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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1998 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 NO. 0-23639
PROVINCE HEALTHCARE COMPANY
(Exact Name of Registrant as 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:
Name of Each Exchange
Title of Each Class On Which Registered
- ------------------- -------------------
NONE 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 26, 1999 (based upon the closing
price of these shares of $16.063 per share on such date) was $195,176,180.
As of March 26, 1999, 15,722,743 shares of the registrant's Common
Stock were issued and outstanding.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Province Healthcare Company owns and operates acute-care hospitals in
attractive non-urban markets throughout the United States. The Company currently
owns or leases 11 general acute care hospitals in seven states with a total of
808 licensed beds. The Company also provides management services to 51 primarily
non-urban hospitals in 17 states with a total of 3,505 licensed beds. At all of
their hospitals, the Company provides a wide range of both inpatient and
outpatient services, along with a variety of locally-needed specialty services
such as skilled nursing units and a range of rehabilitation care. The Company
seeks to acquire hospitals that are either the sole or primary health care
provider in the community, and then develop that facility into the hub of health
care delivery for the area. After acquiring a hospital, the Company works with
the local leadership team to improve the hospital's operating performance and to
expand the range and scope of services provided to the community.
The Company's objective is to be the leading provider of high quality
health care in selected non-urban markets. Accordingly, there is a specific
target market for potential acquisitions, generally defined as follows: (i) the
facility has a minimum service area population of 20,000 with a stable or
growing employment and economic base; (ii) the facility is the sole or primary
provider of health care services in the community; (iii) the facility has annual
net patient revenue of at least $12.0 million; and (iv) the facility has the
potential to benefit from the expertise and resources provided by Province. The
Company's goal is to acquire annually two to four of the approximately 1,100
hospitals that fit the acquisition profile.
Following the acquisition of a hospital, the Company begins to implement
a number of proven policies and procedures designed to improve the efficiency of
the hospital's operations and maximize its financial performance. The Company's
operating strategy is built on four foundational points: (i) expand the range
and scope of services available in the local market to better serve the
community and increase market share; (ii) improve hospital operations by
implementing appropriate expense controls, maintaining appropriate staffing
levels through the facility, reducing supply costs, and renegotiating certain
vendor contracts; (iii) recruit additional physicians to the community, both
general practitioners and specialty physicians; and (iv) form strong
relationships with local employers and regional tertiary health care providers
to help insure the position of the local hospital as the focal point for the
delivery of health care in the community.
Prior to its 1996 recapitalization and merger with PHC of Delaware, Inc.
("PHC"), the Company operated under the name Brim, Inc. ("Brim"). The current
operations of the Company include the operations of Brim and PHC. Brim and its
predecessors have provided health care services, including managing and
operating non-urban hospitals, since the 1970s. PHC was founded in February 1996
by Golder, Thoma, Cressey, Rauner Fund IV, L.P. and Martin S. Rash
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to acquire and operate hospitals in attractive non-urban markets. In December
1996, Brim was recapitalized (the "Recapitalization"). Subsequently, PHC merged
with a subsidiary of Brim in a transaction accounted for as a reverse
acquisition (the "Merger"). In connection with the Recapitalization, Mr. Rash
and Richard D. Gore were elected as the senior management of the Company.
The Company's management team has extensive experience in acquiring
poorly performing non-urban hospitals and improving their financial operations.
Prior to co-founding PHC, Mr. Rash was the Chief Operating Officer of Community
Health Systems, Inc. ("Community"), which acquires and operates non-urban
hospitals. During Mr. Rash's tenure, Community acquired many non-urban hospitals
and owned or leased 36 hospitals as of December 31, 1995. Mr. Gore was
previously employed as Vice President and Controller of Quorum Health Group,
Inc., which owns, operates and manages acute care hospitals. John M. Rutledge,
the Company's Chief Operating Officer, was previously employed as a Regional
Vice President/Group Director at Community. James Thomas Anderson, the Company's
Senior Vice President of Acquisitions and Development, was previously a Vice
President/Group Director at Community. Both Mr. Rutledge and Mr. Anderson
reported directly to Mr. Rash while at Community.
THE NON-URBAN HEALTH CARE MARKET
According to United States Census Bureau statistics, just over a third
of the people in the United States lives in counties with a population of less
than 150,000. In these non-urban areas, hospitals are typically the primary
resource for health care services, and in many cases the local hospital is the
only provider of acute care services. As of October 1996, there were
approximately 1,500 non-urban hospitals in the country, of which more than 1,100
were owned by not-for-profit or governmental entities.
The Company believes that these non-urban areas provide attractive
markets. Because of the smaller population base, these areas generally only have
one or two hospitals in each market, resulting in less competition. The
resulting strong market position of the hospital(s) in these markets also limits
the entry of alternate providers, such as outpatient surgery centers,
rehabilitation facilities, or diagnostic imaging centers. The demographic
characteristics and relative strength of the local hospital makes non-urban
markets historically less attractive to HMOs and other forms of managed care.
The Company also believes that non-urban communities generally are characterized
by a high level of patient and physician loyalty that fosters a cooperative
relationship between the hospital, physicians, patients, and the community.
While the non-urban health care market presents numerous opportunities,
these hospitals recently have come under considerable pressure. The
not-for-profit and governmental entities that typically own and operate these
hospitals often have limited access to the capital required to keep pace with
the rapid advances in medical technology and to make ongoing capital
improvements. These hospitals also frequently lack the depth and range of
management resources and expertise needed to control expenses, recruit needed
physicians, and expand the range of programs and services. Additionally, the
health care environment is extremely dynamic, with rapidly changing
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regulations and laws. Collectively, this combination of factors may result in
poor operating performance, a decline in the range of services available
locally, a physician community that feels it cannot provide appropriate levels
of care, and a community perception of subpar quality of care. As a result
patients, by choice or physician direction, leave the community for care. This
out migration often leads to a further downward spiral, both economically and
through community perception, further limiting the hospital's ability to address
the issues that initially led to these pressures.
As a result of these issues, not-for-profit and governmental hospitals
increasingly are looking to sell or lease these hospitals to entities like the
Company, that have the capital resources and the management expertise to better
serve the community. The Company believes that a significant opportunity for
consolidation exists in the non-urban health care market.
BUSINESS STRATEGY
The Company's objective is to be the leading provider of high quality
health care services in selected non-urban markets. The key elements of the
Company's strategy are to:
Acquire Hospitals in Attractive Non-Urban Markets. The Company seeks to
acquire hospitals that are the sole or primary provider of health care services
in their markets and that present the opportunity to increase profitability and
local market share. Approximately 1,100 non-urban hospitals fit the Company's
acquisition profile, and the Company's goal is to acquire two to four such
hospitals each year.
Expand Breadth of Services to Increase Local Market Share. The Company
seeks to provide additional health care services and programs in response to
community needs. These services may include specialty inpatient services,
outpatient services, home health care and mental health clinics. The Company
also may make capital investments in technology and the physical plant to
further improve both the quality of health care and the reputation of the
hospital in the community. By providing a broader range of services and a more
attractive care setting, the Company believes it can reduce patient migration
and increase hospital revenues.
Improve Hospital Operations. Following the acquisition of a hospital,
the Company augments local management with appropriate operational and financial
managers and installs its standardized information system. The local management
team implements appropriate expense controls, manages staffing levels according
to patient volumes, reduces supply costs by requiring strict compliance with the
Company's supply arrangements, and renegotiates certain vendor contracts.
Recruit Physicians. The Company believes that recruiting physicians to
local communities is key to increasing the quality and breadth of health care.
The Company works with the local hospital board, management and medical staff to
determine the number and type of additional physicians needed in the community.
The Company's corporate physician recruiting staff then assists the local
management team in identifying and recruiting specific physicians to the
community to meet those needs.
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Develop Health Care Networks. The Company forms networks to address
local employers' integrated health care needs and to solidify the position of
the Company's hospitals as the focal point of their respective community's
health care delivery system. As part of its efforts to develop these networks,
the Company seeks relationships with regional tertiary care providers.
ACQUISITION PROGRAM
The Company's goal is to acquire two to four hospitals each year that
are the sole or primary providers of health care services in attractive
non-urban markets. The Company acquires hospital operations by purchasing
hospitals or by entering into long-term leases. The Company targets acquisition
candidates that: (i) have a minimum services area population of 20,000 with a
stable or growing employment base; (ii) are the sole or primary providers of
health care services in the community; (iii) have annual net patient revenue of
at least $12.0 million; and (iv) have financial performance that will benefit
from management's proven operating skills. There are approximately 1,100
hospitals in the United States that meet the Company's target criteria.
In addition to responding to requests for proposals from entities that
are seeking to sell or lease a hospital, the Company proactively identifies
acquisition targets. Also, the Company seeks to acquire selected hospitals to
which it already provides contract management services. The Company also
identifies attractive markets and hospitals and initiates meetings with hospital
systems, comprised of one or more urban tertiary care hospitals and a number of
non-urban hospitals, to discuss acquiring non-urban hospitals or operating them
through a joint venture. Such joint ventures allow the health system to maintain
an affiliation for providing tertiary care to the non-urban hospitals without
the management responsibility.
The Company believes that it generally takes six to 12 months between
the hospital owner's decision to accept offers and the consummation of a sale or
lease. After a potential acquisition has been identified, the Company undertakes
a systematic approach to evaluating and closing the transaction. The Company
begins the acquisition process with a thorough due diligence review of the
target hospital. The Company utilizes its 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 its due diligence review, the Company prepares an operating plan
for the target hospital, identifies opportunities for operating efficiencies and
physician recruiting needs, and assesses productivity and management information
systems. Throughout the process, the Company works closely with community
leaders in order to enhance both the community's understanding of the Company's
philosophy and abilities and the Company's knowledge of the needs of the
community.
The competition to acquire non-urban hospitals is intense, and the
Company believes that often the acquiror will be selected for a variety of
reasons, not exclusively on the basis of price. The Company believes it is well
positioned to compete for acquisitions for several reasons. The Company's
management team has extensive experience in acquiring and operating previously
under-performing non-urban hospitals. The Company also benefits from access to
capital, strong
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financial and operating systems, a national purchasing organization, and
training programs. The Company believes its strategy of increasing access
to, and quality of, health care in the communities served by its hospitals
aligns its interests with those of the communities. The Company believes that
the alignment of interests with the community, the Company's reputation for
providing market-specific, high quality health care, and its focus on physician
recruiting enable the Company to compete successfully for acquisitions.
During 1996, PHC purchased Memorial Mother Frances Hospital in
Palestine, Texas and leased Starke Memorial Hospital in Knox, Indiana, and Brim
leased Parkview Regional Hospital in Mexia, Texas. In August 1997, the Company
leased Colorado River Medical Center. The Company provided management services
to Parkview Regional Hospital and Colorado River Medical Center prior to their
respective acquisitions.
On May 1, 1998, Province acquired Havasu Samaritan Regional Hospital in
Lake Havasu City, Arizona, and on June 11, 1998, the Company acquired Elko
General Hospital in Elko, Nevada. In December 1998, the Company exercised its
option to purchase General Hospital in Eureka, California, which it had leased
since 1986. In June 1998, the Company entered into a Lease and Management
Agreement for Moosa Memorial Hospital (also known as Eunice Regional Medical
Center) in Eunice, Louisiana, which the Company had managed since March 1998.
The Company managed this hospital until the acquisition closed on February 22,
1999. Each of the six hospitals acquired by the Company, and three of the
hospitals acquired by Brim prior to the Merger, have been acquired from
not-for-profit or governmental entities.
HOSPITAL OPERATIONS
Following the acquisition of a hospital, the Company implements its
systematic policies and procedures to improve the hospital's operating and
financial performance. The Company implements 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. The Company also plans to form
health care networks with employers in the community and regional tertiary care
hospitals. Management believes that the long-term growth potential of a hospital
is dependent on the Company's ability to add appropriate health care services
and effectively recruit physicians.
Each hospital management team is comprised of a chief executive officer,
chief financial officer and chief nursing officer. The Company believes 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 the Company's operating plan. The operating plan is developed by
the local management team in conjunction with the Company's senior management
team and sets forth revenue enhancement strategies and specific expense
benchmarks. The Company has implemented a performance-based compensation program
for each local management team based upon the achievement of the goals set forth
in the operating plan.
While the local management team is responsible for the day-to-day
operations of the hospitals, the Company's corporate staff provides support
services to each hospital, including
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physician recruiting, corporate compliance, reimbursement, 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. The Company
promotes communication among its hospitals so that local expertise and
improvements can be shared throughout the Company's network.
As part of the Company's efforts to improve access to high quality
health care in the communities it serves, the Company adds appropriate services
at its hospitals. Services and care programs added may include specialty
inpatient services, such as cardiology, skilled nursing, rehabilitation and
subacute care, and outpatient services such as same-day surgery. The Company
also provides home health care services. Management believes 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. The Company also makes capital investments
in technology and facilities to increase the quality and breadth of services
available in the communities. By increasing the services provided at the
Company's hospitals and upgrading the technology used in providing such
services, the Company believes that it improves the quality of care and the
hospitals' reputation in each community, which in turn may increase patient
census and revenue.
To achieve the operating efficiencies set forth in the operating plan,
the Company (i) evaluates existing hospital management; (ii) adjusts staffing
levels according to patient volumes using best demonstrated practices by
department; (iii) capitalizes on purchasing efficiencies and renegotiates
certain vendor contracts; and (iv) installs a standardized management
information system. The Company also enforces strict protocols for compliance
with the Company's supply contracts. All of the Company's owned and leased
hospitals currently purchase supplies and certain equipment pursuant to an
arrangement between the Company and a large investor-owned hospital company.
Vendor contracts also are evaluated, and based on cost comparisons, such
contracts are either renegotiated or terminated. The Company prepares for the
transition of management information systems to its standardized system prior to
the completion of an acquisition, so that the newly-acquired hospital can
typically begin using the Company's management information systems immediately
following completion of the acquisition.
The Company works with local hospital boards, management and medical
staff to determine the number and type of additional physicians needed in the
community. The Company's 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 the Company's hospitals are identified by the Company's
internal physician recruiting staff, which is supplemented by the efforts of
independent recruiting firms. When recruiting a physician to a community, the
Company generally guarantees the physician a minimum level of revenue during a
limited initial period and assists the physician with his or her transition to
the community. The Company requires the physician to repay some or all of the
amounts expended for such assistance in the event the physician leaves the
community within a specified period. The Company prefers not to employ
physicians, and relocating physicians rarely become employees of the Company.
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Owned and Leased Hospitals
The Company currently owns or leases and operates 11 general acute care
hospitals in California, Texas, Arizona, Colorado, Indiana, Nevada and
Louisiana, with a total of 808 licensed beds. Nine of the Company's 11 hospitals
are the only hospital in the town in which they are located. The owned and
leased hospitals represented 88.8% and 92.3% of the Company's net operating
revenues for the years ended December 31, 1997 and 1998, respectively.
The Company's 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 services and physical therapy. The
Company's hospitals also frequently provide certain specialty services which
include skilled nursing, rehabilitation and home health care services. The
Company's hospitals 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 the Company's owned and leased hospitals as of March 26, 1999:
Licensed Owned
Hospital Beds Leased
- -------- ---- ------
Colorado Plains Medical Center
Fort Morgan, Colorado 50 Leased(1)
Colorado River Medical Center
Needles, California 53 Leased(2)
Elko General Hospital
Elko, Nevada 50 Owned(3)
Eunice Regional Medical Center
Eunice, Louisiana 85 Leased (4)
General Hospital
Eureka, California 83 Owned (5)
Havasu Samaritan Regional Hospital
Lake Havasu City, Arizona 119(6) Owned
Memorial Mother Frances Hospital
Palestine, Texas 104 Owned(7)
Ojai Valley Community Hospital
Ojai, California 116(8) Owned
Palo Verde Hospital
Blythe, California 55 Leased(9)
Parkview Regional Hospital
Mexia, Texas 44 Leased(10)
Starke Memorial Hospital
Knox, Indiana 49 Leased(11)
---
Total 808
===
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(1) The lease expires in April 2014 and is subject to a five-year renewal
term. The Company has a right of first refusal to purchase the hospital.
(2) The lease expires in July 2012, and is subject to three five-year
renewal terms. The Company has a right of first refusal to purchase the
hospital.
(3) The Company contractually has agreed to construct a replacement facility
within 36 months of the acquisition date. This facility was acquired on
June 11, 1998.
(4) The lease expires in June 2008, and is subject to a five-year renewal
option. The Company contractually has agreed to construct a replacement
facility upon the hospital reaching a pre-determined level of net
patient revenue; the existing lease would automatically terminate at the
time the replacement hospital commences operations.
(5) The lease had an expiration date of December 2000. The Company exercised
its option to purchase the hospital in December 1998.
(6) Includes a 20-bed skilled nursing facility.
(7) The hospital is owned by a partnership of which a subsidiary of the
Company is the sole general partner (with a 1.0% general partnership
interest) and another subsidiary of the Company has a 94.0% limited
partnership interest, subject to an option by the other limited partner
to acquire an additional 5.0% interest.
(8) Includes a 66-bed skilled nursing facility.
(9) The lease expires in December 2002, and is subject to a ten-year renewal
option. The Company has the option to purchase the hospital at any time
prior to termination of the lease, subject to regulatory approval.
(10) The lease expires in January 2011, and is subject to two five-year
renewal terms. The Company has a right of first refusal to purchase the
hospital.
(11) The lease expires in September 2016, and is subject to two ten-year
renewal options. The Company has a right of first refusal to purchase
the hospital.
Colorado Plains Medical Center is located approximately 70 miles
northeast of Denver and is the only hospital in town. 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. In 1997, Colorado Plains completed an $8.5 million
expansion project that included expansion of surgery, recovery, emergency room
and radiology facilities as well as a new entrance. The hospital provides home
health services, and opened an inpatient rehabilitation unit in September 1998.
The closest competing hospitals are located approximately 50 miles away.
Colorado Plains is a sole community provider as designated under Medicare and
has a service area population of approximately 43,000.
Colorado River Medical Center is located approximately 100 miles south
of Las Vegas, Nevada and is the only hospital in town. The hospital purchased
two home health agencies and opened an inpatient cardiac rehabilitation unit in
August 1998. The hospital's primary competitor is located approximately 20 miles
away. Colorado River is a sole community provider as designated under Medicare
and has a service area population of approximately 47,000.
Elko General Hospital is located approximately 290 miles from Reno,
Nevada and 225 miles from Salt Lake City, Utah, and is the largest hospital
between those two cities. The Elko region has experienced rapid population
growth over the last five years, with gold mining and gaming being the primary
industries. The Company acquired this hospital on June 11, 1998 and expects to
construct and open a replacement hospital facility within 36 months of the
acquisition date. Elko is a sole community provider as designated under Medicare
and has a service area population of approximately 65,000.
