1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________.
COMMISSION FILE NUMBER: 333-94521
IASIS HEALTHCARE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0450619
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) (Identification No.)
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(Address of Principal Executive Offices)
(615) 844-2747
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ x ] NO [ ]
As of February 8, 2001, 3,043,949.50 shares of the
Registrant's Common Stock were outstanding.
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION..........................................................................1
ITEM 1. FINANCIAL STATEMENTS:.................................................................1
Condensed and Consolidated Balance Sheets at December 31, 2000 (Unaudited) and
September 30, 2000....................................................................1
Condensed and Consolidated Statements of Operations (Unaudited) -- Three
Months Ended December 31, 2000 and 1999...............................................2
Condensed and Consolidated Statements of Cash Flows (Unaudited) -- Three
Months Ended December 31, 2000 and 1999...............................................3
Notes to Unaudited Condensed and Consolidated Financial Statements....................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ..........................................................................11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........................19
PART II - OTHER INFORMATION............................................................................20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................................20
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IASIS HEALTHCARE CORPORATION
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
2000 2000
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ -- $ --
Accounts receivable, net of allowance for doubtful
accounts of $30,032 and $31,403, respectively .............. 165,949 146,744
Inventories ................................................... 20,110 19,874
Current deferred tax assets ................................... 1,146 1,146
Prepaid expenses and other current assets ..................... 15,041 13,181
--------- ---------
Total current assets ...................................... 202,246 180,945
Property and equipment, net ....................................... 361,059 361,293
Goodwill and other intangibles, net ............................... 300,334 302,380
Deferred debt financing costs, net ................................ 22,555 23,472
Deferred tax assets ............................................... 2,036 2,036
Other assets ...................................................... 3,719 3,713
--------- ---------
Total assets .............................................. $ 891,949 $ 873,839
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................................. $ 47,265 $ 31,707
Salaries and benefits payable ................................. 15,328 13,040
Accrued interest payable ...................................... 12,738 20,020
Medical claims payable ........................................ 16,993 16,530
Other accrued expenses and other current liabilities .......... 15,321 20,739
Current portion of accrued loss on discontinued operations .... 2,974 4,008
Current maturities of long-term debt and capital lease
obligations .............................................. 12,457 9,883
--------- ---------
Total current liabilities ................................. 123,076 115,927
Long-term debt and capital lease obligations ...................... 560,322 547,771
Other long-term liabilities ....................................... 13,920 13,372
Minority interest ................................................. 2,075 2,060
Mandatorily redeemable Series A preferred stock -- $0.01 par
value, authorized 500,000 shares; no shares issued and -- 183,199
outstanding at December 31, 2000 and 160,000 shares
at September 30, 2000
Mandatorily redeemable Series B preferred stock -- $0.01 par value,
authorized 50,000 shares; no shares issued and outstanding
at December 31, 2000 and 5,311 shares at September 30, 2000... -- 6,079
--------- ---------
Total liabilities ......................................... 699,393 868,408
STOCKHOLDERS' EQUITY
Common stock-- $0.01 par value, authorized 5,000,000
shares; 3,041,147 shares and 1,371,840 shares issued and
outstanding at December 31, 2000 and September 30, 2000,
respectively................................................. 30 14
Additional paid-in capital .................................... 450,504 259,784
Treasury stock, at cost, 1,550,250 shares at December 31, 2000
and September 30, 2000 ..................................... (155,025) (155,025)
Accumulated deficit ........................................... (102,953) (99,342)
--------- ---------
Total stockholders' equity .................................. 192,556 5,431
--------- ---------
Total liabilities and stockholders' equity .................. $ 891,949 $ 873,839
========= =========
See accompanying notes to condensed and consolidated financial statements.
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IASIS HEALTHCARE CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
DECEMBER 31,
------------------------
2000 1999
--------- ---------
Net revenue ....................................... $ 219,369 $ 177,695
Costs and expenses:
Salaries and benefits ......................... 77,085 60,906
Supplies ...................................... 32,136 26,116
Other operating expenses ...................... 64,995 49,829
Provision for bad debts ....................... 17,395 13,229
Interest, net ................................. 17,208 14,375
Depreciation and amortization ................. 14,108 10,384
Recapitalization costs ........................ -- 3,442
--------- ---------
Total costs and expenses .................... 222,927 178,281
--------- ---------
Loss from continuing operations before
minority interests and income taxes ........... (3,558) (586)
Minority interests ................................ 53 (92)
--------- ---------
Loss from continuing operations before
income taxes .................................. (3,611) (494)
Income tax expense ................................ -- --
--------- ---------
Net loss from continuing operations ......... (3,611) (494)
Discontinued operations:
Losses from operations of discontinued physician
practice operations ......................... -- (1,219)
--------- ---------
Net loss ................................... (3,611) (1,713)
Preferred stock dividends accrued (reversed) and
accretion ..................................... (25,348) 5,520
--------- ---------
Net earnings (loss) attributable to common
stockholders .................................. $ 21,737 $ (7,233)
========= =========
See accompanying notes to condensed and consolidated financial statements.
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IASIS HEALTHCARE CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
DECEMBER 31,
----------------------
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................. $ (3,611) $ (1,713)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ....................... 14,108 10,384
Minority interests .................................. 53 (92)
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable ............................... (19,205) (81,968)
Supplies, prepaid expenses and other
current assets .................................. (2,408) (15,925)
Accounts payable and other accrued liabilities .... 5,061 22,168
--------- ---------
Net cash used in operating activities ............... (6,002) (67,146)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................... (9,391) (9,175)
Payments for acquisitions, net ........................ -- (434,424)
Increase in other assets .............................. (907) (1,487)
--------- ---------
Net cash used in investing activities ............... (10,298) (445,086)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility ......................... -- 160,000
Proceeds from issuance of preferred stock ............. -- 160,000
Proceeds from issuance of common stock ................ 1,620 --
Repurchase of common stock ............................ -- (155,025)
Proceeds from senior bank debt borrowings ............. 45,600 330,000
Proceeds from issuance of senior subordinated notes ... -- 230,000
Payment of debt and capital leases .................... (30,920) (160,230)
Common and preferred stock issuance costs incurred .... -- (2,540)
Debt financing costs incurred ......................... -- (25,360)
--------- ---------
Net cash provided by financing activities ........... 16,300 536,845
--------- ---------
Increase in cash and cash equivalents ..................... -- 24,613
Cash and cash equivalents at beginning of period .......... -- --
--------- ---------
Cash and cash equivalents at end of period ................ $ -- $ 24,613
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest ............................................ $ 24,492 $ 5,367
========= =========
Income taxes ........................................ $ 3,250 $ --
========= =========
SUPPLEMENTAL SCHEDULE OF INVESTING ACTIVITIES:
Effects 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)
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligations incurred to acquire
equipment....................................... $ 600 $ 179
========= =========
Exchange of preferred stock for common stock ....... $ 189,278 $ --
========= =========
See accompanying notes to condensed and consolidated financial statements.
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IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed and consolidated financial statements include
the accounts of IASIS Healthcare Corporation ("IASIS" or "the Company")
(formerly known as Paracelsus Utah Facilities, the Company's predecessor entity)
and its wholly owned subsidiaries and have been prepared in accordance with
accounting principles generally accepted in the United States 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
accounting principles generally accepted in the United States for complete
financial statements.
