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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 001-12055
PARACELSUS HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-3565943
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
515 W. GREENS ROAD, SUITE 500, HOUSTON, TEXAS
(Address of principal executive offices)
77067 (281) 774-5100
(Zip Code) (Registrant's telephone number, including
area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, NO STATED VALUE NEW YORK STOCK EXCHANGE
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(Title of Class) (Name of each exchange on which registered)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The number of shares of Registrant's Common Stock outstanding on March 27, 2000
was 57,667,721. The aggregate market value of voting stock held by
non-affiliates of the Registrant, based upon the closing price of the
Registrant's Common Stock on March 27, 2000 was $6,910,473.*
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* Excludes 26,076,988 shares deemed to be held by directors and officers, and
stockholders whose ownership exceeds five percent of the shares of Common
Stock outstanding at March 27, 2000. Exclusion of shares held by any person
should not be construed to indicate that such person possesses the power,
direct or indirect, to direct or cause the direction of the management or
policies of the Registrant, or that such person is controlled by, or under
common control with, the Registrant.
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PARACELSUS HEALTHCARE CORPORATION
FORM 10-K ANNUAL REPORT
YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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PAGE REFERENCE
PRELIMINARY STATEMENT FORM 10-K
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Part I
Item 1. Business 4
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 20
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 7A. Quantitative and Qualitative Disclosures About Market
Risks 36
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 69
Part III
Item 10. Directors and Executive Officers of the Registrant 69
Item 11. Executive Compensation 71
Item 12. Security Ownership of Certain Beneficial Owners
and Management 75
Item 13. Certain Relationships and Related Transactions 77
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports 79
on Form 8-K
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FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K are "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve a number of risks and
uncertainties. 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 continued listing of the Company's common stock on the New York
Stock Exchange;
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 Company's ability to consummate acceptable financing arrangements,
under reasonable terms, to replace its existing interim facility and
off-balance sheet receivable financing agreement; and
o The possibility that the Company may be forced to file for protection
under Chapter 11 of the Federal Bankruptcy Code or that its creditors
could file an involuntary petition seeking to place the Company in
bankruptcy.
The Company is generally not required to, and does not undertake to, update
or revise its forward-looking statements.
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PART I
ITEM 1. BUSINESS
GENERAL
Paracelsus Healthcare Corporation, a California corporation ("PHC"), was
incorporated in November 1980. PHC, both directly or through its subsidiaries
(collectively, the "Company" or the "Registrant"), owns and operates acute care
and related healthcare businesses in selected markets. In August 1996, the
Company acquired Champion Healthcare Corporation ("Champion") by exchanging one
share of the Company's Common Stock for each share of Champion's Common Stock
and two shares of the Company's Common Stock for each share of Champion's
Preferred Stock (the "Merger"). The Company's hospitals offer a broad array of
general medical and surgical services on an inpatient, outpatient and emergency
basis. In addition, certain hospitals and their related facilities offer home
health, skilled nursing care, rehabilitation and psychiatric services. As of
December 31, 1999, the Company owned or operated 10 acute care hospitals in
seven states with 1,287 licensed beds. Of the 10 hospitals, eight are owned and
two are leased.
ISSUES AFFECTING LIQUIDITY
The Company incurred significant operating losses in 1999 and had a working
capital deficit at December 31, 1999. These matters and certain developments
described below have raised substantial doubt as to the Company's ability to
continue operations as a going concern. The report of the Company's independent
auditors, Ernst & Young, LLP, includes an explanatory paragraph for a going
concern uncertainty.
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. The Notes represent unsecured obligations of PHC and are not
guaranteed by any of the Company's subsidiaries; accordingly, the Note holders
have no direct claim on the assets of any of the Company's hospital operating
subsidiaries. Given the Company's financial condition and liquidity, the Company
cannot repay in full its obligations under the Notes, nor does the Company have
access to equity sources or other commitments necessary to refinance or
otherwise satisfy in full its obligations under the Notes. The Company is
currently engaged in negotiations with the Note holders to develop an
alternative, sustainable capital structure for the Company.
The Company has retained an investment banking firm and legal counsel to
review its strategic alternatives. Considering the Company's limited financial
resources, there can be no assurance that the Company will succeed in
formulating an alternative capital structure acceptable to the Note holders, in
which case the Note holders are entitled, at their discretion, to accelerate all
principal and interest due on the Notes. Either as a result of negotiations with
the Note holders--or if such negotiations fail--the Company could file under
Chapter 11 of the Bankruptcy Code (the "Bankruptcy Code") or be subject to an
involuntary petition. A reorganization would likely result in a significant
dilution of the ownership interest of the existing holders of the Company's
common stock. There can be no assurance that a bankruptcy proceeding would
result in a reorganization of the Company rather than a liquidation. If a
liquidation or a protracted reorganization were to occur, there is a substantial
risk that there would be
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insufficient cash or property available for distribution to the Company's
creditors and/or the holders of the Company'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 are guarantors 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 Consolidated Balance Sheet at
December 31, 1999, which has resulted in a working capital deficit of $309.2
million. The 1999 Consolidated Financial Statements included in Item 8 have been
prepared assuming the Company will continue as a going concern and do not
include further adjustments to reflect 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 described
above.
As the result of the default of interest payment on the Notes, the Company
is also in default with certain provisions under its off-balance sheet
receivable financing agreement (the "Commercial Paper" program) (see Item 8.
Note 9) under which a wholly-owned subsidiary of the Company has sold $32.3
million of eligible receivables as of March 27, 2000. As a result of this
default, the subsidiary is unable to sell additional receivables under the
Commercial Paper program. On March 30, 2000, the Company received a commitment
for a $62.0 million secured financing facility (the "New Facility") from a
lending group which will replace the Company's Commercial Paper program and
existing letters of credit outstanding. The Company anticipates that the
outstanding letters of credit will be secured by cash collateral held by the
lenders. The New Facility will be used primarily to fund normal working
capital of the Company's hospitals. The New Facility will be an obligation of
certain of the Company's subsidiaries and will be secured by all patient
accounts receivable of the Company's hospitals and a first lien on two of its
hospitals. Accordingly, the New Facility will not be an obligation of PHC. The
lender under the Company's current Commercial Paper program has agreed to extend
the program until April 17, 2000 while the Company and the proposed lenders
under the New Facility complete due diligence and documentation necessary for
the New Facility. There can be no assurance that the Company will ultimately
consummate the New Facility.
The Company is in a highly leveraged financial position. Should the Company
fail to consummate the New Facility, the Company would have no available credit
lines and therefore would be required to finance its cash needs from operations.
Furthermore, in the event the Commercial Paper program is not extended beyond
April 17, 2000, a wind down of the program would commence with the Company's
current lender retaining a significant portion of the Company's operating cash
flows until all amounts outstanding under the Commercial Paper program are
repaid in full. In the event of a wind down, operating cash flows would likely
be insufficient to meet the Company's operational and capital expenditure needs.
On October 12, 1999, the Company repaid all borrowings outstanding under
its senior credit facilities of $223.5 million in conjunction with the sale of
its Utah operations. Prior to repayment, the senior credit facilities provided
total commitments of $255.0 million (see Item 8. Note 7). Concurrent with the
repayment, most of the commitments under the facilities were permanently
cancelled. The Company entered into an interim financing arrangement with one of
its original bank lenders, which has reduced its original commitment under the
senior bank credit agreement to $11.6 million. As of March 27, 2000, the Company
had $11.6 million in outstanding letters of credit under its interim credit
facility, all of which were fully secured by cash collateral held by the lender,
and no outstanding borrowings. As the result of the default of interest payment
on the Notes, the Company is also in default under its interim credit facility.
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DIVESTITURES AND CLOSURES OF HOSPITALS
Pursuant to a recapitalization agreement completed on October 8, 1999, the
Company sold 93.9% of the outstanding common stock of a wholly owned subsidiary
("HoldCo") to JLL Healthcare, LLC, an affiliate of the private equity firm of
Joseph Littlejohn & Levy, Inc., for $280.0 million in cash, inclusive of working
capital. The Company retained a minority interest in the outstanding common
stock of HoldCo, which owned substantially all of the assets of five hospitals,
with 640 licensed beds, and related facilities located in the Salt Lake City
area (the "Utah Facilities"). Subsequent to the closing of the recapitalization
agreement, IASIS Healthcare Corporation, a Tennessee corporation, was merged
with and into a wholly owned subsidiary of HoldCo, with the HoldCo subsidiary as
the surviving entity. Following the merger, HoldCo changed its name to IASIS
Healthcare Corporation, in which the Company retains a 5.8% minority interest.
The recapitalization agreement was arrived at through an arms length
negotiation. Net cash proceeds were used to eliminate all indebtedness then
outstanding under the Company's senior credit facilities totaling $223.5 million
and to reduce $12.8 million in borrowings under the Commercial Paper program.
The Company also eliminated $7.8 million in annual operating lease payments
related to one of the Utah Facilities.
On September 30, 1999, the Company completed the sale of the stock of
Paracelsus Senatobia Community, Inc. ("Senatobia"), which owned and operated a
76-bed acute care hospital located in Mississippi. The sales price of
approximately $4.7 million, which included the sale of net working capital, was
paid by a combination of $100,000 in cash, $1.6 million in second lien
promissory notes, and the assumption by the buyer of approximately $3.0 million
in capital lease obligations and related lease guaranty payments.
Effective June 30, 1999, the Company sold substantially all of the assets
of four skilled nursing facilities (collectively, the "Convalescent Hospitals").
The facilities had 232 licensed beds. The sales price of approximately $6.9
million, which excluded net working capital, was paid by a combination of $3.0
million in cash and a $3.9 million second lien promissory note, which is subject
to prepayment discounts. In connection with the sale, the Company paid $1.0
million to terminate a lease agreement at one of the facilities and used the
remaining cash proceeds of $2.0 million from the sale to reduce its outstanding
indebtedness under its senior revolving credit facility
Effective March 31, 1999, the Company sold the stock of Paracelsus Bledsoe
County Hospital, Inc. ("Bledsoe"), which operated a 32 licensed bed facility
located in Tennessee. The sales price of approximately $2.2 million, including
working capital, was paid by a combination of $100,000 in cash and the issuance
by the buyer of $2.1 million in promissory notes.
BUSINESS STRATEGY
The Company generally seeks to operate hospitals in small to mid-sized
markets. The Company focuses on increasing its market share by implementing
operating strategies to position each of its hospitals as a preeminent provider
of healthcare services on a quality, cost-effective basis that meets the needs
of the communities that the facilities serve. The Company continually analyzes
whether each of its hospitals fits within its strategic plans and will continue
to evaluate ways in which its assets may be used to maximize shareholder value.
To that end, the Company may from time to time elect to close, sell, exchange or
convert to alternate use certain of its facilities in order to respond to
changing market conditions. When appropriate and to the extent financial
resources permit, the Company will pursue growth opportunities through selective
acquisition of additional hospitals in markets where the Company
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can develop a preeminent market position. In light of the uncertainties
discussed in "Issues Affecting Liquidity," the Company is uncertain as to its
acquisition and disposition plan in 2000 and beyond.
HOSPITAL OPERATING STRATEGY
The Company seeks to provide quality healthcare services on a
cost-effective basis while being responsive to the needs of each community in
which the Company operates. The Company believes that the delivery of healthcare
services is a local business. Accordingly, each hospital's operating strategy
and business plan are designed to meet the healthcare needs of the local market
through local management initiative, responsibility and accountability, combined
with corporate support and oversight. Incentive compensation programs are
offered to reward local managers for accomplishing predetermined goals. The
significant components of the Company's hospital operating strategy are as
follows:
MARKET PENETRATION - The Company seeks to increase its market share (i) by
offering a full range of hospital and related healthcare services, (ii) by
providing quality services on a cost effective basis and (iii) through
appropriate physician development efforts.
The Company selectively adds new services such as orthopedic surgery,
psychiatric, cardiology and pain management programs at its hospitals and, where
appropriate, invests in new technologies. The Company also develops
complementary healthcare businesses such as primary care clinics to augment the
service capabilities and create a larger service network for its existing
hospitals, thereby providing care in a cost effective and medically appropriate
setting. In some cases, the Company may also acquire, merge or establish
alliances with other providers through affiliation agreements, joint venture
arrangements or partnerships. Historically, the Company's investment in its
hospitals, primarily through capital expenditures, were financed through
additional borrowings and internally generated funds. Due to the liquidity
issues previously discussed, there can be no assurance that the Company will
have sufficient resources to finance its capital expenditure plan in 2000.
Various factors, such as technological developments permitting more
procedures to be performed on an outpatient basis, pharmaceutical advances and
pressures to contain healthcare costs, have led to a shift from inpatient care
to ambulatory or outpatient care. The Company has responded to this trend by
restructuring existing surgical and diagnostic capacity to allow a greater
number and range of procedures to be performed on an outpatient basis.
The Company has implemented a care defect reduction program to measure the
quality of patient care and to reduce errors in the patient care process. The
program focuses on improving patient care processes through staff involvement
and education and uses certain indicators to measure the quality of patient
care. The Company believes the focus on the quality of care in its hospitals
will improve its customer satisfaction rate and reduce its liability risk.
The Company has implemented a proprietary customer service program in each
of its hospitals to ensure that hospital employees are responding to patient
needs. This program achieves its objective through employee training programs
and by focusing management's attention on areas needing improvement on a timely
basis.
A key element of the Company's hospital operating strategy is to establish
and maintain a cooperative relationship with its physicians. The Company focuses
on supporting and retaining existing physicians and attracting additional
qualified physicians in existing or under-served medical specialties. The
Company's hospitals often provide newly recruited physicians with various
services to assist them in opening and commencing their practices, including
financial support and office rental. The Company
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may affiliate, joint venture or partner with physician practices or, in selected
cases, manage or acquire such physician practices through appropriate
subsidiaries and affiliated organizations. While physicians may terminate their
association with a hospital at any time, the Company believes that by improving
the level of care at its hospitals, equipping its hospitals with up-to-date
medical technology and forging strong relationships with physicians, it will
attract and retain qualified physicians.
COST CONTROLS - The Company seeks to position each of its hospitals as a
cost effective healthcare provider in its market. To achieve this objective, the
Company utilizes a disciplined cost control system to (i) implement staffing
standards and manage resources to optimize staffing efficiency, (ii) utilize
national purchasing contracts and monitor supply usage, (iii) renegotiate or
eliminate purchased service contracts, where appropriate, (iv) evaluate and
eliminate on an ongoing basis underutilized or unprofitable services and (v)
implement utilization management programs to help monitor and manage clinical
resources to render medically appropriate and cost effective care. Corporate
staff support is available for key operating and cost decisions, as well as for
reimbursement, insurance/risk management, purchasing and other significant
accounting and support functions. In 1999, the Company instituted further
initiatives to cut costs not directly related to patient care, including
reducing corporate overhead and eliminating nonessential programs and office
space. As healthcare payors seek to reduce their healthcare expenditures, the
ability to reduce and control operating costs will become more important to the
Company's results of operations and future growth.
NETWORKS - One factor of ever-increasing importance in the competitive
position of the Company's hospitals is the ability of those facilities to
obtain, retain and renegotiate managed care contracts. A health care provider's
ability to compete for managed care contracts is affected by, among other
factors, whether the hospital is part of an integrated health care delivery
network and, if so, the scope, breadth and quality of services offered by such
network and by competing networks. The Company evaluates changing circumstances
in each geographic area on an ongoing basis and attempts to position itself to
compete in the managed care market by forming its own, or joining with others to
form, integrated health care delivery networks, where appropriate.
STANDARDIZED POLICIES AND PROCEDURES AND MANAGEMENT INFORMATION SYSTEMS -
The Company's hospitals are managed by experienced hospital administrators and
financial personnel. To assist them, the Company has sought to maintain
financial control and to improve operating practices at the hospitals through
standardization. To that end, the Company has developed a comprehensive
financial reporting system and implemented standardized policies and procedures.
The Company uses the financial reporting system to monitor certain key financial
data and operating statistics at each facility, to establish the annual budget
and to measure hospitals' financial and operational performance. The Company has
also standardized systems for patient billings, general accounting and payroll,
as well as clinical applications and is installing systems to automate staffing
utilization and to monitor the profitability of managed care contracts. In
addition, the Company has implemented policies and procedures to guide its
facilities in areas such as quality and customer service, physician relations
and arrangements, human resources, billings and collections, regulatory and
ethical compliance and accounting and financial reporting.
OPERATIONS
The Company seeks to create a local healthcare system in each of its
markets that offers a continuum of inpatient, outpatient, emergency and
alternative care options. In many such markets, the Company will establish its
acute care hospitals as the hub of a local provider system that can include home
health agencies, clinics, physician practices and medical office buildings.
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ACUTE CARE HOSPITALS - The Company owns and operates 10 acute care
hospitals with a total of 1,287 licensed beds in seven states. Each of the
Company's acute care hospitals provides a broad array of general medical and
surgical services on an inpatient, outpatient and emergency basis, including
some or all of the following: intensive and cardiac care, diagnostic services,
radiology services and obstetrics on an inpatient basis and ambulatory surgery,
laboratory and radiology services on an outpatient basis.
HOME HEALTH AGENCIES - The Company provides home health services through
six of its hospitals in four states. These services include home nursing,
infusion therapy, physical therapy, respiratory services and other
rehabilitative services.
PHYSICIAN PRACTICES - The Company owns and operates a number of physician
practices in rural and urban settings. Most of these practices are primary care
physician offices where the physicians are employed by or are under contract
with one of the Company's hospitals or a related entity. The physician practices
serve to complement the Company's acute care hospitals in their respective
markets by allowing the Company to provide a wider range of services in optimal
settings and provide the opportunity to attract patients to the Company's
hospitals.
PHYSICIAN ARRANGEMENTS - The Company owns a majority interest in and/or
operates three physician joint ventures. In most cases, a physician or a group
of physicians holds the minority interests in the joint ventures directly or
indirectly. Additionally, several of the Company's hospitals have assisted with
the formation of and participation in physician hospital organizations or
management services organizations. The Company believes that its physician
arrangements are in compliance with applicable Federal and state laws. However,
there can be no assurance that such arrangements will not be challenged by
governmental agencies.
MEDICAL OFFICE BUILDINGS - The Company owns, leases or manages 15 medical
office buildings located adjacent to certain of its hospitals.
COMPETITION
Competition for patients among hospitals and other healthcare providers has
intensified in recent years. During this period, hospital occupancy rates have
declined as a result of cost containment pressures, changes in technology,
changes in government regulations and reimbursement and a shift from inpatient
to outpatient utilization. Such factors have prompted new competitive strategies
by hospitals and other healthcare providers as well as an increase in the
consolidation of such providers. In certain areas in which the Company operates,
there are other hospitals or facilities that provide services comparable to
those offered by the Company's hospitals. Many of these hospitals may have
greater financial resources and may offer a wider range of services than the
Company's hospitals. In addition, hospitals owned by government agencies or
other tax-exempt entities benefit from endowments, charitable contributions and
tax-exempt financing, none of which are available to the Company.
On July 1, 1998, the Company completed the purchase from its partner the
remaining 50% partnership interest in Dakota Heartland Health System ("DHHS")
thereby giving the Company 100% ownership of DHHS. DHHS owns and operates a
218-bed general acute care hospital in Fargo, North Dakota. In this market where
DHHS is one of two primary healthcare providers, construction is underway on a
third competing hospital, which is owned in part by a physicians group who has
admitted a number of patients to DHHS. While the Company expects that the new
hospital will not have a significant impact on the Company's patient volume in
admissions and visits in 2000, competition for patients from the new hospital,
once completed, will likely be unfavorable to DHHS' operating results
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thereafter. The Company is currently evaluating various business alternatives to
preserve DHHS' position in this market.
The competitive position of the Company's hospitals also has been, and in
all likelihood will continue to be, affected by the increased initiatives
undertaken during the past several years by Federal and state governments and
other major purchasers of healthcare, including insurance companies and
employers, to revise payment methodologies and monitor healthcare expenditures
in an effort to contain healthcare costs. As employers, private and government
payors and others turn to the use of managed care in an attempt to control
rising health care costs, the importance of obtaining managed care contracts has
increased over the years and is expected to continue to increase. In many of the
Company's existing markets, the competitive position of its hospital is
dependent on its ability to obtain managed care contracts at reasonable terms.
Under such contracts, health care providers agree to provide services on a
discounted-fee or capitated basis in exchange for the payors agreeing to send
some or all of their members/enrollees to those providers. The profitability of
such contracts depends upon the provider's ability to negotiate payments per
patient that, in the aggregate, are adequate to cover the cost of meeting the
health care needs of the covered persons. The Company currently has no material
contracts to provide services on a capitated basis.
The Company's hospitals are dependent upon the physicians practicing in the
communities served by the hospitals. A small number of physicians accounts for a
significant portion of patient admissions at some of the Company's hospitals.
The competition for physicians in some specialty areas, including primary care,
is intense. While the Company seeks to retain physicians of varied specialties
on its hospitals' medical staffs and to attract other qualified physicians,
there can be no assurance that the Company's hospitals will succeed in doing so.
In addition, certain physicians are affiliated with managed care providers that
may preclude them from utilizing the Company's facilities for their patients, or
referring patients to doctors using the Company's facilities, if the facility or
referred doctors are not currently contracting with such managed care providers.
In certain geographic markets, there is a shortage of nurses and other
healthcare professionals in certain specialties, which has resulted in increased
costs at those facilities. The availability of nursing personnel and other
healthcare professionals fluctuates from year to year, and the Company cannot
predict the degree to which it will be affected by the future availability and
cost of nursing and other healthcare personnel.
SOURCES OF REVENUE
The Company receives payment for services rendered to patients from private
payors (primarily private insurance), managed care providers, the Federal
government under the Medicare and TriCare (formerly the Civilian Health and
Medical Program of the Uniformed Services or CHAMPUS) programs and state
governments under their respective Medicaid programs. See "Hospital
Accreditation and Government Regulation - Medicare, Medicaid."
The Company's revenue primarily depends on the level of inpatient census,
the volume of outpatient services, the acuity of patients' conditions and
charges for services. Reimbursement rates for inpatient routine services vary
significantly depending on the type of service and the geographic location of
the hospital. The table below sets forth the percentages of acute care gross
patient revenue for each category of payor during each of the periods indicated.
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YEAR ENDED DECEMBER 31,
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1999 1998 1997
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Medicare................................................. 41.1% 42.6% 43.1%
Medicaid................................................. 7.4% 11.0% 13.8%
Managed care, private insurance, and other payors........ 51.5% 46.4% 43.1%
----- ----- -----
100.0% 100.0% 100.0%
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Amounts received from most payors are less than the hospitals' customary
charges for the services provided. All of the Company's hospitals (as do most
acute care hospitals) derive a substantial portion of their revenue from the
Medicare and Medicaid programs, which pay participating health care providers
for covered services rendered and items provided to qualified beneficiaries.
Both of these programs are government programs, which are heavily regulated and
use complex methods for determining payments to providers. These programs are
subject to frequent changes, which in recent years have reduced and in the
future years are expected to continue to reduce payments to hospitals. In light
of the high percentage of Medicare and Medicaid patients, the Company's ability
in the future to operate its business successfully will depend in large measure
on its ability to adapt to changes in these programs. See "Hospital
Accreditation and Governmental Regulation."
The importance of obtaining managed care contracts has increased over the
years and is expected to continue to increase as employers, private and
government payors and others turn to the use of managed care in an attempt to
control rising health care costs. The Company's hospitals have experienced an
increasing shift in payor mix from traditional Medicare/Medicaid to managed care
consistent with the industry trends. The revenues and operating results of most
of the Company's hospitals are significantly affected by the hospitals' ability
to negotiate favorable contracts with managed care payors. The Company is
experiencing demands from managed care payors for increasing discounted fee
structures. Inpatient utilization, average lengths of stay and occupancy rates
continue to be negatively affected by payor-required preadmission authorization
and utilization review and by payor pressure to maximize outpatient and
alternative healthcare delivery services for less acutely ill patients. The
Company is responding to this trend by dedicating resources and managed care
professionals to evaluate and negotiate contracts with these payors and obtain
better rates and by avoiding entering into capitation arrangements. Also, the
Company is installing information systems to improve the information available
to management to monitor compliance of hospital billing and collection practices
with the negotiated rates. The trend toward managed care has and may continue to
adversely affect the Company's ability to grow net operating revenue and improve
operating margins.
HOSPITAL ACCREDITATION AND GOVERNMENT REGULATION
All hospitals, and the healthcare industry generally, are subject to
compliance with various Federal, state and local regulations relating to
licensure, operations, billing, reimbursement, relationships with physicians,
construction of new facilities, expansion or acquisition of existing facilities
and offering of new services. All facilities receive periodic inspection by
state and local licensing agencies, as well as by non-governmental organizations
acting under contract or pursuant to Federal law, to review compliance with
standards of medical care and requirements concerning facilities, equipment,
staffing, cleanliness and related matters. Failure to comply with applicable
laws and regulations could result in, among other things, the imposition of
fines, temporary suspension of the ability to admit new patients to the facility
or, in extreme circumstances, exclusion from participation in government
healthcare reimbursement programs such as Medicare and Medicaid (from which the
Company derives substantial revenues) or the revocation of facility licenses.
While all of the Company's hospitals have obtained the
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<PAGE> 12
licenses that the Company believes are necessary under applicable law for the
operation of the hospitals, there can be no assurance that its hospitals will be
able to comply in the future or that future regulatory changes will not have an
adverse impact on the Company. At December 31, 1999, all of the Company's
hospitals were accredited by the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO"), allowing them to participate in the Medicare/Medicaid
programs.
CERTIFICATE OF NEED - In four of the states in which the Company's
hospitals operate, certificate of need ("CON") regulations control the
development and expansion of healthcare services and facilities. Those
regulations generally require proper government approval for the expansion or
acquisition of existing facilities, the construction of new facilities, the
addition of new beds, the acquisition of major items of equipment and the
introduction of certain new services. Failure to obtain necessary approval can
result in the inability to complete a project, the imposition of civil and, in
some cases, criminal sanctions, the inability to receive Medicare and Medicaid
reimbursement and/or the revocation of a facility's license. Of the seven states
in which the Company operates, a CON is required in Florida, Georgia, Tennessee
and Virginia.
MEDICARE - The Federal Medicare program provides medical insurance
benefits, including hospitalization, principally to persons 65 and older and to
certain disabled persons. Each of the Company's hospitals is certified as a
provider of services under the Medicare program. A substantial portion of the
Company's revenue is derived from patients covered by this program. See "Sources
of Revenue" above. The Medicare program has undergone significant changes during
the past several years to reduce overall healthcare costs, which have resulted
in reduced rates of growth in reimbursement payments for a substantial portion
of hospital procedures and charges. In addition, the requirements for
certification in the Medicare program are subject to change. In order to remain
qualified for the program, it may be necessary for the Company to make changes
from time to time in its facilities, equipment, personnel and services. Although
the Company intends to continue its participation in the Medicare program, there
is no assurance that it will continue to qualify for participation.
Pursuant to the Social Security Act Amendments of 1983 and subsequent
budget reconciliation and modifications, Congress adopted a prospective payment
system ("PPS"). PPS is a fixed payment system in which illnesses are classified
into Diagnostic Related Groups ("DRGs") which do not consider a specific
hospital's costs, but are adjusted for an area wage differential. Each DRG is
assigned a fixed payment amount that forms the basis for calculating the amount
that the hospital is reimbursed for each Medicare patient. Generally, under PPS,
if the costs of meeting the health care needs of the patient are greater than
the predetermined payment rate, the hospital must absorb the loss. Conversely,
if the cost of the services provided is less than the predetermined payment, the
hospital retains the difference. Since DRG rates are based upon a statistically
normal distribution of severity, a hospital may receive additional payments if a
patient falls outside the normal distribution.
Historically, DRG rates were increased each year to take into account the
increased cost of goods and services purchased by hospitals and non-hospitals
(the "Market Basket"). With the exception of federal fiscal year 1997 (which
ended September 30, 1997), in which the increase in DRG rates was equal to the
2.5% Market Basket, the percentage increases to the DRG rates for the past
several years have been lower than the Market Basket and, as a result, payments
received by hospitals under DRG-PPS have not kept up with the cost of goods and
services. Additionally, the Balanced Budget Act of 1997 ("1997 Budget Act")
froze DRG rates at their 1997 levels through federal fiscal year 1998 (which
ended September 30, 1998). The 1997 Budget Act also limits the rate of increase
in DRG rates thereafter. Payments to be received by general hospitals under
DRG-PPS continue to be below the increases in the cost of goods and services
purchased by hospitals. The update for the federal fiscal year beginning October
1, 1999, has been set at 1.1 percent (2.9 percent Market Basket minus 1.8
percent).
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<PAGE> 13
Prior to 1988, Medicare reimbursed hospitals for 100% of their share of
capital related costs, which included depreciation, interest, taxes and
insurance related to plant and equipment for inpatient hospital services. The
reimbursed rate was reduced thereafter to 90% of costs. Federal regulations,
effective October 1, 1991, created a PPS for inpatient capital costs to be
phased in over a ten-year transition period from a hospital-based rate to a
fully Federal payment rate or a per-case rate, which is likely to result in
further reductions in the rate of growth in reimbursement payments. Beginning
with cost reporting periods on or after October 1, 2001, all hospitals are to be
paid at the standard Federal rate. Additionally, pursuant to the 1997 Budget
Act, capital rates were reduced by an additional 2.1%. This change in capital
cost payment could have a negative impact on the operating revenues of the
Company.
Psychiatric and rehabilitation hospitals, as well as psychiatric or
rehabilitation units that are distinct parts of a hospital, are exempt from PPS
and continue to be reimbursed on a reasonable cost basis, with limits placed
upon the annual rate of increase in operating costs per discharge. For fiscal
years 1999 through 2002, the annual update factor is dependent upon where the
hospital's costs fall in relation to the limits set by the Tax Equity and Fiscal
Responsibility Act of 1982 ("TEFRA"). The annual update factor will range from
0% to the Market Basket percentage increase, depending upon whether the
hospital's costs are at, below or above the TEFRA target limits or the Federal
national target limits, whichever are lower.
