EXHIBIT 99.1
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
---------------------------
2004 2003
------------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,824 $ 46,117
Accounts receivable, less allowance for
doubtful accounts of $78,274 (unaudited)
in 2004 and $66,835 in 2003 137,052 110,335
Inventories 21,796 18,424
Prepaid expenses and other 14,068 14,614
Assets of discontinued operations 1,365 14,995
------------- -----------
Total current assets 184,105 204,485
Property and equipment, net 578,587 459,843
Goodwill 388,709 309,191
Other assets 31,666 36,874
------------- -----------
$ 1,183,067 $ 1,010,393
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,235 $ 16,083
Accrued salaries and benefits 32,653 27,852
Accrued expenses 25,933 14,241
Current portion of long-term debt 76,241 743
Liabilities of discontinued operations 346 5,156
------------- -----------
Total current liabilities 167,408 64,075
Long-term debt, less current portion 428,383 447,956
Other liabilities 69,090 49,579
Minority interests 2,387 1,910
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, 50,030,550 (unaudited) shares
and 48,841,157 shares issued and outstanding at
December 31, 2004 and 2003, respectively 500 488
Additional paid-in-capital 319,996 306,091
Retained earnings 195,685 141,186
Accumulated other comprehensive loss (382) (892)
------------- -----------
Total stockholders' equity 515,799 446,873
------------- -----------
$ 1,183,067 $ 1,010,393
============= ===========
See accompanying notes.
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
----------------------------------
2004 2003 2002
--------- ---------- ----------
(unaudited)
Revenues:
Net patient revenue $ 872,275 $ 735,841 $ 649,954
Other 10,631 10,367 8,308
--------- --------- ---------
882,906 746,208 658,262
Expenses:
Salaries, wages and benefits 323,565 282,794 261,499
Purchased services 85,698 68,872 69,934
Supplies 114,186 95,579 84,408
Provision for doubtful accounts 95,015 72,583 53,201
Other operating expenses 96,934 88,137 69,447
Rentals and leases 11,250 9,007 8,284
Transaction costs 851 -- --
Depreciation and amortization 46,881 37,617 32,169
Interest expense 29,652 26,262 21,285
Minority interests 687 260 34
Loss (gain) on sale of assets 30 75 (77)
Loss on early extinguishment of debt -- 486 --
--------- --------- ---------
Total expenses 804,749 681,672 600,184
--------- --------- ---------
Income from continuing operations
before provision for income taxes 78,157 64,536 58,078
Income taxes 28,101 22,816 23,240
--------- --------- ---------
Income from continuing operations 50,056 41,720 34,838
Discontinued operations, net of tax:
(Loss) earnings from operations (2,220) (1,149) 1,274
Net gain (loss) on divestitures 6,663 (8,952) --
--------- --------- ---------
4,443 (10,101) 1,274
--------- --------- ---------
Net income $ 54,499 $ 31,619 $ 36,112
========= ========= =========
Earnings (loss) per common share:
Basic:
Continuing operations $ 1.01 $ 0.85 $ 0.72
Discontinued operations:
(Loss) earnings from
operations (0.04) (0.02) 0.03
Net gain (loss) on divestitures 0.13 (0.18) --
--------- --------- ---------
Net income $ 1.10 $ 0.65 $ 0.75
========= ========= =========
Diluted:
Continuing operations $ 0.96 $ 0.84 $ 0.70
Discontinued operations:
(Loss) earnings from
operations (0.03) (0.02) 0.03
Net gain (loss) on divestitures 0.11 (0.15) --
--------- --------- ---------
Net income $ 1.04 $ 0.67 $ 0.73
========= ========= =========
See accompanying notes.
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, 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
Exercise of stock options and related
income tax benefit (unaudited)........ 932,451 9 12,711 -- -- 12,720
Issuance of common stock from
employee stock purchase plan and
other (unaudited)..................... 256,942 3 1,194 -- -- 1,197
Comprehensive income:
Net income (unaudited)................ -- -- -- 54,499 -- 54,499
Change in fair value of
derivatives, net of tax of $318
(unaudited)........................ -- -- -- -- 510 510
---------
Comprehensive income (unaudited)......... -- -- -- -- -- 55,009
---------- ------ --------- ---------- --------- ---------
Balance at December 31, 2004 (unaudited). 50,030,550 $ 500 $ 319,996 $ 195,685 $ (382) $ 515,799
========== ====== ========= ========== ========= =========
See accompanying notes.
