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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 September 30, 2000
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 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
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes[X] No[ ]
As of November 13, 2000, there were outstanding 59,143,721 shares of the
Registrant's Common Stock, no stated value.
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<PAGE> 2
PARACELSUS HEALTHCARE CORPORATION
Debtor-in-Possession
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
<S> <C>
Page Reference
Form 10-Q
Forward-Looking Statements 3
--------------------------
PART I. FINANCIAL INFORMATION
------
Item 1. Financial Statements-- (Unaudited)
Condensed Consolidated Balance Sheets--
September 30, 2000 and December 31, 1999 4
Consolidated Statements of Operations--
Three and Nine Months ended September 30, 2000
and 1999 5
Condensed Consolidated Statements of Cash Flows--
Nine Months ended September 30, 2000 and 1999 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
-------
Item 1. Legal Proceedings 22
Item 2. Change in Securities 24
Item 3. Default upon Senior Securities 25
SIGNATURE 26
</TABLE>
<PAGE>3
Forward-Looking Statements
Paracelsus Healthcare Corporation ("PHC") and its subsidiaries,
collectively, are herein referred to as the "Company." 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. All
statements regarding the Company's expected future financial position, results
of operations, cash flows, liquidity, financing plans, business strategy,
budgets, projected costs and capital expenditures, competitive position, growth
opportunities, plans and objectives of management for future operations and
words such as "anticipate," "believe," "plan," "estimate," "expect," "intend,"
"may" and other similar expressions are forward-looking statements. Such
forward-looking statements are inherently uncertain, and stockholders must
recognize that actual results may differ materially from the Company's
expectations as a result of a variety of factors, including, without limitation,
those discussed below.
Factors which may cause the Company's actual results in future periods
to differ materially from forecast results include, but are not limited to:
o Uncertainties related to PHC's voluntary petition under Chapter 11
of the Bankruptcy Code including, but not limited to, (i) the
Company's ability to consummate, in substantial terms, the Plan of
Reorganization, as proposed, (ii) actions which may be taken by
creditors and the outcome of various administrative matters in the
Chapter 11 proceeding and (iii) the possibility of delays in the
confirmation and/or the effective date of the Plan of
Reorganization;
o The Company's inability to access capital markets given the
Company's current financial condition;
o The Company's senior management may be required to dedicate
an excessive amount of time and effort dealing with the Company's
financial condition with less time focusing directly on the
operations of its businesses;
o The Company may be unable to retain top management and other key
personnel, including physicians;
o Competition, including the potential impact of a new competing
hospital opened in November 2000 in the Fargo, North Dakota
market, and general economic, demographic and business
conditions, both nationally and in the regions in which
the Company operates;
o Existing government regulations and changes in legislative
proposals for healthcare reform, including changes in Medicare and
Medicaid reimbursement levels;
o The ability to enter into managed care provider arrangements on
acceptable terms;
o Liabilities and other claims asserted against the Company;
o The loss of any significant customer, including but not
limited to managed care contracts;
o The Company's ability to comply with the terms of the subsidiary
level credit facility;
o The Company's ability to achieve profitable operations after the
confirmation of the Plan of Reorganization; and
o The Company's ability to generate sufficient cash from
operations to meet its obligations.
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
Debtor-in-Possession
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in 000's)
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
2000 1999
-------------------- --------------------
(Unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents.............................................. $ 14,632 $ 22,723
Restricted cash........................................................ 8,679 12,991
Accounts receivable, net............................................... 66,918 30,796
Supplies............................................................... 8,351 8,655
Income taxes receivable................................................ 6,321 6,152
Other current assets................................................... 16,360 14,212
--------- ----------
Total current assets............................................... 121,261 95,529
Property and equipment..................................................... 342,076 339,528
Less: Accumulated depreciation and amortization............................ (126,625) (113,052)
---------- ----------
215,451 226,476
Goodwill................................................................... 85,055 87,684
Other assets............................................................... 29,188 27,369
---------- ----------
Total assets....................................................... $ 450,955 $ 437,058
========== ==========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable....................................................... $ 30,114 $ 35,563
Accrued interest payable (Note 2)...................................... 411 12,598
Accrued liabilities and other.......................................... 17,826 20,426
Long-term debt in default classified as current (Note 2)............... 3,085 335,445
Long-term debt due within one year..................................... 485 654
---------- ----------
Total current liabilities.......................................... 51,921 404,686
Long-term debt (Note 3).................................................... 37,618 3,685
Liabilities subject to compromise (Note 2)................................. 373,597 -
Other long-term liabilities................................................ 11,719 23,490
Stockholders' equity (deficit):
Common stock........................................................... 216,047 215,761
Additional paid-in capital............................................. 11,874 12,105
Accumulated deficit.................................................... (251,821) (222,669)
---------- ----------
Total stockholders' equity (deficit)............................... (23,900) 5,197
---------- ----------
Total Liabilities and Stockholders' Equity (Deficit)....................... $ 450,955 $ 437,058
========== ==========
See accompanying notes.
</TABLE>
<PAGE>5
PARACELSUS HEALTHCARE CORPORATION
Debtor-in-Possession
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000's, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
----------------- ----------------- ---------------- -----------------
Net revenue...................................$. 93,207 $ 138,161 $ 279,330 $ 432,372
Costs and expenses:
Salaries and benefits......................... 40,643 56,038 120,714 173,138
Other operating expenses...................... 35,888 57,623 107,279 172,647
Provision for bad debts....................... 9,851 11,051 22,435 32,536
Interest (excludes contractual interest of
$1.5 million on pre-petition debt
obligations in the three and nine
months ended September 30, 2000) 8,742 13,588 27,967 39,771
Depreciation and amortization................. 8,117 10,758 24,281 30,543
Unusual items................................. - (5,465) - 2,203
Loss (gain) on sale of facilities............. - (2,273) - 114
--------- ---------- ----------- ------------
Total costs and expenses................ 103,241 141,320 302,676 450,952
--------- ---------- ----------- ------------
Loss before minority interests,
reorganization costs, income taxes and
discontinued operations...................... (10,034) (3,159) (23,346) (18,580)
Minority interests.............................. - 149 - 270
--------- ---------- ----------- ------------
Loss before reorganization costs, income taxes
and discontinued operations................. (10,034) (3,010) (23,346) (18,310)
Reorganization costs............................ (1,451) - (5,806) -
---------- ---------- ----------- ------------
Loss before income taxes and discontinued
operations................................... (11,485) (3,010) (29,152) (18,310)
Provision (benefit) for income taxes............ - 366 - (5,739)
---------- ---------- ----------- ------------
Loss before discontinued operations (11,485) (3,376) (29,152) (12,571)
Loss on discontinued operations................. - (601) - (601)
---------- ---------- ----------- ------------
Net loss......................................$. (11,485) $ (3,977) $ (29,152) $ (13,172)
========== ========== =========== ============
Loss per share - basic and assuming dilution:
Loss before discontinued operations......$. (0.20) (0.06) $ (0.50) $ (0.23)
Loss on discontinued operations............ - (0.01) - (0.01)
---------- ---------- ----------- ------------
Loss per share...........................$. (0.20) $ (0.07) $ (0.50) $ (0.24)
========== ========== =========== ============
See accompanying notes.
