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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 2000
REGISTRATION NO. 333-32870
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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PROVINCE HEALTHCARE COMPANY
(Exact name of registrant as specified in its charter)
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DELAWARE 62-1710772
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
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PROVINCE HEALTHCARE COMPANY
105 WESTWOOD PLACE, SUITE 400
BRENTWOOD, TENNESSEE 37027
(615) 370-1377
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------------
MARTIN S. RASH
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PROVINCE HEALTHCARE COMPANY
105 WESTWOOD PLACE, SUITE 400
BRENTWOOD, TENNESSEE 37027
(615) 370-1377
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES TO:
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J. CHASE COLE, ESQ. RICHARD B. VILSOET, ESQ.
WALLER LANSDEN DORTCH & DAVIS, SHEARMAN & STERLING
A PROFESSIONAL LIMITED LIABILITY COMPANY 599 LEXINGTON AVENUE
2100 NASHVILLE CITY CENTER NEW YORK, NEW YORK 10022
511 UNION STREET (212) 848-4000
NASHVILLE, TENNESSEE 37219
(615) 244-6380
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Effective Date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering: [ ] ________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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The information in this prospectus is not complete and may be changed.
This prospectus is not an offer to sell the securities and is not
soliciting an offer to buy the securities in any state where the offer or
sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 6, 2000
PROSPECTUS
4,020,100 SHARES
PROVINCE HEALTHCARE LOGO
COMMON STOCK
---------------------
We are offering 3,620,100 shares, and the selling stockholders are offering
400,000 shares. The underwriters are offering all 4,020,100 shares in the U.S.
and Canada.
Our shares are quoted on the Nasdaq National Market under the symbol
"PRHC." On March 20, 2000, the last reported sale price for our common stock was
$24.875 per share.
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 10 OF THIS PROSPECTUS.
----------------------
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<CAPTION>
PER SHARE TOTAL
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Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Province...................... $ $
Proceeds, before expenses, to the selling stockholders...... $ $
</TABLE>
The underwriters may also purchase up to an additional 441,015 shares from
us, and up to an additional 162,000 shares from selling stockholders, at the
public offering price, less the underwriting discount, within 30 days from the
date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery on or about
, 2000.
----------------------
MERRILL LYNCH & CO. CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
FIRST UNION SECURITIES, INC.
ROBERTSON STEPHENS
WARBURG DILLON READ LLC
----------------------
The date of this prospectus is , 2000.
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(Province Healthcare Map)
TABLE OF CONTENTS
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PAGE
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Prospectus Summary............................. 3
Risk Factors................................... 10
Forward-Looking Statements..................... 17
Use of Proceeds................................ 18
Dividend Policy................................ 18
Price Range of Common Stock.................... 19
Capitalization................................. 20
Unaudited Pro Forma Condensed Consolidated
Financial Statement.......................... 21
Selected Consolidated Financial Data........... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 24
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PAGE
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Business....................................... 32
Government Reimbursement....................... 44
Health Care Regulation and Licensing........... 46
Management..................................... 50
Principal and Selling Stockholders............. 52
Description of Capital Stock................... 56
Underwriting................................... 58
Legal Matters.................................. 60
Experts........................................ 60
Where You Can Find Additional Information...... 61
Incorporation of Certain Information by
Reference.................................... 61
Index to Financial Statements.................. F-1
</TABLE>
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not, and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information appearing in this prospectus is accurate only
as of the date on the front cover of this prospectus. Our business, financial
condition, results of operations and prospects may have changed since that date.
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PROSPECTUS SUMMARY
This summary highlights selected information appearing elsewhere in this
prospectus and may not contain all of the information that is important to you.
This prospectus includes information about the shares we are offering, as well
as information regarding our business and detailed financial data. We encourage
you to read this prospectus in its entirety. Unless otherwise indicated, all
information in this prospectus assumes that the underwriters do not exercise
their over-allotment option.
ABOUT OUR COMPANY
WHO WE ARE
We own and operate acute care hospitals located in non-urban markets in
eight states. We currently own or lease 15 general acute care hospitals with a
total of 1,327 licensed beds. Our objective is to be the primary provider of
quality health care services in the selected non-urban markets that we serve. We
offer a wide range of inpatient and outpatient medical services as well as
specialty services, including rehabilitation and home health care. We target
hospitals for acquisition that are the sole or a primary provider of health care
in non-urban communities. After acquiring a hospital, we implement a number of
strategies designed to improve financial performance. These strategies include
improving hospital operations, expanding the breadth of services and recruiting
physicians to increase market share. We also provide management services to 48
primarily non-urban hospitals in 18 states and Puerto Rico with a total of 3,584
licensed beds. For the year ended December 31, 1999, we had, on a pro forma
basis to reflect full-year results for hospitals we acquired during such period,
net operating revenue of $415.3 million, and EBITDA, the sum of income before
income taxes, interest, depreciation and amortization and minority interest, of
$68.9 million. During this period, our owned and leased hospitals accounted for
94.2% of net operating revenue.
THE NON-URBAN HEALTH CARE MARKET
We believe that non-urban areas are attractive markets. Because non-urban
service areas have smaller populations, there are generally only one or two
hospitals in each market. We believe the size and demographic characteristics of
non-urban markets and the relative strength of many rural hospitals also make
non-urban markets less attractive to HMOs, other forms of managed care, and
alternate site providers, such as outpatient surgery, rehabilitation or
diagnostic imaging centers.
Despite these attractive characteristics for health care service providers,
many not-for-profit and governmental operators of non-urban hospitals are under
increasing pressure arising from capital constraints, limited management
resources and the challenges of managing in a complex health care regulatory
environment. This combination of factors may result in a limited range of
services being available locally in any non-urban market. As a result, patients
by choice or physician direction may obtain care outside of their community.
This outmigration often leads to the non-urban hospital's deteriorating
operating performance, further limiting its ability to address the issues that
initially led to these pressures. Ultimately, these pressures can force owners
to sell or lease their hospitals to companies, like us, that have greater
financial and management resources coupled with proven operating strategies to
address these issues and thereby serve the community better.
OUR COMPETITIVE STRENGTHS
LEADING HEALTH CARE PROVIDER IN OUR MARKETS. Currently, 13 of our 15 owned
or leased hospitals are the only provider of acute care services in their
communities. Growing populations, combined with strong market positions, in the
communities in which we operate provide us with attractive growth and operating
improvement opportunities.
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FOCUSED AND DISCIPLINED ACQUISITION STRATEGY. We have a highly focused and
disciplined acquisition strategy with well-defined criteria. We target
acquisition candidates that:
- have a minimum service area population of 20,000 with a stable employment
base and growing population;
- are the sole or a primary provider of health care services in the
community;
- have annual net patient revenue of at least $12.0 million; and
- have financial performance that will benefit from our strategies for
improving operations, revenues and profitability.
DEMONSTRATED ABILITY TO INTEGRATE ACQUISITIONS SUCCESSFULLY AND IMPROVE
OPERATING PERFORMANCE. All of the hospitals we have acquired over the past four
years have been successfully integrated into our organization. We have a highly
effective post-acquisition strategic plan which includes improving hospital
operations, expanding the breadth of services and recruiting physicians. Our
success in this regard is evidenced by our improving the consolidated EBITDA
margin for the seven hospitals we have owned or leased since January 1, 1997
from 2.8% in the last full fiscal year prior to acquisition to 17.5% for the
year ended December 31, 1999.
PROVEN MANAGEMENT TEAM WITH SIGNIFICANT EXPERIENCE IN THE NON-URBAN
HOSPITAL SECTOR. Our management team has extensive experience in acquiring,
improving and managing hospitals in non-urban markets. Our top five executives
have an average of over 20 years experience in the hospital sector, primarily
with non-urban hospitals. Prior to founding our company, Martin S. Rash, our
Chairman, Chief Executive Officer and President, was the Chief Operating Officer
of Community Health Systems, Inc., an owner and operator of non-urban hospitals.
Richard D. Gore, our Vice Chairman and Chief Financial Officer, previously
served as Vice President and Controller of Quorum Health Group, Inc., an owner
and operator of acute care hospitals. During their careers these two executives
have been involved in the acquisition of over 68 hospitals. John M. Rutledge,
our Executive Vice President and Chief Operating Officer, and James T. Anderson,
our Senior Vice President of Acquisitions and Development, previously served as
Regional Vice President/Group Director and as Vice President/Group Director of
Community Health Systems, Inc., respectively, reporting directly to Mr. Rash.
Howard T. Wall III, our Senior Vice President and General Counsel, previously
served as a member of Waller Lansden Dortch & Davis, a law firm based in
Nashville, Tennessee, where he chaired the health care group.
BUSINESS STRATEGY
The key elements of our business strategy are to:
ACQUIRE HOSPITALS IN ATTRACTIVE NON-URBAN MARKETS. We seek to acquire
hospitals that are the sole or a primary provider of health care services in
their markets and that present us the opportunity to increase profitability and
market share. We believe there are approximately 1,100 non-urban hospitals in
the United States that meet our acquisition criteria, and our goal is to acquire
two to four of these hospitals each year.
IMPROVE HOSPITAL OPERATIONS. Following the acquisition of a hospital, we
augment local management with appropriate operational and financial managers and
install our 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 our
supply arrangements, and renegotiates certain vendor contracts. By implementing
this strategy, we seek to improve operating performance at each of the hospitals
we acquire.
EXPAND BREADTH OF SERVICES TO INCREASE LOCAL MARKET SHARE AND REDUCE
PATIENT OUTMIGRATION. We seek to provide additional health care services and
programs in response to community needs. These services may include specialty
inpatient, outpatient and rehabilitation. We also may make capital investments
in technology and the physical plant to improve both the quality of health care
and the reputation of the hospital in the community. By providing a broader
range of services in a more attractive
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setting, we enable residents in our markets to seek care in our hospitals,
thereby stemming patient outmigration and increasing hospital revenues.
RECRUIT PHYSICIANS. We believe that recruiting physicians to local
communities is key to increasing the quality of health care and breadth of
available services. We work with the local hospital board, management and
medical staff to determine the number and type of additional physicians needed
in the community. Our corporate physician recruiting staff then assists the
local management team in identifying and recruiting specific physicians to the
community to meet those needs. During 1998, we recruited 54 new physicians, and
for the year ended December 31, 1999, we recruited 49 additional physicians.
Approximately 60% of the physicians recruited in 1998 and 1999 were primary care
physicians and approximately 40% were specialty care physicians. We believe that
expansion of services in our hospitals also should assist in future physician
recruiting efforts.
OUR FORMATION
We were founded in February 1996 by Golder, Thoma, Cressey, Rauner Fund IV,
L.P. and Martin S. Rash to acquire and operate hospitals in non-urban markets.
We acquired our first hospital, Memorial Mother Frances Hospital in Palestine,
Texas, in July 1996. In December 1996, we acquired Brim, Inc., an owner and
operator of non-urban hospitals, in a transaction accounted for as a reverse
acquisition. Because we had been in existence for less than a year at December
31, 1996, and because Brim, Inc. had been in existence for several years, we are
considered the successor to Brim, Inc.'s operations. We completed an initial
public offering on February 10, 1998, and a follow-on equity offering on July 8,
1998. Our common stock is quoted on the Nasdaq National Market under the symbol
"PRHC."
RECENT DEVELOPMENTS
Since January 1, 1999, we have completed the acquisitions of six hospitals
and announced the signing of an agreement to acquire one additional hospital. A
brief description of each of these acquisitions follows:
On February 22, 1999, we entered into a special services agreement for the
lease of Eunice Community Medical Center, a 91-bed general acute care facility,
located in Eunice, Louisiana, by purchasing certain assets totaling $4.9 million
and assuming certain liabilities and entering into a ten-year lease agreement,
with a five-year renewal option, totaling $0.8 million. Eunice is located
approximately 50 miles northwest of Lafayette. The total service area consisting
of St. Landry Parish has a population of approximately 100,000. Eunice Community
Medical Center had revenue of $13.0 million in the most recent fiscal year prior
to acquisition.
On April 12, 1999, we acquired Glades General Hospital, a 73-bed, full
service, general acute care facility, located in Belle Glade, Florida, by
purchasing certain assets totaling $17.2 million and assuming certain
liabilities totaling $4.9 million. The facility is located 45 miles west of West
Palm Beach on the southeast corner of Lake Okeechobee. The total service area
population is approximately 36,000. Glades General Hospital had revenue of $25.0
million in the most recent fiscal year prior to acquisition.
On June 1, 1999, we acquired Doctors' Hospital of Opelousas, a 133-bed
general acute care facility, located in Opelousas, Louisiana, by purchasing
certain assets totaling $25.7 million and assuming certain liabilities totaling
$2.8 million. The hospital is approximately 21 miles east of Eunice, Louisiana
where we operate a 91-bed health care facility and approximately 22 miles north
of Lafayette. Opelousas is the parish seat with a population of approximately
21,000 in the city of Opelousas. The total service area consisting of St. Landry
Parish has a population of approximately 100,000. Doctors' Hospital of Opelousas
had net patient revenue of $24.9 million in the most recent fiscal year prior to
acquisition.
On October 1, 1999, we acquired assets totaling $82.5 million and assumed
liabilities totaling $4.2 million of Minden Medical Center, a 124-bed general
acute care hospital located in Minden, Louisiana and Trinity Valley Medical
Center, a 153-bed general acute care hospital facility, located in Palestine,
Texas. Minden is approximately 28 miles from Shreveport, and has a total service
area population of
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approximately 64,000. Palestine, a community of approximately 19,000 residents,
is located 50 miles from Tyler, Texas, roughly equidistant from Dallas and
Houston. The total service area population for Trinity Valley Medical Center,
which has subsequently been renamed Palestine Regional Medical Center, is
approximately 104,000. These facilities had combined revenue of $60.6 million in
the most recent fiscal year prior to acquisition.
On February 15, 2000, we entered into a long term lease agreement for the
City of Ennis Hospital, a 45-bed general acute care facility, located in Ennis,
Texas, approximately 35 miles southeast of Dallas. The total service area,
consisting of Ennis and surrounding Ellis County, has a population of
approximately 85,000. The long-term lease totals $3.0 million over a 30-year
period. The hospital was previously operated by Baylor Healthcare System, which
had closed inpatient services at the time of the commencement of the lease. We
expect to have the hospital operating as a full service acute care facility in
the second quarter of 2000.
On April 3, 2000, we announced that we had entered into an agreement to
lease the Bolivar Medical Center, a 200-bed general acute care facility, located
in Cleveland, Mississippi. The facility is located approximately 40 miles from
Clarksdale, Mississippi, 50 miles from Greenwood, Mississippi, and 100 miles
from Memphis, Tennessee. The total service area population is approximately
55,000. The long-term lease has a 40-year term with prepaid rent of $26.4
million. Bolivar Medical Center had annual revenues of approximately $30
million. The closing of the transaction, which is currently scheduled for April
14, 2000, is subject to customary closing conditions, including receipt of
regulatory approvals.
PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at 105 Westwood Place, Suite
400, Brentwood, Tennessee 37027, and our telephone number is (615) 370-1377. You
may also obtain additional information about the company from our website
(www.provincehealthcare.com). Information contained on our website is not part
of this prospectus.
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THE OFFERING
Common stock offered:
By Province.............. 3,620,100 shares
By the selling
stockholders........... 400,000 shares
--------------
Total......................... 4,020,100 shares
Shares outstanding after the
offering.................... 19,394,196 shares
Use of proceeds............... We estimate that our net proceeds from this
offering without exercise of the over-allotment
option will be approximately $84,947,488. We
intend to use these net proceeds to repay
outstanding indebtedness under our credit
facility, thereby increasing the amount
available for borrowing under that facility,
which we intend to use:
- to fund future acquisitions;
- to fund working capital; and
- for general corporate purposes.
We will not receive any of the proceeds from
the sale of shares by the selling stockholders,
estimated to be approximately $9,950,000.
Risk factors.................. See "Risk Factors" and other information
included in this prospectus for a discussion of
factors you should carefully consider before
deciding to invest in shares of our common
stock.
Nasdaq National Market
symbol...................... PRHC
The number of shares outstanding after the offering excludes 2,572,293
shares reserved for issuance under our stock option plan, of which options to
purchase 1,724,690 shares at an average exercise price of $15.94 have been
granted and are outstanding as of March 1, 2000. The number of shares
outstanding after the offering also excludes 217,498 shares reserved for
issuance under our employee stock purchase plan. This number also assumes that
the underwriters' over-allotment option is not exercised. We have granted an
option to the underwriters to purchase up to an aggregate of 603,015 shares of
common stock to cover over-allotments, if any, of which up to 162,000 shares may
be sold by five additional stockholders of our company, other than the
stockholders selling shares in the offering. If the underwriters exercise their
over-allotment option in full and the additional stockholders participate fully,
we will issue and sell an additional 441,015 shares and the additional
stockholders will sell an additional 162,000 shares.
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SUMMARY HISTORICAL AND PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL AND OPERATING DATA
The following summary historical and pro forma condensed consolidated
financial information should be read in conjunction with "Unaudited Pro Forma
Condensed Consolidated Financial Statement," "Selected Consolidated Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our audited consolidated financial statements included
elsewhere in this prospectus. The consolidated statement of income data set
forth below for the years ended December 31, 1997, 1998 and 1999 are derived
from and qualified by reference to our audited consolidated financial
statements, which appear elsewhere in this prospectus. The summary pro forma
information does not purport to represent what our results actually would have
been if these events had occurred at the date indicated, nor does this
information purport to project our results for any future period.
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PRO FORMA
YEAR ENDED DECEMBER 31, YEAR ENDED
----------------------------------- DECEMBER 31,
1997 1998 1999 1999(1)
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(DOLLARS IN THOUSANDS, OTHER THAN PER SHARE DATA)
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INCOME STATEMENT DATA(2):
Net operating revenue........................... $170,527 $238,855 $346,692 $415,277
Net income...................................... 4,075 10,007 14,501 18,761
Net income (loss) to common shareholders........ (1,002) 9,311 14,501 18,761
Net income (loss) per share to common
shareholder--diluted.......................... (0.17) 0.68 0.91 0.96
Cash dividends declared per common share........ -- -- -- --
OPERATING DATA(2):
EBITDA(3)....................................... $ 23,847 $ 42,098 $ 59,461 $ 68,923
Capital expenditures............................ 15,557 15,545 20,890 20,890
Number of hospitals at end of period............ 8 10 14 14
Admissions...................................... 15,142 21,538 32,509 32,509
BALANCE SHEET DATA (AT END OF PERIOD)(2):
Total assets.................................... $176,461 $339,377 $502,213 $502,213
Total long-term obligations, including current
maturities.................................... 89,096 136,098 262,215 177,268
Mandatory redeemable preferred stock............ 50,162 -- -- --
Common stockholders' equity (deficit)........... (1,056) 169,191 184,359 269,306
</TABLE>
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(1) The pro forma balance sheet data as of December 31, 1999 gives effect to the
sale of the shares of our common stock offered hereby and the application of
the estimated net proceeds from the sale of the common stock to the
repayment of debt as described in "Use of Proceeds," as if all such
transactions had been completed as of December 31, 1999. The pro forma
income statement data for the year ended December 31, 1999 gives effect to
our acquisitions of Eunice Community Medical Center, Glades General
Hospital, Doctors' Hospital of Opelousas, Minden Medical Center and Trinity
Valley Medical Center, and the sale by us of 3,620,100 shares of common
stock offered hereby and the application of $84,947,488 of the estimated net
proceeds from the sale of the common stock to the repayment of debt as
described in "Use of Proceeds," as if all such transactions had been
completed as of January 1, 1999. The pro forma income statement data does
not include our acquisition of the City of Ennis Hospital in February 2000,
because it was not a significant acquisition.
(2) The financial and operating data for the periods presented are not strictly
comparable because of the significant effect that acquisitions have had on
such data. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Impact of Acquisitions and Divestitures" and
Note 3 of our consolidated financial statements included elsewhere in this
prospectus.
(footnotes continued on following page)
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(footnotes continued from prior page)
(3) EBITDA represents the sum of income before income taxes, interest,
depreciation and amortization and minority interest. We understand that
industry analysts generally consider EBITDA to be one measure of the
financial performance of a company that is presented to assist investors in
analyzing the operating performance of a company and its ability to service
debt. We believe that an increase in EBITDA level is an indicator of our
improved ability to service existing debt, to sustain potential future
increases in debt and to satisfy capital requirements. EBITDA, however, is
not a measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of operating performance or to cash flows from operating, investing,
or financing activities as a measure of liquidity. Given that EBITDA is not
a measurement determined in accordance with generally accepted accounting
principles and is thus susceptible to varying calculations, EBITDA, as
presented, may not be comparable to other similarly titled measures of other
companies.
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RISK FACTORS
You should carefully consider the risks described below before making a
decision to invest in our common stock. Some of the following factors relate
principally to our business and the industry in which we operate. Other factors
relate principally to your investment in our common stock. The risks and
uncertainties described below are not the only ones facing our company.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also constrain our business and operations.
If any of the matters included in the following risks were to occur, our
business, financial condition, results of operations, cash flows or prospects
could be materially adversely affected. In such case, the trading price of our
common stock could decline and you could lose all or part of your investment.
A SIGNIFICANT PORTION OF OUR REVENUE IS DEPENDENT ON MEDICARE AND MEDICAID
PAYMENTS, AND POSSIBLE REDUCTIONS IN MEDICARE OR MEDICAID PAYMENTS IN THE FUTURE
OR THE IMPLEMENTATION OF OTHER MEASURES TO REDUCE REIMBURSEMENTS MAY REDUCE OUR
REVENUE.
In 1999, 68.6%, and in 1998, 68.9%, of our revenue was derived from the
Medicare and Medicaid programs, which are highly regulated and subject to
frequent and substantial changes. The Federal Balanced Budget Act of 1997, which
established a plan to balance the federal budget by fiscal year 2002, includes
significant reductions in spending levels for the Medicare and Medicaid
programs, including:
- payment reductions for inpatient and outpatient hospital services;
- establishment of a prospective payment system for hospital outpatient
services, skilled nursing facilities and home health agencies under
Medicare; and
- repeal of the federal payment standard often referred to as the "Boren
Amendment" for hospitals and nursing facilities, which could result in
lower Medicaid reimbursement rates.
A number of states also are considering legislation designed to reduce
their Medicaid expenditures and to provide universal coverage and additional
care. In addition, private payers increasingly are attempting to control health
care costs through direct contracting with hospitals to provide services on a
discounted basis, increased utilization review and greater enrollment in managed
care programs such as health maintenance organizations and preferred provider
organizations. We believe that hospital operating margins have been, and may
continue to be, under significant pressure because of deterioration in pricing
flexibility, changes in payer mix and growth in operating expenses in excess of
the increase in prospective payments under the Medicare program.
In recent years, an increasing number of proposals have been introduced in
Congress and in some state legislatures to make major changes in the health care
system. While the rate of increase in the payments we receive for our services
may be reduced as a result of future federal and state legislation, it is
uncertain at this time what health care reform legislation may ultimately be
enacted or whether other changes in health care programs will occur. We believe
that large additional reductions in the payments we receive for our services
could reduce our overall revenues.
OUR FUTURE REVENUE AND PROFITABILITY MAY BE CONSTRAINED BY FUTURE HEALTH CARE
COST CONTAINMENT INITIATIVES UNDERTAKEN BY PURCHASERS OF HEALTH CARE SERVICES.
The competitive position of our hospitals is affected by the increasing
number of initiatives undertaken during the past several years by major
purchasers of health care, including federal and state governments, insurance
companies and employers to revise payment methodologies and monitor health care
expenditures in order to contain and reduce health care costs. As a result of
these initiatives, organizations offering prepaid and discounted medical
services packages may represent an increasing portion of our patient admissions
and may negotiate increased discounts resulting in reduced hospital revenue
growth. If we are unable to lower costs through increased operational
efficiencies and the trend toward declining reimbursements and payments
continues, our future revenue and profitability will be constrained.
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WE ARE SUBJECT TO GOVERNMENTAL REGULATION. WE MAY BE SUBJECTED TO ALLEGATIONS
THAT WE FAILED TO COMPLY WITH GOVERNMENTAL REGULATIONS WHICH MAY RESULT IN
SANCTIONS THAT REDUCE OUR REVENUE AND PROFITABILITY.
The health care industry is subject to extensive federal, state and local
laws, including regulations with respect to:
- licensure;
- conduct of operations;
- ownership of facilities;
- addition of facilities and services; and
- prices for services.
These laws and regulations are extremely complex and, in many instances,
the industry does not have the benefit of significant regulatory or judicial
interpretation of those laws. In particular, Medicare and Medicaid antifraud and
abuse provisions, known as the "anti-kickback statute," prohibit certain
business practices and relationships related to items or services reimbursable
under Medicare, Medicaid and other federal health care programs, including the
payment or receipt of remuneration to induce or arrange for the referral of
patients covered by a federal or state health care program.
U.S. Department of Health and Human Services regulations describe some of
the conduct and business relationships immune from prosecution under the
anti-kickback statute. We try to structure each of our business arrangements to
fit within or as close as possible to one of these safe harbors. However,
because there are a limited number of safe harbors that often apply only to a
very limited scope of activity, not all legal arrangements fit within safe
harbors. The fact that a given business arrangement falls outside one of these
statutory safe harbors does not render the arrangement illegal; however,
business arrangements of health care service providers that fail to satisfy the
applicable safe harbors criteria risk scrutiny by enforcement authorities.