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Eunice Regional Medical Center is located in Eunice, Louisiana and is
the only hospital in town. The hospital is located 45 miles northeast of
LaFayette, Louisiana and 70 miles west of Baton Rouge. The nearest competitor is
located approximately 15 miles away. The hospital previously was managed by the
Company. The hospital's service area population is approximately 20,000.
General Hospital is located approximately 300 miles north of San
Francisco. The hospital also operates an ambulatory surgery center and a home
health agency that are located near the hospital. The Company recently completed
a renovation of General Hospital's obstetrical unit and opened a rehabilitation
unit in September 1998. There is one other hospital in Eureka, and two small
hospitals located 15 and 20 miles away. The nearest tertiary care hospitals are
located approximately 160 miles away. General Hospital's service area population
is approximately 122,000.
Havasu Samaritan Regional Hospital is located approximately 180 miles
from Phoenix, Arizona and 130 miles from Las Vegas, Nevada, and is the only
hospital in town. The hospital is located in the 16th fastest growing county in
the United States, according to United States Census Bureau statistics. The
Company acquired this hospital on May 1, 1998. The hospital currently provides
general acute care, skilled nursing care, radiation, oncology and diagnostic
services, including the recent addition of a cardiac catheterization lab. Havasu
is a sole community provider as designated under Medicare and has a service area
population of approximately 70,000.
Memorial Mother Frances Hospital is located approximately halfway
between Dallas and Houston, and approximately 50 miles from Tyler, Texas. The
hospital provides home health care, and operates rural health clinics. Recently
10 beds were added to its inpatient rehabilitation unit, thereby expanding unit
capacity to 22 beds. Memorial Mother Frances Hospital has a relationship with a
tertiary care hospital in Tyler. The hospital's primary competitor also is
located in Palestine. The hospital's service area population is approximately
104,000.
Ojai Valley Community Hospital is located approximately 85 miles
northeast of Los Angeles and is the only hospital in town. Along with its 50-bed
acute care hospital, Ojai Valley has a 66-bed skilled nursing facility. In 1997,
Ojai Valley purchased a home health business and opened a rural health clinic in
a neighboring town. The hospital's primary competitors are located 18 to 20
miles away, but due to the geography and traffic conditions, such hospitals are
30 to 60 minutes away by vehicle. The hospital's service area population is
approximately 30,000.
Palo Verde Hospital is located in southeast California near the Arizona
border. It is 120 miles east of Palm Springs, California and is the only
hospital in town. The hospital provides home health care, and opened an
outpatient physical therapy department in 1998. The hospital's primary
competitors are one small hospital located 45 miles away and two large hospitals
located
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approximately 100 miles away. Palo Verde Hospital is a sole community provider
as designated under Medicare and has a service area population of approximately
20,000 that increases substantially during the winter months due to a seasonal
inflow of residents.
Parkview Regional Hospital is located approximately 40 miles east of
Waco, Texas and is the only hospital in town. In 1997, the hospital completed a
$5.7 million expansion and renovation project which included a new emergency
room and new radiology, surgery and inpatient rehabilitation departments. The
hospital's primary competitors are hospitals located 35 to 40 miles away. The
hospital's service area population is approximately 40,000.
Starke Memorial Hospital is located approximately 50 miles from South
Bend, Indiana and is the only hospital in town. Starke Memorial's primary
competitors are two large hospitals, located approximately 30 and 35 miles away.
The hospital's service area population is approximately 25,000.
The Company also owns a 48,000 square foot office building in Portland,
Oregon and leases approximately 26,600 square feet of office space for its
corporate headquarters in Brentwood, Tennessee under a seven-year lease that
expires on March 31, 2005 and contains customary terms and conditions.
Operating Statistics
The following table sets forth certain operating statistics for the
Company's owned or leased hospitals for each of the periods presented.
Company (Successor)
Brim (Predecessor) --------------------------------------------
Period Period
January 1 to Feb. 2 to Year Ended December 31,
December 18, December 31, -------------------------
1996 1996 1997 1998
---- ---- ---- ----
Hospitals owned or leased (at end
of period) 5 7 8 10
Licensed beds (at end of period) 371 513 570 723
Beds in service (at end of period) 266 393 477 647
Admissions 9,496 1,964 15,142 21,538
Average length of stay (days)(1) 5.9 4.3 5.6 5.1
Patient days 56,310 8,337 84,386 110,872
Adjusted patient days (2) 96,812 15,949 149,567 196,097
Occupancy rate (% of licensed
beds) (3) 43.1% 39.5% 40.6% 42.0%
Occupancy rate (% of beds in
service)(4) 60.1% 51.3% 48.5% 46.9%
Net patient service revenue
(in thousands) $87,900 $16,425 $149,296 $217,364
Gross outpatient service revenue
(in thousands) $64,472 $14,088 $110,879 $161,508
Gross outpatient service revenue
(% of gross patient service revenue) 43.4% 48.2% 44.5% 43.5%
(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 (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 revenues to equivalent patient
days.
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(3) Percentages are calculated by dividing average daily census by average
licensed beds.
(4) Percentages are calculated by dividing average daily census by average
beds in service.
Sources of Revenue
The Company receives payments for patient care from private insurance
carriers, federal Medicare programs for elderly and disabled patients, HMOs,
preferred provider organizations ("PPOs"), state Medicaid programs, the Civilian
Health and Medical Program of the Uniformed Services ("CHAMPUS"), employers and
patients directly. See "Item 7. Management's Discussion and Analysis of Results
of Operations and Financial Condition."
The following table sets forth the percentage of the patient days of
the Company's owned and leased hospitals (excluding the 66-bed skilled nursing
facility at Ojai Valley Community Hospital) from various payors for the periods
indicated. The data for the periods presented are not strictly comparable
because of the significant effect that acquisitions have had on the Company. See
"Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition."
Period
February 2 to Year Ended December 31,
December 31, --------------------------
Source 1996 1997 1998
- ------ ------ ------ ------
Medicare 63.3% 60.3% 57.8%
Medicaid 12.0 13.1 11.1
Private and other sources 24.7 26.6 31.1
------ ------ ------
Total 100.0% 100.0% 100.0%
====== ====== ======
All percentages in the table above exclude the 66-bed skilled nursing facility
at Ojai Valley Community Hospital. Substantially all of the patient days at the
Ojai Valley skilled nursing facility are provided by Medicaid. The Ojai Valley
skilled nursing facility utilization is as follows:
Private and
Medicare Medicaid Other Sources
-------- -------- -------------
Period February 2 to December 31, 1996 16.0% 68.6% 15.4%
Year ended December 31, 1997 11.8 76.2 12.0
Year ended December 31, 1998 7.8 80.9 11.3
Quality Assurance
The Company's hospitals implement quality assurance procedures to ensure a
consistently high 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
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technological support provided to the physician. The Company surveys all of its
patients either during their stay at the hospital or subsequently by mail to
identify potential areas of improvement. All of the Company's hospitals are
accredited by the Joint Commission on Accreditation of Health Care
Organizations.
Regulatory Compliance Program
The Company has developed a corporate-wide compliance program overseen
by a Vice President of Corporate Compliance. The Company's compliance program
focuses on all areas of regulatory compliance, including physician recruitment,
reimbursement and cost reporting practices, billing, health information
management, laboratory and home health care operations. The Company has
conducted on-site compliance training for all of the employees at its owned
hospitals, corporate and management company entities. The Company also maintains
a toll-free hotline to permit employees to report compliance concerns on an
anonymous basis. The Company regularly monitors its corporate compliance program
to respond to developments in health care regulation and the industry.
MANAGEMENT SERVICES
The Company's management services division provides comprehensive
management services to 51 primarily non-urban hospitals in 17 states with a
total of 3,505 licensed beds. These services are provided under three to
five-year contracts with the Company. The Company generally provides a chief
executive officer, who is an employee of the Company, and may also provide a
chief financial officer. The Company typically does not employ other hospital
personnel. The Company provides a continuum of solutions to the problems faced
by these hospitals through services which may include instituting new financial
and operating systems and various management initiatives, such as establishing a
local or regional provider network to efficiently meet a community's health care
needs. Management believes the Company'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 division represented 10.7% and 7.7% of net operating
revenue for the years ended December 31, 1997 and 1998, respectively. PHC did
not provide management services until its acquisition of Brim on December 18,
1996.
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 the Company's hospitals face less
competition in their immediate patient service areas than would be expected in
larger communities. While the Company's hospitals are generally the primary
provider of health care services in their respective communities, its hospitals
face competition from larger tertiary care centers and, in some cases, other
non-urban hospitals. Some of the hospitals that compete with the Company are
owned by governmental agencies or not-for-profit entities supported by
endowments
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and charitable contributions, and can finance capital expenditures on a
tax-exempt basis.
The Company faces competition for acquisitions primarily from for-profit
hospital management companies as well as not-for-profit entities. Some of the
Company's competitors have greater financial and other resources than the
Company. Increased competition for the acquisition of non-urban acute care
hospitals could have an adverse impact on the Company's ability to acquire such
hospitals on favorable terms.
EMPLOYEES AND MEDICAL STAFF
As of March 1, 1999, the Company had 2,785 "full-time equivalent"
employees, including 32 corporate personnel and 139 management company
personnel. The remaining employees, most of whom are nurses and office
personnel, work at the hospitals. The Company considers relations with its
employees to be good.
The Company typically does not employ physicians and, as of March 1,
1999, the Company employed only 12 practicing physicians. Certain of the
Company's hospital services, including emergency room coverage, radiology,
pathology and anesthesiology services, are provided through independent
contractor arrangements with physicians.
GOVERNMENT REIMBURSEMENT
Medicare payments for acute hospital services are based on a prospective
payment system ("PPS"). Under PPS, a hospital receives a fixed amount for
inpatient hospital services based on the established fixed payment amount per
discharge for categories of hospital treatment known as diagnosis related groups
("DRGs"). DRG payments do not consider a specific hospital's costs, but are
national rates adjusted for area wage differentials. Psychiatric services,
long-term care, rehabilitation, pediatric services, certain designated
research hospitals and distinct parts of rehabilitation and psychiatric units
within hospitals are currently exempt from PPS and are reimbursed on a
cost-based system, subject to specific reimbursement caps (known as TEFRA
limits). For the year ended December 31, 1998, the Company had five units
reimbursed under the TEFRA methodology.
For several years, the percentage increases to the DRG rates have been
lower than the percentage increases in the cost of goods and services purchased
by general hospitals. The index used to adjust the DRG rates is based on the
cost of goods and services purchased by hospitals as well as those purchased by
non-hospitals (the "Market Basket"). The historical Market Basket rates of
increase were 1.5%, 2.0% and 2.5% for federal fiscal years 1997, 1998 and 1999,
respectively. However, the Balanced Budget Act of 1997 (the "1997 Act") set the
DRG rate of increase for federal fiscal year 1998 at zero percent. The 1997 Act
set the DRG rates of increase for future federal fiscal years at rates that will
be based on the Market Basket rates less reduction factors of 1.9% in 1999, 1.8%
in 2000, and 1.1% in 2001 and 2002. The Company anticipates that future
legislation may further decrease the rates of increase for DRG payments, but
does not know the amount of the final reduction.
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Outpatient services provided by general hospitals are reimbursed by
Medicare at the lower of customary charges or approximately 90% of actual cost,
subject to additional limits on the reimbursement of certain outpatient
services. The 1997 Act mandated the implementation of a PPS for Medicare
outpatient services by January 1, 1999. This outpatient PPS system will be based
on a system of Ambulatory Payment Categories ("APCs"). Each APC will represent a
bundle of outpatient services and each APC will be assigned a fully prospective
reimbursement rate. Because implementing regulations with respect to outpatient
PPS have not been promulgated, the Company is not able to predict the full
impact of this provision of the 1997 Act. The Health Care Financing
Administration ("HCFA") has announced that the implementation of outpatient PPS
will be delayed until January 1, 2000 or later.
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 Company's
current operations are in states that have historically had well-funded Medicaid
programs with adequate payment rates.
The Company owns or leases four hospitals in California. The Medicaid
program in California, known as Medi-Cal, reimburses hospital inpatient cost on
one of three methods: (i) cost-based, subject to various limits known as
MIRL/Peer Group limits; (ii) negotiated rates per discharge or per diems for
hospitals under contract; or (iii) managed care initiatives, where payment rates
tend to be capitated and networks must be formed. Three of the Company's four
California hospitals are cost-based for Medi-Cal and the other is paid under the
negotiated contract method. None of the Company's cost-based hospitals is
currently subject to a MIRL/Peer Group limit, because its cost per discharge has
historically been below the limit. There can be no assurance that this will
remain the case in the future. Medi-Cal currently has a managed care initiative
that is primarily targeted at urban areas. The Company does not expect that
Medi-Cal will begin rural managed care contracting in the near future.
Medicare has special payment provisions for "Sole Community Hospitals"
or SCHs. An SCH is generally the only hospital in at least a 35-mile radius.
Colorado Plains, Colorado River, Elko, Havasu and Palo Verde qualify as SCHs
under Medicare regulations. Special payment provisions related to SCHs include a
higher DRG rate, which is based on a blend of hospital-specific costs and the
national DRG rate; and a 90% payment "floor" for capital cost. In addition, the
CHAMPUS program has special payment provisions for hospitals recognized as SCHs
for Medicare purposes.
The Medicare, Medicaid and CHAMPUS 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 requires many
years, because of audits by the program representatives, providers' rights of
appeal and the
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application of numerous technical reimbursement provisions. Management believes
that adequate provision has been made for such adjustments. Until final
adjustment, however, significant issues remain unresolved and previously
determined allowances could become either inadequate or more than ultimately
required.
HEALTH CARE REFORM, REGULATION AND LICENSING
Certain Background Information
Health care, as one of the largest industries in the United States,
continues to attract much legislative interest and public attention. Medicare,
Medicaid, and other public and private hospital cost-containment programs,
proposals to limit health care spending, proposals to limit prices and industry
competitive factors are among the many factors that are highly significant to
the health care industry. In addition, the health care industry is governed by a
framework of federal and state laws, rules and regulations that are extremely
complex and for which the industry has the benefit of only limited regulatory or
judicial interpretation. Although the Company believes it is in compliance in
all material respects with such laws, rules and regulations, if a determination
is made that the Company was in violation of such laws, rules or regulations,
its business, financial condition and results of operations could be materially
adversely affected.
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 the Company and proposals to increase co-payments and deductibles from
program and private patients. The Company's 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 fewer of certain treatments and
procedures being performed. Utilization review entails the review of the
admission and course of treatment of a patient by a third party. Utilization
review by third-party peer review organizations ("PROs") is required in
connection with the provision of care paid for by Medicare and Medicaid.
Utilization review by third parties is also required under many managed care
arrangements.
Many states have enacted, or are considering enacting, measures that are
designed to reduce their Medicaid expenditures and to make certain changes to
private health care insurance. Various states have applied, or are considering
applying, for a federal waiver from current Medicaid regulations to allow them
to serve some of their Medicaid participants through managed care providers.
These proposals also may attempt to include coverage for some people who
presently are uninsured, and generally could have the effect of reducing
payments to hospitals, physicians and other providers for the same level of
service provided under Medicaid.
Certificate of Need Requirements
Some states require approval for purchase, construction and expansion of
health care facilities, including findings of need for additional or expanded
health care facilities or services. Certificates of Need ("CONs"), which are
issued by governmental agencies with jurisdiction over
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health care facilities, are at times required for capital expenditures exceeding
a prescribed amount, changes in bed capacity or services and certain other
matters. However, Texas and California, states in which the Company operates six
of its 11 hospitals, do not currently require CONs for hospital construction or
changes in the mix of services. The Company is unable to predict whether it will
be able to obtain any CON that may be necessary to accomplish its business
objectives in any jurisdiction where such CON is 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 (the "Anti-kickback
Amendments"), prohibit certain business practices and relationships that might
affect the provision and cost of health care services reimbursable under
Medicare and Medicaid, 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 Amendments 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 has issued regulations that create safe
harbors under the Anti-kickback Amendments ("Safe Harbors"). A given business
arrangement that does not fall within a Safe Harbor is not per se illegal;
however, business arrangements of health care services providers 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, broadened the scope of
certain fraud and abuse laws, such as the Anti-kickback Amendments, to include
all health care services reimbursed under a federal program or state healthcare
programs.
The Company provides financial incentives to recruit physicians into the
communities served by its hospitals, including payments of relocation expenses
and minimum cash collection guarantees, and structures these incentives so as to
fall within a proposed safe harbor for physician recruitment. However, the
proposed safe harbor for physician recruitment has never been finalized.
Although the Company is not subject to the Internal Revenue Service Revenue
Rulings and related authority addressing recruitment activities by tax-exempt
facilities, management believes that such IRS authority tends to set the
industry standard for acceptable recruitment activities. The Company believes
that its recruitment policies are being conducted in accordance with the IRS
authority and industry practice.
The Company also enters into certain leases with physicians and is a
party to one joint venture with physicians. The Company believes that these
arrangements do not violate the Anti-kickback Amendments. There can be no
assurance that regulatory authorities who enforce the Anti-kickback Amendments
will not determine that the Company's physician recruiting activities or other
physician arrangements violate the Anti-kickback Amendments or other federal
laws. Such a determination could subject the Company to liabilities under the
Social Security Act, including exclusion of the Company from participation in
Medicare and Medicaid.
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There is increasing scrutiny by law enforcement authorities, the Office
of Inspector General ("OIG") of the Department of Health and Human Services
("HHS"), the courts, and Congress of arrangements between health care providers
and potential referral sources to ensure that the arrangements are not designed
as a mechanism to exchange remuneration for patient care referrals and
opportunities. Investigators also have demonstrated a willingness to look behind
the formalities of a business transaction to determine the underlying purpose of
payments between health care providers and potential referral sources.
Enforcement actions have increased, as evidenced by recent highly publicized
enforcement investigations of certain hospital activities. To its knowledge, the
Company is not currently the subject of any investigation that is likely to have
a material adverse effect on its business, financial condition or results of
operations. There can be no assurance that the Company and its hospitals will
not be the subject of investigations or inquiries in the future.
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 (the "Stark
Laws"). A person making a referral, or seeking payment for services referred, in
violation of the Stark Laws would be subject to the following sanctions: (i)
civil money penalties of up to $15,000 for each service; (ii) assessments equal
to twice the dollar value for each service; and/or (iii) exclusion from
participation in the Medicare Program (which can subject the person or entity to
exclusion from participation in state health care programs). Further, if any
physician or entity enters into an arrangement or scheme that the physician or
entity knows or should know has the principal purpose of assuring referrals by
the physician to a particular entity, and the physician directly makes referrals
to such entity, then such physician or entity could be subject to a civil money
penalty of up to $100,000. Many states have adopted or are considering similar
legislative proposals, some of which extend beyond the Medicaid program, to
prohibit the payment or receipt of remuneration for the referral of patients and
physician self-referrals regardless of the source of the payment for the care.
The Company's contracts with physicians on the medical staff of its hospitals
and its participation in and development of joint ventures and other financial
relationships with physicians could be adversely affected by these amendments
and similar state enactments.
