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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010
OR
     
o   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: 333-117362
IASIS HEALTHCARE LLC
(Exact name of registrant as specified in its charter)
     
DELAWARE   20-1150104
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
DOVER CENTRE
117 SEABOARD LANE, BUILDING E
   
FRANKLIN, TENNESSEE   37067
(Address of principal executive offices)   (Zip Code)
(615) 844-2747
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ
As of August 11, 2010, 100% of the registrant’s common interests outstanding (all of which are privately owned and are not traded on any public market) were owned by IASIS Healthcare Corporation, its sole member.
 
 

 

 


 

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 Exhibit 31.1
 Exhibit 31.2

 

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PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
IASIS HEALTHCARE LLC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
                 
    June 30,     September 30,  
    2010     2009  
 
               
ASSETS
               
 
               
Current assets:
               
Cash and cash equivalents
  $ 130,160     $ 206,528  
Accounts receivable, less allowance for doubtful accounts of $120,280 and $126,132 at June 30, 2010 and September 30, 2009, respectively
    221,327       230,198  
Inventories
    53,476       50,492  
Deferred income taxes
    11,130       39,038  
Prepaid expenses and other current assets
    121,379       49,453  
 
           
Total current assets
    537,472       575,709  
 
               
Property and equipment, net
    980,797       997,353  
Goodwill
    717,920       717,920  
Other intangible assets, net
    27,750       30,000  
Other assets, net
    35,522       36,222  
 
           
Total assets
  $ 2,299,461     $ 2,357,204  
 
           
 
               
LIABILITIES AND EQUITY
               
 
               
Current liabilities:
               
Accounts payable
  $ 71,821     $ 68,552  
Salaries and benefits payable
    45,369       42,548  
Accrued interest payable
    2,128       12,511  
Medical claims payable
    110,556       113,519  
Other accrued expenses and other current liabilities
    85,389       65,701  
Current portion of long-term debt and capital lease obligations
    6,705       8,366  
 
           
Total current liabilities
    321,968       311,197  
 
               
Long-term debt and capital lease obligations
    1,046,480       1,051,471  
Deferred income taxes
    103,352       106,425  
Other long-term liabilities
    56,212       54,222  
 
               
Non-controlling interests with redemption rights
    72,527       72,527  
 
               
Equity:
               
Member’s equity
    688,576       750,932  
Non-controlling interests
    10,346       10,430  
 
           
Total equity
    698,922       761,362  
 
           
Total liabilities and equity
  $ 2,299,461     $ 2,357,204  
 
           
See accompanying notes.

 

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IASIS HEALTHCARE LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In Thousands)
                                 
    Quarter Ended     Nine Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Net revenue:
                               
Acute care revenue
  $ 438,211     $ 417,880     $ 1,300,445     $ 1,237,506  
Premium revenue
    199,777       183,738       591,022       504,410  
 
                       
Total net revenue
    637,988       601,618       1,891,467       1,741,916  
 
                               
Costs and expenses:
                               
Salaries and benefits (includes stock compensation of $118, $141, $2,367 and $420, respectively)
    170,035       164,879       514,688       495,387  
Supplies
    66,333       63,950       200,167       187,529  
Medical claims
    172,031       158,919       510,692       422,519  
Other operating expenses
    93,579       79,708       266,854       237,011  
Provision for bad debts
    49,416       45,594       142,901       137,892  
Rentals and leases
    10,067       10,008       30,487       29,221  
Interest expense, net
    16,711       16,334       50,065       51,129  
Depreciation and amortization
    24,007       24,217       71,909       73,509  
Management fees
    1,250       1,250       3,750       3,750  
Hurricane-related property damage
                      938  
 
                       
Total costs and expenses
    603,429       564,859       1,791,513       1,638,885  
 
                               
Earnings from continuing operations before gain (loss) on disposal of assets and income taxes
    34,559       36,759       99,954       103,031  
Gain (loss) on disposal of assets, net
    (149 )     184       (206 )     1,497  
 
                       
 
                               
Earnings from continuing operations before income taxes
    34,410       36,943       99,748       104,528  
Income tax expense
    12,683       13,715       36,544       38,975  
 
                       
 
                               
Net earnings from continuing operations
    21,727       23,228       63,204       65,553  
Earnings (loss) from discontinued operations, net of income taxes
    (384 )     167       (363 )     (333 )
 
                       
 
                               
Net earnings
    21,343       23,395       62,841       65,220  
Net earnings attributable to non-controlling interests
    (2,002 )     (2,666 )     (6,063 )     (7,240 )
 
                       
 
                               
Net earnings attributable to IASIS Healthcare LLC
  $ 19,341     $ 20,729     $ 56,778     $ 57,980  
 
                       
See accompanying notes.

 

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IASIS HEALTHCARE LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
                 
    Nine Months Ended  
    June 30,  
    2010     2009  
Cash flows from operating activities
               
Net earnings
  $ 62,841     $ 65,220  
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation and amortization
    71,909       73,509  
Amortization of loan costs
    2,356       2,257  
Stock compensation costs
    2,367       420  
Deferred income taxes
    23,839       11,792  
Income tax benefit from stock compensation
    (1,770 )      
Income tax benefit from parent company interest
    4,989        
Loss (gain) on disposal of assets, net
    206       (1,497 )
Loss from discontinued operations
    363       333  
Hurricane-related property damage
          938  
Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:
               
Accounts receivable, net
    9,154       (18,854 )
Inventories, prepaid expenses and other current assets
    (74,909 )     (2,491 )
Accounts payable, other accrued expenses and other accrued liabilities
    13,137       39,231  
 
           
Net cash provided by operating activities — continuing operations
    114,482       170,858  
Net cash provided by (used in) operating activities — discontinued operations
    (567 )     1,548  
 
           
Net cash provided by operating activities
    113,915       172,406  
 
           
 
               
Cash flows from investing activities
               
Purchases of property and equipment, net
    (53,465 )     (66,608 )
Cash paid for acquisition, net
          (1,521 )
Proceeds from sale of assets
    50       5,240  
Change in other assets, net
    1,856       1,832  
 
           
Net cash used in investing activities — continuing operations
    (51,559 )     (61,057 )
Net cash provided by investing activities — discontinued operations
          10  
 
           
Net cash used in investing activities
    (51,559 )     (61,047 )
 
           
 
               
Cash flows from financing activities
               
Payment of debt and capital lease obligations
    (6,772 )     (53,672 )
Distribution to parent company in connection with the repurchase of equity, net
    (124,962 )      
Distributions to non-controlling interests
    (6,921 )     (4,721 )
Costs paid for the repurchase of partnership interests, net
    (69 )     (1,379 )
 
           
Net cash used in financing activities
    (138,724 )     (59,772 )
 
           
 
Change in cash and cash equivalents
    (76,368 )     51,587  
Cash and cash equivalents at beginning of period
    206,528       80,738  
 
           
Cash and cash equivalents at end of period
  $ 130,160     $ 132,325  
 
           
 
               
Supplemental disclosure of cash flow information
               
Cash paid for interest
  $ 58,145     $ 60,519  
 
           
Cash paid for income taxes, net
  $ 7,513     $ 3,834  
 
           
See accompanying notes.

 

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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements as of and for the quarters and nine months ended June 30, 2010 and 2009, reflect the financial position, results of operations and cash flows of IASIS Healthcare LLC (“IASIS” or the “Company”). The Company’s sole member and parent company is IASIS Healthcare Corporation (“Holdings” or “IAS”).
IASIS owns and operates medium-sized acute care hospitals in high-growth urban and suburban markets. At June 30, 2010, the Company owned or leased 15 acute care hospital facilities and one behavioral health hospital facility, with a total of 2,886 beds in service, located in six regions:
    Salt Lake City, Utah;
 
    Phoenix, Arizona;
 
    Tampa-St. Petersburg, Florida;
 
    three cities in Texas, including San Antonio;
 
    Las Vegas, Nevada; and
 
    West Monroe, Louisiana.
The Company also owns and operates Health Choice Arizona, Inc. (“Health Choice” or the “Plan”), a Medicaid and Medicare managed health plan in Phoenix, Arizona, which covered over 199,000 lives at June 30, 2010.
The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The condensed consolidated balance sheet of the Company at September 30, 2009, has been derived from the audited consolidated financial statements at that date. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments (consisting of normal recurring items) necessary for a fair presentation of results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year.
Principles of Consolidation
The unaudited condensed consolidated financial statements include all subsidiaries and entities under common control of the Company. Control is generally defined by the Company as ownership of a majority of the voting interest of an entity. In addition, control is demonstrated in most instances when the Company is the sole general partner in a limited partnership. Significant intercompany transactions have been eliminated.

 

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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying unaudited condensed consolidated financial statements and notes. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications have no impact on the Company’s total assets or total liabilities and equity.
General and Administrative
The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as “general and administrative” by the Company would include the IASIS corporate office costs, which were $7.7 million and $12.4 million for the quarters ended June 30, 2010 and 2009, respectively, and $27.0 million and $33.0 million for the nine months ended June 30, 2010 and 2009, respectively.
Adoption of New Accounting Standards
Effective October 1, 2009, the Company adopted the new provisions of Financial Accounting Standards Board (“FASB”) authoritative guidance regarding non-controlling interests in consolidated financial statements. The guidance requires the Company to clearly identify and present ownership interests in subsidiaries held by parties other than the Company in the consolidated financial statements within the equity section. It also requires the amounts of consolidated net earnings attributable to the Company and to the non-controlling interests to be clearly identified and presented on the face of the consolidated statements of operations.
The Company consolidates seven subsidiaries with non-controlling interests that include third-party partners that own limited partnership units with certain redemption features. The redeemable limited partnership units require the Company to buy back the units upon the occurrence of certain events at the fair value of the units. In addition, the limited partnership agreements for all of the limited partnerships provide the limited partners with put rights which allow the units to be sold back to the Company, subject to certain limitations, at the fair value of the units. According to the limited partnership agreements, the fair value of the units is generally calculated as the product of the EBITDA (earnings before interest, taxes, depreciation, amortization and management fees) and a fixed multiple, less any long-term debt of the entity. The majority of these put rights require an initial holding period of six years after purchase, at which point the holder of the redeemable limited partnership units may put back to the Company 20% of such holder’s units. Each succeeding year, the number of vested redeemable units will increase by 20% until the end of the tenth year after the initial investment, at which point 100% of the units may be put back to the Company. Under no circumstances shall the Company be required to repurchase more than 25% of the total vested redeemable limited partnership units in any fiscal year. The equity attributable to these interests has been classified as non-controlling interests with redemption rights in the accompanying unaudited condensed consolidated balance sheets.

 

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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following schedule presents the reconciliation of total equity, member’s equity attributable to the Company, and equity attributable to the non-controlling interests as if the provisions of the non-controlling interest authoritative guidance were adopted as of September 30, 2009 (in thousands):
                                 
    Non-controlling                      
    Interests with             Non-        
    Redemption     Member’s     controlling        
    Rights     Equity     Interests     Total Equity  
 
                               
Balance at September 30, 2009 (as previously reported)
  $     $ 780,847     $     $ 780,847  
 
                               
Adjustment to non-controlling interests from adoption of FASB authoritative guidance
    72,527       (29,915 )     10,430       (19,485 )
 
                       
 
                               
Balance at September 30, 2009 (as adjusted)
    72,527       750,932       10,430       761,362  
 
                               
Net earnings
    5,968       56,778       95       56,873  
 
                               
Distributions to, and repurchases of, non-controlling interests
    (6,811 )           (179 )     (179 )
 
                               
Stock compensation
          2,367             2,367  
 
                               
Other comprehensive loss
          (685 )           (685 )
 
                               
Distribution to parent company in connection with the repurchase of equity, net
          (124,962 )           (124,962 )
 
                               
Contribution from parent related to tax benefit from Holdings Senior PIK Loans interest
          4,989             4,989  
 
                               
Adjustment to redemption value of non-controlling interests with redemption rights
    843       (843 )           (843 )
 
                       
 
                               
Balance at June 30, 2010
  $ 72,527     $ 688,576     $ 10,346     $ 698,922  
 
                       
The Company has adopted the new FASB authoritative guidance regarding business combinations, which applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This new guidance establishes principles and requirements for recognition and measurement of items acquired during a business combination, as well as certain disclosure requirements in the financial statements. The adoption of these provisions did not impact the Company’s results of operations or financial position; however, it is anticipated to have a material effect on the Company’s accounting for future acquisitions.
The Company has adopted the new FASB authoritative guidance issued in January 2010 requiring additional information to be disclosed with respect to Level 3 fair value measurements, as well as transfers to and from Level 1 and Level 2 measurements. In addition, enhanced disclosures are required concerning inputs and valuation techniques used to determine Level 2 and Level 3 fair value measurements. The new disclosures and clarifications of existing disclosures were effective for the quarter ending March 31, 2010, with the effective date for additional Level 3 related disclosures effective for periods beginning after December 15, 2010. The new provisions have not significantly impacted the Company’s disclosures, and the Company does not anticipate any significant impact in periods after December 15, 2010.
Subsequent Events Consideration
The Company has evaluated its financial statements and disclosures for the impact of subsequent events up to the date of filing its quarterly report on Form 10-Q with the Securities and Exchange Commission.

 

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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following (in thousands):
                 
    June 30,     September 30,  
    2010     2009  
Senior secured credit facilities
  $ 571,733     $ 576,150  
Senior subordinated notes
    475,000       475,000  
Capital leases and other obligations
    6,452       8,687  
 
           
 
    1,053,185       1,059,837  
 
               
Less current maturities
    6,705       8,366  
 
           
 
  $ 1,046,480     $ 1,051,471  
 
           
Senior Secured Credit Facilities
The $854.0 million senior secured credit facilities include: (i) a senior secured term loan of $439.0 million; (ii) a senior secured delayed draw term loan of $150.0 million; (iii) a senior secured revolving credit facility of $225.0 million, which includes a $100.0 million sub-limit for letters of credit; and (iv) a senior secured synthetic letter of credit facility of $40.0 million. All facilities mature on March 15, 2014, except for the revolving credit facility, which matures on April 27, 2013. The term loans bear interest at an annual rate of LIBOR plus 2.00% or, at the Company’s option, the administrative agent’s base rate plus 1.00%. The revolving loans bear interest at an annual rate of LIBOR plus an applicable margin ranging from 1.25% to 1.75% or, at the Company’s option, the administrative agent’s base rate plus an applicable margin ranging from 0.25% to 0.75%, such rate in each case depending on the Company’s senior secured leverage ratio. A commitment fee ranging from 0.375% to 0.50% per annum is charged on the undrawn portion of the senior secured revolving credit facility and is payable in arrears.
Principal under the senior secured term loan is due in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount ($439.0 million) during the first six years thereof, with the balance payable in four equal installments beginning April 2013. Principal under the senior secured delayed draw term loan is due in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount ($150.0 million) until March 31, 2013, with the balance payable in four equal installments during the final year of the loan. The senior secured credit facilities are also subject to mandatory prepayment under specific circumstances, including a portion of excess cash flow, a portion of the net proceeds from an initial public offering, asset sales, debt issuances and specified casualty events, each subject to various exceptions.
The senior secured credit facilities are (i) secured by a first mortgage and lien on the real property and related personal and intellectual property of the Company and pledges of equity interests in the entities that own such properties and (ii) guaranteed by certain of the Company’s subsidiaries.
The senior secured credit facilities contain certain covenants which, among other things, limit the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, liens and encumbrances and other matters customarily restricted in such agreements.
At June 30, 2010, amounts outstanding under the Company’s senior secured credit facilities consisted of a $424.7 million term loan and a $147.0 million delayed draw term loan. In addition, the Company had $39.9 million and $36.2 million in letters of credit outstanding under the synthetic letter of credit facility and the revolving credit facility, respectively. The weighted average interest rate of outstanding borrowings under the senior secured credit facilities was 3.4% and 3.3% for the quarter and nine months ended June 30, 2010, respectively.

