EXHIBIT 99.1
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. Such statements may
include words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe" and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance. Any or all of
our forward-looking statements in this report may turn out to be wrong. They can
be affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Many factors mentioned in our discussion in this report will
be important in determining future results. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially. Factors
that may cause our plans, expectations, future financial condition and results
to change include, but are not limited to:
- the highly competitive nature of the healthcare business;
- the efforts of insurers, healthcare providers and others to contain
healthcare costs;
- the financial condition of managed care organizations that pay us
for healthcare services;
- possible changes in the levels and terms of reimbursement for our
charges by government programs, including Medicare and Medicaid or
other third-party payors;
- changes in or failure to comply with federal, state or local laws
and regulations affecting the healthcare industry;
- the possible enactment of federal or state healthcare reform;
- the departure of key members of our management;
- claims and legal actions relating to professional liability;
- our ability to implement successfully our acquisition and
development strategy;
- our ability to recruit and retain qualified personnel and
physicians;
- potential federal or state investigations;
- fluctuations in the market value of our common stock or notes;
- changes in accounting principles generally accepted in the United
States or in our critical accounting policies;
1
- changes in demographic, general economic and business conditions,
both nationally and in the regions in which we operate;
- changes in the availability, cost and terms of insurance coverage
for our hospitals and physicians who practice at our hospitals; and
- other risks described in this report.
Except as required by law, we undertake no obligation to publicly update
any forward-looking statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any additional
disclosures we make in our Form 10-K, 10-Q and 8-K reports to the Securities and
Exchange Commission. These are factors that we think could cause our actual
results to differ materially from expected results. Other factors besides those
listed here may cause future events or results to differ from those forecasted.
You are cautioned not to place undue reliance on such forward-looking statements
when evaluating the information presented in this report. This discussion is
provided as permitted by the Private Securities Litigation Reform Act of 1995.
OVERVIEW
We are a healthcare services company focused on acquiring and operating
hospitals in attractive non-urban markets in the United States. As of December
31, 2003, we owned or leased 20 general acute care hospitals in 13 states with a
total of 2,262 licensed beds, and managed 36 primarily non-urban hospitals in 14
states with a total of 2,985 licensed beds. On April 30, 2004, we completed the
sale of Glades General Hospital in Belle Glade, Florida. Our remaining 19
hospitals and operations are reported as continuing operations, with a total of
2,189 licensed beds at December 31, 2003. Effective June 1, 2004, we completed
the acquisition, through a long-term lease, of Memorial Medical Center in Las
Cruces, New Mexico. On June 30, 2004, we completed the sale of Brim Healthcare,
Inc., our hospital management subsidiary.
DISCONTINUED OPERATIONS
On April 30, 2004, we completed the sale of Glades General Hospital in
Belle Glade, Florida to a wholly-owned subsidiary of the Health Care District of
Palm Beach County. The District reacquired the operating assets of the hospital
for a purchase price of approximately $1.5 million in cash at closing, net of
assumed and contractual obligations. Under the purchase agreement, we retained
the hospital's accounts receivable, income tax receivable and deferred income
taxes. We also retained certain payroll-related liabilities and other accrued
expenses.
On June 30, 2004, we completed the sale of the stock of Brim Healthcare,
Inc., our hospital management subsidiary, to Brim Holding Company, Inc.,an
independent investor-owned entity for approximately $13.2 million in cash.
As required by Statement of Financial Accounting Standards No. 144 ("SFAS
No. 144"), Accounting for the Impairment or Disposal of Long-Lived Assets, the
operations and non-cash impairment of assets charge related to Glades General
Hospital and Brim Healthcare, Inc. are reported as "discontinued operations" and
the consolidated financial statements, statistics and all references to such
information contained in this Report have been adjusted to reflect this
presentation for all periods. Our remaining 19 hospitals continue to be reported
as "continuing operations."
MERGER AGREEMENT
On August 16, 2004, our Company and LifePoint Hospitals, Inc.
("LifePoint") announced that we had entered into a definitive merger agreement
(the "Merger Agreement") pursuant to which LifePoint will acquire us. Pursuant
to the terms of the Merger Agreement, our Company and LifePoint will each become
wholly-owned subsidiaries of a newly formed holding company that will be
publicly traded. Each of the our shareholders will receive a per share
consideration comprised of $11.375 of cash and a number of shares of common
stock of the new company equal to an exchange ratio of between 0.3447 and
0.2917, which shares will have a value of $11.375 to the extent that LifePoint's
average share price is between $33.00 and $39.00. The exchange ratio will be
0.3447 if the volume weighted average daily share price of a share of
LifePoint's common stock for the twenty consecutive trading day period ending at
close of business on the third trading day prior to the closing (the "LifePoint
average share price") is $33.00 or less, and 0.2917 if LifePoint's average share
price is $39.00 or more. If LifePoint's average share price is between $33.00
and $39.00, then the exchange ratio will be equal to $11.375 divided by the
LifePoint average share price.
2
The proposed merger is subject to approval by the stockholders of our
Company and LifePoint. Closing of the proposed merger is subject to clearance or
expiration of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 and the satisfaction of other customary
closing conditions.
IMPACT OF ACQUISITIONS AND DIVESTITURES
An integral part of our strategy is to acquire non-urban acute care
hospitals. Because of the financial impact of our 2001 and 2002 acquisitions, it
is difficult to make meaningful comparisons between our financial statements for
the fiscal periods presented. In addition, because of the relatively small
number of owned and leased hospitals, each hospital acquisition can materially
affect our overall operating performance. Upon the acquisition of a hospital, we
typically take a number of steps to lower operating costs. The impact of such
actions may be offset by cost increases to expand services, strengthen medical
staff and improve market position. The benefits of these investments and of
other activities to improve operating margins generally do not occur
immediately. Consequently, the financial performance of a newly-acquired
hospital may adversely affect overall operating margins in the near term. As we
make additional hospital acquisitions, we expect that this effect will be
mitigated by the expanded financial base of existing hospitals and the
allocation of corporate overhead among a larger number of hospitals. We also may
divest certain hospitals in the future if we determine a hospital no longer fits
within our strategy.
3
INDUSTRY TRENDS
Reimbursement
The federal Medicare program accounted for approximately 38.5%, 45.4% and
39.6% of net patient revenue in 2003, 2002 and 2001, respectively. The state
Medicaid programs accounted for approximately 10.3%, 11.3% and 9.0% of net
patient revenue in 2003, 2002 and 2001, respectively. The payment rates under
the Medicare program for inpatients are prospective, based upon the diagnosis of
a patient. The Medicare payment rate increases historically have been less than
actual inflation.
Both federal and state legislatures are continuing to scrutinize the
healthcare industry for the purpose of reducing healthcare costs. While we are
unable to predict what, if any, future healthcare-reform legislation may be
enacted at the federal or state level, we expect continuing pressure to limit
expenditures by governmental healthcare programs. The Balanced Budget Act of
1997 imposed certain limitations on increases in the inpatient Medicare rates
paid to acute care hospitals. As required by the Balanced Budget Act of 1997,
payments for hospital outpatient, psychiatric sub-acute, home health and
rehabilitation sub-acute services have converted to prospective payment systems,
instead of payments being based on costs. Most hospital outpatient services are
now reimbursed under an outpatient prospective payment system based on a system
of Ambulatory Payment Classifications. Rehabilitation sub-acute services
transitioned to a prospective payment system in 2002. Psychiatric sub-acute
services are transitioning to a prospective payment system. The Centers for
Medicare and Medicaid Services ("CMS") is proposing a three-year transition
period for the implementation of the proposed prospective payment system
starting with the cost reporting period for psychiatric services beginning on or
after April 1, 2004.
On December 8, 2003, President Bush signed into law the Medicare
Prescription Drug Improvement and Modernization Act of 2003 (the "Medicare
Prescription Drug Act"). The Medicare Prescription Drug Act provides for changes
in Medicare reimbursement for hospitals. For example, the Medicare Prescription
Drug Act requires all acute care hospitals to participate in CMS's
quality-of-care National Voluntary Hospital Reporting Initiative in order to
receive the full market basket increase in fiscal year 2005 through 2007. Those
acute care hospitals that fail to participate in CMS's quality-of-care National
Voluntary Reporting Initiative will receive a lesser increase in Medicare
reimbursement equal to the market basket update minus 0.4 percent.
Outpatient Utilization
The hospital industry and some of our hospitals continue to have
significant unused capacity. The result is substantial competition for patients
and physicians. Inpatient utilization continues to be affected negatively by
payor-required pre-admission authorization and by payor pressure to maximize
outpatient and alternative healthcare delivery services for less acutely ill
patients. We expect increased competition and admission constraints to continue
in the future. The ability to respond successfully to these trends, as well as
spending reductions in governmental healthcare programs, will play a significant
role in determining the ability of our hospitals to maintain their current rate
of net patient revenue growth and operating margins.
We expect the industry trend towards the provision of more services on an
outpatient basis to continue. This trend is the result of increased focus on
managed care and advances in technology.
Billing and Collection
The billing and collection of accounts receivable by hospitals are
complicated by a number of factors, including:
- the complexity of the Medicare and Medicaid regulations;
- increases in managed care;
- hospital personnel turnover;
- the dependence of hospitals on physician documentation of medical
records;
4
- an increase in the number of patients who do not maintain health
insurance; and
- the subjective judgment involved.
These factors, or any combination of them, may impact our ability to bill
and collect our accounts receivable at the rates we have anticipated, which
could negatively affect our future cash flows.
Healthcare providers are experiencing an increase in their provision for
doubtful accounts relating to "self-pay" accounts receivable. "Self-pay" revenue
refers to payment for healthcare services received directly from individual
patients, either in the form of a deductible or co-payment under a health
insurance plan or as full or partial payment of the amount charged by the
provider or not covered by insurance. The current soft economic environment,
higher unemployment rates and increasing numbers of uninsured patients, combined
with higher co-payments and deductibles, are placing a greater portion of the
financial responsibility for healthcare services on the patient rather than
insurers. Additionally, many of these patients are being admitted through the
emergency department and often require more costly care, resulting in higher
billings. Many of these accounts remain uncollected for extended periods of
time, requiring providers to increase the amounts reserved as "doubtful
accounts" and ultimately written off as uncollectible. Although the trend is
national, the ability of providers to collect self-pay accounts varies greatly
by geographic markets and demographic factors.
Investigations
The federal government and a number of states are increasing the resources
devoted to investigating allegations of fraud and abuse in the Medicare and
Medicaid programs. At the same time, regulatory and law enforcement authorities
are taking an increasingly strict view of the requirements imposed on providers
by the Social Security Act and Medicare and Medicaid regulations. Although we
believe that we are in material compliance with such laws, a determination that
we have violated such laws, or even the public announcement that we were being
investigated concerning possible violations, could have a material adverse
effect on our company.
Our historical financial trend has been impacted favorably by our success
in acquiring acute care hospitals. While we believe that the healthcare industry
trends described above may create future acquisition opportunities, our future
financial growth rates will be impacted by our ability to acquire hospitals and
to successfully integrate them into our system.
5
RESULTS OF OPERATIONS
The following tables present, for the periods indicated, the results of
operations of our company and its subsidiaries. Such information has been
derived from our consolidated statements of income included elsewhere in this
report. The results of operations for the periods presented include hospitals
from their respective dates of acquisition.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2003 2002
---------------------- ---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
% OF % OF % CHANGE
AMOUNT REVENUES AMOUNT REVENUES FROM PRIOR YEAR
---------- -------- --------- -------- ---------------
Revenues:
Net patient revenue $ 735,841 $ 649,954
Other 10,367 8,308
---------- ---------
746,208 100.0% 658,262 100.0% 13.4%
Expenses:
Salaries, wages and benefits 282,794 37.9 261,499 39.7
Purchased services 68,872 9.2 69,934 10.6
Supplies 95,579 12.8 84,408 12.8
Provision for doubtful accounts 72,583 9.7 53,201 8.1
Other operating expenses 88,137 11.8 69,447 10.6
Rentals and leases 9,007 1.2 8,284 1.3
Depreciation and amortization 37,617 5.1 32,169 4.9
Interest expense 26,262 3.5 21,285 3.2
Minority interests 260 - 34 -
Loss (gain) on sale of assets 75 - (77) -
Loss on early extinguishment of debt 486 0.1 - -
---------- -------- --------- --------
Total expenses 681,672 91.3 600,184 91.2
Income from continuing operations
before provision for income taxes 64,536 8.7 58,078 8.8 11.1%
Income taxes 22,816 3.1 23,240 3.5
---------- -------- --------- --------
Income from continuing operations 41,720 5.6 34,838 5.3 19.8%
Discontinued operations, net of tax:
(Loss) earnings from operations (1,149) 1,274
Impairment of assets (8,952) -
---------- ---------
Net income $ 31,619 $ 36,112 (12.4)%
========== =========
Diluted earnings (loss) per common share:
Continuing operations $ 0.84 $ 0.70
Discontinued operations, net of tax:
(Loss) earnings from operations (0.02) 0.03
Impairment of assets (0.15) -
---------- ---------
Net income $ 0.67 $ 0.73
========== =========
6
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2002 2001
---------------------- ---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
% OF % OF % CHANGE
AMOUNT REVENUES AMOUNT REVENUES FROM PRIOR YEAR
---------- -------- --------- -------- ---------------
Revenues:
Net patient revenue $ 649,954 $ 480,627
Other 8,308 6,253
---------- ---------
658,262 100.0% 486,880 100.0% 35.2%
Expenses:
Salaries, wages and benefits 261,499 39.7 190,055 39.0
Purchased services 69,934 10.6 46,588 9.6
Supplies 84,408 12.8 56,211 11.5
Provision for doubtful accounts 53,201 8.1 44,277 9.1
Other operating expenses 69,447 10.6 47,353 9.7
Rentals and leases 8,284 1.3 6,818 1.4
Depreciation and amortization 32,169 4.9 27,611 5.7
Interest expense 21,285 3.2 11,071 2.3
Minority interests 34 - 267 0.1
Loss (gain) on sale of assets (77) - 178 -
---------- -------- --------- --------
Total expenses 600,184 91.2 430,429 88.4
Income from continuing operations
before provision for income taxes 58,078 8.8 56,451 11.6 2.9%
Income taxes 23,240 3.5 23,796 4.9
---------- -------- --------- --------
Income from continuing operations 34,838 5.3 32,655 6.7 6.7%
Discontinued operations, net of tax:
Earnings from operations 1,274 253
---------- ---------
Net income $ 36,112 $ 32,908 9.7%
========== =========
Diluted earnings per common share:
Continuing operations $ 0.70 $ 0.67
Discontinued operations, net of tax:
Earnings from operations 0.03 -
---------- ---------
Net income $ 0.73 $ 0.67
========== =========
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The following tables present key operating statistics for our owned and
leased hospitals (excluding discontinued operations) for the periods presented.
