<PAGE> 1
Registration No. 333-56663
Filed pursuant to rule 424(b)(4)
3,570,000 Shares
(PROVINCE HEALTHCARE LOGO)
Common Stock
------------------
Of the 3,570,000 shares of Common Stock, par value $0.01 per share (the
"Common Stock") offered hereby (the "Offering"), 2,300,000 shares are being
offered by Province Healthcare Company ("Province" or the "Company") and
1,270,000 shares are being offered by the Selling Stockholders. The Company will
not receive any of the proceeds from the sale of shares by the Selling
Stockholders. See "Principal and Selling Stockholders." The Common Stock of the
Company is traded on the Nasdaq National Market under the symbol "PRHC." On July
8, 1998, the last reported sale price for the Common Stock was $26.38 per share.
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS PROCEEDS
TO DISCOUNTS AND TO TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............ $26.00 $1.30 $24.70 $24.70
- -------------------------------------------------------------------------------------------------------------------------
Total(2)............. $92,820,000 $4,641,000 $56,810,000 $31,369,000
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Before deducting expenses of the Offering estimated at $600,000, payable by
the Company.
(2) The Company and certain Selling Stockholders have granted the Underwriters a
30-day option to purchase up to 385,500 and 150,000 additional shares of
Common Stock, respectively, solely to cover over-allotments, if any. To the
extent the option is exercised, the Underwriters will offer the additional
shares at the Price to Public shown above. If the option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions,
Proceeds to Company and Proceeds to Selling Stockholders will be
$106,743,000, $5,337,150, $66,331,850 and $35,074,000, respectively. See
"Underwriting."
------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of the Common Stock will be made at the
offices of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about July
14, 1998.
BT Alex. Brown
BancAmerica Robertson Stephens
Goldman, Sachs & Co.
The Robinson-Humphrey Company
THE DATE OF THIS PROSPECTUS IS JULY 8, 1998.
<PAGE> 2
[PHOTOGRAPHS OF THE COMPANY'S NEW HOSPITALS -- HAVASU AND ELKO]
[MAP OF COMPANY'S EXISTING HOSPITAL PORTFOLIO]
THE UNDERWRITERS AND OTHER PERSONS MAY OVER-ALLOT OR EFFECT TRANSACTIONS
THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH REGULATION M OR ANY SUCCESSOR RULES UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE
"UNDERWRITING."
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Consolidated
Financial Statements and the related Notes thereto appearing elsewhere in this
Prospectus.
THE COMPANY
Province Healthcare Company is an owner and operator of acute-care
hospitals in attractive non-urban markets. The Company currently owns and
operates 10 general acute care hospitals in six states with a total of 739
licensed beds. The Company also provides management services to 50 primarily
non-urban hospitals in 19 states with a total of 3,422 licensed beds. The
Company offers a wide range of inpatient and outpatient medical services and
also provides specialty services, including skilled nursing and rehabilitation.
In developing a platform for the provision of health care services within target
markets, the Company seeks to acquire hospitals which are the sole or primary
providers of health care in those communities. After acquiring a hospital, the
Company seeks to improve the hospital's operating performance and to broaden the
range of services provided to the community. For the year ended December 31,
1997 and the three months ended March 31, 1998, the Company had net operating
revenue of $170.5 million and $47.9 million, respectively.
The Company believes that non-urban markets are attractive to health care
service providers. Because non-urban service areas have smaller populations,
there are generally only one or two hospitals in each non-urban market,
resulting in less competition. The strong market position of the acute care
hospital in these smaller markets also limits the entry of alternate site
providers, which provide services such as outpatient surgery, rehabilitation or
diagnostic imaging. The demographic characteristics of non-urban markets and the
relative strength of the local hospital also make non-urban markets less
attractive to HMOs and other forms of managed care. In addition, the Company
believes that non-urban communities are generally characterized by a high level
of patient and physician loyalty that fosters cooperative relationships among
the local hospital, physicians and patients. Despite these attractive
characteristics, many not-for-profit and governmental operators of non-urban
hospitals are under pressure due to capital constraints, limited management
resources and the challenges of managing in a complex health care regulatory
environment. These pressures often result in diminished operating and financial
performance which can lead owners to sell or lease their hospitals to companies,
like Province, that have greater financial and management resources.
The Company's objective is to be the leading provider of high quality
health care services in selected non-urban markets. To achieve this end, the
Company seeks to acquire hospitals which are the sole or primary providers of
health care services in their markets and which present the opportunity to
increase profitability and market share. The Company targets acquisition
candidates that: (i) have a minimum service area population of 20,000 with a
stable or growing employment base; (ii) are the sole or primary providers of
health care services in the community; (iii) have annual net patient revenue of
at least $12.0 million; and (iv) have financial performance that will benefit
from Province management's proven operating skills. The Company's goal is to
acquire two to four hospitals each year of the approximately 1,100 non-urban
hospitals that fit the Company's acquisition profile.
Following the acquisition of a hospital, the Company implements its
systematic policies and procedures to improve the hospital's operating and
financial performance. Key elements of the Company's operating strategy are to:
(i) expand the breadth of services offered in the community to increase local
market share; (ii) improve hospital operations by implementing appropriate
expense controls, managing staffing levels, reducing supply costs, and
renegotiating certain vendor contracts; (iii) recruit additional general
practitioners and specialty physicians to the community; and (iv) form
relationships with local employers and regional tertiary providers to solidify
the position
1
<PAGE> 4
of the Company's hospital as the focal point of the community's health care
delivery system. The Company expects to make capital expenditures and to incur
operating costs in implementing this strategy, which management believes will be
offset by increases in market share and profitability.
Prior to its 1996 recapitalization and merger with PHC of Delaware, Inc.
("PHC"), the Company operated under the name Brim, Inc. ("Brim"). The current
operations of the Company include certain Brim operations and all of the
operations of PHC. Brim and its predecessors have provided health care services,
including managing and operating non-urban hospitals, since the 1970s. PHC was
founded in February 1996 by Golder, Thoma, Cressey, Rauner Fund IV, L.P. ("GTCR
Fund IV") and Martin S. Rash to acquire and operate hospitals in attractive
non-urban markets. In December 1996, Brim was recapitalized (the
"Recapitalization"). Subsequently, PHC merged with a subsidiary of Brim in a
transaction accounted for as a reverse acquisition (the "Merger"). In connection
with the Recapitalization, Mr. Rash and Richard D. Gore were elected as the
senior management of the Company.
The Company's management team has extensive experience in acquiring and
operating previously under-performing non-urban hospitals. Prior to co-founding
PHC, Mr. Rash was the Chief Operating Officer of Community Health Systems, Inc.
("Community"), an acquiror and operator of non-urban hospitals. During Mr.
Rash's tenure, Community acquired many non-urban hospitals and owned or leased
36 hospitals at December 31, 1995. Mr. Gore was previously employed as Vice
President and Controller of Quorum Health Group, Inc., an owner, operator and
manager of acute care hospitals. John M. Rutledge, the Company's Chief Operating
Officer, was previously employed as a Regional Vice President/Group Director at
Community. James Thomas Anderson, the Company's Senior Vice President of
Acquisitions and Development, was previously a Vice President/Group Director at
Community. Both Mr. Rutledge and Mr. Anderson reported directly to Mr. Rash
while at Community.
RECENT DEVELOPMENTS
On February 10, 1998, the Company completed an initial public offering of
5,405,000 shares of its Common Stock at a price of $16.00 per share (the "IPO"),
the net proceeds of which totaled $77.2 million. Of the net proceeds from the
IPO, $22.7 million was used to redeem all of the outstanding shares of the
Company's Series A Senior Preferred Stock, no par value (the "Senior Preferred
Stock"), and pay all accumulated dividends thereon, $14.9 million was used to
repurchase a portion of the Common Stock issued upon the conversion of Series B
Junior Preferred Stock, no par value (the "Junior Preferred Stock"), at the time
of the IPO, and $39.6 million was used to repay amounts outstanding under the
Company's prior credit agreement.
Since the IPO, the Company has acquired two hospitals and has signed a
definitive agreement to lease a third facility. Each of the five hospitals
acquired by the Company, and three of the hospitals acquired by Brim prior to
the Merger, have been acquired from not-for-profit or governmental entities.
Approximately 1,100 non-urban hospitals in the United States are currently owned
by not-for-profit or governmental entities.
On May 1, 1998, the Company acquired the 119-bed Havasu Samaritan Regional
Hospital ("Havasu") in Lake Havasu City, Arizona. The hospital is located in the
16th fastest growing county in the United States according to United States
Census Bureau statistics. Havasu is located 180 miles northwest of Phoenix,
Arizona and 130 miles southeast of Las Vegas, Nevada. The closest hospital is
Province's Colorado River facility located 40 miles away in Needles, California.
For the year ended December 31, 1997, the hospital generated net revenues of
approximately $55.1 million.
On June 11, 1998, the Company acquired the 50-bed Elko General Hospital
("Elko") in Elko, Nevada. The hospital is located 290 miles from Reno, Nevada
and 225 miles from Salt Lake City, Utah and is the largest hospital between
these two cities. The terms of the Elko acquisition agreement provide that the
Company will construct and open a replacement hospital facility within
2
<PAGE> 5
36 months of the acquisition date. The closest competing hospital is the
University of Utah Medical Center in Salt Lake City, Utah. For the 12 months
ended December 31, 1997, Elko generated net revenues of approximately $26.4
million.
Also, in June 1998, the Company entered into an agreement to lease and to
acquire certain operating assets of Moosa Memorial Hospital (also known as
Eunice Regional Medical Center) ("Eunice") in Eunice, Louisiana. The hospital is
located 45 miles northeast of Lafayette, Louisiana and 70 miles west of Baton
Rouge. The hospital is currently being managed by the Company pursuant to a
management services agreement. The initial term of the lease will be for a
period of 10 years, or until the Company has completed construction of a
replacement hospital facility pursuant to the terms of the lease. The
transaction is scheduled to close on or before July 31, 1998.
THE OFFERING
Common Stock offered by:
The Company............................. 2,300,000 shares
The Selling Stockholders................ 1,270,000 shares
Common Stock to be outstanding after the
Offering.................................. 15,310,965 shares(1)
Use of proceeds........................... To repay certain indebtedness. See
"Use of Proceeds."
Nasdaq National Market symbol............. "PRHC"
- ---------------
(1) Excludes 703,206 shares of Common Stock issuable upon the exercise of
options outstanding as of July 7, 1998 issued pursuant to the Company's 1997
Long-Term Equity Incentive Plan, as amended, at a weighted average exercise
price of $13.73 per share.
3
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL AND STATISTICAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<TABLE>
<CAPTION>
BRIM (PREDECESSOR)(1)(2) COMPANY (SUCCESSOR)(1)(2)
-------------------------- ---------------------------------------------------------------
PRO FORMA AS
ADJUSTED(3)
--------------------
THREE MONTHS THREE
PERIOD PERIOD YEAR ENDED YEAR MONTHS
YEAR ENDED JAN. 1, FEB. 2 TO ENDED MARCH 31, ENDED ENDED
DECEMBER 31, TO DEC. 18, DEC. 31, DEC. 31, ----------------- DEC. 31, MARCH 31,
1995 1996 1996 1997 1997 1998 1997 1998
------------ ----------- --------- -------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net operating revenue........ $101,214 $112,600 $17,255 $170,527 $40,459 $47,851 $251,988 $ 70,570
Operating expenses........... 97,993 109,129 18,268 154,566 35,893 41,916 225,541 60,991
Interest expense............. 738 1,675 976 8,121 1,761 1,855 10,746 2,895
Costs of recapitalization.... -- 8,951 -- -- -- -- -- --
Loss (gain) on sale of
assets..................... (2,814) 442 -- 115 87 33 115 33
Income (loss) from continuing
operations before provision
for income taxes and
extraordinary item......... 5,297 (7,597) (1,989) 7,725 2,718 4,047 15,586 6,651
Income (loss) from continuing
operations before
extraordinary item......... $ 3,369 $ (5,307) (1,316) 4,075 1,507 2,275 8,874 3,860
Net income (loss) to common
shareholders(4)............ $(1,750) $ (1,002) $ 392 $ 1,579 $ 8,874 $ 3,860
Net income (loss) per share
to common shareholders --
diluted(4)(5):............. $ (0.61) $ (0.17) $ 0.06 $ 0.16 $ 0.57 $ 0.25
Weighted average number of
common and common
equivalent shares(5)....... 2,860 5,787 6,354 9,615 15,440 15,582
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED(6)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 6,675 $ 7,073
Total assets.............................................. 181,222 312,493
Long-term obligations, less current maturities............ 52,166 123,956
Common stockholders' equity............................... 95,844 152,054
</TABLE>
<TABLE>
<CAPTION>
BRIM (PREDECESSOR)(1)(2) COMPANY (SUCCESSOR)(1)(2)
--------------------------- ------------------------------------------------
THREE MONTHS
PERIOD PERIOD YEAR ENDED
YEAR ENDED JANUARY 1 TO FEBRUARY 2 TO ENDED MARCH 31,
DECEMBER 31, DECEMBER 18, DECEMBER 31, DECEMBER 31, -----------------
1995 1996 1996 1997 1997 1998
------------ ------------ ------------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
STATISTICAL DATA(7):
Hospitals owned or leased (at end of
period)............................ 4 5 7 8 7 8
Licensed beds (at end of period)..... 294 371 513 570 517 570
Admissions........................... 8,839 9,496 1,964 15,142 3,910 4,575
Patient days......................... 56,088 56,310 8,337 84,386 20,904 25,570
Adjusted patient days(8)............. 92,085 96,812 15,949 149,567 36,437 42,295
Average length of stay (days)(9)..... 6.4 5.9 4.3 5.6 5.3 5.6
Gross outpatient service revenue (in
thousands)......................... $51,414 $64,472 $14,088 $110,879 $25,860 $30,010
Gross outpatient service revenue (%
of gross patient service
revenue)........................... 39.1 43.4 48.2 44.5 42.4 40.0
EBITDA (in thousands)(10)............ $ 5,185 $ 5,244 $ 478 $ 23,847 $ 6,404 $ 8,208
CASH PROVIDED BY (USED IN):
Operating activities................. $ 4,123 $ 220 $ 1,636 $ (838) $(1,264) $ 233
Investing activities................. (1,527) 9,378 3,602 (18,230) (2,481) (2,539)
Financing activities................. (2,128) 15,943 6,018 11,998 (431) 4,795
</TABLE>
See accompanying footnotes on the following page.
4
<PAGE> 7
- ---------------
(1) Principal Hospital Company was formed on February 2, 1996. On December 18,
1996, Brim completed a leveraged recapitalization (the "Recapitalization").
Immediately thereafter, on December 18, 1996, PHC was merged with a
subsidiary of Brim in a transaction in which Brim issued junior preferred
and common stock in exchange for all of the outstanding common stock of PHC
(the "Merger"). Because the PHC shareholders became owners of a majority of
the outstanding shares of Brim after the Merger, PHC was considered the
acquiring enterprise for financial reporting purposes and the transaction
was accounted for as a reverse acquisition. Therefore, the historical
financial statements of PHC replaced the historical financial statements of
Brim, the assets and liabilities of Brim were recorded at fair value as
required by the purchase method of accounting, and the operations of Brim
were reflected in the operations of the combined enterprise from the date
of acquisition. Since PHC had been in existence for less than a year at
December 31, 1996, and because Brim had been in existence for several
years, PHC is considered the successor to Brim's operations. Although PHC
was considered the acquiring enterprise for financial reporting purposes,
PHC became a wholly-owned subsidiary of Brim, the predecessor company, as a
result of the Merger.
(2) The financial statements of the Company and Brim for the periods presented
are not strictly comparable due to the significant effect that the
acquisitions, divestitures and the Recapitalization have had on such
statements. See Note 3 of Notes to Consolidated Financial Statements of the
Company and Notes 2 and 3 of the Notes to Consolidated Financial Statements
of Brim.
(3) Data included in pro forma statements of income for the year ended December
31, 1997 and the three months ended March 31, 1998, give effect to: (i) the
conversion of the Junior Preferred Stock and accumulated and unpaid
dividends with an aggregate carrying amount of $35.3 million into 2,204,420
shares of Common Stock (the "Preferred Stock Conversion") in connection
with the IPO; (ii) the sale of 5,405,000 shares of Common Stock in the IPO,
and the application of the net proceeds from the IPO of $77.2 million to
the repurchase of the Common Stock issued with respect to 13,636 of the
shares of Junior Preferred Stock converted in the Preferred Stock
Conversion, the redemption of the Company's Series A Senior Preferred
Stock, no par value (the "Senior Preferred Stock") and the repayment of
debt; (iii) the operating results from the acquisition of Havasu and Elko
for periods prior to their acquisition; and (iv) the sale of Common Stock
in the Offering and the application of the estimated net proceeds thereof
to the repayment of debt, as described in "Use of Proceeds," as if all such
transactions had been completed as of January 1, 1997.
(4) Includes preferred stock dividends and accretion of $0.2 million, $5.1
million and $0.7 million for the period February 2, 1996 to December 31,
1996, the year ended December 31, 1997, and the three months ended March
31, 1998, respectively.
(5) Net income (loss) per share to common shareholders for the historical
period February 2, 1996 to December 31, 1996, the year ended December 31,
1997 and three months ended March 31, 1998 is computed using the weighted
average number of shares of Common Stock outstanding during the period,
including dilutive common equivalent shares from stock options and warrants
(using the treasury stock method unless the effect is anti-dilutive). Net
income (loss) per share applicable to common shareholders on the 1997 and
1998 pro forma amounts are based on the assumptions outlined in Note 3
above.
(6) The pro forma balance sheet data as of March 31, 1998 gives effect to (i)
the acquisitions of Havasu and Elko and (ii) the sale of Common Stock in
the Offering and the application of the estimated net proceeds thereof to
the repayment of debt, as described in "Use of Proceeds," as if all such
transactions had been completed as of March 31, 1998.
(7) Excludes Fifth Avenue Hospital in Seattle, Washington, which was sold in
May 1995.
(8) Adjusted patient days have been calculated based on an industry-accepted,
revenue-based formula (multiplying actual patient days by the sum of gross
inpatient revenue and gross outpatient revenue and dividing the result by
gross inpatient revenue for each hospital) to reflect an approximation of
the number of inpatients and outpatients served.
(9) Average length of stay is calculated based on the number of patient days
divided by the number of admissions.
(10) As calculated herein, EBITDA represents the sum of income (loss) from
continuing operations before provision for income taxes, interest expense,
depreciation and amortization, minority interest, plus costs of
recapitalization and loss (gain) on sale of assets. Management does not
believe it is appropriate to include nonrecurring items in its calculation
of EBITDA, since such items by their nature are difficult to anticipate and
do not recur, and therefore are not particularly helpful to investors in
analyzing a company's ability to service debt. Management understands that
industry analysts generally consider EBITDA to be one measure of the
financial performance of a company that is presented to assist investors in
analyzing the operating performance of the Company and its ability to
service debt. Management believes that an increase in EBITDA level is an
indicator of the Company's improved ability to service existing debt, to
sustain potential future increases in debt and to satisfy capital
requirements. However, EBITDA is not a measure of financial performance
under generally accepted accounting principles and should not be considered
an alternative (i) to net income as a measure of operating performance or
(ii) to cash flows from operating, investing, or financing activities as a
measure of liquidity. Given that EBITDA is not a measurement determined in
accordance with generally accepted accounting principles and is thus
susceptible to varying calculations, EBITDA as presented may not be
comparable to other similarly titled measures of other companies.
5
<PAGE> 8
FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus Summary and under the captions "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business," and elsewhere in this Prospectus, constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company or industry results
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions, both
nationally and in regions where the Company operates; demographic changes; the
effect of existing or future governmental regulation and federal and state
legislative and enforcement initiatives on the Company's business, including the
Balanced Budget Act of 1997; changes in Medicare and Medicaid reimbursement
levels; the Company's ability to implement successfully its acquisition and
development strategy and changes in such strategy; the availability and terms of
financing to fund the expansion of the Company's business, including the
acquisition of additional hospitals; the Company's ability to attract and retain
qualified management personnel and to recruit and retain physicians and other
health care personnel to the non-urban markets it serves; the effect of managed
care initiatives on the non-urban markets served by the Company's hospitals and
the Company's ability to enter into managed care provider arrangements on
acceptable terms; the effect of liability and other claims asserted against the
Company; the effect of competition in the markets served by the Company's
hospitals; and other factors referenced in this Prospectus. Certain of these
factors are discussed in more detail elsewhere in this Prospectus. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. The Company disclaims any obligation to
update any such factors or to publicly announce the result of any revisions to
any of the forward-looking statements contained herein to reflect future events
or developments. See "Risk Factors."
Unless the context otherwise requires, references in this Prospectus to
"Province" or the "Company" shall mean Province Healthcare Company and its
predecessors (including Principal Hospital Company, formerly known as Brim,
Inc.), together with Province Healthcare Company's direct and indirect
subsidiaries. Unless otherwise indicated, all information contained in this
Prospectus: (i) has been adjusted to give effect to the Recapitalization, the
Merger, the 3-for-1 stock split effected in May 1997 and the Reincorporation (as
defined below); and (ii) assumes no exercise of the Underwriters' over-allotment
option in connection with the Offering.
6
<PAGE> 9
THE COMPANY
Prior to the Recapitalization and the Merger with PHC, the Company operated
under the name Brim, Inc. The current operations of the Company include certain
Brim operations and all of the operations of PHC. Brim and its predecessors have
provided health care services, including managing and operating non-urban
hospitals, since the 1970s. PHC was founded in February 1996 by GTCR Fund IV and
Mr. Rash to acquire and operate hospitals in non-urban communities in the United
States. In December 1996, Brim was recapitalized. Following the
Recapitalization, a subsidiary of Brim merged with PHC in a transaction
accounted for as a reverse acquisition, and the Company operated under the name
Principal Hospital Company.
During 1996, prior to the Merger, PHC purchased Memorial Mother Frances
Hospital in Palestine, Texas and leased Starke Memorial Hospital in Knox,
Indiana, and Brim leased Parkview Regional Hospital in Mexia, Texas
(collectively, the "Pre-Merger Acquisitions"). In August 1997, the Company
entered into a lease of Needles Desert Communities Hospital in Needles,
California, subsequently renamed Colorado River Medical Center ("Colorado
River"), (the "Colorado River Acquisition"). On May 1, 1998, the Company
purchased Havasu Samaritan Regional Hospital ("Havasu") in Lake Havasu City,
Arizona, and on June 11, 1998 the Company acquired Elko General Hospital
("Elko") in Elko, Nevada (collectively, the "1998 Acquisitions" and,
collectively with the Pre-Merger Acquisitions and the Colorado River
Acquisition, the "Acquisitions"). Each of the Acquisitions were acquired from
not-for-profit or governmental entities.
On February 4, 1998, the Company merged with and into Province Healthcare
Company, a Delaware corporation, to change the Company's name and jurisdiction
of incorporation and to make certain other changes to the Company's authorized
capitalization (the "Reincorporation").
The Company's principal executive offices are located at 105 Westwood
Place, Suite 400, Brentwood, Tennessee 37027, and its telephone number is (615)
370-1377.
THE RECAPITALIZATION AND THE MERGER
On December 18, 1996, Brim was recapitalized pursuant to an Investment
Agreement among GTCR Fund IV, Brim and PHC. The basic elements of the December
1996 recapitalization of Brim included the following: GTCR Fund IV and other
investors purchased new shares of Brim's common and preferred stock; Brim sold
its senior living business and entered into a new credit facility to, along with
the proceeds from the sale of the new shares, provide financing for the
redemption of a portion of its pre-existing common and preferred stock; this
pre-existing common and preferred stock was redeemed; and certain pre-existing
debt was repaid.
Following the Recapitalization, PHC became a wholly-owned subsidiary of
Brim as a result of the Merger. In connection with the Merger, the stockholders
of PHC received an aggregate of 14,403 shares of Brim's Junior Preferred Stock
and 2,757,947 shares of Brim's Common Stock, and PHC's existing debt of $19.3
million was repaid. Because the PHC shareholders became owners of a majority of
the outstanding shares of Brim after the Merger, PHC was considered the
acquiring enterprise for financial reporting purposes and the transaction was
accounted for as a reverse acquisition. Therefore, the historical financial
statements of PHC replaced the historical financial statements of Brim, the
assets and liabilities of Brim were recorded at fair value as required by the
purchase method of accounting, and the operations of Brim were reflected in the
operations of the combined enterprise from the date of acquisition. Since PHC
had been in existence for less than a year at December 31, 1996, and because
Brim had been in existence for several years, PHC is considered the successor to
Brim's operations. Although PHC was considered the acquiring enterprise for
financial reporting purposes, PHC became a wholly-owned subsidiary of Brim, the
predecessor company, as a result of the Merger.
7
<PAGE> 10
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following information before
making an investment in the Common Stock offered hereby.
RISKS OF ACQUISITION STRATEGY
A key element of the Company's growth strategy is expansion through the
acquisition of acute care hospitals in attractive non-urban markets. There can
be no assurance that the Company will be able to acquire hospitals which meet
its target criteria on satisfactory terms, or of the number of such acquisitions
the Company will make during a period of time. Expenses arising from the
Company's efforts to complete acquisitions, increase services offered or
increase its market penetration could have a material adverse effect on the
Company's business, financial condition or results of operations. There can be
no assurance that the Company will be able to implement its growth strategy
successfully or manage its expanded operations effectively and profitably.
The Company faces competition for acquisitions primarily from other
for-profit health care companies as well as not-for-profit entities. Some of the
Company's competitors have greater financial and other resources than the
Company. Increased competition for the acquisition of non-urban acute care
hospitals could have an adverse impact on the Company's ability to acquire such
hospitals on favorable terms.
Hospital acquisitions generally require a longer period to complete than
acquisitions in many other businesses and are subject to additional uncertainty.
In recent years, the legislatures and attorneys general of several states have
shown a heightened level of interest in transactions involving the sale of
hospitals by not-for-profit entities. Although the level of interest varies from
state to state, the trend is to provide for increased governmental review, and
in some cases approval, of transactions in which not-for-profit entities sell a
health care facility. Attorneys general in certain states, including California,
where the Company owns or leases four hospitals, have been especially active in
evaluating these transactions. Although the Company has not yet been adversely
affected as a result of these trends, such increased scrutiny may increase the
difficulty or prevent the completion of transactions with not-for-profit
organizations in certain states in the future, and may affect the Company's
ability to exercise existing purchase options for hospitals, including the
hospitals in Eureka, California (lease expires in December 2000) and Blythe,
California (lease expires in December 2002, subject to a 10-year renewal
option).
EFFECT OF REIMBURSEMENT AND PAYMENT POLICIES; HEALTH CARE REFORM LEGISLATION
The Company's owned and leased hospitals derive a substantial portion of
their revenue from Medicare and Medicaid programs. Such programs are highly
regulated and are subject to frequent and substantial changes. In recent years,
changes in Medicare and Medicaid programs have resulted in limitations on, and
reduced levels of, payment and reimbursement for a substantial portion of
hospital procedures and costs. The Balanced Budget Act of 1997 established a
plan to balance the budget by fiscal year 2002, and included significant
additional reductions in spending levels for the Medicare and Medicaid programs.
Federal and state proposals are pending that would impose further
limitations on governmental payments to health care providers such as the
Company and increase co-payments and deductibles. In addition, a number of
states are considering legislation designed to reduce their Medicaid
expenditures and to provide universal coverage and additional care and/or to
impose additional taxes on hospitals to help finance or expand the states'
Medicaid systems. Significant additional reductions in payment levels could have
a material adverse effect on the business, financial condition and results of
operations of the Company.
8
<PAGE> 11
An increasing number of related legislative proposals have been introduced
or proposed in Congress and in some state legislatures that would effect major
changes in the health care system, either nationally or at the state level.
Among the proposals under discussion or already enacted are price controls on
hospitals, insurance market reforms to increase the availability of group health
insurance coverage to small businesses, requirements that all businesses offer
health insurance coverage to their employees, and restrictions on the ability of
hospitals to own and operate home health agencies. While the Company anticipates
that payments to hospitals will be reduced as a result of future federal and
state legislation, it is uncertain at this time what legislation on health care
reform may ultimately be enacted or whether other changes in the administration
or interpretation of governmental health care programs will occur. There can be
no assurance that future health care legislation or other changes in the
administration or interpretation of governmental health care programs will not
have a material adverse effect on the Company's business, financial condition or
results of operations. See "Business -- Health Care Reform, Regulation and
Licensing."
HEALTH CARE INDUSTRY INVESTIGATIONS
Significant media and public attention has recently been focused on the
hospital industry due to ongoing investigations reportedly related to certain
referral, cost reporting, and billing practices, laboratory and home health care
services and physician ownership and joint ventures involving hospitals. The
alleged practices have been the subject of federal and state investigations, as
well as other proceedings.
As part of its hospital operations, the Company operates laboratories and
provides some home health care services. The Company also has significant
Medicare and Medicaid billings. The Company monitors its billing practices and
hospital practices to maintain compliance with prevailing industry
interpretations of applicable law, and believes that its current practices are
consistent with current industry practices. The applicable laws are complex and
constantly evolving; however, there can be no assurance that the government
investigations will not result in interpretations which are inconsistent with
industry practices, including the Company's practices. In public statements
surrounding the current investigations, governmental authorities have taken
positions on a number of issues, including some for which little official
interpretation has previously been available, such as the legality of physician
ownership in health care facilities in which they perform services and the
propriety of including marketing costs in the Medicare cost report of
hospital-affiliated home health agencies. Certain of these positions appear to
be inconsistent with practices that have been common within the industry and
which have not previously been challenged in this manner. Moreover, in certain
instances, government investigations that have in the past been conducted under
the civil provisions of federal law, are now being conducted as criminal
investigations under the Medicare fraud and abuse laws. The Company has reviewed
the current billing practices at all of its facilities in light of these
investigations and does not believe that any of its facilities are taking
positions on reimbursement issues that are contrary to the government's position
on these issues. Moreover, none of the Company's hospitals have physician
investors. There can be no assurance, however, that the Company or other
hospital operators will not be the subject of future investigations or
inquiries. The positions taken by authorities in the current investigations or
any future investigations of the Company or other providers could have a
material adverse effect on the Company's business, financial condition or
results of operations. See " -- Health Care Regulation" and
"Business -- Hospital Operations -- Regulatory Compliance Program" and
" -- Health Care Reform, Regulation and Licensing."
DEPENDENCE ON MANAGEMENT
The Company's success is largely dependent on the skills, experience and
efforts of its senior management. The Company's operations are also dependent on
the efforts, ability and experience of key members of its local management
staffs. The loss of services of one or more members of the
9
<PAGE> 12
Company's senior management or of a significant portion of its local management
staff could have a material adverse effect on the Company's business, financial
condition or results of operations. The Company does not maintain key man life
insurance policies on any of its officers. See "Management."
DEPENDENCE ON PHYSICIANS
The success of the Company's owned and leased hospitals is dependent upon
the number and quality of the physicians on the medical staff of, or who admit
patients to, such facilities, the admissions practices of such physicians and
the maintenance of good relations between the Company and such physicians.
Hospital physicians are generally not employees of the Company and most staff
physicians have admitting privileges at other hospitals. Only a limited number
of physicians are interested in practicing in the non-urban communities in which
the Company's hospitals are located, and the loss of physicians in these
communities, or the inability of the Company to recruit physicians to these
communities, could have a material adverse effect on the Company's business,
financial condition and results of operations. The operations of the Company's
hospitals may also be affected by the shortage of nurses and certain other
health care professionals in these communities. See "Business -- Employees and
Medical Staff."
HEALTH CARE REGULATION
The health care industry is subject to extensive federal, state and local
laws and regulations relating to issues such as licensure, conduct of
operations, ownership of facilities, addition of facilities and services, and
prices for services, that are extremely complex and for which, in many
instances, the industry has the benefit of little or no regulatory or judicial
interpretation. In particular, Medicare and Medicaid anti-kickback amendments
codified under Section 1128B(b) of the Social Security Act (the "Anti-kickback
Amendments") prohibit certain business practices and relationships that might
affect the provision and cost of health care services reimbursable under
Medicare and Medicaid, including the payment or receipt of remuneration for the
referral of patients whose care will be paid for by Medicare or other
governmental programs. Sanctions for violating the Anti-kickback Amendments
include criminal penalties and civil sanctions, including fines and possible
exclusion from government programs such as Medicare and Medicaid. Pursuant to
the Medicare and Medicaid Patient and Program Protection Act of 1987, the
Department of Health and Human Services ("HHS") has issued regulations that
describe some of the conduct and business relationships permissible under the
Anti-kickback Amendments ("Safe Harbors"). The fact that a given business
arrangement does not fall within a Safe Harbor does not render the arrangement
per se illegal. Business arrangements of health care service providers that fail
to satisfy the applicable Safe Harbor criteria, however, risk increased scrutiny
by enforcement authorities. The "Health Insurance Portability and Accountability
Act of 1996," which became effective January 1, 1997, amends, among other
things, Title XI (42.U.S.C. 1301 et seq.) to broaden the scope of certain fraud
and abuse laws to include all health care services, whether or not they are
reimbursed under a federal program. See "-- Health Care Industry
Investigations."
The Company provides financial incentives to recruit physicians into the
communities served by its hospitals, including loans and minimum revenue
guarantees, and structures these incentives so as to fall within a proposed safe
harbor for physician recruitment. However, the proposed safe harbor for
physician recruitment has never been finalized. The Company also enters into
certain leases with physicians, and is a party to certain joint ventures with
physicians. There can be no assurance that regulatory authorities who enforce
the Anti-kickback Amendments will not determine that the Company's physician
recruiting activities, other physician arrangements or group purchasing
activities violate the Anti-kickback Amendments or other federal laws. Such a
determination could subject the Company to liabilities under the Social Security
Act, including exclusion of the Company from participation in Medicare and
Medicaid. See "Business -- Health Care Reform, Regulation and Licensing."
10
<PAGE> 13
In addition, Section 1877 of the Social Security Act (commonly known as the
"Stark Laws"), which restricts referrals by physicians of Medicare and other
government-program patients to providers of a broad range of designated health
services with which they have ownership or certain other financial arrangements,
was amended effective January 1, 1995, to broaden significantly the scope of
prohibited physician referrals under the Medicare and Medicaid programs to
providers with which referring physicians have ownership or certain other
financial arrangements (the "Self-Referral Prohibitions"). Many states have
adopted or are considering similar legislative proposals, some of which extend
beyond the respective state's Medicaid program to prohibit the payment or
receipt of remuneration for the referral of patients and physician
self-referrals regardless of the source of the payment for the care. The
Company's participation in and development of joint ventures and other financial
relationships with physicians and others could be adversely affected by these
amendments and similar state enactments.
Both federal and state government agencies have announced heightened and
coordinated civil and criminal enforcement efforts. One federal initiative,
Operation Restore Trust, is focused on investigating health care providers in
the home health and nursing home industries as well as on medical suppliers to
these providers in 17 states, including California, Texas, Arizona and Colorado,
where the Company provides home health and nursing home care. The Office of
Inspector General and Department of Justice have from time to time established
enforcement initiatives that focus on specific billing practices or other
suspected areas of abuse. Current initiatives include a focus on hospital
billing for outpatient charges associated with inpatient services, as well as
hospital laboratory billing practices.
Some states require state approval for purchase, construction and expansion
of health care facilities, including findings of need for additional or expanded
health care facilities or services. Certificates of Need ("CONs"), which are
issued by governmental agencies with jurisdiction over health care facilities,
may be required for capital expenditures exceeding a prescribed amount, changes
in bed capacity or services and certain other matters. Following a number of
years of decline, the number of states requiring CONs is on the rise. It should
be noted, however, that Ohio and Pennsylvania recently allowed their respective
CON laws to expire under the provisions of those states' sunset laws. Texas,
Louisiana and Indiana do not have CON laws. There can be no assurances that the
Company will be able to obtain required CONs in states requiring them.
The laws, rules and regulations described above are subject to considerable
interpretation. If a determination is made that the Company is in violation of
such laws, rules or regulations, or if further changes in the regulatory
framework occur, any such determination or changes could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Health Care Reform, Regulation and Licensing."
COMPETITION
Competition among hospitals and other health care providers in the United
States has intensified in recent years as hospital occupancy rates have declined
as a result of cost containment pressures, changing technology, changes in
government regulation and reimbursement, changes in practice patterns (e.g.,
shifting from inpatient to outpatient treatments), the impact of managed care
organizations, and other factors. The Company's hospitals face competition from
larger tertiary care centers, outpatient service providers and other local
non-urban hospitals, which provide similar services to those offered by the
Company's hospitals. Some of the hospitals that compete with the Company are
owned by governmental agencies or not-for-profit corporations supported by
endowments and charitable contributions, and can finance capital expenditures on
a tax-exempt basis. In addition, the Company faces competition for acquisitions
primarily from for-profit hospital management companies as well as
not-for-profit entities. Some of the Company's competitors are larger, may be
more established and may have more capital and other resources than the Company.
See "Business -- Competition."
11
<PAGE> 14
LEVERAGED FINANCIAL POSITION
As of March 31, 1998, after giving pro forma effect to the acquisition of
Havasu and Elko, the Company's total long-term obligations (excluding current
maturities) would have been $180.2 million, or 65.3% of its total
capitalization. Additionally, as of March 31, 1998, after giving pro forma
effect to the application of the net proceeds of the Offering, the Company's
total long-term obligations (excluding current maturities) would have been
$124.0 million, or 44.9% of its total capitalization. The Company has a $260.0
million line of credit with a group of banks. See "Capitalization," "Pro Forma
Condensed Consolidated Financial Statements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The Company may incur additional indebtedness in the future, including
senior indebtedness, subject to limitations imposed by the Credit Agreement. The
level of the Company's indebtedness could have important consequences to the
Company and holders of its Common Stock, including: (i) a substantial portion of
the Company's cash flow from operations must be dedicated to debt service and
will not be available for other purposes (such as operations); (ii) the
Company's ability to obtain additional debt financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes and
other purposes may be limited; (iii) certain of the Company's borrowings are at
variable rates of interest, which makes the Company vulnerable to increases in
interest rates; and (iv) the Company's level of indebtedness could limit its
flexibility in reacting to changes in the industry and economic conditions
generally and such indebtedness contains numerous financial and other
restrictive covenants (including restrictions on payments of dividends,
incurrences of indebtedness and sales of assets), the failure to comply with
which may result in an event of default which, if not cured or waived, could
cause such indebtedness to be declared immediately due and payable. Certain of
the Company's competitors may operate on a less leveraged basis and therefore
could have significantly greater operating and financing flexibility than the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
NEED FOR ADDITIONAL CAPITAL
The Company's acquisition program requires substantial capital resources.
In addition, the operations of its existing hospitals require ongoing capital
expenditures for renovation and expansion and the addition of costly medical
equipment and technology utilized in the hospitals. The Company may incur
indebtedness and may issue, from time to time, debt or equity securities to fund
any such expenditures. There can be no assurance that sufficient financing will
be available on terms satisfactory to the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business -- Business Strategy."
CONCENTRATION OF HOSPITALS IN CALIFORNIA
Four of the Company's 10 owned and leased hospitals are located in
California and, for the three months ended March 31, 1998, 30.5% of the
Company's pro forma net operating revenue was derived from its hospitals located
in California. Accordingly, the Company may be particularly sensitive to
economic, competitive and regulatory conditions in California.
California has created a voluntary health insurance purchasing cooperative
that seeks to make health care coverage more affordable for businesses with five
to 50 employees and, effective January 1, 1995, began changing the payment
system for participants in its Medicaid program in certain counties from
fee-for-service arrangements to managed care plans. While none of the Company's
hospitals are located in the counties targeted for conversion to managed care,
if the state is able to implement successfully managed care in these counties,
this initiative could be expanded
12
<PAGE> 15
throughout the state. Reduction in reimbursement levels in California, including
reductions due to the implementation of managed care, could have a material
adverse effect on the business, financial condition and results of operations of
the Company.
