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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (615) 844-2747
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of December 15, 2000, there were 3,039,474.50 shares of the
Registrant's Common Stock outstanding.
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TABLE OF CONTENTS
PART I...........................................................................................................1
Item 1. Business.......................................................................................1
Item 2. Properties....................................................................................23
Item 3. Legal Proceedings.............................................................................24
Item 4. Submission of Matters to a Vote of Security Holders...........................................24
PART II.........................................................................................................24
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.....................24
Item 6. Selected Financial Data.......................................................................25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................38
Item 8. Financial Statements and Supplementary Data...................................................39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........73
PART III........................................................................................................73
Item 10. Directors and Executive Officers of the Registrant............................................73
Item 11. Executive Compensation........................................................................76
Item 12 Security Ownership of Certain Beneficial Owners and Management................................79
Item 13. Certain Relationships and Related Transactions................................................80
PART IV.........................................................................................................84
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............................84
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IASIS HEALTHCARE CORPORATION
PART I
ITEM 1. BUSINESS.
COMPANY OVERVIEW
We operate 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. Currently, we own or lease 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. We also operate five ambulatory
surgery centers and a Medicaid managed health plan in Phoenix called Health
Choice that serves over 43,000 members.
Our general, acute care hospitals offer a variety of inpatient medical
and surgical services commonly available in hospitals, including cardiology,
emergency services, general surgery, internal medicine, obstetrics and
orthopedics. In addition, our facilities provide outpatient and ancillary
services including outpatient surgery, physical therapy, radiation therapy,
radiology and respiratory therapy. Our corporate staff provides a variety of
management services to our healthcare facilities, including strategic planning,
designing and operating information systems, ethics and compliance programs,
contract negotiation and management, accounting, financial and clinical systems,
legal support, personnel and employee benefits management, supply and equipment
purchasing agreements and resource management.
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 annual report on Form
10-K.
FORMATION
Our company was formed in 1999 through a series of transactions that
were arranged by certain members of our 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 JLL Healthcare, LLC and some of our stockholders
purchased $125.0 million of the common stock of a subsidiary of Paracelsus
Healthcare Corporation that owned five acute care hospitals in the Salt Lake
City, Utah market. Following the common stock purchase, the subsidiary was
recapitalized and Paracelsus retained a minority interest. Subsequent to the
common stock purchase and the recapitalization, the subsidiary of Paracelsus
changed its name to IASIS Healthcare Corporation.
The second of these transactions was effective October 15, 1999, when
we acquired ten acute care hospitals and other related facilities and assets
from Tenet Healthcare Corporation. Concurrent with the acquisition of the Tenet
hospitals, a management company, originally formed by certain members of our
management team, was merged with and into a subsidiary of our company.
BUSINESS STRATEGY
Our objective is to provide high-quality, cost-effective healthcare
services in the select communities we serve. The key elements of our business
strategy are:
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- - INCREASE REVENUE BY EXPANDING SERVICES. We intend to increase our
revenue by broadening the scope of services offered at our facilities,
updating our technology and equipment and, recognizing the shift from
inpatient to outpatient treatments, enhancing the convenience and
quality of our outpatient services. We believe that the expansion of
surgical capacity and the upgrading of specialty services, such as
women's services, cardiology, orthopedics, radiology and other
diagnostic services, represent particularly attractive opportunities to
increase patient visits, admissions and surgeries. We also seek to
increase the revenue generated by our emergency rooms by
differentiating between emergent care patients and non-urgent care
patients, which we believe alleviates patient flow bottlenecks and
results in more appropriate and expedient patient care, thereby
increasing patient volume and net revenue.
- - IMPROVE OPERATING EFFICIENCIES. We believe profitability at our
facilities can be improved through increased volume and implementation
of well-defined operating expense control initiatives. We continue to
standardize and upgrade management 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. In addition, our emergency rooms fast-track
emergent care patients, which we believe allows us to optimize staffing
efficiencies, design protocols to match the acuity of medical cases and
more efficiently allocate our hospital resources.
- - STRENGTHEN PHYSICIAN RETENTION AND RECRUITING. We believe that the
retention and recruitment of physicians is critical to our goal of
increasing the quality and breadth of the services offered by our
hospitals. We intend to retain and recruit physicians by equipping our
hospitals with technologically advanced equipment, sponsoring training
programs to educate physicians on advanced medical procedures and
creating an environment within which physicians prefer to practice. We
also will use our existing physician relationships to recruit new
primary care physicians and specialists. We are creating local
physician advisory committees, comprised of leading area physicians,
who work closely with our local leadership teams to advise us
concerning facility and market-specific needs and strategies. We
believe that establishing such committees also will assist in
developing a long-term relationship between physicians and our local
leadership teams, enhance physician loyalty and improve the quality of
patient care.
- - IMPROVE MANAGED CARE POSITION THROUGH BETTER PAYOR RELATIONSHIPS. We
believe that establishing and maintaining strong relationships with
managed care payors is critical to our success. We plan to increase
utilization of our facilities by entering into contracts with new
payors and, over time, we expect to improve profitability by
negotiating more favorable terms with our existing payors. We believe
that understanding facility-specific issues and concerns, developing
relationships with local payors and strengthening our market presence
by establishing networks of hospitals to organize the delivery of
healthcare services will enable us to negotiate more favorable terms
with both new and existing payors.
- - RETAIN AND DEVELOP LOCAL LEADERSHIP TEAMS. A professional, competent,
attentive leadership team at each facility is integral to developing
and implementing strategic objectives at our hospitals. We recruit
experienced and capable senior managers in order to give each hospital
its own dedicated leadership team. We believe a stable local leadership
team, including a chief executive officer, chief financial officer and
chief nursing officer at each facility, enhances physician relations
and maintains continuity in the community. To incentivize local
leadership teams, we have developed a performance-based compensation
program for each local leadership team based upon the achievement of
the goals set forth in an operating plan for each facility and the
success of its network.
- - STRENGTHEN RETENTION AND RECRUITMENT OF NURSES AND MEDICAL SUPPORT
PERSONNEL. In certain markets, the availability of nurses and other
medical support personnel has become a significant operating issue for
hospitals and other providers of healthcare services. We believe that
retention and recruitment of nurses
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and medical support personnel is critical to our ability to provide
high quality, cost effective healthcare services to our patients. We
intend to retain and recruit nurses and medical support personnel by
creating a desirable, professional work environment, providing
competitive wages, benefits and long-term incentives and providing
career development opportunities and training programs. In order to
supplement our current employee base, we intend to expand our
relationships with colleges, universities and other medical education
institutions in our markets and recruit nurses and other medical
support personnel from abroad.
- - SELECTIVELY PURSUE STRATEGIC ACQUISITIONS AND PARTNERSHIPS. We intend
to selectively pursue hospital acquisitions in our existing markets
where we believe we can improve the financial and operational
performance of the acquired hospital and enhance our regional presence.
Additionally, we will focus our new market development efforts in
regions with a growing population base of greater than 100,000, a
stable or improving managed care environment and favorable
demographics. In addition, we will continue to identify opportunities
to expand our presence through strategic alliances with healthcare
providers and by partnering with physicians to develop additional
services.
HOSPITAL OPERATIONS
At each hospital we operate, we implement systematic policies and
procedures to improve the hospital's operating and financial performance. We
develop an operating plan designed to increase revenue through the expansion of
services offered by the hospital and the recruitment of physicians in each
community and to reduce costs by improving operating efficiency. Each hospital's
local leadership team is comprised of a chief executive officer, chief financial
officer and chief nursing officer. Each local leadership team, in consultation
with our corporate staff, develops an annual operating plan setting forth
revenue enhancement strategies and specific expense benchmarks. We believe that
the competence, skills, and experience of the leadership team at each hospital
is critical to the hospital's success, because of their 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 leadership 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, and the breadth of our services, level of technology, emphasis
on quality of care, level of physician support and convenience for patients and
physicians. Factors that impact 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 certain pro forma combined operating
statistics for our hospitals:
2000 1999
------- -------
Number of hospitals at end of period 15 15
Number of operating beds at end of period 2,194(1) 2,144
Admissions(2) 76,306 70,443
Adjusted admissions(3) 124,211 112,966
Patient days(4) 340,386 324,274
Adjusted patient days(5) 537,929 513,055
Average daily census(6) 930 888
Average length of stay(7) 4.46 4.60
- -------------------------
Note: For 2000, the above table includes data for our company for the year
ended September 30 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 and the Tenet hospitals for
the year ended September 30, 1999. Statistics do not include Health
Choice.
(1) Includes 71 beds at Rocky Mountain Medical Center, formerly named PHC
Regional Hospital and Medical Center, which closed in June 1997 and
reopened April 10, 2000.
(2) Represents the total number of patients admitted to our hospitals for
stays in excess of 23 hours. Management and investors use this number
as a general measure of inpatient volume.
(3) This computation equates outpatient revenue to the volume measure
(admissions) used to measure inpatient volume, resulting in a general
measure of combined inpatient and outpatient volume. Adjusted
admissions are computed by multiplying admissions (inpatient volume) by
the sum of gross inpatient revenue and gross outpatient revenue and
then dividing the resulting amount by gross inpatient revenue.
Management and investors use this number as a general measure of
inpatient and outpatient volume.
(4) Represents the number of days beds were occupied over the period.
(5) This computation equates outpatient revenue to the volume measure
(patient days) used to measure inpatient days, resulting in a general
measure of combined inpatient days and outpatient volume. Adjusted
patient days are computed by multiplying patient days (inpatient
volume) by the sum of gross inpatient revenue and gross outpatient
revenue and then dividing the resulting amount by gross inpatient
revenue. Management and investors use this number as a general measure
of inpatient days and outpatient volume.
(6) Represents the average number of inpatients in our hospitals each day.
(7) Represents the average number of days that a patient stayed in our
hospitals.
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. The patient volumes and net operating revenue at our
hospitals and outpatient 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.
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
intensive staffing levels with corresponding lower costs to provide a range of
services sought by physicians, patients and payors.
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SOURCES OF REVENUE
We receive payment for patient services from the federal government
primarily under the Medicare program, state governments under their respective
Medicaid programs, health maintenance organizations, preferred provider
organizations, other private insurers and directly from patients. The
approximate percentages of pro forma net patient service revenue from continuing
operations of our facilities from these sources during the periods specified
below were as follows:
2000 1999 1998
------ ------ ------
Medicare 29.6% 31.5% 35.8%
Medicaid 7.4 6.7 6.9
Private Payors 63.0 61.8 57.3
------ ------ ------
Total 100.0% 100.0% 100.0%
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Note: For 2000, the above table includes data for our company for the year
ended September 30 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. Statistics do not include
Health Choice.
Medicare is a federal program that provides hospital and medical
insurance benefits to persons age 65 and over, some disabled persons and persons
with end-stage renal disease. Medicaid programs are jointly funded by federal
and state governments and are administered by states under an approved plan 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
Medicare and Medicaid services.
Private payors include health maintenance organizations, preferred
provider organizations, private insurance companies and individual patients.
During the year ended September 30, 2000, 37.6% of our net patient service
revenue was from private managed care payors. Most of our hospitals offer
discounts from established charges to private payors if they are large group
purchasers of healthcare services. These discount programs limit our ability to
increase charges in response to increasing costs. 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 such 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 payors.
COMPETITION
Our facilities and related businesses operate in competitive
environments. A number of factors affect our competitive position within a
geographic area, including: the scope, breadth and quality of services; number,
quality and specialties of physicians, nurses and other healthcare
professionals; reputation; managed care contracting relationships; physical
condition of facilities and medical equipment; location; availability of parking
or proximity to public transportation; ability to form local hospital networks;
tenure in the community; and charges for services. We currently face competition
from established, not-for-profit healthcare corporations, as well as
investor-sponsored hospital corporations. In the future, we expect to encounter
increased competition from companies, like ours, that consolidate hospitals and
healthcare companies in specific geographic markets. Continued consolidation 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.
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A significant factor in the competitive position of a hospital is the
number and quality of physicians affiliated with the hospital. In large part, a
hospital's revenue, whether from managed care payors, traditional health
insurance payors or directly from patients, depend on the quality and scope of
physicians' practices associated with the hospital. Physicians refer patients to
hospitals on the basis of the quality of services provided by the hospital, the
quality of the medical staff and employees affiliated with the hospital, the
quality and age of the hospital's facilities and equipment, and the hospital's
location. We intend to retain and recruit physicians by equipping our hospitals
with technologically advanced equipment, sponsoring training programs to educate
physicians on advanced medical procedures and creating an environment within
which physicians prefer to practice. While physicians may terminate their
association with a hospital operated by us at any time, our hospitals seek to
retain physicians of varied specialties on the hospitals' medical staffs and to
recruit other qualified physicians. Accordingly, we strive to maintain and
improve the level of care at our hospitals, uphold ethical and professional
standards and provide quality facilities, equipment, employees and services for
physicians and their patients.
Another factor in the competitive position of a hospital is the ability
of its management to negotiate 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. Some of our markets, including Salt Lake City, have
experienced significant managed care penetration. The revenue and operating
results of our hospitals are significantly affected by the hospitals' ability to
negotiate favorable contracts with managed care payors. Health maintenance
organizations and preferred provider organizations use managed care contracts to
direct patients to, and manage the use of, hospital services in exchange for
discounts from the hospitals' established charges. 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, if so, the scope and quality of services offered by
the network and by competing networks. A hospital that is part of a network that
offers a broad range of services in a wide geographic area is more likely to
obtain 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.
State certificate of need laws, which place limitations on a hospital's
ability to expand hospital services and add new equipment, also may have the
effect of restricting competition. The application process for approval of
covered services, facilities, changes in operations and capital expenditures is
highly competitive. In those states that have no certificate of need laws or
that set relatively high thresholds before expenditures become reviewable by
state authorities, competition in the form of new services, facilities and
capital spending may be more prevalent. Florida is the only state in which we
currently operate that requires compliance with certificate of need laws.
The hospital industry and our hospitals continue to have significant
unused capacity. Inpatient utilization, average lengths of stay and average
inpatient occupancy rates continue to be negatively affected by
pre-authorization and utilization review, medical and pharmacological advances,
and payment mechanisms that maximize outpatient and alternative healthcare
delivery services for less acutely ill patients. We expect admissions
constraints, payor pressures and increased competition to continue. We will
endeavor to meet these challenges by expanding our facilities' outpatient
services, offering appropriate discounts to private payor groups, upgrading
facilities and equipment and offering new programs and services.
One element of our business strategy is expansion through the
acquisition of general, acute care hospitals in growing markets. The competition
to acquire hospitals is significant, and we cannot assure you that suitable
acquisitions for which other healthcare companies, including those with greater
financial resources than ours, may be competing, will be available to us.
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EMPLOYEES AND MEDICAL STAFF
We have 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.
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. With exceptions, physicians generally are not employees
of our hospitals. However, some physicians provide services in our hospitals in
exchange for a fair market value fee.
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
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.
