1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 5, 2000
REGISTRATION NO. 333-94521
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
IASIS HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 76-0450619
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
FRANK A. COYLE
GENERAL COUNSEL AND SECRETARY
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPY TO:
ROBERT B. PINCUS, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
ONE RODNEY SQUARE
WILMINGTON, DELAWARE 19801
(302) 651-3000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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AMOUNT PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF TO BE OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SECURITY(1) OFFERING PRICE(1) REGISTRATION FEE(1)
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13% Senior Subordinated Exchange
Notes Due 2009..................... $230,000,000 100% $230,000,000 $60,720
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Guarantees of the 13% Senior
Subordinated Exchange Notes(2)..... -- -- -- --
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Total................................ $230,000,000 100% $230,000,000 $60,720(3)
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(1) Determined in accordance with Rule 457(f) promulgated under the Securities
Act of 1933, as amended (the "Securities Act").
(2) No separate consideration will be received for the Guarantees, and,
therefore, no additional registration fee is required.
(3) Pursuant to Rule 457(a) under the Securities Act, $60,720 of the
Registration Fee was previously paid in connection with the initial filing
of this Registration Statement on Form S-4 with the Securities and Exchange
Commission on January 12, 2000.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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2
ADDITIONAL REGISTRANTS
MEMORIAL HOSPITAL OF TAMPA, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1795584
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
MESA GENERAL HOSPITAL, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1795590
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
ODESSA REGIONAL HOSPITAL, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1795574
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
PALMS OF PASADENA HOSPITAL, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1795583
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
3
SOUTHWEST GENERAL HOSPITAL, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1795572
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
ST. LUKE'S MEDICAL CENTER, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1795587
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
ST. LUKE'S BEHAVIORAL HOSPITAL, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1795588
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
TEMPE ST. LUKE'S HOSPITAL, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1795586
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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4
TOWN & COUNTRY HOSPITAL, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1795580
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
BAPTIST JOINT VENTURE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1796514
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
BEAUMONT HOSPITAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1796501
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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BILTMORE SURGERY CENTER HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1796499
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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CLINICARE OF UTAH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1795211
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
5
DAVIS HOSPITAL & MEDICAL CENTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1795217
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
DAVIS SURGICAL CENTER HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1796493
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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FIRST CHOICE PHYSICIANS NETWORK HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1796513
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
HEALTH CHOICE ARIZONA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1796494
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
6
IASIS HEALTHCARE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1798194
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
IASIS MANAGEMENT COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1797795
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
JORDAN VALLEY HOSPITAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1795215
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
METRO AMBULATORY SURGERY
CENTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1796497
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
PIONEER VALLEY HEALTH PLAN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1795212
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
7
PIONEER VALLEY HOSPITAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1795216
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
ROCKY MOUNTAIN MEDICAL CENTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1795213
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
SALT LAKE REGIONAL MEDICAL
CENTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1795214
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
SANDY CITY HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1796492
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
8
SOUTHRIDGE PLAZA HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1796491
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
SSJ ST. PETERSBURG HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8062 62-1796504
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
IASIS HEALTHCARE MSO SUB OF
SALT LAKE CITY, LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
UTAH 8062 62-1756039
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
BILTMORE SURGERY CENTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ARIZONA 8062 86-0837176
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
-------------------------
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(615) 844-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
9
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
THE INFORMATION IN THIS PROSPECTUS WILL BE AMENDED OR COMPLETED;
DATED APRIL 5, 2000
PROSPECTUS
OFFER TO EXCHANGE ALL 13% SENIOR SUBORDINATED NOTES DUE 2009
FOR 13% SENIOR SUBORDINATED EXCHANGE NOTES DUE 2009
OF
IASIS HEALTHCARE CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON [ ] UNLESS EXTENDED.
------------------------
Terms of the exchange offer:
- - We will issue up to $230,000,000 aggregate principal amount of new notes.
- - The terms of the new notes are substantially identical to those of the
outstanding old notes, except that the transfer restrictions and registration
rights relating to the old notes do not apply to the new notes.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF RISKS YOU SHOULD
CONSIDER BEFORE TENDERING YOUR OLD NOTES.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this prospectus is [ ], 2000.
10
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
The Exchange Offer........................................ 1
Consequences of Not Exchanging Old Notes.................. 4
Summary Description of the New Notes...................... 4
IASIS Healthcare Corporation.............................. 7
Summary Historical and Unaudited Pro Forma Combined
Financial Information.................................. 9
Notes to Summary Historical and Unaudited Pro Forma
Combined Financial Information......................... 14
Risk Factors................................................ 17
Offering Risks............................................ 17
Company Risks............................................. 19
Industry Risks Related to Our Company..................... 25
Use of Proceeds............................................. 28
The Exchange Offer.......................................... 29
Terms of the Exchange Offer; Period for Tendering Old
Notes.................................................. 29
Procedures for Tendering Old Notes........................ 30
Acceptance of Old Notes for Exchange; Delivery of New
Notes.................................................. 32
Book-Entry Transfer....................................... 33
Guaranteed Delivery Procedures............................ 34
Withdrawal Rights......................................... 34
Conditions to the Exchange Offer.......................... 35
Exchange Agent............................................ 36
Fees and Expenses......................................... 36
Transfer Taxes............................................ 37
Consequence of Exchanging or Failing to Exchange Old
Notes.................................................. 37
Certain United States Federal Income Tax Consequences....... 39
Exchange Offer............................................ 39
U.S. Holders.............................................. 40
Non-U.S. Holders.......................................... 40
Information Reporting and Backup Withholding.............. 41
Accounting Treatment........................................ 42
The Transactions............................................ 43
The Recapitalization...................................... 43
The Tenet Acquisition..................................... 43
The Merger................................................ 44
Ownership of IASIS Following the Transactions............. 45
Capitalization.............................................. 46
Unaudited Pro Forma Combined Financial Information.......... 47
Unaudited Pro Forma Combined Statements of Operations for
the Three Months Ended December 31, 1999.................. 49
Notes to the Unaudited Pro Forma Combined Statements of
Operations for the Three Months Ended December 31, 1999... 50
Unaudited Pro Forma Combined Statements of Operations for
the Nine Months Ended September 30, 1999.................. 52
i
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PAGE
----
Notes to the Unaudited Pro Forma Combined Statements of
Operations for the Nine Months Ended September 30, 1999... 53
Unaudited Pro Forma Combined Statements of Operations for
the Year Ended December 31, 1998.......................... 56
Notes to Unaudited Pro Forma Combined Statements of
Operations for the Year Ended December 31, 1998........... 57
Selected Historical Financial Information -- Paracelsus
Hospitals................................................. 60
Notes to Selected Historical Financial
Information -- Paracelsus Hospitals....................... 62
Selected Historical Financial Information -- Tenet
Hospitals................................................. 63
Notes to Selected Historical Financial Information -- Tenet
Hospitals................................................. 65
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 66
General................................................... 66
Management Discussion and Analysis........................ 67
IASIS..................................................... 67
Three Months Ended December 31, 1999 compared to Three
Months Ended December 31, 1998......................... 67
Paracelsus Hospitals...................................... 69
Nine Months Ended September 30, 1999 Compared to Nine
Months Ended September 30, 1998........................ 69
Year Ended December 31, 1998 compared to Year Ended
December 31, 1997...................................... 70
Tenet Hospitals........................................... 71
Three Months Ended August 31, 1999 Compared to Three
Months Ended August 31, 1998........................... 71
Year Ended May 31, 1999 Compared to Year Ended May 31,
1998................................................... 72
Year Ended May 31, 1998 Compared to Year Ended May 31,
1997................................................... 73
Liquidity and Capital Resources........................... 74
IASIS..................................................... 74
Paracelsus Hospitals...................................... 79
Tenet Hospitals........................................... 79
Year 2000 Compliance...................................... 80
Inflation................................................. 80
Market Risk............................................... 80
New Accounting Standards.................................. 80
Business.................................................... 82
Company Overview.......................................... 82
Business Strategy......................................... 82
Services and Operations................................... 84
Utilization............................................... 85
Sources of Revenue........................................ 86
Competition............................................... 87
Properties................................................ 90
Employees and Medical Staff............................... 90
Regulatory Compliance Program............................. 91
Legal Proceedings......................................... 91
Reimbursement; Regulation................................. 91
Medicare.................................................. 91
Medicaid.................................................. 93
Annual Cost Reports....................................... 93
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PAGE
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Managed Care.............................................. 93
Commercial Insurance...................................... 94
Government Regulation and Other Factors................... 94
Licensure, Certification and Accreditation................ 94
Certificates of Need...................................... 94
Utilization Review........................................ 95
Federal Healthcare Program Regulations and Fraud and
Abuse.................................................. 95
The Federal False Claims Act.............................. 97
Corporate Practice of Medicine/Fee Splitting.............. 98
The Emergency Medical Treatment and Active Labor Act...... 98
Healthcare Reform......................................... 99
Conversion Legislation.................................... 99
Healthcare Industry Investigations........................ 100
Environmental Matters..................................... 101
Insurance................................................. 102
Management.................................................. 103
Directors and Executive Officers.......................... 103
Board of Directors........................................ 105
Employment Agreements..................................... 106
The 2000 Stock Option Plan and Other Incentive
Arrangements........................................... 106
Management Equity Purchase Program........................ 107
Stock Ownership............................................. 108
Beneficial Owners and Management............................ 108
Certain Relationships and Related Transactions.............. 111
Transition Services Agreement............................. 111
License Agreements........................................ 111
Stockholders Agreement.................................... 111
Tax Sharing Agreement..................................... 112
Description of Credit Facility.............................. 113
Revolving Credit Facility................................. 113
Tranche A Term Loan....................................... 114
Tranche B Term Loan....................................... 114
Description of Notes........................................ 115
Brief Description of the Notes and the Guarantees......... 115
Principal, Maturity and Interest.......................... 116
Methods of Receiving Payments on the Notes................ 116
Paying Agent and Registrar for the Notes.................. 116
Transfer and Exchange..................................... 116
Subsidiary Guarantees..................................... 117
Subordination............................................. 117
Optional Redemption....................................... 119
Mandatory Redemption...................................... 120
Repurchase at the Option of Holders....................... 120
Change of Control......................................... 120
Asset Sales............................................... 121
Selection and Notice...................................... 123
Covenants................................................. 124
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PAGE
----
Incurrence of Indebtedness and Issuance of Preferred
Stock.................................................. 127
No Senior Subordinated Debt............................... 130
Liens..................................................... 130
Dividend and Other Payment Restrictions Affecting
Subsidiaries........................................... 131
Merger, Consolidation or Sale of Assets................... 132
Designation of Restricted and Unrestricted Subsidiaries... 133
Transaction with Affiliates............................... 134
Additional Subsidiary Guarantees.......................... 135
Business Activities....................................... 136
Reports................................................... 136
Events of Default and Remedies............................ 136
No Personal Liability of Directors, Officers, Employees
and Stockholders....................................... 138
Legal Defeasance and Covenant Defeasance.................. 139
Amendment, Supplement and Waiver.......................... 140
Satisfaction and Discharge................................ 142
Concerning the Trustee.................................... 142
Book-Entry, Delivery and Form............................. 143
Certificated Securities................................... 144
Registration Rights; Liquidated Damages................... 145
Definitions............................................... 149
Description of Preferred Stock.............................. 171
Plan of Distribution........................................ 171
Legal Matters............................................... 172
Experts..................................................... 172
Available Information....................................... 173
Index to Unaudited and Audited Financial Statements......... F-1
iv
14
PROSPECTUS SUMMARY
The following summary highlights selected information from this prospectus
and may not contain all of the information that is important to you. This
prospectus includes specific terms of the new notes, as well as information
regarding our business and detailed financial data. We encourage you to
carefully read this entire prospectus, including the discussion of risks and
uncertainties affecting our business included under the caption "Risk Factors"
beginning on page 17, and the documents to which we refer you.
THE EXCHANGE OFFER
OLD NOTES...................... 13% Senior Subordinated Notes due 2009, which
we issued on October 15, 1999.
NEW NOTES...................... 13% Senior Subordinated Exchange Notes due
2009.
EXCHANGE OFFER................. We are offering to issue up to $230,000,000
aggregate principal amount of the new notes in
exchange for a like principal amount of the
old notes. We are offering the new notes to
satisfy our obligations under the registration
rights agreement we entered into when we sold
the old notes in transactions under Rule 144A
and Regulation S under the Securities Act.
EXPIRATION DATE; TENDERS....... The exchange offer will expire at 5:00 p.m.,
New York City time, on [twenty business days
after effective date], 2000, unless we extend
the period for tendering your old notes. When
you tender your old notes, you represent to
us:
- that you are not an "affiliate," as defined
in Rule 144 under the Securities Act, of
IASIS;
- that at the time of commencement of the
exchange offer, neither you nor, to your
knowledge, anyone who will receive new notes
from you, has any arrangement or
understanding with any person to participate
in the distribution of the new notes and you
do not intend to engage in the distribution
of the new notes; and
- that you are acquiring any new notes you
receive in the exchange offer in the
ordinary course of your business.
For further information regarding resales of
the new notes by broker-dealers, see the
discussion under the caption "Plan of
Distribution" on pages 171 to 172.
WITHDRAWAL; NON-ACCEPTANCE..... You may withdraw any old notes you tender in
the exchange offer at any time prior to 5:00
p.m., New York City time, on [twenty business
days after effective date], 2000. If we decide
for any reason not to accept any old notes you
tender for exchange, we will return the old
notes to the registered holder at our expense
1
15
promptly after the exchange offer expires or
terminates. If you tender your old notes by
book-entry transfer into the exchange agent's
account at The Depository Trust Company, DTC
will credit any withdrawn or unaccepted old
notes to your account at DTC. For further
information regarding the withdrawal of
tendered notes, see "The Exchange
Offer -- Terms of the Exchange Offer; Period
for Tendering Old Notes" on pages 29 to 30 and
"-- Withdrawal Rights" on pages 34 to 35.
CONDITIONS TO THE EXCHANGE
OFFER.......................... The exchange offer is subject to customary
conditions. We may waive the conditions to the
exchange offer. See the discussion under the
caption "The Exchange Offer -- Conditions to
the Exchange Offer" on pages 35 to 36 for more
information regarding conditions to the
exchange offer.
PROCEDURES FOR TENDERING OLD
NOTES.......................... If you do not use the procedures described
under the caption "The Exchange
Offer -- Guaranteed Delivery Procedures" on
page 34 to tender your old notes, you must do
one of the following on or prior to the
expiration of the exchange offer if you want
to participate in the exchange offer:
- you must tender your old notes by sending
- the certificates for your old notes, in
proper form for transfer,
- a letter of transmittal you have properly
completed and executed with any required
signature guarantees and
- all other documents the letter of
transmittal requires,
to The Bank of New York, as exchange agent, at
one of the addresses listed under the caption
"The Exchange Offer -- Exchange Agent" on page
36; or
- you must tender your old notes by using the
book-entry procedures described below and
you must transmit a letter of transmittal
you have properly completed and executed,
with any required signature guarantees, or
an agent's message instead of the letter of
transmittal, to the exchange agent. For more
information regarding the use of book-entry
transfer procedures, including a description
of the required agent's message and
confirmation of book-entry transfer, see the
discussion under the caption "The Exchange
Offer -- Book Entry Transfer" on page 33.
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16
GUARANTEED DELIVERY
PROCEDURES..................... If you are a registered holder of the old
notes and you wish to tender your old notes in
the exchange offer, but
- you do not have the old notes immediately
available,
- you do not have enough time to send your old
notes or other required documents to the
exchange agent before the exchange offer
expires, or
- you cannot complete the procedure for
book-entry transfer on a timely basis,
you may tender old notes by following the
procedures described under the caption "The
Exchange Offer -- Guaranteed Delivery
Procedures" on page 34.
RESALES........................ Based on interpretations by the staff of the
Securities and Exchange Commission in
no-action letters issued to third parties, we
believe that you may offer the new notes you
receive in the exchange offer for resale, or
you may resell or otherwise transfer the new
notes without compliance with the registration
and prospectus delivery provisions of the
Securities Act. However, you will not be able
to freely transfer the new notes if:
- you are an "affiliate," as defined in Rule
144 under the Securities Act, of IASIS;
- you are acquiring the new notes in the
exchange offer outside the ordinary course
of your business;
- you have an arrangement or understanding
with another person to participate in the
distribution of the new notes you will
receive in the exchange offer; or
- you are a broker-dealer that receives new
notes for its own account in the exchange
offer in exchange for old notes that you
acquired as a result of market-making or
other trading activities.
If you fall within one of the exceptions
listed above, you must comply with the
registration and prospectus delivery
requirements of the Securities Act if you
resell the new notes.
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS.............. If you are a beneficial owner whose old notes
are registered in the name of a broker,
dealer, commercial bank, trust company or
other nominee and you wish to tender your old
notes in the exchange offer, you should
promptly contact the registered holder. You
should then instruct the registered holder to
tender on your behalf. If you wish to tender
in the exchange offer on your own behalf,
before you complete and execute the letter of
transmittal and deliver your old notes, you
must either
- make arrangements to register ownership of
the old notes in your name or
3
17
- obtain a properly completed bond power from
the registered holder.
CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES...... You will not recognize gain or loss for United
States federal income tax purposes as a result
of your exchange of old notes for new notes in
the exchange offer. See the discussion under
the caption "Certain United States Federal
Income Tax Consequences" beginning on page 39
for more information regarding tax
consequences of the exchange offer.
USE OF PROCEEDS................ We will not receive any cash proceeds from the
exchange offer.
EXCHANGE AGENT................. The Bank of New York is the exchange agent for
the exchange offer. You may find the addresses
and telephone number of the exchange agent
under the caption "The Exchange
Offer -- Exchange Agent" on page 36.
CONSEQUENCES OF NOT EXCHANGING OLD NOTES
If you do not exchange your old notes in the exchange offer, you will not
be able to freely transfer the old notes. In general, you may offer or sell your
old notes only:
- if you have registered the old notes under the Securities Act and
applicable state securities laws;
- under an exemption from registration under the Securities Act and
applicable state securities laws; or
- in a transaction not subject to the Securities Act and applicable state
securities laws.
We do not currently intend to register the old notes under the Securities
Act. Under some circumstances, however, holders of old notes may require us to
file a shelf registration statement and cause the shelf registration statement
to become effective. The shelf registration statement would cover these holders'
resales of old notes. For more information regarding the consequences of not
tendering your old notes and our obligation to file a shelf registration
statement, see "The Exchange Offer -- Consequences of Exchanging or Failing to
Exchange Old Notes" on pages 37 to 38 and "Description of Notes -- Registration
Rights; Liquidated Damages" on pages 145 to 149.
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the new notes and the old notes are substantially identical.
One difference between the new notes and the old notes is that the transfer
restrictions and registration rights relating to the old notes do not apply to
the new notes. If we do not complete the exchange offer by [30 business days
after effective date], 2000, and we do not have an effective shelf registration
statement on file with the SEC to register the old notes on that date, the
interest rate on the old notes will increase by 0.50% for the first 90-day
period and by 0.25% for each subsequent 90-day period. The maximum annual
interest rate increase is 2.00%. The interest rate will stop increasing when we
complete the exchange offer or have an effective shelf registration statement on
file.
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18
SECURITIES OFFERED............. $230,000,000 aggregate principal amount of 13%
Senior Subordinated Exchange Notes due 2009.
MATURITY DATE.................. October 15, 2009.
INTEREST....................... Interest on the new notes accrues at an annual
rate of 13%. We will pay interest in cash on
April 15 and October 15 of each year,
beginning on April 15, 2000.
RANKING........................ The new notes will rank equally with our other
senior subordinated indebtedness. The new
notes will be junior to all of our senior
indebtedness.
At December 31, 1999, after giving effect to:
- the old notes offering,
- the recapitalization transaction in which
our current principals acquired hospitals
and related facilities that Paracelsus
Healthcare Corporation previously owned, and
- our acquisition of hospitals and related
facilities from Tenet Healthcare
Corporation,
IASIS and its subsidiaries had approximately
$561.3 million of outstanding indebtedness. Of
this amount, approximately $331.3 million was
senior to the old notes and will be senior to
the new notes. For a discussion of the
recapitalization transaction and acquisition
described above, see "The Transactions"
beginning on page 43.
SINKING FUND................... None.
OPTIONAL REDEMPTION............ We may redeem any of the new notes beginning
on October 15, 2004. The initial redemption
price will equal 106.50% of their principal
amount, plus accrued and unpaid interest. The
redemption price will decline each year after
2004. The redemption price will be 100% of the
principal amount, plus accrued and unpaid
interest, beginning on October 15, 2008.
Before October 15, 2002, we may redeem up to
35% of the aggregate principal amount of all
old notes and new notes outstanding on the
date of redemption. The redemption price will
equal 113.00% of the aggregate principal
amount of the notes we redeem, plus accrued
and unpaid interest and any liquidated
damages. We may only redeem the notes using
the net cash proceeds we receive from capital
stock we issue, with some limitations. For
additional information regarding optional
redemption of the notes, see the discussion
under the caption "Description of
Notes -- Optional Redemption" on pages 119 to
120.
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19
CHANGE OF CONTROL.............. If any of the following "change of control"
events occurs:
- we sell all or substantially all of our
assets,
- we merge or consolidate with another
company,
- we liquidate or dissolve our company, or
- we or another person removes or replaces a
majority of our board of directors,
the terms of the notes require us to make an
offer to purchase all outstanding old notes
and new notes. The purchase price will equal
101% of the principal amount of all notes
outstanding on the date of purchase, plus
accrued and unpaid interest. We may not have
enough funds available at the time of a change
of control to make any required debt repayment
or repurchases of the notes. The terms of our
credit facility may block these payments as
well. For more information on change of
control consequences, please see "Description
of Notes -- Repurchase at the Option of
Holders -- Change of Control" on page 120.
COVENANTS...................... The terms of the new notes restrict our
ability, among other things, to:
- incur additional indebtedness,
- pay dividends or make distributions on our
capital stock,
- repurchase or redeem our capital stock,
- make particular kinds of investments and
other restricted payments,
- create liens,
- enter into transactions with affiliates,
- issue stock of subsidiaries,
- use assets as security in other
transactions,
- transfer or sell assets, and
- merge or consolidate with other companies.
For a more detailed description of these
restrictions and any exceptions to these
restrictions, see the discussion under the
caption "Description of Notes -- Covenants" on
pages 124 to 126.
TRADING MARKET................. There is no established trading market for the
old notes and the exchange offer is the
initial public offering of the new notes.
Accordingly, there is no established trading
market for the new notes. However, J.P. Morgan
Securities Inc., the initial purchaser of the
old notes, has
6
20
indicated that it intends to make a market in
the new notes. Nevertheless, we cannot assure
you that an active trading market will
develop.
LISTING........................ We do not intend to apply for listing of the
new notes on any national securities exchange
or for quotation through any automated
inter-dealer quotation system.
SUBSIDIARY GUARANTEES.......... All of our subsidiaries, with some possible
exceptions in the future, will guarantee our
obligations under the new notes. The
subsidiaries will fully and unconditionally
guarantee our obligations. The guarantees will
be subordinated to all senior indebtedness of
our subsidiary guarantors.
IASIS HEALTHCARE CORPORATION
COMPANY REVIEW
We are a for-profit hospital management company with operations in select
markets in the United States. Our facilities operate in four regions:
(1) Salt Lake City, Utah;
(2) Phoenix, Arizona;
(3) Tampa-St. Petersburg, Florida; and
(4) three markets within the State of Texas.
We either own or operate 15 general, acute care hospitals and 4 ambulatory
surgery centers, with a total of 2,144 operating beds. We focus on networks of
medium-sized hospitals, each with 100 to 400 beds.
The following series of transactions occurring in the latter half of 1999
formed our company:
- we recapitalized HoldCo, a subsidiary of Paracelsus Healthcare
Corporation,
- we acquired a number of hospitals from Tenet Healthcare Corporation, and
- we merged Iasis Healthcare Corporation, a Tennessee corporation which we
refer to in this prospectus as the management company, with one of our
subsidiaries.
In the recapitalization, JLL Healthcare, LLC, Triumph Partners III, L.P.
and Triumph III Investors, L.P., which we refer to in this prospectus
collectively as the Triumph investment funds, and General Electric Capital
Corporation acquired approximately 94% of the outstanding common stock of
HoldCo, a wholly owned subsidiary of Paracelsus Healthcare that owned 5
hospitals in the Utah area. To effect the recapitalization, JLL Healthcare, the
Triumph investment funds and General Electric Capital acquired less than half of
HoldCo's outstanding common stock and HoldCo repurchased more than half of its
outstanding common stock, in both instances from Paracelsus Healthcare.
Following the recapitalization, HoldCo changed its name to IASIS Healthcare
Corporation and JLL Healthcare, the Triumph investment funds and General
Electric Capital held approximately 94% of our outstanding common stock.
Paracelsus Healthcare retained and continues to hold approximately 6% of our
outstanding common stock.
7
21
We subsequently acquired a number of general, acute care hospitals and
related assets from Tenet Healthcare Corporation. Concurrent with these
acquisitions, Iasis Healthcare Corporation, the Tennessee corporation referred
to in this document as management company, merged with a wholly owned subsidiary
of ours which survived the merger. Our business now consists of the hospitals we
gained control of in the recapitalization, the hospitals and related assets we
acquired from Tenet Healthcare Corporation and the holdings of management
company. For more information about these formation transactions, see the
discussion under the caption "The Transactions" beginning on page 43.
The address of our principal executive offices is 113 Seaboard Lane, Suite
A-200, Franklin, Tennessee 37067 and our telephone number is (615) 844-2747.
8
22
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following tables present the summary historical and unaudited pro forma
combined financial information and operating data of IASIS as of the dates
indicated. As a result of IASIS' change in fiscal year from December 31 to
September 30 during 1999, the unaudited pro forma combined financial information
and operating data has been provided as of and for the three months ended
December 31, 1999, the nine months ended September 30, 1999 and the year ended
December 31, 1998.
We have derived the historical Statement of Operations data and Balance
Sheet data of IASIS Healthcare Corporation, which we refer to as IASIS, for the
three months ended December 31, 1999 from, and you should read the data in
conjunction with, the unaudited financial statements included elsewhere in this
prospectus.
We have derived the historical Statement of Operations data of Paracelsus
Utah Facilities, which we refer to as Paracelsus or Paracelsus hospitals, for
the nine months ended September 30, 1999 and the year ended December 31, 1998
from, and you should read the data in conjunction with, the audited financial
statements and related notes to the audited financial statements included
elsewhere in this prospectus.
We have derived the historical Statement of Operations data of Tenet
Hospitals, which we refer to as Tenet or Tenet hospitals, for the period from
October 1, 1999 through October 15, 1999, the nine months ended August 31, 1999
and the twelve months ended November 30, 1998 from recast unaudited financial
statements not included in this prospectus.
We have derived the historical Statement of Operations data of Iasis
Healthcare Corporation, which we refer to as management company, a Tennessee
corporation that merged with our wholly owned subsidiary, for the period from
October 1, 1999 through October 15, 1999, the nine months ended September 30,
1999 and the period from inception, February 23, 1998, through December 31, 1998
from recast unaudited financial statements not included in this prospectus.
The unaudited pro forma combined statements of operations for three months
ended December 31, 1999, the year ended December 31, 1998 and the nine months
ended September 30, 1999 give effect to the pro forma adjustments reflecting the
recapitalization, the Tenet acquisition, the merger with management company and
the related financing, which we refer to as the pro forma transactions, as if
they had occurred as of January 1, 1998.
The unaudited historical consolidated balance sheet data of IASIS as of
December 31, 1999 reflects the impact of the pro forma transactions, each of
which occurred during October 1999.
The summary unaudited pro forma combined financial information does not
purport to be indicative of the results of operations we would have actually
achieved had we completed the pro forma transactions as of the dates specified,
nor are they necessarily indicative of the results of operations that we may
achieve in the future.
The unaudited pro forma combined statements of operations for the nine
months ended September 30, 1999 and the year ended December 31, 1998 do not
reflect non-recurring costs of $3.4 million recognized in the three months ended
December 31, 1999 in connection with the recapitalization. None of the unaudited
combined statements of operations reflect other non-recurring costs IASIS
expects to recognize in connection
9
23
with the recapitalization, the Tenet acquisition and the merger with management
company. These non-recurring costs include legal, accounting and other
professional fees and some charges associated with the combination of the
operations of the Paracelsus hospitals, the Tenet hospitals and the management
company. We have based the summary unaudited pro forma combined financial
information on assumptions and adjustments described in the notes to the
unaudited pro forma combined financial information included in this prospectus.
10
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SUMMARY HISTORICAL AND
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
PERIOD FROM THREE
THREE MONTHS PERIOD FROM OCTOBER 1, 1999 MONTHS
ENDED OCTOBER 1, 1999 THROUGH ENDED
DECEMBER 31, THROUGH OCTOBER 15, 1999 DECEMBER 31,
1999 OCTOBER 15, 1999 MANAGEMENT 1999
IASIS TENET COMPANY TOTAL PRO FORMA
------------- ---------------- ---------------- -------- ------------
Dollars in thousands
STATEMENT OF OPERATIONS DATA:
Operating revenues........... $179,290 $ 22,807 $ 47 $202,144 $202,144
Operating expenses:
Salaries, wages and
benefits................. 62,217 8,588 126 70,931 70,931
Supplies and other......... 77,227 12,368 131 89,726 89,726
Provision for bad debts.... 13,450 370 -- 13,820 13,820
Management fees and
corporate overhead(1).... -- 313 -- 313 313
Depreciation and
amortization............. 10,196 1,019 11 11,226 11,243
Recapitalization costs..... 3,442 -- -- 3,442 3,442
Loss on sale of accounts
receivable(2)............ -- 2,191 -- 2,191 2,191
-------- -------- -------- -------- --------
166,532 24,849 268 191,649 191,666
-------- -------- -------- -------- --------
Operating income (loss)...... 12,758 (2,042) (221) 10,495 10,478
Interest expense (income).... 14,375 (15) 453 14,813 17,107
Minority interests........... (92) (156) -- (248) (346)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income
taxes...................... (1,525) (1,871) (674) (4,070) (6,283)
======== ======== ======== ======== ========
Provision (benefit) for
income taxes............... -- (747) -- (747) --
-------- -------- -------- -------- --------
Net income (loss)............ $ (1,525) $ (1,124) $ (674) $ (3,323) $ (6,283)
======== ======== ======== ======== ========
OTHER DATA:
Adjusted Net Loss(5)......... $ (1,216)
EBITDA(6).................... $ 22,954 (1,023) (210) 21,721 21,721
Adjusted EBITDA(6)........... $ 26,788
Depreciation and amortization
expense.................... $ 10,196 1,019 11 11,226 11,243
Capital expenditures......... $ 9,175 276 -- 9,451
Ratio of earnings to fixed
charges (7)................ .91x .67x
BALANCE SHEET DATA:
Cash and cash equivalents.... $ 24,613
Total assets................. $862,729
Long-term debt (including
current portion)........... $561,289
Preferred stock.............. $169,443
Shareholders' equity......... $ 38,289
STATISTICAL DATA:
Number of hospitals at end of
period..................... 15 10 -- 15
Number of operating beds at
the end of period (8)...... 2,144 1,643 -- 2,144
Admissions (9)............... 16,137 2,063 -- 18,200
Average length of stay (days)
(10)....................... 4.4 4.8 -- 4.4
Average daily census (11).... 912 658 -- 900
Occupancy rate (12).......... 42.5% 40.0% -- 42.0%
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SUMMARY HISTORICAL AND
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
NINE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, AUGUST 31, SEPTEMBER 30, NINE MONTHS
1999 1999 1999 ENDED
------------- ----------- ------------- SEPTEMBER 30,
MANAGEMENT 1999
PARACELSUS TENET COMPANY TOTAL PRO FORMA
------------- ----------- ------------- -------- -------------
Dollars in thousands
STATEMENT OF OPERATIONS DATA:
Operating revenues........... $140,950 $443,311 $ 758 $585,019 $585,019
Operating expenses:
Salaries, wages and
benefits................. 49,155 146,103 1,792 197,050 197,050
Supplies and other......... 58,847 181,078 874 240,799 241,799
Provision for bad debts.... 9,979 33,831 -- 43,810 43,810
Management fees and
corporate overhead(1).... 5,135 6,085 -- 11,220 11,220
Depreciation and
amortization............. 9,620 19,446 123 29,189 31,432
Loss on sale of accounts
receivable (2)........... -- 4,548 -- 4,548 4,548
-------- -------- ------- -------- --------
132,736 391,091 2,789 526,616 529,859
-------- -------- ------- -------- --------
Operating income (loss)...... 8,214 52,220 (2,031) 58,403 55,160
Interest expense (income).... 7,304 (1,407) (13) 5,884 49,192
Minority interests........... (140) 1,386 -- 1,246 (622)
-------- -------- ------- -------- --------
Income (loss) from continuing
operations before income
taxes and cumulative effect
of accounting change....... 1,050 52,241 (2,018) 51,273 6,590
Provision (benefit) for
income taxes............... -- 20,989 -- 20,989 2,636
-------- -------- ------- -------- --------
Income (loss) before
cumulative effect of
accounting change.......... $ 1,050 $ 31,252 $(2,018) $ 30,284 $ 3,954
======== ======== ======= ======== ========
OTHER DATA:
Adjusted Net Income (5)...... $ 12,577
EBITDA (6)................... $ 17,834 71,666 (1,908) 87,592 86,592
Adjusted EBITDA (6).......... $ 95,215
Depreciation and amortization
expense.................... $ 9,620 19,446 123 29,189 31,432
Capital expenditures......... $ 13,476 9,044 77 22,597
Ratio of earnings to fixed
charges (7)................ 1.1x 1.1x
STATISTICAL DATA:
Number of hospitals at end of
period..................... 5 10 -- 15
Number of operating beds at
the end of period (8)...... 501 1,643 -- 2,144
Admissions (9)............... 13,849 39,820 -- 53,669
Average length of stay
(10)....................... 3.6 5.0 -- 4.6
Average daily census (11).... 182 724 -- 906
Occupancy rate (12).......... 36.3% 44.1% -- 42.3%
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SUMMARY HISTORICAL AND
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
PERIOD FROM
INCEPTION
(FEBRUARY 23,
1998 THROUGH
TWELVE MONTHS DECEMBER 31,
YEAR ENDED ENDED 1998)
DECEMBER 31, NOVEMBER 30, ------------- YEAR ENDED
1998 1998 DECEMBER 31,
------------ ------------- MANAGEMENT 1998
PARACELSUS TENET COMPANY TOTAL PRO FORMA
------------ ------------- ------------- -------- ------------
Dollars in thousands
STATEMENT OF OPERATIONS
DATA:
Operating revenues.......... $183,112 $558,956 $ 181 $742,249 $742,249
Operating expenses:
Salaries, wages and
benefits................ 65,942 196,216 685 262,843 262,843
Supplies and other........ 73,950 243,975 270 318,195 318,895
Provision for bad debts... 11,727 36,634 -- 48,361 48,361
Management fees and
corporate overhead
(1)..................... 6,587 8,633 -- 15,220 15,220
Depreciation and
amortization............ 11,770 24,634 79 36,483 40,808
Impairment and
restructuring charges
(3)..................... -- 19,455 -- 19,455 19,455
Reversal of excess loss
contract accrual (4).... (7,500) -- -- (7,500) (7,500)
-------- -------- ------ -------- --------
162,476 529,547 1,034 693,057 698,082
-------- -------- ------ -------- --------
Operating income............ 20,636 29,409 (853) 49,192 44,167
Interest expense............ 17,088 1,515 -- 18,603 65,615
Minority interests.......... 68 2,068 -- 2,136 395
-------- -------- ------ -------- --------
Income (loss) from
continuing operations
before income taxes....... 3,480 25,826 (853) 28,453 (21,843)
Provision (benefit) for
income taxes.............. -- 10,513 1 10,514 --
-------- -------- ------ -------- --------
Net income (loss)........... $ 3,480 $ 15,313 $ (854) $ 17,939 $(21,843)
======== ======== ====== ======== ========
OTHER DATA:
Adjusted Net Loss (5)....... $ (6,414)
EBITDA (6).................. $ 32,406 54,043 (774) 85,675 84,975
Adjusted EBITDA (6)......... $100,404
Depreciation and
amortization expense...... $ 11,770 24,634 79 36,483 40,808
Capital expenditures........ $ 6,427 22,668 72 29,167
Ratio of earnings to fixed
charges (7)............... 1.2x .73x
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NOTES TO SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
COMBINED FINANCIAL INFORMATION
(Dollars in thousands)
(1) Historical management fees and corporate overhead include allocations of
corporate costs for general and administrative functions. The costs were
historically allocated based on relative revenues or costs incurred divided
by the number of hospital operations. The historical allocated costs do not
necessarily represent the level of costs that the individual hospitals
expect to incur in the future.
(2) Effective August 31, 1999, some of the Tenet hospitals entered into a
receivables sale agreement to sell patient related receivables to Tenet
Healthcare. The sale generated a loss as the amounts the Tenet hospitals
realized upon sale were less than the patient receivable balances on the
Tenet hospitals' individual balance sheets. This was due to the fact that
the Tenet hospitals discounted the receivables to reflect the time value of
money and anticipated collection costs.
(3) On May 31, 1998 Tenet recorded a non-cash restructuring and impairment
charge related to the planned closure of St. Luke's Behavioral Health Center
by May 31, 1999. Prior to final closure, Tenet Healthcare began negotiations
with potential buyers for some Arizona operations including St. Luke's
Behavioral Health Center. IASIS ultimately acquired this facility from Tenet
Healthcare and does not currently plan to close this facility.
(4) Relates to a reversal of a reserve related to the final contract settlement
in connection with the termination of an unprofitable payor contract at
Rocky Mountain Medical Center, formerly named PHC Regional Hospital and
Medical Center.
(5) We define Adjusted Net Income (Loss) as net income (loss) or income (loss)
before cumulative effect of accounting change for the period presented,
adjusted for items management considers to be non-recurring and excluding
historical management fees and corporate overhead, recapitalization costs,
impairment and restructuring charges, reversal of excess loss contract
accrual and loss on sale of accounts receivable. The following table
provides a summary of items management considers to be non-recurring and
one-time items, including an adjustment for estimated corporate cost along
with the related impact on Adjusted Net Income (Loss) for the periods
presented.
PRO FORMA PRO FORMA
PRO FORMA NINE THREE MONTHS
YEAR ENDED MONTHS ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1999 1999
------------- ------------- -------------
Net income (loss).................... $(21,843) $ 3,954 $ (6,283)
Adjustments:
Remove historical management fees
and corporate overhead.......... 15,220 11,220 313
Estimated corporate cost........... (11,746) (7,145) (879)
Recapitalization costs............. -- -- 3,442
Impairment and restructuring
charges......................... 19,455 -- --
Reversal of excess loss contract
accrual......................... (7,500) -- --
Loss on sale of accounts
receivable...................... -- 4,548 2,191
-------- -------- --------
Adjusted Net Income (Loss)........... $ (6,414) $ 12,577 $ (1,216)
======== ======== ========
The estimated corporate cost includes estimates of actual costs to be
incurred for salaries and benefits and other costs for executive management,
finance, human resource,
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NOTES TO SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
COMBINED FINANCIAL INFORMATION
(Dollars in thousands)
risk management, information systems, corporate compliance and other general and
administrative functions, net of amounts included in IASIS' and management
company's historical financial statements.
Actual results and cost savings may differ materially from those reflected
above due to a number of factors, including without limitation,
- an inability to replace existing services provided by Paracelsus
Healthcare and Tenet Healthcare at the costs anticipated by our
management;
- an inability to reduce salaries, wages and benefits; and
- an increase in other of our costs. See "If we are unable to achieve
anticipated cost savings, we will not achieve projected operational
efficiencies and we may have inadequate capital to meet our debt service
and other obligations" on page 22.
(6) We define EBITDA as operating income before interest expense, minority
interests, income taxes, and depreciation and amortization. While you should
not consider EBITDA in isolation or as a substitute for net income,
operating cash flows or other cash flow statement data determined in
accordance with GAAP, management understands EBITDA is a commonly used tool
for measuring a company's ability to service debt, especially in evaluating
healthcare companies. We define Adjusted EBITDA as EBITDA for the period
presented, adjusted for items management considers to be non-recurring and
excluding historical management fees and corporate overhead,
recapitalization costs, impairment and restructuring charges, reversal of
excess loss contract accrual and loss on sale of accounts receivable. In
addition, EBITDA and Adjusted EBITDA may not be comparable to similarly
titled measures of other companies. The following table provides a summary
of items management considers to be non-recurring and one-time items,
including an adjustment for estimated corporate cost along with the related
impact on Adjusted EBITDA for the periods presented.
PRO FORMA PRO FORMA
PRO FORMA NINE THREE MONTHS
YEAR ENDED MONTHS ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1999 1999
------------ ------------- ------------
EBITDA.................................. $ 84,975 $86,592 $21,721
Adjustments:
Remove historical management fees and
corporate overhead................. 15,220 11,220 313
Estimated corporate cost.............. (11,746) (7,145) (879)
Recapitalization costs................ -- -- 3,442
Impairment and restructuring
charges............................ 19,455 -- --
Reversal of excess loss contract
accrual............................ (7,500) -- --
Loss on sale of accounts receivable... -- 4,548 2,191
-------- ------- -------
Adjusted EBITDA......................... $100,404 $95,215 $26,788
======== ======= =======
(7) We have calculated the ratio of earnings to fixed charges by dividing
income from continuing operations before fixed charges, minority interests
and income taxes by fixed charges, which consists of interest charges,
meaning interest expense plus
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NOTES TO SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
COMBINED FINANCIAL INFORMATION
(Dollars in thousands)
interest charged to construction, the portion of rent expense which we deem
to be equivalent to interest expense, and amortization of certain financing
costs. Fixed charges exceeded earnings for the three months ended December
31, 1999 (Historical) by $1.6 million, for the three months ended December
31, 1999 (Pro Forma) by $6.6 million and for the year ended December 31,
1998 (Pro Forma) by $21.4 million. Excluding the impact of recapitalization
costs, impairment and restructuring charges, reversal of excess loss
contract accrual and loss on sale of accounts receivable, the ratio of
earnings to fixed charges was 1.1x for the three months ended December 31,
1999 (Historical). Fixed charges exceeded earnings for the three months
ended December 31, 1999 (Pro Forma) by $1.0 million and for the year ended
December 31, 1998 (Pro Forma) by $9.5 million.
(8) Excludes 120 beds at Rocky Mountain Medical Center, formerly named PHC
Regional Hospital and Medical Center, which closed in June 1997 and is
scheduled to reopen during the first quarter of 2000. See "Liquidity and
Capital Resources" beginning on page 74.
(9) Represents the total number of patients our hospitals admitted for stays in
excess of 23 hours. Our management and certain investors use this number as
a general measure of inpatient volume.
(10) Represents the average number of days that a patient stays in our
hospitals.
(11) Represents the average number of inpatients in our hospitals each day.
(12) Represents the percentage of operating beds occupied by patients. Occupancy
percentage does not include 120 beds at Rocky Mountain Medical Center.
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RISK FACTORS
You should carefully consider the following risk factors in addition to the
other information in this prospectus before deciding to tender your old notes in
the exchange offer. The risk factors described below -- other than the risk
factor described under the caption "If you do not exchange your old notes, you
will continue to be subject to transfer restrictions on the old notes" -- are
generally applicable to the old notes as well as the new notes.
In addition to the risks described in this prospectus, risks and
uncertainties not presently known to us or that we currently deem to be
immaterial may also materially and adversely affect our business operations. If
any of the following risks actually occur, our business, financial condition or
results of operations could be materially adversely affected.
OFFERING RISKS
BECAUSE THERE IS NO ESTABLISHED TRADING MARKET FOR THE NOTES, YOU MAY FIND
IT DIFFICULT TO SELL YOUR NOTES
There is no established trading market for the new notes or the old notes
and we do not intend to apply for listing of the new notes on any securities
exchange or for quotation through any automated inter-dealer quotation system.
Without an established trading market for the notes, you may not be able to sell
your new notes. Although J.P. Morgan Securities Inc., the initial purchaser of
the old notes, has informed us that it currently intends to make a market in the
new notes, it has no obligation to do so and may discontinue making a market at
any time without notice. Moreover, the liquidity of any market for the new notes
will also depend upon
- the number of holders of the new notes,
- our performance,
- the market for similar securities, and
- the interest of securities dealers in making a market in the new notes.
Accordingly, a liquid trading market may not develop for the new notes. In
addition, any trading market that existed for the old notes will be negatively
affected due to the decrease in the size of the "float" of the old notes caused
by old notes being tendered and accepted in the exchange offer.
IF YOU DO NOT EXCHANGE YOUR OLD NOTES, YOU WILL CONTINUE TO BE SUBJECT TO
TRANSFER RESTRICTIONS ON THE OLD NOTES
If you do not exchange your old notes for new notes in the exchange offer,
you will continue to be subject to the restrictions on transfer of your old
notes described in the legend on the certificates for your old notes. The
restrictions on transfer of your old notes arise because we issued the old notes
under exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, you may only offer or sell the old notes if they are registered under
the Securities Act and applicable state securities laws, or offered and sold
under an exemption from, or in a transaction not subject to, these requirements.
We do not plan to register the old notes under the Securities Act. For further
information regarding the consequences of tendering your old notes in the
exchange offer, see the discussions below under the captions "The Exchange
Offer -- Consequences of Exchanging or Failing to Exchange Old
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Notes" on pages 37 to 38 and "Certain United States Federal Income Tax
Consequences" beginning on page 39.
IF WE ARE UNABLE TO REPURCHASE THE NEW NOTES FOLLOWING A CHANGE OF CONTROL,
AS REQUIRED BY THE INDENTURE, WE WOULD BE IN DEFAULT UNDER THE INDENTURE AND OUR
CREDIT FACILITY AND WOULD NOT BE ABLE TO MAKE PAYMENTS TO YOU
If there is a change of control of our company, you may require us to
repurchase your new notes at 101% of their principal amount, plus accrued and
unpaid interest to the date of repurchase. Since a change of control would
likely constitute an event of default under our credit facility and any future
other debt agreements, we may be prevented from repurchasing your new notes
unless we are able to refinance our indebtedness or obtain waivers. In addition,
we simply may not have sufficient resources to repurchase your new notes. If we
fail to repurchase the new notes, we may default under the indenture which
would, in turn, constitute a default under our credit facility and could
constitute a default under our other senior indebtedness. In this situation, we
would likely be restricted from making payments to you until our obligations
under our senior indebtedness are paid in full. For a further discussion and a
definition of the term "change of control," see "Description of
Notes -- Repurchase at the Option of Holders -- Change of Control" on page 120.
IF A COURT FINDS OUR SALE OF THE NOTES TO BE A FRAUDULENT CONVEYANCE, YOU
WOULD NOT RECEIVE PAYMENTS OF PRINCIPAL OR INTEREST ON YOUR NOTES AND YOU WOULD
NOT BE ABLE TO SELL THE NOTES IN THE SECONDARY MARKET
Under federal bankruptcy laws and comparable provisions of state fraudulent
transfer laws, a court could void our obligations under the new notes and the
subsidiary guarantees or could subordinate claims under the new notes or the
subsidiary guarantees to all of our other indebtedness or the indebtedness of
any guarantor subsidiary. If a court voids our obligations under the new notes,
or subordinates claims on the new notes or subsidiary guarantees, you would not
receive payments of principal or interest on the notes, and you would not be
able to resell your notes in the secondary market. In addition, a court could
void any payment by us or any guarantor subsidiary under the new notes or any
subsidiary guarantee. A court would be empowered to take these actions, if,
among other things, we or the guarantor subsidiary, at the time we or it
incurred the indebtedness evidenced by the new notes or guarantee:
- received less than reasonably equivalent value or fair consideration for
the incurrence of this indebtedness;
- was insolvent or rendered insolvent by reason of this incurrence;
- was engaged in a business or transaction for which our or our guarantor
subsidiary's remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that we or it would incur, debts beyond
our or its ability to pay those debts as they mature.
SOME HOLDERS WHO EXCHANGE THEIR OLD NOTES MAY BE DEEMED TO BE UNDERWRITERS
If you exchange your old notes in the exchange offer for the purpose of
participating in a distribution of the new notes, you may be deemed to have
received restricted securities. In that event, you will be required to comply
with the registration and
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prospectus delivery requirements of the Securities Act in connection with any
resale transaction.
COMPANY RISKS
OUR SIGNIFICANT INDEBTEDNESS MAY LIMIT OUR ABILITY TO GROW AND COMPETE WITH
OTHER HOSPITAL MANAGEMENT COMPANIES AND MAY PROHIBIT US FROM MAKING PAYMENTS ON
THE NEW NOTES
The amount of our outstanding indebtedness is large compared to the net
book value of our assets, and we have substantial repayment obligations under
our outstanding debt. Our substantial indebtedness could have important
consequences to you. It may affect our ability to develop as a company and your
ability to receive payment on the new notes. Our indebtedness could also:
- increase our vulnerability to general adverse economic and industry
conditions because we must still meet our significant debt service
obligations, notwithstanding the fact that our revenues may have
decreased;
- increase our vulnerability to interest rate fluctuations because much of
our debt may be at variable interest rates;
- limit our ability to obtain additional financing to fund future working
capital requirements, capital expenditures and other general corporate
requirements because our significant indebtedness may reduce the
availability of new financing sources;
- limit our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of these funds to
make principal payments and fund debt service; and
As of December 31, 1999, after giving effect to the offering of the old
notes, the recapitalization transaction in which our current principals acquired
hospitals and related facilities from Paracelsus Healthcare and the acquisition
of hospitals and related facilities from Tenet Healthcare, we had:
- total consolidated debt of approximately $561.3 million,
- total stockholders' equity of $38.9 million, and
- for the three-month period and the twelve-month period ended December 31,
1999, fixed charges exceeded earnings by $6.6 million and $.07 million,
respectively.
We have calculated the ratio of earnings to fixed charges by dividing income
from continuing operations before fixed charges, minority interests and income
taxes by fixed charges. Fixed charges consist of interest charges, meaning
interest expense plus interest charged to construction, the portion of rent
expense which we deem to be equivalent to interest expense, and amortization of
certain financing costs. The ratio of earnings to fixed charges provides a
useful measure of our liquidity because it reveals the portion of our income
that is not dedicated to the repayment of recurring expenses.
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33
The following table indicates the aggregate amount of principal and
interest payments we will be required to make during each of the next five
years:
YEAR PRINCIPAL INTEREST
---- ---------- -----------
2000................................. 7,536,000 63,696,926
2001................................. 10,628,000 62,975,002
2002................................. 19,375,000 61,615,626
2003................................. 28,125,000 59,433,594
2004................................. 28,750,000 56,215,626
---------- -----------
Total................................ 94,414,000 303,936,774
IF WE NEED TO SEEK BANKRUPTCY PROTECTION, WE WILL NOT REPAY HOLDERS OF THE
NEW NOTES UNTIL WE REPAY ALL OF OUR SENIOR INDEBTEDNESS, INCLUDING OUR CREDIT
FACILITY
In the event that we seek bankruptcy protection, we may not be able to
satisfy our obligations under the new notes until after we repay our senior
creditors. Our obligations under the new notes and the subsidiary guarantees
will be subordinated to substantially all of our existing and future
indebtedness, including our credit facility, but excluding trade payables and
any debt that expressly provides that it ranks equally with, or subordinate to,
the new notes or the subsidiary guarantees. Any subsidiary guarantee will be
subordinated in right of payment to all senior indebtedness of the relevant
guarantor subsidiary including guarantees of our credit facility. The new notes
will also be effectively subordinated to all of our secured debt to the extent
of the assets securing that indebtedness.
As of December 31, 1999, after giving effect to the offering of the old
notes, the recapitalization in which our current principals acquired control of
IASIS and the acquisition by which IASIS acquired hospitals and related
facilities from Tenet Healthcare, we had $331.3 million of senior debt,
excluding letters of credit and guarantees. Of this $331.3 million senior debt,
we have $330.0 million of indebtedness outstanding under our credit facility,
all of which is senior to the new notes. We may also incur additional senior
indebtedness consistent with the terms of our debt agreements.
IF WE BREACH ANY OF THE RESTRICTIVE PROVISIONS IN OUR DEBT AGREEMENTS, WE
MAY HAVE TO IMMEDIATELY REPAY A SIGNIFICANT PORTION OF OUR INDEBTEDNESS
If we breach any of the restrictions in our debt agreements, we may have to
repay a significant portion of our indebtedness. We may not be able to make
payments to you as a holder of the new notes if we have to make these
accelerated payments. Our debt agreements may restrict our ability to:
- declare dividends or redeem or repurchase capital stock;
- prepay, redeem or repurchase debt, including the new notes;
- incur liens and engage in sale-leaseback transactions;
- make loans and investments;
- incur additional indebtedness;
- amend or otherwise change debt and other material agreements;
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- make capital expenditures;
- engage in mergers, acquisitions and asset sales;
- enter into transactions with affiliates; and
- change our primary business.
These restrictive provisions will also limit our flexibility in dealing
with changing economic conditions and may limit our ability to finance future
operations or capital needs or to engage in other business activities. For a
further discussion of operating and financial restrictions affecting us, see the
discussion below under the captions "Description of Notes -- Covenants" on pages
124 to 126 and "Description of Credit Facility" on pages 113 to 114.
BECAUSE OUR DEBT AGREEMENTS DO NOT RESTRICT OUR ABILITY TO INCUR ADDITIONAL
INDEBTEDNESS, THERE IS A RISK THAT WE MAY INCUR INDEBTEDNESS IN EXCESS OF OUR
ABILITY TO REPAY
Because our credit facility and the indenture do not fully restrict our
ability to incur new indebtedness, there is a risk to you that we may incur
indebtedness in excess of our ability to repay, thereby impairing our ability to
meet our repayment obligations under the new notes. The terms of the indenture
do not fully prohibit us or our subsidiaries from incurring additional
indebtedness. Our credit facility permits additional borrowings of up to $125.0
million and all of those borrowings would be senior to the new notes and the
subsidiary guarantees. This means that, in the event of a default under any
indebtedness that is senior to the new notes, you would not be repaid or
otherwise receive compensation in respect of the new notes unless and until all
of our senior indebtedness is repaid.
BECAUSE WE DO NOT HAVE AN INDEPENDENT OPERATING HISTORY, WE MAY NOT BE ABLE
TO ACCURATELY PREDICT OUR WORKING CAPITAL REQUIREMENTS
We have a limited independent operating history and may not be able to
accurately predict our working capital and other cash needs. If we fail to
maintain adequate working capital and experience a resultant lack of liquidity,
we may default on our required payment obligations, including payment
obligations to you under the new notes. Prior to the formation of IASIS, various
entities owned directly or indirectly by Paracelsus Healthcare, Tenet Healthcare
and their predecessors conducted the business operations of our current
facilities. Paracelsus Healthcare and Tenet Healthcare have substantially longer
operating histories than we do and may have greater financial and administrative
resources and infrastructure than ours. Moreover, while the members of our
senior management team have extensive experience managing large groups of
hospitals, they have not worked together as a single management team and they
have not managed our hospitals. Accordingly, our working capital needs may be
difficult to predict.
As an independent company, we will be required to supplement our hospitals'
financial and administrative systems and other resources to provide services
necessary to operate successfully as an independent company. We will also need
to fund our working capital requirements and other cash needs from our cash flow
and other sources. Our cash flow and the revolving credit facility may not,
however, be adequate to meet our working capital and other cash needs in the
future, which may negatively affect our ability to make payments to you as a
holder of the new notes.
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BECAUSE OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE COMPARABLE TO
FUTURE PERIODS, YOU MAY NOT BE ABLE TO ACCURATELY EVALUATE CHANGES IN OUR
FINANCIAL POSITION BY REVIEWING OUR FINANCIAL STATEMENTS
The entity currently operating as IASIS comprises the assets of three
historically separate entities. Accordingly, our historical financial
information is derived exclusively from the financial information of our
predecessors and does not provide you with an established independent operating
history upon which you may evaluate us. As a result, the historical financial
information included in this prospectus may not necessarily reflect our results
of operations, financial position and cash flows in the future or what our
results of operations, financial position and cash flows would have been had we
been a separate, independent entity during the periods presented. In addition,
the historical financial information does not reflect many significant changes
resulting from the recapitalization in which our current principals acquired
control of IASIS, the acquisition by which IASIS acquired hospitals and related
facilities from Tenet Healthcare, the credit facility and the offering of the
old notes. As a consequence, our results of operations and financial condition
subsequent to the recapitalization and the acquisition are not and will not be
comparable to prior periods.
IF WE ARE UNABLE TO ACHIEVE ANTICIPATED COST SAVINGS WE WILL NOT ACHIEVE
PROJECTED OPERATIONAL EFFICIENCIES AND WE MAY HAVE INADEQUATE CAPITAL TO MEET
OUR DEBT SERVICE AND OTHER OBLIGATIONS
Our business plan anticipates that we will have the ability to operate our
hospitals with lower costs than the overhead allocated by former owners. In the
event that we fail to realize these expected cost-savings for any reason, our
liquidity for future periods could be impaired because of the greater amount of
capital that we would need to devote to the payment of expenses. If this is the
case, we may not be able to make payments to you under the new notes. For
example, we expect to achieve significant cost savings through the
implementation of new management information systems and the outsourcing of
accounts receivable collection functions, among other things. We have reflected
these potential annualized cash cost savings as supplemental adjustments in the
unaudited pro forma combined financial information and elsewhere in this
prospectus. These potential cost savings are based on analyses completed by
members of our management which necessarily involve assumptions as to future
events, including general business and industry conditions, competitive factors,
local labor markets and labor productivity. While we believe these analyses and
underlying assumptions to be reasonable, unforeseen factors may offset the
estimated cost savings or other components of our business plan. As a result,
our actual cost savings may vary considerably, or be considerably delayed,
compared to the estimates described in this prospectus. As a result, we may have
overestimated our projected liquidity and cash flows for future periods and, as
a result, we may have inadequate capital to meet our debt service and other
obligations in the future.
WHEN OUR TRANSITIONAL SERVICES AGREEMENTS EXPIRE, WE MAY NOT BE ABLE TO
OBTAIN SUBSTITUTE SERVICES ON COMMERCIALLY ACCEPTABLE TERMS AND WE MAY INCUR
SUBSTANTIAL ADDITIONAL COSTS
The transitional services agreements we entered into with Paracelsus
Healthcare and Tenet Healthcare following the transactions which formed our
company will expire in less than 12 months. The services provided under those
agreements, which are described below, are very important to us and there is a
risk that we will not be able to obtain substitute services on commercially
acceptable terms. When these agreements terminate, we will
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have to provide these services in-house or contract with third parties.
Accordingly, we may incur substantial additional costs for these services. These
services generally include:
- information systems;
- employees temporarily contracted from Tenet Healthcare; and
- purchasing and contract services.
Also, in connection with the recapitalization and the acquisition,
Paracelsus Healthcare and Tenet Healthcare agreed to indemnify us against
specified liabilities as described under "The Transactions" beginning on page
43. However, we cannot assure you that Paracelsus Healthcare and Tenet
Healthcare will honor their indemnity obligations. We may, therefore, also incur
substantial costs to satisfy any potential liabilities.
IF WE LOSE ANY OF OUR KEY PERSONNEL WITH HEALTHCARE EXPERTISE, OVERSIGHT OF
OUR MANAGEMENT FUNCTIONS MAY BE IMPAIRED AND OUR BUSINESS OPERATIONS MAY BE
DISRUPTED
Our success is largely dependent on the skills, experience and efforts of
our senior management team, which includes Wayne Gower, our President and Chief
Executive Officer, John Crawford, our Executive Vice President and Chief
Financial Officer, and Linda Hischke, our Division President. Our operations are
also dependent on the efforts, ability and experience of key members of our
hospital management staffs. If we lose the services of one or more members of
our senior management team or of a significant portion of our hospital
management staff at one or more of our hospitals we would likely experience a
significant disruption in our operations. The loss of senior management members
could undermine our reporting structure and result in inadequate oversight of
lower- and mid-level management functions. Moreover, the loss of hospital
management staff and resultant diminution in operational oversight could result
in inadequate cost containment or other failures of our business units to adhere
to their respective business plans.
We intend to enter into employment agreements with Messrs. Gower and
Crawford. We do not have employment agreements with any other employees. We do
not maintain key man life insurance policies on any of our officers. For further
information regarding our senior management team, see the discussion below under
the caption "Management" beginning on page 103.
IF WE FAIL TO INTEGRATE THE MANAGEMENT INFORMATION SYSTEMS AT OUR
HOSPITALS, OUR EXPENSES COULD INCREASE AND OUR PROFITABILITY COULD DECLINE
Our success is dependent in part on our access to sophisticated information
systems and our ability to integrate these systems into our hospitals. If we are
unable to integrate these systems, we will not be able to realize currently
projected cost-savings and, as a result, our profitability could be reduced.
These systems are essential to the following areas of our business operations,
among others,
- patient accounting, including billing and collection of accounts
receivable,
- financial, accounting and reporting,
- coding,
- payroll,
- compliance,
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- laboratory systems,
- radiology and pharmacy systems,
- medical records,
- document storage,
- materials management,
- asset management, and
- negotiating, pricing and managing payor contracts.
We expect that these systems will assist us in realizing operating efficiencies
and capturing, maintaining, monitoring and analyzing cost, quality and
utilization data. We may experience unanticipated delays, complications and
expenses in implementing, integrating and operating these systems. We may also
face challenges in connection with the integration of the systems currently in
use at the acquired hospitals with our new and existing systems. Since our
facilities were previously owned by entities that were not affiliated with each
other or with IASIS, the management information systems in use at the various
facilities were not previously linked and are not necessarily compatible. In
order to take full advantage of the newly acquired systems, as well as the
existing systems we will retain, we will need to overcome any challenges that
may be posed by the integration of these systems with our new and existing
systems. This integration may, however, prove to be more difficult or costly
than currently anticipated.
BECAUSE WE RELY ON THIRD-PARTY VENDORS FOR MANY OF OUR MANAGEMENT
INFORMATION SYSTEMS, NON-PERFORMANCE BY ANY OF THESE VENDORS COULD DISRUPT OUR
OPERATIONS.
We are dependent on third-party vendors for some of our management
information systems. Because of the integral nature of these systems to our
operations, any loss of these vendors, whether due to contract termination,
breach or otherwise, could result in a material disruption of our core
operational functions. The third-party vendors on which we rely include Tenet
Healthcare Corporation, McKesson HBOC, Inc., and Lawson Associates, Inc.. Under
a series of contracts we recently entered into with McKesson HBOC, Inc., we will
receive equipment, software and maintenance at most of our facilities, including
with respect to patient accounting, laboratory, radiology and pharmacy systems.
Other vendors have in the past, and will in the future, provide comparable
services.
Our arrangement with a vendor that provides services for some of our Utah
facilities is scheduled to expire in April 2000. Although we have attempted to
negotiate an extension of this contract until new systems and personnel are in
place, the vendor has notified us that it intends to terminate service on the
scheduled expiration date of the contract. If this relationship is terminated
before we are able to initiate operation of substitute systems, we could
experience a material disruption to the affected operations. Although we do not
anticipate that other vendors will prematurely terminate their relationships
with us, any such termination, or a default in the performance of vendors'
contractual obligations to us, could also disrupt our operations or otherwise
have a negative impact on our business operations. In the event of such a
termination we may not be able to obtain or maintain these systems. We may also
be unable to replace these systems or vendors' support in a reasonable time or
at a reasonable cost.
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THE INTERESTS OF OUR CONTROLLING STOCKHOLDER, JOSEPH LITTLEJOHN & LEVY, MAY
CONFLICT WITH YOUR INTERESTS AS A NEW NOTE HOLDER
Some decisions concerning our operations or financial structure may present
conflicts of interest between Joseph Littlejohn & Levy Fund III, L.P. and the
holders of the new notes. If we encounter financial difficulties or are unable
to pay our debts as they mature, the interests of our equity holders might
conflict with those of the holders of the new notes. In addition, our equity
holders may have an interest in pursuing acquisitions, divestitures, financings
or other transactions, that, in their judgment, could enhance their equity
investment even though these transactions might involve risks to the holders of
the new notes. JLL Healthcare, LLC, which is controlled by Joseph Littlejohn &
Levy Fund III, L.P., an affiliate of Joseph Littlejohn & Levy, beneficially owns
84.7% of our outstanding common stock. As a result of its voting power, JLL
Healthcare, LLC is in a position to elect a majority of our board of directors
and control all matters affecting us, including any determination with respect
to:
- our direction and policies;
- the acquisition and disposition of assets;
- future issuances of common stock, preferred stock or other securities;
- our future incurrence of debt; and
- any dividends on our common stock or preferred stock.
IF ANY ONE OF THE FOUR STATES IN WHICH WE OPERATE EXPERIENCES AN ECONOMIC
DOWNTURN OR OTHER MATERIAL CHANGES, OUR OVERALL BUSINESS RESULTS MAY SUFFER
Of our fifteen general, acute care hospitals, five are located in Utah,
three are located in Arizona, three are located in Florida, and four are located
in Texas. On a pro forma basis for the three months ended December 31, 1999, our
Utah hospitals generated 27.9% of our net revenues, our Arizona hospitals
generated 26.2%, our Florida hospitals generated 23.2% and our Texas hospitals
generated 22.7%. Accordingly, any material change in the current demographic,
economic, competitive and regulatory conditions in Utah, Arizona, Florida or
Texas could adversely affect our overall business results because of the
significance of our operations in each of these states to our overall operating
performance. Moreover, due to our concentration of revenues in only four
markets, our business is not diversified and is therefore subject to greater
market risks than some competing multi-facility healthcare companies. Since each
state in which we do business may represent 20% or more of our revenues, our
profitability could also be diminished due to market volatility in any one of
these markets or negative changes in any of a number of market conditions.
INDUSTRY RISKS RELATING TO OUR COMPANY
IF WE ARE UNABLE TO ENTER INTO FAVORABLE CONTRACTS WITH MANAGED CARE PAYORS
OUR OPERATING REVENUES MAY BE REDUCED
Our ability to negotiate favorable contracts with Health Maintenance
Organizations, Preferred Provider Organizations and other managed care payors
significantly affects the revenues and operating results of most of our
hospitals. If we lose any of these contracts or we are unable to enter into new
contracts on favorable terms, our revenues derived from operations will be
reduced and our growth prospects will be diminished. Revenues derived from HMOs,
PPOs and other managed care payors accounted for approximately 36.7% of our pro
forma net operating revenues for the three months ended December 31, 1999. As
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such, our future success will depend, in part, on our hospitals' ability to
continue to enter into managed care contracts and to organize and structure
local hospital networks, in each case on terms favorable to us. Other healthcare
companies, including some with greater financial resources or a wider range of
services, may also be competing for these opportunities.
BECAUSE WE ENTER INTO CAPITATED CONTRACTS WITH PRIVATE PAYORS, LIMITATIONS
ON PAYMENTS AND REIMBURSEMENTS MAY SIGNIFICANTLY REDUCE OUR REVENUES
Private payors, including indemnity and managed care payors, accounted for
approximately 64.6% of our pro forma net operating revenues for the three months
ended December 31, 1999. Any reduction in the amount private payors pay us will
cause our revenues to decrease. These payors are increasingly demanding
discounted fee structures or prepaid capitation arrangements that impose on
healthcare providers all or a portion of the financial risk associated with
patient treatment. With capitated contracts, we receive specific fixed periodic
payments from an HMO, PPO, or employer, based on the number of members of the
organization we service. In return, we agree to provide healthcare services to
those members regardless of the actual costs incurred and services provided. The
profitability of those contracts depends upon our ability to negotiate payments
per patient that, in the aggregate, are adequate to cover the cost of meeting
the healthcare needs of the covered individuals. We may not be able to enter
into any contracts of this type or, even if we do, the payments we receive may
not be adequate to cover the cost of meeting the healthcare needs of the covered
persons. We will lose revenue if this occurs.
RECENT LEGISLATIVE CHANGES LIMITING PAYMENTS PROVIDED BY GOVERNMENTAL
PROGRAMS MAY SIGNIFICANTLY REDUCE OUR REVENUES
Payments from government healthcare programs, such as Medicare and
Medicaid, accounted for approximately 35.4% of our pro forma net operating
revenues for the three months ended December 31, 1999. Recent legislative
changes, including those enacted as part of the Balanced Budget Act of 1997,
have resulted in limitations on and, in some cases, reductions in levels of,
payments to healthcare providers under many of these government programs. Many
changes imposed by the Balanced Budget Act are being phased in over a period of
years. The Balanced Budget Act significantly changes the method of payment under
the Medicare and Medicaid programs which has resulted, and we expect will
continue to result, in significant reductions in payments for our inpatient,
outpatient, home health and skilled nursing services, which may cause our
revenues to decline.
GOVERNMENT INVESTIGATIONS INVOLVING OUR PREDECESSORS MAY RESULT IN THE
IMPOSITION OF MONETARY OR OTHER PENALTIES AGAINST OUR COMPANY
We are aware that prior to our ownership of them, various of the acquired
hospitals were contacted in relation to government investigations of, among
other things, billing practices relating to clinical laboratory test claims. As
the current owner of the facilities, in the event that this governmental
investigation is reinitiated or otherwise escalates, we would likely incur costs
and expenses, including legal fees and the allocable portion of our executives'
time and efforts, and those costs and expenses could be significant. During the
time we have owned the acquired hospitals, no governmental official has
contacted us regarding any of these government initiatives. Moreover, we are not
aware of the current status of the initiatives involving our predecessors, if
any, and cannot predict the remedial actions a governmental entity may elect to
take against us or our predecessors stemming
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from these government initiatives or the final outcome of any related legal or
administrative action. While we take the position that, under the terms of the
agreements by which we acquired these hospitals, the prior owners retained any
liability resulting from these government initiatives, the prior owners'
resolution of these matters, in the event that any resolution was deemed
necessary, may still have an effect on our operations. At present, however, our
management is not aware of any government initiative targeted at us. For further
information regarding government investigations, see "Business -- Healthcare
Industry Investigations" beginning on page 100.
UNFORESEEN CHANGES IN OUR BUSINESS, THE HEALTHCARE INDUSTRY GENERALLY OR
THE ECONOMY AS A WHOLE MAY CAUSE THE FORWARD-LOOKING STATEMENTS IN THIS
PROSPECTUS TO BE INACCURATE.
This prospectus includes or incorporates forward-looking statements
regarding, among other things, our financial condition and business strategy. We
have based these forward-looking statements on our current expectations and
projections about future events. While we believe these expectations and
projections are reasonable, these forward-looking statements are inherently
subject to risks, uncertainties and assumptions about us, including, among other
things:
- our high degree of leverage;
- our ability to incur substantially more debt;
- operating and financial restrictions in our debt agreements;
- our ability to service indebtedness incurred in connection with the
transactions described in this prospectus;
- our lack of history as an independent operating company;
- our ability to achieve estimated cost savings;
- our ability to successfully implement our business strategies;
- intense levels of competition in the healthcare industry;
- the risks related to healthcare regulation reforms; and
- our ability to successfully integrate any future acquisitions.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur. These forward looking
statements are also subject to the risks, uncertainties and assumptions
discussed above, as well as under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 66.
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USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes in
the exchange offer. We will receive old notes in like principal amount in
exchange for the issuance of the new notes in the exchange offer. We will cancel
all old notes surrendered in exchange for new notes in the exchange offer.
