<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ending June 30, 1999.
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________.
Commission File No.: 001-14397
NEW AMERICAN HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 62-1750169
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
109 WESTPARK DRIVE, SUITE 440
NASHVILLE, TENNESSEE 37027
(Address of principal executive offices) (Zip Code)
(615) 221-5070
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT JULY 30, 1999
----- ----------------------------
<S> <C>
Common stock, $.01 par value 17,442,364
</TABLE>
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NEW AMERICAN HEALTHCARE CORPORATION
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets
June 30, 1999 (unaudited) and March 31, 1999 1
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows
Three Months Ended June 30, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 5
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURE 15
</TABLE>
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NEW AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30,1999 (unaudited) and March 31, 1999
(In thousands, except per share information)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
ASSETS 1999 1999
------ -------- --------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents 1,914 5,971
Patient accounts receivable, net of allowance for
doubtful accounts of $10,969 and $10,005 39,475 39,986
Other receivables 779 2,113
Inventories 3,542 3,824
Prepaid expenses and other current assets 1,671 2,393
Assets held for sale 17,861 --
-------- --------
Total current assets 65,242 54,287
Property and equipment, net 92,946 122,199
Goodwill, net of accumulated amortization of $886 and $927 23,839 41,919
Other assets 1,691 1,359
-------- --------
Total assets 183,718 219,764
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 17,029 20,014
Estimated third-party payor settlements 4,229 7,188
Current portion of capital lease obligations 400 447
-------- --------
Total current liabilities 21,658 27,649
Capital lease obligations, excluding current portion 5,398 5,499
Long-term debt 106,300 103,300
Deferred income taxes 262 1,473
Stockholders' equity:
Common stock, $.01 par value; 50,000 shares authorized;
16,019 and 16,172 shares issued and outstanding 160 162
Non-voting common stock, $.01 par value: 1,500 shares
authorized; 1,423 shares issued and outstanding 14 14
Treasury stock, 153 and 92 shares of common stock at cost (16) (5)
Additional paid-in capital 81,969 82,082
Common stock warrants 235 235
Deferred compensation (391) (507)
Accumulated deficit (31,871) (138)
-------- --------
Total stockholders' equity 50,100 81,843
-------- --------
Total liabilities and stockholders' equity 183,718 219,764
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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NEW AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Three months ended June 30, 1999 and 1998
(In thousands, except per share information)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------
1999 1998
---- ----
<S> <C> <C>
Revenue:
Net patient service revenue 49,159 34,856
Other revenue 889 1,042
------- -------
Net operating revenue 50,048 35,898
------- -------
Expenses:
Salaries and benefits 23,200 16,210
Professional fees 7,334 4,715
Supplies 6,077 3,968
Provision for doubtful accounts 5,373 3,012
General and administrative 1,286 665
Asset write-down, transition and other related costs 29,628 --
Other 5,111 3,889
Depreciation and amortization 2,204 1,359
Interest 2,404 1,557
------- -------
82,617 35,375
------- -------
Income (loss) before income taxes (32,569) 523
Income taxes (836) 209
------- -------
Net income (loss) (31,733) 314
Cumulative preferred dividend -- 437
------- -------
Net loss attributable to common stockholders (31,733) (123)
======= =======
Net loss per share:
Basic (1.81) (0.02)
Diluted (1.81) (0.02)
Weighted average number of shares and
dilutive share equivalents outstanding:
Basic 17,500 8,027
======= =======
Diluted 17,500 8,027
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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NEW AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three months ended June 30, 1999 and 1998
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows provided by (used in) operating activities (5,743) 1,066
------ ------
Cash flows from investing activities:
Purchase of property and equipment (1,375) (650)
Sale of property 246 --
------ ------
Net cash used in investing activities (1,129) (650)
------ ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 3,000 --
Repayment of long-term debt -- (6,000)
Repayment of notes payable to affiliates -- (296)
Repayment of capital lease obligations (148) --
Purchase of treasury stock (10) --
Deferred financing costs (27) (69)
------ ------
Net cash provided by (used in) financing activities 2,815 (6,365)
------ ------
Net decrease in cash (4,057) (5,949)
Cash and cash equivalents at beginning of period 5,971 6,119
------ ------
Cash and cash equivalents at end of period 1,914 170
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest 2,261 939
Cash paid during the period for income taxes 142 310
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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NEW AMERICAN HEALTHCARE CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except per share information)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial reporting and the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. Interim results
are not necessarily indicative of results that may be expected for the
full year.
