PROVINCE HEALTHCARE COMPANY

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N3TC6rOjcrooUCC9F7yH0BZXBLtjUoFVuzMyXsqfG+2JyPPgL2cMOwAlGWkch6/n bA8xmuQwY81OO4pENi9KWA== 0000950144-05-002910.txt : 20050321 0000950144-05-002910.hdr.sgml : 20050321 20050321165449 ACCESSION NUMBER: 0000950144-05-002910 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050321 ITEM INFORMATION: Regulation FD Disclosure ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20050321 DATE AS OF CHANGE: 20050321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROVINCE HEALTHCARE CO CENTRAL INDEX KEY: 0001044942 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-GENERAL MEDICAL & SURGICAL HOSPITALS, NEC [8062] IRS NUMBER: 621710772 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-31320 FILM NUMBER: 05694673 BUSINESS ADDRESS: STREET 1: 105 WESTPARK DR STREET 2: STE 400 CITY: BRENTWOOD STATE: TN ZIP: 37027 BUSINESS PHONE: 6153701377 MAIL ADDRESS: STREET 1: 105 WESTPARK DR STREET 2: SUITE 180 CITY: BRENTWOOD STATE: TN ZIP: 37207 8-K 1 g93965e8vk.htm PROVINCE HEALTHCARE COMPANY PROVINCE HEALTHCARE COMPANY

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

Current Report

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): March 21, 2005

PROVINCE HEALTHCARE COMPANY

(Exact Name of Registrant Specified in Its Charter)

Commission File Number 1-31320


Delaware		62-1710772
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

105 Westwood Place
Suite 400
Brentwood, Tennessee		37027
(Address of Principal Executive Offices)		(Zip Code)

(615) 370-1377

(Registrant’s Telephone Number, Including Area Code)

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS


ITEM 7.01 Regulation FD Disclosure
ITEM 9.01 Financial Statements and Exhibits
SIGNATURE
EX-99.1 REGISTRANT'S UNAUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
EX-99.2 FINANCIAL INFORMATION REGARDING THE REGISTRANT'S FINANCIAL STATEMENTS

Section 7 – Regulation FD

ITEM 7.01 Regulation FD Disclosure.

Pursuant to Regulation FD, Province Healthcare Company (“Province”) is furnishing under ITEM 7.01 of this Current Report on Form 8-K the information included as Exhibits 99.1 and 99.2 to this report.

ITEM 9.01 Financial Statements and Exhibits.

(c) Exhibits.


Exhibit
Number		Description
99.1		Registrant’s Unaudited Consolidated Balance Sheets, Statements of Income, Statements of Changes in Stockholders’ Equity, Statements of Cash Flows and Financial Notes Thereto as of and for the Year Ended December 31, 2004.

99.2		Financial Information Regarding the Registrant’s Unaudited Consolidated Financial Statements for the Year Ended December 31, 2004 and its Audited Consolidated Financial Statements for the Years Ended December 31, 2003 and 2002.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.

Province Healthcare Company

/s/ Steven R. Brumfield
Date: March 21, 2005 Vice President and Controller

EX-99.1 2 g93965exv99w1.txt EX-99.1 REGISTRANT'S UNAUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004 EXHIBIT 99.1 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

See accompanying notes. PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

See accompanying notes. PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

See accompanying notes. PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)

See accompanying notes. PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 1. ORGANIZATION AND ACCOUNTING POLICIES BASIS OF PRESENTATION The information presented in the accompanying consolidated financial statements and footnotes for 2004 is unaudited. The 2003 and 2002 information has been derived from the audited consolidated financial statements contained in Province Healthcare Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 14, 2004. ORGANIZATION Province Healthcare Company (the "Company") was founded on February 2, 1996, and is engaged in the business of owning and leasing hospitals in non-urban communities throughout the United States. As of December 31, 2004, the Company owned or leased 21 general acute care hospitals in 13 states with an aggregate of 2,533 licensed beds. Effective April 30, 2004, the Company sold Glades General Hospital in Belle Glade, Florida and, effective June 30, 2004, sold Brim Healthcare, Inc., its hospital management subsidiary. The operations of Glades General Hospital and Brim Healthcare, Inc. are reported as discontinued operations, as further discussed in Note 3. The Company's remaining hospitals and operations are reported as continuing operations. BASIS OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company, its majority-owned subsidiaries and partnerships in which the Company or one of its subsidiaries is a general partner and has a majority voting interest. All significant intercompany accounts and transactions have been eliminated in consolidation. CRITICAL ACCOUNTING POLICIES AND ESTIMATES (UNAUDITED) The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, the Company evaluates its estimates, including those related to bad debts, contractual discounts, risk management reserves and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements: Allowance for Doubtful Accounts Substantially all of the Company's accounts receivable are related to providing healthcare services to the Company's hospitals' patients. The Company's ability to collect outstanding receivables from third-party payors and others is critical to its operating performance and cash flows. The primary collection risk lies with uninsured patient accounts or patient accounts for which a balance remains after primary insurance has paid. Insurance coverage is verified prior to treatment for all procedures scheduled in advance and walk-in patients. Insurance coverage is not verified in advance of procedures for emergency room patients. Deductibles and co-payments are generally determined prior to the patient's discharge with emphasis on collection efforts before discharge. Once these amounts are determined, any remaining patient balance is identified and collection activity is initiated before the patient is discharged. The Company's standard collection procedures are then followed until such time that management determines the account is uncollectible, at which point the account is written off. For hospitals that the Company has owned in excess of one year, the Company's policy with respect to estimating its allowance for doubtful accounts is to reserve 50% of all self-pay accounts receivable aged between 121 and 150 days and 100% of all self-pay accounts that have aged greater than 150 days. For hospitals that the Company has owned less than one year, the Company estimates the allowance for doubtful accounts by applying a hospital-specific reserve percentage for each self-pay and non self-pay accounts receivable 30 day aging category, beginning with the 0-30 day aging category, with all self-pay and non-self pay accounts fully reserved at 150 days. Accordingly, substantially all of the Company's bad debt expense is related to uninsured patient accounts and patient accounts for which a balance remains after primary insurance has paid. The Company continually monitors its accounts receivable balances and utilizes cash collections data and other analytical tools to support the basis for its estimates of the provision for doubtful accounts. In addition, the Company performs hindsight procedures on historical collection and write-off experience to determine the reasonableness of its policy for estimating the allowance for doubtful accounts. Significant changes in payor mix or business office operations, or deterioration in aging accounts receivable could result in a significant increase in this allowance. In general, the standard collection cycle at the Company's hospitals is as follows: - Upfront cash collection of deductibles, co-payments, and self-pay accounts. - From the time the account is billed until the period 120 days after the billing, internal business office collections and early out program collections are performed. - From the time the account is 121 days after billing until the period one year after billing, uncollected accounts are turned over to one of two primary collection agencies utilized by the Company. - One year following the date of billing, any uncollected accounts are written off and the accounts are turned over to a secondary collection agency. Uncollected accounts are manually written off: (a) if the balance is less than $10.00, (b) when turned over to an outside secondary collection agency at 365 days, or (c) earlier than 365 days if all collection efforts indicate an account is uncollectible. Once accounts have been written off, they are not included in our gross accounts receivable or allowance for doubtful accounts. The Company owned or leased three hospitals in Texas, which accounted for 16.1% (unaudited) and 16.6% of net accounts receivable in 2004 and 2003, respectively. The Company owned or leased four hospitals in Louisiana, which accounted for 9.5% (unaudited) and 13.2% of net accounts receivable in 2004 and 2003, respectively. The Company owned or leased two hospitals, one of which was acquired in 2004, in New Mexico which accounted for 16.2% (unaudited) and 3.6% of net accounts receivable in 2004 and 2003, respectively. Same-store upfront cash collections for the year ended December 31, 2004 were approximately $13.5 million (unaudited) compared to $11.5 million and $8.1 million for the years ended December 31, 2003 and 2002, respectively. Allowance for Contractual Discounts The Company derives a significant portion of its revenues from Medicare, Medicaid and other payors that receive discounts from its standard charges. The Medicare and Medicaid regulations and various managed care contracts under which these discounts must be calculated are often complex and subject to interpretation and adjustment. In addition, the services authorized and provided and resulting reimbursement are often subject to interpretation. These interpretations sometimes result in payments that differ from the Company's estimates. Additionally, updated regulations and contract negotiations occur frequently, necessitating the Company's continual review and assessment of the estimation process. The Company's hospitals' computerized billing systems do not automatically calculate and record contractual allowances. Rather, the Company utilizes an internally developed contractual model to estimate the allowance for contractual discounts on a payor - specific basis, given its interpretation of the applicable regulations or contract terms. The Company's contractual model for Medicare and Medicaid inpatient services utilizes the application of actual DRG data to individual patient accounts to calculate contractual allowances. For all inpatient and outpatient non-Medicare and non-Medicaid services, the Company's contractual model utilizes six month historical paid claims data by payor for such services to calculate the contractual allowances. Differences between the contractual allowances estimated by the Company's contractual model and actual paid claims are adjusted when the individual claims are paid. The Company's contractual model is updated each quarter. In addition to the contractual allowances estimated and recorded by the Company's contractual model, the Company also records an allowance equal to 100% of all Medicare, Medicaid, and other insurance payors accounts receivable that are aged greater than 365 days. Risk Management Reserves The Company purchased a professional liability claims-made reporting policy effective January 1, 2004. This coverage is subject to a $5.0 million self-insured retention per occurrence for general and professional liability and provides coverage up to $50.0 million for claims incurred during the annual policy term. This retention amount increases our exposure for claims occurring prior to December 31, 2002 and reported on or after January 1, 2004, due to the increased retention amount as compared to prior years. In 2002, the Company had a claims-made reporting policy subject to a $750,000 deductible and a $2.0 million self-insured retention per occurrence, providing coverage up to $51.0 million for claims incurred during the annual policy term in 2002. In 2001, the Company maintained insurance for individual malpractice claims exceeding $50,000 per medical incident, subject to an annual maximum of $500,000 for claims occurring and reported in 2001. The Company purchased a tail policy that provides an unlimited claim reporting period for its professional liability for claims incurred in 2000 and prior years. The Company estimates its self-insured retention portion of the malpractice risks using an outside actuary which uses historical claims data, demographic factors, severity factors and other actuarial assumptions. The Company maintains a reserve to cover both reported claims and claims that have been incurred but not yet reported within its self-insured retention. Workers' compensation claims are insured with a deductible with stop loss limits of $100,000 per accident and a $1.9 million and $2.2 million minimum cap on total losses for the 1999 and 2000 years, respectively, and $250,000 per accident and a $6.6 million and $3.0 million minimum cap on total losses for the 2002 and 2001 years, respectively. The Company increased the deductible loss amount to $500,000 per accident effective January 1, 2003. The minimum cap for total 2003 losses is $12.0 million. The minimum cap for total 2004 losses is $12.1 million (unaudited). In 2002 and 2003, the Company's arrangement with the insurance provider allowed it to prepay the expected amounts of annual workers' compensation claims, which are based upon claims experience. The claims processor tracks payments for the policy year. At the end of the policy year, the claims processor compares the total amount prepaid by the Company to the actual amount paid by the claims processor. This comparison will ultimately result in a receivable from or a payable to the claims processor. The Company is fully insured in the commercial marketplace for workers' compensation claims prior to January 1, 1999. The Company utilized loss run reports provided by the claims administrator to determine the appropriate range of loss reserves for the 1999 year and subsequent years. The Company's accruals are calculated to cover the risk from both reported claims and claims that have been incurred but not yet reported. Intangible Assets The Company adopted Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"), effective July 1, 2001 and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), effective January 1, 2002. Under SFAS No. 142, goodwill and indefinite lived intangible assets from acquisitions prior to July 1, 2001 are no longer amortized effective January 1, 2002, but are subject to annual impairment tests. The Company performed its annual impairment tests as of October 1, 2004, 2003 and 2002 and did not incur any impairment charge. In accordance with the new rules, goodwill resulting from acquisitions after June 30, 2001 has not been amortized. Other intangible assets will continue to be amortized over their useful lives. Management of the Company evaluates all acquisitions independently to determine the appropriate amortization period for identified intangible assets. Each evaluation includes an analysis of factors such as historic and projected financial performance, evaluation of the estimated useful lives of buildings and fixed assets acquired, the indefinite lives of certificates of need and licenses acquired, the competition within local markets, and lease terms where applicable. Revenue Recognition The Company recognizes revenues in the period in which services are performed. Accounts receivable, as reflected on the accompanying consolidated balance sheets, include amounts due from third-party payors, patients, and others. The Company has agreements with third-party payors that provide for payments to the Company at amounts different from its established rates. A summary of the payment arrangements with major third-party payors follows: - Medicare--Inpatient acute hospital services rendered to Medicare program beneficiaries are paid at prospectively determined rates per diagnosis related group ("DRG"). These DRG rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Outpatient services are generally reimbursed under the outpatient prospective payment system, which pays a fixed rate for a given bundle of outpatient services. These bundles are known as Ambulatory Payment Classifications or "APC's". Inpatient nonacute services, related to Medicare beneficiaries are paid based on a cost reimbursement methodology subject to various cost limits. The Company is reimbursed for cost-based services at a tentative rate, with final settlement determined after submission of annual cost reports by the Company and audits thereof by the Medicare fiscal intermediary. The Company's classification of patients under the Medicare program and the appropriateness of their admission are subject to an independent review. The majority of the Company's Medicare cost reports have been audited by the Medicare fiscal intermediary through December 31, 2001. - Medicaid--The Medicaid programs in all states, other than California, in which the Company owns or leases hospitals are prospective payment systems which generally do not have retroactive cost report settlement procedures. Inpatient services rendered to the recipients under the Medi-Cal program (California's Medicaid program) are reimbursed either under contracted rates or reimbursed for cost reimbursable items at a tentative rate with final settlement determined after submission of annual cost reports by the Company and audits thereof by Medi-Cal. The Company leases two hospitals in California, and its Medi-Cal cost reports have been audited by the Medi-Cal fiscal intermediary through December 31, 2001. - Other--The Company also has entered into payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations. The basis for payment to the Company under these agreements includes prospectively determined rates per discharge, discounts from established charges, and prospectively determined daily rates. In 2004, 2003, and 2002, the Company owned or leased three hospitals in Texas, which accounted for 15.0% (unaudited), 16.6%, and 17.6% of net patient revenue, respectively. In 2004, 2003, and 2002 the Company owned or leased four hospitals in Louisiana, which accounted for 15.0% (unaudited), 17.6% and 17.6% of net patient revenue, respectively. The Company owned or leased two hospitals in New Mexico, one of which was acquired in 2004, which accounted for 15.2% (unaudited) of net patient revenue in 2004. Final determination of amounts earned under the Medicare and Medicaid programs often occur in subsequent years because of audits by the programs, rights of appeal and the application of numerous technical provisions. Differences between original estimates and subsequent revisions (including final settlements) are included in the consolidated statements of income in the period in which the revisions are made, and resulted in an increase in net patient revenue of $9,876,000 (unaudited), of which $2,857,000 (unaudited) related to facilities that had not previously qualified for disproportionate share payments in prior years, and $5,482,000 in 2004 and 2003, respectively, and a decrease in net patient revenue of $908,000 in 2002. The Company provides care without charge to patients who are financially unable to pay for the healthcare services they receive. Because the Company does not pursue collection of amounts determined to qualify as charity care, they are not reported in net patient revenues. Discontinued Operations In accordance with the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which the Company adopted effective January 1, 2002, the Company has presented the financial position, operating results and cash flows of Glades General Hospital and Brim Healthcare, Inc. as discontinued operations in the accompanying consolidated financial statements as of December 31, 2004 and 2003 and for each of the years in the three year period ending December 31, 2004. Operating results for each of the years in the three year period ending December 31, 2004 and the major classes of assets and liabilities for the years ended December 31, 2004 and 2003 for the Company's discontinued operations are presented in Note 3. Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company places its cash in financial institutions that are federally insured and limits the amount of credit exposure with any one financial institution. Accounts Receivable The Company receives payment for services rendered from federal and state agencies (under the Medicare, Medicaid and TRICARE programs), managed care health plans, commercial insurance companies, employers and patients. During the years ended December 31, 2004, 2003, and 2002, approximately 47.8% (unaudited), 48.8%, and 56.7%, respectively, of the Company's net patient revenue from continuing operations related to patients participating in the Medicare and Medicaid programs. Management recognizes that revenues and receivables from government agencies are significant to its operations, but it does not believe that there are significant credit risks associated with these government agencies. Management does not believe that there are any other significant concentrations of revenues from any particular payor that would subject it to any significant credit risks in the collection of its accounts receivable. Inventories Inventories are stated at the lower of cost, determined by the first-in, first-out method, or market. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation and amortization. Routine maintenance and repairs are charged to expense as incurred. Expenditures that increase capacities or extend useful lives are capitalized. Depreciation expense, including amortization of assets capitalized under capital leases, is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the lesser of the terms of the respective leases or their estimated useful lives. Buildings and improvements are depreciated over estimated useful lives ranging generally from 20 to 40 years. Estimated useful lives of equipment vary generally from 3 to 20 years. Prior to January 1, 2002, the Company recognized impairments of long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". In accordance with SFAS No. 144, when events, circumstances or operating results indicate that the carrying values of certain long-lived assets and related identifiable intangible assets (excluding goodwill) that are expected to be held and used might be impaired, the Company considers the recoverability of assets to be held and used by comparing the carrying amount of the assets to the present value of future net cash flows expected to be generated by the assets. If assets are identified as impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets as determined by independent appraisals or estimates of discounted future cash flows. Other Assets Other assets consist primarily of costs associated with the issuance of debt which are amortized on a straight-line basis, which approximates the interest method, over the life of the related debt, and costs to recruit physicians to the Company's markets, which are deferred and amortized over the term of the respective physician recruitment agreement, which is generally three years. Amortization of deferred loan costs is included in interest expense. Deferred loan costs totaled $11,739,000 (unaudited) (net of accumulated amortization of $15,569,000 (unaudited)) and $15,305,000 (net of accumulated amortization of $11,940,000) at December 31, 2004 and 2003, respectively. Amortization of physician recruiting costs is included in other operating expenses. Net physician recruiting costs included in the accompanying consolidated balance sheets at December 31, 2004 and 2003 totaled $16,395,000 (unaudited) and $17,107,000, respectively. Income Taxes The Company accounts for income taxes under the asset and liability method. This method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company assesses the likelihood that deferred tax assets will be recovered from future taxable income to determine whether a valuation allowance should be established. Other Noncurrent Liabilities Other noncurrent liabilities consist primarily of insurance liabilities, supplemental deferred compensation liability, and deferred income taxes. Minority Interests The consolidated financial statements include all assets, liabilities, revenues and expenses of less than 100% owned entities controlled by the Company. Accordingly, the Company has recorded minority interests in the earnings and equity of such consolidated entities. Stock Based Compensation The Company, from time to time, grants stock options for a fixed number of common shares to employees and directors at a fixed exercise price. The Company accounts for employee stock option grants using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25"), and related interpretations, and accordingly, recognizes no compensation expense for the stock option grants when the exercise price of the options equals, or is greater than, the market price of the underlying stock on the date of grant. The following proforma information is being presented in accordance with Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which was adopted by the Company effective January 1, 2003. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), net income and earnings per share would have been reduced to the pro forma amounts indicated in the following table (in thousands, except per share data):