Regulatory authorities that enforce the anti-kickback statute could
determine that any of our hospitals' arrangements not meeting safe harbor
criteria violate the anti-kickback statute or other federal laws. Such a
determination could subject us to liabilities under the Social Security Act,
including:
- criminal penalties;
- civil monetary penalties; and/or
- exclusion from participation in Medicare, Medicaid or other federal
health care programs, any of which could impair our ability to operate
one or more of our hospitals or to operate profitably.
The Health Insurance Portability and Accountability Act of 1996, which
became effective January 1, 1997, added new anti-fraud and abuse laws that
include all health care services, whether or not they are reimbursed under a
federal or state program, and creates new enforcement mechanisms to combat fraud
and abuse, including an incentive program under which individuals can receive up
to $1,000 for providing information on Medicare fraud and abuse that leads to
the recovery of at least $100 of Medicare funds. This statute also requires
hospitals and other providers to implement measures to ensure the privacy of
patients' medical records. We may incur additional expenses in order to comply
with the new standards, although we cannot foresee the extent of our costs for
implementing the requirements at this stage.
In addition, the portion of the Social Security Act commonly known as the
"Stark law" prohibits physicians from referring Medicare or Medicaid patients to
certain providers of designated health services if the physician or a member of
his immediate family has an ownership interest or compensation arrangement with
that provider. Sanctions for violating the Stark law include civil money
penalties and possible exclusion from the Medicare program.
Many states have adopted or are considering similar anti-kickback and
physician self-referral legislation, some of which extends beyond the scope of
the federal law 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.
11
<PAGE> 13
Some states require prior approval for the purchase, construction and
expansion of health care facilities, based upon a state's determination of need
for additional or expanded health care facilities or services. Such
determinations, embodied in certificates of need issued by governmental agencies
with jurisdiction over health care facilities, may be required for capital
expenditures exceeding a prescribed amount, changes in bed capacity or services
and certain other matters. Two states in which we currently own hospitals,
Florida and Nevada, have certificate of need laws. The failure to obtain any
required certificate of need could impair our ability to operate or expand
operations in any state.
The laws, rules and regulations described above are ever-changing, complex
and subject to interpretation. We exercise care in structuring arrangements with
physicians and other referral sources to comply in all material respects with
applicable laws. It is possible, however, that government officials charged with
responsibility for enforcing such laws could assert that we or certain
transactions in which we are involved, are in violation of such laws. It is also
possible that such laws ultimately could be interpreted by the courts in a
manner inconsistent with our interpretations. In the event of a determination
that we are in violation of such laws, rules or regulations, or if further
changes in the regulatory framework occur, any such determination or changes
could result in monetary or punitive sanctions or exclusion from governmental
programs, either of which would impair our ability to operate profitably. See
"Government Reimbursement" and "Health Care Regulation and Licensing" for a
detailed discussion of laws and regulations affecting our business.
PROVIDERS IN THE HOSPITAL INDUSTRY HAVE BEEN THE SUBJECT OF FEDERAL AND STATE
INVESTIGATIONS, AND WE MAY BECOME SUBJECT TO SUCH INVESTIGATIONS IN THE FUTURE.
Significant media and public attention has recently been focused on the
hospital industry due to ongoing investigations related to certain referral,
cost reporting and billing practices, laboratory and home health care services
and physician ownership and joint ventures involving hospitals. Both federal and
state government agencies have announced heightened and coordinated civil and
criminal enforcement efforts. In addition, the Office of the Inspector General
of the U.S. Department of Health and Human Services and the Department of
Justice have from time to time established enforcement initiatives that focus on
specific billing practices or other suspected areas of abuse. Recent initiatives
include a focus on hospital billing for outpatient charges associated with
inpatient services, as well as hospital laboratory billing practices.
As part of our hospital operations, we operate laboratories and provide
some home health care services. We also have significant Medicare and Medicaid
billings. Although we monitor our billing practices and hospital practices to
maintain compliance with prevailing industry interpretations of applicable law
and believe that our current practices are consistent with current industry
practices, government investigations or interpretations inconsistent with
industry practices could occur. In public statements, governmental authorities
have taken positions on issues for which little official interpretation had been
available previously, such as the legality of physician ownership in health care
facilities in which they perform services and the propriety of including
marketing costs in the Medicare cost report of hospital-affiliated home health
agencies. Some of these positions appear to be inconsistent with practices that
have been common within the industry and which have not previously been
challenged in this manner. Moreover, some government investigations that have in
the past been conducted under the civil provisions of federal law are now being
conducted as criminal investigations under the Medicare fraud and abuse laws. We
have reviewed the current billing practices at all of our facilities in light of
these investigations and do not believe that any of our facilities are taking
positions on reimbursement issues that are contrary to the government's position
on these issues. Moreover, none of our hospitals currently have physician
investors, although we may have physician investors in the future. Nevertheless,
we cannot predict whether we or other hospital operators will be the subject of
future investigations or inquiries. See "Health Care Regulation and Licensing"
and "Business -- Regulatory Compliance Program."
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<PAGE> 14
WE MAY NEED TO OBTAIN ADDITIONAL FINANCING IN ORDER TO FUND OUR ACQUISITION
PROGRAM AND CAPITAL EXPENDITURES, AND WE CANNOT BE SURE THAT ADDITIONAL
FINANCING WILL BE AVAILABLE WHEN NEEDED.
Our acquisition program requires substantial capital resources. The
operations of our existing hospitals require ongoing capital expenditures for
renovation, expansion and the addition of medical equipment and technology
utilized in the hospitals. For example, we are undertaking an expansion of Lake
Havasu Regional Medical Center that we anticipate will cost approximately $26
million. Also, we have committed to build a replacement facility for Elko
General Hospital that we estimate will cost approximately $30 million. Further,
if specified operating targets are achieved, we have agreed to build replacement
facilities for Eunice Community Medical Center and Glades General Hospital.
These two facilities are expected to cost approximately $20 million and $25
million, respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
We may need to incur additional indebtedness and may issue, from time to
time, debt or equity securities to fund any of these expenditures. We cannot
assure you that sufficient financing will be available to us on satisfactory
terms or that our level of indebtedness may not restrict our ability to borrow
additional funds. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
OUR GROWTH STRATEGY DEPENDS ON ACQUISITIONS, AND WE MAY NOT BE ABLE TO MANAGE
OUR GROWTH EFFECTIVELY OR ACQUIRE HOSPITALS THAT MEET OUR TARGET CRITERIA. WE
MAY ALSO HAVE DIFFICULTIES ACQUIRING HOSPITALS FROM NON-PROFIT ENTITIES DUE TO
REGULATORY SCRUTINY.
A key element of our growth strategy is expansion through the acquisition
of acute care hospitals in attractive non-urban markets. We face competition for
acquisitions primarily from other for-profit health care companies as well as
not-for-profit entities. Some of our competitors have greater financial and
other resources than we do. If we are able to make acquisitions, there can be no
assurance that we will be able to implement our growth strategy successfully or
manage our expanded operations effectively and profitably. In general, we cannot
assure you that we will be able to acquire hospitals that meet our target
criteria on satisfactory terms, if at all, nor can we offer guarantees as to the
number of acquisitions we will make during a period of time.
Hospital acquisitions generally require a longer period to complete than
acquisitions in many other businesses and are subject to additional regulatory
uncertainty. In recent years, the legislatures and attorneys general of some
states have shown a heightened level of interest in transactions involving the
sale of hospitals by not-for-profit entities. Although the level of interest
varies from state to state, the trend is to provide for increased governmental
review, and in some cases approval, of transactions in which not-for-profit
entities sell a health care facility. Attorneys general in certain states,
including California, where we own or lease four hospitals, have been especially
active in evaluating these transactions. Although we have not yet been adversely
affected as a result of these trends, such increased scrutiny may increase the
difficulty or prevent the completion of transactions with not-for-profit
organizations in certain states in the future, and may affect our ability to
exercise existing purchase options for hospitals, including our hospital in
Blythe, California, where our lease expires in December 2002.
OUR REVENUE IS HEAVILY CONCENTRATED IN CALIFORNIA AND ARIZONA, WHICH MAKES US
PARTICULARLY SENSITIVE TO REGULATORY AND ECONOMIC CHANGES IN THOSE STATES.
Four of our 15 owned or leased hospitals are located in California. For the
years ended December 31, 1999, 1998 and 1997, these hospitals accounted for
22.7%, 33.4% and 40.9% of our net operating revenue, respectively, making us
particularly sensitive to economic, competitive and regulatory conditions in
California.
California has created a voluntary health insurance purchasing cooperative
that seeks to make health care coverage more affordable for businesses with five
to 50 employees and changed the payment system for participants in its Medicaid
program in certain counties from fee-for-service arrangements to managed care
plans. While none of our hospitals are located in the counties converted to
managed care, if the state
13
<PAGE> 15
is able to implement managed care successfully in these counties, this
initiative could be expanded throughout the state. Reduction in reimbursement
levels in California, including reductions resulting from the implementation of
managed care, could significantly reduce our operating revenue from our
California operations.
We also own Lake Havasu Regional Medical Center, which accounted for
approximately 17.6% and 15.7% of our net operating revenue for the years ended
December 31, 1999 and 1998, respectively. Similarly, this concentration of
revenue in Arizona makes us particularly sensitive to economic, competitive and
regulatory conditions in Arizona.
OUR CALIFORNIA HOSPITALS MUST COMPLY WITH CALIFORNIA SEISMIC STANDARDS WHICH MAY
REQUIRE US TO MAKE SIGNIFICANT CAPITAL EXPENDITURES.
California has a statute and regulations that require hospitals to meet
seismic performance standards. Regulated hospitals that do not meet the
standards may be required to retrofit certain facilities. California law
requires that owners of regulated hospitals evaluate their facilities and
develop a plan and schedule for complying with the standards. We are required to
conduct engineering studies of our California facilities to determine whether
and to what extent modifications to our facilities will be required. Compliance
plans, if necessary, must be filed with the State of California by 2002. Any
facilities not currently in compliance with the seismic regulations and
standards must be brought into compliance by 2008. We may have to make
significant capital expenditures to comply with the seismic standards, which
could impact our earnings. See "Health Care Regulation and
Licensing -- California Seismic Standards."
OUR PERFORMANCE DEPENDS ON OUR ABILITY TO RECRUIT AND RETAIN QUALITY PHYSICIANS
AND OTHER HEALTH CARE PROFESSIONALS AT OUR HOSPITALS.
The success of our owned or leased hospitals depends on the following
factors:
- the number and quality of the physicians on the medical staff of, or who
admit patients to, our hospitals;
- the admissions practices of those physicians; and
- the maintenance of good relations between our company and such
physicians.
We generally do not employ physicians, and most of our staff physicians
have admitting privileges at other hospitals. Only a limited number of
physicians are interested in practicing in the non-urban communities in which
our hospitals are located, and the loss of physicians in these communities, or
inability to recruit physicians to these communities, could make it more
difficult to attract patients to our hospitals and could affect our
profitability. The operations of our hospitals also may be affected by the
shortage of nurses and other health care professionals in these communities. See
"Business -- Employees and Medical Staff."
WE DEPEND SIGNIFICANTLY ON KEY PERSONNEL, AND LOSS OF THE SERVICES OF ONE OR
MORE OF OUR KEY SENIOR OR LOCAL MANAGEMENT PERSONNEL WOULD WEAKEN OUR MANAGEMENT
TEAM AND OUR ABILITY TO DELIVER HEALTH CARE SERVICES EFFICIENTLY.
Our success largely depends on the skills, experience and efforts of our
senior management. Our operations also are dependent on the efforts, ability and
experience of key members of our local management staff. The loss of services of
one or more members of our senior management or of a significant portion of any
of our local management staff could weaken significantly our management
expertise and our ability to deliver health care services efficiently. We do not
maintain key man life insurance policies on any of our officers. See
"Management."
OTHER HOSPITALS PROVIDE SIMILAR SERVICES, WHICH MAY RAISE THE LEVEL OF
COMPETITION FACED BY OUR HOSPITALS.
Our hospitals face competition from larger tertiary care centers,
outpatient service providers and other non-urban hospitals in our service areas,
which provide similar services to those offered by our hospitals.
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<PAGE> 16
Some of the hospitals that compete with ours are owned by governmental agencies
or not-for-profit corporations supported by endowments and charitable
contributions, and can finance capital expenditures and operations on a
tax-exempt basis. Some of these competitors are larger, may be more established
and may have more capital and other resources than we do. Many of our hospitals
attempt to attract patients from surrounding counties and communities, including
communities in which a competing hospital exists. If our competitors are able to
finance capital improvements and expand services at their facilities, we may be
unable to attract patients away from these hospitals. See
"Business -- Competition."
WE MAY BE SUBJECT TO LIABILITIES BECAUSE OF CLAIMS BROUGHT AGAINST OUR OWNED AND
LEASED HOSPITALS.
In recent years, plaintiffs have brought actions against hospitals and
other health care providers, alleging malpractice, product liability or other
legal theories. Many of these actions involved large claims and significant
defense costs. We maintain professional malpractice liability insurance and
general liability insurance in amounts that management believes are sufficient
for its operations to cover claims arising out of the operations of its owned
and leased hospitals. Some of the claims, however, could exceed the scope of the
coverage in effect or coverage of particular claims could be denied. While our
professional and other liability insurance has been adequate in the past to
provide for liability claims, there can be no assurance that such insurance will
continue to be available for us to maintain adequate levels of insurance.
WE MAY BE SUBJECT TO LIABILITIES BECAUSE OF CLAIMS ARISING FROM OUR HOSPITAL
MANAGEMENT ACTIVITIES.
We may be subject to liabilities from the acts, omissions and liabilities
of the employees of hospitals we manage or from the actions of our employees in
connection with the management of such hospitals. Our hospital management
contracts generally require the hospitals we manage to indemnify us against
certain claims and to maintain specified amounts of insurance, however, we
cannot assure you that the hospitals will maintain such insurance or that such
indemnities will be available. Recently, other hospital management companies
have been subject to complaints alleging that these companies violated certain
laws on behalf of hospitals they managed. In some cases, plaintiffs brought
actions against the managing company instead of, or in addition to, their
individually managed hospital clients for these violations. We cannot provide
assurance our managed hospitals or other third parties will hold us harmless for
any losses they incur arising out of the acts, omissions and liabilities of the
employees of the hospitals we manage. If the courts determine that we are liable
for amounts exceeding the limits of any insurance coverage or for claims outside
the scope of that coverage or any indemnity, or if any indemnity agreement is
determined to be unenforceable, then the resulting liability could affect
adversely our business, results of operations and financial condition.
OUR SUBSTANTIAL LEVERAGE COULD ADVERSELY AFFECT OUR ABILITY TO RUN OUR BUSINESS.
We have now and will continue to have a significant amount of indebtedness.
As adjusted for the offering, we expect to have $175.0 million of long-term
obligations outstanding, net of current maturities, and to have additional
availability under our credit facility of $121.5 million. This indebtedness
could have important consequences to you. For example, it could:
- limit our ability to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate purposes;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the funds
available to us for working capital, capital expenditures, acquisitions
and general corporate purposes;
- make us more vulnerable to economic downturns and reduce our flexibility
in responding to changing business and economic conditions;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- place us at a competitive disadvantage compared to our competitors that
have less debt; and
- limit our ability to borrow additional funds.
15
<PAGE> 17
RESTRICTIVE DEBT COVENANTS IN OUR CREDIT FACILITY LIMIT OUR OPERATIONAL AND
CAPITAL FLEXIBILITY.
Our credit facility contains significant covenants that, among other
things, restrict our ability to:
- dispose of assets;
- incur additional indebtedness;
- pay dividends on or repurchase our capital stock;
- merge or consolidate; and
- engage in transactions with affiliates.
These restrictions could adversely affect our ability to finance our future
operations or capital needs or engage in other business activities that may be
in the best interests of our stockholders.
Also, our credit facility requires us to maintain compliance with the
financial ratios included in that facility. Our ability to comply with these
ratios may be affected by events beyond our control. A breach of any of these
covenants or our inability to comply with the required financial ratios could
result in a default under our credit facility. If a default were to occur, the
lenders could require us to repay all borrowings outstanding under our credit
facility or require us to apply all of our available cash to repay these
borrowings. We cannot assure you that, if the indebtedness under our credit
facility were accelerated, our assets would be sufficient to repay this
indebtedness.
WE HAVE NEVER PAID A DIVIDEND ON OUR COMMON SHARES AND HAVE NO CURRENT PLANS TO
DO SO.
During our existence, we have never paid a cash dividend, and we do not
anticipate paying any cash dividend in the foreseeable future. Our credit
facility also restricts the payment of cash dividends. If we incur any future
indebtedness to refinance our existing indebtedness or to fund our future
growth, our ability to pay dividends may be further restricted by the terms of
such indebtedness.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS COULD ADVERSELY
AFFECT OUR COMMON STOCK PRICE.
Sales of a substantial number of shares of our common stock in the market
could adversely affect the price of our common stock. After giving effect to the
offering, we will have 19,394,196 shares of common stock outstanding, assuming
no exercise of the underwriters' over-allotment option. Of these, 17,644,432
shares are beneficially owned by persons not affiliated with members of our
board of directors and executive officers.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
The trading price of our common stock has been and may continue to be
subject to wide fluctuations. Our stock price may fluctuate in response to a
number of events and factors, including:
- quarterly variations in operating results;
- changes in financial estimates and recommendations by securities
analysts;
- the operating and stock price performance of other companies that
investors may deem comparable;
- news reports relating to trends in our markets;
- acquisitions and financings; and
- sales of blocks of stock by insiders.
The majority of this volatility, however, is attributable to the current
state of the stock market, in which wide price swings are common. These broad
market and industry fluctuations may adversely affect the price of our common
stock, regardless of our operating performance.
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<PAGE> 18
FORWARD-LOOKING STATEMENTS
This prospectus and other materials we have filed or may file with the
Securities and Exchange Commission, as well as information included in oral
statements or other written statements made, or to be made, by us, contain, or
will contain, disclosures which are "forward-looking statements."
Forward-looking statements include all statements that do not relate solely to
historical or current facts, and can be identified by the use of words such as
"may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan"
or "continue." These forward-looking statements address, among other things, our
strategic objectives and the anticipated effects of the sale of our common
stock. See "Prospectus Summary," "Risk Factors," "Business," "Government
Reimbursement" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." These forward-looking statements are based on the
current plans and expectations of our management and are subject to a number of
uncertainties and risks that could significantly affect our current plans and
expectations and future financial condition and results. These factors include,
but are not limited to:
- the highly competitive nature of the health care business;
- the efforts of insurers, health care providers and others to contain
health care costs;
- possible changes in the Medicare program that may further limit
reimbursements to health care providers and insurers;
- changes in federal, state or local regulation affecting the health care
industry;
- the possible enactment of federal or state health care reform;
- the departure of key members of our management;
- claims and legal actions relating to professional liability;
- our ability to implement successfully our acquisition and development
strategy;
- potential federal or state investigations;
- fluctuations in the market value of our common stock;
- changes in accounting practices;
- changes in general economic conditions; and
- other risk factors described in this prospectus.
As a consequence, current plans, anticipated actions and future financial
conditions and results may differ from those expressed in any forward-looking
statements made by or on behalf of our company. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. You are cautioned not to unduly
rely on such forward-looking statements when evaluating the information
presented herein.
17
<PAGE> 19
USE OF PROCEEDS
The net proceeds to us from the sale of our common stock in this offering,
after deducting estimated underwriters' discounts and estimated offering costs
of $0.6 million, are estimated to be $84.9 million, based upon an assumed public
offering price of $24.875 per share, which was the closing price of our common
stock on March 20, 2000 as quoted on the Nasdaq National Market. If the
underwriters exercise their over-allotment option in full, the additional net
proceeds to us are estimated to be $10.4 million. We intend to utilize all of
the proceeds of the offering to repay outstanding borrowings under our credit
facility, thereby increasing the amount available for borrowing under that
facility to fund future acquisitions, working capital and for general corporate
purposes. As of March 20, 2000, we had borrowed approximately $252.3 million
under the credit facility to fund acquisitions and working capital. These
borrowings bear interest, at the Company's option, at adjusted base rates or at
adjusted LIBOR rates, and have a final maturity on March 31, 2003. The weighted
average interest rate at March 20, 2000 was 7.75%.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain our earnings for use in our business and therefore do
not anticipate declaring or paying any cash dividends in the foreseeable future.
Our credit facility prohibits us from paying dividends other than dividends paid
in our common stock. Any future determination to declare or pay cash dividends
will be made by our board of directors in light of our earnings, financial
position, capital requirements, credit agreements and such other factors as our
board of directors deems relevant at such time. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and Note 5 of the notes to our consolidated financial
statements.
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<PAGE> 20
PRICE RANGE OF COMMON STOCK
We completed our initial public offering on February 10, 1998, at a price
per share of $16.00. Prior to that date, no public market existed for our common
stock. We completed a follow-on offering on July 8, 1998, at a price per share
of $26.00. Our common stock is quoted on the Nasdaq National Market under the
symbol "PRHC." The following table sets forth the range of high and low sales
prices for our common stock for the periods indicated, as reported by the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1998
First Quarter............................................... $ 27 1/8 $ 18 7/8
Second Quarter.............................................. 29 5/8 23
Third Quarter............................................... 37 1/4 25 3/8
Fourth Quarter.............................................. 36 20 1/4
1999
First Quarter............................................... $ 36 $ 13
Second Quarter.............................................. 24 1/2 13 7/16
Third Quarter............................................... 20 3/16 10 1/2
Fourth Quarter.............................................. 23 7/8 10 5/8
2000
First Quarter (through March 20, 2000)...................... $ 28 3/8 $ 19 3/4
</TABLE>
On March 20, 2000, the last reported sales price for our common stock on
the Nasdaq National Market was $24.875 per share. At March 17, 2000, there were
15,774,096 shares of our common stock held by approximately 313 holders of
record. We believe our common stock is beneficially held by more than 400
individual stockholders.
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<PAGE> 21
CAPITALIZATION
The following table sets forth as of December 31, 1999:
- the capitalization of our company; and
- the capitalization of our company as adjusted to reflect the sale of the
shares of common stock offered hereby and the application of the
estimated net proceeds to us from the sale of those shares, as if these
transactions had occurred as of December 31, 1999.
This table should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Long-term obligations, less current maturities:
Revolving credit facility................................. $246,300 $161,353
Capital lease obligations................................. 7,141 7,141
Other long term obligations............................... 6,551 6,551
-------- --------
Total long-term obligations, less current
maturities....................................... 259,992 175,045
Stockholders' equity:
Common stock, $0.01 par value; authorized: 25,000,000
shares; issued and outstanding: 15,742,048 shares
actual and 19,362,148 shares as adjusted.............. 157 193
Additional paid-in capital................................ 163,593 248,504
Retained earnings......................................... 20,609 20,609
-------- --------
Total stockholders' equity........................ 184,359 269,306
-------- --------
Total capitalization......................... $444,351 $444,351
======== ========
</TABLE>
The table above excludes:
- 1,724,690 shares of common stock issuable upon exercise of options
outstanding at March 1, 2000 at a weighted average exercise price of
$15.94 per share;
- 847,603 shares of common stock reserved for future grant or issuance
under our 1997 stock option plan; and
- 217,498 shares of common stock reserved for issuance under our employee
stock purchase plan.
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<PAGE> 22
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENT
The following unaudited pro forma condensed consolidated statement of
income for the year ended December 31, 1999, gives effect to the following
transactions, as if all such transactions had been completed as of January 1,
1999:
- the acquisitions of Eunice Community Medical Center, Glades General
Hospital, Doctors' Hospital of Opelousas, Minden Medical Center and
Trinity Valley Medical Center; and
- the sale of 3,620,100 shares of common stock in the offering at an
offering price of $24.875 per share, and the application of the estimated
net proceeds thereof to the repayment of debt as described in "Use of
Proceeds".
The pro forma condensed consolidated financial information presented herein
does not purport to represent what our results of operations or financial
position would have been had such transactions, in fact, occurred at the
beginning of the period presented or to project our results of operations in any
future period. The pro forma results of operations, which do not take into
account certain operational changes we instituted upon the acquisition of our
hospitals, are not necessarily indicative of the results that may be expected
from such hospitals. The unaudited pro forma condensed consolidated statement of
income should be read in conjunction with our audited consolidated financial
statements, included elsewhere in this prospectus, and the financial statements
of Doctors' Hospital of Opelousas and the combined financial statements of
Minden Medical Center and Trinity Valley Medical Center, which are incorporated
by reference to Current Reports on Forms 8-K/A previously filed by us with the
Securities and Exchange Commission. The pro forma income statement data does not
include our acquisition of the City of Ennis Hospital in February 2000, because
it was not a significant acquisition. Certain reclassifications have been made
in the acquired companies' historical financial statements, included in the pro
forma financial statements, to conform to the presentation in our financial
statements.