REGULATORY COMPLIANCE PROGRAM
Our policy is to conduct our business with integrity and in compliance
with the law. Our regulatory 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 compliance committees for the board of
directors, our corporate management and the local leadership teams at each of
our facilities, which have oversight supervision responsibility for effective
development and implementation of our program. Our Vice President for Ethics and
Business Practices, who reports directly to our Chief Executive Officer, serves
as Chief Compliance Officer and is charged with direct responsibility for the
development and implementation of our compliance program. We also have a
designated Facility Compliance Officer for each facility. Other features of our
compliance program include initial and periodic legal compliance and ethics
training, development and implementation of policies and procedures, and a
mechanism for employees to report, without fear of retaliation, any suspected
legal or ethical violations. We have also engaged a nationally recognized law
firm to periodically provide independent assessments of the effectiveness of our
compliance program.
REIMBURSEMENT
Medicare
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
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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
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 are
classified into groups called ambulatory payment classifications (APCs).
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 minus 1.0% for each of the federal fiscal years 2000 through 2002.
Depending on the services provided, a hospital may be paid for more than one APC
for an encounter. 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. We
have been negatively impacted 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 being
phased in over three cost reporting periods, starting with cost reporting
periods beginning on or after July 1, 1998. The impact of the new payment system
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 funded jointly by federal and state governments
and are administered by states under an approved plan. State Medicaid programs
may use a prospective payment system, cost-based or other payment methodology
for hospital services. Medicaid programs are required to take into account and
make payments to hospitals serving disproportionate numbers of low income
patients with special needs. Medicaid reimbursement often is less than a
hospital's cost of services. The federal government and many states 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
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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.
Many prior year cost reports of our facilities are still open. In the
recapitalization transaction with Paracelsus Healthcare Corporation and the
Tenet transaction, we negotiated customary indemnification and hold harmless
provisions for any damages we may incur relating to any cost report
reimbursements, settlements, repayments or fines to the extent they relate to
periods prior to the respective closing dates of those transactions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources." We believe we have complied with
all federal and state regulations in preparing and filing cost reports since the
date of the recapitalization transaction and the acquisition of the Tenet
hospitals. However, if any of our facilities are found to be in violation of
federal or state laws relating to Medicare or Medicaid that are our
responsibility, 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. Any such sanctions could have a material adverse
effect on our financial position and results of operations.
Managed Care
The percentage of admissions and net revenue attributable to managed
care payors 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 payors will continue in the future. Generally, we
receive lower payments from managed care payors 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 impact on operating results.
GOVERNMENT REGULATION AND OTHER FACTORS
Licensure, Certification and Accreditation
Healthcare facility construction and operation is subject to federal,
state and local regulations relating to the adequacy of medical care, equipment,
personnel, operating policies and procedures, fire prevention, rate-setting and
compliance with building codes and environmental protection laws. Our facilities
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.
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The requirements for licensure, 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 and addition of new beds or services may be subject to
review by state regulatory agencies under a certificate of need program. Florida
is the only state in which we currently operate that requires approval under a
certificate of need program. These laws generally require appropriate state
agency determination of public need and approval prior to the addition of beds
or services or other capital expenditures. Failure to obtain necessary state
approval can result in the inability to expand facilities, add services,
complete an acquisition or change ownership. Further, violation may result in
the imposition of civil sanctions or the revocation of a facility's license.
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 that is in substantial noncompliance with the
standards of the peer review organization be excluded from participation in the
Medicare program. Most nongovernmental managed care organizations also require
utilization review.
Federal Healthcare Program Regulations and Fraud and Abuse
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 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.
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The Office of the Inspector General at the Department of Health and
Human Services, among other regulatory agencies, is responsible for identifying
and eliminating fraud, abuse and waste. 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 transaction could violate the
anti-kickback statute or other federal healthcare laws. The Office of the
Inspector General has identified the following incentive arrangements as
potential violations:
- - 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 a few of our facilities.
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. We believe that our arrangements with physicians have been structured to
comply with current law. 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 such as upcoding 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 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, whether or
not they are reimbursed under a federal program. This act also created new
enforcement mechanisms to
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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, even if the investor, officer or employee had no knowledge of
the fraud. It also establishes a new violation for the payment of inducements to
Medicare or Medicaid beneficiaries in order to influence those beneficiaries to
order or receive services from a particular provider or practitioner.
The 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.
The federal government has not finalized regulations that will set
forth exceptions and interpret provisions of the Stark Law. We have structured
our financial arrangements with physicians to comply with the statutory
exceptions to the Stark Law. However, when the federal government finalizes
these regulations, it may interpret the Stark Law differently than we have
interpreted it. 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, or are
considering adopting, 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
Another trend impacting the healthcare industry today is the increased
use of the federal False Claims Act, and, in particular, actions being brought
by individuals on the government's behalf under the False Claims Act
whistleblower provisions. Whistleblower provisions allow private individuals to
bring actions on behalf of the government alleging that the defendant has
defrauded the federal government. If the government intervenes in the action and
prevails, the party filing the initial complaint may share in any settlement or
judgment. If the government does not intervene in the action, the whistleblower
plaintiff may pursue the action independently.
When a defendant is determined to be liable under the False Claims Act,
it must pay three times the actual damages sustained by the government, plus
mandatory civil penalties of between $5,000 to $10,000 for each separate false
claim. There are many potential bases for liability under the False Claims Act.
Liability often arises when an entity knowingly submits a false claim for
reimbursement to the federal government. The False Claims Act defines the term
"knowingly" broadly. Thus, although simple negligence will not give rise to
liability under the
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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.
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 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.
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 on
December 20, 2000. These privacy regulations could be further amended or delayed
prior to their current effective date of March 25, 2001. However, if they become
effective 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,
if they become effective, could impose significant costs on our facilities in
order to comply with these standards. Healthcare providers will have two years
to come into compliance with any final regulations once they become effective.
We cannot predict the final form that these regulations will take or the impact
that final regulations, when effective, 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 the regulations issued under the Administrative Simplification
Provisions. These statutes vary by state and could impose additional penalties.
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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, but not yet implemented, that expand the areas within a
facility that must provide emergency treatment. 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 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.
The Balanced Budget Act of 1997 has the effect of reducing payments to
hospitals and other healthcare providers under the Medicare and Medicaid
programs. This law has had, and we expect it to continue to have, an impact on
our revenue under the Medicare and Medicaid programs. In addition, there
continue to be federal and state proposals that would, and actions that do,
impose more limitations on payments to providers like ourselves and proposals to
increase co-payments and deductibles from patients.
Many states have enacted or are considering enacting measures 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
not-for-profit organizations in various states.
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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, but not limited to, cost
reporting and billing practices relating to clinical laboratory test claims and
home health agency costs, physician recruitment practices, and physician
ownership of healthcare providers and joint ventures with hospitals. We have
substantial Medicare, Medicaid and other governmental billings, which could
result in heightened scrutiny of our operations. We continue to monitor these
and all other aspects of our business and have developed a compliance program to
assist us in gaining comfort that our business practices are consistent with
current industry standards. However, because the law in this area is complex and
constantly evolving, we cannot assure you that government investigations will
not result in interpretations that are inconsistent with industry practices,
including ours. In public statements surrounding current investigations,
governmental authorities have taken positions on a number of issues, including
some for which little official interpretation previously has been available,
that appear to be inconsistent with practices that have been common within the
industry and 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, including several of our
hospitals, to ensure conformity with this reimbursement rule. Another example
involves the federal government's initiative regarding healthcare providers
"unbundling" and separately billing for laboratory tests that should have been
billed as a "bundled unit." The federal government 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 may initiate similar
investigations in the future at hospitals operated by us and that such
investigations may result in significant penalties to us. In some instances,
indemnity insurers and other non-governmental payors of hospitals under
investigation or the subject of litigation have sought repayment from hospitals
for alleged wrongful conduct that was identified by government attorneys or
investigators. These insurers and other non-government payors may not have had
any more information than their review of the government's investigation or
court actions. Therefore, governmental investigation of us or entities with whom
we do business could result in adverse publicity concerning us and could limit
our ability to make acquisitions.
The positions taken by authorities in the current investigations or any
future investigations of us or other providers and the liabilities or penalties
that may be imposed could have a material adverse effect on our business,
financial condition or results of operations.
HEALTH CHOICE
Health Choice is a prepaid Medicaid managed health plan in the Phoenix,
Arizona area that was acquired in connection with the acquisition of the Tenet
hospitals. Health Choice derives approximately 100% of its
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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 us to provide healthcare
services in exchange for fixed periodic payments and supplemental payments from
the Arizona Health Care Cost Containment System. 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 term of the current contract with the Arizona Health Care Cost
Containment System is five years, with annual renewal options, and expires on
September 30, 2002. In the event the contract with the Arizona Health Care Cost
Containment System were to be discontinued, our financial condition and results
of operations could be adversely affected.
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 members 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 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 effective,
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: (i) 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; (ii) certain discounts offered to prepaid health plans
by contracting providers; (iii) certain price reductions offered to eligible
managed care organizations; and (iv) 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 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 small
quantities of hazardous and low level medical radioactive waste, ownership or
historical use of underground and above-ground storage tanks at some locations,
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management of potential past and future 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 potential acquisition of or maintenance of air emission
permits for boilers or other equipment. We do not expect the matters discussed
above and our compliance with environmental laws and regulations to have a
material impact on our capital expenditures, earnings or competitive position.
We also may be subject to requirements related to the remediation of, or the
liability for remediation of, substances that have been released to the
environment at properties owned or operated by us or at properties where
substances were sent for off-site treatment or disposal. These remediation
requirements may be imposed without regard to fault, and liability for
environmental remediation can be substantial.
INSURANCE
As is typical in the healthcare industry, we are subject to claims and
legal actions by patients in the ordinary course of business. To cover these
claims, we maintain professional malpractice liability insurance and general
liability insurance in amounts 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.
RISK FACTORS
If We Are Unable to Enter Into Favorable Contracts with Managed Care
Payors, Our Operating Revenue May be Reduced
Our ability to negotiate favorable contracts with health maintenance
organizations, preferred provider organizations and other managed care payors
significantly affects the revenue and operating results of most of our
hospitals. If we lose any of these contracts or are unable to enter into new
contracts on favorable terms, our revenue derived from operations will be
reduced and our growth prospects will be diminished. Certain of our contracts
with managed care payors are capitated contracts, under which we receive
specific fixed periodic payments based on the number of members of the
organization we service, regardless of the actual costs incurred and services
provided. The payments we receive may not be adequate to cover the cost of
meeting the healthcare needs of the covered persons. Revenue derived from health
maintenance organizations, preferred provider organizations and other managed
care payors accounted for approximately 33% of our net revenue for the year
ended September 30, 2000. As such, 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 or a wider range of services, also may be
competing for these opportunities.
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, offer a wider range of services and have more capital and other
resources than we do. If our competitors are able to finance capital
improvements, expand services or obtain favorable managed care contracts at
their facilities, we may be unable to attract patients away from these
hospitals.
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Recent Legislative Changes Limiting Payments Provided by Governmental
Programs May Significantly Reduce Our Revenue
Government healthcare programs, such as Medicare and Medicaid,
accounted for approximately 37% of our net revenue, exclusive of revenue from
Health Choice, for the year ended September 30, 2000. Recent legislative
changes, including those enacted as part of the Balanced Budget Act of 1997,
have resulted in limitations on and, in some cases, reductions in levels of,
payments to healthcare providers under many of these government programs. Many
changes imposed by the Balanced Budget Act 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, which has resulted, and we
expect will continue to result, in significant reductions in payments for our
inpatient, outpatient, home health and skilled nursing services, which may cause
our revenue to decline. Final regulations implementing Medicare's new
prospective payment system for outpatient hospital services were enacted
recently. To date, our cash flows have been negatively impacted to some extent
by the delays in processing our claims under the new system.
Our Future Revenue and Profitability May be Constrained by Future
Healthcare Cost Containment Initiatives Undertaken by Purchasers of Healthcare
Services
Efforts by major purchasers of healthcare, including federal and state
governments, managed care companies and insurance companies, to revise payment
methodologies and monitor healthcare expenditures in order to contain and reduce
healthcare costs may have a material adverse effect on our revenue and
profitability. As a result of these initiatives, organizations offering prepaid
and discounted medical services packages may represent an increasing portion of
our patient admissions and they may negotiate increased discounts or fixed
prospective payment contracts resulting in reduced hospital revenue growth. If
we are unable to lower costs by increasing operational efficiencies to offset
declining reimbursements and payments, our revenue and profitability will be
adversely affected.
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 market by a competitor. We
believe these exclusionary contracting 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. We filed a lawsuit against the competitor
seeking damages and other remedies, but were unable to obtain injunctive relief.
To improve census levels, we recently have executed managed care contracts that
are effective January 1, 2001 with two large payors in the Salt Lake City
market. These payors previously did not contract with Rocky Mountain Medical
Center because of the exclusionary contracting practices of our competitor. If
we are unsuccessful in growing revenue at Rocky Mountain Medical Center and
reducing operating losses, we may be forced to significantly alter our plans and
strategies with respect to this hospital.
Our Performance Depends on Our Ability to Recruit and Retain Quality
Physicians at Our Hospitals
The success of our hospitals depends on the following factors, among
others: the number and quality of the physicians on the medical staff of, or who
admit patients to, our hospitals; the admissions practices of those physicians;
and the maintenance of good relations between us and those physicians.
We generally do not employ physicians, and most of our staff physicians
have admitting privileges at other hospitals. Our inability to recruit and
retain physicians, or our inability to provide hospital staffing or services at
our hospitals that meet the needs of physicians, could make it more difficult to
attract patients to our hospitals and could affect our profitability.
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Our Hospitals Face Competition for Staffing, Which May Increase our
Labor Costs and Reduce Profitability
We compete with other healthcare providers with respect to attracting
and retaining qualified management personnel responsible for the day-to-day
operations of each of our hospitals, as well as nurses and other non-physician
healthcare professionals. In certain markets, the availability of nurses and
other medical support personnel has become a significant operating issue to
hospitals and other providers of healthcare services. This shortage of nurses or
trained personnel may require us to enhance our wage and benefits package in
order to attract and retain them 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 our rates charged to payors 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. Any significant failure to attract and retain qualified
management, nurses and other medical support personnel, control our labor costs,
or pass on any increased labor costs to payors through rate increases could have
a material adverse effect on our profitability.
Our Significant Indebtedness May Limit Our Ability to Grow and Compete
with Other Hospital Companies
The amount of our outstanding indebtedness is large compared to the net
book value of our assets, and we have substantial repayment obligations under
our outstanding debt. In addition, the outstanding indebtedness under our bank
credit facility bears interest at a floating rate plus a fixed margin.
Therefore, increases in prevailing interest rates will increase our interest
payment obligations. As a result of our substantial debt repayment obligations,
we are limited in our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of these funds to make
principal and interest payments. Our indebtedness increases our vulnerability to
general adverse economic and industry conditions because we must still meet our
significant debt service obligations, notwithstanding the fact that our revenue
may have decreased. This could affect our ability to develop as a company by
limiting our ability to obtain additional financing to fund future working
capital requirements, operations, including operating losses of Rocky Mountain
Medical Center, capital expenditures, acquisitions and other general corporate
requirements.