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------------------
2004 2003 2002
------------- ------------- ------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 50,056 $ 41,720 $ 34,838
Adjustments to reconcile income
from continuing operations to
net cash provided by operating
activities:
Depreciation and amortization 46,881 37,617 32,169
Deferred income taxes 29,373 14,215 8,776
Provision for professional liability 4,300 5,476 7,209
Loss on early extinguishment of debt -- 486 --
Loss (gain) of sale of assets 30 75 (77)
Changes in operating assets and liabilities,
net of effects from acquisitions and
disposals:
Accounts receivable (12,596) (1,172) 6,511
Inventories (887) 712 (1,311)
Prepaid expenses and other (2,726) (3,347) 4,012
Accounts payable and
accrued expenses 9,184 (4,107) (2,696)
Accrued salaries and benefits (521) 4,505 (315)
Other 3,162 8,165 1,022
------------ ------------ ------------
Net cash provided by operating activities 126,256 104,345 90,138
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (90,557) (56,926) (45,469)
Purchase of hospitals and
healthcare entities (152,215) -- (171,157)
Sale of hospitals and healthcare entities 14,667 -- --
------------ ------------ ------------
Net cash used in investing activities (228,105) (56,926) (216,626)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 110,372 194,199 134,321
Repayments of debt (56,150) (213,049) (44,048)
Issuance of common stock 12,200 2,574 11,037
------------ ------------ ------------
Net cash provided by (used in)
financing activities 66,422 (16,276) 101,310
------------ ------------- ------------
Net cash (used in) provided by
continuing operations (35,427) 31,143 (25,178)
Net cash (used in) provided by
discontinued operations (866) 349 841
------------ ------------ ------------
(Decrease) increase in cash and
cash equivalents (36,293) 31,492 (24,337)
Cash and cash equivalents at
beginning of period 46,117 14,625 38,962
------------ ------------ ------------
Cash and cash equivalents at end
of period $ 9,824 $ 46,117 $ 14,625
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 28,706 $ 23,986 $ 19,958
============ ============ ============
Cash paid for income taxes, net $ 1,840 $ 10,322 $ 14,848
============ ============ ============
ACQUISITIONS:
Assets acquired $ 170,921 $ -- $ 181,268
Liabilities assumed (18,706) -- (10,111)
------------- ------------ ------------
Cash paid, net of cash acquired $ 152,215 $ -- $ 171,157
============ ============ ============
See accompanying notes.
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
1. ORGANIZATION AND ACCOUNTING POLICIES
BASIS OF PRESENTATION
The information presented in the accompanying consolidated financial
statements and footnotes for 2004 is unaudited. The 2003 and 2002 information
has been derived from the audited consolidated financial statements contained in
Province Healthcare Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 14, 2004.
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. As of December 31, 2004, the
Company owned or leased 21 general acute care hospitals in 13 states with an
aggregate of 2,533 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 further discussed in Note 3. The Company's remaining
hospitals and operations are reported as continuing operations.
BASIS OF CONSOLIDATION
The accompanying 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 (UNAUDITED)
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. For hospitals that the Company has owned in
excess of one year, 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. For hospitals that the Company has owned less
than one year, the Company estimates the allowance for doubtful accounts by
applying a hospital-specific reserve percentage for each self-pay and non
self-pay accounts receivable 30 day aging category, beginning with the 0-30 day
aging category, with all self-pay and non-self pay accounts fully reserved at
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 hindsight procedures on
historical collection and write-off experience to determine the reasonableness
of its 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 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.
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 Company owned or leased three hospitals in Texas, which accounted for
16.1% (unaudited) and 16.6% of net accounts receivable in 2004 and 2003,
respectively. The Company owned or leased four hospitals in Louisiana, which
accounted for 9.5% (unaudited) and 13.2% of net accounts receivable in 2004 and
2003, respectively. The Company owned or leased two hospitals, one of which was
acquired in 2004, in New Mexico which accounted for 16.2% (unaudited) and 3.6%
of net accounts receivable in 2004 and 2003, respectively.
Same-store upfront cash collections for the year ended December 31, 2004
were approximately $13.5 million (unaudited) compared to $11.5 million and $8.1
million for the years ended December 31, 2003 and 2002, respectively.
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, 2004. 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, 2004, 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 minimum cap for total 2004 losses is
$12.1 million (unaudited). In 2002 and 2003, the Company's arrangement with the
insurance provider allowed 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.
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. The Company performed its annual impairment tests as of
October 1, 2004, 2003 and 2002 and did not incur any impairment charge. 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.
Revenue Recognition
The Company recognizes revenues in the period in which services are
performed. Accounts receivable, as reflected on the accompanying consolidated
balance sheets, include amounts due from third-party payors, patients, and
others. 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 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--The Medicaid programs in all states, other than
California, in which the Company owns or leases hospitals are
prospective payment systems which generally do not have retroactive
cost report settlement procedures. 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.