</TABLE>
<PAGE>6
PARACELSUS HEALTHCARE CORPORATION
Debtor-in-Possession
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000's)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Nine months ended
September 30,
--------------------------------------
2000 1999
------------------ ------------------
Cash Flows from Operating Activities:
Net loss .................................................... $ (29,152) $ (13,172)
Non-cash expenses and changes in operating assets
and liabilities............................................ 34,909 1,662
------------ -----------
Net cash provided by (used in) operating activities
before reorganization costs................................ 5,757 (11,510)
Reorganization costs.......................................... (5,806) -
------------ -----------
Net cash used in operating activities......................... (49) (11,510)
------------ -----------
Cash Flows from Investing Activities:
Proceeds from sale of facilities, net of expenses............. - 2,025
Additions to property and equipment, net...................... (5,833) (24,034)
(Increase) decrease in other assets, net...................... (1,446) 1,590
------------ -----------
Net cash used in investing activities......................... (7,279) (20,419)
------------ -----------
Cash Flows from Financing Activities:
Borrowings under revolving credit facility.................... 36,000 43,100
Repayments under revolving credit facility.................... (2,000) (13,430)
Termination of obligations under the commercial
paper financing program................................... (32,000) -
Repayments of debt, net ...................................... (411) (5,324)
Deferred financing costs...................................... (2,352) -
------------ ----------
Net cash provided by (used in) financing activities........... (763) 24,346
------------ ----------
Decrease in cash and cash equivalents......................... (8,091) (7,583)
Cash and cash equivalents at beginning of period.............. 22,723 11,944
------------ ----------
Cash and cash equivalents at end of period.................... $ 14,632 $ 4,361
============ ==========
Supplemental Cash Flow Information:
Interest paid.............................................. $ 3,321 $ 48,124
Income taxes (refunded) paid............................... $ 715 $ (26)
Noncash Investing Activities:
Notes receivable from sale of hospitals.................... $ - $ 7,304
Debt assumed by purchaser of hospitals..................... $ - $ 2,952
Capital lease obligations.................................. $ - $ 1,124
See accompanying notes.
</TABLE>
<PAGE>7
PARACELSUS HEALTHCARE CORPORATION
Debtor-in-Possession
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2000
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Organization - Paracelsus Healthcare Corporation ("PHC") was incorporated in
November 1980 for the principal purpose of owning and operating acute care and
related healthcare businesses in selected markets. PHC and its subsidiaries (the
"Company") presently operate 10 acute care hospitals with 1,287 licensed beds in
seven states, of which eight are owned and two are leased.
Basis of Presentation - On September 15, 2000, PHC filed a voluntary petition
for protection under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") with the United States Bankruptcy Court for the Southern
District of Texas (Houston Division) (the "Bankruptcy Court") (Case no.
00-38590-H5-11). The bankruptcy filing is limited to PHC, the parent company,
and does not include any of PHC's hospital subsidiaries. Simultaneously with the
commencement of its bankruptcy case, PHC filed a Plan of Reorganization (the
"Plan") pursuant to which PHC proposes to effect its capital restructuring.
During the Chapter 11 proceeding, PHC is operating as a debtor-in-possession
under the authority of the Bankruptcy Code. PHC elected to seek Bankruptcy Court
protection in order to facilitate the restructuring of its debt while continuing
to maintain normal business operations at PHC's hospital subsidiaries. PHC's
hospital subsidiaries did not file for bankruptcy protection and are expected to
continue paying, in the ordinary and normal course of business, all wages,
benefits and other employee obligations, as well as all outstanding and ongoing
accounts payable to their contractors and vendors.
The Company's continuing operating losses and liquidity issues and
PHC's Chapter 11 proceeding raise substantial doubt about the Company's ability
to continue as a going concern. The ability of the Company to continue as a
going concern is dependent upon, among other things, (i) the Company's ability
to comply with the terms of the subsidiary level credit facility, (ii)
confirmation of the Plan under the Bankruptcy Code, (iii) the Company's ability
to achieve profitable operations after such confirmation, and (iv) the Company's
ability to generate sufficient cash from operations to meet its obligations.
The condensed consolidated financial statements of the Company have
been prepared in accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7") and generally accepted
accounting principles applicable to a going concern, which assumes that assets
will be realized and liabilities will be discharged in the normal course of
business. The financial statements do not include further adjustments, if any,
reflecting the possible future effects on the recoverability and classification
of assets or the amount and classification of liabilities that may result from
the outcome of uncertainties discussed herein. The Plan and other actions during
the Chapter 11 proceeding could change materially the amounts currently recorded
in the consolidated financial statements.
<PAGE>8
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 a
complete set of financial statements. These financial statements should be read
in conjunction with the audited consolidated financial statements and notes
thereto for the year ended December 31, 1999, included in the Company's 1999
Form 10-K. Operating results for the three and nine months ended September 30,
2000, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the Company's customary accounting
practices and SOP 90-7. Management believes that the financial information
included herein reflects all adjustments necessary for a fair presentation of
interim results and, except for the costs described in Note 3, all such
adjustments are of a normal and recurring nature.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
Earnings Per Share - The following table sets forth the computation of basic and
diluted loss before discontinued operations per share (dollars in thousands,
except per share amounts).
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
--------- -------- -------- ---------
Numerator (a):
Loss before discontinued operations............... $ (11,485) $ (3,376) $(29,152) $(12,571)
========= ======== ======== ========
Denominator:
Weighted average shares used for basic earnings per
share............................................ 58,284 55,922 58,325 55,386
Effect of dilutive securities:
Employee stock options.......................... - - - -
--------- -------- -------- ---------
Dilutive potential common shares.................. - - - -
--------- -------- -------- ---------
Shares used for diluted earnings per share........ 58,284 55,922 58,325 55,386
========= ======== ======== =========
Loss before discontinued operations per share:
Basic............................................. $ (0.20) $ (0.06) $ (0.50) $ (0.23)
========= ======== ======== =========
Diluted........................................... $ (0.20) $ (0.06) $ (0.50) $ (0.23)
========= ======== ======== =========
----------------------
</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 1.7 million shares of the Company's common stock at
a weighted average exercise price of $3.16 per share and warrants to purchase
414,690 shares at a weighted average exercise price of $9.00 per share were
outstanding during the three and nine months ended September 30, 2000, but were
not included in the computation of diluted EPS due to their anti-dilutive effect
on reported loss before discontinued operations.
<PAGE>9
See Note 2 for additional discussion of common stock and warrants to
purchase common stock to be issued in connection with the Plan of
Reorganization, which if confirmed and when effective, will result in
significant dilution of the ownership interests of the existing holders of
the Company's common stock.
Comprehensive Loss - Comprehensive loss for the three and nine months ended
September 30, 2000 of $11.7 million and $29.4 million, respectively, included
$231,000 of deferred compensation costs related to the issuance of restricted
stock grants under an employment agreement. Comprehensive loss for the three and
nine months ended September 30, 1999 equaled the net loss reported for each of
the respective periods.
Restricted Cash - The Company had restricted cash of $8.7 million and $13.0
million at September 30, 2000 and December 31, 1999, respectively, as collateral
for outstanding letters of credit and other commitments.
NOTE 2. PROCEEDING UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On September 15, 2000, PHC filed a voluntary petition for protection
under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court
for the Southern District of Texas (Case no. 00-38590-H5-11). The bankruptcy
filing is limited to PHC, the parent company, and does not include any of PHC's
hospital subsidiaries. Simultaneously with the commencement of its bankruptcy
case, PHC filed the Plan of Reorganization pursuant to which PHC proposes to
effect its capital restructuring. PHC elected to seek Bankruptcy Court
protection in order to facilitate the restructuring of its debt while continuing
to maintain normal business operations at PHC's hospital subsidiaries.
PHC's hospital subsidiaries did not file for bankruptcy protection and
are expected to continue paying, in the ordinary and normal course of business,
all wages, benefits and other employee obligations, as well as all outstanding
and ongoing accounts payable to their contractors and vendors. A $62.0 million
credit facility (see Note 3), secured at the subsidiary level, is not directly
affected by PHC's bankruptcy filing. The Company expects cash on hand and
cash generated from operations to be sufficient to meet the working
capital and capital expenditure needs of the hospital subsidiaries during the
restructuring process.