Our debt agreements contain significant financial covenants and
restrict our ability to incur additional indebtedness, make capital
expenditures, engage in mergers, acquisitions and asset sales, incur liens and
engage in sale-leaseback transactions. If we breach any of the restrictions in
our debt agreements, we may have to repay immediately a significant portion of
our indebtedness. In addition, substantially all of our outstanding common stock
has been pledged 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.
We are Subject to Governmental Regulation and We May Be Subjected to
Allegations that We Failed to Comply with Governmental Regulations, Which May
Result in Sanctions that Reduce Our Revenue and Profitability
The healthcare industry is subject to extensive federal, state and
local laws, including regulations with respect to licensure, conduct of
operations, ownership of facilities, addition of facilities and services, and
prices for services. These laws and regulations are extremely complex and, in
many instances, the industry does not have the benefit of significant regulatory
or judicial interpretation of these laws. In particular, Medicare and Medicaid
fraud and abuse provisions, known as the "anti-kickback statute," prohibit
certain business practices and relationships related to items or services
reimbursable under Medicare, Medicaid and other federal healthcare programs,
including the payment or receipt of remuneration to induce or arrange for the
referral of patients covered by a federal or state healthcare program.
Federal government safe harbor regulations describe some of the conduct
and business relationships
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immune from prosecution under the anti-kickback statute. However, because there
are a limited number of safe harbors that often apply only to a very limited
scope of activity, not all legal arrangements fit within safe harbors. The fact
that a given business arrangement falls outside one of these safe harbors does
not render the arrangement illegal; however, business arrangements that fail to
satisfy a safe harbor risk scrutiny by enforcement authorities. We try to
structure our business arrangements to fit within or as close as possible to one
of these safe harbors. Enforcement authorities could determine that any of our
hospitals' arrangements that do not meet a safe harbor violate the anti-kickback
statute or other federal laws. Such a determination could subject us to
liabilities under the Social Security Act, including criminal penalties, civil
money penalties or exclusion from participation in Medicare, Medicaid or other
federal healthcare programs, any of which could impair our ability to operate
one or more of our hospitals or to operate profitably.
The Health Insurance Portability and Accountability Act of 1996, which
became effective January 1, 1997, added new fraud and abuse laws that include
all healthcare services, whether or not they are reimbursed under a federal or
state program, and created new enforcement mechanisms to combat fraud and abuse,
including 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. This statute also requires hospitals and
other providers to implement measures to ensure the privacy and security of
patients' medical records. Further, this statute requires healthcare providers
to comply with electronic data transmission standards when submitting or
receiving certain healthcare transactions electronically. We may incur
additional expenses in order to comply with the new standards, although we
cannot foresee the extent of our costs for implementing the requirements at this
stage.
In addition, the portion of the Social Security Act commonly known as
the "Stark Law" prohibits physicians from referring Medicare or Medicaid
patients to certain providers of designated health services if the physician or
a member of his immediate family has an ownership interest or compensation
arrangement with that provider. Sanctions for violating the Stark Law include
civil money penalties and possible exclusion from the Medicare program.
Many states have adopted or are considering similar anti-kickback and
physician self-referral legislation, some of which extends beyond the scope of
federal law to prohibit the payment or receipt of remuneration for the referral
of patients and physician self-referrals regardless of the source of payment for
care.
Some states require healthcare providers to receive prior approvals
known as certificates of need for the purchase, construction and expansion of
healthcare facilities, capital expenditures exceeding a prescribed amount,
changes in bed capacity or services and other matters. Such determinations are
based upon a state's determination of 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 in
Florida.
The laws, rules and regulations described above are ever-changing,
complex and subject to interpretation. We exercise care in structuring
arrangements with physicians and other referral sources to comply in all
material respects with applicable laws. It is possible, however, that government
officials responsible for enforcing such laws could assert that we or
transactions in which we are involved, are in violation of such laws. It also is
possible that courts could interpret such laws in a manner inconsistent with our
interpretations. In the event of a determination that we are in violation of
such laws, or if further changes in the regulatory framework occur, any such
determination or changes could result in monetary or punitive sanctions or
exclusion from governmental programs, any of which could impair our ability to
operate profitably.
Providers in the Hospital Industry Have Been the Subject of Federal and
State Investigations, and We May Become Subject to Such Investigations in the
Future
Both federal and state government agencies have announced heightened
and coordinated civil and criminal enforcement efforts as part of their ongoing
investigations related to referral, cost reporting and billing practices,
laboratory and home healthcare services and physician ownership and joint
ventures involving hospitals.
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In addition, 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 enforcement initiatives that focus on specific billing practices or
other suspected areas of abuse. Recent initiatives include a focus on hospital
billing for outpatient charges associated with inpatient services, as well as
hospital laboratory billing practices.
As part of our hospital operations, we operate laboratories and provide
some home healthcare services. We also have significant Medicare and Medicaid
billings. Although we monitor our billing practices and hospital practices to
maintain compliance with prevailing industry interpretations of applicable law
and believe that our current practices are consistent with current industry
practices, government investigations or interpretations inconsistent with
industry practices could occur. In public statements, governmental authorities
have taken positions on issues for which little official interpretation had been
available previously, such as the legality of physician ownership in healthcare
facilities in which they perform services and the propriety of including
marketing costs in the Medicare cost report of hospital-affiliated home health
agencies. Some of these positions appear to be inconsistent with practices that
have been common within the industry and which have not been challenged
previously in this manner. Moreover, some government investigations that have
been conducted in the past under the civil provisions of federal law are now
being conducted as criminal investigations under the Medicare fraud and abuse
laws. We have reviewed the current billing practices at all of our facilities in
light of these investigations and do not believe that any of our facilities are
taking positions on reimbursement issues that are contrary to the government's
position on these issues. Moreover, none of our hospitals currently have
physician investors, although our hospitals may have physician investors in the
future and some of our ambulatory surgery centers currently have physician
investors. Nevertheless, we cannot predict whether we or other hospital
operators will be the subject of future investigations or inquiries.
We Have a Limited Operating History
Our current management team began operating our hospitals in 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.
If We Fail to Successfully Implement and Integrate Our Management
Information Systems at Our Hospitals, Our Expenses Could Increase, Our Cash
Flows Could Be Negatively Affected and Our Profitability Could Decline
Our success is dependent in part on our access to sophisticated
information systems and ability to successfully implement and integrate these
systems into our hospitals. We recently have converted and upgraded our
information systems in certain of our facilities in Utah, Florida and Texas, and
plan to complete conversions at our remaining hospitals no later than December
31, 2001. 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 and, as a result, our profitability
could be reduced. These systems are essential to the following areas of our
business operations, among others: patient accounting, including billing and
collection of accounts receivable, financial, accounting and reporting, coding,
payroll, compliance, laboratory systems, radiology and pharmacy systems, medical
records, document storage, materials management, asset management, and
negotiating, pricing and managing payor contracts.
Significant Competition From Other Healthcare Companies May Impact Our
Ability to Acquire Hospitals on Favorable Terms
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 financial resources than us. Therefore, we may not be able to
acquire hospitals on terms favorable to us or at all.
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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 hospitals. As a result, we may not
realize all or any of the anticipated benefits of an acquisition and we may
incur significant costs.
If Any One of the Regions in Which We Operate Experiences an Economic
Downturn or Other Material Changes, Our Overall Business Results May Suffer
Of our 15 general, 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 year ended September 30,
2000, our Salt Lake City hospitals generated 25% of our net revenue, our Phoenix
hospitals generated 22%, our Tampa-St. Petersburg hospitals generated 20%, our
Texas hospitals generated 21% and other operations, including Health Choice, our
Arizona-based managed care health plan, generated the remaining 12% of our net
revenue. Accordingly, any material change in the current demographic, economic,
competitive and regulatory conditions in our regions could adversely affect our
overall business results because of the significance of our operations in each
of these states to our overall operating performance. Moreover, due to the
concentration of our revenue in only four regions, our business is not
diversified and is, therefore, subject to greater market risks than some
competing multi-facility healthcare companies. Because each region in which we
do business may represent 20% or more of our revenue, our profitability also
could be diminished due to market volatility in any one of these markets or
negative changes in any of a number of market conditions.
We May be Subject to Liabilities Because of Claims Brought Against Our
Owned and Leased Hospitals
In recent years, plaintiffs have brought actions against hospitals and
other healthcare providers, alleging malpractice, product liability or other
legal theories. Many of these actions involved large claims and significant
defense costs. We maintain professional malpractice liability insurance and
general liability insurance in amounts that management believes are sufficient
for its operations to cover claims arising out of the operations of its
hospitals. Some of the claims, however, could exceed the scope of the coverage
in effect or coverage of particular claims could be denied. Although our
professional and other liability insurance has been adequate in the past to
provide for liability claims, we cannot assure you that adequate levels of
insurance will continue to be available on acceptable terms.
Our Inability to Control Healthcare Costs in Our Health Choice Plan May
Result in Premiums that Are Not Sufficient to Cover Medical Costs
During the year ended September 30, 2000, our Health Choice health plan
generated approximately 11% of our net revenue. The Arizona Health Care Cost
Containment System sets the premium payments we receive at Health Choice. If we
fail to effectively manage healthcare costs, the costs of healthcare services
and supplies that we provide to the members of Health Choice may exceed the
premiums we receive. This shortfall could significantly change our results of
operations and affect our profitability. Many factors can cause actual
healthcare costs to exceed the premiums set by the Arizona Health Care Cost
Containment System, including the increased cost of individual healthcare
services, the type and number of individual healthcare services delivered and
the occurrence of catastrophes or epidemics and other unforeseen occurrences.
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ITEM 2. PROPERTIES.
We operate 15 general, acute care hospitals and five ambulatory surgery
centers. Of the 15 hospitals we operate, we own 11 hospitals and lease four
hospitals pursuant to lease agreements. 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
HOSPITALS CITY STATE BEDS
--------- ---- ----- ----
Davis Hospital and Medical Center Layton UT 126
Jordan Valley Hospital West Jordan UT 50
Pioneer Valley Hospital(1) West Valley City UT 139
Rocky Mountain Medical Center Salt Lake City UT 118
Salt Lake Regional Medical Center Salt Lake City UT 200
Mesa General Hospital Medical Center(2) Mesa AZ 143
St. Luke's Medical Center(3)(4) Phoenix AZ 350
Tempe St. Luke's Hospital(4) Tempe AZ 106
Memorial Hospital of Tampa Tampa FL 174
Palms of Pasadena Hospital St. Petersburg FL 307
Town & Country Hospital Tampa FL 201
Mid-Jefferson Hospital Nederland TX 138
Odessa Regional Hospital Odessa TX 100
Park Place Medical Center Port Arthur TX 244
Southwest General Hospital San Antonio TX 286
Surgery Centers
---------------
Davis Surgical Center(5) Layton UT --
Sandy City ASC(6) West Jordan UT --
Biltmore Surgery Center(7) Phoenix AZ --
Metro Surgery Center Mesa AZ --
Arizona Diagnostic and Surgery Center Mesa AZ --
- -------------------------
(1) Pioneer Valley Hospital is leased pursuant to a lease agreement that
expires on June 30, 2004. We have options to extend the term of the
lease through June 30, 2034.
(2) 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.
(3) Includes St. Luke's Behavioral Health Center.
(4) St. Luke's Medical Center, St. Lukes 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.
(5) Owned by a joint venture in which we own a 30% interest.
(6) Owned by a joint venture in which we own a 50% interest.
(7) 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.
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ITEM 3. 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, and seeks both injunctive relief and
unspecified monetary and punitive damages. A preliminary injunction hearing was
held on October 3, 2000, which resulted in the court denying our request for a
preliminary injunction. The case is still pending with a trial date currently
scheduled for May 2002. We intend to continue to vigorously pursue this
litigation.
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
will have a material adverse effect upon our business, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders during the fourth
quarter ended September 30, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for our common stock. At
September 30, 2000, there were 61 holders of record of our common stock.
We have not declared or paid a cash dividend on our common stock. It is
the present policy of our board of directors to retain all earnings to support
operations and finance expansion. Our senior credit facilities restrict 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.
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ITEM 6. SELECTED FINANCIAL DATA.
The following tables present selected financial data for our company
for the year ended September 30, 2000 derived from our audited consolidated and
combined financial statements and include financial data for the Tenet hospitals
from October 15, 1999, their date of acquisition. The selected financial data
reflects all adjustments that, in the opinion of our management, are necessary
for a fair presentation of such information.
The following tables also present selected historical financial data
for the Paracelsus hospitals for each of the fiscal years in the three years
ended December 31, 1998, and for the nine months ended September 30, 1998 and
1999. We have 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 Healthcare Corporation. We have derived the selected financial data
for the nine months ended September 30, 1998 from the unaudited combined
financial statements of the Paracelsus hospitals.
IASIS PARACELSUS HOSPITALS(1)
------------- ------------------------------------------------------------------------------
PREDECESSOR
COMPANY
PERIOD -----------
FROM DATE PERIOD
OF FROM
YEAR ENDED NINE MONTHS ENDED YEARS ENDED ACQUISITION JANUARY 1,
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, TO 1996
------------- ----------------------- ----------------------- DECEMBER 31, TO DATE OF
2000 1999 1998 1998 1997 1996 ACQUISITION
--------- --------- --------- --------- --------- --------- -------
(in thousands)
STATEMENT OF OPERATIONS DATA:
Net revenue $ 815,163 $ 137,397 $ 134,017 $ 178,309 $ 186,263 $ 98,249 $88,886
Costs and expenses:
Salaries and benefits 285,451 47,169 47,306 63,158 63,902 41,040 32,087
Supplies and other
operating expenses 357,552 56,846 55,073 71,346 71,609 43,343 32,377
Provision for bad debts 60,579 9,934 8,131 11,822 16,488 7,382 6,032
Interest, net 62,352 7,304 13,426 17,088 22,097 8,465 6,125
Depreciation and
amortization 47,559 9,620 8,606 11,770 11,122 6,863 4,031
Allocated management fees -- 5,027 4,940 6,587 7,519 3,839 2,822
Recapitalization costs(2) 3,478 -- -- -- -- -- --
Restructuring and
impairment charges(3) -- -- -- -- -- 52,492 --
Loss contract accrual(4) -- -- -- -- -- 38,082 --
Reversal of excess loss
contract accrual(4) -- -- (7,500) (7,500) (15,531) -- --
Cost of hospital
closure(5) -- -- -- -- 3,500 -- --
--------- --------- --------- --------- --------- --------- -------
Total costs and expenses 816,971 135,900 129,982 174,271 180,706 201,506 83,474
--------- --------- --------- --------- --------- --------- -------
Earnings (loss) from
continuing operations
before income taxes (1,808) 1,497 4,035 4,038 5,557 (103,257) 5,412
Minority interests 74 (140) 54 68 23 -- --
--------- --------- --------- --------- --------- --------- -------
Earnings (loss) from
continuing operations
before income taxes (1,882) 1,637 3,981 3,970 5,534 (103,257) 5,412
Income tax expense
(benefit) 2,219 -- -- -- -- (9,210) 2,116
--------- --------- --------- --------- --------- --------- -------
Net earnings (loss)
from continuing
operations $ (4,101) $ 1,637 $ 3,981 $ 3,970 $ 5,534 $ (94,047) $ 3,296
========= ========= ========= ========= ========= ========= =======
BALANCE SHEET DATA(6):
Total assets $ 873,839 $ 213,259 $ 222,458 $ 216,319 $ 232,943 $ 256,288
Long-term debt and capital
lease obligations
(including current
portion) 557,654 1,499 1,269 2,273 2,019 1,565
Stockholder's equity
(deficit)(7) 5,431 (84,585) (85,568) (85,635) (89,115) (93,879)
Working capital 65,018 3,687 17,433 10,350 16,028 11,112
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- ------------------------
(1) The selected financial data includes financial data for the Paracelsus
hospitals for the following periods:
HOSPITAL PERIOD
-------------------------------- -------------------------------------
Davis Hospital and Medical Paracelsus Healthcare Corporation
Center acquired facility May 17, 1996
(predecessor company)
Pioneer Valley Hospital Paracelsus Healthcare Corporation
acquired facility May 17, 1996
(predecessor company)
Rocky Mountain Medical Center Since being acquired by Paracelsus
Healthcare Corporation as of May
17, 1996 through closure of
facility as of June 30, 1997.
