such as the number of pieces of equipment and systems
with Year 2000 issues, the availability and cost of various solutions to any
Year 2000 issues and the cost of replacing equipment or systems that cannot be
brought into compliance or with respect to which it is more cost-effective in
the long run to replace, are not fully known at this time and could have an
aggregate material impact on the Company's estimate. The Company will receive
additional information concerning these and other matters as it completes each
phase of its Year 2000 compliance program.
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
is requesting assurance from these parties that their services and products will
not be interrupted or malfunction due to the Year 2000 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 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.
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<PAGE> 34
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 resources 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.
OTHER LITIGATION
During 1998, the Company settled certain litigation previously reported
in its 1997 Form 10-K concerning alleged violations of certain Medicare rules
and claims involving certain insurance carriers (See Item 8 - Notes 4 and 15).
The Company is subject to claims and legal actions by patients and
others in the ordinary course of business. The Company believes that all such
claims and actions are either adequately covered by insurance or will not have a
material adverse effect on the Company's financial condition, results of
operations or liquidity.
DISPOSITION OF THE PSYCHIATRIC AND OTHER LA METRO HOSPITALS
On September 30, 1998, the Company completed its exit of the
psychiatric hospital business and the metropolitan Los Angeles market with the
sale of the eight LA Metro hospitals. The purchase price of approximately $33.7
million, which included the purchase of net working capital, was paid by a
combination of $16.5 million in cash, the assumption of approximately $3.2
million in debt, and issuance by the purchaser of $9.9 million of secured
promissory notes and an additional secured second lien subordinated note in the
principal amount of $3.8 million. 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 Revolving Credit Facility, a $9.3 million reduction in amounts
outstanding under the Company's commercial paper 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.
VALUATION ALLOWANCE ON DEFERRED TAX ASSETS
For financial accounting purposes, a valuation allowance of $53.3
million had been recognized at December 31, 1996 to offset the deferred tax
assets related to the Company's net operating losses, bad debt allowances and
other accrued expenses that resulted from the significant write-downs of assets
during that year. Approximately $3.0 million of the valuation allowance resulted
from the Merger with the remaining valuation allowance recognized as a reduction
in income tax benefits in 1996. No change in the valuation allowance was
recorded in 1997. During 1998, the Company recorded a reduction in the valuation
allowance of $5.1 million based on revisions to its tax planning strategies.
Such revisions
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<PAGE> 35
consider an increase in the utilization of net operating loss carryforwards due
to estimated taxable gains generated from the disposition of core assets, that
are strategically appropriate and consistent with the Company's overall
long-term business objectives.
In assessing the need for an amount of the valuation allowance, the
Company has relied solely upon future income generated by tax planning
strategies, including the divestiture of four core and all non-core hospital
assets. The Company's tax planning strategies assume proceeds from divestitures
based on present market conditions. In the event the Company believes these
transactions will be consummated, a substantial portion of the Company's
deferred tax assets will be realized. If the Company determines in the future
that such tax planning strategies will not be completed or if future income
generated by tax planning strategies does not prove to be sufficient to realize
the benefit previously recorded due to changes in market conditions, an
adjustment to the valuation allowance would be charged to income in the period
such determination was made.
The Company has significant net operating losses to offset future
taxable income. However, U.S. Federal income tax law limits a corporation's
ability to utilize net operating losses if it experiences an ownership change of
greater than 50% over a three-year period. In the event of such a future
ownership change, the Company's net operating loss carryforward would be subject
to an annual limitation. This may require an adjustment to the valuation
allowance that would be charged to income in the period such an ownership change
occurred.
As discussed in Part I. Item 3 - "Legal Proceedings," the Company has
reached a proposed global settlement with respect to the Shareholder Litigation.
The final implementation of the proposed global settlement may result, under
certain conditions, in a change of ownership that could create limitations for
the Company under Section 382 of the Internal Revenue Code. This in turn may
require the Company to record an additional valuation allowance against its
deferred tax assets.
REGULATORY MATTERS
Healthcare reform legislation has been proposed at both Federal and
state levels. In August 1997, the President signed into law the 1997 Budget Act,
which projects to produce a net savings of $115.0 billion for Medicare and $13.0
billion for Medicaid over five years. The changes in Medicare reimbursement
mandated by the 1997 Budget Act include, among others, (i) no increases in the
rates paid to acute care hospitals for inpatient care through September 30,
1998, (ii) a reduction in capital reimbursement rate, (iii) a conversion of
payments for certain Medicare outpatient services from a cost-based approach,
subject to certain limits, to a prospective payment system and (iv) phase-in
reduction in reimbursement for disproportionate share and bad debt. While such
changes in the Medicare program will generally result in lower payments to the
Company, management expects to offset any material adverse financial impact of
such changes through further cost reduction efforts and other means. However,
management cannot predict the impact future reforms may have on its business,
nor can there be any assurance that the Company will be able to mitigate the
impact of any future reforms through additional cost reductions. Accordingly,
such reforms may have a material adverse effect on the Company's results of
operations, financial position or liquidity.
On March 9, 1998, the U.S. Securities and Exchange Commission
(the"SEC") entered a formal order authorizing a private investigation, In re
Paracelsus Healthcare Corp., FW-2067. Pursuant to the formal order, the staff of
the SEC's Fort Worth District Office is investigating the accounting and
financial reporting issues that were the subject of the internal inquiry
described in the Company's 1996 Form 10-K filed in April 1997. The Company is
cooperating with the staff of the SEC.
IMPACT OF INFLATION
The healthcare industry is labor intensive. Wages and other expenses
increase during periods of inflation and when shortages of qualified personnel
in the marketplace occur. The Company has, to date, offset increases in other
operating costs by increasing charges, expanding services and implementing cost
control measures to curb increases in operating costs. The Company's ability to
increase prices is limited by various Federal and state laws that establish
payment limitations for hospital services rendered to
35
<PAGE> 36
Medicare and Medicaid patients and by other factors. The Company's ability to
increase prices may also be affected by its need to remain competitive. There
can be no assurance that the Company will be able to continue to offset such
future cost increases.
RECENT PRONOUNCEMENTS
In March and in April 1998, the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants issued two
Statements of Position ("SOPs") that are effective for financial statements for
fiscal years beginning after December 15, 1998, which will apply to the Company
beginning with its fiscal year ended December 31, 1999. SOP 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,"
provides guidance on the circumstances under which the costs of certain computer
software should be capitalized and/or expensed. SOP 98-5, "Reporting on the
Costs of Start-Up Activities," requires such costs to be expensed as incurred
instead of capitalized and amortized. The Company does not expect the adoption
of either of these SOPs to have a material effect on its future results of
operations.
In 1998, the Financial Accounting Standard Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which will
require companies to recognize all derivatives on the balance sheet at fair
value. SFAS No. 133 is effective for all companies for fiscal years beginning
after June 15, 1999. The Company expects SFAS No. 133 to have no impact on the
Company's financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Market Risks Associated with Financial
Instruments."
36
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Paracelsus Healthcare Corporation Consolidated Financial Statements:
Report of Independent Auditors................................................................. 38
Consolidated Balance Sheets - December 31, 1998 and 1997....................................... 39
Consolidated Statements of Operations - for the years ended December 31, 1998, 1997
and 1996.................................................................................... 41
Consolidated Statements of Stockholders' Equity - for the years ended December 31,
1998, 1997 and 1996........................................................................ 42
Consolidated Statements of Cash Flows - for the years ended December 31, 1998,
1997 and 1996............................................................................... 43
Notes to Consolidated Financial Statements..................................................... 45
</TABLE>
37
<PAGE> 38
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Paracelsus Healthcare Corporation
We have audited the accompanying consolidated balance sheets of Paracelsus
Healthcare Corporation as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the index at Item 14(a)(2).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Paracelsus
Healthcare Corporation at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Effective September 30, 1996, the Company adopted Statement of Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of."
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Houston, Texas
April 1, 1999
38
<PAGE> 39
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in 000's)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 11,944 $ 28,173
Restricted cash ...................................................... 1,029 6,457
Marketable securities (Note 6) ....................................... -- 2,157
Accounts receivable, net of allowance for doubtful
accounts: 1998- $40,551; 1997- $54,442 ........................... 67,332 70,675
Supplies ............................................................. 12,172 13,700
Deferred income taxes (Note 7) ....................................... 9,641 25,818
Refundable income taxes .............................................. 7,365 7,698
Prepaid expenses and other current assets ............................ 19,386 19,329
--------- ---------
Total current assets .............................................. 128,869 174,007
Property and equipment (Notes 3 and 9):
Land and improvements ................................................ 31,783 27,022
Buildings and improvements ........................................... 301,398 261,740
Equipment ............................................................ 186,998 141,030
Construction in progress ............................................. 11,729 9,000
--------- ---------
531,908 438,792
Less: Accumulated depreciation and amortization ........................... (168,009) (130,728)
--------- ---------
363,899 308,064
Long-term assets of discontinued operations, net (Note 3 and 4) ........... -- 3,842
Assets held for sale, net (Note 3 and 5) .................................. -- 15,182
Investment in Dakota Heartland Health System (Note 3) ..................... -- 48,499
Deferred income taxes (Note 7) ............................................ 43,096 25,027
Goodwill, net of accumulated amortization: 1998 - $10,637;
1997- $5,395 (Note 3) ................................................... 136,994 121,498
Other assets .............................................................. 43,244 38,705
--------- ---------
Total Assets .............................................................. $ 716,102 $ 734,824
========= =========
</TABLE>
39
<PAGE> 40
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in 000's)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 41,301 $ 46,722
Due to government third parties ................................. 5,950 8,409
Accrued liabilities:
Accrued salaries and benefits ............................. 15,896 22,424
Accrued interest .......................................... 13,670 13,559
Other ..................................................... 23,242 39,306
Current maturities of long-term debt ............................ 6,284 6,209
--------- ---------
Total current liabilities .................................... 106,343 136,629
Long-term debt (Note 8) .............................................. 533,048 491,914
Other long-term liabilities (Notes 2, 13, 15 and 18) ................. 42,370 64,278
Commitments and contingencies (Notes 9 and 15)
Stockholders' equity (Note 12):
Preferred stock, $.01 par value per share, 25,000,000 shares
authorized, none outstanding ................................. -- --
Common stock, no stated value, 150,000,000 shares
authorized, 55,118,000 shares outstanding in 1998 and
55,094,000 in 1997 .......................................... 222,977 224,475
Additional paid-in capital ...................................... 390 390
Other comprehensive income ...................................... -- 12
Accumulated deficit ............................................. (189,026) (182,874)
--------- ---------
Total stockholders' equity ................................... 34,341 42,003
--------- ---------
Total Liabilities and Stockholders' Equity ........................... $ 716,102 $ 734,824
========= =========
</TABLE>
See accompanying notes.
40
<PAGE> 41
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000's, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net revenue ..................................................... $ 664,058 $ 659,219 $ 493,106
Costs and expenses:
Salaries and benefits ......................................... 276,200 271,300 238,074
Other operating expenses ...................................... 265,735 269,653 220,387
Provision for bad debts ....................................... 42,659 46,606 38,321
Interest ...................................................... 51,859 47,372 31,034
Depreciation and amortization ................................. 38,330 30,179 23,727
Equity in earnings of Dakota Heartland Health System
(Note 3) .................................................... -- (9,794) (3,207)
Impairment charges (Note 2) ................................... 1,417 7,782 72,322
Merger costs (Note 3) ......................................... -- -- 40,804
Unusual items (Note 2) ........................................ (6,637) (6,531) 60,521
--------- --------- ---------
Total costs and expenses ........................................ 669,563 656,567 721,983
--------- --------- ---------
Income (loss) from continuing operations before gain on
on sale of facilities, minority interests, income
taxes and extraordinary loss ................................. (5,505) 2,652 (228,877)
Gain on sale of facilities ...................................... 6,825 -- --
Minority interests .............................................. (3,180) (1,996) (1,806)
--------- --------- ---------
Income (loss) from continuing operations before income
taxes and extraordinary loss ................................. (1,860) 656 (230,683)
Provision (benefit) for income taxes ............................ 693 1,812 (76,186)
--------- --------- ---------
Loss from continuing operations before
extraordinary loss ........................................... (2,553) (1,156) (154,497)
Discontinued operations (Note 4):
Loss from operations of discontinued psychiatric
hospitals, net .......................................... -- -- (33,545)
Loss on disposal of discontinued psychiatric
hospitals, net .......................................... (2,424) (5,243) (37,450)
--------- --------- ---------
Loss before extraordinary loss .................................. (4,977) (6,399) (225,492)
Extraordinary loss from early extinguishment of
debt, net (Note 8) ........................................... (1,175) -- (7,724)
--------- --------- ---------
Net loss ........................................................ $ (6,152) $ (6,399) $(233,216)
========= ========= =========
Net loss per share - basic and assuming dilution:
Continuing operations .................................... $ (0.05) $ (0.02) $ (3.94)
Discontinued operations .................................. (0.04) (0.10) (1.81)
Extraordinary loss ....................................... (0.02) -- (0.20)
--------- --------- ---------
Net loss per share .............................................. $ (0.11) $ (0.12) $ (5.95)
========= ========= =========
</TABLE>
See accompanying notes.
41
<PAGE> 42
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
($ and shares in 000's)
<TABLE>
<CAPTION>
OTHER RETAINED
COMMON STOCK ADDITIONAL COMPREHENSIVE EARNINGS
------------------------ PAID-IN INCOME (ACCUMULATED
SHARES AMOUNT CAPITAL (LOSS) DEFICIT) TOTAL
------ ------ ------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ............. 1 4,500 $ 390 $ 212 $ 81,619 $ 86,721
66,159.426-for-one stock split ........... 29,771 -- -- -- -- --
Acquisition of Champion .................. 19,762 158,449 -- -- -- 158,449
Sale of common stock ..................... 5,200 39,841 -- -- -- 39,841
Grant of value options (Note 12) ......... -- 21,642 -- -- -- 21,642
Exercise of stock subscription
rights ................................. 80 40 -- -- -- 40
Cash dividends to stockholder ............ -- -- -- -- (24,878) (24,878)
Change in unrealized gains on
marketable securities, net
of taxes (Note 6) ..................... -- -- -- (112) -- (112)
Net loss ................................. -- -- -- -- (233,216) (233,216)
--------- ---------- ---------
Comprehensive loss ....................... (112) (233,216) (233,328)
-------- --------- --------- --------- ---------- ---------
Balance at December 31, 1996 ............. 54,814 224,472 390 100 (176,475) 48,487
Exercise of stock options ................ 280 3 -- -- -- 3
Change in unrealized gains on
marketable securities, net of
taxes (Note 6) ........................ -- -- -- (88) -- (88)
Net loss ................................. -- -- -- -- (6,399) (6,399)
--------- ---------- ---------
Comprehensive loss ....................... (88) (6,399) (6,487)
-------- --------- --------- --------- ---------- ---------
Balance at December 31, 1997 ............. 55,094 224,475 390 12 (182,874) 42,003
Exercise of stock options ................ 17 61 -- -- -- 61
Exercise of warrants ..................... 7 7 -- -- -- 7
Forfeiture of value options
(Notes 12 and 15) ........................ -- (1,566) -- -- -- (1,566)
Change in unrealized gains on
marketable securities, net of
taxes (Note 6) ........................ -- -- -- (12) -- (12)
Net loss ................................. -- -- -- -- (6,152) (6,152)
--------- ---------- ---------
Comprehensive loss ....................... (12) (6,152) (6,164)
-------- --------- --------- --------- ---------- ---------
Balance at December 31, 1998 ............. 55,118 $ 222,977 $ 390 $ -- $ (189,026) $ 34,341
======== ========= ========= ========= ========== =========
</TABLE>
See accompanying notes.
42
<PAGE> 43
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000's)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................................... $ (6,152) $ (6,399) $ (233,216)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization .............................................. 38,330 30,179 23,727
Impairment charges ......................................................... 1,417 7,782 72,322
Unusual items .............................................................. (6,637) (6,531) 60,521
Disposal loss on discontinued operations ................................... 2,424 5,243 37,450
Non-cash merger expenses ................................................... -- -- 16,565
Gain on sale of facilities ................................................. (6,825) -- --
Deferred income taxes ...................................................... 609 (4,016) (50,955)
Extraordinary loss ......................................................... 1,175 -- 7,724
Minority interests ......................................................... 3,180 1,996 1,806
Equity in Dakota Heartland Health System, net of distributions ............ -- (36) 5,063
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable ................................................... 17,363 (5,988) 5,464
Federal income tax refunds, net ...................................... 333 24,077 --
Supplies, prepaid expenses and other current assets ................... 1,928 (10,203) (15,246)
Accounts payable and other accrued liabilities ........................ (52,402) (32,109) 46,638
--------- --------- ----------
Net cash provided by (used in) operating activities .......................... (5,257) 3,995 (22,137)
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities .................................... -- -- (4,332)
Sale of marketable securities ................................................ 2,145 19,967 4,513
Maturities of held-to-maturity securities .................................... -- -- 150
Acquisitions of facilities, net of cash acquired ............................. (59,278) -- (117,835)
Proceeds from disposal of facilities ......................................... 38,219 12,201 --
Additions to property and equipment, net ..................................... (21,965) (16,524) (14,513)
Increase (decrease) in minority interests .................................... (4,355) 291 (2,389)
Increase in other assets ..................................................... (5,106) (5,945) (6,467)
--------- --------- ----------
Net cash provided by (used in) investing activities .......................... (50,340) 9,990 (140,873)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Credit Facilities ........................................... 84,528 38,000 446,500
Repayments under Credit Facilities ........................................... (35,485) (34,593) (342,000)
Proceeds from long-term borrowings ........................................... -- -- 336,038
Repayments of debt ........................................................... (5,759) (5,388) (266,598)
Deferred financing costs ..................................................... (3,984) (1,602) (12,540)
Sale of common stock, net .................................................... 68 -- 39,841
Dividends to shareholder ..................................................... -- -- (24,878)
--------- --------- ----------
Net cash provided by (used in) financing activities .......................... 39,368 (3,583) 176,363
--------- --------- ----------
Increase(decrease) in cash and cash equivalents .............................. (16,229) 10,402 13,353
Cash and cash equivalents at beginning of year ............................... 28,173 17,771 4,418
--------- --------- ----------
Cash and cash equivalents at end of year ..................................... $ 11,944 $ 28,173 $ 17,771
========= ========= ==========
</TABLE>
See accompanying notes.