The Company is unable to predict the future course of federal, state and
local regulation or legislation, including Medicare and Medicaid statutes and
regulations. Further changes in the regulatory framework or in the
interpretation of these laws, rules and regulations could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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Environmental Regulations
The Company's health care operations generate medical waste that must be
disposed of in compliance with federal, state and local environmental laws,
rules and regulations. The Company's operations, as well as the Company's
purchases and sales of facilities, also are subject to various other
environmental laws, rules and regulations.
Health Care Facility Licensing Requirements
The Company's health care facilities are subject to extensive federal,
state and local legislation and regulation. In order to maintain their operating
licenses, health care facilities must comply with strict standards concerning
medical care, equipment and hygiene. Various licenses and permits also are
required in order to dispense narcotics, operate pharmacies, handle radioactive
materials and operate certain equipment. The Company's health care facilities
hold all required governmental approvals, licenses and permits. All licenses,
provider numbers and other permits or approvals required to perform the
Company's business operations are held by subsidiaries of the Company. All of
the Company's hospitals are fully accredited by the Joint Commission on
Accreditation of Health Care Organizations.
Utilization Review Compliance and Hospital Governance
The Company's health care facilities are subject to and comply with
various forms of utilization review. In addition, under the Medicare PPS, each
state must have a PRO to carry out a federally mandated system of review of
Medicare patient admissions, treatments and discharges in hospitals. Medical and
surgical services and practices are extensively supervised by committees of
staff doctors at each health care facility, are overseen by each health care
facility's local governing board, the primary voting members of which are
physicians and community members, and are reviewed by the Company's quality
assurance personnel. The local governing boards also help maintain standards for
quality care, develop long-range plans, establish, review and enforce practices
and procedures and approve the credentials and disciplining of medical staff
members.
Governmental Developments Regarding Sales of Not-for-Profit Hospitals
In recent years, the legislatures and attorneys general of several
states have shown a heightened level of interest in transactions involving the
sale of non-profit hospitals. Although the level of interest varies from state
to state, the trend is to provide for increased governmental review, and in some
cases approval, of transactions in which not-for-profit corporations sell a
health care facility. Attorneys general in certain states, including California,
have been especially active in evaluating these transactions. Although the
Company has not yet been affected adversely as a result of these trends, such
increased scrutiny may increase the difficulty or prevent the completion of
transactions with not-for-profit organizations in certain states in the future.
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California Seismic Standards
California recently adopted a law requiring standards and regulations to
be developed to ensure hospitals meet seismic performance standards. Within
three years after adoption of the standards by the California Building Standards
Commission, owners of subject properties are to evaluate their facilities and
develop a plan and schedule for complying with the standards. The Commission has
adopted evaluation criteria, and in 1998 adopted the retrofit standards. The
Company will be required to conduct engineering studies of its California
facilities to determine whether and to what extent modifications to its
facilities will be required. In order to comply with the seismic standards, the
Company could incur significant capital costs. These costs may, in turn, have a
material adverse effect on the Company's financial condition or results of
operations.
PROFESSIONAL LIABILITY
As part of its business, the Company is subject to claims of liability
for events occurring as part of the ordinary course of hospital operations. To
cover these claims, the Company maintains professional malpractice liability
insurance and general liability insurance in amounts that management believes
to be sufficient for its operations, although some claims may exceed the scope
of the coverage in effect. The Company also maintains umbrella coverage. At
various times in the past, the cost of malpractice and other liability insurance
has risen significantly. Therefore, there can be no assurance that such
insurance will continue to be available at a reasonable price for the Company to
maintain adequate levels of insurance.
Through its typical hospital management contract, the Company attempts
to protect itself 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 the Company as an additional
insured party on the hospital's professional and comprehensive general liability
policies. The Company's management contracts specifically provide for the
indemnification of the Company by the hospital against claims that arise out of
the actions of the hospital employees, medical staff members and other personnel
who are not employees of the Company. 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 the Company's hospital facilities and other
properties can be found in Item 1 of this Report under the caption, "Business -
Hospital Operations - Owned and Leased Hospitals."
ITEM 3. LEGAL PROCEEDINGS
The 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
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contracts or for wrongful restriction of or interference with physician's staff
privileges. In certain of these actions, plaintiffs request punitive or other
damages that may not be covered by insurance. The Company is currently not a
party to any proceeding which, in management's opinion, would have a material
adverse effect on the Company's 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
The Company's Common Stock is quoted on the Nasdaq National Market
("Nasdaq") under the symbol "PRHC." The Company's Common Stock began publicly
trading on February 11, 1998. From February 11, 1998 through December 31, 1998,
the high and low sales prices for the Company's Common Stock as reported
by Nasdaq, were as follows:
1998 QUARTER ENDED HIGH LOW
------------------ ----------- -----------
March 31 $ 27.125 $ 18.875
June 30 29.625 23.000
September 30 37.250 25.375
December 31 36.000 20.250
As of March 26, 1999, there were approximately 251 record holders of the
Company's Common Stock.
The Company historically has retained and currently intends to retain
all earnings to finance the development and expansion of its operations and,
therefore, does not anticipate paying cash dividends or making any other
distributions on its shares of Common Stock in the foreseeable future.
Furthermore, the Company's credit facilities contain restrictions on the
Company's ability to pay dividends. The Company's future dividend policy will be
determined by its Board of Directors on the basis of various factors, including
the Company's results of operations, financial condition, business
opportunities, capital requirements and such other factors as the Board of
Directors may deem relevant.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of
(i) the Company's predecessor (Brim) as of and for each of the two years ended
December 31, 1995, and as of December 18, 1996 and for the period January 1,
1996 to December 18, 1996, and (ii) the Company as of December 31, 1996, 1997
and 1998, and for the period February 2, 1996 to December 31, 1996 and the years
ended December 31, 1997 and 1998. The selected financial information for the
predecessor and the Company has been derived from the audited consolidated
financial statements of the predecessor and the Company. The selected
consolidated financial data are qualified by, and should be read in conjunction
with, "Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition" and the Consolidated Financial Statements and Notes thereto
of the Company and Brim, appearing elsewhere in this Report.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Company
Brim (Predecessor)(1)(2) (Successor)(1)(2)
----------------------------------- -----------------------------------
Period Period
Jan. 1, Feb. 2,
Year Ended December 31, 1996 To 1996 To Year Ended December 31,
---------------------- Dec. 18, Dec. 31, ----------------------
1994 1995 1996 1996 1997 1998
-------- -------- -------- ------- -------- --------
INCOME STATEMENT DATA:
Net operating revenue $102,067 $101,214 $112,600 $17,255 $170,527 $238,855
Income (loss) from continuing
operations 2,858 3,369 (5,307) (1,316) 4,075 10,007
Net income (loss) 2,701 3,105 708 (1,578) 4,075 10,007
Net income (loss) to common
shareholders (1,750) (1,002) 9,311
Net income (loss) per share to
common shareholders- diluted (0.61) (0.17) 0.68
Cash dividends declared
per common share -- -- --
BALANCE SHEET DATA
(at end of period):
Total assets 50,170 50,888 76,998 160,521 176,461 337,504
Long-term obligations, less
current maturities 9,371 7,161 75,995 77,789 83,043 134,301
Mandatory redeemable preferred
stock 8,816 8,816 31,824 46,227 50,162 --
Common stockholders' equity
(deficit) 12,380 15,366 (56,308) (490) (1,056) 169,191
(1) PHC was formed on February 2, 1996. On December 18, 1996, Brim completed
a leveraged recapitalization. Immediately thereafter on December 18,
1996, a subsidiary of Brim merged with PHC in a transaction in which
Brim issued junior preferred stock and common stock in exchange for all
of the outstanding common stock of PHC. Because the PHC shareholders
became owners of a majority of the outstanding shares of Brim after the
Merger, PHC was considered the acquiring enterprise for financial
reporting purposes and the transaction was accounted for as a reverse
acquisition. Therefore, the historical financial statements of PHC
replaced the historical financial statements of Brim, the assets and
liabilities of Brim were recorded at fair value as required by the
purchase method of accounting, and the operations of Brim were reflected
in the operations of the combined enterprise from the date of
acquisition. Because PHC had been in existence for
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less than a year at December 31, 1996, and because Brim had been in
existence for several years, PHC is considered the successor to Brim's
operations. The balance sheet data of Brim (Predecessor) as of December
18, 1996 represents the historical cost basis of Brim's assets and
liabilities after the leveraged recapitalization but prior to the
reverse acquisition. The reverse acquisition resulted in a new basis of
accounting such that Brim's assets and liabilities were recorded at
their fair value in the Company's consolidated balance sheet upon
consummation of the reverse acquisition. Although PHC was considered
the acquiring enterprise for financial reporting purposes, PHC became a
wholly-owned subsidiary of Brim, the predecessor company, as a result
of the Merger.
(2) The financial statements of the Company and Brim for the periods
presented are not strictly comparable due to the significant effect
that acquisitions, divestitures and the Recapitalization have had on
such statements. See Note 3 of Notes to Consolidated Financial
Statements of the Company, and Notes 2, 3 and 6 of Notes to
Consolidated Financial Statements of Brim.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in conjunction with the
Company's consolidated financial statements and related notes thereto included
elsewhere in this Report.
OVERVIEW
Province Healthcare Company is a health care services company focused
on acquiring and operating hospitals in attractive non-urban markets in the
United States. As of December 31, 1998, the Company operated ten general acute
care hospitals in six states with a total of 723 licensed beds, and managed 52
hospitals in 17 states with a total of 3,574 licensed beds.
PHC of Delaware, Inc., a subsidiary of the Company, was founded in
February 1996 by Golder, Thoma, Cressey, Rauner Fund IV, L.P. ("GTCR Fund IV")
and Martin S. Rash to acquire and operate hospitals in attractive non-urban
markets. PHC acquired its first hospital, Memorial Mother Frances Hospital
("Memorial Mother Frances") in Palestine, Texas, in July 1996 and acquired
Starke Memorial Hospital ("Starke") in Knox, Indiana, in October 1996.
In December 1996, a subsidiary of Brim, Inc. merged with PHC in a
transaction in which Brim issued Junior Preferred Stock and Common Stock in
exchange for all of the outstanding common stock of PHC, and PHC became a
wholly-owned subsidiary of Brim. Because the PHC shareholders became owners of a
majority of the outstanding shares of Brim after the Merger, PHC was considered
the acquiring enterprise for financial reporting purposes and the transaction
was accounted for as a reverse acquisition. Therefore, the historical financial
statements of PHC replaced the historical financial statements of Brim, the
assets and liabilities of Brim were recorded at fair value as required by the
purchase method of accounting, and the operations of Brim were reflected in the
operations of the combined enterprise from the date of acquisition. Because PHC
had been in existence for less than a year at December 31, 1996, and because
Brim had been in existence for several years, PHC is considered the successor to
Brim's operations.
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On February 4, 1998, the Company merged with and into Province
Healthcare Company, a Delaware corporation, to change the Company's name and
jurisdiction of incorporation and to make certain other changes to the Company's
authorized capitalization.
IMPACT OF ACQUISITIONS AND DIVESTITURES
An integral part of the Company's strategy is to acquire non-urban
acute care hospitals. See "Item 1. Business - Business Strategy." Because of the
financial impact of the Company's recent acquisitions, it is difficult to make
meaningful comparisons between the Company's financial statements for the fiscal
periods presented. In addition, due to the relatively small number of owned and
leased hospitals, each hospital acquisition can materially affect the overall
operating margin of the Company. Upon the acquisition of a hospital, the Company
typically takes a number of steps to lower operating costs. See "Item 1.
Business - Hospital Operations." 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 the Company makes additional hospital
acquisitions, the Company expects 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.
In February 1996, Brim acquired Parkview Regional Hospital by entering
into a 15-year operating lease agreement with two five-year renewal terms, and
by purchasing certain assets and assuming certain liabilities for a purchase
price of $1.8 million. In December 1996, Brim sold its senior living business
(see "-Discontinued Operations") and certain assets related to three medical
office buildings.
In July 1996, PHC purchased certain assets and assumed certain
liabilities of Memorial Mother Frances for a purchase price of $23.2 million in
a transaction resulting in PHC owning 95.0% of the hospital. In October 1996,
PHC acquired Starke Memorial by assuming certain liabilities and entering into a
capital lease agreement, and by purchasing certain assets for a purchase price
of $7.7 million. In December 1996, a subsidiary of Brim and PHC merged in a
transaction which has been accounted for as a reverse acquisition (i.e., the
acquisition of Brim by PHC).
In August 1997, the Company acquired Colorado River Medical Center
("Colorado River"), in Needles, California (formerly Needles Desert Communities
Hospital) by purchasing certain assets, assuming certain liabilities, and
entering into a fifteen-year lease agreement, with three five-year renewal
options, for a purchase price of approximately $6.3 million.
In May 1998, the Company acquired Havasu Samaritan Regional Hospital
("Havasu") in Lake Havasu City, Arizona, for approximately $107.5 million. In
June, 1998, the Company acquired Elko General Hospital ("Elko") in Elko, Nevada
for a purchase price of approximately
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$23.3 million. To finance these acquisitions, the Company borrowed $106.0
million and $22.0 million, respectively, under its revolving credit facility.
All the acquisitions described above were accounted for as purchase
business combinations, and the results of operations of the hospitals have been
included in the results of operations of the Company from the purchase dates
forward.
The December 31, 1996 results of operations of the Company include five
months of operations for Memorial Mother Frances, three months of operations for
Starke Memorial, and 13 days of operations for Brim. Brim's operations consisted
of five owned/leased hospitals and a hospital management company operation. In
the discussion that follows, Memorial Mother Frances, Starke Memorial and Brim
are referred to as the "1996 Acquisitions."
The December 31, 1997 results include twelve months of operations for
the 1996 Acquisitions, plus five months of operations for Colorado River.
The December 31, 1998 results include twelve months of operations for
the 1996 Acquisitions and Colorado River, plus eight months of operations for
Havasu and six and one-half months of operations for Elko. In the discussion
that follows, Colorado River, Havasu and Elko are referred to as the "1997 and
1998 Acquisitions."
On February 22, 1999, the Company entered into a "special services
agreement" for the lease of Eunice Regional Medical Center, an 85-bed general
acute care hospital located in Eunice, Louisiana. The Company purchased certain
assets, assumed certain liabilities, and entered into a ten-year lease
agreement, with one five-year renewal option. The transaction was accounted for
as a purchase business combination, with a purchase price of approximately $1.7
million.
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 the consolidated statements of operations of the Company included
elsewhere in this report. The results of operations for the periods presented
include hospitals from their acquisition dates, as previously discussed.
Period From
Feb. 2, Year Ended December 31,
To Dec. 31, --------------------------
1996 1997 1998
---- ---- ----
Net operating revenue 100.0% 100.0% 100.0%
Operating expenses (1) 97.2 86.0 82.4
------ ------ ------
EBITDA (2) 2.8 14.0 17.6
Depreciation and amortization 7.6 4.4 5.6
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Interest 5.7 4.8 4.4
Minority interest 1.0 0.3 0.1
------ ------ ------
Income (loss) before income taxes (11.5) 4.5 7.5
(Provision) benefit for income taxes 3.9 (2.1) (3.3)
------ ------ ------
Net income (loss) before
extraordinary item (7.6) 2.4 4.2
Extraordinary item (1.5) -- --
------ ------ ------
Net income (loss) (9.1)% 2.4% 4.2%
====== ====== ======
(1) Operating expenses represent expenses before interest, minority
interest, loss on sale of assets, income taxes, depreciation and
amortization.
(2) EBITDA represents the sum of income before income taxes, interest,
minority interest, depreciation and amortization, and loss on sale of
assets. Management understands that industry analysts generally consider
EBITDA to be one measure of the financial performance of a company that
is presented to assist investors in analyzing the operating performance
of the Company and its ability to service debt. Management believes that
an increase in EBITDA level is an indicator of the Company's improved
ability to service existing debt, to sustain potential future increases
in debt and to satisfy capital requirements. However, EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative (i) to net income
as a measure of operating performance or (ii) to cash flows from
operating, investing, or financing activities as a measure of liquidity.
Given that EBITDA is not a measurement determined in accordance with
generally accepted accounting principles and is thus susceptible to
varying calculations, EBITDA, as presented, may not be comparable to
other similarly titled measures of other companies.
Hospital revenues are received primarily from Medicare, Medicaid and
commercial insurance. The percentage of revenues received from the Medicare
program is expected to increase due to the general aging of the population. The
payment rates under the Medicare program for inpatients are based on a PPS,
based upon the diagnosis of a patient. While these rates are indexed for
inflation annually, the increases have historically been less than actual
inflation. In addition, states, insurance companies and employers are actively
negotiating the amounts paid to hospitals as opposed to their standard rates.
The trend toward managed care, including health maintenance organizations,
preferred provider organizations and various other forms of managed care, may
affect the hospitals' ability to maintain their current rate of net revenue
growth.
Net operating revenue is comprised of: (i) net patient service revenue
from the Company's owned and leased hospitals; (ii) management and professional
services revenue; and (iii) other revenue.
Net patient service revenue is reported net of contractual adjustments
and policy discounts. The adjustments principally result from differences
between the hospitals' customary charges and payment rates under the Medicare
and Medicaid programs. Customary charges generally have increased at a faster
rate than the rate of increase for Medicare and Medicaid payments. Operating
expenses of the
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hospitals primarily consist of salaries and benefits, purchased services,
supplies, provision for doubtful accounts and other operating expenses
(principally consisting of utilities, insurance, property taxes, travel,
freight, postage, telephone, advertising, repairs and maintenance).
Management and professional services revenue is comprised of fees from
management and professional consulting services provided to third-party
hospitals pursuant to management contracts and consulting arrangements, plus
reimbursable expenses. Operating expenses for the management and professional
services business primarily consist of salaries and benefits and reimbursable
expenses.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net operating revenue increased from $170.5 million in 1997, to $238.9
million in 1998, an increase of $68.4 million or 40.1%. Revenue generated by
hospitals owned during both periods increased $5.2 million, or 3.4% in 1998. The
increase in revenue generated by hospitals owned during both periods is
primarily the result of higher volumes and price increases, partially offset by
increased managed care and charity care discounts and the effects of the
Balanced Budget Act of 1997 (the "1997 Act"). (See "Item 1. Business -
Government Reimbursement.") Cost report settlements and the filing of cost
reports during the year resulted in positive revenue adjustments of $3.3 million
(2.2% of net patient service revenue) in 1997 and $4.0 million (1.8% of net
patient service revenue) in 1998. The remaining increase of $63.2 million was
primarily attributable to the 1997 and 1998 Acquisitions.
Operating expenses increased from $146.7 million in 1997, to $196.8
million in 1998, an increase of $50.1 million or 34.2%. Operating expenses were
86.0% of net operating revenue in 1997, compared to 82.4% in 1998. The increase
in operating expenses of hospitals owned during both periods resulted from
volume increases, increased services and change in case mix, offset by decreased
expenses in home health as a result of the 1997 Act and decreased expenses from
the closing of two geriatric psychiatric units. The majority of the increase in
operating expenses was attributable to the 1997 and 1998 Acquisitions.