In the opinion of management, the accompanying unaudited interim
financial statements contain all material adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the
consolidated financial position, results of operation and cash flows of
New American Healthcare Corporation (the "Company") for the interim
periods presented.
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 year ended March 31, 1999.
(2) ASSET WRITE-DOWN, TRANSITION AND OTHER RELATED COSTS
Asset write-down, transition and other related costs totaling
approximately $29,628 were recorded during the three months ended June
30, 1999. These charges were comprised of approximately $28,895 of asset
write-down costs, $703 of severance costs and $30 of other related costs.
Assets held for sale totaled approximately $17,861 at June 30, 1999, and
consisted of current assets, property and equipment and other assets from
three hospitals associated with the asset write-down during the three
months ended June 30, 1999. The Company expects to dispose of the assets
during the year ended March 31, 2000. Net revenue and pre-tax losses from
the hospitals to be disposed of totaled $13,262 and $2,012, respectively,
for the three months ended June 30, 1999. Net revenue and pre-tax income
from the hospitals to be disposed of totaled $11,464 and $459,
respectively, for the three months ended June 30, 1998.
(3) SUBSEQUENT EVENTS
Effective August 1, 1999, the Company sold Davenport Medical Center to a
health care system. The value received approximated the net carrying
value of Davenport Medical Center.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
Certain statements in this Report constitute forward-looking
statements. Such forward-looking statements (which may be identified by words
such as "anticipate," "believe," "estimate," "expect," "intend" and similar
expressions) involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others: general economic and business conditions, both
nationally and in regions where the Company operates; demographic changes; the
effect of existing or future governmental regulation and federal and state
legislative and enforcement initiatives affecting the Company's business,
including the Balanced Budget Act of 1997; changes in Medicare and Medicaid
reimbursement levels; the Company's ability to implement successfully its
business strategy and changes in such strategy; the availability and terms of
financing to fund the operation of the Company's business; the Company's ability
to attract and retain qualified management personnel and to recruit and retain
physicians and other health care personnel to the non-urban markets it serves;
the effect of managed care initiatives on the non-urban markets served by the
Company's hospitals and the Company's ability to enter into managed care
provider arrangements on acceptable terms; the effect of liability and other
claims asserted against the Company; the effect of competition in the markets
served by the Company's hospitals; and other factors referenced in this Report.
Certain of these factors are discussed in more detail elsewhere in this Report.
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 herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
OVERVIEW
New American acquires and operates acute care hospitals throughout the
United States. The Company was formed to capitalize on opportunities to be the
principal provider of health care services in those non-urban communities which
it targets.
The Company acquired its first hospital in August 1996 and through June
1999 has acquired ten additional hospitals. These eleven acute care hospitals
are located in nine states and have a total of 1,347 licensed beds.
IMPACT OF ACQUISITIONS
Because of the financial impact of the Company's recent acquisitions,
it is difficult to make meaningful comparisons between the Company's financial
statements for the fiscal periods presented. In addition, due to the relatively
small number of hospitals currently operated, each hospital can materially
affect the overall operating margins of the Company. Upon the acquisition of a
hospital, the Company typically takes a number of steps intended to lower
operating costs. The impact of such actions may be offset by the cost of revenue
enhancing initiatives such as expanding services, strengthening medical staff,
and improving market position. The benefits of these investments and of other
activities to improve operating margins generally do not occur immediately.
Consequently, the financial performance of a newly acquired hospital may
initially have an adverse effect on the Company's overall operating margins. The
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operating results of acquisitions are included in the Company's results of
operations from the respective dates of purchase.
