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 June 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 August 14, 2000, there were outstanding 58,967,721 shares of the
Registrant's Common Stock, no stated value.
<PAGE> 2
PARACELSUS HEALTHCARE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 2000
INDEX
Page Reference
Form 10-Q
Forward-Looking Statements 3
--------------------------
PART I. FINANCIAL INFORMATION
------
Item 1. Financial Statements-- (Unaudited)
Condensed Consolidated Balance Sheets--
June 30, 2000 and December 31, 1999 4
Consolidated Statements of Operations--
Three and Six Months Ended June 30, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows--
Six Months Ended June 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 12
Item 3. Quantitative and Qualitative Disclosures about Market 18
Risks
PART II. OTHER INFORMATION 19
-------
SIGNATURE 20
<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 Competition 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 ability to attract and retain qualified personnel, including physicians;
o The Company's ability to develop and consummate an acceptable and
sustainable alternative financial structure, considering the
Company's liquidity and limited financial resources;
o The likelihood that PHC will file for protection under Chapter 11
of the Federal Bankruptcy Code or the possibility that its
creditors could file an involuntary petition seeking to place PHC
in bankruptcy.
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>
June 30, December 31,
2000 1999
---------------- --------------------
(Unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents. ............. $ 14,872 $ 22,723
Restricted cash........................... 12,513 12,991
Accounts receivable, net.................. 63,636 30,796
Supplies............................................ 8,873 8,655
Income taxes receivable.......................... 6,321 6,152
Other current assets............................. 19,953 14,212
--------- ----------
Total current assets...................... 126,168 95,529
Property and equipment............................ 342,093 339,528
Less: Accumulated depreciation and amortization... (124,245) (113,052)
---------- ----------
217,848 226,476
Goodwill........................................... 86,368 87,684
Other assets....................................... 27,046 27,369
---------- ----------
Total assets...............................$ 457,430 $ 437,058
========== ==========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable............................. $ 29,354 $ 35,563
Accrued interest payable..................... 29,951 12,598
Accrued liabilities and other................ 16,388 20,426
Long-term debt in default classified as
current (Note 2). .............. 335,270 335,445
Long-term debt due within one year........ 495 654
---------- ----------
Total current liabilities.............. 411,458 404,686
Long-term debt (Note 3)....................... 39,692 3,685
Other long-term liabilities................... 18,750 23,490
Stockholders' equity (deficit):
Common stock.............................. 216,045 215,761
Additional paid-in capital................ 11,821 12,105
Accumulated deficit....................... (240,336) (222,669)
---------- ----------
Total stockholders' equity (deficit) .. (12,470) 5,197
--------- ----------
Total Liabilities and Stockholders' Equity
(Deficit). ...................... $ 457,430 $ 437,058
======== ==========
</TABLE>
See accompanying notes.
<PAGE> 5
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000's, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -------------------------------
2000 1999 2000 1999
---------------- ----------------- ---------------- --------------
Net revenue $ 91,039 $ 143,267 $ 186,123 $ 294,211
Costs and expenses:
Salaries and benefits 39,371 58,135 80,071 117,100
Other operating expenses 35,232 56,939 71,391 115,024
Provision for bad debts 5,626 9,087 12,584 21,485
Interest 10,215 13,079 19,225 26,183
Depreciation and amortization 7,951 9,970 16,164 19,785
Restructuring costs (Note 4) 1,808 - 4,355 -
Unusual items - 6,545 - 7,668
Loss on sale of facilities - 2,387 - 2,387
---------- ---------- ---------- ----------
Total costs and expenses 100,203 156,142 203,790 309,632
---------- ---------- ---------- ----------
Loss before minority interests
and income taxes (9,164) (12,875) (17,667) (15,421)
Minority interests - 58 - 121
---------- ---------- ---------- ----------
Loss before income taxes (9,164) (12,817) (17,667) (15,300)
Income tax benefit - (5,208) - (6,105)
------------- ---------- ---------- ----------
Net loss $ (9,164) $ (7,609) $ (17,667) $ (9,195)
========== ========== ========== ==========
Net loss per share - basic
and assuming dilution $ (0.16) $ (0.14) $ (0.30) $ (0.17)
========== =========== =========== ==========
</TABLE>
See accompanying notes.
