1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 6, 2001
REGISTRATION NO. 333-54086
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
IASIS HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 8062 76-0450619
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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)
------------------------
COPIES TO:
PHYLLIS G. KORFF JEFFREY BAGNER
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
FOUR TIMES SQUARE ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10036 NEW YORK, NEW YORK 10004
(212) 735-3000 (212) 859-8000
LEIGH WALTON
BASS, BERRY & SIMS PLC
315 DEADERICK STREET, SUITE 2700
NASHVILLE, TENNESSEE 37238
(615) 742-6200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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, please 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. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
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 delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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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 THAT 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
SECTION 8(a), MAY DETERMINE.
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2
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be
used in connection with a U.S. and Canadian offering of the registrant's common
stock and one to be used in connection with a concurrent international offering
of the common stock. The international prospectus will be identical to the U.S.
prospectus except that it will have a different front cover page, table of
contents page, underwriting section and back cover page. The U.S. prospectus is
included herein and is followed by the alternate pages to be used in the
international prospectus. The alternate pages to be used in the international
prospectus have been labeled "Alternate Page for International Prospectus."
3
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.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 6, 2001
PROSPECTUS
13,350,000 SHARES
[IASIS LOGO]
COMMON STOCK
----------------------
This is IASIS Healthcare Corporation's initial public offering. We are
selling all of the shares. The U.S. underwriters are offering 10,680,000 shares
in the U.S. and Canada and the international managers are offering 2,670,000
shares outside the U.S. and Canada.
We expect the public offering price to be between $14.00 and $16.00 per
share. Currently, no public market exists for the shares. After pricing of the
offering, the shares will trade on the New York Stock Exchange under the symbol
"IAS."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
----------------------
PER SHARE TOTAL
--------- -----
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to IASIS Healthcare.............. $ $
The U.S. underwriters may also purchase up to an additional 1,602,000
shares from us at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments. The
international managers may similarly purchase up to an additional 400,500 shares
from us.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares will be ready for delivery on or about , 2001.
----------------------
MERRILL LYNCH & CO. SALOMON SMITH BARNEY
BANC OF AMERICA SECURITIES LLC
CIBC WORLD MARKETS
DEUTSCHE BANC ALEXM BROWN
LEHMAN BROTHERS
JEFFERIES & COMPANY, INC. SUNTRUST EQUITABLE SECURITIES
----------------------
The date of this prospectus is , 2001.
4
Omitted Graphic and Image Material
The following graphic and image material is omitted from the form of the
prospectus filed electronically:
Inside Front Cover:
The IASIS Healthcare Corporation logo and a map of the contiguous United
States indicating the four states, Utah, Arizona, Texas and Florida, and six
markets, Salt Lake City, Utah, Phoenix, Arizona, Odessa, San Antonio and Port
Arthur, Texas, and Tampa-St. Petersburg, Florida, in which we operate. The map
shows the location of our 15 hospitals and five ambulatory surgery centers in
these markets, as well as our corporate headquarters near Nashville, Tennessee.
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TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
Risk Factors................................................ 8
Forward-Looking Statements.................................. 15
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Business.................................................... 36
Management.................................................. 57
Stock Ownership of Principal Stockholders and Management.... 64
Certain Relationships and Related Party Transactions........ 66
Description of Indebtedness................................. 69
Description of Our Capital Stock............................ 71
Shares Eligible for Future Sale............................. 74
Certain United States Federal Tax Consequences to Non-United
States Holders............................................ 76
Underwriting................................................ 79
Legal Matters............................................... 83
Experts..................................................... 83
Where You Can Find More Information......................... 83
Index to Financial Statements............................... F-1
Index to Unaudited Pro Forma and Pro Forma As Adjusted
Combined and Consolidated Financial Information........... P-1
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
6
PROSPECTUS SUMMARY
The following summary highlights some of the information from this
prospectus and may not contain all the information that is important to you. You
should read the entire prospectus, including the section entitled "Risk Factors"
and our consolidated and combined financial statements and related notes, before
deciding to invest in our common stock. In this prospectus, unless the context
otherwise requires a different meaning, all references to (1) "IASIS," "we,"
"our," "us," or "our company" are to IASIS Healthcare Corporation and its
subsidiaries, (2) "Paracelsus" are to Paracelsus Healthcare Corporation, (3)
"Tenet" are to Tenet Healthcare Corporation, (4) "Paracelsus hospitals" are to
the five hospitals that were owned by a subsidiary of Paracelsus in which we
acquired a controlling interest as part of a recapitalization transaction in
October 1999, and (5) "Tenet hospitals" are to the ten hospitals that we
acquired from Tenet in October 1999.
OUR COMPANY
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.
For the twelve months ended December 31, 2000, approximately 90% of our net
revenue was derived from markets within our regions that are growing at rates
above the national average. Additionally, our net revenue from hospital
operations is well balanced across these regions, with each region contributing
between 20% and 25% of our total net revenue. We also operate five ambulatory
surgery centers and a Medicaid managed health plan called Health Choice that
serves over 42,000 members in Arizona. For the twelve months ended December 31,
2000, we had total net revenue of $848.3 million and EBITDA of $124.1 million,
both excluding start-up results at one of our hospitals.
IASIS was formed in October 1999 through a series of transactions that were
arranged by Joseph Littlejohn & Levy, Inc. and members of our management team.
Joseph Littlejohn & Levy is the private equity firm that controls JLL
Healthcare, LLC, our largest stockholder. As part of a recapitalization
transaction, we acquired a controlling interest in a subsidiary of Paracelsus
that owned five hospitals and other related assets. Following this transaction,
we also acquired ten hospitals and other related assets from Tenet.
Since October 1999, we have put in place an experienced senior management
team under whose leadership we have:
- developed strategic plans for each of our markets and facilities;
- recruited additional physicians to our hospitals;
- expanded and improved our facilities and services;
- installed standardized clinical and financial information systems in 11
of our 15 hospitals;
- strengthened our local management teams; and
- initiated company-wide compliance and quality assurance programs.
As a result of these initiatives, during the twelve months ended December 31,
2000, we achieved net revenue growth of 8.5% and an increase in patient
admissions of 8.6% compared to the pro forma twelve months ended December 31,
1999, both excluding start-up results at one of our hospitals.
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BUSINESS STRATEGY
Our objective is to provide high quality, cost-effective healthcare
services in the communities we serve. The key elements of our business strategy
are:
- INCREASE OUR MARKET SHARE IN HIGH-GROWTH MARKETS. Most of our hospitals
are located in high-growth markets that are expected to experience
population growth rates through 2005 in excess of the national average.
We intend to increase our market share in our existing markets through
organic growth and selective acquisitions.
- RECRUIT AND RETAIN QUALITY PHYSICIANS. We intend to continue to recruit
and retain quality physicians for our medical staffs and maintain their
loyalty to our facilities by:
- equipping our hospitals with technologically advanced equipment;
- sponsoring training programs to educate physicians on advanced medical
procedures;
- providing physicians with remote access to clinical information
through our new information systems; and
- enhancing physician convenience and access.
We also use our existing physician relationships to recruit new primary
care physicians and specialists. In addition, we are establishing local
physician advisory committees to work closely with our local management
teams and to advise us on facility- and market-specific needs and
strategies.
- INCREASE REVENUE BY EXPANDING OUR SERVICES. We analyze demographic and
patient data and consult with key physicians and payors to identify and
prioritize the healthcare needs of the communities we serve. In fiscal
2001, we intend to allocate approximately 80% of our capital expenditure
budget to expand services and purchase new equipment. Examples include:
- expanding emergency room and surgical capacity;
- upgrading and expanding specialty services, including cardiology,
orthopedics and obstetrics;
- updating our technology in imaging, diagnostic and other medical
equipment; and
- enhancing the convenience and quality of our outpatient services.
- PROVIDE HIGH QUALITY SERVICES. We believe the high quality of our
services differentiates our hospitals within their markets and provides
us with a competitive advantage. Between January 1, 1999 and February 1,
2001, six of our hospitals were surveyed by the Joint Commission on
Accreditation of Healthcare Organizations and the average of our scores,
some of which are preliminary, is 94. Additionally, in 2000, two of our
hospitals were recognized by the HCIA-Sachs Institute as being among the
"Top 100 Hospitals in America" for demonstrating superior clinical,
operational and financial performance.
- FOCUS ON OPERATIONAL EXCELLENCE. Our management team has extensive
multi-facility operating experience and focuses on operational excellence
at our facilities. We believe we can improve our operations and
profitability by:
- implementing case and resource management with a focus on efficient
staffing and supply utilization;
- capitalizing on purchasing efficiencies and reducing operating costs
through our relationship with Broadlane, a national group purchasing
organization;
- completing the installation of standardized information systems at
each of our facilities to provide us with more accurate, timely and
cost-effective clinical and financial information; and
- improving our billing and collection processes to increase cash flow
and reduce bad debt expenses.
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8
- CONTINUE TO DEVELOP FAVORABLE MANAGED CARE RELATIONSHIPS. We plan to
increase patient volume at our facilities and improve our profitability
by negotiating more favorable terms with managed care plans and, where
desirable, entering into contracts with additional managed care plans. We
believe that we will be able to negotiate more favorable terms by
marketing facility-specific strengths that demonstrate:
- the quality and breadth of our services;
- the expertise of our physicians; and
- convenient patient access.
We also organize our hospitals as networks to strengthen our market
presence and more effectively deliver healthcare services, both of which
increase our attractiveness to managed care plans.
- CONTINUE TO STRENGTHEN LOCAL MANAGEMENT TEAMS. We recruit experienced
senior managers to give our hospitals their own dedicated management
teams. Since October 1999, we have hired new executive managers at 10 of
our 15 hospitals. We believe a strong local management team at each
facility, including a chief executive officer, chief financial officer
and chief nursing officer, enhances physician and community relations. We
have developed a performance-based compensation program based upon the
achievement of qualitative and quantitative goals set forth in an
operating plan for each facility.
- SELECTIVELY PURSUE ACQUISITIONS AND STRATEGIC ALLIANCES. We intend to
selectively pursue hospital acquisitions in existing and new markets
where we believe we can improve the financial and operational performance
of the acquired hospital and enhance our regional presence. We intend to
target hospitals with 100 to 400 beds. We will focus our new market
development efforts in high-growth urban and suburban regions with stable
or improving managed care environments. In addition, we will continue to
identify opportunities to expand our presence through strategic alliances
with other healthcare providers.
INDUSTRY OVERVIEW
The U.S. Health Care Financing Administration estimated that in 1999 total
annual U.S. healthcare expenditures grew by 6.0% to $1.2 trillion. It projects
that total U.S. healthcare spending will grow by 6.5% annually from 2001 through
2008. By these estimates, healthcare expenditures will account for approximately
$2.2 trillion, or 16.2%, of the total U.S. gross domestic product by 2008.
Hospital services represents the largest segment of the healthcare
industry, accounting for 33% of total healthcare expenditures in 1999, or $401
billion. The U.S. Health Care Financing Administration projects the hospital
services category to grow by 5.7% per year through 2008. It expects growth in
hospital spending to continue due to the aging of the U.S. population and
consumer demand for expanded medical services. According to the American
Hospital Association, there are over 5,000 hospitals in the United States, of
which approximately 86% are owned by not-for-profit and government entities.
------------------------
Our principal executive offices are located at 113 Seaboard Lane, Suite
A-200, Franklin, Tennessee 37067 and our telephone number at that address is
(615) 844-2747. Our corporate website address is www.iasishealthcare.com.
Information contained on our website is not part of this prospectus.
3
9
THE OFFERING
Common stock offered by IASIS
U.S. offering............... 10,680,000 shares
International offering...... 2,670,000 shares
----------------
Total.................. 13,350,000 shares
Shares outstanding after this
offering......................... 45,282,528 shares
Use of proceeds.................. We estimate that our net proceeds from this
offering without exercise of the
over-allotment options will be
approximately $185.0 million. We intend to
use the net proceeds to repay a portion of
our outstanding indebtedness and possibly
to fund purchases of two hospital
facilities we currently operate under a
lease. See "Use of Proceeds."
Risk factors..................... See "Risk Factors" beginning on page 8 and
other information included in this
prospectus for a discussion of the factors
you should carefully consider before
deciding to invest in shares of our common
stock.
NYSE symbol...................... "IAS"
The number of shares outstanding after this offering excludes 7,158,280
shares of common stock reserved for issuance under our 2000 Stock Option Plan.
Of these reserved shares, 6,514,422 shares are issuable upon exercise of
outstanding stock options. Of these shares, 2,146,342 shares are issuable at an
exercise price of $9.52 per share, 2,439,413 shares are issuable at an exercise
price of $24.76 per share and 1,928,667 shares are issuable at an exercise price
of $40.00 per share.
Unless otherwise indicated, the information in this prospectus assumes:
- a 10.5-for-one common stock split prior to the closing of this offering
and the resulting restatement of all common share and per share data;
- no exercise of the underwriters' over-allotment options to purchase
2,002,500 additional shares of our common stock;
- no exercise of outstanding options to purchase our common stock; and
- an assumed offering price of $15.00 per share, which is the mid-point of
the range of the initial offering prices set forth on the cover page of
this prospectus.
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10
SUMMARY FINANCIAL AND OTHER DATA
The comparability of our financial and other data has been affected by the
change in our fiscal year from December 31 to September 30 during 1999, the
recapitalization involving the Paracelsus hospitals effective October 8, 1999
and the Tenet acquisition effective October 15, 1999. To facilitate comparisons,
summary financial and other data in the following tables has been presented for
(1) the nine months ended September 30, 2000, (2) our most recent fiscal year
ended September 30, 2000, (3) our most recent quarter ended December 31, 2000,
and (4) for selected operating data, the twelve months ended December 31, 2000,
and, in each case, the corresponding prior periods.
You should read the summary financial and other data below in conjunction
with our consolidated and combined financial statements, condensed and
consolidated unaudited financial statements, pro forma and pro forma as adjusted
consolidated and combined financial statements and their respective accompanying
notes.
The following table presents summary financial data for:
- the nine months and the year ended September 30, 1999 on a pro forma
basis, giving effect to the recapitalization of the Paracelsus hospitals,
the Tenet acquisition and the merger with a company formed by members of
our management as if these events had occurred on the first day of the
period;
- the nine months ended September 30, 2000 on an actual basis;
- the year ended September 30, 2000 (1) on a pro forma basis giving effect
to the recapitalization of the Paracelsus hospitals, the Tenet
acquisition and the merger with a company formed by members of our
management as if these events had occurred on October 1, 1999 and (2) on
a pro forma as adjusted basis giving effect to this offering;
- the three months ended December 31, 1999 on a pro forma basis giving
effect to the recapitalization of the Paracelsus hospitals, the Tenet
acquisition and the merger with a company formed by members of our
management as if these events had occurred on October 1, 1999; and
- the three months ended and as of December 31, 2000 (1) on an actual basis
and (2) on a pro forma as adjusted basis giving effect to this offering.
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ------------------------------------
PRO PRO PRO PRO FORMA
FORMA ACTUAL FORMA FORMA AS ADJUSTED
1999 2000 1999 2000 2000(A)
-------- ---------- -------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenue.............................. $581,466 $ 637,468 $763,848 $ 838,017 $ 838,017
Costs and expenses:
Salaries and benefits.................. 195,064 224,545 257,700 294,165 294,165
Supplies and other operating
expenses............................. 239,798 281,607 318,047 370,051 370,051
Provision for bad debts................ 43,765 47,350 57,436 60,949 60,949
Interest, net.......................... 49,192 47,977 65,589 65,084 45,960
Depreciation and amortization.......... 35,150 37,175 47,343 48,808 48,808
Allocated management fees.............. 11,112 -- 14,370 313 313
Recapitalization costs(b).............. -- 36 -- -- --
Loss on sale of accounts receivable.... 4,548 -- 4,548 2,191 2,191
-------- ---------- -------- ----------- -----------
Total costs and expenses............... 578,629 638,690 765,033 841,561 822,437
-------- ---------- -------- ----------- -----------
Earnings (loss) from continuing
operations before minority interests
and income taxes....................... 2,837 (1,222) (1,185) (3,544) 15,580
Minority interests....................... (622) 166 (232) (180) (180)
-------- ---------- -------- ----------- -----------
Earnings (loss) from continuing
operations before income taxes......... 3,459 (1,388) (953) (3,364) 15,760
Income tax expense....................... 1,384 2,219 -- 2,219 6,832
-------- ---------- -------- ----------- -----------
Net earnings (loss) from continuing
operations............................. $ 2,075 $ (3,607) $ (953) $ (5,583) $ 8,928
======== ========== ======== =========== ===========
Net earnings (loss) from continuing
operations attributable to common
stockholders(c)........................ $ -- $ (23,489) $ -- $ (5,583) $ 8,928
Basic and diluted net earnings (loss)
from continuing operations per common
share(c)............................... $ -- $ (1.63) $ -- $ (0.18) $ 0.20
Weighted average number of common shares
used for basic net earnings (loss) from
continuing operations per common
share(c)............................... -- 14,401,430 -- 31,434,863 44,784,863
Weighted average number of common and
common equivalent shares used for
diluted net earnings from continuing
operations per common share(c)......... -- -- -- -- 44,977,529
THREE MONTHS ENDED
DECEMBER 31,
---------------------------------------
PRO PRO FORMA
FORMA ACTUAL AS ADJUSTED
1999 2000 2000(A)
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenue.............................. $ 200,549 $ 219,369 $ 219,369
Costs and expenses:
Salaries and benefits.................. 69,620 77,085 77,085
Supplies and other operating
expenses............................. 88,444 97,131 97,131
Provision for bad debts................ 13,599 17,395 17,395
Interest, net.......................... 17,107 17,208 12,084
Depreciation and amortization.......... 11,633 14,108 14,108
Allocated management fees.............. 313 -- --
Recapitalization costs(b).............. -- -- --
Loss on sale of accounts receivable.... 2,191 -- --
----------- ----------- ----------
Total costs and expenses............... 202,907 222,927 217,803
----------- ----------- ----------
Earnings (loss) from continuing
operations before minority interests
and income taxes....................... (2,358) (3,558) 1,566
Minority interests....................... (346) 53 53
----------- ----------- ----------
Earnings (loss) from continuing
operations before income taxes......... (2,012) (3,611) 1,513
Income tax expense....................... -- -- 761
----------- ----------- ----------
Net earnings (loss) from continuing
operations............................. $ (2,012) $ (3,611) $ 752
=========== =========== ==========
Net earnings (loss) from continuing
operations attributable to common
stockholders(c)........................ $ (2,012) $ 21,737 $ 752
Basic and diluted net earnings (loss)
from continuing operations per common
share(c)............................... $ (0.07) $ 0.81 $ 0.02
Weighted average number of common shares
used for basic net earnings (loss) from
continuing operations per common
share(c)............................... 30,458,745 26,779,284 45,143,711
Weighted average number of common and
common equivalent shares used for
diluted net earnings from continuing
operations per common share(c)......... -- -- 45,631,810
(footnotes begin on page 7)
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AS OF DECEMBER 31, 2000
--------------------------
PRO FORMA
AS
ACTUAL ADJUSTED(d)
-------- --------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets................................................ $891,949 $890,949
Long-term debt and capital lease obligations, excluding
current maturities........................................ 560,322 376,322
Stockholders' equity........................................ 192,556 375,556
Working capital............................................. 79,170 79,170
SELECTED OPERATING DATA
The following table presents (1) pro forma combined operating data for our
acute care service and Health Choice business segments for the nine months ended
September 30, 1999 and for the three months ended December 31, 1999, (2) actual
operating data for our acute care service and Health Choice business segments
for the nine months ended September 30, 2000 and for the three months ended
December 31, 2000 and (3) pro forma and actual operating data for the twelve
months ended December 31, 1999 and 2000.
NINE MONTHS ENDED THREE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
--------------------- --------------------- --------------------
PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PERCENTAGE
1999 2000 1999 2000 1999 2000 CHANGE
--------- -------- --------- -------- --------- -------- ----------
(DOLLARS IN THOUSANDS)
FINANCIAL DATA:
ACUTE CARE SERVICE
ALL FACILITIES EXCLUDING ROCKY MOUNTAIN
MEDICAL CENTER
Net revenue............................. $518,522 $562,558 $178,275 $188,505 $696,797 $751,063 7.8%
EBITDA(e)............................... 84,597 90,493 25,473 30,049 110,070 120,542 9.5%
ROCKY MOUNTAIN MEDICAL CENTER
Net revenue............................. $ -- $ 4,463 $ -- $ 4,092 $ -- $ 8,555 --
EBITDA(e)............................... -- (8,917) -- (3,479) -- (12,396) --
HEALTH CHOICE
Net revenue............................. $ 62,944 $ 70,447 $ 22,274 $ 26,772 $ 85,218 $ 97,219 14.1%
EBITDA(e)............................... 2,582 2,390 909 1,188 3,491 3,578 2.5%
TOTAL
Net revenue............................. $581,466 $637,468 $200,549 $219,369 $782,015 $856,837 9.6%
EBITDA(e)............................... 87,179 83,966 26,382 27,758 113,561 111,724 (1.6)%
Adjusted EBITDA(e)...................... 87,179 92,883 26,382 31,237 113,561 124,120 9.3%
OPERATING DATA:
ACUTE CARE SERVICE
ALL FACILITIES EXCLUDING ROCKY MOUNTAIN
MEDICAL CENTER:
Number of hospitals at end of period.... 14 14 14 14 14 14 --
Number of operating beds at end of
period................................ 2,144 2,123 2,144 2,123 2,144 2,123 --
Average daily census(f)................. 898 942 880 940 893 941 5.4%
Average length of stay(g)............... 4.6 4.5 4.4 4.4 4.6 4.4 (2.7)%
Occupancy rates (average beds in
service).............................. 41.9% 44.2% 41.1% 44.3% 41.7% 44.2% 6.2%
Admissions(h)........................... 53,183 57,750 18,200 19,796 71,383 77,546 8.6%
Adjusted admissions(i).................. 85,376 93,810 29,632 31,391 115,008 125,201 8.9%
Patient days(j)......................... 245,029 258,012 80,985 86,442 326,014 344,454 5.7%
Adjusted patient days(i)................ 388,919 407,115 128,340 133,107 517,259 540,222 4.4%
(footnotes begin on following page)
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(a) The pro forma as adjusted statement of operations data for the year ended
September 30, 2000 and the three months ended December 31, 2000 give effect
to the sale of 13,350,000 shares of common stock in the offering and the
application of the estimated net proceeds from the offering to the repayment
of debt as described in "Use of Proceeds," as if they had occurred at the
beginning of the period presented.
(b) We incurred legal, accounting and other related charges in connection with
the recapitalization transaction. These non-recurring costs are not
reflected in the pro forma and pro forma as adjusted financial information.
(c) Includes preferred stock dividends and accretion of $19,882 for the nine
months ended September 30, 2000 (actual) and the reversal of preferred
stock dividends of $(25,348) for the three months ended December 31, 2000
(actual). Net earnings (loss) from continuing operations per common share
and the weighted average number of common and common equivalent shares for
the year ended September 30, 2000 (pro forma) and for the three months
ended December 31, 1999 (pro forma) give effect to the exchange of our
mandatorily redeemable Series A and Series B preferred stock for 17,357,671
shares of our common stock which occurred on October 26, 2000 as if the
exchange occurred at the beginning of the period presented. Net earnings
(loss) from continuing operations per common share and the weighted average
number of common and common equivalent shares for the year ended September
30, 2000 (pro forma as adjusted) and for the three months ended December
31, 2000 (pro forma as adjusted) give effect to this offering and the above
noted exchange of our preferred stock as if the exchange and the offering
occurred at the beginning of the period presented. Net earnings (loss) from
continuing operations per common share is not shown for any period ended
prior to October 1, 1999 as such periods represent combined financial
statements for entities under common control.
(d)The pro forma as adjusted balance sheet data as of December 31, 2000 gives
effect to the sale of 13,350,000 shares of common stock in this offering and
the application of the estimated net proceeds from the offering to the
repayment of debt, as described in "Use of Proceeds," as if these events
occurred as of December 31, 2000.
(e) EBITDA represents earnings from continuing operations before interest
expense, minority interests, income taxes, recapitalization costs and
depreciation and amortization. We define Adjusted EBITDA as EBITDA adjusted
for start up losses from Rocky Mountain Medical Center which was opened on
April 10, 2000. Because our 1999 results do not include Rocky Mountain
Medical Center, Adjusted EBITDA makes the 2000 period more comparable to the
1999 period. Although you should not consider EBITDA or Adjusted 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
and Adjusted EBITDA are commonly used to evaluate a company's financial
performance, especially in evaluating healthcare companies. EBITDA and
Adjusted EBITDA, as presented, may not be comparable to similarly titled
measures of other companies.
(f) Represents the average number of inpatients in our hospitals each day.
(g) Represents the average number of days that a patient stayed in our
hospitals.
(h) 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.
(i) 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 revenues and then dividing that number by gross inpatient revenues.
(j) Represents the number of days our beds were occupied over the period.
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RISK FACTORS
You should carefully consider the following factors in addition to the
other information in this prospectus before investing in our common stock.
RISKS RELATED TO OUR BUSINESS
IF WE ARE UNABLE TO ENTER INTO FAVORABLE CONTRACTS WITH MANAGED CARE PLANS, OUR
OPERATING REVENUE MAY BE REDUCED.
Our ability to negotiate favorable contracts with health maintenance
organizations, preferred provider organizations and other managed care plans
significantly affects the revenue and operating results of most of our
hospitals. Revenue derived from health maintenance organizations, preferred
provider organizations and other managed care plans accounted for approximately
38% of our net patient revenue for the fiscal year ended September 30, 2000. Our
future success will depend, in part, on our ability to renew existing managed
care contracts and enter into new managed care contracts on terms favorable to
us. Other healthcare companies, including some with greater financial resources,
greater geographic coverage or a wider range of services, may compete with us
for these opportunities. As of December 31, 2000, our hospitals received
payments under only one significant capitated contract, which generates
approximately $13.0 million of our revenue on an annualized basis. We receive
specific fixed periodic payments based on the number of members of the
organization we serve under this capitated contract, regardless of the actual
costs incurred and services provided by us. The payments we receive under this
capitated contract or any future capitated contracts we may enter into may not
be adequate to cover the costs of meeting the healthcare needs of the people
covered by these plans.
CHANGES IN GOVERNMENTAL PROGRAMS MAY SIGNIFICANTLY REDUCE OUR REVENUE.
Government healthcare programs, principally Medicare and Medicaid,
accounted for approximately 37% of our net revenue for the fiscal year ended
September 30, 2000, exclusive of revenue from Health Choice. 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 for certain services under many of these
government programs. Many changes imposed by the Balanced Budget Act of 1997 are
being phased in over a period of years. Certain rate reductions resulting from
the Balanced Budget Act of 1997 are being mitigated by the Balanced Budget
Refinement Act of 1999 and will be mitigated by the Benefits Improvement
Protection Act of 2000. Nonetheless, the Balanced Budget Act of 1997
significantly changed the method of payment under the Medicare and Medicaid
programs. This change has resulted, and we expect will continue to result, in
significant reductions in payments for our inpatient, outpatient, home health
and skilled nursing services. Final regulations implementing Medicare's new
prospective payment system for outpatient hospital services also were
promulgated recently. To date, our cash flows have been somewhat negatively
affected by the delays in processing our claims under this new system.
OUR HOSPITALS FACE COMPETITION FOR PATIENTS FROM OTHER HOSPITALS AND HEALTHCARE
PROVIDERS.
The hospital industry is highly competitive. Our hospitals face competition
for patients from other hospitals in our markets, large tertiary care centers
and outpatient service providers that provide similar services to those provided
by our hospitals. Some of the hospitals that compete with ours are owned by
governmental agencies or not-for-profit corporations supported by endowments and
charitable contributions and can finance capital expenditures and operations on
a tax-exempt basis. Some of our competitors are larger, are more established,
have greater geographic coverage, offer a wider range of services or have more
capital or other resources than we do. If our competitors are able to finance
capital improvements, recruit physicians, expand services or obtain favorable
managed care contracts at their facilities, we may experience a decline in
patient volume.
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OUR PERFORMANCE DEPENDS ON OUR ABILITY TO RECRUIT QUALITY PHYSICIANS.
The success of our hospitals depends on the following factors, among
others:
- the number and quality of the physicians on the medical staffs of our
hospitals;
- the admitting practices of those physicians; and
- our maintenance of good relations with those physicians.
We generally do not employ physicians. If we are unable to provide adequate
support personnel or technologically advanced equipment and facilities at our
hospitals that meet the needs of physicians, they may be discouraged from
referring patients to our facilities, which could adversely affect our
profitability.
OUR HOSPITALS FACE COMPETITION FOR STAFFING, WHICH MAY INCREASE OUR LABOR COSTS
AND REDUCE PROFITABILITY.
We compete with other healthcare providers in recruiting and retaining
qualified management and staff personnel responsible for the day-to-day
operations of each of our hospitals, including nurses and other non-physician
healthcare professionals. In some markets, the scarce availability of nurses and
other medical support personnel has become a significant operating issue to
healthcare providers. This shortage may require us to enhance wages and benefits
to recruit and retain nurses and other medical support personnel or to hire more
expensive temporary personnel. We also depend on the available labor pool of
semi-skilled and unskilled employees in each of the markets in which we operate.
If our labor costs increase, we may not be able to raise rates to offset these
increased costs. Because a significant percentage of our revenue consists of
fixed, prospective payments, our ability to pass along increased labor costs is
constrained. Our failure to recruit and retain qualified management, nurses and
other medical support personnel, or to control our labor costs could have a
material adverse effect on our profitability.
WE MAY CONTINUE TO HAVE OPERATING LOSSES AT ROCKY MOUNTAIN MEDICAL CENTER.
The census levels and resulting net revenue at Rocky Mountain Medical
Center have been significantly lower than we expected prior to opening the
hospital, principally as a result of what we believe to be exclusionary
contracting practices pursued in the Salt Lake City area by a competitor. We
believe these practices have had a material adverse effect on the business and
operations of Rocky Mountain Medical Center by precluding significant managed
care companies from contracting with Rocky Mountain Medical Center, thereby
preventing certain physicians and patients from using this facility. For the
fiscal year ended September 30, 2000 and the three months ended December 31,
2000, our operating expenses exceeded our net revenue by $9.0 million and $3.5
million, respectively, at Rocky Mountain Medical Center. We filed a lawsuit
against the competitor seeking damages and other remedies. This lawsuit is
currently pending. We executed managed care contracts that became effective as
of January 1, 2001 with two large managed care plans in Salt Lake City. These
plans previously did not contract with Rocky Mountain Medical Center. If we are
unsuccessful in growing revenue at Rocky Mountain Medical Center and reducing
its operating losses, we may be forced to significantly alter our plans and
strategies with respect to this hospital.
OUR SIGNIFICANT INDEBTEDNESS MAY LIMIT OUR ABILITY TO GROW AND COMPETE WITH
OTHER HOSPITAL COMPANIES.
As of December 31, 2000, we had total long-term debt of $560.3 million
excluding current maturities. After giving effect to this offering and assuming
that all the net proceeds will be used to repay outstanding indebtedness, we
will have approximately $376.3 million in total long-term debt excluding current
maturities. This represents approximately 49.8% of our total capitalization. The
amount of our outstanding indebtedness is large compared to the net book value
of our assets, and we have significant repayment obligations under our
outstanding debt. In addition, the outstanding indebtedness under our bank
credit facility bears interest at floating rates. Therefore, increases in
prevailing interest rates will increase our interest payment obligations.
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Our significant debt repayment obligations:
- limit our ability to use operating cash flow in other areas of our
business because we must use a substantial portion of these funds to make
principal and interest payments;
- increase our vulnerability to general adverse economic and industry
conditions because we must still meet our debt service obligations,
notwithstanding the fact that our revenue may have decreased; and
- limit our ability to obtain additional financing to fund future working
capital requirements, capital expenditures, acquisitions and other
general corporate requirements.
Our debt agreements contain financial covenants that restrict our ability
to incur additional indebtedness, make capital expenditures, and engage in
mergers, acquisitions and asset sales. If we breach any of the restrictions in
our debt agreements, we may have to immediately repay a significant portion of
our indebtedness. In addition, substantially all of our current stockholders
have pledged their common stock for the benefit of our lenders as security for
our obligations under our bank credit facility. In the event of a default under
our bank credit facility, our lenders would have the right to foreclose on the
common stock of our current stockholders, which would result in a change of
control of our company.
IF WE FAIL TO COMPLY WITH EXTENSIVE LAWS AND GOVERNMENT REGULATIONS, WE COULD
SUFFER PENALTIES OR BE REQUIRED TO MAKE SIGNIFICANT CHANGES TO OUR OPERATIONS.
The healthcare industry, including our company, is required to comply with
extensive and complex laws and regulations at the federal, state and local
government levels relating to, among other things:
- billing for services;
- relationships with physicians and other referral sources;
- adequacy of medical care;
- quality of medical equipment and services;
- qualifications of medical and support personnel;
- confidentiality, maintenance and security issues associated with medical
records;
- the screening, stabilization and transfer of patients who have emergency
medical conditions;
- licensure;
- operating policies and procedures; and
- addition of facilities and services.
Because many of these laws and regulations are relatively new, we do not
always have the benefit of significant regulatory or judicial interpretation of
these laws and regulations. In the future, different interpretations or
enforcement of these laws and regulations could subject our current or past
practices to allegations of impropriety or illegality or could require us to
make changes in our facilities, equipment, personnel, services, capital
expenditure programs and operating expenses.
If we fail to comply with applicable laws and regulations, we could be
subjected to liabilities, including:
- criminal penalties;
- civil penalties, including the loss of our licenses to operate one or
more of our facilities; and
- exclusion of one or more of our facilities from participation in the
Medicare, Medicaid and other federal and state healthcare programs.
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STATE EFFORTS TO REGULATE THE CONSTRUCTION OR EXPANSION OF HOSPITALS COULD
IMPAIR OUR ABILITY TO OPERATE AND EXPAND OUR OPERATIONS.
Some states require healthcare providers to obtain prior approval, known as
certificates of need, for:
- the purchase, construction or expansion of healthcare facilities;
- capital expenditures exceeding a prescribed amount; or
- changes in services or bed capacity.
In giving approval, these states consider the need for additional or expanded
healthcare facilities or services. Florida is the only state in which we
currently own hospitals that has certificate of need laws. The failure to obtain
any required certificate of need could impair our ability to operate or expand
operations.
PROVIDERS IN THE HEALTHCARE INDUSTRY HAVE BEEN THE SUBJECT OF FEDERAL AND STATE
INVESTIGATIONS, AND WE MAY BECOME SUBJECT TO INVESTIGATIONS IN THE FUTURE.
Both federal and state government agencies have heightened and coordinated
civil and criminal enforcement efforts as part of numerous ongoing
investigations of hospital companies, as well as their executives and managers.
These investigations relate to a wide variety of topics, including:
- referral, cost reporting and billing practices;
- laboratory and home healthcare services; and
- physician ownership and joint ventures involving hospitals.
Amendments in 1986 to the federal False Claims Act have made it easier for
private parties to bring "qui tam" whistleblower lawsuits against companies.
Some states have adopted similar state whistleblower and false claims
provisions.
The Office of the Inspector General of the U.S. Department of Health and
Human Services and the Department of Justice have, from time to time,
established national enforcement initiatives that focus on specific billing
practices or other suspected areas of abuse. Initiatives include a focus on
hospital billing for outpatient charges associated with inpatient services, as
well as hospital laboratory billing practices.
Some of our activities could become the subject of governmental
investigations or inquiries. For example, we have significant Medicare and
Medicaid billings, we provide some durable medical equipment and home healthcare
services, we have joint venture arrangements involving physician investors and
we have one hospital that has physician investors. In addition, our executives
and managers, many of whom have worked at other healthcare companies that are or
may become the subject of federal and state investigations and private
litigation, could be included in governmental investigations or named as
defendants in private litigation. We are not aware of any material governmental
investigations involving any of our facilities, our executives or managers. Any
future investigations of us, our executives or managers could result in
significant liabilities or penalties to us, as well as adverse publicity.
WE HAVE A LIMITED OPERATING HISTORY.
Some of our current management team began operating our hospitals in
October 1999. Other members of our key hospital management team have joined us
since then. Additionally, David R. White became chief executive officer of our
company on December 1, 2000, having served as our Chairman since October 1999.
As a result, although the individual members of our management team have
experience managing large groups of hospitals, they have limited experience
managing our hospitals and working together as a single management team.
Therefore, you should evaluate our business operations in view of the risks,
uncertainties, delays and difficulties associated with a new company.
In addition, our lack of operating history may make it difficult for
investors to evaluate our business and financial condition. We have only been
operating all of our facilities together for one full fiscal year and therefore
we do not have complete comparative historical financial information with which
to evaluate
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our performance. We have provided pro forma financial and other data for the
nine months ended September 30, 1999, the years ended September 30, 1999 and
2000, and the three months ended December 31, 1999, but such data is not
necessarily indicative of what our performance would have been had we owned all
of our facilities during such periods. In addition, much of our historical
information was prepared by the prior owners of our facilities.
