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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, 2001 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, 2002 (based upon the closing price
of these shares of $27.28 per share on such date) was $865,078,099.
As of March 1, 2002, 31,711,074 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, 2001.
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 healthcare business;
- - the efforts of insurers, healthcare providers and others to contain
healthcare costs;
- - the financial condition of managed care organizations that pay us for
healthcare services;
- - 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 healthcare industry;
- - the possible enactment of federal or state healthcare 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 or in our critical accounting policies;
- - changes in demographic, general economic and business conditions, both
nationally and in the regions in which we operate; and
- - other risks described in this report.
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. You are advised, however, to consult any additional
disclosures we make in our Form 10-K, 10-Q and 8-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 December 20, 2001
(Commission File No. 333-75646), 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.
We currently own or lease 19 general acute care hospitals in 11 states with a
total of 2,156 licensed beds. Our objective is to be the primary provider of
quality healthcare services in the selected non-urban markets that we serve. We
target hospitals for acquisition that are the sole or a primary provider of
healthcare 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.
WHAT WE DO
Our general acute care hospitals typically provide a full range of
services commonly available in hospitals, such as internal medicine, general
surgery, cardiology, oncology, orthopedics, obstetrics, rehabilitation, subacute
care, as well as diagnostic and emergency services. Our hospitals also generally
provide outpatient and ancillary healthcare services such as outpatient surgery,
laboratory, radiology, respiratory therapy, home healthcare and physical
therapy. In addition, certain of our general acute care hospitals have a limited
number of licensed psychiatric beds. We provide capital resources and make
available a variety of management services to our owned and leased hospitals. In
addition, we provide management services to 35 primarily non-urban hospitals
that we do not own or lease in 13 states with a total of 2,776 licensed beds.
For the year ended December 31, 2001, our owned and leased hospitals accounted
for 97.0% of our net operating revenue.
THE NON-URBAN HEALTHCARE MARKET
According to 2000 U.S. Census Bureau statistics, over one-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 healthcare services, and in many cases the local hospital is the only
provider of acute care services. According to the American Hospital Association,
as of March 2, 2002, there were approximately 2,200 non-urban hospitals in the
country. Of those, approximately 1,100 hospitals meet our acquisition criteria
described below.
We believe that non-urban areas are attractive markets in which to
operate hospitals. Because non-urban service areas have smaller populations,
only one or two hospitals are generally located 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.
We believe that a significant opportunity for consolidation exists in
the non-urban healthcare market. Despite the attractive characteristics of these
markets for healthcare 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 healthcare regulatory environment. This combination of factors often
causes these operators to limit the range of services offered through their
non-urban hospitals. 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 at the hospital, further limiting its
ability to address the issues that initially led to these pressures. As a result
of these pressures, not-for-profit and governmental hospitals increasingly are
selling or leasing these hospitals to companies, like us, that have greater
financial and management resources, coupled with proven operating strategies, to
help serve the community better.
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 healthcare services in
their markets and that present the opportunity to increase profitability and
local market
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share. We believe that approximately 1,100 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. Using demonstrated best
practices, the local management team implements expense controls, manages
staffing levels according to patient volumes, reduces supply costs by requiring
strict 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 healthcare services and programs in
response to community needs. These services may include specialty inpatient,
outpatient and rehabilitation services. We also may make capital investments in
technology and physical plant to improve both the quality of healthcare 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 and Retain Physicians. We believe that recruiting physicians
into local communities and retaining their services at our hospitals are key to
increasing the quality of healthcare 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. We
recruited 49, 60 and 58 new physicians, respectively, during 1999, 2000, and
2001. Approximately 50% of the physicians recruited during the last three years
have been primary care physicians and approximately 50% have been specialty-care
physicians. In addition, we have recruited 44 new physicians to join our
hospital staffs in 2002 and 2003. We believe that expansion of services in our
hospitals 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 identify attractive markets and
hospitals and initiate meetings with hospital systems to discuss acquiring
non-urban hospitals or operating them through a joint venture.
We believe that it generally takes six to 12 months from a hospital
owner's decision to accept an offer until 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, receipt of attorney general approval, 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 acquisition of non-urban hospitals is competitive, 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
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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, healthcare in the communities 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 healthcare, and our focus on physician
recruiting and retention 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 healthcare
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;
- - capitalize on purchasing efficiencies and renegotiate certain vendor
contracts; and o improve billings and collections policies and
procedures.
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 healthcare 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
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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.
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 prior to the end of the contract 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 19 general acute care hospitals in Alabama,
Arizona, California, Colorado, Florida, Indiana, Louisiana, Mississippi, Nevada,
Pennsylvania and Texas, with a total of 2,156 licensed beds. Of our 19
hospitals, 18 are the only providers of acute care services in their
communities. The owned or leased hospitals represented 97.0% of our net
operating revenue for the year ended December 31, 2001, compared to 96.0% for
the year ended December 31, 2000, and 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
healthcare. 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.
The following table sets forth certain information with respect to each
of our owned or leased hospitals as of March 1, 2002.
DATE
HOSPITAL LICENSED BEDS OWNED/ LEASED ACQUIRED
-------- ------------- ------------- --------
Ashland Regional Medical Center ..................... 126(1) Owned Aug. 2001
Ashland, Pennsylvania
Bolivar Medical Center............................... 165(2) Leased Apr. 2000
Cleveland, Mississippi
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
Ennis Regional Medical Center........................ 45 Leased(5) Feb. 2000
Ennis, Texas
Eunice Community Medical Center...................... 91 Leased(6) Feb. 1999
Eunice, Louisiana
Glades General Hospital.............................. 73 Owned Apr. 1999
Belle Glade, Florida
Havasu Regional Medical Center....................... 138 Owned May 1998
Lake Havasu City, Arizona
Medical Center of Southern Indiana................... 96 Owned Oct. 2001
Charlestown, Indiana
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DATE
HOSPITAL LICENSED BEDS OWNED/ LEASED ACQUIRED
-------- ------------- ------------- --------
Minden Medical Center................................ 159 Owned Oct. 1999
Minden, Louisiana
Northeastern Nevada Regional Hospital (7)............ 75 Owned Jun. 1998
Elko, Nevada
Palestine Regional Medical Center(8)................. 250 Owned(9) July 1996
Palestine, Texas
Palo Verde Hospital.................................. 51 Leased(10) Dec. 1996
Blythe, California
Parkview Regional Hospital........................... 59 Leased(11) Dec. 1996
Mexia, Texas
Selma Regional Medical Center (14) .................. 214 Owned July 2001
Selma, Alabama
Starke Memorial Hospital............................. 53 Leased(12) Oct. 1996
Knox, Indiana
Teche Regional Medical Center ....................... 168 Leased(13) Dec. 2001
Morgan City, Louisiana
Vaughan Regional Medical Center (14) ................ 125 Owned Oct. 2001
Selma, Alabama
Total licensed beds.......................... 2,156
- -----------------
(1) Includes 40 dually licensed skilled nursing and long-term care beds.
(2) Includes 24 skilled nursing beds but excludes 35 long-term care beds.
The lease expires in April 2040.
(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 February 2030, and is subject to three 10-year
renewal terms at our option.
(6) The lease expires in June 2008, and is subject to a five-year renewal
option.
(7) This newly-constructed 75-bed, 125,000 square foot hospital replaced
the old 50-bed Elko General Hospital in September 2001.
(8) We initially acquired Memorial Mother Frances Hospital in July 1996. In
October 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.
(9) 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
96.35%, subject to an option by the other non-affiliated limited
partner (which currently owns a 2.65% interest) to acquire up to 10% of
the total limited partnership interests.
(10) 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.
(11) 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.
(12) 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.
(13) On December 7, 2001, we completed the acquisition, through a long-term
lease, of Lakewood Medical Center. With the completion of the
acquisition, we changed the name of the hospital to Teche Regional
Medical Center. The term of the lease expires in December 2041.
(14) We acquired Selma Regional Medical Center, formerly known as Selma
Baptist Medical Center, located in Selma, Alabama, in July 2001. In
October 2001, we acquired Vaughan Regional Medical Center, which is
also located in Selma, Alabama, approximately four miles from Selma
Baptist. In April 2002, we will consolidate the operations of Selma
Regional Medical Center with Vaughan Regional Medical Center, and form
one regional hospital with two
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campuses. Upon completion of the consolidation, we will change the name
of Selma Regional Medical Center to Vaughan Regional Medical Center -
Parkway Campus, and we will change the name of Vaughan Regional Medical
Center to Vaughan Regional Medical Center - Dallas Avenue Campus.
Ashland Regional Medical Center is a general acute care facility with
126 beds located in Ashland, Pennsylvania, approximately 110 miles northwest of
Philadelphia, Pennsylvania. Ashland, Pennsylvania has a service area population
of approximately 65,000. The nearest competitor of Ashland Regional Medical
Center is Regional Medical Center in Pottsville, Pennsylvania, located 20 miles
from Ashland.
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.
Colorado Plains Medical Center is a 50-bed general 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. 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'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 general acute care facility
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 out-migration 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.
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 healthcare facility and
approximately 22 miles north of Lafayette, Louisiana. 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. 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 completed a $3.0 million 32-bed
addition to the hospital in April 2000.
Ennis Regional Medical Center is a 45-bed general acute care facility
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 HealthCare System Waxahachie Hospital, located 17 miles
from Ennis.
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 own. 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 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.
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Havasu Regional Medical Center is a 138-bed general acute care facility
providing healthcare 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 healthcare system. Lake
Havasu City has a service area population of 127,000 residents in the rapidly
growing Colorado River basin. We completed construction of a $26.0 million
ancillary expansion in February, 2002. The nearest competitor is Kingman
Regional Medical Center in Kingman, Arizona, which is approximately 60 miles
from Havasu Regional Medical Center.
Medical Center of Southern Indiana is a 96-bed general acute care
facility located in Charlestown, Indiana. Charlestown, Indiana is located
approximately 16 miles northwest of Louisville, Kentucky, and has a service area
population of approximately 48,000. Medical Center of Southern Indiana is the
only hospital in the community. The hospital's nearest competitor is Clark
Memorial in Jeffersonville, Indiana, which is located approximately 20 miles
from Medical Center of Southern Indiana.
Minden Medical Center is a 159-bed general acute care facility 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's nearest competitors are the
Willis-Knight Medical Center and Bossier Medical Center, which are both located
in Shreveport.
Northeastern Nevada Regional Hospital, which opened in September 2001
as a replacement to Elko General Hospital, is a newly-constructed, 75-bed
general 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 grew and expanded with the
community, undergoing two major renovations in 1958 and 1976. The nearest
competitors are in Salt Lake City, Utah.