In the opinion of management, the accompanying unaudited condensed and
consolidated financial 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 preparation of the financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the accompanying unaudited condensed and consolidated financial statements and
notes. Actual results could differ from those estimates.
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.
IASIS operates networks of medium-sized hospitals in high-growth urban
and suburban markets. As of December 31, 2000, the Company owned or leased 15
hospitals with a total of 2,194 operating beds. The Company's hospitals are
currently located in four regions:
- Salt Lake City, Utah;
- Phoenix, Arizona;
- Tampa-St. Petersburg, Florida; and
- three cities in the State of Texas, including San Antonio.
The Company also operates five ambulatory surgery centers and a
Medicaid managed health plan called Health Choice that serves over 42,000
members in Arizona.
2. RECAPITALIZATION AND ACQUISITION TRANSACTIONS
IASIS was formed in October 1999 through a series of transactions that
were arranged by Joseph Littlejohn & Levy, Inc. and members of the Company's
current management team. Joseph Littlejohn & Levy is the private equity firm
that controls JLL Healthcare, LLC, the Company's largest stockholder.
RECAPITALIZATION
Effective October 8, 1999, Paracelsus Healthcare Corporation
("Paracelsus") and unrelated third parties recapitalized five acute care
hospitals (Paracelsus Utah Facilities) in the Salt Lake City, Utah market owned
by a subsidiary of Paracelsus valued at $287.0 million, net of a working capital
adjustment of $1.0 million. In connection with the recapitalization, JLL
Healthcare, LLC and some of the Company's stockholders purchased 1,250,000
shares of the outstanding common stock of the Paracelsus subsidiary for an
aggregate of $125.0 million. The subsidiary then repurchased $155.0 million of
its common stock from Paracelsus, which is being held as treasury stock as of
December 31, 2000. The recapitalization transaction resulted in Paracelsus
retaining an approximately 6% minority interest at an implied value of
approximately $8.0 million in the subsidiary. After the recapitalization, the
former
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IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
2. RECAPITALIZATION AND ACQUISITION TRANSACTIONS (CONTINUED)
RECAPITALIZATION (CONTINUED)
Paracelsus subsidiary changed its name to IASIS Healthcare Corporation and
changed its fiscal year end to September 30. The Company's $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
bank credit facility. The Company expensed legal, accounting and other related
costs of approximately $3.5 million associated with the recapitalization during
the fiscal year ended September 30, 2000.
THE TENET ACQUISITION
Effective October 15, 1999, the Company acquired ten acute care
hospitals and other related facilities and assets ("Tenet hospitals") from Tenet
Healthcare Corporation ("Tenet") for approximately $431.8 million in cash and
approximately $41.2 million in assumed liabilities. The Company did not acquire
accounts receivable from Tenet but financed the related growth in working
capital with proceeds from borrowings under its bank credit facilities and other
sources of capital.
MANAGEMENT COMPANY ACQUISITION
Concurrent with the Tenet transaction, a company formed by members of
the Company's management to acquire and operate hospitals and related businesses
was merged with and into a wholly owned subsidiary of the Company. In the
merger, stockholders of this company received shares of the Company's common
stock and preferred stock with a total value of approximately $9.5 million.
OTHER INFORMATION
The following table summarizes the allocation of the aggregate purchase
price of the acquisitions (in thousands):
TENET MANAGEMENT
HOSPITALS COMPANY TOTAL
--------- ------- ---------
Purchase price, including direct costs of
acquisition $ 436,918 $ 9,460 $ 446,378
Identifiable assets acquired 220,850 289 221,139
Liabilities assumed (41,203) (150) (41,353)
--------- ------- ---------
Identifiable net assets acquired 179,647 139 179,786
--------- ------- ---------
Goodwill $ 257,271 $ 9,321 $ 266,592
========= ======= =========
Direct costs of acquisitions of approximately $5.1 million were
capitalized as a component of the purchase price and primarily consisted of
legal fees, professional and accounting fees and other costs related to the
transactions.
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IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
2. RECAPITALIZATION AND ACQUISITION TRANSACTIONS (CONTINUED)
OTHER INFORMATION (CONTINUED)
The Tenet transaction and merger with a company formed by members of
the Company's management were accounted for using the purchase method of
accounting. The operating results of the acquired companies have been included
in the condensed and consolidated statements of operations from their date of
acquisition, October 15, 1999.
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following
(in thousands):
DECEMBER 31, SEPTEMBER 30,
2000 2000
-------- --------
Bank facilities ......... $341,500 $326,668
Senior subordinated notes 230,000 230,000
Capital lease obligations 1,279 986
-------- --------
572,779 557,654
Less current maturities.. 12,457 9,883
-------- --------
$560,322 $547,771
======== ========
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, 2000, amounts outstanding under the tranche A and
tranche B term loans were $77.5 million and $247.5 million, respectively. As of
December 31, 2000, the Company had drawn $16.5 million under the revolving
credit facility and had issued approximately $28.6 million in letters of credit,
resulting in remaining availability under the revolving credit facility of
approximately $79.9 million. The revolving credit facility includes a $75.0
million sub-limit for letters of credit that may be issued by the Company.
Repayments under the term loans are due in quarterly installments. In addition,
the loans under the Bank Facilities 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 Bank Facilities bear interest
at variable rates at specified margins above either Morgan Guaranty Trust
Company of New York's alternate base rate or its reserve-adjusted Eurodollar
rate. The weighted average interest rate on outstanding borrowings under the
Bank Facilities was approximately 11.1% at December 31, 2000. The Company also
pays a commitment fee equal to 0.5% of the average daily amount available under
the revolving credit facility.
The Bank Facilities require the Company to comply with various
financial ratios and tests and contain 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 Bank Facilities are guaranteed by the
Company's subsidiaries and these guaranties are secured by a pledge of
substantially all of the subsidiaries' assets. Substantially all of the
Company's outstanding common stock is pledged for the benefit of the Company's
lenders as security for the Company's obligations under the Bank Facilities.
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IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
SENIOR SUBORDINATED NOTES
On October 13, 1999, the Company issued $230.0 million of 13% senior
subordinated notes due 2009. On May 25, 2000, the Company exchanged all of its
outstanding 13% senior subordinated notes due 2009 for 13% senior subordinated
exchange notes due 2009 that have been registered under the Securities Act of
1933, as amended (the "Notes"). Terms and conditions of the exchange offer were
as set forth in the registration statement on Form S-4 filed with the Securities
and Exchange Commission that became effective on April 17, 2000. The Notes are
unsecured obligations and are subordinated in right of payment to all existing
and future senior indebtedness of the Company. Interest on the Notes is payable
semi-annually.
Except 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
independent assets or operations apart from its ownership of the Subsidiary
Guarantors. At December 31, 2000, all of the Subsidiary Guarantors were wholly
owned and fully and unconditionally guaranteed the 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 Company's
ability to merge or consolidate.
