SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
Commission file number 1-12055
PARACELSUS HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3565943
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
515 W. GREENS ROAD, SUITE 800, HOUSTON, TEXAS
(Address of principal executive offices)
77067 (281) 774-5100
(Zip Code) (Registrant's telephone number, including
area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, NO STATED VALUE NEW YORK STOCK EXCHANGE
(Title of Class) (Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes[X] No[ ]
As of May 14, 1999, there were outstanding 55,118,330 shares of the
Registrant's Common Stock, no stated value.
<PAGE>2
PARACELSUS HEALTHCARE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 1999
INDEX
PAGE REFERENCE
FORM 10-Q
FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements-- (Unaudited)
Condensed Consolidated Balance Sheets--
March 31, 1999 and December 31, 1998 4
Consolidated Statements of Operations--
Three Months Ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows-
Three Months Ended March 31, 1999 and 1998 6
Notes to Interim Condensed Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. OTHER INFORMATION 17
SIGNATURE 18
<PAGE>3
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q are "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve a number of risks and
uncertainties. Factors which may cause the Company's actual results in future
periods to differ materially from forecast results include, but are not limited
to: the outcome of litigation pending against the Company and certain
affiliated persons; general economic and business conditions, both nationally
and in the regions in which the Company operates; industry capacity;
demographic changes; existing government regulations and changes in, or the
failure to comply with government regulations; legislative proposals for
healthcare reform; the ability to enter into managed care provider arrangements
on acceptable terms; changes in Medicare and Medicaid reimbursement levels;
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 of 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.
<PAGE>4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARACELSUS HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in 000's)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 5,645 $ 11,944
Restricted cash 6,736 1,029
Accounts receivable, net 54,561 67,332
Deferred income taxes 9,641 9,641
Other current assets 48,137 38,923
---------- ---------
Total current assets 124,720 128,869
Property and equipment 534,972 531,908
Less: Accumulated depreciation and amortization (173,749) (168,009)
---------- ----------
361,223 363,899
Goodwill 135,699 136,994
Other assets 85,193 86,340
---------- ----------
Total assets $ 706,835 $ 716,102
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 45,484 $ 41,301
Accrued liabilities and other 42,824 58,758
Current maturities of long-term debt 5,451 6,284
---------- ----------
Total current liabilities 93,759 106,343
Long-term debt 541,246 533,048
Other long-term liabilities 39,075 42,370
Stockholders' equity:
Common stock 222,977 222,977
Additional paid-in capital 390 390
Accumulated deficit (190,612) (189,026)
---------- ---------
Total stockholders' equity 32,755 34,341
---------- ---------
Total Liabilities and Stockholders' Equity $ 706,835 $ 716,102
========== =========
</TABLE>
See accompanying notes.
<PAGE>5
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000's, except per share data)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------ -------
1999 1998
---------- -----------
<TABLE>
<CAPTION>
<S> <C> <C>
Net revenue $ 150,944 $ 186,882
Costs and expenses:
Salaries and benefits 58,965 75,116
Other operating expenses 58,085 74,707
Provision for bad debts 12,398 10,517
Interest 13,104 12,379
Depreciation and amortization 9,815 9,276
Unusual charges 1,123 -
---------- ----------
Total costs and expenses 153,490 181,995
---------- ----------
Income (loss) before minority interest, income
taxes and extraordinary charge (2,546) 4,887
Minority interests 63 (2,585)
---------- ----------
Income (loss) before income taxes and
extraordinary charge (2,483) 2,302
Provision (benefit) for income taxes (897) 677
---------- ----------
Income (loss) before extraordinary charge (1,586) 1,625
Extraordinary charge on extinguishment of debt, net - (1,175)
---------- ----------
Net income (loss) $ (1,586) $ 450
========== ==========
Earnings (loss) per share - basic and assuming
dilution:
Income (loss) before extraordinary charge $ (0.03) $ 0.03
Extraordinary charge on extinguishment of debt, net - (0.02)
---------- ---------
Net income (loss) per share $ (0.03) $ 0.01
========== =========
</TABLE>
See accompanying notes.