(1)
YEAR ENDED DECEMBER 31,
----------------------------------------
2003 2002 % CHANGE
------------ ------------ --------
CONSOLIDATED HOSPITALS (CONTINUING OPERATIONS):
Number of hospitals at end of period 19 19 --%
Licensed beds at end of period (2) 2,189 2,207 (0.8)
Beds in service at end of period 1,933 1,933 --
Inpatient admissions (3) 72,630 69,107 5.1
Adjusted admissions (4) 131,557 120,990 8.7
Net patient revenue per adjusted admission $ 5,593 $ 5,372 4.1
Patient days (5) 307,195 299,138 2.7
Adjusted patient days (6) 556,331 523,307 6.3
Average length of stay (days) (7) 4.2 4.3 (2.3)
Net patient revenue (in thousands) $ 735,841 $ 649,954 13.2
Gross patient revenue (in thousands) (8):
Inpatient $ 903,740 $ 799,358 13.1%
Outpatient 732,844 599,333 22.3
------------ ------------ --------
Total gross patient revenue $ 1,636,584 $ 1,398,691 17.0%
============ ============ ========
SAME HOSPITALS (CONTINUING OPERATIONS)(9):
Number of hospitals at end of period 19 19 --%
Licensed beds at end of period (2) 2,189 2,207 (0.8)
Beds in service at end of period 1,933 1,933 --
Inpatient admissions (3) 68,205 67,694 0.8
Adjusted admissions (4) 121,707 118,035 3.1
Net patient revenue per adjusted admission $ 5,521 $ 5,363 2.9
Patient days (5) 287,880 293,248 (1.8)
Adjusted patient days (6) 513,539 510,906 0.5
Average length of stay (days) (7) 4.2 4.3 (2.3)
Net patient revenue (in thousands) $ 671,910 $ 633,005 6.1
Gross patient revenue (in thousands)(8):
Inpatient $ 857,340 $ 787,050 8.9%
Outpatient 672,018 584,687 14.9
------------ ------------ --------
Total gross patient revenue $ 1,529,358 $ 1,371,737 11.5%
============ ============ ========
- ------------
(1) All statistics have been restated to exclude the ownership and operations
of Glades General Hospital, which was sold on April 30, 2004. The
statistics above have not been impacted by the disposal of Brim
Healthcare, Inc.
(2) Beds for which a hospital has been granted approval to operate from the
applicable state licensing agency.
(3) Represents the total number of patients admitted (in a facility for a
period in excess of 23 hours) and used by management and investors as a
general measure of inpatient volume.
(4) Used by management and investors as a general measure of combined
inpatient and outpatient volume. Adjusted admissions are computed by
multiplying admissions (inpatient volume) by the outpatient factor. The
outpatient factor is the sum of gross inpatient revenue and gross
outpatient revenue divided by gross inpatient revenue. The adjusted
admissions computation equates outpatient revenue to the volume measure
(admissions) used to measure inpatient volume, resulting in a general
measure of combined inpatient and outpatient volume.
(5) Represents the total number of days the patients who are admitted stay in
our hospitals.
(6) Adjusted patient days are computed by multiplying patient days (inpatient
volume) by the outpatient factor. The outpatient factor is the sum of
gross inpatient revenue and gross outpatient revenue divided by gross
inpatient revenue. The adjusted patient days computation equates
outpatient revenue to the volume measure (patient days) used to measure
inpatient volume, resulting in a general measure of combined inpatient and
outpatient volume.
(7) The average number of days admitted patients stay in our hospitals.
(8) Represents revenues prior to reductions for discounts and contractual
allowances.
(9) Same hospital information includes the operations of only those hospitals
which were owned or leased during both entire periods presented and
excludes the ownership and operations of Glades General Hospital, which
was sold on April 30, 2004.
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YEAR ENDED DECEMBER 31,
----------------------------------------
2002 2001 % CHANGE
------------ ------------ --------
CONSOLIDATED HOSPITALS (CONTINUING OPERATIONS):
Number of hospitals at end of period 19 18 5.6%
Licensed beds at end of period (2) 2,207 2,063 7.0
Beds in service at end of period 1,933 1,839 5.1
Inpatient admissions (3) 69,107 52,053 32.8
Adjusted admissions (4) 120,990 86,198 40.4
Net patient revenue per adjusted admission $ 5,372 $ 5,576 (3.7)
Patient days (5) 299,138 227,596 31.4
Adjusted patient days (6) 523,307 376,539 39.0
Average length of stay (days) (7) 4.3 4.4 (2.3)
Net patient revenue (in thousands) $ 649,954 $ 480,627 35.2
Gross patient revenue (in thousands) (8):
Inpatient $ 799,358 $ 588,203 35.9%
Outpatient 599,333 387,195 54.8
------------ ------------ --------
Total gross patient revenue $ 1,398,691 $ 975,398 43.4%
============ ============ ========
SAME HOSPITALS (CONTINUING OPERATIONS)(9):
Number of hospitals at end of period 16 16 --%
Licensed beds at end of period (2) 1,785 1,895 (5.8)
Beds in service at end of period 1,649 1,671 (1.3)
Inpatient admissions (3) 49,919 50,283 (0.7)
Adjusted admissions (4) 85,134 83,346 2.1
Net patient revenue per adjusted admission $ 5,511 $ 5,621 (2.0)
Patient days (5) 214,423 218,891 (2.0)
Adjusted patient days (6) 364,567 352,439 3.4
Average length of stay (days) (7) 4.3 4.2 2.4
Net patient revenue (in thousands) $ 469,170 $ 468,509 0.1
Gross patient revenue (in thousands)(8):
Inpatient $ 614,783 $ 571,920 7.5%
Outpatient 433,689 377,449 14.9
------------ ------------ --------
Total gross patient revenue $ 1,048,472 $ 949,369 10.4%
============ ============ ========
See notes following preceding table.
Hospital revenues are received primarily from Medicare, Medicaid and
commercial insurance. The revenues received from the Medicare program are
expected to increase with the general aging of the population. The payment rates
under the Medicare program for inpatients are based on a prospective payment
system, based upon the diagnosis of a patient. While these rates are indexed for
inflation annually, the increases historically have been less than actual
inflation. In addition, states, insurance companies and employers are actively
negotiating the amounts paid to hospitals as opposed to paying standard hospital
rates. The trend toward managed care, including health maintenance
organizations, preferred provider
9
organizations and various other forms of managed care, may affect our hospitals'
ability to maintain their current rate of net operating revenue growth.
We continuously monitor the cost/benefit relationship of services provided
at our hospitals, and make decisions related to adding new services or
discontinuing existing services.
Net patient revenue is reported net of contractual adjustments and policy
discounts. The adjustments principally result from differences between our
hospitals' customary charges and payment rates under the Medicare, Medicaid and
other third-party payor programs. Customary charges generally have increased at
a faster rate than the rate of increase for Medicare and Medicaid payments. We
provide care without charge to patients who are financially unable to pay for
the healthcare services they receive. Because we do not pursue collection of
amounts determined to qualify as charity care, they are not reported in net
patient revenue. Operating expenses of our hospitals primarily consist of
salaries, wages and benefits, purchased services, supplies, provision for
doubtful accounts, rentals and leases, and other operating expenses, principally
consisting of utilities, insurance, property taxes, travel, physician
recruiting, telephone, advertising, repairs and maintenance.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenues increased 13.4% to $746.2 million in 2003 compared to $658.3
million in 2002. This increase was primarily attributable to the hospitals
acquired in 2002 and an increase in same hospital revenues. During the second
quarter of 2002, the Company acquired Los Alamos Medical Center in New Mexico
and Memorial Hospital of Martinsville and Henry County in Virginia. Same
hospital net patient revenues increased 6.1% in 2003 from 2002 primarily due to
increases in adjusted admissions of 3.1% and net patient revenue per adjusted
admission of 2.9%. The increase in adjusted admissions was attributable, in
part, to the addition of 106 new doctors, of which 17 are hospital-based, in our
communities in 2003. Cost report settlements and the filing of cost reports also
increased revenue in 2003 by $5.5 million compared to a reduction in revenue in
2002 of $0.9 million.
Salaries, wages and benefits as a percentage of revenues, decreased to
37.9% from 39.7% in 2002. The decrease is primarily due to improvements
resulting from continued implementation of our flexible staffing standards
throughout our hospitals, which effectively matches labor with hospital volume
trends and continued cost containment of employee benefit expenses.
Purchased services, as a percentage of revenues, decreased to 9.2% in 2003
from 10.6% in 2002. The decrease is primarily attributable to an 18.5% reduction
in contract labor and reductions in collection agency fees as we were less
reliant on outside collection consultants and staffing.
Provision for doubtful accounts, as a percentage of revenues, increased to
9.7% in 2003 from 8.1% in 2002 due primarily to the increase in bad debts
resulting from increases in self-pay revenue. During 2003, self-pay revenue as a
percentage of total gross revenues increased to 4.6% from 3.8% in 2002. The most
significant increase occurred in the second quarter of 2003 when self-pay
revenue as a percentage of gross revenues increased to 5.1% but then declined
slightly in the third quarter to 4.8% and continued to decline in the fourth
quarter to 4.5%. The increase in self-pay revenue is due to the current economic
environment and slow employment recovery, coupled with changes in benefit plan
design toward increased co-pays and deductibles as employers pass a greater
percentage of healthcare costs to individual employees. Net patient revenue
associated with self-pay patients are generally recorded at gross charges, which
are higher than what government programs and managed care plans pay. As a
result, failure to receive payment from self-pay and uninsured patients results
in a higher provision for doubtful accounts as a percentage of total net patient
revenue. We are monitoring the self-pay revenue category closely and expect
provision for doubtful accounts expense to be in the 10% of revenues range
during the first six months of 2004.
Other operating expenses increased as a percentage of revenues to 11.8% in
2003 from 10.6% in 2002 primarily due to increased medical malpractice, workers'
compensation and directors and officers insurance cost of $7.2 million and
increased physician recruitment expense of $3.1 million.
Depreciation and amortization expense increased $5.4 million to $37.6
million in 2003 from $32.2 million in 2002 primarily due to depreciation at the
two hospitals acquired in 2002 and capital expenditures.
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Interest expense increased to $26.3 million in 2003 from $21.3 million
primarily due to the issuance in May 2003 of $200.0 million aggregate principal
amount of 7 1/2% Senior Subordinated Notes due 2013, offset by repayments of
outstanding borrowings on our senior bank credit facility, repurchases of a
portion of our 4 1/2% Convertible Subordinated Notes due 2005 and entering into
a $100.0 million fixed to floating interest rate swap agreement during the third
quarter of 2003.
The write-off of deferred loan costs and the gain resulting from
repurchasing a portion of our 4 1/2% Convertible Subordinated Notes at a
discount resulted in a net pre-tax loss on extinguishment of debt of $0.5
million during 2003.
The provision for income taxes totaled $22.8 million, or a 35.4% effective
tax rate, in 2003 compared to $23.2 million, or a 40.0% effective tax rate, in
2002. The reduction in the effective tax rate during 2003 was primarily
attributable to a $2.3 million reduction in our tax liabilities due to the final
and favorable resolution of examinations by taxing authorities as we recently
concluded audits that have been ongoing for over one year. For 2004, we
anticipate our effective tax rate to approximate 38.0%; however, changing
circumstances and regulations may result in a change in the actual effective tax
rate.
In 2003, the Company's discontinued operations incurred an after-tax
impairment of assets charge of $8.9 million and a loss from operations totaling
$1.1 million. In 2002, the discontinued operations achieved earnings from
operations of $1.3 million. The decline in operations resulted primarily from a
shift in the demographic make-up of the service area surrounding Glades General
Hospital and a significant increase in the proportion of indigent care provided
by that facility.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues increased to $658.3 million in 2002 from $486.9 million in 2001,
an increase of $171.4 million, or 35.2%. Cost report settlements and the filing
of cost reports decreased revenues in 2002 by $0.9 million and increased
revenues in 2001 by $0.6 million. Net patient revenue generated by the 16
hospitals owned during both periods increased 0.1%. These 16 hospitals also
incurred a decline in inpatient admissions of 0.7%, which was primarily
attributable to the departure of 51 physicians at the hospitals during 2002.
Total net patient revenue increased 35.2% during 2002, primarily related to the
hospitals acquired in the fourth quarter of 2001 and during 2002.
Our 2002 operations were adversely affected by the loss of physicians.
During 2002, we lost 51 physicians who were major contributors, with the
majority leaving in the last six months of the year. We define a "major
contributor" as a physician generating $200,000 or more in revenues annually.
All of these physicians left for reasons unrelated to hospital operations. We
recruited 82 physicians in 2002, 59% of whom only started their practices in the
third and fourth quarters of the year. Therefore, the new practices were unable
to generate sufficient volume to replace the lost revenues generated by the
departing physicians. As the new physicians' practices move along the timeline
toward full, mature practices, lost revenues will be replaced. Of the 82
recruited physicians, 76 were admitting physicians. Based on historic practice
patterns of physicians recruited to our hospitals, to date, these physician
practices are tracking in line with historic trends and our expectations.
Our 2002 operations were adversely impacted by increased competition from
ambulatory surgery centers in two of our markets. We have been proactive in the
only other markets large enough to support full service ambulatory surgery
centers that currently do not have these services, by either pursuing a
certificate of need for a full service ambulatory surgery center ourselves or
working with physicians in the market to address the community need for
outpatient surgery services.
Increases in expenses such as salaries, wages and benefits, purchased
services, supplies, provision for doubtful accounts, rentals and leases and
other operating expenses resulted primarily from new hospital acquisitions in
the fourth quarter of 2001 and in the second quarter of 2002 and from the
addition of new services and increased physician recruiting. The consolidated
provision for doubtful accounts decreased to 8.1% of revenues in 2002 from 9.1%
of revenues in 2001, primarily related to improvement in days in accounts
receivable and increased up-front cash collections.
Depreciation and amortization expense increased to $32.2 million, or 4.9%
of revenues, in 2002 from $27.6 million, or 5.7% of revenues in 2001. The
increase in depreciation and amortization resulted primarily from the
acquisition of hospitals in 2002 and 2001 as previously mentioned and capital
expenditures at hospitals owned during both periods, offset by non-amortization
of goodwill in 2002, which had an impact of approximately $6.2 million.
11
Interest expense increased to $21.3 million in 2002 from $11.1 million in
2001, an increase of 92.3%. This was a result of increased borrowings to finance
the acquisition of additional hospitals in the fourth quarter of 2001 and in
2002, and interest on the $172.0 million principal amount of 4 1/2% Convertible
Subordinated Notes issued in October 2001.