Facility was reopened April 10,
2000 by IASIS
Salt Lake Regional Medical Since being acquired by Paracelsus
Center Healthcare Corporation on August
16, 1996
Jordan Valley Hospital Since being acquired by Paracelsus
Healthcare Corporation on August
16, 1996
(2) We incurred legal, accounting and other related charges of approximately
$3.5 million in connection with the recapitalization transaction.
(3) During 1996, an impairment charge of approximately $52.5 million was
recorded due to significant losses incurred at Rocky Mountain Medical
Center. The charge was based upon independent third party appraisals.
(4) 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 payor contract.
(5) In 1997, a charge of $3.5 million was recorded due to the closure of Rocky
Mountain Medical Center in June 1997.
(6) Balance sheet data for the predecessor company for the period from January
1, 1996 to the date of acquisition represents information for only two
hospitals and therefore is not considered comparable with other periods.
(7) On October 26, 2000, all shares of our mandatorily redeemable Series A and
Series B Preferred Stock were converted into shares of our common stock on
a ten-for-one basis. This conversion will be recorded in the first quarter
of fiscal 2001 and will increase our stockholders' equity by approximately
$189.3 million.
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ITEM 7. 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 consolidated and
combined financial statements, the notes to our consolidated and combined
financial statements, and the other financial information appearing elsewhere in
this report. Data for the year ended September 30, 2000 has been derived from
our audited consolidated and combined financial statements. Data for the nine
months ended September 30, 1999 has been derived from the audited combined
financial statements of Paracelsus Healthcare Corporation. Data for the year
ended September 30, 1999 and the nine months ended September 30, 1998 is
unaudited. 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 nine months ended September 30, 1999 and 1998 may not be indicative of
operating results for the full respective years.
FORWARD LOOKING STATEMENTS
Some of the statements we make in this annual report on Form 10-K are
forward-looking. 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, among others,
the risks and uncertainties discussed under the caption "Risk Factors" in this
annual report on Form 10-K. Although we believe that the assumptions underlying
the forward-looking statements contained herein 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 annual report on
Form 10-K will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, you should not
regard the inclusion of such information as a representation by us or any other
person that our objectives and plans will be achieved. We do not undertake any
obligation to publicly release any revisions to any forward-looking statements
contained herein to reflect events and circumstances occurring after the date
hereof or to reflect the occurrence of unanticipated events.
GENERAL
We operate 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. Currently, we own or lease 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. We also operate five ambulatory
surgery centers and a Medicaid managed health plan serving over 43,000 members
in Arizona.
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 significantly reduced by this reimbursement methodology. We expect
patient volumes from Medicare and Medicaid to continue to increase due to the
general aging of the population and expansion of state Medicaid programs. Under
the Balanced Budget Act of l997, 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 200l. 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 mitigated by the Benefits Improvement
Protection Act of 2000. The percentage of net patient service revenue related to
Medicare and Medicaid was approximately 37.0% for the 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 and cost containment pressures from Medicare, Medicaid,
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managed care organizations and other payors. Approximately 36.8% of our gross
revenue during the 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 such prospective payment
system to have a material adverse effect on our future operating results. We
have been negatively impacted 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.
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 the Medicare and Medicaid programs
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.
RECAPITALIZATION AND ACQUISITION TRANSACTIONS
Our company was formed during 1999 in a series of transactions that
were arranged by certain members of our 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 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 certain other of our stockholders
purchased $125.0 million of the common stock of the subsidiary from Paracelsus
Healthcare Corporation and the subsidiary repurchased $155.0 million of its
common stock from Paracelsus Healthcare Corporation. The recapitalization
transaction resulted in Paracelsus retaining a minority interest at an implied
value of approximately $8.0 million in the preexisting Paracelsus subsidiary
that owned the Paracelsus Utah facilities. Subsequent to the recapitalization,
the preexisting Paracelsus subsidiary 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 general, acute care hospitals and other related facilities and
assets from Tenet Healthcare Corporation for approximately $431.8 million in
cash and assumed liabilities of approximately $41.2 million. 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 impact 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 management company, originally
formed by certain 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 the management company received shares
of our common stock and preferred stock with a total value of approximately $9.5
million.
The Tenet transaction 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 Consolidated and Combined
Statements of Operations from the October 15, 1999 date of acquisition.
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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 year ended September 30, 2000 of $10.6 million,
compared to losses of $600,000 in the year ended September 30, 1999. The loss
from discontinued operations includes a charge of $7.4 million to provide for
costs associated with the discontinuation and disposal of the physician practice
operations.
SELECTED OPERATING STATISTICS
The following table sets forth certain operating statistics for each of
the periods presented. The operating statistics include the Tenet hospitals from
October 15, 1999, their date of acquisition.
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 1999 1998
------- ------- ------ ------
Number of hospitals at end of period 15 4 4 4
Licensed beds at end of period 2,682 515 515 515
Operating beds at end of period 2,194 501 501 501
Admissions 74,243 17,946 13,849 13,736
Adjusted admissions 121,030 33,969 25,726 26,100(1)
Average length of stay 4.45 3.53 3.59 3.49
Patient days 330,510 63,398 49,773 48,003
Adjusted patient days 522,908 122,691 93,863 91,200(1)
Occupancy rates (average beds in service)(2) 43.7% 34.7% 36.4% 35.1%
- -----------------------------
(1) Estimated based upon 1999 data. Data for 1998 was not readily available.
(2) 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 43.2% for the year ended September 30, 2000.
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RESULTS OF CONTINUING OPERATIONS
The following table presents, for the periods indicated, information
expressed as a percentage of net revenue. Such information has been derived from
the Consolidated and Combined Statements of Operations. The results of
operations for the periods presented include the Tenet hospitals and the
management company from their acquisition date, October 15, 1999.
NINE MONTHS
YEAR ENDED NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
2000 (UNAUDITED) 1999 (UNAUDITED)
----- ----- ----- -----
Net revenue 100.0% 100.0% 100.0% 100.0%
Salaries and benefits 35.0 34.7 34.3 35.3
Supplies 15.1 14.3 14.3 13.6
Provision for bad debts 7.4 7.5 7.2 6.1
Other operating expenses(1) 28.8 29.6 30.8 25.6
----- ----- ----- -----
Total operating expenses 86.3 86.1 86.6 80.6
----- ----- ----- -----
EBITDA(2) 13.7 13.9 13.4 19.4
Depreciation and amortization 5.8 7.0 7.0 6.4
Interest, net 7.7 6.1 5.3 10.0
Minority interests -- (0.1) (0.1) --
Recapitalization costs 0.4 -- -- --
----- ----- ----- -----
Earnings (loss) from continuing operations
before income taxes (0.2) 0.9 1.2 3.0
Income tax expense 0.3 -- -- --
----- ----- ----- -----
Net earnings (loss) from continuing
operations (0.5) 0.9 1.2 3.0
Discontinued operations (1.3) (0.4) (0.4) (0.3)
----- ----- ----- -----
Net earnings (loss) (1.8)% 0.5% 0.8% 2.7%
===== ===== ===== =====
- ---------------------------
(1) Other operating expenses consist of allocated management fees, reversal of
excess loss accruals and other direct operating costs.
(2) 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 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.
YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO YEAR ENDED SEPTEMBER 30, 1999
Net revenue for the year ended September 30, 2000 was $815.2 million,
an increase of $633.5 million, or 348.7%, from $181.7 million for the 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 year ended September 30, 2000, or 95.9% of the
total increase in net revenue for the year ended September 30, 2000, compared to
the same period in 1999. During the 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 year ended September 30, 2000 compared to 1999. The remaining
increase in net revenue related to the opening of Rocky Mountain Medical Center
in April 2000, which contributed $4.5 million in net revenue during the 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 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 year ended September 30, 1999 to 39,934 for
the same
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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 year ended September 30, 1999 to $703.6 million for the 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 year ended September
30, 2000, or 93.5% of the total increase in operating expenses for the year
ended September 30, 2000 compared to the 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 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 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.
We opened Rocky Mountain Medical Center in Salt Lake City, Utah in
April 2000. Rocky Mountain Medical Center is Salt Lake City's newest general,
acute care hospital with 118 licensed and 71 operating beds. Rocky Mountain
Medical Center offers general medicine, surgery, emergency room services,
cardiology, orthopedics, oncology and after-hours pediatrics programs. During
the 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, depreciation, amortization and taxes of
$9.0 million. Our census levels and net revenue were 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
market by a competitor. We believe these exclusionary contracting 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. During the year ended
September 30, 2000, Rocky Mountain Medical Center had an average daily census of
less than ten. On August 18, 2000, we filed a lawsuit against the competitor
seeking damages and other remedies, but were unable to obtain injunctive relief.
The case has been set for trial in May 2002. To improve census levels, we
recently have negotiated managed care contracts that are effective January 1,
2001 with two large payors in the Salt Lake City market. These payors previously
did not contract with Rocky Mountain Medical Center because of the exclusionary
contracting practices of our competitor. The medical office building on the
Rocky Mountain Medical Center campus is now approximately 65% occupied and we
have in excess of 215 physicians on staff. The operating expenses of $13.5
million incurred during the 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
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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, which we currently
expect will occur by the end of March 2001.
Operating expenses as a percentage of net revenue were 86.3% for the
year ended September 30, 2000 and 86.1% for the year ended September 30, 1999.
EBITDA was $111.6 million, or 13.7% of net revenue, for the year ended September
30, 2000, compared to $25.3 million, or 13.9% of net revenue, for the year ended
September 30, 1999. This decline in the EBITDA 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 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 year ended September 30, 1999 to $47.6 million for the
year ended September 30, 2000 due to the Tenet transaction and the merger with
the management company.
Interest expense increased $51.4 million from $11.0 million for the
year ended September 30, 1999 to $62.4 million for the 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 year ended September 30,
1999 primarily represents interest costs that Paracelsus (our former parent
company) allocated to us in proportion to amounts due to Paracelsus.
We incurred legal, accounting and other related costs of approximately
$3.5 million during the 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 year ended September 30, 2000 and earnings of $1.6
million for the 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 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 the 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 year ended September 30, 2000 of $10.6 million, compared to losses of
$600,000 in 1999. The loss from discontinued operations for the 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 year ended September 30, 2000 was a loss of
$14.7 million compared to net earnings of $1.0 million for the year ended
September 30, 1999.
We recorded preferred stock dividends and accretion of $25.4 million
during the year ended September 30, 2000. The preferred stock, which was
converted to 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 does not result in a current cash payment. Net earnings
(loss) attributable to common stockholders after the effect of the preferred
stock dividends and accretion for the 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.
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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 impacted by the Balanced Budget Act of 1997, which
was substantially phased in by the third quarter of 1998, the increasing
penetration of managed care and the restructuring of home health operations in
the latter half of 1998. The Paracelsus hospitals experienced a slight increase
of 0.8% in inpatient admissions from 13,736 in the nine months ended September
30, 1998 to 13,849 for the 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 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 impact in 1998 from the collection of
accounts previously written off. As a result of the computer system conversion
at certain hospitals, the billing function and collection efforts were hampered
as resources were directed towards the conversion rather than devoting full
effort to billing and collecting receivables. Also, the computer system
conversion resulted in certain data being lost, thereby further hindering
collection efforts on converted patient accounts.
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 impact 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.
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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.
Income 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. Income from continuing operations before income taxes in 1998
included an unusual gain of $7.5 million relating to the settlement of a
capitated contract dispute.
The Paracelsus hospitals recorded no income tax provision or benefit
for the nine months ended September 30, 1999 and 1998 due to revisions of the
estimated valuation allowance on deferred tax assets.
Losses from our discontinued physician practice operations for the nine
months ended September 30, 1999 were $600,000, compared to losses of $400,000
for the nine months ended September 30, 1998.
Net income for the nine months ended September 30, 1999 was $1.0
million compared to net income of $3.6 million for the nine months ended
September 30, 1998.
SUMMARY OF OPERATIONS BY QUARTER
The following table presents unaudited quarterly operating results for
the years 2000 and 1999. 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. 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
----------------------------------------------------------
SEPT. 30, JUNE 30, MAR. 31, DEC. 31,
2000 2000 2000 1999
--------- --------- -------- ---------
(in thousands)
Net revenue $ 206,076 $ 210,879 $220,513 $ 177,695
EBITDA 19,383 27,520 37,063 27,615
Net earnings (loss) (18,378) (788) 6,176 (1,713)
Net earnings (loss) excluding
the effects of discontinued
operations (9,891) (1,575) 7,859 (494)
QUARTER ENDED
----------------------------------------------------------
SEPT. 30, JUNE 30, MAR. 31, DEC. 31,
1999 1999 1999 1998
--------- --------- -------- ---------
(in thousands)
Net revenue $ 44,948 $ 45,807 $ 46,642 $ 44,292
EBITDA 3,930 7,183 7,308 6,830
Net earnings (loss) (2,003) 1,491 1,562 (67)
Net earnings (loss) excluding
the effects of discontinued
operations (1,807) 1,687 1,757 (10)
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LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we had $65.0 million in working capital,
compared to $3.7 million at September 30, 1999, an increase of $61.3 million.
This increase resulted primarily from the acquisition of the Tenet hospitals and
the recapitalization transaction financed by borrowings under our bank credit
facility and the issuance of preferred stock and subordinated debt. We used cash
of $39.4 million in operating activities during the year ended September 30,
2000, compared to cash generated by operating activities of $25.8 million during
the year ended September 30, 1999. During the year ended September 30, 2000, the
negative cash flow from operations was due primarily to the growth in accounts
receivable of $127.0 million from $19.7 million at September 30, 1999 to $146.7
million at September 30, 2000. We did not purchase accounts receivable as part
of the acquisition of the Tenet hospitals and have accordingly experienced an
increase in accounts receivable during 2000. At September 30, 2000, net accounts
receivable of $146.7 million amounted to approximately 70 days of net revenue
outstanding.
