1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________.
COMMISSION FILE NUMBER: 333-94521
IASIS HEALTHCARE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0450619
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) (Identification No.)
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(Address of Principal Executive Offices)
(615) 844-2747
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [x] NO [ ]
As of August 11, 2000, 1,371,490 shares of the Registrant's Common
Stock were outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION ................................................................ 1
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated and Combined Balance Sheets (Unaudited)
June 30, 2000 and September 30, 1999 ........................................ 1
Condensed Consolidated and Combined Statements of Operations (Unaudited)
Three Months Ended June 30, 2000 and 1999 and Nine Months Ended
June 30, 2000 and 1999 ...................................................... 2
Condensed Consolidated and Combined Statements of Cash Flows (Unaudited)
Nine Months Ended June 30, 2000 and 1999 .................................... 3
Notes to Unaudited Condensed Consolidated and Combined Financial Statements . 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS .................................................................. 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .................. 18
PART II. OTHER INFORMATION .................................................................... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................................ 19
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IASIS HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
PREDECESSOR
SEPTEMBER 30,
JUNE 30, 1999
2000 (NOTE 1)
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 3,345 $ --
Accounts receivable, net of allowance for doubtful
accounts of $37,691 at June 30, 2000 and $10,850 at
September 30, 1999...................................... 145,885 19,674
Supplies ................................................. 19,729 4,501
Prepaid expenses and other current assets ................ 29,322 4,283
--------- ---------
Total Current Assets ................................. 198,281 28,458
Property and equipment, net of accumulated depreciation ...... 429,940 136,927
Goodwill and other intangible assets, net of accumulated
amortization ............................................. 219,426 46,988
Deferred debt financing costs, net of accumulated
amortization ............................................. 24,103 --
Other assets ................................................. 5,305 886
--------- ---------
Total Assets ......................................... $ 877,055 $ 213,259
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ......................................... $ 41,438 $ 15,739
Accrued salaries and benefits ............................ 17,078 5,229
Medical claims payable ................................... 16,467 1,030
Other accrued liabilities and expenses ................... 25,142 2,072
Current maturities of long-term debt and capital lease
Obligations ......................................... 7,996 701
--------- ---------
Total Current Liabilities ............................ 108,121 24,771
Due to Paracelsus ............................................ -- 270,814
Long-term debt and capital lease obligations ................. 549,513 798
Other long-term liabilities .................................. 3,825 --
Minority interest ............................................ 2,238 1,461
Series A Preferred Stock -- $.01 par value, authorized 500,000
shares; 160,000 shares issued and outstanding at
June 30, 2000 (liquidation preference value of $178,133
at June 30, 2000)........................................ 176,784 --
Series B Preferred Stock -- $.01 par value, authorized 50,000
shares; 5,311 shares issued and outstanding at June 30,
2000(liquidation preference value of $5,913 at
June 30, 2000) .......................................... 5,868 --
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock -- $.01 par value, authorized 5,000,000
shares; 1,371,490 shares issued and outstanding at
June 30, 2000........................................... 14 --
Additional paid-in capital ............................... 266,667 --
Treasury stock (at cost) ................................. (155,025) --
Accumulated deficit ...................................... (80,950) (84,585)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ................... 30,706 (84,585)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ... $ 877,055 $ 213,259
========= =========
See accompanying notes
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IASIS HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2000 1999 2000 1999
--------- -------- --------- ---------
Net revenue ....................................... $ 215,247 $ 46,991 $ 618,279 $ 140,207
COSTS AND EXPENSES:
Salaries and benefits ......................... 77,291 15,939 215,957 48,623
Supplies ...................................... 31,957 6,500 93,453 19,359
Other operating expenses ...................... 62,681 12,523 174,408 35,878
Provision for bad debts ....................... 15,011 3,350 44,378 10,413
Interest, net ................................. 16,132 2,431 45,577 8,525
Depreciation and amortization ................. 12,753 3,097 34,248 9,413
Allocated management fees ..................... -- 1,692 -- 5,061
Recapitalization costs ........................ -- -- 3,478 --
--------- -------- --------- ---------
Total costs and expenses .................... 215,825 45,532 611,499 137,272
--------- -------- --------- ---------
Earnings (loss) from operations before minority
interests and income taxes ...................... (578) 1,459 6,780 2,935
Minority interests ................................ 210 (32) 252 (51)
--------- -------- --------- ---------
Earnings (loss) from operations before income taxes (788) 1,491 6,528 2,986
Provision for income taxes ........................ -- -- 2,853 --
--------- -------- --------- ---------
Net earnings (loss) ......................... (788) 1,491 3,675 2,986
Preferred stock dividends and accretion ........... 6,627 -- 18,775 --
--------- -------- --------- ---------
Net earnings (loss) attributable to common
shareholders .................................... $ (7,415) $ 1,491 $ (15,100) $ 2,986
========= ======== ========= =========
See accompanying notes
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IASIS HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED
AND COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
JUNE 30,
---------------------
2000 1999
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ............................................ $ 3,675 $ 2,986
Adjustments to reconcile net earnings to net cash
Provided by (used in) operating activities:
Depreciation and amortization ......................... 34,248 9,413
Minority interests .................................... 252 (51)
Changes in operating assets and liabilities, Net of the
effect of acquisitions:
Accounts receivable ................................. (117,491) 7,017
Supplies, prepaid expenses and other
current assets .................................... (19,710) (706)
Accounts payable and other accrued liabilities ...... 42,299 471
--------- --------
Net cash provided by (used in) operating activities.... (56,727) 19,130
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ..................... (36,910) (12,309)
Payments for acquisitions, net .......................... (433,401) --
(Increase) decrease in other assets ..................... (1,339) 16
--------- --------
Net cash used in investing activities ................. (471,650) (12,293)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock ............... 160,000 --
Repurchase of common stock .............................. (155,025) --
Proceeds from senior bank debt borrowings ............... 330,000 --
Proceeds from issuance of senior subordinated notes ..... 230,000 --
Payment of debt and capital leases ...................... (4,010) (926)
Common and preferred stock issuance costs incurred ...... (2,625) --
Debt financing costs incurred ........................... (26,618) --
Net decrease in due to Paracelsus ....................... -- (9,916)
--------- --------
Net cash provided by (used in) financing activities.... 531,722 (10,842)
--------- --------
Increase (decrease) in cash and cash equivalents ............ 3,345 (4,005)
Cash and cash equivalents at beginning of the period ........ -- 4,005
--------- --------
Cash and cash equivalents at end of the period .............. $ 3,345 $ --
========= ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Effects of acquisitions, net:
Assets acquired, net of cash .......................... $ 481,531 $ --
Liabilities assumed ................................... (38,670) --
Issuance of preferred and common stock, net ........... (9,460) --
--------- --------
Payment for acquisitions, net ....................... $ 433,401 $ --
========= ========
See accompanying notes
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IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
AND COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed consolidated and combined 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
generally accepted accounting principles for interim financial reporting and in
accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements.