 

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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8 3/4% Senior Subordinated Notes
The Company, together with its wholly-owned subsidiary, IASIS Capital Corporation, a holding company with no assets or operations, as issuers, have outstanding $475.0 million aggregate principal amount of 8 3/4% senior subordinated notes due 2014 (the “8 3/4% notes”). The 8 3/4% notes are general unsecured senior subordinated obligations and are subordinated in right of payment to all existing and future senior debt of the Company. The Company’s existing domestic subsidiaries, other than certain non-guarantor subsidiaries, which include Health Choice and the Company’s non-wholly owned subsidiaries, are guarantors of the 8 3/4% notes. The 8 3/4% notes are effectively subordinated to all of the issuers’ and the guarantors’ secured debt to the extent of the value of the assets securing the debt and are structurally subordinated to all liabilities and commitments (including trade payables and capital lease obligations) of the Company’s subsidiaries that are not guarantors of the 8 3/4% notes.
Holdings Senior Paid-in-Kind Loans
IAS has outstanding Senior Paid-in-Kind (“PIK”) Loans, which were used to repurchase certain preferred equity from its stockholders in fiscal 2007. The Senior PIK Loans mature June 15, 2014, and bear interest at an annual rate equal to LIBOR plus 5.25%. At June 30, 2010, the outstanding balance of the Senior PIK Loans was $384.2 million, which includes $84.2 million of interest that has accrued to the principal of these loans since the date of issuance, and is recorded in the financial statements of IAS. In June 2012, the Senior PIK Loans, which rank behind the Company’s existing debt, will convert to cash-pay, at which time all accrued interest becomes payable.
3. INTEREST RATE SWAPS
Effective March 2, 2009, the Company executed interest rate swap transactions with Citibank, N.A. and Wachovia Bank, N.A., as counterparties, with notional amounts totaling $425.0 million. The arrangements with each counterparty include two interest rate swap agreements, one with a notional amount of $112.5 million maturing on February 28, 2011 and one with a notional amount of $100.0 million maturing on February 29, 2012. The Company entered into these interest rate swap arrangements to mitigate the floating interest rate risk on a portion of its outstanding variable rate debt. Under these agreements, the Company is required to make monthly fixed rate payments to the counterparties, as calculated on the applicable notional amounts, at annual fixed rates, which range from 1.5% to 2.0% depending upon the agreement. The counterparties are obligated to make monthly floating rate payments to the Company based on the one-month LIBOR rate for the same referenced notional amount.
         
    Total Notional  
Date Range   Amounts  
    (in thousands)  
Expiring on February 28, 2011
  $ 225,000  
Expiring on February 29, 2012
  $ 200,000  
The Company accounts for its interest rate swaps in accordance with the provisions of FASB authoritative guidance regarding accounting for derivative instruments and hedging activities, which also includes enhanced disclosure requirements. In accordance with these provisions, the Company has designated its interest rate swaps as cash flow hedge instruments. The Company assesses the effectiveness of these cash flow hedges on a quarterly basis, with any ineffectiveness being measured using the hypothetical derivative method. The Company completed an assessment of its cash flow hedge instruments during the quarters and nine months ended June 30, 2010 and 2009, and determined its hedging instruments to be highly effective in all periods. Accordingly, no gain or loss resulting from hedging ineffectiveness is reflected in the Company’s accompanying unaudited condensed consolidated statements of operations.
The Company applies the provisions of FASB authoritative guidance regarding fair value measurements, which provides a single definition of fair value, establishes a framework for measuring fair value, and expands disclosures concerning fair value measurements. The Company applies these provisions to the valuation and disclosure of its interest rate swaps. This authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: (i) Level 1, which is defined as quoted prices in active markets that can be accessed at the measurement date; (ii) Level 2, which is defined as inputs other than quoted prices in active markets that are observable, either directly or indirectly; and (iii) Level 3, which is defined as unobservable inputs resulting from the existence of little or no market data, therefore potentially requiring an entity to develop its own assumptions.

 

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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company determines the fair value of its interest rate swaps in a manner consistent with that used by market participants in pricing hedging instruments, which includes using a discounted cash flow analysis based upon the terms of the agreements, the impact of the one-month forward LIBOR curve and an evaluation of credit risk. Given the use of observable market assumptions and the consideration of credit risk, the Company has categorized the valuation of its interest rate swaps as Level 2.
The fair value of the Company’s interest rate swaps at June 30, 2010 and September 30, 2009, reflect liability balances of $5.8 million and $4.7 million, respectively, and are included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets. The fair value of the Company’s interest rate swaps reflects a liability because the effect of the forward LIBOR curve on future interest payments results in less interest due to the Company under the variable rate component included in the interest rate swap agreements, as compared to the amount due the Company’s counterparties under the fixed interest rate component. Any change in the fair value of the Company’s interest rate swaps, net of income taxes, is included in other comprehensive loss as a component of member’s equity in the accompanying unaudited condensed consolidated balance sheets.
4. COMPREHENSIVE INCOME
Comprehensive income consists of two components: net earnings and other comprehensive income. Other comprehensive income refers to revenues, expenses, gains and losses that under the FASB authoritative guidance related to accounting for comprehensive income are recorded as elements of equity, but are excluded from net earnings. The following table presents the components of comprehensive income, net of income taxes, for the quarters and nine months ended June 30, 2010 and 2009 (in thousands):
                                 
    Quarter Ended     Nine Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
 
                               
Net earnings
  $ 21,343     $ 23,395     $ 62,841     $ 65,220  
Change in fair value of interest rate swaps
    56       2,852       (1,092 )     (2,217 )
Change in income tax expense (benefit)
    (21 )     (1,068 )     407       829  
 
                       
 
                               
Comprehensive income
  $ 21,378     $ 25,179     $ 62,156     $ 63,832  
 
                       
The components of accumulated other comprehensive loss, net of income taxes, as of June 30, 2010 and September 30, 2009, are as follows (in thousands):
                 
    June 30,     September 30,  
    2010     2009  
 
               
Fair value of interest rate swaps
  $ (5,753 )   $ (4,660 )
Income tax benefit
    2,142       1,734  
 
           
 
               
Accumulated other comprehensive loss
  $ (3,611 )   $ (2,926 )
 
           
5. DISTRIBUTION TO PARENT
During the nine months ended June 30, 2010, the Company distributed $125.0 million, net of a $1.8 million income tax benefit, to IAS to fund the repurchase of certain shares of its outstanding preferred stock and cancel certain vested rollover options to purchase its common stock. The holder of the IAS preferred stock is represented by an investor group led by TPG, JLL Partners and Trimaran Fund Management. The repurchase of preferred stock, which included accrued and outstanding dividends, and the cancellation of rollover options were funded by the Company’s excess cash on hand. The cancellation of the rollover options, which were associated with the Company’s 2004 recapitalization, resulted in the Company recognizing $2.0 million in stock compensation expense during the nine months ended June 30, 2010.

 

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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES
Net Revenue
The calculation of appropriate payments from the Medicare and Medicaid programs, as well as terms governing agreements with other third-party payors, is complex and subject to interpretation. Final determination of amounts earned under the Medicare and Medicaid programs often occurs subsequent to the year in which services are rendered 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 but not limited to claims relating to patient treatment and personal injuries. To cover these types of claims, the Company maintains professional and general 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. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is currently not a party to any such proceedings that, in the Company’s opinion, would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company expenses an estimate of the costs it expects to incur under the self-insured retention exposure for professional and general liability claims using historical claims data, demographic factors, severity factors, current incident logs and other actuarial analysis. At June 30, 2010 and September 30, 2009, the Company’s professional and general liability accrual for asserted and unasserted claims totaled $43.9 million and $41.7 million, respectively. The semi-annual valuations from the Company’s independent actuary for professional and general liability losses resulted in a change in related estimates for prior periods which decreased professional and general liability expense by $1.9 million and $3.2 million during the nine months ended June 30, 2010 and 2009, respectively.
The Company is subject to claims and legal actions in the ordinary course of business related to workers’ compensation. To cover these types of claims, the Company maintains workers’ compensation insurance coverage with a self-insured retention. The Company accrues costs of workers’ compensation claims based upon estimates derived from its claims experience. The semi-annual valuations from the Company’s independent actuary for workers’ compensation losses resulted in a change in related estimates for prior periods which increased benefits expense by $801,000 during the nine months ended June 30, 2010, compared to a decrease of $852,000 during the same prior year period.
Health Choice
Health Choice has entered into capitated contracts whereby the Plan provides healthcare services in exchange for fixed periodic and supplemental payments from the Arizona Health Care Cost Containment System (“AHCCCS”) and the Centers for Medicare & Medicaid Services (“CMS”). 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 that current capitated payments received, together with reinsurance and other supplemental payments are sufficient to pay for the services Health Choice is obligated to deliver. As of June 30, 2010, the Company has provided a performance guaranty in the form of letters of credit totaling $43.2 million for the benefit of AHCCCS to support its obligations under the Health Choice contract to provide and pay for the healthcare services. The amount of the performance guaranty is generally based, in part, upon the membership in the Plan and the related capitation revenue paid to Health Choice.
As of June 30, 2010, in connection with a state-wide effort in Arizona to manage the state’s fiscal budget issues, AHCCCS delayed the transmittal of the Plan’s June capitation payment totaling $64.7 million. The Company has recorded a receivable related to this delayed capitation payment, which is classified in other current assets in the balance sheet at June 30, 2010. The capitation payment was subsequently received in July 2010.

 

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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Acquisitions
The Company has acquired and in the future may choose to acquire businesses with prior operating histories. Such businesses may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company has procedures designed to conform business practices to its policies following the completion of any acquisition, there can be no assurance that the Company will not become liable for previous activities of prior owners that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines.
Other
On March 31, 2008, the United States District Court for the District of Arizona (the “District Court”) dismissed with prejudice a qui tam complaint previously filed against IAS. The qui tam action sought monetary damages and civil penalties under the federal False Claims Act (“FCA”) and included allegations that certain business practices related to physician relationships and the medical necessity of certain procedures resulted in the submission of claims for reimbursement in violation of the FCA. The case dates back to March 2005 and became the subject of a subpoena by the Office of Inspector General (“OIG”) in September 2005. In August 2007, the case was unsealed and became a private lawsuit after the Department of Justice declined to intervene. The United States District Judge dismissed the case from the bench at the conclusion of oral arguments on IAS’ motion to dismiss. On April 21, 2008, the court issued a written order dismissing the case with prejudice and entering formal judgment for IAS. On May 7, 2008, the qui tam relator’s counsel filed a Notice of Appeal to the United States Court of Appeals for the Ninth Circuit to appeal the District Court’s dismissal of the case. On May 21, 2008, IAS filed a Notice of Cross-Appeal to the United States Court of Appeals for the Ninth Circuit from a portion of the April 21, 2008 Order related to the relator’s misappropriation of information subject to a claim of attorney-client privilege by IAS. Oral argument in the Ninth Circuit was held before the United States Court of Appeals for the Ninth Circuit on March 9, 2010. Currently, the Company does not anticipate receiving a written opinion from the Ninth Circuit in less than six months from the date of oral argument. If the appeal of the order dismissing the qui tam action with prejudice was to be resolved in a manner unfavorable to IAS, it could have a material adverse effect on the Company’s business, financial condition and results of operations, including exclusion from the Medicare and Medicaid programs.