<PAGE> 6
PARACELSUS HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000's)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Six Months Ended
June 30,
--------------------------------------
2000 1999
------------------ ------------------
Cash Flows from Operating Activities:
Net loss $ (17,667) $ (9,195)
Non-cash expenses and changes in operating assets
and liabilities 12,040 18,729
----------- ----------
Net cash provided by (used in) operating activities (5,627) 9,534
----------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of facilities, net of expenses - 1,925
Additions to property and equipment, net (2,736) (14,644)
(Increase) decrease in other assets, net (1,036) 1,923
---------- ----------
Net cash used in investing activities (3,772) (10,796)
---------- ----------
Cash Flows from Financing Activities:
Borrowings under revolving credit facility 36,000 17,000
Repayments under revolving credit facility - (11,420)
Termination of obligations under the commercial
paper financing program (32,000) -
Repayments of debt, net (327) (3,898)
Deferred financing costs (2,125) -
---------- ----------
Net cash provided by financing activities 1,548 1,682
---------- ----------
Increase (decrease) in cash and cash equivalents (7,851) 420
Cash and cash equivalents at beginning of period 22,723 11,944
---------- ----------
Cash and cash equivalents at end of period $ 14,872 $ 12,364
========== ==========
Supplemental Cash Flow Information:
Interest paid $ 1,006 $ 26,542
Income taxes (refunded) paid $ 715 $ (26)
Noncash Investing Activities:
Notes receivable from sale of hospitals $ - $ 6,169
Capital lease obligations $ - $ 1,124
</TABLE>
See accompanying notes.
<PAGE> 7
PARACELSUS HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 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 - 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. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered necessary for a
fair presentation have been included. The Company's business is seasonal in
nature and subject to general economic conditions and other factors.
Accordingly, operating results for the three and six months ended June 30, 2000,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. 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.
The Company incurred operating losses in the three and six months ended
June 30, 2000 and the year ended December 31, 1999, and had a working capital
deficit at June 30, 2000 and December 31, 1999. These matters and certain
liquidity issues described in Note 2 have raised substantial doubt as to the
Company's ability to continue as a going concern. The accompanying unaudited
condensed consolidated financial statements have been prepared assuming the
Company will continue as a going concern and contemplate the realization of
assets and the settlement of liabilities and commitments 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 the uncertainties discussed herein.
<PAGE> 8
Earnings Per Share - The following table sets forth the computation of basic and
diluted net loss per share (dollars in thousands, except per share amounts).
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
Numerator (a):
Loss before extraordinary charge $ (9,164) $ (7,609) $(17,667) $ (9,195)
======== ======== ======== =======
Denominator:
Weighted average shares used for
basic earnings per share 58,350 55,118 58,343 55,118
Effect of dilutive securities:
Employee stock options - - - -
-------- ------- -------- ------
Dilutive potential common shares - - - -
-------- ------- -------- ------
Shares used for diluted earnings
per share 58,350 55,118 58,343 55,118
======== ====== ====== ======
Loss before extraordinary charge
per share:
Basic $ (0.16) $ (0.14) $ (0.30) $ (0.17)
======== ======== ========= =========
Diluted $ (0.16) $ (0.14) $ (0.30) $ (0.17)
======== ======== ========= =========
</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 1.5 million shares of the Company's common stock at
a weighted average exercise price of $3.57 per share and warrants to purchase
414,906 shares at a weighted average exercise price of $9.00 per share were
outstanding during the six months ended June 30, 2000, but were not included in
the computation of diluted EPS because the exercise price was greater than the
average market price of the common shares.