<PAGE>6
PARACELSUS HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000's)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
----------- ----------
<TABLE>
<CAPTION>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,586) $ 450
Non-cash expenses and changes in operating
assets and liabilities (3,824) (7,951)
---------- ----------
Net cash used in operating activities (5,410) (7,501)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net (5,610) (3,836)
Decrease in other assets, net (2,644) 2,037
---------- ----------
Net cash used in investing activities (8,254) (1,799)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities 10,000 -
Repayments under credit facilities (600) -
Repayments of debt, net (2,035) (772)
Deferred financing costs - (3,984)
---------- ----------
Net cash provided by (used in) financing activities 7,365 (4,756)
---------- ----------
Decrease in cash and cash equivalents (6,299) (14,056)
Cash and cash equivalents at beginning of period 11,944 28,173
---------- ----------
Cash and cash equivalents at end of period $ 5,645 $ 14,117
========== ==========
Supplemental Cash Flow Information:
Interest paid $ 20,461 $ 20,877
Income taxes paid $ - $ 49
Noncash Investing Activities:
Notes receivable from sale of hospital $ 2,269 $ -
</TABLE>
See accompanying notes.
<PAGE>7
PARACELSUS HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1999
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION - Paracelsus Healthcare Corporation (the "Company") was
incorporated in November 1980 for the principal purpose of owning and
operating acute care and related healthcare businesses in selected
markets. The Company presently operates 15 hospitals with 1,878
licensed beds in 9 states, of which 11 are owned and four are leased. The
Company also operates four skilled nursing facilities with a total of 232
licensed beds in California, one of which is leased. See Note 6 -
Subsequent Event.
BASIS OF PRESENTATION - On July 1, 1998, the Company completed the
purchase of Dakota Medical Foundation's 50% partnership interest in a
general partnership operating as Dakota Heartland Health Systems ("DHHS")
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 a result of this change in control, the Company
has recast its 1998 consolidated statement of operations to account for
DHHS under the consolidated method of accounting as though the
transaction had occurred on January 1, 1998.
The accompanying unaudited condensed consolidated financial
statements of the Company have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-Q. Accordingly, they do not include all of
the information and notes required by generally accepted accounting
principles for annual financial statements. In the opinion of management,
all adjustments, consisting of normal recurring accruals, considered necessary
for a fair presentation have been included. The balance sheet at March 31,
1999, has been derived from the unaudited financial statements at that date
but does not include all of the information and footnotes required by
generally accepted accounting principles for a complete set of financial
statements. The Company's business is seasonal in nature and subject to
general economic conditions and other factors. Accordingly, operating results
for the three months ended March 31, 1999, are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999. These
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended
December 31, 1998, included in the Company's 1998 Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
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.
ACCOUNTING PRONOUNCEMENTS - In March and April 1998, the Accounting
Standards Executive Committee of the American Institute of Certified
Public Accountants issued two Statements of Position ("SOPs") which
applied to the Company in the first quarter ended March 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 adoption of the SOPs had no material impact on the
Company's financial condition or results of operations.
<PAGE>8
EARNINGS PER SHARE - The following table sets forth the computation of
basic and diluted earnings per share (dollars in thousands, except per share
amounts).