4. PREFERRED STOCK
Concurrent with the Tenet transaction, the Company issued 160,000
shares of mandatorily redeemable Series A preferred stock for proceeds, net of
issuance costs, of $158.6 million. In connection with the merger with the
company formed by members of the Company's management, the Company issued 5,311
shares of mandatorily redeemable Series B preferred stock valued at an aggregate
of $5.3 million. On October 26, 2000, all shares of the Company's mandatorily
redeemable Series A and Series B preferred stock were exchanged for shares of
the Company's common stock on the basis of ten common shares for each preferred
share. The preferred stock was exchanged for common stock without benefit to the
preferred stockholders of the accrued dividends, therefore, previously accrued
preferred stock dividends were reversed. The exchange increased the net earnings
available for common stockholders and stockholders' equity by approximately
$25.3 million and $189.3 million, respectively.
5. DISCONTINUED OPERATIONS
During the fourth quarter of fiscal 2000, IASIS implemented plans to
sell its physician practice operations businesses and close related practice
support offices during fiscal 2001, resulting in an estimated loss on sale and
closure of $7.4 million in the year ended September 30, 2000. The operating
results of the physician practice operations businesses are reflected as
discontinued operations in the accompanying condensed and consolidated
statements of operations. IASIS estimated losses of approximately $900,000 from
the physician practice operations businesses from the date IASIS committed
itself to the sale and closure through the projected sale and closure dates in
fiscal 2001. The remainder of the estimated loss on sale and closure consists
primarily of lease termination costs and physician contract termination costs.
The estimated loss on sale and closure includes approximately $3.2 million of
costs expected to be paid subsequent to fiscal 2001 which are recorded within
other long term liabilities in the accompanying condensed and consolidated
balance sheets.
Net revenue for the physician practice operations was approximately
$1.6 million for the three months ended December 31, 1999.
6. SEGMENT AND GEOGRAPHIC INFORMATION
The Company's acute care hospitals and related health care businesses
are similar in their activities and the economic environments in which they
operate (i.e., urban markets). Accordingly, the Company's reportable operating
segments consist of (1) acute care hospitals and related healthcare businesses,
collectively, and (2) its
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IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
6. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
Medicaid managed health plan, Health Choice and a related entity (collectively
referred to as Health Choice). The following is a financial summary by business
segment for the periods indicated (EBITDA represents earnings from continuing
operations before interest expense, minority interests, income taxes,
recapitalization costs and depreciation and amortization):
THREE MONTHS
ENDED DECEMBER 31,
----------------------
2000 1999
--------- ---------
(In thousands)
ACUTE CARE SERVICE:
Net patient revenue $ 194,260 $ 159,460
Revenue between segments (1,663) (739)
--------- ---------
Net revenue 192,597 158,721
Salaries and benefits 75,929 60,001
Supplies 32,039 26,045
Other operating expenses (1) 40,664 32,740
Provision for bad debts 17,395 13,229
--------- ---------
EBITDA 26,570 26,706
Interest expense, net 17,208 14,375
Depreciation and amortization 14,054 10,346
--------- ---------
Earnings (loss) from continuing operations
before minority interests and income taxes (1) $ (4,692) $ 1,985
========= =========
Segment assets $ 887,069 $ 851,197
========= =========
Earnings (loss) from continuing operations
before minority interests and income taxes (1) $ (4,692) $ 1,985
Recapitalization costs -- 3,442
Minority interests 53 (92)
--------- ---------
Loss from continuing operations
before income taxes $ (4,745) $ (1,365)
========= =========
HEALTH CHOICE:
Net patient revenue $ -- $ --
Capitation payments 26,772 18,974
Revenue between segments -- --
--------- ---------
Net revenue 26,772 18,974
Salaries and benefits 1,156 905
Supplies 97 71
Other operating expenses (1) 24,331 17,089
Provision for bad debts -- --
--------- ---------
EBITDA 1,188 909
Interest expense, net -- --
Depreciation and amortization 54 38
--------- ---------
Earnings from continuing operations before
minority interests and income taxes (1) $ 1,134 $ 871
========= =========
Segment assets $ 4,002 $ 2,582
========= =========
Earnings from continuing operations before
minority interests and income taxes (1) $ 1,134 $ 871
Recapitalization costs -- --
Minority interests -- --
--------- ---------
Earnings from continuing operations before income taxes $ 1,134 $ 871
========= =========
(1) Amounts exclude recapitalization costs.
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IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
7. CONTINGENCIES
NET REVENUE
Final determination of amounts earned under the Medicare and Medicaid
programs often occurs in subsequent years because of audits by the programs,
rights of appeal and the application of numerous technical provisions. In the
opinion of management, adequate provision has been made for adjustments that may
result from such routine audits and appeals.
PROFESSIONAL, GENERAL AND WORKERS COMPENSATION LIABILITY RISKS
The Company is subject to claims and legal actions in the ordinary
course of business, including claims relating to patient treatment. To cover
these types of claims, the Company maintains general liability and professional
liability insurance in excess of self-insured retentions through a commercial
insurance carrier in amounts that the Company believes to be sufficient for its
operations, although, potentially, some claims may exceed the scope of coverage
in effect. The Company has expensed the full self-insured retention exposure for
general liability and professional liability claims. The Company is currently
not a party to any such proceedings that, in the Company's opinion, would have a
material adverse effect on the Company's business, financial condition or
results of operations.
The Company is subject to claims and legal actions in the ordinary
course of business relative to workers compensation and other labor and
employment matters. To cover these types of claims, the Company maintains
workers compensation insurance coverage, with a self-insured retention. The
Company accrues costs of workers compensation claims based upon estimates
derived from its claims experience.
GENERAL LIABILITY CLAIMS
The Company is currently, and from time to time expects to be, subject
to claims and suits arising in the ordinary course of business, including claims
for personal injuries or wrongful restriction of, or interference with,
physicians' staff privileges. Plaintiffs in these matters may request punitive
or other damages that may not be covered by insurance. The Company is not aware
that it is currently a party to any such proceeding which, in management's
opinion, if adversely decided, would have a material effect on the Company's
results of operations or financial position.
HEALTH CHOICE
Health Choice has entered into a capitated contract whereby the plan
provides healthcare services in exchange for fixed periodic and supplemental
payments from the Arizona Health Care Cost Containment System ("AHCCCS"). These
services are provided regardless of the actual costs incurred to provide these
services. The Company receives reinsurance and other supplemental payments from
AHCCCS to cover certain costs of healthcare services that exceed certain
thresholds. The Company believes the capitated payments, together with
reinsurance and other supplemental payments, are sufficient to pay for the
services Health Choice is obligated to deliver. The Company has provided
performance guaranties in the form of a surety bond in the amount of $9.4
million and a letter of credit in the amount of $1.6 million for the benefit of
AHCCCS to support its obligations under the Health Choice contract to provide
and pay for the healthcare services.
TAX SHARING AGREEMENT
The Company and some of its 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. The Company
and JLL Healthcare, LLC have entered into a tax sharing agreement in connection
with the recapitalization. The tax sharing agreement requires the
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IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
7. CONTINGENCIES (CONTINUED)
TAX SHARING AGREEMENT (CONTINUED)
Company to make payments to JLL Healthcare, LLC such that, with respect to tax
returns for any taxable period in which the Company or any of its 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 the Company
will be determined, subject to some adjustments, as if the Company and each of
its 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.
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 the Company and JLL
Healthcare, LLC, for any period in which the Company was included in JLL
Healthcare, LLC's consolidated group, the Company 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.