Our provision for income taxes was $23.2 million for the year ended
December 31, 2002, compared to $23.8 million in 2001. These provisions reflect
effective income tax rates of 40.0% in 2002 and 42.2% in 2001. See Note 8 of the
notes to our consolidated financial statements for information regarding
differences between effective tax rates and statutory rates.
In 2002, the income from discontinued operations totaled $1.3 million
compared to $0.3 million in 2001. The increase in income from discontinued
operations was primarily due to a decrease in amortization expense of
approximately $0.5 million. Of the decrease in amortization expense of $0.5
million, $0.3 million was due to the non-amortization of goodwill expense
beginning in 2002 and $0.2 million was due to Brim Healthcare, Inc. other
intangible assets, which became fully amortized at the end of 2001.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, we had working capital from continuing operations of
$130.6 million, including cash and cash equivalents of $46.1 million, compared
to working capital from continuing operations of $100.9 million, including $14.6
million in cash and cash equivalents at December 31, 2002.
Net cash provided by operating activities was $104.3 million for the year
ended December 31, 2003, compared to $90.1 million for the year ended December
31, 2002. The $14.2 million increase in cash provided by operating activities is
primarily due to a $6.9 million increase in income from continuing operations, a
$5.4 million increase in depreciation and amortization, as previously discussed,
and a $5.4 million increase in our deferred income tax provision resulting
primarily from a $7.0 million income tax refund received during the first
quarter of 2003.
Net cash used in investing activities decreased to $56.9 million in 2003
from $216.6 million in 2002. The $159.7 million reduction is primarily due to
$171.2 million paid for the 2002 acquisitions of Memorial Hospital of
Martinsville and Henry County and Los Alamos Medical Center, as partially offset
by an increase in our capital expenditures in 2003 as compared to 2002, focusing
on revenue generating projects. Significant capital expenditures for the year
ended December 31, 2003 included $2.2 million for our cath lab renovation at
Havasu Regional Medical Center, $8.2 million for our cath/surgery suite at
Palestine Regional Medical Center, $3.0 million for our MRI/CT suite at Teche
Regional Medical Center and $3.0 million medical office building costs at Teche
Regional Medical Center.
Net cash used in financing activities totaled $16.3 million for 2003
compared to $101.3 million of cash provided by financing activities during the
prior year. The change in financing activities is primarily due to $123.0
million in borrowings in 2002 under our senior credit facility for the two 2002
hospital acquisitions. During 2003, we received $194.2 million of net proceeds
from the issuance of 7 1/2% Senior Subordinated Notes due 2013, which proceeds
were used, along with existing cash, to repay $114.3 million outstanding on the
senior bank credit facility and to repurchase $74.0 million principal amount of
our 4 1/2% Convertible Subordinated Notes due 2005.
We maintain a senior bank credit facility with Wachovia Bank, National
Association, as agent and issuing bank for a syndicate of lenders with aggregate
commitments up to $250.0 million. At December 31, 2003, we had $246.4 million,
net of outstanding letters of credit, available for borrowing under the senior
bank credit facility. Loans under the senior bank credit facility bear interest,
at our option, at the adjusted base rate or at the adjusted LIBOR rate. We pay a
commitment fee, which varies from three-eighths to one-half of one percent of
the unused portion, depending on our compliance with certain financial ratios.
We may prepay any principal amount outstanding under the senior bank credit
facility at any time before the maturity date of November 13, 2006.
In May 2003, we completed a public offering of $200.0 million aggregate
principal amount of 7 1/2% Senior
12
Subordinated Notes due June 1, 2013. Net proceeds of the offering totaling
$194.2 million were used to repay $114.3 million in existing borrowings under
the senior bank credit facility and to repurchase $74.0 million of our 4 1/2%
Convertible Subordinated Notes due 2005. The 7 1/2% Notes bear interest from May
27, 2003 at the rate of 7 1/2% per year, payable semi-annually on June 1 and
December 1, beginning on December 1, 2003. We may redeem all or a portion of the
7 1/2% Notes on or after June 1, 2008, at the then current redemption prices,
plus accrued and unpaid interest. In addition, at any time prior to June 1,
2006, we may redeem up to 35% of the aggregate principal amount of the 7 1/2%
Notes within 60 days of one or more common stock offerings with the net proceeds
of such offerings at a redemption price of 107.5% of the principal amount, plus
accrued and unpaid interest. Note holders may require us to repurchase all of
the holder's notes at 101% of their principal amount plus accrued and unpaid
interest in some circumstances involving a change of control. The 7 1/2% Notes
are unsecured and subordinated to our existing and future senior indebtedness.
The 7 1/2% Notes rank equal in right of payment to our 4 1/2% Convertible
Subordinated Notes due 2005 and our 4 1/4% Convertible Subordinated Notes due
2008. The 7 1/2% Notes effectively rank junior to our subsidiary liabilities.
The indenture contains limitations on our ability to incur additional
indebtedness, sell material assets, retire, redeem or otherwise reacquire its
capital stock, acquire the capital stock or assets of another business, and pay
dividends.
In 2000, we sold $150.0 million aggregate principal amount of 4 1/2%
Convertible Subordinated Notes due November 20, 2005. The 4 1/2% Notes bear
interest at the rate of 4 1/2% per year, payable semi-annually on each May 20
and November 20. The 4 1/2% Notes are convertible at the option of the holder at
any time on or prior to maturity into shares of our common stock at a conversion
price of $26.45 per share. The conversion price is subject to adjustment. We may
redeem all or a portion of the 4 1/2% Notes on or after November 20, 2003, at
the then current redemption prices, plus accrued and unpaid interest. Note
holders may require us to repurchase all of the holder's notes at 100% of their
principal amount plus accrued and unpaid interest in some circumstances
involving a change of control. The 4 1/2% Notes are unsecured obligations and
rank junior in right of payment to all of our existing and future senior
indebtedness. The 4 1/2% Notes rank equal in right of payment to our 4 1/4%
Convertible Subordinated Notes due 2008 and our 7 1/2% Senior Subordinated Notes
due 2013. The 4 1/2% Notes effectively rank junior to our subsidiary
liabilities. The indenture does not contain any financial covenants. At December
31, 2003, $76.0 million principal amount of the 4 1/2% Notes remained
outstanding, and a total of 2,872,760 shares of common stock have been reserved
for issuance upon conversion of the remaining 4 1/2% Notes.
In October 2001, we sold $172.5 million of 4 1/4% Convertible Subordinated
Notes due October 10, 2008. Net proceeds of approximately $166.4 million were
used to reduce the outstanding balance on our senior bank credit facility and
for acquisitions. The 4 1/4% Notes bear interest at the rate of 4 1/4% per year,
payable semi-annually on each April 10 and October 10. The 4 1/4% Notes are
convertible at the option of the holder at any time on or prior to maturity into
shares of our common stock at a conversion price of $27.70 per share. The
conversion price is subject to adjustment. We may redeem all or a portion of the
4 1/4% Notes on or after October 10, 2004, at the then current redemption
prices, plus accrued and unpaid interest. Note holders may require us to
repurchase all of the holder's notes at 100% of their principal amount plus
accrued and unpaid interest in some circumstances involving a change of control.
The 4 1/4% Notes are unsecured and subordinated to our existing and future
senior indebtedness. The 4 1/4% Notes rank equal in right of payment to our
4 1/2% Convertible Subordinated Notes due 2005 and our 7 1/2% Senior
Subordinated Notes due 2013. The 4 1/4% Notes effectively rank junior to our
subsidiary liabilities. The indenture does not contain any financial covenants.
A total of 6,226,767 shares of our common stock have been reserved for issuance
upon conversion of the 4 1/4% Notes.
Our Board of Directors has authorized the repurchase from time to time and
subject to market conditions of our outstanding 4 1/2% Notes and 4 1/4% Notes in
the open market or in privately negotiated transactions. During 2003, we
repurchased $74.0 million principal amount of the 4 1/2% Notes. We recorded a
$486,000 pretax loss associated with the early extinguishment of debt related to
the repurchase of the 4 1/2% Notes. We have not repurchased any of the 4 1/4%
Notes. Additional repurchases of either series of notes, if any, will be made
out of cash provided by operations, amounts available under our senior bank
credit facility, or from the proceeds of future financing activities.
Our shelf registration statement, providing for the offer, from time to
time, of common stock and/or debt securities up to an aggregate of $300.0
million remains effective with the Securities and Exchange Commission. Following
the issuance of $200.0 million aggregate principal amount of our 7 1/2% Senior
Subordinated Notes due 2013, the shelf registration statement remains available
for the issuance of up to $100.0 million of additional securities, subject to
market conditions and our capital needs.
We intend to acquire additional acute care facilities and are actively
seeking out such acquisitions. There can be no assurance that we will not
require additional debt or equity financing for any particular acquisition.
Also, we continually
13
review our capital needs and financing opportunities and may seek additional
equity or debt financing for our acquisition program or other needs.
Capital expenditures for our owned and leased hospitals may vary from year
to year depending on facility improvements and service enhancements undertaken
by the hospitals. We expect to make total capital expenditures in 2004 of
approximately $50.0 million, exclusive of any acquisitions of businesses or new
hospital construction projects. Planned capital expenditures for 2004 consist
principally of capital improvements to owned and leased hospitals. We expect to
incur approximately $46.0 million in new hospital construction projects related
to one hospital in Hardeeville, South Carolina and one hospital in Ft. Mohave,
Arizona. We anticipate opening the South Carolina hospital by late 2004 and the
Arizona hospital in the second half of 2005. We are obligated to construct a new
facility at our Eunice, Louisiana location contingent upon the existing facility
meeting specified operating targets. At December 31, 2003, the specified
operating targets had not been met. A replacement facility, if constructed, at
Eunice is estimated to cost approximately $26.5 million. We expect to fund these
expenditures through cash provided by operating activities and borrowings under
our revolving credit facility.
Our management anticipates that cash flows from operations, amounts
available under our senior credit facility, and our anticipated access to
capital markets are sufficient to meet expected liquidity needs, planned capital
expenditures, potential acquisitions and other expected operating needs for the
next twelve months.
The following table reflects a summary of our obligations and commitments
outstanding as of December 31, 2003.
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------
LESS THAN 1
YEAR 1-2 YEARS 3-4 YEARS THEREAFTER TOTAL
----------- --------- --------- ---------- ---------
(IN THOUSANDS)
CONTRACTUAL CASH
OBLIGATIONS:
Long-term debt $ -- $ 75,970 $ 172,500 $ 196,634 $445,104
Capital lease
obligations, with
interest 1,037 987 946 2,115 5,085
Operating leases 6,516 10,889 9,246 14,717 41,368
----------- --------- --------- ---------- ---------
Subtotal $ 7,553 $ 87,846 $ 182,692 $ 213,466 $491,557
----------- --------- --------- ---------- ---------
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
--------------------------------------------------------------------
LESS THAN 1
YEAR 1-2 YEARS 3-4 YEARS THEREAFTER TOTAL
----------- --------- --------- ---------- ---------
(IN THOUSANDS)
OTHER COMMITMENTS:
Letters of credit $ 3,565 $ -- $ -- $ -- $ 3,565
Construction and
improvement
commitments 75,204 9,838 -- -- 85,042
Physician
commitments(1) 17,304 1,187 -- -- 18,491
----------- --------- --------- ---------- ---------
Subtotal $ 96,073 $ 11,025 $ -- $ -- $ 107,098
----------- --------- --------- ---------- ---------
Total
obligations
and
commitments $ 103,626 $ 98,871 $ 182,692 $ 213,466 $ 598,655
=========== ========= ========= ========== =========
- ------------
(1) Represents the aggregate of our contractual obligations for advances to
physicians as reflected in physician recruiting agreements. See Note 11 to
our consolidated financial statements included in this Report. Amounts
shown are calculated based on the full extent of the obligation set forth
in the agreements, although the actual amount of such advances often
depends on the financial performance of the physician's practice during
the first year after relocating to
14
the community. In most cases, the amounts advanced under the agreements
are significantly less than the contractual commitment.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. In preparing
our financial statements, we are required to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. We
evaluate our estimates and judgments on an ongoing basis. We base our estimates
and judgments on historical experience and on various other factors that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Our actual results may differ
from these estimates, and different assumptions or conditions may yield
different estimates. The following represent the estimates that we consider most
critical to our operating performance and involve the most complex assumptions
and assessments.
Allowance for Doubtful Accounts.
Substantially all of our accounts receivable are related to providing
healthcare services to our hospitals' patients. Our ability to collect
outstanding receivables from third-party payors and others is critical to our
operating performance and cash flows. The primary collection risk lies with
uninsured patient accounts or patient accounts for which a balance remains after
primary insurance has paid. Insurance coverage is verified prior to treatment
for all procedures scheduled in advance and walk-in patients. Insurance coverage
is not verified in advance of procedures for emergency room patients.
Deductibles and co-payments are generally determined prior to the patient's
discharge with emphasis on collection efforts before discharge. Once these
amounts are determined, any remaining patient balance is identified and
collection activity is initiated before the patient is discharged. Our standard
collection procedures are then followed until such time that management
determines the account is uncollectible, at which point the account is written
off. Our policy with respect to estimating our allowance for doubtful accounts
is to reserve 50% of all self-pay accounts receivable aged between 121 and 150
days and 100% of all self-pay accounts that have aged greater than 150 days.
Accordingly, substantially all of our bad debt expense is related to uninsured
patient accounts and patient accounts for which a balance remains after primary
insurance has paid. We continually monitor our accounts receivable balances and
utilize cash collections data and other analytical tools to support the basis
for our estimates of the provision for doubtful accounts. In addition, we
perform quarterly hindsight procedures on historical collection and write-off
experience to determine the reasonableness of our policy for estimating the
allowance for doubtful accounts. Significant changes in payor mix or business
office operations, or deterioration in aging accounts receivable could result in
a significant increase in this allowance.
In general, the standard collection cycle at our hospitals is as follows:
- Upfront cash collection of deductibles, co-payments, and self-pay
accounts.
- From the time the account is billed until the period 120 days after
the billing, internal business office collections and early out
program collections are performed.
- From the time the account is 121 days after billing until the period
one year after billing, uncollected accounts are turned over to one
of two primary collection agencies utilized by our company.
- One year following the date of billing, any uncollected accounts are
written off and the accounts are turned over to our secondary
collection agency.
The following table summarizes our days revenue outstanding on a
same-store basis as of the dates indicated:
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
- ----------------- ----------------- -----------------
54 56 63
Our target for days revenue outstanding ranges from 53 to 58 days. The
primary reason for the decrease in days revenue outstanding for each of the
years presented above are as a result of our increased efforts in our collection
cycle.
15
The focus on these efforts has resulted in our days revenue outstanding to fall
within our target range for the past two years.