RESULTS OF OPERATIONS
Net operating revenue is comprised of net patient service revenue and
other revenue. Net patient service revenue is reported net of contractual
adjustments and policy discounts. The adjustments principally result from
differences between the hospitals' customary charges and payment rates under the
Medicare and Medicaid programs and other third-party payors. Customary charges
have generally increased at a faster rate than the rate of increase for Medicare
and Medicaid payments. Other revenue includes cafeteria sales, medical office
building rental income and other miscellaneous revenue. Operating expenses
primarily consist of hospital related costs of operation and include salaries
and benefits, professional fees (includes medical professionals and consulting
services), supplies, provision for doubtful accounts, and other operating
expenses (principally consisting of utilities, insurance, property taxes,
travel, freight, postage, telephone, advertising, repairs and maintenance).
General and administrative expenses primarily relate to corporate overhead.
The following table presents, for the periods indicated, information
expressed as a percentage of net operating revenue. Such information has been
derived from the Consolidated Statements of Operations of the Company included
elsewhere in the report.
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERCENTAGE
June 30, Increase (Decrease)
------------------------ of Dollar Amounts
1999 1998
---- ----
<S> <C> <C> <C>
Net operating revenue 100.0% 100.0% 39.3%
Operating expenses before depreciation
and amortization and interest 156.0% 90.3% 140.7%
------------------------
EBITDA (1) -56.0% 9.7% -900.0%
Depreciation and amortization 4.4% 3.9% 57.1%
Interest 4.8% 4.5% 50.0%
------------------------
Income (loss) before income taxes -65.2% 1.4% -6620.0%
Income taxes -1.8% 0.6% -550.0%
------------------------
Income (loss) -63.4% 0.5% -10666.7%
Cumulative preferred dividend 0.0% 1.1% -100.0%
------------------------
Net loss attributable to common stockholders -63.4% -0.6% 31600.0%
========================
</TABLE>
(1) EBITDA represents the sum of income before income tax expense,
interest, and depreciation and amortization. Management understands
that industry analysts generally consider EBITDA to be one measure of
the financial performance of a company that is presented to assist
investors in analyzing the operating performance of the company and its
ability to service debt. Management believes that an increase in EBITDA
level is an indicator of the Company's improved ability to service
existing debt, to sustain potential future increases in debt and to
satisfy capital requirements. However, EBITDA is not a measure of
financial performance under generally accepted accounting principles
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and should not be considered an alternative (i) to net income as a
measure of operating performance or (ii) to cash flows from operating,
investing, or financing activities as a measure of liquidity. Given
that EBITDA is not a measurement determined in accordance with
generally accepted accounting principles and is thus susceptible to
varying calculation, EBITDA, as presented, may not be comparable to
other similarly titled measures of other companies.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Net operating revenue was $50.0 million for the three months ended June
30, 1999, compared to $35.9 million for the comparable period of 1998, an
increase of $14.1 million or 39.3%. Net operating revenue for the hospitals
owned during both three months ended June 30, 1999 and 1998, excluding hospitals
held for sale, was $25.3 and $24.4 million, respectively. Net operating revenue
for the hospitals held for sale owned during both three months ended June 30,
1999 and 1998 was $8.6 and $11.5 million, respectively. This total decrease for
hospitals owned during both periods is primarily due to managed care pricing
pressures in three markets, lower-than-expected volume growth and a slow down in
physician recruitment.
Operating expenses less depreciation and amortization and interest were
$78.0 million, or 156.0% of net operating revenue, for the three months ended
June 30, 1999, compared to $32.4 million, or 90.3% of net operating revenue, for
the comparable period of 1998. Operating expenses less depreciation and
amortization and interest for the hospitals owned during both three months ended
June 30, 1999 and 1998, excluding hospitals held for sale, was $44.9 and $21.8
million, respectively. Operating expenses less depreciation and amortization and
interest for the hospitals held for sale owned during both three months ended
June 30, 1999 and 1998 was $18.7 and $10.6 million, respectively. This total
increase for hospitals owned during both periods is primarily due to $29.6
million of asset write-down, transition and other related costs during the three
months ended June 30, 1999.
Depreciation and amortization expense was $2.2 million for the three
months ended June 30, 1999, compared to $1.4 million for the comparable period
of 1998, an increase of $0.8 million or 57.1%. The increase is primarily due to
an increase in depreciation expense relating to acquisitions and a $0.7 million
increase in capital expenditures for the three months ended June 30, 1999.