PHC's decision to restructure its debt was due to its highly leveraged
capital structure. Despite positive earnings before interest, taxes,
depreciation, amortization and unusual charges, the high interest burden has
severely impacted PHC's reinvestment opportunities. In an effort to conserve
capital and to preserve the normal operations of the hospital subsidiaries, PHC
did not make its interest payments of $33.5 million on the $325.0 million 10%
Senior Subordinated Notes (the "Notes") due February 15 and August 15, 2000.
PHC has been in negotiations with certain Note holders (the "Note
Holders"). The Note Holders of the majority of the principal amount of
the Notes support the main financial terms of the Plan and, subject to certain
conditions, have indicated an intent to vote in favor of the Plan. On the
effective date (the "Effective Date") of the Plan , as modified on October 6,
2000, all principal and interest outstanding on the Notes and
allowed general unsecured claims of up to $15.0 million will be exchanged for
(i) the reorganized PHC's 11.5% Senior Notes (due on August 15, 2005) in the
aggregate principal amount of $130.0 million (the "New Notes"), (ii) a Cash
Payment, as defined in the Plan, and (iii) 95.0% of the reorganized PHC's common
stock, subject to dilution through the exercise of the Series A Warrants and
Series B Warrants (as referred to below). Interest on the New Notes shall accrue
commencing on the Effective Date. The Plan also provides for the holders of
PHC's common stock as of the Record Date (as defined in the Plan) to receive (i)
5.0% of the reorganized PHC's common stock, (ii) warrants (the "Series A
Warrants") to purchase prior to the fifth anniversary of the Effective Date an
additional 9.64% of the reorganized PHC's common stock (exercisable at $320.0
million enterprise value of the reorganized PHC), and (iii) warrants (the
"Series B Warrants") to purchase prior to the first anniversary of the Effective
Date an additional 2.0% of the reorganized PHC's common stock (exercisable at
$100.0 million value of the reorganized PHC's common stock). The Plan would make
its effectiveness subject to certain conditions, including among others,
limiting the amount of all allowed general unsecured claims, including any
disputed general unsecured claims (other than the Notes), to $15.0 million.
<PAGE>10
The terms of a settlement agreement executed in connection with
the global settlement of shareholder litigation that became effective in
September 1999, provide that the Company's $7.2 million 6.51% subordinated note
("Park Note") and accrued interest convert to PHC's common stock
in the event PHC files a voluntary petition in bankruptcy. No shares of common
stock have been issued to Park at this time. See "Liabilities Subject to
Compromise" discussed below. Under the proposed Plan of Reorganization,
(i) the Park Note will be deemed to have been converted to approximately 1.9
million shares of PHC's common stock upon the filing of the Bankruptcy, (ii)
the Park Note holder (Park Hospital GmbH or "Park") will be deemed to have
been issued the common stock in accordance with the terms of the settlement
and (iii) the Park Note will be cancelled upon receipt of such shares of common
stock by Park. The 1.9 million shares will be deemed to be outstanding as
of the Record Date for the purposes of the distribution of the 5.0% of
the reorganized PHC's common stock and warrants as discussed above.
The Plan also contains a management retention plan (the "Retention
Plan") to enhance the ability of the Company to retain key management employees
during the restructuring period. Under the Retention Plan, bonuses aggregating
$1.0 million will be awarded, subject to certain conditions, to certain key
management employees. The Retention Plan provides that the retention bonuses
will be awarded in two equal amounts upon: (i) the Effective Date and (ii)
ninety days following the Effective Date. The Plan, as well as PHC's Disclosure
Statement, are on file with the Bankruptcy Court and are available for review
and copying during the Bankruptcy Court's normal business hours.
On October 2, 2000, PHC received approval from the Bankruptcy Court to
pay pre-petition and post-petition PHC's employee wages, salaries and benefits.
The Bankruptcy Court also approved orders granting authority, among other
things, to pay pre-petition claims of certain utilities. All other PHC
pre-petition liabilities are classified in the condensed consolidated balance
sheet as liabilities subject to compromise. PHC intends to pay post-petition
claims of all vendors and providers in the ordinary course of business.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness
from PHC are subject to an automatic stay and other contractual obligations
against PHC may not be enforced. In addition, PHC may assume or reject executory
contracts, including lease obligations, under the Bankruptcy Code. Parties
affected by the lease or contract rejections may file claims with the Bankruptcy
Court in accordance with procedures set forth in the Bankruptcy Code.
<PAGE>11
The Plan of Reorganization must be voted upon by the holders of Allowed
Claims and Allowed Equity Interests in impaired classes set forth in the Plan
and approved by the Bankruptcy Court. There can be no assurance that the Plan
will be approved by the requisite holders of claims or equity interests,
confirmed by the Bankruptcy Court, or consummated. A plan of reorganization must
be confirmed by the Bankruptcy Court after certain findings required by the
Bankruptcy Code are made by the Bankruptcy Court. The Bankruptcy Court may
confirm a plan of reorganization notwithstanding the non-acceptance of the plan
by an impaired class of creditors or equity holders if certain requirements of
the Bankruptcy Code are met.
In accordance with SOP 90-7, "Liabilities Subject to Compromise" on the
accompanying condensed consolidated balance sheet refers to PHC liabilities
incurred prior to the commencement of the Chapter 11 proceeding and do not
reflect liabilities of any of PHC's subsidiaries. These liabilities, consisting
primarily of long-term debt, including the principal amounts of the Notes and
the Park Note and accrued interest through September 15, 2000, certain accounts
payable, accrued liabilities and post-termination benefit obligations to former
officers and key employees, represent the Company's estimate of known or
potential claims to be resolved in connection with the Chapter 11 proceeding.
Such claims remain subject to future adjustments based on negotiations, actions
of the Bankruptcy Court, further developments with respect to disputed claims,
future rejection of executory contracts or unexpired leases, determination as to
the value of any collateral securing claims, treatment under the Plan and other
events. Payment terms for these amounts as proposed in the Plan are discussed
above.
A summary of the principal categories of claims classified as
"Liabilities Subject to Compromise" as a result of the Chapter 11 proceeding
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
10% Senior Subordinated Notes................................. $ 325,000
Accrued interest through September 15, 2000................... 36,853
6.51% Subordinated Note....................................... 7,185
Post-termination benefit obligations.......................... 3,254
Vendor accounts payable....................................... 705
Accrued litigation liabilities................................ 600
--------------
Total liabilities subject to compromise................... $ 373,597
==============
</TABLE>
The financial statements do not include further adjustments, if any,
reflecting the possible future effects on the recoverability and classification
of assets or the amount and classification of liabilities that may result from
the outcome of the uncertainties associated with the Chapter 11 proceeding. If
the Chapter 11 proceeding had not been filed, the Company would have reported a
working capital deficit of approximately $303.6 million at September 30, 2000.
During the pendency of the Chapter 11 proceeding, the Company is not recording
the contractual amount of interest expense related to the Notes and the Park
Note after September 15, 2000. Contractual interest obligations excluded from
interest expense reported on the accompanying condensed statements of operations
was $1.5 million for the three and nine months ended September 30, 2000.
Due to cross default provisions, a hospital subsidiary's capital lease
obligation has been presented as current liabilities in the Company's condensed
consolidated balance sheet at September 30, 2000.
At the Company's request, on October 26, 2000, the Bankruptcy Court
dismissed the PHC Finance, Inc. Chapter 11 proceeding which was filed on March
15, 2000.