Many outpatient services continue to be reimbursed, subject to certain
regulatory limitations, on a modified cost-reimbursement basis, at the lower of
customary charges or a percentage of actual costs. Congress has established
additional limits on reimbursement of the following outpatient services: (i)
clinical laboratory services, which are reimbursed based upon a fee schedule and
(ii) ambulatory surgery procedures and certain imaging and other diagnostic
procedures, which are reimbursed based upon the lower of the hospital's specific
costs or a blend of the hospital's specific costs and the rate paid by Medicare
to non-hospital providers for such services. The 1997 Budget Act required the
payment method for most outpatient services provided at hospitals to be
converted from the cost-based system to PPS effective January 1, 1999, and
phased-in over a three-year period. Congress has approved postponing the
implementation of outpatient PPS due to Year 2000 issues. The implementation
date is expected to be July 2000. The financial effect of such change in payment
methodology may have a negative impact on the Company.
Home health services historically have been exempt from PPS and have been
paid by Medicare at cost, subject to certain limits. The 1997 Budget Act
mandates that home health care reimbursement must transition to a prospective
payment system on October 1, 2000, as well as a 15% reduction in the cost limits
and per beneficiary limits effective September 30, 2000. Subsequent legislation
has deferred enactment of the 15% reduction until one year after implementation
of PPS for homehealth. During a transition period of not longer than 4 years,
home health care reimbursement rates in effect under the current system have
been reduced and will be a blend of agency-specific costs and the
regional-specific costs, until a fully prospective payment rate is achieved. The
Company currently has six hospitals that provide home health care services. The
financial effect of such a change in payment methodology may have a negative
impact on the Company.
The 1997 Budget Act mandated numerous other adjustments and reductions to
the Medicare system that may adversely impact the Company's operations. With
respect to the valuation of capital assets as a result of a change in hospital
ownership, the 1997 Budget Act eliminates the allowance for return on equity
capital, and bases reimbursement on the book value of the assets, recognizing no
gain or recapture of depreciation. In addition, the 1997 Budget Act mandated the
following changes: (i) a reduction in reimbursement for Medicare enrollee
deductible and coinsurance bad debts of 25% for fiscal year 1998, 40% for fiscal
year 1999 and 45% for fiscal year 2000 and periods thereafter, (ii) a reduction
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<PAGE> 14
in the bonus payments made to hospitals whose costs are below the target amounts
from 5% of the target amount to 2% and (iii) the transition of skilled nursing
home reimbursement to PPS, based upon 1995 allowable costs, with a three year
transition period beginning on or after July 1, 1998.
In 1999, Congress passed the Balanced Budget Refinement Act of 1999
("BBRA") which was designed to provide relief to healthcare providers from
certain of the requirements of the 1997 Budget Act by delaying or modifying the
implementation of certain provisions and increasing or restoring payments for
certain services thereunder. There are a number of other initiatives before
Congress that would provide relief to payment reductions brought about by the
1997 Budget Act. However, there is no assurance that such initiatives will be
enacted or, if enacted, that they would have any significant favorable impact on
the Company.
MEDICAID - Medicaid is a Federally mandated medical assistance program that
is administered and funded in part by each state pursuant to which hospital
benefits are available to indigent persons. Each of the Company's hospitals is
certified for participation in the various state Medicaid programs. A
substantial portion of the Company's revenue is derived from patients covered by
this program. See "Sources of Revenue." Medicaid payment methodology varies from
state to state, with most payments being made on a prospective payment system or
under programs that negotiate payment levels with individual hospitals. Many
states have adopted broad-based hospital-specific taxes to help fund the state's
share of its Medicaid program. In addition, certain states have obtained or are
applying for waivers from by the Health Care Financing Administration ("HCFA")
to replace their Medicaid programs with managed care programs.
The 1997 Budget Act repealed the Boren Amendment to the Medicaid Act to
give states greater flexibility in establishing Medicaid payment methods and
rates. The Boren Amendment previously required states to undertake a financial
analysis and provide assurance to the Federal government that the Medicaid rates
were reasonable in meeting the costs incurred by healthcare providers in
providing care to Medicaid patients. In lieu thereof, Congress has mandated that
states employ a rate setting process that requires prior publication and an
opportunity for provider comment on the rates, effective for rates of payment on
and after January 1, 1998.
Many states have enacted or are considering enacting measures that are
designed to reduce their Medicaid expenditures and to make certain changes to
private health care insurance. Various states have applied, or are considering
applying, for a Federal waiver from current Medicaid regulations to allow them
to serve some of their Medicaid participants through managed care providers.
Texas was denied a waiver under Section 1115 of the 1997 Budget Act but is in
the process of implementing regional managed care programs under a more limited
waiver. California has created a voluntary health insurance purchasing
cooperative that seeks to make health care coverage more affordable for
businesses with five to 50 employees and, effective January 1, 1995, changed the
payment system for participants in its Medicaid program in certain counties from
fee-for-service arrangements to managed care plans. Florida also has
legislation, and other states are considering adopting legislation, imposing a
tax on net revenues of hospitals to help finance or expand the provision of
health care to the uninsured and underinsured persons. The Virginia Medicaid
program has contracted with managed care payors and effectively has assigned to
these payors the ability to determine the composition of the provider network. A
number of other states are considering the enactment of managed care initiatives
designed to provide universal low-cost coverage. These proposals also may
attempt to include coverage for some people who currently are uninsured.
The Medicare and Medicaid programs make additional payments to those
healthcare providers that serve a disproportionate share of low-income patients.
The qualification and funding for disproportionate share payments vary by year
and by state as applicable to Medicaid. Disproportionate share payments for
future years could vary significantly from historical payments.
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<PAGE> 15
Within the statutory framework of the Medicare and Medicaid programs, there
are substantial areas subject to administrative rulings, interpretations and
discretion that may affect payments made under these programs. Funds received
from these programs are subject to audit. These audits can result in retroactive
adjustments of such payments. It often takes many years to make a final
determination about the amounts earned under the programs because of audits by
the program representatives, providers' rights of appeal and the application of
numerous technical reimbursement provisions. Management believes that adequate
provision has been made for such adjustments. There can be no assurance that
future audits will not result in material retroactive adjustments.
Federal and state legislators continue to consider legislation that could
significantly impact Medicare, Medicaid and other government funding of
healthcare costs. Initiatives currently before Congress, if enacted, would
reduce the rate of growth in reimbursement payments under various government
programs including, among others, payments to disproportionate share and
teaching hospitals. A reduction in these payments would adversely affect net
revenue and operating margins at certain of the Company's hospitals. The Company
is unable to predict what legislation, if any, will be enacted at the Federal
and state levels in the future or what effect such legislation may have on the
Company's financial position, results of operations or liquidity.
UTILIZATION REVIEW COMPLIANCE - To ensure efficient utilization of
facilities and services, Federal regulations require that admission to and
utilization of facilities by Medicare and Medicaid patients must be reviewed by
a Peer Review Organization ("PRO"). A PRO may address the appropriateness of
patient admissions and discharges, the quality of care provided, the validity of
DRG classifications and appropriateness of cases with extraordinary length of
stay or cost. The PRO may deny admission or payment. Such review may be
conducted either prospectively or retroactively and is subject to administrative
and judicial appeal.
ANTI-KICKBACK AND SELF-REFERRAL REGULATIONS - Federal law prohibits the
knowing and willful payment, receipt or offer of remuneration by healthcare
providers to any person, including physicians, to induce referrals of Medicare
and Medicaid patients or in exchange for such referrals (the "Anti-Kickback
Law"). Federal law also prohibits a physician from referring Medicare and
Medicaid patients to certain designated health services in which the physician
has ownership or certain other financial arrangements, unless an exception is
available (the "Stark II Law"). Many states have adopted or are considering
similar legislative proposals to extend the prohibition to referrals of all
patients regardless of payor. Violations of the Anti-Kickback Law and Stark II
Law may result in certain civil sanctions, such as civil monetary penalties, and
exclusion from participating in the Medicare and Medicaid programs. Violations
of the Anti-Kickback Law can also result in the imposition of criminal
sanctions.
The Office of the Inspector General of Health and Human Services ("OIG")
has promulgated regulations that define certain safe harbors to offer protection
to certain common business arrangements under the Anti-Kickback Law. The failure
of an arrangement to meet the requirements of a safe harbor does not render the
arrangement illegal. Those arrangements, however, are subject to scrutiny by the
OIG's office and other enforcement agencies. None of the Company's joint
ventures with physician investors fall within any of the defined safe harbors.
Under the Company's joint venture arrangements, physician investors are not
under any obligation to refer or admit their patients, including Medicare or
Medicaid beneficiaries, to receive services at the Company's facilities, nor are
distributions to those physician investors contingent upon or calculated with
reference to referral by the physician investors. On the basis thereof, the
Company does not believe the ownership of interests in or receipt of
distributions from its joint ventures would be construed to be knowing and
willful payments to the physician investors to induce them to refer patients in
violation of the Anti-Kickback Law. In addition,
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<PAGE> 16
the Company has entered into various other relationships and arrangements with
physicians, including the acquisition of physician practices. There can be no
assurance that such arrangements will not be challenged by government
enforcement agencies. In addition, in certain circumstances, private citizens
may bring a civil action to recover sums paid in violation of Federal law.
Federal and state government agencies have announced heightened and coordinated
civil and criminal enforcement efforts. The Company cannot predict the effect on
the Company's financial position, results of operations or liquidity from
possible judgments, if any, that may result from any inquiry, or the impact of
new Federal or state laws and regulations that could require the Company to
restructure certain of its arrangements.
THE EMERGENCY MEDICAL TREATMENT AND ACTIVE LABOR ACT - Congress adopted the
Federal Emergency Medical Treatment and Active Labor Act ("EMTALA") in response
to reports of a widespread hospital emergency room practice of "patient
dumping." At the time of the enactment, patient dumping was considered to have
occurred when a hospital capable of providing the needed care sent a patient to
another facility or simply turned the patient away based on such patient's
inability to pay for his or her care. The law imposes requirements upon
physicians, hospitals and other facilities that provide emergency medical
services. These requirements pertain to what care must be provided to anyone who
comes to such facilities seeking care before they may be transferred to another
facility or otherwise denied care. Sanctions, which may be imposed on a
physician, hospital or other facility failing to fulfill these requirements,
include termination of a hospital's Medicare provider agreement, exclusion of a
physician from participation in Medicare and Medicaid programs and civil
monetary penalties. In addition, the law creates private civil remedies that
enable (i) an individual who suffers personal harm as a direct result of a
violation of the law and (ii) a medical facility that suffers a financial loss
as a direct result of another participating hospital's violation of the law to
sue the offending hospital for damages and equitable relief. Two of the
Company's hospitals were notified by HCFA of potential violations of the
requirements of EMTALA. The hospitals have conducted internal investigations and
have responded to HFCA. The Company believes that the ultimate outcome of these
matters should have no material impact to the Company's financial condition and
results of operations. The Company also believes that hospital practices are
otherwise in compliance with EMTALA.
ENVIRONMENTAL MATTERS
The Company is subject to various Federal, state and local statutes and
ordinances regulating the discharge of materials into the environment. The
Company's management does not believe that the Company will be required to
expend any material amounts in order to comply with these laws and regulations
or that compliance will materially affect its capital expenditures, earnings or
competitive position.
SEASONALITY
The hospital industry is seasonal, with the strongest demand for hospital
services generally occurring during January through April and the weakest during
the summer months. Accordingly, the Company's revenues and earnings are
generally highest during the first quarter and lowest during the third quarter.
Seasonal variations are caused by a number of factors, including, but not
necessarily limited to, seasonal cycles of illness, climate and weather
conditions, vacation patterns of both patients and physicians and other factors
relating to the timing of elective procedures.
MEDICAL STAFF AND EMPLOYEES
At December 31, 1999, the Company had approximately 4,200 full-time and
part-time employees. The Company also had 868 licensed physicians who were
members of the medical staffs of
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<PAGE> 17
the Company's hospitals. Physician staff members may also serve on the medical
staffs of other hospitals and each may terminate his or her affiliation with the
Company's hospital at any time. The Company is subject to Federal and state
employment laws and the Federal minimum wage and hour labor laws. The Company
also maintains employee benefit plans, which are subject to reporting and
operational compliance with the Internal Revenue Code and the U.S. Department of
Labor. Labor relations at the Company's hospitals have been satisfactory.
LIABILITY INSURANCE
The Company is subject to claims and suits in the ordinary course of
business, including those arising from care and treatment provided at its
facilities. The Company maintains insurance and, where appropriate, reserves
with respect to the possible liability arising from such claims. The Company is
self-insured for the first $1.0 million per occurrence of general and
professional liability claims. Excess insurance amounts up to $50.0 million are
covered by third party insurance carriers. The Company records an estimated
liability for its uninsured exposure and self-insured retention based on
historical loss patterns and actuarial projections. Although the Company
believes that its insurance and loss reserves are adequate, there can be no
assurance that such insurance and loss reserves will cover all potential claims
that may be asserted.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following is certain information regarding the executive officers of
the Company.
ROBERT L. SMITH, age 48, joined the Company as Chief Executive Officer and
director effective March 27, 2000. Since March 1999, Mr. Smith was Divisional
Vice President of Christus Health, a Dallas-based not-for-profit healthcare
system. Prior to Christus Health, he was Chief Executive Officer and Regional
President of the Southeast Texas Operating Division of the Sisters of Charity of
the Incarnate Word Health Care System since 1995. Prior thereto, Mr. Smith spent
14 years with National Medical Enterprises, Inc. ("NME"), predecessor company to
Tenet Healthcare Corporation, where he held a number of divisional senior
management positions.
JAMES G. VANDEVENDER, age 52, interim Chief Executive Officer and director
since July 1, 1999 until his resignation from the Company on February 29, 2000.
He served as Senior Executive Vice President, Chief Financial Officer and
director of the Company from June 1997 to July 1, 1999, and as Executive Vice
President, Chief Financial Officer and director since August 1996. From 1990 to
1996, he was Executive Vice President, Chief Financial Officer, Secretary and a
director of Champion, which he co-founded. From 1987 to 1989, Mr. VanDevender
pursued private investments. From 1981 to 1987, he was Senior Vice President of
Republic Health Corporation ("Republic") where he was primarily responsible for
acquisitions and development, and held other senior management positions in the
areas of accounting and finance. Prior thereto, he was employed in various
management positions for four years by Hospital Affiliates International.
LAWRENCE A. HUMPHREY, age 44, Chief Financial Officer since August 1999 and
has served as Executive Vice President - Finance since June 1997, and as Senior
Vice President, Corporate Finance since August 1996. Effective February 1996,
Mr. Humphrey was promoted to Senior Vice President - Corporate Finance. From
1993 to 1994, he was Operations Controller, and from September 1994 to 1996, he
was Vice President - Operations Finance of Champion. Prior thereto, he was
employed in various management positions for 12 years by NME. Mr. Humphrey is a
Certified Public Accountant.
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<PAGE> 18
MICHAEL M. BROOKS, age 51, served as Senior Vice President - Development
from August 1996 until his resignation from the Company on February 29, 2000.
From 1992 to 1993, he was Operations Controller and from September 1993 to 1996,
he was Vice President - Administration and Development of Champion. Effective
February 1996, Mr. Brooks became Senior Vice President - Development. From 1989
to 1992, he was a healthcare consultant and was associated with Champion in that
capacity during 1991. From 1987 to 1988, he co-owned and operated an acute care
hospital in El Paso, Texas. From 1983 to 1986, he was employed in various senior
management positions by Republic.
STEVEN D. PORTER, age 50, Senior Vice President of Operations since August
1999 and Regional Vice President since January 1999. Prior to joining the
Company, he was with Texas Health Resources (formerly Harris Methodist Health
System) since 1987, where he served in various roles with increasing
responsibilities from hospital administrator to senior vice president of health
care management until his departure in 1999.
DEBORAH H. FRANKOVICH, age 52, Senior Vice President and Treasurer since
June 1997, has served as Vice President and Treasurer since August 1996. From
1994 to 1996, she was Vice President and Treasurer of Champion. From 1990 to
1994, she was a healthcare financing consultant. Prior thereto, she was Vice
President and Treasurer of Healthcare International, Inc. from 1985 to 1989, and
Vice President and Treasurer of HealthVest, which she co-founded, from 1986 to
1990. Prior to joining Healthcare International, she worked in the New York
healthcare lending group of Citibank for seven years.
ROBERT M. STARLING, age 40, a Senior Vice President and Controller since
June 1997, has served as Vice President and Controller since August 1996. From
1995 to 1996, he was Vice President and Controller of Champion. Prior thereto,
he was Director of Finance for Columbia/HCA Healthcare Corporation from July
1994 to December 1994 and an Audit Manager with Coopers and Lybrand LLP (now
PriceWaterhouseCoopers LLP) from 1986 to 1994. Mr. Starling is a Certified
Public Accountant.
TOD B. MITCHELL, age 39, Senior Vice President - Operations Finance since
January 2000. Prior thereto, he served as Senior Vice President -
Medicare/Medicaid Reimbursements since October 1999 and as Vice President -
Medicare/Medicaid Reimbursements since 1996. From 1994 to 1996, he was the
Director of Medicare/Medicaid Reimbursements with Champion. Mr. Mitchell is a
Certified Public Accountant.
During 1999, the following executive officers resigned from the Company:
Charles R. Miller, President, Chief Operating Officer and director; Ronald R.
Patterson, Executive Vice President and President, Healthcare Operations; Ronald
L. Watson, Senior Vice President, Operations Finance and Systems Support; W.
Warren Wilkey, Senior Vice President, Operations; and Gary L. Chandler, Senior
Vice President, Managed Care, Networks and Strategic Development.
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<PAGE> 19
ITEM 2. PROPERTIES
The following table sets forth the name and location of facility, date of
acquisition and number of licensed beds for each of the hospitals operated by
the Company as of December 31, 1999. Unless otherwise indicated, all hospitals
are owned by the Company.
<TABLE>
<CAPTION>
DATE OF LICENSED
LICENSED FACILITY LOCATION ACQUISITION BEDS
----------------- -------- ----------- --------
<S> <C> <C> <C>
CALIFORNIA
Lancaster Community Hospital Lancaster 2/01/81 117
FLORIDA
Santa Rosa Medical Center (1) Milton 5/17/96 129
GEORGIA
Flint River Community Hospital (1) Montezuma 1/01/86 49
NORTH DAKOTA
Dakota Heartland Health System Fargo 8/16/96 218
TENNESSEE
Cumberland River Hospital Celina 10/01/85 36
Fentress County General Hospital Jamestown 10/01/85 85
TEXAS
BayCoast Medical Center Baytown 8/16/96 191
The Medical Center of Mesquite Mesquite 10/01/90 176
Westwood Medical Center Midland 8/16/96 107
VIRGINIA
Capitol Medical Center (2) Richmond 8/16/96 179
-----
Total Licensed Beds 1,287
=====
</TABLE>
- -------------------------
(1) Hospital facility is leased.
(2) The Company owns an 88.7% general partnership interest in a limited
partnership that owns the hospital.
The Company owns, leases or manages medical office buildings located
adjacent to certain of its hospitals. Most of the space in each medical office
building is leased or subleased, primarily to local physicians. The remaining
space is used by the Company for hospital administration and clinical purposes
or held for future development.
The Company leases its corporate offices in Houston, Texas. The Company
subleases to a third party its leased offices in Pasadena, California.
The Company believes that its existing facilities are adequate to carry on
its business as presently conducted.
ITEM 3. LEGAL PROCEEDINGS
SHAREHOLDER LITIGATION - The global settlement of the putative class and
derivative actions against the Company arising out of the Merger (collectively,
the "Shareholder Litigation") became effective in 1999. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Litigation," for a more comprehensive discussion of the terms of
the settlement.
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<PAGE> 20
OTHER LITIGATION - The Company is subject to claims and legal actions by
patients and others in the ordinary course of business. The Company believes
that all such claims and actions are either adequately covered by insurance or
will not have a material adverse effect on the Company's financial condition,
results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of stockholders on October 20, 1999, the
stockholders approved the election of Ms. Joan S. Fortune to serve as a Class
III director for a three-year term expiring at the 2002 annual meeting of
stockholders, with 50,732,691 votes "FOR" and 86,265 votes "WITHHELD." There
were 4,299,374 non-votes.
See Part III. Item 10 for the names and terms of office of all other
directors whose term continued after the meeting.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is trading on the New York Stock Exchange
("NYSE") under the symbol "PLS." At March 27, 2000, there were approximately
1,581 holders of record of the Company's common stock. The following table sets
forth the high and low sale prices per share of the Company's common stock for
the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
--------- -------
<S> <C> <C>
Fiscal Year Ended December 31, 1999
First Quarter ................... $ 1 9/16 $ 1
Second Quarter .................. 1 3/8 1
Third Quarter ................... 1 3/8 3/4
Fourth Quarter .................. 1 5/16 1/4
Fiscal Year Ended December 31, 1998
First Quarter ................... $ 4 13/16 $ 3
Second Quarter .................. 5 1/16 2 1/2
Third Quarter ................... 3 1/2 1 3/4
Fourth Quarter .................. 3 5/16 1 3/8
</TABLE>
The Company did not declare a cash dividend in 1999 and 1998 and does not
anticipate the payment of any cash dividends in the foreseeable future.
Restrictions imposed by the Company's existing debt obligations also limit the
ability of the Company to pay dividends.
Except as set forth below, the Company did not issue any unregistered
securities during 1999 and 1998. In connection with the settlement of the
Shareholder Litigation, the Company issued 1.5 million shares of common stock
for purposes of distribution to class members and 1.0 million shares of common
stock to terminate a service and advisory contract with a former chairman of the
Board of Directors. The securities issued were exempt from registration with the
U.S. Securities and Exchange Commission (the "SEC") pursuant to Section 3(a)(10)
of the Securities Act of 1933.
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The NYSE informed the Company that it remains below the NYSE's required
minimum share price of $1 over a 30 trading-day period. Based on the Company's
1999 Consolidated Financial Statements in this Form 10-K, the Company no longer
meets the NYSE minimum criteria for stockholders' equity of not less than $50
million. The Company is currently pursuing alternatives that include negotiating
with the Note holders to develop an alternative, sustainable capital structure
that it believes may enable the Company to regain compliance. There can be no
assurance that such actions will be successful or that the Company's common
stock will continue to be listed on a national securities exchange. If the
Company's securities are delisted, the delisting would have a material adverse
effect on the liquidity and trading price of the Company's securities.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data of the
Company and should be read in conjunction with the related Consolidated
Financial Statements and accompanying Notes to Consolidated Financial Statements
(See Item 8).
The 1999 Consolidated Financial Statements have been prepared on the basis
of accounting principles applicable to going concerns 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 uncertainties discussed herein.
The report of the Company's independent auditors, Ernst & Young, LLP, includes
an explanatory paragraph for a going concern uncertainty.
21
<PAGE> 22
<TABLE>
<CAPTION>
(IN 000'S, EXCEPT PER SHARE DATA AND RATIOS)
---------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net revenue ................................ $ 516,537 $ 664,058 $ 659,219 $ 493,106 $ 434,179
Operating expenses ......................... (474,108) (584,594) (587,559) (496,782) (399,019)
Capital costs (a) .......................... (89,830) (90,189) (77,551) (54,761) (31,719)
Equity in earnings of Dakota Heartland
Health System ........................... -- -- 9,794 3,207 --
Impairment charges (b) ..................... -- (1,417) (7,782) (72,322) --
Merger costs ............................... -- -- -- (40,804) --
Unusual items (c) .......................... (4,248) 6,637 6,531 (60,521) --
Gain on sale of facilities ................. 77,454 6,825 -- -- 9,026
Minority interests ......................... (54) (3,180) (1,996) (1,806) (1,803)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income
taxes and extraordinary loss ............ 25,751 (1,860) 656 (230,683) 10,664
Provision (benefit) for income taxes (d) ... 54,207 693 1,812 (76,186) 4,375
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before extraordinary loss .... (28,456) (2,553) (1,156) (154,497) 6,289
Loss from discontinued operations (d) ...... (1,019) (2,424) (5,243) (70,995) (2,852)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary loss .... (29,475) (4,977) (6,399) (225,492) 3,437
Extraordinary loss (d) (e) ................. (4,168) (1,175) -- (7,724) --
--------- --------- --------- --------- ---------
Net income (loss) .......................... $ (33,643) $ (6,152) $ (6,399) $(233,216) $ 3,437
========= ========= ========= ========= =========
Income (loss) per share - basic and
assuming dilution:
Continuing operations ................... $ (0.51) $ (0.05) $ (0.02) $ (3.94) $ 0.21
Net income (loss) ....................... $ (0.60) $ (0.11) $ (0.12) $ (5.95) $ 0.12
Weighted average common shares
outstanding (f) ......................... 55,957 55,108 54,946 39,213 29,772
BALANCE SHEET DATA
Cash and cash equivalents .................. $ 22,723 $ 11,944 $ 28,173 $ 17,771 $ 4,418
Working capital (deficit) .................. (309,157) 22,526 37,378 33,762 57,011
Total assets ............................... 437,058 716,102 734,824 772,832 333,386
Long-term debt (g) ......................... 3,685 533,048 491,914 491,057 130,352
Long-term debt in default classified as
current liabilities ..................... 335,445 -- -- -- --
Stockholders' equity ....................... 5,197 34,341 42,003 48,487 86,721
Book value per share ....................... 0.09 0.62 0.76 0.88 2.91
RATIOS
Adjusted EBITDA (h) ....................... $ 42,375 $ 76,284 $ 79,458 $ (2,275) $ 33,357
Adjusted EBITDA margin ..................... 8.2% 11.5% 12.1% (0.5)% 7.7%
Debt to total debt and equity .............. 98.5% 93.9% 92.1% 91.0% 60.0%
</TABLE>
- ----------------------------------
a) Includes interest, depreciation and amortization.
b) Consists of (i) a $1.4 million ($0.02 per share) write-down of certain
Tennessee facilities in 1998, (ii) a $7.8 million ($0.09 per share)
write-down of certain of the Company's Los Angeles Metropolitan hospitals
("LA Metro") in 1997 and (iii) in 1996, the write down of PHC Regional
Medical Center ("PHC Regional") for $52.5 million ($0.90 per share),
certain LA Metro hospitals
22
<PAGE> 23
for $11.9 million ($0.20 per share) and two other facilities and estimated
disposal costs of $7.9 million ($0.13 per share).
c) Consists in 1999 of (i) a $5.5 million corporate restructuring charge
($0.10 per share), (ii) a $2.2 million charge ($0.04 per share) associated
with the execution of an executive agreement (the "Executive Agreement"),
(iii) a $2.0 million charge ($0.04 per share) in the fourth quarter
associated with litigation expenses and the write down to net realizable
value of a note receivable and other assets, all of which were related to
sold facilities, offset by (iv) a $5.5 million gain ($0.10 per share) from
the settlement of the Shareholder Litigation. Unusual items in 1998 consist
of (i) a $7.5 million gain ($0.08 per share) from the settlement of a 1996
capitation agreement offset by (ii) a net charge of $863,000 ($0.01 per
share) resulting from the execution of the Executive Agreement, the
restructuring of certain home health operations, severances and the
settlement of a contract dispute and litigation. Unusual items in 1997
consist of (i) a reversal of a loss contract accrual of $15.5 million
($0.17 per share), (ii) a charge of $3.5 million ($0.03 per share) relating
to the closure of PHC Regional, (iii) a charge of $2.5 million ($0.03 per
share) for a corporate reorganization and (iv) a charge of $3.0 million
($0.04 per share) for the settlement of certain litigation. Unusual items
in 1996 consist of charges of $38.1 million ($0.65 per share) for a loss
contract and $22.4 million ($0.38 per share) for expenses relating to
certain investigation and other litigation matters.
d) The provision for income taxes in 1999 includes an increase in income tax
provision of $26.8 million ($0.48 per share) from the recording of a
valuation allowance, which offsets the Company's net deferred tax assets.
Of this amount, $24.7 million was applied to increase income tax provision
on income from continuing operations and $2.1 million was applied to
eliminate income tax benefits on losses from discontinued operations and an
extraordinary loss. The benefit for income taxes in 1996 includes a
reduction in income tax benefits of $50.0 million ($1.27 per share) from
the recording of a valuation allowance. Of this amount, $17.7 million was
applied to reduce income tax benefits on losses from continuing operations
and the remaining $32.3 million to reduce income tax benefits on losses
from discontinued operations and an extraordinary loss. As a result, no
income tax benefits have been recognized on the losses from discontinued
operations and the extraordinary losses recorded in 1999 and 1996.
e) Reflects loss associated with the early extinguishment of debt.
f) Reflects the effect of the 66,159,426-for-one stock split in conjunction
with the Merger.
g) Excludes long-term debt due within one year and long-term debt in default
classified as current liabilities.
h) Adjusted EBITDA represents income (loss) from continuing operations before
income taxes and extraordinary loss, depreciation and amortization,
interest, impairment charges, merger costs, unusual items and gain from
sale of facilities. While EBITDA is not a substitute for operating cash
flows determined in accordance with generally accepted accounting
principles, it is a commonly used tool for measuring a company's ability to
service debt. 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.
23
<PAGE> 24
SELECTED OPERATING STATISTICS
The following table sets forth selected operating statistics for the
Company's consolidated hospitals for the periods and dates indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
ACUTE CARE HOSPITALS(1):
Total number of hospitals ................... 10 16 23
Licensed beds at end of period .............. 1,287 1,916 2,337
Patient days ................................ 246,203 311,144 328,331
Inpatient admissions ........................ 53,655 65,746 69,997
Average length of stay (days) ............... 4.6 4.7 4.7
Outpatient visits (excluding home health) ... 572,593 689,192 658,806
Home health visits .......................... 274,758 503,944 870,930
Deliveries .................................. 7,652 9,602 9,728
Surgery cases ............................... 34,431 46,902 48,488
Occupancy rate .............................. 38.6% 35.8% 36.9%
Outpatient utilization (2) .................. 38.5% 37.6% 39.3%
PSYCHIATRIC HOSPITALS(3):
Total number of hospitals ................... -- -- 2
Licensed beds at end of period .............. -- -- 114
Patient days ................................ -- 4,099 19,554
Inpatient admissions ........................ -- 322 1,462
Average length of stay (days) ............... -- 12.7 13.4
Outpatient visits ........................... -- 4,736 16,998
Occupancy rate .............................. -- 25.0% 35.9%
Outpatient utilization (2) .................. -- 18.3% 15.8%
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes the sold facilities through their respective dates of disposition
and DHHS from January 1, 1998.