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<PAGE> 23
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL(A)
--------------------------------------------------
MINDEN/ PRO FORMA PRO FORMA
TRINITY ACQUISITION ACQUISITIONS OFFERING
PROVINCE EUNICE GLADES OPELOUSAS VALLEY ADJUSTMENTS CONSOLIDATED ADJUSTMENTS
-------- ------- ------- --------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Net patient service
revenue.................... $323,319 $ 712 $9,138 $11,440 $46,323 $390,932
Management and professional
services................... 13,319 -- -- -- -- 13,319
Reimbursable expenses........ 6,668 -- -- -- -- 6,668
Other...................... 3,386 84 384 66 438 4,358
-------- ------- ------ ------- ------- ------- -------- -------
Net operating revenue.... 346,692 796 9,522 11,506 46,761 415,277 --
Expenses:
Salaries, wages and
benefits................... 139,183 676 3,317 4,502 19,328 167,006
Reimbursable expenses........ 6,668 -- -- -- -- 6,668
Purchased services........... 39,454 312 1,286 1,889 5,642 48,583
Supplies..................... 38,931 163 1,050 1,614 5,271 47,029
Provision for doubtful
accounts................... 25,572 228 2,015 368 4,058 32,241
Other operating expenses..... 30,222 268 466 1,263 3,939 36,158
Rentals and leases........... 7,201 32 80 119 434 7,866
Depreciation and
amortization............... 19,734 18 205 628 2,277 $ 391(b) 23,253
Interest expense............. 13,901 66 18 638 6,582 (2,525)(c) 18,680 $(5,921)(e)
Management fees.............. -- 39 -- 764 -- 803
Minority interest............ 166 -- -- -- -- 166
Loss (gain) on sale of
assets..................... 11 -- -- -- -- 11
-------- ------- ------ ------- ------- ------- -------- -------
Total expenses......... 321,043 1,802 8,437 11,785 47,531 (2,134) 388,464 (5,921)
-------- ------- ------ ------- ------- ------- -------- -------
Income (loss) before income
taxes........................ 25,649 (1,006) 1,085 (279) (770) 2,134 26,813 5,921
Income taxes (benefit)......... 11,148 -- -- -- -- 464(d) 11,612 2,361(d)
-------- ------- ------ ------- ------- ------- -------- -------
Net income (loss).............. $ 14,501 $(1,006) $1,085 $ (279) $ (770) $ 1,670 $ 15,201 $ 3,560
======== ======= ====== ======= ======= ======= ======== =======
Net income per common share:
Basic........................ $ 0.92 $ 0.97
======== ========
Diluted...................... $ 0.91 $ 0.95
======== ========
Weighted-average shares:
Basic earnings per common
share...................... 15,726 15,726
Diluted earnings per common
share...................... 16,012 16,012
<CAPTION>
PRO FORMA
CONSOLIDATED
AS
ADJUSTED
------------
<S> <C>
Revenue:
Net patient service
revenue.................... $390,932
Management and professional
services................... 13,319
Reimbursable expenses........ 6,668
Other...................... 4,358
--------
Net operating revenue.... 415,277
Expenses:
Salaries, wages and
benefits................... 167,006
Reimbursable expenses........ 6,668
Purchased services........... 48,583
Supplies..................... 47,029
Provision for doubtful
accounts................... 32,241
Other operating expenses..... 36,158
Rentals and leases........... 7,866
Depreciation and
amortization............... 23,253
Interest expense............. 12,759
Management fees.............. 803
Minority interest............ 166
Loss (gain) on sale of
assets..................... 11
--------
Total expenses......... 382,543
--------
Income (loss) before income
taxes........................ 32,734
Income taxes (benefit)......... 13,973
--------
Net income (loss).............. $ 18,761
========
Net income per common share:
Basic........................ $ 0.97
========
Diluted...................... $ 0.96
========
Weighted-average shares:
Basic earnings per common
share...................... 19,346
Diluted earnings per common
share...................... 19,632
</TABLE>
- ---------------
(a) Historical financial information represents the period prior to acquisition
as follows:
Eunice -- January 1, 1999 through February 22, 1999
Glades -- January 1, 1999 through April 11, 1999
Opelousas -- January 1, 1999 through May 31, 1999
Minden/Trinity Valley -- January 1, 1999 through September 30, 1999
(b) Reflects the elimination of the historical depreciation expense of the
acquired companies, and the inclusion of our depreciation of property, plant
and equipment and amortization of intangible assets.
(c) Reflects the elimination of the historical interest expense related to debt
of the acquired companies not assumed in the acquisitions, and the inclusion
of the interest expense related to the debt we incurred to finance the
acquisitions.
(d) Reflects the inclusion of the income tax expense based on the combined
federal and state statutory rate of 40.0%, applied to adjusted pre-tax
income.
(e) Reflects the elimination of the interest expense related to the $84.9
million of long-term obligations to be repaid with the net proceeds of the
offering.
22
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of:
- Our predecessor, Brim, Inc. as of and for the year ended December 31,
1995, and as of December 18, 1996 and for the period January 1, 1996 to
December 18, 1996, and
- Our company as of December 31, 1996, 1997, 1998 and 1999 and for the
period February 2, 1996 to December 31, 1996 and the years ended December
31, 1997, 1998 and 1999. The selected financial information for the
predecessor and our company has been derived from the audited
consolidated financial statements of the predecessor and our 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 our consolidated financial statements
and related notes, appearing elsewhere in this prospectus.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
BRIM
(PREDECESSOR)(1)(2) PROVINCE (SUCCESSOR)(1)(2)
---------------------- -----------------------------------------------
PERIOD PERIOD
YEAR JAN. 1, FEB. 2, YEAR ENDED
ENDED 1996 1996 DECEMBER 31,
DEC. 31, TO DEC. 18, TO DEC. 31, --------------------------------
1995 1996 1996 1997 1998 1999
-------- ----------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net operating revenue............... $101,214 $112,600 $ 17,255 $170,527 $238,855 $346,692
Income (loss) from continuing
operations........................ 3,369 (5,307) (1,316) 4,075 10,007 14,501
Net income (loss)................... 3,105 708 (1,578) 4,075 10,007 14,501
Net income (loss) to common
shareholders...................... (1,750) (1,002) 9,311 14,501
Net income (loss) per share to
common shareholders -- diluted.... (0.61) (0.17) 0.68 0.91
Cash dividends declared per common
share............................. -- -- -- --
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets........................ $ 50,888 $ 76,998 $160,521 $176,461 $339,377 $502,213
Long-term obligations, less current
maturities........................ 7,161 75,995 77,789 83,043 134,301 259,992
Mandatory redeemable preferred
stock............................. 8,816 31,824 46,227 50,162 -- --
Common stockholders' equity
(deficit)......................... 15,366 (56,308) (490) (1,056) 169,191 184,359
</TABLE>
- ---------------
(1) Our company was formed on February 2, 1996. On December 18, 1996, Brim, Inc.
completed a leveraged recapitalization. Immediately thereafter on December
18, 1996, we acquired Brim, Inc. in a transaction accounted for as a reverse
acquisition. Therefore, the assets and liabilities of Brim, Inc. were
recorded at fair value as required by the purchase method of accounting, and
the operations of Brim, Inc. were reflected in the operations of the
combined enterprise from the date of acquisition. Because our company had
been in existence for less than a year at December 31, 1996, and because
Brim, Inc. had been in existence for several years, we were considered the
successor to Brim, Inc.'s operations. The balance sheet data of Brim, Inc.
as of December 18, 1996 represents the historical cost basis of Brim, Inc.'s
assets and liabilities after the leveraged recapitalization but prior to the
reverse acquisition.
(2) The financial data of the predecessor and successor for the periods
presented are not strictly comparable due to the significant effect that
acquisitions, divestitures and the recapitalization of Brim, Inc. have had
on such data. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Impact of Acquisitions and
Divestitures" and Note 3 of the notes to our consolidated financial
statements.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and related notes thereto included elsewhere
in this prospectus.
OVERVIEW
We are a health care services company focused on acquiring and operating
hospitals in attractive non-urban markets in the United States. As of December
31, 1999, we owned and operated 14 general acute care hospitals in eight states
with a total of 1,282 licensed beds, and managed 48 hospitals in 18 states, plus
Puerto Rico, with a total of 3,584 licensed beds. In addition, in February 2000,
we entered into a long-term lease agreement for the City of Ennis Hospital, a
45-bed acute care facility located in Ennis, Texas.
Our company was founded in February 1996 by Golder, Thoma, Cressey, Rauner
Fund IV, L.P. and Martin S. Rash to acquire and operate hospitals in attractive
non-urban markets. We acquired our first hospital, Memorial Mother Frances
Hospital in Palestine, Texas, in July 1996.
In December 1996, we acquired Brim, Inc. in a transaction accounted for as
a reverse acquisition. Therefore, the assets and liabilities of Brim were
recorded at fair value as required by the purchase method of accounting, and the
operations of Brim were reflected in the operations of the combined enterprise
from the date of acquisition. Because we had been in existence for less than a
year at December 31, 1996, and because Brim had been in existence for several
years, we are considered the successor to Brim's operations.
IMPACT OF ACQUISITIONS AND DIVESTITURES
An integral part of our strategy is to acquire non-urban acute care
hospitals. Because of the financial impact of our recent acquisitions, it is
difficult to make meaningful comparisons between our 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 our
overall operating performance. Upon the acquisition of a hospital, we typically
take a number of steps to lower operating costs. The impact of such actions may
be offset by cost increases to expand services, strengthen medical staff and
improve market position. The benefits of these investments and of other
activities to improve operating margins generally do not occur immediately.
Consequently, the financial performance of a newly-acquired hospital may
adversely affect overall operating margins in the near term. As we make
additional hospital acquisitions, we expect that this effect will be mitigated
by the expanded financial base of existing hospitals and the allocation of
corporate overhead among a larger number of hospitals. We may also divest
certain hospitals in the future if we determine a hospital no longer fits within
our strategy.
1997 Acquisition
In August 1997, we acquired Colorado River Medical Center in Needles,
California by purchasing certain assets and assuming certain liabilities and
entering into a fifteen-year lease agreement, with three five-year renewal
options, for a purchase price of approximately $6.3 million. The 1997 results of
operations include five months of operations for Colorado River Medical Center.
1998 Acquisitions
In May 1998, we acquired Lake Havasu Regional Medical Center in Lake Havasu
City, Arizona, for approximately $107.5 million. In June 1998, we acquired Elko
General Hospital in Elko, Nevada for a purchase price of approximately $23.3
million. To finance these acquisitions, we borrowed $106.0 million and $22.0
million, respectively, under our revolving credit facility.
The 1998 results of operations include twelve months of operations for the
acquisition in 1997, plus eight months of operations for Lake Havasu Regional
Medical Center and six and one-half months of operations for Elko General
Hospital.
24
<PAGE> 26
1999 Acquisitions
In February 1999, we entered into a special services agreement for the
lease of Eunice Community Medical Center in Eunice, Louisiana by purchasing
certain assets totaling $4.9 million and assuming certain liabilities and
entering into a ten-year lease agreement, with a five-year renewal option,
totaling $0.8 million.
In April 1999, we acquired assets of Glades General Hospital in Belle
Glade, Florida totaling $17.2 million and assumed liabilities totaling $4.9
million. To finance this acquisition, we borrowed $13.5 million under our
revolving credit facility.
In June 1999, we acquired assets totaling $25.7 million and assumed
liabilities totaling $2.8 million of Doctors' Hospital of Opelousas in
Opelousas, Louisiana. To finance this acquisition, we borrowed $22.0 million
under our revolving credit facility.
In October 1999, we acquired assets totaling $82.5 million and assumed
liabilities totaling $4.2 million of Trinity Valley Medical Center in Palestine,
Texas and Minden Medical Center in Minden, Louisiana. To finance the
acquisition, we borrowed $77.0 million under our revolving credit facility.
Following the acquisition, we merged Trinity Valley Medical Center into Memorial
Mother Frances Hospital, a hospital that we already owned in Palestine, Texas,
and changed the name of the hospital to Palestine Regional Medical Center.
The 1999 results include twelve months of operations for the acquisitions
in 1997 and 1998, ten months and six days of operations for Eunice Community
Medical Center, eight and one-half months of operations for Glades General
Hospital, seven months of operations for Doctors' Hospital of Opelousas, and
three months of operations for Trinity Valley Medical Center and Minden Medical
Center.
All the acquisitions described above were accounted for as purchase
business combinations, and the results of operations of the hospitals have been
included in our results of operations from the purchase dates forward.
Recent Acquisitions
In February 2000, we entered into a long-term lease agreement for the City
of Ennis Hospital in Ennis, Texas by entering into a 30-year lease agreement.
The aggregate rental payments required under the long-term lease total $3.0
million.
Recent Developments
On April 3, 2000, we announced that we entered into an agreement to lease
the Bolivar Medical Center in Cleveland, Mississippi by entering into a 40-year
lease agreement. Pre-paid rent required under the long-term lease will be $26.4
million. The closing of the transaction, which is currently scheduled for April
14, 2000, is subject to customary closing conditions, including receipt of
regulatory approvals.
GENERAL
The federal Medicare program accounted for approximately 60.3%, 57.8% and
56.2% of hospital patient days in 1997, 1998 and 1999, respectively. The state
Medicaid programs accounted for approximately 13.1%, 11.1% and 12.4% of hospital
patient days in 1997, 1998 and 1999, respectively. The payment rates under the
Medicare program for inpatients are prospective, based upon the diagnosis of a
patient. The Medicare payment rate increases historically have been less than
actual inflation.
Both federal and state legislators are continuing to scrutinize the health
care industry for the purpose of reducing health care costs. While we are unable
to predict what, if any, future health reform legislation may be enacted at the
federal or state level, we expect continuing pressure to limit expenditures by
governmental health care programs. The Balanced Budget Act of 1997 imposed
certain limitations on increases in the inpatient Medicare rates paid to acute
care hospitals. Payments for Medicare outpatient services provided at acute care
hospitals and home health services historically have been paid based on
25
<PAGE> 27
costs, subject to certain limits. The Balanced Budget Act of 1997 requires that
the payment for those services be converted to a prospective payment system,
which will be phased in over time. The Balanced Budget Act of 1997 also includes
a managed care option that could direct Medicare patients to managed care
organizations. Further changes in the Medicare or Medicaid programs and other
proposals to limit health care spending could have a material adverse impact
upon the health care industry and our company.
Some of our acute care hospitals, like most acute care hospitals in the
United States, have significant unused capacity. The result is substantial
competition for patients and physicians. Inpatient utilization continues to be
affected negatively by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative health care delivery services
for less acutely ill patients. We expect increased competition and admission
constraints to continue in the future. The ability to respond successfully to
these trends, as well as spending reductions in governmental health care
programs, will play a significant role in determining the ability of our
hospitals to maintain their current rate of net revenue growth and operating
margins.
We expect the industry trend in increased outpatient services to continue
because of the increased focus on managed care and advances in technology.
Outpatient revenue of our owned or leased hospitals was approximately 44.5%,
43.5% and 42.6% of gross patient service revenue in 1997, 1998 and 1999,
respectively.
The billing and collection of accounts receivable by hospitals are
complicated by:
- the complexity of the Medicare and Medicaid regulations;
- increases in managed care;
- hospital personnel turnover;
- the dependence of hospitals on physician documentation of medical
records; and
- the subjective judgment involved.
There can be no assurance that this complexity will not negatively impact
our future cash flows or results of operations.
The federal government and a number of states are rapidly increasing the
resources devoted to investigating allegations of fraud and abuse in the
Medicare and Medicaid programs. At the same time, regulatory and law enforcement
authorities are taking an increasingly strict view of the requirements imposed
on providers by the Social Security Act and Medicare and Medicaid regulations.
Although we believe that we are in material compliance with such laws, a
determination that we have violated such laws, or even the public announcement
that we were being investigated concerning possible violations, could have a
material adverse effect on our company.
Our historical financial trend has been impacted favorably by our success
in acquiring acute care hospitals. While we believe that trends in the health
care industry described above may create possible future acquisition
opportunities, there can be no assurances that we can continue to maintain our
current growth rate through hospital acquisitions and successfully integrate the
hospitals into our system.
Our owned and leased hospitals accounted for 88.8%, 92.3% and 94.2% of our
net operating revenue in 1997, 1998 and 1999, respectively. We currently own
four hospitals in California, which accounted for 40.9%, 33.4% and 22.7% of net
operating revenue in 1997, 1998 and 1999, respectively. This concentration of
results of operations in this market increases the risk that adverse
developments at these facilities, or in the economic, regulatory or industry
environment in California, could have a material adverse effect on our
operations or financial condition.
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the amounts reported in our financial statements. Resolution of
matters, for example, final settlements with third party payors, may result in
26
<PAGE> 28
changes from those estimates. The timing and amount of such changes in estimates
may cause fluctuations in our quarterly or annual operating results.
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 our consolidated statements of income included elsewhere in this
report. The results of operations for the periods presented include hospitals
from their acquisition dates, as previously discussed.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Net operating revenue....................................... 100.0% 100.0% 100.0%
Operating expenses (1)...................................... 86.0 82.4 82.8
----- ----- -----
EBITDA (2).................................................. 14.0 17.6 17.2
Depreciation and amortization............................... 4.4 5.6 5.7
Interest.................................................... 4.8 4.4 4.0
Minority interest........................................... 0.3 0.1 0.0
----- ----- -----
Income before income taxes.................................. 4.5 7.5 7.5
Provision for income taxes.................................. (2.1) (3.3) (3.3)
----- ----- -----
Net income.................................................. 2.4% 4.2% 4.2%
===== ===== =====
</TABLE>
- ---------------
(1) Operating expenses represent expenses before interest, minority interest,
income taxes, depreciation and amortization.
(2) EBITDA represents the sum of income before income taxes, interest,
depreciation and amortization and minority interest. We understand that
industry analysts generally consider EBITDA to be one measure of the
financial performance of a company that is presented to assist investors in
analyzing the operating performance of a company and its ability to service
debt. We believe that an increase in EBITDA level is an indicator of our
improved ability to service existing debt, to sustain potential future
increases in debt and to satisfy capital requirements. EBITDA, however, is
not a measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of operating performance or to cash flows from operating, investing,
or financing activities as a measure of liquidity. Given that EBITDA is not
a measurement determined in accordance with generally accepted accounting
principles and is thus susceptible to varying calculations, EBITDA, as
presented, may not be comparable to other similarly titled measures of other
companies.
Hospital revenues are received primarily from Medicare, Medicaid and
commercial insurance. The percentage of revenues received from the Medicare
program is expected to increase due to the general aging of the population. The
payment rates under the Medicare program for inpatients are based on a
prospective payment system, 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:
- net patient service revenue from our owned and leased hospitals;
- management and professional services revenue; and
- other revenue.
27
<PAGE> 29
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, Medicaid
and other third-party payor programs. Customary charges generally have increased
at a faster rate than the rate of increase for Medicare and Medicaid payments.
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.
Management and professional services revenue plus reimbursable expenses totals
less than 6% of consolidated net operating revenue. Operating expenses for the
management and professional services business primarily consist of salaries and
benefits and reimbursable expenses.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net operating revenue increased from $238.9 million in 1998 to $346.7
million in 1999, an increase of $107.8 million or 45.1%. Net patient service
revenue generated by hospitals owned during both periods, including Palestine
Regional Medical Center, increased $21.1 million, or 9.9%, resulting from
inpatient and outpatient volume increases, new services and price increases.
Cost report settlements and the filing of cost reports resulted in positive
revenue adjustments of $4.0 million, or 1.8% of net operating revenue, in 1998,
and $0.9 million, or 0.2% of net revenues in 1999. The remaining increase was
primarily attributable to the acquisitions of additional hospitals in 1998 and
1999.
Operating expenses increased from $196.8 million, or 82.4% of net operating
revenue, in 1998 to $287.2 million, or 82.8% of net operating revenue in 1999.
The increase in operating expenses of hospitals owned during both periods
resulted primarily from new services, volume increases, change in case mix and
increased recruiting expenses, offset by a decrease in provision for doubtful
accounts. The majority of the increase in operating expenses was attributable to
the acquisition of additional hospitals in 1998 and 1999.
EBITDA increased from $42.1 million, or 17.6% of net operating revenue, in
1998 to $59.5 million, or 17.2% of net operating revenue, in 1999.
Depreciation and amortization expense increased from $13.4 million, or 5.6%
of net operating revenue, in 1998, to $19.7 million, or 5.7% of net operating
revenue in 1999. The increase in depreciation and amortization resulted
primarily from the acquisitions in 1999 and a full year of expense for
acquisitions made in 1998. Interest expense as a percent of net operating
revenue decreased from 4.4% in 1998 to 4.0% in 1999.
Income before provision for income taxes was $25.6 million in 1999,
compared to $17.9 million in 1998, an increase of $7.7 million or 43.0%. The
increase resulted primarily from the acquisition of additional hospitals in 1998
and 1999.
Our provision for income taxes was $11.1 million in 1999, compared to $7.9
million in 1998. These provisions reflect effective income tax rates of 43.5% in
1999 compared to 44.2% in 1998. See Note 8 of the notes to our consolidated
financial statements for information regarding differences between effective tax
rates and statutory rates.
Net income was $14.5 million, or 4.2% of net operating revenue, in 1999,
compared to $10.0 million, or 4.2% of net operating revenue in 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net operating revenue increased from $170.5 million in 1997 to $238.9
million in 1998, an increase of $68.4 million or 40.1%. Net patient service
revenue generated by hospitals owned during both periods increased $5.2 million,
or 3.4% in 1998, primarily as a result of higher volumes and price increases,
partially offset by increased managed care and charity care discounts and the
effects of the Balanced
28
<PAGE> 30
Budget Act of 1997. Cost report settlements and the filing of cost reports
during the year resulted in positive revenue adjustments of $3.3 million, or
2.2% of net patient service revenue, in 1997 and $4.0 million, or 1.8% of net
patient service revenue, in 1998. The remaining increase of $63.2 million was
primarily attributable to the acquisition of additional hospitals in 1997 and
1998.
Operating expenses increased from $146.7 million in 1997, to $196.8 million
in 1998, an increase of $50.1 million or 34.2%. Operating expenses were 86.0% of
net operating revenue in 1997, compared to 82.4% in 1998. The increase in
operating expenses of hospitals owned during both periods resulted from volume
increases, increased services and change in case mix, offset by decreased
expenses in home health as a result of the Balanced Budget Act of 1997, and
decreased expenses from the closing of two geriatric psychiatric units. The
majority of the increase in operating expenses was attributable to the
acquisition of additional hospitals in 1997 and 1998.
EBITDA was $23.8 million, or 14.0% of net operating revenue in 1997,
compared to $42.1 million, or 17.6% of net operating revenue in 1998. The
increase is primarily the result of the acquisition of additional hospitals in
1997 and 1998.
Depreciation and amortization expense was $7.6 million, or 4.4% of net
operating revenue in 1997 compared to $13.4 million, or 5.6% of net operating
revenue, in 1998. The increase in depreciation and amortization resulted from
the acquisition of additional hospitals in 1997 and 1998 and increased capital
expenditures. Interest expense as a percent of net operating revenue decreased
from 4.8% in 1997 to 4.4% in 1998.
Income before income taxes was $17.9 million in 1998, compared to $7.7
million in 1997, an increase of $10.2 million. The increase resulted primarily
from the acquisition of additional hospitals in 1998.
Our provision for income taxes was $7.9 million in 1998, compared to $3.7
million in 1997. These provisions reflect effective income tax rates of 44.2% in
1998, compared to 47.2% in 1997. See Note 8 of the notes to our consolidated
financial statements for information regarding differences between effective tax
rates and statutory rates.
Net income was $4.1 million, or 2.4% of net operating revenue in 1997,
compared to $10.0 million, or 4.2% of net operating revenue in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had working capital of $64.0 million. The ratio of
current assets to current liabilities was 2.5 to 1.0 at December 31, 1999, and
3.3 to 1.0 at December 31, 1998.
Total long-term obligations increased to $260.0 million at December 31,
1999, from $134.3 million at December 31, 1998. The increase resulted primarily
from the borrowings to finance the acquisition of additional hospitals in 1999.
On September 10, 1999, we increased the size of our credit facility to
$295.0 million, including a $255.3 million revolving line of credit and a $39.7
million end-loaded lease facility. At December 31, 1999, we had $246.3 million
outstanding under our revolving line of credit and $43.4 million available,
which includes availability under the end-loaded lease facility that can be
converted to revolver availability at our option. At March 20, 2000, we had
$252.3 million outstanding under our revolving line of credit and $36.6 million
available, including availability under the end-loaded lease facility.
Our credit facility contains limitations on our ability to incur additional
indebtedness including contingent obligations, sell material assets, retire,
redeem or otherwise reacquire our capital stock, acquire the capital stock or
assets of another business, and pay dividends. Our credit facility also requires
us to maintain a specified net worth and meet or exceed certain coverage,
leverage, and indebtedness ratios. Indebtedness under our credit facility is
secured by substantially all of our assets. We are required under our credit
facility to pay certain commitment fees, based upon amounts borrowed and
available for borrowing, during the term of our agreement.
29
<PAGE> 31
Interest rate swap agreements are used to manage our interest rate exposure
under our credit facility. In 1997, we entered into an interest rate swap
agreement, which effectively converted for a five-year period $35.0 million of
floating-rate borrowings to fixed-rate borrowings. In 1998, we entered into an
interest rate swap agreement, which effectively converted for a five-year period
$45.0 million of floating-rate borrowings to fixed-rate borrowings. We secured a
6.27% fixed interest rate on the 1997 swap agreement, and a 5.625% fixed
interest rate on the 1998 swap agreement.
Cash used in operations was $0.8 million in 1997 and $4.1 million in 1998,
and cash provided by operations was $19.0 million in 1999. Cash used in
investing activities was $18.2 million in 1997, $146.4 million in 1998 and
$140.1 million in 1999, relating primarily to acquisitions and capital
expenditures. Net cash provided by financing activities was $12.0 million in
1997, relating primarily to net proceeds from long-term debt and issuance of
preferred stock. Net cash provided by financing activities was $148.5 million in
1998, relating primarily to our initial public offering and our follow-on equity
offering and the application of the proceeds, and net borrowings to finance
acquisitions. Cash provided by financing activities was $119.0 million in 1999,
relating primarily to net borrowings to finance acquisitions.