OTHER
In connection with the acquisition of the Tenet hospitals, the Company
agreed to use its best efforts to cause Tenet to be released from its
obligations under certain contractual obligations that the Company assumed in
the Tenet acquisition. If the Company is unable to cause Tenet to be released
from its obligations, in 2002 the Company may be required to make a cash payment
to Tenet of up to $4.0 million and increase a letter of credit the Company has
currently provided to Tenet by $5.0 million.
8. SUBSEQUENT EVENTS
On February 6, 2001, the Company declared a 10.5-for-one stock split of
the outstanding common stock and common stock options and approved an increase
in authorized shares of common stock to be effective prior to the effectiveness
of a registration statement for an initial public offering of the Company's
common stock.
On February 1, 2001, the Company sold limited partnership units in the
Company's subsidiary that owns Odessa Regional Hospital to third party investors
for an aggregate of $2.1 million. The net proceeds of this equity sale will be
used to fund a portion of the expansion of the hospital, which is expected to be
completed within the next 18 to 24 months. After giving effect to this sale, the
Company will own approximately 88.7% of the equity in this subsidiary.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations should be read in conjunction with our unaudited condensed
and consolidated financial statements, the notes to our unaudited condensed and
consolidated financial statements and the other financial information appearing
elsewhere in this report. Data for the three months ended December 31, 2000 and
1999 has been derived from our unaudited condensed and consolidated financial
statements.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning
of the Federal securities laws, which are intended to be covered by the safe
harbors created thereby. These forward-looking statements include all statements
that are not historical statements of fact and those regarding our intent,
belief or expectations including, but not limited to, the discussions of our
operating and growth strategy (including possible acquisitions and
dispositions), projections of revenue, income or loss, and future operations.
Forward-looking statements involve risks and uncertainties including, without
limitation, those associated with our ability to enter into favorable contracts
with managed care payors; the highly competitive nature of the healthcare
industry; possible changes in Medicare and Medicaid reimbursement levels and
other Federal or state healthcare reforms; future cost containment initiatives
undertaken by purchasers of healthcare services; our ability to successfully
build census levels, grow revenue and reduce operating losses at Rocky Mountain
Medical Center; our ability to attract and retain qualified management and
personnel, including physicians and nurses; our ability to service our
significant indebtedness; the effect of existing and future governmental
regulations, including the Balanced Budget Act of 1997, the Balanced Budget
Refinement Act of 1999 and the Benefits Improvement Protection Act of 2000; the
impact of possible governmental investigations; our ability to successfully
implement and integrate our management information systems at our hospitals; our
limited operating history; our ability to successfully manage the risks of our
Medicaid managed care plan, Health Choice; our ability to successfully complete
and integrate acquisitions of other companies or facilities; general economic
and business conditions; and those risks, uncertainties and others matters
detailed under the caption "Risk Factors" in our Annual Report on Form 10-K for
the fiscal year ended September 30, 2000 and from time to time in our filings
with the Securities and Exchange Commission.
Although we believe that the assumptions underlying the forward-looking
statements contained in this report are reasonable, any of these assumptions
could prove to be inaccurate, and, therefore, there can be no assurance that the
forward-looking statements included in this report will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking
statements included in this report, you should not regard the inclusion of such
information as a representation by us or any other person that our objectives
and plans will be achieved. We undertake no obligation to publicly release any
revisions to any forward-looking statements contained herein to reflect events
and circumstances occurring after the date hereof or to reflect the occurrence
of unanticipated events.
GENERAL
We are a leading owner and operator of acute care hospitals that
develops and operates networks of medium-sized hospitals in high-growth urban
and suburban markets. We operate our hospitals with a strong community focus by
offering and developing healthcare services to meet the needs of the markets we
serve, promoting strong relationships with physicians, working with local
managed care plans and recruiting experienced local management. As of December
31, 2000, we owned or leased 15 hospitals with a total of 2,194 operating beds.
Our hospitals are currently located in four regions:
- Salt Lake City, Utah;
- Phoenix, Arizona;
- Tampa-St. Petersburg, Florida; and
- three cities in the State of Texas, including San Antonio.
We also operate five ambulatory surgery centers and a Medicaid managed health
plan called Health Choice that serves over 42,000 members in Arizona.
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Net revenue is comprised of net patient service revenue and other
revenue. Net patient service revenue is reported net of contractual adjustments.
The adjustments principally result from differences between the hospitals'
established charges and payment rates under Medicare, Medicaid and the various
managed care organizations. Established hospital charges generally have
increased at a faster rate than the rate of increase for Medicare and Medicaid
payments. We record net patient service revenue at the estimated net realizable
amounts for services rendered to Medicare and Medicaid patients, including
estimated retroactive adjustments under reimbursement agreements with the
payors. Retroactive adjustments are accrued on an estimated basis in the period
the related services are rendered and are adjusted in future periods, if
necessary, when final settlements are determined. Other revenue includes revenue
from Health Choice, medical office building rental income and other
miscellaneous revenue. Operating expenses consist of salaries and benefits,
supplies, other operating expenses and provision for bad debts.
Our hospitals' revenue continues to be affected by an increasing
proportion of revenue being derived from fixed payment, higher discount sources
including Medicare, Medicaid, managed care organizations and others. Fixed
payment amounts are often based upon a diagnosis regardless of the cost incurred
or the level of services provided. Our revenue, cash flows and earnings have
been reduced by this reimbursement methodology. We expect patient volumes from
Medicare and Medicaid to continue to increase due to the general aging of the
population and expansion of state Medicaid programs. Under the Balanced Budget
Act of 1997, reimbursement from Medicare and Medicaid was reduced during 1998
and 1999, and will continue to be reduced as certain changes are phased in
during 2000 and 2001. Certain of the rate reductions resulting from the Balanced
Budget Act of 1997 are being mitigated by the Balanced Budget Refinement Act of
1999 and will be further mitigated by the Benefits Improvement Protection Act of
2000. It is estimated that the Benefits Improvement Protection Act of 2000 will
provide approximately $35 billion in funding restorations to Medicare healthcare
providers over a period of five years, approximately one-third of which will go
to hospitals. Exclusive of Health Choice, the percentage of our net revenue
related to Medicare and Medicaid was approximately 35% for the three months
ended December 31, 2000.
Our revenue also is affected by the trend toward performing more
services on an outpatient basis due to advances in medical technology and
pharmacology as well as cost containment pressures from Medicare, Medicaid,
managed care organizations and other sources of revenue. Approximately 35% of
our gross patient revenue during the three months ended December 31, 2000 was
generated from outpatient procedures.
Based on our preliminary assessment of the recently released final
regulations implementing Medicare's new prospective payment system for
outpatient hospital care, we currently do not expect the prospective payment
system to have a material adverse effect on our future operating results. We
have been somewhat negatively affected by delays in processing our claims under
the new prospective payment system for outpatient hospital care subsequent to
its implementation in August 2000.