EBITDA was $23.8 million, or 14.0% of net operating revenue in 1997,
compared to $42.1 million, or 17.6% of net operating revenue in 1998. The
increase is primarily the result of the 1997 and 1998 Acquisitions.
Depreciation and amortization expense was $7.6 million, or 4.4% of net
operating revenue in 1997, compared to $13.4 million, or 5.6% of net operating
revenue in 1998. The increase in depreciation and amortization resulted from the
1997 and 1998 Acquisitions and increased capital expenditures. Interest expense
as a percent of net operating revenue decreased from 4.8% in 1997 to 4.4% in
1998.
Net income was $4.1 million, or 2.4% of net operating revenue in 1997,
compared to $10.0 million, or 4.2% of net operating revenue in 1998.
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YEAR ENDED DECEMBER 31, 1997 COMPARED TO PERIOD FROM FEBRUARY 2, 1996 (PHC'S
INCEPTION) TO DECEMBER 31, 1996
Net operating revenue was $170.5 million in 1997, compared to $17.3
million in 1996, an increase of $153.2 million. This increase is principally the
result of a full year's operations for the 1996 Acquisitions. Cost report
settlements and the filing of cost reports resulted in no revenue adjustments in
1996 and positive revenue adjustments of $3.3 million (2.2% of net patient
service revenue) in 1997.
Operating expenses were $16.8 million, or 97.2% of net operating revenue
in 1996, compared to $146.7 million, or 86.0% of net operating revenue in 1997,
principally as a result of a full year of operations for the 1996 Acquisitions.
EBITDA was $0.5 million, or 2.8% of net operating revenue in 1996,
compared to $23.8 million, or 14.0% of net operating revenue in 1997,
principally as a result of a full year of operations for the 1996 Acquisitions.
Depreciation and amortization expense was $1.3 million, or 7.6% of net
operating revenue in 1996, compared to $7.6 million, or 4.4% of net operating
revenue in 1997. Interest expense was $1.0 million, or 5.7% of net operating
revenue in 1996, compared to $8.1 million, or 4.8% of net operating revenue in
1997. This increase resulted primarily from $52.7 million in new bank debt
incurred in connection with the recapitalization of Brim, and an increase of
$10.0 million in bank debt during 1997 to fund the acquisition of Colorado River
and the buyout of the operating lease at Ojai.
Net loss was $1.6 million, or 9.1% of net operating revenue in 1996,
compared to net income of $4.1 million, or 2.4% of net operating revenue in
1997.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased from $21.4 million at December 31, 1997 to
$50.7 million at December 31, 1998. The ratio of current assets to current
liabilities was 1.8 to 1.0 at December 31, 1997 and 3.5 to 1.0 at December 31,
1998.
In February 1998, the Company completed its initial public offering of
5,405,000 shares of common stock. In connection with the offering, the Series B
redeemable junior preferred stock was converted into common stock at the public
offering price. The net proceeds from the offering were used to reduce the
balance of the outstanding term and revolving credit loans ($39.6 million),
redeem the outstanding balance of the Series A redeemable senior preferred stock
plus accrued dividends ($22.7 million) and repurchase a portion of the common
stock that was issued upon conversion of the Series B junior preferred stock
($14.9 million).
In July 1998, the Company completed its public offering of 2,685,500
shares of common stock at an offering price of $26.00 per share. The net
proceeds from the offering of approximately $65.7 million primarily were used to
reduce amounts outstanding on the revolving line of credit.
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In March 1998, the Company amended and restated its Credit Agreement
and increased the size of its credit facility to $260.0 million. The total
amount outstanding under the credit facility increased from $82.0 million at
December 31, 1997 to $127.0 million at December 31, 1998. The increase resulted
primarily from the borrowings to finance the Havasu and Elko acquisitions,
offset by a reduction in debt from application of stock offering proceeds. The
loans under the Credit Agreement bear interest at the adjusted base rate or at
the adjusted LIBOR rate, plus in each case, a margin depending on the amount of
the Company's outstanding indebtedness.
The Credit Agreement contains limitations on the Company's ability to
incur additional indebtedness (including contingent obligations), sell material
assets, retire, redeem or otherwise reacquire its capital stock, acquire the
capital stock or assets of another business, and pay dividends. The Credit
Agreement also requires the Company to maintain a specified net worth and meet
or exceed certain coverage, leverage, and indebtedness ratios. Indebtedness
under the Credit Agreement is secured by substantially all assets of the
Company. The Credit Agreement obligates the Company to pay certain commitment
fees, based upon amounts borrowed and available for borrowing, during its term.
Interest rate swap agreements are used to manage the Company's interest
rate exposure under the Credit Agreement. In 1997, the Company entered into an
interest rate swap agreement, which effectively converted for a three-year
period $35.0 million of floating-rate borrowings to fixed-rate borrowings. In
1998, the Company entered into an interest rate swap agreement, which
effectively converted for a five-year period $45.0 million of floating-rate
borrowings to fixed-rate borrowings. The Company secured a 6.27% fixed interest
rate on the 1997 swap agreement, and a 5.625% fixed interest rate on the 1998
swap agreement.
Cash used in operations increased from $0.8 million in 1997 to $4.1
million in 1998, primarily due to a large increase in accounts receivable,
primarily at newly-acquired hospitals. Cash used in investing activities
increased from $18.2 million in 1997 to $146.4 million in 1998, relating
primarily to the Havasu and Elko acquisitions and capital expenditures. Net cash
provided by financing activities increased from $12.0 million in 1997 to $148.5
million in 1998, primarily as a result of the initial public offering and the
follow-on public offering and the application of the proceeds, and borrowings
related to the Havasu and Elko acquisitions.
Capital expenditures, excluding acquisitions, were $15.6 million in 1997
and $15.5 million in 1998. Capital expenditures for the owned hospitals may vary
from year to year, depending on facility improvements and service enhancements.
The management services business does not require significant capital
expenditures. The Company expects to make capital expenditures in 1999 of
approximately $15.1 million, exclusive of any acquisitions of businesses or
construction projects. These expenditures will be funded through cash provided
by operating activities and borrowings under the revolving credit agreement.
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IMPACT OF YEAR 2000
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS
The following discussion is designated as Year 2000 readiness
disclosure for purposes of the Year 2000 Information Readiness and Disclosure
Act.
Some older computer programs and systems were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognizes a date using "00" as the
year 1900 rather than the year 2000. Certain of the Company's computer hardware
and software, facility equipment (e.g., communications equipment, environmental
controls such as heating and air conditioning systems, and elevators), and
medical equipment that are date sensitive, may contain programs with the Year
2000 problem. If uncorrected, the problem could result in computer system and
program failures or equipment and medical device malfunctions that could result
in a disruption of business operations or affect patient diagnosis and
treatment.
STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT, INCLUDING TIMETABLE FOR
COMPLETION OF EACH REMAINING PHASE.
The Company's plan to resolve the Year 2000 issue involves the following
four phases: assessment, remediation, testing, and implementation. The Company
has replaced the majority of its key financial and operational systems as a part
of its systems consolidation in the normal course of business. This replacement
has been a planned approach during the last two years to enhance or better meet
its functional business and operational requirements. In addition to the
replacement program, some of the Company's software and hardware is being
modified so that its computer systems will function properly with respect to
dates in the year 2000 and thereafter.
The Company is currently working with outside consultants, who are
visiting each of the owned hospitals to determine the depth of the problem as it
relates to devices that are attached to the Company's information systems. The
purpose is twofold: (i) They are testing the hospital computer networks to
identify problem areas relative to the communications of the information system
hardware, the network servers and various devices attached to the network. This
phase is focused on identifying conflict/problem areas and recommending
solutions to address these problems; and (ii) They are evaluating each personal
computer for hardware and software related Year 2000 issues. The result of this
process will be a report that will document a physical layout of the network,
any potential or existing network problems, and an inventory of each system with
its potential Year 2000 problems.
In the area of medical equipment, the Company is working with a
consultant to identify issues impacting medical equipment items/systems. This
process will be completed in three phases: (i) identification of medical
equipment items/systems impacted by Year 2000 issues; (ii) evaluation of such
medical equipment; and (iii) Year 2000 resolution. The Company has completed
Phase I of this process and has completed 80% of Phase II. Management believes
that this process will substantially address its Year 2000 issues, and
anticipates a completion date no later than June 30, 1999.
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NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE YEAR
2000
The Company relies heavily on third parties in operating its business.
In addition to its reliance on software, hardware and other equipment vendors to
verify Year 2000 compliance of their products, the Company also depends on (i)
fiscal intermediaries that process claims and make payments on behalf of the
Medicare program, (ii) insurance companies, HMOs and other private payors,
(iii) utilities that provide electricity, water, natural gas and telephone
services and (iv) vendors of medical supplies and pharmaceuticals used in
patient care. As part of its Year 2000 strategy, the Company has been working
with its major vendors and has received assurances such vendors are addressing
the Year 2000 issue. The Company has received assurances from four of its
largest vendors that their software modules are fully compliant with software
releases completed by the end of 1998. At this point, there have been no
identified problems associated with this portion of the systems. Failure of
these third parties to resolve their Year 2000 issues could have a material
adverse effect on the Company's results of operations and ability to provide
health care services.
The Company uses various third-party software products to perform
electronic billing to Medicare, Medicaid, and certain other third-party payors.
These electronic billing systems allow for a direct electronic interface with
the computer systems of third-party payors, including Medicare and Medicaid.
This direct interface allows the individual electronic bills to be edited
on-line so that they can be successfully uploaded to the host system. In
addition, certain Medicare intermediaries transmit remittance advice data back
to the Company through these same electronic billing systems. The remittance
advice data transmitted back to the Company determines the amount of payment
that a particular hospital will receive for a particular remittance advice. In
addition, most of the Company's hospitals receive electronic funds transfer from
the Medicare intermediaries.
Reimbursement under the Medicare program is administered by HCFA. HCFA
employs more than 60 carriers and intermediaries to process Medicare
fee-for-service claims throughout the United States. There are several hundred
different computer systems involved in the every day work of HCFA, its carriers
and intermediaries. HCFA, under its internal Year 2000 compliance program,
identified 99 mission critical systems, 25 that are directly managed by HCFA and
74 that are managed by outside carriers and intermediaries. These 99 systems
contain more than 50 million lines of computer code that require re-writing to
ensure Year 2000 compliance. In a public statement on its web page, HCFA has
stated that the major HCFA forms, utilized for claims submission by the Company,
are Year 2000 compliant. This includes both paper and electronic claims
submission. There can be no assurance that HCFA's mission critical systems,
which most directly affect the Company, will be compliant in time to prevent
disruptions to the Medicare payments received by the Company. Moreover, HCFA has
announced the delayed implementation of certain new regulations as well as the
possible postponement of scheduled rate increases while its resources are
re-directed towards Year 2000 compliance. While certain members of Congress have
taken strong exception to HCFA's announcement to delay rate increases, it is
possible that rate increases that were scheduled
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to take effect on October 1, 1999, could be delayed until December 31, 1999 or
later.
COSTS
The Company is utilizing both internal and external resources to
complete the Year 2000 modifications. The Company believes that the Year
2000-related remediation costs incurred through December 31, 1998 have not been
material to its results of operations.
During 1998, the majority of the costs related to Year 2000 were in the
area of consulting services to assess the impact of Year 2000, and to inventory
the existing information technology and medical equipment to determine the level
of Year 2000 compliance. During 1998, approximately $50,000 of direct cost was
incurred as part of this assessment. The costs of Year 2000 software compliance
were included in standard software maintenance agreements with the Company's
major vendors. No additional costs were incurred to modify this software over
and above those amounts incurred as part of the normal business process.
During 1999, the consulting services have continued relative to the
assessment of the Year 2000 project. The Company expects consulting costs
related to medical equipment compliance to be $160,000 in the first quarter of
1999, and $60,000 in the second quarter of 1999. Assessment costs related to
information technology compliance are expected to be $30,000 in the first
quarter of 1999, and $50,000 in the second quarter of 1999, and have been
included in the information systems budget. These costs will be expensed as
incurred, and have been included in the Company's 1999 internal budget.
Based upon a review of completed hospital assessments, the Company
expects approximately $2,000,000 in remediation/replacement capital expenditures
for both information technology and medical equipment, which is approximately
67% of the total information systems capital budget for 1999. These funds are
part of a contingency budget. There can be no guarantee that actual costs and
results will not differ materially from those anticipated. No significant
information systems projects have been delayed due to the Year 2000 project.
By utilizing external consultants for the assessments associated with
Year 2000, the Company has achieved independent verification and validation
processes to assure the reliability of risk and cost estimates.
RISK AND CONTINGENCY PLANS
Management of the Company believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner. As noted above, the Company
has not yet completed all necessary phases of the Year 2000 program, but expects
to complete the program no later than June 30, 1999. In the event that the
Company does not complete any additional phases, the Company may be unable to
diagnose or treat patients, bill for patient services or collect and apply
payments from patients or third party payors. In addition, disruptions in the
economy generally resulting from Year 2000 issues could materially adversely
affect the Company. The amount of potential liability and lost revenue cannot be
reasonably estimated at this time.
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The Company believes that the most reasonably likely worst case Year
2000 scenario is that some of its material third party payors will not be Year
2000 compliant, and will have difficulty processing and paying the Company's
bills, thereby possibly affecting the Company's cash flows. The Company intends
to develop a contingency plan to address this scenario. It is expected that such
a plan would involve establishing procedures whereby the Company would revert to
manual billing processes. In addition, the plan would involve ensuring the
Company's access to additional capital through, for example, its revolving
credit facility.
The Company intends to complete its initial contingency plan by June 30,
1999. Each of the Company's owned hospitals has a disaster plan that will be
reviewed as a part of the Company's overall contingency planning process, to
assure that each plan includes contingency planning for the Year 2000 issues.
However, failure by third parties to resolve their own Year 2000 issues may
render each hospital's contingency plan ineffective.
The foregoing assessment is based on information currently available to
the Company. The Company will revise its assessment as it continues to implement
its Year 2000 strategy. The Company can provide no assurances that applications
and equipment the Company believes to be Year 2000 compliant will not experience
difficulties, or that the Company will not experience difficulties obtaining
resources needed to make modifications to or replace the Company's affected
systems and equipment. Failure by the Company or third parties on which it
relies to resolve Year 2000 issues could have a material adverse effect on the
Company's results of operations and its ability to provide health care services.
Consequently, the Company can give no assurances that issues related to the Year
2000 will not have a material adverse effect on the Company's financial
condition or results of operations.
The Company has established and distributed a set of guidelines and
strategies for each of its managed hospitals to use in evaluating and planning
for making their facilities Year 2000 compliant. The Company intends to monitor
the progress of the response by the hospitals it manages to the Year 2000
problem. The Company does not believe that it is responsible for ensuring Year
2000 compliance by its managed hospitals. Ultimately, responsibility for
implementing the individual Year 2000 compliance plan at each managed hospital
rests with each managed hospital's board; the Company can only implement the
boards' recommendations at their direction.
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GENERAL
The federal Medicare program accounted for approximately 60.3% and 57.8%
of hospital patient days in 1997 and 1998, respectively. The state Medicaid
programs accounted for approximately 13.1% and 11.1% of hospital patient days in
1997 and 1998, respectively. The payment rates under the Medicare program for
inpatients are prospective, based upon the diagnosis of a patient. The Medicare
payment rate increases have historically been less than actual inflation.
Both federal and state legislators are continuing to scrutinize the
health care industry for the purpose of reducing health care costs. While the
Company is unable to predict what, if any, future health reform legislation may
be enacted at the federal or state level, the Company expects continuing
pressure to limit expenditures by governmental health care programs. The 1997
Act 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 1997 Act requires that the
payment for those services be converted to a prospective payment system, which
will be phased in over time. The 1997 Act also includes a managed care option
that could direct Medicare patients to managed care organizations. Further
changes in the Medicare or Medicaid programs and other proposals to limit health
care spending could have a material adverse impact upon the health care industry
and the Company.
The Company's acute care hospitals, like most acute care hospitals in
the United States, have significant unused capacity. The result is substantial
competition for patients and physicians. Inpatient utilization continues to be
affected negatively by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative health care delivery services
for less acutely ill patients. The Company expects increased competition and
admission constraints to continue in the future. The ability to respond
successfully to these trends, as well as spending reductions in governmental
health care programs, will play a significant role in determining the ability of
the Company's hospitals to maintain their current rate of net revenue growth and
operating margins.
The Company expects the industry trend in increased outpatient services
to continue because of the increased focus on managed care and advances in
technology. Outpatient revenue of the Company's owned or leased hospitals was
approximately 44.5% and 43.5% of gross patient service revenue in 1997 and 1998,
respectively.
The complexity of the Medicare and Medicaid regulations, increases in
managed care, hospital personnel turnover, the dependence of hospitals on
physician documentation of medical records and the subjective judgment involved
complicates the billing and collections of accounts receivable by hospitals.
There can be no assurance that this complexity will not negatively impact the
Company's future cash flows or results of operations.
The federal government and a number of states are rapidly increasing the
resources devoted to investigating allegations of fraud and abuse in the
Medicare and Medicaid programs. At the same
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time, regulatory and law enforcement authorities are taking an increasingly
strict view of the requirements imposed on providers by the Social Security Act
and Medicare and Medicaid regulations. Although the Company believes that it is
in material compliance with such laws, a determination that the Company has
violated such laws, or even the public announcement that the Company was being
investigated concerning possible violations, could have a material adverse
effect on the Company.
The Company's historical financial trend has been impacted favorably by
its success in acquiring acute care hospitals. While the Company believes that
trends in the health care industry described above may create possible future
acquisition opportunities, there can be no assurances that it can continue to
maintain its current growth rate through hospital acquisitions and successfully
integrate the hospitals into its system.
The Company intends to acquire additional acute care facilities, and is
actively seeking out such acquisitions. There can be no assurance that the
Company will not require additional debt or equity financing for any particular
acquisition. Also, the Company continually reviews its capital needs and
financing opportunities and may seek additional equity or debt financing for its
acquisition program or other needs.
The Company's owned hospitals accounted for 95.2%, 88.8% and 92.3% of
the Company's net operating revenue in 1996, 1997 and 1998, respectively. The
Company currently owns four hospitals in California, which accounted for 33.4%
of 1998 net operating revenue. This concentration of results of operations in
this market increases the risk that adverse developments at these facilities, or
in the economic, regulatory or industry environment in California, could have a
material adverse effect on the Company's operations or financial condition.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the amounts reported in its financial statements.
Resolution of matters, for example, final settlements with third party payors,
may result in changes from those estimates. The timing and amount of such
changes in estimates may cause fluctuations in the Company's quarterly or annual
operating results.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components. The Company had no items of other comprehensive income, and
accordingly, adoption of the statement had no effect on the consolidated
financial statements.