Comprehensive Loss - Comprehensive loss for the three and six months ended June
30, 2000 of $9.4 million and $18.0 million, respectively, included $284,000 of
deferred compensation costs related to the issuance of restricted stock grants
under an employment agreement. Comprehensive loss for the three and six months
ended June 30, 1999 equaled reported net loss for each of the respective period.
Restricted Cash - The Company had restricted cash of $12.5 million and $13.0
million at June 30, 2000 and December 31, 1999, respectively, as collateral for
outstanding letters of credit and other commitments.
NOTE 2 . ISSUES AFFECTING LIQUIDITY
As previously reported in the Company's 1999 Form 10-K, on February 15,
2000, the Company did not make the interest payment of approximately $16.3
million due on the Company's $325.0 million 10% Senior Subordinated Notes (the
"Notes") due 2006, which upon the expiration of a 30-day grace period on March
16, 2000, constituted an event of default under the Note indenture.
Additionally, the Company does not expect to make the $16.3 million interest
payment due on the Notes on August 15, 2000.
<PAGE> 9
The Company is working with the holders of the majority of the Notes to
develop a financial restructuring plan. Considering the Company's limited
financial resources, there can be no assurance that the Company and the Note
holders will succeed in formulating an acceptable alternative capital structure,
in which case the Note holders are entitled, at their discretion, to accelerate
all principal and interest due on the Notes. Based upon the most recent
discussions with the Note holders, the Company believes it is likely that a
restructuring plan (the "Plan") will be implemented in the near future through a
voluntary filing of bankruptcy under Chapter 11 of the Bankruptcy Code (the
"Bankruptcy Code"). The bankruptcy filing will be limited to PHC and will not,
as presently contemplated, include any of PHC's subsidiaries (except for PHC
Finance, Inc, as discussed below). The Plan will likely result in a substantial
dilution of the ownership interest of the existing holders of PHC's
common stock. There can be no assurance that a bankruptcy proceeding would
result in a reorganization of PHC rather than liquidation under Chapter
7 of the Bankruptcy Code. If a liquidation or a protracted reorganization were
to occur, there is a substantial risk that there would be insufficient cash or
property available for payment in full of all claims of PHC's creditors
and/or for any distribution to the holders of PHC's common stock.
Relating to the matters discussed above, on March 15, 2000, a
wholly-owned, second-tier subsidiary of PHC, PHC Finance, Inc., filed a
voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code
with the U.S. Bankruptcy Court for the Southern District of Texas in Houston.
The subsidiary, whose principal assets are several medical office buildings,
does not own or operate any hospital facilities, and neither PHC nor any of the
Company's hospital operating subsidiaries is a guarantor for any obligations of
PHC Finance, Inc.
Given the Company's default on the Notes and the uncertainty
surrounding the ultimate resolution of the Company's negotiations with its Note
holders, the principal amount of the Notes and certain other debt obligations
have been presented as current liabilities in the Company's condensed
consolidated balance sheet at June 30, 2000, which has resulted in a working
capital deficit of $285.3 million.
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 June 30, 2000 reflects offsetting increases in
accounts receivable and long-term debt. As of June 30, 2000, the Company had
$36.0 million in outstanding borrowings under the Credit Facility and $12.3
million in outstanding letters of credit, which are fully secured by cash
collateral held by the lenders. The Company recorded deferred financing costs of
$2.1 million in connection with the Credit Facility as of June 30, 2000.
<PAGE> 10
NOTE 4 . RESTRUCTURING COSTS AND UNUSUAL CHARGES
In the six months ended June 30, 2000, the Company recorded
approximately $4.4 million of restructuring costs for professional fees incurred
in connection with its efforts to restructure the Notes. In the six months ended
June 30, 1999, the Company recorded unusual items of $7.7 million, which
included a $2.2 million net charge associated with an executive agreement with
certain former senior executives and a $5.5 million corporate restructuring
charge.
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 discussed in Note 2, which, if
unfavorably resolved, would adversely affect the Company's future operations.