In the opinion of management, the accompanying unaudited condensed
consolidated and combined 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
combined balance sheet of the Company at September 30, 1999 has been derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles. The unaudited condensed
consolidated and combined financial statements and footnote disclosures should
be read in conjunction with the Company's registration statement on Form S-4
declared effective by the Securities and Exchange Commission on April 17, 2000.
The unaudited condensed consolidated and combined financial statements
included herein as of September 30, 1999 and for the three- and nine-month
periods ended June 30, 1999 have been prepared on the push-down basis of the
historical cost of Paracelsus Healthcare Corporation ("Paracelsus") and,
accordingly, may not be indicative of the financial position, results of
operations and cash flows of the Company which might have occurred had it been
an independent stand-alone entity during the periods presented.
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the accompanying unaudited
condensed consolidated and combined financial statements and notes. Actual
results could differ from those estimates.
IASIS is a for-profit hospital management company with operations in
select markets in the United States. IASIS' facilities are currently located in
four regions: (1) Salt Lake City, Utah; (2) Phoenix, Arizona; (3) Tampa-St.
Petersburg, Florida; and (4) three markets within the State of Texas. IASIS
either owns or operates 15 general, acute care hospitals with a total of 2,194
operating beds and four ambulatory surgery centers. The Company is developing
community-focused hospital networks in high-growth markets. The Company also
operates a Medicaid managed health plan called Health Choice in Phoenix,
Arizona.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified in order to conform
to current period presentation. Such reclassifications had no material effect on
the financial position and results of operations as previously reported.
2. RECAPITALIZATION AND ACQUISITION TRANSACTIONS
RECAPITALIZATION
Effective October 8, 1999, Paracelsus and unrelated third parties
recapitalized the Paracelsus Utah Facilities, valued at $287.0 million, net of a
working capital adjustment. The recapitalization transaction resulted in
Paracelsus retaining a minority interest at an implied value of $8.0 million in
a preexisting Paracelsus subsidiary ("HoldCo") to which the ownership interests
in the Paracelsus Utah Facilities had been transferred. Subsequent to the
recapitalization, HoldCo changed its name to IASIS Healthcare Corporation and
changed its fiscal year end to September 30.
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IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
AND COMBINED FINANCIAL STATEMENTS
As part of the recapitalization, the unrelated third parties purchased
$125.0 million of IASIS' common stock from Paracelsus, and IASIS purchased
$155.0 million of its own stock from Paracelsus which is being held as treasury
stock as of June 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 credit facility. Legal, accounting and
other related charges of $3.5 million associated with the recapitalization have
been expensed as incurred.
THE TENET HOSPITALS 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 $428.3 million in cash, net of a preliminary working
capital adjustment of $18.9 million. The total cost of the assets acquired may
later change due to a pending, final working capital adjustment. The final
working capital adjustment will be based upon the difference between the
estimated working capital of $18.9 million as of August 31, 1999 and the actual
working capital determined as of the closing date, October 15, 1999. IASIS is in
the process of finalizing the working capital adjustment with Tenet and expects
to recognize the impact of the adjustment during the quarter ended September 30,
2000. The effect of the final working capital adjustment will result in an
adjustment to goodwill recognized in the Tenet hospitals acquisition.
MANAGEMENT COMPANY ACQUISITION
Concurrent with the acquisition of the Tenet hospitals, a management
company, IASIS Healthcare Corporation, a Tennessee corporation, that was
originally formed by members of our current management to acquire and operate
hospitals and related businesses, was merged with and into an acquisition
subsidiary of IASIS, with IASIS' subsidiary as the surviving entity. In the
merger, shareholders of the management company received shares of our common
stock and preferred stock with a total value of $9.5 million.
OTHER INFORMATION
The following table summarizes the allocation of the aggregate purchase
price of the acquisitions (in thousands):
TENET MANAGEMENT
HOSPITALS COMPANY TOTAL
--------- ------- ---------
Purchase price, including direct costs of acquisition $ 433,807 $ 9,460 $ 443,267
Assets acquired ..................................... 303,409 289 303,698
Liabilities assumed ................................. (38,519) (151) (38,670)
--------- ------- ---------
Net assets acquired ................................. 264,890 138 265,028
--------- ------- ---------
Goodwill ............................................ $ 168,917 $ 9,322 $ 178,239
========= ======= =========
Purchase price adjustments had not been finalized as of June 30, 2000
and are subject to working capital settlements and receipt of independent
appraisals of the assets acquired. Direct costs of acquisitions of $5.0 million
were capitalized as an element of the purchase price and primarily consist of
legal fees and professional and accounting fees.
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 business operations have been included in the accompanying
Unaudited Condensed Consolidated and Combined Statements of Operations from the
October 15, 1999 date of acquisition.