Palestine Regional Medical Center is a two-campus, 250-bed general
acute care 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 97-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
HealthCare Center and East Texas Medical Center, both in Tyler, Texas.
Palo Verde Hospital is a 51-bed general acute care facility 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. 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 facility located in
Mexia, Texas, approximately 85 miles south of Dallas, 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 general acute care facility 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.
9
Teche Regional Medical Center is a general acute care facility with 168
beds located in Morgan City, Louisiana, approximately 67 miles south of Baton
Rouge, Louisiana. The hospital has a service area of approximately 82,000
people. We acquired the hospital through a long-term lease in December 2001.
Teche Regional Medical Center is the only hospital in the community it serves.
The hospital's nearest competitor is Thibodeaux Regional Medical Center located
approximately 30 miles away in Thidodeaux, Louisiana.
Vaughan Regional Medical Center and Selma Regional Medical Center
located in Selma, Alabama, will be consolidated in April 2002 into a two-campus,
214-bed general acute care facility. Selma, which has a service area population
of approximately 90,000, is located approximately 50 miles west of Montgomery,
Alabama and 97 miles south of Birmingham, Alabama. The Parkway Campus will be
comprised of the former Selma Regional Medical Center that we acquired from
Baptist Health of Montgomery, Alabama in July 2001. The Dallas Avenue Campus
will be comprised of the former Vaughan Regional Medical Center, that we
acquired from Vaughan Regional Medical Center, Inc. in October 2001. The two
campuses are located approximately four miles from each other. The hospital's
nearest competitor is Baptist Medical Center, located approximately 48 miles
away in Montgomery, Alabama.
RECENT ACQUISITION AGREEMENTS
On March 14, 2002, we entered into a definitive agreement to acquire
substantially all of the assets of Los Alamos Medical Center in Los Alamos, New
Mexico. Los Alamos is located approximately 96 miles north of Albuquerque and 40
miles west of Santa Fe. The hospital is licensed for 47 acute care beds, has a
service area population of approximately 50,000 and has current annual revenues
of approximately $31.5 million. It is anticipated that the acquisition will
close in the second quarter of 2002, subject to customary closing conditions and
regulatory approvals, including the approval of the transaction by the Attorney
General of New Mexico.
On March 18, 2002, we entered into a definitive agreement to acquire
Memorial Hospital of Martinsville and Henry County in Martinsville, Virginia.
Martinsville is located approximately 50 miles south of Roanoke, Virginia. The
hospital is licensed for 237 acute care beds, has a service area population in
excess of 100,000 and has current annual revenues of approximately $80.3
million. It is anticipated that the acquisition will close in the second
quarter of 2002, subject to customary closing conditions and regulatory
approvals, including approval of the transaction by the Attorney General of the
Commonwealth of Virginia.
OPERATING STATISTICS
The following table sets forth certain operating statistics for our
owned or leased hospitals for each of the periods presented.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
Hospitals owned or leased at end of period .......... 8 10 14 14 19
Licensed beds (at end of period) .................... 570 723 1,282 1,326 2,136
Beds in service (at end of period) .................. 477 647 1,186 1,228 1,899
Admissions .......................................... 15,142 21,538 32,509 47,971 55,937
Average length of stay (days)(1) .................... 5.6 5.2 4.8 4.5 4.3
Patient days ........................................ 84,386 110,816 156,846 216,663 241,967
Adjusted patient days(2) ............................ 149,567 195,998 273,394 372,352 397,577
Occupancy rate (% of licensed beds)(3) .............. 40.6% 42.0% 33.4% 44.6% 31.0%
Occupancy rate (% of beds in service)(4) ............ 48.5% 46.9% 36.2% 48.0% 34.9%
Net patient service revenue (in thousands) .......... $ 149,296 $ 217,364 $ 323,319 $ 445,772 $ 509,061
Gross outpatient service revenue (in thousands) ..... $ 110,879 $ 161,508 $ 257,248 $ 377,663 $ 410,785
- -----------------
(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.
10
(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
"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 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."
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
SOURCE 1997 1998 1999 2000 2001
- ------ ------ ------ ------ ------ ------
Medicare ................................................ 60.3% 57.8% 56.3% 56.1% 54.8%
Medicaid ................................................ 13.1 11.1 12.4 17.9 18.9
Private and other sources ............................... 26.6 31.1 31.3 26.0 26.3
------ ------ ------ ------ ------
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 we sold in October, 2000.
Substantially all of the patient days at the Ojai Valley skilled nursing
facility were provided by Medicaid.
MANAGEMENT INFORMATION SYSTEMS
Following the acquisition of a hospital, we implement our systematic
procedures to improve the hospital's operating and financial performance. One of
our first steps is to convert the newly-acquired hospital to our broad based
management information system. Our hospital management information 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 Healthcare Organizations.
REGULATORY COMPLIANCE PROGRAM
We maintain a corporate-wide compliance program. Our compliance program
focuses on all areas of regulatory compliance, including physician recruitment,
reimbursement and cost reporting practices, laboratory and home healthcare
operations. Each of our hospitals designates a compliance officer and undergoes
an annual risk assessment to determine 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
healthcare regulation and the industry. We also maintain a toll-
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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 35 primarily non-urban hospitals in 13 states with a total of 2,776
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
on Accreditation of Healthcare 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 healthcare, 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 3.0% of the net operating revenue for the year ended
December 31, 2001 and 4.0% of the net operating revenue for the year ended
December 31, 2000.
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
healthcare 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 recruit other qualified physicians
through our in-house recruiting department. 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 the
management's ability to negotiate service contracts with purchasers of group
healthcare 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 healthcare 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. Four states in which we operate, Alabama,
Florida, Mississippi and Nevada, 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 - Healthcare Regulation and Licensing."
12
We, and the healthcare 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 reduce reimbursement levels for
what is covered, federal and state efforts to reform the healthcare 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 healthcare 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
43,510 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, 2002, we had 5,892 "full-time equivalent" employees,
including 82 corporate personnel and 82 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 6%
of our employees are represented by unions.
We typically do not employ physicians and, as of March 1, 2002, we
employed 13 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.
ENVIRONMENTAL MATTERS
We are subject to various Federal, state and local statutes and
ordinances regulating the discharge of materials into the environment. Our
healthcare 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. We
do not expect that we will be required to expend any material amounts in order
to comply with these laws and regulations or that compliance will materially
affect our capital expenditures, earnings or competitive position.
13
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 acute inpatient services. Under this prospective payment system, a
hospital receives a fixed amount for inpatient hospital services based on the
patient's final diagnosis. These payments do not consider a specific hospital's
costs, but are national rates adjusted for area wage differentials and case-mix
index. Certain sub-acute inpatient services are currently being converted by
Medicare to a prospective payment system. Rehabilitation sub-acute services were
converted to a prospective payment system for cost report periods beginning on
or after January 1, 2002. This system is similar to the acute inpatient system
because it pays a rate based on the type of discharge. Psychiatric sub-acute
services are currently paid based on cost subject to specific caps known as
TEFRA limits. Skilled nursing sub-acute services are paid based on a prospective
per diem, which is also tied to the patient's needs and condition.
For several years, the percentage increases to the prospective payment
rates have been lower than the percentage increases in the cost of goods and
services purchased by general hospitals. The index used to adjust payment rates
is based on a price proxy, known as the HCFA market basket index, reduced by
Congressionally-mandated reduction factors. 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 1.1% in 2001 and 2002. The Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 ("BIPA") amended the Balanced Budget Act
of 1997 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 represents a bundle of outpatient services, and each Ambulatory Payment
Category has been assigned a fully prospective reimbursement rate. On February
28, 2002, the Center for Medicare and Medicaid Services (CMS), formerly Health
Care Finance Administration, announced a final rule establishing new patient
rates for hospital outpatient departments. In most cases, the new rate is lower
than the calendar 2001 rates.
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, Northeastern Nevada Regional Hospital, Havasu
Regional Medical Center, Palo Verde Hospital and Parkview Regional Hospital
qualify as Sole Community Hospitals under Medicare regulations. Special payment
provisions related to Sole Community Hospitals include the payment of a
hospitals specific rate which may be higher than the Federal DRG payment rate.
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.
The result is that states have set lower Medicaid reimbursement rates than they
would have under the Boren Amendment.
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
14
audits by the program representatives, providers' rights of appeal and the
application of numerous technical reimbursement provisions. Differences between
original estimates and subsequent revisions (including final settlements) are
included in consolidated statements of income in the period in which the
revisions are made. 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.
Because of information technology problems at CMS, U.S. hospitals have
been unable to file Medicare cost reports for periods ending on or after August
1, 2000. Most U.S. hospitals, including the Company's hospitals, have at least
two cost report years which have neither been completed nor filed. Because of
this, the magnitude of potential adjustments and changes in estimates is
significantly greater at December 31, 2001 and for the year then ended than in
recent years.
HEALTHCARE REGULATION AND LICENSING
Background Information
Healthcare, 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 healthcare spending, and proposals to limit prices and
industry competitive factors are among the many factors that are highly
significant to the healthcare industry. In addition, the healthcare 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.
Many states have enacted, or are considering enacting, measures that
are designed to reduce their Medicaid expenditures and to make changes to
private healthcare 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 healthcare facilities, including findings of need for additional or expanded
healthcare facilities or services. Certificates of need, which are issued by
governmental agencies with jurisdiction over healthcare facilities, are at times
required for capital expenditures exceeding a prescribed amount, changes in bed
capacity or services and certain other matters. Four states in which we
currently own hospitals, Alabama, Florida, Mississippi 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
healthcare services reimbursable under Medicaid or Medicare or other federal
healthcare 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 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
15
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 healthcare services reimbursed under a federal or state healthcare 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 healthcare providers and potential referral
sources to ensure that the arrangements are not designed as a mechanism to
exchange remuneration for patient care referrals and opportunities.
Investigators also have demonstrated a willingness to look behind the
formalities of a business transaction to determine the underlying purpose of
payments between healthcare providers and potential referral sources.
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. Fortney "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
healthcare 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.
Federal False Claims Act
The government has shown an increasing willingness in recent years to
bring lawsuits against healthcare providers alleging violations of a variety of
healthcare and non-healthcare laws, including, among others, the federal false
claims act (the "False Claims Act") and mail fraud and wire fraud. The False
Claims Act, in particular, has been used with increasing frequency and
creativity. The False Claims Act has "qui tam" or "whistleblower" provisions
that allow private individuals to bring actions on behalf of the government
alleging that the defendant has defrauded the government. If the action is
successful, the private individual may recover up to one-third of the
government's recovery. The False Claims Act provides for a penalty of up to
three times the amount of the false claim, plus up to $11,000 for each claim
falsely submitted to the government.