 

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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. SEGMENT AND GEOGRAPHIC INFORMATION
The Company’s acute care hospitals and related healthcare businesses are similar in their activities and the economic environments in which they operate (i.e. urban and suburban markets). Accordingly, the Company’s reportable operating segments consist of (1) acute care hospitals and related healthcare businesses, collectively “Acute Care,” and (2) Health Choice. The following is a financial summary by business segment for the periods indicated (in thousands):
                                 
    For the Quarter Ended June 30, 2010  
    Acute Care     Health Choice     Eliminations     Consolidated  
Acute care revenue
  $ 438,211     $     $     $ 438,211  
Premium revenue
          199,777             199,777  
Revenue between segments
    2,319             (2,319 )      
 
                       
Net revenue
    440,530       199,777       (2,319 )     637,988  
 
                               
Salaries and benefits (excludes stock compensation)
    165,051       4,866             169,917  
Supplies
    66,293       40             66,333  
Medical claims
          174,350       (2,319 )     172,031  
Other operating expenses
    87,451       6,128             93,579  
Provision for bad debts
    49,416                   49,416  
Rentals and leases
    9,650       417             10,067  
 
                       
Adjusted EBITDA(1)
    62,669       13,976             76,645  
 
                               
Interest expense, net
    16,711                   16,711  
Depreciation and amortization
    23,115       892             24,007  
Stock compensation
    118                   118  
Management fees
    1,250                   1,250  
 
                       
Earnings from continuing operations before loss on disposal of assets and income taxes
    21,475       13,084             34,559  
Loss on disposal of assets, net
    (149 )                 (149 )
 
                       
Earnings from continuing operations before income taxes
  $ 21,326     $ 13,084     $     $ 34,410  
 
                       
                                 
    For the Quarter Ended June 30, 2009  
    Acute Care     Health Choice     Eliminations     Consolidated  
Acute care revenue
  $ 417,880     $     $     $ 417,880  
Premium revenue
          183,738             183,738  
Revenue between segments
    2,542             (2,542 )      
 
                       
Net revenue
    420,422       183,738       (2,542 )     601,618  
 
                               
Salaries and benefits (excludes stock compensation)
    159,838       4,900             164,738  
Supplies
    63,905       45             63,950  
Medical claims
          161,461       (2,542 )     158,919  
Other operating expenses
    75,876       3,832             79,708  
Provision for bad debts
    45,594                   45,594  
Rentals and leases
    9,635       373             10,008  
 
                       
Adjusted EBITDA(1)
    65,574       13,127             78,701  
 
                               
Interest expense, net
    16,334                   16,334  
Depreciation and amortization
    23,320       897             24,217  
Stock compensation
    141                   141  
Management fees
    1,250                   1,250  
 
                       
Earnings from continuing operations before gain on disposal of assets and income taxes
    24,529       12,230             36,759  
Gain on disposal of assets, net
    184                   184  
 
                       
Earnings from continuing operations before income taxes
  $ 24,713     $ 12,230     $     $ 36,943  
 
                       

 

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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                 
    For the Nine Months Ended June 30, 2010  
    Acute Care     Health Choice     Eliminations     Consolidated  
Acute care revenue
  $ 1,300,445     $     $     $ 1,300,445  
Premium revenue
          591,022             591,022  
Revenue between segments
    8,331             (8,331 )      
 
                       
Net revenue
    1,308,776       591,022       (8,331 )     1,891,467  
 
                               
Salaries and benefits (excludes stock compensation)
    497,916       14,405             512,321  
Supplies
    200,030       137             200,167  
Medical claims
          519,023       (8,331 )     510,692  
Other operating expenses
    248,380       18,474             266,854  
Provision for bad debts
    142,901                   142,901  
Rentals and leases
    29,334       1,153             30,487  
 
                       
Adjusted EBITDA(1)
    190,215       37,830             228,045  
 
                               
Interest expense, net
    50,065                   50,065  
Depreciation and amortization
    69,240       2,669             71,909  
Stock compensation
    2,367                   2,367  
Management fees
    3,750                   3,750  
 
                       
Earnings from continuing operations before loss on disposal of assets and income taxes
    64,793       35,161             99,954  
Loss on disposal of assets, net
    (206 )                 (206 )
 
                       
Earnings from continuing operations before income taxes
  $ 64,587     $ 35,161     $     $ 99,748  
 
                       
Segment assets
  $ 2,006,311     $ 293,150             $ 2,299,461  
 
                         
Capital expenditures
  $ 53,288     $ 177             $ 53,465  
 
                         
Goodwill
  $ 712,163     $ 5,757             $ 717,920  
 
                         
                                 
    For the Nine Months Ended June 30, 2009  
    Acute Care     Health Choice     Eliminations     Consolidated  
Acute care revenue
  $ 1,237,506     $     $     $ 1,237,506  
Premium revenue
          504,410             504,410  
Revenue between segments
    6,551             (6,551 )      
 
                       
Net revenue
    1,244,057       504,410       (6,551 )     1,741,916  
 
                               
Salaries and benefits (excludes stock compensation)
    480,214       14,753             494,967  
Supplies
    187,316       213             187,529  
Medical claims
          429,070       (6,551 )     422,519  
Other operating expenses
    220,272       16,739             237,011  
Provision for bad debts
    137,892                   137,892  
Rentals and leases
    28,038       1,183             29,221  
Hurricane-related property damage
    938                   938  
 
                       
Adjusted EBITDA(1)
    189,387       42,452             231,839  
 
                               
Interest expense, net
    51,129                   51,129  
Depreciation and amortization
    70,860       2,649             73,509  
Stock compensation
    420                   420  
Management fees
    3,750                   3,750  
 
                       
Earnings from continuing operations before gain on disposal of assets and income taxes
    63,228       39,803             103,031  
Gain on disposal of assets, net
    1,497                   1,497  
 
                       
Earnings from continuing operations before income taxes
  $ 64,725     $ 39,803     $     $ 104,528  
 
                       
Segment assets
  $ 2,141,103     $ 225,832             $ 2,366,935  
 
                         
Capital expenditures
  $ 65,810     $ 798             $ 66,608  
 
                         
Goodwill
  $ 776,341     $ 5,757             $ 782,098  
 
                         

 

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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
     
(1)   Adjusted EBITDA represents earnings from continuing operations before interest expense, income tax expense, depreciation and amortization, stock compensation, gain (loss) on disposal of assets and management fees. Management fees represent monitoring and advisory fees paid to TPG, the Company’s majority financial sponsor, and certain other members of IASIS Investment LLC, majority shareholder of IAS. Management routinely calculates and communicates adjusted EBITDA and believes that it is useful to investors because it is commonly used as an analytical indicator within the healthcare industry to evaluate hospital performance, allocate resources and measure leverage capacity and debt service ability. In addition, the Company uses adjusted EBITDA as a measure of performance for its business segments and for incentive compensation purposes. Adjusted EBITDA should not be considered as a measure of financial performance under GAAP, and the items excluded from adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to net earnings, cash flows generated by operating, investing, or financing activities or other financial statement data presented in the condensed consolidated financial statements as an indicator of financial performance or liquidity. Adjusted EBITDA, as presented, differs from what is defined under the Company’s senior secured credit facilities and may not be comparable to similarly titled measures of other companies.
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The 8 3/4% notes described in Note 2 are fully and unconditionally guaranteed on a joint and several basis by all of the Company’s existing domestic subsidiaries, other than non-guarantor subsidiaries which include Health Choice and the Company’s non-wholly owned subsidiaries.
Summarized condensed consolidating balance sheets at June 30, 2010 and September 30, 2009, condensed consolidating statements of operations for the quarters and nine months ended June 30, 2010 and 2009, and condensed consolidating statements of cash flows for the nine months ended June 30, 2010 and 2009, for the Company, segregating the parent company issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, are found below. Prior year amounts have been reclassified to conform to the current year presentation.

 

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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
IASIS Healthcare LLC
Condensed Consolidating Balance Sheet (unaudited)
June 30, 2010
(in thousands)
                                         
            Subsidiary     Subsidiary             Condensed  
    Parent Issuer     Guarantors     Non-Guarantors     Eliminations     Consolidated  
 
                                       
Assets
                                       
Current assets:
                                       
Cash and cash equivalents
  $     $ 129,963     $ 197     $     $ 130,160  
Accounts receivable, net
          89,781       131,546             221,327  
Inventories
          23,351       30,125             53,476  
Deferred income taxes
    11,130                         11,130  
Prepaid expenses and other current assets
          18,374       103,005             121,379  
 
                             
Total current assets
    11,130       261,469       264,873             537,472  
 
                                       
Property and equipment, net
          349,340       631,457             980,797  
Intercompany
          (214,143 )     214,143              
Net investment in and advances to subsidiaries
    1,799,503                   (1,799,503 )      
Goodwill
    17,331       67,445       633,144             717,920  
Other intangible assets, net
                27,750             27,750  
Other assets, net
    12,825       18,224       4,473             35,522  
 
                             
Total assets
  $ 1,840,789     $ 482,335     $ 1,775,840     $ (1,799,503 )   $ 2,299,461  
 
                             
 
                                       
Liabilities and Equity
                                       
Current liabilities:
                                       
Accounts payable
  $     $ 32,769     $ 39,052     $     $ 71,821  
Salaries and benefits payable
          23,278       22,091             45,369  
Accrued interest payable
    2,128       (3,223 )     3,223             2,128  
Medical claims payable
                110,556             110,556  
Other accrued expenses and other current liabilities
          34,457       50,932             85,389  
Current portion of long-term debt and capital lease obligations
    5,890       815       20,274       (20,274 )     6,705  
 
                             
Total current liabilities
    8,018       88,096       246,128       (20,274 )     321,968  
 
                                       
Long-term debt and capital lease obligations
    1,040,843       5,637       552,400       (552,400 )     1,046,480  
Deferred income taxes
    103,352                         103,352  
Other long-term liabilities
          55,575       637             56,212  
 
                             
Total liabilities
    1,152,213       149,308       799,165       (572,674 )     1,528,012  
 
                                       
Non-controlling interests with redemption rights
          72,527                   72,527  
 
                                       
Equity:
                                       
Member’s equity
    688,576       250,154       976,675       (1,226,829 )     688,576  
Non-controlling interests
          10,346                   10,346  
 
                             
 
Total equity
    688,576       260,500       976,675       (1,226,829 )     698,922  
 
                             
Total liabilities and equity
  $ 1,840,789     $ 482,335     $ 1,775,840     $ (1,799,503 )   $ 2,299,461  
 
                             

 

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Table of Contents

IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
IASIS Healthcare LLC
Condensed Consolidating Balance Sheet (unaudited)
September 30, 2009
(in thousands)
                                         
            Subsidiary     Subsidiary             Condensed  
    Parent Issuer     Guarantors     Non-Guarantors     Eliminations     Consolidated  
Assets
                                       
Current assets:
                                       
Cash and cash equivalents
  $     $ 206,331     $ 197     $     $ 206,528  
Accounts receivable, net
          90,883       139,315             230,198  
Inventories
          22,405       28,087             50,492  
Deferred income taxes
    39,038                         39,038  
Prepaid expenses and other current assets
          15,521       33,932             49,453  
 
                             
Total current assets
    39,038       335,140       201,531             575,709  
 
                                       
Property and equipment, net
          347,657       649,696             997,353  
Intercompany
          (243,956 )     243,956              
Net investment in and advances to subsidiaries
    1,851,008                   (1,851,008 )      
Goodwill
    17,331       67,445       633,144             717,920  
Other intangible assets, net
                30,000             30,000  
Other assets, net
    15,182       16,780       4,260             36,222  
 
                             
Total assets
  $ 1,922,559     $ 523,066     $ 1,762,587     $ (1,851,008 )   $ 2,357,204  
 
                             
 
                                       
Liabilities and Equity
                                       
Current liabilities:
                                       
Accounts payable
  $     $ 25,269     $ 43,283     $     $ 68,552  
Salaries and benefits payable
          25,008       17,540             42,548  
Accrued interest payable
    12,511       (3,239 )     3,239             12,511  
Medical claims payable
                113,519             113,519  
Other accrued expenses and other current liabilities
          39,559       26,142             65,701  
Current portion of long-term debt and capital lease obligations
    7,431       935       20,614       (20,614 )     8,366  
 
                             
Total current liabilities
    19,942       87,532       224,337       (20,614 )     311,197  
 
                                       
Long-term debt and capital lease obligations
    1,045,260       6,211       566,980       (566,980 )     1,051,471  
Deferred income taxes
    106,425                         106,425  
Other long-term liabilities
          53,577       645             54,222  
 
                             
Total liabilities
    1,171,627       147,320       791,962       (587,594 )     1,523,315  
 
                                       
Non-controlling interests with redemption rights
          72,527                   72,527  
 
                                       
Equity:
                                       
Member’s equity
    750,932       292,789       970,625       (1,263,414 )     750,932  
Non-controlling interests
          10,430                   10,430  
 
                             
 
Total equity
    750,932       303,219       970,625       (1,263,414 )     761,362  
 
                             
Total liabilities and equity
  $ 1,922,559     $ 523,066     $ 1,762,587     $ (1,851,008 )   $ 2,357,204  
 
                             

 

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Table of Contents

IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
For the Quarter Ended June 30, 2010 (unaudited)
(in thousands)
                                         
            Subsidiary     Subsidiary             Condensed  
    Parent Issuer     Guarantors     Non-Guarantors     Eliminations     Consolidated  
Net revenue
                                       
Acute care revenue
  $     $ 170,905     $ 269,625     $ (2,319 )   $ 438,211  
Premium revenue
                199,777             199,777  
 
                             
Total net revenue
          170,905       469,402       (2,319 )     637,988  
 
                                       
Costs and expenses
                                       
Salaries and benefits
          86,937       83,098             170,035  
Supplies
          27,907       38,426             66,333  
Medical claims
                174,350       (2,319 )     172,031  
Other operating expenses
          29,185       64,394             93,579  
Provision for bad debts
          21,589       27,827             49,416  
Rentals and leases
          4,268       5,799             10,067  
Interest expense, net
    16,711             10,507       (10,507 )     16,711  
Depreciation and amortization
          10,271       13,736             24,007  
Management fees
    1,250       (5,759 )     5,759             1,250  
Equity in earnings of affiliates
    (39,249 )                 39,249        
 
                             
Total costs and expenses
    (21,288 )     174,398       423,896       26,423       603,429  
 
                                       
Earnings (loss) from continuing operations before loss on disposal of assets and income taxes
    21,288       (3,493 )     45,506       (28,742 )     34,559  
Loss on disposal of assets, net
          (31 )     (118 )           (149 )
 
                             
 
                                       
Earnings (loss) from continuing operations before income taxes
    21,288       (3,524 )     45,388       (28,742 )     34,410  
Income tax expense
    12,683                         12,683  
 
                             
 
                                       
Net earnings (loss) from continuing operations
    8,605       (3,524 )     45,388       (28,742 )     21,727  
Earnings (loss) from discontinued operations, net of income taxes
    229       (608 )     (5 )           (384 )
 
                             
 
                                       
Net earnings (loss)
    8,834       (4,132 )     45,383       (28,742 )     21,343  
Net earnings attributable to non-controlling interests
          (2,002 )                 (2,002 )
 
                             
 
                                       
Net earnings (loss) attributable to IASIS Healthcare LLC
  $ 8,834     $ (6,134 )   $ 45,383     $ (28,742 )   $ 19,341  
 
                             

 

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Table of Contents

IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
For the Quarter Ended June 30, 2009 (unaudited)
(in thousands)
                                         
            Subsidiary     Subsidiary             Condensed  
    Parent Issuer     Guarantors     Non-Guarantors     Eliminations     Consolidated  
Net revenue
                                       
Acute care revenue
  $     $ 162,850     $ 257,572     $ (2,542 )   $ 417,880  
Premium revenue
                183,738             183,738  
 
                             
Total net revenue
          162,850       441,310       (2,542 )     601,618  
 
                                       
Costs and expenses
                                       
Salaries and benefits
          81,176       83,703             164,879  
Supplies
          26,629       37,321             63,950  
Medical claims
                161,461       (2,542 )     158,919  
Other operating expenses
          31,174       48,534             79,708  
Provision for bad debts
          22,557       23,037             45,594  
Rentals and leases
          3,925       6,083             10,008  
Interest expense, net
    16,334             9,464       (9,464 )     16,334  
Depreciation and amortization
          10,064       14,153             24,217  
Management fees
    1,250       (5,531 )     5,531             1,250  
Equity in earnings of affiliates
    (41,599 )                 41,599        
 
                             
Total costs and expenses
    (24,015 )     169,994       389,287       29,593       564,859  
 
                                       
Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes
    24,015       (7,144 )     52,023       (32,135 )     36,759  
Gain (loss) on disposal of assets, net
          187       (3 )           184  
 
                             
 
