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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Fiscal Year Ended December 31, 2000 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period from
__________________to__________________
Commission File Number 0-23639
PROVINCE HEALTHCARE COMPANY
(Exact Name of Registrant Specified in Its Charter)
DELAWARE 62-1710772
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
105 WESTWOOD PLACE
SUITE 400
BRENTWOOD, TENNESSEE 37027
(Address of Principal Executive Offices) (Zip Code)
(615) 370-1377
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the shares of Common Stock of the
Registrant held by nonaffiliates on March 1, 2001 (based upon the closing price
of these shares of $36.00 per share on such date) was $957,240,324.
As of March 1, 2001, 31,099,081 shares of the Registrant's Common
Stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2001 Annual
Meeting of Shareholders are incorporated by reference under Part III of this
report. The Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days after December 31, 2000.
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FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. Such statements may
include words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe" and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance. Any or all of
our forward-looking statements in this report may turn out to be wrong. They can
be affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Many factors mentioned in our discussion in this report will
be important in determining future results. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially. Factors
that may cause our plans, expectations, future financial condition and results
to change include, but are not limited to:
- the highly competitive nature of the health care business;
- the efforts of insurers, health care providers and others to
contain health care costs;
- possible changes in the levels and terms of reimbursement for
our charges by government programs, including Medicare and
Medicaid or other third-party payors;
- changes in or failure to comply with federal, state or local
laws and regulations affecting the health care industry;
- the possible enactment of federal or state health care reform;
- the departure of key members of our management;
- claims and legal actions relating to professional liability;
- our ability to implement successfully our acquisition and
development strategy;
- our ability to attract and retain qualified personnel and
recruit physicians;
- potential federal or state investigations;
- fluctuations in the market value of our common stock or notes;
- changes in accounting principles generally accepted in the
United States; and
- changes in demographic, general economic and business
conditions, both nationally and in the regions in which we
operate.
Except as required by law, we undertake no obligation to publicly
update any forward-looking statements, whether as a result of new information,
future events or otherwise. We advise you, however, to consult any additional
disclosures we make in our Form 10-Q, 8-K and 10-K reports to the Securities and
Exchange Commission, as well as the discussion of risks and uncertainties under
the caption "Risk Factors" contained in our Registration Statement on Form S-3,
filed with the Securities and Exchange Commission on January 24, 2001
(Commission File No. 333-54192), and any amendments to such registration
statement. These are factors that we think could cause our actual results to
differ materially from expected results. Other factors besides those listed here
also could affect us adversely. This discussion is provided as permitted by the
Private Securities Litigation Reform Act of 1995.
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PART I
ITEM 1. BUSINESS
OVERVIEW
We own and operate acute care hospitals located in non-urban markets in
nine states. We currently own or lease 14 general acute care hospitals with a
total of 1,358 licensed beds. Our objective is to be the primary provider of
quality health care services in the selected non-urban markets that we serve. We
offer a wide range of inpatient and outpatient medical services as well as
specialty services, including rehabilitation and home health care. We target
hospitals for acquisition that are the sole or a primary provider of health care
in the non-urban communities that they serve. After acquiring a hospital, we
implement a number of strategies designed to improve financial performance.
These strategies include improving hospital operations, expanding the breadth of
services and recruiting physicians to increase market share. We also provide
management services to 40 primarily non-urban hospitals in 16 states with a
total of 3,166 licensed beds. For the year ended December 31, 2000, our owned
and leased hospitals accounted for 96.0% of net operating revenue.
THE NON-URBAN HEALTH CARE MARKET
According to 1999 U.S. Census Bureau statistics, over a third of the
people in the United States live in counties with a population of less than
150,000. In these non-urban areas, hospitals are typically the primary resource
for health care services, and in many cases the local hospital is the only
provider of acute care services. According to the American Hospital Association,
as of January 1999, there were approximately 2,200 non-urban hospitals in the
country. Of those, approximately 1,500 meet our acquisition criteria.
We believe that non-urban areas are attractive markets. Because
non-urban service areas have smaller populations, there are generally only one
or two hospitals in each market. We believe the size and demographic
characteristics of non-urban markets and the relative strength of the local
hospital also make non-urban markets less attractive to health maintenance
organizations, other forms of managed care, and alternate site providers, such
as outpatient surgery, rehabilitation or diagnostic imaging providers.
Despite these attractive characteristics for health care service
providers, many not-for-profit and governmental operators of non-urban hospitals
are under increasing pressure due to capital constraints, limited management
resources and the challenges of managing in a complex health care regulatory
environment. This combination of factors often results in a limited range of
services being available locally. As a result, patients by choice or physician
direction may obtain care outside of the community. This out-migration often
leads to deteriorating operating performance, further limiting the hospital's
ability to address the issues that initially led to these pressures. Ultimately,
these pressures can force owners to sell or lease their hospitals to companies,
like us, that have greater financial and management resources, coupled with
proven operating strategies, to address these issues. As a result of these
issues, not-for-profit and governmental hospitals increasingly are selling or
leasing these hospitals to entities like Province, that have the capital
resources and the management expertise to serve the community better. We believe
that a significant opportunity for consolidation exists in the non-urban health
care market.
BUSINESS STRATEGY
The key elements of our business strategy are to:
Acquire Hospitals in Attractive Non-Urban Markets. We seek to acquire
hospitals that are the sole or a primary provider of health care services in
their markets and that present the opportunity to increase profitability and
local market share. We believe that approximately 1,500 non-urban hospitals in
the United States meet our acquisition criteria, and our goal is to acquire two
to four of these hospitals each year.
Improve Hospital Operations. Following the acquisition of a hospital,
we augment local management with appropriate operational and financial managers
and install our standardized information system. The local management team
implements appropriate expense controls, manages staffing levels according to
patient volumes, reduces supply costs by requiring strict
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compliance with our supply arrangements and often renegotiates vendor contracts.
By implementing this strategy, we seek to improve operating performance at each
of the hospitals we acquire.
Expand Breadth of Services to Increase Market Share and Reduce Patient
Out-migration. We seek to provide additional health care services and programs
in response to community needs. These services may include specialty inpatient,
outpatient and rehabilitation. We also may make capital investments in
technology and the physical plant to improve both the quality of health care and
the reputation of the hospital in the community. By providing a broader range of
services in a more attractive setting, we encourage residents in our markets to
seek care in our hospitals, thereby reducing patient out-migration and
increasing hospital revenues.
Recruit Physicians. We believe that recruiting physicians to local
communities is key to increasing the quality of health care and breadth of
available services. We work with the local hospital board, management and
medical staff to determine the number and type of additional physicians needed
in the community. Our corporate physician recruiting staff then assists the
local management team in identifying and recruiting specific physicians to the
community to meet those needs. During 1998, we recruited 54 new physicians; and
during 1999, we recruited 49 additional physicians. During 2000, we have
recruited 60 new physicians. Approximately 50% of the physicians recruited in
1998, 1999 and 2000 were primary care physicians and approximately 50% were
specialty care physicians. We believe that expansion of services in our
hospitals also should assist in future physician recruiting efforts.
ACQUISITION PROGRAM
We proactively identify acquisition targets in addition to responding
to requests for proposals from entities that are seeking to sell or lease
hospitals. We also seek to acquire selected hospitals to which we currently
provide contract management services. We also identify attractive markets and
hospitals and initiate meetings with hospital systems to discuss acquiring
non-urban hospitals or operating them through a joint venture. These hospital
systems are comprised of one or more urban tertiary care hospitals and a number
of non-urban hospitals, and such joint ventures allow the health system to
maintain an affiliation for providing tertiary care to the non-urban hospitals
without the management responsibility.
We believe that it generally takes six to 12 months between a hospital
owner's decision to accept an offer and the consummation of a sale or lease.
After a potential acquisition has been identified, we undertake a systematic
approach to evaluating and closing the transaction. We begin the acquisition
process with a thorough due diligence review of the target hospital and its
community. We use our dedicated teams of experienced personnel to conduct a
formalized review of all aspects of the target's operations, including Medicare
reimbursement, purchasing, fraud and abuse compliance, litigation, capital
requirements and environmental issues. During the course of our due diligence
review, we prepare an operating plan for the target hospital, identify
opportunities for operating efficiencies and physician recruiting needs, and
assess productivity and management information systems. Throughout the process,
we work closely with community leaders in order to enhance both the community's
understanding of our philosophy and abilities and our knowledge of the needs of
the community.
From time to time, we enter into letters of intent with acquisition
targets in connection with our evaluation of a potential acquisition. Such
letters of intent generally are executed prior to the commencement of due
diligence undertaken during the evaluation process. In addition to due
diligence, proposed transactions to acquire hospitals for which we have signed a
letter of intent are subject to numerous conditions and contingencies, including
internal approvals of both our company and the target companies, receipt of
regulatory approvals, resolution of legal and equitable matters relating to
continuation of labor agreements, supply and service agreements and preparation
and negotiation of documentation. In addition, our letters of intent generally
provide that they may be terminated by either party without cause. Accordingly,
we cannot assure you that any such proposed transaction for which we have signed
a letter of intent will occur, or if it occurs, we cannot predict the values or
condition of the assets that may be acquired, the purchase price of such assets
or the terms of their acquisition.
The competition to acquire non-urban hospitals is intense, and we
believe that the acquirer will be selected for a variety of reasons, not
exclusively on the basis of price. We believe that we are well positioned to
compete for acquisitions for several reasons. First, our management team has
extensive experience in acquiring and operating previously under-performing
non-urban hospitals. Second, we benefit from access to capital, strong financial
and operating systems, a national purchasing organization and training programs.
Third, we believe our strategy of increasing access to, and quality of, health
care in the communities
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served by our hospitals aligns our interests with those of the communities.
Finally, we believe that the alignment of interests with the community, our
reputation for providing market-specific, quality health care, and our focus on
physician recruiting enables us to compete successfully for acquisitions.
HOSPITAL OPERATIONS
Following the acquisition of a hospital, we implement our systematic
policies and procedures to improve the hospital's operating and financial
performance. We implement an operating plan designed to reduce costs by
improving operating efficiency and increasing revenue through the expansion of
the breadth of services offered by the hospitals and the recruitment of
physicians to the community. We believe that the long-term growth potential of a
hospital is dependent on that hospital's ability to add appropriate health care
services and effectively recruit and retain physicians.
Each hospital management team is comprised of a chief executive
officer, chief financial officer and chief nursing officer. We believe that the
quality of the local management team at each hospital is critical to the
hospital's success because the management team is responsible for implementing
the elements of our operating plan. The operating plan is developed by the local
management team in conjunction with our senior management team and sets forth
revenue enhancement strategies and specific expense benchmarks. We have
implemented a performance-based compensation program for each local management
team based upon the achievement of the goals set forth in the operating plan.
The local management team is responsible for the day-to-day operations
of the hospitals, our corporate staff provides support services to each
hospital, including physician recruiting, corporate compliance, reimbursement
advice, standardized information systems, human resources, accounting, cash
management and other finance activities, tax and insurance support. Financial
controls are maintained through utilization of standardized policies and
procedures. We promote communication among our hospitals so that local expertise
and improvements can be shared throughout our network.
To achieve the operating efficiencies set forth in the operating plan,
we do the following:
- evaluate existing hospital management;
- adjust staffing levels according to patient volumes using best
demonstrated practices by department;
- install a standardized management information system; and
- capitalize on purchasing efficiencies and renegotiate certain
vendor contracts.
We also enforce strict protocols for compliance with our supply
contracts. All of our owned or leased hospitals currently purchase supplies and
certain equipment pursuant to an arrangement we have with an affiliate of HCA -
The Healthcare Company. We also evaluate the vendor contracts, and based on cost
comparisons, we may renegotiate or terminate such contracts. We prepare for the
transition of management information systems to our standardized system prior to
the completion of an acquisition, so that the newly-acquired hospital may begin
using our management information systems following completion of the
acquisition.
EXPANSION OF SERVICES
As part of our efforts to improve access to quality health care in the
communities we serve, we add services at our hospitals on an as-needed basis.
Added services and care programs may include specialty inpatient services, such
as cardiology, rehabilitation and subacute care, and outpatient services such as
same-day surgery. We believe the establishment of quality emergency room
departments, obstetrics and gynecological services are particularly important
because they are often the most visible and needed services provided to the
community. We also make capital investments in technology and facilities to
increase the quality and breadth of services available in the communities. By
increasing the services provided at our hospitals and upgrading the technology
used in providing such services, we believe that we improve each hospital's
quality of care and reputation in the community, which in turn may increase
patient census and revenue.
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PHYSICIAN RECRUITMENT
We work with local hospital boards, management and medical staff to
determine the number and type of additional physicians needed in the community.
Our corporate staff then assists the local management team in identifying and
recruiting specific physicians to the community to meet those needs. The
majority of physicians who relocate their practices to the communities served by
our hospitals are identified by our internal physician recruiting staff, which
is supplemented by the efforts of independent recruiting firms. When recruiting
a physician to a community, we generally guarantee the physician a minimum level
of cash collections during a limited initial period and assist the physician
with his or her transition to the community. We require the physician to repay
some or all of the amounts expended for such assistance in the event the
physician leaves the community within a specified period. We prefer not to
employ physicians; therefore, recruited physicians generally do not become our
employees.
OWNED AND LEASED HOSPITALS
We currently own or lease 14 general acute care hospitals in Arizona,
California, Colorado, Florida, Indiana, Louisiana, Mississippi, Nevada and
Texas, with a total of 1,358 licensed beds. Of our 14 hospitals, 13 are the only
providers of acute care services in their communities. The owned or leased
hospitals represented 96.0% of our net operating revenue for the year ended
December 31, 2000, compared to 94.2% for the year ended December 31, 1999.
Our hospitals offer a wide range of inpatient medical services such as
operating/recovery rooms, intensive care units, diagnostic services and
emergency room services, as well as outpatient services such as same-day
surgery, radiology, laboratory, pharmacy and physical therapy. Our hospitals
frequently provide specialty services that include rehabilitation and home
health care. Our hospitals currently do not provide highly specialized surgical
services such as organ transplants and open heart surgery and are not engaged in
extensive medical research or educational programs.
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The following table sets forth certain information with respect to each
of our owned or leased hospitals as of March 1, 2001.
LICENSED OWNED/ DATE
HOSPITAL BEDS LEASED ACQUIRED
- -------- ---- ------ --------
Bolivar Medical Center...................... 165 Leased(1) Apr. 2000
Cleveland, Mississippi
City of Ennis Hospital...................... 45 Leased(2) Feb. 2000
Ennis, Texas
Colorado Plains Medical Center.............. 50 Leased(3) Dec. 1996
Fort Morgan, Colorado
Colorado River Medical Center............... 53 Leased(4) Aug. 1997
Needles, California
Doctors' Hospital of Opelousas.............. 165 Owned Jun. 1999
Opelousas, Louisiana
Elko General Hospital....................... 50 Owned Jun. 1998
Elko, Nevada
Eunice Community Medical Center............. 91 Leased(5) Feb. 1999
Eunice, Louisiana
Glades General Hospital..................... 73 Owned Apr. 1999
Belle Glade, Florida
Havasu Regional Medical Center.............. 118 Owned May 1998
Lake Havasu City, Arizona
Minden Medical Center....................... 124 Owned Oct. 1999
Minden, Louisiana
Palestine Regional Medical Center(6)........ 257 Owned(7) July 1996
Palestine, Texas
Palo Verde Hospital......................... 55 Leased(8) Dec. 1996
Blythe, California
Parkview Regional Hospital.................. 59 Leased(9) Dec. 1996
Mexia, Texas
Starke Memorial Hospital.................... 53 Leased(10) Oct. 1996
Knox, Indiana
-----
Total licensed beds.................. 1,358
=====
(1) Includes 24 skilled nursing beds but excludes 35 long-term care beds. The
lease expires in April 2040.
(2) The lease expires in February 2030, and is subject to three 10-year renewal
terms at our option.
(3) The lease expires in April 2014, and is subject to a five-year renewal
term. We have a right of first refusal to purchase the hospital.
(4) The lease expires in July 2012, and is subject to three five-year renewal
terms. We have a right of first refusal to purchase the hospital.
(5) The lease expires in June 2008, and is subject to a five-year renewal
option.
(footnotes continued on following page)
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(6) We initially acquired Memorial Mother Frances Hospital in July 1996. On
October 1, 1999, we completed the acquisition of Trinity Valley Medical
Center, which is also located in Palestine, Texas. With the completion of
the acquisition, we changed the name of Trinity Valley Medical Center to
Palestine Regional Medical Center and we changed the name of Memorial
Mother Frances Hospital to Palestine Regional Medical Center - West Campus.
We operate each as a single hospital with two campuses.
(7) The hospital is owned by a partnership in which a subsidiary of ours is the
sole general partner, with a 1.0% general partnership interest, and another
subsidiary of ours has a limited partnership interest of not less than 94%,
subject to an option by the other non-affiliated limited partner to acquire
up to 10% of the total limited partnership interests. In June 1999, the
partnership received additional capital contributions from its partners,
although the exact ownership percentage of each limited partner remains
subject to further negotiation.
(8) The lease expires in December 2002, and is subject to a ten-year renewal
option. We have the option to purchase the hospital at any time prior to
termination of the lease, subject to regulatory approval.
(9) The lease expires in January 2011, and is subject to two five-year renewal
terms. We have a right of first refusal to purchase the hospital.
(10) The lease expires in September 2016, and is subject to two ten-year renewal
options. We have a right of first refusal to purchase the hospital.
Bolivar Medical Center is a general acute care facility with 141 acute
care beds, 24 skilled nursing beds and 35 long-term care beds located in
Cleveland, Mississippi. Established in 1962, the hospital is owned by Bolivar
County, Mississippi. Cleveland is a manufacturing-based community with an
estimated 16,000 residents and an estimated service area population of 55,000.
The nearest competitor is South Sunflower County Hospital in Indianola,
Mississippi, located 32 miles from Cleveland.