Healthcare Facility Licensing Requirements
Our healthcare facilities are subject to extensive federal, state and
local legislation and regulation. In order to maintain their operating licenses,
healthcare 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 healthcare 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 Healthcare Organizations.
16
Utilization Review Compliance and Hospital Governance
Our healthcare facilities are subject to and comply with various forms
of utilization review. In addition, under the Medicare prospective payment
system, each state has a Quality Improvement 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 also
supervised extensively by committees of staff doctors at each healthcare
facility, are overseen by each healthcare 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
healthcare facility. Attorneys general in certain states, including California,
have been especially active in evaluating these transactions.
Medical Records Privacy Legislation
Pursuant to the requirements of the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"), the Department of Health and Human
Services on December 28, 2000 published regulations designed to protect the
privacy of patient health information. These privacy regulations became final on
April 14, 2001, and compliance with these regulations is required by April 14,
2003 for most healthcare organizations. Prior to the date the regulations became
final, however, the incoming administration reopened the final privacy
regulations for additional comment, suggesting that the final regulations may be
further modified. On March 21, 2002, the Department of Health and Human Services
announced proposed revisions to the privacy rules, to be published on March 27,
2002. There is a 30-day comment period after the revised rules are published.
The Department of Health and Human Services has indicated it will consider
public comments on the proposed revisions before issuing the final rules. The
privacy rules will apply to medical records and other individually identifiable
health information used or disclosed by healthcare providers, hospitals, health
plans and healthcare clearinghouses in any form, whether electronically, on
paper, or orally. The standards:
- - increase consumer control over their health information, including
requiring patient authorization prior to using or disclosing protected
health information for purposes other than treatment, payment, or
health operations;
- - mandate substantial civil and criminal penalties for violation of a
patient's right to privacy;
- - grant patients the right to obtain access to their records, to amend
their records, to obtain accountings of disclosure of their health
information, and to request restrictions on disclosure.
The standards also require healthcare providers to implement and
enforce privacy policies to ensure compliance with the standards. HIPAA gives
the Department of Health and Human Services authority to make changes to the
privacy rules prior to April 14, 2003. 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.
17
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 for upgrading these systems 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 substantial compliance with the
regulations and standards.
We are required to conduct engineering studies of our California
facilities to determine whether and to what extent modifications to our
facilities will be required. We have submitted compliance plans for our
California facilities, which were required to be filed with the State of
California by January 1, 2002. Any facilities not currently in compliance with
the applicable seismic regulations and standards must be brought into compliance
by 2008, or 2013 if the facility obtains an extension. We may be required to
make significant capital expenditures to comply with the seismic standards,
which could impact our earnings.
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, 2000, we purchased a tail policy that provided an
unlimited claim reporting period for our professional liability for claims
incurred prior to December 31, 2000. Effective January 1, 2001, we purchased a
claims-made policy and will provide an accrual for incurred but not reported
claims. Recently, 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."
18
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 physicians staff privileges. In certain of these actions,
plaintiff's request punitive and 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 2000 and 2001, the high and low sale prices for our common
stock as reported by the Nasdaq National Market for the periods indicated, were
as follows:
2000 HIGH LOW
- ---- ---- ---
First Quarter......................................................... $ 20.50 $ 13.00
Second Quarter........................................................ 24.88 15.33
Third Quarter......................................................... 40.25 24.00
Fourth Quarter........................................................ 42.63 27.13
2000 HIGH LOW
- ---- ---- ---
First Quarter......................................................... $ 39.81 $ 24.13
Second Quarter........................................................ 35.70 22.77
Third Quarter......................................................... 39.57 31.20
Fourth Quarter........................................................ 38.09 25.50
As of March 1, 2002, there were approximately 31,711,074 shares of
common stock outstanding, held by 899 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.
19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
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)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Net operating revenue ........................ $ 170,527 $238,855 $346,692 $469,858 $530,739
Income from continuing operations ............ 4,075 10,007 14,501 19,938 32,908
Net income ................................... 4,075 10,007 14,501 19,938 32,908
Net income (loss) to common shareholders(*) .. (1,002) 9,311 14,501 19,938 32,908
Net income (loss) per share to
common shareholders--diluted ............. (0.12) 0.45 0.60 0.67 1.01
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets ................................. $ 176,461 $339,377 $497,616 $530,852 $759,897
Long-term obligations, less current maturities 83,043 134,301 259,992 162,086 330,838
Mandatory redeemable preferred stock ......... 50,162 -- -- -- --
Stockholders' equity (deficit) ............... (1,056) 169,191 184,359 314,714 362,005
- ----------------------------------
(*) Preferred stock dividends and accretion totaled $5,077 and $696 in 1997 and
1998, respectively. The preferred stock was redeemed in February 1998 at the
time of the Company's initial public offering.
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 healthcare services company focused on acquiring and operating
hospitals in attractive non-urban markets in the United States. As of December
31, 2001, we owned or leased 19 general acute care hospitals in eleven states
with a total of 2,136 licensed beds, and managed 35 hospitals in 13 states with
a total of 2,776 licensed beds.
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, because of 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.
20
GENERAL
The federal Medicare program accounted for approximately 56.3%, 56.1%
and 54.8% of hospital patient days in 1999, 2000, and 2001, respectively. The
state Medicaid programs accounted for approximately 12.4%, 17.9% and 18.9% of
hospital patient days in 1999, 2000 and 2001, 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
healthcare industry for the purpose of reducing healthcare costs. While we are
unable to predict what, if any, future healthcare-reform legislation may be
enacted at the federal or state level, we expect continuing pressure to limit
expenditures by governmental healthcare 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. The Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 ("BIPA") amended the Balanced Budget Act
of 1997 by giving hospitals a full market basket increase 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. Further changes in the Medicare or Medicaid programs and other
proposals to limit healthcare spending could have a material adverse effect on
the healthcare 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 healthcare 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 healthcare
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 towards the provision of more services on
an outpatient basis to continue. This trend is the result of increased focus on
managed care and advances in technology.
The billing and collection of accounts receivable by hospitals are
complicated by a number of factors, including:
- 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.
21
Our historical financial trend has been impacted favorably by our
success in acquiring acute care hospitals. While we believe that trends in the
healthcare industry described above may create 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.
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,
--------------------------------------
1999 2000 2001
---- ---- ----
Net operating revenue.......................... 100.0% 100.0% 100.0%
Operating expenses(1).......................... (82.8) (82.1) (81.3)
------ ------- ------
EBITDA(2)...................................... 17.2 17.9 18.7
Depreciation and amortization.................. (5.7) (5.7) (5.7)
Interest, net.................................. (4.0) (3.5) (2.3)
Minority interest.............................. (0.0) (0.0) (0.0)
Loss on sale................................... (0.0) (1.3) (0.0)
------ ------- ------
Income before income taxes..................... 7.5 7.4 10.7
Provision for income taxes..................... (3.3) (3.2) (4.5)
------ ------- ------
Net income..................................... 4.2% 4.2% 6.2%
====== ======= ======
- ----------------------------------
(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 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 with 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
paying standard hospital 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.
Net patient service revenue is reported net of contractual adjustments
and policy discounts. The adjustments principally result from differences
between our 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 our 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.
Other revenue is comprised of fees from management and professional
consulting services provided to third-party hospitals pursuant to management
contracts and consulting arrangements, reimbursable expenses and miscellaneous
other revenue items. Management and professional services revenue plus
reimbursable expenses total less than 3% of our consolidated net
22
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, 2001 Compared to Year Ended December 31, 2000
Net operating revenue increased from $469.9 million in 2000 to $530.7
million in 2001, an increase of $60.9 million or 13.0%. We divested two
hospitals in the fourth quarter of 2000, which prevents meaningful total revenue
comparisons. Net patient service revenue generated by hospitals owned during
both periods increased $57.9 million, or 14.7%, resulting from inpatient and
outpatient volume increases, new services and price increases. Cost report
settlements and the filing of cost reports resulted in negative revenue
adjustments of $0.7 million, or 0.1% of net operating revenue, in 2000, and a
positive revenue adjustment of $0.6 million, or 0.1% of net revenues in 2001.
The remaining increase was primarily attributable to the acquisitions of
additional hospitals in 2000 and 2001.
Operating expenses increased from $385.7 million, or 82.1% of net
operating revenue, in 2000 to $431.3 million, or 81.3% of net operating revenue
in 2001. 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.
EBITDA increased from $84.1 million, or 17.9% of net operating revenue,
in 2000 to $99.5 million, or 18.7% of net operating revenue, in 2001, primarily
as a result of improved operations at hospitals owned during both periods.
Depreciation and amortization expense increased from $26.6 million, or
5.7% of net operating revenue, in 2000, to $30.2 million, or 5.7% of net
operating revenue in 2001. The increase in depreciation and amortization
resulted primarily from capital expenditures and the acquisitions in 2001, and a
full year of expense for acquisitions made in 2000.
Interest expense as a percent of net operating revenue decreased from
3.5% in 2000 to 2.3% in 2001. Proceeds from the sale of convertible notes in
November and December 2000 and in October 2001 were used to reduce the
higher-rate of indebtedness under the revolving credit facility.
Income before provision for income taxes was $56.7 million in 2001,
compared to $34.7 million in 2000, an increase of $22.0 million or 63.4%. The
increase resulted primarily from improved operations at hospitals owned during
both periods.
Our provision for income taxes was $23.8 million in 2001, compared to
$14.7 million in 2000. These provisions reflect effective income tax rates of
42.0% in 2001 compared to 42.5% in 2000. 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 $32.9 million, or 6.2% of net operating revenue, in
2001, compared to $19.9 million, or 4.2% of net operating revenue in 2000.
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.
23
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.
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.
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 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. A total of 3,781,440 shares of common stock have been
reserved for issuance upon conversion of the 4 1/2% Notes.
In October 2001, we sold $172.5 million of Convertible Subordinated
Notes, due October 10, 2008. Net proceeds of approximately $166.4 million were
used to reduce the outstanding balance on the revolving line of credit and for
acquisitions. The notes bear interest from October 10, 2001 at the rate of 4
1/4% per year, payable semi-annually on April 10 and October 10, beginning on
April 10, 2002. 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 $41.55 per share. The conversion price is subject to adjustment. We may
redeem all or a portion of the notes on or after October 10, 2004, 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 and subordinated to our existing and future
senior indebtedness and senior subordinated indebtedness. The notes are ranked
equal in right of payment to our 4 1/2% notes due in 2005. The notes rank junior
to our subsidiary liabilities. The indenture does not contain any financial
covenants. A total of 4,151,178 shares of common stock have been reserved for
issuance upon conversion of the 4 1/4% notes.