(2) Gross Outpatient Revenue as a percent of Total Gross Patient Revenue.
(3) Includes the LA Metro psychiatric facilities though disposition date.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The healthcare industry as a whole faces increasing uncertainty from
governmental and private industry efforts to reform healthcare delivery and
payment systems. As a result, the Company continues to experience significant
changes on several fronts, including 1) a general reduction of payment rates by
government and other payors, 2) an increasing shift in payor mix from
traditional Medicare/Medicaid and indemnity payors to managed care and 3)
increasing competition for patients and technological advances which require
increased capital investments. The Company has taken steps to address these
challenges, such as divesting of selected hospitals and certain unprofitable
businesses, implementing cost control measures on a hospital-by-hospital basis,
reducing the overall corporate cost structure, renegotiating payor contracts and
service arrangements, actively recruiting physicians and expanding facilities
and services in selected markets. The Company also actively monitors and
analyzes the potential impact of proposed healthcare legislation to formulate
its business strategies. However, the
24
<PAGE> 25
Company cannot predict whether new healthcare legislation will be passed at the
Federal or state level and what resulting response the Company may take.
The Consolidated Financial Statements in Item 8 set forth certain data with
respect to the financial position, results of operations and cash flows of the
Company and should be read in conjunction with the following discussion and
analysis.
The 1999 Consolidated Financial Statements have been prepared on the basis
of accounting principles applicable to going concerns 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 uncertainties discussed herein.
The report of the Company's independent auditors, Ernst & Young, LLP, includes
an explanatory paragraph for a going concern uncertainty.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K are "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve a number of risks and
uncertainties. 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 continued listing of the Company's common stock on the New York
Stock Exchange;
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 Company's ability to consummate acceptable financing arrangements,
under reasonable terms, to replace its existing interim facility and
off-balance sheet receivable financing agreement; and
o The possibility that the Company may be forced to file for protection
under Chapter 11 of the Federal Bankruptcy Code or that its creditors
could file an involuntary petition seeking to place the Company in
bankruptcy.
The Company is generally not required to, and does not undertake to, update
or revise its forward-looking statements.
25
<PAGE> 26
ISSUES AFFECTING LIQUIDITY
The Company incurred significant operating losses in 1999 and had a
working capital deficit at December 31, 1999. These matters and certain
developments described below have raised substantial doubt as to the Company's
ability to continue as a going concern.
On February 15, 2000, the Company did not make the interest payment of
approximately $16.3 million 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. The Notes represent unsecured obligations of PHC and are not
guaranteed by any of the Company's subsidiaries; accordingly, the Note holders
have no direct claim on the assets of any of the Company's hospital operating
subsidiaries. Given the Company's financial condition and liquidity, the Company
cannot repay in full its obligations under the Notes, nor does the Company have
access to equity sources or other commitments necessary to refinance or
otherwise satisfy in full its obligations under the Notes. The Company is
currently engaged in negotiations with the Note holders to develop an
alternative, sustainable capital structure for the Company.
The Company has retained an investment banking firm and legal counsel
to review its strategic alternatives. Considering the Company's limited
financial resources, there can be no assurance that the Company will succeed in
formulating an alternative capital structure acceptable to the Note holders, in
which case the Note holders are entitled, at their discretion, to accelerate all
principal and interest due on the Notes. Either as a result of negotiations with
the Note holders--or if such negotiations fail--the Company could file for
protection under Chapter 11 of the Bankruptcy Code or be subject to an
involuntary petition. A reorganization would likely result in a significant
dilution of the ownership interest of the existing holders of the Company's
common stock. There can be no assurance that a bankruptcy proceeding would
result in a reorganization of the Company rather than a liquidation. 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
distribution to the Company's creditors and/or the holders of the Company'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 are guarantors 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 Consolidated Balance Sheet at
December 31, 1999, which has resulted in a working capital deficit of $309.2
million. The 1999 Consolidated Financial Statements included in Item 8 have been
prepared assuming the Company will continue as a going concern and do not
include further adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of the uncertainties described
above.
As the result of the default of interest payment on the Notes, the Company
is also in default with certain provisions under the Commercial Paper program
(see Item 8. Note 9) under which a wholly-owned subsidiary of the Company has
sold $32.3 million of eligible receivables as of March 27, 2000. As a result of
this default, the subsidiary is unable to sell additional receivables under the
Commercial Paper program. On March 30, 2000, the Company received a $62.0
million commitment under the New Facility from a lending group which will
replace the Company's Commercial Paper program and existing letters of credit
outstanding. The Company anticipates that the outstanding letters of credit will
be
26
<PAGE> 27
secured by cash collateral held by the lenders. The New Facility will be used
primarily to fund normal working capital of the Company's hospitals. The New
Facility will be an obligation of certain of the Company's subsidiaries and will
be secured by all patient accounts receivable of the Company's hospitals and a
first lien on two of its hospitals. Accordingly, the New Facility will not be an
obligation of PHC. The lender under the Company's current Commercial Paper
program has agreed to extend the program until April 17, 2000 while the Company
and the proposed lenders under the New Facility complete due diligence and
documentation necessary for the New Facility. There can be no assurance that the
Company will ultimately consummate the New Facility.
The Company is in a highly leveraged financial position. Should the Company
fail to consummate the New Facility, the Company would have no available credit
lines and therefore would be required to finance its cash needs from operations.
Furthermore, in the event the Commercial Paper program is not extended beyond
April 17, 2000, a wind down of the program would commence with the Company's
current lender retaining a significant portion of the Company's operating cash
flows until all amounts outstanding under the Commercial Paper program are
repaid in full. In the event of a wind down, operating cash flows would likely
be insufficient to meet the Company's operational and capital expenditure needs.
On October 12, 1999, the Company repaid all borrowings outstanding under
its senior credit facilities of $223.5 million in conjunction with the sale of
the Utah Facilities. Prior to repayment, the senior credit facilities provided
total commitments of $255.0 million (see Item 8. Note 7). Concurrent with the
repayment, most of the commitments under the facilities were permanently
cancelled. The Company entered into an interim financing arrangement with one of
its original bank lenders, which has reduced its original commitment under the
senior bank credit agreement to $11.6 million. As of March 27, 2000, the Company
had $11.6 million in outstanding letters of credit under its interim credit
facility, all of which were fully secured by cash collateral held by the bank,
and no outstanding borrowings. As the result of the default of interest payment
on the Notes, the Company is also in default under its interim credit facility.
The NYSE informed the Company that it remains below the NYSE's required
minimum share price of $1 over a 30 trading-day period. Based on the Company's
1999 Consolidated Financial Statements in this Form 10-K, the Company no longer
meets the NYSE minimum criteria for stockholders' equity of not less than $50
million. The Company is currently pursuing alternatives that include negotiating
with the Note holders to develop an alternative, sustainable capital structure
that it believes may enable the Company to regain compliance. There can be no
assurance that such actions will be successful or that the Company's common
stock will continue to be listed on a national securities exchange. If the
Company's securities are delisted, the delisting would have a material adverse
effect on the liquidity and trading price of the Company's securities.
RESULTS OF OPERATIONS
The Company previously segregated its hospitals into two operating
segments: Core Markets and Non Core Markets. The Company designated certain
hospitals as "Core Facilities" with the goal of expanding and further
integrating the hospitals' presence in their respective markets. As the
designation implies, the Core Facilities comprised the operational and financial
core of the Company's business. "Non Core" Markets consisted of all other
hospital operations owned by the Company, which were being evaluated for
possible disposition. This designation was made in conjunction with the
Company's efforts to reduce its debt through the disposition of certain
hospitals, an objective that was largely accomplished with the disposition of
the Utah operations in the fourth quarter of 1999 and the resulting repayment of
all borrowings outstanding under the Company's senior credit facility.
Accordingly, the Company ceased making the Core and Non Core distinction for its
reportable segments.
27
<PAGE> 28
The comparison of operating results to prior years is difficult given the
numbers of divestitures, closures and acquisition by the Company in the affected
periods. "Same Hospitals" as used in the following discussion, where
appropriate, consist of acute care hospitals owned throughout both periods for
which comparative operating results are presented.
OPERATIONS DATA
The following table summarizes, for the periods indicated, changes in
selected operating percentages for the Company's facilities. The discussion that
follows should be read in conjunction with the Company's Consolidated Financial
Statements and the notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Percentage of Net Revenue
Net revenue ....................................... 100.0% 100.0% 100.0%
----- ----- -----
Salaries and benefits ............................. (42.4) (41.6) (41.2)
Other operating expenses .......................... (41.3) (40.0) (40.8)
Provision for bad debts ........................... (8.1) (6.4) (7.1)
----- ----- -----
Operating costs ................................... (91.8) (88.0) (89.1)
----- ----- -----
Operating margin .................................. 8.2 12.0 10.9
Capital costs (a) ................................. (17.4) (13.6) (11.8)
Equity in earnings of DHHS ........................ -- -- 1.5
Impairment charges ................................ -- (0.2) (1.2)
Unusual items ..................................... (0.8) 1.0 1.0
Gain on sale of facilities ........................ 15.0 1.0 --
Minority interests ................................ -- (0.5) (0.3)
----- ----- -----
Income (loss) from continuing operations before
Income taxes and extraordinary loss ........... 5.0% (0.3)% 0.1%
===== ===== =====
</TABLE>
- --------------------
(a) Includes interest, depreciation and amortization.
YEAR ENDED DECEMBER 31, 1999
COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Net revenue for year ended December 31, 1999, was $516.6 million, a
decrease of $147.5 million, or 22.2%, from $664.1 million for the same period in
1998. The decline in net revenue is largely due to the sale of eight acute care
hospitals in 1998 and the sale of Bledsoe, the Convalescent Hospitals, Senatobia
and the Utah Facilities in 1999.
Net revenue at "Same Hospitals" decreased by $8.4 million, or 2.3%, to
$357.6 million for the year ended December 31, 1999, compared to $366.0 million
in 1998. This decrease resulted primarily from an $8.0 million charge to net
revenue in the fourth quarter to revise estimates of amounts due to the Company
from managed care payors ($7.0 million) and from the Medicare/Medicaid programs
($1.0 million). The increase in managed care allowances reflects the impact of
increased managed care penetration at several of the Company's hospitals, the
effect of the increasing discounted fee structures demanded by the managed care
payors and the improvement in information available which has allowed
28
<PAGE> 29
the Company's to better estimate amounts due under managed care contracts. In
response, management is currently reviewing all material managed care contracts
and when permitted, either renegotiating or canceling contracts it deems
unfavorable to the Company. The Company is also installing information systems
at certain of it hospitals to improve management's ability to ensure that
billing and collection practices accurately reflect negotiated rates. The trend
of payors shifting to managed care plans has and may continue to adversely
affect the Company's ability to grow net operating revenue and improve operating
margins.
The Company's "Same Hospitals" experienced a 3.1% increase in inpatient
admissions from 37,288 in the year ended December 31, 1998 to 38,435 in the
comparable period in 1999. Same Hospital patient days increased 0.7% from
188,889 in 1998 to 190,117 in 1999. The increase in admissions and patient days
resulted from (i) an increase in the number of physicians and services at
several of the Company's hospitals and (ii) increased volume generated from
certain hospital benchmarking and service awareness programs implemented in
1998. Excluding home health visits, outpatient visits at "Same Hospitals"
declined 2.9% from 316,397 in 1998 to 307,314 in 1999 due primarily to the
consolidation and/or selective reduction of services at certain hospitals. Home
health visits in "Same Hospitals" decreased 29.6% from 370,223 in 1998 to
260,689 in 1999 primarily due to the 1998 closure or sale of home health
operations in response to the 1997 Budget Act.
Operating expenses (salaries and benefits, other operating expenses and
provision for bad debts), expressed as a percentage of net revenue, were 91.8%
of net revenue in 1999 and 88.0% in 1998, and operating margins were 8.2% and
12.0%, respectively. Operating expenses in 1998 were favorably impacted by a
$5.5 million reduction in general and medical professional liability costs.
Additionally, operating expenses in 1999 were unfavorably impacted by a $2.9
million increase in bad debt expense at the Company's Same Hospitals, as
discussed below, and a $4.7 million increase in workers compensation reserves.
The fourth quarter charge for workers compensation was the result of revised
actuarial estimates, which were negatively impacted by unfavorable claims
experience. Substantially all of this charge related to prior years and
approximately half of this charge was incurred at the sold/closed facilities.
The aforementioned factors ($2.3 million of the workers compensation charge
and all of the increase in bad debt expense) contributed to the decline in Same
Hospitals operating margins. Operating expenses at the Company's Same Hospitals
were 87.2% of net revenue in 1999 as compared to 84.2% in 1998, and operating
margins were 12.8% and 15.8%, respectively. The Company believes that the
increase in bad debt expense resulted from (i) the shift in payor mix from
traditional Medicare and indemnity healthcare coverage, which has minimal bad
debts, to managed care, (ii) a general trend in payment delays and
denial of claims by managed care payors, which increased the allowance for
doubtful accounts, (iii) the residual effect of the computer system conversion
at certain facilities in the early part of the year and (iv) business office
turnover at certain facilities. While the Company is unable to predict whether
the current trend in bad debt expense will continue, the Company has undertaken
a number of actions to mitigate the increase in bad debts. These actions include
strengthening hospital business office operations, pursuing litigation on past
due accounts, particularly with respect to certain managed care payors, and
modifying admittance policies at selected hospitals.
Interest expense decreased $1.6 million from $51.8 million in 1998 to $50.2
million in 1999, due to the repayment of all amounts outstanding under the
senior credit facilities in October 1999, offset by increased borrowings under
such facilities during the year. The increased borrowings were used primarily to
fund facility expansion, Year 2000 expenditures and working capital.
Depreciation and amortization expense increased $1.3 million from $38.3
million in 1998 to $39.6 million in 1999, primarily due to the acquisition of
DHHS on July 1, 1998 and additions to property and equipment. This increase was
partially offset by a decrease in depreciation and amortization from facilities
sold in 1999.
29
<PAGE> 30
Income before income taxes, discontinued operations and extraordinary
charge was $25.8 million for the year ended December 31, 1999 and included a net
gain on sale of facilities of $77.5 million and a net unusual charge of $4.2
million. The gain on sale of facilities resulted from the sale of the Utah
Facilities, Senatobia and the Convalescent Hospitals, which was partially offset
by a loss from the final working capital adjustment and prepayment discount on
notes receivable related to the sale in 1998 of LA Metro (see Item 8. Note 4).
The net unusual charge, as more fully discussed in Item 8. Note 3, consisted of
(i) a $5.5 million corporate restructuring charge relating to employee
termination costs, service contract cancellation and the write-down of certain
deferred costs, leasehold improvements and redundant equipment, (ii) a $2.2
million charge associated with the execution of the Executive Agreement, (iii) a
$2.0 million charge in the fourth quarter associated with litigation expenses
and the write down to net realizable value of a note receivable and other
assets, all of which were related to sold facilities, offset by (iv) a $5.5
million gain from the settlement of the Shareholder Litigation.
Loss before income taxes, discontinued operations and extraordinary charge
for the year ended December 31, 1998, was $1.9 million and reflected (i) an
impairment charge of $1.4 million to write down certain long lived assets to
fair value, (ii) minority interest of $4.1 million, attributable to DHHS offset
by (iii) a net unusual gain of $6.6 million primarily from the settlement of a
capitation contract ($7.5 million) partially offset by net charges from the
execution of the Executive Agreement, the restructuring of home health
operations, severances and settlement of litigation ($863,000) and (iv) a net
gain of $6.8 million on sale of facilities.
The Company recorded an income tax provision for income from continuing
operations of $54.2 million in 1999 and $693,000 in 1998. The total provision
for income taxes in 1999 includes an increase in income tax provision of $26.8
million from the recording of additional valuation allowance to reserve all
remaining net deferred tax assets as of December 31, 1999. See more discussion
in "Valuation Allowance on Deferred Tax Assets." Of the $26.8 million, $24.7
million was applied to increase the income tax provision on income from
continuing operations and $2.1 million was applied to eliminate income tax
benefits on losses from discontinued operations and an extraordinary loss. As a
result, no income tax benefits have been recognized on the losses from
discontinued operations and the extraordinary loss recorded in 1999. The income
tax provision in 1999 differed from the statutory rate due to (i) the
aforementioned increase in the valuation allowance (ii) nondeductible goodwill
associated with the sale of the Utah Facilities, (iii) nondeductible expenses
from the settlement of Shareholder Litigation and from goodwill amortization,
which were partially offset by (iv) a non-taxable gain related to the execution
of the Executive Agreement. Income tax expense in 1998 differed from the
statutory rate due to nondeductible goodwill amortization and expenses related
to the Shareholder Litigation, partially offset by a decrease in valuation
allowance.
In 1999, the Company recorded a loss from discontinued operations of $1.0
million (no tax benefits), or $0.02 per share, resulting from certain Medicare
contractual adjustments related to the discontinued psychiatric operations sold
in 1998. In 1998, the Company recorded a loss from discontinued operations of
$2.4 million (net of tax of $1.7 million), or $0.04 per share, to reflect the
settlement of litigation concerning alleged violations of certain Medicare
rules.
Net loss was $33.6 million, or $0.60 per diluted share, in 1999, compared
to $6.2 million, or $0.11 per diluted share, in 1998. Net loss included an
extraordinary charge for the write-off of deferred loan costs of $4.2 million
(no tax benefits), or $0.07 per share, in 1999 and $1.2 million (net of tax
benefits of $816,000), or $0.02 per share, in 1998, relating to the early
extinguishment of debt in those respective years. Weighted average common and
common equivalent shares outstanding were 56.0 million and 55.1 million in 1999
and 1998, respectively. The increase in common and common equivalent shares
reflects the weighted average effect of shares of common stock issued in
connection with the settlement of the Shareholder Litigation.
30
<PAGE> 31
YEAR ENDED DECEMBER 31, 1998
COMPARED WITH YEAR ENDED DECEMBER 31, 1997
The "Same Hospitals" designation used in the following discussion includes
all hospitals owned and operated by the Company as of December 31, 1998, for
which full year comparative results are included the Company's 1998 and 1997
Consolidated Statements of Operations. Some of these hospitals were subsequently
sold in 1999. Consequently, the following Same Hospital discussion does not
necessarily reflect amounts reported in Item 8. Note 13 - Operating Segments.
Net revenue for the year ended December 31, 1998, was $664.0 million, an
increase of $4.8 million, or 0.7%, from $659.2 million for the same period of
1997. As the result of the acquisition of DHHS, 1998 net revenue included DHHS
for the twelve months ended December 31, 1998. DHHS was accounted for under the
equity method for the year ended December 31, 1997. Net revenue for 1998
increased $103.7 million from the acquisition of DHHS and was offset by a $48.5
million decrease in net revenue primarily attributable to the dispositions of
the two hospitals located in Chico, California (the "Chico Hospitals"), the LA
Metro Hospitals and the closure of PHC Regional. The remaining decline in net
revenue occurred at the Company's Same Hospitals, as discussed below.
Net revenue at Same Hospitals for the year ended December 31, 1998 was
$472.8 million compared to $523.2 million in 1997, a decrease of $50.4 million,
or 9.6%. The decrease in net revenue at the Company's Same Hospitals is due to
(i) a decline in utilization and reimbursement rates for home health and other
healthcare operations as a consequence of the 1997 Budget Act, (ii) the
restructuring of home health operations at certain of the Company's hospitals in
1998, including in some cases the closing of such operations, (iii) an overall
decline in volume at the hospitals and (iv) continued tightening of payment
levels by managed care plans.
The Company's Same Hospitals experienced a 6.1% decrease in inpatient
admissions from 52,060 in 1997 to 48,903 in 1998. Same Hospital patient days
decreased 7.4% from 233,011 in 1997 to 215,786 in 1998. The decline in volumes
was principally related to the termination of unfavorable managed care
contracts, the closure of skilled nursing units in response to revenue
reductions under the 1997 Budget Act and an overall decline in volumes from the
deterioration of the home health operations. Excluding home health visits,
outpatient visits in Same Hospitals increased 2.8% from 565,369 in 1997 to
581,142 in 1998. Home health visits in Same Hospitals decreased 45.7% from
866,604 in 1997 to 470,595 in 1998 primarily due to stricter utilization
standards under the 1997 Budget Act effective October 1, 1997, and the closure
of home health operations at certain facilities.
Operating expenses (salaries and benefits, other operating expenses and
provision for bad debts) decreased $3.0 million from $587.6 million in 1997 to
$584.6 million in 1998. The year ended December 31, 1998, included DHHS
operating expenses of $80.3 million, which was offset by a $51.9 million
decrease from closed/sold facilities and a $5.5 million reduction in general and
medical professional liability costs as a result of revisions of actuarial
estimates based on improvement in claim settlement experience. The balance of
the reduction in operating expenses occurred primarily at the Company's Same
Hospitals as a result of management's effort to reduce costs in response to
reductions in net revenue.
Operating expenses at the Company's Same Hospitals increased from 83.5% of
net revenue in 1997 to 86.0% in 1998, and operating margins decreased from 16.5%
to 14.0%, respectively. The deterioration in operating margins occurred
primarily as a result of the aforementioned stricter utilization standards and
reductions in reimbursement rates under the 1997 Budget Act. Although the 1997
Budget
31
<PAGE> 32
Act became effective October 1, 1997, certain key provisions of the Act were not
finalized until the latter part of 1998, particularly with respect to the
Company's home health operations; and in response, the Company undertook a
series of strategic actions in the fourth quarter of 1998 to lower its cost
structure. These actions, which included a combination of staff and wage
reductions and other cost cutting measures, did not keep pace with declines in
net revenue.
Interest expense increased $4.5 million from $47.4 million in 1997 to $51.9
million in 1998, primarily due to a net increase in outstanding indebtedness
under the senior credit facilities resulting from the acquisition of DHHS, net
of proceeds from the dispositions of the LA Metro and the Chico Hospitals.
Additionally, approximately $2.7 million of interest expense incurred in 1997,
which related to borrowings to finance the acquisition of PHC Regional, was
charged to the loss contract accrual previously established at December 31,
1996. Accordingly, such amount was not reflected as interest expense in the 1997
Consolidated Statement of Operations.
Depreciation and amortization expense increased $8.1 million to $38.3
million in 1998 from $30.2 million for the same period in 1997. An increase of
$5.9 million in depreciation and amortization expense resulted from the
acquisition of DHHS, which was accounted for under the equity method of
accounting in 1997. The remainder of the increase is primarily related to
current year additions to property and equipment.
Loss before income taxes, discontinued operations and extraordinary charge
for the year ended December 31, 1998 was $1.9 million and included $12.1
million, net of minority interest of $4.1 million, attributable to income from
DHHS on a consolidated basis. Loss before income taxes, discontinued operations
and extraordinary charge also included (i) an impairment charge of $1.4 million
to write down certain long lived assets to fair value offset by (ii) $6.6
million of unusual items (including a $7.5 million gain from the settlement of a
capitation contract dispute offset by a net charge of $863,000 resulting from
the execution of the Executive Agreement, the restructuring of certain home
health operations, severances and the settlement of a contract dispute and
litigation) and (iii) a net gain of $6.8 million on sale of facilities.
Income before income taxes and discontinued operations in 1997 was $656,000
and included (i) equity in earnings of DHHS of $9.8 million, (ii) a net unusual
gain of $6.5 million from the reversal of $15.5 million related to a loss
contract accrual offset by charges, which totaled $9.0 million relating to
hospital closure, corporate reorganization and settlement of litigation and
(iii) impairment charges of $7.8 million relating to the LA Metro hospitals.
The Company recorded income tax expense of $693,000 on pre-tax loss of $1.9
million in 1998 and income tax expense of $1.8 million on pre-tax income of
$656,000 in 1997. Income tax expense in 1998 differed from the U.S. statutory
rate due to goodwill and nondeductible costs related to the Shareholder
Litigation. These increases in the income tax provision were partially offset by
the decrease in valuation allowance. Income tax expense in 1997 differed from
the U.S. statutory rate due to nondeductible goodwill amortization.
The Company recorded a loss from discontinued operations of $2.4 million
(net of tax benefit of $1.7 million), or $0.04 per diluted share, in 1998 to
reflect the settlement of the 1995 litigation concerning alleged violations of
certain Medicare rules. The claims related substantially to the LA Metro
psychiatric facilities, which have been reported as discontinued operations
since September 1996.
During 1997, the Company recorded a loss on disposal of the discontinued
psychiatric facilities of $5.2 million (net of tax benefits of $3.7 million),
which consisted of an impairment charge of $1.9
32
<PAGE> 33
million to reduce the psychiatric hospital assets to their estimated net
realizable value and a charge of $3.3 million relating to outstanding litigation
matters.
Net loss for the year ended December 31, 1998 was $6.2 million, or $0.11
per diluted share, compared to net loss of $6.4 million, or $0.12 per diluted
share, for the same period of 1997. Weighted average common and common
equivalent shares outstanding increased from 54.9 million in 1997 to 55.1
million in 1998 due to the 1998 exercise of stock options and warrants.
LIQUIDITY AND CAPITAL RESOURCES
The introductory information to this Item as set forth in "Issues Affecting
Liquidity" discusses the important issues affecting the Company's liquidity and
capital resources.
Net cash used in operating activities for the year ended December 31, 1999
was $43.5 million, compared to $5.3 million for the same period in 1998. The
$38.2 million increase in cash used in operating activities resulted from (i)
the pay down of the Commercial Paper program related to the sale of the Utah
Facilities, (ii) cash collateral used to secure letters of credit outstanding
under the interim credit facility, (iii) payments made in connection with the
Executive Agreement, (iv) payments made to third-party intermediaries for
amounts due under the Medicare/Medicaid programs and (v) 1999 losses from
operations. Net cash provided from investing activities was $253.3 million
during 1999, as compared to net cash used in investing activities of $50.3
million during 1998. The $303.6 million increase was primarily attributable to
net cash received from the disposition of hospitals in 1999 of $282.1 million
compared to net cash expenditures of $21.1 million in 1998 from the acquisition
of DHHS net of proceeds from the disposition of hospitals. Net cash used in
financing activities during 1999 was $199.1 million, compared to net cash
provided by financing activities of $39.4 million during 1998. This decrease was
due primarily from the repayment in 1999 of all amounts outstanding under the
senior credit facilities.
In connection with the sale of the Utah Facilities, Senatobia, the
Convalescent Hospitals and Bledsoe, the Company reduced its long-term debt by
$228.5 million, which included the repayment of all indebtedness under the
senior credit facilities of $225.5 million and the assumption of $3.0 million of
hospital debt assumed by a purchaser of the hospitals. The Company further
reduced amounts of eligible receivables sold under the Commercial Paper program
by $12.8 million with the net proceeds from the divestitures and eliminated
approximately $7.8 million in annual facility lease commitments.
On November 25, 1998, the Company and its former senior executives, Mr.
Miller, Mr. VanDevender and Mr. Patterson (the "Senior Executives") executed the
Executive Agreement superseding their existing employment contracts and certain
other stock option and retirement agreements with the Company. Pursuant to the
Executive Agreement, the Company paid the Senior Executives $4.6 million in
April 1999. See Item 8. Note 15 for more discussion on the effect of the
Executive Agreement on the Company's financial condition and results of
operations.
Capital expenditures during the last three years were financed primarily
through additional borrowings and internally generated funds. Due to the
liquidity issues previously discussed, there can be no assurance that the
Company will have sufficient resources to finance its capital expenditure
program in 2000.
33
<PAGE> 34
YEAR 2000 COMPLIANCE
The Company had implemented its plan to address possible exposures related
to the impact of Year 2000 computer issues on its computer systems, its
equipment and third parties with which the Company's systems interface. Since
entering the year 2000 and passing the February leap year date, the Company has
not experienced any significant adverse consequences from disruptions to its
business nor is it aware of any significant Year 2000-related disruptions
impacting its third party payors or vendors. The Company will continue to
monitor its patient care and operation critical systems over the next several
months but does not anticipate any significant impacts due to Year 2000
exposures from its internal systems as well as from third parties. The Company's
total cost for addressing all Year 2000 issues was approximately $8.0 million,
which included approximately $6.5 million of capital expenditures related to
replacement systems and $1.5 million of expenses.
LITIGATION
SHAREHOLDER LITIGATION - In 1999, the global settlement of the Shareholder
Litigation became effective. The following discussion is limited to the material
terms of the settlement. More comprehensive discussions of the global settlement
were made in the Company's previously filed 1998 Form 10-K and 1999 Form 10-Q's.
In accordance with the terms of the global settlement, the Company paid
$14.0 million, which was funded from insurance proceeds, to the class settlement
fund for distribution to class members and issued 1.5 million shares of common
stock for purposes of distribution to class members. Park Hospital GmbH (the
"Former Majority Shareholder") also transferred 8.7 million shares of the
Company's common stock to certain former Champion shareholders and 1.2 million
shares of the Company's common stock for purposes of distribution to class
members. In addition, the Company made a payment of $1.0 million in cash and
issued 1.0 million shares of common stock to terminate a contract with Dr.
Manfred G. Krukemeyer, who is the ultimate legal owner of the Former Majority
Shareholder and a former Chairman of the Board of Directors of the Company (the
"Former Chairman").
The settlement reduced the Company's existing and future obligations to
certain former officers and directors and terminated options to purchase
approximately 1.3 million shares of the Company's common stock at $0.01 per
share ("Value Options") granted in connection with the Merger. The settlement
modified the Executive Agreement with the Company's three former senior
executives (Mr. Charles R. Miller, Mr. James G. VanDevender, and Mr. Ronald R.
Patterson) and following the completion of such agreement in June 1999, Mr.