- 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 2004, 2003, and 2002, the Company owned or leased three hospitals in
Texas, which accounted for 15.0% (unaudited), 16.6%, and 17.6% of net patient
revenue, respectively. In 2004, 2003, and 2002 the Company owned or leased four
hospitals in Louisiana, which accounted for 15.0% (unaudited), 17.6% and 17.6%
of net patient revenue, respectively. The Company owned or leased two hospitals
in New Mexico, one of which was acquired in 2004, which accounted for 15.2%
(unaudited) of net patient revenue in 2004.
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 $9,876,000 (unaudited), of which $2,857,000 (unaudited) related to
facilities that had not previously qualified for disproportionate share payments
in prior years, and $5,482,000 in 2004 and 2003, respectively, and a decrease in
net patient revenue of $908,000 in 2002.
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.
Discontinued Operations
In accordance with the provisions of Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144"), which the Company adopted effective January 1, 2002,
the Company has presented the financial position, operating results and cash
flows of Glades General Hospital and Brim Healthcare, Inc. as discontinued
operations in the accompanying consolidated financial statements as of December
31, 2004 and 2003 and for each of the years in the three year period ending
December 31, 2004. Operating results for each of the years in the three year
period ending December 31, 2004 and the major classes of assets and liabilities
for the years ended December 31, 2004 and 2003 for the Company's discontinued
operations are presented in Note 3.
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, 2004, 2003, and 2002, approximately 47.8% (unaudited),
48.8%, and 56.7%, 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, less accumulated depreciation
and amortization. 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.
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 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.
Other Assets
Other assets consist primarily of costs associated with the issuance of
debt which are amortized on a straight-line basis, which approximates 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 $11,739,000 (unaudited) (net of accumulated
amortization of $15,569,000 (unaudited)) and $15,305,000 (net of accumulated
amortization of $11,940,000) at December 31, 2004 and 2003, 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, 2004 and 2003 totaled $16,395,000
(unaudited) and $17,107,000, respectively.
Income Taxes
The Company accounts for income taxes under the asset and liability
method. This method requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences attributable to differences
between the financial statement carrying amounts of assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which these temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. The Company
assesses the likelihood that deferred tax assets will be recovered from future
taxable income to determine whether a valuation allowance should be established.
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.
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 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):
2004 2003 2002
---------- ---------- ----------
(unaudited)
Net income - as reported $ 54,499 $ 31,619 $ 36,112
Less pro forma effect of stock option
grants (4,749) (4,744) (10,922)
---------- ---------- ----------
Pro forma net income $ 49,750 $ 26,875 $ 25,190
========== ========== ==========
Earnings per share - as reported
Basic $ 1.10 $ 0.65 $ 0.75
Diluted $ 1.04 $ 0.67 $ 0.73
Earnings per share - pro forma
Basic $ 1.00 $ 0.55 $ 0.52
Diluted $ 0.96 $ 0.55 $ 0.51
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 2004, 2003 and 2002,
respectively: risk-free interest rate of 2.80% (unaudited), 2.47% and 4.11%;
dividend yield of 0%; volatility factor of the expected market price of the
Company's common stock of .560 (unaudited), .634 and .594; and a
weighted-average expected
life of the option of 4.0 (unaudited), 4.0 years and 3.9 years. The estimated
weighted average fair values of shares granted during 2004, 2003 and 2002, using
the Black-Scholes option pricing model, were $7.30 (unaudited), $4.04 and $9.46,
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.
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, 2002.
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 December 2003, the Financial Accounting Standards Board ("FASB") issued
Revised Interpretation No. 46, "Consolidation of Variable Interest Entities"
("FIN 46R"), which requires the consolidation of variable interest entities. FIN
46R, as revised, was applicable to financial statements of companies that had
interests in special purpose entities, as defined, during 2003. Effective as of
the first quarter of 2004, FIN 46R was applicable to financial statements of
companies that have interests in all other types of entities. Adoption of FIN
46R had no effect on the Company's financial position, results of operations or
cash flows.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123R, "Share-Based Payments" ("SFAS No. 123R"), a revision of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", which addresses financial accounting and reporting for costs
associated with stock-based compensation. SFAS No. 123R addresses all forms of
share-based payment awards, including shares issued under employee stock
purchase plans and stock options. SFAS No. 123R will require the Company to
recognize compensation expense beginning July 1, 2005, in an amount equal to the
fair value of share-based payments related to unvested share-based payment
awards over the applicable vesting period. As permitted by SFAS No. 123, the
Company currently accounts for share-based payments to employees using Opinion
25's intrinsic value method and, as such, generally recognizes no compensation
cost for employee stock options. Accordingly, the adoption of SFAS No. 123R's
fair value method will have a significant impact on the Company's results of
operations, although it will
have no impact on the Company's overall financial position. The impact of the
adoption of SFAS No. 123R cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future. However, had the
Company adopted SFAS No. 123R in prior periods, the impact of that standard
would have approximated the impact of SFAS No. 123 as described in the
disclosure of pro forma net income and earnings per share in Note 1 to the
Company's consolidated financial statements.