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------ ------------------
<S> <C> <C>
Numerator (a):
Income (loss) before extraordinary
charge $ (1,586) $ 1,625
Extraordinary charge - (1,175)
-------- --------
Net income (loss) $ (1,586) $ 450
======== ========
Denominator:
Weighted average shares used for basic
earnings per share 55,118 55,093
Effect of dilutive securities:
Employee stock options - 2,446
-------- --------
Dilutive potential common shares - 2,446
-------- --------
Shares used for diluted earnings
per share 55,118 57,539
======== ========
Income (loss) per share - basic
assuming dilution:
Income (loss) before extraordinary $ (0.03) $ 0.03
charge
Extraordinary charge - ( 0.02)
-------- -------
Net income (loss) $ (0.03) $ 0.01
======== =======
</TABLE>
- -------------------------------
(a) Amount is used for both basic and diluted earnings per share
computations since there is no earnings effect related to the dilutive
securities.
Options to purchase 4,783,649 and 4,988,288 shares of the Company's
common stock at a weighted average exercise price of $7.47 and $7.37 per
share and warrants to purchase 414,906 and 422,286 shares at a weighted
average exercise price of $9.00 and $8.84 per share were outstanding
during the quarter ended March 31, 1999 and 1998, respectively, 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.
COMPREHENSIVE INCOME - Comprehensive loss for the quarter ended March 31,
1999 equaled net loss of $1.6 million as compared to comprehensive
income, which equaled net income, of $450,000 for the same period in
1998.
RESTRICTED CASH - The Company had restricted cash of $6.7 million and
$1.0 million at March 31, 1999 and December 31, 1998, respectively, for
payments related to the commercial paper financing program.
<PAGE>9
NOTE 2. UNUSUAL CHARGES
As previously reported, on November 25, 1998, the Company and its
senior executives, Mr. Charles R. Miller, Mr. James G. VanDevender and
Mr. Ronald R. Patterson executed an agreement ("the Executive Agreement")
superseding their existing employment contracts and certain other stock
option and retirement agreements with the Company. As a result of the
Executive Agreement, the Company recorded a net unusual charge of $1.1
million, representing a charge of $1.8 million relating to the ratable
portion of required-stay amounts to be paid to the executives, offset by
a gain of $671,000 from the amortization of the deferred gain recorded in
connection with certain stock options forfeited by the senior executives.
The Company expects to record an additional charge of $1.1 million, in
the quarter ended June 30, 1999. As of March 31, 1999, the Company had
funded to an escrow account amounts payable to the senior executives. As
a result of the satisfactory fulfillment of certain terms and conditions
set forth in the Executive Agreement, on April 14, 1999, the senior
executives were paid from the escrow account amounts totaling $2.7
million, which represented the after-tax balance of the $4.6 million
payments as specified by the Executive Agreement.
NOTE 3. DISPOSITION OF HOSPITAL
Effective March 31, 1999, the Company sold Paracelsus Bledsoe County
Hospital, Inc. ("Bledsoe"), which operated a 32 licensed-bed facility
located in Pikeville, Tennessee. The sales price of approximately $2.2
million, including working capital, was paid by a combination of $100,000
in cash and the issuance by the buyer of $2.1 million of promissory
notes. The notes are secured by all outstanding common stock and assets
of Bledsoe. Certain of the notes may be adjusted for any increase or
decrease from a final adjustment of net working capital. The Company
recorded no material gain or loss on the sale. Bledsoe's results of
operations in the quarter ended March 31, 1999 were not material to the
Company's consolidated statements of operations. The pro forma effect of
the disposition of Bledsoe on the Company's 1998 results of operations
was previously reported in the Company's Current Report on Form 8-K dated
April 15, 1999.
NOTE 4. OPERATING SEGMENTS
The Company segregates its hospitals into core and non core markets
("Core Facilities" and "Non Core Facilities", respectively). There has
been no material change in the composition of Core and Non Core
Facilities or in the accounting policies of the segments as previously
reported in the Company's 1998 Form 10-K. 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, including Bledsoe, have been
included in the All Other category. Selected segment information for the
quarters ended March 31, 1999 and 1998 are as followed:
<PAGE>10
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
------------------------------------------------
CORE NON CORE ALL OTHER TOTAL
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net revenue........ $ 126,056 $ 21,701 $ 3,187 $ 150,944
Adjusted EBITDA (a) $ 25,188 $ 1,610 $ (5,239) $ 21,559
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
------------------------------------------------
CORE NON CORE ALL OTHER TOTAL
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net revenue $ 128,046 $ 23,776 $ 35,060 $ 186,882
Adjusted EBITDA (a) $ 23,476 $ 3,153 $ (2,672) $ 23,957
</TABLE>
- -------------------------------------
(a) Earnings before extraordinary charge, interest, taxes, depreciation,
amortization and unusual charges.