Pro forma information regarding net income and earnings per share is required by SFAS No. 123, "Accounting for Stock Based Compensation", and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2004, 2003 and 2002, respectively: risk-free interest rate of 2.80% (unaudited), 2.47% and 4.11%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of .560 (unaudited), .634 and .594; and a weighted-average expected life of the option of 4.0 (unaudited), 4.0 years and 3.9 years. The estimated weighted average fair values of shares granted during 2004, 2003 and 2002, using the Black-Scholes option pricing model, were $7.30 (unaudited), $4.04 and $9.46, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. In accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"), the calculation of diluted earnings per share for the year ended December 31, 2003 using the "if converted" method includes the impact of the Company's convertible notes. Since the Company reports discontinued operations, income from continuing operations has been utilized in determining whether the convertible notes were dilutive or antidilutive to earnings per share. The convertible notes were dilutive to earnings per share on income from continuing operations and were antidilutive to net income for the year ended December 31, 2003. The convertible notes were antidilutive to earnings per share on pro forma income from continuing operations and pro forma net income for the year ended December 31, 2002. Interest Rate Swap Agreements The Company enters into interest rate swap agreements as a means of managing its interest rate exposure. The differential to be paid or received is recognized over the life of the agreement as an adjustment to interest expense. Effective January 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended ("SFAS No. 133"). SFAS No. 133 requires that all derivatives, whether designated in hedging relationships or not, be recognized on the balance sheet at fair value and requires the recognition of the resulting gains or losses as adjustments to earnings or other comprehensive income. In accordance with the provisions of SFAS No. 133, the Company designated its outstanding interest rate swap agreement as a fair value hedge and determined that this hedge qualifies for treatment under the short-cut method of measuring effectiveness. Under the provisions of SFAS No. 133, this hedge is determined to be perfectly effective and there is no requirement to periodically evaluate effectiveness. This derivative and the related hedged debt amount has been recognized in the consolidated financial statements at its respective fair value. Recently Issued Accounting Pronouncements In December 2003, the Financial Accounting Standards Board ("FASB") issued Revised Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46R"), which requires the consolidation of variable interest entities. FIN 46R, as revised, was applicable to financial statements of companies that had interests in special purpose entities, as defined, during 2003. Effective as of the first quarter of 2004, FIN 46R was applicable to financial statements of companies that have interests in all other types of entities. Adoption of FIN 46R had no effect on the Company's financial position, results of operations or cash flows. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R, "Share-Based Payments" ("SFAS No. 123R"), a revision of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", which addresses financial accounting and reporting for costs associated with stock-based compensation. SFAS No. 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans and stock options. SFAS No. 123R will require the Company to recognize compensation expense beginning July 1, 2005, in an amount equal to the fair value of share-based payments related to unvested share-based payment awards over the applicable vesting period. As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using Opinion 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123R's fair value method will have a significant impact on the Company's results of operations, although it will have no impact on the Company's overall financial position. The impact of the adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to the Company's consolidated financial statements. 2. PENDING ACQUISITION BY LIFEPOINT HOSPITALS, INC. (UNAUDITED) The Company announced on August 16, 2004 that it had entered into a definitive merger agreement with LifePoint Hospitals, Inc. ("LifePoint") in which LifePoint will acquire the Company for approximately $1.7 billion in cash, stock and the assumption of the Company's debt. The transaction is expected to close in the first half of 2005. Pursuant to the definitive agreement, if the proposed transaction is consummated, the businesses of LifePoint and the Company will be combined under a newly formed company, which will be renamed LifePoint Hospitals, Inc. ("New LifePoint"). Each stockholder of the Company will receive a per share consideration comprised of $11.375 in cash and a number of shares of New LifePoint common stock equal to an exchange ratio of between .3447 and .2917 per common share of the Company, which will represent a value of $11.375 if the volume weighted average of the daily sales prices for share of LifePoint common stock for the 20 consecutive trading day period ending at the close of business on the third trading day prior to closing (the "LifePoint average share price") is between $33.00 and $39.00. If the LifePoint average share price is $33.00 or less, the exchange ratio will be 0.3447, and if the LifePoint average share price is $39.00 or more, the exchange ratio will be 0.2917. The agreement provides for alternative structures. While it is anticipated that shares received by the Company's stockholders will be received in a tax-free exchange, the parties have agreed to a taxable alternative structure at the same price if necessary to complete the acquisition. Each of the Boards of Directors of LifePoint and the Company have unanimously approved the proposed transaction. Completion of the transaction is subject to approval by the LifePoint stockholders and the Company's stockholders, receipt of necessary financing by LifePoint and certain other conditions. 3. DISCONTINUED OPERATIONS On April 30, 2004 the Company sold substantially all of the assets and assigned certain liabilities of Glades General Hospital ("Glades") in Belle Glade, Florida, to a wholly-owned subsidiary of the Health Care District of Palm Beach County for approximately $1.5 million (unaudited), resulting in an immaterial gain on divestiture. Effective June 30, 2004, the Company sold the stock of Brim Healthcare, Inc. ("Brim") to Brim Holding Company, Inc., an independent investor-owned Delaware corporation, for approximately $13.2 million (unaudited), resulting in a pre-tax gain on divestiture of $11.3 million (unaudited) ($7.0 million (unaudited) gain net of tax). The operations of Glades and Brim are reported as discontinued operations and the operating results for the years ended December 31, 2004, 2003 and 2002 are presented in the following table (in thousands):