                                       
Earnings (loss) from continuing operations before income taxes
    24,015       (6,957 )     52,020       (32,135 )     36,943  
Income tax expense
    12,650             1,065             13,715  
 
                             
 
                                       
Net earnings (loss) from continuing operations
    11,365       (6,957 )     50,955       (32,135 )     23,228  
Earnings (loss) from discontinued operations, net of income taxes
    (100 )     253       14             167  
 
                             
 
                                       
Net earnings (loss)
    11,265       (6,704 )     50,969       (32,135 )     23,395  
Net earnings attributable to non-controlling interests
          (2,666 )                 (2,666 )
 
                             
 
                                       
Net earnings (loss) attributable to IASIS Healthcare LLC
  $ 11,265     $ (9,370 )   $ 50,969     $ (32,135 )   $ 20,729  
 
                             

 

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Table of Contents

IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
For the Nine Months Ended June 30, 2010 (unaudited)
(in thousands)
                                         
            Subsidiary     Subsidiary             Condensed  
    Parent Issuer     Guarantors     Non-Guarantors     Eliminations     Consolidated  
Net revenue
                                       
Acute care revenue
  $     $ 517,001     $ 791,775     $ (8,331 )   $ 1,300,445  
Premium revenue
                591,022             591,022  
 
                             
Total net revenue
          517,001       1,382,797       (8,331 )     1,891,467  
 
                                       
Costs and expenses
                                       
Salaries and benefits
          261,713       252,975             514,688  
Supplies
          84,049       116,118             200,167  
Medical claims
                519,023       (8,331 )     510,692  
Other operating expenses
          86,414       180,440             266,854  
Provision for bad debts
          65,352       77,549             142,901  
Rentals and leases
          12,750       17,737             30,487  
Interest expense, net
    50,065             30,886       (30,886 )     50,065  
Depreciation and amortization
          30,129       41,780             71,909  
Management fees
    3,750       (17,075 )     17,075             3,750  
Equity in earnings of affiliates
    (116,035 )                 116,035        
 
                             
Total costs and expenses
    (62,220 )     523,332       1,253,583       76,818       1,791,513  
 
                                       
Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes
    62,220       (6,331 )     129,214       (85,149 )     99,954  
Gain (loss) on disposal of assets, net
          28       (234 )           (206 )
 
                             
 
                                       
Earnings (loss) from continuing operations before income taxes
    62,220       (6,303 )     128,980       (85,149 )     99,748  
Income tax expense
    36,544                         36,544  
 
                             
 
                                       
Net earnings (loss) from continuing operations
    25,676       (6,303 )     128,980       (85,149 )     63,204  
Earnings (loss) from discontinued operations, net of income taxes
    216       (571 )     (8 )           (363 )
 
                             
 
                                       
Net earnings (loss)
    25,892       (6,874 )     128,972       (85,149 )     62,841  
Net earnings attributable to non-controlling interests
          (6,063 )                 (6,063 )
 
                             
 
                                       
Net earnings (loss) attributable to IASIS Healthcare LLC
  $ 25,892     $ (12,937 )   $ 128,972     $ (85,149 )   $ 56,778  
 
                             

 

19


Table of Contents

IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
For the Nine Months Ended June 30, 2009 (unaudited)
(in thousands)
                                         
            Subsidiary     Subsidiary             Condensed  
    Parent Issuer     Guarantors     Non-Guarantors     Eliminations     Consolidated  
Net revenue
                                       
Acute care revenue
  $     $ 488,285     $ 755,772     $ (6,551 )   $ 1,237,506  
Premium revenue
                504,410             504,410  
 
                             
Total net revenue
          488,285       1,260,182       (6,551 )     1,741,916  
 
                                       
Costs and expenses
                                       
Salaries and benefits
          246,364       249,023             495,387  
Supplies
          78,200       109,329             187,529  
Medical claims
                429,070       (6,551 )     422,519  
Other operating expenses
          86,769       150,242             237,011  
Provision for bad debts
          68,297       69,595             137,892  
Rentals and leases
          11,942       17,279             29,221  
Interest expense, net
    51,129             33,237       (33,237 )     51,129  
Depreciation and amortization
          31,827       41,682             73,509  
Management fees
    3,750       (16,267 )     16,267             3,750  
Hurricane-related property damage
                938             938  
Equity in earnings of affiliates
    (117,334 )                 117,334        
 
                             
Total costs and expenses
    (62,455 )     507,132       1,116,662       77,546       1,638,885  
 
                                       
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes
    62,455       (18,847 )     143,520       (84,097 )     103,031  
Gain on disposal of assets, net
          1,479       18             1,497  
 
                             
 
                                       
Earnings (loss) from continuing operations before income taxes
    62,455       (17,368 )     143,538       (84,097 )     104,528  
Income tax expense
    37,910             1,065             38,975  
 
                             
 
                                       
Net earnings (loss) from continuing operations
    24,545       (17,368 )     142,473       (84,097 )     65,553  
Earnings (loss) from discontinued operations, net of income taxes
    198       (561 )     30             (333 )
 
                             
 
                                       
Net earnings (loss)
    24,743       (17,929 )     142,503       (84,097 )     65,220
Net earnings attributable to non-controlling interests
          (7,240 )                 (7,240 )
 
                             
 
                                       
Net earnings (loss) attributable to IASIS Healthcare LLC
  $ 24,743     $ (25,169 )   $ 142,503     $ (84,097 )   $ 57,980  
 
                             

 

20


Table of Contents

IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended June 30, 2010 (unaudited)
(in thousands)
                                         
            Subsidiary     Subsidiary             Condensed  
    Parent Issuer     Guarantors     Non-Guarantors     Eliminations     Consolidated  
Cash flows from operating activities
                                       
Net earnings (loss)
  $ 25,892     $ (6,874 )   $ 128,972     $ (85,149 )   $ 62,841  
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
                                       
Depreciation and amortization
          30,129       41,780             71,909  
Amortization of loan costs
    2,356                         2,356  
Stock compensation costs
    2,367                         2,367  
Deferred income taxes
    23,839                         23,839  
Income tax benefit from stock compensation
    (1,770 )                       (1,770 )
Income tax benefit from parent company interest
    4,989                         4,989  
Loss (gain) on disposal of assets, net
          (28 )     234             206  
Loss (earnings) from discontinued operations
    (216 )     571       8             363  
Equity in earnings of affiliates
    (116,035 )                 116,035        
Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:
                                       
Accounts receivable, net
          1,385       7,769             9,154  
Inventories, prepaid expenses and other current assets
          (3,798 )     (71,111 )           (74,909 )
Accounts payable, other accrued expenses and other accrued liabilities
    (8,613 )     13,557       8,193             13,137  
 
                             
Net cash provided by (used in) operating activities — continuing operations
    (67,191 )     34,942       115,845       30,886       114,482  
Net cash used in operating activities — discontinued operations
    (216 )     (351 )                 (567 )
 
                             
Net cash provided by (used in) operating activities
    (67,407 )     34,591       115,845       30,886       113,915  
 
                             
 
                                       
Cash flows from investing activities
                                       
Purchases of property and equipment, net
          (31,626 )     (21,839 )           (53,465 )
Proceeds from sale of assets
          19       31             50  
Change in other assets, net
          1,960       (104 )           1,856  
 
                             
Net cash used in investing activities
          (29,647 )     (21,912 )           (51,559 )
 
                             
 
                                       
Cash flows from financing activities
                                       
Payment of debt and capital lease obligations
    (6,079 )           (693 )           (6,772 )
Distribution to parent company in connection with the repurchase of equity, net
    (124,962 )                       (124,962 )
Distributions to non-controlling interests
          (179 )     (6,742 )           (6,921 )
Costs paid for repurchase of partnership interests, net
          (69 )                 (69 )
Change in intercompany balances with affiliates, net
    198,448       (81,064 )     (86,498 )     (30,886 )      
 
                             
Net cash provided by (used in) financing activities
    67,407       (81,312 )     (93,933 )     (30,886 )     (138,724 )
 
                             
 
                                       
Change in cash and cash equivalents
          (76,368 )                 (76,368 )
Cash and cash equivalents at beginning of period
          206,331       197             206,528  
 
                             
Cash and cash equivalents at end of period
  $     $ 129,963     $ 197     $     $ 130,160  
 
                             

 

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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended June 30, 2009 (unaudited)
(in thousands)
                                         
            Subsidiary     Subsidiary             Condensed  
    Parent Issuer     Guarantors     Non-Guarantors     Eliminations     Consolidated  
Cash flows from operating activities
                                       
Net earnings (loss)
  $ 24,743     $ (17,929 )   $ 142,503     $ (84,097 )   $ 65,220  
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
                                       
Depreciation and amortization
          31,827       41,682             73,509  
Amortization of loan costs
    2,257                         2,257  
Stock compensation costs
    420                         420  
Deferred income taxes
    11,792                         11,792  
Gain on disposal of assets, net
          (1,479 )     (18 )           (1,497 )
Loss (earnings) from discontinued operations
    (198 )     561       (30 )           333  
Hurricane-related property damage
                938             938  
Equity in earnings of affiliates
    (117,334 )                 117,334        
Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:
                                       
Accounts receivable, net
          4,724       (23,578 )           (18,854 )
Inventories, prepaid expenses and other current assets
          (505 )     (1,986 )           (2,491 )
Accounts payable, other accrued expenses and other accrued liabilities
    (10,346 )     42,896       6,681             39,231  
 
                             
Net cash provided by (used in) operating activities — continuing operations
    (88,666 )     60,095       166,192       33,237       170,858  
Net cash provided by (used in) operating activities — discontinued operations
    (198 )     1,905       (159 )           1,548  
 
                             
Net cash provided by (used in) operating activities
    (88,864 )     62,000       166,033       33,237       172,406  
 
                             
 
                                       
Cash flows from investing activities
                                       
Purchases of property and equipment, net
          (18,835 )     (47,773 )           (66,608 )
Cash paid for acquisition, net
          (1,521 )                 (1,521 )
Proceeds from sale of assets
          3,007       2,233             5,240  
Change in other assets, net
          (173 )     2,005             1,832  
 
                             
Net cash used in investing activities — continuing operations
          (17,522 )     (43,535 )           (61,057 )
Net cash provided by investing activities — discontinued operations
          10                   10  
 
                             
Net cash used in investing activities
          (17,512 )     (43,535 )           (61,047 )
 
                             
 
                                       
Cash flows from financing activities
                                       
Payment of debt and capital lease obligations
    (52,813 )     125       (984 )           (53,672 )
Distributions to non-controlling interests
                (4,721 )           (4,721 )
Costs paid for repurchase of partnership interests, net
          (1,379 )                 (1,379 )
Change in intercompany balances with affiliates, net
    141,677       8,508       (116,948 )     (33,237 )      
 
                             
Net cash provided by (used in) financing activities
    88,864       7,254       (122,653 )     (33,237 )     (59,772 )
 
                             
 
                                       
Change in cash and cash equivalents
          51,742       (155 )           51,587  
Cash and cash equivalents at beginning of period
          80,336       402             80,738  
 
                             
Cash and cash equivalents at end of period
  $     $ 132,078     $ 247     $     $ 132,325  
 
                             

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements, the notes to our unaudited condensed consolidated financial statements and the other financial information appearing elsewhere in this report. Data for the quarters and nine months ended June 30, 2010 and 2009, has been derived from our unaudited condensed consolidated financial statements. References herein to “we,” “our” and “us” are to IASIS Healthcare LLC and its subsidiaries.
FORWARD LOOKING STATEMENTS
Some of the statements we make in this report are forward-looking within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Those 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), financing needs, projections of revenue, income or loss, capital expenditures 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 related to our ability to generate sufficient cash to service our existing indebtedness, our substantial level of indebtedness that could adversely affect our financial condition, the possibility of an increase in interest rates, which would increase the cost of servicing our debt and could reduce profitability, our ability to retain and negotiate favorable contracts with managed care plans, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively the “Health Reform Law”), which represents significant change to the healthcare industry, and other changes in governmental programs that may reduce our revenues, our hospitals’ competition for patients from other hospitals and healthcare providers, our hospitals facing a growth in volume and revenue related to uncompensated care, our ability to recruit and retain quality physicians, our hospitals’ competition for staffing which may increase our labor costs and reduce profitability, our failure to continually enhance our hospitals with the most recent technological advances in diagnostic and surgical equipment that may adversely affect our ability to maintain and expand our markets, our failure to comply with extensive laws and government regulations, the significant restrictions imposed by the Health Reform Law on hospitals that have physician owners, the potential of exposure to liability from some of our hospitals being required to submit to the Department of Health and Human Services (the “Department”) information on their relationships with physicians, expenses incurred in connection with an appeal of the court order dismissing with prejudice the qui tam litigation, the possibility that we may become subject to federal and state investigations in the future, our ability to satisfy regulatory requirements with respect to our internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, a failure of our information systems that would adversely affect our ability to properly manage our operations, an economic downturn or other material change in any one of the regions in which we operate, potential liabilities because of claims brought against our facilities, increasing insurance costs that may reduce our cash flows and net earnings, the impact of certain factors, including severe weather conditions and natural disasters, on operations at our hospitals, our ability to control costs at Health Choice Arizona, Inc. (“Health Choice” or the “Plan”), the impact of any significant alteration to the Arizona Health Care Cost Containment System (“AHCCCS”) payment structure of its contracts or the amount of premiums paid to us, the possibility of Health Choice’s contract with AHCCCS being discontinued, significant competition from other healthcare companies and state efforts to regulate the sale of not-for-profit hospitals that may affect our ability to acquire hospitals, difficulties with the integration of acquisitions that may disrupt our ongoing operations, the significant capital expenditures that would be involved in the construction of current projects or other new hospitals that could have an adverse effect on our liquidity, state efforts to regulate the construction or expansion of hospitals that could impair our ability to operate and expand our operations, our dependence on key personnel, the loss of one or more of which could have a material adverse effect on our business, potential responsibilities and costs under environmental laws that could lead to material expenditures or liability, the possibility of a decline in the fair value of our reporting units that could result in a material non-cash charge to earnings and those risks, uncertainties and other matters detailed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, and in our subsequent filings with the Securities and Exchange Commission (the “SEC”).