RECAPITALIZATION AND ACQUISITION TRANSACTIONS
IASIS was formed in October 1999 through a series of transactions that
were arranged by Joseph Littlejohn & Levy, Inc. and members of our current
management team. Joseph Littlejohn & Levy is the private equity firm that
controls JLL Healthcare, LLC, our largest stockholder. The first transaction was
effective October 8, 1999, when Paracelsus Healthcare Corporation and unrelated
third parties recapitalized five acute care hospitals in the Salt Lake City,
Utah market owned by a subsidiary of Paracelsus, valued at $287.0 million, net
of a working capital adjustment of $1.0 million.
In connection with the recapitalization, JLL Healthcare, LLC and some
of our stockholders purchased an aggregate of $125.0 million of the outstanding
common stock of a subsidiary of Paracelsus. The subsidiary then repurchased
$155.0 million of its common stock from Paracelsus. The recapitalization
transaction resulted in Paracelsus retaining an approximately 6% minority
interest at an implied value of approximately $8.0 million in the preexisting
Paracelsus subsidiary that owned the Paracelsus Utah facilities. After the
recapitalization, the former Paracelsus subsidiary changed its name to IASIS
Healthcare Corporation and changed its fiscal year end to September 30.
The second transaction was effective October 15, 1999, when we acquired
ten acute care hospitals and other related facilities and assets from Tenet
Healthcare Corporation for approximately $431.8 million in cash and
approximately $41.2 million in assumed liabilities. We have reached an agreement
with Tenet on net working capital acquired in the transaction with the exception
of adjustments relating to physician services operations and certain other
matters.
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The effect of the adjustment for these remaining matters, if any, is not
expected to be material and would result in a reduction in goodwill recognized
in the Tenet transaction.
Concurrent with the Tenet transaction, a company formed by members of
our management to acquire and operate hospitals and related businesses was
merged with and into a wholly owned subsidiary of our company. In the merger,
stockholders of this company received shares of our common stock and preferred
stock with a total value of approximately $9.5 million.
The Tenet transaction and merger with a company formed by members of
our management were accounted for using the purchase method of accounting. The
operating results of these acquired companies have been included in our
condensed and consolidated statements of operations from the October 15, 1999
date of acquisition.
DISCONTINUED OPERATIONS
Our financial results from continuing operations do not include the
results of operations of Clinicare, our physician practice operations consisting
of 31 physicians in 13 offices. We are exiting this business and intend to sell
the assets of our physician practices and close our practice support offices.
Revenue and expenses associated with these operations have been reclassified to
discontinued operations. During the three months ended December 31, 1999, we
incurred losses of $1.2 million from our discontinued physician practice
operations.
SELECTED OPERATING DATA
The following table sets forth selected operating data for each of the
periods presented. The operating data includes the Tenet hospitals from October
15, 1999, their date of acquisition.
THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
(UNAUDITED) (UNAUDITED)
----------- -----------
Number of hospitals at end of period 15 14
Licensed beds at end of period 2,685(a) 2,567
Operating beds at end of period 2,194(a) 2,144
Average length of stay (days) (b) 4.36 4.41
Occupancy rates (average beds in service) (c) 44.3% 41.2%
Admissions (d) 20,006 16,137
Adjusted admissions (e) 31,789 26,451
Patient days (f) 87,260 71,109
Adjusted patient days (e) 134,658 113,319
- -----------------------------
(a) Includes 118 licensed beds and 71 operating beds at Rocky Mountain
Medical Center, formerly named PHC Regional Hospital and Medical
Center, which was closed in June 1997 by Paracelsus and reopened by us
on April 10, 2000.
(b) Represents the average number of days that a patient stayed in our
hospitals.
(c) Excludes 71 beds at Rocky Mountain Medical Center placed in service on
April 10, 2000. If these beds were included, the occupancy rate would
have been 43.2% for the three months ended December 31, 2000.
(d) 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.
(e) Adjusted admissions and adjusted patient days are general measures of
combined inpatient and outpatient volume. We compute adjusted
admissions/patient days by multiplying admissions/patient days by gross
patient revenue and then dividing that number by gross inpatient
revenue.
(f) Represents the number of days our beds were occupied over the period.
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RESULTS OF OPERATIONS
The following table presents, for the periods indicated, information
expressed as a percentage of net revenue. Such information has been derived from
our unaudited condensed and consolidated statements of operations. The results
of operations for the periods presented include the Tenet hospitals and the
company formed by members of our management from October 15, 1999, their
acquisition date.
THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
----------- -----------
Net revenue 100.0% 100.0%
Salaries and benefits 35.1 34.3
Supplies 14.7 14.7
Other operating expenses 29.6 28.0
Provision for bad debts 7.9 7.5
----- -----
Total operating expenses 87.3 84.5
----- -----
EBITDA (a) 12.7 15.5
Depreciation and amortization 6.4 5.8
Interest, net 7.9 8.1
Minority interests -- --
Recapitalization costs -- 1.9
----- -----
Loss from continuing operations before income taxes (1.6) (0.3)
Income tax expense -- --
----- -----
Net loss from continuing operations (1.6) (0.3)
Discontinued operations -- (0.7)
----- -----
Net loss (1.6)% (1.0)%
===== =====
- ---------------------------
(a) EBITDA represents earnings from continuing operations before interest
expense, minority interests, income taxes, recapitalization costs and
depreciation and amortization. Although you should not consider EBITDA in
isolation or as a substitute for net earnings, operating cash flows or
other cash flow statement data determined in accordance with accounting
principles generally accepted in the United States, management understands
that EBITDA is commonly used to evaluate a company's financial performance,
especially in evaluating healthcare companies. EBITDA, as presented, may
not be comparable to similarly titled measures of other companies.
THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1999
Net revenue for the three months ended December 31, 2000 was $219.4
million, an increase of $41.7 million, or 23.5%, from $177.7 million for the
three months ended December 31, 1999. Approximately $22.8 million of the
increase in net revenue is attributable to the fact that revenue for the
three months ended December 31, 2000 included a full three months of operations
for the Tenet facilities and Health Choice compared to the prior year period,
which included the results of operations for the Tenet facilities and Health
Choice from their acquisition date, October 15, 1999. The remaining $18.9
million increase in net revenue is due to increasing volume and revenue growth
in both our hospital operations, which we refer to as our acute care service
segment in our financial statements, and Health Choice.
Net revenue from our hospital operations for the three months ended
December 31, 2000 was $192.6 million, an increase of $33.9 million, or 21.4%,
from $158.7 million for the three months ended December 31, 1999. Approximately
$19.5 million of the increase is due to the results of the Tenet hospital
facilities being included for a full three months for the quarter ended December
31, 2000, and $4.1 million of the increase is due to the opening of Rocky
Mountain Medical Center on April 10, 2000. The remaining increase in net revenue
of $10.3 million is due primarily to volume growth in our hospital operations.
The increase in volume was attributable largely
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to our increased focus on improving physician relations and communications,
physician recruitment, new services, facility improvements and population growth
in our primary service areas.
Admissions, excluding Rocky Mountain Medical Center, increased 22.7%
from 16,137 for the three months ended December 31, 1999 to 19,796 for the same
period in 2000, and patient days, excluding Rocky Mountain Medical Center,
increased 21.6% from 71,109 for the three months ended December 31, 1999 to
86,442 for the same period in 2000. Adjusted admissions, excluding Rocky
Mountain Medical Center, increased 18.7% from 26,451 for the three months ended
December 31, 1999 to 31,391 for the same period in 2000 and adjusted patient
days, excluding Rocky Mountain Medical Center, increased 17.5% from 113,319 for
the three months ended December 31, 1999 to 133,107 for the same period in 2000.