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IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
AND COMBINED FINANCIAL STATEMENTS
In connection with the recapitalization and the acquisitions, IASIS did
not assume any liability or obligation due to payors, including private insurers
and government payors such as the Medicare and Medicaid programs. IASIS also did
not assume any cost report reimbursements, settlements, repayments, or fines, if
any, to the extent they relate to periods prior to the respective closing dates
of such transactions. The agreements with Tenet and Paracelsus include customary
indemnification and hold harmless provisions for any damages incurred by the
Company related to these types of excluded liabilities.
The recapitalization transaction was effected pursuant to the terms of
a recapitalization agreement. Under the terms of the recapitalization agreement,
the purchase price paid by JLL Healthcare, LLC, one of IASIS' current
principals, in connection with the recapitalization was subject to a
post-closing working capital adjustment, which represents an adjustment of the
purchase price paid based upon the difference between the estimate of working
capital as of the closing date and the working capital actually purchased as of
the closing date of October 8, 1999. IASIS agreed to a negotiated settlement of
the working capital adjustment for a cash payment of $1.0 million which IASIS
received on March 21, 2000, resulting in a reduction in opening equity of $1.2
million relating to the recapitalization transaction.
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 October 1, 1998, 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
JUNE 30
----------------------------
2000 1999
--------- ---------
Net revenue .... $ 641,133 $ 579,436
Net income ..... $ 1,039 $ 8,589
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.
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IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
AND COMBINED FINANCIAL STATEMENTS
3. LONG TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
JUNE 30, SEPTEMBER 30,
2000 1999
-------- ------
Bank facilities ............. $326,668 $ --
Senior subordinated notes ... 230,000 --
Capital lease obligations ... 841 1,499
-------- ------
557,509 1,499
Less current maturities...... 7,996 701
-------- ------
$549,513 $ 798
======== ======
BANK FACILITIES
Under a credit facility dated October 15, 1999, a syndicate of lenders
made a total of $455.0 million available to the Company in the form of an $80.0
million Tranche A term loan, a $250.0 million Tranche B term loan and a $125.0
million revolving credit facility (collectively, the "Bank Facilities").
As of June 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;
- 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
thereunder will be due and payable on October 15, 2005. No amounts were drawn
under the revolving credit facility as of June 30, 2000. The revolving credit
facility includes a $75 million sub-limit for letters of credit that may be
issued by the Company. As of June 30, 2000, the Company had issued $25.2 million
in letters of credit.
The Tranche A term loan matures on October 15, 2005. The Tranche B term
loan matures on October 15, 2007. Repayments under the term loans are due in
quarterly installments. There will be no substantial amortization of the Tranche
B term loan until the sixth year. 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 LIBOR. The weighted average interest
rate on the Bank Facilities was approximately 11.1% at June 30, 2000, including
a commitment fee equal to 0.5% of the average daily amount available under the
revolving credit facility.
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IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
AND COMBINED FINANCIAL STATEMENTS
The Bank Facilities require that the Company 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. These guarantees are secured by a pledge of
substantially all of the subsidiaries' assets.
SENIOR SUBORDINATED NOTES
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
operations apart from its ownership of the Subsidiary Guarantors. At June 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.
4. 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 $5.3 million. Issuance costs of $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 three and nine month periods ended June 30, 2000
was $15,000 and $40,000, respectively. The Series A preferred stock and the
Series B preferred stock (collectively referred to as preferred stock) are
identical in all respects, except as follows. The Series A preferred stock is
mandatorily redeemable on October 15, 2010 and the Series B preferred stock is
mandatorily redeemable on October 15, 2020, in each case, for $1,000 per share
plus all accrued and unpaid dividends to the redemption date or as soon
thereafter as will not be prohibited by then-existing debt agreements. The
preferred stock has a liquidation preference over the common stock equal to the
redemption price of $1,000 per share plus all accrued and unpaid dividends.
Dividends on the preferred stock are payable when, as and if declared by the
board of directors and will accrue at the rate of 16.0% per annum from their
date of issuance. No dividends or distributions may be made on the common stock
unless and until all accrued and unpaid dividends are first paid to the holders
of the preferred stock.
Without the consent of the holders of a majority of the outstanding
preferred stock, 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
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IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
AND COMBINED FINANCIAL STATEMENTS
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.
5. SHAREHOLDERS' EQUITY
On May 1, 2000, the Company's Board of Directors approved the 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 686,566, subject to adjustment as provided
for in the Plan. The exercise price per share of common stock purchasable upon
exercise of an option will be determined by a committee of our Board of
Directors. In the case of an incentive stock option, the exercise price will be
not less than the fair market value of a share of common stock on the date of
its grant. On May 1, 2000, our Board of Directors approved the grant of stock
options covering all of the shares of common stock under the 2000 Stock Option
Plan.
6. SEGMENT DISCLOSURES
The Company's acute care hospitals and related health care businesses
are similar in their business 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. 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."
ACUTE CARE SERVICES HEALTH CHOICE
(IN THOUSANDS) (IN THOUSANDS)
------------------------ -------------------
THREE NINE THREE NINE
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 2000 2000 2000
--------- --------- ------- -------
Net patient service revenue ..... $ 193,660 $ 557,637 $ -- $ --
Capitation premiums ............. -- -- 23,087 65,142
Revenue between segments ........ (1,500) (4,500) -- --
--------- --------- ------- -------
Net revenue ..................... 192,160 553,137 23,087 65,142
Operating expenses (1) .......... 193,526 545,270 22,299 62,751
Earnings (loss) before minority
interests and income taxes (1) (1,441) 7,867 863 2,391
Interest expense, net ........... 16,102 45,547 30 30
Depreciation and amortization ... 12,717 34,128 36 120
Segment assets .................. 874,228 874,228 2,827 2,827
A reconciliation to income before income taxes follows:
Earnings (loss) before minority
interest and income taxes(1) .... (1,441) 7,867 863 2,391
Recapitalization costs .......... -- 3,478 -- --
Minority interests .............. 210 252 -- --
--------- --------- ------- -------
Income (loss) before income taxes $ (1,651) $ 4,137 $ 863 $ 2,391
========= ========= ======= =======
(1) Amounts exclude recapitalization costs
7. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement establishes comprehensive accounting and
reporting standards for derivative
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IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
AND COMBINED FINANCIAL STATEMENTS
instruments and hedging activities that require a company to record the
derivative instruments at fair value in the balance sheet. Furthermore, the
derivative instrument must meet specific criteria or the change in its fair
value is to be recognized in earnings in the period of change. To achieve hedge
accounting treatment, the derivative instrument needs to be part of a
well-documented hedging strategy that describes the exposure to be hedged, the
objective of the hedge and a measurable definition of its effectiveness in
hedging the exposure. In July 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133, which
requires the adoption of SFAS 133 in fiscal years beginning after June 15, 2000.
