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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO
_________________.
COMMISSION FILE NO. 0-23639
PROVINCE HEALTHCARE COMPANY
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(Exact Name Of Registrant As Specified In Its Charter)
DELAWARE 62-1710772
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.
105 WESTWOOD PLACE, SUITE 400, BRENTWOOD, TENNESSEE 37027
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(Address of Principal Executive Officers) (Zip Code)
(615) 370-1377
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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NONE NONE
Securities registered pursuant to Section 12(g)
COMMON STOCK, $.01 PAR VALUE PER SHARE
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ ] NO [X]
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the shares of Common Stock (based upon
the closing price of these shares on March 26, 1998) of the registrant held by
nonaffiliates on March 26, 1998 ($24.63 per share), was $67,512,825.
As of March 26, 1998, 13,009,768 shares of the registrant's Common
Stock were issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference and the part of Form 10-K into
which the document is incorporated:
Portions of the Registrant's Proxy
Statement Relating to the Annual Meeting of
Shareholders to be held on May 14, 1998.......................Part III
Portions of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-34421......................Part IV
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PART I
ITEM 1. BUSINESS
OVERVIEW
Province Healthcare Company ("Province" or the "Company") is a provider
of health care services in attractive non-urban markets in the United States.
The Company currently owns or leases eight general acute care hospitals in four
states with a total of 570 licensed beds. The Company also provides management
services to 50 primarily non-urban hospitals in 17 states with a total of 3,448
licensed beds. The Company offers a wide range of inpatient and outpatient
medical services and also provides specialty services including skilled nursing,
geriatric psychiatry 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, the Company had net
operating revenue of $170.5 million.
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 primary providers of health care 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, a
subsidiary of Brim was merged into PHC, and PHC became a subsidiary of Brim (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
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care hospitals. John M. Rutledge, the Company's Chief Operating Officer, was
previously employed as a Regional Vice President/Group Director at Community,
reporting directly to Mr. Rash. James Thomas Anderson, the Company's Senior Vice
President of Acquisitions and Development, was previously a Vice President/Group
Director of Community.
THE NON-URBAN HEALTH CARE MARKET
According to United States Census data, 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 relative dominance 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 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 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
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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 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 primary providers of health care 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 twelve 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
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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.
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 Needles Desert Communities Hospital in Needles, California (which
subsequently changed its name to Colorado River Medical Center). Brim provided
management services to Parkview Regional Hospital and Needles Desert Communities
Hospital, prior to their respective acquisitions.
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.
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
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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 or leases eight general acute care hospitals
in California, Texas, Colorado and Indiana with a total of 570 licensed beds.
Six of the Company's eight hospitals are the only hospital in the town in which
they are located. The owned and leased hospitals represented 95.2% and 87.5% of
the Company's net operating revenues for the period from February 2, 1996 to
December 31, 1996 and the fiscal year ended December 31, 1997, respectively.
Management believes that the facilities at its owned and leased hospitals are
generally suitable and adequate for the services offered.
The Company's hospitals offer a wide range of inpatient medical
services such as operating/recovery rooms, intensive care units, diagnostic
services and emergency room services, as well as outpatient services such as
same-day surgery, radiology, laboratory, pharmacy services and physical therapy.
The Company's hospitals also frequently provide certain specialty services which
include skilled nursing, geriatric psychiatry, 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.
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The following table sets forth certain information with respect to each
of the Company's currently owned and leased hospitals.
<TABLE>
<CAPTION>
LICENSED OWNED/
HOSPITAL BEDS LEASED
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<S> <C> <C>
Colorado Plains Medical Center
Fort Morgan, Colorado 40 Leased(1)
General Hospital
Eureka, California 83 Leased(2)
Memorial Mother Frances Hospital
Palestine, Texas 97 Owned(3)
Colorado River Medical Center (formerly
Needles Desert Communities Hospital)
Needles, California 53 Leased(4)
Ojai Valley Community Hospital
Ojai, California 116(5) Owned
Palo Verde Hospital
Blythe, California 55 Leased(6)
Parkview Regional Hospital
Mexia, Texas 77 Leased(7)
Starke Memorial Hospital
Knox, Indiana 49 Leased(8)
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Total 570
</TABLE>
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(1) The lease expires in April 2014 and is subject to a five-year renewal
term. The Company has a right of first refusal to purchase the
hospital.
(2) The lease expires in December 2000. The Company has the option to
purchase the hospital at any time prior to termination of the lease,
subject to regulatory approval.
(3) 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.
(4) 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.
(5) Includes a 66-bed skilled nursing facility.
(6) 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.
(7) 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.
(8) 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 ("Colorado Plains") 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. Colorado Plains recently
completed an $8.5 million expansion project which included expansion of surgery,
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recovery, emergency room and radiology facilities as well as a new entrance.
The Company is planning a renovation of the hospital's obstetrical unit in 1998.
The hospital also expects to open an inpatient rehabilitation unit in July 1998.
The closest competing hospitals are located approximately 50 miles away.
Colorado Plains is a sole community provider as designated under Medicare and
has a service area population of approximately 43,000.
General Hospital is located approximately 300 miles north of San
Francisco. The hospital also operates a newly-completed 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.
Memorial Mother Frances Hospital ("Memorial Mother Frances") is located
in Palestine, TX, approximately halfway between Dallas and Houston, and
approximately 50 miles from Tyler, Texas. The hospital has added a twelve-bed
inpatient rehabilitation unit and is in the process of expanding the unit.
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.
Colorado River Medical Center (formerly Needles Desert Communities
Hospital) ("Needles") 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 July 1998. The hospital's primary competitor is
located approximately 20 miles away. Needles is a sole community provider as
designated under Medicare and has a service area population of approximately
47,000. Effective February 4, 1998, Needles changed its name to Colorado River
Medical Center.