City of Ennis Hospital is a 45-bed hospital located in Ennis, Texas,
approximately 35 miles southeast of Dallas. Established in the mid-1950's, the
hospital is owned by the City of Ennis. The acute care facility is the only
hospital serving the Ennis community, which has a total service area population
of approximately 85,000 people. The nearest competitor is the 73-bed Baylor
Health Care System Waxahachie Hospital, located 17 miles from Ennis. The City of
Ennis Hospital previously was operated by the Baylor Health Care System, which
had closed most services at the hospital in November 1999, at which time
ownership reverted back to the City of Ennis. Upon the commencement of our lease
of the facility in February 2000, the hospital provided emergency, skilled
nursing, lab and radiology services. The hospital is now operating as a full
service acute care facility.
Colorado Plains Medical Center is a 50-bed acute care facility located
in Fort Morgan, Colorado, approximately 70 miles from Denver. Fort Morgan is an
agricultural-based community with an estimated 12,000 residents and an estimated
service area population of 43,000. The original hospital was built in 1952, and
Brim purchased the hospital from the county in 1986. The hospital is the only
rural-based level III trauma center in Colorado, and one of only 10 such rural
centers in the United States. The hospital provides home health care services
and opened an inpatient rehabilitation unit in September 1998. The hospital's
major competition comes from the 276-bed Northern Colorado Medical Center
located in Greeley, Colorado, which is about 45 miles west of Colorado Plains.
East Morgan County Hospital, located nine miles away in Brush, Colorado, is the
closest hospital to Colorado Plains and offers only limited services. Both of
these competing hospitals are owned by the Lutheran Health System.
Colorado River Medical Center is a 53-bed hospital located in Needles,
California, approximately 100 miles southwest of Las Vegas, Nevada. The
hospital, established in 1974, previously was owned by the City of Needles.
Colorado River Medical Center is the only hospital serving a community base of
approximately 20,000 people. Colorado River Medical Center has no significant
in-market competition, but does suffer limited outmigration to a major
university medical center in Loma Linda, California. Another competitor is
Bullhead Community Hospital, located 22 miles away, which serves the Laughlin,
Nevada and Bullhead City, Arizona areas. We completed construction in August
1999 on a $3.5 million medical office building in nearby Fort Mojave, Arizona.
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Doctors' Hospital of Opelousas is a 165-bed general acute care
facility, located in Opelousas, Louisiana approximately 21 miles east of Eunice,
Louisiana where Province operates a 91-bed health care facility and
approximately 22 miles north of Lafayette. Opelousas is the parish seat with a
population of approximately 21,000 in the city of Opelousas and approximately
100,000 residents of the St. Landry Parish. We purchased the hospital from
HCA--The Healthcare Company, which owned the hospital in a joint venture with 13
area physicians. The facility originally was constructed in 1981 with additions
and renovations completed in 1984, including a Women's Healthcare Center. The
primary competition for Doctors' Hospital of Opelousas is the 134-bed Opelousas
General Hospital, a county owned not-for-profit facility located approximately
five miles from Doctors' Hospital of Opelousas. We began construction in
November 1999 on a $5.6 million medical office building which is 98% complete. A
$3.0 million 32-bed addition to the hospital was completed in April 2000.
Elko General Hospital is a 50-bed acute care facility located in Elko,
Nevada. Elko, Nevada is located 237 miles west of Salt Lake City, Utah, 295
miles northeast of Reno and 475 miles north of Las Vegas. Elko County's
population is approximately 55,000, with the primary population base residing in
the city of Elko. Originally constructed as a 20-bed hospital in 1920, Elko
General Hospital has grown and expanded with the community undergoing two major
renovations in 1958 and 1976. We began construction on February 1, 2000 on a new
$30.0 million facility to serve the growing community.
Eunice Community Medical Center is a 91-bed general acute care facility
located in Eunice, Louisiana. Eunice, Louisiana is a community of approximately
20,000 people, located approximately 50 miles northwest of Lafayette. The total
service area consisting of St. Landry Parish has a population of approximately
100,000. We entered into a 10-year lease with a 5-year renewal option on the
facility. The hospital is located 21 miles from Opelousas General Hospital, a
133-bed facility, which we recently acquired. We must construct a replacement
facility, at such time as the hospital reaches pre-determined operating levels.
The lease will terminate at the time the replacement facility commences
operations. Eunice Community Medical Center competes with Savoy Medical Center
located in Mamou, Louisiana, approximately 15 miles north of Eunice.
Glades General Hospital is a 73-bed full service general acute care
facility serving the residents of Western Palm Beach, Hendry and Glades counties
and is located 45 miles west of West Palm Beach on the southeast corner of Lake
Okeechobee. Belle Glade, Florida has a service area population of 36,000. The
nearest competitor is Columbia Palms West, located 30 miles away in Loxahatchee,
Florida. We believe this market presents a solid growth opportunity for the
hospital and the potential to open an emergency care clinic in the Pahokee
market.
Havasu Regional Medical Center is a 118-bed acute care facility
providing health care services for a population of over 41,000 primarily in the
Lake Havasu City, Arizona area. Lake Havasu City is on the shore of Lake Havasu
on the Colorado River border of California and Arizona. It is now the major
population center of southern Mohave County, one of the fastest growing counties
in the United States. We acquired the facility in May 1998 from the Samaritan
Health System, a Phoenix, Arizona, based not-for-profit health care system. The
hospital currently provides general acute care, skilled nursing care, radiation,
oncology and diagnostic services, including the recent addition of a cardiac
catheterization lab. Lake Havasu City has a service area population of 127,000
residents in the rapidly growing Colorado River basin. We began construction of
a $26.0 million ancillary expansion in January 2000.
Minden Medical Center is a 124-bed general acute care hospital located
in Minden, Louisiana. Minden, Louisiana is approximately 28 miles from
Shreveport and has a service area population of approximately 64,000. We
acquired the facility in October 1999, along with Trinity Valley Medical Center,
from Tenet Healthcare Corporation. The hospital currently provides general acute
care, geriatric psychiatric and obstetric services. The hospital's nearest
competitors are the Willis-Knight Medical Center and Bossier Medical Center,
which are both located in Shreveport.
Palestine Regional Medical Center is a two-campus, 257-bed general
acute care hospital facility located in Palestine, Texas. Palestine, a community
of approximately 19,000 residents, is located 50 miles south of Tyler, Texas and
is roughly equidistant from Dallas and Houston. The total service area
population for the hospital, which includes Anderson and eight surrounding
counties, is estimated at 104,000 people. The main campus is comprised of the
former Trinity Valley Medical Center, a 153-bed facility that we acquired in
October 1999 from Tenet Healthcare Corporation. The West campus is comprised of
the former Memorial Mother Frances Hospital, a 104-bed acute care facility also
located in Palestine, which we have owned since 1996. Palestine Regional Medical
Center competes indirectly with two other hospitals, Mother Frances Hospital
Regional
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Health Care Center and East Texas Medical Center, both in Tyler, Texas.
Tenet completed construction in August 1999 of a $3.8 million medical office
building at the hospital's main campus.
Palo Verde Hospital is a 55-bed acute care hospital located in Blythe,
California, which is in southeast California on the Arizona border. The hospital
is located in a community with a stable population of 20,000; however, the
population increases significantly during the winter months due to a seasonal
influx of retirees. Brim Hospitals, Inc. entered into a lease to operate the
hospital in January 1993 from the Palo Verde Hospital Association. The nearest
competitor is Parker Hospital in Parker, California, which is approximately 45
miles from Palo Verde Hospital.
Parkview Regional Hospital is a 59-bed acute care hospital located in
Mexia, Texas. Parkview's primary service area includes Mexia and the surrounding
Limestone County, as well as Freestone, Leon, and Hill counties. Mexia is the
area's largest city with a population of 7,000 people. The service area of the
hospital includes approximately 50,000 residents. Brim Hospitals, Inc. acquired
the hospital through a long-term lease in February 1996. Parkview Regional
Hospital is the only hospital in the community, but experiences competition from
Waco hospitals, about 40 miles to the west.
Starke Memorial Hospital is a 53-bed hospital in Knox, Indiana, a
community located approximately 50 miles from South Bend. The town of Knox has a
population of approximately 8,000, and the population of Starke County is
estimated to be 23,000. The hospital's total service area, including the
surrounding counties, is approximately 35,000. Established in 1952, the hospital
had been owned by Starke County until Province purchased it in October 1996. The
nearest competing hospitals are the 36-bed St. Joe Marshall County Hospital,
which is located 18 miles east in Plymouth, Indiana, and the 307-bed Porter
Memorial Hospital, which is located 32 miles away in Valparaiso, Indiana.
OPERATING STATISTICS
The following table sets forth certain operating statistics for our
owned or leased hospitals for each of the periods presented.
BRIM
(PREDECESSOR) PROVINCE (SUCCESSOR)
------------ ---------------------------------------------------------
PERIOD PERIOD
JANUARY 1 TO FEB. 2 TO YEAR ENDED DECEMBER 31,
DECEMBER 18, DEC. 31, -------------------------------------------
1996 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
Hospitals owned or leased at end of period....... 5 7 8 10 14 14
Licensed beds (at end of period)................. 371 513 570 723 1,282 1,326
Beds in service (at end of period)............... 266 393 477 647 1,186 1,228
Admissions....................................... 9,496 1,964 15,142 21,538 32,509 47,971
Average length of stay (days)(1)................. 5.9 4.3 5.6 5.2 4.8 4.5
Patient days..................................... 56,310 8,337 84,386 110,816 156,846 216,663
Adjusted patient days(2)......................... 96,812 15,949 149,567 195,998 273,394 372,352
Occupancy rate (% of licensed beds)(3)........... 43.1% 39.5% 40.6% 42.0% 33.4% 44.6%
Occupancy rate (% of beds in service)(4)......... 60.1% 51.3% 48.5% 46.9% 36.2% 48.0%
Net patient service revenue (in thousands)....... $87,900 $16,425 $149,296 $217,364 $323,319 $445,772
Gross outpatient service revenue (in thousands).. $64,472 $14,088 $110,879 $161,508 $257,248 $377,663
Gross outpatient service revenue (% of
gross patient service revenue)................ 43.4% 48.2% 44.5% 43.5% 42.6% 41.8%
- ----------------------------------
(1) Average length of stay is calculated based on the number of patient days
divided by the number of admissions.
(2) Adjusted patient days have been calculated based on an industry-accepted
revenue-based formula of multiplying actual patient days by the sum of
gross inpatient revenue and gross outpatient revenue and dividing the
result by gross inpatient revenue for each hospital, to reflect an
approximation of the volume of service provided to inpatients and
outpatients by converting total patient revenue to equivalent patient days.
(3) Percentages are calculated by dividing average daily census by average
licensed beds.
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(4) Percentages are calculated by dividing average daily census by average beds
in service.
SOURCES OF REVENUE
We receive payments for patient care from private insurance carriers,
federal Medicare programs for elderly and disabled patients, health maintenance
organizations, preferred provider organizations, state Medicaid programs,
TriCare (formerly known as the Civilian Health and Medical Program of the
Uniformed Services, or CHAMPUS), and from employers and patients directly. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
The following table sets forth the percentage of the patient days of
our owned or leased hospitals, excluding the 66-bed skilled nursing facility at
Ojai Valley Community Hospital, from various payors for the periods indicated.
The data for the periods presented are not strictly comparable because of the
significant effect that acquisitions have had on us. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PERIOD
FEBRUARY 2 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------------------------------
SOURCE 1996 1997 1998 1999 2000
- ------ ---- ---- ---- ---- ----
Medicare........................... 63.3% 60.3% 57.8% 56.3% 56.1%
Medicaid........................... 12.0 13.1 11.1 12.4 17.9
Private and other sources.......... 24.7 26.6 31.1 31.3 26.0
----- ----- ----- ----- -----
Total.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
All percentages in the table above exclude the 66-bed skilled nursing
facility at Ojai Valley Community Hospital, which was sold in October, 2000.
Substantially all of the patient days at the Ojai Valley skilled nursing
facility were provided by Medicaid.
MANAGEMENT INFORMATION SYSTEMS
Upon the completion of an acquisition, one of our first steps is to
convert the newly-acquired hospital to our management information system. Our
hospital management system contains the primary software required to run an
entire hospital, bundled into one software package. This software includes
features such as a general ledger, patient accounting, billing, accounts
receivable, payroll, accounts payable and pharmacy. Our goal is to convert an
acquired hospital to our management information system within sixty days from
the date of the acquisition.
QUALITY ASSURANCE
Our hospitals implement quality assurance procedures to monitor the
level of care. Each hospital has a medical director who supervises and is
responsible for the quality of medical care provided. In addition, each hospital
has a medical advisory committee comprised of physicians who review the
professional credentials of physicians applying for medical staff privileges at
the hospital. Medical advisory committees also review and monitor surgical
outcomes along with procedures performed and the quality of the logistical,
medical and technological support provided to the physician. We survey all of
our patients either during their stay at the hospital or subsequently by mail to
identify potential areas of improvement. All of our hospitals are accredited by
the Joint Commission on Accreditation of Health Care Organizations.
REGULATORY COMPLIANCE PROGRAM
We maintain a corporate-wide compliance program under the direction of
Starley Carr, our Vice President of Corporate Compliance. Prior to joining our
company, Mr. Carr served with the Federal Bureau of Investigation, where he
investigated various white collar crimes, including those related to the health
care industry. Our compliance program focuses on all areas of regulatory
compliance, including physician recruitment, reimbursement and cost reporting
practices, laboratory and home health care operations. Each of our hospitals
designates a compliance officer and undergoes an annual risk assessment to
determine
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potential risk issues and develop plans to correct problems should they arise.
In addition, all of our employees are given a thorough introduction to our
ethical and compliance guidelines, as well as a guide to the proper resources to
address any concerns that may arise. We also conduct annual training to
re-emphasize our established guidelines. We regularly monitor corporate
compliance programs to respond to developments in health care regulation and the
industry. We also maintain a toll-free hotline to permit employees to report
compliance concerns on an anonymous basis. In addition, the hotline is a method
of obtaining answers to questions of compliance encountered during the
day-to-day operation of a facility.
MANAGEMENT AND PROFESSIONAL SERVICES
Brim Healthcare, Inc., a wholly owned subsidiary, provides management
services to 40 primarily non-urban hospitals in 16 states with a total of 3,166
licensed beds. These services are provided for a fixed monthly fee under three
to seven-year contracts. Brim Healthcare, Inc. generally provides a chief
executive officer, who is an employee of Brim Healthcare, Inc., and may also
provide a chief financial officer. Brim Healthcare, Inc. typically does not
employ other hospital personnel. Management services typically are limited to
strategic planning, operational consulting and assistance with Joint Commission
of Accreditation for Health Care Organizations accreditation and compliance. To
further promote compliance, Brim Healthcare, Inc. requires that each of the
hospitals that it manages have a compliance officer. In addition, to assist
hospitals and community health care, Brim Healthcare, Inc. sometimes establishes
regional provider networks. We believe that Brim Healthcare, Inc.'s contract
management business provides a competitive advantage in identifying and
developing relationships with suitable acquisition candidates and in
understanding the local markets in which such hospitals operate. This subsidiary
represented less than 4.0% of the net operating revenue for the year ended
December 31, 2000 and less than 6.0% of net operating revenue for the year ended
December 31, 1999.
COMPETITION
The primary bases of competition among hospitals in non-urban markets
are the quality and scope of medical services, strength of referral network,
location, and, to a lesser extent, price. With respect to the delivery of
general acute care services, most of our hospitals face less competition in
their immediate patient service areas than would be expected in larger
communities. While our hospitals are generally the primary provider of health
care services in their respective communities, our hospitals face competition
from larger tertiary care centers and, in some cases, other non-urban hospitals.
Some of the hospitals that compete with us are owned by governmental agencies or
not-for-profit entities supported by endowments and charitable contributions,
and can finance capital expenditures on a tax-exempt basis.
One of the most significant factors in the competitive position of a
hospital is the number and quality of physicians affiliated with the hospital.
Although physicians may at any time terminate their affiliation with a hospital
that we operate, our hospitals seek to retain physicians of varied specialties
on the hospitals' medical staffs and to attract other qualified physicians. We
believe physicians refer patients to a hospital primarily on the basis of the
quality of services it renders to patients and physicians, the quality of other
physicians on the medical staff, the location of the hospital and the quality of
the hospital's facilities, equipment and employees. Accordingly, we strive to
maintain high ethical and professional standards and quality facilities,
equipment, employees and services for physicians and their patients.
Another factor in the competitive position of a hospital is
management's ability to negotiate service contracts with purchasers of group
health care services. Health maintenance organizations and preferred provider
organizations attempt to direct and control the use of hospital services through
managed care programs and to obtain discounts from hospitals' established
charges. In addition, employers and traditional health insurers increasingly are
interested in containing costs through negotiations with hospitals for managed
care programs and discounts from established charges. Generally, hospitals
compete on the basis of market reputation, geographic location, quality and
range of services, quality of the medical staff, convenience and price for
service contracts with group health care service purchasers. The importance of
obtaining contracts with managed care organizations varies from market to
market, depending on the market strength of such organizations. Managed care
contracts generally are less important in the non-urban markets served by us
than they are in urban and suburban markets where there is typically a higher
level of managed care penetration.
State certificate of need laws, which place limitations on a hospital's
ability to expand hospital services and add new equipment, also may have the
effect of restricting competition. Three states in which we operate,
Mississippi, Florida and Nevada,
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currently have certificate of need laws. The application process for approval of
covered services, facilities, changes in operations and capital expenditures is,
therefore, highly competitive. In those states that have no certificate of need
laws or that set relatively high thresholds before expenditures become
reviewable by state authorities, competition in the form of new services,
facilities and capital spending may be more prevalent. We have not experienced,
and do not expect to experience, any material adverse effects from state
certificate of need requirements or from the imposition, elimination or
relaxation of such requirements. See "Item 1. Business - Health Care Regulation
and Licensing."