We intend to acquire additional acute care facilities, and are actively
seeking out such acquisitions. There can be no assurance that we will not
require additional debt or equity financing for any particular acquisition.
Also, we continually review our capital needs and financing opportunities and
may seek additional equity or debt financing for our acquisition program or
other needs.
Capital expenditures in 1998 and 1999, were $15.5 million and $20.9
million, respectively. Capital expenditures for the owned hospitals may vary
from year to year depending on facility improvements and service enhancements
undertaken by the hospitals. We expect to make total capital expenditures in
2000 of approximately $24.3 million, exclusive of any acquisitions of businesses
or construction projects. Planned capital expenditures for 2000 consist
principally of capital improvements to owned and leased hospitals. We expect to
fund these expenditures through cash provided by operating activities and
borrowings under our revolving credit facility. With respect to construction
projects, we have started construction of a replacement facility for Elko
General Hospital, currently expected to cost approximately $30.0 million, and if
pre-determined operating levels are achieved, we have agreed to build
replacement facilities for Eunice Community Medical Center, currently expected
to cost approximately $20.0 million, and Glades General Hospital, currently
expected to cost approximately $25.0 million. We cannot estimate whether and
when each hospital will achieve its individual pre-determined operating levels,
but we believe it will take approximately thirty-six months to complete
construction from such date. We have started construction on an ancillary
expansion at Lake Havasu Regional Medical Center, which is expected to cost
approximately $26.0 million. In addition, in connection with certain
acquisitions we have made, we have committed and may commit in the future to
spend specified amounts for capital expenditures.
IMPACT OF YEAR 2000 ISSUES
In prior years, we discussed the nature and progress of our plans to become
Year 2000 ready. In late 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believe those systems
successfully responded to the Year 2000 date change. We expensed approximately
$1.0 million during 1999 in connection with remediating our systems. We are not
aware of any material problems resulting from Year 2000 issues, either with our
services, our internal systems, or the products and services of third parties.
We will continue to monitor our mission critical computer applications and those
of our suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued, and was required to be adopted in years
beginning after June 15, 1999. In June 1999, SFAS No. 137 was issued, deferring
the effective date of SFAS No. 133 for one year. This statement requires all
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derivatives to be recorded on the balance sheet at fair value. This results in
the offsetting changes in fair values or cash flows of both the hedge and the
hedged item being recognized in earnings in the same period. Changes in fair
value of derivatives not meeting the statement's hedge criteria are included in
income. We expect to adopt the new statement January 1, 2001, and do not expect
the adoption of this statement to have a significant effect on our results of
operations or financial position.
INFLATION
The health care industry is labor intensive. Wages and other expenses
increase, especially during periods of inflation and labor shortages. In
addition, suppliers pass along to us rising costs in the form of higher prices.
We generally have been able to offset increases in operating costs by increasing
charges for services, expanding services, and implementing cost control measures
to curb increases in operating costs and expenses. In light of cost containment
measures imposed by government agencies and private insurance companies, we are
unable to predict our ability to offset or control future cost increases, or our
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk involves interest rate risk. Our interest expense
is sensitive to changes in the general level of U. S. interest rates. To
mitigate the impact of fluctuations in U. S. interest rates, we generally expect
to maintain a substantial percent of its debt as fixed rate in nature by
entering into interest rate swap transactions. The $80.0 million of aggregate
interest rate swap agreements, entered into in 1997 and 1998, are contracts to
exchange periodically fixed and floating interest rate payments over the lives
of the agreements. The floating-rate payments are based on LIBOR and fixed-rate
payments are dependent upon market levels at the time the swap agreement was
consummated. The interest rate swap agreements do not constitute positions
independent of the underlying exposures. We do not hold or issue derivative
instruments for trading purposes and are not a party to any instruments with
leverage features. The swap agreements allow the counterparty a one-time option
at the end of the initial term to cancel the agreement or extend the swaps for
an incremental time period. We are exposed to credit losses in the event of
nonperformance by the counterparties to our financial instruments. The
counterparties are creditworthy financial institutions, and we expect our
counterparties to fully satisfy their contract obligations. We received a
weighted average rate of 5.72%, 5.67% and 5.27%, and paid a weighted average
rate of 6.27%, 6.14% and 5.91% on our interest rate swap agreements, for the
years ended December 31, 1997, 1998 and 1999, respectively.
The carrying amount of our total debt of $134.3 million and $260.0 million
at December 31, 1998 and 1999, respectively, approximated fair value. We had
$128.7 million and $249.2 million of variable rate debt outstanding at December
31, 1998 and 1999, respectively, with interest rate swaps in place to offset the
variability of $80.0 million of this balance in 1998 and 1999. At this borrowing
level, a hypothetical 10% adverse change in interest rates, considering the
effect of the interest rate hedge agreements, would have an unfavorable impact
on our net income and cash flows of approximately $0.3 million in 1998 and $0.7
million in 1999. A hypothetical 10% adverse change in interest rates on the
fixed-rate debt would not have a material impact on the fair value of such debt.
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BUSINESS
OVERVIEW
We own and operate acute care hospitals located in non-urban markets in
eight states. We currently own or lease 15 general acute care hospitals with a
total of 1,327 licensed beds. Our objective is to be the primary provider of
quality health care services in the selected non-urban markets that we serve. We
offer a wide range of inpatient and outpatient medical services as well as
specialty services, including rehabilitation and home health care. We target for
acquisition hospitals that are the sole or a primary provider of health care in
non-urban communities. After acquiring a hospital, we implement a number of
strategies designed to maximize financial performance. These strategies include
improving hospital operations, expanding the breadth of services and recruiting
physicians to increase market share. We also provide management services to 48
primarily non-urban hospitals in 18 states and Puerto Rico with a total of 3,584
licensed beds. For the year ended December 31, 1999, we had, on a pro forma
basis to reflect full-year results for hospitals we acquired during such period,
net operating revenue of $415.3 million, and EBITDA, the sum of income before
income taxes, interest, depreciation, amortization and minority interest, of
$68.9 million. During this time period, our owned and leased hospitals accounted
for 94.2% of net operating revenue.
THE NON-URBAN HEALTH CARE MARKET
According to 1999 United States Census Bureau statistics, over a third of
the people in the United States live in counties with a population of less than
150,000. In these non-urban areas, hospitals are typically the primary resource
for health care services, and in many cases the local hospital is the only
provider of acute care services. As of January 1999, there were approximately
1,100 non-urban hospitals in the country that were owned by not-for-profit or
governmental entities.
We believe that non-urban areas are attractive markets. Because non-urban
service areas have smaller populations, there are generally only one or two
hospitals in each market. We believe the size and demographic characteristics of
non-urban markets and the relative strength of the local hospital also make
non-urban markets less attractive to HMOs, other forms of managed care, and
alternate site providers, such as outpatient surgery, rehabilitation or
diagnostic imaging providers.
Despite these attractive characteristics, many not-for-profit and
governmental operators of non-urban hospitals are under increasing pressure due
to capital constraints, limited management resources and the challenges of
managing in a complex health care regulatory environment. This combination of
factors often results in a limited range of services being available locally. As
a result, patients by choice or physician direction may obtain care outside of
the community. This outmigration often leads to deteriorating operating
performance, further limiting the hospital's ability to address the issues that
initially led to these pressures. Ultimately, these pressures can force owners
to sell or lease their hospitals to companies, like us, that have greater
financial and management resources, coupled with proven operating strategies, to
address these issues. As a result of these issues, not-for-profit and
governmental hospitals increasingly are selling or leasing these hospitals to
entities like Province, that have the capital resources and the management
expertise to serve the community better. We believe that a significant
opportunity for consolidation exists in the non-urban health care market.
BUSINESS STRATEGY
The key elements of our business strategy are to:
Acquire Hospitals in Attractive Non-Urban Markets. We seek to acquire
hospitals that are the sole or a primary provider of health care services in
their markets and that present the opportunity to increase profitability and
local market share. We believe that approximately 1,100 non-urban hospitals in
the United States meet our acquisition criteria, and our goal is to acquire two
to four of these hospitals each year.
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Improve Hospital Operations. Following the acquisition of a hospital, we
augment local management with appropriate operational and financial managers and
install our 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 our
supply arrangements and often renegotiates vendor contracts. By implementing
this strategy, we seek to improve operating performance at each of the hospitals
we acquire.
Expand Breadth of Services to Increase Market Share and Reduce Patient
Outmigration. We seek to provide additional health care services and programs
in response to community needs. These services may include specialty inpatient,
outpatient and rehabilitation. We also may make capital investments in
technology and the physical plant to improve both the quality of health care and
the reputation of the hospital in the community. By providing a broader range of
services in a more attractive setting, we encourage residents in our markets to
seek care in our hospitals, thereby reducing patient outmigration and increasing
hospital revenue.
Recruit Physicians. We believe that recruiting physicians to local
communities is key to increasing the quality of health care and breadth of
available services. We work with the local hospital board, management and
medical staff to determine the number and type of additional physicians needed
in the community. Our corporate physician recruiting staff then assists the
local management team in identifying and recruiting specific physicians to the
community to meet those needs. During 1998, we recruited 54 new physicians, and
for the year ended December 31, 1999, we recruited 49 additional physicians.
Approximately, 60% of the physicians recruited in 1998 and 1999 were primary
care physicians and approximately 40% were specialty care physicians. We believe
that expansion of services in our hospitals also should assist in physician
recruiting.
ACQUISITION PROGRAM
We proactively identify acquisition targets in addition to responding to
requests for proposals from entities that are seeking to sell or lease
hospitals. We also seek to acquire selected hospitals to which we currently
provide contract management services. We also identify attractive markets and
hospitals and initiate meetings with hospital systems to discuss acquiring
non-urban hospitals or operating them through a joint venture. These hospital
systems are comprised of one or more urban tertiary care hospitals and a number
of non-urban hospitals, and such joint ventures allow the health system to
maintain an affiliation for providing tertiary care to the non-urban hospitals
without the management responsibility.
We believe that it generally takes six to 12 months between a hospital
owner's decision to accept an offer and the consummation of a sale or lease.
After a potential acquisition has been identified, we undertake a systematic
approach to evaluating and closing the transaction. We begin the acquisition
process with a thorough due diligence review of the target hospital and its
community. We use our 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 our due diligence
review, we prepare an operating plan for the target hospital, identify
opportunities for operating efficiencies and physician recruiting needs, and
assess productivity and management information systems. Throughout the process,
we work closely with community leaders in order to enhance both the community's
understanding of our philosophy and abilities and our knowledge of the needs of
the community.
From time to time, we enter into letters of intent with acquisition targets
in connection with our evaluation of a potential acquisition. Such letters of
intent are generally executed prior to the commencement of due diligence
undertaken during the evaluation process. In addition to due diligence, proposed
transactions to acquire hospitals for which we have signed a letter of intent
are subject to numerous conditions and contingencies, including internal
approvals of both our company and the target companies, receipt of regulatory
approvals, resolution of legal and equitable matters relating to continuation of
labor agreements, supply and service agreements and preparation and negotiation
of documentation. In addition, our letters of intent generally provide that they
may be terminated by either party without cause.
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Accordingly, there can be no assurance that any such proposed transaction for
which we have signed a letter of intent will occur, or if it occurs, there can
be no assurance as to the assets that may be acquired, the purchase price of
such assets or the terms of their acquisition.
The competition to acquire non-urban hospitals is intense, and we believe
that the acquirer will be selected for a variety of reasons, not exclusively on
the basis of price. We believe that we are well positioned to compete for
acquisitions for several reasons. First, our management team has extensive
experience in acquiring and operating previously under-performing non-urban
hospitals. Second, we benefit from access to capital, strong financial and
operating systems, a national purchasing organization and training programs.
Third, we believe our strategy of increasing access to, and quality of, health
care in the communities served by our hospitals aligns our interests with those
of the communities. Finally, we believe that the alignment of interests with the
community, our reputation for providing market-specific, quality health care,
and our focus on physician recruiting enables us to compete successfully for
acquisitions.
HOSPITAL OPERATIONS
Following the acquisition of a hospital, we implement our systematic
policies and procedures to improve the hospital's operating and financial
performance. We implement 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. We believe that the long-term growth potential of a
hospital is dependent on that hospital's ability to add appropriate health care
services and effectively recruit and retain physicians.
Each hospital management team is comprised of a chief executive officer,
chief financial officer and chief nursing officer. We believe 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 our operating plan. The operating plan is developed by the local
management team in conjunction with our senior management team and sets forth
revenue enhancement strategies and specific expense benchmarks. We have
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, our 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. We promote communication among our hospitals so that
local expertise and improvements can be shared throughout our network.
To achieve the operating efficiencies set forth in the operating plan, we
do the following:
- evaluate existing hospital management;
- adjust staffing levels according to patient volumes using best
demonstrated practices by department;
- install a standardized management information system; and
- capitalize on purchasing efficiencies and renegotiate certain vendor
contracts.
We also enforce strict protocols for compliance with our supply contracts.
All of our owned or leased hospitals currently purchase supplies and certain
equipment pursuant to an arrangement we have with an affiliate of Columbia/HCA
Healthcare Corporation. Vendor contracts also are evaluated, and based on cost
comparisons, such contracts may be renegotiated or terminated. We prepare for
the transition of management information systems to our standardized system
prior to the completion of an acquisition, so that the newly-acquired hospital
may begin using our management information systems following completion of the
acquisition.
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EXPANSION OF SERVICES
As part of our efforts to improve access to quality health care in the
communities we serve, we add services at our hospitals on an as-needed basis.
Added services and care programs may include specialty inpatient services, such
as cardiology, rehabilitation and subacute care, and outpatient services such as
same-day surgery. We believe the establishment of quality emergency room
departments, obstetrics and gynecological services are particularly important,
because they are often the most visible and needed services provided to the
community. We also make capital investments in technology and facilities to
increase the quality and breadth of services available in the communities. By
increasing the services provided at our hospitals and upgrading the technology
used in providing such services, we believe that we improve the quality of care
and the hospitals' reputation in each community, which in turn may increase
patient census and revenue.
PHYSICIAN RECRUITMENT
We work with local hospital boards, management and medical staff to
determine the number and type of additional physicians needed in the community.
Our 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
our hospitals are identified by our internal physician recruiting staff, which
is supplemented by the efforts of independent recruiting firms. When recruiting
a physician to a community, we generally guarantee the physician a minimum level
of cash collections during a limited initial period and assist the physician
with his or her transition to the community. We require 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. We prefer not to
employ physicians; therefore, recruited physicians generally do not become our
employees.
OWNED AND LEASED HOSPITALS
We currently own or lease and operate 15 general acute care hospitals in
California, Texas, Arizona, Colorado, Indiana, Nevada, Louisiana and Florida,
with a total of 1,327 licensed beds. Of our 15 hospitals, 13 are the only
providers of acute care services in their communities. The owned or leased
hospitals represented 94.2% of our net operating revenue for the year ended
December 31, 1999, compared to 92.3% for the year ended December 31, 1998.
Our 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 and physical therapy. Our hospitals
also frequently provide certain specialty services which include rehabilitation
and home health care. Our hospitals currently do not provide highly specialized
surgical services such as organ transplants and open heart surgery and are not
engaged in extensive medical research or educational programs.
The following table sets forth certain information with respect to each of
our owned or leased hospitals as of March 1, 2000.
<TABLE>
<CAPTION>
LICENSED OWNED/ DATE
HOSPITAL BEDS LEASED ACQUIRED
- -------- -------- --------- -----------
<S> <C> <C> <C>
City of Ennis Hospital
Ennis, Texas.......................................... 45 Leased(1) Feb. 2000
Colorado Plains Medical Center
Fort Morgan, Colorado................................. 50 Leased(2) Dec. 1996
Colorado River Medical Center
Needles, California................................... 53 Leased(3) Aug. 1997
Doctors' Hospital of Opelousas
Opelousas, Louisiana.................................. 133 Owned Jun. 1999
Elko General Hospital
Elko, Nevada.......................................... 50 Owned(4) Jun. 1998
</TABLE>
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<TABLE>
<CAPTION>
LICENSED OWNED/ DATE
HOSPITAL BEDS LEASED ACQUIRED
- -------- -------- --------- -----------
<S> <C> <C> <C>
Eunice Community Medical Center
Eunice, Louisiana..................................... 91 Leased(5) Feb. 1999
General Hospital
Eureka, California.................................... 75 Owned(6) Dec. 1996
Glades General Hospital
Belle Glade, Florida.................................. 73 Owned Apr. 1999
Lake Havasu Regional Medical Center
Lake Havasu City, Arizona............................. 118 Owned May 1998
Minden Medical Center
Minden, Louisiana..................................... 124 Owned Oct. 1999
Ojai Valley Community Hospital
Ojai, California...................................... 110(7) Owned Dec. 1996
Palestine Regional Medical Center(8)
Palestine, Texas...................................... 257 Owned(9) July 1996
Palo Verde Hospital
Blythe, California.................................... 55 Leased(10) Dec. 1996
Parkview Regional Hospital
Mexia, Texas.......................................... 44 Leased(11) Dec. 1996
Starke Memorial Hospital
Knox, Indiana......................................... 49 Leased(12) Oct. 1996
-----
Total......................................... 1,327
=====
</TABLE>
- ---------------
(1) The lease expires in February 2030, and is subject to three 10-year renewal
terms at our option.
(2) The lease expires in April 2014, and is subject to a five-year renewal
term. We have a right of first refusal to purchase the hospital.
(3) The lease expires in July 2012, and is subject to three five-year renewal
terms. We have a right of first refusal to purchase the hospital.
(4) This facility was acquired on June 11, 1998.
(5) The lease expires in June 2008, and is subject to a five-year renewal
option.
(6) We initially leased this facility and exercised our option to purchase the
hospital in December 1998.
(7) Includes a 66-bed skilled nursing facility.
(8) We initially acquired Memorial Mother Frances Hospital in July 1996. On
October 1, 1999, we completed the acquisition of Trinity Valley Medical
Center, which is also located in Palestine, Texas. With the completion of
the acquisition we renamed Trinity Valley Medical Center as Palestine
Regional Medical Center and we renamed Memorial Mother Frances Hospital as
Palestine Regional Medical Center -- West Campus. We operate the two as a
single hospital with two campuses.
(9) The hospital is owned by a partnership in which a subsidiary of ours is the
sole general partner, with a 1.0% general partnership interest, and another
subsidiary of ours has a limited partnership interest of not less than 94%,
subject to an option by the other non-affiliated limited partner to acquire
up to 10% of the total limited partnership interests. The partnership
recently received additional capital contributions from its partners, and
the exact ownership percentage of each limited partner remains subject to
further negotiation.
(10) The lease expires in December 2002, and is subject to a ten-year renewal
option. We have the option to purchase the hospital at any time prior to
termination of the lease, subject to regulatory approval.
(11) The lease expires in January 2011, and is subject to two five-year renewal
terms. We have a right of first refusal to purchase the hospital.
(12) The lease expires in September 2016, and is subject to two ten-year renewal
options. We have a right of first refusal to purchase the hospital.
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City of Ennis Hospital is a 45-bed hospital located in Ennis, Texas,
approximately 35 miles southeast of Dallas. Established in the mid-1950's, the
hospital is owned by the City of Ennis. The acute care facility is the only
hospital serving the Ennis community, which has a total service area population
of approximately 85,000 people. The nearest competitor is the 73-bed Baylor
Health Care System Waxahachie Hospital, located 17 miles from Ennis. The City of
Ennis Hospital was previously operated by the Baylor Health Care System, which
had closed most services at the hospital in November 1999, at which time
ownership reverted back to the City of Ennis. Upon the commencement of our lease
of the facility in February 2000, the hospital provided emergency, skilled
nursing, lab and radiology services. We intend to have a full service acute care
facility operating in the second quarter of 2000.
Colorado Plains Medical Center is a 50-bed acute care facility located in
Fort Morgan, Colorado, approximately 70 miles from Denver. Fort Morgan is an
agricultural-based community with an estimated 12,000 residents and an estimated
service area population of 43,000. The original hospital was built in 1952, and
Brim purchased the hospital from the county in 1986. 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. The hospital provides home health care services
and opened an inpatient rehabilitation unit in September 1998. The hospital's
major competition comes from the 276-bed Northern Colorado Medical Center
located in Greeley, Colorado, which is about 45 miles west of Colorado Plains.
East Morgan County Hospital, located nine miles away in Brush, Colorado, is the
closest hospital to Colorado Plains and offers only limited services. Both of
these competing hospitals are owned by the Lutheran Health System.
Colorado River Medical Center is a 53-bed hospital located in Needles,
California, approximately 100 miles southwest of Las Vegas, Nevada. The
hospital, established in 1974, was previously owned by the City of Needles.
Colorado River Medical Center is the only hospital serving a community base of
approximately 20,000 people. Colorado River Medical Center has no significant
in-market competition, but does suffer limited outmigration to a major
university medical center in Loma Linda, California. Another competitor is
Bullhead Community Hospital, located 22 miles away, which serves the Laughlin,
Nevada and Bullhead City, Arizona areas. We completed construction in August
1999 on a $3.5 million medical office building in nearby Fort Mojave, Arizona.
Doctors' Hospital of Opelousas is a 133-bed general acute care facility,
located in Opelousas, Louisiana approximately 21 miles east of Eunice, Louisiana
where Province operates a 91-bed health care facility and approximately 22 miles
north of Lafayette. Opelousas is the parish seat with a population of
approximately 21,000 in the city of Opelousas and approximately 100,000
residents of the St. Landry Parish. We purchased the hospital from Columbia/HCA
Healthcare Corporation which owned the hospital in a joint venture with 13 area
physicians. The facility originally was constructed in 1981 with additions and
renovations completed in 1984, including a Women's Healthcare Center. The
primary competition for Doctors' Hospital of Opelousas is the 134-bed Opelousas
General Hospital, a county owned not-for-profit facility located approximately
five miles from Doctors' Hospital of Opelousas. We began construction in
November 1999 on a $5.6 million medical office building and a $3.0 million
32-bed addition to the hospital.
Elko General Hospital is a 50-bed acute care facility located in Elko,
Nevada. Elko, Nevada is located 237 miles west of Salt Lake City, Utah, 295
miles northeast of Reno and 475 miles north of Las Vegas. Elko County's
population is approximately 55,000, with the primary population base residing in
the city of Elko. Originally constructed as a 20-bed hospital in 1920, Elko
General Hospital has grown and expanded with the community undergoing two major
renovations in 1958 and 1976. We began construction on February 1, 2000 on a new
$30.0 million facility to serve the growing community.
Eunice Community Medical Center is a 91-bed general acute care facility
located in Eunice, Louisiana. Eunice, Louisiana is a community of approximately
20,000 people, located approximately 50 miles northwest of Lafayette. The total
service area consisting of St. Landry Parish has a population of approximately
100,000. We entered into a 10-year lease with a 5-year renewal option on the
facility. The hospital is located 21 miles from Opelousas General Hospital, a
133-bed facility, which we recently acquired. We must construct a replacement
facility, at such time as the hospital reaches pre-determined
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operating levels. The lease will terminate at the time the replacement facility
commences operations. Eunice Community Medical Center competes with Savoy
Medical Center located in Mamou, Louisiana, approximately 15 miles north of
Eunice.
General Hospital is a 75-bed acute care hospital located in Eureka,
California, approximately 300 miles north of San Francisco. Eureka, California
has a population of 28,000 within the city limits, 46,000 in the immediate urban
area, and 129,000 in the hospital's service area. General Hospital is one of two
hospitals operating in the service area. General Hospital originally was
established in 1906, and Brim Hospitals, Inc. acquired the hospital in January
1986 from the county. The hospital also operates an ambulatory surgery center
and a home health agency that are located near the hospital.
Glades General Hospital is a 73-bed full service general acute care
facility serving the residents of Western Palm Beach, Hendry and Glades counties
and is located 45 miles west of West Palm Beach on the southeast corner of Lake
Okeechobee. Belle Glade, Florida has a service area population of 36,000. The
nearest competitor is Columbia Palms West, located 30 miles away in Loxahatchee,
Florida. We believe this market presents a solid growth opportunity for the
hospital and the potential to open an emergency care clinic in the Pahokee
market. We began construction in January 2000 on a $1.5 million medical office
building addition.
Lake Havasu Regional Medical Center is a 118-bed acute care facility
providing health care services for a population of over 41,000 primarily in the
Lake Havasu City, Arizona area. Lake Havasu City is on the shore of Lake Havasu
on the Colorado River border of California and Arizona. It is now the major
population center of southern Mohave County, one of the fastest growing counties
in the United States. We acquired the facility in May 1998 from the Samaritan
Health System, a Phoenix, Arizona, based not-for-profit health care system. The
hospital currently provides general acute care, skilled nursing care, radiation,
oncology and diagnostic services, including the recent addition of a cardiac
catheterization lab. Lake Havasu City has a service area population of 127,000
residents in the rapidly growing Colorado River basin. We began construction of
a $26.0 million ancillary expansion in January 2000.
Minden Medical Center is a 124-bed general acute care hospital located in
Minden, Louisiana. Minden, Louisiana is approximately 28 miles from Shreveport
and has a service area population of approximately 64,000. Province acquired the
facility in October 1999, along with Trinity Valley Medical Center, from Tenet
Healthcare Corporation. The hospital currently provides general acute care,
geriatric psychiatric and obstetric services. The hospital's nearest competitors
are the Willis-Knight Medical Center and Bossier Medical Center, which are both
located in Shreveport.