Ojai Valley Community Hospital ("Ojai Valley") 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
March 1998. 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 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 ("Starke Memorial") is located approximately
50 miles from South Bend, Indiana and is the only hospital in town. The hospital
is affiliated with a tertiary hospital in South Bend. 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 17,814 square feet of office space for its
corporate headquarters in Brentwood,
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Tennessee under a 7-year lease which expires on February 28, 2005 and contains
customary terms and conditions.
Sources of Revenue
The Company receives payments for patient care from private insurance
carriers, federal Medicare programs for elderly and disabled patients, HMOs,
preferred provider organizations ("PPOs"), state Medicaid programs, the Civilian
Health and Medical Program of the Uniformed Services ("CHAMPUS"), employers and
patients directly. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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 is developing a corporate-wide compliance program. In June
1997, the Company 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 will focus on all areas of regulatory compliance, including physician
recruitment, reimbursement and cost reporting practices, laboratory and home
health care operations.
MANAGEMENT SERVICES
The Company's management services division provides comprehensive
management services to 47 primarily non-urban hospitals in 17 states with a
total of 3,295 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% of net operating revenue for
the fiscal year ended December 31, 1997. PHC did not provide management
services until its acquisition of Brim on December 18, 1996.
COMPETITION
The primary bases of competition among hospitals in non-urban markets
are the quality and scope of medical services, strength of referral network,
location, and, to a lesser extent, price. With respect to the delivery of
general acute care services, most of the Company's hospitals face less
competition in their immediate patient service areas than would be expected in
larger communities. While the Company's hospitals are generally the primary
provider of health care services in their
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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 March 1, 1998, the Company had 1,240 "full-time equivalent"
employees, 39 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 March 30,
1998, the Company employed only eight 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 general hospital inpatient care are based on a
prospective payment system ("PPS"). Under the PPS, a hospital receives a fixed
amount for operating costs based on the established fixed payment amount per
discharge for categories of hospital treatment, commonly known as a diagnosis
related group ("DRG"), for each Medicare inpatient. DRG payments do not consider
a specific hospital's costs, but are adjusted for area wage differentials. The
DRG payments do not include reimbursement for capital costs. Psychiatric
services, long-term care, rehabilitation, pediatric services and certain
designated research hospitals, and distinct parts of rehabilitation and
psychiatric units within hospitals, are currently exempt from PPS and are
reimbursed on a cost-based system, subject to specific reimbursement caps (known
as TEFRA limits). For the year ended December 31, 1997, the Company had only
one unit that was reimbursed under this 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. The Company anticipates that future legislation may decrease the
future rate of increase for DRG payments, but is unable to predict the amount of
the final reduction. Medicare reimburses general hospitals' capital costs
separately from DRG payments.
Outpatient services provided at general hospitals typically 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 Company anticipates that future legislation may reduce the
aggregate reimbursement received, but is unable to predict the amount of the
final reduction.
Each state has its own Medicaid program that is funded jointly by the
state and 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 the needs and resources of their citizens. As a result, each
state Medicaid plan has its own payment formula and recipient eligibility
criteria. The
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<PAGE> 12
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/PIRL limits; (ii) negotiated rate per discharge or per diem 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 contract
method. None of the cost-based hospitals is currently subject to a MIRL/PIRL
limit, because their 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, Needles and Palo Verde Hospital 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 Omnibus Budget Reconciliation Act of 1993 provides for certain
budget targets through federal fiscal year 1997, which, if not met, may result
in adjustments in payment rates. 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. Congress recently enacted the Balanced Budget Act of 1997, which
establishes a plan to balance the federal budget by fiscal year 2002, and
includes significant additional reductions in spending levels for the Medicare
and Medicaid programs.
The Medicare, Medicaid and CHAMPUS programs are subject to statutory
and regulatory changes, administrative rulings, interpretations and
determinations, requirements for utilization review and new governmental funding
restrictions, all of which may materially increase or decrease program payments
as well as affect the cost of providing services and the timing of payment to
facilities. The final determination of amounts earned under the programs often
requires many years, because of audits by the program representatives,
providers' rights of appeal and the 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.
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<PAGE> 13
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 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 eight 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.
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. No Safe Harbor for physician recruitment is currently in force.
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
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<PAGE> 14
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 also participates in a group
purchasing joint venture. 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.
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 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.
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Environmental Regulations
The Company's health care operations generate medical waste that must
be disposed of in compliance with federal, state and local environmental laws,
rules and regulations. The Company's operations, as well as the Company's
purchases and sales of facilities, 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. Each of
the Company's facilities that is eligible for accreditation is 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.
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, just prior to the date of this
report, adopted the retrofit standards. Therefore, the Company is unable, at
this time, to evaluate its facilities to determine whether the requirements or
the cost of complying with these requirements will have a material adverse
effect on the Company's business, financial condition or results of operations.
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<PAGE> 16
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.
ITEM 2. PROPERTIES
Information with respect to the Company's hospital facilities and other
properties can be found in Item 1 of this Report under the caption, "Business -
Hospital Operations - Owned and Leased Hospitals."
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, subject to claims and suits arising
in the ordinary course of business, including claims for damages for personal
injuries, breach of management contracts or for wrongful restriction of or
interference with physician's staff privileges. In certain of these actions,
plaintiffs request punitive or other damages that may not be covered by
insurance. The Company is currently not a party to any proceeding which, in
management's opinion, would have a material adverse effect on the Company's
business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market
("Nasdaq") under the symbol "PRHC." The Company's Common Stock began publicly
trading on February 17, 1998. From February 17, 1998 through March 26, 1998 the
Company's Common Stock recorded a high closing price of $24.63 per share and a
low closing price of $18.875 per share, as reported by Nasdaq.