The net proceeds from the offering of the old notes, after deducting
underwriting discounts and commissions and our expenses of $14,242,000, were
approximately $215,758,000. We used the net proceeds from the offering, as well
as borrowings of $330,000,000 under our credit facility and $160,000,000 in
proceeds from the issuance of our preferred stock, in the following amounts for
the following purposes:
- $160.0 million to repay the outstanding balance under our credit
facility, which we refer to in this prospectus as the $160.0 million
credit facility,
- $428.3 million to finance the acquisition of hospitals and related
facilities from Tenet Healthcare,
- $99.9 million to fund an opening cash balance required for working
capital, and
- $17.6 million to pay related fees and expenses of the transactions.
Our $160.0 million credit facility consisted of a revolving loan facility
and a Term-A Loan having final maturities of October 8, 2005, a Term-B Loan
having a final maturity of April 8, 2006 and a Term-C Loan having a final
maturity of January 8, 2000. The loans under the $160.0 million credit facility
bore interest at a rate per annum equal to The Bank of Nova Scotia's alternate
base rate plus a margin of 2.00% for revolving loans, 1.00% for Term-A Loans,
and 3.00% for Term-B Loans and Term-C Loans. We used the borrowings under our
$160.0 million credit facility to finance a portion of the recapitalization in
which our current principals acquired control of IASIS and to pay related fees
and expenses of the transactions of $5.0 million.
For further information regarding the material terms of our current credit
facility, see "Description of Credit Facility" on pages 113 to 114. For further
information regarding the current indebtedness of IASIS, see "Capitalization" on
page 46.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
On October 15, 1999, we issued an aggregate principal amount of
$230,000,000 of our 13% Senior Subordinated Notes due 2009 in offerings under
Rule 144A and Regulation S of the Securities Act. We did not register these
notes under the Securities Act. We issued the old notes, and we will issue the
new notes, under an indenture, dated as of October 15, 1999, by and among IASIS,
our wholly owned subsidiaries, as subsidiary guarantors, and The Bank of New
York, as trustee. We sold the old notes to J.P. Morgan Securities Inc. as
initial purchaser, under a purchase agreement, dated October 13, 1999, among
IASIS, the subsidiary guarantors and J.P. Morgan Securities Inc. When we sold
the old notes to J.P. Morgan, we also signed a registration rights agreement in
which we agreed to exchange all the issued and outstanding old notes for a like
principal amount of our 13% Senior Subordinated Exchange Notes due 2009. We have
filed copies of the indenture and the registration rights agreement as exhibits
to the registration statement of which this prospectus is a part.
This prospectus and the enclosed letter of transmittal constitute an offer
to exchange new notes for all of the issued and outstanding old notes. We are
extending this exchange offer to all holders of the old notes. We are first
sending this prospectus and the enclosed letter of transmittal on or about
[effective date], 2000, to all known holders of old notes. Subject to the
conditions listed below, we will accept for exchange all old notes which holders
properly tender on or prior to the expiration of the exchange offer and not
withdrawn as permitted below. The exchange offer will expire at 5:00 p.m., New
York City time, on [twenty business days after effective date]. However, if we,
in our sole discretion, extend the period of time during which the exchange
offer is open, the exchange offer will expire at the latest time and date to
which we extend the exchange offer. Our obligation to accept old notes for
exchange in the exchange offer is limited. For more information on the
conditions to our obligation to complete the exchange offer, please see the
discussion under the caption "-- Conditions to the Exchange Offer."
We expressly reserve the right, at any time and from time to time, to
extend the period of time during which the exchange offer is open. If we extend
this period of time, this will delay our acceptance of old notes for exchange.
If we elect to extend the period of time during which the exchange offer is
open, we will give you oral or written notice of the extension and delay, as
described below. During any extension of the exchange offer, all old notes
holders previously tendered and did not withdraw will remain subject to the
exchange offer and we may accept these old notes for exchange. We will return to
the registered holder, at our expense, any old notes we do not accept for
exchange as promptly as practicable after the expiration or termination of the
exchange offer. In the case of an extension, we will issue a press release or
other public announcement no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled expiration of the exchange
offer.
We expressly reserve the right to amend or terminate the exchange offer,
and not to accept for exchange any old notes we did not previously accept for
exchange if any of the events described under the caption "-- Conditions to the
Exchange Offer" occur. We will give you prompt oral or written notice of any
amendment, termination or nonacceptance.
Following completion of the exchange offer, we may, in our sole discretion,
commence one or more additional exchange offers to those holders of old notes
who did not exchange their old notes for new notes. The terms of these
additional exchange offers may differ
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from those applicable to this exchange offer. We may use this prospectus, as we
may amend or supplement it from time to time, in connection with any additional
exchange offers. We will conduct these additional exchange offers from time to
time until holders have exchanged all outstanding old notes for new notes, on
terms and conditions to be described in the prospectus and letter of transmittal
we will distribute in connection with the additional exchange offers.
PROCEDURES FOR TENDERING OLD NOTES
Old notes tendered in the exchange offer must be in denominations of $1,000
principal amount and any integral multiple of $1,000.
When you tender your old notes, and we accept the old notes, this will
constitute a binding agreement between you and IASIS, subject to the terms and
conditions described in this prospectus and the enclosed letter of transmittal.
If you do not use the procedures described under the caption "-- Guaranteed
Delivery Procedures," you must do one of the following on or prior to the
expiration of the exchange offer if you wish to participate in the exchange
offer:
- you must tender your old notes by sending
- the certificates for your old notes, in proper form for transfer,
- a properly completed and duly executed letter of transmittal,
with any required signature guarantees, and
- all other documents required by the letter of transmittal,
to The Bank of New York, as exchange agent, at one of the
addresses listed below under the caption "-- Exchange Agent"; or
- you must tender your old notes by using the book-entry procedures
described under the caption "-- Book-Entry Transfer" and
transmitting a properly completed and duly executed letter of
transmittal, with any required signature guarantees, or an agent's
message instead of the letter of transmittal, to The Bank of New
York, as exchange agent, at one of the addresses listed below under
the caption "-- Exchange Agent."
In order for a book-entry transfer to constitute a valid tender of your old
notes in the exchange offer, the exchange agent must receive a confirmation of
book-entry transfer of your old notes into the exchange agent's account at The
Depository Trust Company prior to the expiration of the exchange offer. The term
"agent's message" means a message, transmitted by DTC and received by the
exchange agent and forming a part of the book-entry confirmation, which states
that DTC has received an express acknowledgment from you that you have received
and have agreed to be bound by the letter of transmittal. If you use this
procedure, we may enforce the letter of transmittal against you.
You must select the method of delivery of
- certificates for old notes,
- letters of transmittal,
- agent's messages and
- all other required documents.
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If you deliver your old notes by mail, we recommend registered mail, properly
insured, with return receipt requested. In all cases, you should allow
sufficient time to assure timely delivery. DO NOT SEND CERTIFICATES FOR OLD
NOTES, LETTERS OF TRANSMITTAL OR AGENT'S MESSAGES TO US.
You must have an eligible guarantor institution guarantee signatures on a
letter of transmittal or a notice of withdrawal unless you are either
- a registered holder of old notes and have not completed the box
entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal or
- exchanging old notes for the account of an eligible guarantor
institution.
An eligible guarantor institution means:
- Banks, as defined in Section 3(a) of the Federal Deposit Insurance
Act;
- Brokers, dealers, municipal securities dealers, municipal securities
brokers, government securities dealers and government securities
brokers, as defined in the Securities Exchange Act of 1934, as
amended;
- Credit unions, as defined in Section 19B(1)(A) of the Federal Reserve
Act;
- National securities exchanges, registered securities associations and
clearing agencies, as these terms are defined in the Exchange Act; and
- Savings associations, as defined in Section 3(b) of the Federal
Deposit Insurance Act.
If signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed, the guarantor must be an eligible guarantor institution. If you plan
to sign the letter of transmittal but you are not the registered holder of the
old notes, including any participant in DTC's system whose name appears on a
security position listing as the owner of the old notes, you must have the old
notes signed by the registered holder of the old notes and that signature must
be guaranteed by an eligible guarantor institution. You may also send a separate
instrument of transfer or exchange signed by the registered holder and
guaranteed by an eligible guarantor institution, but that instrument must be in
a form satisfactory to us in our sole discretion. In addition, if a person or
persons other than the registered holder or holders of old notes signs the
letter of transmittal, certificates for the old notes must be endorsed or
accompanied by appropriate bond powers, in either case signed exactly as the
name or names of the registered holder or holders that appear on the
certificates for old notes.
We will determine in our sole discretion all questions as to the validity,
form, eligibility, including time of receipt, and acceptance of old notes
tendered for exchange. Our determination will be final and binding. We reserve
the absolute right to reject any and all tenders of old notes improperly
tendered or to not accept any old notes, the acceptance of which we or our
counsel determine to be unlawful. We also reserve the absolute right to waive
any defects or irregularities or conditions of the exchange offer as to any old
notes either before or after the expiration of the exchange offer, including the
right to waive the ineligibility of any holder who seeks to tender old notes in
the exchange offer. Our interpretation of the terms and conditions of the
exchange offer as to any particular old notes either before or after the
expiration of the exchange offer, including the terms and conditions of the
letter of transmittal and the accompanying instructions, will be final and
binding. Unless waived, you must cure any defects or irregularities in
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connection with tenders of old notes for exchange within a time period that we
determine to be reasonable. Neither we, The Bank of New York, as exchange agent,
nor any other person has any duty to give notification of any defect or
irregularity with respect to any tender of old notes for exchange, nor will we
have any liability for failure to give this notification.
If you are a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation, or act in a similar fiduciary or representative
capacity, and wish to sign the letter of transmittal or any certificates for old
notes or bond powers, you must indicate your status when signing. If you are
acting in any of these capacities, you must submit proper evidence satisfactory
to us of your authority to so act unless we waive this requirement.
By tendering your old notes, you represent to us:
(1) that you are not an "affiliate," as defined in Rule 144 under the
Securities Act, of IASIS;
(2) that at the time of the commencement of the exchange offer, you do
not have any arrangement or understanding with any person to
participate in the distribution of the new notes and you do not
intend to engage in the distribution of the new notes; and
(3) that you are acquiring any new notes in the ordinary course of
your business.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the expiration of the exchange offer, all old
notes properly tendered and will issue the new notes promptly after we accept
the old notes. For purposes of the exchange offer, we will be deemed to have
accepted properly tendered old notes for exchange when, as and if we have given
oral or written notice of acceptance to The Bank of New York, as exchange agent.
We will give prompt written confirmation of any oral notice.
For each old note we accept for exchange in the exchange offer, we will
send or cause to be sent to the holder of the old note a new note having a
principal amount at maturity equal to that of the surrendered old note. Interest
on the new note will accrue:
(1) from the later of (a) the last date to which we paid interest on
the old note surrendered in exchange for the new note or (b) if
you surrender the old note for exchange on a date in a period
which includes the record date for an interest payment date to
occur on or after the date of the exchange and as to which we will
pay interest, the date to which we will pay interest on the
interest payment date; or
(2) if we have not paid interest on the old note, from and including
October 15, 1999.
If we do not complete the exchange offer by [thirty business days after
effective date], and we do not have an effective shelf registration statement on
file with the SEC to register the old notes on that date, the interest rate on
the old notes will increase by 0.50% for the first 90 day-period and will
increase by 0.25% for each subsequent 90-day period. The maximum annual interest
rate increase will be 2.0%. The interest rate will cease to increase when we
complete the exchange offer or have an effective shelf registration statement on
file with the SEC. We will make interest payments, if any, on old notes
exchanged for new notes on each April 15th and October 15th during which the new
notes
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are outstanding. We will make interest payments to the person who, at the close
of business on the October 1st or April 1st next preceding the interest payment
date, is the registered holder of the old notes if the record date occurs prior
to the exchange, or is the registered holder of the new notes if the record date
occurs on or after the date of the exchange, even if the notes are cancelled
after the record date and on or before the interest payment date. For a further
discussion of the circumstances under which we would be required to pay
liquidated damages, see the caption "Description of Notes -- Registration
Rights; Liquidated Damages" beginning on page 145.
In all cases, we will issue new notes in exchange for old notes only after
The Bank of New York, as exchange agent, timely receives:
(1) either certificates for all physically tendered old notes, in
proper form for transfer, or a book-entry confirmation of transfer
of the old notes into the exchange agent's account at DTC, as the
case may be, and
(2) a properly completed and duly executed letter of transmittal, with
any required signature guarantees, and all other required
documents or, in the case of a book-entry confirmation, a properly
completed and duly executed letter of transmittal, with any
required signature guarantees, or an agent's message instead of
the letter of transmittal.
If for any reason we do not accept any tendered old notes or if you submit
old notes for a greater principal amount than you desire to exchange, we will
return the unaccepted or non-exchanged old notes to you at our expense. In the
case of old notes tendered by book-entry transfer into the exchange agent's
account at DTC by using the book-entry procedures described below, DTC will
credit the unaccepted or non-exchanged old notes to your account maintained with
DTC. We will return any old notes required to be returned to you as promptly as
practicable after the expiration or termination of the exchange offer.
BOOK-ENTRY TRANSFER
Within two business days after the date of this prospectus, The Bank of New
York, as exchange agent, will establish an account at DTC for the old notes
tendered in the exchange offer. Once established, any financial institution that
is a participant in DTC's systems may make book-entry delivery of old notes by
causing DTC to transfer the old notes into the exchange agent's account at DTC
in accordance with DTC's procedures for transfer. Although delivery of the old
notes may be effected through book-entry transfer at DTC, you must transmit or
cause to be transmitted, and the exchange agent must receive, on or prior to the
expiration of the exchange offer the letter of transmittal or a facsimile of the
letter of transmittal, with any required signature guarantees, or an agent's
message instead of a letter of transmittal, and any other required documents, at
one of the addresses listed below under the caption "-- Exchange Agent." In
addition, the exchange agent must receive book-entry confirmation of transfer of
the old notes into the exchange agent's account at DTC prior to the expiration
of the exchange offer. If you cannot comply with these procedures, you may be
able to use the guaranteed delivery procedures described below.
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GUARANTEED DELIVERY PROCEDURES
If you are a registered holder of the old notes and wish to tender your old
notes, but
- you do not have certificates for the old notes immediately
available,
- you do not have enough time to send your old notes or other required
documents to the exchange agent before the exchange offer expires or
- you cannot complete the procedure for book-entry transfer before the
exchange offer expires,
you may tender your old notes if:
- you make the tender through an eligible guarantor institution; and
- prior to the expiration of the exchange offer, an eligible guarantor
institution sends to the exchange agent and the exchange agent
receives a properly completed and duly executed notice of guaranteed
delivery, substantially in the form we have provided, setting forth
your name and address, and the amount of old notes you are tendering
and stating that you are making the tender by notice of guaranteed
delivery. You or the guarantor institution may send these documents
by overnight courier, registered or certified mail or facsimile
transmission.
If you elect to use this procedure, you must also guarantee that within three
New York Stock Exchange, Inc. trading days after the date of execution of the
notice of guaranteed delivery, the eligible guarantor institution will deposit
with the exchange agent:
- the certificates for all physically tendered old notes, in proper
form for transfer, or a book-entry confirmation of transfer of the
old notes into the exchange agent's account at DTC, as the case may
be, and
- a properly completed and duly executed letter of transmittal, with
any required signature guarantees, and all other required documents
or, in the case of a book-entry confirmation, a properly completed
and duly executed letter of transmittal, with any required signature
guarantees, or an agent's message instead of the letter of
transmittal.
The exchange agent must receive these items within the time specified for the
book-entry transfer to be effective.
WITHDRAWAL RIGHTS
YOU MAY WITHDRAW TENDERS OF OLD NOTES AT ANY TIME PRIOR TO THE EXPIRATION
OF THE EXCHANGE OFFER.
For a withdrawal to be effective, The Bank of New York, as exchange agent
must receive a written notice of withdrawal prior to the expiration of the
exchange offer at one of the addresses listed below under the caption
"--Exchange Agent." Any notice of withdrawal must:
- specify the name of the person who tendered the old notes to be
withdrawn,
- identify the old notes to be withdrawn, including the principal
amount of the old notes, and
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- where certificates for old notes have been transmitted, specify the
name in which the old notes are registered, if different from that
of the withdrawing holder.
If the withdrawing holder has delivered, caused to be delivered or
otherwise identified to the exchange agent certificates for old notes, then,
prior to the release of the certificates, the withdrawing holder must also
submit the serial numbers of the particular certificates to be withdrawn and a
signed notice of withdrawal with signatures guaranteed by an eligible guarantor
institution unless the holder is an eligible guarantor institution. If the
holder has tendered old notes using the procedure for book-entry transfer
described above, any notice of withdrawal must specify the name and number of
the account at DTC to be credited with the withdrawn old notes and otherwise
comply with the procedures of the book-entry transfer facility. We will
determine all questions as to the validity, form and eligibility, including time
of receipt, of these notices. Our determination will be final and binding. We
will deem any old notes so withdrawn not to have been validly tendered for
exchange in the exchange offer.
We will promptly return to the registered holder, at our expense, any old
notes which a holder has tendered for exchange but which are not exchanged for
any reason. In the case of old notes tendered by book-entry transfer into the
exchange agent's account at DTC, DTC will credit any withdrawn or unaccepted old
notes to the tendering holder's account at DTC. A holder may retender properly
withdrawn old notes at any time on or prior to the expiration of the exchange
offer by following one of the procedures described above under "-- Procedures
for Tendering Old Notes."
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, we will not be
required to accept any old notes for exchange or to issue any new notes in
exchange for old notes, and we may terminate or amend the exchange offer if, at
any time before we accept the old notes for exchange or we exchange new notes
for old notes, any of the following events occurs:
- the exchange offer is determined to violate any applicable law or any
applicable interpretation of the staff of the SEC;
- any federal law, statute or regulation is adopted or enacted or an action
or proceeding is pending or threatened in any court or by any
governmental agency that might materially impair our ability to proceed
with the exchange offer;
- any material adverse development occurs in any existing legal action or
proceeding involving IASIS;
- we do not receive any governmental approval we deem necessary for the
completion of the exchange offer;
- any stop order is threatened or in effect with respect to the
registration statement of which this prospectus forms a part or the
qualification of the indenture under the Trust Indenture Act of 1939;
- the staff of the SEC changes the current interpretation which permits the
notes we will issue in the exchange offer to be offered for resale,
resold and otherwise transferred -- other than by broker-dealers and any
holder which is an "affiliate" of IASIS within the meaning of Rule 144
under the Securities Act -- without compliance with the registration and
prospectus delivery provisions of the Securities
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Act, assuming the transferring holder complies with the other limitations
we discussed in this prospectus; or
- any of the conditions precedent to our obligations under the registration
rights agreement are not fulfilled.
These conditions are for our benefit only and we may assert them regardless
of the circumstances giving rise to any condition. We may also waive any
condition in whole or in part at any time in our sole discretion. Our failure at
any time to exercise any of these rights does not mean we have waived that right
and each right is an ongoing right that we may assert at any time.
In addition, we will not accept any old notes for exchange or issue any new
notes in exchange for old notes, if at the time a stop order is threatened or in
effect which relates to:
- the registration statement of which this prospectus forms a part; or
- the qualification under the Trust Indenture Act of 1939 of the indenture
under which we issued the old notes and we will issue the new notes.
EXCHANGE AGENT
We have appointed The Bank of New York as the exchange agent for the
exchange offer. You should direct all completed letters of transmittal and
agent's messages to the exchange agent at one of the addresses listed below. You
should direct questions and requests for assistance, requests for additional
copies of this prospectus or the letter of transmittal, agent's messages and
requests for notices of guaranteed delivery to the exchange agent at one of the
following addresses:
Delivery To: The Bank of New York, Exchange Agent
By Regular or Certified By Facsimile: By Overnight Courier or Hand:
Mail: (Eligible Guarantor
Institutions only) The Bank of New York
The Bank of New York 101 Barclay Street
101 Barclay Street, 7E (212) 815-6339 Corporate Trust Services
New York, NY 10286 Window
Attention: To Confirm by Telephone Ground Level
Reorganization Section or for Information Call: New York, NY 10286
Attention:
(212) 815-3428 Reorganization Section
IF YOU DELIVER A LETTER OF TRANSMITTAL OR AGENT'S MESSAGE TO AN ADDRESS
OTHER THAN THE ADDRESS LISTED ABOVE OR, IF YOU TRANSMIT INSTRUCTIONS BY
FACSIMILE IN A MANNER NOT DESCRIBED ABOVE, THAT DELIVERY OR TRANSMISSION WILL
NOT BE A VALID DELIVERY OF THE LETTER OF TRANSMITTAL OR AGENT'S MESSAGE.
FEES AND EXPENSES
The Bank of New York, as exchange agent, is making the principal
solicitation by mail. We will pay the exchange agent customary fees for its
services, reimburse the exchange agent for its reasonable out-of-pocket expenses
incurred in connection with the provision of these services and pay other
registration expenses, including fees and expenses of the trustee under the
indenture relating to the notes, filing fees, blue sky fees and printing and
distribution expenses. We will not make any payment to brokers, dealers or
others soliciting acceptances of the exchange offer.
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Officers and regular employees of IASIS and its affiliates and persons
engaged by the exchange agent may make additional solicitations by telephone,
facsimile or in person.
TRANSFER TAXES
You will not be obligated to pay any transfer taxes in connection with the
tender of old notes in the exchange offer unless you instruct us to register new
notes in the name of, or request that old notes not tendered or not accepted in
the exchange offer be returned to, a person other than the registered tendering
holder. In those cases, you will be responsible for the payment of any
applicable transfer tax.
CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE OLD NOTES
If you do not exchange your old notes for new notes in the exchange offer,
your old notes will continue to be subject to the provisions of the indenture
relating to the notes regarding transfer and exchange of the old notes and the
restrictions on transfer of the old notes described in the legend on your
certificates. These transfer restrictions are required because we issued the old
notes under an exemption from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. In general, a holder may not offer or sell the old notes unless the holder
registers the old notes under the Securities Act or the holder sells the old
notes in reliance on an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. We do not plan to register
the old notes under the Securities Act. Based on interpretations by the staff of
the SEC, as described in no-action letters issued to third parties, we believe
that you may reoffer, resell or otherwise transfer the new notes you receive in
the exchange offer without compliance with the registration and prospectus
delivery provisions of the Securities Act. However, you will not be able to
freely transfer the new notes if:
- you are an "affiliate," as defined in Rule 144 under the Securities Act,
of IASIS;
- you are acquiring the new notes in the exchange offer outside the
ordinary course of your business; or
- you have an arrangement or understanding with another person to
participate, or you engage or intend to engage, in the distribution of
the new notes.
We do not intend to request the SEC to consider, and the SEC has not
considered, the exchange offer in the context of a similar no-action letter. As
a result, we cannot guarantee that the staff of the SEC would make a similar
determination with respect to the exchange offer as in the circumstances
described in the no-action letters discussed above. Each holder, other than a
broker-dealer, must acknowledge that it is not engaged in, and does not intend
to engage in, a distribution of new notes and has no arrangement or
understanding to participate in a distribution of new notes. If you are an
affiliate of IASIS, are engaged in or intend to engage in a distribution of the
new notes or have any arrangement or understanding with respect to the
distribution of the new notes, you:
- may not rely on the applicable interpretations of the staff of the SEC,
and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection when you resell the new notes.
If you are a broker-dealer that holds old notes acquired for its own account as
a result of market-making or other trading activities, and who receives new
notes in the exchange offer, you must acknowledge that you may be considered an
underwriter within the
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meaning of the Securities Act and that you will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of the new
notes. In addition, to comply with state securities laws, you may not offer or
sell the new notes in any state unless you have registered or qualified the
notes for sale in that state or an exemption from registration or qualification
is available and you have complied with it. The offer and sale of the new notes
to "qualified institutional buyers," as defined in Rule 144A under the
Securities Act, is generally exempt from registration or qualification under
state securities laws. We do not plan to register or qualify the sale of the new
notes in any state where an exemption from registration or qualification is
required and not available.
We are not making the exchange offer to, and we will not accept surrenders
for exchange from, holders of the notes in any jurisdiction in which the
exchange offer or its acceptance would not comply with the securities or blue
sky laws of such jurisdiction.
All resales must be made in compliance with state securities or "blue sky"
laws. This compliance may require that the exchange notes be registered or
qualified in a state or that the resales be made by or through a licensed
broker-dealer, unless exemptions from these requirements are available. We
assume no responsibility with regard to compliance with these requirements.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain United States federal income tax
consequences to U.S. holders and non-U.S. holders, as defined below, of
- the exchange of old notes for the new notes, but only to the extent
discussed below under the caption "Exchange Offer"; and
- the ownership and disposition of the new notes we will issue in the
exchange offer.
This discussion is based upon the Internal Revenue Code of 1986, as amended,
existing and proposed Treasury regulations and applicable judicial decisions and
administrative interpretations, as of the current date, all of which are subject
to change, possibly with retroactive effect or different interpretations. This
discussion does not address all tax considerations that may be important to a
particular holder in light of the holder's circumstances. Moreover, this
discussion does not address tax considerations relevant to certain categories of
investors that may be subject to special rules, including some financial
institutions, insurance companies, tax-exempt organizations, dealers in
securities, persons who hold notes through partnerships or other pass-through
entities, U.S. expatriates or persons who hold the notes as part of a hedge,
conversion transaction, straddle or other risk reduction transaction. We have
assumed in this summary that the holders have held the old notes and will hold
the new notes as capital assets, meaning, generally, as property held for
investment. This discussion does not address the tax considerations arising
under the laws of any state, local or foreign jurisdiction. You are urged to
consult your tax advisor as to the particular tax considerations to you of the
exchange, ownership and dispositions of the notes, including the effect and
applicability of state, local or foreign tax laws.
The term "U.S. holder" means a beneficial owner of a note that is:
- a citizen or resident of the United States for United States federal
income tax purposes;
- a corporation or partnership created or organized in, or under the law
of, the United States or any political subdivision thereof;
- an estate the income of which is subject to United States federal income
taxation regardless of its source; or
- a trust, the administration of which is subject to the primary
supervision of a court within the United States and that has one or more
United States persons with authority to control all substantial
decisions, or if the trust was in existence on August 20, 1996 and has
elected to continue to be treated as a United States person.
A "non-U.S. holder" is a holder that is not a U.S. holder.
EXCHANGE OFFER
The exchange of old notes for new notes issued in the exchange offer will
not be treated as an "exchange" for United States federal income tax purposes
because the new notes issued in the exchange offer will not differ materially in
kind or extent from the old notes. Rather, the new notes received in the
exchange offer will be treated as a continuation of the old notes. Consequently,
you will not recognize gain or loss as a result of the exchange. In addition,
you will have the same adjusted tax basis and holding period
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in the new notes issued in the exchange offer as you had in your old notes
immediately prior to the exchange.
U.S. HOLDERS
INTEREST ON THE NEW NOTES. Interest on the new notes will be taxable to a
U.S. holder as ordinary income at the time it is received or accrued, depending
on the holder's method of tax accounting.
SALE, EXCHANGE, RETIREMENT OR OTHER TAXABLE DISPOSITION OF THE NEW
NOTES. Upon the sale, exchange, redemption or other taxable disposition of a
new note, a U.S. holder will recognize capital gain or loss equal to the
difference between the amount of money and fair market value of property
received in exchange for the new note, except to the extent attributable to
accrued but unpaid interest, and the U.S. holder's adjusted tax basis in the new
note.
MARKET DISCOUNT. U.S. holders, other than original purchasers of the old
notes in the original offering, should be aware that the sale of the new notes
may be affected by the market discount provisions of the Internal Revenue Code.
These rules generally provide that if a U.S. holder of an old note purchased the
note, subsequent to the original offering, at a market discount in excess of a
statutorily-defined minimal amount, and then recognizes gain upon a disposition,
or a partial redemption, of the new note, the lesser of the gain or the portion
of the market discount that accrued while the old note and new note were held by
the holder will be treated as ordinary interest income at the time of
disposition. The rules also provide that a U.S. holder who acquires a note at a
market discount may be required to defer a portion of any interest expense that
may otherwise be deductible on any indebtedness incurred or maintained to
purchase or carry the note until the holder disposes of the note in a taxable
transaction. If a U.S. holder of a note elects to include market discount in
income currently, neither of these rules would apply.
NON-U.S. HOLDERS
INTEREST ON THE NEW NOTES. Subject to the discussion below of backup
withholding, interest paid on the new notes to a non-U.S. holder will generally
qualify for the "portfolio interest exemption" and therefore will generally not
be subject to United States federal income or withholding tax if:
- the interest is not effectively connected with the conduct of a trade or
business within the United States by the non-U.S. holder;
- the non-U.S. holder does not actually or constructively own 10% or more
of the total voting power of our stock entitled to vote;
- the non-U.S. holder is not a controlled foreign corporation with respect
to which we are a "related person" within the meaning of the Internal
Revenue Code; and
- the beneficial owner certifies, under penalties of perjury, that the
owner is not a United States person and provides the owner's name and
address.
If specified requirements are satisfied, the certification described
immediately above may be provided by a securities clearing organization, a bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business.
Under new Treasury regulations, which generally are effective for payments
made after December 31, 2000, subject to some transition rules, the
certification described above may also be provided by a qualified intermediary
on behalf of one or more beneficial
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owners or other intermediaries, provided that the intermediary has entered into
a withholding agreement with the Internal Revenue Service and other conditions
are met.
A non-U.S. holder that is not exempt from tax under these rules will be
subject to United States federal income tax withholding at a rate of 30% unless:
- the interest is effectively connected with the conduct of a United States
trade or business, in which case the interest will be subject to the same
United States federal income tax on net income that applies to United
States persons generally and, with respect to corporate holders and under
certain circumstances, the branch profits tax; or
- the rate of withholding is reduced or eliminated by an applicable income
tax treaty; and
- in either case, the non-U.S. holder provides the proper certification as
to the holder's exemption from withholding.
GAIN ON THE DISPOSITION OF THE NEW NOTES. A non-U.S. holder will generally
not be subject to United States federal income or withholding tax on gain
realized on the sale, exchange, redemption or other disposition of a new note,
unless:
- in the case of an individual non-U.S. holder, the holder is present in
the United States for 183 days or more in the year of the sale, exchange,
redemption or other disposition and either (1) has a "tax home" in the
United States and certain other requirements are met or (2) the gain from
the disposition is attributable to an office or other fixed place of
business in the United States; or
- the gain is effectively connected with the conduct of a trade or business
within the United States by the non-U.S. holder.
INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S. HOLDERS. In general, information reporting will apply to payments of
interest on or the gross proceeds resulting from the sale or other disposition
of the new notes made by us with respect to some non-corporate U.S. holders. A
U.S. holder will further be subject to backup withholding at the rate of 31%
with respect to interest, principal and premium, if any, we pay on a new note,
unless the U.S. holder (1) is an entity (including corporations, tax-exempt
organizations and certain qualified nominees) that is exempt from withholding
and, when required, demonstrates this fact, or (2) provides us with a correct
taxpayer identification number, certifies that the taxpayer identification
number is correct and that the holder has not been notified by the Internal
Revenue Service that it is subject to backup withholding due to under reporting
of interest or dividends and otherwise complies with applicable requirements of
the backup withholding rules. Any amount withheld under the backup withholding
rules is allowable as a credit against the U.S. holder's United States federal
income tax liability, provided that the required information is furnished to the
Internal Revenue Service.
NON-U.S. HOLDERS. We will, when required, report to the Internal Revenue
Service and to each non-U.S. holder the amount of any interest paid to, and the
tax withheld with respect to, that holder, regardless of whether any tax was
actually withheld on the payments. Copies of these information returns may also
be made available to the tax authorities of the country in which the non-U.S.
holder resides under the provisions of a specific treaty or agreement.
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Under current Treasury regulations, information reporting and backup
withholding will not apply to payments of interest on or principal of the new
notes by us or our agent to a non-U.S. holder if the non-U.S. holder certifies,
under penalties of perjury, as to its status as a non-United States person or
otherwise establishes an exemption (provided that neither we nor our agent have
actual knowledge that the holder is a United States person or that the
conditions of any other exemptions are not in fact satisfied). The payment of
the proceeds on the disposition of new notes to or through the United States
office of a United States or foreign broker will be subject to information
reporting and backup withholding unless the owner provides the certification
described above or otherwise establishes an exemption, as long as the broker
does not have actual knowledge that the holder is a United States person or that
the conditions of any other exemption are not in fact satisfied. The proceeds of
the disposition by a non-U.S. holder of notes to or through a foreign office of
a broker will generally not be subject to backup withholding or information
reporting. If the broker is a United States person, a controlled foreign
corporation or a foreign person deriving 50% or more of its gross income from
all sources for certain periods from activities that are effectively connected
with the conduct of a United States trade or business, information reporting
requirements will apply unless the broker has documentary evidence in its files
of the holder's status as a non-U.S. holder and has no actual knowledge to the
contrary or unless the holder otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the non-U.S.
holder's United States federal income tax liability provided that the required
information is furnished to the Internal Revenue Service.
New Treasury regulations relating to withholding tax on income paid to
non-U.S. holders will generally be effective for payments made after December
31, 2000, but will be limited by some transition rules. In general, these new
regulations do not significantly alter the substantive withholding and
information reporting requirements, but rather unify current certification
procedures and forms, and clarify reliance standards. The new regulations also
alter the procedures for claiming benefits of an income tax treaty and permit
the shifting of primary responsibility for withholding to certain financial
intermediaries acting on behalf of beneficial owners under some circumstances.
ACCOUNTING TREATMENT
We will record the exchange notes at the same carrying value as the notes,
which is face value as reflected in our accounting records on the date of
exchange. Accordingly, we will not recognize any gain or loss for accounting
purposes. We will amortize the expenses of the exchange offer over the term of
the exchange notes.
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THE TRANSACTIONS
THE RECAPITALIZATION
Our current principals, JLL Healthcare, LLC, Triumph Partners III, L.P. and
Triumph III Investors, L.P., which we refer to in this prospectus collectively
as the Triumph investment funds, and General Electric Capital Corporation,
acquired their ownership interests in our company by means of a recapitalization
transaction completed on October 8, 1999. In the recapitalization, JLL
Healthcare acquired approximately 87.4%, the Triumph investment funds acquired
approximately 4.9% and General Electric Capital acquired approximately 1.7% of
the outstanding common stock of HoldCo, a wholly owned subsidiary of Paracelsus
Healthcare. HoldCo held the following hospitals in the Salt Lake City, Utah
area:
- - Davis Hospital and Medical Center,
- - Jordan Valley Hospital,
- - Pioneer Valley Hospital,
- - Rocky Mountain Medical Center, formerly named PHC Regional Hospital and
Medical Center, and
- - Salt Lake Regional Medical Center.
As part of the recapitalization, JLL Healthcare, the Triumph investment
funds and General Electric Capital purchased $125.0 million of our common stock
from Paracelsus Healthcare and we repurchased $155.0 million of our common stock
from Paracelsus Healthcare. The recapitalization valued HoldCo at $288.0
million, subject to a working capital adjustment of $1.0 million which was
received on March 21, 2000. Upon the closing of the recapitalization, Paracelsus
Healthcare retained approximately 6.0% of HoldCo's outstanding common stock, at
an implied value of $8.0 million. The recapitalization was financed with
borrowings under our $160.0 million credit facility together with the above
referenced $125.0 million stock purchase.
Following the recapitalization, HoldCo changed its name to IASIS Healthcare
Corporation.
THE TENET ACQUISITION
IASIS acquired the following general, acute care hospitals and other
related facilities and assets from Tenet Healthcare:
- - Mesa General Hospital Medical Center in Mesa, Arizona,
- - St. Luke's Medical Center in Phoenix, Arizona,
- - Tempe St. Luke's Hospital in Tempe, Arizona,
- - Memorial Hospital of Tampa in Tampa-St. Petersburg, Florida,
- - Palms of Pasadena Hospital in Tampa-St. Petersburg, Florida,
- - Town & Country Hospital in Tampa-St. Petersburg, Florida,
- - Mid-Jefferson Hospital in Nederland, Texas,
- - Odessa Regional Hospital in Odessa, Texas,
- - Park Place Medical Center in Port Arthur, Texas, and
- - Southwest General Hospital in San Antonio, Texas.
IASIS paid $428.3 million in cash for these acquisitions, net of a preliminary
working capital adjustment of $18.9 million, but that value may later change due
to a final working
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capital adjustment. The purchase price of $447.2 million was reduced by an
estimated $18.9 million for unaudited working capital as of August 31, 1999.
In connection with the acquisition of the hospitals and other related
facilities and assets from Tenet Healthcare, we did not acquire patient accounts
receivable, nor did we assume specific current liabilities. At August 31, 1999,
subsequent to a sale of $98.0 million of patient accounts receivable by Tenet
hospitals to Tenet Healthcare, patient accounts receivable were $13.0 million,
excluding patient credit balances. We have, however, financed an opening cash
balance of $99.9 million to fund working capital as accounts receivable and
current liabilities increase to normalized levels.
Concurrent with the offering of the old notes and the acquisition of the
hospitals and other related facilities and assets from Tenet Healthcare, we
repaid the $160.0 million credit facility in its entirety.
In connection with the recapitalization and the acquisition, we did not
assume any liability or obligation due to payors including private insurers and
government payors like the Medicare and Medicaid programs. We also did not
assume any cost report reimbursements, settlements, repayments, or fines, if
any, to the extent they relate to periods prior to the respective closing dates
of these transactions. The agreements with Tenet Healthcare and Paracelsus
Healthcare include customary indemnifications and hold harmless provisions for
any damages incurred by us related to these types of excluded liabilities.
THE MERGER
Concurrent with the acquisition of the hospitals and related facilities
from Tenet Healthcare, management company merged with and into a wholly-owned
subsidiary of IASIS, with IASIS' subsidiary as the surviving entity. In the
merger, shareholders of management company received shares of our common stock
and preferred stock with a total value of $9.5 million.
SOURCES AND USES
The following table lists the aggregate sources and uses of cash funds for
each of the transactions taken as a whole.
Dollars in millions
SOURCES OF FUNDS:
Credit facility (1)........ $ 330.0
Old notes.................. 230.0
Credit facility -- $160.0
million (5).............. 160.0
Preferred stock (3)........ 160.0
Common stock (4)........... 125.0
--------
Total................. $1,005.0
========
USES OF FUNDS:
Tenet acquisition (2)...... $ 428.3
The recapitalization (5)... 280.0
Credit facility -- $160.0
million (5).............. 160.0
Opening cash balance (2)... 99.9
Fees and expenses.......... 36.8
--------
Total................. $1,005.0
========
- -------------------------
(1) The credit facility includes $330.0 million of term loans and a $125.0
million revolving credit facility which we do not expect to have an
outstanding balance at the completion of the exchange offer.
(2) IASIS has not acquired accounts receivable and certain current liabilities
associated with the Tenet hospitals, and as a result, IASIS funded an
opening cash balance
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required for working capital as accounts receivable and current liabilities
increase to normalized levels. The purchase price, excluding accounts
receivable, of $447.2 million has been reduced by an estimated $18.9 million
working capital adjustment determined in accordance with the acquisition
agreement.
(3) Of this amount, JLL Healthcare, LLC provided $148.8 million, the Triumph
investment funds provided $8.4 million, and General Electric Capital
Corporation provided $2.8 million. We issued former shareholders of
management company preferred stock valued at $5.3 million.
(4) Of this amount, JLL Healthcare, LLC provided $116.2 million, the Triumph
investment funds provided $6.6 million and General Electric Capital
Corporation provided $2.2 million. We issued former shareholders of
management company common stock valued at $4.2 million, and Paracelsus
Healthcare retained equity valued at $8.0 million. Common stock of $133.0
million was used to fund, in part, the recapitalization in which our current
principals acquired control of IASIS and $4.2 million was issued in
connection with the merger.
(5) As part of the recapitalization, JLL Healthcare, LLC, the Triumph investment
funds and General Electric Capital Corporation purchased $125.0 million of
IASIS' common stock from Paracelsus Healthcare and IASIS repurchased $155.0
million of its common stock from Paracelsus Healthcare. The recapitalization
was financed in part with borrowings under our $160.0 million credit
facility, which we repaid concurrent with the offering of the old notes and
the acquisition of the hospitals and other related facilities and assets
from Tenet Healthcare.
OWNERSHIP OF IASIS FOLLOWING THE TRANSACTIONS
Joseph Littlejohn & Levy Fund III, L.P., an affiliate of Joseph Littlejohn
& Levy, controls JLL Healthcare, LLC, which owns 84.7% of our common stock.
Joseph Littlejohn & Levy is a leading private equity firm managing more than
$1.4 billion of committed capital. Joseph Littlejohn & Levy invests in a variety
of buyout situations including financial restructurings, operational
turnarounds, industry consolidations and strategic co-investments. Joseph
Littlejohn & Levy focuses on industries with long-term growth fundamentals
populated by a large group of participants, many of which are undercapitalized,
underperforming or neglected subsidiaries of large diversified parent companies.
Since its formation in 1988, Joseph Littlejohn & Levy has made investments
across a broad range of industries including healthcare, basic manufacturing,
food and consumer products, automotive components, commodity and specialty
chemicals, and media and telecommunications. Joseph Littlejohn & Levy has
substantial experience in the hospital management industry as a result of its
sponsorship of the 1991 restructuring of OrNda HealthCorp. After making a
significant equity investment in OrNda HealthCorp., Joseph Littlejohn & Levy and
management implemented a comprehensive restructuring, acquisition and growth
program, increasing revenues from $460.0 million to $3.0 billion and improving
cash flow over seven-fold from $60.0 million to $440.0 million by 1997. OrNda
HealthCorp. grew to become the third largest for-profit hospital management
company in the United States.
Current investments include, among others, Hayes Lemmerz International,
Inc., Motor Coach Industries International, Inc., New World Pasta Company, and
Builders First Source. IASIS is Joseph Littlejohn & Levy's largest equity
investment to date.
45
59
CAPITALIZATION
The following table presents our historical capitalization as of December
31, 1999 which gives effect to the following transactions:
- the recapitalization in which our current principals acquired control of
IASIS,
- the merger of management company with and into a wholly owned subsidiary
of IASIS,
- our acquisition of hospitals and related facilities from Tenet Healthcare
and
- the related financings.
You should read the information in this table in conjunction with "Unaudited Pro
Forma Combined Financial Information" beginning on page 47, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 66 and each of the historical audited financial statements for
Paracelsus hospitals, Tenet hospitals and Iasis Healthcare Corporation, which we
refer to in this prospectus as the management company, including the related
notes, and our unaudited financial information and related notes which appear
elsewhere in this prospectus.
DECEMBER 31,
1999
------------
Dollars in thousands
Long-term debt:
Credit facility(1)........................................ $ 330,000
Old notes................................................. 230,000
Capital lease obligations................................. 1,289
---------
Total long-term debt........................................ 561,289
Minority interest........................................... 1,900
Preferred stock............................................. 169,443
Shareholders' equity:
Common stock.............................................. 14
Additional paid-in capital................................ 284,930
Treasury stock (at cost).................................. (155,025)
Accumulated deficit....................................... (91,630)
---------
Total shareholders' equity.................................. 38,289
---------
Total capitalization........................................ $ 770,921
=========
- -------------------------
(1) The credit facility includes $330.0 million of term loans and a $125.0
million revolving credit facility. For more information about our credit
facility, see "Description of Credit Facility" beginning on page 113.
46
60
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following tables present the unaudited pro forma combined financial
information of IASIS and should be read in conjunction with the related notes.
As a result of IASIS' change in fiscal year from December 31 to September 30
during 1999, the unaudited pro forma combined financial information and
operating data has been provided as of and for the three months ended December
31, 1999, the nine months ended September 30, 1999 and the year ended December
31, 1998. The statement of operations data included in the unaudited pro forma
combined statement of operations reflects the following:
- The unaudited pro forma combined statements of operations for the three
months ended December 31, 1999 include the following:
- the results of operations of IASIS for the three months ended December
31, 1999, which include the results of operations for the Tenet
Hospitals and the management company from October 16, 1999 to December
31, 1999, and
- the results of operations of the Tenet hospitals and the management
company for the period from October 1, 1999 through October 15, 1999.
- The unaudited pro forma combined statements of operations for the nine
months ended September 30, 1999 include the following:
- the results of operations of the Paracelsus hospitals and the
management company for the nine months ended September 30, 1999, and
- the results of operations of the Tenet hospitals for the nine months
ended August 31, 1999.
- The unaudited pro forma combined statements of operations for the year
ended December 31, 1998 include the following:
- the results of operations of the Paracelsus hospitals for the year
ended December 31, 1998,
- the results of operations of the Tenet hospitals for the twelve months
ended November 30, 1998, and
- the results of operations of the management company for the period
from inception, February 23, 1998, through December 31, 1998.
The unaudited pro forma combined financial information is presented to
reflect the recapitalization, the merger with the management company and the
Tenet acquisition. The unaudited pro forma combined financial information is
presented as if the transactions occurred as of January 1, 1998. The merger with
the management company and the Tenet acquisition have been accounted for as
purchases, so that goodwill was recorded for the excess of the purchase
consideration over the fair value of the net assets acquired. We have prepared
the unaudited pro forma combined financial information to give effect to related
financing transactions, including the sale of the old notes, and the application
of the net proceeds from the sale of the old notes.
47
61
The summary unaudited pro forma financial information does not purport to
be indicative of our results of operations that we would have actually achieved
had the pro forma transactions occurred as of the dates specified, nor are they
necessarily indicative of the results of operations that we may achieve in the
future.
The unaudited pro forma combined statements of operations give effect to
certain cost savings primarily related to anticipated reductions of corporate
overhead costs that management believes may be realized as a result of the
recapitalization and the Tenet acquisition. The unaudited pro forma combined
statements of operations for the nine months ended September 30, 1999 and the
year ended December 31, 1998 do not reflect certain non-recurring costs of $3.4
million recognized in the three months ended December 31, 1999 in connection
with the recapitalization. Other non-recurring costs expected to be recognized
in connection with the recapitalization, the Tenet acquisition and the merger
with the management company, including legal, accounting and other professional
fees and certain charges associated with the combination of the operations of
the Paracelsus hospitals, the Tenet hospitals and the management company, are
not reflected in the unaudited pro forma combined statements of operations for
any period presented. We have based the unaudited pro forma combined financial
information on assumptions and adjustments described in the notes to the
unaudited pro forma combined financial information included below.
48
62
IASIS HEALTHCARE CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999
PRO
FORMA OTHER
MANAGEMENT ACQUISITION PRO FORMA PRO FORMA
IASIS TENET COMPANY TOTAL ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
-------- ------- ---------- -------- ----------- ----------- ------------
Dollars in thousands
STATEMENT OF OPERATIONS DATA:
Operating revenues................ $179,290 $22,807 $ 47 $202,144 $ -- $ -- $ 202,144
Operating expenses:
Salaries, wages and benefits.... 62,217 8,588 126 70,931 -- -- 70,931
Supplies and other.............. 77,227 12,368 131 89,726 -- -- 89,726
Provision for bad debts......... 13,450 370 -- 13,820 -- -- 13,820
Management fees and corporate
overhead(1)................... -- 313 -- 313 -- -- 313
Depreciation and amortization... 10,196 1,019 11 11,226 17(4) -- 11,243
Recapitalization costs(2)....... 3,442 -- -- 3,442 -- -- 3,442
Loss on sale of accounts
receivable(3)................. -- 2,191 -- 2,191 -- 2,191
-------- ------- ----- -------- ---- ------- ---------
166,532 24,849 268 191,649 17 -- 191,666
-------- ------- ----- -------- ---- ------- ---------
Operating income (loss)........... 12,758 (2,042) (221) 10,495 (17) -- 10,478
Interest expense (income)......... 14,375 (15) 453 14,813 -- 2,732(6) 17,107
(438)(7)
Minority interests................ (92) (156) -- (248) (98)(5) -- (346)
-------- ------- ----- -------- ---- ------- ---------
Income (loss) before income
taxes........................... (1,525) (1,871) (674) (4,070) 81 (2,294) (6,283)
Provision (benefit) for income
taxes........................... -- (747) -- (747) -- 747(8) --
-------- ------- ----- -------- ---- ------- ---------
Net income (loss)................. $ (1,525) $(1,124) $(674) $(3,323) $ 81 $(3,041) $ (6,283)
======== ======= ===== ======== ==== ======= =========
See accompanying Notes to the Unaudited Pro Forma Combined Statements of
Operations
49
63
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
(1) Historical management fees and corporate overhead include allocations
of corporate costs for general and administrative functions. The costs
were historically allocated based on relative revenues or costs
incurred divided by the number of hospital operations. The historical
allocated costs do not necessarily represent the level of costs that
the individual hospitals expect to incur in the future.
(2) IASIS incurred legal, accounting and other related charges of $3,442 in
connection with the recapitalization transaction.
(3) Effective August 31, 1999, certain of the Tenet hospitals entered into
a Receivables Sale Agreement to sell to Tenet Healthcare patient
related receivables existing on that date as well as patient related
receivables generated thereafter. Losses were generated on sales during
the period September 1, 1999 through October 15, 1999 as the amounts
realized upon sale were less than the patient receivable balances on
certain Tenet hospitals individual balance sheets due to the fact that
the receivables were discounted to reflect the time value of money and
anticipated collection costs.
(4) To adjust depreciation and amortization based on the increase in
goodwill, which is defined below, in connection with the Tenet
acquisition and the merger with management company and pro forma
amortization of deferred financing fees for the period October 1, 1999
through October 15, 1999. Amortization associated with the increase in
goodwill and deferred financing fees for the period October 16, 1999
through December 31, 1999 is reflected in the historical financial
statements of IASIS. The recorded values of the depreciable assets
acquired are considered to approximate fair value. However, management
has not obtained an independent appraisal of the assets acquired. Costs
in excess of the fair market value of the net assets acquired, or
"goodwill," are being amortized over a ten to thirty-five year period.
Deferred financing fees are amortized over the term of the related
debt. The following table presents the allocation of the respective
purchase price and determination of the amount of goodwill recognized
in connection with the Tenet acquisition and the merger with the
management company as well as a reconciliation of the pro forma
depreciation and amortization adjustment:
MANAGEMENT
TENET COMPANY TOTAL
-------- ---------- --------
Purchase price, including direct costs
of acquisitions...................... $435,735 $9,460 $445,195
Assets acquired........................ 305,703 963 306,666
Liabilities assumed.................... (46,386) (151) (46,537)
-------- ------ --------
Net assets acquired.................... 259,317 812 260,129
-------- ------ --------
Goodwill............................... $176,418 $8,648 $185,066
======== ====== ========
50
64
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
Amortization of goodwill of $185,066 recognized in
connection with the Tenet acquisition and the merger with
management company for the period October 1, 1999 through
October 15, 1999.......................................... $246
Amortization of deferred financing fees of $25,360 for the
period October 1, 1999 through October 15, 1999........... 132
----
378
Amortization included in historical combined Tenet hospitals
and management company financial statements............... 361
----
Pro forma adjustment........................................ $ 17
====
The fair value of the assets acquired and resulting determination of
goodwill and related amortization could change upon receipt of an
independent appraisal of the assets acquired.
(5) To eliminate the minority interest relating to the 25% interest in
Odessa Regional Hospital previously owned by various physicians as
limited partners. Tenet Healthcare conveyed to IASIS 100% of the assets
of Odessa Regional Hospital.
(6) To record interest expense on the debt incurred to finance the
transactions, for the period October 1, 1999 through October 15, 1999
calculated on a fifteen-day basis as follows:
INTEREST INTEREST
INSTRUMENT AMOUNT RATE EXPENSE
---------- -------- -------- --------
Revolving credit facility................ $ -- 10.00% $ 26
Term loans
Tranche A.............................. 80,000 10.00 333
Tranche B.............................. 250,000 10.75 1,120
-------- ------
Total term loans......................... 330,000 1,453
Senior subordinated notes................ 230,000 13.00 1,246
-------- ------
560,000
Capitalized leases....................... 1,289 Various 7
-------- ------
$561,289 $2,732
======== ======
The $125.0 million revolving credit facility has a 0.5% commitment fee on
the unused balance.
The above interest amounts on the revolving credit facility and term
loans assume a Eurodollar rate (equivalent to LIBOR) of 6.5%.
(7) To remove combined net interest expense of Tenet Healthcare and the
management company recognized during the period October 1, 1999 through
October 15, 1999.
(8) To remove historical tax benefit because of the uncertainty of IASIS'
future ability to utilize net operating losses.
51
65
IASIS HEALTHCARE CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
PRO FORMA PRO FORMA
RECAPITALIZATION MANAGEMENT ACQUISITION PRO FORMA
PARACELSUS ADJUSTMENTS PRO FORMA TENET COMPANY ADJUSTMENTS AS ADJUSTED
---------- ---------------- --------- -------- ---------- ----------- -----------
Dollars in thousands
STATEMENT OF OPERATIONS
DATA:
Operating revenues.......... $140,950 $ -- $140,950 $443,311 $ 758 $ -- $585,019
Operating expenses:
Salaries, wages and
benefits................ 49,155 -- 49,155 146,103 1,792 -- 197,050
Supplies and other........ 58,847 -- 58,847 181,078 874 1,000(4) 241,799
Provision for bad debts... 9,979 -- 9,979 33,831 -- -- 43,810
Management fees and
corporate overhead(1)... 5,135 -- 5,135 6,085 -- -- 11,220
Depreciation and
amortization............ 9,620 -- 9,620 19,446 123 2,243(5) 31,432
Loss on sale of accounts
receivable(2)........... -- -- -- 4,548 -- -- 4,548
-------- ------- -------- -------- ------- -------- --------
132,736 -- 132,736 391,091 2,789 3,243 529,859
-------- ------- -------- -------- ------- -------- --------
Operating income (loss)..... 8,214 -- 8,214 52,220 (2,031) (3,243) 55,160
Interest expense (income)... 7,304 7,063(3) 14,367 (1,407) (13) 36,245(3) 49,192
Minority interests.......... (140) -- (140) 1,386 -- (1,868)(6) (622)
-------- ------- -------- -------- ------- -------- --------
Income (loss) before income
taxes and cumulative
effect of accounting
change.................... 1,050 (7,063) (6,013) 52,241 (2,018) (37,620) 6,590
Provision (benefit) for
income taxes.............. -- -- -- 20,989 -- (18,353)(7) 2,636
-------- ------- -------- -------- ------- -------- --------
Income (loss) before
cumulative effect of
accounting change......... $ 1,050 $(7,063) $ (6,013) $ 31,252 $(2,018) $(19,267) $ 3,954
======== ======= ======== ======== ======= ======== ========
See accompanying Notes to the Unaudited Pro Forma Combined Statements of
Operations
52
66
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
(1) Historical management fees and corporate overhead include allocations
of corporate costs for general and administrative functions. The costs
were historically allocated based on relative revenues or costs
incurred divided by the number of hospital operations. The historical
allocated costs do not necessarily represent the level of costs that
the individual hospitals expect to incur in the future.
(2) Effective August 31, 1999, certain of the Tenet hospitals entered into
a Receivables Sale Agreement to sell to Tenet Healthcare patient
related receivables. A loss was generated on the sale as the amounts
realized upon sale were less than the patient receivables balances on
certain Tenet hospitals individual balance sheets due to the fact that
the receivables were discounted to reflect the time value of money and
anticipated collection costs.
(3) To record interest expense on the debt incurred to finance the
transactions, calculated on a nine-month basis as follows:
INTEREST INTEREST
INSTRUMENT AMOUNT RATE EXPENSE
---------- -------- -------- --------
Revolving credit facility................... $ -- 10.00% $ 469
Term loans
Tranche A................................. 80,000 10.00 6,000
Tranche B................................. 250,000 10.75 20,156
-------- -------
Total term loans............................ 330,000 26,156
Senior subordinated notes................... 230,000 13.00 22,425
-------- -------
560,000 49,050
Capitalized leases.......................... 1,499 Various 142
-------- -------
$561,499 $49,192
======== =======
The $125.0 million revolving credit facility has a 0.5% commitment fee
on the unused balance.
The above interest amounts on the revolving credit facility and term
loans assume a Eurodollar rate (equivalent to LIBOR) of 6.5%. A 0.125%
increase or decrease in the assumed average interest rate would change
the pro forma interest expense for the nine months ended September 30,
1999 by approximately $.3 million.
53
67
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
Estimated allocation of pro forma interest expense between the
operations of Paracelsus and the operations of Tenet and the
management company:
TENET AND
THE MANAGEMENT
PARACELSUS COMPANY TOTAL
---------- -------------- -------
Allocation of interest expense on revolving
credit facility, term loans and senior
subordinated notes(a).................... $14,225 $34,825 $49,050
Interest on capitalized leases............. 142 -- 142
------- ------- -------
Total...................................... 14,367 34,825 49,192
Historical interest expense (income)....... 7,304 (1,420) 5,884
------- ------- -------
Pro forma adjustment....................... $ 7,063 $36,245 $43,308
======= ======= =======
(a) Interest expense was allocated based on the amounts borrowed to
finance both the Paracelsus recapitalization and the Tenet and the
management company transactions. IASIS borrowed $160,000 to finance
the recapitalization and $400,000 to finance the Tenet and the
management company transactions for a total borrowing of $560,000,
resulting in 29% of the interest expense, or $14,225 being allocated
to Paracelsus and 71% of the interest expense, or $34,825 being
allocated to the Tenet and the management company transactions. For
further information regarding use of proceeds, see "Use of Proceeds"
on page 28.
(4) Operating expenses in the historical combined financial statements for
Tenet hospitals did not include rent expense for St. Luke's Behavioral
Health Center. Payments made were charged against restructuring
reserves established as of May 31, 1998. Accordingly, a pro forma
adjustment has been made to supplies and other expenses in the amount
of $1.0 million, representing nine months of these rent payments.
(5) To adjust depreciation and amortization based on the increase in
goodwill in connection with the Tenet acquisition and the merger with
management company and pro forma amortization of deferred financing
fees. The recorded values of the depreciable assets acquired are
considered to approximate fair value. However, management has not
obtained an independent appraisal of the assets acquired. Goodwill is
being amortized over a ten to thirty-five year period. Deferred
financing fees are amortized over the term of the related debt. The
following table presents the allocation of the respective purchase
price and determination of the amount of goodwill recognized in
connection with the Tenet acquisition and
54
68
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
the merger with management company as well as a reconciliation of the
pro forma depreciation and amortization adjustment:
MANAGEMENT
TENET COMPANY TOTAL
-------- ---------- --------
Purchase price, including direct costs
of acquisition........................ $435,735 $9,460 $445,195
Assets acquired......................... 305,703 963 306,666
Liabilities assumed..................... (46,386) (151) (46,537)
-------- ------ --------
Net assets acquired..................... 259,317 812 260,129
-------- ------ --------
Goodwill................................ $176,418 $8,648 $185,066
======== ====== ========
Amortization of goodwill of $185,066 recognized in
connection with Tenet acquisition and the merger with
management company........................................ $4,428
Amortization of deferred financing fees of $25,360.......... 2,367
------
Pro forma amortization...................................... 6,795
Amortization included in historical combined Tenet hospitals
and management company financial statements............... 4,552
------
Pro forma adjustment........................................ $2,243
======
The fair value of the assets acquired and resulting determination of
goodwill and related amortization could change upon receipt of an
independent appraisal of the assets acquired.
(6) To eliminate the minority interest relating to the 25% interest in
Odessa Regional Hospital previously owned by various physicians as
limited partners. Tenet Healthcare Corporation conveyed to IASIS 100%
of the assets of Odessa Regional Hospital.
(7) To record the tax benefit on the pro forma adjustments and to adjust
the effective tax rate on the pro forma as adjusted combined financial
statements to equal 40.0% for the nine months ended September 30, 1999.
55
69
IASIS HEALTHCARE CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
PRO FORMA PRO FORMA
RECAPITALIZATION MANAGEMENT ACQUISITION AS ADJUSTED
PARACELSUS ADJUSTMENTS PRO FORMA TENET COMPANY ADJUSTMENTS PRO FORMA
---------- ---------------- --------- -------- ---------- ----------- -----------
Dollars in thousands
STATEMENT OF OPERATIONS
DATA:
Operating revenues...... $183,112 $ -- $183,112 $558,956 $ 181 $ -- $742,249
Operating expenses:
Salaries, wages and
benefits............ 65,942 -- 65,942 196,216 685 -- 262,843
Supplies and other.... 73,950 -- 73,950 243,975 270 700(5) 318,895
Provision for bad
debts............... 11,727 -- 11,727 36,634 -- -- 48,361
Management fees and
corporate overhead
(1)................. 6,587 -- 6,587 8,633 -- -- 15,220
Depreciation and
amortization........ 11,770 -- 11,770 24,634 79 4,325(6) 40,808
Impairment and
restructuring
charges (2)......... -- -- -- 19,455 -- -- 19,455
Reversal of excess
loss contract
accrual (3)......... (7,500) -- (7,500) -- -- -- (7,500)
-------- ------- -------- -------- ------ -------- --------
162,476 -- 162,476 529,547 1,034 5,025 698,082
-------- ------- -------- -------- ------ -------- --------
Operating income
(loss)................ 20,636 -- 20,636 29,409 (853) (5,025) 44,167
Interest expense........ 17,088 2,093(4) 19,181 1,515 -- 44,919(4) 65,615
Minority interests...... 68 -- 68 2,068 -- (1,741)(7) 395
-------- ------- -------- -------- ------ -------- --------
Income (loss) before
income taxes.......... 3,480 (2,093) 1,387 25,826 (853) (48,203) (21,843)
Provision (benefit) for
income taxes.......... -- -- -- 10,513 1 (10,514)(8) --
-------- ------- -------- -------- ------ -------- --------
Net income (loss)....... $ 3,480 $(2,093) $ 1,387 $ 15,313 $ (854) $(37,689) $(21,843)
======== ======= ======== ======== ====== ======== ========
See accompanying Notes to the Unaudited Pro Forma Combined Statements of
Operations
56
70
IASIS HEALTHCARE CORPORATION
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
(1) Historical management fees and corporate overhead include allocations
of corporate costs for general and administrative functions. The costs
were historically allocated based on relative revenues or costs
incurred divided by the number of hospital operations. The historical
allocated costs do not necessarily represent the level of costs that
the individual hospitals expect to incur in the future.
(2) On May 31, 1998 Tenet Healthcare recorded a non-cash impairment and
restructuring charge related to the planned closure of St. Luke's
Behavioral Health Center by May 31, 1999. Prior to final closure, Tenet
Healthcare began negotiations with potential buyers for certain Arizona
operations, including St. Luke's Behavioral Health Center. IASIS
ultimately acquired this facility from Tenet and does not currently
plan to close this facility. The restructuring accruals primarily
included cash payments which would have been made subsequent to May 31,
1998 under long-term lease commitments and other anticipated costs of
closure.
(3) Relates to a reversal of a reserve related to the final contract
settlement for the termination of an unprofitable payor contract at
Rocky Mountain Medical Center, formerly named PHC Regional Hospital and
Medical Center.
(4) To record interest expense on the debt incurred to finance the
transactions, calculated as follows:
INTEREST INTEREST
INSTRUMENT AMOUNT RATE EXPENSE
---------- -------- -------- --------
Revolving credit facility............... $ -- 10.00% $ 625
Term loans
Tranche A............................. 80,000 10.00 8,000
Tranche B............................. 250,000 10.75 26,875
-------- -------
Total term loans........................ 330,000 34,875
Senior subordinated notes............... 230,000 13.00 29,900
-------- -------
560,000 65,400
Capitalized leases...................... 2,150 Various 215
-------- -------
$562,150 65,615
======== =======
The $125.0 million revolving credit facility has a 0.5% commitment fee
on the unused balance.
The above interest amounts on the revolving credit facility and term
loans assume a Eurodollar rate (equivalent to LIBOR) of 6.5%. A 0.125%
increase or decrease in the assumed average interest rate would change
the pro forma interest expense for the year ended December 31, 1998 by
approximately $.4 million.
57
71
IASIS HEALTHCARE CORPORATION
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(CONTINUED)
YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
Estimated allocation of pro forma interest expense between the
operations of Paracelsus and the operations of Tenet and the
management company:
TENET AND
THE MANAGEMENT
PARACELSUS COMPANY TOTAL
---------- -------------- -------
Allocation of interest expense on revolving
credit facility, term loans and senior
subordinated notes(a).................... $18,966 $46,434 $65,400
Interest on capitalized leases............. 215 -- 215
------- ------- -------
Total...................................... 19,181 46,434 65,615
Historical interest expense................ 17,088 1,515 18,603
------- ------- -------
Pro forma adjustment....................... $ 2,093 $44,919 $47,012
======= ======= =======
(a) Interest expense was allocated based on the amounts borrowed to
finance both the Paracelsus recapitalization and the Tenet and the
management company transactions. IASIS borrowed $160,000 to finance
the recapitalization and $400,000 to finance the Tenet and the
management company transactions for a total borrowing of $560,000,
resulting in 29% of the interest expense, or $18,966 being allocated
to Paracelsus and 71% of the interest expense, or $46,434 being
allocated to the Tenet and the management company transactions. For
further information regarding use of proceeds, see "Use of Proceeds"
on page 28.
(5) Operating expenses in the historical combined financial statements for
Tenet hospitals did not include rent expense associated with St. Luke's
Behavioral Health Center for the period from June 1, 1998 through
December 31, 1998. Accordingly, a pro forma adjustment has been made to
supplies and other expenses in the amount of $0.7 million representing
six months of these rent payments.
(6) To adjust depreciation and amortization based on the increase in
goodwill in connection with the Tenet acquisition and the merger with
management company and pro forma amortization of deferred financing
fees. The recorded values of the depreciable assets acquired are
considered to approximate fair value as management has not obtained an
independent appraisal of the assets acquired. Goodwill is being
amortized over a ten to thirty-five year period. Deferred financing
fees are amortized over the term of the related debt. The following
table presents the allocation of the respective purchase price and
determination of the amount of goodwill recognized in connection with
the Tenet acquisition and
58
72
IASIS HEALTHCARE CORPORATION
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(CONTINUED)
YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
the merger with the management company as well as a reconciliation of
the pro forma depreciation and amortization adjustment:
MANAGEMENT
TENET COMPANY TOTAL
-------- ---------- --------
Purchase price, including direct costs
of acquisition........................ $435,735 $9,460 $445,195
Assets acquired......................... 305,703 963 306,666
Liabilities assumed..................... (46,386) (151) (46,537)
-------- ------ --------
Net assets acquired..................... 259,317 812 260,129
-------- ------ --------
Goodwill................................ $176,418 $8,648 $185,066
======== ====== ========
Amortization of goodwill of $185,066 recognized in
connection with Tenet acquisition and the merger with the
management company........................................ $5,906
Amortization of deferred financing fees of $25,360.......... 3,166
------
Pro forma amortization...................................... 9,072
Amortization included in historical combined Tenet hospitals
and the management company financial statements........... 4,747
------
Pro forma adjustment........................................ $4,325
======
The fair value of the assets acquired and resulting determination of
goodwill and related amortization could change upon receipt of an
independent appraisal of the assets acquired.
(7) To eliminate the minority interest relating to the 25% interest in
Odessa Regional Hospital previously owned by various physicians as
limited partners, Tenet Healthcare conveyed to IASIS 100% of the assets
of Odessa Regional Hospital.
(8) To remove historical tax expense. Because of the uncertainty of IASIS'
future ability to utilize net operating losses, the pro forma tax
benefit has been limited to the amount of historical expense.
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SELECTED HISTORICAL FINANCIAL INFORMATION
PARACELSUS HOSPITALS AND IASIS
The following tables present selected historical financial information for
the Paracelsus hospitals for each of the fiscal years in the five-years ended
December 31, 1998 and for the nine months ended September 30, 1998 and 1999. We
have derived the selected financial information for each of the three years
ended December 31, 1996, 1997 and 1998 and for the nine months ended September
30, 1999 from the combined financial statements of the Paracelsus hospitals,
which have been audited by Ernst & Young LLP, independent auditors for
Paracelsus Healthcare Corporation, and from the underlying accounting records of
the Paracelsus hospitals. We have derived the selected financial information for
the years ended December 31, 1994 and 1995 from unaudited combined financial
statements of the predecessor owners of the Paracelsus hospitals. We have
derived the selected financial information for the nine months ended September
30, 1998 from the unaudited combined financial statements of the Paracelsus
hospitals. The selected historical financial information reflects all
adjustments consisting of normal recurring adjustments that, in the opinion of
the management of Paracelsus Healthcare Corporation, are necessary for a fair
presentation of such information. Operating results for the nine months ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the twelve months ending December 31, 1999.
The following tables also present selected historical financial information
for IASIS for the three months ended December 31, 1999 and 1998. We have derived
the selected financial information for the three months ended December 31, 1999
from the unaudited consolidated financial statements of IASIS. We have derived
the selected financial information for the three months ended December 31, 1998
from the unaudited combined financial statements of Paracelsus hospitals. The
selected historical financial information reflects all adjustments that, in the
opinion of the management of IASIS, are necessary for a fair presentation of
such information. Operating results for the three months ended December 31, 1999
are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 2000.
You should read all information included in the following tables in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on page 66 and with the combined financial statements
and related notes of the Paracelsus hospitals and the unaudited consolidated
financial statements and related notes of IASIS. Certain amounts derived from
the combined statements of operations of Paracelsus hospitals and the
consolidated statements of operations of IASIS have been reclassified to conform
with the presentation below.