California recently adopted a law requiring standards and regulations to be
developed to ensure hospitals meet seismic performance standards. Within three
years after adoption of the standards by the California Building Standards
Commission, owners of subject properties are to evaluate their facilities and
develop a plan and schedule for complying with the standards. The Commission has
adopted evaluation criteria and has recently adopted the retrofit standards. The
Company will be required to conduct engineering studies of its California
facilities to determine whether and to what extent modifications to its
facilities will be required. Significant capital expenditures to comply with the
seismic standards could have a material adverse effect on the Company's
financial condition or results of operations.
RISKS RELATED TO INTANGIBLE ASSETS
The Company's acquisitions and the Merger have resulted in significant
increases in intangible assets and goodwill. At March 31, 1998, on a pro forma
basis to reflect the acquisition of Havasu and Elko, the Company had goodwill
and other intangible assets of $144.2 million, which are being amortized over
periods ranging from five to 35 years, with a weighted average life of 33.0
years. There can be no assurance that the value of intangible assets will ever
be realized by the Company. On an ongoing basis, the Company makes an
evaluation, based on undiscounted cash flows, to determine whether events and
circumstances indicate that all or a portion of the carrying value of intangible
assets may no longer be recoverable, in which case an additional charge to
earnings may be necessary. Any future determination requiring the write off of a
significant portion of unamortized intangible assets could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview" and Note 2 of Notes to Consolidated Financial
Statements.
PROFESSIONAL LIABILITY
In recent years, physicians, hospitals and other health care providers have
become subject to an increasing number of lawsuits alleging malpractice, product
liability or related legal theories, many of which involve large claims and
significant defense costs. To cover claims arising out of the operations of
owned, leased and managed hospitals, the Company maintains professional
malpractice liability insurance and general liability insurance in amounts that
management believes to be sufficient for its operations, although some claims
may exceed the scope of the coverage in effect. The cost of malpractice and
other liability insurance has risen significantly during the past few years.
While the Company's professional and other liability insurance has been adequate
in the past to provide for liability claims, there can be no assurance that such
insurance will continue to be available for the Company to maintain adequate
levels of insurance. The Company's management contracts with its managed
hospitals generally require the hospital to indemnify the Company against
certain claims and to maintain specified amounts of insurance, however, there
can be no assurance the hospitals will maintain such insurance or that such
indemnities will be available.
EFFECTIVE CONTROL BY CERTAIN STOCKHOLDERS
Upon completion of the Offering, the Company's officers and directors and
their affiliates as a group will beneficially own 32.5% of the outstanding
shares of Common Stock, including 23.8% which will be owned by GTCR Fund IV. As
a result of such ownership, these stockholders, if acting together, may
effectively have the ability to elect the Board of Directors and thereby control
the affairs and management of the Company. This may have the effect of delaying,
deferring or preventing a change in control of the Company. See "Management" and
"Principal and Selling Stockholders."
13
<PAGE> 16
ABSENCE OF DIVIDENDS
The Company does not anticipate paying cash dividends in the foreseeable
future. In addition, the terms of the Company's Credit Agreement prohibit the
payment of cash dividends. Any future indebtedness incurred to refinance the
Company's existing indebtedness or to fund future growth may prohibit or limit
the Company's ability to pay dividends. See "Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
There will be 15,310,965 shares of Common Stock outstanding upon completion
of the Offering (15,696,465 shares if the Underwriters over-allotment option is
exercised in full). The 5,405,000 shares issued in the IPO are, and upon
completion of the Offering, the 3,570,000 shares of Common Stock offered hereby
will be, eligible for resale in the public market without restriction by persons
other than affiliates of the Company. The remaining 6,335,965 shares of Common
Stock are "restricted securities" as that term is defined in Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act") and will be eligible
for sale in the public market at prescribed times pursuant to Rule 144. The
Company, its executive officers and directors and substantially all of the
current stockholders have agreed not to sell or otherwise dispose of any of the
shares of Common Stock owned by them in the public market for a period of 90
days after the date of this Prospectus without the prior written consent of BT
Alex. Brown Incorporated. Sales of substantial amounts of the Company's Common
Stock in the public market, or the perception that such sales could occur, could
adversely affect the prevailing market price for the Common Stock and could
impair the Company's ability to raise additional capital through the sale of
equity securities. See "Description of Capital Stock" and "Shares Eligible for
Future Sale."
In connection with the Recapitalization, the Company entered into a
Registration Agreement (the "Registration Agreement") which provides demand and
piggyback registration rights to certain of the Company's current stockholders
and pursuant to which 1,270,000 shares are being offered hereby. Substantially
all of such shares other than the shares offered hereby are subject to the
90-day restrictions described above. The registration rights are subject to
certain notice requirements, timing restrictions and volume limitations which
may be imposed by the underwriters of such Offering. See "Shares Eligible for
Future Sale -- Registration Agreement." In addition, the Company has registered
1,209,016 shares of Common Stock authorized for issuance under its 1997
Long-Term Equity Incentive Plan and 250,000 shares of Common Stock authorized
for issuance under its Employee Stock Purchase Plan. See
"Management -- Long-Term Equity Incentive Plan" and "-- Employee Stock Purchase
Plan."
14
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after deducting
estimated underwriting discounts and Offering expenses, are estimated to be
$56.2 million ($65.7 million if the Underwriters' over-allotment option is
exercised in full). The Company will not receive any of the proceeds from the
sale of Common Stock by the Selling Stockholders. All of the proceeds of the
Offering will be used to reduce the outstanding loan balances under the Amended
and Restated Credit Agreement, dated as of March 30, 1998, among the Company,
First Union National Bank, as Agent and Issuing Bank, and the various lenders
named therein (the "Credit Agreement"). At June 30, 1998, the Company had
borrowed approximately $185.1 million on the revolving credit facility under the
Credit Agreement to fund acquisitions and working capital. These borrowings bear
interest at a weighted average rate of 7.57% and mature on March 31, 2003.
DIVIDEND POLICY
The Company currently intends to retain its earnings for use in its
business and therefore does not anticipate declaring or paying any cash
dividends in the foreseeable future. The Credit Agreement prohibits the payment
of dividends by the Company (other than dividends paid in the Company's stock).
Any future determination to declare or pay cash dividends will be made by the
Board of Directors in light of the Company's earnings, financial position,
capital requirements, credit agreements and such other factors as the Board of
Directors deems relevant at such time. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 5 of Notes to Consolidated Financial Statements.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the Nasdaq National Market under the symbol
"PRHC." The Company completed its IPO on February 10, 1998. Prior to that date,
no public market existed for the Common Stock. The following table sets forth
the high and low intra-day sales prices for the Common Stock for the periods
indicated as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
YEAR ENDING DECEMBER 31, 1998 ------ ------
<S> <C> <C>
First Quarter (commencing February 10, 1998)............... $27.13 $18.88
Second Quarter............................................. 29.63 23.00
Third Quarter (through July 8, 1998)....................... 28.50 26.00
</TABLE>
On July 8, 1998, the last reported sales price of the Common Stock on the
Nasdaq National Market was $26.38 per share. At June 8, 1998, there were 23
holders of record of Common Stock.
15
<PAGE> 18
CAPITALIZATION
The following table sets forth as of March 31, 1998: (i) the capitalization
of the Company; (ii) the capitalization of the Company on a pro forma basis to
reflect the 1998 Acquisitions; and (iii) the capitalization of the Company on a
pro forma as adjusted basis to reflect the 1998 Acquisitions, the sale of the
shares of Common Stock offered hereby, and the application of the estimated net
proceeds therefrom as if all such transactions had occurred as of March 31,
1998. See Pro Forma Condensed Consolidated Financial Statements.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 6,675 $ 7,073 $ 7,073
======== ======== ========
Long-term obligations(1):
Senior Credit Facility.................................... $ 48,000 $176,000 $119,790
Capital lease obligations................................. 4,157 4,157 4,157
Other long-term obligations............................... 9 9 9
-------- -------- --------
Total long-term obligations....................... $ 52,166 $180,166 $123,956
-------- -------- --------
Common stockholders' equity:
Common stock:
$0.01 par value, authorized: 25,000,000 shares; issued
and outstanding: 13,009,768 shares and 15,310,965
shares pro forma as adjusted(2)...................... 130 130 153
Additional paid-in capital................................ 97,338 97,338 153,525
Retained deficit.......................................... (1,624) (1,624) (1,624)
-------- -------- --------
Total common stockholders' equity...................... 95,844 95,844 152,054
-------- -------- --------
Total capitalization.............................. $148,010 $276,010 $276,010
======== ======== ========
</TABLE>
- ---------------
(1) Excludes current maturities.
(2) Excludes 703,206 shares of Common Stock issuable upon exercise of stock
options outstanding as of July 7, 1998 with a weighted average exercise
price of $13.73 per share. See "Management -- Long-Term Equity Incentive
Plan" and Note 7 of Notes to Consolidated Financial Statements.
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<PAGE> 19
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On February 10, 1998, Province completed its IPO and its Junior Preferred
Stock was converted into Common Stock. On May 1, 1998, Province acquired Havasu.
On June 10, 1998, Province acquired Elko.
The following unaudited pro forma condensed consolidated balance sheet as
of March 31, 1998 gives effect to: (i) the acquisitions of Havasu and Elko by
Province and (ii) the sale of 2,300,000 shares of Common Stock in the Offering
at an offering price of $26.00 per share and the application of the estimated
net proceeds thereof to the repayment of debt as described in "Use of Proceeds,"
as if all such transactions had been completed as of March 31, 1998.
The following unaudited pro forma condensed consolidated statements of
income for the year ended December 31, 1997 and the three months ended March 31,
1998 give effect to: (i) the conversion of Junior Preferred Stock into Common
Stock and the sale of 5,405,000 shares of Common Stock in the IPO at the price
of $16.00 per share, and the application of the net proceeds thereof to the
repurchase of certain shares of Common Stock, the redemption of Senior Preferred
Stock and the repayment of debt; (ii) the acquisitions of Havasu and Elko by
Province; and (iii) the sale of 2,300,000 shares of Common Stock in the Offering
at an offering price of $26.00 per share and the application of the estimated
net proceeds thereof to the repayment of debt as described in "Use of Proceeds,"
as if all such transactions had been completed as of January 1, 1997.
The pro forma condensed consolidated financial information presented herein
does not purport to represent what the Company's results of operations or
financial position would have been had such transactions in fact occurred at the
beginning of the periods presented or to project the Company's results of
operations in any future period. The pro forma result of operations, which do
not take into account certain operational changes instituted by the Company upon
acquisition of its hospitals, are not necessarily indicative of the results that
may be expected from such hospitals. The unaudited pro forma condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related Notes thereto included elsewhere
in this Prospectus.
17
<PAGE> 20
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITIONS PRO FORMA OFFERING PRO FORMA
---------------------------- PRO FORMA ACQUISITIONS PRO FORMA OFFERING
PROVINCE HAVASU ELKO ADJUSTMENTS CONSOLIDATED ADJUSTMENTS CONSOLIDATED
-------- ------- ------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 6,675 $ 6 $ 1,581 $ 106,000(a)
(6)(b)
(105,567)(c)
22,000(d)
(1,581)(e)
(22,035)(f) $ 7,073 $ 56,210(g)
(56,210)(g) $ 7,073
Accounts receivable, net.......... 35,705 3,767 5,297 (3,767)(b) 41,002 41,002
Inventories....................... 3,848 1,076 584 5,508 5,508
Prepaid expenses and other........ 6,028 160 109 (154)(b)
350(f) 6,493 6,493
-------- ------- ------- --------- -------- -------- --------
Total current assets........ 52,256 5,009 7,571 (4,760) 60,076 -- 60,076
Property, plant and equipment,
net............................... 66,804 18,666 8,798 11,094(c)
(5,248)(f) 100,114 100,114
Other assets:
Unallocated purchase price........ 760 -- -- 760 760
Cost in excess of net assets
acquired, net................... 53,146 -- -- 75,724(c)
14,417(f) 143,287 143,287
Other............................. 8,256 7,982 588 (7,982)(b)
(588)(e) 8,256 8,256
-------- ------- ------- --------- -------- -------- --------
$181,222 $31,657 $16,957 $ 82,657 $312,493 $ -- $312,493
======== ======= ======= ========= ======== ======== ========
LIABILITIES AND COMMON STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable.................. $ 5,029 $ 667 $ 588 $ (667)(b) $ 5,617 $ 5,617
Accrued salaries and benefits..... 6,968 -- -- 6,968 6,968
Accrued expenses.................. 2,311 510 856 489(c)
(172)(e)
1,000(f) 4,994 4,994
Current maturities of long-term
obligations..................... 2,255 637 773 (637)(b)
(773)(e) 2,255 2,255
-------- ------- ------- --------- -------- -------- --------
Total current liabilities... 16,563 1,814 2,217 (760) 19,834 -- 19,834
Long-term obligations, less current
maturities........................ 52,166 21,062 1,926 106,000(a)
(21,062)(b)
22,000(d)
(1,926)(e) 180,166 $(56,210)(g) 123,956
Third-party settlements............. 7,255 -- -- 7,255 7,255
Other liabilities................... 8,506 -- 60 (60)(e) 8,506 8,506
Minority interest................... 888 -- -- 888 888
Common stockholders' equity:
Net assets........................ -- 8,781 12,754 10,457(b)
(19,238)(c)
762(e)
(13,516)(f) -- --
Common stock...................... 130 -- 130 23(g) 153
Additional paid-in-capital........ 97,338 -- 97,338 56,187(g) 153,525
Retained earnings (deficit)....... (1,624) (1,624) (1,624)
-------- ------- ------- --------- -------- -------- --------
Total common stockholders'
equity.................... 95,844 8,781 12,754 (21,535) 95,844 56,210 152,054
-------- ------- ------- --------- -------- -------- --------
$181,222 $31,657 $16,957 $ 82,657 $312,493 $ -- $312,493
======== ======= ======= ========= ======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated balance
sheet.
18
<PAGE> 21
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
- ---------------
<TABLE>
<S> <C>
(a) Reflects the borrowing by Province of $106.0 million to finance the
acquisition of Havasu.
(b) Reflects the elimination of Havasu assets not purchased and
liabilities not assumed by Province as follows:
Cash............................................... $ (6)
Accounts receivable, net........................... (3,767)
Prepaid expenses and other......................... (154)
Other.............................................. (7,982)
Accounts payable................................... 667
Current maturities of long-term obligations........ 637
Long-term obligations, less current maturities..... 21,062
---------
Net assets......................................... $ 10,457
=========
(c) Reflects the purchase of Havasu and the allocation of the $105.5
million purchase price to adjust assets purchased and liabilities
assumed to fair value and to record intangibles as follows:
Property, plant and equipment...................... $ 11,094
Cost in excess of net assets acquired.............. 75,724
Accrued expenses................................... (489)
Net assets......................................... 19,238
---------
Cash paid.......................................... $ 105,567
=========
(d) Reflects the borrowing by Province of $22.0 million to finance the
acquisition of Elko.
(e) Reflects the elimination of Elko assets not purchased and liabilities
not assumed by Province as follows:
Cash............................................... $ (1,581)
Other.............................................. (588)
Accrued expenses................................... 172
Current maturities of long-term obligations........ 773
Long-term obligations, less current maturities..... 1,926
Other liabilities.................................. 60
---------
Net assets......................................... $ 762
=========
(f) Reflects the purchase of Elko and the allocation of the purchase
price to adjust assets purchased and liabilities assumed to fair
value and to record intangibles as follows:
Prepaid expenses and other......................... $ 350
Property, plant and equipment...................... (5,248)
Cost in excess of net assets acquired.............. 14,417
Accrued expenses................................... (1,000)
Net assets......................................... 13,516
---------
Cash paid.......................................... $ 22,035
=========
(g) Reflects the sale of 2,300,000 shares of Common Stock in the Offering
at the assumed offering price of $26.00 per share and the receipt and
application of $56.2 million in net proceeds to the repayment of
long-term obligations as follows:
Common Stock....................................... $ 23
Additional paid-in-capital......................... 56,187
---------
Net proceeds....................................... 56,210
Long-term obligations.............................. (56,210)
---------
$ --
=========
</TABLE>
19
<PAGE> 22
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
IPO HISTORICAL ACQUISITIONS PRO FORMA OFFERING
HISTORICAL PRO FORMA PRO FORMA ----------------- PRO FORMA ACQUISITIONS PRO FORMA
PROVINCE ADJUSTMENTS IPO HAVASU ELKO ADJUSTMENTS CONSOLIDATED ADJUSTMENTS
---------- ----------- --------- ------- ------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Net patient service
revenue................. $149,296 $149,296 $55,101 $25,863 $230,260
Management and
professional services... 9,691 9,691 -- -- 9,691
Reimbursable expenses..... 6,674 6,674 -- -- 6,674
Other..................... 4,866 4,866 -- 497 5,363
-------- ------- -------- ------- ------- -------- -------- -------
Net operating
revenue........... 170,527 -- 170,527 55,101 26,360 -- 251,988 --
Expenses:
Salaries, wages and
benefits................ 66,172 66,172 16,626 13,333 96,131
Reimbursable expenses..... 6,674 6,674 -- -- 6,674
Purchased services........ 23,242 23,242 -- 1,172 24,414
Supplies.................. 16,574 16,574 7,457 3,619 27,650
Provision for doubtful
accounts................ 12,812 12,812 4,541 2,794 20,147
Other operating expenses.. 16,318 16,318 14,407 2,353 33,078
Rentals and leases........ 4,888 4,888 -- 282 5,170
Depreciation and
amortization............ 7,557 7,557 1,689 1,287 $ 1,560(d)
(145)(e) 11,948
Interest expense.......... 8,121 $(3,334)(a) 4,787 1,628 139 7,170(f)
1,687(g) 15,411 $(4,665)(h)
Minority interest......... 329 329 -- -- 329
Loss on sale of assets.... 115 115 -- -- 115
-------- ------- -------- ------- ------- -------- -------- -------
Total expenses...... 162,802 (3,334) 159,468 46,348 24,979 10,272 241,067 (4,665)
-------- ------- -------- ------- ------- -------- -------- -------
Income before income taxes.. 7,725 3,334 11,059 8,753 1,381 (10,272) 10,921 4,665
Income taxes.............. 3,650 1,299(b) 4,949 -- -- (54)(b) 4,895 1,817(b)
-------- ------- -------- ------- ------- -------- -------- -------
Net income.................. 4,075 2,035 6,110 8,753 1,381 (10,218) 6,026 2,848
Preferred stock dividends
and accretion............. (5,077) 5,077(c) -- -- --
-------- ------- -------- ------- ------- -------- -------- -------
Net income (loss) to common
shareholders.............. $ (1,002) $ 7,112 $ 6,110 $ 8,753 $ 1,381 $(10,218) $ 6,026 $ 2,848
======== ======= ======== ======= ======= ======== ======== =======
Basic earnings (loss) per
common share:
Net income................ $ 0.71 $ 0.49
Preferred stock dividends
and accretion........... (0.88) --
-------- --------
Net income (loss) per
common share............ $ (0.17) $ 0.49
======== ========
Diluted earnings (loss) per
common share:
Net income................ $ 0.71 $ 0.46
Preferred stock dividends
and accretion........... (0.88) --
-------- --------
Net income (loss) per
common share............ $ (0.17) $ 0.46
======== ========
Weighted average shares:
Basic earnings per common
share................... 5,787 12,466
Diluted earnings per
common share............ 5,787 13,140
<CAPTION>
PRO FORMA
OFFERING
CONSOLIDATED
-------------
<S> <C>
Revenue:
Net patient service
revenue................. $230,260
Management and
professional services... 9,691
Reimbursable expenses..... 6,674
Other..................... 5,363
--------
Net operating
revenue........... 251,988
Expenses:
Salaries, wages and
benefits................ 96,131
Reimbursable expenses..... 6,674
Purchased services........ 24,414
Supplies.................. 27,650
Provision for doubtful
accounts................ 20,147
Other operating expenses.. 33,078
Rentals and leases........ 5,170
Depreciation and
amortization............
11,948
Interest expense..........
10,746
Minority interest......... 329
Loss on sale of assets.... 115
--------
Total expenses...... 236,402
--------
Income before income taxes.. 15,586
Income taxes.............. 6,712
--------
Net income.................. 8,874
Preferred stock dividends
and accretion............. --
--------
Net income (loss) to common
shareholders.............. $ 8,874
========
Basic earnings (loss) per
common share:
Net income................ $ 0.60
Preferred stock dividends
and accretion........... --
--------
Net income (loss) per
common share............ $ 0.60
========
Diluted earnings (loss) per
common share:
Net income................ $ 0.57
Preferred stock dividends
and accretion........... --
--------
Net income (loss) per
common share............ $ 0.57
========
Weighted average shares:
Basic earnings per common
share................... 14,766
Diluted earnings per
common share............ 15,440
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated statements
of income.
20
<PAGE> 23
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
IPO HISTORICAL ACQUISITIONS PRO FORMA OFFERING
HISTORICAL PRO FORMA PRO FORMA ---------------- PRO FORMA ACQUISITIONS PRO FORMA
PROVINCE ADJUSTMENTS IPO HAVASU ELKO ADJUSTMENTS CONSOLIDATED ADJUSTMENTS
---------- ----------- --------- ------- ------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Net patient service
revenue................... $42,750 $42,750 $15,168 $7,417 $65,335
Management and professional
services.................. 2,930 2,930 -- -- 2,930
Reimbursable expenses....... 1,562 1,562 -- -- 1,562
Other....................... 609 609 -- 134 743
------- ----- ------- ------- ------ ------- ------- -------
Net operating
revenue............. 47,851 -- 47,851 15,168 7,551 -- 70,570 --
Expenses:
Salaries, wages and
benefits.................. 18,606 18,606 4,786 3,859 27,251
Reimbursable expenses....... 1,562 1,562 -- -- 1,562
Purchased services.......... 6,035 6,035 -- 331 6,366
Supplies.................... 4,627 4,627 2,218 1,007 7,852
Provision for doubtful
accounts.................. 3,082 3,082 996 521 4,599
Other operating expenses.... 4,257 4,257 3,483 690 8,430
Rentals and leases.......... 1,474 1,474 -- 86 1,560
Depreciation and
amortization.............. 2,205 2,205 459 366 $ 353(d)
(80)(e) 3,303
Interest expense............ 1,855 $(474)(a) 1,381 395 28 1,840(f)
436(g) 4,080 $(1,185)(h)
Minority interest........... 68 68 -- -- 68
Loss on sale of assets...... 33 33 -- -- 33
------- ----- ------- ------- ------ ------- ------- -------
Total expenses........ 43,804 (474) 43,330 12,337 6,888 2,549 65,104 (1,185)
------- ----- ------- ------- ------ ------- ------- -------
Income before income taxes.... 4,047 474 4,521 2,831 663 (2,549) 5,466 1,185
Income taxes.................. 1,772 189(b) 1,961 -- -- 368(b) 2,329 462(b)
------- ----- ------- ------- ------ ------- ------- -------
Net income.................... 2,275 285 2,560 2,831 663 (2,917) 3,137 723
Preferred stock dividends and
accretion................... (696) 696(c) -- -- -- --
------- ----- ------- ------- ------ ------- ------- -------
Net income to common
shareholders................ $ 1,579 $ 981 $ 2,560 $ 2,831 $ 663 $(2,917) $ 3,137 $ 723
======= ===== ======= ======= ====== ======= ======= =======
Basic earnings per common
share:
Net income.................. $ 0.24 $ 0.20
Preferred stock dividends
and accretion............. (0.07) --
------- -------
Net income per common
share..................... $ 0.17 $ 0.20
======= =======
Diluted earnings per common
share:
Net income.................. $ 0.23 $ 0.19
Preferred stock dividends
and accretion............. (0.07) --
------- -------
Net income per common
share..................... $ 0.16 $ 0.19
======= =======
Weighted average shares:
Basic earnings per common
share..................... 9,343 13,010
Diluted earnings per common
share..................... 9,615 13,282
<CAPTION>
PRO FORMA
OFFERING
CONSOLIDATED
-------------
<S> <C>
Revenue:
Net patient service
revenue................... $65,335
Management and professional
services.................. 2,930
Reimbursable expenses....... 1,562
Other....................... 743
-------
Net operating
revenue............. 70,570
Expenses:
Salaries, wages and
benefits.................. 27,251
Reimbursable expenses....... 1,562
Purchased services.......... 6,366
Supplies.................... 7,852
Provision for doubtful
accounts.................. 4,599
Other operating expenses.... 8,430
Rentals and leases.......... 1,560
Depreciation and
amortization..............
3,303
Interest expense............
2,895
Minority interest........... 68
Loss on sale of assets...... 33
-------
Total expenses........ 63,919
-------
Income before income taxes.... 6,651
Income taxes.................. 2,791
-------
Net income.................... 3,860
Preferred stock dividends and
accretion................... --
-------
Net income to common
shareholders................ $ 3,860
=======
Basic earnings per common
share:
Net income.................. $ 0.25
Preferred stock dividends
and accretion............. --
-------
Net income per common
share..................... $ 0.25
=======
Diluted earnings per common
share:
Net income.................. $ 0.25
Preferred stock dividends
and accretion............. --
-------
Net income per common
share..................... $ 0.25
=======
Weighted average shares:
Basic earnings per common
share..................... 15,310
Diluted earnings per common
share..................... 15,582
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated statements
of income.
21
<PAGE> 24
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- ---------------
(a) Reflects the elimination of interest expense associated with the $39.6
million of long-term obligations repaid with the net proceeds of the IPO.
(b) Reflects the inclusion of the income tax expense (benefit) based on the
combined federal and state statutory rate of 39.0% applied to adjusted
pre-tax income or loss.
(c) Reflects the elimination of the dividends and the accretion of issuance
costs on the Senior Preferred Stock redeemed with a portion of the net
proceeds of the IPO and the Junior Preferred Stock converted into Common
Stock in connection with the IPO.
(d) Reflects the elimination of the historical depreciation expense of Havasu,
and the inclusion of the Company's depreciation of property, plant and
equipment and amortization of goodwill and other intangible assets.
(e) Reflects the elimination of the historical depreciation expense of Elko, and
the inclusion of the Company's depreciation of property, plant and equipment
and amortization of goodwill and other intangible assets.
(f) Reflects the elimination of the historical interest expense related to the
debt of Havasu not assumed in the acquisition, and the inclusion of the
Company's interest expense related to the debt used to finance the
acquisition.
(g) Reflects the elimination of the historical interest expense related to the
debt of Elko not assumed in the acquisition, and the inclusion of the
Company's interest expense related to the debt used to finance the
acquisition.
(h) Reflects the elimination of the historical interest expense related to the
$56.2 million of long-term obligations to be repaid with the net proceeds of
the Offering.
22
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of (i)
the Company's predecessor (Brim) as of and for each of the three fiscal years
ended December 31, 1995, and as of December 18, 1996 and for the period January
1, 1996 to December 18, 1996; and (ii) the Company as of December 31, 1996 and
for the period February 2, 1996 to December 31, 1996, and as of and for the year
ended December 31, 1997 and as of and for each of the three-month periods ended
March 31, 1997 and 1998. The selected financial data for the predecessor and the
Company has been derived from the audited consolidated financial statements of
the predecessor and the Company, except for the March 31, 1997 and 1998
financial data, which information has been derived from the unaudited condensed
consolidated financial statements of the Company. These unaudited condensed
consolidated financial statements include all adjustments necessary (consisting
of normal recurring accruals) for a fair presentation of the financial position
and the results of operations for these periods. Operating results for the three
months ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 1998. The selected
consolidated financial data are qualified by, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
BRIM (PREDECESSOR)(1)(2) COMPANY (SUCCESSOR)(1)(2)
--------------------------------------------- -------------------------------------------------
PERIOD PERIOD THREE MONTHS
YEAR ENDED DECEMBER 31, JAN. 1 1996 FEB. 2 1996 YEAR ENDED MARCH 31,
----------------------------- TO DEC. 18, TO DEC. 31, ENDED ------------------
1993 1994 1995 1996 1996 DEC. 31, 1997 1997 1998
------- -------- -------- ------------- ------------ ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net operating revenue....... $84,859 $102,067 $101,214 $112,600 $ 17,255 $170,527 $40,459 $ 47,851
Operating expenses.......... 80,784 96,887 97,993 109,129 18,268 154,566 35,893 41,916
Interest expense............ 1,097 935 738 1,675 976 8,121 1,761 1,855
Costs of recapitalization... -- -- -- 8,951 -- -- -- --
Loss (gain) on sale of
assets.................... (10) (635) (2,814) 442 -- 115 87 33
------- -------- -------- -------- -------- -------- ------- --------
Income (loss) from
continuing operations
before provision for
income taxes and
extraordinary item........ 2,988 4,880 5,297 (7,597) (1,989) 7,725 2,718 4,047
Provision (benefit) for
income taxes.............. 1,772 2,022 1,928 (2,290) (673) 3,650 1,211 1,772
------- -------- -------- -------- -------- -------- ------- --------
Income (loss) from
continuing operations
before extraordinary
item...................... 1,216 2,858 3,369 (5,307) (1,316) 4,075 1,507 2,275
Net income (loss)........... $ 2,950 $ 2,701 $ 3,105 $ 708 (1,578) 4,075 1,507 2,275
Net income (loss) to common
shareholders $ (1,750) $ (1,002) $ 392 $ 1,579
Net income (loss) per share
to common shareholders
before extraordinary
item -- basic(3).......... $ (0.52) $ (0.17) $ 0.07 $ 0.17
Net income (loss) per share
to common shareholders
before extraordinary
item -- diluted(3)........ $ (0.52) $ (0.17) $ 0.06 $ 0.16
======== ======== ======= ========
Cash dividends declared per
common share.............. $ -- $ -- $ -- $ --
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents... $ 2,477 $ 1,819 $ 2,287 $ 27,828 $ 11,256 $ 4,186 $ 7,080 $ 6,675
Total assets................ 47,463 50,170 50,888 76,998 160,521 176,461 156,633 181,222
Long-term obligations, less
current maturities........ 11,884 9,371 7,161 75,995 77,789 83,043 78,564 52,166
Mandatory redeemable
preferred stock........... 8,816 8,816 8,816 31,824 46,227 50,162 46,227 --
Common stockholders' equity
(deficit)................. 9,973 12,380 15,366 (56,308) (490) (1,056) (98) 95,844
</TABLE>
23
<PAGE> 26
- ---------------
(1) PHC was formed on February 2, 1996. On December 18, 1996, Brim completed a
leveraged recapitalization. Immediately thereafter on December 18, 1996, PHC
was merged with and into a subsidiary of Brim in a transaction in which Brim
issued junior preferred stock and common stock in exchange for all of the
outstanding common stock of PHC. Because the PHC shareholders became owners
of a majority of the outstanding shares of Brim after the Merger, PHC was
considered the acquiring enterprise for financial reporting purposes and the
transaction was accounted for as a reverse acquisition. Therefore, the
historical financial statements of PHC replaced the historical financial
statements of Brim, the assets and liabilities of Brim were recorded at fair
value as required by the purchase method of accounting, and the operations
of Brim were reflected in the operations of the combined enterprise from the
date of acquisition. Since PHC had been in existence for less than a year at
December 31, 1996, and because Brim had been in existence for several years,
PHC is considered the successor to Brim's operations. The balance sheet data
of Brim (Predecessor) as of December 18, 1996 represents the historical cost
basis of Brim's assets and liabilities after the leveraged recapitalization
but prior to the reverse acquisition. The reverse acquisition resulted in a
new basis of accounting such that Brim's assets and liabilities were
recorded at their fair value in the Company's consolidated balance sheet
upon consummation of the reverse acquisition. Although PHC was considered
the acquiring enterprise for financial reporting purposes, PHC became a
wholly-owned subsidiary of Brim, the predecessor company, as a result of the
Merger.
(2) The financial statements of the Company and Brim for the periods presented
are not strictly comparable due to the significant effect that acquisitions,
divestitures and the Recapitalization have had on such statements. See Note
3 of Notes to Consolidated Financial Statements of the Company, and Notes 2
and 3 of Notes to Consolidated Financial Statements of Brim.
(3) In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share and includes dilutive equivalent shares in the
calculation unless the effect is anti-dilutive. All earnings per share
amounts for all periods have been presented, and where appropriate, restated
to conform to Statement 128 requirements.
24
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Registration Statement.
OVERVIEW
Province Healthcare Company is an owner and operator of acute care
hospitals in attractive non-urban markets. The Company currently owns and
operates 10 general acute care hospitals in six states with a total of 739
licensed beds, and manages 50 hospitals in 19 states with a total of 3,422
licensed beds.
PHC of Delaware, Inc. ("PHC"), a subsidiary of the Company, was founded in
February 1996 by GTCR Fund IV and Martin S. Rash to acquire and operate
hospitals in attractive non-urban markets. PHC acquired its first hospital,
Memorial Mother Frances in Palestine, Texas, in July 1996 and acquired Starke
Memorial in Knox, Indiana, in October 1996.
On December 18, 1996, a subsidiary of Brim, Inc. and PHC merged in a
transaction in which Brim issued Junior Preferred Stock and Common Stock in
exchange for all of the outstanding common stock of PHC and PHC became a
wholly-owned subsidiary of Brim. Since the PHC shareholders became owners of a
majority of the outstanding shares of Brim after the Merger, PHC was considered
the acquiring enterprise for financial reporting purposes and the transaction
was accounted for as a reverse acquisition. Therefore, the historical financial
statements of PHC replaced the historical financial statements of Brim, the
assets and liabilities of Brim were recorded at fair value as required by the
purchase method of accounting, and the operations of Brim were reflected in the
operations of the combined enterprise from the date of acquisition. Since PHC
had been in existence for less than a year at December 31, 1996, and because
Brim had been in existence for several years, PHC is considered the successor to
Brim's operations. Although PHC was considered the acquiring enterprise for
financial reporting purposes, PHC became a wholly owned subsidiary of Brim, the
predecessor company, as a result of the Merger.
On February 4, 1998, the Company merged with and into Province Healthcare
Company, a Delaware corporation, to change the Company's name and jurisdiction
of incorporation and to make certain other changes to the Company's authorized
capitalization.
On February 10, 1998, the Company completed its initial public offering of
common stock at a price of $16.00 per share (the "IPO"). In connection with the
IPO, 32,295 shares of Junior Preferred Stock were converted into 2,204,420
shares of Common Stock at the public offering price of the Common Stock. The net
proceeds from the IPO were used to reduce the balance of the outstanding term
and revolving senior credit loans ($39.6 million), redeem the outstanding shares
of the Senior Preferred Stock plus accrued dividends ($22.7 million), and
repurchase 930,266 shares of the Common Stock which were issued upon conversion
of the Junior Preferred Stock ($14.9 million).
IMPACT OF ACQUISITIONS AND DIVESTITURES
An integral part of the Company's strategy is to acquire non-urban acute
care hospitals. Because of the financial impact of the Company's recent
acquisitions, it is difficult to make meaningful comparisons between the
Company's financial statements for the fiscal periods presented. In addition,
due to the relatively small number of owned and leased hospitals, each hospital
acquisition can materially affect the overall operating margin of the Company.
Upon the acquisition of a hospital, the Company typically takes a number of
steps to lower operating costs. The impact of such actions may be offset by cost
increases to expand services, strengthen medical staff and improve market
position. The benefits of these investments and of other activities to improve
operating margins generally do not occur immediately. Consequently, the
financial performance of a newly-acquired hospital may adversely affect overall
operating margins in the near term. As the Company
25
<PAGE> 28
makes additional hospital acquisitions, the Company expects that this effect
will be mitigated by the expanded financial base of existing hospitals and the
allocation of corporate overhead among a larger number of hospitals.
In February 1995, Brim acquired two senior living residences for $15.8
million. In September 1995, Brim sold the real property of the two facilities
and leased them back under an operating lease agreement for a minimum lease term
of 15 years. In May 1995, Brim sold Fifth Avenue Hospital, located in Seattle,
Washington, for $6.0 million and recorded a pre-tax gain on this transaction of
$2.5 million.
In February 1996, Brim acquired Parkview Regional Hospital by entering into
a 15-year operating lease agreement with two five-year renewal terms, and by
purchasing certain assets and assuming certain liabilities for a purchase price
of $1.8 million. In December 1996, Brim sold its senior living business (see
"-- Discontinued Operations") and certain assets related to three medical office
buildings.
In July 1996, PHC purchased certain assets and assumed certain liabilities
of Memorial Mother Frances for a purchase price of $23.2 million in a
transaction resulting in PHC owning 95.0% of the hospital. In October 1996, PHC
acquired Starke Memorial by assuming certain liabilities and entering into a
capital lease agreement, and by purchasing certain net assets for a purchase
price of $7.7 million. On December 18, 1996, a subsidiary of Brim and PHC merged
in a transaction which has been accounted for as a reverse acquisition (i.e.,
the acquisition of Brim by PHC).
In August 1997, the Company acquired Colorado River by assuming certain
liabilities and entering into a lease agreement, and by purchasing certain net
assets for a purchase price of $2.6 million.
On May 1, 1998, the Company acquired Havasu Samaritan Regional Hospital by
purchasing certain net assets and assuming certain liabilities for a purchase
price of $105.5 million.
On June 11, 1998, the Company acquired Elko General Hospital by purchasing
certain net assets and assuming certain liabilities for a purchase price of
$21.7 million. The terms of the acquisition provide that the Company will
construct and open a replacement hospital facility within 36 months of the
acquisition date.
In June 1998, the Company entered into an agreement to lease and to acquire
certain operating assets of Moosa Memorial Hospital (also known as Eunice
Regional Medical Center) in Eunice, Louisiana. The hospital is currently being
managed by the Company pursuant to a management services agreement. The lease is
to be for a term of 10 years with total rental payments of $130,000. The lease
will further provide that the Company will construct a replacement hospital
facility in the community pursuant to the terms of the lease. The transaction is
scheduled to close on or before July 31, 1998.
The December 31, 1996 results of operations of the Company include five
months of operations for Memorial Mother Frances, three months of operations for
Starke Memorial, and 13 days of operations for Brim. Brim's operations consisted
of five owned/leased hospitals and a hospital management company operation. In
the discussion that follows, Memorial Mother Frances, Starke Memorial, Parkview
and Brim are referred to as the "1996 Acquisitions." The December 31, 1997
results include 12 months of operations for all the above entities, plus five
months of operations for Colorado River. The March 31, 1998 results include the
results of operations for all the Company's hospitals other than the 1998
Acquisitions.