As of March 26, 1998, there were approximately 27 record holders of
the Company's Common Stock.
The Company historically has retained and currently intends to retain
all earnings to finance the development and expansion of its operations and,
therefore, does not anticipate paying cash dividends or making any other
distributions on its shares of Common Stock in the foreseeable future.
Furthermore, the Company's credit facilities contain restrictions on the
Company's ability to pay dividends. The Company's future dividend policy will be
determined by its Board of Directors on the basis of various factors, including
the Company's results of operations, financial condition, business
opportunities, capital requirements and such other factors as the Board of
Directors may deem relevant.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of
(i) the Company's predecessor (Brim) as of and for each of the 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 1997 and for the period February 2, 1996 to December 31, 1996 and the
year ended December 31, 1997. The selected financial information for the
predecessor and the Company has been derived from the audited consolidated
financial statements of the predecessor and the Company. The selected
consolidated financial data are qualified by, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements and Notes thereto of
the Company and Brim, respectively, appearing elsewhere in this report.
Selected Consolidated Financial Data
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Brim(Predecessor)(1)(2) Company (Successor)(1)(2)
------------------------------------------------ ------------------------
Period Jan. Period Feb.
Year Ended December 31, 1, 1996 TO 2, 1996 TO Year Ended
---------------------------------- Dec. 18, Dec. 31 Dec. 31,
1993 1994 1995 1996 1996 1997
-------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net operating revenue .......... $ 84,859 $ 102,067 $ 101,214 $ 112,600 $ 17,255 $170,527
Operating expenses ............. 80,784 96,887 97,993 109,129 18,268 154,566
Interest expense ............... 1,097 935 738 1,675 976 8,121
Costs of recapitalization ...... -- -- -- 8,951 -- --
Loss (gain) on sale of assets .. (10) (635) (2,814) 442 -- 115
-------- --------- --------- --------- -------- ---------
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
Provision (benefit) for income
taxes ....................... 1,772 2,022 1,928 (2,290) (673) 3,650
-------- --------- --------- --------- -------- ---------
Income (loss) from continuing
operations before
extraordinary item .......... 1,216 2,858 3,369 (5,307) (1,316) 4,075
Income (loss) from discontinued
operations, less applicable
income taxes ................ 593 (157) (264) 6,015 -- --
-------- --------- --------- --------- -------- ---------
Income (loss) before cumulative
effect of change in
accounting for income taxes
and extraordinary item ...... 1,809 2,701 3,105 708 (1,316) 4,075
Extraordinary loss from
extinguishment of debt, net
of taxes .................... -- -- -- -- (262) --
Cumulative effect of change in
accounting for income taxes . 1,141 -- -- -- -- --
-------- --------- --------- --------- -------- ---------
Net income (loss) .............. $ 2,950 $ 2,701 $ 3,105 $ 708 $ (1,578) $ 4,075
======== ========= ========= ========= ======== =========
Preferred stock dividends and
accretion ................... (172) (5,077)
-------- ---------
Net loss to common shareholders $ (1,750) $ (1,002)
======== =========
Net loss per share to common
shareholders before
extraordinary item - basic(3) $ (0.52) $ (0.17)
======== =========
Net loss per share to common
shareholders before
extraordinary item - diluted(3) $ (0.52) $ (0.16)
======== =========
Cash dividends declared per
common share ................ $ -- $ --
======== =========
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents....... $ 2,477 $ 1,819 $ 2,287 $ 27,828 $ 11,256 $ 4,186
Total assets.................... 47,463 50,170 50,888 76,998 160,521 176,461
Long-term obligations, less
current maturities........... 11,884 9,371 7,161 75,995 77,789 83,043
Mandatory redeemable preferred
stock........................ 8,816 8,816 8,816 31,824 46,227 50,162
Common stockholders' equity
(deficit).................... 9,973 12,380 15,366 (56,308) (490) (1,056)
</TABLE>
- ---------------
(1) PHC was formed on February 2, 1996. On December 18, 1996, Brim
completed a leveraged recapitalization. Immediately thereafter on
December 18, 1996, a subsidiary of Brim merged with PHC in a
transaction in which Brim issued junior preferred stock and common
stock in exchange for all of the outstanding common stock of PHC.
Because the PHC shareholders became owners of a majority of the
outstanding shares of Brim after the Merger, PHC was considered the
acquiring enterprise for financial reporting purposes and the
transaction was accounted for as a reverse acquisition. Therefore, the
historical financial statements of PHC replaced the historical
financial statements of Brim, the assets and liabilities of Brim were
recorded at fair value as required by the purchase method of
accounting, and the operations of Brim were reflected in the operations
of the combined enterprise from the date of acquisition. 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 3 and 4 of Notes to Consolidated
Financial Statements of Brim.
(3) In 1997, the Financial Accounting Standards Board 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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Company's consolidated financial statements and related notes thereto included
elsewhere in this report.
OVERVIEW
Province Healthcare Company is a health care services company focused
on acquiring and operating hospitals in attractive non-urban markets in the
United States. The Company currently operates eight general acute care hospitals
in four states with a total of 570 licensed beds, and manages 50 hospitals in 17
states with a total of 3,448 licensed beds.
PHC of Delaware, Inc., 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.