IF WE FAIL TO SUCCESSFULLY IMPLEMENT AND INTEGRATE OUR INFORMATION SYSTEMS AT
OUR HOSPITALS, OUR EXPENSES COULD INCREASE, AND OUR CASH FLOWS COULD BE
NEGATIVELY AFFECTED.
Our success is dependent in part on our access to sophisticated information
systems and our ability to successfully implement and integrate these systems
into our operations. We recently have converted and upgraded our information
systems in 11 of our 15 hospitals, and plan to complete similar conversions at
our remaining hospitals by December 31, 2001. These systems are essential to the
following areas of our business operations, among others:
- patient accounting, including billing and collection of net revenue;
- financial, accounting, reporting and payroll;
- coding and compliance;
- laboratory, radiology and pharmacy systems;
- medical records and document storage;
- inventory management; and
- negotiating, pricing and administering managed care contracts.
If we are unable to successfully implement and integrate these systems, we may
experience delays in collection of net revenue and may not be able to realize
anticipated cost savings.
SIGNIFICANT COMPETITION FROM OTHER HEALTHCARE COMPANIES AND STATE EFFORTS TO
REGULATE THE SALE OF NOT-FOR-PROFIT HOSPITALS MAY AFFECT OUR ABILITY TO ACQUIRE
HOSPITALS.
One element of our business strategy is to expand through selective
acquisitions of hospitals in our existing markets and in new high-growth
markets. We compete for acquisitions with other healthcare companies, some of
which have greater competitive advantages or financial resources than us.
Therefore, we may not be able to acquire hospitals on terms favorable to us or
at all. Additionally, many states, including some where we have hospitals and
others where we may in the future acquire hospitals, have adopted legislation
regarding the sale or other disposition of hospitals operated by not-for-profit
entities. In other states that do not have specific legislation, the attorneys
general have demonstrated an interest in these transactions under their general
obligations to protect charitable assets from waste. These legislative and
administrative efforts focus primarily on the appropriate valuation of the
assets divested and the use of the proceeds of the sale by the not-for-profit
seller. These review and approval processes can add time to the closing of an
acquisition of a not-for-profit hospital and future actions on the state level
could seriously delay or even prevent our ability to acquire not-for-profit
hospitals in the future.
DIFFICULTIES WITH THE INTEGRATION OF ACQUISITIONS MAY DISRUPT OUR ONGOING
OPERATIONS.
If we are able to make acquisitions, we cannot guarantee that we will be
able to effectively integrate the acquired facilities with our existing
operations. The process of integrating acquired hospitals may require a
disproportionate amount of management's time and attention, potentially
distracting management from its day-to-day responsibilities. In addition, poor
integration of acquired facilities could cause interruptions to our business
activities, including those of the acquired facilities. As a result, we may not
realize all or any of the anticipated benefits of an acquisition and we may
incur significant costs related to the acquisitions or integration of these
facilities. In addition, we may acquire hospitals that have unknown or
contingent liabilities, including liabilities for failure to comply with
healthcare laws and regulations.
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Although we seek indemnification from prospective sellers covering these
matters, we may nevertheless have material liabilities for past activities of
acquired hospitals.
IF ANY ONE OF THE REGIONS IN WHICH WE OPERATE EXPERIENCES AN ECONOMIC DOWNTURN
OR OTHER MATERIAL CHANGE, OUR OVERALL BUSINESS RESULTS MAY SUFFER.
Of our 15 acute care hospitals, five are located in Salt Lake City, three
are located in Phoenix, three are located in Tampa-St. Petersburg, and four are
located in the State of Texas. For the twelve months ended December 31, 2000,
our net revenue was generated as follows:
OPERATIONS NET REVENUE
---------- -----------
Salt Lake City........................... 25%
Phoenix.................................. 22%
Tampa-St. Petersburg..................... 20%
Texas.................................... 21%
Health Choice and other.................. 12%
Any material change in the current demographic, economic, competitive or
regulatory conditions in any of these regions could adversely affect our overall
business results because of the significance of our operations in each of these
regions to our overall operating performance. Moreover, due to the concentration
of our revenue in only four regions, our business is not diversified and,
therefore, is subject to greater market risks than some competing multi-facility
healthcare companies.
WE MAY BE SUBJECT TO LIABILITIES BECAUSE OF CLAIMS BROUGHT AGAINST OUR
FACILITIES.
Plaintiffs frequently bring actions against hospitals and other healthcare
providers, alleging malpractice, product liability or other legal theories. Many
of these actions involve large claims and significant defense costs. We maintain
professional malpractice liability insurance and general liability insurance in
amounts we believe are sufficient to cover claims arising out of the operations
of our facilities. Some of the claims, however, could exceed the scope of the
coverage in effect or coverage of particular claims or damages could be denied.
Our insurance coverage may not continue to be available at a reasonable cost.
SHOULD WE BE UNABLE TO CONTROL HEALTHCARE COSTS AT HEALTH CHOICE, OUR
PROFITABILITY MAY BE ADVERSELY AFFECTED.
During the fiscal year ended September 30, 2000, our Health Choice health
plan generated approximately 11% of our net revenue and 3% of our EBITDA. Health
Choice derives substantially all of its net revenue through a contract with the
Arizona Health Care Cost Containment System, which is the state agency that
administers Arizona's Medicaid program. The Arizona Health Care Cost Containment
System sets the capitated rates we receive at Health Choice and Health Choice
subcontracts with physicians, hospitals and other healthcare providers to
provide services to its enrollees. If we fail to effectively manage healthcare
costs, these costs may exceed the payments we receive. Many factors can cause
actual healthcare costs to exceed the capitated rates set by the Arizona Health
Care Cost Containment System, including:
- our ability to contract with cost-effective healthcare providers;
- the increased cost of individual healthcare services;
- the type and number of individual healthcare services delivered; and
- the occurrence of catastrophes, epidemics or other unforeseen
occurrences.
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RISKS RELATED TO THIS OFFERING
JOSEPH LITTLEJOHN & LEVY CONTROLS OUR COMPANY AND ITS INTERESTS MAY CONFLICT
WITH YOUR INTERESTS AS A STOCKHOLDER.
JLL Healthcare, LLC, which is controlled by an affiliate of Joseph
Littlejohn & Levy, Inc., will beneficially own approximately 62% of our
outstanding common stock after this offering. As a result of its voting power,
JLL Healthcare will be in a position to elect our board of directors and control
all matters affecting us, including any determination with respect to:
- our direction and policies;
- any merger, consolidation or sale of all or substantially all of our
assets;
- future issuances of common stock, preferred stock or other securities;
- future incurrence of debt; and
- any dividends on our common stock or preferred stock.
Accordingly, this concentration of control gives JLL Healthcare the ability to
prevent a change of control or a business combination of our company.
BECAUSE THE INITIAL PUBLIC OFFERING PRICE OF OUR COMMON STOCK EXCEEDS OUR NET
TANGIBLE BOOK VALUE PER SHARE, INVESTORS WILL EXPERIENCE IMMEDIATE AND
SUBSTANTIAL DILUTION.
Our existing stockholders acquired their shares of common stock at an
average cost substantially below the initial public offering price. As a result,
purchasers of the common stock in the offering will experience immediate and
substantial dilution in the amount of $13.88 per share.
IF EXISTING STOCKHOLDERS SELL THEIR COMMON STOCK, YOU COULD LOSE A SIGNIFICANT
PART OF YOUR INVESTMENT.
Sales of a substantial number of shares of our common stock into the public
market after this offering, or the perception that these sales could occur,
could have a material adverse effect on our stock price. Immediately prior to
this offering, there were 31,932,528 shares of our common stock outstanding. We
have granted our existing stockholders demand rights, subject to some
conditions, to cause us to file, at our expense, a registration statement under
the Securities Act covering resales of their shares. These shares will represent
approximately 71% of our outstanding common stock after this offering. JLL
Healthcare and, if approved by JLL Healthcare pursuant to the stockholders
agreement, our other existing stockholders may sell their shares under Rule 144
of the Securities Act if the requirements of that rule are satisfied. Our
executive officers, directors and holders of substantially all of our currently
outstanding shares and options have agreed, with exceptions, not to sell or
transfer any of our common stock for 180 days after the date of this prospectus
without first obtaining the prior written consent of Merrill Lynch.
IF OUR STOCK PRICE FLUCTUATES AFTER THE INITIAL OFFERING, YOU COULD LOSE A
SIGNIFICANT PART OF YOUR INVESTMENT.
Prior to this offering, there has been no public market for our common
stock. The shares have been approved for listing on the New York Stock Exchange
under the symbol "IAS." We do not know if an active trading market will develop
for our common stock or how the common stock will trade in the future. We will
determine the initial public offering price through negotiation with our
underwriters. However, you may not be able to resell your shares at or above the
initial public offering price because of fluctuations in the market price of our
common stock resulting from changes in our operating performance or prospects,
changes in interest rates, changes in analyst earnings estimates or
recommendations. In addition, the stock market in general has experienced
extreme volatility that often has been unrelated to the operating performance or
prospects of particular companies.
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WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS IN THE NEAR FUTURE.
We do not anticipate paying cash dividends in the foreseeable future. In
addition, the terms of our outstanding debt restrict our ability to pay cash
dividends on our common stock. Any future indebtedness we may incur to refinance
our existing debt or to fund future growth may prohibit or limit our ability to
pay dividends.
IF PROVISIONS IN OUR CORPORATE DOCUMENTS AND DELAWARE LAW DELAY OR PREVENT A
CHANGE IN CONTROL OF OUR COMPANY, WE MAY BE UNABLE TO CONSUMMATE A TRANSACTION
THAT OUR STOCKHOLDERS CONSIDER FAVORABLE.
Our certificate of incorporation and by-laws may discourage, delay or
prevent a merger or acquisition involving us that our stockholders may consider
favorable by:
- authorizing the issuance of preferred stock, the terms of which may be
determined at the sole discretion of the board of directors; and
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at meetings.
Delaware law also may discourage, delay or prevent someone from acquiring or
merging with us.
FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus are forward-looking statements.
We generally identify forward-looking statements in this prospectus using words
like "believe," "intend," "expect," "estimate," "may," "should," "plan,"
"project," "contemplate," "anticipate," "predict" or similar expressions. 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 known and unknown risks and uncertainties that may cause actual results
in future periods to differ materially from those anticipated in the forward-
looking statements. Those risks and uncertainties include the risks and
uncertainties discussed under the caption "Risk Factors" in this prospectus.
Although we believe that the assumptions underlying the forward-looking
statements contained in this prospectus 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 prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included in this prospectus, 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. Except as required by applicable
law, including the securities laws of the United States, and the rules and
regulations of the Securities and Exchange Commission, we do not plan to
publicly update or revise any forward-looking statements after we distribute
this prospectus, whether as a result of any new information, future events or
otherwise.
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USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the 13,350,000
shares of common stock that we are offering will be approximately $185 million,
after deducting the underwriting discount and estimated offering expenses, or
approximately $213 million if the underwriters' over-allotment options are
exercised in full. We will use the net proceeds from this offering to repay a
portion of our outstanding indebtedness and possibly to fund purchases of two
hospital facilities we currently operate under a lease. Unless otherwise
indicated, all information in this prospectus assumes that we will use all of
the net proceeds from this offering to repay outstanding indebtedness under our
bank credit facility.
Our bank credit facility consists of a revolving credit facility and
tranche A and tranche B term loans. We may reborrow any amounts repaid under the
revolving credit facility for working capital and other general corporate
purposes. Amounts repaid under the term loans may not be reborrowed. Under the
terms of our bank credit facility, the tranche A and B term loans must be repaid
on a pro rata basis based upon the outstanding principal amount of each loan.
Additionally, we will have to pay a 1% prepayment premium on the prepaid
principal amount of the tranche B loan. Our revolving credit facility and
tranche A term loan bear interest at either the Morgan Guaranty Trust Company of
New York's alternate base rate, plus a margin ranging from 1.00% to 2.50%, or
its reserve-adjusted Eurodollar rate, plus a margin ranging from 2.00% to 3.50%,
both depending on our leverage ratio. The revolving credit facility terminates
and the tranche A term loan matures on September 30, 2004. The tranche B term
loan bears interest at the alternate base rate, plus 3.25%, or the
reserve-adjusted Eurodollar rate, plus 4.25%. The tranche B loan matures on
September 30, 2006. The weighted average interest rate on our bank credit
facility was approximately 11.1% at December 31, 2000.
We have $230.0 million in 13% senior subordinated notes due October 15,
2009. We have the option, subject to the consent of our senior lenders, to use a
portion of the net proceeds from this offering to redeem up to 35% of the notes
at a redemption price of 113% of the principal amount of the notes, plus accrued
unpaid interest to the redemption date.
We are currently negotiating to acquire two hospital facilities that we
currently operate under a lease agreement for approximately $55 million. Annual
rent payments for these hospitals are currently approximately $7.7 million. We
cannot assure you that we will be able to reach an agreement to purchase these
facilities. If we are unable to reach an agreement to purchase these facilities,
we will use all of the net proceeds from this offering to repay outstanding
indebtedness. Our bank credit facility does not permit us to acquire these
facilities without the consent of our lenders.
Until used to repay indebtedness or fund the purchase of these facilities,
we will invest the net proceeds of this offering in short-term, investment grade
securities.
DIVIDEND POLICY
We have not declared or paid a cash dividend on our common stock and do not
anticipate paying cash dividends in the foreseeable future. We currently retain
all earnings to support operations and finance expansion. Any determination to
declare dividends on our capital stock will depend upon our operating results,
market conditions and other factors deemed relevant by our board of directors.
Our bank credit facility restricts our ability to pay cash dividends on our
common stock, and the indenture governing our senior subordinated notes
currently prohibits the payment of cash dividends on our common stock.
16
22
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2000
on an actual basis and on a pro forma as adjusted basis giving effect to the
sale of 13,350,000 shares of our common stock in this offering and application
of the net proceeds to repay outstanding indebtedness under our bank credit
facility as if these events had occurred as of December 31, 2000. See "Use of
Proceeds" on page 16. The information in the following table gives effect to an
increase in authorized shares and a 10.5-for-one common stock split.
AS OF DECEMBER 31, 2000
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
--------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Long-term debt:
Bank credit facility:(a)
Revolving credit loans................................. $ 16,500 $ --
Term loans............................................. 325,000 157,500
Senior subordinated notes due 2009........................ 230,000 230,000
Capital lease obligations................................. 1,279 1,279
--------- ---------
Total debt............................................. 572,779 388,779
Less current maturities................................... (12,457) (12,457)
--------- ---------
Total long-term debt................................... 560,322 376,322
--------- ---------
Minority interest........................................... 2,075 2,075
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding actual and
pro forma as adjusted.................................. -- --
Common stock, $.01 par value, 100,000,000 shares
authorized; 31,932,016 shares issued and outstanding
actual; 45,282,016 shares issued and outstanding pro
forma as adjusted...................................... 319 453
Nonvoting common stock, $.01 par value, 10,000,000 shares
authorized; no shares issued and outstanding actual and
pro forma as adjusted.................................. -- --
Additional paid-in capital................................ 450,215 635,081
Treasury stock, at cost, 16,277,625 shares actual and pro
forma as adjusted...................................... (155,025) (155,025)
Accumulated deficit(b).................................... (102,953) (104,953)
--------- ---------
Total stockholders' equity.................................. 192,556 375,556
--------- ---------
Total capitalization........................................ $ 754,953 $ 753,953
========= =========
- ---------------
(a) The bank credit facility includes tranche A and tranche B term loans and a
revolving credit facility. For more information about our bank credit
facility, see "Description of Indebtedness" beginning on page 69.
(b)Pro forma as adjusted accumulated deficit reflects the write-off of $1.0
million of deferred financing costs, net of related tax benefits, as a result
of the reduction in borrowing capacity under the bank credit facility.
The table above excludes:
- 6,543,851 shares of common stock issuable upon exercise of options
outstanding at December 31, 2000; and
- an additional 643,858 shares of common stock reserved for issuance under
our 2000 Stock Option Plan at December 31, 2000.
17
23
DILUTION
Our net tangible book deficit as of December 31, 2000 was approximately
$133.5 million, or $4.18 per share of common stock. Net tangible book value
(deficit) per share represents the amount of total tangible assets less total
liabilities, divided by the shares of common stock outstanding as of December
31, 2000. After giving effect to the issuance and sale of the 13,350,000 shares
of common stock in this offering, and after deducting the underwriting discount
and the estimated offering expenses payable by us, our pro forma net tangible
book value as of December 31, 2000 would have been $50.5 million, or $1.12 per
share of common stock. This represents an immediate increase in pro forma net
tangible book value of $5.30 per share of common stock to existing stockholders
and an immediate dilution of $13.88 per common share to new investors purchasing
shares of common stock in this offering. The following table illustrates this
per share dilution:
Initial public offering price per share..................... $15.00
Net tangible book (deficit) per share as of December 31,
2000................................................... $(4.18)
Increase in net tangible book value per share attributable
to new investors....................................... 5.30
Pro forma net tangible book value per share after
offering.................................................. 1.12
------
Dilution per share to new investors......................... $13.88
======
The following table summarizes the differences between the number of shares
of common stock purchased from us, the aggregate effective cash consideration
paid and the average price per share paid by existing stockholders and new
investors purchasing shares of common stock in this offering:
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
Existing stockholders..... 31,932,016 70.5% $303,992,792 60.3% $ 9.52
New investors............. 13,350,000 29.5 200,250,000 39.7 15.00
---------- ----- ------------ -----
Total................ 45,282,016 100.0% $504,242,792 100%
========== ===== ============ =====
The foregoing discussion and table assumes no exercise of any stock options
outstanding at December 31, 2000. To the extent that any of these options are
exercised, there will be further dilution to the new investors. As of December
31, 2000, there were options outstanding to purchase an aggregate of 6,543,851
shares of our common stock, of which 1,380,851 were then vested and exercisable.
As of December 31, 2000, 2,175,771 of these shares were issuable at an exercise
price of $9.52 per share, 2,439,413 of these shares were issuable at an exercise
price of $24.76 per share and 1,928,667 of these shares were issuable at an
exercise price of $40.00 per share. Following December 31, 2000, options to
purchase 29,429 of these shares were exercised.
18
24
SELECTED FINANCIAL DATA
We derived the selected financial data 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. We
derived the selected financial data for the nine months ended September 30, 1998
from the unaudited condensed combined financial statements of the Paracelsus
hospitals.
We derived the selected financial data for the fiscal year ended September
30, 2000 from our consolidated and combined financial statements, which have
been audited by Ernst & Young LLP and include financial data for the Tenet
hospitals from October 15, 1999, their date of acquisition. We derived the
selected financial data for the three months ended December 31, 1999, which
include financial data for the Tenet hospitals from October 15, 1999, their date
of acquisition, and for the three months ended December 31, 2000 from our
unaudited condensed and consolidated financial statements. The unaudited
condensed and consolidated financial statements and the unaudited condensed
combined financial statements reflect all adjustments that, in the opinion of
our management, are necessary for a fair presentation of such information.
You should read the selected financial data in the tables below in
conjunction with our consolidated and combined financial statements, unaudited
condensed and consolidated financial statements and the accompanying notes. You
should also read Management's Discussion and Analysis of Financial Condition and
Results of Operations. All of these materials are contained elsewhere in this
prospectus.
PARACELSUS HOSPITALS IASIS
--------------------------------------------------------------------------- -------------
PREDECESSOR
COMPANY
--------------
PERIOD FROM PERIOD FROM
JANUARY 1, DATE OF YEARS ENDED NINE MONTHS ENDED YEAR ENDED
1996 TO ACQUISITION TO DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
DATE OF DECEMBER 31, ------------------- ------------------- -------------
ACQUISITION(A) 1996(B) 1997(C) 1998 1998 1999 2000(C)
-------------- -------------- -------- -------- -------- -------- -------------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenue..................... $ 88,886 $ 98,249 $186,263 $178,309 $134,017 $137,397 $ 815,163
Costs and expenses:
Salaries and benefits......... 32,087 41,040 63,902 63,158 47,306 47,169 285,451
Supplies and other operating
expenses.................... 32,377 43,343 71,609 71,346 55,073 56,846 357,552
Provision for bad debts....... 6,032 7,382 16,488 11,822 8,131 9,934 60,579
Interest, net................. 6,125 8,465 22,097 17,088 13,426 7,304 62,352
Depreciation and
amortization................ 4,031 6,863 11,122 11,770 8,606 9,620 47,559
Allocated management fees..... 2,822 3,839 7,519 6,587 4,940 5,027 --
Recapitalization costs(d)..... -- -- -- -- -- -- 3,478
Restructuring and impairment
charges(e).................. -- 52,492 -- -- -- -- --
Loss contract accrual(f)...... -- 38,082 -- -- -- -- --
Reversal of excess loss
contract accrual(f)......... -- -- (15,531) (7,500) (7,500) -- --
Cost of hospital closure(g)... -- -- 3,500 -- -- -- --
-------- -------- -------- -------- -------- -------- ---------
Total costs and expenses...... 83,474 201,506 180,706 174,271 129,982 135,900 816,971
-------- -------- -------- -------- -------- -------- ---------
Earnings (loss) from continuing
operations before minority
interests and income taxes.... 5,412 (103,257) 5,557 4,038 4,035 1,497 (1,808)
Minority interests.............. -- -- 23 68 54 (140) 74
-------- -------- -------- -------- -------- -------- ---------
Earnings (loss) from continuing
operations before income
taxes......................... 5,412 (103,257) 5,534 3,970 3,981 1,637 (1,882)
Income tax expense (benefit).... 2,116 (9,210) -- -- -- -- 2,219
-------- -------- -------- -------- -------- -------- ---------
Net earnings (loss) from
continuing operations......... $ 3,296 $(94,047) $ 5,534 $ 3,970 $ 3,981 $ 1,637 $ (4,101)
======== ======== ======== ======== ======== ======== =========
IASIS
---------------------
THREE MONTHS ENDED
DECEMBER 31,
---------------------
1999 2000
---------- --------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenue..................... $ 177,695 $219,369
Costs and expenses:
Salaries and benefits......... 60,906 77,085
Supplies and other operating
expenses.................... 75,945 97,131
Provision for bad debts....... 13,229 17,395
Interest, net................. 14,375 17,208
Depreciation and
amortization................ 10,384 14,108
Allocated management fees..... -- --
Recapitalization costs(d)..... 3,442 --
Restructuring and impairment
charges(e).................. -- --
Loss contract accrual(f)...... -- --
Reversal of excess loss
contract accrual(f)......... -- --
Cost of hospital closure(g)... -- --
---------- --------
Total costs and expenses...... 178,281 222,927
---------- --------
Earnings (loss) from continuing
operations before minority
interests and income taxes.... (586) (3,558)
Minority interests.............. (92) 53
---------- --------
Earnings (loss) from continuing
operations before income
taxes......................... (494) (3,611)
Income tax expense (benefit).... -- --
---------- --------
Net earnings (loss) from
continuing operations......... $ (494) $ (3,611)
========== ========
(footnotes begin on following page)
19
25
PARACELSUS HOSPITALS
-----------------------------------------------------
PREDECESSOR
COMPANY
--------------
PERIOD FROM PERIOD FROM
JANUARY 1, DATE OF YEARS ENDED
1996 TO ACQUISITION TO DECEMBER 31,
DATE OF DECEMBER 31, -------------------
ACQUISITION(A) 1996(B) 1997(C) 1998
-------------- -------------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Net earnings (loss) from
continuing operations
attributable to common
stockholders(h)........... -- -- -- --
Net earnings (loss) from
continuing operations per
common share(h)........... -- -- -- --
Weighted average number of
common shares............. -- -- -- --
Cash dividends declared per
common share.............. -- -- -- --
BALANCE SHEET DATA
(AT END OF PERIOD):
Total assets................ $256,288 $232,943 $216,319
Long-term debt and capital
lease obligations
(including current
portion).................. 1,565 2,019 2,273
Mandatorily redeemable
Series A and Series B
preferred stock(i)........ -- -- -- --
Stockholders' equity
(deficit)(i).............. (93,879) (89,115) (85,635)
Working capital............. 11,112 16,028 10,350
PARACELSUS HOSPITALS IASIS
-------------------- -----------------------------------------
NINE MONTHS ENDED YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
------------------- ------------- -------------------------
1998 1999 2000(C) 1999 2000
-------- -------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Net earnings (loss) from
continuing operations
attributable to common
stockholders(h)........... -- -- $ (29,503) $ (6,014) $ 21,737
Net earnings (loss) from
continuing operations per
common share(h)........... -- -- $ (2.10) $ (0.46) $ 0.81
Weighted average number of
common shares............. -- -- 14,077,192 13,101,074 26,779,284
Cash dividends declared per
common share.............. -- -- -- -- --
BALANCE SHEET DATA
(AT END OF PERIOD):
Total assets................ $222,458 $213,259 $ 873,839 $ 862,541 $ 891,949
Long-term debt and capital
lease obligations
(including current
portion).................. 1,269 1,499 557,654 561,289 572,779
Mandatorily redeemable
Series A and Series B
preferred stock(i)........ -- -- 189,278 169,443 --
Stockholders' equity
(deficit)(i).............. (85,568) (84,585) 5,431 38,101 192,556
Working capital............. 17,433 3,687 65,018 82,761 79,170
- ---------------
(a) Represents the results of operations of Davis Hospital and Medical Center
and Pioneer Valley Hospital from January 1, 1996 to May 17, 1996, the date
Paracelsus acquired these hospitals.
(b) Represents the results of operations of Davis Hospital and Medical Center,
Pioneer Valley Hospital and Rocky Mountain Medical Center, formerly known as
PHC Regional Hospital and Medical Center, from May 17, 1996, the date
Paracelsus acquired these hospitals, through December 31, 1996, and the
results of operations of Salt Lake Regional Medical Center and Jordan Valley
Hospital from August 16, 1996, the date Paracelsus acquired these hospitals,
through December 31, 1996.
(c) Rocky Mountain Medical Center was closed on June 30, 1997 by Paracelsus. We
reopened the facility on April 10, 2000.
(d) We incurred legal, accounting and other related charges of approximately
$3.5 million in connection with the recapitalization transaction.
(e) During 1996, Paracelsus recorded an impairment charge of approximately
$52.5 million due to significant losses incurred at Rocky Mountain Medical
Center. The charge was based upon independent third party appraisals.
(f) The loss reserve of approximately $38.1 million initially recorded in 1996
in connection with an unprofitable capitated Medicare managed care contract
at Rocky Mountain Medical Center was reduced by approximately $15.5 million
in 1997 and by $7.5 million in 1998 based on the final settlement of the
unprofitable contract.
(g) In June 1997, Paracelsus recorded a charge of $3.5 million due to the
closure of Rocky Mountain Medical Center.
(h) Includes preferred stock dividends accrued (reversed) and accretion of
$25,402, $5,520 and $(25,348) for the year ended September 30, 2000, and the
three months ended December 31, 1999 and 2000, respectively. Net earnings
(loss) from continuing operations per common share is not shown for any
period ended prior to October 1, 1999 as such periods represent combined
financial statements for entities under common control.
(i) 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 was
recorded in the quarter ended December 31, 2000, and increased our
stockholders' equity by approximately $189.3 million.
20
26
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 audited consolidated and
combined financial statements and related notes, the unaudited condensed and
consolidated financial statements and related notes and the other financial
information appearing elsewhere in this prospectus. Data for the nine months
ended September 30, 1998, the year ended September 30, 1999 and the three months
ended December 31, 1999 and 2000 is unaudited. Data for the nine months ended
September 30, 1998 and the year ended September 30, 1999 has been derived from
the unaudited condensed combined financial statements of the Paracelsus
hospitals. Data for the nine months ended September 30, 1999 has been derived
from the audited combined financial statements of Paracelsus. Data for the
fiscal year ended September 30, 2000 has been derived from our audited
consolidated and combined financial statements. Data for the three months ended
December 31, 1999 and 2000 has been derived from our unaudited condensed and
consolidated financial statements. Data for periods prior to the 2000 fiscal
year may not be indicative of the results of operations that we would have
experienced had we been an independent, stand-alone entity during all of the
periods presented. Data for the three months ended December 31, 1999 and 2000
and the nine months ended September 30, 1998 and 1999 may not be indicative of
operating results for the full respective years.
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.
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, provision for bad debts, allocation of
management fees and reversal of excess loss accruals.
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
21
27
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
37% for the fiscal year ended September 30, 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 37% of our gross
patient revenue during the fiscal year ended September 30, 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 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 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 preexisting 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 for
approximately $431.8 million in cash and approximately $41.2 million in assumed
liabilities. We have reached an agreement with Tenet on the net working capital
acquired in the transaction with the exception of adjustments relating to
physician services operations and certain other matters. 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
consolidated and combined statements of operations from the October 15, 1999
date of acquisition.
22
28
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. We incurred losses from our discontinued physician
practice operations in the fiscal year ended September 30, 2000 of $10.6
million, compared to losses of $644,000 in the year ended September 30, 1999.
The loss from discontinued operations in the fiscal year ended September 30,
2000 includes a charge of $7.4 million to provide for costs associated with the
discontinuation and disposal of the physician practice operations.
SELECTED OPERATING DATA
The following table sets forth selected operating data for each of the
periods presented. The operating data include the Tenet hospitals from October
15, 1999, their date of acquisition.
NINE MONTHS ENDED YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
------------------ ----------------- -------------------
1998 1999 1999 2000 1999 2000
------- ------- ------- ------- -------- --------
Number of hospitals at end of
period............................ 4 4 4 15 14 15
Licensed beds at end of period...... 515 515 515 2,685(a) 2,567 2,685(a)
Operating beds at end of period..... 501 501 501 2,194(a) 2,144 2,194(a)
Average length of stay (days)(b).... 3.49 3.59 3.53 4.45 4.41 4.36
Occupancy rates (average beds in
service)(c)....................... 35.1% 36.4% 34.7% 43.5% 41.2% 44.3%
Admissions(d)....................... 13,736 13,849 17,946 74,243 16,137 20,006
Adjusted admissions(e).............. 26,100(f) 25,726 33,969 121,030 26,451 31,789
Patient days(g)..................... 48,003 49,773 63,398 330,510 71,109 87,260
Adjusted patient days(e)............ 91,200(f) 93,863 122,691 522,908 113,319 134,658
- ---------------
(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 are included, the occupancy rate would have been
43.0% for the fiscal year ended September 30, 2000 and 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) Estimated based upon 1999 data. Data for 1998 was not readily available.
(g) Represents the number of days our beds were occupied over the period.
23
29
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 consolidated and combined statements of operations. The results of
operations include the Tenet hospitals and the company formed by members of our
management from October 15, 1999, their acquisition date.
NINE MONTHS ENDED YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
------------------ ---------------- ------------------
1998 1999 1999 2000 1999 2000
------ ------ ----- ----- ------ ------
Net revenue...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Salaries and benefits............ 35.3 34.3 34.7 35.0 34.3 35.1
Supplies......................... 13.6 14.3 14.3 15.1 14.7 14.7
Provision for bad debts.......... 6.1 7.2 7.5 7.4 7.5 7.9
Other operating expenses(a)...... 25.6 30.8 29.6 28.8 28.0 29.6
----- ----- ----- ----- ----- -----
Total operating expenses......... 80.6 86.6 86.1 86.3 84.5 87.3
----- ----- ----- ----- ----- -----
EBITDA(b)........................ 19.4 13.4 13.9 13.7 15.5 12.7
Depreciation and amortization.... 6.4 7.0 7.0 5.8 5.8 6.4
Interest, net.................... 10.0 5.3 6.1 7.7 8.1 7.9
Minority interests............... -- (0.1) (0.1) -- -- --
Recapitalization costs........... -- -- -- 0.4 1.9 --
----- ----- ----- ----- ----- -----
Earnings (loss) from continuing
operations before income
taxes.......................... 3.0 1.2 0.9 (0.2) (0.3) (1.6)
Income tax expense............... -- -- -- 0.3 -- --
----- ----- ----- ----- ----- -----
Net earnings (loss) from
continuing operations.......... 3.0 1.2 0.9 (0.5) (0.3) (1.6)
Discontinued operations.......... (0.3) (0.4) (0.4) (1.3) (0.7) --
----- ----- ----- ----- ----- -----
Net earnings (loss).............. 2.7% 0.8% 0.5% (1.8)% (1.0)% (1.6)%
===== ===== ===== ===== ===== =====
- ---------------
(a) Other operating expenses consist of allocated management fees, reversal of
excess loss contract accruals and other direct operating costs.
(b) 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
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30
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 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 beds and 71
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31
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. Our census levels and net revenue
have been significantly lower than we expected prior to opening the hospital
principally as a result of what we believe to be exclusionary contracting
practices pursued in Salt Lake City by a competitor. We believe these
exclusionary practices have had a material adverse effect on the business and
operations of Rocky Mountain Medical Center by precluding certain significant
managed care companies from contracting with Rocky Mountain Medical Center,
thereby preventing certain physicians and patients from using this facility. On
April 18, 2000, we filed a lawsuit against the competitor seeking damages and
other remedies. The lawsuit is currently pending.
We have negotiated managed care contracts that became effective January 1,
2001 with two large managed care plans in the Salt Lake City market. We believe
these managed care plans previously did not contract with Rocky Mountain Medical
Center because of the exclusionary contracting practices of our competitor.
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 to 17 in January and February
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 at Rocky Mountain Medical Center 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 noted above. 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
26
32
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.
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.
Year Ended September 30, 2000 Compared to the Year Ended September 30, 1999
Net revenue for the fiscal year ended September 30, 2000 was $815.2
million, an increase of $633.5 million, or 348.7%, from $181.7 million for the
fiscal year ended September 30, 1999. The increase in net revenue is due largely
to the addition of the Tenet hospitals. The Tenet hospitals contributed
approximately $607.5 million in net revenue for the fiscal year ended September
30, 2000, or 95.9% of the total increase in net revenue for the fiscal year
ended September 30, 2000, compared to the same period in 1999. During the fiscal
year ended September 30, 2000, total admissions and patient days were 74,243 and
330,510, respectively, of which 54,572 admissions and 262,734 patient days
resulted from the addition of the Tenet hospitals. Same facilities, which
represent the Paracelsus operations other than Rocky Mountain Medical Center,
provided $203.2 million in net revenue in 2000 versus $181.7 million in 1999, or
$21.5 million of the increase in net revenue for the fiscal year ended September
30, 2000 compared to 1999. The remaining increase in net revenue related to the
opening of Rocky Mountain Medical Center in
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33
April 2000, which contributed $4.5 million in net revenue during the fiscal year
ended September 30, 2000.
As noted above, same facilities net revenue increased by $21.5 million, an
11.8% increase over the 1999 period. The increase in net revenue of same
facilities was attributable primarily to an increase in volume. Same facility
admissions increased 7.6% from 17,946 for the fiscal year ended September 30,
1999 to 19,315 for the same period in 2000 and same facility patient days
increased 4.7% from 63,398 in 1999 to 66,387 in 2000. Same facility adjusted
admissions increased 17.6% from 33,969 for the fiscal year ended September 30,
1999 to 39,934 for the same period in 2000 and same facility adjusted patient
days increased 12.3% from 122,691 in 1999 to 137,744 in 2000. The increase in
volume for same facilities was attributable largely to our increased focus on
improving physician relations and communications, physician recruitment, new
services, facility improvements and population growth in our primary service
areas.
Operating expenses increased by $547.2 million from $156.4 million for the
fiscal year ended September 30, 1999 to $703.6 million for the fiscal year ended
September 30, 2000 largely due to the addition of the Tenet hospitals. The Tenet
hospitals contributed $511.6 million in operating expenses for the fiscal year
ended September 30, 2000, or 93.5% of the total increase in operating expenses
for the fiscal year ended September 30, 2000 compared to the fiscal year ended
September 30, 1999. Components of this increase are $204.1 million in salaries
and benefits, $92.9 million in supplies, $45.8 million in provision for bad
debts and $168.8 million in other operating expenses.
Operating expenses for same facilities increased $18.6 million during the
fiscal year ended September 30, 2000, due primarily to the incremental cost of
increased patient volume, higher supply costs, and increased salary, benefit and
temporary staffing costs. We have experienced increased competition for
personnel in Utah, which required us to use a higher level of temporary staffing
to meet patient needs. The increased level of temporary staffing and general
wage inflation has resulted in an increase in salaries and benefits expense per
paid full time equivalent employee over the prior year period. We are sharing
personnel among hospitals in the Utah market where possible to increase staffing
efficiency and reduce the need for temporary staffing. Effective April 1, 2000,
we converted information systems at three of our Utah facilities. These
conversions require extensive staff training, both formal and informal on the
job training, which creates additional temporary and overtime costs. Our benefit
expense is higher than in the prior year period due to higher costs, use of a
different benefit plan in the current period, and differences in the way we
record benefits compared to the allocation methodologies used by the former
owner. The increase in supply costs is due to rising costs of pharmaceuticals
and other supplies, including high cost medical devices, and increasing volume
in existing services.