Effective January 1, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information.
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Statement 131 established standards for reporting of information about operating
segments. In excess of 90% of the Company's assets, revenues and income are
derived from one segment, the ownership and operation of acute care hospitals.
Accordingly, segment disclosures are not presented in these financial
statements.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued, and is required to be adopted in years beginning
after June 15, 1999. The Company expects to adopt the new Statement effective
January 1, 2000. The Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If a derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedged
asset, liability, or firm commitment through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a hedge derivative's change in fair value will be
immediately recognized in earnings. The Company does not anticipate that the
adoption of this Statement will have a significant effect on its results of
operations or financial position.
INFLATION
The health care industry is labor intensive. Wages and other expenses
increase, especially during periods of inflation and labor shortages. In
addition, suppliers pass along rising costs to the Company in the form of higher
prices. The Company has generally been able to offset 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, the Company is unable to predict its ability to offset or
control future cost increases, or its ability to pass on the increased costs
associated with providing health care services to patients with government or
managed care payors, unless such payors correspondingly increase reimbursement
rates.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this discussion, including without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects," and words of similar import, constitute forward-looking
statements. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, both nationally and in
regions where the Company operates; demographic changes; the effect of existing
36
37
or future governmental regulation and federal and state legislative and
enforcement initiatives on the Company's business, including the 1997 Act;
changes in Medicare and Medicaid reimbursement levels; the Company's ability to
implement successfully its acquisition and development strategy and changes in
such strategy; Year 2000 compliance; the availability and terms of financing to
fund the expansion of the Company's business, including the acquisition of
additional hospitals; the Company's ability to attract and retain qualified
management personnel and to recruit and retain physicians and other health care
personnel to the non-urban markets it serves; the effect of managed care
initiatives on the non-urban markets served by the Company's hospitals and the
Company's ability to enter into managed care provider arrangements on acceptable
terms; the effect of liability and other claims asserted against the Company;
the effect of competition in the markets served by the Company's hospitals; and
other factors referenced in this Report. Certain of these factors are discussed
in more detail elsewhere in this Report. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the result of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk involves interest rate risk. The
Company's interest expense is sensitive to changes in the general level of U. S.
interest rates. To mitigate the impact of fluctuations in U. S. interest rates,
the Company generally expects to maintain a substantial percent of its debt as
fixed rate in nature by entering into interest rate swap transactions. The
interest rate swap agreements, entered into in 1997 and 1998, are contracts to
exchange periodically fixed and floating interest rate payments over the life of
the agreements. The floating-rate payments are based on LIBOR and fixed-rate
payments are dependent upon market levels at the time the swap agreement was
consummated. The interest rate swap agreements do not constitute positions
independent of the underlying exposures. The Company does not hold or issue
derivative instruments for trading purposes and is not a party to any
instruments with leverage features. The swap agreements allow the counterparty a
one-time option at the end of the initial term to cancel the agreement or extend
the swaps for an incremental time period. The Company is exposed to credit
losses in the event of nonperformance by the counterparties to its financial
instruments. The counterparties are creditworthy financial institutions, and the
Company expects the counterparties to fully satisfy their contract obligations.
The Company received a weighted average rate of 5.72% and 5.67%, and paid a
weighted average rate of 6.27% and 6.14% on its interest rate swap agreements,
for the years ended December 31, 1997 and 1998, respectively.
At December 31, 1998, the carrying amount of the Company's total debt of
$134.3 million approximated fair value. The Company had $128.7 million of
variable rate debt outstanding at December 31, 1998, with
37
38
interest rate swaps in place to offset the variability of $80.0 million of this
balance. At this borrowing level, a hypothetical 10% adverse change in interest
rates, considering the effect of the interest rate hedge agreements, would have
an unfavorable impact on the Company's net income and cash flows of
approximately $0.3 million. A hypothetical 10% adverse change in interest rates
on the fixed-rate debt would not have a material impact on the fair value of
such debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the executive officers and directors of the
Company is incorporated by reference from the Company's Proxy Statement relating
to the Annual Meeting of Shareholders to be held on May 20, 1999. Such Proxy
Statement will be filed with the Commission not later than 120 days subsequent
to December 31, 1998.
Information with respect to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated by reference from the Company's
Proxy Statement relating to the Annual Meeting of Shareholders to be held on
May 20, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to the compensation of the Company's executive
officers is incorporated by reference from the Company's Proxy Statement
relating to the Annual Meeting of Shareholders to be held on May 20, 1999,
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, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to the security ownership of certain
beneficial owners of the Company's Common Stock and management is incorporated
by reference from the Company's Proxy Statement relating to the Annual Meeting
of Shareholders to be held on May 20, 1999. Such Proxy Statement will be filed
with the Commission not later than 120 days subsequent to December 31, 1998.
38
39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related
transactions between the Company and its executive officers and directors is
incorporated by reference from the Company's Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 20, 1999. Such Proxy Statement
will be filed with the Commission not later than 120 days subsequent to December
31, 1998.
39
40
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) and (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES
The Consolidated Financial Statements and Financial Statement Schedules
of the 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. ("Brim") and Carryco, Inc. (a)
2.2 Plan and Agreement of Merger, dated as of December 17, 1996,
between Brim, Principal Hospital Company ("PHC") and Principal
Merger Company (a)
2.3 Agreement and Plan of Merger, dated as of November 27, 1996,
between Brim, 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 ("Province") (a)
3.1 Amended and Restated Certificate of Incorporation of Province
(a)
3.2 Amended and Restated Bylaws of Province (a)
4.1 Form of Common Stock Certificate (a)
4.2 Amended and Restated Credit Agreement, dated as of March 30,
1998, among Province, First Union National Bank, as Agent and
Issuing Bank, and various lenders thereto (b)
40
41
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
4.3 Participation Agreement, dated as of March 30, 1998, among
Province, as Construction Agent and Lessee, various parties as
Guarantors, First Security Bank, National Association, as
Owner Trustee, various banks party thereto, as Holders,
various banks party thereto, as Lenders, and First Union
National Bank, as Agent (b)
4.4 First Amendment to Credit Agreement and Waiver, dated as of
November 20, 1998, among Province, First Union National Bank,
as Agent and Issuing Bank, and various lenders thereto *
10.1 Investment Agreement, dated as of November 21, 1996, between
Brim, Golder, Thoma, Cressey, Rauner Fund IV, L.P. ("GTCR Fund
IV") and PHC (a)
10.2 First Amendment to Investment Agreement, dated as of December
17, 1996, between Brim, GTCR Fund IV and PHC (a)
10.3 Form of Investment Agreement Counterpart (a)
10.4 Employment Agreement, dated as of December 17, 1996, by and
between A.E. Brim and Brim (a)
10.5 Stockholders Agreement, dated as of December 17, 1996, by and
among Brim, GTCR Fund IV, Leeway & Co., First Union
Corporation of Virginia, AmSouth Bancorporation, Martin S.
Rash ("Rash"), Richard D. Gore ("Gore"), PHC and certain other
stockholders (a)
10.6 First Amendment to Stockholders Agreement, dated as of July
14, 1997, by and among the Company, GTCR Fund IV, Rash, Gore
and certain other stockholders (a)
10.7 Registration Agreement, dated as of December 17, 1996, by and
among Brim, PHC, GTCR Fund IV, Leeway & Co., First Union
Corporation of Virginia, AmSouth Bancorporation and certain
other stockholders (a)
10.8 Senior Management Agreement, dated as of December 17, 1996,
between Brim, Rash, GTCR Fund IV, Leeway & Co. and PHC (a)
10.9 First Amendment to Senior Management Agreement, dated as of
July 14, 1997, between the Company, Rash and GTCR Fund IV (a)
41
42
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.10 Senior Management Agreement, dated as of December 17, 1996,
between Brim, Gore, GTCR Fund IV, Leeway & Co. and PHC (a)
10.11 First Amendment to Senior Management Agreement, dated as of
July 14, 1997, between the Company, Gore and GTCR Fund IV (a)
10.12 Lease Agreement, dated December 16, 1985, as amended, by and
between Union Labor Hospital Association and Brim Hospitals,
Inc. (a)
10.13 Lease Agreement, dated October 1, 1996, by and between County
of Starke, State of Indiana, and Principal Knox Company (a)
10.14 Lease Agreement, dated December 1, 1993, by and between Palo
Verde Hospital Association and Brim Hospitals, Inc. (a)
10.15 Lease Agreement, dated May 15, 1986, as amended, by and
between Fort Morgan Community Hospital Association and Brim
Hospitals, Inc. (a)
10.16 Lease Agreement, dated April 24, 1996, as amended, by and
between Parkview Regional Hospital, Inc. and Brim Hospitals,
Inc. (a)
10.17 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)
10.18 Corporate Purchasing Agreement, dated April 21, 1997, between
Aligned Business Consortium Group and PHC (a)
10.19 Principal Hospital Company 1997 Long-Term Equity Incentive
Plan (a)
10.20 Lease Agreement, dated December 17, 1996, between Brim and
Encore Senior Living, L.L.C. (a)
42
43
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.21 First Amendment to Securities Purchase Agreement, dated as of
December 31, 1997, between PHC and Leeway & Co. (a)
10.22 Second Amendment to Senior Management Agreement, dated as of
October 15, 1997, between the Company, Rash, GTCR Fund IV (a)
10.23 Second Amendment to Senior Management Agreement, dated as of
October 15, 1997, between the Company, Gore and GTCR Fund IV
(a)
10.24 Second Amendment to Stockholders Agreement, dated as of
December 31, 1997, between the Company, GTCR Fund IV, Rash,
Gore and certain other stockholders (a)
10.25 Asset Acquisition Agreement and Escrow Instructions, dated
March 22, 1994, between THC-Seattle, Inc., Community
Psychiatric Centers, Brim Fifth Avenue, Inc. and Brim
Hospitals, Inc. (a)
10.26 Bill of Sale and Assignment, dated July 9, 1997, by
Nationwide Health Properties, Inc. in favor of Brim Hospitals,
Inc. (a)
10.27 Asset Purchase Agreement, dated July 12, 1996, between
Memorial Hospital Foundation-Palestine, Inc. and Palestine
Principal Healthcare Limited Partnership (a)
10.28 Agreement of Limited Partnership, dated July 17, 1996, between
Principal Hospital Company, Palestine-Principal, Inc. and
Mother Frances Hospital Regional Healthcare Center. (a)
10.29 Lease Agreement, dated as of March 30, 1998, between First
Security Bank, National Association, as Owner Trustee, and
Province Healthcare Company, as Lessee (b)
10.30 Asset Purchase Agreement, dated April 29, 1998, between
Province Healthcare Company, PHC-Lake Havasu, Inc. and
Samaritan Health System (c)
10.31 Asset Purchase Agreement, dated June 8, 1998, between Province
Healthcare Company and the County of Elko (d)
10.32 Amendment to the Province Healthcare Company Long-Term Equity
Incentive Plan, effective March 24, 1998 (e)
10.33 Province Healthcare Company Employee Stock Purchase Plan,
effective March 24, 1998 (e)
21.1 Subsidiaries of the Registrant *
43
44
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
23.1 Consent of Ernst & Young LLP *
27.1 Financial Data Schedule - 1998 (for SEC use only) *
27.2 Financial Data Schedule - 1997 (for SEC use only) *
(a) Incorporated by reference to the exhibits filed with the
Registrant's Registration Statement on Form S-1, Registration
No. 333-34421.
(b) Incorporated by reference to the exhibits filed with the
Registrant's Quarterly Report on Form 10-Q, for the quarterly
period ended March 31, 1998, Commission File No. 0-23639.
(c) Incorporated by reference to the exhibits filed with the
Registrant's Current Report on Form 8-K, dated May 14, 1998,
Commission File No. 0-23639.
(d) Incorporated by reference to Exhibit 10.26 filed with the
Registrant's Registration Statement on Form S-1, Registration
No. 333-56663.
(e) Incorporated by reference to the exhibits filed with the
Registrant's Proxy Statement on Schedule 14A, dated May 11,
1998, Commission File No. 0-23639.
(*) Filed herewith
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
The following is a list of all executive compensation plans
and arrangements filed as exhibits to this Annual Report on Form 10-K:
EXHIBIT
NUMBER EXHIBIT
- ------ -------
10.4 Employment Agreement, dated as of December 17, 1996, by and
between A.E. Brim and Brim (a)
10.19 Principal Hospital Company 1997 Long-Term Equity Incentive
Plan (a)
10.32 Amendment to the Province Healthcare Company Long-Term Equity
Incentive Plan, effective March 24, 1998 (e)
10.33 Province Healthcare Company Employee Stock Purchase Plan,
effective March 24, 1998 (e)
44
45
- --------------------
(a) Incorporated by reference to exhibits filed with the
Registrant's Registration Statement on Form S-1, Registration
No. 333-34421
(e) Incorporated by reference to the exhibits filed with the
Registrant's Proxy Statement on Schedule 14A, dated May 11,
1998, Commission File No. 0-23639
(b) REPORTS ON FORM 8-K
None.
45
46
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
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.
Name Title Date
---- ----- ----
/s/ Martin S. Rash President and Chief Executive March 30, 1999
Martin S. Rash Officer, Director
/s/ Richard D. Gore Executive Vice President and March 30, 1999
Richard D. Gore Chief Financial Officer
/s/ Bruce V. Rauner Director March 30, 1999
Bruce V. Rauner
/s/ Joseph P. Nolan Director March 30, 1999
Joseph P. Nolan
/s/ A. E. Brim Director March 30, 1999
A. E. Brim
/s/ Michael T. Willis Director March 30, 1999
Michael T. Willis
/s/ David L. Steffy Director March 30, 1999
David L. Steffy
46
47
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 are included as a separate section of this
report:
Province Healthcare Company
Report of Independent Auditors...............................................................................F-2
Consolidated Balance Sheets At December 31, 1997 and 1998....................................................F-3
Consolidated Statements of Operations for the period February 2, 1996 to
December 31, 1996 and for the Years Ended December 31, 1997
and 1998.................................................................................................F-4
Consolidated Statements of Changes in Common Stockholders' Equity (Deficit) for
the period February 2, 1996 to December 31, 1996 and for the
Years Ended December 31, 1997 and 1998...................................................................F-5
Consolidated Statements of Cash Flows for the period February 2, 1996
to December 31, 1996 and for the Years Ended December 31, 1997
and 1998.................................................................................................F-6
Notes to Consolidated Financial Statements...................................................................F-7
Brim, Inc. and Subsidiaries
Report of Independent Auditors..............................................................................F-28
Consolidated Statement of Income for the period January 1, 1996 to
December 18, 1996.......................................................................................F-29
Consolidated Statement of Cash Flows for the period January 1, 1996
to December 18, 1996....................................................................................F-30
Notes to Consolidated Financial Statements..................................................................F-32
The following financial statement schedule is included as a separate
section of this report.
Schedule II - Valuation and Qualifying Accounts S-1
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore, have been
omitted.
F-1
48
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Province Healthcare Company
We have audited the accompanying consolidated balance sheets of
Province Healthcare Company (formerly known as Principal Hospital Company) and
subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, changes in common stockholders' equity (deficit),
and cash flows for the period February 2, 1996 (date of inception) to December
31, 1996 and the years ended December 31, 1997 and 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Province Healthcare Company and subsidiaries as of December 31, 1997 and 1998,
and the consolidated results of their operations and their cash flows for the
period February 2, 1996 to December 31, 1996 and the years ended December 31,
1997 and 1998, in conformity with generally accepted accounting principles.
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.
Ernst & Young LLP
Nashville, Tennessee
February 19, 1999, except for Note 17,
as to which the date is February 22, 1999
F-2
49
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
1997 1998
--------- --------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 4,186 $ 2,113
Accounts receivable, less allowance
for doubtful accounts of $4,749 in 1997
and $9,033 in 1998 30,902 51,253
Inventories 3,655 7,083
Prepaid expenses and other 8,334 10,211
--------- --------
Total current assets 47,077 70,660
Property, plant and equipment, net 65,974 112,114
Other assets:
Unallocated purchase price 760 2,345
Cost in excess of net
assets acquired, net 53,624 142,017
Other 9,026 10,368
--------- --------
63,410 154,730
--------- --------
$ 176,461 $337,504
========= ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 6,524 $ 6,786
Accrued salaries and benefits 8,720 8,655
Accrued expenses 4,422 2,710
Current maturities of long-term obligations 6,053 1,797
--------- --------
Total current liabilities 25,719 19,948
Long-term obligations, less current maturities 83,043 134,301
Third-party settlements 4,680 3,502
Other liabilities 13,088 9,862
Minority interest 825 700
--------- --------
101,636 148,365
Mandatory redeemable preferred stock 50,162 --
Common stockholders' equity (deficit):
Common stock--no par value at
December 31, 1997; $0.01 par value at
December 31, 1998; 25,000,000 shares authorized;
issued and outstanding 6,330,614
shares and 15,704,578 shares at
December 31, 1997 and 1998, respectively 2,116 157
Additional paid-in-capital -- 162,926
Retained earnings (deficit) (3,172) 6,108
--------- --------
(1,056) 169,191
--------- --------
$ 176,461 $337,504
========= ========
See accompanying notes.
F-3
50
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
PRO FORMA
(UNAUDITED)
PERIOD YEAR ENDED
FEB. 2 YEAR ENDED DECEMBER 31 DEC. 31,
TO DEC. 31, ----------------------- 1998
1996 1997 1998 (NOTE 15)
-------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Net patient service revenue $ 16,425 $ 149,296 $ 217,364 $217,364
Management and professional services 607 11,517 11,885 11,885
Reimbursable expenses -- 6,674 6,520 6,520
Other 223 3,040 3,086 3,086
-------- --------- --------- --------
Net operating revenue 17,255 170,527 238,855 238,855
Expenses:
Salaries, wages and benefits 7,599 66,172 94,970 94,970
Reimbursable expenses -- 6,674 6,520 6,520
Purchased services 2,286 23,242 28,250 28,250
Supplies 1,897 16,574 24,252 24,252
Provision for doubtful accounts 1,909 12,812 17,839 17,839
Other operating expenses 2,872 16,318 19,149 19,149
Rentals and leases 214 4,888 5,777 5,777
Depreciation and amortization 1,307 7,557 13,409 13,409
Interest expense 976 8,121 10,555 7,332
Minority interest 184 329 155 155
Loss on sale of assets -- 115 45 45
-------- --------- --------- --------
Total expenses 19,244 162,802 220,921 217,698
-------- --------- --------- --------
Income (loss) before income taxes (1,989) 7,725 17,934 21,157
Income taxes (benefit) (673) 3,650 7,927 9,348
-------- --------- --------- --------
Income (loss) before extraordinary item (1,316) 4,075 10,007 11,809
Loss from early retirement of debt,
net of taxes of $167 (262) -- -- --
-------- --------- --------- --------
Net income (loss) (1,578) 4,075 10,007 11,809
Preferred stock dividends and accretion (172) (5,077) (696) --
-------- --------- --------- --------
Net income (loss) to common shareholders $ (1,750) $ (1,002) $ 9,311 $ 11,809
======== ========= ========= ========
Income (loss) per share to common
shareholders--basic:
Income (loss) before extraordinary item $ (0.52) $ (0.17) $ 0.70 $ 0.75
Extraordinary item (0.09) -- -- --
-------- --------- --------- --------
Net income (loss) to common shareholders $ (0.61) $ (0.17) $ 0.70 $ 0.75
======== ========= ========= ========
Income (loss) per share to common shareholders--diluted:
Income (loss) before extraordinary item $ (0.52) $ (0.17) $ 0.68 $ 0.74
Extraordinary item (0.09) -- -- --
-------- --------- --------- --------
Net income (loss) to common shareholders $ (0.61) $ (0.17) $ 0.68 $ 0.74
======== ========= ========= ========
See accompanying notes.