Adoption of FASB No. 133 is not expected to have a material effect on the
Company's financial statements.
8. CONTINGENCIES
As is typical in the healthcare industry, 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 some claims
may exceed the scope of coverage in effect. It is the Company's current policy
to expense 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.
The Company's Medicaid managed health plan, Health Choice, enters into
capitated contracts whereby the plan agrees to provide healthcare services for
specific, fixed periodic and supplemental payments from the Medicaid program in
Arizona. These services are provided regardless of the actual costs incurred to
provide the services. The Company receives reinsurance payments from the
Medicaid program in Arizona to cover certain costs of healthcare services that
exceed certain thresholds. The Company believes the capitated payments, together
with reinsurance payments, are sufficient to pay for the services Health Choice
is obligated to deliver.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations should be read in conjunction with the financial
statements, the notes to the financial statements, and the other financial
information appearing elsewhere herein and in our registration statement on Form
S-4 filed with the Securities and Exchange Commission that became effective on
April 17, 2000.
FORWARD-LOOKING STATEMENTS
Some of the statements we make in this report on Form 10-Q are
forward-looking in nature. Forward-looking statements involve known and unknown
risks and uncertainties which cause actual results in future periods to differ
materially from those anticipated in the forward-looking statements. Those risks
and uncertainties include, among others, risks and uncertainties associated with
general economic and business conditions, the effect of existing and future
governmental regulations, including the Balanced Budget Act of 1997 and the
Balanced Budget Refinement Act, changes in Medicare and Medicaid reimbursement
levels, the highly competitive nature of the healthcare industry, the possible
enactment of Federal or state healthcare reform, the impact of possible future
governmental investigations, our ability to attract and retain qualified
management and personnel, including physicians, our ability to enter into
managed care provider arrangements on acceptable terms, our ability to
successfully negotiate agreements with payors at Rocky Mountain Medical Center
and build census levels there, our ability to successfully manage the risks of
our Medicaid managed care plan, Health Choice, our ability to successfully
convert our management information systems, our ability to service our
significant indebtedness, and our ability to implement successfully the
Company's acquisition and development strategy and to obtain financing therefor.
You are cautioned not to unduly rely on such forward-looking statements when
evaluating the information presented in this report.
GENERAL
We are a for-profit hospital management company with operations in
select markets in the United States. Our hospitals' revenues continue to be
affected by an increasing proportion of revenue being derived from fixed
payment, higher discount sources including Medicare, Medicaid, managed care
organizations, insurance companies and employer-based health plans. Fixed
payment amounts are often based upon a diagnosis, regardless of the cost
incurred or the level of services provided. Our revenues, cash flows and
earnings have been significantly reduced by this shift in reimbursement. The
Balanced Budget Act ("BBA") has reduced the amount of reimbursement that we
receive from Medicare and Medicaid. Although we expect our volume from
governmental sources to increase, the level of reimbursement from these programs
was reduced in 1998 and further reductions will be phased in over the next two
years. Certain of the rate reductions resulting from the BBA may be mitigated by
the Balanced Budget Refinement Act of 1999. The percentage of net revenue
related to Medicare and Medicaid was approximately 36.6% and 36.3% for the three
and nine months ended June 30, 2000, respectively.
Our revenues are also affected by the trend toward the conversion of
more services being performed on an outpatient basis due to advances in medical
technology and pharmaceuticals and cost containment pressures from Medicare,
Medicaid, managed care organizations and other payors. Approximately 39.0% and
37.6% of our gross revenue during the three and nine months ended June 30, 2000,
respectively, was generated from outpatient procedures.
We receive hospital revenues primarily from Medicare, Medicaid and
commercial insurance. Medicare is a federal program for elderly patients and
patients with disabilities. The payment rates under the Medicare program for
inpatients are based on a prospective payment system that is tied to the
diagnosis of the patient. Medicaid is a jointly-funded federal and state program
administered by individual states for indigent patients. Payments from Medicare
and Medicaid account for a significant portion of our operating revenues.
Managed care organizations, such as health maintenance organizations and
preferred provider organizations, also account for a significant portion of our
revenues.
Net revenue is comprised of net patient service revenue and other
revenue. Net patient service revenue is reported net of contractual adjustments
and policy discounts. The adjustments principally result from differences
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between the hospitals' customary charges and payment rates under the Medicare
and Medicaid programs and the various managed care organizations. Customary
charges have generally increased at a faster rate than the rate of increase for
Medicare and Medicaid payments. Other revenue includes revenue from Health
Choice, medical office building rental income and other miscellaneous revenue.
Operating expenses primarily consist of hospital related costs of operation and
include salaries and benefits, professional fees, supplies, provision for
doubtful accounts and other expenses such as utilities, insurance, property
taxes, travel, freight, postage, telephone, advertising, repairs and
maintenance.