The Company recorded no income tax benefit in the three and six months ended
June 30, 2000, as the result of recording an additional valuation allowance of
$3.6 million and $6.8 million, respectively, to reserve all net deferred tax
assets generated during the respective periods. The deferred tax valuation
allowance as of June 30, 2000 totaled $81.9 million.
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 and operated
by the Company. "All Other" is comprised of closed/sold facilities and overhead
costs. Selected segment information for the three and six months ended June 30,
2000 and 1999, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Three Months ended
June 30, 2000
---------------------------------------
Same
Hospitals All Other Total
------------ --------- ---------
Net revenue................................. $ 90,400 $ 639 $ 91,039
Adjusted EBITDA (a).......................... $ 13,602 $ (2,792) $ 10,810
Three Months ended
June 30, 1999
---------------------------------------
Same
Hospitals All Other Total
------------ ---------- ---------
Net revenue.................................. $ 90,700 $ 52,567 $ 143,267
Adjusted EBITDA (a).......................... $ 16,384 $ 2,780 $ 19,164
<PAGE> 11
Six Months ended
June 30, 2000
---------------------------------------
Same
Hospitals All Other Total
------------ ---------- ---------
Net revenue................................. $ 184,557 $ 1,566 $ 186,123
Adjusted EBITDA (a).......................... $ 27,420 $ (5,343) $ 22,077
Six Months ended
June 30, 1999
---------------------------------------
Same
Hospitals All Other Total
------------ ---------- ---------
Net revenue.................................. $ 186,604 $ 107,607 $ 294,211
Adjusted EBITDA (a).......................... $ 33,399 $ 7,324 $ 40,723
</TABLE>
-------------------------------------
(a) Earnings before extraordinary charge, interest, taxes, depreciation,
amortization, restructuring 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.
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 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.
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company incurred operating losses in the three and six months
ended June 30, 2000 and the year ended December 31, 1999, and had a working
capital deficit at June 30, 2000 and December 31, 1999. These matters and
certain liquidity issues described below have raised substantial doubt as to the
Company's ability to continue as a going concern. The accompanying unaudited
condensed consolidated financial statements have been prepared assuming the
Company will continue as a going concern and contemplate the realization of
assets and the settlement of liabilities and commitments 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 the uncertainties discussed herein.
ISSUES AFFECTING LIQUIDITY
As previously reported in the Company's 1999 Form 10-K on February 15,
2000, the Company did not make the interest payment of approximately $16.3
million due on the Notes, which upon the expiration of a 30-day grace period on
March 16, 2000, constituted an event of default under the Note indenture.
Additionally, the Company does not expect to make the $16.3 million interest
payment due on the Notes on August 15, 2000.
The Company is working with the holders of the majority of the Notes to
develop a financial restructuring plan. Considering the Company's limited
financial resources, there can be no assurance that the Company and the Note
holders will succeed in formulating an acceptable alternative capital structure,
in which case the Note holders are entitled, at their discretion, to accelerate
all principal and interest due on the Notes. Based upon the most recent
discussions with the Note holders, the Company believes it is likely that a
restructuring plan will be implemented in the near future through a voluntary
filing of bankruptcy under Chapter 11 of the Bankruptcy Code. The bankruptcy
filing will be limited to PHC and will not, as presently contemplated, include
any of PHC's subsidiaries (except for PHC Finance, Inc, as discussed below). The
Plan will likely result in a substantial dilution of the ownership interest of
the existing holders of PHC's common stock. There can be no assurance
that a bankruptcy proceeding would result in a reorganization of PHC
rather than liquidation under Chapter 7 of the Bankruptcy Code. If a liquidation
or a protracted reorganization were to occur, there is a substantial risk that
there would be insufficient cash or property available for payment in full of
all claims of PHC's creditors and/or for any distribution to the holders of
PHC's common stock.
Relating to the matters discussed above, on March 15, 2000, a
wholly-owned, second-tier subsidiary of PHC, PHC Finance, Inc., filed a
voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code
with the U.S. Bankruptcy Court for the Southern District of Texas in Houston.