DISCONTINUED OPERATIONS
During 1995 and 1996, Brim discontinued certain operations. In May 1995,
Brim discontinued its business of providing managed care administration and
practice management services to physician groups, reporting an after-tax loss of
$0.7 million on the disposition. In September 1995,
26
<PAGE> 29
Brim disposed of its stand-alone business of providing surgery on an outpatient
basis for a loss of $0.4 million, net of taxes. In December 1996, immediately
prior to the Recapitalization, Brim sold its senior living business for a gain
of $5.5 million, net of taxes. The net results of operations of these businesses
are included in "Discontinued Operations" in the 1995 and 1996 consolidated
financial statements of Brim, Inc.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, information
expressed as a percentage of net operating revenue. Such information has been
derived from the consolidated statements of operations of the Company
(successor) and Brim (predecessor) included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
BRIM (PREDECESSOR) COMPANY (SUCCESSOR)
--------------------------- -------------------------------------------
PERIOD FROM PERIOD FROM THREE MONTHS
JANUARY 1, FEBRUARY 2, ENDED
YEAR ENDED 1996 TO 1996 TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 18, DECEMBER 31, DECEMBER 31, -------------
1995 1996 1996 1997 1997 1998
------------ ------------ ------------ ------------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Net patient service
revenue.................... 75.0% 78.1% 95.2% 87.5% 85.3% 89.3%
Management and professional
services revenue........... 19.3 16.3 3.5 9.6 12.3 9.4
Other revenue................ 5.7 5.6 1.3 2.9 2.4 1.3
----- ----- ----- ----- ----- -----
Net operating revenue........ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Salaries, wages and
benefits................. 54.7 51.5 44.0 42.7 42.3 42.2
Purchased services......... 14.3 15.3 13.2 13.6 12.5 12.6
Supplies................... 10.1 10.0 11.0 9.7 9.5 9.6
Provision for doubtful
accounts................. 4.5 6.8 11.1 7.5 5.9 6.4
Other operating expenses... 7.9 7.7 16.6 9.6 10.7 8.9
Rentals and leases......... 3.5 4.0 1.2 2.9 3.3 3.1
Depreciation and
amortization............. 1.9 1.6 7.6 4.4 4.4 4.6
Interest expense........... 0.7 1.5 5.7 4.8 4.4 3.9
Minority interest.......... -- -- 1.1 0.2 0.1 0.1
Costs of
recapitalization......... -- 7.9 -- -- -- --
Loss (gain) on sale of
assets................... (2.8) 0.4 -- 0.1 0.2 0.1
----- ----- ----- ----- ----- -----
Income (loss) from continuing
operations before provision
for income taxes and
extraordinary item......... 5.2% (6.7)% (11.5)% 4.5% 6.7% 8.5%
Income (loss) from continuing
operations before
extraordinary item......... 3.3% (4.7)% (7.6)% 2.4% 3.7% 4.8%
Net income (loss)............ 3.1% 0.6% (9.1)% 2.4% 3.7% 4.8%
</TABLE>
Hospital revenues are received primarily from Medicare, Medicaid and
commercial insurance. The percentage of revenues received from the Medicare
program is expected to increase due to the general aging of the population. The
payment rates under the Medicare program for inpatients are based on a
prospective payment system ("PPS"), based upon the diagnosis of a patient. While
these rates are indexed for inflation annually, the increases have historically
been less than actual inflation. In addition, states, insurance companies and
employers are actively negotiating the amounts paid to hospitals as opposed to
their standard rates. The trend toward managed care, including health
maintenance organizations, preferred provider organizations and various other
forms of managed care, may affect the hospitals' ability to maintain their
current rate of net revenue growth.
27
<PAGE> 30
Net operating revenue is comprised of: (i) net patient service revenue from
the Company's owned and leased hospitals; (ii) management and professional
services revenue; and (iii) other revenue.
Net patient service revenue is reported net of contractual adjustments and
policy discounts. The adjustments principally result from differences between
the hospitals' customary charges and payment rates under the Medicare and
Medicaid programs. Customary charges have generally increased at a faster rate
than the rate of increase for Medicare and Medicaid payments. Operating expenses
of the hospitals primarily consist of salaries and benefits, purchased services,
supplies, provision for doubtful accounts and other operating expenses
(principally consisting of utilities, insurance, property taxes, travel,
freight, postage, telephone, advertising, repairs and maintenance).
Management and professional services revenue is comprised of fees from
management and professional consulting services provided to third-party
hospitals pursuant to management contracts and consulting arrangements, plus
reimbursable expenses. Operating expenses for the management and professional
services business primarily consist of salaries and benefits and reimbursable
expenses.
Other revenues include interest income and other miscellaneous revenue.
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Net operating revenue was $47.9 million for the three months ended March
31, 1998, compared to $40.5 million for the comparable period of 1997, an
increase of $7.4 million or 18.3%.
Net patient service revenue totaled $42.8 million for the three months
ended March 31, 1998, compared to $34.5 million for the three months ended March
31, 1997, an increase of $8.3 million or 24.1%. Net patient service revenue
increased $3.4 million, or 9.8%, at hospitals owned during both periods ("same
hospital basis"), resulting from inpatient and outpatient volume increases, as
well as price increases. The remaining increase of $4.9 million was primarily
attributable to the Colorado River Acquisition.
Management and professional services revenue totaled $4.5 million for the
three months ended March 31, 1998, compared to $5.0 million for the three months
ended March 31, 1997, a decrease of $0.5 million or 10.0%. This decrease
resulted primarily from a net loss in the number of management contracts and a
decrease in consulting revenues. Reimbursable expenses decreased $0.1 million or
5.9%.
Salaries, wages and benefits totaled $18.6 million for the three months
ended March 31, 1998, compared to $15.4 million for the three months ended March
31, 1997, an increase of $3.2 million or 20.8%. Salaries, wages and benefits
increased $1.4 million, or 11.1%, on a same hospital basis, due primarily to an
increase in hospitals' volume and pay rate increases. The remaining increase of
$1.8 million was primarily attributable to the Colorado River Acquisition ($1.6
million) and rate increases at the management company and the corporate office.
Purchased services totaled $6.0 million for the three months ended March
31, 1998, compared to $5.0 million for the three months ended March 31, 1997, an
increase of $1.0 million or 20.0%. Purchased services increased $0.5 million, or
12.3%, on a same hospital basis, primarily as a result of an increase in
contract labor due to a shortage of nurses. The remaining increase of $0.5
million was primarily attributable to the Colorado River Acquisition ($0.4
million) and professional fees as a result of acquisition activity.
Supplies expense totaled $4.6 million for the three months ended March 31,
1998, compared to $3.8 million for the three months ended March 31, 1997, an
increase of $0.8 million or 21.1%. Supplies expense increased $0.4 million, or
9.6%, on a same hospital basis, due primarily to volume increases. The remaining
$0.4 million was primarily attributable to the Colorado River Acquisition.
28
<PAGE> 31
Provision for doubtful accounts totaled $3.1 million for the three months
ended March 31, 1998, compared to $2.4 million for the three months ended March
31, 1997, an increase of $0.7 million, or 29.2%. Provision for doubtful accounts
increased $0.4 million, or 15.3%, on a same hospital basis, primarily as a
result of increased net patient service revenue. The remaining $0.3 million was
primarily attributable to the Colorado River Acquisition.
Other operating expenses totaled $4.3 million for the three months ended
March 31, 1998, compared to $4.4 million for the three months ended March 31,
1997, a decrease of $0.1 million, or 2.3%. Other operating expenses decreased
$0.2 million, or 7.2%, on a same hospital basis, primarily as a result of lower
insurance and property tax expense. The Colorado River Acquisition resulted in
an increase of $0.3 million in other operating expenses. Other operating
expenses at the management company and the corporate office decreased $0.2
million.
Rentals and leases totaled $1.5 million for the three months ended March
31, 1998, compared to $1.3 million for the three months ended March 31, 1997, an
increase of $0.2 million or 15.4%, resulting primarily from higher office
building and office equipment rental expense at the corporate office and the
Colorado River Acquisition.
Depreciation and amortization totaled $2.2 million for the three months
ended March 31, 1998, compared to $1.8 million for the three months ended March
31, 1997, an increase of $0.4 million, or 22.2%. Depreciation and amortization
increased $0.3 million, or 22.2% on a same hospital basis, primarily as a result
of capital expenditures. The remaining $0.1 million increase was primarily
attributable to the Colorado River Acquisition.
Interest expense totaled $1.9 million for the three months ended March 31,
1998, compared to $1.8 million for the three months ended March 31, 1997, an
increase of $0.1 million, or 5.6%, primarily as a result of higher interest
rates.
The net result of the above was that the Company recorded net income of
$2.3 million for the three months ended March 31, 1998, compared to $1.5 million
for the three months ended March 31, 1997, an increase of $0.8 million, or
53.3%.
Year Ended December 31, 1997 Compared to Period From February 2, 1996 (PHC's
Inception) to December 31, 1996 (Successor)
The December 31, 1996 results of operations include five months of
operations for Memorial Mother Frances, three months of operations for Starke
Memorial, and 13 days of operations for Brim. The December 31, 1997 results
include 12 months of operations for the 1996 Acquisitions plus five months of
operations for Colorado River.
Net operating revenue was $170.5 million in 1997, compared to $17.3 million
in 1996, an increase of $153.2 million.
Net patient service revenue totaled $149.3 million in 1997, compared to
$16.4 million in 1996, an increase of $132.9 million. This increase is
principally the result of a full year's operations for the 1996 Acquisitions.
Net patient services revenue is shown net of contractual adjustments of $100.1
million and $13.5 million in 1997 and 1996, respectively. Cost report
settlements and the filing of cost reports in the current year resulted in
positive revenue adjustments of $0 and $3.3 million (2.2% of net patient service
revenue) for the period February 2, 1996 to December 31, 1996 and the year ended
December 31, 1997, respectively.
Management and professional services revenue totaled $16.4 million in 1997,
which consisted of management and professional services fees and reimbursable
expenses of $9.7 million and $6.7 million, respectively. Management and
professional services revenue totaled $0.6 million in 1996, including $0.3
million of reimbursable expenses, and related to the 13 days of operations
following the acquisition of Brim. Reimbursable expenses (which are included in
operating revenue and
29
<PAGE> 32
operating expenses at the same amount) are comprised of salaries, employee
benefits and other costs paid by the Company and fully reimbursed by client
hospitals.
Other revenue totaled $4.9 million in 1997, compared to $0.2 million in
1996. The Company did not have other revenue prior to its acquisition of Brim in
December 1996.
Salaries, wages and benefits totaled $72.8 million in 1997, compared to
$7.6 million in 1996, an increase of $65.2 million, principally as a result of a
full year of operations for the 1996 Acquisitions. Salaries, wages and benefits,
excluding reimbursable expenses of $6.7 million and $0.3 million in 1997 and in
1996, respectively increased $55.7 million.
Purchased services expense totaled $23.2 million in 1997, compared to $2.3
million in 1996, an increase of $20.9 million, principally as a result of a full
year of operations for the 1996 Acquisitions.
Supplies expense totaled $16.6 million in 1997 compared to $1.9 million in
1996, an increase of $14.7 million, principally as a result of a full year of
operations for the 1996 Acquisitions.
The provision for doubtful accounts totaled $12.8 million in 1997, compared
to $1.9 million in 1996, an increase of $10.9 million, principally as a result
of a full year of operations for the 1996 Acquisitions.
Other operating expenses totaled $16.3 million in 1997, compared to $2.9
million in 1996, an increase of $13.4 million, principally as a result of a full
year of operations for the 1996 Acquisitions.
Rentals and leases totaled $4.9 million in 1997, compared to $0.2 million
in 1996, an increase of $4.7 million, principally as a result of a full year of
operations for the 1996 Acquisitions.
Depreciation and amortization totaled $7.6 million in 1997, compared to
$1.3 million in 1996, an increase of $6.3 million, principally as a result of a
full year of operations for the 1996 Acquisitions.
Interest expense totaled $8.1 million in 1997, compared to $1.0 million in
1996, an increase of $7.1 million. This increase resulted primarily from $52.7
million of new bank debt incurred in connection with the Recapitalization,
immediately prior to the acquisition of Brim, and an increase of $10.0 million
in bank debt during 1997 to fund the acquisition of Colorado River and the
buyout of the operating lease at Ojai Valley Community Hospital.
The Company recorded a loss on sale of assets of $0.1 million in 1997,
related primarily to the sale of unused assets at the hospitals.
The combined federal and state effective tax rates for 1997 and 1996 were
47.2% and 33.8%, respectively. For information concerning the provision for
income taxes, as well as information regarding differences between effective tax
rates and statutory rates, see Note 9 of the Notes to Consolidated Financial
Statements.
Period from February 2, 1996 (PHC's inception) to December 31, 1996
(Successor)
PHC of Delaware, Inc. was founded on February 2, 1996, by GTCR Fund IV and
Martin S. Rash to acquire and operate hospitals in attractive non-urban markets.
In July 1996, PHC purchased certain assets totaling $26.4 million and assumed
certain liabilities totaling $3.2 million of Memorial Mother Frances for a
purchase price of $23.2 million. In October 1996, PHC acquired Starke Memorial
by assuming certain liabilities and entering into a capital lease agreement and
by purchasing certain net assets for a purchase price of $7.7 million. On
December 18, 1996, a subsidiary of Brim merged into PHC, and PHC became a
subsidiary of Brim. In exchange for their shares in PHC, the PHC shareholders
received 14,403 shares of Brim's redeemable Junior Preferred Stock and 2,757,947
shares of Brim's Common Stock. This transaction has been accounted for as a
reverse acquisition under the purchase method of accounting. As a result, for
accounting purposes PHC was considered to have acquired Brim. The historical
financial statements of PHC became the historical financial statements of Brim
and include the results of Brim from the effective date of the
30
<PAGE> 33
Merger, December 18, 1996. As a result of these acquisitions, the Company has
unallocated purchase price of $7.3 million related to Starke Memorial and $52.3
million of cost in excess of net assets acquired related to Brim. The allocation
of the Starke purchase price was finalized in the third quarter of 1997 and
consisted of property, plant and equipment of $5.2 million and cost in excess of
net assets acquired of $2.3 million. The final allocation did not have a
significant impact on the Company's consolidated results of operations.
The results of operations of the Company for the period February 2, 1996 to
December 31, 1996 include the operations of Memorial Mother Frances since the
acquisition date of July 26, 1996, the results of operations of Starke Memorial
since the acquisition date of October 1, 1996, and the results of operations of
Brim since the Merger date of December 18, 1996.
Net operating revenue totaled $17.3 million for the period. Net patient
service revenue totaled $16.4 million (net of contractual adjustments of $13.5
million), or 95.2% of net operating revenue. Management and professional
services revenue totaled $0.6 million, or 3.5% of net operating revenue, and
other revenue totaled $0.2 million, or 1.3% of net operating revenue. The
management and professional services revenue relates to 13 days' revenue from
the management company acquired in the Brim Merger.
Interest expense of $1.0 million results principally from 13 days' interest
on the $52.7 million additional debt incurred by Brim to effect the
Recapitalization, immediately before the Merger with PHC, and interest on debt
incurred by PHC to effect the Memorial Mother Frances acquisition in July 1996
($13.7 million), and the Starke Memorial acquisition in October 1996 ($5.6
million).
All other operating expenses totaled $18.2 million.
Loss from early retirement of debt of $0.3 million (net of taxes) relates
to the refinancing of $19.3 million of debt at the time of the Merger with Brim,
and was treated as an extraordinary item for accounting purposes.
The Company recorded a net loss of $1.6 million for the period February 2,
1996 to December 18, 1996.
Period From January 1, 1996 to December 18, 1996 Compared to Year Ended
December 31, 1995 (Predecessor)
Net operating revenue was $112.6 million in 1996, compared to $101.2
million in 1995, an increase of $11.4 million, or 11.3%.
Net patient service revenue totaled $87.9 million in 1996, compared to
$75.9 million in 1995, an increase of $12.0 million, or 15.8%. This increase was
principally the result of the Parkview Regional Hospital acquisition ($9.1
million in net patient service revenue). Net patient service revenue increased
$2.9 million, or 3.8%, on a same hospital basis related to increased patient
volumes, new patient services and increased customary charges. Net patient
service revenue is shown net of contractual adjustments of $63.8 million and
$57.4 million in 1996 and 1995, respectively.
The components of management and professional services revenue were as
follows (in millions):
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED JANUARY 1 TO
DECEMBER 31, 1995 DECEMBER 18, 1996 INCREASE/(DECREASE)
----------------- ----------------- -------------------
<S> <C> <C> <C>
Management fees................ $10.5 $ 8.9 $(1.6)
Professional services fees..... 0.2 0.4 0.2
Reimbursable expenses.......... 8.9 9.0 0.1
----- ----- -----
Total................ $19.6 $18.3 $(1.3)
===== ===== =====
</TABLE>
31
<PAGE> 34
The decrease in management fees is principally the result of a decline in
the number of management contracts, offset partially by price increases.
Professional services fees increased $0.2 million in 1996 as a result of the
introduction of managed care consulting. Reimbursable expenses increased $0.1
million, or 1.1%, as a result of an increase in the number of management
contracts which provide for reimbursable expenses.
Other revenue totaled $6.4 million in 1996, compared to $5.8 million in
1995, an increase of $0.6 million, or 10.3%. This increase is principally
attributable to a $1.0 million fee received in 1996 relating to a terminated
merger.
Salaries, wages and benefits expenses totaled $58.1 million in 1996,
compared to $55.3 million in 1995, an increase of $2.8 million, or 5.1%.
Salaries, wages and benefits, excluding reimbursable expenses, increased $2.7
million, or 5.8%. The Parkview Regional Hospital acquisition accounted for $4.0
million of salary, wages and benefits expense, offset by a decrease of $1.3
million of salary, wages and benefits expense, or 2.8%, on a same hospital
basis, primarily as a result of the sale of Fifth Avenue Hospital in mid-1995.
Purchased services expense totaled $17.2 million in 1996, compared to $14.4
million in 1995, an increase of $2.8 million, or 19.4%. The Parkview Regional
Hospital acquisition accounted for $1.7 million of this increase. Purchased
services increased $1.1 million, or 14.6%, on a same hospital basis, primarily
as a result of increased professional fees at the corporate level related to the
Recapitalization.
Supplies expense totaled $11.2 million in 1996, compared to $10.1 million
in 1995, an increase of $1.1 million, or 10.9% as a result of the Parkview
Regional Hospital acquisition.
The provision for doubtful accounts totaled $7.7 million in 1996, compared
to $4.6 million in 1995, an increase of $3.1 million, or 67.4%. The Parkview
Regional Hospital acquisition (10 and a half month's operations in 1996)
accounted for $1.0 million of this increase. The provision increased $2.1
million, or 45.7%, on a same hospital basis. Of the same hospital increase,
approximately $0.5 million relates to a provision and write-off during 1996 for
accounts receivable acquired and subsequently deemed uncollectible at a clinic
purchased by one of the leased hospitals, and $0.6 million relates to a
provision and a write-off of uncollectible accounts receivable at the management
company. The remaining $0.9 million increase reflects a deterioration in the
aging of the accounts in 1996.
Other operating expenses totaled $8.7 million in 1996, compared to $8.0
million in 1995, an increase of $0.7 million, or 8.8%, principally as a result
of the Parkview Regional Hospital acquisition.
Rentals and leases totaled $4.5 million in 1996, compared to $3.6 million
in 1995, an increase of $0.9 million, or 25.0%. Of this increase, $0.4 million
resulted from the Parkview Regional Hospital acquisition. The remaining increase
resulted from scheduled rent increases in the long-term facilities leases and
other lease and rental obligations at the other hospitals.
Depreciation and amortization totaled $1.8 million in 1996, compared to
$2.0 million in 1995, a decrease of $0.2 million, or 10.0%. This decrease
resulted primarily from the sale of Fifth Avenue Hospital in May 1995 and the
short period in 1996.
Interest expense totaled $1.7 million in 1996, compared to $0.7 million in
1995, an increase of $1.0 million, or 142.9%. This increase resulted primarily
from interest penalties required to settle debt on property sold in connection
with the sale of the senior living business.
Recapitalization expense totaled $9.0 million in 1996. This expense
consisted of $8.0 million paid to settle options and $1.0 million of
transaction-related costs (principally professional fees).
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<PAGE> 35
A loss on sale of assets of $0.4 million was recorded in 1996, compared to
a gain of $2.8 million in 1995. The 1996 loss resulted from the sale of certain
assets in connection with the Recapitalization. The gain in 1995 resulted from
the sale of Fifth Avenue Hospital in May 1995.
The net result of the above was that Brim recorded a loss from continuing
operations before provision for income taxes of $7.6 million in 1996, compared
to income from continuing operations of $5.3 million in 1995, a decrease of
$12.9 million.
An income tax benefit of $2.3 million was recognized in 1996, as a result
of the $7.6 million loss from continuing operations (30.2% effective rate),
compared to tax expense of $1.9 million in 1995 on income of $5.3 million (36.4%
effective rate). For information concerning the provision for income taxes, as
well as information regarding differences between effective tax rates and
statutory rates, see Note 5 of the Notes to Consolidated Financial Statements of
Brim.
Income from discontinued operations, net of income taxes, in 1996 was $0.5
million, compared to $0.8 million in 1995, a decrease of $0.3 million, or 37.5%.
The income is from the operations of the senior living business, which was sold
in December 1996.
Gain on disposal of discontinued operations, net of income taxes, in 1996
was $5.5 million, compared to a loss of $1.0 million in 1995. The 1996 gain is
related to the sale of the senior living business. The 1995 loss resulted from
the loss on the sale of Brim's managed care business and Fifth Avenue Hospital.
The net result of the above was that Brim recorded net income in 1996 of
$0.7 million, compared to net income of $3.1 million in 1995, a decrease of $2.4
million, or 77.4%.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of $35.7 million,
including cash and cash equivalents of $6.7 million. The ratio of current assets
to current liabilities was 3.2 to 1.0 at March 31, 1998, compared to 1.8 to 1.0
at December 31, 1997.
As with the hospital industry in general, a major component of the
Company's working capital is accounts receivable arising from services provided
to patients of its owned and leased hospitals. Payments on accounts receivable
are made by third-party payors (Medicare, Medicaid, and insurance plans) and
directly by the patients. The Company believes that the average collection
period for its owned and leased hospitals is consistent with the industry
average. Fees for management and professional services are generally paid
monthly.
Cash used in operations totaled $0.8 million for the year ended December
31, 1997. Cash provided by (used in) operations totaled $0.2 million and ($1.3
million) for the three months ended March 31, 1998 and 1997, respectively.
Cash used in investing activities totaled $18.2 million for the year ended
December 31, 1997, and $2.5 million for each of the three month periods ended
March 31, 1998 and 1997. These amounts related to acquisitions of hospitals and
purchases and disposals of property, plant and equipment in each period.
Cash provided by financing activities totaled $12.0 million for the year
ended December 31, 1997. These amounts resulted from the proceeds from long-term
debt, net of debt refinancing and issuance of stock. Net cash provided by
financing activities was $4.8 million for the three months ended March 31, 1998,
primarily as a result of the IPO. Cash used in financing activities was $0.4
million in 1997, as a result of repayment of debt.
Capital expenditures, excluding acquisitions for each of the three month
periods ended March 31, 1998 and 1997, were $2.5 million and $2.4 million,
respectively. Capital expenditures for the owned hospitals may vary from year to
year depending on facility improvements and service enhancements undertaken by
the hospitals. The management services business does not require
33
<PAGE> 36
significant capital expenditures. The Company expects to make capital
expenditures in 1998 of approximately $12.0 million, exclusive of any
acquisitions of businesses. Planned capital expenditures for 1998 consist
principally of capital improvements to owned and leased hospitals. The Company
expects to fund these expenditures through cash provided by operating activities
and borrowings under the Senior Credit Facility.
The Company intends to acquire additional acute care hospitals, and is
actively seeking such acquisitions. There can be no assurance that the Company
will not require additional debt or equity financing for any particular
acquisition.
On February 10, 1998, the Company completed its IPO at a price of $16.00
per share, the net proceeds of which totaled $77.2 million. In addition, in
connection with the IPO, all outstanding shares of Junior Preferred Stock and
accumulated dividends thereon were converted into shares of Common Stock based
on the liquidation value of the Junior Preferred Stock and the IPO price. Of the
net proceeds from the IPO, $22.7 million was used to redeem all of the
outstanding shares of the Company's Senior Preferred Stock and pay all
accumulated dividends thereon, $14.9 million was used to repurchase a portion of
the Common Stock issued upon the conversion of Junior Preferred Stock at the
time of the IPO, and $39.6 million was used to repay amounts outstanding under
the Company's prior credit agreement. Upon completion of the IPO, the Company's
stockholders' equity consisted solely of common equity, which totaled $94.4
million on a pro forma basis as of December 31, 1997, after applying the net
proceeds of the IPO.
For further information concerning the IPO and the pro forma effect of the
IPO on the Company's financial condition and results of operations, see the
Company's unaudited pro forma balance sheet as of March 31, 1998 and the
unaudited pro forma statements of income for the year ended December 31, 1997
and the three months ended March 31, 1998 included elsewhere in this Prospectus,
and Notes 7 and 9 of Notes to Condensed Consolidated Financial Statements as of
and for the three months ended March 31, 1998.
On March 30, 1998, the Company entered into an Amended and Restated Credit
Agreement (the "Credit Agreement") with First Union National Bank, as Agent and
Issuing Bank, and a syndicated group of lenders named therein and increased its
senior credit facility to $260.0 million, including a $35.0 million end-loaded
lease facility component and a $225.0 million revolving credit facility
component (collectively, the "Senior Credit Facility"). Borrowings under the
increased Senior Credit Facility were used to purchase Havasu on May 1, 1998 and
Elko in June 1998. Amounts outstanding under the Credit Agreement as of June 1,
1998, were $156.8 million. The Company borrowed an additional $22.0 million in
June 1998 in connection with the Elko acquisition. The net proceeds of the
Offering will be used to reduce the outstanding balance under the Credit
Agreement. Borrowings under the Credit Agreement bear interest at a floating
rate, which is calculated on the basis of the Agent's prime rate, the federal
funds rate or LIBOR, plus, in each case, a margin depending upon the amount of
the Company's outstanding indebtedness. Interest rate swap agreements are used
on a limited basis to manage the Company's interest rate exposure under the
Credit Agreement. The agreements are contracts to exchange periodically fixed
and floating interest rate payments over the life of the agreements. During
1997, the Company entered into an interest rate swap agreement, which
effectively converted for a three-year period $35.0 million of floating-rate
borrowings to fixed-rate borrowings. The floating-rate payments are based on
LIBOR, and fixed-rate payments are dependent upon market levels at the time the
swap agreement was consummated. For the three months ended March 31, 1998, the
Company received a weighted average rate of 5.88% and paid a weighted average
rate of 6.27%. The Company pays a commitment fee ranging from one-quarter to
one-half of one percent on the unused portion of the revolving portion of the
Senior Credit Facility. The Company may prepay the principal amount outstanding
under the Credit Agreement at any time before maturity. The Senior Credit
Facility matures on March 31, 2003. Borrowings under the Senior Credit Facility
used to fund acquisitions do not require consent of the lenders so long as they
are used for (i) individual acquisitions in which the acquisition amount for the
individual facility is $25.0 million or less and (ii) any acquisition so long
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<PAGE> 37
as the aggregate acquisition amounts for all acquisitions consummated during any
four consecutive fiscal quarters is less than $40.0 million.
The Credit Agreement contains limitations on the Company's ability to incur
additional indebtedness (including contingent obligations), sell material
assets, retire, redeem or otherwise reacquire its capital stock, acquire the
capital stock or assets of another business, and pay dividends. The Credit
Agreement also requires the Company to maintain a specified net worth and meet
or exceed certain coverage, leverage, and indebtedness ratios. Indebtedness
under the Credit Agreement is secured by substantially all assets of the
Company.
The Company intends to acquire additional acute care facilities, and is
actively seeking such acquisitions. There can be no assurance that the Company
will not require additional debt or equity financing for any particular
acquisition. Also, the Company continually reviews its capital needs and
financing opportunities and may seek additional equity or debt financing for its
acquisition program or other needs.
The Company believes that its future cash flow from operations, together
with borrowings available under the Credit Agreement and the net proceeds of the
Offering, will be sufficient to fund the Company's operating expenses, capital
expenditures, and debt service requirements for the next 12 months. The Company
will continue to pursue its acquisition strategy and in connection therewith may
pursue additional financings and incur additional indebtedness.
INFLATION
The health care industry is labor intensive. Wages and other expenses
increase, especially during periods of inflation and labor shortages. In
addition, suppliers pass along rising costs to the Company in the form of higher
prices. The Company has generally been able to offset increases in operating
costs by increasing charges for services and expanding services. The Company has
also implemented cost control measures to curb increases in operating costs and
expenses. In light of cost containment measures imposed by government agencies
and private insurance companies, the Company is unable to predict its ability to
offset or control future cost increases, or its ability to pass on the increased
costs associated with providing health care services to patients with government
or managed care payors, unless such payors correspondingly increase
reimbursement rates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Statement changes the
way public companies report segment information in annual financial statements
and also requires those companies to report selected segment information in
interim financial reports to shareholders. The Statement is effective for the
Company beginning with its December 31, 1998 financial statements. The Statement
affects only disclosures presented in the financial statements and will have no
effect on consolidated financial position or results of operations.
IMPACT OF YEAR 2000
Some older computer programs and systems were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has replaced the majority of its key financial and operational
systems as a part of its systems consolidation in the normal course of business.
This replacement has been a planned approach during the last year to enhance or
better meet its functional business and operational
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<PAGE> 38
requirements. Management believes that this program will substantially meet or
address its Year 2000 issues. In addition to its replacement program, the
Company will require modifying some of its software and hardware so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. The estimated cost of the remaining replacement and modification
for the Year 2000 issue is not considered material to the Company's earnings or
financial position.
The Company also plans to initiate a formal communication process with all
its significant vendors and third-party payors to determine the extent to which
the Company's interface systems are vulnerable to those third parties' failure
to remediate their own Year 2000 issues. There is no guarantee that the systems
of other companies on which the Company's systems rely will be timely converted
and would not have an adverse effect on the Company's system.
The Company believes that with modifications to existing software and
hardware and conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of the Company.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this discussion, including without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects," and words of similar import, constitute forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions, both
nationally and in regions where the Company operates; demographic changes; the
effect of existing or future governmental regulation and federal and state
legislative and enforcement initiatives on the Company's business, including the
Balanced Budget Act of 1997; changes in Medicare and Medicaid reimbursement
levels; the Company's ability to implement successfully its acquisition and
development strategy and changes in such strategy; the availability and terms of
financing to fund the expansion of the Company's business, including the
acquisition of additional hospitals; the Company's ability to attract and retain
qualified management personnel and to recruit and retain physicians and other
health care personnel to the non-urban markets it serves; the effect of managed
care initiatives on the non-urban markets served by the Company's hospitals and
the Company's ability to enter into managed care provider arrangements on
acceptable terms; the effect of liability and other claims asserted against the
Company; the effect of competition in the markets served by the Company's
hospitals; and other factors referenced in this Prospectus. Certain of these
factors are discussed in more detail elsewhere in this Prospectus. Given these
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments. See "Risk Factors."
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<PAGE> 39
BUSINESS
OVERVIEW
Province Healthcare Company is an owner and operator of acute-care
hospitals in attractive non-urban markets. The Company currently owns and
operates 10 general acute care hospitals in six states with a total of 739
licensed beds. The Company also provides management services to 50 primarily
non-urban hospitals in 19 states with a total of 3,422 licensed beds. The
Company offers a wide range of inpatient and outpatient medical services and
also provides specialty services including skilled nursing and rehabilitation.
In developing a platform for the provision of health care services within target
markets, the Company seeks to acquire hospitals which are the sole or primary
providers of health care services in those communities. After acquiring a
hospital, the Company seeks to improve the hospital's operating performance and
to broaden the range of services provided to the community. For the year ended
December 31, 1997 and the three months ended March 31, 1998, the Company had net
operating revenue of $170.5 million and $47.9 million, respectively.
The Company's objective is to be the leading provider of high quality
health care in selected non-urban markets. To achieve this end, the Company
seeks to acquire hospitals which are the sole or primary providers of health
care services in their markets and which present Province's management the
opportunity to increase profitability and market share. The Company targets
acquisition candidates that: (i) have a minimum service area population of
20,000 with a stable or growing employment base; (ii) are the sole or primary
providers of health care services in the community; (iii) have annual net
patient revenue of at least $12.0 million; and (iv) have financial performance
that will benefit from Province management's proven operating skills. The
Company's goal is to acquire two to four hospitals each year of the
approximately 1,100 non-urban hospitals that fit the Company's acquisition
profile.
Following the acquisition of a hospital, the Company implements its
systematic policies and procedures to improve the hospital's operating and
financial performance. Key elements of the Company's operating strategy are to:
(i) expand the breadth of services offered in the community to increase local
market share; (ii) improve hospital operations by implementing appropriate
expense controls, managing staffing levels, reducing supply costs and
renegotiating certain vendor contracts; (iii) recruit additional general
practitioners and specialty physicians to the community; and (iv) form
relationships with local employers and regional tertiary providers to solidify
the position of the Company's hospital as the focal point of the community's
health care delivery system.
Prior to its 1996 recapitalization and merger with PHC of Delaware, Inc.
("PHC"), the Company operated under the name Brim, Inc. ("Brim"). The current
operations of the Company include the operations of Brim and PHC. Brim and its
predecessors have provided health care services, including managing and
operating non-urban hospitals, since the 1970s. PHC was founded in February 1996
by Golder, Thoma, Cressey, Rauner Fund IV, L.P. ("GTCR Fund IV") and Martin S.
Rash to acquire and operate hospitals in attractive non-urban markets. In
December 1996, Brim was recapitalized (the "Recapitalization"). Subsequently,
PHC merged with a subsidiary of Brim in a transaction accounted for as a reverse
acquisition (the "Merger"). In connection with the Recapitalization, Mr. Rash
and Richard D. Gore were elected as the senior management of the Company.
The Company's management team has extensive experience in acquiring and
operating previously under-performing non-urban hospitals. Prior to co-founding
PHC, Mr. Rash was the Chief Operating Officer of Community Health Systems, Inc.
("Community"), an acquiror and operator of non-urban hospitals. During Mr.
Rash's tenure, Community acquired many non-urban hospitals and owned or leased
36 hospitals at December 31, 1995. Mr. Gore was previously employed as Vice
President and Controller of Quorum Health Group, Inc., an owner, operator and
manager of acute care hospitals. John M. Rutledge, the Company's Chief Operating
Officer, was previously employed as a Regional Vice President/Group Director at
Community. James Thomas Anderson, the Company's Senior Vice President of
Acquisitions and Development, was previously a Vice
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<PAGE> 40
President/Group Director at Community. Both Mr. Rutledge and Mr. Anderson
reported directly to Mr. Rash while at Community.
THE NON-URBAN HEALTH CARE MARKET
According to United States Census Bureau statistics, 33.7% of the United
States population lives in counties with populations of less than 150,000. In
these non-urban communities, hospitals are typically the primary source of
health care, and, in many cases, a single hospital is the only provider of acute
care services. As of October 1996, there were approximately 1,500 non-urban
hospitals in the United States, over 1,100 of which were owned by not-for-profit
or governmental entities.
The Company believes that non-urban health care markets are attractive to
health care service providers. Because non-urban service areas have smaller
populations, there are generally only one or two hospitals in each non-urban
market, resulting in less competition. The strong market position of the acute
care hospital in these smaller markets also limits the entry of alternate site
providers, which provide services such as outpatient surgery, rehabilitation or
diagnostic imaging. The demographic characteristics and the relative strength of
the local hospital also make non-urban markets less attractive to HMOs and other
forms of managed care. In addition, the Company believes that non-urban
communities are generally characterized by a high level of patient and physician
loyalty that fosters cooperative relationships among the local hospital,
physicians and patients.
Although the characteristics of the non-urban health care market present a
number of opportunities, hospitals in such markets have been under considerable
pressure. The not-for-profit and governmental entities that typically own and
operate these hospitals may have limited access to the capital required to keep
pace with advances in medical technology and to make needed capital
improvements. Non-urban hospitals also frequently lack the management resources
necessary to control hospital expenses, recruit physicians and expand health
care services. The increasingly dynamic and complex health care regulatory
environment compounds these pressures. Collectively, these factors frequently
lead to poor operating performance, a decline in the breadth of services
offered, dissatisfaction by community physicians and the perception of subpar
quality of care in the community. As a result, patients migrate to, or are
referred by local physicians to, hospitals in larger urban markets. Patient
migration further increases the financial pressure on non-urban physicians and
hospitals, thereby limiting their ability to address the issues which have led
to these pressures.
As a result of these pressures, not-for-profit and governmental owners of
non-urban hospitals have increasingly sought to sell or lease these hospitals to
companies, like Province, that have the access to capital and management
resources to better serve the community. The Company believes that a significant
opportunity for consolidation exists in the non-urban health care market.
BUSINESS STRATEGY
The Company's objective is to be the leading provider of high quality
health care services in selected non-urban markets. The key elements of the
Company's strategy are to:
Acquire Hospitals in Attractive Non-Urban Markets. The Company seeks to
acquire hospitals which are the sole or primary provider of health care services
in their markets and which present the opportunity to increase profitability and
local market share. Approximately 1,100 non-urban hospitals fit the Company's
acquisition profile, and the Company's goal is to acquire two to four such
hospitals each year.
Expand Breadth of Services to Increase Local Market Share. The Company
seeks to provide additional health care services and care programs in response
to the needs of the community. These services may include specialty inpatient
services, outpatient services, home health care and mental health clinics. The
Company may also make capital investments in technology and the physical plant
to further improve both the quality of health care and the reputation of the
hospital in the community. By providing a broader range of services and a more
attractive care setting, the Company
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<PAGE> 41
believes it can increase health care expenditures captured locally and limit
patient migration to larger urban facilities, thereby increasing hospital
revenue.
Improve Hospital Operations. Following the acquisition of a hospital, the
Company augments local management with appropriate operational and financial
managers and installs its standardized information system. The local management
team implements appropriate expense controls, manages staffing levels according
to patient volumes, reduces supply costs by requiring strict compliance with the
Company's supply arrangements and renegotiates certain vendor contracts.
Recruit Physicians. The Company believes that recruiting physicians in
local communities is key to increasing the quality and breadth of health care.
The Company works with the local hospital board, management and medical staff to
determine the number and type of additional physicians needed in the community.
The Company's corporate physician recruiting staff then assists the local
management team in identifying and recruiting specific physicians to the
community to meet those needs.
Develop Health Care Networks. The Company plans to form networks to
address local employers' integrated health care needs and to solidify the
position of the Company's hospitals as the focal point of their respective
community's health care delivery system. As part of its efforts to develop these
networks, the Company seeks relationships with regional tertiary care providers.
ACQUISITION PROGRAM
The Company's goal is to acquire two to four hospitals each year which are
the sole or primary providers of health care services in attractive non-urban
markets and which present the opportunity to increase the hospitals'
profitability and local market share. The Company acquires hospital operations
by purchasing hospitals or by entering into long-term leases. The Company
targets acquisition candidates that: (i) have a minimum service area population
of 20,000 with a stable or growing employment base; (ii) are the sole or primary
providers of health care services in the community; (iii) have annual net
patient revenue of at least $12.0 million; and (iv) have financial performance
that will benefit from management's proven operating skills. There are
approximately 1,100 hospitals in the United States which meet the Company's
target criteria.
In addition to responding to requests for proposals from entities which are
seeking to sell or lease a hospital, the Company proactively identifies
acquisition targets through three sources. The Company: (i) seeks to acquire
selected hospitals to which it provides contract management services; (ii)
identifies attractive markets and hospitals and initiates meetings with hospital
owners to discuss the benefits to the community of a possible acquisition by the
Company; and (iii) seeks to acquire non-urban hospitals from, or form joint
ventures with, hospital systems comprised of one or more urban tertiary care
hospitals and a number of non-urban hospitals. Such joint ventures allow the
tertiary care hospital to maintain an affiliation to provide tertiary care for
the non-urban hospitals without the management responsibility.
The Company believes that it generally takes six to 12 months between the
hospital owner's decision to accept offers and the consummation of a sale or
lease. After a potential acquisition has been identified, the Company undertakes
a systematic approach to evaluating and closing the transaction. The Company
begins the acquisition process with a thorough due diligence review of the
target hospital. The Company utilizes its dedicated teams of experienced
personnel to conduct a formalized review of all aspects of the target's
operations, including Medicare reimbursement, purchasing, fraud and abuse
compliance, litigation, capital requirements, and environmental issues. During
the course of its due diligence review, the Company prepares an operating plan
for the target hospital, identifies opportunities for operating efficiencies and
physician recruiting needs, and assesses productivity and management information
systems. Throughout the process, the Company works closely with community
decision-makers in order to enhance both the community's understanding of the
Company's philosophy and abilities and the Company's knowledge of the needs of
the community.
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<PAGE> 42
The competition to acquire non-urban hospitals is intense, and the Company
believes that often the acquiror will be selected for a variety of reasons, not
exclusively on the basis of price. The Company believes it is well positioned to
compete for acquisitions for several reasons. The Company's management team has
extensive experience in acquiring and operating previously under-performing
non-urban hospitals. The Company also benefits from access to capital, strong
financial and operating systems, a national purchasing organization, and
training programs. The Company believes its strategy of increasing the access
to, and the quality of, health care in the communities served by its hospitals
aligns its interests with those of the communities. The Company believes that
this alignment of interests, together with the Company's reputation for
providing market-specific, high quality health care, its focus on physician
recruiting and its proactive approach to identifying acquisition targets, enable
the Company to compete successfully for acquisitions.