43
<PAGE> 44
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000's)
Supplemental schedule of noncash investing and financing activities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Details of businesses acquired in purchase transactions:
Fair value of assets acquired ......................... $ 71,217 $ -- $ 502,426
Liabilities assumed ................................... (11,939) -- (220,624)
Stock and stock options issued ........................ -- -- (163,967)
--------- --------- ---------
Cash paid for acquisitions ................................ $ 59,278 $ -- $ 117,835
========= ========= =========
Notes receivable from sale of hospitals ................... $ 13,698 $ -- $ --
========= ========= =========
Debt assumed by purchaser of hospitals .................... $ 3,239 $ -- $ --
========= ========= =========
Capital lease obligation .................................. $ 1,653 $ 915 $ 230
========= ========= =========
</TABLE>
See accompanying notes.
44
<PAGE> 45
PARACELSUS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
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. Prior to
August 16, 1996, the Company was wholly owned by Park-Hospital GmbH (the
"Majority Shareholder"), a German Corporation wholly owned by Dr. Manfred G.
Krukemeyer, the Company's former Chairman of the Board of Directors, (the
"Former Chairman"). On August 16, 1996, the Company acquired Champion Healthcare
Corporation ("Champion") (the "Merger") and completed an initial public equity
offering. The results of Champion have been included in the operations of the
Company since August 16, 1996. As of December 31, 1998, the Company operated 16
hospitals with 1,916 licensed beds in nine states. The Company also operates
four skilled nursing facilities with 232 licensed beds.
BASIS OF PRESENTATION - Certain reclassifications to the prior years'
financial statements have been made to conform with current year presentation.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly-owned or majority owned
subsidiaries and partnerships. All significant intercompany accounts and
transactions have been eliminated in consolidation. Investments in affiliates,
of which the Company owns more than 20% but not in excess of 50%, are recorded
on the equity method. Minority interests represent income allocated to the
minority partners' investment.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS - The Company considers highly liquid investments with
original maturities of three months or less to be cash equivalents.
RESTRICTED CASH - The Company had restricted cash of $1.0 million and
$6.5 million at December 31, 1998 and 1997, respectively, for payments of fees
and interest related to the commercial paper financing program and for other
financial commitments (See Note 10).
MARKETABLE SECURITIES - Marketable securities, consisting of corporate
bonds, mortgage-backed bonds, government securities and equity securities, are
stated at fair value and classified as available-for-sale. Unrealized gains and
losses, net of tax, of available-for-sale securities are included in other
comprehensive income as a component of stockholders' equity until realized.
Available-for-sale securities that are available for use in current operations
are classified as current assets regardless of the securities' contractual
maturity dates (See Note 6).
SUPPLIES - Supplies, principally medical supplies, are stated at the
lower of cost (first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the land improvements (5-25 years), buildings and improvements
(5-40 years) and equipment (3-20 years). Leaseholds are amortized on a
straight-line basis over the lesser of the terms of the respective leases or
their estimated useful lives. Expenditures for renovations and other significant
improvements are capitalized; however, maintenance and repairs, which do not
improve or extend the useful lives of the respective assets are charged to
45
<PAGE> 46
operations as incurred. Depreciation expense was $27.7 million, $22.1 million
and $19.0 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
GOODWILL AND OTHER LONG-TERM ASSETS - Goodwill, representing costs in
excess of net assets acquired, is amortized on a straight-line basis over a
period of 20 to 35 years. Debt issuance costs are amortized on a straight-line
basis (which approximates the interest method) over the term of the related
debt. Amortization expense was $10.6 million, $8.1 million and $4.7 million for
the years ended December 31, 1998, 1997 and 1996, respectively. The Company
regularly reviews the carrying value of goodwill and other long-term assets in
relation to the operating performance and future undiscounted cash flows of the
underlying hospitals. The Company records to expense, on a current basis, any
diminution in values of goodwill and other long-term assets based on the
difference between the sum of the future discounted cash flows and net book
value.
NET REVENUE - Net revenue includes amounts estimated by management to
be reimbursable by Medicare under the Prospective Payment System and by Medicare
and Medicaid programs under the provisions of cost-reimbursement and other
payment formulas. Payments for services rendered to patients covered by such
programs are generally less than billed charges. Deductions from revenue are
made to reduce the charges to these patients to estimated receipts based on each
program's principles of payment/reimbursement. Final settlements under these
programs are subject to administrative review and audit by third parties.
Approximately 53.6%, 56.9% and 58.4% of gross patient revenue for the years
ended December 31, 1998, 1997 and 1996, respectively, related to services
rendered to patients covered by Medicare and Medicaid programs.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing (See Note 15). Compliance with such laws and regulations can be
subject to future government review and interpretation as well as significant
regulatory action including fines, penalties, and exclusion from the Medicare
and Medicaid programs.
In the ordinary course of business, the Company renders services free
of charge to patients who are financially unable to pay for hospital care. The
value of these services rendered is not material to the Company's consolidated
results of operations.
INCOME TAXES - The Company records its income taxes under the liability
method. Under this method, deferred income tax assets and liabilities are
recognized for the tax consequences of temporary differences by applying enacted
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities.
46
<PAGE> 47
NET INCOME (LOSS) PER SHARE - The following table (in 000's except per
share data) sets forth the computation of basic and diluted income (loss) per
share from continuing operations as required by Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share."
<TABLE>
<CAPTION>
1998 1997 1996
---- ----- ----
<S> <C> <C> <C>
Numerator (a):
Loss from continuing operations
before extraordinary loss ........................ $ (2,553) $ (1,156) $ (154,497)
Loss on discontinued operations .................... (2,424) (5,243) (70,995)
Extraordinary charge ............................... (1,175) -- (7,724)
---------- ---------- ----------
Net income (loss) .................................. $ (6,152) $ (6,399) $ (233,216)
========== ========== ==========
Denominator:
Weighted average shares used for basic
earnings per share .............................. 55,108 54,946 39,213
Effect of dilutive securities:
Employee stock options ........................... -- -- --
---------- ---------- ----------
Dilutive potential common shares ................... -- -- --
---------- ---------- ----------
Shares used for diluted earnings per share ........... 55,108 54,946 39,213
========== ========== ==========
Loss per share - basic and assuming dilution:
Loss from continuing operations
before extraordinary loss ........................ $ (0.05) $ (0.02) $ (3.94)
Loss on discontinued operations .................... (0.04) (0.10) (1.81)
Extraordinary charge ............................... (0.02) -- (0.20)
---------- ---------- ----------
Net loss ........................................... $ (0.11) $ (0.12) $ (5.95)
========== ========== ==========
</TABLE>
- -------------------------------------------------------------------------------
(a) Amount is used for both basic and diluted earnings per share computations
since there is no earnings effect related to dilutive securities.
Weighted average number of common shares outstanding for all periods
presented has been adjusted to reflect the 66,159.426-for-one stock split in
conjunction with the Merger. Options to purchase 4,833,469 shares of the
Company's common stock at a weighted average exercise price of $7.45 per share
and warrants to purchase 414,906 shares at a weighted average exercise price of
$9.00 per share were outstanding during the year ended December 31, 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.
EMPLOYEE STOCK OPTIONS - The Company has elected to continue following
the existing accounting rules under Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees" in accounting for its
employee stock options. See Note 12 for certain pro forma disclosures required
under SFAS No. 123, "Accounting for Stock Issued to Employees."
COMPREHENSIVE INCOME - The Company has adopted for its fiscal year
ended December 31, 1998, SFAS No. 130, "Reporting Comprehensive Income" which
establishes standards for reporting and display of comprehensive income and its
components. Comprehensive income is defined as the change in net assets of a
business enterprise during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity during a
period except those from investments by owners and distributions to owners. All
prior-period financial statements have been restated to reflect the adoption of
this accounting standard.
NOTE 2. IMPAIRMENT CHARGES AND UNUSUAL ITEMS
UNUSUAL ITEMS - During 1998, the Company recorded unusual items of $6.6
million ($4.0 million after-tax) consisting primarily of (i) a gain of $7.5
million resulting from the settlement with PacifiCare of Utah ("PacifiCare")
regarding a dispute over administration of a 1996 capitation agreement offset by
(ii) a
47
<PAGE> 48
net charge of $863,000 resulting from the execution of a senior executive
agreement (the "Executive Agreement"), the restructuring of certain home health
operations, severances and the settlement of a contract dispute and litigation.
During 1997, the Company recorded unusual items totaling $6.5 million
($3.9 million after-tax), consisting of (i) a reduction of $15.5 million in the
loss contract accrued at PHC Regional Hospital and Medical Center ("PHC
Regional") based upon the most recent available operating information associated
with the 1996 capitation agreement, offset by charges of (ii) $3.5 million
relating to the closure of PHC Regional in June 1997, (iii) $3.0 million for
settlement costs associated with a lawsuit and (iv) $2.5 million for a corporate
reorganization completed in May 1997. Such charges consisted primarily of
employee severance and related costs, and to a lesser extent, certain other
contract termination costs. The $15.5 million reduction in the loss contract and
$3.0 million charge for settlement costs were recorded in the fourth quarter of
1997.
During 1996, the Company recorded unusual charges of $60.5 million
($40.5 million after-tax), consisting of $38.1 million for a loss contract at
PHC Regional and $22.4 million for expenses related to the Special Committee's
investigation and other litigation matters. The loss contract charge was based
on a study conducted by the Company with the assistance of independent third
party consultants, which projected future healthcare and maintenance costs under
the then capitation agreement to exceed future premiums. The Special Committee
was appointed by the Board of Directors to supervise and direct the conduct of
an inquiry by outside legal counsel regarding, among other things, the Company's
accounting and financial reporting practices and procedures for the periods
prior to the quarter ended September 30, 1996.
IMPAIRMENT CHARGES - During the fourth quarter of 1998, the Company
recorded an impairment charge of $1.4 million ($836,000 after-tax) on two of its
facilities in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed of," to reduce the book
value of these facilities to their estimated fair value. The charge occurred as
the result of the deterioration of the home health operations at these
facilities.
During the fourth quarter of 1997, the Company recorded an impairment
charge of $7.8 million ($4.6 million after-tax) on certain of its Los Angeles
metropolitan hospitals ("LA Metro") held for sale (See Notes 3 and 5) to reduce
the book value of those assets to their estimated net realizable value based
upon the latest available offers received from third party purchasers. During
1996, in conjunction with the Company's adoption of SFAS No. 121, the Company
recorded impairment charges of $72.3 million ($48.5 million after-tax) for the
write down of the long-lived assets of the following acute care hospitals: (i)
$52.5 million for PHC Regional (ii) $11.9 million for four of the acute care LA
Metro facilities held for sale and a related clinic and (iii) $7.9 million for
two other facilities and other estimated disposition costs, based on independent
third party appraisals. On September 30, 1998, the Company sold substantially
all the assets of the LA Metro hospitals.
NOTE 3. ACQUISITIONS, DISPOSITIONS AND CLOSURES OF HOSPITALS
Acquisitions
On July 1, 1998, the Company completed the purchase of Dakota Medical
Foundation's 50% partnership interest in a general partnership operating as DHHS
for $64.5 million, inclusive of working capital, thereby giving the Company 100%
ownership of DHHS. Prior to the purchase, the Company owned 50% of DHHS and
accounted for its investment under the equity method. The transaction was
accounted for as a step purchase acquisition. As the result of 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 audited consolidated
financial statements of DHHS as of and for the years ended December 31, 1997 and
1996 are included in the Company's 1997 Form 10-K. The Company's results of
operations for the year ended December 31, 1998, reflect minority interest of
$4.1 million for the six-month period prior to the change in control. The
accompanying financial statements reflect the allocation of purchase price based
on the results of a third-
48
<PAGE> 49
party appraisal. Based on this appraisal, the Company recorded goodwill of $24.7
million, which is being amortized on a straight-line basis over an estimated
useful life of 20 years.
On August 16, 1996, the Company acquired Champion through the merger of
a wholly-owned subsidiary of the Company with and into Champion. The Company
issued approximately 19.8 million shares of its common stock in exchange for all
of the issued and outstanding shares of Champion's common stock and preferred
stock, and assumed all of Champion's outstanding liabilities totaling
approximately $220.5 million. Additionally, outstanding options, subscription
rights, warrants and convertible notes to acquire Champion's common stock were
converted to similar rights to acquire approximately 1.9 million shares of the
Company's common stock. The total purchase price, including all costs associated
with the transaction and liabilities assumed, was approximately $394.4 million.
The Merger was accounted for using the purchase method of accounting. The
Company recorded goodwill of $103.5 million, which is being amortized on a
straight-line basis over an estimated useful life of 35 years.
The Company incurred approximately $56.2 million in Merger costs, of
which $40.8 million was expensed and $15.4 million was capitalized as part of
the purchase price of Champion. Merger costs of $40.8 million consisted
primarily of cash payments, provision for benefits and grants of stock options
to certain executives and employees of the Company in accordance with the Merger
terms (See Notes 12, 13 and 18) and corporate office consolidation costs.
Capitalized merger costs of $15.4 million consisted primarily of payments for
legal and other closing costs, cash payments and benefits provided to certain
former Champion executives.
On May 17, 1996, the Company acquired PHC Regional, including certain
current assets, for approximately $71.0 million in cash. The Company financed
the acquisition with amounts borrowed under the then existing credit facility.
In connection with the adoption of SFAS No. 121 and the significant operating
losses recognized at this facility since its acquisition date, the Company, in
conjunction with an independent appraisal, recorded an impairment charge of
$52.5 million ($35.2 million after-tax) on December 31, 1996 (See Note 2),
including initially recorded goodwill of $15.8 million. The results of
operations of PHC Regional have been included in the operations of the Company
since May 17, 1996. See "Dispositions and Closures" below.
On May 17, 1996, the Company acquired Pioneer Valley Hospital in West
Valley City, Utah; Davis Hospital and Medical Center in Layton, Utah and Santa
Rosa Medical Center in Milton, Florida from another healthcare company. In
exchange, the other party received the Company's Peninsula Medical Center in
Ormond Beach, Florida; Elmwood Medical Center in Jefferson, Louisiana; Halstead
Hospital in Halstead, Kansas and $38.5 million in cash, net of a working capital
differential. The Company also purchased the real property of Elmwood and
Halstead from a real estate investment trust ("REIT"), exchanged the Elmwood and
Halstead real property for the Pioneer real property and then sold the Pioneer
real property to the REIT. The acquisition of these facilities was accounted for
as a purchase transaction. The Company financed the acquisition from borrowings
under the then existing revolving line of credit. The Company recorded goodwill
of $15.2 million, which is being amortized on a straight-line basis over an
estimated useful life of 20 years. The results of the acquired hospitals have
been included in the operations of the Company since May 17, 1996. No material
gain or loss was recorded on the hospitals exchanged.
Dispositions and Closures
On December 29, 1998, the Company terminated the lease and closed
Cumberland River Hospital South, a 41-bed acute care facility in Gainesboro,
Tennessee. The closure had no significant impact to the Company's financial
position or results of operations.
On September 30, 1998, the Company completed the sale of substantially
all of the assets of the eight LA Metro hospitals (527 licensed beds and one
previously closed hospital). The purchase price of approximately $33.7 million,
which included the purchase of net working capital, was paid by a combination of
$16.5 million in cash, the assumption of approximately $3.2 million in debt, and
issuance by the purchaser of $9.9 million of secured promissory notes and an
additional secured second lien
49
<PAGE> 50
subordinated note in the principal amount of $3.8 million. 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 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. Such amount is reflected in "Gain on sale of facilities" in the
accompanying Consolidated Statements of Operations.
In June 1997, the Company closed PHC Regional as a result of continuing
losses under the capitation agreement with PacifiCare. In August 1997, the
Company executed an Amended and Restated Provider Agreement with PacifiCare,
retroactive to July 1, 1997, to (i) receive payment for services provided to
enrollees on a per diem basis instead of a capitation basis; (ii) revise the
contract term from 15 years to 5 years ending in June 2002; (iii) no longer
provide exclusive service to enrollees; and (iv) agree on a mechanism to resolve
disagreements regarding the administration of the capitation agreement prior to
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 year ended December 31, 1998 included a $7.5 million gain ($4.4
million, after-tax), which represents the excess of the loss contract accrual
over the settlement payment.
On May 15, 1997, a wholly owned subsidiary of the Company entered into
a joint venture with a group of physicians in which the subsidiary leased the
55-bed Orange County Hospital of Buena Park ("Buena Park") and the 85-bed
Bellwood General Hospital in Bellflower, California to a limited liability
company formed by the joint venture. The subsidiary owned a 51% interest in the
joint venture. Operating results of Buena Park subsequent to the formation of
the joint venture are included in income from continuing operations. This
facility, among other LA Metro hospitals, was sold in September 1998, as
discussed above.
On April 28, 1997, the Company completed the sale of two psychiatric
facilities, the 149-bed Lakeland Regional Hospital in Springfield, Missouri and
the 70-bed Crossroads Regional Hospital in Alexandria, Louisiana.
No gain or loss was recognized in connection with this divestiture.
On January 31, 1997, the Company closed the 104-bed Orange County
Community Hospital of Orange and consolidated services into Buena Park.
On March 15, 1996, the Company closed the 119-bed Desert Palms
Community Hospital in Palmdale, California and sold its remaining assets in July
1998. The sale had no significant impact on the Company's financial position or
results of operations.
Unaudited Pro Forma Financial Data
The following unaudited pro forma financial information for the years
ended December 31, 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 on 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 date
specified, nor are they necessarily indicative of results of operations that may
be expected in the future. Earnings before extraordinary charge, interest,
taxes, depreciation, amortization, unusual items, impairment charges and gain on
the sale of facilities ("Adjusted EBITDA") has been included because it is a
widely used measure of internally generated cash flow and is frequently used in
evaluating a company's performance. Adjusted EBITDA is not an acceptable measure
of liquidity, cash flow or operating income under generally accepted accounting
principles.
50
<PAGE> 51
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
-------------------------------------------------------------------------------
Chico
Hospital DHHS LA Metro
Pro Forma Pro Forma Pro Forma Company Pro
As Reported Adj.(a) Adj.(b) Adj.(c) Forma
------------ ---------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Net revenue $ 664,058 $ (18,873) $ -- $ (58,000) $ 587,185
============ ========= ============ ========= =========
Adjusted EBITDA $ 76,284 $ (3,826) $ 4,141 $ (40) $ 76,559
============ ========= ============ ========= =========
Loss before
income taxes,
discontinued
operations and
extraordinary charge $ (1,860) $ (8,911) $ 672 $ 925 $ (9,174)
============ ========= ============ ========= =========
Loss before
extraordinary loss and
discontinued operations $ (2,553) $ (5,258) $ 397 $ 546 $ (6,868)
============ ========= ============ ========= =========
Net loss $ (6,152) $ (5,258) $ 397 $ 2,970 $ (8,043)
============ ========= ============ ========= =========
Loss per share - basic
assuming dilution:
Loss before
discontinued
operations and
extraordinary charge $ (0.05) $ (0.12)
============ =========
Net loss per share $ (0.11) $ (0.15)
============ =========
</TABLE>
- -----------------------------------
(a) 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.