The subsidiary, whose principal assets are several medical office buildings,
does not own or operate any hospital facilities, and neither PHC nor any of the
Company's hospital operating subsidiaries is a guarantor for any obligations of
PHC Finance, Inc.
Given the Company's default on the Notes and the uncertainty
surrounding the ultimate resolution of the Company's negotiations with its Note
holders, the principal amount of the Notes and certain other debt obligations
have been presented as current liabilities in the Company's condensed
consolidated balance sheet at June 30, 2000, which has resulted in a working
capital deficit of $285.3 million.
<PAGE> 13
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 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 is also subject to certain
default provisions and a covenant on certain minimum levels of cash generated
from operations.
As of June 30, 2000, the Company had $36.0 million in outstanding
borrowings under the Credit Facility and $12.3 million in outstanding letters of
credit, which are fully secured by cash collateral held by the lenders. As of
August 14, 2000, the Company had $4.5 million in available borrowing capacity
under the Credit Facility, subject to limitations of eligible receivables,
EBITDA performance of certain subsidiaries and limitation on advances to
non-borrower affiliates.
RESULTS OF OPERATIONS
On August 1, 2000, the Health Care Financing Administration adopted a
prospective payment system ("PPS") for outpatient hospital services. PPS is a
fixed payment system in which outpatient services are classified into Ambulatory
Payment Classifications ("APCs") without considering a specific hospital's
costs. A hospital is reimbursed a fixed payment amount for each Medicare patient
by APC. Generally, under PPS, if the costs of meeting the health care needs of
the patient are greater than the predetermined payment rate, the hospital must
absorb the loss. Revenue associated with APC related services is not material
relative to the Company's total net revenue. Consequently, the Company does not
expect the adoption of PPS for outpatient services to have a material impact on
its results of operations or liquidity.
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 throughout both periods for
which comparative operating results are presented.
Results of Operations - Three Months ended June 30, 2000
compared with Three Months ended June 30, 1999
Net revenue for the three months ended June 30, 2000, was $91.0
million, a decrease of $52.3 million, or 36.5%, from $143.3 million for the same
period in 1999. The decrease in net revenue was directly related to the sale of
nine hospitals included in the results of operations for the 1999 quarter.
Net revenue at Same Hospitals for the three months ended June 30, 2000
was $90.4 million compared to $90.7 million in 1999. Net revenue for the quarter
reflects the continuing shift in payor mix from the traditional Medicare,
Medicaid and indemnity plans to managed care, from which the Company generally
receives lower reimbursements, and a decline in patient volumes primarily at the
Company's Richmond, Virginia hospital, as more fully discussed below. The impact
of increased managed care patients on net revenue was partially mitigated in the
current period by an overall rate increase.
<PAGE> 14
For the three months ended June 30, 2000, the Company's Same Hospitals
reported inpatient admissions of 9,398 as compared to 9,422 in 1999. Same
Hospitals patient days decreased 2.8% from 46,665 in 1999 to 45,371 in 2000. The
decrease in admissions was due primarily to the departure of several physicians
at the Richmond, Virginia facility as the result of a revision to the hospital's
medical staff bylaws. Excluding home health visits, outpatient visits increased
5.7% from 75,209 in 1999 to 79,472 in 2000. Outpatient visits at eight of the
Company's hospitals outpaced prior year as the result of increased services and
physicians in many of these markets and due to the industry trend of increased
outpatient utilization. Same Hospitals home health visits decreased 5.8% from
67,163 in 1999 to 63,259 in 2000 due largely to the cancellation of certain home
health contracts at the Richmond facility. Excluding the Richmond facility,
admissions, outpatient visits (excluding home health) and home health visits
increased 0.4%, 9.3% and 0.7%, respectively, although patient days decreased by
2.5%. The decline in patient days resulted from the Company's effectiveness in
reducing the average length of stay per admission by 2.9% from 4.75 days in 1999
to 4.61 days in 2000.