In connection with the decision to sell Glades, the Company wrote off goodwill associated with the hospital, wrote off the net book value of physician recruiting costs and wrote down the other assets of Glades to their estimated net realizable value, less cost to sell. These charges are included in the impairment charge recorded in 2003. The major classes of assets and liabilities of discontinued operations in the consolidated balance sheets as of December 31, 2004 and 2003 are as follows (in thousands):

The Company will continue to pursue collection of the remaining net accounts receivable under its standard collection policies. 4. ACQUISITIONS 2004 Acquisition (unaudited) In June 2004, the Company acquired Memorial Medical Center in Las Cruces, New Mexico, through a long-term capital lease agreement, for approximately $152.2 million, including working capital and direct and incremental costs of the acquisition. To finance this acquisition, the Company borrowed $110.0 million under its senior bank credit facility and used approximately $42.2 million of available cash. This is the Company's second New Mexico hospital and is one of two hospitals in the community, serving a population in excess of 150,000. 2002 Acquisitions In May 2002, the Company acquired Memorial Hospital of Martinsville and Henry County in Martinsville, Virginia, for approximately $129.2 million, including working capital. To finance this acquisition, the Company borrowed $86.0 million under its revolving credit facility and used approximately $43.2 million of available cash. This is the Company's first Virginia hospital and is the only hospital in the county, serving a population in excess of 100,000. In June 2002, the Company acquired Los Alamos Medical Center in Los Alamos, New Mexico, for approximately $39.0 million, including working capital. To finance this acquisition, the Company borrowed $37.0 million under its revolving credit facility and used $2.0 million from available cash. This was the Company's first New Mexico hospital and is the only hospital in the community, serving a population of approximately 50,000. The hospitals acquired by the Company in 2004 and 2002 are the primary providers of healthcare services in their markets and, as previously underperforming hospitals, present the Company with the opportunity, under its management, to increase profitability and garner local market share. The Company's strategy with respect to these markets is to improve hospital operations, expand healthcare services to increase market share by reducing patient out-migration, and recruit and retain quality physicians to increase the quality of healthcare and the breadth of healthcare services. The foregoing acquisitions were accounted for using the purchase method of accounting. The operating results of the hospitals acquired in 2004 and 2002 have been included in the accompanying consolidated statements of income from the respective dates of acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for the hospital acquisition completed in 2004 (in thousands) (unaudited): Accounts receivable, net $ 14,121 Inventories 2,485 Prepaid expenses and other 257 --------- Total current assets acquired 16,863 Property and equipment 74,537 Goodwill 79,518 Other 3 --------- Total assets acquired 170,921 Total liabilities assumed (18,706) --------- Net assets acquired $ 152,215 =========

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for the hospital acquisitions completed in 2002 (in thousands): Accounts receivable, net $ 12,913 Inventories 2,177 Prepaid expenses and other 119 --------- Total current assets acquired 15,209 Property and equipment 63,457 Goodwill 101,815 Other 787 --------- Total assets acquired 181,268 Total liabilities assumed (10,111) --------- Net assets acquired $ 171,157 =========

Pro Forma Acquisition Information The following pro forma information reflects the operations of the hospitals acquired in 2004 and 2002, as if the respective transactions had occurred as of the first day of the fiscal year immediately preceding the year of the acquisitions (in thousands, except per share data):
2004 2003 2002 ----------- ----------- --------- (unaudited) (unaudited) Net revenue $ 945,542 $ 883,335 $ 701,850 Net income $ 52,630 $ 24,674 $ 38,112 Earnings per share: Basic $ 1.06 $ 0.51 $ 0.79 Diluted $ 1.01 $ 0.55 $ 0.77
The pro forma results of operations do not purport to represent what the Company's results would have been had such transactions, in fact, occurred at the beginning of the periods presented or to project the Company's results of operations in any future period. 5. PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands):
DECEMBER 31, ------------------------- 2004 2003 ------------ ----------- (unaudited) Land $ 40,263 $ 23,344 Land improvements 6,602 5,292 Leasehold improvements 20,036 19,554 Buildings and improvements 408,878 335,788 Equipment 243,632 191,900 ------------ ----------- 719,411 575,878 Less accumulated depreciation and amortization (163,344) (121,835) ------------ ----------- 556,067 454,043 Construction-in-progress (estimated cost to complete at December 31, 2004 - $82,037 (unaudited)) 22,520 5,800 ------------ ----------- $ 578,587 $ 459,843 ============ ===========
Depreciation expense totaled approximately $46,320,000 (unaudited), $37,120,000 and $32,059,000 in 2004, 2003 and 2002, respectively. Assets under capital leases were $4,614,000 (unaudited) and $6,206,000, net of accumulated amortization of $7,927,000 (unaudited) and $5,631,000 at December 31, 2004 and 2003, respectively. Interest is capitalized in connection with construction projects at the Company's facilities. The capitalized interest is recorded as part of the asset to which it relates and is depreciated over the asset's estimated useful life. In 2004 and 2003, $1,357,000 (unaudited) and $712,000 of interest cost, respectively, was capitalized. 6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt consists of the following (in thousands):
December 31, ---------------------------- 2004 2003 ------------- --------- (unaudited) Credit facility $ 55,000 $ -- Senior subordinated notes 198,337 196,634 Convertible subordinated notes 248,470 248,470 ------------- --------- 501,807 445,104 Obligations under capital leases (see Note 10) 2,817 3,595 ------------- --------- 504,624 448,699 Less current portion (76,241) (743) ------------- --------- $ 428,383 $ 447,956 ============= =========
CREDIT FACILITY (UNAUDITED) The Company maintains a bank senior credit facility ("Credit Facility") of $250,000,000. At December 31, 2004, the Company had outstanding letters of credit of $8,277,000, reducing the amount available under the Credit Facility to $186,723,000. On June 1, 2004, in connection with the acquisition of Memorial Medical Center in Las Cruces, New Mexico, the Company borrowed $110.0 million under its senior revolving bank credit facility to finance the acquisition. The Company subsequently repaid $55.4 million (including $0.4 million borrowed under the revolver in the third quarter of 2004) of the revolver borrowing with the proceeds from the sale of Brim Healthcare, Inc. and from cash flows from operations. The loans under the Credit Facility bear interest, at the Company's option, at the adjusted base rate or at the adjusted LIBOR rate. The interest rate ranged from 3.875% to 5.125% during 2004. The Company pays a commitment fee, which varies from one-half to three-eighths of one percent of the unused portion, depending on the Company's compliance with certain financial ratios. The Company may prepay any principal amount outstanding under the Credit Facility at any time before the maturity date of November 13, 2006. The Credit Facility contains limitations on the Company's ability to incur additional indebtedness (including contingent obligations), sell material assets, retire, redeem or otherwise reacquire its capital stock, acquire the capital stock or assets of another business, and pay dividends. The Credit Facility also requires the Company to maintain a specified net worth and meet or exceed certain coverage, leverage, and indebtedness ratios. Indebtedness under the Credit Facility is secured by substantially all assets of the Company. In April 2004, the Company amended its senior bank credit facility to, among other items, (i) obtain consent for a limited repurchase of a portion of the Company's 4 1/2% Convertible Subordinated Notes due 2005 and/or the 4 1/4% Convertible Subordinated Notes due 2008, (ii) adjust the timing of the step down of leverage covenants, and (iii) approve the acquisition of Memorial Medical Center as a Permitted Acquisition. 7 1/2% SENIOR SUBORDINATED NOTES In May 2003, the Company completed its public offering of $200,000,000 aggregate principal amount of 7 1/2% Senior Subordinated Notes due June 1, 2013 (the "7 1/2% Senior Subordinated Notes"). Net proceeds of the offering totaling $194,212,000 were used to repay $114,300,000 in existing borrowings under the Credit Facility and to repurchase $74,030,000 of the Company's 4 1/2% Convertible Subordinated Notes. The 7 1/2% Senior Subordinated Notes bear interest from May 27, 2003 at the rate of 7 1/2% per year, payable semi-annually on June 1 and December 1, beginning on December 1, 2003. The Company may redeem all or a portion of the 7 1/2% Senior Subordinated Notes on or after June 1, 2008, at the then current redemption prices, plus accrued and unpaid interest. In addition, at any time prior to June 1, 2006, the Company may redeem up to 35% of the aggregate principal amount of the 7 1/2% Senior Subordinated Notes within 60 days of one or more common stock offerings with the net proceeds of such offerings at a redemption price of 107.5% of the principal amount, plus accrued and unpaid interest. Note holders may require the Company to repurchase all of the holder's notes at 101% of their principal amount plus accrued and unpaid interest in some circumstances involving a change of control. The 7 1/2% Senior Subordinated Notes are unsecured and subordinated to the Company's existing and future senior indebtedness. The 7 1/2% Senior Subordinated Notes rank equal in right of payment to the Company's 4 1/2% Convertible Subordinated Notes due 2005 and its 4 1/4% Convertible Subordinated Notes due 2008. The 7 1/2% Senior Subordinated Notes effectively rank junior to the Company's subsidiary liabilities. The indenture contains limitations on the Company's ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire its capital stock, acquire the capital stock or assets of another business, and pay dividends. 4 1/4% CONVERTIBLE SUBORDINATED NOTES In October 2001, the Company sold $172,500,000 of Convertible Subordinated Notes due October 10, 2008 (the "4 1/4% Notes"). Net proceeds of approximately $166,400,000 were used to reduce the outstanding balance on the revolving line of credit and for acquisitions. The 4 1/4% Notes bear interest from October 10, 2001 at the rate of 4 1/4% per year, payable semi-annually on April 10 and October 10, beginning on April 10, 2002. The 4 1/4% Notes are convertible at the option of the holder at any time on or prior to maturity into shares of the Company's common stock at a conversion price of $27.70 per share. The conversion price is subject to adjustment. The Company may redeem all or a portion of the 4 1/4% Notes on or after October 10, 2004, at the then current redemption prices, plus accrued and unpaid interest. Note holders may require the Company to repurchase all of the holder's notes at 100% of their principal amount plus accrued and unpaid interest in some circumstances involving a change of control. The 4 1/4% Notes are unsecured and subordinated to the Company's existing and future senior indebtedness. The 4 1/4% Notes are ranked equal in right of payment to the Company's 4 1/2% Notes due in 2005 and its 7 1/2% Senior Subordinated Notes due 2013. The 4 1/4% Notes effectively rank junior to the Company's subsidiary liabilities. The indenture does not contain any financial covenants. A total of 6,226,767 shares (unaudited) of common stock have been reserved for issuance upon conversion of the 4 1/4% Notes. 4 1/2% CONVERTIBLE SUBORDINATED NOTES In November and December 2000, the Company sold $150,000,000 aggregate principal amount of 4 1/2% Convertible Subordinated Notes due November 20, 2005 (the "4 1/2% Notes"). The 4 1/2% Notes bear interest from November 20, 2000 at the rate of 4 1/2% per year, payable semi-annually on May 20 and November 20, beginning on May 20, 2001. The 4 1/2% Notes are convertible at the option of the holder at any time on or prior to maturity into shares of the Company's common stock at a conversion price of $26.45 per share. The conversion price is subject to adjustment. The Company may redeem all or a portion of the 4 1/2% Notes on or after November 20, 2003, at the then current redemption prices, plus accrued and unpaid interest. Note holders may require the Company to repurchase all of the holder's notes at 100% of their principal amount plus accrued and unpaid interest in some circumstances involving a change of control. In 2003, the Company repurchased $74,030,000 of the 4 1/2% Notes from the proceeds from the sale of the 7 1/2% Senior Subordinated Notes as discussed above. The Company recorded a $486,000 pretax loss associated with the early extinguishment of debt related to the repurchase of the 4 1/2% Notes. The 4 1/2% Notes are unsecured obligations and rank junior in right of payment to all of the Company's existing and future senior indebtedness. The 4 1/2% Notes rank equal in right of payment to the Company's 4 1/4% Convertible Subordinated Notes due 2008 and its 7 1/2% Senior Subordinated Notes due 2013. The 4 1/2% Notes effectively rank junior to the Company's subsidiary liabilities. The indenture does not contain any financial covenants. A total of 2,872,760 shares (unaudited) of common stock have been reserved for issuance upon conversion of the remaining 4 1/2% Notes. INTEREST RATE SWAP AGREEMENTS Interest rate swap agreements are used to manage the Company's interest rate exposure. In 1998, the Company entered into an interest rate swap agreement, which effectively converted for a five-year period $45,000,000 of floating-rate borrowings to fixed-rate borrowings. In January 2001, the Company terminated $16,500,000 of the $45,000,000 swap agreement, leaving a notional amount of $28,500,000 converted to fixed-rate borrowings. The Company secured a 5.625% fixed interest rate on the swap agreement, which was subsequently amended to a 4.45% fixed interest rate during 2002. In May 2003, the Company terminated the remainder of the previously existing swap agreement. In July 2003, the Company entered into an interest rate swap agreement which effectively converted for a ten-year period $100,000,000 of the $200,000,000 fixed rate borrowings under the 7 1/2% Senior Subordinated Notes to floating-rate borrowings. The Company secured a LIBOR plus 2.79% floating interest rate over the term of the interest rate swap agreement. The Senior Subordinated Notes are recorded net of the $1,663,000 (unaudited) fair value adjustment of the interest rate swap. The interest rate swap agreement is a fair value hedge. The outstanding agreement exposes the Company to credit losses in the event of non-performance by the counterparty to the financial instrument. The Company anticipates that the counterparty will fully satisfy its obligations under the contract. AGGREGATE MATURITIES (UNAUDITED) Aggregate maturities of long-term debt at December 31, 2004, excluding capital leases (see Note 10), are as follows (in thousands): 2005 $ 75,970 2006 55,000 2007 -- 2008 172,500 2009 -- Thereafter 198,337 ---------- $ 501,807 ==========