24
Total long-term obligations, less current maturities, increased to
$330.8 million at December 31, 2001, from $162.1 million at December 31, 2000.
The increase resulted primarily from the sale of $172.5 million of Convertible
Notes in October 2001.
In October 2001, we reduced the size of our credit facility to $250.0
million including a revolving line of credit of $203.0 million and an end-loaded
lease facility of $47.0 million. At December 31, 2001, we had an outstanding
letter of credit of $2.1 million, no borrowings outstanding under our revolving
line of credit and $208.3 million available, which included availability under
the end-loaded lease facility that could be converted to revolver availability
at our option.
We had contemplated financing the construction of a hospital and three
medical office buildings using the end-loaded lease facility agreement. The
properties were in the final stages of construction at December 31, 2001. Given
the current business environment, we made the decision to modify the terms of
the end-loaded lease facility to enable us to account for the properties and
borrowings on the balance sheet. In the first quarter of 2002, we anticipate
recording approximately $45.8 million in property and equipment and long-term
debt on our balance sheet related to these projects.
We estimate that this financing decision will result in an additional
annual expense, after tax, of approximately $0.6 million. This is the result of
the difference between depreciation of the facilities and interest on the debt,
as compared to the net rent expense that would have been incurred if the
properties had been financed under the end-loaded lease facility.
The loans under the credit facility bear interest, at our option, at
the adjusted base rate or at the adjusted LIBOR rate. The interest rate ranged
from 3.64% to 7.98% during 2001. We pay a commitment fee, which varies from
one-half to three-eighths of one percent of the unused portion, depending on
compliance with certain financial ratios. The principal amount outstanding under
the revolving credit agreement may be prepaid at any time before the maturity
date of May 31, 2005.
The 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. The credit
facility also requires that we maintain a specified net worth and meet or exceed
certain coverage, leverage, and indebtedness ratios. Indebtedness under the
credit facility is secured by substantially all assets of our company.
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, 2001 Compared to Year Ended December 31,
2000
Working capital increased to $136.2 million at December 31, 2001 from
$63.4 million at December 31, 2000, resulting primarily from increased business
volumes, growth in accounts receivable from acquired hospitals, and effective
management of our working capital. Our cash flows from operating activities
increased by $5.7 million from $32.7 million provided in 2000 to $38.4 million
provided in 2001. Offsetting our improved profitability was a large increase in
accounts receivable, both at hospitals owned during both periods, resulting from
volume increases, new services and price increases, and a build-up of accounts
receivable at newly-acquired hospitals. The use of our cash in investing
activities increased from $40.7 million in 2000 to $169.8 million in 2001,
reflecting more acquisitions during 2001. Our cash flows provided by financing
activities increased $162.8 million from $8.0 million in 2000, to $170.8 million
in 2001, primarily because of increased borrowings related to acquisitions and
the sale of convertible notes.
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 resulted from higher volumes at hospitals owned during both periods
and acquired 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
25
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.
Capital Expenditures
Capital expenditures, excluding acquisitions, in 1999, 2000 and 2001,
were $20.9 million, $44.0 million, and $72.2 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
2002 of approximately $27.4 million, exclusive of any acquisitions of businesses
or construction projects. Planned capital expenditures for 2002 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. 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 do not know 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
completed construction on an ancillary expansion at Havasu Regional Medical
Center in 2001, at a cost of approximately $26.0 million. In addition, in
connection with certain acquisitions we have made, we have committed and may
commit in the future to make specified capital expenditures.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. In preparing
our financial statements, we are required to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. We
evaluate our estimates and judgments on an ongoing basis. We base our estimates
and judgments on historical experience and on various other factors that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Our actual results may differ
from these estimates, and different assumptions or conditions may yield
different estimates.
Allowance for Doubtful Accounts
Our ability to collect outstanding receivables from third-party payors
is critical to our operating performance and cash flows. The allowance for
doubtful accounts was approximately 31.1% of the accounts receivable balance,
net of contractual discounts, at December 31, 2001. The primary collection risk
lies with uninsured patient accounts or patient accounts for which a balance
remains after primary insurance has paid. We estimate the allowance for doubtful
accounts primarily based upon the age of the accounts since patient discharge
date. The allowance for doubtful accounts increased, as a percentage of accounts
receivable net of contractual adjustments, from 8.5% in 2000 to 31.1% in 2001.
This increase primarily resulted from the timing of write-off of accounts. Prior
to 2001, accounts were removed from the accounts receivable balance and sent to
the collection agency when aged to 150 days. Beginning in 2001, the accounts
were removed from the accounts receivable balance at the earlier of return from
the agency or when aged to 365 days. We continually monitor our accounts
receivable balances and utilize cash collections data and other analytical tools
to support the basis for our estimates of the provision for doubtful accounts.
Significant changes in payor mix or business office operations could have a
significant impact on our results of operations and cash flow.
Allowance for Contractual Discounts
The percentage of our patient service revenue derived from Medicare and
Medicaid patients continues to be high. For the year ended December 31, 2001,
combined Medicare and Medicaid utilization was 73.7%, based on a patient day
calculation. The Medicare and Medicaid contracts are often complex and may
include multiple reimbursement mechanisms for different types of services
provided in our hospitals, and cost settlement provisions requiring complex
calculations and assumptions subject to interpretation. We estimate the
allowance for contractual discounts on a payor-specific basis, given our
interpretation of the applicable regulations or contract terms. We have invested
significant human resources and information systems to improve the
26
estimation process; however, the services authorized and provided and related
reimbursement are often subject to interpretation that could result in payments
that differ from our estimates. Additionally, updated regulations and contract
negotiations occur frequently, necessitating our continual review and assessment
of the estimation process.
General and Professional Liability Reserves
Given the nature of our operating environment, we may become subject to
medical malpractice or workers compensation claims or lawsuits. To mitigate a
portion of this risk, in 2001 we maintained insurance for individual malpractice
claims exceeding $50,000 per medical incident, subject to an annual maximum of
$500,000, and workers compensation claims exceeding $250,000. We estimate our
self-insured retention portion of the malpractice and workers compensation risks
using historical claims data, demographic factors, severity factors and other
actuarial assumptions. The estimated accrual for malpractice and workers
compensation claims could be significantly affected should current and future
occurrences differ from historical claims trends. The estimation process is also
complicated by the relatively short period of time in which we have owned some
of our healthcare facilities, as occurrence data under previous ownership may
not necessarily reflect occurrence data under our ownership. While management
monitors current claims closely and considers outcomes when estimating our
insurance accruals, the complexity of the claims and wide range of potential
outcomes often hampers timely adjustments to the assumptions used in the
estimates.
Medical Claims Reserves
We maintain self-insured medical and dental plans for employees. Claims
are accrued under these plans as the incidents that give rise to them occur. We
use a third-party administrator to process all such claims. 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.
We have entered into a reinsurance agreement with an independent insurance
company to limit our losses on claims. Under the terms of this agreement, the
insurance company will reimburse us a maximum of $875,000 on any individual
claim. While management believes that its estimation methodology effectively
captures trends in medical claims costs, actual payments could differ
significantly from our estimates, given changes in the healthcare cost structure
or adverse experience.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 2001, we adopted Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended ("SFAS No. 133"). SFAS No. 133 requires that all
derivatives, whether designated in hedging relationships or not, be recognized
on the balance sheet at fair value. If the derivative is designated as a fair
value hedge, the changes in the fair value of the derivative and the hedged item
are recognized in earnings. If the derivative is designated as a cash flow
hedge, changes in the fair value of the derivative are recorded in other
comprehensive income and are recognized in the income statement when the hedged
item affects earnings. In accordance with the provisions of SFAS No. 133, we
designated our outstanding interest rate swap agreement as a cash flow hedge. We
determined that the current agreements are highly effective in offsetting the
fair value changes in a portion of our debt. These derivatives and the related
hedged debt amounts have been recognized in the consolidated financial
statements at their respective fair values.
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, Business Combinations, ("SFAS No. 141") and SFAS No. 142, Goodwill
and Other Intangible Assets ("SFAS No. 142"). SFAS No. 141 was effective July 1,
2001, and SFAS No. 142 became effective January 1, 2002. Under the new rules in
SFAS No. 142, goodwill and indefinite lived intangible assets will no longer be
amortized effective January 1, 2002, but will be subject to annual impairment
tests. Other intangible assets will continue to be amortized over their useful
lives. (See Note 3 in our Notes to Consolidated Financial Statements.)
The Company will apply the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of 2002. Application of
the nonamortization provisions of SFAS No. 142 is expected to result in an
increase in net income of approximately $4.4 million ($0.13 per share) per year.
During 2002, we will perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets as of January 1, 2002, and have
not yet determined what the effect of these tests will be on our earnings and
financial position.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"), which supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets
27
to be Disposed Of, ("SFAS No. 121") and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. SFAS No. 144 removes goodwill from its scope and clarifies other
implementation issues related to SFAS No. 121. SFAS No. 144 also provides a
single framework for evaluating long-lived assets to be disposed of by sale. The
provisions of this statement were adopted effective January 1, 2002 and had no
material effect on the Company's results of operations or financial position.
INFLATION
The healthcare 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 do
not know whether we will be able to offset or control future cost increases, or
our ability to pass on the increased costs associated with providing healthcare
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 interest rates. To mitigate the impact of fluctuations
in interest rates, we generally maintain 50% - 75% of our debt at a fixed rate,
either by borrowing on a long-term basis or entering into an interest rate swap.
At December 31, 2001, 100% of our outstanding debt was effectively at a fixed
rate. Our interest rate swap contract allows us to periodically exchange fixed
rate and floating rate payments over the life of the agreement. Floating-rate
payments are based on LIBOR, and fixed-rate payments are dependent upon market
levels at the time the interest rate swap was consummated. Our interest rate
swap is a cash flow hedge, which effectively converted an aggregate notional
amount of $28.5 million of floating rate borrowings to fixed rate borrowings at
December 31, 2001. Our policy is not to hold or issue derivatives for trading
purposes and to avoid derivatives with leverage features. We are exposed to
credit losses in the event of nonperformance by the counterparty to the
financial instrument. We anticipate that the counterparty will fully satisfy its
obligations under the contract.