2. PENDING ACQUISITION BY LIFEPOINT HOSPITALS, INC. (UNAUDITED)
The Company announced on August 16, 2004 that it had entered into a
definitive merger agreement with LifePoint Hospitals, Inc. ("LifePoint") in
which LifePoint will acquire the Company for approximately $1.7 billion in cash,
stock and the assumption of the Company's debt. The transaction is expected to
close in the first half of 2005.
Pursuant to the definitive agreement, if the proposed transaction is
consummated, the businesses of LifePoint and the Company will be combined under
a newly formed company, which will be renamed LifePoint Hospitals, Inc. ("New
LifePoint"). Each stockholder of the Company will receive a per share
consideration comprised of $11.375 in cash and a number of shares of New
LifePoint common stock equal to an exchange ratio of between .3447 and .2917 per
common share of the Company, which will represent a value of $11.375 if the
volume weighted average of the daily sales prices for share of LifePoint common
stock for the 20 consecutive trading day period ending at the close of business
on the third trading day prior to closing (the "LifePoint average share price")
is between $33.00 and $39.00. If the LifePoint average share price is $33.00 or
less, the exchange ratio will be 0.3447, and if the LifePoint average share
price is $39.00 or more, the exchange ratio will be 0.2917.
The agreement provides for alternative structures. While it is anticipated
that shares received by the Company's stockholders will be received in a
tax-free exchange, the parties have agreed to a taxable alternative structure at
the same price if necessary to complete the acquisition.
Each of the Boards of Directors of LifePoint and the Company have
unanimously approved the proposed transaction. Completion of the transaction is
subject to approval by the LifePoint stockholders and the Company's
stockholders, receipt of necessary financing by LifePoint and certain other
conditions.
3. 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 (unaudited), 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
(unaudited), resulting in a pre-tax gain on divestiture of $11.3 million
(unaudited) ($7.0 million (unaudited) 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, 2004, 2003 and 2002 are presented in the following
table (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------
2004 2003 2002
--------- --------- --------
(unaudited)
Revenues $ 17,150 $ 45,480 $ 46,085
Operating expenses 20,096 45,052 41,242
Depreciation and amortization 49 1,699 2,062
Interest expense 143 478 672
(Gain) loss on divestitures (10,774) 11 --
Impairment charge -- 13,773 --
-------- -------- --------
Total expenses 9,514 61,013 43,976
-------- -------- --------
Income (loss) before provision for income
taxes 7,636 (15,533) 2,109
Income taxes (benefit) 3,193 (5,432) 835
-------- -------- --------
Earnings (loss) from discontinued operations $ 4,443 $(10,101) $ 1,274
======== ======== ========
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, 2004 and 2003 are as follows
(in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003
------ -------
(unaudited)
Cash $ 438 $ 17
Accounts receivable, net 922 6,931
Inventories -- 529
Prepaid expenses and other current assets 5 392
Property and equipment, net -- 3,157
Goodwill -- 80
Other assets -- 33
Deferred income taxes -- 3,856
------ -------
Total assets of discontinued operations 1,365 14,995
------ -------
Accounts payable -- 812
Accrued salaries and benefits 84 1,603
Accrued expenses 217 513
Long-term debt -- 982
Income taxes payable -- 1,246
Deferred income taxes 45 --
------ -------
Total liabilities of discontinued operations 346 5,156
------ -------
Net assets of discontinued operations $1,019 $ 9,839
====== =======
The Company will continue to pursue collection of the remaining net
accounts receivable under its standard collection policies.
4. ACQUISITIONS
2004 Acquisition (unaudited)
In June 2004, the Company acquired Memorial Medical Center in Las Cruces,
New Mexico, through a long-term capital lease agreement, for approximately
$152.2 million, including working capital and 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 $42.2
million of available cash. This is the Company's second New Mexico hospital and
is one of two hospitals in the community, serving a population in excess of
150,000.
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 was
the Company's first New Mexico hospital and is the only hospital in the
community, serving a population of approximately 50,000.