Uncollected accounts are manually written off: (a) if the balance is less
than $10.00, (b) when turned over to an outside secondary collection agency at
365 days, or (c) earlier than 365 days if all collection efforts indicate an
account is uncollectible. Once accounts have been written off, they are not
included in our gross accounts receivable or allowance for doubtful accounts.
The approximate percentage of total gross accounts receivable summarized
by aging categories is as follows:
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- ----------------- -----------------
0 to 60 days.............. 57.7% 52.9% 55.1%
61 to 150 days............ 17.2 17.3 20.4
Over 150 days............. 25.1 29.8 24.5
----------------- ----------------- -----------------
Total..................... 100.0% 100.0% 100.0%
================= ================= =================
The approximate percentage of total gross accounts receivable summarized
by payor is as follows:
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- ----------------- -----------------
Medicare.................. 25.5% 23.3% 27.4%
Medicaid.................. 11.6 12.5 16.5
Managed Care and Other.... 25.4 26.2 29.1
Self-Pay.................. 37.5 38.0 27.0
----------------- ----------------- -----------------
Total..................... 100.0% 100.0% 100.0%
================= ================= =================
We owned or leased three hospitals in Texas, which accounted for 16.6% and
17.5% of net accounts receivable in 2003 and 2002, respectively. We owned one
hospital in Arizona, which accounted for 11.0% and 10.0% of net accounts
receivable in 2003 and 2002, respectively.
Upfront cash collections for the year ended December 31, 2003 were
approximately $11.5 million compared to $8.1 million and $4.4 million for the
years ended December 31, 2002 and 2001, respectively.
Allowance for Contractual Discounts.
We derive a significant portion of our revenues from Medicare, Medicaid
and other payors that receive discounts from our standard charges. The Medicare
and Medicaid regulations and various managed care contracts under which these
discounts must be calculated are often complex and subject to interpretation and
adjustment. In addition, the services authorized and provided and resulting
reimbursement, are often subject to interpretation. These interpretations
sometimes result in payments that differ from our estimates. Additionally,
updated regulations and contract negotiations occur frequently, necessitating
our continual review and assessment of the estimation process. Our hospitals'
computerized billing systems do not automatically calculate and record
contractual allowances. Rather, we utilize an internally developed contractual
model to estimate the allowance for contractual discounts on a payor - specific
basis, given our interpretation of the applicable regulations or contract terms.
Our contractual model for Medicare and Medicaid inpatient services utilizes the
application of actual DRG data to individual patient accounts to calculate
contractual allowances. For all inpatient and outpatient non-Medicare and
non-Medicaid services, our contractual model utilizes six month historical paid
claims data by payor for such services to calculate the contractual allowances.
Differences between the contractual allowances estimated by our contractual
model and actual paid claims are adjusted when the individual claims are paid.
Our contractual model is updated each quarter. In addition to the contractual
allowances estimated and recorded by our contractual model, we also record an
allowance equal to 100% of all Medicare, Medicaid, and other insurance payors
accounts receivable that are aged greater than 365 days.
General and Professional Liability Reserves
We purchased a professional liability claims made reporting policy
effective January 1, 2003. This coverage is subject to a $5.0 million
self-insured retention per occurrence for general and professional liability and
provides coverage up to $50.0 million for claims incurred during the annual
policy term. This retention amount increases our exposure for claims occurring
prior to December 31, 2002, and reported on or after January 1, 2003 due to the
increased retention amount as compared to prior years. In 2002, the Company had
a claims-made reporting policy subject to a $750,000 deductible and a
16
$2.0 million self-insured retention per occurrence, providing coverage up to
$51.0 million for claims incurred during the annual policy term in 2002. In
2001, we maintained insurance for individual malpractice claims exceeding
$50,000 per medical incident, subject to an annual maximum of $500,000 for
claims occurring and reported in 2001. We purchased a tail policy that provides
an unlimited claim reporting period for our professional liability for claims
incurred in 2000 and prior years. We estimate our self-insured retention portion
of the malpractice risks using an outside actuary which uses historical claims
data, demographic factors, severity factors and other actuarial assumptions. The
estimated accrual for malpractice claims could be significantly affected should
current and future occurrences differ from historical claims trends. The
estimation process is also complicated by the relatively short period of time in
which we have owned some of our healthcare facilities, as occurrence data under
previous ownership may not necessarily reflect occurrence data under our
ownership. While management monitors current claims closely and considers
outcomes when estimating our insurance accruals, the complexity of the claims
and wide range of potential outcomes often hampers timely adjustments to the
assumptions used in the estimates. We maintain a reserve to cover both reported
claims and claims that have been incurred but not yet reported within our
self-insured retention.
Workers' Compensation Reserves
Workers' compensation claims are insured with a deductible with stop loss
limits of $100,000 per accident and a $1.9 million and $2.2 million minimum cap
on total losses for the 1999 and 2000 years, respectively, and $250,000 per
accident and a $6.6 million and $3.0 million minimum cap on total losses for the
2002 and 2001 years, respectively. We increased our deductible loss amount to
$500,000 per accident effective January 1, 2003. The minimum cap for total 2003
losses is $12.0 million. Our arrangement with the insurance provider allows us
to prepay the expected amounts of annual workers' compensation claims, which is
based upon claims experience. The claims processor tracks payments for the
policy year. At the end of the policy year, the claims processor compares the
total amount prepaid by us to the actual amount paid by the claims processor.
This comparison ultimately will result in a receivable from or a payable to the
claims processor.
We are fully insured in the commercial marketplace for workers'
compensation claims prior to January 1, 1999. We utilize loss run reports
provided by the claims administrator to determine the appropriate range of loss
reserves for the 1999 and subsequent years. Our accruals are calculated to cover
the risk from both reported claims and claims that have been incurred but not
yet reported.
Goodwill and Long-Lived Assets, Including Impairment
Our consolidated financial statements primarily include the following
types of long-lived assets: property and equipment, goodwill and other
intangible assets. Property and equipment purchased in the normal course of
business are recorded at the cost of the purchase and a useful life is assigned
based upon the nature of the asset in comparison to our policy. We also, in
connection with our acquisition of businesses, acquire property and equipment,
goodwill and other intangible assets. We use outside firms to perform a
valuation of these acquired assets for the purpose of allocating the purchase
price of the acquisition. As a result of the adoption of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No.
142"), we have obtained valuation reports to identify property and equipment, as
well as any intangible assets purchased in our acquisitions. Based on the
valuation reports completed to date, the only identifiable intangible assets
valued have been non-compete agreements and licenses and accreditations, which
have had minimal associated value; the remainder was goodwill. In accordance
with SFAS No. 142, goodwill resulting from acquisitions after June 30, 2001 has
not been amortized.
Impairment of goodwill is governed by SFAS No. 142. In accordance with the
adoption of SFAS No. 142, we completed our transitional impairment test prior to
June 30, 2002 as of the beginning of 2002. The results of our review indicated
that no impairment was present related to the adoption of this accounting
standard. Additionally, we completed our annual impairment test as of October 1,
2003. The results of our 2003 review indicated that no impairment occurred,
other than for Glades General Hospital, as discussed below. Our annual
impairment test is based upon a combination of market capitalization and a
projected run-rate for income from continuing operations before provision for
income taxes, depreciation and amortization, interest, minority interests, loss
on sale of assets and loss on extinguishment of debt (adjusted for a multiple of
earnings) for the consolidated company.
Impairment of long-lived assets other than goodwill is governed by
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. We adopted this statement effective
January 1, 2002. In accordance with the standard, in connection with the sale of
Glades General Hospital, which was effective April
17
30, 2004, the Company recorded an after tax impairment charge of $8.9 million
related to the write-off of goodwill associated with the hospital, the write-off
of the net book value of physician recruiting costs and the write down of other
assets of the hospital to their net realizable value, less costs to sell.
INFLATION
The healthcare industry is labor intensive. Wages and other expenses
increase, especially during periods of inflation and labor shortages. In
addition, suppliers pass along to us rising costs in the form of higher prices.
We generally have been able to offset increases in operating costs by increasing
charges for services, expanding services, and implementing cost control measures
to curb increases in operating costs and expenses. In light of cost containment
measures imposed by government agencies and private insurance companies, we do
not know whether we will be able to offset or control future cost increases, or
be able to pass on the increased costs associated with providing healthcare
services to patients with government or managed care payors, unless such payors
correspondingly increase reimbursement rates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our policy is not to hold or issue derivatives for trading purposes and to
avoid derivatives with leverage features. Our primary market risk involves
interest rate risk. Our interest expense is sensitive to changes in the general
level of interest rates. To mitigate the impact of fluctuations in interest
rates, we generally maintain 50% - 80% of our debt at a fixed rate, either by
borrowing on a long-term basis or entering into an interest rate swap. At
December 31, 2003, approximately 77% of our outstanding debt was effectively at
a fixed rate. We entered into an interest rate swap agreement which effectively
converted, for a ten-year period, $100.0 million of the $200.0 million
fixed-rate borrowings under our 7 1/2% Senior Subordinated Notes due 2013 to
floating rate borrowings. Floating rate borrowings are based on LIBOR plus 2.79%
over the term of the agreement. Our interest rate swap is a fair value hedge. We
are exposed to credit losses in the event of nonperformance by the counterparty
to the financial instrument. We anticipate that the counterparty will fully
satisfy its obligations under the contract.
The carrying amount of our total long-term debt, less current maturities,
of $448.0 million and $460.4 million at December 31, 2003 and 2002,
respectively, approximated fair value. At the December 31, 2003 borrowing level,
a hypothetical 1% increase in interest rates, considering the effect of the
interest rate hedge agreement, would have no significant impact on our net
income and cash flows. A hypothetical 1% increase in interest rates on the
fixed-rate debt would not have a material impact on the fair value of such debt.
18
INDEX TO FINANCIAL STATEMENTS
The following consolidated financial statements are filed as part of this report
under Item 8 - Financial Statements and Supplementary Data:
Page
----
ANNUAL FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm ..... F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002.................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 2003, 2002 and 2001.......................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 2003, 2002 and 2001.......................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001.......................................... F-6
Notes to Consolidated Financial Statements...................................... F-7
Financial statement schedules are not required under the related instructions or
are inapplicable and therefore have been omitted.
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BOARD OF DIRECTORS
PROVINCE HEALTHCARE COMPANY
We have audited the accompanying consolidated balance sheets of Province
Healthcare Company and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2003.
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 audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Province
Healthcare Company and subsidiaries at December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, in conformity with U.S.
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed, in 2002, its method of accounting for goodwill and other
intangible assets.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 10, 2004,
except for Notes 2 and 16, as to which the dates are
June 30, 2004 and August 16, 2004, respectively
F-2
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
---------------------------
2003 2002
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 46,117 $ 14,625
Accounts receivable, less allowance for
doubtful accounts of $66,835 in 2003 and
$64,712 in 2002 110,335 108,148
Inventories 18,424 19,203
Prepaid expenses and other 14,614 15,746
Assets of discontinued operations 14,995 28,191
------------- -----------
Total current assets 204,485 185,913
Property and equipment, net 459,843 440,111
Goodwill 309,191 311,092
Unallocated purchase price -- 466
Other assets 36,874 36,605
------------- -----------
$ 1,010,393 $ 974,187
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,083 $ 19,629
Accrued salaries and benefits 27,852 23,347
Accrued expenses 14,241 12,841
Current portion of long-term debt 743 974
Liabilities of discontinued operations 5,156 7,902
------------- -----------
Total current liabilities 64,075 64,693
Long-term debt, less current portion 447,956 460,370
Other liabilities 49,579 33,310
Minority interests 1,910 2,612
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock - $0.01 par value, 100,000
shares authorized, none issued and outstanding -- --
Common stock - $0.01 par value; 150,000,000
shares authorized, 48,841,157 shares and
48,581,549 shares issued and outstanding at
December 31, 2003 and 2002, respectively 488 486
Additional paid-in-capital 306,091 304,102
Retained earnings 141,186 109,567
Accumulated other comprehensive loss (892) (953)
------------- -----------
Total stockholders' equity 446,873 413,202
------------- -----------
$ 1,010,393 $ 974,187
============= ===========
See accompanying notes.
F-3
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
2003 2002 2001
---------- ---------- ----------
Revenues:
Net patient revenue $ 735,841 $ 649,954 $ 480,627
Other 10,367 8,308 6,253
---------- ---------- ----------
746,208 658,262 486,880
Expenses:
Salaries, wages and benefits 282,794 261,499 190,055
Purchased services 68,872 69,934 46,588
Supplies 95,579 84,408 56,211
Provision for doubtful accounts 72,583 53,201 44,277
Other operating expenses 88,137 69,447 47,353
Rentals and leases 9,007 8,284 6,818
Depreciation and amortization 37,617 32,169 27,611
Interest expense 26,262 21,285 11,071
Minority interests 260 34 267
Loss (gain) on sale of assets 75 (77) 178
Loss on early extinguishment of debt 486 -- --
---------- ---------- ----------
Total expenses 681,672 600,184 430,429
---------- ---------- ----------
Income from continuing operations
before provision for income taxes 64,536 58,078 56,451
Income taxes 22,816 23,240 23,796
---------- ---------- ----------
Income from continuing operations 41,720 34,838 32,655
Discontinued operations, net of tax:
(Loss) earnings from operations (1,149) 1,274 253
Impairment of assets (8,952) -- --
---------- ---------- ----------
(10,101) 1,274 253
---------- ---------- ----------
Net income $ 31,619 $ 36,112 $ 32,908
========== ========== ==========
Earnings (loss) per common share:
Basic:
Continuing operations $ 0.85 $ 0.72 $ 0.69
Discontinued operations, net of tax:
(Loss) earnings from
operations (0.02) 0.03 0.01
Impairment of assets (0.18) -- --
---------- ---------- ----------
Net income $ 0.65 $ 0.75 $ 0.70
========== ========== ==========
Diluted:
Continuing operations $ 0.84 $ 0.70 $ 0.67
Discontinued operations, net of tax:
(Loss) earnings from
operations (0.02) 0.03 --
Impairment of assets (0.15) -- --
---------- ---------- ----------
Net income $ 0.67 $ 0.73 $ 0.67
========== ========== ==========
See accompanying notes.