Interest expense was $2.4 million for the three months ended June 30,
1999, compared to $1.6 million for the comparable period of 1998, an increase of
$0.8 million or 50.0%. The increase was due to the increase in average
outstanding indebtedness associated with the eleven hospitals owned during the
three months ended June 30, 1999 versus only eight hospitals having been owned
for the comparable period of 1998. The average debt outstanding for the three
months ended June 30, 1999 and 1998 was $104.3 and $36.5 million, respectively,
bearing interest at a rate of 9.0% and 8.2% at the end of each respective
period.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had working capital of $43.6 million
including cash and cash equivalents of $1.9 million. The ratio of current assets
to current liabilities was 3.0 to 1.0 at June 30, 1999 and 2.0 to 1.0 at March
31, 1999.
On August 20, 1998, the Company completed its initial public offering
("IPO") of common stock, selling five million shares at $13.00 per share,
netting the Company approximately $58.0 million. Net
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proceeds of the offering were used to pay dividends on and to redeem all of the
Series A preferred stock ($26.3 million), to pay interest on and prepay all of
the subordinated debt ($26.4 million) and to reduce indebtedness under the
Company's revolving credit facility ($5.0 million). Concurrent with the IPO, the
then outstanding Series B convertible preferred stock was converted into 1.4
million and 2.8 million shares of non-voting and voting common stock,
respectively.
On May 14, 1999, the Company amended and restated its revolving credit
agreement. The credit agreement has a revolving credit limit of $116.0 million.
Borrowings under the facility bear interest of (i) a base rate equal to the
greater of the Prime Rate or the Federal Funds rate, plus in either case, a
margin of up to 2.75% or (ii) London Interbank Offered Rate as of the date of
borrowing plus a margin of up to 4%. The applicable margin is determined by a
ratio of indebtedness to EBITDAR, as defined in the Credit Agreement, calculated
on a monthly basis. The facility is due and payable November 30, 2002, with a
required permanent reduction of $12.0 and $8.0 million by October 31, 1999 and
2000, respectively. Additionally, the Company is required to pay down
outstanding indebtedness upon the sale of any facilities and beginning with the
year ended March 31, 2000, by the amount of any excess cash flow for the year,
as defined within the agreement, less $4.0 million of cash and cash equivalents
to be maintained by the Company. At June 30, 1999, $106.3 million of the Credit
Facility was drawn, an increase of $3.0 million from March 31, 1999. At June 30,
1999, the average borrowing rate on the Credit Facility was 9.0%.
Cash flows used in operating activities were $5.7 million for the three
months ended June 30, 1999 compared to cash flows provided by operating
activities of $1.1 million for the comparable period of 1998. Cash used in
investing activities was $1.1 million for the three months ended June 30, 1999
and $0.7 million for the three months ended June 30, 1998, primarily related to
the acquisition of equipment. Net cash provided by financing activities was $2.8
million for the three months ended June 30, 1999, primarily from bank borrowings
related to working capital expenditures. Net cash used in financing activities
was $6.4 million for the three months ended June 30, 1998, primarily from
repayment of $6.0 million of debt.
The Company continually reviews its capital needs and financing
opportunities and may seek additional equity or debt financing for these or
other needs. There can be no assurance that the Company will not require
additional debt or equity financing or that such financing will be available on
acceptable terms. Effective August 1, 1999, the Company sold Davenport Medical
Center to a health care system. The value received approximated the net carrying
value of Davenport Medical Center. The Company is exploring the sale of up to
two additional hospitals during fiscal year 2000. During the three months ended
June 30, 1999, the Company wrote down the assets of the facilities, which it
intends to sell. The funds provided by any dispositions will be used to pay down
outstanding indebtedness on the revolving credit facility.
Capital expenditures, excluding acquisitions, for the three months
ended June 30, 1999 and 1998 were $1.4 million and $0.7 million, respectively.
Capital expenditures related to management information systems ("MIS") (both
financial and clinical) were approximately $0.2 million for the three months
ended June 30, 1999. Capital expenditures for the Company's hospitals will vary
from year to year depending on facility improvements and service enhancements
undertaken. The Company expects to fund fiscal year 2000 capital needs with
excess operating cash flows and borrowings from the revolving credit facility.
