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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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 500, HOUSTON, TEXAS
(Address of principal executive offices)
77067 (281) 774-5100
(Zip Code) (Registrant's telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, NO STATED VALUE NEW YORK STOCK EXCHANGE
(Title of Class) (Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes[X] No[ ]
As of November 10, 1999, there were outstanding 57,667,721 shares of the
Registrant's Common Stock, no stated value.
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<PAGE> 2
PARACELSUS HEALTHCARE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1999
INDEX
PAGE REFERENCE
FORM 10-Q
FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements-- (Unaudited)
Condensed Consolidated Balance Sheets--
September 30, 1999 and December 31, 1998 4
Consolidated Statements of Operations--
Three Months and Nine Months Ended
September 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows-
Nine Months Ended September 30, 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 14
Item 3. Quantitative and Qualitative Disclosures
about Market Risks 22
PART II. OTHER INFORMATION 22
SIGNATURE 24
<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: 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 obtain a new credit facility at
reasonable terms and conditions to fund working capital requirements and the
expansion of the Company's business and its continued compliance with its
existing debt covenants and its ability to obtain waivers in the event of
noncompliance. 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>
<S> <C> <C>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------------- ----------------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 4,361 $ 11,944
Restricted cash 1,179 1,029
Accounts receivable, net 60,128 67,332
Deferred income taxes 10,766 9,641
Other current assets 36,055 38,923
---------- ----------
Total current assets 112,489 128,869
Property and equipment 537,766 531,908
Less: Accumulated depreciation and amortization (176,023) (168,009)
---------- ----------
361,743 363,899
Goodwill 133,450 136,994
Other assets 83,943 86,340
---------- ----------
Total Assets $ 691,625 $ 716,102
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 46,103 $ 41,301
Accrued liabilities and other 36,610 58,758
Current maturities of long-term debt 5,543 6,284
---------- ----------
Total current liabilities 88,256 106,343
Long-term debt 556,161 533,048
Other long-term liabilities 21,540 42,370
Stockholders' equity:
Common stock 215,761 222,977
Additional paid-in capital 12,105 390
Accumulated deficit (202,198) (189,026)
---------- ----------
Total stockholders' equity 25,668 34,341
---------- ----------
Total Liabilities and Stockholders' Equity $ 691,625 $ 716,102
========== ==========
See accompanying notes.
</TABLE>
<PAGE> 5
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000's, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------------------------
1999 1998 1999 1998
----------------- ----------------- ---------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net revenue $ 138,161 $ 157,169 $ 432,372 $ 520,744
Costs and expenses:
Salaries and benefits 56,038 68,955 173,138 216,846
Other operating expenses 57,623 63,831 172,647 209,813
Provision for bad debts 11,051 10,368 32,536 30,248
Interest 13,588 13,108 39,771 38,782
Depreciation and amortization 10,758 9,490 30,543 27,616
Unusual items (5,465) (6,967) 2,203 (6,989)
Loss (gain) on sale of facilities (2,273) 275 114 (6,825)
---------- ----------- ---------- ----------
Total costs and expenses 141,320 159,060 450,952 509,491
---------- ----------- ---------- ----------
Income (loss) before minority interests, income
taxes, discontinued operations and
extraordinary charge (3,159) (1,891) (18,580) 11,253
Minority interests 149 113 270 (3,173)
----------- ------------ ---------- ----------
Income (loss) before income taxes, discontinued
operations and extraordinary charge (3,010) (1,778) (18,310) 8,080
Provision (benefit) for income taxes 366 (111) (5,739) 2,424
---------- ------------ ---------- ----------
Income (loss) before discontinued
operations and extraordinary charge (3,376) (1,667) (12,571) 5,656
Loss on discontinued operations (601) (2,424) (601) (2,424)
----------- ------------ ----------- ----------
Income (loss) before extraordinary charge (3,977) (4,091) (13,172) 3,232
Extraordinary charge on extinguishment
of debt, net (1,175)
----------- ------------ ----------- ----------
Net income (loss) $ (3,977) $ (4,091) $ (13,172) $ 2,057
=========== ============ =========== ==========
Income (loss) per share - basic and assuming dilution:
Income (loss) before extraordinary
charge $ (0.06) $ (0.03) $ (0.23) $ 0.10
Loss on discontinued operations (0.01) (0.04) (0.01) (0.04)
Extraordinary charge on
extinguishment of debt (0.02)
----------- ------------ ----------- ----------
Net income (loss) per share $ (0.07) $ (0.07) $ (0.24) $ 0.04
=========== ============ =========== ==========
See accompanying notes.
</TABLE>
<PAGE> 6
PARACELSUS HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000's)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------
1999 1998
------------------ ------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (13,172) $ 2,057
Non-cash expenses and changes in operating assets
and liabilities 1,662 (9,704)
------------ -------------
Net cash used in operating activities (11,510) (7,647)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of DHHS, net of cash acquired - (59,278)
Proceeds from sale of facilities, net of expenses 2,025 36,398
Additions to property and equipment, net (24,034) (14,428)
Decrease (increase) in other assets, net 1,590 (6,928)
------------ -------------
Net cash used in investing activities (20,419) (44,236)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock - 67
Borrowings under senior revolving credit facility 43,100 74,528
Repayments under senior revolving credit facility (13,430) (34,485)
Repayments of debt, net (5,324) (4,314)
Deferred financing costs - (3,984)
------------ -------------
Net cash provided by financing activities 24,346 31,812
------------ -------------
Decrease in cash and cash equivalents (7,583) (20,071)
Cash and cash equivalents at beginning of period 11,944 28,173
------------ -------------
Cash and cash equivalents at end of period $ 4,361 $ 8,102
============ =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 48,124 $ 45,265
Income taxes refunded $ (26) $ (440)
NONCASH INVESTING ACTIVITIES:
Notes receivable from sale of hospitals $ 7,304 $ 13,698
Debt assumed by purchaser of hospitals $ 2,952 $ 3,239
Capital lease obligations $ 1,124 $ -
See accompanying notes.