Our investing activities used $491.9 million during the year ended
September 30, 2000. The acquisition of the Tenet hospitals and the
recapitalization transaction accounted for $436.9 million of the funds used in
investing activities. Financing activities during the year ended September 30,
2000 provided net cash of $531.2 million. During the year ended September 30,
2000, we repaid $164.2 million in outstanding borrowings pursuant to the terms
of our bank credit facilities and capital lease obligations, including $3.3
million repaid pursuant to our current bank credit facility.
Capital expenditures for the year ended September 30, 2000 were $53.7
million, including capital expenditures of approximately $19 million for
information systems, $9 million for equipment and improvements at Rocky Mountain
Medical Center, and $8 million for facility renovation and expansion of the
emergency room at one of our hospitals. We have budgeted capital expenditures
for 2001 of approximately $50 million, including $32 million for expansion and
capital to fund new services at our facilities, $11 million for renovation and
replacement equipment at our facilities and $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
significantly exceed budgeted amounts.
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.
As of September 30, 2000, we had repaid $3.3 million of the Tranche A
and Tranche B term loans. No amounts were outstanding under our revolving credit
facility as of September 30, 2000; however, the revolving credit facility
includes a $75.0 million sub-limit for letters of credit that may be issued by
us and, as of September 30, 2000, we had issued $25.2 million in letters of
credit. The loans under the bank credit facility bear interest at variable rates
at fixed margins above either the agent bank's alternate base rate or its
reserve-adjusted Eurodollar rate. The weighted average drawn cost of outstanding
borrowings under the bank credit facility was approximately 10.5% at September
30, 2000.
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 guaranties are secured by a pledge of substantially all of the
subsidiaries' assets.
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
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to require us to repurchase all or any part of that holder's notes pursuant to
the terms of the indenture. Except as described above with respect to a change
of control, we are not required to make mandatory redemption or sinking fund
payments with respect to the notes. We are a holding company with no operations
apart from ownership of our subsidiaries. At September 30, 2000, all of the
subsidiaries were wholly owned and 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.
For the year ended September 30, 2000, approximately $89.4 million, or
11.0% of our total net revenue of $815.2 million, was derived from Health
Choice. This prepaid Medicaid health plan, acquired in connection with the
acquisition of the Tenet hospitals, derives approximately 100% of its revenue
through a contract with the Arizona Health Care Cost Containment System to
provide specific health services to qualified Medicaid enrollees through
contracts with providers. The contract requires us to provide healthcare
services in exchange for fixed periodic payments and supplemental payments from
the Arizona Health Care Cost Containment System. 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. 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 do not currently expect a material increase in
the amount of the performance guaranties during the 2001 fiscal year. The term
of the current contract with the Arizona Health Care Cost Containment System is
five years, with annual renewal options, and expires on September 30, 2002. In
the event the contract with the Arizona Health Care Cost Containment System were
to be discontinued, our financial condition and results of operations could be
adversely affected.
On October 26, 2000, all shares of our mandatorily redeemable Series A
and Series B Preferred Stock were converted into shares of our common stock on a
ten-for-one basis. The conversion will be recorded in the first quarter of
fiscal 2001 and will increase our stockholders' equity by approximately $189.3
million. This conversion will not impact our cash flow.
Our liquidity and capital resources have been negatively impacted by
Rocky Mountain Medical Center. During the 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, 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. We expect to continue to incur operating losses until our net revenue
exceeds our operating expenses, which we currently expect will occur by the end
of March 2001. We expect to incur capital expenditures of approximately $6.0
million at Rocky Mountain Medical Center during 2001. 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 $6.0 million of capital expenditures 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 discussed above, we did not assume any liability or obligation of
Paracelsus Healthcare Corporation or Tenet Healthcare Corporation 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 Healthcare Corporation and Tenet Healthcare Corporation 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
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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 Healthcare
Corporation 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. Paracelsus amended its Plan
of Reorganization to include the assumption of the indemnification obligation
and the bankruptcy court confirmed this Plan, as supplemented and amended, on
December 8, 2000. 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.
As of December 22, 2000, we have drawn $16.5 million under our
revolving credit facility and have issued $28.6 million in letters of credit,
resulting in remaining availability under the revolving credit facility of $79.9
million. Based upon the current level of operations and anticipated growth, we
believe that cash generated from operations and amounts available under the
revolving credit facility will be adequate to meet our anticipated debt service
requirements, capital expenditures and working capital needs for the next 12 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 the bank facilities, or otherwise, to enable us to service our
indebtedness including the bank facilities and our senior subordinated exchange
notes, or to make anticipated capital expenditures. One element of our business
strategy is expansion through the acquisition of hospitals in our existing and
new high growth markets. The completion of acquisitions may result in the
incurrence of, or assumption by us, of additional indebtedness. Our future
operating performance, reduction of operating losses at Rocky Mountain Medical
Center, ability to service or refinance the senior subordinated exchange notes,
and ability to service and extend or refinance the 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.
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ITEM 7A. 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. We have
in place a $455.0 million bank credit facility that bears interest at a floating
rate at a fixed margin above either Morgan Guaranty Trust Company of New York's
alternative base rate or its reserve adjusted LIBOR. The bank credit facility
consists of a $125.0 million revolving credit facility, an $80.0 million Tranche
A term loan and a $250.0 million Tranche B term loan.
The $125.0 million revolving credit facility and Tranche A term loan
bear interest at the alternative base rate, plus a margin of 1.00% to 2.50%, or
reserve-adjusted Eurodollar rate, plus 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. At September 30, 2000, no amounts were
outstanding under the revolving credit facility, other than $25.2 million for
the issuance of letters of credit. At September 30, 2000, $78.3 million was
outstanding under the Tranche A term loan and bore interest at 10.25%.
The Tranche B term loan bears interest at the alternative base rate,
plus 3.25%, or the reserve-adjusted Eurodollar rate, plus 4.25%, and matures on
September 30, 2006. At September 30, 2000, $248.3 million was outstanding under
the Tranche B term loan and bore interest at 11.0%.
Although changes in the alternative 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 the bank credit facility approximate the carrying value of the facility as
a result of the variable interest rates in place as of September 30, 2000.
We have $230.0 million in senior subordinated exchange notes due
October 15, 2009, with interest payable semi-annually at 13.0%. At any time
prior to October 15, 2002, we may on one or more occasions redeem up to 35% of
the aggregate principal amount of the notes at a redemption price of 113.0% of
the principal amount of the notes, plus accrued unpaid interest to the
redemption date, with the net proceeds of one or more sales by us of our stock.
On or after October 15, 2004, the notes are redeemable, in whole or in part, at
our option at any time at the redemption prices (expressed as percentages of the
principal amount thereof) set forth below, together with accrued and unpaid
interest to the redemption date, if redeemed during the 12 month period
beginning on October 15 of the years indicated:
Year Price
---- -----
2004 106.500%
2005 104.875
2006 103.250
2007 101.625
2008 and thereafter 100.000
The fair market value of the outstanding senior subordinated exchange
notes at September 30, 2000 was $223.1 million, based upon quoted market prices
as of that date.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
IASIS HEALTHCARE CORPORATION
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
PAGE
-----------------
Report of Independent Auditors 40
Consolidated and Combined Balance Sheets at September 30, 2000 and September 30, 1999 41
Consolidated and Combined Statements of Operations for the Years Ended September
30, 2000 and 1999 (unaudited), the Nine Months Ended September 30, 1999 and
1998 (unaudited), and the Year Ended December 31, 1998 42
Consolidated and Combined Statements of Cash Flows for the Years Ended September
30, 2000 and 1999 (unaudited), the Nine Months Ended September 30, 1999 and
1998 (unaudited), and the Year Ended December 31, 1998 43
Consolidated and Combined Statements of Stockholders' Equity for the Year Ended
September 30, 2000, the Nine Months Ended September 30, 1999, and the Year
Ended December 31, 1998 44
Notes to Consolidated and Combined Financial Statements 45
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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.
ERNST & YOUNG LLP
Nashville, Tennessee
November 21, 2000
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IASIS Healthcare Corporation
Consolidated and Combined Balance Sheets
(in thousands except share amounts)
SEPTEMBER 30,
SEPTEMBER 30, 1999
2000 NOTE 1
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ -- $ --
Accounts receivable, net of allowance for doubtful accounts of $31,403
and $10,850, respectively 146,744 19,674
Inventories 19,874 4,501
Current deferred tax assets 1,146 --
Prepaid expenses and other current assets 13,181 4,283
--------- ---------
Total current assets 180,945 28,458
Property and equipment, net 361,293 136,927
Goodwill and other intangibles, net 302,380 46,988
Deferred debt financing costs, net 23,472 --
Deferred tax assets 2,036 --
Other assets 3,713 886
--------- ---------
Total assets $ 873,839 $ 213,259
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 31,707 $ 15,739
Salaries and benefits payable 13,040 5,229
Accrued interest payable 20,020 --
Medical claims payable 16,530 --
Other accrued expenses and other current liabilities 20,739 3,102
Current portion of accrued loss on discontinued operations 4,008 --
Current maturities of long-term debt and capital lease obligations 9,883 701
--------- ---------
Total current liabilities 115,927 24,771
Due to Paracelsus -- 270,814
Long-term debt and capital lease obligations 547,771 798
Other long-term liabilities 13,372 --
Minority interest 2,060 1,461
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 5,000,000 shares; 1,371,840
shares issued and outstanding at September 30, 2000 14 --
Additional paid-in capital 259,784 --
Treasury stock, at cost, 1,550,250 shares at September 30, 2000 (155,025) --
Accumulated deficit (99,342) (84,585)
--------- ---------
Total stockholders' equity (deficit) 5,431 (84,585)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 873,839 $ 213,259
========= =========
See accompanying notes.
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IASIS Healthcare Corporation
Consolidated and Combined Statements of Operations
(in thousands)
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
2000 1999 1999 1998 1998
------------- ------------- ------------- ------------- ------------
(Unaudited) (Unaudited)
Net revenue $ 815,163 $ 181,689 $ 137,397 $ 134,017 $ 178,309
Costs and expenses:
Salaries and benefits 285,451 63,021 47,169 47,306 63,158
Supplies 123,376 25,968 19,643 18,205 24,530
Other operating expenses 234,176 47,150 37,203 36,868 46,816
Provision for bad debts 60,579 13,625 9,934 8,131 11,822
Interest, net 62,352 10,966 7,304 13,426 17,088
Depreciation and amortization 47,559 12,784 9,620 8,606 11,770
Allocated management fees -- 6,674 5,027 4,940 6,587
Reversal of excess loss contract accrual -- -- -- (7,500) (7,500)
Recapitalization costs 3,478 -- -- -- --
--------- --------- --------- --------- ---------
Total costs and expenses 816,971 180,188 135,900 129,982 174,271
--------- --------- --------- --------- ---------
Earnings (loss) from continuing operations
before minority interests and income taxes (1,808) 1,501 1,497 4,035 4,038
Minority interests 74 (126) (140) 54 68
--------- --------- --------- --------- ---------
Earnings (loss) from continuing operations
before income taxes (1,882) 1,627 1,637 3,981 3,970
Income tax expense 2,219 -- -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss) from continuing operations (4,101) 1,627 1,637 3,981 3,970
Discontinued operations:
Losses from operations of discontinued
physician practice operations (3,226) (644) (587) (435) (490)
Loss on disposal of physician practice
operations, including provision of $941
for operating losses during phase out
period (7,376) -- -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss) (14,703) 983 1,050 3,546 3,480
Preferred stock dividends and accretion of
preferred stock discount 25,402 -- -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss) attributable to common
stockholders $ (40,105) $ 983 $ 1,050 $ 3,546 $ 3,480
========= ========= ========= ========= =========
See accompanying notes.
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IASIS Healthcare Corporation
Consolidated and Combined Statements of Cash Flows
(in thousands)
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
2000 1999 1999 1998 1998
------------- ------------- ------------- ------------- ------------
(unaudited) (unaudited)
CASH FLOW FROM OPERATING ACTIVITIES
Net earnings (loss) $ (14,703) $ 983 $ 1,050 $ 3,546 $ 3,480
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 47,559 12,784 9,620 8,606 11,770
Reversal of excess loss contract accrual -- -- -- (7,500) (7,500)
Minority interests 74 (126) (140) 54 68
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 (117,440) 10,066 5,057 3,655 8,664
Supplies, prepaid expenses and
other current assets (8,525) 175 374 294 94
Accounts payable and other
accrued liabilities 49,467 1,887 1,590 (10,681) (10,385)
--------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities (39,374) 25,769 17,551 (2,026) 6,191
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (53,692) (17,391) (13,476) (2,513) (6,427)
Payments for acquisitions, net (436,918) -- -- -- --
(Increase) decrease in other assets (1,250) 16 -- -- 16
--------- -------- -------- -------- --------
Net cash used in investing activities (491,860) (17,375) (13,476) (2,513) (6,411)
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 (164,249) (1,235) (773) (750) (1,211)
Common and preferred stock issuance costs
incurred (2,625) -- -- -- --
Debt financing costs incurred (26,902) -- -- -- --
Net decrease in amount due to Paracelsus -- (11,164) (4,787) 4,846 (1,532)
--------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities 531,234 (12,399) (5,560) 4,096 (2,743)
--------- -------- -------- -------- --------
Decrease in cash and cash equivalents -- (4,005) (1,485) (443) (2,963)
Cash and cash equivalents at beginning of
period -- 4,005 1,485 4,448 4,448
--------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ -- $ -- $ -- $ 4,005 $ 1,485
========= ======== ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 43,547 $ 10,966 $ 7,304 $ 13,426 $ 17,088
========= ======== ======== ======== ========
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.
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IASIS Healthcare Corporation
Consolidated and Combined Statements of Stockholders' Equity
(in thousands except share amounts)
STOCKHOLDER'S
DEFICIT OF
FORMER PARENT
ADDITIONAL COMPANY/
COMMON STOCK PAID-IN TREASURY ACCUMULATED
SHARES PAR VALUE CAPITAL STOCK DEFICIT TOTAL
--------- --------- ---------- -------- ------------- ----------
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 1,330,000 14 280,948 -- -- 280,962
Repurchase of common stock
held by Paracelsus -- -- -- (155,025) -- (155,025)
Acquisition of management company 41,490 -- 4,149 -- -- 4,149
Stock options exercised 350 -- 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 1,371,840 $ 14 $ 259,784 $(155,025) $(99,342) $ 5,431
========= ====== ========= ========= ======== =========
See accompanying notes.
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IASIS Healthcare Corporation
Notes to Consolidated 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
43,000 members.
The preparation of financial statements in conformity with generally accepted
accounting principles 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 and combined financial statements include all subsidiaries and
entities controlled by the Company. Control is generally defined by the Company
as ownership of a majority of the voting interest of an entity. 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 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
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.
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 generally accepted accounting
principles for interim financial information and with the instructions of
Regulation S-X and are unaudited. In the opinion of the Company's management,
the 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 generally accepted accounting principles
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 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.
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET REVENUE (CONTINUED)
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 term of the contract with AHCCCS is five
years, with annual renewal provisions, and expires September 30, 2002.
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 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.
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
48
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(B) GOODWILL AND OTHER INTANGIBLES (CONTINUED)
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 and 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.
49
52
IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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-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.
50
53
IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
51
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 80,000 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.