<PAGE>12
NOTE 3 . LONG TERM DEBT
On May 16, 2000, the Company entered into a new credit agreement with a
lending group, which provides a $62.0 million revolving credit and letter of
credit guaranty facility (the "Credit Facility"), expiring May 15, 2003. The
Credit Facility was used to refinance obligations outstanding under the
Company's prior off-balance sheet commercial paper financing program, to replace
existing letters of credit outstanding under the previously existing interim
financing arrangement and to fund normal working capital and certain capital
expenditures of the Company's hospitals. The Credit Facility is an obligation of
certain of the Company's subsidiaries and is secured by all of the Company's
eligible patient receivables and certain other assets of the Company's hospitals
and a first lien on two of its hospitals. Accordingly, the Credit Facility is
not an obligation of PHC. Borrowings under the Credit Facility bear interest at
prime plus 1.5% or LIBOR plus 3.75% per annum and are limited to hospitals'
eligible receivables and certain operating measurements, as defined. The Company
is obligated to pay certain commitment fees based upon amounts borrowed and
available for borrowing during the terms of the Credit Facility. The Company
also is subject to certain default provisions and a covenant on certain minimum
levels of cash generated from operations.
The termination of the off-balance-sheet commercial paper program
effectively resulted in the Company's reacquisition of $32.0 million in accounts
receivable previously sold to an unaffiliated trust on a non-recourse basis,
which was financed with borrowings under the Credit Facility. Consequently, the
accompanying balance sheet as of September 30, 2000 reflects offsetting
increases in accounts receivable and long-term debt. As of September 30, 2000,
the Company had $34.0 million in outstanding borrowings under the Credit
Facility and $8.6 million in outstanding letters of credit, which are fully
secured by cash collateral. The Company recorded deferred financing costs of
$2.4 million in connection with the Credit Facility.
NOTE 4. REORGANIZATION COSTS AND UNUSUAL CHARGES
In the three and nine months ended September 30, 2000, the Company
recorded approximately $1.5 million and $5.8 million of reorganization costs for
professional fees incurred in connection with its reorganization activities. In
the three months ended September 30, 1999, the Company recorded a net unusual
gain of $5.5 million related to the settlement of shareholder litigation.
Unusual charges for the nine months ended September 30, 1999, reflected (i) a
$2.2 million net charge associated with the execution of an executive agreement
with certain former officers of the Company and a $5.5 million corporate
restructuring charge in the first half of 1999, offset by (ii) the net gain of
$5.5 million related to the settlement of shareholder litigation.
NOTE 5. INCOME TAXES
During the fourth quarter of 1999, the Company recorded a deferred tax
valuation allowance aggregating $26.8 million to reserve the full amount of the
Company's net deferred tax assets at December 31, 1999, due to the issues
affecting liquidity and related uncertainties which, if unfavorably resolved,
would adversely affect the Company's future operations. The Company recorded no
income tax benefit in the three and nine months ended September 30, 2000, as the
result of recording an additional valuation allowance of $4.6 million and $11.4
million, respectively, to reserve all net deferred tax assets generated during
the respective periods. The deferred tax valuation allowance as of September 30,
2000 totaled $86.4 million.
<PAGE>13
NOTE 6. OPERATING SEGMENTS
There has been no material change in the Company's reportable segments
as previously reported in the Company's 1999 Form 10-K. "Same Hospitals," as a
reportable segment, consist of acute care hospitals currently owned, or leased,
and operated by the Company. "All Other" comprises of closed/sold facilities and
overhead costs. Selected segment information for the three and nine months ended
September 30, 2000 and 1999, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Three Months ended
September 30, 2000
---------------------------------------
Same
Hospitals All Other Total
---------- ----------- ------------
Net revenue................................. $ 93,187 $ 20 $ 93,207
Adjusted EBITDA (a) (b)..................... $ 10,109 $ (3,284) $ 6,825
Three Months ended
September 30, 1999
---------------------------------------
Same
Hospitals All Other Total
---------- ----------- ------------
Net revenue................................. $ 91,154 $ 47,007 $ 138,161
Adjusted EBITDA (a)......................... $ 13,722 $ (124) $ 13,598
Nine Months ended
September 30, 2000
---------------------------------------
Same
Hospitals All Other Total
---------- ----------- ------------
Net revenue................................. $277,744 $ 1,586 $ 279,330
Adjusted EBITDA (a) (b)..................... $ 37,529 $ (8,627) $ 28,902
Nine months ended
September 30, 1999
---------------------------------------
Same
Hospitals All Other Total
---------- ----------- ------------
Net revenue................................. $277,759 $ 154,613 $ 432,372
Adjusted EBITDA (a)......................... $ 47,120 $ 7,201 $ 54,321
-------------------------------------
</TABLE>
(a) Earnings from continuing operations before interest, taxes, depreciation,
amortization, reorganization costs and unusual charges ("Adjusted EBITDA")
has been included because it is a widely used measure of internally
generated cash flow and is frequently used in evaluating a company's
performance. Adjusted EBITDA is not an acceptable measure of liquidity,
cash flow or operating income under generally accepted accounting
principles and may not be comparable to similarly titled measures of other
companies.
(b) Adjusted EBITDA in 2000 reflected the impact of $537,000 in shut down costs
relating to the closure of unprofitable physician practices.
<PAGE>14
NOTE 7. CONTINGENCIES
The Company has been involved in discussions with the Federal
government regarding a review of pneumonia claims filed with the Medicare
program by the Company's Jamestown, Tennessee facility for years 1992-1997. As a
result of this review, the Federal government has asserted that such filings
contained coding errors that allegedly resulted in an estimated overpayment of
up to $1.3 million by the Medicare program. Furthermore, in such cases the
Federal government has the ability to seek treble damages and other monetary
relief under the False Claims Act. The Company and the Federal government have
conducted independent reviews and have entered into settlement discussions to
resolve this matter. Based on the results of the Company's independent review,
the Company has accrued $480,000 for potential settlement costs associated with
this matter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On September 15, 2000, PHC filed a voluntary petition for protection
under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court
for the Southern District of Texas (Case no. 00-38590-H5-11). The bankruptcy
filing is limited to PHC, the parent company, and does not include any of PHC's
hospital subsidiaries. Simultaneously with the commencement of its bankruptcy
case, PHC filed the Plan of Reorganization pursuant to which PHC proposes to
effect its capital restructuring. During the Chapter 11 proceeding, PHC is
operating as a debtor-in-possession under the authority of the Bankruptcy Code.
PHC elected to seek Bankruptcy Court protection in order to facilitate the
restructuring of its debt while continuing to maintain normal business
operations at PHC's hospital subsidiaries. See Note 2 of the notes to condensed
consolidated financial statements.
The Company's continuing operating losses and liquidity issues and
PHC's Chapter 11 proceeding raise substantial doubt about the Company's ability
to continue as a going concern. The ability of the Company to continue as a
going concern is dependent upon, among other things, (i) the Company's ability
to comply with the terms of the subsidiary level Credit Facility, (ii)
confirmation of the Plan under the Bankruptcy Code, (iii) the Company's ability
to achieve profitable operations after such confirmation, and (iv) the Company's
ability to generate sufficient cash from operations to meet its obligations.
The condensed consolidated financial statements of the Company have
been prepared in accordance with SOP 90-7 and generally accepted accounting
principles applicable to a going concern, which assumes that assets will be
realized and liabilities will be discharged in the normal course of business.
The financial statements do not include further adjustments, if any, reflecting
the possible future effects on the recoverability and classification of assets
or the amount and classification of liabilities that may result from the outcome
of uncertainties discussed herein. The Plan and other actions during the Chapter
11 proceeding could change materially the amounts currently recorded in the
consolidated financial statements.
<PAGE>15
RESULTS OF OPERATIONS
The comparison of operating results to prior years is difficult given
the number of divestitures in 1999. "Same Hospitals" as used in the following
discussion consist of acute care hospitals owned or leased throughout both
periods for which comparative operating results are presented.