F-4
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Accumulated
Common Stock Additional Other
------------------- Paid-In Retained Comprehensive
Shares Amount Capital Earnings Loss Total
---------- ------ ---------- -------- ------------- -----------
Balance at December 31, 2000......................... 46,362,882 $ 463 $ 273,704 $ 40,547 $ -- $ 314,714
Exercise of stock options and
related income tax benefit........................ 844,339 9 13,253 -- -- 13,262
Treasury stock...................................... (2,319) -- (45) -- -- (45)
Issuance of common stock from employee
stock purchase plan............................... 284,082 3 2,036 -- -- 2,039
Comprehensive income:
Net income...................................... -- -- -- 32,908 -- 32,908
Cumulative effect of change in accounting for
derivative financial instruments,
net of tax of $42............................. -- -- -- -- (58) (58)
Change in fair value of derivatives,
net of tax of $504............................ -- -- -- -- (815) (815)
-----------
Comprehensive income................................ -- -- -- -- -- 32,035
---------- ------ ---------- -------- ------------- -----------
Balance at December 31, 2001......................... 47,488,984 475 288,948 73,455 (873) 362,005
Exercise of stock options and
related income tax benefit........................ 1,031,998 10 13,952 -- -- 13,962
Treasury stock...................................... 1,545 -- 45 -- -- 45
Issuance of common stock from employee
stock purchase plan............................... 59,022 1 1,032 -- -- 1,033
Other............................................... -- -- 125 -- -- 125
Comprehensive income:
Net income...................................... -- -- -- 36,112 -- 36,112
Change in fair value of derivatives,
net of tax of $53............................. -- -- -- -- (80) (80)
-----------
Comprehensive income................................ -- -- -- -- -- 36,032
---------- ------ ---------- -------- ------------- -----------
Balance at December 31, 2002......................... 48,581,549 486 304,102 109,567 (953) 413,202
Exercise of stock options and
related income tax benefit........................ 143,882 1 828 -- -- 829
Issuance of common stock from employee
stock purchase plan and other..................... 115,726 1 1,161 -- -- 1,162
Comprehensive income:
Net income...................................... -- -- -- 31,619 -- 31,619
Change in fair value of derivatives,
net of tax of $38............................. -- -- -- -- 61 61
-----------
Comprehensive income................................ -- -- -- -- -- 31,680
---------- ------ ---------- -------- ------------- -----------
Balance at December 31, 2003........................ 48,841,157 $ 488 $ 306,091 $141,186 $ (892) $ 446,873
========== ====== ========== ======== ============= ===========
See accompanying notes.
F-5
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2002 2001
----------- ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Income from continuing operations $ 41,720 $ 34,838 $ 32,655
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities:
Depreciation and amortization 37,617 32,169 27,611
Deferred income taxes 14,215 8,776 6,125
Provision for professional liability 5,476 7,209 200
Loss on early extinguishment of debt 486 -- --
Loss (gain) on sale of assets 75 (77) 178
Changes in operating assets and liabilities, net of
effects from acquisitions and disposals:
Accounts receivable (1,172) 6,511 (14,651)
Inventories 712 (1,311) (1,425)
Prepaid expenses and other (3,347) 4,012 (15,406)
Accounts payable and accrued expenses (4,107) (2,696) (3,573)
Accrued salaries and benefits 4,505 (315) 1,184
Other 8,165 1,022 484
----------- ------------ ------------
Net cash provided by operating activities 104,345 90,138 33,382
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (56,926) (45,469) (69,816)
Purchase of hospitals and
healthcare entities -- (171,157) (97,607)
----------- ------------ ------------
Net cash used in investing activities (56,926) (216,626) (167,423)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 194,199 134,321 337,939
Repayments of debt (213,049) (44,048) (178,348)
Issuance of common stock 2,574 11,037 11,969
----------- ------------ ------------
Net cash (used in) provided by financing activities (16,276) 101,310 171,560
----------- ------------ ------------
Net cash provided by (used in) continuing operations 31,143 (25,178) 37,519
Net cash provided by discontinued operations 349 841 1,443
----------- ------------ ------------
Increase (decrease) in cash and cash equivalents 31,492 (24,337) 38,962
Cash and cash equivalents at beginning of period 14,625 38,962 --
----------- ------------ -----------
Cash and cash equivalents at end of period $ 46,117 $ 14,625 $ 38,962
=========== ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 23,986 $ 19,958 $ 9,742
=========== ============ ============
Cash paid for income taxes, net $ 10,322 $ 14,848 $ 28,185
=========== ============ ============
ACQUISITIONS:
Assets acquired $ -- $ 181,268 $ 109,014
Liabilities assumed -- (10,111) (11,407)
----------- ------------ ------------
Cash paid, net of cash acquired $ -- $ 171,157 $ 97,607
=========== ============ ============
See accompanying notes.
F-6
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
1. ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION
Province Healthcare Company (the "Company") was founded on February 2,
1996, and is engaged in the business of owning and leasing hospitals in
non-urban communities throughout the United States. At December 31, 2003, the
Company owned or leased 20 general acute care hospitals in 13 states with 2,262
licensed beds. Effective April 30, 2004, the Company sold Glades General
Hospital in Belle Glade, Florida and, effective June 30, 2004, sold Brim
Healthcare, Inc., its hospital management subsidiary. The operations of Glades
General Hospital and Brim Healthcare, Inc. are reported as discontinued
operations, as discussed in Note 2. The Company's remaining 19 hospitals and
operations are reported as continuing operations, with a total of 2,189 licensed
beds at December 31, 2003. At December 31, 2003, the Company managed, through
its Brim Healthcare, Inc. subsidiary, 36 primarily non-urban hospitals in 14
states with a total of 2,985 licensed beds.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
its majority-owned subsidiaries and partnerships in which the Company or one of
its subsidiaries is a general partner and has a majority voting interest. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and judgments that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. On an ongoing basis, the Company
evaluates its estimates, including those related to bad debts, contractual
discounts, risk management reserves and intangible assets. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. The Company believes the
following critical accounting policies affect its more significant judgments and
estimates used in the preparation of its consolidated financial statements:
Allowance for Doubtful Accounts
Substantially all of the Company's accounts receivable are related to
providing healthcare services to the Company's hospitals' patients. The
Company's ability to collect outstanding receivables from third-party payors and
others is critical to its operating performance and cash flows. The primary
collection risk lies with uninsured patient accounts or patient accounts for
which a balance remains after primary insurance has paid. Insurance coverage is
verified prior to treatment for all procedures scheduled in advance and walk-in
patients. Insurance coverage is not verified in advance of procedures for
emergency room patients. Deductibles and co-payments are generally determined
prior to the patient's discharge with emphasis on collection efforts before
discharge. Once these amounts are determined, any remaining patient balance is
identified and collection activity is initiated before the patient is
discharged. The Company's standard collection procedures are then followed until
such time that management determines the account is uncollectible, at which
point the account is written off. The Company's policy with respect to
estimating its allowance for doubtful accounts is to reserve 50% of all self-pay
accounts receivable aged between 121 and 150 days and 100% of all self-pay
accounts that have aged greater than 150 days. Accordingly, substantially all of
the Company's bad debt expense is related to uninsured patient accounts and
patient accounts for which a balance remains after primary insurance has paid.
The Company continually monitors its accounts receivable balances and utilizes
cash collections data and other analytical tools to support the basis for its
estimates of the provision for doubtful accounts. In addition, the Company
performs quarterly hindsight procedures on historical collection and write-off
experience to determine the reasonableness of its policy for estimating the
allowance for
F-7
doubtful accounts. Significant changes in payor mix or business office
operations, or deterioration in aging accounts receivable could result in a
significant increase in this allowance.
In general, the standard collection cycle at the Company's hospitals is as
follows:
- Upfront cash collection of deductibles, co-payments, and self-pay
accounts.
- From the time the account is billed until the period 120 days after
the billing, internal business office collections and early out
program collections are performed.
- From the time the account is 121 days after billing until the period
one year after billing, uncollected accounts are turned over to one
of two primary collection agencies utilized by the Company.
- One year following the date of billing, any uncollected accounts are
written off and the accounts are turned over to a secondary
collection agency.
The following table summarizes the Company's days revenue outstanding on a
same-store basis as of the dates indicated:
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- ------------------- -----------------
54 56 63
The Company's target for days revenue outstanding ranges from 53 to 58
days. The primary reason for the decrease in days revenue outstanding for each
of the years presented above are as a result of the Company's increased efforts
in its collection cycle.
Uncollected accounts are manually written off: (a) if the balance is less
than $10.00, (b) when turned over to an outside secondary collection agency at
365 days, or (c) earlier than 365 days if all collection efforts indicate an
account is uncollectible. Once accounts have been written off, they are not
included in our gross accounts receivable or allowance for doubtful accounts.
The approximate percentage of total gross accounts receivable summarized
by aging categories is as follows:
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- ------------------ -----------------
0 to 60 days............... 57.7% 52.9% 55.1%
61 to 150 days............. 17.2 17.3 20.4
Over 150 days.............. 25.1 29.8 24.5
----------------- ------------------ -----------------
Total...................... 100.0% 100.0% 100.0%
================= ================== =================
The approximate percentage of total gross accounts receivable summarized
by payor is as follows:
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- ------------------ -----------------
Medicare................... 25.5% 23.3% 27.4%
Medicaid................... 11.6 12.5 16.5
Managed Care and Other..... 25.4 26.2 29.1
Self-Pay................... 37.5 38.0 27.0
----------------- ------------------ -----------------
Total...................... 100.0% 100.0% 100.0%
================= ================== =================
The Company owned or leased three hospitals in Texas, which accounted for
16.6% and 17.5% of net accounts receivable in 2003 and 2002, respectively. The
Company owned one hospital in Arizona, which accounted for 11.0% and 10.0% of
net accounts receivable in 2003 and 2002, respectively.
Upfront cash collections for the year ended December 31, 2003 were
approximately $11.5 million compared to $8.1 million and $4.4 million for the
years ended December 31, 2002 and 2001, respectively.
F-8
Allowance for Contractual Discounts
The Company derives a significant portion of its revenues from Medicare,
Medicaid and other payors that receive discounts from its standard charges. The
Medicare and Medicaid regulations and various managed care contracts under which
these discounts must be calculated are often complex and subject to
interpretation and adjustment. In addition, the services authorized and provided
and resulting reimbursement are often subject to interpretation. These
interpretations sometimes result in payments that differ from the Company's
estimates. Additionally, updated regulations and contract negotiations occur
frequently, necessitating the Company's continual review and assessment of the
estimation process. The Company's hospitals' computerized billing systems do not
automatically calculate and record contractual allowances. Rather, the Company
utilizes an internally developed contractual model to estimate the allowance for
contractual discounts on a payor - specific basis, given its interpretation of
the applicable regulations or contract terms. The Company's contractual model
for Medicare and Medicaid inpatient services utilizes the application of actual
DRG data to individual patient accounts to calculate contractual allowances. For
all inpatient and outpatient non-Medicare and non-Medicaid services, the
Company's contractual model utilizes six month historical paid claims data by
payor for such services to calculate the contractual allowances. Differences
between the contractual allowances estimated by the Company's contractual model
and actual paid claims are adjusted when the individual claims are paid. The
Company's contractual model is updated each quarter. In addition to the
contractual allowances estimated and recorded by the Company's contractual
model, the Company also records an allowance equal to 100% of all Medicare,
Medicaid, and other insurance payors accounts receivable that are aged greater
than 365 days.
Risk Management Reserves
The Company purchased a professional liability claims-made reporting
policy effective January 1, 2003. This coverage is subject to a $5.0 million
self-insured retention per occurrence for general and professional liability and
provides coverage up to $50.0 million for claims incurred during the annual
policy term. This retention amount increases our exposure for claims occurring
prior to December 31, 2002 and reported on or after January 1, 2003, due to the
increased retention amount as compared to prior years. In 2002, the Company had
a claims-made reporting policy subject to a $750,000 deductible and a $2.0
million self-insured retention per occurrence, providing coverage up to $51.0
million for claims incurred during the annual policy term in 2002. In 2001, the
Company maintained insurance for individual malpractice claims exceeding $50,000
per medical incident, subject to an annual maximum of $500,000 for claims
occurring and reported in 2001. The Company purchased a tail policy that
provides an unlimited claim reporting period for its professional liability for
claims incurred in 2000 and prior years. The Company estimates its self-insured
retention portion of the malpractice risks using an outside actuary which uses
historical claims data, demographic factors, severity factors and other
actuarial assumptions. The Company maintains a reserve to cover both reported
claims and claims that have been incurred but not yet reported within its
self-insured retention.
Workers' compensation claims are insured with a deductible with stop loss
limits of $100,000 per accident and a $1.9 million and $2.2 million minimum cap
on total losses for the 1999 and 2000 years, respectively, and $250,000 per
accident and a $6.6 million and $3.0 million minimum cap on total losses for the
2002 and 2001 years, respectively. The Company increased the deductible loss
amount to $500,000 per accident effective January 1, 2003. The minimum cap for
total 2003 losses is $12.0 million. The Company's arrangement with the insurance
provider allows it to prepay the expected amounts of annual workers'
compensation claims, which are based upon claims experience. The claims
processor tracks payments for the policy year. At the end of the policy year,
the claims processor compares the total amount prepaid by the Company to the
actual amount paid by the claims processor. This comparison will ultimately
result in a receivable from or a payable to the claims processor.
The Company is fully insured in the commercial marketplace for workers'
compensation claims prior to January 1, 1999. The Company utilized loss run
reports provided by the claims administrator to determine the appropriate range
of loss reserves for the 1999 year and subsequent years. The Company's accruals
are calculated to cover the risk from both reported claims and claims that have
been incurred but not yet reported.
F-9
Intangible Assets
The Company adopted Statement of Financial Accounting Standards No. 141,
Business Combinations ("SFAS No. 141"), effective July 1, 2001 and Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS No. 142"), effective January 1, 2002. Under SFAS No. 142, goodwill and
indefinite lived intangible assets from acquisitions prior to July 1, 2001 are
no longer amortized effective January 1, 2002, but are subject to annual
impairment tests. In accordance with the new rules, goodwill resulting from
acquisitions after June 30, 2001 has not been amortized. Other intangible assets
will continue to be amortized over their useful lives.
Management of the Company evaluates all acquisitions independently to
determine the appropriate amortization period for identified intangible assets.
Each evaluation includes an analysis of factors such as historic and projected
financial performance, evaluation of the estimated useful lives of buildings and
fixed assets acquired, the indefinite lives of certificates of need and licenses
acquired, the competition within local markets, and lease terms where
applicable.
Discontinued Operations
As disclosed in Note 2, the operations of Glades General Hospital and Brim
Healthcare, Inc. are reported as discontinued operations and the consolidated
financial statements for all prior periods have been adjusted to reflect this
presentation. In addition, certain other prior period amounts have been
reclassified to conform to the current year presentation. Such other
reclassifications had no material effect on the financial position and results
of operations as previously reported.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The Company places
its cash in financial institutions that are federally insured and limits the
amount of credit exposure with any one financial institution.
Accounts Receivable
The Company receives payment for services rendered from federal and state
agencies (under the Medicare, Medicaid and TRICARE programs), managed care
health plans, commercial insurance companies, employers and patients. During the
years ended December 31, 2003, 2002, and 2001, approximately 48.8%, 56.7%, and
48.6%, respectively, of the Company's net patient revenue from continuing
operations related to patients participating in the Medicare and Medicaid
programs. Management recognizes that revenues and receivables from government
agencies are significant to its operations, but it does not believe that there
are significant credit risks associated with these government agencies.