 

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Although we believe that the assumptions underlying the forward-looking statements contained in this report are reasonable, any of these assumptions could prove to be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included in this report, you should not regard the inclusion of such information as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.
EXECUTIVE OVERVIEW
We are a leading owner and operator of medium-sized acute care hospitals in high-growth urban and suburban markets. We operate our hospitals with a strong community focus by offering and developing healthcare services targeted to the needs of the markets we serve, promoting strong relationships with physicians and working with local managed care plans. At June 30, 2010, we owned or leased 15 acute care hospital facilities and one behavioral health hospital facility, with a total of 2,886 beds in service, located in six regions:
    Salt Lake City, Utah;
    Phoenix, Arizona;
    Tampa-St. Petersburg, Florida;
    three cities in Texas, including San Antonio;
    Las Vegas, Nevada; and
    West Monroe, Louisiana.
We also own and operate Health Choice, a Medicaid and Medicare managed health plan in Phoenix, Arizona, that serves over 199,000 members.
Recently Enacted Health Reform Law
In March 2010, President Obama signed the Health Reform Law into law. The Health Reform Law will change how healthcare services are covered, delivered, and reimbursed, through expanded coverage of previously uninsured individuals and reduced government healthcare spending. In addition, the new law reforms certain aspects of health insurance, expands existing efforts to tie Medicare and Medicaid payments to performance and quality, and contains provisions intended to strengthen fraud and abuse enforcement.
The Health Reform Law will decrease the number of uninsured individuals by expanding coverage through a combination of public program expansion and private sector health insurance reforms. The Health Reform Law expands eligibility under existing Medicaid programs by requiring states to expand Medicaid coverage to all individuals under age 65 with incomes up to 133% of the federal poverty level no later than January 2014, and subsidizes states that create non-Medicaid plans for residents with incomes between 133% and 200% of the federal poverty level. The Health Reform Law also requires states to establish health insurance exchanges to facilitate the purchase of health insurance by individuals and small employers, and further, imposes financial penalties on individuals who fail to carry health insurance coverage and certain employers that do not provide health insurance coverage. The Health Reform Law establishes a number of health insurance market reforms, including a ban on lifetime limits and pre-existing condition exclusions, new benefit mandates, and increased dependent coverage.
The Health Reform Law contains a number of provisions designed to significantly reduce Medicare and Medicaid program payments, including reductions in Medicare market basket updates and Medicare and Medicaid disproportionate share funding. Further, the Health Reform Law establishes or expands efforts to tie payments to quality and integration, including an increased emphasis on bundling payments and programs to promote coordination of care. Additionally, the Health Reform Law expands program integrity initiatives for federal healthcare programs, including expansion of the Recovery Audit Contractor (“RAC”) program to include Medicaid and Part C and Part D of Medicare and increased resources to fight fraud, waste, and abuse.

 

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The Health Reform Law significantly narrows the Stark Law’s whole hospital exception. As a result, the Health Reform Law prohibits newly created physician-owned hospitals from billing for services provided to Medicare patients referred by their physician owners, and effectively prevents the formation of physician-owned hospitals after March 23, 2010. While the amended whole hospital exception grandfathers certain existing physician-owned hospitals, including ours, it generally prohibits a grandfathered hospital from increasing its aggregate percentage of physician ownership beyond the aggregate level that was in place as of March 23, 2010. Further, subject to limited exceptions, a grandfathered physician-owned hospital may not increase the number of operating rooms, procedure rooms, and beds for which it is licensed beyond the number for which it was licensed as of March 23, 2010. Among other things, grandfathered physician-owned hospitals must meet additional disclosure requirements. The Health Reform Law requires grandfathered physician-owned hospitals to comply with the new requirements by September 23, 2011, and requires the Department to audit hospitals’ compliance beginning no later than November 1, 2011.
Because of the many variables involved, including the law’s complexity, lack of implementing regulations or interpretive guidance, gradual implementation, and possible amendment, the impact of the Health Reform Law is not yet fully known. We are unable to predict the net effect of the reductions in Medicare and Medicaid spending, the expected reimbursement received from providing care to previously uninsured individuals, and numerous other provisions in the law that may affect our operations. We are further unable to foresee how individuals and businesses will respond to the choices afforded them by the Health Reform Law. Thus, we cannot predict the full impact of the Health Reform Law at this time.
Revenue and Volume Trends
Net revenue for the quarter ended June 30, 2010, increased 6.0% to $638.0 million, compared to $601.6 million in the prior year quarter. Net revenue for the nine months ended June 30, 2010, increased 8.6% to $1.9 billion, compared to $1.7 billion in the prior year period. Net revenue is comprised of acute care and premium revenue. Acute care revenue contributed $20.3 million and $62.9 million to the increase in total net revenue for the quarter and nine months ended June 30, 2010, respectively, while premium revenue at Health Choice contributed $16.0 million and $86.6 million for the same periods, respectively.
Acute Care Revenue
Acute care revenue is comprised of net patient revenue and other revenue. A large percentage of our hospitals’ net patient revenue consists of fixed payment, discounted sources, including Medicare, Medicaid and managed care organizations. Reimbursement for Medicare and Medicaid services is often fixed regardless of the cost incurred or the level of services provided. Similarly, a greater percentage of the managed care companies we contract with reimburse providers on a fixed payment basis regardless of the costs incurred or the level of services provided. Net patient revenue is reported net of discounts and contractual adjustments. Contractual adjustments principally result from differences between the hospitals’ established charges and payment rates under Medicare, Medicaid and various managed care plans. Additionally, discounts and contractual adjustments result from our uninsured discount and charity care programs. Other revenue includes medical office building rental income and other miscellaneous revenue.
Certain of our acute care hospitals receive supplemental Medicaid reimbursement, including reimbursement from programs for participating private hospitals that enter into indigent care affiliation agreements with public hospitals or county governments in the state of Texas. Under the CMS approved programs, affiliated hospitals, including our Texas hospitals, have expanded the community healthcare safety net by providing indigent healthcare services. Participation in indigent care affiliation agreements by our Texas hospitals has resulted in an increase in acute care revenue by virtue of the hospitals’ entitlement to supplemental Medicaid inpatient reimbursement. Revenue recognized under these Texas private supplemental Medicaid reimbursement programs for the quarter and nine months ended June 30, 2010, was $22.4 million and $60.1 million, respectively, compared to $13.6 million and $42.2 million, respectively, in each of the same prior year periods. It is unclear whether our revenues from these programs will be adversely affected as the provisions of the Health Reform Law are implemented.

 

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Admissions decreased 1.0% and increased 1.4% for the quarter and nine months ended June 30, 2010, respectively, compared to the same prior year periods. Adjusted admissions decreased 0.3% and increased 0.8%, for the quarter and nine months ended June 30, 2010, respectively, compared to the same prior year periods. Our volume has been negatively impacted, in part, by an overall decline in obstetric related services, resulting from the impact of the current economic environment, and the closures of our neonatal intensive care unit on October 1, 2009, and our obstetrics service line on January 1, 2010, at our North Las Vegas hospital. Excluding these service line closures, admissions increased 1.4% and 3.3% for the quarter and nine months ended June 30, 2010, respectively, compared to the same prior year periods, while adjusted admissions increased 2.1% and 2.7% for the quarter and nine months ended June 30, 2010, respectively, compared to the same prior year periods. These volume improvements have been driven primarily by growth in our inpatient surgeries, as well as general medicine and psychiatric services.
While we have experienced growth in our inpatient service lines, we believe that outpatient volumes continue to be negatively impacted, in part, by the effect of the economic climate in our markets, including the impact of high unemployment and patient decisions to defer or cancel elective procedures, general primary care and other non-emergent healthcare procedures until their conditions become more acute. The deferral of non-emergent procedures has also been facilitated by an increase in the number of high deductible employer sponsored health plans, which ultimately shift more of the medical cost responsibility onto the patient. As a result, these factors have contributed to declines in both emergency room visits and outpatient surgeries.
We believe our volumes over the long-term will continue to grow as a result of our business strategies, including the strategic deployment of capital, the expansion of our physician base and the general aging of the population.
The following table provides the sources of our gross patient revenue by payor for the quarters and nine months ended June 30, 2010 and 2009.
                                 
    Quarter Ended     Nine Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Medicare
    30.9 %     30.2 %     31.4 %     31.6 %
Managed Medicare
    12.7 %     11.8 %     12.3 %     11.6 %
Medicaid
    8.5 %     8.3 %     8.3 %     8.1 %
Managed Medicaid
    12.2 %     10.8 %     12.2 %     10.6 %
Managed care and other
    30.3 %     34.0 %     30.8 %     33.2 %
Self-pay
    5.4 %     4.9 %     5.0 %     4.9 %
 
                       
Total
    100.0 %     100.0 %     100.0 %     100.0 %
 
                       
Consistent with industry trends, we are currently experiencing a shift in our patient volumes and revenue from commercial and managed care payors to Medicaid and managed Medicaid. Given the high rate of unemployment and its impact on the economy, particularly in the markets we serve, we expect the increase in our Medicaid and managed Medicaid payor mixes to continue until the U.S. economy experiences an economic recovery that includes job growth and declining unemployment. Additionally, the decline in outpatient related volumes, the majority of which are typically comprised of commercial and managed care patients, has contributed to the decline in our managed care revenue mix.
Net patient revenue per adjusted admission increased 5.5% and 4.6% for the quarter and nine months ended June 30, 2010, respectively, compared to the same prior year periods. Our net patient revenue per adjusted admission has benefitted, in part, from an overall decline in obstetric related services, which was particularly impacted by the service line closures at our North Las Vegas hospital, as well as continued increases in managed care rates, additional supplemental Medicaid reimbursement associated with our Texas market, and growth in physician practice revenue as we continue to invest in our physician employment strategy. While our net patient revenue per adjusted admission continues to increase, the impact of high unemployment and other industry pressures, including but not limited to the shift in our payor mix from commercial and managed care payors to more Medicaid and managed Medicaid, both of which typically result in lower reimbursement on a per adjusted admission basis, have contributed to moderating rates of pricing growth. Additionally, the impact of state budgetary issues on Medicaid funding, which has resulted in rate freezes and in some cases rate cuts to providers, has caused a decline in pricing related to Medicaid and managed Medicaid volumes, which is compounded by the impact of increasing Medicaid utilization. As states continue working through their budgetary issues, any additional cuts to Medicaid funding would negatively impact our future pricing.

 

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The Health Reform Law provides for annual decreases to the market basket updates used to adjust Medicare reimbursement rates for hospital services, including a 0.25% reduction to the market basket for 2010 for discharges occurring on or after April 1, 2010. The Health Reform Law also provides for the following reductions to the market basket update for each of the following federal fiscal years: 0.25% in 2011, 0.1% in 2012 and 2013, 0.3% in 2014, 0.2% in 2015 and 2016, and 0.75% in 2017, 2018, and 2019. For federal fiscal year 2012 and each subsequent federal fiscal year, the Health Reform Law provides for the annual market basket update to be further reduced by a productivity adjustment, based on nationwide productivity gains over the preceding 10 years. CMS estimates that the combined market basket and productivity adjustments will reduce Medicare payments under the inpatient prospective payment system by $112.6 billion from 2010 to 2019.
For federal fiscal year 2010, CMS provided a 2.1% market basket update to the Medicare severity diagnosis-related group (“MS-DRG”) rate for hospitals that submit certain quality patient care indicators. However, as required by the Health Reform Law, CMS reduced the federal fiscal year 2010 market basket increase applicable to discharges occurring on or after April 1, 2010, by 0.25% to 1.85%.
On July 30, 2010, CMS issued a final rule updating the MS-DRG rate for the federal fiscal year 2011 hospital inpatient prospective payment system by 2.35%, which includes a market basket increase of 2.6% and, as required by the Health Reform Law, a reduction of 0.25%. In addition, CMS has finalized a documentation and coding adjustment of negative 2.9% in federal fiscal year 2011 to account for changes in payments unrelated to changes in patient case mix in federal fiscal years 2008 and 2009. This reduction represents one-half of the documentation and coding adjustment required to recover the increase in aggregate payments made in 2008 and 2009 during implementation of the MS-DRG system. CMS plans to recover the remaining 2.9% and interest in federal fiscal year 2012. When these adjustments are combined, hospitals will face a net reduction of 0.55% in payments for inpatient services in federal fiscal year 2011. Those hospitals that do not submit certain quality patient care indicators in federal fiscal year 2010 will receive an additional 2.0% reduction in federal fiscal year 2011. CMS has also announced that an additional prospective and permanent downward adjustment of 3.9% will be needed to avoid increased Medicare spending unrelated to patient severity of illness. CMS is not implementing this additional 3.9% reduction at this time, but has stated that it will be required in the future.
In some cases, commercial third-party payors and other payors such as some state Medicaid programs rely on all or portions of the MS-DRG system to determine payment rates; therefore, adjustments that negatively impact Medicare payments may also negatively impact payments from these other payors.
Premium Revenue
Premium revenue generated under the AHCCCS and CMS contracts with Health Choice represented 31.3% and 31.2% of our consolidated net revenue for the quarter and nine months ended June 30, 2010, respectively, compared to 30.5% and 29.0%, respectively, in the same prior year periods. Most premium revenue at Health Choice is derived through a contract with AHCCCS to provide specified health services to qualified Medicaid enrollees through contracted providers. AHCCCS is the state agency that administers Arizona’s Medicaid program. The contract requires Health Choice to arrange for healthcare services for enrolled Medicaid patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates, and supplemental payments from AHCCCS. Health Choice also contracts with CMS to provide coverage as a Medicare Advantage Prescription Drug (“MAPD”) Special Needs Plan (“SNP”). This contract allows Health Choice to offer Medicare and Part D drug benefit coverage to new and existing dual-eligible members (i.e., those that are eligible for Medicare and Medicaid). Under current law, CMS’ authority to designate SNPs has been extended through December 31, 2013. Additionally, effective for this 2010 plan year, SNPs are required to meet additional CMS requirements, including requirements relating to model of care, cost-sharing, disclosure of information, and reporting of quality measures.