The Company previously announced its intentions to sell Crosby Memorial
Hospital. The Company is obligated to build a new, replacement facility for
Crosby Memorial Hospital within 36 months of the November 1, 1998 acquisition
date. If the Company fails to meet this commitment, the Company must purchase
the existing facility for $15.0 million.
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YEAR 2000 ISSUES
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field. By the year 2000,
these date code fields will need to accept four-digit entries to distinguish
21st century dates from 20th century dates. These products include software
applications running on desktop computers and network servers as well as in
microchips and microcontrollers incorporated into equipment. Certain of the
Company's computer hardware and software, building infrastructure components
(e.g. alarm systems and HVAC systems) and medical devices that are date
sensitive, may contain programs with the Year 2000 problem. Computer systems,
which do not include four-digit entries, could fail or produce erroneous results
causing disruptions of operations or affect patient diagnosis and treatment. As
a result, many software and computer systems may need to be upgraded or replaced
in order to comply with such Year 2000 requirements.
Status of the Company's Year 2000 Compliance
MIS. The Company is in the process of converting all of its hospitals
to a new management information system (MIS), which it believes is Year 2000
compliant. As of June 30, 1999, nine of the Company's eleven hospitals had been
converted to the new system. The Company expects the remaining two hospitals to
be converted by October 1999. The provider of the MIS has represented to the
Company that the new system is Year 2000 compliant and the Company's testing of
the system has not indicated any material Year 2000 noncompliance.
Non-MIS Equipment. Various clinical and non-clinical equipment
currently in use at the Company's hospitals incorporates time/date elements. The
Company has substantially completed an itemized inventory of all of its
hospitals and identified substantially all equipment with potential Year 2000
problems. The Company believes it will have completed this process and
established a time frame for repairing or replacing any non-compliant equipment
by September 30, 1999. The Company is also in the process of contracting its
group-purchasing agent to determine any Year 2000 compliance problems with
respect to its sources of supplies. The Company has not received sufficient
information from its group purchasing agent to determine any Year 2000
compliance problems with respect to its sources of supplies or to establish an
estimated date for completing subsequent phases with respect to its supplies. In
addition, the Company has established a plan to inventory the infrastructure in
each of its hospitals to determine any Year 2000 compliance problems. The
Company expects to complete its Year 2000 compliance plan with respect to the
hospital's infrastructure by December 31, 1999.
Third-Party Relationships. In addition, the Company has ongoing
relationships with third-party suppliers, vendors, payors and others, which may
have computer systems with Year 2000 compliance problems that the Company does
not control. Medicare is a significant source of revenues to the Company.
According to the Health Care Financing Administration ("HCFA") web page, the
Medicare program will be ready to process acceptable claims in the Year 2000.
However, there can be no assurance that the fiscal intermediaries and
governmental agencies with which the Company transacts business and which are
responsible for payment to the Company under Medicare and Medicaid programs, as
well as other payors, will not experience problems with Year 2000 compliance. In
addition, the Company depends upon other vendors such as utilities, which
provide electricity, water, natural gas and telephone services and vendors of
medical supplies and pharmaceuticals used in patient care. As a part of its Year
2000 strategy, the Company intends to seek assurances from these parties that
their services and products will not be interrupted or malfunction due to the
Year 2000 problem and expects to complete the initial contacting of these
parties by September 30, 1999. The failure of such third parties to remedy Year
2000 problems could
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have a material adverse effect on the Company's business, financial condition
and results of operations and ability to provide health care services.
Costs of Year 2000 Compliance
The Company expects to make capital expenditures of approximately $7.5
million which includes (i) approximately $6.3 million for the new MIS software
and hardware, of which $4.8 million was expended in fiscal year 1999 and $0.2
million was expended in the three months ended June 30, 1999 and (ii) certain
non-MIS costs associated with Year 2000 compliance. The Company does not expect
to incur any other additional material Year 2000 compliance costs. The failure
of the Company's MIS to be Year 2000 compliant could have a material adverse
effect on the Company's business, financial conditions and results of
operations.