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SELECTED HISTORICAL FINANCIAL INFORMATION
PARACELSUS HOSPITALS(1)
-----------------------------------------------------------
-----------------------------------------------------------
PREDECESSOR COMPANIES
------------------------------------------
PERIOD PERIOD
TO DATE FROM DATE
YEARS ENDED OF ACQUISITION OF ACQUISITION
DECEMBER 31, FROM THROUGH
------------------------- JANUARY 1, DECEMBER 31,
1994 1995 1996 1996
----------- ----------- -------------- --------------
Dollars in thousands
STATEMENT OF OPERATIONS DATA:
Operating revenues............... $71,769 $80,006 $88,886 $ 98,249
Operating expenses:
Salaries, wages and benefits.... 25,670 28,882 32,087 41,040
Supplies and other.............. 23,538 27,502 32,377 43,343
Provision for bad debts......... 3,777 5,323 6,032 7,382
Management fees and corporate
overhead...................... 1,475 4,806 2,822 3,839
Depreciation and amortization... 4,236 4,022 4,031 6,863
Recapitalization costs(2)....... -- -- -- --
Restructuring and impairment
charges (3)................... -- -- -- 52,492
Loss contract accrual (4)....... -- -- -- 38,082
Reversal of excess loss contract
accrual (4)................... -- -- -- --
Costs of hospital closure (5)... -- -- -- --
------- ------- ------- --------
58,696 70,535 77,349 193,041
------- ------- ------- --------
Operating income (loss).......... 13,073 9,471 11,537 (94,792)
Interest expense (income)........ 3,144 2,566 6,125 8,465
Minority interests............... -- -- -- --
------- ------- ------- --------
Income (loss) from continuing
operations before income
taxes......................... 9,929 6,905 5,412 (103,257)
Provision (benefit) for income
taxes........................... 3,893 2,738 2,116 (9,210)
------- ------- ------- --------
Income (loss) from continuing
operations.................... $ 6,036 $ 4,167 $ 3,296 $(94,047)
======= ======= ======= ========
OTHER DATA (6):
EBITDA (7).................................................................. $(87,929)
Depreciation and amortization expense....................................... 6,863
Capital expenditures........................................................ 5,752
Ratio of earnings to fixed charges(8)....................................... --
BALANCE SHEET DATA (6):
Total assets................................................................ $256,288
Long-term debt (including current portion).................................. 1,565
Shareholders' equity (deficit).............................................. (93,879)
Working capital............................................................. 11,112
PARACELSUS HOSPITALS(1)
-------------------------------------------- IASIS
---------------------------
YEARS ENDED NINE MONTHS ENDED THREE MONTHS THREE MONTHS
DECEMBER 31, SEPTEMBER 30, ENDED ENDED
------------------- ---------------------- DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999 1998 1999
-------- -------- ----------- -------- ------------ ------------
Dollars in thousands
STATEMENT OF OPERATIONS DATA:
Operating revenues............... $192,575 $183,112 $137,722 $140,950 45,390 179,290
Operating expenses:
Salaries, wages and benefits.... 67,664 65,942 49,480 49,155 16,462 62,217
Supplies and other.............. 75,434 73,950 57,097 58,847 16,853 77,227
Provision for bad debts......... 17,020 11,727 8,073 9,979 3,654 13,450
Management fees and corporate
overhead...................... 7,519 6,587 4,940 5,135 1,647 --
Depreciation and amortization... 11,122 11,770 8,606 9,620 3,164 10,196
Recapitalization costs(2)....... -- -- -- -- -- 3,442
Restructuring and impairment
charges (3)................... -- -- -- -- -- --
Loss contract accrual (4)....... -- -- -- -- -- --
Reversal of excess loss contract
accrual (4)................... (15,531) (7,500) (7,500) -- -- --
Costs of hospital closure (5)... 3,500 -- -- -- -- --
-------- -------- -------- -------- -------- --------
166,728 162,476 120,696 132,736 41,780 166,532
-------- -------- -------- -------- -------- --------
Operating income (loss).......... 25,847 20,636 17,026 8,214 3,610 12,758
Interest expense (income)........ 22,097 17,088 13,426 7,304 3,662 14,375
Minority interests............... 23 68 54 (140) 14 (92)
-------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income
taxes......................... 3,727 3,480 3,546 1,050 (66) (1,525)
Provision (benefit) for income
taxes........................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations.................... $ 3,727 $ 3,480 $ 3,546 $ 1,050 $ (66) $ (1,525)
======== ======== ======== ======== ======== ========
OTHER DATA (6):
EBITDA (7)....................... $ 36,969 $ 32,406 $ 25,632 $ 17,834 6,774 22,954
Depreciation and amortization exp 11,122 11,770 8,606 9,620 3,164 10,196
Capital expenditures............. 1,897 6,427 2,513 13,476 3,915 9,175
Ratio of earnings to fixed charge 1.1x 1.2x 1.2x 1.1x -- --
BALANCE SHEET DATA (6):
Total assets..................... $232,943 $216,319 $222,458 $213,259 216,319 862,729
Long-term debt (including current 2,019 2,273 1,269 1,499 2,273 561,289
Shareholders' equity (deficit)... (89,114) (85,634) (85,568) (84,585) (85,634) 38,289
Working capital.................. 16,028 10,350 17,433 3,687 10,350 82,761
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NOTES TO SELECTED HISTORICAL FINANCIAL INFORMATION
PARACELSUS HOSPITALS AND IASIS
(1) The selected financial information excludes the financial information
related to discontinued operations. See note 4 of Notes to Combined
Financial Statements of Paracelsus hospitals.
The selected financial data includes financial information for the
Paracelsus hospitals for the following periods:
HOSPITAL PERIOD
-------- ------
Davis Hospital and Medical
Center.......................... Since January 1, 1994 (Predecessor
Company)
Pioneer Valley Hospital........... Since January 1, 1994 (Predecessor
Company)
Rocky Mountain Medical Center..... Since being acquired by Paracelsus
Healthcare Corporation as of May 17, 1996
through closure of facility as of June
30, 1997
Salt Lake Regional Medical
Center.......................... Since being acquired by Paracelsus
Healthcare Corporation on August 16, 1996
Jordan Valley Hospital............ Since being acquired by Paracelsus
Healthcare Corporation on August 16, 1996
(2) IASIS incurred legal, accounting and other related charges of $3,442 in
connection with the recapitalization transaction.
(3) During 1996, an impairment charge of $52.5 million was recorded due to
significant losses incurred at Rocky Mountain Medical Center, formerly
named PHC Regional Hospital and Medical Center. The charge was based
upon independent third party appraisals.
(4) In 1996 a loss reserve of $38.1 million was established in connection
with an unprofitable payor contract at Rocky Mountain Medical Center.
The loss reserve initially recorded in 1996 was reduced by $15.5
million in 1997 and by $7.5 million in 1998 based on the final
settlement of the unprofitable payor contract.
(5) In 1997 a charge of $3.5 million was recorded due to the closure of
Rocky Mountain Medical Center in June 1997.
(6) Other data and balance sheet data for the predecessor companies for the
year ended December 31, 1994 and 1995 and the period to acquisition
from January 1, 1996 represents information for only two hospitals and
therefore is not considered comparable with other periods.
(7) EBITDA is defined as operating income before interest expense, minority
interests, income taxes, and depreciation and amortization. While
EBITDA should not be considered in isolation or as a substitute for net
income, operating cash flows or other cash flow statement data
determined in accordance with generally accepted accounting principles,
management understands EBITDA is a commonly used tool for measuring a
company's ability to service debt, especially in evaluating healthcare
companies. In addition, EBITDA may not be comparable to similarly
titled measures of other companies.
(8) The ratio of earnings to fixed charges is calculated by dividing income
from continuing operations before fixed charges, minority interests and
income taxes by fixed charges, which consists of interest charges,
meaning interest expense plus interest charged to construction, the
portion of rent expense which is deemed to be equivalent to interest
expense, and amortization of certain financing costs. Earnings were
insufficient to cover fixed charges by $103.3 million, $.05 million and
$1.6 million for the period ended December 31, 1996, the three months
ended December 31, 1998 and 1999, respectively.
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SELECTED HISTORICAL FINANCIAL INFORMATION
TENET HOSPITALS
The following tables present selected historical financial information for
the Tenet hospitals for each of the fiscal years in the five-years ended May 31,
1999 and for the three months ended August 31, 1998 and 1999. We have derived
the selected financial information for each of the three fiscal years ended May
31, 1997, 1998 and 1999 from the combined financial statements of the Tenet
hospitals, which have been audited by KPMG LLP, independent auditors for Tenet
Healthcare Corporation, and from the underlying accounting records of the Tenet
hospitals. We have derived the selected financial information for the fiscal
years ended May 31, 1995 and 1996 and for the three months ended August 31, 1998
and 1999 from unaudited condensed combined financial statements of the Tenet
hospitals. The selected historical financial information reflects all
adjustments consisting of normal recurring adjustments that, in the opinion of
the management of Tenet Healthcare Corporation, are necessary for a fair
presentation of such information. Operating results for the three months ended
August 31, 1999 are not necessarily indicative of the results that may be
expected for the year.
You should read all information included in the following tables in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on page 66 and with the combined financial statements
and related notes. Certain amounts derived from the combined statements of
operations have been reclassified to conform with the presentation below.
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SELECTED HISTORICAL FINANCIAL INFORMATION
TENET HOSPITALS
THREE MONTHS ENDED
YEARS ENDED MAY 31, AUGUST 31,
------------------------------------------------------------- --------------------
1995(1) 1996 1997 1998 1999 1998 1999
----------- ----------- -------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Dollars in thousands
STATEMENT OF OPERATIONS DATA:
Operating revenues.............. $440,476 $593,213 $540,609 $547,226 $572,506 $133,482 $142,196
Operating expenses:
Salaries, wages and
benefits.................... 152,659 202,649 195,532 199,186 192,573 47,601 47,434
Supplies and other............ 172,920 254,239 222,142 227,271 237,874 59,234 63,903
Provision for bad debts....... 23,957 30,680 32,579 37,827 41,904 9,936 11,843
Management fees and corporate
overhead.................... 14,063 17,504 19,717 10,641 7,518 1,702 1,880
Depreciation and
amortization................ 22,978 23,316 24,703 25,291 26,638 7,663 7,130
Impairment and restructuring
charges (2)................. -- -- -- 19,455 -- -- --
Loss on sale of accounts
receivable (3).............. -- -- -- -- -- -- 4,548
Unusual items................. 3,822 4,334 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
390,399 532,722 494,673 519,671 506,507 126,136 136,738
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)......... 50,077 60,491 45,936 27,555 65,999 7,346 5,458
Net interest expense (income)... 8,512 2,049 1,036 1,179 (669) 536 (210)
Minority interests (4).......... -- 3,190 3,176 2,597 2,421 545 (114)
-------- -------- -------- -------- -------- -------- --------
Income before income taxes,
extraordinary charge and
cumulative effect of
accounting change............. 41,565 55,252 41,724 23,779 64,247 6,265 5,782
Provision for income taxes
(5)........................... 16,626 22,101 17,130 10,513 25,650 2,500 2,307
-------- -------- -------- -------- -------- -------- --------
Income before extraordinary
charge and cumulative effect
of accounting change.......... 24,939 33,151 24,594 13,266 38,597 3,765 3,475
Extraordinary charge from early
extinguishment of debt (6).... -- -- -- 6,726 -- -- --
-------- -------- -------- -------- -------- -------- --------
Cumulative effect of accounting
change(7)..................... -- -- -- -- -- 1,018
-------- -------- -------- -------- -------- -------- --------
Net income.................... $ 24,939 $ 33,151 $ 24,594 $ 6,540 $ 38,597 $ 3,765 $ 2,457
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
EBITDA (8)...................... $ 73,055 $ 83,807 $ 70,639 $ 52,846 $ 92,637 $ 15,009 $ 12,588
Depreciation and amortization
expense....................... 22,978 23,316 24,703 25,291 26,638 7,663 7,130
Capital expenditures............ -- -- 23,481 28,055 17,280 3,070 598
BALANCE SHEET DATA:
Total assets.................... $458,035 $591,119 $562,358 $573,997 $594,557 $564,479 $458,242
Long-term debt (including
current portion).............. 62,278 33,738 32,652 8,591 7,971 8,495 7,707
Shareholders' equity............ 343,121 420,686 449,190 422,957 437,930 421,705 325,162
Working capital................. 46,015 63,737 60,525 61,262 80,949 65,084 (24,369)
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NOTES TO SELECTED HISTORICAL FINANCIAL INFORMATION
TENET HOSPITALS
(1) The summary historical financial information for the year ended May 31,
1995 does not include a full year of results of operations for
hospitals acquired from a third party.
(2) On May 31, 1998 Tenet recorded a non-cash restructuring and impairment
charge related to the planned closure of St. Luke's Behavioral Health
Center by May 31, 1999. Prior to final closure, Tenet Healthcare began
negotiations with potential buyers for certain Arizona operations,
including St. Luke's Behavioral Health Center. IASIS ultimately
acquired this facility from Tenet Healthcare and does not currently
plan to close this facility. The restructuring accruals primarily
included future cash payments which would have been made under
long-term lease commitments and other anticipated costs of closure.
(3) Effective August 31, 1999, certain of the Tenet hospitals entered into
a Receivables Sale Agreement to sell to Tenet Healthcare patient
related receivables. A loss was generated on the sale as the amounts
realized upon sale were less than the patient receivable balances on
certain Tenet hospitals individual balance sheets due to the fact that
the receivables were discounted to reflect the time value of money and
future anticipated collection costs.
(4) Minority interests primarily relates to the 25% interest in Odessa
Regional Hospital owned by various physicians as limited partners.
(5) Income tax expense for the years ended May 31, 1995 and 1996 has been
adjusted to reflect an average rate of 40% for the periods presented.
(6) The extraordinary charge, which is net of tax benefits of $4.2 million,
represents the allocation to Tenet hospitals of an extraordinary charge
related to the redemption of certain Tenet senior notes.
(7) On June 1, 1999, the Tenet hospitals changed its method of accounting
for start-up costs to expense such costs as incurred in accordance with
Statement of Position 98-5, published by the Accounting Standards
Executive Committee of the American Institute of Certified Public
Accountants. The adoption of the Statement resulted in the write-off of
previously capitalized start-up costs as of May 31, 1999 in the amount
of $1.0 million, net of tax benefit, which amount is shown as a
cumulative effect of an accounting change in the three months ended
August 31, 1999.
(8) EBITDA is defined as operating income before interest expense, minority
interests, income taxes, and depreciation and amortization. While
EBITDA should not be considered in isolation or as a substitute for net
income, operating cash flows or other cash flow statement data
determined in accordance with generally accepted accounting principles,
management understands EBITDA is a commonly used tool for measuring a
company's ability to service debt, especially in evaluating healthcare
companies. In addition, EBITDA may not be comparable to similarly
titled measures of other companies.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations has been prepared separately for the Paracelsus hospitals, the Tenet
hospitals, and IASIS and should be read in conjunction with the financial
statements of each entity, the notes to the financial statements, and the other
financial information appearing elsewhere in this prospectus. This discussion
contains, in addition to historical information, forward-looking statements that
are subject to risks and uncertainties. Our actual results may differ materially
from those anticipated in the forward-looking statements. For more information
regarding the risks and uncertainties, see "Risk Factors." A discussion and
analysis of financial condition and results of operations of management company
has not been provided as management believes that this information would not
enhance the quality of the information provided nor enhance an assessment of the
financial condition and results of operations of IASIS' business as a whole. For
more information regarding management company, please see the related financial
statements and accompanying notes appearing elsewhere in this prospectus.
GENERAL
We are a for-profit hospital management company with operations in select
markets in the United States. Our hospitals' revenues continue to be affected by
an increasing proportion of revenue being derived from fixed payment, higher
discount sources including Medicare, Medicaid, managed care organizations,
insurance companies and employer-based health plans. Fixed payment amounts are
often based upon the diagnosis, regardless of the cost incurred or the level of
service provided. Our revenues, cash flows and earnings have been significantly
reduced by this shift in reimbursement. The Balanced Budget Act has reduced the
amount of reimbursement that we receive from Medicare and Medicaid. Although we
expect our volume from governmental sources to increase, the level of
reimbursement from these programs was reduced in 1998 and further reductions
will be phased in over the next two years. Decreases in Medicare reimbursement
rates mandated by the Balanced Budget Act are expected to lower our revenues by
approximately $4.3 million in fiscal 2000, $3.5 million in fiscal 2001, and $2.0
million in each of fiscal years 2002, 2003, and 2004. The percentage of pro
forma net revenue related to Medicare and Medicaid was 35.4% for the three
months ended December 31, 1999 compared to 38.2% for the nine months ended
September 30, 1999.
Our revenues are also affected by the trend toward the conversion of more
services being performed on an outpatient basis due to advances in medical
technology and pharmaceuticals and cost containment pressures from Medicare,
Medicaid, managed care organizations and other payors.
Hospital revenues are primarily received from Medicare, Medicaid and
commercial insurance. Medicare is a federal program for elderly patients and
patients with disabilities. The payment rates under the Medicare program for
inpatients are based on a prospective payment system that is tied to the
diagnosis of the patient. Medicaid is a jointly-funded federal and state program
administered by individual states for indigent patients. Payments from Medicare
and Medicaid account for a significant portion of our operating revenues.
Managed care organizations, such as Health Maintenance Organizations and
Preferred Provider Organizations, also account for a significant portion of our
revenues.
Net operating revenues are comprised of net patient service revenue and
other revenue. Net patient service revenue is reported net of contractual
adjustments and policy
66
80
discounts. The adjustments principally result from differences between the
hospitals' customary charges and payment rates under the Medicare and Medicaid
programs and the various managed care organizations. Customary charges have
generally increased at a faster rate than the rate of increase for Medicare and
Medicaid payments. Other revenue includes revenue from Health Choice, a Medicaid
managed health plan in Arizona, medical office building rental income and other
miscellaneous revenue. Operating expenses primarily consist of hospital related
costs of operation and include salaries and benefits, professional fees,
supplies, provision for doubtful accounts and other expenses such as utilities,
insurance, property taxes, travel, freight, postage, telephone, advertising,
repairs and maintenance.
MANAGEMENT DISCUSSION AND ANALYSIS
IASIS
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1998
Net revenue for the three months ended December 31, 1999 was $179.3
million, an increase of $133.9 million, or 294.9% from $45.4 million for the
same period in 1998. The increase in net revenue is largely due to the Tenet
acquisition effective October 15, 1999 whereby we acquired ten acute care
hospitals and other related facilities and assets from Tenet Healthcare. The
Tenet acquisition contributed $128.2 million in net revenue for the three months
ended December 31, 1999, or 95.7% of the total increase in net revenue for the
three months ended December 31, 1999 compared to the same period in 1998.
Hospitals in operation for the entire 1999 and 1998 period which we refer to as
same hospitals, consisted exclusively of the Paracelsus hospitals. Same
hospitals provided $50.8 million in net revenue in 1999 versus $45.4 million in
1998, or $5.4 million of the remaining increase in net revenue for the three
months ended December 31, 1999 compared to 1998.
As noted above, same hospitals net revenue increased by $5.4 million, an
11.9% increase over the 1998 period. The increase in net revenue of same
hospitals was primarily attributable to an increase in volume. Inpatient
admissions increased 11.9% from 4,185 in the three months ended December 31,
1998 to 4,684 for the same period in 1999. Patient days increased 11.4% from
14,748 in 1998 to 16,428 in 1999.
During the three months ended December 31, 1999, we generated total
admissions and patient days of 16,137 and 71,109, respectively, of which 11,453
admissions and 54,681 patient days resulted from the Tenet acquisition.
Operating expenses, including salaries and benefits, supplies, other
operating expenses, provision for bad debts, and allocated management fees
increased by $114.3 million from $38.6 million for the three months ended
December 31, 1998 to $152.9 million for the same period in 1999 largely due to
the Tenet acquisition. The Tenet acquisition contributed $106.8 million in
operating expenses for the three months ended December 31, 1999 or 93.4% of the
total increase in operating expenses for the three months ended December 31,
1999 compared to the same period in 1998. Of the remaining $8.3 million
increase, $5.4 million related to same hospitals, which was largely attributable
to the increased patient volumes for same hospitals during this period, and $2.9
million related to corporate and miscellaneous other operating expenses which
have increased as a result of the growth of IASIS.
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81
Operating expenses as a percentage of net revenue remained relatively
stable at 85.0% for the three months ended December 31, 1998 and 85.3% for the
same period in 1999.
Interest expense increased $10.7 million from $3.7 million for the three
months ended December 31, 1998 to $14.4 million for the same period in 1999,
largely due to an increase in borrowings associated with the Tenet acquisition
and the recapitalization of Paracelsus hospitals. During the three months ended
December 31, 1999, our average cost of borrowings was 11.6%. Interest expense of
$3.7 million for the three-month period ended December 31, 1998 primarily
represents interest costs Paracelsus Healthcare (our former parent company)
allocated to us in proportion to amounts due to Paracelsus Healthcare.
Depreciation and amortization expense increased $7.0 million from $3.2
million for the three months ended December 31, 1998 to $10.2 million for the
same period in 1999 largely due to depreciation on the property and equipment
acquired in the Tenet acquisition and the merger with the management company
which contributed $5.0 million of the total increase of $7.0 million.
Amortization of goodwill of $185.1 million recognized in the Tenet acquisition
and the merger with the management company and amortization of deferred
financing costs of $25.4 million incurred in connection with the above
transactions and the recapitalization transaction accounted for $1.8 million or
25.7% of the total $7.0 million increase in depreciation and amortization.
We incurred legal, accounting and other related costs of $3.4 million
during the three months ended December 31, 1999 related to the recapitalization
transaction.
Loss from continuing operations before income taxes was $1.5 million and
$.07 million for the three months ended December 31, 1999 and 1998,
respectively. The increase in the loss from continuing operations before income
taxes was primarily due to increases in interest expense, amortization expense
and recapitalization costs, offset by operating earnings from the Tenet
acquisition, as described above.
We recorded no income tax provision or benefit for the three months ended
December 31, 1999 and 1998 due to uncertainty about our future ability to
utilize net operating losses. As required by SFAS No. 109, an assessment of our
future ability to utilize net operating losses is highly dependent upon
historical operating results which are limited given IASIS' short operating
history.
Net loss for the three months ended December 31, 1999 was $1.5 million
compared to net loss of $0.7 million for the same period of 1998.
Dividends of $5.5 million were accrued during the three months ended
December 31, 1999 on the preferred stock issued in connection with the Tenet
acquisition and the merger with the management company. Dividends on the
preferred stock accrue at the rate of 16.0% per annum from their date of
issuance.
Issuance costs of $1.3 million were recorded against the aggregate
preference value of the preferred stock and are being accreted over an eleven to
twenty-one year period. Accretion during the three months ended December 31,
1999 was $.01 million.
Net loss attributable to common shareholders for the three months ended
December 31, 1999 was $7.0 million compared to $.07 million for the same period
in 1998.
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PARACELSUS HOSPITALS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Net revenue for the nine months ended September 30, 1999, was $140.9
million, an increase of $3.2 million, or 2.3%, from $137.7 million for the same
period in 1998. The increase in net revenue is largely due to increased patient
volumes in admissions, patient days and outpatient visits excluding home health.
To a lesser extent, net revenue was unfavorably impacted by the Balanced Budget
Act of 1997, which was substantially phased in by the third quarter of 1998, the
increasing penetration of managed care and the restructuring of home health
operations in the latter half of 1998.
The Paracelsus hospitals experienced a slight increase of 0.8% in inpatient
admissions from 13,736 in the nine months ended September 30, 1998 to 13,849 for
the same period in 1999. Patient days increased 3.7% from 48,003 in 1998 to
49,773 in 1999. Excluding home health visits, outpatient visits increased 13.6%
from 214,940 in 1998 to 244,248 in 1999. The increase in admissions and
outpatient visits resulted from
- the increase in number of physicians and services at several hospitals,
- increased volume generated from certain hospital benchmarking and service
awareness programs implemented in 1998 and
- favorable demographic changes in the Salt Lake metropolitan area.
Due to the closure or sale of all home health operations in 1998, the Paracelsus
hospitals reported no home health visits in 1999 as compared to 26,920 in 1998.
Operating expenses, including salaries and benefits, other operating
expenses and provision for bad debts, increased by $3.3 million from $114.7
million for the nine months ended September 30, 1998 to $118.0 million for the
same period in 1999 primarily from increases in bad debt expense and supply
costs. The increase in bad debt expense resulted from
- the effect of a computer system conversion at certain hospitals,
- personnel turnover, which unfavorably affected billings and collections
at certain facilities and
- a favorable impact in 1998 from the collection of accounts previously
written off.
As a result of the computer system conversion at certain hospitals, the
billing function and collection efforts were hampered as resources were directed
towards the conversion rather than devoting full effort to billing and
collecting receivables. Also, the computer system conversion resulted in certain
data being lost thereby further hindering collection efforts on converted
patient accounts.
An increase in acuity at one hospital contributed to the increase in supply
costs. Operating expenses expressed as a percentage of net revenue, remained
relatively flat at 83.3% for the nine months ended September 30, 1998 and 83.7%
for the nine months ended September 30, 1999. The stability of operating margins
of 16.3% and 16.7% for the nine months ended September 30, 1999 and 1998,
respectively, reflects the favorable impact of the various cost reduction
initiatives undertaken in the latter half of 1998 associated with consolidating
certain departments and eliminating corresponding management functions. In
addition, these initiatives included elimination of excess labor and contracted
services, which consisted of a combination of staff and wage reductions,
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overtime reductions, and reduction in the utilization of outside contracted
nurses. The financial impact of these various cost reduction initiatives is not
individually determinable due to system limitations. Salaries and benefits as a
percentage of net revenue, which improved from 35.9% for the nine months ended
September 30, 1998, to 34.9% for the same period in 1999, is expected to remain
at lower levels than in past years.
Interest expense decreased $6.1 million from $13.4 million for the nine
months ended September 30, 1998 to $7.3 million for the same period in 1999,
primarily due to an increase in cash generated from operations and a decrease in
interest allocation from Paracelsus Healthcare Corporation.
Allocated management fees increased $.2 million from $4.9 million for the
nine months ended September 30, 1998 to $5.1 million for the same period in 1999
due to an increase in net revenue of Paracelsus hospitals during the period. The
allocated management fees are for corporate general and administrative,
financial, legal, human resources, information systems and other services and
are allocated pro rata to Paracelsus hospitals based on net revenue which is
believed to be indicative of the consumption of corporate services relative to
all other hospitals of Paracelsus. Allocated management fees equated to 4.0% of
net revenue for the nine months ended September 30, 1999 and 1998. Amounts
allocated are not necessarily indicative of the actual costs which may have been
incurred had the Company operated as an entity unaffiliated with Paracelsus;
however, in the opinion of Paracelsus management, this allocation method is
reasonable.
Depreciation and amortization expense increased $1.0 million from $8.6
million for the nine months ended September 30, 1998 to $9.6 million for the
same period in 1999 primarily due to additions to property and equipment.
Income from continuing operations before income taxes was $1.0 million and
$3.5 million for the nine months ended September 30, 1999 and 1998,
respectively. Income from continuing operations before income taxes in 1998
included an unusual gain of $7.5 million relating to the settlement of a
capitated contract dispute.
The Paracelsus hospitals recorded no income tax provision or benefit for
the nine months ended September 30, 1999 and 1998 due to revisions of the
estimated valuation allowance on deferred tax assets.
Net income for the nine months ended September 30, 1999 was $1.0 million
compared to net income of $3.5 million for the same period of 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net revenues decreased 4.9% to $183.1 million in 1998 from $192.6 million
in 1997. Inpatient admissions decreased 3.9% from a year ago and outpatient
visits decreased 8.0%. The decrease in revenues was due to several factors
including decreases in Medicare reimbursement rates mandated by the Balanced
Budget Act, which became effective October 1, 1997, and the sale of a home
health business during 1998. Other factors that contributed to the decline in
revenues included the closing of skilled nursing and psychiatric units and lower
reimbursement rates from managed care payors.
Salaries, wages and benefits were $65.9 million or 36.0% of net operating
revenues in 1998 compared to $67.7 million or 35.1% of net operating revenues in
1997. A reduction in staffing levels in reaction to the implementation of the
Balanced Budget Act caused this $1.8 million decrease. As a percentage of net
operating revenues, salaries, wages and benefits increased due to the overall
decrease in net revenue discussed above.
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Other operating expenses were $74.0 million or 40.4% of net operating
revenues in 1998, compared to $75.4 million or 39.1% of net operating revenues
in 1997. Supply costs are included in this category, which remained essentially
flat as a percentage of net operating revenues at approximately 13.5% for both
periods, which was attributable to a reduction in certain higher cost procedures
at some facilities. The remaining expenses in this category including
professional fees, contract services, repairs and maintenance, rents and leases,
utilities and insurance increased as a percentage of net operating revenues to
26.8% in 1998 from 25.5% in 1997. This increase reflects a decline in net
revenues that was not sufficiently offset by cost reduction efforts.
Provision for doubtful accounts decreased to $11.8 million or 6.4% of net
operating revenues in 1998 from $17.0 million or 8.8% of net operating revenues
in 1997. The decrease was due primarily to the improvement of collection
processes at two facilities and the collection of previously reserved home
health accounts receivable.
Allocated management fees decreased $.9 million from $7.5 million for the
year ended December 31, 1997 to $6.6 million for the same period in 1998 due to
a decrease in net revenue of Paracelsus hospitals during the period. Allocated
management fees equated to 4.0% of net revenue for the nine months ended
September 30, 1999 and 1998.
Depreciation and amortization expense was $11.8 million or 6.4% of net
operating revenues in 1998 compared to $11.1 million or 5.8% of net operating
revenues in 1997. The increase was due primarily to additions to property and
equipment.
Income from continuing operations before income taxes was $3.5 million and
$3.7 million for the year ended December 31, 1998 and 1997, respectively. Income
from continuing operations before income taxes in 1998 included an unusual gain
of $7.5 million relating to the settlement of a capitated contract dispute.
Income from continuing operations before income taxes in 1997 included an
unusual gain of $12.0 million relating to a $15.5 million reduction of a loss
contract accrual, offset by charges of $3.5 million relating to a hospital
closure.
The Paracelsus hospitals recorded no income tax provision or benefit for
the years ended December 31, 1998 and 1997 due to revisions of the estimated
valuation allowance on deferred tax assets.
Net income for the year ended December 31, 1998 was $3.5 million compared
to net income of $4.8 million for the year ended December 31, 1997.
TENET HOSPITALS
THREE MONTHS ENDED AUGUST 31, 1999 COMPARED TO THREE MONTHS ENDED AUGUST 31,
1998
Net operating revenues for the three months ended August 31, 1999 was
$142.2 million, an increase of $8.7 million, or 6.5%, from $133.5 for the same
period in 1998. Net operating revenues increased due to improved managed care
reimbursement as a result of negotiation of more favorable contract payment
terms and facility-specific initiatives to expand existing services and recruit
physicians offset, in part, by a decrease in volumes resulting from market
uncertainty due to the impending sale of the Tenet hospitals to IASIS.
The Tenet hospitals experienced a slight decrease of 1.5% in inpatient
admissions from 12,601 for the three months ended August 31, 1998 to 12,412 for
the same period in 1999. Patient days decreased 4.6% from 62,032 for the three
months ended August 31,
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1998 to 59,154 for the same period in 1999. Outpatient visits decreased 8.6%
from 137,518 for the three months ended August 31, 1998 to 125,752 for the same
period in 1999.
Salaries and benefits expense decreased to $47.4 million or 33.3% of net
operating revenues for the three months ended August 31, 1999, compared to $47.6
million, or 35.7%, of net operating revenues for the same period in 1998.
Salaries and benefits as a percentage of net operating revenues decreased
primarily due to a reduction in the number of employees and an increase in
Health Choice revenue, with minimal additional staffing.
Supplies expense was $20.4 million or 14.4% of net operating revenues for
the three months ended August 31, 1999 compared to $20.2 million or 15.1% of net
operating revenues for the same period in 1998. Supply saving initiatives,
including negotiation of more favorable supply contracts, had a positive impact
which decreased supplies expense as a percentage of net operating revenue.
Provision for doubtful accounts increased to $11.8 million, or 8.3%, of net
operating revenue for the three months ended August 31, 1999 compared to $9.9
million, or 7.4%, of net operating revenues for the same period in 1998. The
increase in provision for doubtful accounts is attributable to a number of
factors, including the continuing shift of business from Medicare to managed
care, a rise in the volume of care provided to uninsured patients in certain of
the Tenet hospitals, delays in payment and denial of claims by managed care
payers, and personnel turnover.
Other operating expenses increased to $43.5 million, or 30.6%, of net
operating revenue for the three months ended August 31, 1999 from $39.1 million,
or 29.3%, of net operating revenue for the same period in 1998. Factors
contributing to this increase included increased operating expenses attributable
to the increase in collection agency and consulting fees and increased
administrative expenses.
Overhead allocated from the parent company increased to $1.9 million for
the three months ended August 31, 1999 compared to $1.7 million for the same
period in 1998 due to an increase in net operating revenues during the same
period. The allocated overhead is for general and administrative, financial,
legal, human resources, information systems and other services from Tenet. The
amounts allocated are generally determined on a pro-rata basis utilizing net
operating revenues for all of Tenet's hospitals. Overhead allocated equated to
1.3% and 1.2% of net operating revenues for the three months ended August 31,
1999 and 1998, respectively.
Such expense allocations may not be representative of the costs of such
services to be incurred in the future or on a stand alone basis; however Tenet's
management believes the allocation method is reasonable.
Depreciation and amortization expense was $7.1 million or 5.0% of net
operating revenues for the three months ended August 31, 1999 compared to $7.7
million or 5.8% of net operating revenues for the same period in 1998.
A loss on sale of accounts receivable was generated on August 31, 1999 as
amounts realized upon sale were less than the patient receivable balances on
certain Tenet hospitals' individual balance sheets due to the fact that the
receivables were discounted to reflect the time value of money and anticipated
collection costs.
YEAR ENDED MAY 31, 1999 COMPARED TO YEAR ENDED MAY 31, 1998
Net operating revenues, which comprise net patient service revenues and
capitation premiums, increased 4.6% to $572.5 million in 1999 from $547.2
million in 1998. Net
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patient service revenues increased 2.6% to $490.3 million in 1999 from $477.7
million in 1998. Volume increased due to the signing of new managed care
contracts in one market and facility-specific initiatives at several other
hospitals. The reduction of inpatient hospital, home health and skilled nursing
facility reimbursement due to the Balanced Budget Act in part offset the
increase in volume. Hospital net revenue per adjusted patient day increased 5.9%
in 1999. Capitation revenue from Health Choice, a Medicaid managed health plan,
increased 18.4% from $69.5 million in 1998 to $82.3 million in 1999, due in part
to a 6.8% premium increase and a $2.3 million increase in independent physician
association, or IPA, management revenue.
Salaries and benefits were $192.6 million or 33.6% of net operating
revenues in 1999 compared to $199.2 million or 36.4% of net operating revenues
in 1998. Supplies were $82.9 million or 14.5% of net operating revenues in 1999
compared to $81.5 million or 14.9% of net operating revenues in 1998. Supply
expenses increased on an absolute dollar basis due to an increase in high cost
procedures and the opening of a cardiac catheterization lab. Salaries and
benefits and supplies as a percentage of net operating revenues decreased
primarily due to a reduction in the number of employees and the significant
increase in Health Choice revenue, which required minimal additional staffing
and no incremental supply costs due to the negotiation of more favorable supply
contracts.
Other operating expenses increased to $155.0 million or 27.1% of net
operating revenue in 1999 from $145.8 million or 26.6% of net operating revenue
in 1998. Factors contributing to this increase included increased operating
expenses attributable to the increase in Health Choice revenues, increased
collection agency and consulting fees and increased administrative expenses.
Provision for doubtful accounts increased to $41.9 million or 7.3% of net
operating revenues in 1999 compared to $37.8 million or 6.9% of net operating
revenues in 1998. The increase is attributable to a number of factors, including
the continuing shift of business from Medicare to managed care, a rise in the
volume of care provided to uninsured patients in certain of the Tenet hospitals,
delays in payment and denial of claims by managed care payors and personnel
turnover.
Overhead allocated from the parent company decreased to $7.5 million in
1999 compared to $10.6 million in 1998. This decrease is primarily attributable
to reductions in corporate headcount and expenses by Tenet Healthcare. Overhead
allocated equated to 1.3% and 1.9% of net operating revenues for the year ended
May 31, 1999 and 1998, respectively.
Depreciation and amortization were $26.6 million or 4.6% of net operating
revenues in 1999, up from $25.3 million or 4.6% of net operating revenues in
1998.
YEAR ENDED MAY 31, 1998 COMPARED TO YEAR ENDED MAY 31, 1997
Total net operating revenues increased 1.2% to $547.2 million in 1998 from
$540.6 million in 1997. Net patient service revenues increased 0.2% to $477.7
million in 1998 from $476.9 million in 1997. Inpatient admissions increased 2.9%
and outpatient visits decreased 11.6% over the prior period. Volume increased
due to a number of factors including the signing of new managed care contracts
and increased admissions to specialty units, including rehabilitation and
skilled nursing, at one facility. The decrease in outpatient visits was
primarily attributable to a reduction in home health services offered. Hospital
net revenue per adjusted patient day decreased 2.4% in 1998. Capitation revenue
for Health Choice increased 9.1% from $63.7 million in 1997 to $69.5 million in
1998, due
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in part to a 4.9% premium increase and, a 13.4% increase in covered lives,
offset by a $3.6 million decrease in independent physician association, or IPA,
management revenue due to the loss of a contract.
Salaries and benefits were $199.2 million or 36.4% of net operating
revenues in 1998 compared to $195.5 million or 36.2% of net operating revenues
in 1997. Salaries and benefits increased primarily due to annual wage and merit
increases and increased utilization of contract nurses at one facility. Supplies
increased to $81.5 million in 1998 from $80.4 million in 1997, and remained
constant as a percentage of net operating revenues at 14.9% over the same
period.
Other operating expenses increased to $145.8 million or 26.6% of net
operating revenues in 1998 from $141.7 million or 26.2% of net operating
revenues in 1997. Factors contributing to this increase included increased
collection agency fees, increased operating expenses attributable to the
increase in Health Choice revenues and increased administrative expenses.
Provision for doubtful accounts increased to $37.8 million or 6.9% of net
operating revenues in 1998 from $32.6 million or 6.0% in 1997. The increase is
attributable to a number of factors, including the continuing shift of business
from Medicare to managed care, a rise in the volume of care provided to
uninsured patients in certain of the Tenet hospitals, delays in payment and
denial of claims by managed care payors and personnel turnover.
Overhead allocated from the parent company decreased to $10.6 million in
1998 compared to $19.7 million in 1997. This decrease can be primarily
attributed to a reduction in allocable non-recurring charges at the corporate
level. Overhead allocated equated to 1.9% and 3.6% of net operating revenues for
the year ended May 31, 1998 and 1997, respectively.
Depreciation and amortization were $25.3 million or 4.6% of net operating
revenues in 1998, up slightly from $24.7 million or 4.6% of net operating
revenues in 1997.
LIQUIDITY AND CAPITAL RESOURCES
IASIS
At December 31, 1999, we had $82.8 million in working capital, compared to
$3.7 million at September 30, 1999, or an increase of $79.1 million primarily
due to the Tenet acquisition and recapitalization transaction financed by the
closing of long-term borrowings and issuance of preferred stock discussed below.
We used cash of $67.1 million in operating activities during the three months
ended December 31, 1999, compared to generating $8.2 million in cash from
operating activities during the three months ended December 31, 1998. During the
three months ended December 31, 1999, the negative cash flow from operations was
due primarily to the growth in accounts receivable to normalized levels due to
IASIS not purchasing accounts receivable in the Tenet transaction as further
discussed below. At December 31, 1999, net accounts receivable of $110.4 million
amounted to approximately 49 days of net revenue. We did not purchase accounts
receivable as part of the Tenet acquisition, therefore we expect days of net
revenue in net accounts receivable to increase as receivables from the Tenet
acquisition increase to normal levels.
Our investing activities used $445.1 million during the three months ended
December 31, 1999. The Tenet acquisition and recapitalization transaction
accounted for substantially all of the funds used in investing activities.
Financing activities provided net
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cash of $536.8 million due to borrowings under our credit facility, issuance of
senior subordinated notes and issuance of Series A preferred stock.
We have recently become an independent company. Therefore, historical cash
flows may not be indicative of future liquidity. Ongoing operations will require
the availability of sufficient funds to service debt, fund working capital and
perform maintenance and growth capital expenditures on our facilities, including
start-up capital expenditures for Rocky Mountain Medical Center, formerly named
PHC Regional Hospital and Medical Center. We intend to finance these activities
through cash flows from our operating activities and from amounts available
under the revolving credit facility. In addition, we did not acquire the
accounts receivable related to the Tenet hospitals as part of the acquisition of
the Tenet hospitals and other assets of Tenet Healthcare and therefore, at
closing, we funded a cash balance of $99.9 million through borrowings under the
credit facility and the offering of the old notes to fund working capital as
accounts receivable increase to normalized levels.
Effective October 8, 1999, Paracelsus Healthcare and unrelated third
parties recapitalized the Paracelsus Utah Facilities, valued at $288.0 million,
subject to a working capital adjustment. The recapitalization transaction
resulted in Paracelsus Healthcare retaining a minority interest at an implied
value of $8.0 million in HoldCo, a preexisting Paracelsus Healthcare subsidiary
to which the ownership interests in the Paracelsus Utah Facilities had been
transferred. Subsequent to the recapitalization, HoldCo changed its name to
IASIS Healthcare Corporation and changed its fiscal year end to September 30th.
As part of the recapitalization, the unrelated third parties purchased
$125.0 million of IASIS' common stock from Paracelsus Healthcare and IASIS
purchased $155.0 million of its own stock from Paracelsus Healthcare which is
being held as treasury stock as of December 31, 1999. IASIS' $155.0 million
purchase of its own stock was financed with a $160.0 million credit facility
which was subsequently repaid concurrent with IASIS' issuance of preferred
stock, offering of senior subordinated notes and borrowing under the bank
facilities all of which are discussed further below. Legal, accounting and other
related charges of $3.4 million associated with the recapitalization have been
expensed as incurred. Additional costs may be incurred in the year 2000 relating
to the recapitalization.
The recapitalization transaction was effected pursuant to the terms of a
recapitalization agreement, a copy of which has been filed as an exhibit to the
registration statement of which this prospectus forms a part. Under the terms of
the recapitalization agreement, the purchase price paid by JLL Healthcare, LLC,
one of our current principals, in connection with the recapitalization is
subject to a post-closing working capital adjustment. The post-closing working
capital adjustment represents an adjustment to the purchase price paid and is
based upon the difference between an estimate of working capital as of the
closing date and the working capital actually purchased as of the closing date
of October 8, 1999. Any positive or negative working capital adjustment will be
recorded as either an increase or decrease, respectively, in the opening equity
resulting from the Paracelsus recapitalization. IASIS settled the working
capital adjustment for $1.0 million which was received on March 21, 2000. The
settlement will result in an adjustment to opening equity to be recorded during
the quarter ended March 31, 2000 and will have no impact on IASIS' results of
operations.
Effective October 15, 1999, IASIS acquired ten acute care hospitals and
other related facilities and assets, which we refer to as Tenet hospitals, from
Tenet Healthcare for $428.3 million in cash, net of a preliminary working
capital adjustment of $18.9 million, but that value may later change due to a
final working capital adjustment. The purchase
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price of $447.2 million was reduced by the estimated $18.9 million for unaudited
working capital as of August 31, 1999.
For the three months ended December 31, 1999, $19.0 million, or 10.6%, of
our total net operating revenues of $179.3 million were derived from Health
Choice Arizona, Inc. HMO. Health Choice, acquired in connection with the Tenet
acquisition, is a prepaid healthplan that derives approximately 99% of its
revenue through a contract with the Arizona Health Care Cost Containment System,
which we refer to as AHCCCS, to provide specified health services through
contracted providers to qualified enrollees. The term of the contract with
AHCCCS is five years, with annual renewal provisions, and expires September 30,
2002. The contract provides for fixed monthly premiums, based on negotiated per
capita member rates. In the event the contract with AHCCCS were to be
discontinued, our financial condition, results of operations and cash flows
would be adversely affected.
Concurrent with the acquisition of the hospitals and related facilities
from Tenet Healthcare, Iasis Healthcare Corporation, which we refer to as the
management company, a Tennessee corporation, which was originally formed by
members of our current management to acquire and operate hospitals and related
businesses, was merged with and into a wholly-owned subsidiary of IASIS, with
IASIS' subsidiary as the surviving entity. In the merger, shareholders of
management company received shares of our common stock and preferred stock with
a total value of $9.5 million.
Purchase price adjustments have not been finalized as of December 31, 1999
and are subject to working capital settlements and receipt of independent
appraisals of the assets acquired. Direct costs of acquisitions for the Tenet
hospitals and the management company acquisitions of $4.4 million were included
as a component of the purchase price and primarily include legal, investment
banking and professional and accounting services.
The acquisition of Tenet hospitals and the management company were
accounted for using the purchase method of accounting. The operating results of
the acquired companies have been included in the accompanying Consolidated
Statements of Operations and Cash Flows from the October 15, 1999 date of
acquisition.
In connection with the recapitalization and the acquisitions, IASIS has not
assumed any liability or obligation due to payors, including private insurers
and government payors such as the Medicare and Medicaid programs. IASIS also did
not assume any cost report reimbursements, settlements, repayments, or fines, if
any, to the extent they relate to periods prior to the respective closing dates
of these transactions. The agreements with Tenet Healthcare and Paracelsus
Healthcare include customary indemnifications and hold harmless provisions for
any damages incurred by IASIS related to these types of excluded liabilities.
Capital expenditures for the three months ended December 31, 1999 and for
the nine months ended September 30, 1999 combined for the Paracelsus hospitals,
Tenet hospitals and the management company were $9.5 million and $22.6 million,
respectively, primarily due to routine maintenance of equipment and facilities
and an expansion project at one of our facilities. Management anticipates that
capital expenditures during the remainder of 2000 will increase over prior
periods primarily due to the re-opening and operation of Rocky Mountain Medical
Center, formerly named PHC Regional Hospital and Medical Center, enhancement of
services at some of the facilities and capital investments relating to operating
independently. Accordingly, we have budgeted capital expenditures for 2000 at
approximately $50.0 million. However, this estimate is based upon management's
analysis
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of various factors, many of which are beyond our control and we cannot assure
you that these capital expenditures, including those associated with the
re-opening of Rocky Mountain Medical Center, will not significantly exceed
budget or that the re-opening of Rocky Mountain Medical Center will be
successful.
We recently entered into a credit facility dated October 15, 1999, through
which a syndicate of lenders made a total of $455.0 million available to IASIS
in the form of an $80.0 million Tranche A term loan, a $250.0 million Tranche B
term loan and a $125.0 million revolving credit facility, which we collectively
refer to as the bank facilities.
As of December 31, 1999, the Tranche A and Tranche B term loans were fully
drawn. The proceeds from the Tranche A and Tranche B term loans together with
proceeds from the offering of the old notes and the issuance of preferred stock
were used for the following purposes:
- repay in its entirety a $200.0 million credit facility of which
approximately $160.0 million was outstanding in connection with the
recapitalization transaction,
- finance a portion of the acquisition of hospitals and related facilities
from Tenet Healthcare Corporation,
- fund an opening cash balance required for working capital and
- pay related fees and expenses associated with the recapitalization and
acquisition transactions.
The $125.0 million revolving credit facility is available for working
capital and other general corporate purposes, and any outstanding amounts under
the facility will be due and payable on October 15, 2005. No amounts were
outstanding under the revolving credit facility as of December 31, 1999 other
than for the issuance of $24.2 million of letters of credit.
The Tranche A term loan matures on October 15, 2005. The Tranche B term
loan matures on October 15, 2007. Repayments under the term loans are due in
quarterly installments. There will be no substantial amortization of the Tranche
B term loan until 2005. In addition, the loans under the credit facility are
subject to mandatory prepayment under specific circumstances, including from a
portion of excess cash flow and the net proceeds of specified casualty events,
asset sales and debt issuances, each subject to various exceptions. The loans
under the credit facility bear interest at variable rates at fixed margins above
either the agent bank's alternate base rate or its reserve-adjusted LIBOR. The
weighted average interest rate on the bank facilities was approximately 10.4% at
December 31, 1999. IASIS also pays a commitment fee equal to .5% of the average
daily amount available under the revolving credit facility.
The credit facility requires that we comply with various financial ratios
and tests and contains covenants limiting our ability to, among other things,
incur debt, engage in acquisitions or mergers, sell assets, make investments or
capital expenditures, make distributions or stock repurchases and pay dividends.
The credit facility is guaranteed by our subsidiaries. These guarantees are
secured by a pledge of substantially all of the subsidiaries' assets.
On October 13, 1999, we issued $230.0 million in old notes which mature on
October 15, 2009 and bear interest at 13% per annum. Interest is payable
semi-annually. The old notes are unsecured obligations and are subordinated in
right of payment to all our existing and future senior indebtedness.
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If a change of control occurs, as defined in the indenture, each holder of
the old notes or the new notes will have the right to require IASIS to
repurchase all or any part of that holder's notes pursuant to the terms of the
indenture. Except as described above with respect to a change of control, we are
not required to make mandatory redemption or sinking fund payments with respect
to the old notes or the new notes.
The old notes are guaranteed jointly and severally by all of our
subsidiaries. We are a holding company with no operations apart from our
ownership of our subsidiaries. At December 31, 1999, all of our subsidiaries
were wholly owned and fully and unconditionally guaranteed the old notes. All of
our current subsidiaries are also expected to guarantee the new notes.
The indenture for the notes contains certain covenants, including but not
limited to, restrictions on new indebtedness, asset sales, capital expenditures,
dividends and the ability to merge or consolidate.
Concurrent with the acquisition of hospitals and related facilities from
Tenet Healthcare, we issued 160,000 shares of Series A preferred stock for
proceeds, net of issuance costs, of $158.7 million. In connection with the
merger with the management company, we issued 5,311 shares of Series B preferred
stock valued at $5.3 million. Issuance costs of $1.3 million and $44,000 were
recorded against the aggregate preference value of the Series A and Series B
preferred stock, respectively. The Series A preferred stock and the Series B
preferred stock, which we collectively refer to as preferred stock, are
identical in all respects, except as follows. The Series A preferred stock is
mandatorily redeemable on October 15, 2010 and the Series B preferred stock is
mandatorily redeemable on October 15, 2020, in each case, for $1,000 per share
plus all accrued and unpaid dividends to the redemption date or as soon
thereafter as will not be prohibited by then-existing debt agreements. The
preferred stock has a liquidation preference over the common stock equal to the
redemption price of $1,000 per share plus all accrued and unpaid dividends.
Dividends on the preferred stock are payable when, as and if declared by the
board of directors and will accrue at the rate of 16.0% per annum from their
date of issuance. No dividends or distributions may be made on the common stock
unless and until all accrued and unpaid dividends are first paid to the holders
of the preferred stock.
Without the consent of the holders of a majority of the outstanding
preferred stock, we may not enter into any merger, consolidation or other
business combination, unless and until the preferred stock is repurchased for an
amount equal to $1,000 per share plus all accrued and unpaid dividends thereon.
Except as required by law or as described above, the holders of the preferred
stock are not entitled to vote on any matter submitted to a vote of the
stockholders. The redemption of, and payment of cash dividends on, the preferred
stock is restricted by the terms of the credit facility and the notes indenture.
At December 31, 1999, IASIS had cash and cash equivalents of $24.6 million
and on January 31, 2000 had cash and cash equivalents of $38.0 million. As of
March 13, 2000, IASIS continued to have no amounts drawn under its revolving
credit facility other than for the issuance of $24.2 million of letters of
credit. Based upon the current level of operations and anticipated growth, we
believe that cash generated from operations and amounts available under the
revolving credit facility will be adequate to meet our anticipated debt services
requirements, capital expenditures and working capital needs for the next
several years. We cannot assure you, however, that our business will generate
sufficient cash flow from operations, that future borrowings will be available
under the credit facility or otherwise to enable us to service our indebtedness
including the credit facility and the notes, or to make anticipated capital
expenditures. One element of our
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business strategy is expansion through the acquisition of hospitals in our
existing and new high growth markets. The competition to acquire hospitals is
significant, and there can be no assurance that suitable acquisitions, for which
other healthcare companies, including those with greater financial resources
than us, may be competing, can be accomplished on terms favorable to us, that
financing, if necessary, can be obtained for these acquisitions or that acquired
facilities can be effectively integrated with our operations. The completion of
acquisitions may result in the incurrence of or assumption by us of additional
indebtedness. Our future operating performance, our ability to service or
refinance the notes, and our ability to service and extend or refinance the
credit facility will be subject to future economic conditions and to financial,
business and other factors, many of which are beyond our control.
PARACELSUS HOSPITALS
Historically, the major source of financing for the Paracelsus hospitals
has been cash generated from operations and funds provided by the former parent
company.
At September 30, 1999, the Paracelsus hospitals had working capital of $3.7
million compared to $10.4 million at December 31, 1998. At December 31, 1997,
working capital was $16.0 million. The decline was due to decreased accounts
receivable balances, which were partially offset by a decrease in accrued
liabilities.
For the nine months ended September 30, 1999, cash provided by operating
activities increased to $17.6 million from cash used in operating activities of
$2.0 million for the nine months ended September 30, 1998 primarily due to a
reduction in interest expense allocated by the parent company and the 1998
settlement of a capitated contract dispute. Cash provided by operating
activities increased to $6.2 million for the year ended December 31, 1998 from
cash used in operating activities of $14.6 million for the year ended December
31, 1997. The increase at December 31, 1998 was due to reductions in unusual
items and supplies and a significant increase in accounts payable, which was
partially offset by growth in accounts receivable balances in the same year.
For the nine months ended September 30, 1999, cash used in investing
activities increased to $13.5 million from $2.5 million for the nine months
ended September 30, 1998, and cash used in investing activities increased to
$6.4 million for the year ended December 31, 1998 from $0.4 million for the year
ended December 31, 1997. These increases were primarily due to increased
purchases of property and equipment during these periods.
TENET HOSPITALS
Historically, the major source of financing for the Tenet hospitals has
been cash generated from operations and funds provided by the former parent
company.
At August 31, 1999, the Tenet hospitals had working capital of $(24.4)
million compared to $80.9 million at May 31, 1999. At May 31, 1998, working
capital was $61.3 million. The decrease from May 31, 1999 to August 31, 1999 was
primarily due to a decrease in accounts receivable as a result of certain of the
Tenet hospitals entering into a Receivables Sale Agreement to sell to Tenet
Healthcare patient related receivables effective August 31, 1999. The increase
from May 31, 1998 to May 31, 1999 was due to increases in accounts receivable
balances, supplies, deferred income taxes and other prepaid expenses offset, in
part, by an increase in medical claims payable.
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For the three months ended August 31, 1999 cash provided by operating
activities increased to $115.9 million from $8.9 million for the three months
ended August 31, 1998 primarily due to a decrease in accounts receivable as a
result of the Receivables Sale Agreement described above, offset, in part, by a
decrease in accounts payable and accrued expenses. Cash provided by operating
activities decreased to $44.0 million for the year ended May 31, 1999 from cash
provided of $70.2 million for the year ended May 31, 1998. The decrease was due
to an increase in patient accounts receivable as well as a decrease in accounts
payable and accrued expenses. For the year ended May 31, 1997, cash provided by
operating activities was $45.9 million. The increase from 1997 to 1998 was
primarily due to a significant increase in accounts payable and accrued
expenses.
For the three months ended August 31, 1999, cash provided by investing
activities increased to $0.03 million from cash used in investing activities of
$3.1 million for the three months ended August 31, 1998, and cash used in
investing activities decreased to $18.0 million for the year ended May 31, 1999
from $23.8 million for the year ended May 31, 1998. For the year ended May 31,
1997, cash used in investing activities was $23.5 million. These changes were
primarily due to capital expenditures.
YEAR 2000 COMPLIANCE
We did not experience any material disruptions or other effects caused by
the Year 2000 Problem, nor do we expect to experience any material disruptions
or other effects caused by the Year 2000 Problem in the future.
INFLATION
Management believes inflation has not had a significant impact on IASIS's
results of operations for the periods presented. Management does not anticipate
inflation having a significant impact on the future results of operations.
MARKET RISK
IASIS is subject to market risk associated with some commodity prices and,
effective with the revolving credit agreement we entered into in October 1999,
changes in interest rates.
To manage the risk of fluctuations in interest rates, IASIS' borrowings are
a mix of fixed and floating rate obligations. This includes the $230.0 million
of old notes that bear interest at a 13% fixed rate and are due 2009. IASIS's
$455.0 million term loan and revolving credit facility bear interest at a
floating rate. The carrying amount of IASIS's debt obligations approximates the
fair value of similar debt instruments of comparable maturity and the interest
rate market risk is currently not considered significant.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement establishes comprehensive accounting and
reporting standards for derivative instruments and hedging activities that
require a company to record the derivative instruments at fair value in the
balance sheet. Furthermore, the derivative instrument must meet specific
criteria or the change in its fair value is to be recognized in earnings in the
period of change. To achieve hedge accounting treatment the derivative
instrument needs to be part of a well-documented hedging strategy that describes
the exposure to be hedged, the objective of the hedge and a measurable
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definition of its effectiveness in hedging the exposure. 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. Adoption of FASB No. 133 is not expected to
have a material adverse effect on IASIS's financial statements.
In March and in April 1998, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants issued two Statements of
Position that are effective for financial statements for fiscal years beginning
after December 15, 1998, which will apply to IASIS beginning with its fiscal
year ended September 30, 2000. 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. IASIS' adoption of SOPs 98-1 and 98-5 did not have a
material impact on its operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statement and requires that these enterprises report selected
information about operating segments in interim financial reports. IASIS'
primary business is providing health care services through its acute care
hospitals and related healthcare businesses. IASIS' chief operating decision
maker, as that term is defined in the accounting standard, regularly reviews
financial information about each of its hospitals for assessing performance and
allocating resources. IASIS' acute care hospitals and related health care
businesses are all similar in their business activities and the economic
environments in which they operate, such as urban markets. Accordingly, IASIS'
reportable operating segments consist of
(1) acute care hospitals and related healthcare businesses collectively,
and
(2) its Medicaid managed health plan, Health Choice.
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BUSINESS
COMPANY OVERVIEW
We are a for-profit hospital management company with operations in select
markets in the United States. Our facilities are currently located in four
regions:
- Salt Lake City, Utah;
- Phoenix, Arizona;
- Tampa-St. Petersburg, Florida; and
- three markets within the state of Texas.
We either own or operate 15 general, acute care hospitals and 4 ambulatory
surgery centers, with a total of 2,144 operating beds. We focus on networks of
medium-sized hospitals, each with 100 to 400 beds. We also operate a Medicaid
managed health plan called Health Choice in Phoenix, Arizona.
According to industry sources, the cumulative population growth in our
markets from 1998 to 2003, on a weighted average revenue basis, is projected to
be 9.3%. This growth compares favorably to the projected national growth rate of
5.0% over the same period.
Our senior management team has extensive experience in multi-facility
hospital operations, financial management and business development with an
average of 23 years of experience in the for-profit hospital industry. Several
of our senior executives, including Wayne Gower, President and Chief Executive
Officer, are former senior executives at Columbia/HCA Healthcare Corporation.
Mr. Gower previously served as President of Columbia/HCA's Summit Division,
overseeing the operations of 21 hospitals with annual net revenues in excess of
$1.0 billion.
Our revenues and EBITDA are well-distributed throughout each of our
markets. This diversity helps to insulate us from individual local economic,
demographic and legislative changes.
BUSINESS STRATEGY
Providing high-quality, cost-effective healthcare services in the select
communities we serve throughout the United States is our strategic objective. We
intend to build strong relationships with physicians, employees and payors
founded on a common vision of customer service, quality care, appropriate
services mix, elimination of unnecessary costs and sound investment of capital
to meet the healthcare needs of the community. We believe that we will operate a
leading for-profit hospital management company by:
- Developing community-focused hospital networks in high growth markets;
- Capitalizing on opportunities for revenue enhancement; and
- Increasing margins by taking advantage of cost saving opportunities.
The key elements of our business strategy are the following:
- Increase volume by expanding services. We intend to increase our
revenues by increasing the capacity of our facilities and broadening the
scope of services offered at our facilities in accordance with local
needs. Recognizing the shift from inpatient to outpatient treatments, we
intend to enhance the convenience of our outpatient services. In
addition, we believe that the expansion of surgical capacity and the
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upgrading of specialty services, such as physical therapy, radiology,
rehabilitation and other diagnostic services, represent particularly
attractive opportunities to increase patient visits, admissions and
surgeries. We also seek to increase the efficiency, and therefore volume,
of our emergency rooms by operating dual-track ERs. We believe that this
dual-track strategy, which separates urgent care patients from non-urgent
care patients will allow us to optimize staffing efficiencies, alleviates
patient flow bottlenecks and design protocols to match the acuity of
medical cases, which we believe will result in a more efficient
allocation of hospital resources.
- Improve operating efficiencies. We believe margins at our facilities can
be improved through the implementation of well-defined operating expense
control initiatives. We will implement several measures including
optimizing staffing levels according to patient volumes and seasonal
needs at each facility, reducing bad debt expense by effectively managing
each hospital's billing and collection processes, reducing supply costs
by eliminating waste and over-utilization and reallocating hospital
services and resources in order to balance community needs and
profitability.
- Retain and develop local management. A strong, attentive management team
at each facility is integral to developing and implementing strategic
objectives at our hospitals. Under previous ownership, several of our
hospitals experienced significant turnover. Many of those hospitals
shared management teams with other facilities. We intend to recruit
experienced senior managers in order to give each hospital its own
dedicated management team. Stable local management, including a chief
executive officer, chief financial officer and chief nursing officer at
each facility, will enhance medical staff relations and maintain
continuity in the community. We will also incentivize local management
teams by basing compensation on the operating results and quality of care
at each facility.
- Strengthen physician retention and recruiting. We believe that the
retention and recruitment of physicians is critical to our long term
success. We will execute this strategy by broadening the range of
services at our hospitals and by utilizing our existing physician
relationships to recruit new primary care physicians and specialists. We
also intend to create local physician advisory committees, comprised of
leading area physicians who will work with management to ascertain local
needs. Our management believes that establishing such committees will
also assist in developing a long-term relationship between physicians and
local management, enhance physician loyalty and improve the quality of
healthcare.
- Improve managed care position through better payor relationships. We
believe that establishing and maintaining strong relationships with
payors is critical to our success. We plan to increase volume by entering
into new contracts with payors and plan to improve profitability by
negotiating more favorable terms in our existing contracts. Under the
larger corporate structures of the previous owners, some managed care
contracting was not negotiated to provide maximum benefit to each of the
individual facilities in the community. We believe that understanding
facility-specific issues and concerns, developing relationships with
local payors and strengthening our market presence will enable us to
negotiate more favorable terms in both new and existing contracts.
- Selectively pursue strategic acquisitions and partnerships. We intend to
selectively pursue hospital acquisitions which will improve financial
performance and regional
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presence in our existing markets. Additionally, we will focus our new
market development efforts on regions with a growing population base
greater than 100,000, a stable or improving managed care environment and
favorable demographics. In addition, we will continue to identify
opportunities to expand our presence through strategic alliances with
providers and by partnering with physicians to develop additional
services.
SERVICES AND OPERATIONS
Our general, acute care hospitals offer a variety of inpatient medical and
surgical services commonly available in hospitals, including
- cardiology,
- emergency services,
- general surgery,
- internal medicine,
- obstetrics and
- orthopedics.
In addition, our facilities provide outpatient and ancillary services
including
- outpatient surgery,
- physical therapy,
- radiation therapy,
- radiology and
- respiratory therapy.
A board of trustees governs each of our hospitals. Each board of trustees
includes members of the hospital's medical staff as well as community leaders.
The board of trustees establishes policies concerning medical, professional and
ethical practices, monitors such practices, and is responsible for ensuring that
these practices conform to established standards. We intend to maintain quality
assurance programs to support and monitor quality of care standards and to meet
accreditation and regulatory requirements. We will monitor patient care
evaluations and other quality of care assessment activities on a continuing
basis.
Our hospitals do not engage in extensive medical research and medical
education programs. However, some of our hospitals have affiliations with
medical schools.
In addition to providing capital resources, we will make available a
variety of management services to our healthcare facilities. These services will
include
- information systems;
- ethics and compliance programs;
- leasing contracts;
- accounting, financial and clinical systems;
- legal support;
- personnel and employee benefits management;
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- internal auditing;
- supply purchasing agreements; and
- resource management.
Some of these services initially will be provided through transitional
arrangements made with Paracelsus Healthcare Corporation and Tenet Healthcare
Corporation. We will participate in the Tenet buy power purchasing program,
allowing us access to very favorable rates on medical and non-medical supplies.
UTILIZATION
We believe that there are two important factors relating to the overall
utilization of a hospital:
(1) the quality and market position of the hospital and
(2) the number, quality and specialities of physicians providing patient
care within the facility.
Generally, we believe that the ability of a hospital to meet the healthcare
needs of its community is determined by its breadth of services, level of
technology, emphasis on quality of care and convenience for patients and
physicians. Other factors which impact utilization include the size of and
growth in local population, local economic conditions, the availability of
reimbursement programs such as Medicare and Medicaid, and market penetration of
managed care programs. Improved treatment protocols as a result of advances in
medical technology and pharmacology also are affecting utilization across the
industry.
The following table presents combined operating statistics for our hospitals:
1997 1998 1999 2000
------- ------- ------- -------
Number of hospitals at end of period......... 15 15 15 15
Number of operating beds at end of period
(1)........................................ 2,144 2,144 2,144 2,144
Admissions (2)............................... 69,721 70,484 53,669 18,200
Patient days (3)............................. 334,998 336,068 247,492 80,985
ER Visits.................................... N/A 260,633 206,855 69,577
Average daily census (4)..................... 918 921 906 900
- -------------------------
Note: Data for 1997 and 1998 is for the twelve months ended December 31 for the
Paracelsus hospitals and is for the twelve months ended May 31 for the
Tenet hospitals; data for 1999 is for the nine months ended September 30
for the Paracelsus hospitals and is for the nine months ended August 31
for the Tenet hospitals; data for 2000 is for the three months ended
December 31, 1999 for IASIS and is for the period October 1, 1999 through
October 15, 1999 for the Tenet hospitals. Statistics do not include
Health Choice.
(1) Excludes 120 beds at Rocky Mountain Medical Center, formerly named PHC
Regional Hospital and Medical Center, which closed in June 1997 and is
scheduled to reopen during the first quarter of 2000. See "Liquidity and
Capital Resources" on page 74.
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(2) Represents the total number of patients admitted to our hospitals for stays
in excess of 23 hours. Management and investors use this number as a general
measure of inpatient volume.
(3) Represents the number of days beds were occupied over the period.
(4) Represents the average number of inpatients in our hospital beds each day.
Our hospitals have experienced significant shifts from inpatient to
outpatient care as well as decreases in average lengths of inpatient stay,
primarily as a result of improvements in technology and clinical practices and
hospital payment changes by Medicare, insurance carriers and self-insured
employers. These hospital payment changes generally encourage the utilization of
outpatient, rather than inpatient, services whenever possible and shortened
lengths of stay for inpatient care. In response to this shift toward outpatient
care, we are reconfiguring some hospitals to more effectively accommodate
outpatient services and restructuring existing surgical capacity to permit
additional outpatient volume and a greater variety of outpatient services.
Our facilities will continue to emphasize those outpatient services that
can be provided on a quality, cost-effective basis and that we believe will
experience increased demand. The patient volumes and net operating revenues at
our hospitals and our outpatient surgery centers are subject to seasonal
variations 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.
In addition, inpatient care is increasingly incorporating sub-acute care,
where a less-intensive level of care is necessary. We have been proactive in the
development of a variety of sub-acute inpatient services to utilize a portion of
our unused capacity. By offering cost-effective sub-acute services in
appropriate circumstances, we are able to provide a continuum of care where the
demand for such services exists. For example, some of our hospitals have
developed rehabilitation units. These units utilize less intensive staffing
levels with corresponding lower costs to provide the range of services sought by
payors.
SOURCES OF REVENUE
We receive payment for patient services from
- the federal government primarily under the Medicare program,
- state governments under their respective Medicaid programs,
- Health Maintenance Organizations,
- Preferred Provider Organizations,
- other private insurers, and
- directly from patients.
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The approximate percentages of net patient revenues from continuing
operations of our facilities from these sources during the periods specified
below were as follows:
1997 1998 1999 2000
----- ----- ----- -----
Medicare.......................................... 37.8% 35.8% 31.5% 29.6%
Medicaid.......................................... 8.6 6.9 6.7 5.8
Private Payors.................................... 53.6 57.3 61.8 64.6
----- ----- ----- -----
Total................................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
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Note: Data for 1997 and 1998 is for the twelve months ended December 31 for the
Paracelsus hospitals and is for the twelve months ended May 31 for Tenet
hospitals; data for 1999 is for the nine months ended September 30 for
the Paracelsus hospitals and is for the nine months ended August 31 for
Tenet hospitals; data for 2000 is for the three months ended December 31,
1999 for IASIS and is for the period October 1, 1999 through October 15,
1999 for the Tenet hospitals. Statistics do not include Health Choice.
Medicare is a federal program that provides hospital and medical insurance
benefits to persons age 65 and over, some disabled persons and persons with
end-stage renal disease. Medicaid programs are jointly funded by federal and
state governments and are administered by states under an approved plan which
provides hospital benefits to qualifying individuals who are unable to afford
care. All of our hospitals are certified as providers of Medicare and Medicaid
services. Amounts received under the Medicare and Medicaid programs are
generally significantly less than the hospital's customary charges for the
services provided.
Private payors include Health Maintenance Organizations, Preferred Provider
Organizations, private insurance companies, employers and individual private
payors. Most of our hospitals offer discounts from established charges to
private payors if they are large group purchasers of healthcare services. These
discount programs limit our ability to increase charges in response to
increasing costs. For more information on managed care programs, see
"-- Competition" below. Patients are generally not responsible for any
difference between customary hospital charges and amounts reimbursed for such
services under Medicare, Medicaid, some private insurance plans, Health
Maintenance Organizations or Preferred Provider Organizations, but are
responsible for services not covered by these plans, exclusions, deductibles or
co-insurance features of their coverage. The amount of such exclusions,
deductibles and co-insurance has generally been increasing each year. Collecting
amounts due from individual patients is typically more difficult than collecting
from governmental or private payors. For more information on the reimbursement
programs on which our revenues are dependent, see "-- Reimbursement; Regulation"
on pages 91 to 94.
COMPETITION
Our facilities and related businesses operate in competitive environments.
A number of factors affect our competitive position within a geographic area,
including:
- the scope, breadth and quality of services;
- number, quality and specialties of physicians, nurses and other
healthcare professionals;
- reputation;
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- managed care contracting relationships; physical condition of facilities
and medical equipment;
- location; parking or proximity to public transportation;
- ability to form local hospital networks;
- tenure in the community; and
- charges for services.
We currently face competition from established, not-for-profit healthcare
corporations. In the future, we expect to encounter increased competition from
companies, like ours, that consolidate hospitals and healthcare companies in
specific geographic markets. Continued consolidation will be a leading
contributing factor to increased competition in markets in which we already have
a presence and in markets we wish to penetrate.
One factor in the competitive position of a hospital is the number and
quality of physicians affiliated with the hospital. In large part, a hospital's
revenues, whether from managed care payors, traditional health insurance payors
or directly from patients, depend on the quality and scope of physicians'
practices associated with the hospital. Physicians refer patients to hospitals
on the basis of the quality of services provided by the hospital, the quality of
the medical staff and employees affiliated with the hospital, the quality and
age of the hospital's facilities and equipment, and the hospital's location. We
intend to retain and recruit physicians by equipping our hospitals with
technologically advanced equipment, sponsoring training programs to educate
physicians on advanced medical procedures and creating an environment within
which physicians prefer to practice. While physicians may terminate their
association with a hospital operated by us at any time, our hospitals seek to
retain physicians of varied specialities on the hospitals' medical staffs and to
recruit other qualified physicians. Accordingly, we strive to maintain and
improve the level of care at our hospitals, uphold ethical and professional
standards and provide quality facilities, equipment, employees and services for
physicians and their patients.
Another factor in the competitive position of a hospital is the ability of
its management to negotiate service contracts with purchasers of group
healthcare services. 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 healthcare costs. The revenues and operating results
of most of our hospitals are significantly affected by the hospitals' ability to
negotiate favorable contracts with managed care payors. Health Maintenance
Organizations and Preferred Provider Organizations use managed care contracts to
direct patients to, and manage the use of, hospital services in exchange for
discounts from the hospitals' established charges. Employers and traditional
health insurers are also increasingly interested in containing costs through
similar contracts with hospitals. The importance of obtaining contracts with
managed care organizations varies from market to market, depending on the market
strength of such organizations.
An additional competitive factor is whether the hospital is part of a local
hospital network and, if so, the scope and quality of services offered by the
network and by competing networks. A hospital that is part of a network that
offers a broad range of services in a wide geographic area is more likely to
obtain managed care contracts than a hospital that is not. We intend to evaluate
changing circumstances in each geographic area on an ongoing basis and to
position ourselves to compete in the managed care market by forming our own, or
joining with others to form, local hospital networks.
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State Certificate of Need laws, which place limitations on a hospitals'
ability to expand hospital services and add new equipment, also may have the
effect of restricting competition. The application process for approval of
covered services, facilities, changes in operations and capital expenditures is
highly competitive. In those states which have no Certificate of Need laws or
which set relatively high thresholds before expenditures become reviewable by
state authorities, competition in the form of new services, facilities and
capital spending may be more prevalent. Florida is the only state in which we
currently operate that requires compliance with Certificate of Need laws. For
more information on regulation and Certificate of Needs, see "-- Government
Regulations and Other Factors" beginning on page 94.