</TABLE>
<PAGE> 7
PARACELSUS HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 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. As of
September 30, 1999, the Company operated 14 hospitals with 1,802 licensed beds
in 8 states, of which 11 are owned and three are leased (see Note 9 - Subsequent
Events).
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
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 September 30, 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 and nine months ended September 30, 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 Annual Report on Form
10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
<PAGE> 8
EARNINGS PER SHARE - The following table sets forth the computation of basic and
diluted income (loss) per share before discontinued operations and extraordinary
charge (dollars in thousands, except per share amounts).
<TABLE>
<CAPTION>
<S> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
Numerator (a):
Income (loss) before discontinued
operations and extraordinary charge $ (3,376) $ (1,667) $(12,571) $ 5,656
======== ======== ======== ========
Denominator:
Weighted average shares used for basic earnings per
share 55,922 55,116 55,386 55,104
Effect of dilutive securities:
employee stock options 564 2,428 - 2,440
-------- -------- --------- --------
Dilutive potential common shares 564 2,428 - 2,440
-------- -------- --------- --------
Shares used for diluted earnings per share 56,486 57,544 55,386 57,544
======== ======== ========= ========
Income (loss) before discontinued operations and
extraordinary charge per share:
Basic $ (0.06) $ (0.03) $ (0.23) $ 0.10
========= ========= ========= ========
Diluted $ (0.06) $ (0.03) $ (0.23) $ 0.10
========= ========= ========= ========
</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 2,563,903 and 3,296,903 shares of the Company's
common stock at a weighted average exercise price of $4.40 and $3.48 per share,
which were outstanding during the three and nine months ended September 30,
1999, respectively, and warrants to purchase 414,906 shares at a weighted
average exercise price of $9.00 per share were not included in the computation
of diluted EPS because their inclusion would have an antidilutive effect in the
periods presented.
RESTRICTED CASH - The Company had restricted cash of $1.2 million and $1.0
million at September 30, 1999 and December 31, 1998, respectively, for payments
related to the commercial paper financing program.
COMPREHENSIVE INCOME - The Company had no other comprehensive income (loss) for
the three and nine months ended September 30, 1999 and 1998; therefore,
comprehensive income (loss) equaled net income (loss) for each of the periods
presented on the accompanying Consolidated Statements of Operations.
NOTE 2. UNUSUAL ITEMS
In the nine months ended September 30, 1999, the Company recorded
unusual items of $2.2 million, which included (i) a $2.2 million net charge
associated with the execution of an executive agreement with certain current and
former officers of the Company and a $5.5 million corporate restructuring
charge, as reported in the Company's results of operations in the first half of
1999, offset by (ii) a net gain of $5.5 million recorded in September 1999
related to the settlement of shareholder litigation, as discussed below.
<PAGE> 9
In September 1999, the global settlement of the putative class and
derivative actions arising out of the Company's August 1996 merger with Champion
Healthcare Corporation ("Champion") and two related public offerings became
effective, in all material respects. In accordance with the terms of the global
settlement, the Company paid $14.0 million, which was funded from insurance
proceeds, to the class settlement fund for distribution to class members and
issued 1.5 million shares of common stock for purposes of distribution to
class members. Park Hospital GmbH (the "Former Majority Shareholder") also
transferred 8.7 million shares of the Company's common stock to certain
former Champion shareholders and 1.2 million shares of the Company's common
stock for purposes of distribution to class members. In addition, the
Company made a payment of $1.0 million in cash and issued 1.0 million shares
of common stock to terminate a contract with Dr. Manfred G. Krukemeyer,
who is the ultimate legal owner of the Former Majority Shareholder and a
former Chairman of the Board of Directors of the Company (the "Former
Chairman").
The settlement reduced the Company's existing and future obligations to
certain former officers and directors and terminated options to purchase
approximately 1.3 million shares of the Company's common stock at $0.01 per
share ("Value Options") granted in connection with the August 1996 merger. The
Company, all class members, the derivative plaintiffs, the separately
represented former Champion shareholders, the Former Majority Shareholder, the
underwriter, and the affected current and former officers and directors provided
mutual releases of all claims arising out of or related to the August 1996
merger and the related public offerings. The terms of the global settlement were
described in detail in the Company's 1998 Annual Report on Form 10-K.
Unusual items for the nine months ended September 30, 1998 of $7.0
million consisted primarily of (i) a gain of $7.5 million from the settlement of
a disputed capitation contract offset by (ii) a net charge of $511,000 from the
restructuring of home health operations and the settlement of a contract dispute
and litigation.
NOTE 3. DISPOSITIONS OF HOSPITALS
On September 30, 1999, the Company completed the sale of the stock of
Paracelsus Senatobia Community, Inc. ("Senatobia"), which owned and operated a
76-bed acute care hospital located in Mississippi. The sales price of
approximately $4.7 million, which included the sale of net working capital, was
paid by a combination of $100,000 in cash, $1.6 million in second lien
promissory notes, and the assumption by the buyer of approximately $3.0 million
in capital lease obligations and related lease guaranty payments. The notes are
subject to final working capital adjustments and to certain discounts under
certain circumstances. The Company recorded a gain of approximately $2.3 million
on the sale of Senatobia.