Results of Operations - Three Months ended September 30, 2000
compared with Three Months ended September 30, 1999
Net revenue for the three months ended September 30, 2000, was $93.2
million, a decrease of $45.0 million, or 32.5%, from $138.2 million for the same
period in 1999. The decrease in net revenue was directly related to the sale of
five hospitals included in the results of operations for the 1999 quarter.
Net revenue at Same Hospitals for the three months ended September 30,
2000 was $93.2 million compared to $91.2 million in 1999, an increase of 2.2% or
$2.0 million. Net revenue for the quarter reflects an overall increase in
admissions and outpatient visits. Partially offsetting these factors, Same
Hospitals net revenue was unfavorably impacted by the continuing shift in payor
mix from traditional Medicare, Medicaid and indemnity coverage to managed
care, from which the Company generally receives lower reimbursement. The
Company has responded to the payor mix shift to managed care by renegotiating
contracts to obtain better rates, collecting under payments, reducing denials
and restricting silent preferred provider organizations. Consequently, the
Company is beginning to realize improved reimbursement from managed care. The
Company will continue its effort on these initiatives and expects improvements
in future periods.
For the three months ended September 30, 2000, Same Hospitals'
inpatient admissions increased 5.4% from 9,268 in 1999 to 9,765 in 2000 and
patient days increased 1.8% from 45,159 in 1999 to 45,961 in 2000. Same
Hospitals' average length of stay declined 3.4% from 4.9 days in 1999 to 4.7
days in 2000. Excluding home health visits, outpatient visits increased 6.3%
from 76,431 in 1999 to 81,279 in 2000. Outpatient visits at seven of the
Company's hospitals outpaced the prior year as the result of an increase in
services and number of physicians in many of these markets and due to the
industry trend of increased outpatient utilization. Surgeries decreased 3.8%
from 5,298 in 1999 to 5,097 in 2000 largely due to increased competition at the
Company's Fargo, North Dakota and Lancaster, California hospitals. Same
Hospitals' home health visits decreased 1.7% from 60,626 in 1999 to 59,615 in
2000 due primarily to the elimination of unprofitable home assistance services.
In the Fargo market, a competing hospital opened in November 2000.
As a result, the Company expects declines in patient volumes at its Fargo
hospital in the coming months, which will adversely impact the Company's net
revenue and operating income. The Fargo hospital accounted for 27.0% the
Company's net revenue and 52.9% of its Same Hospital EBITDA in the 2000 quarter.
The Company continues to pursue various alternatives to mitigate the effect of
increased competition in this market.
<PAGE>16
Operating expenses (salaries and benefits, other operating expenses and
provision for bad debts) decreased $38.3 million from $124.7 million in the
three months ended September 30, 1999 to $86.4 million in 2000 due primarily to
sold facilities. Excluding sold hospitals, operating expenses at Same Hospitals
increased by approximately $5.6 million, primarily due to a $2.3 million
increase in salaries and benefits and a $2.4 million increase in bad debt
expense. The increase in salaries and benefits was due to a combination of
market related wage increases and increased volumes at certain hospitals. Salary
and benefits also increased due to $368,000 in severance charges at one
hospital, the majority of which related to the closure of unprofitable
physician practices. Approximately half the increase in bad debt expense
occurred at one hospital and was due largely to an increase in self-pay patients
and emergency room visits, which generally result in higher bad debt expense.
Additionally, certain of the Company's hospitals have also experienced
significant turnover in their business office personnel, which has adversely
impacted bad debt expense as well. The Company has filled all but one of the
management vacancies in its hospital business offices, and expects to see
improved business office performance in the months ahead. The Company is also
implementing a comprehensive revenue cycle management initiative in all of its
hospitals, a significant component of which is aimed at reducing bad debt
expense through improved business office processes. This initiative involves
implementing systems and processes to track, benchmark and improve the
hospitals' admission, billing and collection cycles. The Company expects this
initiative to show some positive results by year-end, although the full impact
of the Company's efforts will not be realized until 2001. Other operating
expense increased by $852,000, due primarily to volume related increases in
supply costs at certain hospitals and increased pharmaceutical costs. Other
operating expense also included $169,000 in non-salary expenses associated with
the closure of physician practices previously discussed.
Operating expenses, expressed as a percentage of net revenue, were
92.7% and 90.3% in 2000 and 1999, respectively. Operating expenses at Same
Hospitals increased to 89.2% of net revenue in 2000 from 85.0% in 1999, and
operating margins decreased to 10.8% from 15.0%, respectively. The reduction in
operating margins resulted from higher operating costs discussed above.
Interest expense decreased $4.8 million from $13.6 million in the three
months ended September 30, 1999 to $8.7 million in 2000, due primarily to a
decrease in the average borrowings outstanding on the revolving line of credit,
partially offset by higher average rate of interest in the current period, which
reflected, in part, additional interest on the defaulted interest payments due
February 15 and August 15, 2000 on the Notes. In accordance with SOP 90-7, the
Company ceased accruing interest on the Notes and other debt obligations subject
to compromise on September 15, 2000, the date of the Bankruptcy filing. As the
result of the Chapter 11 proceeding, contractual interest obligations excluded
from interest expense in the accompanying 2000 condensed statement of operations
was $1.5 million.
Depreciation and amortization expense decreased $2.6 million from $10.8
million in the three months ended September 30, 1999 to $8.1 million for the
same period in 2000 primarily due to the sale of five hospitals included in the
results of operations for the 1999 quarter. Partially offsetting the effect of
sold facilities, depreciation and amortization increased from current year
additions to property and equipment and the write-off of intangibles of $418,000
in connection with the closure of physician practices in the current quarter.
<PAGE>17
Loss before income taxes and discontinued operations was $11.5 million
for the three months ended September 30, 2000, and included reorganization costs
of approximately $1.5 million for professional fees incurred in connection with
the Company's reorganization efforts. 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.
The Company recorded no income tax benefit in the three months ended
September 30, 2000 as the result of recording an additional valuation allowance
to reserve all net deferred tax assets generated during the current quarter. The
Company recognized an income tax benefit of $366,000 in 1999.
In 1999, 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.
Net loss for the three months ended September 30, 2000 was $11.5
million, or $0.20 per diluted share, compared to $4.0 million, or $0.07 per
diluted share, for the same period of 1999. Weighted average common and common
equivalent shares outstanding increased to 58.3 million in 2000 from 55.9
million in 1999 due primarily to the issuance of common stock in connection with
the settlement of litigation in September 1999, an employment agreement in March
2000 and the exercise of stock options in the current quarter.
Results of Operations - Nine Months ended September 30, 2000
compared with Nine Months ended September 30, 1999
Net revenue for the nine months ended September 30, 2000, was $279.3
million, a decrease of $153.1 million, or 35.4%, from $432.4 million for the
same period in 1999. The decline in net revenue is due to the sale of ten
hospitals in 1999.
Net revenue at Same Hospitals was $277.7 million and $277.8 million in
the nine months ended September 30, 2000 and 1999, respectively. The stability
in net revenue was due largely to an overall increase in admissions and
outpatient visits. Offsetting these factors, Same Hospitals net revenue was
unfavorably impacted by the continuing shift in payor mix to managed care as
previously discussed.
Same Hospitals experienced a 1.3% increase in inpatient admissions from
28,995 in the nine months ended September 30, 1999 to 29,358 in the comparable
period in 2000. Same Hospital patient days decreased 1.9% from 144,648 in 1999
to 141,841 in 2000. Average length of stay per admission declined by 3.2% from
5.0 days in 1999 to 4.8 days in 2000. Excluding home health visits, outpatient
visits increased 5.2% from 228,486 in 1999 to 240,336 in 2000. Outpatient visits
at eight of the Company's hospitals outpaced the prior year as the result of
increases in services and number of physicians in many of these markets and due
to the industry trend of increased outpatient utilization. Surgeries decreased
1.5% from 15,988 in 1999 to 15,744 in 2000 largely due to increased competition
in two of the Company's larger markets, as discussed above. To a lesser extent,
certain of the decline in surgeries was also due to the departure of several
physicians at the Company's Richmond, Virginia hospital as the result of a
revision to the credentialing standards for the hospital's medical staff. Home
health visits at Same Hospitals decreased 7.7% from 202,141 in 1999 to 186,519
in 2000 largely due to the discontinuance of certain unprofitable home health
contracts at the Richmond facility and a decline of home health operations in
other markets.