Of the remaining $17.0 million increase in operating expenses, $13.5
million is related to Rocky Mountain Medical Center and $3.5 million is related
to corporate and miscellaneous other operating expenses that have increased as a
result of the growth of our company. During the fiscal year ended September 30,
2000, we added personnel to our corporate staff in the areas of operations
management, operations finance, clinical operations, information systems and
corporate finance.
During the fiscal year ended September 30, 2000, at Rocky Mountain Medical
Center we recorded net revenue of $4.5 million and incurred operating expenses
of $13.5 million, resulting in a loss before interest, taxes, depreciation and
amortization of $9.0 million. Our census levels and net revenue were
significantly lower than we expected prior to opening the hospital. The
operating expenses of $13.5 million incurred during the fiscal year ended
September 30, 2000 consisted of $5.5 million in salaries and benefits, $1.3
million in supplies, $900,000 in provision for bad debts and $5.8 million in
other operating expenses. Other operating expenses included costs for purchased
services, rents and leases, utilities, marketing, insurance and other expenses,
including approximately $335,000 of professional fees associated with the
lawsuit we have filed with respect to Rocky Mountain Medical Center.
Operating expenses as a percentage of net revenue were 86.3% for the fiscal
year ended September 30, 2000 and 86.1% for the fiscal year ended September 30,
1999. EBITDA was $111.6 million, or 13.7% of net revenue, for the fiscal year
ended September 30, 2000, compared to $25.3 million, or 13.9% of net revenue,
for the fiscal year ended September 30, 1999. This decline in the EBITDA
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34
margin was due primarily to the addition of Health Choice, which was a part of
the acquisition of the Tenet facilities, and the operating losses at Rocky
Mountain Medical Center. Health Choice, our Medicaid managed health plan, has a
significantly lower EBITDA margin than the acute care services business.
Excluding results from Rocky Mountain Medical Center and Health Choice, net
revenue and EBITDA were $721.3 million and $117.3 million, respectively, for the
fiscal year ended September 30, 2000, resulting in an EBITDA margin of 16.3%.
Depreciation and amortization expense increased $34.8 million from $12.8
million for the fiscal year ended September 30, 1999 to $47.6 million for the
fiscal year ended September 30, 2000 due to the Tenet transaction and the merger
with a company formed by members of our management.
Interest expense increased $51.4 million from $11.0 million for the fiscal
year ended September 30, 1999 to $62.4 million for the fiscal year ended
September 30, 2000, primarily due to borrowings of $560.0 million associated
with the acquisition of the Tenet hospitals and the recapitalization of the
Paracelsus hospitals. Interest expense of $11.0 million for the fiscal year
ended September 30, 1999 primarily represents interest costs that Paracelsus
allocated to us.
We incurred legal, accounting and other related costs of approximately $3.5
million during the fiscal year ended September 30, 2000 related to the
recapitalization transaction.
Earnings (loss) from continuing operations before income taxes was a loss
of $1.9 million for the fiscal year ended September 30, 2000 and earnings of
$1.6 million for the fiscal year ended September 30, 1999. The decrease in the
earnings from operations before income taxes was due largely to increases in
interest expense and recapitalization costs offset partially by operating
earnings from the acquisition of the Tenet hospitals.
We recorded a provision for income taxes for the fiscal year ended
September 30, 2000 of $2.2 million. We recorded no provision or benefit for
income taxes in 1999. Our provision for income taxes results from differences
between earnings recognized for financial reporting purposes and taxable income
and the corresponding change in valuation allowance on our deferred tax assets.
See Note 7 of the notes to our consolidated and combined financial statements
for information regarding differences between effective tax rates and statutory
rates.
We incurred losses from our discontinued physician practice operations for
the fiscal year ended September 30, 2000 of $10.6 million, compared to losses of
$644,000 in 1999. The loss from discontinued operations for the fiscal year
ended September 30, 2000 includes a charge of $7.4 million to provide for costs
associated with the discontinuation and disposal of the physician practice
operations.
Net earnings (loss) for the fiscal year ended September 30, 2000 was a loss
of $14.7 million compared to net earnings of $1.0 million for the fiscal year
ended September 30, 1999.
We recorded preferred stock dividends and accretion of $25.4 million during
the fiscal year ended September 30, 2000. The preferred stock, which was
exchanged for shares of common stock in October 2000, was mandatorily redeemable
and dividends were payable in shares of our capital stock. Therefore, the
accrual of dividends did not result in a cash payment. Net earnings (loss)
attributable to common stockholders after the effect of the preferred stock
dividends and accretion for the fiscal year ended September 30, 2000 was a loss
of $40.1 million compared to net earnings of $1.0 million for the same period in
1999.
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 $137.4
million, an increase of $3.4 million, or 2.5%, from $134.0 million for the nine
months ended September 30, 1998. The increase in net revenue is largely due to
increased patient volumes in admissions and patient days. To a lesser extent,
net revenue was unfavorably affected 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%
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35
in inpatient admissions from 13,736 in the nine months ended September 30, 1998
to 13,849 for the nine months ended September 30, 1999. Patient days increased
3.7% from 48,003 in 1998 to 49,773 in 1999. The increase in admissions and
patient days 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 City metropolitan area.
Operating expenses increased by $11.1 million from $107.9 million for the
nine months ended September 30, 1998 to $119.0 million for the nine months ended
September 30, 1999, primarily as a result of an unusual gain of $7.5 million
relating to the settlement of a capitated contract dispute that was recorded
during the nine months ended September 30, 1998 and increases in supply costs
and the provision for bad debts. An increase in acuity at one hospital
contributed to the increase in supply costs. The increase in the provision for
bad debts resulted from the effect of a computer system conversion at certain
hospitals, personnel turnover that unfavorably affected billings and collections
at certain facilities and a favorable effect 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.
Allocated management fees increased $100,000 from $4.9 million for the nine
months ended September 30, 1998 to $5.0 million for the nine months ended
September 30, 1999 due to an increase in revenue at the Paracelsus hospitals
during this 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 hospitals of Paracelsus. Allocated management fees
equated to 3.7% of net revenue for the nine months ended September 30, 1999 and
1998. Amounts allocated are not necessarily indicative of the actual costs that
may have been incurred had we operated as an entity unaffiliated with
Paracelsus.
Various cost reduction initiatives were 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, overtime reductions and reduction in
the utilization of outside contracted nurses. The financial effect of these
various cost reduction initiatives is not individually determinable due to
system limitations. Salaries and benefits as a percentage of net revenue
improved from 35.3% for the nine months ended September 30, 1998, to 34.3% for
the nine months ended September 30, 1999.
Operating expenses as a percentage of net revenue were 86.6% for the nine
months ended September 30, 1999 and 80.6% for the nine months ended September
30, 1998. EBITDA was $18.4 million, or 13.4% of net revenue, for the nine months
ended September 30, 1999 compared to $26.1 million, or 19.4% of net revenue, for
the nine months ended September 30, 1998. The decline in the EBITDA margin was
due primarily to the unusual gain of $7.5 million relating to the settlement of
a capitated contract dispute recorded during the nine months ended September 30,
1998.
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
nine months ended September 30, 1999 primarily due to additions to property and
equipment.
Interest expense decreased $6.1 million from $13.4 million for the nine
months ended September 30, 1998 to $7.3 million for the nine months ended
September 30, 1999, primarily due to an increase in cash generated from
operations and a decrease in interest allocation from Paracelsus.
Earnings from continuing operations before income taxes was $1.6 million
and $4.0 million for the nine months ended September 30, 1999 and 1998,
respectively. Earnings from continuing operations before
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36
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.
Losses from our discontinued physician practice operations for the nine
months ended September 30, 1999 were $587,000, compared to losses of $435,000
for the nine months ended September 30, 1998.
Net earnings for the nine months ended September 30, 1999 was $1.0 million
compared to net earnings of $3.6 million for the nine months ended September 30,
1998.
SUMMARY OF OPERATIONS BY QUARTER
The patient volumes and net operating revenue at our hospitals and
ambulatory surgery centers are subject to seasonal variations and generally are
greater during the quarters ending December 31 and March 31 than other quarters.
These seasonal variations are caused by a number of factors, including 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.
The following table presents unaudited quarterly operating results for the
fiscal years ended September 30, 1999 and 2000 and the quarter ended December
31, 2000. We believe that all necessary adjustments have been included in the
amounts stated below to present fairly the quarterly results when read in
conjunction with the consolidated and combined financial statements and the
unaudited condensed and consolidated financial statements. Results of operations
for any particular quarter are not necessarily indicative of results of
operations for a full year or predictive of future periods.
QUARTER ENDED
-------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1998 1999 1999 1999
------------- ----------- ----------- -----------
(IN THOUSANDS)
Net revenue................................. $ 44,292 $ 46,642 $ 45,807 $ 44,948
EBITDA...................................... 6,830 7,308 7,183 3,930
Net earnings (loss) from continuing
operations................................ (10) 1,757 1,687 (1,807)
Net earnings (loss)......................... (67) 1,562 1,491 (2,003)
QUARTER ENDED
-------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1999 2000 2000 2000
------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenue................................. $ 177,695 $ 220,513 $ 210,879 $ 206,076
EBITDA...................................... 27,615 37,063 27,520 19,383
Net earnings (loss) from continuing
operations................................ (494) 7,859 (1,575) (9,891)
Net earnings (loss)......................... (1,713) 6,176 (788) (18,378)
Net loss attributable to common
stockholders(a)........................... (7,233) (452) (7,415) (25,005)
Net earnings (loss) per common share:
Net earnings (loss) from continuing
operations per common share(a)(b)...... $ (0.46) $ 0.09 $ (0.57) $ (1.15)
Net earnings (loss) from discontinued
operations per common share............ (0.09) (0.12) 0.06 (0.59)
----------- ----------- ----------- -----------
Net loss per common share(a).............. $ (0.55) $ (0.03) $ (0.51) $ (1.74)
=========== =========== =========== ===========
Weighted average number of common
shares................................. 13,101,074 14,400,613 14,400,613 14,403,063
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QUARTER ENDED
DEC. 31, 2000
----------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net revenue................................ $ 219,369
EBITDA..................................... 27,758
Net loss from continuing operations........ (3,611)
Net loss................................... (3,611)
Net earnings attributable to common
stockholders............................. 21,737
Net earnings per common share:
Net earnings from continuing operations
per common share(b)(c)................ $ 0.81
Net loss per common share from
discontinued operations............... --
-----------
Net earnings per common share(c)......... $ 0.81
===========
Weighted average number of common
shares................................ 26,779,284
- ---------------
(a) Includes preferred stock dividends and accretion of $5,520, $6,628, $6,627
and $6,627 incurred during the quarters ended December 31, 1999, March 31,
2000, June 30, 2000 and September 30, 2000, respectively.
(b)Net earnings (loss) from continuing operations per common share is not shown
for any period ended prior to October 1, 1999 as such periods represent
combined financial statements for entities under common control.
(c)Includes reversal of preferred stock dividends of $25,348.
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
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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 170,057 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 described in "Use of Proceeds" on page 16, we will use some or all of
the net proceeds from this offering to repay a portion of our outstanding
indebtedness. Therefore, we expect that our interest expense in fiscal 2001 will
be lower than in fiscal 2000.
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. As of
September 30, 2000, amounts outstanding under the tranche A and tranche B term
loans were $78.3 million and $248.3 million, respectively, and no amounts were
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 March 5, 2001 we had drawn $30.0 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 $66.4
million.
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
stockholders' equity by approximately $189.3 million and did not affect our cash
flow.
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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 fiscal year ended September 30, 2000, at
Rocky Mountain Medical Center we incurred operating losses of $9.0 million,
working capital growth of approximately $1.4 million and capital expenditures of
$8.8 million and entered into sixty-month operating leases for new medical
equipment requiring aggregate lease payments of approximately $215,000 per
month. 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 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 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 our current level of operations and anticipated growth, we
believe that cash generated from operations and amounts available under the
revolving credit facility, together with the estimated net proceeds of this
offering, will be adequate to finance our capital expenditures and working
capital needs for
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the next 12 to 18 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 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 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risk from exposure to changes in interest rates
based on our financing, investing and cash management activities. Amounts
outstanding under our bank credit facility bear interest at floating rates at
specified margins above either the agent bank's alternate base rate or its
reserve adjusted Eurodollar rate. We have not taken any action to cover interest
rate risk and are not a party to any interest rate market risk management
activities.
Although changes in the alternate base rate or reserve-adjusted Eurodollar
rate would affect the cost of funds borrowed in the future, we believe the
effect, if any, of reasonably possible near term changes in interest rates on
our consolidated financial position, results of operations or cash flow would
not be material. The fair market value of the outstanding obligations under our
bank credit facility approximates the carrying value of the bank credit facility
as a result of the variable interest rates. See "Description of Indebtedness"
beginning on page 69 for more detail.
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BUSINESS
INDUSTRY OVERVIEW
The U.S. Health Care Financing Administration estimated that in 1999 total
annual U.S. healthcare expenditures grew by 6.0% to $1.2 trillion. It projects
that total U.S. healthcare spending will grow by 6.5% annually from 2001 through
2008. By these estimates, healthcare expenditures will account for approximately
$2.2 trillion, or 16.2%, of the total U.S. gross domestic product by 2008.
Hospital services represents the largest segment of the healthcare
industry, accounting for 33% of total healthcare expenditures in 1999, or $401
billion. The U.S. Health Care Financing Administration projects the hospital
services category to grow by 5.7% per year through 2008. It expects growth in
hospital spending to continue due to the aging of the U.S. population and
consumer demand for expanded medical services. According to the American
Hospital Association, there are over 5,000 hospitals in the United States, of
which approximately 86% are owned by not-for-profit and government entities.
The U.S. hospital industry is broadly defined to include acute care,
rehabilitation and psychiatric facilities that are either public (government
owned and operated), not-for-profit private (religious or secular), or
for-profit institutions (investor owned). These facilities offer a broad range
of healthcare services, including internal medicine, general surgery,
cardiology, oncology, neurosurgery, orthopedics, obstetrics and gynecology, and
emergency services. In addition, hospitals also offer other ancillary services
including psychiatric, diagnostic, rehabilitation, home health and outpatient
surgery services.
Hospital Industry Trends
Demographic Trends. According to the U.S. Census Bureau, there are
approximately 35 million Americans aged 65 or older in the United States today,
who comprise approximately 13% of the total U.S. population. By the year 2030
the number of elderly persons is expected to climb to 69 million, or 20% of the
total population. Due to the increasing life expectancy of Americans, the number
of people aged 85 years and older is also expected to increase from 4.3 million
to 8.5 million by the year 2030. This increase in life expectancy will increase
demand for healthcare services and, as importantly, the demand for innovative,
more sophisticated means of delivering those services. Hospitals, as the largest
category of care in the healthcare market, will be among the main beneficiaries
of this increase in demand.
Consolidation. During the late 1980s and early 1990s, there was
significant industry consolidation involving large, investor-owned hospital
companies seeking to achieve economies of scale. While consolidation activity in
the hospital industry is continuing, this consolidation is primarily taking
place through mergers and acquisitions involving not-for-profit hospital
systems. Reasons for this activity include:
- limited access to capital;
- financial performance issues, including challenges associated with
changes in reimbursement;
- the desire to enhance the local availability of healthcare in the
community;
- the need and ability to recruit primary care physicians and specialists;
and
- the need to achieve general economies of scale and to gain access to
standardized and centralized functions, including favorable supply
agreements.
Shifting Utilization Trends. Over the past decade, many procedures that
had previously required hospital visits with overnight stays have been performed
on an outpatient basis. This shift has been driven by cost containment efforts
led by private and government payors. The focus on cost containment has
coincided with advancements in medical technology that have allowed patients to
be treated with less invasive procedures that do not require overnight stays.
According to the American Hospital Association, the number of surgeries
performed on an inpatient basis declined from 1994 to 1998 at an average annual
rate of 0.3%, from 9.8 million in 1994 to 9.7 million in 1998. During the same
period, the number of outpatient surgeries increased at an average annual rate
of 4.3%, from 13.2 million in 1994 to 15.6 million
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in 1998. The mix of inpatient as compared to outpatient surgeries shifted from a
ratio of 42.8% inpatient to 57.2% outpatient in 1994 to a ratio of 38.4%
inpatient to 61.6% outpatient in 1998.
These trends have led to a reduction in the average length of stay and, as
a result, inpatient utilization rates. According to the American Hospital
Association, the average length of stay in hospitals has declined from 6.7 days
in 1994 to 6.0 days in 1998.
COMPANY OVERVIEW
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.
For the twelve months ended December 31, 2000, approximately 90% of our net
revenue was derived from markets within our regions that are growing at rates
above the national average. Additionally, our net revenue from hospital
operations is well balanced across these regions, with each region contributing
between 20% and 25% of our total net revenue. We also operate five ambulatory
surgery centers and a Medicaid managed health plan called Health Choice that
serves over 42,000 members in Arizona. For the twelve months ended December 31,
2000, we had total net revenue of $848.3 million and EBITDA of $124.1 million,
both excluding start-up results at one of our hospitals.
IASIS was formed in October 1999 through a series of transactions that were
arranged by Joseph Littlejohn & Levy, Inc. and members of our management team.
Joseph Littlejohn & Levy is the private equity firm that controls JLL
Healthcare, LLC, our largest stockholder. As part of a recapitalization
transaction, we acquired a controlling interest in a subsidiary of Paracelsus
that owned five hospitals and other related assets. Following this transaction,
we also acquired ten hospitals and other related assets from Tenet.
Since October 1999, we have put in place an experienced senior management
team under whose leadership we have:
- developed strategic plans for each of our markets and facilities;
- recruited additional physicians to our hospitals;
- expanded and improved our facilities and services;
- installed standardized clinical and financial information systems in 11
of our 15 hospitals;
- strengthened our local management teams; and
- initiated company-wide compliance and quality assurance programs.
As a result of these initiatives, during the twelve months ended December 31,
2000, we achieved net revenue growth of 8.5% and an increase in patient
admissions of 8.6% compared to the pro forma twelve months ended December 31,
1999, both excluding start-up results at Rocky Mountain Medical Center.
BUSINESS STRATEGY
Our objective is to provide high quality, cost-effective healthcare
services in the communities we serve. The key elements of our business strategy
are:
- INCREASE OUR MARKET SHARE IN HIGH-GROWTH MARKETS. Most of our hospitals
are located in high-growth markets that are expected to experience
population growth rates through 2005 in excess of
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the national average. We intend to increase our market share in our
existing markets through organic growth and selective acquisitions.
- RECRUIT AND RETAIN QUALITY PHYSICIANS. We intend to continue to recruit
and retain quality physicians for our medical staffs and maintain their
loyalty to our facilities by:
- equipping our hospitals with technologically advanced equipment;
- sponsoring training programs to educate physicians on advanced medical
procedures;
- providing physicians with remote access to clinical information
through our new information systems; and
- enhancing physician convenience and access.
We also use our existing physician relationships to recruit new primary
care physicians and specialists. In addition, we are establishing local
physician advisory committees to work closely with our local management
teams and to advise us on facility- and market-specific needs and
strategies.
- INCREASE REVENUE BY EXPANDING OUR SERVICES. We analyze demographic and
patient data and consult with key physicians and payors to identify and
prioritize the healthcare needs of the communities we serve. In fiscal
2001, we intend to allocate approximately 80% of our capital expenditure
budget to expand services and purchase new equipment. Examples include:
- expanding emergency room and surgical capacity;
- upgrading and expanding specialty services, including cardiology,
orthopedics and obstetrics;
- updating our technology in imaging, diagnostic and other medical
equipment; and
- enhancing the convenience and quality of our outpatient services.
- PROVIDE HIGH QUALITY SERVICES. We believe the high quality of our
services differentiates our hospitals within their markets and provides
us with a competitive advantage. Between January 1, 1999 and February 1,
2001, six of our hospitals were surveyed by the Joint Commission on
Accreditation of Healthcare Organizations and the average of our scores,
some of which are preliminary, is 94. Additionally, in 2000, two of our
hospitals were recognized by the HCIA-Sachs Institute as being among the
"Top 100 Hospitals in America" for demonstrating superior clinical,
operational and financial performance.
- FOCUS ON OPERATIONAL EXCELLENCE. Our management team has extensive
multi-facility operating experience and focuses on operational excellence
at our facilities. We believe we can improve our operations and
profitability by:
- implementing case and resource management with a focus on efficient
staffing and supply utilization;
- capitalizing on purchasing efficiencies and reducing operating costs
through our relationship with Broadlane, a national group purchasing
organization;
- completing the installation of standardized information systems at
each of our facilities to provide us with more accurate, timely and
cost-effective clinical and financial information; and
- improving our billing and collection processes to increase cash flow
and reduce bad debt expenses.
- CONTINUE TO DEVELOP FAVORABLE MANAGED CARE RELATIONSHIPS. We plan to
increase patient volume at our facilities and improve our profitability
by negotiating more favorable terms with managed care plans and, where
desirable, entering into contracts with additional managed care plans. We
believe that we will be able to negotiate more favorable terms by
marketing facility-specific strengths that demonstrate:
- the quality and breadth of our services;
- the expertise of our physicians; and
- convenient patient access.
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We also organize our hospitals as networks to strengthen our market
presence and more effectively deliver healthcare services, both of which
increase our attractiveness to managed care plans.
- CONTINUE TO STRENGTHEN LOCAL MANAGEMENT TEAMS. We recruit experienced
senior managers to give our hospitals their own dedicated management
teams. Since October 1999, we have hired new executive managers at 10 of
our 15 hospitals. We believe a strong local management team at each
facility, including a chief executive officer, chief financial officer
and chief nursing officer, enhances physician and community relations. We
have developed a performance-based compensation program based upon the
achievement of qualitative and quantitative goals set forth in an
operating plan for each facility.
- SELECTIVELY PURSUE ACQUISITIONS AND STRATEGIC ALLIANCES. We intend to
selectively pursue hospital acquisitions in existing and new markets
where we believe we can improve the financial and operational performance
of the acquired hospital and enhance our regional presence. We intend to
target hospitals with 100 to 400 beds. We will focus our new market
development efforts in high-growth urban and suburban regions with stable
or improving managed care environments. In addition, we will continue to
identify opportunities to expand our presence through strategic alliances
with other healthcare providers.
OUR MARKETS
Our hospitals are located in some of the fastest growing markets in the
United States.
Salt Lake City, Utah
We operate five hospitals with a total of 633 licensed beds in the Salt
Lake City market. The population in this market is projected to grow by 6.9%
between 2000 and 2005, which is one and one-half times the national average. We
generated approximately 25% of our net revenue for the twelve months ended
December 31, 2000 in this market.
Phoenix, Arizona
We operate three hospitals with a total of 602 licensed beds in the Phoenix
market. The population in this market is projected to grow by 13.5% between 2000
and 2005, which is three times the national average. We generated approximately
22% of our net revenue, exclusive of Health Choice and other operations, for the
twelve months ended December 31, 2000 in this market. In 2000, the Joint
Commission on Accreditation of Health Care Organizations surveyed St. Luke's
Medical Center, Tempe St. Luke's Hospital, and Mesa General Hospital Medical
Center and scored these facilities 91, 94 and a preliminary 93, respectively. In
addition, during 2000, Tempe-St. Luke's Hospital was recognized by HCIA-Sachs
Institute as one of the "Top 100 Hospitals in America."
Tampa-St. Petersburg, Florida
We operate three hospitals with a total of 682 licensed beds in the
Tampa-St. Petersburg market. The population in this market is projected to grow
by 5.4% between 2000 and 2005, which exceeds the national average. We generated
approximately 20% of our net revenue for the twelve months ended December 31,
2000 in this market. In 2000, Palms of Pasadena Hospital, one of our hospitals
in this market, was recognized by HCIA-Sachs Institute as one of the "Top 100
Hospitals in America."
Texas
We operate four hospitals with a total of 768 licensed beds in San Antonio,
Odessa and Beaumont. The population in San Antonio is projected to grow by 9.2%
between 2000 and 2005, which is twice the national average. We generated
approximately 21% of our net revenue for the twelve months ended December 31,
2000 in Texas. In January 2001, Park Place Medical Center, Mid-Jefferson
Hospital and Southwest General Hospital were surveyed by the Joint Commission on
Accreditation of Health Care Organizations and received preliminary scores of
97, 98 and 92, respectively.
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OUR FACILITIES
We operate 15 acute care hospitals and five ambulatory surgery centers. Of
the 15 hospitals we operate, we own 11 and lease four. One of the hospitals we
own has third party investors that together own an 11.2% ownership interest.
Three of the surgery centers we operate are owned by joint ventures in which we
own varying interests. The following table contains information concerning our
hospitals and ambulatory surgery centers.
LICENSED
FACILITY CITY STATE BEDS
- -------- ---------------- ----- --------
HOSPITALS
Salt Lake City, Utah
Davis Hospital and Medical Center......................... Layton UT 126
Jordan Valley Hospital.................................... West Jordan UT 50
Pioneer Valley Hospital(a)................................ West Valley City UT 139
Rocky Mountain Medical Center............................. Salt Lake City UT 118
Salt Lake Regional Medical Center......................... Salt Lake City UT 200
Phoenix, Arizona
Mesa General Hospital Medical Center(b)................... Mesa AZ 143
St. Luke's Medical Center(c)(d)........................... Phoenix AZ 350
Tempe St. Luke's Hospital(d).............................. Tempe AZ 109
Tampa-St. Petersburg, Florida
Memorial Hospital of Tampa................................ Tampa FL 174
Palms of Pasadena Hospital................................ St. Petersburg FL 307
Town & Country Hospital................................... Tampa FL 201
State of Texas
Mid-Jefferson Hospital.................................... Nederland TX 138
Odessa Regional Hospital(e)............................... Odessa TX 100
Park Place Medical Center................................. Port Arthur TX 244
Southwest General Hospital................................ San Antonio TX 286
SURGERY CENTERS
Salt Lake City, Utah
Davis Surgical Center(f).................................. Layton UT --
Sandy City ASC(g)......................................... West Jordan UT --
Phoenix, Arizona
Biltmore Surgery Center(h)................................ Phoenix AZ --
Metro Surgery Center...................................... Mesa AZ --
Arizona Diagnostic and Surgery Center..................... Mesa AZ --
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(a) Pioneer Valley Hospital is leased pursuant to a lease agreement that expires
on January 31, 2004. We have options to extend the term of the lease through
January 31, 2034.
(b) Mesa General Hospital Medical Center is leased pursuant to a lease agreement
that expires on July 31, 2003. We have options to extend the term of the
lease through July 31, 2023.
(c) Includes St. Luke's Behavioral Health Center.
(d) St. Luke's Medical Center, St. Luke's Behavioral Center and Tempe St. Luke's
Hospital are leased pursuant to a lease agreement that expires on January
31, 2010. We have an option to extend the term of the lease through January
31, 2015.
(e)Owned by a limited partnership in which we own an 88.7% interest.
(f) Owned by a joint venture in which we own a 30% interest.
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(g) Owned by a joint venture in which we own a 50% interest.
(h) Owned by a joint venture in which we own a 62.4% interest.
We also operate medical office buildings in conjunction with our hospitals.
These office buildings are occupied primarily by physicians who practice at our
hospitals.
Our principal executive offices in Franklin, Tennessee are located in
approximately 18,500 square feet of office space, subject to a lease that
expires in 2003 with respect to approximately 2,000 square feet and in 2005 with
respect to the remaining 16,500 square feet. We have an option to extend the
term of the lease for two additional five-year periods. Our principal executive
offices, hospitals and other facilities are suitable for their respective uses
and generally are adequate for our present needs.
HOSPITAL OPERATIONS
Our senior management team has extensive multi-facility operating
experience and focuses on maintaining operational excellence at our facilities.
At each hospital we operate, we implement systematic policies and procedures to
improve the hospital's operating and financial performance. A hospital's local
management team is generally comprised of a chief executive officer, chief
financial officer and chief nursing officer. Local management teams, in
consultation with our corporate staff, develop annual operating plans setting
forth revenue growth strategies for the expansion of services offered by the
hospital and the recruitment of physicians in each community and plans to reduce
costs by improving operating efficiencies. We believe that the competence,
skills and experience of the management team at each hospital is critical to the
hospital's success because of its role in executing the hospital's operating
plan. We have developed a performance-based compensation program for each local
management team based upon achievement of the goals set forth in the annual
operating plan.
Our hospital management teams are advised by boards of trustees that
include members of hospital medical staffs 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 maintain quality assurance
programs to support and monitor quality of care standards and to meet
accreditation and regulatory requirements. We monitor patient care evaluations
and other quality of care assessment activities on a continuing basis.
We believe that the ability of our hospitals to meet the healthcare needs
of their communities is determined by the quality, skills and compassion of our
employees, breadth of our services, level of technology, emphasis on quality of
care, level of physician support and convenience for patients and physicians.
Factors that affect demand for our services 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 affect the nature and demand for healthcare
services across the industry, including at our hospitals.
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The following table presents (1) pro forma combined operating data for our
hospitals for the years ended September 30, 1999 and 2000 and (2) pro forma
combined and actual operating data for our hospitals for the three months ended
December 31, 1999 and 2000, respectively. The pro forma combined operating data
for all periods presented gives effect to the recapitalization transaction and
the Tenet acquisition as if they occurred at the beginning of the pro forma
periods presented. Data does not include Health Choice.
THREE MONTHS ENDED
DECEMBER 31,
YEAR ENDED SEPTEMBER 30, ---------------------
PRO FORMA PERCENTAGE PERCENTAGE
------------------------ INCREASE PRO FORMA ACTUAL INCREASE
1999 2000 (DECREASE) 1999 2000 (DECREASE)
---------- ---------- ---------- --------- -------- ----------
Number of hospitals at end of
period..................... 14 15 -- 14 15 --
Number of operating beds at
end of period.............. 2,144 2,194(a) 2.3% 2,144 2,194(a) 2.3%
Average daily census(b)...... 888 930 -- 880 948 --
Average length of stay
(days)(c).................. 4.6 4.5 -- 4.4 4.4 --
Occupancy rates (average beds
in service)(d)............. 41.4% 43.4% -- 41.1% 44.3% --
Admissions(e)................ 70,443 76,306 8.3% 18,200 20,006 9.9%
Adjusted admissions(f)....... 112,966 124,211 9.9% 29,632 31,789 7.3%
Patient days(g).............. 324,274 340,386 5.0% 80,985 87,260 7.7%
Adjusted patient days(f)..... 513,055 537,929 4.8% 128,340 134,658 4.9%
- ---------------
(a) Includes 71 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 inpatients in our hospitals each day.
(c) Represents the average number of days that a patient stayed in our
hospitals.
(d) Excludes 71 beds at Rocky Mountain Medical Center placed in service on
April 10, 2000. If these beds are included, the occupancy rate would have
been 42.9% for the fiscal year ended September 30, 2000 and 43.2% for the
three months ended December 31, 2000.
(e) 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.
(f) 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.
(g) Represents the number of days our beds were occupied over the period.
Our hospitals continue to experience shifts from inpatient to outpatient
care as well as reductions in average lengths of inpatient stay, primarily as a
result of improvements in technology, pharmacology and clinical practices and
hospital payment changes by Medicare and insurance carriers. In response to this
shift toward outpatient care, we are reconfiguring some hospitals to more
effectively accommodate outpatient services and restructuring existing surgical
and diagnostic capacity to permit additional outpatient volume and a greater
variety of outpatient services. Our facilities will continue to deliver those
outpatient services that can be provided on a quality, cost-effective basis and
that we believe will be in increased demand.
In addition, inpatient care is shifting increasingly to sub-acute care when
a less-intensive, lower cost level of care is appropriate. We have been
proactive in the development of a variety of sub-acute inpatient services to
utilize a portion of our available capacity. By offering cost-effective
sub-acute services in appropriate circumstances, we are able to provide a
continuum of care when the demand for such services exists. For example, some of
our hospitals have developed rehabilitation units. These units utilize less
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intensive staffing levels with corresponding lower costs to provide a range of
services sought by physicians, patients and payors.
HEALTH CHOICE
Health Choice is a prepaid Medicaid managed health plan in the Phoenix,
Arizona area that we acquired in connection with the acquisition of the Tenet
hospitals. For the fiscal year ended September 30, 2000, we derived
approximately $89.4 million or 11.0% of our total net revenue of $815.2 million
from Health Choice. Health Choice derives substantially all of its revenue
through a contract with the Arizona Health Care Cost Containment System to
provide specified health services to qualified Medicaid enrollees through
contracts with providers. The contract requires Health Choice to arrange for
healthcare services for enrolled Medicaid patients in exchange for fixed
periodic payments and supplemental payments from the Arizona Health Care Cost
Containment System. Health Choice subcontracts with physicians, hospitals and
other healthcare providers to provide services to its enrollees. These services
are provided regardless of the actual costs incurred to provide these services.
We receive reinsurance and other supplemental payments from the Arizona Health
Care Cost Containment System to cover certain costs of healthcare services that
exceed certain thresholds. Health Choice is reimbursed for healthcare costs that
exceed stated amounts at a rate of 75% (85% for catastrophic cases) of qualified
healthcare costs in excess of stated levels of $5,000 to $35,000 depending on
the rate code assigned to the member. Qualified costs are the lesser of the
amount paid by Health Choice or the Arizona Health Care Cost Containment System
fee schedule. 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 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 currently do not expect a material
increase in the amount of the performance guaranties during the 2001 fiscal
year. The contract with the Arizona Health Care Cost Containment System
commenced on October 1, 1997 for an initial term of one year and reserves to the
Arizona Health Care Cost Containment System the option to extend the term of the
contract from time to time through September 30, 2002. Under the current
amendment, the contract has been extended through September 30, 2001. In the
event the contract with the Arizona Health Care Cost Containment System were to
be discontinued, our revenue would be reduced and profitability could be
adversely affected.
OUR INFORMATION SYSTEMS
We recently have converted and upgraded our clinical and financial
information systems in 11 of our 15 hospitals. We selected McKesson HBOC's
clinical and patient accounting software and Lawson's financial application and
enterprise resource planning software. We plan to complete similar conversions
at our remaining hospitals no later than December 31, 2001. These sophisticated
systems are essential to the following areas of our business operations, among
others:
- patient accounting, including billing and collection of net revenue;
- financial, accounting, reporting and payroll;
- coding and compliance;
- laboratory, radiology and pharmacy systems;
- medical records and document storage;
- materials and asset management; and
- negotiating, pricing and administering our managed care contracts.
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We will continue to standardize and integrate our information systems, which
will allow us to:
- optimize staffing levels according to patient volumes and seasonal needs
at each facility;
- reduce bad debt expense by effectively managing each hospital's billing
and collection processes; and
- reduce supply costs by concentrating our purchasing power and eliminating
waste and over-utilization.
SOURCES OF REVENUE
We receive payment for patient services from:
- the federal government primarily under the Medicare program;
- state Medicaid programs;
- health maintenance organizations or "HMOs", preferred provider
organizations or "PPOs" and other private insurers; and
- individual patients.
The table below presents the approximate percentage of net patient revenue
received from the following sources:
NET REVENUE BY PAYOR SOURCE 1998 1999 2000
--------------------------- ----- ----- -----
Medicare............................................ 35.8% 31.5% 29.6%
Medicaid............................................ 6.9 6.7 7.4
Private insurance and other......................... 57.3 61.8 63.0(a)
----- ----- -----
Total............................................... 100.0% 100.0% 100.0%
===== ===== =====
- ---------------
(a) For the fiscal year ended September 30, 2000, 37.6% of our net patient
revenue was from private managed care payors.
For 2000, the above table includes data for our company for the fiscal year
ended September 30, 2000 and data for the Tenet hospitals for the period from
October 1, 1999 through October 15, 1999. For 1999, the above table includes
data for the Paracelsus hospitals for the nine months ended September 30, 1999
and the Tenet hospitals for the nine months ended August 31, 1999. For 1998, the
above table includes data for the Paracelsus hospitals for the year ended
December 31, 1998 and the Tenet hospitals for the year ended May 31, 1998. This
data does not include Health Choice.
We believe that reductions in Medicare payments as a percentage of our
total revenue, renegotiation of our managed care contracts and increased
penetration of commercial insurance companies in our markets have resulted in an
increase in the percentage of revenue from managed care plans, private insurance
companies and other private sources.
Most of our hospitals offer discounts from established charges to private
managed care plans if they are large group purchasers of healthcare services.
These discount programs limit our ability to increase charges in response to
increasing costs. Patients generally are not responsible for any difference
between established hospital charges and amounts reimbursed for such services
under Medicare, Medicaid, some private insurance plans, health maintenance
organizations or preferred provider organizations, but are generally responsible
for services not covered by these plans, and exclusions, deductibles or
co-insurance features of their coverage. The amount of these exclusions,
deductibles and co-insurance generally has been increasing each year. Collecting
amounts due from individual patients is typically more difficult than collecting
from governmental or private managed care plans.