52
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
2. RECAPITALIZATION AND ACQUISITION TRANSACTIONS (CONTINUED)
RECAPITALIZATION (CONTINUED)
As part of the recapitalization, JLL Healthcare, LLC, one of IASIS' current
principals, and certain other of the Company's stockholders purchased 1,250,000
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 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.
53
56
IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
2. RECAPITALIZATION AND ACQUISITION TRANSACTIONS (CONTINUED)
OTHER INFORMATION
The following table summarizes the allocation of the aggregate purchase price
of the acquisitions (in thousands):
TENET HOSPITALS MANAGEMENT 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.
54
57
IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
2. RECAPITALIZATION AND ACQUISITION TRANSACTIONS (CONTINUED)
OTHER INFORMATION (CONTINUED)
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.
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,
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 1999
------------------ ------------------ -------------
Net revenue $838,017 $763,868 $579,966
Net earnings (loss) (19,499) (2,944) 23
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.
55
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following (in
thousands):
SEPTEMBER 30,
2000 1999
-------- ------
Bank facilities $326,668 $ --
Senior subordinated notes 230,000 --
Capital lease obligations (see Note 9) 986 1,499
-------- ------
557,654 1,499
Less current maturities 9,883 701
-------- ------
$547,771 $ 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 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,
- - fund an opening cash balance required for working capital, and
- - pay related fees and expenses associated with the recapitalization and
acquisition transactions.
56
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
BANK FACILITIES (CONTINUED)
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.
57
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
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.
58
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
SENIOR SUBORDINATED NOTES (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,
2000 1999
--------- ---------
Land $ 29,371 $ 15,200
Buildings and improvements 213,034 112,694
Equipment 199,073 65,525
--------- ---------
441,478 193,419
Less allowances for depreciation and amortization (99,491) (67,416)
--------- ---------
341,987 126,003
Construction-in-progress (estimated cost to
complete at September 30, 2000 - $7,715) 19,306 10,924
--------- ---------
$ 361,293 $ 136,927
========= =========
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.
59
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
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.
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 a ten-for-one basis. 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.
60
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
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 686,566, 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, 514,280.7 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
172,285.3 options available for grant.
Information regarding the Company's stock option activity for fiscal 2000 is
summarized below:
WEIGHTED
AVERAGE
STOCK OPTION PRICE EXERCISE
OPTIONS PER SHARE PRICE
--------- ------------ ---------
Balances, September 30, 1999 -- $ -- $ --
Granted 514,280.7 $100 - 420 $ 253.40
Exercised 350.0 $ 100 $ 100.00
Cancelled -- $ -- $ --
---------
Balances, September 30, 2000 513,930.7
=========
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.
61
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
6. STOCK OPTIONS (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
-------------- -------------- ----------- ---------------- --------------
$ 100 171,959.9 9 $ 26.71 20,810.8
$ 260 190,864.3 9 $ -- 17,320.6
$ 420 151,106.5 9 $ -- 13,703.8
--------- --------
513,930.7 51,835.2
========= ========
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%
Expected life 2 1/2 to 5 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.
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
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):
2000 1999 1998
------- -------- -------
Current:
Federal $ 3,299 $ -- $ --
State 366 -- --
Deferred:
Federal (1,530) -- --
State 84 -- --
------- -------- -------
$ 2,219 $ -- $ --
======= ======== =======
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 December 31, 1998 follows (in thousands):
2000 1999 1998
------- ----- -------
Federal statutory rate $ (659) $ 367 $ 1,218
State income taxes, net of federal income tax benefit 293 -- --
Non-deductible goodwill amortization 410 542 722
Unbenefitted affiliate loss -- -- 696
Other non-deductible expenses 209 27 20
Change in valuation allowance charged to tax provision 1,727 (929) (2,604)
Other items, net 239 (7) (52)
------- ----- -------
Provision for income taxes $ 2,219 $ -- $ --
======= ===== =======
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
A summary of the items comprising the deferred tax assets and liabilities at
September 30 follows (in thousands):
2000 1999
--------------------------- ------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- ------- -----------
Depreciation and fixed asset basis
differences $ -- $10,976 $ -- $41
Amortization and intangible asset basis
differences 44,749 -- 5,745 --
Allowance for doubtful accounts 8,624 -- 3,811 --
Accrued expenses and other long-term
liabilities 9,747 -- 984 --
Deductible carryforwards
and credits 2,597 -- 9,265
Discontinued operations 2,913 -- -- --
Valuation allowance (54,472) -- (19,764) --
-------- ------- ------- ---
Total $ 14,158 10,976 $ 41 $41
======== ======= ======= ===
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.
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
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.
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.
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
8. CONTINGENCIES (CONTINUED)
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 costs 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 costs 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 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.
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
8. CONTINGENCIES (CONTINUED)
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.
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
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.
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):
CAPITAL OPERATING
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 spaced
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
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71
IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
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 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
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
11. RETIREMENT PLANS (CONTINUED)
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 $281,00 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) (in thousands):
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IASIS Healthcare Corporation
Notes to Consolidated and Combined Financial Statements (continued)
12. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
2000 1999 1998
------------ -------------- ------------
(In Thousands)
ACUTE CARE SERVICE:
Net patient revenue $ 732,814 $ 137,397 $178,309
Capitation premiums -- -- --
Revenue between segments (7,073) -- --
--------- --------- --------
Net revenue 725,741 137,397 178,309
Salaries and benefits 281,006 47,169 63,158
Supplies 123,023 19,643 24,530
Other operating expenses(1) 152,850 42,230 45,903
Provision for bad debts 60,579 9,934 11,822
--------- --------- --------
EBITDA 108,283 18,421 32,896
Interest expense, net 62,214 7,304 17,088
Depreciation and amortization 47,406 9,620 11,770
--------- --------- --------
Earnings (loss) from continuing operations before minority
interests and income taxes(1) $ (1,337) $ 1,497 $ 4,038
========= ========= ========
Segment assets $ 870,501 $ 211,934 $215,223
========= ========= ========
Capital expenditures $ 53,670 $ 13,476 $ 6,427
========= ========= ========
Earnings (loss) from continuing operations before minority
interests and income taxes(1) (1,337) 1,497 4,038
Recapitalization costs 3,478 -- --
Minority interests 74 (140) 68
--------- --------- --------
Earnings (loss) from continuing operations before minority
interests income taxes(1) $ (4,889) $ 1,637 $ 3,970
========= ========= ========
HEALTH CHOICE:
Net patient revenue $ -- $ -- $ --
Capitation premiums 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.
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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):
2000 1999
------- ------
Health insurance payable $ 4,280 $ --
Federal income taxes payable 4,159 --
Taxes other than income 7,769 --
Other 4,531 3,102
------- ------
$20,739 $3,102
======= ======
A summary of activity in the Company's allowances for doubtful accounts follows
(in thousands):
ACCOUNTS
PROVISION 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.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table below presents information with respect to our directors and
executive officers:
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, General Counsel
Linda W. Hischke 55 Division President
Michael French 51 Division President
Paul S. Levy 53 Director
David Y. Ying 46 Director
Jeffrey C. Lightcap 41 Director
Anthony Grillo 45 Director
Ramsey A. Frank 40 Director
Frank J. Rodriguez 29 Director
Michael S. Berk 30 Director
Stuart C. McWhorter 32 Director
Jay R. Bloom 45 Director
Robert E. Kiss 43 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 ten 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 also serves as one of our
Directors. 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, the management
company 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
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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 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, the management company 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.
Linda W. Hischke has been our Division President for the Utah and Texas
markets since October 1999. Prior to joining us, Ms. Hischke served from 1998 to
1999 as President of WYN Associates Healthcare Consulting in Park City, Utah.
From 1995 to 1997, Ms. Hischke served as President for the Mountain Division of
Columbia/HCA, where she was responsible for hospitals with 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. Prior to joining us, 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.
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. and New World Pasta
Company.
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.
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.
Anthony Grillo has been one of our Directors since October 1999. Mr.
Grillo is a Senior Managing Director of Joseph Littlejohn & Levy, which he
joined in January 1999. From March 1991 to December 1998, Mr. Grillo was a
Senior Managing Director at The Blackstone Group, where he was involved with
Blackstone's private equity, restructuring and mergers practices. Mr. Grillo
serves as a director of several companies, including Hayes Lemmerz International
Inc., Lancer Industries and Littelfuse, Inc.
Ramsey A. Frank has been one of our Directors since October 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.
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Frank J. Rodriguez has been one of our Directors since October 1999.
Mr. Rodriguez is a Vice President of Joseph Littlejohn & Levy, which he joined
in August 1995. From July 1993 to July 1995, Mr. Rodriguez was a member of the
Merchant Banking Group at Donaldson, Lufkin & Jenrette. Mr. Rodriguez serves as
a director of Motor Coach Industries International Inc.
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, and prior to 1993 served as an analyst at Wasserstein
Perella & Co., Inc.
Stuart C. McWhorter has been one of our Directors since October 1999.
Mr. McWhorter is a founder and principal of Nashville, Tennessee-based Clayton
Associates, an advisory and venture capital firm. In January 1996, Mr. McWhorter
assisted in the creation of OrthoLink Physicians Corporation, an orthopaedic
physician practice management company. At OrthoLink, he served as Vice President
of Managed Care and Vice President of Acquisitions until April 1998. From July
1993 to July 1995 he served as Vice President of Physician and Network
Development for Brookwood Medical Center, a 600-bed tertiary hospital system
owned by Tenet Healthcare Corporation. Mr. McWhorter is a director for Patriot
Medical Technologies, Bytes of Knowledge and Censis Technologies.
Jay R. Bloom has been one of our Directors since October 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 adviser to Trimaran Fund II, L.L.C., and a Managing Director of
Caravelle Advisors, LLC. Mr. Bloom serves as a director of several companies,
including Heating Oil Partners, L.P. and Transportation Technologies Industries,
Inc.
Robert E. Kiss has been one of our Directors since October 1999. Mr.
Kiss is a Vice President of J.P. Morgan Investment Management, Inc., the
investment management affiliate of J.P. Morgan & Co. Inc., which he joined in
March 2000. Prior to March 2000, Mr. Kiss was with J.P. Morgan Capital
Corporation, the private equity investment unit of J.P. Morgan & Co. Inc., which
he joined in June 1996. Prior to June 1996, Mr. Kiss served in various
capacities in J.P. Morgan's corporate finance department. Mr. Kiss serves as a
director of Accordant Health Services, Inc.
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.
Under a stockholders agreement, dated as of October 8, 1999, among the
Company, JLL Healthcare, LLC and other of our stockholders, our board of
directors is comprised of thirteen members, including ten designees of JLL
Healthcare, LLC, the chairman of the board and the chief executive officer.
Pursuant to the operating agreement of JLL Healthcare, LLC, its designees on the
board of directors will include eight designees of Joseph Littlejohn & Levy, one
designee of CIBC WMC Inc. and one designee of J.P. Morgan Capital Corporation.
Messrs. Levy, Ying, Lightcap, Grillo, Frank, Rodriguez, Berk, McWhorter, Bloom
and Kiss serve on the board of directors as designees of JLL Healthcare, LLC.
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.
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ITEM 11. 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
and our four most highly compensated executive officers who were serving as
executive officers as of September 30, 2000 whose salary and bonus exceeded
$100,000 during the year ended September 30, 2000:
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------ ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS(#) COMPENSATION
--------------------------- ---- ---------- --------- ---------- ------------
C. Wayne Gower 2000 $510,000 -- 102,322.9 $ 3,546(2)
President & Chief
Operating Officer(1)
John K. Crawford 2000 277,883 -- 62,250.0 3,494(2)
Executive Vice President &
Chief Financial Officer
Linda W. Hischke 2000 250,900 -- 24,000.0 116,803(3)
Division President
Frank A. Coyle 2000 148,817 -- 9,600.0 3,390(2)
Secretary and General
Counsel
Ken Perry(4) 2000 200,112 -- 25,000.0 4,528(2)
Vice President-Financial
Operations
- ---------------------
(1) 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.
(2) Our contribution on behalf of the employee to our 401k plan.
(3) Represents our contribution of $3,157 on behalf of Ms. Hischke to our 401k
plan and relocation allowance of $113,646.
(4) Mr. Perry served as our Vice President-Financial Operations through
November 30, 2000 and subsequently left our company.
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The following table sets forth certain information concerning options
granted in 2000 to the named executive officers. None of the named executive
officers were granted stock appreciation rights.
OPTIONS GRANTED IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-----------------------------------------------------
PERCENT POTENTIAL REALIZABLE
OF TOTAL VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL OR BASE EXPIRATION ------------------------
NAME GRANTED (#) YEAR (%) PRICE ($/SH) DATE 5%($) 10%($)
---- ----------- -------- ------------ ---- ---------- ---------
C. Wayne Gower 2,960.0(1) $100 5/1/10 186,153 471,748
30,225.8(2) 100 5/1/10 1,900,884 4,817,214
38,716.8(2) 260 5/1/10 -- --
30,420.3(2) 420 5/1/10 -- --
-------------
102,322.9 19.9%
John K. Crawford 20,189.2(2) 100 5/1/10 1,269,688 3,217,639
23,554.1(2) 260 5/1/10 -- --
18,506.7(2) 420 5/1/10 -- --
-------------
62,250.0 12.1%
Linda W. Hischke 7,783.8(2) 100 5/1/10 489,519 1,240,537
9,081.1(2) 260 5/1/10 -- --
7,135.1(2) 420 5/1/10 -- --
-------------
24,000.0 4.7%
Frank A. Coyle 1,776.0(1) 100 5/1/10 111,692 283,049
1,337.5(2) 100 5/1/10 84,115 213,163
3,632.4(2) 260 5/1/10 -- --
2,854.1(2) 420 5/1/10 -- --
-------------
9,600.0 1.9%
Ken Perry 2,565.4(1) 100 5/1/10 161,337 408,859
5,542.7(2) 100 5/1/10 348,577 883,364
9,459.5(2) 260 5/1/10 -- --
7,432.4(2) 420 5/1/10 -- --
-------------
25,000.0 4.9%
- -----------------------
(1) The option was fully vested on the date of grant.
(2) The option vests in five equal annual installments, with the first
installment vesting on September 30, 2000.
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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 $100 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 OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED-OPTIONS HELD AT
SEPTEMBER 30, 2000 (#)
----------------------------------
NAME EXERCISABLE UNEXERCISABLE
---- ----------- -------------
C. Wayne Gower 10,318.2 92,004.7
John K. Crawford 5,645.4 56,604.6
Linda W. Hischke 2,176.5 21,823.5
Frank A. Coyle 1,493.7 8,106.3
Ken Perry 3,167.3 21,832.7
DIRECTORS' COMPENSATION
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. In addition, 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 33,334.5 shares of our common stock at an exercise price of $100 per
share, 38,717.6 shares at an exercise price of $260 per share, and 30,420.9
shares at an exercise price of $420 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.
EMPLOYMENT AGREEMENTS
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 the
employment agreements commenced on February 1, 2000 and continue for five years.