RECAPITALIZATION AND ACQUISITION TRANSACTIONS
Our company was formed during 1999 in a series of transactions that
were arranged by members of our current management team and Joseph Littlejohn &
Levy, Inc., the New York based private equity firm that controls JLL Healthcare,
LLC, our single largest stockholder. The first of these transactions was
effective October 8, 1999, when Paracelsus Healthcare Corporation ("Paracelsus")
and unrelated third parties recapitalized the Paracelsus Utah Facilities (five
acute care hospitals in the Salt Lake City, Utah market with 635 licensed beds),
valued at $287.0 million, net of a working capital adjustment. The
recapitalization transaction resulted in Paracelsus retaining a minority
interest at an implied value of approximately $8.0 million in a preexisting
Paracelsus subsidiary ("HoldCo") to which the ownership interests in the
Paracelsus Utah Facilities had been transferred. Subsequent to the
recapitalization, HoldCo changed its name to IASIS Healthcare Corporation and
changed its fiscal year end to September 30.
The second of these transactions was effective October 15, 1999, when
we acquired ten acute care hospitals and other related facilities and assets
("Tenet hospitals") from Tenet Healthcare Corporation ("Tenet") for $428.3
million in cash, net of a preliminary working capital adjustment of $18.9
million. This value may change due to a final working capital adjustment. We are
in the process finalizing the working capital adjustment with Tenet and expect
to recognize the impact of the adjustment, if any, during the quarter ended
September 30, 2000. The effect of the final working capital adjustment will
result in an adjustment to goodwill recognized in the Tenet hospitals
acquisition.
Concurrent with the acquisition of the Tenet hospitals, a management
company, originally formed by members of our current management to acquire and
operate hospitals and related businesses, was merged with and into our wholly
owned acquisition subsidiary. In the merger, shareholders of the management
company received shares of our common stock and preferred stock with a total
value of $9.5 million.
The acquisition of the Tenet hospitals and the management company were
accounted for using the purchase method of accounting. The operating results of
these acquired companies have been included in the accompanying Unaudited
Condensed Consolidated and Combined Statements of Operations from the October
15, 1999 date of acquisition.
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
the Unaudited Condensed Consolidated and Combined Statements of Operations
included elsewhere in our report. The results of operations for the periods
presented include the Tenet hospitals and the management company from their
acquisition dates, as discussed above.
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THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- ------------------
2000 1999 2000 1999
------ ------ ------ ------
Net revenue ................... 100.0% 100.0% 100.0% 100.0%
Operating expenses (1) ........ 86.9% 85.1% 85.4% 85.1%
------ ------ ------ ------
EBITDA (2) .................... 13.1% 14.9% 14.6% 14.9%
Depreciation and amortization . 5.9% 6.6% 5.5% 6.7%
Interest, net ................. 7.5% 5.2% 7.4% 6.1%
Minority interests ............ .1% (.1)% -- --
Recapitalization costs ........ -- -- .6% --
------ ------ ------ ------
Earnings (loss) from operations
before income taxes ......... (.4)% 3.2% 1.1% 2.1%
Provision for income taxes .... -- -- .5% --
------ ------ ------ ------
Net earnings (loss) ........... (.4)% 3.2% .6% 2.1%
====== ====== ====== ======
(1) Operating expenses include salaries and benefits, supplies, other
operating expenses, provision for bad debts and allocated management
fees.
(2) EBITDA represents earnings from operations before interest expense,
minority interests, income taxes, recapitalization costs, and
depreciation and amortization. While you should not consider EBITDA in
isolation or as a substitute for net income, operating cash flows or
other cash flow statement data determined in accordance with generally
accepted accounting principles, management understands that EBITDA is a
commonly used tool for measuring a company's ability to service debt,
especially in evaluating healthcare companies. EBITDA, as presented,
may not be comparable to similarly titled measures of other companies.
SELECTED OPERATING STATISTICS
The following table sets forth certain operating statistics for each of
the periods presented.
(UNAUDITED) (UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ -------------------
2000 1999 2000 1999
------ ------ ------- ------
Number of hospitals at end of period ....... 15 5 15 5
Licensed beds at end of period ............. 2,684 635 2,684 635
Operating beds at end of period ............ 2,194 501 2,194 501
Admissions ................................. 18,725 4,556 55,056 13,451
Patient days ............................... 82,863 15,747 246,686 47,818
Occupancy rates (average beds in service)(1) 42.6% 34.5% 43.7% 35.0%
(1) Excludes 71 beds at Rocky Mountain Medical Center placed in service on
April 10, 2000. If these beds are included, occupancy rates would have
been 41.6% and 43.4% for the three and nine-months ended June 30, 2000,
respectively.
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THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Net revenue for the three months ended June 30, 2000 was $215.2
million, an increase of $168.2 million, or 357.9% from $47.0 million for the
same period in 1999. The increase in net revenue is largely due to the
acquisition of the Tenet hospitals effective October 15, 1999. The Tenet
hospitals acquisition contributed approximately $156.9 million in net revenue
for the three months ended June 30, 2000, or 93.3% of the total increase in net
revenue for the three months ended June 30, 2000 compared to the same period in
1999. Facilities in operation for the entire 2000 and 1999 periods, which we
refer to as same facilities, consisted of the Paracelsus hospitals and related
operations. Same facilities provided $56.6 million in net revenue in 2000 versus
$47 million in 1999, or $9.6 million of the remaining increase in net revenue
for the three months ended June 30, 2000 compared to 1999. The remaining
increase in net revenue related to the opening of Rocky Mountain Medical Center
("Rocky Mountain"), discussed further below, which contributed $1.7 million in
net revenue during the quarter ended June 30, 2000.
As noted above, same facilities net revenue increased by $9.6 million,
a 20.4% increase over the 1999 period. The increase in net revenue of same
facilities was primarily attributable to an increase in volume. Same facility
admissions increased 8.6% from 4,556 in the three months ended June 30, 1999 to
4,948 for the same period in 2000 and same facility patient days increased 3.9%
from 15,747 in 1999 to 16,366 in 2000. The increase in volume for same
facilities was largely attributable to our increased focus on improving
physician relations and communications, new services and deployment of capital.