Operating expenses (salaries and benefits, other operating expenses and
provision for bad debts) decreased $44.0 million from $124.2 million in the
three months ended June 30, 1999 to $80.2 million in 2000 due primarily to sold
facilities. Excluding sold facilities, operating expenses at Same Hospitals
increased by approximately $2.5 million primarily due to (i) a $1.1 million
increase in salaries and benefits due to tight labor markets for nurses and
other personnel at several facilities, which resulted in increases in both pay
rates and the use of overtime and contract labor and (ii) an increase of $1.2
million in other operating costs primarily from higher supply costs associated
with volume related increases at certain facilities and increased
pharmaceutical cost.
Operating expenses, expressed as a percentage of net revenue, were
88.1% and 86.7% in 2000 and 1999, respectively. Operating expenses at Same
Hospitals increased to 85.0% of net revenue in 2000 from 82.0% in 1999, and
operating margins decreased to 15.0% from 18.0%, respectively. The reduction in
operating margins resulted from higher operating costs as previously discussed.
Interest expense decreased $2.9 million from $13.1 million in the three
months ended June 30, 1999 to $10.2 million in 2000, due primarily to a decrease
in the average borrowings outstanding, partially offset by higher average rate
of interest in the current period, which reflected, in part, additional interest
on the defaulted interest payment due February 15, 2000 on the Notes. The
weighted average interest rates on borrowings were 11.4% and 9.6% in 2000 and
1999, respectively.
Depreciation and amortization expense decreased $2.0 million from $10.0
million in the three months ended June 30, 1999 to $8.0 million for the same
period in 2000 primarily due to the sale of nine hospitals included in the
results of operations for the 1999 quarter, partially offset by an increase from
additions to property and equipment.
Loss before income taxes was $9.2 million for the three months ended
June 30, 2000, and included restructuring costs of approximately $1.8 million
for professional fees incurred in connection with the Company's efforts to
restructure the Notes. Loss before income taxes was $12.8 million for the three
months ended June 30, 1999 and included (i) unusual charges of $6.5 million,
which consisted of a $5.5 million corporate restructuring charge and a $1.0
million charge associated with an executive agreement and (ii) loss on sale of
hospitals of $2.4 million.
The Company recorded no income tax benefit in the three months ended
June 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 $5.2 million in 1999.
<PAGE> 15
Net loss for the three months ended June 30, 2000 was $9.2 million, or
$0.16 per diluted share, compared to $7.6 million, or $0.14 per diluted share,
for the same period of 1999. Weighted average common and common equivalent
shares outstanding increased to 58.4 million in 2000 from 55.1 million in 1999
due to the issuance of common stock in connection with the settlement of
litigation in September 1999 and an employment agreement in March 2000.
Results of Operations - Six Months ended June 30, 2000
compared with Six Months ended June 30, 1999
Net revenue for the six months ended June 30, 2000, was $186.1 million,
a decrease of $108.2 million, or 36.7%, from $294.2 million for the same period
in 1999. The decline in net revenue is largely due to the sale of ten hospitals
in 1999.
Net revenue at Same Hospitals for the six months ended June 30, 2000
was $184.6 million compared to $186.6 million in 1999, a decrease of $2.0
million, or 1.1%. The decline in net revenue was due in part to the
aforementioned shift in payor mix from the traditional Medicare, Medicaid and
indemnity plans to managed care and to a decline in patient volumes primarily at
the Company's Richmond, Virginia facility, as more fully discussed below.
Same Hospitals experienced a 0.7% decrease in inpatient admissions from
19,727 in the six months ended June 30, 1999 to 19,593 in the comparable period
in 2000. Same Hospital patient days decreased 3.6% from 99,489 in 1999 to 95,880
in 2000. As previously discussed, the decrease in admissions was primarily
related to the departure of several physicians at the Richmond, Virginia
facility. Excluding home health visits, Same Hospital outpatient visits
increased 4.6% from 152,055 in 1999 to 159,057 in 2000 as the result of
increased services and physicians in many of these markets and due to the
industry trend of increased outpatient utilization. Home health visits in Same
Hospitals decreased 10.3% from 141,515 in 1999 to 126,904 in 2000 largely due to
the cancellation of certain home health contracts at the Richmond facility and a
general slow down of home health operations in other markets. Excluding the
Richmond facility, admissions and outpatient visits (excluding home health)
increased 0.4% and 8.1%, respectively, while patient days and home health visits
declined by 2.1% and 0.8%, respectively. The decline in patient days resulted
from the Company's effectiveness in reducing the average length of stay per
admission by 3.0% from 5.04 days in 1999 to 4.89 days in 2000.