COMPETITION
Most of our hospitals are located in high-growth markets that are expected
to experience population growth rates through 2005 in excess of the national
average. In large part, a hospital's revenue, whether from managed care plans,
traditional health insurance payors or directly from patients, depends on the
quality and scope of physicians' practices associated with the hospital.
Physicians refer patients to hospitals
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primarily on the basis of the quality and scope 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 enhancing
physician convenience and access. While physicians may terminate their
affiliation with a hospital operated by us at any time, our hospitals seek to
retain physicians of varied specialties on the hospitals' medical staffs and to
recruit other qualified physicians. We strive to maintain and improve the level
of care at our hospitals and to provide quality facilities, equipment, employees
and services for physicians and their patients. A number of factors affect our
competitive position, including:
- number, quality and specialties of physicians, nurses and other
healthcare professionals;
- the scope, breadth and quality of services;
- reputation;
- managed care contracting relationships;
- physical condition of facilities and medical equipment;
- location;
- availability of parking or proximity to public transportation;
- charges for services; and
- ability to form local hospital networks.
We currently face competition from established, not-for-profit healthcare
corporations, investor-owned hospital corporations, large tertiary care centers
and outpatient service providers. 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 in
the healthcare industry will be a leading contributing factor to increased
competition in markets in which we already have a presence and in markets we may
enter in the future.
Another factor in the competitive position of a hospital is the ability of
its management to negotiate contracts with purchasers of group healthcare
services. The importance of obtaining managed care contracts has increased in
recent years and is expected to continue to increase as private and government
payors and others turn to managed care organizations to help control rising
healthcare costs. Our markets have experienced significant managed care
penetration. The revenue and operating results of our hospitals are
significantly affected by our hospitals' ability to negotiate favorable
contracts with managed care plans. 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. Traditional health insurers also are interested
in containing costs through similar contracts with hospitals.
An additional competitive factor is whether a hospital is part of a local
hospital network and 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 more
favorable managed care contracts than a hospital that is not. We intend to
evaluate changing circumstances in each geographic area in which we operate on
an ongoing basis and to position ourselves to compete in these managed care
markets by forming our own, or joining with others to form, local hospital
networks.
EMPLOYEES AND MEDICAL STAFF
As of December 31, 2000, we had approximately 8,100 employees, including
approximately 2,800 part-time employees. Our employees are not subject to
collective bargaining agreements. We consider our employee relations to be good.
In certain markets, there currently is a shortage of nurses and other medical
support personnel. We recruit and retain nurses and medical support personnel by
creating a desirable, professional work environment, providing competitive
wages, benefits and long-term incentives, and providing career development and
other training programs. In order to supplement our current
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employee base, we intend to expand our relationship with colleges, universities
and other medical education institutions in our markets and recruit nurses and
other medical support personnel from abroad.
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 each hospital's medical staff and the appropriate
governing board of the hospitals in accordance with established credentialing
criteria.
COMPLIANCE PROGRAM
Under our management's leadership, we have voluntarily initiated a
company-wide compliance program. Our compliance program is designed to ensure
that we maintain high standards of conduct in the operation of our business and
implement policies and procedures so that employees act in compliance with all
applicable laws, regulations and company policies. The organizational structure
of our compliance program includes a compliance committee of our board of
directors, a corporate management compliance committee and local management
compliance committees at each of our facilities. The compliance committee of the
board of directors has been formed and its charter has been adopted, but members
will not be appointed until we appoint additional independent directors. These
committees have the responsibility for the effective development and
implementation of our program. Our Vice President of Ethics and Business
Practices, who reports directly to our Chief Executive Officer and will report
to the compliance committee of our board of directors, serves as Chief
Compliance Officer and is charged with direct responsibility for the development
and implementation of our compliance program. We also have designated a Facility
Compliance Officer for each facility. Other features of our compliance program
include initial and periodic timing and effectiveness reviews, the development
and implementation of policies and procedures and a mechanism for employees to
report, without fear of retaliation, any suspected legal or ethical violations.
REIMBURSEMENT
Medicare
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. All of our hospitals are certified as providers of
Medicare services. Under the Medicare program, acute care hospitals receive
reimbursement under a prospective payment system for inpatient hospital
services. Currently, hospitals exempt from the prospective payment system
methodology include psychiatric, long-term care, rehabilitation hospitals,
children's hospitals and cancer 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 of 1997, prospective payment system-exempt hospitals and hospital
units may receive reduced reimbursement. Effective for cost reporting periods
beginning on or after April 1, 2001, inpatient rehabilitation services will be
paid through a prospective payment system methodology.
Under the current hospital prospective payment system, a hospital receives
a fixed payment 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 for acute care hospitals
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. 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 adjusted annually and have been
affected by federal legislation. 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
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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 traditionally have been paid at the lower of
established charges or on a reasonable cost basis. On August 1, 2000, the Health
Care Financing Administration began reimbursing hospital outpatient services and
certain Medicare Part B services furnished to hospital inpatients who have no
Part A coverage on a prospective payment system basis. The Health Care Financing
Administration will continue to use existing fee schedules to pay for physical,
occupational and speech therapies, durable medical equipment, clinical
diagnostic laboratory services and nonimplantable orthotics and prosthetics.
All services paid under the new prospective payment system for hospital
outpatient services are classified into groups called ambulatory payment
classifications or "APC"s. Services in each APC are similar clinically and in
terms of the resources they require. A payment rate is established for each APC.
The fee schedule for the outpatient prospective payment system is to be updated
by the market basket index for the federal fiscal year 2000 and the market
basket index minus 1% for the federal fiscal year 2002. Depending on the
services provided, a hospital may be paid for more than one APC for a patient
visit. Based upon 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 such prospective payment
system to have a material adverse effect on our future operating results.
However, 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.
Medicare historically has reimbursed skilled nursing units within hospitals
on the basis of actual costs, subject to limits. The Balanced Budget Act of 1997
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 in the process of
being phased in. The effect of the new payment system generally has been to
significantly reduce reimbursement for skilled nursing services, which has led
many hospitals to close such units. We will monitor closely 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.
Medicaid
Medicaid programs are jointly funded by federal and state governments and
are administered by states under an approved plan that provides hospital and
other healthcare benefits to qualifying individuals who are unable to afford
care. All of our hospitals are certified as providers of Medicaid services.
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 currently are 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.
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.
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Many prior year cost reports of our facilities are still open. If any of
our facilities are found to have been in violation of federal or state laws
relating to preparing and filing of Medicare or Medicaid cost reports, whether
prior to or after the recapitalization transactions and our ownership of these
facilities, our facilities and we could be subject to substantial monetary
fines, civil and criminal penalties and exclusion from participation in the
Medicare and Medicaid programs. If an allegation is lodged against one of our
facilities for a violation occurring during the time period before the
recapitalization transaction, or before our acquisition of the Tenet hospitals,
we may have indemnification rights against Paracelsus or Tenet, as the case may
be. In the recapitalization transaction with Paracelsus and in the Tenet
transaction, we negotiated customary indemnification and hold harmless
provisions for any damages we may incur.
Managed Care
The percentage of admissions and net revenue attributable to managed care
plans has increased as a result of pressures to control the cost of healthcare
services. We expect that the trend toward increasing percentages related to
managed care plans will continue in the future. Generally, we receive lower
payments from managed care plans than from traditional commercial/indemnity
insurers; however, as part of our business strategy, we intend to take steps to
improve our managed care position.
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 may receive reduced levels of reimbursement, which may
have a negative effect 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
also are 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. If any facility loses its accreditation by this Joint Commission, or
otherwise loses its certification under the Medicare program, then the facility
will 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 from time to time, certification and accreditation
are subject to change and, in order to remain qualified, we may need to make
changes in our facilities, equipment, personnel and services.
Certificates of Need
In some states, the construction of new facilities, acquisition of existing
facilities or 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
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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.
Utilization Review
Federal law contains numerous provisions designed to ensure that services
rendered by hospitals to Medicare and Medicaid patients meet professionally
recognized standards and 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 be reviewed by peer
review organizations that analyze the appropriateness of Medicare and Medicaid
patient admissions and discharges, quality of care provided, validity of
diagnosis, related group classifications and appropriateness of cases of
extraordinary length of stay or cost. Peer review organizations may deny payment
for services provided, assess fines and recommend to the Department of Health
and Human Services that a provider not in substantial compliance with the
standards of the peer review organization be excluded from participation in the
Medicare program. Most non-governmental managed care organizations also require
utilization review.
Federal and State Fraud and Abuse Provisions
Participation in any federal healthcare program, like Medicare, is
regulated heavily by statute and regulation. If a hospital provider fails to
substantially comply with the numerous conditions of participation in the
Medicare or Medicaid program or performs specific prohibited acts, the
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 statutes is a section of the Social Security Act known as the
anti-kickback statute. This law prohibits providers and others from soliciting,
receiving, offering or paying, directly or indirectly, any remuneration with the
intent of generating referrals or orders for services or items covered by a
federal healthcare program. 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 healthcare programs, including Medicare and Medicaid.
As authorized by Congress, the Office of the Inspector General at the
Department of Health and Human Services, has published final safe harbor
regulations that outline categories of activities that are deemed protected from
prosecution under the anti-kickback statute. Currently there are safe harbors
for various activities, including the following: investment interests, space
rental, equipment rental, practitioner recruitment, personal services and
management contracts, sale of practice, referral services, warranties,
discounts, employees, group purchasing organizations, waiver of beneficiary
coinsurance and deductible amounts, managed care arrangements, obstetrical
malpractice insurance subsidies, investments in group practices, ambulatory
surgery centers, and referral agreements for specialty services.
The fact that conduct or a business arrangement does not fall within a safe
harbor does not automatically render the conduct or business arrangement illegal
under the anti-kickback statute. 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 Office of the Inspector General, among other regulatory agencies, is
responsible for identifying and eliminating fraud, abuse and waste. 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" that, although they do not have the force of law, identify
features of a transaction that may indicate that the
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transaction could violate the anti-kickback statute or other federal healthcare
laws. The Office of the Inspector General has identified several incentive
arrangements as potential violations, including:
- payment of any incentive by the hospital when a physician refers a
patient to the hospital;
- use of free or significantly discounted office space or equipment for
physicians in facilities usually located close to the hospital;
- provision of free or significantly discounted billing, nursing, or other
staff services;
- free training for a physician's office staff, including management and
laboratory techniques;
- guaranties that provide that if the physician's income fails to reach a
predetermined level, the hospital will pay any portion of the remainder;
- low-interest or interest-free loans, or loans which may be forgiven if a
physician refers patients to the hospital;
- payment of the costs of a physician's travel and expenses for
conferences;
- payment of services which require few, if any, substantive duties by the
physician, or payment for services in excess of the fair market value of
the services rendered; or
- purchasing goods or services from physicians at prices in excess of their
fair market value.
We have a variety of financial relationships with physicians who refer
patients to our hospitals. Physicians own interests in three of our ambulatory
surgery centers and one of our hospitals. We also have contracts with physicians
providing for a variety of financial arrangements, including employment
contracts, leases and professional service agreements. We provide financial
incentives to recruit physicians to relocate to communities served by our
hospitals, including minimum revenue guaranties and loans. Although we believe
that our arrangements with physicians have been structured to comply with
current law and available interpretations, some of our arrangements do not
expressly meet requirements for safe harbor protection under the anti-kickback
statute. We cannot assure you that regulatory authorities that enforce these
laws will not determine that these financial arrangements violate the
anti-kickback statute or other applicable laws. This determination could subject
us to liabilities under the Social Security Act, including criminal penalties,
civil monetary penalties and exclusion from participation in Medicare, Medicaid
or other federal healthcare programs, any of which could have a material adverse
effect on our business, financial condition or results of operations.
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 anti-kickback statute, these provisions are very broad. Further, the
Health Insurance Portability and Accountability Act of 1996 created civil
penalties for conduct including improper coding and billing for unnecessary
goods and services. Careful and accurate preparation and submission of claims
for reimbursement must be performed in order to avoid liability.
The Health Insurance Portability and Accountability Act of 1996 also
broadened the scope of the fraud and abuse laws by adding several criminal
provisions for healthcare fraud offenses that apply to all health benefit
programs. This act also created new enforcement mechanisms to combat fraud and
abuse, including the Medicare Integrity Program and 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 healthcare 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.
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The Social Security Act also includes a provision commonly known as the
"Stark Law." This law prohibits physicians from referring Medicare and Medicaid
patients to entities with which they or any of their immediate family members
have a financial relationship if these entities provide certain designated
health services that are reimbursable by Medicare, including 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 a physician's ownership
interest in an entire hospital as opposed to an ownership interest in a hospital
department. There are also exceptions for many of the customary financial
arrangements between physicians and providers, including employment contracts,
leases and recruitment agreements.
We have structured our financial arrangements with physicians to comply
with the statutory exceptions to the Stark Law. On January 4, 2001, the Health
Care Financing Administration issued final regulations subject to comment
intended to clarify parts of the Stark Law and some of the exceptions to it.
These regulations are considered the first phase of a two-phase process, with
the remaining regulations to be published at an unknown future date. The phase
one regulations are to be effective January 4, 2002, or in the case of some of
the provisions relating to home health agencies, April 6, 2001. The Health Care
Financing Administration is accepting comments on the phase one regulations
until April 4, 2001, which may lead to further changes. We cannot predict the
final form that these regulations will take or the effect that the final
regulations will have on us.
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.
Many of the states in which we operate also have adopted laws that prohibit
payments to physicians in exchange for referrals similar to the anti-kickback
statute, 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 and Similar State Laws
Another trend affecting 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's "qui tam" or
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 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 private party brings a qui
tam action under the False Claims Act, the defendant generally will not be
served with the lawsuit until the government makes a determination whether it
will intervene.
When a defendant is determined by a court of law to be liable under the
False Claims Act, the defendant must pay three times the actual damages
sustained by the government, plus mandatory civil penalties of between $5,500 to
$11,000 for each separate false claim. Settlements entered into prior to
litigation usually involve a less severe damages methodology. 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 federal
government. The False Claims Act defines the term "knowingly" broadly.
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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. In some cases, whistleblowers or the federal government
have taken the position that providers who allegedly have violated other
statutes, such as the anti-kickback statute and the Stark Law, have thereby
submitted false claims under the False Claims Act. From time to time, companies
in the healthcare industry, including ours, may be subject to actions under the
False Claims Act. We currently are not aware of any actions against us under the
False Claims Act.
A number of states, including states in which we operate, have adopted
their own false claims provisions as well as their own whistleblower provisions
whereby a private party may file a civil lawsuit in state court.
Corporate Practice of Medicine/Fee Splitting
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 that may violate
these restrictions. These statutes vary from state to state, are often vague and
seldom have 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.
Administrative Simplification
The Administrative Simplification Provisions of the Health Insurance
Portability and Accountability Act of 1996 require the use of uniform electronic
data transmission standards for healthcare claims and payment transactions
submitted or received electronically. These provisions are intended to encourage
electronic commerce in the healthcare industry. On August 17, 2000, the Health
Care Financing Administration published final regulations establishing
electronic data transmission standards that all healthcare providers must use
when submitting or receiving certain healthcare transactions electronically.
Compliance with these regulations is required by October 16, 2002. We cannot
predict the impact that final regulations, when fully implemented, will have on
us.
The Administrative Simplification Provisions also require the Health Care
Financing Administration to adopt standards to protect the security and privacy
of health-related information. The Health Care Financing Administration proposed
regulations containing security standards on August 12, 1998. These proposed
security regulations have not been finalized, but as proposed, would require
healthcare providers to implement organizational and technical practices to
protect the security of electronically maintained or transmitted health-related
information. In addition, the Health Care Financing Administration released
final regulations containing privacy standards in December 2000. These privacy
regulations become effective February 2001 but compliance with these regulations
is not required until April 2003. Therefore, these privacy regulations could be
further amended prior to the compliance date. However, as currently drafted, the
privacy regulations will extensively regulate the use and disclosure of
individually identifiable health-related information. The security regulations,
as proposed, and the privacy regulations could impose significant costs on our
facilities in order to comply with these standards. We cannot predict the final
form that these regulations will take or the impact that final regulations, when
fully implemented, will have on us.
Violations of the Administrative Simplification Provisions could result in
civil penalties of up to $25,000 per type of violation in each calendar year and
criminal penalties of up to $250,000 per violation. In addition, our facilities
will continue to remain subject to any state laws that are more restrictive than
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the regulations issued under the Administrative Simplification Provisions. These
statutes vary by state and could impose additional penalties.
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 that 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. Regulations recently
have been adopted that expand the areas within a facility that must provide
emergency treatment to include provider based outpatient departments. Sanctions
for violations of this statute 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 that enable an individual who suffers personal harm as a
direct result of a violation of the law, and 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.
Although we believe that our practices are in material compliance with the law,
we can give no assurance that governmental officials responsible for enforcing
the law will not assert from time to time that our facilities are in violation
of this statute.
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.
Many states have enacted or are considering enacting measures designed to
reduce their Medicaid expenditures and change private healthcare insurance. Most
states, including the states in which we operate, have applied for and been
granted federal waivers from current Medicaid regulations to allow them to serve
some or all 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
revenue 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 generally 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 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
or acquisitions of not-for-profit organizations in various states.
Healthcare Industry Investigations
Significant media and public attention has focused in recent years on the
hospital industry. There are numerous ongoing federal and state investigations
regarding multiple issues including cost reporting and billing practices,
especially those relating to clinical laboratory test claims and home health
agency costs, physician recruitment practices, and physician ownership of
healthcare providers and joint ventures with
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hospitals. These investigations have targeted hospital companies as well as
their executives and managers. We have substantial Medicare, Medicaid and other
governmental billings, which 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 both legal principles and 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 that 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 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 also has 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. Further, the
federal government continues to investigate Medicare overpayments to prospective
payment hospitals that incorrectly report transfers of patients to other
prospective payment system hospitals as discharges. We are aware that prior to
our acquisition of them, several of our hospitals were contacted in relation to
certain government investigations that were targeted at an entire segment of the
healthcare industry. Although we take the position that, under the terms of the
acquisition agreements, the prior owners of these hospitals retained any
liability resulting from these government investigations, we cannot assure you
that the prior owners' resolution of these matters or failure to resolve these
matters, in the event that any resolution was deemed necessary, will not have a
material adverse effect on our operations.
It is possible that governmental entities could initiate investigations in
the future at facilities operated by us and that such investigations could
result in significant penalties to us, as well as adverse publicity. It is also
possible that our executives and managers, many of whom have worked at other
healthcare companies that are or may become the subject of federal and state
investigations and private litigation, could be included in governmental
investigations or named as defendants in private litigation. We are not aware of
any material governmental investigations involving any of our facilities, our
executives or managers. The positions taken by authorities in any future
investigations of us, our executives or managers or other healthcare providers
and the liabilities or penalties that may be imposed could have a material
adverse effect on our business, financial condition and results of operations.
Health Choice Regulatory Matters
Health Choice is subject to state and federal laws and regulations, and the
Health Care Financing Administration and the Arizona Health Care Cost
Containment System have the right to audit Health Choice to determine the plan's
compliance with such standards. Health Choice is required to file periodic
reports with the Arizona Health Care Cost Containment System and to meet certain
financial viability standards. Health Choice also must provide its enrollees
with certain mandated benefits and must meet certain quality assurance and
improvement requirements. As of October 16, 2002, Health Choice must comply with
the standardized formats for electronic transactions set forth in the
Administrative Simplification Provisions of the Health Insurance Portability and
Accountability Act, and when final
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regulations become effective, Health Choice will be required to comply with
federal security and privacy standards for health-related information. We cannot
predict the final form that these regulations will take or the impact that the
final regulations, when fully implemented, will have on us.
The federal anti-kickback statute has been interpreted to prohibit the
payment, solicitation, offering or receipt of any form of remuneration in return
for the referral of federal healthcare program patients or any item or service
that is reimbursed, in whole or in part, by any federal healthcare program.
Similar anti-kickback statutes have been adopted in Arizona, which apply
regardless of the source of reimbursement. The Department of Health and Human
Services has adopted safe harbor regulations specifying certain relationships
and activities that are deemed not to violate the federal anti-kickback statute
that specifically relate to managed care:
- waivers by health maintenance organizations of Medicare and Medicaid
beneficiaries' obligation to pay cost-sharing amounts or to provide other
incentives in order to attract Medicare and Medicaid enrollees;
- certain discounts offered to prepaid health plans by contracting
providers;
- certain price reductions offered to eligible managed care organizations;
and
- certain price reductions offered by contractors with substantial
financial risk to managed care organizations.
We believe that the incentives offered by Health Choice to its Medicaid
enrollees and the discounts it receives from contracting healthcare providers
should satisfy the requirements of the safe harbor regulations. However, failure
to satisfy each criterion of the applicable safe harbor does not mean that the
arrangement constitutes a violation of the law; rather the safe harbor
regulations provide that the arrangement must be analyzed on the basis of its
specific facts and circumstances. We believe that Health Choice's arrangements
comply in all material respects with the federal anti-kickback statute and
similar Arizona statutes.
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 because 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 hazardous and low level medical
radioactive waste;
- ownership or historical use of underground and above-ground storage
tanks;
- management of impacts from leaks of hydraulic fluid or oil associated
with elevators, chiller units or incinerators;
- 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 our compliance with environmental laws and regulations to
have a material effect on us. We also may be subject to requirements related to
the 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.
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
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and general liability insurance in amounts that 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. Losses up to our self-insured
retentions and any losses incurred in excess of amounts maintained under such
insurance will be funded from working capital. 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 that will allow us to maintain adequate levels of
coverage. We also cannot assure you that our cash flow will be adequate to
provide for professional and general liability claims in the future.
LEGAL PROCEEDINGS
On August 18, 2000, our subsidiary, Rocky Mountain Medical Center, filed a
Complaint and Motion for Preliminary Injunction in the Third Judicial District
Court for Salt Lake County, State of Utah against St. Mark's Hospital. St.
Mark's Hospital is owned by HCA - The Healthcare Company. The complaint alleges
certain state law violations by St. Mark's Hospital, including exclusionary
contracting practices constituting, among other things, a group boycott under
the Utah Antitrust Act. This lawsuit is currently pending.
We are involved in other litigation and proceedings in the ordinary course
of our business. We do not believe the outcome of any such litigation,
individually or in the aggregate, will have a material adverse effect upon our
business, financial condition or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The table below presents information with respect to our directors and
executive officers at the time of the closing of this offering:
NAME AGE POSITION
- ---- --- --------
David R. White.............. 53 Chairman of the Board and Chief Executive Officer
C. Wayne Gower.............. 53 President, Chief Operating Officer and Director
John K. Crawford............ 42 Executive Vice President, Chief Financial Officer and
Director
Frank A. Coyle.............. 36 Secretary and General Counsel
Jerre H. Frazier............ 65 Chief Compliance Officer
Linda W. Hischke............ 56 Division President
Michael French.............. 51 Division President
Michael S. Berk............. 31 Director
Jay R. Bloom................ 45 Director
Ramsey A. Frank............. 40 Director
Paul S. Levy................ 53 Director
Jeffrey C. Lightcap......... 42 Director
R. Clayton McWhorter........ 67 Director
David Y. Ying............... 46 Director
DAVID R. WHITE was our non-executive Chairman of the Board of Directors
from October 1999 until November 30, 2000. On December 1, 2000, Mr. White was
appointed our Chief Executive Officer. He continues to serve as Chairman of the
Board. Mr. White served as President and Chief Executive Officer of LifeTrust,
an assisted living company, from November 1998 until November 2000. From June
1994 to September 1998, Mr. White served as President of the Atlantic Group at
Columbia/HCA, where he was responsible for 45 hospitals located in nine 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 since October 1999, our Chief
Operating Officer since December 1, 2000, and a Director since October 1999.
From October 1999 until November 30, 2000, Mr. Gower served as our Chief
Executive Officer. From November 1998 until October 1999, Mr. Gower served as
Chief Executive Officer of Iasis Healthcare Corporation, a company formed by
members of our management that was merged into one of our subsidiaries. Mr.
Gower served as President of Columbia/HCA's Summit Division from April 1994 to
September 1998, with responsibility for 21 hospitals with net revenue 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 2000 and one of our Directors since March 2000. From
October 1997 to October 1999, Mr. Crawford served as Executive Vice President
and Chief Financial Officer of PhyCor, Inc., a physician management company. Mr.
Crawford served as Vice President and Chief Financial Officer of PhyCor, Inc.
from July 1994 to October 1997. From 1991 to July 1994, he served in numerous
operating and finance
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positions at PhyCor. Previously, he was a Senior 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
1999. From August 1998 until October 1999, Mr. Coyle served as Secretary and
General Counsel of Iasis Healthcare Corporation, a company formed by members of
our management that was merged into one of our subsidiaries. Mr. Coyle served
from May 1995 to August 1998 as Assistant Vice President Development in
Physician Services and in-house Development Counsel for Columbia/HCA. From May
1990 to May 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 health
maintenance organizations.
JERRE H. FRAZIER has been our Vice President of Ethics and Business
Practices and Chief Compliance Officer since November 1999. Mr. Frazier served
from 1996 to November 1999 as Director of Compliance for Columbia/HCA. From 1990
to 1996, Mr. Frazier was an attorney with Baker, Worthington, Crossley,
Stansberry & Woolf. Prior to that time, Mr. Frazier practiced law for more than
35 years in Washington, D.C., Houston, Texas and Nashville, Tennessee. Mr.
Frazier has extensive experience with healthcare and regulatory matters.
LINDA W. HISCHKE has been our Division President for the Utah and Texas
markets since October 1999. 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 revenue 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.
MICHAEL FRENCH has been our Division President for the Arizona and Florida
markets since November 2000. Mr. French served from October 1998 to November
2000 as President and Chief Operating Officer of Charter Behavioral Health
Systems, Inc. From May 1997 to August 1998, Mr. French served as Vice President,
Southeast Region for Tenet Health System. From January 1995 to February 1997,
Mr. French served as President and Chief Executive Officer of Intercoastal
Health Systems, Inc.
MICHAEL S. BERK has been one of our Directors since October 1999. Mr. Berk
is a Vice President of Joseph Littlejohn & Levy, which he joined in February
1999. From September 1997 to February 1999, Mr. Berk was an associate at
Frontenac Company.
JAY R. BLOOM has been one of our Directors since October 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 February 1990 to August
1995, Mr. Bloom was a Managing Director of the Argosy Group L.P. Mr. Bloom is
also a Managing Director of Trimaran Fund Management, L.L.C., the investment
advisor to Trimaran Fund II, L.L.C., and a Managing Director of Caravelle
Advisors, L.L.C. Mr. Bloom serves as a director of several companies, including
Heating Oil Partners, L.P. and Transportation Technologies Industries, Inc.
RAMSEY A. FRANK has been one of our Directors since October 1999. Mr. Frank
is a Senior Managing Director of Joseph Littlejohn & Levy, which he joined in
September 1999. From January 1993 to September 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. Mr. Frank serves
as a director of AdvancePCS.
PAUL S. LEVY has been one of our Directors since October 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., Fairfield Manufacturing Company, Inc., AdvancePCS and New
World Pasta Company.
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JEFFREY C. LIGHTCAP has been one of our Directors since October 1999. Mr.
Lightcap is a Senior Managing Director of Joseph Littlejohn & Levy, which he
joined in June 1997. From February 1993 to May 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. and New World Pasta Company.
R. CLAYTON MCWHORTER has been one of our directors since February 2001. Mr.
McWhorter is Chairman and Chief Executive Officer of Clayton Associates, LLC, a
venture capital firm he founded in 1996. Mr. McWhorter served as Chairman of the
Board of Columbia/HCA from April 1995 to May 1996. He served as Chairman,
President and Chief Operating Officer of HealthTrust, Inc. from April 1987 to
April 1995 and as President and Chief Executive Officer of Hospital Corporation
of America from 1985 to April 1987. Mr. McWhorter also serves as a director of
Edgewater Technologies, Inc.
DAVID Y. YING has been one of our Directors since October 1999. Mr. Ying is
a Senior Managing Director of Joseph Littlejohn & Levy, which he joined in June
1997. From January 1993 to May 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.
Mr. French served as President and Chief Executive Officer of Charter
Behavioral Health Systems, Inc. from October 1998 to November 2000. Charter
filed for reorganization under Chapter 11 of the United States Bankruptcy Code
in February 2000.
Our certificate of incorporation and by-laws provide that our board consist
of not less than three nor more than fifteen members, the exact number of which
shall be determined by our board in a resolution. Our directors are elected at
our annual meeting of stockholders for one-year terms and until their successors
are duly elected and qualified. Our executive officers serve at the discretion
of the board of directors.
We intend to appoint two new independent directors within three months of
this offering and one additional independent director within one year of this
offering. We currently anticipate that these new directors will include a senior
executive with healthcare industry experience, a physician and a person with
extensive healthcare regulatory experience.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has compensation and audit committees and has agreed
to establish a compliance committee. The compensation committee currently
consists of Messrs. Lightcap and Berk and will include new independent directors
upon their appointment to our board of directors. The audit committee currently
consists of Mr. Bloom and will include new independent directors upon their
appointment to our board of directors. The compliance committee will consist of
one of our current directors and one or more newly appointed independent
directors. Our board of directors has approved the charter of our compliance
committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 2000, the compensation committee was comprised of Messrs.
White, Levy, Lightcap and Frank J. Rodriguez, one of our former directors.
Messrs. Levy, Lightcap and Rodriguez have never been officers or employees of
our company or its subsidiaries. Mr. White was not an officer or employee of our
company during the 2000 fiscal year; however, he was appointed our Chief
Executive Officer on December 1, 2000.
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DIRECTOR COMPENSATION
Currently, our directors 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. Following this offering, we intend to adopt customary
compensation arrangements for our independent directors that are consistent with
other publicly traded hospital companies.
CHIEF EXECUTIVE OFFICER APPOINTMENT
On December 1, 2000, David R. White was appointed our Chief Executive
Officer. In connection with this appointment, our board of directors granted Mr.
White options to purchase 207,520 shares of our common stock at an exercise
price of $9.52 per share, 243,919 shares at an exercise price of $24.76 per
share, and 191,652 shares at an exercise price of $40.00 per share. Twenty
percent of the options vested on the date of grant. The remaining options vest
in four equal annual installments, with the first installment vesting on
September 30, 2001. The options have a ten year term. In May 2000, our board of
directors granted David R. White, who at the time was serving as our
non-executive Chairman, options to purchase 350,009 shares of our common stock
at an exercise price of $9.52 per share, 406,535 shares at an exercise price of
$24.76 per share, and 319,418 shares at an exercise price of $40.00 per share.
The options vest in five equal annual installments, with the first installment
vesting on September 30, 2000, and have a ten year term. For a discussion of Mr.
White's terms of employment, please see the section of this prospectus entitled
"Employment Agreements."
EXECUTIVE COMPENSATION
The following table provides information as to annual, long-term or other
compensation during the last fiscal year for our Chief Executive Officer as of
September 30, 2000 and our four other most highly compensated executive officers
who were serving as executive officers as of September 30, 2000.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
--------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION
- --------------------------- ---- --------- -------- ------------ ------------
C. Wayne Gower.............................. 2000 $510,000 -- 1,074,388 $ 3,546(b)
President & Chief Operating Officer(a)
John K. Crawford............................ 2000 277,883 -- 653,622 3,494(b)
Executive Vice President & Chief Financial
Officer
Linda W. Hischke............................ 2000 250,900 -- 251,997 116,803(c)
Division President
Frank A. Coyle.............................. 2000 150,275 -- 100,795 3,390(b)
Secretary and General Counsel
Ken Perry(d)................................ 2000 200,112 -- 262,497 4,528(b)
Vice President -- Financial Operations
- ---------------
(a) Mr. Gower served as our President and Chief Executive Officer through
November 30, 2000. He has served as our President and Chief Operating
Officer since December 1, 2000.
(b) Our contribution on behalf of the employee to our 401(k) plan.
(c) Our contribution of $3,157 on behalf of Ms. Hischke to our 401(k) plan and
relocation allowance of $113,646.
(d) Mr. Perry served as our Vice President-Financial Operations through November
30, 2000 and subsequently left our company.
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STOCK OPTION GRANTS
The following table sets forth certain information concerning options
granted in 2000 to the named executive officers. None of the named executive
officers were granted stock appreciation rights.
OPTIONS GRANTED IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
----------------------------------------------------
PERCENT
OF TOTAL POTENTIAL REALIZABLE VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN FISCAL OR BASE EXPIRATION ------------------------------
NAME GRANTED (#) YEAR (%) PRICE ($/SH) DATE 5% ($) 10% ($)
- ---- ----------- ---------- ------------ ---------- ------------ ------------
C. Wayne Gower......... 31,079(a) 9.52 5/1/10 186,153 471,748
317,370(b) 9.52 5/1/10 1,900,884 4,817,214
406,526(b) 24.76 5/1/10 -- --
319,413(b) 40.00 5/1/10 -- --
---------
1,074,388 19.9%
John K. Crawford....... 211,985(b) 9.52 5/1/10 1,269,688 3,217,639
247,317(b) 24.76 5/1/10 -- --
194,320(b) 40.00 5/1/10 -- --
---------
653,622 12.1%
Linda W. Hischke....... 81,729(b) 9.52 5/1/10 489,519 1,240,537
95,350(b) 24.76 5/1/10 -- --
74,918(b) 40.00 5/1/10 -- --
---------
251,997 4.7%
Frank A. Coyle(c)...... 18,647(a) 9.52 5/1/10 111,692 283,049
14,043(b) 9.52 5/1/10 84,115 213,163
38,139(b) 24.76 5/1/10 -- --
29,966(b) 40.00 5/1/10 -- --
---------
100,795 1.9%
Ken Perry.............. 26,936(a) 9.52 5/1/10 161,337 408,859
58,197(b) 9.52 5/1/10 348,577 883,364
99,324(b) 24.76 5/1/10 -- --
78,040(b) 40.00 5/1/10 -- --
---------
262,497 4.9%
- ---------------
(a) The options were fully vested on the date of grant.
(b) The options vest in five equal annual installments. The first installment
vested on September 30, 2000.
(c) On December 1, 2000, we granted Mr. Coyle options to purchase 8,172 shares
of our common stock at an exercise price of $9.52 per share, 9,534 shares at
an exercise price of $24.76 per share, and 7,491 shares at an exercise price
of $40.00 per share.
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The following table summarizes certain information with respect to
unexercised options held by the named executive officers at September 30, 2000.
The securities underlying unexercised options were valued at $9.52 per share at
September 30, 2000 pursuant to a valuation conducted by an independent
investment banking firm. No unexercised options were in-the-money at September
30, 2000.
FISCAL YEAR-END OPTIONS
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS HELD AT
SEPTEMBER 30, 2000
----------------------------
NAME EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------
C. Wayne Gower.............................................. 108,340 966,048
John K. Crawford............................................ 59,276 594,346
Linda W. Hischke............................................ 22,853 229,144
Frank A. Coyle.............................................. 15,683 85,112
Ken Perry................................................... 33,256 229,241
2000 STOCK OPTION PLAN
Our board of directors approved the IASIS Healthcare Corporation 2000 Stock
Option Plan on May 1, 2000, and our stockholders approved the plan on December
29, 2000. The plan is designed to comply with the requirements of
"performance-based compensation" under Section 162(m) of the Internal Revenue
Code, and the conditions for exemption from the short-swing profit recovery
rules under Rule 16b-3 under the Securities Exchange Act. Under the terms of
this plan, a committee established by our board of directors administers this
plan and may grant, in its discretion, incentive stock options and non-qualified
stock options to selected directors, officers, employees and consultants of our
company. Among other things, the committee has the power to determine at what
time options may be granted as well as the terms, conditions, restrictions and
performance criteria, if any, relating to the options. In addition, the plan
prohibits the transfer of options, except by will or the laws of descent. Upon
exercise of an option under the plan, an optionee is required to enter into a
stockholders' agreement with us in the form then in effect. The stockholders'
agreement governs the optionee's rights as a stockholder and restricts the
optionee's ability to transfer his or her shares of common stock.
The maximum number of shares of our common stock that may be issued
pursuant to options granted under the plan is 7,208,940; provided, however, that
the maximum number of shares of our common stock that any optionee may receive
during the term of the plan may not exceed 3,675,000, all subject to adjustment
as described in this plan.
The terms and conditions applicable to options are set forth by the
committee in each individual option agreement. However, no option granted under
this plan may expire later than ten years from its date of grant. In addition,
the committee may not grant incentive stock options to any person who is not our
employee on the date of the grant, and the exercise price of an incentive stock
option cannot be less than the fair market value of a share of our common stock
on the date of its grant. The exercise price of an incentive stock option
granted to a stockholder who owns at the time of the grant shares of our common
stock with more than ten percent of the total combined voting power of all
classes of our capital stock cannot be less than 110% of the fair market value
of a share of our common stock on the date of the grant and the exercise period
shall not exceed five years from the date of the grant. Furthermore, the
aggregate fair market value of the shares of our common stock for which
incentive stock options granted under this plan or any other stock option plan
of our company, determined as of the date of grant, that become exercisable for
the first time by any person during any calendar year may not exceed $100,000.