<PAGE>18
Operating expenses decreased $127.9 million from $378.3 million in the
nine months ended September 30, 1999 to $250.4 million in 2000 due to sold
facilities. Expressed as a percentage of net revenue, operating expenses were
89.7% and 87.5% for the nine months ended September 30, 2000 and 1999,
respectively. Operating margins were 10.3% and 12.5% in 2000 and 1999,
respectively. The majority of the deterioration in operating margin occurred at
Same Hospitals as further discussed below.
Operating expenses at Same Hospitals increased by $9.4 million, or
4.1%, due to (i) a $5.5 million increase in salaries and benefits as a result of
generally tight labor markets, as discussed above, (ii) an increase of $2.6
million in other operating costs primarily from volume related increases in
supply costs at certain facilities and increased pharmaceutical cost and
(iii) an increase of $1.3 million in bad debt expense. As previously discussed,
the majority of the increase in bad debts was attributable to one facility,
which has experienced increases in self-pay patients and emergency room visits,
which generally result in higher bad debt expense. In addition, turnover in key
business office personnel at certain hospitals has unfavorably impacted bad debt
expense.
Operating expenses at Same Hospitals increased from 83.1% of net
revenue in 1999 to 86.5% in 2000, and operating margins decreased from 16.9% to
13.5%, respectively. The decline in operating margins reflected higher operating
costs in the current period as a result of the factors discussed above.
Interest expense decreased $11.8 million from $39.8 million in the nine
months ended September 30, 1999 to $28.0 million in 2000, primarily due to a
reduction in the average borrowings outstanding. The decrease in interest
expense was offset in part by an increase in the average rate of interest in the
current period and additional interest on the defaulted interest payments due
February 15, 2000 and August 15, 2000 on the Notes. In accordance with SOP 90-7,
the Company ceased accruing interest on the Notes and other debt obligations
subject to compromise on September 15, 2000, the date of the Bankruptcy filing.
As the result of the Chapter 11 proceeding, contractual interest obligations
excluded from interest expense in the accompanying 2000 condensed statement of
operations was $1.5 million.
Depreciation and amortization expense decreased $6.2 million from $30.5
million in the nine months ended September 30, 1999 to $24.3 million for the
same period in 2000 primarily due to the sale of ten hospitals in 1999,
partially offset by an increase from additions to property and equipment and the
write-off of intangibles in connection with the shut down of physician practices
in the current quarter.
Loss before income taxes and discontinued operations was $29.2 million
for the nine months ended September 30, 2000 and included reorganization costs
of $5.8 million for professional fees incurred in connection with the Company's
reorganization efforts. Loss before income taxes and discontinued operations for
the nine months ended September 30, 1999 was $18.3 million 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.
<PAGE>19
The Company recorded no income tax benefit in the nine months ended
September 30, 2000 as the result of recording an additional valuation allowance
to reserve all net deferred tax assets generated during the current period. The
Company recorded income tax benefit of $5.7 million in the nine months ended
September 30, 1999.
In 1999, 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.
Net loss for the nine months ended September 30, 2000 was $29.2
million, or $0.50 per diluted share, compared to $13.2 million, or $0.24 per
diluted share, for the same period of 1999. Weighted average common and common
equivalent shares outstanding were 58.3 million and 55.4 million in 2000 and
1999, respectively. The increase in weighted average common and common
equivalent shares outstanding resulted from the issuance of common stock in
connection with the settlement of litigation in September 1999, an employment
agreement in March 2000 and the exercise of stock options in the current year.
LIQUIDITY AND CAPITAL RESOURCES
On September 15, 2000, PHC filed a voluntary petition for protection
under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court
for the Southern District of Texas (Case no. 00-38590-H5-11). The bankruptcy
filing is limited to PHC, the parent company, and does not include any of PHC's
hospital subsidiaries. Simultaneously with the commencement of its bankruptcy
case, PHC filed the Plan of Reorganization pursuant to which PHC proposes to
effect its capital restructuring. PHC elected to seek Bankruptcy Court
protection in order to facilitate the restructuring of its debt while continuing
to maintain normal business operations at PHC's hospital subsidiaries.
PHC's hospital subsidiaries have not filed for bankruptcy protection
and are expected to continue paying, in the ordinary and normal course of
business, all wages, benefits and other employee obligations, as well as all
outstanding and ongoing accounts payable to their contractors and vendors. The
$62.0 million Credit Facility, secured at the subsidiary level, is not directly
affected by PHC's filing. The Company expects cash on hand and cash generated
from operations to be sufficient to meet the working capital and capital
expenditure needs of the hospital subsidiaries during the restructuring process.
PHC's decision to restructure its debt was due to its highly leveraged
capital structure. Despite positive earnings before interest, taxes,
depreciation, amortization and unusual charges, the high interest burden has
severely impacted PHC's reinvestment opportunities. In an effort to conserve
capital and to preserve the normal operations of the hospital subsidiaries, PHC
did not make its interest payments of $33.5 million on the Notes due February 15
and August 15, 2000.
PHC has been in negotiations with the Note Holders. The Note Holders of
the majority of the principal amount of the Notes support the main
financial terms of the Plan and, subject to certain conditions, have indicated
an intent to vote in favor of the Plan. On the Effective Date of the Plan,
as modified on October 6, 2000, all principal and interest
outstanding on the Notes and allowed general unsecured claims of up to $15.0
million will be exchanged for (i) the reorganized PHC's 11.5% Senior Notes (due
on August 15, 2005) in the aggregate principal amount of $130.0 million, (ii) a
Cash Payment, as defined in the Plan, and (iii) 95.0% of the reorganized PHC's
common stock, subject to dilution through the exercise of the Series A Warrants
and Series B Warrants (as referred to below). Interest on the New Notes shall
accrue commencing on the Effective Date. The Plan also provides for the holders
of PHC's common stock as of the Record Date (as defined in the Plan) to receive
(i) 5.0% of the reorganized PHC's common stock, (ii) Series A Warrants to
purchase prior to the fifth anniversary of the Effective Date an additional
9.64% of the reorganized PHC's common stock (exercisable at $320.0 million
enterprise value of the reorganized PHC), and (iii) Series B Warrants to
purchase prior to the first anniversary of the Effective Date an additional 2.0%
of the reorganized PHC's common stock (exercisable at $100.0 million value of
the reorganized PHC's common stock). The Plan would make its effectiveness
subject to certain conditions, including among others, limiting the amount of
all allowed general unsecured claims, including any disputed general unsecured
claims (other than the Notes), to $15.0 million.
<PAGE>20
The terms of a settlement agreement executed in connection with
the global settlement of shareholder litigation in September 1999, provide that
the Company's $7.2 million 6.51% subordinated Park Note and accrued
interest convert to PHC's common stock in the event PHC files a voluntary
petition in bankruptcy. No shares of common stock have been issued to
Park at this time. See "Liabilities Subject to Compromise" discussed below.
Under the proposed Plan of Reorganization, (i) the Park Note will be deemed
to have been converted to approximately 1.9 million shares of PHC's common
stock upon the filing of the Bankruptcy, (ii) Park will be deemed to have been
issued the common stock in accordance with the terms of the settlement and
(iii) the Park Note will be cancelled upon receipt of such shares of common
stock by Park. The 1.9 million shares will be deemed to be outstanding as of
the Record Date for the purposes of the distribution of the 5.0% of the
reorganized PHC's common stock and warrants as discussed above.