We, and the health care industry as a whole, face the challenge of
continuing to provide quality patient care while dealing with rising costs,
strong competition for patients and a general reduction of reimbursement rates
by both private and government payors. As both private and government payors
reduce the scope of what may be reimbursed and reduced reimbursement levels for
what is covered, federal and state efforts to reform the health care system may
further impact reimbursement rates. Changes in medical technology, existing and
future legislation, regulations and interpretations and competitive contracting
for provider services by private and government payors may require changes in
our facilities, equipment, personnel, rates and/or services in the future.
The hospital industry and some of our hospitals continue to have
significant unused capacity. Inpatient utilization, average lengths of stay and
average inpatient occupancy rates continue to be negatively affected by
payor-required pre-admission authorization, utilization review, and payment
mechanisms to maximize outpatient and alternative health care delivery services
for less acutely ill patients. Admissions constraints, payor pressures and
increased competition are expected to continue. We will endeavor to meet these
challenges by expanding our facilities' outpatient services, offering
appropriate discounts to private payor groups, upgrading facilities and
equipment, and offering new programs and services.
We also face competition for acquisitions primarily from for-profit
hospital management companies as well as not-for-profit entities. Some of our
competitors have greater financial and other resources than us. Increased
competition for the acquisition of non-urban acute care hospitals could have an
adverse impact on our ability to acquire such hospitals on favorable terms.
PROPERTIES
In addition to our owned and leased hospitals, we lease approximately
33,488 square feet of office space for our corporate headquarters in Brentwood,
Tennessee under a seven-year lease that expires on March 31, 2005 and contains
customary terms and conditions. See "Item 1. Business - Owned and Leased
Hospitals."
EMPLOYEES AND MEDICAL STAFF
As of March 1, 2001, we had 4,132 "full-time equivalent" employees,
including 51 corporate personnel and 91 management company personnel. The
remaining employees, most of whom are nurses and office personnel, work at the
hospitals. We consider relations with our employees to be good. Approximately
5.13% of our employees are represented by unions.
We typically do not employ physicians and, as of March 1, 2001, we
employed less than five practicing physicians. Certain of our hospital services,
including emergency room coverage, radiology, pathology and anesthesiology
services, are provided through independent contractor arrangements with
physicians.
LITIGATION
We are involved in litigation arising in the ordinary course of
business. It is our opinion, after consultation with legal counsel, that these
matters will be resolved without material adverse effect on our consolidated
financial position or results of operations.
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GOVERNMENT REIMBURSEMENT
MEDICARE/MEDICAID REIMBURSEMENT
A significant portion of our revenue is dependent upon Medicare and
Medicaid payments. The Medicare program pays hospitals on a prospective payment
system for inpatient services at medical/ surgical hospitals. Under the
prospective payment system, a hospital receives a fixed amount for inpatient
hospital services based on the established fixed payment amount per discharge
for categories of hospital treatment known as diagnosis related group payments.
Diagnosis related group payments do not consider a specific hospital's costs,
but are national rates adjusted for area wage differentials and case-mix index..
Psychiatric services, long-term care, rehabilitation, certain designated
research hospitals and distinct parts of rehabilitation and psychiatric units
within hospitals currently are exempt from the prospective payment system and
are reimbursed on a cost-based system, subject to specific reimbursement caps,
which are known as TEFRA limits.
For several years, the percentage increases to the diagnosis related
group payments rates have been lower than the percentage increases in the cost
of goods and services purchased by general hospitals. The index used to adjust
the diagnosis related group payments rates is based on a price proxy, known as
the HCFA market basket index, reduced by Congressionally-mandated reduction
factors. The historical diagnostic related group rate increases were 1.5%, 2%,
0%, 0.7% and 1.1% for federal fiscal years 1996, 1997, 1998, 1999 and 2000,
respectively. The Balanced Budget Act of 1997 set the diagnostic related group
payment rates of increase for future federal fiscal years at rates that will be
based on the market basket rates less reduction factors of 1.8% in 2000, and
1.1% in 2001 and 2002. The Medicare, Medicaid, and SCHIP Benefits Improvement
and Protection Act of 2000 ("BIPA") amended the Balanced Budget Act by giving
hospitals a full market basket increase in fiscal 2001 and market basket minus
0.55% in fiscal years 2002 and 2003. In addition, BIPA contains provisions
delaying scheduled reductions in payment for home health agencies and other
provisions designed to lessen the impact on providers of spending reductions
contained in the Balanced Budget Act of 1997.
Most outpatient services provided by general hospitals are reimbursed
by Medicare under the outpatient prospective payment system. The Balanced Budget
Act of 1997 mandated the implementation of the prospective payment system for
Medicare outpatient services. This outpatient prospective payment system is
based on a system of Ambulatory Payment Categories. Each Ambulatory Payment
Category will represent a bundle of outpatient services, and each Ambulatory
Payment Category will be assigned a fully prospective reimbursement rate. BIPA
also improves the updates for outpatient services. Prior to BIPA, the update for
calendar years 2000 through 2002 was to be limited to the market basket minus
1%. BIPA modifies the updated provisions for the period April 1, 2001 through
December 31, 2001. As a result, hospital outpatient payments will be updated by
the amount established by BIPA effective January 1, 2001 plus 0.32%.
Medicare has special payment provisions for "Sole Community Hospitals."
A Sole Community Hospital is generally the only hospital in at least a 35-mile
radius or a 45-minute driving time radius. Colorado Plains Medical Center,
Colorado River Medical Center, Elko General Hospital, Havasu Regional Medical
Center, Parkview Regional Hospital and Palo Verde Hospital qualify as Sole
Community Hospitals under Medicare regulations. Special payment provisions
related to Sole Community Hospitals include a higher related group payments rate
which is based on a blend of hospital-specific costs and the national diagnosis
related group payments rate; and a 90% payment "floor" for capital cost. In
addition, the CHAMPUS program has special payment provisions for hospitals
recognized as Sole Community Hospitals for Medicare purposes. The Balanced
Budget Refinement Act of 1999 also provides a payment increase for Sole
Community Hospitals for fiscal year 2001. For fiscal year 2001, the prospective
payment system rate increase for Sole Community Hospitals is 3.4%.
Each state has its own Medicaid program that is funded jointly by such
state and the federal government. Federal law governs how each state manages its
Medicaid program, but there is wide latitude for states to customize Medicaid
programs to fit local needs and resources. As a result, each state Medicaid plan
has its own payment formula and recipient eligibility criteria.
The Balanced Budget Act of 1997 also repealed the Boren Amendment. The
Boren Amendment was enacted in 1980 and imposed several requirements on states
in their calculations of Medicaid rates. For example, the Boren Amendment
required states to pay providers rates that are "reasonable and adequate" to
meet the necessary costs of an economically and efficiently operated facility.
Although the full effect of the repeal of the Boren Amendment is not yet known,
the likely result will be that states will begin setting lower Medicaid
reimbursement rates than they would have under Boren.
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PROGRAM ADJUSTMENTS
The Medicare, Medicaid and TriCare programs are subject to statutory
and regulatory changes, administrative rulings, interpretations and
determinations, requirements for utilization review and new governmental funding
restrictions, all of which may materially increase or decrease program payments
as well as affect the cost of providing services and the timing of payment to
facilities. The final determination of amounts earned under the programs often
takes many years because of audits by the program representatives, providers'
rights of appeal and the application of numerous technical reimbursement
provisions. Management believes that adequate provision has been made for such
adjustments. Until final adjustment, however, significant issues remain
unresolved and previously determined allowances could become either inadequate
or more than ultimately required.
HEALTH CARE REGULATION AND LICENSING
CERTAIN BACKGROUND INFORMATION
Health care, as one of the largest industries in the United States,
continues to attract much legislative interest and public attention. Medicare,
Medicaid, and other public and private hospital cost-containment programs,
proposals to limit health care spending and proposals to limit prices and
industry competitive factors are among the many factors that are highly
significant to the health care industry. In addition, the health care industry
is governed by a framework of federal and state laws, rules and regulations that
are extremely complex and for which the industry has the benefit of only limited
regulatory or judicial interpretation.
There continue to be federal and state proposals that would, and
actions that do, impose more limitations on government and private payments to
providers such as us. In addition, there are proposals to increase co-payments
and deductibles from program and private patients. Our facilities also are
affected by controls imposed by government and private payors designed to reduce
admissions and lengths of stay. Such controls, including what is commonly
referred to as "utilization review," have resulted in a decrease in certain
treatments and procedures being performed. Utilization review entails a third
party's review of a patient's admission and course of treatment of a patient by
a third party. Utilization review by third-party peer review organizations is
required in connection with the provision of care paid for by Medicare and
Medicaid. Utilization review by third parties also is required under many
managed care arrangements.
Many states have enacted, or are considering enacting, measures that
are designed to reduce their Medicaid expenditures and to make changes to
private health care insurance. Various states have applied, or are considering
applying, for a federal waiver from current Medicaid regulations to allow them
to serve some of their Medicaid participants through managed care providers.
These proposals also may attempt to include coverage for some people who
presently are uninsured, and generally could have the effect of reducing
payments to hospitals, physicians and other providers for the same level of
service provided under Medicaid.
CERTIFICATE OF NEED REQUIREMENTS
Some states require approval for purchase, construction and expansion
of health care facilities, including findings of need for additional or expanded
health care facilities or services. Certificates of need, which are issued by
governmental agencies with jurisdiction over health care facilities, are at
times required for capital expenditures exceeding a prescribed amount, changes
in bed capacity or services and certain other matters. Three states in which we
currently own hospitals, Mississippi, Florida and Nevada, have certificate of
need laws. In addition, we may in the future buy additional hospitals in states
that require certificates of need. We are unable to predict whether our
hospitals will be able to obtain any certificates of need that may be necessary
to accomplish their business objectives in any jurisdiction where such
certificates of need are required.
ANTI-KICKBACK AND SELF-REFERRAL REGULATIONS
Sections of the Anti-Fraud and Abuse Amendments to the Social Security
Act, commonly known as the "anti-kickback" statute, prohibit certain business
practices and relationships that might influence the provision and cost of
health care services reimbursable under Medicaid or Medicare or other federal
health care programs, including the payment or receipt of remuneration for the
referral of patients whose care will be paid for by Medicare or other government
programs. Sanctions for
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violating the anti-kickback statute include criminal penalties and civil
sanctions, including fines and possible exclusion from government programs, such
as the Medicare and Medicaid programs. Pursuant to the Medicare and Medicaid
Patient and Program Protection Act of 1987, the U.S. Department of Health and
Human Services issued regulations that create safe harbors under the
anti-kickback statute. A given business arrangement that does not fall within an
enumerated safe harbor is not per se illegal; however, business arrangements
that fail to satisfy the applicable safe harbor criteria risk increased scrutiny
by enforcement authorities. The Health Insurance Portability and Accountability
Act of 1996, which became effective January 1, 1997, added several new fraud and
abuse laws. These new laws cover all health insurance programs--private as well
as governmental. In addition, the Health Insurance Portability and
Accountability Act of 1996 broadened the scope of certain fraud and abuse laws,
such as the anti-kickback statute, to include not just Medicare and Medicaid
services, but all health care services reimbursed under a federal or state
health care program.
There is increasing scrutiny by law enforcement authorities, the Office
of Inspector General of the Department of Health and Human Services, the courts
and Congress of arrangements between health care providers and potential
referral sources to ensure that the arrangements are not designed as a mechanism
to exchange remuneration for patient care referrals and opportunities.
Investigators also have demonstrated a willingness to look behind the
formalities of a business transaction to determine the underlying purpose of
payments between health care providers and potential referral sources.
Enforcement actions have increased, as evidenced by recent highly publicized
enforcement investigations of certain hospital activities.
In addition, provisions of the Social Security Act prohibit physicians
from referring Medicare and Medicaid patients to providers of a broad range of
designated health services with which the physicians or their immediate family
members have ownership or certain other financial arrangements. Certain
exceptions are available for employment agreements, leases, physician
recruitment and certain other physician arrangements. These provisions are known
as the Stark law and are named for the legislative sponsor, Rep. Pete Stark
(R-CA). A person making a referral, or seeking payment for services referred, in
violation of the Stark law would be subject to the following sanctions:
- civil money penalties of up to $15,000 for each service;
- restitution of any amounts received for illegally billed
claims; and/or
- exclusion from participation in the Medicare program, which can
subject the person or entity to exclusion from participation in
state health care programs.
Further, if any physician or entity enters into an arrangement or
scheme that the physician or entity knows or should know has the principal
purpose of assuring referrals by the physician to a particular entity, and the
physician directly makes referrals to such entity, then such physician or entity
could be subject to a civil money penalty of up to $100,000. Many states have
adopted or are considering similar legislative proposals, some of which extend
beyond the Medicaid program, to prohibit the payment or receipt of remuneration
for the referral of patients and physician self-referrals regardless of the
source of the payment for the care.
ENVIRONMENTAL REGULATIONS
Our health care operations generate medical waste that must be disposed
of in compliance with federal, state and local environmental laws, rules and
regulations. Our operations, as well as our purchases and sales of facilities,
also are subject to various other environmental laws, rules and regulations.
HEALTH CARE FACILITY LICENSING REQUIREMENTS
Our health care facilities are subject to extensive federal, state and
local legislation and regulation. In order to maintain their operating licenses,
health care facilities must comply with strict standards concerning medical
care, equipment and hygiene. Various licenses and permits also are required in
order to dispense narcotics, operate pharmacies, handle radioactive materials
and operate certain equipment. Our health care facilities hold all required
governmental approvals, licenses and permits. All licenses, provider numbers and
other permits or approvals required to perform our business operations are held
by our subsidiaries. All of our hospitals are fully accredited by the Joint
Commission on Accreditation of Health Care Organizations.
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UTILIZATION REVIEW COMPLIANCE AND HOSPITAL GOVERNANCE
Our health care facilities are subject to and comply with various forms
of utilization review. In addition, under the Medicare prospective payment
system, each state must have a peer review organization to carry out federally
mandated system of review of Medicare patient admissions, treatments and
discharges in hospitals. Medical and surgical services and practices are
supervised extensively by committees of staff doctors at each health care
facility, are overseen by each health care facility's local governing board, the
primary voting members of which are physicians and community members, and are
reviewed by our quality assurance personnel. The local governing boards also:
- help maintain standards for quality care;
- develop long-range plans;
- establish, review and enforce practices and procedures; and
- approve the credentials; and disciplining of medical staff
members.
GOVERNMENTAL DEVELOPMENTS REGARDING SALES OF NOT-FOR-PROFIT HOSPITALS
In recent years, the legislatures and attorneys general of several
states have shown a heightened level of interest in transactions involving the
sale of non-profit hospitals. Although the level of interest varies from state
to state, the trend is to provide for increased governmental review, and in some
cases approval, of transactions in which not-for-profit corporations sell a
health care facility. Attorneys general in certain states, including California,
have been especially active in evaluating these transactions.
PROPOSED MEDICAL RECORDS PRIVACY LEGISLATION
The Health Insurance Portability and Accountability Act of 1996
directed Congress to pass comprehensive health privacy legislation no later than
August 21, 1999. In the event Congress failed to pass such legislation, the act
required the Secretary of the Health and Human Services to issue regulations
designed to protect the privacy of individually identifiable health information
no later than February 21, 2000. Neither Congress nor the Department of Health
and Human Services met these deadlines, although the Department of Health and
Human Services did eventually publish final privacy regulations on December 28,
2000. On January 20, 2001, the incoming administration imposed a 60-day
moratorium on many new regulations issued by the prior administration. Although
the moratorium is not supposed to affect regulations issued pursuant to a
legislative mandate, it is not yet clear whether the HIPPA regulations will be
affected. When effective, the standards will apply to medical records created by
health care providers, hospitals, health plans and health care clearinghouses
that are either transmitted or maintained electronically and the paper printouts
created from these records. The standards:
- increase consumer control over their medical records;
- mandate substantial financial penalties for violation of a
patient's right to privacy; and
- with a few exceptions, require that an individual's health care
information only be used for health purposes.
The standards also require health care providers to implement and
enforce privacy policies to ensure compliance with the standards. The standards
may be modified further prior to final implementation. Until the standards are
implemented in the final form, we cannot know the extent of our costs for
implementing the requirements imposed by the regulations. We have appointed an
internal task force to study the proposed regulations' potential effects on our
business and to prepare us for compliance with the regulations.
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CALIFORNIA SEISMIC STANDARDS
California enacted the Alfred E. Alquist Hospital Facilities Seismic
Safety Act in 1973 and substantially amended the Alquist Act in 1983 and 1995.
The Act requires that the California Building Standards Commission adopt
earthquake performance categories, seismic evaluation procedures, standards and
timeframes for upgrading certain facilities, and seismic retrofit building
standards. These regulations require hospitals to meet seismic performance
standards to ensure that they are capable of providing medical services to the
public after an earthquake or other disaster. The Building Standards Commission
completed its adoption of evaluation criteria and retrofit standards in 1998.
The Alquist Act requires that within three years after the Building
Standards Commission has adopted evaluation criteria and retrofit standards:
- certain hospitals must conduct seismic evaluations and submit
these evaluations to the Office of Statewide Health Planning
and Development, Facilities Development Division for its review
and approval;
- hospitals must identify the most critical nonstructural systems
that represent the greatest risk of failure during an
earthquake and submit timetables to Office of Statewide Health
Planning and Development, Facilities Development Division for
its review and approval; and
- regulated hospitals must prepare a plan and compliance schedule
for each regulated building demonstrating the steps a hospital
will take to bring the hospital buildings into compliance with
the regulations and standards.
We will be required to conduct engineering studies of our California
facilities to determine whether and to what extent modifications to our
facilities will be required. If significant modifications are required to comply
with the seismic standards, we could incur substantial capital costs. Compliance
plans, if necessary, must be filed with the State of California by 2002. Any
facilities currently not in compliance with the seismic regulations and
standards must be brought into compliance by 2008, or 2013 if the facility
obtains an extension.