Operating expenses, expressed as a percentage of net revenue, were
88.1% and 86.2%, respectively, for the six months ended June 30, 2000 and 1999,
respectively. Operating expenses decreased $89.6 million from $253.6 million in
the six months ended June 30, 1999 to $164.0 million in 2000 due to reductions
from sold facilities. Operating margins were 11.9% and 13.8% in 2000 and 1999,
respectively.
Operating expenses at Same Hospitals increased by approximately $3.9
million from (i) a $3.2 million increase in salaries and benefits as a result of
generally tight labor markets, as discussed above and (ii) an increase of $1.8
million in other operating costs primarily from higher supply costs associated
with volume related increases at certain facilities and with increased
pharmaceutical cost. These increases were offset by a $1.1 million decrease
in bad debt expense due, in part, to the Company's initiatives to strengthen its
hospital business office operations, which have resulted in improved
collections, as well as (i) the Company's efforts to more timely identify and
segregate charity care and (ii) improvements in the Company's ability to
estimate amounts due from managed care payors as a result of new information
systems implemented in the latter part of 1999. The latter two initiatives have
resulted in more accurate estimates of net revenue at the time services are
provided. Additionally, 1999 bad debt expense was unfavorably impacted by
collection issues arising from information system conversions and personnel
turnover at several facilities.
Operating expenses at Same Hospitals increased from 82.1% of net
revenue in 1999 to 85.1% in 2000, and operating margins decreased from 17.9% to
14.9%, respectively. The decline in operating margins reflected higher operating
costs and lower net revenue in the current period as a result of the factors
discussed above.
<PAGE> 16
Interest expense decreased $7.0 million from $26.2 million in the six
months ended June 30, 1999 to $19.2 million in 2000, primarily due to a
reduction in the average borrowings outstanding, partially offset by an increase
in the average rate of interest in the current period, which reflected, in part,
additional interest on the defaulted interest payment due February 15, 2000 on
the Notes. The weighted average interest rate on borrowings were 10.9% and
9.7% in 2000 and 1999, respectively.
Depreciation and amortization expense decreased $3.6 million from $19.8
million in the six months ended June 30, 1999 to $16.2 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.
Loss before income taxes was $17.7 million for the six months ended
June 30, 2000 and included restructuring costs of $4.4 million for professional
fees incurred in connection with the Company's efforts to restructure the Notes.
Loss before income taxes for the six months ended June 30, 1999 was $15.3
million and included (i) unusual charges of $7.7 million, which consisted of a
$5.5 million corporate restructuring charge and a $2.2 million charge associated
with an executive agreement and (ii) a loss on sale of facilities of $2.4
million.
The Company recorded no income tax benefit in the six months ended June
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 $6.1 million in the six months ended June 30,
1999.
Net loss for the six months ended June 30, 2000 was $17.7 million, or
$0.30 per diluted share, compared to net loss of $9.2 million, or $0.17 per
diluted share, for the same period of 1999. Weighted average common and common
equivalent shares outstanding were 58.3 million and 55.1 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 and an employment
agreement in March 2000.
LIQUIDITY AND CAPITAL RESOURCES
The introductory information to this Item as set forth in "Issues
Affecting Liquidity" discusses important issues affecting the Company's
liquidity and capital resources.