(b) Pro forma adjustments to Adjusted EBITDA reflect the reversal of minority
interest and an increase in depreciation and amortization expense.
(c) Pro forma adjustments to reflect the disposition of the LA Metro hospitals,
including the addition of $1.4 million of interest income on notes
receivable and the removal of the $2.4 million loss from discontinued
operations from certain of those facilities.
51
<PAGE> 52
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
------------------------------------------------------------------------------
Chico
Hospital DHHS LA Metro
As Reported Pro Forma Pro Forma Pro Forma Company Pro
Adj.(a) Adj.(b) Adj.(c) Forma
----------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net revenue $ 659,219 $ (33,751) $ 99,927 $ (94,474) $ 630,921
========= ========= ========= ========= ===========
Adjusted EBITDA $ 79,458 $ (2,245) $ 13,189 $ (4,337) $ 86,065
========= ========= ========= ========= ===========
Income before
income taxes and
discontinued operations $ 656 $ 1,330 $ 1,167 $ 4,818 $ 7,971
========= ========= ========= ========= ===========
Income (loss) before
discontinued operations $ (1,156) $ 784 $ 690 $ 2,842 $ 3,160
========= ========= ========= ========= ===========
Net income (loss) $ (6,399) $ 784 $ 690 $ 8,085 $ 3,160
========= ========= ========= ========= ===========
Income (loss) per share-
basic and assuming dilution:
Income (loss) before
discontinued operations $ (0.02) $ 0.06
========= ===========
Net income (loss) $ (0.12) $ 0.06
========= ===========
</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 the addition $1.4 million in interest income from notes receivable
and the removal of a $5.2 million loss on discontinued operations on certain
of those facilities.
NOTE 4. DISCONTINUED OPERATIONS
With the sale of the LA Metro facilities in September 1998, the Company
completed its previously announced plan to exit the psychiatric hospital
business. Such operations had been reported as discontinued operations since
September 1996. Prior to their disposition, the net assets related to the LA
Metro psychiatric facilities were segregated on the Company's Consolidated
Balance Sheet as "Long- term assets of discontinued operations, net."
In September 1998, the Company recorded a $2.4 million charge (net of
tax benefit of $1.7 million) as "Loss on disposal of discontinued psychiatric
hospitals, net" to reflect the settlement of litigation concerning violations of
certain Medicare rules alleged by two former hospital employees ("the relators")
filed in October 1995. 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 the LA Metro psychiatric hospitals. 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 on September 30, 1998 and the balance to
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 as to the
Company and others. The Company reported the excess of the settlement over
amounts previously accrued as "Discontinued Operations - Loss on disposal of
discontinued psychiatric hospitals, net" in the 1998 Consolidated Statement of
Operations.
52
<PAGE> 53
During 1996, the Company recorded an estimated loss on disposal of the
discontinued operations of $37.5 million (no income tax benefit - see table
below) to reduce the related assets to their estimated net realizable value and
to accrue for estimated operating losses during the phase out period. During the
fourth quarter of 1997, the Company recorded an additional estimated disposal
loss of $5.2 million (net of income tax benefits of $3.7 million), of which $1.9
million was for a further write down of assets to their estimated net realizable
value based upon most recent offers from third party purchasers and $3.3 million
for charges relating to outstanding litigation matters. During 1998 and 1997, in
accordance with APB No. 30, losses of $4.4 million and $1.1 million,
respectively, from operations of the discontinued psychiatric hospitals were
charged to the disposal loss accrual previously established in September 1996.
Accordingly, such losses were not reflected in the Consolidated Statement of
Operations.
During 1996, the Company recorded a charge for settlement costs
totaling $22.4 million regarding two lawsuits, of which $19.9 million was
related to a case involving the operation of its psychiatric programs. Such
charge consisted primarily of settlement payments, legal fees and the write off
of certain psychiatric accounts receivable. Operating results of the
discontinued operations for the year ended December 31, 1996, including the
settlement charge of $19.9 million but excluding the estimated disposal loss,
have been reported separately as "Discontinued operations - Loss from operations
of discontinued psychiatric hospitals, net" in the Consolidated Statements of
Operations. Summarized operating financial data for the discontinued psychiatric
care line of business for the year ended December 31, 1996 is as follows ($ in
000's):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996(a)
------------
<S> <C>
Net revenue............................................... $ 37,323
Operating loss (b)........................................ (14,892)
Loss from operations before income tax benefit......... (33,545)
Income tax benefit (c).................................... --
Net loss from operation of discontinued operations........ (33,545)
</TABLE>
- --------------------
(a) Represents operating results for the nine months ended September 30, 1996.
Operating results for the three months ended December 31, 1996 and
estimated operating losses through the expected disposition date have been
included in "Discontinued operations - Loss on disposal of discontinued
psychiatric hospitals, net" in the Consolidated Statements of Operations.
(b) Operating loss was derived by subtracting from net revenue, salaries and
benefits, provision for bad debts and other operating expenses.
(c) No income tax benefits were recognized on loss from discontinued operations
in 1996 as a result of recording a valuation allowance on deferred tax
assets.
NOTE 5. ASSETS HELD FOR SALE
With the sale of the LA Metro facilities in September 1998, the Company
completed its plan to dispose of the under performing hospitals in that area.
Prior to disposition, the net assets related to these facilities were segregated
on the Company's Consolidated Balance Sheet as "Assets held for sale, net."
Operating results of the LA metro hospitals included in the
Consolidated Statements of Operations are as follows ($ in 000's):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net revenue.................................. $ 59,393 $ 95,864 $ 92,518
Operating income (loss)(a)................... 1,434 5,726 (6,440)
</TABLE>
53
<PAGE> 54
- -------------------
(a) Operating income (loss) was derived by subtracting from net revenue,
salaries and benefits, provision for bad debts and other operating expenses.
During 1996, in conjunction with the disposition plan of these
hospitals and the Company's adoption of SFAS No. 121, the Company recorded an
impairment charge of $11.9 million ($8.0 million after-tax) to reduce the net
assets of four of these facilities and a related clinic to their estimated fair
value. During 1997, the Company recorded an additional impairment charge of $7.8
million ($4.6 million after-tax) to further write down assets of these
facilities to their estimated net realizable value based upon the most recent
offers from third party purchasers.
NOTE 6. MARKETABLE SECURITIES
In January 1997, the Company ceased all underwriting activity of its
wholly-owned insurance subsidiary, Hospital Assurance Company Ltd. (`HAC") and
placed it into runoff (See Note 15). HAC paid a dividend to the Company
thereupon leaving a minimum capital surplus to runoff workers' compensation
liabilities relating to California and Texas exposures for fiscal years 1993,
1994 and 1995. The Company then received all assets and assumed all other
liabilities of HAC. During 1998 and 1997, the Company liquidated all of HAC's
investment in marketable securities since such holdings were no longer required
for statutory purposes. The Company received proceeds from maturities or sales
of fixed maturity securities totaling $2.1 million, $20.0 million and $4.5
million during 1998, 1997 and 1996, respectively. The Company recognized gains
in connection with such dispositions of $42,000, $61,000 and $84,000 in 1998,
1997 and 1996, respectively.
As of December 31, 1998, the Company has no investment in marketable
securities. The following table summarizes marketable securities, with fair
value based on quoted market prices, at December 31, 1997 ($ in 000's):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-sale securities:
Corporate bonds ................................ $ 559 $ 14 $ -- $ 573
U.S. Government notes .......................... 100 3 -- 103
Mortgage-backed bonds .......................... 870 -- (15) 855
Obligations of states and municipalities ...... 608 18 -- 626
------- ------- ------- -------
$ 2,137 $ 35 $ (15) $ 2,157
======= ======= ======= =======
</TABLE>
NOTE 7. INCOME TAXES
The provision for income taxes consists of the following ($ in 000's):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Continuing operations:
Current:
Federal ................................................. $ -- $ -- $ (18,852)
State ................................................... 84 813 (3,075)
Deferred:
Federal ................................................. 520 853 (44,162)
State ................................................... 89 146 (10,097)
-------- -------- ---------
Total income tax provision (benefit) from continuing
operations ................................................ 693 1,812 (76,186)
Discontinued operations .................................... (1,685) (3,644) --
Extraordinary losses ....................................... (816) -- --
-------- -------- ---------
Total income tax benefit ................................... $ (1,808) $ (1,832) $ (76,186)
======== ======== =========
</TABLE>
54
<PAGE> 55
During 1992, the Company changed its method of reporting income for tax
purposes from cash to accrual basis. Under the cash basis, the Company deferred
approximately $72.0 million of taxable income for periods ending prior to
October 1, 1991. Of the amounts deferred, $16.8 million was included in taxable
income of year ended December 31, 1996. As of December 31, 1996, all income that
had been deferred by the use of cash-basis accounting had been included in
taxable income.
The following table reconciles the differences between the statutory
Federal income tax rate and the effective tax rate for continuing operations ($
in 000's):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1998 % 1997 % 1996 %
---- - ---- - ---- -
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate ...................... $ (651) (35.0) $ 230 35.0 $ (80,739) (35.0)
State income taxes, net of Federal
income tax benefit ........................ (112) (6.0) 39 6.0 (14,640) (6.3)
Non-deductible merger and litigation
settlement costs (a) ...................... 5,068 272.5 -- -- 897 0.4
Non-deductible goodwill amortization ........ 1,488 80.0 1,543 235.3 571 0.2
Adjustment to valuation allowance (b) ....... (5,100) (274.2) -- -- 17,725 7.7
-------- ------ -------- ----- --------- -----
Effective income tax rate ................... $ 693 37.3 $ 1,812 276.3 $ (76,186) (33.0)
======== ====== ======== ===== ========= =====
</TABLE>
- ----------------------------------
(a) In 1998, certain liabilities relating to the Shareholder Litigation were
recharacterized as non-deductible for federal income tax purposes as a
result of the proposed global settlement (See Note 18).
(b) See discussion on adjustment to valuation allowance below.
The tax effects of temporary differences that give rise to significant
portions of the Federal and state deferred tax assets and liabilities are
comprised of the following ($ in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Accelerated depreciation ............................ $ 13,318 $ 3,684
--------- ---------
Total deferred tax liabilities ................... 13,318 3,684
--------- ---------
DEFERRED TAX ASSETS:
Allowance for bad debts ............................. (8,548) (19,923)
Accrued expenses .................................... (17,180) (47,629)
Net operating losses ................................ (68,467) (21,600)
Other - net ......................................... (20,041) (18,658)
--------- ---------
Total deferred tax assets ........................ (114,236) (107,810)
Valuation allowance against deferred tax assets ..... 48,181 53,281
--------- ---------
Net deferred tax assets .......................... (66,055) (54,529)
--------- ---------
Net deferred tax assets ............................... (52,737) (50,845)
Less: Current deferred tax assets ..................... (9,641) (25,818)
--------- ---------
Long-term deferred tax assets ......................... $ (43,096) $ (25,027)
========= =========
</TABLE>
For financial reporting purposes, the Company recorded valuation
allowances of $48.2 and $53.3 million as of December 31, 1998 and 1997,
respectively, to offset deferred tax assets principally related to the Company's
net operating losses, bad debt allowances and other accrued expenses. The
Company considers prudent and feasible tax planning strategies in assessing the
need for a valuation allowance. As of December 31, 1997 the Company assumed
$45.8 million of benefit attributable to tax planning strategies, primarily
through the sale of appreciated non-core hospital assets. The Company also
assumed a $5.0 million benefit related to future taxable income. During 1998,
the Company reduced the valuation
55
<PAGE> 56
allowance by $5.1 million based upon revisions to its tax planning strategies,
of which approximately $1.9 million is anticipated to be realized in future
periods. Such revisions consider an increase in the utilization of net operating
loss carryforwards due to estimated taxable gains generated from the disposition
of certain core hospitals that are strategically appropriate and consistent with
the Company's overall long-term business objectives. As of December 31, 1998,
the Company assumed $52.7 million of benefit attributable to tax planning
strategies, solely through the sale of all non-core and four core hospital
assets. The Company also assumed no benefit related to future taxable income.
The Company's tax planning strategies assume proceeds from divestitures based on
present market conditions. If the Company were to determine that any such tax
planning strategies could not be implemented or if future income generated from
tax planning strategies does not prove to be sufficient to realize the benefit
previously recorded due to changes in market conditions, an adjustment to the
deferred tax asset of up to $52.7 million would be charged in the period of such
determination.
At December 31, 1998, the Company has net operating loss carryforwards
of $167.0 million, inclusive of $24.0 million acquired from Champion in the
Merger, for U.S. Federal income tax purposes that will expire in 2010. All
Champion net operating losses can only be used to offset the separate Company
income from the Champion group. In addition, as a result of the change in
ownership of the Champion group at August 16, 1996, the Champion net operating
losses are also limited under Section 382 of the Internal Revenue Code.
As discussed in Note 18, the Company has reached a proposed global
settlement with respect to the Shareholder Litigation. The final implementation
of the proposed global settlement may, under certain conditions, result in a
change of ownership that could create further limitations for the Company under
Section 382 of the Internal Revenue Code. This in turn may require the Company
to record an additional valuation allowance against its deferred tax assets.
The Company received income tax refunds, net of payments, of $333,000
and $24.1 million in 1998 and 1997, respectively, and paid income taxes, net of
refunds, of $1.0 million during 1996.
NOTE 8. LONG TERM DEBT
The Company's long-term debt consists of the following ($ in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
Revolving Credit Facility ................... $ 83,282 $ 149,238
Term Loan Facilities ........................ 113,200 --
10% Senior Subordinated Notes ............... 325,000 325,000
6.51% Subordinated Note ..................... 7,185 7,185
Capital lease obligations (See Note 9) ...... 9,500 9,434
Other ....................................... 1,165 7,266
--------- ---------
539,332 498,123
Less current maturities ..................... (6,284) (6,209)
--------- ---------
Total long-term debt ........................ $ 533,048 $ 491,914
========= =========
</TABLE>
REVOLVING CREDIT FACILITY - On March 30, 1998, the Company entered into
an Amended and Restated Credit Agreement, which was subsequently amended on June
15, 1998 ("the Amended Credit Agreement"), to provide total commitments of
$140.0 million under a Revolving Credit Facility and $115.0 million in term
loans (the "Term Loan Facilities") consisting of a five-year $45.0 million Term
Loan Facility ("Tranche A Facility") and a six-year $70.0 million Term Loan
Facility ("Tranche B Facility"). The Revolving Credit Facility is available for
general corporate purposes, including funding working capital needs, permitted
acquisitions and capital expenditures and the issuance of letters of credit up
to $25.0 million. It is subject to mandatory quarterly reductions of $9.5
million, commencing on March 31, 2001, and a limit of $50.0 million available
for working capital needs. The Term Loan Facilities replaced existing
indebtedness of the Company under its prior Credit Facility. The Tranche A
Facility principal is payable in quarterly installments ranging from $600,000 to
$2.5 million with a final balloon payment of $22.5 million due on March 31,
2003. The Tranche B Facility principal is payable in annual installments of
$500,000 with a final balloon payment of $67.5 million due on March 31, 2004.
The Company is further required to make mandatory prepayments equal to 100% of
(i) net cash proceeds
56
<PAGE> 57
from permitted asset sales, (ii) debt issuances and (iii) equity issuances,
subject to certain allowable exclusions for debt and equity as described in the
Amended Credit Agreement. Such prepayments are generally to be applied ratably
to the Revolving Credit Facility, the Tranche A Facility and the Tranche B
Facility (collectively the "Facilities"), but in certain circumstances may be
applied solely as prepayments of the Revolving Credit Facility. Prepayments
under the Revolving Credit Facility do not result in a mandatory reduction in
borrowing capacity under such facility, but prepayments under the Term Loan
Facilities do result in a mandatory permanent reduction.
Borrowings under the Revolving Credit Facility and the Tranche A
Facility bear interest at the Company's option, at (i) LIBOR plus a margin
ranging from 1.25% to 2.75% or (ii) the prime rate plus a margin ranging from
0.0% to 1.25%. Borrowings under the Tranche B Facility bear interest at LIBOR
plus 2.75% and may be reduced in certain circumstances. The Company is required
to pay annual commitment fees ranging from .25% to .50% of the unused portion of
the Revolving Credit Facility. Letters of credit issued under the Revolving
Credit Facility require annual fees equal to the effective LIBOR margin and are
to be paid quarterly in arrears. As of December 31, 1998, the Company had
outstanding borrowings of $83.3 million under the Revolving Credit Facility,
$43.2 million under the Tranche A Facility and $70.0 million under the Tranche B
Facility. The weighted average borrowing rates for the year ended December 31,
1998 were 8.96%, 8.31% and 8.54% under the Revolving Credit Facility, Tranche A
and Tranche B, respectively. The Company also had outstanding letters of credit
of $17.8 million as of December 31, 1998.
The Facilities are secured by the right of lenders to a first priority
lien in certain of the real and personal properties of the Company and its
subsidiaries and a first priority interest in the capital stock of all of the
Company's present and future subsidiaries, except for the Excluded Subsidiaries
as defined in the Amended Credit Agreement.
During the first quarter ended March 31, 1998, the Company recognized
an extraordinary charge for the write-off of deferred financing costs of $1.2
million, net of tax benefits of $817,000, relating to the Credit Facility in
existence prior to March 30, 1998.
During 1996, the Company recognized an extraordinary loss for the
write-off of deferred loan costs of $1.7 million, no tax benefit, relating to
the credit facility in existence prior to August 1996. No tax benefit was
recognized on this charge due to the recording of a valuation allowance.
SENIOR SUBORDINATED NOTES - On August 16, 1996, the Company completed a
$325.0 million registered offering of 10% Senior Subordinated Notes (the
"Notes"). Of the $315.2 million net proceeds received from the offering, $81.6
million was used to repay the 9.875% Senior Subordinated Notes (the "9.875%
Notes"), including $3.9 million in tender and consent fees, $177.7 million to
repay certain Champion existing debt assumed upon the consummation of the
Merger, and the remaining $55.9 million to repay amounts outstanding under the
Company's previous revolving credit facility. The Notes are general unsecured
senior subordinated obligations of the Company and will mature on August 15,
2006. The Notes are not subject to any mandatory redemption and may not be
redeemed prior to August 15, 2001. On August 22, 1996, all of the 9.875% Notes
were redeemed, which resulted in an extraordinary loss of $6.0 million,
consisting of $3.9 million in tender and consent fees and $2.1 million for the
write-off of deferred financing costs.