 

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The Health Reform Law imposes significant funding cuts on managed Medicare plans by freezing rates for 2011 at the 2010 levels and reducing payments by approximately $132.0 billion to $145.0 billion over ten years, with fee adjustments based on service benchmarks and quality rankings.
As a result of increasing enrollment in the state program, primarily attributable to the impact of high unemployment, Health Choice’s enrollment through its AHCCCS contract at June 30, 2010, exceeded 199,000 members, compared to over 187,000 members at September 30, 2009 and over 181,000 members at June 30, 2009. This increased enrollment experienced by Health Choice has been the primary driver behind the growth in premium revenue during the recent quarters. We anticipate that enrollment levels will continue to be directly impacted by the health of the economy in the state of Arizona.
Premiums received from AHCCCS and CMS to provide services to our members, which have been declining on a per member per month basis, will be further affected by the significant budgetary concerns that continue to face the state of Arizona. As Arizona continues working to eliminate its budget deficit, its recently enacted budget for fiscal year 2011 includes additional reimbursement cuts, including elimination of Medicaid coverage for some services and a cut of up to 5% for all Medicaid providers. In an effort to relieve some of the pressure, on May 18, 2010, voters passed a sales tax referendum that would temporarily raise money at the state level to help fund these budgetary shortfalls. In addition, the state of Arizona has considered budget components that would eliminate Arizona’s State Children’s Health Insurance Program (“SCHIP”), and Medicaid coverage for approximately 310,000 childless adults. However, as a result of the Health Reform Law, which requires states to maintain their Medicaid and SCHIP eligibility levels in place as of March 23, 2010, the state has not pursued these options further, as it would currently result in the loss of federal Medicaid funding. Despite the efforts by state officials and voters, the state legislature may have to consider additional cuts to Medicaid funding beyond the initial 5% that is planned for fiscal 2011, as a result of the impact of the Health Reform Law and the uncertainty surrounding the impact of the recent extension of the federal medical assistance percentage (“FMAP”), which was originally implemented in 2009 by the American Recovery and Reinvestment Act (“ARRA”). Depending upon member mix, we generally believe Health Choice could continue to experience a decline in rates received on a per member per month basis, which may negatively impact our premium revenue over the near-term.
Significant Industry Trends
The following sections discuss recent trends that we believe are significant factors in our current and/or future operating results and cash flows. Certain of these trends apply to the entire acute care hospital industry, while others may apply to us more specifically. These trends could be short-term in nature or could require long-term attention and resources. While these trends may involve certain factors that are outside of our control, the extent to which these trends affect our hospitals and our ability to manage the impact, if any, of these trends play vital roles in our current and future success. In many cases, we are unable to predict what impact these trends will have on us.
Value-Based Reimbursement
There is a trend in the healthcare industry towards value-based purchasing of healthcare services. These value-based purchasing programs include both public reporting and financial incentives tied to the quality and efficiency of care provided by facilities. The Health Reform Law recently enacted by Congress expands the use of value-based purchasing initiatives in federal healthcare programs. We expect programs of this type to become more common in the healthcare industry.

 

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Medicare requires providers to report certain quality measures in order to receive full reimbursement increases that previously were awarded automatically. CMS has expanded, through a series of rulemakings, the number of patient care indicators that hospitals must report. CMS currently requires hospitals to report 46 quality measures in order to qualify for the full market basket update to the inpatient prospective payment system for fiscal year 2011 and will require hospitals to report 55 quality measures to qualify for the full market basket update for fiscal year 2012. CMS will require hospitals to report 57 quality measures in fiscal year 2011 to receive the full market basket update for fiscal year 2013. CMS also requires hospitals to submit quality data regarding eleven measures relating to outpatient care in order to receive the full market basket increase under the outpatient prospective payment system in calendar year 2011. In order to receive the full market basket update for calendar year 2012, CMS has proposed increasing the number of outpatient quality measures that must be reported to 17. We anticipate that CMS will continue to expand the number of inpatient and outpatient quality measures. We have invested significant capital and resources in the implementation of our advanced clinical system that assists us in monitoring and reporting these quality measures. CMS makes the data submitted by hospitals, including our hospitals, public on its website.
Medicare no longer pays hospitals additional amounts for the treatment of certain preventable adverse events, also known as hospital-acquired conditions (“HACs”), unless the condition was present at admission. Currently, there are ten categories of conditions on the list of HACs. On January 15, 2009, CMS announced three National Coverage Determinations that prohibit Medicare reimbursement for erroneous surgical procedures performed on an inpatient or outpatient basis. These three erroneous surgical procedures are in addition to the HACs designated by CMS by regulation. The Deficit Reduction Act of 2005 provides that CMS may revise the list of HACs from time to time. Effective July 1, 2011, the Health Reform Law will prohibit the use of federal funds under the Medicaid program to reimburse providers for medical assistance provided to treat HACs. Further, effective federal fiscal year 2013, hospitals with excessive readmissions for certain conditions designated by the Department will receive reduced payments for all inpatient discharges, not just discharges relating to the conditions subject to the excessive readmission standard. Beginning in federal fiscal year 2015, hospitals that fall into the top 25% of national risk-adjusted HAC rates for all hospitals in the previous year will receive a 1% reduction in their total Medicare payments.
The Health Reform Law also requires the Department to implement a value-based purchasing program for inpatient hospital services. Beginning in federal fiscal year 2013, the Department will reduce inpatient hospital payments for all discharges by a percentage specified by statute ranging from 1% to 2% and pool the total amount collected from these reductions to fund payments to reward hospitals that meet or exceed certain quality performance standards established by the Department. The Department will determine the amount received by each hospital that meets or exceeds the quality performance standards from the pool of dollars created by these payment reductions.
Many large commercial payors currently require providers to report quality data. Several commercial payors have announced that they will stop reimbursing hospitals for certain preventable adverse events. A number of state hospital associations have also announced policies addressing the waiver of patient bills for care related to a serious adverse event. In addition, managed care organizations may begin programs that condition payment on performance against specified measures. The quality measurement criteria used by commercial payors may be similar to or even more stringent than Medicare requirements.
We expect these trends towards value-based purchasing of healthcare services by Medicare and other payors to continue. Because of these trends, if we are unable to demonstrate quality of care in our facilities, our operating results could be significantly impacted in the future.
Physician Integration
In an effort to meet community needs and address coverage issues, we continue to recruit and employ physicians with primary emphasis on family practice and internal medicine, general surgery, hospitalists, obstetrics and gynecology, cardiology, neurology and orthopedics. Our ability to attract and retain skilled physicians to our hospitals is critical to our success and is affected by the quality of care at our hospitals. This is one reason we have taken significant steps in implementing our expanded quality of care initiatives. We believe intense efforts focusing on quality of care will enhance our ability to recruit and retain the skilled physicians necessary to make our hospitals successful.

 

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We experience certain risks associated with the integration of medical staffs at our hospitals. As we continue to focus on our physician employment strategy, we face significant competition for skilled physicians in certain of our markets as more hospital providers adopt a physician staffing model approach, coupled with a general shortage of physicians across most specialties. This increased competition has resulted in efforts by managed care organizations to align with certain provider networks in the markets in which we operate. For the nine months ended June 30, 2010, we have experienced a 32.2% increase in our employed physician base. We expect that employing physicians should provide relief on cost pressures associated with on-call coverage and other professional fees. However, we anticipate incurring additional labor and other start-up related costs as we continue the integration of employed physicians.
We also face risk from competition for outpatient business. We expect to mitigate this risk through continued focus on our physician employment strategy, our commitment to capital investment in our hospitals, including updated technology and equipment, and our commitment to our quality of care initiatives that some competitors, including individual physicians or physician groups, may not be equipped to implement.
Uncompensated Care
Like others in the hospital industry, we continue to experience high levels of uncompensated care, including charity care and bad debts. These elevated levels are driven by the number of uninsured patients seeking care at our hospitals, increasing healthcare costs and other factors beyond our control, such as increases in the amount of co-payments and deductibles as employers continue to pass more of these costs on to their employees. In addition, as a result of high unemployment and its impact on the economy, we believe that our hospitals may continue to experience high levels of or possibly growth in bad debts and charity care. During the quarter and nine months ended June 30, 2010, our uncompensated care as a percentage of acute care revenue was 13.3% and 12.8%, respectively, compared to 12.8% and 13.0% in the same prior year periods.
We continue to monitor our self-pay admissions on a daily basis and continue to focus on the efficiency of our emergency rooms, point-of-service cash collections, Medicaid eligibility automation and process-flow improvements. While the volume of patients registered as uninsured remains high, we continue to be successful in qualifying many of these uninsured patients for Medicaid or other third-party coverage, which has helped to alleviate some of the pressure created from the growth in our uncompensated care.
Our level of uncompensated care continues to be affected by the volume of under-insured patients or patient balances after insurance. At June 30, 2010, self-pay balances after insurance were $35.0 million, compared to $37.3 million at September 30, 2009, and $35.0 million at June 30, 2009.
We anticipate that if we experience further growth in uninsured volume and revenue over the near-term, along with continued increases in co-payments and deductibles for insured patients, our uncompensated care will increase and our results of operations could be adversely affected.
One purpose of the Health Reform Law is to decrease the number of uninsured individuals, which should reduce our losses associated with providing indigent care. However, since the Health Reform Law will be gradually implemented, with many of the provisions not taking effect until 2014 or later, it is not possible to predict the full impact of the Health Reform Law on our level of uncompensated care, or how soon the impact will be felt.

 

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The percentages of insured and uninsured gross hospital receivables (prior to allowances for contractual adjustments and doubtful accounts) are summarized as follows:
                 
    June 30,     September 30,  
    2010     2009  
Insured receivables
    63.3 %     62.0 %
Uninsured receivables
    36.7 %     38.0 %
 
           
Total
    100.0 %     100.0 %
 
           
The percentages in the table above are calculated using gross receivable balances. Uninsured receivables and insured receivables are net of discounts and contractual adjustments recorded at the time of billing. The shift from uninsured to insured receivables reflects improved cash collections on self-pay accounts, as well as our success in qualifying uninsured patients for Medicaid or other third-party coverage. Included in insured receivables are accounts that are pending approval from Medicaid. These receivables were 2.4% and 3.2% of gross hospital receivables at June 30, 2010 and September 30, 2009, respectively.
The percentages of gross hospital receivables in summarized aging categories are as follows:
                 
    June 30,     September 30,  
    2010     2009  
0 to 90 days
    72.6 %     69.4 %
91 to 180 days
    16.8 %     18.1 %
Over 180 days
    10.6 %     12.5 %
 
           
Total
    100.0 %     100.0 %
 
           
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
A summary of significant accounting policies is disclosed in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. Our critical accounting policies are further described under the caption “Critical Accounting Policies and Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. There have been no changes in the nature of our critical accounting policies or the application of those policies since September 30, 2009.

 

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SELECTED OPERATING DATA
The following table sets forth certain unaudited operating data for each of the periods presented.
                                 
    Quarter Ended     Nine Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
 
                               
Acute Care
                               
Number of acute care hospital facilities at end of period
    15       15       15       15  
Beds in service at end of period (1)
    2,886       2,789       2,886       2,789  
Average length of stay (days) (2)
    4.8       4.7       4.8       4.7  
Occupancy rates (average beds in service)
    45.9 %     46.2 %     46.9 %     47.5 %
Admissions (3)
    24,968       25,229       76,679       75,628  
Adjusted admissions (4)
    42,655       42,780       127,654       126,615  
Patient days (5)
    120,515       117,378       369,402       354,332  
Adjusted patient days (4)
    198,439       191,157       593,277       569,299  
Net patient revenue per adjusted admission
  $ 10,197     $ 9,668     $ 10,118     $ 9,671  
Outpatient revenue as a % of gross patient revenue
    40.7 %     39.6 %     39.1 %     38.8 %
 
                               
Health Choice
                               
Medicaid covered lives
    195,183       177,933       195,183       177,933  
Dual-eligible lives (6)
    4,256       3,580       4,256       3,580  
Medical loss ratio (7)
    87.3 %     87.9 %     87.8 %     85.1 %
     
(1)   Includes St. Luke’s Behavioral Hospital.
 
(2)   Represents the average number of days that a patient stayed in our hospitals.
 
(3)   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.
 
(4)   Adjusted admissions and adjusted patient days are general measures of combined inpatient and outpatient volume. We compute adjusted admissions/patient days by multiplying admissions/patient days by gross patient revenue and then dividing that number by gross inpatient revenue.
 
(5)   Represents the number of days our beds were occupied by inpatients over the period.
 
(6)   Represents members eligible for Medicare and Medicaid benefits under Health Choice’s contract with CMS to provide coverage as a MAPD SNP.
 
(7)   Represents medical claims expense as a percentage of premium revenue, including claims paid to our hospitals.

 

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RESULTS OF OPERATIONS SUMMARY
Consolidated
The following table sets forth, for the periods presented, our results of consolidated operations expressed in dollars and as a percentage of net revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.
                                                                 
    Quarter Ended     Quarter Ended     Nine Months Ended     Nine Months Ended  
    June 30, 2010     June 30, 2009     June 30, 2010     June 30, 2009  
($ in thousands)   Amount     Percentage     Amount     Percentage     Amount     Percentage     Amount     Percentage  
 
                                                               
Net revenue
                                                               
Acute care revenue
  $ 438,211       68.7 %   $ 417,880       69.5 %   $ 1,300,445       68.8 %   $ 1,237,506       71.0 %
Premium revenue
    199,777       31.3 %     183,738       30.5 %     591,022       31.2 %     504,410       29.0 %
 
                                               
Total net revenue
    637,988       100.0 %     601,618       100.0 %     1,891,467       100.0 %     1,741,916       100.0 %
 
                                                               
Costs and expenses
                                                               
Salaries and benefits
    170,035       26.7 %     164,879       27.4 %     514,688       27.2 %     495,387       28.4 %
Supplies
    66,333       10.4 %     63,950       10.6 %     200,167       10.6 %     187,529       10.8 %
Medical claims
    172,031       27.0 %     158,919       26.4 %     510,692       27.0 %     422,519       24.3 %
Other operating expenses
    93,579       14.7 %     79,708       13.3 %     266,854       14.1 %     237,011       13.6 %
Provision for bad debts
    49,416       7.7 %     45,594       7.6 %     142,901       7.6 %     137,892       7.9 %
Rentals and leases
    10,067       1.6 %     10,008       1.7 %     30,487       1.6 %     29,221       1.7 %
Interest expense, net
    16,711       2.6 %     16,334       2.7 %     50,065       2.7 %     51,129       2.9 %
Depreciation and amortization
    24,007       3.7 %     24,217       4.0 %     71,909       3.8 %     73,509       4.2 %
Management fees
    1,250       0.2 %     1,250       0.2 %     3,750       0.2 %     3,750       0.2 %
Hurricane-related property damage
                                  938       0.1 %
 
                                               
Total costs and expenses
    603,429       94.6 %     564,859       93.9 %     1,791,513       94.8 %     1,638,885       94.1 %
 
                                                               
Earnings from continuing operations before gain (loss) on disposal of assets and income taxes
    34,559       5.4 %     36,759       6.1 %     99,954       5.2 %     103,031       5.9 %
Gain (loss) on disposal of assets, net
    (149 )     0.0 %     184       0.0 %     (206 )     0.0 %     1,497       0.1 %
 
                                               
 
                                                               
Earnings from continuing operations before income taxes
    34,410       5.4 %     36,943       6.1 %     99,748       5.2 %     104,528       6.0 %
Income tax expense
    12,683       2.0 %     13,715       2.3 %     36,544       1.9 %     38,975       2.3 %
 
                                               
 
                                                               
Net earnings from continuing operations
    21,727       3.4 %     23,228       3.8 %     63,204       3.3 %     65,553       3.7 %
Earnings (loss) from discontinued operations, net of income taxes
    (384 )     (0.1 )%     167       0.0 %     (363 )     0.0 %     (333 )     0.0 %
 
                                               
 