Miller and Mr. Patterson resigned from the Company. Mr. VanDevender served as
interim CEO effective July 1, 1999 until his resignation on February 29, 2000.
The settlement also gave the Former Majority Shareholder and the former
Champion shareholders, who could be deemed to be acting as a group under Section
13 (d) of the Securities Exchange Act of 1934, each the right to designate three
members of the Company's Board of Directors. In connection with the settlement,
the Company entered into a new shareholder agreement containing provisions
governing restrictions on the Former Majority Shareholder's transfer of shares,
limiting the Former Majority Shareholder's response to acquisition proposals,
governing the composition of the Board of Directors and outlining the Former
Majority Shareholder's registration rights with respect to its shares.
Concurrently, the Company terminated a previously existing shareholder
protection rights agreement, an anti-takeover device, and the shareholder
agreement adopted at the time of the Merger.
34
<PAGE> 35
As the result of the settlement, the Company, all class members, the
derivative plaintiffs, the separately represented former Champion shareholders,
the Former Majority Shareholder, the underwriter, and the affected current and
former officers and directors provided mutual releases of all claims arising out
of or related to the Merger and the related public offerings. All pending
actions against all released parties were dismissed. Additionally, the Company,
the separately represented Champion shareholders, and the members of the class
have agreed to assign any claims they have against the Company's independent
auditors to the Former Majority Shareholder. The settlement requires the Company
to indemnify current and former officers and directors, the Former Majority
Shareholder, and certain separately represented former Champion shareholders
against (i) liability, costs and expenses arising from any Merger-related claims
brought by current or former Company security holders who are not parties to the
settlement or members of a class certified for settlement purposes and (ii)
reasonable costs and expenses, excluding monetary sanctions, incurred in
connection with any ongoing or future governmental investigation relating to the
Merger and public offerings.
OTHER LITIGATION - The Company is subject to claims and legal actions by
patients and others in the ordinary course of business. The Company believes
that all such claims and actions are either adequately covered by insurance or
will not have a material adverse effect on the Company's financial condition,
results of operations or liquidity.
VALUATION ALLOWANCE ON DEFERRED TAX ASSETS
The Company considers prudent and feasible tax planning strategies in
assessing the need for a valuation allowance. As of December 31, 1998, the
Company recorded a valuation allowance of $48.2 million based on its previously
existing tax strategies, which assumed the utilization of net operating loss
carryforwards to reduce estimated taxable gains generated from the sale of
selected hospitals and no benefit related to future taxable income. The
Company's tax planning strategies assumed proceeds from divestitures based on
previously existing market conditions. As of December 31, 1999, a valuation
allowance for the full amount of the net deferred tax asset was recorded due to
issues affecting liquidity and related uncertainties discussed herein, which, if
unfavorably resolved, will adversely affect the Company's future operations on a
continuing basis. In the event that the Company is forced to file for protection
under Chapter 11 of the Bankruptcy Code, the realization of the tax assets may
be substantially and permanently impaired. The future realization of the
deductible temporary differences and net operating loss carryforwards depends,
among other things, on the Company's ability to develop and consummate an
acceptable and sustainable financial structure and the existence of sufficient
taxable income within the carryforward period.
At December 31, 1999, the Company had net operating loss carryforwards of
$136.7 million for U.S. Federal income tax purposes that will expire in varying
amounts from 2010 to 2013, if not utilized. Additionally, U.S. Federal income
tax law limits a corporation's ability to utilize net operating losses if it
experiences an ownership change of greater than 50% over a three-year period. In
the event of such a future ownership change, the Company's net operating loss
carryforward may be subject to an annual limitation on its use.
INDUSTRY OUTLOOK
The general hospital industry in the United States and the Company's
hospitals continue to have significant unused capacity, and thus there is
substantial competition for patients. Inpatient utilization continues to be
negatively affected by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative healthcare delivery services for
less acutely ill patients. Increased competition, admission constraints and
payor pressure are expected to continue.
35
<PAGE> 36
The ongoing challenge facing the Company and the healthcare industry as a
whole is to continue to provide quality patient care in an environment of rising
costs, strong competition for patients and a general reduction of reimbursement
rates by both private and government payors. Because of national, state and
private industry efforts to reform healthcare delivery and payment systems, the
healthcare industry as a whole faces increased uncertainty. The Company is
unable to predict whether any new healthcare legislation at the federal and/or
state level will be passed in the future and what action it may take in response
to such legislation, but it continues to monitor all proposed legislation and
analyze its potential impact in order to formulate the Company's future business
strategies.
OTHER REGULATORY MATTER
On March 9, 1998, the SEC entered a formal order authorizing a private
investigation, In re Paracelsus Healthcare Corp., FW-2067. Pursuant to the
formal order, the staff of the SEC's Fort Worth District Office is investigating
the accounting and financial reporting issues that were the subject of the
internal inquiry described in the Company's 1996 Form 10-K filed in April 1997.
The Company is cooperating with the staff of the SEC.
IMPACT OF INFLATION
The healthcare industry is labor intensive. Wages and other expenses
increase during periods of inflation and when shortages of qualified personnel
in the marketplace occur. The Company has attempted to abate increases in other
operating costs by increasing charges, expanding services and implementing cost
control measures to curb increases in operating costs. The Company's ability to
increase prices is limited by various Federal and state laws that establish
payment limitations for hospital services rendered to Medicare and Medicaid
patients and by other factors. The Company's ability to increase prices may also
be affected by its need to remain competitive. There can be no assurance that
the Company will be able to continue to offset such future cost increases.
RECENT PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), which will require companies to recognize
all derivatives on the balance sheet at fair value. In July 1999, the FASB
issued Statement of Financial Accounting Standards No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, which requires the adoption of SFAS 133 in fiscal
years beginning after June 15, 2000. The Company expects SFAS No. 133 to have no
material impact on the Company's financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's only exposure to market risk is changes in the general level
of U.S. interest rates. All of the Company's debt obligations of approximately
$339.8 million as of December 31, 1999 (see Item 8. Notes 7 and 10), had fixed
interest rates ranging from 6.51% to 10.5% and accordingly have no earnings
exposure to changes in 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.
36
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Paracelsus Healthcare Corporation Consolidated Financial Statements:
Report of Independent Auditors..................................................................... 39
Consolidated Balance Sheets - December 31, 1999 and 1998........................................... 40
Consolidated Statements of Operations - for the years ended December 31, 1999, 1998
And 1997...................................................................................... 42
Consolidated Statements of Stockholders' Equity - for the years ended December 31,
1999, 1998 and 1997........................................................................... 43
Consolidated Statements of Cash Flows - for the years ended December 31, 1999,
1998 and 1997................................................................................. 44
Notes to Consolidated Financial Statements......................................................... 46
</TABLE>
37
<PAGE> 38
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Paracelsus Healthcare Corporation
We have audited the accompanying consolidated balance sheets of Paracelsus
Healthcare Corporation as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the index at Item 14(a)(2).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Paracelsus
Healthcare Corporation at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully described in
Note 2 to the consolidated financial statements, the Company incurred
significant operating losses in 1999 and had a working capital deficiency at
December 31, 1999. In addition, the Company is in default under its senior
subordinated indenture agreement and certain other financing agreements. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. (Management's plans in regard to these matters are also described
in Note 2.) The consolidated financial statements do not include adjustments, if
any, to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Houston, Texas
March 30, 2000
38
<PAGE> 39
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in 000's)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 22,723 $ 11,944
Restricted cash .............................................. 12,991 1,029
Accounts receivable, net of allowance for doubtful
accounts: 1999- $27,553; 1998- $40,551 ................... 30,796 67,332
Supplies ..................................................... 8,655 12,172
Deferred income taxes (Note 6) ............................... -- 9,641
Refundable income taxes ...................................... 6,152 7,365
Prepaid expenses and other current assets .................... 14,212 19,386
--------- ---------
Total current assets ...................................... 95,529 128,869
Property and equipment (Notes 1 and 8):
Land and improvements ........................................ 14,704 31,783
Buildings and improvements ................................... 189,544 301,398
Equipment .................................................... 132,901 186,998
Construction in progress ..................................... 2,379 11,729
--------- ---------
339,528 531,908
Less: Accumulated depreciation and amortization ................... (113,052) (168,009)
--------- ---------
226,476 363,899
Deferred income taxes (Note 6) .................................... -- 43,096
Goodwill, net of accumulated amortization: 1999 - $9,828; 1998 -
$10,637 (Notes 1 and 4) ........................................ 87,684 136,994
Other assets ...................................................... 27,369 43,244
--------- ---------
Total Assets ...................................................... $ 437,058 $ 716,102
========= =========
</TABLE>
39
<PAGE> 40
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in 000's)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 35,563 $ 41,301
Due to government third parties .................................... -- 5,950
Accrued liabilities:
Accrued salaries and benefits .................................. 8,877 15,896
Accrued interest ............................................... 12,598 13,670
Other .......................................................... 11,549 23,242
Deferred income taxes .............................................. -- --
Long-term debt due within one year ................................. 654 6,284
Long-term debt in default classified as current (Note 7) ........... 335,445 --
--------- ---------
Total current liabilities ...................................... 404,686 106,343
Long-term debt (Note 7) ............................................. 3,685 533,048
Other long-term liabilities (Notes 12 and 14) ....................... 23,490 42,370
Commitments and contingencies (Note 14)
Stockholders' equity (Note 11):
Preferred stock, $.01 par value per share, 25,000,000 shares
authorized, none outstanding ................................ -- --
Common stock, no stated value, 150,000,000 shares
authorized, 57,667,721 shares outstanding in 1999 and
55,118,330 in 1998 ......................................... 215,761 222,977
Additional paid-in capital ..................................... 12,105 390
Accumulated deficit ............................................ (222,669) (189,026)
--------- ---------
Total stockholders' equity ................................. 5,197 34,341
--------- ---------
Total Liabilities and Stockholders' Equity .......................... $ 437,058 $ 716,102
========= =========
</TABLE>
See accompanying notes.
40
<PAGE> 41
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000's, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net revenue ................................................ $ 516,537 $ 664,058 $ 659,219
Costs and expenses:
Salaries and benefits ................................... 219,012 276,200 271,300
Other operating expenses ................................ 213,404 265,735 269,653
Provision for bad debts ................................. 41,692 42,659 46,606
Interest ................................................ 50,235 51,859 47,372
Depreciation and amortization ........................... 39,595 38,330 30,179
Equity in earnings of Dakota Heartland
Health System (Note 4) ................................. -- -- (9,794)
Impairment charges (Note 3) ............................. -- 1,417 7,782
Unusual items (Note 3) .................................. 4,248 (6,637) (6,531)
--------- --------- ---------
Total costs and expenses ................................... 568,186 669,563 656,567
--------- --------- ---------
Income (loss) from continuing operations before gain on
sale of facilities, minority interests, income taxes
and extraordinary loss ................................. (51,649) (5,505) 2,652
Gain on sale of facilities (Note 4) ........................ 77,454 6,825 --
Minority interests ......................................... (54) (3,180) (1,996)
--------- --------- ---------
Income (loss) from continuing operations before income
taxes and extraordinary loss ........................... 25,751 (1,860) 656
Provision for income taxes (Note 6) ........................ 54,207 693 1,812
--------- --------- ---------
Loss from continuing operations before
extraordinary loss ..................................... (28,456) (2,553) (1,156)
Discontinued operations (Note 5):
Loss on disposal of discontinued psychiatric
hospitals ........................................... (1,019) (2,424) (5,243)
--------- --------- ---------
Loss before extraordinary loss ............................. (29,475) (4,977) (6,399)
Extraordinary loss from early extinguishment of
debt (Note 7) ........................................... (4,168) (1,175) --
--------- --------- ---------
Net loss ................................................... $ (33,643) $ (6,152) $ (6,399)
========= ========= =========
Net loss per share - basic and assuming dilution:
Continuing operations ................................. $ (0.51) $ (0.05) $ (0.02)
Discontinued operations ............................... (0.02) (0.04) (0.10)
Extraordinary loss .................................... (0.07) (0.02) --
--------- --------- ---------
Net loss per share ......................................... $ (0.60) $ (0.11) $ (0.12)
========= ========= =========
</TABLE>
See accompanying notes.
41
<PAGE> 42
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
($ and shares in 000's)
<TABLE>
<CAPTION>
OTHER
COMMON STOCK ADDITIONAL COMPREHEN-
----------------------- PAID-IN SIVE INCOME ACCUMULATED
SHARES AMOUNT CAPITAL (LOSS) DEFICIT TOTAL
------- --------- ---------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ........... 54,814 $ 224,472 $ 390 $ 100 $(176,475) $ 48,487
Exercise of stock options .............. 280 3 -- -- -- 3
Change in unrealized gains on
marketable securities, net of
taxes ............................... -- -- -- (88) -- (88)
Net loss ............................... -- -- -- -- (6,399) (6,399)
----- --------- --------
Comprehensive loss ..................... (88) (6,399) (6,487)
------- --------- -------- ----- --------- --------
Balance at December 31, 1997 ........... 55,094 224,475 390 12 (182,874) 42,003
Exercise of stock options .............. 17 61 -- -- -- 61
Exercise of warrants ................... 7 7 -- -- -- 7
Forfeiture of value options (Note 15)... -- (1,566) -- -- -- (1,566)
Change in unrealized gains on
marketable securities, net of
taxes ............................... -- -- -- (12) -- (12)
Net loss ............................... -- -- -- -- (6,152) (6,152)
----- --------- --------
Comprehensive loss ..................... (12) (6,152) (6,164)
------- --------- -------- ----- --------- --------
Balance at December 31, 1998 ........... 55,118 222,977 390 -- (189,026) 34,341
Common stock issued/
transferred in connection with
the settlement of Shareholder
Litigation (Notes 3 and 11) ......... 1,549 1,840 11,715 -- -- 13,555
Issuance of common stock in
connection with termination
of certain advisory and service
agreement (Notes 3 and 11) .......... 1,000 1,188 -- -- -- 1,188
Forfeiture of value options
(Notes 3 and 11) .................... (10,244) -- -- -- (10,244)
Net loss ............................... -- -- -- -- (33,643) (33,643)
----- --------- --------
Comprehensive loss ..................... -- (33,643) (33,643)
------ --------- -------- ----- --------- --------
Balance at December 31, 1999 ........... 57,667 $ 215,761 $ 12,105 $ -- $(222,669) $ 5,197
======= ========= ======== ===== ========= ========
</TABLE>
See accompanying notes.
42
<PAGE> 43
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000's)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................... $ (33,643) $ (6,152) $ (6,399)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization ............................................. 39,595 38,330 30,179
Impairment charges ........................................................ -- 1,417 7,782
Unusual items ............................................................. 4,248 (6,637) (6,531)
Disposal loss on discontinued operations .................................. 1,019 2,424 5,243
Gain on sale of facilities ................................................ (77,454) (6,825) --
Deferred income taxes ..................................................... 52,737 609 (4,016)
Extraordinary loss ........................................................ 4,168 1,175 --
Minority interests ........................................................ 54 3,180 1,960
Changes in operating assets and liabilities, net of effects of
acquisitions and divestitures:
Accounts receivable .................................................... 1,274 17,363 (5,988)
Federal income tax refunds, net ........................................ 1,213 333 24,077
Supplies, prepaid expenses and other current assets .................... (5,834) 1,928 (10,203)
Accounts payable and other accrued liabilities ......................... (30,846) (52,402) (32,109)
--------- -------- --------
Net cash provided by (used in) operating activities ........................ (43,469) (5,257) 3,995
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of marketable securities .............................................. -- 2,145 19,967
Acquisitions of facilities, net of cash acquired ........................... -- (59,278) --
Proceeds from disposal of facilities ....................................... 282,050 38,219 12,201
Additions to property and equipment, net ................................... (29,203) (21,965) (16,524)
Increase (decrease) in minority interests .................................. 509 (4,355) 291
(Increase) decrease in other assets ........................................ (49) (5,106) (5,945)
--------- -------- --------
Net cash provided by (used in) investing activities ........................ 253,307 (50,340) 9,990
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Revolving Credit Facility ................................. 43,100 84,528 38,000
Repayments under Revolving Credit Facility ................................. (126,382) (35,485) (34,593)
Repayments of debt ......................................................... (115,777) (5,759) (5,388)
Deferred financing costs ................................................... -- (3,984) (1,602)
Sale of common stock, net .................................................. -- 68 --
--------- -------- --------
Net cash provided by (used in) financing activities ........................ (199,059) 39,368 (3,583)
--------- -------- --------
Increase (decrease) in cash and cash equivalents ........................... 10,779 (16,229) 10,402
Cash and cash equivalents at beginning of year ............................. 11,944 28,173 17,771
--------- -------- --------
Cash and cash equivalents at end of year ................................... $ 22,723 $ 11,944 $ 28,173
========= ======== ========
</TABLE>
See accompanying notes.
43
<PAGE> 44
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000's)
Supplemental schedule of noncash investing and financing activities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Settlement of Shareholder Litigation (Note 3):
Issuance of common stock ............................... $ 3,028 $ -- $ --
Forfeitures of Value Options ........................... (10,244) -- --
Common stock contributed by the Former Majority
Shareholder ............................................ 11,715 -- --
-------- -------- ----
$ 4,499 $ -- $ --
======== ======== ====
Details of businesses acquired in purchase transactions:
Fair value of assets acquired .......................... $ -- $ 71,217 $ --
Liabilities assumed .................................... -- (11,939) --
Stock and stock options issued ......................... -- -- --
-------- -------- ----
Cash paid for acquisitions ................................. $ -- $ 59,278 $ --
======== ======== ====
Notes receivable from sale of hospitals .................... $ 7,304 $ 13,698 $ --
======== ======== ====
Debt assumed by purchaser of hospitals ..................... $ 2,952 $ 3,239 $ --
======== ======== ====
Capital lease obligations .................................. $ 4,018 $ 1,653 $915
======== ======== ====
</TABLE>
See accompanying notes.
44
<PAGE> 45
PARACELSUS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
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 are collectively referred to herein as the "Company". Prior to
August 16, 1996, the Company was wholly owned by Park Hospital GmbH (the "Former
Majority Shareholder"), a German Corporation wholly owned by Dr. Manfred G.
Krukemeyer, the Company's former Chairman of the Board of Directors, (the
"Former Chairman"). On August 16, 1996, the Company acquired Champion Healthcare
Corporation ("Champion") (the "Merger") and completed an initial public equity
offering. The results of Champion have been included in the operations of the
Company since August 16, 1996. As of December 31, 1999, the Company operated 10
hospitals with 1,287 licensed beds in seven states.
BASIS OF PRESENTATION - Certain reclassifications to the prior years'
financial statements have been made to conform with the current year
presentation.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly-owned or majority owned
subsidiaries and partnerships. All significant intercompany accounts and
transactions have been eliminated in consolidation. Investments in affiliates,
of which the Company owns more than 20% but not in excess of 50%, are recorded
on the equity method. Minority interests represent income allocated to the
minority partners' investment.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS - The Company considers highly liquid investments with
original maturities of three months or less to be cash equivalents.
RESTRICTED CASH - The Company had restricted cash of $13.0 million and
$1.0 million at December 31, 1999 and 1998, respectively, as collateral for
outstanding letters of credit and for payments of fees and interest related to
the commercial paper financing program.
SUPPLIES - Supplies, principally medical supplies, are stated at the
lower of cost (first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the land improvements (5-25 years), buildings and improvements
(5-40 years) and equipment (3-20 years). Leaseholds are amortized on a
straight-line basis over the lesser of the terms of the respective leases or
their estimated useful lives. Expenditures for renovations and other significant
improvements are capitalized; however, maintenance and repairs, which do not
improve or extend the useful lives of the respective assets, are charged to
operations as incurred. Depreciation expense was $28.9 million, $27.7 million
and $22.1 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
45
<PAGE> 46
GOODWILL AND OTHER LONG-TERM ASSETS - Goodwill, representing costs in
excess of net assets acquired, is amortized on a straight-line basis over a
period of 20 to 35 years. Debt issuance costs are amortized on a straight-line
basis (which approximates the interest method) over the term of the related
debt. Amortization expense was $10.7 million, $10.6 million and $8.1 million for
the years ended December 31, 1999, 1998 and 1997, respectively. The Company
regularly reviews the carrying value of goodwill and other long-term assets in
relation to the operating performance and future undiscounted cash flows of the
underlying hospitals. The Company records to expense on a current basis any
diminution in values of goodwill and other long-term assets based on the
difference between the sum of the future discounted cash flows and net book
value.
NET REVENUE - Net revenue includes amounts estimated by management to
be reimbursable by Medicare under the Prospective Payment System and by Medicare
and Medicaid programs under the provisions of cost-reimbursement and other
payment formulas. Payments for services rendered to patients covered by such
programs are generally less than billed charges. Deductions from revenue are
made to reduce the charges to these patients to estimated receipts based on each
program's principles of payment/reimbursement. Final settlements under these
programs are subject to administrative review and audit by third parties.
Approximately 48.5%, 53.6% and 56.9% of gross patient revenue for the years
ended December 31, 1999, 1998 and 1997, respectively, related to services
rendered to patients covered by Medicare and Medicaid programs.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
material pending or threatened investigations involving allegations of potential
wrongdoing. Compliance with such laws and regulations can be subject to future
government review and interpretation as well as significant regulatory action
including fines, penalties and exclusion from the Medicare and Medicaid
programs.
In the ordinary course of business, the Company renders services free
of charge to patients who are financially unable to pay for hospital care. The
value of these services rendered is not material to the Company's consolidated
results of operations.
INCOME TAXES - The Company records its income taxes under the liability
method. Under this method, deferred income tax assets and liabilities are
recognized for the tax consequences of temporary differences by applying enacted
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities.
46
<PAGE> 47
NET LOSS PER SHARE - The following table (in 000's except per share
data) sets forth the computation of basic and diluted loss per share from
continuing operations as required by Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share."
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Numerator (a):
Loss from continuing operations
before extraordinary loss ................... $ (28,456) $ (2,553) $ (1,156)
Loss on discontinued operations ............... (1,019) (2,424) (5,243)
Extraordinary charge .......................... (4,168) (1,175) --
--------- --------- ---------
Net loss ...................................... $ (33,643) $ (6,152) $ (6,399)
========= ========= =========
Denominator:
Weighted average shares used for basic
Earnings per share ......................... 55,957 55,108 54,946
Effect of dilutive securities:
Employee stock options ...................... -- -- --
--------- --------- ---------
Dilutive potential common shares .............. -- -- --
--------- --------- ---------
Shares used for diluted earnings per share ...... 55,957 55,108 54,946
========= ========= =========
Loss per share - basic and assuming dilution:
Loss from continuing operations
before extraordinary loss ................... $ (0.51) $ (0.05) $ (0.02)
Loss on discontinued operations ............... (0.02) (0.04) (0.10)
Extraordinary charge .......................... (0.07) (0.02) --
--------- --------- ---------
Net loss ...................................... $ (0.60) $ (0.11) $ (0.12)
========= ========= =========
</TABLE>
- -----------------------------------
(a) Amount is used for both basic and diluted earnings per share computations
since there is no earnings effect related to dilutive securities.
Options to purchase 2,231,403 shares of the Company's common stock at a
weighted average exercise price of $4.17 per share and warrants to purchase
414,690 shares at a weighted average exercise price of $9.00 per share were
outstanding during the year ended December 31, 1999, but were not included in
the computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares.
EMPLOYEE STOCK OPTIONS - The Company has elected to continue following
the existing accounting rules under Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees" in accounting for its
employee stock options. See Note 11 for certain pro forma disclosures required
under SFAS No.
123, "Accounting for Stock Issued to Employees."
ACCOUNTING PRONOUNCEMENTS - Beginning in 1998, the Company adopted SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components. Comprehensive
income is defined as the change in net assets of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity during a period except those from
investments by owners and distributions to owners. The adoption of SFAS 130 had
no material impact on the Company's stockholders' equity or net loss in each of
the years presented.
47
<PAGE> 48
In March and in April 1998, the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants issued two
Statements of Position ("SOPs") that are effective for financial statements for
fiscal years beginning after December 15, 1998. SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," provides
guidance on the circumstances under which the costs of certain computer software
should be capitalized and/or expensed. SOP 98-5, "Reporting on the Costs of
Start-Up Activities," requires such costs to be expensed as incurred instead of
capitalized and amortized. The Company's adoption of the SOPs, effective January
1, 1999, did not have a material effect on its results of operations.
NOTE 2. ISSUES AFFECTING LIQUIDITY
The Company incurred significant operating losses in 1999 and had a
working capital deficit at December 31, 1999. These matters and certain
developments described below have raised substantial doubt as to the Company's
ability to continue operations as a going concern. Accordingly, the accompanying
1999 Consolidated Financial Statements have been prepared on the basis of
accounting principles applicable to going concerns 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 amounts and classification of
liabilities that may result from the outcome of these uncertainties.
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. The Notes represent unsecured obligations of PHC and are not
guaranteed by any of the Company's subsidiaries; accordingly, the Note holders
have no direct claim on the assets of any of the Company's hospital operating
subsidiaries. Given the Company's financial condition and liquidity, the Company
cannot repay in full its obligations under the Notes, nor does the Company have
access to equity sources or other commitments necessary to refinance or
otherwise satisfy in full its obligations under the Notes. The Company is
currently engaged in negotiations with the Note holders to develop an
alternative, sustainable capital structure for the Company.
The Company has retained an investment banking firm and legal counsel
to review its strategic alternatives. Considering the Company's limited
financial resources, there can be no assurance that the Company will succeed in
formulating an alternative capital structure acceptable to the Note holders, in
which case the Note holders are entitled, at their discretion, to accelerate all
principal and interest due on the Notes. Either as a result of negotiations with
the Note holders--or if such negotiations fail--the Company could file for
protection under Chapter 11 of the Bankruptcy Code or be subject to an
involuntary petition. A reorganization would likely result in a significant
dilution of the ownership interest of the existing holders of the Company's
common stock. There can be no assurance that a bankruptcy proceeding would
result in a reorganization of the Company rather than a liquidation. 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
distribution to the Company's creditors and/or the holders of the Company'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 are guarantors 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 Consolidated Balance
Sheet at December 31, 1999, which has resulted in a working capital deficit of
$309.2 million.
48
<PAGE> 49
As the result of the default of interest payment on the Notes, the Company is
also in default with certain provisions under its off-balance sheet receivable
financing agreement (the "Commercial Paper" program) (see Note 9) under which a
wholly-owned subsidiary of the Company has sold $32.3 million of eligible
receivables as of March 27, 2000. As a result of this default, the subsidiary is
unable to sell additional receivables under the Commercial Paper program. On
March 30, 2000, the Company received a commitment for a $62.0 million secured
financing facility (the "New Facility") from a lending group which will replace
the Company's Commercial Paper program and existing letters of credit
outstanding. The Company anticipates that the outstanding letters of credit will
be secured by cash collateral held by the lenders. The New Facility will be used
primarily to fund normal working capital of the Company's hospitals. The New
Facility will be an obligation of certain of the Company's subsidiaries and will
be secured by all patient accounts receivable of the Company's hospitals and a
first lien on two of its hospitals. Accordingly, the New Facility will not be an
obligation of PHC. The lender under the Company's current Commercial Paper
program has agreed to extend the program until April 17, 2000, while the Company
and the proposed lenders under the New Facility complete due diligence and
documentation necessary for the New Facility. There can be no assurance that the
Company will ultimately consummate the New Facility.
The Company is in a highly leveraged financial position. Should the
Company fail to consummate the New Facility, the Company would have no available
credit lines and therefore would be required to finance its cash needs from
operations. Furthermore, in the event the Commercial Paper program is not
extended beyond April 17, 2000, a wind down of the program would commence with
the Company's current lender retaining a significant portion of the Company's
operating cash flows until all amounts outstanding under the Commercial Paper
program are repaid in full. In the event of a wind down, operating cash flows
would likely be insufficient to meet the Company's operational and capital
expenditure needs.
On October 12, 1999, the Company repaid all borrowings outstanding
under its senior credit facilities of $223.5 million in conjunction with the
sale of its Utah operations. Prior to repayment, the senior credit facilities
provided total commitments of $255.0 million (see Note 7). Concurrent with the
repayment, most of the commitments under the facilities were permanently
cancelled. The Company entered into an interim financing arrangement with one of
its original bank lenders, which has reduced its original commitment under the
senior bank credit agreement to $11.6 million. As of March 27, 2000, the Company
had $11.6 million in outstanding letters of credit under its interim credit
facility, all of which were fully secured by cash collateral held by the lender,
and no outstanding borrowings. As the result of the default of interest payment
on the Notes, the Company is also in default under its interim credit facility.
NOTE 3. IMPAIRMENT CHARGES AND UNUSUAL ITEMS
UNUSUAL ITEMS - In 1999, the Company recorded a net unusual charge of
$4.2 million, which included (i) a $2.2 million net charge associated with the
execution of a senior executive agreement (the "Executive Agreement") with
certain former officers (the "Senior Executives") of the Company, see Note 15,
(ii) a $5.5 million corporate restructuring charge, discussed below, (iii) a
$2.0 million charge in the fourth quarter associated with litigation expenses
and the write down to net realizable value of a note receivable and other
assets, all of which were related to sold facilities offset by (iv) a net gain
of $5.5 million related to the settlement of litigation (the "Shareholder
Litigation") as discussed below.
49
<PAGE> 50
The restructuring charge was recorded in June 1999 as a result of the
Company's efforts to further reduce corporate overhead through the consolidation
and/or elimination of various corporate functions and contracts and a reduction
of corporate office space under lease. Such charge included $2.2 million for
employee termination costs, $1.3 million for the cancellation of certain lease
and maintenance contracts and $2.0 million for the write-down of certain
deferred costs, leasehold improvements and redundant equipment. Costs totaling
$1.5 million, which primarily related to the cancellation of a service contract,
remained in accrued expenses in the accompanying Consolidated Balance Sheet as
of December 31, 1999.