IMPACT OF ACQUISITIONS AND DIVESTITURES
An integral part of the Company's strategy is to acquire non-urban
acute care hospitals. See "Item 1. Business - Business Strategy." Because of the
financial impact of the Company's recent acquisitions, it is difficult to make
meaningful comparisons between the Company's financial statements for the fiscal
periods presented. In addition, due to the relatively small number of owned and
leased hospitals, each hospital acquisition can materially affect the overall
operating margin of the Company. Upon the acquisition of a hospital, the Company
typically takes a number of steps to lower operating costs. See "Item 1.
Business - Hospital Operations." The impact of such actions may be offset by
cost increases to expand services, strengthen medical staff and improve market
position. The benefits of these investments and of other activities to improve
operating margins generally do not occur immediately. Consequently, the
financial performance of a newly-acquired hospital may adversely affect overall
operating margins in the near term. As the Company makes additional hospital
acquisitions, the Company expects that this effect will be mitigated by the
expanded financial base of existing hospitals and the allocation of corporate
overhead among a larger number of hospitals.
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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 Needles in Needles, CA by assuming
certain liabilities and entering into a lease agreement, and by purchasing
certain net assets for a purchase price of $2.6 million.
The December 31, 1996 results of operations of the Company include five
months of operations for Memorial Mother Frances, three months of operations for
Starke Memorial, and 13 days of operations for Brim. Brim's operations consisted
of five owned/leased hospitals and a hospital management company operation. In
the discussion that follows, Memorial Mother Frances, Starke Memorial and Brim
are referred to as the "1996 Acquisitions." The December 31, 1997 results
include twelve months of operations for all the above entities, plus five months
of operations for Needles. Same-store hospital comparisons have not been
presented due to the fact that none of the hospitals were owned for all of 1996
and 1997.
DISCONTINUED OPERATIONS
During the past three years, 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, 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.
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<PAGE> 22
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 report.
<TABLE>
<CAPTION>
Brim (Predecessor) Company (Successor)
------------------------------- -------------------------------
Period From
Year Ended Jan. 1, 1996 TO Feb. 2, Year Ended
Dec. 31 Dec. 18, 1996 TO Dec. 31, Dec. 31,
1995 1996 1996 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net patient service revenue ............ 75.0% 78.1% 95.2% 87.5%
Management and professional services
revenue ............................. 19.3 16.3 3.5 9.6
Other revenue .......................... 5.7 5.6 1.3 2.9
----- ----- ----- -----
Net operating revenue .................. 100.0% 100.0% 100.0% 100.0%
Expenses:
Salaries, wages and benefits ........ 54.6 51.6 44.0 42.7
Purchased services .................. 14.2 15.3 13.2 13.6
Supplies ............................ 10.0 10.0 11.0 9.7
Provision for doubtful accounts ..... 4.5 6.8 11.1 7.5
Other operating expenses ............ 7.9 7.7 16.6 9.6
Rentals and leases .................. 3.5 4.0 1.2 2.9
Depreciation and amortization ....... 1.9 1.6 7.6 4.4
Interest expense .................... 0.7 1.5 5.7 4.8
Minority interest ................... -- -- 1.1 0.2
Costs of recapitalization ........... -- 7.9 -- --
Loss (gain) on sale of assets ....... (2.8) 0.4 -- 0.1
----- ----- ----- -----
Income (loss) from continuing operations
before provision for income taxes and
extraordinary item................... 5.2% (6.7)% (11.5)% 4.5%
Income (loss) from continuing operations
before extraordinary item............ 3.3% (4.7)% (7.6)% 2.4%
Net income (loss) ...................... 3.1% 0.6% (9.1)% 2.4%
</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.
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
22
<PAGE> 23
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.
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 thirteen days of operations for Brim. The December 31, 1997
results include twelve months of operations for the 1996 Acquisitions plus five
months of operations for Needles.
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
favorable revenue adjustments of $0 and $3,260,000 (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 and related to
the thirteen days of operations following the acquisition of Brim. Reimbursable
expenses (which are included in operating revenue and 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.
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 1996 and in
1997, 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.
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<PAGE> 24
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 Brim
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 Needles
and the buyout of the operating lease at Ojai.
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 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 are as
follows (in millions):
<TABLE>
<CAPTION>
Period From
Year Ended Jan. 1, TO
Dec. 31, Dec. 18, Increase
1995 1996 (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>
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.
24
<PAGE> 25
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 this increase. Salaries, wages and benefits decreased $1.3 million,
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 (ten 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).
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
25
<PAGE> 26
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 80.0%.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had working capital of $21.4 million,
including cash and cash equivalents of $4.2 million. The ratio of current assets
to current liabilities was 1.8 to 1.0 at December 31, 1997, compared to 2.0 to
1.0 at December 31, 1996.
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.
The Company's cash requirements, excluding acquisitions, have
historically been funded by cash generated from operations. Cash provided by
operations was $1.6 million for the period February 2, 1996 to December 31,
1996. Cash used in operations totaled $0.8 million for the year ended December
31, 1997.
Cash provided by investing activities totaled $3.6 million for the
period February 2, 1996 to December 31, 1996. Cash used in investing activities
totaled $18.2 million for the year ended December 31, 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 $6.0 million for the
period February 2, 1996 to December 31, 1996 and $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.
Capital expenditures for owned and leased hospitals may vary from year
to year depending on facility improvements and service enhancements undertaken
by the hospitals. Management services activities do not require significant
capital expenditures. Capital expenditures for the year ended December 31, 1997
were $15.3 million. The Company expects to make capital expenditures in 1998 of
less than $10.0 million, exclusive of any acquisitions of businesses, and
excluding the planned renovation of the obstetrical unit at Colorado Plains
Medical Center. Planned capital expenditures for 1998 consist principally of
capital improvements at owned and leased hospitals. The Company expects to fund
these expenditures through cash provided by operating activities and borrowings
under its revolving credit agreement.