Effective June 30, 1999, the Company sold substantially all of the
assets of four skilled nursing facilities (collectively, the "Convalescent
Hospitals"). The facilities had 232 licensed beds. The sales price of
approximately $6.9 million, which excluded net working capital, was paid by a
combination of $3.0 million in cash and a $3.9 million second lien promissory
note, which is subject to prepayment discounts. In connection with the sale, the
Company paid $1.0 million to terminate a lease agreement at one of the
facilities and used the remaining cash proceeds of $2.0 million from the sale to
reduce its outstanding indebtedness under its senior revolving credit facility.
The Company recorded a pretax gain of approximately $1.3 million on the
disposition.
<PAGE> 10
In June 1999, the Company also recorded a loss on sale of facilities of
$3.7 million in connection with the sale of the eight hospitals located in
metropolitan Los Angeles ("LA Metro") as previously reported in the Company's
1998 Annual Report on Form 10-K. The charge resulted from the final settlement
of working capital and the recognition of a prepayment discount on certain
promissory notes. The notes were repaid in full during the second quarter of
1999 and the proceeds were used to reduce the Company's indebtedness under the
senior revolving credit facility.
Effective March 31, 1999, the Company sold the stock of 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 in promissory notes. The
notes are secured by all outstanding common stock and assets of Bledsoe. The
Company recorded no material gain or loss on the Bledsoe disposition.
The results of operations of Senatobia, the Convalescent Hospitals and
Bledsoe for the three and nine months ended September 30, 1999 were not material
to the Company's consolidated statements of operations, individually and on a
combined basis. The pro forma effect of the dispositions of Senatobia, the
Convalescent Hospitals and Bledsoe on the Company's 1998 results of operations
was previously reported in the Company's Current Report on Form 8-K dated
September 30, 1999.
NOTE 4. LOSS FROM DISCONTINUED OPERATIONS
Loss from discontinued operations for the three and nine months ended
September 30, 1999 reflected a charge of $601,000 (net of tax benefit of
$418,000) from certain Medicare contractual adjustments related to the
completion of prior year cost reports for the discontinued psychiatric
operations, which the Company sold in June 1998.
Loss from discontinued operations of $2.4 million (net of tax benefit
of $1.7 million) for the three and nine months ended September 30, 1998
reflected the settlement of litigation concerning alleged violations of certain
Medicare rules at the discontinued psychiatric facilities.
NOTE 5. LONG-TERM DEBT
Effective June 30, 1999, the Company amended its senior bank credit
agreement, which provides for, among other things (i) an increase in interest
rates, (ii) a change in certain financial covenants for the last three quarters
of 1999, (iii) a reduction in the revolving credit loan commitments for any
prepayment made in connection with an asset disposition, as defined, (iv) an
increase in permitted letters of credit and (v) approval of certain asset
dispositions, as defined. See Note 9 regarding the subsequent repayment of
indebtedness under the senior bank credit agreement.
<PAGE> 11
As of September 30, 1999, the Company was in compliance with or
received waivers for all debt covenants to which it was subject under the senior
bank credit agreement. The Company's continued compliance with its debt
covenants, under the existing senior bank credit agreement or a new credit
facility, when completed as discussed in Note 9 below, is predicated on its
ability to maintain certain levels of operating performance. If the Company is
unable to meet such 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.
NOTE 6. STOCKHOLDERS' EQUITY
As discussed in Note 2, the global settlement to shareholder litigation
became final in September 1999. In connection therewith, the Company issued 1.0
million shares of common stock to the Former Chairman and 1.5 million shares of
common stock for purposes of distribution to class members, which resulted in an
increase in common stock of $3.0 million based on the market value of the shares
on March 24, 1999, the execution date of the global settlement. Additionally,
the Company recorded (i) a reduction in common stock of $10.2 million related to
the termination of Value Options to purchase 1.3 million shares of the Company's
common stock, which were previously recorded as merger expenses in connection
with the August 1996 merger, and (ii) an increase in additional-paid-in capital
of $11.7 million, which reflected the market value, on March 24, 1999, of the
9.9 million shares of common stock transferred from the Former Majority
Shareholder to the former Champion shareholders and for purposes of distribution
to the class members.
NOTE 7. 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
Annual Report on Form 10-K, except for the reclassification of the Non Core
Facilities sold in 1999 to the "All Other" segment for each of the periods
presented below. 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. See Note 9 regarding the subsequent
disposition of certain Core Facilities. Selected segment information for the
three and nine months ended September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
<S> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------
CORE NON CORE ALL OTHER TOTAL
---------- ----------- ------------ ------------
Net revenue................................. $ 122,431 $ 14,936 $ 794 $ 138,161
Adjusted EBITDA (a).......................... $ 20,158 $ 611 $ (7,171) $ 13,598
THREE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------------------------
CORE NON CORE ALL OTHER TOTAL
---------- ---------- ------------ ------------
Net revenue.................................. $ 116,412 $ 16,385 $ 24,372 $ 157,169
Adjusted EBITDA (a).......................... $ 17,909 $ 622 $ (4,403) $ 14,128
</TABLE>
<PAGE>12
<TABLE>
<CAPTION>
<S> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------
CORE NON CORE ALL OTHER TOTAL
---------- ---------- ----------- ------------
Net revenue................................. $ 370,579 $ 48,025 $ 13,768 $ 432,372
Adjusted EBITDA (a).......................... $ 68,834 $ 3,527 $ (18,040) $ 54,321
NINE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------------------------
CORE NON CORE ALL OTHER TOTAL
---------- ---------- ------------ ------------
Net revenue.................................. $ 367,916 $ 52,868 $ 99,960 $ 520,744
Adjusted EBITDA (a) (b)...................... $ 65,401 $ 5,084 $ (9,821) $ 60,664
</TABLE>
- ------------------------------------
(a) Earnings before unusual items, gain (loss) on sale of facilities, interest,
taxes, depreciation, amortization and extraordinary charge.