The carrying amount of our total long-term debt, less current
maturities, of $162.1 million and $330.8 million at December 31, 2000 and 2001,
respectively, approximated fair value. We had $4.0 million of variable rate debt
outstanding at December 31, 2000, with interest rate swaps in place to offset
the variability of the entire balance in 2000. At the December 31, 2001
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
28
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 22, 2002, 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, 2001.
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 22,
2002.
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 22, 2002 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, 2001.
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 22, 2002. Such proxy statement will be filed with
the Securities and Exchange Commission not later than 120 days subsequent to
December 31, 2001.
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 22, 2002. Such proxy statement will be
filed with the Securities and Exchange Commission not later than 120 days
subsequent to December 31, 2001.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(A)(1) AND (A)(2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The Consolidated Financial Statements and Financial Statement Schedule
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)
29
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
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, as filed with the Delaware Secretary of State on
June 16, 2000 (e)
3.2 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 Province
Healthcare Company's 4 1/2% Convertible Subordinated Notes due 2005 (g)
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 (g)
4.4 Indenture, dated as of October 10, 2001 between Province Healthcare
Company and National City Bank, including the forms of Province
Healthcare Company's 4 1/4% Convertible Subordinated Notes due 2008 (i)
4.5 Registration Rights Agreement, dated as of October 10, 2001, among
Province Healthcare Company and Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, First Union Securities, Inc., UBS
Warburg LLC and Banc of America Securities LLC as Initial Purchasers
(i)
10.1 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)
10.2 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)
10.3 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)
10.4 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)
10.5 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)
10.6 Lease Agreement, dated October 1, 1996, by and between County of
Starke, State of Indiana, and Principal Knox Company (a)
30
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.7 Lease Agreement, dated December 1, 1993, by and between Palo Verde
Hospital Association and Brim Hospitals, Inc. (a)
10.8 Lease Agreement, dated May 15, 1986, as amended, by and between Fort
Morgan Community Hospital Association and Brim Hospitals, Inc. (a)
10.9 Lease Agreement, dated April 24, 1996, as amended, by and between
Parkview Regional Hospital, Inc. and Brim Hospitals, Inc. (a)
10.10 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)
10.11 Lease and Management Agreement and Annex, dated June 9, 1998, by and
between St. Landry Parish Hospital Service District No. 1 and
PHC-Eunice, Inc. (*)
10.12 Lease Agreement, dated February 15, 2000, by and between The City of
Ennis, Texas, PRHC-Ennis, L.P. and Province Healthcare Company. (*)
10.13 Lease Agreement and Annex, dated as of December 7, 2001, by and among
Hospital Service District No. 2 of the Parish of St. Mary, State of
Louisiana, PHC-Morgan City, L.P. and Province Healthcare Company. (*)
10.14 Lease Agreement, dated December 17, 1996, between Brim, Inc. and Encore
Senior Living, L.L.C. (a)
10.15 Corporate Purchasing Agreement, dated April 21, 1997, between Aligned
Business Consortium Group and Principal Hospital Company (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 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)
10.19 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. (h)
10.20 Amended and Restated Participation Agreement, dated as of November 13,
2001, among Province Healthcare Company, as Construction Agent and
Lessee, various parties as Guarantors, Wells Fargo Bank Northwest,
National Association, as the Owner Trustee under the PHC Real Estate
Trust 1998-1, various banks and lending institutions as Holders,
various banks and lending institutions as Lenders, Bank of America,
N.A. as Syndicate Agent, UBS Warburg LLC, as Co-Documentation Agent,
Merrill Lynch, as Co-Documentation Agent, First Union Securities, Inc.,
as Sole Book-Runner and Co-Lead Arranger, Bank of America, N.A., as
Co-Lead Manager and First Union National Bank, as Agent (*)
31
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.21 Third Amended and Restated Senior Credit Agreement, dated as of
November 13, 2001, among Province Healthcare Company, First Union
National Bank, as Agent and Issuing Bank, and various parties thereto
(*)
10.22 Asset Purchase Agreement, dated April 29, 1998, between Province
Healthcare Company, PHC-Lake Havasu, Inc. and Samaritan Health System
(b)
10.23 Province Healthcare Company Employee Stock Purchase Plan, effective
March 24, 1998 (c)(**)
10.24 Asset Sale Agreement, dated July 23, 1999, between Tenet Healthcare
Corporation and Province Healthcare Company (d)
10.25 Amendment No. 1 to Asset Sale Agreement, dated September 29, 1999,
between Tenet Healthcare Corporation and Province Healthcare Company
(f)
10.26 Province Healthcare Company Amended and Restated 1997 Long-Term Equity
Incentive Plan (h)**
10.27 Executive Severance Agreement by and between Province Healthcare
Company and Martin S. Rash, dated October 18, 1999 (e)**
10.28 Executive Severance Agreement by and between Province Healthcare
Company and James Thomas Anderson, dated October 18, 1999 (e)
10.29 Executive Severance Agreement by and between Province Healthcare
Company and John M. Rutledge, dated October 18, 1999 (e)**
10.30 Executive Severance Agreement by and between Province Healthcare
Company and Howard T. Wall, III, dated October 18, 1999 (e)**
10.31 Executive Severance Agreement by and between Province Healthcare
Company and Stephen M. Ray, dated January 1, 2002 (*) (**)
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, filed August 27, 1999, Registration
No. 333-34421
(b) 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
(c) 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
(d) 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
32
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
(e) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report filed on Form 10-Q, for the quarterly period ended
March 31, 2000, Commission File No. 0-23639
(f) 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
(g) Incorporated by reference to the Exhibits filed with the Registrant's
Registration Statement on Form S-3, dated January 24, 2001,
Registration No. 333-54192
(h) Incorporated by reference to the exhibits filed with the Registrant's
Annual Report filed on Form 10-K, for the fiscal period ended December
31, 2000, Commission File No. 0-23639
(i) Incorporated by reference to the Exhibits filed with the Registrant's
Registration Statement on Form S-3, filed December 20, 2001,
Registration No. 333-75646
(*) Filed herewith
(**) Management Compensatory Plan or Arrangement
(b) Reports on Form 8-K
On October 4, 2001, we filed a Current Report on Form 8-K to report the
closing of the acquisition of Vaughan Regional Medical Center and the
announcement of the offering of $150.0 million of Convertible Subordinated Notes
due 2008, plus an additional $22.5 million principal amount to cover
over-allotments.
On October 5, 2001, we filed a Current Report on Form 8-K to report the
closing of the acquisition of Medical Center of Southern Indiana.
On October 15, 2001, we filed a Current Report on Form 8-K to report
the issuance and sale of $172.5 million aggregate principal amount of 4 1/4%
Convertible Subordinated Notes due 2008.
On November 5, 2001, we filed a Current Report on Form 8-K to report
the appointment of Stephen M. Ray to the office of Senior Executive Vice
President, Finance and Chief Financial Officer.
On November 20, 2001, we filed a Current Report on Form 8-K to report
that we entered into an amended and restated senior credit facility.
On December 12, 2001, we filed a Current Report on Form 8-K to report
the closing of the acquisition of Lakewood Medical Center.
33
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
The undersigned directors of Province Healthcare Company, a Delaware
corporation, do hereby constitute and appoint Martin S. Rash their 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 may
determine to 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 and March 27, 2002
Martin S. Rash Chief Executive Officer
/s/ Stephen M. Ray Senior Executive Vice President, March 27, 2002
Stephen M. Ray Chief Financial Officer and Director
/s/ John M. Rutledge President, Chief Operating Officer and March 27, 2002
John M. Rutledge Director
/s/ Winfield C. Dunn Director March 27, 2002
Winfield C. Dunn
/s/ Paul J. Feldstein Director March 27, 2002
Paul J. Feldstein
/s/ David R. Klock Director March 27, 2002
David R. Klock
/s/ Joseph P. Nolan Director March 27, 2002
Joseph P. Nolan
/s/ David L. Steffy Director March 27, 2002
David L. Steffy
34
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, 2000 and 2001.................................................. F-3
Consolidated Statements of Income for the Years Ended December 31, 1999,
2000 and 2001........................................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1999, 2000 and 2001............................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 2000 and 2001..................................................................................... 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
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, 2000 and 2001,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2001. 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 at December 31, 2000 and 2001, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001, 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.
As discussed in Note 2 to the consolidated financial statements, in
2001 the Company changed its method of accounting for business combinations.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 21, 2002, except for Note 15,
as to which the date is March 18, 2002
F-2
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------
2000 2001
---- ----
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ -- $ 39,375
Accounts receivable, less allowance for doubtful accounts of
$8,321 in 2000 and $49,678 in 2001.................................................. 89,208 109,826
Inventories............................................................................... 11,805 15,926
Prepaid expenses and other................................................................ 7,282 21,515
--------- ----------
Total current assets................................................................ 108,295 186,642
Property, plant and equipment, net........................................................... 210,277 306,494
Goodwill, net................................................................................ 183,331 180,497
Unallocated purchase price................................................................... 1,698 49,013
Other........................................................................................ 27,251 37,251
--------- ----------
422,557 573,255
--------- ----------
$ 530,852 $ 759,897
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 12,359 $ 17,515
Accrued salaries and benefits............................................................. 14,736 18,867
Accrued expenses.......................................................................... 15,655 12,139
Current maturities of long-term obligations............................................... 2,179 1,879
--------- ----------
Total current liabilities........................................................... 44,929 50,400
Long-term obligations, less current maturities............................................... 162,086 330,838
Other liabilities............................................................................ 7,343 14,000
Minority interest............................................................................ 1,780 2,654
Stockholders' equity:
Common stock--$0.01 par value; 50,000,000 shares authorized at December 31,
2000 and 2001, issued and outstanding 30,908,588 and
31,659,323 shares at December 31, 2000 and 2001, respectively........................... 309 317
Additional paid-in-capital................................................................ 273,858 289,106
Retained earnings......................................................................... 40,547 73,455
Accumulated other comprehensive loss...................................................... -- (873)
--------- ---------
314,714 362,005
--------- ----------
$ 530,852 $ 759,897
========= ==========
See accompanying notes.