6.51% SUBORDINATED NOTE - Pursuant to an agreement in conjunction with
the Merger, the Majority Shareholder received a $7.2 million 6.51% subordinated
note from the Company. The note provides for payments of principal and interest
in an aggregate annual amount of $1.0 million over a term of 10 years. The
Majority Shareholder waived its right to receive principal payments under the
note until all obligations of the Company under the Amended Credit Agreement
have been satisfied. See Note 18 for discussion of a proposed reinstatement of
the stated terms in connection with the Shareholder Litigation settlement. When
the proposed global settlement becomes effective after court approval, the
Company will recommence payments of principal on the stated terms of the note
and use its reasonable best efforts to repay outstanding amounts in arrears.
The Company will prepay the outstanding balance in certain circumstances.
57
<PAGE> 58
OTHER DEBT - Other debt at December 31, 1998 and 1997 consists
primarily of mortgage notes and other collateralized and unsecured notes. These
obligations mature in various installments through 2016 at interest rates
ranging from 8.8% to 10.0% as of December 31, 1998 and 1997.
The terms of the various debt agreements include certain restrictive
covenants. Among other restrictions, the covenants include limitations on
investments, borrowings, liens, change of control, acquisitions and dispositions
of assets and transactions with affiliates, and require maintenance of certain
ratios regarding fixed charge coverage, leverage, minimum EBITDA, net worth and
maintenance of the commercial paper financing program (See Note 10). The Company
may declare and pay cash dividends in an aggregate amount not to exceed $250,000
in connection with a merger consummated by Champion prior to its acquisition by
the Company. Under certain circumstances, the Company may repurchase its own
common stock from directors, officers and employees in an aggregate amount not
to exceed $1.0 million per year. The Company was in compliance with all loan
covenants to which it was subject as of December 31, 1998. The Company's
continued compliance with its loan covenants is predicated on its ability to
maintain certain levels of profitability and on its ability to sell certain
non-core assets. If the Company is unable to meet these objectives, it will be
required to seek waivers from its lenders in the future. However, there can be
no assurance that the Company will be able to obtain such waivers, if needed.
Maturities of long-term debt outstanding as of December 31, 1998 for
the next five years and thereafter are ($ in 000's):
<TABLE>
<S> <C>
1999 ................................. $ 6,284
2000 ................................. 6,123
2001 ................................. 44,875
2002 ................................. 46,827
2003 ................................. 30,678
Thereafter ........................... 404,545
---------
Total $ 539,332
=========
</TABLE>
The Company paid interest of $51.7 million, $46.4 million and $20.0
million during 1998, 1997 and 1996, respectively.
NOTE 9. LEASES
The Company leases property and equipment under cancelable and
non-cancelable leases. Future minimum operating and capital lease payments as of
December 31, 1998, including amounts relating to leased hospitals, for the next
five years and thereafter are ($ in 000's):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, OPERATING CAPITAL
----------------------- --------- -------
<S> <C> <C>
1999............................................ $ 14,563 $ 2,220
2000............................................ 13,546 1,519
2001............................................ 12,875 1,284
2002............................................ 12,676 1,212
2003............................................ 12,059 660
Thereafter...................................... 10,354 6,106
--------- ---------
Total minimum future payments................... $ 76,073 13,001
=========
Less amount representing interest............... (3,501)
---------
9,500
Less current portions........................... (2,220)
----------
Long-term capital lease obligations............. $ 7,280
=========
</TABLE>
58
<PAGE> 59
The following summarized amounts relate to assets leased by the Company
under capital leases ($ in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
------- --------
<S> <C> <C>
Property, plant & equipment..................... $ 8,316 $ 6,612
Accumulated depreciation........................ (3,129) (2,419)
------- --------
Net book value............................... $ 5,187 $ 4,193
======= ========
</TABLE>
Depreciation of assets under capital leases is included in depreciation
and amortization in the Consolidated Statements of Operations. Rental expense
was $23.2 million, $25.6 million and $20.1 million for 1998, 1997 and 1996,
respectively.
NOTE 10. SALE OF ACCOUNTS RECEIVABLE
A subsidiary of the Company has an agreement with an unaffiliated trust
(the "Trust") to sell the Company's hospital eligible accounts receivable (the
"Eligible Receivables") on a nonrecourse basis to the Trust. A special purpose
subsidiary of a major lending institution provides up to $65.0 million in
commercial paper financing to the Trust to finance the purchase of the Eligible
Receivables from the Company's subsidiary, with the Eligible Receivables serving
as collateral. The commercial paper notes have a term of not more than 120 days.
Eligible receivables sold to the Trust at December 31, 1998 and 1997 were $32.6
million and $38.3 million, respectively. Interest expense charged to the Trust
related to the commercial paper financing is passed through to the Company and
included as interest expense in the Company's Consolidated Statement of
Operations. Interest expense incurred by the Company related to this program was
$2.0 million, $2.5 million and $3.2 million for the years ended December 31,
1998, 1997 and 1996, respectively. The commercial paper financing program has
been extended through October 31, 1999, and the Company expects the program to
be renewed beyond 1999.
NOTE 11. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
CREDIT RISK - Financial instruments that potentially subject the
Company to concentration of credit risk consist principally of investments in
marketable securities and accounts receivable. As of December 31, 1998, the
Company has no investments in marketable securities (see Note 6). Credit risk on
accounts receivable is limited because a majority of the receivables are due
from governmental agencies, commercial insurance companies and managed care
organizations. The Company continually monitors and adjusts its reserves and
allowances associated with these receivables.
FAIR VALUES OF FINANCIAL INSTRUMENTS - All financial instruments are
held for purposes other than trading. The estimated fair values of all financial
instruments, other than marketable securities and long-term debt, approximated
their carrying amounts due to the short-term maturity of these instruments. The
carrying amount and fair value of marketable securities held as of December 31,
1997, are disclosed at Note 6. The carrying amount and fair value of long-term
debt are as follows ($ in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1998 1997
-------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Long-term Debt:
Revolving Credit Facility ............. $ 83,282 $ 83,282 $ 149,238 $ 149,238
Term Loan Facilities ................. 113,200 113,200 -- --
10% Senior Subordinated Notes ......... 325,000 289,250 325,000 331,500
6.51% Subordinated Note ............... 7,185 6,283 7,185 6,790
</TABLE>
The fair values of the Revolving Credit Facility and the Term Loan
Facilities approximated the carrying amounts since the interest rate is based on
a current market rate. The fair value of the Notes was based on the quoted
market price. The fair value of the remaining debt was estimated using
discounted cash flow analyses based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements.
59
<PAGE> 60
NOTE 12. STOCKHOLDERS' EQUITY
COMMON AND PREFERRED STOCK - The Company has 150.0 million authorized
shares of common stock, no stated value per share. Each share is entitled to one
vote and does not have any cumulative voting rights. The Company is also
authorized to issue 25.0 million shares of preferred stock at $.01 par value per
share, which may be issued in such series and have such rights, preferences and
other provisions as may be determined by the Board of Directors without approval
by the holders of common stock.
Pursuant to the Shareholder Protection Rights Agreement, the Company
designated 1.5 million of its 25.0 million authorized preferred shares as
Participating Preferred Stock ("Preferred Share") and paid a dividend of one
Preferred Share purchase right ("Right") for each outstanding share of the
Company's common stock to stockholders of record as of August 15, 1996. Each
Preferred Share will be entitled to an aggregate quarterly dividend equal to the
greater of 25% of each Right's exercise price or 100 times the quarterly
dividend declared on the Company's common stock. In the event of liquidation,
the holder of each Preferred Share will be entitled to receive a liquidation
payment of $100 per share plus any accrued but unpaid dividends. Each Preferred
Share will have 100 votes, voting together with the common stock. No Preferred
Shares are currently outstanding. Each Right entitles the registered holder to
purchase from the Company, one one-hundredth of a Preferred Share at a price of
$42.50, subject to an adjustment that could include the right to acquire,
subject to certain conditions, common stock in the Company or such other entity
with which the Company engages in certain types of transactions, such as a
merger. The Rights currently are not exercisable and will be exercisable only if
a person or group acquires beneficial ownership of 25% or more of the Company's
outstanding shares of common stock (i.e., becomes an "Acquiring Person" as
defined in the related Rights Agreement). The Rights, which expire on August 16,
2006, are redeemable in whole, but not in part, at the Company's option at a
price of $.01 per Right at any time before such dates specified in the Rights
Agreement in relation to a person becoming an Acquiring Person. The Company will
terminate the Shareholder Protection Rights Agreement upon the final approval of
the settlement related to the Shareholder Litigation as discussed in Note 18.
In connection with the August 1996 Merger, all 450 outstanding shares
of the Company's common stock, which were solely owned by the Majority
Shareholder, were split into an aggregate of 29.8 million shares as a result of
a 66,159.426-for-one stock split. Upon the consummation of the Merger, each
share of Champion common and preferred stock was exchanged for one and two
shares of the Company's common stock, respectively. Accordingly, the Company
issued 19.8 million shares of its common stock in connection with such exchange.
On August 16, 1996, the Company's common stock began trading on the New York
Stock Exchange under the symbol "PLS."
During the 1996 period prior to the Merger, the Company paid cash
dividends of $3.8 million to the Majority Shareholder. In conjunction with the
Merger, the Company declared a dividend of $21.1 million to the Majority
Shareholder, which was paid on August 30, 1996. After receipt of the $21.1
million dividend and accrued interest of $104,000, and pursuant to a related
agreement, the Majority Shareholder paid approximately $3.0 million plus accrued
interest in full satisfaction of a note payable to the Company. Additionally,
the Majority Shareholder loaned the Company $7.2 million and received a $7.2
million 6.51% subordinated note from the Company (See Note 8).
On August 16, 1996, the Company completed a sale of 5.2 million shares
of its common stock at $8.50 per share. Net proceeds of $39.8 million were used
along with proceeds from the Notes offering (See Note 8) to repay existing and
acquired indebtedness as well as pay for Merger related costs (See Note 3).
STOCK OPTION PLAN - On July 15, 1996, the Company adopted the 1996
Stock Incentive Plan (the "Incentive Plan") to provide stock-based incentive
awards, including incentive stock options, non-qualified stock options,
restricted stock, performance shares, stock appreciation rights and deferred
stock, to key employees, consultants and advisors. Pursuant to the termination
of the Company's Phantom Equity Long-Term Incentive Plan in connection with the
Merger, options to purchase 1.6 million shares of the Company's common stock
were granted at an exercise price of $.01 per share ("Value Options") to certain
directors and officers of the Company in addition to aggregate cash payments of
$20.7 million,
60
<PAGE> 61
which if combined, approximated the accrued value of the canceled phantom stock
appreciation rights and/or preferred stock units thereunder. Additionally,
pursuant to the various employment agreements, Value Options were granted to
certain senior executive officers to purchase 1.2 million shares in addition to
options to purchase 2.8 million shares of the Company's common stock at an
exercise price of $8.50 per share. The Company recognized merger expenses
totaling $32.0 million related to the cancellation of the Phantom Equity
Long-Term Incentive Plan and the issuance of certain Value Options. See Note 18
for discussion of the proposed termination and cancellation of certain Value
Options in connection with the Shareholder Litigation settlement.
In connection with the Merger, the Company also assumed and converted
all Champion outstanding options, subscription rights, warrants and convertible
notes to similar rights to acquire approximately 1.9 million shares of the
Company's common stock.
As more fully discussed in Note 15, on November 25, 1998, the Company
and certain of its senior executives executed the Executive Agreement, which
effectively superseded their then existing employment and stock option
compensation arrangements. In connection therewith, the senior executives gave
up all rights to exercise or dispose of 696,000 shares of Value Options granted
in connection with the Merger.
At December 31, 1998, there were 9.0 million shares of common stock
reserved for exercise of options. Except for the Value Options as noted above,
stock options were generally granted at an exercise price equal to the estimated
fair market value of the shares on the date of grant and expire ten years from
the grant date. The Value Options are fully vested on the date of grant, with
the remaining options vesting generally over a period of 3 to 4 years from the
date of grant. Options generally expire upon certain events (such as termination
of employment with the Company), except for Value Options, which remain
exercisable until the end of the 10-year option term. The following table
presents the number of shares covered by options outstanding and the related
number of options granted, assumed, exercised and canceled since August 1996 (in
000's):
<TABLE>
<CAPTION>
WEIGHTED
NUMBER EXERCISE AVERAGE
OF PRICE EXERCISE
OPTIONS PER SHARE PRICE
------- --------- -----
<S> <C> <C> <C>
Outstanding at January 1, 1996 .............. -- -- --
Granted ................................... 5,530 $0.01 to $8.50 $ 4.28
Assumed ................................... 1,335 $1.00 to $9.00 5.96
Exercised ................................. -- -- --
Canceled .................................. -- -- --
------
Outstanding at December 31, 1996 ............ 6,865 $0.01 to $9.00 4.60
Granted ..................................... 1,105 $5.19 5.19
Exercised ................................... (280) $0.01 0.01
Canceled .................................... (135) $0.01 to $9.00 2.18
------
Outstanding at December 31, 1997 ............ 7,555 $0.01 to $9.00 4.90
Granted ..................................... -- -- --
Exercised ................................... (17) $3.56 3.56
Canceled .................................... (156) $3.92 to $9.00 4.96
Forfeited ................................... (696) $0.01 0.01
------
Outstanding at December 31, 1998 ............ 6,686 $0.01 to $9.00 $ 5.41
======
</TABLE>
61
<PAGE> 62
The number of options exercisable at December 31, 1998, 1997 and 1996
were 4.1 million, 4.2 million and 3.8 million, respectively. The following table
summarizes information concerning currently outstanding and exercisable options
as of December 31, 1998 (in 000's):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
------------------ --------------- ---------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.01 1,673(a) 7.61 years $0.01 1,673 $0.01
$1.00-$9.00 5,013 6.94 years $7.22 2,448 $6.77
-----------
(a) Includes 1.3 million Value Options which will be terminated and cancelled when the proposed
global settlement becomes effective.
</TABLE>
The Company has elected to follow APB No. 25 and related
interpretations in accounting for its employee stock options. Pro forma
information regarding net income and earnings per share is required by SFAS No.
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The weighted
average grant-date fair values were $3.66 for options granted during 1997 and
$3.86 for options granted during 1996, using the Black-Scholes option pricing
model with the following weighted-average assumptions for 1997 and 1996,
respectively: risk-free interest rates of 5.60% and 6.25%; dividend yields of
0.0%; volatility factors of the expected market price of the Company's stock of
97.4% and 49.2%; and a weighted-average expected life of the options of 4 years.
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purpose of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for 1998, 1997 and 1996 is as follows and includes
compensation expense of $4.1 million ($2.4 million after-tax), $5.6 million
($3.3 million after-tax) and $2.0 million ($1.2 million after-tax),
respectively, ($ in 000's, except for earnings per share data):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ----------
<S> <C> <C> <C>
Pro forma net loss........................... $ (8,597) $ (9,687) $ (234,464)
Pro forma net loss per share:
Basic and assuming dilution............... $ (0.16) $ (0.18) $ (5.98)
</TABLE>
WARRANTS AND CONVERTIBLE SECURITIES - As of December 31, 1998, the
Company had outstanding warrants to purchase 414,906 shares of Common Stock at
an exercise price ranging from $5.90 to $9.00 per share and expiring from June
1, 1999 through December 31, 2003.
NOTE 13. EMPLOYEE BENEFIT PLANS
The Company has defined contribution 401(k) retirement plans covering
all eligible employees at its hospitals and the corporate office. Participants
may contribute up to 15% of pretax compensation, not exceeding a limit set
annually by the Internal Revenue Service. The Company matches $.25 for each
$1.00 of employee contributions up to 6% of employees' gross salary and may make
additional discretionary contributions. Total expense for employer contributions
to the plan for 1998, 1997 and 1996 was $2.0 million, $1.6 million and $1.3
million, respectively. Contribution expense for the year
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<PAGE> 63
ended December 31, 1998 includes $724,000 relating to DHHS (see Note 3). Prior
to 1998, the Company accounted for its investment in DHHS under the equity
method.
The Company has a supplemental executive retirement plan ("SERP") to
provide additional post-termination benefits to a selected group of management
and highly compensated employees. As a result of a change in control from the
Merger, officers and employees of the Company who were participants in the SERP
prior to the Merger became fully vested in all benefits thereunder. During 1996,
the Company recognized Merger expenses of $5.1 million related to the vesting of
such benefits. Pursuant to their respective employment agreements, certain
Champion executives became participants in the SERP and received retroactive
benefits for their years of service with Champion. The Company capitalized
approximately $1.9 million of such non-cash charges as part of the purchase
price of Champion. In April 1997, the Board of Directors elected to terminate
the provision of future benefits for certain participants under the plan, which
resulted in a plan curtailment. As a result, the Company incurred minimal
expenses in 1998 related to the plan. Total expenses for the plan were $141,000
(net of curtailment gain of $1.6 million), and $1.1 million for the years ended
December 31, 1997 and 1996, respectively. In connection with the execution of
the Executive Agreement discussed in Note 15, the Company is released from SERP
obligations to certain senior executives. As discussed in Note 18, the Company
will be released from additional SERP obligations when the Shareholder
Litigation settlement becomes effective upon court approval.
NOTE 14. OPERATING SEGMENTS
Effective December 31, 1998, the Company adopted SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information. SFAS No.
131 superseded SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS No. 131 establishes standards for the way public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. SFAS No. 131 also establishes
standards for related disclosures about product and services, geographic areas
and major customers. The adoption of SFAS No. 131 did not affect the Company's
results of operations or financial position.
The Company segregates its hospitals into two operating segments: Core
Markets and Non Core Markets. The Company has designated certain hospitals as
"Core Facilities" with the goal of expanding and further integrating the
hospitals' presence in their respective markets. The Company believes it can
compete most effectively in these markets on the basis of cost, customer
service, and quality of care. As the designation implies, the Company believes
these hospitals comprise the operational and financial core of the Company's
business. Typical Core Market attributes include, but are not limited to, a
service area population of between 30,000 and 500,000, growing populations,
improving median incomes, limited competition from large scale hospital
franchises, and lower managed care penetration than is typically found in larger
metropolitan areas. The Company's current Core Markets consist of all of its
operations in metropolitan Salt Lake City, Utah; Fargo, North Dakota; Mesquite,
Texas; Midland, Texas; Lancaster, California; Milton, Florida and Richmond,
Virginia. The Company may, from time to time, consider divesting certain core
assets if such disposition meets the Company's strategic objectives.