7. STOCKHOLDERS' EQUITY COMMON STOCK On April 30, 2002, the Company effected a three-for-two stock split, in the form of a 50% stock dividend, to stockholders of record on April 20, 2002. The stock split resulted in the issuance of 15.9 million shares of common stock and a transfer between additional paid-in capital and common stock of $159,000. All historical references to common share, earnings per share amounts and conversion rights under debt instruments included in the consolidated financial statements and notes thereto have been restated to reflect the three-for-two split. PREFERRED SHARE PURCHASE RIGHTS To establish a new shareholders' rights plan, on December 30, 2002, the Board of Directors declared a dividend distribution of one Preferred Share Purchase Right ("Right") on each outstanding share of the Company's common stock. The dividend distribution was payable to shareholders of record on January 10, 2003. Under certain circumstances, each Right will entitle shareholders to buy one ten-thousandth of a share of newly created Series A Junior Participating Preferred Stock of the Company at an exercise price of $75.00. The Rights are redeemable at $.01 per Right at any time before a person has acquired 15% or more of the Company's outstanding common stock. The Preferred Share Purchase Right Plan will expire on December 31, 2012. The Rights have certain anti-takeover effects. The rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not determined by the Board of Directors to be in the best interest of all shareholders. The Rights should not interfere with any merger or other business combination approved by the Board of Directors. STOCK OPTIONS In March 1997, the Company's Board of Directors and shareholders approved the 1997 Long-Term Equity Incentive Plan (the "Plan"). The Company has reserved 12,620,286 shares for issuance under the Plan. Under the Plan, options to purchase shares may be granted to officers, employees, and directors. The options have a maximum term of ten years and generally vest in five equal annual installments. Options are generally granted at not less than market price on the date of grant. The following is a summary of option transactions during 2004, 2003 and 2002:
NUMBER OF OPTION OPTIONS PRICE RANGE --------- --------------- Balance at December 31, 2001 5,219,878 $ 2.03 - $23.00 Options granted 2,492,327 10.80 - 23.50 Options exercised (1,031,997) 2.03 - 23.50 Options forfeited (1,009,375) 2.03 - 23.50 ---------- Balance at December 31, 2002 5,670,833 2.03 - 23.50 Options granted 1,454,150 7.71 - 13.52 Options exercised (143,882) 2.03 - 11.50 Options forfeited (214,212) 6.72 - 23.50 ---------- Balance at December 31, 2003 6,766,889 2.03 - 23.50 Options granted (unaudited) 1,660,000 14.16 - 17.62 Options exercised (unaudited) (927,951) 2.03 - 21.08 Options forfeited (unaudited) (464,246) 7.17 - 23.50 ---------- Balance at December 31, 2004 (unaudited) 7,034,692 $ 2.03 - $23.50 ==========
The following table summarizes information concerning outstanding and exercisable options at December 31, 2004 (unaudited):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------- ---------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE - ------------------------ ----------- ---------------- -------- ----------- -------- $ 2.03 - $ 7.17 282,769 4.3 $ 6.81 282,769 $ 6.81 7.71 - 7.71 1,028,856 8.2 7.71 127,696 7.71 8.95 - 11.50 947,185 5.9 10.76 653,685 10.65 11.56 - 15.75 887,650 9.2 15.30 21,950 12.65 15.83 - 16.40 1,037,775 7.9 16.09 307,539 16.35 16.67 - 16.71 797,376 6.5 16.69 797,376 16.69 17.62 - 18.20 808,206 8.1 18.02 226,541 18.20 18.67 - 21.08 533,673 6.9 20.00 392,736 20.25 23.00 - 23.00 24,808 6.6 23.00 20,164 23.00 23.50 - 23.50 686,394 7.4 23.50 667,050 23.50 --------- --------- $ 2.03 - $23.50 7,034,692 7.4 15.01 3,497,506 16.21 ========= =========
At December 31, 2003 and 2002, respectively, 3,356,852 and 2,636,954 options were exercisable. At December 31, 2004, the Company had options representing 1,162,680 (unaudited) shares available for future grant. EMPLOYEE STOCK PURCHASE PLAN In May 1998 the Company's Board adopted, and in June 1998 the stockholders approved, the Province Healthcare Company Employee Stock Purchase Plan (the "ESPP"). Under the ESPP, employees may purchase shares of common stock at 85% of market price on the first day of the year or 85% of the market price on the last day of the year, whichever is lower. The shares are purchased each year with funds withheld from employees through payroll deductions from January 1 through December 31. A total of 1,125,000 shares of Common Stock have been reserved for issuance under the ESPP. Participation in the ESPP commenced June 1, 1998. Shares issued under the ESPP totaled 256,942 (unaudited), 126,874 and 59,022 in 2004, 2003 and 2002, respectively. 8. INCOME TAXES The provision for income taxes from continuing operations consists of the following amounts (in thousands):
2004 2003 2002 ---------- --------- ---------- (unaudited) Current: Federal $ 3,679 $ 7,840 $ 13,045 State (243) 761 1,419 ---------- --------- ---------- 3,436 8,601 14,464 Deferred: Federal 21,870 13,312 7,939 State 2,795 903 837 ---------- --------- ---------- 24,665 14,215 8,776 ---------- --------- ---------- $ 28,101 $ 22,816 $ 23,240 ========== ========= ==========
The differences between the Company's effective income tax rate and the statutory federal income tax rate are as follows (in thousands):
2004 2003 2002 ---------------- --------------- -------------- (unaudited) Statutory federal rate $ 27,355 35.0% $ 22,588 35.0% $ 20,327 35.0% State income taxes, net of federal income tax benefit 1,659 2.1 1,081 1.7 1,467 2.5 Permanent differences 387 0.5 271 0.4 232 0.4 Other (1,300) (1.6) (1,124) (1.7) 1,214 2.1 --------- ---- --------- ---- -------- ---- $ 28,101 36.0% $ 22,816 35.4% $ 23,240 40.0% ========= ==== ========= ==== ======== ====
The components of the Company's deferred tax assets and (liabilities) for continuing operations are as follows (in thousands):
DECEMBER 31, -------------------------- 2004 2003 ------------ ------------ (unaudited) Depreciation and amortization $ (53,797) $ (33,659) Accounts receivable (10,068) (4,215) Accruals and reserves 1,201 1,947 Insurance reserves 6,470 4,789 Third party settlements 2,965 2,224 Operating leases (2,520) (2,201) Capital lease interest 702 683 Other 214 582 ----------- ----------- Net deferred tax liability $ (54,833) $ (29,850) =========== ===========
In the accompanying consolidated balance sheets, net current deferred tax liabilities of $8,118,000 (unaudited) and $2,015,000 are included in accrued expenses at December 31, 2004 and 2003, respectively. Net noncurrent deferred tax liabilities of $46,715,000 (unaudited) and $27,835,000 are included in other liabilities at December 31, 2004 and 2003, respectively. The Company recorded a deferred tax liability of $318,000 (unaudited) related to interest rate swap agreements during 2004. The expense of the deferred taxes is recorded in comprehensive income. The Company has been examined by federal and various state tax authorities. The completed examinations did not have a negative impact on the financial condition or results of operations of the Company. In 2004, the Company recorded a reduction in its provision for income taxes of approximately $800,000 (unaudited) due to final resolution of examinations on certain issues by taxing authorities of audits that had been ongoing for over one year. 9. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
2004 2003 2002 ------- --------- -------- (unaudited) Earnings per common share: Income from continuing operations $50,056 $ 41,720 $34,838 Add convertible notes interest, net of tax 7,781 8,325 -- ------- -------- ------- Income from continuing operations 57,837 50,045 34,838 Discontinued operations 4,443 (10,101) 1,274 ------- -------- ------- Net income $62,280 $ 39,944 $36,112 ======= ======== ======= Weighted average shares: Weighted average shares - basic 49,543 48,692 48,146 Dilution for employee stock options 1,395 613 1,307 Dilution for convertible notes 9,100 10,243 -- ------- -------- ------- Weighted-average shares - diluted 60,038 59,548 49,453 ======= ======== ======= Basic earnings per common share: Income from continuing operations $ 1.01 $ 0.85 $ 0.72 Discontinued operations 0.09 (0.20) 0.03 ------- -------- ------- Net income $ 1.10 $ 0.65 $ 0.75 ======= ======== ======= Diluted earnings per common share: Income from continuing operations $ 0.96 $ 0.84 $ 0.70 Discontinued operations 0.08 (0.17) 0.03 ------- -------- ------- Net income $ 1.04 $ 0.67 $ 0.73 ======= ======== =======
In accordance with SFAS No. 128, the calculation of diluted earnings per share for the year ended December 31, 2004 using the "if converted" method includes the impact of the Company's convertible notes. Since the Company reports discontinued operations, income from continuing operations has been utilized in determining whether the convertible notes were dilutive or antidilutive to earnings per share. The convertible notes were dilutive to earnings per share on income from continuing operations and net income for the year ended December 31, 2004. The convertible notes were dilutive to earnings per share on income from continuing operations and were anti-dilutive to net income for the year ended December 31, 2003. The effect of the convertible notes to purchase 5,672,160 shares of common stock, and related interest expense, were not included in the computation of diluted earnings per share in 2002 because their effect would have been anti-dilutive. 10. LEASES (UNAUDITED) The Company leases various buildings, office space and equipment. The leases expire at various times and have various renewal options. These leases are classified as either capital leases or operating leases based on the terms of the respective agreements. Future minimum payments at December 31, 2004, by year and in the aggregate, under capital leases and noncancellable operating leases with initial terms of one year or more consist of the following (in thousands):
CAPITAL OPERATING LEASES LEASES --------- --------- 2005 $ 479 $ 7,609 2006 469 6,803 2007 471 5,324 2008 478 4,634 2009 414 3,059 Thereafter 2,311 15,538 ------- ------- Total minimum lease payments 4,622 $42,967 ======= Amount representing interest (at rates ranging from 3.94% to 9.74%) (1,805) ------- Present value of net minimum lease payments (including $271 classified as current) $ 2,817 =======
11. COMMITMENTS AND CONTINGENCIES (UNAUDITED) LITIGATION SETTLEMENT In January 2005, the Company executed a confidential settlement agreement (the "Settlement Agreement") to resolve litigation and other disputes arising in 2002. Under the terms of the Settlement Agreement, the Company paid $0.5 million in January 2005 for conditions satisfied under the terms of the Settlement Agreement. This amount has been expensed and accrued in the December 31, 2004 financial statements. The Company also funded approximately $2.5 million in an escrow account payable over a two year period upon the satisfaction of certain future events, including non-competition. COMMITMENTS In 2004, the Company began construction of a new 60-bed acute care hospital in Ft. Mohave, Arizona. This new hospital is currently estimated to cost approximately $31,000,000, of which approximately $7,790,000 has been incurred at December 31, 2004. Construction of the Ft. Mohave facility is anticipated to be completed in the third quarter of 2005. In 2004, the Company also began construction of a 52-bed replacement facility for its existing 72-bed facility in Eunice, Louisiana. The replacement facility is estimated to cost approximately $25,600,000, of which approximately $1,095,000 has been incurred at December 31, 2004. Construction of the Eunice replacement facility is anticipated to be completed in the second quarter of 2006. GENERAL LIABILITY CLAIMS The Company is subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, employment-related claims, breach of management contracts and for wrongful restriction of, or interference with, physicians' staff privileges. In certain of these actions, plaintiffs may seek punitive or other damages against the Company, which are generally not covered by insurance. In management's opinion, the Company is currently not a party to any proceeding that would have a material adverse effect on the Company's results of operations or financial condition. ACQUISITIONS The Company has acquired hospitals with prior operating histories. The hospitals that the Company acquires may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations. Although the Company obtains contractual indemnification from sellers covering these matters, such indemnification may be insufficient to cover material claims or liabilities for past activities of acquired hospitals. PHYSICIAN COMMITMENTS In order to recruit and retain physicians to the communities it serves, the Company has committed to provide certain financial assistance in the form of recruiting agreements with various physicians. In consideration for a physician relocating to one of its communities and agreeing to engage in private practice for a specified period of time, the Company may loan certain amounts of money to a physician, generally not to exceed a period of one year, to assist in establishing his or her practice. The actual amount of such commitments to be subsequently advanced to physicians often depends on the financial results of the physicians' practice during the guarantee period. Amounts advanced under the recruiting agreements are generally forgiven pro rata over a period of three years contingent upon the physician continuing to practice in the respective community. Estimated future commitment payments for physicians under recruiting agreements in effect at December 31, 2004 are approximately $22,895,000. 