                                                               
Net earnings
    21,343       3.3 %     23,395       3.8 %     62,841       3.3 %     65,220       3.7 %
Net earnings attributable to non-controlling interests
    (2,002 )     (0.3 )%     (2,666 )     (0.4 )%     (6,063 )     (0.3 )%     (7,240 )     (0.4 )%
 
                                               
 
                                                               
Net earnings attributable to IASIS Healthcare LLC
  $ 19,341       3.0 %   $ 20,729       3.4 %   $ 56,778       3.0 %   $ 57,980       3.3 %
 
                                               

 

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Acute Care
The following table and discussion sets forth, for the periods presented, the results of our acute care operations expressed in dollars and as a percentage of acute care revenue, prior to elimination of revenue between segments. Such information has been derived from our unaudited condensed consolidated statements of operations.
                                                                 
    Quarter Ended     Quarter Ended     Nine Months Ended     Nine Months Ended  
    June 30, 2010     June 30, 2009     June 30, 2010     June 30, 2009  
($ in thousands)   Amount     Percentage     Amount     Percentage     Amount     Percentage     Amount     Percentage  
 
                                                               
Acute care revenue
                                                               
Acute care revenue
  $ 438,211       99.5 %   $ 417,880       99.4 %   $ 1,300,445       99.4 %   $ 1,237,506       99.5 %
Revenue between segments (1)
    2,319       0.5 %     2,542       0.6 %     8,331       0.6 %     6,551       0.5 %
 
                                               
Total acute care revenue
    440,530       100.0 %     420,422       100.0 %     1,308,776       100.0 %     1,244,057       100.0 %
 
                                                               
Costs and expenses
                                                               
Salaries and benefits
    165,169       37.5 %     159,979       38.1 %     500,283       38.2 %     480,634       38.6 %
Supplies
    66,293       15.0 %     63,905       15.2 %     200,030       15.3 %     187,316       15.1 %
Other operating expenses
    87,451       19.9 %     75,876       18.0 %     248,380       19.0 %     220,272       17.7 %
Provision for bad debts
    49,416       11.2 %     45,594       10.8 %     142,901       10.9 %     137,892       11.1 %
Rentals and leases
    9,650       2.2 %     9,635       2.3 %     29,334       2.2 %     28,038       2.2 %
Interest expense, net
    16,711       3.8 %     16,334       3.9 %     50,065       3.8 %     51,129       4.1 %
Depreciation and amortization
    23,115       5.2 %     23,320       5.6 %     69,240       5.3 %     70,860       5.7 %
Management fees
    1,250       0.3 %     1,250       0.3 %     3,750       0.3 %     3,750       0.3 %
Hurricane-related property damage
                                      938       0.1 %
 
                                               
Total costs and expenses
    419,055       95.1 %     395,893       94.2 %     1,243,983       95.0 %     1,180,829       94.9 %
 
                                                               
Earnings from continuing operations before gain (loss) on disposal of assets and income taxes
    21,475       4.9 %     24,529       5.8 %     64,793       5.0 %     63,228       5.1 %
 
                                                               
Gain (loss) on disposal of assets, net
    (149 )     0.0 %     184       0.0 %     (206 )     0.0 %     1,497       0.1 %
 
                                               
Earnings from continuing operations before income taxes
  $ 21,326       4.9 %   $ 24,713       5.8 %   $ 64,587       5.0 %   $ 64,725       5.2 %
 
                                               
     
(1)   Revenue between segments is eliminated in our consolidated results.
Quarters Ended June 30, 2010 and 2009
Acute care revenue — Acute care revenue from our hospital operations for the quarter ended June 30, 2010, was $440.5 million, an increase of $20.1 million or 4.8%, compared to $420.4 million in the prior year quarter. The increase in acute care revenue is due primarily to an increase in net patient revenue per adjusted admission of 5.5%, offset by a 0.3% decrease in adjusted admissions.
Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in acute care revenue of $2.2 million and $1.4 million for the quarters ended June 30, 2010 and 2009, respectively.
Salaries and benefits — Salaries and benefits expense from our hospital operations for the quarter ended June 30, 2010, was $165.2 million, or 37.5% of acute care revenue, compared to $160.0 million, or 38.1% of acute care revenue in the prior year quarter. The improvement in our salaries and benefits expense as a percentage of acute care revenue is the result of a 0.6% decline in nursing contract labor as a percentage of acute care revenue, compared to the prior year quarter.
Other operating expenses — Other operating expenses from our hospital operations for the quarter ended June 30, 2010, were $87.5 million, or 19.9% of acute care revenue, compared to $75.9 million, or 18.0% of acute care revenue in the prior year quarter. Included in the current year quarter were increased professional fees associated with our participation in the indigent care affiliation agreements in our Texas market. Excluding the impact of these indigent care affiliation agreements, other operating expenses as a percentage of acute care revenue were 16.9% for the quarter ended June 30, 2010, compared to 16.3% in the prior year quarter. Additionally, we experienced a 0.2% increase in other professional fees, a 0.2% increase in non-income taxes related to state-level provider tax programs and a 0.1% increase in purchased services primarily related to additional information technology costs.
Provision for bad debts — Provision for bad debts from our hospital operations for the quarter ended June 30, 2010, was $49.4 million, or 11.2% of acute care revenue, compared to $45.6 million, or 10.8% of acute care revenue in the prior year quarter. As a result of the current economic environment and the related impact of high unemployment, we experienced an increase in self-pay volume and revenue. Self-pay admissions increased 1.1% in the current quarter, as compared to the prior year quarter, and self-pay admissions as a percentage of total admissions were 5.9%, compared to 5.8% in the prior year quarter.
Nine Months Ended June 30, 2010 and 2009
Acute care revenue — Acute care revenue from our hospital operations for the nine months ended June 30, 2010, was $1.3 billion, an increase of $64.7 million or 5.2%, compared to $1.2 billion in the prior year period. The increase in acute care revenue is comprised of an increase in adjusted admissions of 0.8% and an increase in net patient revenue per adjusted admission of 4.6%.
Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in acute care revenue of $4.7 million and $3.5 million for the nine months ended June 30, 2010 and 2009, respectively.

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Salaries and benefits — Salaries and benefits expense from our hospital operations for the nine months ended June 30, 2010, was $500.3 million, or 38.2% of acute care revenue, compared to $480.6 million, or 38.6% of acute care revenue in the prior year period. Included in the current year period was $2.0 million of stock compensation expense incurred in connection with the repurchase of certain equity by our parent company. Excluding all stock compensation expense, salaries and benefits expense was 38.0% of acute care revenue for the nine months ended June 30, 2010, compared to 38.6% in the prior year period. During the current year period, we experienced a 0.3% improvement in contract labor as a percentage of acute care revenue, compared to the prior year period. The remaining decline in salaries and benefits expense as a percentage of acute care revenue is the result of improved productivity management leveraged against growth in acute care revenue.
Other operating expenses — Other operating expenses from our hospital operations for the nine months ended June 30, 2010, were $248.4 million, or 19.0% of acute care revenue, compared to $220.3 million, or 17.7% of acute care revenue in the prior year period. Included in the current year period were increased professional fees associated with our participation in the indigent care affiliation agreements in our Texas market. Excluding the impact of these indigent care affiliation agreements, other operating expenses as a percentage of acute care revenue were 16.3% for the nine months ended June 30, 2010, compared to 15.7% in the prior year period. Other operating expenses in the current year period also included a $1.9 million reduction in insurance expense resulting from changes in prior year actuarial estimates associated with our professional and general liability reserves, compared to a $3.2 million reduction in the prior year period. The remaining increase in other operating expenses as a percentage of acute care revenue in the current year period is comprised of an increase in purchased services, primarily associated with additional information technology costs and collection agency fees.
Provision for bad debts — Provision for bad debts from our hospital operations for the nine months ended June 30, 2010, was $142.9 million, or 10.9% of acute care revenue, compared to $137.9 million, or 11.1% of acute care revenue in the prior year period. The decrease in the provision for bad debts as a percentage of acute care revenue reflects our success at qualifying uninsured patients for coverage under Medicaid. As a result of the effects of a significant economic downturn, including the impact of high unemployment and the related increase in the number of individuals eligible for Medicaid or similar programs, we have experienced an increase in the number of patients qualifying for such coverage.
Health Choice
The following table and discussion sets forth, for the periods presented, the results of our Health Choice operations expressed in dollars and as a percentage of premium revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.
                                                                 
    Quarter Ended     Quarter Ended     Nine Months Ended     Nine Months Ended  
    June 30, 2010     June 30, 2009     June 30, 2010     June 30, 2009  
($ in thousands)   Amount     Percentage     Amount     Percentage     Amount     Percentage     Amount     Percentage  
 
                                                               
Premium revenue
                                                               
Premium revenue
  $ 199,777       100.0 %   $ 183,738       100.0 %   $ 591,022       100.0 %   $ 504,410       100.0 %
 
                                                               
Costs and expenses
                                                               
Salaries and benefits
    4,866       2.4 %     4,900       2.6 %     14,405       2.4 %     14,753       3.0 %
Supplies
    40       0.0 %     45       0.0 %     137       0.0 %     213       0.0 %
Medical claims (1)
    174,350       87.3 %     161,461       87.9 %     519,023       87.8 %     429,070       85.1 %
Other operating expenses
    6,128       3.1 %     3,832       2.1 %     18,474       3.2 %     16,739       3.3 %
Rentals and leases
    417       0.2 %     373       0.2 %     1,153       0.2 %     1,183       0.2 %
Depreciation and amortization
    892       0.5 %     897       0.5 %     2,669       0.5 %     2,649       0.5 %
 
                                               
Total costs and expenses
    186,693       93.5 %     171,508       93.3 %     555,861       94.1 %     464,607       92.1 %
 
                                               
Earnings before income taxes
  $ 13,084       6.5 %   $ 12,230       6.7 %   $ 35,161       5.9 %   $ 39,803       7.9 %
 
                                               
     
(1)   Medical claims paid to our hospitals of $2.3 million and $2.5 million for the quarters ended June 30, 2010 and 2009, respectively, and $8.3 million and $6.6 million for the nine months ended June 30, 2010 and 2009, respectively, are eliminated in our consolidated results.

 

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Quarters Ended June 30, 2010 and 2009
Premium revenue — Premium revenue from Health Choice for the quarter ended June 30, 2010, was $199.8 million, an increase of $16.0 million or 8.7%, compared to $183.7 million in the prior year quarter. The growth in premium revenue was due to a 12.2% increase in Medicaid member months resulting from increased enrollment in the state program, primarily attributable to the impact of high unemployment, partially offset by a 3.5% decline in Medicaid premium revenue on a per member per month basis.
Medical claims — Medical claims expense for the quarter ended June 30, 2010, was $174.4 million, compared to $161.5 million in the prior year quarter. Medical claims expense as a percentage of premium revenue was 87.3% for the quarter ended June 30, 2010, compared to 87.9% in the prior year quarter. The decrease in our medical claims expense as a percentage of premium revenue is primarily due to improvements in utilization, which have helped to reduce costs on a per member per month basis.
Nine Months Ended June 30, 2010 and 2009
Premium revenue — Premium revenue from Health Choice for the nine months ended June 30, 2010, was $591.0 million, an increase of $86.6 million or 17.2%, compared to $504.4 million in the prior year period. The growth in premium revenue was due to a 17.7% increase in Medicaid member months resulting from increased enrollment in the state program, primarily attributable to the impact of high unemployment, as well as slight gains in market share.
Medical claims — Medical claims expense for the nine months ended June 30, 2010, was $519.0 million, compared to $429.1 million in the prior year period. Medical claims expense as a percentage of premium revenue was 87.8% for the nine months ended June 30, 2010, compared to 85.1% in the prior year period. The increase in our medical claims expense as a percentage of premium revenue is primarily the result of an overall increase in medical costs on a per member per month basis, compared to the prior year period, coupled with a 1.3% decline in overall premium revenue on a per member per month basis.
Income Taxes
The following discussion sets forth, for the periods indicated, the impact of income taxes on our consolidated results. Such information has been derived from our unaudited condensed consolidated statements of operations.
Quarters Ended June 30, 2010 and 2009
Income tax expense — Income tax expense for the quarter ended June 30, 2010, resulted in an effective tax rate on earnings from continuing operations of 36.9%, compared to 37.1% in the prior year quarter.
Nine Months Ended June 30, 2010 and 2009
Income tax expense — Income tax expense for the nine months ended June 30, 2010, resulted in an effective tax rate on earnings from continuing operations of 36.6%, compared to 37.3% in the prior year period. The decrease in our effective tax rate is primarily the result of lower valuation allowances, related to subsidiary net operating losses, in the current year period, compared to the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
Overview of Cash Flow Activities for the Nine Months Ended June 30, 2010 and 2009
Our cash flows are summarized as follows (in thousands):
                 
    Nine Months Ended  
    June 30,  
    2010     2009  
Cash flow from operating activities
  $ 113,915     $ 172,406  
Cash flow from investing activities
    (51,559 )     (61,047 )
Cash flow from financing activities
    (138,724 )     (59,772 )
Operating Activities
The decrease in operating cash flows of $58.5 million for the nine months ended June 30, 2010, compared to the prior year period, is attributable to the delayed receipt of Health Choice’s June capitation payment from AHCCCS totaling $64.7 million, in connection with a state-wide effort in Arizona to manage the state’s fiscal budget issues. The capitation payment was subsequently received in July 2010.
At June 30, 2010, we had $215.5 million in net working capital, compared to $264.5 million at September 30, 2009. Net accounts receivable decreased $8.9 million to $221.3 million at June 30, 2010, from $230.2 million at September 30, 2009. Our days revenue in accounts receivable at June 30, 2010, were 45, compared to 48 at September 30, 2009, and 51 at June 30, 2009.