"Non Core" Markets consist of all other hospital operations currently
owned by the Company and some of these are being evaluated for possible
disposition. The Non Core Facilities comprise all of the Company's operations in
Tennessee, Georgia, Mississippi and Baytown, Texas, as well as its convalescent
hospitals in California. With the exception of the Baytown, Texas facility,
these Non Core Markets are located in rural areas with limited growth potential.
The Company's Baytown, Texas facility is located in metropolitan Houston, Texas,
and faces substantial competition from a number of large health care providers,
many of which have substantially greater resources than the Company.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company does not allocate
income taxes, senior bank debt interest, or subordinated note interest to its
reportable segments. These items, along with overhead costs, and the operations
of sold/closed facilities have been included in the All Other category.
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<PAGE> 64
The Company evaluates performance based on numerous criteria, the most
significant of which is Adjusted EBITDA. The following table summarizes selected
financial data for the Company's reportable segments ($ in 000's):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------
Core Non Core All Other Total
---- -------- --------- -----
<S> <C> <C> <C> <C>
Net revenue ........................................... $ 484,792 $ 91,696 $ 87,570 $ 664,058
Adjusted EBITDA ....................................... 85,229 329 (9,274) 76,284
Property and equipment, net ........................... 303,670 34,984 25,245 363,899
Capital expenditures .................................. 14,294 1,858 5,813 21,965
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------
Core Non Core All Other Total
---- -------- --------- -----
<S> <C> <C> <C> <C>
Net revenue ........................................... $ 402,492 $ 120,693 $ 136,034 $ 659,219
Adjusted EBITDA ....................................... 80,522 15,633 (16,697) 79,458
Property and equipment, net ........................... 235,146 36,008 36,910 308,064
Equity investment in DHHS ............................. 48,499 -- -- 48,499
Capital expenditures .................................. 12,897 2,714 913 16,524
</TABLE>
64
<PAGE> 65
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------
Core Non Core All Other Total
---- -------- --------- -----
<S> <C> <C> <C> <C>
Net revenue $ 225,121 $ 94,751 $ 173,234 $ 493,106
Adjusted EBITDA 42,231 5,684 (50,190) (2,275)
Property and equipment, net 238,401 32,564 39,870 310,835
Equity investment in DHHS 48,463 -- -- 48,463
Capital expenditures 8,505 1,887 4,121 14,513
</TABLE>
The Company's revenue primarily depends on the level of inpatient
census, the volume of outpatient services, the acuity of patients' conditions
and charges for services. Reimbursement rates for inpatient routine services
vary significantly depending on the type of service and the geographic location
of the hospital. The Company receives payment for services rendered to patients
from private payors (primarily private insurance), managed care providers, the
Federal government under the Medicare and TriCare (formerly the Civilian Health
and Medical Program of the Uniformed Services or CHAMPUS) programs and state
governments under their respective Medicaid programs. The Company also receives
payment under capitated contract arrangements with certain managed care
organizations where in the Company is required to provide services to enrollees
on a per diem basis. Approximately 53.6%, 56.9% and 58.4% of gross patient
revenue for the years ended December 31, 1998, 1997 and 1996, respectively,
related to services rendered to patients covered by Medicare and Medicaid
programs.
NOTE 15. COMMITMENTS AND CONTINGENCIES
SHAREHOLDER LITIGATION - The Company is a defendant in multiple class
and derivative actions arising out of or related to the August 1996 Merger and
the subsequent initial public equity offering (See Part I. Item 3 "Legal
Proceedings"). Some complaints assert putative class actions on behalf of
current and former holders of the Company's securities for claims under federal
and state statutes and the common law relating to the exchange offer for
Champion stock in connection with the Merger, the August 1996 public offerings
by the Company of common stock and subordinated notes, and trading in the
Company's securities in the period between the Merger and October 9, 1996. In
summary, the complaints allege that the Merger and public offerings proceeded on
the basis of materially misleading disclosures and omissions by the Company and
Champion, as well as certain of the Company's and Champion's officers,
directors, and underwriters. The claims asserted include claims under section 11
of the Securities Act of 1933 and under section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder. In March 1998, the federal district court
(the "Court") dismissed claims relating to the subordinated notes. Other
complaints assert claims derivatively on behalf of the Company or Champion
against the Company, Champion, various current or former officers and directors
of the Company and Champion, the Majority Shareholder and the Company's
independent auditors.
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On March 24, 1999, the Company executed certain agreements providing
for a proposed global settlement that will resolve substantially all claims
against the Company related to the Merger and outstanding class action and
derivative lawsuits. The settlement agreements are subject to final approval by
the Court. The effect of the terms of the settlements on the Company's financial
condition and results of operations is discussed in Note 18.
THE EXECUTIVE AGREEMENT - On November 25, 1998, the Company and its
senior executives, Mr. Charles R. Miller, Mr. James G. VanDevender and Mr.
Ronald R. Patterson executed the Executive Agreement superseding their existing
employment contracts and certain other stock option and retirement agreements
with the Company. The Executive Agreement was amended in certain respects,
including the elimination of certain additional payments, in connection with the
proposed global settlement of the Shareholder Litigation. Under the Executive
Agreement, as amended, the senior executives agreed to remain in their current
management positions with the Company at least until June 30, 1999. Mr. Miller
is the only senior executive who has currently expressed an intent to leave the
Company immediately after June 30, 1999. Mr. VanDevender will be designated
interim Chief Executive Officer effective July 1, 1999.
Pursuant to the Executive Agreement, the Company paid the senior
executives $501,000 during 1998, which represented amounts due such individuals
for vested benefits under the SERP, and the senior executives released the
Company from any obligations under the SERP or any similar retirement plan. The
Executive Agreement also commits the Company to pay the senior executives $4.6
million upon the earlier to occur of certain specified events, including the
filing of the Company's 1998 Form 10-K, but no later than April 30, 1999. Of
such amount, approximately $4.0 million is being accrued ratably to expense
through June 30, 1999, the required-stay period. The remaining amount of
$645,000, which is associated with a non-compete arrangement provided for in the
Executive Agreement, will be recorded to other assets and amortized to expense
over the non-compete period (one year) upon the executives' separation of
service. Upon payment to the senior executives, the Company and the senior
executives will provide each other with mutual releases of any and all
obligations either party may have under the respective employment agreements or
otherwise arising out of the senior executives' employment.
Pursuant to the Executive Agreement, the senior executives gave up all
rights to exercise or dispose of 696,000 shares of Value Options that they
received at the time of the Merger. The fair market value of the Value Options
upon the execution of the Executive Agreement was approximately $1.6 million.
Accordingly, upon the execution of such agreement, the Company recorded a
reduction to common stock and a corresponding liability of $1.6 million that is
being amortized ratably to income over the required-stay period ending June 30,
1999.
The Company recorded approximately $352,000 of net expenses related to
the Executive Agreement, which was included in unusual items, for the year ended
December 31, 1998.
OTHER LITIGATION - In 1998, the Company settled certain litigation
previously reported in its 1997 Form 10-K concerning alleged violations of
certain Medicare rules (see Note 4) and claims involving certain insurance
carriers under the Racketeering Influenced and Corrupt Organizations Act and the
Employee Retirement Income Security Act discussed below.
The Company reached a settlement to litigation filed on September 10,
1997, by twelve health care insurers and/or administrators (the "Plaintiffs") in
an action 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. 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. In accordance with the terms of the settlement, the Company paid the
Plaintiffs $995,000 in full settlement of all claims on November 23, 1998. The
suit was dismissed with prejudice and the Plaintiffs released 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
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and burdens of protracted litigation. The settlement had no significant impact
on the Company's financial condition, results of operations or liquidity.
The Company is subject to claims and legal actions by patients and
others in the ordinary course of business. The Company believes that all such
claims and actions are either adequately covered by insurance or will not have a
material adverse effect on the Company's financial condition, results of
operations or liquidity.
REGULATORY INVESTIGATION - On March 9, 1998, the U.S. Securities and
Exchange Commission (the"SEC") entered a formal order authorizing a private
investigation, In re Paracelsus Healthcare Corp., FW-2067. Pursuant to the
formal order, the staff of the SEC's Fort Worth District Office is investigating
the accounting and financial reporting issues that were the subject of the
internal inquiry described in the Company's 1996 Form 10-K filed in April 1997.
The Company is cooperating with the staff of the SEC.
PROFESSIONAL AND LIABILITY RISKS - The Company is subject to claims and
suits in the ordinary course of business, including those arising from care and
treatment afforded at its facilities. The Company maintains insurance and, where
appropriate, reserves with respect to the possible liability arising from such
claims. For periods from October 1992 to December 1996, the Company, excluding
the former Champion entities, insured the first $500,000 of general and
professional liability claims through HAC. The Company had third-party excess
insurance coverage over the first $500,000 per occurrence up to $100 million.
Commencing January 1, 1997, pursuant to the Company's plan to cease all
underwriting activity of HAC, the Company became self-insured for the first $1
million of general and professional liability claims, with excess insurance
amounts up to $100 million covered by a third party insurance carrier, including
all claims incurred but not reported as of December 31, 1996 for all
subsidiaries, including Champion. The Company is self-insured for reported
claims related to former Champion facilities for periods prior to 1997 up to
$1.0 million per occurrence and $4.0 million in the aggregate, with amounts in
excess of $1.0 million but less than $10 million covered by a third party
insurance carrier.
Effective October 1, 1997, the Company changed its professional and
general liability insurance carrier. The Company continues to self-insure the
first $1.0 million per occurrence of general and professional liability claims
and $4.0 million in the aggregate; however, excess insurance amounts up to $50.0
million are now covered by third party insurance carriers. The Company accrues
an estimated liability for its uninsured exposure and self-insured retention
based on historical loss patterns and actuarial projections.
The Company believes that its insurance and loss reserves are adequate
to cover potential claims that may be asserted and that the outcome of such
claims will not have a material effect on the Company's financial position,
results of operations or liquidity.
IMPACT OF YEAR 2000 (Unaudited) - 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 and corporate office 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 financial statements 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, results of operations or liquidity. See Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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NOTE 16. CERTAIN RELATED PARTY TRANSACTIONS
The Company paid dividends of $24.9 million to the Majority Shareholder
during the year ended December 31, 1996. The Company also paid accrued interest
of $104,000 to the Majority Shareholder in connection with the dividend paid in
August 1996, pursuant to the terms of the Merger agreement. After receipt of the
dividend paid in August 1996 and pursuant to a related agreement, the Majority
Shareholder paid approximately $3.0 million plus accrued interest in full
satisfaction of a note payable to the Company. Additionally, the Majority
Shareholder loaned the Company $7.2 million and received a $7.2 million 6.51%
subordinated note from the Company (See Note 8). The Company paid interest on
such note of $467,000 and $533,000 in 1998 and 1997, respectively. See Note 18
for discussion of the proposed recommencement of principal payments in
accordance with the stated terms of the note in connection with the Shareholder
Litigation settlement.
Effective August 1996, the Company is a party to an agreement with the
Former Chairman, pursuant to which he provides management and strategic advisory
services to the Company for an annual consulting fee of $1.0 million, for a term
not to exceed ten years. Effective April 15, 1997, the annual consulting fee to
the Former Chairman was reduced to $250,000 until all obligations of the Company
under the Amended Credit Agreement have been satisfied. Payments of $187,500 and
$500,000 and $375,000 were made to the Former Chairman during 1998, 1997 and
1996, respectively. See Note 18 for discussion of a proposed termination of this
agreement in connection with the Shareholder Litigation settlement.
Prior to the consummation of the Merger, the Company was a party to an
Amended and Restated Know-How Contract with Paracelsus Klinik, a sole
proprietorship owned by the Former Chairman, which provided for the transfer of
specified know-how to the Company for an annual payment of the lesser of
$400,000 or 0.75% of Paracelsus' net operating revenue, as defined in the
Know-How Contract. Such contract was terminated in August 1996. A payment of
$250,000 was made to Paracelsus Klinik during 1996.
NOTE 17. QUARTERLY DATA (UNAUDITED)
The following table summarizes the Company's quarterly financial data
for the years ended December 31, 1998 and 1997 ($ in 000's, except per share
data):
<TABLE>
<CAPTION>
INCOME (LOSS) PER SHARE
---------------------------------------------
INCOME
(LOSS) FROM NET NET
NET CONTINUING DISCONTINUED INCOME CONTINUING DISCONTINUED INCOME
QUARTERS REVENUE OPERATIONS OPERATIONS (LOSS) OPERATIONS OPERATIONS (LOSS)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter -
1998(a) $ 186,882 $ 1,625 $ -- $ 450 $ 0.03 $ -- $ 0.01
1997 168,490 5,168 -- 5,168 0.09 -- 0.09
Second Quarter -
1998(b) 176,693 5,698 -- 5,698 0.10 -- 0.10
1997(c) 167,256 (3,017) -- (3,017) (0.05) -- (0.05)
Third Quarter -
1998(d) (e) 157,169 (1,667) (2,424) (4,091) (0.03) (0.04) (0.07)
1997 166,661 138 -- 138 -- -- --
Fourth Quarter -
1998(f) 143,314 (8,209) -- (8,209) (0.15) -- (0.15)
1997(g) (h) 156,812 (3,445) (5,243) (8,688) (0.06) (0.10) (0.16)
</TABLE>
- -------------------------------------------------------------------------------
(a) Includes an extraordinary loss from early extinguishment of debt of $1.2
million ($0.02 per share).
(b) Includes an after-tax gain of $4.2 million ($0.07 per share) on the sale of
the Chico facilities.
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(c) Includes after-tax unusual charges of $3.5 million ($0.07 per share),
consisting of $2.0 million ($0.04 per share) relating to the closure of a
hospital and $1.5 million ($0.03 per share) relating to a corporate
reorganization.
(d) Includes an after-tax gain of $4.4 million ($0.08 per share) relating to the
settlement of a capitation agreement.
(e) Includes an after-tax charge of $2.4 million ($0.04 per share) relating to
the settlement of litigation concerning alleged violations of certain
Medicare rules at certain of the Company's former the psychiatric
facilities.
(f) Includes (i) impairment charges, net of tax, of $836,000 ($0.02 per share)
relating to the write-down of long-lived assets to fair value at certain
facilities and (ii) an after-tax charge of $116,000 (break-even per share)
resulting from the execution of the Executive Agreement.
(g) Includes after-tax unusual charges consisting of a reversal of a loss
contract accrual of $9.2 million ($0.17 per share), offset by a charge of
$1.8 million ($0.03 per share) for the settlement of certain litigation.
Quarterly results also include an after-tax impairment charge of $4.6
million ($0.08 per share), and contractual expenses of $2.8 million ($0.05
per share) to revise estimates of amounts due to the Company with respect
to Medicare/Medicaid receivables, the majority of which relate to prior
years, and other after-tax charges totaling $1.4 million ($0.03 per share)
attributable to the enactment of the Balanced Budget Act of 1997 effective
October 1, 1997 and other recently announced initiatives by the Federal
government with respect to reimbursement practices and policies.
(h) Discontinued operations includes an after-tax disposal loss of $5.2 million
($0.09 per share) on these facilities, consisting of an impairment charge
of $1.9 million ($0.03 per share) to reduce psychiatric hospital assets to
their estimated net realizable value based upon the most recent offers from
third party purchasers and a charge of $3.3 million ($0.06 per share)
relating to certain outstanding litigation matters.
Quarterly operating results are not necessarily representative of
operations for a full year for various reasons including levels of occupancy,
fluctuations in interest rates, and acquisitions and divestitures.
NOTE 18. SUBSEQUENT EVENTS
On March 24, 1999, the Company executed three separate but interrelated
agreements providing for a proposed global settlement that will resolve
substantially all claims against the Company related to the Merger and
outstanding class action and derivative lawsuits. The proposed global settlement
is subject to final approval by the Court. The principal terms of the three
agreements are as follows:
CLASS SETTLEMENT - Under the proposed class settlement, the parties
will stipulate to a settlement class that includes all individuals who purchased
or acquired the Company's common stock in the Merger or the public offering or
who purchased such stock in the after market from August 16, 1996 to October 9,
1996 (the "Class"). However, the Class will exclude certain former Champion
shareholders (the "Former Champion Shareholders") and others. In exchange for
releasing claims against the Company and others, the Class participants will be
entitled to cash and Company common stock that will be deposited into a class
settlement fund or distributed directly to the class. The Company will
contribute $14.0 million in cash and approximately 1.5 million shares of the
Company's common stock. The Company expects to fund all or nearly all of the
cash portion of its contribution with proceeds from certain insurance polices.
Additionally, the Majority Shareholder will contribute approximately 1.2 million
shares of unregistered Company common stock and the lead underwriter at the time
of the Merger will contribute $1.0 million to the settlement fund. The stock and
cash contributed to the settlement fund will be distributed in accordance with a
proposed plan of distribution after approval of the Court. It is anticipated
that plaintiffs' attorney fees and expenses will be paid from the settlement
fund.
PARK/CHAMPION SETTLEMENT AGREEMENT - In the proposed agreement between
the Majority Shareholder, the Former Chairman, the Former Champion Shareholders
and the Company, the Majority Shareholder has agreed to transfer approximately
8.7 million shares of unregistered stock that it owns to the Former Champion
Shareholders. Additionally, the Majority Shareholder has agreed to make
available approximately 1.2 million shares of unregistered stock for the Class
Settlement. The parties have agreed
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to execute mutual releases of existing and potential claims related to the
issues underlying the class and derivative actions.
At December 31, 1998, the Company had previously recorded long-term
liabilities related to the Shareholder Litigation of which approximately $11.7
million is expected to be relieved through the contribution of 9.9 million
shares of Company common stock by the Majority Shareholder in connection with
the Class Settlement and the Park/Champion settlement. The Company will reduce
the liability and record a corresponding increase in additional-paid-in capital
when the settlements become effective.
As discussed in Note 8, the Company has a $7.2 million note payable to
the Majority Shareholder wherein the Company is presently required to pay
interest only on the outstanding loan balance. The agreement provides that
beginning with the annual payment due in August 2000, the Company will
recommence payment of principal in accordance with the note's stated terms.
Additionally, the Company has agreed to use its reasonable best efforts to seek
approval from its lenders to repay principal amounts that are in arrears. The
Company will prepay the outstanding balance in certain circumstances.
As discussed further in Note 16, at the time of the Merger, the Company
entered into a management and strategic advisory services agreement with the
Former Chairman. Under the proposed terms of settlement, all obligations to the
Former Chairman will terminate; in return, the Company will issue the Former
Chairman 1.0 million newly issued shares of the Company's common stock and
pay him $1.0 million when the proposed settlement becomes effective.