In September 1999, the global settlement of the putative class and
derivative actions, collectively the Shareholder Litigation, arising out of the
Merger and two related public offerings became effective. In accordance with the
terms of the global settlement, the Company paid $14.0 million, which was funded
from insurance proceeds, to the class settlement fund for distribution to class
members and issued 1.5 million shares of common stock for purposes of
distribution to class members. The Former Majority Shareholder also transferred
8.7 million shares of the Company's common stock to certain former Champion
shareholders and 1.2 million shares of the Company's common stock for purposes
of distribution to class members. In addition, the Company made a payment of
$1.0 million in cash and issued 1.0 million shares of common stock to the Former
Chairman to terminate a service and advisory contract with him. With respect to
the issuance/transfer of the Company's common stock, the values assigned to the
shares issued/transferred were determined based on the quoted market value at
the time global settlement was executed.
The settlement reduced the Company's existing and future obligations to
certain former officers and directors and terminated options, granted in
connection with the Merger, to purchase the Company's common stock of
approximately 1.4 million shares at $0.01 per share ("Value Options") and 2.8
million shares at $8.50 per share ("Market Options"). The Company, all class
members, the derivative plaintiffs, the separately represented former Champion
shareholders, the Former Majority Shareholder, the underwriter, and the affected
current and former officers and directors provided mutual releases of all claims
arising out of or related to the Merger and the related public offerings.
During 1998, the Company recorded unusual items of $6.6 million
consisting primarily of (i) a gain of $7.5 million resulting from the settlement
with PacifiCare of Utah ("PacifiCare") regarding a dispute over administration
of a 1996 capitation agreement offset by (ii) a net charge of $863,000 resulting
from the execution of the Executive Agreement, the restructuring of certain home
health operations, severances and the settlement of a contract dispute and
litigation.
During 1997, the Company recorded unusual items totaling $6.5 million,
consisting of (i) a reduction of $15.5 million in the loss contract accrued at
PHC Regional Hospital and Medical Center ("PHC Regional") associated with a 1996
capitation agreement, offset by charges of (ii) $3.5 million relating to the
closure of PHC Regional in June 1997, (iii) $3.0 million for settlement costs
associated with a lawsuit and (iv) $2.5 million for a corporate reorganization
completed in May 1997. Such charges consisted primarily of employee severance
and related costs, and to a lesser extent, certain other contract termination
costs. The $15.5 million reduction in the loss contract and $3.0 million charge
for settlement costs were recorded in the fourth quarter of 1997.
IMPAIRMENT CHARGES - During the fourth quarter of 1998, the Company
recorded an impairment charge of $1.4 million on two of its facilities in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed of," to reduce the book value of
these facilities to their estimated fair value. The charge occurred as the
result of the deterioration of the home health operations at these facilities.
50
<PAGE> 51
During the fourth quarter of 1997, the Company recorded an impairment
charge of $7.8 million on certain of its Los Angeles metropolitan hospitals ("LA
Metro") held for sale to reduce the book value of those assets to their
estimated fair value based upon the latest available offers received from third
party purchasers. On September 30, 1998, the Company sold substantially all the
assets of the LA Metro hospitals.
NOTE 4. ACQUISITIONS, DISPOSITIONS AND CLOSURES OF HOSPITALS
Acquisitions
On July 1, 1998, the Company completed the purchase of Dakota Medical
Foundation's 50% partnership interest in a general partnership operating as DHHS
for $64.5 million, inclusive of working capital, thereby giving the Company 100%
ownership of DHHS. Prior to the purchase, the Company owned 50% of DHHS and
accounted for its investment under the equity method. The transaction was
accounted for as a step purchase acquisition. As the result of the change in
control of DHHS, the Company has recast its Consolidated Statements of
Operations to account for DHHS under the consolidated method of accounting as
though the transaction had occurred at the beginning of the year. The audited
consolidated financial statements of DHHS as of and for the year ended December
31, 1997 are included in the Company's 1997 Form 10-K. The Company's results of
operations for the year ended December 31, 1998, reflect minority interest of
$4.1 million for the six-month period prior to the change in control. The
accompanying financial statements reflect the allocation of purchase price based
on the results of a third-party appraisal. Based on this appraisal, the Company
recorded goodwill of $24.7 million, which is being amortized on a straight-line
basis over an estimated useful life of 20 years.
Dispositions and Closures
Pursuant to a recapitalization agreement completed on October 8, 1999,
the Company sold 93.9% of the outstanding common stock of a wholly owned
subsidiary ("HoldCo") to JLL Healthcare, LLC, an affiliate of the private equity
firm of Joseph Littlejohn & Levy, Inc., for $280.0 million in cash, inclusive of
working capital. The Company retained a minority interest in the outstanding
common stock of HoldCo, which owned substantially all of the assets of five
hospitals, with 640 licensed beds, and related facilities located in the Salt
Lake City area (the "Utah Facilities"). Subsequent to the closing of the
recapitalization agreement, IASIS Healthcare Corporation, a Tennessee
corporation, was merged with and into a wholly owned subsidiary of HoldCo, with
the HoldCo subsidiary as the surviving entity. Following the Merger, HoldCo
changed its name to IASIS Healthcare Corporation, in which the Company retains a
5.8% minority interest.
The recapitalization agreement was arrived at through an arms length
negotiation. Net cash proceeds were used to eliminate all indebtedness then
outstanding under the Company's senior credit facilities totaling $223.5 million
and to reduce borrowings under the Commercial Paper program by $12.8 million.
The Company also eliminated $7.8 million in annual operating lease payments at
one of the Utah Facilities. The Company recorded a pretax gain of approximately
$77.8 million, net of allocated goodwill of $43.1 million, on the sale of the
Utah Facilities.
On September 30, 1999, the Company completed the sale of the stock of
Paracelsus Senatobia Community, Inc. ("Senatobia"), which owned and operated a
76-bed acute care hospital located in Mississippi. The sales price of
approximately $4.7 million, which included the sale of net working capital, was
paid by a combination of $100,000 in cash, $1.6 million in second lien
promissory notes,
51
<PAGE> 52
and the assumption by the buyer of approximately $3.0 million in capital lease
obligations and related lease guaranty payments. The Company recorded a pretax
gain of approximately $2.0 million on the sale of Senatobia.
Effective June 30, 1999, the Company sold substantially all of the
assets of four skilled nursing facilities (collectively, the "Convalescent
Hospitals"). The facilities had 232 licensed beds. The sales price of
approximately $6.9 million, which excluded net working capital, was paid by a
combination of $3.0 million in cash and a $3.9 million second lien promissory
note, which is subject to prepayment discounts. In connection with the sale, the
Company paid $1.0 million to terminate a lease agreement at one of the
facilities. The Company recorded a pretax gain of approximately $1.3 million on
the disposition.
Effective March 31, 1999, the Company sold the stock of Paracelsus
Bledsoe County Hospital, Inc. ("Bledsoe"), which operated a 32 licensed bed
facility located in Tennessee. The sales price of approximately $2.2 million,
including working capital, was paid by a combination of $100,000 in cash and the
issuance by the buyer of $2.1 million in promissory notes. The notes are secured
by all outstanding common stock and assets of Bledsoe. The Company recorded no
material gain or loss on the Bledsoe disposition.
On December 29, 1998, the Company terminated the lease and closed
Cumberland River Hospital South, a 41-bed acute care facility in Gainesboro,
Tennessee. The closure had no significant impact on the Company's financial
position or results of operations.
On September 30, 1998, the Company completed the sale of substantially
all of the assets of the eight LA Metro hospitals (527 licensed beds and one
previously closed hospital). The purchase price of approximately $33.7 million,
which included the purchase of net working capital, was paid by a combination of
$16.5 million in cash, the assumption of approximately $3.2 million in debt, and
issuance by the purchaser of $9.9 million of secured promissory notes and an
additional secured second lien subordinated note in the principal amount of $3.8
million. In June 1999, the Company recorded a loss of $3.6 million in connection
with the sale of LA Metro. The charge resulted from the final settlement of
working capital and the recognition of a prepayment discount on certain
promissory notes, which were repaid in full during the second quarter of 1999.
On June 30, 1998, the Company completed the sale of substantially all
of the assets of Chico Community Hospital, Inc., which included a 123-bed acute
care hospital and a 60-bed rehabilitation hospital, both located in Chico,
California, (collectively, the "Chico Hospitals") for $25.0 million in cash plus
working capital and the termination of a facility operating lease and related
letter of credit. The Company recorded a pretax gain of $7.1 million on the
disposition.
In June 1997, the Company closed PHC Regional as a result of continuing
losses under the capitation agreement with PacifiCare. The Company recorded
unusual charges of $3.5 million relating to the closure of PHC Regional.
On April 28, 1997, the Company completed the sale of two psychiatric
facilities, the 149-bed Lakeland Regional Hospital in Springfield, Missouri and
the 70-bed Crossroads Regional Hospital in Alexandria, Louisiana. No gain or
loss was recognized in connection with this divestiture.
52
<PAGE> 53
Unaudited Pro Forma Financial Data
The following unaudited pro forma financial information for the years
ended December 31, 1999 and 1998 (dollars in thousands, except per share
amounts) assumes the above acquisition and dispositions occurred on January 1,
1998. Accordingly, the pro forma information excludes the net gain on the
disposition of hospitals of $77.5 million and $7.1 million in 1999 and 1998
respectively. The 1999 pro forma information also excludes the extraordinary
charge related to the write-off of deferred financing costs of $4.2 million from
the early extinguishment of debt outstanding under the senior credit facilities
as the result of the sale of the Utah Facilities. The unaudited pro forma
financial information below does not purport to present the financial position
or results of operations of the Company had the above transactions occurred on
the date specified, nor are they necessarily indicative of results of operations
that may be expected in the future. Earnings before extraordinary charge,
interest, taxes, depreciation, amortization, unusual items, impairment charges
and gain on the sale of facilities ("Adjusted EBITDA") has been included because
it is a widely used measure of internally generated cash flow and is frequently
used in evaluating a company's performance. Adjusted EBITDA is not an acceptable
measure of liquidity, cash flow or operating income under generally accepted
accounting principles and may not be comparable to similarly titled measures of
other companies.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 (a) 1998
--------- ---------
<S> <C> <C>
Net Revenue $ 362,268 $ 377,194
========= =========
Adjusted EBITDA 27,370 46,667
========= =========
Loss before extraordinary loss (95,814) (10,320)
Extraordinary loss -- (1,175)
--------- ---------
Net loss $ (95,814) $ (11,495)
========= =========
Loss per common share:
Continuing operations $ (1.71) $ (0.19)
Discontinued operations -- --
Extraordinary loss -- (0.02)
--------- ---------
Net loss per common share $ (1.71) $ (0.21)
========= =========
Weighted average common shares outstanding 55,957 55,108
========= =========
</TABLE>
- -----------------------------------
(a) Pro forma adjustments reflect the disposition of hospitals, including the
removal of gain on sale of such facilities and related income tax effect.
Accordingly, a pro forma increase to the income tax provision of $46.6
million was recorded to increase the valuation allowance to reduce all
incremental unutilized net operating losses.
NOTE 5. DISCONTINUED OPERATIONS
With the sale of the LA Metro facilities in September 1998, the Company
completed its previously announced plan to exit the psychiatric hospital
business. Such operations had been reported as discontinued operations since
September 1996. During 1998 and 1997, in accordance with APB No. 30, losses of
$4.4 million and $1.1 million, respectively, from operations of the discontinued
psychiatric hospitals were charged to the disposal loss accrual previously
established in September 1996. Accordingly, such losses were not reflected in
the Consolidated Statement of Operations.
53
<PAGE> 54
Loss from discontinued operations for the year ended December 31, 1999
reflected a charge of $1.0 million (no tax benefits) from certain Medicare
contractual adjustments related to the completion of prior year cost reports for
the discontinued psychiatric operations.
Loss from discontinued operations of $2.4 million (net of tax benefit
of $1.7 million) for the year ended December 31, 1998 reflected the settlement
of litigation concerning alleged violations of certain Medicare rules at the
discontinued psychiatric facilities.
NOTE 6. INCOME TAXES
The provision for income taxes consists of the following ($ in 000's):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 (a) 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Continuing operations:
Current:
Federal .......................................... $ 1,437 $ -- $ --
State ............................................ 33 84 813
Deferred:
Federal .......................................... 45,603 520 853
State ............................................ 7,134 89 146
------- ------- -------
Total income tax provision from continuing
operations......................................... 54,207 693 1,812
Discontinued operations ............................. -- (1,685) (3,644)
Extraordinary losses ................................ -- (816) --
------- ------- -------
Total income tax provision (benefit) ................ $54,207 $(1,808) $(1,832)
======= ======= =======
</TABLE>
- ------------------------------------
(a) The provision for income taxes in 1999 includes an increase of $26.8
million from the recording of a valuation allowance, which offsets the
Company's net deferred tax assets. Of this amount, $24.7 million was
applied to increase the income tax provision on income from continuing
operations and $2.1 million was applied to eliminate income tax benefits on
losses from discontinued operations and an extraordinary loss. As a result,
no income tax benefits have been recognized on the losses from discontinued
operations and the extraordinary loss recorded in 1999.
The following table reconciles the differences between the statutory
Federal income tax rate and the effective tax rate for continuing operations ($
in 000's):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1999 % 1998 % 1997 %
------- ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate ........................... $ 9,013 35.0 $ (651) (35.0) $ 230 35.0
State income taxes, net of Federal
income tax benefit ........................... 1,545 6.0 (112) (6.0) 39 6.0
Non-deductible merger and litigation
settlement costs (a) ......................... 14 -- 5,068 272.5 -- --
Non-deductible goodwill amortization ............. 1,278 5.0 1,488 80.0 1,543 235.3
Non-deductible goodwill related to the sale of
the Utah facilities (b) ...................... 17,657 68.6 -- -- -- --
Adjustment to valuation allowance (c) ............ 24,700 95.9 (5,100) (274.2) -- --
------- ----- ------- ----- ------ -----
Effective income tax rate ........................ $54,207 210.5 $ 693 37.3 $1,812 276.3
======= ===== ======= ===== ====== =====
</TABLE>
54
<PAGE> 55
(a) Certain liabilities relating to the Shareholder Litigation were
recharacterized as non-deductible for federal income tax purposes as a
result of the global settlement.
(b) Non-deductible goodwill related to certain sold Utah facilities which were
acquired in connection with the Merger.
(c) See discussion on adjustment to valuation allowance below.
The tax effects of temporary differences that give rise to significant
portions of the Federal and state deferred tax assets and liabilities are
comprised of the following ($ in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Accelerated depreciation ................................. $ 21,249 $ 13,318
--------- ---------
Total deferred tax liabilities .......................... $ 21,249 13,318
--------- ---------
DEFERRED TAX ASSETS:
Allowance for bad debts .................................. (7,109) (8,548)
Accrued expenses ......................................... (11,699) (17,180)
Net operating losses ..................................... (56,063) (68,467)
Other - net .............................................. (21,386) (20,041)
--------- ---------
Total deferred tax assets ............................... (96,257) (114,236)
Valuation allowance against deferred tax assets .......... 75,008 48,181
--------- ---------
Net deferred tax assets ................................. (21,249) (66,055)
--------- ---------
Net deferred tax assets .................................... -- (52,737)
Less: Current deferred tax assets .......................... -- (9,641)
--------- ---------
Long-term deferred tax assets .............................. $ -- $ (43,096)
========= =========
</TABLE>
The Company considers prudent and feasible tax planning strategies in
assessing the need for a valuation allowance. As of December 31, 1998, the
Company recorded a valuation allowance of $48.2 million based on its previously
existing tax strategies, which assumed the utilization of net operating loss
carryforwards to reduce estimated taxable gains generated from the sale of
selected hospitals. The Company also assumed no benefit related to future
taxable income. The Company's tax planning strategies assumed proceeds from
divestitures based on previously existing market conditions. As of December 31,
1999, a valuation allowance for the full amount of the net deferred tax asset
was recorded due to issues affecting liquidity and related uncertainties
discussed in Note 2, which, if unfavorably resolved, will adversely affect the
Company's future operations on a continuing basis. In the event that the Company
is forced to file for protection under Chapter 11 of the Bankruptcy Code, the
realization of the tax assets may be substantially and permanently impaired.
Accordingly, the provision for income taxes in 1999 includes an increase in
income tax provision of $26.8 million from the recording of a valuation
allowance, which offsets the Company's net deferred tax assets. The future
realization of the deductible temporary differences and net operating loss
carryforwards depends on the Company's ability to develop and consummate an
acceptable and sustainable financial structure and the existence of sufficient
taxable income within the carryforward period.
At December 31, 1999, the Company has net operating loss carryforwards
of $136.7 million for U.S. Federal income tax purposes that will expire in
varying amounts from 2010 to 2013, if not utilized. Additionally, U.S. Federal
income tax law limits a corporation's ability to utilize net operating losses if
it experiences an ownership change of greater than 50% over a three-year period.
In the event of such a future ownership change, the Company's net operating loss
carryforward may be subject to an annual limitation on its use.
55
<PAGE> 56
The Company received income tax refunds, net of payments, of $492,000,
$333,000 and $24.1 million in 1999, 1998 and 1997 respectively.
NOTE 7. LONG TERM DEBT
The Company's long-term debt consists of the following ($ in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Revolving Credit Facility ............................................ $ -- $ 83,282
Term Loan Facilities ................................................. -- 113,200
10% Senior Subordinated Notes ........................................ 325,000 325,000
6.51% Subordinated Note .............................................. 7,185 7,185
Capital lease obligations (See Note 8) ............................... 7,599 9,500
Other ................................................................ -- 1,165
--------- ---------
339,784 539,332
Less long-term debt in default classified as current liabilities ..... (335,445) --
Less long-term debt due within one year .............................. (654) (6,284)
--------- ---------
Total long-term debt ................................................. $ 3,685 $ 533,048
========= =========
</TABLE>
SENIOR CREDIT FACILITIES - On October 12, 1999, the Company repaid all
borrowings outstanding of $223.5 million on its senior credit facilities in
conjunction with the sale of the Utah Facilities. The senior credit facilities
provided total commitments of $140.0 million under a Revolving Credit Facility
and $115.0 million in term loans (the "Term Loan Facilities"). The Term Loan
Facilities consisted of a five-year $45.0 million commitment ("Tranche A") and a
six-year $70.0 million commitment ("Tranche B"). The weighted average borrowing
rates for the year ended December 31, 1999 were 8.02%, 7.94% and 8.10% under the
Revolving Credit Facility, Tranche A and Tranche B, respectively.
Concurrent with the repayment of all indebtedness under the senior
credit facilities, most of the commitments under such facilities were
permanently cancelled. The Company entered into an interim financing arrangement
with one of its original bank lenders, which has reduced its original commitment
under the senior bank credit agreement to $11.6 million. As the result of the
default of interest payment on the Notes, the Company is also in default under
its interim credit facility. As of December 31, 1999, the Company had $11.6
million in outstanding letters of credit under its interim credit facility, all
of which were fully secured by cash collateral held by the bank, and no
outstanding borrowings. The cash collateral securing the letters of credit is
reflected in the Company's Consolidated Balance Sheet as restricted cash.
In the fourth quarter ended December 31, 1999, the Company recorded an
extraordinary charge of $4.2 million, no tax benefits, from the write-off of
deferred financing costs due to early extinguishment of debt under the senior
credit facilities.
During the first quarter ended March 31, 1998, the Company recognized
an extraordinary charge for the write-off of deferred financing costs of $1.2
million, net of tax benefits of $816,000, relating to the credit facility in
existence prior to March 30, 1998.
SENIOR SUBORDINATED NOTES - On August 16, 1996, the Company completed a
$325.0 million registered offering of 10% Senior Subordinated Notes, which are
general unsecured senior subordinated obligations of the Company and are not
guaranteed by any of its subsidiaries. The Notes mature
56
<PAGE> 57
on August 15, 2006. The Notes are not subject to any mandatory redemption and
may not be redeemed prior to August 15, 2001. As a result of the default of
interest payment on the Notes (see Note 2), the principal amount of the Notes
($325.0 million) is presented as a current liability on the Company's
Consolidated Balance Sheet as of December 31, 1999.
6.51% SUBORDINATED NOTE - Pursuant to an agreement made in conjunction
with the Merger, the Former Majority Shareholder received a $7.2 million 6.51%
subordinated unsecured note from the Company. The note, which is not guaranteed
by any of the Company's subsidiaries, provides for payments of principal and
interest in an aggregate annual amount of $1.0 million over a term of 10 years.
The Former Majority Shareholder had previously waived its right to receive
principal payments under the note until all obligations of the Company under the
senior bank credit agreement have been satisfied. In connection with the global
settlement of the Shareholder Litigation and as the result of the repayment of
the senior credit facilities, the Company is obligated to resume payments of
principal on the stated terms of the note and use its reasonable best efforts to
repay outstanding amounts in arrears. As the result of the default of interest
payment under the Notes, the Company is prohibited from making principal or
interest payments due on the note. Additionally, the Former Majority Shareholder
has the ability to accelerate the debt, to increase the interest rate on the
note to 8.5% per annum and seek other remedies from the Company. Accordingly,
the principal amount of the note ($7.2 million) is presented as a current
liability on the Company's Consolidated Balance Sheet as of December 31, 1999.
OTHER DEBT - Other debt at December 31, 1999 and 1998 consists
primarily of mortgage notes and capital lease obligations. These obligations
mature in various installments through 2011 at interest rates ranging from 8.65%
to 10.5% as of December 31, 1999 and 1998. Due to the uncertainty related to the
default and corresponding remedies described in Note 2, the principal amounts of
a certain capital lease obligation ($3.3 million), which contain cross-default
provisions, are presented as current liabilities on the Company's Consolidated
Balance Sheet as of December 31, 1999.
Maturities of long-term debt outstanding, excluding amounts in default
classified as current liabilities, as of December 31, 1999 for the next five
years and thereafter are ($ in 000's):
<TABLE>
<S> <C>
2000 ................................... $ 654
2001 ................................... 433
2002 ................................... 404
2003 ................................... 200
2004 ................................... 107
Thereafter ............................. 2,541
-------
Total .................................. $ 4,339
=======
</TABLE>
The Company paid interest of $50.2 million, $51.7 million and $46.4
million during 1999, 1998 and 1997, respectively.
57
<PAGE> 58
NOTE 8. LEASES
The Company leases property and equipment under cancelable and
non-cancelable leases. Future minimum operating and capital lease payments as of
December 31, 1999, including amounts relating to leased hospitals, for the next
five years and thereafter are ($ in 000's):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, OPERATING CAPITAL
----------------------- --------- -------
<S> <C> <C>
2000 (a) ............................... $ 2,471 $ 890
2001 ................................... 1,967 814
2002 ................................... 1,204 740
2003 ................................... 483 619
2004 ................................... 296 370
Thereafter ............................. 1,098 6,415
------- -------
Total minimum future payments .......... $ 7,519 9,848
=======
Less amount representing interest ...... (5,509)
-------
4,339
Less current portions .................. (654)
-------
Long-term capital lease obligations .... $ 3,685
=======
</TABLE>
- ----------------------
(a) Excludes $4.3 million, including interest of $1.0 million, of future minimum
lease payments under a capital lease obligation in default.
The following summarized amounts relate to assets leased by the Company
under capital leases ($ in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Property & equipment $ 10,331 $ 8,316
Accumulated depreciation (3,406) (3,129)
-------- --------
Net book value $ 6,925 $ 5,187
======== ========
</TABLE>
Depreciation of assets under capital leases is included in depreciation
and amortization in the Consolidated Statements of Operations. Rental expense
was $15.6 million, $23.2 million and $25.6 million for 1999, 1998 and 1997,
respectively.
NOTE 9. SALE OF ACCOUNTS RECEIVABLE
A subsidiary of the Company has an agreement with an unaffiliated trust
(the "Trust") to sell the Company's hospital eligible accounts receivable (the
"Eligible Receivables") on a nonrecourse basis to the Trust, hereafter referred
to as the Commercial Paper program. A special purpose subsidiary of a major
lending institution provides up to $65.0 million in commercial paper financing
to the Trust to finance the purchase of the Eligible Receivables from the
Company's subsidiary, with the Eligible Receivables serving as collateral. The
commercial paper notes have a term of not more than 120 days. Eligible
receivables sold at book value to the Trust at no gain or loss at December 31,
1999 and 1998 were $31.0 million and $32.6 million, respectively. Interest
expense charged to the Trust related to the commercial paper financing is passed
through to the Company and included as interest expense in the Company's
Consolidated Statement of Operations. Interest expense incurred by the Company
related to this program was $2.2 million, $2.0 million and $2.5 million for the
years ended December 31, 1999, 1998 and 1997, respectively.
58
<PAGE> 59
As the result of the default of interest payment on the Notes, the
Company is also in default with certain provisions under the Commercial Paper
program. As a result of this default, the subsidiary is unable to sell
additional eligible receivables under the Commercial Paper program. On March 30,
2000, the Company received a commitment for a $62.0 million New Facility, which
will replace the Company's Commercial Paper program. The lender under the
Company's current Commercial Paper program has a agreed to extend the program
until April 17, 2000, while the Company completes due diligence and
documentation necessary for the New Facility. There can be no assurance that the
Company will ultimately consummate the New Facility.
NOTE 10. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
CREDIT RISK - Financial instruments that potentially subject the
Company to concentration of credit risk consist principally of accounts
receivable. Credit risk on accounts receivable is limited because a majority of
the receivables are due from governmental agencies, commercial insurance
companies and managed care organizations. The Company continually monitors and
adjusts its reserves and allowances associated with these receivables.
FAIR VALUES OF FINANCIAL INSTRUMENTS - All financial instruments are
held for purposes other than trading. The estimated fair values of all financial
instruments, other than long-term debt, approximated their carrying amounts due
to the short-term maturity of these instruments. The carrying amount and fair
value of long-term debt are as follows ($ in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1999 1998
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Long-term Debt:
Revolving Credit Facility ........ $ -- $ -- $ 83,282 $ 83,282
Term Loan Facilities ............. -- -- 113,200 113,200
10% Senior Subordinated Notes .... 325,000 188,500 325,000 289,250
6.51% Subordinated Note .......... 7,185 4,400 7,185 6,283
</TABLE>
The fair values of the Revolving Credit Facility and the Term Loan
Facilities approximated the carrying amounts since the interest rate was based
on a current market rate. The fair value of the Notes is based on the quoted
market price. The fair value of the remaining debt was estimated using
discounted cash flow analyses based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements.
As of March 17, 2000, the fair value of the Notes based on the quoted
market price was $146.3 million.
NOTE 11. STOCKHOLDERS' EQUITY
COMMON AND PREFERRED STOCK - The Company has 150.0 million authorized
shares of common stock, no stated value per share. Each share is entitled to one
vote and does not have any cumulative voting rights. The Company is also
authorized to issue 25.0 million shares of preferred stock at $0.01 par value
per share, which may be issued in such series and have such rights, preferences
and other provisions as may be determined by the Board of Directors without
approval by the holders of common stock. No preferred shares are currently
outstanding.
59
<PAGE> 60
In connection with the global settlement of Shareholder Litigation
effective September 2, 1999, the Company issued 1.5 million shares of common
stock for purposes of distribution to class members and 1.0 million shares of
common stock to the Former Chairman to terminate a service and advisory contract
with him. The Company recorded unusual charges of $3.0 million related to the
shares issued based upon the quoted market value of the Company's common stock
at the time the global settlement was executed.
STOCK OPTION PLAN - On July 15, 1996, the Company adopted the 1996
Stock Incentive Plan (the "Incentive Plan") to provide stock-based incentive
awards, including incentive stock options, non-qualified stock options,
restricted stock, performance shares, stock appreciation rights and deferred
stock, to directors, key employees, consultants and advisors.
In connection with the Merger, the Company granted 1.6 million Value
Options to certain directors and officers of the Company in addition to
aggregate cash payments of $20.7 million to terminate all phantom stock
appreciation rights and/or preferred stock units under a previously existing
stock incentive plan. Additionally, pursuant to the various employment
agreements, the Company also granted 1.2 million Value Options and 2.8 million
Market Options to certain senior executive officers. In connection with the
global settlement of Shareholder Litigation, 1.4 million Value Options and all
of the Market Options were cancelled (see Note 3). The issuance of the Value
Options was originally recorded as a merger expense in connection with the
Merger. Accordingly, the Company recorded a benefit of $10.2 million which was
included as a component of the $5.5 million net gain related to the settlement
of the Shareholder Litigation in unusual items, and a corresponding reduction in
common stock from the cancellation of the Value Options based upon the quoted
market value of the Company's common stock at the time the global settlement was
executed. The cancellation of the Market Options had no impact on the Company's
stockholders' equity or 1999 results of operations.
As more fully discussed in Note 15, in connection the execution of the
Executive Agreement and subsequent resignation of the Senior Executives, 696,000
Value Options were cancelled.
At December 31, 1999, there were 9.9 million shares of common stock
reserved for exercise of options. Except for the Value Options as noted above,
stock options were generally granted at an exercise price equal to or in excess
of the estimated fair market value of the shares on the date of grant and expire
ten years from the grant date. The Value Options and options granted to
directors were fully vested on the date of grant, with the remaining options
vesting generally over a period of 3 to 4 years from the date of grant. Options
generally expire upon certain events (such as termination of employment with the
Company), except for Value Options, which remain exercisable until the end of
the 10-year option term. The following table presents the number of shares
covered by options outstanding and the related number of options granted,
assumed, exercised and canceled for each period in the three years ended
December 31, 1999 (in 000's):
60
<PAGE> 61
<TABLE>
<CAPTION>
WEIGHTED
NUMBER EXERCISE AVERAGE
OF PRICE EXERCISE
OPTIONS PER SHARE PRICE
------- -------------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1996 .. 6,865 $0.01 to $9.00 $ 4.60
Granted ......................... 1,105 $ 5.19 $ 5.19
Exercised ....................... (280) $ 0.01 $ 0.01
Canceled ........................ (135) $0.01 to $9.00 $ 2.18
------
Outstanding at December 31, 1997 .. 7,555 $0.01 to $9.00 $ 4.90
Granted ......................... -- -- --
Exercised ....................... (17) $ 3.56 $ 3.56
Canceled ........................ (156) $3.92 to $9.00 $ 4.96
Forfeited ....................... (696) $ 0.01 $ 0.01
------
Outstanding at December 31, 1998 .. 6,686 $0.01 to $9.00 $ 5.41
Granted ......................... 1,105 $0.63 to 2.20 $ 2.11
Canceled ........................ (5,127) $0.01 to $9.00 $ 5.66
------
Outstanding at December 31, 1999 .. 2,664 $0.01 to $9.00 $ 3.51
======
</TABLE>
The number of options exercisable at December 31, 1999, 1998 and 1997
were 1.8 million, 4.1 million and 4.2 million, respectively. The following table
summarizes information concerning currently outstanding and exercisable options
as of December 31, 1999 (in 000's):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------ --------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
- ----------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.01 373 6.61 years $0.01 373 $0.01
$0.63-$9.00 2,291 6.75 years $4.10 1,433 $4.70
</TABLE>
The Company has elected to follow APB No. 25 and related
interpretations in accounting for its employee stock options. Pro forma
information regarding net income and earnings per share is required by SFAS No.