The Plan also contains the Retention Plan to enhance the ability of the
Company to retain key management employees during the restructuring period.
Under the Retention Plan, bonuses aggregating $1.0 million will be awarded,
subject to certain conditions, to certain key management employees. The
Retention Plan provides that the retention bonuses will be awarded in two equal
amounts upon: (i) the Effective Date and (ii) ninety days following the
Effective Date. The Plan, as well as PHC's Disclosure Statement, are on file
with the Bankruptcy Court and are available for review and copying during the
Bankruptcy Court's normal business hours.
On October 2, 2000, PHC received approval from the Bankruptcy Court to
pay pre-petition and post-petition PHC's employee wages, salaries and benefits.
The Bankruptcy Court also approved orders granting authority, among other
things, to pay pre-petition claims of certain utilities. All other PHC
pre-petition liabilities are classified in the condensed consolidated balance
sheet as liabilities subject to compromise. PHC intends to pay post-petition
claims of all vendors and providers in the ordinary course of business.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness
from PHC are subject to an automatic stay and other contractual obligations
against PHC may not be enforced. In addition, PHC may assume or reject executory
contracts, including lease obligations, under the Bankruptcy Code. Parties
affected by the lease or contract rejections may file claims with the Bankruptcy
Court in accordance with procedures set forth in the Bankruptcy Code.
The Plan of Reorganization must be voted upon by the holders of Allowed
Claims and Allowed Equity Interests in impaired classes set forth in the Plan
and approved by the Bankruptcy Court. There can be no assurance that the Plan
will be approved by the requisite holders of claims or equity interests,
confirmed by the Bankruptcy Court, or consummated. A plan of reorganization must
be confirmed by the Bankruptcy Court after certain findings required by the
Bankruptcy Code are made by the Bankruptcy Court. The Bankruptcy Court may
confirm a plan of reorganization notwithstanding the non-acceptance of the plan
by an impaired class of creditors or equity holders if certain requirements of
the Bankruptcy Code are met.
<PAGE>21
At the Company's request, on October 26, 2000, the Bankruptcy Court
dismissed the PHC Finance, Inc. Chapter 11 proceeding which was filed on March
15, 2000.
In accordance with SOP 90-7, "Liabilities Subject to Compromise" on the
accompanying condensed consolidated balance sheet refers to PHC liabilities
incurred prior to the commencement of the Chapter 11 proceedings and do not
reflect liabilities of any of PHC's subsidiaries. These liabilities, consisting
primarily of long-term debt, including the principal amounts of the Notes and
the Park Note and accrued interest through September 15, 2000, certain accounts
payable, accrued liabilities and post-termination benefit obligations to former
officers and key employees, represent the Company's estimate of known or
potential claims to be resolved in connection with the Chapter 11 proceeding.
Such claims remain subject to future adjustments based on negotiations, actions
of the Bankruptcy Court, further developments with respect to disputed claims,
future rejection of executory contracts or unexpired leases, determination as to
the value of any collateral securing claims, treatment under the Plan and other
events. Payment terms for these amounts as proposed in the Plan are discussed
above.
Net cash provided by operating activities before payments of
reorganization costs was $5.8 million in the nine months ended September 30,
2000, compared to net cash used in operations of $11.5 million for the same
period of 1999. Including reorganization costs, net cash used in operating
activities was $49,000 in 2000. The Company expects that future reorganization
costs will be paid as incurred from internally generated cash from operations
and existing cash balances. Net cash used in investing activities was $7.3
million during 2000 compared to $20.4 million during 1999, and reflected
primarily a decrease in capital expenditures attributable to ten hospitals sold
in 1999. Net cash used in financing activities during 2000 was $763,000, which
reflected net borrowings of $34.0 million under the subsidiary-level Credit
Facility, offset by (i) the termination of $32.0 million of obligations under
the off-balance-sheet commercial paper program and (ii) the payment of $2.4
million in deferred financing costs on the subsidiary-level Credit Facility. Net
cash provided by financing activities in 1999 reflected net borrowings of $29.7
million under the then existing revolving credit facility offset by repayments
of $5.3 million of other debts, primarily capital lease obligations.
As of September 30, 2000, the Company had $34.0 million in outstanding
borrowings under its subsidiary-level Credit Facility and $8.6 million in
outstanding letters of credit, which are fully secured by cash collateral. As of
November 14, 2000, the Company had no available borrowing capacity under its
subsidiary-level Credit Facility. The Company anticipates that internally
generated cash from operations and existing cash balances will be sufficient to
fund the hospitals' routine capital expenditures and working capital
requirements through 2000.
The Company is in a highly leveraged financial position. The Company's
continuing operating losses and liquidity issues and PHC's Chapter 11 proceeding
raise substantial doubt about the Company's ability to continue as a going
concern. The ability of the Company to continue as a going concern is dependent
upon, among other things, (i) the Company's ability to comply with the terms of
the subsidiary level Credit Facility, (ii) confirmation of the Plan under the
Bankruptcy Code, (iii) the Company's ability to achieve profitable operations
after such confirmation, and (iv) the Company's ability to generate sufficient
cash from operations to meet its obligations. The Plan and other actions during
the Chapter 11 proceeding could change materially the amounts currently recorded
in the consolidated financial statements.
<PAGE>22
LITIGATION
The Company has been involved in discussions with the Federal
government regarding a review of pneumonia claims filed with the Medicare
program by the Company's Jamestown, Tennessee facility for years 1992-1997. As a
result of this review, the Federal government has asserted that such filings
contained coding errors that allegedly resulted in an estimated overpayment of
up to $1.3 million by the Medicare program. Furthermore, in such cases the
Federal government has the ability to seek treble damages under the False Claims
Act. The Company and the Federal government have conducted independent reviews
and have entered into settlement discussions to resolve this matter. Based on
the results of the Company's independent review, the Company has accrued
$480,000 for potential settlement costs associated with this matter.
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's only exposure to market risk is changes in the general
level of market interest rates. The Company does not hold or issue derivative
instruments for trading purposes and is not a party to any instruments with
leverage features.
With respect to the Company's interest-bearing liabilities, borrowings
of $34.0 million under the subsidiary-level Credit Facility at September 30,
2000 are subject to variable rates of interest and are affected by the general
level of market interest rates. The Company's variable rate debt bears interest
at prime plus 1.5% or LIBOR plus 3.75%. Based on a hypothetical 1% increase in
interest rates, the potential annualized impact on future pretax earnings would
be approximately $340,000.
All other debt obligations of the Company have fixed interest rates
ranging from 6.51% to 10.5% and accordingly have no earnings exposure to changes
in interest rates. Additionally, under the Bankruptcy Code, actions to collect
certain of the pre-petition indebtedness against the Company are subject to an
automatic stay and other contractual obligations against the Company may not be
enforced.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 15, 2000, PHC filed a voluntary petition for protection
under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court
for the Southern District of Texas (Case no. 00-38590-H5-11). The bankruptcy
filing is limited to PHC, the parent company, and does not include any of PHC's
hospital subsidiaries. Simultaneously with the commencement of its bankruptcy
case, PHC filed the Plan of Reorganization pursuant to which PHC proposes to
effect its capital restructuring. During the Chapter 11 proceeding, PHC is
operating as a debtor-in-possession under the authority of the Bankruptcy Code.
PHC elected to seek Bankruptcy Court protection in order to facilitate the
restructuring of its debt while continuing to maintain normal business
operations at PHC's hospital subsidiaries.