During 1996, PHC purchased Memorial Mother Frances Hospital in Palestine,
Texas and leased Starke Memorial Hospital in Knox, Indiana, and Brim leased
Parkview Regional Hospital in Mexia, Texas. In August 1997, the Company leased
Colorado River Medical Center. The Company provided management services to
Parkview Regional Hospital and Colorado River Medical Center prior to their
respective acquisitions.
On May 1, 1998, Province acquired Havasu Samaritan Regional Hospital in
Lake Havasu City, Arizona, and on June 11, 1998, the Company acquired Elko
General Hospital in Elko, Nevada. Also, in June 1998, the Company entered into
an agreement to lease and acquire certain operating assets of Moosa Memorial
Hospital (also known as Eunice Regional Medical Center) in Eunice, Louisiana.
This transaction is scheduled to close on or before July 31, 1998. Each of the
five hospitals acquired by the Company, and three of the hospitals acquired by
Brim prior to the Merger, have been acquired from not-for-profit or governmental
entities and the recent agreement to lease Moosa Memorial Hospital is with a
hospital service district. Approximately 1,100 non-urban hospitals in the United
States are currently owned by not-for-profit or governmental entities.
HOSPITAL OPERATIONS
Following the acquisition of a hospital, the Company implements its
systematic policies and procedures to improve the hospital's operating and
financial performance. The Company implements an operating plan designed to
reduce costs by improving operating efficiency and increasing revenue through
the expansion of the breadth of services offered by the hospitals and the
recruitment of physicians to the community. The Company also plans to form
health care networks with employers in the community and regional tertiary care
hospitals. Management believes that the long-term growth potential of a hospital
is dependent on the Company's ability to add appropriate health care services
and effectively recruit physicians.
Each hospital management team is comprised of a chief executive officer,
chief financial officer and chief nursing officer. The Company believes that the
quality of the local management team at each hospital is critical to the
hospital's success, because the management team is responsible for implementing
the elements of the Company's operating plan. The operating plan is developed by
the local management team in conjunction with the Company's senior management
team and sets forth revenue enhancement strategies and specific expense
benchmarks. The Company has implemented a performance-based compensation program
for each local management team based upon the achievement of the goals set forth
in the operating plan.
While the local management team is responsible for the day-to-day
operations of the hospitals, the Company's corporate staff provides support
services to each hospital, including physician recruiting, corporate compliance,
reimbursement advice, standardized information systems, human resources,
accounting, cash management and other finance activities, tax and insurance
support. Financial controls are maintained through utilization of standardized
policies and procedures. The Company promotes communication among its hospitals
so that local expertise and improvements can be shared throughout the Company's
network.
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As part of the Company's efforts to improve access to high quality health
care in the communities it serves, the Company adds appropriate services at its
hospitals. Services and care programs added may include specialty inpatient
services, such as cardiology, geriatric psychiatry, skilled nursing,
rehabilitation and subacute care, and outpatient services such as same-day
surgery, radiology, laboratory, pharmacy services and physical therapy. The
Company may also add home health care services and mental health clinics.
Management believes the establishment of quality emergency room departments and
obstetrics and gynecological services are particularly important, because they
are often the most visible services provided to the community. The Company also
makes capital investments in technology and facilities to increase the quality
and breadth of services available in the communities. By increasing the services
provided at the Company's hospitals and upgrading the technology used in
providing such services, the Company believes that it improves the quality of
care and the hospitals' reputation in each community, which in turn may increase
patient census and revenue.
To achieve the operating efficiencies set forth in the operating plan, the
Company: (i) evaluates existing hospital management; (ii) adjusts staffing
levels according to patient volumes using best demonstrated practices by
department; (iii) capitalizes on purchasing efficiencies and renegotiates
certain vendor contracts; and (iv) installs a standardized management
information system. The Company also enforces strict protocols for compliance
with the Company's supply contracts. All of the Company's owned and leased
hospitals currently purchase supplies and certain equipment pursuant to an
arrangement between the Company and a large investor-owned hospital company.
Vendor contracts are also evaluated, and based on cost comparisons, contracts
are either renegotiated or terminated. The Company prepares for the transition
of management information systems to its standardized system prior to the
completion of an acquisition, so that the newly-acquired hospital can typically
begin using the Company's management information systems immediately following
completion of the acquisition.
The Company works with local hospital boards, management and medical staff
to determine the number and type of additional physicians needed in the
community. The Company's corporate staff then assists the local management team
in identifying and recruiting specific physicians to the community to meet those
needs. The majority of physicians who relocate their practices to the
communities served by the Company's hospitals are identified by the Company's
internal physician recruiting staff, which is supplemented by the efforts of
independent recruiting firms. When recruiting a physician to a community, the
Company generally guarantees the physician a minimum level of revenue during a
limited initial period and assists the physician with his or her transition to
the community. The Company requires the physician to repay some or all of the
amounts expended for such assistance in the event the physician leaves the
community within a specified period. The Company prefers not to employ
physicians, and relocating physicians rarely become employees of the Company.
The Company plans to form networks to address local employers' health care needs
and to solidify the position of the Company's hospitals as the focal point of
their respective community's health care delivery system. As part of its efforts
to develop these networks, the Company also seeks relationships with regional
tertiary care providers.
Owned and Leased Hospitals
The Company currently owns and operates 10 general acute care hospitals in
California, Texas, Arizona, Colorado, Indiana and Nevada with a total of 739
licensed beds. Eight of the Company's 10 hospitals are the only hospital in the
town in which they are located. The owned and leased hospitals represented 87.5%
and 89.3% of the Company's net operating revenues for the year ended December
31, 1997, and the three months ended March 31, 1998, respectively.
The Company's hospitals offer a wide range of inpatient medical services
such as operating/recovery rooms, intensive care units, diagnostic services and
emergency room services, as well as outpatient services such as same-day
surgery, radiology, laboratory, pharmacy services and physical therapy. The
Company's hospitals also frequently provide certain specialty services which
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include skilled nursing, rehabilitation and home health care services. The
Company's hospitals do not provide highly specialized surgical services such as
organ transplants and open heart surgery and are not engaged in extensive
medical research or educational programs.
The following table sets forth certain information with respect to each of
the Company's owned and leased hospitals.
<TABLE>
<CAPTION>
LICENSED OWNED/
HOSPITAL BEDS LEASED
- -------- -------- ---------
<S> <C> <C>
Colorado Plains Medical Center
Fort Morgan, Colorado..................................... 40 Leased(1)
Colorado River Medical Center
Needles, California....................................... 53 Leased(2)
Elko General Hospital
Elko, Nevada.............................................. 50 Owned(3)
General Hospital
Eureka, California........................................ 83 Leased(4)
Havasu Samaritan Regional Hospital
Lake Havasu City, Arizona................................. 119(5) Owned
Memorial Mother Frances Hospital
Palestine, Texas.......................................... 97 Owned(6)
Ojai Valley Community Hospital
Ojai, California.......................................... 116(7) Owned
Palo Verde Hospital
Blythe, California........................................ 55 Leased(8)
Parkview Regional Hospital
Mexia, Texas.............................................. 77 Leased(9)
Starke Memorial Hospital
Knox, Indiana............................................. 49 Leased(10)
---
Total............................................. 739
===
</TABLE>
- ---------------
(1) The lease expires in April 2014 and is subject to a five-year renewal term.
The Company has a right of first refusal to purchase the hospital.
(2) The lease expires in July 2012, and is subject to three five-year renewal
terms. The Company has a right of first refusal to purchase the hospital.
(3) The Company has contractually agreed to construct a replacement facility
within 36 months of the acquisition date. This facility was acquired on
June 11, 1998.
(4) The lease expires in December 2000. The Company has the option to purchase
the hospital at any time prior to termination of the lease, subject to
regulatory approval.
(5) Includes a 20-bed skilled nursing facility.
(6) The hospital is owned by a partnership of which a subsidiary of the Company
is the sole general partner (with a 1.0% general partnership interest) and
another subsidiary of the Company has a 94.0% limited partnership interest,
subject to an option by the other limited partner to acquire an additional
5.0% interest.
(7) Includes a 66-bed skilled nursing facility.
(8) The lease expires in December 2002, and is subject to a ten-year renewal
option. The Company has the option to purchase the hospital at any time
prior to termination of the lease, subject to regulatory approval.
(9) The lease expires in January 2011, and is subject to two five-year renewal
terms. The Company has a right of first refusal to purchase the hospital.
(10) The lease expires in September 2016, and is subject to two ten-year renewal
options. The Company has a right of first refusal to purchase the hospital.
Colorado Plains Medical Center is located approximately 70 miles northeast
of Denver and is the only hospital in town. The hospital is the only rural-based
Level III trauma center in Colorado, and one of only 10 such rural centers in
the United States. In 1997, Colorado Plains completed an $8.5 million expansion
project which included expansion of surgery, recovery, emergency room and
radiology facilities as well as a new entrance. The hospital also expects to
open an inpatient rehabilitation unit in September 1998. The closest competing
hospitals are located approximately 50
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miles away. Colorado Plains is a sole community provider as designated under
Medicare and has a service area population of approximately 43,000.
Colorado River Medical Center is located approximately 100 miles south of
Las Vegas, Nevada and is the only hospital in town. The hospital expects to open
an inpatient rehabilitation unit in August 1998. The hospital's primary
competitor is located approximately 20 miles away. Colorado River is a sole
community provider as designated under Medicare and has a service area
population of approximately 47,000.
Elko General Hospital is located approximately 290 miles from Reno, Nevada
and 225 miles from Salt Lake City, Utah, and is the largest hospital between
those two cities. The Elko region has experienced rapid population growth over
the last five years, with gold mining and gaming being the primary industries.
The Company acquired this hospital on June 11, 1998 and expects to construct and
open a replacement hospital facility within 36 months of the acquisition date.
Elko is a sole community provider as designated under Medicare and has a service
area population of approximately 65,000.
General Hospital is located approximately 300 miles north of San Francisco.
The hospital also operates an ambulatory surgery center located near the
hospital. The Company recently completed a renovation of General Hospital's
obstetrical unit. There is one other hospital in Eureka, and two small hospitals
located 15 and 20 miles away. The nearest tertiary care hospitals are located
approximately 160 miles away. General Hospital's service area population is
approximately 122,000.
Havasu Samaritan Regional Hospital is located approximately 180 miles from
Phoenix, Arizona and 130 miles from Las Vegas, Nevada, and is the only hospital
in town. The hospital is located in the 16th fastest growing county in the
United States, according to United States Census Bureau statistics. The Company
acquired this hospital on May 1, 1998. The hospital currently provides general
acute care, radiation, oncology and diagnostic services, including a recently
added cardiac catheterization lab. Havasu is a sole community provider as
designated under Medicare and has a service area population of approximately
70,000.
Memorial Mother Frances Hospital is located approximately halfway between
Dallas and Houston, and approximately 50 miles from Tyler, Texas. The hospital
recently added 10 beds to its inpatient rehabilitation unit, thereby expanding
unit capacity to 22 beds. Memorial Mother Frances Hospital has a relationship
with a tertiary care hospital in Tyler. The hospital's primary competitor is
also located in Palestine. The hospital's service area population is
approximately 104,000.
Ojai Valley Community Hospital is located approximately 85 miles northeast
of Los Angeles and is the only hospital in town. Along with its 50-bed acute
care hospital, Ojai Valley has a 66-bed skilled nursing facility. In 1997, Ojai
Valley purchased a home health business and opened a rural health clinic in a
neighboring town. The hospital's primary competitors are located 18 to 20 miles
away, but due to the geography and traffic conditions, such hospitals are 30 to
60 minutes away by car. The hospital's service area population is approximately
30,000.
Palo Verde Hospital is located in southeast California near the Arizona
border. It is 120 miles east of Palm Springs, California and is the only
hospital in town. The hospital expects to open an inpatient sub-acute unit in
January 1999. The hospital's primary competitors are one small hospital located
45 miles away and two large hospitals located approximately 100 miles away. Palo
Verde Hospital is a sole community provider as designated under Medicare and has
a service area population of approximately 20,000 that increases substantially
during the winter months due to a seasonal inflow of residents.
Parkview Regional Hospital is located approximately 40 miles east of Waco,
Texas and is the only hospital in town. The hospital recently completed a $5.7
million expansion and renovation project which included a new emergency room and
new radiology, surgery and inpatient
43
<PAGE> 46
rehabilitation departments. The hospital's primary competitors are hospitals
located 35 to 40 miles away. The hospital's service area population is
approximately 40,000.
Starke Memorial Hospital is located approximately 50 miles from South Bend,
Indiana and is the only hospital in town. Starke Memorial's primary competitors
are two large hospitals, located approximately 30 and 35 miles away. The
hospital's service area population is approximately 25,000.
The Company also owns a 48,000 square foot office building in Portland,
Oregon and leases approximately 17,800 square feet of office space for its
corporate headquarters in Brentwood, Tennessee under a seven-year lease which
expires on February 28, 2005 and contains customary terms and conditions.
Operating Statistics
The following table sets forth certain operating statistics for the
Company's owned or leased hospitals (excluding Fifth Avenue Hospital in Seattle,
Washington, which was sold in May 1995) for each of the periods presented.
<TABLE>
<CAPTION>
BRIM (PREDECESSOR) COMPANY (SUCCESSOR)
------------------------------ --------------------------------------------------
THREE
PERIOD PERIOD YEAR MONTHS
YEAR ENDED JANUARY 1 TO FEBRUARY 2 TO ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 18, DECEMBER 31, DECEMBER 31, -----------------
1995 1996 1996 1997 1997 1998
------------ --------------- --------------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Hospitals owned or leased (at end of
period)............................. 4 5 7 8 7 8
Licensed beds (at end of period)...... 294 371 513 570 517 570
Beds in service (at end of period).... 243 266 393 477 405 463
Admissions............................ 8,839 9,496 1,964 15,142 3,910 4,575
Average length of stay (days)(1)...... 6.4 5.9 4.3 5.6 5.3 5.6
Patient days.......................... 56,088 56,310 8,337 84,386 20,904 25,570
Adjusted patient days(2).............. 92,085 96,812 15,949 149,567 36,437 42,295
Occupancy rate (% of licensed
beds)(3)............................ 52.3 43.1 39.5 40.6 44.9 49.8
Occupancy rate (% of beds in
service)(4)......................... 63.2 60.1 51.3 48.5 57.4 61.4
Net patient service revenue (in
thousands).......................... $75,871 $87,900 $16,425 $149,296 $34,504 $42,750
Gross outpatient service revenue (in
thousands).......................... $51,414 $64,472 $14,088 $110,879 $25,860 $30,010
Gross outpatient service revenue (% of
gross patient service revenue)...... 39.1 43.4 48.2 44.5 42.4 40.0
</TABLE>
- ---------------
(1) Average length of stay is calculated based on the number of patient days
divided by the number of admissions.
(2) Adjusted patient days have been calculated based on an industry-accepted
revenue-based formula (multiplying actual patient days by the sum of gross
inpatient revenue and gross outpatient revenue and dividing the result by
gross inpatient revenue for each hospital) to reflect an approximation of
the volume of service provided to inpatients and outpatients by converting
total patient revenues to equivalent patient days.
(3) Percentages are calculated by dividing average daily census by average
licensed beds.
(4) Percentages are calculated by dividing average daily census by average beds
in service.
Sources of Revenue
The Company receives payments for patient care from private insurance
carriers, federal Medicare programs for elderly and disabled patients, HMOs,
preferred provider organizations ("PPOs"), state Medicaid programs, the Civilian
Health and Medical Program of the Uniformed Services ("CHAMPUS"), employers and
patients directly. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
44
<PAGE> 47
The following table sets forth the percentage of the patient days of the
Company's owned and leased hospitals (excluding Fifth Avenue Hospital and the
66-bed skilled nursing facility at Ojai Valley Community Hospital) from various
payors for the periods indicated. The data for the periods presented are not
strictly comparable because of the significant effect that acquisitions have had
on the Company. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition."
<TABLE>
<CAPTION>
BRIM (PREDECESSOR) COMPANY (SUCCESSOR)
---------------------------- -----------------------------------------------
PERIOD PERIOD THREE MONTHS
YEAR ENDED JANUARY 1 TO FEBRUARY 2 TO YEAR ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 18, DECEMBER 31, DECEMBER 31, ----------------
1995 1996(1) 1996(1) 1997 1997 1998
------------ ------------- ------------- ------------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Medicare.................... 50.2% 54.7% 63.3% 60.3% 58.4% 62.3%
Medicaid.................... 16.8 17.0 12.0 13.1 15.0 11.0
Private and other sources... 33.0 28.3 24.7 26.6 26.6 26.7
----- ----- ----- ----- ----- -----
Total.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) All percentages in this table exclude Fifth Avenue Hospital and the 66-bed
skilled nursing facility at Ojai Valley Community Hospital. Substantially
all of the revenue at the Ojai Valley skilled nursing facility is provided
by Medicaid. The Ojai Valley skilled nursing facility utilization is as
follows:
<TABLE>
<CAPTION>
PRIVATE AND
MEDICARE MEDICAID OTHER SOURCE
-------- -------- ------------
<S> <C> <C> <C>
Period January 1 to December 18, 1996 (Predecessor)......... 12.9% 73.5% 13.6%
Period February 2 to December 31, 1996 (Successor).......... 16.0 68.6 15.4
Year ended December 31, 1997 (Successor).................... 11.8 76.2 12.0
Three months ended March 31, 1997........................... 12.8 74.5 12.7
Three months ended March 31, 1998........................... 11.9 76.4 11.7
</TABLE>
Quality Assurance
The Company's hospitals implement quality assurance procedures to ensure a
consistently high level of care. Each hospital has a medical director who
supervises and is responsible for the quality of medical care provided. In
addition, each hospital has a medical advisory committee comprised of physicians
who review the professional credentials of physicians applying for medical staff
privileges at the hospital. Medical advisory committees also review and monitor
surgical outcomes along with procedures performed and the quality of the
logistical, medical and technological support provided to the physician. The
Company surveys all of its patients either during their stay at the hospital or
subsequently by mail to identify potential areas of improvement. All of the
Company's hospitals are accredited by the Joint Commission on Accreditation of
Health Care Organizations other than Palo Verde, which is currently pursuing
accreditation.
Regulatory Compliance Program
The Company has developed a corporate-wide compliance program and, in June
1997, hired Starley Carr as its Vice President of Corporate Compliance. Prior to
joining the Company, Mr. Carr served with the Federal Bureau of Investigation,
where he investigated various white collar crimes, including those related to
the health care industry. The Company's compliance program focuses on all areas
of regulatory compliance, including physician recruitment, reimbursement and
cost reporting practices, laboratory and home health care operations. The
Company has conducted on-site compliance training for all of the employees at
eight of its hospitals and expects to complete employee training at the
remaining two hospitals by the third quarter of 1998. The Company also maintains
a toll-free hotline to permit employees to report compliance concerns on an
anonymous basis. The Company will regularly monitor its corporate compliance
program to respond to developments in health care regulation and the industry.
See "Risk Factors -- Health Care Regulation" and " -- Health Care Industry
Investigations."
45
<PAGE> 48
MANAGEMENT SERVICES
The Company's management services division provides comprehensive
management services to 50 primarily non-urban hospitals in 19 states with a
total of 3,422 licensed beds. These services are provided under three to
five-year contracts with the Company. The Company generally provides a chief
executive officer, who is an employee of the Company, and may also provide a
chief financial officer, but it does not typically employ other hospital
personnel. The Company provides a continuum of solutions to the problems faced
by these hospitals through services which may include instituting new financial
and operating systems and various management initiatives, such as establishing a
local or regional provider network to efficiently meet a community's health care
needs. Management believes the Company's contract management business provides a
competitive advantage in identifying and developing relationships with suitable
acquisition candidates and in understanding the local markets in which such
hospitals operate. This division represented 9.6% and 9.4% of net operating
revenue for the fiscal year ended December 31, 1997 and the three months ended
March 31, 1998, respectively. PHC did not provide management services until its
acquisition of Brim on December 18, 1996. Two of the Company's recent hospital
acquisitions grew out of relationships formed while the Company provided
management services to such hospitals.
COMPETITION
The primary bases of competition among hospitals in non-urban markets are
the quality and scope of medical services, strength of referral network,
location, and, to a lesser extent, price. With respect to the delivery of
general acute care services, most of the Company's hospitals face less
competition in their immediate patient service areas than would be expected in
larger communities. While the Company's hospitals are generally the primary
provider of health care services in their respective communities, its hospitals
face competition from larger tertiary care centers and, in some cases, other
non-urban hospitals. Some of the hospitals that compete with the Company are
owned by governmental agencies or not-for-profit entities supported by
endowments and charitable contributions, and can finance capital expenditures on
a tax-exempt basis.
The Company faces competition for acquisitions primarily from for-profit
hospital management companies as well as not-for-profit entities. Some of the
Company's competitors have greater financial and other resources than the
Company. Increased competition for the acquisition of non-urban acute care
hospitals could have an adverse impact on the Company's ability to acquire such
hospitals on favorable terms.
EMPLOYEES AND MEDICAL STAFF
As of June 9, 1998, the Company had 2,672 "full-time equivalent" employees,
27 of whom were corporate personnel. The remaining employees, most of whom are
nurses and office personnel, work at the hospitals. None of the Company's
employees is covered by a collective bargaining agreement. The Company considers
relations with its employees to be good.
The Company typically does not employ physicians and, as of May 31, 1998,
the Company employed only three practicing physicians. Certain of the Company's
hospital services, including emergency room coverage, radiology, pathology and
anesthesiology services, are provided through independent contractor
arrangements with physicians.
GOVERNMENT REIMBURSEMENT
Medicare payments for acute hospital services are based on a prospective
payment system ("PPS"). Under PPS, a hospital receives a fixed amount for
inpatient hospital services based on the established fixed payment amount per
discharge for categories of hospital treatment known as diagnosis related groups
("DRGs"). DRG payments do not consider a specific hospital's costs, but are
national rates adjusted for area wage differentials. Psychiatric services,
long-term care, rehabilitation, pediatric services and certain designated
research hospitals, and distinct parts of
46
<PAGE> 49
rehabilitation and psychiatric units within hospitals are currently exempt from
PPS and are reimbursed on a cost-based system, subject to specific reimbursement
caps (known as TEFRA limits). For the year ended December 31, 1997, the Company
had five units reimbursed under the TEFRA methodology.
For several years, the percentage increases to the DRG rates have been
lower than the percentage increases in the cost of goods and services purchased
by general hospitals. The index used to adjust the DRG rates is based on the
cost of goods and services purchased by hospitals as well as those purchased by
non-hospitals (the "Market Basket"). The historical Market Basket rates of
increase were 2.0%, 1.5% and 2.0% for federal fiscal years 1995, 1996 and 1997,
respectively. However, the Balanced Budget Act of 1997 ("BBA") set the DRG rate
of increase for federal fiscal year 1998 at zero percent. The BBA set the DRG
rates of increase for future federal fiscal years at rates that will be based on
the Market Basket rates less reduction factors of 1.9% in 1999, 1.8% in 2000,
and 1.1% in 2001 and 2002. The Company anticipates that future legislation may
further decrease the future rates of increase for DRG payments, but is unable to
predict the amount of the final reduction.
Outpatient services provided by general hospitals are reimbursed by
Medicare at the lower of customary charges or approximately 90% of actual cost,
subject to additional limits on the reimbursement of certain outpatient
services. The BBA mandated the implementation of a PPS for Medicare outpatient
services by January 1, 1999. This outpatient PPS system will be based on a
system of Ambulatory Payment Categories ("APCs"). Each APC will represent a
bundle of outpatient services and each APC will be assigned a fully prospective
reimbursement rate. Because implementing regulations with respect to outpatient
PPS have not been promulgated, the Company is not able to predict the full
impact of this provision of the BBA.
Each state has its own Medicaid program that is funded jointly by such
state and the federal government. Federal law governs how each state manages its
Medicaid program, but there is wide latitude for states to customize Medicaid
programs to fit local needs and resources. As a result, each state Medicaid plan
has its own payment formula and recipient eligibility criteria. The Company's
current operations are in states that have historically had well-funded Medicaid
programs with adequate payment rates.
The Company owns or leases four hospitals in California. The Medicaid
program in California, known as Medi-Cal, reimburses hospital inpatient cost on
one of three methods: (i) cost-based, subject to various limits known as
MIRL/Peer Group limits; (ii) negotiated rates per discharge or per diems for
hospitals under contract; or (iii) managed care initiatives, where payment rates
tend to be capitated and networks must be formed. Three of the Company's four
California hospitals are cost-based for Medi-Cal and the other is paid under the
negotiated contract method. None of the Company's cost-based hospitals is
currently subject to a MIRL/Peer Group limit, because its cost per discharge has
historically been below the limit. There can be no assurance that this will
remain the case in the future. Medi-Cal currently has a managed care initiative
that is primarily targeted at urban areas. The Company does not expect that
Medi-Cal will begin rural managed care contracting in the near future.
Medicare has special payment provisions for "Sole Community Hospitals" or
SCHs. An SCH is generally the only hospital in at least a 35-mile radius.
Colorado Plains, Colorado River, Elko, Havasu and Palo Verde qualify as SCHs
under Medicare regulations. Special payment provisions related to SCHs include a
higher DRG rate, which is based on a blend of hospital-specific costs and the
national DRG rate; and a 90% payment "floor" for capital costs, thereby
guaranteeing the hospital SCH capital reimbursement equal to 90% of capital
cost. In addition, the CHAMPUS program has special payment provisions for
hospitals recognized as SCHs for Medicare purposes.
The Medicare, Medicaid and CHAMPUS programs are subject to statutory and
regulatory changes, administrative rulings, interpretations and determinations,
requirements for utilization review and new governmental funding restrictions,
all of which may materially increase or decrease
47
<PAGE> 50
program payments as well as affect the cost of providing services and the timing
of payment to facilities. The final determination of amounts earned under the
programs often requires many years, because of audits by the program
representatives, providers' rights of appeal and the application of numerous
technical reimbursement provisions. Management believes that adequate provision
has been made for such adjustments. Until final adjustment, however, significant
issues remain unresolved and previously determined allowances could become
either inadequate or more than ultimately required.
HEALTH CARE REFORM, REGULATION AND LICENSING
Certain Background Information
Health care, as one of the largest industries in the United States,
continues to attract much legislative interest and public attention. Medicare,
Medicaid, and other public and private hospital cost-containment programs,
proposals to limit health care spending, proposals to limit prices and industry
competitive factors are among the many factors which are highly significant to
the health care industry. In addition, the health care industry is governed by a
framework of federal and state laws, rules and regulations that are extremely
complex and for which the industry has the benefit of only limited regulatory or
judicial interpretation. Although the Company believes it is in compliance in
all material respects with such laws, rules and regulations, if a determination
is made that the Company was in violation of such laws, rules or regulations,
its business, financial condition and results of operations could be materially
adversely affected.
There continue to be federal and state proposals that would, and actions
that do, impose more limitations on government and private payments to providers
such as the Company and proposals to increase co-payments and deductibles from
program and private patients. The Company's facilities also are affected by
controls imposed by government and private payors designed to reduce admissions
and lengths of stay. Such controls, including what is commonly referred to as
"utilization review," have resulted in fewer of certain treatments and
procedures being performed. Utilization review entails the review of the
admission and course of treatment of a patient by a third party. Utilization
review by third-party peer review organizations ("PROs") is required in
connection with the provision of care paid for by Medicare and Medicaid.
Utilization review by third parties is also required under many managed care
arrangements.
Many states have enacted, or are considering enacting, measures that are
designed to reduce their Medicaid expenditures and to make certain changes to
private health care insurance. Various states have applied, or are considering
applying, for a federal waiver from current Medicaid regulations to allow them
to serve some of their Medicaid participants through managed care providers.
These proposals also may attempt to include coverage for some people who
presently are uninsured, and generally could have the effect of reducing
payments to hospitals, physicians and other providers for the same level of
service provided under Medicaid.
Certificate of Need Requirements
Some states require approval for purchase, construction and expansion of
health care facilities, including findings of need for additional or expanded
health care facilities or services. Certificates of Need ("CONs"), which are
issued by governmental agencies with jurisdiction over health care facilities,
are at times required for capital expenditures exceeding a prescribed amount,
changes in bed capacity or services and certain other matters. However, Texas
and California, states in which the Company operates six of its 10 hospitals, do
not currently require CONs for hospital construction or changes in the mix of
services. The Company is unable to predict whether it will be able to obtain any
CON that may be necessary to accomplish its business objectives in any
jurisdiction where such CONs are required.
48
<PAGE> 51
Anti-kickback and Self-Referral Regulations
Sections of the Anti-Fraud and Abuse Amendments to the Social Security Act,
commonly known as the "anti-kickback" statute (the "Anti-kickback Amendments"),
prohibit certain business practices and relationships that might affect the
provision and cost of health care services reimbursable under Medicare and
Medicaid, including the payment or receipt of remuneration for the referral of
patients whose care will be paid for by Medicare or other government programs.
Sanctions for violating the Anti-kickback Amendments include criminal penalties
and civil sanctions, including fines and possible exclusion from government
programs such as the Medicare and Medicaid programs. Pursuant to the Medicare
and Medicaid Patient and Program Protection Act of 1987, the U.S. Department of
Health and Human Services has issued regulations that create safe harbors under
the Anti-kickback Amendments ("Safe Harbors"). A given business arrangement
which does not fall within a Safe Harbor is not per se illegal; however,
business arrangements of health care service providers that fail to satisfy the
applicable Safe Harbor criteria risk increased scrutiny by enforcement
authorities. The "Health Insurance Portability and Accountability Act of 1996,"
which became effective January 1, 1997 broadened the scope of certain fraud and
abuse laws, such as the Anti-kickback Amendments, to include all health care
services, whether or not they are reimbursed under a federal program.
The Company provides financial incentives to recruit physicians into the
communities served by its hospitals, including loans and minimum revenue
guarantees and structures these incentives so as to fall within a proposed safe
harbor for physician recruitment. However, the proposed safe harbor for
physician recruitment has never been finalized. Although the Company is not
subject to the Internal Revenue Service Revenue Rulings and related authority
addressing recruitment activities by tax-exempt facilities, management believes
that such IRS authority tends to set the industry standard for acceptable
recruitment activities. The Company believes that its recruitment policies are
being conducted in accordance with the IRS authority and industry practice. The
Company also enters into certain leases with physicians and is a party to
certain joint ventures with physicians. The Company believes that these
arrangements do not violate the Anti-kickback Amendments. There can be no
assurance that regulatory authorities who enforce the Anti-kickback Amendments
will not determine that the Company's physician recruiting activities, other
physician arrangements, or group purchasing activities violate the Anti-kickback
Amendments or other federal laws. Such a determination could subject the Company
to liabilities under the Social Security Act, including exclusion of the Company
from participation in Medicare and Medicaid.
The Company's operations necessarily involve financial relationships with
physicians on the medical staff. Such arrangements include professional services
agreements for services at its hospitals and physician recruitment incentives to
encourage physicians to establish private practices in markets served by the
Company's owned or leased hospitals. Although the Company believes that these
arrangements are lawful, no safe harbor provisions apply to physician
recruitment arrangements not involving physician employment. Evolving
interpretations of current, or the adoption of new, federal or state laws or
regulations could affect these arrangements.
There is increasing scrutiny by law enforcement authorities, the Office of
Inspector General ("OIG") of the Department of Health and Human Services
("HHS"), the courts, and Congress of arrangements between health care providers
and potential referral sources to ensure that the arrangements are not designed
as a mechanism to exchange remuneration for patient care referrals and
opportunities. Investigators have also demonstrated a willingness to look behind
the formalities of a business transaction to determine the underlying purpose of
payments between health care providers and potential referral sources.
Enforcement actions have increased, as evidenced by recent highly publicized
enforcement investigations of certain hospital activities. Although, to its
knowledge, the Company is not currently the subject of any investigation which
is likely to have a material adverse effect on its business, financial condition
or results of operations, there can be no assurance that the Company and its
hospitals will not be the subject of investigations or inquiries in the future.
49
<PAGE> 52
In addition, provisions of the Social Security Act restrict referrals by
physicians of Medicare and other government-program patients to providers of a
broad range of designated health services with which they have ownership or
certain other financial arrangements (the "Stark Laws"). A person making a
referral, or seeking payment for services referred, in violation of Stark would
be subject to the following sanctions: (i) civil money penalties of up to
$15,000 for each service; (ii) assessments equal to twice the dollar value for
each service; and/or (iii) exclusion from participation in the Medicare Program
(which can subject the person or entity to exclusion from participation in state
health care programs). Further, if any physician or entity enters into an
arrangement or scheme that the physician or entity knows or should know has the
principal purpose of assuring referrals by the physician to a particular entity,
and the physician directly made referrals to such entity, then such physician or
entity could be subject to a civil money penalty of up to $100,000. Many states
have adopted or are considering similar legislative proposals, some of which
extend beyond the Medicaid program to prohibit the payment or receipt of
remuneration for the referral of patients and physician self-referrals
regardless of the source of the payment for the care. The Company's contracts
with physicians on the medical staff of its hospitals and its participation in
and development of joint ventures and other financial relationships with
physicians could be adversely affected by these amendments and similar state
enactments.
The Company is unable to predict the future course of federal, state and
local regulation or legislation, including Medicare and Medicaid statutes and
regulations. Further changes in the regulatory framework or in the
interpretation of these laws, rules and regulations could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Environmental Regulations
The Company's health care operations generate medical waste that must be
disposed of in compliance with federal, state and local environmental laws,
rules and regulations. The Company's operations, as well as the Company's
purchases and sales of facilities, are also subject to various other
environmental laws, rules and regulations.
Health Care Facility Licensing Requirements
The Company's health care facilities are subject to extensive federal,
state and local legislation and regulation. In order to maintain their operating
licenses, health care facilities must comply with strict standards concerning
medical care, equipment and hygiene. Various licenses and permits also are
required in order to dispense narcotics, operate pharmacies, handle radioactive
materials and operate certain equipment. The Company's health care facilities
hold all required governmental approvals, licenses and permits. All licenses,
provider numbers and other permits or approvals required to perform the
Company's business operations are held by subsidiaries of the Company. All of
the Company's hospitals are fully accredited by the Joint Commission on
Accreditation of Health Care Organizations, other than Palo Verde, which is
currently pursuing accreditation.
Utilization Review Compliance and Hospital Governance
The Company's health care facilities are subject to and comply with various
forms of utilization review. In addition, under the Medicare prospective payment
system, each state must have a PRO to carry out a federally mandated system of
review of Medicare patient admissions, treatments and discharges in general
hospital. Medical and surgical services and practices are extensively supervised
by committees of staff doctors at each health care facility, are overseen by
each health care facility's local governing board, the primary voting members of
which are physicians and community members, and are reviewed by the Company's
quality assurance personnel. The local governing boards also help maintain
standards for quality care, develop long-range plans, establish, review and
enforce practices and procedures and approve the credentials and disciplining of
medical staff members.
50
<PAGE> 53
Governmental Developments Regarding Sales of Not-for-Profit Hospitals
In recent years, the legislatures and attorneys general of several states
have shown a heightened level of interest in transactions involving the sale of
non-profit hospitals. Although the level of interest varies from state to state,
the trend is to provide for increased governmental review, and in some cases
approval, of transactions in which not-for-profit corporations sell a health
care facility. Attorneys general in certain states, including California, have
been especially active in evaluating these transactions. Although the Company
has not yet been adversely affected as a result of these trends, such increased
scrutiny may increase the difficulty or prevent the completion of transactions
with not-for-profit organizations in certain states in the future.
California Seismic Standards
California recently adopted a law requiring standards and regulations to be
developed to ensure hospitals meet seismic performance standards. Within three
years after adoption of the standards by the California Building Standards
Commission, owners of subject properties are to evaluate their facilities and
develop a plan and schedule for complying with the standards. The Commission has
adopted evaluation criteria and has recently adopted the retrofit standards. The
Company will be required to conduct engineering studies of its California
facilities to determine whether and to what extent modifications to its
facilities will be required. Significant capital expenditures to comply with the
seismic standards could have a material adverse effect on the Company's
financial condition or results of operations.
PROFESSIONAL LIABILITY
As part of its business, the Company is subject to claims of liability for
events occurring as part of the ordinary course of hospital operations. To cover
these claims, the Company maintains professional malpractice liability insurance
and general liability insurance in amounts which management believes to be
sufficient for its operations, although some claims may exceed the scope of the
coverage in effect. The Company also maintains umbrella coverage. At various
times in the past, the cost of malpractice and other liability insurance has
risen significantly. Therefore, there can be no assurance that such insurance
will continue to be available at a reasonable price for the Company to maintain
adequate levels of insurance.
Through its typical hospital management contract, the Company attempts to
protect itself from such liability by requiring the hospital to maintain certain
specified limits of insurance coverage, including professional liability,
comprehensive general liability, worker's compensation and fidelity insurance,
and by requiring the hospital to name the Company as an additional insured party
on the hospital's professional and comprehensive general liability policies. The
Company's management contracts also usually provide for the indemnification of
the Company by the hospital against claims that arise out of the actions of the
hospital employees, medical staff members and other non-Company personnel.
However, there can be no assurance the hospitals will maintain such insurance or
that such indemnities will be available.
51
<PAGE> 54
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the Company's
directors and executive officers as of May 11, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Martin S. Rash................... 43 Chairman of the Board, President, Chief Executive
Officer and Director
Richard D. Gore.................. 46 Executive Vice President and Chief Financial Officer
John M. Rutledge................. 40 Senior Vice President and Chief Operating Officer
James Thomas Anderson............ 44 Senior Vice President of Acquisitions and Development
James O. McKinney................ 44 Senior Vice President of Managed Operations
Howard T. Wall, III.............. 39 Senior Vice President and General Counsel
Brenda B. Rector................. 50 Vice President and Controller
Bruce V. Rauner.................. 42 Director
Joseph P. Nolan.................. 33 Director
A.E. Brim........................ 67 Director
Michael T. Willis................ 53 Director
David L. Steffy.................. 55 Director
</TABLE>
Mr. Rash has served as the President, Chief Executive Officer and as a
director of the Company since the Recapitalization in December 1996, and as
Chairman of the Board since May 1998. From February 1996 to December 1996, Mr.
Rash served as Chief Executive Officer of PHC. Mr. Rash was employed by
Community Health Systems, Inc., an operator of non-urban acute care hospitals,
from 1986 to February 1996, and served as its Chief Operating Officer from
February 1994 to February 1996.
Mr. Gore has served as Executive Vice President and Chief Financial Officer
of the Company since the Recapitalization in December 1996. From April 1996 to
December 1996, Mr. Gore served as Executive Vice President and Chief Financial
Officer of PHC. Mr. Gore served as Vice President and Controller of Quorum
Health Group, Inc., a hospital management company, from February 1990 to April
1996.
Mr. Rutledge has served as Senior Vice President and Chief Operating
Officer of the Company since December 1996. From 1986 to October 1996, Mr.
Rutledge served in several senior management positions with Community Health
Systems, Inc., most recently serving as a Regional Vice President/Group Director
from 1992 to October 1996.
Mr. Anderson has served as Senior Vice President of Acquisitions and
Development of the Company since January 1998. From November 1993 to January
1998, Mr. Anderson served as a Vice President/Group Director of Community Health
Systems, Inc., and was its Operations Controller from September 1992 to November
1993. From April 1990 to September 1992, Mr. Anderson served as Chief Financial
Officer of Clarksville Memorial Hospital in Clarksville, Tennessee, and from
1984 to April 1990, he served as Chief Executive Officer of Harton Medical
Center in Tullahoma, TN.
Mr. McKinney has served as Senior Vice President of Managed Operations of
the Company and President of Brim Healthcare since January 1997. From 1994 to
1997, Mr. McKinney served as Senior Vice President of Brim Healthcare. He served
as a Vice President of Brim Healthcare from 1990 to 1994.
Mr. Wall has served as Senior Vice President and General Counsel of the
Company since September 1997. From 1990 to September 1997, Mr. Wall served as a
Partner of Waller Lansden Dortch & Davis, a law firm based in Nashville,
Tennessee, where he practiced in the health care group.