Any incentive stock options granted in excess of this limitation will be treated
for all purposes as non-qualified stock options.
Our board of directors may amend this plan at any time for any reason
subject to the stockholders approval to the extent necessary to meet the
requirements of applicable law. However, no amendment can
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adversely affect an optionee's right under a previously granted option without
the consent of the optionee. Unless terminated earlier by the board, this plan
will terminate by its terms effective May 1, 2010, although previously granted
options may be exercised after plan termination in accordance with the terms of
the plan as in effect upon termination.
As of December 31, 2000, options to purchase a total of 6,543,851 shares
had been granted and were outstanding under this plan, of which options to
purchase 1,380,851 shares were then vested and exercisable. Generally, options
vest in five equal annual installments commencing September 30, 2000. A portion
of the options granted to some optionees vested immediately on the date of
grant.
Our stock option agreements provide that, in the event of a change of
control, all then unexercisable options shall become immediately exercisable in
full. A change in control is deemed to have occurred when any person or group of
persons within the meaning of Section 13(d) of the Exchange Act, other than
Joseph Littlejohn & Levy Fund III, L.P. or any of its affiliates, shall acquire
beneficially or of record more than 50% of our then outstanding voting
securities or upon a sale of all or substantially all of our assets.
EMPLOYMENT ARRANGEMENTS
We entered into a five-year employment agreement with David R. White under
which he serves as our Chairman of the Board and Chief Executive Officer. His
employment commenced on December 1, 2000. Mr. White's employment agreement
provides for an initial base salary of $625,000 each year. Mr. White is also
entitled to receive an annual target bonus of up to 200% of his base salary
based upon the achievement of EBITDA and total indebtedness objectives set
annually by our board of directors.
Mr. White's employment agreement contains severance provisions regarding
his compensation upon termination of his employment under some circumstances. If
Mr. White's employment is terminated without cause or if he leaves our company
for "good reason," he will be entitled to receive severance payments equal to
two times his annual base salary, a lump sum payment equal to the present value
of all other benefits he would have received through two years after the date of
his termination, and could be eligible to receive a pro rata bonus that is
determined based on a formula described in his employment agreement. This
agreement contains a non-competition and non-solicitation provision pursuant to
which Mr. White will not compete with us or our subsidiaries within 25 miles of
the location of any hospital we manage for two years following the date of
termination of his employment. During this time he will not solicit or hire our
business partners and employees. In certain circumstances following a change in
control, we have agreed to compensate Mr. White in the event any payment under
his employment agreement is subject to an excise tax under Section 4999 of the
Internal Revenue Code.
We have entered into employment agreements with C. Wayne Gower and John K.
Crawford pursuant to which they respectively serve as our President and our
Executive Vice President and Chief Financial Officer. The terms of these
employment agreements commenced on February 1, 2000 and continue for five years.
These employment agreements provide for initial base salaries of $510,000 per
year for Mr. Gower and $350,000 per year for Mr. Crawford. Messrs. Gower and
Crawford are also entitled to receive annual target bonuses of up to 100% of
their base salaries based upon the achievement of certain EBITDA and total
indebtedness objectives set annually by our board of directors. Each of the
employment agreements contains a noncompetition and non-solicitation provision
pursuant to which each of Messrs. Gower and Crawford has agreed, subject to
certain exceptions, that for two years following the date of our termination of
his employment agreement, he will not compete with us or our subsidiaries within
50 miles of the location of any hospital we manage and will not solicit or hire
certain business partners and employees. The employment agreements also contain
severance provisions regarding their compensation upon our termination of their
employment under certain circumstances. If the employment of either Mr. Gower or
Mr. Crawford is terminated without cause or if either of them leaves our company
for "good reason", he will be entitled to receive severance payments equal to
two times his respective annual base salaries, a lump sum payment equal to the
present value of all other benefits he would have received through two years
after the date of termination, and could be eligible to receive a pro rata bonus
that is determined based on a formula described in his employment agreements.
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STOCK OWNERSHIP OF
PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table presents information as of March 5, 2001 regarding
ownership of shares of our common stock by each person known to be a holder of
more than 5% of our common stock, the members of our board of directors at the
time of the closing of this offering, each current executive officer named in
the summary compensation table and all directors and executive officers as a
group.
When reviewing the following table, you should be aware that the amounts
and percentage of common stock beneficially owned are reported on the basis of
regulations of the Securities and Exchange Commission governing the
determination of beneficial ownership of securities. Under the rules of the
Securities and Exchange Commission, 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.
Unless otherwise indicated, the address of each person listed below is 113
Seaboard Lane, Suite A-200, Franklin, Tennessee 37067.
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(a)
SHARES -----------------------
BENEFICIALLY BEFORE THE AFTER THE
BENEFICIAL OWNERS OWNED(b) OFFERING OFFERING
- ----------------- ------------ ---------- ---------
JLL Healthcare, LLC(c)................................... 27,974,625 87.6% 61.8%
David R. White........................................... 357,626 1.1 *
C. Wayne Gower........................................... 285,212 * *
John K. Crawford......................................... 130,724 * *
Frank A. Coyle........................................... 69,731 * *
Linda W. Hischke......................................... 50,399 * *
Michael S. Berk(d)....................................... -- -- --
Jay R. Bloom............................................. -- -- --
Ramsey A. Frank(d)....................................... 27,974,625 87.6 61.8
Paul S. Levy(d).......................................... 27,974,625 87.6 61.8
Jeffrey C. Lightcap(d)................................... 27,974,625 87.6 61.8
R. Clayton McWhorter(e).................................. 380,138 1.2 *
David Y. Ying(d)......................................... 27,974,625 87.6 61.8
Directors and executive officers as a group (14
persons)............................................... 29,258,954 89.4 63.4
- ---------------
* Less than 1%.
(a) Percentage ownership is based on 31,932,528 shares outstanding prior to
this offering and 45,282,528 shares outstanding after this offering.
(b) The following shares of common stock subject to options currently
exercisable or exercisable within 60 days of February 13, 2001 are deemed
outstanding for the purpose of computing the percentage ownership of the
person holding such options but are not deemed outstanding for computing
the percentage ownership of any other person: Mr. White, 347,125; Mr.
Gower, 239,740; Mr. Crawford, 130,724; Mr. Coyle, 35,076; Ms. Hischke,
50,399; all directors and executive officers as a group (14 persons),
813,563.
(c) 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 owned by JLL Healthcare, LLC. Members of JLL Healthcare,
LLC include Joseph Littlejohn & Levy Fund III, L.P., Trimaran Fund II,
L.L.C. and other investors in the Trimaran investment program, J.P. Morgan
Capital Corporation, FCA Ventures II, L.P. and other investors.
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(d) Messrs. Levy, Ying, Lightcap, Frank and Berk are all associated with Joseph
Littlejohn & Levy Fund III, L.P. which, through its controlling interest in
JLL Healthcare, LLC, may be deemed to beneficially own all of the shares of
common stock owned by JLL Healthcare, LLC. Mr. Berk disclaims any
beneficial ownership of this common stock. Messrs. Levy, Ying, Lightcap 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.
(e)Mr. McWhorter is Managing Partner of Clayton Associates, which is the
co-general partner of FCA Ventures II, L.P. As a result, Mr. McWhorter may
be deemed to beneficially own 366,413 shares of common stock owned by FCA
Venture II, L.P. Mr. McWhorter disclaims beneficial ownership of shares of
common stock owned by FCA Ventures II, L.P.
Substantially all of our current stockholders have pledged their common
stock of our company for the benefit of our lenders as security for our
obligations under our bank credit facility. In the event of a default under our
bank credit facility, our lenders would have the right to foreclose on the
common stock of our current stockholders, which would result in a change in
control of our company.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
RECAPITALIZATION, ACQUISITION AND MERGER TRANSACTIONS
IASIS was formed in October 1999 through a series of transactions that were
arranged by Joseph Littlejohn & Levy, Inc. and members of our management team.
Joseph Littlejohn & Levy is the private equity firm that controls JLL
Healthcare, LLC, our largest stockholder. In 1999, Joseph Littlejohn & Levy,
Inc. and certain members of our management team secured an agreement from
Paracelsus to enter into a recapitalization transaction involving
PHC/Psychiatric Healthcare Corporation, a wholly owned subsidiary of Paracelsus
that owned five hospitals in the Utah area. Pursuant to the recapitalization
transaction, JLL Healthcare, LLC and certain other of our stockholders acquired
an aggregate of 94% of the outstanding shares of common stock of PHC/Psychiatric
Healthcare Corporation from Paracelsus for an aggregate purchase price of $125.0
million. As part of the recapitalization, PHC/Psychiatric Healthcare Corporation
repurchased $155.0 million of its shares of common stock from Paracelsus. The
recapitalization valued PHC/Psychiatric Healthcare Corporation at $287.0
million, net of a working capital adjustment of $1.0 million. Upon the closing
of the recapitalization, Paracelsus retained approximately 6.0% of
PHC/Psychiatric Healthcare Corporation's outstanding common stock. Paracelsus
has sold its interest in our company.
On October 15, 1999, PHC/Psychiatric Healthcare Corporation acquired ten
acute care hospitals and other related facilities and assets from Tenet for
approximately $431.8 million in cash and assumed liabilities of approximately
$41.2 million.
On October 15, 1999, concurrent with the acquisition of the hospitals and
related facilities and assets from Tenet, JLL Healthcare LLC purchased
148,771.93 shares of our mandatorily redeemable series A preferred stock for a
purchase price of $148,771,930. In addition, a company formed by members of our
management, originally to acquire and operate hospitals and related businesses,
was merged with and into a wholly owned subsidiary of PHC/Psychiatric Healthcare
Corporation. In the merger, David White, Wayne Gower, Frank Coyle, Clayton
McWhorter, Stuart McWhorter, one of our former directors, and an investment
partnership with which Clayton McWhorter and Stuart McWhorter are affiliated
received 4,605, 19,940, 15,197, 5,986, 12,894 and 159,823 shares of our common
stock and 56.14, 243.10, 185.27, 72.99, 157.20 and 1,948.43 shares of our
mandatorily redeemable series B preferred stock, respectively. The
PHC/Psychiatric Healthcare Corporation subsidiary continued as the surviving
entity of the merger. Following the recapitalization, PHC/Psychiatric Healthcare
Corporation was renamed IASIS Healthcare Corporation.
See "Stock Ownership of Principal Stockholders and Management" on page 64,
for information regarding the current ownership of our common stock.
TRANSITION SERVICES AGREEMENT
During fiscal 2000, we were a party to a transition services agreement with
Paracelsus under which Paracelsus agreed to provide specified services to us,
including data processing services and systems technology services. The fee for
these services was equal to Paracelsus's cost, plus 2.0%. During fiscal 2000, we
paid approximately $290,000 to Paracelsus pursuant to this agreement. The
agreement was terminated in April 2000.
LICENSE AGREEMENTS
During fiscal 2000, we were a party to a license agreement with Paracelsus
under which Paracelsus granted us a license to utilize specific intellectual
property, including administrative software, and policies, procedures and
compliance manuals, related to the administration of our business. The license
agreement was terminated in October 2000.
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STOCKHOLDERS AGREEMENT
In connection with the recapitalization of the Paracelsus hospitals and the
acquisition of hospitals and related facilities from Tenet, JLL Healthcare, LLC
and the other investors in our company entered into a stockholders agreement
dated October 8, 1999, as amended, governing their ownership of our company. The
following is a summary of the material terms of the stockholders agreement:
- The stockholders other than JLL Healthcare, LLC have agreed to specified
restrictions on the transfer of their shares.
- There is no provision restricting how our stockholders vote on any
matters.
- From and after 180 days 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 us. JLL Healthcare is entitled to eight demand
registrations, each other stockholder owning more than 5% of the
outstanding common stock is entitled to two demand registrations, and
each stockholder owning more than 3% and less than 5% is entitled to one
demand registration.
- From and after 180 days following an initial public offering, whenever
the company proposes to register any of its equity securities or
securities convertible or exchangeable into or exercisable for its equity
securities (other than registrations on Forms S-8 and S-4), the
stockholders shall have "piggyback" registration rights with respect to
all these registrations.
- We have agreed to pay the administrative fees and expenses of JLL
Healthcare, LLC during the term of the stockholders agreement. During the
fiscal year ended September 30, 2000, we paid JLL Healthcare, LLC
approximately $1.4 million for its administrative fees and expenses,
including approximately $1.3 million of expenses relating to the
recapitalization, acquisition and merger transactions.
TAX SHARING AGREEMENTS
In connection with the recapitalization, we and JLL Healthcare, LLC entered
into a tax sharing agreement. This agreement will terminate and have no force
and effect upon the closing of this offering. We and JLL Healthcare, LLC have
been the only members of JLL Healthcare, LLC's consolidated group for U.S.
federal income tax purposes as well as of some similar consolidated, combined or
unitary groups for state and local income tax purposes. 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. For any period in which we were included in JLL Healthcare,
LLC's consolidated group, we would be liable in the event that any federal tax
liability was incurred, but not discharged, by JLL Healthcare, LLC.
Under a new tax sharing agreement, which will be effective upon the closing
of the offering, we are responsible for and will indemnify JLL Healthcare, LLC
for all taxes attributable to us. This new tax sharing agreement contains
provisions regarding related tax matters, such as preparation of tax returns,
filing of tax returns, and the handling of tax audits.
HEADQUARTERS LEASE AGREEMENT
We lease a total of approximately 18,500 square feet of office space for
our corporate headquarters in Franklin, Tennessee pursuant to a lease agreement
with The Dover Centre, LLC, a Tennessee limited liability company in which
Clayton McWhorter, a director of our company, owns a 37.5% membership interest.
Clayton Associates, LLC, a Tennessee limited liability company of which Stuart
C. McWhorter, a former director of our company, is a 45% member, has an option
to acquire the membership interest of Clayton McWhorter in The Dover Centre,
LLC. The current annual rent per square foot for approximately 16,500 square
feet of space is $17.00, subject to increase to $17.51, $18.04, $18.58 and
$19.14 in August 2001, August 2002, August 2003 and August 2004, respectively.
With respect to the remaining
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approximately 2,000 square feet of space, the current annual rent per square
foot is $18.50, subject to increase to $19.05 and $19.62 in November 2001 and
November 2002, respectively. Currently, the aggregate monthly base rent under
the lease is $26,483. Additional rent is payable under the lease in an amount
equal to the company's proportionate share of the excess of actual operating
expenses over budgeted operating expenses for the base year 2000, grossed up to
reflect 95% occupancy. The term of the lease with respect to approximately
16,500 square feet of space commenced on May 1, 2000 and terminates on July 31,
2005, and the term of the lease with respect to the remaining approximately
2,000 square feet of space commenced on October 15, 2000 and terminates on
October 31, 2003. We have the option to renew the lease for two additional
periods of five years each, subject to a base rent increase of 3%. During fiscal
2000, we paid The Dover Centre, LLC aggregate rent of $93,449.
ADDITIONAL INVESTMENT
On December 15, 2000, JLL Healthcare, LLC, our largest stockholder,
purchased an additional 149,625 shares of our common stock for a purchase price
of $1,425,000 and Clayton McWhorter, Stuart McWhorter and an investment
partnership with which Clayton McWhorter and Stuart McWhorter are affiliated
purchased an additional 73 shares, 158 shares and 1,959 shares of our common
stock, respectively, for an aggregate purchase price of $20,870.
EXCHANGE OF OUR PREFERRED STOCK
On October 26, 2000, all outstanding shares of our Series A and Series B
preferred stock were exchanged on the basis of ten common shares for each
preferred share for an aggregate of 17,357,671 shares of our common stock. The
preferred stock was mandatorily redeemable and dividends were payable in shares
of our capital stock. Therefore, the accrual of dividends did not result in a
cash payment.
EXCHANGE OF COMMON STOCK HELD BY JLL HEALTHCARE
In connection with this offering, we entered into an agreement and plan of
reorganization with JLL Healthcare. The plan of reorganization provides that
upon the closing of this offering, JLL Healthcare will transfer to us all of our
common stock that it owns in exchange for us issuing to JLL Healthcare an amount
of newly issued common stock that maintains JLL Healthcare's current ownership
percentage. We are undertaking the reorganization to provide us with more
flexibility in our capital structure, to increase the liquidity of our common
stock over time, to achieve a more efficient tax structure and to provide
administrative cost savings. We believe that the reorganization should be
treated as a tax-free reorganization for U.S. federal income tax purposes,
although we cannot assure you that it will be so treated. If not, we would be
liable for a significant amount of tax.
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DESCRIPTION OF INDEBTEDNESS
OUR BANK CREDIT FACILITY
The following summary of the material provisions of our bank credit
facility is not complete and is subject to, and is qualified in its entirety by
reference to, the terms of our bank credit facility.
Under our bank credit facility, 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 commitment to provide a revolving credit facility of up to $125.0
million.
Our revolving credit facility and tranche A term loan bear interest at
either the Morgan Guaranty Trust Company of New York's alternate base rate, plus
a margin ranging from 1.00% to 2.50%, or the reserve-adjusted Eurodollar rate,
plus a margin ranging from 2.00% to 3.50%, both depending on our leverage ratio.
The tranche B term loan bears interest at the alternate base rate, plus 3.25%,
or the reserve-adjusted Eurodollar rate, plus 4.25%. The weighted average
interest rate on our bank credit facility was approximately 11.1% at December
31, 2000. We also pay a commitment fee of 0.5% of the average daily amount
available under the revolving credit facility.
We may voluntarily prepay some or all of our obligations under our bank
credit facility. In addition, the loans under our bank credit facility are
subject to mandatory prepayment under specific circumstances, including
prepayment with of a portion of excess cash flow and the net proceeds of
specified casualty events, asset sales and debt issuances, each subject to
various exceptions.
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 on September 30, 2004. As of December 31, 2000, we had drawn $16.5
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 $79.9 million.
The $80.0 million tranche A term loan was fully drawn in a single borrowing
on the closing date of our bank credit facility and, once repaid, cannot be
reborrowed. The tranche A term loan matures on September 30, 2004. 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 September 30, 2006. There will be no substantial
amortization of the tranche B term loan until the sixth year. As of December 31,
2000, $77.5 million was outstanding under the tranche A term loan and $247.5
million was outstanding under the tranche B term loan.
Our bank credit facility contains negative covenants that limit our ability
to:
- 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.
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Our bank 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
our bank credit facility.
Our bank credit facility also includes customary:
- representations and warranties;
- affirmative covenants; and
- events of default, including the occurrence of a change of control and a
cross default to our other material indebtedness.
Our obligations under our bank credit facility are guaranteed by our direct
and indirect domestic subsidiaries that are not unrestricted subsidiaries. In
addition, our obligations and the guarantor subsidiaries' obligations under our
bank 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. In addition, substantially all our
current stockholders have pledged their common stock for the benefit of our
lenders as security for our obligations under our bank credit facility.
We will use the net proceeds from this offering to repay a portion of our
outstanding indebtedness under our bank credit facility.
NOTES
In October 1999, we issued $230 million aggregate principal amount of 13%
senior subordinated notes due 2009. Interest on these notes is payable in cash
on April 15 and October 15 of each year. These notes rank junior to all our
senior indebtedness and equally with our other senior subordinated indebtedness.
These notes mature on October 15, 2009.
We may redeem any of these notes beginning on October 15, 2004. The initial
redemption price will equal 106.5% 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 of the notes outstanding on the date of redemption with the net
cash proceeds we receive from capital stock which we issue. The redemption price
will equal 113.0% of the aggregate principal amount of the notes redeemed, plus
accrued and unpaid interest. 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.
Upon the occurrence of a change of control, the terms of these notes
require us to make an offer to purchase all outstanding notes. The purchase
price will equal 101% of the principal amount of all notes outstanding, plus
accrued and unpaid interest to the date of purchase.
The terms of these 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 some kinds of investments and other restricted payments;
- transfer or sell assets; and
- merge or consolidate with other companies.
All our subsidiaries have guaranteed our obligations under these notes.
These guarantees are subordinated to all senior indebtedness of the guarantors.
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DESCRIPTION OF OUR CAPITAL STOCK
OVERVIEW
This prospectus contains a summary of our common stock and preferred stock.
These summaries are not meant to be a complete description of each security.
However, this prospectus contains the material terms of the securities being
offered.
Our amended and restated certificate of incorporation provides for an
increase in our authorized capital stock as follows:
- 100,000,000 shares of common stock, par value $.01 per share, of which
31,932,528 shares will be issued and outstanding prior to this offering;
- 10,000,000 shares of nonvoting common stock, par value $.01 per share, of
which no shares will be issued and outstanding; and
- 5,000,000 shares of preferred stock, par value $.01 per share, of which
no shares will be issued and outstanding.
After the closing of the offering, JLL Healthcare, LLC and our directors
and officers will beneficially own approximately 63.4% of the outstanding common
stock, or 56.5% on a diluted basis. As long as JLL Healthcare, LLC and our
directors and officers continue to own in the aggregate more than 50% of the
outstanding shares of common stock, they will be in a position to elect our
board of directors and control all matters affecting us, including any
determination with respect to:
- our direction and policies;
- any merger, consolidation or sale of all or substantially all of our
assets;
- future issuances of common stock, preferred stock or other securities;
- future incurrence of debt; and
- any dividends on our common stock or preferred stock.
COMMON STOCK AND NONVOTING COMMON STOCK
Voting rights. Each holder of common stock is entitled to one vote for
each share held on all matters to be voted upon by stockholders. Holders of
shares of nonvoting common stock are not entitled to vote on matters to be voted
upon by stockholders except as otherwise required by law.
Dividends. The holders of common stock and nonvoting common stock, after
any preferences of holders of any preferred stock, are entitled to receive
dividends as determined by our board of directors.
Liquidation and dissolution. Upon the voluntary or involuntary
liquidation, dissolution or winding-up of IASIS, our net assets will be
distributed pro rata to the holders of our common stock and nonvoting common
stock, subject to any preferences of holders of our preferred stock.
Other rights. Holders of our common stock have no right to:
- convert the stock into any other security;
- have the stock redeemed; or
- purchase additional stock or to maintain their proportionate ownership
interest.
Our common stock does not have cumulative voting rights. Holders of our
common stock are not required to make additional capital contributions.
Holders of our nonvoting common stock have the right, subject to certain
limitations, to convert any or all shares of nonvoting common stock into an
equal number of shares of common stock but may not
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have their stock redeemed or purchase additional stock to maintain their
proportionate ownership interest in our company.
The outstanding shares of common stock are, and the shares sold in this
offering will be, when issued and paid for, duly authorized, validly issued,
fully paid and nonassessable. The rights, preferences and privileges of holders
of common stock and nonvoting common stock are subject to, and may be adversely
affected by, the rights of holders of shares of any series of preferred stock
that may be designated and issued in the future.
PREFERRED STOCK
Currently, our board of directors has the authority, within the limitations
and restrictions stated in our amended and restated certificate of
incorporation, to provide by resolution for the issuance of shares of
preferred stock, in one or more classes or series, and to fix the rights,
preferences, privileges and restrictions of this preferred stock, including
dividend rights, conversion rights, voting rights, terms of redemption,
liquidation preferences and the number of shares constituting any series or the
designation of such series. The issuance of preferred stock could have the
effect of decreasing the market price of the common stock and could adversely
affect the voting and other rights of the holders of common stock.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of our directors to
us and our stockholders to the fullest extent permitted by Delaware law.
Specifically, our directors will not be personally liable for money damages for
breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law, which concerns
unlawful payments of dividends, stock purchases, or redemptions; and
- for any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation and by-laws will also contain provisions
indemnifying our directors and officers to the fullest extent permitted by
Delaware law. The indemnification permitted under Delaware law is not exclusive
of any other rights to which such persons may be entitled.
In addition, we maintain directors' and officers' liability insurance to
provide our directors and officers with insurance coverage for losses arising
from claims based on breaches of duty, negligence, error and other wrongful
acts.
We intend to enter into indemnification agreements with our directors and
executive officers. These agreements will contain provisions that may require
us, among other things, to indemnify these directors and executive officers
against certain liabilities that may arise because of their status or service as
directors or executive officers, advance their expenses incurred as a result of
any proceeding against them as to which they could be indemnified and obtain
directors' and officers' liability insurance.
At present there is no pending litigation or proceeding involving any
director or officer, as to which indemnification is required or permitted. We
are not aware of any threatened litigation or proceeding which may result in a
claim for such indemnification.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS AND PROVISIONS OF
DELAWARE LAW
Our amended and restated certificate of incorporation and our amended and
restated by-laws include the provisions summarized below. These provisions may
be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder might consider in its best
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interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders.
Stockholder Action; Special Meeting of Stockholders
Our amended and restated certificate of incorporation eliminates the
ability of stockholders to act by written consent. It further provides that
special meetings of our stockholders may be called only by the chairman of the
board of directors, the president or a majority of the board of directors.
Advance Notice Requirements for Stockholder Proposals and Directors
Nominations
Our amended and restated by-laws provide that stockholders seeking to bring
business before an annual meeting of stockholders must provide timely notice in
writing. To be timely, a stockholder's notice must be delivered to or mailed and
received at our principal executive offices not less than 90 days nor more than
120 days prior to the anniversary date of the immediately preceding annual
meeting of stockholders; provided, that in the event that the annual meeting is
called for a date that is not within 30 days before or after such anniversary
date, notice by the stockholder in order to be timely must be received not later
than the close of business on the 10th day following the date on which notice of
the date of the annual meeting was mailed to stockholders or made public. Our
amended and restated by-laws also specify certain requirements as to the form
and content of a stockholder's notice. These provisions may preclude
stockholders from bringing matters before an annual meeting of stockholders or
from making nominations for directors at an annual meeting of stockholders.
Authorized But Unissued Shares
The authorized but unissued shares of our common stock and preferred stock
are available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
Delaware Anti-Takeover Law
Our amended and restated certificate of incorporation contains a provision
expressly electing not to be governed by Section 203 of the Delaware General
Corporation Law. In general, Section 203 restricts some business combinations
involving interested stockholders or their affiliates. An interested stockholder
is defined as any person or entity that is the beneficial owner of at least 15%
of a corporation's voting stock or is an affiliate or associate of the
corporation or the owner of 15% or more of the outstanding voting stock of the
corporation at any time in the past three years. Because of this election in our
amended and restated certificate of incorporation, Section 203 will not apply to
us.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is First Union
National Bank.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there is not a current public market for our common
stock. No prediction can be made as to the effect, if any, that market sales of
shares of our common stock or the availability of shares of our common stock for
sale will have on the market price prevailing from time to time. Nevertheless,
sale of substantial amounts of our common stock in the public market could
adversely affect the prevailing market price of our common stock and our ability
to raise equity capital in the future.
SALE OF RESTRICTED SHARES
Upon completion of this offering, we will have an aggregate of 45,282,528
outstanding shares of common stock, excluding 6,514,422 shares underlying
outstanding options. Of these shares, all of the 13,350,000 shares sold in this
offering, or 15,352,500 shares if the underwriters' over-allotment option is
exercised in full, will be freely tradable without restriction or further
registration under the Securities Act, except that any shares purchased by our
affiliates, as that term is defined in Rule 144 under the Securities Act, may
generally only be sold in compliance with the limitations of Rule 144 described
below. As defined in Rule 144, an affiliate of an issuer is a person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the issuer. The remaining
outstanding shares of our common stock will be deemed "restricted securities" as
that term is defined under Rule 144. Restricted securities may be sold in the
public market only if they qualify for an exemption from registration under Rule
144, including Rule 144(k).
LOCK-UP AGREEMENTS
Our executive officers, directors and holders of substantially all of our
currently outstanding shares and options have agreed, with exceptions, not to
sell or transfer any of our common stock for 180 days after the date of this
prospectus without first obtaining the prior written consent of Merrill Lynch.
We have agreed not to issue, sell or otherwise dispose of any shares of
common stock during the 180-day period following the date of the prospectus,
except we may grant options to purchase shares of common stock under our 2000
Stock Option Plan and issue shares of common stock either upon the exercise of
outstanding options under our 2000 Stock Option Plan.
RULE 144
In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year, including a
person who is our affiliate, is entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which is
expected to be approximately 452,825 shares upon completion of this
offering; or
- the average weekly trading volume of our common stock on the New York
Stock Exchange during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to a sale, subject to restrictions
specified in Rule 144.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and to the availability of current public information about us.
RULE 144(k)
Under Rule 144(k) as currently in effect, a person who has not been one of
our affiliates at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell those shares without regard to the volume, manner-of-sale or
other limitations contained in Rule 144.
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STOCK OPTIONS
Options to purchase 6,514,422 shares of common stock have been granted and
are outstanding under our 2000 Stock Option Plan, of which 1,351,422 are vested
and exercisable. Generally, the options vest in five equal annual installments
commencing September 30, 2000. A portion of the options granted to some
optionees vested immediately as of the date of grant. Upon completion of this
offering, we will file a registration statement to register shares of common
stock reserved for issuance under our 2000 Stock Option Plan. That registration
statement would become effective immediately upon filing. Accordingly, shares
covered by that registration statement would become eligible for sale in the
public markets, subject to vesting restrictions, Rule 144 volume limitations
applicable to our affiliates and the lock-up agreements with the underwriters.
REGISTRATION RIGHTS
Our existing stockholders are parties to a stockholders agreement with us
that provides for registration rights to cause us to register under the
Securities Act all or part of the shares of our common stock. Registration of
the sale of these shares of our common stock would permit their sale into the
public market immediately. If our existing stockholders sell a large number of
shares, the market price of our common stock could decline. These holders of
registration rights are subject to lock-up periods of not more than 180 days
following the date of this prospectus or any subsequent prospectus.
Additionally, under the terms of the stockholders agreement, all our
stockholders, other than JLL Healthcare, LLC, are required to obtain the prior
written consent of JLL Healthcare, LLC to transfer their shares of common stock
or exercise their demand registration rights. Please refer to the information in
this prospectus under the heading "Certain Relationships and Related Party
Transactions -- Stockholders Agreement" beginning on page 67 for a more detailed
discussion of these registration rights.
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES TO
NON-UNITED STATES HOLDERS
The following discussion is a summary of material United States federal
income and estate tax consequences of the ownership and disposition of our
common stock by non-United States holders. This discussion does not deal with
all aspects of United States federal income and estate taxation and does not
deal with foreign, state and local tax consequences. This discussion does not
address all tax considerations that may be relevant to non-United States holders
in light of their personal circumstances, or to certain non-United States
holders that may be subject to special treatment under United States federal
income or estate tax laws. Furthermore, this discussion is based on the Internal
Revenue Code of 1986, as amended, Treasury Department regulations, published
positions of the Internal Revenue Service and court decisions now in effect, all
of which are subject to change, possibly with retroactive effect. YOU ARE URGED
TO CONSULT YOUR OWN TAX ADVISOR REGARDING THE UNITED STATES FEDERAL TAX
CONSEQUENCES OF OWNING AND DISPOSING OF OUR COMMON STOCK, AS WELL AS THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
In this section we use the term United States holder to refer to a
beneficial owner of our common stock that is:
- a citizen or resident of the United States;
- a corporation, partnership or other entity (other than an estate or
trust) created or organized in or under the laws of the United States or
any political subdivision of the United States;
- an estate the income of which is subject to United States federal income
taxation regardless of its source; or
- a trust that:
- is subject to the supervision of a court within the United States
and the control of one or more United States persons; or
- has a valid election in effect under applicable United States
Treasury regulations to be treated as a United States person.
An individual may be treated as a resident of the United States in any
calendar year for United States federal income tax purposes, instead of a
nonresident, by, among other ways, being present in the United States on at
least 31 days in that calendar year and for an aggregate of at least 183 days
during a three-year period ending in that calendar year. For purposes of this
calculation, you would count all of the days present in that calendar year,
one-third of the days present in the immediately preceding year and one-sixth of
the days present in the second preceding year. Residents are subject to United
States federal income tax as if they were United States citizens.
We use the term non-United States holder to refer to a beneficial owner of
our common stock that is not a United States holder.
DIVIDENDS
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. See "Dividend Policy." In the event, however, that dividends
are paid on shares of common stock, any dividend paid to a non-United States
holder generally will be subject to United States withholding tax either at a
rate of 30% of the gross amount of the dividend or at a lesser applicable treaty
rate. However, dividends that are effectively connected with the conduct of a
trade or business of the non-United States holder within the United States and,
where a tax treaty applies, that are attributable to a United States permanent
establishment of the non-United States holder are not subject to the withholding
tax but instead are subject to United States federal income tax on a net income
basis at applicable graduated individual or corporate rates.
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In order for dividends paid to a non-United States holder to be exempt from
withholding under the effectively connected income exemption, the holder must
comply with certification and disclosure requirements. In some circumstances, a
foreign corporation that receives effectively connected dividends may be subject
to an additional branch profits tax at a 30% rate or a lesser applicable treaty
rate.
For purposes of determining whether tax is to be withheld at a reduced rate
as specified by a treaty, recently finalized Treasury regulations require a
non-United States holder generally to provide certification as to that
non-United States holder's entitlement to treaty benefits. These regulations
also provide special rules to determine whether, for treaty applicability
purposes, dividends that we pay to a non-United States holder that is an entity
should be treated as paid to holders of interests in that entity.
GAIN ON DISPOSITION OF COMMON STOCK
If you are a non-United States holder, you will generally not be subject to
United States federal income tax with respect to gain recognized on a sale or
other disposition of our common stock unless:
- the gain is effectively connected with a trade or business of yours in
the United States or, where a tax treaty provides, the gain is
attributable to a United States permanent establishment of yours;
- you are an individual and hold our common stock as a capital asset, you
are present in the United States for 183 or more days in the taxable year
of the sale or other disposition and certain other conditions are met;
- you are subject to tax pursuant to the provisions of the United States
federal income tax laws applicable to certain United States expatriates;
or
- we are or have been a United States real property holding corporation for
United States federal income tax purposes.
We believe that we are not, and do not anticipate becoming, a United States
real property holding corporation for United States federal income tax purposes.
If we were to become a United States real property holding corporation, so long
as our common stock is, as we expect, regularly traded on an established
securities market, you would be subject to federal income tax on any gain from
the sale or other disposition of our common stock only if you actually or
constructively owned, during the five-year period preceding the disposition,
more than 5% of our common stock.
Special rules may apply to non-United States holders, such as controlled
foreign corporations, passive foreign investment companies, foreign personal
holding companies and corporations that accumulate earnings to avoid federal
income tax, that are subject to special treatment under the Code. These entities
should consult their own tax advisors to determine the United States federal,
state, local and other tax consequences that may be relevant to them.
BACKUP WITHHOLDING AND INFORMATION REPORTING
We must report annually to the Internal Revenue Service and to you the
amount of dividends paid to you and the tax withheld with respect to these
dividends, regardless of whether withholding was required. Copies of the
information returns reporting the dividends and withholding may also be made
available to the tax authorities in the country in which you reside under the
provisions of an applicable income tax treaty or information exchange agreement.
Pursuant to recently finalized Treasury regulations, a non-United States
holder will be entitled to an exemption from information reporting requirements
and backup withholding tax on dividends that we pay on our common stock if the
non-United States holder provides a Form W-8BEN (or satisfies certain
documentary evidence requirements for establishing that it is a non-United
States holder) or otherwise establishes an exemption. Payments by a United
States office of a broker of the proceeds of a sale of our
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common stock are subject to both backup withholding at a rate of 31% and
information reporting, unless the non-United States holder provides a Form
W-8BEN (or satisfies certain documentary requirements for establishing that it
is a non-United States holder) or otherwise establishes an exemption.
Information reporting requirements, but generally not backup withholding,
will also apply to payments of the proceeds from sales of our common stock by
foreign offices of United States brokers, or foreign brokers with certain types
of relationships to the United States, unless the broker has documentary
evidence in its records that the holder is a non-United States holder and
certain other conditions are met, or the holder otherwise establishes an
exemption.
Backup withholding is not an additional tax. Any amounts that we withhold
under the backup withholding rules will be refunded or credited against
non-United States holder's United States federal income tax liability, if the
required information is furnished to the Internal Revenue Service.
ESTATE TAX
Common stock owned or treated as owned by an individual who is not a
citizen or resident of the United States, as specifically defined for United
States federal estate tax purposes, at the time of death will be included in
that holder's gross estate for United States federal estate tax purposes, unless
an applicable estate tax treaty provides otherwise, and may be subject to United
States federal estate tax.