<PAGE>23
PHC's decision to restructure its debt was due to its highly leveraged
capital structure. Despite positive earnings before interest, taxes,
depreciation, amortization and unusual charges, the high interest burden has
severely impacted PHC's reinvestment opportunities. In an effort to conserve
capital and to preserve the normal operations of the hospital subsidiaries, PHC
did not make its interest payments of $33.5 million on the Notes due February 15
and August 15, 2000.
PHC has been in negotiations with the Note Holders. The Note Holders of
the majority of the principal amount of the Notes support the principal
financial terms of the Plan and, subject to certain conditions, have indicated
an intent to vote in favor of the Plan. On the Effective Date of the Plan,
as modified on October 6, 2000, all principal and interest
outstanding on the Notes and allowed general unsecured claims of up to $15.0
million will be exchanged for (i) the reorganized PHC's 11.5% Senior Notes (due
on August 15, 2005) in the aggregate principal amount of $130.0 million, (ii) a
Cash Payment, as defined in the Plan, and (iii) 95.0% of the reorganized PHC's
common stock, subject to dilution through the exercise of the Series A Warrants
and Series B Warrants (as referred to below). Interest on the New Notes shall
accrue commencing on the Effective Date. The Plan also provides for the holders
of PHC's common stock as of the Record Date (as defined in the Plan) to receive
(i) 5.0% of the reorganized PHC's common stock, (ii) Series A Warrants to
purchase prior to the fifth anniversary of the Effective Date an additional
9.64% of the reorganized PHC's common stock (exercisable at $320.0 million
enterprise value of the reorganized PHC), and (iii) Series B Warrants to
purchase prior to the first anniversary of the Effective Date an additional 2.0%
of the reorganized PHC's common stock (exercisable at $100.0 million value of
the reorganized PHC's common stock). The Plan would make its effectiveness
subject to certain conditions, including among others, limiting the amount of
all allowed general unsecured claims, including any disputed general unsecured
claims (other than the Notes), to $15.0 million.
The terms of a settlement agreement executed in connection with
the global settlement of shareholder litigation in September 1999, provide that
the Company's $7.2 million 6.51% subordinated Park Note and accrued
interest convert to PHC's common stock in the event PHC files a voluntary
petition in bankruptcy. No shares of common stock have been issued to
Park at this time. See "Liabilities Subject to Compromise" discussed below.
Under the proposed Plan of Reorganization, (i) the Park Note will be deemed
to have been converted to approximately 1.9 million shares of PHC's common
stock upon the filing of the Bankruptcy, (ii) Park will be deemed to have been
issued the common stock in accordance with the terms of the settlement and
(iii) the Park Note will be cancelled upon receipt of such shares of common
stock by Park. The 1.9 million shares will be deemed to be outstanding as of
the Record Date for the purposes of the distribution of the 5.0% of the
reorganized PHC's common stock and warrants as discussed above.
The Plan also contains the Retention Plan to enhance the ability of the
Company to retain key management employees during the restructuring period.
Under the Retention Plan, bonuses aggregating $1.0 million will be awarded,
subject to certain conditions, to certain key management employees. The
Retention Plan provides that the retention bonuses will be awarded in two equal
amounts upon: (i) the Effective Date and (ii) ninety days following the
Effective Date. The Plan, as well as PHC's Disclosure Statement, are on file
with the Bankruptcy Court and are available for review and copying during the
Bankruptcy Court's normal business hours.
<PAGE>24
On October 2, 2000, PHC received approval from the Bankruptcy Court to
pay pre-petition and post-petition PHC's employee wages, salaries and benefits.
The Bankruptcy Court also approved orders granting authority, among other
things, to pay pre-petition claims of certain utilities. All other PHC
pre-petition liabilities are classified in the condensed consolidated balance
sheet as liabilities subject to compromise. PHC intends to pay post-petition
claims of all vendors and providers in the ordinary course of business.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness
against PHC are subject to an automatic stay and other contractual obligations
against PHC may not be enforced. In addition, PHC may assume or reject executory
contracts, including lease obligations, under the Bankruptcy Code. Parties
affected by the lease or contract rejections may file claims with the Bankruptcy
Court in accordance with procedures set forth in the Bankruptcy Code.
The Plan of Reorganization must be voted upon by the holders of Allowed
Claims and Allowed Equity Interests in impaired classes set forth in the Plan
and approved by the Bankruptcy Court. There can be no assurance that the Plan
will be approved by the requisite holders of claims or equity interests,
confirmed by the Bankruptcy Court, or consummated. A plan of reorganization must
be confirmed by the Bankruptcy Court after certain findings required by the
Bankruptcy Code are made by the Bankruptcy Court. The Bankruptcy Court may
confirm a plan of reorganization notwithstanding the non-acceptance of the plan
by an impaired class of creditors or equity holders if certain requirements of
the Bankruptcy Code are met.
At the Company's request, on October 26, 2000, the Bankruptcy Court
dismissed the PHC Finance, Inc. Chapter 11 proceeding which was filed on March
15, 2000.
ITEM 2. CHANGE IN SECURITIES
In connection with PHC's Chapter 11 proceeding, actions to collect
pre-petition indebtedness under the Notes and certain other obligations against
the Company are subject to an automatic stay. Furthermore, on the Effective
Date of the Plan, as modified on October 6, 2000,all principal
and interest outstanding on the Notes and allowed general unsecured claims of up
to $15.0 million will be exchanged for (i) the reorganized PHC's 11.5% Senior
Notes (due on August 15, 2005) in the aggregate principal amount of $130.0
million, (ii) a Cash Payment, as defined by the Plan, and (iii) 95.0% of the
reorganized PHC's common stock, subject to dilution through the exercise of the
Series A Warrants and Series B Warrants. The Plan also provides for the holders
of PHC's common stock as of the Record Date (as defined in the Plan) to receive
(i) 5.0% of the reorganized PHC's common stock, (ii) Series A Warrants to
purchase prior to the fifth anniversary of the Effective Date an additional
9.64% of the reorganized PHC's common stock (exercisable at $320.0 million
enterprise value of the reorganized PHC), and (iii) Series B Warrants to
purchase prior to the first anniversary of the Effective Date an additional 2.0%
of the reorganized PHC's common stock (exercisable at $100.0 million value of
the reorganized PHC's common stock).
<PAGE>25
The terms of a settlement agreement executed in connection with
the global settlement of shareholder litigation in September 1999, provide that
the Company's $7.2 million 6.51% subordinated Park Note and accrued
interest convert to PHC's common stock in the event PHC files a voluntary
petition in bankruptcy. No shares of common stock have been issued to
Park at this time. See "Liabilities Subject to Compromise" discussed below.
Under the proposed Plan of Reorganization, (i) the Park Note will be deemed
to have been converted to approximately 1.9 million shares of PHC's common
stock upon the filing of the Bankruptcy, (ii) Park will be deemed to have been
issued the common stock in accordance with the terms of the settlement and
(iii) the Park Note will be cancelled upon receipt of such shares of common
stock by Park. The 1.9 million shares will be deemed to be outstanding as of
the Record Date for the purposes of the distribution of the 5.0% of the
reorganized PHC's common stock and warrants as discussed above.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company defaulted on the interest payments of approximately $33.5
million due on February 15, and August 15, 2000 on the Company's $325.0 million
10% Senior Subordinated Notes due 2006. Relating therewith, on September 15,
2000, PHC filed a voluntary petition for protection under Chapter 11 of the
Bankruptcy Code as further discussed elsewhere in this Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibit
27 Financial Data Schedule
(b) Report on Form 8-K
The Company filed on September 20, 2000, a Current Report on Form 8-K,
reporting pursuant to Item 3, that PHC filed a voluntary petition for protection
under Chapter 11 of the Bankruptcy Code.
<PAGE>26
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/ LAWRENCE A. HUMPHREY
Dated: November 14, 2000 ____________________________
Lawrence A. Humphrey
Executive Vice President &
Chief Financial Officer