The employment agreements provide for initial base salaries of $510,000 and
$350,000 per year for Messrs. Gower and Crawford, respectively. Messrs. Gower
and Crawford are 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 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 termination of the
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 the termination of employment of Messrs. Gower
and Crawford by us under certain circumstances in which they will be entitled to
receive severance payments equal to (i) two times their respective annual base
salaries, plus (ii) a lump sum payment equal to the present value of all other
benefits through two years after the date of termination, plus (iii) an amount
equal to two times the base target bonus set forth in our bonus plan for senior
executives, in the event EBITDA shall equal or exceed the aggregate budgeted
EBITDA, such severance amount being payable over 24 months.
We currently are negotiating an employment agreement with David R.
White, our Chairman of the Board and Chief Executive Officer. We expect to
finalize and sign this employment agreement in January 2001.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 2000, the Compensation Committee was comprised of Messrs.
White, Levy, Lightcap and Rodriguez. 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information as of December 15, 2000
regarding ownership of shares of our common stock by each person known to be a
holder of our common stock, the members of our board of directors, our five most
highly compensated executive officers, and all our current directors and
executive officers as a group.
When reviewing the following table, you should be aware that:
- - The amounts and percentage of common stock 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 SEC, a person is deemed to be a
"beneficial owner" of a security if that person has or shares "voting
power," which includes the power to vote or to direct the voting of
such security, or "investment power," which includes the power to
dispose of or to direct the disposition of such security. A person is
also deemed to be a beneficial owner of any securities of which that
person has a right to acquire beneficial ownership within 60 days.
Under these rules, more than one person may be deemed a beneficial
owner of securities as to which he has no economic interest.
- - The amounts and percentage of common stock reported in the table
include shares of common stock issuable upon the exercise of options
granted pursuant to our 2000 Stock Option Plan that the following
persons are entitled to exercise within 60 days of December 15, 2000:
Mr. White, 33,059.80; Mr. Gower, 22,832.60; Mr. Crawford, 12,450.00;
Mr. Coyle, 3,340.80; Ms. Hischke, 4,800.00; all directors and executive
officers as a group (16 persons), 76,482.2.
- - 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.
- - Messrs. Levy, Ying, Lightcap, Grillo, Frank, Rodriguez and Berk are all
associated with Joseph Littlejohn & Levy Fund III, L.P. which, through
its controlling interest in JLL Healthcare, LLC, beneficially owns all
of the shares of common stock owned by JLL Healthcare, LLC. Messrs.
Rodriguez and Berk disclaim any beneficial ownership of this common
stock. Messrs. Levy, Ying, Lightcap, Grillo and Frank are managing
members of JLL Associates III, LLC, the general partner of Joseph
Littlejohn & Levy Fund III, L.P., and, as a result, each may be deemed
to beneficially own all of the shares owned by JLL Healthcare, LLC.
- - 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
beneficially owns 34,896.53 shares of common stock owned by FCA
Ventures II, L.P. Mr. McWhorter disclaims beneficial ownership of
shares of common stock owned by FCA Ventures II, L.P.
- - Unless otherwise indicated, the address of each person listed below is
113 Seaboard Lane, Suite A-200, Franklin, Tennessee 37067.
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COMMON STOCK
--------------------------
NUMBER PERCENT
Beneficial Owners OF SHARES OF CLASS
----------------- --------- --------
JLL Healthcare, LLC 2,664,250.00 87.7%
David R. White 34,059.96 1.1
C. Wayne Gower 27,163.31 *
John K. Crawford 12,450.00 *
Frank A. Coyle 6,641.34 *
Linda W. Hischke 4,800.00 *
Jay R. Bloom --- ---
Stuart C. McWhorter 37,712.05 1.2
Paul S. Levy 2,664,250.00 87.7
David Y. Ying 2,664,250.00 87.7
Jeffrey C. Lightcap 2,664,250.00 87.7
Anthony Grillo 2,664,250.00 87.7
Ramsey A. Frank 2,664,250.00 87.7
Frank J. Rodriguez --- ---
Michael S. Berk --- ---
Robert E. Kiss --- ---
Directors and executive officers as a group 2,787,076.66 89.5
(16 persons)
- --------------------------
* Less than 1%.
Substantially all of our outstanding common stock has been pledged 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, which would result in a
change in control of our company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
RECAPITALIZATION, ACQUISITION AND MERGER TRANSACTIONS
Our company was formed during 1999 in a series of transactions that
were arranged by certain 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. In 1999, Joseph Littlejohn
& Levy, Inc. and certain members of our management team secured an agreement
from Paracelsus Healthcare Corporation to enter into a recapitalization
transaction involving PHC/Psychiatric Healthcare Corporation, a wholly owned
subsidiary of Paracelsus Healthcare Corporation 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 91.2% of the
outstanding common stock of PHC/Psychiatric Healthcare Corporation from
Paracelsus Healthcare Corporation for an aggregate purchase price of $125.0
million. As part of the recapitalization, PHC/Psychiatric Healthcare Corporation
repurchased $155.0 million of its common stock from Paracelsus Healthcare
Corporation. 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 Healthcare Corporation retained
approximately 6.0% of PHC/Psychiatric Healthcare Corporation's outstanding
common stock, at an implied value of $8.0 million.
On October 15, 1999, PHC/Psychiatric Healthcare Corporation acquired
ten general, acute care hospitals and other related facilities and assets from
Tenet Healthcare Corporation 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 Healthcare Corporation, a
management company, originally formed by certain members of our management
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team to acquire and operate hospitals and related businesses, was merged with
and into a wholly owned subsidiary of PHC/Psychiatric Healthcare Corporation.
The PHC/Psychiatric Healthcare Corporation subsidiary that merged with the
management company was an acquisition vehicle with no independent business
operations that was formed for the sole purpose of merging with the management
company. The PHC/Psychiatric Healthcare Corporation subsidiary continued as the
surviving entity of the merger and PHC/Psychiatric Healthcare Corporation was
renamed IASIS Healthcare Corporation. In the merger, stockholders of the
management company, who include certain members of our current management team,
received shares of our common stock and preferred stock with a total value of
approximately $9.5 million.
The number of shares of our common stock and preferred stock
beneficially owned, determined based on the regulations of the Securities and
Exchange Commission governing the determination of beneficial ownership of
securities, immediately following the completion of the recapitalization,
acquisition and merger transactions on October 15, 1999, by the members of our
board of directors, each of our executive officers, each person that owns
greater than five percent of our common stock, and our directors and executive
officers as a group is set forth in the following table. All shares of our
preferred stock were converted to common stock on a ten-for-one basis on October
26, 2000.
Number of
Shares of
Number of Shares Percent of Preferred Percent of
of Common Stock Class Stock Class
--------------- --------- ----- -----
Name:
JLL Healthcare, LLC 1,162,280.70 84.7 148,771.93 90.0%
David R. White 438.60 * 56.14 *
C. Wayne Gower 1,899.14 * 243.10 *
John K. Crawford -- -- -- --
Frank A. Coyle 1,447.38 * 185.27 *
Linda W. Hischke -- -- -- --
Paul S. Levy 1,162,280.70(1) 84.7 148,771.93(1) 90.0%
David Y. Ying 1,162,280.70(1) 84.7 148,771.93(1) 90.0%
Jeffrey C. Lightcap 1,162,280.70(1) 84.7 148,771.93(1) 90.0%
Anthony Grillo 1,162,280.70(1) 84.7 148,771.93(1) 90.0%
Ramsey A. Frank 1,162,280.70(1) 84.7 148,771.93(1) 90.0%
Frank J. Rodriguez -- -- -- --
Michael S. Berk -- -- -- --
Stuart C. McWhorter 16,449.36(2) * 2,105.63(2) *
Jay R. Bloom -- -- -- --
Robert E. Kiss -- -- -- --
- -----------------------------------------
* Less than 1%
(1) All shares issued to JLL Healthcare, LLC.
(2) Includes 15,221.28 shares of common stock and 1,948.43 shares of preferred
stock issued to FCA Venture Partners II, L.P.
See Item 12, "Security Ownership of Certain Beneficial Owners and Management,"
for information regarding the current ownership of our common stock.
TRANSITION SERVICES AGREEMENT
During fiscal 2000, we were a party to transition services agreements
with Paracelsus Healthcare Corporation and Tenet Healthcare Corporation under
which these parties agreed to provide specified services to us, including data
processing services and systems technology services. The fee for these services
was equal to the service provider's cost, plus 2.0%, in the case of the
arrangement with Paracelsus Healthcare Corporation, and a flat fee based on out
of pocket expenses in the case of the arrangement with Tenet Healthcare
Corporation. During fiscal 2000, we paid approximately $290,000 to Paracelsus
Healthcare Corporation and $5.2 million to Tenet Healthcare Corporation pursuant
to these agreements. The agreement with Paracelsus Healthcare Corporation was
terminated in April 2000. The agreement with Tenet Healthcare Corporation
expires on June 1, 2001.
LICENSE AGREEMENTS
During fiscal 2000, we were a party to license agreements with
Paracelsus Healthcare Corporation and Tenet Healthcare Corporation under which
those parties granted us licenses to utilize specific intellectual property
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(including administrative software, and policies, procedures and compliance
manuals) related to the administration of our business. The license agreements
were terminated in October 2000.
STOCKHOLDERS AGREEMENT
In connection with the recapitalization and the acquisition of
hospitals and related facilities from Tenet Healthcare Corporation, JLL
Healthcare, LLC and the other investors in our company entered into a
stockholders agreement dated October 8, 1999 governing their ownership of our
company. The following is a summary of the material terms of the stockholders
agreement:
- - The stockholders agreement provides that our board of directors
initially consists of thirteen members, including ten representatives
of JLL Healthcare, LLC, the chairman of the board and the chief
executive officer.
- - The stockholders other than JLL Healthcare, LLC have agreed to
specified provisions relating to the transfer of their shares.
- - There is no provision restricting how our stockholders vote on any
matters.
- - Prior to an initial public offering of our common stock, stockholders
will have designated preemptive rights to participate in any future
private offerings of our capital stock to maintain their pro rata
interest in our company.
- - 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.
- - We have agreed to pay the administrative fees and expenses incurred by
JLL Healthcare, LLC during the term of the stockholders agreement.
During the year ended September 30, 2000, we paid JLL Healthcare, LLC
approximately $1,380,000 for its administrative fees and expenses,
including approximately $1.3 million of expenses relating to the
recapitalization, acquisition and merger transactions.
Some provisions of the stockholders agreement will terminate in the
event of a qualifying initial public offering of our common stock.
TAX SHARING AGREEMENT
We and some of our subsidiaries are included in JLL Healthcare, LLC's
consolidated group for U.S. federal income tax purposes as well as in some
consolidated, combined or unitary groups which include JLL Healthcare, LLC for
state, local and foreign income tax purposes. We and JLL Healthcare have entered
into a tax sharing agreement in connection with the recapitalization. The tax
sharing agreement requires us to make payments to JLL Healthcare, LLC such that,
with respect to tax returns for any taxable period in which we or any of our
subsidiaries is included in JLL Healthcare, LLC's consolidated group or any
combined group, including JLL Healthcare, LLC, the amount of taxes to be paid by
us will be determined, subject to some adjustments, as if we and each of our
subsidiaries included in JLL Healthcare, LLC's consolidated group or a combined
group including JLL Healthcare, LLC filed their own consolidated, combined or
unitary tax return. We and JLL Healthcare, LLC will prepare pro forma tax
returns with respect to any tax return filed with respect to JLL Healthcare,
LLC's consolidated group or any combined group including JLL Healthcare, LLC in
order to determine the amount of tax sharing payments under the tax sharing
agreement.
JLL Healthcare, LLC will be responsible for filing any tax return with
respect to JLL Healthcare, LLC's consolidated group or any combined group
including JLL Healthcare, LLC. The tax sharing agreement requires us
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to assume responsibility for preparing these tax returns. The tax sharing
agreement does not alter our general responsibility for preparing and filing any
tax returns that include only our company and our subsidiaries.
JLL Healthcare, LLC will be primarily responsible for controlling and
contesting any audit or other tax proceeding with respect to JLL Healthcare,
LLC's consolidated group or any combined group including JLL Healthcare, LLC.
The tax sharing agreement requires us to conduct the contest of any audit or tax
proceeding that relates to any tax return which we are responsible for
preparing. JLL Healthcare, LLC, however, may control the entering into of any
settlement or agreement or any decision in connection with any judicial or
administrative tax proceeding.
Each member of a consolidated group for U.S. federal income tax
purposes is jointly and severally liable for the federal income tax liability of
each other member of the consolidated group. Accordingly, although the tax
sharing agreement allocates tax liabilities between us and JLL Healthcare, LLC,
for any period in which we were included in JLL Healthcare, LLC's consolidated
group, we could be liable in the event that any federal tax liability was
incurred, but not discharged, by any other member of JLL Healthcare, LLC's
consolidated group.