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<PAGE> 55
Ms. Rector has served as Vice President and Controller of the Company since
the Merger in December 1996. From October 1996 to December 1996, Ms. Rector
served as Vice President and Controller of PHC. From October 1990 to October
1996, Ms. Rector served as a partner in Ernst & Young LLP's health care industry
practice.
Mr. Rauner has served as a director of the Company since the Merger in
December 1996 (Chairman of the Board, December 1996 - May 1998), and served as a
director of PHC from its inception in February 1996 to December 1996. Mr. Rauner
is the Managing Principal of GTCR Golder Rauner, LLC and has been a Principal
with Golder, Thoma, Cressey, Rauner, Inc. ("GTCR"), a venture capital firm and
the general partner of GTCR Fund IV, since 1981. Mr. Rauner is also a director
of Lason, Inc., Polymer Group, Inc., Coinmach Laundry Corporation, Esquire
Communications Ltd. and Metamor Worldwide, Inc.
Mr. Nolan has served as a director of the Company since the
Recapitalization in December 1996, and served as a director of PHC from its
inception in February 1996 to December 1996. Mr. Nolan is a Principal of GTCR
Golder Rauner, LLC and has been a Principal of GTCR since July 1996. Mr. Nolan
joined GTCR in February 1994. From May 1990 to January 1994, Mr. Nolan served as
Vice President Corporate Finance at Dean Witter Reynolds Inc. Mr. Nolan is also
a director of Lason, Inc. and Esquire Communications Ltd.
Mr. Brim formed Brim, Inc. and has served as a director of the Company
since its formation. He has served as Chairman Emeritus since December 1996.
From the Company's formation until December 1996, he served as Chairman and
Chief Executive Officer of the Company.
Mr. Willis has served as a director of the Company since August 1997. Mr.
Willis has served since 1993 as Chairman of the Board, Chief Executive Officer
and President of Metamor Worldwide, Inc., a diversified staffing services
company, previously known as COREStaff, Inc. Mr. Willis is also a director of
Southwest Bank of Texas.
Mr. Steffy has served as a director of the Company since August 1997. Mr.
Steffy is a founder and director of Intensiva HealthCare Corporation, a
long-term acute care hospital company, Odyessy Healthcare Inc., a hospice health
care company and Arcadian Healthcare Management, an operator of rural healthcare
service networks. From 1985 to 1996, Mr. Steffy was Vice Chairman and Director
of Community Health Systems, Inc., a company he co-founded.
The Board of Directors has established two standing committees. The
Compensation Committee was appointed by the Board of Directors in January 1998
to administer the Company's stock plans and recommend to the Board of Directors
compensation of the Company's executive officers. The Compensation Committee is
comprised of Messrs. Brim, Nolan and Willis.
The Audit Committee was appointed by the Board of Directors in January 1998
to recommend the annual appointment of the Company's auditors, with whom the
Audit Committee reviews the scope of audit and non-audit assignments and related
fees, accounting principles used by the Company in financial reporting, internal
auditing procedures and the adequacy of the Company's internal control
principles. The Audit Committee is comprised of Messrs. Willis and Steffy.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is currently composed of Messrs. Brim, Nolan and
Willis. Mr. Brim served as Chairman and Chief Executive Officer of Brim, Inc.
until the merger with Principal Hospital Company (predecessor-in-interest by
merger to the Company) in December 1996, and he is currently an employee of the
Company. See "Executive Compensation" for a description of Mr. Brim's employment
agreement. Mr. Nolan is a member of GTCR Golder Rauner, LLC.
No executive officer of the Company serves as a member of the Compensation
Committee or as a director of any other entity whose executive officer serves as
a director of the Company.
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<PAGE> 56
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid by the Company and its
subsidiaries in 1996 and 1997 to: (i) the Company's Chief Executive Officer;
(ii) the Company's four other most highly compensated executive officers as of
December 31, 1997; and (iii) the Company's former Senior Vice President of
Acquisitions and Development, who resigned in December 1997 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------
ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- --------------------------- ---- -------- -------- ------------
<S> <C> <C> <C> <C>
Martin S. Rash(1)........................................... 1997 $261,458 $130,729 $12,647
Chairman of the Board, President and 1996 229,166 114,583 0
Chief Executive Officer
Richard D. Gore(2).......................................... 1997 181,205 90,602 10,236
Executive Vice President 1996 123,958 61,979 0
and Chief Financial Officer
James O. McKinney(3)........................................ 1997 177,329 88,665 10,070
Senior Vice President 1996 141,036 20,974 4,760
of Managed Operations
John M. Rutledge(4)......................................... 1997 172,005 86,002 9,959
Senior Vice President 1996 7,167 0 0
and Chief Operating Officer
Brenda B. Rector(5)......................................... 1997 130,503 52,201 6,072
Vice President and Controller 1996 22,917 9,167 0
Steven P. Taylor(6)......................................... 1997 193,166 88,000 10,595
Former Senior Vice President 1996 196,027 48,180 6,436
of Acquisition and Development
</TABLE>
- ---------------
(1) Mr. Rash was compensated at an annual salary of $250,000 in 1996, and he
joined PHC upon its formation in February 1996 and became the Company's
Chief Executive Officer in December 1996. All other compensation included
Company contributions of $4,800 under a 401(k) plan and $7,847 under a
supplemental deferred compensation plan in 1997.
(2) Mr. Gore was compensated at an annual salary of $175,000 in 1996, and he
joined PHC in April 1996 and became the Company's Executive Vice President
and Chief Financial Officer in December 1996. All other compensation
included Company contributions of $4,800 under a 401(k) plan and $5,436
under a supplemental deferred compensation plan in 1997.
(3) Mr. McKinney was compensated at an annual salary of 133,463 in 1996 (by
Brim, Inc., a predecessor-in-interest by merger to the Company), and he
joined PHC in January 1997. All other compensation included Company
contributions of (i) $4,760 under a 401(k) plan in 1996, and (ii) $4,750
under a 401(k) plan and $5,320 under a supplemental deferred compensation
plan in 1997.
(4) Mr. Rutledge was compensated at an annual salary of $172,000 in 1996, and he
joined PHC in December 1996. All other compensation included Company
contributions of $4,799 under a 401(k) plan and $5,160 under a supplemental
deferred compensation plan in 1997.
(5) Ms. Rector was compensated at an annual salary of $110,000 in 1996, and she
joined PHC in October 1996 and became the Company's Vice President and
Controller in December 1996. All other compensation included Company
contributions of $3,462 under a 401(k) plan and $2,610 under a supplemental
deferred compensation plan in 1997.
(6) Mr. Taylor resigned from the Company in December 1997. All other
compensation included Company contributions of (i) $6,436 under a 401(k)
plan in 1996 and (ii) $4,800 under a 401(k) plan and $5,795 under a
supplemental deferred compensation plan in 1997.
54
<PAGE> 57
STOCK OPTION GRANTS
The following table sets forth certain information regarding grants of
stock options under the Equity Incentive Plan made to the Named Executive
Officers during 1997. None of the Named Executive Officers exercised any stock
options during 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
PERCENT OF AT
NUMBER OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------------
NAME GRANTED FISCAL YEAR PER SHARE(1) DATE 5% 10%
- ---- ---------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Martin S. Rash....... -- -- -- -- -- --
Richard D. Gore...... -- -- -- -- -- --
James O. McKinney.... 5,464 2.1% $4.58 March 3, 2007 $ 15,738.16 $ 39,887.20
John M. Rutledge..... 109,290 42.4 4.58 March 3, 2007 314,755.20 797,817.00
Brenda B. Rector..... 27,978 10.9 4.58 March 3, 2007 80,576.64 204,239.40
Stephen P. Taylor.... -- -- -- -- -- --
</TABLE>
- ---------------
(1) Based upon the fair market value of the Common Stock on the date of grant of
options, as determined by the Company's Board of Directors.
(2) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the term
will be at the assumed 5% and 10% levels or at any other defined level.
Unless the market price of the Common Stock appreciates over the option
term, no value will be realized from the option grants made to the Named
Executive Officers.
EMPLOYMENT AGREEMENTS
The Company entered into Senior Management Agreements with Messrs. Rash and
Gore effective as of December 17, 1996. Messrs. Rash and Gore are the Company's
Chief Executive Officer and Chief Financial Officer, respectively, and currently
receive annual base salaries determined by the Company's Board of Directors (the
"Board") which will be adjusted by the Compensation Committee. Mr. Rash's annual
base salary may not be less than $250,000 and Mr. Gore's salary may not be less
than $175,000. Each will be eligible to receive a bonus each year of up to fifty
percent (50%) of his annual base salary for such year, based on the achievement
of certain operational and financial objectives. Their employment periods
continue until their resignation, disability, or death, or until the Board
determines that termination of their employment is in the best interests of the
Company. In the event Mr. Rash's or Mr. Gore's employment is terminated by the
Company without cause or as a result of death or disability, the Company has
agreed to pay to such executive an amount equal to twice his annual base salary;
provided that such severance payments cease upon acceptance of employment with
an entity which owns and operates rural hospitals. Messrs. Rash and Gore have
agreed not to compete with the Company or solicit Company employees following
the termination of their employment for a period of two years in the case of Mr.
Rash, or one year in the case of Mr. Gore.
The Company entered into an Employment Agreement with Mr. Brim effective as
of December 17, 1996. Mr. Brim receives an annual base salary of $121,680, to be
increased in accordance with increases in the salary of similarly situated
executives of the Company. Mr. Brim is also entitled to an automobile and
expense allowance, and the Company pays certain club dues on his behalf. Mr.
Brim's agreement terminates on the earliest to occur of his death, permanent
disability, termination for cause, voluntary termination or December 17, 1999.
In the event that Mr. Brim's employment is terminated without cause, the Company
has agreed to pay him an amount equal to his base salary. Mr. Brim has agreed
not to compete with the Company or to solicit Company employees during the term
of his employment, and has agreed not to disclose confidential information
regarding the Company.
55
<PAGE> 58
DIRECTOR COMPENSATION
Directors of the Company who are employees of the Company or its
subsidiaries are not entitled to receive any fees for serving as directors.
Non-employee directors of the Company receive a fee of $1,000 per board meeting
attended and are reimbursed for out-of-pocket expenses related to the Company's
business. In addition, non-employee directors of the Company are eligible to
participate in the Company's 1997 Long-Term Equity Incentive Plan.
LONG-TERM EQUITY INCENTIVE PLAN
In March 1997 the Board adopted the 1997 Long-Term Equity Incentive Plan,
and the Board and the stockholders approved increases in the number of shares
available pursuant to the plan in each of October 1997 and June 1998 (as
amended, the "Equity Incentive Plan"). The Equity Incentive Plan provides for
grants of stock options, stock appreciation rights ("SARs") in tandem with
options, restricted stock, performance awards and any combination of the
foregoing to certain directors, officers and key employees of the Company and
its subsidiaries. Options to purchase a total of 1,209,016 shares of Common
Stock are available for issuance pursuant to the Equity Incentive Plan, of which
options to purchase 703,206 shares have been granted and are outstanding as of
July 7, 1998.
The Equity Incentive Plan is administered by the Compensation Committee. As
grants to be awarded under the Equity Incentive Plan are made entirely in the
discretion of the Compensation Committee, the recipients, amounts and values of
future benefits to be received pursuant to the Equity Incentive Plan are not
determinable.
Pursuant to the Equity Incentive Plan, the Compensation Committee may award
grants of incentive stock options conforming to the provisions of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code") ("incentive
options"), and other stock options ("non-qualified options"), subject to a
maximum award of 114,754 options or SARs to any one grantee in any calendar
year. The exercise price of any option will be determined by the Compensation
Committee in its discretion, provided that the exercise price of an incentive
option may not be less than 100% of the fair market value of a share of Common
Stock on the date of grant of the option, and the exercise price of an incentive
option awarded to a person who owns stock constituting more than 10% of the
voting power of the Company may not be less than 110% of such fair market value
on such date.
The term of each option will be established by the Compensation Committee,
subject to a maximum term of 10 years from the date of grant in the case of a
non-qualified option or an incentive option and of five years from the date of
grant in the case of an incentive option granted to a person who owns stock
constituting more than 10% of the voting power of the Company. In addition, the
Equity Incentive Plan provides that all options generally cease vesting on, and
terminate 90 days after, the date on which a grantee ceases to be a director,
officer or employee of the Company or its subsidiaries, although the Equity
Incentive Plan allows certain exceptions depending upon the circumstances of
cessation. In the case of the grantee's death or disability, all of the
grantee's options become fully vested and exercisable and remain so for one year
after the date of death or disability. In the event of retirement, only the
options vested on the date of retirement remain exercisable, for a period of
three years after retirement, so long as the grantee does not compete with the
Company during such period. Upon termination for cause, all options terminate
immediately. In addition, immediately prior to a change in control of the
Company, all options become fully vested and exercisable.
The Compensation Committee may grant SARs in tandem with stock options to
any optionee pursuant to the Equity Incentive Plan. SARs become exercisable only
when, to the extent and on the conditions that the related options are
exercisable, and they expire at the same time the related options expire. The
exercise of an option results in the immediate forfeiture of any related SAR to
the extent the option is exercised, and the exercise of an SAR results in the
immediate forfeiture of any related option to the extent the SAR is exercised.
56
<PAGE> 59
Upon exercise of an SAR, the grantee will receive an amount in cash and/or
shares of Common Stock equal to the difference between the fair market value of
a share of Common Stock on the date of exercise and the exercise price of the
option to which it relates, multiplied by the number of shares as to which the
SAR is exercised.
Under the Equity Incentive Plan, the Compensation Committee may award
restricted stock subject to such conditions and restrictions, and for such
duration (which shall be at least six months except as otherwise described
below), as it determines in its discretion. A grantee will be required to pay
the Company at least the aggregate par value of any shares of restricted stock
within 10 days of the date of grant, unless such shares are treasury shares.
Except as otherwise provided by the Compensation Committee, all restrictions on
a grantee's restricted stock will lapse immediately prior to a change in control
of the Company or at such time as the grantee ceases to be a director, officer
or employee of the Company and its subsidiaries due to death, disability or
retirement. If a grantee ceases to serve as such a director, office or employee
for any other reason, all his or her restricted stock as to which the applicable
restrictions have not lapsed will be forfeited immediately.
Pursuant to the Equity Incentive Plan, the Compensation Committee may grant
performance awards contingent upon achievement of set goals and objectives with
respect to specified performance criteria. Performance awards may include
specific dollar-value target awards, performance units, the value of which is
established by the Compensation Committee at the time of grant, and/or
performance shares, the value of which is equal to the fair market value of a
share of Common Stock on the date of grant. The value of a performance award may
be fixed or fluctuate on the basis of specified performance criteria. Unless the
Compensation Committee determines otherwise, no award under the Equity Incentive
Plan may vest and become exercisable within six months of the date of grant;
provided that all awards vest immediately prior to a change in control of the
Company and in certain other circumstances upon a participant's termination of
employment or performance of services for the Company as described above. Unless
the Compensation Committee determines otherwise, no award made pursuant to the
Equity Incentive Plan will be transferable otherwise than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations order,
and each award may be exercised only by the grantee or his or her guardian or
legal representative.
The Board may amend or terminate the Equity Incentive Plan in its
discretion, except that no amendment will become effective without prior
approval of the Company's stockholders if such approval is necessary for
continued compliance with the performance-based compensation exception of
Section 162(m) of the Code or any stock exchange listing requirements. If not
previously terminated by the Board, the Equity Incentive Plan will terminate on
March 3, 2007.
EMPLOYEE STOCK PURCHASE PLAN
In May 1998 the Board adopted, and in June 1988 the stockholders approved,
the Province Healthcare Company Employee Stock Purchase Plan (the "ESPP"). The
ESPP grants to all eligible employees an option to purchase shares of Common
Stock at a discount from fair market value and is intended to qualify as an
employee stock purchase plan under section 423 of the Code. The option is
granted on January 1 of each year. As of May 31, 1998, approximately 1,804
employees were eligible to participate in the ESPP. The ESPP is administered by
the Compensation Committee of the Board of Directors. No member of the
Compensation Committee is eligible to participate in the ESPP. A total of
250,000 shares of Common Stock have been reserved for issuance under the ESPP.
All employees who have been employed for at least 90 days are eligible to
participate in the ESPP, except: (i) employees who are regularly scheduled to
work less than 20 hours per week, (ii) employees who are regularly scheduled to
work fewer than five months during the year or (iii) employees who own 5% or
more of the voting power or the value of all classes of the Company's capital
stock.
57
<PAGE> 60
On January 1 of each year (the "Grant Date"), each eligible employee is
granted an option to purchase shares of Common Stock on the next following
December 31 (the "Exercise Date"). The purchase price of the Common Stock under
the option is 85% of the fair market value of the Common Stock on either the
Grant Date or the Exercise Date, whichever is lower. This right to purchase
Common Stock is limited to the lesser of: (i) the number of shares that may be
purchased with 10% of the eligible employee's compensation during the year or
(ii) $25,000 per calendar year, based on the fair market value of the Common
Stock on each Grant Date. In order to exercise the option granted under the
ESPP, an employee must authorize the Company to deduct a portion of the
employee's regular pay to be held for the purchase of Common Stock. On each
Exercise Date, the funds deducted are used to purchase shares of Common Stock
for each participating employee. Options that are not exercised by participating
employees terminate on the Exercise Date.
In general, an employee's right to participate in the ESPP expires
immediately on termination of employment. At that time, all payroll amounts that
have been withheld and have not yet been used to purchase Common Stock since the
previous Exercise Date are refunded to the employee without interest. If
termination is due to death, disability or retirement, however, the employee (or
the personal representative of his estate) may elect instead for amounts
previously withheld to be used to purchase Common Stock at the next Exercise
Date.
58
<PAGE> 61
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
REDEMPTION OF SENIOR PREFERRED STOCK AND COMMON STOCK CONVERSION AND REPURCHASE
Immediately following the consummation of the IPO in February 1998, the
Company used $22.7 million of the net proceeds from the IPO to redeem all of the
outstanding shares of the Senior Preferred Stock, which were held by Leeway &
Co. In addition, in connection with the IPO, all outstanding shares of Junior
Preferred Stock were converted into 2,204,420 shares of Common Stock, and the
Company used $14.9 million of the net proceeds from the IPO to repurchase from
GTCR Fund IV and Leeway & Co. 930,266 of the shares of Common Stock issued upon
conversion of 13,636 of their shares of Junior Preferred Stock.
RECENT STOCK PURCHASES
In connection with the Recapitalization, the stockholders of the Company
entered into a Stockholders Agreement with the Company (the "Stockholders
Agreement"). On July 15, 1997, pursuant to the terms of the Stockholders
Agreement and a Purchase Agreement dated as of December 17, 1996 between the
Company and the Investors, the Company sold 2,733 shares of Junior Preferred
Stock and 448,033 shares of Common Stock to GTCR Fund IV; 794 shares of Junior
Preferred Stock and 130,164 shares of Common Stock to Leeway & Co.; 64 shares of
Junior Preferred Stock and 71,639 shares of Common Stock to Mr. Rash; 119 shares
of Junior Preferred Stock and 49,672 shares of Common Stock to Mr. Gore; and
22.5 shares of Junior Preferred Stock and 3,689 shares of Common Stock to each
of the two other Investors for a purchase price of $1,000 per share of Junior
Preferred Stock and $0.61 per share of Common Stock, resulting in an aggregate
purchase price of $4.2 million. Mr. Rash is a Director and executive officer of
the Company, and Mr. Gore is an executive officer of the Company. The two other
Investors are affiliated with banks which are lenders to the Company under its
bank credit facility. In addition, in September 1997, Leeway & Co. exercised its
warrant to purchase 253,228 shares of Common Stock for an aggregate exercise
price of $15,447. The Stockholders Agreement was terminated upon completion of
the Company's IPO in February 1998.
EXECUTIVE NOTES
In connection with the Recapitalization, the Company loaned $112,956 to Mr.
Rash and $67,768 to Mr. Gore pursuant to promissory notes (the "Executive
Notes"). In addition, in connection with the Recapitalization, Mr. Gore borrowed
an additional $211,200 from the Company pursuant to a demand note (the "Demand
Note") which was subsequently repaid. The Company loaned such amounts to Messrs.
Rash and Gore to finance a portion of their purchase of the Company's securities
pursuant to the Recapitalization. The Executive Notes and the Demand Note bear
interest at a rate per annum equal to the lesser of: (i) the rate designated in
The Wall Street Journal as the "prime rate;" and (ii) the highest rate permitted
by applicable law. The principal amount of the Executive Notes and all interest
accrued thereon mature on December 17, 2002. The Executive Notes may be prepaid
in whole or in part at any time.
PROFESSIONAL SERVICES AGREEMENT
The Company had a Professional Services Agreement with GTCR pursuant to
which GTCR provided financial and management consulting services. Under the
agreement, GTCR received an annual management fee of $200,000 and a fee of 1.25%
of the amount of debt and equity investments, for their assistance in obtaining
such investments. During the years ended December 31, 1996 and 1997, and for the
three months ended March 31, 1998, PHC and the Company had paid or accrued an
aggregate of $1.4 million, $252,273 and $26,300, respectively, in fees under the
agreement. The agreement was terminated prior to the consummation of the IPO.
Messrs. Rauner and Nolan, principals of GTCR, continue to serve as directors of
the Company and are compensated as non-employee directors. See
"Management -- Director Compensation."
59
<PAGE> 62
SENIOR MANAGEMENT AGREEMENTS
In connection with the Recapitalization, Messrs. Rash and Gore entered into
Senior Management Agreements with the Company, GTCR Fund IV and Leeway & Co. (as
amended, the "Executive Agreements"). The Executive Agreements provide that a
portion of the Common Stock purchased by each of Messrs. Rash and Gore is
subject to vesting (the "Vesting Shares"). Upon completion of the IPO, 50% of
the Vesting Shares became vested, and the remaining Vesting Shares will become
vested in equal installments on the first three anniversaries of the completion
of the IPO. Unvested shares are subject to repurchase by the Company (or, if the
Company does not elect to repurchase such shares, by GTCR Fund IV) at their
original cost upon termination of executive's employment with the Company for
any reason. For purposes of determining earnings per share, 100% of the Common
Stock purchased by Messrs. Rash and Gore is considered outstanding. The
Executive Agreements entitle the Company and GTCR Fund IV to repurchase from
each of Messrs. Rash and Gore upon the termination of his employment: (i) vested
Common Stock at a price equal to fair market value; and (ii) unvested Common
Stock at a price equal to original cost. The Executive Agreements also contain
restrictions on the transfer of the Company's securities. Upon completion of the
IPO, the portions of the Executive Agreements which restricted the transfer of
the Company's securities were terminated.
The Executive Agreements further provide that in the event GTCR or its
affiliates own less than 25% of the Common Stock of the Company or any person or
entity acquires 20% or more of the Common Stock or all or substantially all of
the Company's assets, then any unvested Common Stock held by Mr. Rash and Mr.
Gore vests immediately upon the occurrence of such event. Following consummation
of the Offering, GTCR and its affiliates will own less than 25% of the
outstanding Common Stock, and all unvested shares held by Mr. Rash and Mr. Gore
will become fully vested.
REGISTRATION AGREEMENT
At the time of the Recapitalization, the Company entered into a
Registration Agreement with its stockholders. See "Shares Eligible for Future
Sale -- Registration Agreement."
SENIOR LIVING DIVESTITURE
Prior to the Recapitalization in December 1996, Brim divested its senior
living business through a series of transactions. In connection therewith, Mr.
Brim and certain other persons who were officers and directors of Brim invested
an aggregate of $5.8 million in the purchasers of Brim's senior living business.
In addition, in connection with the divestiture of the senior living business, a
limited liability company whose members included Mr. Brim, Mr. Taylor and
certain other persons who were officers and directors of Brim at such time
purchased from Brim three medical buildings for a purchase price of $406,500
plus the assumption of approximately $800,000 of indebtedness.
OPTION SETTLEMENTS
In connection with the Recapitalization, all outstanding stock options of
Brim, Inc. were bought out. Pursuant to this option buyout, Messrs. Brim,
McKinney and Taylor received $861,326, $144,498 and $861,326, respectively, in
respect of their Brim, Inc. stock options.
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<PAGE> 63
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to ownership of the
Common Stock as of June 1, 1998 by (i) each person known by the Company
beneficially to own five percent or more of the Company's Common Stock; (ii)
each of the Company's directors and the executive officers named in the Summary
Compensation Table; (iii) the Selling Stockholders; and (iv) all directors and
executive officers of the Company as a group. Unless otherwise indicated, to the
knowledge of the Company, each stockholder listed below has sole voting and
investment power with respect to the shares beneficially owned. The Company is
unaware of any person other than those listed below that beneficially owns more
than 5% of the outstanding shares of the Company's Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE SHARES TO OWNED AFTER THE
OFFERING(1)(2) BE SOLD OFFERING(1)(2)
DIRECTORS, OFFICERS, SELLING ------------------- IN THE -------------------
AND 5% STOCKHOLDERS NUMBER PERCENT OFFERING NUMBER PERCENT
- ---------------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Golder, Thoma, Cressey, Rauner Fund IV,
L.P.(3)................................. 4,501,258 34.5% 850,000 3,651,258 23.8%
Bruce V. Rauner(3)(4)..................... 4,501,258 34.5 850,000 3,651,258 23.8
Joseph P. Nolan(3)(5)..................... 4,506,258 34.5 850,000 3,656,258 23.8
Leeway & Co.(6)........................... 1,153,218 8.8 287,000 866,218 5.7
Martin S. Rash(7)......................... 615,737 4.7 -- 615,737 4.0
Richard D. Gore(7)........................ 423,062 3.2 -- 423,062 2.8
James O. McKinney(7)(8)................... 26,278 * -- 26,278 *
John M. Rutledge(7)(9).................... 61,858 * -- 61,858 *
Brenda B. Rector(7)(10)................... 8,096 * -- 8,096 *
A.E. Brim(11)............................. 158,105 1.2 39,000 119,105 *
Michael T. Willis(12)..................... 10,000 * -- 10,000 *
David L. Steffy(7)........................ 40,000 * -- 40,000 *
Steven P. Taylor(13)...................... 156,739 1.2 24,000 132,739 *
John Miller(14)........................... 156,739 1.2 30,000 126,739 *
CTK Capital Corporation(15)............... 108,601 * 20,000 88,601 *
SSS Capital Corporation(16)............... 108,601 * 20,000 88,601 *
All executive officers and directors as a
group (12 persons)...................... 5,872,394 45.0% 1,200,000 4,983,394 32.5%
</TABLE>
- ---------------
* Less than 1%.
(1) Includes shares of Common Stock subject to options which are exercisable
within 60 days of June 1, 1998.
(2) Shares of Common Stock subject to options which are exercisable within 60
days of June 1, 1998 are considered to be outstanding for the purpose of
determining the percent of the shares held by a holder, but not for the
purpose of computing the percentage held by others.
(3) The address of each of Golder, Thoma, Cressey, Rauner Fund IV, L.P. ("GTCR
Fund IV") and Messrs. Rauner and Nolan is 6100 Sears Tower, Chicago, IL
60606.
(4) Represents shares held and shares to be sold in the Offering by GTCR Fund
IV. GTCR is the general partner of GTCR IV, L.P., which is the general
partner of GTCR Fund IV. As a principal of GTCR, Mr. Rauner may be deemed
to share the power to vote and dispose of the shares held by GTCR Fund IV.
Mr. Rauner disclaims beneficial ownership of the shares of Common Stock
owned by GTCR Fund IV.
(5) Includes shares held and shares to be sold in the Offering by GTCR Fund IV.
GTCR is the general partner of GTCR IV, L.P., which is the general partner
of GTCR Fund IV. As a principal of GTCR, Mr. Nolan may be deemed to share
the power to vote and dispose of the shares held by GTCR Fund IV. Mr. Nolan
disclaims beneficial ownership of the shares of Common Stock owned by GTCR
Fund IV. Mr. Nolan owns 5,000 shares individually.
(6) The address of Leeway & Co. is c/o State Street Bank and Trust Company,
Master Trust Division -- Q4W, P.O. Box 1992, Boston, Massachusetts 02101.
(7) The address of each of Messrs. Rash, Gore, McKinney, Rutledge, Steffy and
Ms. Rector is 105 Westwood Place, Suite 400, Nashville, TN 37027.
(8) Includes options to purchase 1,093 shares granted under the Company's
Equity Incentive Plan.
(9) Includes options to purchase 21,858 shares granted under the Company's
Equity Incentive Plan.
(10) Includes options to purchase 5,596 shares granted under the Company's
Equity Incentive Plan.
(11) Includes 156,739 shares, which are held of record by Brim Capital
Corporation, and options to purchase 1,366 shares owned by Mr. Brim
individually.
(12) The address of Mr. Willis is Metamor Worldwide, Inc. 4400 Post Oak Pkwy
#1130, Houston, TX 77027.
(13) Mr. Taylor resigned from the Company in December 1997. The address of Mr.
Taylor is 305 NE 102d Ave., Portland, OR 97202.
(14) Mr. Miller is a former officer of Brim.
(15) James Williams, a principal of CTK Capital Corporation, is a former officer
of Brim.
(16) David McAllister, a principal of SSS Capital Corporation, is a former
officer of Brim.
61
<PAGE> 64
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 25,000,000 shares of
Common Stock, par value $0.01 per share; 25,000 shares of Series A Senior
Preferred Stock, no par value; 50,000 shares of Series B Junior Preferred Stock,
no par value; and 100,000 shares of Preferred Stock, par value $.01 per share.
At July 7, 1998, there were 13,010,965 shares of Common Stock, and no shares of
Senior Preferred Stock, Junior Preferred Stock or Preferred Stock outstanding.
Upon completion of the Offering, 15,310,965 shares of Common Stock will be
issued and outstanding, and no shares of Senior Preferred Stock, Junior
Preferred Stock or Preferred Stock will be outstanding. The following summary of
certain provisions of the Company's capital stock describes all material
provisions of, but does not purport to be complete, and is subject to, and
qualified in its entirety by, the Certificate of Incorporation and the Bylaws of
the Company that are included as exhibits to the Registration Statement of which
this Prospectus forms a part and by the provisions of applicable law.
COMMON STOCK
The issued and outstanding shares of Common Stock are, and the shares of
Common Stock being offered will be upon payment therefor, validly issued, fully
paid and nonassessable. Subject to the prior rights of the holders of any
Preferred Stock and the terms of the Credit Agreement, the holders of
outstanding shares of Common Stock are entitled to receive dividends out of
assets legally available therefor at such time and in such amounts as the Board
of Directors may from time to time determine. See "Dividend Policy." The shares
of Common Stock are not redeemable or convertible, and the holders thereof have
no preemptive or subscription rights to purchase any securities of the Company.
Upon liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive pro rata the assets of the Company which
are legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of any holders of Preferred Stock
then outstanding. Each outstanding share of Common Stock is entitled to vote on
all matters submitted to a vote of stockholders.
PREFERRED STOCK
The Board may, without any further vote or action by the Company's
stockholders, from time to time, direct the issuance of shares of Preferred
Stock in one or more series with such designations, rights, preferences and
limitations as the Board may determine, including the consideration received
therefor. The Board also has the authority to determine the number of shares
comprising each series, dividend rates, redemption provisions, liquidation
preferences, sinking fund provisions, conversion rights and voting rights
without the approval by the holders of Common Stock. Although it is not possible
to state the effect that any issuance of Preferred Stock might have on the
rights of holders of Common Stock, the issuance of Preferred Stock may have one
or more of the following effects: (i) to restrict Common Stock dividends if
Preferred Stock dividends have not been paid; (ii) to dilute the voting power
and equity interest of holders of Common Stock to the extent that any series of
Preferred Stock has voting rights or is convertible into Common Stock; or (iii)
to prevent current holders of Common Stock from participating in the
distribution of the Company's assets upon liquidation until any liquidation
preferences granted to holders of Preferred Stock are satisfied. In addition,
the issuance of Preferred Stock may, under certain circumstances, have the
effect of discouraging a change in control of the Company by, for example,
granting voting rights to holders of Preferred Stock that require approval by
the separate vote of the holders of Preferred Stock for any amendment to the
Company's Certificate of Incorporation or any reorganization, consolidation,
merger or other similar transaction involving the Company. As a result, the
issuance of the Preferred Stock may discourage bids for the Common Stock at a
premium over the market price therefor, and could have a materially adverse
effect on the market value of the Common Stock. There are currently no shares of
Preferred Stock outstanding and the Board of Directors does not presently intend
to issue any shares of Preferred Stock.
62
<PAGE> 65
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is governed by the provisions of Section 203 of the Delaware
General Corporation Law. In general, the law prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. "Business combination" includes
mergers, asset sales and other transactions resulting in a financial benefit to
the stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years, did own) 15% or more of
the corporation's voting stock. The statute could prohibit or delay mergers or
other takeover or change in control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Certificate of Incorporation limits the liability of
directors to the fullest extent permitted by the Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, including
gross negligence, except liability for: (i) breach of the director's duty of
loyalty; (ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law; (iii) the unlawful payment of a
dividend or unlawful stock purchase or redemption; and (iv) any transaction from
which the director derives an improper personal benefit. This provision of the
Company's Certificate of Incorporation has no effect on the availability of
equitable remedies such as injunction or rescission. Additionally, this
provision will not limit liability under state or federal securities laws. The
Certificate of Incorporation also provides that the Company shall indemnify
directors and officers of the Company to the fullest extent permitted by such
law. The Company believes that these provisions will assist the Company in
attracting and retaining qualified individuals to serve as directors.
CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS AFFECTING CHANGE OF CONTROL
The Company's Certificate of Incorporation and By-laws include certain
restrictions on who may call a special meeting of stockholders and prohibit
certain actions by written consent of the holders of the Common Stock. The
effect of these provisions may be the delaying, deterring or preventing of a
future takeover or change in control of the Company unless such takeover or
change in control is approved by the Board.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is First Union
National Bank.
63
<PAGE> 66
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 15,310,965 shares of
Common Stock outstanding (15,696,465 shares if Underwriter's over-allotment
option is exercised in full). Of these shares, the 5,405,000 shares issued in
the IPO and the 3,570,000 shares of Common Stock sold in the Offering will be
tradeable without restriction under the Securities Act, except for any such
shares which may be acquired by an "affiliate" of the Company (an "Affiliate"),
as that term is defined in Rule 144 under the Securities Act ("Rule 144"), which
shares will be subject to the resale limitations of Rule 144.
In general, under Rule 144 as currently in effect, if a period of at least
one year has elapsed since the later of the date the "restricted securities" (as
that phrase is defined in Rule 144) were acquired from the Company and the date
they were acquired from an Affiliate, then the holder of such restricted
securities (including an Affiliate) is entitled to sell a number of shares
within any three-month period that does not exceed the greater of 1% of the then
outstanding shares of the Common Stock (approximately 153,110 shares immediately
after this Offering) or the average weekly reported volume of trading of the
Common Stock on the Nasdaq National Market during the four calendar weeks
preceding such sale. The holder may only sell such shares through unsolicited
brokers' transactions. Sales under Rule 144 are also subject to certain
requirements pertaining to the manner of such sales, notices of such sales and
the availability of current public information concerning the Company.
Affiliates may sell shares not constituting restricted shares in accordance with
the foregoing volume limitations and other requirements but without regard to
the one-year period. After the Offering, 6,335,965 shares of Common Stock will
be eligible for sale in the public market at prescribed times under Rule 144,
subject to the volume limitations and other requirements described above,
without consideration of the contractual restrictions described below.
Under Rule 144(k), if a period of at least two years has elapsed between
the later of the date restricted shares were acquired from the Company and the
date they were acquired from an Affiliate, as applicable, a holder of such
restricted shares who is not an Affiliate at the time of the sale and has not
been an Affiliate for at least three months prior to the sale would be entitled
to sell the shares immediately without regard to the volume limitations and
other conditions described above. Ninety days after the date of this Prospectus,
no shares of Common Stock will be eligible for sale without restriction under
Rule 144(k).
Notwithstanding the foregoing, the Company, its executive officers and
directors, and substantially all of its current stockholders have agreed that
for a period of 90 days after the date of the Offering they will not, without
the prior written consent of BT Alex. Brown Incorporated, offer, sell, contract
to sell or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock except pursuant
to the Underwriting Agreement. Of the approximately 6,335,965 shares of Common
Stock otherwise eligible for sale as discussed above, substantially all are
subject to such agreements.
The Company can make no predictions as to the effect, if any, that sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of significant amounts of the
Common Stock in the public market, or the perception that such sales may occur,
could adversely affect prevailing market prices. See "Risk Factors -- Shares
Eligible for Future Sale; Registration Rights."
STOCK OPTIONS
As of June 1, 1998 the Company has outstanding options to purchase a total
of 703,206 shares of Common Stock pursuant to the Company's Equity Incentive
Plan. The Company has registered the options and shares issuable under the
Equity Incentive Plan, and approximately 51,884 of these options are currently
exercisable and may be resold in the public market. Of the shares subject to
options, 368,171 are subject to lock-up agreements. Upon completion of this
Offering, an additional
64
<PAGE> 67
504,613 shares of Common Stock will be available for future option grants under
the Company's Equity Incentive Plan. See "Management -- Long-Term Equity
Incentive Plan."
REGISTRATION AGREEMENT
In connection with the Recapitalization in December 1996, the stockholders
of Brim at such time (the "Original Stockholders") entered into a Registration
Agreement with Brim (the "Registration Agreement"). The Registration Agreement
provides for certain demand registration rights to the Original Stockholders,
and to subsequent holders of the Common Stock acquired by the Original
Stockholders in connection with the Recapitalization. The demand registration
rights commence from and after the 180th day after the closing of the Company's
IPO. The holders of a majority of the registrable securities held by the
Original Stockholders (and their permitted transferees) other than Leeway & Co.
are entitled to request two long-form registrations in which the Company pays
all registration expenses and an unlimited number of short-form registrations in
which the Company pays all registration expenses. Such holders are also entitled
to request an unlimited number of long-form registrations in which holders of
registrable securities pay their pro-rata share of registration expenses. The
holders of a majority of the registrable securities held by Leeway & Co. (and
their permitted transferees) are entitled to request one long-form registration
in which the Company pays all registration expenses and an unlimited number of
long-form registrations in which the holders of registrable securities pay their
share of registration expenses. The Company is entitled to postpone a demand
registration for up to one year under certain circumstances, and is not required
to effect a demand registration within one year of a previous registration in
which holders of registrable securities participated without reduction of the
number of their included shares.
The Registration Agreement also provides that, subject to certain
limitations, the Original Stockholders (and their permitted transferees) may
request inclusion of their shares in a registration of securities by the Company
(other than pursuant to a demand registration). Expenses incurred in connection
with the exercise of such piggyback registration rights are borne by the
Company. In accordance with such Registration Agreement, 1,270,000 shares are
being offered by the Selling Stockholders pursuant hereto.
65
<PAGE> 68
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting
Agreement, the Underwriters named below (the "Underwriters") through their
Representatives, BT Alex. Brown Incorporated, BancAmerica Robertson Stephens,
Goldman, Sachs & Co., and The Robinson-Humphrey Company, LLC, have severally
agreed to purchase from the Company and the Selling Stockholders the following
respective numbers of shares of Common Stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
BT Alex. Brown Incorporated................................. 921,000
BancAmerica Robertson Stephens.............................. 921,000
Goldman, Sachs & Co. ....................................... 921,000
The Robinson-Humphrey Company, LLC.......................... 307,000
SunTrust Equitable Securities Corporation................... 250,000
Wheat First Union........................................... 250,000
---------
Total............................................. 3,570,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.
The Company and the Selling Stockholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $0.75 per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $0.10 per share to
certain other dealers. After the Offering, the offering price and other selling
terms may be changed by the Representatives of the Underwriters.