In addition, the population in the Salt Lake City area continues to grow and our
hospitals are benefiting from favorable demographics.
During the three months ended June 30, 2000, total admissions and
patient days were 18,725 and 82,863, respectively, of which 13,657 admissions
and 66,006 patient days resulted from the Tenet hospitals acquisition.
Operating expenses, including salaries and benefits, supplies, other
operating expenses, provision for bad debts, and allocated management fees
increased by $146.9 million from $40.0 million for the three months ended June
30, 1999 to $186.9 million for the same period in 2000 largely due to the Tenet
hospitals acquisition. The Tenet hospitals acquisition contributed $131.9
million in operating expenses for the three months ended June 30, 2000 or 89.8%
of the total increase in operating expenses for the three months ended June 30,
2000 compared to the same period in 1999.
Operating expenses for same facilities increased $8.2 million during
this period, due primarily to the increased patient volume, higher supply costs
and increased salaries and benefits expense due to higher utilization of
temporary staffing and increased benefit costs. We have experienced a tight
labor market in Utah, resulting in an increase in salaries and benefits expense
per paid full time equivalent employee over the prior year period. Our benefit
expense is higher than in the prior year period due to the variance in recorded
benefit expense under the Company's ownership compared to the methodologies used
by the former owner to record similar benefit expense. The increase in supply
costs is primarily due to certain new services in the Utah market and increasing
volume in existing services that utilize high cost medical devices.
Of the remaining $6.8 million increase in operating expenses, $2.2
million related to corporate and miscellaneous other operating expenses that
have increased as a result of the growth of our company and $4.6 million related
to the opening of Rocky Mountain in Salt Lake City, Utah on April 10, 2000.
Rocky Mountain is a full service acute care hospital with 120 licensed and 71
operational beds. Rocky Mountain had a daily census of less than 10 and recorded
$1.7 million of net revenue during the third quarter. Since June 30, 2000, the
daily census has reached as high as 15. We expect to continue to have operating
losses at Rocky Mountain until the average daily census is in the range of 25 to
35, depending on payor mix. While we have physicians leasing space and moving
into the adjacent medical office building owned by Rocky Mountain and have in
excess of 190 physicians with staffing privileges, it is uncertain when we will
obtain this average daily census at Rocky Mountain. The average daily census and
net revenue at Rocky Mountain in the first few months of operation have been
lower than expected primarily due to impediments that are blocking our ability
to attain certain managed care contracts. We are vigorously pursuing elimination
of any barriers that patients may encounter in seeking care at Rocky Mountain.
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Operating expenses as a percentage of net revenue were 85.1% for the
three months ended June 30, 1999 and 86.9% for the same period in 2000. EBITDA
was $28.3 million or 13.1% of net revenue for the three months ended June 30,
2000, compared to $7.0 million or 14.9% of net revenue for the comparable period
in 1999. The decline in the EBITDA margin from 14.9% in the prior period to
13.1% for the three months ended June 30, 2000 was due primarily to the addition
of Health Choice, which was a part of the Tenet hospitals acquisition, and the
operating losses at Rocky Mountain. Health Choice, our Medicaid managed health
plan, has a significantly lower EBITDA margin than the acute care services
business.
Interest expense increased $13.7 million from $2.4 million for the
three months ended June 30, 1999 to $16.1 million for the same period in 2000,
largely due to an increase in borrowings associated with the Tenet hospitals
acquisition and the recapitalization of the Paracelsus hospitals. At June 30,
2000, our weighted average cost of borrowings was 11.1%, inclusive of a
commitment fee on the amount available and undrawn under the revolving credit
facility. Interest expense of $2.4 million for the three-month period ended June
30, 1999 primarily represents interest costs Paracelsus (our former parent
company) allocated to us in proportion to amounts due to Paracelsus.
Depreciation and amortization expense increased $9.7 million from $3.1
million for the three months ended June 30, 1999 to $12.8 million for the same
period in 2000 largely due to depreciation on the property and equipment
acquired in the Tenet hospitals acquisition and the merger with the management
company. Amortization expense of $1.6 million related to goodwill recorded in
the Tenet hospitals acquisition and the merger with the management company, and
$0.9 million in amortization of deferred financing costs incurred in connection
with the above transactions and the recapitalization transaction, also
contributed to the increase in depreciation and amortization expense.
Net earnings (loss) for the three months ended June 30, 2000 were
$(0.8) million compared to $1.5 million for the same period in 1999. We recorded
no provision or benefit for income taxes in 1999 or for the three months ended
June 30, 2000.
Preferred stock dividends and accretion of $6.6 million was recorded
during the three months ended June 30, 2000 for the preferred stock issued in
connection with the Tenet hospitals acquisition and the merger with the
management company. Dividends on the preferred stock accrue at the rate of 16.0%
per annum. Net earnings (loss) attributable to common shareholders after the
effect of the preferred stock dividends and accretion for the three months ended
June 30, 2000 was $(7.4) million compared to $1.5 million for the same period in
1999.
NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO NINE MONTHS ENDED JUNE 30, 1999
Net revenue for the nine months ended June 30, 2000 was $618.3 million,
an increase of $478.1 million, or 341.0% from $140.2 million for the same period
in 1999. The increase in net revenue is largely due to the Tenet hospitals
acquisition. The Tenet hospitals acquisition contributed approximately $452.1
million in net revenue for the nine months ended June 30, 2000, or 94.6% of the
total increase in net revenue for the nine months ended June 30, 2000 compared
to the same period in 1999. Same facilities provided $164.5 million in net
revenue in 2000 versus $140.2 million in 1999, or $24.3 million of the remaining
increase in net revenue for the nine months ended June 30, 2000 compared to
1999. The remaining increase in net revenue related to the opening of Rocky
Mountain, which contributed $1.7 million in net revenue during the nine months
ended June 30, 2000.