The hospitals acquired by the Company in 2004 and 2002 are the primary
providers of healthcare services in their markets and, as previously
underperforming hospitals, present the Company with the opportunity, under its
management, to increase profitability and garner local market share. The
Company's strategy with respect to these markets is to
improve hospital operations, expand healthcare services to increase market share
by reducing patient out-migration, and recruit and retain quality physicians to
increase the quality of healthcare and the breadth of healthcare services.
The foregoing acquisitions were accounted for using the purchase method of
accounting. The operating results of the hospitals acquired in 2004 and 2002
have been included in the accompanying consolidated statements of income from
the respective dates of acquisition.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition for the hospital
acquisition completed in 2004 (in thousands) (unaudited):
Accounts receivable, net $ 14,121
Inventories 2,485
Prepaid expenses and other 257
---------
Total current assets acquired 16,863
Property and equipment 74,537
Goodwill 79,518
Other 3
---------
Total assets acquired 170,921
Total liabilities assumed (18,706)
---------
Net assets acquired $ 152,215
=========
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
Goodwill 101,815
Other 787
---------
Total assets acquired 181,268
Total liabilities assumed (10,111)
---------
Net assets acquired $ 171,157
=========
Pro Forma Acquisition Information
The following pro forma information reflects the operations of the
hospitals acquired in 2004 and 2002, 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):
2004 2003 2002
----------- ----------- ---------
(unaudited) (unaudited)
Net revenue $ 945,542 $ 883,335 $ 701,850
Net income $ 52,630 $ 24,674 $ 38,112
Earnings per share:
Basic $ 1.06 $ 0.51 $ 0.79
Diluted $ 1.01 $ 0.55 $ 0.77
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.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31,
-------------------------
2004 2003
------------ -----------
(unaudited)
Land $ 40,263 $ 23,344
Land improvements 6,602 5,292
Leasehold improvements 20,036 19,554
Buildings and improvements 408,878 335,788
Equipment 243,632 191,900
------------ -----------
719,411 575,878
Less accumulated depreciation and amortization (163,344) (121,835)
------------ -----------
556,067 454,043
Construction-in-progress (estimated cost to
complete at December 31, 2004 - $82,037
(unaudited)) 22,520 5,800
------------ -----------
$ 578,587 $ 459,843
============ ===========
Depreciation expense totaled approximately $46,320,000 (unaudited),
$37,120,000 and $32,059,000 in 2004, 2003 and 2002, respectively. Assets under
capital leases were $4,614,000 (unaudited) and $6,206,000, net of accumulated
amortization of $7,927,000 (unaudited) and $5,631,000 at December 31, 2004 and
2003, 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 2004 and 2003, $1,357,000 (unaudited) and $712,000 of
interest cost, respectively, was capitalized.
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt consists of the following (in thousands):
December 31,
----------------------------
2004 2003
------------- ---------
(unaudited)
Credit facility $ 55,000 $ --
Senior subordinated notes 198,337 196,634
Convertible subordinated notes 248,470 248,470
------------- ---------
501,807 445,104
Obligations under capital leases (see Note 10) 2,817 3,595
------------- ---------
504,624 448,699
Less current portion (76,241) (743)
------------- ---------
$ 428,383 $ 447,956
============= =========
CREDIT FACILITY (UNAUDITED)
The Company maintains a bank senior credit facility ("Credit Facility") of
$250,000,000. At December 31, 2004, the Company had outstanding letters of
credit of $8,277,000, reducing the amount available under the Credit Facility to
$186,723,000.
On June 1, 2004, in connection with the acquisition of Memorial Medical
Center in Las Cruces, New Mexico, the Company borrowed $110.0 million under its
senior revolving bank credit facility to finance the acquisition. The Company
subsequently repaid $55.4 million (including $0.4 million borrowed under the
revolver in the third quarter of 2004) of the revolver borrowing with the
proceeds from the sale of Brim Healthcare, Inc. and from cash flows from
operations.
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 3.875% to 5.125% during 2004. 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 April 2004, the Company amended its senior bank credit facility to,
among other items, (i) obtain consent for a limited repurchase of a portion of
the Company's 4 1/2% Convertible Subordinated Notes due 2005 and/or the 4 1/4%
Convertible Subordinated Notes due 2008, (ii) adjust the timing of the step down
of leverage covenants, and (iii) approve the acquisition of Memorial Medical
Center as a Permitted Acquisition.
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 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 1/4% 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 (unaudited) of common stock have been
reserved for issuance upon conversion of the 4 1/4% Notes.
4 1/2% CONVERTIBLE SUBORDINATED NOTES
In November and December 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 (unaudited) of common stock have been reserved for issuance
upon conversion of the remaining 4 1/2% 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 $1,663,000 (unaudited) 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.