PROFESSIONAL LIABILITY
As part of our business, we are subject to claims of liability for
events occurring as part of the ordinary course of hospital operations. To cover
these claims, we maintain professional malpractice liability insurance and
general liability insurance in amounts that management believes to be sufficient
for our operations, although some claims may exceed the scope of the coverage in
effect. At December 31, 1999, we had a tail policy that transferred all risk for
our professional liability. Effective January 1, 2000, we purchased a
professional liability unlimited claim reporting policy. Effective January 1,
2001, we purchased a claims-made policy and will provide an accrual for incurred
but not reported claims. At various times in the past, the cost of malpractice
and other liability insurance has risen significantly. Therefore, adequate
levels of insurance may not continue to be available at a reasonable price.
Through our typical hospital management contract, we attempt to protect
ourselves from such liability by requiring the hospital to maintain certain
specified limits of insurance coverage, including professional liability,
comprehensive general liability, worker's compensation and fidelity insurance,
and by requiring the hospital to name us as an additional insured party on the
hospital's professional and comprehensive general liability policies. We also
maintain certain contingent liability policies designed to cover contingent
exposure Brim Hospitals, Inc. could incur under such management contracts. Our
management contracts generally provide for our indemnification by the hospital
against claims that arise out of hospital operations. However, there can be no
assurance the hospitals will maintain such insurance or that such indemnities
will be available.
ITEM 2. PROPERTIES
Information with respect to our hospital facilities and other
properties can be found in Item 1 of this report under the captions, "Business -
Owned and Leased Hospitals," and "Business - Properties."
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ITEM 3. LEGAL PROCEEDINGS
Our company is, from time to time, subject to claims and suits arising
in the ordinary course of business, including claims for damages for personal
injuries, breach of management contracts or for wrongful restriction of or
interference with physician's staff privileges. In certain of these actions,
plaintiff's request punitive or other damages that may not be covered by
insurance. We currently are not a party to any proceeding which, in our opinion,
would have a material adverse effect on our business, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Nasdaq National Market under the
symbol "PRHC." For 1999 and 2000, the high and low sale prices for our common
stock as reported by the Nasdaq National Market for the periods indicated, were
as follows:
1999
HIGH LOW
---- ---
First Quarter................................... $24.00 $ 8.67
Second Quarter.................................. 16.33 8.96
Third Quarter................................... 13.46 7.00
Fourth Quarter.................................. 15.92 7.08
2000
First Quarter................................... 20.50 13.00
Second Quarter.................................. 24.88 15.33
Third Quarter................................... 40.25 24.00
Fourth Quarter.................................. 42.63 27.13
As of March 1, 2001, there were approximately 31,099,081 shares of
common stock outstanding, held by 768 record holders.
We historically have retained and currently intend to retain all
earnings to finance the development and expansion of our operations and,
therefore, do not anticipate paying cash dividends or making any other
distributions on our shares of common stock in the foreseeable future.
Furthermore, our credit facilities contain restrictions on our ability to pay
dividends. Our future dividend policy will be determined by our Board of
Directors on the basis of various factors, including our results of operations,
financial condition, business opportunities, capital requirements and such other
factors as the Board of Directors may deem relevant.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of:
- Our predecessor, Brim, Inc. as of December 18, 1996 and for the
period January 1, 1996 to December 18, 1996, and
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- Our Company as of December 31, 1996, 1997, 1998, 1999 and 2000
and for the period February 2, 1996 to December 31, 1996 and
the years ended December 31, 1997, 1998, 1999 and 2000. The
selected consolidated financial data for the predecessor and
our company for 1996 through 2000 has been derived from the
audited consolidated financial statements of the predecessor
and our company.
The selected consolidated financial data is qualified by, and should be
read in conjunction with, "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and related notes, appearing elsewhere in this report.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BRIM
(PREDECESSOR)(1)(2) PROVINCE (SUCCESSOR)(1)(2)
------------------- ---------------------------------------------------
PERIOD
PERIOD FEB. 2,
JAN.1, 1996 1996 TO YEAR ENDED DECEMBER 31,
TO DEC. 18, DEC. 31, --------------------------------------
1996 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Net operating revenue............................. $112,600 $ 17,255 $170,527 $238,855 $346,692 $469,858
Income (loss) from continuing operations.......... (5,307) (1,316) 4,075 10,007 14,501 19,938
Net income (loss)................................. 708 (1,578) 4,075 10,007 14,501 19,938
Net income (loss) to common shareholders.......... (1,750) (1,002) 9,311 14,501 19,938
Net income (loss) per share to
common shareholders--diluted.................. (0.41) (0.12) 0.45 0.60 0.67
Cash dividends declared per common share.......... -- -- -- -- --
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets...................................... $ 76,998 $160,521 $176,461 $339,377 $497,616 $530,852
Long-term obligations, less current maturities.... 75,995 77,789 83,043 134,301 259,992 162,086
Mandatory redeemable preferred stock.............. 31,824 46,227 50,162 -- -- --
Common stockholders' equity (deficit)............. (56,308) (490) (1,056) 169,191 184,359 314,714
- ----------------------------------
(1) Our company was formed on February 2, 1996. On December 18, 1996, Brim,
Inc. completed a leveraged recapitalization. Immediately thereafter on
December 18, 1996, we acquired Brim, Inc. in a transaction accounted for as
a reverse acquisition. Therefore, the assets and liabilities of Brim, Inc.
were recorded at fair value as required by the purchase method of
accounting, and the operations of Brim, Inc. were reflected in the
operations of the combined enterprise from the date of acquisition. Because
our company had been in existence for less than a year at December 31,
1996, and because Brim, Inc. had been in existence for several years, we
were considered the successor to Brim, Inc.'s operations. The balance sheet
data of Brim, Inc. as of December 18, 1996 represents the historical cost
basis of Brim, Inc.'s assets and liabilities after the leveraged
recapitalization but prior to the reverse acquisition.
(2) The financial data of the predecessor and successor for the periods
presented are not strictly comparable due to the significant effect that
acquisitions, divestitures and the recapitalization of Brim, Inc. have had
on such data. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Impact of Acquisitions and
Divestitures" and Note 3 of the notes to our consolidated financial
statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and related notes thereto included elsewhere
in this report.
OVERVIEW
We are a health care services company focused on acquiring and
operating hospitals in attractive non-urban markets in the United States. As of
December 31, 2000, we owned or leased 14 general acute care hospitals in nine
states with a total of 1,326 licensed beds, and managed 40 hospitals in 16
states with a total of 3,166 licensed beds.
Our company was founded in February 1996 by Golder, Thoma, Cressey,
Rauner Fund IV, L.P. and Martin S. Rash to acquire and operate hospitals in
attractive non-urban markets. We acquired our first hospital, Memorial Mother
Frances Hospital in Palestine, Texas, in July 1996.
In December 1996, we acquired Brim, Inc. in a transaction accounted for
as a reverse acquisition. Therefore, the assets and liabilities of Brim were
recorded at fair value as required by the purchase method of accounting, and the
operations of Brim were reflected in the operations of the combined enterprise
from the date of acquisition. Because we had been in existence for less than a
year at December 31, 1996, and because Brim had been in existence for several
years, we are considered the successor to Brim's operations.
IMPACT OF ACQUISITIONS AND DIVESTITURES
An integral part of our strategy is to acquire non-urban acute care
hospitals. Because of the financial impact of our recent acquisitions, it is
difficult to make meaningful comparisons between our financial statements for
the fiscal periods presented. In addition, due to the relatively small number of
owned and leased hospitals, each hospital acquisition can materially affect our
overall operating performance. Upon the acquisition of a hospital, we typically
take a number of steps to lower operating costs. The impact of such actions may
be offset by cost increases to expand services, strengthen medical staff and
improve 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
adversely affect overall operating margins in the near term. As we make
additional hospital acquisitions, we expect that this effect will be mitigated
by the expanded financial base of existing hospitals and the allocation of
corporate overhead among a larger number of hospitals. We may also divest
certain hospitals in the future if we determine a hospital no longer fits within
our strategy.
1998 Acquisitions
In May 1998, we acquired Havasu Regional Medical Center in Lake Havasu
City, Arizona, for approximately $107.5 million. In June 1998, we acquired Elko
General Hospital in Elko, Nevada for a purchase price of approximately $23.3
million. To finance these acquisitions, we borrowed $106.0 million and $22.0
million, respectively, under our revolving credit facility.
The 1998 results of operations include eight months of operations for
Havasu Regional Medical Center and six and one-half months of operations for
Elko General Hospital.
1999 Acquisitions
In February 1999, we entered into a special services agreement for the
lease of Eunice Community Medical Center in Eunice, Louisiana, by purchasing
assets totaling $4.9 million and assuming certain liabilities and entering into
a ten-year lease agreement, with a five-year renewal option, totaling $0.8
million. We are obligated under the lease to construct a replacement facility
(currently estimated to cost approximately $20.0 million) at such time as the
net patient service revenue of the hospital reaches a pre-determined level. The
lease will terminate at the time the replacement facility commences operations.
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In April 1999, we acquired assets totaling $17.2 million and assumed
liabilities totaling $4.9 million of Glades General Hospital in Belle Glade,
Florida. To finance this acquisition, we borrowed $13.5 million under our
revolving credit facility. We are obligated under the Asset Purchase Agreement
to build a replacement hospital following the fifth year after the closing, at a
cost of not less than $25.0 million, contingent upon the hospital meeting
certain financial targets following the closing.
In June 1999, we acquired assets totaling $25.7 million and assumed
certain liabilities totaling $2.8 million of Doctors' Hospital of Opelousas in
Opelousas, Louisiana. To finance this acquisition, we borrowed $22.0 million
under our revolving credit facility.
In October 1999, we acquired assets totaling $82.5 million and assumed
liabilities totaling $4.2 million of Trinity Valley Medical Center in Palestine,
Texas and Minden Medical Center in Minden, Louisiana. To finance the
acquisition, we borrowed $77.0 million under our revolving credit facility.
Following the acquisition, we merged Trinity Valley Medical Center into Memorial
Mother Frances Hospital, a hospital that we already owned in Palestine, Texas,
and changed the name of the hospital to Palestine Regional Medical Center.
The 1999 results of operations include the results of Trinity Valley
Medical Center and Minden Medical Center effective October 1, 1999, Doctors'
Hospital of Opelousas effective June 1, 1999, Glades General Hospital effective
May 1, 1999, and Eunice Community Medical Center effective April 1, 1999.
2000 Acquisitions
In February 2000, we acquired, through a long-term capital lease
agreement, the assets and business of the 45-bed City of Ennis Hospital from the
City of Ennis, Texas. The aggregate rental payments required under the
thirty-year lease total $3.0 million, including a prepayment of $2.0 million. To
finance the lease prepayment, we borrowed $2.0 million under our revolving
credit facility.
In April 2000, we acquired, through a long-term capital lease
agreement, the assets and business of the 165-bed Bolivar Medical Center in
Cleveland, Mississippi, from Bolivar County. Aggregate payments under the
forty-year lease total $26.4 million, and were prepaid at the date of
acquisition. To finance the prepaid lease payment and the purchase of working
capital, we borrowed $24.6 million under our revolving credit facility.
The 2000 results of operations include the results of City of Ennis
Hospital effective March 1, 2000, and Bolivar Medical Center effective May 1,
2000.
All of the acquisitions described above were accounted for as purchase
business combinations. Our owned and leased hospitals accounted for 92.3%,
94.2%, and 96.0% of our net operating revenue in 1998, 1999 and 2000,
respectively.
Recent Dispositions
In October 2000, we sold substantially all of the assets of Ojai Valley
Community Hospital, a 110-bed general acute-care facility located in Ojai,
California, to the Ojai Valley Community Hospital Foundation. The sale price for
the hospital was approximately $2.0 million, including working capital. After
application of tax benefits, we recorded a loss on the sale of approximately
$6.3 million in the fourth quarter of 2000.
In December, 2000, we completed the sale of substantially all of the
assets of General Hospital, a 75-bed acute-care hospital located in Eureka,
California, to St. Joseph Health Systems. The sale price for the hospital was
$26.5 million plus approximately $5.0 million for working capital, subject to
settlement after 90 days. After application of tax provision, we recorded a gain
on the sale of approximately $2.6 million in the fourth quarter of 2000.
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GENERAL
The federal Medicare program accounted for approximately 57.8%, 56.3%
and 56.1% of hospital patient days in 1998, 1999, and 2000, respectively. The
state Medicaid programs accounted for approximately 11.1%, 12.4% and 17.9% of
hospital patient days in 1998, 1999 and 2000, respectively. The payment rates
under the Medicare program for inpatients are prospective, based upon the
diagnosis of a patient. The Medicare payment rate increases historically have
been less than actual inflation.
Both federal and state legislatures are continuing to scrutinize the
health care industry for the purpose of reducing health care costs. While we are
unable to predict what, if any, future health reform legislation may be enacted
at the federal or state level, we expect continuing pressure to limit
expenditures by governmental health care programs. The Balanced Budget Act of
1997 imposed certain limitations on increases in the inpatient Medicare rates
paid to acute care hospitals. 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 Balanced Budget Act of
1997 also includes a managed care option that 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
effect on the health care industry and our company.
Some of our 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
affected negatively by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative health care delivery services
for less acutely ill patients. We expect 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 ability of our
hospitals to maintain their current rate of net revenue growth and operating
margins.
We expect the industry trend in increased outpatient services to
continue because of the increased focus on managed care and advances in
technology. Outpatient revenue of our owned or leased hospitals was
approximately 43.5%, 42.6% and 41.8% of gross patient service revenue in 1998,
1999 and 2000, respectively.
The billing and collection of accounts receivable by hospitals are
complicated by:
- 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.
These factors, or any combination of them, may impact our ability to
bill and collect our accounts receivable at the rates we have anticipated, which
could negatively affect our future cash flows.
The federal government and a number of states are 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 we believe that we are in material compliance with such laws, a
determination that we have violated such laws, or even the public announcement
that we were being investigated concerning possible violations, could have a
material adverse effect on our company.
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Our historical financial trend has been impacted favorably by our
success in acquiring acute care hospitals. While we believe that trends in the
health care industry described above may create possible future acquisition
opportunities, we may not be able to maintain our current growth rate through
hospital acquisitions and successfully integrate the hospitals into our system.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that affect the amounts reported in our financial statements.
Resolution of matters, for example, final settlements with third-party payors,
may result in changes from those estimates. The timing and amount of such
changes in estimates may cause fluctuations in our quarterly or annual operating
results.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, information
expressed as a percentage of net operating revenue. Such information has been
derived from our consolidated statements of income included elsewhere in this
report. The results of operations for the periods presented include hospitals
from their acquisition dates, as previously discussed.
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1999 2000
---- ---- ----
Net operating revenue................... 100.0% 100.0% 100.0%
Operating expenses(1)................... (82.4) (82.8) (82.1)
----- ----- -----
EBITDA(2)............................... 17.6 17.2 17.9
Depreciation and amortization........... (5.6) (5.7) (5.7)
Interest, net........................... (4.4) (4.0) (3.5)
Minority interest....................... (0.1) (0.0) (0.0)
Loss on sale............................ (0.0) (0.0) (1.3)
----- ----- -----
Income before income taxes.............. 7.5 7.5 7.4
Provision for income taxes.............. (3.3) (3.3) (3.2)
---- ----- -----
Net income.............................. 4.2% 4.2% 4.2%
==== ===== =====
- ----------------------------------
(1) Operating expenses represent expenses before interest, minority interest,
income taxes, depreciation and amortization.
(2) EBITDA represents the sum of income before income taxes, interest,
depreciation and amortization and minority interest. We understand 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 a company and its ability to service
debt. We believe that an increase in EBITDA level is an indicator of our
improved ability to service existing debt, to sustain potential future
increases in debt and to satisfy capital requirements. EBITDA, however, is
not a measure of financial performance under accounting principles
generally accepted in the United States and should not be considered an
alternative to net income as a measure of operating performance or 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 accounting principles generally accepted in the United States and is
thus susceptible to varying calculations, EBITDA, as presented, may not be
comparable to other similarly titled measures of other companies.
Hospital revenues are received primarily from Medicare, Medicaid and
commercial insurance. The percentage of revenues 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 based on a
prospective payment system, based upon the diagnosis of a patient. While these
rates are indexed for inflation annually, the increases historically have been
less than actual inflation. In addition, states, insurance companies and
employers are actively negotiating the amounts paid to hospitals as opposed to
their standard rates. The trend toward managed care, including health
maintenance organizations, preferred provider organizations and various other
forms of managed care, may affect the hospitals' ability to maintain their
current rate of net operating revenue growth.
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Net operating revenue is comprised of:
- net patient service revenue from our owned and leased hospitals;
- management and professional services 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,
Medicaid and other third-party payor programs. Customary charges generally have
increased at a faster rate than the rate of increase for Medicare and Medicaid
payments. Operating expenses of the hospitals primarily consist of salaries,
wages and benefits, purchased services, supplies, provision for doubtful
accounts, rentals and leases, and other operating expenses, principally
consisting of utilities, insurance, property taxes, travel, freight, postage,
telephone, advertising, repairs and maintenance.
Management and professional services revenue is comprised of fees from
management and professional consulting services provided to third-party
hospitals pursuant to management contracts and consulting arrangements.
Management and professional services revenue plus reimbursable expenses total
less than 4% of consolidated net operating revenue. Operating expenses for the
management and professional services business primarily consist of salaries,
wages and benefits and reimbursable expenses.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net operating revenue increased from $346.7 million in 1999 to $469.9
million in 2000, an increase of $123.2 million, or 35.5%. Cost report
settlements and the filing of cost reports resulted in a positive revenue
adjustment of $0.9 million, or 0.2% of net operating revenue, in 1999, and a
negative revenue adjustment of $0.7 million, or 0.1% of net operating revenue in
2000. Net patient service revenue generated by hospitals owned during both
periods increased $56.6 million, or 18.3%, resulting from market expansion,
inpatient volume increases, new services and price increases. The remaining
increase was primarily attributable to the acquisition of additional hospitals
in 1999 and 2000.