Management does not believe that there are any other significant concentrations
of revenues from any particular payor that would subject it to any significant
credit risks in the collection of its accounts receivable.
Inventories
Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market.
Property and Equipment
Property and equipment are stated at cost. Routine maintenance and repairs
are charged to expense as incurred. Expenditures that increase capacities or
extend useful lives are capitalized. Depreciation expense, including
amortization of assets capitalized under capital leases, is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized on a straight-line basis over the lesser of the terms
of the respective leases or their estimated useful lives. Buildings and
improvements are depreciated over estimated useful lives ranging generally from
20 to 40 years. Estimated useful lives of equipment vary generally from 3 to 20
years.
The Company adopted Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144")
effective January 1, 2002. Prior to January 1, 2002, the Company recognized
impairments of long-lived assets in accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
In accordance with SFAS No. 144, when events, circumstances
F-10
or operating results indicate that the carrying values of certain long-lived
assets and related identifiable intangible assets (excluding goodwill) that are
expected to be held and used might be impaired, the Company considers the
recoverability of assets to be held and used by comparing the carrying amount of
the assets to the present value of future net cash flows expected to be
generated by the assets. If assets are identified as impaired, the impairment is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets as determined by independent appraisals or estimates of
discounted future cash flows. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
Other Assets
Other assets consist primarily of costs associated with the issuance of
debt which are amortized using the interest method over the life of the related
debt, and costs to recruit physicians to the Company's markets, which are
deferred and amortized over the term of the respective physician recruitment
agreement, which is generally three years. Amortization of deferred loan costs
is included in interest expense. Deferred loan costs totaled $15,305,000 (net of
accumulated amortization of $11,940,000) and $11,733,000 (net of accumulated
amortization of $8,518,000) at December 31, 2003 and 2002, respectively.
Amortization of physician recruiting costs is included in other operating
expenses. Net physician recruiting costs included in the accompanying
consolidated balance sheets at December 31, 2003 and 2002 totaled $16,975,000
and $18,049,000, respectively.
Other Noncurrent Liabilities
Other noncurrent liabilities consist primarily of insurance liabilities,
supplemental deferred compensation liability, and deferred income taxes.
Minority Interests
The consolidated financial statements include all assets, liabilities,
revenues and expenses of less than 100% owned entities controlled by the
Company. Accordingly, the Company has recorded minority interests in the
earnings and equity of such consolidated entities.
Patient Revenue
The Company's healthcare facilities have entered into agreements with
third-party payors, including government programs and managed care health plans,
under which the facilities are paid based upon established charges, the cost of
providing services, predetermined rates per diagnosis, fixed per diem rates or
discounts from established charges.
Net patient revenue is reported at the estimated net realizable amounts
from 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 are adjusted, if necessary, in
future periods when final settlements are determined (See Note 7).
The Company provides care without charge to patients who are financially
unable to pay for the healthcare services they receive. Because the Company does
not pursue collection of amounts determined to qualify as charity care, they are
not reported in net patient revenues.
Stock Based Compensation
The Company, from time to time, grants stock options for a fixed number of
common shares to employees and directors at a fixed exercise price. The Company
accounts for employee stock option grants using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("Opinion 25"), and related interpretations, and
accordingly, recognizes no compensation expense for the stock option grants when
the exercise price of the options equals, or is greater than, the market price
of the underlying stock on the date of grant.
The following proforma information is being presented in accordance with
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which was adopted by the Company
effective January 1, 2003. Had compensation cost for the Company's stock-based
compensation plans been
F-11
determined based on the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS No. 123, Accounting
for Stock-Based Compensation ("SFAS No. 123"), net income and earnings per share
would have been reduced to the pro forma amounts indicated in the following
table (in thousands, except per share data):
2003 2002 2001
---------- ----------- ----------
Net income - as reported $ 31,619 $ 36,112 $ 32,908
Less pro forma effect of stock option
grants (4,744) (10,922) (8,452)
---------- ----------- ----------
Pro forma net income $ 26,875 $ 25,190 $ 24,456
========== =========== ==========
Earnings per share - as reported
Basic $ 0.65 $ 0.75 $ 0.70
Diluted $ 0.67 $ 0.73 $ 0.67
Earnings per share - pro forma
Basic $ 0.55 $ 0.52 $ 0.52
Diluted $ 0.55 $ 0.51 $ 0.50
In accordance with Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS No. 128"), the calculation of diluted earnings per
share for the year ended December 31, 2003 using the "if converted" method
includes the impact of the Company's convertible notes. Since the Company
reports discontinued operations, income from continuing operations has been
utilized in determining whether the convertible notes were dilutive or
antidilutive to earnings per share. The convertible notes were dilutive to
earnings per share on income from continuing operations and were antidilutive to
net income for the year ended December 31, 2003. The convertible notes were
antidilutive to earnings per share on pro forma income from continuing
operations and pro forma net income for the year ended December 31, 2003.
Interest Rate Swap Agreements
The Company enters into interest rate swap agreements as a means of
managing its interest rate exposure. The differential to be paid or received is
recognized over the life of the agreement as an adjustment to interest expense.
Effective January 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended ("SFAS No. 133"). SFAS No. 133 requires that all
derivatives, whether designated in hedging relationships or not, be recognized
on the balance sheet at fair value and requires the recognition of the resulting
gains or losses as adjustments to earnings or other comprehensive income. In
accordance with the provisions of SFAS No. 133, the Company designated its
outstanding interest rate swap agreement as a fair value hedge and determined
that this hedge qualifies for treatment under the short-cut method of measuring
effectiveness. Under the provisions of SFAS No. 133, this hedge is determined to
be perfectly effective and there is no requirement to periodically evaluate
effectiveness. This derivative and the related hedged debt amount has been
recognized in the consolidated financial statements at its respective fair
value.
Recently Issued Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46") to
expand upon and strengthen existing accounting guidance that addresses when a
company should include in its financial statements the assets, liabilities and
activities of another entity. Until now, a company generally has included
another entity in its consolidated financial statements only if it controlled
the entity through voting interests. FIN 46 changes that guidance by requiring a
variable interest entity, as defined, to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities, or is entitled to receive a majority of the entity's
residual returns, or both. FIN 46 also requires disclosure about variable
interest entities that the company is not required to consolidate but in which
it has a significant variable interest. On December 24, 2003, the FASB issued a
revision of FIN 46 that replaced the original interpretation and codified
proposed modifications and other decisions previously issued through certain
FASB Staff Positions, including the deferral of the effective date of applying
FIN 46 to certain variable interests. The revised FIN 46 requires the Company to
apply the provisions of FIN 46 immediately to any special purpose entities and
to any variable interest entities created after January 31, 2003. Application
F-12
of the provisions will be required for all other variable interest entities in
financial statements for periods ending after March 15, 2004. The Company does
not anticipate any effect on its consolidated financial position or operating
results from the application of FIN 46.
2. DISCONTINUED OPERATIONS
On April 30, 2004 the Company sold substantially all of the assets and
assigned certain liabilities of Glades General Hospital ("Glades") in Belle
Glade, Florida, to a wholly-owned subsidiary of the Health Care District of Palm
Beach County for approximately $1.5 million, resulting in an immaterial gain on
divestiture. Effective June 30, 2004, the Company sold the stock of Brim
Healthcare, Inc. ("Brim") to Brim Holding Company, Inc., an independent
investor-owned Delaware corporation, for approximately $13.2 million, resulting
in a pre-tax gain on divestiture of $11.3 million ($7.0 million gain net of
tax). The operations of Glades and Brim are reported as discontinued operations
and the operating results for the years ended December 31, 2003, 2002 and 2001
are presented in the following table (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
----------- ---------- ----------
Revenues $ 45,480 $ 46,085 $ 43,859
Operating expenses 45,052 41,242 39,967
Depreciation and amortization 1,699 2,062 2,568
Interest expense 478 672 1,019
Loss on sale of asset 11 -- 18
Impairment charge 13,773 -- --
---------- ---------- ----------
Total expenses 61,013 43,976 43,572
---------- ---------- ----------
Income (loss) before provision for income
taxes (15,533) 2,109 287
Income taxes (benefit) (5,432) 835 34
---------- ---------- ----------
(Loss) earnings from discontinued operations $ (10,101) $ 1,274 $ 253
========== ========== ==========
In connection with the decision to sell Glades, the Company wrote off
goodwill associated with the hospital, wrote off the net book value of physician
recruiting costs and wrote down the other assets of Glades to their estimated
net realizable value, less cost to sell. These charges are included in the
impairment charge recorded in 2003.
The major classes of assets and liabilities of discontinued operations in
the consolidated balance sheets as of December 31, 2003 and 2002 are as follows
(in thousands):
Year Ended December 31,
-----------------------
2003 2002
------- -------
Cash $ 17 $ 23
Accounts receivable, net 6,931 9,283
Inventories 529 632
Prepaid expenses and other current assets 392 570
Property and equipment, net 3,157 7,268
Goodwill 80 8,298
Other assets 33 2,117
Deferred income taxes 3,856 --
------- -------
Total assets of discontinued operations 14,995 28,191
------- -------
Accounts payable 812 764
Accrued salaries and benefits 1,603 2,033
Accrued expenses 513 357
Long-term debt 982 1,900
Income taxes payable 1,246 1,706
Deferred income taxes -- 1,142
------- -------
Total liabilities of discontinued operations 5,156 7,902
------- -------
Net assets of discontinued operations $ 9,839 $20,289
======= =======
F-13
3. ACQUISITIONS AND GOODWILL
2001 ACQUISITIONS
In 2001, the Company acquired five hospitals: Selma Regional Medical
Center, acquired in July 2001; Ashland Regional Medical Center, acquired in
August 2001; Vaughan Regional Medical Center, acquired in October 2001; Medical
Center of Southern Indiana, acquired in October 2001; and Teche Regional Medical
Center, acquired in December 2001.
In the second quarter of 2002, the Company consolidated the operations of
Selma Regional Medical Center and Vaughan Regional Medical Center. The
consolidation of the operations of these hospitals resulted in a regional
hospital (Vaughan Regional Medical Center) that provides more intensive services
to the large area it serves.
2002 ACQUISITIONS
In May 2002, the Company acquired Memorial Hospital of Martinsville and
Henry County in Martinsville, Virginia, for approximately $129.2 million,
including working capital. To finance this acquisition, the Company borrowed
$86.0 million under its revolving credit facility and used approximately $43.2
million of available cash. This is the Company's first Virginia hospital and is
the only hospital in the county, serving a population in excess of 100,000.
In June 2002, the Company acquired Los Alamos Medical Center in Los
Alamos, New Mexico, for approximately $39.0 million, including working capital.
To finance this acquisition, the Company borrowed $37.0 million under its
revolving credit facility and used $2.0 million from available cash. This is the
Company's first New Mexico hospital and is the only hospital in the community,
serving a population of approximately 50,000.
The foregoing acquisitions were accounted for using the purchase method of
accounting. The operating results of the hospitals acquired in 2002 and 2001
have been included in the accompanying consolidated statements of income from
the respective dates of acquisition.
PRO FORMA ACQUISITION INFORMATION
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition for the hospital
acquisitions completed in 2002 (in thousands):
Accounts receivable, net $ 12,913
Inventories 2,177
Prepaid expenses and other 119
----------
Total current assets acquired 15,209
Property and equipment 63,457
Unallocated purchase price 466
Goodwill 101,349
Other 787
----------
Total assets acquired 181,268
----------
Total liabilities assumed 10,111
----------
Net assets acquired $ 171,157
==========
The following pro forma information reflects the operations of the
hospitals acquired in 2002 and 2001, as if the respective transactions had
occurred as of the first day of the fiscal year immediately preceding the year
of the acquisitions (in thousands, except per share data):
2002 2001
------------ ----------
Net revenue $ 701,850 $ 688,310
Net income 38,112 35,454
Earnings per share:
Basic $ 0.79 $ 0.75
Diluted 0.77 0.73
F-14
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.
PRO FORMA GOODWILL INFORMATION
Had the Company been accounting for its goodwill under SFAS No. 142 during
the year ended December 31, 2001, the Company's pro forma net income and
earnings per share would have been as follows (in thousands, except per share
data):
Reported net income $ 32,908
Add: Goodwill amortization, net of tax 4,198
----------
Pro forma adjusted net income $ 37,106
==========
Basic earnings per share:
Reported net income $ 0.70
Add: Goodwill amortization, net of tax 0.09
----------
Pro forma adjusted net income $ 0.79
==========
Diluted earnings per share:
Reported net income $ 0.67
Add: Goodwill amortization, net of tax 0.09
----------
Pro forma adjusted net income $ 0.76
==========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31,
-------------------------
2003 2002
------------ -----------
Land $ 23,344 $ 21,458
Land improvements 5,292 5,106
Leasehold improvements 19,554 17,286
Buildings and improvements 335,788 313,635
Equipment 191,900 158,721
------------ -----------
575,878 516,206
Less accumulated depreciation and amortization (121,835) (84,985)
------------ -----------
454,043 431,221
Construction-in-progress (estimated cost to
complete at December 31, 2003 - $85,042) 5,800 8,890
------------ -----------
$ 459,843 $ 440,111
============ ===========
Depreciation expense totaled approximately $37,120,000, $32,059,000 and
$21,583,000 in 2003, 2002 and 2001, respectively. Assets under capital leases
were $6,206,000 and $59,180,000, net of accumulated amortization of $5,631,000
and $11,965,000 at December 31, 2003 and 2002, respectively. Interest is
capitalized in connection with construction projects at the Company's
facilities. The capitalized interest is recorded as part of the asset to which
it relates and is depreciated over the asset's estimated useful life. In 2003
and 2002, $712,000 and $942,000 of interest cost, respectively, was capitalized.
F-15
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31,
-----------------------
2003 2002
----------- -----------
Credit facility $ -- $ 94,000
Senior subordinated notes 196,634 --
Convertible subordinated notes 248,470 322,500
----------- -----------
445,104 416,500
Obligations under capital leases (see Note 10) 3,595 44,844
----------- -----------
448,699 461,344
Less current portion (743) (974)
----------- -----------
$ 447,956 $ 460,370
=========== ===========
CREDIT FACILITY
The Company maintains a bank senior credit facility ("Credit Facility") of
$250,000,000. At December 31, 2003, the Company had outstanding letters of
credit of $3,565,000, reducing the amount available under the Credit Facility to
$246,435,000.
The loans under the Credit Facility bear interest, at the Company's
option, at the adjusted base rate or at the adjusted LIBOR rate. The interest
rate ranged from 3.54% to 5.04% during 2003. The Company pays a commitment fee,
which varies from one-half to three-eighths of one percent of the unused
portion, depending on the Company's compliance with certain financial ratios.