The Company intends to purchase or lease 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, or that any needed financing will be available on
favorable terms.
26
<PAGE> 27
The Company has a $100.0 million Credit Agreement with First Union
National Bank of North Carolina, as agent for a syndicated group of lenders. The
facility consists of a revolving credit facility in an amount of up to $65.0
million and a term loan facility in the amount of $35.0 million. Amounts
outstanding under the Credit Agreement at December 31, 1997 and December 31,
1996 were $82.0 million and $72.0 million, respectively, of which $35.0 million
related to the term loan portion of the Credit Agreement as of each such date.
Borrowings under the Credit Agreement bear interest, at the Company's option, at
the adjusted base rate or at the adjusted LIBOR rate. Interest ranged from 7.9%
to 9.3% during the year ended December 31, 1997, and 8.1% to 9.3% during the
period February 2, 1996 to December 31, 1996. The Company pays a commitment fee
of one-half of one percent on the unused portion of the revolving credit
facility. The Company may prepay the principal amount outstanding under the
Credit Agreement at any time before maturity. The revolving credit facility
matures on December 16, 1999. Borrowings under the revolver for acquisitions
require the consent of the lenders. In March 1997, as required under the Credit
Agreement, 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, with a current effective rate of 6.3%.
As discussed below, the Company repaid the $35.0 million term loan and
made a payment of $4.5 million on the revolving credit agreement subsequent to
December 31, 1997.
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.
Management has amended and restated the Credit Agreement, subsequent to
December 31, 1997, to increase availability under the credit facility to $260.0
million.
In February 1998, the Company closed an initial public offering of its
Common Stock, the net proceeds of which totaled approximately $77.2 million. In
addition, in connection with the offering, 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 initial public offering price. Of the net proceeds from the offering, $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 initial public offering, and $39.6
million was used to repay amounts outstanding under the $100.0 million Credit
Agreement. Upon completion of the offering, the Company's capital structure
consists solely of common equity, and totaled $94.4 million on a pro forma basis
as of December 31, 1997, after applying the proceeds of the offering.
For further information concerning the initial public offering of
Common Stock and the pro forma effect of the offering on the Company's financial
condition and results of operations, see the unaudited pro forma balance sheet
as of December 31, 1997 and the unaudited pro forma statement of operations for
the year then ended, included with the Company's historical Consolidated
Financial Statements, and Notes 15 and 16 of Notes to Consolidated Financial
Statements.
The Company believes that its future cash flow from operations,
together with borrowings available under the Credit Agreement, will be
sufficient to fund the Company's operating expenses, capital expenditures and
debt service requirements for the foreseeable future. The Company will continue
to pursue its acquisition strategy and in connection therewith may pursue
additional financings and incur additional indebtedness.
27
<PAGE> 28
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. 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 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
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.
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 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 project is estimated to be completed not later than December 31,
1999, which is prior to any anticipated impact on its operating systems. 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
28
<PAGE> 29
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. 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
recently-enacted 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 report.
Certain of these factors are discussed in more detail elsewhere in this report.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the executive officers and directors of the
Company is incorporated by reference from the Company's Proxy Statement relating
to the Annual Meeting of Shareholders to be held on May 14, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to the compensation of the Company's executive
officers is incorporated by reference from the Company's Proxy Statement
relating to the Annual Meeting of Shareholders to be held on May 14, 1998,
except that the Comparative Performance Graph and the Compensation Committee
Report on Executive Compensation included in the Proxy Statement are expressly
not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to the security ownership of certain
beneficial owners of the Company's Common Stock and management is incorporated
by reference from the Company's Proxy Statement relating to the Annual Meeting
of Shareholders to be held on May 14, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related
transactions between the Company and its executive officers and directors is
incorporated by reference from the Company's Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 14, 1998.
30
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) and (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES
The Consolidated Financial Statements and Financial Statement
Schedules of the Company required to be included in Part II, Item 8 are indexed
on page F-1 and submitted as a separate section of this report.
All other schedules are omitted, because they are not applicable or
not required, or because the required information is included in the
Consolidated Financial Statements or notes thereto.
(a)(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
*2.1 Agreement and Plan of Merger, dated as of December 16, 1996, between
Brim, Inc. ("Brim") and Carryco, Inc.
*2.2 Plan and Agreement of Merger, dated as of December 17, 1996, between
Brim, Principal Hospital Company ("PHC") and Principal Merger Company
*2.3 Agreement and Plan of Merger, dated as of November 27, 1996, between
Brim, Brim Senior Living, Inc., Encore Senior Living, L.L.C. and Lee
Zinsli
*2.4 Amended and Restated Agreement and Plan of Merger, dated as of January
15, 1998, between Principal Hospital Company and Province Healthcare
Company
*3.1 Amended and Restated Certificate of Incorporation of Province
*3.2 Amended and Restated By-laws of Province
*4.1 Form of Common Stock Certificate
*4.2 Securities Purchase Agreement, dated as of December 17, 1996, between
Brim and Leeway & Co.
*4.3 Form of Series A Senior Preferred Stock Certificate
*4.4 Form of Series B Junior Preferred Stock Certificate
*4.5 Credit Agreement, dated as of December 17, 1996, among Brim, First
Union National Bank of North Carolina, as Agent, and the other lenders
party thereto
*4.6 First Amendment to Credit Agreement and Modification of Loan Documents,
dated March 26, 1997, among PHC, First Union National Bank of North
Carolina, as Agent, and the other lenders under the Credit Agreement
*4.7 Second Amendment to Credit Agreement and Modification of Loan Documents
dated August 11, 1997, among PHC, First Union National Bank, as Agent,
and the other lenders under the Credit Agreement.