AGGREGATE MATURITIES (UNAUDITED)
Aggregate maturities of long-term debt at December 31, 2004, excluding
capital leases (see Note 10), are as follows (in thousands):
2005 $ 75,970
2006 55,000
2007 --
2008 172,500
2009 --
Thereafter 198,337
----------
$ 501,807
==========
7. 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 Right ("Right") 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
Preferred Share Purchase Right 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.
The following is a summary of option transactions during 2004, 2003 and
2002:
NUMBER OF OPTION
OPTIONS PRICE RANGE
--------- ---------------
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 (1,009,375) 2.03 - 23.50
----------
Balance at December 31, 2002 5,670,833 2.03 - 23.50
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 6,766,889 2.03 - 23.50
Options granted (unaudited) 1,660,000 14.16 - 17.62
Options exercised (unaudited) (927,951) 2.03 - 21.08
Options forfeited (unaudited) (464,246) 7.17 - 23.50
----------
Balance at December 31, 2004 (unaudited) 7,034,692 $ 2.03 - $23.50
==========
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2004 (unaudited):
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 - $ 7.17 282,769 4.3 $ 6.81 282,769 $ 6.81
7.71 - 7.71 1,028,856 8.2 7.71 127,696 7.71
8.95 - 11.50 947,185 5.9 10.76 653,685 10.65
11.56 - 15.75 887,650 9.2 15.30 21,950 12.65
15.83 - 16.40 1,037,775 7.9 16.09 307,539 16.35
16.67 - 16.71 797,376 6.5 16.69 797,376 16.69
17.62 - 18.20 808,206 8.1 18.02 226,541 18.20
18.67 - 21.08 533,673 6.9 20.00 392,736 20.25
23.00 - 23.00 24,808 6.6 23.00 20,164 23.00
23.50 - 23.50 686,394 7.4 23.50 667,050 23.50
--------- ---------
$ 2.03 - $23.50 7,034,692 7.4 15.01 3,497,506 16.21
========= =========
At December 31, 2003 and 2002, respectively, 3,356,852 and 2,636,954
options were exercisable. At December 31, 2004, the Company had options
representing 1,162,680 (unaudited) shares available for future grant.
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 256,942 (unaudited), 126,874 and 59,022 in
2004, 2003 and 2002, respectively.
8. INCOME TAXES
The provision for income taxes from continuing operations consists of the
following amounts (in thousands):
2004 2003 2002
---------- --------- ----------
(unaudited)
Current:
Federal $ 3,679 $ 7,840 $ 13,045
State (243) 761 1,419
---------- --------- ----------
3,436 8,601 14,464
Deferred:
Federal 21,870 13,312 7,939
State 2,795 903 837
---------- --------- ----------
24,665 14,215 8,776
---------- --------- ----------
$ 28,101 $ 22,816 $ 23,240
========== ========= ==========
The differences between the Company's effective income tax rate and the
statutory federal income tax rate are as follows (in thousands):
2004 2003 2002
---------------- --------------- --------------
(unaudited)
Statutory federal rate $ 27,355 35.0% $ 22,588 35.0% $ 20,327 35.0%
State income taxes, net of federal income
tax benefit 1,659 2.1 1,081 1.7 1,467 2.5
Permanent differences 387 0.5 271 0.4 232 0.4
Other (1,300) (1.6) (1,124) (1.7) 1,214 2.1
--------- ---- --------- ---- -------- ----
$ 28,101 36.0% $ 22,816 35.4% $ 23,240 40.0%
========= ==== ========= ==== ======== ====
The components of the Company's deferred tax assets and (liabilities) for
continuing operations are as follows (in thousands):
DECEMBER 31,
--------------------------
2004 2003
------------ ------------
(unaudited)
Depreciation and amortization $ (53,797) $ (33,659)
Accounts receivable (10,068) (4,215)
Accruals and reserves 1,201 1,947
Insurance reserves 6,470 4,789
Third party settlements 2,965 2,224
Operating leases (2,520) (2,201)
Capital lease interest 702 683
Other 214 582
----------- -----------
Net deferred tax liability $ (54,833) $ (29,850)
=========== ===========
In the accompanying consolidated balance sheets, net current deferred tax
liabilities of $8,118,000 (unaudited) and $2,015,000 are included in accrued
expenses at December 31, 2004 and 2003, respectively. Net noncurrent deferred
tax liabilities of $46,715,000 (unaudited) and $27,835,000 are included in other
liabilities at December 31, 2004 and 2003, respectively.