NOTE 5. CONTINGENCIES
SHAREHOLDERS LITIGATION - On March 24, 1999, the Company executed certain
agreements providing for a proposed global settlement that will resolve
substantially all claims against the Company from outstanding class
action and derivative lawsuits arising out of or related to the August
1996 merger. The settlement agreements, which are described in the
Company's 1998 Form 10-K, are subject to final approval by the federal
district court (the "Court").
On May 13, 1999, insurance proceeds of approximately $12.3 million
were transferred to the class settlement fund. The Company expects that
its insurance carriers will make an additional transfer of $1.7 million
to the fund for a total of $14.0 million. On May 14, 1999, the Court
held a hearing on whether, among other things, to grant preliminary
approval of the proposed global settlement. If the approval is granted,
a notice of the class settlement will be sent to the members of the class
and a notice of the derivative settlement will be sent to all current
shareholders. After an opt-out and comment period, the Court will
determine whether to grant final approval. 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.
DEBT COMPLIANCE - The Company was in compliance with all debt covenants
to which it was subject as of March 31, 1999. The Company's continued
compliance with its debt covenants is predicated on its ability to
maintain certain levels of operating performance and on its ability to
sell certain non-core assets and to reduce debt. 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.
IMPACT OF YEAR 2000 - As with most other industries, hospitals and health
care systems use information systems that may misidentify dates beginning
January 1, 2000, and result in system or equipment failures or
miscalculations. Information systems include computer programs, building
infrastructure components and computer-aided biomedical equipment. The
Company has a Year 2000 strategy for its hospitals that includes phases
for education, inventory and assessment of applications and equipment at
risk, analysis and planning, testing, conversion/remediation/replacement
and post-implementation. The Company can provide no assurances that
<PAGE>11
applications and equipment the Company believes to be Year 2000 compliant
will not experience difficulties, or that the Company will not experience
difficulties obtaining resources needed to make modifications to correct
or replace the Company's affected systems and equipment. Failure by the
Company or third parties on which it relies to resolve Year 2000 issues
could have a material adverse effect on the Company's results of
operations and its ability to provide health care services. Consequently,
the Company can give no assurances that issues related to Year 2000 will
not have a material adverse effect on the Company's financial condition
or results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further discussion.
NOTE 6. SUBSEQUENT EVENTS
On May 5, 1999, the Company entered into a definitive agreement for
the sale of four Non Core Facilities, which, on a combined basis, operate
246 licensed beds. The sale included the remaining two Tennessee
hospitals and two other hospitals located Georgia and Mississippi. The
transaction is subject to the normal due diligence by the buyer, and the
Company expects the sale to be completed in the quarter ended June 30,
1999. However, there can be no assurance on the final outcome of the due
diligence process or that the terms and conditions of the definitive
agreement will be satisfactorily fulfilled.
<PAGE>12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The comparison of operating results for 1999 with prior years is
difficult given the acquisitions and divestitures 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, "same
hospitals" exclude facilities sold in 1998 and Bledsoe, which was sold
March 31, 1999, and include DHHS which was consolidated in 1998 and
included in the Company's results of operations for both periods
presented.