Ojai Valley Community Hospital is a 110-bed acute care hospital, including
a 66-bed nursing facility in Ojai, California, a geographically isolated
community 85 miles northwest of Los Angeles. Ojai is located approximately 18
miles from Ventura, California, but its geographical isolation delays travel
such that Ojai residents must drive for 30-60 minutes to reach Ventura by car.
The Ojai Valley community includes about 31,000 residents. The acute care
hospital was acquired by Brim, Inc. in April 1994. Ojai Valley Community
Hospital's primary competitor is Community Memorial Hospital located in Ventura,
California.
Palestine Regional Medical Center is a two-campus, 257-bed general acute
care hospital facility located in Palestine, Texas. Palestine, a community of
approximately 19,000 residents, is located 50 miles south of Tyler, Texas and is
roughly equidistant from Dallas and Houston. The total service area population
for the hospital, which includes Anderson and eight surrounding counties, is
estimated at 104,000 people. The main campus is comprised of the former Trinity
Valley Medical Center, a 153-bed facility that we acquired in October 1999 from
Tenet Healthcare Corporation. The West campus is comprised of the former
Memorial Mother Frances Hospital, a 104-bed acute care facility also located in
Palestine, which we have owned since 1996. Palestine Regional Medical Center
competes indirectly with two other hospitals, Mother Frances Hospital Regional
Health Care Center and East Texas Medical Center, both in Tyler, Texas. Tenet
completed construction in August 1999 of a $3.8 million medical office building
at the hospital's main campus.
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Palo Verde Hospital is a 55-bed acute care hospital located in Blythe,
California, which is in southeast California on the Arizona border. The hospital
is located in a community with a stable population of 20,000; however, the
population increases significantly during the winter months due to a seasonal
influx of retirees. Brim Hospitals, Inc. entered into a lease to operate the
hospital in January 1993 from the Palo Verde Hospital Association. The nearest
competitor is Parker Hospital in Parker, California, which is approximately 45
miles from Palo Verde Hospital.
Parkview Regional Hospital is a 44-bed acute care hospital located in
Mexia, Texas. Parkview's primary service area includes Mexia and the surrounding
Limestone County, as well as Freestone, Leon, and Hill counties. Mexia is the
area's largest city with a population of 7,000 people. The service area of the
hospital includes approximately 50,000 residents. Brim Hospitals, Inc. acquired
the hospital through a long-term lease in February 1996. Parkview Regional
Hospital is the only hospital in the community, but experiences competition from
Waco hospitals, about 40 miles to the west.
Starke Memorial Hospital is a 49-bed hospital in Knox, Indiana, a community
located approximately 50 miles from South Bend. The town of Knox has a
population of approximately 8,000, and the population of Starke County is
estimated to be 23,200. The hospital's total service area, including the
surrounding counties, is approximately 35,000. Established in 1952, the hospital
had been owned by Starke County until Province purchased it in October 1996. The
nearest competing hospitals are the 36-bed St. Joe Marshall County Hospital,
which is located 18 miles east in Plymouth, Indiana, and the 307-bed Porter
Memorial Hospital, which is located 32 miles away in Valparaiso, Indiana.
OPERATING STATISTICS
The following table sets forth certain operating statistics for our owned
or leased hospitals for each of the periods presented.
<TABLE>
<CAPTION>
BRIM
(PREDECESSOR) PROVINCE (SUCCESSOR)
------------- ----------------------------------------------
PERIOD PERIOD
JANUARY 1 TO FEB. 2 TO YEAR ENDED DECEMBER 31,
DECEMBER 18, DEC. 31, ---------------------------------
1996 1996 1997 1998 1999
------------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Hospitals owned or leased at end
of period....................... 5 7 8 10 14
Licensed beds (at end of
period)......................... 371 513 570 723 1,282
Beds in service (at end of
period)......................... 266 393 477 647 1,186
Admissions........................ 9,496 1,964 15,142 21,538 32,509
Average length of stay
(days)(1)....................... 5.9 4.3 5.6 5.2 4.8
Patient days...................... 56,310 8,337 84,386 110,816 156,846
Adjusted patient days(2).......... 96,812 15,949 149,567 195,998 273,394
Occupancy rate (% of licensed
beds)(3)........................ 43.1% 39.5% 40.6% 42.0% 33.4%
Occupancy rate (% of beds in
service)(4)..................... 60.1% 51.3% 48.5% 46.9% 36.2%
Net patient service revenue (in
thousands)...................... $87,900 $16,425 $149,296 $ 217,364 $323,319
Gross outpatient service revenue
(in thousands).................. $64,472 $14,088 $110,879 $ 161,508 $257,248
Gross outpatient service revenue
(% of gross patient service
revenue)........................ 43.4% 48.2% 44.5% 43.5% 42.6%
</TABLE>
- ---------------
(1) Average length of stay is calculated based on the number of patient days
divided by the number of admissions.
(footnotes continued on following page)
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(footnotes continued from the prior page)
(2) Adjusted patient days have been calculated based on an industry-accepted
revenue-based formula of multiplying actual patient days by the sum of gross
inpatient revenue and gross outpatient revenue and dividing the result by
gross inpatient revenue for each hospital, to reflect an approximation of
the volume of service provided to inpatients and outpatients by converting
total patient revenue to equivalent patient days.
(3) Percentages are calculated by dividing average daily census by average
licensed beds.
(4) Percentages are calculated by dividing average daily census by average beds
in service.
SOURCES OF REVENUE
We receive payments for patient care from private insurance carriers,
federal Medicare programs for elderly and disabled patients, HMOs, preferred
provider organizations, state Medicaid programs, the Civilian Health and Medical
Program of the Uniformed Services, also known as CHAMPUS, and from employers and
patients directly. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The following table sets forth the percentage of the patient days of our
owned or leased hospitals, excluding the 66-bed skilled nursing facility at Ojai
Valley Community Hospital, from various payors for the periods indicated. The
data for the periods presented are not strictly comparable because of the
significant effect that acquisitions have had on us. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
PERIOD
FEBRUARY 2 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------
SOURCE 1996 1997 1998 1999
- ------ ------------- ----- ----- -----
<S> <C> <C> <C> <C>
Medicare............................................... 63.3% 60.3% 57.8% 56.2%
Medicaid............................................... 12.0 13.1 11.1 12.4
Private and other sources.............................. 24.7 26.6 31.1 31.4
----- ----- ----- -----
Total........................................ 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
All percentages in the table above exclude the 66-bed skilled nursing
facility at Ojai Valley Community Hospital. Substantially all of the patient
days at the Ojai Valley skilled nursing facility are provided by Medicaid. The
Ojai Valley skilled nursing facility utilization is as follows:
<TABLE>
<CAPTION>
PRIVATE AND
OTHER
MEDICARE MEDICAID SOURCES
-------- -------- -----------
<S> <C> <C> <C>
Period February 2 to December 31, 1996...................... 16.0% 68.6% 15.4%
Year ended December 31, 1997................................ 11.8 76.2 12.0
Year ended December 31, 1998................................ 7.8 80.9 11.3
Year ended December 31, 1999................................ 4.5 83.1 12.5
</TABLE>
MANAGEMENT INFORMATION SYSTEMS
Upon the completion of an acquisition, one of our first steps is to convert
the newly-acquired hospital to our management information system. Our hospital
management system contains the primary software required to run an entire
hospital, bundled into one software package. This software includes features
such as a general ledger, patient accounting, billing, accounts receivable,
payroll, accounts payable and pharmacy. Our goal is to convert an acquired
hospital to our management information system within sixty days from the date of
the acquisition.
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QUALITY ASSURANCE
Our hospitals implement quality assurance procedures to monitor the 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. We survey all of our patients
either during their stay at the hospital or subsequently by mail to identify
potential areas of improvement. All of our hospitals are accredited by the Joint
Commission on Accreditation of Health Care Organizations.
REGULATORY COMPLIANCE PROGRAM
We maintain a corporate-wide compliance program under the direction of
Starley Carr, our Vice President of Corporate Compliance. Prior to joining our
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. Our compliance program focuses on all areas of regulatory
compliance, including physician recruitment, reimbursement and cost reporting
practices, laboratory and home health care operations. Each of our hospitals
designates a compliance officer, and each facility undergoes an annual risk
assessment to determine potential risk issues and develop plans to correct
problems should they arise. In addition, all of our employees are given a
thorough introduction to our ethical and compliance guidelines, as well as a
guide to the proper resources to address any concerns that may arise. We also
conduct annual training to re-emphasize our established guidelines. We regularly
monitor corporate compliance programs to respond to developments in health care
regulation and the industry. We also maintain a toll-free hotline to permit
employees to report compliance concerns on an anonymous basis. In addition, the
hotline is a method of obtaining answers to questions of compliance encountered
during the day-to-day operation of a facility.
MANAGEMENT AND CONSULTING SERVICES
Brim Healthcare, Inc., a wholly owned subsidiary, provides management
services to 48 primarily non-urban hospitals in 18 states and Puerto Rico with a
total of 3,584 licensed beds. These services are provided for a fixed monthly
fee under three to seven-year contracts. Brim Healthcare, Inc. generally
provides a chief executive officer, who is an employee of Brim Healthcare, Inc.,
and may also provide a chief financial officer. Brim Healthcare, Inc. typically
does not employ other hospital personnel. Management services are typically
limited to strategic planning, operational consulting and assistance with Joint
Commission of Accreditation for Health Care Organizations accreditation and
compliance. To further promote compliance, Brim Healthcare, Inc. requires that
each of the hospitals that it manages have a compliance officer. In addition, to
assist hospitals and community health care, Brim Healthcare, Inc. sometimes
establishes regional provider networks. We believe that Brim Healthcare, Inc.'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 subsidiary
represented less than 6.0% of net operating revenue for the year ended December
31, 1999 compared to less than 8.0% of net operating revenue for the year ended
December 31, 1998.
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 our hospitals face less competition in
their immediate patient service areas than would be expected in larger
communities. While our hospitals are generally the primary provider of health
care services in their respective communities, our hospitals face competition
from larger tertiary care centers and, in some cases, other non-urban hospitals.
Some of the hospitals that compete with us 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.
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One of the most significant factors in the competitive position of a
hospital is the number and quality of physicians affiliated with the hospital.
Although physicians may at any time terminate their affiliation with a hospital
that we operate, our hospitals seek to retain physicians of varied specialties
on the hospitals' medical staffs and to attract other qualified physicians. We
believe physicians refer patients to a hospital primarily on the basis of the
quality of services it renders to patients and physicians, the quality of other
physicians on the medical staff, the location of the hospital and the quality of
the hospital's facilities, equipment and employees. Accordingly, we strive to
maintain high ethical and professional standards and quality facilities,
equipment, employees and services for physicians and their patients.
Another factor in the competitive position of a hospital is management's
ability to negotiate service contracts with purchasers of group health care
services. HMOs and preferred provider organizations attempt to direct and
control the use of hospital services through managed care programs and to obtain
discounts from hospitals' established charges. In addition, employers and
traditional health insurers are increasingly interested in containing costs
through negotiations with hospitals for managed care programs and discounts from
established charges. Generally, hospitals compete on the basis of market
reputation, geographic location, quality and range of services, quality of the
medical staff, convenience and price for service contracts with group health
care service purchasers. The importance of obtaining contracts with managed care
organizations varies from market to market, depending on the market strength of
such organizations. Managed care contracts generally are less important in the
non-urban markets served by us than they are in urban and suburban markets where
there is typically a higher level of managed care penetration.
State certificate of need laws, which place limitations on a hospital's
ability to expand hospital services and add new equipment, also may have the
effect of restricting competition. Two states in which we operate, Florida and
Nevada, currently have certificate of need laws. The application process for
approval of covered services, facilities, changes in operations and capital
expenditures is, therefore, highly competitive. In those states that have no
certificate of need laws or that set relatively high thresholds before
expenditures become reviewable by state authorities, competition in the form of
new services, facilities and capital spending may be more prevalent. We have not
experienced, and do not expect to experience, any material adverse effects from
state certificate of need requirements or from the imposition, elimination or
relaxation of such requirements. See "Health Care Regulation and Licensing."
We, and the health care industry as a whole, face the challenge of
continuing to provide quality patient care while dealing with rising costs,
strong competition for patients and a general reduction of reimbursement rates
by both private and government payers. As both private and government payers
reduce the scope of what may be reimbursed and reduced reimbursement levels for
what is covered, federal and state efforts to reform the health care system may
further impact reimbursement rates. Changes in medical technology, existing and
future legislation, regulations and interpretations and competitive contracting
for provider services by private and government payers may require changes in
our facilities, equipment, personnel, rates and/or services in the future.
The hospital industry and some of our hospitals continue to have
significant unused capacity. Inpatient utilization, average lengths of stay and
average inpatient occupancy rates continue to be negatively affected by
payer-required pre-admission authorization, utilization review, and payment
mechanisms to maximize outpatient and alternative health care delivery services
for less acutely ill patients. Admissions constraints, payer pressures and
increased competition are expected to continue. We will endeavor to meet these
challenges by expanding our facilities' outpatient services, offering
appropriate discounts to private payer groups, upgrading facilities and
equipment, and offering new programs and services.
We also face competition for acquisitions primarily from for-profit
hospital management companies as well as not-for-profit entities. Some of our
competitors have greater financial and other resources than us. Increased
competition for the acquisition of non-urban acute care hospitals could have an
adverse impact on our ability to acquire such hospitals on favorable terms.
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<PAGE> 44
PROPERTIES
In addition to our owned and leased hospitals, we own a 48,000 square foot
office building in Portland, Oregon and lease approximately 33,488 square feet
of office space for our corporate headquarters in Brentwood, Tennessee under a
seven-year lease that expires on March 31, 2005 and contains customary terms and
conditions. See "Business -- Owned and Leased Hospitals."
EMPLOYEES AND MEDICAL STAFF
As of March 1, 2000, we had 3,324 "full-time equivalent" employees,
including 32 corporate personnel and 125 management company personnel. The
remaining employees, most of whom are nurses and office personnel, work at the
hospitals. We consider relations with our employees to be good. Approximately
1.56% of our employees are represented by unions.
We typically do not employ physicians and, as of March 1, 2000, we employed
less than 10 practicing physicians. Certain of our hospital services, including
emergency room coverage, radiology, pathology and anesthesiology services, are
provided through independent contractor arrangements with physicians.
LITIGATION
We are involved in litigation arising in the ordinary course of business.
It is our opinion, after consultation with legal counsel, that these matters
will be resolved without material adverse effect on our consolidated financial
position or results of operations.
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<PAGE> 45
GOVERNMENT REIMBURSEMENT
Medicare/Medicaid Reimbursement
A significant portion of our revenue is dependent upon Medicare and
Medicaid payments. In recent years, fundamental changes in the Medicare and
Medicaid programs, including the implementation of a prospective payment system
for inpatient services at medical/surgical hospitals, have resulted in
limitations on, and reduced levels of payment and reimbursement for, a
substantial portion of hospital procedures and costs.
Under the prospective payment system, a hospital receives a fixed amount
for inpatient hospital services based on the established fixed payment amount
per discharge for categories of hospital treatment known as diagnosis related
group payments. Diagnosis related group payments do not consider a specific
hospital's costs, but are national rates adjusted for area wage differentials.
Psychiatric services, long-term care, rehabilitation, certain designated
research hospitals and distinct parts of rehabilitation and psychiatric units
within hospitals currently are exempt from the prospective payment system and
are reimbursed on a cost-based system, subject to specific reimbursement caps,
which are known as TEFRA limits.
For several years, the percentage increases to the diagnosis related group
payments 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
diagnosis related group payments rates is based on a price proxy, known as the
HCFA market basket index, reduced by Congressionally-mandated reduction factors.
The historical diagnostic related group rate increases were 1.1%, 1.5%, 2%, 0,
and .5% for federal fiscal years 1995, 1996, 1997, 1998 and 1999, respectively.
The Balanced Budget Act of 1997 set the diagnostic related group payment rates
of increase for future federal fiscal years at rates that will be based on the
market basket rates less reduction factors of 1.8% in 2000, and 1.1% in 2001 and
2002. We anticipate that future legislation may further decrease the rates of
increase for diagnosis related group payments, but we do not know the amount of
the final reduction.
Outpatient services provided by general hospitals are reimbursed by
Medicare at the lower of customary charges or Medicare's definition of cost,
subject to additional limits on the reimbursement of certain outpatient
services. The Balanced Budget Act of 1997 mandated the implementation of the
prospective payment system for Medicare outpatient services by January 1, 1999.
This outpatient prospective payment system will be based on a system of
Ambulatory Payment Categories. Each Ambulatory Payment Category will represent a
bundle of outpatient services, and each Ambulatory Payment Category will be
assigned a fully prospective reimbursement rate. Because final regulations
implementing the outpatient prospective payment system have not been
promulgated, we are not able to predict the full impact of this provision of the
Balanced Budget Act of 1997. The Health Care Financing Administration has
announced that the implementation of the outpatient prospective payment system
will be delayed until July 1, 2000 or later. The outpatient prospective payment
system will be further affected by changes mandated by the Medicare Balanced
Budget Refinement Act of 1999. In most cases, this legislation will lessen the
impact of reimbursement limitations imposed by the Balanced Budget Act of 1997.
For example, the Balanced Budget Refinement Act of 1999 increases Medicare
payments under the prospective payment system for hospital outpatient services
provided to certain high-cost outlier patients.
Medicare has special payment provisions for "Sole Community Hospitals." A
Sole Community Hospital is generally the only hospital in at least a 35-mile
radius or a 45-minute driving time radius. Colorado Plains Medical Center,
Colorado River Medical Center, Elko General Hospital, Lake Havasu Regional
Medical Center and Palo Verde Hospital qualify as Sole Community Hospitals under
Medicare regulations. Special payment provisions related to Sole Community
Hospitals include a higher diagnosis related group payments rate, which is based
on a blend of hospital-specific costs and the national diagnosis related group
payments rate; and a 90% payment "floor" for capital cost. In addition, the
CHAMPUS program has special payment provisions for hospitals recognized as Sole
Community Hospitals for Medicare purposes. The Balanced Budget Refinement Act of
1999 provides hospitals with greater flexibility to participate in Medicare as
Sole Community Hospitals. The Balanced Budget Refinement Act
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of 1999 also provides a payment increase for Sole Community Hospitals for fiscal
year 2001. For fiscal year 2001, the prospective payment system rate increase
for hospitals not qualifying as Sole Community Hospitals is the market basket
minus 1.1%. For Sole Community Hospitals, the prospective payment system rate
increase will be the market basket percentage increase.
Each state has its own Medicaid program that is funded jointly by such
state and the federal government. Federal law governs how each state manages its
Medicaid program, but there is wide latitude for states to customize Medicaid
programs to fit local needs and resources. As a result, each state Medicaid plan
has its own payment formula and recipient eligibility criteria.
The Balanced Budget Act of 1997 also repealed the Boren Amendment. The
Boren Amendment was enacted in 1980 and imposed several requirements on states
in their calculations of Medicaid rates. For example, the Boren Amendment
required states to pay providers rates that are "reasonable and adequate" to
meet the necessary costs of an efficiently operated facility. Although the full
effect of the repeal of the Boren Amendment is not yet known, the likely result
will be that states will begin setting lower Medicaid reimbursement rates than
they would have under Boren.
California Reimbursement
We own or lease four hospitals in California. The Medicaid program in
California, known as Medi-Cal, reimburses hospital inpatient costs on one of
three methods: (i) cost-based, subject to various limits known as MIRL/Peer
Group limits; (ii) negotiated rates per discharge or per diems for hospitals
under contract; or (iii) managed care initiatives, where payment rates tend to
be capitated and networks must be formed. Three of our four California hospitals
are cost-based for Medi-Cal and the other is paid under the negotiated contract
method. None of our cost-based hospitals is currently subject to a MIRL/Peer
Group limit because its cost per discharge has historically been below the
limit. There can be no assurance that this will remain the case in the future.
Medi-Cal currently has a managed care initiative that is primarily targeted at
urban areas. We do not expect that Medi-Cal will begin rural managed care
contracting in the near future.
Program Adjustments
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.
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HEALTH CARE REGULATION AND LICENSING
CERTAIN BACKGROUND INFORMATION
Health care, as one of the largest industries in the United States,
continues to attract much legislative interest and public attention. Medicare,
Medicaid, and other public and private hospital cost-containment programs,
proposals to limit health care spending, proposals to limit prices and industry
competitive factors are among the many factors that are highly significant to
the health care industry. In addition, the health care industry is governed by a
framework of federal and state laws, rules and regulations that are extremely
complex and for which the industry has the benefit of only limited regulatory or
judicial interpretation.
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 us. In addition, there are proposals to increase co-payments and
deductibles from program and private patients. Our 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 a decrease in 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 is required in
connection with the provision of care paid for by Medicare and Medicaid.
Utilization review by third parties also is 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 changes to private
health care insurance. Various states have applied, or are considering applying,
for a federal waiver from current Medicaid regulations to allow them to serve
some of their Medicaid participants through managed care providers. These
proposals also may attempt to include coverage for some people who presently are
uninsured, and generally could have the effect of reducing payments to
hospitals, physicians and other providers for the same level of service provided
under Medicaid.
CERTIFICATE OF NEED REQUIREMENTS
Some states require approval for purchase, construction and expansion of
health care facilities, including findings of need for additional or expanded
health care facilities or services. Certificates of need, 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. Two states in which we
currently own hospitals, Florida and Nevada, have certificate of need laws. In
addition, we may in the future buy additional hospitals in states that require
certificates of need. We are unable to predict whether our hospitals will be
able to obtain any certificates of need that may be necessary to accomplish
their business objectives in any jurisdiction where such certificates of need
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, prohibit certain business
practices and relationships that might influence the provision and cost of
health care services reimbursable under Medicaid or Medicare or other federal
health care programs, 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 statute 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 issued regulations that create safe
harbors under the anti-kickback statute. A given business arrangement that does
not fall within an enumerated safe harbor is not per se illegal; however,
business arrangements of health care services providers that fail to satisfy the
applicable safe harbor criteria risk increased scrutiny by enforcement
authorities. The Health Insurance Portability and Accountability Act of 1996,
which became effective January 1, 1997, added several new fraud and abuse laws.
These new laws cover all
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health insurance programs -- private as well as governmental. In addition, the
Health Insurance Portability and Accountability Act of 1996 broadened the scope
of certain fraud and abuse laws, such as the anti-kickback statute, to include
not just Medicare and Medicaid services, but all health care services reimbursed
under a federal or state health care program.
There is increasing scrutiny by law enforcement authorities, the Office of
Inspector General of the Department of Health and Human Services, the courts and
Congress of arrangements between health care providers and potential referral
sources to ensure that the arrangements are not designed as a mechanism to
exchange remuneration for patient care referrals and opportunities.
Investigators also have demonstrated a willingness to look behind the
formalities of a business transaction to determine the underlying purpose of
payments between health care providers and potential referral sources.
Enforcement actions have increased, as evidenced by recent highly publicized
enforcement investigations of certain hospital activities.
In addition, provisions of the Social Security Act prohibit physicians from
referring Medicare and Medicaid patients to providers of a broad range of
designated health services with which the physicians or their immediate family
members have ownership or certain other financial arrangements. Certain
exceptions are available for employment agreements, leases, physician
recruitment and certain other physician arrangements. These provisions are known
as the Stark laws and are named for the legislative sponsor, Rep. Pete Stark
(R-CA). A person making a referral, or seeking payment for services referred, in
violation of the Stark laws would be subject to the following sanctions:
- civil money penalties of up to $15,000 for each service;
- assessments equal to twice the dollar value for each service; and/or
- exclusion from participation in the Medicare program, which can subject
the person or entity to exclusion from participation in state health care
programs.
Further, if any physician or entity enters into an arrangement or scheme
that the physician or entity knows or should know has the principal purpose of
assuring referrals by the physician to a particular entity, and the physician
directly makes referrals to such entity, then such physician or entity could be
subject to a civil money penalty of up to $100,000. Many states have adopted or
are considering similar legislative proposals, some of which extend beyond the
Medicaid program, to prohibit the payment or receipt of remuneration for the
referral of patients and physician self-referrals regardless of the source of
the payment for the care.
ENVIRONMENTAL REGULATIONS
Our health care operations generate medical waste that must be disposed of
in compliance with federal, state and local environmental laws, rules and
regulations. Our operations, as well as our purchases and sales of facilities,
also are subject to various other environmental laws, rules and regulations.
HEALTH CARE FACILITY LICENSING REQUIREMENTS
Our 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. Our health care facilities hold all required
governmental approvals, licenses and permits. All licenses, provider numbers and
other permits or approvals required to perform our business operations are held
by our subsidiaries. All of our hospitals are fully accredited by the Joint
Commission on Accreditation of Health Care Organizations.
UTILIZATION REVIEW COMPLIANCE AND HOSPITAL GOVERNANCE
Our 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 peer review organization to carry out federally mandated
system of review of Medicare patient admissions, treatments and
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discharges in hospitals. Medical and surgical services and practices are
supervised extensively 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 our 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.
PROPOSED MEDICAL RECORDS PRIVACY LEGISLATION
The Health Insurance Portability and Accountability Act of 1996 directed
Congress to pass comprehensive health privacy legislation no later than August
21, 1999. In the event Congress failed to pass such legislation, the act
required the Secretary of Health and Human Services to issue regulations
designed to protect the privacy of individually identifiable health information.