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UNDERWRITING
We intend to offer the shares in the United States and Canada through the
U.S. underwriters and elsewhere through the international managers. Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Salomon Smith Barney Inc., Banc of
America Securities LLC, CIBC World Markets Corp., Deutsche Banc Alex. Brown
Inc., Lehman Brothers Inc., Jefferies & Company, Inc. and SunTrust Equitable
Securities Corporation are acting as U.S. representatives of the U.S.
underwriters named below. Subject to the terms and conditions described in a
U.S. purchase agreement among us and the U.S. underwriters, and concurrently
with the sale of 2,670,000 shares to the international managers, we have agreed
to sell to the U.S. underwriters, and the U.S. underwriters severally have
agreed to purchase from us, the number of shares listed opposite their names
below.
NUMBER
OF SHARES
U.S. UNDERWRITER ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Salomon Smith Barney Inc. ..................................
Banc of America Securities LLC..............................
CIBC World Markets Corp. ...................................
Deutsche Banc Alex. Brown Inc. .............................
Lehman Brothers Inc. .......................................
Jefferies & Company, Inc. ..................................
SunTrust Equitable Securities Corporation...................
----------
Total.......................................... 10,680,000
==========
We have also entered into an international purchase agreement with the
international managers for sale of the shares outside the United States and
Canada for whom Merrill Lynch International, Salomon Brothers International
Limited, Bank of America International Limited, CIBC World Markets plc, Deutsche
Bank AG London, Lehman Brothers International (Europe), Jefferies International
Limited and SunTrust Equitable Securities Corporation are acting as lead
managers. Subject to the terms and conditions in the international purchase
agreement, and concurrently with the sale of 10,680,000 shares to the U.S.
underwriters pursuant to the U.S. purchase agreement, we have agreed to sell to
the international managers, and the international managers severally have agreed
to purchase 2,670,000 shares from us. The initial public offering price per
share and the total underwriting discount per share are identical under the U.S.
purchase agreement and the international purchase agreement.
The U.S. underwriters and the international managers have agreed to
purchase all of the shares sold under the U.S. and international purchase
agreements if any of these shares are purchased. If an underwriter defaults, the
U.S. and international purchase agreements provide that the purchase commitments
of the nondefaulting underwriters may be increased or the purchase agreements
may be terminated. The closings for the sale of shares to be purchased by the
U.S. underwriters and the international managers are conditioned on one another.
We have agreed to indemnify the U.S. underwriters and the international
managers against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments the U.S. underwriters and international
managers may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
COMMISSIONS AND DISCOUNTS
The U.S. representatives have advised us that the U.S. underwriters propose
initially to offer the shares to the public at the initial public offering price
on the cover page of this prospectus and to dealers
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at that price less a concession not in excess of $ per share. The U.S.
underwriters may allow, and the dealers may reallow, a discount not in excess of
$ per share to other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
The following table shows the public offering price, underwriting discount
and proceeds before expenses to IASIS Healthcare. The information assumes either
no exercise or full exercise by the U.S. underwriters and the international
managers of their over-allotment options.
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
Public offering price.............................. $ $ $
Underwriting discount.............................. $ $ $
Proceeds, before expenses, to IASIS Healthcare..... $ $ $
The expenses of the offering, not including the underwriting discount, are
estimated at $1,930,000 and are payable by IASIS Healthcare.
OVER-ALLOTMENT OPTION
We have granted options to the U.S. underwriters to purchase up to
1,602,000 additional shares at the public offering price less the underwriting
discount. The U.S. underwriters may exercise these options for 30 days from the
date of this prospectus solely to cover any over-allotments. If the U.S.
underwriters exercise these options, each will be obligated, subject to
conditions contained in the purchase agreements, to purchase a number of
additional shares proportionate to that U.S. underwriter's initial amount
reflected in the above table.
We have also granted options to the international managers, exercisable for
30 days from the date of this prospectus, to purchase up to 400,500 additional
shares to cover any over-allotments on terms similar to those granted to the
U.S. underwriters.
INTERSYNDICATE AGREEMENT
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the intersyndicate agreement, the U.S. underwriters and the international
managers may sell shares to each other for purposes of resale at the public
offering price, less an amount not greater than the selling concession. Under
the intersyndicate agreement, the U.S. underwriters and any dealer to whom they
sell shares will not offer to sell or sell shares to persons who are non-U.S. or
non-Canadian persons or to persons they believe intend to resell to persons who
are non-U.S. or non-Canadian persons, except in the case of transactions under
the intersyndicate agreement. Similarly, the international managers and any
dealer to whom they sell shares will not offer to sell or sell shares to U.S. or
Canadian persons or to persons they believe intend to resell to U.S. or Canadian
persons, except in the case of transactions under the intersyndicate agreement.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 1,001,250 shares offered by this prospectus for
sale to some of our directors, officers, employees, business associates and
related persons. If these persons purchase reserved shares, this will reduce the
number of shares available for sale to the general public. Any reserved shares
that are not orally confirmed for purchase within one day of the pricing of this
offering will be offered by the underwriters to the general public on the same
terms as the other shares offered by this prospectus.
NO SALES OF SIMILAR SECURITIES
We, our executive officers, directors and holders of substantially all of
our currently outstanding shares and options have agreed, with exceptions, not
to sell or transfer any of our common stock for 180 days
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after the date of this prospectus without first obtaining the prior written
consent of Merrill Lynch. Specifically, we and these other individuals have
agreed not to directly or indirectly
- offer, pledge, sell or contract to sell any of our common stock,
- sell any option or contract to purchase any of our common stock,
- purchase any option or contract to sell any of our common stock,
- grant any option, right or warrant for the sale of any of our common
stock,
- lend or otherwise dispose of or transfer any of our common stock,
- request or demand that we file a registration statement related to our
common stock, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any of our common stock
whether any such swap or transaction is to be settled by delivery of
shares or other securities, in cash or otherwise.
This lockup provision applies to our common stock and to securities
convertible into or exchangeable or exercisable for or repayable with our common
stock. It also generally applies to our common stock owned now or acquired later
by the person executing the agreement or for which the person executing the
agreement later acquires the power of disposition.
NEW YORK STOCK EXCHANGE LISTING
The shares have been approved for listing on the New York Stock Exchange
under the symbol "IAS." In order to meet the requirements for listing on that
exchange, the U.S. underwriters and the international managers have undertaken
to sell a minimum number of shares to a minimum number of beneficial owners as
required by that exchange.
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations among
us and the U.S. representatives and lead managers. In addition to prevailing
market conditions, the factors to be considered in determining the initial
public offering price are
- the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us,
- our financial information,
- the history of, and the prospects for, our company and the industry in
which we compete,
- an assessment of our management, its past and present operations and the
prospects for, and timing of, our future revenue,
- the present state of our development, and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price.
NASD REGULATIONS
The net proceeds from this offering will be used to repay a portion of our
outstanding indebtedness under our bank credit facility that consists of a
revolving credit and tranche A and tranche B term loans. Because more than ten
percent of the net proceeds of the offering may be paid to members or affiliates
of members of the National Association of Securities Dealers, Inc. participating
in the offering, the offering will be conducted in accordance with NASD Conduct
Rule 2710(c)(8). This rule requires that the public offering price of an equity
security be no higher than the price recommended by a qualified independent
underwriter which has participated in the preparation of the registration
statement and performed its usual standard of due diligence with respect to that
registration statement. Merrill Lynch has agreed to act as
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qualified independent underwriter for the offering. The price of the shares will
be no higher than that recommended by Merrill Lynch.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
underwriters and the selling group members from bidding for and purchasing our
common stock. However, the U.S. representatives may engage in transactions that
stabilize the price of our common stock, such as bids or purchases to peg, fix
or maintain that price.
The underwriters may purchase and sell our common stock in the open market.
These transactions may include short sales, stabilizing transactions and
purchases to cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of shares than they are required to
purchase in the offering. "Covered" short sales are sales made in an amount not
greater than the underwriters' option to purchase additional shares from the
issuer in the offering. The underwriters may close out any covered short
position by either exercising their option to purchase additional shares or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the common shares in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing transactions consist
of various bids for or purchases of common shares made by the underwriters in
the open market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding a decline in the
market price of the common shares. As a result, the price of our common stock
may be higher than the price that might otherwise exist in the open market.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the U.S.
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
INTERNET DISTRIBUTION
Merrill Lynch will be facilitating internet distribution for the offering
to some of its internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its online brokerage customers.
An electronic prospectus is available on the website maintained by Merrill
Lynch. Other than the prospectus in electronic format, the information on the
Merrill Lynch website relating to the offering is not a part of this prospectus.
OTHER RELATIONSHIPS
Certain of the underwriters or their affiliates may from time to time
provide investment banking, commercial banking or other services to us or Joseph
Littlejohn & Levy, Inc. In addition, an affiliate of CIBC World Markets Corp. is
one of our indirect equity investors. Jay Bloom, one of our directors, is a
Managing Director of CIBC World Markets and is a Managing Director of Trimaran
Fund II, L.L.C., an indirect equity investor in our company.
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LEGAL MATTERS
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, as special
counsel to IASIS, is passing upon the validity of the shares offered by the
company and certain other legal matters in connection with this offering. Bass,
Berry & Sims PLC, Nashville, Tennessee, is also passing on certain legal matters
for IASIS. Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, also
represents JLL Healthcare, LLC and its affiliates from time to time. Fried,
Frank, Harris, Shriver & Jacobson (a partnership including professional
corporations), New York, New York, is acting as legal counsel to the
underwriters.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated and
combined financial statements at September 30, 2000 and 1999 and for the year
ended September 30, 2000, the nine months ended September 30, 1999 and the year
ended December 31, 1998, as set forth in their report. We have included our
financial statements in the prospectus and elsewhere in this 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.
We have agreed to indemnify and hold KPMG harmless against and from any and
all legal costs and expenses incurred by KPMG in successful defense of any legal
action or proceeding that arises as a result of KPMG's consent to the inclusion
of its audit report on the Tenet Hospitals' past combined financial statements
included in this registration statement.
WHERE YOU CAN FIND MORE INFORMATION
We file reports and other information with the SEC. We filed with the SEC a
registration statement on Form S-1 under the Securities Act with respect to the
shares of common stock offered by this prospectus. This prospectus does not
contain all the information included in the registration statement nor all of
the exhibits and schedules. Additional information about our company and the
common stock included in the registration statement and the exhibits and
schedules. Statements contained in this prospectus regarding the contents of any
contract or any other document to which reference is made are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as exhibit to the registration statement, each such
statement being qualified in all respects by such reference. A copy of the
registration statement and the exhibits and schedules filed may be inspected
without charge at the public reference room maintained by the SEC in Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of
the registration statement may be obtained upon the payment of the fees
prescribed by the SEC. Information on the operation of the public reference room
may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of this Web site is http://www.sec.gov. Our public files are also
available for inspection at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
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INDEX TO FINANCIAL STATEMENTS
PAGE
----
IASIS HEALTHCARE CORPORATION
Report of Independent Auditors.............................. F-2
Consolidated and Combined Balance Sheets at September 30,
1999 and September 30, 2000............................... F-3
Consolidated and Combined Statements of Operations for the
Year Ended December 31, 1998, the Nine Months Ended
September 30, 1998 (unaudited) and 1999, and the Years
Ended September 30, 1999 (unaudited) and 2000............. F-4
Consolidated and Combined Statements of Cash Flows for the
Year Ended December 31, 1998, the Nine Months Ended
September 30, 1998 (unaudited) and 1999, and the Years
Ended September 30, 1999 (unaudited) and 2000............. F-5
Consolidated and Combined Statements of Stockholders' Equity
(Deficit) for the Year Ended December 31, 1998, the Nine
Months Ended September 30, 1999, and the Year Ended
September 30, 2000........................................ F-6
Notes to Consolidated and Combined Financial Statements..... F-7
Condensed and Consolidated Balance Sheets at December 31,
2000 (unaudited) and September 30, 2000................... F-25
Unaudited Condensed and Consolidated Statements of
Operations for the Three Months Ended December 31, 2000
and 1999.................................................. F-26
Unaudited Condensed and Consolidated Statements of Cash
Flows for the Three Months Ended December 31, 2000 and
1999...................................................... F-27
Notes to Unaudited Condensed and Consolidated Financial
Statements................................................ F-28
TENET HOSPITALS
Independent Auditors' Report................................ F-35
Combined Balance Sheets at May 31, 1998 and 1999, and August
31, 1999 (unaudited)...................................... F-36
Combined Statements of Income and Changes in Ownership
Equity for the Years Ended May 31, 1997, 1998 and 1999 and
the Three Months Ended August 31, 1998 and 1999
(unaudited)............................................... F-37
Combined Statements of Cash Flows for the Years Ended May
31, 1997, 1998 and 1999, and the Three Months Ended August
31, 1998 and 1999 (unaudited)............................. F-38
Notes to Combined Financial Statements...................... F-39
F-1
90
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
IASIS Healthcare Corporation
We have audited the accompanying balance sheets of IASIS Healthcare
Corporation as of September 30, 2000 and 1999, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the year ended
September 30, 2000, the nine months ended September 30, 1999 and the year ended
December 31, 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 financial position of IASIS Healthcare Corporation
as of September 30, 2000 and 1999, and the results of its operations and its
cash flows for the year ended September 30, 2000, the nine months ended
September 30, 1999 and the year ended December 31, 1998 in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
November 21, 2000
except for Note 15, as to
which the date is
March 6, 2001
F-2
91
IASIS HEALTHCARE CORPORATION
CONSOLIDATED AND COMBINED BALANCE SHEETS
SEPTEMBER 30,
1999 SEPTEMBER 30,
NOTE (1) 2000
------------- -------------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ --
Accounts receivable, net of allowance for doubtful
accounts of $10,850 and $31,403, respectively........... 19,674 146,744
Inventories............................................... 4,501 19,874
Current deferred tax assets............................... -- 1,146
Prepaid expenses and other current assets................. 4,283 13,181
-------- ---------
Total current assets............................... 28,458 180,945
Property and equipment, net................................. 136,927 361,293
Goodwill and other intangibles, net......................... 46,988 302,380
Deferred debt financing costs, net.......................... -- 23,472
Deferred tax assets......................................... -- 2,036
Other assets................................................ 886 3,713
-------- ---------
Total assets....................................... $213,259 $ 873,839
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 15,739 $ 31,707
Salaries and benefits payable............................. 5,229 13,040
Accrued interest payable.................................. -- 20,020
Medical claims payable.................................... -- 16,530
Other accrued expenses and other current liabilities...... 3,102 20,739
Current portion of accrued loss on discontinued
operations.............................................. -- 4,008
Current maturities of long-term debt and capital lease
obligations............................................. 701 9,883
-------- ---------
Total current liabilities.......................... 24,771 115,927
Due to Paracelsus........................................... 270,814 --
Long-term debt and capital lease obligations................ 798 547,771
Other long-term liabilities................................. -- 13,372
Minority interest........................................... 1,461 2,060
Mandatorily redeemable Series A Preferred Stock -- $0.01 par
value, authorized 500,000 shares; 160,000 shares issued
and outstanding at September 30, 2000 (liquidation
preference value of $184,534 at September 30, 2000)....... -- 183,199
Mandatorily redeemable Series B Preferred Stock -- $0.01 par
value, authorized 50,000 shares; 5,311 shares issued and
outstanding at September 30, 2000 (liquidation preference
value of $6,125 at September 30, 2000).................... -- 6,079
Stockholders' equity (deficit):
Common stock -- $0.01 par value, authorized 100,000,000
shares; 14,404,288 shares issued and outstanding at
September 30, 2000...................................... -- 144
Additional paid-in capital................................ -- 259,654
Treasury stock, at cost, 16,277,625 shares at September
30, 2000................................................ -- (155,025)
Accumulated deficit....................................... (84,585) (99,342)
-------- ---------
Total stockholders' equity (deficit)............... (84,585) 5,431
-------- ---------
Total liabilities and stockholders' equity
(deficit)........................................ $213,259 $ 873,839
======== =========
See accompanying notes.
F-3
92
IASIS HEALTHCARE CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1998 1999 1999 2000
------------ ------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenue.................................. $178,309 $134,017 $137,397 $181,689 $ 815,163
Costs and expenses:
Salaries and benefits...................... 63,158 47,306 47,169 63,021 285,451
Supplies................................... 24,530 18,205 19,643 25,968 123,376
Other operating expenses................... 46,816 36,868 37,203 47,150 234,176
Provision for bad debts.................... 11,822 8,131 9,934 13,625 60,579
Interest, net.............................. 17,088 13,426 7,304 10,966 62,352
Depreciation and amortization.............. 11,770 8,606 9,620 12,784 47,559
Allocated management fees.................. 6,587 4,940 5,027 6,674 --
Reversal of excess loss contract accrual... (7,500) (7,500) -- -- --
Recapitalization costs..................... -- -- -- -- 3,478
-------- -------- -------- -------- ----------
Total costs and expenses............ 174,271 129,982 135,900 180,188 816,971
-------- -------- -------- -------- ----------
Earnings (loss) from continuing operations
before minority interests and income
taxes...................................... 4,038 4,035 1,497 1,501 (1,808)
Minority interests........................... 68 54 (140) (126) 74
-------- -------- -------- -------- ----------
Earnings (loss) from continuing operations
before income taxes........................ 3,970 3,981 1,637 1,627 (1,882)
Income tax expense........................... -- -- -- -- 2,219
-------- -------- -------- -------- ----------
Net earnings (loss) from continuing
operations........................ 3,970 3,981 1,637 1,627 (4,101)
Discontinued operations:
Losses from operations of discontinued
physician practice operations............ (490) (435) (587) (644) (3,226)
Loss on disposal of physician practice
operations, including provision of $941
for operating losses during phase out
period................................... -- -- -- -- (7,376)
-------- -------- -------- -------- ----------
Net earnings (loss)................. 3,480 3,546 1,050 983 (14,703)
Preferred stock dividends and accretion of
preferred stock discount................... -- -- -- -- 25,402
-------- -------- -------- -------- ----------
Net earnings (loss) attributable to
common stockholders............... $ 3,480 $ 3,546 $ 1,050 $ 983 $ (40,105)
======== ======== ======== ======== ==========
Loss per common share (Note 14):
Loss from continuing operations
attributable to common stockholders...... $ -- $ -- $ -- $ -- $ (2.10)
Loss from discontinued operations.......... -- -- -- -- (0.75)
-------- -------- -------- -------- ----------
Net loss attributable to common
stockholders............................. $ -- $ -- $ -- $ -- $ (2.85)
======== ======== ======== ======== ==========
Weighted average number of common shares..... -- -- -- -- 14,077,192
See accompanying notes.
F-4
93
IASIS HEALTHCARE CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1998 1999 1999 2000
------------ ------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)....................... $ 3,480 $ 3,546 $ 1,050 $ 983 $ (14,703)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization........... 11,770 8,606 9,620 12,784 47,559
Reversal of excess loss contract
accrual............................... (7,500) (7,500) -- -- --
Minority interests...................... 68 54 (140) (126) 74
Deferred tax assets, net................ -- -- -- -- (3,182)
Loss accrual for discontinued
operations............................ -- -- -- -- 7,376
Changes in operating assets and
liabilities, net of effect of
acquisitions:
Accounts receivable................... 8,664 3,655 5,057 10,066 (117,440)
Supplies, prepaid expenses and other
current assets...................... 94 294 374 175 (8,525)
Accounts payable and other accrued
liabilities......................... (10,385) (10,681) 1,590 1,887 49,467
-------- -------- -------- -------- ---------
Net cash provided by (used in)
operating activities.............. 6,191 (2,026) 17,551 25,769 (39,374)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....... (6,427) (2,513) (13,476) (17,391) (53,692)
Payments for acquisitions, net............ -- -- -- -- (436,918)
(Increase) decrease in other assets....... 16 -- -- 16 (1,250)
-------- -------- -------- -------- ---------
Net cash used in investing
activities........................ (6,411) (2,513) (13,476) (17,375) (491,860)
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.... -- -- -- -- 35
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........ (1,211) (750) (773) (1,235) (164,249)
Common and preferred stock issuance costs
incurred................................ -- -- -- -- (2,625)
Debt financing costs incurred............. -- -- -- -- (26,902)
Net decrease in amount due to
Paracelsus.............................. (1,532) 4,846 (4,787) (11,164) --
-------- -------- -------- -------- ---------
Net cash provided by (used in)
financing activities.............. (2,743) 4,096 (5,560) (12,399) 531,234
-------- -------- -------- -------- ---------
Decrease in cash and cash equivalents....... (2,963) (443) (1,485) (4,005) --
Cash and cash equivalents at beginning of
period.................................... 4,448 4,448 1,485 4,005 --
-------- -------- -------- -------- ---------
Cash and cash equivalents at end of
period.................................... $ 1,485 $ 4,005 $ -- $ -- $ --
======== ======== ======== ======== =========
Supplemental disclosure of cash flow
information:
Cash paid for interest.................... $ 17,088 $ 13,426 $ 7,304 $ 10,966 $ 43,547
======== ======== ======== ======== =========
Supplemental schedule of investing
activities:
Effects of acquisitions, net:
Assets acquired, net of cash............ $ -- $ -- $ -- $ -- $(487,731)
Liabilities assumed..................... -- -- -- -- 41,353
Issuance of preferred and common stock,
net................................... -- -- -- -- 9,460
-------- -------- -------- -------- ---------
Payment for acquisitions, net............. $ -- $ -- $ -- $ -- $(436,918)
======== ======== ======== ======== =========
See accompanying notes.
F-5
94
IASIS HEALTHCARE CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
STOCKHOLDER'S
DEFICIT OF
FORMER PARENT
COMMON STOCK ADDITIONAL COMPANY/
---------------------- PAID-IN TREASURY ACCUMULATED
SHARES PAR VALUE CAPITAL STOCK DEFICIT TOTAL
---------- --------- ---------- --------- ------------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance at December 31, 1997.......... -- $ -- $ -- $ -- $(89,115) $(89,115)
Net income.......................... -- -- -- -- 3,480 3,480
---------- ---- -------- --------- -------- --------
Balance at December 31, 1998.......... -- -- -- -- (85,635) (85,635)
Net income.......................... -- -- -- -- 1,050 1,050
---------- ---- -------- --------- -------- --------
Balance at September 30, 1999......... -- -- -- -- (84,585) (84,585)
Recapitalization:
Effect of recapitalization........ 13,964,996 140 280,822 -- -- 280,962
Repurchase of common stock held by
Paracelsus...................... -- -- -- (155,025) -- (155,025)
Acquisition of management company..... 435,617 4 4,145 -- -- 4,149
Stock options exercised............... 3,675 -- 35 -- -- 35
Net loss.............................. -- -- -- -- (14,703) (14,703)
Accretion of preferred stock
discount............................ -- -- -- -- (54) (54)
Preferred stock dividends............. -- -- (25,348) -- -- (25,348)
---------- ---- -------- --------- -------- --------
Balance at September 30, 2000......... 14,404,288 $144 $259,654 $(155,025) $(99,342) $ 5,431
========== ==== ======== ========= ======== ========
See accompanying notes.
F-6
95
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
IASIS Healthcare Corporation ("IASIS" or the "Company") (formerly known as
Paracelsus Utah Facilities, the Company's predecessor entity) operates general,
acute care hospitals, with a focus on developing and operating networks of
medium-sized hospitals with 100 to 400 beds in mid-size urban and suburban
markets. IASIS currently owns or leases 15 hospitals with a total of 2,194
operating beds. These hospitals are located in four regions: Salt Lake City,
Utah; Phoenix, Arizona; Tampa-St. Petersburg, Florida; and three markets within
the State of Texas. IASIS also operates five ambulatory surgery centers and a
Medicaid managed health plan in Phoenix called Health Choice that serves over
40,000 members.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and rely on assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
The consolidated (as of and for the year ended September 30, 2000) and
combined financial statements (as of and for all other periods presented)
include all subsidiaries and entities under common control of the Company.
Significant intercompany transactions have been eliminated. Investments in
entities that the Company does not control, but in which it has a substantial
ownership interest and can exercise significant influence, are accounted for
using the equity method.
The combined financial statements included herein as of September 30, 1999
and for the year ended September 30, 1999 (unaudited), the nine-month periods
ended September 30, 1999 and 1998 (unaudited) and the year ended December 31,
1998 have been prepared on the historical cost basis 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 all of
the periods presented. The results of the nine months ended September 30, 1999
and 1998 (unaudited) may not be indicative of operating results for the full
respective years.
Unaudited Combined Financial Statements
The combined statements of operations and the combined statements of cash
flows for the year ended September 30, 1999 and the nine-month period ended
September 30, 1998 (unaudited combined financial statements) have been prepared
by the Company's management in accordance with accounting principles generally
accepted in the United States for interim financial information and with the
instructions of Regulation S-X and are unaudited. In the opinion of the
Company's management, the unaudited combined financial statements include all
adjustments consisting of only normal recurring adjustments, necessary for a
fair presentation of the results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted from the unaudited combined
financial statements. The unaudited combined financial statements should be read
in conjunction with the audited financial statements appearing herein.
Net Revenue
The Company's healthcare facilities have entered into agreements with
third-party payors, including government programs and managed care health plans,
under which the facilities are paid based upon established charges, the cost of
providing services, predetermined rates per diagnosis, fixed per diem rates or
discounts from established charges.
Net patient service revenue is reported at the estimated net realizable
amounts from third-party payors and others for services rendered, including
estimated retroactive adjustments under reimbursement
F-7
96
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
agreements with third-party payors. Retroactive adjustments are accrued on an
estimated basis in the period the related services are rendered and are
adjusted, if necessary, in future periods when final settlements are determined.
Laws and regulations governing Medicare and Medicaid programs are complex
and subject to interpretation. As a result, there is at least a reasonable
possibility that recorded estimates will change by a material amount in the near
term. 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 that would have a material effect
on the Company's financial statements. 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.
The Company provides care without charge to patients who are financially
unable to pay for the healthcare services they receive. Because the Company does
not pursue collection of amounts determined to qualify as charity care, they are
not reported in net revenue.
Health Choice Arizona, Inc. ("Health Choice" or the "Plan") is a prepaid
Medicaid managed health plan that derives approximately 100% 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
Medicaid enrollees. Revenue generated under the AHCCCS contract with Health
Choice represents approximately 11% of the net revenue of IASIS for the year
ended September 30, 2000. The contract with AHCCCS commenced on October 1, 1997
for an initial term of one year and reserves to AHCCCS the option to extend the
term of the contract from time to time through September 30, 2002. Under the
current amendment, the contract has been extended through September 30, 2001.
Capitation payments received by Health Choice are recognized as revenue in
the month that members are entitled to health care services.
Contractually, Health Choice is reimbursed by AHCCCS for healthcare costs
that exceed stated amounts at a rate of 75 percent (85 percent for catastrophic
cases) of qualified healthcare 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 healthcare costs exceed stated amounts as provided under the
contract including estimates of such costs at the end of each accounting period.
Cash and Cash Equivalents
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents.
Accounts Receivable
The Company receives payments for services rendered from Federal and state
agencies (under the Medicare, Medicaid and TRICARE programs), managed care
health plans, commercial insurance companies, employers and patients. During the
year ended September 30, 2000, the nine months ended September 30, 1999 and the
year ended December 31, 1998, approximately 45%, 34% and 34%, respectively, of
the Company's gross patient revenue related to patients participating in the
Medicare and Medicaid programs. The Company recognizes that revenues and
receivables from government agencies are significant to its operations, but does
not believe that there are significant credit risks associated with these
government agencies. The Company believes that concentration of credit risk from
other payors is limited by the number of patients and payors.
F-8
97
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories, principally medical supplies and pharmaceuticals, are stated
at the lower of cost (first-in, first-out) or market.
Long-lived Assets
(a) Property and Equipment
Property and equipment are stated at cost. Routine maintenance and repairs
are charged to expense as incurred. Expenditures that increase capacities or
extend useful lives are capitalized. Depreciation expense, including
amortization of assets capitalized under capital leases, is computed using the
straight-line method and was $32.8 million, $7.9 million and $9.6 million for
the year ended September 30, 2000, the nine months ended September 30, 1999 and
the year ended December 31, 1998, respectively. Buildings and improvements are
depreciated over estimated useful lives ranging generally from 10 to 40 years.
Estimated useful lives of equipment vary generally from 3 to 10 years.
Leaseholds are amortized on a straight-line basis over the lesser of the terms
of the respective leases or their estimated useful levels.
(b) Goodwill and Other Intangibles
Goodwill and other intangibles consist primarily of costs in excess of the
fair value of identifiable net assets of acquired entities and are amortized
using the straight-line method, generally over periods ranging from 20 to 35
years for hospital acquisitions.
At September 30, 2000 and 1999, goodwill and other intangibles are net of
accumulated amortization of $17.8 million and $6.5 million, respectively.
When events, circumstances and operating results indicate that the carrying
values of certain long-lived assets and the related identifiable intangible
assets might be impaired, the Company prepares projections of the undiscounted
future cash flows expected to result from the use of the assets and their
eventual disposition. If the projections indicate that the recorded amounts are
not expected to be recoverable, such amounts are reduced to estimated fair
value. Fair value is estimated based upon internal evaluations of each asset
that include quantitative analyses of net revenue and cash flows, reviews of
recent sales of similar assets and market responses based upon discussions with
and offers received from potential buyers.
(c) Deferred Debt Financing Costs
Debt financing costs are deferred and amortized over the term of related
debt. Amounts reported as of September 30, 2000 are net of accumulated
amortization of $3.4 million.
Income Taxes
For the periods prior to the recapitalization, Paracelsus filed
consolidated federal and state income tax returns which included all of its
eligible subsidiaries, including the Company. The provisions for income taxes in
the accompanying statement of operations for periods prior to the
recapitalization were completed 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 for these periods were made by the Company
through Paracelsus.
The Company accounts for income taxes under the asset and liability method.
This approach requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities.
Medical Claims Payable
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-
F-9
98
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
capitated arrangements is accrued as services are rendered by hospitals,
physicians, and other health care providers during the year. The Plan's medical
claims expense is approximately $69.1 million for the year ended September 30,
2000 and is included in other operating expenses in the accompanying
consolidated and combined statements of operations.
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 current inpatient utilization trends 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.
Due To Paracelsus
Due to Paracelsus for periods prior to the recapitalization 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 former Paracelsus hospitals, over funds transferred to the centralized cash
management account at Paracelsus. Generally, this balance was 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 such as payroll, interest,
insurance, and income taxes. Generally, the balance was decreased through daily
cash deposits from collections of accounts receivable by the Company to the
account. Interest cost of Paracelsus was 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 $7.3
million and $17.0 million for the nine months ended September 30, 1999 and for
the year ended December 31, 1998, respectively.
Allocated Management Fees
Paracelsus incurred various corporate general and administrative expenses.
These corporate overhead expenses were allocated to the Company for periods
prior to the recapitalization based on net revenue. The amounts allocated by
Paracelsus are not necessarily indicative of the actual costs that may have been
incurred had the Company operated as an entity unaffiliated with Paracelsus.
Stock Based Compensation
The Company, from time to time, grants stock options for a fixed number of
common shares to employees. The Company accounts for employee stock option
grants in accordance with Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and accordingly, recognizes no compensation
expense for the stock option grants when the exercise price of the options
equals, or is greater than, the market value of the underlying stock on the date
of grant.
Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities are reflected in the accompanying consolidated and combined
financial statements at fair value because of the short-term maturity of these
instruments. The fair value of the Company's long-term bank facility debt and
capital lease obligations also approximate carrying value as they bear interest
at current market rates. The estimated fair value of the Company's senior
subordinated notes was approximately $223.1 million at September 30, 2000,
compared to a carrying value of $230.0 million at that date. The estimated fair
value of the senior subordinated notes at September 30, 2000 is based upon
quoted market prices at that date.
F-10
99
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications
Certain prior period amounts have been reclassified to conform to current
period presentation. Such reclassifications had no material effect on the
financial position and results of operations previously reported.
Reversal of Excess Loss Contract Accrual
During 1998, the Company recorded an unusual gain of approximately $7.5
million resulting from a settlement with a payor regarding a dispute over
administration of a 1996 capitation agreement. The gain represents the excess of
a related accrual over the settlement payment of $5.5 million.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 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 SFAS 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 No. 133 in fiscal years beginning after June
15, 2000. Adoption of SFAS No. 133 is not expected to have a material effect on
the Company's financial statements.
2. RECAPITALIZATION AND ACQUISITION TRANSACTIONS
Recapitalization
Effective October 8, 1999, Paracelsus and unrelated third parties
recapitalized five acute care hospitals in the Salt Lake City, Utah market
("Paracelsus Utah Facilities") owned by a subsidiary of Paracelsus, valued at
$287.0 million, net of a working capital adjustment of $1.0 million. The
recapitalization transaction resulted in Paracelsus retaining 840,000 shares of
common stock representing a minority interest at an implied value of $8.0
million in the preexisting Paracelsus subsidiary ("HoldCo") that owned the
Paracelsus Utah Facilities. Subsequent to the recapitalization, HoldCo changed
its name to IASIS Healthcare Corporation and changed its fiscal year end to
September 30.
As part of the recapitalization, JLL Healthcare, LLC, one of IASIS' current
principals, and certain other of the Company's stockholders purchased 13,124,996
shares of IASIS' common stock from Paracelsus for $125.0 million, and IASIS
repurchased $155.0 million of its common stock from Paracelsus which is being
held as treasury stock as of September 30, 2000. 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 bank credit
facility. Legal, accounting and other related costs of approximately $3.5
million associated with the recapitalization have been expensed.
Prior to the recapitalization, all equity accounts of the Company were
combined and reported as Stockholder's Deficit of Former Parent Company due to
the Company's status as a combination of subsidiaries of Paracelsus Healthcare
Corporation.
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 ("Tenet") for approximately $431.8 million
F-11
100
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
in cash and assumption of approximately $41.2 million in liabilities. The
Company did not acquire accounts receivable from Tenet but financed the related
growth in working capital with proceeds from its borrowings under its bank
facilities and other sources of capital.
Management Company Acquisition
Concurrent with the acquisition of the Tenet hospitals, a management
company, originally formed by certain members of the Company's 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, stockholders of the management company received shares of
IASIS 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):
MANAGEMENT
TENET 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 consist of legal fees,
professional and accounting fees and other costs related to the transactions.
The acquisition of the 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 and
combined statements of operations from the October 15, 1999 date of acquisition.
In connection with the recapitalization and the acquisitions, IASIS assumed
the Medicare provider numbers of the prior owners but did not assume any
pre-closing 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 and Paracelsus include customary
indemnifications and hold harmless provisions for any damages incurred by the
Company related to these types of excluded liabilities.
During fiscal 2000, the Company was a party to a transition services
agreement with Paracelsus under which Paracelsus agreed to provide specified
services to the Company, including data processing services and systems
technology services, at the service provider's cost plus 2%. For the year ended
September 30, 2000, the Company paid approximately $290,000 to Paracelsus
pursuant to this agreement. This agreement was terminated in April 2000.
Pursuant to the terms and conditions of a stockholders' agreement among the
Company, JLL Healthcare, LLC, and certain other stockholders, the Company has
agreed to pay certain administrative fees and expenses incurred by JLL
Healthcare, LLC, during the term of the stockholders agreement. During the year
ended September 30, 2000, the Company paid JLL Healthcare, LLC approximately
$1.4 million for its administrative fees and expenses, including approximately
$1.3 million of expenses relating to the recapitalization, acquisition and
merger transactions.
F-12
101
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 the Tenet hospitals and the management
company had occurred as of the beginning of the respective period, after giving
effect to certain adjustments, including the depreciation and amortization of
the assets acquired and changes in net interest expense resulting from changes
in consolidated debt (in thousands):
NINE MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
------------------ ------------------ ------------------
Net revenue.......................... $579,966 $763,868 $ 838,017
Net earnings (loss).................. 23 (2,944) (19,499)
Net loss per common share............ -- -- $ (3.19)
Weighted average number of common
shares............................. -- -- 14,077,192
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. Earnings per common share is not shown for any period other
than the year ended September 30, 2000 as such periods represent combined
financial statements for entities under common control. Net loss per common
share for the year ended September 30, 2000 includes preferred stock dividends
and accretion of approximately $25.4 million.
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following (in
thousands):
SEPTEMBER 30,
-----------------
1999 2000
------ --------
Bank facilities............................................. $ -- $326,668
Senior subordinated notes................................... -- 230,000
Capital lease obligations (see Note 9)...................... 1,499 986
------ --------
1,499 557,654
Less current maturities..................................... 701 9,883
------ --------
$ 798 $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 September 30, 2000, amounts outstanding under the Tranche A and
Tranche B term loans were $78.3 million and $248.3 million, respectively. 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 the Tenet hospitals,
F-13
102
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
- 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 will
be due and payable on September 30, 2004. At September 30, 2000, no amounts were
drawn under the revolving credit facility and the Company had issued
approximately $25.2 million in letters of credit, resulting in remaining
availability under the revolving credit facility of approximately $99.8 million.
The revolving credit facility includes a $75.0 million sub-limit for letters of
credit that may be issued by the Company.