Changes in Medicare payments mandated by the Balanced Budget Act of
1997 (the "1997 Budget Act"), which became effective October 1, 1997, as
well as certain proposed changes to various states' Medicaid programs,
have reduced revenues and earnings significantly as these changes are
phased in through 1999. The most significant changes were phased in by
October 1, 1998. The Medicare/Medicaid programs accounted for
approximately 48.9% of gross patient revenues for the quarter ended March
31, 1999 and 52.6% for the same period in 1998.
Pressures to control healthcare costs and a shift from traditional
Medicare/Medicaid and from traditional indemnity insurers have resulted
in an increase in the number of patients whose healthcare coverage is
provided under managed care plans. The percentage of the Company's
gross patient revenues attributable to managed care increased to 33.8%
in the quarter ended March 31, 1999 from 30.9% in the same period in
1998. The Company generally receives lower payments per patient from
managed care payors than it does from traditional indemnity insurers.
The Company anticipates that its managed care business will continue to
increase in the future.
RESULTS OF OPERATIONS - QUARTER ENDED MARCH 31, 1999
COMPARED WITH QUARTER ENDED MARCH 31, 1998
Net revenue for the quarter ended March 31, 1999, was $150.9
million, a decrease of $36.0 million, or 19.2%, from $186.9 million for
the same period in 1998. The decline in net revenue is largely due to the
ten hospitals sold in June and September of 1998. The remaining decline
in net revenue occurred at the Company's "same hospitals," as discussed
below.
Net revenue at "same hospitals" for the quarter ended March 31, 1999
was $147.8 million compared to $151.8 million in 1998, a decrease of $4.0
million, or 2.7%. Same hospitals net revenue at Core Facilities decreased
$2.0 million, or 1.6%, from $128.1 million in 1998 to $126.1 million in
1999. Same hospital net revenue at Non Core Facilities decreased $2.1
million, or 8.7%, from $23.8 million in 1998 to $21.7 million in 1999.
Among the Non Core Facilities, the Tennessee market hospitals, which have
significant home health operations, decreased $1.3 million, or 15.1%,
from $8.8 million in 1998 to $7.5 million in 1999. The decrease in net
revenue at the Company's "same hospitals" is due to the Company's closure
of 27 home health offices and two skilled nursing facilities and the sale
of two home health agencies in 1998 in response to the 1997 Budget Act.
While the restructuring of the home health operations is likely to
continue in 1999, which will further reduce net revenue, the Company
anticipates that the effect of the 1997 Budget Act on payment levels will
not significantly impact the Company's net revenue in 1999.
The Company's "same hospitals" experienced a 2.5% increase in
inpatient admissions from 14,933 in the quarter ended March 31, 1998 to
15,305 in the comparable period in 1999. Same hospital patient days
increased 3.4% from 69,618 in 1998 to 71,988 in 1999. Excluding home
health visits, outpatient visits in "same hospitals" increased 6.2% from
155,882 in 1998 to 165,535 in 1999. The increase in admissions and
<PAGE>13
outpatient visits resulted from (i) a delayed flu season in some markets
in the current year, (ii) population growth in certain markets, (iii) an
increase in the number of physicians and services at several of the
Company's hospitals and (iv) increased volume generated from certain
hospital benchmarking and service awareness programs implemented in 1998.
Home health visits in "same hospitals" decreased 39.4% from 122,617 in
1998 to 74,352 in 1999 primarily due to the closures or sales of home
health operations as discussed above.
The following table presents "same hospitals" operating statistics
for the Company's Core and Non Core Facilities for the quarters ended
March 31, 1999 and 1998.