Had the Tenet hospital facilities been included as of October 1, 1999 rather
than October 15, 1999, the date of the Tenet acquisition, admissions, patient
days, adjusted admissions and adjusted patient days, excluding Rocky Mountain
Medical Center, would have increased 8.8%, 6.7%, 5.9% and 3.7%, respectively.
The volume growth was well balanced across all the markets in which we operate.
Net revenue from Health Choice was $26.8 million for the three months
ended December 31, 2000, an increase of $7.8 million, or 41.1%, from $19.0
million in the same period in 1999. Approximately $3.3 million of the increase
is due to the results of Health Choice being included for a full three months
for the quarter ended December 31, 2000. Additionally, covered lives under this
prepaid Medicaid plan have increased from 36,800 at December 31, 1999 to 42,200
at December 31, 2000, an increase of 14.7%. The increase in covered lives has
positively impacted Health Choice revenue for the three months ended December
31, 2000 compared to the prior period.
Operating expenses increased $41.5 million from $150.1 million for the
three months ended December 31, 1999 to $191.6 million for the three months
ended December 31, 2000 largely due to the addition of the Tenet hospitals and
Health Choice effective October 15, 1999 and the opening of Rocky Mountain
Medical Center. Operating expenses as a percentage of net revenue were 87.3% for
the three months ended December 31, 2000 and 84.5% for the three months ended
December 31, 1999. Excluding Rocky Mountain Medical Center, operating expenses
as a percentage of net revenue were 85.5% for the three months ended December
31, 2000.
Operating expenses from our hospital operations for the three months
ended December 31, 2000 were $166.0 million, an increase of $34.0 million, or
25.7%, from $132.0 million for the three months ended December 31, 1999.
Approximately $20.8 million of the increase, consisting of $8.7 million in
salaries and benefits, $1.8 million in supplies, $400,000 in provision for bad
debts and $9.9 million in other operating expenses, is due to the results of the
Tenet hospital facilities being included for a full three months for the quarter
ended December 31, 2000. Of the remaining $13.2 million increase in operating
expenses, $7.6 million is due to the opening of Rocky Mountain Medical Center
and $5.6 million is due primarily to the volume growth in our hospital
operations.
Operating expenses from our hospital operations, excluding Rocky
Mountain Medical Center, as a percentage of net revenue were 84.1% for the three
months ended December 31, 2000 compared to 83.1% for the three months ended
December 31, 1999. This increase was due primarily to increased salaries and
benefits expense as a percentage of net revenue of 1.2% for the three months
ended December 31, 2000 compared to the same period in 1999. The increase in
salaries and benefits expense as a percentage of net revenue was primarily due
to general wage inflation, an increased level of temporary staffing in certain
of our markets where volume has been growing and increased staffing at our
corporate office compared to the same period in the prior year.
We opened Rocky Mountain Medical Center in Salt Lake City, Utah on
April 10, 2000. Rocky Mountain Medical Center is Salt Lake City's newest acute
care hospital with 118 licensed and 71 operating beds. Rocky Mountain Medical
Center offers general medicine, surgery, emergency room services, cardiology,
orthopedics, oncology and after-hours pediatrics programs. During the three
months ended December 31, 2000, Rocky Mountain Medical Center generated net
revenue of $4.1 million and incurred operating expenses of $7.6 million,
resulting in a loss before interest, taxes, depreciation and amortization of
$3.5 million. We have negotiated managed care contracts that became effective
January 1, 2001 with two large managed care plans in the Salt Lake City market.
Additionally, we have completed operating room modifications that will enable us
to perform orthopedic procedures and began providing new cardiology services at
Rocky Mountain Medical Center in January 2001. Primarily as a result of these
new contracts and services, we have seen our daily census increase to as high as
29 and our average daily census has increased from an average of less than ten
during the three months ended December 31, 2000
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to 17 in January 2001. In addition, the medical office building on the Rocky
Mountain Medical Center campus was approximately 66% occupied as of December 31,
2000, and we have in excess of 215 physicians on the medical staff.
We incurred operating expenses of $7.6 million during the three months
ended December 31, 2000 consisting of $2.5 million in salaries and benefits,
$600,000 in supplies, $1.3 million in provision for bad debts and $3.2 million
in other operating expenses. Other operating expenses included costs for
purchased services, rents and leases, utilities, marketing, insurance and other
expenses, including approximately $473,000 of professional fees associated with
the lawsuit we have filed with respect to Rocky Mountain Medical Center. We
expect to continue to have operating losses at Rocky Mountain Medical Center
until we are able to build our census to a level that causes our net revenue to
exceed our operating expenses.
Operating expenses for Health Choice increased $7.5 million during the
three months ended December 31, 2000 compared to the same period in 1999 due to
the incremental cost of increased enrollment and the fact that Health Choice was
acquired effective October 15, 1999 and therefore did not have a full quarter of
expenses in the prior period. Operating expenses as a percentage of net revenue
for Health Choice were comparable at 95.6% for the three months ended December
31, 2000 and 95.2% for the three months ended December 31, 2000.
EBITDA was $27.8 million, or 12.7% of net revenue, for the three months
ended December 31, 2000, compared to $27.6 million, or 15.5% of net revenue, for
the three months ended December 31, 1999. This decline in the EBITDA margin was
due primarily to the operating losses at Rocky Mountain Medical Center.
Excluding results from Rocky Mountain Medical Center, net revenue and EBITDA
were $215.3 million and $31.3 million, respectively, for the three months ended
December 31, 2000, resulting in an EBITDA margin of 14.5%.
EBITDA for hospital operations, excluding Rocky Mountain Medical
Center, was $30.1 million, or 16.0% of net revenue, for the three months ended
December 31, 2000, compared to $26.7 million, or 16.8% of net revenue, for the
three months ended December 31, 1999. Assuming that the acquisition of the Tenet
hospital facilities on October 15, 1999 was effective as of October 1, 1999,
EBITDA for hospital operations, excluding Rocky Mountain Medical Center, for the
three months ended December 31, 1999 would have been $25.5 million, or 14.3% of
net revenue.
Health Choice, our Medicaid managed health plan, has a significantly
lower EBITDA margin than hospital operations. EBITDA for Health Choice was $1.2
million, or 4.4% of net revenue, for the three months ended December 31, 2000,
compared to $900,000, or 4.8% of net revenue, for the three months ended
December 31, 1999. Assuming that the acquisition of Health Choice on October 15,
1999 was effective as of October 1, 1999, the EBITDA margin for Health Choice
for the three months ended December 31, 1999 would have been 4.1% of net
revenue.
Depreciation and amortization expense increased $3.7 million from $10.4
million for the three months ended December 31, 1999 to $14.1 million for the
three months ended December 31, 2000 due to the acquisition of the Tenet
facilities on October 15, 1999 and the depreciation of assets associated with
Rocky Mountain Medical Center.
Interest expense increased $2.8 million from $14.4 million for the
three months ended December 31, 1999 to $17.2 million for the three months ended
December 31, 2000, due to the timing of borrowings of $560.0 million associated
with the acquisition of the Tenet hospitals and the recapitalization of the
Paracelsus hospitals on October 15, 1999 and interest rate increases.