12. RETIREMENT PLANS The Company sponsors defined contribution employee benefit plans which cover substantially all employees. Employees may contribute a percentage of eligible compensation subject to Internal Revenue Service limits. The plans call for the Company to make matching contributions, based on either a percentage of employee contributions or a discretionary amount as determined by the Company. Contributions by the Company to the plans totaled $3,281,000 (unaudited), $3,198,000 and $2,854,000 for the years ended December 31, 2004, 2003 and 2002, respectively. The Company sponsors a nonqualified supplemental deferred compensation plan for selected management employees. As determined by the Board of Directors, the plan provides a benefit of 1% to 3% of the employee's compensation. The participant's amount is fully vested, except in those instances where the participant's employment terminates for any reason other than retirement, death or disability, in which case the participant forfeits a portion of the employer's contribution depending on length of service. Plan expenses totaled $122,000 (unaudited), $148,000 and $226,000 for the years ended December 31, 2004, 2003 and 2002, respectively. 13. FAIR VALUES OF FINANCIAL INSTRUMENTS (UNAUDITED) Cash and Cash Equivalents-The carrying amount reported in the consolidated balance sheets for cash and cash equivalents approximates fair value. Accounts Receivable and Accounts Payable-The carrying amount reported in the consolidated balance sheets for accounts receivable and accounts payable approximates fair value. Long-Term Obligations-The carrying value of the Company's 4 1/2% Notes, 4 1/4% Notes, and 7 1/2% Senior Subordinated Notes was $75,970,000, $172,500,000 and $200,000,000, respectively, at December 31, 2004. The fair value of the Company's 4 1/2% Notes, 4 1/4% Notes, and 7 1/2% Notes was $76,540,000, $174,656,000 and $209,962,000, respectively, at December 31, 2004, based on the quoted market prices at December 31, 2004. Interest Rate Swap Agreement-The fair value of the Company's interest rate swap agreement is $1,663,000 at December 31, 2004, based on quoted market prices for similar debt issues. 14. ALLOWANCES FOR DOUBTFUL ACCOUNTS A summary of activity in the Company's allowance for doubtful accounts is as follows (in thousands):
ACCOUNTS BALANCE AT PROVISION FOR ALLOWANCES WRITTEN OFF BALANCE AT BEGINNING OF DOUBTFUL ACQUIRED IN NET OF END OF PERIOD ACCOUNTS ACQUISITIONS RECOVERIES PERIOD ------------ ------------- ------------ ----------- ------------ Year ended December 31, 2002 $ 44,476 $ 53,201 $ 10,729 $ (43,694) $ 64,712 Year ended December 31, 2003 $ 64,712 $ 72,583 $ -- $ (70,460) $ 66,835 Year ended December 31, 2004 (unaudited) $ 66,835 $ 95,015 $ 19,547 $(103,123) $ 78,274
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly financial information for the years ended December 31, 2004 and 2003 is summarized below (in thousands, except per share data):
QUARTER ------------------------------------------------- FIRST SECOND THIRD FOURTH ---------- ---------- ---------- ---------- 2004 Net revenues $ 200,577 $ 208,534 $ 235,315 $ 238,480 Income from continuing operations $ 12,207 $ 11,830 $ 11,891 $ 14,128 Discontinued operations (646) 6,369 (362) (918) --------- --------- --------- --------- Net income $ 11,561 $ 18,199 $ 11,529 $ 13,210 ========= ========= ========= ========= Basic earnings (loss) per share: Income from continuing operations $ 0.25 $ 0.24 $ 0.24 $ 0.28 Discontinued operations (0.01) 0.13 (0.01) (0.02) --------- --------- --------- --------- Net income $ 0.24 $ 0.37 $ 0.23 $ 0.26 ========= ========= ========= ========= Diluted earnings (loss) per share: Income from continuing operations $ 0.24 $ 0.23 $ 0.23 $ 0.27 Discontinued operations (0.01) 0.11 (0.01) (0.02) --------- --------- --------- --------- Net income $ 0.23 $ 0.34 $ 0.22 $ 0.25 ========= ========= ========= ========= 2003 Net revenues $ 182,443 $ 183,935 $ 184,789 $ 195,041 Income from continuing operations $ 9,892 $ 9,919 $ 10,201 $ 11,708 Discontinued operations (41) (258) (394) (9,408) --------- --------- --------- --------- Net income $ 9,851 $ 9,661 $ 9,807 $ 2,300 ========= ========= ========= ========= Basic earnings (loss) per share: Income from continuing operations $ 0.20 $ 0.20 $ 0.21 $ 0.24 Discontinued operations -- -- (0.01) (0.19) --------- --------- --------- --------- Net income $ 0.20 $ 0.20 $ 0.20 $ 0.05 ========= ========= ========= ========= Diluted earnings (loss) per share: Income from continuing operations $ 0.20 $ 0.20 $ 0.21 $ 0.23 Discontinued operations -- -- (0.01) (0.16) --------- --------- --------- --------- Net income $ 0.20 $ 0.20 $ 0.20 $ 0.07 ========= ========= ========= =========
The amounts presented in the preceding table for the first quarter of 2004 and 2003 reflect the restatement of Brim Healthcare, Inc. as a discontinued operation. The Form 10-Q for the quarterly period ended March 31, 2004, as filed, reflected Brim Healthcare, Inc. in continuing operations. The restatement of Brim Healthcare, Inc. as a discontinued operation resulted in a decrease of $4,299,000 in net revenues, an increase in income from continuing operations of $63,000 and an increase in the loss from discontinued operations of $63,000 for the quarter ended March 31, 2004. The restatement of Brim Healthcare, Inc. as a discontinued operation resulted in a decrease of $4,021,000 in net revenues, a decrease in income from continuing operations of $147,000 and a decrease in the loss from discontinued operations of $147,000 for the quarter ended March 31, 2003. The restatement of Brim Healthcare, Inc. as a discontinued operation did not have any effect on net income for the quarters ended March 31, 2004 and 2003. 16. SUBSEQUENT EVENT (UNAUDITED) On March 18, 2005, in connection with the pending acquisition by LifePoint, the Company commenced a cash tender offer and consent solicitation for any and all of its 7 1/2% Senior Subordinated Notes. The tender offer consideration for each $1,000 principal amount of 7 1/2% Senior Subordinated Notes validly tendered and accepted for purchase will be based on a fixed spread of 50 basis points over the yield on the price, as of April 12, 2005, of the 2.625% U.S. Treasury Note due May 15, 2008, plus accrued interest minus a consent payment equal to $20 per $1,000 principal amount tendered and accepted for purchase. The tender offer is scheduled to expire on April 15, 2005, unless extended or terminated earlier. EX-99.2 3 g93965exv99w2.txt EX-99.2 FINANCIAL INFORMATION REGARDING THE REGISTRANT'S FINANCIAL STATEMENTS EXHIBIT 99.2 FORWARD-LOOKING STATEMENTS PROPOSED MERGER WITH LIFEPOINT HOSPITALS, INC. Our disclosure and analysis in the following discussion contain some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Our proposed merger with LifePoint Hospitals, Inc., projected to close by April 15, 2005, will affect a number of the forward-looking statements made herein. Although we believe our management team and management of LifePoint Hospitals share many of the same goals and operating strategies, some of the forward-looking statements contained herein may become inapplicable once the operations of the two companies are combined upon completion of the merger. The following discussions apply only to Province Healthcare and do not give effect to the proposed merger, the operations of LifePoint, or the combined operations of our company and LifePoint following the merger. Any or all of our forward-looking statements contained herein may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in this discussion will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. Factors that may cause our plans, expectations, future financial condition and results to change include, but are not limited to: - the highly competitive nature of the healthcare business; - the efforts of insurers, healthcare providers and others to contain healthcare costs; - the financial condition of managed care organizations that pay us for healthcare services; - possible changes in the levels and terms of reimbursement for our charges by government programs, including Medicare and Medicaid or other third-party payors; - changes in or failure to comply with federal, state or local laws and regulations affecting the healthcare industry; - the possible enactment of federal or state healthcare reform; - the departure of key members of our management; - claims and legal actions relating to professional liability; - our ability to implement successfully our acquisition and development strategy; - our ability to recruit and retain qualified personnel and physicians; - potential federal or state investigations; - fluctuations in the market value of our common stock or notes; - changes in accounting principles generally accepted in the United States or in our critical accounting policies; - changes in demographic, general economic and business conditions, both nationally and in the regions in which we operate; - changes in the availability, cost and terms of insurance coverage for our hospitals and physicians who practice at our hospitals; and - other risks described herein. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any additional disclosures we make in our Form 10-K, 10-Q and 8-K reports to the Securities and Exchange Commission, as well as the discussion of risks and uncertainties to be described in our Annual Report on Form 10-K for the year ended December 31, 2004. These are factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed here also could affect us adversely. You are cautioned not to place undue reliance on such forward-looking statements when evaluating the information presented in this report. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. EXECUTIVE OVERVIEW We are a healthcare services company focused on acquiring and operating hospitals in attractive non-urban communities throughout the United States. As of December 31, 2004, we owned or leased 21 general acute care hospitals in 13 states with a total of 2,533 licensed beds. On April 30, 2004, we completed the sale of Glades General Hospital in Belle Glade, Florida to a wholly-owned subsidiary of the Health Care District of Palm Beach County. The District reacquired the operating assets of the hospital for a purchase price of approximately $1.5 million in cash at closing, net of assumed and contractual obligations. Under the purchase agreement, we retained the hospital's accounts receivable, income tax receivable and deferred income taxes. We also retained certain payroll-related liabilities and other accrued expenses. On June 30, 2004, we completed the sale of the stock of Brim Healthcare, Inc., our hospital management subsidiary, to Brim Holding Company, Inc., an independent investor-owned entity for approximately $13.2 million in cash. As required by Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), Accounting for the Impairment or Disposal of Long-Lived Assets, the operations and non-cash impairment of assets charge related to Glades General Hospital and Brim Healthcare, Inc. are reported as "discontinued operations" and the consolidated financial statements, statistics and all references to such information contained in this discussion have been adjusted to reflect this presentation for all periods. Our remaining 21 hospitals continue to be reported as "continuing operations." Effective June 1, 2004, we completed the acquisition, through a long-term lease, of the 286-bed Memorial Medical Center in Las Cruces, New Mexico ("Memorial Medical Center") for approximately $152.2 million, including direct and incremental costs of the acquisition. On August 16, 2004, our company and LifePoint Hospitals, Inc. ("LifePoint") announced that we had entered into a definitive merger agreement (the "Merger Agreement") pursuant to which LifePoint will acquire us. Pursuant to the terms of the Merger Agreement, our company and LifePoint will each become wholly-owned subsidiaries of a newly formed holding company that will be publicly traded. Each of our shareholders will receive a per share consideration comprised of $11.375 of cash and a number of shares of common stock of the new company equal to an exchange ratio of between 0.3447 and 0.2917, which shares will have a value of $11.375 to the extent that LifePoint's average share price is between $33.00 and $39.00. The exchange ratio will be 0.3447 if the volume weighted average daily share price of a share of LifePoint's common stock for the twenty consecutive trading day period ending at close of business on the third trading day prior to the closing (the "LifePoint average share price") is $33.00 or less, and 0.2917 if LifePoint's average share price is $39.00 or more. If LifePoint's average share price is