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The weighted
average grant-date fair values were $0.78 for options granted during 1999 and
$3.66 for options granted during 1997, using the Black-Scholes option pricing
model with the following weighted-average assumptions for 1999 and 1997
respectively: risk-free interest rates of 5.97%and 5.60%; dividend yields of
0.0%; volatility factors of the expected market price of the Company's stock of
96.4% and 97.4%; and a weighted-average expected life of the options of 4 years.
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
61
<PAGE> 62
For purpose of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for 1999, 1998 and 1997 is as follows and includes
compensation expense of $751,000 (no tax effect), $4.1 million ($2.4 million
after-tax) and $5.6 million ($3.3 million after-tax), respectively, ($ in 000's,
except for earnings per share data):
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma net loss ..................... $ (34,394) $ (8,597) $ (9,687)
Pro forma net loss per share:
Basic and assuming dilution ......... $ (0.61) $ (0.16) $ (0.18)
</TABLE>
WARRANTS AND CONVERTIBLE SECURITIES - As of December 31, 1999, the
Company had outstanding warrants to purchase 414,690 shares of Common Stock at
an exercise price of $9.00 per share expiring December 31, 2003.
NOTE 12. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) retirement plan covering
all eligible employees at its hospitals and the corporate office. Participants
may contribute up to 20% of pretax compensation, not exceeding a limit set
annually by the Internal Revenue Service. The Company matches $.25 for each
$1.00 of employee contributions up to 6% of employees' gross salary and may make
additional discretionary contributions. Total expense for employer contributions
to the plan for 1999, 1998 and 1997 was $1.2 million, $2.0 million and $1.6
million, respectively.
The Company has a supplemental executive retirement plan ("SERP") to
provide additional post-termination benefits to a selected group of management
and highly compensated employees. As a result of a change in control from the
Merger, officers and employees of the Company who were participants in the SERP
prior to the Merger became fully vested in all benefits thereunder. In April
1997, the Board of Directors elected to terminate the provision of future
benefits for certain participants under the plan, which resulted in a plan
curtailment. As a result, the Company incurred minimal expenses in 1999 and 1998
related to the plan. Total expenses for the plan were $141,000 (net of
curtailment gain of $1.6 million) for the year ended December 31, 1997. In
connection with the execution of the Executive Agreement and the global
settlement of the Shareholder Litigation, the Company is released from SERP
obligations to certain former senior executives. The effect of this release is
included as a component of the $5.5 million net gain related to the settlement
of the Shareholder Litigation included in unusual items.
NOTE 13. OPERATING SEGMENTS
Effective December 31, 1998, the Company adopted SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." SFAS No.
131 also establishes standards for reporting information about operating
segments and related disclosures about product and services, geographic areas
and major customers. The adoption of SFAS No. 131 did not affect the Company's
results of operations or financial position.
The Company previously segregated its hospitals into two operating
segments: Core Markets and Non Core Markets. The Company designated certain
hospitals as "Core Facilities" with the goal of expanding and further
integrating the hospitals' presence in their respective markets. As the
designation
62
<PAGE> 63
implies, the Core Facilities comprised the operational and financial core of the
Company's business. "Non Core" Markets consisted of all other hospital
operations owned by the Company, which were being evaluated for possible
disposition. This designation was made in conjunction with the Company's efforts
to reduce its debt through the disposition of certain hospitals, an objective
that was largely accomplished with the disposition of the Utah operations in the
fourth quarter of 1999 and the resulting repayment of all borrowings outstanding
under the Company's senior credit facility. Accordingly, the Company ceased
making the Core and Non Core distinction for its reportable segments. "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.
The accounting policies of "Same Hospitals" are the same as those
described in the summary of significant accounting policies. The Company does
not allocate income taxes and interest to Same Hospitals. Additionally, "Same
Hospitals" do not have significant non-cash items in reported profit or loss
other than depreciation and amortization. The Company evaluates performance
based on numerous criteria, the most significant of which is Adjusted EBITDA.
The following table summarizes selected financial data for the Company's
reportable segments, which have been restated for all years presented to reflect
the change in the Company's reportable segments, ($ in 000's):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------------------
Same Hospitals All Other Total
-------------- --------- ---------
<S> <C> <C> <C>
Net revenue ............................ $ 357,601 $ 158,936 $ 516,537
Adjusted EBITDA ........................ 45,614 (3,239) 42,375
Property and equipment, net ............ 219,043 7,433 226,476
Capital expenditures ................... 14,082 15,121 29,203
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------
Same Hospitals All Other Total
-------------- --------- ---------
<S> <C> <C> <C>
Net revenue ............................ $365,992 $298,066 $664,058
Adjusted EBITDA ........................ 53,807 22,477 76,284
Property and equipment, net ............ 219,050 144,849 363,899
Capital expenditures ................... 10,264 11,701 21,965
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------
Same Hospitals All Other Total
-------------- --------- ---------
<S> <C> <C> <C>
Net revenue ............................ $301,602 $357,617 $659,219
Adjusted EBITDA ........................ 60,183 19,275 79,458
Property and equipment, net ............ 149,213 158,851 308,064
Equity investment in DHHS (Note 4) ..... 48,499 -- 48,499
Capital expenditures ................... 12,169 4,355 16,524
</TABLE>
The Company's revenue primarily depends on the level of inpatient
census, the volume of outpatient services, the acuity of patients' conditions
and charges for services. Reimbursement rates for inpatient routine services
vary significantly depending on the type of service and the geographic location
of the hospital. The Company receives payment for services rendered to patients
from private payors (primarily private insurance), managed care providers, the
Federal government under the Medicare and TriCare (formerly the Civilian Health
and Medical Program of the Uniformed Services or CHAMPUS) programs and state
governments under their respective Medicaid programs. Approximately 48.5%,
63
<PAGE> 64
53.6% and 56.9% of gross patient revenue for the years ended December 31, 1999,
1998 and 1997, respectively, related to services rendered to patients covered by
Medicare and Medicaid programs.
NOTE 14. COMMITMENTS AND CONTINGENCIES
LITIGATION - The Company is subject to claims and legal actions by
patients and others in the ordinary course of business. The Company believes
that all such claims and actions are either adequately covered by insurance or
will not have a material adverse effect on the Company's financial condition,
results of operations or liquidity.
REGULATORY INVESTIGATION - On March 9, 1998, the U.S. Securities and
Exchange Commission (the "SEC") entered a formal order authorizing a private
investigation, In re Paracelsus Healthcare Corp., FW-2067. Pursuant to the
formal order, the staff of the SEC's Fort Worth District Office is investigating
the accounting and financial reporting issues that were the subject of the
internal inquiry described in the Company's 1996 Form 10-K filed in April 1997.
The Company is cooperating with the staff of the SEC.
PROFESSIONAL AND LIABILITY RISKS - The Company is subject to claims and
suits in the ordinary course of business, including those arising from care and
treatment provided at its facilities. The Company maintains insurance and, where
appropriate, reserves with respect to the possible liability arising from such
claims. The Company is self-insured for the first $1.0 million per occurrence of
general and professional liability claims. Excess insurance amounts up to $50.0
million are covered by third party insurance carriers. The Company accrues an
estimated liability for its uninsured exposure and self-insured retention based
on historical loss patterns and actuarial projections.
The Company believes that its insurance and loss reserves are adequate
to cover potential claims that may be asserted and that the outcome of such
claims will not have a material effect on the Company's financial position,
results of operations or liquidity.
NOTE 15. CERTAIN RELATED PARTY TRANSACTIONS
THE EXECUTIVE AGREEMENT - On November 25, 1998, the Company and the
Senior Executives, Mr. Charles R. Miller, Mr. James G. VanDevender and Mr.
Ronald R. Patterson executed the Executive Agreement superseding their existing
employment contracts and certain other stock option and retirement agreements
with the Company. Under the Executive Agreement, as amended, Messrs. Miller and
Patterson remained in their management positions with the Company until their
resignation on June 30, 1999. Mr. VanDevender entered into a separate employment
agreement with the Company and served as interim Chief Executive Officer
effective July 1, 1999 until his resignation from the Company on February 29,
2000.
Pursuant to the Executive Agreement, the Company paid the Senior
Executives $501,000 in 1998 for amounts due under the SERP, and the Senior
Executives released the Company from any obligations under the SERP or any
similar retirement plan. In April 1999, the Company also paid the Senior
Executives $4.6 million, of which approximately $4.0 million was recorded
ratably to expense through June 30, 1999, the required-stay period. The
remaining amount of $645,000, which is associated with a non-compete arrangement
provided for in the Executive Agreement, was recorded as other assets and
amortized to expense over the non-compete period (one year) upon the Senior
Executives' separation of service. The Company and the Senior Executives
provided each other with mutual releases of any and all obligations either party
may have under the respective employment agreements or otherwise arising out of
the Senior Executives' employment.
64
<PAGE> 65
Pursuant to the Executive Agreement, the Senior Executives gave up all
rights to exercise or dispose of 696,000 Value Options that they received at the
time of the Merger. The Value Options were cancelled upon the Senior Executives'
resignation from the Company. The quoted market value of the Value Options upon
the execution of the Executive Agreement of approximately $1.6 million was
recorded as a reduction to common stock. A corresponding liability of $1.6
million was amortized ratably to income over the required-stay period ended June
30, 1999.
The Company recorded approximately $2.2 million and $352,000 of net
expenses related to the Executive Agreement, which was included in unusual
items, for the year ended December 31, 1999 and 1998, respectively.
6.51% SUBORDINATED NOTE - The Former Majority Shareholder received a
$7.2 million 6.51% subordinated note from the Company (See Note 7). The Company
paid interest on such note of $467,000 in 1999 and 1998 and $533,000 in 1997. In
connection with the global settlement of the Shareholder Litigation and as the
result of the repayment of the senior credit facilities, the Company is
obligated to resume payments of principal on the stated terms of the note and
use its reasonable best efforts to repay outstanding amounts in arrears. As the
result of the default of interest payment under the Notes, the Company is
prohibited from making principal or interest payments on the note. Additionally,
the Former Majority Shareholder has the ability to accelerate the debt, to
increase the interest rate on the note to 8.5% per annum and seek other remedies
from the Company.
CONSULTING AGREEMENT - Effective August 1996, the Company was a party
to an agreement with the Former Chairman, pursuant to which he provided
management and strategic advisory services to the Company for an annual
consulting fee for a term not to exceed ten years. The Company paid the Former
Chairman consulting fees of $187,500 in 1999 and 1998 and $500,000 in 1997. In
connection with the global settlement of the Shareholder Litigation, the Company
paid the Former Chairman $1.0 million in cash and issued to him 1.0 million
shares of common stock to terminate the agreement. The Company recorded unusual
charges of $2.2 million relating therewith based on the value of the cash
payment and the quoted market value of the Company's common stock at the time
the global settlement was executed.
INSURANCE AGREEMENT - The Company is also a party to an insurance
agreement, which provides insurance benefits to the Former Chairman in the event
of his death or permanent disability in an amount equal to $1.0 million per year
during the 10-year term of such agreement, which expires 2006.
65
<PAGE> 66
NOTE 16. QUARTERLY DATA (UNAUDITED)
The following table summarizes the Company's quarterly financial data
for the years ended December 31, 1999 and 1998 ($ in 000's, except per share
data):
<TABLE>
<CAPTION>
INCOME (LOSS) PER SHARE
INCOME --------------------------------------
(LOSS) FROM NET NET
NET CONTINUING DISCONTINUED INCOME CONTINUING DISCONTINUED INCOME
QUARTERS REVENUE OPERATIONS OPERATIONS (LOSS) OPERATIONS OPERATIONS (LOSS)
-------- -------- ---------- ------------ -------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter -
1999(a) .................. $150,944 $ (1,586) $ -- $ (1,586) $ (0.03) $ -- $ (0.03)
1998(b) .................. 186,882 1,625 -- 450 0.03 -- 0.01
Second Quarter -
1999(c)(d) ............... 143,267 (7,609) -- (7,609) (0.14) -- (0.14)
1998(c) .................. 176,693 5,698 -- 5,698 0.10 -- 0.10
Third Quarter -
1999(e) ................. 138,161 (3,376) (601) (3,977) (0.06) (0.01) (0.07)
1998(f)(g) .............. 157,169 (1,667) (2,424) (4,091) (0.03) (0.04) (0.07)
Fourth Quarter -
1999(h)(i) ............... 84,165 (15,885) (418) (20,471) (0.28) (0.01) (0.36)
1998(j) .................. 143,314 (8,209) -- (8,209) (0.15) -- (0.15)
- ----------------------
</TABLE>
(a) Includes an unusual charge of $1.1 million resulting from the execution of
the Executive Agreement.
(b) Includes extraordinary loss from early extinguishment of debt, net of tax,
of $1.2 million ($0.02 per share).
(c) Includes a loss of $2.4 million in 1999 and $7.1 million in 1998 on the
sale of hospitals.
(d) Includes unusual charges of (i) $1.1 million resulting from the execution
of the Executive Agreement and (ii) $5.5 million relating to corporate
restructuring charges.
(e) Includes (i) an unusual gain of $5.5 million resulting from the settlement
of the Shareholder Litigation and (ii) a gain of $2.0 million on the sale
of a hospital.
(f) Includes a gain of $7.5 million relating to the settlement of a capitation
agreement.
(g) Includes (i) an after tax charge of $601,000 ($0.01 per share) related to
Medicare contractual adjustment at the discontinued psychiatric facilities
in 1999 and (ii) an after-tax charge of $2.4 million ($0.04 per share)
relating to the settlement of litigation concerning alleged violations of
certain Medicare rules at certain of the Company's discontinued
psychiatric facilities in 1998.
(h) Includes a gain of $77.8 million on the sale of the Utah Facilities and an
increase in income tax provision of $26.8 million from the recording of a
valuation allowance, which offsets the Company's net deferred tax assets.
Of the $26.8 million, $24.7 million was reflected as an increase in the
income tax provision on income from continuing operations and $2.1 million
was applied to eliminate income tax benefits on losses from discontinued
operations and an extraordinary loss.
(i) Includes extraordinary loss from the early extinguishment of debt, (no tax
effect) of $4.2 million ($0.7 per share).
(j) Includes (i) impairment charges, net of tax, of $1.4 million relating to
the write-down of long-lived assets to fair value at certain facilities
and (ii) $196,000 resulting from the execution of the Executive Agreement.
Quarterly operating results are not necessarily representative of
operations for a full year for various reasons including levels of occupancy,
fluctuations in interest rates, acquisitions and divestitures.
66
<PAGE> 67
NOTE 17. RECENT PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board ("FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), which will require companies to
recognize all derivatives on the balance sheet at fair value. In July 1999, the
FASB issued Statement of Financial Accounting Standards No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, which requires the adoption of SFAS 133 in fiscal
years beginning after June 15, 2000. The Company expects SFAS No. 133 to have no
material impact on the Company's financial position or results of operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding the Company's executive
officers is set forth under "Executive Officers of the Registrant" in Part I of
this Report.
The directors of the Company, their positions and offices, their
respective terms of office as directors, their respective ages and background
are as follows:
JOAN S. FORTUNE, age 52, a director since 1999 whose term expires at
the 2002 annual meeting of stockholders. From 1995 until 1999, she was retired
with no other position. Ms. Fortune was General Partner of Frontenac Company, a
venture capital firm from 1987 until her retirement in 1995. She was a director
of Frontenac from 1984 to 1987. At Frontenac, Ms. Fortune specialized in
investments in healthcare products and services. Prior to her time at Frontenac,
she was a management consultant with Hayes/Hill, Inc. and worked for more than
10 years in the healthcare industry at American Hospital Supply Corporation,
G.D. Searle & Co. and a research facility associated with the University of
Wisconsin.
NOLAN LEHMANN, age 55, a director since 1998 whose term expires at the
2000 annual meeting of stockholders. Mr. Lehmann is the President and director
of Equus Capital Management Corporation, an investment advisor firm located in
Houston, Texas, since 1983. Mr. Lehmann is also President and a director of
Equus II Incorporated, a registered investment company traded on the New York
Stock Exchange. Mr. Lehmann also serves as a director of Allied Waste
Industries, Inc. and Drypers Corporation. Mr. Lehmann holds graduate and
undergraduate degrees in accounting and economics from Rice University and is a
Certified Public Accountant.
ROBERT W. MILLER, age 58, a director since 1999 whose term expires at
the 2000 annual meeting of stockholders. Mr. Miller was a partner with the law
firm of King & Spalding from 1985 until his retirement at the end of 1997. He
currently serves as non-executive Chairman of the Board of Magellan Health
Services, Inc., a behavioral managed care company listed on the New York Stock
Exchange, and is a past president of the American Academy of Healthcare
Attorneys.
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<PAGE> 68
HEINER MEYER ZU LOSEBECK, age 47, a director since 1998 whose term
expires at the 2001 annual meeting of stockholders. Dr. Meyer zu Losebeck is the
Managing Director of Paracelsus-Kliniken-Deutschland GmbH ("PKD"), Park, and
other affiliates of PKD. PKD owns and operates 26 hospitals ranging in size from
42 to 350 beds in Germany and Switzerland. Park owns approximately 34.5 percent
of the shares of the Company, and PKD owns all the shares of Park. From 1989
through August 1997, Dr. Meyer zu Losebeck was a tax consultant, auditor, and
chartered accountant at Dr. Mertens and Partners, Osnabruck, Germany.
PETER SCHNITZLER , age 32, a director since 1999 whose term expires at
the 2000 annual meeting of stockholders. Mr. Schnitzler is the Corporate
Accountant of PKD. He has been employed by PKD (and its respective legal
predecessor) since 1993. Mr. Schnitzler has a graduate degree in finance,
auditing and hospital administration.
LAWRENCE P. ENGLISH, age 59, a director since 1999 whose term expires
at the 2001 annual meeting of stockholders. Mr. English is President of Lawrence
P. English, Inc., a consulting and turnaround management firm. He was the
founder, Chairman and Chief Executive Officer ("CEO") of Aesthetics Medical
Management, Inc., a physician management company from 1997 to 1998. From 1992 to
1996, he was the president of Cigna Healthcare, a healthcare management
organization and a division of Cigna Corporation. Mr. English currently serves
as a director of Spacefitters, Inc., a Windsor, Connecticut based technology
company, and Dental Benefit Providers, a Bethesda, Maryland based dental HMO.
Mr. English has over 36 years of experience in the insurance and health care
industries.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Based solely upon confirmations provided by the directors and executive
officers of the Company reporting transactions involving the Company's
securities during the most recent fiscal year, the Company believes that all
transactions by reporting persons were reported on a timely basis. Based on
shareholder filings, the Company does not believe any other shareholders are
subject to Section 16(a) filing requirements.
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<PAGE> 69
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation for the Company's
former Chief Executive Officer, four most highly compensated executive officers
and two other senior executives, Messrs. Miller and Patterson, who resigned from
the Company effective June 30, 1999 (collectively the "Named Executives") with
respect to all services rendered to the Company during the calendar years
indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------- ------------
ALL
SECURITIES OTHER
UNDERLYING COMPEN-
NAME AND PRINCIPAL SALARY BONUS OPTIONS SATION
POSITION YEAR ($) ($) (#) ($)(b)(c)
------------------ ---- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
James G. VanDevender (a)
Senior Executive Vice 1999 $ 457,500 $ 125,000 -- $1,324,466
President & Chief 1998 370,313 -- -- 108,005
Executive Officer 1997 360,000 -- -- --
Lawrence A. Humphrey 1999 $ 276,898 $ 160,900 100,000 $ 3,989
Executive Vice President 1998 268,427 -- -- 2,375
& Chief Financial Officer 1997 245,416 -- 100,000 2,551
Michael M. Brooks (a) 1999 $ 238,890 $ 156,671 100,000 $ 3,785
Senior Vice President, 1998 232,062 100,000 -- 3,690
Development 1997 224,253 -- 100,000 8,962
Deborah H. Frankovich 1999 $ 197,428 $ 75,998 75,000 $ 2,883
Senior Vice President & 1998 190,396 -- -- 2,375
Treasurer 1997 184,996 -- 75,000 2,345
Robert M. Starling 1999 $ 195,987 $ 75,998 75,000 $ 3,329
Senior Vice President & 1998 190,105 -- -- 2,165
Controller 1997 184,996 -- 75,000 1,954
Charles R. Miller (a) 1999 $ 270,000 $ -- -- $1,972,836
President & Chief Operating 1998 548,167 -- -- 315,460
Officer 1997 500,000 -- -- --
Ronald R. Patterson (a)
Executive Vice President & 1999 $ 187,500 $ -- -- $1,347,958
President, Healthcare 1998 370,313 -- -- 92,920
Operations 1997 360,000 -- -- 2,375
</TABLE>
- ---------------------
(a) Messrs. Miller and Patterson resigned from the Company effective June 30,
1999. Messrs. VanDevender and Brooks resigned from the Company effective
February 29, 2000.
(b) 1999 included payments of $2.0 million to Mr. Miller and $1.3 million each
to Messrs. VanDevender and Patterson made in connection with the Executive
Agreement.
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<PAGE> 70
(c) Represents relocation reimbursements, life insurance premiums and matching
contributions paid by the Company under its Employee Retirement Savings
401(k) Plan and includes payments in 1998 for vested benefits under the
supplemental executive retirement plan to Messrs. Miller, VanDevender and
Patterson of $310,510, $104,969 and $85,793, respectively.
The following table summarizes stock option grants made during
1999 to the Named Executives and the potential realizable values of the options,
based on certain assumptions. All options were granted in April 1999 under the
Company's 1996 Stock Incentive Plan. The exercise prices on stock options
previously granted were not amended or adjusted. The Company has no outstanding
stock appreciation rights.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL GRANT
UNDERLYING OPTIONS MARKET DATE
OPTIONS GRANTED TO EXERCISE PRICE ON PRESENT
GRANTED EMPLOYEES IN PRICE DATE OF VALUE
NAME (#) FISCAL YEAR ($/SHARE) GRANT EXPIRATION DATE ($)(b)
---- ----------- ------------- --------- -------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
C. Miller -- -- -- -- -- --
J. VanDevender -- -- -- -- -- --
R. Patterson -- -- -- -- -- --
L. Humphrey 100,000(a) 9.6% $ 2.20 $ 1.375 April 1, 2009 $ 80,000
M. Brooks 100,000(a) 9.6% $ 2.20 $ 1.375 April 1, 2009 $ 80,000
D. Frankovich 75,000(a) 7.2% $ 2.20 $ 1.375 April 1, 2009 $ 60,000
R. Starling 75,000(a) 7.2% $ 2.20 $ 1.375 April 1, 2009 $ 60,000
</TABLE>
- -------------
(a) Options have a ten-year term and vest as follows: (i) 25% on April 1,
1999, (ii) 25% on April 1, 2000, (iii) 16-2/3% on April 1, 2001, (iv)
16-2/3% on April 1, 2002 and (v) 16-2/3% on March 31, 2003. Vesting of all
options accelerate in the event of a change in control.
(b) The fair value of these options was estimated at the date of grant or the
assumption date using a Black-Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rate of 5.97%,
dividend yield of 0%, volatility factor of the expected market price of
the Company's stock of 96.4%, and a weighted-average expected life of the
option of 4 years. There can be no assurance that the hypothetical grant
date present values of the options reflected in this table will be
realized.
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
No options were exercised by the Named Executives during 1999. The
following table sets forth the number of options held by the Named Executives
and their value at December 31, 1999.
70
<PAGE> 71
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END (#) OPTIONS AT FY-END($)(a)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles R. Miller 108,000 -- $ -- --
James G. VanDevender 350,000(b) -- -- --
Ronald R. Patterson -- -- -- --
Lawrence A. Humphrey 117,500 112,500 -- --
Michael M. Brooks 177,500(c) 112,500 -- --
Deborah H. Frankovich 85,625 84,375 -- --
Robert M. Starling 85,625 84,375 -- --
</TABLE>
- ---------------
(a) Market value of underlying securities at December 31, 1999 was below the
option exercise price for all options outstanding.
(b) Excludes 180,000 Value Options, which Mr. VanDevender gave up all rights
to exercise or dispose of and which were cancelled upon his subsequent
resignation from the Company on February 29, 2000. Reported shares
included 278,000 options, which expire, if not exercised within 90 days
following Mr. VanDevender's resignation from the Company, and 72,000
options, which expire on December 31, 2000.
(c) All reported options expire if not exercised within 90 days following Mr.
Brooks' resignation from the Company.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company has a supplemental executive retirement plan ("SERP") to
provide additional post-termination benefits to selected members of management
and certain highly compensated employees. As a result of a change in control
from the Merger, officers and employees of the Company who were participants in
the SERP prior to the Merger became fully vested in all benefits thereunder.
Pursuant to their respective employment agreements, certain Champion executives
became participants in the SERP and received retroactive benefits for their
years of service with Champion. In April 1997, the Board of Directors elected to
terminate the provision of future benefits for certain participants under the
plan.
Pursuant to the Executive Agreement, the Company was released from SERP
obligations to Messrs. Miller, VanDevender and Patterson. In turn, the Company
paid the senior executives $501,272 during 1998 (as reported in footnote (c) to
the Summary Compensation Table), which represented amounts due such individuals
for vested benefits under the SERP. In connection with the global settlement of
the Shareholder Litigation, the Company was also released from certain existing
contractual obligations under the SERP to certain former officers when the
settlement became effective. Messrs. Brooks, Humphrey, Starling and Ms.
Frankovich do not participate in the SERP. No other officers of the Company
participate in the SERP.
ANNUAL BONUS PLAN
The 1999 Bonus Plan (the "Bonus Plan") is designed to reward certain
employees of the Company for achieving corporate performance objectives. The
Bonus Plan is intended to provide an incentive for superior work and to motivate
participating employees toward higher achievement and business results, to link
their goals and interests more closely with those of the Company and its
shareholders, and to enable the Company to attract and retain highly qualified
employees. With respect to those officers holding the title of executive officer
and above, the Bonus Plan is administered and approved by the Compensation and
Stock Option Committee each year. Upon achievement by the
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Company of certain targeted operating results or other performance goals, such
as operating income, earnings per share or quality standards, the Company will
pay performance bonuses, the aggregate amounts of which will be determined
annually based upon an objective formula.
EMPLOYEE RETIREMENT SAVINGS 401(k) PLAN
The Company has a defined contribution 401(k) retirement plan covering
all eligible employees at its hospitals and the corporate office. Participants
may contribute up to 20% of pretax compensation, not exceeding a limit set
annually by the Internal Revenue Service. The Company matched $.25 for each
$1.00 of employee contributions up to 6% of employees' gross pay. The Company
may make additional discretionary contributions. In 1999, the Company
contributed $1.2 million to the plan.
CHANGE OF CONTROL SEPARATION PAY PLAN
Effective August 1, 1997 and amended April 1, 1999, the Company
established the Change of Control Separation Pay Plan (the "Separation Pay
Plan") to retain key employees and to provide, under certain circumstances,
severance to participants whose employment with the Company ends after a Change
of Control, as defined. Messrs. Miller, VanDevender and Patterson did not
participate in the Separation Pay Plan. Messrs. Humphrey, Brooks, Starling and
Ms. Frankovich and other officers and certain employees of the Company
participated in the Separation Pay Plan which was administered by the
Compensation and Stock Option Committee and provided participants with severance
benefits, under certain circumstances, ranging from twelve to twenty-four months
of base salary, as defined. The Separation Pay Plan expired on December 31,
1999.
EMPLOYMENT, SERVICES AND OTHER AGREEMENTS
On July 1, 1999, the Company entered into an employment agreement,
which was extended through February 29, 2000, with Mr. VanDevender. Pursuant
therewith, Mr. VanDevender's compensation included (i) a base salary of not less
than $45,000 per month, (ii) a bonus of $125,000, plus a variable component
based on the completion of certain events before December 31, 1999 and (iii)
certain benefits, including, but not limited to, life insurance and long-term
disability. The agreement also included certain non-compete provisions, which
will remain in effect for a period of 12 months following Mr. VanDevender's
resignation from the Company on February 29, 2000.
On November 25, 1998, the Company and the Senior Executives executed
the Executive Agreement superseding their then existing employment contracts and
certain other stock option and retirement agreements with the Company. See Item
8. Note 15 for a more comprehensive discussion of the terms of the agreement.
The Company entered into Indemnity and Insurance Coverage Agreements,
effective August 16, 1996, with the certain Named Executives, members of the
Board of Directors and certain other officers of the Company, to advance
reasonable defense costs in connection with litigation, investigations and other
proceedings, subject to their undertakings to repay such costs in certain
circumstances. Pursuant to these agreements, the Company incurred defense costs
of approximately $205,000 in 1999 on behalf of Messrs. Miller, VanDevender and
Patterson, collectively.
COMPENSATION OF DIRECTORS
Beginning in October 1999, each non-employee director of the Company
receives an annual fee of $25,000 (reduced from $30,000 prior thereto), a fee of
$2,500 for each meeting (or $1,000 for each
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telephonic conference) of the Board or any committee thereof attended and annual
grant of fully-vested stock options at each annual meeting of stockholders after
which the director continues to serve. Directors of the Company who are also
employees of the Company will not receive any additional compensation for their
service as directors. All directors will be reimbursed for reasonable expenses
incurred in the performance of their duties.