(b) Core Facilities adjusted EBITDA for the nine months ended
September 30, 1998 included minority interest of $4.1 million
attributable to the Company's former partner in DHHS.
NOTE 8. CONTINGENCIES
IMPACT OF YEAR 2000 - The Company has completed the first five of seven
phases of the Year 2000 project plan, which included, among others, (i)
obtaining vendor certification (ii) identifying and testing all patient care
critical and operations critical items and (iii) correcting/replacing
non-compliant systems. The sixth phase, which involves developing contingency
plans, is substantially completed. The seventh and final phase which focuses on
identifying and correcting any unpredictable malfunction in the systems and
equipment will be conducted throughout the remainder of 1999, as planned. The
Company's efforts have focused on identifying and remediating, as necessary,
patient care or operations critical equipment that were not Year 2000
compliant. Consequently, the Company does not expect the Year 2000 issues to
have an adverse impact on patient care. Furthermore, each hospital has
developed a back-up plan for critical equipment in case it unexpectedly fails.
However, 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 in implementing any
contingency or back-up plans, if and when necessary. Additionally, failure by
third parties on which the Company relies for systems or operational support
could have a material effect on the Company's results of operations and its
ability to provide health care services. See Item 2. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
further discussion.
<PAGE> 13
NOTE 9. SUBSEQUENT EVENTS
Pursuant to a recapitalization agreement completed on October 8, 1999,
the Company sold 93.9% of the outstanding common stock of a wholly-owned
subsidiary ("HoldCo") to JLL Healthcare, LLC, an affiliate of the private equity
firm of Joseph Littlejohn & Levy, Inc., for $280.0 million in cash, inclusive of
working capital. The Company retained 6.1% of the outstanding common stock of
HoldCo, which owned substantially all of the assets of five hospitals, including
one which was previously closed in June 1997, with 640 licensed beds, and
related facilities located in Salt Lake City, Utah. The Company had previously
classified the operating hospitals as Core Facilities.
The cash proceeds from the transaction were used to eliminate all
indebtedness then outstanding and related accrued interest under the Company's
senior credit facilities totaling $223.5 million, to reduce borrowings under the
commercial paper financing program by approximately $12.8 million and to provide
collateral of $11.5 million for certain outstanding letters of credit. The
Company also eliminated $7.8 million in annual operating lease payments related
to one of the Utah Facilities. The Company expects to record a gain of
approximately $82.0 million on the transaction, subject to the final settlement
of working capital and the valuation of the Company's remaining investment in
HoldCo, and an extraordinary charge of approximately $4.0 million from the
write-off of deferred financing costs due to the early extinguishment of debt
under the senior credit facilities.
Concurrent with the repayment of all indebtedness under the senior
credit facilities, most of the commitments under such facilities were
permanently cancelled. The Company has entered into an interim financing
arrangement with one of its bank lenders, which maintained its original
commitment under the senior bank credit agreement of $34.8 million. The Company
is in the process of negotiating with such lender for a new credit facility to
replace the interim financing arrangement in the fourth quarter of 1999.
However, there can be no assurance that the Company will be successful in its
effort to obtain a new financing commitment under acceptable terms and
conditions.
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The healthcare industry as a whole faces increasing uncertainty from
governmental and private industry efforts to reform healthcare delivery and
payment systems. As a result, the Company continues to experience significant
changes on several fronts, including 1) a general reduction of payment rates by
government and other payors, 2) an increasing shift in payor mix from
traditional Medicare/ Medicaid and indemnity payors to managed care and 3)
increasing competition for patients and technological advances which require
increased capital investments. The Company has taken steps to address these
challenges, such as divesting of selected unprofitable businesses or markets,
implementing cost control measures on a hospital-by-hospital basis, reducing the
overall corporate cost structure, renegotiating payor contracts and service
arrangements, actively recruiting physicians and expanding facilities and
services in selected markets. The Company also actively monitors and analyzes
the potential impact of proposed healthcare legislation to formulate its
business strategies. However, the Company cannot predict whether other
healthcare legislation will be passed at the federal or state level and what
resulting response the Company may take.
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 as of September 30, 1999 and throughout the periods
for which comparative operating results are presented. In October 1999, the
Company sold 93.9% of the outstanding common stock of a wholly-owned subsidiary,
which owned substantially all of the assets of five hospitals, including one
which was previously closed in June 1997, and related facilities located in Salt
Lake City, Utah. See "Liquidity and Capital Resources". The following
discussions include the results of operations for these Utah facilities for all
periods presented.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1998
Net revenue for the three months ended September 30, 1999, was $138.2
million, a decrease of $19.0 million, or 12.1%, from $157.2 million for the same
period in 1998. The decline in net revenue is largely due to the sale of eight
acute care hospitals in 1998 and Bledsoe and the Convalescent Hospitals in the
first half of 1999, and to a lesser extent, from a $3.1 million charge to net
revenue to revise estimates of amounts due to the Company from the
Medicare/Medicaid programs, which primarily related to prior years cost reports
for sold facilities.
Net revenue at "same hospitals" for the three months ended September
30, 1999 increased $4.6 million, or 3.4%, to $137.4 million from $132.8 million
in 1998. Same hospital net revenue at Core Facilities increased $6.0 million, or
5.2%, from $116.4 million in 1998 to $122.4 million in 1999. Same hospital net
revenue at Non Core Facilities decreased $1.5 million, or 8.8%, from $16.4
million in 1998 to $14.9 million in 1999. Same hospital net revenue increased
primarily due to increased patient volumes at the Company's Core Facilities. To
a lesser extent, net revenue was unfavorably impacted by the Balanced Budget Act
of 1997 (the "1997 Budget Act"), which was substantially phased in by the third
quarter of 1998, the increasing penetration of managed care and the
restructuring of home health operations in the latter half of 1998.