between $33.00 and $39.00, then the exchange ratio will be equal to $11.375 divided by the LifePoint average share price. The proposed merger is subject to approval by the stockholders of our company and LifePoint. The proposed merger is projected to close by April 15, 2005, subject to the satisfaction of customary closing conditions. During the fourth quarter of 2004, we completed the construction of the 41-bed Coastal Carolina Medical Center in Hardeeville, South Carolina and opened the hospital on November 29, 2004. Revenues from continuing operations for the year ended December 31, 2004 increased 18.3% to $882.9 million, compared with $746.2 million for the year ended December 31, 2003, primarily as a result of the acquisition of Memorial Medical Center and increases in same-store net patient revenue per adjusted admission of 6.2% and outpatient revenue of 11.2%, as well as the recording of cost report settlements. For the year ended December 31, 2004, income from continuing operations was $50.1 million compared with $41.7 million for the year ended December 31, 2003. The increase in income from continuing operations was primarily due to the acquisition of Memorial Medical Center and improved operations at our same store hospitals. Cash flow from operations for the year ended December 31, 2004 increased 21.0% to $126.3 million, compared with $104.3 million for the year ended December 31, 2003. The increase was due primarily to an increase of $8.3 million in our income from continuing operations, a $9.3 million increase in depreciation and amortization expense (of which $5.0 million is attributable to the Memorial Medical Center acquisition), and an increase of $15.2 million in our deferred income tax provision resulting from the Memorial Medical Center acquisition and divestitures of Glades General Hospital and Brim Healthcare, Inc. The increase in cash flow from operations is partially offset by an increase in net accounts receivable of continuing operations of $12.6 million. The increase in net accounts receivable principally relates to a $6.2 million loan to a third party for the construction of a medical office building on one of our facility's campuses and approximately $5.9 million from the lessor of Memorial Medical Center for their obligations required under the facility lease agreement. For the year ended December 31, 2004, 19 of our 21 owned or leased hospitals are considered same-store hospitals. Memorial Medical Center and Coastal Carolina Medical Center are excluded from same-store results. On a same-store basis, net patient revenue for the year ended December 31, 2004 increased 5.9%, net patient revenue per adjusted admission increased 6.2% and surgeries increased 3.1% as compared to the year ended December 31, 2003. We continue to see the results of the successful recruitment of primary care physicians and specialists in 2003 and 2004, strong outpatient growth and an increase in acuity. Same-store outpatient revenue for the year ended December 31, 2004 increased 11.2% and same-store acuity increased 2.2%. In the fourth quarter of 2003, we announced plans to construct a new 60-bed acute care hospital in Ft. Mohave, Arizona, near our existing hospital in Needles, California. Construction of the Ft. Mohave facility is anticipated to be completed in the third quarter of 2005. In the first quarter of 2005, we announced plans to construct a 52-bed replacement facility for our existing 72-bed facility in Eunice, Louisiana. Construction of the Eunice replacement facility is anticipated to be completed in the second quarter of 2006. REVENUES The table below reflects the approximate percentages of net patient revenue received from Medicare, Medicaid, managed care and other payors and self-pay for the periods presented:
YEAR ENDED DECEMBER 31, ----------------------- 2004 2003 2002 ------ ------ ---- Medicare 37.7% 38.5% 45.4% Medicaid 10.1 10.3 11.3 Managed care and other payors 41.2 44.2 38.2 Self-pay 11.0 7.0 5.1 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== =====
Net patient revenue is reported net of contractual adjustments and policy discounts. Net patient revenue includes amounts estimated by management to be reimbursable by Medicare and Medicaid under prospective payment systems and provisions of cost-reimbursement and other payment methods. In addition, we are reimbursed by non-governmental payors using a variety of payment methodologies. Amounts we receive from treatment of patients covered by these programs are generally less than the standard billing rates. We account for the differences between the estimated program reimbursement rates and the standard billing rates as contractual adjustments, which we deduct from gross revenues to arrive at net patient revenue. Final settlements under some of these programs are subject to adjustment based on administrative review and audit by third parties. We account for adjustments to previous reimbursement estimates as contractual adjustments and report them in the periods that such adjustments become known. Cost report settlements and the filing of cost reports increased net patient revenue by $9.9 million, of which $2.9 million related to facilities that had not previously qualified for disproportionate share payments in prior years, and $5.5 million for the years ended December 31, 2004 and 2003, respectively, and decreased net patient revenue by $0.9 million for the year ended December 31, 2002. The payment rates under the Medicare program for inpatients are based on a prospective payment system, depending upon the diagnosis of a patient's condition. While these rates are indexed for inflation annually, the increases have historically been less than actual inflation. Reductions in the rate of increase in Medicare reimbursement may have an adverse impact on our net patient revenue growth. Effective April 1, 2002, the Centers for Medicare and Medicaid Services implemented changes to the Medicare outpatient prospective system. Although these changes have resulted in reductions to Medicare outpatient payments, these reductions, as well as changes to the Medicare system caused by the Benefit Improvement and Protection Act of 2000, should not materially affect our net patient revenue growth. While the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("MMA") provides a broad range of provider payment benefits, federal government spending in excess of federal budgetary provisions contained in passage of MMA could result in future deficit spending for the Medicare system, which could cause future payments under the Medicare system to grow at a slower rate or decline. We continually monitor the cost/benefit relationship of services provided at our hospitals, and make decisions about adding new services or discontinuing existing services. Revenue/Volume Trends The key metrics we use to internally evaluate our revenues are adjusted admissions, which we equate to volume, and revenues per adjusted admission, which we relate to pricing and acuity. We anticipate our patient volumes and related revenues will continue to be impacted by the following factors: - - Physician Recruitment and Retention. Recruiting and retaining both primary care physicians and specialists for our non-urban communities is a key to increasing revenues and patient volumes. Adding specialists and new services typically results in an increase in volumes at a hospital. We recruited 148 physicians during the year ended December 31, 2004, of which approximately two-thirds of these physicians are specialists. - - Medicare Rate Increases. MMA provides a prescription drug benefit for Medicare beneficiaries and also contains numerous provisions that provide incremental funding to hospitals. Hospitals qualify for Medicare disproportionate share hospital ("DSH") payments when their percentage of low-income patients exceeds 15%. A majority of our hospitals qualify to receive DSH payments. Effective April 1, 2004, MMA raised the cap on the DSH payment adjustment percentage from 5.25% to 12.0% for rural and small urban hospitals and specified that payments to all hospitals are based on the same conversion factor, regardless of geographic location. A majority of our hospitals are benefiting from these provisions. - - Growth in Outpatient Services. Many procedures once performed only on an inpatient basis are now performed as outpatient procedures. This shift is the result of continuing advances in medical and pharmaceutical technologies, and of efforts by payors to control costs. Reimbursement for inpatient services is typically higher than that for the same procedures performed on an outpatient basis. We anticipate that the long-term growth trend toward outpatient services will continue. The following table reflects gross outpatient, inpatient and other revenues as a percentage of our total gross revenues:
YEAR ENDED DECEMBER 31, ----------------------- 2004 2003 2002 ------ ------ ----- Outpatient 46.0% 44.5% 42.6% Inpatient 53.4 54.9 56.8 Other 0.6 0.6 0.6 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== =====
Other Trends Increase in Provision for Doubtful Accounts. Like many of the other companies in our industry, we are experiencing an increase in our provision for doubtful accounts relating to "self-pay" accounts receivable. "Self-pay" revenue refers to payment for healthcare services received directly from individual patients, either in the form of a deductible or co-payment under a health insurance plan or as full or partial payment of the amount charged by the provider or not covered by insurance. The current soft economic environment, higher unemployment rates and increasing numbers of uninsured patients, combined with higher co-payments and deductibles, are placing a greater portion of the financial responsibility for healthcare services on the patient rather than insurers. Additionally, many of these patients are being admitted through the emergency room department and often require more costly care, resulting in higher billings. Many of these accounts remain uncollected for extended periods of time, requiring providers to increase the amounts reserved as "doubtful accounts" and ultimately written off as uncollectible. We experienced an increase in our provision for doubtful accounts during each of the years in the three-year period ending December 31, 2004. Although the economies of a majority of the communities in which we operate hospitals have stabilized, some of our hospitals are experiencing a reduction in state Medicaid coverage, primarily in Texas. In addition, we realized an increase in our provision for doubtful accounts during the year ended December 31, 2004 as a result of our acquisition of Memorial Medical Center. Our provision for doubtful accounts relates primarily to self-pay revenues. Self-pay revenues as a percentage of total net patient revenue were 11.0%, 7.0% and 5.1% for the years ended December 31, 2004, 2003 and 2002, respectively. Our gross revenues are reduced for patient accounts identified as charity and indigent care. Our hospitals write-off a patient's account upon the determination that the patient qualifies, or when it is not paid and deemed uncollectible, under a hospital's charity and indigent care policy. Charity care (based on gross charges) was approximately $17.5 million, $23.5 million and $19.3 million for the years ended December 31, 2004, 2003 and 2002, respectively. Charity care and provision for doubtful accounts was approximately $112.5 million, $96.1 million and $72.5 million for the years ended December 31, 2004, 2003 and 2002, respectively. RESULTS OF OPERATIONS The following tables present, for the periods indicated, the results of operations of our company and its subsidiaries. Such information has been derived from our unaudited consolidated statements of income for the year ended December 31, 2004 and our audited consolidated statements of income for the years ended December 31, 2003 and 2002. The results of operations for the periods presented include hospitals from their respective dates of acquisition.
YEAR ENDED DECEMBER 31, -------------------------------------------- 2004 2003 --------------------- --------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) -------------------------------------------- % OF % OF % CHANGE AMOUNT REVENUES AMOUNT REVENUES FROM PRIOR YEAR -------- -------- -------- -------- --------------- Revenues: Net patient revenue $872,275 $735,841 Other 10,631 10,367 -------- -------- 882,906 100.0% 746,208 100.0% 18.3% Expenses: Salaries, wages and benefits 323,565 36.6 282,794 37.9 Purchased services 85,698 9.7 68,872 9.2 Supplies 114,186 12.9 95,579 12.8 Provision for doubtful accounts 95,015 10.8 72,583 9.7 Other operating expenses 96,934 11.0 88,137 11.8 Rentals and leases 11,250 1.3 9,007 1.2 Transaction costs 851 0.1 -- -- Depreciation and amortization 46,881 5.3 37,617 5.1 Interest expense 29,652 3.3 26,262 3.5 Minority interests 687 0.1 260 -- Loss on sale of assets 30 -- 75 -- Loss on early extinguishment of debt -- -- 486 0.1 -------- ----- -------- ----- Total expenses 804,749 91.1 681,672 91.3 18.1% Income from continuing operations before provision for income taxes 78,157 8.9 64,536 8.7 21.1% Income taxes 28,101 3.2 22,816 3.1 -------- ----- -------- ----- Income from continuing operations 50,056 5.7 41,720 5.6 20.0%