The hospital industry and our hospitals continue to have significant unused
capacity. Inpatient utilization, average lengths of stay and average inpatient
occupancy rates continue to be negatively affected by pre-authorization and
utilization review as well as payment mechanisms to maximize outpatient and
alternative healthcare delivery services for less acutely ill patients. We
expect admissions constraints, payor pressures and increased competition to
continue. We will endeavor to meet these challenges by expanding our facilities'
outpatient services, offering appropriate discounts to private payor groups,
upgrading facilities and equipment, and offering new programs and services.
One element of our business strategy is expansion through the acquisition
of general, acute care hospitals in growing markets. The competition to acquire
hospitals is significant, and we cannot assure you that suitable acquisitions,
for which other healthcare companies, including those with greater financial
resources than ours, may be competing, will be available to us. The acquiror
will often be selected for a variety of reasons and not exclusively on the basis
of price. We believe that our strategic goals align our interests with those of
the local communities served by our hospitals. We also believe that our
commitment to maintaining the local availability of healthcare services,
together with the reputation of our hospitals for providing market specific,
high quality healthcare, our focus on physician recruiting and retention, our
management's operating experience, and our direct access to capital will enable
us to compete successfully for acquisitions.
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PROPERTIES
The following table lists the facilities we acquired by means of the
recapitalization and the Tenet acquisition:
LICENSED
HOSPITALS CITY STATE BEDS
- --------- ---------------- ----- --------
Davis Hospital and Medical Center............ Layton UT 126
Jordan Valley Hospital....................... West Jordan UT 50
Pioneer Valley Hospital...................... West Valley City UT 139
Salt Lake Regional Medical Center............ Salt Lake City UT 200
Rocky Mountain Medical Center (1)............ Salt Lake City UT 120
Mesa General Hospital Medical Center......... Mesa AZ 143
St. Luke's Medical Center (2)................ Phoenix AZ 350
Tempe St. Luke's Hospital.................... Tempe AZ 106
Memorial Hospital of Tampa................... Tampa FL 174
Palms of Pasadena Hospital................... St. Petersburg FL 307
Town & Country Hospital...................... Tampa FL 201
Mid-Jefferson Hospital....................... Nederland TX 138
Odessa Regional Hospital..................... Odessa TX 100
Park Place Medical Center.................... Port Arthur TX 244
Southwest General Hospital................... San Antonio TX 286
OTHER OPERATIONS
- ----------------
Davis Surgical Center........................ Layton UT --
Sandy City ASC............................... West Jordan UT --
Biltmore Surgery Center...................... Phoenix AZ --
Metro Surgery Center......................... Mesa AZ --
Health Choice of Arizona..................... Phoenix AZ --
- -------------------------
(1) Rocky Mountain Medical Center, formerly named PHC Regional Hospital and
Medical Center, has been closed since June 1997 and is scheduled to reopen
during the first quarter of 2000. See "Liquidity and Capital Resources"
beginning on page 74.
(2) Includes St. Luke's Behavioral Health Center.
Medical office buildings also are operated in conjunction with our
hospitals. These office buildings are primarily occupied by physicians who
practice at our hospitals.
Our headquarters are located in Franklin, Tennessee. We also have a
division office in Salt Lake City, Utah.
Our hospitals and other facilities are suitable for their respective uses
and are, in general, adequate for our present needs.
EMPLOYEES AND MEDICAL STAFF
We have approximately 7,000 employees, including approximately 900
part-time employees. None of our employees is subject to collective bargaining
agreements. We consider our employee relations to be good. While some of our
hospitals experience union organizing activity from time to time, we do not
expect such efforts to materially adversely affect our future operations. Our
hospitals, like most hospitals, have had labor costs rise
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faster than the general inflation rate. There can be no assurance as to future
availability and cost of qualified medical personnel.
Our hospitals are staffed by licensed physicians who have been admitted to
the medical staff of our individual hospitals. Any licensed physician may apply
to be admitted to the medical staff of any of our hospitals, but admission to
the staff must be approved by the hospital's medical staff and the appropriate
governing board of the hospital in accordance with established credentialing
criteria. With exceptions, physicians generally are not employees of our
hospitals. However, some physicians provide services in our hospitals in
exchange for a fair market value fee.
REGULATORY COMPLIANCE PROGRAM
Our policy is to conduct our business with integrity and in compliance with
the law. Under separate license agreements, we plan to use the compliance
programs and corresponding policies and procedures of Tenet Healthcare
Corporation and Paracelsus Healthcare Corporation for a limited period of time
following consummation of the transactions until such time as we adopt our own
compliance program. Our compliance program will focus on all areas of regulatory
compliance, including physician relationships, reimbursement and cost reporting
practices and laboratory operations.
We intend for this regulatory compliance program to ensure that we maintain
high standards of conduct in the operation of our business and that we implement
policies and procedures so that employees act in full compliance with all
applicable laws, regulations and company policies. Under the regulatory
compliance program, we intend to provide initial and periodic legal compliance
and ethics training to every employee, review various areas of our operations,
and develop and implement policies and procedures designed to foster compliance
with the law. The program will also include a mechanism for employees to report,
without fear of retaliation, any suspected legal or ethical violations to their
supervisors or designated compliance officers in our hospitals. We will
regularly monitor our ongoing compliance efforts.
LEGAL PROCEEDINGS
We will be, from time to time, subject to claims and suits arising in the
ordinary course of business, including claims for damages for personal injuries,
medical malpractice, breach of management contracts, or for wrongful restriction
of or interference with physicians' staff privileges. In a number of these
actions, plaintiffs request punitive or other damages that may not be covered by
insurance. We are currently not a party to any proceeding which, in management's
opinion, would have a material adverse effect on our business, financial
condition or results of operations.
REIMBURSEMENT; REGULATION
MEDICARE
Under the Medicare program, acute care hospitals receive reimbursement
under a prospective payment system for inpatient hospital services. Currently,
hospitals exempt from prospective payment system methodology, include
psychiatric, long-term care and rehabilitation hospitals. Specially designated
psychiatric or rehabilitation units that are distinct parts of an acute care
hospital and that meet Health Care Financing Administration criteria for
exemption are reimbursed on a reasonable cost-based system, subject to cost
limits. Under the Balanced Budget Act, prospective payment system-exempt
hospitals and hospital units may receive reduced reimbursement. For inpatient
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rehabilitation services, a prospective payment system methodology is to be
phased in between October 1, 2000 and October 1, 2002.
Under current hospital prospective payment system, predetermined payment
amounts per inpatient discharge are established based on the patient's assigned
diagnosis related group. This diagnosis related group classifies categories of
illnesses according to the estimated intensity of hospital resources necessary
to furnish care for each principal diagnosis. The diagnosis related group rates
have been established for acute care hospitals participating in the Medicare
program and are based upon a statistically normal distribution of severity. When
treatments for patients fall well outside the normal distribution, providers may
request and receive additional payments, known as outliers. The diagnosis
related group payments do not consider a specific hospital's actual costs but
are adjusted for geographic area wage differentials.
The diagnosis related group rates are updated and re-calibrated annually
and have been affected by several recent federal enactments. The index used to
adjust the diagnosis related group rates, known as the "market basket index,"
gives consideration to the inflation experienced by hospitals and entities
outside of the healthcare industry in purchasing goods and services. However,
for several years the percentage increases to the diagnosis related group rates
have been lower than the percentage increases in the costs of goods and services
purchased by hospitals. The diagnosis related group rates are adjusted each
federal fiscal year. We anticipate that future legislation may decrease the
future rate of increase for diagnosis related group payments, but we are unable
to predict the amount of the reduction.
Outpatient services provided at general, acute care hospitals typically are
reimbursed by Medicare at the lower of customary charges or reasonable costs,
subject to additional limits on the reimbursement of outpatient services. The
Balanced Budget Act contains provisions that affect outpatient hospital
services, including a requirement that the Health Care Financing Administration
develop an outpatient prospective payment system to begin January 1, 1999. While
proposed regulations were published in September 1998, there have been delays
due to year 2000 operational factors, among other issues. Therefore,
implementation of outpatient prospective payment system has been delayed until
after January 1, 2000 and we anticipate even further delays. We are not able to
predict the effect, if any, that the new payment system will have on our
business, financial conditions or results of operations. After the fee schedule
is established for this new system, the fee schedule is to be updated by the
market basket minus 1.0% for each of the federal fiscal years 2000 through 2002.
Similarly, effective January 1, 1999, therapy services rendered by hospitals to
outpatients and inpatients not reimbursed by Medicare Part A are reimbursed
according to the Medicare physician fee schedule.
Medicare has historically reimbursed skilled nursing units within hospitals
on the basis of actual costs, subject to limits. The Balanced Budget Act
requires the establishment of a prospective payment system for Medicare skilled
nursing units, under which units will be paid a federal per diem rate for
virtually all covered services. The new payment system is being phased in over
three cost reporting periods, starting with cost reporting periods beginning on
or after July 1, 1998. The impact of the new payment system has generally been
to significantly reduce reimbursement for skilled nursing services, which has
led many hospitals to close such units. We will closely monitor and evaluate the
few remaining skilled nursing units in our hospitals and related facilities to
determine whether it is feasible to continue to offer such services under the
new reimbursement regime.
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MEDICAID
Medicaid programs are jointly funded by federal and state governments and
are administered by states under an approved plan. State Medicaid programs may
use a prospective payment system, cost-based or other payment methodology for
hospital services. Medicaid programs are required to take into account and make
payments to hospitals serving disproportionate numbers of low income patients
with special needs. Medicaid reimbursement often is less than a hospital's cost
of services. The federal government and many states are currently considering
significant reductions in the level of Medicaid funding while at the same time
expanding Medicaid benefits which could adversely affect future levels of
Medicaid reimbursements received by our hospitals.
On November 27, 1991, Congress enacted the Medicaid Voluntary Contribution
and Provider-Specific Tax Amendments of 1991, which limit the amount of
voluntary contributions and provider-specific taxes that can be used by states
to fund Medicaid and require the use of broad-based taxes for such funding. As a
result of the enactment of these amendments, some of the states in which we
operate have adopted broad-based provider taxes to fund their Medicaid programs.
The impact of these new taxes upon us has not been materially adverse. However,
we cannot predict whether any additional broad-based provider taxes will be
adopted by the states in which we operate and, accordingly, we are not able to
assess the effect of such additional taxes on our results of operations or
financial position.
ANNUAL COST REPORTS
All hospitals participating in the Medicare and Medicaid programs, whether
paid on a reasonable cost basis or under a prospective payment system, are
required to meet specific financial reporting requirements. Federal regulations
require submission of annual cost reports identifying medical costs and expenses
associated with the services provided by each hospital to Medicare beneficiaries
and Medicaid recipients. Annual cost reports required under the Medicare and
Medicaid programs are subject to routine audits, which may result in adjustments
to the amounts ultimately determined to be due to us under these reimbursement
programs. The audit process, particularly in the case of Medicaid, takes several
years to reach the final determination of allowable amounts under the programs.
Providers also have the right of appeal, and it is common to contest issues
raised in audits of prior years' reports.
Although we are not aware of any investigations of cost reports, many cost
reports of our facilities are still open. If we, or any of our facilities, are
found to be in violation of federal or state laws relating to Medicare, Medicaid
or similar programs, we and our facilities could be subject to substantial
monetary fines, civil and criminal penalties and exclusion from participation in
the Medicare and Medicaid programs. Any such sanctions could have a material
adverse effect on our financial position and results of operations.
MANAGED CARE
Pressures to control the cost of healthcare services have resulted in
increases to the percentage of admissions and net revenues attributable to
managed care payors. The percentage of our admissions attributable to managed
care payors has increased in recent years. We expect that the trend toward
increasing percentages related to managed care payors will continue in the
future. We generally receive lower payments from managed care payors than from
traditional commercial/indemnity insurers; however, as part of our
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business strategy, we intend to take steps to improve our managed care position.
For a more detailed discussion of this strategy, see "Business Strategy"
beginning on page 82.
COMMERCIAL INSURANCE
Our hospitals provide services to some individuals covered by traditional
private healthcare insurance. Private insurance carriers make direct payments to
hospitals or, in some cases, reimburse their policy holders, based upon the
particular hospital's established charges and the particular coverage provided
in the insurance policy.
Commercial insurers are continuing efforts to limit the payments for
hospital services by adopting discounted payment mechanisms, including
prospective payment or diagnosis related group-based payment systems, for more
inpatient and outpatient services. To the extent that these efforts are
successful, hospitals will receive reduced levels of reimbursement which may
have a negative impact on operating results.
GOVERNMENT REGULATION AND OTHER FACTORS
LICENSURE, CERTIFICATION AND ACCREDITATION
Healthcare facility construction and operation is subject to federal, state
and local regulations relating to the adequacy of medical care, equipment,
personnel, operating policies and procedures, fire prevention, rate-setting and
compliance with building codes and environmental protection laws. Our facilities
are also subject to periodic inspection by governmental and other authorities to
assure continued compliance with the various standards necessary for licensing
and accreditation. We believe that all of our operating healthcare facilities
are properly licensed under appropriate state laws. All of our operating
hospitals are certified under the Medicare program and are accredited by the
Joint Commission on Accreditation of Healthcare Organizations, the effect of
which is to permit the facilities to participate in the Medicare and Medicaid
programs. We will seek to have Rocky Mountain Medical Center, formerly named PHC
Regional Hospital and Medical Center, accredited upon reopening. Should any
facility lose its accreditation by this Joint Commission, or otherwise lose its
certification under the Medicare program, the facility would be unable to
receive reimbursement from the Medicare and Medicaid programs. We intend to
conduct our operations in compliance with current applicable federal, state,
local and independent review body regulations and standards. The requirements
for licensure, certification and accreditation are subject to change and, in
order to remain qualified, we may need to effect changes in our facilities,
equipment, personnel and services.
CERTIFICATES OF NEED
In some states, the construction of new facilities, the acquisition of
existing facilities and the addition of new beds or services may be subject to
review by state regulatory agencies under a Certificate of Need program. Florida
is the only state in which we currently operate that requires approval under a
Certificate of Need program. These laws generally require appropriate state
agency determination of public need and approval prior to the addition of beds
or services or other capital expenditures. Failure to obtain necessary state
approval can result in the inability to expand facilities, add services,
complete an acquisition or change ownership. Further, violation may result in
the imposition of civil sanctions or the revocation of a facility's license.
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UTILIZATION REVIEW
Federal law contains numerous provisions designed to ensure that services
rendered by hospitals to Medicare and Medicaid patients meet professionally
recognized standards, are medically necessary and that claims for reimbursement
are properly filed. These provisions include a requirement that a sampling of
admissions of Medicare and Medicaid patients must be reviewed by peer review
organizations, which review the appropriateness of Medicare and Medicaid patient
admissions and discharges, the quality of care provided, the validity of
diagnosis related group classifications and the appropriateness of cases of
extraordinary length of stay or cost. Peer review organizations may deny payment
for services provided, may assess fines and also have the authority to recommend
to the Department of Health and Human Services that a provider which is in
substantial noncompliance with the standards of the peer review organization be
excluded from participation in the Medicare program. Most nongovernmental
managed care organizations require utilization review.
FEDERAL HEALTHCARE PROGRAM REGULATIONS AND FRAUD AND ABUSE
Participation in any federal healthcare program, like Medicare, is heavily
regulated. If a hospital provider fails substantially to comply with the
numerous conditions of participation in the Medicare or Medicaid program or
performs specific prohibited acts, such hospital's participation in the Medicare
program may be terminated or civil or criminal penalties may be imposed upon it
under provisions of the Social Security Act.
Among these regulations are the antikickback, antifraud and abuse
amendments codified under Section 1128B(b) of the Social Security Act which
prohibit providers and others from soliciting, receiving, offering or paying,
directly or indirectly, any remuneration in return for the referral for a
service or item covered by a federal healthcare program or ordering any covered
services or item. Violations of this statute constitute a felony and can result
in imprisonment or fines, civil penalties up to $50,000, damages up to three
times the total amount of remuneration and exclusion from participation in
federal health care programs, including Medicare and Medicaid.
Congress authorized the Office of the Inspector General to publish
regulations which outline categories of activities that would be deemed not to
violate the antikickback regulations. The Office of the Inspector General has
published final safe harbor regulations aimed at protecting some activities from
prosecution under the antikickback regulations. Currently there are safe harbors
for various activities, including but not limited to
- investment interests,
- space rental,
- equipment rental,
- personal services and management contracts,
- sale of practice,
- referral services,
- warranties,
- discounts,
- employees,
- group purchasing organizations,
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- waiver of beneficiary coinsurance and
- deductible amounts and managed care arrangements.
The fact that a conduct or a given business arrangement does not fall
within a safe harbor does not automatically render the conduct or business
arrangement illegal under the antikickback regulations. The conduct and business
arrangements, however, do risk increased scrutiny by government enforcement
authorities. We may be less willing than some of our competitors to enter into
conduct or business arrangements that do not clearly satisfy the safe harbors.
As a result, this unwillingness may put us at a competitive disadvantage.
The Health Insurance Portability and Accountability Act enacted a criminal
provision for healthcare fraud offenses which applies to all health benefit
programs, whether or not they are reimbursed under a federal program. This act
also created new enforcement mechanisms to combat fraud and abuse, including the
Medicare Integrity program as well as an incentive program under which
individuals can receive up to $1,000 for providing information on Medicare fraud
and abuse that leads to the recovery of at least $100 of Medicare funds. In
addition, federal enforcement officials now have the ability to exclude from
Medicare and Medicaid any investors, officers and managing employees associated
with business entities that have committed health care fraud, even if the
investor, officer or employee had no knowledge of the fraud. It also establishes
a new violation for the payment of inducements to Medicare or Medicaid
beneficiaries in order to influence those beneficiaries to order or receive
services from a particular provider or practitioner. The Balanced Budget Act
also allows civil monetary penalties to be imposed on a provider contracting
with individuals or entities that the provider knows or should know is excluded
from a federal healthcare program.
The Office of the Inspector General at the Department of Health and Human
Services, among other regulatory agencies, is responsible for identifying and
eliminating fraud, abuse and waste, as well as promoting efficiency in the
Department of Health and Human Services departmental operations. The Office of
the Inspector General carries out this mission through a nationwide program of
audits, investigations and inspections. In order to provide guidance to
healthcare providers, the Office of the Inspector General has from time to time
issued "fraud alerts" which, although they do not have the force of law,
identify features of transactions which may indicate that the transaction could
violate the antikickback regulations or other federal healthcare laws.
Section 1877 of the Social Security Act, commonly known as the "Stark Law,"
prohibits referrals of Medicare and Medicaid patients by physicians to entities
with which the physician has a financial relationship and which provide
"designated health services" which are reimbursable by Medicare. "Designated
health services" include, among other things, clinical laboratory services,
physical and occupational therapy services, radiology services, durable medical
equipment, home health services and inpatient and outpatient hospital services.
Sanctions for violating the Stark Law include civil money penalties up to
$15,000 per prohibited service provided, assessments equal to twice the dollar
value of each such service provided and exclusion from the federal healthcare
programs. There are a number of exceptions to the self-referral prohibition,
including an exception for physician's ownership interest in the entire hospital
to which the physician refers patients.
Proposed regulations implementing the Stark Law have not been implemented,
although final regulations dealing with an earlier version of the Stark Law,
which dealt exclusively with clinical laboratory services rather than designated
health services, have
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been in effect since 1995. We cannot predict the final form that these
regulations will take or the effect that the final regulations will have on us.
We provide financial incentives to recruit physicians into the communities
serviced by our hospitals, including loans and minimum revenue guarantees. On
occasion, we enter into different types of financial relationships with
physicians, including but not limited to, recruitment incentives given to new or
relocating physicians where a need for a physician exists, employment
agreements, medical director agreements and lease agreements. We believe that
our arrangements with physicians have been structured in an attempt to comply
with current law. The Department of Health and Services has adopted a safe
harbor against antikickback regulations for some physician recruitment, however,
some of these arrangements do not expressly meet requirements for safe harbor
protection under the antikickback regulations. We cannot assure you that
regulatory authorities who enforce these laws will not determine that these
financial arrangements violate the antikickback regulations or other applicable
laws. This determination could subject us to liabilities under the Social
Security Act, including criminal penalties, civil monetary penalties and/or
exclusion from participation in Medicare, Medicaid or other federal healthcare
programs, any of which could have a material adverse effect on the business,
financial condition or results of our operations.
Evolving interpretations of current, or the adoption of new, federal or
state laws or regulations could affect many of the arrangements entered into by
each of our hospitals. Law enforcement authorities, including the Office of the
Inspector General, the courts and Congress are increasing scrutiny of
arrangements between healthcare providers and potential referral sources to
ensure that the arrangements are not designed as a mechanism to exchange
remuneration for patient care referrals and opportunities. Investigators also
have demonstrated a willingness to look behind the formalities of a business
transaction to determine the underlying purpose of payments between healthcare
providers and potential referral sources.
The Social Security Act also imposes criminal and civil penalties for
submitting false claims to Medicare and Medicaid. False claims include, but are
not limited to, billing for services not rendered, misrepresenting actual
services rendered in order to obtain higher reimbursement and cost report fraud.
Like the antikickback regulations, this statute is very broad. Careful and
accurate preparation and submission of claims for reimbursement must be
performed in order to avoid liability under the false claims statutes.
Many of the states in which we operate also have adopted, or are
considering adopting, laws that prohibit payments to physicians in exchange for
referrals similar to the antikickback regulations, some of which apply
regardless of the source of payment for care. These statutes typically provide
criminal and civil penalties as well as loss of licensure. Many states also have
passed self-referral legislation similar to the Stark Law, prohibiting the
referral of patients to entities with which the physician has a financial
relationship regardless of the source of payment for care. Little precedent
exists for the interpretation or enforcement of these state laws.
THE FEDERAL FALSE CLAIMS ACT
Another trend impacting the healthcare industry today is the increased use
of the federal False Claims Act, and, in particular, actions being brought by
individuals on the government's behalf under the False Claims Act whistleblower
provisions. Whistleblower provisions allow private individuals to bring actions
on behalf of the government alleging that the defendant has defrauded the
federal government. If the government intervenes in
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the action and prevails, the party filing the initial complaint may share in any
settlement or judgment. If the government does not intervene in the action, the
whistleblower plaintiff may pursue the action independently.
When a defendant is determined to be liable under the False Claims Act, it
must pay three times the actual damages sustained by the government, plus
mandatory civil penalties of between $5,000 to $10,000 for each separate false
claim. There are many potential bases for liability under the False Claims Act.
Liability often arises when an entity knowingly submits a false claim for
reimbursement to the United States government. The False Claims Act defines the
term "knowingly" broadly. Thus, although simple negligence will not give rise to
liability under the False Claims Act, submitting a claim with reckless disregard
to its truth or falsity constitutes "knowing" submission under the False Claims
Act and, therefore, will qualify for liability. From time to time, companies in
the healthcare industry, including ours, may be subject to these types of
actions. We are unable to predict the impact of such actions.
CORPORATE PRACTICE OF MEDICINE/FEE SPLITTING
Some of the states in which we operate have laws that prohibit unlicensed
persons or business entities, including corporations, from employing physicians
or laws that prohibit direct or indirect payments or fee-splitting arrangements
between physicians and unlicensed persons or business entities. Possible
sanctions for violations of these restrictions include loss of a physician's
license, civil and criminal penalties and rescission of business arrangements
which may violate these restrictions. These statutes vary from state to state,
are often vague and have seldom been interpreted by the courts or regulatory
agencies. Although we exercise care to structure our arrangements with
healthcare providers to comply with the relevant state law, and believe these
arrangements comply with applicable laws in all material respects, we cannot
assure you that governmental officials charged with responsibility for enforcing
these laws will not assert that we, or transactions in which we are involved,
are in violation of such laws, or that such laws ultimately will be interpreted
by the courts in a manner consistent with our interpretations.
THE EMERGENCY MEDICAL TREATMENT AND ACTIVE LABOR ACT
The federal Emergency Medical Treatment and Active Labor Act was adopted by
Congress 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 which provide
emergency medical services. Such 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 money penalties. In addition, the law creates private civil remedies
which enable
(1) an individual who suffers personal harm as a direct result of a
violation of the law and
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(2) 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.
One hospital was notified by the Health Care Financing Administration that it
had violated the requirements of the Emergency Medical Treatment and Active
Labor Act prior to our ownership of the hospitals. The hospital submitted a plan
of correction to the Health Care Financing Administration and it is not
anticipated that there will be any material adverse consequences resulting from
the violation. In addition, one of our hospitals in Utah recently was inspected
in connection with an allegation of a potential violation of the Emergency
Medical Treatment and Active Labor Act and subsequently received a preliminary
determination letter from the Health Care Financing Administration asserting
violations of the Emergency Medical Treatment and Active Labor Act. The hospital
has conducted its own internal investigation related to this matter and is
preparing its written response. Although we believe that our practices are
otherwise in compliance with the law, we can give no assurance that governmental
officials responsible for enforcing the law will not assert that this or other
of our facilities are in violation of these laws.
HEALTHCARE REFORM
The healthcare industry attracts much legislative interest and public
attention. Changes in the Medicare, Medicaid and other programs, hospital
cost-containment initiatives by public and private payors, proposals to limit
payments and healthcare spending and industry-wide competitive factors are
highly significant to the healthcare industry. In addition, a framework of
extremely complex federal and state laws, rules and regulations governs the
healthcare industry and, for many provisions, there is little history of
regulatory or judicial interpretation to rely on.
The Balanced Budget Act has the effect of reducing payments to hospitals
and other healthcare providers under the Medicare and Medicaid programs. This
has had, and we expect it to continue to have, an impact on our revenues under
the Medicare and Medicaid programs. In addition, there continue to be federal
and state proposals that would, and actions that do, impose more limitations on
payments to providers like ourselves and proposals to increase co-payments and
deductibles from patients.
Many states have enacted or are considering enacting measures that are
designed to reduce their Medicaid expenditures and to change private healthcare
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.
We are unable to predict the future course of federal, state or local
healthcare legislation. Further changes in the law or regulatory framework that
reduce our revenues or increase our costs could have a material adverse effect
on our business, financial condition or results of operations.
CONVERSION LEGISLATION
Many states have enacted or are considering enacting laws affecting the
conversion or sale of not-for-profit hospitals. These laws, in general, include
provisions relating to attorney general approval, advance notification and
community involvement. In addition, state attorneys general in states without
specific conversion legislation may exercise authority over these transactions
based upon existing law. In many states, there has been an increased interest in
the oversight of not-for-profit conversions. The adoption of
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conversion legislation and the increased review of not-for-profit hospital
conversions may increase the cost and difficulty or prevent the completion of
transactions with not-for-profit organizations in various states in the future.
HEALTHCARE INDUSTRY INVESTIGATIONS
Significant media and public attention recently has focused on the hospital
industry. There are numerous ongoing federal and state investigations regarding
multiple issues including but not limited to cost reporting and billing
practices relating to clinical laboratory test claims and home health agency
costs, physician recruitment practices, and physician ownership of healthcare
providers and joint ventures with hospitals. We have substantial Medicare,
Medicaid and other governmental billings, which in itself could result in
heightened scrutiny of our operations. We continue to monitor these and all
other aspects of our business and have developed a compliance program to assist
us in gaining comfort that our business practices are consistent with current
industry standards. However, because the law in this area is complex and
constantly evolving, we cannot assure you that government investigations will
not result in interpretations that are inconsistent with industry practices,
including ours. In public statements surrounding current investigations,
governmental authorities have taken positions on a number of issues, including
some for which little official interpretation previously has been available,
that appear to be inconsistent with practices that have been common within the
industry and which previously have not been challenged in this manner. In some
instances, government investigations that have in the past been conducted under
the civil provisions of federal law may now be conducted as criminal
investigations.
Many current healthcare investigations are national initiatives in which
federal agencies target an entire segment of the healthcare industry. One
example is the federal government's initiative regarding hospital providers'
improper requests for separate payments for services rendered to a patient on an
outpatient basis within three days prior to the patient's admission to the
hospital, where reimbursement for such services is included as part of the
reimbursement for services furnished during an inpatient stay. In particular,
the government has targeted all hospital providers including several of our
hospitals to ensure conformity with this reimbursement rule. Another example
involves the federal government's initiative regarding healthcare providers
"unbundling" and separately billing for laboratory tests that should have been
billed as a "bundled unit." The federal government has also launched a national
investigative initiative targeting the billing of claims for inpatient services
related to bacterial pneumonia, as the government has found that many hospital
providers have attempted to bill for pneumonia cases under more complex and
expensive reimbursement codes, such as diagnosis related groups codes. We are
aware that prior to our ownership of them various of the acquired hospitals were
contacted in relation to certain government initiatives which were targeted at
an entire segment of the healthcare industry. While we take the position that,
under the terms of the agreements pursuant to which we acquired these hospitals,
the prior owners retained any liability resulting from these government
initiatives, we cannot assure you that the prior owners' resolution of these
matters, in the event that any resolution was deemed necessary, will not have an
effect on our operations.
We cannot assure you that governmental entities will not initiate similar
investigations in the future at hospitals operated by us and that such
investigations will not result in significant penalties to us. In some
instances, indemnity insurers and other non-governmental payors of hospitals
under investigation or the subject of litigation have sought repayment from
hospitals for alleged wrongful conduct that was identified by government
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attorneys or investigators. These insurers and other non-government payors may
not have had any more information than their review of the government's
investigation or court actions. Therefore, governmental investigation of us or
entities with whom we do business could result in adverse publicity concerning
us and could limit our ability to make acquisitions.
The positions taken by authorities in the current investigations or any
future investigations of us or other providers and the liabilities or penalties
that may be imposed could have a material adverse effect on our business,
financial condition or results of operations.
ENVIRONMENTAL MATTERS
We are subject to various federal, state and local laws and regulations
relating to environmental protection. Our hospitals are not highly regulated
under environmental laws since we do not engage in any industrial activities at
those locations. The principal environmental requirements and concerns
applicable to our operations relate to the proper handling and disposal of small
quantities of hazardous and low level medical radioactive waste, the ownership
or historical use of underground and above-ground storage tanks at some
locations, the management of potential past and future impacts from leaks of
hydraulic fluid or oil associated with elevators, chiller units or incinerators,
the appropriate management of asbestos-containing materials present or likely to
be present at some locations, and the potential acquisition of or maintenance of
air emission permits for boilers or other equipment. We do not expect the
matters discussed above and our compliance with environmental laws and
regulations to have a material impact on our capital expenditures, earnings or
competitive position. We cannot assure you, however, that additional
environmental issues relating to presently known or unknown matters will not
require investigation, assessment or expenditures. In addition, future events,
such as changes in existing laws and regulations or their interpretation and the
approach of other compliance deadlines may or will give rise to additional
compliance costs or liabilities. Compliance with more stringent laws or
regulations, as well as different interpretations of existing laws, may require
additional expenditures by us which may be material.
We also may be subject to requirements related to the remediation of, or
the liability for remediation of, substances that have been released to the
environment at properties owned or operated by us or at properties where
substances were sent for off-site treatment or disposal. These remediation
requirements may be imposed without regard to fault, and liability for
environmental remediation can be substantial. We have not been notified of any
such releases relating to our off-site treatment or disposal of hazardous waste.
However, after due inquiry, to the best of our knowledge we are aware that nine
of our locations have been or currently are the subject of environmental
investigation or remediation, six as a consequence of known or suspected leaks
from underground storage tanks, two from a minor leak of hydraulic fluid, and
the other from broken battery casings discovered on an undeveloped portion of a
site. All remedial activities and significant required expenditures in
connection with the cleanup of six of these releases have been made and no
additional investigative or remedial activities are expected. With respect to
the remaining three locations, we do not expect additional investigations and
potential remedial activities to have a material impact on our capital
expenditures, earnings or competitive position.
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INSURANCE
As is typical in the healthcare industry, we are subject to claims and
legal actions by patients in the ordinary course of business. To cover these
claims, we maintain professional malpractice liability insurance and general
liability insurance in amounts which we believe to be sufficient for our
operations, although some claims may exceed the scope of the coverage in effect.
We also maintain umbrella coverage. At various times in the past, the cost of
malpractice and other liability insurance has risen significantly. Therefore, we
cannot assure you that this insurance will continue to be available at
reasonable prices which will allow us to maintain adequate levels of coverage.
Any losses incurred in excess of amounts maintained under such insurance will be
funded from working capital. We cannot assure you that our cash flow will be
adequate to provide for professional and general liability claims in the future.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The table below presents information with respect to our directors and
executive officers, as of April 5, 2000:
NAME AGE POSITION
---- --- --------
David R. White............................ 52 Non-executive Chairman of the Board
C. Wayne Gower............................ 52 President, Chief Executive Officer and
Director
John K. Crawford.......................... 41 Executive Vice President, Chief
Financial Officer and Director
Frank A. Coyle............................ 35 Secretary, General Counsel
Linda W. Hischke.......................... 55 Division President
Paul S. Levy.............................. 52 Director
David Y. Ying............................. 45 Director
Jeffrey C. Lightcap....................... 41 Director
Anthony Grillo............................ 44 Director
Ramsey A. Frank........................... 39 Director
Frank J. Rodriguez........................ 28 Director
Michael S. Berk........................... 30 Director
Stuart C. McWhorter....................... 31 Director
Jay R. Bloom.............................. 44 Director
Robert E. Kiss............................ 42 Director
DAVID R. WHITE has been our non-executive Chairman of the Board of
Directors since October 8, 1999. Mr. White is currently President and Chief
Executive Officer of LifeTrust, an assisted living company, which he joined in
1998. From 1994 to 1998 Mr. White served as President of the Atlantic Group at
Columbia/HCA, where he was responsible for 45 hospitals located in 10 different
states. Previously, Mr. White was Executive Vice President and Chief Operating
Officer at Community Health Systems, Inc., a for-profit hospital management
company that operated approximately 20 acute-care hospitals.
C. WAYNE GOWER has been our President and Chief Executive Officer since
October 8, 1999 and also serves as one of our Directors. Prior to joining us,
Mr. Gower served as President of Columbia/HCA's Summit Division from 1994 to
1998 with responsibility for 21 hospitals with net revenues in excess of $1.0
billion. During his tenure with Columbia/HCA, Mr. Gower had direct
accountability for 30 hospitals which included the acquisition and development
of five hospitals. From 1982 to 1993, Mr. Gower served as Group Vice President
of Quorum Health Resources, Inc., Senior Vice President of Acquisitions and
Development for Community Health Systems, Inc. and Vice President of Operations
for Republic Health Corporation. Prior to 1982 Mr. Gower spent seven years in
various management and financial capacities at Hospital Affiliates
International. Mr. Gower began his career as an auditor with Peat, Marwick and
Mitchell.
JOHN K. CRAWFORD has been our Executive Vice President and Chief Financial
Officer since February 1, 2000 and one of our Directors since March 6, 2000.
Since 1994, Mr. Crawford served as Executive Vice President and Chief Financial
Officer at PhyCor, Inc., a physician management company that went public in
1992. From 1991 to 1994, he served in numerous operating and finance positions
at PhyCor. Previously, he was a Senior
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Manager at KPMG LLP where he served numerous clients with a concentration on
start-up and high growth companies.
FRANK A. COYLE has been our Secretary and General Counsel since October 8,
1999. Prior to joining us, Mr. Coyle served from 1995 to 1998 as Assistant Vice
President Development in Physician Services and in-house Development Counsel for
Columbia/ HCA. From 1990 to 1995 Mr. Coyle was an attorney with Baker,
Worthington, Crossley, Stansberry & Woolf where his work included mergers,
acquisitions, securities transactions, not-for-profit representation and
formation of Tennessee HMOs.
LINDA W. HISCHKE has been our Division President for the Utah and Texas
markets since October 8, 1999. Prior to joining us, Ms. Hischke served from 1998
to 1999 as President of WYN Associates Healthcare Consulting in Park City, Utah.
From 1995 to 1997 Ms. Hischke served as President for the Mountain Division of
Columbia/HCA, where she was responsible for hospitals with net revenues in
excess of $1.0 billion. Previously she served as a Regional Vice President for
HealthTrust in Houston, Texas, where she was responsible for 12 hospitals.
PAUL S. LEVY has been one of our Directors since October 8, 1999. Mr. Levy
is a Senior Managing Director of Joseph Littlejohn & Levy, which he founded in
1988. Mr. Levy serves as a Director of several companies, including Motor Coach
Industries International Inc., Hayes Lemmerz International Inc., Builders
FirstSource, Inc., Jackson Automotive Group, Inc., Fairfield Manufacturing
Company, Inc. and New World Pasta Company.
DAVID Y. YING has been one of our Directors since October 8, 1999. Mr. Ying
is a Senior Managing Director of Joseph Littlejohn & Levy, which he joined in
1997. From 1993 to 1997 Mr. Ying was a Managing Director at Donaldson, Lufkin &
Jenrette, Inc., where he was the head of its restructuring department. Mr. Ying
serves as a Director of several companies, including Motor Coach Industries
International, Inc., Hayes Lemmerz International Inc., Builders FirstSource,
Inc. and New World Pasta Company.
JEFFREY C. LIGHTCAP has been one of our Directors since October 8, 1999.
Mr. Lightcap is a Senior Managing Director of Joseph Littlejohn & Levy, which he
joined in 1997. From 1993 to 1997 Mr. Lightcap was a Managing Director at
Merrill Lynch & Co., Inc., where he was the head of leveraged buyout firm
coverage for the mergers and acquisitions group. Mr. Lightcap serves as a
Director of several companies, including Motor Coach Industries International
Inc., Hayes Lemmerz International Inc., Jackson Automotive Group Inc. and New
World Pasta Company.
ANTHONY GRILLO has been one of our Directors since October 8, 1999. Mr.
Grillo is a Senior Managing Director of Joseph Littlejohn & Levy, which he
joined in 1999. From 1991 to 1999 Mr. Grillo was a Senior Managing Director at
The Blackstone Group, where he was involved with Blackstone's private equity,
restructuring and mergers practices. Mr. Grillo serves as a Director of several
companies, including Hayes Lemmerz International Inc., Lancer Industries and
Littelfuse, Inc.
RAMSEY A. FRANK has been one of our Directors since October 8, 1999. Mr.
Frank is a Senior Managing Director of Joseph Littlejohn & Levy, which he joined
in 1999. From 1993 to 1999 Mr. Frank was a Managing Director at Donaldson,
Lufkin & Jenrette, where he headed the restructuring group and was a senior
member of the leveraged finance group.
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FRANK J. RODRIGUEZ has been one of our Directors since October 8, 1999. Mr.
Rodriguez is a Vice President of Joseph Littlejohn & Levy, which he joined in
1995. From 1993 to 1995 Mr. Rodriguez was a member of the Merchant Banking Group
at Donaldson, Lufkin & Jenrette. Mr. Rodriguez serves as a Director of Motor
Coach Industries International, Inc. and Jackson Automotive Group.
MICHAEL S. BERK has been one of our Directors since October 8, 1999. Mr.
Berk is a Vice President of Joseph Littlejohn & Levy, which he joined in 1999.
From 1997 to 1999 Mr. Berk was an Associate at Frontenac Company, and prior to
1993 served as an Analyst at Wasserstein Perella & Co., Inc.
STUART C. MCWHORTER has been one of our Directors since October 8, 1999.
Mr. McWhorter is founder and principal of Nashville, Tennessee-based Clayton
Associates, an advisory and venture capital firm. In January 1996, Mr. McWhorter
assisted in the creation of OrthoLink Physicians Corporation, an orthopaedic
physician practice management company. At OrthoLink, he served as Vice President
of Managed Care and Vice President of Acquisitions until April 1998. From 1993
to 1996 he served as Vice President of Physician and Network Development for
Brookwood Medical Center, a 600-bed tertiary hospital system owned by Tenet
Healthcare Corporation. Mr. McWhorter is a director for Patriot Medical
Technologies, Bytes of Knowledge and Censis Technologies.
JAY R. BLOOM has been one of our Directors since October 8, 1999. Mr. Bloom
is a Managing Director and co-head of the Leveraged Financed Group of CIBC World
Markets, a position he has held since August 1995. From 1990 to 1995 Mr. Bloom
was a Managing Director of the Argosy Group L.P. Mr. Bloom serves as a Director
of several companies, including Global Crossing Ltd., Consolidated Advisers
Limited, L.L.C., Domino's, Inc., Heating Oil Partners, L.P. and Morris Material
Handling, Inc.
ROBERT E. KISS has been one of our Directors since October 8, 1999. Mr.
Kiss is a Vice President of J.P. Morgan Investment Management, Inc., the
investment management affiliate of J.P. Morgan & Co. Inc., which he joined in
2000. Prior to 2000, Mr. Kiss was with J.P. Morgan Capital Corporation, the
private equity investment unit of J.P. Morgan & Co. Inc., which he joined in
1996. Prior to 1996 Mr. Kiss served in various capacities in J.P. Morgan's
corporate finance department. Mr. Kiss serves as a Director of Accordant Health
Services, Inc.
Under a stockholders agreement, dated as of October 8, 1999 among IASIS,
JLL Healthcare, LLC, Triumph Partners III, L.P. and Triumph III Investors, L.P.,
which are collectively referred to in this prospectus as the Triumph investment
funds, and General Electric Capital Corporation and other stockholders of IASIS,
our board of directors is comprised of thirteen members, including ten designees
of JLL Healthcare, LLC, the chairman of the board and the chief executive
officer. For further information on the stockholders agreement, see
"Stockholders Agreement" beginning on page 111.
Pursuant to the operating agreement of JLL Healthcare, LLC, its designees
on the board of directors will include eight designees of Joseph Littlejohn &
Levy, one designee of CIBC WMC Inc. and one designee of J.P. Morgan Capital
Corporation. Messrs. Levy, Ying, Lightcap, Grillo, Frank, Rodriguez, Berk,
McWhorter, Bloom and Kiss serve on the board of directors as designees of JLL
Healthcare, LLC.
BOARD OF DIRECTORS
GENERAL. The board of directors of IASIS manages its business and affairs.
Under our by-laws, the IASIS board of directors must consist of not less than
three nor more
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than eighteen members, with the exact number of members being fixed from time to
time by our board of directors. Currently, thirteen members comprise our board
of directors.
TERM OF OFFICE OF DIRECTORS. Our directors are elected by the affirmative
vote of a plurality of the votes cast by our stockholders at IASIS's annual
meeting of stockholders. Once elected, each director serves until the next
annual meeting of stockholders and until his or her successor is duly elected
and qualified, or until his or her earlier death, resignation or removal.
DIRECTOR COMPENSATION. Directors of IASIS do not receive any compensation
for their services. We do, however, reimburse them for travel expenses and other
out-of-pocket costs incurred in connection with attendance at board of directors
and committee meetings.
COMMITTEES OF THE BOARD OF DIRECTORS. As permitted by our amended and
restated by-laws, IASIS' board of directors has two standing committees: the
Audit Committee and the Compensation Committee.
The Audit Committee currently consists of Messrs. McWhorter, Kiss, Bloom
and Ying. The primary purposes of the Audit Committee are to
- provide objective oversight of the accounting functions and internal
controls of IASIS, its subsidiaries and affiliates and
- ensure the quality and objectivity of our financial statements.
The Compensation Committee currently consists of Messrs. White, Levy,
Lightcap and Rodriguez. The primary purposes of the Compensation Committee are
to
- oversee and maintain the compensation practices of IASIS,
- establish appropriate incentives to motivate and reward key management
employees and
- oversee the competency and qualification of key management personnel.
EMPLOYMENT AGREEMENTS
We intend to enter into employment agreements with Mr. Gower, our
President, Chief Executive Officer and one of our Directors, and Mr. Crawford,
our Executive Vice President, Chief Financial Officer and one of our Directors.
THE 2000 STOCK OPTION PLAN AND OTHER INCENTIVE ARRANGEMENTS
We plan to adopt the 2000 Stock Option Plan which will provide for the
grant to our officers and key employees of incentive stock options and
nonqualified stock options, in either case, to acquire shares of our common
stock. The 2000 Stock Option Plan will provide for the issuance of options to
purchase shares of common stock. The options will vest in seven years, but this
vesting may be accelerated upon the achievement of specific performance
objectives. We believe that the grant of options to purchase stock under our
2000 Stock Option Plan will assist us in retaining and recruiting employees of
outstanding ability and will also give senior management a financial stake in
the future performance of IASIS. We have not yet granted any options under the
plan.
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MANAGEMENT EQUITY PURCHASE PROGRAM
We expect to establish a management equity purchase program to assist some
of our executive officers in acquiring shares of our common stock. The program
will allow some of our executive officers to enter into loan agreements with
IASIS to pay for a portion of their investment in our common stock. The
principal amount of these loans, plus interest, will be due in full three years
from issuance and must be repaid from a portion of any cash bonuses received by
the executives prior to such time. The aggregate principal amount of loans
outstanding under the program will not exceed $5.0 million.
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STOCK OWNERSHIP
BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information regarding ownership of shares of
our common stock and preferred stock, as of April 5, 2000 by:
- each person known to be a holder of our common stock or our preferred
stock;
- the members of our board of directors;
- our four most highly compensated executive officers; and
- all our current directors and executive officers as a group.
When reviewing the following table, you should be aware that:
- The amounts and percentage of common stock and preferred stock
beneficially owned are reported on the basis of regulations of the SEC
governing the determination of beneficial ownership of securities. Under
the rules of the SEC, a person is deemed to be a "beneficial owner" of a
security if that person has or shares "voting power," which includes the
power to vote or to direct the voting of such security, or "investment
power," which includes the power to dispose of or to direct the
disposition of such security. A person is also deemed to be a beneficial
owner of any securities of which that person has a right to acquire
beneficial ownership within 60 days. Under these rules, more than one
person may be deemed a beneficial owner of securities as to which he has
no economic interest.
- We have two series of preferred stock. The former shareholders of the
management company own all of the shares of Series B preferred stock. For
further information on the terms of our preferred stock, see "Description
of Preferred Stock" on page 171.
- Through its controlling interest in JLL Healthcare, LLC, Joseph
Littlejohn & Levy Fund III, L.P. may be deemed to beneficially own all of
the shares of common stock and preferred stock owned by JLL Healthcare,
LLC. Members of JLL Healthcare, LLC include Joseph Littlejohn & Levy Fund
III, L.P., CIBC WMC Inc., J.P. Morgan Capital Corporation and other
investors.
- Mr. Coyle is a former shareholder of management company, and received
shares of our common stock and preferred stock in the merger.
- Messrs. Levy, Ying, Lightcap, Grillo, Frank, Rodriguez and Berk are all
associated with Joseph Littlejohn & Levy Fund III, L.P. which, through
its controlling interest in JLL Healthcare, LLC, beneficially owns all of
the shares of common stock and preferred stock owned by JLL Healthcare,
LLC. Messrs. Rodriguez and Berk disclaim any beneficial ownership of this
common stock and preferred stock. Messrs. Levy, Ying, Lightcap, Grillo
and Frank are managing members of JLL Associates III, LLC, the general
partner of Joseph Littlejohn & Levy Fund III, L.P., and, as a result,
each may be deemed to beneficially own all of the shares owned by JLL
Healthcare, LLC.
- Frederick W. McCarthy is the majority stockholder of Triumph III
Advisors, Inc., which indirectly controls Triumph Partners III, L.P., and
Triumph III Investors, Inc., the general partner of Triumph III
Investors, L.P. As a result, Mr. McCarthy beneficially owns the shares of
IASIS common stock and IASIS preferred stock owned by Triumph III
Investors, L.P. and Triumph Partners III, L.P.
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- Paracelsus Healthcare Corporation is a publicly traded corporation.
According to a Schedule 13D/A filed on December 10, 1999, Park-Hospital
GmbH, a wholly owned subsidiary of Paracelsus-Kliniken-Deutschland GmbH,
is the direct beneficial owner of 34.52% of the issued and outstanding
shares of common stock of Paracelsus. Paracelsus-Kliniken-Deutschland
GmbH, Dr. Heiner Meyer zu Losebeck and Peter Frommhold, as co-executors
of the estate of Professor Dr. Hartmut Krukemeyer, and the managing
directors of Park-Hospital GmbH and Paracelsus-Kliniken-Deutschland each
may be deemed to beneficially own the shares of Paracelsus common stock
owned by Park-Hospital GmbH and, accordingly, the shares of IASIS common
stock owned by Paracelsus.
- Unless otherwise indicated, the address of each person listed below is
113 Seaboard Lane, Suite A-200, Franklin, Tennessee 37067.
COMMON STOCK OF IASIS PREFERRED STOCK OF IASIS
-------------------------------- --------------------------------
PERCENT OF PERCENT OF
NUMBER OF SHARES CLASS NUMBER OF SHARES CLASS
---------------- ------------- ---------------- -------------
BENEFICIAL OWNERS:
JLL Healthcare, LLC........... 1,162,281 84.7% 148,772 90.0%
Paracelsus Healthcare
Corporation................. 80,000 5.8% -- --
Triumph Partners III,
L.P.(1)..................... 65,000 4.7% 8,320 5.0%
Triumph III Investors,
L.P.(1)..................... 789 * 101 *
General Electric Capital
Corporation................. 21,930 1.6% 2,807 1.7%
Other third-party
investors(2)................ 41,490 3.0% 5,311 3.2%
DIRECTORS AND EXECUTIVE
OFFICERS:
David R. White................ 433 * 55 *
C. Wayne Gower................ 1,874 * 240 *
John K. Crawford.............. -- -- -- --
Frank A. Coyle................ 1,428 * 183 *
Linda W. Hischke.............. -- -- -- --
Paul S. Levy.................. 1,162,281 84.7% 148,772 90.0%
David Y. Ying................. 1,162,281 84.7% 148,772 90.0%
Jeffrey C. Lightcap........... 1,162,281 84.7% 148,772 90.0%
Anthony Grillo................ 1,162,281 84.7% 148,772 90.0%
Ramsey A. Frank............... 1,162,281 84.7% 148,772 90.0%
Frank J. Rodriguez............ -- -- -- --
Michael S. Berk............... -- -- -- --
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COMMON STOCK OF IASIS PREFERRED STOCK OF IASIS
-------------------------------- --------------------------------
PERCENT OF PERCENT OF
NUMBER OF SHARES CLASS NUMBER OF SHARES CLASS
---------------- ------------- ---------------- -------------
Stuart C. McWhorter........... 1,212 * 155 *
Jay R. Bloom(3)............... -- -- -- --
Robert E. Kiss(4)............. -- -- -- --
All directors and executive
officers as a group (11
persons).................... 1,170,074 85.3% 149,772 90.6%
- -------------------------
(1) We refer to Triumph Partners III, L.P. and Triumph III Investors, L.P.
collectively as the Triumph investment funds.
(2) Comprised of the former shareholders of management company.
(3) Mr. Bloom is a Managing Director and co-head of the High Yield Division of
CIBC World Markets, which has a membership interest in JLL Healthcare, LLC.
Mr. Bloom disclaims beneficial ownership of such interest or the shares of
common and preferred stock owned by JLL Healthcare, LLC.
(4) Mr. Kiss is a Vice President and an officer of J.P. Morgan Investment
Management, Inc. Prior to his current position, Mr. Kiss was a Vice
President and officer of J.P. Morgan Capital Corporation, which has a
membership interest in JLL Healthcare, LLC. Mr. Kiss disclaims beneficial
ownership of such interest or the shares of common and preferred stock owned
by JLL Healthcare, LLC.
* Less than 1%.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Joseph Littlejohn & Levy Fund III, L.P., an affiliate of Joseph Littlejohn
& Levy, controls JLL Healthcare, LLC, which beneficially owns 84.7% of our
common stock. Paracelsus Healthcare Corporation controls PHC/PHC Holdings, Inc.,
which beneficially owns 5.8% of our common stock. Some of these entities and
individuals are parties to material agreements with IASIS, as described below.
TRANSITION SERVICES AGREEMENT
We are a party to transition services agreements with Paracelsus Healthcare
Corporation and Tenet Healthcare Corporation. Paracelsus Healthcare Corporation
and Tenet Healthcare Corporation have agreed to provide specified services to
us, for periods generally not to exceed twelve months, including data processing
services and systems technology services, at the service provider's cost plus
2.0%, in the case of the arrangement with Paracelsus Healthcare Corporation, or
for a flat fee based on out of pocket expenses, in the case of the arrangement
with Tenet Healthcare Corporation.
LICENSE AGREEMENTS
We are a party to license agreements with Paracelsus Healthcare Corporation
and Tenet Healthcare Corporation, under which those parties granted us licenses
to utilize specific intellectual property related to the administration of our
business for a period of twelve months. This intellectual property agreement
consists of administrative software, and policies, procedures and compliance
manuals.
STOCKHOLDERS AGREEMENT
In connection with the recapitalization and the acquisition of hospitals
and related facilities from Tenet Healthcare Corporation, JLL Healthcare, LLC,
the Triumph investment funds, General Electric Capital Corporation and the other
investors in IASIS entered into a stockholders agreement dated October 8, 1999
governing their ownership of IASIS. The following is a summary of the material
terms of the stockholders agreement:
- The stockholders agreement provides that our board of directors initially
consists of thirteen members, including ten representatives of JLL
Healthcare, LLC, the chairman of the board and the chief executive
officer.
- The stockholders other than JLL Healthcare, LLC have agreed to specified
provisions relating to the transfer of their shares.
- There is no provision restricting how our stockholders vote on any
matters.
- Following an initial public offering of our common stock, the
stockholders, under specified circumstances and subject to some
conditions, will have the right to require us to register their shares
under the Securities Act and to participate in specified registrations of
shares by IASIS.
- Prior to an initial public offering of our common stock, each stockholder
will have designated preemptive rights to participate in any future
private offerings of our capital stock to maintain their pro rata
interest in IASIS.
- We have agreed to pay some administrative expenses incurred by JLL
Healthcare, LLC.
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Some provisions of the stockholders agreement will terminate in the event
of an initial public offering of our common stock.
TAX SHARING AGREEMENT
We and some of our subsidiaries are included in JLL Healthcare, LLC's
consolidated group for U.S. federal income tax purposes as well as in some
consolidated, combined or unitary groups which include JLL Healthcare, LLC for
state, local and foreign income tax purposes. We and JLL Healthcare have entered
into a tax sharing agreement in connection with the recapitalization. The tax
sharing agreement requires us to make payments to JLL Healthcare, LLC such that,
with respect to tax returns for any taxable period in which we or any of our
subsidiaries is included in JLL Healthcare, LLC's consolidated group or any
combined group, including JLL Healthcare, LLC, the amount of taxes to be paid by
us will be determined, subject to some adjustments, as if we and each of our
subsidiaries included in JLL Healthcare, LLC's consolidated group or a combined
group including JLL Healthcare, LLC filed their own consolidated, combined or
unitary tax return. We and JLL Healthcare, LLC will prepare pro forma tax
returns with respect to any tax return filed with respect to JLL Healthcare,
LLC's consolidated group or any combined group including JLL Healthcare, LLC in
order to determine the amount of tax sharing payments under the tax sharing
agreement.
JLL Healthcare, LLC will be responsible for filing any tax return with
respect to JLL Healthcare, LLC's consolidated group or any combined group
including JLL Healthcare, LLC. The tax sharing agreement requires us to assume
responsibility for preparing these tax returns. The tax sharing agreement does
not alter our general responsibility for preparing and filing any tax returns
that include only IASIS and its subsidiaries.
JLL Healthcare, LLC will be primarily responsible for controlling and
contesting any audit or other tax proceeding with respect to JLL Healthcare,
LLC's consolidated group or any combined group including JLL Healthcare, LLC.
The tax sharing agreement requires us to conduct the contest of any audit or tax
proceeding that relates to any tax return which we are responsible for
preparing. JLL Healthcare, LLC, however, may control the entering into of any
settlement or agreement or any decision in connection with any judicial or
administrative tax proceeding.
Each member of a consolidated group for U.S. federal income tax purposes is
jointly and severally liable for the federal income tax liability of each other
member of the consolidated group. Accordingly, although the tax sharing
agreement allocates tax liabilities between us and JLL Healthcare, LLC, for any
period in which we were included in JLL Healthcare, LLC's consolidated group, we
could be liable in the event that any federal tax liability was incurred, but
not discharged, by any other member of JLL Healthcare, LLC's consolidated group.
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DESCRIPTION OF CREDIT FACILITY
The following summary of the material provisions of the credit facility is
not complete and is subject to, and is qualified in its entirety by reference
to, the terms of the credit facility.
Under the credit facility, a syndicate of lenders made a total of $455.0
million available to us in the form of
- $80.0 million Tranche A term loan, fully drawn upon the offering of the
old notes,
- $250.0 million Tranche B term loan, fully drawn upon the offering of the
old notes, and
- a commitment to provide a revolving credit facility of up to $125.0
million.
We used the proceeds from the credit facility together with proceeds from
the offering of the old notes and the equity investment made by JLL Healthcare,
LLC and other investors to:
- repay in its entirety the $200.0 million credit facility of which
approximately $160.0 million was outstanding,
- finance a portion of the acquisition of hospitals and related facilities
from Tenet Healthcare Corporation,
- fund an opening cash balance required for working capital and
- pay related fees and expenses associated with the transactions.
The loans under the credit facility bear interest at variable rates at a
fixed margin above either Morgan Guaranty Trust Company of New York's alternate
base rate or its reserve-adjusted LIBOR. Initially, the margins will be as
follows:
CREDIT FACILITY BASE RATE LIBOR
- --------------- --------- -----
Revolver................................... 2.50% 3.50%
Tranche A Term Loan........................ 2.50% 3.50%
Tranche B Term Loan........................ 3.25% 4.25%
Thereafter, the margins for the revolver and the Tranche A Loan will vary
based on a pricing grid.
We may voluntarily prepay some or all of our obligations under the credit
facility. In addition, the loans under the credit facility are subject to
mandatory prepayment under specific circumstances, including from a portion of
excess cash flow and the net proceeds of specified casualty events, asset sales
and debt issuances, each subject to various exceptions.
REVOLVING CREDIT FACILITY
Under the revolving credit facility, we may borrow, repay and reborrow up
to $125.0 million from time to time. Letters of credit and swing line loans are
available under the revolving credit facility. The revolving credit facility
terminates five years after the closing date of the credit facility. As of March
13, 2000, no amounts had been drawn on the revolving credit facility other than
for the issuance of $24.2 million of letters of credit.
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TRANCHE A TERM LOAN
The $80.0 million Tranche A term loan was fully drawn in a single borrowing
on the closing date of the credit facility and, once repaid, cannot be
reborrowed. The Tranche A term loan matures on the five year anniversary of the
closing of the credit facility.
TRANCHE B TERM LOAN
The $250.0 million Tranche B term loan was fully drawn in a single
borrowing on the closing date of the credit facility and, once repaid, cannot be
reborrowed. The Tranche B term loan matures on the seven-year anniversary of the
closing of the credit facility. There will be no substantial amortization of the
Tranche B term loan until the sixth year.
The credit facility contains negative covenants limiting our ability to,
among other things,
- incur debt,
- create liens,
- pay dividends,
- make distributions or stock repurchases,
- make investments or capital expenditures,
- engage in transactions with affiliates,
- sell assets, and
- engage in mergers or acquisitions and other negative covenants customary
for this type of financing.
The credit facility requires us to comply with certain financial tests and
to maintain certain financial ratios relating to
- total leverage,
- fixed charge coverage, and
- interest expense coverage.
Failure to satisfy any of these financial covenants constitutes a default
under the credit facility.
The credit facility also includes
- representations and warranties,
- affirmative covenants, and
- events of default, including a cross default to our other material
indebtedness or a change of control, in each case, customary for this
type of financing.
Our obligations under the credit facility are guaranteed by our direct and
indirect domestic subsidiaries that are not our unrestricted subsidiaries. In
addition, our obligations and the guarantor subsidiaries' obligations under the
credit facility are secured by substantially all of our assets and the guarantor
subsidiaries' assets, including the capital stock of subsidiaries with customary
and other specific exceptions.
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DESCRIPTION OF NOTES
IASIS issued the old notes under an indenture, by and among itself, its
Guarantors and The Bank of New York, as trustee. The following summary of the
indenture is not complete and is subject to, and is qualified in its entirety by
reference to, the Trust Indenture Act and to all of the provisions of the
indenture, including the definitions of various terms in the indenture and those
terms made a part of the indenture by reference to the Trust Indenture Act as in
effect on the date of the indenture.
We have attached the indenture as an exhibit to the registration statement
of which this prospectus forms a part and the indenture is incorporated by
reference in this prospectus in its entirety. A copy of the indenture may be
obtained from IASIS by any holder of the notes upon request. Please refer to the
section below captioned "--Definitions" for the definitions of capitalized terms
used in this section of the prospectus and not otherwise defined. Review of the
defined terms found in that section is necessary to an understanding of the
restrictions and limitations imposed on IASIS by the notes and the indenture.
For purposes of this description, the word "IASIS" refers only to IASIS
Healthcare Corporation and not its subsidiaries.
The terms of the new notes are identical in all material respects to the
terms of the old notes, except for transfer restrictions relating to the
outstanding notes, and, in both cases, include those terms stated in the
indenture and those made part of the indenture by reference to the Trust
Indenture Act. Any old notes that remain outstanding after the exchange offer,
together with the new notes issued in the exchange offer, will be treated as a
single class of securities under the indenture for voting purposes. When we
refer to the term "note" or "notes" in this "Description of Notes" section, we
are referring to both the old notes and the new notes to be issued in the
exchange offer. When we refer to "holders" of the notes, we are referring to
those persons who are the registered holders of the notes on the books of the
registrar appointed under the indenture.
As of the date of the indenture, all of our subsidiaries will be
"Restricted Subsidiaries." However, under the circumstances described below
under the caption "--Covenants--Designation of Restricted and Unrestricted
Subsidiaries," we will be permitted to designate some of our subsidiaries as
"Unrestricted Subsidiaries." Our Unrestricted Subsidiaries will not be subject
to many of the restrictive covenants in the indenture. Our Unrestricted
Subsidiaries will not guarantee the notes.
BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES
The notes:
- are general unsecured obligations of IASIS;
- are subordinated in right of payment to all existing and future Senior
Debt of IASIS;
- are equal in right of payment with any future senior subordinated
Indebtedness of IASIS; and
- are unconditionally guaranteed by the Guarantors.
The notes are guaranteed by all of the Domestic Subsidiaries of IASIS.
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Each Guarantee of the notes:
- is a general unsecured obligation of the Guarantor;
- is subordinated in right of payment to all existing and future Senior
Debt of the Guarantor; and
- is equal in right of payment with any future senior subordinated
Indebtedness of the Guarantor.
As of the date of this prospectus, all of our subsidiaries will be
Guarantors.
PRINCIPAL, MATURITY AND INTEREST
The notes in aggregate principal amount of $230.0 million will mature on
October 15, 2009 under the indenture, including, without limitation, waivers,
amendments, redemptions and offers to purchase. The old notes and the new notes
will be issued in denominations of $1,000 and integral multiples of $1,000.
Interest on the notes will accrue at the rate of 13% per annum and will be
payable semi-annually in arrears on April 15 and October 15, commencing on April
15, 2000. IASIS will make each interest payment to the persons who are holders
of record at the close of business on the April 1 and October 1 immediately
preceeding the applicable interest payment date.
Interest on the notes will accrue from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a holder has given wire transfer instructions to IASIS, IASIS will pay
all principal, interest and premium and Liquidated Damages, if any, on that
holder's notes in accordance with those instructions. All other payments on the
notes will be made at the office or agency of the paying agent and registrar
within the City and State of New York unless IASIS elects to make interest
payments by check mailed to the registered addresses of the holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee will initially act as paying agent and registrar for the notes.
IASIS may change the paying agent or registrar without prior notice to holders
of the notes, and IASIS or any of its Subsidiaries may act as paying agent or
registrar.
TRANSFER AND EXCHANGE
A holder of the notes may transfer or exchange the notes in accordance with
the indenture. The registrar and the trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and IASIS may
require a holder to pay any taxes and fees required by law or permitted by the
indenture. IASIS is not required to transfer or exchange any note selected for
redemption. Also, IASIS is not required to transfer or exchange any note for a
period of 15 days before a selection of notes to be redeemed.
The registered holder of a note will be treated as the owner of it for all
purposes.
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SUBSIDIARY GUARANTEES
The Guarantors will jointly and severally guarantee IASIS' obligations
under the notes. Each Subsidiary Guarantee will be subordinated to the prior
payment in full of all Senior Debt of that Guarantor. The subordination
provisions applicable to the Subsidiary Guarantees will be the same as the
subordination provisions applicable to the notes, as set forth below under
"-- Subordination." The obligations of each Guarantor under its Subsidiary
Guarantee will be limited as necessary to prevent that Subsidiary Guarantee from
constituting a fraudulent conveyance under applicable law. See "Risk
Factors-- If a court finds our sale of the notes to be a fraudulent conveyance,
you would not receive payments of principal or interest on your notes and you
would not be able to sell your notes in the secondary market."
A Guarantor may not sell or otherwise dispose of all or substantially all
of its assets to, or consolidate with or merge with or into--whether or not the
Guarantor is the surviving Person--another Person, other than IASIS or another
Guarantor, unless:
(1) immediately after giving effect to that transaction, no Default or
Event of Default exists; and
(2) either:
(a) the Person acquiring the property in the sale or disposition or
the Person formed by or surviving the consolidation or merger
assumes all the obligations of that Guarantor under a
supplemental indenture satisfactory to the trustee; or
(b) the Net Proceeds of the sale or other disposition are applied
in accordance with the "Asset Sale" provisions of the
indenture.
The Subsidiary Guarantee of a Guarantor will be released:
(1) in connection with any sale or other disposition of all or
substantially all of the assets of that Guarantor or of a
Guarantor which is the parent company of that Guarantor, including
by way of merger or consolidation, to a Person that is not, either
before or after giving effect to the transaction, a Subsidiary of
IASIS, if the Guarantor or the parent company applies the Net
Proceeds of that sale or other disposition in accordance with the
"Asset Sale" provisions of the indenture;
(2) in connection with any sale of all of the Capital Stock of a
Guarantor, or a parent company Guarantor, to a Person that is not,
either before or after giving effect to the transaction, a
Subsidiary of IASIS, if no Default or Event of Default has
occurred and is continuing or if IASIS applies the Net Proceeds of
that sale in accordance with the "Asset Sale" provisions of the
indenture; or
(3) if IASIS properly designates any Restricted Subsidiary that is a
Guarantor as an Unrestricted Subsidiary.
See "--Repurchase at the Option of Holders--Asset Sales."
SUBORDINATION
The payment of principal, interest and premium and Liquidated Damages, if
any, and any other Obligations under or relating to the notes will be
subordinated to the prior payment in full in cash or Cash Equivalents, other
than Cash Equivalents of the type
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referred to in clauses (3) and (4) of the definition of Cash Equivalents, of all
Senior Debt of IASIS, including Senior Debt incurred after the date of the
indenture.
The holders of Senior Debt will be entitled to receive payment in full in
cash or Cash Equivalents, other than Cash Equivalents of the type referred to in
clauses (3) and (4) of the definition of Cash Equivalents, of all Obligations
due in respect of Senior Debt, including interest after the commencement of any
bankruptcy proceeding at the rate specified in the applicable Senior Debt,
whether or not the interest is an allowable claim, before the holders of the
notes will be entitled to receive any payment or distribution of any kind or
character with respect to any Obligations on, or relating to, the notes in the
event of any distribution to creditors of IASIS:
(1) in a liquidation or dissolution of IASIS;
(2) in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to IASIS or its property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshaling of IASIS' assets and liabilities.
Holders of the notes, however, may receive and retain Permitted Junior
Securities and payments made from the trust described under "--Legal Defeasance
and Covenant Defeasance" so long as the trust was created in accordance with all
relevant conditions specified in the indenture at the time it was created.
IASIS also may not make any payment or distribution of any kind with
respect to any Obligations on or with respect to the notes or acquire any notes
for cash or property or otherwise, except in Permitted Junior Securities or from
the trust described under "--Legal Defeasance and Covenant Defeasance" so long
as the trust was created in accordance with all relevant conditions specified in
the indenture at the time it was created, if:
(1) a payment default on Designated Senior Debt occurs and is
continuing; or
(2) any other default occurs and is continuing on any Designated
Senior Debt that permits holders of that Designated Senior Debt or
their Representative to accelerate its maturity and the Trustee
receives a notice of the default which by its terms states that it
is a "Payment Blockage Notice" from the Representative of that
Designated Senior Debt.
Payments on and distributions with respect to any Obligations on, or with
respect to, the notes may and will be resumed:
(1) in the case of a payment default, upon the date on which the
default is cured or waived; and
(2) in the case of a nonpayment default, the earlier of
(a) the date on which all nonpayment defaults are cured or waived,
(b) 179 days after the date of delivery of the applicable Payment
Blockage Notice or
(c) the date on which the Trustee receives notice from the
Representative for the Designated Senior Debt rescinding the
Payment Blockage Notice, unless the maturity of any Designated
Senior Debt has been accelerated.
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No new Payment Blockage Notice will be effective unless and until at least
360 days have elapsed since the effectiveness of the immediately prior Payment
Blockage Notice.
No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the trustee will be, or be made, the
basis for a subsequent Payment Blockage Notice unless the default has been cured
or waived for a period of not less than 90 consecutive days.
If the trustee or any holder of the notes receives any payment or
distribution of assets of any kind or character, whether in cash, properties or
securities, in respect of any Obligations with respect to the notes, except in
Permitted Junior Securities or from the trust as described under "--Legal
Defeasance and Covenant Defeasance" so long as the trust was created in
accordance with all relevant conditions specified in the indenture at the time
it was created, at a time when such payment is prohibited by these subordination
provisions, the trustee or the holder, as the case may be, will hold the payment
in trust for the benefit of the holders of Senior Debt. Upon the proper written
request of the holders of Senior Debt or their representative, the trustee or
the holder, as the case may be, shall forthwith deliver the amounts in trust to
the holders of Senior Debt on a pro rata basis based on the aggregate principal
amount of the Senior Debt or their proper representative.
IASIS must promptly notify holders of Senior Debt if payment of the notes
is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event
of a bankruptcy, liquidation or reorganization of IASIS, holders of notes may
recover less ratably than creditors of IASIS who are holders of Senior Debt. See
"Risk Factors--If we need to seek bankruptcy protection, as a holder of the new
notes you may not be repaid until we repay all of our Senior indebtedness,
including our credit facility."
OPTIONAL REDEMPTION
At any time prior to October 15, 2002, IASIS may on any one or more
occasions redeem up to 35% of the aggregate principal amount of notes issued
under the indenture at a redemption price of 113.000% of the principal amount of
the notes, plus accrued and unpaid interest and Liquidated Damages, if any, to
the redemption date, with the net cash proceeds of one or more Equity Offerings;
provided that:
(1) at least 65% of the aggregate principal amount of notes issued
under the indenture remains outstanding immediately after the
occurrence of the redemption, excluding notes held by IASIS and
its Subsidiaries; and
(2) the redemption must occur within 90 days of the date of the
closing of the Equity Offering.
Except as described in the preceding paragraph, the notes will not be
redeemable at IASIS' option prior to October 15, 2004.
After October 15, 2004, IASIS may redeem all or a part of the notes upon
not less than 30 nor more than 60 days' notice, at the redemption prices,
expressed as percentages of principal amount, listed below plus accrued and
unpaid interest and Liquidated
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Damages, if any, to the applicable redemption date, if redeemed during the
twelve-month period beginning on October 15 of the years indicated below:
YEAR PERCENTAGE
- ---- ----------
2004................................................... 106.500%
2005................................................... 104.875%
2006................................................... 103.250%
2007................................................... 101.625%
2008 and thereafter.................................... 100.000%
MANDATORY REDEMPTION
IASIS is not required to make mandatory redemption or sinking fund payments
with respect to the notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, each holder of notes will have the right to
require IASIS to repurchase all or any part, equal to $1,000 or an integral
multiple of $1,000, of that holder's notes pursuant to a Change of Control Offer
on the terms set forth in the indenture. In the Change of Control Offer, IASIS
will offer a Change of Control Payment in cash equal to 101% of the aggregate
principal amount of notes repurchased plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of purchase. Within 30 days following
any Change of Control, IASIS will mail a notice to each holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase notes on the Change of Control Payment Date specified in the
notice, referred to as the "Change of Control Payment Date," which date shall be
no earlier than 30 days and no later than 60 days from the date the notice is
mailed, in accordance with the procedures required by the indenture and
described in the notice. IASIS will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations to the
extent these laws and regulations are applicable in connection with the
repurchase of the notes as a result of a Change of Control. To the extent that
the provisions of any securities laws or regulations conflict with the Change of
Control provisions of the indenture, IASIS will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Change of Control provisions of the indenture by virtue of
the conflict.