The Company and certain of the Selling Stockholders have granted to the
Underwriters an option, exercisable not later than 30 days after the date of
this Prospectus, to purchase up to 535,500 additional shares of Common Stock at
the public Offering price less the underwriting discounts and commissions set
forth on the cover page of this Prospectus. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of shares of
Common Stock to be purchased by it shown in the above table bears to 3,570,000,
and the Company and the Selling Stockholders will be obligated, pursuant to the
option, to sell such shares to the Underwriters. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
Common Stock offered hereby. If purchased, the Underwriters will offer such
additional shares on the same terms as those on which the 3,570,000 shares are
being offered.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
Subject to certain exceptions, the Company has agreed not to issue, offer,
sell, sell short or otherwise dispose of any shares of Common Stock for a period
of 90 days from the date of this Prospectus without the prior written consent of
BT Alex. Brown Incorporated. In addition, stockholders of the Company holding in
the aggregate approximately 6.4 million shares of Common Stock and options to
purchase 368,171 shares of Common Stock, have agreed not to offer or otherwise
dispose of any such Common Stock for a period of 90 days from the date of this
Prospectus without the prior written consent of BT Alex. Brown Incorporated. See
"Shares Eligible for Future Sale."
66
<PAGE> 69
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Exchange Act of 1934, as amended, certain persons
participating in this Offering may engage in transactions, including stabilizing
bids, syndicate covering transactions or the imposition of penalty bids which
may have the effect of stabilizing, maintaining or otherwise affecting the
market price of the Common Stock at a level above that which might otherwise
prevail in the open market. A "stabilizing bid" is a bid for or the purchase of
Common Stock on behalf of the Underwriters for the purpose of fixing or
maintaining the price of the Common Stock. A "syndicate covering transaction" is
the bid for or the purchase of the Common Stock on behalf of the Underwriters to
reduce a short position incurred by the Underwriters in connection with the
Offering. A "penalty bid" is an arrangement permitting the Representatives to
reclaim the selling concession otherwise accruing to an Underwriter or syndicate
member in connection with the Offering if the Common Stock originally sold by
such Underwriter or syndicate member is purchased by the Underwriters in a
syndicate covering transaction and has therefore not been effectively placed by
such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.
The Representatives have from time to time performed certain financial
advisory and investment banking services for the Company for which they have
received customary fees. The Representatives acted as underwriters in the
Company's offering of 5,405,000 shares of Common Stock in the IPO. In the
future, in the ordinary course of their businesses, the Representatives and
certain of their affiliates may engage in investment banking or other
transactions of a financial nature with the Company, including the provision of
certain advisory services and the making of loans to the Company and its
affiliates, for which they would receive customary fees.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Waller Lansden Dortch & Davis, A Professional Limited
Liability Company, Nashville, Tennessee. Certain legal matters will be passed
upon for the Underwriters by Alston & Bird LLP, Atlanta, Georgia.
EXPERTS
The consolidated financial statements and supplemental schedule of Province
Healthcare Company at December 31, 1996 and 1997, and for the period February 2,
1996 to December 31, 1996, and the year ended December 31, 1997; the
consolidated financial statements of Brim, Inc. for the period January 1, 1996
to December 18, 1996; and the financial statements of Havasu Samaritan Regional
Hospital at December 31, 1996 and 1997, and for each of the three years in the
period ended December 31, 1997, appearing in this Registration Statement, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of Brim, Inc. and subsidiaries for
the year ended December 31, 1995 have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
In connection with the Recapitalization, the Company's board of directors
approved the appointment of Ernst & Young LLP, independent auditors, as
independent accountants for the
67
<PAGE> 70
Company, to replace KPMG Peat Marwick LLP, independent certified public
accountants, whom the Company dismissed on December 18, 1996.
During 1994 and 1995, and the period from January 1, 1996 through December
18, 1996, there were no disagreements with KPMG Peat Marwick LLP on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure nor did KPMG Peat Marwick LLP's reports on the
financial statements for such periods contain an adverse opinion or disclaimer
of opinion, nor were such reports qualified or modified as to uncertainty, audit
scope or accounting.
In connection with the filing of the Company's Registration Statement in
the IPO, KPMG Peat Marwick LLP was provided with a copy of this disclosure and
was requested by the Company to furnish a letter addressed to the Commission
stating whether they agree with the above statements. A copy of KPMG Peat
Marwick LLP's letter to the Commission is filed as an exhibit to the IPO
Registration Statement (Reg. No. 333-34421).
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 pursuant to the Securities
Act with respect to the Common Stock offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement, certain
items of which are omitted as permitted by the rules and regulations of the
Commission. Statements contained in this Prospectus as to the contents of any
contract, agreement or other document filed with the Registration Statement as
exhibits are necessarily summaries of such documents, and each such statement is
qualified in its entirety by reference to the copy of the applicable document
filed as an exhibit to the Registration Statement. For further information about
the Company and the securities offered hereby, reference is made to the
Registration Statement and to the consolidated financial statements, schedules
and exhibits filed as a part thereof.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Commission. The
Registration Statement, the exhibits and schedules forming a part thereof and
the reports and other information filed by the Company with the Commission in
accordance with the Exchange Act may be inspected without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the following regional offices of the Commission:
7 World Trade Center, Suite 1300, New York, New York 10048; and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois,
60661-2511. Copies of such materials or any part thereof may also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains an
Internet web site at http://www.sec.gov that contains reports, proxy statements
and other information.
68
<PAGE> 71
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROVINCE HEALTHCARE COMPANY
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets at December 31, 1996 and 1997... F-3
Consolidated Statements of Operations for the period
February 2, 1996 to December 31, 1996 and for the Year
Ended December 31, 1997................................... F-4
Consolidated Statements of Changes in Common Stockholders'
Deficit for the period February 2, 1996 to December 31,
1996 and for the Year Ended December 31, 1997............. F-5
Consolidated Statements of Cash Flows for the period
February 2, 1996 to December 31, 1996 and for the Year
Ended December 31, 1997................................... F-6
Notes to Consolidated Financial Statements.................. F-7
Condensed Consolidated Balance Sheet at March 31, 1998
(Unaudited)............................................... F-25
Condensed Consolidated Statements of Income for the three
months ended March 31, 1997 and 1998 (Unaudited).......... F-26
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1998 (Unaudited).... F-27
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... F-28
BRIM, INC. AND SUBSIDIARIES
Report of Independent Auditors.............................. F-32
Independent Auditors' Report................................ F-33
Consolidated Statements of Income for the Year Ended
December 31, 1995 and for the period January 1, 1996 to
December 18, 1996......................................... F-34
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1995 and for the period January 1, 1996 to
December 18, 1996......................................... F-35
Notes to Consolidated Financial Statements.................. F-36
HAVASU SAMARITAN REGIONAL HOSPITAL
Report of Independent Auditors.............................. F-44
Balance Sheets at December 31, 1996 and 1997................ F-45
Statements of Operations and Changes in Net Assets for the
Years Ended December 31, 1995, 1996 and 1997.............. F-46
Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997....................................... F-47
Notes to Financial Statements............................... F-48
Condensed Balance Sheet at March 31, 1998 (Unaudited)....... F-55
Condensed Statements of Operations and Changes in Net Assets
for the Three Months Ended March 31, 1997 and 1998
(Unaudited)............................................... F-56
Condensed Statements of Cash Flows for the Three Months
Ended March 31, 1997 and 1998 (Unaudited)................. F-57
Notes to Condensed Financial Statements (Unaudited)......... F-58
FINANCIAL STATEMENT SCHEDULE -- PROVINCE HEALTHCARE COMPANY
Report of Independent Auditors on Schedule.................. S-1
Schedule II -- Valuation and Qualifying Accounts............ S-2
</TABLE>
F-1
<PAGE> 72
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Province Healthcare Company
We have audited the accompanying consolidated balance sheets of Province
Healthcare Company (formerly known as Principal Hospital Company) and
subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of operations, changes in common stockholders' deficit, and cash
flows for the period February 2, 1996 (date of inception) to December 31, 1996
and the year ended December 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Province
Healthcare Company and subsidiaries as of December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for the period
February 2, 1996 to December 31, 1996 and the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Nashville, Tennessee
March 23, 1998
F-2
<PAGE> 73
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------- DECEMBER 31, 1997
1996 1997 (NOTE 16)
-------- -------- -----------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 11,256 $ 4,186 $ 4,186
Accounts receivable, less allowance for doubtful
accounts of $4,477 in 1996 and $4,749 in 1997.... 22,829 30,902 30,902
Inventories......................................... 2,883 3,655 3,655
Prepaid expenses and other.......................... 8,159 8,334 8,334
-------- -------- --------
Total current assets........................ 45,127 47,077 47,077
Property, plant and equipment, net.................... 49,497 65,974 65,974
Other assets:
Unallocated purchase price.......................... 7,265 760 760
Cost in excess of net assets acquired, net.......... 52,333 53,624 53,624
Other............................................... 6,299 9,026 9,026
-------- -------- --------
65,897 63,410 63,410
-------- -------- --------
$160,521 $176,461 $176,461
======== ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................... $ 7,915 $ 6,524 $ 6,524
Accrued salaries and benefits....................... 7,772 8,720 8,720
Accrued expenses.................................... 5,359 4,422 4,422
Current maturities of long-term obligations......... 1,873 6,053 6,053
-------- -------- --------
Total current liabilities................... 22,919 25,719 25,719
Long-term obligations, less current maturities........ 77,789 83,043 43,501
Third-party settlements............................... 6,604 4,680 4,680
Other liabilities..................................... 6,898 13,088 7,373
Minority interest..................................... 574 825 825
-------- -------- --------
91,865 101,636 56,379
Mandatory redeemable preferred stock.................. 46,227 50,162 --
Common stockholders' equity (deficit):
Common stock -- no par value; authorized 20,000,000
shares; issued and outstanding 5,370,500 shares
and 6,330,614 shares at December 31, 1996 and
1997, respectively, 13,009,768 shares, $0.01 par
value, pro forma (unaudited) at December 31,
1997............................................. 1,680 2,116 130
Additional paid-in-capital.......................... -- -- 97,405
Retained deficit.................................... (2,170) (3,172) (3,172)
-------- -------- --------
(490) (1,056) 94,363
-------- -------- --------
$160,521 $176,461 $176,461
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 74
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
PERIOD FEBRUARY 2, YEAR ENDED DECEMBER 31, 1997
TO DECEMBER 31, 1996 DECEMBER 31, 1997 (NOTE 16)
-------------------- ----------------- -----------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenue:
Net patient service revenue......... $16,425 $149,296 $149,296
Management and professional
services......................... 607 16,365 16,365
Other............................... 223 4,866 4,866
------- -------- --------
Net operating revenue....... 17,255 170,527 170,527
------- -------- --------
Expenses:
Salaries, wages and benefits........ 7,599 72,846 72,846
Purchased services.................. 2,286 23,242 23,242
Supplies............................ 1,897 16,574 16,574
Provision for doubtful accounts..... 1,909 12,812 12,812
Other operating expenses............ 2,872 16,318 16,318
Rentals and leases.................. 214 4,888 4,888
Depreciation and amortization....... 1,307 7,557 7,557
Interest expense.................... 976 8,121 4,787
Minority interest................... 184 329 329
Loss on sale of assets.............. -- 115 115
------- -------- --------
Total expenses.............. 19,244 162,802 159,468
------- -------- --------
Income (loss) before income taxes..... (1,989) 7,725 11,059
Income taxes (benefit)................ (673) 3,650 4,949
------- -------- --------
Income (loss) before extraordinary
item................................ (1,316) 4,075 6,110
Loss from early retirement of debt,
net of taxes of $167................ (262) -- --
------- -------- --------
Net income (loss)..................... (1,578) 4,075 6,110
Preferred stock dividends and
accretion........................... (172) (5,077) --
------- -------- --------
Net income (loss) to common
shareholders........................ $(1,750) $ (1,002) $ 6,110
======= ======== ========
Income (loss) per share to common
shareholders -- basic:
Income (loss) before
extraordinary item............. $ (0.52) $ (0.17) $ 0.49
Extraordinary item............... (0.09) -- --
------- -------- --------
Net income (loss) to common
shareholders.............. $ (0.61) $ (0.17) $ 0.49
======= ======== ========
Income (loss) per share to common
shareholders -- diluted:
Income (loss) before
extraordinary item............. $ (0.52) $ (0.17) $ 0.46
Extraordinary item............... (0.09) -- --
------- -------- --------
Net income (loss) to common
shareholders.............. $ (0.61) $ (0.17) $ 0.46
======= ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 75
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
NOTES
CLASS A COMMON CLASS B COMMON NO PAR VALUE RECEIVABLE
STOCK STOCK COMMON STOCK FOR
------------------ ---------------- ------------------ COMMON RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STOCK DEFICIT TOTAL
------- -------- ------- ------ --------- ------ ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at February 2,
1996.................... -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
Issuance of stock....... 13,983 13,983 85,890 86 -- -- (211) -- 13,858
Dividends on Class A
Common Stock.......... 420 420 -- -- -- -- -- (420) --
Exchange of PHC Class A
and Class B common
stock for Brim common
stock................. (14,403) (14,403) (85,890) (86) 2,757,947 86 211 -- (14,192)
Reverse acquisition of
Brim.................. -- -- -- -- 2,612,553 1,594 -- -- 1,594
Preferred stock
dividends and
accretion............. -- -- -- -- -- -- -- (172) (172)
Net loss................ -- -- -- -- -- -- -- (1,578) (1,578)
------- -------- ------- ---- --------- ------ ----- ------- --------
Balance at December 31,
1996.................... -- -- -- -- 5,370,500 1,680 -- (2,170) (490)
Issuance of stock......... -- -- -- -- 960,114 436 -- -- 436
Preferred stock dividends
and accretion........... -- -- -- -- -- -- -- (5,077) (5,077)
Net income.............. -- -- -- -- -- -- -- 4,075 4,075
------- -------- ------- ---- --------- ------ ----- ------- --------
Balance at December 31,
1997.................... -- $ -- -- $ -- 6,330,614 $2,116 $ -- $(3,172) $ (1,056)
======= ======== ======= ==== ========= ====== ===== ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 76
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FEBRUARY 2, YEAR ENDED
TO DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................................... $ (1,578) $ 4,075
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 1,307 7,557
Provision for doubtful accounts................... 1,909 12,812
Deferred income taxes............................. (874) 4,677
Extraordinary charge from retirement of debt...... 429 --
Provision for professional liability.............. 200 36
Loss on sale of assets............................ -- 115
Changes in operating assets and liabilities, net
of effects from acquisitions and disposals:
Accounts receivable.......................... (3,243) (20,885)
Inventories.................................. 91 (712)
Prepaid expenses and other................... 724 (3,833)
Other assets................................. 375 (2,256)
Accounts payable and accrued expenses........ 2,160 (2,449)
Accrued salaries and benefits................ 643 860
Third-party settlements...................... -- (1,924)
Other liabilities............................ (507) 1,089
--------- --------
Net cash provided by (used in) operating
activities...................................... 1,636 (838)
INVESTING ACTIVITIES
Purchase of property, plant and equipment............ (1,043) (15,557)
Purchase of acquired companies, net of cash
received.......................................... 4,645 (2,673)
--------- --------
Net cash provided by (used in) investing
activities...................................... 3,602 (18,230)
FINANCING ACTIVITIES
Proceeds from long-term debt......................... 19,300 12,000
Repayments of debt................................... (26,431) (4,143)
Additions to deferred loan costs..................... (709) --
Issuance of common stock............................. 13,858 436
Issuance of preferred stock.......................... -- 3,705
--------- --------
Net cash provided by financing activities............ 6,018 11,998
--------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 11,256 (7,070)
Cash and cash equivalents at beginning of period..... -- 11,256
--------- --------
Cash and cash equivalents at end of period........... $ 11,256 $ 4,186
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid during the period...................... $ 1,011 $ 7,143
========= ========
Income taxes paid during the period.................. $ -- $ 5,639
========= ========
ACQUISITIONS
Assets acquired...................................... $ 148,326 $ 3,191
Liabilities assumed.................................. (119,553) (518)
Common and preferred stock issued.................... (33,418) --
--------- --------
Cash paid (received)................................. $ (4,645) $ 2,673
========= ========
NONCASH TRANSACTIONS
Dividends and accretion.............................. $ 172 $ 5,077
========= ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 77
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION
The Company (formerly Principal Hospital Company (PHC) until February 4,
1998) was founded on February 2, 1996. The Company is engaged in the business of
owning, leasing and managing hospitals in non-urban communities principally in
the northwestern and southwestern United States.
As more fully discussed in Note 3, on December 18, 1996, a subsidiary of
Brim, Inc. (Brim) and PHC merged in a transaction in which Brim issued junior
preferred stock and common stock in exchange for all of the outstanding Class A
and Class B common stock of PHC. As the PHC shareholders became owners of a
majority of the outstanding shares of Brim after the merger, PHC was considered
the acquiring enterprise for financial reporting purposes and the transaction
was accounted for as a reverse acquisition. Therefore, the historical financial
statements of PHC replaced the historical financial statements of Brim, the
assets and liabilities of Brim were recorded at fair value as required by the
purchase method of accounting, and the operations of Brim were reflected in the
operations of the combined enterprise from the date of acquisition. As PHC was
in existence for less than a year at December 31, 1996 and because Brim has been
in existence for several years, PHC is considered the successor to Brim's
operations. Brim, the predecessor company and surviving legal entity, changed
its name to Principal Hospital Company on January 16, 1997. Subsequently, on
February 4, 1998, the merged company was renamed Province Healthcare Company
during the reincorporation more fully described in Note 15.
2. ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
its majority-owned subsidiaries and partnerships in which the Company or one of
its subsidiaries is a general partner and has a controlling interest. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the 1997 presentation. These reclassifications had no
effect on net income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents include all highly liquid investments with an original
maturity of three months or less when acquired. The Company places its cash in
financial institutions that are federally insured and limits the amount of
credit exposure with any one financial institution.
PATIENT ACCOUNTS RECEIVABLE
The Company's primary concentration of credit risk is patient accounts
receivable, which consist of amounts owed by various governmental agencies,
insurance companies and private
F-7
<PAGE> 78
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
patients. The Company manages the receivables by regularly reviewing its
accounts and contracts and by providing appropriate allowances for uncollectible
amounts. Significant concentrations of gross patient accounts receivable at
December 31, 1996 and 1997, consist of receivables from Medicare of 29% and 36%,
respectively, and Medicaid of 17% and 12%, respectively. Concentration of credit
risk relating to accounts receivable is limited to some extent by the diversity
and number of patients and payors and the geographic dispersion of the Company's
operations.
INVENTORIES
Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated on the basis of cost. Routine
maintenance and repairs are charged to expense as incurred. Expenditures that
increase values, change capacities or extend useful lives are capitalized.
Depreciation is computed by the straight-line method over the estimated useful
lives of the assets, which range from 3 to 40 years. Amortization of equipment
under capital leases is included in the provision for depreciation.
INTANGIBLE ASSETS
Intangible assets arising from the accounting for acquired businesses are
amortized using the straight-line method over the estimated useful lives of the
related assets which range from 5 years for management contracts to 20 to 35
years for cost in excess of net assets acquired. The Company reviews its
long-lived and intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. The
measurement of possible impairment is based upon determining whether projected
undiscounted future cash flows of the acquired business or from the use of the
asset over the remaining amortization period is less than the carrying amount of
the asset. As of December 31, 1997, in the opinion of management, there has been
no such impairment.
At December 31, 1996 and 1997, cost in excess of net assets acquired
totaled $52,393,000 and $55,653,000, respectively, and accumulated amortization
totaled $60,000 and $2,029,000, respectively. Management contracts are included
in other noncurrent assets. At December 31, 1996 and 1997, management contracts
totaled $1,200,000 and accumulated amortization totaled $9,000 and $249,000,
respectively.
OTHER ASSETS
Deferred loan costs are included in other noncurrent assets and are
amortized over the term of the related debt by the interest method. At December
31, 1996 and 1997, deferred loan costs totaled $2,959,000 and $3,083,000,
respectively, and accumulated amortization totaled $48,000 and $916,000,
respectively.
RISK MANAGEMENT
The Company maintains self-insured medical and dental plans for employees.
Claims are accrued under these plans as the incidents that give rise to them
occur. Unpaid claim accruals are based on the estimated ultimate cost of
settlement, including claim settlement expenses, in accordance with an average
lag time and past experience. The Company has entered into reinsurance
agreements for certain plans with independent insurance companies to limit its
losses on claims. Under the terms of these agreements, the insurance companies
will reimburse the
F-8
<PAGE> 79
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company based on the level of reinsurance which ranges from $30,000 per
individual claim up to $1,000,000. These reimbursements are included in
salaries, wages and benefits in the accompanying consolidated statements of
operations.
The Company is insured for professional liability based on a claims-made
policy purchased in the commercial insurance market. The provision for
professional liability and comprehensive general liability claims include
estimates of the ultimate costs for claims incurred but not reported, in
accordance with actuarial projections based on past experience. Management is
aware of no potential professional liability claims whose settlement, if any,
would have a material adverse effect on the Company's consolidated financial
position or results of operations.
OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist primarily of insurance liabilities,
supplemental deferred compensation liability, and deferred income taxes.
PATIENT SERVICE REVENUE
Net patient service revenue is reported at the estimated net realizable
amounts from patients, third-party payors, and others for services rendered,
including estimated retroactive adjustments under reimbursement agreements with
third-party payors. Estimated settlements under third-party reimbursement
agreements are accrued in the period the related services are rendered and
adjusted in future periods as final settlements are determined.
Approximately 63% and 62% of gross patient service revenue for the period
February 2, 1996 to December 31, 1996, and for the year ended December 31, 1997,
respectively, are from participation in the Medicare and state sponsored
Medicaid programs.
MANAGEMENT AND PROFESSIONAL SERVICES
Management and professional services is comprised of fees from management
and professional services provided to third-party hospitals pursuant to
management contracts and consulting arrangements. The base fees associated with
the hospital management contracts are determined in the initial year of the
contract on an individual hospital basis. In certain contracts, the Company is
entitled to a yearly bonus based on the performance of the managed hospital. The
base fee, which is fixed, is based on a fair market wage and is not dependent on
any bonus structure. The management contracts are adjusted yearly based on an
agreed upon inflation indicator. The substantial majority of management and
professional services revenue consists of the management fees earned under the
hospital management contracts and reimbursable expenses. The reimbursable
expenses relate to salaries and benefits of Company employees that serve as
executives at the managed hospitals. The salaries and benefits of these
employees are legal obligations of, and are paid by, the Company and are
reimbursed by the managed hospitals. Fees are recognized as revenue as services
are performed. Reimbursable expenses are included in salaries, wages and
benefits in the accompanying consolidated statements of operations. Management
and professional services revenue, excluding reimbursable expenses, was $294,000
and $9,690,000 for the period February 2, 1996 to December 31, 1996 and for the
year ended December 31, 1997, respectively. The Company does not maintain any
ownership interest in and does not fund operating losses or guarantee any
minimum income for these managed hospitals. The Company does not have any
guarantees to these hospitals, except for two managed hospitals for which the
Company has guaranteed the hospitals' long-term debt of $690,000.
F-9
<PAGE> 80
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK BASED COMPENSATION
The Company, from time to time, grants stock options for a fixed number of
common shares to employees. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and accordingly, recognizes no compensation expense for the stock option grants
when the exercise price of the options equals, or is greater than, the market
price of the underlying stock on the date of grant.
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.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 128, Earnings per Share. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented and, where appropriate, restated to conform to Statement 128
requirements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income. The Statement requires that items required to be recognized as
components of comprehensive income be reported in a financial statement
displayed with the same prominence as other financial statements. The Statement
is effective for financial statements for fiscal years beginning after December
15, 1997. Adoption of Statement No. 130 will have no impact on the Company's net
income or stockholders' equity.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. The Statement changes the way public
companies report segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial reports to shareholders. The Statement is effective for financial
statements for fiscal years beginning after December 15, 1997. The statement
affects only disclosures presented in the financial statements and will have no
effect on consolidated financial position or results of operations.
F-10
<PAGE> 81
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS
MEMORIAL MOTHER FRANCES HOSPITAL
In July 1996, the Company purchased certain assets totaling $26,394,000 and
assumed certain liabilities totaling $3,211,000 of Memorial Mother Frances
Hospital for a purchase price of $23,183,000, summarized as follows (In
thousands):
<TABLE>
<S> <C>
Assets acquired:
Current assets............................................ $ 3,545
Property, plant and equipment, net........................ 22,849
-------
26,394
Liabilities assumed:
Current liabilities....................................... (478)
Long-term obligations..................................... (2,234)
Other liabilities......................................... (499)
-------
(3,211)
-------
Purchase price.............................................. $23,183
=======
</TABLE>
STARKE MEMORIAL HOSPITAL
In October 1996, the Company acquired Starke Memorial Hospital by assuming
certain liabilities ($211,000), purchasing current assets ($458,000) and
entering into a capital lease agreement for a purchase price of $7,742,000. The
allocation of the unallocated purchase price of $7,495,000 was finalized in the
third quarter of 1997 and consisted of property, plant and equipment and cost in
excess of net assets acquired of $5,201,000 and $2,294,000 respectively. The
cost in excess of net assets acquired is being amortized over 20 years.
BRIM, INC.
On December 18, 1996, a subsidiary of Brim merged with PHC. Brim was
engaged in the business of owning, leasing and managing hospitals in non-urban
communities primarily in the northwestern and southwestern United States. In
exchange for their shares in PHC, the PHC shareholders received 14,403 shares of
newly-designated redeemable junior preferred stock and 2,757,947 shares of newly
designated common stock of Brim. As discussed in Note 1, the merger was
accounted for as a reverse acquisition under the purchase method of accounting
and, for accounting purposes, PHC was considered as having acquired Brim. The
historical financial statements of PHC became the historical financial
statements of Brim and include the results of operations of Brim from the
effective date of the merger, December 18, 1996. The reverse acquisition of Brim
by PHC
F-11
<PAGE> 82
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
resulted in cost in excess of net assets acquired of $52,393,000 summarized as
follows (In thousands):
<TABLE>
<S> <C>
Purchase price.............................................. $ 1,594
Add liabilities assumed:
Current liabilities....................................... 18,768
Long-term obligations, less current maturities............ 75,943
Other liabilities......................................... 13,889
--------
108,600
Mandatory redeemable preferred stock........................ 31,824
--------
140,424
Less assets acquired:
Current assets............................................ 57,015
Property, plant and equipment, net........................ 26,570
Other noncurrent assets................................... 4,840
Management contracts...................................... 1,200
--------
89,625
--------
Cost in excess of net assets acquired....................... $ 52,393
========
</TABLE>
The cost in excess of net assets acquired is being amortized over a period
ranging from 20 to 35 years, resulting in a weighted average useful life of 30.9
years.
The principal elements of transactions occurring in conjunction with the
reverse acquisition included the following:
- First Additional Investment -- As a result of the reverse acquisition,
PHC assumed an agreement between Brim and Golder, Thoma, Cressey, Rauner
Fund IV, L.P. (GTCR Fund IV) that granted GTCR Fund IV the right to
acquire, at its sole discretion, up to 2,733 shares of the Company's
redeemable junior preferred stock at a price of $1,000 per share, and up
to 448,033 shares of the Company's common stock at a price of $0.61 per
share, at any time through December 17, 1999. The agreement provided that
Leeway & Co., Mr. Martin Rash, Mr. Richard Gore, and two banks were
obligated to purchase redeemable junior preferred stock and common stock
in specified amounts at the same per share prices in the event GTCR Fund
IV exercised its right to acquire junior preferred and common stock. In
July 1997, GTCR Fund IV exercised its right and, accordingly, 3,755
shares of redeemable junior preferred stock and 706,886 shares of common
stock were purchased for net proceeds of $4,182,000 by GTCR Fund IV, Mr.
Rash, Mr. Gore, and two banks.
- Second Additional Investment -- The agreement discussed immediately above
also granted GTCR Fund IV the right to acquire up to 4,545 shares of the
Company's redeemable junior preferred stock at a price of $1,000 per
share, and up to 745,082 shares of the Company's common stock at a price
of $0.61 per share, at any time after the date upon which the investment
discussed above was completed and before December 17, 1998. The agreement
also granted Leeway & Co. the right to acquire senior preferred stock,
redeemable junior preferred stock, common stock, and a common stock
warrant, and granted Mr. Rash and Mr. Gore the right to acquire common
stock, in specified amounts at the same per share prices in the event
GTCR exercised its right to acquire junior preferred and common stock. In
connection with the public offering of its common stock, the rights of
GTCR Fund IV, Leeway & Co., Mr. Rash, and Mr. Gore, to purchase stock of
the Company pursuant to the Second Initial Investment were terminated
with no purchases being made (see note 15.)
F-12
<PAGE> 83
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- The Company approved a plan to terminate approximately 200 corporate
and hospital operating personnel of Brim. The Company accrued
approximately $2,190,000 of severance liability relating to these
approved terminations as of December 31, 1996 and included this
liability in the cost in excess of net assets acquired of Brim.
Subsequent to December 31, 1996, the Company terminated
approximately 200 employees and paid severance benefits of the full
amount of the recorded severance liability.
- As a result of the reverse acquisition, PHC is deemed for financial
reporting purposes to have assumed a warrant that had been issued by
Brim for 253,228 shares of Brim's common stock. The warrant has an
exercise price of $0.061 per share and has a twelve-year term (see
Note 7).
NEEDLES DESERT COMMUNITIES HOSPITAL
Effective August 1, 1997, the Company acquired Needles Desert Communities
Hospital (which subsequently changed its name to Colorado River Medical Center)
by entering into a 15-year lease agreement with three five-year renewal terms
and by purchasing assets totaling $1,139,000, prepaying rent totaling $2,052,000
and assuming certain liabilities totaling $518,000.
OTHER INFORMATION
In accordance with its stated policy, management of the Company evaluates
all acquisitions independently to determine the appropriate amortization period
for cost in excess of net assets acquired. Each evaluation includes an analysis
of factors such as historic and projected financial performance, evaluation of
the estimated useful lives of buildings and fixed assets acquired, the
indefinite lives of certificates of need and licenses acquired, the competition
within local markets, and lease terms where applicable.
The foregoing acquisitions were accounted for using the purchase method of
accounting. The operating results of the acquired companies have been included
in the accompanying consolidated statements of operations from the respective
dates of acquisition.
The following pro forma information reflects the operations of the entities
acquired in 1996 and 1997, as if the respective transactions had occurred as of
January 1, 1996. 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 January 1, 1996. (In thousands, except per share data).
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Total revenue............................................... $164,748 $177,248
Net loss.................................................... $(11,607) $ 3,435
Net loss per share to common shareholders -- basic.......... $ (4.06) $ 0.59
Weighted average common shares.............................. 2,860 5,787
</TABLE>
The Company has minority ownership in various health care related
businesses. These investments are accounted for by the equity method. The
assets, liabilities and results of operations of these businesses are not
material to the consolidated financial statements.
F-13
<PAGE> 84
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- -------
<S> <C> <C>
Land........................................................ $ 2,181 $ 4,991
Leasehold improvements...................................... 2,616 3,114
Buildings and improvements.................................. 31,359 37,310
Equipment................................................... 12,359 22,846
------- -------
48,515 68,261
Less allowances for depreciation and amortization........... (927) (5,900)
------- -------
47,588 62,361
Construction-in-progress (estimated cost to complete at
December 31, 1997 -- $10,992)............................. 1,909 3,613
------- -------
$49,497 $65,974
======= =======
</TABLE>
Assets under capital leases were $18,491,000 and $23,619,000 net of
accumulated amortization of $171,000 and $2,684,000 at December 31, 1996 and
1997, respectively. Interest is capitalized in connection with construction
projects at the Company's facilities. The capitalized interest is recorded as
part of the asset to which it relates and is amortized over the asset's
estimated useful life. In 1996 and 1997, respectively, $28,000 and $223,000 of
interest cost was capitalized.
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- -------
<S> <C> <C>
Revolving credit agreement.................................. $37,000 $47,000
Term loan................................................... 35,000 35,000
Other debt obligations...................................... 87 47
------- -------
72,087 82,047
Obligations under capital leases (see Note 11).............. 7,575 7,049
------- -------
79,662 89,096
Less current maturities..................................... (1,873) (6,053)
------- -------
$77,789 $83,043
======= =======
</TABLE>
Prior to the merger with Brim (see Note 3), the Company had outstanding
debt of $19,300,000. In connection with the merger, the Company repaid its
outstanding debt and reported a $262,000 loss on early retirement, net of taxes
of $167,000, as a result of the write off of related deferred financing costs.
As a result of the reverse acquisition of Brim, the Company assumed a $100
million credit facility of Brim, consisting of a revolving credit agreement in
an amount of up to $65,000,000 and a term loan in the amount of $35,000,000.
There was $47,000,000 of borrowings outstanding under the revolving credit
agreement and $35,000,000 under the term loan at December 31, 1997. Future
borrowings under the revolver are limited, in certain instances, to acquisitions
of identified businesses. At December 31, 1997, the Company had additional
borrowing capacity available under the revolver of approximately $18,000,000.
F-14
<PAGE> 85
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The loans under the credit agreement bear interest, at the Company's
option, at the adjusted base rate or at the adjusted LIBOR rate. The interest
rate ranged from 9.50% to 7.88% during 1997. The Company pays a commitment fee
of one-half of one percent on the unused portion of the revolving credit
agreement. The Company may prepay the principal amount outstanding under the
revolving credit agreement at any time before the maturity date of December 16,
1999. The term loan is payable in quarterly installments ranging from $1,250,000
commencing in the second quarter of 1998 to $2,250,000 in 2002, plus one payment
of $2,000,000 in 2002.
The Company has a standby letter of credit with the bank. Amounts
outstanding under the letter of credit totaled $603,000 and $0 at December 31,
1996 and 1997, respectively. Amounts outstanding are applied against the credit
availability under the Company's revolving credit agreement.
In certain circumstances, the Company is required to make mandatory
prepayments of the term loan and revolver to the extent of (i) 100% of net
proceeds from the issuance of equity securities in excess of $25,000,000,
provided however that in connection with a qualified initial public offering of
the Company's common stock, the Company is only required to make a mandatory
prepayment in an amount equal to the first $20,000,000 of net cash proceeds;
(ii) 100% of the net proceeds of any debt issued; and (iii) 100% of net proceeds
from asset sales other than sales of obsolete equipment in the ordinary course
of business or insurance proceeds.
The credit facility limits, under certain circumstances, 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; or 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.
During 1997, as required by the credit facility, the Company entered into
an interest rate swap agreement, which effectively converted for a three-year
period $35.0 million of floating-rate borrowings to fixed-rate borrowings. This
interest rate swap agreement will be used to manage the Company's interest rate
exposure. The agreement is a contract to periodically exchange floating interest
rate payments for fixed interest rate payments over the life of the agreement.
The Company secured an 6.27% fixed interest rate. The Company is exposed to
credit losses in the event of non-performance by the counterparty to its
financial instruments. The Company anticipates that the counterparty will be
able to fully satisfy its obligations under the contract.
Aggregate maturities of long-term obligations at December 31, 1997,
excluding capital leases, are as follows (In thousands):
<TABLE>
<S> <C>
1998........................................................ $ 3,774
1999........................................................ 52,773
2000........................................................ 6,750
2001........................................................ 7,750
2002........................................................ 11,000
Thereafter.................................................. --
-------
$82,047
=======
</TABLE>
As discussed in Notes 15 and 16, the Company repaid the $35,000,000 term
loan and made a payment of $4,542,000 on the revolving credit agreement
subsequent to December 31, 1997 from the proceeds of the initial public offering
of the Company's common stock. Management has
F-15
<PAGE> 86
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amended and restated the Credit Agreement, subsequent to December 31, 1997, to
increase availability under the credit facility to $260.0 million.
6. MANDATORY REDEEMABLE PREFERRED STOCK
Redeemable preferred stock consists of the following (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- -------
<S> <C> <C>
Series A redeemable senior preferred stock -- $1,000 per
share stated value, authorized 25,000, issued outstanding
20,000, net of a warrant of $139,000 and unamortized
issuance costs of $892,000 and $793,000, as of December
31, 1996 and 1997, respectively........................... $18,969 $19,068
Series B redeemable junior preferred stock -- $1,000 per
share stated value, authorized 50,000, issued and
outstanding 28,540 and 32,295, net of unamortized issuance
costs of $1,282,000 and $1,201,000, as of December 31,
1996 and 1997, respectively............................... 27,258 31,094
------- -------
$46,227 $50,162
======= =======
</TABLE>
The 20,000 outstanding shares of Series A redeemable senior preferred stock
and a warrant to purchase 253,228 shares of common stock were issued in December
1996 by Brim for cash of $20.0 million. Issuance costs totaled $892,000. Series
A redeemable preferred stock pays cumulative preferential dividends which accrue
on a daily basis at the rate of 11% and are payable in cash when and as declared
by the board of directors.
Of the 32,295 outstanding shares of Series B redeemable junior preferred
stock, 28,540 were issued in December 1996 by Brim and 3,755 were issued in July
1997. Issuance costs totaled $1,282,000 and $50,000 in December 1996 and July
1997, respectively. Series B redeemable junior preferred stock pays cumulative
preferential dividends which accrue on a daily basis at the rate of 8% and are
payable in cash when and as declared by the board of directors.
In connection with its initial public offering of common stock (see Note
15), the Company redeemed all of the outstanding shares of preferred stock and
all accrued and unpaid dividends thereon.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
The capital stock of the Company consists of common stock, no par value, of
which 20,000,000 shares are authorized and 6,330,614 shares are issued and
outstanding as of December 31, 1997.
The capital stock of PHC previously consisted of Class A Common Stock, and
Class B Common Stock. All of the PHC Class A and Class B Common Stock was
exchanged by the PHC shareholders in the merger with Brim for 14,403 shares of
Brim junior preferred stock and 2,757,947 shares of Brim common stock as more
fully discussed in Note 3.
On May 8, 1997, the Company declared a three-for-one stock split of the
outstanding common stock and common stock options and warrant to shareholders of
record on May 8, 1997. All common share and per share data, included in the
accompanying consolidated financial statements and footnotes thereto, have been
restated to reflect this stock split.
F-16
<PAGE> 87
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS
The Company follows Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25) and related Interpretations in accounting
for its employee stock options, because as discussed below, the alternative fair
value accounting provided for under FASB Statement No. 123, Accounting for
Stock-Based Compensation, requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, when the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
The Company had no stock options outstanding prior to March 1997. In March
1997, the Company's Board of Directors approved the 1997 Long-Term Incentive
Plan (the Plan) under which options to purchase 959,016 shares of common stock
may be granted to officers, employees, and directors. The options have a maximum
term of 10 years and vest in five equal annual installments. Options are
generally granted at not less than market price on the date of grant. In March
1997, the Company granted options to purchase an aggregate of 284,530 shares of
Common Stock at an exercise price of $4.575. In September 1997, the Company's
Board of Directors approved the grant of options to acquire 70,586 common shares
at an exercise price equal to the initial public offering price of the Company's
common stock, but none of these options were granted at December 31, 1997. As of
December 31, 1997, the remaining contractual life of the options is 9.3 years,
none of the options are exercisable, and shares available for grant total
674,486. No options were exercised or forfeited during 1997.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997: risk-free interest rate of 6.41%; dividend yield of 0%;
volatility factor of the expected market price of the Company's common stock of
.563; and a weighted-average expected life of the option of 5 years.
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 the Company's employee stock options have characteristics
significantly different from those of traded options, and 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 follows (in thousands, except for per share information):
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Pro forma net loss to common shareholders................... $(1,131)
Pro forma net loss per share to common shareholders:
Basic..................................................... (0.20)
Diluted................................................... (0.18)
</TABLE>
F-17
<PAGE> 88
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WARRANT
In connection with the reverse acquisition of Brim (see Note 3), the
Company assumed a warrant that had been issued by Brim to purchase 253,228
shares of Brim's common stock. On September 12, 1997, the warrant, which had an
exercise price of $0.061 per share, was exercised resulting in total proceeds to
the Company of $15,447.
8. PATIENT SERVICE REVENUE
The Company has agreements with third-party payors that provide for
payments to the Company at amounts different from its established rates. A
summary of the payment arrangements with major third-party payors follows:
- Medicare -- Inpatient acute care services rendered to Medicare program
beneficiaries are paid at prospectively determined rates per diagnosis.