<TABLE>
<CAPTION>
"SAME HOSPITALS"
------------------------------
THREE MONTHS ENDED MARCH 31,
------------------------------
1999 1998 % CHANGE
------- ------- --------
<S> <C> <C> <C>
Core Facilities
- ---------------
Patient Days 59,678 57,230 4.3%
Inpatient Admissions 12,477 12,270 1.7
Outpatient Visits, excluding Home Health 139,399 127,035 9.7
Home Health Visits............... 46,424 74,463 (37.7)
Non Core Facilities
- -------------------
Patient Days 12,310 12,388 (0.6)%
Inpatient Admissions 2,828 2,663 6.2
Outpatient Visits, excluding Home Health 26,136 28,847 (9.4)
Home Health Visits 27,928 48,154 (42.0)
</TABLE>
Operating expenses (salaries and benefits, other operating expenses
and provision for bad debts), expressed as a percentage of net revenue,
and operating margin remained flat at 85.8% and 14.2%, respectively,
between the quarters ended March 31, 1999 and 1998. Operating expenses
decreased $30.9 million from $160.3 million in the quarter ended March
31, 1998 to $129.4 million in 1999 primarily from closed/sold facilities.
Excluding sold/closed facilities, same hospital operating expenses
decreased by approximately $1.6 million primarily from (i) a decrease of
$3.9 million in salaries and benefits and other operating expenses
resulting from cost cutting measures implemented in the fourth quarter of
1998 offset by (ii) an increase in provision for bad debt of $2.3 million
due largely to collection issues arising from information systems
conversions and personnel turnover at several hospitals.
Operating expenses at the Company's "same hospitals" increased
slightly from 80.8% of net revenue in 1998 to 81.9% in 1998, and
operating margins decreased from 19.2% to 18.1%, respectively. The slight
deterioration in operating margins occurred primarily at the Non Core
Facilities, which declined from 13.3% in 1998 to 7.4% in 1999, due to the
closure of home health operations in response to the 1997 Budget Act, overall
volume reductions at these facilities and an increase in the provision
for bad debt due to reasons stated above. On a "same hospital" basis,
Core Facility operating margins remained relatively constant at 19.9% in 1999
and 20.4% in 1998, despite a 22.2% increase in provision for bad debt due to
information systems conversions and personnel turnover as previously
discussed. Management believes that the information systems conversions and
personnel turnover issues have been addressed and that bad debt expense should
be in line with historical results in future quarters. As previously reported,
the Company undertook a series of strategic actions in 1998 to lower its cost
structure in response to the 1997 Budget Act. These actions included exiting
unprofitable home
<PAGE>14
health businesses in several markets and implementing staff and wage
reductions and other cost cutting measures. Such efforts have contributed to
the stability of the Company's operating margins on a consolidated basis.
Management believes that the cost savings associated with these initiatives
will favorably impact the Company's results of operations throughout 1999.
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.
Interest expense increased $725,000 from $12.4 million in the
quarter ended March 31, 1998 to $13.1 million in 1999, primarily due to
an increase in borrowings under the credit facilities and the commercial
paper program, which was partially offset by a decrease in interest rates
under the credit facilities.
Depreciation and amortization expense increased $539,000 from $9.3
million the quarter ended March 31, 1998 to $9.8 million for the same
period in 1999 primarily due to additions to property and equipment since
April 1, 1998.
Loss before income taxes and extraordinary charge of $2.5 million
for the quarter ended March 31, 1999, included an unusual charge of $1.1
million resulting from the Executive Agreement executed in November 1998.
The Company expects to record an additional $1.1 million of unusual
charges relating to the Executive Agreement in the quarter ended June 30,
1999. Income before income taxes and extraordinary charge of $2.3
million for the quarter ended March 31, 1998 included minority interests
of $2.5 million attributable to DHHS. The Company acquired its former
partner's 50% interest in DHHS in July 1998.
The Company recorded income tax benefit of $897,000 on pre-tax loss
of $2.5 million in the quarter ended March 31, 1999 and income tax
expense of $677,000 on pre-tax income of $2.3 million for the same period
in 1998. Income tax benefit in 1999 differed from the statutory rate due
to nondeductible goodwill amortization which was offset by a non-taxable
gain related to the Executive Agreement. Income tax expense in 1998
differed from the statutory rate due to nondeductible goodwill
amortization which was partially offset by a decrease in valuation
allowance.