On the Change of Control Payment Date, IASIS will, to the extent lawful:
(1) accept for payment all notes or portions of notes properly
tendered pursuant to the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all Notes or portions of notes so
tendered; and
(3) deliver or cause to be delivered to the Trustee the notes so
accepted together with an Officers' Certificate stating the
aggregate principal amount of notes or portions of notes being
purchased by IASIS.
The Paying Agent will promptly mail to each holder of notes so tendered the
Change of Control Payment for those notes, and the Trustee will promptly
authenticate and mail, or cause to be transferred by book entry, to each holder
a new note equal in principal
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amount to any unpurchased portion of the notes surrendered, if any; provided
that each new note will be in a principal amount of $1,000 or an integral
multiple of $1,000.
Prior to complying with any of the provisions of this "Change of Control"
covenant, but in any event within 90 days following a Change of Control, IASIS
will either repay all outstanding Senior Debt or obtain the requisite consents,
if any, under all agreements governing outstanding Senior Debt to permit the
repurchase of notes required by this covenant. IASIS will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
IASIS shall first comply with the covenant in the first sentence in the
immediately preceding paragraph before it will be required to repurchase notes
under the provisions described above. IASIS's failure to comply with the
covenant described in the immediately preceding sentence may constitute with
notice and lapse of time an Event of Default described under clause (2) under
the caption "-- Events of Default and Remedies."
The provisions described above that require IASIS to make a Change of
Control Offer following a Change of Control will be applicable regardless of
whether any other provisions of the indenture are applicable. Except as
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the holders of the notes to require that IASIS
repurchase or redeem the notes in the event of a takeover, recapitalization or
similar transaction.
IASIS will not be required to make a Change of Control Offer upon a Change
of Control if a third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements described in the
Indenture applicable to a Change of Control Offer made by IASIS and purchases
all notes validly tendered and not withdrawn under the Change of Control Offer.
The definition of Change of Control includes a phrase relating to the
direct or indirect sale, lease, transfer, conveyance or other disposition of
"all or substantially all" of the properties or assets of IASIS and its
Restricted Subsidiaries taken as a whole. Although there is a limited body of
case law interpreting the phrase "substantially all," there is no precise
established definition of the phrase under applicable law. Accordingly, the
ability of a holder of notes to require IASIS to repurchase the notes as a
result of a sale, lease, transfer, conveyance or other disposition of less than
all of the assets of IASIS and its Restricted Subsidiaries taken as a whole to
another Person or group may be uncertain.
ASSET SALES
IASIS will not, and will not permit any of its Restricted Subsidiaries to,
consummate an Asset Sale unless:
(1) IASIS or the Restricted Subsidiary, as the case may be, receives
consideration at the time of the Asset Sale at least equal to the
fair market value of the assets or Equity Interests issued or sold
or otherwise disposed of;
(2) the fair market value is determined by IASIS' Board of Directors
and evidenced by a resolution of the Board of Directors; and
(3) at least 75% of the consideration received by IASIS or the
Restricted Subsidiary is in the form of cash or Cash Equivalents
other than in the case where IASIS or the Restricted Subsidiary is
undertaking a Hospital Swap.
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For purposes of this provision, each of the following will be
deemed to be cash:
(a) any liabilities, as shown on IASIS' or the Restricted
Subsidiary's most recent balance sheet, of IASIS or any
Restricted Subsidiary, other than contingent liabilities and
liabilities that are by their terms subordinated to the notes
or any Subsidiary Guarantee, that are assumed by the transferee
of any of those assets pursuant to a novation agreement that
releases IASIS or the Restricted Subsidiary from further
liability; and
(b) any securities, notes or other obligations received by IASIS or
any Restricted Subsidiary from the transferee that are, subject
to ordinary settlement periods, converted by IASIS or the
Restricted Subsidiary into cash, to the extent of the cash
received in that conversion, within 180 days of the applicable
Asset Sale.
Notwithstanding the prior provisions, the 75% limitation referred to in
clause (3) will not apply to any Asset Sale in which the cash or Cash
Equivalents portion of the consideration received from the Asset Sale,
determined in accordance with these provisions, is equal to or greater than what
the after-tax proceeds would have been had the Asset Sale complied with the 75%
limitation described above.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
IASIS may apply the Net Proceeds at its option:
(1) to repay Senior Debt and, if the Senior Debt repaid is revolving
credit Indebtedness, to correspondingly reduce commitments with
respect to that Indebtedness;
(2) to acquire all or substantially all of the assets of, or the
Voting Stock of, another Permitted Business;
(3) to make capital expenditures; or
(4) to acquire other assets that are used or useful in a Permitted
Business.
The requirements of clauses (2)-(4) above will, however, be deemed to be
satisfied if an agreement, including a lease, whether a capital lease or an
operating lease, committing to make the acquisitions or expenditures referred to
in the agreement is entered into by IASIS or its Restricted Subsidiary within
365 days after the receipt of the Net Proceeds and the Net Proceeds are applied
in accordance with that agreement.
Notwithstanding the previous provision, in the event that a Restricted
Subsidiary dividends or distributes to all of its stockholders on a pro rata
basis any proceeds of an Asset Sale to IASIS or another Restricted Subsidiary,
IASIS or the Restricted Subsidiary need only apply its share of the proceeds in
accordance with the preceding clauses (1) through (4).
Pending the final application of any such Net Proceeds, IASIS may
temporarily reduce revolving credit borrowings or otherwise invest the Net
Proceeds in any manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $10.0 million, IASIS will make an
Asset Sale Offer to all holders of notes and all holders of other Indebtedness
that is equal in ranking to the notes containing provisions similar to those in
the indenture with respect to offers to purchase or
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redeem with the proceeds of sales of assets to purchase the maximum principal
amount of notes and the other equal ranking Indebtedness that may be purchased
out of the Excess Proceeds. The offer price in any Asset Sale Offer will be
equal to 100% of principal amount plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of purchase, and will be payable in
cash. If any Excess Proceeds remain after consummation of an Asset Sale Offer,
IASIS may use the Excess Proceeds for any purpose not otherwise prohibited by
the indenture. If the aggregate principal amount of notes and other equal
ranking Indebtedness tendered into the Asset Sale Offer exceeds the amount of
Excess Proceeds, the trustee will select the notes and other equal ranking
Indebtedness to be purchased on a pro rata basis based on the principal amount
of notes and other equal ranking Indebtedness tendered. Upon completion of each
Asset Sale Offer, the amount of Excess Proceeds will be reset at zero.
IASIS will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations to the extent these laws and
regulations are applicable in connection with each repurchase of notes in
relation to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the Asset Sales provisions of the
indenture, IASIS will comply with the applicable securities laws and regulations
and will not be deemed to have breached its obligations under the Asset Sale
provisions of the indenture by virtue of the conflict.
The agreements governing IASIS' outstanding Senior Debt currently prohibit
IASIS from purchasing any notes, and also provides that certain change of
control or asset sale events with respect to IASIS would constitute a default
under these agreements. Any future credit agreements or other agreements
relating to Senior Debt to which IASIS becomes a party may contain similar
restrictions and provisions. In the event a Change of Control or Asset Sale
occurs at a time when IASIS is prohibited from purchasing notes, IASIS could
seek the consent of its senior lenders to the purchase of notes or could attempt
to refinance the borrowings that contain the prohibition. If IASIS does not
obtain a consent or repay those borrowings, IASIS will remain prohibited from
purchasing notes. In that case, IASIS' failure to purchase tendered notes would
constitute an Event of Default under the indenture which would, in turn,
constitute a default under the Senior Debt. In those circumstances, the
subordination provisions in the indenture would likely restrict payments to the
holders of notes.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
(1) if the notes are listed, in compliance with the requirements of
the principal national securities exchange on which the notes are
listed; or
(2) if the notes are not so listed, on a pro rata basis, by lot or by
a method as the trustee deems fair and appropriate.
No notes of $1,000 or less will be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each holder of notes to be redeemed at his or her
registered address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount to be
redeemed. A substitute note in principal amount equal to the unredeemed portion
of the original Note will be issued in
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the name of the holder upon cancellation of the original note. Notes called for
redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on notes or portions of them called
for redemption.
COVENANTS
Restricted Payments
IASIS will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of IASIS' or any of its Restricted
Subsidiaries' Equity Interests including, without limitation, any
payment in connection with any merger or consolidation involving
IASIS or any of its Restricted Subsidiaries or to the direct or
indirect holders of IASIS' or any of its Restricted Subsidiaries'
Equity Interests in their capacity as such, other than dividends
or distributions payable in Equity Interests not including
Disqualified Stock, of IASIS or payable to IASIS or a Restricted
Subsidiary of IASIS;
(2) purchase, redeem or otherwise acquire or retire for value
including, without limitation, in connection with any merger or
consolidation involving IASIS, any Equity Interests of IASIS or
any direct or indirect parent of IASIS;
(3) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness
that is subordinated to the notes or the Subsidiary Guarantees,
except a payment of interest or principal at or after the Stated
Maturity of the Indebtedness; or
(4) make any Restricted Investment, with all payments and other
actions described in clauses (1) through (4) above being
collectively referred to as "Restricted Payments,"
unless, at the time of and after giving effect to the Restricted Payment:
(1) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence of the Restricted
Payment;
(2) IASIS would, at the time of the Restricted Payment and after
giving pro forma effect to the Restricted Payment as if the
Restricted Payment had been made at the beginning of the
applicable four-quarter period, have been permitted to incur at
least $1.00 of additional Indebtedness under to the Fixed Charge
Coverage Ratio test in the first paragraph of the covenant
described below under the caption "-- Incurrence of Indebtedness
and Issuance of Preferred Stock"; and
(3) the Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by IASIS and its Restricted
Subsidiaries after the date of the indenture, excluding Restricted
Payments permitted by clauses (2) through (10) of the next
succeeding paragraph and the aggregate amount of outstanding
Permitted Investments allowed under clause (16) of the definition
of Permitted Investments, is less than the sum, without
duplication, of:
(a) 50% of the Consolidated Net Income of IASIS for the period,
taken as one accounting period, from the beginning of the first
fiscal quarter
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ending after the date of the Indenture to the end of IASIS'
most recently ended fiscal quarter for which internal financial
statements are available at the time of the Restricted Payment
or, if the Consolidated Net Income for the period is a deficit,
less 100% of the deficit, plus
(b) 100% of the aggregate net cash proceeds received by IASIS since
the date of the indenture as a contribution to its equity
capital, other than Disqualified Stock, or from the issue or
sale of Equity Interests of IASIS, other than Disqualified
Stock, or from the issue or sale of convertible or exchangeable
Disqualified Stock or convertible or exchangeable debt
securities of IASIS that have been converted into or exchanged
for Equity Interests, other than Equity Interests, Disqualified
Stock or debt securities sold to a Subsidiary of IASIS, plus
(c) the lesser of
(A) all cash returns, including dividends, interest,
distributions, returns of principal and profits on sale,
on Restricted Investments that were made after the date of
the indenture, minus the cost of disposition, if any;
provided that the amount of cash return on the Restricted
Investment will be excluded from Consolidated Net Income
for purposes of calculating clause 3(a) above on an after
tax basis to the extent included in Consolidated Net
Income, and
(B) the initial amount of the Restricted Investment, plus
(d) upon redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary not in violation of the indenture, the
fair market value of the net assets of the Subsidiary.
So long as no Default has occurred and is continuing or would be caused by
the Restricted Payment, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of the dividend, if at the date of declaration the
payment would have complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness of IASIS or any
Guarantor or of any Equity Interests of IASIS in exchange for, or
out of the net cash proceeds of the substantially concurrent
sale, other than to a Restricted Subsidiary of IASIS, of, Equity
Interests of IASIS, other than Disqualified Stock; provided that
the amount of any of these net cash proceeds that are utilized
for any of these redemption, repurchase, retirement, defeasance
or other acquisition shall be excluded from clause (3)(b) of the
preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of IASIS or any Guarantor with the net
cash proceeds from an incurrence of Permitted Refinancing
Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary of IASIS
to the holders of its common Equity Interests on a pro rata
basis;
(5) the declaration and payment of dividends to holders of any class
or series of Disqualified Stock of IASIS issued after the date of
the indenture in
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accordance with the covenant described below under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock";
(6) the declaration and payment of regularly accruing dividends to
holders of any class or series of Designated Preferred Stock of
IASIS issued on or after the date of the indenture; provided that
at the time of the designation of the preferred stock as
Designated Preferred Stock, and after giving effect to the
designation on a pro forma basis, for purposes of making
determinations on a pro forma basis pursuant to this clause (6),
treating all dividends which will accrue on the Designated
Preferred Stock during the four full fiscal quarters immediately
following the issuance, as well as all other Designated Preferred
Stock then outstanding, as if the same will in fact be, or have
in fact been, paid in cash, IASIS would have been able to incur
at least $1.00 of additional Indebtedness, other than Permitted
Debt, in accordance with the covenant described below under the
caption "-- Incurrence of Indebtedness and Issuance of Preferred
Stock";
(7) the retirement of any shares of Disqualified Stock of IASIS by
conversion into, or by exchange for, shares of Refinancing
Disqualified Stock of IASIS, or out of the Net Proceeds of the
substantially concurrent sale, other than to a Subsidiary of
IASIS, of other shares of Refinancing Disqualified Stock of
IASIS;
(8) payments to JLL Healthcare, LLC in an amount not to exceed
$500,000 per annum to pay its operating and administrative
expenses incurred in the ordinary course of business;
(9) payments under the tax sharing agreement among JLL Healthcare,
LLC, IASIS and its subsidiaries, as in effect on the date of the
indenture; and
(10) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of IASIS or any Restricted
Subsidiary of IASIS held by any member of IASIS', or any of its
Restricted Subsidiaries', management under any management equity
subscription agreement or stock option agreement in effect as of
the date of the indenture; provided that the aggregate price
paid, excluding the cancellation of debt owing by the management
member, for all the repurchased, redeemed, acquired or retired
Equity Interests will not exceed $2.0 million in any twelve-month
period.
The amount of all Restricted Payments other than cash will be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued to or by IASIS or the Restricted
Subsidiary, as the case may be, in accordance with the Restricted Payment. The
fair market value of any assets or securities that are required to be valued by
this covenant will be determined by the Board of Directors.
For purposes of determining compliance with this "Restricted Payments"
covenant, in the event that a Restricted Payment meets the criteria of more than
one of the types of Restricted Payments described in the above clauses, IASIS,
in its sole discretion, may order and classify, and from time to time may
reorder and reclassify, the Restricted Payment if it would have been permitted
at the time such Restricted Payment was made and at the time of the
reclassification.
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INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
IASIS will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
any Indebtedness, including Acquired Debt, and IASIS will not issue any
Disqualified Stock and will not permit any of its Restricted Subsidiaries to
issue any shares of preferred stock; provided, however, that IASIS may incur
Indebtedness, including Acquired Debt, or issue Disqualified Stock, and the
Guarantors may incur Indebtedness or issue preferred stock, if the Fixed Charge
Coverage Ratio for IASIS' most recently ended four full fiscal quarters for
which financial statements are available immediately preceding the date on which
the additional Indebtedness is incurred or the Disqualified Stock or preferred
stock is issued would have been at least 2.0 to 1, if the additional
Indebtedness is incurred or the Disqualified Stock or preferred stock is issued
on or prior to October 15, 2002, or 2.25 to 1, if additional Indebtedness is
incurred or the Disqualified Stock or preferred stock is issued thereafter,
determined on a pro forma basis, including a pro forma application of the net
proceeds therefrom, as if the additional Indebtedness had been incurred or the
preferred stock or Disqualified Stock had been issued, as the case may be, at
the beginning of such four-quarter period;
The first paragraph of this covenant will not prohibit any of the following
"Permitted Debt":
(1) the incurrence by IASIS and any Guarantor of additional
Indebtedness and letters of credit under Credit Facilities in an
aggregate principal amount at any one time outstanding under this
clause (1), with letters of credit being deemed to have a
principal amount equal to the face amount thereof, not to exceed
$330.0 million plus the greater of (x) $125.0 million and (y) the
amount equal to 85% of the net book value of receivables and 65%
of the net book value of inventory of IASIS and its Restricted
Subsidiaries on a consolidated basis at the time the Indebtedness
is incurred, as determined in accordance with GAAP, less the
aggregate amount of all scheduled repayments and mandatory
prepayments, of the principal amount of any term Indebtedness
under a Credit Facility, other than repayments that are
concurrently reborrowed, that have actually been made since the
date of the indenture and less the aggregate amount of all Net
Proceeds of Asset Sales that have actually been applied by IASIS
or any of its Restricted Subsidiaries since the date of the
indenture to repay revolving credit Indebtedness to the extent
that the corresponding revolving credit commitments have been
permanently reduced under a Credit Facility pursuant to the
covenant described above under the caption "--Repurchase at the
Option of Holders--Asset Sales"; provided that the amount will be
reduced to the extent of any reduction or elimination of any
commitment under any Credit Facility resulting from or relating
to the consummation of any Qualified Receivables Transaction;
provided, further, that the reduction will apply only for so long
as the Qualified Receivables Transaction is in effect;
(2) the incurrence by IASIS and its Restricted Subsidiaries of the
Existing Indebtedness;
(3) the incurrence by IASIS and the Guarantors of Indebtedness
represented by the notes and the related Subsidiary Guarantees to
be issued on the date
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of the indenture and the exchange notes and the related Subsidiary
Guarantees to be issued pursuant to the registration rights
agreement;
(4) the incurrence by IASIS or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case, incurred
for the purpose of financing all or any part of the purchase
price or cost of construction or improvement of property, plant
or equipment used in the business of IASIS or the Restricted
Subsidiary, in an aggregate principal amount, including all
Permitted Refinancing Indebtedness incurred to refund, refinance
or replace any Indebtedness incurred pursuant to this clause (4),
not to exceed the greater of $25.0 million and 3% of Total Assets
at any time outstanding;
(5) the incurrence by IASIS or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net
proceeds of which are used to refund, refinance or replace
Indebtedness, other than intercompany Indebtedness, that was
permitted by the indenture to be incurred under the first
paragraph of this covenant or clauses (2), (3), (4), (5), (14) or
(18) of this paragraph;
(6) the incurrence by IASIS or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among IASIS and any of its
Restricted Subsidiaries; provided, however, that:
(a) if IASIS or any Guarantor is the obligor on the Indebtedness,
unless the Indebtedness is owing to IASIS or another
Guarantor, that Indebtedness must be expressly subordinated to
the prior payment in full in cash of all Obligations with
respect to the notes, in the case of IASIS, or the Subsidiary
Guarantee, in the case of a Guarantor; and
(b) (A) any subsequent issuance or transfer of Equity Interests
that results in any Indebtedness being held by a Person other
than IASIS or a Restricted Subsidiary and (B) any sale or
other transfer of any Indebtedness to a Person that is not
either IASIS or a Restricted Subsidiary shall be deemed, in
each case, to constitute an incurrence of Indebtedness by
IASIS or the Restricted Subsidiary, as the case may be, that
was not permitted by this clause (6);
(7) the issuance by any Restricted Subsidiary of preferred stock to
IASIS and any of its Restricted Subsidiaries; provided, however,
that
(a) any subsequent issuance or transfer of Equity Interests that
results in any preferred stock being held by a Person other
than IASIS or a Restricted Subsidiary and
(b) any sale or other transfer of any preferred stock to a Person
that is not either IASIS or a Restricted Subsidiary shall be
deemed, in each case, to constitute an issuance of preferred
stock by the Restricted Subsidiary that was not permitted by
this clause (7);
(8) the issuance of Refinancing Disqualified Stock, Refinancing
Preferred Stock and Refinancing Subsidiary Preferred Stock;
(9) the incurrence by IASIS or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing
or hedging
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(a) interest rate risk with respect to any floating or fixed rate
Indebtedness that is permitted by the terms of the indenture
to be outstanding or
(b) fluctuations in foreign currency exchange rates or commodity
prices, with respect to currencies or commodities used by
IASIS or its Restricted Subsidiaries in the ordinary course of
business;
(10) the guarantee by IASIS or any of the Guarantors of Indebtedness
of IASIS or a Restricted Subsidiary of IASIS that was permitted
to be incurred by another provision of this covenant;
(11) the accrual of interest, the accretion or amortization of
original issue discount, the payment of interest on any
Indebtedness in the form of additional Indebtedness with the same
terms, and the payment of dividends on Disqualified Stock in the
form of additional shares of the same class of Disqualified Stock
will not be deemed to be an incurrence of Indebtedness or an
issuance of Disqualified Stock for purposes of this covenant;
provided, in each such case, that the applicable amount is
included in Fixed Charges of IASIS as accrued;
(12) Indebtedness of IASIS or any Restricted Subsidiary arising from
the honoring by a bank or other financial institution of a check,
draft or similar instrument inadvertently, except in the case of
daylight overdrafts, drawn against insufficient funds in the
ordinary course of business; provided, that the Indebtedness is
extinguished within five business days of incurrence;
(13) Indebtedness of IASIS or any of its Restricted Subsidiaries
represented by letters of credit for the account of IASIS or the
Restricted Subsidiary, as the case may be, including, without
limitation, in order to provide security for workers'
compensation claims or payment obligations in connection with
self-insurance and other Indebtedness with respect to workers'
compensation claims, self-insurance and similar obligations of
IASIS or any Restricted Subsidiary;
(14) the incurrence by IASIS of additional Indebtedness in an
aggregate principal amount or accreted value, as applicable,
which amount may, but need not be, incurred in whole or in part
under the Credit Facilities at any time outstanding, including
all Permitted Refinancing Indebtedness incurred to refund,
refinance or replace any Indebtedness incurred under this clause
(14), not to exceed $65.0 million;
(15) Indebtedness arising from any agreement entered into by IASIS or
any of its Restricted Subsidiaries providing for indemnification,
purchase price adjustment, holdback, contingency payment
obligations based on the performance of the acquired or disposed
assets or similar obligations, other than Guarantees of
Indebtedness, incurred by any Person in connection with the
acquisition or disposition of assets permitted by the indenture;
(16) trade letters of credit, performance and surety bonds, completion
guarantees or similar arrangements of IASIS or any of its
Restricted Subsidiaries in the ordinary course of business;
(17) Physician Support Obligations incurred by IASIS or any of its
Restricted Subsidiaries;
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(18) Acquired Debt of Restricted Subsidiaries acquired or assumed by
IASIS or another Restricted Subsidiary of IASIS, or resulting
from the merger or consolidation of one or more Persons into or
with one or more Restricted Subsidiaries of IASIS; provided, that
(a) the Acquired Debt is not incurred in contemplation of the
respective acquisition, merger or consolidation, and
(b) after giving effect to any Acquired Debt acquired or assumed
under this clause (18), IASIS would be permitted to incur at
least $1.00 of additional Indebtedness under the Fixed Charge
Coverage Ratio test referred to in the first paragraph of this
"--Incurrence of Indebtedness and Issuance of Preferred Stock"
covenant; and
(19) the incurrence by a Receivables Subsidiary of Indebtedness in a
Qualified Receivables Transaction.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (19) above, or is
entitled to be incurred pursuant to the first paragraph of this covenant, IASIS
will be permitted to classify such item of Indebtedness on the date of its
incurrence, or from time to time reclassify all or a portion of the item of
Indebtedness, in any manner that complies with this covenant. Indebtedness under
Credit Facilities outstanding on the date on which notes are first issued and
authenticated under the indenture shall be deemed to have been incurred on the
date in reliance on the exception provided by clause (1) of the definition of
Permitted Debt.
NO SENIOR SUBORDINATED DEBT
IASIS will not incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that is subordinate or junior in right of payment to
any Senior Debt of IASIS and senior in any respect in right of payment to the
notes. No Guarantor will incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is subordinate or junior in right of
payment to the Senior Debt of the Guarantor and senior in any respect in right
of payment to such Guarantor's Subsidiary Guarantee.
LIENS
IASIS will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, assume or suffer to exist any Lien of any
kind securing Indebtedness or trade payables on any asset now owned or hereafter
acquired, except Permitted Liens, unless:
(1) if the Lien secures Indebtedness which is subordinated to the
notes, that Lien will be subordinated to the Lien granted to the
holders of the notes to the same extent as the Indebtedness is
subordinated to the notes; and
(2) in all other cases, the notes are equally and ratably secured.
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DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
IASIS will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital
Stock to IASIS or any of its Restricted Subsidiaries, or with
respect to any other interest or participation in, or measured
by, its profits, or pay any indebtedness owed to IASIS or any of
its Restricted Subsidiaries;
(2) make loans or advances to IASIS or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to IASIS or any of its
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Indebtedness as in effect on the date of the indenture
and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings
thereof, provided that those amendments, modifications,
restatements, renewals, increases, supplements, refundings,
replacement or refinancings are no more restrictive, taken as a
whole, with respect to the dividend and other payment
restrictions than those contained in such Existing Indebtedness,
as in effect on the date of the indenture;
(2) the indenture, the notes and the Subsidiary Guarantees;
(3) applicable law;
(4) any contract or Capital Stock of a Person acquired by IASIS or
any of its Restricted Subsidiaries as in effect at the time of
such acquisition, except to the extent the contract was entered
into in connection with or in contemplation of the acquisition,
which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person
and its Subsidiaries, or the property or assets of the Person and
its Subsidiaries, so acquired, provided that, in the case of any
contract evidencing Indebtedness, that Indebtedness was permitted
by the terms of the indenture to be incurred;
(5) customary non-assignment provisions in leases or other agreements
entered into in the ordinary course of business and consistent
with past practices;
(6) customary restrictions in Capital Lease Obligations, security
agreements or mortgages securing Indebtedness of IASIS or a
Restricted Subsidiary to the extent those restrictions restrict
the transfer of the property subject to the Capital Lease
Obligations, security agreements and mortgages;
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by that Restricted
Subsidiary pending its sale or other disposition;
(8) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing the Permitted
Refinancing Indebted-
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ness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being
refinanced;
(9) Liens securing Indebtedness that limit the right of the debtor to
dispose of the assets subject to the Lien;
(10) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements, asset sale
agreements, stock sale agreements and other similar agreements
entered into in the ordinary course of business;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business;
(12) contracts entered into in the ordinary course of business, not
relating to any Indebtedness, and that do not, individually or in
the aggregate, detract from the value of property or assets of
IASIS or any Restricted Subsidiary in any manner material to
IASIS or any Restricted Subsidiary;
(13) customary provisions restricting dispositions of real property
interests contained in any reciprocal easement agreements of
IASIS or any Restricted Subsidiary;
(14) Indebtedness or other contractual requirements of a Receivables
Subsidiary in connection with a Qualified Receivables
Transaction, provided that these restrictions apply only to the
Receivables Subsidiary; and
(15) restrictions on the transfer of property or assets required by
any regulatory authority having jurisdiction over IASIS or any
Restricted Subsidiary or any of their businesses.
MERGER, CONSOLIDATION OR SALE OF ASSETS
IASIS may not, directly or indirectly: (x) consolidate or merge with or
into another Person, whether or not IASIS is the surviving corporation; or (y)
sell, assign, transfer, convey or otherwise dispose of all or substantially all
of the properties or assets of IASIS and its Restricted Subsidiaries taken as a
whole, in one or more related transactions, to another Person, unless:
(1) either:
(a) IASIS is the surviving corporation; or
(b) the Person formed by or surviving any consolidation or merger
of this type, if other than IASIS, or to which the sale,
assignment, transfer, conveyance or other disposition shall
have been made is a corporation organized or existing under the
laws of the United States, any state thereof or the District of
Columbia;
(2) the Person formed by or surviving any consolidation or merger of
this type, if other than IASIS, or the Person to which the sale,
assignment, transfer, conveyance or other disposition shall have
been made assumes all the obligations of IASIS under the notes,
the indenture and the registration rights agreement by means of
agreements reasonably satisfactory to the trustee;
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(3) immediately after any transaction of this type no Default or
Event of Default exists; and
(4) IASIS or the Person formed by or surviving any consolidation or
merger of this type, if other than IASIS, or to which the sale,
assignment, transfer, conveyance or other disposition shall have
been made, will, on the date of the transaction after giving pro
forma effect to the transaction and any related financing
transactions as if the same had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test contained in the first paragraph of the
covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock."
In addition, IASIS may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation or Sale of
Assets" covenant will not apply to (x) a merger, consolidation, sale,
assignment, transfer, conveyance or other disposition of assets between or among
IASIS and any Guarantor or (y) transfers of accounts receivable and related
assets of the type specified in the definition of "Qualified Receivables
Transaction," or a fractional undivided interest in those assets, by a
Receivables Subsidiary in a Qualified Receivables Transaction.
Notwithstanding clause (4) above, IASIS may merge with an Affiliate
incorporated or organized solely either
(1) for the purpose of reincorporating or reorganizing IASIS in another
jurisdiction or
(2) to realize tax benefits without complying with the foregoing clause
(4) provided, that, immediately after giving effect to the
transaction on a pro forma basis, either
(a) the surviving entity could incur at least $1.00 of additional
Indebtedness, other than Permitted Indebtedness, under the
"--Incurrence of Indebtedness and Issuance of Preferred Stock"
covenant and
(b) the Fixed Charge Coverage Ratio of the surviving entity is not
less than the Fixed Charge Coverage Ratio of IASIS immediately
prior to the transaction and the surviving entity conducts no
business other than a Permitted Business except to the extent
as would not be material to the surviving entity and its
Restricted Subsidiaries taken as a whole.
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate
fair market value of all outstanding Investments owned by IASIS and its
Restricted Subsidiaries in the Subsidiary so designated will be deemed to be an
Investment made as of the time of the designation and will either reduce the
amount available for Restricted Payments under the first paragraph of the
covenant described above under the caption "--Restricted Payments" or reduce the
amount available for future Investments under one or more clauses of the
definition of Permitted Investments, as IASIS shall determine. That designation
will only be permitted if the Investment would be permitted at that time and if
the Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary. The Board of Directors may
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redesignate any Unrestricted Subsidiary to be a Restricted Subsidiary if the
redesignation would not cause a Default.
TRANSACTIONS WITH AFFILIATES
IASIS will not, and will not permit any of its Restricted Subsidiaries to,
make any payment to, or sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from, or enter into
or make or amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate, unless:
(1) such "Affiliate Transaction" is on terms that are no less
favorable to IASIS or the relevant Restricted Subsidiary than
those that would have been obtained in a comparable transaction
by IASIS or the Restricted Subsidiary with an unrelated Person;
and
(2) IASIS delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in
excess of $5.0 million, a resolution of the Board of Directors
contained in an Officers' Certificate certifying that the
Affiliate Transaction complies with this covenant and that a
majority of the disinterested members of the Board of Directors
has approved the Affiliate Transaction; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in
excess of $10.0 million, an opinion as to the fairness to the
holders of the Affiliate Transaction from a financial point of
view issued by an accounting, appraisal or investment banking
firm of national standing.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) reasonable fees and compensation paid to, and indemnity and
similar arrangements provided on behalf of, officers, directors
or employees of IASIS or any Restricted Subsidiary of IASIS as
determined in good faith by IASIS' Board of Directors or senior
management;
(2) transactions between or among IASIS or its Restricted
Subsidiaries or both;
(3) the payment of management fees to any Affiliate of IASIS not to
exceed in the aggregate to all Affiliates, in any twelve-month
period, the greater of
(a) $1.0 million and
(b) an amount equal to 1% of Consolidated Cash Flow and the
reimbursement of expenses incurred by Affiliates from time to
time in the course of providing management, investment banking,
commercial banking, or financial advisory services to, or
monitoring their investments in, IASIS;
(4) Restricted Payments that are permitted by the provisions of the
Indenture described above under the caption "--Restricted
Payments";
(5) loans and advances to officers and employees of IASIS or any of
its Restricted Subsidiaries for bona fide business purposes in
the ordinary course of business;
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(6) transactions between IASIS and any of its Affiliates involving
investment banking, commercial banking, financial advisory and
related activities;
(7) issuances of securities or payments or distributions in
connection with employment incentive plans, employee stock plans,
employees stock option plans and similar plans and arrangements
approved by the Board of Directors of IASIS;
(8) sales and issuances of the Capital Stock of IASIS, other than
Disqualified Stock, to the extent otherwise permitted under the
indenture;
(9) any agreements or arrangements in effect on, or entered into on
or prior to, the date of the indenture, including the tax sharing
agreement, or any amendment, modification, or supplement or any
replacement, so long as any such amendment, modification,
supplement or replacement agreement is not materially more
disadvantageous to the holders of the notes than the original
agreements as in effect on the date of the indenture, and any
transactions contemplated by any of these agreements or
arrangements;
(10) the existence of, or the performance by IASIS or any of its
Restricted Subsidiaries of its obligations under the terms of,
any stockholders agreement, partnership agreement or limited
liability company members agreement, including any registration
rights agreement or purchase agreement related to any agreement
of that type, to which it is a party as of the date of the
indenture and any similar agreements which it may enter into
after that time, in each case subject to compliance with the
other provisions of the indenture; provided, however, that the
existence, or the performance by IASIS or any of its Restricted
Subsidiaries of obligations under any future amendment to any
such existing agreement or under any similar agreement entered
into after the date of the Indenture shall only be permitted by
this clause (10) to the extent that the terms, taken as a whole,
of any amendment or new agreement are not otherwise materially
disadvantageous to the holders of the notes;
(11) payments in respect of fees, costs and expenses incurred in
connection with the Transactions; and
(12) transactions between or among IASIS or its Subsidiaries or both
or transactions between a Receivables Subsidiary and any Person
in which the Receivables Subsidiary has an Investment.
ADDITIONAL SUBSIDIARY GUARANTEES
If IASIS or any of its Restricted Subsidiaries acquires or creates another
Domestic Subsidiary or if any Restricted Subsidiary becomes a Domestic
Subsidiary of IASIS after the date of the indenture, then that newly acquired or
created Domestic Subsidiary must become a Guarantor and execute a supplemental
indenture and deliver an Opinion of Counsel to the trustee; provided, that no
Domestic Subsidiary of this type shall be required to become a Guarantor,
execute a supplemental indenture and deliver an Opinion of Counsel
(1) for so long as a Credit Agreement shall be in effect, if it is not
an obligor under the Credit Agreement and is not required to deliver
a Guarantee under the Credit Agreement of the obligations of IASIS
under the Credit Agreement or
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(2) if such Domestic Subsidiary is a Receivables Subsidiary.
BUSINESS ACTIVITIES
IASIS will not, and will not permit any Restricted Subsidiary to, engage in
any business other than Permitted Businesses, except to the extent as would not
be material to IASIS and its Restricted Subsidiaries taken as a whole. Any
Receivables Subsidiary and any Subsidiary of a Receivables Subsidiary may engage
in a business related or ancillary to a Qualified Receivables Transaction.
REPORTS
Whether or not required by the SEC, so long as any notes are outstanding,
IASIS will furnish to the holders of notes, within the time periods specified in
the SEC's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC on Forms 10-Q and
10-K if IASIS were required to file those forms, including a
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information
only, a report on the annual financial statements by IASIS'
certified independent accountants; and
(2) all current reports that would be required to be filed with the SEC
on Form 8-K if IASIS were required to file those reports.
In addition, whether or not required by the SEC, IASIS will file a copy of
all of the information and reports referred to in clauses (1) and (2) above with
the SEC for public availability within the time periods specified in the SEC's
rules and regulations, unless the SEC will not accept such a filing, and make
that information available to securities analysts and prospective investors upon
request. In addition, IASIS and the Subsidiary Guarantors have agreed that, for
so long as any notes remain outstanding, they will furnish to the holders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered by Rule 144A(d)(4) under the Securities
Act.
If IASIS has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph shall include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of IASIS and
its Restricted Subsidiaries separate from the financial condition and results of
operations of the Unrestricted Subsidiaries of IASIS.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the notes, whether or not
prohibited by the subordination provisions of the indenture;
(2) default in payment when due of the principal of, or premium, if any,
on the notes, whether or not prohibited by the subordination
provisions of the indenture;
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(3) failure by IASIS or any of its Subsidiaries to comply with the
provisions described under the captions "-- Repurchase at the Option
of Holders -- Asset Sales," or "-- Covenants -- Merger,
Consolidation or Sale of Assets";
(4) failure by IASIS or any of its Subsidiaries to comply with any of
the other covenants in the indenture for a period of 60 consecutive
days after written notice by the trustee or by the holders of at
least 25% in principal amount of the notes;
(5) default under any mortgage, indenture or instrument under which
there is issued and outstanding any Indebtedness for money borrowed
by IASIS or any of its Restricted Subsidiaries, or the payment of
which is guaranteed by IASIS or any of its Restricted Subsidiaries,
whether the Indebtedness or guarantee now exists, or is created
after the date of the indenture, if that default:
(a) is caused by a failure to pay principal at the final stated
maturity of such Indebtedness, referred to as a "Payment
Default"; or
(b) results in the acceleration of the Indebtedness prior to its
express maturity,
in the case of both clauses (a) and (b), only if the principal
amount of any Indebtedness, together with the principal amount of
any other Indebtedness under which there has been a Payment Default
or the maturity of which has been so accelerated, aggregates $10.0
million or more;
(6) failure by IASIS or any of its Subsidiaries to pay final judgments
aggregating in excess of $10.0 million, net of any amounts covered
by insurance or indemnity arrangements provided by a reputable and
creditworthy insurance company or other Person, which judgments are
not paid, discharged or stayed for a period of 60 consecutive days
after the judgments become final and nonappealable;
(7) except as permitted by the indenture, any Subsidiary Guarantee by a
Guarantor that is a Significant Subsidiary shall be held in any
judicial proceeding to be unenforceable or invalid or shall cease
for any reason to be in full force and effect or any Guarantor that
is a Significant Subsidiary, or any Person acting on behalf of any
Guarantor that is a Significant Subsidiary, shall deny or disaffirm
its obligations under its Subsidiary Guarantee; and
(8) events of bankruptcy or insolvency with respect to IASIS or any of
its Restricted Subsidiaries which is a Significant Subsidiary.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to IASIS, all outstanding notes will
become due and payable immediately without further action or notice. If any
other Event of Default occurs and is continuing, the trustee, upon request of
holders of at least 25% in principal amount of the notes then outstanding, or
the holders of at least 25% in principal amount of the then outstanding notes
may declare all the notes to be due and payable by notice in writing to IASIS
and the trustee specifying the respective Event of Default and that notice is a
"notice of acceleration," referred to as the "Acceleration Notice," and the same
(1) will become immediately due and payable or
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(2) if there are any amounts outstanding under the Credit Agreement,
will become immediately due and payable upon the first to occur of
an acceleration under the Credit Agreement or five business days
after receipt by IASIS and the Representative under the Credit
Agreement of the Acceleration Notice but only if the Event of
Default is then continuing. The holders of a majority in aggregate
principal amount of the then outstanding notes by written notice
to the trustee may on behalf of all of the holders rescind an
acceleration and its consequences if the rescission would not
conflict with any judgment or decree and if all existing Events of
Default have been cured or waived, but not including Events of
Default like nonpayment of principal, interest or premium that has
become due solely because of the acceleration.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to limitations, holders of a majority in
principal amount of the then outstanding notes may direct the trustee in its
exercise of any trust or power. The trustee may withhold from holders of the
notes notice of any continuing Default or Event of Default if it determines that
withholding notice is in their interest, but the trustee may not withhold a
Default or Event of Default relating to the payment of principal or interest or
Liquidated Damages.
The holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
interest or Liquidated Damages on, or the principal of, the notes.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of IASIS with the
intention of avoiding payment of the premium that IASIS would have had to pay if
IASIS then had elected to redeem the notes in accordance with the optional
redemption provisions of the indenture, an equivalent premium shall also become
and be immediately due and payable to the extent permitted by law upon the
acceleration of the notes. If an Event of Default occurs prior to October 15,
2004, by reason of any willful action or inaction taken or not taken by or on
behalf of IASIS with the intention of avoiding the prohibition on redemption of
the notes prior to October 15, 2004, then the premium specified in the indenture
will also become immediately due and payable to the extent permitted by law upon
the acceleration of the notes.
IASIS is required to deliver to the trustee annually a statement regarding
compliance with the indenture. Upon becoming aware of any Default or Event of
Default, IASIS is required to deliver to the trustee a statement specifying the
Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of IASIS or any
Guarantor, in that capacity, will have any liability for any obligations of
IASIS or the Guarantors under the notes, the indenture, the Subsidiary
Guarantees, or for any claim based on, in respect of, or by reason of,
obligations or their creation. Each holder of notes by accepting a note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the notes. The waiver may not be effective to
waive liabilities under the federal securities laws.
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE
IASIS may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding notes and all obligations
of the Guarantors discharged with respect to their Subsidiary Guarantees,
referred to as "Legal Defeasance," except for:
(1) the rights of holders of outstanding notes to receive payments in
respect of the principal of, or interest or premium and Liquidated
Damages, if any, on the notes when payments are due from the trust
referred to below;
(2) IASIS' obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost
or stolen notes and the maintenance of an office or agency for
payment and money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee,
and IASIS' and the Guarantor's obligations in connection with the
rights, powers, trusts, duties and immunities of the trustee; and
(4) the Legal Defeasance provisions of the indenture.
In addition, IASIS may, at its option and at any time, elect to have the
obligations of IASIS and the Guarantors released with respect to covenants that
are described in the indenture, referred to as "Covenant Defeasance," and after
that time any omission to comply with those covenants will not constitute a
Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, some events, not, however, including nonpayment, bankruptcy,
receivership, rehabilitation and insolvency events, described under "Events of
Default" will no longer constitute an Event of Default with respect to the
notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) IASIS must irrevocably deposit with the trustee, in trust, for the
benefit of the holders of the notes, cash in U.S. dollars,
noncallable Government Securities, or a combination thereof, in
amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the
principal of, or interest and premium and Liquidated Damages, if
any, on the outstanding notes on the stated maturity or on the
applicable redemption date, as the case may be, and IASIS must
specify whether the notes are being defeased to maturity or to a
particular redemption date;
(2) in the case of Legal Defeasance, IASIS will have delivered to the
trustee an Opinion of Counsel reasonably acceptable to the trustee
confirming that
(a) IASIS has received from, or there has been published by, the
Internal Revenue Service a ruling or
(b) since the date of the indenture, there has been a change in the
applicable federal income tax law, in either case to the effect
that, and based on that change the Opinion of Counsel shall
confirm that, the holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes
as a result of the Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if the Legal
Defeasance had not occurred;
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(3) in the case of Covenant Defeasance, IASIS will have delivered to the
trustee an Opinion of Counsel reasonably acceptable to the trustee
confirming that the holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a
result of the Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same
times as would have been the case if the Covenant Defeasance had not
occurred;
(4) no Default or Event of Default will have occurred and be continuing
either:
(a) on the date of the deposit, other than a Default or Event of
Default resulting from the borrowing of funds to be applied to
the deposit; or
(b) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the
91st day after the date of deposit;
(5) any Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument, other than the indenture, to which IASIS or
any of its Subsidiaries is a party or by which IASIS or any of its
Subsidiaries is bound;
(6) IASIS must have delivered to the trustee an Opinion of Counsel to
the effect that, assuming no intervening bankruptcy of IASIS or any
Guarantor between the date of deposit and the 91st day following the
deposit and assuming that no holder is an "insider" of IASIS under
applicable bankruptcy law, after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally;
(7) IASIS must deliver to the trustee an Officers' Certificate stating
that the deposit was not made by IASIS with the intent of preferring
the holders of notes over the other creditors of IASIS with the
intent of defeating, hindering, delaying or defrauding creditors of
IASIS or others; and
(8) IASIS must deliver to the trustee an Officers' Certificate and an
Opinion of Counsel, each stating that all conditions precedent
relating to the Legal Defeasance or the Covenant Defeasance have
been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next three succeeding paragraphs, the indenture
or the notes may be amended or supplemented with the consent of the holders of
at least a majority in principal amount of the notes then outstanding including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, notes, and any existing default or
compliance with any provision of the indenture or the notes may be waived with
the consent of the holders of a majority in principal amount of the then
outstanding notes including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for, notes.
Without the consent of each holder affected, an amendment or waiver may not
with respect to any notes held by a nonconsenting holder:
(1) reduce the principal amount of notes whose holders must consent to
an amendment, supplement or waiver;
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(2) reduce the principal of or change the fixed maturity of any note or
alter the provisions with respect to the redemption of the notes,
other than provisions relating to the covenants described above
under the caption "-- Repurchase at the Option of Holders";
(3) reduce the rate of or change the time for payment of interest on any
note;
(4) waive a Default or Event of Default in the payment of principal of,
or interest or premium, or Liquidated Damages, if any, on the notes,
except a rescission of acceleration of the notes by the holders of
at least a majority in aggregate principal amount of the notes and a
waiver of the payment default that resulted from this acceleration;
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of holders of notes to
receive payments of principal of, or interest or premium or
Liquidated Damages, if any, on the notes;
(7) waive a redemption payment with respect to any note, other than a
payment required by one of the covenants described above under the
caption "-- Repurchase at the Option of Holders";
(8) release any Guarantor from any of its obligations under its
Subsidiary Guarantee or the indenture, except in accordance with the
terms of the indenture; or
(9) make any change in the preceding amendment and waiver provisions.
In addition, any amendment to, or waiver of, the provisions of the
indenture relating to subordination that adversely affects the rights of the
holders of the notes will require the consent of the holders of at least 75% in
aggregate principal amount of notes then outstanding.
Notwithstanding the preceding, without the consent of any holder of notes,
IASIS, the Guarantors and the trustee may amend or supplement the indenture or
the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of IASIS' obligations to holders of
notes in the case of a merger or consolidation or sale of all or
substantially all of IASIS' assets;
(4) to make any change that would provide any additional rights or
benefits to the holders of notes or that does not adversely affect
the legal rights under the indenture of any holder; or
(5) to comply with requirements of the SEC in order to effect or
maintain the qualification of the indenture under the Trust
Indenture Act.
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SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect as
to all notes issued under the indenture, when:
(1) either:
(a) all notes that have been authenticated, except lost, stolen or
destroyed notes that have been replaced or paid and notes for
whose payment money has been deposited in trust and repaid to
IASIS, have been delivered to the trustee for cancellation; or
(b) all notes that have not been delivered to the trustee for
cancellation have become due and payable by reason of the
making of a notice of redemption or otherwise or will become
due and payable within one year and IASIS or any Guarantor has
irrevocably deposited or caused to be deposited with the
trustee as trust funds in trust solely for the benefit of the
holders, cash in U.S. dollars, noncallable Government
Securities, or a combination of cash and noncallable Government
Securities, in amounts as will be sufficient without
consideration of any reinvestment of interest, to pay and
discharge the entire indebtedness on the notes not delivered to
the trustee for cancellation for principal, premium and
Liquidated Damages, if any, and accrued interest to the date of
maturity or redemption;
(2) no Default or Event of Default shall have occurred and be continuing
on the date of the deposit or shall occur as a result of the deposit
and the deposit will not result in a breach or violation of, or
constitute a default under, any other instrument to which IASIS or
any Guarantor is a party or by which IASIS or any Guarantor is
bound;
(3) IASIS or any Guarantor has paid or caused to be paid all sums
payable by it under the indenture; and
(4) IASIS has delivered irrevocable instructions to the trustee under
the indenture to apply the deposited money toward the payment of the
notes at maturity or the redemption date, as the case may be.
In addition, IASIS must deliver an Officers' Certificate and an Opinion of
Counsel to the trustee stating that all conditions precedent to satisfaction and
discharge have been satisfied.
CONCERNING THE TRUSTEE
If the trustee becomes a creditor of IASIS or any Guarantor, the indenture
limits its right to obtain payment of claims in certain cases, or to realize on
certain property received in respect of any such claim as security or otherwise.
The trustee will be permitted to engage in other transactions; however, if it
acquires any conflicting interest it must eliminate the conflict within 90 days
and apply to the SEC for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
shall occur and be continuing, the trustee will be required, in the exercise of
its power, to use the degree of care of a prudent person in the conduct of
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his or her own affairs. Subject to these provisions, the trustee will be under
no obligation to exercise any of its rights or powers under the indenture at the
request of any holder of notes, unless the holder shall have offered to the
trustee security and indemnity satisfactory to it against any loss, liability or
expense.
BOOK-ENTRY, DELIVERY AND FORM
Except as described below, the new notes will be issued in the form of one
or more registered notes in global form without coupons. Each global note will
be deposited with, or on behalf of, DTC and registered in the name of Cede &
Co., as nominee of DTC, or will remain in the custody of the trustee pursuant to
the FAST Balance Certificate Agreement between DTC and the trustee.
DTC has advised IASIS that it is:
(1) a limited purpose trust company organized under the laws of the
State of New York,
(2) a member of the Federal Reserve System,
(3) a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and
(4) a "clearing agency" registered pursuant to Section 17A of the
Exchange Act.
DTC was created to hold securities for its participating organizations, or
"DTC Participants," and facilitates the clearance and settlement of securities
transactions between DTC Participants through electronic book-entry changes to
the accounts of the DTC Participants, consequently eliminating the need for
physical transfer and delivery of certificates. DTC Participants include
securities brokers and dealers, including the placement agents from the original
offering of the old notes, banks and trust companies, clearing corporations and
other organizations. Access to DTC's system is also available to other entities
such as banks, brokers, dealers and trust companies, or "Indirect DTC
Participants," that clear through or maintain a custodial relationship with a
DTC Participant, either directly or indirectly. Holders who are not DTC
Participants may beneficially own securities held by or on behalf of DTC only
through DTC Participants or Indirect DTC Participants.
IASIS expects, as provided in the procedures established by DTC, that
(1) upon deposit of the global notes, DTC will credit the accounts of
DTC Participants with an interest in the global note and
(2) ownership of the new notes will be shown on, and the transfer of
ownership of the new notes will be effected only through, records
maintained by DTC with respect to the interest of DTC Participants,
the DTC Participants and the Indirect DTC Participants.
The laws of some states require that some persons take physical delivery in
definitive form of securities that they own and that a security interest in
negotiable instruments can only be perfected by delivery of certificates
representing the instruments. Consequently, the ability to transfer the new
notes or to pledge the new notes as collateral will be limited to this extent.
So long as DTC or its nominee is the registered owner of a global note, DTC
or the nominee, as the case may be, will be considered the sole owner or holder
of the new notes
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represented by the global note for all purposes under the indenture. Except as
provided below, owners of beneficial interests in a global note will not
(1) be entitled to have the new notes represented by the global note
registered in their names,
(2) receive or be entitled to receive physical delivery of certificated
securities, and
(3) be considered the owners or holders of the new notes for any
purpose, including with respect to the giving of any directions,
instruction or approval to the trustee. As a result, the ability of
a person having a beneficial interest in new notes represented by a
global note to pledge or transfer that interest to persons or
entities that do not participate in DTC's system or to otherwise
take action with respect to that interest, may be affected by the
lack of a physical certificate evidencing the interest.
Accordingly, each holder owning a beneficial interest in a global note must
rely on the procedures of DTC and, if the holder is not a DTC Participant or an
Indirect DTC Participant, on the procedures of the DTC Participant through which
the holder owns its interest, to exercise any rights of a holder of new notes
under the indenture or the global note. IASIS understands that under existing
industry practice, in the event IASIS requests any action of holders of new
notes or a holder that is an owner of a beneficial interest in a global note
desires to take any action that DTC, as the holder of the global note, is
entitled to take, DTC would authorize the DTC Participants to take the action
and the DTC Participants would authorize holders owning through the DTC
Participants to take the action or would otherwise act upon the instruction of
the holders. Neither IASIS nor the trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of the new notes by DTC, or for maintaining, supervising or reviewing any
records of DTC relating to the new notes.
Payments of the principal of, premium, if any, and interest on, any new
notes represented by a global note registered in the name of DTC or its nominee
on the applicable record date will be payable by the trustee to or at the
direction of DTC or its nominee in its capacity as the registered holder of the
global note representing the new notes. Under the terms of the indenture, IASIS
and the trustee may treat the persons in whose names the new notes, including
the global notes, are registered as the owners for the purpose of receiving
payment and for any and all other purposes whatsoever. As a result, neither
IASIS nor the trustee has or will have any responsibility or liability for the
payment of amounts due to beneficial owners of interest in the global note,
including principal, premium, if any, and interest, or to immediately credit the
accounts of the relevant DTC Participants with payment, in amounts proportionate
to their respective holdings in principal amount of beneficial interests in the
global note as shown on the records of DTC. Payments by the DTC Participants and
the Indirect DTC Participants to the beneficial owners of interests in the
global note will be governed by standing instructions and customary practice and
will be the responsibility of the DTC Participants or the Indirect DTC
Participants and DTC.
CERTIFICATED SECURITIES
(1) If DTC notifies IASIS in writing that it is no longer willing or
able to act as a depository or DTC ceases to be registered as a
clearing agency under the Exchange Act and IASIS is unable to locate
a qualified successor within 90 days,
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(2) IASIS, at its option, notifies the trustee in writing that it elects
to cause the issuance of notes issued in the exchange offer in
definitive form under the indenture or
(3) upon the occurrence of other specified events,
then, upon surrender by DTC of its global notes, certificated securities will be
issued to each Person that DTC identifies as the beneficial owner of the new
notes, represented by the global notes.
Upon any issuance of this type, the trustee is required to register the
certificated securities in the name of the Persons identified as beneficial
owners or the nominee of any beneficial owner and cause the same to be delivered
to these Persons.
NO LIABILITY FOR DELAY IN IDENTIFYING BENEFICIAL OWNERS. Neither IASIS nor
the trustee will be liable for any delay by DTC or any DTC Participant or
Indirect DTC Participant in identifying the beneficial owners of the related new
notes and each beneficial owner may conclusively rely on, and will be protected
in relying on, instructions from DTC for all purposes, including with respect to
the registration and delivery, and the respective principal amounts, of the new
notes to be issued.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
Holders of the new notes are not entitled to any registration rights with
respect to the new notes.
The following description summarizes the material provisions of the
registration rights agreement and is not complete and is subject to, and is
qualified in its entirety by reference to, all of the provisions of the
registration rights agreement. We have attached a copy of the registration
rights agreement as an exhibit to the registration statement of which this
prospectus forms a part and the registration rights agreement is incorporated by
reference in this prospectus in its entirety.
IASIS, the subsidiary guarantors and J. P. Morgan Securities, Inc. entered
into the registration rights agreement on October 15, 1999. Under the terms of
the registration rights agreement, IASIS and the subsidiary guarantors agreed to
file this registration statement with the SEC. Upon the effectiveness of this
registration statement, IASIS and the subsidiary guarantors will offer to
holders of transfer restricted securities who are able to make specified
representations the opportunity to exchange their transfer restricted securities
for a like principal amount of new notes and related guarantees, subject to the
terms and conditions of the exchange offer described elsewhere in this
prospectus.
Under some circumstances, we have agreed to file with the SEC a shelf
registration statement to cover resales of the transfer restricted securities by
holders who satisfy certain conditions relating to the provision of information
in connection with the shelf registration statement. We will file the shelf
registration statement if:
(1) we are not permitted to complete the exchange offer because the
exchange offer is not permitted by applicable law or SEC policy; or
(2) any holder of transfer restricted securities notifies us prior to
the 20th day following completion of the exchange offer that:
(a) it is prohibited by law or SEC policy from participating in the
exchange offer; or
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(b) that it may not resell the new notes acquired in the exchange
offer to the public without delivering a prospectus and the
prospectus contained in the exchange offer registration
statement is not appropriate or available for such resales; or
(c) that it is a broker-dealer and owns notes acquired directly
from us or one of our affiliates.
We will use our commercially reasonable efforts to cause the applicable
registration statement to be declared effective as promptly as possible by the
SEC.
For purposes of the preceding paragraphs, "transfer restricted securities"
means each note until the earliest to occur of:
(1) the date on which the note has been exchanged by a Person other than
a broker-dealer for a new note we will issue in the exchange offer;
(2) following the exchange by a broker-dealer in the exchange offer of
an old note for a new note, the date on which the new note is sold
to a purchaser who receives from the broker-dealer on or prior to
the date of the sale a copy of the prospectus contained in the
exchange offer registration statement;
(3) the date on which the note has been effectively registered under the
Securities Act and disposed of in accordance with the shelf
registration statement; or
(4) the date on which the note is distributed to the public under Rule
144 under the Securities Act.
Under the terms of the registration rights agreement, IASIS and the
Guarantors agreed to:
(1) file an exchange offer registration statement with the SEC on or
prior to January 13, 2000;
(2) use their commercially reasonable efforts to have the exchange offer
registration statement declared effective by the SEC on or prior to
April 12, 2000;
(3) unless the exchange offer would not be permitted by applicable law
or SEC policy,
(a) use their commercially reasonable efforts to commence the
exchange offer; and
(b) use their commercially reasonable efforts to issue on or prior
to 30 business days, or longer if required by the federal
securities laws, after the date on which the exchange offer
registration statement was declared effective by the SEC, new
notes issued in the exchange offer in exchange for all old
notes tendered prior to that time in the exchange offer; and
(4) if obligated to file the shelf registration statement, use their
commercially reasonable efforts to file the shelf registration
statement with the SEC on or prior to 30 days after such filing
obligation arises and to cause the shelf registration to be declared
effective by the SEC on or prior to 90 days after that obligation
arises.
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The registration rights agreement also requires us to include the
prospectus for the exchange offer information necessary to allow broker-dealers
who hold notes, other than notes purchased directly from us or one of our
affiliates, to exchange the notes in the exchange offer and to satisfy the
prospectus delivery requirements in connection with resales of the new notes
received by such broker-dealers in the exchange offer.
This prospectus covers the offer and sale of the new notes in the exchange
offer and the resale of new notes received in the exchange offer by any
broker-dealer who held notes other than notes purchased directly from us or one
of our affiliates.
We will pay liquidated damages if:
(1) we fail to file any of the registration statements required by the
registration rights agreement on or before the date specified for
the required filing; or
(2) any of the required registration statements is not declared
effective by the SEC on or prior to the date specified for
effectiveness, referred to as the "effectiveness target date";
(3) we fail to complete the exchange offer within 30 business days of
the effectiveness target date with respect to the registration
statement relating to the exchange offer; or
(4) the shelf registration statement or the registration statement
relating to the exchange offer is declared effective but thereafter
ceases to be effective or usable in connection with resales of
transfer restricted securities during the periods specified in the
registration rights agreement. Each event referred to in clauses (1)
through (4) above is referred to as a "registration default."
The amount of liquidated damages will be equal to a per annum rate of 0.50%
on the principal amount of notes held by the holder, with respect to the first
90-day period immediately following the occurrence of the first registration
default.
Liquidated damages will increase by an additional per annum rate of 0.25%
with respect to each subsequent 90-day period until all registration defaults
have been cured, up to a maximum amount of liquidated damages for all
registration defaults of 2.00% per annum on the principal amount of notes.
We will pay all accrued liquidated damages on each interest date in the
manner provided for the payment of interest in the indenture. Following the cure
of all registration defaults, the accrual of liquidated damages will cease.
Based on interpretations by the staff of the SEC, as discussed in no-action
letters issued to third parties, we believe that you may offer for resale,
resell or otherwise transfer the new notes and the related guarantees you
receive in the exchange offer without compliance with the registration and
prospectus delivery provisions of the Securities Act. Any purchaser of the
notes, however, who is either an affiliate of IASIS, a broker-dealer who
purchased notes directly from us or one of the affiliates for resale, or who
intends to participate in the exchange offer for the purpose of distributing the
new notes:
- will not be able to rely on the interpretation of the staff of the
SEC;
- will not be able to tender its notes in the exchange offer; and
- must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or transfer of the
notes, unless the
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holder makes the sale or transfer in compliance with an exemption from
the requirements.
By tendering your old notes, you represent to us:
- that you are not an affiliate of IASIS, as defined in Rule 144 under
the Securities Act;
- that you are acquiring any new notes you receive in the exchange offer
in the ordinary course of your business; and
- that at the time of the commencement of the exchange offer, neither
you nor, to your knowledge, anyone receiving new notes from you, has
any arrangement or understanding with any person to participate in the
distribution of the new notes in violation of the Securities Act.
The SEC has taken the position that participating broker-dealers may
fulfill their prospectus delivery requirements with respect to resales of the
new notes, other than a resale of an unsold allotment from the original sale of
the old notes, by delivering this prospectus to prospective purchasers. IASIS
and the subsidiary guarantors have agreed that for a period of 180 days after
the date on which the registration statement containing this prospectus is
declared effective, they will make this prospectus, as amended or supplemented,
available to any participating broker-dealer for use in connection with any
resale of the new notes. For further information regarding the obligations of
broker-dealers, including the prospectus delivery requirement, see "Plan of
Distribution."
In the event that we file a shelf registration statement, we will:
- provide a copy of the prospectus contained in the shelf registration
statement to each holder of old notes;
- notify each holder of old notes when the shelf registration statement
has been declared effective; and
- take other actions as are required to permit unrestricted resales of
the old notes.
If you sell old notes under the shelf registration statement:
- you must be named as a selling security holder in the prospectus that
forms a part of the shelf registration statement;
- you must deliver a prospectus to any purchasers of your old notes;
- you will be subject to the civil liability provisions of the
Securities Act in connection with such sales; and
- you will be bound by the provisions of the registration rights
agreement that are applicable to holders who sell their old notes
under the shelf registration statement, including various
indemnification rights and obligations.
In addition, each holder will be required to deliver information to be used in
connection with the shelf registration statement and to provide comments on the
shelf registration statement within the time periods called for in the notes
registration rights agreement in order to have their notes included in the shelf
registration statement and to benefit from the provisions regarding liquidated
damages.
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Holders of old notes who sell their old notes under a shelf registration
statement are subject to various indemnification rights and obligations.
DEFINITIONS
We have listed below defined terms used in the indenture. We refer you to
the indenture for a full disclosure of all these terms, as well as any other
capitalized terms we use in this Description of Notes for which we have not
provided any definition.
"ACQUIRED DEBT" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time the other
Person is merged or consolidated with or into or became a Subsidiary
of the specified Person, whether or not the Indebtedness is incurred
in connection with, or in contemplation of, the other Person merging
with or into, or becoming a Subsidiary of, the specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by the
specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person shall be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings. No Person other than IASIS or any
Subsidiary of IASIS in whom a Receivables Subsidiary makes an Investment in
connection with a Qualified Receivables Transaction will be deemed to be an
Affiliate of IASIS or any of its Subsidiaries solely by reason of that
Investment.
"ASSET SALE" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights; provided that the sale, conveyance or other disposition of
all or substantially all of the assets of IASIS and its Restricted
Subsidiaries taken as a whole will be governed by the provisions of
the Indenture described above under the caption "--Repurchase at the
Option of Holders--Change of Control" or the provisions described
above under the caption "--Covenants--Merger, Consolidation or Sale
of Assets" and not by the provisions of the Asset Sale covenant; and
(2) the issuance of Equity Interests by any of IASIS' Restricted
Subsidiaries or the sale of Equity Interests in any of IASIS'
Subsidiaries.
Notwithstanding the preceding, the following items shall not be deemed to
be Asset Sales:
(1) any single transaction or series of related transactions that
involves assets having a fair market value of less than the greater
of (a) $1.0 million and (b) 1% of Consolidated Cash Flow;
(2) a sale or transfer of assets between or among IASIS and its
Restricted Subsidiaries,
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(3) an issuance of Equity Interests by a Restricted Subsidiary to IASIS
or to another Restricted Subsidiary;
(4) the sale or lease of equipment, inventory, accounts receivable or
other assets in the ordinary course of business;
(5) the sale or other disposition of cash or Cash Equivalents;
(6) a Restricted Payment or Permitted Investment that is permitted by
the covenant described above under the caption
"--Covenants--Restricted Payments";
(7) the sale, lease, conveyance, disposition or other transfer of (a)
the Capital Stock of or any Investment in any Unrestricted
Subsidiary or (b) Permitted Investments made in accordance with
clause (16) of the definition of Permitted Investments;
(8) surrender or waiver of contract rights or the settlement, release
or surrender of contract, tort or other claims of any kind;
(9) the licensing of intellectual property in the ordinary course of
business;
(10) granting of Liens not otherwise prohibited by the indenture;
(11) leases or subleases to third persons in the ordinary course of
business that do not interfere in any material respect with the
business of IASIS or any of its Restricted Subsidiaries;
(12) sales of accounts receivable and related assets of the type
specified in the definition of "Qualified Receivables Transaction"
to a Receivables Subsidiary for the fair market value of those
accounts receivable and related assets, less amounts required to be
established as reserves and customary discounts pursuant to
contractual agreements with entities that are not Affiliates of
IASIS entered into as part of a Qualified Receivables Transaction;
(13) transfers of accounts receivable and related assets of the type
specified in the definition of "Qualified Receivables Transaction,"
or a fractional undivided interest of those accounts receivable and
related assets, by a Receivables Subsidiary in a Qualified
Receivables Transaction; and
(14) the substantially contemporaneous sale and leaseback of an asset
acquired after the date of the indenture; provided that the sale
and leaseback occurs within 180 days after the date of the
acquisition of the asset by IASIS and its Restricted Subsidiaries.
"BENEFICIAL OWNER" has the meaning assigned to that term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person," as that term is used in Section 13(d)(3)
of the Exchange Act, the "person" shall be deemed to have beneficial ownership
of all securities that the "person" has the right to acquire by conversion or
exercise of other securities, whether the right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition. The terms
"Beneficially Owns" and "Beneficially Owned" shall have a corresponding meaning.
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"BOARD OF DIRECTORS" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the board of directors of the general
partner of the partnership; and
(3) with respect to any other Person, the board or committee of the
Person serving a similar function.
"CAPITAL LEASE OBLIGATION" means, at the time any determination of capital
lease obligations is to be made, the amount of the liability in respect of a
capital lease that would at that time be required to be capitalized on a balance
sheet in accordance with GAAP.
"CAPITAL STOCK" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents of
corporate stock;
(3) in the case of a partnership or limited liability company, general
or limited partnership or membership interests; and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or
distributions of assets of, the issuing Person.
"CASH EQUIVALENTS" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality of the
government, provided that the full faith and credit of the United
States is pledged in support of the securities, having maturities of
not more than one year from the date of acquisition;
(3) certificates of deposit, demand and time deposits, eurodollar time
deposits, bankers' acceptances with maturities not exceeding one
year and overnight bank deposits, in each case, with any lender
party to the Credit Agreement or with any domestic commercial bank
having capital and surplus in excess of $500.0 million;
(4) repurchase obligations with a term of not more than one year for
underlying securities of the types described in clauses (2) and (3)
above entered into with any financial institution meeting the
qualifications specified in clause (3) above;
(5) commercial paper having one of the two highest ratings obtainable
from Moody's Investors Service, Inc. or Standard & Poor's Rating
Services and in each case maturing within one year after the date of
acquisition;
(6) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or
any public instrumentality of the state having one of the two
highest ratings obtainable from Moody's or S&P and maturing within
one year from the date of acquisition thereof; and
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(7) money market funds at least 95% of the assets of which constitute
Cash Equivalents of the kinds described in clauses (1) through (6)
of this definition.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other
disposition, not including a merger or consolidation, in one or a
series of related transactions, of all or substantially all of the
properties or assets of IASIS and its Restricted Subsidiaries taken
as a whole to any "person," as that term is used in Section 13(d)(3)
of the Exchange Act, other than to a Principal or a Related Party of
a Principal;
(2) the adoption of a plan relating to the liquidation or dissolution of
IASIS;
(3) the consummation of any transaction, including, without limitation,
any merger or consolidation, the result of which is that any
"person," as defined above, other than the Principals and their
Related Parties, becomes the Beneficial Owner, directly or
indirectly, of more than 50% of the Voting Stock of IASIS, measured
by voting power rather than number of shares; or
(4) during any period of two consecutive years, individuals who at the
beginning of the period constituted the Board of Directors of IASIS,
together with any new directors whose election by the Board of
Directors or whose nomination for election by the stockholders of
IASIS has been approved by the Principals or a majority of the
directors then still in office who either were directors at the
beginning of the period or whose election or recommendation for
election was previously so approved, cease to constitute a majority
of the Board of Directors of IASIS.
"CONSOLIDATED CASH FLOW" means, with respect to any specified Person for
any period, the Consolidated Net Income of the Person for the period plus:
(1) an amount equal to any extraordinary gain or loss and any net gain
or loss realized by the Person or any of its Restricted Subsidiaries
in connection with an Asset Sale, to the extent that the gains or
losses were utilized in computing such Consolidated Net Income; plus
(2) provision for taxes based on income or profits of the Person and its
Restricted Subsidiaries for the period, to the extent that provision
for taxes was deducted in computing Consolidated Net Income; plus
(3) consolidated interest expense of the Person and its Restricted
Subsidiaries for the period, whether paid or accrued and whether or
not capitalized, including, without limitation,
(a) amortization of debt issuance costs and original issue
discount,
(b) non-cash interest payments,
(c) the interest component of any deferred payment obligations,
(d) the interest component of all payments associated with Capital
Lease Obligations, and
(e) commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings,
and net of the effect of all payments made or received pursuant
to Hedging Obligations, to
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the extent that any expense was deducted in computing
Consolidated Net Income; plus
(4) fees, costs, charges, and expenses incurred in connection with the
Paracelsus Recapitalization and the Tenet Acquisition; plus
(5) depreciation, amortization including amortization of goodwill and
other intangibles, but excluding amortization of prepaid cash
expenses that were paid in a prior period, and other non-cash
expenses and items, excluding any non-cash expense to the extent
that it represents an accrual of or reserve for cash expenses in any
future period or amortization of a prepaid cash expense that was
paid in a prior period, of the Person and its Restricted
Subsidiaries for the period to the extent that the depreciation,
amortization and other non-cash expenses and items were deducted in
computing Consolidated Net Income; minus
(6) non-cash items increasing Consolidated Net Income for the period,
other than the accrual of revenue in the ordinary course of
business, in each case, on a consolidated basis and determined in
accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, the interest expense of, and the depreciation and amortization
and other non-cash items of, a Restricted Subsidiary of a Person shall be added
to Consolidated Net Income to compute Consolidated Cash Flow only to the extent
and in the same proportion that Net Income of that Restricted Subsidiary was
included in calculating the Consolidated Net Income of that Person.