The agreement also provides for certain changes in corporate
governance, the execution of a new shareholder agreement with the Majority
Shareholder, the termination of the Shareholder Protection Rights Agreement, and
the payment of certain cost and legal expenses of the Former Champions
Shareholders.
DERIVATIVE SETTLEMENT - In connection with the proposed global settlement
which will result in the release of claims related to the Merger against certain
current and former officers and directors, the proposed settlement will also (i)
relieve the Company of certain existing and future consulting agreement
obligations as well as certain existing contractual obligations under the SERP,
(ii) result in the termination and cancellation of Value Options to purchase 1.3
million shares of Company's common stock, (iii) transfer to the Company
virtually all insurance reimbursement rights of the settling parties while
providing the insureds certain rights of indemnification from the Company and
(iv) require the Company to pay legal fees of certain parties.
The proposed global settlement also modifies the Executive Agreement
with Mr. Miller, Mr. VanDevender, and Mr. Patterson. The senior executives have
waived their rights to certain additional payments under the Executive Agreement
upon the settlement of the Shareholder Litigation. See Note 15 for discussion of
the Executive Agreement.
The Company will recognize the relief of its obligations under the
SERP, consulting agreements, and, Value Options when the proposed global
settlement becomes effective. The Company expects the settlement agreements, as
described, to have no material adverse impact on the Company's financial
condition, results of operations or liquidity. There can be no assurance that
the Court will approve the settlement agreements or that the conditions
contained in any such agreements will be satisfactorily fulfilled.
NOTE 19. RECENT PRONOUNCEMENTS
In March and in April 1998, the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants issued two
Statements of Position ("SOPs") that are effective for financial statements for
fiscal years beginning after December 15, 1998, which will apply to the Company
beginning with its fiscal year ended December 31, 1999. SOP 98-1, "Accounting
for the Costs of
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Computer Software Developed or Obtained for Internal Use,"
provides guidance on the circumstances under which the costs of certain computer
software should be capitalized and/or expensed. SOP 98-5, "Reporting on the
Costs of Start-Up Activities," requires such costs to be expensed as incurred
instead of capitalized and amortized. The Company does not expect the adoption
of either of these SOPs to have a material effect on its future results of
operations.
In 1998, the Financial Accounting Standard Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which will
require companies to recognize all derivatives on the balance sheet at fair
value. SFAS No. 133 is effective for all companies for fiscal years beginning
after June 15, 1999. The Company expects SFAS No. 133 to have no impact on the
Company's financial position or results of operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item (i) will be included in an
amendment to this Form 10-K to be filed by April 30, 1999 with the Securities
and Exchange Commission and (ii) is as set forth under "Executive Officers of
the Registrant" in Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in an amendment
to this Form 10-K to be filed by April 30, 1999 with the Securities and Exchange
Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item will be included in an amendment
to this Form 10-K to be filed by April 30, 1999 with the Securities and Exchange
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in an amendment
to this Form 10-K to be filed by April 30, 1999 with the Securities and Exchange
Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
See Item 8 of this Report.
(a)(2) FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts
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All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable or have been disclosed
in the consolidated financial statements and notes thereto and therefore have
been omitted.
(a)(3) EXHIBITS
3.4 (a) Amended and Restated Articles of Incorporation of Paracelsus.
3.5 (a) Amended and Restated Bylaws of Paracelsus.
4.1 (a) Indenture, dated August 16, 1996 between Paracelsus and
AmSouth Bank of Alabama, as Trustee (including the form of
certificate representing the 10% Senior Subordinated Notes due
2006).
4.2 (b) Shareholder Protection Rights Agreement between Paracelsus and
ChaseMellon Shareholder Services, L.L.C, as Rights Agent.
4.5 (c) Form of Warrant issued pursuant to Champion Series E Note
Purchase Agreement, dated May 1, 1995, as amended.
4.6 (d) Form of Warrant issued pursuant to Champion Series D Note and
Stock Purchase Agreement dated December 31, 1993, as amended.
4.9 (e) Certificate representing Common Stock.
10.1 (e) Pooling Agreement, dated as of April 16, 1993 among PHC
Funding Corp. II ("PFC II"), Sheffield Receivables Corporation
and Bankers Trust Company, as trustee (the "Trustee").
10.2 (e) Servicing Agreement, dated as of April 16, 1993, among PFC II,
Paracelsus and the Trustee.
10.3 (e) Guarantee, dated as of April 16, 1993, by Paracelsus in favor
of PFC II.
10.4 (e) Sale and Servicing Agreement between subsidiaries of Paracelsus
and PFC II.
10.5 (e) Subordinate Note by PFC II in favor of Hospitals.
10.8 (a) $400 Million Reducing Revolving Credit Facility, dated as of
August 16, 1996, among Paracelsus, Bank of America National Trust
and Savings Association, as agent, and other lenders named therein
(10.1).
10.9 (q) First Amendment to Credit Agreement, dated as of April 14,
1997, among Paracelsus, Bank America National Trust and Savings
Association, as agent, and other lenders named therein.
10.10 (q) Second Amendment to Credit Agreement, dated as of August 14,
1997, among Paracelsus, Bank America National Trust and Savings
Association, as agent, and other lenders named therein.
10.11 (r) Third Amendment to Credit Agreement, dated as of April 14,
1997, among Paracelsus, Bank America National Trust and Savings
Association, as agent, and other lenders named therein.
10.16 (f) The Restated Paracelsus Healthcare Corporation Supplemental
Executive Retirement Plan.
10.17 (a) Amendment No. 1 to the Supplemental Executive Retirement Plan.
10.19 (e) Paracelsus Healthcare Corporation Annual Incentive Plan (10.17).
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10.25 (h) Asset Purchase Agreement, dated as of March 29, 1996 between
Paracelsus and FHP, Inc.
10.33 (f) Restated Champion Healthcare Corporation Founders' Stock Option
Plan.
10.34 (a) License Agreement between Dr. Manfred George Krukemeyer and
Paracelsus.
10.36 (a) Registration Rights Agreement between Paracelsus and
Park-Hospital GmbH.
10.37 (a) Voting Agreement between Park-Hospital GmbH and Messrs. Miller
and VanDevender.
10.38 (a) Services Agreement between Paracelsus and Dr. Manfred G.
Krukemeyer.
10.39 (a) Insurance Agreement between Paracelsus and Dr. Manfred G.
Krukemeyer.
10.40 (a) Non-Compete Agreement between Paracelsus and Dr. Manfred G.
Krukemeyer.
10.41 (a) Shareholder Agreement between Paracelsus and Park-Hospital GmbH,
as guaranteed by Dr. Manfred G. Krukemeyer.
10.42 (a) Dividend and Note Agreement between Paracelsus and Park-Hospital
GmbH.
10.43 (a) Employment Agreement between Charles R. Miller and Paracelsus,
including the Management Rights Agreement.
10.44 (a) Employment Agreement between R.J. Messenger and Paracelsus,
including the Management Rights Agreement.
10.45 (a) Employment Agreement between James G. VanDevender and Paracelsus.
10.46 (a) Employment Agreement between Ronald R. Patterson and Paracelsus.
10.47 (a) Employment Agreement between Robert C. Joyner and Paracelsus.
10.48 (a) Paracelsus 1996 Stock Incentive Plan.
10.49 (a) Paracelsus Healthcare Corporation Executive Officer Performance
Bonus Plan.
10.50 (a) First Refusal Agreement among Park-Hospital GmbH, Dr. Manfred G.
Krukemeyer and Messrs. Messenger, Miller, VanDevender and
Patterson.
10.51(g) Agreement between Robert C. Joyner and Paracelsus.
10.54 (a) Registration Rights Agreement among Paracelsus and certain
Champion Investors.
10.56 (a) Indemnity and Insurance Coverage Agreement between Paracelsus
and certain Champion and Paracelsus executive officers.
10.57 (o) AmeriHealth Amended and Restated 1988 Non-Qualified Stock Option
Plan.
10.58 (n) Champion Employee Stock Option Plan dated December 31, 1991, as
amended (10.14).
10.59 (n) Champion Employee Stock Option Plan No. 2 dated May 29, 1992, as
amended (10.15).
10.60 (n) Champion Employee Stock Option Plan No. 3 dated September 1992,
as amended (10.16).
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10.61 (n) Champion Employee Stock Option Plan No. 4, dated January 5, 1994,
as amended (10.17).
10.62 (p) Champion Healthcare Corporation Physicians Stock Option
Plan (4.2).
10.63 (n) Champion Selected Executive Stock Option Plan No. 5, dated
May 25, 1995 (4.12).
10.64 (n) Champion Directors' Stock Option Plan, dated 1992.
10.65 (a) Paracelsus' 6.51% Subordinated Notes Due 2006 (10.64).
10.66 (q) Letter Agreement between R. J. Messenger and Paracelsus
Healthcare Corporation dated April 11, 1997.
10.67 (i) The Second Amended and First Restated Asset Purchase Agreement
for Chico Community Hospital, dated December 15, 1997, and as
amended on June 12, 1998.
10.68 (i) Asset Purchase Agreement for Chico Community Rehabilitation
Hospital, dated December 15, 1997, and as amended on June 10,
1998.
10.69 (i) Agreement for Purchase and Sale of Partnership Interest, dated
June 1, 1998, by and between Dakota Medical Foundation and
Paracelsus Healthcare Corporation of North Dakota, Inc.
10.70 (j) Asset Purchase Agreement, dated September 30, 1998, by and
among Alta Healthcare System LLC, and Paracelsus Healthcare
Corporation.
10.71 (k) Settlement Agreement between the (a) United States of America,
acting through the United States Department of Justice and on
behalf of the Office of Inspector General of the Department of
Health and Human Services; (b) Timothy Hill and Alan Leavitt; (c)
Paracelsus Healthcare Corporation; and (d) individual defendant
Joseph Sharp.
10.72 (l) $180 Million Reducing Revolving Credit Facility and $75
Million Term Loan Facilities dated as of March 30, 1998, among
Paracelsus, Banque Paribas, as agent, and other lenders named
therein.
10.73 (l) Change in Control Separation Pay Plan.
10.74 (m) The First Amendment to Amended and Restated Credit Agreement,
effective June 15, 1998, by and among Paracelsus Healthcare
Corporation, Paribas, Toronto Dominion (Texas), Inc. and Bank
Montreal.
10.75 Memorandum of Understanding among Paracelsus Healthcare
Corporation, Charles R. Miller, James G. VanDevender, Ronald R.
Patterson, Park-Hospital GmbH, and the members of the Ad Hoc
Committee of Former Shareholders of Champion Healthcare
Corporation.
21.1 List of subsidiaries of Paracelsus.
23.1 Consent of Ernst & Young L.L.P.
27 Financial Data Schedule.
- --------------------------
(a) Incorporated by reference from Exhibit of the same number (or if otherwise
noted, Exhibit number contained in parenthesis which refers to the exhibit
number in such Quarterly Report) to the Company's Quarterly Report on Form
10-Q for quarter ended September 30, 1996.
(b) Incorporated by reference from Exhibit of the same number to the Company's
Registration Statement on Form 8-A, filed on August 12, 1996.
74
<PAGE> 75
(c) Incorporated by reference from Exhibit 10.23(g) to Champion's Annual Report
on Form 10-K for the year ended December 31, 1995.
(d) Incorporated by reference from Exhibit 10.23(f) to Champion's Annual Report
on Form 10-K for the year ended December 31, 1995.
(e) Incorporated by reference from Exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
(f) Incorporated by reference from Exhibit of the same number to the Company's
Registration Statement on Form S-4, Registration No. 333-08521, filed on
July 19, 1996.
(g) Incorporated by reference from Exhibit of the same number to the Company's
Annual Report on Form 10-K, dated December 31, 1997.
(h) Incorporated by reference from Exhibit of the same number (or if otherwise
noted, Exhibit number contained in parenthesis which refers to the exhibit
number in such Quarterly Report) to the Company's Annual Report on Form 10-
K for the year ended September 30, 1995.
(i) Incorporated by reference from Exhibits of the same numbers to the
Company's Current Report on Form 8-K, dated June 30, 1998.
(j) Incorporated by reference from Exhibit of the same number to the Company's
Current Report on Form 8-K, dated June 30, 1998.
(k) Incorporated by reference from Exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
(l) Incorporated by reference from Exhibits 10.6 and 10.15 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(m) Incorporated by reference from Exhibit 10.7 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(n) Incorporated by reference from Exhibit of the same number (or if otherwise
noted, Exhibit number contained in parenthesis which refers to the exhibit
number in such Annual Report) to Champion's Annual Report for the year
ended December 31, 1994.
(o) Incorporated by reference from Exhibit 10.06 to AmeriHealth's Annual Report
on Form 10K for the year ended December 31, 1992.
(p) Incorporated by reference from Exhibit of the same number (or if otherwise
noted, Exhibit number contained in parenthesis which refers to the exhibit
number in such Registration Statement) to Champion's Registration Statement
on Form S-8, filed on August 3, 1995.
(q) Incorporated by reference from Exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K, dated November 30, 1998,
reporting, pursuant to Item 5 thereof, that the New York Stock Exchange had
notified the Company that it was not in compliance with certain financial
criteria for continued listing.
75
<PAGE> 76
PARACELSUS HEALTHCARE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
($ in 000's)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF YEAR EXPENSES WRITE-OFFS OTHER END OF YEAR
----------- ------- -------- ---------- ----- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Allowance for doubtful accounts $ 54,442 42,659 (56,550) $ 40,551
Year ended December 31, 1997
Allowance for doubtful accounts $ 36,469 46,606 (28,633) $ 54,442
Year ended December 31, 1996
Allowance for doubtful accounts 28,321 50,958(a) (24,424) (18,386)(b) 36,469
</TABLE>
- --------------------
(a) Includes bad debt expenses of $12.6 million and $16.7 million for the
years ended December 31, 1996 and 1995, respectively, related to the
psychiatric hospitals which have been reclassified to discontinued
operations.
(b) Represents allowance for doubtful accounts balance of $36.1 million
related to the psychiatric hospitals which have been reclassified to
discontinued operations, net of $17.7 million acquired reserves from the
acquisition of Champion.
76
<PAGE> 77
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARACELSUS HEALTHCARE CORPORATION
(Registrant)
By: /s/ CHARLES R. MILLER
---------------------------------------------
Charles R. Miller
President, Chief Operating Officer & Director
Pursuant to the requirement of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------------- ---------------------------------------- --------------------
<S> <C> <C>
/s/ CHARLES R. MILLER President, Chief Operating Officer April 9, 1999
- --------------------------------------------------- and Director
Charles R. Miller
/s/ JAMES G. VANDEVENDER Senior Executive Vice President, April 9, 1999
- --------------------------------------------------- Chief Financial Officer and Director
James G. VanDevender
/s/ ROBERT M. STARLING Senior Vice President and April 9, 1999
- --------------------------------------------------- Controller
Robert M. Starling
/s/ HEINER MEYER ZU LOSEBECK Director April 9, 1999
- ---------------------------------------------------
Dr. Heiner Meyer Zu Losebeck
/s/ NOLAN LEHMANN Director April 9, 1999
- ---------------------------------------------------
Nolan Lehmann
/s/ CHRISTIAN A. LANGE Director April 9, 1999
- ---------------------------------------------------
Christian A. Lange
</TABLE>
77
<PAGE> 78
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
3.4 (a) Amended and Restated Articles of Incorporation of Paracelsus.
3.5 (a) Amended and Restated Bylaws of Paracelsus.
4.1 (a) Indenture, dated August 16, 1996 between Paracelsus and
AmSouth Bank of Alabama, as Trustee (including the form of
certificate representing the 10% Senior Subordinated Notes due
2006).
4.2 (b) Shareholder Protection Rights Agreement between Paracelsus and
ChaseMellon Shareholder Services, L.L.C, as Rights Agent.
4.5 (c) Form of Warrant issued pursuant to Champion Series E Note
Purchase Agreement, dated May 1, 1995, as amended.
4.6 (d) Form of Warrant issued pursuant to Champion Series D Note and
Stock Purchase Agreement dated December 31, 1993, as amended.
4.9 (e) Certificate representing Common Stock.
10.1 (e) Pooling Agreement, dated as of April 16, 1993 among PHC
Funding Corp. II ("PFC II"), Sheffield Receivables Corporation
and Bankers Trust Company, as trustee (the "Trustee").
10.2 (e) Servicing Agreement, dated as of April 16, 1993, among PFC II,
Paracelsus and the Trustee.
10.3 (e) Guarantee, dated as of April 16, 1993, by Paracelsus in favor
of PFC II.
10.4 (e) Sale and Servicing Agreement between subsidiaries of Paracelsus
and PFC II.
10.5 (e) Subordinate Note by PFC II in favor of Hospitals.
10.8 (a) $400 Million Reducing Revolving Credit Facility, dated as of
August 16, 1996, among Paracelsus, Bank of America National Trust
and Savings Association, as agent, and other lenders named therein
(10.1).
10.9 (q) First Amendment to Credit Agreement, dated as of April 14,
1997, among Paracelsus, Bank America National Trust and Savings
Association, as agent, and other lenders named therein.
10.10 (q) Second Amendment to Credit Agreement, dated as of August 14,
1997, among Paracelsus, Bank America National Trust and Savings
Association, as agent, and other lenders named therein.
10.11 (r) Third Amendment to Credit Agreement, dated as of April 14,
1997, among Paracelsus, Bank America National Trust and Savings
Association, as agent, and other lenders named therein.
10.16 (f) The Restated Paracelsus Healthcare Corporation Supplemental
Executive Retirement Plan.
10.17 (a) Amendment No. 1 to the Supplemental Executive Retirement Plan.
10.19 (e) Paracelsus Healthcare Corporation Annual Incentive Plan (10.17).
</TABLE>
<PAGE> 79
<TABLE>
<S> <C>
10.25 (h) Asset Purchase Agreement, dated as of March 29, 1996 between
Paracelsus and FHP, Inc.
10.33 (f) Restated Champion Healthcare Corporation Founders' Stock Option
Plan.
10.34 (a) License Agreement between Dr. Manfred George Krukemeyer and
Paracelsus.
10.36 (a) Registration Rights Agreement between Paracelsus and
Park-Hospital GmbH.
10.37 (a) Voting Agreement between Park-Hospital GmbH and Messrs. Miller
and VanDevender.
10.38 (a) Services Agreement between Paracelsus and Dr. Manfred G.
Krukemeyer.
10.39 (a) Insurance Agreement between Paracelsus and Dr. Manfred G.