We incurred legal, accounting and other related costs of approximately
$3.4 million during the three months ended December 31, 1999 related to the
recapitalization transaction.
Losses from continuing operations before income taxes were $3.6 million
for the three months ended December 31, 2000 compared to a loss of $500,000 for
the three months ended December 31, 1999. The increase in losses from continuing
operations before income taxes was due to losses at Rocky Mountain Medical
Center, increases in depreciation and amortization expense and interest expense
during the three months ended December 31, 2000, offset partially by
recapitalization costs incurred in the three months ended December 31, 1999.
We recorded no provision for income taxes for the three months ended
December 31, 2000 and 1999 due to the uncertainty of realizing a tax benefit
related to the losses incurred.
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We incurred losses from our discontinued physician practice operations
for the three months ended December 31, 1999 of $1.2 million.
Net loss for the three months ended December 31, 2000 was $3.6
million compared to a net loss of $1.7 million for the three months ended
December 31, 1999.
We recorded a reversal of preferred stock dividends of $25.3 million
during the three months ended December 31, 2000, compared to preferred stock
dividends and accretion of $5.5 million recorded during the three months ended
December 31, 1999. The preferred stock, which was exchanged for shares of our
common stock on the basis of ten common shares for each preferred share in
October 2000, was mandatorily redeemable and dividends were payable in shares of
our common stock. The preferred stock was exchanged for common stock without
benefit to the preferred stockholders of the accrued dividends, therefore, the
accrual of dividends was reversed. The exchange did not result in a cash
payment. Net earnings attributable to common stockholders after the effect of
the preferred stock dividends and accretion for the three months ended December
31, 2000 was $21.7 million compared to a net loss of $7.2 million for the same
period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, we had $79.2 million in working capital, compared
to $65.0 million at September 30, 2000, an increase of $14.2 million. We used
cash of $6.0 million in operating activities during the three months ended
December 31, 2000, compared to using $67.1 million of cash in operating
activities during the three months ended December 31, 1999. During the three
months ended December 31, 2000, the increase in working capital and negative
cash flow from operations were due primarily to the growth in accounts
receivable of $19.2 million from $146.7 million at September 30, 2000 to $165.9
million at December 31, 2000. At December 31, 2000, net accounts receivable of
$165.9 million amounted to approximately 78.6 days of net revenue outstanding
compared to 70 days at September 30, 2000. The increase in days of net revenue
outstanding at December 31, 2000 is due in part to information system
conversions and related business office disruptions in our Florida and Texas
markets during the fourth quarter of fiscal year 2000 and the quarter ended
December 31, 2000. In addition, we have been negatively affected to some extent
by delays in processing our claims under the new prospective payment system for
outpatient hospital care subsequent to its implementation in August 2000.
Our investing activities used $10.3 million during the three months
ended December 31, 2000. Capital expenditures for the three months ended
December 31, 2000 were approximately $9.4 million, including capital
expenditures of $4.0 million for information systems, $2.7 million for equipment
and improvements at Rocky Mountain Medical Center and $600,000 for renovation
and expansion of the emergency room at one of our hospitals. We have budgeted
capital expenditures for the remainder of fiscal 2001 of approximately $40.0
million, including $22.1 million for expansion and new services at our
facilities, $10.4 million for renovation and replacement equipment at our
facilities and $3.7 million for implementation and integration of our
information systems. The capital expenditures budget for 2001 is based upon our
analysis of various factors, many of which are beyond our control, and we cannot
assure you that our capital expenditures will not exceed budgeted amounts.
Financing activities during the three months ended December 31, 2000
provided net cash of $16.3 million due primarily to borrowings under our bank
credit facility. During the three months ended December 31, 2000, we borrowed
$45.6 million pursuant to the terms of our revolving credit facility, we repaid
$1.8 million in outstanding borrowings pursuant to the terms of our bank credit
facility and capital lease obligations and we made voluntary prepayments of
$29.1 million pursuant to the terms of our revolving credit facility. During the
next twelve months, we are required to repay a total of $11.9 million under our
bank credit facility. During the three months ended December 31, 2000, we
received proceeds of approximately $1.6 million from the issuance of an
aggregate of 16,196.5 shares of common stock to certain of our existing
stockholders.
Effective October 15, 1999, we entered into a bank credit facility
through which a syndicate of lenders made a total of $455.0 million available to
us 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. Proceeds from the
tranche A and tranche B term loans were used in conjunction with the
recapitalization and acquisition transactions. The $125.0 million revolving
credit facility is available for working capital and other general corporate
purposes.
The bank 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 bank credit facility is guaranteed by our subsidiaries and
these guarantees are secured by a pledge of substantially all the subsidiaries'
assets.
As of December 31, 2000, amounts outstanding under the tranche A and
tranche B term loans were $77.5 million and $247.5 million, respectively, and we
had $16.5 million outstanding under our revolving credit facility. The revolving
credit facility includes a $75.0 million sub-limit for letters of credit that
may be issued by us and, as of December 31, 2000, we had issued $28.6 million in
letters of credit. The loans under the bank credit facility bear interest at
variable rates at specified margins above either the agent bank's alternate base
rate or its reserve-adjusted Eurodollar rate. The weighted average interest rate
of outstanding borrowings under the bank credit facility was approximately 11.1%
at December 31, 2000. As of February 8, 2001, we had drawn $24.5 million under
our revolving credit facility and had issued $28.6 million in letters of credit,
resulting in remaining availability under the revolving credit facility of $73.7
million.
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On October 13, 1999, we issued $230.0 million of 13% senior
subordinated notes due 2009. On May 25, 2000, we exchanged all of our
outstanding 13% senior subordinated notes due 2009 for 13% senior subordinated
exchange notes due 2009 that have been registered under the Securities Act of
1933, as amended. The notes are unsecured obligations and are subordinated in
right of payment to all of our existing and future senior indebtedness. If a
change in control occurs, as defined in the indenture, each holder of the notes
will have the right to require us to repurchase all or any part of that holder's
notes in cash at 101% of the aggregate principal amount of notes repurchased
plus accrued and unpaid interest to the date of purchase. Except with respect to
a change of control, we are not required to make mandatory redemption or sinking
fund payments with respect to the notes. At December 31, 2000, all our
subsidiaries fully and unconditionally guaranteed the notes on a joint and
several basis. The indenture for the notes contains certain covenants, including
but not limited to, restrictions on new indebtedness, asset sales, capital
expenditures, dividends and our ability to merge or consolidate.
On October 26, 2000, all shares of our mandatorily redeemable Series A
and Series B preferred stock were exchanged for shares of our common stock on
the basis of ten common shares for each preferred share. This exchange increased
our net earnings attributable to common stockholders by $25.3 million, increased
our stockholders' equity by approximately $189.3 million and did not affect our
cash flow.
On February 1, 2001, we sold limited partnership units in our
subsidiary that owns Odessa Regional Hospital to third party investors for an
aggregate of $2.1 million. The net proceeds of this equity sale will be used to
fund a portion of the expansion of the hospital, which is expected to be
completed within the next 18 to 24 months. After giving effect to this sale, we
will own approximately 88.7% of the equity in this subsidiary.