F-4
51
PROVINCE HEALTHCARE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON
STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
NOTES
CLASS A CLASS B RECEIVABLE
COMMON STOCK COMMON STOCK COMMON STOCK FOR ADDITIONAL RETAINED
------------------- ---------------- -------------------- COMMON PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL (DEFICIT) TOTAL
-------- -------- -------- ------ ----------- ------- ----- -------- -------- ---------
Balance at February 2, 1996 -- $ -- -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of stock 13,983 13,983 85,890 86 -- -- (211) -- -- 13,858
Dividends on Class A
Common Stock 420 420 -- -- -- -- -- -- (420) --
Exchange of PHC Class A
and Class B Common Stock
for Brim Common Stock (14,403) (14,403) (85,890) (86) 2,757,947 86 211 -- -- (14,192)
Reverse acquisition of Brim -- -- -- -- 2,612,553 1,594 -- -- -- 1,594
Preferred stock dividends
and accretion -- -- -- -- -- -- -- -- (172) (172)
Net loss -- -- -- -- -- -- -- -- (1,578) (1,578)
-------- -------- -------- ---- ----------- ------- ----- -------- -------- ---------
Balance at December 31, 1996 -- -- -- -- 5,370,500 1,680 -- -- (2,170) (490)
Issuance of stock -- -- -- -- 960,114 436 -- -- -- 436
Preferred stock dividends
and accretion -- -- -- -- -- -- -- -- (5,077) (5,077)
Net income -- -- -- -- -- -- -- -- 4,075 4,075
-------- -------- -------- ---- ----------- ------- ----- -------- -------- ---------
Balance at December 31, 1997 -- -- -- -- 6,330,614 2,116 -- -- (3,172) (1,056)
Reincorporation -- -- -- -- -- (2,053) -- 2,053 -- --
Conversion of junior prefer
red stock and initial
public offering of common
stock -- -- -- -- 6,679,154 67 -- 95,285 (31) 95,321
Issuance of stock from
follow-on stock offering -- -- -- -- 2,685,500 27 -- 65,500 -- 65,527
Exercise of stock options -- -- -- -- 9,310 -- -- 88 -- 88
Preferred stock dividends
and accretion -- -- -- -- -- -- -- -- (696) (696)
Net income -- -- -- -- -- -- -- -- 10,007 10,007
-------- -------- -------- ---- ----------- ------- ----- -------- -------- ---------
Balance at December 31, 1998 -- $ -- -- $ -- 15,704,578 $ 157 $ -- $162,926 $ 6,108 $ 169,191
======== ======== ======== ==== =========== ======= ===== ======== ======== =========
See accompanying notes.
F-5
52
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD
FEB. 2 YEAR ENDED DECEMBER 31,
TO DEC. 31, -----------------------
1996 1997 1998
--------- -------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss) $ (1,578) $ 4,075 $ 10,007
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,307 7,557 13,409
Provision for doubtful accounts 1,909 12,812 17,839
Deferred income taxes (874) 4,677 862
Extraordinary charge from retirement of debt 429 -- --
Provision for professional liability 200 36 (54)
Loss on sale of assets -- 115 45
Changes in operating assets and liabilities, net of effects from
acquisitions and disposals:
Accounts receivable (3,243) (20,885) (31,902)
Inventories 91 (712) (1,524)
Prepaid expenses and other 724 (3,833) (3,472)
Other assets 375 (2,256) (4,716)
Accounts payable and accrued expenses 2,160 (2,449) (2,274)
Accrued salaries and benefits 643 860 (1,582)
Third-party settlements -- (1,924) (1,178)
Other liabilities (507) 1,089 391
--------- -------- ---------
Net cash provided by (used in) operating activities 1,636 (838) (4,149)
INVESTING ACTIVITIES
Purchase of property, plant and equipment (1,043) (15,557) (15,545)
Purchase of acquired companies, net of cash received 4,645 (2,673) (130,842)
--------- -------- ---------
Net cash provided by (used in) investing activities 3,602 (18,230) (146,387)
FINANCING ACTIVITIES
Proceeds from long-term debt 19,300 12,000 248,042
Repayments of debt (26,431) (4,143) (204,638)
Additions to deferred loan costs (709) -- --
Issuance of common stock 13,858 436 142,682
Issuance of preferred stock -- 3,705 --
Repurchase of common stock -- -- (14,884)
Redemption of senior preferred stock -- -- (22,739)
--------- -------- ---------
Net cash provided by financing activities 6,018 11,998 148,463
--------- -------- ---------
Net increase (decrease) in cash and cash equivalents 11,256 (7,070) (2,073)
Cash and cash equivalents at beginning of period -- 11,256 4,186
--------- -------- ---------
Cash and cash equivalents at end of period $ 11,256 $ 4,186 $ 2,113
========= ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid during the period $ 1,011 $ 7,143 $ 9,260
========= ======== =========
Income taxes paid during the period $ -- $ 5,639 $ 5,055
========= ======== =========
ACQUISITIONS
Assets acquired $ 148,326 $ 3,191 $ 133,683
Liabilities assumed (119,553) (518) (2,841)
Common and preferred stock issued (33,418) -- --
--------- -------- ---------
Cash paid (received) $ (4,645) $ 2,673 $ 130,842
========= ======== =========
NONCASH TRANSACTIONS
Dividends and accretion $ 172 $ 5,077 $ 696
========= ======== =========
See accompanying notes.
F-6
53
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION
The Company (formerly Principal Hospital Company (PHC) until February
4, 1998) was founded on February 2, 1996. The Company is engaged in the business
of owning, leasing and managing hospitals in non-urban communities, principally
in the northwestern and southwestern United States.
As discussed in Note 3, on December 18, 1996, a subsidiary of Brim,
Inc. (Brim) and PHC merged in a transaction in which Brim issued junior
preferred and common stock to PHC. As the PHC shareholders became owners of a
majority of the outstanding shares of Brim after the merger, PHC was considered
the acquiring enterprise for financial reporting purposes and the transaction
was accounted for as a reverse acquisition. Therefore, the historical financial
statements of PHC replaced the historical financial statements of Brim, the
assets and liabilities of Brim were recorded at fair value as required by the
purchase method of accounting, and the operations of Brim were reflected in the
operations of the combined enterprise from the date of acquisition. As PHC was
in existence for less than a year at December 31, 1996, and because Brim has
been in existence for several years, PHC is considered the successor to Brim's
operations. Brim, the predecessor company and surviving legal entity, changed
its name to Principal Hospital Company on January 16, 1997.
On February 4, 1998, the Company merged with a wholly-owned subsidiary
in order to change its jurisdiction of incorporation to Delaware and change its
name to Province Healthcare Company. In the Merger, the Company exchanged 1.83
shares of its no par common stock for each share of the subsidiary's $0.01 par
value common stock. All common share and per share data included in the
consolidated financial statements and footnotes thereto have been restated to
reflect this reincorporation.
2. ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, its majority-owned subsidiaries and partnerships in which the Company
or one of its subsidiaries is a general partner and has a controlling interest.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to
F-7
54
conform to the 1998 presentation. These reclassifications had no effect on net
income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents include all highly liquid investments with an original
maturity of three months or less when acquired. The Company places its cash in
financial institutions that are federally insured and limits the amount of
credit exposure with any one financial institution.
PATIENT ACCOUNTS RECEIVABLE
The Company's primary concentration of credit risk is patient accounts
receivable, which consist of amounts owed by various governmental agencies,
insurance companies and private patients. The Company manages the receivables by
regularly reviewing its accounts and contracts and by providing appropriate
allowances for uncollectible amounts. Significant concentrations of gross
patient accounts receivable at December 31, 1997 and 1998, consist of
receivables from Medicare of 36% and 35%, respectively, and Medicaid of 12% and
12%, respectively. Concentration of credit risk relating to accounts receivable
is limited to some extent by the diversity and number of patients and payors.
INVENTORIES
Inventories are stated at the lower of cost, determined by the
first-in, first-out method, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated on the basis of cost. Routine
maintenance and repairs are charged to expense as incurred. Expenditures that
increase values, change capacities or extend useful lives are capitalized.
Depreciation is computed by the straight-line method over the estimated useful
lives of the assets, which range from 3 to 40 years. Amortization of equipment
under capital leases is included in the provision for depreciation.
INTANGIBLE ASSETS
Intangible assets arising from the accounting for acquired businesses
are amortized using the straight-line method over the estimated useful lives of
the related assets which range
F-8
55
from 5 years for management contracts to 15 to 35 years for cost in excess of
net assets acquired.
At December 31, 1997 and 1998, cost in excess of net assets acquired
totaled $55,653,000 and $147,654,000, respectively, and accumulated amortization
totaled $2,029,000 and $5,637,000, respectively. Management contracts are
included in other noncurrent assets. At December 31, 1997 and 1998, management
contracts totaled $1,200,000 and accumulated amortization totaled $249,000 and
$489,000, respectively.
OTHER ASSETS
Deferred loan costs are included in other noncurrent assets and are
amortized over the term of the related debt by the interest method. At December
31, 1997 and 1998, deferred loan costs totaled $3,083,000 and $4,487,000,
respectively, and accumulated amortization totaled $916,000 and $1,637,000,
respectively.
RISK MANAGEMENT
The Company maintains self-insured medical and dental plans for
employees. Claims are accrued under these plans as the incidents that give rise
to them occur. Unpaid claim accruals are based on the estimated ultimate cost of
settlement, including claim settlement expenses, in accordance with an average
lag time and past experience. The Company has entered into a reinsurance
agreement with an independent insurance company to limit its losses on claims.
Under the terms of this agreement, the insurance company will reimburse the
Company a maximum of $900,000 on any individual claim. These reimbursements are
included in salaries, wages and benefits in the accompanying consolidated
statements of operations.
The Company is insured for professional liability based on a
claims-made policy purchased in the commercial insurance market. The provision
for professional liability and comprehensive general liability claims includes
estimates of the ultimate costs for claims incurred but not reported, in
accordance with actuarial projections based on past experience. Management is
aware of no professional liability claims whose settlement, if any, would have a
material adverse effect on the Company's consolidated financial position or
results of operations.
F-9
56
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 at the estimated net realizable
amounts from patients, third-party payors, and others for services rendered,
including estimated retroactive adjustments under reimbursement agreements with
third-party payors. Estimated settlements under third-party reimbursement
agreements are accrued in the period the related services are rendered and
adjusted in future periods as final settlements are determined.
MANAGEMENT AND PROFESSIONAL SERVICES
Management and professional services is comprised of fees from
management and professional services provided to third-party hospitals pursuant
to management contracts and consulting arrangements. The base fees associated
with the hospital management contracts are determined in the initial year of the
contract on an individual hospital basis. In certain contracts, the Company is
entitled to a yearly bonus based on the performance of the managed hospital. The
base fee, which is fixed, is based on a fair market wage and is not dependent on
any bonus structure. The management contracts are adjusted yearly based on an
agreed upon inflation indicator. The reimbursable expenses relate to salaries
and benefits of Company employees that serve as executives at the managed
hospitals. The salaries and benefits of these employees are legal obligations
of, and are paid by, the Company and are reimbursed by the managed hospitals.
Fees are recognized as revenue as services are performed. The Company does not
maintain any ownership interest in and does not fund operating losses or
guarantee any minimum income for these managed hospitals. The Company does not
have any guarantees to these hospitals, except for two managed hospitals for
which the Company has guaranteed the hospitals' long-term debt of $690,000.
STOCK BASED COMPENSATION
The Company, from time to time, grants stock options for a fixed number
of common shares to employees. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and accordingly, recognizes no compensation expense for the
stock option grants when the exercise price of the options equals, or is greater
than, the market 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.
F-10
57
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. Statement
No. 130 established new rules for the reporting and display of comprehensive
income and its components. The Company had no items of other comprehensive
income, and accordingly, adoption of the Statement had no effect on the
consolidated financial statements.
Effective January 1, 1998, the Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. Statement
No. 131 established standards for the reporting of information about operating
segments. In excess of 90% of the Company's assets, revenues and income are
derived from one segment, the ownership and operation of acute care hospitals.
Accordingly, segment disclosures are not presented in these financial
statements.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued, and is required to be adopted in years beginning
after June 15, 1999. This Statement requires all derivatives to be recorded on
the balance sheet at fair value. This results in the offsetting changes in fair
values or cash flows of both the hedge and the hedged item being recognized in
earnings in the same period. Changes in fair value of derivatives not meeting
the Statement's hedge criteria are included in income. The Company expects to
adopt the new Statement January 1, 2000. The Company does not expect the
adoption of this Statement to have a significant effect on its results of
operations or financial position.
F-11
58
3. ACQUISITIONS
MEMORIAL MOTHER FRANCES HOSPITAL
In July 1996, the Company purchased certain assets totaling $26,394,000
and assumed certain liabilities totaling $3,211,000 of Memorial Mother Frances
Hospital for a purchase price of $23,183,000. Cost of the acquisition
approximated net assets acquired.
STARKE MEMORIAL HOSPITAL
In October 1996, the Company acquired Starke Memorial Hospital by
purchasing certain assets totaling $458,000, assuming certain liabilities
totaling $211,000, and entering into a capital lease agreement, for a purchase
price of approximately $7,742,000. The cost in excess of net assets acquired is
being amortized over 20 years.
BRIM, INC.
In December 1996, a subsidiary of Brim merged with PHC. Brim was
engaged in the business of owning, leasing and managing hospitals in non-urban
communities primarily in the northwestern and southwestern United States. In
exchange for their shares in PHC, the PHC shareholders received 14,403 shares of
newly-designated redeemable junior preferred stock and 2,757,947 shares of newly
designated common stock of Brim. The Company purchased certain assets totaling
$89,625,000 and assumed certain liabilities totaling $140,424,000 for a purchase
price of approximately $1,594,000. The acquisition of Brim resulted in cost in
excess of net assets acquired of $52,393,000, which is being amortized over a
period ranging from 20 to 35 years.
As discussed in Note 1, the merger was accounted for as a reverse
acquisition under the purchase method of accounting and, for accounting
purposes, PHC was considered as having acquired Brim. The historical financial
statements of PHC became the historical financial statements of Brim and include
the results of operations of Brim from the effective date of the merger,
December 18, 1996.
COLORADO RIVER MEDICAL CENTER
In August 1997, the Company acquired Colorado River Medical Center by
purchasing certain assets totaling $70,000, assuming certain liabilities
totaling $121,000, and entering into a capital lease agreement, for a purchase
price of approximately $6,293,000. Cost in excess of net assets acquired in the
acquisition totaled approximately $1,047,000 and is being amortized over 15
years.
F-12
59
HAVASU SAMARITAN REGIONAL HOSPITAL
In May 1998, the Company acquired Havasu Samaritan Regional Hospital in
Lake Havasu City, Arizona, for approximately $107,467,000. To finance this
acquisition, the Company borrowed $106,000,000 under its revolving credit
facility. Cost in excess of net assets acquired in the acquisition totaled
approximately $76,474,000 and is being amortized over 35 years.
ELKO GENERAL HOSPITAL
In June 1998, the Company acquired Elko General Hospital in Elko,
Nevada, for a purchase price of approximately $23,251,000. To finance this
acquisition, the Company borrowed $22,000,000 under its revolving credit
facility. Cost in excess of net assets acquired in the acquisition totaled
approximately $14,331,000 and is being amortized over 35 years. The allocation
of the purchase price has been determined based upon currently available
information and is subject to further refinement, pending the final settlement
of the working capital acquired. The Company has committed to spend at least
$30,000,000 on a replacement facility within thirty-six months of the
acquisition close date.
OTHER INFORMATION
In accordance with its stated policy, management of the Company
evaluates all acquisitions independently to determine the appropriate
amortization period for cost in excess of net assets acquired. Each evaluation
includes an analysis of factors such as historic and projected financial
performance, evaluation of the estimated useful lives of buildings and fixed
assets acquired, the indefinite lives of certificates of need and licenses
acquired, the competition within local markets, and lease terms where
applicable.
The foregoing acquisitions were accounted for using the purchase method
of accounting. The operating results of the acquired companies have been
included in the accompanying consolidated statements of operations from the
respective dates of acquisition.
The following pro forma information reflects the operations of the
entities acquired in 1996, 1997 and 1998, 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):
1996 1997 1998
----------- ----------- -----------
Net operating revenue $ 164,748 $ 258,406 $ 272,899
Net income (loss) (11,435) (972) 10,361
Net income (loss) to common shareholders (11,607) (6,049) 9,665
Basic earnings (loss) per share:
Net income (loss) $ (4.00) $ (0.17) $ 0.78
F-13
60
Net income (loss) to common shareholders (4.06) (1.05) 0.72
Diluted earnings per share:
Net income (loss) (4.00) $ (0.17) $ 0.76
Net income (loss) to common shareholders (4.06) (1.05) 0.71
The pro forma results of operations do not purport to represent what
the Company's results would have been had such transactions in fact occurred at
the beginning of the periods presented or to project the Company's results of
operations in any future period.
The Company has minority ownership in various health care related
businesses. These investments are accounted for by the equity method. The
assets, liabilities and results of operations of these businesses are not
material to the consolidated financial statements.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
DECEMBER 31,
--------------------------
1997 1998
--------- ---------
Land $ 4,991 $ 12,448
Leasehold improvements 3,114 3,392
Buildings and improvements 37,310 61,176
Equipment 22,846 42,385
--------- ---------
68,261 119,401
Less allowances for depreciation and amortization (5,900) (15,242)
--------- ---------
62,361 104,159
Construction-in-progress (estimated cost to complete
at December 31, 1998--$31,683) 3,613 7,955
--------- ---------
$ 65,974 $ 112,114
========= =========
Assets under capital leases were $23,619,000 and $17,374,000, net of
accumulated amortization of $2,684,000 and $3,957,000 at December 31, 1997 and
1998, 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 amortized over the asset's
estimated useful life. In 1997 and 1998, respectively, $223,000 and $288,000 of
interest cost was capitalized.