These rates vary according to a patient classification system that is
based on clinical, diagnostic, and other factors. Inpatient nonacute
services, certain outpatient services and medical education costs related
to Medicare beneficiaries are paid based on a cost reimbursement
methodology. The Company is reimbursed for cost reimbursable items at a
tentative rate with final settlement determined after submission of
annual cost reports by the Company and audits thereof by the Medicare
fiscal intermediary. The Company's classification of patients under the
Medicare program and the appropriateness of their admission are subject
to an independent review. The majority of the Company's Medicare cost
reports have been audited by the Medicare fiscal intermediary through
December 31, 1995.
- Medicaid -- Inpatient and outpatient services rendered to the
beneficiaries 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's Medi-Cal cost reports have been audited by the
Medi-Cal fiscal intermediary through December 31, 1995. 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.
Final determination of amounts earned under the Medicare and Medicaid
programs often occur in subsequent years because of audits by the programs,
rights of appeal and the application of numerous technical provisions.
Differences between original estimates and subsequent revisions (including final
settlements) are included in the statements of operations in the period in which
the revisions are made, and resulted in increases in net patient service revenue
of $788,000 for the predecessor company in 1996 and $3,260,000 for the Company
in 1997. The amount of the revisions that occurred in the fourth quarter of 1997
totaled $2,400,000.
F-18
<PAGE> 89
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The provision for income tax expense (benefit) attributable to income
(loss) before extraordinary item consists of the following amounts (In
thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE YEAR
FEBRUARY 2 TO ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Current:
Federal........................................ $ 162 $ (829)
State.......................................... 39 (198)
----- -------
201 (1,027)
Deferred:
Federal........................................ (706) 3,776
State.......................................... (168) 901
----- -------
(874) 4,677
----- -------
$(673) $ 3,650
===== =======
</TABLE>
The differences between the Company's effective income tax rate of 33.8%
and 47.2% before extraordinary item for 1996 and 1997, respectively, and the
statutory federal income tax rate of 34.0% are as follows (In thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE YEAR
FEBRUARY 2 TO ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- ------------------
<S> <C> <C>
Statutory federal rate.......................... $(676) $2,627
State income taxes, net of federal income tax
benefit....................................... (85) 464
Amortization of goodwill........................ -- 577
Other........................................... 88 (18)
----- ------
$(673) $3,650
===== ======
</TABLE>
F-19
<PAGE> 90
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's deferred tax assets and liabilities are as
follows (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets -- current:
Accounts and notes receivable............................. $ 3,305 $ --
Accrued vacation liability................................ 710 739
Accrued liabilities....................................... 1,260 447
------- -------
Deferred tax assets -- current.............................. 5,275 1,186
Deferred tax liabilities -- current:
Accounts and notes receivable............................. -- (32)
------- -------
Deferred tax liabilities -- current......................... -- (32)
------- -------
Net deferred tax assets -- current.......................... $ 5,275 $ 1,154
======= =======
Deferred tax assets -- noncurrent:
Net operating losses...................................... $ 278 $ 278
Accrued liabilities....................................... 706 701
Other..................................................... -- 115
------- -------
984 1,094
Less valuation allowance.................................... (278) (278)
------- -------
Deferred tax assets -- noncurrent........................... 706 816
Deferred tax liabilities -- noncurrent:
Property, plant and equipment............................. (4,246) (5,047)
Management contracts...................................... (464) (370)
Other..................................................... (41) --
------- -------
Deferred tax liabilities -- noncurrent...................... (4,751) (5,417)
------- -------
Net deferred tax liabilities -- noncurrent.................. $(4,045) $(4,601)
======= =======
Total deferred tax assets......................... $ 6,259 $ 2,280
======= =======
Total deferred tax liabilities.................... $ 4,751 $ 5,449
======= =======
Total valuation allowance......................... $ 278 $ 278
======= =======
</TABLE>
In the accompanying consolidated balance sheets, net current deferred tax
assets and net noncurrent deferred tax liabilities are included in prepaid
expenses and other, and other liabilities, respectively.
The Company had net operating loss carryforwards (NOLs) of approximately
$714,000 at December 31, 1996 and 1997 related to a subsidiary. These NOLs will
expire beginning in 2009. Due to restrictions on the use of the NOLs under the
Internal Revenue Code, management believes there is a risk they may expire
unused and, accordingly, has established a valuation reserve against the tax
benefit of the NOLs. Management believes it is more likely than not that the
remaining deferred tax assets will ultimately be realized through future taxable
income from operations.
During 1997, the Internal Revenue Service finalized its examination of the
predecessor company's federal income tax returns for the 1993 and 1994 years.
Finalization of the examination had no impact on the results of operations of
the Company.
F-20
<PAGE> 91
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (In thousands, except per share data):
<TABLE>
<CAPTION>
PRO FORMA
1997
1996 1997 (SEE NOTE 16)
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Numerator for basic and diluted income (loss) per
share to common shareholders:
Income (loss) before extraordinary item........... $(1,316) $ 4,075 $ 6,110
Less preferred stock dividends.................... (172) (5,077) --
------- ------- -------
Income (loss) before extraordinary item to common
shareholders................................... (1,488) (1,002) 6,110
Extraordinary item................................ (262) -- --
------- ------- -------
Net income (loss) to common shareholders.......... $(1,750) $(1,002) $ 6,110
======= ======= =======
Denominator:
Denominator for basic income (loss) per share to
common shareholders -- weighted-average
shares......................................... 2,860 5,787 12,466
Effect of dilutive securities:
Stock rights................................... -- 336 336
Warrants....................................... 10 189 189
Employee stock options......................... -- 149 149
------- ------- -------
Denominator for diluted income (loss) per share to
common shareholders -- adjusted weighted-
average shares................................. 2,870 6,461 13,140
======= ======= =======
Income (loss) per share to common shareholders --
basic:
Income (loss) before extraordinary item to common
shareholders................................... $ (0.52) $ (0.17) $ 0.49
Extraordinary item................................ (0.09) -- --
------- ------- -------
Net income (loss) to common shareholders.......... $ (0.61) $ (0.17) $ 0.49
======= ======= =======
Income (loss) per share to common shareholders --
diluted:(1)
Income (loss) before extraordinary item to common
shareholders................................... $ (0.52) $ (0.17) $ 0.46
Extraordinary item................................ (0.09) -- --
------- ------- -------
Net income (loss) to common shareholders.......... $ (0.61) $ (0.17) $ 0.46
======= ======= =======
</TABLE>
- ------------------
(1) Historical diluted loss per share amounts for 1996 and 1997 have been
calculated using the same denominator as used in the basic income (loss) per
share calculation as the inclusion of dilutive securities in the denominator
would have an anti-dilutive effect.
11. LEASES
The Company leases various buildings, office space and equipment. The
leases expire at various times and have various renewal options. These leases
are classified as either capital leases or operating leases based on the terms
of the respective agreements.
F-21
<PAGE> 92
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments at December 31, 1997, by year and in the aggregate,
under capital leases and noncancellable operating leases with terms of one year
or more consist of the following (In thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1998........................................................ $ 2,785 $ 4,286
1999........................................................ 2,332 2,981
2000........................................................ 1,271 2,367
2001........................................................ 883 1,465
2002........................................................ 316 1,311
Thereafter.................................................. 1,021 5,246
------- -------
Total minimum lease payments................................ 8,608 $17,656
=======
Amount representing interest................................ (1,559)
-------
Present value of net minimum lease payments (including
$2,279 classified as current)..................... $ 7,049
=======
</TABLE>
12. CONTINGENCIES
The Company is involved in litigation and regulatory investigations arising
in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, these matters will be resolved without material
adverse effect on the Company's consolidated financial position or results of
operations.
13. RETIREMENT PLANS
The Company sponsors defined contribution employee benefit plans which
cover substantially all employees. Employees may contribute a percentage of
eligible compensation subject to Internal Revenue Service limits. The plans call
for the Company to make matching contributions, based on either a percentage of
employee contributions or a discretionary amount as determined by the Company.
Contributions by the Company to the plans totaled $112,000 and $988,000 for the
period February 2, 1996 to December 31, 1996 and the year ended December 31,
1997, 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 expense totaled
$4,000 and $98,000 for the period February 2, 1996 to December 31, 1996 and the
year ended December 31, 1997, respectively.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents: The carrying amount reported in the balance
sheets for cash and cash equivalents approximates fair value.
Accounts Receivable and Accounts Payable: The carrying amount reported in
the balance sheets for accounts receivable and accounts payable approximates
fair value.
Long-Term Debt: The carrying amount reported in the balance sheets for
long-term obligations approximates fair value. The fair value of the Company's
long-term obligations is
F-22
<PAGE> 93
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $720,000 at December 31, 1997.
15. SUBSEQUENT EVENTS
REINCORPORATION
On February 4, 1998, the Company merged with a wholly-owned subsidiary in
order to change its jurisdiction of incorporation to Delaware and change its
name to Province Healthcare Company. In the Merger, the Company exchanged 1.83
shares of its no par common stock for each share of the subsidiary's $0.01 par
value common stock. All common share and per share data included in the
consolidated financial statements and footnotes thereto have been restated to
reflect this reincorporation.
PUBLIC OFFERING OF COMMON STOCK
On February 10, 1998, the Company completed its initial public offering of
common stock. The net proceeds from the offering were used to reduce the balance
of the outstanding term and revolving credit loans, redeem the outstanding
balance of the Series A redeemable senior preferred stock plus accrued
dividends, and repurchase a portion of the common stock held by GTCR and Leeway
& Co. In connection with the offering, the Series B redeemable junior preferred
stock was converted into common stock at the public offering price of the common
stock. (See Note 16.)
16. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The unaudited pro forma consolidated balance sheet as of December 31, 1997
gives effect to (i) the conversion from no par value to $0.01 par value common
stock, (ii) the conversion of junior preferred stock into common stock, and
(iii) the sale of common stock in the initial public offering and the
application of net proceeds thereof to the repurchase of certain shares of
common stock, the redemption of senior preferred stock and the repayment of
debt, as if all such transactions had been completed as of December 31, 1997 at
the offering price of $16.00 per share, as follows (see Note 15):
- The reclassification of $2,053,000 from common stock to additional
paid-in-capital upon conversion from no par to $0.01 par value Common
Stock.
- The prepayment of $696,000 of dividends on the senior preferred stock and
junior preferred stock.
- The conversion of the 32,295 shares of junior preferred stock net of
issuance costs plus accumulated and unpaid dividends into 2,204,420
shares of common stock at the initial public offering price of $16.00 per
share.
- The sale of 5,405,000 shares of common stock in the offering at the
initial public offering price of $16.00 per share for proceeds net of
offering costs, of $77,165,000.
- The repurchase of 930,266 shares of common stock using offering proceeds
of $14,884,000.
- The redemption of 20,000 shares of senior preferred stock with a
liquidation value of $20,000,000 net of issuance and warrant costs of
$932,000 and the payment of accumulated and unpaid dividends of
$2,739,000, using offering proceeds of $22,739,000.
F-23
<PAGE> 94
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- The application of the remaining proceeds from the offering of
$39,542,000 for the repayment of long-term obligations.
The unaudited pro forma consolidated statement of operations for the year
ended December 31, 1997 gives effect to (i) the conversion of junior preferred
stock into common stock and (ii) the sale of common stock in the offering and
the application of net proceeds thereof to the repurchase of certain shares of
common stock, the redemption of senior preferred stock and the repayment of
debt, as if all such transactions had been completed as of January 1, 1997 at
the initial public offering price of $16.00 per share, as follows:
- The elimination of interest expense associated with the $39,542,000 of
long-term obligations incurred on December 18, 1996 and repaid with the
net proceeds of the offering, and the elimination of the related income
tax benefit based on the combined federal and state statutory rate of
39%.
- The elimination of the dividends and the accretion of issuance costs on
the senior preferred stock redeemed with a portion of the net proceeds of
the offering and the junior preferred stock converted into common stock
in connection with the offering.
The pro forma consolidated financial information does not purport to
represent what the Company's results of operations or financial position would
have been had such transactions in fact occurred at December 31, 1997 as to the
pro forma balance sheet, or as of January 1, 1997 as to the statement of
operations, or to project the Company's results of operations in any future
period.
F-24
<PAGE> 95
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,675
Accounts receivable, less allowance for doubtful accounts
of $5,562.............................................. 35,705
Inventories............................................... 3,848
Prepaid expenses and other................................ 6,028
--------
Total current assets.............................. 52,256
Property, plant and equipment, net.......................... 66,804
Other assets:
Unallocated purchase price................................ 760
Cost in excess of net assets acquired, net................ 53,146
Other assets.............................................. 8,256
--------
Total assets...................................... $181,222
========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,029
Accrued salaries and benefits............................. 6,968
Accrued expenses.......................................... 2,311
Current maturities of long-term obligations............... 2,255
--------
Total current liabilities......................... 16,563
Long-term obligations, less current maturities.............. 52,166
Third-party settlements..................................... 7,255
Other liabilities........................................... 8,506
Minority interest........................................... 888
Mandatory redeemable preferred stock........................ --
Common stockholders' equity (deficit):
Common stock -- $0.01 par value, authorized 25,000,000,
issued and outstanding 13,009,768...................... 130
Additional paid-in-capital................................ 97,338
Retained deficit.......................................... (1,624)
--------
Total common stockholders' equity (deficit)....... 95,844
--------
Total liabilities, redeemable preferred stock and
common stockholders' equity...................... $181,222
========
</TABLE>
See accompanying notes.
F-25
<PAGE> 96
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------
PRO FORMA
(NOTE 10)
1997 1998 1998
-------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenue:
Net patient service revenue............................... $34,504 $42,750 $42,750
Management and professional services...................... 3,253 2,930 2,930
Reimbursable expenses..................................... 1,707 1,562 1,562
Other..................................................... 995 609 609
------- ------- -------
Net operating revenue............................. 40,459 47,851 47,851
Expenses:
Salaries, wages and benefits.............................. 15,400 18,606 18,606
Reimbursable expenses..................................... 1,707 1,562 1,562
Purchased services........................................ 5,045 6,035 6,035
Supplies.................................................. 3,817 4,627 4,627
Provision for doubtful accounts........................... 2,410 3,082 3,082
Other operating expenses.................................. 4,353 4,257 4,257
Rentals and leases........................................ 1,323 1,474 1,474
Depreciation and amortization............................. 1,770 2,205 2,205
Interest expense.......................................... 1,761 1,855 1,381
Minority interest......................................... 68 68 68
Loss on sale of assets.................................... 87 33 33
------- ------- -------
Total expenses.................................... 37,741 43,804 43,330
Income before provision for income taxes.................... 2,718 4,047 4,521
Provision for income taxes.................................. 1,211 1,772 1,961
------- ------- -------
Net income.................................................. 1,507 2,275 2,560
Preferred stock dividends and accretion..................... (1,115) (696) --
------- ------- -------
Net income to common shareholders........................... $ 392 $ 1,579 $ 2,560
======= ======= =======
Basic earnings per share to common shareholders:
Net income................................................ $ 0.28 $ 0.24 $ 0.20
Preferred stock dividends and accretion................... (0.21) (0.07) --
------- ------- -------
Net income to common shareholders......................... $ 0.07 $ 0.17 $ 0.20
======= ======= =======
Diluted earnings per share to common shareholders:
Net income................................................ $ 0.24 $ 0.23 $ 0.19
Preferred stock dividends and accretion................... (0.18) (0.07) --
------- ------- -------
Net income to common shareholders......................... $ 0.06 $ 0.16 $ 0.19
======= ======= =======
</TABLE>
See accompanying notes.
F-26
<PAGE> 97
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1998
-------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:........ $ (1,264) $ 233
INVESTING ACTIVITIES
Purchase of property, plant and equipment................. (2,420) (2,524)
Net capital contributions and
withdrawals -- investments............................. (61) (15)
-------- -------
Net cash used in investing activities..................... (2,481) (2,539)
FINANCING ACTIVITIES
Proceeds from long-term debt.............................. -- 61,000
Repayments of debt........................................ (431) (95,649)
Net proceeds from issuance of common stock................ -- 77,067
Exchange of Junior Preferred Stock........................ -- (14,884)
Redemption of Senior Preferred Stock...................... -- (22,739)
-------- -------
Net cash provided by (used in) financing activities....... (431) 4,795
-------- -------
Net increase (decrease) in cash and cash equivalents...... (4,176) 2,489
Cash and cash equivalents at beginning of period.......... 11,256 4,186
-------- -------
Cash and cash equivalents at end of period................ $ 7,080 $ 6,675
======== =======
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid during the period........................... $ 1,433 $ 1,966
======== =======
Income taxes paid during the period....................... $ 41 $ 166
======== =======
NONCASH TRANSACTIONS
Dividends and accretion on preferred stock................ $ 1,115 $ 696
Conversion and redemption of preferred stock.............. -- 33,138
Property and equipment acquired through capital leases.... 706 --
</TABLE>
See accompanying notes.
F-27
<PAGE> 98
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. Interim results are not necessarily indicative of results
that may be expected for the full year.
In the opinion of management, the accompanying interim financial statements
contain all material adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position,
results of operations and cash flows of Province Healthcare Company (the
"Company").
For further information, refer to the consolidated financial statements and
footnotes included herein.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." The Statement requires that items required to be recognized as
components of comprehensive income be reported in a financial statement
displayed with the same prominence as other financial statements. The Statement
is effective for financial statements for fiscal years beginning after December
15, 1997. For the three month period ending March 31, 1998, the Company had no
comprehensive income components except for net income.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Statement changes the
way public companies report segment information in annual financial statements
and also requires those companies to report selected segment information in
interim financial reports to shareholders. The Statement is effective for the
Company beginning with its December 31, 1998 financial statements. The Statement
affects only disclosures presented in the financial statements and will have no
effect on consolidated financial position or results of operations.
3. LONG-TERM DEBT
On March 30, 1998, the Company amended and restated its Credit Agreement
and increased its credit facilities to $260 million, including a five-year $35
million End-Loaded Lease Facility ("ELLF"). At March 31, 1998, the Company had
$48 million outstanding under its revolving line of credit and no amounts
outstanding under the ELLF.
The Amended and Restated Credit Agreement contains limitations on the
Company's ability to incur additional indebtedness (including contingent
obligations), sell material assets, retire, redeem or otherwise reacquire its
capital stock, acquire the capital stock or assets of another business, and pay
dividends. The Amended and Restated Credit Agreement also requires the Company
to maintain a specified net worth and meet or exceed certain coverage, leverage,
and indebtedness ratios. Indebtedness under the Amended and Restated Credit
Agreement is secured by substantially all assets of the Company.
F-28
<PAGE> 99
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (In thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
ACTUAL PRO FORMA
---------------- (NOTE 10)
1997 1998 1998
------- ------ ---------
<S> <C> <C> <C>
Numerator:
Net income............................................ $ 1,507 $2,275 $ 2,560
Preferred stock dividends and accretion............... (1,115) (696) --
------- ------ -------
Net income to common shareholders..................... $ 392 $1,579 $ 2,560
======= ====== =======
Denominator:
Denominator for basic earnings per share to common
shareholders -- weighted-average shares............ 5,371 9,343 13,010
Effect of dilutive securities --
Incentive stock options............................ 311 272 272
July stock issuance................................ 672 -- --
------- ------ -------
Denominator for diluted earnings per share......... 6,354 9,615 13,282
Basic earnings per share to common shareholders:
Net income............................................ $ 0.28 $ 0.24 $ 0.20
Preferred stock dividends and accretion............... (0.21) (0.07) --
------- ------ -------
Net income to common shareholders..................... $ 0.07 $ 0.17 $ 0.20
======= ====== =======
Diluted earnings per share to common shareholders:
Net income............................................ $ 0.24 $ 0.23 $ 0.19
Preferred stock dividends and accretion............... (0.18) (0.07) --
------- ------ -------
Net income to common shareholders..................... $ 0.06 $ 0.16 $ 0.19
======= ====== =======
</TABLE>
5. INCOME TAXES
The income tax provision recorded for the three months ended March 31, 1998
and 1997 differs from the expected income tax provision due to permanent
differences and the provision for state income taxes.
6. ACQUISITIONS
In August 1997, the Company acquired Colorado River Medical Center ("CRMC")
(formerly Needles Desert Communities Hospital) in Needles, California by paying
cash of $3,191,000 and assuming liabilities totaling $518,000. The operating
results of CRMC are included in the Company's results of operations from the
date of purchase; therefore, the results of operations for the first quarter of
1998 include CRMC.
7. CONTINGENCIES
Management continually evaluates contingencies based on the best available
evidence and believes that adequate provision for losses has been provided to
the extent necessary. In the opinion of management, the ultimate resolution of
the following contingencies will not have a material effect on the Company's
results of operations or financial position.
F-29
<PAGE> 100
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GENERAL AND PROFESSIONAL LIABILITY RISKS
The reserve for the self-insured portion of general and professional
liability risks is included in "Other liabilities" and is based on actuarially
determined estimates.
LITIGATION
The Company currently, and from time to time, is expected to be subject to
claims and suits arising in the ordinary course of business.
NET PATIENT SERVICE REVENUE
Final determination of amounts earned under the Medicare and Medicaid
programs often occurs in subsequent periods because of audits by the programs,
rights of appeal and the application of numerous technical provisions.
FINANCIAL INSTRUMENTS
Interest rate swap agreements are used on a limited basis to manage the
Company's interest rate exposure. The agreements are contracts to periodically
exchange fixed and floating interest rate payments over the life of the
agreements. On March 10, 1997, as required by the Credit Agreement, the Company
entered into an interest rate swap agreement, which effectively converted for a
five-year period $35 million of floating-rate borrowings to fixed-rate
borrowings. The floating-rate payments are based on LIBOR, and fixed-rate
payments are dependent upon market levels at the time the swap agreement was
consummated. For the three months ended March 31, 1998 and 1997, the Company
received a weighted average rate of 5.88% and 5.72% and paid a weighted average
rate of 6.27% and 6.27%, respectively.
8. STOCKHOLDERS' EQUITY
REINCORPORATION
On February 4, 1998, the Company merged with a wholly-owned subsidiary in
order to change its jurisdiction of incorporation to Delaware and change its
name to Province Healthcare Company. In the Merger, the Company exchanged 1.83
shares of its no par common stock for each share of the subsidiary's $0.01 par
value common stock. All common share and per share data included in the
condensed consolidated financial statements and footnotes thereto have been
restated to reflect this reincorporation. As a result of the reincorporation,
$2,053,000 was reclassified from common stock to additional paid-in-capital upon
conversion from no par to $0.01 par value Common Stock.
PUBLIC OFFERING OF COMMON STOCK
On February 17, 1998, the Company closed its initial public offering of
common stock. In connection with the offering, the Series B redeemable junior
preferred stock was converted into common stock at the public offering price of
the common stock. The net proceeds from the offering were used to redeem the
outstanding balance of the Series A redeemable senior preferred stock plus
accrued dividends, reduce the balance of the outstanding term and revolving
credit loans, and repurchase a portion of the common stock which was issued upon
conversion of the Series B redeemable junior preferred stock.
F-30
<PAGE> 101
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the changes in the stockholders' equity
accounts as a result of the reincorporation and the initial public offering of
common stock (In thousands):
<TABLE>
<CAPTION>
NO PAR VALUE
COMMON STOCK
------------------- ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN-CAPITAL DEFICIT TOTAL
---------- ------ --------------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997... 6,330,614 $2,116 $ -- ($3,172) $(1,056)
Reincorporation................ -- (2,053) 2,053 -- --
Conversion of the junior
preferred stock and initial
public offering of common
stock........................ 6,679,154 67 95,285 (31) 95,321
Preferred stock dividends and
accretion.................... -- -- -- (696) (696)
Net income..................... -- -- -- 2,275 2,275
---------- ------ ------- ------- -------
Balance at March 31, 1998...... 13,009,768 $ 130 $97,338 ($1,624) $95,844
========== ====== ======= ======= =======
</TABLE>
9. SUBSEQUENT EVENT
On May 1, 1998, the Company acquired the assets and business of Havasu
Samaritan Regional Hospital ("Havasu") in Lake Havasu City, Arizona for
approximately $105.5 million. To finance the acquisition, the Company borrowed
$106.0 million under its revolving credit facility. The acquisition will be
accounted for as a purchase business combination, and the results of operations
of Havasu will be included in the results of operations of the Company from the
purchase date forward.
On June 11, 1998, the Company acquired certain net assets and assumed
certain liabilities of Elko General Hospital ("Elko") for a purchase price of
$21.7 million. To finance the acquisition, the Company borrowed $22.0 million
under its revolving credit facility. The acquisition will be accounted for as a
purchase business combination, and the results of operations of Elko will be
included in the results of operations of the Company from the purchase date
forward.
10. PRO FORMA FINANCIAL INFORMATION
The condensed consolidated pro forma statement of income for the three
months ended March 31, 1998, gives effect to (i) the conversion of junior
preferred stock into common stock and (ii) the sale of common stock in the
offering and the application of net proceeds thereof to the repurchase of
certain shares of common stock, the redemption of senior preferred stock and the
repayment of debt, as if all such transactions had been completed as of January
1, 1998, at the initial public offering price of $16.00 per share, as follows:
-- The elimination of interest expense associated with the $39.5 million of
long-term obligations repaid with the net proceeds of the offering, and
the elimination of the related income tax benefit based on the combined
federal and state statutory rate of 39%.
-- The elimination of the dividends and the accretion of issuance costs on
the senior preferred stock redeemed with a portion of the net proceeds
of the offering, and the junior preferred stock converted into common
stock in connection with the offering.
The pro forma condensed consolidated financial information does not purport
to represent what the Company's results of operations would have been had such
transactions in fact occurred as of January 1, 1998, or to project the Company's
results of operations in any future period.
F-31
<PAGE> 102
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Brim, Inc.
We have audited the accompanying consolidated statements of income and cash
flows of Brim, Inc. and subsidiaries for the period January 1, 1996 to December
18, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Brim, Inc. and subsidiaries for the period January 1, 1996 to December 18,
1996 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Nashville, Tennessee
April 30, 1997, except for
the second paragraph of
Note 10, as to which the date
is February 4, 1998
F-32
<PAGE> 103
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Brim, Inc.
We have audited the accompanying consolidated statements of income and cash
flows of Brim, Inc. and subsidiaries for the year ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Brim, Inc. and subsidiaries for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Portland, Oregon
March 8, 1996
F-33
<PAGE> 104
BRIM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1 TO
DECEMBER 31, 1995 DECEMBER 18, 1996
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Revenue:
Net patient service revenue............................ $ 75,871 $ 87,900
Management and professional services................... 19,567 18,330
Other.................................................. 5,776 6,370
-------- --------
Net operating revenue.......................... 101,214 112,600
-------- --------
Expenses:
Salaries, wages and benefits........................... 55,289 58,105
Purchased services..................................... 14,411 17,199
Supplies............................................... 10,143 11,218
Provision for doubtful accounts........................ 4,601 7,669
Other operating expenses............................... 8,030 8,674
Rentals and leases..................................... 3,555 4,491
Depreciation and amortization.......................... 1,964 1,773
Interest expense....................................... 738 1,675
Costs of recapitalization.............................. -- 8,951
(Gain) loss on sale of assets.......................... (2,814) 442
-------- --------
Total expenses................................. 95,917 120,197
-------- --------
Income (loss) from continuing operations before provision
for income taxes....................................... 5,297 (7,597)
Provision (benefit) for income taxes..................... 1,928 (2,290)
-------- --------
Income (loss) from continuing operations................. 3,369 (5,307)
Discontinued operations:
Income from discontinued operations, less applicable
income taxes........................................... 783 537
(Loss) gain on disposal of discontinued operations, to
related parties in 1996, less applicable income
taxes.................................................. (1,047) 5,478
-------- --------
Total discontinued operations.................. (264) 6,015
-------- --------
Net income............................................... $ 3,105 $ 708
======== ========
</TABLE>
See accompanying notes.
F-34
<PAGE> 105
BRIM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1 TO
DECEMBER 31, 1995 DECEMBER 18, 1996
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 3,105 $ 708
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 2,631 1,773
Provision for doubtful accounts........................... 4,734 7,669
Loss (income) from investments............................ (86) 272
Deferred income taxes..................................... (137) (3,277)
Gain on sale of assets.................................... (2,608) (8,519)
Provision for professional liability...................... 301 468
Changes in operating assets and liabilities, net of
effects from acquisitions and disposals:
Accounts receivable..................................... (5,269) (5,899)
Inventories............................................. (140) (48)
Prepaid expenses and other.............................. 3,178 2,448
Accounts payable and accrued expenses................... (1,880) 3,450
Accrued salaries and benefits........................... -- 1,144
Third-party settlements................................. 62 245
Other liabilities....................................... 232 (214)
-------- --------
Net cash provided by operating activities................... 4,123 220
INVESTING ACTIVITIES
Purchase of property, plant and equipment................... (1,398) (12,642)
Net capital contributions and withdrawals -- investments.... (2,063) 1,775
Purchase of acquired company................................ (15,765) (1,763)
Proceeds from sale of assets................................ 20,607 21,957
Escrow deposit on facility purchase......................... (3,829) --
Other....................................................... 921 51
-------- --------
Net cash (used in) provided by investing activities......... (1,527) 9,378
FINANCING ACTIVITIES
Proceeds from long-term debt................................ 39 72,000
Repayments of debt.......................................... (2,048) (6,657)
Issuance of common stock.................................... 245 --
Repurchase of common stock.................................. (364) --
Recapitalization............................................ -- (49,400)
-------- --------
Net cash (used in) provided by financing activities......... (2,128) 15,943
-------- --------
Net increase in cash and cash equivalents................... 468 25,541
Cash and cash equivalents at beginning of year.............. 1,819 2,287
-------- --------
Cash and cash equivalents at end of year.................... $ 2,287 $ 27,828
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid during the year............................... $ 1,584 $ 558
======== ========
Income taxes paid during the year........................... $ 4,183 $ 2,288
======== ========
ACQUISITIONS
Fair value of assets acquired............................... $ 15,784 $ 3,092
Liabilities assumed......................................... (19) (1,329)
-------- --------
Cash paid................................................... $ 15,765 $ 1,763
======== ========
SALE OF ASSETS
Assets sold................................................. $ 17,791 $ 13,274
Liabilities released........................................ 505 155
Debt assumed by purchaser................................... (297) --
Gain on sale of assets...................................... 2,608 8,519
-------- --------
Cash received............................................... $ 20,607 $ 21,948
======== ========
NONCASH TRANSACTIONS
Property, plant and equipment acquired through capital
leases.................................................... $ -- $ 3,045
======== ========
Noncash issuance of stock in connection with
recapitalization.......................................... $ -- $ 4,118
======== ========
</TABLE>
See accompanying notes.
F-35
<PAGE> 106
BRIM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 18, 1996
1. ORGANIZATION AND ACCOUNTING POLICIES
Brim, Inc. and its subsidiaries (Brim or the Company) are engaged in the
business of owning, leasing and managing hospitals in non-urban communities
principally in the northwestern and southwestern United States. As more fully
described in Note 2, the Company consummated a leveraged recapitalization on
December 18, 1996. Immediately thereafter, as more fully described in Note 10, a
subsidiary of the Company merged with Principal Hospital Company (PHC) in a
transaction accounted for as a reverse acquisition of Brim by PHC. These
accompanying financial statements are presented on the historical cost basis
after the leveraged recapitalization but prior to the reverse acquisition. The
reverse acquisition resulted in a new basis of accounting such that Brim's
assets and liabilities were recorded at their fair value in PHC's consolidated
balance sheet upon consummation of the reverse acquisition. Brim, the
predecessor company, was renamed Principal Hospital Company on January 16, 1997.
PHC is considered the successor company of Brim.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
its majority-owned subsidiaries and partnerships in which the Company or one of
its subsidiaries is a general partner and has a controlling interest. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RISK MANAGEMENT
The Company maintains self-insured medical and dental plans for employees.
Claims are accrued under these plans as the incidents that give rise to them
occur. Unpaid claim accruals are based on the estimated ultimate cost of
settlement, including claim settlement expenses, in accordance with an average
lag time and past experience. The Company has entered into reinsurance
agreements for certain plans with independent insurance companies to limit its
losses on claims. Under the terms of these agreements, the insurance companies
will reimburse the Company based on the level of reinsurance which ranges from
$30,000 per individual claim up to $1,000,000. These reimbursements are included
in salaries, wages and benefits in the accompanying consolidated statements of
income.
The Company is insured for professional liability based on a claims-made
policy purchased in the commercial insurance market. The provision for
professional liability and comprehensive general liability claims include
estimates of the ultimate costs for claims incurred but not reported, in
accordance with actuarial projections based on past experience. Management is
aware of no potential professional liability claims whose settlement, if any,
would have a material adverse effect on the Company's consolidated financial
position or results of operations.
PATIENT SERVICE REVENUE
Net patient service revenue is reported at the estimated net realizable
amounts from patients, third-party payors, and others for services rendered,
including estimated retroactive adjustments under reimbursement agreements with
third-party payors. Estimated settlements under third-party
F-36
<PAGE> 107
BRIM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reimbursement agreements are accrued in the period the related services are
rendered and adjusted in future periods as final settlements are determined.
Approximately 61% of gross patient service revenue for the year ended
December 31, 1995, and for the period January 1 to December 18, 1996, is from
participation in the Medicare and state sponsored Medicaid programs.
MANAGEMENT AND PROFESSIONAL SERVICES
Management and professional services is comprised of fees from management
and professional consulting services provided to third-party hospitals pursuant
to management contracts and consulting arrangements. The base fees associated
with the hospital management contracts are determined in the initial year of the
contract on an individual hospital basis. In certain contracts, the Company is
entitled to a yearly bonus based on the performance of the managed hospital. The
base fee, which is fixed, is based on a fair market wage and is not dependent on
any bonus structure. The management contracts are adjusted yearly based on an
agreed upon inflation indicator. The substantial majority of management and
professional services revenue consists of the management fees earned under the
hospital management contracts and reimbursable expenses. The reimbursable
expenses relate to salaries and benefits of Company employees that serve as
executives at the managed hospitals. The salaries and benefits of these
employees are legal obligations of, and are paid by, the Company and are
reimbursed by the managed hospitals. Fees are recognized as revenue as services
are performed. Reimbursable expenses are included in salaries, wages and
benefits in the accompanying consolidated statements of income. Management and
professional services revenue, excluding reimbursable expenses, was $10,652,000
and $9,329,000 for the year ended December 31, 1995, and for the period January
1 to December 18, 1996, respectively. The Company does not maintain any
ownership interest in and does not fund operating losses or guarantee any
minimum income for these managed hospitals. The Company does not have any
guarantees to these hospitals, except for one managed hospital for which the
Company has guaranteed the hospital's long-term debt of $500,000.
STOCK BASED COMPENSATION
The Company, from time to time, grants stock options for a fixed number of
common shares to employees. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and accordingly, recognizes no compensation expense for the stock option grants
when the exercise price of the options equals, or is greater than, the market
price of the underlying stock on the date of grant.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1995 consolidated financial
statements to conform to the 1996 presentation. These reclassifications had no
effect on the results of operations previously reported.
2. RECAPITALIZATION
On December 18, 1996, Brim was recapitalized pursuant to an Investment
Agreement dated November 21, 1996, by and between Brim and Golder, Thoma,
Cressey, Rauner Fund IV, L.P. (GTCR Fund IV), and PHC. The basic elements of the
recapitalization of the Company included the following: GTCR Fund IV and other
investors purchased new shares of the Company's common and preferred stock; the
Company sold its senior living business and entered into a new credit facility
to, along with the proceeds from the sale of the new shares, provide financing
for the redemption of a
F-37
<PAGE> 108
BRIM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
portion of the pre-existing common and preferred stock; this pre-existing common
and preferred stock was redeemed; and certain pre-existing debt was repaid. The
recapitalization was accounted for as such and, accordingly, did not result in a
new basis of accounting.
The principal elements of the recapitalization included the following:
- Brim sold for cash its two wholly-owned subsidiaries engaged in senior
living activities for a gross sales price of $19.7 million (see Note 6),
and sold for cash certain real estate properties for a price of $406,500
plus assumption of debt of approximately $800,000 (see Note 3).
- GTCR Fund IV purchased 1,051,476 shares, Mr. Martin Rash purchased 16,886
shares, Mr. Richard Gore purchased 31,477 shares, two banks purchased
15,737 shares, and Leeway & Co., a subsidiary of AT&T, purchased 615,082
shares of Brim newly-designated common stock for cash of approximately
$1.1 million. Messrs. Rash and Gore purchased 295,011 shares of Brim
newly-designated common stock for notes of $179,956.
- Through a series of transactions, Brim pre-transaction shareholders who
were to remain shareholders after the recapitalization received 3,580
shares of newly-designated junior preferred stock and 586,884 shares of
Brim newly-designated common stock with a value of approximately $4.0
million in exchange for their common stock of Brim.
- GTCR Fund IV purchased 6,414 shares, Mr. Rash purchased 103 shares, Mr.
Gore purchased 192 shares, two banks purchased 96 shares and Leeway & Co.
purchased 3,752 shares of newly-designated redeemable junior preferred
stock for cash of approximately $10.6 million.
- Leeway & Co. purchased 20,000 shares of newly designated redeemable
senior preferred stock and was issued a warrant to purchase 253,228
shares of newly-designated common stock for total cash consideration of
$20.0 million. A value of $139,000 was assigned to the warrant.
- Brim entered into a $100.0 million credit facility with First Union
National Bank and borrowed $35.0 million under the term loan portion of
the facility, and $37.0 million under the $65.0 million revolving credit
portion of the facility.
- The outstanding common stock of all Brim shareholders who were not to
remain as shareholders after the recapitalization was exchanged for
redeemable junior preferred stock. The preferred stock was then redeemed
for cash of approximately $42.3 million, and outstanding stock options
were settled for cash of approximately $8.0 million.
- Brim redeemed pre-existing Series A preferred stock held by General
Electric Credit Corporation for cash of approximately $29.9 million.
- Existing Brim debt of $5.4 million was paid.
- An aggregate of approximately $6.5 million was deposited into escrow
accounts for possible breaches of representations and warranties that
were made in connection with the recapitalization. Escrow funds not used
for settlement of breaches within 18 months of the recapitalization will
be released to the redeemed Brim shareholders.
The common stock ownership subsequent to the recapitalization consists of a
22.5% interest held by certain of the pre-recapitalization Brim shareholders and
77.5% held by the new investors.
Total financing fees and legal, accounting and other related costs of the
recapitalization amounted to approximately $14,231,000. Costs totaling
$8,951,000 were charged to operations at the date of the recapitalization,
consisting of cash paid to buy-out stock options of $7,995,000 and
transaction-related costs of $956,000. Costs of $2,321,000 associated with the
sale of common and preferred stock were allocated to retained earnings (deficit)
as to the common stock, and were
F-38
<PAGE> 109
BRIM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
netted against the proceeds as to the preferred stock. Financing costs of
$2,959,000 associated with the credit facility with First Union National Bank
were recorded as deferred loan costs.
3. ACQUISITIONS AND DIVESTITURES
In February 1995, the Company acquired two senior living residences for
approximately $15,800,000. In September 1995, the Company sold the real property
of the two facilities and leased them back under an operating lease agreement
for a minimum lease term of 15 years. The gain on the sale of $138,000 was
deferred to be recognized over the lease term.
In May 1995, the Company sold a hospital facility for approximately
$6,000,000. Cash proceeds from the sale were approximately $5,200,000 and the
Company recorded a gain on this transaction of approximately $2,500,000.
In February 1996, the Company acquired Parkview Regional Hospital by
entering into a 15-year operating lease agreement with two five-year renewal
terms and by purchasing certain assets totaling $3,092,000 and assuming certain
liabilities totaling $1,329,000, for a purchase price of $1,763,000. The
operating results of Parkview have been included in the accompanying
consolidated statements of income from the date of acquisition. Accordingly, the
accompanying consolidated statement of income for the period January 1 to
December 18, 1996 includes the results of approximately 10 months of operations
of Parkview.