Net cash used in operating activities was $5.6 million in the six
months ended June 30, 2000, compared to net cash provided by operations of $9.5
million for the same period of 1999. Cash from operating activities decreased
due to payments of (i) $7.1 million to Medicare/ Medicaid third-party
intermediaries, (ii) $4.4 million for professional fees related to the Note
restructuring activities, (iii) $1.0 million for the working capital settlement
on the Utah hospitals sold in 1999, (iv) $850,000 of cash collateral on certain
letter of credit commitments, and (v) $715,000 for federal income taxes. Net
cash used in investing activities was $3.8 million during 2000 compared to $10.8
million during 1999, and reflected primarily a decrease in capital expenditures
of $8.2 million made at the ten hospitals sold in 1999. Net cash provided by
financing activities during 2000 was $1.5 million, which reflected total
borrowings of $36.0 million under the 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 $2.1 million in loan costs on
the Credit Facility.
In connection with its efforts to restructure the Notes, the Company
paid approximately $4.4 million of professional fees in the six months ended
June 30, 2000. The Company expects that future restructuring costs will be
paid as incurred from internally generated cash from operations and existing
cash balances.
The Company anticipates that internally generated cash from operations,
existing cash balances and borrowings under the Credit Facility will be
sufficient to fund the hospitals' routine capital expenditures and working
capital requirements through 2000.
<PAGE> 17
The Company is in a highly leveraged financial position. The Company's
liquidity and its ability to continue as a going concern are dependent upon,
among other things, its ability to (i) successfully negotiate and consummate a
plan to restructure its capital structure, (ii) achieve profitable operations
after the restructuring and (iii) generate sufficient cash from operations to
meet its obligations.
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 U.S. interest rates. The Company does not hold or issue derivative
instruments for trading purposes and is not a party to any instruments with
leverage features.
With respect to the Company's interest-bearing liabilities, borrowings
of $36.0 million under the Credit Facility at June 30, 2000 are subject to
variable rates of interest and are affected by the general level of U.S.
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
$360,000.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no other material developments in the legal
proceedings.
ITEM 2. CHANGE IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As previously reported in the Company's 1999 Form 10-K, on February 15,
2000, the Company did not make the interest payment of approximately $16.3
million due on the Company's $325.0 million 10% Senior Subordinated Notes due
2006, which upon the expiration of a 30-day grace period on March 16, 2000,
constituted an event of default under the Note indenture. Additionally, the
Company does not expect to make the $16.3 million interest payment due on the
Notes on August 15, 2000. The Company is currently engaged in negotiations with
the majority of the Note holders to develop a financial restructuring plan.
<PAGE> 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On May 23, 2000, the New York Stock Exchange (the "Exchange") informed
the Company that a decision had been made to suspend further trading of the
Company's common stock and that it planned to apply to the Securities and
Exchange Commission (the "SEC") to delist the issue. Among the reasons cited by
the Exchange were an abnormally low trading price and that the Company had
fallen below certain of the Exchange's continued listing criteria.
As a consequence thereof, the Company pursued alternative public
trading markets for its stock and on June 5, 2000, the Company's common stock
began trading on the National Association of Brokers Dealers Over the Counter
Bulletin Board Service under ticker symbol "PLHC."
On July 13, 2000, the SEC granted the application of the Exchange for
removal of the Company's common stock from listing and registration on the
Exchange under the Securities Act of 1934. The removal from listing and
registration was effective on July 14, 2000.
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibit
10.84 $62,000,000 Credit Agreement dated May 16, 2000 among certain Paracelsus
subsidiaries and the CIT Group/ Business Credit, Inc., Heller Healthcare
Finance, Inc., and other lenders.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed on May 17, 2000, a Current Report on Form 8-K,
reporting pursuant to Item 5, that it had consummated a $62,000,000 subsidiary
level financing facility.
The Company filed on May 24, 2000, a Current Report on Form 8-K,
reporting pursuant to Item 5, to report of the Exchange's decision to suspend
and to apply to delist the Company's common stock.
<PAGE> 19
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: August 14, 2000 --------------------
Lawrence A. Humphrey
Executive Vice President &
Chief Financial Officer