<PAGE> 15
The Company's "same hospitals" experienced a 2.4% increase in inpatient
admissions from 13,516 in the three months ended September 30, 1998 to 13,840 in
the comparable period in 1999. "Same hospitals" patient days decreased 0.7% from
61,696 in 1998 to 61,264 in 1999. Excluding home health visits, outpatient
visits at "same hospitals" increased 3.2% from 151,230 in 1998 to 156,051 in
1999. The increase in admissions and outpatient visits were primarily driven by
the Core Facilities and resulted from (i) favorable demographic changes in
certain markets, (ii) the increase in number of physicians and services at
several of the Company's hospitals and (iii) increased volume generated from
certain hospital benchmarking and service awareness programs implemented in
1998. Volume at the Non Core Facilities, as reported below, declined due to the
closure of certain operations and increasing competition in a selected market.
Home health visits in "same hospitals" decreased 34.5% from 92,532 in 1998 to
60,626 in 1999 primarily due to the closure or sale of certain home health
operations throughout 1998.
The following table presents "same hospitals" operating statistics for
the Company's Core and Non Core Facilities for the three months ended September
30, 1999 and 1998.
<TABLE>
<CAPTION>
<S> <C>
"SAME HOSPITALS"
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
1999 1998 % CHANGE
------- ------- --------
CORE FACILITIES
Patient Days.............................................. 53,481 52,142 2.6%
Inpatient Admissions .................................. 11,997 11,414 5.1
Outpatient Visits, excluding Home Health.................. 135,522 128,239 5.7
Home Health Visits........................................ 37,453 58,650 (36.1)
NON CORE FACILITIES
Patient Days.............................................. 7,783 9,554 (18.5)%
Inpatient Admissions...................................... 1,843 2,102 (12.3)
Outpatient Visits, excluding Home Health.................. 20,529 22,991 (10.7)
Home Health Visits........................................ 23,173 33,882 (31.6)
</TABLE>
Operating expenses (salaries and benefits, other operating expenses and
provision for bad debts), expressed as a percentage of net revenue, decreased to
90.3% in the three months ended September 30, 1999 compared to 91.1% for the
comparable period in 1998. Operating expenses decreased $18.5 million to $124.7
million in 1999 from $143.2 million in 1998 primarily from the Company's
strategic disposition of certain facilities, the closure of unprofitable
business operations, and from cost reduction efforts implemented in the latter
part of 1998. These initiatives contributed to an improvement in the Company's
operating margins from 8.9% in 1998 to 9.7% in 1999. Operating expenses in 1998
included a favorable adjustment of approximately $4.5 million to reduce the
general and professional liability insurance accruals to reflect actuarial
estimates.
Operating expenses at the Company's "same hospitals" declined to 85.0%
of net revenue in 1999 from 86.1% in 1998, and operating margins improved to
15.0% from 13.9%, respectively. On a "same hospital" basis, Core Facility
operating margins increased to 16.3% in 1999 from 15.3% in 1998, and Non Core
operating margins increased to 4.1% in 1999 from 3.8% in 1998. The improvement
reflects the favorable impact of the various cost reduction initiatives
undertaken during the second half of 1998. However, the improvement was
partially offset by an increase in the provision in bad debt, which the Company
believes resulted from (i) the shift in payor mix from traditional Medicare,
which has minimal bad debts, to managed care and self-pay patients, (ii) a
general trend in payment delays and denial of claims by managed care payors,
which increased the allowance for doubtful accounts and (iii) the residual
effect of the computer system conversion at certain facilities in the early part
of the year and (iv) management turnover at certain facilities. While the
Company is unable to predict whether the current trend in bad debt expense will
continue, the Company has undertaken a number of actions to mitigate the
increase in bad debts including, strengthening the hospital business office
operations, pursuing litigation on past due accounts, particularly with respect
to certain managed care payors, and modifying admittance policies at selected
hospitals.
<PAGE> 16
Interest expense increased $480,000 from $13.1 million in the three
months ended September 30, 1998 to $13.6 million in 1999, primarily due to a net
increase in borrowings under the senior credit facility and commercial paper
program to fund working capital and capital expenditures.
Depreciation and amortization expense increased $1.3 million from $9.5
million in the three months ended September 30, 1998 to $10.8 million for the
same period in 1999 primarily due to additions to property and equipment.
Loss before income taxes and discontinued operations was $3.0 million
for the three months ended September 30, 1999 and included (i) an unusual gain
of $5.5 million from the settlement of shareholder litigation in September 1999
and (ii) a $2.3 million gain on the sale of a hospital. Loss before income taxes
and discontinued operations of $1.8 million for the three months ended September
30, 1998 included an unusual gain of $7.0 million primarily attributable to the
settlement of a capitated contract dispute.
The Company recorded an income tax provision of $366,000 for the three
months ended September 30, 1999 and an income tax benefit of $111,000 for the
same period in 1998. The income tax provision for 1999 differed from the
statutory rate due to nondeductible expense from the settlement of shareholder
litigation and goodwill amortization. The income tax benefit for 1998 differed
from the statutory rate due to nondeductible goodwill amortization and an
increase in the valuation allowance.
The Company recorded a loss from discontinued operations of $601,000
(net of tax benefit of $418,000), or $0.01 per share, resulting from certain
Medicare contractual adjustments related to the discontinued psychiatric
operations sold in 1998. Loss from discontinued operations in 1998 of $2.4
million (net of tax of $1.7 million), or $0.04 per diluted share, resulted from
the settlement of the 1995 litigation concerning alleged violations of certain
Medicare rules at the Company's former psychiatric hospitals.