"CONSOLIDATED NET INCOME" means, with respect to any specified Person for
any period, the aggregate of the Net Income of the Person and its Restricted
Subsidiaries for the period, on a consolidated basis, determined in accordance
with GAAP and before dividends on preferred stock; provided that:
(1) the Net Income, but not loss, of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method
of accounting shall be included only to the extent of the amount of
dividends or distributions paid in cash to the specified Person or
a Restricted Subsidiary thereof;
(2) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is
not at the date of determination permitted without any prior
governmental approval that has not been obtained or, directly or
indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Subsidiary or its
stockholders;
(3) solely for purposes of determining the aggregate amount available
for Restricted Payments under clause 3(a) of the Restricted
Payments covenant, the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to the date
of the acquisition shall be excluded;
(4) the cumulative effect of a change in accounting principles shall be
excluded;
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(5) there shall be added to the Net Income of such Person the amount of
any decrease in the deferred tax asset for the period relating to
the actual cash tax benefit realized by IASIS, or the consolidated
tax group of which IASIS is a member, resulting from the election
under Section 338(h)(10) of the Code in respect of the Paracelsus
Recapitalization;
(6) the fees, costs and expenses of the Transactions shall be excluded;
(7) income or losses attributable to discontinued operations shall be
excluded, including, without limitation, operations disposed of
during such period whether or not such operations were classified
as discontinued;
(8) all extraordinary gains and losses, non-recurring cumulative
effects of accounting changes and, without duplication,
non-recurring or unusual gains and losses and all restructuring
charges shall be excluded;
(9) any non-cash charges attributable to applying the purchase method
of accounting in accordance with GAAP shall be excluded; and
(10) non-cash charges relating to employee benefit or other management
compensation plans of IASIS or a Restricted Subsidiary, excluding
any non-cash charge to the extent that it represents an accrual of
or reserve for cash expenses in any future period or amortization
of a prepaid cash expense incurred in a prior period, to the extent
that the non-cash charges are deducted in computing Consolidated
Net Income; provided, further that if IASIS or any Restricted
Subsidiary makes a cash payment in respect of a non-cash charge in
any period, the cash payment shall be deducted from the
Consolidated Net Income of IASIS for such period without
duplication.
"CREDIT AGREEMENT" means the Credit Agreement, dated as of October 15,
1999, by and among IASIS and Morgan Guaranty Trust Company of New York, as
administrative agent, and the other lenders that are a party to the Credit
Agreement, together with the related documents to the Credit Agreement
including, without limitation, any guarantee agreements and security documents,
in each case as those agreements may be or have been amended, supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring, including
increasing the amount of available borrowings under the Credit Agreement or
adding Subsidiaries of IASIS as additional borrowers or guarantors under the
Credit Agreement, all or any portion of the Indebtedness under the agreement or
any successor or replacement agreement and whether by the same or any other
agent, lender or group of lenders.
"CREDIT FACILITIES" means, one or more debt facilities including, without
limitation, the Credit Agreement or commercial paper facilities, in each case
with banks or other institutional lenders providing for revolving credit loans,
term loans, receivables financing, including through the sale of receivables to
lenders or to special purpose entities formed to borrow from lenders against
receivables, or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time.
"DEFAULT" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"DESIGNATED PREFERRED STOCK" means the preferred stock of IASIS, not
constituting Disqualified Stock or any preferred stock issued prior to the date
of the indenture or any preferred stock issued in exchange or substitution for
preferred stock issued prior to the
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date of the indenture, and is designated as Designated Preferred Stock on or
after its date of issuance in accordance with an Officers' Certificate delivered
to the trustee on the designation of the preferred stock, the cash proceeds of
which are excluded from the calculation provided for in clause 3(b) of the
covenant described above under the caption "--Covenants--Restricted Payments."
"DESIGNATED SENIOR DEBT" means:
(1) any Indebtedness under or in respect of the Credit Agreement; and
(2) any other Senior Debt permitted under the Indenture the principal
amount of which is $25.0 million or more and that has been
designated by IASIS in the instrument or agreement relating to the
same as "Designated Senior Debt."
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder, or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of its holder, in whole or
in part, on or prior to the date that is 91 days after the date on which the
notes mature, other than for Capital Stock which is not Disqualified Stock.
Notwithstanding the preceding sentence, (a) any Capital Stock that would
constitute Disqualified Stock solely because its holders have the right to
require IASIS to repurchase the Capital Stock upon the occurrence of a change of
control or an asset sale shall not constitute Disqualified Stock if the terms of
the Capital Stock provide that IASIS may not repurchase or redeem any of the
Capital Stock unless the repurchase or redemption complies with the covenant
described above under the caption "--Covenants--Restricted Payments," and (b)
any Capital Stock that would constitute Disqualified Stock solely because the
Capital Stock is issued under an employee benefit plan of IASIS or its
Subsidiaries or by a plan to employees and may be required to be repurchased by
IASIS in order to satisfy applicable statutory or regulatory obligations shall
not constitute Disqualified Stock. The amount of Disqualified Stock shall be its
mandatory maximum redemption price or liquidation preference, as applicable,
plus accrued dividends.
"DOMESTIC SUBSIDIARY" means any Restricted Subsidiary that was formed under
the laws of the United States or any state of the United States or the District
of Columbia or that guarantees or otherwise provides direct credit support for
any Indebtedness of IASIS or any Guarantor.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock, but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock.
"EQUITY OFFERING" means a sale by IASIS of shares of its Capital Stock
however designated and whether voting or non-voting, other than Disqualified
Stock, and any and all rights, warrants or options to acquire such Capital
Stock.
"EXISTING INDEBTEDNESS" means Indebtedness of IASIS and its Subsidiaries,
other than Indebtedness under the Credit Agreement, in existence on the date of
the indenture.
"FIXED CHARGES" means, with respect to any specified Person for any period,
the sum, without duplication, of:
(1) the consolidated interest expense of a Person and its Restricted
Subsidiaries for a period, whether paid or accrued, including,
without limitation,
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(a) original issue discount,
(b) non-cash interest payments,
(c) the interest component of any deferred payment obligations,
(d) the interest component of all payments associated with Capital
Lease Obligations, and
(e) commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings,
and net of the effect of all payments made or received pursuant
to Hedging Obligations and excluding amortization of deferred
financing costs; plus
(2) the consolidated interest of a Person and its Restricted
Subsidiaries that was capitalized during a period; plus
(3) any interest expense on Indebtedness of another Person that is
Guaranteed by a Person or one of its Restricted Subsidiaries or
secured by a Lien on assets of that Person or one of its
Restricted Subsidiaries, whether or not the Guarantee or Lien is
called upon; plus
(4) the product of
(a) all dividends paid, whether or not in cash, on any series of
Disqualified Stock or Designated Preferred Stock of a Person or
any of its Restricted Subsidiaries, other than dividends on
Equity Interests payable solely in Equity Interests of IASIS,
other than Disqualified Stock, or to IASIS or a Restricted
Subsidiary of IASIS, times
(b) a fraction, (x) the numerator of which is one and(y) the
denominator of which is one minus the then current combined
federal, state and local statutory tax rate of the Person,
expressed as a decimal, in each case, on a consolidated basis
and in accordance with GAAP.
"FIXED CHARGE COVERAGE RATIO" means with respect to any specified Person
for any period, the ratio of the Consolidated Cash Flow of the Person and its
Restricted Subsidiaries for a period to the Fixed Charges of the Person and its
Restricted Subsidiaries for a period. In the event that the specified Person or
any of its Restricted Subsidiaries incurs, assumes, Guarantees, repays,
repurchases or redeems any Indebtedness, other than ordinary working capital
borrowings, or issues, repurchases or redeems preferred stock subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated and on or prior to the "Calculation Date" on which the event for
which the calculation of the Fixed Charge Coverage Ratio is made, then the Fixed
Charge Coverage Ratio shall be calculated giving pro forma effect to the
incurrence, assumption, Guarantee, repayment, repurchase or redemption of
Indebtedness, or the issuance, repurchase or redemption of preferred stock, and
the use of the proceeds therefrom as if the same had occurred at the beginning
of the applicable four-quarter reference period.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions that have been made by the specified Person or any of
its Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions,
during the four-quarter reference period or subsequent to the
reference period and on or prior to the Calculation Date shall be
given pro forma effect as if they had occurred on the first day of
the four-quarter reference period and Consolidated Cash
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Flow for the reference period shall be calculated on a pro forma
basis in accordance with Regulation S-X under the Securities Act,
but without giving effect to clause (3) of the proviso contained in
the definition of Consolidated Net Income;
(2) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be
excluded; and
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to the Fixed
Charges will not be obligations of the specified Person or any of
its Restricted Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in any other statements by another entity as have
been approved by a significant segment of the accounting profession, which are
in effect on the date of the indenture.
"GUARANTEE" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements, of all or any
part of any Indebtedness.
"GUARANTORS" means each Restricted Subsidiary that executes a Subsidiary
Guarantee in accordance with the provisions of the indenture and their
respective successors and assigns; provided that upon the release of the
Subsidiary Guarantee under the Indenture, the Person shall cease to be a
Guarantor.
"HEDGING OBLIGATIONS" means, with respect to any specified Person, the
obligations of the Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect the Person
against fluctuations in interest rates, currency exchange rates or
commodity prices.
"HOSPITAL" means a hospital, outpatient clinic, long-term care facility,
medical office building or other facility, business or other asset that is used
or useful in or related to the provision of healthcare services.
"HOSPITAL SWAP" means an exchange of assets and, to the extent necessary to
equalize the value of the assets being exchanged, cash by IASIS or a Restricted
Subsidiary for one or more Hospitals and/or one or more Related Businesses or
for 100% of the Capital Stock of any Person owning or operating one or more
Hospitals or one or more Related Businesses, provided that cash does not exceed
20% of the sum of the amount of the cash and the fair market value of the
Capital Stock or assets received or given by IASIS or a Restricted Subsidiary in
the transaction, unless the excess cash is applied in accordance with the
requirements of the third paragraph of the "Asset Sales" covenant.
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"IASIS MERGER" means the merger of Iasis Healthcare Corporation, a
Tennessee corporation, into IASIS on or prior to the date of the indenture.
"INDEBTEDNESS" means, without duplication with respect to any specified
Person, any indebtedness of the Person, whether or not contingent, in respect
of:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit or reimbursement agreements in respect of the
letters of credit;
(3) banker's acceptances;
(4) representing Capital Lease Obligations;
(5) the balance deferred and unpaid of the purchase price of any
property, except any balance that constitutes an accrued expense
or trade payable; or
(6) representing the net obligations under any Hedging Obligations, if
and to the extent any of the preceding items, other than letters
of credit and Hedging Obligations, would appear as a liability
upon a balance sheet of the specified Person prepared in
accordance with GAAP. In addition, the term "Indebtedness"
includes all Indebtedness of others secured by a Lien on any asset
of the specified Person, whether or not the Indebtedness is
assumed by the specified Person, and, to the extent not otherwise
included, the Guarantee by the specified Person of any
indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued
with original issue discount; or
(2) the principal amount thereof in the case of all other
Indebtedness.
"INVESTMENTS" means, with respect to any Person, all direct or indirect
investments by a Person in other Persons, including Affiliates, in the forms of
loans, including Guarantees or other obligations, advances or capital
contributions, but excluding commission, travel, relocation, payroll,
entertainment and similar advances to officers and employees made in the
ordinary course of business, purchases or other acquisitions for consideration
of Indebtedness, Equity Interests or other securities, together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP.
If IASIS or any Subsidiary of IASIS sells or otherwise disposes of any
Equity Interests of any direct or indirect Subsidiary of IASIS so that, after
giving effect to any sale or disposition, that Person is no longer a Subsidiary
of IASIS, IASIS shall be deemed to have made an Investment on the date of the
sale or disposition equal to the fair market value of the Equity Interests of
the Subsidiary not sold or disposed of in an amount determined as provided in
the final paragraph of the covenant described above under the caption
"--Covenants--Restricted Payments." The acquisition by IASIS or any Subsidiary
of IASIS of a Person that holds an Investment in a third Person shall be deemed
to be an Investment by IASIS or the Subsidiary in the third Person in an amount
equal to the fair market value of the Investment held by the acquired Person in
that third Person in an amount determined as provided in the final paragraph of
the covenant described above under the caption "--Covenants--Restricted
Payments." The outstanding amount of any Investment shall be the original cost
of the Investment, reduced by all returns on the Investment, including
dividends, interest, distributions, returns of principal and profits on sale.
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"JLL HOSPITAL MERGER" means the merger of JLL Hospital, LLC into IASIS on
or prior to the date of the indenture.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of the asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including
(a) any conditional sale or other title retention agreement,
(b) any lease,
(c) any option or other agreement to sell or give a security interest in
and
(d) except in connection with any Qualified Receivables Transaction, any
filing of or agreement to give any financing statement under the
Uniform Commercial Code or equivalent statutes of any jurisdiction.
"LIQUIDATED DAMAGES" means all liquidated damages then owing in accordance
with Section 5 of the registration rights agreement.
"NET INCOME" means, with respect to any specified Person, the net income or
loss of the Person, determined in accordance with GAAP and before any reduction
in respect of preferred stock dividends, excluding, however:
(1) any gain or loss, together with any related provision for taxes on
the gain or loss, realized in connection with: (a) any Asset Sale;
or (b) the disposition of any securities by the Person or any of
its Restricted Subsidiaries or the extinguishment of any
Indebtedness of the Person or any of its Restricted Subsidiaries;
and
(2) any extraordinary gain or loss, together with any related
provision for taxes on extraordinary gain or loss.
"NET PROCEEDS" means the aggregate cash proceeds received by IASIS or any
of its Restricted Subsidiaries in respect of any Asset Sale, including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale, net of the direct costs relating to
the Asset Sale, including, without limitation, legal, accounting and investment
banking fees, and sales commissions, and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof, in each case, after
taking into account any available tax credits or deductions and any tax sharing
arrangements, and amounts required to be applied to the repayment of
Indebtedness, other than Indebtedness under a Credit Facility, secured by a Lien
on the asset or assets that were the subject of such Asset Sale and any reserve
for adjustment in respect of the sale price of such asset or assets established
in accordance with GAAP.
"NON-RECOURSE DEBT" means Indebtedness:
(1) as to which neither IASIS nor any of its Restricted Subsidiaries
(a) provides credit support of any kind, including any undertaking,
agreement or instrument that would constitute Indebtedness,
other than the pledge of the stock of an Unrestricted
Subsidiary; provided that the pledge otherwise constitutes
Non-Recourse Debt,
(b) is directly or indirectly liable as a guarantor or otherwise,
or
(c) constitutes the lender;
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(2) no default with respect to which, including any rights that the
holders may have to take enforcement action against an
Unrestricted Subsidiary, would permit upon notice, lapse of time
or both any holder of any other Indebtedness, other than the
notes, of IASIS or any of its Restricted Subsidiaries to declare a
default on other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and
(3) as to which the lenders of the Indebtedness have been notified in
writing or have agreed in writing in the agreement relating to the
Indebtedness or otherwise that they will not have any recourse to
the stock or assets of IASIS or any of its Restricted
Subsidiaries.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"PARACELSUS RECAPITALIZATION" means the recapitalization of IASIS, which at
the time of the recapitalization was a wholly owned Subsidiary of Paracelsus
Healthcare Corporation that owned hospital assets located in Utah, under the
recapitalization agreement, dated as of August 16, 1999.
"PERMITTED BUSINESS" means any business
(1) which is the same, similar, ancillary or related to any of the
businesses that IASIS and its Restricted Subsidiaries are engaged in
on the date of the indenture or
(2) in the healthcare industry.
"PERMITTED INVESTMENTS" means:
(1) any Investment in, including Guarantees of the obligations of,
IASIS or a Restricted Subsidiary of IASIS;
(2) any Investment in Cash Equivalents;
(3) any Investment by IASIS or any Restricted Subsidiary of IASIS in a
Person, if as a result of the Investment:
(a) the Person becomes a Restricted Subsidiary of IASIS; or
(b) the Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets
to, or is liquidated into, IASIS or a Restricted Subsidiary of
IASIS;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made under and in
compliance with the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales";
(5) any acquisition of assets, including Capital Stock, solely in
exchange for the issuance of Equity Interests, other than
Disqualified Stock, of IASIS;
(6) Hedging Obligations;
(7) loans and advances made to and guarantees provided for the benefit
of officers and employees of IASIS and its Restricted Subsidiaries
in the ordinary course of business not to exceed $5.0 million in
the aggregate at any one time outstanding;
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(8) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers compensation, performance
and similar deposits entered into as a result of the operations of
the business in the ordinary course of business;
(9) Investments in securities of trade debtors or customers received
under any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of the trade debtors or customers or in
good faith settlement of delinquent obligations of the trade
debtors or customers;
(10) obligations of one or more officers or other employees of IASIS or
any of its Restricted Subsidiaries in connection with the officer's
or employee's acquisition of shares of common stock of IASIS so
long as no cash or other assets are paid by IASIS or any of its
Restricted Subsidiaries to the officers or employees in connection
with the acquisition of any obligations;
(11) Investments in any of the notes;
(12) receivables owing to IASIS or any Restricted Subsidiary created in
the ordinary course of business;
(13) the acquisition by a Receivables Subsidiary in connection with a
Qualified Receivables Transaction of Equity Interests of a trust or
other Person established by the Receivables Subsidiary to effect
the Qualified Receivables Transaction; and any other Investment by
IASIS or a Subsidiary of IASIS in a Receivables Subsidiary or any
Investment by a Receivables Subsidiary in any other Person in
connection with a Qualified Receivables Transaction customary for
the transactions;
(14) Physician Support Obligations;
(15) in the event IASIS or a Restricted Subsidiary shall establish a
Subsidiary for the purpose of insuring the healthcare businesses or
facilities owned or operated by IASIS, any Subsidiary, any
physician employed by or on the medical staff of any business or
facility of this type, known as the "Insurance Subsidiary,"
Investments in an amount which do not exceed the minimum amount of
capital required under the laws of the jurisdiction in which the
Insurance Subsidiary is formed, and any Investment by the Insurance
Subsidiary which is a legal investment for an insurance company
under the laws of the jurisdiction in which the Insurance
Subsidiary is formed and made in the ordinary course of business
and rated in one of the four highest rating categories;
(16) other Investments in any Person having an aggregate fair market
value as measured on the date each Investment was made and without
giving effect to subsequent changes in value, when taken together
with all other Investments made pursuant to this clause (16) that
are at the time outstanding not to exceed an amount equal to the
greater of (x) $30.0 million and (y) 3% of Total Assets; and
(17) Investments in connection with Hospital Swaps.
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"PERMITTED JUNIOR SECURITIES" means debt or equity securities of IASIS or
any successor corporation issued pursuant to a plan of reorganization or
readjustment of IASIS that are subordinated to the payment of all then
outstanding Senior Debt of IASIS at least to the same extent that the notes are
subordinated to the payment of all Senior Debt of IASIS on the date of the
indenture, so long as:
(1) the effect of the use of this defined term in the subordination
provisions contained in the indenture is not to cause the notes to
be treated as part of:
(a) the same class of claims as the Senior Debt of IASIS; or
(b) any class of claims equal in ranking with, or senior to, the
Senior Debt of IASIS for any payment or distribution in any
case or proceeding or similar event relating to the
liquidation, insolvency, bankruptcy, dissolution, winding up or
reorganization of IASIS; and
(2) to the extent that any Senior Debt of IASIS outstanding on the date
of consummation of any such plan of reorganization or readjustment
is not paid in full in cash or Cash Equivalents, other than Cash
Equivalents of the type referred to in clauses (3) and (4) of the
Cash Equivalents definition, on that date, either:
(a) the holders of any Senior Debt not so paid in full in cash or
Cash Equivalents, other than Cash Equivalents of the type
referred to in clauses (3) and (4) of the Cash Equivalents
definition have consented to the terms of the plan of
reorganization or readjustment; or
(b) the holders receive securities which constitute Senior Debt of
IASIS which are guaranteed by guarantees constituting Senior
Debt of each Guarantor and which have been determined by the
relevant court to constitute satisfaction in full in money or
money's worth of any Senior Debt of IASIS and any related
Senior Debt of the Guarantors not paid in full in cash or Cash
Equivalents, other than Cash Equivalents of the type referred
to in clauses (3) and (4) of the Cash Equivalents definition.
"PERMITTED LIENS" means:
(1) Liens of IASIS and any Guarantor securing Senior Debt that was
permitted by the terms of the Indenture to be incurred;
(2) Liens in favor of IASIS or the Guarantors;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with or is acquired by, IASIS
or any Subsidiary of IASIS; provided that those Liens were in
existence prior to the contemplation of the merger, consolidation
or acquisition and do not extend to any assets other than those of
the Person merged into, consolidated with or acquired by IASIS or
the Subsidiary;
(4) Liens on property existing at the time of acquisition of the
property by IASIS or any Subsidiary of IASIS, provided that those
Liens were in existence prior to the contemplation of the
acquisition;
(5) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like
nature incurred in the ordinary course of business;
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(6) Liens to secure Indebtedness, including Capital Lease Obligations,
permitted by clause (4) of the second paragraph of the covenant
entitled "--Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock" covering only the assets acquired, constructed or
improved with the Indebtedness;
(7) Liens existing on the date of the indenture;
(8) Liens for taxes, assessments or governmental charges or claims that
(a) are not yet delinquent or (b) are being contested in good faith
by appropriate proceedings promptly instituted and diligently
concluded, provided that in the case of clause (b), any reserve or
other appropriate provision as shall be required in conformity with
GAAP shall have been made;
(9) Liens incurred in the ordinary course of business of IASIS or any
Subsidiary of IASIS with respect to obligations that do not exceed
$5.0 million at any one time outstanding;
(10) security for the payment of workers' compensation, unemployment
insurance, other social security benefits or other
insurance-related obligations, including, but not limited to, in
respect of deductibles, self-insured retention amounts and premiums
and adjustments to those amounts and premiums, entered into in the
ordinary course of business;
(11) deposits or pledges in connection with bids, tenders, leases and
contracts, other than contracts for the payment of money, entered
into in the ordinary course of business;
(12) zoning restrictions, easements, licenses, reservations, provisions,
covenants, conditions, waivers, restrictions on the use of property
or minor irregularities of title and, with respect to leasehold
interests, mortgages, obligations, liens and other encumbrances
incurred, created, assumed or permitted to exist and arising by,
through or under a landlord or owner of the leased property, with
or without consent of the lessee, none of which interferes in any
material respect with the ordinary conduct of the business of IASIS
or any of its Subsidiaries or materially impairs the use of any
parcel of property;
(13) deposits or pledges to secure public or statutory obligations,
progress payments, surety and appeal bonds or other obligations of
like nature incurred in the ordinary course of business;
(14) survey title exceptions, title defects, encumbrances, easements,
reservations of, or rights of others for, rights of way, sewers,
electric lines, telegraph or telephone lines and other similar
purposes or zoning or other restrictions as to the use of real
property not materially interfering with the ordinary conduct of
the business of IASIS and its Subsidiaries taken as a whole;
(15) Liens arising by operation of law in favor of landlords, mechanics,
carriers, warehousemen, materialmen, laborers, employees, suppliers
or the like, incurred in the ordinary course of business for sums
which are not yet delinquent or are being contested in good faith
by negotiations or by appropriate proceedings which suspend the
collection thereof;
(16) leases, subleases, licenses or sublicenses to third parties entered
into in the ordinary course of business;
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(17) Liens securing any Permitted Refinancing Indebtedness so long as
the Lien securing the Permitted Refinancing Indebtedness is limited
to all or part of the same property or assets, plus improvements,
accessions, proceeds or dividends or distributions, that secured,
or under written arrangements could secure, the original
Indebtedness; or incurred in respect of any Indebtedness secured
by, or securing any refinancing, refunding, extension, renewal or
replacement, in whole or in part, of any other obligation secured
by, any other Permitted Liens, provided that any new Lien of this
type is limited to all or part of the same property or assets, plus
improvements, accessions, proceeds or dividends or distributions,
that secured, or, under the written arrangements under which the
original Lien arose could secure, the obligations to which Liens of
this type relate;
(18) Liens securing Hedging Obligations;
(19) Liens arising out of judgments, decrees, orders or awards in
respect of which IASIS shall in good faith be prosecuting an appeal
or proceedings for review which appeal or proceedings shall not
have been finally terminated, or if the period within which the
appeal or proceedings may be initiated shall not have expired;
(20) Liens on Capital Stock of an Unrestricted Subsidiary that secure
Indebtedness or other obligation of the Unrestricted Subsidiary;
and
(21) Liens incurred in connection with a Qualified Receivables
Transaction, which in the case of IASIS and its Restricted
Subsidiaries that are not Receivables Subsidiaries shall be limited
to receivables and related assets referred to in the definition of
Qualified Receivables Transaction.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of IASIS or any
of its Restricted Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of IASIS or any of its Restricted Subsidiaries, other than
intercompany Indebtedness; provided that:
(1) the principal amount, or accreted value, if applicable, of the
Permitted Refinancing Indebtedness does not exceed the principal
amount, or accreted value, if applicable, of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded, plus
all accrued interest on the Indebtedness and the amount of all fees,
commissions, discounts, costs, expenses and premiums incurred in
connection with the Indebtedness;
(2) if the Indebtedness is not Senior Debt, either
(a) the Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded or
(b) all scheduled payments on or in respect of the Permitted
Refinancing Indebtedness, other than interest payments, shall
be at least 91 days following the final scheduled maturity of
the notes; and if the Indebtedness is Senior Debt and has a
final stated maturity later than the final stated maturity of
the notes, the Permitted Refinancing
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Indebtedness has a final stated maturity later than the final
stated maturity of the notes;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the
notes, the Permitted Refinancing Indebtedness is subordinated in
right of payment to, the notes on terms at least as favorable to the
holders of notes as those contained in the documentation governing
the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and
(4) the Indebtedness is incurred either by IASIS or any Guarantor or by
the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded.
"PERSON" means any
(1) individual,
(2) corporation,
(3) partnership,
(4) joint venture,
(5) association,
(6) joint-stock company,
(7) trust, unincorporated organization,
(8) limited liability company or
(9) government or other entity.
"PHYSICIAN SUPPORT OBLIGATION" means a loan to or on behalf of, or a
guarantee of indebtedness of, a physician or healthcare professional providing
service to patients in the service area of a Hospital or other health care
facility operated by IASIS or any of its Restricted Subsidiaries made or given
by IASIS or any Subsidiary of IASIS
(a) in the ordinary course of its business and
(b) under the terms of a written agreement having a period not to
exceed five years.
"PRINCIPALS" means Joseph Littlejohn & Levy, Inc., referred to as JLL,
investment funds managed by JLL, partners of JLL, an entity controlled by any of
the foregoing and/or by a trust of the type described hereafter, and/or a trust
for the benefit of any of the foregoing.
"QUALIFIED RECEIVABLES TRANSACTION" means any transaction or series of
transactions entered into by IASIS or any of its Subsidiaries under which IASIS
or any of its Subsidiaries sells, conveys or otherwise transfers to:
(1) a Receivables Subsidiary, in the case of a transfer by IASIS or any
of its Subsidiaries, which transfer may be effected through IASIS or
one or more Subsidiaries; and
(2) any other Person in the case of a transfer by a Receivables
Subsidiary, or grants a security interest in, any accounts
receivable, instruments, chattel paper, general intangibles and
similar "Receivables" of IASIS or any of its
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Subsidiaries, and any related assets, including, without limitation,
all collateral securing the Receivables, all contracts, contract
rights and all guarantees or other obligations in respect of the
Receivables, proceeds of the Receivables and any other assets which
are customarily transferred or in respect of which security
interests are customarily granted in connection with asset
securitization transactions of this type;
provided that a Receivables Subsidiary participating in a Qualified Receivables
Transaction shall meet the requirements delineated in the definition of
"Receivables Subsidiary."
"RECAPITALIZATION REFINANCING" means the debt refinancing in connection
with the Paracelsus Recapitalization and Tenet Acquisition.
"RECEIVABLES SUBSIDIARY" means a Subsidiary of IASIS which engages in no
activities other than in connection with the financing of accounts receivable
and which is designated by the Board of Directors of IASIS as a Receivables
Subsidiary
(a) no portion of the Indebtedness or any other Obligations (contingent or
otherwise) of which:
(1) is guaranteed by IASIS or any Subsidiary of IASIS, excluding
guarantees of Obligations, other than the principal of, and interest
on, Indebtedness, in accordance with representations, warranties,
covenants and indemnities entered into in the ordinary course of
business in connection with a Qualified Receivables Transaction;
(2) is recourse to or obligates IASIS or any Subsidiary of IASIS in any
way other than in accordance with representations, warranties,
covenants and indemnities customarily entered into in connection
with a Qualified Receivables Transaction; or
(3) subjects any property or asset of IASIS or any Subsidiary of IASIS,
other than accounts receivable and related assets as delineated in
the definition of "Qualified Receivables Transaction," directly or
indirectly, contingently or otherwise, to the satisfaction of the
Indebtedness, other than in accordance with representations,
warranties, covenants and indemnities customarily entered into in
connection with a Qualified Receivables Transaction;
(b) with which neither IASIS nor any Subsidiary of IASIS has any material
contract, agreement, arrangement or understanding other than on terms
no less favorable to IASIS or such Subsidiary than those that might be
obtained at the time from Persons who are not Affiliates of IASIS,
other than as may be customary in a Qualified Receivables Transaction
including for fees payable in the ordinary course of business in
connection with servicing accounts receivable; and
(c) with which neither IASIS nor any Subsidiary of IASIS has any obligation
to maintain or preserve such Subsidiary's financial condition or cause
the Subsidiary to achieve certain levels of operating results. Any such
designation by the Board of Directors of IASIS will be evidenced to the
trustee by filing with the trustee a certified copy of the resolution
of the Board of Directors of IASIS giving effect to the designation and
an Officers' Certificate certifying that the designation complied with
the foregoing conditions.
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"REFINANCING DISQUALIFIED STOCK" means any Disqualified Stock of IASIS
issued in exchange for, or the net proceeds of which are used to extend,
refinance, renew, replace or refund other Disqualified Stock of IASIS; provided
that:
(1) the amount of the Refinancing Disqualified Stock does not exceed the
amount of the Disqualified Stock so extended, refinanced, renewed,
replaced or refunded, plus all accrued dividends on the Disqualified
Stock and the amount of all fees, commissions, discounts, costs,
expenses and premiums incurred in connection with the Disqualified
Stock; and
(2) either
(a) the Refinancing Disqualified Stock by its terms, or upon the
happening of any event, matures or is mandatorily redeemable in
accordance with a sinking fund obligation or otherwise at the option
of the holder, in whole or in part, on or later than the final
maturity date of, or date that by its terms, or upon the happening
of any event, matures, or is mandatorily redeemable pursuant to a
sinking fund obligation or otherwise at the option of the holder, in
whole or in part, of, the Disqualified Stock being extended,
refinanced, renewed, replaced or refunded or
(b) all scheduled payments on or in respect of the Refinancing
Disqualified Stock, other than dividend payments, shall be at least
91 days following the final scheduled maturity of the notes.
"REFINANCING PREFERRED STOCK" means any preferred stock of IASIS issued in
exchange for, or the net proceeds of which are used to extend, refinance, renew,
replace or refund other preferred stock of IASIS; provided that:
(1) the amount of the Refinancing Preferred Stock does not exceed the
amount of the preferred stock so extended, refinanced, renewed,
replaced or refunded, plus all accrued dividends on the Refinancing
Preferred Stock and the amount of all fees, commissions, discounts,
costs, expenses and premiums incurred in connection with the
Refinancing Preferred Stock; and
(2) the Refinancing Preferred Stock is not Disqualified Stock.
"REFINANCING SUBSIDIARY PREFERRED STOCK" means any preferred stock of any
Restricted Subsidiary of IASIS issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace or refund other preferred
stock of the Restricted Subsidiary; provided that:
(1) the amount of the Refinancing Subsidiary Preferred Stock does not
exceed the amount of the preferred stock so extended, refinanced,
renewed, replaced or refunded, plus all accrued dividends on the
Refinancing Subsidiary Preferred Stock and the amount of all fees,
commissions, discounts, costs, expenses and premiums incurred in
connection with the Refinancing; and
(2) such Refinancing Subsidiary Preferred Stock is not Disqualified Stock.
"RELATED BUSINESS" means a healthcare business affiliated or associated
with a Hospital or any business related or ancillary to the provision of
healthcare services or information or the investment in, or the management,
leasing or operation of, a Hospital.
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"RELATED PARTY" means:
(1) any controlling stockholder, 80% or more owned Subsidiary, or immediate
family member, in the case of an individual, of any Principal; or
(2) any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding an 80%
or more controlling interest of which consist of any one or more
Principals or any other Persons referred to in the immediately
preceding clause (1).
"REPRESENTATIVE" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; provided that if, and
for so long as, any Designated Senior Debt lacks a representative of this type,
then the Representative for the Designated Senior Debt shall at all times
constitute the holders of a majority in outstanding principal amount of the
Designated Senior Debt in respect of any Designated Senior Debt.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the Person
referred to that is not an Unrestricted Subsidiary.
"SENIOR DEBT" means:
(1) all Indebtedness outstanding under all Credit Facilities, all Hedging
Obligations, and guarantees of the Hedging Obligations, with respect to
the Credit Facilities of IASIS and the Guarantors, whether outstanding
on the date of the indenture or incurred after that date;
(2) any other Indebtedness incurred by IASIS and the Guarantors, unless the
instrument under which the Indebtedness is incurred expressly provides
that it is on a parity with or subordinated in right of payment to the
notes or the Subsidiary Guarantees, as the case may be; and
(3) all Obligations with respect to the items listed in the preceding
clauses (1) and (2), including any interest accruing subsequent to the
filing of a petition of bankruptcy at the rate provided for in the
documentation with respect to the Obligation, whether or not the
interest is an allowed claim under applicable law.
Notwithstanding anything to the contrary in the preceding, Senior Debt will
not include:
(1) any liability for federal, state, local or other taxes owed or owing by
IASIS or the Guarantors;
(2) any Indebtedness of IASIS or any Guarantor to any of its Subsidiaries;
(3) any trade payables; or
(4) the portion of any Indebtedness that is incurred in violation of the
indenture but only to the extent so incurred.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, under the
Securities Act, as is in effect on the date hereof.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the original documentation
governing the Indebtedness, and shall
168
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not include any contingent obligations to repay, redeem or repurchase any
interest of this type or principal prior to the date originally scheduled for
the payment of principal or interest.
"SUBSIDIARY" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock entitled,
without regard to the occurrence of any contingency, to vote in the
election of directors, managers or trustees is at the time owned or
controlled, directly or indirectly, by a Person or one or more of the
other Subsidiaries of that Person or a combination of both; and
(2) any partnership
(a) the sole general partner or the managing general partner of which is
the Person or a Subsidiary of that Person or
(b) the only general partners of which are the Person or one or more
Subsidiaries of that Person or any combination of both.
"SUBSIDIARY GUARANTEE" means the Guarantee of the notes by a Guarantor.
"TENET ACQUISITION" means the acquisition of some acute care hospitals
located in Arizona, Florida and Texas, from Tenet Healthcare Corporation, by
IASIS, by means of the asset sale agreement, dated as of August 15, 1999.
"TOTAL ASSETS" means the total consolidated assets of IASIS and its
Restricted Subsidiaries shown on the most recent consolidated balance sheet of
IASIS and its Restricted Subsidiaries.
"TRANSACTIONS" means the Paracelsus Recapitalization, the Recapitalization
Refinancing, the Tenet Acquisition, the JLL Hospital Merger and the IASIS
Merger.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of IASIS that is designated
by the Board of Directors as an Unrestricted Subsidiary by resolution of the
Board of Directors of IASIS, but only to the extent that the Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding
with IASIS or any Restricted Subsidiary of IASIS unless the terms of
any agreement, contract, arrangement or understanding of this type are
no less favorable to IASIS or the Restricted Subsidiary than those that
might be obtained at the time from Persons who are not Affiliates of
IASIS;
(3) is a Person with respect to which neither IASIS nor any of its
Restricted Subsidiaries has any direct or indirect obligation
(a) to subscribe for additional Equity Interests or
(b) to maintain or preserve the Person's financial condition or to cause
the Person to achieve any specified levels of operating results; and
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of IASIS or any of its Restricted
Subsidiaries;
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except in the case of clause (3) or (4), to the extent
(a) that IASIS or the Restricted Subsidiary could otherwise provide a
guarantee or incur such Indebtedness other than as Permitted Debt
under "--Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock" above and
(b) the provision of the guarantee and the incurrence of indebtedness
otherwise would be permitted under "--Covenants--Restricted
Payments" above.
Any designation of a Subsidiary of IASIS as an Unrestricted Subsidiary
shall be evidenced to the trustee by filing with the trustee a certified copy of
the resolution of the Board of Directors of IASIS giving effect to the
designation and an Officers' Certificate certifying that the designation
complied with the preceding conditions and was permitted by the covenant
described above under the caption "--Covenants--Restricted Payments." If, at any
time, any Unrestricted Subsidiary would fail to meet the preceding requirements
as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the indenture and any Indebtedness of the Subsidiary
shall be deemed to be incurred by a Restricted Subsidiary of IASIS as of that
date and, if the Indebtedness is not permitted to be incurred as of that date
under the covenant described under the caption "--Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock," IASIS shall be in default of that
covenant. The Board of Directors of IASIS may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that the
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of IASIS of any outstanding Indebtedness of the Unrestricted
Subsidiary and the designation shall only be permitted if
(1) the Indebtedness is permitted under the covenant described under the
caption "--Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock," calculated on a pro forma basis as if the designation
had occurred at the beginning of the four-quarter reference period; and
(2) no Default or Event of Default would be in existence following the
designation.
"VOTING STOCK" of any Person as of any date means the Capital Stock of the
Person that is at the time entitled to vote in the election of the Board of
Directors of the Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying
(a) the amount of each then remaining installment, sinking fund, serial
maturity or other required payments of principal, including payment
at final maturity, by
(b) the number of years calculated to the nearest one-twelfth that will
elapse between the relevant date and the making of the payment; by
(2) the then outstanding principal amount of the Indebtedness.
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DESCRIPTION OF PREFERRED STOCK
Our board of directors is authorized to issue up to 550,000 shares of
preferred stock in series and with designations and rights as the board
determines. In connection with the acquisition of hospitals and related
facilities from Tenet Healthcare Corporation, we authorized the issuance of up
to 500,000 shares of Series A preferred stock and in connection with the merger
we authorized the issuance of up to 50,000 shares of Series B preferred stock.
The Series A preferred stock and the Series B preferred stock are identical in
all respects, except as we describe below. 160,000 shares of Series A preferred
stock and 5,311 of Series B preferred stock will be outstanding following the
acquisition of hospitals and related facilities from Tenet Healthcare
Corporation and the merger. We must mandatorily redeem the Series A preferred
stock on October 15, 2010 and we must mandatorily redeem the Series B preferred
stock on October 15, 2020, in each case, for $1,000 per share plus all accrued
and unpaid dividends to the redemption date or as soon after the applicable
redemption date as will be permitted by our then-existing debt agreements. The
preferred stock has a liquidation preference over the common stock equal to the
redemption price of $1,000 per share plus all accrued and unpaid dividends.
Dividends on the preferred stock are payable when, as and if declared by our
board of directors and will accrue at the rate of 16.0% per annum from their
date of issuance. No dividends or distributions may be made on the common stock
unless and until all accrued and unpaid dividends are first paid to the holders
of the preferred stock. Without the consent of the holders of a majority of the
outstanding preferred stock, we may not enter into any merger, consolidation or
other business combination, unless and until the preferred stock is repurchased
for an amount equal to $1,000 per share plus all accrued and unpaid dividends on
the preferred stock. Except as required by law or as described above, the
holders of the preferred stock are not entitled to vote on any matter submitted
to a vote of the stockholders. The redemption of, and payment of cash dividends
on, the preferred stock is restricted by the terms of our credit facility and
the indenture. For a description of the ownership of the preferred stock, see
"Stock Ownership of Beneficial Owners and Management" on page 108.
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of the new notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for old notes where the old notes
were acquired as a result of market-making activities or other trading
activities. IASIS has agreed that for a period of 180 days after the exchange
offer is consummated, it will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with resales of the new
notes. All resales must be made in compliance with state securities or blue sky
laws. IASIS assumes no responsibility with regard to compliance with these
requirements.
IASIS will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account in
the exchange offer may be sold from time to time in one or more transactions in
the over-the-counter market, in negotiated transactions, through the writing of
options on the new notes or a combination of these methods of resale, at market
prices prevailing at the time of resale, at prices related to those prevailing
market prices or negotiated prices. Any resale of the new notes may be made
directly to purchasers or to or through brokers or dealers who may receive
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185
compensation in the form of commissions or concessions from the broker-dealer or
the purchasers or both of the new notes. Any broker-dealer that resells new
notes that the broker-dealer received for its own account in the exchange offer
and any broker or dealer that participates in a distribution of the new notes
may be deemed to be an "underwriter" within the meaning of the Securities Act.
Any profit on any resale of new notes and any commissions or concessions
received by any persons deemed to be underwriters may be deemed to be
underwriting compensation under the Securities Act. The enclosed letter of
transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the exchange offer is consummated, IASIS
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests these documents
from the exchange agent. IASIS has agreed to pay all expenses incident to the
exchange offer, other than commissions or concessions of any brokers or dealers,
and will indemnify the holders of the new notes, including any broker-dealers,
against specific liabilities, including liabilities under the Securities Act.
We may use this prospectus, as we may amend or supplement it from time to
time, in connection with any additional exchange offers. These additional
exchange offers may take place from time to time until all outstanding old notes
have been exchanged for new notes, subject to the terms and conditions contained
in the prospectus and the letter of transmittal we distribute in connection with
these additional exchange offers.
LEGAL MATTERS
Skadden, Arps, Slate, Meagher & Flom LLP will pass upon the legality of the
new notes we are offering by this prospectus.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the combined
financial statements of the Paracelsus Utah Facilities, as of September 30, 1999
and December 31, 1998 and for the nine months ended September 30, 1999 and for
each of the two years in the period ended December 31, 1998 as shown in their
report included in this prospectus. We have included the combined financial
statements of the Paracelsus Utah Facilities in the prospectus and elsewhere in
the registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
The combined financial statements of the Tenet Hospitals as of May 31, 1999
and 1998, and for each of the years in the three-year period ended May 31, 1999,
have been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere in this prospectus, and upon the authority of said firm as experts in
accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of IASIS Healthcare Corporation (the management company) as
of September 30, 1999 and 1998 and for the year ended September 30, 1999 and the
period from February 23, 1998 (date of inception) through September 30, 1998 as
shown in their report included in this prospectus. We have included the
consolidated financial statements of IASIS Healthcare Corporation (the
management company) in the prospectus and
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elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
We and our subsidiary guarantors have filed with the SEC a registration
statement on Form S-4 of which this prospectus forms a part, under the
Securities Act, in connection with our offering of the new notes. As permitted
by the rules and regulations of the SEC, this prospectus does not contain all of
the information in the registration statement. You will find additional
information about IASIS, the subsidiary guarantors and the new notes in the
registration statement. Any statements made in this prospectus concerning the
provisions of legal documents are not necessarily complete and you should read
the documents that are filed as exhibits to the registration statement.
As a result of the exchange offer, IASIS will become subject to the
informational requirements of the Exchange Act and will file periodic reports,
statements and other information with the SEC. We do not expect that the
subsidiary guarantors will be subject to the informational requirements of the
Exchange Act. You may inspect and copy the registration statement, including
exhibits, and, when filed, our periodic reports, statements and other
information filed with the SEC at the public reference facilities maintained by
the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the SEC's regional offices located at 7 World Trade Center, New
York, New York 10048 and at Citicorp Center, 500 West Madison Street (Suite
1400), Chicago, Illinois 60661. Copies may be obtained from the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The SEC also maintains a Web site at http://www.sec.gov which
will contain, when filed, our reports, statements and other information filed
with the SEC.
If we are not required to be subject to the reporting requirements of the
Exchange Act in the future, we will be required under the indenture for the new
notes and the old notes to continue to file with the SEC and to furnish to
holders of the new notes and the old notes the reports, statements and other
information specified in Sections 13 and 15(d) of the Exchange Act, including
annual reports containing audited consolidated financial statements of IASIS and
quarterly reports containing unaudited condensed consolidated financial data for
the first three quarters of each fiscal year.
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INDEX TO UNAUDITED AND AUDITED FINANCIAL STATEMENTS
PAGE
----
IASIS Healthcare Corporation (Unaudited):
Consolidated and Combined Balance Sheets as of December
31, 1999 and September 30, 1999........................ F-2
Consolidated and Combined Statements of Operations........ F-3
Consolidated and Combined Statements of Cash Flows........ F-4
Notes to Consolidated and Combined Financial Statements... F-5
Paracelsus Utah Facilities (Subsidiaries of Paracelsus
Healthcare Corporation) and Predecessor Companies:
Report of Independent Auditors............................ F-14
Combined Balance Sheets as of September 30, 1999 and
December 31, 1998...................................... F-15
Combined Statements of Operations and Changes in
Shareholder's Deficit.................................. F-16
Combined Statements of Cash Flows......................... F-17
Notes to Combined Financial Statements.................... F-18
Tenet Hospitals:
Independent Auditors' Report.............................. F-32
Combined Balance Sheets -- May 31, 1999 and 1998.......... F-33
Combined Statements of Income and Changes in Ownership
Equity -- Three years ended May 31, 1999............... F-34
Combined Statements of Cash Flows -- Three years ended May
31, 1999............................................... F-35
Notes to Combined Financial Statements -- Three years
ended May 31, 1999..................................... F-36
IASIS Healthcare Corporation (the management company):
Report of Independent Auditors............................ F-50
Consolidated Balance Sheets as of September 30, 1999 and
1998................................................... F-51
Consolidated Statements of Operations..................... F-52
Consolidated Statements of Changes in Stockholders'
Equity................................................. F-53
Consolidated Statements of Cash Flows..................... F-54
Notes to Consolidated Financial Statements................ F-55
F-1
188
IASIS HEALTHCARE CORPORATION
CONSOLIDATED AND COMBINED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
PREDECESSOR
-------------
SEPTEMBER 30,
DECEMBER 31, 1999
1999 (NOTE 1)
------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 24,613 $ --
Accounts receivable, net of allowance for doubtful
accounts of $20,658 (unaudited) at December 31, 1999
and $10,850 at September 30, 1999...................... 110,362 19,674
Supplies.................................................. 21,541 4,501
Note receivable........................................... -- 2,125
Prepaid expenses and other current assets................. 23,725 2,158
--------- --------
Total current assets................................... 180,241 28,458
Property and equipment:
Land and improvements..................................... 37,936 15,200
Buildings and improvements................................ 287,161 112,694
Equipment................................................. 158,809 65,525
Construction in progress (estimated cost to complete and
equip after December 31, 1999 -- $9,400)............... 13,998 10,923
--------- --------
497,904 204,342
Less: Accumulated depreciation.............................. (74,911) (67,415)
--------- --------
422,993 136,927
Goodwill and other intangible assets, net of accumulated
amortization
of $8,770 (unaudited) at December 31, 1999 and $6,521 at
September 30, 1999........................................ 230,974 46,988
Deferred debt financing costs, net of accumulated
amortization of $525 (unaudited) at December 31, 1999..... 24,835 --
Other assets................................................ 3,686 886
--------- --------
Total assets........................................... $ 862,729 $213,259
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 25,949 $ 15,739
Due to government third parties........................... -- 930
Accrued liabilities:
Accrued salaries and benefits.......................... 8,579 5,229
Medical claims payable................................. 18,001 1,030
Other.................................................. 16,774 1,142
Other current liabilities................................. 20,641 --
Current maturities of long-term debt and capital lease
obligations............................................ 7,536 701
--------- --------
Total current liabilities.............................. 97,480 24,771
Due to Paracelsus........................................... -- 270,814
Long-term debt and capital lease obligations................ 553,753 798
Other long-term liabilities................................. 1,864 --
Minority interest........................................... 1,900 1,461
Series A Preferred Stock -- $.01 par value, authorized
500,000 shares; 160,000 shares issued and outstanding at
December 31, 1999 (liquidation preference value of
$165,333 at December 31, 1999)............................ 163,999 --
Series B Preferred Stock -- $.01 par value, authorized
50,000 shares; 5,311 shares issued and outstanding at
December 31, 1999 (liquidation preference value of $5,488
at December 31, 1999)..................................... 5,444 --
Shareholders' Equity (Deficit):
Common stock -- $.01 par value, authorized 5,000,000
shares; 1,371,490 shares issued and outstanding at
December 31, 1999......................................... 14 --
Additional paid-in capital................................ 284,930 --
Treasury stock (at cost).................................. (155,025) --
Accumulated deficit....................................... (91,630) (84,585)
--------- --------
Total Shareholders' equity (deficit)................... 38,289 (84,585)
--------- --------
Total liabilities and shareholders' equity (deficit)... $ 862,729 $213,259
========= ========
See accompanying notes.
F-2
189
IASIS HEALTHCARE CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
------------- ------------
Net revenue................................................. $ 179,290 $ 45,390
Costs and expenses:
Salaries and benefits..................................... 62,217 16,462
Supplies.................................................. 26,372 6,383
Other operating expenses.................................. 50,855 10,470
Provision for bad debts................................... 13,450 3,654
Interest.................................................. 14,375 3,662
Depreciation and amortization............................. 10,196 3,164
Allocated management fees................................. -- 1,647
Recapitalization costs.................................... 3,442 --
------------ ------------
Total costs and expenses............................... 180,907 45,442
------------ ------------
Loss from continuing operations before minority interests
and income taxes.......................................... (1,617) (52)
Minority interests.......................................... (92) 14
------------ ------------
Loss from continuing operations before income taxes......... (1,525) (66)
Provision for income taxes.................................. -- --
------------ ------------
Net loss.................................................... (1,525) $ (66)
Accretion of Preferred Stock dividends...................... 5,510 --
Accretion of Preferred Stock discount....................... 10 --
------------ ------------
Net loss attributable to common shareholders................ $ (7,045) $ (66)
============ ============
See accompanying notes.
F-3
190
IASIS HEALTHCARE CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
1999 1998
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $ (1,525) $ (66)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 10,196 3,164
Minority interests........................................ (92) 14
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Accounts receivable.................................... (81,968) 5,009
Supplies, prepaid expenses and other current assets.... (15,925) (200)
Accounts payable and other accrued liabilities......... 22,168 297
--------- -------
Net cash provided by (used in) operating activities......... (67,146) 8,218
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment......................... (9,175) (3,915)
Payments for acquisitions, net.............................. (434,424) --
(Increase) decrease in other assets......................... (1,487) 16
--------- -------
Net cash used in investing activities....................... (445,086) (3,899)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of preferred stock................... 160,000 --
Repurchase of common stock.................................. (155,025) --
Proceeds from senior bank debt borrowings................... 330,000 --
Proceeds from issuance of senior subordinated notes......... 230,000 --
Payment of debt and capital leases.......................... (230) (461)
Common and preferred stock issuance costs incurred.......... (2,540) --
Debt financing costs incurred............................... (25,360) --
Net decrease in due to Paracelsus........................... -- (6,378)
--------- -------
Net cash provided by (used in) financing activities......... 536,845 (6,839)
--------- -------
Increase (decrease) in cash and cash equivalents............ 24,613 (2,520)
Cash and cash equivalents at beginning of the period........ 0 4,005
--------- -------
Cash and cash equivalents at end of the period.............. $ 24,613 $ 1,485
========= =======
Supplemental disclosure of noncash investing and financing
activities:
Effect of acquisitions, net:
Assets acquired, net of cash........................... $ 490,420 $ --
Liabilities assumed.................................... (46,536) --
Issuance of preferred and common stock, net............ (9,460) --
--------- -------
Payments for acquisitions, net.................... $ 434,424 $ --
========= =======
See accompanying notes.
F-4
191
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated and combined financial statements include the accounts of
IASIS Healthcare Corporation ("IASIS" or "the Company") (formerly known as
Paracelsus Utah Facilities) and its wholly owned subsidiaries and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and in accordance with Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited consolidated and
combined statements contain all adjustments (consisting of normal recurring
items) necessary for a fair presentation of results for the interim periods
presented. The results of operations for any interim period are not necessarily
indicative of results for the full year. The combined balance sheet of the
Company at September 30, 1999 has been derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. The consolidated and combined financial statements and
footnote disclosures should be read in conjunction with the September 30, 1999
audited combined financial statements and the notes thereto of Paracelsus Utah
Facilities.
The combined financial statements included herein as of September 30, 1999
and for the three-month period ended December 31, 1998 have been prepared on the
push-down basis of the historical cost of Paracelsus Healthcare Corporation
("Paracelsus") and, accordingly, may not be indicative of the financial
position, results of operations and cash flows of the Company which might have
occurred had it been an independent stand-alone entity during the periods
presented.
IASIS is a for-profit hospital management company with operations in select
markets in the United States. IASIS' facilities are currently located in four
regions: (1) Salt Lake City, Utah; (2) Phoenix, Arizona; (3) Tampa-St.
Petersburg, Florida; and (4) three markets within the State of Texas. IASIS
either owns or operates 15 general, acute care hospitals and four ambulatory
surgery centers, with a total of 2,144 operating beds. The Company focuses on
networks of medium-sized hospitals, each with 100 to 400 beds. The Company also
operates a Medicaid managed health plan called Health Choice in Phoenix,
Arizona.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying consolidated
and combined financial statements and notes. Actual results could differ from
those estimates.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified in order to conform to
current period presentation. Such reclassifications had no material effect on
the financial position and results of operations as previously reported.
F-5
192
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. RECAPITALIZATION AND ACQUISITION TRANSACTIONS
RECAPITALIZATION
Effective October 8, 1999, Paracelsus and unrelated third parties
recapitalized the Paracelsus Utah Facilities, valued at $288.0 million, subject
to a working capital adjustment. The recapitalization transaction resulted in
Paracelsus retaining a minority interest at an implied value of $8.0 million in
a preexisting Paracelsus subsidiary (HoldCo) to which the ownership interests in
the Paracelsus Utah Facilities had been transferred. Subsequent to the
recapitalization, HoldCo changed its name to IASIS Healthcare Corporation and
changed its fiscal year end to September 30th.
As part of the recapitalization, the unrelated third parties purchased
$125.0 million of IASIS' common stock from Paracelsus and IASIS purchased $155.0
million of its own stock from Paracelsus which is being held as treasury stock
as of December 31, 1999. IASIS' $155.0 million purchase of its own stock was
financed with a $160.0 million credit facility which was subsequently repaid
concurrent with the Company's issuance of preferred stock, offering of Senior
Subordinated Notes and borrowing under a credit facility. Legal, accounting and
other related charges of $3.4 million associated with the recapitalization have
been expensed as incurred.
THE TENET ACQUISITION
Effective October 15, 1999, IASIS acquired ten acute care hospitals and
other related facilities and assets (Tenet hospitals) from Tenet Healthcare
Corporation for $428.3 million in cash, net of a preliminary working capital
adjustment of $18.9 million, but that value may later change due to a final
working capital adjustment. The purchase price of $447.2 million was reduced by
an estimated $18.9 million for unaudited working capital as of August 31, 1999.
The final working capital adjustment will be based upon the difference between
the estimated working capital of $18.9 million as of August 31, 1999 and the
actual working capital determined as of the closing date, October 15, 1999.
IASIS is in the process of determining the final working capital adjustment with
Tenet and expects to finalize the adjustment during the quarter ended June 30,
2000. Any difference between the estimated working capital as of August 31, 1999
and the actual working capital as of October 15, 1999 will be recorded as an
adjustment to goodwill recognized in the Tenet acquisition.
MANAGEMENT COMPANY ACQUISITION
Concurrent with the acquisition of the hospitals and related facilities
from Tenet Healthcare Corporation, Iasis Healthcare Corporation (management
company), a Tennessee corporation, which was originally formed by members of our
current management to acquire and operate hospitals and related businesses, was
merged with and into a wholly-owned subsidiary of IASIS, with IASIS' subsidiary
as the surviving entity. In the merger, shareholders of management company
received shares of our common stock and preferred stock with a total value of
$9.5 million.
F-6
193
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER INFORMATION
The following table summarizes the allocation of the aggregate purchase
price of the acquisitions (in thousands):
MANAGEMENT
TENET HOSPITALS COMPANY TOTAL
--------------- ---------- --------
Purchase price, including direct costs of
acquisition................................ $435,735 $9,460 $445,195
Assets acquired.............................. 305,703 963 306,666
Liabilities assumed.......................... (46,386) (151) (46,537)
-------- ------ --------
Net assets acquired.......................... 259,317 812 260,129
-------- ------ --------
Goodwill..................................... $176,418 $8,648 $185,066
======== ====== ========
Purchase price adjustments have not been finalized as of December 31, 1999
and are subject to working capital settlements and receipt of independent
appraisals of the assets acquired. Direct costs of acquisitions of $4.4 million
were capitalized as a component of the purchase price and primarily include
legal services and professional and accounting services.
The acquisition of Tenet hospitals and the management company were
accounted for using the purchase method of accounting. The operating results of
the acquired companies have been included in the accompanying Consolidated
Statement of Operations from the October 15, 1999 date of acquisition.
In connection with the recapitalization and the acquisitions, IASIS has not
assumed any liability or obligation due to payors including private insurers and
government payors such as the Medicare and Medicaid programs. IASIS also did not
assume any cost report reimbursements, settlements, repayments, or fines, if
any, to the extent they relate to periods prior to the respective closing dates
of such transactions. The agreements with Tenet Healthcare Corporation and
Paracelsus Healthcare Corporation include customary indemnifications and hold
harmless provisions for any damages incurred by the Company related to these
types of excluded liabilities.
The recapitalization transaction was effected pursuant to the terms of a
recapitalization agreement. Under the terms of the recapitalization agreement,
the purchase price paid by JLL Healthcare, LLC, one of IASIS' current
principals, in connection with the recapitalization is subject to a post-closing
working capital adjustment. The post-closing working capital adjustment
represents an adjustment to the purchase price paid and is based upon the
difference between an estimate of working capital as of the closing date and the
working capital actually purchased as of the closing date of October 8, 1999.
Any positive or negative working capital adjustment will be recorded as either
an increase or decrease, respectively, in the opening equity resulting from the
Paracelsus recapitalization. IASIS settled the working capital adjustment for
$1.0 million which was received on March 21, 2000. The settlement will result in
an adjustment to opening equity to be recorded during the quarter ended March
31, 2000 and will have no impact on IASIS' results of operations.
F-7
194
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA RESULTS
The following represents the unaudited pro forma results of consolidated
operations as if the acquisitions of Tenet hospitals and the management company
had occurred as of October 1, 1998, after giving effect to certain adjustments,
including the depreciation and amortization of the assets acquired, changes in
net interest expense resulting from changes in consolidated debt, and changes in
overhead expenses:
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
(THOUSANDS) (THOUSANDS)
------------------ ------------------
Operating revenues............................. $202,144 $183,500
Net loss....................................... $ (6,283) $ (1,774)
The pro forma information given above does not purport to be indicative of
what actually would have occurred if the acquisitions had occurred as of the
date assumed, and is not intended to be a projection of the impact on future
results or trends.
NOTE 3. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
Bank Facilities.................................. $330,000 $ --
Senior Subordinated Notes........................ 230,000 --
Capital lease obligations........................ 1,289 1,499
-------- ------
561,289 1,499
Less current maturities.......................... 7,536 701
-------- ------
$553,753 $ 798
======== ======
BANK FACILITIES
Under a credit facility dated October 15, 1999, a syndicate of lenders made
a total of $455.0 million available to the Company in the form of an $80.0
million Tranche A term loan, a $250.0 million Tranche B term loan and a $125.0
million revolving credit facility (collectively the "Bank Facilities").
As of December 31, 1999, the Tranche A and Tranche B term loans were fully
drawn. The proceeds from the Tranche A and Tranche B term loans together with
proceeds from the offering of the Senior Subordinated Notes and the issuance of
preferred stock were used for the following purposes:
- repay in its entirety a $200.0 million credit facility of which
approximately $160.0 million was outstanding in connection with the
recapitalization transaction,
- finance a portion of the acquisition of hospitals and related facilities
from Tenet Healthcare Corporation,
- fund an opening cash balance required for working capital and
F-8
195
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
- pay related fees and expenses associated with the recapitalization and
acquisition transactions.
The $125.0 million revolving credit facility is available for working
capital and other general corporate purposes, and any outstanding amounts
thereunder will be due and payable on October 15, 2005. No amounts were
outstanding under the revolving credit facility as of December 31, 1999.
The Tranche A term loan matures on October 15, 2005. The Tranche B term
loan matures on October 15, 2007. Repayments under the term loans are due in
quarterly installments. There will be no substantial amortization of the Tranche
B term loan until the sixth year. In addition, the loans under the credit
facility are subject to mandatory prepayment under specific circumstances,
including from a portion of excess cash flow and the net proceeds of specified
casualty events, asset sales and debt issuances, each subject to various
exceptions. The loans under the credit facility bear interest at variable rates
at fixed margins above either Morgan Guaranty Trust Company of New York's
alternate base rate or its reserve-adjusted LIBOR. The weighted average interest
rate on the Bank Facilities was approximately 10.6% at December 31, 1999. The
Company also pays a commitment fee equal to .5% of the average daily amount
available under the revolving credit facility.
The credit facility requires that the Company comply with various financial
ratios and tests and contains covenants limiting the Company's ability to, among
other things, incur debt, engage in acquisitions or mergers, sell assets, make
investments or capital expenditures, make distributions or stock repurchases and
pay dividends. The credit facility is guaranteed by the Company's subsidiaries.
These guarantees are secured by a pledge of substantially all of the
subsidiaries' assets.
SENIOR SUBORDINATED NOTES
On October 13, 1999, the Company issued $230.0 million in Senior
Subordinated Notes maturing on October 15, 2009 and bearing interest at 13% per
annum (the "Notes"). Interest is payable semi-annually. The Notes are unsecured
obligations and are subordinated in right of payment to all existing and future
senior indebtedness of the Company.
If a change of control occurs, as defined in the indenture, each holder of
the Notes will have the right to require the Company to repurchase all or any
part of that holder's Notes pursuant to the terms of the indenture. Except as
described above with respect to a change of control, the Company is not required
to make mandatory redemption or sinking fund payments with respect to the Notes.
The Notes are guaranteed jointly and severally by all of the Company's
subsidiaries ("Subsidiary Guarantors"). The Company is a holding company with no
operations apart from its ownership of the Subsidiary Guarantors. At December
31, 1999, all of the Subsidiary Guarantors were wholly owned and fully and
unconditionally guaranteed the Notes. The Company has not presented separate
financial statements and other disclosures concerning each subsidiary guarantor
because it has determined that such information is not material to investors.
F-9
196
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The indenture for the Notes contains certain covenants, including but not
limited to, restrictions on new indebtedness, asset sales, capital expenditures,
dividends and the ability to merge or consolidate.
OTHER LONG-TERM DEBT INFORMATION
Maturities of long-term debt at December 31, 1999 are as follows (in
thousands):
2000........................................................ 7,536
2001........................................................ 10,628
2002........................................................ 19,375
2003........................................................ 28,125
2004........................................................ 28,750
Thereafter.................................................. 466,875
--------
561,289
========
NOTE 4. PREFERRED STOCK
Concurrent with the acquisition of hospitals and related facilities from
Tenet Healthcare Corporation, the Company issued 160,000 shares of Series A
preferred stock for proceeds, net of issuance costs, of $158.7 million. In
connection with the merger with the management company, the Company issued 5,311
shares of Series B preferred stock valued at $5.3 million. Issuance costs of
$1.3 million and $44,000 were recorded against the aggregate preference value of
the Series A and Series B preferred stock, respectively, and will be accreted
over 11 years and 21 years, respectively. Accretion for the period ended
December 31, 1999 was $10,000. The Series A preferred stock and the Series B
preferred stock (collectively referred to as preferred stock) are identical in
all respects, except as provided below. The Series A preferred stock is
mandatorily redeemable on October 15, 2010 and the Series B preferred stock is
mandatorily redeemable on October 15, 2020, in each case, for $1,000 per share
plus all accrued and unpaid dividends to the redemption date or as soon
thereafter as will not be prohibited by then-existing debt agreements. The
preferred stock has a liquidation preference over the common stock equal to the
redemption price of $1,000 per share plus all accrued and unpaid dividends.
Dividends on the preferred stock are payable when, as and if declared by the
board of directors and will accrue at the rate of 16.0% per annum from their
date of issuance. No dividends or distributions may be made on the common stock
unless and until all accrued and unpaid dividends are first paid to the holders
of the preferred stock.
Without the consent of the holders of a majority of the outstanding
preferred stock, the Company may not enter into any merger, consolidation or
other business combination, unless and until the preferred stock is repurchased
for an amount equal to $1,000 per share plus all accrued and unpaid dividends
thereon. Except as required by law or as described above, the holders of the
preferred stock are not entitled to vote on any matter submitted to a vote of
the stockholders. The redemption of, and payment of cash dividends on, the
preferred stock is restricted by the terms of the credit facility and the Senior
Subordinated Notes indenture.
F-10
197
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. SHAREHOLDERS' EQUITY
The consolidated balance sheet as of December 31, 1999 includes adjustments
to reflect certain transactions in connection with the recapitalization and the
acquisitions of Tenet hospitals and the management company. The changes to
stockholders' equity are as follows (in thousands except share amounts):
SHAREHOLDER'S
COMMON STOCK DEFICIT OF
----------------- ADDITIONAL FORMER PARENT
PAR PAID-IN TREASURY COMPANY/ACCUMULATED
SHARES VALUE CAPITAL STOCK DEFICIT TOTAL
--------- ----- ---------- --------- ------------------- ---------
Balance at September 30,
1999......................... -- $-- $ -- $ -- $(84,585) $ (84,585)
Recapitalization:
Effect of recapitalization... 1,330,000 14 280,781 -- -- 280,795(a)
Repurchase of common stock
held by
Paracelsus................. -- -- -- (155,025) -- (155,025)
Acquisition of management
company...................... 41,490 -- 4,149 -- -- 4,149
Net loss....................... -- -- -- -- (1,525) (1,525)
Accretion of preferred stock
discount..................... -- -- -- -- (10) (10)
Accretion of preferred stock
dividends.................... -- -- -- -- (5,510) (5,510)
--------- --- -------- --------- -------- ---------
1,371,490 $14 $284,930 $(155,025) $(91,630) $ 38,289
========= === ======== ========= ======== =========
(a) Net assets contributed by former parent company gross of
shareholders deficit of former parent company............. $281,947
Less: Costs of common stock issuances....................... (1,152)
--------
Increase in equity of Company as result of
recapitalization.......................................... $280,795
========
The recapitalization transaction resulted in Paracelsus retaining 80,000
shares of the Company valued at $8.0 million and an outside investor
acquiring from Paracelsus 1,250,000 shares for $125.0 million (see Note 2).
Prior to the recapitalization, all equity accounts of the Company were
combined and reported as Shareholder's Deficit of Former Parent Company due to
the Company's status as a combination of subsidiaries of Paracelsus Healthcare
Corporation.
At December 31, 1999, the Company had no stock options outstanding. All
previously outstanding stock options were cancelled in connection with the
recapitalization and acquisition of the management company. The Company expects
to establish a stock option plan during 2000.
NOTE 6. SEGMENT DISCLOSURES
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statement and requires that these enterprises report selected
information about operating
F-11
198
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
segments in interim financial reports. IASIS' primary business is providing
health care services through its acute care hospitals and related healthcare
businesses. IASIS' chief operating decision maker, as that term is defined in
the accounting standard, regularly reviews financial information about each of
its hospitals for assessing performance and allocating resources. IASIS' acute
care hospitals and related health care businesses are all similar in their
business activities and the economic environments in which they operate (i.e.,
urban markets). Accordingly, IASIS' reportable operating segments consist of (1)
acute care hospitals and related healthcare businesses, collectively, and (2)
its Medicaid managed health plan, Health Choice. Prior to the acquisition of the
Tenet hospitals, including Health Choice, management had determined that the
Company did not have separately reportable segments as defined under SFAS 131.
ACUTE CARE HEALTH
THREE MONTHS ENDED DECEMBER 31, 1999 (UNAUDITED) SERVICES CHOICE TOTAL
- ------------------------------------------------ ---------- ------- --------
(DOLLARS IN THOUSANDS)
Net patient service revenues................... $161,055 $ -- $161,055
Capitation premiums............................ -- 18,974 18,974
Revenues between segments...................... (739) -- (739)
-------- ------- --------
Net operating revenues....................... $160,316 $18,974 $179,290
======== ======= ========
Interest expense............................... 14,375 -- 14,375
Depreciation and amortization.................. 10,158 38 10,196
Provision for income taxes..................... -- -- --
Net income (loss).............................. $ (2,398) $ 873 $ (1,525)
Total assets................................... $860,431 $ 2,298 $862,729
======== ======= ========
Capital expenditures........................... $ 9,169 $ 6 $ 9,175
======== ======= ========
NOTE 7. RECENTLY ISSUED ACCOUNTING STANDARDS
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement establishes comprehensive accounting and
reporting standards for derivative instruments and hedging activities that
require a company to record the derivative instruments at fair value in the
balance sheet. Furthermore, the derivative instrument must meet specific
criteria or the change in its fair value is to be recognized in earnings in the
period of change. To achieve hedge accounting treatment the derivative
instrument needs to be part of a well-documented hedging strategy that describes
the exposure to be hedged, the objective of the hedge and a measurable
definition of its effectiveness in hedging the exposure. 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. Adoption of FASB No. 133 is not expected to
have a material adverse effect on IASIS's financial statements.
F-12
199
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In March and in April 1998, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants issued two Statements of
Position that are effective for financial statements for fiscal years beginning
after December 15, 1998, which will apply to IASIS beginning with its fiscal
year ended September 30, 2000. 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. IASIS' adoption of SOPs 98-1 and 98-5 did not have a
material impact on its operations.
F-13
200
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Paracelsus Healthcare Corporation
We have audited the accompanying combined balance sheets of 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., Clinicare of Utah, Inc.,
and PHC/Psychiatric Healthcare Corporation (collectively the "Paracelsus Utah
Facilities" or the "Company"), all of which are wholly owned subsidiaries of
Paracelsus Healthcare Corporation as of September 30, 1999 and December 31,
1998, and the related combined statements of operations and changes in
shareholder's deficit and cash flows for the nine month period ended September
30, 1999, and each of the two years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Paracelsus Utah Facilities at September 30, 1999 and December 31, 1998, and the
combined results of their operations and their cash flows for the nine month
period ended September 30, 1999, and each of the two years in the period ended
December 31, 1998, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
Houston, Texas
November 12, 1999
F-14
201
PARACELSUS UTAH FACILITIES
(SUBSIDIARIES OF PARACELSUS HEALTHCARE CORPORATION)
COMBINED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ 1,485,222
Accounts receivable, net of allowance for doubtful
accounts: 1999 -- $10,850,000; 1998 -- $12,637,000..... 19,673,625 24,730,251
Supplies.................................................. 4,501,201 4,278,132
Note receivable........................................... 2,125,000 --
Prepaid expenses and other current assets................. 2,157,706 2,880,353
------------ ------------
Total current assets................................... 28,457,532 33,373,958
Property and equipment:
Land and improvements..................................... 15,200,127 14,726,526
Buildings and improvements................................ 112,694,063 111,855,814
Equipment................................................. 65,525,370 62,933,215
Construction in progress (estimated cost to complete and
equip after September 30, 1999 -- $5,897,000).......... 10,923,188 1,485,627
------------ ------------
204,342,748 191,001,182
Less: Accumulated depreciation.............................. (67,415,717) (59,575,856)
------------ ------------
136,927,031 131,425,326
Goodwill and other intangible assets, net of accumulated
amortization:
1999 -- $6,521,000; 1998 -- $5,046,000.................... 46,987,794 48,459,844
Note receivable............................................. -- 2,000,000
Other assets................................................ 886,408 1,059,381
------------ ------------
Total assets........................................... $213,258,765 $216,318,509
============ ============
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable.......................................... $ 15,739,117 $ 14,624,350
Due to government third parties........................... 930,535 1,413,669
Accrued liabilities:
Accrued salaries and benefits.......................... 5,228,768 3,974,716
Other.................................................. 2,171,204 2,466,492
Current maturities of capital lease obligations........... 701,217 545,121
------------ ------------
Total current liabilities.............................. 24,770,841 23,024,348
Due to Paracelsus........................................... 270,813,584 275,599,990
Capital lease obligations................................... 798,302 1,727,651
Minority interest........................................... 1,460,664 1,600,808
Commitments and contingencies (Note 7)...................... -- --
Shareholder's deficit....................................... (84,584,626) (85,634,288)
------------ ------------
Total Liabilities and Shareholder's Deficit............ $213,258,765 $216,318,509
============ ============
See accompanying notes.