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
F-14
61
DECEMBER 31,
--------------------------
1997 1998
--------- ---------
Revolving credit agreement $ 47,000 $ 127,000
Term loan 35,000 --
Other debt obligations 47 1,652
--------- ---------
82,047 128,652
Obligations under capital leases (see Note 11) 7,049 7,446
--------- ---------
89,096 136,098
Less current maturities (6,053) (1,797)
--------- ---------
$ 83,043 $ 134,301
========= =========
In connection with the Brim merger in 1996, the Company repaid its
outstanding debt and reported a $262,000 loss on early retirement, net of taxes
of $167,000, as a result of the write off of related deferred financing costs.
As a result of the reverse acquisition of Brim, the Company assumed a
$100 million Credit Agreement of Brim, consisting of a revolving credit facility
in an amount of up to $65,000,000 and a term loan in the amount of $35,000,000.
There were $47,000,000 of borrowings outstanding under the revolving credit
agreement and $35,000,000 under the term loan at December 31, 1997. The Company
repaid the $35,000,000 term loan in 1998 using proceeds from its initial public
offering.
In March 1998, the Company amended and restated its Credit Agreement to
consist of a revolving credit agreement in the amount of $260,000,000. At
December 31, 1998, the Company had $127,000,000 outstanding under its
revolving line of credit and borrowing availability of $133,000,000.
The loans under the Credit Agreement bear interest, at the Company's
option, at the adjusted base rate or at the adjusted LIBOR rate. The interest
rate ranged from 6.78% to 9.50% during 1998. The Company pays a commitment fee,
which varies from one-quarter to one-half of one percent of the unused portion,
depending on the Company's compliance with certain financial ratios. The Company
may prepay the principal amount outstanding under the revolving credit agreement
at any time before the maturity date of March 30, 2003.
The Credit Agreement contains limitations on the Company's ability to
incur additional indebtedness (including contingent obligations), sell material
assets, retire, redeem or otherwise reacquire its capital stock, acquire the
capital stock or assets of another business, and pay dividends. The Credit
Agreement also requires the Company to maintain a specified net worth and meet
or exceed certain coverage, leverage, and indebtedness ratios. Indebtedness
under the Credit Agreement is secured by substantially all assets of the
Company.
During 1997, as required by the credit facility, the Company entered
into an interest rate
F-15
62
swap agreement, which effectively converted for a three-year period $35,000,000
of floating-rate borrowings to fixed-rate borrowings. On September 4, 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. These interest rate swap agreements are used to manage
the Company's interest rate exposure. The agreements are contracts to
periodically exchange floating interest rate payments for fixed interest rate
payments over the life of the agreements. The Company secured a 6.27% fixed
interest rate on the 1997 swap and a 5.63% rate on the 1998 swap. These
agreements expose the Company to credit losses in the event of non-performance
by the counterparties to its financial instruments. The Company anticipates that
the counterparties will fully satisfy their obligations under the contracts.
Aggregate maturities of long-term obligations at December 31, 1998,
excluding capital leases, are as follows (in thousands):
1999 $ --
2000 1,652
2001 100,000
2002 27,000
--------
$128,652
========
6. MANDATORY REDEEMABLE PREFERRED STOCK
Redeemable preferred stock consists of the following:
DECEMBER 31,
-----------------------
1997 1998
------- ----
(in thousands)
Series A redeemable senior preferred stock-
$20,000,000 stated value, net of a warrant and
unamortized issuance costs of $932,000 $19,068 $ --
Series B redeemable junior preferred stock-
$32,295,000 stated value, net of unamortized
issuance costs of $1,201,000 31,094 --
------- ----
$50,162 --
======= ====
The 20,000 outstanding shares of Series A redeemable senior preferred
stock and a warrant to purchase 253,228 shares of common stock were issued in
December 1996 by Brim for cash of $20,000,000. Issuance costs totaled
$892,000. Series A redeemable preferred stock paid
F-16
63
cumulative preferential dividends which accrued on a daily basis at the rate of
11% and were payable in cash when and as declared by the board of directors.
Of the 32,295 outstanding shares of Series B redeemable junior
preferred stock at December 31, 1997, 28,540 were issued in December 1996 by
Brim and 3,755, were issued in July 1997. Issuance costs totaled $1,282,000 and
$50,000 for the December 1996 and July 1997 issues, respectively. Series B
redeemable junior preferred stock paid cumulative preferential dividends which
accrued on a daily basis at the rate of 8% and were payable in cash when and as
declared by the board of directors.
In connection with its initial public offering of common stock, the
Company redeemed all of the outstanding shares of Series A preferred stock and
all accrued and unpaid dividends thereon; and converted into common stock all of
the outstanding shares of Series B preferred stock, plus accrued and unpaid
dividends thereon.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
Prior to the merger with Brim, the capital stock of PHC consisted of
Class A Common Stock, and Class B Common Stock. All of the Class A and Class B
Common Stock was exchanged by the PHC shareholders in the merger with Brim for
14,403 shares of Brim junior preferred stock and 2,757,947 shares of Brim common
stock as more fully discussed in Note 3.
In May 1997, the Company declared a three-for-one stock split of the
outstanding common stock and common stock options and warrant. All common share
and per share data included in the accompanying consolidated financial
statements and footnotes have been restated to reflect this stock split.
In February 1998, the Company merged with a wholly-owned subsidiary in
order to change its jurisdiction of incorporation to Delaware and change its
name to Province Healthcare Company. In the Merger, the Company exchanged 1.83
shares of its no par common stock for each share of the subsidiary's $0.01 par
value common stock. All common share and per share data included in the
consolidated financial statements and footnotes have been restated to reflect
this reincorporation. As a result of the reincorporation, $2,053,000 was
reclassified from common stock to additional paid-in-capital upon conversion
from no par to $0.01 par value Common Stock.
In February 1998, the Company closed its initial public offering of
5,405,000 shares of common stock at an offering price of $16.00 per share. In
connection with the offering, the Series B redeemable junior preferred stock was
converted into common stock at the public offering price of the common stock.
The net proceeds from the offering were used to redeem the outstanding balance
of the Series A redeemable senior preferred stock plus accrued dividends, reduce
the balance of the outstanding term and revolving credit loans, and repurchase a
portion of the
F-17
64
common stock which was issued upon conversion of the Series B redeemable junior
preferred stock.
In July 1998, the Company completed its public offering of 2,685,500
shares of common stock at an offering price of $26.00 per share. The net
proceeds from the offering of approximately $65,700,000 were used primarily to
reduce debt.
STOCK OPTIONS
The Company follows Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related Interpretations in
accounting for its employee stock options. Under APB 25, when the exercise price
of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
In March 1997, the Company's Board of Directors approved the 1997
Long-Term Incentive Plan (the Plan). Under the Plan, options to purchase shares
may be granted to officers, employees, and directors. The options have a maximum
term of ten years and vest in five equal annual installments. Options are
generally granted at not less than market price on the date of grant.
The following is a summary of option transactions during 1997 and 1998:
Number. of Option
Options Price Range
---------- ------------------------
Balance at January 1, 1997 -- $ -- $ --
Options granted 286,907 4.58 4.58
Options exercised -- -- --
Options forfeited (8,252) 4.58 4.58
--------
Balance at December 31, 1997 278,655 4.58 4.58
Options granted 633,868 16.00 28.06
Options exercised (9,310) 4.58 16.00
Options forfeited (119,013) 4.58 16.00
--------
Balance at December 31, 1998 784,200
========
At December 31, 1997, 37,736 options were exercisable, with a vesting
schedule based on employment date.
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998:
F-18
65
Options Outstanding Options Exercisable
- --------------------------------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ---- ----- ----------- -----
$ 4.58-$4.58 226,316 8.2 $ 4.58 80,675 $ 4.58
16.00-16.00 385,084 9.1 16.00 8,158 16.00
21.00-21.00 110,800 9.8 21.00 -- --
26.00-26.00 54,000 9.4 26.00 -- --
28.06-28.06 8,000 9.9 28.06 -- --
- ------------- ------- --- ------ ------ ------
$4.58-$28.06 784,200 9.0 $14.22 88,833 $ 5.63
============= ======= === ====== ====== ======
At December 31, 1998, the Company had options representing 415,506 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 1997 and 1998, respectively:
risk-free interest rate of 6.41% and 5.28%; dividend yield of 0%; volatility
factor of the expected market price of the Company's common stock of .563 and
.640; and a weighted-average expected life of the option of 5 years. The
estimated weighted average fair values of shares granted during 1997 and 1998,
using the Black-Scholes option pricing model, were $2.90 and $12.80,
respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except for per share
information):
F-19
66
1997 1998
--------- ---------
Pro forma net income (loss) to common shareholders $ (1,131) $ 8,592
Pro forma net income (loss) per share to common shareholders:
Basic (0.20) 0.64
Diluted (0.20) 0.63
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 "ESSP"). Under the Plan, employees may purchase shares of common stock
at 85% of market price on the first day of the year or 85% of market price on
the last day of the year, whichever is lower. The shares are purchased each year
with funds withheld from employees through payroll deductions from January 1
through December 31. A total of 250,000 shares of Common Stock have been
reserved for issuance under the ESSP. Participation in the Plan commenced in
January 1998.
WARRANT
In connection with the reverse acquisition of Brim (see Note 3), the
Company assumed a warrant that had been issued by Brim to purchase 253,228
shares of Brim's common stock for $15,447. On September 12, 1997, the warrant,
was exercised.
8. 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. Inpatient
nonacute services, certain outpatient services and medical
education costs 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, 1996.
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67
- 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
owns or leases four hospitals in California, and its Medi-Cal
cost reports have been audited by the Medi-Cal fiscal
intermediary through December 31, 1996. 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.
Approximately 62% and 57% of gross patient service revenue for the
years ended December 31, 1997 and 1998, respectively, are from participation in
the Medicare and state-sponsored Medicaid programs.
The Company owns or leases four hospitals in California, which
accounted for 40.9% of net operating revenue in 1997 and 33.4% in 1998. Three of
these hospitals were acquired in the Company's merger with Brim, and only
thirteen days of operations were included in 1996 results of operations.
Final determination of amounts earned under the Medicare and Medicaid
programs often occur in subsequent years because of audits by the programs,
rights of appeal and the application of numerous technical provisions.
Differences between original estimates and subsequent revisions (including final
settlements) are included in the statements of operations in the period in which
the revisions are made, and resulted in increases in net patient service revenue
of $788,000 for the predecessor company in 1996, and $3,260,000 and $4,050,000
for the Company in 1997 and 1998, respectively. The amount of the revisions that
occurred in the fourth quarter of 1997 and 1998 totaled $2,400,000 and $650,000,
respectively.
9. INCOME TAXES
The provision for income tax expense (benefit) attributable to income
(loss) before extraordinary item consists of the following amounts (in
thousands):
1996 1997 1998
------- ------- -------
Current:
Federal $ 162 $ (829) $ 5,556
State 39 (198) 1,509
------- ------- -------
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68
201 (1,027) 7,065
Deferred:
Federal (706) 3,776 905
State (168) 901 (43)
------- ------- -------
(874) 4,677 862
------- ------- -------
$ (673) $ 3,650 $ 7,927
======= ======= =======
The differences between the Company's effective income tax rate of
33.8%, 47.2% and 44.2% before extraordinary item for 1996, 1997 and 1998,
respectively, and the statutory federal income tax rate of 34.0% for 1996 and
1997 and 35.0% for 1998 are as follows (in thousands):
1996 1997 1998
------- ------- ------
Statutory federal rate $ (676) $ 2,627 $6,277
State income taxes, net of
federal income tax benefit (85) 464 953
Amortization of goodwill -- 577 594
Other 88 (18) 103
------- ------- ------
$ (673) $ 3,650 $7,927
======= ======= ======
The components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
DECEMBER 31,
-------------------------
1997 1998
------- -------
Deferred tax assets--current:
Accrued vacation liability $ 739 $ 1,061
Accrued liabilities 447 457
------- -------
Deferred tax assets--current 1,186 1,518
Deferred tax liabilities--current:
Accounts and notes receivable (32) (136)
------- -------
Deferred tax liabilities--current (32) (136)
------- -------
Net deferred tax assets--current $ 1,154 $ 1,382
======= =======
Deferred tax assets--noncurrent:
Net operating losses $ 278 $ 520
Accrued liabilities 727 670
Other 115 162
------- -------
1,120 1,352
Less valuation allowance (278) (286)
------- -------
Deferred tax assets--noncurrent 842 1,066
Deferred tax liabilities--noncurrent:
Property, plant and equipment (5,047) (5,224)
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69
Management contracts (370) (284)
Goodwill (26) (1,249)
------- -------
Deferred tax liabilities--noncurrent (5,443) (6,757)
------- -------
Net deferred tax liabilities--noncurrent $(4,601) $(5,691)
======= =======
Total deferred tax assets $ 2,306 $ 2,870
======= =======
Total deferred tax liabilities $ 5,475 $ 6,893
======= =======
Total valuation allowance $ 278 $ 286
======= =======
In the accompanying consolidated balance sheets, net current deferred
tax assets and net noncurrent deferred tax liabilities are included in prepaid
expenses and other, and other liabilities, respectively.
The Company had Federal net operating loss carryforwards (NOLs) of
approximately $714,000 at December 31, 1997 and 1998 related to a subsidiary.
These NOLs will expire beginning in 2009. Due to restrictions on the use of the
NOLs, management believes there is a risk they may expire unused, and
accordingly, has established a valuation reserve against the tax benefit of the
NOLs. Management believes it is more likely than not that the remaining deferred
tax assets, will ultimately be realized through future taxable income from
operations.
During 1997, the Internal Revenue Service finalized its examination of
the predecessor company's federal income tax returns for the 1993 and 1994
years. Finalization of the examination had no impact on the financial condition
or results of operations of the Company. The IRS is currently engaged in an
examination of the predecessor company's federal income tax returns for 1995 and
1996. Finalization of the examination is not expected to have a significant
impact on the financial condition or results of operations of the Company.
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
PRO FORMA
(UNAUDITED)
1998
1996 1997 1998 (SEE NOTE 15)
------- ------- -------- -------
Numerator for basic and diluted income
(loss) per share to common shareholders:
Income (loss) before extraordinary item $(1,316) $ 4,075 $ 10,007 $11,809
Less preferred stock dividends (172) (5,077) (696) --
------- ------- -------- -------
Income (loss) before extraordinary item
to common shareholders (1,488) (1,002) 9,311 11,809
Extraordinary item (262) -- -- --
------- ------- -------- -------
Net income (loss) to common shareholders $(1,750) $(1,002) $ 9,311 $11,809
======= ======= ======== =======
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70
Denominator:
Denominator for basic income (loss) per
share to common shareholders--
weighted-average shares 2,860 5,787 13,344 15,697
Effect of dilutive securities:
Stock rights -- 336 -- --
Warrants 10 189 -- --
Employee stock options -- 149 328 328
------- ------- -------- -------
Denominator for diluted income (loss)
per share to common shareholders--
adjusted weighted-average shares 2,870 6,461 13,672 16,025
======= ======= ======== =======
Income (loss) per share to common shareholders--basic:
Income (loss) before extraordinary item
to common shareholders $ (0.52) $ (0.17) $ 0.70 $ 0.75
Extraordinary item (0.09) -- -- --
------- ------- -------- -------
Net income (loss) to common shareholders $ (0.61) $ (0.17) $ 0.70 $ 0.75
======= ======= ======== =======
Income (loss) per share to common shareholders--diluted:
Income (loss) before extraordinary item
to common shareholders $ (0.52) $ (0.17) $ 0.68 $ 0.74
Extraordinary item (0.09) -- -- --
------- ------- -------- -------
Net income (loss) to common shareholders $ (0.61) $ (0.17) $ 0.68 $ 0.74
======= ======= ======== =======
Diluted loss per share amounts for 1996 and 1997 have been calculated
using the same denominator as used in the basic loss per share calculation, as
the inclusion of dilutive securities in the denominator would have an
anti-dilutive effect.
11. LEASES
During 1998, the Company entered into a five-year $35,000,000 End
Loaded Lease Financing agreement to provide a financing option for future
construction of medical office buildings on the campuses of its owned/leased
hospitals, and may be used for the construction of a replacement facility at one
of its owned hospitals. The interest rate and facility fee rate are
substantially the same as the Company's revolving line of credit (see Note 5).
All lease payments are guaranteed by the Company. At December 31, 1998, the
entire $35,000,000 was available under the ELLF agreement.
The Company leases various buildings, office space and equipment. The
leases expire at various times and have various renewal options. These leases
are classified as either capital leases or operating leases based on the terms
of the respective agreements.
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71
Future minimum payments at December 31, 1998, 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
------ ------
1999 $ 2,308 $ 5,066
2000 1,400 4,167
2001 1,369 3,343
2002 986 2,580
2003 527 2,266
Thereafter 3,720 11,992
-------- -------
Total minimum lease payments 10,310 $29,414
=======
Amount representing interest (2,864)
-------
Present value of net minimum lease payments
(including $1,793 classified as current) $ 7,446
=======
12. LITIGATION
The Company is involved in litigation arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
these matters will be resolved without material adverse effect on the Company's
consolidated financial position or results of operations.
13. 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 $988,000 and $1,340,000 for
the years ended December 31, 1997 and 1998, 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
$98,000 and $197,000 for the years ended December 31, 1997 and 1998,
respectively.
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72
14. 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 Debt -- 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 agreements -- The fair value of the Company's
interest rate swap agreements is $575,000 at December 31, 1998, based on quoted
market prices for similar debt issues.
15. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The unaudited pro forma condensed consolidated statement of operations
for the year ended December 31, 1998 gives effect to (i) the conversion of
junior preferred stock into common stock at the initial public offering ("IPO")
price of $16.00 per share; (ii) the sale of common stock in the IPO in February
1998, and the application of net proceeds thereof to the repurchase of certain
shares of common stock, the redemption of senior preferred stock and the
repayment of debt; and (iii) the sale of common stock at $26.00 per share in a
public offering completed in July 1998, and the application of net proceeds
thereof to reduce debt; as if all such transactions had been completed as of
January 1, 1998.
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 1997
and 1998 is summarized below (in thousands, except per share data):
Quarter
First Second Third Fourth
----- ------ ----- ------
1997
Net operating revenue $ 40,459 $ 40,089 $ 43,087 $ 46,892
Income before income taxes 2,718 1,821 1,590 1,595
Net income 1,507 988 817 763
Net income (loss) to common shareholders 392 (168) (620) (606)
Basic earnings per common share:
Net income 0.28 0.18 0.13 0.12
Net income (loss) to common shareholders 0.07 (0.03) (0.10) (0.10)
F-26
73
Diluted earnings per common share:
Net income 0.24 0.18 0.13 0.12
Net income (loss) to common shareholders 0.06 (0.03) (0.10) (0.10)
1998
Net operating revenue 47,851 56,632 67,271 67,100
Income before income taxes 4,047 3,811 4,550 5,525
Net income 2,275 2,134 2,531 3,067
Net income to common shareholders 1,579 2,134 2,531 3,067
Basic earnings per common share:
Net income 0.24 0.16 0.17 0.20
Net income to common shareholders 0.17 0.16 0.17 0.20
Diluted earnings per common share:
Net income 0.23 0.16 0.16 0.19
Net income to common shareholders 0.16 0.16 0.16 0.19
17. SUBSEQUENT EVENT
On February 22, 1999, the Company entered into a "special services
agreement" for the lease of Eunice Regional Medical Center, an 85-bed general
acute care hospital, located in Eunice, Louisiana. The Company purchased certain
assets, assumed certain liabilities, and entered into a ten-year lease
agreement, with a five-year renewal option. The transaction was accounted for as
a purchase business combination, with a purchase price of approximately
$1,669,000. The Company is obligated under the lease to construct a replacement
facility (currently estimated to cost approximately $20,000,000) at such time as
the net patient revenue of the hospital reaches a pre-determined level. The
lease will terminate at the time the replacement hospital commences operations.