The Company may prepay any principal amount outstanding under the Credit
Facility at any time before the maturity date of November 13, 2006.
The Credit Facility contains limitations on the Company's ability to incur
additional indebtedness (including contingent obligations), sell material
assets, retire, redeem or otherwise reacquire its capital stock, acquire the
capital stock or assets of another business, and pay dividends. The Credit
Facility also requires the Company to maintain a specified net worth and meet or
exceed certain coverage, leverage, and indebtedness ratios. Indebtedness under
the Credit Facility is secured by substantially all assets of the Company.
In March, May and June 2003, the Company amended the Credit Facility to
(i) add additional hospitals as collateral security, (ii) obtain consent for
various transactions, including the issuance of $200,000,000 aggregate principal
amount of 7 1/2% Senior Subordinated Notes due 2013, repurchase of a portion of
the outstanding 4 1/2% Convertible Subordinated Notes due 2005, and the interest
rate swap agreement on a portion of the 7 1/2% Senior Subordinated Notes, and
(iii) increase the flexibility of certain leverage and joint venture investment
covenants.
7 1/2% SENIOR SUBORDINATED NOTES
In May 2003, the Company completed its public offering of $200,000,000
aggregate principal amount of 7 1/2% Senior Subordinated Notes due June 1, 2013
(the "7 1/2% Senior Subordinated Notes"). Net proceeds of the offering totaling
$194,212,000 were used to repay $114,300,000 in existing borrowings under the
Credit Facility and to repurchase $74,030,000 of the Company's 4 1/2%
Convertible Subordinated Notes. The 7 1/2% Senior Subordinated Notes bear
interest from May 27, 2003 at the rate of 7 1/2% per year, payable semi-annually
on June 1 and December 1, beginning on December 1, 2003. The Company may redeem
all or a portion of the 7 1/2% Senior Subordinated Notes on or after June 1,
2008, at the then current redemption prices, plus accrued and unpaid interest.
In addition, at any time prior to June 1, 2006, the Company may redeem up to 35%
of the aggregate principal amount of the 7 1/2% Senior Subordinated Notes within
60 days of one or more common stock offerings with the net proceeds of such
offerings at a redemption price of 107.5% of the principal amount, plus accrued
and unpaid interest. Note holders may require the Company to repurchase all of
the holder's notes at 101% of their principal amount plus accrued and unpaid
interest in some circumstances involving a change of control. The 7 1/2% Senior
Subordinated Notes are unsecured and subordinated to the Company's existing and
future senior indebtedness. The 7 1/2% Senior Subordinated Notes rank equal in
right of payment to the Company's 4 1/2% Convertible Subordinated Notes due 2005
and its 4 1/4% Convertible Subordinated Notes due 2008. The 7 1/2% Senior
Subordinated Notes effectively rank junior to the Company's subsidiary
liabilities. The indenture contains limitations on the Company's
F-16
ability to incur additional indebtedness, sell material assets, retire, redeem
or otherwise reacquire its capital stock, acquire the capital stock or assets of
another business, and pay dividends.
4 1/2% CONVERTIBLE SUBORDINATED NOTES
In 2000, the Company sold $150,000,000 aggregate principal amount of
4 1/2% Convertible Subordinated Notes due November 20, 2005 (the "4 1/2%
Notes"). The 4 1/2% Notes bear interest from November 20, 2000 at the rate of
4 1/2% per year, payable semi-annually on May 20 and November 20, beginning on
May 20, 2001. The 4 1/2% Notes are convertible at the option of the holder at
any time on or prior to maturity into shares of the Company's common stock at a
conversion price of $26.45 per share. The conversion price is subject to
adjustment. The Company may redeem all or a portion of the 4 1/2% Notes on or
after November 20, 2003, at the then current redemption prices, plus accrued and
unpaid interest. Note holders may require the Company to repurchase all of the
holder's notes at 100% of their principal amount plus accrued and unpaid
interest in some circumstances involving a change of control.
In 2003, the Company repurchased $74,030,000 of the 4 1/2% Notes from the
proceeds from the sale of the 7 1/2% Senior Subordinated Notes as discussed
above. The Company recorded a $486,000 pretax loss associated with the early
extinguishment of debt related to the repurchase of the 4 1/2% Notes.
The 4 1/2% Notes are unsecured obligations and rank junior in right of
payment to all of the Company's existing and future senior indebtedness. The
4 1/2% Notes rank equal in right of payment to the Company's 4 1/4% Convertible
Subordinated Notes due 2008 and its 7 1/2% Senior Subordinated Notes due 2013.
The 4 1/2% Notes effectively rank junior to the Company's subsidiary
liabilities. The indenture does not contain any financial covenants. A total of
2,872,760 shares of common stock have been reserved for issuance upon conversion
of the remaining 4 1/2% Notes.
4 1/4% CONVERTIBLE SUBORDINATED NOTES
In October 2001, the Company sold $172,500,000 of Convertible Subordinated
Notes due October 10, 2008 (the "4 1/4% Notes"). Net proceeds of approximately
$166,400,000 were used to reduce the outstanding balance on the revolving line
of credit and for acquisitions. The 4 1/4% Notes bear interest from October 10,
2001 at the rate of 4 1/4% per year, payable semi-annually on April 10 and
October 10, beginning on April 10, 2002. The 4 1/4% Notes are convertible at the
option of the holder at any time on or prior to maturity into shares of the
Company's common stock at a conversion price of $27.70 per share. The conversion
price is subject to adjustment. The Company may redeem all or a portion of the
4 1/4% Notes on or after October 10, 2004, at the then current redemption
prices, plus accrued and unpaid interest. Note holders may require the Company
to repurchase all of the holder's notes at 100% of their principal amount plus
accrued and unpaid interest in some circumstances involving a change of control.
The 4 1/4% Notes are unsecured and subordinated to the Company's existing and
future senior indebtedness. The 4 1/4% Notes are ranked equal in right of
payment to the Company's 4 1/2% Notes due in 2005 and its 7 1/2% Senior
Subordinated Notes due 2013. The 4 1/4% Notes effectively rank junior to the
Company's subsidiary liabilities. The indenture does not contain any financial
covenants. A total of 6,226,767 shares of common stock have been reserved for
issuance upon conversion of the 4 1/4% Notes.
INTEREST RATE SWAP AGREEMENTS
Interest rate swap agreements are used to manage the Company's interest
rate exposure. In 1998, the Company entered into an interest rate swap
agreement, which effectively converted for a five-year period $45,000,000 of
floating-rate borrowings to fixed-rate borrowings. In January 2001, the Company
terminated $16,500,000 of the $45,000,000 swap agreement, leaving a notional
amount of $28,500,000 converted to fixed-rate borrowings. The Company secured a
5.625% fixed interest rate on the swap agreement, which was subsequently amended
to a 4.45% fixed interest rate during 2002. In May 2003, the Company terminated
the remainder of the previously existing swap agreement.
In July 2003, the Company entered into an interest rate swap agreement
which effectively converted for a ten-year period $100,000,000 of the
$200,000,000 fixed rate borrowings under the 7 1/2% Senior Subordinated Notes to
floating-rate borrowings. The Company secured a LIBOR plus 2.79% floating
interest rate over the term of the interest rate swap agreement. The Senior
Subordinated Notes are recorded net of the $3,366,000 fair value adjustment of
the interest rate swap. The interest rate swap agreement is a fair value hedge.
The outstanding agreement exposes the Company to credit losses in the event of
non-performance by the counterparty to the financial instrument. The Company
anticipates that the counterparty will fully satisfy its obligations under the
contract.
F-17
AGGREGATE MATURITIES
Aggregate maturities of long-term debt at December 31, 2003, excluding
capital leases (see Note 10), are as follows (in thousands):
2004 $ --
2005 75,970
2006 --
2007 --
2008 172,500
Thereafter 196,634
----------
$ 445,104
==========
6. STOCKHOLDERS' EQUITY
COMMON STOCK
On April 30, 2002, the Company effected a three-for-two stock split, in
the form of a 50% stock dividend, to stockholders of record on April 20, 2002.
The stock split resulted in the issuance of 15.9 million shares of common stock
and a transfer between additional paid-in capital and common stock of $159,000.
All historical references to common share, earnings per share amounts and
conversion rights under debt instruments included in the consolidated financial
statements and notes thereto have been restated to reflect the three-for-two
split.
PREFERRED SHARE PURCHASE RIGHTS
To establish a new shareholders' rights plan, on December 30, 2002, the
Board of Directors declared a dividend distribution of one Preferred Share
Purchase Rights ("Rights") on each outstanding share of the Company's common
stock. The dividend distribution was payable to shareholders of record on
January 10, 2003. Under certain circumstances, each Right will entitle
shareholders to buy one ten-thousandth of a share of newly created Series A
Junior Participating Preferred Stock of the Company at an exercise price of
$75.00. The Rights are redeemable at $.01 per Right at any time before a person
has acquired 15% or more of the Company's outstanding common stock. The Rights
Plan will expire on December 31, 2012.
The Rights have certain anti-takeover effects. The rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not determined by the Board of Directors to be in the best interest of
all shareholders. The Rights should not interfere with any merger or other
business combination approved by the Board of Directors.
STOCK OPTIONS
In March 1997, the Company's Board of Directors and shareholders approved
the 1997 Long-Term Equity Incentive Plan (the "Plan"). The Company has reserved
12,620,286 shares for issuance under the Plan. Under the Plan, options to
purchase shares may be granted to officers, employees, and directors. The
options have a maximum term of ten years and generally vest in five equal annual
installments. Options are generally granted at not less than market price on the
date of grant.
F-18
The following is a summary of option transactions during 2003, 2002 and
2001:
NUMBER OF OPTION
OPTIONS PRICE RANGE
---------- --------------------
Balance at December 31, 2000 3,811,467 $ 2.03 - $ 19.95
Options granted 2,710,550 16.05 - 23.00
Options exercised (844,340) 2.03 - 19.95
Options forfeited (457,799) 2.03 - 19.95
----------
Balance at December 31, 2001 5,219,878 2.03 - 23.00
Options granted 2,492,327 10.80 - 23.50
Options exercised (1,031,997) 2.03 - 23.50
Options forfeited (1,008,489) 2.03 - 23.50
----------
Balance at December 31, 2002 5,671,719 2.03 - 23.00
Options granted 1,454,150 7.71 - 13.52
Options exercised (143,882) 2.03 - 11.50
Options forfeited (214,212) 6.72 - 23.50
----------
Balance at December 31, 2003 6,767,775 $ 2.03 - $ 23.50
==========
F-19
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
- ------------------------ ----------- --------------- -------- ----------- --------
$ 2.03 - $ 7.17 589,492 4.9 $ 6.70 464,032 $ 6.65
7.71 - 7.71 1,315,450 9.2 7.71 -- --
8.95 - 10.80 596,839 7.2 9.69 364,939 9.21
11.50 - 11.50 685,733 6.3 11.50 366,276 11.50
11.56 - 16.40 730,460 7.6 15.76 265,964 15.91
16.67 - 16.71 797,376 7.5 16.69 669,653 16.69
18.20 - 18.67 746,438 8.4 18.27 166,977 18.31
19.00 - 21.08 572,562 8.0 20.27 380,930 20.58
23.00 - 23.00 37,466 7.6 23.00 14,984 23.00
23.50 - 23.50 695,959 8.4 23.50 663,767 23.50
---------- --------------- -------- ---------- --------
$ 2.03 - $23.50 6,767,775 7.7 $ 14.05 3,357,522 $ 15.76
========== =============== ======== ========== ========
At December 31, 2002 and 2001, respectively, 2,637,553 and 1,751,881
options were exercisable. At December 31, 2003, the Company had options
representing 2,357,548 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 2003, 2002 and 2001,
respectively: risk-free interest rate of 2.47%, 4.11% and 4.89%; dividend yield
of 0%; volatility factor of the expected market price of the Company's common
stock of .634, .594 and .603; and a weighted-average expected life of the option
of 4.0 years, 3.9 years, and 4.2 years. The estimated weighted average fair
values of shares granted during 2003, 2002 and 2001, using the Black-Scholes
option pricing model, were $4.04, $9.46 and $9.51, 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 summarized in Note 1.
EMPLOYEE STOCK PURCHASE PLAN
In May 1998 the Company's Board adopted, and in June 1998 the stockholders
approved, the Province Healthcare Company Employee Stock Purchase Plan (the
"ESPP"). Under the ESPP, employees may purchase shares of common stock at 85% of
market price on the first day of the year or 85% of the market price on the last
day of the year, whichever is lower. The shares are purchased each year with
funds withheld from employees through payroll deductions from January 1 through
December 31. A total of 1,125,000 shares of Common Stock have been reserved for
issuance under the ESPP. Participation in the ESPP commenced June 1, 1998.
Shares issued under the ESPP totaled 126,874, 59,022 and 284,082 in 2003, 2002
and 2001, respectively.
7. PATIENT 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 hospital services rendered to Medicare
program beneficiaries are paid at prospectively determined rates per
diagnosis related group ("DRG"). These DRG rates vary according to a
patient classification system that is based on clinical, diagnostic,
and other factors. Outpatient services are generally reimbursed
under
F-20
the outpatient prospective payment system, which pays a fixed rate
for a given bundle of outpatient services. These bundles are known
as Ambulatory Payment Classifications or "APC's". Inpatient nonacute
services, related to Medicare beneficiaries are paid based on a cost
reimbursement methodology subject to various cost limits. The
Company is reimbursed for cost-based services at a tentative rate,
with final settlement determined after submission of annual cost
reports by the Company and audits thereof by the Medicare fiscal
intermediary. The Company's classification of patients under the
Medicare program and the appropriateness of their admission are
subject to an independent review. The majority of the Company's
Medicare cost reports have been audited by the Medicare fiscal
intermediary through December 31, 2001.
- Medicaid--Inpatient services rendered to the recipients under the
Medi-Cal program (California's Medicaid program) are reimbursed
either under contracted rates or reimbursed for cost reimbursable
items at a tentative rate with final settlement determined after
submission of annual cost reports by the Company and audits thereof
by Medi-Cal. The Company leases two hospitals in California, and its
Medi-Cal cost reports have been audited by the Medi-Cal fiscal
intermediary through December 31, 2001. 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.
In 2003, 2002, and 2001 the Company owned or leased three hospitals in
Texas, which accounted for 16.6%, 17.6%, and 26.0% of net patient revenue from
continuing operations, respectively. In 2003, 2002, and 2001 the Company owned
one hospital in Arizona, which accounted for 11.1%, 12.3% and 16.5% of net
patient revenue from continuing operations, respectively.
Final determination of amounts earned under the Medicare and Medicaid
programs often occur in subsequent years because of audits by the programs,
rights of appeal and the application of numerous technical provisions.