Congress failed to pass the legislation, and on October 29, 1999, the Health and
Human Services issued a proposed set of standards to comply with the act's
mandate. The standards will apply to medical records created by health care
providers, hospitals, health plans and health care clearinghouses that are
either transmitted or maintained electronically and the paper printouts created
from these records. The proposed standards:
- increase consumer control over their medical records,
- mandate substantial financial penalties for violation of a patient's
right to privacy, and
- with a few exceptions, require that an individual's health care
information only be used for health purposes.
The proposed standards also require health care providers to implement and
enforce privacy policies to ensure compliance with the standards. The proposed
standards are not yet final, and may be modified prior to finalization. Until
the standards are finalized, we cannot know the extent of our costs for
implementing the requirements imposed by the regulations. We have appointed an
internal task force to study the proposed regulations' potential effects on our
business and to prepare us for compliance with the regulations.
CALIFORNIA SEISMIC STANDARDS
California enacted the Alfred E. Alquist Hospital Facilities Seismic Safety
Act in 1973 and substantially amended the Alquist Act in 1983 and 1995. The Act
requires that the California Building Standards Commission adopt earthquake
performance categories, seismic evaluation procedures, standards and timeframes
for upgrading certain facilities, and seismic retrofit building standards. These
regulations require hospitals to meet seismic performance standards to ensure
that they are capable of providing medical services to the public after an
earthquake or other disaster. The Building Standards Commission completed its
adoption of evaluation criteria and retrofit standards in 1998.
The Alquist Act requires that within three years after the Building
Standards Commission has adopted evaluation criteria and retrofit standards:
- certain hospitals must conduct seismic evaluations and submit these
evaluations to the Office of Statewide Health Planning and Development,
Facilities Development Division for its review and approval;
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<PAGE> 50
- hospitals must identify the most critical nonstructural systems that
represent the greatest risk of failure during an earthquake and submit
timetables to Office of Statewide Health Planning and Development,
Facilities Development Division for its review and approval; and
- regulated hospitals must prepare a plan and compliance schedule for each
regulated building demonstrating the steps a hospital will take to bring
the hospital buildings into compliance with the regulations and
standards.
We will be required to conduct engineering studies of our California
facilities to determine whether and to what extent modifications to our
facilities will be required. If significant modifications are required to comply
with the seismic standards, we could incur substantial capital costs. Compliance
plans, if necessary, must be filed with the State of California by 2002. Any
facilities currently not in compliance with the seismic regulations and
standards must be brought into compliance by 2008.
PROFESSIONAL LIABILITY
As part of our business, we are subject to claims of liability for events
occurring as part of the ordinary course of hospital operations. To cover these
claims, we maintain professional malpractice liability insurance and general
liability insurance in amounts that management believes to be sufficient for our
operations, although some claims may exceed the scope of the coverage in effect.
We also have a tail policy that transfers all risk for our professional
liability, and we maintain 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 adequate levels of insurance will
continue to be available at a reasonable price.
Through our typical hospital management contract, we attempt to protect
ourselves 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 us as an additional insured party on the
hospital's professional and comprehensive general liability policies. We also
maintain certain contingent liability policies designed to cover contingent
exposure Brim Hospitals, Inc. could incur under such management contracts. Our
management contracts generally provide for our indemnification by the hospital
against claims that arise out of hospital operations. However, there can be no
assurance the hospitals will maintain such insurance or that such indemnities
will be available.
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<PAGE> 51
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning our directors
and executive officers as of March 17, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Martin S. Rash....................... 45 Chairman of the Board, President, Chief Executive
Officer and Director
Richard D. Gore...................... 47 Vice Chairman of the Board, Chief Financial Officer and
Director
John M. Rutledge..................... 42 Executive Vice President and Chief Operating Officer
James Thomas Anderson................ 46 Senior Vice President of Acquisitions and Development
Howard T. Wall III................... 41 Senior Vice President, General Counsel and Secretary
Brenda B. Rector..................... 52 Vice President and Controller
Bruce V. Rauner...................... 44 Director
Joseph P. Nolan...................... 35 Director
A.E. Brim............................ 69 Director
David L. Steffy...................... 56 Director
Winfield C. Dunn..................... 72 Director
</TABLE>
Mr. Rash has served as the President, Chief Executive Officer and as a
director of our company since the Brim recapitalization in December 1996, and as
Chairman of the Board since May 1998. From February 1996 to December 1996, Mr.
Rash served as Chief Executive Officer of PHC of Delaware, Inc. Mr. Rash was
employed by Community Health Systems, Inc., an operator of non-urban acute care
hospitals, from 1986 to February 1996, and served as its Chief Operating Officer
from February 1994 to February 1996.
Mr. Gore has served as Chief Financial Officer of our company since the
Brim recapitalization in December 1996 and was named Vice Chairman of the Board
in December 1999. Mr. Gore also served as Executive Vice President of Province
from December 1996 to December 1999. From April 1996 to December 1996, Mr. Gore
served as Executive Vice President and Chief Financial Officer of PHC of
Delaware, Inc. Mr. Gore served as Vice President and Controller of Quorum Health
Group, Inc., a hospital management company, from February 1990 to April 1996.
Mr. Rutledge has served as Chief Operating Officer of our company since
December 1996 and was named Executive Vice President in December 1999. Mr.
Rutledge served as Senior Vice President of Province from December 1996 to
December 1999. From 1986 to October 1996, Mr. Rutledge served in several senior
management positions with Community Health Systems, Inc., most recently serving
as a Regional Vice President/Group Director from 1992 to October 1996.
Mr. Anderson has served as Senior Vice President of Acquisitions and
Development of our company since January 1998. From November 1993 to January
1998, Mr. Anderson served as a Vice President/Group Director of Community Health
Systems, Inc., and was its Operations Controller from September 1992 to November
1993. From April 1990 to September 1992, Mr. Anderson served as Chief Financial
Officer of Clarksville Memorial Hospital in Clarksville, Tennessee, and from
1984 to April 1990, he served as Chief Executive Officer of Harton Medical
Center in Tullahoma, Tennessee.
Mr. Wall has served as Senior Vice President, Secretary and General Counsel
of our company since September 1997. From 1990 to September 1997, Mr. Wall
served as a member of Waller Lansden Dortch & Davis, a law firm based in
Nashville, Tennessee, where he chaired the health care group.
Ms. Rector has served as Vice President and Controller of our company since
the Brim recapitalization in December 1996. From October 1996 to December 1996,
Ms. Rector served as Vice
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<PAGE> 52
President and Controller of PHC of Delaware, Inc. From October 1990 to October
1996, Ms. Rector served as a partner in Ernst & Young LLP's health care industry
practice.
Mr. Rauner has served as a director of our company since the Brim
recapitalization in December 1996, and served as Chairman of the Board, from
December 1996 to May 1998. He also served as a director of PHC of Delaware, Inc.
from its inception in February 1996 to December 1996. Mr. Rauner is the Managing
Principal of GTCR Golder Rauner, LLC and has been a Principal with Golder,
Thoma, Cressey, Rauner, Inc., a venture capital firm and the general partner of
Golder, Thoma, Cressey, Rauner Fund IV, L.P., since 1981. Mr. Rauner is also a
director of Lason, Inc., Polymer Group, Inc., Coinmach Laundry Corporation,
Esquire Communications Ltd. and Metamor Worldwide, Inc.
Mr. Nolan has served as a director of our company since the Brim
recapitalization in December 1996, and served as a director of PHC of Delaware,
Inc. from its inception in February 1996 to December 1996. Mr. Nolan is a
Principal of GTCR Golder Rauner, LLC and has been a Principal of Golder, Thoma,
Cressey, Rauner, Inc. since July 1996. Mr. Nolan joined Golder, Thoma, Cressey,
Rauner, Inc. in February 1994. From May 1990 to January 1994, Mr. Nolan served
as Vice President Corporate Finance at Dean Witter Reynolds Inc. Mr. Nolan is
also a director of Lason, Inc. and Esquire Communications Ltd.
Mr. Brim formed Brim, Inc. and has served as a director of our company
since its formation. He has served as Chairman Emeritus since December 1996.
From Province's formation until December 1996, he served as Chairman and Chief
Executive Officer of Brim, Inc.
Mr. Steffy has served as a director of our company since August 1997. Mr.
Steffy is a founder and director of Intensiva HealthCare Corporation, a
long-term acute care hospital company, Odyessy Healthcare Inc., a hospice health
care company and Arcadian Healthcare Management, an operator of rural health
care service networks. From 1985 to 1996, Mr. Steffy was Vice Chairman and
Director of Community Health Systems, Inc., a company he co-founded.
Dr. Dunn, a former Governor of the State of Tennessee, was appointed to the
board of directors of our company in February 2000. From 1979 to 1985, Dr. Dunn
served as Senior Vice-President, Government Affairs, for HCA. From 1987 to 1991,
Dr. Dunn served as Chairman of the Board of First Cumberland Bank. In 1993, Dr.
Dunn became Chairman of the Board of Medshares Management Group, Incorporated,
an owner and manager of home health care agencies.
Each director is elected to serve until their successor is elected at the
next annual meeting of shareholders or until their earlier death, resignation or
removal as provided in our bylaws. Our executive officers serve at the
discretion of the board of directors. There are no family relationships among
any of our directors or executive officers.
The board of directors has established three standing committees. The
compensation committee was appointed by the board of directors in January 1998
to administer our stock plans and recommend to the board of directors
compensation of our executive officers. During 1999, the compensation committee
was comprised of Messrs. Brim, Nolan and Michael Willis. Mr. Willis resigned
from the board of directors in January 2000. The compensation committee is
currently comprised of Messrs. Steffy and Dunn.
The audit committee was appointed by the board of directors in January 1998
to recommend the annual appointment of our auditors, with whom the audit
committee reviews the scope of audit and non-audit assignments and related fees,
accounting principles used by us in financial reporting, internal auditing
procedures and the adequacy of our internal control principles. During 1999, the
audit committee was comprised of Messrs. Willis and Steffy. Mr. Willis resigned
from the board of directors in January 2000. The audit committee is currently
comprised of Messrs. Steffy and Nolan.
The compliance committee was appointed by the board of directors in
February 2000 to oversee our corporate compliance program. See
"Business -- Regulatory Compliance Program." The compliance committee is
comprised of Messrs. Brim, Nolan and Dunn.
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<PAGE> 53
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to ownership of our
common stock as of March 17, 2000, by
- each person known by us to be the beneficial owner of more than 5% of our
common stock;
- each of our directors;
- our chief executive officer and four most highly compensated officers
other than the chief executive officer;
- all of our directors and executive officers as a group; and
- each stockholder selling shares in this offering.
To our knowledge, unless otherwise indicated, each stockholder listed below
has sole voting and investment power with respect to the shares beneficially
owned. We are unaware of any person other than those listed below that
beneficially owns more than 5% of the outstanding shares of our common stock.
Under Securities and Exchange Commission rules, the number of shares shown as
beneficially owned includes shares of common stock subject to options that
currently are exercisable or will be exercisable within 60 days of March 17,
2000. Shares of common stock subject to options that are currently exercisable
or will be exercisable within 60 days of March 17, 2000 are considered to be
outstanding for the purpose of determining the percentage of the shares held by
a holder, but not for the purpose of computing the percentage held by others.
We have granted an option to the underwriters to purchase up to an
aggregate of 603,015 shares of common stock to cover over-allotments, if any, of
which up to 162,000 shares may be sold by five additional stockholders of our
company not selling shares in this offering. Such shares will not be sold unless
the underwriters exercise their over-allotment option, and the table below
assumes that such over-allotment option will not be exercised. If the
underwriters exercise their over-allotment option in full, Martin S. Rash may
sell up to 60,000 shares, which would result in Mr. Rash beneficially owning
552,319 shares of common stock or 2.8% of the common stock outstanding
immediately following the offering; Richard D. Gore may sell up to 50,000
shares, which would result in Mr. Gore beneficially owning 404,647 shares of
common stock or 2.1% of the common stock outstanding immediately following the
offering; Howard T. Wall may sell up to 10,000 shares, which would result in Mr.
Wall beneficially owning 51,513 shares of common stock or less than 1% of the
common stock outstanding immediately following the offering; John M. Rutledge
may sell up to 40,000 shares, which would result in Mr. Rutledge beneficially
owning 162,476 shares of common stock or less than 1% of the common stock
outstanding immediately following the offering; and J. Thomas Anderson may sell
up to 2,000 shares, which would result in Mr. Anderson beneficially owning
80,184 shares of common stock or less than 1% of the common stock outstanding
immediately following the offering.
All computations are based on 15,774,096 shares of common stock outstanding
on March 17, 2000.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE SHARES TO OWNED AFTER THE
OFFERING BE SOLD OFFERING
SELLING AND 5% STOCKHOLDERS, ------------------- IN THE -------------------
DIRECTORS, OFFICERS NUMBER PERCENT OFFERING NUMBER PERCENT
- ---------------------------- --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
AMVESCAP PLC(1)
11 Devonshire Square
London EC2M 4YR
England....................................... 1,603,650 10.2% -- 1,603,650 8.3%
Putnam Investments, Inc.(2)
One Post Office Square
Boston, MA 02109.............................. 1,592,000 10.1 -- 1,592,000 8.2
J.&W. Seligman & Co. Incorporated(3)
100 Park Avenue
New York, NY 10017............................ 1,350,571 8.6 -- 1,350,571 7.0
</TABLE>
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<PAGE> 54
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE SHARES TO OWNED AFTER THE
OFFERING BE SOLD OFFERING
SELLING AND 5% STOCKHOLDERS, ------------------- IN THE -------------------
DIRECTORS, OFFICERS NUMBER PERCENT OFFERING NUMBER PERCENT
- ---------------------------- --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Chartwell Investment Partners(4)
1235 Westlakes Drive, Suite 330
Berwyn, PA 19312.............................. 819,592 5.2 -- 819,592 4.2
Golder, Thoma, Cressey, Rauner Fund IV, L.P.
6100 Sears Tower
Chicago, IL 60606............................. 501,258 3.2 400,000 101,258 *
Martin S. Rash(5)(13)........................... 612,319 3.9 -- 612,319 3.1
Bruce V. Rauner(6).............................. 554,909 3.5 -- 154,909 *
Joseph P. Nolan(7).............................. 512,432 3.2 -- 112,432 *
Richard D. Gore(8)(13).......................... 454,647 2.9 -- 454,647 2.3
John M. Rutledge(9)(13)......................... 202,476 1.3 -- 202,476 1.0
James T. Anderson(10)(13)....................... 82,184 * -- 82,184 *
Howard T. Wall III(11)(13)...................... 61,513 * -- 61,513 *
Winfield C. Dunn(13)............................ -- -- -- -- --
A.E. Brim(12)
305 N.E. 102d Ave
Portland, OR 97020............................ 49,043 * -- 49,043 *
David L. Steffy(13)(14)......................... 67,221 * -- 67,221 *
All executive officers and directors as a group
(10 persons)(15).............................. 2,149,764 13.2 -- 1,749,764 8.8
</TABLE>
- ---------------
* Less than 1%
(1) The number of shares listed as beneficially owned by AMVESCAP PLC includes
shares held by certain of its affiliates. Information is derived from a
Schedule 13G/A filed by AMVESCAP PLC with the Securities and Exchange
Commission on March 9, 2000.
(2) The number of shares listed as beneficially owned by Putnam Investments,
Inc. includes shares held by certain of its affiliates. Information is as
of December 31, 1999 and is derived from a Schedule 13G/A filed by Putnam
Investments, Inc. with the Securities and Exchange Commission on February
17, 2000.
(3) Includes shares owned directly by Mr. William C. Morris, owner of a
majority of the outstanding voting securities of J.&W. Seligman & Co.
Incorporated. Information is as of December 31, 1999 and is derived from a
Schedule 13G/A filed by J.&W. Seligman & Co. Incorporated with the
Securities and Exchange Commission on February 10, 2000.
(4) Information is as of December 31, 1998 and is derived from a Schedule 13G
filed by Chartwell Investment Partners with the Securities and Exchange
Commission on February 16, 1999.
(5) Includes 541,660 shares owned directly by Mr. Rash and options to purchase
70,659 shares granted under the 1997 stock option plan.
(6) Includes 501,258 shares held by Golder, Thoma, Cressey, Rauner Fund IV,
L.P. ("GTCR Fund IV") prior to this offering and 101,258 shares held by
GTCR Fund IV after this offering. GTCR Fund IV is selling 400,000 shares in
this offering. Golder, Thoma, Cressey, Rauner, Inc. ("GTCR") is the general
partner of GTCR IV, L.P., which in turn is the general partner of GTCR Fund
IV. As a principal of GTCR, Mr. Rauner may be deemed to share the power to
vote and dispose of the shares held by GTCR Fund IV. Mr. Rauner disclaims
beneficial ownership of the shares of common stock owned by GTCR Fund IV.
Mr. Rauner also owns 53,651 shares individually. The address of Mr. Rauner
is the same address shown for GTCR Fund IV.
(7) Includes 501,258 shares held by GTCR Fund IV prior to this offering, and
101,258 shares held by GTCR Fund IV after this offering. GTCR Fund IV is
selling 400,000 shares in this offering. GTCR is the general partner of
GTCR IV, L.P., which in turn is the general partner of GTCR Fund IV. As a
principal of GTCR, Mr. Nolan may be deemed to share the power to vote and
dispose of the shares held by GTCR Fund IV. Mr. Nolan disclaims beneficial
ownership of the shares of Common
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<PAGE> 55
Stock owned by GTCR Fund IV. Mr. Nolan also owns 11,174 shares
individually. The address for Mr. Nolan is the same address shown for GTCR
Fund IV.
(8) Includes options to purchase 59,185 shares granted under the 1997 stock
option plan.
(9) Includes options to purchase 161,387 shares granted under the 1997 stock
option plan.
(10) Includes options to purchase 54,184 shares granted under the 1997 stock
option plan.
(11) Includes options to purchase 61,513 shares granted under the 1997 stock
option plan.
(12) Includes 40,046 shares held of record by Brim Capital Corporation, and
options owned by Mr. Brim individually to purchase 8,997 shares under the
1997 stock option plan.
(13) The address of each of Messrs. Rash, Gore, Anderson, Rutledge, Steffy, Dunn
and Wall is 105 Westwood Place, Suite 400, Nashville, TN 37027.
(14) Includes options to purchase 7,221 shares granted under the 1997 stock
option plan.
(15) Includes options to purchase 476,514 shares granted under the 1997 stock
option plan.
STOCKHOLDERS AGREEMENT AND SENIOR MANAGEMENT AGREEMENTS
In connection with the Brim recapitalization, and in addition to becoming
parties to the stockholders agreement, dated December 17, 1996, Messrs. Rash and
Gore entered into senior management agreements with our company, Golder, Thoma,
Cressey, Rauner Fund IV, L.P. and Leeway & Co. These executive agreements
provide that a portion of the common stock purchased by each of Messrs. Rash and
Gore is subject to vesting. Upon completion of our initial public offering in
February 1998, 50% of the shares eligible to vest became vested, and the
remaining shares eligible to vest will become vested in equal installments on
the first three anniversaries of the completion of the offering. Unvested shares
are subject to repurchase by us or, if we do not elect to repurchase such
shares, by Golder, Thoma, Cressey, Rauner Fund IV, L.P., at their original cost
upon termination of executive's employment with us for any reason. For purposes
of determining earnings per share, 100% of the common stock purchased by Messrs.
Rash and Gore is considered outstanding. The executive agreements entitle us and
Golder, Thoma, Cressey, Rauner Fund IV, L.P. to repurchase from each of Messrs.
Rash and Gore upon the termination of his employment any Junior Preferred Stock
and vested common stock at a price equal to fair market value and any unvested
common stock at a price equal to original cost. The stockholders agreement
entitles us and Golder, Thoma, Cressey, Rauner Fund IV, L.P. to repurchase
shares of the common stock and Junior Preferred Stock from an employee
stockholder upon the termination of such employee's employment by us at a price
equal to fair market value. The stockholders agreement and the executive
agreements also contain restrictions on the transfer of Province's securities.
Pursuant to the stockholders agreement, the stockholders agree to consent to and
participate in any sale of our company approved by the board of directors and by
the holders of a majority of the common stock. The stockholders agreement and
the portions of the executive agreements which restrict the transfer of our
securities were terminated in February 1998 in connection with our initial
public offering. All shares to which Mr. Rash and Mr. Gore were entitled have
become fully vested.
REGISTRATION AGREEMENT
In connection with the Brim recapitalization, the stockholders of Brim,
Inc. at such time entered into a registration agreement with Brim, Inc. The
registration agreement provides for certain demand registration rights to the
stockholders party thereto and to subsequent holders of the common stock
acquired by the stockholders party thereto in connection with the Brim
recapitalization. The demand registration rights commenced from and after the
180th day after the closing of our initial public offering. The holders of a
majority of the registrable securities held by the stockholders party thereto,
other than Leeway & Co., are entitled to request two long-form registrations in
which we pay all registration expenses. Such holders are also entitled to
request an unlimited number of long-form registrations in which holders of
registrable securities pay their pro-rata share of registration expenses. The
holders of a majority of the registrable securities held by Leeway & Co. are
entitled to request one long-form registration in which we pay all registration
expenses and an unlimited number of long-form registrations in which the holders
of registrable securities pay their share of registration expenses. We are
entitled to postpone a demand registration for up to one year under certain
circumstances, and we are not required to effect a
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<PAGE> 56
demand registration within one year of a previous registration in which holders
of registrable securities participated without reduction of the number of their
included shares.
The registration agreement also provides that, subject to certain
limitations, the stockholders party thereto and their permitted transferees may
request inclusion of their shares in a registration of equity securities by us,
other than pursuant to a demand registration. Expenses incurred in connection
with the exercise of such piggyback registration rights are borne by us.
Each of the stockholders party to the registration agreement, other than
those identified in this prospectus as selling shares of common stock in this
offering or pursuant to the underwriters' over-allotment option, have waived
their right to include their shares in this offering.
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<PAGE> 57
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 25,000,000 shares of common stock,
par value $0.01 per share; and 175,000 shares of preferred stock, of which
25,000 shares have been designated as Series A Senior Preferred Stock, no par
value; and 50,000 shares have been designated as Series B Junior Preferred
Stock, no par value. As of March 17, 2000, there were 15,774,096 shares of
common stock outstanding held of record by 313 stockholders, and no shares of
preferred stock outstanding. We believe our common stock is beneficially held by
more than 400 individual stockholders. The following description of our capital
stock and provisions of our certificate of incorporation and bylaws are only
summaries and we encourage you to review complete copies of our certificate of
incorporation and bylaws, which we have previously filed with the Securities and
Exchange Commission.
COMMON STOCK
Holders of our common stock are entitled to receive, as, when and if
declared by our board of directors, dividends and other distributions in cash,
stock or property from our assets or funds legally available for those purposes
subject to any dividend preferences that may be attributable to preferred stock.
Holders of common stock are entitled to one vote for each share held of record
on all matters on which stockholders may vote. Holders of common stock are not
entitled to cumulative voting for the election of directors. There are no
preemptive, conversion, redemption or sinking fund provisions applicable to our
common stock. All outstanding shares of common stock are fully paid and
non-assessable. In the event of our liquidation, dissolution or winding up,
holders of common stock are entitled to share ratably in the assets available
for distribution, subject to any prior rights of any holders of preferred stock
then outstanding.
PREFERRED STOCK
All outstanding shares of our Series A Senior Preferred Stock and Series B
Junior Preferred Stock have been redeemed and may not be reissued or resold.
With respect to the remaining 100,000 authorized shares of preferred stock, our
board of directors may from time to time, without stockholder approval,
designate one or more series of preferred stock with dividend rates, redemption
prices, preferences on liquidation or dissolution, conversion rights, voting
rights and any other preferences, which rights and preferences could adversely
affect the voting power of the holders of common stock. Issuances of preferred
stock could:
- restrict the payment of dividends on common stock if dividends on the
preferred stock have not been paid in full;
- dilute the voting power and equity interests of holders of common stock
to the extent the preferred stock is convertible into common stock or has
voting rights; or
- prevent the holders of common stock from participating in the
distribution of our assets upon liquidation until any liquidation
preferences held by the holders of preferred stock are satisfied.
In addition, issuances of preferred stock could make it harder for a third
party to acquire, or could discourage or delay a third party from acquiring, a
majority of our outstanding common stock.
DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS MAY HAVE
AN ANTI-TAKEOVER EFFECT
Provisions in our certificate of incorporation, bylaws and Delaware law
could make it harder for someone to acquire us through a tender offer, proxy
contest or otherwise. We are governed by the provisions of Section 203 of the
Delaware General Corporate Law, which provides that a person who owns (or within
three years, did own) 15% or more of a company's voting stock is an "interested
stockholder." Section 203 prohibits a public Delaware corporation from engaging
in a business combination with an
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<PAGE> 58
interested stockholder for a period commencing three years from the date in
which the person became an interested stockholder unless:
- the board of directors approved the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owns at
least 85% of the voting stock of the corporation (excluding shares owned
by officers, directors, or certain employee stock purchase plans); or
- at or subsequent to the time the transaction is approved by the board of
directors, there is an affirmative vote of at least 66.66% of the
outstanding voting stock.
Section 203 could prohibit or delay mergers or other takeover attempts
against us, and accordingly, may discourage attempts to acquire us through
tender offer, proxy contest or otherwise.