The Company recorded a deferred tax liability of $318,000 (unaudited)
related to interest rate swap agreements during 2004. The expense of the
deferred taxes is recorded in comprehensive income.
The Company has been examined by federal and various state tax
authorities. The completed examinations did not have a negative impact on the
financial condition or results of operations of the Company. In 2004, the
Company recorded a reduction in its provision for income taxes of approximately
$800,000 (unaudited) due to final resolution of examinations on certain issues
by taxing authorities of audits that had been ongoing for over one year.
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
2004 2003 2002
------- --------- --------
(unaudited)
Earnings per common share:
Income from continuing operations $50,056 $ 41,720 $34,838
Add convertible notes interest, net of tax 7,781 8,325 --
------- -------- -------
Income from continuing operations 57,837 50,045 34,838
Discontinued operations 4,443 (10,101) 1,274
------- -------- -------
Net income $62,280 $ 39,944 $36,112
======= ======== =======
Weighted average shares:
Weighted average shares - basic 49,543 48,692 48,146
Dilution for employee stock options 1,395 613 1,307
Dilution for convertible notes 9,100 10,243 --
------- -------- -------
Weighted-average shares - diluted 60,038 59,548 49,453
======= ======== =======
Basic earnings per common share:
Income from continuing operations $ 1.01 $ 0.85 $ 0.72
Discontinued operations 0.09 (0.20) 0.03
------- -------- -------
Net income $ 1.10 $ 0.65 $ 0.75
======= ======== =======
Diluted earnings per common share:
Income from continuing operations $ 0.96 $ 0.84 $ 0.70
Discontinued operations 0.08 (0.17) 0.03
------- -------- -------
Net income $ 1.04 $ 0.67 $ 0.73
======= ======== =======
In accordance with SFAS No. 128, the calculation of diluted earnings per
share for the year ended December 31, 2004 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 net income for the year ended December 31, 2004. The convertible
notes were dilutive to earnings per share on income from continuing operations
and were anti-dilutive to net income for the year ended December 31, 2003. The
effect of the convertible notes to purchase 5,672,160 shares of common stock,
and related interest expense, were not included in the computation of diluted
earnings per share in 2002 because their effect would have been anti-dilutive.
10. LEASES (UNAUDITED)
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, 2004, 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
--------- ---------
2005 $ 479 $ 7,609
2006 469 6,803
2007 471 5,324
2008 478 4,634
2009 414 3,059
Thereafter 2,311 15,538
------- -------
Total minimum lease payments 4,622 $42,967
=======
Amount representing interest (at rates ranging from
3.94% to 9.74%) (1,805)
-------
Present value of net minimum lease payments
(including $271 classified as current) $ 2,817
=======
11. COMMITMENTS AND CONTINGENCIES (UNAUDITED)
LITIGATION SETTLEMENT
In January 2005, the Company executed a confidential settlement agreement
(the "Settlement Agreement") to resolve litigation and other disputes arising in
2002. Under the terms of the Settlement Agreement, the Company paid $0.5 million
in January 2005 for conditions satisfied under the terms of the Settlement
Agreement. This amount has been expensed and accrued in the December 31, 2004
financial statements. The Company also funded approximately $2.5 million in an
escrow account payable over a two year period upon the satisfaction of certain
future events, including non-competition.
COMMITMENTS
In 2004, the Company began construction of a new 60-bed acute care
hospital in Ft. Mohave, Arizona. This new hospital is currently estimated to
cost approximately $31,000,000, of which approximately $7,790,000 has been
incurred at December 31, 2004. Construction of the Ft. Mohave facility is
anticipated to be completed in the third quarter of 2005. In 2004, the Company
also began construction of a 52-bed replacement facility for its existing 72-bed
facility in Eunice, Louisiana. The replacement facility is estimated to cost
approximately $25,600,000, of which approximately $1,095,000 has been incurred
at December 31, 2004. Construction of the Eunice replacement facility is
anticipated to be completed in the second quarter of 2006.
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 hospitals with prior operating histories. The
hospitals that the Company acquires may have unknown or contingent liabilities,
including liabilities for failure to comply with healthcare laws and
regulations. Although the Company obtains contractual indemnification from
sellers covering these matters, such indemnification may be insufficient to
cover material claims or liabilities for past activities of acquired hospitals.
PHYSICIAN COMMITMENTS
In order to recruit and retain physicians to the communities it serves,
the Company has committed to provide certain financial assistance in the form of
recruiting agreements with various physicians. In consideration for a physician
relocating to one of its communities and agreeing to engage in private practice
for a specified period of time, the Company may loan certain amounts of money to
a physician, generally not to exceed a period of one year, to assist in
establishing his or her practice. The actual amount of such commitments to be
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, 2004 are approximately $22,895,000.