YEAR ENDED DECEMBER 31, ----------------------------------------------------- 2004 2003 ------------------------- ------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) % OF % OF % CHANGE AMOUNT REVENUES AMOUNT REVENUES FROM PRIOR YEAR ----------- -------- ----------- -------- --------------- Discontinued operations, net of tax: Loss from operations (2,220) (1,149) Net gain (loss) on divestitures 6,663 (8,952) ----------- ----------- Net income $ 54,499 $ 31,619 72.4% =========== =========== Diluted earnings per common share: Continuing operations $ 0.96 $ 0.84 Discontinued operations, net of tax: Loss from operations (0.03) (0.02) Net gain (loss) on divestitures 0.11 (0.15) ----------- ----------- Net income $ 1.04 $ 0.67 =========== ===========

YEAR ENDED DECEMBER 31, --------------------------------------------------- 2003 2002 ------------------------- ------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) % OF % OF % CHANGE AMOUNT REVENUES AMOUNT REVENUES FROM PRIOR YEAR ------------ --------- ------------ -------- --------------- Revenues: Net patient revenue $ 735,841 $ 649,954 Other 10,367 8,308 ------------ ------------ 746,208 100.0% 658,262 100.0% 13.4% Expenses: Salaries, wages and benefits 282,794 37.9 261,499 39.7 Purchased services 68,872 9.2 69,934 10.6 Supplies 95,579 12.8 84,408 12.8 Provision for doubtful accounts 72,583 9.7 53,201 8.1 Other operating expenses 88,137 11.8 69,447 10.6 Rentals and leases 9,007 1.2 8,284 1.3 Depreciation and amortization 37,617 5.1 32,169 4.9 Interest expense 26,262 3.5 21,285 3.2 Minority interests 260 -- 34 -- Loss (gain) on sale of assets 75 -- (77) -- Loss on early extinguishment of debt 486 0.1 -- -- ------------ ------ ------------ ------ Total expenses 681,672 91.3 600,184 91.2 13.6% Income from continuing operations before provision for income taxes 64,536 8.7 58,078 8.8 11.1% Income taxes 22,816 3.1 23,240 3.5 ------------ ------ ------------ ------ Income from continuing operations 41,720 5.6 34,838 5.3 19.8% Discontinued operations, net of tax: (Loss) earnings from operations (1,149) 1,274
Net loss on divestitures (8,952) -- ------------ ------------ Net income $ 31,619 $ 36,112 (12.4)% ============ ============ Diluted earnings (loss) per common share: Continuing operations $ 0.84 $ 0.70 Discontinued operations, net of tax: (Loss) earnings from operations (0.02) 0.03 Net loss on divestitures (0.15) -- ------------ ------------ Net income $ 0.67 $ 0.73 ============ ============