Risks Related to Year 2000 Issues
The Company believes that it will be able to resolve its Year 2000
compliance problems before December 31, 1999; however, the Company has not yet
completed all of the phases of its Year 2000 compliance program. The failure of
the new MIS program, the non-MIS equipment or the hospital infrastructure to be
Year 2000 compliant could have a material adverse effect on the Company's
business, financial condition and results of operations. The failure of any of
the foregoing could result in the Company's inability to diagnose or treat
patients, bill for patient services, or collect payment from patients or
third-party payors. Finally, if there are such disruptions generally in the
economy as a result of Year 2000 compliance problems, such disruptions could
have a material adverse effect on the Company. The Company is unable to estimate
the amount of the potential liability or lost revenue at this time.
The Company believes that the most likely worst case scenario of Year
2000 compliance problems is that some third-party payors will not be Year 2000
compliant. The failure of such third-party payors to be Year 2000 compliant
could result in delays and difficulties in receiving payments from such payors
for services provided by the Company. These problems could result from the
inability to file claims with certain payors by electronic filings as well as
such payors inability to process either electronic or paper filings. These
problems could seriously impact the Company's cash flows. The Company intends to
develop a contingency plan to address this scenario. It is expected that such a
plan would involve establishing procedures whereby the Company would revert to
manual billing processes and ensuring access to additional capital in case of
cash flow problems.
Contingency Plans for Year 2000 Issues
The Company intends to complete an initial contingency plan by August
31, 1999. However, in some instances (e.g. loss of water supply), the Company
may not be able to develop contingency plans which allow the affected hospital
to continue to operate. Each of the Company's hospitals has a disaster plan,
which will be reviewed as a part of the Company's contingency planning process.
The foregoing is based on information currently available to the
Company. The Company will revise its strategy as it completes its assessment of
Year 2000 issues. The Company can provide no assurances that applications and
equipment the Company believes to be Year 2000 compliant will not experience
difficulties or that the Company will not experience difficulties obtaining
resources needed to make modifications to or replace the Company's affected
systems and equipment. Failure by the Company or third parties on which it
relies to resolve Year 2000 issues could have a material adverse effect on the
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Company's results of operations and its ability to provide health care services.
Consequently, the Company can give no assurances that issues related to Year
2000 will not have a material adverse effect on the Company's financial
condition or results of operations.
ENVIRONMENTAL MATTERS
The Company acquired Puget Sound Hospital in Tacoma, Washington in
September 1999. During its due diligence process, the Company discovered certain
environmental contamination involving underground storage tanks no longer in
use. Environmental consultants have developed a work plan to remediate such
existing contamination, which must be approved by the Washington State
Department of Ecology. Once the work plan is approved, remediation may begin.
The prior owner has agreed to fund all costs of such remediation.
Although the Company is not currently aware of any other material
environmental claims pending or threatened against it or any of its hospitals,
no assurances can be given that a material environmental claim will not be
asserted against the Company or against any of its hospitals. The costs of
defending against claims of liability, or of remediating a contaminated
property, could have a material adverse effect on the Company's business,
financial condition and results of operations.
INFLATION
The health care industry is labor intensive. Wages and other expenses
increase, especially during periods of inflation and labor shortages. In
addition, suppliers pass along rising costs to the Company in the form of higher
prices. The Company has generally been able to offset such increases in
operating costs by its cost containment activities and expanding services. In
light of reimbursement measures imposed by government agencies and private
insurance companies, the Company is unable to predict its ability to offset or
control future cost increases, or its ability to pass on the increased costs
associated with providing health care services to patients with government or
managed care payors, unless such payors correspondingly increase reimbursement
rates.
GENERAL
Hospital revenue is received primarily from Medicare, Medicaid and
commercial insurance. The federal Medicare program accounted for approximately
53.3% and 63.3% of hospital patient days for the three months ended June 30,
1999 and 1998, respectively. The state Medicaid programs accounted for
approximately 19.8% and 16.7% of hospital patient days for the three months
ended June 30, 1999 and 1998, respectively. The Company's percentage of revenue
received from the Medicare program is expected to increase due to the general
aging of the population. The payment rates under the Medicare program for
inpatients are prospective, based upon the diagnosis of a patient. The Medicare
payment rate increases have historically been less than actual inflation. In
addition, numerous states, insurance companies and employers are actively
negotiating discounts to the Company's standard rates. The trend towards
increased managed care, including a shift in payor mix toward health maintenance
organizations, preferred provider organizations and other managed care payors,
may also adversely affect payment rates for the Company's services and the
Company's ability to achieve targeted growth rates in net patient service
revenue.