F-3
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------
1999 2000 2001
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Net patient service revenue................................................. $ 323,319 $ 445,772 $ 509,061
Other....................................................................... 23,373 24,086 21,678
--------- --------- ----------
Net operating revenue................................................. 346,692 469,858 530,739
Expenses:
Salaries, wages and benefits................................................ 139,183 180,881 205,628
Purchased services.......................................................... 39,454 48,573 50,723
Supplies.................................................................... 38,931 54,465 59,341
Provision for doubtful accounts............................................. 25,572 43,604 49,283
Other operating expenses.................................................... 36,890 51,053 58,758
Rentals and leases.......................................................... 7,201 7,164 7,536
Depreciation and amortization............................................... 19,734 26,629 30,179
Interest expense............................................................ 13,901 16,657 12,090
Minority interest........................................................... 166 178 267
Loss on sale of assets...................................................... 11 5,979 196
-------- --------- ----------
Total expenses........................................................ 321,043 435,183 474,001
-------- --------- ----------
Income before income taxes..................................................... 25,649 34,675 56,738
Income taxes................................................................... 11,148 14,737 23,830
-------- --------- ----------
Net income..................................................................... $ 14,501 $ 19,938 $ 32,908
======== ========= ==========
Earnings per share:
Basic....................................................................... $ 0.61 $ 0.70 $ 1.05
======== ========= ==========
Diluted .................................................................... $ 0.60 $ 0.67 $ 1.01
======== ========= ==========
See accompanying notes.
F-4
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ACCUMULATED
OTHER
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS LOSS TOTAL
------ ------ ------- -------- ---- -----
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
Exercise of stock options....................... 562,893 6 9,969 -- -- 9,975
Income tax benefit from stock options exercised. -- -- 3,287 -- -- 3,287
Treasury stock.................................. (1,546) -- (45) -- -- (45)
Issuance of common stock from employee
stock purchase plan........................... 189,388 2 2,037 -- -- 2,039
Net income...................................... -- -- -- 32,908 -- 32,908
Cumulative effect of change in accounting for
derivative financial instruments,
net of tax of $42............................. -- -- -- -- (58) (58)
Change in fair value of derivatives,
net of tax of $504............................ -- -- -- -- (815) (815)
----------
Comprehensive income............................ -- -- -- -- -- 32,035
----------- ------ --------- ---------- -------- ----------
Balance at December 31, 2001....................... 31,659,323 $ 317 $ 289,106 $ 73,455 $ (873) $ 362,005
=========== ====== ========= ========== ======== ==========
See accompanying notes.
F-5
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------
1999 2000 2001
---- ---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income.................................................................... $ 14,501 $ 19,938 $ 32,908
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................................... 19,734 26,629 30,179
Provision for doubtful accounts......................................... 25,572 43,604 49,283
Deferred income taxes................................................... 1,428 (5,316) 6,469
Provision for professional liability.................................... (1,597) 15 200
Loss on sale of assets.................................................. 11 5,979 196
Other................................................................... (357) -- --
Changes in operating assets and liabilities, net of
effects from acquisitions and disposals:
Accounts receivable................................................... (50,791) (51,319) (62,299)
Inventories........................................................... (1,396) (1,610) (1,574)
Prepaid expenses and other............................................ 4,372 1,498 (15,357)
Other assets.......................................................... (4,810) (11,207) (935)
Accounts payable and accrued expenses................................. 12,464 435 (2,563)
Accrued salaries and benefits......................................... (234) 3,514 993
Other liabilities..................................................... 145 471 930
Other................................................................. -- 34 --
---------- --------- ---------
Net cash provided by operating activities.................................. 19,042 32,665 38,430
INVESTING ACTIVITIES
Purchase of property, plant and equipment.................................. (20,890) (44,045) (72,207)
Purchase of acquired hospitals, net of cash received....................... (119,236) (31,399) (97,607)
Proceeds from sale of hospitals............................................ -- 30,630 --
Proceeds from sale of assets............................................... -- 4,121 --
---------- --------- ---------
Net cash used in investing activities...................................... (140,126) (40,693) (169,814)
FINANCING ACTIVITIES
Proceeds from long-term debt............................................... 186,045 252,462 337,939
Repayments of debt......................................................... (67,562) (349,860) (179,149)
Issuance of common stock................................................... 488 105,325 11,969
Other...................................................................... -- 101 --
---------- --------- ---------
Net cash provided by financing activities.................................. 118,971 8,028 170,759
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents.......................... (2,113) -- 39,375
Cash and cash equivalents at beginning of period........................... 2,113 -- --
---------- --------- ---------
Cash and cash equivalents at end of period................................. $ -- $ -- $ 39,375
========== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid during the period............................................ $ 13,253 $ 16,913 $ 9,742
========== ========= =========
Income taxes paid during the period........................................ $ 9,410 $ 9,870 $ 28,185
========== ========= =========
ACQUISITIONS
Assets acquired............................................................ $ 131,912 $ 35,925 $ 109,014
Liabilities assumed........................................................ (12,676) (4,526) (11,407)
---------- --------- ---------
Cash paid, net of cash acquired............................................ $ 119,236 $ 31,399 $ 97,607
========== ========= =========
See accompanying notes.
F-6
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
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. Our owned and leased
hospitals accounted for 94.2%, 96.0% and 97.0% of our net operating revenue in
1999, 2000, and 2001, respectively.
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 majority voting
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 2001 presentation. These reclassifications had no
effect on net income as previously reported.
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. The allowance for doubtful accounts
increased, as a percentage of accounts receivable net of contractual
adjustments, from 8.5% in 2000 to 31.1% in 2001. This increase primarily
resulted from the timing of write-off of accounts. Prior to 2001, accounts were
removed from the accounts receivable balance and sent to the collection agency
when aged to 150 days. Beginning in 2001, the accounts were removed from the
accounts receivable balance at the earlier of return from the collection agency
or when aged to 365 days. Significant concentrations of gross patient accounts
receivable at December 31, 2000 and 2001, consist of receivables from Medicare
of 33% and 26%, respectively, and Medicaid of 15% and 14%, 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.
F-7
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 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
have been amortized using the straight-line method over the estimated useful
lives of the related assets which ranged from 5 years for management contracts
to 15 to 35 years for goodwill. The value assigned to management contracts was
fully amortized in 2001.
At December 31, 2000 and 2001, goodwill totaled $200,721,000 and
$203,993,000, respectively, and accumulated amortization totaled $17,390,000 and
$23,496,000, respectively. The carrying value of goodwill is reviewed if the
facts and circumstances suggest that it may be impaired. If this review
indicates that goodwill will not be recoverable based on undiscounted cash flows
of the related assets, the Company writes down the goodwill to estimated fair
value.
OTHER ASSETS
Deferred loan costs are included in other noncurrent assets and are
amortized by the interest method over the term of the related debt. At December
31, 2000 and 2001, deferred loan costs totaled $10,341,000 and $19,850,000,
respectively, and accumulated amortization totaled $3,393,000 and $5,577,000,
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 $875,000 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 that provided an unlimited claim reporting period
for its professional liability for claims incurred prior to December 31, 1999.
Effective January 1, 2000, the Company purchased a professional liability
unlimited claim reporting policy for 2000. Both coverages are 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 has provided 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. (See Note 7.)
STOCK BASED COMPENSATION
The Company, from time to time, grants stock options for a fixed number
of common shares to employees and directors. The Company accounts for employee
stock option grants in accordance with Accounting Principles Board Opinion No.
25,
F-8
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.
Effective January 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended ("SFAS No. 133"). SFAS No. 133 requires that all
derivatives, whether designated in hedging relationships or not, be recognized
on the balance sheet at fair value. If the derivative is designated as a fair
value hedge, the changes in the fair value of the derivative and the hedged item
are recognized in earnings. If the derivative is designated as a cash flow
hedge, changes in the fair value of the derivative are recorded in other
comprehensive income and are recognized in the income statement when the hedged
item affects earnings. In accordance with the provisions of SFAS No. 133, the
Company designated its outstanding interest rate swap agreement as a cash flow
hedge. The Company determined that the current agreements are highly effective
in offsetting the fair value changes in a portion of the Company's debt. These
derivatives and the related hedged debt amounts have been recognized in the
consolidated financial statements at their respective fair values.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, Business Combinations, ("SFAS No. 141") and SFAS No. 142, Goodwill
and Other Intangible Assets ("SFAS No. 142"). SFAS No. 141 was effective July 1,
2001, and SFAS No. 142 is effective January 1, 2002. Under the new rules in SFAS
No. 142, goodwill and indefinite lived intangible assets from acquisitions prior
to July 1, 2001, will no longer be amortized effective January 1, 2002, but will
be subject to annual impairment tests. In accordance with the new rules,
goodwill resulting from acquisitions after June 30, 2001, has not been
amortized. Other intangible assets will continue to be amortized over their
useful lives. (See Note 3.)
The Company will apply the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of 2002. Application of
the nonamortization provisions of SFAS No. 142 is expected to result in an
increase in net income of approximately $4.4 million ($0.13 per share) per year.
During 2002, the Company will perform the first of the required impairment tests
of goodwill and indefinite lived intangible assets as of January 1, 2002 and has
not yet determined what the effect of these tests will be on the earnings and
financial position of the Company.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"), which supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, ("SFAS No. 121"), and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. SFAS No. 144 removes goodwill from its scope and
clarifies other implementation issues related to SFAS No. 121. SFAS No. 144 also
provides a single framework for evaluating long-lived assets to be disposed of
by sale. The provisions of this statement were adopted effective January 1, 2002
and had no material effect on the Company's results of operations or financial
position.
3. ACQUISITIONS AND DIVESTITURES
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 entering into a ten-year lease agreement with a five-year
renewal option, totaling $767,000. Goodwill totaled approximately $2,885,000 and
was being amortized over 15 years. Under the lease agreement, the Company is
obligated to construct a replacement facility (currently estimated to cost
approximately $20,000,000) at such time as the net patient service revenue of
the hospital reaches a predetermined level. The lease will terminate at the time
the replacement facility commences operations.
F-9
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. Goodwill totaled approximately
$8,920,000 and was being amortized over 35 years. Under the asset purchase
agreement, the Company is obligated to build a replacement facility following
the fifth year after the closing, at a cost of not less than $25,000,000,
contingent upon the hospital meeting certain financial targets subsequent to the
closing.
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. Goodwill totaled approximately $5,659,000 and was
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. Goodwill totaled approximately $37,124,000
and was 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. Goodwill totaled approximately $2,874,000 and was being amortized over
35 years.
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.
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. After
application of tax provision, the Company recorded a gain on the sale of
approximately $2,600,000 in the fourth quarter of 2000.
F-10
SELMA REGIONAL MEDICAL CENTER
In July 2001, the Company acquired assets totaling $36,254,000 and
assumed liabilities totaling $1,300,000 of Selma Regional Medical Center
(formerly Selma Baptist Hospital) in Selma, Alabama. To finance this
acquisition, the Company borrowed $34,000,000 under its revolving credit
facility. The allocation of the purchase price has been determined based upon
currently available information and is subject to further refinement pending
final appraisal. This is the Company's first Alabama hospital, allowing entrance
into a new market.