*10.1 Investment Agreement, dated as of November 21, 1996, between Brim,
Golder, Thoma, Cressey, Rauner Fund IV, L.P. ("GTCR Fund IV") and PHC
*10.2 First Amendment to Investment Agreement, dated as of December 17, 1996,
between Brim, GTCR Fund IV and PHC
*10.3 Form of Investment Agreement Counterpart
*10.4 Preferred Stock Purchase Agreement, dated as of November 25, 1996,
between Brim and General Electric Capital Corporation
*10.5 Employment Agreement, dated as of December 17, 1996, by and between
Steven P. Taylor and Brim
*10.6 Employment Agreement, dated as of December 17, 1996, by and between
A.E. Brim and Brim
*10.7 Stockholders Agreement, dated as of December 17, 1996, by and among
Brim, GTCR Fund IV, Leeway & Co., First Union Corporation of Virginia,
AmSouth Bancorporation, Martin S. Rash ("Rash"), Richard D. Gore
("Gore"), PHC and certain other stockholders
*10.8 First Amendment to Stockholders Agreement, dated as of July 14, 1997,
by and among the Company, GTCR Fund IV, Rash, Gore and certain other
stockholders
31
<PAGE> 32
*10.9 Registration Agreement, dated as of December 17, 1996, by and among
Brim, PHC, GTCR Fund IV, Leeway & Co., First Union Corporation of
America, AmSouth Bancorporation and certain other stockholders
*10.10 Senior Management Agreement, dated as of December 17, 1996, between
Brim, Rash, GTCR Fund IV, Leeway & Co. and PHC
*10.11 First Amendment to Senior Management Agreement, dated as of July 14,
1997, between the Company, Rash and GTCR Fund IV
*10.12 Senior Management Agreement, dated as of December 17, 1996, between
Brim, Gore, GTCR Fund IV, Leeway & Co. and PHC
*10.13 First Amendment to Senior Management Agreement, dated as of July 14,
1997, between the Company, Gore and GTCR Fund IV
*10.14 Professional Services Agreement, dated as of December 17, 1996, by and
between Golder, Thoma, Cressey, Rauner, Inc., Brim and PHC
*10.15 Lease Agreement, dated December 16, 1985, as amended, by and between
Union Labor Hospital Association and Brim Hospitals, Inc.
*10.16 Lease Agreement, dated October 1, 1996, by and between County of
Starke, State of Indiana, and Principal Knox Company
*10.17 Lease Agreement, dated December 1, 1992, by and between Palo Verde
Hospital Association and Brim Hospitals, Inc.
*10.18 Lease Agreement, dated May 15, 1986, as amended, by and between Fort
Morgan Community Hospital Association and Brim Hospitals, Inc.
*10.19 Lease Agreement, dated April 24, 1996, as amended, by and between
Parkview Regional Hospital, Inc. and Brim Hospitals, Inc.
*10.20 Lease Agreement and Annex dated June 30, 1997, by and between The Board
of Trustees of Needles Desert Communities Hospital and
Principal-Needles, Inc.
*10.21 Stock Purchase and Sale Agreement, dated as of November 27, 1996,
between Brim, CC-Lantana, Inc. and Lee Zinsli
*10.22 Purchase and Sale Agreement, dated as of November 25, 1996, between
Brim, Brim Senior Living, Inc., Brim Pavilion, Inc., and Plaza
Enterprises, L.L.C.
*10.23 Corporate Purchasing Agreement, dated April 21, 1997, between Aligned
Business Consortium Group and PHC
*10.24 Principal Hospital Company 1997 Long-Term Equity Incentive Plan
*10.25 Lease Agreement, dated December 17, 1996, between Brim and Encore
Senior Living, L.L.C.
*10.26 First Amendment to Securities Purchase Agreement, dated as of December
31, 1997, between PHC and Leeway & Co.
*10.27 Second Amendment to Senior Management Agreement, dated as of October
15, 1997, between the Company, Rash and GTCR Fund IV
*10.28 Second Amendment to Senior Management Agreement, dated as of October
15, 1997, between the Company, Gore and GTCR Fund IV
*10.29 Second Amendment to Stockholders Agreement, dated as of December 31,
1997, between the Company, GTCR Fund IV, Rash, Gore and certain other
stockholders
*10.30 Asset Acquisition Agreement and Escrow Instructions, dated March 22,
1994, between THC-Seattle, Inc., Community Psychiatric Centers, Brim
Fifth Avenue, Inc. and Brim Hospitals, Inc.
*10.31 Bill of Sale and Assignment, dated July 9, 1997, by Nationwide Health
Properties, Inc. in favor of Brim Hospitals, Inc.
*10.32 Asset Purchase Agreement, dated July 12, 1996, between Memorial
Hospital Foundation-Palestine, Inc. and Palestine Principal Healthcare
Limited Partnership.
*10.33 Agreement of Limited Partnership, dated July 17, 1996, between
Principal Hospital Company, Palestine-Principal, Inc. and Mother
Frances Hospital Regional Healthcare Center.
21.1 Subsidiaries of the Registrant
32
<PAGE> 33
27.1 Financial Data Schedule - 1997 (for SEC use only)
27.2 Financial Data Schedule - 1996 Restated (for SEC use only)
- ---------------
(*) Incorporated by reference from Registrant's Registration Statement on
Form S-1, (Registration No. 333-34421).
33
<PAGE> 34
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
The following is a list of all executive compensation plans and
arrangements filed as exhibits to this Annual Report on Form 10-K:
EXHIBIT
NUMBER EXHIBIT
- ------ -------
*10.24 Principal Hospital Company 1997 Long-Term Equity Incentive Plan
- --------------------
* Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 333-34421.