F-15
202
PARACELSUS UTAH FACILITIES
(SUBSIDIARIES OF PARACELSUS HEALTHCARE CORPORATION)
COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN SHAREHOLDER'S DEFICIT
PARACELSUS UTAH FACILITIES COMBINED
--------------------------------------------------------------
(UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
------------- ------------- ------------ ------------
Net revenue................................ $140,949,655 $137,722,329 $183,111,848 $192,574,770
Costs and expenses:
Salaries and benefits.................... 49,154,953 49,479,811 65,941,842 67,663,759
Other operating expenses................. 58,846,888 57,097,346 73,950,516 75,434,320
Provision for bad debts.................. 9,979,306 8,072,997 11,727,282 17,020,294
Interest................................. 7,304,134 13,426,170 17,087,855 22,096,944
Depreciation and amortization............ 9,619,669 8,605,581 11,769,622 11,122,134
Allocated management fees................ 5,135,187 4,940,319 6,587,092 7,518,557
Reversal of excess loss contract
accrual............................... -- (7,500,000) (7,500,000) (15,531,000)
Costs of hospital closure................ -- -- -- 3,500,000
------------ ------------ ------------ ------------
Total costs and expenses.............. 140,040,137 134,122,224 179,564,209 188,825,008
------------ ------------ ------------ ------------
Income from continuing operations before
minority interests and income taxes...... 909,518 3,600,105 3,547,639 3,749,762
Minority interests......................... (140,144) 53,607 67,919 23,484
------------ ------------ ------------ ------------
Income from continuing operations before
income taxes............................. 1,049,662 3,546,498 3,479,720 3,726,278
Provision for income taxes................. -- -- -- --
Discontinued operations:
Income from operations of discontinued
psychiatric hospitals................. -- -- -- 1,038,306
------------ ------------ ------------ ------------
Net income................................. 1,049,662 3,546,498 3,479,720 4,764,584
Shareholder's deficit at beginning of
period................................... (85,634,288) (89,114,008) (89,114,008) (93,878,592)
------------ ------------ ------------ ------------
Shareholder's deficit at end of period..... $(84,584,626) $(85,567,510) $(85,634,288) $(89,114,008)
============ ============ ============ ============
See accompanying notes.
F-16
203
PARACELSUS UTAH FACILITIES
(SUBSIDIARIES OF PARACELSUS HEALTHCARE CORPORATION)
COMBINED STATEMENTS OF CASH FLOWS
PARACELSUS UTAH FACILITIES COMBINED
--------------------------------------------------------------
(UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
------------- ------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................... $ 1,049,662 $ 3,546,498 $ 3,479,720 $ 4,764,584
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................. 9,619,669 8,605,581 11,769,622 11,122,134
Reversal of excess loss contract accrual....... -- (7,500,000) (7,500,000) (15,531,000)
Costs of hospital closure...................... -- -- -- 3,500,000
Minority interests............................. (140,144) 53,607 67,919 23,484
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Accounts receivable......................... 5,056,626 3,655,102 8,664,594 1,346,012
Supplies, prepaid expenses and other current
assets.................................... 374,576 293,700 93,951 1,602,868
Accounts payable and other accrued
liabilities............................... 1,590,397 (10,681,342) (10,384,803) (21,408,034)
------------ ----------- ------------ ------------
Net cash provided by (used in) operating
activities..................................... 17,550,786 (2,026,854) 6,191,003 (14,579,952)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment...... (13,476,349) (2,512,736) (6,427,458) (1,897,084)
Increase in minority interests................... -- -- -- 1,509,405
Decrease in other assets......................... -- -- 16,058 3,686
------------ ----------- ------------ ------------
Net cash used in investing activities............ (13,476,349) (2,512,736) (6,411,400) (383,993)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of capital leases........................ (773,253) (749,827) (1,210,780) (438,097)
Net (decrease) increase in due to Paracelsus..... (4,786,406) 4,845,879 (1,531,680) 15,464,670
------------ ----------- ------------ ------------
Net cash provided by (used in) financing
activities..................................... (5,559,659) 4,096,052 (2,742,460) 15,026,573
------------ ----------- ------------ ------------
(Decrease) increase in cash and cash
equivalents.................................... (1,485,222) (443,538) (2,962,857) 62,628
Cash and cash equivalents at beginning of the
period......................................... 1,485,222 4,448,079 4,448,079 4,385,451
------------ ----------- ------------ ------------
Cash and cash equivalents at end of the period... $ -- $ 4,004,541 $ 1,485,222 $ 4,448,079
============ =========== ============ ============
See accompanying notes.
F-17
204
PARACELSUS UTAH FACILITIES
(SUBSIDIARIES OF PARACELSUS HEALTHCARE CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Paracelsus Utah Facilities is comprised of 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., Clinicare of Utah, Inc., and
PHC/Psychiatric Healthcare Corporation (which includes Lakeland Regional
Hospital and Crossroads Regional Hospital) (collectively the "Paracelsus Utah
Facilities" or the "Company"), each of which is a wholly owned subsidiary of
Paracelsus Healthcare Corporation ("Paracelsus").
The Company, with 515 licensed beds, excluding PHC Regional Hospital and
Medical Center, which has been closed since June 1997, provides health care
services to patients in and around metropolitan Salt Lake City, Utah. Lakeland
Regional Hospital and Crossroads Regional Hospital were sold in 1997 (See Note
4).
BASIS OF COMBINATION
The combined financial statements include the accounts of the Company and
its wholly-owned or majority owned subsidiaries and partnerships, for the nine
months ended September 30, 1999, and for the years ended December 31, 1998 and
1997, and have been prepared on the push-down basis of the historical cost of
Paracelsus.
All significant intrafacility accounts and transactions have been
eliminated. Minority interests represent income allocated to the minority
partners' investment. Investments in affiliates, of which the Company owns more
than 20% but not in excess of 50%, are recorded on the equity method.
The combined financial statements included herein may not necessarily be
indicative of the results of operations, financial position, and cash flows of
the Company in the future or had the Company operated as a separate and
independent company during the periods presented.
The combined financial statements included herein do not reflect any
changes that may occur in the financing and operations of the Company as a
result of the Recapitalization (See Note 13).
UNAUDITED INTERIM COMBINED FINANCIAL STATEMENTS
The combined statement of operations and the combined statement of cash
flows for the nine months ended September 30, 1998 (interim combined financial
statements) have been prepared by the Company's management in accordance with
generally accepted accounting principles for interim financial information and
with the instructions of Regulation S-X and are unaudited. In the opinion of the
Company's management, the interim financial statements include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the interim results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim combined unaudited financial
statements. The interim combined financial statements should be read in
conjunction with the audited financial
F-18
205
PARACELSUS UTAH FACILITIES
(SUBSIDIARIES OF PARACELSUS HEALTHCARE CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
statements appearing herein. The results of the nine months ended September 30,
1998 may not be indicative of operating results for the full respective years.
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 AND CASH EQUIVALENTS
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents.
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. Included
in property and equipment is capitalized interest expense of $218,000 for the
nine month period ended September 30, 1999. Depreciation expense recognized by
the Company was approximately $7,863,000, $9,597,000, and $8,874,000 for the
nine month period ended September 30, 1999 and for the years ended December 31,
1998 and 1997, respectively.
GOODWILL AND OTHER INTANGIBLE 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. Approximately
$3,349,000 of the purchase price of certain hospitals was allocated to
identifiable intangible assets, including medical records, assembled work force,
and manuals (the "other intangible assets"), based upon their fair value as
determined by an independent appraiser. The other intangible assets are being
amortized over a period of 2 to 10 years. Amortization expense recognized by the
Company was approximately $1,757,000, $2,173,000, and $2,248,000 for the nine
month period ended September 30, 1999 and for the years ended December 31, 1998
and 1997, respectively.
F-19
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PARACELSUS UTAH FACILITIES
(SUBSIDIARIES OF PARACELSUS HEALTHCARE CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company regularly reviews the carrying value of goodwill and other
intangible 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
intangible assets based on the difference between the sum of the future
discounted cash flows and net book value.
SHAREHOLDER'S DEFICIT
Shareholder's deficit represents the net investment in the Company by
Paracelsus. It includes common stock, additional paid-in-capital, and net
earnings or losses.
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 34% of the Company's gross patient revenue for the nine month
period ended September 30, 1999 and for the years ended December 31, 1998 and
1997 related to services rendered to patients covered by Medicare and Medicaid
programs.
Administrative procedures for both Medicare and Medicaid preclude final
determination of retrospective settlements until the related cost reports have
been audited and settled by the intermediaries. Settlements under cost
reimbursement agreements with third-party payers are estimated and recorded in
the period in which the related services are rendered and are adjusted in future
periods as final settlements are determined. Final determination of amounts
earned under the Medicare and Medicaid programs often occur in subsequent years
because of audits by the programs, rights of appeal and the application of
numerous technical provisions. In the opinion of the Company's management,
adequate provision has been made for any adjustments that may result from such
reviews.
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
pending or threatened investigations involving allegations of potential wrong
doing. Compliance with such laws and regulations can be subject to future
governmental review and interpretation, as well as significant regulatory action
including fines, penalties, and exclusion from the Medicare and Medicaid
programs. Noncompliance could result in 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 for the nine
F-20
207
PARACELSUS UTAH FACILITIES
(SUBSIDIARIES OF PARACELSUS HEALTHCARE CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
month period ended September 30, 1999 and for the years ended December 31, 1998
and 1997, respectively.
INCOME TAXES
Paracelsus files consolidated federal and state income tax returns which
include all of its eligible subsidiaries, including the Company. The provisions
for income taxes in the combined statements of operations for all periods
presented have been computed on a separate return basis (i.e., assuming the
Company had not been included in a consolidated income tax return with
Paracelsus). All income tax payments are made by the Company through Paracelsus.
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.
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, which consists of
amounts owed by various governmental agencies, insurance companies and private
patients. 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 Value of Financial Instruments
The estimated fair values of all financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable and capital lease
obligations, approximate their carrying amounts due to the short-term maturity
of these instruments.
RECLASSIFICATIONS
The accompanying 1998 financial statements have been reclassified to
conform to the 1999 financial statement presentation. The reclassifications had
no impact on net income or shareholder's deficit.
2. REVERSAL OF EXCESS LOSS CONTRACT ACCRUAL
During 1998, the Company recorded an unusual gain of approximately
$7,500,000 resulting from a settlement with PacifiCare of Utah ("PacifiCare")
regarding a dispute over administration of a 1996 capitation agreement. That
agreement had resulted in losses to PHC Regional Hospital and Medical Center
("PHC Regional") in 1996 and 1997, and the eventual closure of PHC Regional in
June 1997 (See Note 3). On August 20, 1997, PacifiCare and Paracelsus agreed to
a specific mechanism to determine amounts owed to
F-21
208
PARACELSUS UTAH FACILITIES
(SUBSIDIARIES OF PARACELSUS HEALTHCARE CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
each other as the result of amending the agreement effective July 1, 1997.
Following the completion of this process in August 1998, the Company recorded a
gain of approximately $7,500,000, which represents the excess of the loss
contract accrual (see below) over the settlement payment of $5,500,000 (see Note
3).
During 1997, the Company recorded an unusual gain of approximately
$15,500,000 resulting from a reduction in the loss contract accrued at PHC
Regional based upon the most recent available operating information associated
with the 1996 capitation agreement. The Company had recorded during 1996 an
unusual charge of approximately $38,100,000 for a loss contract at PHC Regional.
Paracelsus had entered into a capitated contract arrangement in 1996 in
connection with its acquisition of PHC Regional. Under the capitated contract,
PHC Regional was financially committed to provide healthcare services to members
under the contract in return for a fixed premium per member per month. The loss
contract charge was based on a study conducted by Paracelsus with the assistance
of independent third-party consultants, which projected future healthcare and
maintenance costs under the then capitation agreement to exceed future premiums.
3. ACQUISITIONS AND CLOSURE OF HOSPITALS
ACQUISITIONS
On August 16, 1996, Paracelsus acquired, among other entities, Salt Lake
Regional Medical Center ("Salt Lake"), Jordan Valley Hospital ("Jordan Valley"),
Lakeland Regional Hospital ("Lakeland"), and Crossroads Regional Hospital
("Crossroads") through its merger with Champion Healthcare Corporation
("Champion"). The total purchase price, including all costs associated with the
merger transaction and liabilities assumed, was approximately $394,400,000.
Paracelsus allocated to the Company a purchase price of approximately
$138,900,000 associated with the fair value of the assets acquired and
liabilities assumed, including goodwill and other intangibles of $42,800,000 of
Salt Lake, Jordan Valley, Lakeland, and Crossroads.
On May 17, 1996, Paracelsus acquired PHC Regional Hospital and Medical
Center ("PHC Regional"), including certain current assets, for approximately
$71,000,000 in cash which has been allocated to the Company. In connection with
the adoption of SFAS No. 121 and the significant operating losses recognized at
this facility since its acquisition date, the Company, in conjunction with an
independent appraisal, recorded an impairment charge of $52,500,000 on December
31, 1996, for the write down of the long-lived assets of PHC Regional, including
initially recorded goodwill of approximately $15,800,000.
On May 17, 1996, Paracelsus acquired Pioneer Valley Hospital ("Pioneer
Valley") and Davis Hospital and Medical Center ("Davis") from Columbia/HCA
Healthcare Corporation ("Columbia"). In exchange, Columbia received three
acute-care facilities then owned by Paracelsus and $38,500,000 in cash, net of a
working capital differential. Paracelsus purchased the real property of two of
its facilities from a real estate investment trust ("REIT") prior to exchanging
the facilities with Columbia and then sold the Pioneer Valley real property
acquired from Columbia to the REIT (See Note 6). Paracelsus allocated to the
Company a purchase price of approximately $48,300,000 associated with the fair
value of the assets acquired and liabilities assumed, including goodwill of
approximately $10,800,000, of Pioneer Valley and Davis.
F-22
209
PARACELSUS UTAH FACILITIES
(SUBSIDIARIES OF PARACELSUS HEALTHCARE CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CLOSURE
In June 1997, PHC Regional was closed as a result of continuing losses
under the capitation agreement with PacifiCare. Costs of approximately
$3,500,000 were incurred during 1997 relating to the closure. In August 1997,
Paracelsus executed an Amended and Restated Provider Agreement with PacifiCare,
retroactive to July 1, 1997, to (i) receive payment for services provided to
enrollees on a per diem basis instead of a capitation basis; (ii) revise the
contract term from 15 years to 5 years ending in June 2002; (iii) no longer
provide exclusive service to enrollees; and (iv) agree on a mechanism to resolve
disagreements regarding the administration of the capitation agreement prior to
July 1, 1997. Following the completion of this process in August 1998, the
Company paid PacifiCare approximately $5,500,000 as a final settlement under the
capitation agreement (See Note 2). In accordance with the terms of the Restated
Provider Agreement, the Company continues to provide services to PacifiCare
enrollees on a per diem basis.
4. DISCONTINUED OPERATIONS
In April 1997, the Company completed the sale of its two psychiatric
hospitals, Lakeland and Crossroads, and received proceeds of approximately
$12,700,000 ($10,200,000 in cash and $2,500,000 note receivable) which
approximated the carrying value of the net assets. As the Company implemented
plans to exit the psychiatric hospital business in September 1996, the net
assets of Lakeland and Crossroads were recorded at their estimated net
realizable value upon their acquisition as part of the Champion acquisition (See
Note 3). The combined financial statements reflect the results of operations of
Lakeland and Crossroads as discontinued operations.
5. INCOME TAXES
For the periods presented, federal and state income taxes are provided as
if the Company files its own separate income tax returns. The Company uses the
liability method in accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on the differences between financial
reporting and tax basis of assets and liabilities, and are measured using
enacted rates and laws that will be in effect when differences are expected to
reverse.
F-23
210
PARACELSUS UTAH FACILITIES
(SUBSIDIARIES OF PARACELSUS HEALTHCARE CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes consists of the following:
PARACELSUS UTAH FACILITIES COMBINED
---------------------------------------------
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------ ------------
Continuing operations:
Current:
Federal......................... $ -- $ -- $ --
State........................... -- -- --
Deferred:
Federal......................... -- -- --
State........................... -- -- --
------------ ------------ -----------
Total income tax provision
(benefit).......................... $ -- $ -- $ --
============ ============ ===========
The following table reconciles the differences between the statutory
federal income tax rate and the effective tax rate for continuing operations:
PARACELSUS UTAH FACILITIES COMBINED
---------------------------------------------
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------ ------------
Federal statutory rate............... $ 367,000 $ 1,218,000 $ 1,304,000
State income taxes................... 106,000 209,000 235,000
Unbenefitted affiliate losses........ -- 696,000 4,306,000
Non-deductible goodwill
amortization....................... 542,000 722,000 636,000
Adjustment to valuation allowance.... (1,015,000) (2,845,000) (6,481,000)
------------ ------------ -----------
Effective income tax rate............ $ -- $ -- $ --
============ ============ ===========
F-24
211
PARACELSUS UTAH FACILITIES
(SUBSIDIARIES OF PARACELSUS HEALTHCARE CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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:
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
Deferred tax assets:
Property, plant, and equipment............ $ -- $ 1,128,000
Allowance for bad debts................... 3,811,000 4,495,000
Accrued expenses.......................... 1,005,000 1,005,000
Net operating losses...................... 9,265,000 8,363,000
Other -- net.............................. 5,724,000 5,788,000
------------- -------------
Total deferred tax assets......... 19,805,000 20,779,000
Valuation allowance against deferred tax
assets.................................... (19,764,000) (20,779,000)
------------- -------------
Net deferred tax assets................ $ 41,000 $ --
============= =============
Deferred Tax Liabilities:
Property, plant and equipment............. $ 41,000 $ --
============= =============
For financial reporting purposes, the Company recorded valuation allowances
of approximately $19,764,000 and $20,779,000 as of September 30, 1999 and
December 31, 1998, respectively, to offset deferred tax assets principally
related to the Company's net operating losses, bad debt allowances and other
accrued expenses.
At September 30, 1999, the Company has net operating loss carryforwards of
approximately $24,221,000, inclusive of approximately $3,636,000 acquired from
Champion in the merger, for U.S. Federal income tax purposes that will expire
beginning in 2006. As a result of the change in ownership of the Champion group
at August 16, 1996, the Champion net operating losses are also limited under
Section 382 of the Internal Revenue Code.
At September 30, 1999 the Company had generated approximately $11,964,000
of tax losses which were absorbed by the members of the Paracelsus consolidated
group. The Paracelsus group was in a loss position during the period the losses
were generated, so the Company has not recognized a tax benefit related to those
losses.
The valuation allowance decreased by approximately $1,015,000 in 1999 and
$2,845,000 in 1998. The Company maintains a valuation allowance against deferred
tax assets it believes will not be realized.
6. LEASES
On May 16, 1996, Pioneer Valley entered into a lease agreement with an
unrelated real estate investment trust for the hospital building. The lease
agreement terminates on January 31, 2004, unless extended by Pioneer Valley for
three consecutive ten-year periods. Under this lease, rent is subject to
increases based on patient revenues with minimum annual increases of 2% and a
maximum annual rent of approximately $8,914,000. The lease agreement grants
Pioneer Valley the option of purchasing the hospital building at any
F-25
212
PARACELSUS UTAH FACILITIES
(SUBSIDIARIES OF PARACELSUS HEALTHCARE CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
time after the initial lease term at the greater of fair market value or
$63,013,000, plus any capital additions paid for by the landlord. Pioneer Valley
has agreed to make capital improvements through December 31, 1999 of at least
$3,400,000. As of September 30, 1999, approximately $3,111,000 had been expended
towards this commitment. In accordance with the lease covenants, Pioneer Valley
obtained, through Paracelsus, a yearly renewable standby letter of credit for
approximately $7,551,000, all of which is unused as of September 30, 1999.
The Company leases property and equipment under cancelable and
noncancelable leases. Future minimum operating and capital lease payments as of
September 30, 1999, including amounts relating to the lease of Pioneer Valley,
for the next five years and thereafter are approximately as follows:
CAPITAL OPERATING
LEASE LEASE SUBLEASE
PAYMENTS PAYMENTS INCOME
---------- ----------- ----------
2000.................................... $ 788,000 $10,466,000 $ 645,000
2001.................................... 736,000 10,437,000 645,000
2002.................................... 44,000 10,544,000 645,000
2003.................................... 32,000 10,497,000 580,000
2004.................................... 11,000 4,675,000 489,000
Thereafter.............................. -- 5,730,000 2,977,000
---------- ----------- ----------
Total minimum future
payments................... 1,611,000 $52,349,000 $5,981,000
=========== ==========
Less amount representing interest....... (112,000)
----------
1,499,000
Less current portions................... (701,000)
----------
Long-term capital lease obligations..... $ 798,000
==========
The following summarized amounts relate to assets leased by the Company
under capital leases:
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
Property, plant, and equipment...................... $2,452,000 $2,375,000
Accumulated depreciation............................ (823,000) (470,000)
---------- ----------
Net book value...................................... $1,629,000 $1,905,000
========== ==========
Depreciation of assets under capital leases is included in depreciation and
amortization in the Combined Statements of Operations.
Rental expense recognized by the Company was approximately $8,454,000,
$11,667,000, and $11,359,000 for the nine months ended September 30, 1999 and
for the years ended December 31, 1998 and 1997, respectively.
F-26
213
PARACELSUS UTAH FACILITIES
(SUBSIDIARIES OF PARACELSUS HEALTHCARE CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
SELF-INSURED LIABILITIES
General and Professional Liability
The Company is subject to claims and suits in the ordinary course of
business, including those arising from care and treatment afforded at its
hospitals. Paracelsus assumes the liability for all general and professional
liability claims incurred. Accordingly, no reserve for general and professional
liability risks is recorded in the accompanying Combined Balance Sheets.
Paracelsus is self-insured for the first $1 million per occurrence of general
and professional liability claims and $4 million in the aggregate. In addition,
Paracelsus has purchased excess insurance coverage up to $50 million in the
aggregate from third-party insurance carriers. The cost of general and
professional liability coverage is allocated by Paracelsus to the Company based
on actuarially determined estimates. The net cost (income) allocated to the
Company for the nine months ended September 30, 1999 and for the years ended
December 31, 1998 and 1997, was approximately $1,333,000, $(45,000), and
$621,000, respectively, net of adjustments allocated for a change in estimate in
accordance with actuarial evaluations of approximately $0, $1,170,000, and
$524,000, respectively.
Worker's Compensation and Health Insurance
The Company participates in Paracelsus' self-insured program for workers'
compensation and health insurance. Paracelsus assumes the liability for all
workers' compensation claims incurred up to $250,000 per claim after which the
Company is insured by a commercial insurance carrier. Accordingly, no reserve
for workers' compensation risk is recorded in the accompanying Combined Balance
Sheets. The cost of workers' compensation coverage is allocated by Paracelsus to
the Company based on actuarially determined estimates. The costs of health
insurance is allocated by Paracelsus to the Company based upon claims paid on
behalf of the Company and an estimate of the total cost of unpaid claims in
accordance with an average lag time and past experience. The costs allocated to
the Company for these self-insured programs for the nine months ended September
30, 1999 and for the years ended December 31, 1998 and 1997, was approximately
$3,182,000, $4,491,000, and $3,125,000, respectively.
Other
The Company has acquired businesses with prior operating histories.
Acquired companies may have unknown or contingent liabilities, including
liabilities for failure to comply with healthcare laws and regulations, such as
billing and reimbursement, fraud and abuse, and similar anti-referral laws.
Although the Company institutes policies designed to conform practices to its
standards following completion of acquisitions, there can be no assurance that
the Company will not become liable for past activities that may later be
asserted to be improper by private plaintiffs or government agencies. Although
the Company generally seeks to obtain indemnification from prospective sellers
covering such matters, there can be no assurance that any such matter will be
covered by indemnification, or if covered, that such indemnification will be
adequate to cover potential losses and fines.
F-27
214
PARACELSUS UTAH FACILITIES
(SUBSIDIARIES OF PARACELSUS HEALTHCARE CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Certain term loan and revolving loan facilities of Paracelsus are secured
in part by the right of lenders to a first priority lien in the real and
personal properties of the Company and a first priority interest in the capital
stock of the Company (See Note 13).
PHYSICIAN COMMITMENTS
The Company has committed to provide certain financial assistance pursuant
to recruiting agreements with various physicians practicing in the communities
it serves. In consideration for a physician relocating to one of its communities
and agreeing to engage in private practice for the benefit of the respective
community, the Company may loan certain amounts of money to a physician normally
over a period of one year to assist in establishing his or her practice. Amounts
committed to be advanced approximated $1,300,000 at September 30, 1999. The
actual amount of such commitments to be subsequently advanced to physicians
often depends upon the financial results of a physician's private practice
during the guaranteed period. Generally, amounts advanced under the recruiting
agreements may be forgiven pro rata over a period of 24 months contingent upon
the physician continuing to practice in the respective community. It is
management's opinion that amounts actually advanced and not repaid will not have
a material adverse effect on the Company's results of operations or financial
position.
8. EMPLOYEE BENEFITS
The Company participates in Paracelsus' defined contribution 401(k)
retirement plan (the "Plan"). The Plan covers all employees of the Company who
have been employed for one year, are at least 21 years of age and work at least
1,000 hours annually. Participants may contribute up to 15% of pretax
compensation not to exceed limits established annually by the Internal Revenue
Service. Paracelsus matches on behalf of the Company $0.25 for each dollar of
employee contributions up to 6% of the employee's gross salary and may make
additional discretionary contributions. The employees immediately vest 100% in
their own contributions and vesting in the employer portion of contributions
occurs gradually after seven years to 100%. The cost allocated to the Company
for contributions to the Plan made by Paracelsus on behalf of the Company for
the nine months ended September 30, 1999 and for the years ended December 31,
1998 and 1997, was approximately $281,000, $417,000, and $430,000, respectively.
9. DUE TO PARACELSUS
Due to Paracelsus consists of expenses allocated from Paracelsus to the
Company and the net excess of funds transferred to or paid on behalf of the
Company, including the initial costs of the hospitals, over funds transferred to
the centralized cash management account at Paracelsus. Generally, this balance
is increased by automatic cash transfers from the account to reimburse the
Company's bank accounts for completed construction project additions, fees and
services provided by Paracelsus, and other operating expenses,
F-28
215
PARACELSUS UTAH FACILITIES
(SUBSIDIARIES OF PARACELSUS HEALTHCARE CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
such as payroll, interest, insurance, and income taxes. Generally, the balance
is decreased through daily cash deposits from collections of accounts receivable
by the Company to the account. Interest cost of Paracelsus is allocated to the
Company in proportion to its outstanding amounts due to Paracelsus. Interest
expense allocated to the Company related to the net balances due Paracelsus was
approximately $7,300,000, $17,000,000, and $22,000,000, for the nine months
ended September 30, 1999 and for the years ended December 31, 1998 and 1997,
respectively.
Allocated Management Fees
Paracelsus incurs various corporate general and administrative expenses.
These corporate overhead expenses are allocated to the Company based on net
revenue. The amounts allocated by Paracelsus are not necessarily indicative of
the actual costs which may have been incurred had the Company operated as an
entity unaffiliated with Paracelsus; however, in the opinion of Paracelsus
management, this allocation method is reasonable.
10. SALE OF ACCOUNTS RECEIVABLE
A subsidiary of Paracelsus has an agreement with an unaffiliated trust (the
"Trust") to sell the hospital eligible accounts receivable (the "Eligible
Receivables") of certain of its subsidiaries, including certain hospitals of the
Company, on a nonrecourse basis to the Trust. A special purpose subsidiary of a
major lending institution provides up to $65,000,000 in commercial paper
financing to the Trust to finance the purchase of the Eligible Receivables, with
the Eligible Receivables serving as collateral. The commercial paper notes have
a term of not more than 120 days. In 1998, Davis and Jordan Valley were added to
the commercial paper financing program and Salt Lake Regional Medical Center was
added in 1999. Eligible Receivables sold at book value to the Trust for no gain
or loss were approximately $11,527,000 and $6,644,000 at September 30, 1999 and
December 31, 1998, respectively.
11. ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of activity in the Company's allowance for doubtful accounts
follows:
BALANCES AT ADDITIONS ACCOUNTS BALANCE AT THE
BEGINNING OF CHARGED TO WRITTEN OFF, NET END OF THE
PERIOD EXPENSES OF RECOVERIES PERIOD
------------ ----------- ---------------- --------------
Allowance for doubtful
accounts:
Year ended December 31,
1997................ $11,556,000 $17,020,000 $ (8,208,000) $20,368,000
Year ended December 31,
1998................ 20,368,000 11,727,000 (19,458,000) 12,637,000
Nine months ended
September 30,
1999................ 12,637,000 9,979,000 (11,766,000) 10,850,000
F-29
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PARACELSUS UTAH FACILITIES
(SUBSIDIARIES OF PARACELSUS HEALTHCARE CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of accounts receivable by debtor as a percentage of total
accounts receivable follows:
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
Medicare................................................... 17.6% 15.2%
Medicaid................................................... 8.9 6.7
HMO/PPO.................................................... 36.4 35.6
Commercial................................................. 13.5 13.5
Self pay/Other............................................. 23.6 29.0
---- ----
100% 100%
==== ====
12. RECENT PRONOUNCEMENTS
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, which will apply to the Company beginning
with its fiscal year ended December 31, 1999. 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 these SOPs, effective
January 1, 1999, did not have a material effect on its results of operations.
In 1998, the Financial Accounting Standards Board 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
impact on the Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statement and requires that these enterprises
report selected information about operating segments in interim financial
reports. Management has determined that the Company does not have separately
reportable segments as defined under SFAS 131. Rather, the Company's facilities
are all similar in their business activities and the economic environments in
which they operate. Assessment of performance and corresponding management
decisions are based upon individual facility results.
F-30
217
PARACELSUS UTAH FACILITIES
(SUBSIDIARIES OF PARACELSUS HEALTHCARE CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUBSEQUENT EVENTS
Effective October 8, 1999, Paracelsus and unrelated third parties
recapitalized the Paracelsus Utah Facilities. The recapitalization transaction
resulted in Paracelsus retaining a minority interest in a preexisting Paracelsus
subsidiary holding the ownership interests in the Paracelsus Utah Facilities,
which subsequent to the recapitalization changed its name to IASIS Healthcare
Corporation ("IASIS") and changed its fiscal year end to September 30th. IASIS,
effective October 15, 1999, acquired ten acute-care hospitals and other related
facilities and assets from an unrelated party.
The following table provides unaudited pro forma operating results as if
such transactions had occurred as of January 1, 1999.
NINE MONTHS
ENDED SEPTEMBER 30,
1999
-------------------
Net revenue...................................... $585,019,000
Net income before cumulative effect of accounting
change......................................... $ 3,954,000
The summary unaudited pro forma operating results do not purport to be
indicative of the results of operations that would have actually been achieved
had the pro forma transactions occurred as of the date specified, nor are they
necessarily indicative of the results of operations that may be achieved in the
future.
F-31
218
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Tenet Healthcare Corporation:
We have audited the accompanying combined balance sheets of St. Luke's
Medical Center, St. Luke's Behavioral Health Center, Mesa General Hospital
Medical Center, Tempe St. Luke's Hospital, Health Choice Arizona, Inc., Memorial
Hospital of Tampa, Town & Country Hospital, Palms of Pasadena Hospital, Odessa
Regional Hospital, Southwest General Hospital, Mid-Jefferson Hospital and Park
Place Medical Center including certain medical office buildings and other
healthcare businesses related to the operations of these hospitals (collectively
the "Tenet Hospitals"), as of May 31, 1999 and 1998, and the related combined
statements of income and changes in ownership equity and cash flows for each of
the years in the three-year period ended May 31, 1999. These combined financial
statements are the responsibility of Tenet Hospitals' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of the Tenet Hospitals
as of May 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the years in the three-year period ended May 31, 1999, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Dallas, Texas
September 20, 1999
F-32
219
TENET HOSPITALS
COMBINED BALANCE SHEETS (NOTE 1)
AUGUST 31, MAY 31, MAY 31,
1999 1999 1998
----------- --------- --------
(UNAUDITED)
In thousands
ASSETS
Current assets:
Accounts receivable, less allowance for
doubtful accounts ($2,209 (unaudited) at
August 31, 1999, $10,152 at May 31, 1999
and $11,095 at May 31, 1998)............ $ 13,010 137,910 119,340
Inventories of supplies, at cost........... 15,413 15,154 13,567
Deferred income taxes...................... 684 4,159 608
Prepaid expenses and other current
assets.................................. 12,263 11,996 10,403
--------- --------- --------
Total current assets......................... 41,370 169,219 143,918
Other assets................................. 2,981 3,010 2,393
Property and equipment, net.................. 283,046 288,419 291,810
Costs in excess of net assets acquired, less
accumulated amortization ($20,160
(unaudited) at August 31, 1999, $19,084 at
May 31, 1999 and $15,444 at May 31,
1998)...................................... 127,272 128,830 132,929
Other intangible assets at cost, less
accumulated amortization ($581 (unaudited)
at August 31, 1999, $901 at May 31, 1999
and $546 at May 31, 1998).................. 3,573 5,079 2,947
--------- --------- --------
$ 458,242 594,557 573,997
========= ========= ========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt.......... $ 1,088 1,137 841
Accounts payable........................... 20,215 19,575 20,029
Employee compensation and benefits......... 10,002 9,806 9,046
Medical claims payable..................... 15,442 15,123 7,945
Other current liabilities.................. 18,992 42,629 44,795
--------- --------- --------
Total current liabilities.......... 65,739 88,270 82,656
Long-term debt, net of current portion....... 6,619 6,834 7,750
Other long-term liabilities and minority
interests.................................. 16,905 17,671 18,529
Deferred income taxes........................ 43,817 43,852 42,105
Commitments and contingencies................
Equity:
Ownership equity........................... 572,861 570,404 531,807
Due from affiliate......................... (247,699) (132,474) (108,850)
--------- --------- --------
Total equity....................... 325,162 437,930 422,957
--------- --------- --------
$ 458,242 594,557 573,997
========= ========= ========
See accompanying notes to combined financial statements.
F-33
220
TENET HOSPITALS
COMBINED STATEMENTS OF INCOME AND CHANGES IN OWNERSHIP EQUITY
THREE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31, MAY 31, MAY 31, MAY 31,
1999 1998 1999 1998 1997
------------ ------------ ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
In thousands
Net patient service revenues.... $119,879 114,352 490,256 477,735 476,931
Capitation premiums............. 22,317 19,130 82,250 69,491 63,678
-------- -------- -------- ------- -------
Net operating revenues...... 142,196 133,482 572,506 547,226 540,609
Operating expenses:
Salaries and benefits......... 47,434 47,601 192,573 199,186 195,532
Supplies...................... 20,361 20,170 82,915 81,503 80,407
Provision for doubtful
accounts.................... 11,843 9,936 41,904 37,827 32,579
Other operating expenses...... 43,542 39,064 154,959 145,768 141,735
Depreciation.................. 5,198 6,433 21,663 20,279 19,487
Amortization.................. 1,932 1,230 4,975 5,012 5,216
Impairment and restructuring
charges..................... -- -- -- 19,455 --
Overhead allocated from
affiliate................... 1,880 1,702 7,518 10,641 19,717
Loss on sale of accounts
receivable.................. 4,548 -- -- -- --
-------- -------- -------- ------- -------
Operating income............ 5,458 7,346 65,999 27,555 45,936
Interest expense................ (203) (405) (996) (909) (1,161)
Interest income (expense) on
certain due from (to)
affiliate balances............ 413 (131) 1,665 (270) 125
Minority interests.............. 114 (545) (2,421) (2,597) (3,176)
-------- -------- -------- ------- -------
Income before income taxes,
extraordinary charge and
cumulative effect of
accounting change........ 5,782 6,265 64,247 23,779 41,724
Taxes on income................. 2,307 2,500 25,650 10,513 17,130
-------- -------- -------- ------- -------
Income before extraordinary
charge and cumulative
effect of accounting
change................... 3,475 3,765 38,597 13,266 24,594
Extraordinary charge from early
extinguishment of corporate
debt (note 1h)................ -- -- -- (6,726) --
Cumulative effect of accounting
change........................ 1,018 -- -- -- --
-------- -------- -------- ------- -------
Net income.................. 2,457 3,765 38,597 6,540 24,594
Ownership equity, beginning of
period........................ 570,404 531,807 531,807 525,267 500,673
-------- -------- -------- ------- -------
Ownership equity, end of
period........................ $572,861 535,572 570,404 531,807 525,267
======== ======== ======== ======= =======
See accompanying notes to combined financial statements.
F-34
221
TENET HOSPITALS
COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31, MAY 31, MAY 31, MAY 31,
1999 1998 1999 1998 1997
------------ ------------ ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
In thousands
Cash flows from operating activities:
Net income................................ $ 2,457 3,765 $ 38,597 6,540 24,594
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 7,130 7,663 26,638 25,291 24,703
Provision for doubtful accounts......... 11,843 9,936 41,904 37,827 32,579
Deferred income taxes................... 3,440 (451) (1,804) (3,634) (2,238)
Impairment and restructuring charges.... -- -- -- 19,455 --
Extraordinary charge.................... -- -- -- 6,726 --
Gain on sale of property and
equipment............................. -- -- -- (400) --
Cumulative effect of accounting
change................................ 1,018 -- -- -- --
Increase (decrease) in cash from changes
in operating assets and liabilities
Accounts receivable, net.............. 113,057 (3,311) (64,689) (44,067) 18,351
Inventories, prepaid expenses and
other current assets............... (525) (739) (648) (539) 1,553
Accounts payable and accrued
expenses........................... (22,133) (7,629) 5,418 22,993 (53,650)
Net expenditures for impairment and
restructuring...................... (350) (350) (1,400) -- --
-------- ------ -------- ------- -------
Net cash provided by operating
activities....................... 115,937 8,884 44,016 70,192 45,892
-------- ------ -------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment....... (598) (3,070) (17,280) (27,655) (23,481)
Proceeds from sale of property and
equipment............................... -- -- -- 1,300 --
Proceeds from collection of note
receivable.............................. -- -- -- 2,500 --
Other items............................... 916 (74) (680) 50 --
-------- ------ -------- ------- -------
Net cash provided by (used in)
investing activities............. 318 (3,144) (17,960) (23,805) (23,481)
-------- ------ -------- ------- -------
Cash flows from financing activities:
Net payments with affiliate............... (115,225) (5,017) (23,624) (41,991) (36,979)
Principal payments on borrowings.......... (264) (96) (667) (1,934) --
Other items............................... (766) (627) (1,765) (2,462) --
-------- ------ -------- ------- -------
Net cash used in financing
activities....................... (116,255) (5,740) (26,056) (46,387) (36,979)
-------- ------ -------- ------- -------
Net decrease in cash and cash equivalents... -- -- -- -- (14,568)
Cash and cash equivalents, beginning of
period.................................... -- -- -- -- 14,568
-------- ------ -------- ------- -------
Cash and cash equivalents, end of period.... $ -- -- -- -- --
======== ====== ======== ======= =======
Supplemental disclosures:
Interest paid, net of amounts
capitalized............................. 203 405 996 909 1,161
Taxes received (paid) are made at the
Parent level.
See accompanying notes to combined financial statements.
F-35
222
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS
THREE YEARS ENDED MAY 31, 1999
(1) SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business and Basis of Presentation
On August 15, 1999, Tenet Healthcare Corporation (Tenet) and certain of its
wholly-owned subsidiaries entered into an Asset Sale Agreement (Agreement) with
JLL Hospital, LLC (JLL), pursuant to which JLL agreed to acquire from Tenet and
certain of its subsidiaries substantially all of the property, equipment and
lease rights related to the operations of nine acute care hospitals, one
specialty hospital and a health maintenance organization (HMO) including certain
medical office buildings and other healthcare businesses related to the
operations of these hospitals for a purchase price of $405.2 million, subject to
certain net working capital and other adjustments at the closing date. In
addition, an eleventh hospital contemplated in the Agreement, Odessa Regional
Hospital, is owned by Odessa Hospital, Ltd., a partnership that is owned 75% by
Tenet Healthcare, Ltd. (a partnership indirectly wholly-owned by Tenet) as
general partner and 25% by various physicians as limited partners. Pursuant to
the Odessa Partnership Agreement, the limited partners have a right of first
refusal with respect to any sale of substantially all the assets of the
partnership. In the event the limited partners do not exercise the right of
first refusal, Tenet will cause Tenet Healthcare, Ltd. to convey all of its
interests in Odessa Hospital, Ltd. to JLL pursuant to the Odessa Asset Sale
Agreement and the above purchase price will increase by $42 million, subject to
certain net working capital and other adjustments at the closing date. In the
event the limited partners exercise the right of first refusal, Tenet will cause
Tenet Healthcare, Ltd. to convey all of its interests in Odessa Hospital, Ltd.
to the limited partners. The eleven hospitals and the HMO including certain
medical office buildings and other healthcare businesses related to the
operations of these hospitals are referred to collectively herein as the "Tenet
Hospitals."
The Tenet Hospitals are primarily engaged in the operation of general
hospitals and related healthcare facilities and are subject to changes in
government legislation that could impact Medicare and Medicaid reimbursement
levels and to increased levels of managed care penetration and changes in payor
patterns that may impact the level and timing of payments for services rendered.
The combined financial statements of the Tenet Hospitals include the
accounts of the following entities:
St. Luke's Medical Center................... Phoenix, Arizona 280 beds
St. Luke's Behavioral Health Center......... Phoenix, Arizona 70 beds
Mesa General Hospital Medical Center........ Mesa, Arizona 143 beds
Tempe St. Luke's Hospital................... Tempe, Arizona 106 beds
Health Choice Arizona, Inc. (HMO)........... Phoenix, Arizona -- --
Memorial Hospital of Tampa.................. Tampa, Florida 174 beds
Town & Country Hospital..................... Tampa, Florida 201 beds
Palms of Pasadena Hospital.................. St. Petersburg, Florida 307 beds
Odessa Regional Hospital.................... Odessa, Texas 100 beds
Southwest General Hospital.................. San Antonio, Texas 286 beds
F-36
223
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Mid-Jefferson Hospital...................... Nederland, Texas 138 beds
Park Place Medical Center................... Port Arthur, Texas 244 beds
At May 31, 1999, the Tenet Hospitals' concentrations of general hospital
beds were in Arizona with 29.2%, Florida with 33.3% and Texas with 37.5%. The
concentrations of hospital beds in these three states increase the risk that any
adverse economic, regulatory or other developments that may occur in such states
may adversely affect the Tenet Hospitals' results of operations or financial
condition.
The accompanying combined financial statements reflect the historical
accounts of the Tenet Hospitals for years presented which reflect the May 31
fiscal year end of Tenet. The combined financial statements include allocations
for certain general and administrative, financial, legal, human resources,
information systems and other services from Tenet. The basis for allocations are
generally determined on a pro-rata basis utilizing net operating revenues for
all of Tenet's hospitals. Such expense allocations to the Tenet Hospitals may
not be representative of the costs of such services to be incurred in the future
or on a stand alone basis. Management believes the allocation method described
above is reasonable.
The Tenet Hospitals maintain their books and records on the accrual basis
of accounting. All significant transactions and balances resulting from business
conducted between the Tenet Hospitals have been eliminated.
(b) Unaudited Interim Combined Financial Statements
The accompanying unaudited combined balance sheet as of August 31, 1999 and
the related unaudited combined statements of income and changes in ownership
equity and cash flows for the three months ended August 31, 1999 and 1998
(interim financial statements) of the Tenet Hospitals have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the interim results
have been included.
The interim unaudited combined financial statements should be read in
conjunction with the audited May 31, 1999 and 1998 financial statements
appearing herein. The results of the three months ended August 31, 1999 may not
be indicative of operating results for the full respective year.
On June 1, 1999, the Tenet Hospitals changed its method of accounting for
start-up costs to expense such costs as incurred in accordance with Statement of
Position 98-5, published by the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants. The adoption of the
Statement resulted in the write-off of previously capitalized start-up costs as
of May 31, 1999 in the amount of $1.0 million, net of tax benefit, which amount
is shown in the accompanying unaudited combined statements of income and changes
in ownership equity as a cumulative effect of an accounting change in the three
months ended August 31, 1999.
F-37
224
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Tenet Hospitals to
make estimates and assumptions that affect the amounts reported in the combined
financial statements and accompanying notes. Actual results could differ from
those estimates.
(d) Revenue Recognition
Net patient service revenues consist primarily of charges that are based on
the hospitals' established billing rates less contractual allowances and
discounts, principally for patients covered by Medicare, Medicaid and other
contractual programs. These allowances and discounts were approximately $761.7
million in 1999, $649.7 million in 1998 and $573.1 million in 1997. Payments
under these programs are based on either predetermined rates or the costs of
services. Estimates of governmental contractual allowances (Medicare and
Medicaid) are based on historically developed models adjusted for currently
effective reimbursement or contract rates, the results of which are adjusted as
final settlements of cost reports are reached, and are determined on a
hospital-by-hospital year-by-year basis. Settlements for retrospectively
determined rates are estimated in the period the related services are rendered
and are adjusted in future periods as final settlements are determined. Final
settlements of prior year cost reports resulted in adjustments that increased
net patient service revenue by approximately $5.9 million in 1999 and decreased
net patient service revenue by approximately $10.4 million and $1.5 million in
1998 and 1997, respectively. Estimates of commercial contractual allowances are
based primarily on the terms of the contractual arrangements with commercial
payors. Obligations related to settlements are included in other current
liabilities in the accompanying combined balance sheets, which amounts
approximated $25.0 million and $19.0 million at May 31, 1999 and 1998,
respectively. Management of the Tenet Hospitals believes that adequate provision
has been made for adjustments that may result from final determination of
amounts earned under these programs. There are no known material claims,
disputes or unsettled matters with third-party payors not adequately provided
for in the combined financial statements. Approximately 40%, 47%, and 50% of net
operating revenues in 1999, 1998 and 1997, respectively were from the
participation of the Tenet Hospitals in Medicare and Medicaid programs.
The Tenet Hospitals provide care to patients who meet certain financial or
economic criteria without charge or at amounts substantially less than its
established rates. Because the Tenet Hospitals do not pursue collection of
amounts determined to qualify as charity care, they are not reported in the
accompanying combined statements of income and changes in ownership equity.
Health Choice Arizona, Inc. HMO (Health Choice or the Plan) is a prepaid
health plan that derives approximately 99% of its revenue through a contract
with the Arizona Health Care Cost Containment System (AHCCCS) to provide
specified health services, through contracted providers to qualified enrollees.
Revenues generated under the AHCCCS contract with Health Choice represent 14%,
13% and 12% of the net operating revenues of the combined Tenet Hospitals for
1999, 1998 and 1997, respectively. The term of the contract with AHCCCS is five
years, with annual renewal provisions, and expires September 30, 2002. The
contract provides for fixed monthly premiums, based on
F-38
225
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
negotiated per capita member rates. Health Choice recently received notification
from the state of Arizona making inquiry into a 1999 claim of approximately $3.4
million submitted by the Plan for payment under a certain state program. The
particular claim in question relates to costs incurred by Health Choice for
providing health care services to potential members (enrollees) of AHCCCS as
they apply for eligibility under the AHCCCS program. In connection with these
services, Health Choice records a receivable due from AHCCCS. As a result of it
discussions with AHCCCS and an analysis of its internal data, Health Choice
recorded a $1.4 million allowance against the $3.4 million claim. There are no
other significant claims at risk.
Capitation premiums received by Health Choice are recognized as revenue in
the month that members are entitled to health care services.
Contractually, Health Choice is reimbursed for health care costs that
exceed stated amounts. AHCCCS reimburses Health Choice 75 percent (85 percent
for catastrophic cases) of qualified health care costs in excess of stated
levels of $5,000 to $35,000 depending on the rate code assigned to the member.
Qualified costs must be incurred during the contract year and are the lesser of
the amount paid by the Plan or the AHCCCS fee schedule. Amounts are recognized
under the contract with AHCCCS when health care costs exceed stated amounts as
provided under the contract including estimates of such costs at month end.
Billed amounts were $1,572,790, $1,133,819 and $941,765 in 1999, 1998 and 1997,
respectively. Unbilled amounts were $973,281, $1,159,614 and $636,896 in 1999,
1998 and 1997, respectively.
(e) Medical Expenses
Monthly capitation payments made by Health Choice to primary care
physicians and other health care providers are expensed in the month services
are contracted to be performed. Claims expense for non-capitated arrangements is
accrued as services are rendered by hospitals, physicians, and other health care
providers during the year. These expenses are approximately $66.9 million, $48.6
million and $41.0 million in 1999, 1998 and 1997, respectively, and are included
in other operating expenses in the accompanying statements of income and changes
in ownership equity.
Medical claims payable related to Health Choice include claims received but
not paid and an estimate of claims incurred but not reported. Incurred but not
reported claims are estimated using a combination of historical claims payment
data and known admissions based upon preauthorization logs.
Contracts between Health Choice and primary care physicians contain
incentives to encourage physicians to practice preventive health care. These
incentives are estimated monthly and recorded in medical claims payable. Actual
incentives are paid semi-annually.
(f) Long-Lived Assets
The Tenet Hospitals use the straight-line method of depreciation for
buildings, building improvements and equipment over their estimated useful lives
as follows: buildings and improvements--25 to 40 years; equipment--3 to 15
years. Capital leases are recorded at the beginning of the lease term as assets
and liabilities at the lower of present value of
F-39
226
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the minimum lease payments or the fair value of the assets, and such assets,
including improvements are amortized over the shorter of the lease term or
estimated useful life.
Costs in excess of the fair value of the net assets of purchased businesses
(goodwill) generally are amortized over 20 to 40 years. Other intangible assets
consist of start-up costs, covenants not to compete, and capitalized software
costs. The straight-line method is used to amortize other intangible assets
generally for periods ranging from one to fifteen years. See Note 1(b).
Impairment of long-lived assets, including goodwill related to such assets,
is recognized whenever events or changes in circumstances indicate that the
carrying amount of the asset, or related groups of assets, may not be
recoverable from estimated future cash flows. Measurement of the amount of
impairment may be based on appraisal, market values of similar assets or
estimates of future discounted cash flows resulting from use and ultimate
disposition of the asset.
The Tenet Hospitals begin the process of determining if their facilities
are impaired at each fiscal year-end by reviewing all of the facilities'
three-year historical and one-year projected cash flows. Facilities whose cash
flows are negative and trending significantly downward on this basis are
selected for further impairment analysis. Their future cash flows (undiscounted
and without interest charges) are estimated over the expected useful life of the
facility and consider patient volumes, changes in payor mix, revenue and expense
growth rates and reductions in Medicare payments due to the Balanced Budget Act
of 1997 (the "BBA") and other regulatory actions, which assumptions vary by
hospital, home health agency and physician practice. The sum of those expected
future cash flows is compared to the carrying value of the assets. If the sum of
the expected future cash flows is less than the carrying amount of the assets,
the Tenet Hospitals recognize an impairment loss. Refer to Note 2 for further
discussion on this matter.
(g) Equity
Ownership equity represents Tenet's investment in the net assets of the
Tenet Hospitals and is non-interest bearing.
The Tenet Hospitals have a cash management agreement with Tenet. Pursuant
to this agreement, daily balances in Tenet Hospitals' cash accounts are
transferred to Tenet in the form of inter-company advances and Tenet funds cash
disbursements on behalf of the Tenet Hospitals in a similar manner. This
activity is reflected in the accompanying combined balance sheets as "Due from
affiliate."
Due from affiliate includes net intercompany activity with Tenet.
Intercompany activity includes advances to the Tenet Hospitals by Tenet for
insurance coverage, working capital requirements, other operating expenses, and
asset purchases. Additionally, Tenet charged the Tenet Hospitals management fees
of approximately $7.5 million, $10.6 million and $19.7 million in 1999, 1998 and
1997, respectively, for general and administrative, financial, legal, human
resources, information services and other services. Offsetting these advances
and management fees are excess cash amounts the Tenet Hospitals advance daily to
Tenet resulting in a net due from affiliate balance at May 31, 1999 and 1998.
Intercompany interest (income) expense was approximately $(1.5) million,
$644,000 and
F-40
227
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
$13,000 in 1999, 1998 and 1997, respectively, for the portion of the due to/from
affiliate balances subject to interest charges pursuant to Tenet internal
policy.
(h) Income Taxes
Tenet files a federal income tax return and state income tax returns for
the respective states in which it does business, which include the operating
results of the Tenet Hospitals as appropriate. Tenet allocates taxes to each of
the Tenet Hospitals on a separate-return basis whereby current and deferred
taxes are allocated to each of the Tenet Hospitals pursuant to the asset and
liability method, as if each of the Tenet Hospitals were a separate taxpayer.
(i) Extraordinary Charge
The approximate $6.7 million extraordinary charge, which is net of tax
benefits of approximately $4.2 million, represents the allocation to the Tenet
Hospitals of an extraordinary charge recorded by Tenet in fiscal 1998 related to
the redemption of certain Tenet senior notes.
(2) IMPAIRMENT AND RESTRUCTURING CHARGES
Restructuring charges are non-routine operating costs related to a distinct
operating business decision. These charges are typically, but not necessarily,
limited to charges associated with the consolidation and/or relocation of
operations, the disposition of operations or productive assets (including
various exit costs), or a significant change in strategic business plans.
In the fourth quarter of the year ended May 31, 1998, Tenet Hospitals
recorded impairment and restructuring charges of approximately $19.5 million
related to the anticipated closure of a specialty hospital including lease
commitments and other costs of closure by May 31, 1999. Prior to final closure,
Tenet began negotiations with potential buyers for certain Arizona operations,
including the specialty hospital, St. Luke's Behavioral Health Center. A
substantial amount of these charges relate to lease commitments that will result
in cash payments over ten years.
The table below presents a reconciliation of beginning and ending liability
balances in connection with impairment and restructuring charges:
TRANSACTIONS FOR FISCAL 1998 TRANSACTIONS FOR FISCAL 1999
BALANCES ---------------------------- BALANCES ---------------------------- BALANCES
AT MAY 31, CASH OTHER AT MAY 31, CASH OTHER AT MAY 31,
DESCRIPTION OF CHARGES 1997 CHARGES PAYMENTS ITEMS 1998 CHARGES PAYMENTS ITEMS 1999
- ---------------------- ---------- ------- -------- ------- ---------- ------- -------- ------- ----------
Estimated costs to close
a facility:
Lease commitments..... -- $15,100 -- -- $15,100 -- $(1,400) -- $13,700
Other anticipated
closure costs....... -- 2,604 -- -- 2,604 -- -- -- 2,604
Impairment losses..... -- 1,751 -- $(1,751) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
-- $19,455 -- $(1,751) $17,704 -- $(1,400) -- $16,304
======= ======= ======= ======= ======= ======= ======= ======= =======
F-41
228
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(3) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consists of the following
(dollars in thousands):
1999 1998
--------- -------
Land............................................. $ 28,029 27,958
Buildings and improvements....................... 219,406 213,810
Construction in progress......................... 519 7,689
Equipment........................................ 150,164 130,975
--------- -------
398,118 380,432
Less accumulated depreciation and amortization... (109,699) (88,622)
--------- -------
Property and equipment, net................. $ 288,419 291,810
========= =======
(4) OTHER TRANSACTIONS WITH AFFILIATES
Health Choice remitted fee-for-service payments of approximately $12.6
million in 1999, $14.9 million in 1998 and $13.4 million in 1997 to certain of
the Tenet Hospitals which amounts are eliminated in the accompanying combined
statements of income and changes in ownership equity.
Health Choice paid approximately $39.3 million and $7.7 million of
sub-capitation fees to First Choice, an organization in which Tenet has
significant ownership interest, in 1999 and 1998, respectively (none in 1997).
At May 31, 1999 and 1998, Health Choice owed First Choice approximately $4.4
million and $1.5 million, respectively, in sub-capitation fees net of medical
claims expense. Additionally, Health Choice received approximately $2.8 million
and $534,000 in management fees revenue from First Choice in 1999 and 1998,
respectively (none in 1997).
(5) LONG-TERM DEBT MATURITIES AND LEASE OBLIGATIONS
Future long-term debt maturities and minimum operating lease payments for
the next five years are as follows (dollars in thousands):
LATER
2000 2001 2002 2003 2004 YEARS
------- ------ ------ ------ ------ ------
Long-term debt........ $ 1,137 753 820 892 971 3,398
Lease obligations..... 13,266 12,955 12,668 12,451 10,617 83,900
Long-term debt consists of loans payable secured by property and equipment
and other unsecured debt with interest rates approximating 8.5%. Rental expense
under operating leases, including short-term leases, was approximately $14.1
million in 1999, $18.5 million in 1998 and $20 million in 1997.
F-42
229
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(6) PROFESSIONAL AND GENERAL LIABILITY INSURANCE
In its normal course of business, the Tenet Hospitals are subject to claims
and lawsuits relating to patient treatment. The Tenet Hospitals believe that its
liability for damages resulting from such claims and lawsuits is adequately
covered by insurance or is adequately provided for in its combined financial
statements.
The Tenet Hospitals insure substantially all of its professional and
comprehensive general liability risks in excess of self-insured retentions
through a majority-owned insurance subsidiary of Tenet. These self-insured
retentions currently are $1 million per occurrence and in prior years varied by
hospital and by policy period from $500,000 to $3 million per occurrence. A
significant portion of these risks is, in turn, reinsured with major independent
insurance companies. The Tenet Hospitals are charged an allocation of cost by
Tenet for its portion of cost relating to this program. The amount allocated to
the Tenet Hospitals for these costs was approximately $1.8 million in fiscal
1999, $3.1 million in fiscal 1998 and $1.6 million in fiscal 1997, which amounts
are included in other operating expenses in the accompanying statements of
income and changes in ownership equity.
Health Choice's contract with AHCCCS requires the Plan to maintain
professional liability insurance, comprehensive general insurance and automobile
liability insurance coverage of at least $1 million for each occurrence. During
1999 and 1998, Health Choice was covered under Tenet's umbrella policy.
A significant portion of these risks is, in turn, reinsured with major
independent insurance companies. During 1997, Health Choice maintained an
occurrence-based policy with coverages of $3 million per claim and $5 million in
the aggregate annually which was applicable to Health Choice individually.
(7) INCOME TAXES
Taxes on income from operations consist of the following amounts (dollars
in thousands):
1999 1998 1997
------- ------ ------
Current:
Federal.................................. $24,636 12,695 17,380
State.................................... 2,818 1,452 1,988
------- ------ ------
27,454 14,147 19,368
------- ------ ------
Deferred:
Federal.................................. (1,619) (3,261) (2,008)
State.................................... (185) (373) (230)
------- ------ ------
(1,804) (3,634) (2,238)
------- ------ ------
$25,650 10,513 17,130
======= ====== ======
F-43
230
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the amount of reported income tax expense and the
amount computed by multiplying income before tax by the statutory Federal income
tax rate is shown below (dollars in thousands):
1999 1998 1997
----------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------ ------- ------ -------
Tax provision at statutory
federal rates................. $22,487 35.0% 8,323 35.0% 14,603 35.0%
State income taxes net of
federal income tax benefit.... 1,711 2.7% 701 2.9% 1,144 2.7%
Goodwill amortization........... 1,274 1.9% 1,271 5.3% 1,273 3.1%
Other........................... 178 0.3% 218 1.0% 110 0.3%
------- ---- ------ ---- ------ ----
Taxes on income................. $25,650 39.9% 10,513 44.2% 17,130 41.1%
======= ==== ====== ==== ====== ====
Deferred tax assets and liabilities as of May 31, 1999 and 1998 relate to
the following (dollars in thousands):
1999 1998
-------------------- --------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
Depreciation and fixed asset basis
differences............................. $ 46,302 44,487
Receivables -- doubtful accounts and
adjustments............................. 4,312 585
Accruals for insurance risks.............. 1,179 1,179
Other long-term liabilities............... 1,909 1,630
Intangible assets......................... 986 1,054
Other accrued liabilities................. 455 --
Inventories............................... 23 20
Other..................................... 2,985 2,988
------ ------ ----- ------
$9,229 48,922 5,223 46,720
====== ====== ===== ======
Management of the Tenet Hospitals believes that realization of the deferred
tax assets is more likely than not to occur as temporary differences reverse
against future taxable income. Accordingly, no valuation allowance has been
established.
(8) EMPLOYEE BENEFIT PLANS
Substantially all employees who are employed by the Tenet Hospitals, upon
qualification, are eligible to participate in the Tenet defined contribution
401(k) plan. Employees who elect to participate generally make contributions
ranging from 1% to 20% of their eligible compensation, and Tenet matches such
contributions up to a maximum percentage. Expenses allocated to the Tenet
Hospitals during fiscal 1999, 1998 and 1997 for the plan were approximately $2.1
million, $1.9 million and $1.8 million, respectively, and are included in
salaries and benefits in the accompanying combined statements of income and
changes in ownership equity.
F-44
231
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Tenet Hospitals do not provide post-retirement healthcare or life
insurance benefits.
(9) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value at May 31, 1999 and 1998 of accounts and notes
receivable, current portion of long-term debt, accounts payable and interest
payable approximate fair value because of the short maturity of these
instruments. The carrying value at May 31, 1999 and 1998 of other assets and
liabilities consisting primarily of long-term notes receivable and long-term
debt are not materially different from the estimated fair values of these
instruments.
The sale of accounts receivable by certain Tenet Hospitals was effective
August 31, 1999 and accordingly was recorded in the three-month interim period
ended August 31, 1999 (see Note 13). The loss on sale of $4.5 million is
reflected in operations in the three-month interim period ended August 31, 1999
and arose solely because of the decision to sell the receivables rather than
collect them in the ordinary course of business.
(10) CONTINGENCIES
Tenet is involved in a lease dispute with the lessor of Mesa General
Hospital Medical Center (Mesa General) regarding the calculation of rent
escalations under the lease. Currently, the lessor and Tenet are exchanging
documentation regarding interpretation of the escalation clause. The ultimate
outcome of this dispute is not determinable and accordingly no adjustments have
been made to the accompanying combined financial statements. Pursuant to the
Agreement, Tenet has agreed to pay JLL a multiple of incremental annual lease
payments that may result from the resolution of this matter, if any. Mesa
General continues to make lease payments in accordance with Tenet's
interpretation of the lease.
Pursuant to its contract with the state of Arizona, Health Choice is
required annually to provide performance bonds, in an acceptable form, to
guarantee performance of the Plan's obligations under its contract. In both 1999
and 1998, the Plan provided approximately $6.7 million related to this
commitment in the form of either a letter of credit under a surety bond or a
performance bond.
Future contract awards are contingent upon the continuation of the AHCCCS
program by the state of Arizona and the Plan's ability and desire to retain its
status as a contractor under the program. As disclosed in Note 1(d), Health
Choice derives approximately 99% of its revenue through a contract with AHCCCS.
(11) SEGMENT DISCLOSURES
The Tenet Hospitals have adopted Statement of Financial Accounting
Standards No. 131 "Disclosures About Segments of an Enterprise and Related
Information." The Tenet Hospitals business is providing health care through its
acute care hospitals, physician practices, and related health care business.
Tenet's chief operating decision maker, as that term is defined in the
accounting standard, regularly reviews financial information about each of its
hospitals including the Tenet Hospitals' facilities and subsidiaries for
assessing performance and allocating resources. Accordingly, the Tenet Hospitals
reportable
F-45
232
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
operating segments consist of (1) acute care hospitals, physician practices and
related healthcare businesses; collectively, and (2) its HMO, Health Choice.
ACUTE CARE HMO
THREE MONTHS ENDED AUGUST 31, 1999 (UNAUDITED) SERVICES SERVICES TOTAL
- ---------------------------------------------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
Net patient service revenues.................. $120,766 $ -- $120,766
Capitation premiums........................... -- 22,317 22,317
Revenues between segments..................... (887) -- (887)
-------- ------- --------
Net operating revenues...................... $119,879 $22,317 $142,196
======== ======= ========
Interest expense.............................. (203) -- (203)
Interest income (expense) on certain due from
(to) affiliate balances..................... (797) 1,210 413
Depreciation and amortization................. 7,079 51 7,130
Income tax expense............................ 1,793 514 2,307
Net income.................................... $ 1,644 $ 813 $ 2,457
======== ======= ========
Total assets.................................. $401,391 $56,851 $458,242
======== ======= ========
Capital expenditures.......................... $ 594 $ 4 $ 598
======== ======= ========
ACUTE CARE HMO
THREE MONTHS ENDED AUGUST 31, 1998 (UNAUDITED) SERVICES SERVICES TOTAL
- ---------------------------------------------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
Net patient service revenues.................. $115,527 $ -- $115,527
Capitation premiums........................... -- 19,130 19,130
Revenues between segments..................... (1,175) -- (1,175)
-------- ------- --------
Net operating revenues...................... $114,352 $19,130 $133,482
======== ======= ========
Interest expense.............................. (405) -- (405)
Interest income (expense) on certain due from
(to) affiliate balances..................... (139) 8 (131)
Depreciation and amortization................. 7,618 45 7,663
Income tax expense............................ 2,094 406 2,500
Net income.................................... $ 3,079 $ 686 $ 3,765
======== ======= ========
Total assets.................................. $520,904 $43,575 $564,479
======== ======= ========
Capital expenditures.......................... $ 3,047 $ 23 $ 3,070
======== ======= ========
F-46
233
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ACUTE CARE HMO
1999 SERVICES SERVICES TOTAL
- ---- ---------- -------- --------
(DOLLARS IN THOUSANDS)
Net patient service revenues.................. $502,856 $ -- $502,856
Capitation premiums........................... -- 82,250 82,250
Revenues between segments..................... (12,600) (12,600)
-------- ------- --------
Net operating revenues...................... $490,256 $82,250 $572,506
======== ======= ========
Interest expense.............................. (988) (8) (996)
Interest income (expense) on certain due from
(to) affiliate balances..................... (3,203) 4,868 1,665
Depreciation and amortization................. 26,453 185 26,638
Income tax expense............................ 22,386 3,264 25,650
Net income.................................... $ 34,993 $ 3,604 $ 38,597
======== ======= ========
Total assets.................................. $541,340 $53,217 $594,557
======== ======= ========
Capital expenditures.......................... $ 17,023 $ 257 $ 17,280
======== ======= ========
ACUTE CARE HMO
1998 SERVICES SERVICES TOTAL
- ---- ---------- -------- --------
(DOLLARS IN THOUSANDS)
Net patient service revenues.................. $492,635 $ -- $492,635
Capitation premiums........................... -- 69,491 69,491
Revenues between segments..................... (14,900) (14,900)
-------- ------- --------
Net operating revenues...................... $477,735 $69,491 $547,226
======== ======= ========
Impairment and restructuring charges.......... 19,455 -- 19,455
Interest expense.............................. (901) (8) (909)
Interest income (expense) on certain due from
(to) affiliate balances..................... (300) 30 (270)
Depreciation and amortization................. 25,042 249 25,291
Income tax expense............................ 9,330 1,183 10,513
Extraordinary charge.......................... 6,726 -- 6,726
Net income.................................... $ 2,855 $ 3,685 $ 6,540
======== ======= ========
Total assets.................................. $529,628 $44,369 $573,997
======== ======= ========
Capital expenditures.......................... $ 27,331 $ 324 $ 27,655
======== ======= ========
F-47
234
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ACUTE CARE HMO
1997 SERVICES SERVICES TOTAL
- ---- ---------- -------- --------
(DOLLARS IN THOUSANDS)
Net patient service revenues.................. $490,331 $ -- $490,331
Capitation premiums........................... -- 63,678 63,678
Revenues between segments..................... (13,400) -- (13,400)
-------- ------- --------
Net operating revenues...................... $476,931 $63,678 $540,609
======== ======= ========
Interest income (expense)..................... (1,322) 161 (1,161)
Interest income (expense) on certain due from
(to) affiliate balances..................... 2,137 (2,012) 125
Depreciation and amortization................. 24,523 180 24,703
Income tax expense............................ 15,489 1,641 17,130
Net income.................................... $ 21,885 $ 2,709 $ 24,594
======== ======= ========
Total assets.................................. $520,334 $42,024 $562,358
======== ======= ========
Capital expenditures.......................... $ 23,341 $ 140 $ 23,481
======== ======= ========
Major customers are disclosed at Note 1(a) and 1(d).
(12) RECENTLY ISSUED ACCOUNTING STANDARDS
As of June 1, 1999, the Tenet Hospitals changed their method of accounting
for start-up costs in accordance with SOP 98-5, "Reporting on the Costs of
Start-up Activities" which requires such costs to be expensed as incurred
instead of capitalized and amortized. The change in accounting principle will
result in the write-off of the start-up costs at June 1, 1999 (approximately
$1.0 million net of tax benefit) capitalized as of May 31, 1999. Previously, the
Tenet Hospitals capitalized start-up costs and amortized them over one year.
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 and
is effective for financial statements for fiscal years beginning after December
15, 1998, which will apply to the Tenet Hospitals beginning June 1, 1999. The
adoption of SOP 98-1 did not have a significant impact on the results of
operations of the Tenet Hospitals at June 1, 1999.
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), as amended by SFAS
137, is effective for financial statements for fiscal years beginning after June
15, 2000, and will apply to the Tenet Hospitals beginning June 1, 2001. SFAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. The Tenet Hospitals do not expect the adoption of SFAS
133 to have a material effect on their future results of operations.
F-48
235
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(13) SUBSEQUENT EVENT
Effective August 31, 1999, Tenet and certain Tenet subsidiaries entered
into a Receivables Sale Agreement pursuant to which those Tenet subsidiaries
agreed to sell to Tenet, without recourse, patient related receivables existing
on August 31, 1999 as well as receivables generated thereafter. Concurrently,
Tenet entered into a Receivables Purchase Agreement with a subsidiary indirectly
wholly-owned by Tenet, pursuant to which Tenet agreed to sell to the subsidiary
all patient related receivables acquired by Tenet pursuant to the Receivables
Sale Agreement. Approximately $98 million of net receivables were sold by the
Tenet Hospitals to Tenet on August 31, 1999.
The patient related receivables sold by the Tenet Hospitals to Tenet on
August 31, 1999, were sold at amounts which were less than the balances of such
receivables on the respective Tenet Hospitals' balance sheets, due to the fact
that they were discounted to primarily reflect the time value of money and
anticipated collection costs.