 

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Investing Activities
Capital expenditures for the nine months ended June 30, 2010, were $53.5 million, compared to $66.6 million in the prior year period. During the current year period, we have spent $13.7 million in information technology in an effort to meet the “meaningful use” requirements set forth by the IT stimulus mandate included in the ARRA. Included in the prior year period was $23.4 million related to the construction of our two patient tower projects in our Utah market, which were completed during fiscal 2009.
Financing Activities
During the nine months ended June 30, 2010, we distributed $125.0 million, net of a $1.8 million income tax benefit, to IASIS Healthcare Corporation (“IAS”), our parent company, to fund the repurchase of certain shares of its outstanding preferred stock and cancel certain vested rollover options to purchase its common stock. The holder of the IAS preferred stock is represented by an investor group led by TPG, JLL Partners and Trimaran Fund Management. The repurchase of preferred stock, which included accrued and outstanding dividends, and the cancellation of rollover options were funded by our excess cash on hand. The cancellation of the rollover options, which were associated with our 2004 recapitalization, resulted in the recognition of $2.0 million in stock compensation expense during the nine months ended June 30, 2010.
During the nine months ended June 30, 2010, pursuant to the terms of our senior secured credit facilities, we made net payments of $4.4 million, compared to $52.2 million in the prior year period, which included the repayment of $47.8 million outstanding under our revolving credit facility. Additionally, we made payments totaling $2.4 million on capital leases and other debt obligations during the nine months ended June 30, 2010, compared to $1.5 million in the prior year period.
Capital Resources
$854.0 Million Senior Secured Credit Facilities
The $854.0 million senior secured credit facilities include: (i) a senior secured term loan of $439.0 million; (ii) a senior secured delayed draw term loan of $150.0 million; (iii) a senior secured revolving credit facility of $225.0 million, with a $100.0 million sub-limit for letters of credit; and (iv) a senior secured synthetic letter of credit facility of $40.0 million. All facilities mature on March 15, 2014, except for the revolving credit facility, which matures on April 27, 2013. The term loans bear interest at an annual rate of LIBOR plus 2.00% or, at our option, the administrative agent’s base rate plus 1.00%. The revolving loans bear interest at an annual rate of LIBOR plus an applicable margin ranging from 1.25% to 1.75% or, at our option, the administrative agent’s base rate plus an applicable margin ranging from 0.25% to 0.75%, such rate in each case depending on our senior secured leverage ratio. A commitment fee ranging from 0.375% to 0.50% per annum is charged on the undrawn portion of the senior secured revolving credit facility and is payable in arrears.
Principal under the senior secured term loan is due in 24 consecutive equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount ($439.0 million) during the first six years thereof, with the balance payable in four equal installments beginning April 2013. Principal under the senior secured delayed draw term loan is due in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount ($150.0 million) until March 31, 2013, with the balance payable in four equal installments during the final year of the loan. The senior secured credit facilities are also subject to mandatory prepayment under specific circumstances, including a portion of excess cash flow, a portion of the net proceeds from an initial public offering, asset sales, debt issuances and specified casualty events, each subject to various exceptions.
The senior secured credit facilities are (i) secured by a first mortgage and lien on our real property and related personal and intellectual property and pledges of equity interests in the entities that own such properties and (ii) guaranteed by certain of our subsidiaries.
The senior secured credit facilities contain certain covenants which, among other things, limit the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, liens and encumbrances and other matters customarily restricted in such agreements. The senior secured credit facilities agreement contains a customary restricted payments covenant, which, among others restrictions, limits the amount of dividends or other cash payments to IAS. As of June 30, 2010, we have $183.0 million available to expend free of any such restrictions pursuant to the restricted payment basket provisions set forth in this covenant.

 

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At June 30, 2010, amounts outstanding under our senior secured credit facilities consisted of a $424.7 million term loan and a $147.0 million delayed draw term loan. In addition, we had $39.9 million and $36.2 million in letters of credit outstanding under the synthetic letter of credit facility and the revolving credit facility, respectively. The weighted average interest rate of outstanding borrowings under the senior secured credit facilities was 3.4% and 3.3% for the quarter and nine months ended June 30, 2010, respectively.
$475.0 Million 8 3/4% Senior Subordinated Notes Due 2014
We and our wholly-owned subsidiary, IASIS Capital Corporation, a holding company with no assets or operations, as issuers, have outstanding $475.0 million aggregate principal amount of 8 3/4% notes. Our 8 3/4% notes are general unsecured senior subordinated obligations of the issuers, are subordinated in right of payment to our existing and future senior debt, are pari passu in right of payment with any of our future senior subordinated debt and are senior in right of payment to any of our future subordinated debt. Our existing domestic subsidiaries, other than certain non-guarantor subsidiaries, which include Health Choice and our non-wholly owned subsidiaries, are guarantors of our 8 3/4% notes. Our 8 3/4% notes are effectively subordinated to all of the issuers’ and the guarantors’ secured debt to the extent of the value of the assets securing the debt and are structurally subordinated to all liabilities and commitments (including trade payables and capital lease obligations) of our subsidiaries that are not guarantors of our 8 3/4% notes. Our 8 3/4% notes require semi-annual interest payments in June and December. The indenture related to the 8 3/4% notes contains a customary restricted payments covenant, which, among others restrictions, limits the amount of dividends or other cash payments to IAS, including payments to fund the interest on the Holdings Senior Paid-in-Kind (“PIK”) Loans, which becomes cash-pay in June 2012. As of June 30, 2010, we have $99.0 million available to expend free of any such restrictions pursuant to the restricted payment basket provisions set forth in this covenant.
Holdings Senior PIK Loans
IAS has outstanding Senior PIK Loans, which mature June 15, 2014. Proceeds were used to repurchase certain preferred equity from the stockholders of IAS. The Senior PIK Loans bear interest at an annual rate equal to LIBOR plus 5.25%. The Senior PIK Loans rank behind our existing debt and will convert to cash-pay in June 2012, at which time all accrued interest becomes payable. At June 30, 2010, the outstanding balance of the Senior PIK Loans was $384.2 million, which includes $84.2 million of interest that has accrued to the principal of these loans since the date of issuance, and is recorded in the financial statements of IAS. The credit agreement related to the Senior PIK Loans includes a restricted payments covenant, which, among other restrictions, limits the amount of dividends that can be paid to the stockholders of IAS. As of June 30, 2010, we have $35.0 million available to expend free of any such restrictions pursuant to the restricted payment basket provisions set forth in this covenant.
Other
We are a party to interest rate swap agreements with Citibank, N.A. (“Citibank”) and Wachovia Bank, N.A. (“Wachovia”), as counterparties, with notional amounts totaling $425.0 million, in an effort to manage exposure to floating interest rate risk on a portion of our variable rate debt. The arrangements with each counterparty include two interest rate swap agreements, one with a notional amount of $112.5 million maturing on February 28, 2011, and one with a notional amount of $100.0 million maturing on February 29, 2012. Under these agreements, we are required to make monthly interest payments to our counterparties at fixed annual interest rates ranging from 1.5% to 2.0%, depending upon the agreement. Our counterparties are obligated to make monthly interest payments to us based upon the one-month LIBOR rate in effect over the term of each agreement.
As of June 30, 2010, we provided a performance guaranty in the form of letters of credit totaling $43.2 million for the benefit of AHCCCS to support our obligations under the Health Choice contract to provide and pay for healthcare services. The amount of the performance guaranty is based in part upon the membership in the plan and the related capitation revenue paid to us.

 

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Capital Expenditures
We plan to finance our proposed capital expenditures with cash generated from operations, borrowings under our senior secured credit facilities and other capital sources that may become available. We expect our capital expenditures for fiscal 2010 to be $80.0 million to $85.0 million, including the following significant expenditures:
    $25.0 million to $28.0 million for other growth and new business projects;
    $23.0 million to $25.0 million in replacement or maintenance related projects at our hospitals;
    $20.0 million related to the healthcare information technology stimulus mandate; and
    $12.0 million in hardware and software costs related to other information systems projects.
Liquidity
We rely on cash generated from our operations as our primary source of liquidity, as well as available credit facilities, project and bank financings and the issuance of long-term debt. From time to time, we have also utilized operating lease transactions that are sometimes referred to as off-balance sheet arrangements. We expect that our future funding for working capital needs, capital expenditures, long-term debt repayments and other financing activities will continue to be provided from some or all of these sources. Each of our existing and projected sources of cash is impacted by operational and financial risks that influence the overall amount of cash generated and the capital available to us. For example, cash generated by our business operations may be impacted by, among other things, economic downturns, weather-related catastrophes and adverse industry conditions. Our future liquidity will be impacted by our ability to access capital markets, which may be restricted due to our credit ratings, general market conditions, and by existing or future debt agreements. For a further discussion of risks that can impact our liquidity, see our risk factors beginning on page 25 of our Annual Report of Form 10-K for the fiscal year ended September 30, 2009, and as updated in our Quarterly Reports on Form 10-Q for the quarters ended December 31, 2009 and March 31, 2010.
Including available cash and our senior secured credit facilities at June 30, 2010, we had available liquidity as follows (in millions):
         
Cash and cash equivalents
  $ 130.2  
Available capacity under our senior secured revolving credit facility
    188.8  
 
     
Net available liquidity at June 30, 2010
  $ 319.0  
 
     
Net available liquidity assumes 100% participation from all lenders currently participating in our senior secured revolving credit facility. On February 9, 2010, Barclays Capital assumed a $20.0 million position in our senior secured revolving credit facility, which represents approximately 8.9% of the total capacity. This position was previously held by Lehman Brothers, which we had identified as a defaulting lender. At completion of this assumption, we had access to 100% of our total revolver capacity.
Our net available liquidity at June 30, 2010, includes the impact of AHCCCS delaying Health Choice’s June 2010 capitation premium payment totaling $64.7 million. This payment was subsequently received in July 2010, and currently has no impact on our available liquidity.
In addition to our available liquidity, we expect to generate positive operating cash flows in fiscal 2010. We will also utilize proceeds from our financing activities as needed.
Based upon our current level of operations and anticipated growth, we believe we have sufficient liquidity to meet our cash requirements over the short-term (next 12 months) and over the next three years. In evaluating the sufficiency of our liquidity for both the short-term and long-term, we considered the expected cash flow to be generated by our operations, cash on hand and the available borrowings under our senior secured credit facilities, compared to our anticipated cash requirements for debt service, working capital, capital expenditures and the payment of taxes, as well as funding requirements for long-term liabilities.

 

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We are unable at this time to extend our evaluation of the sufficiency of our liquidity beyond three years. We cannot assure you, however, that our operating performance will generate sufficient cash flow from operations or that future borrowings will be available under our senior secured credit facilities, or otherwise, to enable us to grow our business, service our indebtedness, including the senior secured credit facilities and the 8 3/4% senior subordinated notes, or make anticipated capital expenditures and tax payments. For more information, see our risk factors beginning on page 25 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, and as updated in our Quarterly Reports on Form 10-Q for the quarters ended December 31, 2009 and March 31, 2010.
One element of our business strategy is to selectively pursue acquisitions and strategic alliances in existing and new markets. Any acquisitions or strategic alliances may result in the incurrence of, or assumption by us, of additional indebtedness. We continually assess our capital needs and may seek additional financing, including debt or equity as considered necessary to fund capital expenditures and potential acquisitions or for other corporate purposes. Our future operating performance, ability to service or refinance our 8 3/4% senior subordinated notes and ability to service and extend or refinance our senior secured credit facilities will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. For more information, see our risk factors beginning on page 25 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, and as updated in our Quarterly Reports on Form 10-Q for the quarters ended December 31, 2009 and March 31, 2010.
OFF-BALANCE SHEET ARRANGEMENTS
We are a party to certain rent shortfall agreements, master lease agreements and other similar arrangements with non-affiliated entities and an unconsolidated entity in the ordinary course of business. We do not believe we have engaged in any transaction or arrangement with an unconsolidated entity that is reasonably likely to materially affect liquidity.
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
SEASONALITY
The patient volumes and acute care revenue of our healthcare operations are subject to seasonal variations and generally are greater during the quarter ended March 31 than other quarters. These seasonal variations are caused by a number of factors, including seasonal cycles of illness, climate and weather conditions in our markets, vacation patterns of both patients and physicians and other factors relating to the timing of elective procedures.
RECENT ACCOUNTING PRONOUNCEMENTS
We have adopted the new authoritative guidance issued by the Financial Accounting Standards Board in January 2010 requiring additional information to be disclosed with respect to Level 3 fair value measurements, as well as transfers to and from Level 1 and Level 2 measurements. In addition, enhanced disclosures are required concerning inputs and valuation techniques used to determine Level 2 and Level 3 fair value measurements. The new disclosures and clarifications of existing disclosures were effective for the quarter ending March 31, 2010, with the effective date for additional Level 3 related disclosures effective for periods beginning after December 15, 2010. The adoption of these new provisions have not significantly impacted our disclosures, and we do not anticipate any significant impact in periods after December 15, 2010.

 

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Item 3. 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. The following components of our senior secured credit facilities bear interest at variable rates at specified margins above either the agent bank’s alternate base rate or the LIBOR rate: (i) a $439.0 million, seven-year term loan; (ii) a $150.0 million senior secured delayed draw term loan; and (iii) a $225.0 million, six-year senior secured revolving credit facility. As of June 30, 2010, we had outstanding variable rate debt of $571.7 million. We have managed our market exposure to changes in interest rates by converting $425.0 million of this variable rate debt to fixed rate debt through the use of interest rate swap agreements. Our interest rate swaps provide for $425.0 million of fixed rate debt under our senior secured credit facilities through February 28, 2011 and $200.0 million from March 1, 2011 through February 29, 2012, at rates ranging from 1.5% to 2.0% depending upon the terms of the specific agreement.
Although changes in the alternate base rate or the LIBOR 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 remaining variable rate debt or our consolidated financial position, results of operations or cash flows would not be material. Holding other variables constant, including levels of indebtedness and interest rate swaps, a 0.125% increase in interest rates would have an estimated impact on pre-tax earnings and cash flows for the next twelve month period of $183,000.
Our interest rate swap agreements expose us to credit risk in the event of non-performance by our counterparties, Citibank and Wachovia. However, we do not anticipate non-performance by Citibank or Wachovia.
We have $475.0 million in senior subordinated notes due December 15, 2014, with interest payable semi-annually at the rate of 8 3/4% per annum. At June 30, 2010, the fair market value of the outstanding 8 3/4% notes was $475.0 million, based upon quoted market prices as of that date.
We currently believe we have adequate liquidity to fund operations during the near term through the generation of operating cash flows, cash on hand and access to our revolving credit facility. Our ability to borrow funds under our revolving credit facility is subject to the financial viability of the participating financial institutions. While we do not anticipate any of our current lenders defaulting on their obligations, we are unable to provide assurance that any particular lender will not default at a future date.
Item 4. Controls and Procedures
Evaluations of Disclosure Controls and Procedures
Under the supervision and with the participation of our management team, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of June 30, 2010. Based on this evaluation, the principal executive officer and principal accounting officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic reports.
Changes in Internal Control Over Financial Reporting
During the period covered by this report, there has been no change in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

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PART II. OTHER INFORMATION
Item 6. Exhibits
(a) List of Exhibits:
         
  31.1    
Certification of Principal Executive Officer Pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  31.2    
Certification of Principal Financial Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  IASIS HEALTHCARE LLC
 
 
Date: August 11, 2010  By:   /s/ John M. Doyle    
    John M. Doyle   
    Chief Financial Officer   

 

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EXHIBIT INDEX
         
Exhibit No.   Description
  31.1    
Certification of Principal Executive Officer Pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  31.2    
Certification of Principal Financial Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

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