ASHLAND REGIONAL MEDICAL CENTER
In August 2001, the Company acquired assets totaling $6,184,000 and
assumed liabilities totaling $994,000 of Ashland Regional Medical Center in
Ashland, Pennsylvania. To finance this acquisition, the Company borrowed
$4,700,000 under its revolving credit facility. The allocation of the purchase
price has been determined based upon currently available information and is
subject to further refinement pending final appraisal. This is the Company's
first Pennsylvania hospital, and is the only hospital in the community.
VAUGHAN REGIONAL MEDICAL CENTER
In October 2001, the Company acquired assets totaling $34,276,000 and
assumed liabilities totaling $6,436,000 of Vaughan Regional Medical Center in
Selma, Alabama. To finance this acquisition, the Company borrowed $28,000,000
under its revolving credit facility. The allocation of the purchase price has
been determined based upon currently available information and is subject to
further refinement pending final appraisal. The Company anticipates
consolidating Vaughan Regional Medical Center and Selma Baptist Hospital in the
second quarter of 2002. This consolidation will allow the Company to establish a
regional hospital that provides more intensive services to the large area it
will serve.
MEDICAL CENTER OF SOUTHERN INDIANA
In October 2001, the Company acquired the assets totaling $19,191,000
and assumed liabilities totaling $2,677,000 of Medical Center of Southern
Indiana in Charlestown, Indiana. To finance this acquisition, the Company
borrowed $16,000,000 under its revolving credit facility. The allocation of the
purchase price has been determined based upon currently available information
and is subject to further refinement pending final appraisal. This facility is
the only hospital in the community, with a service area of approximately 48,000.
TECHE REGIONAL MEDICAL CENTER
In December 2001, the Company acquired, through a long-term lease
agreement, the assets and business of Teche Regional Medical Center (formerly
Lakewood Medical Center) in Morgan City, Louisiana. The 40-year lease totals
approximately $11,212,000, which was prepaid at closing from available cash. The
allocation of the purchase price has yet to be determined and is included in
unallocated purchase price on the balance sheet. This facility is the only
hospital in the community, with a service area of approximately 82,000 people.
The purchase agreement provides that additional rent is to be paid
annually (on each anniversary of the lease commencement date) if earnings reach
levels specified in the lease. The outcome of the contingency based on future
earnings is not determinable beyond a reasonable doubt. Therefore, any
contingent payments will be added to the purchase price when the contingency is
resolved and the additional consideration is distributable.
OTHER INFORMATION
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.
F-11
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition for all five of the
acquisitions completed in 2001 (in thousands):
Accounts receivable $ 7,652
Inventories 2,547
Prepaid expenses and other 152
---------
Total current assets acquired 10,351
Property, plant and equipment 49,296
Unallocated purchase price 49,013
Other 354
---------
Total assets acquired 109,014
Total liabilities assumed 11,407
---------
Net assets acquired $ 97,607
=========
In accordance with its stated policy, management of the Company
evaluates all acquisitions independently to determine the appropriate
amortization period for identified intangible assets. 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. Goodwill on
acquisitions prior to July 1, 2001 will no longer be amortized, effective
January 1, 2002. Goodwill resulting from acquisitions after June 30, 2001 has
not been amortized. Identified intangibles with definite lives will continue to
be amortized over their estimated useful lives. Goodwill resulting from
acquisitions in 1999, 2000 and 2001 is deductible for tax purposes over a
15-year period.
The following pro forma information reflects the operations of the
entities acquired in 1999, 2000 and 2001, 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):
1999 2000 2001
--------- --------- ----------
Net operating revenue................................................ $ 379,405 $ 608,424 $ 619,911
Net income .......................................................... 14,336 16,302 31,742
Earnings per share:
Basic ........................................................ 0.61 0.57 1.01
Diluted ...................................................... 0.60 0.55 0.97
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.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
DECEMBER 31,
------------------------
2000 2001
--------- ----------
Land................................................................................ $ 14,939 $ 16,430
Leasehold improvements.............................................................. 7,552 8,334
Buildings and improvements.......................................................... 114,590 175,070
Equipment........................................................................... 85,742 132,762
--------- ----------
222,823 332,596
Less allowances for depreciation and amortization................................... (35,685) (57,768)
--------- ----------
187,138 274,828
Construction-in-progress (estimated cost to complete at
December 31, 2001--$48,142)...................................................... 23,139 31,666
--------- ----------
$ 210,277 $ 306,494
========= ==========
Depreciation expense totaled approximately $13,953,000, $19,980,000 and
$23,657,000 in 1999, 2000 and 2001, respectively. Assets under capital leases
were $19,446,000 and $19,873,000, net of accumulated amortization of $6,225,000
and $8,130,000 at December 31, 2000 and 2001, 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 2000
and 2001, $1,036,000 and $1,348,000 of interest cost, respectively, was
capitalized.
F-12
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
DECEMBER 31,
-----------------------
2000 2001
--------- --------
Revolving line of credit.......................................................... $ 4,000 $ --
Convertible subordinated notes.................................................... 150,000 322,500
Other debt obligations............................................................ 3,588 4,367
--------- --------
157,588 326,867
Obligations under capital leases (see Note 10).................................... 6,677 5,850
--------- --------
164,265 332,717
Less current maturities........................................................... (2,179) (1,879)
--------- --------
$ 162,086 $330,838
========= ========
In October 2001, the Company reduced the size of its credit facility to
$250,000,000, including a revolving line of credit of $203,000,000 and an
end-loaded lease facility of $47,000,000. At December 31, 2001, the Company had
an outstanding letter of credit of $2,120,000, no borrowings outstanding under
its revolving line of credit and $208,291,000 available, which includes
availability under the end-loaded lease facility that could be converted to
revolver availability at the Company's option.
The Company contemplated financing the construction of a hospital and
three medical office buildings using the end-loaded lease facility agreement.
The properties were in the final stages of construction at December 31, 2001.
Subsequent to December 31, 2001, the Company made the decision to modify the
terms of the end-loaded lease facility to enable it to account for the
properties and borrowings on the balance sheet. During the first quarter of
2002, the Company anticipates recording approximately $45,800,000 in property
and equipment and long-term debt on the balance sheet related to these
properties.
The Company estimates that this financing decision will result in an
additional annual expense, after tax, of approximately $559,000. This is the
result of the difference between depreciation of the facilities and interest on
the debt, as compared to the net rent expense that would have been incurred if
the properties had been financed under the end-loaded lease facility.
The loans under the credit facility bear interest, at the Company's
option, at the adjusted base rate or at the adjusted LIBOR rate. The interest
rate ranged from 3.64% to 7.98% during 2001. The Company pays a commitment fee,
which varies from one-half to three-eighths 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 credit
facility at any time before the maturity date of May 31, 2005.
The credit facility 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
facility also requires the Company to maintain a specified net worth and meet or
exceed certain coverage, leverage, and indebtedness ratios. Indebtedness under
the credit facility is secured by substantially all assets of the Company.
In November and December 2000, the Company sold $150,000,000 of
Convertible Subordinated 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
F-13
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.
In October 2001, the Company sold $172,500,000 of Convertible
Subordinated Notes due October 10, 2008. Net proceeds of approximately
$166,400,000 were used to reduce the outstanding balance on the revolving line
of credit and for acquisitions. The notes bear interest from October 10, 2001 at
the rate of 4 1/4% per year, payable semi-annually on April 10 and October 10,
beginning on April 10, 2002. 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 $41.55 per share. The conversion price is subject
to adjustment. The Company may redeem all or a portion of the notes on or after
October 10, 2004, 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 and
subordinated to the Company's existing and future senior indebtedness and senior
subordinated indebtedness. The notes are ranked equal in right of payment to the
Company's 4 1/2% notes due in 2005. The notes rank junior to the Company's
subsidiary liabilities. The indenture does not contain any financial covenants.
A total of 4,151,178 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 facility. 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 $45,000,000 of floating-rate borrowings to
fixed-rate borrowings. In January 2001, the Company terminated $16,500,000 of
the $45,000,000 swap agreement, leaving a notional amount of $28,500,000
converted 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, 2001,
excluding capital leases, are as follows (in thousands):
2002.............................................................. $ 823
2003.............................................................. 2,609
2004.............................................................. 935
2005.............................................................. 150,000
2006.............................................................. --
Thereafter........................................................ 172,500
---------
$ 326,867
==========
6. STOCKHOLDERS' EQUITY
COMMON STOCK
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
In March 1997, the Company's Board of Directors and shareholders
approved the 1997 Long-Term Equity Incentive Plan (the "Plan"). The Company has
reserved 5,413,524 shares for issuance under 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.
F-14
The following is a summary of option transactions during 1999, 2000 and
2001:
NUMBER OF OPTION
OPTIONS PRICE RANGE
------------- ------------------
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
Options granted.................................................................. 1,807,033 24.08 - 34.50
Options exercised................................................................ (562,893) 3.05 - 29.92
Options forfeited................................................................ (305,157) 3.05 - 29.92
-----------
Balance at December 31, 2001........................................................ 3,479,961 $ 3.05 - $34.50
===========
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ------------------------ ----------- ------------ -------- ----------- -----
$ 3.05- $ 10.08.................................... 473,861 6.5 $ 7.74 268,873 $ 6.21
10.67- 10.75.................................... 427,525 6.6 10.70 156,558 10.69
13.42- 14.25.................................... 325,271 8.0 13.70 231,371 13.50
17.25- 17.25.................................... 664,057 8.3 17.25 110,940 17.25
17.33- 24.08.................................... 76,089 8.1 21.25 13,050 17.62
24.60- 24.60.................................... 482,313 9.4 24.60 -- --
25.00- 25.00.................................... 82,137 9.3 25.00 -- --
25.06- 25.06.................................... 423,625 9.2 25.06 383,037 25.06
27.25- 28.50.................................... 381,349 9.7 27.80 -- --
29.35- 34.50.................................... 143,734 9.6 31.74 4,092 29.92
- --------------------- ------------- ---- ------ ----------- ------
$ 3.05- $ 34.50.................................... 3,479,961 8.3 $18.81 1,167,921 $15.70
===================== ============= ==== ====== =========== ======
At December 31, 1999 and 2000, respectively, 471,304 and 618,763
options were exercisable. At December 31, 2001, the Company had options
representing 387,454 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 1999, 2000 and 2001,
respectively: risk-free interest rate of 5.51%, 6.45% and 4.89%; dividend yield
of 0%; volatility factor of the expected market price of the Company's common
stock of .756, .740 and .603; and a weighted-average expected life of the option
of 5 years for 1999 and 2000 and 4.2 years for 2001. The estimated weighted
average fair values of shares granted during 1999, 2000 and 2001, using the
Black-Scholes option pricing model, were $6.65, $10.26 and $14.26, 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
F-15
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):
1999 2000 2001
-------- ------- -------
Pro forma net income................................................................ $ 12,681 $14,080 $24,456
Pro forma net income per share:
Basic............................................................................. 0.54 0.49 0.78
Diluted........................................................................... 0.53 0.47 0.75
The effect of applying SFAS No. 123 for providing pro forma disclosure
is not likely to be representative of the effect on reported net income for
future years.