Net loss for the three months ended September 30, 1999 was $4.0
million, or $0.07 per diluted share, compared to a net loss of $4.1 million or
$0.07 per diluted share, for the same period of 1998. Weighted average common
and common equivalent shares outstanding were 56.5 million and 57.5 million in
1999 and 1998, respectively.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1998
Net revenue for the nine months ended September 30, 1999, was $432.4
million, a decrease of $88.4 million, or 17.0%, from $520.7 million for the same
period in 1998. The decline in net revenue is largely due to the sale of eight
acute care hospitals in 1998 and the sale of Bledsoe and the Convalescent
Hospitals in March and June 1999, respectively.
Net revenue at "same hospitals" decreased by $2.2 million, or 0.5%, to
$418.6 million for the nine months ended September 30, 1999 compared to $420.8
million in 1998. This decrease occurred entirely at the Company's Non Core
Facilities as a result of an overall decline in patient volumes. Same hospital
net revenue at Core Facilities increased $2.7 million, or 0.7%, from $367.9
million in 1998 to $370.6 million in 1999. Same hospital net revenue at Non Core
Facilities decreased $4.9 million, or 9.2%, from $52.9 million in 1998 to $48.0
million in 1999. Increased patient volumes in admissions, patient days and
outpatient visits (excluding home health) contributed to the increase in net
revenue at the Core Facilities.
<PAGE> 17
The Company's "same hospitals" experienced a 2.3% increase in inpatient
admissions from 41,889 in the nine months ended September 30, 1998 to 42,844 in
the comparable period in 1999. Same hospital patient days increased 1.8% from
190,992 in 1998 to 194,421 in 1999. Excluding home health visits, outpatient
visits at "same hospitals" increased 3.7% from 456,038 in 1998 to 472,734 in
1999. The increase in admissions and outpatient visits resulted from (i)
favorable demographic changes in certain markets, (ii) an increase in the number
of physicians and services at several of the Company's hospitals and (iii)
increased volume generated from certain hospital benchmarking and service
awareness programs implemented in 1998. Home health visits in "same hospitals"
decreased 36.6% from 318,715 in 1998 to 202,141 in 1999 primarily due to the
1998 closure or sale of certain home health operations in response to the 1997
Budget Act.
The following table presents "same hospitals" operating statistics for
the Company's Core and Non Core Facilities for the nine months ended September
30, 1999 and 1998.
<TABLE>
<CAPTION>
<S> <C>
"SAME HOSPITALS"
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998 % CHANGE
---- ---- --------
CORE FACILITIES
Patient Days.............................................. 167,995 161,357 4.1%
Inpatient Admissions .................................. 36,642 35,431 3.4
Outpatient Visits, excluding Home Health.................. 410,169 383,814 6.9
Home Health Visits........................................ 125,362 195,486 (35.9)
NON CORE FACILITIES
Patient Days.............................................. 26,426 29,635 (10.8)%
Inpatient Admissions...................................... 6,202 6,458 (4.0)
Outpatient Visits, excluding Home Health.................. 62,565 72,224 (13.4)
Home Health Visits........................................ 76,779 123,229 (37.7)
</TABLE>
Operating expenses (salaries and benefits, other operating expenses and
provision for bad debts), expressed as a percentage of net revenue, remained
relatively flat at 87.5% and 87.7% in the nine months ended September 30, 1999
and 1998, respectively. Operating expenses decreased $78.6 million from $456.9
million in the nine months ended September 30, 1998 to $378.3 million in 1999
largely due to reductions from closed/sold facilities and cost reduction
initiatives implemented in the second half of 1998. Operating expenses in 1998
included a favorable adjustment of approximately $4.5 million to reduce the
general and professional liability insurance accruals to reflect actuarial
estimates. Operating margins were 12.5% and 12.3% in 1999 and 1998,
respectively.
<PAGE> 18
Operating expenses at the Company's "same hospitals" were 82.8% of net
revenue in 1999 and 82.3% in 1998, and operating margins were 17.2% and 17.7%,
respectively. Core Facility operating margins remained relatively flat at 18.5%
in 1999 and 18.9% in 1998, and Non Core Facility operating margins decreased to
7.3% from 9.6%, respectively. The stability of Core operating margins reflects
the favorable impact of the various cost reduction initiatives undertaken in the
latter half of 1998. Additionally, the comparison of 1999 operating margins to
1998 is less subject to the impact of the 1997 Budget Act on net revenue as
reimbursement reductions were substantially phased in by the third quarter of
1998. Non Core operating margins in 1999 remained below 1998 levels despite
significant restructuring and cost reduction measures due to the loss of higher
margin home health business and an overall decline in patient volumes at these
facilities.
Interest expense increased $1.0 million from $38.8 million in the nine
months ended September 30, 1998 to $39.8 million in 1999, due to a net increase
in borrowings under the senior credit facility (primarily to fund the
acquisition of DHHS in July 1998, facility expansion, Year 2000 expenditures and
working capital) and commercial paper program.
Depreciation and amortization expense increased $2.9 million from $27.6
million in the nine months ended September 30, 1998 to $30.5 million for the
same period in 1999 primarily due to the acquisition of DHHS on July 1, 1998 and
additions to property and equipment.
Loss before income taxes, discontinued operations and extraordinary
charge was $18.3 million for the nine months ended September 30, 1999 and
included (i) unusual charges of $2.2 million, which consisted of a $5.5 million
corporate restructuring charge, a $2.2 million charge associated with an
executive agreement offset by a $5.5 million gain from the settlement of
shareholder litigation and (ii) a net loss on sale of facilities of $114,000
(see Note 3). Income before income taxes, discontinued operations and
extraordinary charge was $8.1 million for the nine months ended September 30,
1998 and included a gain on sale of the Chico Hospitals of $7.1 million, an
unusual gain of $7.0 million primarily from the settlement of a capitated
contract dispute and minority interests of $4.1 million attributable to DHHS.