In December 1996, the Company sold its senior living business (see Note 6)
and certain assets related to three medical office buildings. The assets related
to three medical office buildings were sold to a limited liability company for
$406,500 plus assumption of debt of approximately $800,000. The accounting basis
for the sale was fair market value and a pre-tax gain of approximately $94,000
was recognized on the sale. The members of the limited liability company were
officers and employees of the Company prior to the recapitalization who
collectively owned 75% of the Company's fully diluted common stock prior to the
recapitalization.
The following pro forma information related to continuing operations
reflects the operations of the entities acquired in 1995 and 1996, and divested
in 1995, as if the respective transactions had occurred as of the first day of
the fiscal year immediately preceding the year of the transactions. The pro
forma results of continuing operations do not purport to represent what the
Company's results of continuing operations would have been had such transactions
in fact occurred at the beginning of the years presented or to project the
Company's results of operations in any future period.
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1 TO
DECEMBER 31, 1995(1) DECEMBER 18, 1996(2)
-------------------- --------------------
<S> <C> <C>
Total revenue...................................... $111,201 $113,433
Income from continuing operations.................. 3,849 (749)
</TABLE>
- ---------------
(1) Includes Parkview Regional Hospital and excludes the hospital divested in
1995.
(2) Includes Parkview Regional Hospital.
The Company has minority interests in various health care related
businesses. These investments are accounted for by the equity method. The
results of operations of these businesses are not material to the consolidated
financial statements.
F-39
<PAGE> 110
BRIM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PATIENT SERVICE REVENUE
The Company has agreements with third-party payors that provide for
payments to the Company at amounts different from its established rates. A
summary of the payment arrangements with major third-party payors follows:
- Medicare -- Inpatient acute care services rendered to Medicare program
beneficiaries are paid at prospectively determined rates per diagnosis.
These rates vary according to a patient classification system that is
based on clinical, diagnostic, and other factors. Inpatient nonacute
services, certain outpatient services and medical education costs related
to Medicare beneficiaries are paid based on a cost reimbursement
methodology. The Company is reimbursed for cost reimbursable items at a
tentative rate with final settlement determined after submission of
annual cost reports by the Company and audits thereof by the Medicare
fiscal intermediary. The Company's classification of patients under the
Medicare program and the appropriateness of their admission are subject
to an independent review. The Company's Medicare cost reports have been
audited by the Medicare fiscal intermediary through December 31, 1993.
- Medicaid -- Inpatient and outpatient services rendered to Medicaid
program beneficiaries are reimbursed either under contracted rates or
reimbursed for cost reimbursable items at a tentative rate with final
settlement determined after submission of annual cost reports by the
Company and audits thereof by Medicaid. The Company's Medicaid cost
reports have been audited by the Medicaid fiscal intermediary through
December 31, 1993.
- Other -- The Company also has entered into payment agreements with
certain commercial insurance carriers, health maintenance organizations
and preferred provider organizations. The basis for payment to the
Company under these agreements includes prospectively determined rates
per discharge, discounts from established charges, and prospectively
determined daily rates.
Final determination of amounts earned under the Medicare and Medicaid
programs often occur in subsequent years because of audits by the programs,
rights of appeal and the application of numerous technical provisions.
Adjustments from finalization of prior year cost reports from both Medicare and
Medicaid resulted in an increase in patient service revenue of $788,000 for the
period January 1 to December 18, 1996.
F-40
<PAGE> 111
BRIM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The provision for income tax expense (benefit) attributable to income from
continuing operations consists of the following amounts (In thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1 TO
DECEMBER 31, 1995 DECEMBER 18, 1996
----------------- -----------------
<S> <C> <C>
Current:
Federal........................................ $1,580 $ 561
State.......................................... 334 134
------ -------
1,914 695
Deferred:
Federal........................................ 11 (2,411)
State.......................................... 3 (574)
------ -------
14 (2,985)
------ -------
$1,928 $(2,290)
====== =======
</TABLE>
The differences between the Company's effective income tax rate of 36.4%
and 30.2% from continuing operations for 1995 and 1996, respectively, and the
statutory federal income tax rate of 34.0% are as follows (In thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1 TO
DECEMBER 31, 1995 DECEMBER 18, 1996
----------------- -----------------
<S> <C> <C>
Statutory federal rate........................... $1,801 $(2,580)
State income taxes, net of federal income tax
benefit........................................ 222 (290)
Amortization of goodwill......................... 69 16
Change in valuation allowance.................... (141) (2)
Nondeductible recapitalization costs............. -- 298
Other............................................ (23) 268
------ -------
$1,928 $(2,290)
====== =======
</TABLE>
The Internal Revenue Service is in the process of finalizing its
examination of the Company's federal income tax returns for the 1993 and 1994
years. Finalization of the examination is not expected to have a significant
impact on the results of operations of the Company.
6. DISCONTINUED OPERATIONS
During May 1995, the Company adopted a plan to dispose of its business of
providing managed care administration and organization infrastructure to
physician groups taking health care payment risk. Revenue from this business
segment was $1,126,000 for the year ended December 31, 1995. Loss from
operations of this business segment was $146,000 for the year ended December
31,1995, net of taxes. The loss on the disposal of this business segment was
$670,000 net of taxes.
During September 1995, the Company adopted a plan to dispose of its
stand-alone business of providing surgery on an outpatient basis. Revenue from
this business segment was $155,000 for the year ended December 31, 1995. Loss
from operations of this business segment was $249,000 for the year ended
December 31, 1995, net of taxes. Loss on disposal of this business was $377,000,
net of taxes.
F-41
<PAGE> 112
BRIM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During November 1996, the Company adopted a plan to sell its senior living
business to companies whose shareholders included unrelated third parties and
certain shareholders, officers, and employees of Brim. The sale of the senior
living business was accomplished in the following separate transactions: (i) the
sale of assets used in connection with the senior living business through the
merger of Brim Senior Living, Inc. with a Delaware limited liability company and
(ii) the sale of Meridian Senior Living, Inc. The sale of assets used in
connection with the senior living business was to a limited liability company
for $15 million. The accounting basis for the sale was fair market value and a
pre-tax gain of $11.4 million was recognized on the sale. The limited liability
company was owned 65% by an unrelated third party and 35% by officers and
shareholders of the Company prior to the recapitalization who collectively owned
61% of the Company's fully diluted common stock prior to the recapitalization.
The sale of the outstanding common stock of Meridian Senior Living, Inc., a
wholly-owned subsidiary, was to an unrelated third party for $4.7 million. The
accounting basis for the sale was fair market value and a loss of $2.4 million
was recognized on the sale. Subsequent to the sale to the unrelated third party,
certain individuals who were officers and stockholders of the Company prior to
the recapitalization became limited partners with the unrelated third party and
collectively held a 14% limited partnership interest. These individuals owned
approximately 60% of the Company's fully diluted common stock prior to the
recapitalization.
The senior living business segment was sold on December 18, 1996. Revenue
from this business segment was $19,422,000 and $18,598,000 for the year ended
December 31, 1995 and for the period January 1 to December 18, 1996,
respectively. Income from operations was $1,178,000 and $537,000, net of taxes,
for the year ended December 31, 1995 and for the period January 1, 1996 to
December 18, 1996, respectively. The gain on the disposal of this business
segment was $5,478,000, net of taxes.
For financial reporting purposes, the results of operations and cash flows
of the discontinued businesses are included in the consolidated financial
statements as discontinued operations. The income (loss) from discontinued
operations is summarized as follows (In thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1 TO
DECEMBER 31, 1995 DECEMBER 18, 1996
----------------- -----------------
<S> <C> <C>
Income from discontinued operations.............. $ 1,284 $ 891
Applicable income taxes.......................... 501 354
------- ------
783 537
(Loss) gain on disposal of discontinued
operations..................................... (1,715) 8,961
Applicable income taxes.......................... (668) 3,483
------- ------
(1,047) 5,478
------- ------
Total.................................. $ (264) $6,015
======= ======
</TABLE>
7. LEASES
The Company leases various buildings, office space and equipment. The
leases expire at various times and have various renewal options. These leases
are classified as either capital leases or operating leases based on the terms
of the respective agreements.
F-42
<PAGE> 113
BRIM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments at December 18, 1996, by year and in the aggregate,
under noncancellable operating leases with terms of one year or more consist of
the following (In thousands:)
<TABLE>
<S> <C>
1997........................................................ $ 3,369
1998........................................................ 2,768
1999........................................................ 2,180
2000........................................................ 1,862
2001........................................................ 1,784
Thereafter.................................................. 5,831
-------
Total minimum lease payments................................ $17,794
=======
</TABLE>
8. CONTINGENCIES
The Company is involved in litigation and regulatory investigations arising
in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, these matters will be resolved without material
adverse effect on the Company's consolidated financial position or results of
operations.
9. RETIREMENT PLANS
The Company sponsors defined contribution employee benefit plans which
cover substantially all employees. Employees may contribute a percentage of
eligible compensation subject to Internal Revenue Service limits. The plans call
for the Company to make matching 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 $394,000 and $385,000 for the
year ended December 31, 1995 and for the period January 1 to December 18, 1996,
respectively.
In January 1995, the Company adopted a nonqualified supplemental deferred
compensation plan for selected management employees. As determined by the Board
of Directors, the Plan provides a benefit of 1% to 3% of the employee's
compensation. The participant's amount is fully vested, except in those
instances where the participant's employment terminates for any reason other
than retirement, death or disability, in which case the participant forfeits a
portion of the employer's contribution depending on length of service. Plan
expense totaled $80,000 and $95,000 for the year ended December 31, 1995 and for
the period January 1 to December 18, 1996, respectively.
10. SUBSEQUENT EVENTS
Immediately after the recapitalization discussed in Note 2, a subsidiary of
the Company was merged into PHC and the Company was renamed Principal Hospital
Company. In exchange for their shares in PHC, the PHC shareholders received
newly-issued redeemable junior preferred stock and common stock of the Company.
While the Company was the legal acquirer, the merger was accounted for as a
reverse acquisition of the Company by PHC.
On May 8, 1997, the Company declared a three-for-one stock split of the
outstanding common stock and common stock options and warrant to shareholders of
record on May 8, 1997. On February 4, 1998, Principal Hospital Company merged
with a wholly-owned subsidiary in order to change its jurisdiction of
incorporation to Delaware and change its name to Province Healthcare Company
(Province). In the Merger, Province exchanged 1.83 shares of its no par common
stock for each share of the subsidiary's $0.01 par value common stock. All
common share data included in the footnotes to the consolidated financial
statements have been restated to reflect the stock split and the
reincorporation.
F-43
<PAGE> 114
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Samaritan Health System
dba Havasu Samaritan Regional Hospital
We have audited the accompanying balance sheets of Havasu Samaritan
Regional Hospital (an operating unit of Samaritan Health System) as of December
31, 1996 and 1997, and the related statements of operations and changes in net
assets, and cash flows for the three years in the period ended December 31,
1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Havasu Samaritan Regional
Hospital at December 31, 1996 and 1997, and the results of its operations and
its cash flows for the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Phoenix, Arizona
May 5, 1998
F-44
<PAGE> 115
HAVASU SAMARITAN REGIONAL HOSPITAL
(AN OPERATING UNIT OF SAMARITAN HEALTH SYSTEM)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 5,500 $ 5,750
Accounts receivable, less allowance for doubtful accounts
of $618,000 in 1996 and in $1,159,000 in 1997.......... 1,834,095 3,049,331
Inventories............................................... 847,185 1,094,129
Other..................................................... 132,301 146,652
----------- -----------
Total current assets.............................. 2,819,081 4,295,862
Assets limited as to use.................................... 1,973,798 1,970,060
Property and equipment, net................................. 17,943,464 17,790,545
Other....................................................... 3,590,201 4,433,580
----------- -----------
Total assets...................................... $26,326,544 $28,490,047
=========== ===========
LIABILITIES AND NET ASSETS
Current liabilities:
Accounts payable.......................................... $ 840,712 $ 978,708
Accrued expenses.......................................... 3,326,066 943,729
Current portion of long-term debt......................... 597,700 636,620
----------- -----------
Total current liabilities......................... 4,764,478 2,559,057
Long-term debt, less current portion........................ 21,374,542 20,996,743
Net assets.................................................. 187,524 4,934,247
----------- -----------
Total liabilities and net assets.................. $26,326,544 $28,490,047
=========== ===========
</TABLE>
See accompanying notes.
F-45
<PAGE> 116
HAVASU SAMARITAN REGIONAL HOSPITAL
(AN OPERATING UNIT OF SAMARITAN HEALTH SYSTEM)
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Net health services............................... $36,987,398 $43,119,350 $55,101,188
----------- ----------- -----------
Total revenue............................. 36,987,398 43,119,350 55,101,188
Expenses:
Salaries, wages and benefits...................... 14,236,405 14,344,613 16,626,159
General and administrative........................ 5,917,715 7,124,119 9,995,088
Supplies.......................................... 5,016,343 5,724,295 7,457,270
Provision for doubtful accounts................... 2,860,514 3,768,725 4,541,100
Corporate allocated expenses...................... 3,596,293 4,411,531 4,411,536
Interest.......................................... 1,582,123 1,659,146 1,628,303
Depreciation and amortization..................... 1,654,855 1,631,557 1,688,330
----------- ----------- -----------
Total expenses............................ 34,864,248 38,663,986 46,347,786
Excess of revenue over expenses..................... 2,123,150 4,455,364 8,753,402
Equity realignments, net............................ (2,607,242) (5,989,351) (4,006,679)
----------- ----------- -----------
(Decrease) increase in net assets................... (484,092) (1,533,987) 4,746,723
Net assets, beginning of year....................... 2,205,603 1,721,511 187,524
----------- ----------- -----------
Net assets, end of year............................. $ 1,721,511 $ 187,524 $ 4,934,247
=========== =========== ===========
</TABLE>
See accompanying notes.
F-46
<PAGE> 117
HAVASU SAMARITAN REGIONAL HOSPITAL
(AN OPERATING UNIT OF SAMARITAN HEALTH SYSTEM)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------
1995 1996 1997
----------- ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
(Decrease) increase in net assets.................... $ (484,092) $(1,533,987) $4,746,723
Adjustments to reconcile (decrease) increase in net
assets to net cash (used in) provided by operating
activities:
Depreciation and amortization................... 1,654,855 1,631,557 1,688,330
Provision for doubtful accounts................. 2,860,514 3,768,725 4,541,100
Changes in operating assets and liabilities:
Increase in accounts receivable, net.......... (6,892,256) (1,904,207) (5,756,336)
Increase in inventories and other current
assets..................................... (45,295) (78,979) (261,295)
Increase (decrease) in accounts payable and
accrued expenses........................... 1,206,217 430,957 (2,244,341)
----------- ----------- ----------
Net cash (used in) provided by operating
activities...................................... (1,700,057) 2,314,066 2,714,181
INVESTING ACTIVITIES
Purchases of property and equipment, net........... (720,411) (1,990,210) (1,450,536)
Decrease in assets limited as to use............... 43,454 979 3,738
Decrease (increase) in other assets................ 2,657,570 (14,967) (928,254)
----------- ----------- ----------
Net cash provided by (used in) investing
activities...................................... 1,980,613 (2,004,198) (2,375,052)
FINANCING ACTIVITIES
Repayment of long-term debt........................ (280,356) (309,868) (338,879)
----------- ----------- ----------
Net cash used in financing activities.............. (280,356) (309,868) (338,879)
----------- ----------- ----------
Net increase in cash............................... 200 -- 250
Cash, beginning of year............................ 5,300 5,500 5,500
----------- ----------- ----------
Cash, end of year.................................. $ 5,500 $ 5,500 $ 5,750
=========== =========== ==========
</TABLE>
See accompanying notes.
F-47
<PAGE> 118
HAVASU SAMARITAN REGIONAL HOSPITAL
(AN OPERATING UNIT OF SAMARITAN HEALTH SYSTEM)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
ORGANIZATION
Havasu Samaritan Regional Hospital (Havasu) is an operating unit of
Samaritan Health System (Samaritan), a not-for-profit organization. Samaritan is
tax exempt under the provisions of the Internal Revenue Code and the Arizona
Revised Statutes. Havasu, an acute care health care provider, is located in Lake
Havasu, Arizona (see Subsequent Event note).
ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Accounts Receivable
Havasu receives payment for services rendered to patients under payment
arrangements with payors which include (i) Medicare and Arizona's Medicaid
program, Arizona Health Care Cost Containment System (AHCCCS), (ii) other third
party payors including commercial carriers, and health maintenance and preferred
provider organizations, and (iii) others. The following table summarizes the
percent of gross accounts receivable from all payors as of December 31:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Medicare and AHCCCS......................................... 46% 44%
Other Third Party........................................... 13 17
Other....................................................... 41 39
--- ---
100% 100%
=== ===
</TABLE>
Inventories
Inventories, consisting principally of supplies, are stated at the lower of
cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment is stated at cost. Upon sale or retirement, cost and
related accumulated depreciation are eliminated from the respective accounts and
any resulting gain or loss is included in other revenue. Depreciation is
computed using the straight-line method over the estimated useful lives of the
respective assets.
Bond Issue Costs
Certain costs incurred in connection with long-term financing programs have
been deferred. Bond issue costs (included in other assets) are amortized using
the interest method over the life of the related bond issue.
F-48
<PAGE> 119
HAVASU SAMARITAN REGIONAL HOSPITAL
(AN OPERATING UNIT OF SAMARITAN HEALTH SYSTEM)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill
The excess of the purchase price over the fair value of net assets acquired
(included in other assets) is being amortized on a straight-line basis over 20
years. Havasu periodically assesses the recoverability of goodwill by comparing
the carrying amount of goodwill to the future benefits or undiscounted cash
flows derived from the asset.
Third Party Payor Settlements
The basis for payment to Havasu under its third party government and
private payor agreements include prospectively determined rates per discharge,
discounts from established charges, and prospectively determined daily rates.
Annually, Medicare cost reports are filed with the intermediary and are
subject to audit and adjustment prior to settlement. Estimates of final
settlements for all years through 1997 have been reflected in accrued expenses.
Revenue
Approximately 52 percent in 1995 and 1996 and 49 percent in 1997 of
Havasu's net health services revenue was derived from the Medicare and AHCCCS
programs, the continuation of which are dependent upon governmental policies.
Net health services revenue is reported at estimated net realizable amounts from
patients, third party payors, and others for services rendered. Contractual
adjustments resulting from agreements with various organizations to provide
services for amounts which differ from billed charges, including services under
the Medicare, AHCCCS, and certain managed care programs, are recorded as
deductions from health services revenue. Provision for doubtful accounts is made
when the related revenue is recorded. Accounts, when determined to be
uncollectible, are charged against the allowance for doubtful accounts.
Laws and regulations governing the Medicare and AHCCCS programs are complex
and subject to interpretation. Havasu believes that it is substantially in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing which would have a material impact on Havasu's financial condition or
results of operations. While no such regulatory inquiries have been made,
compliance with such laws and regulations can be subject to future government
review and interpretation as well as significant regulatory action including
fines, penalties, and exclusion from the Medicare and AHCCCS programs.
ACCOUNTS RECEIVABLE SALE
At December 31, 1996, Samaritan had sold certain of its eligible accounts
receivable (including $5,484,143 of Havasu's accounts receivable), as defined,
to Hospital Billing and Collection Service, Ltd. (HBCS), a Delaware
not-for-profit cooperative. Proceeds from the sale were in the form of cash (see
Transactions with Affiliates note) and noninterest bearing subordinated notes.
Samaritan also purchased HBCS capital certificates. As of December 31, 1996,
$1,051,826 of noninterest bearing notes and $822,621 of capital certificates
were allocated to Havasu by Samaritan based on the ratio of Havasu's sold
accounts receivable to the aggregate accounts receivable portfolio sold to HBCS
(included in other assets). In conjunction with the sale, Samaritan was required
to repurchase from HBCS all accounts receivable which became uncollectible after
180 days (the recourse provision). Havasu estimated its liability under the
recourse provision to be $838,106 at December 31, 1996 (included in accrued
expenses). Effective July 1, 1997, Samaritan terminated its agreement with HBCS
and repurchased the sold receivables with proceeds from a short-term note from
First National
F-49
<PAGE> 120
HAVASU SAMARITAN REGIONAL HOSPITAL
(AN OPERATING UNIT OF SAMARITAN HEALTH SYSTEM)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Bank of Chicago (FNBC). This short-term note was subsequently repaid on
September 30, 1997, with proceeds from an accounts receivable sale to Preferred
Receivables Funding Corporation (PRFC), as described below.
At December 31, 1996, Samaritan had sold certain of its eligible accounts
receivable (including $2,843,671 of Havasu's accounts receivable), as defined,
to PRFC, with FNBC serving as agent. Proceeds from the sales were in the form of
cash (see Transactions with Affiliates note) and a noninterest bearing retained
collateralization. As of December 31, 1996, $656,223 of noninterest bearing
retained collateralization was allocated to Havasu by Samaritan based on the
ratio of Havasu's sold accounts receivable to the aggregate accounts receivable
portfolio sold to PRFC (included in other assets). In conjunction with the sale,
Samaritan was required to pay PRFC the amount of all accounts receivable which
became uncollectible or remained uncollected after 180 days. Havasu estimated
its liability under this provision to be $223,181 at December 31, 1996 (included
in accrued expenses).
Effective September 30, 1997, Samaritan amended its agreement with PRFC
effectively repurchasing the then sold receivables. Simultaneously, Samaritan
sold its accounts receivable (including approximately $9,782,000 of Havasu's
accounts receivable) to Samaritan Finance Company, LLC (SFC), a special purpose
subsidiary of Samaritan. SFC, in turn, simultaneously sold an undivided
percentage interest in a defined portion of the receivables to PRFC, with FNBC
serving as agent. Under the sale agreement, the receivables are sold without
recourse. Proceeds from the sale to FNBC were in the form of cash (see
Transactions with Affiliates note) and retained collateralization. As of
December 31, 1997, $3,462,839 of retained collateralization was allocated to
Havasu by Samaritan based on the ratio of Samaritan's total retained
collateralization to Samaritan's total accounts receivable portfolio sold to
FNBC, applied to Havasu's sold accounts receivable (included in other assets).
ASSETS LIMITED AS TO USE
Pursuant to the terms of bond indentures, Samaritan is required to maintain
amounts on deposit in separate accounts and with trustees. These funds can be
used only to satisfy obligations permitted by the respective agreements and are
invested primarily in governmental obligations that are stated at market. As of
December 31, 1996 and 1997, $1,992,851 and $2,011,598, respectively, of 1990B
Bond Reserve Funds (see Long-Term Debt note) were allocated to Havasu by
Samaritan based upon the estimated use of debt proceeds.
PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows (see Assets Held
for Sale Note):
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Land................................................... $ 2,236,000 $ 2,236,000
Buildings and improvements............................. 8,658,393 9,451,460
Equipment and improvements............................. 18,513,643 20,453,411
------------ ------------
29,408,036 32,140,871
Amortization and accumulated depreciation.............. (12,910,126) (14,367,608)
------------ ------------
16,497,910 17,773,263
Construction in progress............................... 1,445,554 17,282
------------ ------------
$ 17,943,464 $ 17,790,545
============ ============
</TABLE>
F-50
<PAGE> 121
HAVASU SAMARITAN REGIONAL HOSPITAL
(AN OPERATING UNIT OF SAMARITAN HEALTH SYSTEM)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OTHER ASSETS
A summary of other assets at December 31, follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Allocated bond issue costs.................................. $1,031,534 $1,031,534
Allocated HBCS subordinated notes and capital
certificates.............................................. 1,874,447 --
Allocated FNBC retained collateralization................... 656,223 3,462,839
Goodwill.................................................... 711,263 711,263
Other....................................................... 30,000 27,000
---------- ----------
4,303,467 5,232,636
Amortization................................................ (713,266) (799,056)
---------- ----------
$3,590,201 $4,433,580
========== ==========
</TABLE>
Bond issue costs were allocated to Havasu by Samaritan based upon the
estimated use of debt proceeds.
ACCRUED EXPENSES
A summary of accrued expenses at December 31, follows:
<TABLE>
<CAPTION>
1996 1997
---------- --------
<S> <C> <C>
Accrued payroll............................................. $ 559,696 $183,147
Interest payable............................................ 116,922 113,511
Third party payor settlement................................ 1,587,712 643,615
Accounts receivable sale recourse provision................. 1,061,287 --
Other....................................................... 449 3,456
---------- --------
$3,326,066 $943,729
========== ========
</TABLE>
LONG-TERM DEBT
A summary of long-term debt at December 31, follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Allocated Refunding Bonds-Series 1990B................... $22,876,620 $22,278,920
Unamortized discount-Series 1990B........................ (904,378) (645,557)
----------- -----------
21,972,242 21,633,363
Less current portion..................................... 597,700 636,620
----------- -----------
$21,374,542 $20,996,743
=========== ===========
</TABLE>
Refunding Bonds -- Series 1990B
During 1990, Samaritan issued tax-exempt Hospital System Revenue Refunding
Bonds, Series 1990B. $26,353,000 of the Series 1990B issuance was allocated to
Havasu by Samaritan based upon the estimated use of debt proceeds. The Bonds are
comprised of Serial Bonds, Term Bonds and Capital Appreciation Bonds. The Serial
and Term Bonds are due in annual installments through 2001 with additional
payments in 2004, 2005, 2013, 2016 and 2019. Interest is due semiannually at
fixed rates which range from 6.00 percent to 7.15 percent. The Capital
Appreciation Bonds will yield approximately 7.25 percent upon their maturity
during each of the years 2006 to 2009. The Bonds
F-51
<PAGE> 122
HAVASU SAMARITAN REGIONAL HOSPITAL
(AN OPERATING UNIT OF SAMARITAN HEALTH SYSTEM)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
are guaranteed by MBIA and are collateralized by substantially all of the
Obligated Group's, as defined, real property and fixed equipment.
In addition to the requirement that certain funds be established and held
by a trustee, bond indentures also place other restrictions on Samaritan,
including restrictions on dispositions of assets, maintenance of a minimum debt
service coverage ratio and days cash on hand, among others.
Havasu's allocated portion of the Refunding Bonds-Series 1990B fair market
value as of December 31, 1997 amounts to $25,049,000.
Future Maturities
Future maturities of Havasu's allocated portion of long-term debt, at
December 31, 1997, follow:
<TABLE>
<S> <C>
1998........................................................ $ 636,620
1999........................................................ 681,100
2000........................................................ 728,360
2001........................................................ 778,400
2002........................................................ 834,000
Thereafter.................................................. 17,974,883
-----------
$21,633,363
===========
</TABLE>
SAVINGS PLAN
Havasu participates in Samaritan's defined contribution plan for all
eligible employees. The plan permits each employee to contribute up to 15
percent of salary on a pretax basis subject to certain limitations under the
Internal Revenue Code. Under the plan, Samaritan provided a matching
contribution equal to a range of 60 percent to 100 percent for each participant
depending on length of service as defined under the plan. Effective January 1,
1997, the Plan was amended and renamed the Futura 401(k) Savings Plan (the
Futura Plan). The Futura Plan's participants include the eligible employees of
Samaritan and its affiliates; HealthPartners of Arizona, Inc., and
HealthPartners of Southern Arizona. Samaritan's match of participant
contributions under the Futura Plan was not changed by this amendment to the
Plan. Havasu's contributions to the plan totaled $293,632 in 1995, $489,924 in
1996 and $310,721 in 1997.
RETIREMENT PLAN
The Samaritan sponsored noncontributing defined benefit plan covering all
employees meeting eligibility requirements was frozen effective December 31,
1992. The frozen benefit accruals are based on years of service and employee's
five highest consecutive years of earnings during the last 10 calendar years
preceding retirement or termination. Samaritan's funding policy is to contribute
annually the amount recommended to satisfy the minimum funding requirements. As
of December 31, 1996 and 1997, Plan information has not been determined for
Havasu as an individual participant in the Plan.
INSURANCE PROGRAMS
Havasu participates in Samaritan's medical malpractice, general liability,
workers' compensation and discriminatory insurance coverage, provided through a
combination of purchased and self-insurance programs. Under its self-insurance
program, Samaritan self-insured the first $1,000,000 per occurrence for medical
malpractice limited in the aggregate to $12,000,000 annually for claims
F-52
<PAGE> 123
HAVASU SAMARITAN REGIONAL HOSPITAL
(AN OPERATING UNIT OF SAMARITAN HEALTH SYSTEM)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
made through May 31, 1993. Effective June 1, 1993, Samaritan began to self
insure the first $5,000,000 per occurrence for medical malpractice with no
aggregate limits. Insurance coverage has been purchased to cover payments in
excess of $5,000,000 per occurrence.
In connection with self-insurance programs, accounts have been established
by Samaritan and Samaritan Insurance Funding Ltd. (SIFL) for the purpose of
accumulating assets based on actuarial recommendations. These assets can be used
only for the payment of medical malpractice, general liability, workers'
compensation and discrimination claims, related expenses and the cost of
administering the accounts. It is Samaritan's policy to record the expense and
related liability for medical malpractice, general liability, workers'
compensation and discriminatory losses based upon actuarial estimates using a
discount rate of 7.0 percent in 1995 and 6.0 percent in 1996 and 1997. No
liabilities related to the self insurance programs are allocated to the
operating units of Samaritan, and no self insurance liabilities were allocated
to Havasu by Samaritan at December 31, 1996 or 1997. Self insurance expense is
allocated to Havasu by Samaritan with other overhead expenses (see Transactions
with Affiliates note).
COMMITMENTS AND CONTINGENCIES
Sale and Leaseback of Equipment Under This Lease
During 1994, Samaritan entered into a sale/leaseback transaction with a
financial institution covering various medical, computer and office equipment
that had been purchased during 1993 and 1994. The lease is for a period of 60
months with monthly lease payments. At December 31, 1996 and 1997 $880,076 of
Havasu's net equipment was leased under the Samaritan sale/leaseback
transaction. Subsequent to December 31, 1997, Samaritan repurchased Havasu's
equipment.
Amounts charged to expense for operating leases totaled $623,206 in 1995,
$660,529 in 1996 and $1,020,320 in 1997.
Year 2000 (Unaudited)
Some of Havasu's information systems and biomedical equipment have
time-sensitive software that will not properly recognize the year 2000. This
could result in a system failure or miscalculations causing disruption of
Havasu's operations. Havasu is currently completing an assessment and developing
a plan to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter.
TRANSACTIONS WITH AFFILIATES
Samaritan allocated corporate expenses of $3,596,293 in 1995, $4,411,531 in
1996 and $4,411,536 in 1997 to Havasu for management services. Corporate
expenses are allocated based on the ratio of Havasu's operating expenses to
Samaritan's consolidated operating expenses for the years ended December 31,
1995 and 1996. Corporate expenses allocated for the year ended December 31, 1997
remained constant with the December 31, 1996 allocated amount.
Havasu participates in Samaritan's centralized cash management function
whereby all of Havasu's cash receipts are deposited into Samaritan's corporate
cash accounts and Samaritan processes Havasu's cash disbursements. The
centralized cash management activity is recorded through the intercompany
balances.
At December 31, 1995, 1996 and 1997, Samaritan made net equity realignments
among its operating units through the elimination of certain intercompany
balances. These realignments were
F-53
<PAGE> 124
HAVASU SAMARITAN REGIONAL HOSPITAL
(AN OPERATING UNIT OF SAMARITAN HEALTH SYSTEM)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
recorded as decreases of $2,607,242, $5,989,351 and $4,006,679 in Havasu's net
assets at December 31, 1995, 1996 and 1997, respectively.
SUBSEQUENT EVENT
On May 1, 1998, Samaritan sold substantially all of the real and personal
assets of Havasu, excluding cash, accounts receivable, notes receivable, trust
fund assets and certain prepaid expenses, to Province Healthcare for
approximately $105,500,000.
F-54
<PAGE> 125
HAVASU SAMARITAN REGIONAL HOSPITAL
(AN OPERATING UNIT OF SAMARITAN HEALTH SYSTEM)
CONDENSED BALANCE SHEET (UNAUDITED)
MARCH 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 5,750
Accounts receivable, less allowance for doubtful accounts
of $974,000............................................ 3,767,756
Inventories............................................... 1,075,634
Other..................................................... 160,164
-----------
Total current assets.............................. 5,009,304
Assets limited as to use.................................... 1,978,248
Property and equipment, net................................. 18,665,620
Other....................................................... 6,003,846
-----------
Total assets...................................... $31,657,018
===========
LIABILITIES AND NET ASSETS
Current liabilities:
Accounts payable.......................................... $ 666,690
Accrued expenses.......................................... 510,587
Current portion of long-term debt......................... 636,620
-----------
Total current liabilities......................... 1,813,897
Long-term debt, less current portion........................ 21,061,883
Net assets.................................................. 8,781,238
-----------
Total liabilities and net assets.................. $31,657,018
===========
</TABLE>
See accompanying notes.
F-55
<PAGE> 126
HAVASU SAMARITAN REGIONAL HOSPITAL
(AN OPERATING UNIT OF SAMARITAN HEALTH SYSTEM)
CONDENSED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Revenue:
Net health services....................................... $13,656,703 $15,168,436
----------- -----------
Total revenue..................................... 13,656,703 15,168,436
Expenses:
Salaries, wages and benefits.............................. 3,855,606 4,786,574
General and administrative................................ 2,218,094 2,380,442
Supplies.................................................. 1,930,190 2,217,844
Provision for doubtful accounts........................... 1,297,699 996,224
Corporate allocated expenses.............................. 1,102,884 1,102,884
Interest.................................................. 377,111 394,689
Depreciation and amortization............................. 404,384 458,840
----------- -----------
Total expenses.................................... 11,185,968 12,337,497
Excess of revenue over expenses............................. 2,470,735 2,830,939
Equity realignments, net.................................... 987,086 1,016,052
----------- -----------
Increase in net assets...................................... 3,457,821 3,846,991
Net assets, beginning of year............................... 187,524 4,934,247
----------- -----------
Net assets, end of year..................................... $ 3,645,345 $ 8,781,238
=========== ===========
</TABLE>
See accompanying notes.
F-56
<PAGE> 127
HAVASU SAMARITAN REGIONAL HOSPITAL
(AN OPERATING UNIT OF SAMARITAN HEALTH SYSTEM)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Increase in net assets...................................... $3,457,821 $3,846,991
Adjustments to reconcile increase in net assets to net cash
provided by operating activities:
Depreciation and amortization............................. 404,384 458,840
Provision for doubtful accounts........................... 1,297,699 996,224
Changes in operating assets and liabilities:
Increase in accounts receivable, net................... (4,132,963) (1,714,649)
Decrease (increase) in inventories and other current
assets................................................ 84,376 (3,205)
Decrease in accounts payable and accrued expenses...... (513,395) (680,020)
---------- ----------
Net cash provided by operating activities.............. 597,922 2,904,181
INVESTING ACTIVITIES
Purchases of property and equipment, net.................... (597,586) (1,312,773)
Increase in other assets.................................... (336) (1,591,408)
---------- ----------
Net cash used in investing activities....................... (597,922) (2,904,181)
---------- ----------
Net increase in cash........................................ -- --
Cash, beginning of year..................................... 5,500 5,750
---------- ----------
Cash, end of year........................................... $ 5,500 $ 5,750
========== ==========
</TABLE>
See accompanying notes.
F-57
<PAGE> 128
HAVASU SAMARITAN REGIONAL HOSPITAL
(AN OPERATING UNIT OF SAMARITAN HEALTH SYSTEM)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1998
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Havasu
Samaritan Regional Hospital (Havasu), an operating unit of Samaritan Health
System (Samaritan), have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months
ended March 31, 1998, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. For further information, refer to
the 1997 financial statements and footnotes thereto included herein.
ACCOUNTS RECEIVABLE SALE
Effective September 30, 1997, Samaritan sold its accounts receivable
(including approximately $12,036,000 of Havasu's accounts receivable as of March
31, 1998) to Samaritan Finance Company, LLC (SFC), a special purpose subsidiary
of Samaritan. SFC, in turn, simultaneously sold an undivided percentage interest
in a defined portion of the receivables to Preferred Receivables Funding
Corporation, with First National Bank of Chicago (FNBC) serving as agent. Under
the sale agreement, the receivables are sold without recourse. Proceeds from the
sale to FNBC were in the form of cash (see Transactions with Affiliates note)
and retained collateralization. As of March 31, 1998, $5,055,000 of retained
collateralization was allocated to Havasu by Samaritan based on the ratio of
Samaritan's total retained collateralization to Samaritan's total accounts
receivable portfolio sold to FNBC, applied to Havasu's sold accounts receivable
(included in other assets).
TRANSACTIONS WITH AFFILIATES
Samaritan allocated corporate expenses of $1,102,884 in 1997 and 1998 to
Havasu for management services. Corporate expenses are allocated based on the
ratio of Havasu's operating expenses to Samaritan's consolidated operating
expenses for the three months ended March 31, 1997. Corporate expenses allocated
for the three months ended March 31, 1998 remained constant with the March 31,
1997 allocated amount.
Havasu participates in Samaritan's centralized cash management function
whereby all of Havasu's cash receipts are deposited into Samaritan's corporate
cash accounts and Samaritan processes Havasu's cash disbursements. The
centralized cash management activity is recorded through the intercompany
balances.
At March 31, 1997 and 1998, Samaritan made net equity realignments among
its operating units through the elimination of certain intercompany balances.
These realignments were recorded as increases of $987,086 and $1,016,052 in
Havasu's net assets at March 31, 1997 and 1998, respectively.
SUBSEQUENT EVENT
On May 1, 1998, Samaritan sold substantially all of the real and personal
assets of Havasu, excluding cash, accounts receivable, notes receivable, trust
fund assets and certain prepaid expenses, to Province Healthcare for
approximately $105,500,000.
F-58
<PAGE> 129
REPORT OF INDEPENDENT AUDITORS ON SCHEDULE
Board of Directors
Province Healthcare Company
We have audited the consolidated financial statements of Province
Healthcare Company and subsidiaries as of December 31, 1996 and 1997, and for
the period February 2, 1996 (date of inception) to December 31, 1996, and the
year ended December 31, 1997, and have issued our report thereon dated March 23,
1998 (included elsewhere in this Registration Statement). Our audit also
included the financial statement schedule listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Nashville, Tennessee
March 23, 1998
S-1
<PAGE> 130
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------ ---------- ----------------------- ----------- ----------
ADDITIONS
-----------------------
(1)
CHARGED
BALANCE CHARGED TO BALANCE
AT TO OTHER (2) AT
BEGINNING COSTS AND ACCOUNTS- DEDUCTIONS- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
For the period February 2, 1996 to
December 31, 1996:
Allowance for doubtful accounts... $ -- $ 1,909 $3,468 $ (900) $4,477
For the year ended December 31,
1997:
Allowance for doubtful accounts... 4,477 12,812 -- (12,540) 4,749
</TABLE>
- ---------------
(1) Allowances as a result of acquisitions.
(2) Uncollectible accounts written off, net of recoveries.
S-2
<PAGE> 131
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, THE SELLING STOCKHOLDERS OR ANY UNDERWRITER. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, OR AN OFFER TO BUY, OR
SOLICITATION OF, ANY PERSON IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
The Company........................... 7
The Recapitalization and the Merger... 7
Risk Factors.......................... 8
Use of Proceeds....................... 15
Dividend Policy....................... 15
Price Range of Common Stock........... 15
Capitalization........................ 16
Pro Forma Condensed Consolidated
Financial Statements................ 17
Selected Consolidated Financial
Data................................ 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 37
Management............................ 52
Certain Relationships and Related
Transactions........................ 59
Principal and Selling Stockholders.... 61
Description of Capital Stock.......... 62
Shares Eligible for Future Sale....... 64
Underwriting.......................... 66
Legal Matters......................... 67
Experts............................... 67
Additional Information................ 68
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
3,570,000 Shares
(PROVINCE HEALTHCARE LOGO)
Common Stock
-------------------
PROSPECTUS
-------------------
BT Alex. Brown
BancAmerica Robertson Stephens
Goldman, Sachs & Co.
The Robinson-Humphrey
Company
July 8, 1998
- ------------------------------------------------------
- ------------------------------------------------------