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 $3,281,000 (unaudited),
$3,198,000 and $2,854,000 for the years ended December 31, 2004, 2003 and 2002,
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
$122,000 (unaudited), $148,000 and $226,000 for the years ended December 31,
2004, 2003 and 2002, respectively.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS (UNAUDITED)
Cash and Cash Equivalents-The carrying amount reported in the consolidated
balance sheets for cash and cash equivalents approximates fair value.
Accounts Receivable and Accounts Payable-The carrying amount reported in
the consolidated balance sheets for accounts receivable and accounts payable
approximates fair value.
Long-Term Obligations-The carrying value of the Company's 4 1/2% Notes, 4
1/4% Notes, and 7 1/2% Senior Subordinated Notes was $75,970,000, $172,500,000
and $200,000,000, respectively, at December 31, 2004. The fair value of the
Company's 4 1/2% Notes, 4 1/4% Notes, and 7 1/2% Notes was $76,540,000,
$174,656,000 and $209,962,000, respectively, at December 31, 2004, based on the
quoted market prices at December 31, 2004.
Interest Rate Swap Agreement-The fair value of the Company's interest rate
swap agreement is $1,663,000 at December 31, 2004, 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, 2002 $ 44,476 $ 53,201 $ 10,729 $ (43,694) $ 64,712
Year ended December 31, 2003 $ 64,712 $ 72,583 $ -- $ (70,460) $ 66,835
Year ended December 31, 2004 (unaudited) $ 66,835 $ 95,015 $ 19,547 $(103,123) $ 78,274
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 2004 and
2003 is summarized below (in thousands, except per share data):
QUARTER
-------------------------------------------------
FIRST SECOND THIRD FOURTH
---------- ---------- ---------- ----------
2004
Net revenues $ 200,577 $ 208,534 $ 235,315 $ 238,480
Income from continuing operations $ 12,207 $ 11,830 $ 11,891 $ 14,128
Discontinued operations (646) 6,369 (362) (918)
--------- --------- --------- ---------
Net income $ 11,561 $ 18,199 $ 11,529 $ 13,210
========= ========= ========= =========
Basic earnings (loss) per share:
Income from continuing operations $ 0.25 $ 0.24 $ 0.24 $ 0.28
Discontinued operations (0.01) 0.13 (0.01) (0.02)
--------- --------- --------- ---------
Net income $ 0.24 $ 0.37 $ 0.23 $ 0.26
========= ========= ========= =========
Diluted earnings (loss) per share:
Income from continuing operations $ 0.24 $ 0.23 $ 0.23 $ 0.27
Discontinued operations (0.01) 0.11 (0.01) (0.02)
--------- --------- --------- ---------
Net income $ 0.23 $ 0.34 $ 0.22 $ 0.25
========= ========= ========= =========
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
========= ========= ========= =========
The amounts presented in the preceding table for the first quarter of 2004
and 2003 reflect the restatement of Brim Healthcare, Inc. as a discontinued
operation. The Form 10-Q for the quarterly period ended March 31, 2004, as
filed, reflected Brim Healthcare, Inc. in continuing operations. The restatement
of Brim Healthcare, Inc. as a discontinued operation resulted in a decrease of
$4,299,000 in net revenues, an increase in income from continuing operations of
$63,000 and an increase in the loss from discontinued operations of $63,000 for
the quarter ended March 31, 2004. The restatement of Brim Healthcare, Inc. as a
discontinued operation resulted in a decrease of $4,021,000 in net revenues, a
decrease in income from continuing operations of $147,000 and a decrease in the
loss from discontinued operations of $147,000 for the quarter ended March 31,
2003. The restatement of Brim Healthcare, Inc. as a discontinued operation did
not have any effect on net income for the quarters ended March 31, 2004 and
2003.
16. SUBSEQUENT EVENT (UNAUDITED)
On March 18, 2005, in connection with the pending acquisition by
LifePoint, the Company commenced a cash tender offer and consent solicitation
for any and all of its 7 1/2% Senior Subordinated Notes. The tender offer
consideration for each $1,000 principal amount of 7 1/2% Senior Subordinated
Notes validly tendered and accepted for purchase will be based on a fixed spread
of 50 basis points over the yield on the price, as of April 12, 2005, of the
2.625% U.S. Treasury Note due May 15, 2008, plus accrued interest minus a
consent payment equal to $20 per $1,000 principal amount tendered and accepted
for purchase. The tender offer is scheduled to expire on April 15, 2005, unless
extended or terminated earlier.