Both federal and state legislators are continuing to scrutinize the
health care industry for the purpose of reducing health care costs. While the
Company is unable to predict what, if any, future health reform legislation may
be enacted at the federal or state level, the Company expects continuing
pressure to limit
11
<PAGE> 14
expenditures by governmental health care programs. Payments for Medicare
outpatient services provided at acute care hospitals and home health services
historically have been paid based on costs, subject to certain limits. The
Balanced Budget Act of 1997 requires that the payment for those services be
converted to a prospective payment system, which will be phased in over time.
The 1997 Act also includes a managed care option, which could direct Medicare
patients to managed care organizations. Further changes in the Medicare or
Medicaid programs and other proposals to limit health care spending could have a
material adverse impact upon the health care industry and the Company.
The Company's acute care hospitals, like most acute care hospitals in
the United States, have significant unused capacity. The result is substantial
competition for patients and physicians. Inpatient utilization continues to be
negatively affected by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative health care delivery services
for less acutely ill patients. The Company expects increased competition and
admission constraints to continue in the future. The ability to respond
successfully to these trends, as well as spending reductions in governmental
health care programs, will play a significant role in determining the hospitals'
ability to maintain their current rate of net revenue growth and operating
margins.
The Company expects the industry trend from inpatient to outpatient
services to continue due to the increased focus on managed care and advances in
technology. Outpatient revenue of the Company's hospitals was approximately
42.5% and 43.0% of gross patient service revenue for the three months ended June
30, 1999 and 1998, respectively.
The complexity of the Medicare and Medicaid regulations, increases in
managed care, hospital personnel turnover, the dependence of hospitals on
physician documentation of medical records and the subjective judgment involved
complicates the billing and collections of accounts receivable by hospitals.
There can be no assurance that this complexity will not negatively impact the
Company's future cash flow or results of operations.
The federal government and a number of states are rapidly increasing
the resources devoted to investigating allegations of fraud and abuse in the
Medicare and Medicaid programs. At the same time, regulatory and law enforcement
authorities are taking an increasingly strict view of the requirements imposed
on providers by the Social Security Act and Medicare and Medicaid regulations.
Although the Company believes that it is in material compliance with such laws,
a determination that the Company has violated such laws, or even the public
announcement that the Company was being investigated concerning possible
violations, could have a material adverse effect on the Company.
12
<PAGE> 15
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
133, Accounting for Derivative Instruments and Hedging Activities, which is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
This statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments imbedded in other contracts and
for hedging activities. It requires that entities recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company does not presently have any
derivative financial instruments and does not believe that this statement will
have a material impact on its financial position or results of operations.
13
<PAGE> 16
PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No.
-----------
<S> <C>
3.1 Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 of the
Company's Report on Form 10-Q for the quarter ended
September 30, 1998).
3.2 Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 of the Company's Report on Form 10-Q for
the quarter ended September 30, 1998).
27 Financial Data Schedule (for SEC use only)
</TABLE>
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 16, 1999 NEW AMERICAN HEALTHCARE CORPORATION
----------
By: /s/ Thomas W. Singleton
----------------------------------------
Chief Executive Officer
By: /s/ Timothy S. Hill
----------------------------------------
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,914
<SECURITIES> 0
<RECEIVABLES> 50,444
<ALLOWANCES> 10,969
<INVENTORY> 3,542
<CURRENT-ASSETS> 65,242
<PP&E> 100,734
<DEPRECIATION> 7,788
<TOTAL-ASSETS> 183,718
<CURRENT-LIABILITIES> 21,658
<BONDS> 0
0
0
<COMMON> 174
<OTHER-SE> 49,926
<TOTAL-LIABILITY-AND-EQUITY> 183,718
<SALES> 0
<TOTAL-REVENUES> 50,048
<CGS> 0
<TOTAL-COSTS> 82,617
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,373
<INTEREST-EXPENSE> 2,404
<INCOME-PRETAX> (32,569)
<INCOME-TAX> (836)
<INCOME-CONTINUING> (31,733)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,733)
<EPS-BASIC> (1.81)
<EPS-DILUTED> (1.81)
</TABLE>