As noted above, same facilities net revenue increased by $24.3 million,
a 17.3% increase over the 1999 period. The increase in net revenue of same
facilities was primarily attributable to an increase in volume. Same hospital
facility admissions increased 7.8% from 13,451 in the nine months ended June 30,
1999 to 14,494 for the same period in 2000 and same hospital facility patient
days increased 5.4% from 47,818 in 1999 to 50,412 in 2000. The increase in
volume for same hospital facilities was largely attributable to our increased
focus on improving physician relations and communications, new services and
deployment of capital.
During the nine months ended June 30, 2000, total admissions and
patient days were 55,056 and 246,686, respectively, of which 38,905 admissions
and 197,484 patient days resulted from the Tenet hospitals acquisition.
Operating expenses, including salaries and benefits, supplies, other
operating expenses, provision for bad debts, and allocated management fees
increased by $408.9 million from $119.3 million for the nine months ended
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June 30, 1999 to $528.2 million for the same period in 2000 largely due to the
Tenet hospitals acquisition. The Tenet hospitals acquisition contributed $374.8
million in operating expenses for the nine months ended June 30, 2000 or 91.6%
of the total increase in operating expenses for the nine months ended June 30,
2000 compared to the same period in 1999.
Operating expenses for same facilities increased $24.0 million during
this period, due primarily to the increased patient volume, higher supply costs,
increased benefit costs and increased salaries and benefits expense due to
increased use of temporary staffing. We have experienced a tight labor market in
Utah, resulting in an increase in salaries and benefits expense per paid full
time equivalent employee over the prior year period. Our benefit expense is
higher than in the prior year period due to recorded benefit expense under the
Company's ownership compared to the methodologies used by the former owner to
record similar benefit expense. The increase in supply costs is primarily due to
certain new services in the Utah market and increasing volume in existing
services that utilize high cost medical devices. The increase in same facilities
operating expenses for the nine months ended June 30, 2000 includes an increase
of approximately $4.2 million related to the physician services operations. Of
the remaining $10.1 million increase in operating expenses, $3.6 million related
to corporate and miscellaneous other operating expenses which have increased as
a result of the growth of our company and $6.5 million related to Rocky
Mountain.
Operating expenses as a percentage of net revenue were 85.1% for the
nine months ended June 30, 1999 and 85.4% for the same period in 2000. EBITDA
was $90.1 million or 14.6% of net revenue for the nine months ended June 30,
2000, compared to $20.9 million or 14.9% of net revenue for the comparable
period in 1999. The decline in the EBITDA margin from 14.9% in the prior period
to 14.6% for the nine months ended June 30, 2000 was due primarily to the
addition of Health Choice, which was a part of the Tenet facilities acquisition,
and the operating losses at Rocky Mountain. Health Choice, our Medicaid managed
health plan, has a significantly lower EBITDA margin than the acute care
services business.
Interest expense increased $37.1 million from $8.5 million for the nine
months ended June 30, 1999 to $45.6 million for the same period in 2000, largely
due to an increase in borrowings associated with the Tenet hospitals acquisition
and the recapitalization of the Paracelsus hospitals. Interest expense of $8.5
million for the nine-month period ended June 30, 1999 primarily represents
interest costs Paracelsus (our former parent company) allocated to us in
proportion to amounts due to Paracelsus.
Depreciation and amortization expense increased $24.8 million from $9.4
million for the nine months ended June 30, 1999 to $34.2 million for the same
period in 2000 largely due to depreciation on the property and equipment
acquired in the Tenet hospitals acquisition and the merger with the management
company. Amortization expense of $4.7 million related to goodwill recorded in
the Tenet hospitals acquisition and the merger with the management company, and
$2.5 million in amortization of deferred financing costs incurred in connection
with the above transactions and the recapitalization transaction, also
contributed to the increase in depreciation and amortization expense.
We incurred legal, accounting and other related costs of $3.5 million
during the nine months ended June 30, 2000 related to the recapitalization
transaction.
Earnings from operations before income taxes were $6.5 million and $3.0
million for the nine months ended June 30, 2000 and 1999, respectively. The
increase in the earnings from operations before income taxes was primarily due
to operating earnings from the Tenet hospitals acquisition offset by increases
in interest expense, depreciation and amortization expense and recapitalization
costs.
We recorded a provision for income taxes for the nine months ended June
30, 2000, of $2.9 million, or approximately 44.0% of earnings before income
taxes. We recorded no provision or benefit for income taxes in 1999.
Net earnings for the nine months ended June 30, 2000 were $3.7 million
compared to $3.0 million for the same period of 1999.
Preferred stock dividends and accretion of $18.8 million was recorded
during the nine months ended June 30, 2000 for preferred stock. Net earnings
(loss) attributable to common shareholders after the effect of the
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preferred stock dividends and accretion for the nine months ended June 30, 2000
was $(15.1) million compared to $3.0 million for the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, we had $90.2 million in working capital, compared to
$3.7 million at September 30, 1999, or an increase of $86.4 million primarily
due to the Tenet hospitals acquisition and the recapitalization transaction
financed by the closing of the long-term borrowings and issuance of preferred
stock. We used cash of $56.7 million in operating activities during the nine
months ended June 30, 2000, compared to generating $19.1 million in cash from
operating activities during the nine months ended June 30, 1999. During the nine
months ended June 30, 2000, the negative cash flow from operations was due
primarily to the growth in accounts receivable to normalized levels reflecting
the fact that we did not purchase accounts receivable in the Tenet hospitals
transaction. At June 30, 2000, net accounts receivable of $145.9 million
amounted to approximately 68 days of net revenue outstanding. We did not
purchase accounts receivable as part of the Tenet hospitals acquisition and have
accordingly experienced an increase in days of net revenue outstanding.