(b) Reports on Form 8-K
None.
34
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Province Healthcare Company
By: /s/ BRENDA B. RECTOR
------------------------------
Brenda B. Rector
Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ MARTIN S. RASH President and Chief Executive Officer, March 31, 1998
- ------------------------------------- Director
Martin S. Rash
/s/ RICHARD D. GORE Executive Vice President and Chief March 31, 1998
- ------------------------------------- Financial Officer
Richard D. Gore
/s/ BRENDA B. RECTOR Vice President, Controller and Chief March 31, 1998
- ------------------------------------- Accounting Officer
Brenda B. Rector
/s/ BRUCE V. RAUNER Director March 31, 1998
- -------------------------------------
Bruce V. Rauner
/s/ JOSEPH P. NOLAN Director March 31, 1998
- -------------------------------------
Joseph P. Nolan
/s/ A.E. BRIM Director March 31, 1998
- -------------------------------------
A.E. Brim
/s/ MICHAEL T. WILLIS Director March 31, 1998
- -------------------------------------
Michael T. Willis
/s/ DAVID L. STEFFY Director March 31, 1998
- -------------------------------------
David L. Steffy
</TABLE>
35
<PAGE> 36
PROVINCE HEALTHCARE COMPANY
Form 10-K -- Item 8 and Item 14 (a)(1) and (2)
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following financial statements are included as a separate section of this
report:
<TABLE>
<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
Brim, Inc. and Subsidiaries
Report of Independent Auditors...................................................F-23
Independent Auditors' Report.....................................................F-24
Consolidated Statements of Income for the Year Ended December 31, 1995 and for
the period January 1, 1996 to December 18, 1996..............................F-25
Consolidated Statements of Cash Flows for the Year Ended December 31, 1995 and
for the period January 1, 1996 to December 18, 1996..........................F-26
Notes to Consolidated Financial Statements.......................................F-28
The following financial statement schedule is included as a separate section of
this report:
Schedule II - Valuation and Qualifying Accounts...................................S-1
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
F-1
<PAGE> 37
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. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Province
Healthcare Company and subsidiaries as of December 31, 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. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Ernst & Young LLP
Nashville, Tennessee
March 23, 1998
F-2
<PAGE> 38
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
(Unaudited)
December 31 Dec. 31, 1997
1996 1997 (Note 16)
-------- -------- -------------
(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> 39
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Pro Forma
(Unaudited)
Year Ended
Period Feb. 2 Year Ended Dec. 31, 1997
to Dec. 31, 1996 Dec. 31, 1997 (Note 16)
---------------- ------------- --------------
(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) $ (0.16) $ 0.46
Extraordinary item (0.09) -- --
-------- --------- --------
Net income (loss) to common shareholders $ (0.61) $ (0.16) $ 0.46
======== ========= ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 40
PROVINCE HEALTHCARE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON
STOCKHOLDERS' DEFICIT
(Dollars in thousands)
<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
------- ------- ------- ------ --------- ------ ----- ------- --------
<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> 41
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period Feb. 2 Year Ended
to Dec. 31, 1996 Dec. 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 for) 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> 42
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.
F-7
<PAGE> 43
Patient Accounts Receivable
The Company's primary concentration of credit risk is patient accounts
receivable, which consist of amounts owed by various governmental agencies,
insurance companies and private patients. The Company manages the receivables by
regularly reviewing its accounts and contracts and by providing appropriate
allowances for uncollectible amounts. Significant concentrations of gross
patient accounts receivable at December 31, 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 Company based on the level of reinsurance
F-8
<PAGE> 44
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.
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
F-9
<PAGE> 45
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.
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
F-10
<PAGE> 46
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 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
F-11
<PAGE> 47
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.)
- 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
F-12
<PAGE> 48
of operations of these businesses are not material to the consolidated financial
statements.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (In thousands):
<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.
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
F-13
<PAGE> 49
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 amended and restated the
Credit Agreement, subsequent to December 31, 1997, to increase availability
under the credit facility to $260.0 million.
F-14
<PAGE> 50
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-15
<PAGE> 51
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 ten 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>
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.
F-16
<PAGE> 52
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.
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 Ended
Feb. 2 to Dec. 31, 1996 Dec. 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>
F-17
<PAGE> 53
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 Ended
Feb. 2 to Dec. 31, 1996 Dec. 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>
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-18
<PAGE> 54
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (In thousands, except per share date):
<TABLE>
<CAPTION>
Pro Forma
(Unaudited)
1997
1996 1997 (See Note 16)
---- ---- -------------
<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:
Income (loss) before extraordinary item to common shareholders $ (0.52) $ (0.16) $ 0.46
Extraordinary item (0.09) -- --
------- ------- -------
Net income (loss) to common shareholders $ (0.61) $ (0.16) $ 0.46
======= ======= =======
</TABLE>
F-19
<PAGE> 55
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.
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
F-20
<PAGE> 56
is estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
Interest rate swap agreement: -- the fair value of the Company's interest
rate swap agreement is $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.
- 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
F-21
<PAGE> 57
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-22
<PAGE> 58
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-23
<PAGE> 59
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-24
<PAGE> 60
BRIM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
For The Period
Year Ended Jan. 1 To
Dec. 31, 1995 Dec. 18, 1996
------------- -------------
<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-25
<PAGE> 61
BRIM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For The Period
Year Ended Jan. 1 To
Dec. 31, 1995 Dec. 18, 1996
------------- -------------
<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 Accounts Payable 3,178 2,448
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
======== ========
</TABLE>
F-26
<PAGE> 62
<TABLE>
<CAPTION>
For The Period
Year Ended Jan. 1 To
Dec. 31, 1995 Dec. 18, 1996
------------- -------------
<S> <C> <C>
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-27
<PAGE> 63
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
F-28
<PAGE> 64
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 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
F-29
<PAGE> 65
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 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.