Operating expenses increased from $287.2 million, or 82.8% of net
operating revenue, in 1999 to $385.7 million, or 82.1% of net operating revenue,
in 2000. The increase in operating expenses of hospitals owned during both
periods resulted primarily from new services, volume increases, change in case
mix, increased physician recruiting and increased provision for doubtful
accounts. The consolidated provision for doubtful accounts increased to 9.3% of
net operating revenue in 2000 from 7.4% of net operating revenue in 1999,
primarily related to two hospitals acquired in 1999. The majority of the
increase in operating expenses was attributable to the acquisition of additional
hospitals in 1999 and 2000.
EBITDA increased from $59.5 million, or 17.2% of net operating revenue,
in 1999 to $84.1 million, or 17.9% of net operating revenue, in 2000.
Depreciation and amortization expense increased from $19.7 million, or
5.7% of net operating revenue, in 1999 to $26.6 million, or 5.7% of net
operating revenue in 2000. The increase in depreciation and amortization
resulted primarily from the acquisition of additional hospitals in 1999 and
2000, and capital expenditures at hospitals owned during both periods. Interest
expense increased from $13.9 million in 1999 to $16.7 million in 2000, an
increase of $2.8 million or 20.1%. This was a result of increased borrowings to
finance the acquisition of additional hospitals in 1999 and 2000 and higher
interest rates, offset by the reduction in the revolving credit facility with
the net proceeds of the common stock offering and the sale of convertible
subordinated notes.
Loss on sale of assets totaled $6.0 million in 2000, primarily as a
result of a net loss of $6.1 million on the sale of two hospitals and an office
building. We sold Ojai Valley Community Hospital in October 2000 at a loss of
approximately $11.0 million. We sold General Hospital in December 2000 for a
gain of approximately $4.5 million. We sold an office building in December 2000
for a gain of approximately $0.4 million. The Company does not expect future
earnings to be impacted as a result of these sales.
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Income before provision for income taxes was $34.7 million for the year
ended December 31, 2000, compared to $25.6 million in 1999, an increase of $9.1
million or 35.5%. On a pro forma basis, adjusting actual net income to exclude
the after-tax effect of the sales of the two hospitals and the office building,
net income for the year was $23.5 million.
Our provision for income taxes was $14.7 million for the year ended
December 31, 2000, compared to $11.1 million in 1999. These provisions reflect
effective income tax rates of 42.5% for 2000, compared to 43.5% for 1999. See
Note 8 of the notes to our consolidated financial statements for information
regarding differences between effective tax rates and statutory rates.
Net income was $19.9 million, or 4.2% of net operating revenue, in
2000, compared to $14.5 million, or 4.2% of net operating revenue, in 1999.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net operating revenue increased from $238.9 million in 1998 to $346.7
million in 1999, an increase of $107.8 million or 45.1%. Net patient service
revenue generated by hospitals owned during both periods, including Palestine
Regional Medical Center, increased $21.1 million, or 9.9%, resulting from
inpatient and outpatient volume increases, new services and price increases.
Cost report settlements and the filing of cost reports resulted in positive
revenue adjustments of $4.0 million, or 1.8% of net operating revenue, in 1998,
and $0.9 million, or 0.2% of net revenues in 1999. The remaining increase was
primarily attributable to the acquisitions of additional hospitals in 1998 and
1999.
Operating expenses increased from $196.8 million, or 82.4% of net
operating revenue, in 1998 to $287.2 million, or 82.8% of net operating revenue
in 1999. The increase in operating expenses of hospitals owned during both
periods resulted primarily from new services, volume increases, change in case
mix and increased recruiting expenses, offset by a decrease in provision for
doubtful accounts. The majority of the increase in operating expenses was
attributable to the acquisition of additional hospitals in 1998 and 1999.
EBITDA increased from $42.1 million, or 17.6% of net operating revenue,
in 1998 to $59.5 million, or 17.2% of net operating revenue, in 1999.
Depreciation and amortization expense increased from $13.4 million, or
5.6% of net operating revenue, in 1998, to $19.7 million, or 5.7% of net
operating revenue in 1999. The increase in depreciation and amortization
resulted primarily from the acquisitions in 1999 and a full year of expense for
acquisitions made in 1998. Interest expense as a percent of net operating
revenue decreased from 4.4% in 1998 to 4.0% in 1999.
Income before provision for income taxes was $25.6 million in 1999,
compared to $17.9 million in 1998, an increase of $7.7 million or 43.0%. The
increase resulted primarily from the acquisition of additional hospitals in 1998
and 1999.
Our provision for income taxes was $11.1 million in 1999, compared to
$7.9 million in 1998. These provisions reflect effective income tax rates of
43.5% in 1999 compared to 44.2% in 1998. See Note 8 of the notes to our
consolidated financial statements for information regarding differences between
effective tax rates and statutory rates.
Net income was $14.5 million, or 4.2% of net operating revenue, in
1999, compared to $10.0 million, or 4.2% of net operating revenue in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
In April 2000, we completed our public offering of 6,333,756 shares of
common stock. Net proceeds from the offering of approximately $94.8 million were
used to reduce the balance of our revolving credit line.
In November and December, 2000, we sold $150.0 million of Convertible
Subordinated Notes, due November 20, 2005. Net proceeds of approximately $145.0
million were used to reduce the outstanding balance on the revolving line of
credit. The Notes bear interest from November 20, 2000 at the rate of 4 1/2% per
year, payable semi-annually on May 20 and November
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20, beginning on May 20, 2001. The Notes are convertible at the option of the
holder at any time on or prior to maturity into shares of our common stock at a
conversion price of $39.67 per share. The conversion price is subject to
adjustment. We may redeem all or a portion of the Notes on or after November 20,
2003, at the then current redemption prices, plus accrued and unpaid interest.
Note holders may require us to repurchase all of the holder's Notes at 100% of
their principal amount plus accrued and unpaid interest in some circumstances
involving a change of control. The notes are unsecured obligations and rank
junior in right of payment to all of our existing and future senior
indebtedness. The indenture does not contain any financial covenants.
Total long-term obligations, less current maturities, decreased to
$162.1 million at December 31, 2000, from $260.0 million at December 31, 1999.
The decrease resulted primarily from the reduction in the revolving credit
facility with the net proceeds from the common stock offering, the sale of
convertible subordinated notes and the proceeds from the sale of Ojai Valley
Community Hospital and General Hospital, offset by borrowings to finance the
City of Ennis Hospital and Bolivar Medical Center acquisitions.
In September 1999, we increased the size of our credit facility to
$295.0 million, including a $255.3 million revolving credit facility and a $39.7
million end-loaded lease facility. At December 31, 2000, we had $4.0 million
outstanding under our revolving credit facility and $264.3 million available,
which includes availability under the end-loaded lease facility that can be
converted to revolver availability at our option.
Our credit facility contains limitations on our ability to incur
additional indebtedness including contingent obligations, sell material assets,
retire, redeem or otherwise reacquire our capital stock, acquire the capital
stock or assets of another business, and pay dividends. Our credit facility also
requires us to maintain a specified net worth and meet or exceed certain
coverage, leverage, and indebtedness ratios. Indebtedness under our credit
facility is secured by substantially all of our assets. We are required under
our credit facility to pay certain commitment fees, based upon amounts borrowed
and available for borrowing, during the term of our agreement.
Interest rate swap agreements are used to manage our interest rate
exposure under our credit facility. In 1997, we entered into an interest rate
swap agreement, that effectively converted for a five-year period $35.0 million
of floating-rate borrowings to fixed-rate borrowings. In June 2000, the
counterparty exercised its option to terminate the swap agreement. In 1998, we
entered into an interest rate swap agreement that effectively converted for a
five-year period $45.0 million of floating-rate borrowings to fixed-rate
borrowings. We secured a 5.625% fixed interest rate on the 1998 swap agreement.
Cash Flows - Year Ended December 31, 2000 Compared to Year Ended December
31, 1999
Working capital increased to $63.4 million at December 31, 2000 from
$59.4 million at December 31, 1999, resulting primarily from increased business
volumes and effective management of our working capital. The ratio of current
assets to current liabilities was 2.4 to 1.0 at December 31, 2000. Our cash
flows from operating activities increased by $13.7 million from $19.0 million in
1999 to $32.7 million in 2000. Offsetting our improved profitability were
increases in accounts receivable and other assets. The increase in accounts
receivable was due to higher volumes at same hospitals and acquisition
hospitals, as well as temporary delays in billing of Medicare and Medicaid
accounts receivable while waiting for assignment of applicable third-party
provider numbers at those newly-acquired hospitals. The increase in other assets
relates to income tax benefits resulting from employee exercises of
non-qualified stock options. The use of our cash in investing activities
decreased from $140.1 million in 1999 to $40.7 million in 2000, resulting
primarily from smaller outlays of cash for acquisitions and disposal of
hospitals in 2000, compared to 1999. Our cash flows provided by financing
activities decreased from $119.0 million in 1999 to $8.0 million in 2000,
resulting from reduced borrowings for acquisitions in 2000, and the net effect
of proceeds from a common stock offering and the sale of convertible debt used
to pay down existing debt under our revolving credit agreement.
Cash Flows - Year Ended December 31, 1999 Compared to Year Ended December
31, 1998
Working capital increased to $59.4 million at December 31, 1999 from
$47.2 million at December 31, 1998, resulting primarily from increased business
volumes and effective management of our working capital. Our cash flows from
operating activities increased by $23.1 million from $4.1 million used in 1998
to $19.0 million provided in 1999. Offsetting our improved profitability was a
large increase in accounts receivable, both at same hospitals and newly-acquired
hospitals. This increase was due to higher volumes at same hospitals and
acquisition hospitals, as well as temporary delays in billing of Medicare and
26
28
Medicaid accounts receivable while waiting for assignment of applicable
third-party provider numbers at those newly acquired hospitals. The use of our
cash in investing activities decreased from $146.4 million in 1998 to $140.1
million in 1999, reflecting some smaller, less expensive acquisitions during
1999. Our cash flows provided by financing activities decreased $29.5 million
from $148.5 million in 1998 to $119.0 million in 1999, due primarily to
decreased borrowings related to acquisitions.
Capital Expenditures
Capital expenditures, excluding acquisitions, in 1998, 1999 and 2000,
were $15.5 million, $20.9 million, and $44.0 million, respectively, inclusive of
construction projects. Capital expenditures for our owned hospitals may vary
from year to year depending on facility improvements and service enhancements
undertaken by the hospitals. We expect to make total capital expenditures in
2001 of approximately $23.1 million, exclusive of any acquisitions of businesses
or construction projects. Planned capital expenditures for 2001 consist
principally of capital improvements to owned and leased hospitals. We expect to
fund these expenditures through cash provided by operating activities and
borrowings under our revolving credit facility. With respect to construction
projects, we have started construction of a replacement facility for Elko
General Hospital, currently expected to cost approximately $30.0 million, and if
pre-determined operating levels are achieved, we have agreed to build
replacement facilities for Eunice Community Medical Center, currently expected
to cost approximately $20.0 million, and Glades General Hospital, currently
expected to cost approximately $25.0 million. We cannot estimate whether and
when each hospital will achieve its individual pre-determined operating levels,
but we believe it will take approximately thirty-six months to complete
construction from such date. We have started construction on an ancillary
expansion at Havasu Regional Medical Center, which is expected to cost
approximately $26.0 million. In addition, in connection with certain
acquisitions we have made, we have committed and may commit in the future to
spend specified amounts for capital expenditures.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting
for Derivatives Instruments and Hedging Activities, as amended by SFAS No. 137
and SFAS No. 138, requires that all derivatives be recorded on the balance sheet
at fair value, which results in offsetting changes in fair values or cash flows
of both the hedge and the hedged item being recognized in earnings or other
comprehensive income in the same period. Changes in fair value of derivatives
not meeting the Statement's hedge criteria are recognized in income. We adopted
the Statement on January 1, 2001, and this adoption did not have a significant
effect on our results of operations or financial position. Our only derivative
is an interest rate swap agreement. See Note 5 of the notes to our consolidated
financial statements. We are required to recognize gains/losses on the swap in
other comprehensive income and to provide additional footnote disclosures, in
our Quarterly Reports on Form 10-Q, related to hedging strategies beginning with
the first quarter of 2001 Form 10-Q.
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 to us rising costs in the form of higher prices.
We generally have been able to offset increases in operating costs by increasing
charges for services, expanding services, and implementing cost control measures
to curb increases in operating costs and expenses. In light of cost containment
measures imposed by government agencies and private insurance companies, we are
unable to predict our ability to offset or control future cost increases, or our
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold or issue derivative instruments for trading purposes and
are not a party to any instruments with leverage features. Our primary market
risk involves interest rate risk. Our interest expense is sensitive to changes
in the general level of U. S. interest rates. To mitigate the impact of
fluctuations in U. S. interest rates, we generally expect to maintain a
substantial percent of our debt as fixed rate in nature by entering into
interest rate swap transactions. Our only derivatives relate to interest rate
swap agreements. In 1997, we entered into an interest rate swap agreement, which
effectively converted for a five-year period $35.0 million of floating-rate
borrowings to fixed-rate borrowings. In June 2000, the counterparty exercised
its option to terminate the swap agreement. The $45.0 million interest rate swap
agreement, entered into in 1998, is a contract to exchange periodically fixed
and floating interest rate payments over the life of the agreement. The
floating-rate payments are based on
27
29
LIBOR and fixed-rate payments are dependent upon market levels at the time the
swap agreement was consummated. The interest rate swap agreement does not
constitute positions independent of the underlying exposure. The swap agreement
allows the counterparty a one-time option at the end of the initial term to
cancel the agreement or extend the swap for an incremental time period. We are
exposed to credit losses in the event of nonperformance by the counterparty to
our financial instrument. The counterparty is a creditworthy financial
institution, and we expect our counterparty to fully satisfy its contract
obligation. We received a weighted average rate of 5.67%, 5.27% and 6.37%, and
paid a weighted average rate of 6.14%, 5.91% and 5.82% on our interest rate swap
agreements, for the years ended December 31, 1998, 1999, and 2000, respectively.
The carrying amount of our total long-term debt, less current
maturities, of $260.0 million and $162.1 million at December 31, 1999 and 2000,
respectively, approximated fair value. We had $249.2 million and $4.0 million of
variable rate debt outstanding at December 31, 1999 and 2000, respectively, with
interest rate swaps in place to offset the variability of $80.0 million of this
balance in 1999 and $4.0 million in 2000. At the December 31, 2000 borrowing
level, a hypothetical 10% adverse change in interest rates, considering the
effect of the interest rate hedge agreement, would have no impact on our net
income and cash flows. A hypothetical 10% adverse change in interest rates on
the fixed-rate debt would not have a material impact on the fair value of such
debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the executive officers and directors of our
company is incorporated by reference from our proxy statement relating to the
annual meeting of shareholders to be held on May 23, 2001, except that the
"Audit Committee Report" included in the proxy statement is expressly not
incorporated herein by reference. Such proxy statement will be filed with the
Commission not later than 120 days subsequent to December 31, 2000.
Information with respect to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated by reference from our proxy
statement relating to the annual meeting of shareholders to be held on May 23,
2001.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to the compensation of our executive officers
is incorporated by reference from our proxy statement relating to our annual
meeting of shareholders to be held on May 23, 2001 except that the "Comparative
Performance Graph" and the "Compensation Committee Report on Executive
Compensation" included in the proxy statement are expressly not incorporated
herein by reference. Such proxy statement will be filed with the Commission not
later than 120 days subsequent to December 31, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to the security ownership of certain
beneficial owners of our common stock and management is incorporated by
reference from our proxy statement relating to the annual meeting of
shareholders to be held on May 23, 2001. Such proxy statement will be filed with
the Securities and Exchange Commission not later than 120 days subsequent to
December 31, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related
transactions between our company and its executive officers and directors is
incorporated by reference from our Proxy Statement relating to the annual
meeting of shareholders to be held on May 23, 2001. Such proxy statement will be
filed with the Securities and Exchange Commission not later than 120 days
subsequent to December 31, 2000.
28
30
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(A)(1) AND (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The Consolidated Financial Statements and Financial Statement Schedules
of Province Healthcare Company required to be included in Part II, Item 8 are
indexed on Page F-1 and submitted as a separate section of this Report.
