Westworld Files for Bankruptcy and May Close

Westworld Community Healthcare Inc., the rural hospital operator weighed down by debts from its aggressive expansion, said Wednesday that it has filed for bankruptcy reorganization and may be forced to close entirely if it cannot find new financing.

The filing late Tuesday under Chapter 11 of the Bankruptcy Code came just 10 days after a Georgia hospital chain dropped its $90-million offer for the ailing Lake Forest company because of the “financial complications” of dealing with Westworld’s many creditors.

In its filing with U.S. Bankruptcy Court in Santa Ana, 5-year-old Westworld listed assets of $85 million and liabilities of $191.3 million as of March 31. The largest creditor is the Bank of America, which is owed about $70 million, company officials said. $65 million more is owed to bondholders.

Westworld officials said Wednesday that the bank and other creditors had refused to extend the company further credit while it tries to reorganize under court protection.

Glen Caster, vice president, said the company has been looking for new financing for the last six months but will be forced to liquidate its holdings entirely if it cannot gain new loans.

Westworld’s bankruptcy petition, which was not a surprise, caps an aggressive ascent in 1984-85 that was followed by an equally spectacular slide beginning early last year.

At its peak, Westworld operated 38 hospitals and two drug-abuse clinics and had several thousand employees in 15 states. It now has 14 facilities, with 1,200 workers in eight states. About 35 employees still work at the company’s Lake Forest headquarters. They represent about half the total of just two weeks ago, when the company announced its latest layoffs.

The expansion was financed with heavy borrowing that the company could not repay after patients began avoiding its hospitals last year because of the pinched rural economy and the company’s unusually high prices for services. Those pricing policies also caused insurance companies and Medicare to delay reimbursement, further crimping Westworld’s cash flow.

From 1986 through March, 1987, Westworld lost $135 million.

Caster said even if Westworld finds new financing, it intends to keep just five of its remaining facilities: two hospitals and a drug-abuse facility in California and two hospitals in Texas.

The other facilities are up for sale. Caster said that several persons and groups had expressed interest in one or more of the operations and that all of the facilities will probably remain open.

Caster said the bankruptcy filing could increase Westworld’s chance of selling its operations because its creditors are now subject to the jurisdiction of the bankruptcy court.

The most recent potential buyer, Gateway Medical Systems Inc. of Atlanta, withdrew its offer last month, in part because of difficulties in winning approval of the takeover plan from Westworld’s creditors.

Caster said the company’s problems had varied causes, including a cut in Medicare reimbursement for rural hospitals in early 1986 and an overall drop in U.S. hospital last year. He also cited the aggressive expansion, noting that the company had bought some hospitals “in haste and with less than sufficient analysis.”

Lawrence Selwitz, an analyst with Bateman Eichler, Hill Richards in Los Angeles, agreed that Westworld’s problems stemmed from many causes:

“It was not one flaw, it was several. But in the end they didn’t have a viable program. They didn’t develop the patient base. It’s one thing to go out and grab a hospital. It’s another to actually serve patients.”