The Tranche A term loan matures on September 30, 2004. The Tranche B term
loan matures on September 30, 2006. Repayments under the term loans are due in
quarterly installments. There are no substantial required repayments of the
Tranche B term loan until September 30, 2005. 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 fixed 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 the Bank Facilities was approximately 10.5% at
September 30, 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 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 Bank Facilities are guaranteed by the Company's subsidiaries.
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.
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. 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.
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
independent assets nor operations apart from its ownership of the Subsidiary
Guarantors. At September 30, 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 ability to merge or consolidate.
F-14
103
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt and capital lease obligations at September 30,
2000 are as follows (in thousands):
2001........................................................ $ 9,883
2002........................................................ 17,599
2003........................................................ 25,088
2004........................................................ 37,555
2005........................................................ 180,029
Thereafter.................................................. 287,500
--------
$557,654
========
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
Land........................................................ $ 15,200 $ 29,371
Buildings and improvements.................................. 112,694 213,034
Equipment................................................... 65,525 199,073
-------- --------
193,419 441,478
Less allowances for depreciation and amortization........... (67,416) (99,491)
-------- --------
126,003 341,987
Construction-in-progress (estimated cost to complete at
September 30, 2000 -- $7,715)............................. 10,924 19,306
-------- --------
$136,927 $361,293
======== ========
Assets leased under capital leases were $1.4 million and $1.6 million, net
of accumulated amortization of approximately $900,000 and $800,000 at September
30, 2000 and 1999, respectively.
5. PREFERRED STOCK
Concurrent with the acquisition of the Tenet hospitals, the Company issued
160,000 shares of Series A preferred stock for proceeds, net of issuance costs,
of $158.6 million. In connection with the merger with the management company,
the Company issued 5,311 shares of Series B preferred stock valued at an
aggregate of approximately $5.3 million, net of issuance costs. Issuance costs
of approximately $1.4 million and $46,000 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
year ended September 30, 2000 was approximately $54,000. 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.
F-15
104
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 Bank Facilities and the Notes
indenture.
On October 26, 2000, all shares of the Company's mandatorily redeemable
Series A and Series B preferred stock were converted into shares of the
Company's common stock on the basis of ten common shares for each preferred
share. The conversion will be recorded in the first quarter of fiscal 2001 and
will increase the Company's stockholders' equity by approximately $189.3
million.
6. STOCK OPTIONS
On May 1, 2000, the Company's Board of Directors, subject to stockholder
approval, approved the IASIS Healthcare Corporation 2000 Stock Option Plan
("2000 Stock Option Plan") to afford an incentive to selected directors,
officers, employees and consultants of the Company through the grant of stock
options. The maximum number of shares of common stock reserved for the grant of
stock options under the 2000 Stock Option Plan is 7,208,940, subject to
adjustment as provided for in the 2000 Stock Option Plan. The number of options
to be granted and the exercise price per share of common stock purchasable upon
exercise of an option will be determined by a committee of the Board of
Directors, subject to stockholder approval. In the case of an incentive stock
option, the exercise price will not be less than the fair market value of a
share of common stock on the date of its grant. As a condition to the exercise
of an option, the optionee shall agree to be bound by the terms and conditions
of a stockholders' agreement among the Company, JLL Healthcare, LLC, and certain
other stockholders, including restrictions on transferability contained therein.
As of September 30, 2000, 5,399,821 options had been granted under the 2000
Stock Option Plan. The options become exercisable in part on the date of grant
or over a period not to exceed seven years after the date of grant, subject to
earlier vesting provisions as provided for in the 2000 Stock Option Plan. All
options granted under the 2000 Stock Option Plan expire no later than 10 years
from the respective date of grant. At September 30, 2000, there were 1,809,119
options available for grant.
Information regarding the Company's stock option activity for fiscal 2000
is summarized below:
WEIGHTED
OPTION PRICE AVERAGE
STOCK OPTIONS PER SHARE EXERCISE PRICE
------------- ------------- --------------
Balances, September 30, 1999................... -- $ -- $ --
Granted...................................... 5,399,821 $9.52 - 40.00 $24.13
Exercised.................................... 3,675 $ 9.52 $ 9.52
Cancelled.................................... -- $ -- $ --
----------
Balances, September 30, 2000................... 5,396,146
==========
At September 30, 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.
F-16
105
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information regarding the options
outstanding at September 30, 2000:
OPTIONS OUTSTANDING
----------------------------
NUMBER WEIGHTED- OPTIONS
OUTSTANDING AT REMAINING AVERAGE FAIR EXERCISABLE AT
SEPTEMBER 30, CONTRACTUAL VALUE OF OPTIONS SEPTEMBER 30,
EXERCISE PRICE 2000 LIFE GRANTED 2000
- -------------- -------------- ----------- ---------------- --------------
$9.52............................... 1,805,535 9 $2.54 218,504
$24.76.............................. 2,004,031 9 $ -- 181,861
$40................................. 1,586,580 9 $ -- 143,885
--------- -------
5,396,146 544,250
========= =======
If the Company had measured compensation cost for the stock options granted
during the year ended September 30, 2000 under the fair value based method
prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, the net
loss for the year ended September 30, 2000 would have changed to the pro forma
amount set forth below (in thousands):
AS REPORTED PRO FORMA
----------- ---------
Net Loss.................................................... $(14,703) $(15,145)
The fair values of options granted used to compute pro forma net loss
disclosures were estimated on the date of grant using a minimum value
option-pricing model based on the following assumptions:
2000
-------------
Risk-free interest rate................................... 5.75% - 6.63%
2 1/2 to 5
Expected life............................................. years
Expected dividend yield................................... 0.0%
The effect of applying SFAS No. 123 for providing pro forma disclosure is
not likely to be representative of the effect on reported net income for future
years.
7. INCOME TAXES
Income tax expense for the year ended September 30, 2000, the nine months
ended September 30, 1999 and the year ended December 31, 1998 on income from
continuing operations consists of the following (in thousands):
1998 1999 2000
------- ------- -------
Current:
Federal................................................. $ -- $ -- $ 3,299
State................................................... -- -- 366
Deferred:
Federal................................................. -- -- (1,530)
State................................................... -- -- 84
------- ------- -------
$ -- $ -- $ 2,219
======= ======= =======
F-17
106
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the federal statutory rate to the effective income tax
rate for the year ended September 30, 2000, the nine months ended September 30,
1999 and the year ended December 31, 1998 follows (in thousands):
1998 1999 2000
------- ----- ------
Federal statutory rate...................................... $ 1,218 $ 367 $ (659)
State income taxes, net of federal income tax benefit....... -- -- 293
Non-deductible goodwill amortization........................ 722 542 410
Unbenefitted affiliate loss................................. 696 -- --
Other non-deductible expenses............................... 20 27 209
Change in valuation allowance charged to tax provision...... (2,604) (929) 1,727
Other items, net............................................ (52) (7) 239
------- ----- ------
Provision for income taxes.................................. $ -- $ -- $2,219
======= ===== ======
A summary of the items comprising the deferred tax assets and liabilities
at September 30 follows (in thousands):
1999 2000
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
Depreciation and fixed asset basis
differences................................... $ -- $41 $ -- $10,976
Amortization and intangible asset basis
differences................................... 5,745 -- 44,749 --
Allowance for doubtful accounts................. 3,811 -- 8,624 --
Accrued expenses and other long-term
liabilities................................... 984 -- 9,747 --
Deductible carryforwards and credits............ 9,265 -- 2,597 --
Discontinued operations......................... -- -- 2,913 --
Valuation allowance............................. (19,764) -- (54,472) --
-------- --- -------- -------
Total................................. $ 41 $41 $ 14,158 $10,976
======== === ======== =======
Net deferred income tax assets totaled $3,182,000 at September 30, 2000
with $1,146,000 included in other current assets and $2,036,000 included in
other assets. Current and non-current deferred tax assets were both $0 at
September 30, 1999.
At September 30, 2000, federal net operating loss carryforwards (expiring
2019) are available to offset future taxable income of approximately $1.8
million. Utilization of the federal net operating loss carryforward in any one
year is limited to approximately $500,000. Future utilization of the federal net
operating loss will result in a reduction of intangible assets. In addition, the
Company has $1.9 million of deferred tax assets related to the Tenet acquisition
whose future realization will result in a reduction of intangible assets.
At September 30, 2000, minimum tax credit carryforwards of approximately
$1.1 million are available to offset future federal regular income tax
liability, to the extent that exceeds future federal alternative minimum tax
liability.
At September 30, 2000, state net operating loss carryforwards (expiring in
2020) are available to offset future taxable income of approximately $19.0
million in various states. Net deferred tax assets related to such carryforwards
are approximately $900,000.
The Company maintains a valuation allowance for deferred tax assets it
believes will not be realized. The valuation allowance increased $34.7 million
during the year ended September 30, 2000 primarily as a result of
recapitalization and purchase accounting adjustments.
F-18
107
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. 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.
Prior to the recapitalization, Paracelsus assumed the liability for all
professional and general liability claims. Accordingly, at September 30, 1999,
no reserve for general and professional liability risks was recorded in the
accompanying combined balance sheet. The cost of general and professional
liability coverage was 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 year ended December 31,
1998, was approximately $1.3 million and $(45,000), respectively, net of
adjustments allocated for a change in estimate in accordance with actuarial
evaluations of approximately $0 and $1.2 million, respectively.
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.
Prior to the recapitalization, the Company participated in Paracelsus'
self-insured program for workers compensation and health insurance. The cost of
workers compensation coverage was allocated by Paracelsus to the Company based
on actuarially determined estimates. The cost of health insurance was 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 cost allocated to the Company for the self-insured
workers compensation and health insurance programs for the nine months ended
September 30, 1999 and for the year ended December 31, 1998, was approximately
$3.2 million and $4.5 million, respectively.
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 AHCCCS. These services are provided
F-19
108
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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 were 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.
9. LEASES
The Company leases various buildings, office space and equipment under
capital and operating lease agreements. The leases expire at various times and
have various renewal options. Operating lease rental expense relating primarily
to the rental of buildings and equipment for the year ended September 30, 2000,
the nine months ended September 30, 1999 and the year ended December 31, 1998
approximated $31.8 million, $8.1 million and $11.2 million, respectively.
F-20
109
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments at September 30, 2000, by fiscal year and in the
aggregate, under capital leases and noncancellable operating leases, net of
sublease income, with initial terms of one year or more consist of the following
(in thousands):
OPERATING
CAPITAL LEASES LEASES
-------------- ---------
2001........................................................ $ 792 $ 27,190
2002........................................................ 115 27,354
2003........................................................ 88 26,792
2004........................................................ 55 26,101
2005........................................................ 29 25,622
Thereafter.................................................. -- 86,848
------ --------
Total minimum lease payments................................ 1,079 $219,907
========
Amount representing interest (at rates ranging from 6.75% to
11.10%)................................................... (93)
------
Present value of net minimum lease payments (including $715
classified as current).................................... $ 986
======
Aggregate future minimum rentals to be received under noncancelable
subleases as of September 30, 2000 were approximately $6.6 million.
The Company leases its corporate headquarters in Franklin, Tennessee from a
lessor in which one of the Company's directors owns an indirect interest. The
term of the lease with respect to approximately 89% of the leased space
commenced on May 1, 2000 and terminates on July 31, 2005, and the term of the
lease with respect to the remaining approximately 11% of leased space commenced
on October 15, 2000 and terminates on October 31, 2003. The Company has the
option to renew the lease for two additional periods of five years each, subject
to an increase in base rent. For the year ended September 30, 2000, the Company
paid the lessor approximately $93,000.
10. 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 estimated loss on sale
and closure and operating results of the physician practice operations
businesses are reflected as discontinued operations in the accompanying
consolidated and combined 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
consolidated and combined balance sheets.
Net revenue for the physician practice operations was approximately $11.7
million, $3.6 million and $4.8 million for the year ended September 30, 2000,
the nine months ended September 30, 1999 and the year ended December 31, 1998.
11. RETIREMENT PLANS
Substantially all employees who are employed by the Company or its
subsidiaries, upon qualification, are eligible to participate in a defined
contribution 401(k) plan (the "Plan"). Employees who elect to participate
generally make contributions from 1% to 20% of their eligible compensation, and
the Company matches, at its discretion, such contributions up to a maximum
percentage. Generally, employees immediately vest 100% in their own
contributions and vest in the employer portion of contributions in a
F-21
110
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
period not to exceed five years. Company contributions to the Plan were
approximately $3.3 million for the year ended September 30, 2000.
Prior to the recapitalization, the Company participated in Paracelsus'
defined contribution 401(k) Retirement Plan (the "Paracelsus Plan"). The
Paracelsus Plan covered substantially all employees of the Company. Participants
could contribute up to 15% of pretax compensation. Paracelsus matched on behalf
of the Company $0.25 for each dollar of employee contributions up to 6% of the
employee's gross salary and could make additional discretionary contributions.
The employees immediately vested 100% in their own contributions and vesting in
the employer portion of contributions occurred gradually after seven years to
100%. The cost allocated to the Company for contributions to the Paracelsus Plan
made by Paracelsus on behalf of the Company for the nine months ended September
30, 1999 and for the year ended December 31, 1998 was approximately $281,000 and
$417,000, respectively.
12. 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 Medicaid managed health plan, Health Choice and a
related entity (collectively referred to as 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 Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information. The following is a
financial summary by business segment for the periods indicated (EBITDA is
defined as earnings from continuing operations before interest expense, minority
interests, income taxes, recapitalization costs, and depreciation and
amortization):
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 2000
------------ ------------- -------------
(IN THOUSANDS)
ACUTE CARE SERVICE:
Net patient revenue................................. $178,309 $137,397 $732,814
Revenue between segments............................ -- -- (7,073)
-------- -------- --------
Net revenue......................................... 178,309 137,397 725,741
Salaries and benefits............................... 63,158 47,169 281,006
Supplies............................................ 24,530 19,643 123,023
Other operating expenses(1)......................... 45,903 42,230 152,850
Provision for bad debts............................. 11,822 9,934 60,579
-------- -------- --------
EBITDA.............................................. 32,896 18,421 108,283
Interest expense, net............................... 17,088 7,304 62,214
Depreciation and amortization....................... 11,770 9,620 47,406
-------- -------- --------
Earnings (loss) from continuing operations before
minority interests and income taxes(1)............ $ 4,038 $ 1,497 $ (1,337)
======== ======== ========
Segment assets...................................... $215,223 $211,934 $870,501
======== ======== ========
Capital expenditures................................ $ 6,427 $ 13,476 $ 53,670
======== ======== ========
Earnings (loss) from continuing operations before
minority interests and income taxes(1)............ $ 4,038 $ 1,497 $ (1,337)
Recapitalization costs.............................. -- -- 3,478
Minority interests.................................. 68 (140) 74
-------- -------- --------
Earnings (loss) from continuing operations before
income taxes...................................... $ 3,970 $ 1,637 $ (4,889)
======== ======== ========
F-22
111
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 2000
------------ ------------- -------------
(IN THOUSANDS)
HEALTH CHOICE:
Net patient revenue................................. $ -- $ -- $ --
Capitation payments................................. -- -- 89,422
Revenue between segments............................ -- -- --
-------- -------- --------
Net revenue......................................... -- -- 89,422
Salaries and benefits............................... -- -- 4,445
Supplies............................................ -- -- 353
Other operating expenses(1)......................... -- -- 81,326
Provision for bad debts............................. -- -- --
-------- -------- --------
EBITDA.............................................. -- -- 3,298
Interest expense, net............................... -- -- 138
Depreciation and amortization....................... -- -- 153
-------- -------- --------
Earnings from continuing operations before minority
interests and income taxes(1)..................... $ -- $ -- $ 3,007
======== ======== ========
Segment assets...................................... $ -- $ -- $ 2,695
======== ======== ========
Capital expenditures................................ $ -- $ -- $ 22
======== ======== ========
Earnings from continuing operations before minority
interests and income taxes(1)..................... $ -- $ -- $ 3,007
Recapitalization costs.............................. -- -- --
Minority interests.................................. -- -- --
-------- -------- --------
Earnings from continuing operations before income
taxes............................................. $ -- $ -- $ 3,007
======== ======== ========
- ---------------
(1) Amounts exclude recapitalization costs.
F-23
112
IASIS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
13. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES AND ALLOWANCES FOR DOUBTFUL
ACCOUNTS
A summary of other accrued expenses and other current liabilities at
September 30 follows (in thousands):
1999 2000
------ -------
Health insurance payable.................................... $ -- $ 4,280
Federal income taxes payable................................ -- 4,159
Taxes other than income..................................... -- 7,769
Other....................................................... 3,102 4,531
------ -------
$3,102 $20,739
====== =======
A summary of activity in the Company's allowances for doubtful accounts
follows (in thousands):
PROVISION ACCOUNTS
FOR WRITTEN OFF,
BEGINNING DOUBTFUL NET OF ENDING
BALANCE ACCOUNTS RECOVERIES BALANCE
--------- --------- ------------ --------
Allowance for doubtful accounts:
Year-ended December 31, 1998................. $20,368 $11,822 $(19,553) $12,637
Nine months ended September 30, 1999......... 12,637 9,934 (11,721) 10,850
Year-ended September 30, 2000................ 10,850 60,579 (40,026) 31,403
The operating results of the Tenet hospitals from the October 15, 1999 date
of acquisition accounted for approximately $45.8 million of the provision for
doubtful accounts and approximately $22.3 million of accounts written off, net
of recoveries, for the year-ended September 30, 2000.
14. LOSS PER COMMON SHARE
Loss per common share is based on the weighted average number of common
shares outstanding. Outstanding options to purchase 544,268 shares have not been
included in the computation of loss per common share because the effect would be
anti-dilutive. Loss from continuing operations per common share and net loss per
common share include preferred stock dividends and accretion of $25,402.
Earnings per common share is not shown for any period other than the year ended
September 30, 2000 as such periods represent combined financial statements for
entities under common control.
15. SUBSEQUENT EVENT
On March 6, 2001, the Company affected 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. All common share and per share data and
authorized common shares included in the accompanying consolidated and combined
financial statements and footnotes thereto have been restated to reflect these
events.
F-24
113
IASIS HEALTHCARE CORPORATION
CONDENSED AND CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
2000 2000
------------- --------------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
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
outstanding at December 31, 2000 and 160,000 shares at
September 30, 2000........................................ -- 183,199
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 100,000,000
shares; 31,932,016 shares and 14,404,288 shares issued
and outstanding at December 31, 2000 and September 30,
2000, respectively...................................... 319 144
Additional paid-in capital................................ 450,215 259,654
Treasury stock, at cost, 16,277,625 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.
F-25
114
IASIS HEALTHCARE CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
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)
=========== ===========
Earnings (loss) per common share (Notes 8 and 9):
Earnings (loss) from continuing operations attributable to
common stockholders....................................... $ 0.81 $ (0.46)
Loss from discontinued operations........................... -- (0.09)
----------- -----------
Net earnings (loss) attributable to common stockholders..... $ 0.81 $ (0.55)
=========== ===========
Weighted average number of common shares.................... 26,779,284 13,101,074
See accompanying notes to condensed and consolidated financial statements.
F-26
115
IASIS HEALTHCARE CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS)
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.
F-27
116
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 13,124,996 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 Paracelsus subsidiary changed
its
F-28
117
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
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):
MANAGEMENT
TENET 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.
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.
F-29
118
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-30
119
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-31
120
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-32
121
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
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 Company to make
payments to JLL Healthcare, LLC such that, with
F-33
122
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
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. EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share are based on the weighted average number
of common shares outstanding. Earnings (loss) from continuing operations per
common share and net earnings (loss) per common share include the reversal of
$(25,348) of preferred stock dividends and the accrual of $5,520 of preferred
stock dividends and accretion for the three months ended December 31, 2000 and
1999, respectively.
9. SUBSEQUENT EVENTS
On March 6, 2001, the Company affected 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. All common share and per share data and
authorized common shares included in the accompanying unaudited condensed and
consolidated financial statements and footnotes thereto have been restated to
reflect these events.
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.
F-34
123
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.
KPMG LLP
Dallas, Texas
September 20, 1999
F-35
124
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-36
125
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-37
126
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-38
127
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
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.
F-39
128
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED MAY 31, 1999
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.
(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
F-40
129
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED MAY 31, 1999
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 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
F-41
130
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED MAY 31, 1999
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 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
F-42
131
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED MAY 31, 1999
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 $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 3, 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-43
132
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED MAY 31, 1999
(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.
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
F-44
133
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED MAY 31, 1999
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
======= ======= =======
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%
======= ==== ======= ==== ======= ====
F-45
134
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED MAY 31, 1999
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.
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
F-46
135
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED MAY 31, 1999
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 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
======== ======= ========
F-47
136
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED MAY 31, 1999
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
======== ======= ========
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
======== ======= ========
F-48
137
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED MAY 31, 1999
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
======== ======= ========
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
F-49
138
TENET HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED MAY 31, 1999
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.
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-50
139
INDEX TO UNAUDITED PRO FORMA AND PRO FORMA AS ADJUSTED
COMBINED AND CONSOLIDATED FINANCIAL INFORMATION
PAGE
----
Unaudited Pro Forma Combined Statements of
Operations -- Nine Months Ended September 30, 1999........ P-3
Notes to Unaudited Pro Forma Combined Statements of
Operations -- Nine Months Ended September 30, 1999........ P-4
Unaudited Pro Forma Combined Statements of
Operations -- Year Ended September 30, 1999............... P-6
Notes to Unaudited Pro Forma Combined Statements of
Operations -- Year Ended September 30, 1999............... P-7
Unaudited Pro Forma and Pro Forma As Adjusted Combined
Statements of Operations -- Year Ended September 30,
2000...................................................... P-9
Notes to Unaudited Pro Forma and Pro Forma As Adjusted
Combined Statements of Operations -- Year Ended September
30, 2000.................................................. P-10
Unaudited Pro Forma Combined Statements of
Operations -- Three Months Ended December 31, 1999........ P-13
Notes to Unaudited Pro Forma Combined Statements of
Operations -- Three Months Ended December 31, 1999........ P-14
Unaudited Pro Forma as Adjusted Consolidated Statements of
Operations -- Three Months Ended December 31, 2000........ P-16
Notes to Unaudited Pro Forma as Adjusted Consolidated
Statements of Operations -- Three Months Ended December
31, 2000.................................................. P-17
P-1
140
UNAUDITED PRO FORMA AND PRO FORMA AS ADJUSTED COMBINED AND
CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma combined and consolidated financial
information and explanatory notes set forth the pro forma effects of the
recapitalization, the merger of the management company with a subsidiary of our
company and the Tenet acquisition. The merger with the management company and
the Tenet acquisition have been accounted for as purchases. Goodwill was
recorded for the excess of the purchase consideration over the fair value of the
identifiable net assets acquired. Pro forma as adjusted financial information
gives effect to the consummation of this offering and the application of the net
proceeds as set forth in "Use of Proceeds" as if these events had occurred at
the beginning of the period presented and for the year ended September 30, 2000,
to the effects of the recapitalization, the merger with the management company
and the Tenet acquisition. The following unaudited pro forma and pro forma as
adjusted combined and consolidated financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited and unaudited financial statements of
our company and of Tenet and the respective related notes, which are included
elsewhere in this prospectus.
The unaudited pro forma combined statements of operations for the nine
months ended September 30, 1999 include 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 September 30, 1999 include the results of operations of the Paracelsus
hospitals and the operations of a company formed by members of our management
team for the year ended September 30, 1999, and the results of operations of the
Tenet hospitals for the year ended August 31, 1999.
The unaudited pro forma and pro forma as adjusted combined statements of
operations for the fiscal year ended September 30, 2000 give effect to the Tenet
acquisition and the merger with a company formed by members of our management
team as if each of these transactions had occurred on October 1, 1999.
The unaudited pro forma combined statements of operations for the three
months ended December 31, 1999 give effect to the Tenet acquisition and the
merger with a company formed by members of our management team as if each of
these transactions had occurred on October 1, 1999.
The unaudited pro forma as adjusted consolidated statements of operations
for the three months ended December 31, 2000 include the results of operations
of our company for the quarter ended December 31, 2000.
The unaudited pro forma and pro forma as adjusted financial information
does not purport to be indicative of the 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. Non-recurring costs of $3.5 million recognized in
the year ended September 30, 2000 in connection with the recapitalization are
not reflected in the unaudited pro forma combined statements of operations for
any period presented. We have based the unaudited pro forma and pro forma as
adjusted combined and consolidated financial information on assumptions and
adjustments described in the notes to the unaudited pro forma and pro forma as
adjusted combined and consolidated financial information included below.
P-2
141
IASIS HEALTHCARE CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
PRO FORMA PRO FORMA
RECAPITALIZATION MANAGEMENT ACQUISITION PRO
PARACELSUS ADJUSTMENTS TENET COMPANY ADJUSTMENTS FORMA
---------- ---------------- -------- ---------- ----------- ---------
(IN THOUSANDS)
Net revenue.................. $137,397 $ -- $443,311 $ 758 $ -- $581,466
Costs and expenses:
Salaries and benefits...... 47,169 -- 146,103 1,792 195,064
Supplies and other
operating expenses....... 56,846 -- 181,078 874 1,000(4) 239,798
Provision for bad debts.... 9,934 -- 33,831 -- -- 43,765
Interest, net.............. 7,304 7,063(3) (1,407) (13) 36,245(3) 49,192
Depreciation &
amortization............. 9,620 -- 19,446 123 5,961(5) 35,150
Allocated management
fees(1).................. 5,027 -- 6,085 -- -- 11,112
Loss on sale of accounts
receivable(2)............ -- -- 4,548 -- -- 4,548
-------- ------- -------- ------- -------- --------
Total costs and
expenses.......... 135,900 7,063 389,684 2,776 43,206 578,629
-------- ------- -------- ------- -------- --------
Earnings (loss) from
continuing operations
before minority interests
and income taxes........... 1,497 (7,063) 53,627 (2,018) (43,206) 2,837
Minority interests........... (140) -- 1,386 -- (1,868)(6) (622)
-------- ------- -------- ------- -------- --------
Earnings (loss) from
continuing operations
before income taxes........ 1,637 (7,063) 52,241 (2,018) (41,338) 3,459
Income tax expense........... -- -- 20,989 -- (19,605)(7) 1,384
-------- ------- -------- ------- -------- --------
Net earnings (loss) from
continuing operations...... $ 1,637 $(7,063) $ 31,252 $(2,018) $(21,733) $ 2,075
======== ======= ======== ======= ======== ========
See accompanying Notes to the Unaudited Pro Forma Combined Statements of
Operations
P-3
142
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
(1) Allocated management fees 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 and revolving credit
facility................................... 330,000 26,625
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.
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
P-4
143
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA
COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
$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.
(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. 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
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............................. $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
======== ====== ========
Amortization of goodwill of $266,592 recognized in
connection with Tenet acquisition and the merger with
management company........................................ $ 7,194
Amortization of deferred financing fees of $26,901.......... 3,319
-------
Pro forma amortization...................................... 10,513
Amortization included in historical combined Tenet hospitals
and management company financial statements............... 4,552
-------
Pro forma adjustment........................................ $ 5,961
=======
(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 combined financial statements to equal
40.0% for the nine months ended September 30, 1999.
P-5
144
IASIS HEALTHCARE CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1999
PRO FORMA PRO FORMA
RECAPITALIZATION MANAGEMENT ACQUISITION
PARACELSUS ADJUSTMENTS TENET COMPANY ADJUSTMENTS PRO FORMA
---------- ---------------- -------- ---------- ----------- ---------
(IN THOUSANDS)
Net revenue................................ $181,689 $ -- $581,220 $ 939 $ -- $763,848
Costs and expenses:
Salaries and benefits.................... 63,021 -- 192,406 2,273 257,700
Supplies and other operating expenses.... 73,118 -- 242,543 1,053 1,333(4) 318,047
Provision for bad debts.................. 13,625 -- 43,811 -- -- 57,436
Interest, net............................ 10,966 8,189(3) (1,415) (10) 47,859(3) 65,589
Depreciation & amortization.............. 12,784 -- 26,105 199 8,255(5) 47,343
Allocated management fees(1)............. 6,674 -- 7,696 -- -- 14,370
Loss on sale of accounts receivable(2)... -- -- 4,548 -- -- 4,548
-------- ------- -------- ------- -------- --------
Total costs and expenses.......... 180,188 8,189 515,694 3,515 57,447 765,033
-------- ------- -------- ------- -------- --------
Earnings (loss) from continuing operations
before minority interests and income
taxes.................................... 1,501 (8,189) 65,526 (2,576) (57,447) (1,185)
Minority interests......................... (126) -- 1,762 -- (1,868)(6) (232)
-------- ------- -------- ------- -------- --------
Earnings (loss) from continuing operations
before income taxes...................... 1,627 (8,189) 63,764 (2,576) (55,579) (953)
Income tax expense (benefit)............... -- -- 25,457 -- (25,457)(7) --
-------- ------- -------- ------- -------- --------
Net earnings (loss) from continuing
operations............................... $ 1,627 $(8,189) $ 38,307 $(2,576) $(30,122) $ (953)
======== ======= ======== ======= ======== ========
See accompanying Notes to the Unaudited Pro Forma Combined Statements of
Operations
P-6
145
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
(1) Allocated management fees 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 twelve-month basis 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 and revolving credit
facility................................... 330,000 35,500
Senior subordinated notes.................... 230,000 13.00 29,900
-------- -------
560,000 65,400
Capitalized leases........................... 1,499 Various 189
-------- -------
$561,499 $65,589
======== =======
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 September 30, 1999 by approximately $.4
million.
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.......... 189 -- 189
------- ------- -------
Total................................... 19,155 46,434 65,589
Historical interest expense (income).... 10,966 (1,425) 9,541
------- ------- -------
Pro forma adjustment.................... $ 8,189 $47,859 $56,048
======= ======= =======
(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
P-7
146
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA
COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
$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.
(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 $1.3 million,
representing one year 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. 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
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............................. $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
======== ====== ========
Amortization of goodwill of $266,592 recognized in
connection with Tenet acquisition and the merger with
management company........................................ $9,592
Amortization of deferred financing fees of $26,901.......... 4,484
------
Pro forma amortization...................................... 14,076
Amortization included in historical combined Tenet hospitals
and management company financial statements............... 5,821
------
Pro forma adjustment........................................ $8,255
======
(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 remove historical tax expense. A tax benefit has not been recorded
because of the uncertainty of our future ability to utilize net operating
losses.
P-8
147
IASIS HEALTHCARE CORPORATION
UNAUDITED PRO FORMA AND PRO FORMA AS ADJUSTED
COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2000
PRO FORMA
MANAGEMENT RECAPITALIZATION
IASIS TENET COMPANY ADJUSTMENT
-------- ------- ---------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenue............. $815,163 $22,807 $ 47 $ --
Costs and expenses:
Salaries and
benefits............ 285,451 8,588 126 --
Supplies and other
operating
expenses............ 357,552 12,368 131 --
Provision for bad
debts............... 60,579 370 -- --
Interest, net......... 62,352 (15) 453 --
Depreciation &
amortization........ 47,559 1,019 11 --
Allocated management
fees(1)............. -- 313 -- --
Recapitalization
costs............... 3,478 -- -- (3,478)(4)
Loss on sale of
accounts
receivable(2)....... -- 2,191 -- --
-------- ------- ----- -------
Total costs and
expenses...... 816,971 24,834 721 (3,478)
-------- ------- ----- -------
Earnings (loss) from
continuing operations
before minority
interests and income
taxes................. (1,808) (2,027) (674) 3,478
Minority interests...... 74 (156) -- --
-------- ------- ----- -------
Earnings (loss) from
continuing operations
before income taxes... (1,882) (1,871) (674) 3,478
Income tax expense
(benefit)............. 2,219 (747) -- --
-------- ------- ----- -------
Net earnings (loss) from
continuing
operations............ $ (4,101) $(1,124) $(674) $ 3,478
======== ======= ===== =======
Basic and diluted net
earnings (loss) from
continuing operations
per common share(3)... -- -- -- --
Weighted average number
of common shares used
for basic net earnings
(loss) from continuing
operations per common
share(3).............. -- -- -- --
Weighted average number
of common and common
equivalent shares used
for diluted net
earnings from
continuing operations
per common share(3)... -- -- -- --
PRO FORMA
ACQUISITION PRO FORMA PRO FORMA
ADJUSTMENTS PRO FORMA OFFERING AS ADJUSTED
----------- ----------- --------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenue............. $ -- $ 838,017 $ -- $ 838,017
Costs and expenses:
Salaries and
benefits............ -- 294,165 -- 294,165
Supplies and other
operating
expenses............ -- 370,051 -- 370,051
Provision for bad
debts............... -- 60,949 -- 60,949
Interest, net......... 2,294(5) 65,084 (19,124)(9) 45,960
Depreciation &
amortization........ 219(6) 48,808 -- 48,808
Allocated management
fees(1)............. -- 313 -- 313
Recapitalization
costs............... -- -- -- --
Loss on sale of
accounts
receivable(2)....... -- 2,191 -- 2,191
------- ----------- -------- -----------
Total costs and
expenses...... 2,513 841,561 (19,124) 822,437
------- ----------- -------- -----------
Earnings (loss) from
continuing operations
before minority
interests and income
taxes................. (2,513) (3,544) 19,124 15,580
Minority interests...... (98)(7) (180) -- (180)
------- ----------- -------- -----------
Earnings (loss) from
continuing operations
before income taxes... (2,415) (3,364) 19,124 15,760
Income tax expense
(benefit)............. 747(8) 2,219 4,613(10) 6,832
------- ----------- -------- -----------
Net earnings (loss) from
continuing
operations............ $(3,162) $ (5,583) $ 14,511 $ 8,928
======= =========== ======== ===========
Basic and diluted net
earnings (loss) from
continuing operations
per common share(3)... -- $ (0.18) $ 0.20
Weighted average number
of common shares used
for basic net earnings
(loss) from continuing
operations per common
share(3).............. -- 31,434,863 44,784,863
Weighted average number
of common and common
equivalent shares used
for diluted net
earnings from
continuing operations
per common share(3)... -- -- -- 44,977,529
See accompanying Notes to the Unaudited Pro Forma and Pro Forma as Adjusted
Combined Statements of Operations
P-9
148
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA AND PRO FORMA AS
ADJUSTED COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS)
(1) Allocated management fees 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) Pro forma and pro forma as adjusted net earnings (loss) from continuing
operations per common share and the pro forma and pro forma as adjusted
weighted average number of common and common equivalent shares give effect
to the exchange of our mandatorily redeemable Series A and Series B
preferred stock for 17,357,671 shares of our common stock which occurred on
October 26, 2000 and to a 10.5-for-one common stock split. Pro forma net
earnings (loss) from continuing operations per common share and the pro
forma as adjusted weighted average number of common and common equivalent
shares also give effect to the sale of 13,350,000 shares of common stock in
the offering and the application of the estimated net proceeds thereof to
the repayment of debt, as described in "Use of Proceeds," as if it had
occurred as of October 1, 1999.
(4) To eliminate non-recurring legal, accounting and other related charges of
approximately $3.5 million incurred in connection with the recapitalization
transaction.
(5) 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 and revolving credit
facility.................................... 330,000 1,479
Senior subordinated notes..................... 230,000 13.00 1,246
-------- ------
560,000 2,725
Capitalized leases............................ 1,499 Various 7
-------- ------
Pro forma debt and interest................... $561,499 $2,732
========
Combined net interest expense of Tenet and the
management company recognized during the
period October 1, 1999 through October 15,
1999........................................ 438
------
Pro forma adjustment..................... $2,294
======
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%.
P-10
149
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA AND PRO FORMA AS
ADJUSTED COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
(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. 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
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............................. $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
======== ====== ========
Amortization of goodwill of $266,592 recognized in
connection with Tenet acquisition and the merger with
management company for the period October 1, 1999 through
October 15, 1999.......................................... $400
Amortization of deferred financing fees of $26,901 for the
period October 1, 1999 through October 15, 1999........... 180
----
Pro forma amortization...................................... 580
Amortization included in historical combined Tenet hospitals
and management company financial statements............... 361
----
Pro forma adjustment........................................ $219
====
(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 Corporation conveyed to IASIS 100% of the assets
of Odessa Regional Hospital.
(8) To remove historical tax benefit because of the uncertainty of our future
ability to utilize net operating losses.
P-11
150
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA AND PRO FORMA AS
ADJUSTED COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
(9)To adjust interest expense to give effect to the consummation of this public
offering and the application of net proceeds to repay a portion of
outstanding indebtedness as if these events had occurred on October 1, 1999,
as follows:
INTEREST INTEREST
INSTRUMENT AMOUNT RATE EXPENSE
- ---------- -------- -------- --------
Revolving credit facility, including letter
of credit fees............................. $ -- Various $ 1,351
Term loans
Tranche A -- average outstanding balance... 35,375 9.93 3,513
Tranche B -- average outstanding balance... 111,375 10.68 11,895
-------- -------
Total term loans and revolving credit
facility................................... 146,750 16,759
Senior subordinated notes.................... 230,000 13.00 29,900
-------- -------
376,750 46,659
Capitalized leases........................... 1,289 Various 98
Other interest income, net................... -- Various (797)
-------- -------
$378,039 $45,960
======== =======
(10)To adjust income tax expense for the effect of changes in interest expense.