(A)(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
2.1 Agreement and Plan of Merger, dated as of December 16, 1996,
between Brim, Inc. and Carryco, Inc.(a)
2.2 Plan and Agreement of Merger, dated as of December 17, 1996,
between Brim, Inc., Principal Hospital Company and Principal
Merger Company(a)
2.3 Agreement and Plan of Merger, dated as of November 27, 1996,
between Brim, Inc., Brim Senior Living, Inc., Encore Senior
Living, L.L.C. and Lee Zinsli(a)
2.4 Amended and Restated Agreement and Plan of Merger, dated as of
January 15, 1998, between Principal Hospital Company and
Province Healthcare Company(a)
3.1 Amended and Restated Certificate of Incorporation of Province
Healthcare Company(a)
3.2 Amended and Restated Certificate of Incorporation of Province
Healthcare Company, as filed with the Delaware Secretary of
State on June 16, 2000(j)
3.3 Amended and Restated Bylaws of Province Healthcare Company(a)
4.1 Form of Common Stock Certificate(a)
4.2 Indenture, dated as of November 20, 2000 between Province
Healthcare Company and National City Bank, including the forms
of the company's 4 1/2% Convertible Subordinated Notes due
2005(k)
4.3 Registration Rights Agreement, dated as of November 20, 2000,
among Province Healthcare Company and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit
Suisse First Boston Corporation, UBS Warburg LLC, First Union
Securities, Inc. and Robertson Stephens, Inc. as Initial
Purchasers(k)
10.1 Employment Agreement, dated as of December 17, 1996, by and
between A.E. Brim and Brim, Inc.(a)
10.2 Stockholders Agreement, dated as of December 17, 1996, by and
among Brim, Inc., GTCR Fund IV, L.P., Leeway & Co., First Union
Corporation of Virginia, AmSouth Bancorporation, Martin S. Rash,
Richard D. Gore, Principal Hospital Company and certain other
stockholders(a)
10.3 First Amendment to Stockholders Agreement, dated as of July 14,
1997, by and among Province Healthcare Company, GTCR Fund IV,
L.P., Martin S. Rash, Richard D. Gore and certain other
stockholders(a)
29
31
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
10.4 Registration Agreement, dated as of December 17, 1996, by and
among Brim, Inc., Principal Hospital Company, GTCR Fund IV,
L.P., Leeway & Co., First Union Corporation of Virginia, AmSouth
Bancorporation and certain other stockholders(a)
10.5 Senior Management Agreement, dated as of December 17, 1996,
between Brim, Inc., Martin S. Rash, GTCR Fund IV, L.P., Leeway
& Co. and Principal Hospital Company(a)
10.6 First Amendment to Senior Management Agreement, dated as of July
14, 1997, between Province Healthcare Company, Martin S. Rash
and GTCR Fund IV, L.P.(a)
10.7 Senior Management Agreement, dated as of December 17, 1996,
between Brim, Inc., Richard D. Gore, GTCR Fund IV, L.P., Leeway
& Co. and Principal Hospital Company(a)
10.8 First Amendment to Senior Management Agreement, dated as of July
14, 1997, between Province Healthcare Company, Richard D. Gore
and GTCR Fund IV, L.P.(a)
10.9 Lease Agreement, dated October 1, 1996, by and between County of
Starke, State of Indiana, and Principal Knox Company(a)
10.10 Lease Agreement, dated December 1, 1993, by and between Palo
Verde Hospital Association and Brim Hospitals, Inc.(a)
10.11 Lease Agreement, dated May 15, 1986, as amended, by and between
Fort Morgan Community Hospital Association and Brim Hospitals,
Inc.(a)
10.12 Lease Agreement, dated April 24, 1996, as amended, by and
between Parkview Regional Hospital, Inc. and Brim Hospitals,
Inc.(a)
10.13 Lease Agreement and Annex, dated June 30, 1997, by and between
The Board of Trustees of Needles Desert Communities Hospital and
Principal-Needles, Inc.(a)
10.14 Corporate Purchasing Agreement, dated April 21, 1997, between
Aligned Business Consortium Group and Principal Hospital
Company(a)
10.15 Lease Agreement, dated December 17, 1996, between Brim, Inc. and
Encore Senior Living, L.L.C.(a)
10.16 First Amendment to Securities Purchase Agreement, dated as of
December 31, 1997, between Principal Hospital Company and
Leeway & Co.(a)
10.17 Second Amendment to Senior Management Agreement, dated as of
October 15, 1997, between Province Healthcare Company, Martin S.
Rash and GTCR Fund IV, L.P.(a)
10.18 Second Amendment to Senior Management Agreement, dated as of
October 15, 1997, between Province Healthcare Company, Richard
D. Gore and GTCR Fund IV, L.P.(a)
30
32
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
10.19 Second Amendment to Stockholders Agreement, dated as of December
31, 1997, between Province Healthcare Company, GTCR Fund IV,
L.P., Martin S. Rash, Richard D. Gore and certain other
stockholders(a)
10.20 Asset Acquisition Agreement and Escrow Instructions, dated March
22, 1994, between THC-Seattle, Inc., Community Psychiatric
Centers, Brim Fifth Avenue, Inc. and Brim Hospitals, Inc.(a)
10.21 Bill of Sale and Assignment, dated July 9, 1997, by Nationwide
Health Properties, Inc. in favor of Brim Hospitals, Inc.(a)
10.22 Asset Purchase Agreement, dated July 12, 1996, between Memorial
Hospital Foundation-Palestine, Inc. and Palestine Principal
Healthcare Limited Partnership(a)
10.23 Amended and Restated Agreement of Limited Partnership, dated
June 30, 1997, between Palestine-Principal G.P., Inc.,
Palestine-Principal, Inc. and Mother Frances Hospital Regional
Healthcare Center.*
10.24 Lease Agreement, dated as of March 30, 1998, between First
Security Bank, National Association, as Owner Trustee, and
Province Healthcare Company, as Lessee(b)
10.25 Participation Agreement, dated as of March 30, 1998, among
Province Healthcare Company, as Construction Agent and Lessee,
various parties as Guarantors, First Security Bank, National
Association, as Owner Trustee, various banks party thereto, as
Holders, various banks party thereto, as Lenders, and First
Union National Bank, as Agent(b)
10.26 Second Amended and Restated Credit Agreement, dated as of
September 10, 1999, among Province Healthcare Company, First
Union National Bank, as Agent and Issuing Bank, and various
parties thereto(h)
10.27 Amendment No. 1 to Certain Operative Agreements, dated as of
September 10, 1999, among Province Healthcare Company, as
Construction Agent and Lessee, various parties as Guarantors,
First Security Bank, National Association, as Owner Trustee,
various banks party thereto, as Lenders, and First Union
National Bank as Agent(h)
10.28 Asset Purchase Agreement, dated April 29, 1998, between Province
Healthcare Company, PHC-Lake Havasu, Inc. and Samaritan Health
System(c)
10.29 Asset Purchase Agreement, dated June 8, 1998, between Province
Healthcare Company and the County of Elko(d)
10.30 Province Healthcare Company Employee Stock Purchase Plan,
effective March 24, 1998(e)
31
33
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
10.31 Asset Purchase Agreement, dated as of March 24, 1999, among Palm
Beach County Health Care District, PHC-Belle Glade, Inc. and
Province Healthcare Company(g)
10.32 Asset Purchase Agreement, dated June 1, 1999, among Doctors'
Hospital of Opelousas Limited Partnership, Columbia/HCA
Healthcare Corporation, PHC-Opelousas, L.P. and Province
Healthcare Company(f)
10.33 Asset Sale Agreement, dated July 23, 1999, between Tenet
Healthcare Corporation and Province Healthcare Company(j)
10.34 Amendment No. 1 to Asset Sale Agreement, dated September 29,
1999, between Tenet Healthcare Corporation and Province
Healthcare Company(i)
10.35 Province Healthcare Company Amended and Restated 1997 Long-Term
Equity Incentive Plan*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Ernst & Young LLP*
(a) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 333-34421
(b) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q, for the quarterly period ended March 31,
1998, Commission File No. 0-23639
(c) Incorporated by reference to the exhibits filed with the Registrant's
Current Report on Form 8-K, dated May 14, 1998, Commission File No. 0-23639
(d) Incorporated by reference to Exhibit 10.26 filed with the Registrant's
Registration Statement on Form S-1, Registration No. 333-56663
(e) Incorporated by reference to the exhibits filed with the Registrant's Proxy
Statement on Schedule 14A, dated May 11, 1998, Commission File No. 0-23639
(f) Incorporated by reference to the exhibits filed with the Registrant's
Current Report on Form 8-K, dated June 17, 1999, Commission File No.
0-23639
(g) Incorporated by reference to the exhibits filed with the Registrant's
Amendment to Current Report on Form 8-K/A, dated June 25, 1999, Commission
File No. 0-23639
(h) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report filed on Form 10-Q, for the quarterly period ended
September 30, 1999, Commission File No. 0-23639
(i) Incorporated by reference to the exhibits filed with the Registrant's
Current Report on Form 8-K, dated October 18, 1999, Commission File No.
0-23639
(j) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report filed on Form 10-Q, for the quarterly period ended June
30, 2000, Commission File No. 0-23639
32
34
(k) Incorporated by reference to the Exhibits filed with the Registrant's
Registration Statement on Form S-3, Registration No. 333-54192
(*) Filed herewith
33
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Province Healthcare Company
By: /s/ Brenda B. Rector
Brenda B. Rector
Vice President and Controller
POWER OF ATTORNEY
That the undersigned directors of Province Healthcare Company, a
Delaware corporation, do hereby constitute and appoint Martin S. Rash the lawful
attorney and agent with full power and authority to do any and all acts and
things and to execute any and all instruments which said attorney and agent
determine may be necessary or advisable or required to enable said corporation
to comply with the Securities Exchange Act of 1934, as amended, and any rules or
regulations or requirements of the Securities and Exchange Commission in
connection with this Annual Report on Form 10-K. Without limiting the generality
of the foregoing power and authority, the powers granted include the power and
authority to sign the names of the undersigned directors in the capacities
indicated below to this Annual Report on Form 10-K or amendments or supplements
thereto, and each of the undersigned hereby ratifies and confirms all that said
attorney and agent shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Martin S. Rash Chairman of the Board, President,
Martin S. Rash Chief Executive Officer March 28, 2001
/s/ Richard D. Gore Vice Chairman of the Board,
Richard D. Gore Chief Financial Officer March 28, 2001
/s/ A. E. Brim Director
A. E. Brim March 28, 2001
/s/ Winfield C. Dunn Director
Winfield C. Dunn March 28, 2001
/s/ Joseph P. Nolan Director
Joseph P. Nolan March 28, 2001
/s/ David L. Steffy Director
David L. Steffy March 28, 2001
34
36
PROVINCE HEALTHCARE COMPANY
FORM 10-K - ITEM 8 AND ITEM 14 (A) (1) AND (2)
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following financial statements and financial statement schedule are included
as a separate section of this report:
PAGE
----
ANNUAL FINANCIAL STATEMENTS
Report of Independent Auditors............................................... F-2
Consolidated Balance Sheets at December 31, 1999 and 2000.................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1998,
1999 and 2000............................................................. F-4
Consolidated Statements of Changes in Common Stockholders' Equity for the
Years Ended December 31, 1998, 1999 and 2000.............................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1999 and 2000....................................................... F-6
Notes to Consolidated Financial Statements................................... F-7
Schedule II - Valuation and Qualifying Accounts.............................. S-1
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and, therefore, have
been omitted.
F-1
37
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
PROVINCE HEALTHCARE COMPANY
We have audited the accompanying consolidated balance sheets of
Province Healthcare Company and subsidiaries as of December 31, 1999 and 2000,
and the related consolidated statements of income, changes in common
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Province Healthcare Company and subsidiaries as of December 31, 1999 and 2000,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/Ernst & Young LLP
Nashville, Tennessee
February 20, 2001
F-2
38
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ -- $ --
Accounts receivable, less allowance for doubtful accounts of
$16,494 in 1999 and $8,321 in 2000 .................................... 84,269 89,208
Inventories ................................................................. 11,122 11,805
Prepaid expenses and other .................................................. 6,534 7,282
-------- --------
Total current assets .................................................. 101,925 108,295
Property, plant and equipment, net ............................................. 186,129 210,277
Cost in excess of net assets acquired, net ..................................... 193,904 183,331
Other .......................................................................... 15,658 28,949
-------- --------
395,691 422,557
-------- --------
$497,616 $530,852
======== ========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................ $ 14,927 $ 12,359
Accrued salaries and benefits ............................................... 10,790 14,736
Accrued expenses ............................................................ 14,558 15,655
Current maturities of long-term obligations ................................. 2,223 2,179
-------- --------
Total current liabilities ............................................. 42,498 44,929
Long-term obligations, less current maturities ................................. 259,992 162,086
Other liabilities .............................................................. 9,997 7,343
Minority interest .............................................................. 770 1,780
Common stockholders' equity:
Common stock--$0.01 par value; 25,000,000 and 50,000,000 shares authorized at
December 31, 1999 and 2000, respectively; issued and outstanding 23,613,072
shares and 30,908,588 shares at December 31, 1999 and 2000, respectively .. 236 309
Additional paid-in-capital .................................................. 163,514 273,858
Retained earnings ........................................................... 20,609 40,547
-------- --------
184,359 314,714
-------- --------
$497,616 $530,852
======== ========
See accompanying notes.
F-3
39
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
--------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Net patient service revenue ........ $ 217,364 $323,319 $445,772
Management and professional services 11,885 13,319 11,850
Reimbursable expenses .............. 6,520 6,668 6,268
Other .............................. 3,086 3,386 5,968
--------- -------- --------
Net operating revenue ........ 238,855 346,692 469,858
Expenses:
Salaries, wages and benefits ....... 94,970 139,183 180,881
Reimbursable expenses .............. 6,520 6,668 6,268
Purchased services ................. 28,250 39,454 48,573
Supplies ........................... 24,252 38,931 54,465
Provision for doubtful accounts .... 17,839 25,572 43,604
Other operating expenses ........... 19,149 30,222 44,785
Rentals and leases ................. 5,777 7,201 7,164
Depreciation and amortization ...... 13,409 19,734 26,629
Interest expense ................... 10,555 13,901 16,657
Minority interest .................. 155 166 178
Loss on sale of assets ............. 45 11 5,979
--------- -------- --------
Total expenses ............... 220,921 321,043 435,183
--------- -------- --------
Income before income taxes ............ 17,934 25,649 34,675
Income taxes .......................... 7,927 11,148 14,737
--------- -------- --------
Net income ............................ 10,007 14,501 19,938
Preferred stock dividends and accretion (696) -- --
--------- -------- --------
Net income to common shareholders ..... $ 9,311 $ 14,501 $ 19,938
========= ======== ========
Basic earnings per common share:
Net income to common shareholders .. $ 0.47 $ 0.61 $ 0.70
========= ======== ========
Diluted earnings per common share:
Net income to common shareholders .. $ 0.45 $ 0.60 $ 0.67
========= ======== ========
See accompanying notes.
F-4
40
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
COMMON STOCK RETAINED
-------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
---------- ------- -------- -------- ---------
Balance at December 31, 1997 ..................... 9,495,921 $ 2,116 $ -- $ (3,172) $ (1,056)
Reincorporation ............................... -- (2,020) 2,020 -- --
Conversion of junior preferred stock and
initial public offering of common stock ..... 10,018,731 100 95,252 (31) 95,321
Issuance of stock from follow-on
stock offering .............................. 4,028,250 40 65,487 -- 65,527
Exercise of stock options ..................... 13,965 -- 88 -- 88
Preferred stock dividends and accretion ....... -- -- -- (696) (696)
Net income .................................... -- -- -- 10,007 10,007
---------- ------- -------- -------- ---------
Balance at December 31, 1998 ..................... 23,556,867 236 162,847 6,108 169,191
Exercise of stock options ..................... 39,972 -- 241 -- 241
Stock option compensation expense ............. -- -- 53 -- 53
Income tax benefit from stock options exercised -- -- 126 -- 126
Issuance of common stock from employee
stock purchase plan ......................... 16,233 -- 247 -- 247
Net income .................................... -- -- -- 14,501 14,501
---------- ------- -------- -------- ---------
Balance at December 31, 1999 ..................... 23,613,072 236 163,514 20,609 184,359
Exercise of stock options ..................... 929,272 9 10,202 -- 10,211
Income tax benefit from stock options exercised -- -- 4,991 -- 4,991
Issuance of common stock from employee
stock purchase plan ......................... 32,488 -- 350 -- 350
Issuance of common stock from offering ........ 6,333,756 64 94,700 -- 94,764
Other ......................................... -- -- 101 -- 101
Net income .................................... -- -- -- 19,938 19,938
---------- ------- -------- -------- ---------
Balance at December 31, 2000 ..................... 30,908,588 $ 309 $273,858 $ 40,547 $ 314,714
========== ======= ======== ======== =========
See accompanying notes.
F-5
41
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1999 2000
--------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income ................................................ $ 10,007 $ 14,501 $ 19,938
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization ....................... 13,409 19,734 26,629
Provision for doubtful accounts ..................... 17,839 25,572 43,604
Deferred income taxes ............................... 862 1,428 (5,316)
Provision for professional liability ................ (54) (1,597) 15
Loss on sale of assets .............................. 45 11 5,979
Other ............................................... -- (357) --
Changes in operating assets and liabilities, net of
effects from acquisitions and disposals:
Accounts receivable ............................... (34,953) (50,791) (51,319)
Inventories ....................................... (1,524) (1,396) (1,610)
Prepaid expenses and other ........................ (3,472) 4,372 1,498
Other assets ...................................... (4,716) (4,810) (11,207)
Accounts payable and accrued expenses ............. (401) 12,464 435
Accrued salaries and benefits ..................... (1,582) (234) 3,514
Other liabilities ................................. 391 145 471
Other ............................................. -- -- 34
--------- --------- ---------
Net cash provided by (used in) operating activities .... (4,149) 19,042 32,665
INVESTING ACTIVITIES
Purchase of property, plant and equipment .............. (15,545) (20,890) (44,045)
Purchase of acquired hospitals, net of cash received ... (130,842) (119,236) (31,399)
Proceeds from sale of hospitals ....................... -- -- 30,630
Proceeds from sale of assets ........................... -- -- 4,121
--------- --------- ---------
Net cash used in investing activities .................. (146,387) (140,126) (40,693)
FINANCING ACTIVITIES
Proceeds from long-term debt ........................... 248,042 186,045 252,462
Repayments of debt ..................................... (204,638) (67,562) (349,860)
Issuance of common stock ............................... 142,682 488 105,325
Repurchase of common stock ............................. (14,884) -- --
Redemption of senior preferred stock ................... (22,739) -- --
Other .................................................. -- -- 101
--------- --------- ---------
Net cash provided by financing activities .............. 148,463 118,971 8,028
--------- --------- ---------
Net decrease in cash and cash equivalents ................. (2,073) (2,113) --
Cash and cash equivalents at beginning of period ....... 4,186 2,113 --
--------- --------- ---------
Cash and cash equivalents at end of period ............. $ 2,113 $ -- $ --
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid during the period ........................ $ 9,260 $ 13,253 $ 16,913
========= ========= =========
Income taxes paid during the period .................... $ 5,055 $ 9,410 $ 9,870
========= ========= =========
ACQUISITIONS
Assets acquired ........................................ $ 133,683 $ 131,912 $ 35,925
Liabilities assumed .................................... (2,841) (12,676) (4,526)
--------- --------- ---------
Cash paid, net of cash acquired ........................ $ 130,842 $ 119,236 $ 31,399
========= ========= =========
NONCASH TRANSACTIONS
Dividends and accretion ................................ $ 696 $ -- $ --
========= ========= =========
See accompanying notes.