Net loss for the quarter ended March 31, 1999 was $1.6 million, or
$0.03 per diluted share, compared to net income of $450,000, or $0.01 per
diluted share, for the same period of 1998. Net income in 1998 included
an extraordinary charge for the write-off of deferred loan costs of $1.2
million (no tax benefit), or $0.02 per share, relating to the credit
facility in existence prior to March 30, 1998. Weighted average common
and common equivalent shares outstanding were 55.1 million in 1999 as
compared to 57.5 million in 1998. The decrease is due to the effect of
dilutive securities which were excluded due to their anti-dilutive effect
on 1999 net loss.
LIQUIDITY AND CAPITAL RESOURCES
The Company had net working capital of $31.0 million at March 31,
1999, an increase of $8.5 million from $22.5 million at December 31,
1998. The increase in net working capital resulted primarily from the
reclassification of certain notes receivable from sale of facilities to
current assets as of March 31, 1999 and the payments of accrued expenses.
The Company's long-term debt as a percentage of total capitalization was
94.3% at March 31, 1999, compared to 93.9% at December 31, 1998.
Net cash used in operating activities was $7.5 million in the
quarter ended March 31, 1998 as compared to $5.4 million for the same
period of 1999. Net cash used in investing activities was $8.3 million
during 1999, as compared to $1.8 million during 1998. The $6.5 million
increase in net cash used in investing activities was primarily
attributable to increases in additions to property and equipment and in
<PAGE>15
other assets. Net cash provided by financing activities during 1999 was
$7.4 million, compared to net cash used in financing activities of $4.8
million during 1998. The $12.2 million increase resulted primarily from
an increase in net borrowings in 1999 and the payment in 1998 of deferred
financing costs associated with the refinancing of the credit facilities
in March 1998.
During the quarter ended March 31, 1999, the Company funded to an
escrow account amounts payable to the senior executives under the
Executive Agreement. As a result of the satisfactory fulfillment of
certain terms and conditions set forth in the agreement, on April 14,
1999, the senior executives were paid from the escrow account amounts
totaling $2.7 million, which represented the after-tax balance of the
$4.6 million payments as specified by the Executive Agreement.
As of May 7, 1999, the Company had $32.8 million available for
borrowings under its credit facilities, subject to the terms thereof, to
fund future capital expenditures, working capital requirements and the
issuance of letters of credit. Additionally, approximately $20.4 million
remained available for borrowings under the commercial paper program,
subject to the availability of the eligible accounts receivable. The
Company was in compliance with all debt covenants to which it was subject
as of March 31, 1999. The Company's continued compliance with its debt
covenants is predicated on its ability to maintain certain levels of
operating performance and on its ability to sell certain non-core assets
and to reduce debt. 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.
The Company anticipates that internally generated cash flows from
earnings, existing cash balances, borrowings under the credit facilities and
the commercial paper program, proceeds from the sale of facilities, 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 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.
LITIGATION
On March 24, 1999, the Company executed certain agreements providing
for a proposed global settlement that will resolve substantially all
claims against the Company from outstanding class action and derivative
lawsuits arising out of or related to the August 1996 merger. The
settlement agreements, which are described in the Company's 1998 Form 10-
K, are subject to final approval by the Court.
On May 13, 1999, insurance proceeds of approximately $12.3 million
were transferred to the class settlement fund. The Company expects that
its insurance carriers will make an additional transfer of $1.7 million
to the fund for a total of $14.0 million. On May 14, 1999, the Court
held a hearing on whether, among other things, to grant preliminary
approval of the proposed global settlement. If the approval is granted,
a notice of the class settlement will be sent to the members of the class
and a notice of the derivative settlement will be sent to all current
shareholders. After an opt-out and comment period, the Court will
determine whether to grant final approval. 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.
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.