Differences between original estimates and subsequent revisions (including final
settlements) are included in the consolidated statements of income in the period
in which the revisions are made, and resulted in an increase in net patient
revenue of $5,482,000 in 2003, a decrease in net patient revenue of $908,000 in
2002, and an increase in net patient revenue of $539,000 in 2001.
8. INCOME TAXES
The provision for income taxes from continuing operations consists of the
following amounts (in thousands):
2003 2002 2001
---------- ---------- ----------
Current:
Federal $ 7,840 $ 13,045 $ 15,898
State 761 1,419 1,773
--------- ---------- ----------
8,601 14,464 17,671
Deferred:
Federal 13,312 7,939 5,559
State 903 837 566
--------- ---------- ----------
14,215 8,776 6,125
--------- ---------- ----------
$ 22,816 $ 23,240 $ 23,796
========= ========== ==========
F-21
The differences between the Company's effective income tax rate of 35.4%,
40.0%, and 42.2% for 2003, 2002 and 2001, respectively, and the statutory
federal income tax rate of 35.0% are as follows (in thousands):
2003 2002 2001
------------------ ----------------- -----------------
Statutory federal rate $ 22,588 35.0% $ 20,327 35.0% $ 19,757 35.0%
State income taxes, net
of federal income tax
benefit 1,081 1.7 1,467 2.5 1,520 2.7
Permanent differences 271 0.4 232 0.4 385 0.7
Other (1,124) (1.7) 1,214 2.1 2,134 3.8
--------- ---- --------- ---- --------- ----
$ 22,816 35.4% $ 23,240 40.0% $ 23,796 42.2%
========= ==== ========= ==== ========= ====
The components of the Company's deferred tax assets and (liabilities) for
continuing operations are as follows (in thousands):
DECEMBER 31,
------------------------
2003 2002
---------- ----------
Depreciation and amortization $ (33,659) $ (18,005)
Accounts receivable (4,215) 426
Accruals and reserves 1,947 2,981
Insurance reserves 4,789 105
Third party settlements 2,224 1,436
Operating leases (2,201) (1,893)
Capital lease interest 683 665
Other 582 (1,312)
---------- ----------
Net deferred tax liability $ (29,850) $ (15,597)
========== ==========
In the accompanying consolidated balance sheets, net current deferred tax
liabilities of $2,015,000 and net current deferred tax assets of $3,591,000 are
included in accrued expenses and prepaid expenses and other at December 31, 2003
and 2002, respectively. Net noncurrent deferred tax liabilities of $27,835,000
and $19,188,000 are included in other liabilities at December 31, 2003 and 2002,
respectively.
The Company recorded a deferred tax liability of $38,000 related to
interest rate swap agreements during 2003. The expense of the deferred taxes is
recorded in comprehensive income.
The Company has been and is currently being examined by federal and
various state tax authorities. The completed examinations are not expected to
have a negative impact on the financial condition or results of operations of
the Company. In 2003, the Company recorded a reduction in its provision for
income taxes of approximately $2,300,000 due to the final and favorable
resolution of examinations on certain issues by taxing authorities of audits
that have been ongoing for over one year.
F-22
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
2003 2002 2001
------------ ---------- ---------
Earnings per common share:
Income from continuing operations $ 41,720 $ 34,838 $ 32,655
Add convertible notes interest, net of tax 8,325 -- --
----------- ---------- ----------
Income from continuing operations 50,045 34,838 32,655
Discontinued operations (10,101) 1,274 253
----------- ---------- ----------
Net income $ 39,944 $ 36,112 $ 32,908
=========== ========== ==========
Weighted average shares:
Weighted average shares - basic 48,692 48,146 47,091
Dilution for employee stock options 613 1,307 1,795
Dilution for convertible notes 10,243 -- --
----------- ---------- ----------
Weighted-average shares - diluted 59,548 49,453 48,886
=========== ========== ==========
Basic earnings per common share:
Income from continuing operations $ 0.85 $ 0.72 $ 0.69
Discontinued operations (0.20) 0.03 0.01
----------- ---------- ----------
Net income $ 0.65 $ 0.75 $ 0.70
=========== ========== ==========
Diluted earnings per common share:
Income from continuing operations $ 0.84 $ 0.70 $ 0.67
Discontinued operations (0.17) 0.03 --
----------- ---------- ----------
Net income $ 0.67 $ 0.73 $ 0.67
=========== ========== ==========
In accordance with SFAS No. 128, the calculation of diluted earnings per
share for the year ended December 31, 2003 using the "if converted" method
includes the impact of the Company's convertible notes. Since the Company
reports discontinued operations, income from continuing operations has been
utilized in determining whether the convertible notes were dilutive or
antidilutive to earnings per share. The convertible notes were dilutive to
earnings per share on income from continuing operations and were antidilutive to
net income for the year ended December 31, 2003.
The effect of the convertible notes to purchase 5,672,160 and 6,226,767
shares of common stock, and related interest expense, were not included in the
computation of diluted earnings per share in 2002 and 2001, because their effect
would have been anti-dilutive.
F-23
10. LEASES
The Company leases various buildings, office space and equipment. The
leases expire at various times and have various renewal options. These leases
are classified as either capital leases or operating leases based on the terms
of the respective agreements. Future minimum payments at December 31, 2003, by
year and in the aggregate, under capital leases and noncancellable operating
leases with initial terms of one year or more consist of the following (in
thousands):
CAPITAL OPERATING
LEASES LEASES
---------- ---------
2004 $ 1,037 $ 6,516
2005 518 5,747
2006 469 5,142
2007 472 4,841
2008 474 4,405
Thereafter 2,115 14,717
---------- ---------
Total minimum lease payments 5,085 $ 41,368
=========
Amount representing interest (at rates ranging from
3.5% to 21.8%) (1,490)
----------
Present value of net minimum lease payments
(including $743 classified as current) $ 3,595
==========
11. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company is obligated to construct a new facility at its Eunice,
Louisiana location contingent upon the existing facility meeting specified
operating targets. At December 31, 2003, the specified operating targets had not
been met. A replacement facility, if constructed, at Eunice is estimated to cost
approximately $26,500,000.
In 2003, the Company began construction of a new hospital in Hardeeville,
South Carolina. This new hospital is currently estimated to cost approximately
$32,700,000, of which approximately $3,200,000 has been incurred at December 31,
2003. In 2004, the Company will begin construction of a new hospital in Ft.
Mojave, Arizona. This new hospital is currently estimated to cost approximately
$30,000,000.
GENERAL LIABILITY CLAIMS
The Company is subject to claims and suits arising in the ordinary course
of business, including claims for damages for personal injuries,
employment-related claims, breach of management contracts and for wrongful
restriction of, or interference with, physicians' staff privileges. In certain
of these actions, plaintiffs may seek punitive or other damages against the
Company, which are generally not covered by insurance. In management's opinion,
the Company is currently not a party to any proceeding that would have a
material adverse effect on the Company's results of operations or financial
condition.
ACQUISITIONS
The Company has acquired and will continue to acquire, hospitals with
prior operating histories. The hospitals that the Company acquires may have
unknown or contingent liabilities, including liabilities for failure to comply
with healthcare laws and regulations. Although the Company obtains contractual
indemnification from sellers covering these matters, such indemnification may be
insufficient to cover material claims or liabilities for past activities of
acquired hospitals.
PHYSICIAN COMMITMENTS
In order to recruit and retain physicians to the communities it serves,
the Company has committed to provide certain financial assistance in the form of
recruiting agreements with various physicians. In consideration for a physician
F-24
relocating to one of its communities and agreeing to engage in private practice
for a specified period of time, the Company may loan certain amounts of money to
a physician, generally not to exceed a period of one year, to assist in
establishing his or her practice. The actual amount of such commitments to be
subsequently advanced to physicians often depends on the financial results of
the physicians' practice during the guarantee period. Amounts advanced under the
recruiting agreements are generally forgiven pro rata over a period of three
years contingent upon the physician continuing to practice in the respective
community. Estimated future commitment payments for physicians under recruiting
agreements in effect at December 31, 2003 are approximately $18,491,000.
12. RETIREMENT PLANS
The Company sponsors defined contribution employee benefit plans which
cover substantially all employees. Employees may contribute a percentage of
eligible compensation subject to Internal Revenue Service limits. The plans call
for the Company to make matching contributions, based on either a percentage of
employee contributions or a discretionary amount as determined by the Company.
Contributions by the Company to the plans totaled $3,198,000, $2,854,000 and
$2,109,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
The Company sponsors a nonqualified supplemental deferred compensation
plan for selected management employees. As determined by the Board of Directors,
the plan provides a benefit of 1% to 3% of the employee's compensation. The
participant's amount is fully vested, except in those instances where the
participant's employment terminates for any reason other than retirement, death
or disability, in which case the participant forfeits a portion of the
employer's contribution depending on length of service. Plan expenses totaled
$148,000, $226,000 and $380,000 for the years ended December 31, 2003, 2002 and
2001, respectively.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents-The carrying amount reported in the balance
sheets for cash and cash equivalents approximates fair value.
Accounts Receivable and Accounts Payable-The carrying amount reported in
the balance sheets for accounts receivable and accounts payable approximates
fair value.
Long-Term Obligations-The carrying amount reported in the balance sheets
for long-term obligations approximates fair value. The fair value of the
Company's long-term obligations is estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
Interest Rate Swap Agreement-The fair value of the Company's interest
rate swap agreement is $3,366,000 at December 31, 2003, based on quoted market
prices for similar debt issues.
14. ALLOWANCES FOR DOUBTFUL ACCOUNTS
A summary of activity in the Company's allowance for doubtful accounts is
as follows (in thousands):
Accounts
Balance at Provision for Allowances Written Off Balance at
Beginning of Doubtful Acquired in Net of End of
Period Accounts Acquisitions Recoveries Period
------------- ------------- ------------ ------------ ----------
Year ended December 31, 2001 $ 6,753 $ 44,277 $ 11,899 $ (18,453) $ 44,476
Year ended December 31, 2002 $ 44,476 $ 53,201 $ 10,729 $ (43,694) $ 64,712
Year ended December 31, 2003 $ 64,712 $ 72,583 $ -- $ (70,460) $ 66,835
F-25
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 2003 and
2002 is summarized below (in thousands, except per share data):
Quarter
---------------------------------------------------------
First Second Third Fourth
----------- ----------- ----------- -----------
2003
Net revenues $ 182,443 $ 183,935 $ 184,789 $ 195,041
Income from continuing operations $ 9,892 $ 9,919 $ 10,201 $ 11,708
Discontinued operations (41) (258) (394) (9,408)
----------- ----------- ----------- -----------
Net income $ 9,851 $ 9,661 $ 9,807 $ 2,300
=========== =========== =========== ===========
Basic earnings (loss) per share:
Income from continuing operations $ 0.20 $ 0.20 $ 0.21 $ 0.24
Discontinued operations -- -- (0.01) (0.19)
----------- ----------- ----------- -----------
Net income $ 0.20 $ 0.20 $ 0.20 $ 0.05
=========== =========== =========== ===========
Diluted earnings (loss) per share:
Income from continuing operations $ 0.20 $ 0.20 $ 0.21 $ 0.23
Discontinued operations -- -- (0.01) (0.16)
----------- ----------- ----------- -----------
Net income $ 0.20 $ 0.20 $ 0.20 $ 0.07
=========== =========== =========== ===========
2002
Net revenues $ 153,931 $ 162,505 $ 172,306 $ 169,520
Income from continuing operations $ 10,845 $ 10,607 $ 9,159 $ 4,227
Discontinued operations 847 344 267 (184)
----------- ----------- ----------- -----------
Net income $ 11,692 $ 10,951 $ 9,426 $ 4,043
=========== ========== =========== ===========
Basic earnings (loss) per share:
Income from continuing operations $ 0.22 $ 0.22 $ 0.19 $ 0.09
Discontinued operations 0.02 0.01 0.01 (0.01)
----------- ----------- ----------- -----------
Net income $ 0.24 $ 0.23 $ 0.20 $ 0.08
=========== =========== ========== ===========
Diluted earnings (loss) per share:
Income from continuing operations $ 0.22 $ 0.21 $ 0.18 $ 0.09
Discontinued operations 0.02 0.01 0.01 (0.01)
----------- ----------- ----------- -----------
Net income $ 0.24 $ 0.22 $ 0.19 $ 0.08
=========== =========== =========== ===========
16. SUBSEQUENT EVENTS
SALE OF GLADES GENERAL HOSPITAL
On April 30, 2004, the Company sold substantially all of the assets and
assigned certain liabilities of Glades General Hospital in Belle Glade, Florida,
to a wholly-owned subsidiary of the Health Care District of Palm Beach County
for a purchase price of approximately $1.5 million in cash at closing, net of
assumed and contractual obligations, resulting in an immaterial gain on
divestiture in 2004.
SALE OF BRIM HEALTHCARE, INC.
Effective June 30, 2004, the Company sold the stock of Brim Healthcare,
Inc. to Brim Holding Company, Inc., an independent investor-owned Delaware
corporation, for approximately $13.2 million in cash, resulting in a pre-tax
gain on divestiture of $11.3 million ($7.0 million gain net of tax).
F-26
ACQUISITION OF MEMORIAL MEDICAL CENTER
Effective June 1, 2004, the Company acquired Memorial Medical Center in
Las Cruces, New Mexico, through a long-term capital lease agreement, for
approximately $152.8 million, including direct and incremental costs of the
acquisition. To finance this acquisition, the Company borrowed $110.0 million
under its senior bank credit facility and used approximately $42.8 million of
available cash.
MERGER AGREEMENT
On August 16, 2004, the Company and LifePoint Hospitals, Inc.
("LifePoint") announced that they had entered into a definitive merger agreement
(the "Merger Agreement") pursuant to which LifePoint will acquire the Company.
Pursuant to the terms of the Merger Agreement, the Company and LifePoint will
each become wholly-owned subsidiaries of a newly formed holding company that
will be publicly traded. Each of the Company's shareholders will receive a per
share consideration comprised of $11.375 of cash and a number of shares of
common stock of the new company equal to an exchange ratio of between 0.3447 and
0.2917, which shares will have a value of $11.375 to the extent that LifePoint's
average share price is between $33.00 and $39.00. The exchange ratio will be
0.3447 if the volume weighted average daily share price of a share of
LifePoint's common stock for the twenty consecutive trading day period ending at
close of business on the third trading day prior to the closing (the "LifePoint
average share price") is $33.00 or less, and 0.2917 if LifePoint's average share
price is $39.00 or more. If LifePoint's average share price is between $33.00
and $39.00, then the exchange ratio will be equal to $11.375 divided by the
LifePoint average share price.
The proposed merger is subject to approval by the stockholders of the
Company and LifePoint. Closing of the proposed merger is subject to clearance or
expiration of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 and the satisfaction of other customary
closing conditions.
F-27