The Company recorded an income tax benefit of $5.7 million in the nine
months ended September 30, 1999 and an income tax expense of $2.4 million for
the same period in 1998. The income tax benefit in 1999 differed from the
statutory rate due to nondeductible expense from the settlement of shareholder
litigation and goodwill amortization, which were partially offset by a
non-taxable gain related to the execution of an executive agreement. Income tax
expense in 1998 differed from the statutory rate due to a decrease in the
valuation allowance, which was partially offset by nondeductible goodwill
amortization.
The Company recorded a loss from discontinued operations of $601,000
(net of tax benefit of $418,000), or $0.01 per share, resulting from certain
Medicare contractual adjustments related to the discontinued psychiatric
operations sold in 1998. The Company recorded a loss from discontinued
operations of $2.4 million (net of tax of $1.7 million), or $0.04 per diluted
share, in 1998 to reflect the settlement of the 1995 litigation concerning
alleged violations of certain Medicare rules.
<PAGE> 19
Net loss for the nine months ended September 30, 1999 was $13.2
million, or $0.24 per diluted share, compared to net income of $2.1 million, or
$0.04 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 (net of tax benefits of $816,000), 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 55.4 million and 57.5
million in 1999 and 1998, respectively. The decrease in weighted average common
and common equivalent shares outstanding resulted from the effect of dilutive
securities, which were excluded due to their antidilutive effect on 1999 net
loss.
LIQUIDITY AND CAPITAL RESOURCES
The Company had net working capital of $24.2 million at September 30,
1999, an increase of $1.7 million from $22.5 million at December 31, 1998. The
increase in net working capital resulted primarily from decreases in interest
payable and Medicare/Medicaid third-party payables, which were partially offset
by a reduction in accounts receivable. The Company's long-term debt as a
percentage of total capitalization increased to 95.6% at September 30, 1999,
compared to 93.9% at December 31, 1998, as the result of the 1999 year-to-date
net loss and from additional net borrowings under the senior credit facilities.
Net cash used in operating activities increased $3.9 million to $11.5
million in the nine months ended September 30, 1999 from $7.6 million for the
same period in 1998. Net cash used in investing activities decreased $23.8
million from $44.2 million in 1998 to $20.4 million in 1999 due to (i) the
acquisition of DHHS for $59.3 million in 1998 partially offset by (ii) a
decrease in proceeds from the sale of facilities of $34.4 million and (iii) an
increase in property and equipment additions primarily from facility expansions
and increased capital expenditures in 1999 associated with Year 2000 and
computer system conversions. Net cash provided by financing activities during
1999 was $24.3 million as compared to $31.8 million during 1998. The $7.5
million decrease resulted primarily from a decrease in acquisition related
borrowings in 1999 relative to 1998, partially offset by a decrease in
repayments under the revolver portion of the senior credit facilities and the
payment of deferred financing costs associated with the refinancing of the
senior credit facility in March 1998.
In June 1999, the Company recorded a corporate restructuring charge of
$5.5 million in connection with its effort to further reduce corporate overhead
through the consolidation and/or elimination of corporate functions and
contracts and a reduction of corporate office space under lease. The cash
portion of the restructuring charge was approximately $3.5 million.
Effective June 30, 1999, the Company amended its senior bank credit
agreement, which provides for, among other things (i) an increase in interest
rates, (ii) a change in certain financial covenants for the last three quarters
of 1999, (iii) a reduction in the revolving credit loan commitments for any
prepayment made in connection with an asset disposition, as defined, (iv) an
increase in permitted letters of credit and (v) approval of certain asset
dispositions, as defined.
Effective July 21, 1999, the Company received waivers to certain
provisions of the senior bank credit agreement to permit the global settlement
of shareholder litigation. The settlement, which became final in September 1999,
had no material adverse impact on the Company's liquidity. The substantial
fulfillment of the settlement terms is described in Item 2. "Legal Proceedings"
in this Quarterly Report on Form 10-Q.
<PAGE> 20
On October 8, 1999, the Company sold 93.9% of HoldCo, which owned
substantially all of the assets of five hospitals and related facilities located
in Salt Lake City, Utah for $280.0 million in cash, inclusive of working
capital. The cash proceeds from the transaction were used to eliminate all
indebtedness then outstanding and related accrued interest under the Company's
senior credit facilities totaling $223.5 million, to reduce borrowings under the
commercial paper financing program by approximately $12.8 million and to provide
collateral of $11.5 million for certain outstanding letters of credit. The
Company also eliminated $7.8 million in annual operating lease payments related
to one of the Utah Facilities. The Company expects to use the balance of the
proceeds, net of transaction costs, for selected capital expenditures and
strategic investments in its existing markets.
As of September 30, 1999, the Company was in compliance with or
received waivers for all debt covenants to which it was subject under the senior
bank credit agreement. as the result of the repayment of all indebtedness under
the senior credit facilities in October 1999, most of the commitments under such
facilities were permanently cancelled. The Company has entered into an interim
financing arrangement with one of its bank lenders, which maintained its
original commitment under the senior bank credit agreement of $34.8 million. The
Company is in the process of negotiating with such lender for a new credit
facility to replace the interim financing arrangement under the existing senior
bank credit agreement in the fourth quarter of 1999. However, there can be no
assurance that the Company will be successful in its effort to obtain a new
financing commitment under acceptable terms and conditions.
The Company's continued compliance with its debt covenants, under the
existing senior bank credit agreement or the new credit facility, when
completed, is predicated on its ability to maintain certain levels of operating
performance. If the Company is unable to meet such 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.
On October 15, 1999, the Company renewed its commercial paper financing
program through April 16, 2000. As of November 9, 1999, approximately $33.2
million remained available for borrowings under the commercial paper program,
subject to the availability of the eligible accounts receivable. The Company
also had $23.2 million available for borrowings under the interim financing
arrangement, subject to the terms thereof, to fund future capital expenditures,
working capital requirements and the issuance of letters of credit.