Our certificate of incorporation and bylaws include certain restrictions on
who may call a special meeting of stockholders and prohibit certain actions by
written consent of the holders of common stock. These provisions could delay,
deter or prevent a future takeover or acquisition of us unless such takeover or
acquisition is approved by the board of directors.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our certificate of incorporation limits the liability of directors to the
fullest extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except for liability for:
- breach of the director's duty of loyalty;
- acts or omissions not in good faith, intentional misconduct or a knowing
violation of the law;
- the unlawful payment of a dividend or unlawful stock purchase or
redemption; and
- any transaction from which the director derives an improper personal
benefit.
This provision, however, has no effect on the availability of equitable
remedies such as an injunction or recision. Additionally, this provision will
not limit liability under state or federal securities laws.
The certificate of incorporation also provides that we shall indemnify our
officers and directors to the fullest extent permitted by such law. We believe
that these provisions will assist us in attracting and retaining qualified
individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is First Union
National Bank. Its address is 1525 West WT Harris Boulevard, Building 3C3,
Charlotte, NC 28262-1153, and its telephone number at this location is (704)
590-7385.
57
<PAGE> 59
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse First
Boston Corporation, Deutsche Bank Securities Inc., First Union Securities, Inc.,
FleetBoston Robertson Stephens Inc. and Warburg Dillon Read LLC are acting as
representatives of the underwriters named below. Subject to the terms and
conditions described in a purchase agreement among us, the selling stockholders
and each of the underwriters, we and the selling stockholders have agreed to
sell to the underwriters, and the underwriters severally have agreed to purchase
from us and the selling stockholders, the number of shares listed opposite their
names below.
<TABLE>
<CAPTION>
NUMBER
OF SHARES
UNDERWRITER ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Credit Suisse First Boston Corporation......................
Deutsche Bank Securities Inc................................
First Union Securities, Inc.................................
FleetBoston Robertson Stephens Inc..........................
Warburg Dillon Read LLC.....................................
----------
Total.......................................... 4,020,100
==========
</TABLE>
The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of these shares are purchased. If an underwriter
defaults, the purchase agreement provides that the purchase commitments of the
non-defaulting underwriters may be increased or the purchase agreements may be
terminated.
We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, or to contribute to payments the underwriters may be required to make in
respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us and the selling stockholders that the
underwriters propose initially to offer the shares of our common stock to the
public at the offering price on the cover page of this prospectus and to dealers
at the price less a concession not in excess of $ per share. The
underwriters may allow, and the dealers may reallow, a discount not in excess of
$ per share to other dealers. After the offering, the public offering
price, concession and discount may be changed.
The following table shows the public offering price, underwriting discount
and proceeds before expenses to us and the selling stockholders. The information
assumes either no exercise or full exercise by the underwriters of their
over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.......................... $ $ $
Underwriting discount.......................... $ $ $
Proceeds, before expenses to Province.......... $ $ $
Proceeds, before expenses, to the
selling stockholders......................... $ $ $
</TABLE>
58
<PAGE> 60
The expenses of the offering, not including the underwriting discount, are
estimated at $0.6 million and are payable by Province.
OVER-ALLOTMENT OPTION
We have granted an option to the underwriters to purchase up to an
aggregate of 603,015 shares of common stock to cover over-allotments, if any, of
which up to 162,000 shares may be sold by five additional stockholders of our
company not selling shares in this offering. The underwriters may exercise this
option for 30 days from the date of this prospectus solely to cover any
over-allotments. If the underwriters exercise this option, each will be
obligated, subject to conditions contained in the purchase agreement, to
purchase a number of additional shares proportionate to that underwriter's
initial amount reflected in the above table.
NO SALES OF SIMILAR SECURITIES
We, the selling stockholders and our executive officers and directors have
agreed not to sell or transfer any common stock for 90 days after the date of
this prospectus without first obtaining the written consent of Merrill Lynch.
Specifically, we and these other individuals have agreed not directly or
indirectly to:
- offer, pledge, sell or contract to sell any common stock;
- sell any option or contract to purchase any common stock;
- purchase any option or contract to sell any common stock;
- grant any option, right or warrant for the sale of any common stock;
- lend or otherwise dispose of or transfer any common stock;
- request or demand that we file a registration statement related to the
common stock; or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common stock. It also
applies to common stock owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition. The restrictions described above do not apply to the sale
of shares by certain stockholders to the underwriters solely to cover
over-allotments in this offering.
QUOTATION ON THE NASDAQ NATIONAL MARKET
Our shares are quoted on the Nasdaq National Market under the symbol
"PRHC."
NASD REGULATIONS
Because more than 10% of the proceeds of this offering, not including
underwriting compensation, will be received by entities who are affiliated with
National Association of Securities Dealers, Inc. members who are participating
in this offering, this offering is being conducted in compliance with the NASD
Conduct Rule 2710(c)(8). Pursuant to that rule, the appointment of a qualified
independent underwriter is not necessary in connection with this offering, as a
bona fide independent market (as defined in the NASD Conduct Rules) exists in
the common shares.
PRICE STABILIZATION, SHORT POSITIONS
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit underwriters from bidding for and
purchasing our common stock. However, the underwriters may engage in
transactions that stabilize the price of the common stock, such as bids or
purchases to peg, fix or maintain that price.
59
<PAGE> 61
If the underwriters create a short position in our common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the underwriters may reduce that short position by
purchasing shares in the open market. The underwriters may also elect to reduce
any short position by exercising all or part of the over-allotment option
described above. Purchases of the common stock to stabilize its price or to
reduce a short term position may cause the price of the common stock to be
higher than it might be in the absence of such purchases.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the representatives
or the lead managers will engage in these transactions or that these
transactions, once commenced, will not be discontinued without notice.
PASSIVE MARKET MAKING
In connection with this offering, underwriters and selling group members
may engage in passive market making transactions in the common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Exchange Act during a period before the commencement of offers or sales of
common stock and extending through the completion of distribution. A passive
market maker must display its bid at a price not in excess of the highest
independent bid of that security. However, if all independent bids are lowered
below the passive market maker's bid, that bid must then be lowered when
specified purchase limits are exceeded.
OTHER RELATIONSHIPS
Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings in the
ordinary course of business with us. They have received customary fees and
commissions for these transactions.
Credit Suisse First Boston Corporation, FleetBoston Robertson Stephens Inc.
and First Union Securities, Inc., each one of the underwriters, are each an
affiliate of a lender under our revolving credit facility. Such affiliates of
Credit Suisse First Boston Corporation, FleetBoston Robertson Stephens Inc. and
First Union Securities, Inc. will receive their proportionate share of the
repayment by us of amounts outstanding under our revolving credit facility from
the net proceeds of this offering. See "Use of Proceeds."
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares offered
hereby will be passed upon for Province by Waller Lansden Dortch & Davis, A
Professional Limited Liability Company, Nashville, Tennessee. Certain legal
matters in connection with the validity of the shares of common stock offered
hereby will be passed upon for the underwriters by Shearman & Sterling.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and 1999, and for each of the three
years in the period ended December 31, 1999, as set forth in their report. We
have included our financial statements in the prospectus and the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
The audited combined financial statements of Doctors' Hospital of Opelousas
and certain affiliated entities are included in our Form 8-K/A dated August 16,
1999, which is incorporated by reference in the prospectus and the registration
statement. Ernst & Young LLP, independent auditors, have audited these combined
financial statements as of and for the year ended December 31, 1998, as set
forth in their report,
60
<PAGE> 62
which is incorporated by reference in the prospectus and the registration
statement. The combined financial statements are incorporated by reference in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
The audited combined financial statements of Minden Medical Center and
Trinity Valley Medical Center including certain medical office buildings and
other health care businesses related to the operations of these hospitals
(collectively, the Tenet Province Hospitals) as of and for the year ended May
31, 1999 are included in our Form 8-K/A dated December 17, 1999, and have been
incorporated by reference herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants, which is
incorporated by reference herein and upon the authority of said firm as experts
in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file reports, proxy statements and other information with the Securities
and Exchange Commission. Our SEC filings are also available over the Internet at
the SEC's website at http://www.sec.gov. You may also read and copy any document
we file at the SEC's public reference rooms in Washington, D.C., New York, New
York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for more
information on the public reference rooms and their copy charges. Reports and
other information concerning us can also be inspected at the offices of Nasdaq,
33 Whitehall Street, New York, New York 10004-2193.
We have filed a registration statement on Form S-3 with the SEC covering
the common stock. For further information on Province and the securities we are
offering in this prospectus, you should refer to our registration statement, its
exhibits and the documents incorporated by reference therein. This prospectus
summarizes material provisions of contracts and other documents that we refer
you to. Since this prospectus may not contain all the information that you may
find important, you should review the full text of those documents.
You should rely only on the information contained and incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not, and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information appearing in this prospectus, as well as
information we previously filed with the SEC and incorporated by reference, is
accurate only as of the date on the front cover of this prospectus. Our
business, financial condition, results of operations and prospects may have
changed since that date.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with the SEC, which means:
- incorporated documents are considered part of the prospectus;
- we can disclose important information to you by referring you to those
documents; and
- information that we file later with the SEC will automatically update and
supercede this information.
We incorporate by reference the documents listed below which we filed with
the SEC under the Securities Exchange Act of 1934:
- our Annual Report on Form 10-K for the fiscal year ended December 31,
1999;
- our Current Report on Form 8-K, filed on June 17, 1999, as amended on
August 16, 1999 (with respect only to the combined financial statements
of Doctors' Hospital of Opelousas and certain affiliated entities as of
and for the fiscal year ended December 31, 1998);
61
<PAGE> 63
- our Current Report on Form 8-K, filed on October 18, 1999, as amended on
December 17, 1999 (with respect only to the combined financial statements
of Minden Medical Center and Trinity Valley Medical Center including
certain medical office buildings and other healthcare businesses related
to the operations of these hospitals (collectively, the Tenet Province
Hospitals) as of and for the fiscal year ended May 31, 1999);
- our Current Report on Form 8-K, filed on March 2, 2000 (with respect to
our acquisition of City of Ennis Hospital in Ennis, Texas);
- our Current Report on Form 8-K, filed on April 4, 2000 (with respect to
our announcement that we have entered into a long-term lease agreement
for the Bolivar Medical Center).
You may request a copy of these filings, at no cost, by writing or
telephoning our Corporate Secretary at the following address:
Province Healthcare Company
105 Westwood Place
Suite 400
Brentwood, Tennessee 37027
Attention: Corporate Secretary
(615) 370-1377
We also incorporate by reference each of the following documents that we
will file with the SEC on or after the date of the filing of this registration
statement and prior to its effectiveness or after the date of this prospectus
but before all the common stock offered by this prospectus has been sold:
- reports filed under Sections 13(a) and (c) of the Securities Exchange Act
of 1934;
- definitive proxy or information statements filed under Section 14 of the
Securities Exchange Act of 1934 in connection with any subsequent
stockholders' meeting; and
- any reports filed under Section 15(d) of the Securities Exchange Act of
1934.
Such documents will become a part of this prospectus from the date such document
is filed.
Any statement contained in this prospectus or in a document incorporated by
reference are modified or superseded for purposes of this prospectus to the
extent that a statement contained in any such document modifies or supersedes
such statement. Any such statement so modified or superseded shall be deemed, as
so modified or superseded, to constitute a part of this prospectus.
62
<PAGE> 64
INDEX TO FINANCIAL STATEMENTS
The following financial statements are included as a separate section of
this prospectus:
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets At December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1998 and 1999.......................... F-4
Consolidated Statements of Changes in Common Stockholders'
Equity for the Years Ended December 31, 1997, 1998 and
1999...................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 65
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Province Healthcare Company
We have audited the accompanying consolidated balance sheets of Province
Healthcare Company and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of income, changes in common stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Province
Healthcare Company and subsidiaries as of December 31, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
Nashville, Tennessee
February 22, 2000
F-2
<PAGE> 66
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,113 $ --
Accounts receivable, less allowance for doubtful accounts
of $9,033 in 1998 and $16,494 in 1999.................. 53,126 88,866
Inventories............................................... 7,083 11,122
Prepaid expenses and other................................ 10,211 6,534
-------- --------
Total current assets.............................. 72,533 106,522
Property, plant and equipment, net.......................... 112,114 186,129
Cost in excess of net assets acquired, net.................. 142,017 193,904
Other....................................................... 12,713 15,658
-------- --------
154,730 209,562
-------- --------
$339,377 $502,213
======== ========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,786 $ 14,927
Accrued salaries and benefits............................. 8,655 10,790
Accrued expenses.......................................... 4,583 14,558
Current maturities of long-term obligations............... 1,797 2,223
-------- --------
Total current liabilities......................... 21,821 42,498
Long-term obligations, less current maturities.............. 134,301 259,992
Third-party settlements..................................... 3,502 4,597
Other liabilities........................................... 9,862 9,997
Minority interest........................................... 700 770
-------- --------
148,365 275,356
Common stockholders' equity:
Common stock -- $0.01 par value; 25,000,000 shares
authorized; issued and outstanding 15,704,578 shares
and 15,742,048 shares at December 31, 1998 and 1999,
respectively........................................... 157 157
Additional paid-in-capital................................ 162,926 163,593
Retained earnings......................................... 6,108 20,609
-------- --------
169,191 184,359
-------- --------
$339,377 $502,213
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 67
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenue:
Net patient service revenue............................... $149,296 $217,364 $323,319
Management and professional services...................... 11,517 11,885 13,319
Reimbursable expenses..................................... 6,674 6,520 6,668
Other..................................................... 3,040 3,086 3,386
-------- -------- --------
Net operating revenue............................. 170,527 238,855 346,692
Expenses:
Salaries, wages and benefits.............................. 66,172 94,970 139,183
Reimbursable expenses..................................... 6,674 6,520 6,668
Purchased services........................................ 23,242 28,250 39,454
Supplies.................................................. 16,574 24,252 38,931
Provision for doubtful accounts........................... 12,812 17,839 25,572
Other operating expenses.................................. 16,318 19,149 30,222
Rentals and leases........................................ 4,888 5,777 7,201
Depreciation and amortization............................. 7,557 13,409 19,734
Interest expense.......................................... 8,121 10,555 13,901
Minority interest......................................... 329 155 166
Loss on sale of assets.................................... 115 45 11
-------- -------- --------
Total expenses.................................... 162,802 220,921 321,043
-------- -------- --------
Income before income taxes.................................. 7,725 17,934 25,649
Income taxes................................................ 3,650 7,927 11,148
-------- -------- --------
Net income.................................................. 4,075 10,007 14,501
Preferred stock dividends and accretion..................... (5,077) (696) --
-------- -------- --------
Net income (loss) to common shareholders.................... $ (1,002) $ 9,311 $ 14,501
======== ======== ========
Basic earnings per common share:
Net income (loss) to common shareholders.................. $ (0.17) $ 0.70 $ 0.92
======== ======== ========
Diluted earnings per common share:
Net income (loss) to common shareholders.................. $ (0.17) $ 0.68 $ 0.91
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 68
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
-------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
---------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996................. 5,370,500 $ 1,680 $ -- $(2,170) $ (490)
Issuance of stock.......................... 960,114 436 -- -- 436
Preferred stock dividends and accretion.... -- -- -- (5,077) (5,077)
Net income................................. -- -- -- 4,075 4,075
---------- ------- -------- ------- --------
Balance at December 31, 1997................. 6,330,614 2,116 -- (3,172) (1,056)
Reincorporation............................ -- (2,053) 2,053 -- --
Conversion of junior preferred stock and
initial public offering of common
stock................................... 6,679,154 67 95,285 (31) 95,321
Issuance of stock from follow-on stock
offering................................ 2,685,500 27 65,500 -- 65,527
Exercise of stock options.................. 9,310 -- 88 -- 88
Preferred stock dividends and accretion.... -- -- -- (696) (696)
Net income................................. -- -- -- 10,007 10,007
---------- ------- -------- ------- --------
Balance at December 31, 1998................. 15,704,578 157 162,926 6,108 169,191
Exercise of stock options.................. 26,648 -- 241 -- 241
Stock option compensation expense.......... -- -- 53 -- 53
Income tax benefit from stock options
exercised............................... -- -- 126 -- 126
Issuance of common stock from employee
stock purchase plan..................... 10,822 -- 247 -- 247
Net income................................. -- -- -- 14,501 14,501
---------- ------- -------- ------- --------
Balance at December 31, 1999................. 15,742,048 $ 157 $163,593 $20,609 $184,359
========== ======= ======== ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 69
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 4,075 $ 10,007 $ 14,501
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 7,557 13,409 19,734
Provision for doubtful accounts........................ 12,812 17,839 25,572
Deferred income taxes.................................. 4,677 862 1,428
Provision for professional liability................... 36 (54) (1,597)
Loss on sale of assets................................. 115 45 11
Other.................................................. -- -- (357)
Changes in operating assets and liabilities, net of
effects from acquisitions and disposals:
Accounts receivable............................... (20,885) (33,775) (51,886)
Inventories....................................... (712) (1,524) (1,396)
Prepaid expenses and other........................ (3,833) (3,472) 4,372
Other assets...................................... (2,256) (4,716) (4,810)
Accounts payable and accrued expenses............. (2,449) (401) 12,464
Accrued salaries and benefits..................... 860 (1,582) (234)
Third-party settlements........................... (1,924) (1,178) 1,095
Other liabilities................................. 1,089 391 145
-------- --------- ---------
Net cash provided by (used in) operating activities....... (838) (4,149) 19,042
INVESTING ACTIVITIES
Purchase of property, plant and equipment................. (15,557) (15,545) (20,890)
Purchase of acquired companies, net of cash received...... (2,673) (130,842) (119,236)
-------- --------- ---------
Net cash used in investing activities..................... (18,230) (146,387) (140,126)
FINANCING ACTIVITIES
Proceeds from long-term debt.............................. 12,000 248,042 186,045
Repayments of debt........................................ (4,143) (204,638) (67,562)
Issuance of common stock.................................. 436 142,682 488
Issuance of preferred stock............................... 3,705 -- --
Repurchase of common stock................................ -- (14,884) --
Redemption of senior preferred stock...................... -- (22,739) --
-------- --------- ---------
Net cash provided by financing activities................. 11,998 148,463 118,971
-------- --------- ---------
Net decrease in cash and cash equivalents................... (7,070) (2,073) (2,113)
Cash and cash equivalents at beginning of period.......... 11,256 4,186 2,113
-------- --------- ---------
Cash and cash equivalents at end of period................ $ 4,186 $ 2,113 $ --
======== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid during the period........................... $ 7,143 $ 9,260 $ 13,253
======== ========= =========
Income taxes paid during the period....................... $ 5,639 $ 5,055 $ 9,410
======== ========= =========
ACQUISITIONS
Assets acquired........................................... $ 6,811 $ 133,683 $ 131,912
Liabilities assumed....................................... (4,138) (2,841) (12,676)
-------- --------- ---------
Cash paid, net of cash acquired........................... $ 2,673 $ 130,842 $ 119,236
======== ========= =========
NONCASH TRANSACTIONS
Dividends and accretion................................... $ 5,077 $ 696 $ --
======== ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 70
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION
Province Healthcare Company (the "Company") was founded on February 2,
1996, and is engaged in the business of owning, leasing and managing hospitals
in non-urban communities, principally in the northwestern and southwestern
United States.
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 1999 presentation. These reclassifications had no
effect on net income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents include all highly liquid investments with an original
maturity of three months or less when acquired. The Company places its cash in
financial institutions that are federally insured and limits the amount of
credit exposure with any one financial institution.
PATIENT ACCOUNTS RECEIVABLE
The Company's primary concentration of credit risk is patient accounts
receivable, which consist of amounts owed by various governmental agencies,
insurance companies and private patients. The Company manages the receivables by
regularly reviewing its accounts and contracts and by providing appropriate
allowances for uncollectible amounts. Significant concentrations of gross
patient accounts receivable at December 31, 1998 and 1999, consist of
receivables from Medicare of 35% and 25%, respectively, and Medicaid of 12% and
10%, respectively. Concentration of credit risk relating to accounts receivable
is limited to some extent by the diversity and number of patients and payors.
INVENTORIES
Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated on the basis of cost. Routine
maintenance and repairs are charged to expense as incurred. Expenditures that
increase values, change capacities or extend useful lives are capitalized.
Depreciation is computed by the straight-line method over the estimated useful
lives of the assets, which range from 3 to 40 years. Amortization of equipment
under capital leases is included in the provision for depreciation.
F-7
<PAGE> 71
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 15 to 35
years for cost in excess of net assets acquired.
At December 31, 1998 and 1999, cost in excess of net assets acquired
totaled $147,654,000 and $204,957,000, respectively, and accumulated
amortization totaled $5,637,000 and $11,053,000, respectively. The carrying
value of cost in excess of net assets acquired is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
cost in excess of net assets acquired will not be recoverable based on
undiscounted cash flows of the related assets, the Company writes down the cost
in excess of net assets acquired to estimated fair value.
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, 1998 and 1999, deferred loan costs totaled $4,487,000 and $5,242,000,
respectively, and accumulated amortization totaled $1,637,000 and $2,384,000,
respectively.
RISK MANAGEMENT
The Company maintains self-insured medical and dental plans for employees.
Claims are accrued under these plans as the incidents that give rise to them
occur. Unpaid claim accruals are based on the estimated ultimate cost of
settlement, including claim settlement expenses, in accordance with an average
lag time and past experience. The Company has entered into a reinsurance
agreement with an independent insurance company to limit its losses on claims.
Under the terms of this agreement, the insurance company will reimburse the
Company a maximum of $900,000 on any individual claim. These reimbursements are
included in salaries, wages and benefits in the accompanying consolidated
statements of income.
At December 31, 1999, the Company purchased a tail policy in the commercial
insurance market to transfer all risk for its professional liability.
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 as services are rendered at the
estimated net realizable amounts from patients, third-party payors, and others
for services rendered, including estimated retroactive adjustments under
reimbursement agreements with third-party payors. Estimated settlements under
third-party reimbursement agreements are accrued in the period the related
services are rendered and adjusted in future periods as final settlements are
determined.
MANAGEMENT AND PROFESSIONAL SERVICES
Management and professional services is comprised of fees from management
and professional services provided to third-party hospitals pursuant to
management contracts and consulting arrangements. The base fees associated with
the hospital management contracts are determined in the initial year of the
contract on an individual hospital basis. In certain contracts, the Company is
entitled to a yearly bonus based on the performance of the managed hospital. The
base fee, which is fixed, is based on a fair market
F-8
<PAGE> 72
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
wage and is not dependent on any bonus structure. The management contracts are
adjusted yearly based on an agreed upon inflation indicator. The reimbursable
expenses relate to salaries and benefits of Company employees that serve as
executives at the managed hospitals. The salaries and benefits of these
employees are legal obligations of, and are paid by, the Company and are
reimbursed by the managed hospitals. Fees are recognized as revenue as services
are performed. The Company does not maintain any ownership interest in and does
not fund operating losses or guarantee any minimum income for 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 employee stock option
grants in accordance with Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and accordingly, recognizes no compensation
expense for the stock option grants when the exercise price of the options
equals, or is greater than, the market price of the underlying stock on the date
of grant.
INTEREST RATE SWAP AGREEMENTS
The Company enters into interest rate swap agreements as a means of
managing its interest rate exposure. The differential to be paid or received is
recognized over the life of the agreement as an adjustment to interest expense.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued, and was required to be adopted in years
beginning after June 15, 1999. In June 1999, SFAS No. 137 was issued, deferring
the effective date of SFAS no. 133 for one year. This statement requires all
derivatives to be recorded on the balance sheet at fair value. This results in
the offsetting changes in fair values or cash flows of both the hedge and the
hedged item being recognized in earnings in the same period. Changes in fair
value of derivatives not meeting the Statement's hedge criteria are included in
income. The Company expects to adopt the new Statement January 1, 2001, and does
not expect the adoption of the Statement to have a significant effect on its
results of operations or financial position.
3. ACQUISITIONS
COLORADO RIVER MEDICAL CENTER
In August 1997, the Company acquired Colorado River Medical Center by
purchasing certain assets totaling $6,811,000 and assuming certain liabilities
and entering into a capital lease agreement totaling $4,138,000. Cost in excess
of net assets acquired in the acquisition totaled approximately $1,007,000 and
is being amortized over 15 years.
LAKE HAVASU SAMARITAN REGIONAL HOSPITAL
In May 1998, the Company acquired Lake Havasu Samaritan Regional Hospital
in Lake Havasu City, Arizona, for approximately $107,467,000. To finance this
acquisition, the Company borrowed $106,000,000 under its revolving credit
facility. Cost in excess of net assets acquired in the acquisition totaled
approximately $76,474,000 and is being amortized over 35 years. The Company has
started construction on an ancillary expansion, which is expected to cost
approximately $26,000,000.
F-9
<PAGE> 73
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ELKO GENERAL HOSPITAL
In June 1998, the Company acquired Elko General Hospital in Elko, Nevada,
for a purchase price of approximately $24,854,000, including the final working
capital settlement in 1999 of $1,603,000. To finance this acquisition, the
Company borrowed $22,000,000 under its revolving credit facility. Cost in excess
of net assets acquired in the acquisition totaled approximately $17,727,000 and
is being amortized over 35 years. The Company has started construction on a
replacement facility that is expected to cost approximately $30,000,000.