Directors are also eligible to receive options to purchase shares of
Common Stock under the 1996 Stock Incentive Plan (the "Incentive Plan"). In
1999, the Company granted each non-employee director named herein, 10,000 shares
of fully-vested options with option price equal to the closing price of the
Company's common stock on the date of grant ($0.63 per share).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning the shares of
Common Stock beneficially owned as of March 27, 2000 by (i) each stockholder
known by the Company to be a beneficial owner of more than five percent of
Common Stock, (ii) each director of the Company, (iii) Mr. James G. VanDevender,
the Company's former chief executive officer, and four of the most highly
compensated executive officers and (iv) all directors and executive officers of
the Company as a group.
The table below also does not reflect the aggregate shares of common
stock held by the former Champion shareholders. If these shareholders were
treated as a group under Section 13(d) of the Securities Exchange Act of 1934
for the purposes of holding their shares, the group would hold in excess of five
percent of the issued and outstanding shares of common stock, and the
shareholdings of each of the Champion shareholders would need to be disclosed in
the table. Although the former Champion shareholders could be deemed to be a
group for purposes of holding shares of the Company's common stock, they have
not filed the disclosure that would be required if they were considered a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNERSHIP (2)(3) CLASS (3)
---------------------------------------- ------------------------------- -------------
<S> <C> <C>
Park-Hospital GmbH(4,5) 19,906,742 34.5%
Paracelsus-Kliniken-Deutschland GmbH(4,5) 19,906,742 34.5%
Dr. Heiner Meyer zu Losebeck(4,5) 19,916,742(7) 34.5%
Peter Frommhold(5,6) 19,906,742 34.5%
Peter Schnitzler(4) 10,000(7) *
James G. VanDevender 450,000(8) *
Nolan Lehmann(9,10,11) 2,585,409 4.5%
Equus II Incorporated(9,10) 2,018,213 3.5%
Equus Capital Partners, L.P.(9,10) 540,481 1.0
Joan S. Fortune 10,000(7) *
Robert W. Miller 15,000(7) *
Lawrence P. English 10,000(7) *
Olympus Private Placement, L.P.(12, 13) 3,319,261 5.8%
Robert S. Morris(12, 13) 3,335,239 5.8%
James A. Conroy(12, 13) 3,335,239 5.8%
Lawrence A. Humphrey 195,910(14) *
Michael M. Brooks 212,916(15) *
Deborah H. Frankovich 167,035(16) *
Robert M. Starling 135,606(17) *
All directors and officers as a group (17 persons) 23,960,183(18) 40.7%
</TABLE>
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<PAGE> 74
- ------------
* Percentage is less than 1% of the total outstanding shares of the Company.
(1) The address of each named director and officer, unless otherwise
indicated, is c/o Paracelsus Healthcare Corporation, 515 W. Greens Road,
Suite 500, Houston, Texas 77067.
(2) Unless otherwise indicated, such shares of Common Stock are owned directly
with sole voting and investment power.
(3) Includes shares issuable upon exercise of stock options or warrants that
are exercisable as of, or exercisable 60 days after March 27, 2000. Such
shares, for the purpose of computing the percentage of outstanding Common
Stock, are deemed owned by each named individual and by the group, but are
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
(4) The address is Sedanstrasse 109, D-49076 Osnabruck, Federal Republic of
Germany.
(5) Park is the record owner of such shares. PKD, as the owner of all of Park
shares, may be deemed to beneficially own the shares of the Company's
common stock owned by Park. Pursuant to the Schedule 13D (Amendment No. 2)
filed by Park, PKD, Dr. Heiner Meyer zu Losebeck, and Mr. Peter Frommhold
on December 8, 1999, Dr. Meyer zu Losebeck and Mr. Frommhold, as
co-executors of the Estate of Professor Dr. Hartmut Krukemeyer, and the
Managing Directors of Park and PKD share indirect voting and investment
power over the shares of Common Stock owned by Park. Therefore, they may
be deemed to beneficially own the shares of Common Stock owned by Park.
(6) The address is Drubbel 17/18, D-48143 Munster, Federal Republic of
Germany.
(7) Includes 10,000 shares issuable upon exercise of options that are
currently exercisable.
(8) Includes 350,000 shares issuable upon exercise of options that are
currently exercisable. Options to purchase 278,000 shares expire if not
exercised upon 90 days following Mr. VanDevender's resignation from the
Company and options to purchase 72,000 shares expire if not exercised on
or before December 31, 2000.
(9) Mr. Lehmann is President of Equus Capital Management Corporation, the
financial advisor and manager of Equus II Incorporated and Equus Capital
Partners, L.P. Mr. Lehmann is also President and Director of Equus II
Incorporated.
(10) Address is 2929 Allen Parkway, Suite 2500, Houston, TX 77019.
(11) By reason of his status as President of Equus Capital Management
Corporation and as President and Director of Equus II Incorporated, Mr.
Lehmann may be deemed to be the beneficial owner of the common shares
owned by Equus II Incorporated and Equus Capital Partners, L.P. In
addition, Mr. Lehmann owns directly 16,715 shares of Common Stock and
10,000 shares issuable upon exercise of options that are currently
exercisable. Accordingly, Mr. Lehmann may be deemed to be the beneficial
owner of 2,585,409 shares of Common Stock. Mr. Lehmann disclaims
beneficial ownership of Common Stock owned by Equus II Incorporated and
Equus Capital Partners, L.P. Both Equus II Incorporated and Equus Capital
Partners, L.P. (as well as other entities with which Mr. Lehmann is
associated) are former Champion shareholders. The number of shares
beneficially owned by Mr. Lehmann does not include any shares owned by
other former Champion shareholders.
(12) Address of principal business office for each reporting person is c/o
Olympus Partners, Metro Center, One Station Place, Stamford, Connecticut
06902
(13) Pursuant to the Schedule 13D filed on September 17, 1999, by the indicated
reporting persons, Messrs. Morris and Conroy share control and may be
deemed beneficial owners of the 3,319,261 shares owned by Olympus Private
Placement, L.P. and 15,978 shares owned by Olympus Executive Fund, L.P. by
virtue of their positions as general partners or officers of general
partners of these entities or other entities that control these entities.
Olympus Private Placement, L. P. and Olympus Executive Fund, L.P. are
former Champion shareholders and may be part of a group of former Champion
shareholders. The number of shares beneficially owned by Olympus Private
Placement, L. P. and Olympus Executive Fund, L.P. does not include any
shares owned by other former Champion shareholders.
(14) Includes 152,916 shares issuable upon exercise of options that are
currently exercisable, or exercisable within 60 days.
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(15) Includes 212,916 shares issuable upon exercise of options that are
currently exercisable, or exercisable within 60 days. If not exercised all
reported options expire upon 90 days following Mr. Brooks' resignation
from the Company.
(16) Includes 112,187 shares issuable upon exercise of options that are
currently exercisable, or exercisable within 60 days.
(17) Includes 112,187 shares issuable upon exercise of options that are
currently exercisable, or exercisable within 60 days.
(18) Includes 1,218,434 shares issuable upon exercise of options that are
currently exercisable, or exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE EXECUTIVE AGREEMENT - On November 25, 1998, the Company and the
Senior Executives, Mr. Charles R. Miller, Mr. James G. VanDevender and Mr.
Ronald R. Patterson executed the Executive Agreement superseding their existing
employment contracts and certain other stock option and retirement agreements
with the Company. Under the Executive Agreement, as amended, Messrs. Miller and
Patterson remained in their management positions with the Company until their
resignation on June 30, 1999. Mr. VanDevender entered into a separate employment
agreement with the Company and was designated interim Chief Executive Officer
effective July 1, 1999 until his resignation from the Company on February 29,
2000.
Pursuant to the Executive Agreement, the Company paid the Senior
Executives $501,000 in 1998 for amounts due under the SERP, and the Senior
Executives released the Company from any obligations under the SERP or any
similar retirement plan. In April 1999, the Company also paid the Senior
Executives $4.6 million, of which approximately $4.0 million represented
consideration for the required stay-period which expired June 30, 1999 and
$645,000 was related to a non-compete arrangement provided in the Executive
Agreement. Pursuant to the Executive Agreement, the Senior Executives also gave
up all rights to exercise or dispose of 696,000 Value Options that they received
at the time of the Merger. The Value Options were cancelled upon the Senior
Executives' resignation from the Company. The Company and the Senior Executives
provided each other with mutual releases of any and all obligations either party
may have under the respective employment agreements or otherwise arising out of
the Senior Executives' employment.
6.51% SUBORDINATED NOTE - The Former Majority Shareholder received a
$7.2 million 6.51% subordinated note from the Company (See Note 7). The Company
paid interest on such note of $467,000 in 1999 and 1998 and $533,000 in 1997. In
connection with the global settlement of the Shareholder Litigation and as the
result of the repayment of the senior credit facilities, the Company is
obligated to resume payments of principal on the stated terms of the note and
use its reasonable best efforts to repay outstanding amounts in arrears. As the
result of the default of interest payment under the Notes, the Company is
prohibited from making principal or interest payments on the note. Additionally,
the Former Majority Shareholder has the ability to accelerate the debt, to
increase the interest rate on the note to 8.5% per annum and seek other remedies
from the Company.
CONSULTING AGREEMENT - Effective August 1996, the Company was a party
to an agreement with the Former Chairman, pursuant to which he provided
management and strategic advisory services to the Company for an annual
consulting fee for a term not to exceed ten years. The Company paid the Former
Chairman consulting fees of $187,500 in 1999 and 1998 and $500,000 in 1997. In
connection with the global settlement of the Shareholder Litigation, the Company
paid the Former Chairman $1.0 million in cash and issued to him 1.0 million
shares of common stock to terminate the agreement.
INSURANCE AGREEMENT - The Company is also a party to an insurance
agreement, which provides insurance benefits to the Former Chairman in the event
of his death or permanent disability in an amount equal to $1.0 million per year
during the 10-year term of such agreement, which expires 2006.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
See Part II. Item 8 of this Report.
(A)(2) FINANCIAL STATEMENT SCHEDULE
PARACELSUS HEALTHCARE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
($ in 000's)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF YEAR EXPENSES WRITE-OFFS OTHER END OF YEAR
----------- ---------- ---------- ---------- ----- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999
Allowance for doubtful accounts $40,551 41,692 (54,690) -- $27,553
Year ended December 31, 1998
Allowance for doubtful accounts $54,442 42,659 (56,550) -- $40,551
Year ended December 31, 1997
Allowance for doubtful accounts $36,469 46,606 (28,633) -- $54,442
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable or have been disclosed
in the consolidated financial statements and notes thereto and therefore have
been omitted.
(A)(3) EXHIBITS
3.1(s) Amended and Restated Bylaws of Paracelsus Healthcare
Corporation dated March 24, 1999.
3.4(a) Amended and Restated Articles of Incorporation of
Paracelsus.
4.1(a) Indenture, dated August 16, 1996 between Paracelsus and
Bank of New York (as successor to AmSouth Bank of Alabama)
as Trustee (including the form of certificate representing
the 10% Senior Subordinated Notes due 2006).
4.2(b) Shareholder Protection Rights Agreement between Paracelsus
and ChaseMellon Shareholder Services, L.L.C, as Rights
Agent.
4.5(c) Form of Warrant issued pursuant to Champion Series E Note
Purchase Agreement, dated May 1, 1995, as amended.
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<PAGE> 77
4.6(d) Form of Warrant issued pursuant to Champion Series D Note
and Stock Purchase Agreement dated December 31, 1993, as
amended.
4.9(e) Certificate representing Common Stock.
10.1(e) Pooling Agreement, dated as of April 16, 1993 among PHC
Funding Corp. II ("PFC II"), Sheffield Receivables
Corporation and Bankers Trust Company, as trustee (the
"Trustee").
10.2(e) Servicing Agreement, dated as of April 16, 1993, among PFC
II, Paracelsus and the Trustee.
10.3(e) Guarantee, dated as of April 16, 1993, by Paracelsus in
favor of PFC II.
10.4(e) Sale and Servicing Agreement between subsidiaries of
Paracelsus and PFC II.
10.5(e) Subordinate Note by PFC II in favor of Hospitals.
10.12(q) Stock Purchase Agreement for Bledsoe County General
Hospital, dated March 12, 1999, among Paracelsus
Healthcare Corporation, Paracelsus Bledsoe County General
Hospital, Inc., and Associates Capital Group, LLC.
10.13(q) First Amendment to Stock Purchase Agreement for Bledsoe
County General Hospital, dated March 31, 1999, among
Paracelsus Healthcare Corporation, Paracelsus Bledsoe
County General Hospital, Inc., and Associates Capital
Group, LLC.
10.16(f) The Restated Paracelsus Healthcare Corporation
Supplemental Executive Retirement Plan.
10.17(a) Amendment No. 1 to the Supplemental Executive Retirement
Plan.
10.19(e) Paracelsus Healthcare Corporation Annual Incentive Plan
(10.17).
10.20(r) Asset Purchase Agreement dated March 15, 1999, by and
among Paracelsus Convalescent Hospitals, Inc., Paracelsus
Real Estate Corporation and Sunland Associates, Inc.
10.21(r) Amendment One to Asset Purchase Agreement, dated April 14,
1999, by and among Paracelsus Convalescent Hospitals,
Inc., Paracelsus Real Estate Corporation and Sunland
Associates, Inc.
10.22(r) Rheem Valley Asset Purchase Agreement, dated March 15,
1999, by and among Paracelsus Convalescent Hospitals,
Inc., Paracelsus Real Estate Corporation and Sunland
Associates, Inc.
10.23(r) Amendment One to Rheem Valley Asset Purchase Agreement,
dated April 14, 1999, by and among Paracelsus Convalescent
Hospitals, Inc., Paracelsus Real Estate Corporation and
Sunland Associates, Inc.
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10.24(s) Stock Purchase Agreement dated September 14, 1999, by and
among Paracelsus Healthcare Corporation, Paracelsus
Senatobia Community Hospital, Inc. and Associates Capital
Group, LLC.
10.26(t) Recapitalization Agreement, dated August 16, 1999, by and
among Paracelsus Healthcare Corporation, PHC/CHC Holdings,
Inc., as parents, and PHC/Psychiatric Healthcare
Corporation, PHC-Salt Lake City, Inc., Paracelsus Pioneer
Valley Hospital, Inc., Pioneer Valley Health Plan, Inc.,
PHC-Jordan Valley, Inc., Paracelsus PHC Regional Medical
Center, Inc., Paracelsus Davis Hospital, Inc., PHC Utah,
Inc., and Clinicare of Utah, Inc., as sellers, and JLL
Hospital, LLC, as buyer.
10.33(f) Restated Champion Healthcare Corporation Founders' Stock
Option Plan.
10.34(a) License Agreement between Dr. Manfred George Krukemeyer
and Paracelsus.
10.36(a) Registration Rights Agreement between Paracelsus and
Park-Hospital GmbH.
10.39(a) Insurance Agreement between Paracelsus and Dr. Manfred G.
Krukemeyer.
10.40(a) Non-Compete Agreement between Paracelsus and Dr. Manfred
G. Krukemeyer.
10.42(a) Dividend and Note Agreement between Paracelsus and
Park-Hospital GmbH.
10.48(a) Paracelsus 1996 Stock Incentive Plan.
10.49(a) Paracelsus Healthcare Corporation Executive Officer
Performance Bonus Plan.
10.54(a) Registration Rights Agreement among Paracelsus and certain
Champion Investors.
10.56(a) Indemnity and Insurance Coverage Agreement between
Paracelsus and certain Champion and Paracelsus executive
officers.
10.57(m) AmeriHealth Amended and Restated 1988 Non-Qualified Stock
Option Plan.
10.58(k) Champion Employee Stock Option Plan dated December 31,
1991, as amended (10.14).
10.59(k) Champion Employee Stock Option Plan No. 2 dated May 29,
1992, as amended (10.15).
10.60(k) Champion Employee Stock Option Plan No. 3 dated September
1992, as amended (10.16).
10.61(k) Champion Employee Stock Option Plan No. 4, dated January
5, 1994, as amended (10.17).
10.62(n) Champion Healthcare Corporation Physicians Stock Option
Plan (4.2).
10.63(k) Champion Selected Executive Stock Option Plan No. 5, dated
May 25, 1995 (4.12).
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<PAGE> 79
10.64(k) Champion Directors' Stock Option Plan, dated 1992.
10.65(a) Paracelsus' 6.51% Subordinated Notes Due 2006 (10.64).
10.67(g) The Second Amended and First Restated Asset Purchase
Agreement for Chico Community Hospital, dated December 15,
1997, and as amended on June 12, 1998.
10.68(g) Asset Purchase Agreement for Chico Community
Rehabilitation Hospital, dated December 15, 1997, and as
amended on June 10, 1998.
10.69(g) Agreement for Purchase and Sale of Partnership Interest,
dated June 1, 1998, by and between Dakota Medical
Foundation and Paracelsus Healthcare Corporation of North
Dakota, Inc.
10.70(h) Asset Purchase Agreement, dated September 30, 1998, by and
among Alta Healthcare System LLC, and Paracelsus
Healthcare Corporation.
10.71(i) Settlement Agreement between the (a) United States of
America, acting through the United States Department of
Justice and on behalf of the Office of Inspector General
of the Department of Health and Human Services; (b)
Timothy Hill and Alan Leavitt; (c) Paracelsus Healthcare
Corporation; and (d) individual defendant Joseph Sharp.
10.72(j) $180 Million Reducing Revolving Credit Facility and $75
Million Term Loan Facilities dated as of March 30, 1998,
among Paracelsus, Banque Paribas, as agent, and other
lenders named therein.
10.73(j) Change in Control Separation Pay Plan.
10.74(k) The First Amendment to Amended and Restated Credit
Agreement, effective June 15, 1998, by and among
Paracelsus Healthcare Corporation, Paribas, Toronto
Dominion (Texas), Inc. and Bank Montreal.
10.75(o) Memorandum of Understanding among Paracelsus Healthcare
Corporation, Charles R. Miller, James G. VanDevender,
Ronald R. Patterson, Park-Hospital GmbH, and the members
of the Ad Hoc Committee of Former Shareholders of Champion
Healthcare Corporation.
10.76 Employment agreement effective July 1, 1999 between James
G. VanDevender and Paracelsus Healthcare Corporation. *
10.77(p) Third Amendment to Amended and Restated Credit Agreement
and Approval of Asset Dispositions effective June 30,
1999.
10.78(p) Shareholder Agreement dated March 19, 1999, between
Park-Hospital GmbH and Paracelsus Healthcare Corporation.
10.79(p) Settlement Agreement dated March 24, 1999, by and among
the former shareholders of Champion Healthcare
Corporation, Park-Hospital GmbH, Dr. Manfred Georg
Krukemeyer, and Paracelsus Healthcare Corporation.
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<PAGE> 80
10.80(p) Stipulation of Settlement dated May 11, 1999, by and among
plaintiffs, individually and as representatives of the
Class, as defined, Paracelsus Healthcare Corporation,
Manfred G. Krukemeyer, R.J. Messenger, James T. Rush,
Charles R. Miller, James G. VanDevender, the Champion
Shareholders, as defined, Park-Hospital GmbH, Donaldson
Lufkin & Jenrette Securities Corporation, Bear Stearns &
Co., Inc., Smith Barney, Inc., and ABN AMRO Chicago
Corporation in connection with the litigation captioned In
re Paracelsus Corp. Securities Litigation, Master File No.
H-96-3464 (EW) filed with the United States District Court
for the Southern District of Texas.
10.81(p) Settlement Agreement dated March 17, 1999, by and between
James G. Caven and Robert Orovitz, derivatively on behalf
of Champion Healthcare Corporation and double derivatively
on behalf of Paracelsus Healthcare Corporation; Paracelsus
Healthcare Corporation; the former shareholders of
Champion Healthcare Corporation; Park-Hospital GmbH;
Donaldson Lufkin & Jenrette Securities Corporation; Bears
Stearns & Co.; Smith Barney, Inc.; and ABN AMRO Chicago
Corporation; Manfred Georg Krukemeyer; Charles R. Miller;
James G. VanDevender; Ronald R. Patterson; R.J. Messenger;
James T. Rush; Robert C. Joyner; Michael D. Hofmann;
Christian A. Lange; and Scott K. Barton.
10.82 Amendment No. 1 to Employment Agreement effective July 1,
1999 between James G. VanDevender and Paracelsus
Healthcare Corporation.
21.1 List of subsidiaries of Paracelsus.
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
- ----------------------
* Portions of the indicated exhibit have been omitted pursuant to a
request for confidentiality treatment, which was filed separately with the
Securities and Exchange Commission on March 30, 2000.
(a) Incorporated by reference from Exhibit of the same number (or if otherwise
noted, Exhibit number contained in parenthesis which refers to the exhibit
number in such Quarterly Report) to the Company's Quarterly Report on Form
10-Q for quarter ended September 30, 1996.
(b) Incorporated by reference from Exhibit of the same number to the Company's
Registration Statement on Form 8-A, filed on August 12, 1996.
(c) Incorporated by reference from Exhibit 10.23(g) to Champion's Annual
Report on Form 10-K for the year ended December 31, 1995.
(d) Incorporated by reference from Exhibit 10.23(f) to Champion's Annual
Report on Form 10-K for the year ended December 31, 1995.
(e) Incorporated by reference from Exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
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<PAGE> 81
(f) Incorporated by reference from Exhibit of the same number to the Company's
Registration Statement on Form S-4, Registration No. 333-08521, filed on
July 19, 1996.
(g) Incorporated by reference from Exhibits of the same numbers to the
Company's Current Report on Form 8-K, dated June 30, 1998.
(h) Incorporated by reference from Exhibit of the same number to the Company's
Current Report on Form 8-K, dated June 30, 1998.
(i) Incorporated by reference from Exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
(j) Incorporated by reference from Exhibits 10.6 and 10.15 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(k) Incorporated by reference from Exhibit 10.7 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(l) Incorporated by reference from Exhibit of the same number (or if otherwise
noted, Exhibit number contained in parenthesis which refers to the exhibit
number in such Annual Report) to Champion's Annual Report for the year
ended December 31, 1994.
(m) Incorporated by reference from Exhibit 10.06 to AmeriHealth's Annual
Report on Form 10K for the year ended December 31, 1992.
(n) Incorporated by reference from Exhibit of the same number (or if otherwise
noted, Exhibit number contained in parenthesis which refers to the exhibit
number in such Registration Statement) to Champion's Registration
Statement on Form S-8, filed on August 3, 1995.
(o) Incorporated by reference from Exhibit of the same number to the Company's
Annual Report on Form 10-K, dated December 31, 1998.
(p) Incorporated by reference from Exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
(q) Incorporated by reference from Exhibit of the same number to the Company's
Current Report on Form 8-K, dated April 15, 1999.
(r) Incorporated by reference from Exhibit of the same number to the Company's
Current Report on Form 8-K, dated July 2, 1999.
(s) Incorporated by reference from Exhibit of the same number to the Company's
Current Report on Form 8-K, dated September 30, 1999.
(t) Incorporated by reference from Exhibit of the same number to the Company's
Current Report on Form 8-K, dated October 8, 1999.
(u) Incorporated by reference from Exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter dated June 30, 1999.
81
<PAGE> 82
(a) REPORTS ON FORM 8-K
The Company filed on October 15, 1999, a Current Report on Form 8-K,
dated September 30, 1999, reporting pursuant to Item 2, the sale of the stock of
Paracelsus Senatobia Community Hospital, Inc.
The Company filed on October 25, 1999, a Current Report on Form 8-K,
dated October 8, 1999, reporting pursuant to Item 2, the sale of 93.9% of the
outstanding common stock of a wholly owned subsidiary which owned substantially
all of the assets of five hospitals and related facilities located in Salt Lake
City, Utah.
82
<PAGE> 83
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARACELSUS HEALTHCARE CORPORATION
(Registrant)
Date: March 30, 2000 By: /s/ ROBERT L. SMITH
-----------------------------------------
Robert L. Smith
Chief Executive Officer & Director
Pursuant to the requirement of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT L. SMITH Chief Executive Officer & March 30, 2000
- ----------------------------------- Director
Robert L. Smith
/s/ LAWRENCE A. HUMPHREY Executive Vice President, Chief March 30, 2000
- ----------------------------------- Financial Officer
Lawrence A. Humphrey
/s/ ROBERT M. STARLING Senior Vice President and March 30, 2000
- ----------------------------------- Controller
Robert M. Starling
/s/ HEINER MEYER ZU LOSEBECK Director March 30, 2000
- -----------------------------------
Dr. Heiner Meyer Zu Losebeck
/s/ NOLAN LEHMANN Director March 30, 2000
- -----------------------------------
Nolan Lehmann
/s/ PETER SCHNITZLER Director March 30, 2000
- -----------------------------------
Peter Schnitzler
/s/ LAWRENCE P. ENGLISH Director March 30, 2000
- -----------------------------------
Lawrence P. English
/s/ JOAN S. FORTUNE Director March 30, 2000
- -----------------------------------
Joan S. Fortune
/s/ ROBERT W. MILLER Director March 30, 2000
- -----------------------------------
Robert W. Miller
</TABLE>
83
<PAGE> 84
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1(s) Amended and Restated Bylaws of Paracelsus Healthcare
Corporation dated March 24, 1999.
3.4(a) Amended and Restated Articles of Incorporation of
Paracelsus.
4.1(a) Indenture, dated August 16, 1996 between Paracelsus and
Bank of New York (as successor to AmSouth Bank of Alabama)
as Trustee (including the form of certificate representing
the 10% Senior Subordinated Notes due 2006).
4.2(b) Shareholder Protection Rights Agreement between Paracelsus
and ChaseMellon Shareholder Services, L.L.C, as Rights
Agent.
4.5(c) Form of Warrant issued pursuant to Champion Series E Note
Purchase Agreement, dated May 1, 1995, as amended.
</TABLE>
<PAGE> 85
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
4.6(d) Form of Warrant issued pursuant to Champion Series D Note
and Stock Purchase Agreement dated December 31, 1993, as
amended.
4.9(e) Certificate representing Common Stock.
10.1(e) Pooling Agreement, dated as of April 16, 1993 among PHC
Funding Corp. II ("PFC II"), Sheffield Receivables
Corporation and Bankers Trust Company, as trustee (the
"Trustee").
10.2(e) Servicing Agreement, dated as of April 16, 1993, among PFC
II, Paracelsus and the Trustee.
10.3(e) Guarantee, dated as of April 16, 1993, by Paracelsus in
favor of PFC II.
10.4(e) Sale and Servicing Agreement between subsidiaries of
Paracelsus and PFC II.
10.5(e) Subordinate Note by PFC II in favor of Hospitals.
10.12(q) Stock Purchase Agreement for Bledsoe County General
Hospital, dated March 12, 1999, among Paracelsus
Healthcare Corporation, Paracelsus Bledsoe County General
Hospital, Inc., and Associates Capital Group, LLC.
10.13(q) First Amendment to Stock Purchase Agreement for Bledsoe
County General Hospital, dated March 31, 1999, among
Paracelsus Healthcare Corporation, Paracelsus Bledsoe
County General Hospital, Inc., and Associates Capital
Group, LLC.
10.16(f) The Restated Paracelsus Healthcare Corporation
Supplemental Executive Retirement Plan.
10.17(a) Amendment No. 1 to the Supplemental Executive Retirement
Plan.
10.19(e) Paracelsus Healthcare Corporation Annual Incentive Plan
(10.17).
10.20(r) Asset Purchase Agreement dated March 15, 1999, by and
among Paracelsus Convalescent Hospitals, Inc., Paracelsus
Real Estate Corporation and Sunland Associates, Inc.
10.21(r) Amendment One to Asset Purchase Agreement, dated April 14,
1999, by and among Paracelsus Convalescent Hospitals,
Inc., Paracelsus Real Estate Corporation and Sunland
Associates, Inc.
10.22(r) Rheem Valley Asset Purchase Agreement, dated March 15,
1999, by and among Paracelsus Convalescent Hospitals,
Inc., Paracelsus Real Estate Corporation and Sunland
Associates, Inc.
10.23(r) Amendment One to Rheem Valley Asset Purchase Agreement,
dated April 14, 1999, by and among Paracelsus Convalescent
Hospitals, Inc., Paracelsus Real Estate Corporation and
Sunland Associates, Inc.
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.24(s) Stock Purchase Agreement dated September 14, 1999, by and
among Paracelsus Healthcare Corporation, Paracelsus
Senatobia Community Hospital, Inc. and Associates Capital
Group, LLC.
10.26(t) Recapitalization Agreement, dated August 16, 1999, by and
among Paracelsus Healthcare Corporation, PHC/CHC Holdings,
Inc., as parents, and PHC/Psychiatric Healthcare
Corporation, PHC-Salt Lake City, Inc., Paracelsus Pioneer
Valley Hospital, Inc., Pioneer Valley Health Plan, Inc.,
PHC-Jordan Valley, Inc., Paracelsus PHC Regional Medical
Center, Inc., Paracelsus Davis Hospital, Inc., PHC Utah,
Inc., and Clinicare of Utah, Inc., as sellers, and JLL
Hospital, LLC, as buyer.
10.33(f) Restated Champion Healthcare Corporation Founders' Stock
Option Plan.
10.34(a) License Agreement between Dr. Manfred George Krukemeyer
and Paracelsus.
10.36(a) Registration Rights Agreement between Paracelsus and
Park-Hospital GmbH.
10.39(a) Insurance Agreement between Paracelsus and Dr. Manfred G.
Krukemeyer.
10.40(a) Non-Compete Agreement between Paracelsus and Dr. Manfred
G. Krukemeyer.
10.42(a) Dividend and Note Agreement between Paracelsus and
Park-Hospital GmbH.
10.48(a) Paracelsus 1996 Stock Incentive Plan.
10.49(a) Paracelsus Healthcare Corporation Executive Officer
Performance Bonus Plan.
10.54(a) Registration Rights Agreement among Paracelsus and certain
Champion Investors.