F-49
236
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
IASIS Healthcare Corporation (the management company)
We have audited the accompanying consolidated balance sheets of IASIS
Healthcare Corporation (the management company) as of September 30, 1999 and
1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year ended September 30, 1999 and
the period from February 23, 1998 (date of inception) to September 30, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements 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 IASIS
Healthcare Corporation (the management company) at September 30, 1999 and 1998,
and the consolidated results of its operations and its cash flows for the year
ended September 30, 1999 and the period from February 23, 1998 (date of
inception) to September 30, 1998 in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Nashville, Tennessee
December 8, 1999
F-50
237
IASIS HEALTHCARE CORPORATION (THE MANAGEMENT COMPANY)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30
1999 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents............................. $ 181,083 $ 154,687
Accounts receivable, net of allowances of
approximately $77,000 in 1999...................... 117,833 --
Prepaid expenses and other current assets............. 21,702 18,187
Due from physician practice........................... 161,123 --
----------- -----------
Total current assets.................................... 481,741 172,874
Equipment and leasehold improvements, net............... 203,175 45,670
Construction in progress (estimated cost to complete and
equip after September 30, 1999 -- $20,600)............ 74,364 --
Service agreement rights, net........................... 185,878 --
Other assets............................................ 94,273 7,087
----------- -----------
Total assets.................................. $ 1,039,431 $ 225,631
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 138,076 $ 15,500
Accrued expenses...................................... 12,496 4,594
----------- -----------
Total current liabilities..................... 150,572 20,094
Stockholders' equity:
Common stock, no par value; 75,000,000 shares
authorized; 1,748,491 and 1,300,000 shares issued
and outstanding at September 30, 1999 and 1998,
respectively....................................... 568,505 1,000
Preferred stock--Series A, convertible, $2.00 par
value; 1,000,000 shares authorized; 1,000,000
shares issued and outstanding at September 30, 1999
and 1998 (liquidation preference amount at
September 30, 1999 -- $2,300,000).................. 2,000,000 2,000,000
Preferred stock--Series B, convertible, $2.00 par
value; 4,000,000 shares authorized; 630,750 shares
issued and outstanding at September 30, 1999
(liquidation preference amount at September 30,
1999 -- $1,261,500)................................ 1,261,500 --
Additional paid-in capital............................ 39,800 --
Stock subscription receivable......................... -- (1,500,000)
Receivable from management............................ (109,018) --
Accumulated deficit................................... (2,871,928) (295,463)
----------- -----------
Total stockholders' equity.................... 888,859 205,537
----------- -----------
Total liabilities and stockholders' equity.... $ 1,039,431 $ 225,631
=========== ===========
See accompanying notes.
F-51
238
IASIS HEALTHCARE CORPORATION (THE MANAGEMENT COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM
FEBRUARY 23,
1998 (DATE OF
YEAR ENDED INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
Net service agreement revenue...................... $ 702,075 $ --
Other revenue...................................... 236,986 --
----------- ---------
939,061 --
Costs and expenses:
Salaries, wages and benefits..................... 2,273,110 203,802
Lease expenses................................... 282,000 20,264
Other operating expenses......................... 771,031 71,440
Depreciation and amortization.................... 199,196 2,645
Interest income.................................. (9,811) (2,688)
----------- ---------
Total costs and expenses........................... 3,515,526 295,463
----------- ---------
Loss before income taxes........................... (2,576,465) (295,463)
Income taxes....................................... -- --
----------- ---------
Net loss........................................... $(2,576,465) $(295,463)
=========== =========
See accompanying notes.
F-52
239
IASIS HEALTHCARE CORPORATION (THE MANAGEMENT COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PREFERRED STOCK PREFERRED STOCK ADDITIONAL STOCK
COMMON STOCK SERIES A SERIES B PAID-IN SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE
--------- -------- --------- ---------- ------- ---------- ---------- ------------
Balance at February 23,
1998,
(date of inception)...... -- $ -- -- $ -- -- $ -- $ -- $ --
Issuance of Common
Stock.................. 1,300,000 1,000 -- -- -- -- -- --
Issuance of Preferred
Stock.................. -- -- 1,000,000 2,000,000 -- -- -- (1,500,000)
Net loss................. -- -- -- -- -- -- -- --
--------- -------- --------- ---------- ------- ---------- ------- -----------
Balance at September 30,
1998..................... 1,300,000 $ 1,000 1,000,000 $2,000,000 -- $ -- $ -- $(1,500,000)
Issuance of Common
Stock.................. 200,000 154 -- -- -- -- -- --
Common Stock repurchase.. (35,200) (30) -- -- -- -- -- --
Issuance of Common Stock
for acquisition........ 283,691 567,381 -- -- -- -- -- --
Issuance of Preferred
Stock.................. -- -- -- -- 630,750 1,261,500 -- --
Proceeds per subscription
agreement.............. -- -- -- -- -- -- -- 1,500,000
Stock compensation....... -- -- -- -- -- -- 39,800 --
Net loss................. -- -- -- -- -- -- -- --
--------- -------- --------- ---------- ------- ---------- ------- -----------
Balance at September 30,
1999..................... 1,748,491 $568,505 1,000,000 $2,000,000 630,750 $1,261,500 $39,800 $ --
========= ======== ========= ========== ======= ========== ======= ===========
RECEIVABLE
FROM ACCUMULATED
MANAGEMENT DEFICIT TOTAL
------------ ------------ -----------
Balance at February 23,
1998,
(date of inception)...... $ -- $ -- $ --
Issuance of Common
Stock.................. -- -- 1,000
Issuance of Preferred
Stock.................. -- -- 500,000
Net loss................. -- (295,463) (295,463)
--------- ------------ -----------
Balance at September 30,
1998..................... $ -- $ (295,463) $ 205,537
Issuance of Common
Stock.................. -- -- 154
Common Stock repurchase.. -- -- (30)
Issuance of Common Stock
for acquisition........ -- -- 567,381
Issuance of Preferred
Stock.................. (109,018) -- 1,152,482
Proceeds per subscription
agreement.............. -- -- 1,500,000
Stock compensation....... -- -- 39,800
Net loss................. -- (2,576,465) (2,576,465)
--------- ------------ -----------
Balance at September 30,
1999..................... $(109,018) $ (2,871,928) $ 888,859
========= ============ ===========
See accompanying notes.
F-53
240
IASIS HEALTHCARE CORPORATION (THE MANAGEMENT COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
FEBRUARY 23,
1998 (DATE OF
YEAR ENDED INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
OPERATING ACTIVITIES
Net loss............................................ $(2,576,465) $(295,463)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 199,196 2,645
Stock compensation................................ 39,800 --
Changes in operating assets and liabilities, net
of effects of acquisition......................
Accounts receivable............................... 25,260
Prepaid expenses and other current assets......... (3,515) (18,187)
Accounts payable.................................. 122,576 15,500
Accrued expenses.................................. (2,098) 4,594
Due from physician practice....................... (161,123) --
----------- ---------
Net cash used in operating activities............... (2,356,369) (290,911)
INVESTING ACTIVITIES
Purchase of physician practice...................... (81,555) --
Purchases of equipment.............................. (101,100) (48,315)
Increase in other assets............................ (87,186) (7,087)
----------- ---------
Net cash used in investing activities............... (269,841) (55,402)
FINANCING ACTIVITIES
Issuance of Preferred Stock - Series A.............. 1,500,000 500,000
Issuance of Preferred Stock - Series B.............. 1,152,482
Issuance of Common Stock............................ 154 1,000
Repurchase of Common Stock.......................... (30) --
----------- ---------
Net cash provided by financing activities........... 2,652,606 501,000
Net increase in cash and cash equivalents........... 26,396 154,687
Cash and cash equivalents at beginning of period.... 154,687 --
----------- ---------
Cash and cash equivalents at end of period.......... $ 181,083 $ 154,687
=========== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Effects of acquisition:
Fair value of assets acquired..................... $ 658,936 $ --
Liabilities assumed............................... (10,000) --
Fair value of Common Stock issued for
acquisition.................................... (567,381) --
----------- ---------
Cash paid for acquisitions, including transaction
costs.......................................... $ 81,555 $ --
=========== =========
See accompanying notes.
F-54
241
IASIS HEALTHCARE CORPORATION (THE MANAGEMENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
IASIS Healthcare Corporation (the management company) (the "Company"),
which was incorporated in the State of Tennessee in February 1998, was formed
with the intention of becoming a healthcare delivery company with its core
business comprising hospital ownership and operation, syndicated ownership of
Company hospitals to physician partners, management and administrative services
for affiliated physician practices and IPA wraparound network development and
management. As of September 30, 1999, the Company was affiliated with one
physician practice operating in Salt Lake City, Utah ("Physician Practice"). The
Company provides a facility and equipment as well as administrative and
technical support for professional services rendered by the Physician Practice
under a long-term service agreement.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of
three months or less when purchased to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable principally represent receivables from patients and
other third-party payors for medical services provided by the Physician
Practice. Terms of the service agreement requires the Company to purchase
receivables generated by the Physician Practice on a monthly basis. Such amounts
are recorded net of contractual allowances and estimated bad debts. Accounts
receivable are a function of the Physician Practice net revenue rather than the
net revenue of the Company.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment is stated at cost and depreciated using the straight-line method
over the estimated useful lives of the assets. The general range of useful lives
is 7 years for medical equipment and 3 to 7 years for computer equipment and
software and office equipment. Leasehold improvements are stated at cost and
depreciated on a straight-line basis over the lesser of the terms of the
respective leases or their estimated useful lives. Accumulated depreciation at
September 30, 1999 and 1998 totaled approximately $57,600 and $2,600,
respectively.
SERVICE AGREEMENT RIGHTS
The Company has entered into a service agreement with the Physician
Practice for a period up to 25 years. Upon acquisition of the Physician
Practice's assets by the Company, the Physician Practice maintained its separate
partnership entity and entered into employment and noncompete agreements with
the practicing physicians. Costs of obtaining the service agreement is amortized
using the straight-line method over 2 years. The service agreement represents
the exclusive right to operate the Physician Practice in affiliation
F-55
242
IASIS HEALTHCARE CORPORATION (THE MANAGEMENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
with the related physician group during the term of the agreement. Amounts
reported at September 30, 1999 are net of accumulated amortization of
approximately $114,200.
Pursuant to the service agreement, the Company provides the Physician
Practice with equipment, supplies, support personnel, and management and
financial advisory services. The Physician Practice is responsible for the
recruitment and hiring of physicians and all other personnel who provide medical
services, and for all issues related to the professional, clinical and ethical
aspects of the practice. As part of the agreement, the Physician Practice is
required to maintain medical malpractice insurance which names the Company as an
additional insured. The Company is also required to maintain general liability
insurance and name the Physician Practice as an additional insured. Upon
termination of the services agreement, the Physician Practice is required to
obtain continuing liability insurance coverage under either a "tail policy" or a
"prior acts policy."
The management fees charged under the service agreement are based on a
predetermined percentage of net operating income of the Physician Practice.
Management fees are recognized by the Company at the time physician service
revenue is accrued by the Physician Practice.
To the extent that operating results indicate the possibility that the
carrying value of service agreement rights has been impaired, the Company would
prepare projections of the undiscounted cash flows from operations of the
Physician Practice over the remaining amortization period. If the projections
indicated that the recorded cost would not be recoverable, such cost amounts
would be reduced to estimated fair value.
CAPITAL STOCK
In August 1998, the Board of Directors approved a 1,300-for-1 Common Stock
split effective August 21, 1998. All shares information has been retroactively
adjusted as if the stock split occurred at the inception date.
NET SERVICE AGREEMENT REVENUE AND OTHER REVENUE
Net Service Agreement Revenue
Net service agreement revenue represents Physician Practice net revenue
less amounts retained by the Physician Practice pursuant to the management
service agreement. Physician Practice net revenue represents expected payments
to be received for services rendered to patients and is reported on the accrual
basis in the period in which services are provided, at established rates,
reduced by provisions for doubtful accounts and contractual adjustments. See
also Note 3.
Other Revenue
Other revenue primarily represents fees earned for billing and collecting
services and are reported on the accrual basis in the period in which the
services are provided at contractually agreed upon rates.
F-56
243
IASIS HEALTHCARE CORPORATION (THE MANAGEMENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined based upon
differences between financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax laws that will be in effect when the
differences are expected to reverse.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," (APB 25) and related
interpretations, as permitted under FASB Statement No. 123, "Accounting for
Stock-Based Compensation" (FAS 123). Accordingly, the Company recognizes no
compensation expense for options granted when the exercise price equals, or is
greater than, the market price of the underlying stock on the date of grant.
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 dates of the financial
statements and reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash and cash
equivalents, accounts payable, and due from Physician Practice approximate fair
value due to the short-term maturity of these instruments.
3. NET SERVICE AGREEMENT REVENUE
Net service agreement revenue reported by the Company represents Physician
Practice net revenue less amounts retained by the Physician Practice. The
amounts retained by the Physician Practice represent amounts due to the
physicians pursuant to the management service agreement between the Company and
the Physician Practice.
Contractual adjustments represent the difference between amounts billed and
amounts reimbursable by commercial insurers and other third-party payors
pursuant to their respective contracts with the Physician Practice. The
allowance for doubtful accounts represents management's estimate of potential
credit issues associated with amounts due from patients, commercial insurers,
and other third-party payors. Management does not believe that receivables from
these payors represent a significant credit risk.
F-57
244
IASIS HEALTHCARE CORPORATION (THE MANAGEMENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net service agreement revenue consists approximately of the following:
YEAR ENDED
SEPTEMBER 30,
1999
-------------
Gross Physician Practice revenue.......................... $1,692,000
Contractual adjustments and bad debt expense.............. 691,000
----------
Physician Practice net revenue............................ 1,001,000
Less: Amounts retained by the Physician Practice.......... 299,000
----------
Net service agreement revenue............................. $ 702,000
==========
The Company's affiliated Physician Practice derives approximately 45% of
their aggregate Physician Practice net revenue from services provided under the
Medicare program for the year ended September 30, 1999. In addition, the
Medicare program comprises approximately 45% of accounts receivable of the
Physician Practice at September 30, 1999. Other than the Medicare program, the
Physician Practice has no payors which represent more than 10% of Physician
Practice net revenue or 10% of accounts receivable at September 30, 1999.
4. AFFILIATION AND ACQUISITION
On November 30, 1998, the Company acquired the net assets of the Physician
Practice in exchange for 283,691 shares of Common Stock valued by the Company at
approximately $567,381, cash of $30,829, and the assumption of approximately
$10,000 in liabilities. In addition, the Company paid $50,726 in acquisition
costs related to the purchase of the Physician Practice.
Simultaneous with the acquisition, the Company entered into a long-term
service agreement with the Physician Practice. The acquisition of the Physician
Practice was accounted for as a purchase, and the accompanying consolidated
financial statements include the results of its operations from the effective
date of the service agreement, which was November 1, 1998.
The fair value of assets acquired, liabilities assumed and Common Stock
issued as a result of the acquisition consisted approximately of the following:
Accounts receivable......................................... $143,093
Leasehold improvements and equipment........................ 185,762
Service agreements rights................................... 330,081
Other accrued expenses...................................... (10,000)
Common Stock issued for acquisition......................... (567,381)
--------
Cash paid for acquisitions, including transaction costs..... $ 81,555
========
F-58
245
IASIS HEALTHCARE CORPORATION (THE MANAGEMENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. CAPITALIZATION
The authorized stock of the Company consists of 75,000,000 shares of Common
Stock, no par value, and 25,000,000 shares of preferred stock of which 1,000,000
shares are designated as Series A Convertible Preferred Stock and 4,000,000
shares are designated as Series B Convertible Preferred Stock.
COMMON STOCK
Holders of each share of Common Stock outstanding are entitled to one vote
for each such share on each matter to be decided by the shareholders. Cumulative
voting for directors is not permitted, which means that the holders of more than
50% of the shares of Common Stock and preferred stock can elect all of the
directors. The Common Stock has no redemption provisions, and the holders
thereof have no preemptive rights. Holders of the Common Stock are entitled to
receive ratably such dividends, if any, as the Board of Directors may declare
from time to time out of funds legally available therefor, subject to the prior
rights of holders of preferred stock. Upon any liquidation of the Company, after
payment or provision for payment of all of the Company's debts and obligations
and subject to the rights of holders of preferred stock, the holders of the
Common Stock are entitled to share ratably in any of the Company's remaining
assets. The outstanding shares of Common Stock are fully paid and
non-assessable.
PREFERRED STOCK
Preferred stock may be issued by the Board of Directors from time to time,
without prior shareholder approval, in one or more series, and the Board of
Directors may fix and determine as to any series any and all of the relative
rights and preferences of shares in such series, including, without limitation,
preferences, limitations or relative rights with respect to redemption rights,
conversion rights, voting rights, dividend rights and preferences in
liquidation.
Series A Preferred Shares
The Board has designated 1,000,000 shares of preferred stock as Series A
Convertible Preferred Stock (the "Series A Preferred Shares"), par value of
$2.00 per share, all of which was sold in September 1998 to one venture capital
investor pursuant to the terms of a Preferred Share Purchase Agreement with the
Company for $500,000 cash and a subscription note receivable of $1,500,000
bearing interest at an annual rate of 5.42%. The subscription note receivable
was paid in 1999. In the event of liquidation, dissolution or winding up of the
Company, the holders of the Series A Preferred Shares are entitled to receive,
in preference to the holders of Common Stock and any other series of preferred
stock, an amount equal to $2.00 per share (subject to equitable adjustment for
stock splits, combinations and similar transactions) plus 15% per annum thereon,
plus any declared but unpaid dividends (the "Series A Liquidation Preference"),
before any funds that would be otherwise distributable to holders of Common
Stock or any other series of preferred stock.
The Series A Preferred Shares will be convertible, at any time, at the
option of the holders, into Common Stock at an initial conversion price of $2.00
per share and will automatically so convert upon the earlier of (i) the closing
of an underwritten initial
F-59
246
IASIS HEALTHCARE CORPORATION (THE MANAGEMENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
registered public offering of Common Stock by the Company at a price of at least
$4.00 per share (adjusted as required to reflect changes in the conversion price
for the Series A Preferred Shares, stock splits, stock dividends, stock
combinations and other similar events) resulting in net proceeds to the Company
of at least $25 million, (ii) the Company's achievement of annual cash flow from
operations in excess of $15 million, as reflected on the Company's audited
annual financial statements, or (iii) the approval of a Qualifying Sale by the
Board of Directors of the Company.
In the event of any subsequent issuance of capital shares by the Company at
a purchase price of less than the then current conversion price for the Series A
Preferred Shares, the conversion price of the Series A Preferred Shares will be
automatically reset to half of the purchase price of the subsequent financing.
In the event of an initial public offering of equity securities by the Company
at a price below $4.00 per share, the Company will automatically reset either
the conversion price or the conversion ratio of the Series A Preferred Shares as
though the price of the equity securities sold in the public offering had been
sold at a price of $4.00 per share.
The holders of the Series A Preferred Shares shall be entitled to vote upon
any matter submitted to the stockholders for a vote on the basis of one vote per
share of Common Stock into which the Series A Preferred Shares are convertible.
No dividends may be paid on the Common Stock or any other series of
preferred stock, without the approval of the holders of 66 2/3% of the Series A
Preferred Shares, until the holders of the Series A Preferred Shares have
received full payment of the Series A Liquidation Preference on a cumulative
basis, after which the holders of Series A Preferred Shares will participate in
any such dividends as though the Series A Preferred Shares had been converted
into Common Stock.
Series B Preferred Shares
The Board has designated 4,000,000 shares of preferred stock as Series B
Convertible Preferred Stock (the "Series B Preferred Shares") par value of $2.00
per share. During 1999, 630,750 Series B Preferred Shares were issued for
$1,152,482 cash and notes receivable from certain members of management with a
combined outstanding balance of $109,018 at September 30, 1999. The notes
receivable from management are to be reimbursed through salary deferrals over
varying periods ending no later than December 31, 1999 for each of the
respective members of management and bear interest at an annual rate of 6%. In
the event of liquidation, dissolution or winding up of the Company, the holders
of the Series B Preferred Shares are entitled to receive, after payment of the
Series A Liquidation Preference to the holders of the Series A Preferred Shares
and in preference to the holders of Common Stock, an amount equal to $2.00 per
share (subject to equitable adjustment for stock splits, combinations and
similar transactions) plus any declared but unpaid dividends (the "Series B
Liquidation Preference"), before any funds that would be otherwise distributable
to holders of Common Stock.
The Series B Preferred Shares will be convertible, at any time, at the
option of the holders, into Common Stock at an initial conversion price of $2.00
per share and will automatically so convert upon the earlier of (i) the closing
of an underwritten initial
F-60
247
IASIS HEALTHCARE CORPORATION (THE MANAGEMENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
registered public offering of Common Stock by the Company at a price of at least
$4.00 per share (adjusted as required to reflect changes in the conversion price
for the Series B Preferred Shares, stock splits, stock dividends, stock
combinations and other similar events) resulting in net proceeds to the Company
of at least $25 million, (ii) the Company's achievement of annual cash flow from
operations in excess of $15 million, as reflected on the Company's audited
annual financial statements, or (iii) the approval of a Qualifying Sale by the
Board of Directors of the Company.
In the event of any subsequent issuance of capital shares by the Company at
a purchase price of less than the then current conversion price for the Series B
Preferred Shares, the conversion price of the Series B Preferred Shares will be
automatically reset on a weighted average basis, based on the purchase price of
the subsequent financing and the number of shares issued in the subsequent
financing.
The holders of the Series B Preferred Shares shall be entitled to vote upon
any matter submitted to the stockholders for a vote on the basis of one vote per
share of Common Stock into which the Series B Preferred Shares are convertible.
No dividends may be paid on the Common Stock, without the approval of the
holders of 66 2/3% of the Series B Preferred Shares, until the holders of the
Series B Preferred Shares have received full payment of the Series B Liquidation
Preference on a cumulative basis, after which the holders of Series B Preferred
Shares will participate in any such dividends as though the Series B Preferred
Shares had been converted into Common Stock.
The Company has the right of first refusal, and to other shareholders
holding at least 2% of the outstanding stock of the Company the right of second
refusal, to repurchase Series B Preferred Shares from investors upon any attempt
by an investor to transfer Series B Preferred Shares.
Series B Preferred Shares have registration rights entitling them to
unlimited piggyback rights, along with the holders of Series A Preferred Shares.
6. INCOME TAXES
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:
1999 1998
--------- ---------
Tax at U.S. statutory rates............................ $(875,998) $(100,457)
State income taxes, net of federal tax benefit......... (102,999) (11,796)
Change in valuation allowance.......................... 979,508 112,064
Other.................................................. (511) 189
--------- ---------
$ -- $ --
========= =========
Deferred federal and state income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting
F-61
248
IASIS HEALTHCARE CORPORATION (THE MANAGEMENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
1999 1998
----------- ---------
Accumulated depreciation.............................. $ 7,744 $ (1,259)
Service agreement rights.............................. 47,480 --
Allowances on accounts receivable..................... 29,349 --
Net operating loss carryforwards...................... 917,334 14,505
Start-up costs........................................ 89,665 98,818
----------- ---------
Total deferred tax assets............................. 1,091,572 112,064
Valuation allowance................................... (1,091,572) (112,064)
----------- ---------
Net deferred tax assets............................... $ -- $ --
=========== =========
The Company has established a valuation allowance for deferred tax assets
at September 30, 1999 and 1998 due to the uncertainty of realizing these assets
in the future. The valuation allowance increased $979,508 during 1999. At
September 30, 1999, the Company has federal net operating loss carryforwards of
$2,414,038 that will expire in 2019.
7. COMMITMENTS AND CONTINGENCIES
INSURANCE
The Company and its affiliated Physician Practice are insured with respect
to medical malpractice risks on a claims-made basis at the Physician Practice
level. It is the Company's policy that provision for estimated premium
adjustments to medical professional liability costs be made for asserted and
unasserted claims and based upon experience. Provision for such professional
liability claims includes estimates of the ultimate costs of such claims. To
date, the Company's experience with such claims has not been significant.
Accordingly, no such provision has been made. Management is not aware of any
claims against it or its affiliated Physician Practice which might have a
material impact on the Company's financial position.
EMPLOYMENT AGREEMENTS
Certain members of management have entered into employment agreements (the
"Agreements") with the Company. The Agreements provide for base salaries
totaling $1,420,000, subject to annual adjustments by the Board of Directors, as
well as participation in any bonus programs adopted by the Company. As of
September 30, 1999, the Company has not adopted any such bonus programs.
The Agreements have an initial term of one to two years and automatically
extend for successive one-year periods unless 60 days notice is given by either
the Company or the employee. The Agreements may be terminated prior to that time
for cause, without notice, under certain events by the employee specified in the
Agreements. In the event the employee is terminated for cause, the Company has
no further obligation to make any payments to the employee.
F-62
249
IASIS HEALTHCARE CORPORATION (THE MANAGEMENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the event that the Company terminates the employment of the employee
without cause, or the employee elects to resign and terminate the employment
agreement upon the occurrence of a change in control (as defined in the
Agreement), then, in addition to all accrued but unpaid compensation earned to
the effective date of such termination, the Company shall pay to the employee a
severance benefit in an amount equal to a multiple of the then current base
salary (currently ranging from one to five times), and any stock options held by
the employee pursuant to any qualified or nonqualified Company option plan shall
immediately vest and become exercisable.
In the event that the employee resigns prior to the expiration of, or
becomes disabled or dies during the stated or extended term of the Agreement,
the Company shall, as applicable, pay to the employee or his estate all accrued
but unpaid compensation earned to the date of resignation or death. The
Agreement otherwise shall terminate in all respects.
EMPLOYEE STOCK PURCHASE AGREEMENTS
The outstanding shares of Common Stock were issued to certain members of
Company management and directors under stock purchase agreements (the "Stock
Purchase Agreements"). The shares of Common Stock purchased by Company
management vest ratably over 60 months. Additionally, all Stock Purchase
Agreements have certain restrictions, including, but not limited to,
transferability of the stock.
OPERATING LEASES
Minimum rental commitments under operating leases having an initial or
remaining noncancelable term of more than one year are approximately as follows:
2000............................................. $ 887,000
2001............................................. 887,000
2002............................................. 887,000
2003............................................. 735,000
2004............................................. 389,000
Thereafter....................................... --
----------
$3,785,000
==========
Total rent expense related to operating leases amounted to $282,000 and
approximately $20,000 for the period ended September 30, 1999 and 1998,
respectively, which include amounts related to general corporate expenses.
Future payments under operating leases include total commitments of
approximately $3,785,000 to be reduced by amounts reimbursable under the service
agreement of approximately $318,000. In the event of termination of the service
agreement, any related lease obligations are also terminated.
F-63
250
IASIS HEALTHCARE CORPORATION (THE MANAGEMENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
HEALTHCARE REGULATION
Current Operations
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
pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquires have been made, 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.
Acquired Practices
The Company has acquired and will likely continue to acquire the net assets
of practices and other companies with prior operating histories. Acquired
practices and companies may have unknown or contingent liabilities for failure
to comply with healthcare laws and regulations, such as billing and
reimbursement, fraud and abuse and similar anti-referral laws. Although the
Company attempts to assure itself that no such liabilities exist and obtains
indemnification from prospective sellers covering such matters, there can be no
assurance that any such matter will be covered by indemnification or, if
covered, that the liability sustained will not exceed contractual limits or the
financial capacity of the indemnifying party.
8. STOCK OPTION PLANS
During 1998, the Company adopted the 1998 Stock and Incentive Plan ("the
1998 Stock Plan"). Under the 1998 Stock Plan, options to purchase a total of
1,750,000 shares of Common Stock were reserved for grant to eligible employees
and other key persons. The options vest over a five-year period and have a term
of ten years from the date of issuance.
On August 1, 1998, 972,000 qualified stock options were granted under the
1998 Stock Plan. These option grants were subsequently approved by the Board of
Directors of the Company in November 1998. An additional 150,000 qualified stock
options were granted on February 19, 1999. If there is a Change in Control (as
defined in the 1998 Stock Option Plan) of the Company, each outstanding option
shall become fully vested on the day before the Change in Control occurs.
Options may be exercised by payment of the option exercise price in either
cash or by tender of shares of Company Common Stock previously owned by the
optionee having a fair market value on the date of exercise equal to the option
price, provided, however, that the optionee shall not be entitled to tender
shares of Company Common Stock pursuant to successive, substantially
simultaneous exercises of options issued under the 1998 Stock Plan or any other
stock option plan of the Company. The optionee may also exercise the options by
delivering a notice of exercise of the options and by simultaneously selling
shares of the option stock thereby acquired pursuant to a brokerage or similar
agreement approved in advance by proper officers of the Company, using the
proceeds of such sale as payment of the exercise price.
F-64
251
IASIS HEALTHCARE CORPORATION (THE MANAGEMENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Since the exercise price of the ISO options granted in 1999 was below the
$2 per share fair value of the Company's Common Stock on the date of grant, the
Company recorded $39,800 of noncash stock option compensation for the year ended
September 30, 1999, with an offsetting increase to additional paid-in capital.
The total excess of fair value over exercise price at the date of grant for all
options granted was $298,500, which is being amortized over the vesting period.
The following is a summary of option transactions during the year ended
September 30, 1999 and the period from February 28, 1998 through September 30,
1998.
1998 EXERCISE WEIGHTED
OPTION PLAN PRICE RANGE AVERAGE PRICE
----------- ----------- -------------
Balance at February 23, 1998............ -- $ -- $ --
Granted............................... 972,000 0.01 0.01
--------- ------ ------
Balance at September 30, 1998........... 972,000 $ 0.01 $ 0.01
--------- ------ ------
Granted............................... 150,000 $ 0.01 $ 0.01
========= ====== ======
Balance at September 30, 1999........... 1,122,000 $ 0.01 $ 0.01
========= ====== ======
1999 1998
-------- --------
Weighted average fair value for options granted during
the period............................................. $ 1.99 $ .01
Options exercisable...................................... 194,400 --
Options available for grant.............................. 628,000 778,000
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, in accounting for stock-based compensation and,
accordingly no compensation cost has been recognized for grants of stock options
in the financial statements. Pro forma information regarding net income is
required by Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, and has been determined as if the
Company had accounted for its stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Minimum Value option pricing model with the following weighted average
assumptions: risk-free interest rate of 6.00%; dividend yield of 0%; and
expected life of the options of five years.
For purposes 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 follows:
1999 1998
---------- --------
Net loss......................................
As reported................................. $2,576,465 $295,463
Pro forma................................... $2,581,259 $295,488
The effects of applying SFAS No. 123 for providing pro forma disclosures
are not likely to be representative of the effects on reported net income for
future years, because
F-65
252
IASIS HEALTHCARE CORPORATION (THE MANAGEMENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
options vest over several years and additional grants generally are made each
year. The weighted-average remaining contractual life of those options
outstanding at September 30, 1999 is 8 years.
9. RECENT PRONOUNCEMENTS
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, which will apply to the Company beginning
with its fiscal year ended September 30, 2000. 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 these SOPs, effective
October 1, 1999, did not have a material effect on its results of operations.
In 1998, the Financial Accounting Standards Board 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
impact on the Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statement and requires that these enterprises
report selected information about operating segments in interim financial
reports. Management has determined that the Company, whose operations are
comprised entirely of providing administrative and technical support to
physician practices, does not have separately reportable segments as defined
under SFAS 131.
10. SUBSEQUENT EVENTS
On October 15, 1999, the Company was merged with and into a subsidiary of
an unrelated healthcare company which then changed its name to IASIS Healthcare
Corporation.
F-66
253
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- ------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY
INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT
RELY ON UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT OFFER TO SELL OR BUY
ANY SECURITIES IN ANY JURISDICTION WHERE IT IS UNLAWFUL. THE INFORMATION IN THIS
PROSPECTUS IS CURRENT AS OF [ ].
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 1
Risk Factors.......................... 17
Use of Proceeds....................... 28
The Exchange Offer.................... 29
Certain United States Federal Income
Tax Consequences.................... 39
The Transactions...................... 43
Capitalization........................ 46
Unaudited Pro Forma Combined Financial
Information......................... 47
Selected Historical Financial
Information......................... 60
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 66
Business.............................. 82
Management............................ 103
Stock Ownership....................... 108
Certain Relationships and Related
Transactions........................ 111
Description of Credit Facility........ 113
Description of Notes.................. 115
Description of Preferred Stock........ 171
Plan of Distribution.................. 171
Legal Matters......................... 172
Experts............................... 172
Available Information................. 173
Index to Financial Statements......... F-1
DEALER PROSPECTUS DELIVERY REQUIREMENT
UNTIL , [90 DAYS AFTER EFFECTIVE DATE] ALL DEALERS THAT EFFECT
TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING,
MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS'
OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$230,000,000
IASIS HEALTHCARE
CORPORATION
13% SENIOR SUBORDINATED
EXCHANGE NOTES DUE 2009
------------------------
PROSPECTUS
------------------------
[ ]
- ------------------------------------------------------
- ------------------------------------------------------
254
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") permits a
Delaware corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he or she is or was a director, officer, employee or agent of the
corporation) or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise. A
corporation may indemnify against expenses, (including attorneys' fees)
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with such action, suit or proceeding if the person indemnified
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. If the person indemnified is not wholly successful in such
action, suit or proceeding, but is successful, on the merits or otherwise, in
one or more but less than all claims, issues or matters in such proceeding, he
or she may be indemnified against expenses actually and reasonably incurred in
connection with each successfully resolved claim, issue or matter. In the case
of an action or suit by or in the right of the corporation to procure a judgment
in its favor, no indemnification may be made in respect to any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery of the
State of Delaware, or the court in which such action or suit was brought, shall
determine upon application that, despite the adjudication of liability, such
person is fairly and reasonably entitled to indemnity for such expenses which
the court shall deem proper. Section 145 provides that, to the extent a present
or former director or officer of a corporation has been successful in the
defense of any action, suit or proceeding referred to above or in the defense of
any claim, issue or manner therein, he or she shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him or
her in connection therewith.
The Amended and Restated Certificate of Incorporation and By-Laws of IASIS
and each of the By-Laws of Baptist Joint Venture Holdings, Inc., Beaumont
Hospital Holdings, Inc., Biltmore Surgery Center Holdings, Inc., CliniCare of
Utah, Inc., Davis Hospital & Medical Center, Inc., Davis Surgical Center
Holdings, Inc., First Choice Physicians Network Holdings, Inc., Health Choice
Arizona, Inc., IASIS Healthcare Holdings, Inc., IASIS Management Company, Jordan
Valley Hospital, Inc., Metro Ambulatory Surgery Center, Inc., Pioneer Valley
Health Plan, Inc., Pioneer Valley Hospital, Inc., Rocky Mountain Medical Center,
Inc., Salt Lake Regional Medical Center, Inc., Sandy City Holdings, Inc.,
Southridge Plaza Holdings, Inc. and SSJ St. Petersburg Holdings, Inc.,
(collectively, the "Delaware Subsidiary Guarantors") provide for indemnification
by IASIS and each of the Delaware Subsidiary Guarantors of each of their
respective directors and officers to the fullest extent permitted by the DGCL
and such right to indemnification shall continue as to a person who has ceased
to be a director or officer of IASIS or of each of the Delaware Subsidiary
Guarantors, as the case may be, and shall inure to the benefit of his or her
heirs, executors and administrators. IASIS' and each of the Delaware Subsidiary
Guarantors' By-Laws provide that every person will be indemnified against any
expenses (including attorneys' fees), judgments, fines, amounts paid in
settlement actually and reasonably incurred on such actions, suits or
proceedings (including an action by or in
II-1
255
the right of IASIS, subject to certain conditions), whether by fact that he or
she is or was a director or officer of IASIS or of each of the Delaware
Subsidiary Guarantors, as the case may be, or is or was serving at the request
of IASIS or of each of the Delaware Subsidiary Guarantors, as the case may be,
as a director, officer, employee or agent of another corporation or enterprise,
subject in all instances to the requirements that such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of IASIS or of each of the Delaware Subsidiary Guarantors,
and with respect to any criminal action or proceeding, had no reasonable cause
to believe such person's conduct was unlawful. While these provisions provide
directors with protection from awards for monetary damages for breaches of their
duty of care, they do not eliminate such duty. Accordingly, these provisions
will have no effect on the availability of equitable remedies such as an
injunction or rescission based on a director's breach of his or her duty of
care.
Section 17-108 of the Delaware Revised Uniform Limited Partnership Act (the
"LP Act") empowers a Delaware limited partnership to indemnify and hold harmless
any partner or other person from and against any and all claims and demands
whatsoever. In accordance with such section, the limited partnership agreements
of Memorial Hospital of Tampa, LP, Mesa General Hospital, LP, Odessa Regional
Hospital, LP, Palms of Pasadena Hospital, LP, Southwest General Hospital, LP,
St. Luke's Behavioral Hospital Center, LP, St. Luke's Medical Center, LP, Tempe
St. Luke's Hospital, LP, Town & Country Hospital, LP (collectively, the "Limited
Partnership Subsidiary Guarantors") each provide that the Limited Partnership
Subsidiary Guarantor, its receivers or its trustee, shall indemnify, hold
harmless and pay all judgments and claims against the general partner, IASIS
Healthcare Holdings, Inc., in the case of each Limited Partnership Subsidiary
Guarantor, its officers, directors, shareholders, employees, agents,
subsidiaries and assigns from any liability, loss or damage incurred by reason
of any act performed, or omitted to be performed in connection with the
partnership business, including reasonable costs, attorney fees and any amount
expended in the settlement of any claims of liability, loss or damage, unless
the loss, liability or damage was caused by the intentional misconduct, gross
negligence or knowing violation of law by the indemnified person.
Article 5 of the Business Corporation Act of the State of Arizona (the
"BCASA") permits an Arizona corporation to indemnify a person made a party to
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than a proceeding by or in the
right of the corporation or a proceeding charging improper personal benefit to
the director), because he or she is or was a director or officer of the
corporation or is or was serving at the corporation's request as a director,
officer or partner, trustee, employee or agent of another corporation or other
enterprise. A corporation may indemnify such persons against obligations to pay
a judgment, settlement, penalty or fine or reasonable expenses incurred with
respect to such proceedings if their conduct was in good faith and not opposed
to the best interests of the corporation (except that conduct in an official
capacity with the corporation shall be in the best interests of the
corporation), and, with respect to criminal proceedings, the individual had no
reasonable cause to believe the conduct was unlawful. The BCASA allows a
corporation to indemnify a director or officer in connection with a proceeding
by or in the right of the corporation, against reasonable expenses, including
attorney fees, incurred in connection therewith unless the director or officer
was adjudged liable to the corporation. A corporation may indemnify a director
or officer in connection with a proceeding charging improper personal benefit to
the director or officer unless the director or officer was adjudged liable on
the basis that personal benefit was improperly received by the director or
officer.
II-2
256
The articles of incorporation and by-laws of Biltmore Surgery Center, Inc.,
an Arizona corporation (the "Arizona Subsidiary Guarantor"), provide for
indemnification by the corporation of its directors and officers to the fullest
extent permitted by the BCASA and such right to indemnification shall continue
as to a person who has ceased to be a director, officer, employee, fiduciary or
agent and shall inure to the benefit of his or her heirs, executors and
administrators. The corporation's by-laws provide that any such person may be
indemnified against all costs, charges, expenses, liabilities and losses
(including, without limitation, attorneys' fees, judgments, fines, employee
benefit plan exercise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection with
any action, suit or proceeding, whether by fact that he or she is or was a
director or officer of the corporation or is or was serving at the request of
the corporation as a director, officer, employee, fiduciary or agent of another
corporation or other enterprise. Unless otherwise determined by the board of
directors, the corporation may indemnify any such person seeking indemnification
in connection with a proceeding initiated by him or her only if the proceeding
was authorized by the board.
Section 48-2b-105(1)(l) of the Utah Limited Liability Company Act (the
"ULLCA") permit a limited liability company to indemnify its members, managers
and any other persons to the same extent that a partnership may indemnify any of
the partners, managers, employees or agents of the partnership against expenses
actually and reasonably incurred by the member or manager in connection with the
defense of an action, suit or proceeding, whether civil or criminal, in which
the member or manager is made a party.
The operating agreement of IASIS Healthcare MSO Sub of Salt Lake City, LLC,
(the "Utah Subsidiary Guarantor") a member managed limited liability company
whose sole member is IASIS, provides for the indemnification of all its members
and employees to the fullest extent of the ULLCA.
IASIS, and the Delaware Subsidiary Guarantors, the Limited Partnership
Subsidiary Guarantors, the Arizona Subsidiary Guarantor and the Utah Subsidiary
Guarantor, (collectively, the "Subsidiary Guarantors") have each purchased and
maintain insurance to protect persons entitled to indemnification pursuant to
their by-laws, limited partnership agreements or operating agreements, as the
case may be, against liabilities asserted against or incurred by them in such
capacity or arising out of their status as such.
ITEM 21. EXHIBITS.
The following exhibits are filed as part of this Registration Statement:
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.1 Recapitalization Agreement, dated as of August 16, 1999, by
and among Paracelsus Healthcare Corporation, PHC/CHC
Holdings, Inc., 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,
Paracelsus Davis Hospital, Inc., PHC Utah, Inc., Clinicare
of Utah, Inc. and JLL Hospital, LLC.*
2.2 Asset Sale Agreement between Tenet Healthcare Corporation
and JLL Hospital, LLC, dated August 15, 1999.*
2.3 Amendment No. 1 to Asset Sale Agreement, made and entered
into as of October 15, 1999, by and between Tenet Healthcare
Corporation and IASIS Healthcare Corporation.*
II-3
257
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.4 Amendment No. 2 to Asset Sale Agreement, made and entered
into as of October 15, 1999, by and between Tenet Healthcare
Corporation and IASIS Healthcare Corporation.*
2.5 Asset Sale Agreement between Odessa Hospital, Ltd., and JLL
Hospital, LLC, dated as of August 15, 1999.*
2.6 Amendment No. 1 to Asset Sale Agreement, dated as of October
15, 1999, by and between Odessa Hospital, Ltd. and IASIS
Healthcare Corporation.*
3.1 Amended and Restated Certificate of Incorporation of
PHC/Psychiatric Healthcare Corporation, changing its name to
IASIS Healthcare Corporation, as filed with the Secretary of
State of the State of Delaware on October 8, 1999.*
3.2 Certificate of Designation, Preferences and Rights of Series
A Preferred Stock of IASIS Healthcare Corporation, as filed
with the Secretary of State of the State of Delaware on
October 15, 1999.*
3.3 Certificate of Designation, Preferences and Rights of Series
B Preferred Stock of IASIS Healthcare Corporation, as filed
with the Secretary of State of the State of Delaware on
October 15, 1999.*
3.4 Amended and Restated By-Laws of IASIS Healthcare
Corporation.*
3.5 Certificate of Incorporation of Baptist Joint Venture
Holdings, Inc., as filed with the Secretary of State of the
State of Delaware on October 1, 1999.*
3.6 Certificate of Incorporation of Beaumont Hospital Holdings,
Inc., as filed with the Secretary of State of the State of
Delaware on October 4, 1999.*
3.7 Certificate of Incorporation of Biltmore Surgery Center,
Inc., as filed with the Secretary of State of the State of
Delaware on October 1, 1999.*
3.8 Certificate of Amendment to the Certificate of Incorporation
of Biltmore Surgery Center, Inc., changing its name to
Biltmore Surgery Center Holdings, Inc., as filed with the
Secretary of State of the State of Delaware on November 9,
1999.*
3.9 Certificate of Incorporation of CliniCare of Utah, Inc., as
filed with the Secretary of State of the State of Delaware
on September 23, 1999.*
3.10 Certificate of Incorporation of Davis Hospital & Medical
Center, Inc., as filed with the Secretary of State of the
State of Delaware on September 23, 1999.*
3.11 Certificate of Incorporation of Davis Surgical Center
Holdings, Inc., as filed with the Secretary of State of the
State of Delaware on October 1, 1999.*
3.12 Certificate of Incorporation of First Choice Physicians
Network Holdings, Inc., as filed with the Secretary of State
of the State of Delaware on October 1, 1999.*
3.13 Certificate of Incorporation of Health Choice Arizona, Inc.,
as filed with the Secretary of State of the State of
Delaware on October 1, 1999.*
3.14 Certificate of Incorporation of IASIS Healthcare Holdings,
Inc., as filed with the Secretary of State of the State of
Delaware on September 23, 1999.*
3.15 Certificate of Incorporation of IASIS Management Company, as
filed with the Secretary of State of the State of Delaware
on October 4, 1999.*
3.16 Certificate of Incorporation of Jordan Valley Hospital,
Inc., as filed with the Secretary of State of the State of
Delaware on September 23, 1999.*
3.17 Certificate of Incorporation of Metro Ambulatory Surgery
Center, Inc., as filed with the Secretary of State of the
State of Delaware on October 1, 1999.*
3.18 Certificate of Incorporation of Pioneer Valley Health Plan,
Inc., as filed with the Secretary of State of the State of
Delaware on September 23, 1999.*
II-4
258
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.19 Certificate of Incorporation of Pioneer Valley Hospital,
Inc., as filed with the Secretary of State of the State of
Delaware on September 23, 1999.*
3.20 Certificate of Incorporation of Rocky Mountain Medical
Center, Inc., as filed with the Secretary of State of the
State of Delaware on September 23, 1999.*
3.21 Certificate of Incorporation of Salt Lake Regional Medical
Center, Inc., as filed with the Secretary of State of the
State of Delaware on September 23, 1999.*
3.22 Certificate of Incorporation of Sandy City Holdings, Inc.,
as filed with the Secretary of State of the State of
Delaware on October 1, 1999.*
3.23 Certificate of Incorporation of Southridge Plaza Holdings,
Inc., as filed with the Secretary of State of the State of
Delaware on October 1, 1999.*
3.24 Certificate of Incorporation of SSJ St. Petersburg Holdings,
Inc., as filed with the Secretary of State of the State of
Delaware on October 1, 1999.*
3.25 Form of By-Laws of Delaware Subsidiary Guarantors.*
3.26 Certificate of Limited Partnership of Memorial Hospital of
Tampa, LP as filed with the Secretary of State of the State
of Delaware on September 24, 1999.*
3.27 Certificate of Limited Partnership of Mesa General Hospital,
LP as filed with the Secretary of State of the State of
Delaware on September 24, 1999.*
3.28 Certificate of Limited Partnership of Odessa Regional
Hospital, LP as filed with the Secretary of State of the
State of Delaware on September 24, 1999.*
3.29 Certificate of Limited Partnership of Palms of Pasadena
Hospital, LP as filed with the Secretary of State of the
State of Delaware on September 24, 1999.*
3.30 Certificate of Limited Partnership of Southwest General
Hospital, LP as filed with the Secretary of State of the
State of Delaware on September 24, 1999.*
3.31 Certificate of Limited Partnership of St. Luke's Behavioral
Hospital, LP as filed with the Secretary of State of the
State of Delaware on September 24, 1999.*
3.32 Certificate of Limited Partnership of St. Luke's Medical
Center, LP as filed with the Secretary of State of the State
of Delaware on September 24, 1999.*
3.33 Certificate of Limited Partnership of Tempe St. Luke's
Hospital, LP as filed with the Secretary of State of the
State of Delaware on September 24, 1999.*
3.34 Certificate of Limited Partnership of Town & Country
Hospital, LP as filed with the Secretary of State of the
State of Delaware on September 24, 1999.*
3.35 Form of Limited Partnership Agreement of Limited Partnership
Subsidiary Guarantors.*
3.36 Articles of Incorporation of Biltmore Surgery Center, Inc.
as filed with the Executive Secretary of the Arizona
Corporation Commission on September 23, 1996.*
3.37 By-Laws of Biltmore Surgery Center, Inc., an Arizona
corporation.*
3.38 Articles of Organization of IASIS Healthcare MSO Sub of Salt
Lake City, LLC, as filed with the Utah Division of
Corporations and Commercial Code on October 5, 1999.*
3.39 Operating Agreement of IASIS Healthcare MSO Sub of Salt Lake
City, LLC.*
4.1 Indenture, dated as of October 15, 1999, among IASIS
Healthcare Corporation, the Delaware and Limited Partnership
Subsidiary Guarantors and The Bank of New York, as Trustee.*
4.2 Supplemental Indenture, dated October 25, 1999, among IASIS
Healthcare Corporation, the Delaware and Limited Partnership
Subsidiary Guarantors, the Arizona Subsidiary Guarantor, as
guaranteeing subsidiary and The Bank of New York, as
Trustee.*
II-5
259
EXHIBIT
NO. DESCRIPTION
- ------- -----------
4.3 Supplemental Indenture, dated November 4, 1999, among IASIS
Healthcare Corporation, the Delaware, Limited Partnership
and Arizona Subsidiary Guarantors, the Utah Subsidiary
Guarantor, as guaranteeing subsidiary and The Bank of New
York, as Trustee.*
4.4 Senior Subordinated Guarantee, dated October 15, 1999 by the
Delaware and Limited Partnership Subsidiary Guarantors in
favor of (i) the holders of IASIS Healthcare Corporation's
outstanding 13% Senior Subordinated Notes due 2009 and 13%
Senior Subordinated Exchange Notes due 2009 to be issued in
the Exchange Offer and covered by this Registration
Statement and (ii) the Bank of New York, as Trustee under
the Indenture governing the above-referenced notes.*
4.5 Senior Subordinated Guarantee, dated October 25, 1999 by the
Arizona Subsidiary Guarantor in favor of (i) the holders of
IASIS Healthcare Corporation's outstanding 13% Senior
Subordinated Notes due 2009 and 13% Senior Subordinated
Exchange Notes due 2009 to be issued in the Exchange Offer
and covered by this Registration Statement and (ii) the Bank
of New York, as Trustee under the Indenture governing the
above-referenced notes.*
4.6 Senior Subordinated Guarantee, dated November 4, 1999 by the
Utah Subsidiary Guarantor in favor of (i) the holders of
IASIS Heathcare Corporation's outstanding 13% Senior
Subordinated Notes due 2009 and 13% Senior Subordinated
Exchange Notes due 2009 to be issued in the Exchange Offer
and covered by this Registration Statement and (ii) the Bank
of New York, as Trustee under the Indenture governing the
above-referenced notes.*
4.7 Registration Rights Agreement, dated as of October 15, 1999,
by and among IASIS Healthcare Corporation, the Subsidiary
Guarantors and J.P. Morgan Securities Inc.*
4.8 Form of IASIS Healthcare Corporation 13% Senior Subordinated
Note due 2009 (included in Exhibit 4.1).*
4.9 Form of IASIS Healthcare Corporation 13% Senior Subordinated
Exchange Note due 2009.*
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
regarding the legality of the securities being registered
hereby.**
10.1 Stockholders Agreement, dated as of October 8, 1999, by and
among IASIS Healthcare Corporation, JLL Healthcare, LLC,
Paracelsus Healthcare Corporation and each of the other
investors listed thereto.*
10.2 Credit Agreement, dated as of October 15, 1999, among IASIS
Healthcare Corporation, Various Lenders, J.P. Morgan
Securities Inc. and The Bank of Nova Scotia, as Co-Lead
Arrangers and Co-Book Runners, Paribas, as Documentation
Agent, The Bank of Nova Scotia, as Syndication Agent, and
Morgan Guaranty Trust Company of New York, as Administrative
Agent.*
10.3 First Amendment, dated as of November 16, 1999, to the
Credit Agreement listed as Exhibit No. 10.2.*
10.4 Security Agreement, dated as of October 15, 1999, between
IASIS Healthcare Corporation, Various Subsidiaries of IASIS
Healthcare Corporation and Morgan Guaranty Trust Company of
New York, as Collateral Agent.*
10.5 Pledge Agreement, dated as of October 15, 1999, between
IASIS Healthcare Corporation, Various Subsidiaries of IASIS
Healthcare Corporation and Morgan Guaranty Trust Company of
New York, as Collateral Agent.*
II-6
260
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.6 Subsidiaries Guaranty, dated as of October 15, 1999 (as
amended, restated, modified and/or supplemented from time to
time), made by each of the Subsidiary Guarantors of IASIS
Healthcare Corporation.*
10.7 Hypothecation Agreement, dated as of October 15, 1999 (as
amended, restated, modified and/or supplemented from time to
time), among each of the pledgors in favor of Morgan
Guaranty Trust Company of New York, as Collateral Agent.*
10.8 Employee Leasing Agreement, dated as of October 15, 1999, by
and among IASIS Healthcare Corporation and Tenet Healthcare
Corporation and certain subsidiaries of Tenet Healthcare
Corporation.*
10.9 Tenet Buypower Purchasing Assistance Agreement, dated as of
October 15, 1999, by and between IASIS Healthcare
Corporation and Tenet HealthSystem Medical, Inc.*
10.10 Transition Services Agreement, dated as of October 8, 1999,
by and between Paracelsus Healthcare Corporation and
PHC/Psychiatric Healthcare Corporation.*
10.11 Tax Sharing Agreement, dated as of October 8, 1999, among
JLL Healthcare, LLC and its affiliates.*
10.12 License Agreement for Policy and Procedures Manuals dated as
of October 15, 1999 between IASIS Healthcare Corporation and
Tenet Healthcare Corporation.*
10.13 License Agreement, dated as of October 8, 1999 between JLL
Healthcare, LLC and Paracelsus Healthcare Corporation.*
12.1 Statement regarding Computation of Ratio of Earnings to
Fixed Charges for the Paracelsus Utah Facilities.*
21.1 Subsidiaries of IASIS Healthcare Corporation.*
23.1 Consent of KPMG LLP.+
23.2 Consent of Ernst & Young LLP.+
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1).**
24.1 Powers of Attorney (included in the signature pages to the
Registration Statement).*
25.1 Statement of Eligibility and Qualification on Form T-1 of
The Bank of New York, as Trustee under the Indenture.*
27.1-6 Financial Data Schedules.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.*
99.4 Form of Letter to Clients.*
- ---------------
+ filed herewith.
* Previously filed.
** To be filed by amendment.
II-7
261
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities a that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by one or more of the
registrants of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, each registrant will, unless in
the opinion of its counsel the matter has been settled by such indemnification
by it is against policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrants hereby undertake to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act, as amended, in accordance with
the rules and regulation prescribed by the Securities and Exchange Commission
under Section 305(b)(2) of the Securities Act.
II-8
262
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
each of the Registrants has duly caused this Registration Statement Amendment to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Franklin, State of Tennessee, on April 5, 2000.
IASIS HEALTHCARE CORPORATION
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary and General
Counsel
BAPTIST JOINT VENTURE HOLDINGS, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
BEAUMONT HOSPITAL HOLDINGS, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
BILTMORE SURGERY CENTER
HOLDINGS, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
BILTMORE SURGERY CENTER, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
II-9
263
CLINICARE OF UTAH, INC.
By: /s/ FRANK A. COYLE
----------------------------------
Name: Frank A. Coyle
Title: Secretary
DAVIS HOSPITAL & MEDICAL CENTER, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
DAVIS SURGICAL CENTER HOLDINGS, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
FIRST CHOICE PHYSICIANS NETWORK
HOLDINGS, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
HEALTH CHOICE ARIZONA, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
II-10
264
IASIS HEALTHCARE HOLDINGS, INC.
By: /s/ FRANK A. COYLE
----------------------------------
Name: Frank A. Coyle
Title: Secretary
IASIS MANAGEMENT COMPANY
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
JORDAN VALLEY HOSPITAL, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
METRO AMBULATORY SURGERY CENTER, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
PIONEER VALLEY HEALTH PLAN, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
PIONEER VALLEY HOSPITAL, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
II-11
265
ROCKY MOUNTAIN MEDICAL CENTER, INC.
By: /s/ FRANK A. COYLE
----------------------------------
Name: Frank A. Coyle
Title: Secretary
SALT LAKE REGIONAL MEDICAL CENTER,
INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
SANDY CITY HOLDINGS, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
SOUTHRIDGE PLAZA HOLDINGS, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
SSJ ST. PETERSBURG HOLDINGS, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
II-12
266
MEMORIAL HOSPITAL OF TAMPA, LP
By: IASIS HEALTHCARE HOLDINGS, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
MESA GENERAL HOSPITAL, LP
By: IASIS HEALTHCARE HOLDINGS, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
ODESSA REGIONAL HOSPITAL, LP
By: IASIS HEALTHCARE HOLDINGS, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
PALMS OF PASADENA HOSPITAL, LP
By: IASIS HEALTHCARE HOLDINGS, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
SOUTHWEST GENERAL HOSPITAL, LP
By: IASIS HEALTHCARE HOLDINGS, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
ST. LUKE'S MEDICAL CENTER, LP
By: IASIS HEALTHCARE HOLDINGS, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
II-13
267
ST. LUKE'S BEHAVIORAL HOSPITAL, LP
By: IASIS HEALTHCARE HOLDINGS, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
TEMPE ST. LUKE'S HOSPITAL, LP
By: IASIS HEALTHCARE HOLDINGS, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
TOWN & COUNTRY HOSPITAL, LP
By: IASIS HEALTHCARE HOLDINGS, INC.
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary
IASIS HEALTHCARE MSO SUB OF SALT LAKE
CITY, LLC
By: IASIS HEALTHCARE CORPORATION
By: /s/ FRANK A. COYLE
------------------------------------
Name: Frank A. Coyle
Title: Secretary and General
Counsel
II-14
268
POWER OF ATTORNEY
Each of the persons whose signature appears below hereby authorizes John K.
Crawford and Frank A. Coyle, and each of them, as attorney-in-fact and agents,
with full powers of substitution, to sign on his or her behalf, individually and
in the capacities stated below, and to file any and all amendments (including
post-effective amendments) to this Registration Statement with the Securities
and Exchange Commission, granting to said attorney-in-fact and agents full power
and authority to perform any other act on behalf of the undersigned required to
be done in the premises.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates set forth below.
SIGNATURE TITLE DATE
--------- ----- ----
* Nonexecutive Chairman of the April 5, 2000
- --------------------------------------------------- Board of IASIS
David R. White
* President and Chief Executive April 5, 2000
- --------------------------------------------------- Officer of IASIS and the
C. Wayne Gower Subsidiary Guarantors and
Director of IASIS
* Executive Vice President and April 5, 2000
- --------------------------------------------------- Chief Financial Officer of
John K. Crawford IASIS and Director of IASIS
/s/ FRANK A. COYLE Secretary of IASIS and the April 5, 2000
- --------------------------------------------------- Subsidiary Guarantors and
Frank A. Coyle General Counsel of IASIS
* Director of IASIS and the Arizona April 5, 2000
- --------------------------------------------------- and Delaware Subsidiary
Paul S. Levy Guarantors
* Director of IASIS and the Arizona April 5, 2000
- --------------------------------------------------- and Delaware Subsidiary
David Y. Ying Guarantors
* Director of IASIS and the Arizona April 5, 2000
- --------------------------------------------------- and Delaware Subsidiary
Jeffrey C. Lightcap Guarantors
* Director of IASIS April 5, 2000
- ---------------------------------------------------
Anthony Grillo
* Director of IASIS April 5, 2000
- ---------------------------------------------------
Ramsey A. Frank
* Director of IASIS April 5, 2000
- ---------------------------------------------------
Frank J. Rodriguez
II-15
269
SIGNATURE TITLE DATE
--------- ----- ----
* Director of IASIS April 5, 2000
- ---------------------------------------------------
Michael S. Berk
* Director of IASIS April 5, 2000
- ---------------------------------------------------
Stuart C. McWhorter
* Director of IASIS April 5, 2000
- ---------------------------------------------------
Jay R. Bloom
* Director of IASIS April 5, 2000
- ---------------------------------------------------
Robert E. Kiss
*By: /s/ FRANK A. COYLE
----------------------------------------------
Attorney-in-Fact
II-16
270
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.1 Recapitalization Agreement, dated as of August 16, 1999, by
and among Paracelsus Healthcare Corporation, PHC/CHC
Holdings, Inc., 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,
Paracelsus Davis Hospital, Inc., PHC Utah, Inc., Clinicare
of Utah, Inc. and JLL Hospital, LLC.*
2.2 Asset Sale Agreement between Tenet Healthcare Corporation
and JLL Hospital, LLC, dated August 15, 1999.*
2.3 Amendment No. 1 to Asset Sale Agreement, made and entered
into as of October 15, 1999, by and between Tenet Healthcare
Corporation and IASIS Healthcare Corporation.*
2.4 Amendment No. 2 to Asset Sale Agreement, made and entered
into as of October 15, 1999, by and between Tenet Healthcare
Corporation and IASIS Healthcare Corporation.*
2.5 Asset Sale Agreement between Odessa Hospital, Ltd., and JLL
Hospital, LLC, dated as of August 15, 1999.*
2.6 Amendment No. 1 to Asset Sale Agreement, dated as of October
15, 1999, by and between Odessa Hospital, Ltd. and IASIS
Healthcare Corporation.*
3.1 Amended and Restated Certificate of Incorporation of
PHC/Psychiatric Healthcare Corporation, changing its name to
IASIS Heathcare Corporation as filed with the Secretary of
State of the State of Delaware on October 8, 1999.*
3.2 Certificate of Designation, Preferences and Rights of Series
A Preferred Stock of IASIS Healthcare Corporation, as filed
with the Secretary of State of the State of Delaware on
October 15, 1999.*
3.3 Certificate of Designation, Preferences and Rights of Series
B Preferred Stock of IASIS Healthcare Corporation, as filed
with the Secretary of State of the State of Delaware on
October 15, 1999.*
3.4 Amended and Restated By-Laws of IASIS Healthcare
Corporation.*
3.5 Certificate of Incorporation of Baptist Joint Venture
Holdings, Inc., as filed with the Secretary of State of the
State of Delaware on October 1, 1999.*
3.6 Certificate of Incorporation of Beaumont Hospital Holdings,
Inc., as filed with the Secretary of State of the State of
Delaware on October 4, 1999.*
3.7 Certificate of Incorporation of Biltmore Surgery Center,
Inc., as filed with the Secretary of State of the State of
Delaware on October 1, 1999.*
3.8 Certificate of Amendment to the Certificate of Incorporation
of Biltmore Surgery Center, Inc., changing its name to
Biltmore Surgery Center Holdings, Inc., as filed with the
Secretary of State of the State of Delaware on November 9,
1999.*
3.9 Certificate of Incorporation of CliniCare of Utah, Inc., as
filed with the Secretary of State of the State of Delaware
on September 23, 1999.*
3.10 Certificate of Incorporation of Davis Hospital & Medical
Center, Inc., as filed with the Secretary of State of the
State of Delaware on September 23, 1999.*
271
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.11 Certificate of Incorporation of Davis Surgical Center
Holdings, Inc., as filed with the Secretary of State of the
State of Delaware on October 1, 1999.*
3.12 Certificate of Incorporation of First Choice Physicians
Network Holdings, Inc., as filed with the Secretary of State
of the State of Delaware on October 1, 1999.*
3.13 Certificate of Incorporation of Health Choice Arizona, Inc.,
as filed with the Secretary of State of the State of
Delaware on October 1, 1999.*
3.14 Certificate of Incorporation of IASIS Healthcare Holdings,
Inc., as filed with the Secretary of State of the State of
Delaware on September 23, 1999.*
3.15 Certificate of Incorporation of IASIS Management Company, as
filed with the Secretary of State of the State of Delaware
on October 4, 1999.*
3.16 Certificate of Incorporation of Jordan Valley Hospital,
Inc., as filed with the Secretary of State of the State of
Delaware on September 23, 1999.*
3.17 Certificate of Incorporation of Metro Ambulatory Surgery
Center, Inc., as filed with the Secretary of State of the
State of Delaware on October 1, 1999.*
3.18 Certificate of Incorporation of Pioneer Valley Health Plan,
Inc., as filed with the Secretary of State of the State of
Delaware on September 23, 1999.*
3.19 Certificate of Incorporation of Pioneer Valley Hospital,
Inc., as filed with the Secretary of State of the State of
Delaware on September 23, 1999.*
3.20 Certificate of Incorporation of Rocky Mountain Medical
Center, Inc., as filed with the Secretary of State of the
State of Delaware on September 23, 1999.*
3.21 Certificate of Incorporation of Salt Lake Regional Medical
Center, Inc., as filed with the Secretary of State of the
State of Delaware on September 23, 1999.*
3.22 Certificate of Incorporation of Sandy City Holdings, Inc.,
as filed with the Secretary of State of the State of
Delaware on October 1, 1999.*
3.23 Certificate of Incorporation of Southridge Plaza Holdings,
Inc., as filed with the Secretary of State of the State of
Delaware on October 1, 1999.*
3.24 Certificate of Incorporation of SSJ St. Petersburg Holdings,
Inc., as filed with the Secretary of State of the State of
Delaware on October 1, 1999.*
3.25 Form of By-Laws of Delaware Subsidiary Guarantors.*
3.26 Certificate of Limited Partnership of Memorial Hospital of
Tampa, LP as filed with the Secretary of State of the State
of Delaware on September 24, 1999.*
3.27 Certificate of Limited Partnership of Mesa General Hospital,
LP as filed with the Secretary of State of the State of
Delaware on September 24, 1999.*
3.28 Certificate of Limited Partnership of Odessa Regional
Hospital, LP as filed with the Secretary of State of the
State of Delaware on September 24, 1999.*
3.29 Certificate of Limited Partnership of Palms of Pasadena
Hospital, LP as filed with the Secretary of State of the
State of Delaware on September 24, 1999.*
3.30 Certificate of Limited Partnership of Southwest General
Hospital, LP as filed with the Secretary of State of the
State of Delaware on September 24, 1999.*
3.31 Certificate of Limited Partnership of St. Luke's Behavioral
Hospital, LP as filed with the Secretary of State of the
State of Delaware on September 24, 1999.*
272
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.32 Certificate of Limited Partnership of St. Luke's Medical
Center, LP as filed with the Secretary of State of the State
of Delaware on September 24, 1999.*
3.33 Certificate of Limited Partnership of Tempe St. Luke's
Hospital, LP as filed with the Secretary of State of the
State of Delaware on September 24, 1999.*
3.34 Certificate of Limited Partnership of Town & Country
Hospital, LP as filed with the Secretary of State of the
State of Delaware on September 24, 1999.*
3.35 Form of Limited Partnership Agreement of Limited Partnership
Subsidiary Guarantors.*
3.36 Articles of Incorporation of Biltmore Surgery Center, Inc.
as filed with the Executive Secretary of the Arizona
Corporation Commission on September 23, 1996.*
3.37 By-Laws of Biltmore Surgery Center, Inc., an Arizona
corporation.*
3.38 Articles of Organization of IASIS Healthcare MSO Sub of Salt
Lake City, LLC, as filed with the Utah Division of
Corporations and Commercial Code on October 5, 1999.*
3.39 Operating Agreement of IASIS Healthcare MSO Sub of Salt Lake
City, LLC.*
4.1 Indenture, dated as of October 15, 1999, among IASIS
Healthcare Corporation, the Delaware and Limited Partnership
Subsidiary Guarantors and The Bank of New York, as Trustee.*
4.2 Supplemental Indenture, dated October 25, 1999, among IASIS
Healthcare Corporation, the Delaware and Limited Partnership
Subsidiary Guarantors, the Arizona Subsidiary Guarantor, as
guaranteeing subsidiary and The Bank of New York, as
Trustee.*
4.3 Supplemental Indenture, dated November 4, 1999, among IASIS
Healthcare Corporation, the Delaware, Limited Partnership
and Arizona Subsidiary Guarantors, the Utah Subsidiary
Guarantor, as guaranteeing subsidiary and The Bank of New
York, as Trustee.*
4.4 Senior Subordinated Guarantee, dated October 15, 1999 by the
Delaware and Limited Partnership Subsidiary Guarantors in
favor of (i) the holders of IASIS Healthcare Corporation's
outstanding 13% Senior Subordinated Notes due 2009 and 13%
Senior Subordinated Exchange Notes due 2009 to be issued in
the Exchange Offer and covered by this Registration
Statement and (ii) the Bank of New York, as Trustee under
the Indenture governing the above-referenced notes.*
4.5 Senior Subordinated Guarantee, dated October 25, 1999 by the
Arizona Subsidiary Guarantor in favor of (i) the holders of
IASIS Healthcare Corporation's outstanding 13% Senior
Subordinated Notes due 2009 and 13% Senior Subordinated
Exchange Notes due 2009 to be issued in the Exchange Offer
and covered by this Registration Statement and (ii) the Bank
of New York, as Trustee under the Indenture governing the
above-referenced notes.*
273
EXHIBIT
NO. DESCRIPTION
- ------- -----------
4.6 Senior Subordinated Guarantee, dated November 4, 1999 by the
Utah Subsidiary Guarantor in favor of (i) the holders of
IASIS Heathcare Corporation's outstanding 13% Senior
Subordinated Notes due 2009 and 13% Senior Subordinated
Exchange Notes due 2009 to be issued in the Exchange Offer
and covered by this Registration Statement and (ii) the Bank
of New York, as Trustee under the Indenture governing the
above-referenced notes.*
4.7 Registration Rights Agreement, dated as of October 15, 1999,
by and among IASIS Healthcare Corporation, the Subsidiary
Guarantors and J.P. Morgan Securities Inc.*
4.8 Form of IASIS Healthcare Corporation 13% Senior Subordinated
Note due 2009 (included in Exhibit 4.1).*
4.9 Form of IASIS Healthcare Corporation 13% Senior Subordinated
Exchange Note due 2009.*
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
regarding the legality of the securities being registered
hereby.**
10.1 Stockholders Agreement, dated as of October 8, 1999, by and
among IASIS Healthcare Corporation, JLL Healthcare, LLC,
Paracelsus Healthcare Corporation and each of the other
investors listed thereto.*
10.2 Credit Agreement, dated as of October 15, 1999, among IASIS
Healthcare Corporation, Various Lenders, J.P. Morgan
Securities Inc. and The Bank of Nova Scotia, as Co-Lead
Arrangers and Co-Book Runners, Paribas, as Documentation
Agent, The Bank of Nova Scotia, as Syndication Agent, and
Morgan Guaranty Trust Company of New York, as Administrative
Agent.*
10.3 First Amendment, dated as of November 16, 1999, to the
Credit Agreement listed as Exhibit No. 10.2.*
10.4 Security Agreement, dated as of October 15, 1999, between
IASIS Healthcare Corporation, Various Subsidiaries of IASIS
Healthcare Corporation and Morgan Guaranty Trust Company of
New York, as Collateral Agent.*
10.5 Pledge Agreement, dated as of October 15, 1999, between
IASIS Healthcare Corporation, Various Subsidiaries of IASIS
Healthcare Corporation and Morgan Guaranty Trust Company of
New York, as Collateral Agent.*
10.6 Subsidiaries Guaranty, dated as of October 15, 1999 (as
amended, restated, modified and/or supplemented from time to
time), made by each of the Subsidiary Guarantors of IASIS
Healthcare Corporation.*
10.7 Hypothecation Agreement, dated as of October 15, 1999 (as
amended, restated, modified and/or supplemented from time to
time), among each of the pledgors in favor of Morgan
Guaranty Trust Company of New York, as Collateral Agent.*
10.8 Employee Leasing Agreement, dated as of October 15, 1999, by
and among IASIS Healthcare Corporation and Tenet Healthcare
Corporation and certain subsidiaries of Tenet Healthcare
Corporation.*
10.9 Tenet Buypower Purchasing Assistance Agreement, dated as of
October 15, 1999, by and between IASIS Healthcare
Corporation and Tenet HealthSystem Medical, Inc.*
274
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.10 Transition Services Agreement, dated as of October 8, 1999,
by and between Paracelsus Healthcare Corporation and
PHC/Psychiatric Healthcare Corporation.*
10.11 Tax Sharing Agreement, dated as of October 8, 1999, among
JLL Healthcare, LLC and its affiliates.*
10.12 License Agreement for Policy and Procedures Manuals dated as
of October 15, 1999 between IASIS Healthcare Corporation and
Tenet Healthcare corporation.*
10.13 License Agreement, dated as of October 8, 1999 between JLL
Healthcare, LLC and Paracelsus Healthcare Corporation.*
12.1 Statement regarding Computation of Ratio of Earnings to
Fixed Charges for the Paracelsus Utah Facilities.*
21.1 Subsidiaries of IASIS Healthcare Corporation.*
23.1 Consent of KPMG LLP.+
23.2 Consent of Ernst & Young LLP.+
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1).**
24.1 Powers of Attorney (included in the signature pages to the
Registration Statement).*
25.1 Statement of Eligibility and Qualification on Form T-1 of
The Bank of New York, as Trustee under the Indenture.*
27.1-6 Financial Data Schedules.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.*
99.4 Form of Letter to Clients.*
- ---------------
+ Filed herewith.
* Previously filed.
** To be filed by amendment.