F-27
74
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Brim, Inc.
We have audited the accompanying consolidated statements of income and cash
flows of Brim, Inc. and subsidiaries for the period January 1, 1996 to December
18, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Brim, Inc. and subsidiaries for the period January 1, 1996 to December 18,
1996 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Nashville, Tennessee
April 30, 1997, except for
the second paragraph of
Note 10, as to which the date
is February 4, 1998
F-28
75
BRIM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD JANUARY 1 TO DECEMBER 18, 1996
(IN THOUSANDS)
Revenue:
Net patient service revenue $ 87,900
Management and professional services 18,330
Other 6,370
---------
Net operating revenue 112,600
---------
Expenses:
Salaries, wages and benefits 58,105
Purchased services 17,199
Supplies 11,218
Provision for doubtful accounts 7,669
Other operating expenses 8,674
Rentals and leases 4,491
Depreciation and amortization 1,773
Interest expense 1,675
Costs of recapitalization 8,951
Loss on sale of assets 442
---------
Total expenses 120,197
---------
Loss from continuing operations before
provision for income taxes (7,597)
Income tax benefit (2,290)
---------
Loss from continuing operations (5,307)
Discontinued operations:
Income from discontinued operations, less applicable
income taxes 537
Gain on disposal of discontinued operations,
to related parties, less applicable
income taxes 5,478
---------
Total discontinued operations 6,015
---------
Net income $ 708
=========
See accompanying notes.
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BRIM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1 TO DECEMBER 18, 1996
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 708
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,773
Provision for doubtful accounts 7,669
Loss from investments 272
Deferred income taxes (3,277)
Gain on sale of assets (8,519)
Provision for professional liability 468
Changes in operating assets and liabilities, net
of effects from acquisitions and disposals:
Accounts receivable (5,899)
Inventories (48)
Prepaid expenses and other 2,448
Accounts Payable and accrued expenses 3,450
Accrued salaries and benefits 1,144
Third-party settlements 245
Other liabilities (214)
--------
Net cash provided by operating activities 220
INVESTING ACTIVITIES
Purchase of property, plant and equipment (12,642)
Net capital contributions and withdrawals--
investments 1,775
Purchase of acquired company (1,763)
Proceeds from sale of assets 21,948
Other 60
--------
Net cash provided by investing activities 9,378
FINANCING ACTIVITIES
Proceeds from long-term debt 72,000
Repayments of debt (6,657)
Recapitalization (49,400)
--------
Net cash provided by financing activities 15,943
--------
Net increase in cash and cash equivalents 25,541
Cash and cash equivalents at beginning of year 2,287
--------
Cash and cash equivalents at end of year $ 27,828
========
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BRIM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE PERIOD JANUARY 1 TO DECEMBER 18, 1996
(IN THOUSANDS)
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid during the year $ 558
========
Income taxes paid during the year $2 ,288
========
ACQUISITIONS
Fair value of assets acquired $ 3,092
Liabilities assumed (1,329)
--------
Cash paid $ 1,763
========
SALE OF ASSETS
Assets sold $ 13,274
Liabilities released 155
Gain on sale of assets 8,519
--------
Cash received $ 21,948
========
NONCASH TRANSACTIONS
Property, plant and equipment acquired through
capital leases $ 3,045
========
Noncash issuance of stock in connection with
recapitalization $ 4,118
========
See accompanying notes.
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BRIM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 18, 1996
1. ORGANIZATION AND ACCOUNTING POLICIES
Brim, Inc. and its subsidiaries (Brim or the Company) are engaged in
the business of owning, leasing and managing hospitals in non-urban communities
principally in the northwestern and southwestern United States. As more fully
described in Note 2, the Company consummated a leveraged recapitalization on
December 18, 1996. Immediately thereafter, as more fully described in Note 10, a
subsidiary of the Company merged with Principal Hospital Company (PHC) in a
transaction accounted for as a reverse acquisition of Brim by PHC. These
accompanying financial statements are presented on the historical cost basis
after the leveraged recapitalization but prior to the reverse acquisition. The
reverse acquisition resulted in a new basis of accounting such that Brim's
assets and liabilities were recorded at their fair value in PHC's consolidated
balance sheet upon consummation of the reverse acquisition. Brim, the
predecessor company, was renamed Principal Hospital Company on January 16, 1997.
PHC is considered the successor company of Brim.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, its majority-owned subsidiaries and partnerships in which the Company
or one of its subsidiaries is a general partner and has a controlling interest.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
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 reinsurance
agreements for certain plans with independent insurance companies to limit its
losses on claims. Under the terms of these agreements, the insurance companies
will reimburse the Company based on the level of reinsurance which ranges from
$30,000 per
F-32
79
individual claim up to $1,000,000. These reimbursements are included in
salaries, wages and benefits in the accompanying consolidated statements of
income.
The Company is insured for professional liability based on a
claims-made policy purchased in the commercial insurance market. The provision
for professional liability and comprehensive general liability claims include
estimates of the ultimate costs for claims incurred but not reported, in
accordance with actuarial projections based on past experience. Management is
aware of no potential professional liability claims whose settlement, if any,
would have a material adverse effect on the Company's consolidated results of
operations.
PATIENT SERVICE REVENUE
Net patient service revenue is reported 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.
Approximately 61% of gross patient service revenue for the period
January 1 to December 18, 1996, is from participation in the Medicare and
state-sponsored Medicaid programs.
MANAGEMENT AND PROFESSIONAL SERVICES
Management and professional services is comprised of fees from
management and professional consulting services provided to third-party
hospitals pursuant to management contracts and consulting arrangements. The base
fees associated with the hospital management contracts are determined in the
initial year of the contract on an individual hospital basis. In certain
contracts, the Company is entitled to a yearly bonus based on the performance of
the managed hospital. The base fee, which is fixed, is based on a fair market
wage and is not dependent on any bonus structure. The management contracts are
adjusted yearly based on an agreed upon inflation indicator. The substantial
majority of management and professional services revenue consists of the
management fees earned under the hospital management contracts and reimbursable
expenses. The reimbursable expenses relate to salaries and benefits of Company
employees that serve as executives at the managed hospitals. The salaries and
benefits of these employees are legal obligations of, and are paid by, the
Company and are reimbursed by the managed hospitals. Fees are recognized as
revenue as services are performed. Reimbursable expenses are included in
salaries, wages and benefits in the accompanying consolidated statements of
income. Management and professional services revenue, excluding reimbursable
expenses, was $9,329,000 for the period January 1 to December 18, 1996. The
Company does not maintain any ownership interest in and does not fund operating
losses or guarantee any minimum income for these managed hospitals. The Company
does not have any guarantees to these hospitals, except for one managed hospital
for which the Company has guaranteed the hospital's long-term debt of $500,000.
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80
STOCK BASED COMPENSATION
The Company, from time to time, grants stock options for a fixed number
of common shares to employees. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and accordingly, recognizes no compensation expense for the stock option grants
when the exercise price of the options equals, or is greater than, the market
price of the underlying stock on the date of grant.
2. RECAPITALIZATION
On December 18, 1996, Brim was recapitalized pursuant to an Investment
Agreement dated November 21, 1996, by and between Brim and Golder, Thoma,
Cressey, Rauner Fund IV, L.P. (GTCR Fund IV), and PHC. The basic elements of the
recapitalization of the Company included the following: GTCR Fund IV and other
investors purchased new shares of the Company's common and preferred stock; the
Company sold its senior living business and entered into a new credit facility
to, along with the proceeds from the sale of the new shares, provide financing
for the redemption of a portion of the pre-existing common and preferred stock;
this pre-existing common and preferred stock was redeemed; and certain
pre-existing debt was repaid. The recapitalization was accounted for as such
and, accordingly, did not result in a new basis of accounting.
The principal elements of the recapitalization included the following:
- Brim sold for cash its two wholly-owned subsidiaries engaged
in senior living activities for a gross sales price of $19.7
million (see Note 6), and sold for cash certain real estate
properties for a price of $406,500 plus assumption of debt of
approximately $800,000 (see Note 3).
- GTCR Fund IV purchased 1,051,476 shares, Mr. Martin Rash
purchased 16,886 shares, Mr. Richard Gore purchased 31,477
shares, two banks purchased 15,737 shares, and Leeway & Co., a
subsidiary of AT&T, purchased 615,082 shares of Brim
newly-designated common stock for cash of approximately $1.1
million. Messrs. Rash and Gore purchased 295,011 shares of
Brim newly-designated common stock for notes of $179,956.
- Through a series of transactions, Brim pre-transaction
shareholders who were to remain shareholders after the
recapitalization received 3,580 shares of newly-designated
junior preferred stock and 586,884 shares of Brim
newly-designated common stock with a value of approximately
$4.0 million in exchange for their common stock of Brim.
- GTCR Fund IV purchased 6,414 shares, Mr. Rash purchased 103
shares, Mr.
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81
Gore purchased 192 shares, two banks purchased 96 shares and
Leeway & Co. purchased 3,752 shares of newly-designated
redeemable junior preferred stock for cash of approximately
$10.6 million.
- Leeway & Co. purchased 20,000 shares of newly designated
redeemable senior preferred stock and was issued a warrant to
purchase 253,228 shares of newly-designated common stock for
total cash consideration of $20.0 million. A value of $139,000
was assigned to the warrant.
- Brim entered into a $100.0 million credit facility with First
Union National Bank and borrowed $35.0 million under the term
loan portion of the facility, and $37.0 million under the
$65.0 million revolving credit portion of the facility.
- The outstanding common stock of all Brim shareholders who were
not to remain as shareholders after the recapitalization was
exchanged for redeemable junior preferred stock. The preferred
stock was then redeemed for cash of approximately $42.3
million, and outstanding stock options were settled for cash
of approximately $8.0 million.
- Brim redeemed pre-existing Series A preferred stock held by
General Electric Credit Corporation for cash of approximately
$29.9 million.
- Existing Brim debt of $5.4 million was paid.
- An aggregate of approximately $6.5 million was deposited into
escrow accounts for possible breaches of representations and
warranties that were made in connection with the
recapitalization. Escrow funds not used for settlement of
breaches within 18 months of the recapitalization will be
released to the redeemed Brim shareholders.
The common stock ownership subsequent to the recapitalization consists
of a 22.5% interest held by certain of the pre-recapitalization Brim
shareholders and 77.5% held by the new investors.
Total financing fees and legal, accounting and other related costs of
the recapitalization amounted to approximately $14,231,000. Costs totaling
$8,951,000 were charged to operations at the date of the recapitalization,
consisting of cash paid to buy-out stock options of $7,995,000 and
transaction-related costs of $956,000. Costs of $2,321,000 associated with the
sale of common and preferred stock were allocated to retained earnings (deficit)
as to the common stock, and were netted against the proceeds as to the preferred
stock. Financing costs of $2,959,000 associated with the credit facility with
First Union National Bank were recorded as deferred loan costs.
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3. ACQUISITIONS AND DIVESTITURES
In February 1996, the Company acquired Parkview Regional Hospital by
entering into a 15-year operating lease agreement with two five-year renewal
terms and by purchasing certain assets totaling $3,092,000 and assuming certain
liabilities totaling $1,329,000, for a purchase price of $1,763,000. The
operating results of Parkview have been included in the accompanying
consolidated statement of income from the date of acquisition. Accordingly, the
accompanying consolidated statement of income for the period January 1 to
December 18, 1996 includes the results of approximately 10 months of operations
of Parkview.
In December 1996, the Company sold its senior living business (see Note
6) and certain assets related to three medical office buildings. The assets
related to three medical office buildings were sold to a limited liability
company for $406,500 plus assumption of debt of approximately $800,000. The
accounting basis for the sale was fair market value and a pre-tax gain of
approximately $94,000 was recognized on the sale. The members of the limited
liability company were officers and employees of the Company prior to the
recapitalization who collectively owned 75% of the Company's fully diluted
common stock prior to the recapitalization.
The following pro forma information related to continuing operations
reflects the operations of the entity acquired in 1996 as if the transaction had
occurred as of the first day of the period presented (in thousands):
Total revenue $113,433
Income from continuing operations (749)
The pro forma results of continuing operations do not purport to
represent what the Company's results of continuing operations would have been
had such transactions in fact occurred at the beginning of the years presented
or to project the Company's results of operations in any future period.
The Company has minority interests in various health care related
businesses. These investments are accounted for by the equity method. The
results of operations of these businesses are not material to the consolidated
financial statements.
4. 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. These
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rates vary according to a patient classification system that
is based on clinical, diagnostic, and other factors. Inpatient
nonacute services, certain outpatient services and medical
education costs related to Medicare beneficiaries are paid
based on a cost reimbursement methodology. The Company is
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 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 Company's
Medicare cost reports have been audited by the Medicare fiscal
intermediary through December 31, 1993.
- Medicaid--Inpatient and outpatient services rendered to
Medicaid program beneficiaries 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 Medicaid. The Company's Medicaid cost reports have
been audited by the Medicaid fiscal intermediary through
December 31, 1993.
- 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.
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.
Adjustments from finalization of prior year cost reports from both Medicare and
Medicaid resulted in an increase in patient service revenue of $788,000 for the
period January 1 to December 18, 1996.
5. INCOME TAXES
The provision for income tax expense (benefit) attributable to income
from continuing operations consists of the following amounts (in thousands):
Current:
Federal $ 561
State 134
-------
695
Deferred:
Federal (2,411)
State (574)
-------
(2,985)
-------
$(2,290)
=======
The differences between the Company's effective income tax rate of
30.2% from
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continuing operations for 1996, and the statutory federal income tax rate of
34.0% are as follows (in thousands):
Statutory federal rate $(2,580)
State income taxes, net of federal income tax benefit (290)
Amortization of goodwill 16
Change in valuation allowance (2)
Nondeductible recapitalization costs 298
Other 268
-------
$(2,290)
=======
The Internal Revenue Service is in the process of finalizing its
examination of the Company's federal income tax returns for the 1995 year.
Finalization of the examination is not expected to have a significant impact on
the results of operations of the Company.
6. DISCONTINUED OPERATIONS
During November 1996, the Company adopted a plan to sell its senior
living business to companies whose shareholders included unrelated third parties
and certain shareholders, officers, and employees of Brim. The sale of the
senior living business was accomplished in the following separate transactions:
(i) the sale of assets used in connection with the senior living business
through the merger of Brim Senior Living, Inc. with a Delaware limited liability
company and (ii) the sale of Meridian Senior Living, Inc. The sale of assets
used in connection with the senior living business was to a limited liability
company for $15 million. The accounting basis for the sale was fair market value
and a pre-tax gain of $11.4 million was recognized on the sale. The limited
liability company was owned 65% by an unrelated third party and 35% by officers
and shareholders of the Company prior to the recapitalization who collectively
owned 61% of the Company's fully diluted common stock prior to the
recapitalization. The sale of the outstanding common stock of Meridian Senior
Living, Inc., a wholly-owned subsidiary, was to an unrelated third party for
$4.7 million. The accounting basis for the sale was fair market value and a loss
of $2.4 million was recognized on the sale. Subsequent to the sale to the
unrelated third party, certain individuals who were officers and stockholders of
the Company prior to the recapitalization became limited partners with the
unrelated third party and collectively held a 14% limited partnership interest.
These individuals owned approximately 60% of the Company's fully diluted common
stock prior to the recapitalization.
The senior living business segment was sold on December 18, 1996.
Revenue from this business segment was $18,598,000 for the period January 1 to
December 18, 1996. Income from operations was $537,000, net of taxes, for the
period January 1, 1996 to December 18, 1996. The gain on the disposal of this
business segment was $5,478,000, net of taxes.
For financial reporting purposes, the results of operations and cash
flows of the
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discontinued businesses are included in the consolidated financial statements as
discontinued operations. The income (loss) from discontinued operations is
summarized as follows (in thousands):
Income from discontinued operations $ 891
Applicable income taxes (354)
-------
537
Gain on disposal of discontinued operations 8,961
Applicable income taxes (3,483)
------
5,478
------
Total $6,015
======
7. 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.
Future minimum payments at December 18, 1996, by year and in the
aggregate, under noncancellable operating leases with terms of one year or more
consist of the following (in thousands):
1997 $ 3,369
1998 2,768
1999 2,180
2000 1,862
2001 1,784
Thereafter 5,831
-------
Total minimum lease payments $17,794
=======
8. CONTINGENCIES
The Company is involved in litigation and regulatory investigations
arising in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, these matters will be resolved without material
adverse effect on the Company's consolidated financial position or results of
operations.
9. 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
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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 $385,000 for the period January 1 to December 18, 1996.
In January 1995, the Company adopted 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 expense totaled $95,000 for the period January 1 to December 18,
1996.
10. SUBSEQUENT EVENTS
Immediately after the recapitalization discussed in Note 2, a
subsidiary of the Company was merged into PHC and the Company was renamed
Principal Hospital Company. In exchange for their shares in PHC, the PHC
shareholders received newly-issued redeemable junior preferred stock and common
stock of the Company. While the Company was the legal acquirer, the merger was
accounted for as a reverse acquisition of the Company by PHC.
On May 8, 1997, the Company declared a three-for-one stock split of the
outstanding common stock and common stock options and warrant to shareholders of
record on May 8, 1997. On February 4, 1998, Principal Hospital Company merged
with a wholly-owned subsidiary in order to change its jurisdiction of
incorporation to Delaware and change its name to Province Healthcare Company
(Province). In the Merger, Province exchanged 1.83 shares of its no par common
stock for each share of the subsidiary's $0.01 par value common stock. All
common share data included in the footnotes to the consolidated financial
statements have been restated to reflect the stock split and the
reincorporation.
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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 period February 2, 1996
to December 31, 1996
Allowance for doubtful accounts $ -- $ 1,909 $ 3,468 $ (900) $ 4,477
For the year ended December 31, 1997
Allowance for doubtful accounts 4,477 12,812 -- (12,540) 4,749
For the year ended December, 1998
Allowance for doubtful accounts 4,749 17,839 2,353 (15,908) 9,033
(1) Allowances as a result of acquisitions.
(2) Uncollectible accounts written off, net of recoveries.
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