P-12
151
IASIS HEALTHCARE CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999
PRO FORMA PRO FORMA
MANAGEMENT RECAPITALIZATION ACQUISITION
IASIS TENET COMPANY ADJUSTMENT ADJUSTMENTS PRO FORMA
-------- ------- ---------- ---------------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenue......................... $177,695 $22,807 $ 47 $ -- $ -- $ 200,549
Costs and expense:
Salaries and benefits............. 60,906 8,588 126 -- -- 69,620
Supplies and other operating
expenses........................ 75,945 12,368 131 -- -- 88,444
Provision for bad debts........... 13,229 370 -- -- -- 13,599
Interest, net..................... 14,375 (15) 453 -- 2,294(5) 17,107
Depreciation & amortization....... 10,384 1,019 11 -- 219(6) 11,633
Allocated management
fees(1)......................... -- 313 -- -- -- 313
Recapitalization costs............ 3,442 -- -- (3,442)(4) -- --
Loss on sale of accounts
receivable(2)................... -- 2,191 -- -- -- 2,191
-------- ------- ----- ------- ------- -----------
Total costs and expenses........ 178,281 24,834 721 (3,442) 2,513 202,907
-------- ------- ----- ------- ------- -----------
Earnings (loss) from continuing
operations before minority
interests and income taxes........ (586) (2,027) (674) 3,442 (2,513) (2,358)
Minority interests.................. (92) (156) -- -- (98)(7) (346)
-------- ------- ----- ------- ------- -----------
Earnings (loss) from continuing
operations before income taxes.... (494) (1,871) (674) 3,442 (2,415) (2,012)
Income tax expense (benefit)........ -- (747) -- -- 747(8) --
-------- ------- ----- ------- ------- -----------
Net earnings (loss) from continuing
operations........................ $ (494) $(1,124) $(674) $ 3,442 $(3,162) $ (2,012)
======== ======= ===== ======= ======= ===========
Net loss from continuing operations
per common share(3)............... -- -- -- -- -- $ (0.07)
Weighted average number of common
shares(3)......................... -- -- -- -- -- 30,458,745
See accompanying Notes to the Unaudited Pro Forma Combined Statements of
Operations
P-13
152
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
(1) Allocated management fees 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 existing on that date as well as patient related receivables
generated thereafter. 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) Pro forma net loss from continuing operations per common share and the pro
forma weighted average number of common and common equivalent shares (pro
forma) give effect to the exchange of our mandatorily redeemable Series A
and Series B preferred stock for 17,357,671 shares of our common stock which
occurred on October 26, 2000 and to a 10.5-for-one common stock split.
(4) To eliminate non-recurring legal, accounting and other related charges
incurred in connection with the recapitalization transaction.
(5) 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 and revolving credit
facility.................................... 330,000 1,479
Senior subordinated notes..................... 230,000 13.00 1,246
-------- ------
560,000 2,725
Capitalized leases............................ 1,289 Various 7
-------- ------
$561,289 $2,732
========
Combined net interest expense of Tenet and the management
company recognized during the period October 1, 1999
through October 15, 1999.................................. 438
------
Pro forma adjustment........................................ $2,294
======
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%.
(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 for the period October
1, 1999 through October 15, 1999. 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
P-14
153
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA
COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
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
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
========= ====== ========
Amortization of goodwill of $266,592 recognized in
connection with the Tenet acquisition and the merger with
management company for the period October 1, 1999 through
October 15, 1999.......................................... $400
Amortization of deferred financing fees of $26,901 for the
period October 1, 1999 through October 15, 1999........... 180
----
580
Amortization included in historical combined Tenet hospitals
and management company financial statements............... 361
----
Pro forma adjustment........................................ $219
====
(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 benefit because of the uncertainty of our future
ability to utilize net operating losses.
P-15
154
IASIS HEALTHCARE CORPORATION
UNAUDITED PRO FORMA AS ADJUSTED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2000
PRO FORMA PRO FORMA
IASIS OFFERING AS ADJUSTED
----------- --------- ------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net revenue........................................... $ 219,369 $ -- $ 219,369
Costs and expenses:
Salaries and benefits............................... 77,085 -- 77,085
Supplies and other operating expenses............... 97,131 -- 97,131
Provision for bad debts............................. 17,395 -- 17,395
Interest, net....................................... 17,208 (5,124)(2) 12,084
Depreciation & amortization......................... 14,108 -- 14,108
----------- ------- -----------
Total costs and expenses.................... 222,927 (5,124) 217,803
----------- ------- -----------
Earnings (loss) from continuing operations before
minority interests and income taxes.............. (3,558) 5,124 1,566
Minority interests.................................. 53 -- 53
----------- ------- -----------
Earnings (loss) from continuing operations
before income taxes....................... (3,611) 5,124 1,513
Income tax expense.................................. -- 761(3) 761
----------- ------- -----------
Net earnings (loss) from continuing
operations................................ $ (3,611) $ 4,363 $ 752
=========== ======= ===========
Net earnings from continuing operations
attributable to common stockholders....... 21,737 -- 752
=========== ======= ===========
Basic and diluted net earnings from continuing
operations per common share(1)................... $ 0.81 -- $ 0.02
Weighted average number of common shares used for
basic net earnings from continuing operations per
common share(1).................................. 26,779,284 -- 45,143,711
Weighted average number of common and common
equivalent shares used for diluted net earnings
from continuing operations per common share(1)... -- -- 45,631,810
See accompanying Notes to the Unaudited Pro Forma as Adjusted Consolidated
Statements of Operations.
P-16
155
IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA AS ADJUSTED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
(1)Net earnings from continuing operations per common share include the reversal
of $(25,348) in preferred stock dividends. Pro forma as adjusted net earnings
from continuing operations per common share and the pro forma as adjusted
weighted average number of common and common equivalent shares give effect to
the exchange of our mandatorily redeemable Series A and Series B preferred
stock for 17,357,671 shares of our common stock, to a 10.5-for-one common
stock split and to the sale of 13,350,000 shares of common stock in the
offering and the application of the estimated net proceeds thereof to the
repayment of debt, as described in "Use of Proceeds," as if these events had
occurred as of October 1, 2000.
(2)To adjust interest expense to give effect to the offering and the application
of net proceeds thereof to repay a portion of outstanding indebtedness as if
these events had occurred on October 1, 2000, as follows:
INTEREST INTEREST
INSTRUMENT AMOUNT RATE EXPENSE
- ---------- -------- -------- --------
Revolving credit facility, including letter
of credit fees............................. $ 16,500 Various $ 688
Term loans
Tranche A.................................. 34,000 10.30 876
Tranche B.................................. 109,000 11.10 3,025
-------- -------
Total term loans and revolving credit
facility................................... 159,500 4,589
Senior subordinated notes.................... 230,000 13.00 7,475
-------- -------
389,500 12,064
Capitalized leases........................... 1,499 Various 158
Interest income.............................. -- Various (138)
-------- -------
$390,999 $12,084
======== =======
(3)To adjust income tax expense for the effect of the change in interest
expense.
P-17
156
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
13,350,000 SHARES
[IASIS LOGO]
COMMON STOCK
----------------------
PROSPECTUS
----------------------
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
BANC OF AMERICA SECURITIES LLC
CIBC WORLD MARKETS
DEUTSCHE BANC ALEX M BROWN
LEHMAN BROTHERS
JEFFERIES & COMPANY, INC.
SUNTRUST EQUITABLE SECURITIES
, 2001
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
157
Omitted Graphic and Image Material
The following graphic and image material is omitted from the form of the
prospectus filed electronically:
Inside Back Cover: A color photograph of each of the following hospitals,
with the name of the hospital and city and state in which the hospital is
located contained in a caption underneath the photograph: Jordon Valley
Hospital, West Jordan, Utah; Salt Lake Regional Medical Center, Salt Lake City,
Utah; Rocky Mountain Medical Center, Salt Lake City, Utah; St. Luke's Medical
Center, Phoenix, Arizona; Tempe St. Luke's Hospital, Tempe, Arizona; and Town &
Country Hospital, Tampa, Florida.
158
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.
[Alternate International Page]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 6, 2001
PROSPECTUS
13,350,000 SHARES
[IASIS LOGO]
COMMON STOCK
----------------------
This is IASIS Healthcare Corporation's initial public offering. We are
selling all of the shares. The international managers are offering 2,670,000
shares outside the U.S. and Canada and the U.S. underwriters are offering
10,680,000 shares in the U.S. and Canada.
We expect the public offering price to be between $14.00 and $16.00 per
share. Currently, no public market exists for the shares. After pricing of the
offering, the shares will trade on the New York Stock Exchange under the symbol
"IAS."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
----------------------
PER SHARE TOTAL
--------- -----
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to IASIS Healthcare.............. $ $
The international managers may also purchase up to an additional 400,500
shares from us at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments. The
U.S. underwriters may similarly purchase up to an additional 1,602,000 shares
from us.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares will be ready for delivery on or about , 2001.
----------------------
MERRILL LYNCH INTERNATIONAL SALOMON SMITH BARNEY
BANK OF AMERICA INTERNATIONAL LIMITED
CIBC WORLD MARKETS
DEUTSCHE BANK
LEHMAN BROTHERS
JEFFERIES INTERNATIONAL LIMITED SUNTRUST EQUITABLE SECURITIES
----------------------
The date of this prospectus is , 2001.
159
[ALTERNATE INTERNATIONAL PAGE]
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
Risk Factors................................................ 8
Forward-Looking Statements.................................. 15
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Business.................................................... 36
Management.................................................. 57
Stock Ownership of Principal Stockholders and Management.... 64
Certain Relationships and Related Party Transactions........ 66
Description of Indebtedness................................. 69
Description of Our Capital Stock............................ 71
Shares Eligible for Future Sale............................. 74
Certain United States Federal Tax Consequences to Non-United
States Holders............................................ 76
Underwriting................................................ 79
Legal Matters............................................... 83
Experts..................................................... 84
Where You Can Find More Information......................... 84
Index to Financial Statements............................... F-1
Index to Unaudited Pro Forma and Pro Forma As Adjusted
Combined and Consolidated Financial Information........... P-1
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
160
[Alternate International Page]
UNDERWRITING
We intend to offer the shares outside the U.S. and Canada through the
international managers and in the U.S. and Canada through the U.S. underwriters.
Merrill Lynch International, Salomon Brothers International Limited, Bank of
America International Limited, CIBC World Markets plc, Deutsche Bank AG London,
Lehman Brothers International (Europe), Jefferies International Limited and
SunTrust Equitable Securities Corporation are acting as lead managers for the
international managers named below. Subject to the terms and conditions
described in an international purchase agreement among us and the international
managers, and concurrently with the sale of 10,680,000 shares to the U.S.
underwriters, we have agreed to sell to the international managers, and the
international managers severally have agreed to purchase from us, the number of
shares listed opposite their names below.
NUMBER
OF SHARES
INTERNATIONAL MANAGER ---------
Merrill Lynch International.................................
Salomon Brothers International Limited......................
Bank of America International Limited.......................
CIBC World Markets plc......................................
Deutsche Bank AG London.....................................
Lehman Brothers International (Europe)......................
Jefferies International Limited.............................
SunTrust Equitable Securities Corporation...................
---------
Total.......................................... 2,670,000
=========
We have also entered into a U.S. purchase agreement with U.S. underwriters
for sale of the shares in the U.S. and Canada for whom Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Salomon Smith Barney Inc., Banc of America
Securities LLC, CIBC World Markets Corp., Deutsche Banc Alex M Brown Inc.,
Lehman Brothers Inc., Jefferies & Company, Inc. and SunTrust Equitable
Securities Corporation are acting as U.S. representatives. Subject to the terms
and conditions in the U.S. purchase agreement, and concurrently with the sale of
2,670,000 shares to the international managers pursuant to the international
purchase agreement, we have agreed to sell to the U.S. underwriters and the U.S.
underwriters severally have agreed to purchase 10,680,000 shares from us. The
initial public offering price per share and the total underwriting discount per
share are identical under the international purchase agreement and the U.S.
purchase agreement.
The international managers and the U.S. underwriters have agreed to
purchase all of the shares sold under the international and the U.S. purchase
agreements if any of these shares are purchased. If an underwriter defaults, the
international and U.S. purchase agreements provide that the purchase commitments
of the nondefaulting underwriters may be increased or the purchase agreements
may be terminated. The closings for the sale of shares to be purchased by the
international managers and the U.S. underwriters are conditioned on one another.
We have agreed to indemnify the international managers and the U.S.
underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the international managers and U.S.
underwriters and may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
79
161
[Alternate International Page]
COMMISSIONS AND DISCOUNTS
The lead managers have advised us that the international managers propose
initially to offer the shares to the public at the initial public offering price
on the cover page of this prospectus and to dealers at that price less a
concession not in excess of $ per share. The international managers may
allow, and the dealers may reallow, a discount not in excess of $ per share
to other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The following table shows the public offering price, underwriting discount
and proceeds before expenses to IASIS Healthcare. The information assumes either
no exercise or full exercise by the international managers and the U.S.
underwriters of their over-allotment options.
WITHOUT WITH
PER SHARE OPTION OPTION
--------- ------- ------
Public offering price...................................... $ $ $
Underwriting discount...................................... $ $ $
Proceeds, before expenses, to IASIS Healthcare............. $ $ $
The expenses of the offering, not including the underwriting discount, are
estimated at $1,930,000 and are payable by IASIS Healthcare.
OVER-ALLOTMENT OPTION
We have granted options to the international managers to purchase up to
400,500 additional shares at the public offering price less the underwriting
discount. The international managers may exercise these options for 30 days from
the date of this prospectus solely to cover any over-allotments. If the
international managers exercise these options, each will be obligated, subject
to conditions contained in the purchase agreements, to purchase a number of
additional shares proportionate to that international manager's initial amount
reflected in the above table.
We have also granted options to the U.S. underwriters, exercisable for 30
days from the date of this prospectus, to purchase up to 1,602,000 additional
shares to cover any over-allotments on terms similar to those granted to the
international managers.
INTERSYNDICATE AGREEMENT
The international managers and the U.S. underwriters have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the intersyndicate agreement, the international managers and the U.S.
underwriters may sell shares to each other for purposes of resale at the public
offering price, less an amount not greater than the selling concession. Under
the intersyndicate agreement, the international managers and any dealer to whom
they sell shares will not offer to sell or sell shares to U.S. persons or
Canadian persons or to persons they believe intend to resell to U.S. or Canadian
persons, except in the case of transactions under the intersyndicate agreement.
Similarly, the U.S. underwriters and any dealer to whom they sell shares will
not offer to sell or sell shares to persons who are non-U.S. or non-Canadian
persons or to persons they believe intend to resell to persons who are non-U.S.
or non-Canadian persons, except in the case of transactions under the
intersyndicate agreement.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 1,001,250 shares offered by this prospectus for
sale to some of our directors, officers, employees, business associates and
related persons. If these persons purchase reserved shares, this will reduce the
number of shares available for sale to the general public. Any reserved shares
that are not orally confirmed for purchase within one day of the pricing of this
offering will be offered by the underwriters to the general public on the same
terms as the other shares offered by this prospectus.
80
162
NO SALES OF SIMILAR SECURITIES
We, our executive officers, directors and holders of substantially all of
our currently outstanding shares and options have agreed, with exceptions, not
to sell or transfer any common stock for 180 days after the date of this
prospectus without first obtaining the prior written consent of Merrill Lynch.
Specifically, we and these other individuals have agreed not to directly or
indirectly
- offer, pledge, sell or contract to sell any common stock,
- sell any option or contract to purchase any common stock,
- purchase any option or contract to sell any common stock,
- grant any option, right or warrant for the sale of any common stock,
- lend or otherwise dispose of or transfer any common stock,
- request or demand that we file a registration statement related to the
common stock, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common stock. It also
generally applies to common stock owned now or acquired later by the person
executing the agreement or for which the person executing the agreement later
acquires the power of disposition.
NEW YORK STOCK EXCHANGE LISTING
The shares have been approved for listing on the New York Stock Exchange
under the symbol "IAS." In order to meet the requirements for listing on that
exchange, the international managers and the U.S. underwriters have undertaken
to sell a minimum number of shares to a minimum number of beneficial owners as
required by that exchange.
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations among
us and the U.S. representatives and lead managers. In addition to prevailing
market conditions, the factors to be considered in determining the initial
public offering price are
- the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us,
- our financial information,
- the history of, and the prospects for, our company and the industry in
which we compete,
- an assessment of our management, its past and present operations, and the
prospects for, and timing of, our future revenues,
- the present state of our development, and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price.
NASD REGULATIONS
The net proceeds from this offering will be used to repay a portion of our
outstanding indebtedness under our bank credit facility that consists of a
revolving credit facility and tranche A and tranche B term
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loans. Because more than ten percent of the net proceeds of the offering may be
paid to members or affiliates of members of the National Association of
Securities Dealers, Inc. participating in the offering, the offering will be
conducted in accordance with NASD Conduct Rule 2710(c)(8). This rule requires
that the public offering price of an equity security be no higher than the price
recommended by a qualified independent underwriter which has participated in the
preparation of the registration statement and performed its usual standard of
due diligence with respect to that registration statement. Merrill Lynch has
agreed to act as qualified independent underwriter for the offering. The price
of the shares will be no higher than that recommended by Merrill Lynch.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
underwriters from bidding for and purchasing our common stock. However, the U.S.
representatives may engage in transactions that stabilize the price of the
common stock, such as bids or purchases to peg, fix or maintain that price.
The underwriters may purchase and sell our common stock in the open market.
These transactions may include short sales, stabilizing transactions and
purchases to cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of shares than they are required to
purchase in the offering. "Covered" short sales are sales made in an amount not
greater than the underwriters' option to purchase additional shares from the
issuer in the offering. The underwriters may close out any covered short
position by either exercising their option to purchase additional shares or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the common shares in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing transactions consist
of various bids for or purchases of common shares made by the underwriters in
the open market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding a decline in the
market price of the common shares. As a result, the price of our common stock
may be higher than the price that might otherwise exist in the open market.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the U.S. representatives makes any representation that the
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
UK SELLING RESTRICTIONS
Each international manager has agreed that
- it has not offered or sold and will not offer or sell any shares of
common stock to persons in the United Kingdom, except to persons whose
ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances which do not constitute an offer
to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995;
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[Alternate International Page]
- it has completed and will comply with all applicable provisions of the
Financial Services Act of 1986 with respect to anything done by it in
relation to the common stock in, from or otherwise involving the United
Kingdom; and
- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issuance
of common stock to a person who is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1996 as amended by the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1997 or is a person to whom such
document may otherwise lawfully be issued or passed on.
NO PUBLIC OFFERING OUTSIDE THE UNITED STATES
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of common
stock, or the possession, circulation or distribution of this prospectus or any
other material relating to our company or shares of our common stock in any
jurisdiction where action for that purpose is required. Accordingly, the shares
of our common stock may not be offered or sold, directly or indirectly, and
neither this prospectus nor any other offering material or advertisements in
connection with the shares of common stock may be distributed or published, in
or from any country or jurisdiction except in compliance with any applicable
rules and regulations of any such country or jurisdiction.
Purchasers of the shares offered by this prospectus may be required to pay
stamp taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the offering price on the cover page of this
prospectus.
INTERNET DISTRIBUTION
Merrill Lynch will be facilitating internet distribution for the offering
to some of its internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its online brokerage customers.
An electronic prospectus is available on the website maintained by Merrill
Lynch. Other than the prospectus in electronic format, the information on the
Merrill Lynch website relating to the offering is not a part of this prospectus.
OTHER RELATIONSHIPS
Certain of the underwriters or their affiliates may from time to time
provide investment banking, commercial banking or other services to us or Joseph
Littlejohn & Levy, Inc. In addition, an affiliate of CIBC World Markets Corp. is
one of our indirect equity investors. Jay Bloom, one of our directors, is a
Managing Director of CIBC World Markets and is a Managing Director of Trimaran
Fund II, L.L.C., an indirect equity investor in our company.
LEGAL MATTERS
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, as special
counsel to IASIS, is passing upon the validity of the shares offered by the
company and certain other legal matters in connection with this offering. Bass,
Berry & Sims PLC, Nashville, Tennessee, is also passing on certain legal matters
for IASIS. Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, also
represents JLL Healthcare, LLC and its affiliates from time to time. Fried,
Frank, Harris, Shriver & Jacobson (a partnership including professional
corporations), New York, New York, is acting as legal counsel to the
underwriters.
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EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated and
combined financial statements at September 30, 2000 and 1999 and for the year
ended September 30, 2000, the nine months ended September 30, 1999 and the year
ended December 31, 1998, as set forth in their report. We have included our
financial statements in the prospectus and elsewhere in this 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.
We have agreed to indemnify and hold KPMG harmless against and from any and
all legal costs and expenses incurred by KPMG in successful defense of any legal
action or proceeding that arises as a result of KPMG's consent to the inclusion
of its audit report on the Tenet Hospitals' past combined financial statements
included in this registration statement.
WHERE YOU CAN FIND MORE INFORMATION
We file reports and other information with the SEC. We filed with the SEC a
registration statement on Form S-1 under the Securities Act with respect to the
shares of common stock offered by this prospectus. This prospectus does not
contain all the information included in the registration statement nor all of
the exhibits and schedules. Additional information about our company and the
common stock included in the registration statement and the exhibits and
schedules. Statements contained in this prospectus regarding the contents of any
contract or any other document to which reference is made are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as exhibit to the registration statement, each such
statement being qualified in all respects by such reference. A copy of the
registration statement and the exhibits and schedules filed may be inspected
without charge at the public reference room maintained by the SEC in Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of
the registration statement may be obtained upon the payment of the fees
prescribed by the SEC. Information on the operation of the public reference room
may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of this Web site is http://www.sec.gov. Our public files are also
available for inspection at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
13,350,000 SHARES
[IASIS LOGO]
COMMON STOCK
----------------------
PROSPECTUS
----------------------
MERRILL LYNCH INTERNATIONAL
SALOMON SMITH BARNEY
BANK OF AMERICA INTERNATIONAL LIMITED
CIBC WORLD MARKETS
DEUTSCHE BANK
LEHMAN BROTHERS
JEFFERIES INTERNATIONAL LIMITED
SUNTRUST EQUITABLE SECURITIES
, 2001
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
167
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a list of estimated expenses in connection with the
issuance and distribution of the securities being registered:
SEC registration fee........................................ $ 61,410.00
NASD filing fee............................................. 25,064.00
Printing and engraving costs................................ 650,000.00
Legal fees and expenses..................................... 660,000.00
Accounting fees and expenses................................ 300,000.00
NYSE listing fee............................................ 225,690.00
Miscellaneous............................................... 11,211.00
-------------
Total.................................................. $1,933,375.00
=============
- ---------------
* To be completed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities, including reimbursement for expenses incurred arising under the
Securities Act. Our amended and restated certificate of incorporation and our
amended and restated by-laws provide for indemnification of our directors,
officers, employees and other agents to the extent and under the circumstances
permitted by the Delaware General Corporation Law. We have also entered into
agreements with our directors and executive officers that require, among other
things, that IASIS indemnify them against certain liabilities that may arise by
reason of their status or service as directors and executive officers to the
fullest extent permitted by Delaware law. We have also purchased directors and
officers liability insurance, which provides coverage against certain
liabilities, including liabilities under the Securities Act.
As permitted by the DGCL, our amended and restated certificate of
incorporation, a copy of which is filed as Exhibit 3.1 to this Registration
Statement, eliminates all liability of our directors for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to us or our stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) pursuant to Section 174 of the DGCL or (iv) for any
transaction from which the director derived an improper personal benefit.
Our amended and restated by-laws, a copy of which is filed as Exhibit 3.4
to this Registration Statement, provides us with the authority to indemnify our
directors, officers and agents to the full extent allowed by the laws of the
State of Delaware.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On October 15, 1999, we issued 435,617 shares of our common stock and 5,311
shares of our mandatorily redeemable Series B preferred stock in connection with
the merger of a subsidiary of our company with a management company owned by
certain members of our management. The shares of common stock issued in the
merger were valued at $4,149,000 and the shares of preferred stock were valued
at $5,311,000. On October 15, 1999, we sold 160,000 shares of our mandatorily
redeemable Series A preferred stock to four purchasers for aggregate
consideration of $160,000,000. On July 21, 2000, we issued 3,532 shares of our
common stock and 43.08 shares of our mandatorily redeemable Series B preferred
stock in settlement of a dispute with one of our former employees. On December
15, 2000, we sold 152,501 shares of our common stock to certain of our existing
stockholders for aggregate consideration
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of $1,452,443. We have sold shares of our common stock to our former employees
pursuant to the exercise of stock options in the amounts, on the dates and for
the consideration as follows: 3,675 shares on July 30, 2000 for $35,000; 11,359
shares on November 29, 2000 for $108,190; 6,197 shares on November 30, 2000 for
$59,018; 14,541 shares on January 18, 2001 for $138,490; 7,444 shares on January
25, 2001 for $70,900; and 7,444 shares on January 26, 2001 for $70,900. 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.
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.
On October 26, 2000, we exchanged 160,000 shares of our Series A preferred
stock and 5,311 shares of our Series B preferred stock for an aggregate of
17,357,671 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.
Pursuant to an Agreement and Plan of Reorganization, upon the closing of
this offering JLL Healthcare, LLC will transfer to us the 27,974,625 shares of
common stock it owns in exchange for us issuing to JLL Healthcare, LLC an amount
of newly issued common stock that maintains JLL Healthcare's current ownership
percentage, after completing the stock split that is described in the prospectus
that is part of this registration statement. The exchange will be exempt under
Section 3(a)(9) of the Securities Act, which exempts exchanges of securities
solely between an issuer and its security holders.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT
NO. DESCRIPTION
- ------- -----------
1.1 Form of Underwriting Agreement*
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(1)
2.2 Asset Sale Agreement between Tenet Healthcare Corporation
and JLL Hospital, LLC, dated August 15, 1999(1)
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(1)
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(1)
2.5 Asset Sale Agreement between Odessa Hospital, Ltd., and JLL
Hospital, LLC, dated as of August 15, 1999(1)
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(1)
2.7 Agreement and Plan of Reorganization between JLL Healthcare,
LLC and IASIS Healthcare Corporation
3.1 Amended and Restated Certificate of Incorporation of IASIS
Healthcare Corporation*
3.2 Amended and Restated By-Laws of IASIS Healthcare
Corporation*
4.1 Specimen of Common Stock Certificate*
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EXHIBIT
NO. DESCRIPTION
- ------- -----------
4.2 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(1)
4.3 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(1)
4.4 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(1)
4.5 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(1)
4.6 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(1)
4.7 Senior Subordinated Guarantee, dated November 4, 1999 by the
Utah 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(1)
4.8 Form of IASIS Healthcare Corporation 13% Senior Subordinated
Exchange Note due 2009(1)
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP*
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(1)
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(4)
10.3 Amendment to Stockholders Agreement dated February 6, 2001
between IASIS Healthcare Corporation and JLL Healthcare,
LLC*
10.4 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(1)
10.5 First Amendment, dated as of November 16, 1999, to the
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(1)
10.6 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(1)
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EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.7 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(1)
10.8 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(1)
10.9 Hypothecation Agreement, dated as of October 15, 1999 (as
amended, restated, modified and/or supplemented from time to
time), among each of the pledgors party thereto in favor of
Morgan Guaranty Trust Company of New York, as Collateral
Agent(1)
10.10 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(1)
10.11 Tenet Buypower Purchasing Assistance Agreement, dated as of
October 15, 1999, by and between IASIS Healthcare
Corporation and Tenet HealthSystem Medical, Inc.(1)
10.12 IASIS Healthcare Corporation 2000 Stock Option Plan(2)
10.13 Employment Agreement dated May 1, 2000 between IASIS
Healthcare Corporation and Mr. C. Wayne Gower
10.14 Pioneer Hospital Lease dated as of May 15, 1996, by and
between AHP of Utah, Inc., as Landlord, and Paracelsus
Pioneer Valley, Hospital, Inc., as Tenant(3)
10.15 First Amendment to Pioneer Hospital Lease by and between AHP
of Utah, Inc., as Landlord, and Paracelsus Pioneer Valley
Hospital, Inc., as Tenant(3)
10.16 Second Amendment to Lease dated as of November 6, 1996, by
and between AHP of Utah, Inc., as Landlord, and Paracelsus
Pioneer Valley Hospital, Inc., as Tenant(3)
10.17 Third Amendment to Lease dated as of March 18, 1999, by and
between AHP of Utah, Inc., as Landlord, and Paracelsus
Pioneer Valley Hospital, Inc., as Tenant(3)
10.18 Lease dated as of July 29, 1977, by and between Sierra
Equities, Inc., as Landlord, and Mesa General Hospital,
Inc., as Tenant(3)
10.19 Addendum to Lease entered into by and between Sierra
Equities, Inc., as Landlord, and Mesa General Hospital,
Inc., as Tenant(3)
10.20 Conforming Amendment to Lease dated as of June 10, 1991, by
and between Sierra Equities, Inc., as Landlord, and Mesa
General Hospital, Inc., as Tenant(3)
10.21 Amendment to Hospital Lease dated as of October 31, 2000, by
and between Sierra Equities, Inc., as Landlord, and Mesa
General Hospital, L.P., as Tenant(3)
10.22 Facility Lease dated as of February 1, 1995, between
Meditrust of Arizona, Inc., as Lessor, and OrNda Healthcorp
of Phoenix, Inc., as Lessee(3)
10.23 Contract between Arizona Health Care Cost Containment System
Administration and Health Choice Arizona(3)
10.24 Amendment to Contract between Arizona Healthcare Cost
Containment System Administration and Health Choice Arizona,
effective October 1, 2000(4)
10.25 Employment Agreement dated February 7, 2001 between IASIS
Healthcare Corporation and David R. White*
10.26 Form of Indemnification Agreement*
10.27 Tax Sharing Agreement between IASIS Healthcare Corporation
and JLL Healthcare, LLC
10.28 Employment Agreement dated May 1, 2000 between IASIS
Healthcare Corporation and Mr. John K. Crawford
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EXHIBIT
NO. DESCRIPTION
- ------- -----------
21 Subsidiaries of IASIS Healthcare Corporation(3)
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG LLP*
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(Included in Exhibit 5.1)
24.1 Power of Attorney (included on the signature page of this
Registration Statement)
- ---------------
* Denotes documents previously filed.
(1) Incorporated reference to the Registrant's Registration Statement on Form
S-4 (Registration No. 333-94521).
(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 2000.
(3) Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 2000.
(4) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 2000.
(b) Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has 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 the registrant 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, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
- For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
- For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 2 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized in City of
Franklin, State of Tennessee on the 6th day of March, 2001.
IASIS HEALTHCARE CORPORATION
By: /s/ DAVID R. WHITE
------------------------------------
David R. White
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the Registration Statement has been signed on its behalf
by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID R. WHITE Chairman of the Board and Chief March 6, 2001
- ------------------------------------------------ Executive Officer (Principal
David R. White Executive Officer)
/s/ JOHN K. CRAWFORD Executive Vice President, Chief March 6, 2001
- ------------------------------------------------ Financial Officer and Director
John K. Crawford (Principal Financial and
Accounting Officer)
* Director March 6, 2001
- ------------------------------------------------
R. Clayton McWhorter
* Director March 6, 2001
- ------------------------------------------------
C. Wayne Gower
* Director March 6, 2001
- ------------------------------------------------
Paul S. Levy
* Director March 6, 2001
- ------------------------------------------------
David Y. Ying
* Director March 6, 2001
- ------------------------------------------------
Jeffrey C. Lightcap
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SIGNATURE TITLE DATE
--------- ----- ----
* Director March 6, 2001
- ------------------------------------------------
Anthony Grillo
* Director March 6, 2001
- ------------------------------------------------
Ramsey A. Frank
* Director March 6, 2001
- ------------------------------------------------
Frank J. Rodriquez
* Director March 6, 2001
- ------------------------------------------------
Michael S. Berk
* Director March 6, 2001
- ------------------------------------------------
Jay R. Bloom
* Director March 6, 2001
- ------------------------------------------------
Robert F. Kiss
/s/ JOHN K. CRAWFORD March 6, 2001
- ------------------------------------------------
*John K. Crawford, Attorney-in-Fact
II-7
174
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
1.1 Form of Underwriting Agreement*
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(1)
2.2 Asset Sale Agreement between Tenet Healthcare Corporation
and JLL Hospital, LLC, dated August 15, 1999(1)
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(1)
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(1)
2.5 Asset Sale Agreement between Odessa Hospital, Ltd., and JLL
Hospital, LLC, dated as of August 15, 1999(1)
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(1)
2.7 Agreement and Plan of Reorganization between JLL Healthcare,
LLC and IASIS Healthcare Corporation
3.1 Amended and Restated Certificate of Incorporation of IASIS
Healthcare Corporation*
3.2 Amended and Restated By-Laws of IASIS Healthcare
Corporation*
4.1 Specimen of Common Stock Certificate*
4.2 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(1)
4.3 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(1)
4.4 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(1)
4.5 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(1)
4.6 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(1)
4.7 Senior Subordinated Guarantee, dated November 4, 1999 by the
Utah 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(1)
175
EXHIBIT
NO. DESCRIPTION
- ------- -----------
4.10 Form of IASIS Healthcare Corporation 13% Senior Subordinated
Exchange Note due 2009(1)
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP*
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(1)
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(4)
10.3 Amendment to Stockholders Agreement dated February 6, 2001
by and between IASIS Healthcare Corporation and JLL
Healthcare, LLC*
10.4 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(1)
10.5 First Amendment, dated as of November 16, 1999, to the
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(1)
10.6 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(1)
10.7 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(1)
10.8 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(1)
10.9 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(1)
10.10 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(1)
10.11 Tenet BuyPower Purchasing Assistance Agreement, dated as of
October 15, 1999, by and between IASIS Healthcare
Corporation and Tenet HealthSystem Medical, Inc.(1)
10.12 IASIS Healthcare Corporation 2000 Stock Option Plan(2)
10.13 Employment Agreement dated May 1, 2000 between IASIS
Healthcare Corporation and Mr. C. Wayne Gower
10.14 Pioneer Hospital Lease dated as of May 15, 1996, by and
between AHP of Utah, Inc., as Landlord, and Paracelsus
Pioneer Valley, Hospital, Inc., as Tenant(3)
10.15 First Amendment to Pioneer Hospital Lease by and between AHP
of Utah, Inc., as Landlord, and Paracelsus Pioneer Valley
Hospital, Inc., as Tenant(3)
10.16 Second Amendment to Lease dated as of November 6, 1996, by
and between AHP of Utah, Inc., as Landlord, and Paracelsus
Pioneer Valley Hospital, Inc., as Tenant(3)
176
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.17 Third Amendment to Lease dated as of March 18, 1999, by and
between AHP of Utah, Inc., as Landlord, and Paracelsus
Pioneer Valley Hospital, Inc., as Tenant(3)
10.18 Lease dated as of July 29, 1977, by and between Sierra
Equities, Inc., as Landlord, and Mesa General Hospital,
Inc., as Tenant(3)
10.19 Addendum to Lease entered into by and between Sierra
Equities, Inc., as Landlord, and Mesa General Hospital,
Inc., as Tenant(3)
10.20 Conforming Amendment to Lease dated as of June 10, 1991, by
and between Sierra Equities, Inc., as Landlord, and Mesa
General Hospital, Inc., as Tenant(3)
10.21 Amendment to Hospital Lease dated as of October 31, 2000, by
and between Sierra Equities, Inc., as Landlord, and Mesa
General Hospital, L.P., as Tenant(3)
10.22 Facility Lease dated as of February 1, 1995, between
Meditrust of Arizona, Inc., as Lessor, and OrNda Healthcorp
of Phoenix, Inc., as Lessee(3)
10.23 Contract between Arizona Health Care Cost Containment System
Administration and Health Choice Arizona(3)
10.24 Amendment to Contract between Arizona Health Care Cost
Containment System and Health Choice Arizona, effective
October 1, 2000(4)
10.25 Employment Agreement dated February 7, 2001 between IASIS
Healthcare Corporation and David R. White*
10.26 Form of Indemnification Agreement*
10.27 Tax Sharing Agreement between IASIS Healthcare Corporation
and JLL Healthcare, LLC
10.28 Employment Agreement dated May 1, 2000 between IASIS
Healthcare Corporation and John K. Crawford
21 Subsidiaries of IASIS Healthcare Corporation(3)
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG LLP*
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1)
24.1 Power of Attorney (included on the signature page of this
Registration Statement)
- ---------------
* Denotes documents previously filed.
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-4 (Registration No. 333-94521).
(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 2000.
(3) Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 2000.
(4) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 2000.