Krukemeyer.
10.40 (a) Non-Compete Agreement between Paracelsus and Dr. Manfred G.
Krukemeyer.
10.41 (a) Shareholder Agreement between Paracelsus and Park-Hospital GmbH,
as guaranteed by Dr. Manfred G. Krukemeyer.
10.42 (a) Dividend and Note Agreement between Paracelsus and Park-Hospital
GmbH.
10.43 (a) Employment Agreement between Charles R. Miller and Paracelsus,
including the Management Rights Agreement.
10.44 (a) Employment Agreement between R.J. Messenger and Paracelsus,
including the Management Rights Agreement.
10.45 (a) Employment Agreement between James G. VanDevender and Paracelsus.
10.46 (a) Employment Agreement between Ronald R. Patterson and Paracelsus.
10.47 (a) Employment Agreement between Robert C. Joyner and Paracelsus.
10.48 (a) Paracelsus 1996 Stock Incentive Plan.
10.49 (a) Paracelsus Healthcare Corporation Executive Officer Performance
Bonus Plan.
10.50 (a) First Refusal Agreement among Park-Hospital GmbH, Dr. Manfred G.
Krukemeyer and Messrs. Messenger, Miller, VanDevender and
Patterson.
10.51(g) Agreement between Robert C. Joyner and Paracelsus.
10.54 (a) Registration Rights Agreement among Paracelsus and certain
Champion Investors.
10.56 (a) Indemnity and Insurance Coverage Agreement between Paracelsus
and certain Champion and Paracelsus executive officers.
10.57 (o) AmeriHealth Amended and Restated 1988 Non-Qualified Stock Option
Plan.
10.58 (n) Champion Employee Stock Option Plan dated December 31, 1991, as
amended (10.14).
10.59 (n) Champion Employee Stock Option Plan No. 2 dated May 29, 1992, as
amended (10.15).
10.60 (n) Champion Employee Stock Option Plan No. 3 dated September 1992,
as amended (10.16).
</TABLE>
<PAGE> 80
<TABLE>
<S> <C>
10.61 (n) Champion Employee Stock Option Plan No. 4, dated January 5, 1994,
as amended (10.17).
10.62 (p) Champion Healthcare Corporation Physicians Stock Option
Plan (4.2).
10.63 (n) Champion Selected Executive Stock Option Plan No. 5, dated
May 25, 1995 (4.12).
10.64 (n) Champion Directors' Stock Option Plan, dated 1992.
10.65 (a) Paracelsus' 6.51% Subordinated Notes Due 2006 (10.64).
10.66 (q) Letter Agreement between R. J. Messenger and Paracelsus
Healthcare Corporation dated April 11, 1997.
10.67 (i) The Second Amended and First Restated Asset Purchase Agreement
for Chico Community Hospital, dated December 15, 1997, and as
amended on June 12, 1998.
10.68 (i) Asset Purchase Agreement for Chico Community Rehabilitation
Hospital, dated December 15, 1997, and as amended on June 10,
1998.
10.69 (i) Agreement for Purchase and Sale of Partnership Interest, dated
June 1, 1998, by and between Dakota Medical Foundation and
Paracelsus Healthcare Corporation of North Dakota, Inc.
10.70 (j) Asset Purchase Agreement, dated September 30, 1998, by and
among Alta Healthcare System LLC, and Paracelsus Healthcare
Corporation.
10.71 (k) Settlement Agreement between the (a) United States of America,
acting through the United States Department of Justice and on
behalf of the Office of Inspector General of the Department of
Health and Human Services; (b) Timothy Hill and Alan Leavitt; (c)
Paracelsus Healthcare Corporation; and (d) individual defendant
Joseph Sharp.
10.72 (l) $180 Million Reducing Revolving Credit Facility and $75
Million Term Loan Facilities dated as of March 30, 1998, among
Paracelsus, Banque Paribas, as agent, and other lenders named
therein.
10.73 (l) Change in Control Separation Pay Plan.
10.74 (m) The First Amendment to Amended and Restated Credit Agreement,
effective June 15, 1998, by and among Paracelsus Healthcare
Corporation, Paribas, Toronto Dominion (Texas), Inc. and Bank
Montreal.
10.75 Memorandum of Understanding among Paracelsus Healthcare
Corporation, Charles R. Miller, James G. VanDevender, Ronald R.
Patterson, Park-Hospital GmbH, and the members of the Ad Hoc
Committee of Former Shareholders of Champion Healthcare
Corporation.
21.1 List of subsidiaries of Paracelsus.
23.1 Consent of Ernst & Young L.L.P.
27 Financial Data Schedule.
</TABLE>
- --------------------------
(a) Incorporated by reference from Exhibit of the same number (or if otherwise
noted, Exhibit number contained in parenthesis which refers to the exhibit
number in such Quarterly Report) to the Company's Quarterly Report on Form
10-Q for quarter ended September 30, 1996.
(b) Incorporated by reference from Exhibit of the same number to the Company's
Registration Statement on Form 8-A, filed on August 12, 1996.
<PAGE> 81
(c) Incorporated by reference from Exhibit 10.23(g) to Champion's Annual Report
on Form 10-K for the year ended December 31, 1995.
(d) Incorporated by reference from Exhibit 10.23(f) to Champion's Annual Report
on Form 10-K for the year ended December 31, 1995.
(e) Incorporated by reference from Exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
(f) Incorporated by reference from Exhibit of the same number to the Company's
Registration Statement on Form S-4, Registration No. 333-08521, filed on
July 19, 1996.
(g) Incorporated by reference from Exhibit of the same number to the Company's
Annual Report on Form 10-K, dated December 31, 1997.
(h) Incorporated by reference from Exhibit of the same number (or if otherwise
noted, Exhibit number contained in parenthesis which refers to the exhibit
number in such Quarterly Report) to the Company's Annual Report on Form 10-
K for the year ended September 30, 1995.
(i) Incorporated by reference from Exhibits of the same numbers to the
Company's Current Report on Form 8-K, dated June 30, 1998.
(j) Incorporated by reference from Exhibit of the same number to the Company's
Current Report on Form 8-K, dated June 30, 1998.
(k) Incorporated by reference from Exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
(l) Incorporated by reference from Exhibits 10.6 and 10.15 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(m) Incorporated by reference from Exhibit 10.7 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(n) Incorporated by reference from Exhibit of the same number (or if otherwise
noted, Exhibit number contained in parenthesis which refers to the exhibit
number in such Annual Report) to Champion's Annual Report for the year
ended December 31, 1994.
(o) Incorporated by reference from Exhibit 10.06 to AmeriHealth's Annual Report
on Form 10K for the year ended December 31, 1992.
(p) Incorporated by reference from Exhibit of the same number (or if otherwise
noted, Exhibit number contained in parenthesis which refers to the exhibit
number in such Registration Statement) to Champion's Registration Statement
on Form S-8, filed on August 3, 1995.
(q) Incorporated by reference from Exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
<PAGE> 1
EXHIBIT 10.75
MEMORANDUM OF UNDERSTANDING
This Memorandum of Understanding ("MoU") is among the following parties:
Paracelsus Healthcare Corporation ("Paracelsus"),
Charles R. Miller ("Miller"),
James G. VanDevender ("VanDevender"),
Ronald R. Patterson ("Patterson"),
Park-Hospital GmbH ("Park"), and
the members of the Ad Hoc Committee of Former Shareholders of
Champion Healthcare Corporation ( the "Ad Hoc Committee")
RECITALS
WHEREAS this MoU is intended to be a binding agreement between the
parties with respect to the subject matters referenced herein;
WHEREAS Miller, VanDevender, and Patterson each have employment
agreements with Paracelsus dated July 17, 1996 ("Employment Agreements");
WHEREAS Park and the Ad Hoc Committee control a majority of the
outstanding shares of Paracelsus;
WHEREAS the parties to this MoU desire to retain the services of
Miller, VanDevender, and Patterson; Miller, VanDevender, and Patterson are
willing to continue to provide services to Paracelsus; and Miller, VanDevender,
and Patterson desire to ensure that their rights under their Employment
Agreements as specifically referenced below are protected;
WHEREAS the parties recognize that entering into this MoU will
facilitate a sale of Paracelsus by addressing issues related to the Employment
Agreements before completion of a transaction with a purchaser;
WHEREAS Miller, VanDevender, and Patterson have been joined as
defendants, along with Paracelsus and others in four shareholder actions
consolidated under the caption, IN RE PARACELSUS CORP. SEC. LITIG., Master File
No. H-96-3464 (EW) (the "Consolidated Action"); and two derivative actions
under the captions, CAVEN V. MILLER, No. H-96-CV-4291 (EW); and OROVITZ V.
MILLER, No. H-97-2752 (EW) (the "Derivative Actions") which are all now pending
in the United States District Court for the Southern District of Texas;
<PAGE> 2
WHEREAS Miller, VanDevender, Patterson, and Paracelsus have been joined
in a shareholder action filed in Texas state court under the caption, ESSEX
IMPORTS V. PARACELSUS, ET AL., No. 96-51864;
WHEREAS Miller, VanDevender, and Paracelsus have been joined in a
shareholder action in Delaware Chancery Court under the caption MOLINARI V.
MILLER, ET AL., C.A. No. 14945;
WHEREAS two shareholder actions have been filed against Paracelsus, but
not Miller, VanDevender, and Patterson in California state court under the
captions, GAONKAR V. PARACELSUS, ET AL., No. BC 158899; and PRESCOTT V.
PARACELSUS, ET AL., No. BC 158979, and a shareholder small claims lawsuit was
filed in South Orange County Municipal Court in California against Paracelsus
and others under the caption, HUTCHENS V. PARACELSUS, ET AL., No. SC38166
(collectively the "California Actions") (the Consolidated Action, the
Derivative Actions, ESSEX, MOLINARI, and the California Actions as well as any
other litigation arising from the merger of Paracelsus and Champion Healthcare
Corporation ("Champion") and the related public offerings shall be referred to
collectively as the "Litigation");
NOW, THEREFORE, IN CONSIDERATION OF THE PREMISES AND MUTUAL COVENANTS
HEREIN CONTAINED, the parties agree as follows:
1. The term "Executive" shall mean Miller, VanDevender, or
Patterson, and the term "Executives" shall mean Miller,
VanDevender, and Patterson.
2. No later than five (5) business days after the earlier of (i)
the execution of this MoU by both Park and the Ad Hoc Committee
or (ii) the last day the Executives can void the MoU pursuant to
para. 27 for failure of Park and the Ad Hoc Committee to sign,
Paracelsus shall pay to each Executive the total amounts, as set
forth in this paragraph, due to that Executive under
Paracelsus's Supplemental Executive Retirement Plan, effective
January 1, 1996, as amended; and each Executive, as a condition
precedent to such payment, shall deliver to Paracelsus a full
<PAGE> 3
and complete release of any obligations Paracelsus may have now
or in the future to that Executive arising out of or in any way
related to Paracelsus's Supplemental Executive Retirement Plan,
effective January 1, 1996, as amended. The total amounts due
each Executive under Paracelsus's Supplemental Executive
Retirement Plan, effective January 1, 1996, as amended, are as
follows:
SERP BENEFITS
Miller's Supplemental Executive Retirement Plan benefits $310,510
VanDevender's Supplemental Executive Retirement Plan benefits $104,969
Patterson's Supplemental Executive Retirement Plan benefits $ 85,793
3. No later than five (5) business days after the execution of this
MoU by Paracelsus and the Executives, Paracelsus and the
Executives shall create an escrow account (the "Escrow Account")
at a depository (the "Escrow Agent") acceptable to both
Paracelsus and the Executives. The following amounts shall be
paid to the Executives and deposited into the Escrow Account in
accordance with para. 5 of this MoU:
CONTRIBUTION FOR MILLER
Three times Miller's current annual salary $1,620,000
Three times 25 percent of Miller's target annual bonus $ 344,250
CONTRIBUTION FOR VANDEVENDER
Three times VanDevender's current annual salary $1,125,000
Three times 25 percent of VanDevender's target annual bonus $ 196,875
<PAGE> 4
CONTRIBUTION FOR PATTERSON
Three times Patterson's current annual salary $1,125,000
Three times 25 percent of Patterson's target annual bonus $ 196,875
4. An additional amount shall be deposited into the Escrow Account
(the "Additional Payment") in accordance with para. 5 of this MoU, which shall
be equal to three times 25 percent of each Executive's target annual bonus, as
listed below:
ADDITIONAL PAYMENT CONTRIBUTION
Miller's Additional Payment $ 344,250
VanDevender's Additional Payment $ 196,875
Patterson's Additional Payment $196,875
5. Paracelsus shall pay to the Executives the total of the amounts
referred to in para. 3 and 4 of this MoU in three (3) monthly
installments with the first installment being made on January 1, 1999, and the
remaining two installments on February 1, 1999, and March 1, 1999. Paracelsus
shall make these installment payments directly to the Executives subject to
their endorsing the payments directly over to the Escrow Account. The first
monthly installment shall be equal to 2/3 of the total of the amounts referred
to in para. 3 and 4 of this MoU. The final two monthly installments
shall be equal to 1/6 of the total amounts referred to in para. 3 and 4.
Interest on the funds held in the Escrow Account shall be payable to
Paracelsus.
6. Upon the later of (a) entry of orders dismissing with prejudice
all claims against each Executive in the Litigation and releasing him from all
other claims arising out of or related to the subject matter of those actions,
(b) the termination of the Executive's employment or his death or disability,
or (c) the payment to the Executive in accordance with para. 18 or 20 of this
<PAGE> 5
MoU, each Executive or, in the case of death or disability, the person
authorized by law to act on behalf of the Executive or his estate ("Successor")
shall relinquish and terminate -- in consideration for the release of that
Executive referred to in para. 15(c) of this MoU -- all rights he or his
Successor has to the Value Options described in para. 3(c)(i) of his
Employment Agreement. Until such time, each Executive agrees not to exercise
or sell, trade, assign, or otherwise dispose of any rights he has to the Value
Options described in para. 3(c)(i) of his Employment Agreement.
7. Paracelsus, Park, and the Ad Hoc Committee will take no action
to revoke or in any way impair the ability of each Executive to exercise the
Market Options described in para. 3(c)(ii) of his Employment Agreement.
Further, Paracelsus, Park, and the Ad Hoc Committee will not assign to any
third person or entity any claim they may have to revoke or impair the ability
of each Executive to exercise the Market Options described in para. 3(c)(ii)
of his Employment Agreement or assist any third person or entity in revoking or
impairing the ability to exercise such options. Market Options vested on the
date an Executive's employment terminates shall be exercisable for two years
after that date.
8. Paracelsus, Park, and the Ad Hoc Committee will take no action
to revoke or in any way impair the ability of each Executive to exercise the
options he held in Champion before the merger of Champion and Paracelsus
("Champion Options"). Further, Paracelsus, Park, and the Ad Hoc Committee will
not assign to any third person or entity any claim Paracelsus may have to
revoke or impair the ability of each Executive to exercise any Champion Options
or assist any third person or entity in revoking or impairing the ability to
exercise such options.
9. Upon the request of the Board of Directors of Paracelsus, each
Executive shall cooperate with Paracelsus and the Board of Directors in
securing replacement senior management, including a chief executive officer,
possibly before the Bonus Payment Date (as defined below), and effecting an
orderly transition of senior management, provided that such obligation shall
<PAGE> 6
not require any Executive to serve as an employee of Paracelsus beyond the
earlier of a Sale of Paracelsus (as defined below) or the Executive's Bonus
Payment Date.
10. Upon termination of each Executive's employment and if payment
is made to that Executive of all amounts referred to in para. 3 of this MoU to
which he is entitled to be paid pursuant to this MoU, that Executive shall not
engage in the actions described in para 10(b) of his Employment Agreement for
a period of twelve (12) months. Each Executive shall be bound by both para.
10(c) and the final paragraph of para. 10(b) of his Employment Agreement.
Each Executive's agreement to abide by the terms of this paragraph is
consideration for payment to him of a portion of the funds referred to in
para 3 of this MoU allocable to that Executive equal to one-half (1/2) of
that Executive's current annual salary.
11. Upon termination of each Executive's employment, unless that
Executive voluntarily terminates his employment before the earlier of the Sale
of Paracelsus or such Executive's Bonus Payment Date or if his employment is
terminated for Cause in accordance with para 21, Paracelsus will provide that
Executive with the insurance and other benefits described in para 5(3) of his
Employment Agreement for a period lasting either (i) thirty-six (36) months or
(ii) until the Executive is provided substantially equivalent benefits by a new
employer, whichever is shorter.
12. Upon termination of each Executive's employment, that Executive
agrees to comply with the obligations of para. 11 of his Employment Agreement
except that such obligations shall apply until the Confidential Information
becomes public.
13. Attached to this MoU is a form of release of Paracelsus of any
claims arising from or related to each Executive's employment by Paracelsus,
including but not limited to any claims arising from or related to his
Employment Agreement and to his service as a director of Paracelsus, except as
otherwise provided in this paragraph. A copy of Miller's Employment Agreement
is attached as Exhibit A hereto, a copy of VanDevender's Employment Agreement
<PAGE> 7
is attached as Exhibit B hereto, and a copy of Patterson's Employment Agreement
is attached as Exhibit C hereto, and all such Exhibits are hereby incorporated
herein by reference. The form of release, when executed, shall not release any
obligation created pursuant to the terms of this MoU; any obligation to
compensate or provide employment benefits to each Executive as provided in
para. 3(a), (b), and (d) of his Employment Agreement for his continued service
as an officer, director and/or employee of Paracelsus until the date of
termination of that Executive's employment; and any obligation Paracelsus may
have to indemnify each Executive. Each Executive or his Successor shall
execute this form of release and deliver the signed release to the Escrow Agent
as a condition precedent to receiving any funds held in the Escrow Account
referred to in para. 3 of this MoU allocable to that Executive.
14. Paracelsus shall execute and deliver to the Escrow Agent a
release in the form attached of each of the Executives of any claims arising
from or related to his employment by Paracelsus, including but not limited to
any claims arising from or related to his Employment Agreement and his service
as a director of Paracelsus except as otherwise provided in this paragraph.
Such release shall not release any obligation created pursuant to the terms of
this MoU or any obligation of the Executive to provide continued service as an
officer, director and/or employee of Paracelsus through the termination of that
Executive's employment. The Escrow Agent shall deliver the executed release to
each Executive or his Successor at the same time, and if, the funds in the
Escrow Account referred to in para. 3 of this MoU are released to such
Executive or his Successor.