Our investing activities used $471.7 million during the nine months
ended June 30, 2000. The Tenet hospitals acquisition and recapitalization
transaction accounted for $433.4 million of the funds used in investing
activities. Financing activities provided net cash of $531.7 million due to
borrowings under our Bank Facilities, issuance of senior subordinated notes and
issuance of preferred stock. During the nine months ended June 30, 2000 we
repaid $4.0 million in outstanding borrowings pursuant to the terms of our Bank
Facilities and capital lease obligations. During the remainder of the fiscal
year ending September 30, 2000, we are required to repay a total of $1.7 million
under our Bank Facilities.
We have recently become an independent company. Therefore, historical
cash flows may not be indicative of future liquidity. Ongoing operations will
require the availability of sufficient funds to service debt, fund working
capital and perform maintenance and growth capital expenditures on our
facilities, including the remaining start-up capital expenditures for Rocky
Mountain. We intend to finance these activities through cash flows from our
operating activities and from amounts available under the revolving credit
facility. In addition, we did not acquire the accounts receivable related to the
Tenet hospitals as part of the acquisition of the Tenet hospitals and other
assets of Tenet. Therefore, at closing of that acquisition, we funded a cash
balance of $99.9 million through borrowings under our Bank Facilities and the
offering of the senior subordinated notes to fund working capital as accounts
receivable increase to normalized levels.
Capital expenditures for the nine months ended June 30, 2000, were
$36.9 million, including capital expenditures of approximately $9.1 million for
information systems, approximately $8.3 million for equipment and improvements
at Rocky Mountain, and approximately $6.0 million for various renovation and
expansion of emergency room facilities at one of the Company's hospitals.
Management anticipates that capital expenditures during the remainder of 2000
will increase over prior periods primarily due to the opening and operation of
Rocky Mountain, enhancement of services at many of the facilities and capital
investments relating to operating independently. Accordingly, we have budgeted
capital expenditures for 2000 of approximately $50.0 million. However, this
estimate is based upon our analysis of various factors, many of which are beyond
our control and we cannot assure you that these capital expenditures, including
those associated with the opening of Rocky Mountain, will not significantly
exceed budget or that the opening of Rocky Mountain will be successful.
As of June 30, 2000, we had repaid $3.3 million of the Tranche A and
Tranche B term loans that make up a part of our Bank Facilities. No amounts were
outstanding under our revolving credit facility as of June 30, 2000 other than
for the issuance of $25.2 million of letters of credit. The loans under the Bank
Facilities bear interest at variable rates at fixed margins above either the
agent bank's alternate base rate or its reserve-adjusted LIBOR. The weighted
average interest rate on the Bank Facilities was approximately 11.1% at June 30,
2000. Included in the weighted average interest rate is a commitment fee equal
to 0.5% of the average daily amount available under the revolving credit
facility.
For the three and nine months ended June 30, 2000, approximately $23.1
million and $65.1 million, respectively, or 10.7% of our total net revenue of
$215.2 million for the three months ended June 30, 2000, and 10.5% of our total
net revenue of $618.3 million for the nine months ended June 30, 2000, were
derived from Health Choice. This prepaid Medicaid health plan, acquired in
connection with the Tenet hospitals acquisition, derives
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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 Medicaid enrollees. The term of the contract
with AHCCCS is five years, with annual renewal provisions, and expires September
30, 2002. The contract provides for fixed monthly premiums, based on negotiated
per capita member rates. In the event the contract with AHCCCS were to be
discontinued, our financial condition, results of operations and cash flows
could be adversely affected.
At June 30, 2000, we had cash and cash equivalents of $3.3 million. As
of August 8, 2000, we continued to have no amounts drawn under our revolving
credit facility other than for the issuance of $25.2 million of letters of
credit, additionally, cash and cash equivalents have increased. Based upon the
current level of operations and anticipated growth, we believe that cash
generated from operations and amounts available under the revolving credit
facility will be adequate to meet our anticipated debt service requirements,
capital expenditures and working capital needs for the next several years. We
cannot assure you, however, that our business will generate sufficient cash flow
from operations, that future borrowings will be available under the Bank
Facilities, or otherwise, to enable us to service our indebtedness including the
Bank Facilities and the 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 competition to
acquire hospitals is significant, and there can be no assurance that suitable
acquisitions, for which other healthcare companies, including those with greater
financial resources than us, may be competing, can be accomplished on terms
favorable to us, that financing, if necessary, can be obtained for these
acquisitions or that acquired facilities can be effectively integrated with our
operations. The completion of acquisitions may result in the incurrence of, or
assumption by us, of additional indebtedness. Our future operating performance,
our ability to service or refinance the Notes, and our ability to service and
extend or refinance the credit facility will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond our control.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement establishes comprehensive accounting and
reporting standards for derivative instruments and hedging activities that
require a company to record the derivative instruments at fair value in the
balance sheet. Furthermore, the derivative instrument must meet specific
criteria or the change in its fair value is to be recognized in earnings in the
period of change. To achieve hedge accounting treatment the derivative
instrument needs to be part of a well-documented hedging strategy that describes
the exposure to be hedged, the objective of the hedge and a measurable
definition of its effectiveness in hedging the exposure. In July 1999, the FASB
issued Statement of Financial Accounting Standards No. 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133, which requires the adoption of SFAS 133 in fiscal
years beginning after June 15, 2000. Adoption of FASB No. 133 is not expected to
have a material effect on our financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk from exposure to changes in
interest rates based on its financing, investing, and cash management
activities. The Company utilizes both fixed-rate and variable-rate debt to
manage its exposure to changes in interest rates. This includes the $230.0
million of senior subordinated notes that bear interest at a 13% fixed rate and
a $455.0 million term loan and revolving credit facility bearing interest at a
floating rate.
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21
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
Exhibit 27.1 - Financial Data Schedule (SEC use only)
(b) The Company filed a Current Report on Form 8-K on May 26,
2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IASIS HEALTHCARE CORPORATION
Date: August 14, 2000 By: /s/ John K. Crawford
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John K. Crawford, Executive Vice
President and Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
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27.1 Financial Data Schedule (SEC use only)