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 375,000 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 16,233, 32,488 and 189,388 in
1999, 2000 and 2001, 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.
- 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.
F-16
Approximately 68.7%, 74.0% and 73.7% of hospital patient days
(unaudited) for the years ended December 31, 1999, 2000 and 2001, respectively,
are derived from Medicare and state-sponsored Medicaid programs.
In 1999, the Company owned or leased two hospitals in Texas, which
accounted for 17.1% of net operating revenues. In 2000 and 2001, the Company
owned or leased three hospitals in Texas, which accounted for 21.4% and 23.9% of
net operating revenues, respectively. In 1999, 2000 and 2001, the Company owned
one hospital in Arizona, which accounted for 17.6%, 15.4% and 15.0% of net
operating revenues, respectively.
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 consolidated statements of income in the period
in which the revisions are made, and resulted in an increase in net patient
service revenue of $892,000 in 1999, a decrease in net patient service revenue
of $722,000 in 2000, and an increase in net patient service revenue of $628,000
in 2001. Because of information technology problems at the Center for Medicare
and Medicaid Services, U.S. hospitals have been unable to file Medicare cost
reports for periods ending on or after August 1, 2000.
8. INCOME TAXES
The provision for income taxes consists of the following amounts (in
thousands):
1999 2000 2001
-------- -------- --------
Current:
Federal........................................................... $ 7,397 $ 17,995 $ 15,167
State............................................................. 1,773 2,058 1,647
-------- -------- --------
9,170 20,053 16,814
Deferred:
Federal........................................................... 1,830 (4,968) 6,329
State............................................................. 148 (348) 687
-------- --------- --------
1,978 (5,316) 7,016
-------- -------- --------
$ 11,148 $ 14,737 $ 23,830
======== ======== ========
The differences between the Company's effective income tax rate of
43.5%, 42.5%, and 42.0% for 1999, 2000 and 2001, respectively, and the statutory
federal income tax rate of 35.0% are as follows (in thousands):
1999 2000 2001
---------------- ---------------- -----------------
Statutory federal rate................................. $ 8,977 35.0% $ 12,136 35.0% $ 19,858 35.0%
State income taxes, net of federal income tax benefit.. 1,248 4.9% 1,112 3.2% 1,517 2.7%
Amortization of goodwill............................... 594 2.3% 576 1.7% 508 0.9%
Other.................................................. 329 1.3% 913 2.6% 1,947 3.4%
------- ----- -------- ---- --------- ------
$11,148 43.5% $ 14,737 42.5% $ 23,830 42.0%
======= ===== ======== ===== ======== =======
F-17
The components of the Company's deferred tax assets and (liabilities)
are as follows (in thousands):
DECEMBER 31,
-------------------------
2000 2001
------- --------
Depreciation and amortization...................................................... $(5,439) $ (9,409)
Accounts receivable................................................................ 1,277 (1,350)
Accruals and reserves.............................................................. 964 1,870
Insurance reserves................................................................. 514 143
Third party settlements............................................................ 1,275 2,090
Operating leases................................................................... (933) (1,570)
Capital lease interest............................................................. 608 643
Net operating losses............................................................... 715 --
Other.............................................................................. 334 143
------- --------
Deferred tax liability.......................................................... (685) (7,440)
Valuation allowance............................................................. (286) --
------- --------
Net deferred tax liability...................................................... $ (971) $ (7,440)
======== =========
In the accompanying consolidated balance sheets, net current deferred
tax assets of $3,308,000 and $2,032,000 and net noncurrent deferred tax
liabilities of $4,278,000 and $9,472,000 at December 31, 2000 and 2001,
respectively, are included in prepaid expenses and other, and other liabilities,
respectively.
The Company recorded a deferred tax asset of $546,000 related to
interest rate swap agreements during 2001. The benefit of the deferred taxes are
recorded in Comprehensive Income.
Prior to the end of 2001, the Internal Revenue Service notified the
Company that they had selected tax years 1998 through 2000 for examination.
Finalization of the examination is not expected to have a significant impact on
the financial condition or results of operation 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):
1999 2000 2001
----------- ------------ -----------
Numerator for basic and diluted income per share:
Net income............................................................ $ 14,501 $ 19,938 $ 32,908
=========== ============ ===========
Denominator:
Denominator for basic income per share
--weighted-average shares.......................................... 23,589 28,658 31,394
Effect of dilutive securities:
Employee stock options............................................. 429 1,136 1,197
----------- ------------ -----------
Denominator for diluted income per share
--adjusted weighted-average shares................................. 24,018 29,794 32,591
=========== ============ ===========
Basic net income per share................................................ $ 0.61 $ 0.70 $ 1.05
=========== ============ ===========
Diluted net income per share.............................................. $ 0.60 $ 0.67 $ 1.01
=========== ============ ===========
The effect of the convertible notes and related interest expense to
purchase 3,781,440 and 4,151,178 shares of common stock were not included in the
computation of diluted earnings per share because their effect would have been
anti-dilutive.
10. LEASES
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.
F-18
Future minimum payments at December 31, 2001, 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
-------- ----------
2002................................................................................ $ 1,905 $ 5,780
2003................................................................................ 1,229 4,950
2004................................................................................ 880 4,027
2005................................................................................ 470 2,962
2006................................................................................ 466 2,375
Thereafter.......................................................................... 3,600 6,757
-------- ---------
Total minimum lease payments........................................................ 8,550 $ 26,851
=========
Amount representing interest........................................................ (2,700)
--------
Present value of net minimum lease payments (including $1,056
classified as current)...................................................... $ 5,850
========
11. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company is obligated under the asset purchase agreement for the
newly acquired Ashland Regional Medical Center to spend approximately $9,000,000
for capital improvements to renovate the hospital's surgery, intensive care,
radiology and other ancillary departments. We expect to fulfill this commitment
within the first year following acquisition. The Company is obligated under the
asset purchase agreement for the newly acquired Tech Regional Medical Center to
spend approximately $8,000,000 for capital improvements during the first
eighteen months of operations. In addition, the Company is obligated to
construct two new facilities at its Eunice, Louisiana and Belle Glade, Florida
locations contingent upon both existing facilities meeting specified operating
targets. The Eunice and Belle Glade replacement facilities are currently
estimated to cost approximately $20,000,000 and $25,000,000, respectively.
GENERAL LIABILITY CLAIMS
The Company is subject to claims and suits arising in the ordinary
course of business, including claims for damages for personal injuries,
employment-related claims, breach of management contracts and for wrongful
restriction of, or interference with, physicians' staff privileges. In certain
of these actions, plaintiffs may seek punitive or other damages against the
Company, which are generally not covered by insurance. In management's opinion,
the Company is currently not a party to any proceeding that would have a
material adverse effect on the Company's results of operations or financial
condition.
ACQUISITIONS
The Company has acquired and will continue to acquire, hospitals with
prior operating histories. The hospitals that the Company acquires may have
unknown or contingent liabilities, including liabilities for failure to comply
with healthcare laws and regulations. Although the Company obtains contractual
indemnification from sellers covering these matters, such indemnification may be
insufficient to cover material claims or liabilities for past activities of
acquired hospitals.
PHYSICIAN COMMITMENTS
In order to recruit and retain physicians to the communities it serves,
the Company has committed to provide certain financial assistance in the form of
recruiting agreements with various physicians. In consideration for a physician
relocating to one of its' communities and agreeing to engage in private practice
for a specified period of time, the Company may loan certain amounts of money to
a physician, generally not to exceed a period of one year, to assist in
establishing his or her practice. The actual amount of such commitments to be
advanced to physicians is generally based on the physicians net income during
the guarantee period. Amounts advanced under the recruiting agreements are
generally forgiven prorata over a period of 36 months contingent upon the
physician continuing to practice in the respective community. The amounts
advanced and not repaid, in management's opinion, will not have a material
adverse effect on the Company's financial condition or results of operations.
F-19
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 $1,865,000, $2,442,000 and
$2,255,000 for the years ended December 31, 1999, 2000 and 2001, 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 length of service. Plan expenses totaled
$167,000, $175,000 and $381,000 for the years ended December 31, 1999, 2000 and
2001, 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 $1,419,000 at December 31, 2001, based on quoted market
prices for similar debt issues.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 2000,
and 2001 is summarized below (in thousands, except per share data):
QUARTER
-------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ----------
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................................... 0.22 0.18 0.18 0.12
Diluted net income per share................................. 0.21 0.18 0.17 0.11
2001
Net operating revenue........................................ $ 122,436 $ 123,528 $ 131,770 $ 153,004
Income before income taxes................................... 14,669 13,331 11,888 16,850
Net income................................................... 8,508 7,732 6,895 9,773
Basic net income per share................................... 0.27 0.25 0.22 0.31
Diluted net income per share................................. 0.26 0.24 0.21 0.30
F-20
15. SUBSEQUENT EVENTS
On March 14, 2002, the Company announced the signing of a definitive
agreement to acquire Los Alamos Medical Center in Los Alamos, New Mexico. The
acquisition will close after review and approval by the Attorney General of New
Mexico. The 47-bed facility is the only hospital in the community, and serves a
population of approximately 50,000. Current annual revenues are approximately
$31.5 million (unaudited).
On March 18, 2002, the Company announced the signing of a definitive
agreement to acquire Memorial Hospital of Martinsville and Henry County in
Martinsville, Virginia. The acquisition will close after review and approval by
the Attorney General of the Commonwealth of Virginia. The 237-bed facility is
the only hospital in the county, and serves a population in excess of 100,000.
Current annual revenues are approximately $80.3 million (unaudited).
F-21
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, 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
For the year ended December 31, 2001
Allowance for doubtful accounts..................... $ 8,321 $ 49,283 $ 11,899 $ (19,825) $ 49,678
- ----------------------------------
(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