15. As part of a final settlement of the Litigation that dismisses
and releases claims against Paracelsus and the Executives and subject to any
required court approval, (a) each Executive or his Successor shall execute a
release of Paracelsus, Park, and the Ad Hoc Committee of any claims made or
that could have been made in the Litigation or otherwise arising from the
merger of Paracelsus and Champion and the related public offerings; (b) each
Executive or his Successor shall execute a release of any party (from which the
<PAGE> 8
Executive or his Successor receives a reciprocal release) of any claims made or
that could have been made in the Litigation or otherwise arising from the
merger of Paracelsus and Champion and the related public offerings; and (c)
Paracelsus, Park, and the Ad Hoc Committee shall execute a release of each
Executive of any claims that Paracelsus, Park, or the Ad Hoc Committee made or
could have been made in the Litigation or otherwise arising from the merger of
Paracelsus and Champion and the related public offerings. Paracelsus, Park,
the Ad Hoc Committee, and the Executives agree for their own benefit to
cooperate and bargain in good faith with all necessary parties in an effort
promptly to achieve such a settlement of the Litigation.
16. Paracelsus shall not be required to take any action to include
any Executive as a recipient of any proceeds (including the redistribution of
common stock) of either a settlement of the Litigation or a settlement between
Park and the Ad Hoc Committee.
17. Paracelsus, Park, and the Ad Hoc Committee acknowledge that each
Executive has certain indemnification rights and agree that they will take no
action to impair any such rights. This MoU does not create any obligation on
the part of Paracelsus, Park and/or the Ad Hoc Committee to indemnify any
Executive, nor does this MoU expand or affect in any way any existing
obligations or rights of indemnification owed to any Executive. Each Executive
shall abide by any modification of their indemnification rights set out in any
settlement agreement concerning Great American Insurance Company Policy No.
DFX0009397.
18. Each Executive's "Bonus Payment Date" shall be the later of
either March 31, 1999, or the filing date of Paracelsus's Form 10-K for fiscal
year 1998, but in no event later than April 30, 1999. Each Executive shall
continue to serve in his present capacity at Paracelsus through the earlier of
a Sale of Paracelsus or his Bonus Payment Date. The duties to be performed by
each Executive through such date shall be of the same scope and level of
responsibility as provided in each Executive's Employment Agreement, including
those duties, as applicable, described in the Management Rights Agreement. If
<PAGE> 9
an Executive continues to be employed by Paracelsus on his Bonus Payment Date,
then on or after such date and on the execution and delivery to the Escrow
Agent of the release referred to in para. 13 of this MoU for that Executive,
(i) the Escrow Agent shall be authorized to pay immediately to that Executive
the funds contributed to the Escrow Account allocable to that Executive
referred to in para. 3 of this MoU, and (ii) the Escrow Agent shall be
authorized to deliver immediately to Paracelsus that Executive's signed release
of Paracelsus referred to in para. 13 of this MoU and to deliver immediately
to the Executive the release of that Executive referred to in para. 14 of this
MoU.
19. If an Executive continues to be employed by Paracelsus on the
effective date of a Sale of Paracelsus (as defined in this paragraph), whether
such day is before, on, or after the Bonus Payment Date, then on such date the
Escrow Agent shall be authorized to pay immediately to such Executive the funds
contributed to the Escrow Account allocable to that Executive referred to in
para. 4 of this MoU. For purposes of this MoU, a "Sale of Paracelsus" means
the sale by Paracelsus of substantially all of its assets to, or the
acquisition of more than 60% of the outstanding common stock of Paracelsus by,
a person or entity other than Park, Dr. Manfred G. Krukemeyer, Paracelsus-
Kliniken-Deutschland GmbH, the trustees of the estate of Dr. Hartmut
Krukemeyer, or an affiliate of any of them.
20. If the effective date of a Sale of Paracelsus occurs before the
Bonus Payment Date, then upon the execution and delivery to the Escrow Agent of
the release referred to in para. 13 of this MoU for each Executive who
continued to be employed by Paracelsus on such date, the Escrow Agent shall be
authorized to pay immediately to that Executive the funds in the Escrow Account
allocable to that Executive referred to in para. 3 of this MoU, and the Escrow
Agent shall be authorized to deliver immediately to the Executive the release
of that Executive referred to in para. 14 of this MoU. In addition,
Paracelsus shall immediately pay each Executive any portion of the funds
referred to in para. 3 not yet paid to the Executive, and, upon such payment,
<PAGE> 10
the Escrow Agent shall be authorized to deliver immediately to Paracelsus that
Executive's signed form of release of Paracelsus referred to in para. 13 of
this MoU.
21. Each Executive shall be compensated and receive employment
benefits in accordance with para. 3(a), (b), and (d) of his Employment
Agreement until that Executive's employment is terminated. Should Paracelsus
terminate the employment of an Executive for any reason other than for "Cause"
(as that term is defined in each Executive's Employment Agreement) before that
Executive's Bonus Payment Date, or if an Executive is unable to carry out his
employment duties with Paracelsus through his Bonus Payment Date due to death
or disability (as those terms are defined in the Executive's Employment
Agreements), the Escrow Agent, upon the receipt of an executed release referred
to in para. 13 of this MoU for that Executive, shall be authorized to pay to
that Executive or his Successor, within ten (10) days of receipt of such signed
release, the funds then held in the Escrow Account allocable to him referred to
in para. 3 of this MoU and the Escrow Agent shall be authorized to deliver to
the Executive or his Successor the release of the Executive referred to in
para. 14 of this MoU. In addition, Paracelsus shall pay to that Executive or
his Successor within such ten (10) day period any portion of the funds referred
to in para. 3 of this MoU not yet paid to the Executive and the Escrow Agent
shall be authorized to deliver to Paracelsus that Executive's signed release of
Paracelsus referred to in para. 13 of this MoU. If Paracelsus terminates the
employment of an Executive for "Cause" as that term is defined in that
Executive's Employment Agreement before his Bonus Payment Date, that Executive
will not be entitled to receive any of the funds held in the Escrow Account
allocable to him. Such termination for "Cause" must be based upon actions or
events that occurred after the effective date of the merger of Paracelsus and
Champion.
22. If an Executive voluntarily terminates his employment before the
earlier of the Sale of Paracelsus or such Executive's Bonus Payment Date or if
an Executive's employment is terminated for Cause in accordance with para 21,
<PAGE> 11
the Escrow Agent shall be authorized immediately to pay to Paracelsus any funds
held in the Escrow Account allocable to that Executive not otherwise expressly
authorized by the terms of this MoU to be paid to the Executive. At such time,
the Escrow Agent shall also be authorized to return to Paracelsus the release
of that Executive referred to in para 14 of this MoU and to return to the
Executive his release of Paracelsus referred to in para 13 of this MoU unless
otherwise expressly authorized under the terms of this MoU. After the Escrow
Agent pays all amounts authorized to be paid to the Executives, it shall
immediately pay to Paracelsus the interest amount in the Escrow Account
referred to in para 5 of this MoU.
23. Each Executive or Paracelsus may terminate for any reason that
Executive's employment with effect after the Bonus Payment Date on giving 30
days advance written notice. Upon termination of an Executive's employment at
any time and provided that payment is made to that Executive of all amounts
referred to in para. 3 of this MoU to which he is entitled to be paid pursuant
to this MoU, that Executive will cease to be an officer, director, and employee
of Paracelsus, its affiliates, and any entity in which the Executive holds such
a position at the request of Paracelsus.
24. Each Executive shall not exercise any rights he may have now or
in the future under para. 4(iii)(E), 4(iii)(F), and 4(iii)(H) of his
Employment Agreement.
25. The parties agree that Paracelsus will withhold federal, state,
and local income and employment taxes from all payments Paracelsus makes to the
Executives under this MoU. All such amounts withheld shall be paid to the
Internal Revenue Service to the extent required by law. All amounts stated in
this MoU are before reduction to reflect such withholding taxes.
26. Each Executive agrees that, as a condition precedent to
Paracelsus's making any payment to the Executive for deposit into the Escrow
Account, he will provide Paracelsus with such consents and statements as
Paracelsus reasonably determines to be necessary or advisable to enable
Paracelsus to receive a refund of or credit for any taxes withheld in
<PAGE> 12
connection with the payment to that Executive for deposit into the Escrow
Account (including without limitation portions relating to the Executive's
share of FICA and Medicare taxes) if all or any portion of the Escrow Account
funds are paid over to Paracelsus under para 22 of this MoU. Each Executive
further agrees to provide any additional consents, statements or documents as
Paracelsus reasonably determines to be necessary or advisable to enable
Paracelsus to receive such a refund or credit. No Executive will claim a
refund or credit of, or otherwise assert any right to receive, any amount
Paracelsus withholds with respect to any payment to the Executive for deposit
into the Escrow Account except to the extent that such withheld amount relates
to an amount the Executive actually receives from the Escrow Account.
27. Unless this MoU is executed by Park and the Ad Hoc Committee no
later than the same day that Paracelsus executes the MoU, each Executive may
withdraw from this MoU, subject to the terms of this para. 27. If any
Executive chooses to exercise this right, any funds deposited in the Escrow
Account allocable to that Executive shall become immediately payable to
Paracelsus and that Executive and Paracelsus will be deemed to have reverted to
their respective statuses as of the date immediately before executing this MoU.
Failure of Park or the Ad Hoc Committee to execute this MoU shall not
constitute "Good Reason" to terminate employment under any of the Executives'
Employment Agreements. The Executives must exercise any right they have under
this paragraph no later than two (2) business days after the last date for Park
and the Ad Hoc Committee to sign this MoU.
28. Resolution of Rights: Legal Fees; No Mitigation:
(a) Except for the obligations referenced in para. 10
and 12 of this MoU, all disputes hereunder shall be settled by final, binding
arbitration, conducted before a panel of three (3) arbitrators in Texas, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment on the arbitration award may be entered in any court having
jurisdiction. Paracelsus shall bear the expenses of such arbitration.
(b) If any contest or dispute shall raise hereunder,
<PAGE> 13
Paracelsus shall advance and reimburse each Executive, on a current basis all
reasonable legal fees and expenses, if any, incurred by the Executive in
connection with such contest or dispute; PROVIDED, that the Executive agrees to
return any advanced or reimbursed expenses to the extent the arbitrators (or
the Court, in the case of a dispute described in para. 10 and 12)
determine that Paracelsus has prevailed as to the material issues raised in
determination of the dispute.
(c) Paracelsus' obligation to make any payments provided for
in this MoU to the Executive and otherwise to perform its obligations hereunder
shall not be affected by any set-off, counterclaim, recoupment, defense or
other claim, right, or action which Paracelsus may have against the Executive
or others. In no event shall any Executive be obligated to seek other
employment or take other action by way of mitigation of the amounts payable to
the Executive under any of the provisions of this MoU.
29. This MoU may be executed and delivered in counterparts or copies
by the parties to this MoU. Each counterpart when signed and delivered to the
other parties to this MoU shall be deemed an original and, taken together, the
counterparts shall constitute one and the same agreement.
30. This MoU shall be binding on the Successors, assigns, heirs,
estates, estate beneficiaries, agents, and attorneys of the Executives and the
successors, assigns, agents, and attorneys of Paracelsus.
PARACELSUS HEALTHCARE CORPORATION
Date: November 25, 1998 By: /s/ Christian A. Lange
------------------------------------------
Its: Director
PARK-HOSPITAL GmbH
Date: By:
--------------------------------------------
Its:
-------------------------------------------
AD HOC COMMITTEE OF FORMER SHAREHOLDERS
OF CHAMPION HEALTHCARE CORPORATION
Date: By:
--------------------------------------------
Its:
-------------------------------------------
Date: November 18, 1998 /s/ JAMES G. VANDEVENDER
---------------------------------------------
James G. VanDevender
Date: November 18, 1998 /s/ CHARLES R. MILLER
---------------------------------------------
Charles R. Miller
Date: November 18, 1998 /s/ RONALD R. PATTERSON
---------------------------------------------
Ronald R. Patterson
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION
CORPORATION OR PARTNERSHIP OF INCORPORATION
<S> <C>
Advanced Healthcare Diagnostic Services CA
AmeriHealth-Lockhart, Inc. GA
Baytown Medical Center, Inc.
(d/b/a BayCoast Medical Center) TX
Bellwood General Hospital Center for the
Surgical Treatment of Obesity
(d/b/a Bellwood Surgical) CA
Bellwood Medical Corporation
(d/b/a Bellwood General Hospital) CA
Brookside Health Group, Inc. VA
CareServices of America, Inc. DE
CareServices of Newport News, Inc.
(d/b/a Brookside Healthcare) VA
CareServices of Williamsburg, Inc.
(d/b/a Brookside Personal Care) VA
Chico Community Hospital, Inc.
(d/b/a's Chico Community Hospital and
Chico Community Rehabilitation Hospital) CA
CliniCare of Utah, Inc. UT
Dakota Health Enterprises, Inc. ND
Future Care Registery, Inc. TN
Hollywood Community Hospital Medical Center, Inc.
(d/b/a's Hollywood Community Hospital and
Hollywood Community Hospital of Van Nuys) CA
Hospital Assurance Company, Ltd. Grand Cayman
Horizon Medical Support Services DE
Lancaster Hospital Corporation
(d/b/a Lancaster Community Hospital) CA
Lincoln Community Medical Corporation CA
Lincoln Community Medical LLC
(d/b/a's Orange County Community Hospital of
Buena Park and Bellwood General Hospital) CA
Lodi Community Hospital, Inc. CA
MC Plus, Inc. VA
Metropolitan Hospital, LP
(d/b/a Capitol Medical Center) VA
Monrovia Hospital Corporation CA
Paracelsus Bellwood Health Center, Inc. CA
Paracelsus Bledsoe County General Hospital, Inc.
(d/b/a Bledsoe County General Hospital) CA
Paracelsus Clay County Hospital, Inc.
(d/b/a's Cumberland River Hospital-North) CA
Paracelsus Convalescent Hospitals, Inc.
(d/b/a's Lafayette Convalescent Hospital, Oak Park
Convalescent Hospital, Rheem Valley Convalescent
Hospital and University Convalescent Hospital) CA
Paracelsus Davis Hospital, Inc.
(d/b/a Davis Hospital and Medical Center) UT
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
CORPORATION OR PARTNERSHIP STATE OF INCORPORATION
<S> <C>
Paracelsus Dickinson County Medical Center
of Virginia, Inc. VA
Paracelsus Fentress County General Hospital, Inc.
(d/b/a Fentress County General Hospital) CA
Paracelsus Healthcare Corporation of North Dakota, Inc. ND
Paracelsus Healthcare Holdings, Inc. DE
Paracelsus Insurance Marketing Services, Inc. CA
Paracelsus Los Angeles Community Hospital, Inc.
(d/b/a's Los Angeles Community Hospital and
Los Angeles Community Hospital of Norwalk) CA
Paracelsus Macon County Medical Center, Inc.
(d/b/a Flint River Community Hospital) CA
Paracelsus Management Services, Inc. CA
Paracelsus Medical Building Corporation CA
Paracelsus Mesquite Hospital, Inc.
(d/b/a The Medical Center of Mesquite) TX
Paracelsus of Virginia, Inc. VA
Paracelsus-OHC, Inc. CA
Paracelsus PHC Regional Medical Center, Inc.
(d/b/a PHC Regional Hospital and Medical Center) UT
Paracelsus Pioneer Valley Hospital, Inc.
(d/b/a Pioneer Valley Hospital) UT
Paracelsus Real Estate Corporation CA
Paracelsus Santa Rosa Medical Center, Inc.
(d/b/a Santa Rosa Medical Center) CA
Paracelsus Senatobia Community Hospital, Inc.
(d/b/a Senatobia Community Hospital) CA
Paracelsus Venture Corporation CA
Paracelsus Woman's Hospital, Inc. CA
Personal Home Health Care, Inc. TN
PHC Finance, Inc. TX
PHC Funding Corp. CA
PHC Funding Corp. II CA
PHC Practice Management Corporation TX
PHC-A of Midland, Inc. CA
PHC-B of Midland, Inc.
(d/b/a Westwood Medical Center) TX
PHC-Jordan Valley, Inc.
(d/b/a Jordan Valley Hospital) UT
PHC-Salt Lake City, Inc.
(d/b/a Salt Lake Regional Medical Center) UT
PHC Utah, Inc. UT
PHC/CHC Holdings, Inc. DE
(d/b/a Paracelsus)
PHC/Psychiatric Healthcare Corporation DE
Pioneer Valley Health Plan, Inc. UT
Premier Care Group, Inc. UT
Professional Practice Management II, Inc. CA
Psychiatric Healthcare Corporation of Louisiana DE
Psychiatric Healthcare Corporation of Missouri DE
Psychiatric Healthcare Corporation of Texas TX
Quality Home Health Care, Inc.
(d/b/a Brookside Home Health Care) VA
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
CORPORATION OR PARTNERSHIP STATE OF INCORPORATION
<S> <C>
Richmond Medical Ventures, Inc. VA
Select Health Systems, Inc. UT
Select Home Care, Inc. UT
Select Home Health & Services, Inc. UT
Three Rivers of Houston County, Inc. GA
West Covina Health Center Corporation GA
Westwood GP, Inc. TX
Westwood Medical Office Building, Ltd. TX
Women's Hospital Corporation CA
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
pertaining to the Paracelsus Healthcare Corporation 1996 Stock Incentive Plan,
as amended (Form S-8 No. 33-10299) and pertaining to various stock option plans
of Paracelsus Healthcare Corporation (Form S-8 No. 33-12331) of our report
dated April 1, 1999, with respect to the consolidated financial statements and
schedule of Paracelsus Healthcare Corporation included in the Annual Report
(Form 10-K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
Houston, Texas
April 8, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,944
<SECURITIES> 0
<RECEIVABLES> 107,883
<ALLOWANCES> 40,551
<INVENTORY> 12,172
<CURRENT-ASSETS> 128,869
<PP&E> 531,908
<DEPRECIATION> 168,009
<TOTAL-ASSETS> 716,102
<CURRENT-LIABILITIES> 106,343
<BONDS> 533,048
0
0
<COMMON> 222,977
<OTHER-SE> (188,636)
<TOTAL-LIABILITY-AND-EQUITY> 716,102
<SALES> 0
<TOTAL-REVENUES> 664,058
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 571,400
<LOSS-PROVISION> 42,659
<INTEREST-EXPENSE> 51,859
<INCOME-PRETAX> (1,860)
<INCOME-TAX> (693)
<INCOME-CONTINUING> (2,553)
<DISCONTINUED> (2,424)
<EXTRAORDINARY> (1,175)
<CHANGES> 0
<NET-INCOME> (6,152)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