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, the father of Stuart C. McWhorter, one of our
directors, owns a 37.5% membership interest. Clayton Associates, LLC, a
Tennessee limited liability company of which Stuart C. McWhorter 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 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.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements: See Item 8
2. Financial Statement Schedules: Not Applicable
3. Management Contracts and Compensatory Plans and Arrangements
- IASIS Healthcare Corporation 2000 Stock Option
Plan (1)
- Form of Employment Agreement between IASIS Healthcare
Corporation and each of Messrs. C. Wayne Gower and
John K. Crawford
4. Exhibits:
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
2.1 Recapitalization Agreement, dated as of August 16, 1999, by
and among Paracelsus Healthcare Corporation, PHC/CHC Holdings,
Inc., PHC/Psychiatric Healthcare Corporation, PHC-Salt Lake
City, Inc., Paracelsus Pioneer Valley Hospital, Inc., Pioneer
Valley Health Plan, Inc., PHC-Jordan Valley, Inc., Paracelsus
PHC Regional Medical Center, Paracelsus Davis Hospital, Inc.,
PHC Utah, Inc., Clinicare of Utah, Inc. and JLL Hospital, LLC
(2)
2.2 Asset Sale Agreement between Tenet Healthcare Corporation and
JLL Hospital, LLC, dated August 15, 1999 (2)
2.3 Amendment No. 1 to Asset Sale Agreement, made and entered into
as of October 15, 1999, by and between Tenet Healthcare
Corporation and IASIS Healthcare Corporation (2)
2.4 Amendment No. 2 to Asset Sale Agreement, made and entered into
as of October 15, 1999, by and between Tenet Healthcare
Corporation and IASIS Healthcare Corporation (2)
2.5 Asset Sale Agreement between Odessa Hospital, Ltd., and JLL
Hospital, LLC, dated as of August 15, 1999 (2)
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 (2)
3.1 Amended and Restated Certificate of Incorporation of IASIS
Healthcare Corporation, as filed with the Secretary of State
of the State of Delaware on October 8, 1999 (2)
3.2 Certificate of Designation, Preferences and Rights of Series A
Preferred Stock of IASIS Healthcare Corporation, as filed with
the Secretary of State of the State of Delaware on October 15,
1999 (2)
3.3 Certificate of Designation, Preferences and Rights of Series B
Preferred Stock of IASIS Healthcare Corporation, as filed with
the Secretary of State of the State of Delaware on October 15,
1999 (2)
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EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
3.4 Amended and Restated By-Laws of IASIS Healthcare Corporation
(2)
4.1 Indenture, dated as of October 15, 1999, among IASIS
Healthcare Corporation, the Delaware and Limited Partnership
Subsidiary Guarantors and The Bank of New York, as Trustee (2)
4.2 Supplemental Indenture, dated October 25, 1999, among IASIS
Healthcare Corporation, the Delaware and Limited Partnership
Subsidiary Guarantors, the Arizona Subsidiary Guarantor, as
guaranteeing subsidiary and The Bank of New York, as Trustee
(2)
4.3 Supplemental Indenture, dated November 4, 1999, among IASIS
Healthcare Corporation, the Delaware, Limited Partnership and
Arizona Subsidiary Guarantors, the Utah Subsidiary Guarantor,
as guaranteeing subsidiary and The Bank of New York, as
Trustee (2)
4.4 Senior Subordinated Guarantee, dated October 15, 1999 by the
Delaware and Limited Partnership Subsidiary Guarantors in
favor of (i) the holders of IASIS Healthcare Corporation's
outstanding 13% Senior Subordinated Notes due 2009 and 13%
Senior Subordinated Exchange Notes due 2009 to be issued in
the Exchange Offer and covered by this Registration Statement
and (ii) the Bank of New York, as Trustee under the Indenture
governing the above-referenced notes (2)
4.5 Senior Subordinated Guarantee, dated October 25, 1999 by the
Arizona Subsidiary Guarantor in favor of (i) the holders of
IASIS Healthcare Corporation's outstanding 13% Senior
Subordinated Notes due 2009 and 13% Senior Subordinated
Exchange Notes due 2009 to be issued in the Exchange Offer and
covered by this Registration Statement and (ii) the Bank of
New York, as Trustee under the Indenture governing the
above-referenced notes (2)
4.6 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 (2)
4.7 Registration Rights Agreement, dated as of October 15, 1999,
by and among IASIS Healthcare Corporation, the Subsidiary
Guarantors and J.P. Morgan Securities Inc.(2)
4.8 Form of IASIS Healthcare Corporation 13% Senior Subordinated
Note due 2009 (included in Exhibit 4.1)
4.9 Form of IASIS Healthcare Corporation 13% Senior Subordinated
Exchange Note due 2009 (2)
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 (2)
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EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
10.2 Credit Agreement, dated as of October 15, 1999, among IASIS
Healthcare Corporation, Various Lenders, J.P. Morgan
Securities Inc. and The Bank of Nova Scotia, as Co-Lead
Arrangers and Co-Book Runners, Paribas, as Documentation
Agent, The Bank of Nova Scotia, as Syndication Agent, and
Morgan Guaranty Trust Company of New York, as Administrative
Agent (2)
10.3 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 (2)
10.4 Security Agreement, dated as of October 15, 1999, between
IASIS Healthcare Corporation, Various Subsidiaries of IASIS
Healthcare Corporation and Morgan Guaranty Trust Company of
New York, as Collateral Agent (2)
10.5 Pledge Agreement, dated as of October 15, 1999, between IASIS
Healthcare Corporation, Various Subsidiaries of IASIS
Healthcare Corporation and Morgan Guaranty Trust Company of
New York, as Collateral Agent (2)
10.6 Subsidiaries Guaranty, dated as of October 15, 1999 (as
amended, restated, modified and/or supplemented from time to
time), made by each of the Subsidiary Guarantors of IASIS
Healthcare Corporation (2)
10.7 Hypothecation Agreement, dated as of October 15, 1999 (as
amended, restated, modified and/or supplemented from time to
time), among each of the pledgors in favor of Morgan Guaranty
Trust Company of New York, as Collateral Agent (2)
10.8 Employee Leasing Agreement, dated as of October 15, 1999, by
and among IASIS Healthcare Corporation and Tenet Healthcare
Corporation and certain subsidiaries of Tenet Healthcare
Corporation (2)
10.9 Tenet Buypower Purchasing Assistance Agreement, dated as of
October 15, 1999, by and between IASIS Healthcare Corporation
and Tenet HealthSystem Medical, Inc. (2)
10.10 Transition Services Agreement, dated as of October 8, 1999, by
and between Paracelsus Healthcare Corporation and
PHC/Psychiatric Healthcare Corporation (2)
10.11 Tax Sharing Agreement, dated as of October 8, 1999, among JLL
Healthcare, LLC and its affiliates (2)
10.12 License Agreement for Policy and Procedures Manuals dated as
of October 15, 1999 between IASIS Healthcare Corporation and
Tenet Healthcare Corporation (2)
10.13 License Agreement, dated as of October 8, 1999 between JLL
Healthcare, LLC and Paracelsus Healthcare Corporation (2)
10.14 IASIS Healthcare Corporation 2000 Stock Option Plan (1)
10.15 Form of Employment Agreement between IASIS Healthcare
Corporation and each of Messrs. C. Wayne Gower and John K.
Crawford
86
89
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
10.16 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
10.17 First Amendment to Pioneer Hospital Lease by and between AHP
of Utah, Inc., as Landlord, and Paracelsus Pioneer Valley
Hospital, Inc., as Tenant
10.18 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
10.19 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
10.20 Lease dated as of July 29, 1977, by and between Sierra
Equities, Inc., as Landlord, and Mesa General Hospital, Inc.,
as Tenant
10.21 Addendum to Lease entered into by and between Sierra Equities,
Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant
10.22 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
10.23 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
10.24 Facility Lease dated as of February 1, 1995, between Meditrust
of Arizona, Inc., as Lessor, and OrNda Healthcorp of Phoenix,
Inc., as Lessee
10.25 Contract between Arizona Health Care Cost Containment System
Administration and Health Choice Arizona
21 Subsidiaries of IASIS Healthcare Corporation
27.1 Financial Data Schedule
27.2 Financial Data Schedule
(1) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 2000.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (Registration No. 333-94521).
(b) During the quarter ended September 30, 2000, the Company filed a
Current Report on Form 8-K to report its earnings for the nine months
ended June 30, 2000.
87
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: December 22, 2000 By: /s/ David R. White
----------------------------------------
David R. White
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed 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
- --------------------------------- Executive Officer (Principal
David R. White Executive Officer) December 22, 2000
/s/ John K. Crawford Executive Vice President, Chief
- --------------------------------- Financial Officer and Director
John K. Crawford (Principal Financial and
Accounting Officer) December 22, 2000
/s/ C. Wayne Gower Director December 22, 2000
- ---------------------------------
C. Wayne Gower
/s/ Paul S. Levy Director December 22, 2000
- ---------------------------------
Paul S. Levy
/s/ David Y. Ying Director December 22, 2000
- ---------------------------------
David Y. Ying
/s/ Jeffrey L. Lightcap Director December 22, 2000
- ---------------------------------
Jeffrey L. Lightcap
/s/ Anthony Grillo Director December 22, 2000
- ---------------------------------
Anthony Grillo
/s/ Ramsey A. Frank Director December 22, 2000
- ---------------------------------
Ramsey A. Frank
88
91
/s/ Frank J. Rodriguez Director December 22, 2000
- ---------------------------------
Frank J. Rodriguez
/s/ Michael S. Berk Director December 22, 2000
- ---------------------------------
Michael S. Berk
/s/ Stuart C. McWhorter Director December 22, 2000
- ---------------------------------
Stuart C. McWhorter
/s/ Jay R. Bloom Director December 22, 2000
- ---------------------------------
Jay R. Bloom
/s/ Robert E. Kiss Director December 22, 2000
- ---------------------------------
Robert E. Kiss
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT
No annual report or proxy material has been sent to security holders.
89
92
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
2.1 Recapitalization Agreement, dated as of August 16, 1999, by
and among Paracelsus Healthcare Corporation, PHC/CHC Holdings,
Inc., PHC/Psychiatric Healthcare Corporation, PHC-Salt Lake
City, Inc., Paracelsus Pioneer Valley Hospital, Inc., Pioneer
Valley Health Plan, Inc., PHC-Jordan Valley, Inc., Paracelsus
PHC Regional Medical Center, Paracelsus Davis Hospital, Inc.,
PHC Utah, Inc., Clinicare of Utah, Inc. and JLL Hospital, LLC
(2)
2.2 Asset Sale Agreement between Tenet Healthcare Corporation and
JLL Hospital, LLC, dated August 15, 1999 (2)
2.3 Amendment No. 1 to Asset Sale Agreement, made and entered into
as of October 15, 1999, by and between Tenet Healthcare
Corporation and IASIS Healthcare Corporation (2)
2.4 Amendment No. 2 to Asset Sale Agreement, made and entered into
as of October 15, 1999, by and between Tenet Healthcare
Corporation and IASIS Healthcare Corporation (2)
2.5 Asset Sale Agreement between Odessa Hospital, Ltd., and JLL
Hospital, LLC, dated as of August 15, 1999 (2)
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 (2)
3.1 Amended and Restated Certificate of Incorporation of IASIS
Healthcare Corporation, as filed with the Secretary of State
of the State of Delaware on October 8, 1999 (2)
3.2 Certificate of Designation, Preferences and Rights of Series A
Preferred Stock of IASIS Healthcare Corporation, as filed with
the Secretary of State of the State of Delaware on October 15,
1999 (2)
3.3 Certificate of Designation, Preferences and Rights of Series B
Preferred Stock of IASIS Healthcare Corporation, as filed with
the Secretary of State of the State of Delaware on October 15,
1999 (2)
93
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
3.4 Amended and Restated By-Laws of IASIS Healthcare Corporation
(2)
4.1 Indenture, dated as of October 15, 1999, among IASIS
Healthcare Corporation, the Delaware and Limited Partnership
Subsidiary Guarantors and The Bank of New York, as Trustee (2)
4.2 Supplemental Indenture, dated October 25, 1999, among IASIS
Healthcare Corporation, the Delaware and Limited Partnership
Subsidiary Guarantors, the Arizona Subsidiary Guarantor, as
guaranteeing subsidiary and The Bank of New York, as Trustee
(2)
4.3 Supplemental Indenture, dated November 4, 1999, among IASIS
Healthcare Corporation, the Delaware, Limited Partnership and
Arizona Subsidiary Guarantors, the Utah Subsidiary Guarantor,
as guaranteeing subsidiary and The Bank of New York, as
Trustee (2)
4.4 Senior Subordinated Guarantee, dated October 15, 1999 by the
Delaware and Limited Partnership Subsidiary Guarantors in
favor of (i) the holders of IASIS Healthcare Corporation's
outstanding 13% Senior Subordinated Notes due 2009 and 13%
Senior Subordinated Exchange Notes due 2009 to be issued in
the Exchange Offer and covered by this Registration Statement
and (ii) the Bank of New York, as Trustee under the Indenture
governing the above-referenced notes (2)
4.5 Senior Subordinated Guarantee, dated October 25, 1999 by the
Arizona Subsidiary Guarantor in favor of (i) the holders of
IASIS Healthcare Corporation's outstanding 13% Senior
Subordinated Notes due 2009 and 13% Senior Subordinated
Exchange Notes due 2009 to be issued in the Exchange Offer and
covered by this Registration Statement and (ii) the Bank of
New York, as Trustee under the Indenture governing the
above-referenced notes (2)
4.6 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 (2)
4.7 Registration Rights Agreement, dated as of October 15, 1999,
by and among IASIS Healthcare Corporation, the Subsidiary
Guarantors and J.P. Morgan Securities Inc.(2)
4.8 Form of IASIS Healthcare Corporation 13% Senior Subordinated
Note due 2009 (included in Exhibit 4.1)
4.9 Form of IASIS Healthcare Corporation 13% Senior Subordinated
Exchange Note due 2009 (2)
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 (2)
94
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
10.2 Credit Agreement, dated as of October 15, 1999, among IASIS
Healthcare Corporation, Various Lenders, J.P. Morgan
Securities Inc. and The Bank of Nova Scotia, as Co-Lead
Arrangers and Co-Book Runners, Paribas, as Documentation
Agent, The Bank of Nova Scotia, as Syndication Agent, and
Morgan Guaranty Trust Company of New York, as Administrative
Agent (2)
10.3 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 (2)
10.4 Security Agreement, dated as of October 15, 1999, between
IASIS Healthcare Corporation, Various Subsidiaries of IASIS
Healthcare Corporation and Morgan Guaranty Trust Company of
New York, as Collateral Agent (2)
10.5 Pledge Agreement, dated as of October 15, 1999, between IASIS
Healthcare Corporation, Various Subsidiaries of IASIS
Healthcare Corporation and Morgan Guaranty Trust Company of
New York, as Collateral Agent (2)
10.6 Subsidiaries Guaranty, dated as of October 15, 1999 (as
amended, restated, modified and/or supplemented from time to
time), made by each of the Subsidiary Guarantors of IASIS
Healthcare Corporation (2)
10.7 Hypothecation Agreement, dated as of October 15, 1999 (as
amended, restated, modified and/or supplemented from time to
time), among each of the pledgors in favor of Morgan Guaranty
Trust Company of New York, as Collateral Agent (2)
10.8 Employee Leasing Agreement, dated as of October 15, 1999, by
and among IASIS Healthcare Corporation and Tenet Healthcare
Corporation and certain subsidiaries of Tenet Healthcare
Corporation (2)
10.9 Tenet Buypower Purchasing Assistance Agreement, dated as of
October 15, 1999, by and between IASIS Healthcare Corporation
and Tenet HealthSystem Medical, Inc. (2)
10.10 Transition Services Agreement, dated as of October 8, 1999, by
and between Paracelsus Healthcare Corporation and
PHC/Psychiatric Healthcare Corporation (2)
10.11 Tax Sharing Agreement, dated as of October 8, 1999, among JLL
Healthcare, LLC and its affiliates (2)
10.12 License Agreement for Policy and Procedures Manuals dated as
of October 15, 1999 between IASIS Healthcare Corporation and
Tenet Healthcare Corporation (2)
10.13 License Agreement, dated as of October 8, 1999 between JLL
Healthcare, LLC and Paracelsus Healthcare Corporation (2)
10.14 IASIS Healthcare Corporation 2000 Stock Option Plan (1)
10.15 Form of Employment Agreement between IASIS Healthcare
Corporation and each of Messrs. C. Wayne Gower and John K.
Crawford
95
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
10.16 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
10.17 First Amendment to Pioneer Hospital Lease by and between AHP
of Utah, Inc., as Landlord, and Paracelsus Pioneer Valley
Hospital, Inc., as Tenant
10.18 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
10.19 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
10.20 Lease dated as of July 29, 1977, by and between Sierra
Equities, Inc., as Landlord, and Mesa General Hospital, Inc.,
as Tenant
10.21 Addendum to Lease entered into by and between Sierra Equities,
Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant
10.22 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
10.23 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
10.24 Facility Lease dated as of February 1, 1995, between Meditrust
of Arizona, Inc., as Lessor, and OrNda Healthcorp of Phoenix,
Inc., as Lessee
10.25 Contract between Arizona Health Care Cost Containment System
Administration and Health Choice Arizona
21 Subsidiaries of IASIS Healthcare Corporation
27.1 Financial Data Schedule
27.2 Financial Data Schedule
(1) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 2000.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (Registration No. 333-94521).