The Company anticipates that internally generated cash flows from
earnings, existing cash balances, borrowings under its existing financing
arrangement and the commercial paper financing program, proceeds from the sale
of facilities, income tax refunds and permitted equipment leasing arrangements
will be sufficient to fund future capital and Year 2000 expenditures (see "Year
2000" discussion below) 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.
<PAGE> 21
The Company no longer satisfies the closing price requirement for
continued listing on the New York Stock Exchange. The Company is currently
considering measures that would enable the Company to regain compliance and
remain listed. There can be no assurance that such measures will be successful,
or that the Company's common stock will continue to be listed on a national
securities exchange.
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.
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. The Company
has completed the first five phases of the project plan, which included, among
others, (i) obtaining vendor certification (ii) identifying and testing all
patient care critical and operations critical items and (iii)
correcting/replacing non-compliant systems.
The sixth phase, which involves developing contingency plans, is
substantially complete. The contingency plan, developed by functional
department and on a hospital-by-hospital basis, includes the identification of
(i) core functions and related supporting mission-critical systems, (ii)
procedures to detect data corruption and manual/replacement procedures to
execute in the event of system malfunction, (iii) loss impact of potential
failures on departmental core functions and procedures for restoring lost data,
(iv) a supply chain readiness assessment for all critical suppliers, (v) 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, (vi) emergency notification procedures with the
corporate command center and with points of contact, including vendors,
customers and/or legal counsel, (vii) 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, and (viii) validation plan to
ensure that the contingency plan is realistic and executable. The Company is in
the process of communicating the corporate master contingency plan to each
hospital and the corporate office. Such plan includes the creation of the
corporate control center to monitor all Year 2000 activities and procedures
addressing alternative data processing systems and power distribution. The
seventh and final phase, which focuses on identifying and correcting any
unpredictable malfunction in the systems and equipment, is in process and will
be conducted throughout the remainder of 1999, as planned.
Based on existing information, the Company believes that its estimate
of Year 2000 total costs of $8.0 million to $10.0 million, as previously
reported in the Company's 1998 Annual Report on Form 10-K, remains appropriate.
To date, the Company has incurred approximately $7.0 million in capital
expenditures on replacement systems and capital projects that would have been
undertaken notwithstanding the Year 2000 compliance program, but the timing of
which was accelerated. The Company has also incurred approximately $1.0 million
in expenses to date, including approximately $400,000 associated with the
write-off of non-compliant systems, which were or will be replaced. The Company
continues to review its Year 2000 total cost estimate as appropriate.
<PAGE> 22
The Company's efforts have focused on identifying and remediating, as
necessary, patient care or operations critical equipment that were not Year
2000 compliant. Consequently, the Company does not expect the Year 2000
issues to have an adverse impact on patient care. Furthermore, each
hospital has developed a back-up plan for critical equipment in case it
unexpectedly fails. However, 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
in implementing any contingency or back-up plans, if and when necessary.
Additionally, failure by third parties on which the Company relies for systems
or operational support could have a material effect on the Company's
results of operations and its ability to provide health care services. The
foregoing assessment is based on information currently available to the Company.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There were no material changes to the information reported in the
Company's 1998 Annual Report on Form 10-K. See Item 2."Management Discussion
and Analysis - Liquidity and Capital Resources."
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In September 1999, the global settlement of the putative class and
derivative actions arising out of the Company's August 1996 merger with Champion
and two related public offerings became effective, in all material respects.
In accordance with the terms of the global settlement, the Company paid $14.0
million, which was funded from insurance proceeds, to the class settlement
fund for distribution to class members and issued 1.5 million shares of
common stock for purposes of distribution to class members. The Former
Majority Shareholder also transferred 8.7 million shares of the Company's
common stock to certain former Champion shareholders and 1.2 million shares
of the Company's common stock for purposes of distribution to class members.
In addition, the Company made a payment of $1.0 million in cash and issued 1.0
million shares of common stock to terminate a contract with the Former Chairman.
The settlement reduced the Company's existing and future obligations to
certain former officers and directors and terminated Value Options to purchase
approximately 1.3 million shares of the Company's common stock granted in
connection with the August 1996 merger. The Company, all class members, the
derivative plaintiffs, the separately represented former Champion shareholders,
the Former Majority Shareholder, the underwriter, and the affected current and
former officers and directors provided mutual releases of all claims arising out
of or related to the August 1996 merger and the related public offerings. The
terms of the global settlement were described in detail in the Company's 1998
Annual Report on Form 10-K.
<PAGE> 23
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 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. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed on October 15, 1999, a Current Report on Form 8-K,
dated September 30, 1999, reporting pursuant to Item 2, the sale of the stock of
Paracelsus Senatobia Community, Inc.
The Company filed on October 25, 1999, a Current Report on Form 8-K,
dated October 8, 1999, reporting pursuant to Item 2, the sale of 93.9% of the
outstanding common stock of a wholly owned subsidiary which owned substantially
all of the assets of five hospitals and related facilities located in Salt Lake
City, Utah.
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Paracelsus Healthcare Corporation
(Registrant)
Dated: November 15, 1999 BY: /S/ LAWRENCE A. HUMPHREY
-------------------------------
Lawrence A. Humphrey
Executive Vice President &
Chief Financial Officer
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<LOSS-PROVISION> 32,536
<INTEREST-EXPENSE> 39,771
<INCOME-PRETAX> (18,310)
<INCOME-TAX> (5,739)
<INCOME-CONTINUING> (12,571)
<DISCONTINUED> (601)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,172)
<EPS-BASIC> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