F-30
<PAGE> 66
- Brim redeemed pre-existing Series A preferred stock held by
General Electric Credit Corporation for cash of approximately
$29.9 million.
- Existing Brim debt of $5.4 million was paid.
- An aggregate of approximately $6.5 million was deposited into
escrow accounts for possible breaches of representations and
warranties that were made in connection with the
recapitalization. Escrow funds not used for settlement of
breaches within 18 months of the recapitalization will be
released to the redeemed Brim shareholders.
The common stock ownership subsequent to the recapitalization consists
of a 22.5% interest held by certain of the pre-recapitalization Brim
shareholders and 77.5% held by the new investors.
Total financing fees and legal, accounting and other related costs of
the recapitalization amounted to approximately $14,231,000. Costs totaling
$8,951,000 were charged to operations at the date of the recapitalization,
consisting of cash paid to buy-out stock options of $7,995,000 and
transaction-related costs of $956,000. Costs of $2,321,000 associated with the
sale of common and preferred stock were allocated to retained earnings (deficit)
as to the common stock, and were netted against the proceeds as to the preferred
stock. Financing costs of $2,959,000 associated with the credit facility with
First Union National Bank were recorded as deferred loan costs.
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.
F-31
<PAGE> 67
<TABLE>
<CAPTION>
For The Period
Year Ended Jan. 1 TO
Dec. 31, 1995(1) Dec. 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.
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-32
<PAGE> 68
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 Jan. 1 TO
Dec. 31, 1995 Dec. 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 Jan. 1 TO
Dec. 31, 1995 Dec. 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-33
<PAGE> 69
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 Jan. 1 TO
Dec. 31, 1995 Dec. 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-34
<PAGE> 70
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-35
<PAGE> 71
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 TO
BALANCE AT CHARGED TO OTHER (2) BALANCE 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............ 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-1
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OF INCORPORATION DOING BUSINESS AS
- ------------------ ---------------------- -----------------
<S> <C> <C>
Blythe-Province, Inc. TN Same.
Brim Equipment Services, Inc. OR Same.
Brim Fifth Avenue, Inc. OR Same.
Brim Healthcare, Inc. OR Same.
Brim Hospitals, Inc. OR General Hospital
Palo Verde Hospital
Colorado Plains Medical Center
Ojai Valley Community Hospital
Brim Outpatient Services, Inc. OR Same.
Brim Pavilion, Inc. OR Same.
Brim Services Group, Inc. OR Same.
Care Health Company, Inc. WA Same.
Community Health Partners, L.L.C. MO Same.
Harris Street Surgery Partners OR Same.
Limited Partnership
InProNet, Inc. OR Same.
Integrated Health Management, LLC CA Same.
Mexia Principal Healthcare Limited TX Parkview Regional Hospital
Partnership
Mexia-Principal, Inc. TX Same.
Northeastern New Mexico Imaging NM Same.
Partnership
Palestine-Principal G.P., Inc. TX Same.
Palestine-Principal Healthcare TX Memorial Mother Frances Hospital
Limited Partnership
Palestine-Principal, Inc. TN Same.
PHC of Delaware, Inc. DE Same.
PHC-Eunice, Inc. LA Same.
PHC-Lake Havasu, Inc. AZ Same.
Principal Hospital Company of NV Same.
Nevada, Inc.
Principal Knox Company DE Starke Memorial Hospital
Principal-Needles, Inc. TN Colorado River Medical Center
The Woodrum Group, Inc. OR Same.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 4,186
<SECURITIES> 0
<RECEIVABLES> 35,651
<ALLOWANCES> 4,749
<INVENTORY> 3,655
<CURRENT-ASSETS> 47,077
<PP&E> 71,874
<DEPRECIATION> 5,900
<TOTAL-ASSETS> 176,461
<CURRENT-LIABILITIES> 25,719
<BONDS> 83,043
50,162
0
<COMMON> 2,116
<OTHER-SE> (3,172)
<TOTAL-LIABILITY-AND-EQUITY> 176,461
<SALES> 165,661
<TOTAL-REVENUES> 170,527
<CGS> 0
<TOTAL-COSTS> 141,869
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12,812
<INTEREST-EXPENSE> 8,121
<INCOME-PRETAX> 7,725
<INCOME-TAX> 3,650
<INCOME-CONTINUING> 4,075
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,075
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.16)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> FEB-04-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 11,256
<SECURITIES> 0
<RECEIVABLES> 27,306
<ALLOWANCES> 4,477
<INVENTORY> 2,883
<CURRENT-ASSETS> 45,127
<PP&E> 48,515
<DEPRECIATION> 927
<TOTAL-ASSETS> 160,521
<CURRENT-LIABILITIES> 22,919
<BONDS> 77,789
46,227
0
<COMMON> 1,680
<OTHER-SE> (2,170)
<TOTAL-LIABILITY-AND-EQUITY> 160,521
<SALES> 17,032
<TOTAL-REVENUES> 17,255
<CGS> 0
<TOTAL-COSTS> 16,359
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,909
<INTEREST-EXPENSE> 976
<INCOME-PRETAX> (1,989)
<INCOME-TAX> (673)
<INCOME-CONTINUING> (1,316)
<DISCONTINUED> 0
<EXTRAORDINARY> (262)
<CHANGES> 0
<NET-INCOME> (1,578)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