<PAGE>16
YEAR 2000
The following discussion updates a more complete disclosure of the
Company's Year 2000 project plan previously reported in the 1998 Form 10-
K. The Company is on track with its Year 2000 seven-phase project plan.
As previously reported, the Company completed the first two phases of the
project plan. Phases three and four involving vendor certification and
developing test plans and compliance criteria for all patient care
critical and operations critical items 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.
All hospitals and the corporate office follow guidelines set forth in the
Company's Year 2000 testing guidebook which specifies all test plans and
procedures. Such test plans require that all patient care critical or
operations critical systems are tested. The Company has developed
a data repository to track the Year 2000 compliance progress of patient care
critical or operations critical equipment and applications, as well as critical
suppliers' compliance status . Based on information from the data repository,
the Company has currently determined that the majority of all items
identified are Year 2000 compliant. All equipment deemed not compliant will
be taken out of service and/or replaced. The Company is in the process of
obtaining vendor certification for the remainder of the equipment and from
third parties such as fiscal intermediaries, insurance companies, banks and
local community service providers.
The sixth and seventh phases involving converting/ replacing patient
care and operations critical non-compliant systems and equipment and
developing contingency plans for potential system failure will be
completed in the fourth quarter of 1999 as planned. The Company has
developed criteria to provide the basis for its Year 2000 contingency
plan. The Company believes that each hospital already has contingency
plans which are required in order for a hospital to obtain and retain its
license. Moreover, the Company's contingency plan will include, among
others, (i) a supply chain readiness assessment for all critical
suppliers, (ii) a staffing plan during the weekend of the century change
and the scheduling of Year 2000 critical personnel to assist and
coordinate activities in the event of system malfunctions and (iii)
backup procedures for all critical physical facility equipment and
systems including heating, water supply, electrical power, elevators,
fire detection and security, and increased fuel resources for extended
usage of emergency power. Based on existing information, the Company
believes that its estimate of Year 2000 expenses as previously reported
in the 1998 Form 10-K remains appropriate.
The foregoing assessment is based on information currently available
to the Company. 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.
REGULATORY MATTERS
Because of national, state and private industry efforts to reform
healthcare delivery and payment systems, the healthcare industry as a
whole faces increased uncertainty. The Company is unable to predict
whether any other healthcare legislation at the federal and/or state
level will be passed in the future and what action it may take in
response to such legislation, but it continues to monitor all proposed
legislation and analyze its potential impact in order to formulate its
future business strategies.
<PAGE>17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 24, 1999, the Company executed certain agreements providing
for a proposed global settlement that will resolve substantially all
claims against the Company from outstanding class action and derivative
lawsuits arising out of or related to the August 1996 merger. The
settlement agreements, which are described in the Company's 1998 Form 10-
K, are subject to final approval by the Court.
On May 13, 1999, insurance proceeds of approximately $12.3 million
were transferred to the class settlement fund. The Company expects that
its insurance carriers will make an additional transfer of $1.7 million
to the fund for a total of $14.0 million. On May 14, 1999, the Court
held a hearing on whether, among other things, to grant preliminary
approval of the proposed global settlement. If the approval is granted,
a notice of the class settlement will be sent to the members of the class
and a notice of the derivative settlement will be sent to all current
shareholders. After an opt-out and comment period, the Court will
determine whether to grant final approval. 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.
There have been no other material developments in the legal
proceedings except as described above.
ITEM 2. CHANGE IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(b) Exhibits
None
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed on April 30, 1999, a Current Report on Form 8-K,
dated April 15, 1999, reporting pursuant to Item 2, the sale of
Paracelsus Bledsoe County Hospital, Inc. effective March 31, 1999.
<PAGE>18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Paracelsus Healthcare Corporation
(Registrant)
/s/ JAMES G. VANDEVENDER
Dated: May 14, 1999 By:-----------------------------------
James G. VanDevender
Senior Executive Vice President,
Chief Financial Officer
& Director
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