F-6
42
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. ORGANIZATION
Province Healthcare Company (the "Company") was founded on February 2,
1996, and is engaged in the business of owning, leasing and managing hospitals
in non-urban communities throughout the United States.
2. ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, its majority-owned subsidiaries and partnerships in which the Company
or one of its subsidiaries is a general partner and has a controlling interest.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the 2000 presentation. These reclassifications had no
effect on net income.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH EQUIVALENTS
Cash equivalents include all highly liquid investments with an original
maturity of three months or less when acquired. The Company places its cash in
financial institutions that are federally insured and limits the amount of
credit exposure with any one financial institution.
PATIENT ACCOUNTS RECEIVABLE
The Company's primary concentration of credit risk is patient accounts
receivable, which consist of amounts owed by various governmental agencies,
insurance companies and private patients. The Company manages the receivables by
regularly reviewing its accounts and contracts and by providing appropriate
allowances for uncollectible amounts. Significant concentrations of gross
patient accounts receivable at December 31, 1999 and 2000, consist of
receivables from Medicare of 25% and 33%, respectively, and Medicaid of 10% and
15%, respectively. Concentration of credit risk relating to accounts receivable
is limited to some extent by the diversity and number of patients and payors.
INVENTORIES
Inventories are stated at the lower of cost, determined by the
first-in, first-out method, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated on the basis of cost. Routine
maintenance and repairs are charged to expense as incurred. Expenditures that
increase values, change capacities or extend useful lives are capitalized.
Depreciation is computed by
F-7
43
the straight-line method over the estimated useful lives of the assets, which
range from 3 to 40 years. Amortization of equipment under capital leases is
included in the provision for depreciation.
INTANGIBLE ASSETS
Intangible assets arising from the accounting for acquired businesses
are amortized using the straight-line method over the estimated useful lives of
the related assets which range from 5 years for management contracts to 15 to 35
years for cost in excess of net assets acquired.
At December 31, 1999 and 2000, cost in excess of net assets acquired
totaled $204,957,000 and $200,721,000, respectively, and accumulated
amortization totaled $11,053,000 and $17,390,000, respectively. The carrying
value of cost in excess of net assets acquired is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
cost in excess of net assets acquired will not be recoverable based on
undiscounted cash flows of the related assets, the Company writes down the cost
in excess of net assets acquired to estimated fair value.
OTHER ASSETS
Deferred loan costs are included in other noncurrent assets and are
amortized over the term of the related debt by the interest method. At December
31, 1999 and 2000, deferred loan costs totaled $5,242,000 and $10,341,000,
respectively, and accumulated amortization totaled $2,384,000 and $3,393,000,
respectively.
RISK MANAGEMENT
The Company maintains self-insured medical and dental plans for
employees. Claims are accrued under these plans as the incidents that give rise
to them occur. Unpaid claim accruals are based on the estimated ultimate cost of
settlement, including claim settlement expenses, in accordance with an average
lag time and past experience. The Company has entered into a reinsurance
agreement with an independent insurance company to limit its losses on claims.
Under the terms of this agreement, the insurance company will reimburse the
Company a maximum of $900,000 on any individual claim. These reimbursements are
included in salaries, wages and benefits in the accompanying consolidated
statements of income.
At December 31, 1999, the Company purchased a tail policy in the
commercial insurance market to transfer all risk for its professional liability.
Effective January 1, 2000, the Company purchased a professional liability
unlimited claim reporting policy. This coverage is subject to a $5,000
deductible per occurrence and limited to an annual cap of $100,000. The policy
provides coverage up to $51,000,000 for claims incurred during the annual policy
term. Effective January 1, 2001, the Company purchased a claims-made policy and
will provide an accrual for incurred but not reported claims.
OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist primarily of insurance
liabilities, supplemental deferred compensation liability, and deferred income
taxes.
PATIENT SERVICE REVENUE
Net patient service revenue is reported as services are rendered at the
estimated net realizable amounts from patients, third-party payors, and others
for services rendered, including estimated retroactive adjustments under
reimbursement agreements with third-party payors. Estimated settlements under
third-party reimbursement agreements are accrued in the period the related
services are rendered and adjusted in future periods as final settlements are
determined.
MANAGEMENT AND PROFESSIONAL SERVICES
Management and professional services is comprised of fees from
management and professional services provided to third-party hospitals pursuant
to management contracts and consulting arrangements. The base fees associated
with the hospital management contracts are determined in the initial year of the
contract on an individual hospital basis. In certain contracts, the
F-8
44
Company is entitled to a yearly bonus based on the performance of the managed
hospital. The base fee, which is fixed, is based on a fair market wage and is
not dependent on any bonus structure. The management contracts are adjusted
yearly based on an agreed upon inflation indicator. The reimbursable expenses
reflected in the consolidated statements of income relate to salaries and
benefits of Company employees that serve as executives at the managed hospitals.
The salaries and benefits of these employees are legal obligations of, and are
paid by, the Company and are reimbursed by the managed hospitals. Fees are
recognized as revenue as services are performed. The Company does not maintain
any ownership interest in and does not fund operating losses or guarantee any
minimum income for managed hospitals.
STOCK BASED COMPENSATION
The Company, from time to time, grants stock options for a fixed number
of common shares to employees. The Company accounts for employee stock option
grants in accordance with Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations, and accordingly,
recognizes no compensation expense for the stock option grants when the exercise
price of the options equals, or is greater than, the market price of the
underlying stock on the date of grant.
INTEREST RATE SWAP AGREEMENTS
The Company enters into interest rate swap agreements as a means of
managing its interest rate exposure. The differential to be paid or received is
recognized over the life of the agreement as an adjustment to interest expense.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting
for Derivatives Instruments and Hedging Activities, as amended by SFAS No. 137
and SFAS No. 138, requires that all derivatives be recorded on the balance sheet
at fair value, which results in offsetting changes in fair values or cash flows
of both the hedge and the hedged item being recognized in earnings or other
comprehensive income in the same period. Changes in fair value of derivatives
not meeting the Statement's hedge criteria are recognized in income. The Company
adopted the Statement on January 1, 2001, and the adoption did not have a
significant effect on results of operations or financial position. The Company's
only derivative is an interest rate swap agreement as discussed in Note 5. The
Company is required to recognize gains/losses on the swap in other comprehensive
income, and to provide additional footnote disclosures in its Quarterly Reports
on Form 10-Q, related to hedging strategies beginning with the first quarter of
2001 Form 10-Q.
3. ACQUISITIONS AND DIVESTITURES
LAKE HAVASU SAMARITAN REGIONAL HOSPITAL
In May 1998, the Company acquired Lake Havasu Samaritan Regional
Hospital in Lake Havasu City, Arizona, for approximately $107,467,000. To
finance this acquisition, the Company borrowed $106,000,000 under its revolving
credit facility. Cost in excess of net assets acquired in the acquisition
totaled approximately $76,474,000 and is being amortized over 35 years. The
Company has started construction on an ancillary expansion, which is expected to
cost approximately $26,000,000.
ELKO GENERAL HOSPITAL
In June 1998, the Company acquired Elko General Hospital in Elko,
Nevada, for a purchase price of approximately $24,854,000, including the final
working capital settlement in 1999 of $1,603,000. To finance this acquisition,
the Company borrowed $22,000,000 under its revolving credit facility. Cost in
excess of net assets acquired in the acquisition totaled approximately
$17,727,000 and is being amortized over 35 years. The Company has started
construction on a replacement facility that is expected to cost approximately
$30,000,000.
EUNICE COMMUNITY MEDICAL CENTER
In February 1999, the Company entered into a special services agreement
for the lease of Eunice Community Medical Center ("Eunice") in Eunice, Louisiana
by purchasing certain assets totaling $4,899,000 and assuming certain
liabilities and
F-9
45
entering into a ten-year lease agreement with a five-year renewal option,
totaling $767,000. Cost in excess of net assets acquired in the acquisition
totaled approximately $2,885,000 and is being amortized over 15 years.
GLADES GENERAL HOSPITAL
In April 1999, the Company acquired assets totaling $17,151,000 and
assumed liabilities totaling $4,926,000 of Glades General Hospital ("Glades") in
Belle Glade, Florida. To finance this acquisition, the Company borrowed
$13,500,000 under its revolving credit facility. Cost in excess of net assets
acquired in the acquisition totaled approximately $8,920,000 and is being
amortized over 35 years.
DOCTORS' HOSPITAL OF OPELOUSAS
In June 1999, the Company acquired assets totaling $25,715,000 and
assumed liabilities totaling $2,753,000 of Doctors' Hospital of Opelousas
("Opelousas"), in Opelousas, Louisiana. To finance this acquisition, the Company
borrowed $22,000,000 under its revolving credit facility. In 2000, working
capital settlements resulted in increases in assets and liabilities of $590,000
and $1,157,000, respectively. Cost in excess of net assets acquired in the
acquisition totaled approximately $5,659,000 and is being amortized over 35
years.
TRINITY VALLEY MEDICAL CENTER AND MINDEN MEDICAL CENTER
In October 1999, the Company acquired assets totaling $82,544,000 and
assumed liabilities totaling $4,230,000 of Trinity Valley Medical Center
("Trinity") in Palestine, Texas and Minden Medical Center ("Minden") in Minden,
Louisiana. To finance the acquisition, the Company borrowed $77,000,000 under
its revolving credit facility. In 2000, working capital settlements resulted in
a decrease in assets of $217,000 and an increase in liabilities of $381,000.
Trinity was merged with and into Memorial Mother Frances Hospital, a hospital
already owned by the Company, in Palestine, Texas, and the name changed to
Palestine Regional Medical Center. Cost in excess of net assets acquired in the
acquisition totaled approximately $37,124,000 and is being amortized over 35
years.
ENNIS REGIONAL MEDICAL CENTER
In February 2000, the Company acquired, through a long-term capital
lease agreement, assets totaling $2,401,000 and assumed liabilities totaling
$190,000 of the City of Ennis Hospital in Ennis, Texas (name changed to Ennis
Regional Medical Center). The long-term lease payments total $3,000,000 over a
thirty-year period, including a rent prepayment of $2,000,000. To finance this
acquisition, the Company borrowed $2,000,000 under its revolving credit
facility. The hospital had been closed prior to its acquisition by the Company.
Cost approximated the fair value of assets acquired.
BOLIVAR MEDICAL CENTER
In April 2000, the Company acquired, through a long-term capital lease
agreement, assets totaling $33,151,000 and assumed liabilities totaling
$2,798,000 of Bolivar Medical Center in Cleveland, Mississippi. The 40-year
lease totals $26,400,000, which was prepaid at the date of closing. To finance
this acquisition, the Company borrowed $24,600,000 under its revolving credit
facility. Cost in excess of net assets acquired in the acquisition totaled
approximately $2,874,000 and is being amortized over 35 years. The allocation of
the purchase price has been determined based upon currently available
information and is subject to further refinement pending final working capital
settlements.
OJAI VALLEY COMMUNITY HOSPITAL
In October 2000, the Company sold substantially all of the assets of
Ojai Valley Community Hospital, a 110-bed general acute-care facility located in
Ojai, California, to the Ojai Valley Community Hospital Foundation. The sale
price for the hospital was approximately $2,000,000, including working capital.
After application of tax benefits, the Company recorded a loss on the sale of
approximately $6,300,000 in the fourth quarter of 2000.
F-10
46
GENERAL HOSPITAL
In December 2000, the Company completed the sale of substantially all
of the assets of General Hospital, a 75-bed acute-care hospital located in
Eureka, California, to St. Joseph Health System. The sale price for the hospital
was $26,500,000 plus approximately $5,000,000 for working capital, subject to
settlement after 90 days. After application of tax provision, the Company
recorded a gain on the sale of approximately $2,600,000 in the fourth quarter of
2000.
OTHER INFORMATION
In accordance with its stated policy, management of the Company
evaluates all acquisitions independently to determine the appropriate
amortization period for cost in excess of net assets acquired. Each evaluation
includes an analysis of factors such as historic and projected financial
performance, evaluation of the estimated useful lives of buildings and fixed
assets acquired, the indefinite lives of certificates of need and licenses
acquired, the competition within local markets, and lease terms where
applicable.
The foregoing acquisitions were accounted for using the purchase method
of accounting. The operating results of the acquired companies have been
included in the accompanying consolidated statements of income from the
respective dates of acquisition.
The following pro forma information reflects the operations of the
entities acquired in 1998, 1999 and 2000, as if the respective transactions had
occurred as of the first day of the fiscal year immediately preceding the year
of the acquisitions (in thousands, except per share data):
1998 1999 2000
----------- ----------- -----------
Net operating revenue ............................. $ 430,577 $ 447,990 $ 480,233
Net income to common shareholders ................. 8,584 16,983 19,701
Basic net income per share to common shareholders . 0.43 0.72 0.69
Diluted net income per share to common shareholders 0.42 0.71 0.66
The pro forma results of operations do not purport to represent what
the Company's results would have been had such transactions in fact occurred at
the beginning of the periods presented or to project the Company's results of
operations in any future period.
The Company has minority ownership in various health care related
businesses. These investments are accounted for by the equity method. The
assets, liabilities and results of operations of these businesses are not
material to the consolidated financial statements.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
DECEMBER 31,
----------------------
1999 2000
--------- ---------
Land .................................................. $ 16,109 $ 14,939
Leasehold improvements ................................ 9,162 7,552
Buildings and improvements ............................ 108,844 114,590
Equipment ............................................. 72,481 85,742
--------- ---------
206,596 222,823
Less allowances for depreciation and amortization ..... (26,878) (35,685)
--------- ---------
179,718 187,138
Construction-in-progress (estimated cost to complete at
December 31, 2000--$32,349) ........................ 6,411 23,139
--------- ---------
$ 186,129 $ 210,277
========= =========
F-11
47
Assets under capital leases were $19,344,000 and $19,446,000, net of
accumulated amortization of $6,082,000 and $6,225,000 at December 31, 1999 and
2000, respectively. Interest is capitalized in connection with construction
projects at the Company's facilities. The capitalized interest is recorded as
part of the asset to which it relates and is depreciated over the asset's
estimated useful life. In 1999 and 2000, $410,000 and $1,036,000 of interest
cost, respectively, was capitalized.
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
DECEMBER 31,
----------------------
1999 2000
--------- ---------
Revolving credit agreement ................... $ 246,300 $ 4,000
Convertible subordinated notes ............... -- 150,000
Other debt obligations ....................... 7,288 3,588
--------- ---------
253,588 157,588
Obligations under capital leases (see Note 10) 8,627 6,677
--------- ---------
262,215 164,265
Less current maturities ...................... (2,223) (2,179)
--------- ---------
$ 259,992 $ 162,086
========= =========
On September 10, 1999, the Company increased the size of its credit
facility to $295,000,000, including a revolving line of credit of $255,300,000
and an end-loaded lease facility of $39,700,000. At December 31, 2000, the
Company had $4,000,000 outstanding under its revolving line of credit and
$264,299,000 available, which includes availability under the end-loaded lease
facility that can be converted to revolver availability at the Company's option.
The loans under the Credit Agreement bear interest, at the Company's
option, at the adjusted base rate or at the adjusted LIBOR rate. The interest
rate ranged from 7.61% to 10.00% during 2000. The Company pays a commitment fee,
which varies from one-quarter to one-half of one percent of the unused portion,
depending on the Company's compliance with certain financial ratios. The Company
may prepay the principal amount outstanding under the revolving credit agreement
at any time before the maturity date of March 30, 2003.
The Credit Agreement contains limitations on the Company's ability to
incur additional indebtedness (including contingent obligations), sell material
assets, retire, redeem or otherwise reacquire its capital stock, acquire the
capital stock or assets of another business, and pay dividends. The Credit
Agreement also requires the Company to maintain a specified net worth and meet
or exceed certain coverage, leverage, and indebtedness ratios. Indebtedness
under the Credit Agreement is secured by substantially all assets of the
Company.
In November and December, 2000, the Company sold $150,000,000 of
Convertible Subordinated Notes (the "Notes"), due November 20, 2005. Net
proceeds of approximately $145,000,000 were used to reduce the outstanding
balance on the revolving line of credit. The Notes bear interest from November
20, 2000 at the rate of 4-1/2% per year, payable semi-annually on May 20 and
November 20, beginning on May 20, 2001. The Notes are convertible at the option
of the holder at any time on or prior to maturity into shares of the Company's
common stock at a conversion price of $39.67 per share. The conversion price is
subject to adjustment. The Company may redeem all or a portion of the Notes on
or after November 20, 2003, at the then current redemption prices, plus accrued
and unpaid interest. Note holders may require the Company to repurchase all of
the holder's Notes at 100% of their principal amount plus accrued and unpaid
interest in some circumstances involving a change of control. The notes are
unsecured obligations and rank junior in right of payment to all of the
Company's existing and future senior indebtedness. The indenture does not
contain any financial covenants. A total of 3,781,440 shares of common stock
have been reserved for issuance upon conversion of the Notes.
Interest rate swap agreements are used to manage the Company's interest
rate exposure under the Credit Agreement. In 1997, the Company entered into an
interest rate swap agreement, which effectively converted for a five-year period
$35,000,000 of floating-rate borrowings to fixed-rate borrowings. In June 2000,
the counterparty exercised its option to terminate the swap agreement. In 1998,
the Company entered into an interest rate swap agreement, which effectively
converted for a five-year period
F-12
48
$45,000,000 of floating-rate borrowings to fixed-rate borrowings. The Company
secured a 6.27% fixed interest rate on the 1997 swap agreement and a 5.625%
fixed interest rate on the 1998 swap agreement. The outstanding agreement
exposes the Company to credit losses in the event of non-performance by the
counterparty. The Company anticipates that the counterparty will fully satisfy
its obligation under the contract.