Our liquidity and capital resources have been negatively affected by
Rocky Mountain Medical Center. During the three months ended December 31, 2000,
at Rocky Mountain Medical Center we incurred operating losses of $3.5 million
and capital expenditures of $2.7 million. We expect to continue to incur
operating losses until our census levels and patient mix generate sufficient net
revenue to cover our operating expenses. We intend to reduce the operating
losses by increasing volume under new and existing managed care contracts,
recruiting new physicians, marketing our services to consumers and making an
additional $3.3 million of capital expenditures in the remainder of fiscal year
2001 to support hospital services, including our diagnostic and operating
capabilities for the cardiology and orthopedics programs. If we are unsuccessful
in growing revenue and reducing operating losses at Rocky Mountain Medical
Center, we may be forced to significantly alter our plans and strategies with
respect to this hospital.
In connection with the recapitalization transaction and the Tenet
transaction, we did not assume any liability or obligation of Paracelsus or
Tenet owed to payors, including private insurers and government payors such as
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.
Our agreements with Paracelsus and Tenet include customary indemnification and
hold harmless provisions for any damages we incur relating to these types of
excluded liabilities. In addition, in the Tenet transaction we agreed to use our
best efforts to cause Tenet to be released from its obligations under certain
contractual obligations that we assumed in the Tenet transaction. If we are
unable to cause Tenet to be released from its obligations, in 2002 we may be
required to make a cash payment to Tenet of up to $4.0 million and increase a
letter of credit we have provided to Tenet by $5.0 million.
Subsequent to the recapitalization transaction, Paracelsus filed a
petition for relief pursuant to Chapter 11 of the United States Bankruptcy Code.
In October 2000, Paracelsus filed with the United States Bankruptcy Court a
Disclosure Statement and a Plan of Reorganization under Chapter 11 of the
Bankruptcy Code. We filed timely objections and proofs of claim against
Paracelsus. In response to our objections and proofs of claim, and in
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exchange for our agreement to withdraw our objections to its Plan of
Reorganization, we negotiated a resolution with Paracelsus whereby Paracelsus
agreed that the restructured debtor would assume all indemnification obligations
of Paracelsus under our recapitalization agreement. Confirmation of this plan by
the bankruptcy court is pending. We also continue to have indemnification rights
against other subsidiaries of Paracelsus that are also parties to our
recapitalization agreement, which rights are not affected by the bankruptcy
proceeding.
We have provided performance guaranties in the form of a surety bond in
the amount of $9.4 million and a letter of credit in the amount of $1.6 million
for the benefit of the Arizona Health Care Cost Containment System to support
our obligations under the Health Choice contract to provide and pay for the
healthcare services. The amount of the performance guaranty that the Arizona
Health Care Cost Containment System requires is based upon the membership in the
plan and the related capitation paid to us. We do not currently expect a
material increase in the amount of the performance guaranties during the 2001
fiscal year.
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 service
requirements, capital expenditures and working capital needs for the next 12
months. We cannot assure you, however, that our business will generate
sufficient cash flow from operations, that future borrowings will be available
under our bank credit facility, or otherwise, to enable us to grow our business,
service our indebtedness including the bank credit facility and our senior
subordinated exchange notes, or to make anticipated capital expenditures. One
element of our business strategy is expansion through the acquisition of
hospitals in our existing and new high-growth markets. The completion of
acquisitions may result in the incurrence of, or assumption by us, of additional
indebtedness. Our future operating performance, ability to reduce operating
losses at Rocky Mountain Medical Center, ability to service or refinance the
senior subordinated exchange notes and ability to service and extend or
refinance the bank credit facility will be subject to future economic conditions
and to financial, business and other factors, many of which are beyond our
control.
On January 22, 2001, we filed a Registration Statement on Form S-1 with
the Securities and Exchange Commission, which we plan to amend on February 13,
2001, to register the sale of up to $213.6 million of our common stock, plus up
to an additional $32.0 million pursuant to the underwriter's over-allotment
options, through an underwritten public offering. We expect to complete the
public offering during the fiscal quarter ended March 31, 2001. If we are able
to successfully complete the public offering, we anticipate using the net
proceeds of the offering, which we currently estimate to be approximately $185.0
million (assuming no exercise of the underwriters over-allotment options), to
repay a portion of our outstanding indebtedness and possibly to fund purchases
of two hospital facilities we currently operate under a lease. Market conditions
or other unanticipated events could delay the public offering or cause us to
postpone or cancel the offering. We cannot assure you that we will be able to
complete the proposed public offering.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the three months ended December 31, 2000, there were no material
changes to our quantitative and qualitative disclosures about the market risk
associated with financial instruments as described in our Annual Report on Form
10-K for the year ended September 30, 2000. At December 31, 2000, the fair
market value of our outstanding senior subordinated exchange notes was $220.8
million, based upon quoted market prices as of that date.
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On October 26, 2000, we exchanged 160,000 shares of our mandatorily
redeemable Series A preferred stock and 5,311 shares of our mandatorily
redeemable Series B preferred stock for an aggregate of 1,653,110 shares of our
common stock. The exchange was exempt under Section 3(a)(9) of the Securities
Act, which exempts exchanges of securities solely between an issuer and its
security holders.
On November 29, 2000, we sold 1,081.9 shares of our common stock to one
of our former employees for $108,190 pursuant to the exercise of stock options.
On November 30, 2000, we sold 590.2 shares of our common stock to one of our
former employees for $59,018 pursuant to the exercise of stock options. On
December 15, 2000, we sold 14,524.4 shares of our common stock to certain of our
existing stockholders for aggregate consideration of $1,452,443. The shares
issued in each of the above transactions were issued in a private transaction
exempt under Section 4(2) of the Securities Act, which exempts sales of
securities that do not involve a public offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 29, 2000, the holders of our common stock approved our 2000
Stock Option Plan by action taken on written consent in lieu of a meeting.
The holders of approximately 88% of our outstanding common stock voted to
approve the plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
Exhibit 10.1 Amendment to Contract between Arizona Health Care Cost
Containment System Administration and Health Choice Arizona effective
October 1, 2000
Exhibit 10.2 Amendment to Stockholders Agreement dated December 19,
2000, by and among IASIS Healthcare Corporation, JLL Healthcare, LLC,
BTIP/Berenson Minella and Berenson Minella Investments LLC
(b) Reports on Form 8-K:
On November 17, 2000, the Company filed a Current Report on Form 8-K to
report that it had issued a press release announcing the date and time
of the online simulcast of its fiscal year-end 2000 conference call.
On November 21, 2000, the Company filed a Current Report on Form 8-K to
report that it had issued a press release announcing its earnings for
the fourth quarter and fiscal year ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IASIS HEALTHCARE CORPORATION
Date: February 12, 2001 By: /s/ John K. Crawford
----------------------------------------
John K. Crawford, Executive Vice
President and Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 Amendment to Contract between Arizona Health Care Cost
Containment System Administration and Health Choice
Arizona effective October 1, 2000
10.2 Amendment to Stockholders Agreement dated December 19,
2000, by and among IASIS Healthcare Corporation, JLL
Healthcare, LLC, BTIP/Berenson Minella and Berenson
Minella Investments LLC
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