EUNICE COMMUNITY MEDICAL CENTER
In February 1999, the Company entered into a special services agreement for
the lease of Eunice Community Medical Center ("Eunice") in Eunice, Louisiana by
purchasing certain assets totaling $4,899,000 and assuming certain liabilities
and entering into a ten-year lease agreement with a five-year renewal option,
totaling $767,000. Cost in excess of net assets acquired in the acquisition
totaled approximately $2,885,000 and is being amortized over 15 years.
GLADES GENERAL HOSPITAL
In April 1999, the Company acquired assets totaling $17,151,000 and assumed
liabilities totaling $4,926,000 of Glades General Hospital ("Glades") in Belle
Glade, Florida. To finance this acquisition, the Company borrowed $13,500,000
under its revolving credit facility. Cost in excess of net assets acquired in
the acquisition totaled approximately $8,920,000 and is being amortized over 35
years.
DOCTORS' HOSPITAL OF OPELOUSAS
In June 1999, the Company acquired assets totaling $25,715,000 and assumed
liabilities totaling $2,753,000 of Doctors' Hospital of Opelousas ("Opelousas"),
in Opelousas, Louisiana. To finance this acquisition, the Company borrowed
$22,000,000 under its revolving credit facility. Cost in excess of net assets
acquired in the acquisition totaled approximately $5,069,000 and is being
amortized over 35 years. The allocation of the purchase price has been
determined based upon currently available information and is subject to further
refinement pending final working capital settlement.
TRINITY VALLEY MEDICAL CENTER AND MINDEN MEDICAL CENTER
In October 1999, the Company acquired assets totaling $82,544,000 and
assumed liabilities totaling $4,230,000 of Trinity Valley Medical Center
("Trinity") in Palestine, Texas and Minden Medical Center ("Minden") in Minden,
Louisiana. To finance the acquisition, the Company borrowed $77,000,000 under
its revolving credit facility. Trinity was merged with and into Memorial Mother
Frances Hospital, a hospital already owned by the Company, in Palestine, Texas,
and the name changed to Palestine Regional Medical Center. Cost in excess of net
assets acquired in the acquisition totaled approximately $37,118,000 and is
being amortized over 35 years. The allocation of the purchase price has been
determined based upon currently available information and is subject to further
refinement pending final working capital settlement.
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
F-10
<PAGE> 74
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 income from the respective dates
of acquisition.
The following pro forma information reflects the operations of the entities
acquired in 1997, 1998 and 1999, as if the respective transactions had occurred
as of the first day of the fiscal year immediately preceding the year of the
acquisitions (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net operating revenue.................................. $258,406 $400,160 $415,277
Net income (loss) to common shareholders............... (6,049) 8,356 15,201
Basic net income (loss) per share to common
shareholders......................................... (1.05) 0.63 0.97
Diluted net income (loss) per share common
shareholders......................................... (1.05) 0.61 0.95
</TABLE>
The pro forma results of operations do not purport to represent what the
Company's results would have been had such transactions in fact occurred at the
beginning of the periods presented or to project the Company's results of
operations in any future period.
The Company has minority ownership in various health care related
businesses. These investments are accounted for by the equity method. The
assets, liabilities and results of operations of these businesses are not
material to the consolidated financial statements.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Land........................................................ $ 12,448 $ 16,109
Leasehold improvements...................................... 3,392 9,162
Buildings and improvements.................................. 61,176 108,844
Equipment................................................... 42,385 72,481
-------- --------
119,401 206,596
Less allowances for depreciation and amortization........... (15,242) (26,878)
-------- --------
104,159 179,718
Construction-in-progress (estimated cost to complete at
December 31, 1999 -- $35,058)............................. 7,955 6,411
-------- --------
$112,114 $186,129
======== ========
</TABLE>
Assets under capital leases were $17,374,000 and $19,344,000, net of
accumulated amortization of $3,957,000 and $6,082,000 at December 31, 1998 and
1999, 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 1998 and 1999, respectively, $288,000 and $410,000 of
interest cost was capitalized.
F-11
<PAGE> 75
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Revolving credit agreement.................................. $127,000 $246,300
Other debt obligations...................................... 1,652 7,288
-------- --------
128,652 253,588
Obligations under capital leases (see Note 10).............. 7,446 8,627
-------- --------
136,098 262,215
Less current maturities................................... (1,797) (2,223)
-------- --------
$134,301 $259,992
======== ========
</TABLE>
On September 10, 1999, the Company increased the size of its credit
facility to $295,000,000, including a revolving line of credit of $255,300,000
and an end-loaded lease facility of $39,700,000. At December 31, 1999, the
Company had $246,300,000 outstanding under its revolving line of credit and
$43,400,000 available, which includes availability under the end-loaded lease
facility that can be converted to revolver availability at the Company's option.
The loans under the Credit Agreement bear interest, at the Company's
option, at the adjusted base rate or at the adjusted LIBOR rate. The interest
rate ranged from 6.21% to 9.00% during 1999. The Company pays a commitment fee,
which varies from one-quarter to one-half of one percent of the unused portion,
depending on the Company's compliance with certain financial ratios. The Company
may prepay the principal amount outstanding under the revolving credit agreement
at any time before the maturity date of March 30, 2003.
The Credit Agreement contains limitations on the Company's ability to incur
additional indebtedness (including contingent obligations), sell material
assets, retire, redeem or otherwise reacquire its capital stock, acquire the
capital stock or assets of another business, and pay dividends. The Credit
Agreement also requires the Company to maintain a specified net worth and meet
or exceed certain coverage, leverage, and indebtedness ratios. Indebtedness
under the Credit Agreement is secured by substantially all assets of the
Company.
Interest rate swap agreements are used to manage the Company's interest
rate exposure under the Credit Agreement. In 1997, the Company entered into an
interest rate swap agreement, which effectively converted for a five-year period
$35,000,000 of floating-rate borrowings to fixed-rate borrowings. In 1998, the
Company entered into an interest rate swap agreement, which effectively
converted for a five-year period $45,000,000 of floating-rate borrowings to
fixed-rate borrowings. The Company secured a 6.27% fixed interest rate on the
1997 swap agreement, and a 5.625% fixed interest rate on the 1998 swap
agreement. These agreements expose the Company to credit losses in the event of
non-performance by the counterparties to its financial instruments. The Company
anticipates that the counterparties will fully satisfy their obligations under
the contracts.
F-12
<PAGE> 76
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate maturities of long-term obligations at December 31, 1999,
excluding capital leases, are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 737
2001........................................................ 55,222
2002........................................................ 100,819
2003........................................................ 95,875
2004........................................................ 935
--------
$253,588
========
</TABLE>
6. STOCKHOLDERS' EQUITY
COMMON STOCK
In May 1997, the Company declared a three-for-one stock split of the
outstanding common stock and common stock options and warrant. All common share
and per share data included in the accompanying consolidated financial
statements and footnotes have been restated to reflect this stock split.
In February 1998, the Company merged with a wholly-owned subsidiary in
order to change its jurisdiction of incorporation to Delaware and change its
name to Province Healthcare Company. In the merger, the Company exchanged 1.83
shares of its no par common stock for each share of the subsidiary's $0.01 par
value common stock. All common share and per share data included in the
consolidated financial statements and footnotes have been restated to reflect
this reincorporation. As a result of the reincorporation, $2,053,000 was
reclassified from common stock to additional paid-in-capital upon conversion
from no par to $0.01 par value Common Stock.
In February 1998, the Company closed its initial public offering of
5,405,000 shares of common stock at an offering price of $16.00 per share. In
connection with the offering, the Series B redeemable junior preferred stock was
converted into common stock at the public offering price of the common stock.
The net proceeds from the offering were used to redeem the outstanding balance
of the Series A redeemable senior preferred stock plus accrued dividends, reduce
the balance of the outstanding term and revolving credit loans, and repurchase a
portion of the common stock which was issued upon conversion of the Series B
redeemable junior preferred stock.
In July 1998, the Company completed its public offering of 2,685,500 shares
of common stock at an offering price of $26.00 per share. The net proceeds from
the offering of approximately $65,700,000 were used primarily to reduce debt.
STOCK OPTIONS
The Company follows Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25) and related Interpretations in accounting
for its employee stock options. Under APB 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
In March 1997, the Company's Board of Directors approved the 1997 Long-Term
Equity Incentive Plan (the "Plan"). Under the Plan, options to purchase shares
may be granted to officers, employees, and directors. The options have a maximum
term of ten years and generally vest in five equal annual installments. Options
are generally granted at not less than market price on the date of grant.
F-13
<PAGE> 77
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of option transactions during 1997, 1998 and
1999:
<TABLE>
<CAPTION>
NUMBER OF OPTION
OPTIONS PRICE RANGE
---------- ---------------
<S> <C> <C> <C>
Balance at January 1, 1997................................ -- $ -- $ --
Options granted......................................... 286,907 4.58 4.58
Options exercised....................................... -- -- --
Options forfeited....................................... (8,252) 4.58 4.58
----------
Balance at December 31, 1997.............................. 278,655 4.58 4.58
Options granted......................................... 633,868 16.00 28.06
Options exercised....................................... (9,310) 4.58 16.00
Options forfeited....................................... (119,013) 4.58 16.00
----------
Balance at December 31, 1998.............................. 784,200 4.58 28.06
Options granted......................................... 631,440 14.25 16.13
Options exercised....................................... (26,648) 4.58 26.00
Options forfeited....................................... (85,493) 4.58 26.00
----------
Balance at December 31, 1999.............................. 1,303,499
==========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 4.58-$ 4.58....................... 210,488 7.2 $ 4.58 115,318 $ 4.58
14.25- 14.25....................... 90,933 9.5 14.25 90,933 14.25
15.13- 15.13....................... 357,706 9.2 15.13 -- --
16.00- 16.00....................... 363,116 8.1 16.00 82,406 16.00
16.13- 16.13....................... 149,656 9.7 16.13 -- --
21.00- 21.00....................... 80,600 8.8 21.00 16,120 21.00
26.00- 26.00....................... 43,000 8.4 26.00 8,600 26.00
28.06- 28.06....................... 8,000 8.9 28.06 1,600 28.06
- ------------- ---------- ------- ------- --------- -------
$ 4.58-$28.06....................... 1,303,499 8.6 $14.52 314,977 $11.90
============= ========== ======= ======= ========= =======
</TABLE>
At December 31, 1997 and 1998, respectively, 37,736 and 88,333 options were
exercisable. At December 31, 1999, the Company had options representing
1,269,559 shares available for future grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, Accounting for Stock Based Compensation, and has been
determined as if the Company had accounted for its employee stock options under
the fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1997, 1998 and 1999,
respectively: risk-free interest rate of 6.41%, 5.28% and 5.51%; dividend yield
of 0%; volatility factor of the expected market price of the Company's common
stock of .563, .640 and .756; and a weighted-average expected life of the option
of 5 years. The estimated weighted average fair values of shares granted during
1997, 1998 and 1999, using the Black-Scholes option pricing model, were $2.90,
$12.80 and $9.97, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models
F-14
<PAGE> 78
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
require the input of highly subjective assumptions including the expected stock
price volatility. Because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except for per share
information):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------ -------
<S> <C> <C> <C>
Pro forma net income (loss) to common shareholders......... $(1,131) $8,592 $12,681
Pro forma net income (loss) per share to common
shareholders:
Basic.................................................... (0.20) 0.64 0.81
Diluted.................................................. (0.20) 0.63 0.79
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In May 1998 the Company's Board adopted, and in June 1998 the stockholders
approved, the Province Healthcare Company Employee Stock Purchase Plan (the
"ESSP"). Under the Plan, employees may purchase shares of common stock at 85% of
market price on the first day of the year or 85% of the market price on the last
day of the year, whichever is lower. The shares are purchased each year with
funds withheld from employees through payroll deductions from January 1 through
December 31. A total of 250,000 shares of Common Stock have been reserved for
issuance under the ESSP. Participation in the Plan commenced June 1, 1998.
Shares issued under the Plan totaled -0- and 10,822 in 1998 and 1999,
respectively.
7. PATIENT SERVICE REVENUE
The Company has agreements with third-party payors that provide for
payments to the Company at amounts different from its established rates. A
summary of the payment arrangements with major third-party payors follows:
- Medicare -- Inpatient acute care services rendered to Medicare program
beneficiaries are paid at prospectively determined rates per diagnosis
related group ("DRG"). These DRG rates vary according to a patient
classification system that is based on clinical, diagnostic, and other
factors. Inpatient nonacute services, certain outpatient services and
medical education costs related to Medicare beneficiaries are paid based
on a cost reimbursement methodology subject to various cost limits. The
Company is reimbursed for cost-based services at a tentative rate, with
final settlement determined after submission of annual cost reports by
the Company and audits thereof by the Medicare fiscal intermediary. The
Company's classification of patients under the Medicare program and the
appropriateness of their admission are subject to an independent review.
The majority of the Company's Medicare cost reports have been audited by
the Medicare fiscal intermediary through December 31, 1996.
- Medicaid -- Inpatient services rendered to the recipients under the
Medi-Cal program (California's medicaid program) are reimbursed either
under contracted rates or reimbursed for cost reimbursable items at a
tentative rate with final settlement determined after submission of
annual cost reports by the Company and audits thereof by Medi-Cal. The
Company owns or leases four hospitals in California, and its Medi-Cal
cost reports have been audited by the Medi-Cal fiscal intermediary
through December 31, 1996. The Medicaid programs of the other states in
which the Company owns or leases hospitals are prospective payment
systems which generally do not have retroactive cost report settlement
procedures.
F-15
<PAGE> 79
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Other -- The Company also has entered into payment agreements with
certain commercial insurance carriers, health maintenance organizations
and preferred provider organizations. The basis for payment to the
Company under these agreements includes prospectively determined rates
per discharge, discounts from established charges, and prospectively
determined daily rates.
Approximately 73.4%, 68.9% and 68.6% of gross patient service revenue for
the years ended December 31, 1997, 1998 and 1999, respectively, are from
participation in the Medicare and state-sponsored Medicaid programs.
The Company owns or leases four hospitals in California, which accounted
for 40.9% of net operating revenue in 1997 and 33.4% in 1998 and 22.7% in 1999.
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 income in the period in which the
revisions are made, and resulted in increases in net patient service revenue of
$3,257,000, $4,050,000 and $892,000 in 1997, 1998 and 1999, respectively.
8. INCOME TAXES
The provision for income taxes consists of the following amounts (in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------ -------
<S> <C> <C> <C>
Current:
Federal.................................................. $ (829) $5,556 $ 7,397
State.................................................... (198) 1,509 1,773
------- ------ -------
(1,027) 7,065 9,170
Deferred:
Federal.................................................. 3,776 905 1,830
State.................................................... 901 (43) 148
------- ------ -------
4,677 862 1,978
------- ------ -------
$ 3,650 $7,927 $11,148
======= ====== =======
</TABLE>
The differences between the Company's effective income tax rate of 47.2%,
44.2%, and 43.5% for 1997, 1998 and 1999, respectively, and the statutory
federal income tax rate of 34.0% for 1997, and 35.0% for 1998 and 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Statutory federal rate...................................... $2,627 $6,277 $ 8,977
State income taxes, net of federal income tax benefit....... 464 953 1,248
Amortization of goodwill.................................... 577 594 594
Other....................................................... (18) 103 329
------ ------ -------
$3,650 $7,927 $11,148
====== ====== =======
</TABLE>
F-16
<PAGE> 80
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's deferred tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets--current:
Accrued vacation liability................................ $ 1,061 $ 1,555
Accrued liabilities....................................... 457 42
------- -------
Deferred tax assets--current.............................. 1,518 1,597
Deferred tax liabilities--current:
Accounts and notes receivable............................. (136) (443)
Accrued liabilities....................................... -- (200)
------- -------
Deferred tax liabilities-current.......................... (136) (643)
------- -------
Net deferred tax assets--current............................ $ 1,382 $ 954
======= =======
Deferred tax assets--noncurrent:
Net operating losses...................................... $ 520 $ 795
Accrued liabilities....................................... 670 33
Other..................................................... 162 170
------- -------
1,352 998
Less valuation allowance.................................. (286) (286)
------- -------
Deferred tax assets--noncurrent........................... 1,066 712
Deferred tax liabilities--noncurrent:
Property, plant and equipment............................. (5,224) (4,845)
Management contracts...................................... (284) (188)
Goodwill.................................................. (1,249) (2,920)
------- -------
Deferred tax liabilities--noncurrent...................... (6,757) (7,953)
------- -------
Net deferred tax liabilities--noncurrent.................... $(5,691) $(7,241)
======= =======
Total deferred tax assets................................... $ 2,870 $ 2,595
======= =======
Total deferred tax liabilities.............................. $ 6,893 $ 8,596
======= =======
Total valuation allowance................................... $ 286 $ 286
======= =======
</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 Federal net operating loss carryforwards (NOLs) of
approximately $714,000 at December 31, 1998 and 1999 related to a subsidiary.
These NOLs will expire beginning in 2009. Due to restrictions on the use of the
NOLs, management believes there is a risk they may expire unused, and
accordingly, has established a valuation reserve against the tax benefit of the
NOLs. Management believes it is more likely than not that the remaining deferred
tax assets, will ultimately be realized through future taxable income from
operations.
During 1997, the Internal Revenue Service finalized its examination of the
predecessor company's federal income tax returns for the 1993 and 1994 years.
Finalization of the examination had no impact on the financial condition or
results of operations of the Company.
The IRS is currently engaged in an examination of the predecessor company's
federal income tax returns for 1995 and 1996. Finalization of the examination is
not expected to have a significant impact on the financial condition or results
of operations of the Company.
F-17
<PAGE> 81
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Numerator for basic and diluted income (loss) per share to
common shareholders:
Net income.............................................. $ 4,075 $10,007 $14,501
Less preferred stock dividends.......................... (5,077) (696) --
------- ------- -------
Net income (loss) to common shareholders................ $(1,002) $ 9,311 $14,501
======= ======= =======
Denominator:
Denominator for basic income (loss) per share to common
shareholders -- weighted-average shares.............. 5,787 13,344 15,726
Effect of dilutive securities:
Stock rights....................................... 336 -- --
Warrants........................................... 189 -- --
Employee stock options............................. 149 328 286
------- ------- -------
Denominator for diluted income (loss) per share to
common shareholders -- adjusted weighted-average
shares............................................... 6,461 13,672 16,012
======= ======= =======
Basic net income (loss) per share to common
shareholders............................................ $ (0.17) $ 0.70 $ 0.92
======= ======= =======
Diluted net income (loss) per share to common
shareholders............................................ $ (0.17) $ 0.68 $ 0.91
======= ======= =======
</TABLE>
Diluted loss per share amounts for 1997 have been calculated using the same
denominator as used in the basic loss per share calculation, as the inclusion of
dilutive securities in the denominator would have an anti-dilutive effect.
10. LEASES
During 1998, the Company entered into a five-year $35,000,000 End-Loaded
Lease Financing (the "ELLF") agreement which was increased to $39,700,000 on
September 10, 1999, to provide a financing option for future construction of
medical office buildings on the campuses of its owned/leased hospitals, and may
be used for the construction of a replacement facility at one of its owned
hospitals. The interest rate and facility fee rate are substantially the same as
the Company's revolving line of credit (see Note 5). All lease payments are
guaranteed by the Company. At December 31, 1999, $34,400,000 was available under
the ELLF agreement.
The Company leases various buildings, office space and equipment. The
leases expire at various times and have various renewal options. These leases
are classified as either capital leases or operating leases based on the terms
of the respective agreements.
F-18
<PAGE> 82
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments at December 31, 1999, 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>
2000........................................................ $ 2,076 $ 5,883
2001........................................................ 2,085 4,703
2002........................................................ 1,595 3,918
2003........................................................ 1,378 3,521
2004........................................................ 930 3,214
Thereafter.................................................. 3,457 11,287
------- -------
Total minimum lease payments................................ 11,521 $32,526
=======
Amount representing interest................................ (2,894)
-------
Present value of net minimum lease payments (including
$1,486 classified as current)............................. $ 8,627
=======
</TABLE>
11. LITIGATION
The Company is involved in litigation arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
these matters will be resolved without material adverse effect on the Company's
consolidated financial position or results of operations.
12. RETIREMENT PLANS
The Company sponsors defined contribution employee benefit plans which
cover substantially all employees. Employees may contribute a percentage of
eligible compensation subject to Internal Revenue Service limits. The plans call
for the Company to make matching contributions, based on either a percentage of
employee contributions or a discretionary amount as determined by the Company.
Contributions by the Company to the plans totaled $988,000, $1,340,000 and
$1,865,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
The Company sponsors a nonqualified supplemental deferred compensation plan
for selected management employees. As determined by the Board of Directors, the
Plan provides a benefit of 1% to 3% of the employee's compensation. The
participant's amount is fully vested, except in those instances where the
participant's employment terminates for any reason other than retirement, death
or disability, in which case the participant forfeits a portion of the
employer's contribution depending on length of service. Plan expenses totaled
$98,000, $197,000, and $167,000 for the years ended December 31, 1997, 1998 and
1999, respectively.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents -- The carrying amount reported in the balance
sheets for cash and cash equivalents approximates fair value.
Accounts Receivable and Accounts Payable -- The carrying amount reported in
the balance sheets for accounts receivable and accounts payable approximates
fair value.
Long-Term Obligations -- The carrying amount reported in the balance sheets
for long-term obligations approximates fair value. The fair value of the
Company's long-term obligations is estimated
F-19
<PAGE> 83
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
using discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
Interest rate swap agreements -- The fair value of the Company's interest
rate swap agreements is $1,908,000 at December 31, 1999, based on quoted market
prices for similar debt issues.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 1998, and
1999 is summarized below (in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER
--------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- --------
<S> <C> <C> <C> <C>
1998
Net operating revenue............................ $47,851 $56,632 $67,271 $ 67,100
Income before income taxes....................... 4,047 3,811 4,550 5,525
Net income....................................... 2,275 2,134 2,531 3,067
Net income to common shareholders................ 1,579 2,134 2,531 3,067
Basic net income per share to common
shareholders................................... 0.17 0.16 0.17 0.20
Diluted net income per share to common
shareholders................................... 0.16 0.16 0.16 0.19
1999
Net operating revenue............................ 73,247 81,225 85,682 106,539
Income before income taxes....................... 7,195 5,854 5,352 7,248
Net income....................................... 4,065 3,307 3,024 4,105
Basic net income per share to common
shareholders................................... 0.26 0.21 0.19 0.26
Diluted net income per share to common
shareholders................................... 0.25 0.21 0.19 0.26
</TABLE>
F-20
<PAGE> 84
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,020,100 SHARES
PROVINCE HEALTHCARE LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
FIRST UNION SECURITIES, INC.
ROBERTSON STEPHENS
WARBURG DILLON READ LLC
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 85
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses to be incurred in connection with this registration statement are
as follows:
<TABLE>
<S> <C>
Commission registration fee................................. $ 30,513
National Association of Securities Dealers, Inc. fee........ 10,500
State qualification expenses (including legal fees)......... 1,500
Auditor's fees and expenses................................. 211,000
Legal fees and expenses..................................... 181,000
Miscellaneous expenses...................................... 165,487
--------
Total........................................ $600,000
========
</TABLE>
All expenses, other than the Commission registration fee, are estimated.
Province Healthcare Company has agreed to bear all expenses (other than
underwriting discounts and selling commissions, and fees and expenses of counsel
and other advisors to the selling stockholders) in connection with the
registration and sale of the shares of common stock being offered by the selling
stockholders.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement(a)
3.1 Amended and Restated Certificate of Incorporation of
Province Healthcare Company(b)
3.2 Bylaws of Province Healthcare Company(b)
4.1 Specimen Common Stock Certificate(b)
4.2 Registration Agreement(b)
5.1 Opinion of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company, including consent(a)
23.1 Consent of Ernst & Young LLP(a)
23.2 Consent of KPMG LLP(a)
</TABLE>
- ---------------
(a) Previously filed
(b) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 333-34421
ITEM 17. UNDERTAKINGS.
A. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
B. Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the forgoing provisions, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the
II-1
<PAGE> 86
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court or appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
C. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of the prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
479(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-2
<PAGE> 87
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment to its
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Nashville, State of Tennessee, on April 6, 2000.
PROVINCE HEALTHCARE COMPANY
By: /s/ Martin S. Rash
--------------------------------------
Martin S. Rash
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Martin S. Rash Chairman of the Board, April 6, 2000
- ----------------------------------------------------- President, Chief Executive
Martin S. Rash Officer and Director
(Principal Executive Officer)
/s/ Martin S. Rash, Attorney-in-fact Vice Chairman of the Board, April 6, 2000
- ----------------------------------------------------- Chief Financial Officer and
Richard D. Gore Director (Principal Financial
Officer)
/s/ Martin S. Rash, Attorney-in-fact Vice President and Controller April 6, 2000
- ----------------------------------------------------- (Principal Accounting
Brenda B. Rector Officer)
/s/ Martin S. Rash, Attorney-in-fact Director April 6, 2000
- -----------------------------------------------------
A.E. Brim
/s/ Martin S. Rash, Attorney-in-fact Director April 6, 2000
- -----------------------------------------------------
Winfield C. Dunn
/s/ Martin S. Rash, Attorney-in-fact Director April 6, 2000
- -----------------------------------------------------
Joseph P. Nolan
/s/ Martin S. Rash, Attorney-in-fact Director April 6, 2000
- -----------------------------------------------------
Bruce V. Rauner
/s/ Martin S. Rash, Attorney-in-fact Director April 6, 2000
- -----------------------------------------------------
David L. Steffy
</TABLE>
II-3