Aggregate maturities of long-term obligations at December 31, 2000,
excluding capital leases, are as follows (in thousands):
2001.................................... $ 1,023
2002.................................... 819
2003.................................... 4,811
2004.................................... 935
2005.................................... 150,000
---------
$ 157,588
=========
6. STOCKHOLDERS' EQUITY
COMMON STOCK
In February 1998, the Company merged with a wholly-owned subsidiary in
order to change its jurisdiction of incorporation to Delaware and change its
name to Province Healthcare Company. In the merger, the Company exchanged 1.83
shares of its no par common stock for each share of the subsidiary's $0.01 par
value common stock. All common share and per share data included in the
consolidated financial statements and footnotes have been restated to reflect
this reincorporation. As a result of the reincorporation, $2,020,000 was
reclassified from common stock to additional paid-in-capital upon conversion
from no par to $0.01 par value Common Stock.
In February 1998, the Company closed its initial public offering of
8,107,500 shares of common stock at an offering price of $10.67 per share. In
connection with the offering, the Series B redeemable junior preferred stock was
converted into common stock at the public offering price of the common stock.
The net proceeds from the offering were used to redeem the outstanding balance
of the Series A redeemable senior preferred stock plus accrued dividends, reduce
the balance of the outstanding term and revolving credit loans, and repurchase a
portion of the common stock which was issued upon conversion of the Series B
redeemable junior preferred stock.
In July 1998, the Company completed its public offering of 4,028,250
shares of common stock at an offering price of $17.33 per share. The net
proceeds from the offering of approximately $65,500,000 were used primarily to
reduce debt.
In April 2000, the Company completed its public offering of 6,333,756
shares of common stock at an offering price of $15.92 per share. The net
proceeds from the offering of approximately $94,800,000 were used to reduce
debt.
On September 28, 2000, the Company distributed a three-for-two split of
its outstanding common stock, effected in the form of a 50% stock dividend to
stockholders of record on September 15, 2000. The stock split resulted in the
issuance of 10.3 million shares of common stock and a transfer between
additional paid in capital and common stock of $103,000. All common share and
earnings per share amounts included in the consolidated financial statements and
notes thereto have been restated to reflect the three-for-two stock split.
STOCK OPTIONS
The Company follows Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related Interpretations in
accounting for its employee stock options. Under APB 25, when the exercise price
of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
F-13
49
In March 1997, the Company's Board of Directors approved the 1997
Long-Term Equity Incentive Plan (the "Plan"). Under the Plan, options to
purchase shares may be granted to officers, employees, and directors. The
options have a maximum term of ten years and generally vest in five equal annual
installments. Options are generally granted at not less than market price on the
date of grant.
The following is a summary of option transactions during 1998, 1999 and
2000:
NUMBER OF OPTION
OPTIONS PRICE RANGE
------- -----------
Balance at December 31, 1997............. 418,117 $ 3.05 $ 3.05
Options granted....................... 950,804 10.67 18.71
Options exercised..................... (13,967) 3.05 10.67
Options forfeited..................... (160,326) 3.05 10.67
---------
Balance at December 31, 1998............. 1,194,628 3.05 18.71
Options granted....................... 947,205 9.50 10.75
Options exercised..................... (39,977) 3.05 10.67
Options forfeited..................... (166,006) 3.05 18.71
---------
Balance at December 31, 1999............. 1,935,850 3.05 18.71
Options granted....................... 1,664,680 13.42 29.92
Options exercised..................... (929,272) 3.05 18.71
Options forfeited..................... (130,280) 3.05 29.92
---------
Balance at December 31, 2000............. 2,540,978 3.05 29.92
=========
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
--------------- ----------- ------------ ----- ----------- -----
$ 3.05 - $ 9.50........ 233,580 6.7 $ 4.58 162,881 $ 5.25
10.08 - 10.08........ 423,178 8.2 10.08 48,390 10.08
10.67 - 10.67........ 342,999 7.1 10.67 72,867 10.67
10.75 - 10.75....... 180,909 8.7 10.75 9,981 10.75
13.42 - 13.42....... 286,694 9.2 13.42 286,694 13.42
14.00 - 14.25....... 195,450 8.5 14.12 30,150 14.00
17.25 - 17.25....... 793,182 9.3 17.25 -- --
17.33 - 17.33....... 41,850 7.4 17.33 4,950 17.33
18.71 - 18.71....... 6,450 7.9 18.71 2,850 18.71
29.92 - 29.92....... 36,686 9.7 29.92 -- --
- ------------------ --------- ----- ------- ------- -------
$ 3.05 - $ 29.92....... 2,540,978 8.4 $ 13.06 618,763 $ 10.72
================== ========= ===== ======= ======= =======
At December 31, 1998 and 1999, respectively, 140,255 and 471,304
options were exercisable. At December 31, 2000, the Company had options
representing 1,889,330 shares available for future grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, Accounting for Stock Based Compensation, and has been
determined as if the Company had accounted for its employee stock options under
the fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1998, 1999 and 2000,
respectively: risk-free interest rate of 5.28%, 5.51% and 6.45%; dividend yield
of 0%; volatility factor of the expected market price of the Company's common
stock of .640, .756 and .740; and a weighted-average expected life of the option
of 5 years. The estimated weighted average fair values of
F-14
50
shares granted during 1998, 1999 and 2000, using the Black-Scholes option
pricing model, were $8.53, $6.65 and $10.26, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except for per share
information):
1998 1999 2000
--------- ---------- ----------
Pro forma net income to common shareholders .......... $ 8,592 $ 12,681 $ 14,080
Pro forma net income per share to common shareholders:
Basic .............................................. 0.43 0.54 0.49
Diluted ............................................ 0.42 0.53 0.47
EMPLOYEE STOCK PURCHASE PLAN
In May 1998 the Company's Board adopted, and in June 1998 the
stockholders approved, the Province Healthcare Company Employee Stock Purchase
Plan (the "ESPP"). Under the ESPP, employees may purchase shares of common stock
at 85% of market price on the first day of the year or 85% of the market price
on the last day of the year, whichever is lower. The shares are purchased each
year with funds withheld from employees through payroll deductions from January
1 through December 31. A total of 250,000 shares of Common Stock have been
reserved for issuance under the ESPP. Participation in the ESPP commenced June
1, 1998. Shares issued under the ESPP totaled -0-, 16,233 and 32,488 in 1998,
1999 and 2000, respectively.
7. PATIENT SERVICE REVENUE
The Company has agreements with third-party payors that provide for payments to
the Company at amounts different from its established rates. A summary of the
payment arrangements with major third-party payors follows:
- Medicare--Inpatient acute care services rendered to Medicare
program beneficiaries are paid at prospectively determined
rates per diagnosis related group ("DRG"). These DRG rates
vary according to a patient classification system that is
based on clinical, diagnostic, and other factors. Outpatient
services are generally reimbursed under the outpatient
prospective payment system, which pays a fixed rate for a
given bundle of outpatient services. These bundles are known
as Ambulatory Payment Classifications or "APC's". Inpatient
nonacute services, related to Medicare beneficiaries are paid
based on a cost reimbursement methodology subject to various
cost limits. The Company is reimbursed for cost-based services
at a tentative rate, with final settlement determined after
submission of annual cost reports by the Company and audits
thereof by the Medicare fiscal intermediary. The Company's
classification of patients under the Medicare program and the
appropriateness of their admission are subject to an
independent review. The majority of the Company's Medicare
cost reports have been audited by the Medicare fiscal
intermediary through December 31, 1998.
- Medicaid--Inpatient services rendered to the recipients under
the Medi-Cal program (California's medicaid program) are
reimbursed either under contracted rates or reimbursed for
cost reimbursable items at a tentative rate with final
settlement determined after submission of annual cost reports
by the Company and audits thereof by Medi-Cal. The Company
leases two hospitals in California, and its Medi-Cal cost
reports have been audited by the Medi-Cal fiscal intermediary
through December 31, 1998. The Medicaid programs of the other
states in which the Company owns or leases hospitals are
prospective payment systems which generally do not have
retroactive cost report settlement procedures.
F-15
51
- Other--The Company also has entered into payment agreements
with certain commercial insurance carriers, health maintenance
organizations and preferred provider organizations. The basis
for payment to the Company under these agreements includes
prospectively determined rates per discharge, discounts from
established charges, and prospectively determined daily rates.
Approximately 68.9%, 68.7% and 74.0% of hospital patient days
(unaudited) for the years ended December 31, 1998, 1999 and 2000, respectively,
are derived from Medicare and state-sponsored Medicaid programs.
In 1998 and 1999, the Company owned or leased four hospitals in
California, which accounted for 33.4% and 22.7% of net operating revenue,
respectively. At December 31, 2000, the Company leased two hospitals in
California, which accounted for 8.1% of net operating revenue.
Final determination of amounts earned under the Medicare and Medicaid
programs often occur in subsequent years because of audits by the programs,
rights of appeal and the application of numerous technical provisions.
Differences between original estimates and subsequent revisions (including final
settlements) are included in the statements of income in the period in which the
revisions are made, and resulted in increases in net patient service revenue of
$4,050,000 and $892,000 in 1998 and 1999, respectively, and a decrease in net
patient service revenue of $722,000 in 2000.
8. INCOME TAXES
The provision for income taxes consists of the following amounts (in
thousands):
1998 1999 2000
-------- -------- --------
Current:
Federal .......................................... $ 5,556 $ 7,397 $ 17,995
State ............................................ 1,509 1,773 2,058
-------- -------- --------
7,065 9,170 20,053
Deferred:
Federal .......................................... 905 1,830 (4,968)
State ............................................ (43) 148 (348)
-------- -------- --------
862 1,978 (5,316)
-------- -------- --------
$ 7,927 $ 11,148 $ 14,737
======== ======== ========
The differences between the Company's effective income tax rate of
44.2%, 43.5%, and 42.5% for 1998, 1999 and 2000, respectively, and the statutory
federal income tax rate of 35.0% are as follows (in thousands):
1998 1999 2000
-------- -------- --------
Statutory federal rate .............................. $ 6,277 $ 8,977 $ 12,136
State income taxes, net of federal income tax benefit 953 1,248 1,112
Amortization of goodwill ............................ 594 594 576
Other ............................................... 103 329 913
-------- -------- --------
$ 7,927 $ 11,148 $ 14,737
======== ======== ========
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52
The components of the Company's deferred tax assets and (liabilities)
are as follows (in thousands):
DECEMBER 31,
--------------------
1999 2000
------- -------
Depreciation and amortization $(8,379) $(5,439)
Accounts receivable ......... (1,508) 1,277
Accruals and reserves ....... 1,590 964
Insurance reserves .......... 471 514
Third party settlements ..... 1,116 1,275
Operating leases ............ (631) (933)
Capital lease interest ...... 614 608
Net operating losses ........ 795 715
Other ....................... (69) 334
------- -------
Deferred tax liability ... (6,001) (685)
------- -------
Valuation allowance ...... (286) (286)
------- -------
Net deferred tax liability $(6,287) $ (971)
======= =======
In the accompanying consolidated balance sheets, net current deferred
tax assets of $954 and $3,308 and net noncurrent deferred tax liabilities of
$7,241 and $4,278 at December 31, 1999 and 2000, respectively, are included in
prepaid expenses and other, and other liabilities, respectively.
The Company had Federal net operating loss carryforwards (NOLs) of
approximately $714,000 at December 31, 1999 and 2000 related to a subsidiary.
These NOLs will expire beginning in 2009. Due to restrictions on the use of the
NOLs, management believes there is a risk they may expire unused, and
accordingly, has established a valuation reserve against the tax benefit of the
NOLs. Management believes it is more likely than not that the remaining deferred
tax assets, will ultimately be realized through future taxable income from
operations.
During 2000, the Internal Revenue Service finalized its examination of
the predecessor Company's federal income tax returns for the 1995 and 1996
years. Finalization of the examination had no material impact on the financial
condition or results of operations of the Company.
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
1998 1999 2000
-------- ------- -------
Numerator for basic and diluted income per share to common shareholders:
Net income ......................................................... $ 10,007 $14,501 $19,938
Less preferred stock dividends ..................................... (696) -- --
-------- ------- -------
Net income to common shareholders .................................. $ 9,311 $14,501 $19,938
======== ======= =======
Denominator:
Denominator for basic income per share to
common shareholders--weighted-average shares .................... 20,016 23,589 28,658
Effect of dilutive securities:
Employee stock options .......................................... 492 429 1,136
-------- ------- -------
Denominator for diluted income per share to
common shareholders--adjusted weighted-average shares ........... 20,508 24,018 29,794
======== ======= =======
Basic net income per share to common shareholders ...................... $ 0.47 $ 0.61 $ 0.70
======== ======= =======
Diluted net income per share to common shareholders ................... $ 0.45 $ 0.60 $ 0.67
======== ======= =======
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53
The convertible notes to purchase 3,781,440 shares of common stock were
not included in the computation of diluted earnings per share because their
effect would be anti-dilutive.
10. LEASES
During 1998, the Company entered into a five-year $35,000,000
End-Loaded Lease Financing (the "ELLF") agreement which was increased to
$39,700,000 on September 10, 1999, to provide a financing option for future
construction of medical office buildings on the campuses of its owned/leased
hospitals, and may be used for the construction of a replacement facility at one
of its owned hospitals. The interest rate and facility fee rate are
substantially the same as the Company's revolving line of credit (see Note 5).
All lease payments are guaranteed by the Company. At December 31, 2000,
$15,131,000 was available under the ELLF agreement.
The Company leases various buildings, office space and equipment. The
leases expire at various times and have various renewal options. These leases
are classified as either capital leases or operating leases based on the terms
of the respective agreements.
Future minimum payments at December 31, 2000, by year and in the
aggregate, under capital leases and noncancellable operating leases with terms
of one year or more consist of the following (in thousands):
CAPITAL OPERATING
LEASES LEASES
2001 ........................................................ $ 1,625 $ 4,513
2002 ........................................................ 1,490 3,898
2003 ........................................................ 1,236 3,574
2004 ........................................................ 880 2,916
2005 ........................................................ 469 1,904
Thereafter .................................................. 4,061 7,059
------- -------
Total minimum lease payments ................................ 9,761 $23,864
=======
Amount representing interest ................................ (3,084)
-------
Present value of net minimum lease payments (including $1,156
classified as current) .................................. $ 6,677
=======
11. LITIGATION
The Company is involved in litigation arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
these matters will be resolved without material adverse effect on the Company's
consolidated financial position or results of operations.
12. RETIREMENT PLANS
The Company sponsors defined contribution employee benefit plans which
cover substantially all employees. Employees may contribute a percentage of
eligible compensation subject to Internal Revenue Service limits. The plans call
for the Company to make matching contributions, based on either a percentage of
employee contributions or a discretionary amount as determined by the Company.
Contributions by the Company to the plans totaled $1,340,000, $1,865,000 and
$2,442,000 for the years ended December 31, 1998, 1999 and 2000, respectively.
The Company sponsors a nonqualified supplemental deferred compensation
plan for selected management employees. As determined by the Board of Directors,
the Plan provides a benefit of 1% to 3% of the employee's compensation. The
participant's amount is fully vested, except in those instances where the
participant's employment terminates for any reason other than retirement, death
or disability, in which case the participant forfeits a portion of the
employer's contribution depending on
F-18
54
length of service. Plan expenses totaled $197,000, $167,000 and $175,000 for the
years ended December 31, 1998, 1999 and 2000, respectively.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents--The carrying amount reported in the balance
sheets for cash and cash equivalents approximates fair value.
Accounts Receivable and Accounts Payable--The carrying amount reported
in the balance sheets for accounts receivable and accounts payable approximates
fair value.
Long-Term Obligations--The carrying amount reported in the balance
sheets for long-term obligations approximates fair value. The fair value of the
Company's long-term obligations is estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
Interest Rate Swap Agreement--The fair value of the Company's interest
rate swap agreement is $90,000 at December 31, 2000, based on quoted market
prices for similar debt issues.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 1999,
and 2000 is summarized below (in thousands, except per share data):
QUARTER
-----------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
1999
Net operating revenue ............................. $ 73,247 $ 81,225 $ 85,682 $106,539
Income before income taxes ........................ 7,195 5,854 5,352 7,248
Net income ........................................ 4,065 3,307 3,024 4,105
Basic net income per share to common shareholders . 0.17 0.14 0.13 0.17
Diluted net income per share to common shareholders 0.17 0.14 0.13 0.17
2000
Net operating revenue ............................. 109,102 117,834 119,678 123,244
Income before income taxes ........................ 9,089 9,672 9,389 6,525
Net income ........................................ 5,226 5,561 5,398 3,753
Basic net income per share to common shareholders . 0.22 0.18 0.18 0.12
Diluted net income per share to common shareholders 0.21 0.18 0.17 0.11
F-19
55
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COL. A COL. B COL C COL .D COL. E
------ ------ ----- ------ ------
ADDITIONS
-----------------------
(1)
CHARGED TO
BALANCE AT CHARGED OTHER (2) BALANCE AT
BEGINNING TO COSTS ACCOUNTS- DEDUCTIONS END
DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE DESCRIBE OF PERIOD
- ----------- --------- ------------ -------- -------- ---------
For the year ended December 31, 1998
Allowance for doubtful accounts..................... $ 4,749 $17,839 $ 2,353 $ (15,908) $ 9,033
For the year ended December 31, 1999
Allowance for doubtful accounts..................... 9,033 25,572 6,866 (24,977) 16,494
For the year ended December 31, 2000
Allowance for doubtful accounts..................... 16,494 43,604 4,693 (56,470) 8,321
- ----------------------------------
(1) Allowances as a result of acquisitions, and working capital settlement
for a prior year acquisition.
(2) Uncollectible accounts written off, net of recoveries.
S-1