10.56(a) Indemnity and Insurance Coverage Agreement between
Paracelsus and certain Champion and Paracelsus executive
officers.
10.57(m) AmeriHealth Amended and Restated 1988 Non-Qualified Stock
Option Plan.
10.58(k) Champion Employee Stock Option Plan dated December 31,
1991, as amended (10.14).
10.59(k) Champion Employee Stock Option Plan No. 2 dated May 29,
1992, as amended (10.15).
10.60(k) Champion Employee Stock Option Plan No. 3 dated September
1992, as amended (10.16).
10.61(k) Champion Employee Stock Option Plan No. 4, dated January
5, 1994, as amended (10.17).
10.62(n) Champion Healthcare Corporation Physicians Stock Option
Plan (4.2).
10.63(k) Champion Selected Executive Stock Option Plan No. 5, dated
May 25, 1995 (4.12).
</TABLE>
<PAGE> 87
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.64(k) Champion Directors' Stock Option Plan, dated 1992.
10.65(a) Paracelsus' 6.51% Subordinated Notes Due 2006 (10.64).
10.67(g) The Second Amended and First Restated Asset Purchase
Agreement for Chico Community Hospital, dated December 15,
1997, and as amended on June 12, 1998.
10.68(g) Asset Purchase Agreement for Chico Community
Rehabilitation Hospital, dated December 15, 1997, and as
amended on June 10, 1998.
10.69(g) Agreement for Purchase and Sale of Partnership Interest,
dated June 1, 1998, by and between Dakota Medical
Foundation and Paracelsus Healthcare Corporation of North
Dakota, Inc.
10.70(h) Asset Purchase Agreement, dated September 30, 1998, by and
among Alta Healthcare System LLC, and Paracelsus
Healthcare Corporation.
10.71(i) Settlement Agreement between the (a) United States of
America, acting through the United States Department of
Justice and on behalf of the Office of Inspector General
of the Department of Health and Human Services; (b)
Timothy Hill and Alan Leavitt; (c) Paracelsus Healthcare
Corporation; and (d) individual defendant Joseph Sharp.
10.72(j) $180 Million Reducing Revolving Credit Facility and $75
Million Term Loan Facilities dated as of March 30, 1998,
among Paracelsus, Banque Paribas, as agent, and other
lenders named therein.
10.73(j) Change in Control Separation Pay Plan.
10.74(k) The First Amendment to Amended and Restated Credit
Agreement, effective June 15, 1998, by and among
Paracelsus Healthcare Corporation, Paribas, Toronto
Dominion (Texas), Inc. and Bank Montreal.
10.75(o) Memorandum of Understanding among Paracelsus Healthcare
Corporation, Charles R. Miller, James G. VanDevender,
Ronald R. Patterson, Park-Hospital GmbH, and the members
of the Ad Hoc Committee of Former Shareholders of Champion
Healthcare Corporation.
10.76 Employment agreement effective July 1, 1999 between James
G. VanDevender and Paracelsus Healthcare Corporation. *
10.77(p) Third Amendment to Amended and Restated Credit Agreement
and Approval of Asset Dispositions effective June 30,
1999.
10.78(p) Shareholder Agreement dated March 19, 1999, between
Park-Hospital GmbH and Paracelsus Healthcare Corporation.
10.79(p) Settlement Agreement dated March 24, 1999, by and among
the former shareholders of Champion Healthcare
Corporation, Park-Hospital GmbH, Dr. Manfred Georg
Krukemeyer, and Paracelsus Healthcare Corporation.
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.80(p) Stipulation of Settlement dated May 11, 1999, by and among
plaintiffs, individually and as representatives of the
Class, as defined, Paracelsus Healthcare Corporation,
Manfred G. Krukemeyer, R.J. Messenger, James T. Rush,
Charles R. Miller, James G. VanDevender, the Champion
Shareholders, as defined, Park-Hospital GmbH, Donaldson
Lufkin & Jenrette Securities Corporation, Bear Stearns &
Co., Inc., Smith Barney, Inc., and ABN AMRO Chicago
Corporation in connection with the litigation captioned In
re Paracelsus Corp. Securities Litigation, Master File No.
H-96-3464 (EW) filed with the United States District Court
for the Southern District of Texas.
10.81(p) Settlement Agreement dated March 17, 1999, by and between
James G. Caven and Robert Orovitz, derivatively on behalf
of Champion Healthcare Corporation and double derivatively
on behalf of Paracelsus Healthcare Corporation; Paracelsus
Healthcare Corporation; the former shareholders of
Champion Healthcare Corporation; Park-Hospital GmbH;
Donaldson Lufkin & Jenrette Securities Corporation; Bears
Stearns & Co.; Smith Barney, Inc.; and ABN AMRO Chicago
Corporation; Manfred Georg Krukemeyer; Charles R. Miller;
James G. VanDevender; Ronald R. Patterson; R.J. Messenger;
James T. Rush; Robert C. Joyner; Michael D. Hofmann;
Christian A. Lange; and Scott K. Barton.
10.82 Amendment No. 1 to Employment Agreement effective July 1,
1999 between James G. VanDevender and Paracelsus
Healthcare Corporation.
21.1 List of subsidiaries of Paracelsus.
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
</TABLE>
- ----------------------
* Portions of the indicated exhibit have been omitted pursuant to a
request for confidentiality treatment, which was filed separately with the
Securities and Exchange Commission on March 30, 2000.
(a) Incorporated by reference from Exhibit of the same number (or if otherwise
noted, Exhibit number contained in parenthesis which refers to the exhibit
number in such Quarterly Report) to the Company's Quarterly Report on Form
10-Q for quarter ended September 30, 1996.
(b) Incorporated by reference from Exhibit of the same number to the Company's
Registration Statement on Form 8-A, filed on August 12, 1996.
(c) Incorporated by reference from Exhibit 10.23(g) to Champion's Annual
Report on Form 10-K for the year ended December 31, 1995.
(d) Incorporated by reference from Exhibit 10.23(f) to Champion's Annual
Report on Form 10-K for the year ended December 31, 1995.
(e) Incorporated by reference from Exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
<PAGE> 89
(f) Incorporated by reference from Exhibit of the same number to the Company's
Registration Statement on Form S-4, Registration No. 333-08521, filed on
July 19, 1996.
(g) Incorporated by reference from Exhibits of the same numbers to the
Company's Current Report on Form 8-K, dated June 30, 1998.
(h) Incorporated by reference from Exhibit of the same number to the Company's
Current Report on Form 8-K, dated June 30, 1998.
(i) Incorporated by reference from Exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
(j) Incorporated by reference from Exhibits 10.6 and 10.15 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(k) Incorporated by reference from Exhibit 10.7 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(l) Incorporated by reference from Exhibit of the same number (or if otherwise
noted, Exhibit number contained in parenthesis which refers to the exhibit
number in such Annual Report) to Champion's Annual Report for the year
ended December 31, 1994.
(m) Incorporated by reference from Exhibit 10.06 to AmeriHealth's Annual
Report on Form 10K for the year ended December 31, 1992.
(n) Incorporated by reference from Exhibit of the same number (or if otherwise
noted, Exhibit number contained in parenthesis which refers to the exhibit
number in such Registration Statement) to Champion's Registration
Statement on Form S-8, filed on August 3, 1995.
(o) Incorporated by reference from Exhibit of the same number to the Company's
Annual Report on Form 10-K, dated December 31, 1998.
(p) Incorporated by reference from Exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
(q) Incorporated by reference from Exhibit of the same number to the Company's
Current Report on Form 8-K, dated April 15, 1999.
(r) Incorporated by reference from Exhibit of the same number to the Company's
Current Report on Form 8-K, dated July 2, 1999.
(s) Incorporated by reference from Exhibit of the same number to the Company's
Current Report on Form 8-K, dated September 30, 1999.
(t) Incorporated by reference from Exhibit of the same number to the Company's
Current Report on Form 8-K, dated October 8, 1999.
(u) Incorporated by reference from Exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter dated June 30, 1999.
<PAGE> 1
EXHIBIT 10.76
[ ] Employee's Copy
[ ] Company's Copy
PARACELSUS HEALTHCARE CORPORATION
EMPLOYMENT AGREEMENT
To JAMES G. VANDEVENDER
This Agreement establishes the terms of your continued employment with
Paracelsus Healthcare Corporation, Inc., a California corporation (the
"Company") and reflects your new position as the Company's interim chief
executive officer ("CEO").
EMPLOYMENT AND DUTIES You and the Company agree to your employment as interim
CEO. In such position, you will report directly to the
Company's Board of Directors (the "Board"). You agree
to perform whatever duties the Board may assign you
from time to time that are consistent with those of the
CEO of a public company. During your employment, you
agree to devote your full business time, attention, and
energies to performing those duties (except as the
Board otherwise agrees from time to time). On
termination of this Agreement, you agree that you
resign as an officer and director and from all other
officer and director positions at the Company and
subsidiaries.
You agree that, if the Company hires or promotes a new
CEO during the Term but retains your services in some
other capacity, your change in position by itself does
not constitute termination without Cause and does not
entitle you to any Severance, whether under this
Agreement or otherwise. However, the hiring or
promotion of a new CEO does not alter the Company's
obligations to you under this Agreement, including
those obligations described under the Salary, Benefits,
Bonus, Payments on Termination, and Severance sections.
TERM OF EMPLOYMENT Your employment under this Agreement begins as of July
1, 1999 (the "Effective Date") and, unless sooner
terminated or extended, ends on December 31, 1999. The
period running from the Effective Date to the
applicable date in the preceding sentence is the
"Term."
<PAGE> 2
COMPENSATION
Salary The Company will pay you a salary (the "Salary")
from the Effective Date at the rate of not less than
$45,000 per month in accordance with its generally
applicable payroll practices.
Benefits During the Term, you will continue to be eligible to
participate in employee benefit and fringe benefit
plans and programs generally available to the
Company's executive officers and such additional
benefits as the Board may from time to time provide.
In addition, during the Term, you will continue to
be entitled to the following life insurance and
disability coverages and fringe benefits:
Life The Company will maintain for your benefit
Insurance life insurance coverage with a face amount
equal to three times the amount of your
annual Salary as in effect from time to
time; provided, however, that if the Company
cannot obtain the full amount of such life
insurance coverage at a reasonable cost, the
Company may instead provide you with a lump
sum death benefit, payable within 90 days
following your death, in such amount as
will, when added to any life insurance
coverage the Company actually obtains,
provide your beneficiary or beneficiaries
with a net amount, after payment of any
Federal and state income taxes, equal to the
net, after-tax amount such beneficiary or
beneficiaries would have received had the
Company obtained the full amount of life
insurance coverage provided for above. You
will have the right to name and to change
from time to time the beneficiary or
beneficiaries under such life insurance
coverage (and death benefits, if any). Such
life insurance coverage (and death benefits,
if any) will be in addition to any death
benefits that may be payable under any
accidental death and dismemberment plan, any
separate business travel accident coverage,
or any pension plan in which you may
participate, and such coverage will also be
in addition to any life insurance that you
purchase for yourself.
Long-Term If you become disabled (as defined in the
Disability long-term disability plan the Company
presently maintains), you are to receive
disability benefits in an amount equal to
60% of your then annual Salary. Any amount
payable under any
Employment Agreement with James G. VanDevender Page 2 of 9
<PAGE> 3
salary continuation plan (including any
salary continuation provided under this
Agreement) or disability plan maintained by
the Company, and any amount payable to you
or to your immediate family as a Social
Security disability benefit or similar
benefit will be counted towards the
Company's fulfillment of such obligation.
Disability benefits will be payable monthly
beginning 30 days following disability and
will continue until you are no longer
disabled, or if earlier, until you reach age
65.
Vacations You will be entitled to such paid vacation
and time as you may reasonably take in your
Holidays discretion so long as such vacation time
does not interfere with the efficient
discharge of your duties and
responsibilities. You will be entitled to
all holidays as listed annually in the
Company's official holiday schedule.
Tax Return The Company will provide you with the
Preparation; assistance of its regular auditors for the
Financial preparation of your Federal and state tax
Advice returns without charge to you. In addition,
the Company will reimburse you up to $5,000
per year for the costs you incur for
financial planning services .
Annual The Company will reimburse you 100% of the
Physical costs you incur in obtaining an annual
comprehensive physical examination to be
conducted by your choice of physician,
clinic, or medical group located within a
reasonable distance from your place of
employment.
Reimbursement for business expenses,
including travel and entertainment, will be
limited to reasonable and necessary expenses
you incur on the Company's behalf in
connection with performing duties on the
Company's behalf and subject to (i) timely
submission of a properly executed Company
expense report form accompanied by
appropriate supporting documentation, and
(ii) compliance with Company policies and
procedures governing business expense
reimbursement and reporting based upon
principles and guidelines established from
time to time by the Board's Audit Committee,
including periodic audits by the Company's
Internal Audit Department and/or the Audit
Committee.
Employment Agreement with James G. VanDevender Page 3 of 9
<PAGE> 4
Bonus You will receive one but only one of the bonus
payments described below if the related event set
forth below (a "Bonus Determination") is completed
before December 31, 1999, with payment on the date
of completion:
o Upon a sale of the Salt Lake facilities
(Pioneer Valley Hospital, Salt Lake City
Regional Medical Center, State Street
Hospital, Davis Hospital Medical Center,
Jordan Valley Hospital, and related
operating Utah assets), a bonus of
$125,000, plus 1% of the gross sales
proceeds in excess of $306 million
(excluding any payments for working
capital included in the gross sales
proceeds),
o Upon a sale of XXXXXXXXXXX, a bonus of
$125,000, plus 1% of the gross sales
proceeds in excess of XXXXXXX (excluding
any payments for working capital
included in the gross sales proceeds), *
o Upon a sale of all of the shares or
assets of the Company, a bonus of
$125,000, plus 1% of the total
enterprise value (gross sales proceeds
plus assumed funded indebtedness) in
excess of $700 million,
o Upon a recapitalization and sale of at
least $25 million of additional common
stock in a private transaction (i.e.,
other than through a public offering), a
bonus of $125,000, plus 1% of the total
amount received in excess of $1.50 per
common share sold (with appropriate
adjustments for stock splits).
- ------------
TERMINATION Subject to the provisions of this section, you and the
Company agree that it may terminate your employment, or
you may resign, except that, if you voluntarily resign,
you must provide the Company with 30 days' prior
written notice (unless the Board has previously waived
such notice in writing or authorized a shorter notice
period).
For Cause The Company may terminate your employment for "Cause"
if you:
* Represents material that has been redacted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act
of 1934. Omitted material for which Confidential treatment has been requested
has been filed separately with the Securities and Exchange Commission.
Employment Agreement with James G. VanDevender Page 4 of 9
<PAGE> 5
(i) commit an act of gross negligence or
otherwise act with willful disregard for the
Company's best interests;
(ii) fail or refuse to perform any duties
delegated to you that are consistent with the
duties of similarly-situated executives or
are otherwise required under this Agreement;
(iii) seize a corporate opportunity for
yourself instead of offering such opportunity
to the Company; or
(iv) are convicted of or plead guilty or no
contest to a misdemeanor (other than a
traffic violation) or felony, or, with
respect to your employment, commit either a
material dishonest act or common law fraud or
intentionally violate any federal or state
securities or tax laws.
Your termination for Cause will be effective
immediately upon the Company's mailing or
transmission of notice of such termination. Before
terminating your employment for Cause under clauses
(i) - (iii) above, the Company will specify in
writing to you the nature of the act, omission,
refusal, or failure that it deems to constitute
Cause and, if the Board considers the situation to
be correctable, give you 30 days after you receive
such notice to correct the situation (and thus
avoid termination for Cause), unless the Company
agrees to extend the time for correction. You agree
that the Board will have the reasonable discretion
to determine whether the situation is correctable
and whether your correction is sufficient.
Without Cause Subject to the provisions below under Payments on
Termination, the Company may terminate your
employment under this Agreement before the end of
the Term without Cause. The termination will take
effect 15 days after the Company gives you written
notice.
Payments on If you resign or the Company terminates your
Termination employment with or without Cause or because of
disability or death or this Agreement expires, the
Company will pay you any unpaid portion of your
Salary pro-rated through the date of actual
termination (and unless your termination is for
Cause, any bonus payments (i) already determined by
such date but not yet paid or (ii) whose Bonus
Determination occurs within 30 days of your actual
termination), reimburse any substantiated but
unreimbursed business expenses, pay any accrued and
unused vacation time (to
Employment Agreement with James G. VanDevender Page 5 of 9
<PAGE> 6
the extent consistent with the Company's policies),
and provide such other benefits as applicable laws
or the terms of the benefits require. Except to the
extent the law requires otherwise or as provided in
the Severance paragraph, neither you nor your
beneficiary or estate will have any rights or
claims under this Agreement or otherwise to receive
severance or any other compensation, or to
participate in any other plan, arrangement, or
benefit, after such termination or resignation.
Severance In addition to the foregoing payments, if before
the end of the Term, the Company terminates your
employment without Cause, the Company will pay you
severance equal to the Salary due between the date
of termination and December 31, 1999, in a single
lump sum, on your actual date of termination. The
Company will also, to the extent permissible by the
terms of its benefit plans, insurance contracts,
and applicable law and except as provided in the
next sentence, cover you for a period of 36 months
under the medical, accident, disability, and life
insurance programs of the Company, or, if shorter,
until you are provided a substantially equivalent
benefit by a new employer. You acknowledge that
such continued coverage may not be possible or
practical and agree to accept in lieu of such
coverage (i) payment by the Company of the premiums
for the period indicated above on individual
insurance policies either you or the Company obtain
that provide substantially equivalent benefits or
(ii) if you are unable to obtain such coverage
(because you are uninsurable at commercially
reasonable rates or, as with disability, because
coverage may be unavailable if you are not
working), one or more payments totaling 150% of the
combined premium cost the Company paid on your
behalf in 1999 (annualized) for any of those
coverages under which you cannot participate after
employment ends.
You are not required to mitigate amounts payable
under the Severance paragraph by seeking other
employment or otherwise. Expiration of this
Agreement, whether because of notice of non-renewal
or otherwise, does not constitute termination
without Cause and does not entitle you to
Severance.
NONCOMPETITION You specifically agree that the noncompetition and
AND SECRECY confidentiality obligations referenced in ""10 and
12 of the Memorandum of Understanding among the
Company, you, and certain others dated as of
November 25, 1998 ("MOU") bar you from competition
and
Employment Agreement with James G. VanDevender Page 6 of 9
<PAGE> 7
disclosure or use of confidential information for
the periods stated or incorporated by reference and
according to the terms of those paragraphs. You
further specifically agree that, for 36 months
after your employment ends, you will not become
employed by or a consultant to the Dakota Clinic.
You agree that you were separately and adequately
compensated for the noncompetition obligations,
that they are ancillary to the MOU and other
agreements, and that they reasonably reflect the
need for the Company to protect its business
interests.
ASSIGNMENT The Company may assign or otherwise transfer this
Agreement and any and all of its rights, duties,
obligations, or interests under it to any of the
affiliates or subsidiaries of the Company. Upon
such assignment or transfer, any such business
entity will be deemed to be substituted for the
Company for all purposes. You agree that assignment
or transfer does not entitle you to Severance. This
Agreement binds and benefits the Company and its
assigns and your heirs and the personal
representatives of your estate. Without the Board's
prior written consent, you may not assign or
delegate this Agreement or any or all rights,
duties, obligations, or interests under it.
SEVERABILITY If the final determination of an arbitrator or a
court of competent jurisdiction declares, after the
expiration of the time within which judicial review
(if permitted) of such determination may be
perfected, that any term or provision of this
Agreement is invalid or unenforceable, the
remaining terms and provisions will be unimpaired,
and the invalid or unenforceable term or provision
will be deemed replaced by a term or provision that
is valid and enforceable and that comes closest to
expressing the intention of the invalid or
unenforceable term or provision.
AMENDMENT; WAIVER Neither you nor the Company may modify, amend, or
waive the terms of this Agreement other than by a
written instrument signed by you and a director of
the Company duly authorized by the Board. Either
party's waiver of the other party's compliance with
any provision of this Agreement is not a waiver of
any other provision of this Agreement or of any
subsequent breach by such party of a provision of
this Agreement.
Employment Agreement with James G. VanDevender Page 7 of 9
<PAGE> 8
WITHHOLDING The Company will reduce its compensatory payments
to you for withholding and FICA taxes and any other
withholdings and contributions required by law.
GOVERNING LAW The laws of the State of Texas (other than its
conflict of laws provisions) govern this Agreement.
NOTICES Notices must be given in writing by personal
delivery, by certified mail, return receipt
requested, by telecopy, or by overnight delivery.
You must send or deliver your notices to the
Company's corporate headquarters. The Company will
send or deliver any notice given to you at your
address as reflected on the Company's personnel
records. You and the Company may change the address
for notice by like notice to the others. You and
the Company agree that notice is received on the
date it is personally delivered, the date it is
received by certified mail, the date of guaranteed
delivery by the overnight service, or the date the
fax machine confirms effective transmission.
SUPERSEDING EFFECT Except as set forth below, this Agreement
supersedes any prior oral or written employment,
severance, or fringe benefit agreements between you
and the Company, other than with respect to your
eligibility for generally applicable employee
benefit plans and supersedes any other prior or
contemporaneous negotiations, commitments,
agreements, and writings, with respect to this
Agreement, relating to the subject matter of this
Agreement, except as specified in this Agreement.
All such other negotiations, commitments,
agreements, and writings, with respect to this
Agreement, will have no further force or effect;
and the parties to any such other negotiation,
commitment, agreement, or writing will have no
further rights or obligations thereunder.
Notwithstanding the previous paragraph, this
Agreement does not supersede or render invalid the
following agreements into which you previously
entered: (1) the MOU, as amended by the Derivative
Settlement Agreement dated March 17, 1999, should
that agreement become effective, except to the
extent a matter specifically addressed in this
Agreement conflicts with the MOU, in which event,
this Agreement will control; (2) the Derivative
Settlement Agreement dated March 17, 1999, except
with respect to those conflicts referenced in
subparagraph (1) of this paragraph; (3) the Class
Action Memorandum of Understanding dated
Employment Agreement with James G. VanDevender Page 8 of 9
<PAGE> 9
March 24, 1999; (4) the Stipulation of Settlement
dated May 11, 1999; (5) the Settlement Agreement
referencing the Great American Insurance Company
Policy bearing policy number DFX0009397; and (6)
the VanDevender to Paracelsus Release of SERP
Benefits dated as of December 3, 1998. This
Agreement must not be construed to deprive you of
any of your rights created or preserved in any
agreement or order entered into after the Effective
Date and relating to the settlement of the In re:
Paracelsus Securities Corp., the Caven, or the
Orovitz litigation, unless such agreement or order
specifically provides that this Agreement will
control. This Agreement must not be construed to
abrogate or render invalid any obligation or right
of indemnification or advancement of costs or
expenses that may be owed to you under any
contract, the Company's Articles of Incorporation
or Bylaws, California law, or Texas law or to alter
any right created or preserved as part of the
pending settlement of the In re: Paracelsus
Securities Corp., the Caven, or the Orovitz
litigation, unless such right is specifically
altered by this Agreement. This Agreement does not
impair the effectiveness of the release between the
parties to this Agreement delivered to you on April
14, 1999, by Bank One as escrow agent.
If you accept the terms of this Agreement, please sign in the space indicated
below. We encourage you to consult with any advisors you choose.
PARACELSUS HEALTHCARE CORPORATION
By:
----------------------------------------
Name:
--------------------------
Title:
-------------------------
I accept and agree to the terms of employment set
forth in this Agreement:
- ---------------------------------
James G. VanDevender
Dated:
--------------------------
Employment Agreement with James G. VanDevender Page 9 of 9
<PAGE> 1
EXHIBIT 10.82
[ ] Employee's Copy
[ ] Company's Copy
AMENDMENT NUMBER ONE TO
PARACELSUS HEALTHCARE CORPORATION
EMPLOYMENT AGREEMENT
TO: James G. VanDevender
This Amendment Number One to Paracelsus Healthcare Corporation
Employment Agreement (this "Amendment") amends that certain Paracelsus
Healthcare Corporation Employment Agreement between Paracelsus Healthcare
Corporation, Inc., a California corporation (the "Company") and James G.
VanDevender as the Company's interim chief executive officer ("CEO" or
"Executive") dated June 25, 1999 (the "Agreement"), and amends such Agreement
as set forth below. Except as amended hereby, all terms and provisions of the
Agreement shall remain in full force and effect.
1. Employment and Duties. That section of the Agreement headed
"Employment and Duties" is hereby amended by adding a new third paragraph
thereto which shall read in its entirety as follows:
The Company agrees that if the Company hires or promotes a
new CEO during the Term, the Company will retain the
Executive's services in the capacity of an executive officer
of the Company with the primary duty of advising such new
CEO. The Executive shall retain all rights to compensation,
benefits and other rights, as set forth in this Agreement, in
his new capacity.
2. Term of Employment. The first sentence of that section of the
Agreement headed "Term of Employment" is hereby amended by replacing such
sentence in its entirety with the following sentence:
Your employment under this Agreement begins as of July 1,
1999 (the "Effective Date") and, unless sooner terminated or
extended, ends on February 29, 2000 (the "End of Term Date").
3. Special Lodging and Travel Reimbursement. The final paragraph
of that section of the agreement headed "benefits" is hereby amended by adding
to the end of such paragraph the following sentence:
<PAGE> 2
Subject to the preceding conditions, effective January 1,
2000, the Company will reimburse reasonable and necessary
lodging expenses in the Houston area until February 29, 2000,
and reasonable and necessary travel expenses for weekly trips
between Houston and your Alabama residence.
4. Severance. The first sentence of the section of the Agreement
headed "Severance" is hereby amended by replacing such sentence in its entirety
with the following sentence:
In addition to the foregoing payments, if before the end of
the Term, the Company terminates your employment without
Cause, the Company will pay you severance equal to the Salary
due between the date of termination and the End of Term Date,
in a single lump sum, on your actual date of termination.
5. Superseding Effect. The second paragraph of the section of
the Agreement headed "Superseding Effect" is hereby amended by adding thereto
the following items at the end of such paragraph:
;(7) the Order and Final Judgment entered July 23, 1999, in
In re: Paracelsus Securities Corp.; (8) the Final Judgment
and Bar Order entered on July 23, 1999, in the Caven and
Orovitz litigation; and (9) the Agreement between the
Company, VanDevender and others signed on or about July 22,
1999.
This Amendment is executed by the Company and the Executive to be
effective the 8th day of December, 1999. Except as amended hereby, all terms
and provisions of the Agreement shall remain in full force and effect.
PARACELSUS HEALTHCARE CORPORATION
By:
------------------------------------------
Name: Nolan Lehmann
Title: Director
I accept and agree to the terms
of employment as set forth in
the Agreement as amended by this
Amendment:
- ------------------------------------
James G. VanDevender
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION
CORPORATION OR PARTNERSHIP OF INCORPORATION
---------------------------- -----------------------------
<S> <C>
Baytown Medical Center, Inc.
(d/b/a BayCoast Medical Center) TX
Lancaster Hospital Corporation
(d/b/a Lancaster Community Hospital) CA
Metropolitan Hospital, LP
(d/b/a Capitol Medical Center) VA
Paracelsus Clay County Hospital, Inc.
(d/b/a's Cumberland River Hospital) CA
Paracelsus Convalescent Hospitals, Inc.
(d/b/a's Lafayette Convalescent Hospital, Oak Park
Convalescent Hospital, Rheem Valley Convalescent
Hospital and University Convalescent Hospital)* CA
PHC-DH, Inc. (f/k/a Paracelsus Davis Hospital, Inc.
and d/b/a Davis Hospital and Medical Center)* UT
Paracelsus Fentress County General Hospital, Inc.
(d/b/a Fentress County General Hospital) CA
Paracelsus Healthcare Corporation of North Dakota, Inc. ND
Paracelsus Healthcare Holdings, Inc. DE
Paracelsus Macon County Medical Center, Inc.
(d/b/a Flint River Community Hospital) CA
Paracelsus Medical Building Corporation CA
Paracelsus Mesquite Hospital, Inc.
(d/b/a The Medical Center of Mesquite) TX
Paracelsus of Virginia, Inc. VA
PHC-RMC, Inc. (f/k/a Paracelsus PHC Regional Medical Center, Inc.
and d/b/a PHC Regional Hospital and Medical Center)* UT
PHC-PVH, Inc. (f/k/a Paracelsus Pioneer Valley Hospital, Inc.
and d/b/a Pioneer Valley Hospital)* UT
Paracelsus Real Estate Corporation CA
Paracelsus Santa Rosa Medical Center, Inc.
(d/b/a Santa Rosa Medical Center) CA
PHC Funding Corp. II CA
PHC-B of Midland, Inc.
(d/b/a Westwood Medical Center) TX
PHC-JVH, Inc. (f/k/a PHC-Jordan Valley, Inc.
and d/b/a Jordan Valley Hospital)* UT
PHC-SLC, Inc. (f/k/a PHC-Salt Lake City, Inc.
and d/b/a Salt Lake Regional Medical Center)* UT
PHC Utah, Inc.* UT
PHC/CHC Holdings, Inc. DE
(d/b/a Paracelsus)
</TABLE>
* Assets sold in 1999
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
pertaining to the Paracelsus Healthcare Corporation 1996 Stock Incentive Plan,
as amended (Form S-8 No. 33-10299) and pertaining to various stock option plans
of Paracelsus Healthcare Corporation (Form S-8 No. 33-12331) of our report dated
March 29, 2000, with respect to the consolidated financial statements and
schedule of Paracelsus Healthcare Corporation included in the Annual Report
(Form 10-K) for the year ended December 31, 1999.
/s/ Ernst & Young LLP
Houston, Texas
March 30, 2000
<TABLE> <S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 22,723
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<RECEIVABLES> 58,349
<ALLOWANCES> 27,553
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<PP&E> 339,528
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<BONDS> 3,685
0
0
<COMMON> 215,761
<OTHER-SE> (210,564)
<TOTAL-LIABILITY-AND-EQUITY> 437,058
<SALES> 0
<TOTAL-REVENUES> 516,537
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