The following tables present key operating statistics for our owned and leased hospitals (excluding discontinued operations) for the periods presented. (1)
YEAR ENDED DECEMBER 31, --------------------------------------------------- 2004 2003 % CHANGE --------------- --------------- -------- CONSOLIDATED HOSPITALS (CONTINUING OPERATIONS): Number of hospitals at end of period 21 19 10.5% Licensed beds at end of period (2) 2,533 2,189 15.7 Beds in service at end of period 2,157 1,933 11.6 Inpatient admissions (3) 76,107 72,630 4.8 Adjusted admissions (4) 141,671 131,557 7.7 Net patient revenue per adjusted admission $ 6,157 $ 5,593 10.1 Patient days (5) 323,949 307,195 5.5 Adjusted patient days (6) 602,962 556,331 8.4 Average length of stay (days) (7) 4.3 4.2 2.4 Net patient revenue (in thousands) $ 872,275 $ 735,841 18.5 Gross patient revenue (in thousands) (8): Inpatient $ 1,033,038 $ 903,740 14.3% Outpatient 889,903 732,844 21.4 --------------- --------------- ---- Total gross patient revenue $ 1,922,941 $ 1,636,584 17.5% =============== =============== ==== SAME HOSPITALS (CONTINUING OPERATIONS)(9): Number of hospitals at end of period 19 19 -- % Licensed beds at end of period (2) 2,206 2,189 0.8 Beds in service at end of period 1,920 1,933 (0.7) Inpatient admissions (3) 70,071 72,630 (3.5) Adjusted admissions (4) 131,277 131,557 (0.2) Net patient revenue per adjusted admission $ 5,937 $ 5,592 6.2 Patient days (5) 297,083 307,195 (3.3) Adjusted patient days (6) 556,459 556,331 -- Average length of stay (days) (7) 4.2 4.2 -- Net patient revenue (in thousands) $ 779,419 $ 735,727 5.9 Gross patient revenue (in thousands) (8): Inpatient $ 933,552 $ 903,740 3.3% Outpatient 814,808 732,844 11.2 --------------- --------------- ---- Total gross patient revenue $ 1,748,360 $ 1,636,584 6.8% =============== =============== ====
- ------------ (1) All statistics have been restated to exclude the ownership and operations of Glades General Hospital, which was sold on April 30, 2004. The statistics above have not been impacted by the disposal of Brim Healthcare, Inc. on June 30, 2004. (2) Beds for which a hospital has been granted approval to operate from the applicable state licensing agency. (3) Represents the total number of patients admitted (in a facility for a period in excess of 23 hours) and used by management and investors as a general measure of inpatient volume. (4) Used by management and investors as a general measure of combined inpatient and outpatient volume. Adjusted admissions are computed by multiplying admissions (inpatient volume) by the outpatient factor. The outpatient factor is the sum of gross inpatient revenue and gross outpatient revenue divided by gross inpatient revenue. The adjusted admissions computation equates outpatient revenue to the volume measure (admissions) used to measure inpatient volume, resulting in a general measure of combined inpatient and outpatient volume. (5) Represents the total number of days the patients who are admitted stay in our hospitals. (6) Adjusted patient days are computed by multiplying patient days (inpatient volume) by the outpatient factor. The outpatient factor is the sum of gross inpatient revenue and gross outpatient revenue divided by gross inpatient revenue. The adjusted patient days computation equates outpatient revenue to the volume measure (patient days) used to measure inpatient volume, resulting in a general measure of combined inpatient and outpatient volume. (7) The average number of days admitted patients stay in our hospitals. (8) Represents revenues prior to reductions for discounts and contractual allowances. (9) Same hospital information includes the operations of only those hospitals which were owned or leased during both entire periods presented and excludes the ownership and operations of Glades General Hospital, which was sold on April 30, 2004.
YEAR ENDED DECEMBER 31, ----------------------------------------------- 2003 2002 % CHANGE ----------------- ----------------- -------- CONSOLIDATED HOSPITALS (CONTINUING OPERATIONS): Number of hospitals at end of period 19 19 --% Licensed beds at end of period (2) 2,189 2,207 (0.8) Beds in service at end of period 1,933 1,933 -- Inpatient admissions (3) 72,630 69,107 5.1 Adjusted admissions (4) 131,557 120,990 8.7 Net patient revenue per adjusted admission $ 5,593 $ 5,372 4.1 Patient days (5) 307,195 299,138 2.7 Adjusted patient days (6) 556,331 523,307 6.3 Average length of stay (days) (7) 4.2 4.3 (2.3) Net patient revenue (in thousands) $ 735,841 $ 649,954 13.2 Gross patient revenue (in thousands) (8): Inpatient $ 903,740 $ 799,358 13.1% Outpatient 732,844 599,333 22.3 ----------------- ----------------- ----- Total gross patient revenue $ 1,636,584 $ 1,398,691 17.0% ================= ================= ===== SAME HOSPITALS (CONTINUING OPERATIONS)(9): Number of hospitals at end of period 19 19 --% Licensed beds at end of period (2) 2,189 2,207 (0.8) Beds in service at end of period 1,933 1,933 -- Inpatient admissions (3) 68,205 67,694 0.8 Adjusted admissions (4) 121,707 118,035 3.1 Net patient revenue per adjusted admission $ 5,521 $ 5,363 2.9 Patient days (5) 287,880 293,248 (1.8) Adjusted patient days (6) 513,539 510,906 0.5 Average length of stay (days) (7) 4.2 4.3 (2.3) Net patient revenue (in thousands) $ 671,910 $ 633,005 6.1 Gross patient revenue (in thousands) (8): Inpatient $ 857,340 $ 787,050 8.9% Outpatient 672,018 584,687 14.9 ----------------- ----------------- ----- Total gross patient revenue $ 1,529,358 $ 1,371,737 11.5% ================= ================= =====
See notes following preceding table. Hospital revenues are received primarily from Medicare, Medicaid and commercial insurance. The revenues received from the Medicare program are expected to increase with the general aging of the population. The payment rates under the Medicare program for inpatients are based on a prospective payment system, based upon the diagnosis of a patient. While these rates are indexed for inflation annually, the increases historically have been less than actual inflation. In addition, states, insurance companies and employers are actively negotiating the amounts paid to hospitals as opposed to paying standard hospital rates. The trend toward managed care, including health maintenance organizations, preferred provider organizations and various other forms of managed care, may affect our hospitals' ability to maintain their current rate of net operating revenue growth. We continually monitor the cost/benefit relationship of services provided at our hospitals, and make decisions related to adding new services or discontinuing existing services. Net patient revenue is reported net of contractual adjustments and policy discounts. The adjustments principally result from differences between our hospitals' customary charges and payment rates under the Medicare, Medicaid and other third-party payor programs. Customary charges generally have increased at a faster rate than the rate of increase for Medicare and Medicaid payments. We provide care without charge to patients who are financially unable to pay for the healthcare services they receive. Because we do not pursue collection of amounts determined to qualify as charity care, they are not reported in net patient revenue. Operating expenses of our hospitals primarily consist of salaries, wages and benefits, purchased services, supplies, provision for doubtful accounts, rentals and leases, and other operating expenses, principally consisting of utilities, insurance, property taxes, travel, physician recruiting, telephone, advertising, repairs and maintenance. Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 Revenues increased 18.3% to $882.9 million in 2004 compared to $746.2 million in 2003. This increase was primarily attributable to the acquisition of Memorial Medical Center in Las Cruces, New Mexico ("Memorial Medical Center") effective June 1, 2004 and an increase in same hospital revenues. Same hospital net patient revenues increased 5.9% in 2004 from 2003 primarily due to increases in net patient revenue per adjusted admission of 6.2% and outpatient revenue of 11.2%. The increase in same-store net patient revenue per adjusted admission was due, in part, by acuity as our same-store Medicare case mix index increased approximately 2.2% to 1.23 for the year ended December 31, 2004 from 1.20 for the year ended December 31, 2003. Cost report settlements and the filing of cost reports also increased revenues in 2004 by $9.9 million, of which $2.9 million related to facilities that had not previously qualified for disproportionate share payments in prior years, and $5.5 million in 2003, respectively. Under our agreement with the seller of Memorial Medical Center, we are to receive payments from the seller through June 1, 2007 as reimbursement for providing certain levels of charity services. For the period from June 1, 2004 through the end of 2004, we recorded $4.2 million in reimbursement for these services provided. The table below reflects the sources of our net patient revenue for the years ended December 31, 2004 and 2003, expressed as a percentage of total net patient revenue:
YEAR ENDED DECEMBER 31, ----------------------- 2004 2003 ----- ----- Medicare 37.7% 38.5% Medicaid 10.1 10.3 Other (including self-pay) 52.2 51.2 ----- ----- 100.0% 100.0% ===== =====
Salaries, wages and benefits as a percentage of revenues, decreased to 36.6% from 37.9% in 2003. The decrease is primarily due to improvements resulting from continued implementation of our flexible staffing standards throughout our hospitals, which effectively matches labor with hospital volume trends and continued cost containment of employee benefit expenses. Purchased services, as a percentage of revenues, increased to 9.7% in 2004 from 9.2% in 2003. The increase is primarily due to an increase in legal fees of $1.6 million and a $4.0 million increase in contract labor (primarily contract services for nursing, emergency room and physical therapy at Memorial Medical Center and four of our same-store hospitals) for the year ended December 31, 2004 compared to the year ended December 31, 2003. The increase in legal fees is related to medical staff bylaws and physician contract matters. The provision for doubtful accounts, as a percentage of revenues, increased to 10.8% in 2004 from 9.7% in 2003 due primarily to the increase in bad debts resulting from the increase in self-pay revenue and due to the purchase of Memorial Medical Center. During the year ended December 31, 2004, self-pay revenue as a percentage of gross revenues increased to 5.9% from 4.6% for 2003. The increase in self-pay revenue is due to the current economic environment and slow employment recovery, coupled with changes in benefit plan design toward increased co-pays and deductibles as employers pass a greater percentage of healthcare costs to individual employees. Although the economies of a majority of the communities in which we operate hospitals have stabilized, some of our hospitals are experiencing a reduction in state Medicaid coverage, particularly in Texas. Net patient revenue associated with self-pay patients are generally recorded at gross charges, which are higher than what government programs and managed care plans pay. As a result, failure to receive payment from self-pay and uninsured patients results in a higher provision for doubtful accounts as a percentage of total net patient revenue. Other operating expenses decreased as a percentage of revenues to 11.0% in 2004 from 11.8% in 2003 primarily due to a reduction of $1.2 million in insurance cost as we continued to realize favorable experience in both professional and general liability and workers' compensation insurance, as determined by our independent third party actuary. Depreciation and amortization expense increased $9.3 million to $46.9 million in 2004 from $37.6 million in 2003. Approximately $5.0 million of this increase is the result of the additional expense associated with the acquisition of Memorial Medical Center, with the remainder of the increase resulting from our capital expenditure program focusing on revenue generating projects. Interest expense increased to $29.7 million in 2004 from $26.3 million in 2003. The increase is primarily driven by the additional debt associated with the acquisition of Memorial Medical Center and the issuance in May 2003 of $200.0 million aggregate principal amount of 7 1/2% Senior Subordinated Notes due 2013, offset by repayments of outstanding borrowings on our senior bank credit facility and repurchases of a portion of our 4 1/2% Convertible Subordinated Notes due 2005. The interest related to the $200.0 million 7 1/2% Senior Subordinated Notes due 2013 was reduced by a $100.0 million fixed to floating interest rate swap agreement entered into in the third quarter of 2003, which has rates currently lower than the underlying debt. The provision for income taxes totaled $28.1 million, or a 36.0% effective tax rate, in 2004 compared to $22.8 million, or a 35.4% effective tax rate, in 2003. The reduction in the effective tax rate for both 2004 and 2003 from the statutory rate was primarily attributable to a reduction in our tax liabilities due to the final and favorable resolution of examinations by taxing authorities in 2004. In addition, the reduction in the federal tax rate for 2004 was attributable to the realization of Empowerment Zone and Renewal Community Tax credits related to two of our facilities and the impact of the disposition of Glades General Hospital and Brim Healthcare, Inc. In 2004, the Company's discontinued operations incurred an after-tax gain on divestitures of $6.7 million and a loss from operations totaling $2.2 million. In 2003, the Company's discontinued operations incurred an after-tax impairment of assets charge of $9.0 million and a loss from discontinued operations totaling $1.1 million. The gain on divestitures recorded in 2004 was principally due to the gain on sale of Brim Healthcare, Inc., which resulted in an after-tax gain of $7.0 million. The impairment of assets charge in 2003 was related to the write-off of goodwill and physician recruiting costs and the write down of other assets of Glades General Hospital to their net realizable value, less cost to sell. The decline in loss from operations resulted primarily from the recording of an additional provision for doubtful accounts for Glades General Hospital patient accounts receivable that we retained in the sale of that entity. Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Revenues increased 13.4% to $746.2 million in 2003 compared to $658.3 million in 2002. This increase was primarily attributable to the hospitals acquired in 2002 and an increase in same hospital revenues. During the second quarter of 2002, the Company acquired Los Alamos Medical Center in New Mexico and Memorial Hospital of Martinsville and Henry County in Virginia. Same hospital net patient revenue increased 6.1% in 2003 from 2002 primarily due to increases in adjusted admissions of 3.1% and net patient revenue per adjusted admission of 2.9%. The increase in adjusted admissions was attributable, in part, to the addition of 106 new doctors, of which 17 were hospital-based, in our communities in 2003. Cost report settlements and the filing of cost reports also increased revenue in 2003 by $5.5 million compared to a reduction in revenue in 2002 of $0.9 million. The table below reflects the sources of our net patient revenue for the years ended December 31, 2003 and 2002, expressed as a percentage of total net patient revenue:
YEAR ENDED DECEMBER 31, ----------------------- 2003 2002 ----- ----- Medicare 38.5% 45.4% Medicaid 10.3 11.3 Other (including self-pay) 51.2 43.3 ----- ----- 100.0% 100.0% ===== =====
Salaries, wages and benefits as a percentage of revenues, decreased to 37.9% from 39.7% in 2002. The decrease is primarily due to improvements resulting from continued implementation of our flexible staffing standards throughout our hospitals, which effectively matches labor with hospital volume trends and continued cost containment of employee benefit expenses. Purchased services, as a percentage of revenues, decreased to 9.2% in 2003 from 10.6% in 2002. The decrease is primarily attributable to an 18.5% reduction in contract labor and reductions in collection agency fees as we were less reliant on outside collection consultants and staffing. Provision for doubtful accounts, as a percentage of revenues, increased to 9.7% in 2003 from 8.1% in 2002 due primarily to the increase in bad debts resulting from increases in self-pay revenue. During 2003, self-pay revenue as a percentage of total gross revenues increased to 4.6% from 3.8% in 2002. The most significant increase occurred in the second quarter of 2003 when self-pay revenue as a percentage of gross revenues increased to 5.1% but then declined slightly in the third quarter to 4.8% and continued to decline in the fourth quarter to 4.5%. The increase in self-pay revenue is due to the current economic environment and slow employment recovery, coupled with changes in benefit plan design toward increased co-pays and deductibles as employers pass a greater percentage of healthcare costs to individual employees. Net patient revenue associated with self-pay patients are generally recorded at gross charges, which are higher than what government programs and managed care plans pay. As a result, failure to receive payment from self-pay and uninsured patients results in a higher provision for doubtful accounts as a percentage of total net patient revenue. Other operating expenses increased as a percentage of revenues to 11.8% in 2003 from 10.6% in 2002 primarily due to increased medical malpractice, workers' compensation and directors and officers insurance cost of $7.2 million and increased physician recruitment expense of $3.1 million based upon the significant number of physicians we recruited to our communities in 2003. Depreciation and amortization expense increased $5.4 million to $37.6 million in 2003 from $32.2 million in 2002 primarily due to depreciation at the two hospitals acquired in 2002 and capital expenditures. Interest expense increased to $26.3 million in 2003 from $21.3 million in 2002 primarily due to the issuance in May 2003 of $200.0 million aggregate principal amount of 7 1/2% Senior Subordinated Notes due 2013, offset by repayments of outstanding borrowings on our senior bank credit facility, repurchases of a portion of our 4 1/2% Convertible Subordinated Notes due 2005 and entering into a $100.0 million fixed to floating interest rate swap agreement during the third quarter of 2003. The write-off of deferred loan costs and the gain resulting from repurchasing a portion of our 4 1/2% Convertible Subordinated Notes at a discount resulted in a net pre-tax loss on extinguishment of debt of $0.5 million during 2003. The provision for income taxes totaled $22.8 million, or a 35.4% effective tax rate, in 2003 compared to $23.2 million, or a 40.0% effective tax rate, in 2002. The reduction in the effective tax rate during 2003 was primarily attributable to a $2.3 million reduction in our tax liabilities due to the final and favorable resolution of examinations by taxing authorities as we recently concluded audits that have been ongoing for over one year. In 2003, the Company's discontinued operations incurred an after-tax impairment of assets charge of $9.0 million and a loss from operations totaling $1.1 million. In 2002, the discontinued operations achieved earnings from operations of $1.3 million. The decline in operations resulted primarily from a shift in the demographic make-up of the service area surrounding Glades General Hospital and a significant increase in the proportion of indigent care provided by that facility. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2004, we had working capital from continuing operations of $15.7 million, including cash and cash equivalents of $9.8 million, compared to working capital from continuing operations of $130.6 million, including $46.1 million in cash and cash equivalents at December 31, 2003. Net cash provided by operating activities was $126.3 million for the year ended December 31, 2004, compared to $104.3 million for the year ended December 31, 2003. The $22.0 million increase in cash provided by operating activities is primarily due to an increase of $8.3 million in our income from continuing operations, a $9.3 million increase in depreciation and amortization expense (of which $5.0 million is attributable to the Memorial Medical Center acquisition), and an increase of $15.2 million in our deferred income tax provision resulting from the Memorial Medical Center acquisition and divestitures of Glades General Hospital and Brim Healthcare, Inc. The increase in cash flow from operations is partially offset by an increase in net accounts receivable of continuing operations of $12.6 million. The increase in net accounts receivable principally relates to a $6.2 million loan to a third party for the construction of a medical office building on one of our facility's campuses and approximately $5.9 million from the lessor of Memorial Medical Center for their obligations required under the facility lease agreement. Net cash used in investing activities increased to $228.1 million in 2004 from $56.9 million in 2003. The $171.2 million increase is primarily due to the $152.2 million acquisition of Memorial Medical Center, and as a result of our capital expenditure program focusing on revenue generating projects. Significant capital expenditures for the year ended December 31, 2004 included $6.3 million for the purchase of land and building at Havasu Regional Medical Center, $25.4 million in construction costs and equipment purchases for the new hospital in Hardeeville, South Carolina, $3.9 million for our MRI project at Los Alamos Medical Center, $3.8 million for women's services at Teche Regional Medical Center, $6.6 million in construction costs for the new hospital in Ft. Mohave, Arizona and $9.3 million for a company-wide information system upgrade. Net cash used in investing activities was partially offset by approximately $14.7 million in cash proceeds from the sale of Glades General Hospital and Brim Healthcare, Inc. in the second quarter of 2004. Net cash provided by financing activities totaled $66.4 million for 2004 primarily due to borrowings of $110.4 million under our senior bank credit facility for the acquisition of Memorial Medical Center, as primarily offset by $55.4 million in repayments of borrowings under our senior bank credit facility and $0.8 million in payments under capital lease obligations. Net cash used in financing activities of $16.3 million in 2003 resulted from $194.2 million in net proceeds from the issuance of our 7 1/2% Senior Subordinated Notes due 2013, which were used to more than offset the cash used to repay $114.3 million outstanding on the senior bank credit facility and to repurchase $74.0 million principal amount of our 4 1/2% Convertible Subordinated Notes due 2005. We maintain a senior bank credit facility with Wachovia Bank, National Association, as agent and issuing bank for a syndicate of lenders with aggregate commitments up to $250.0 million. At December 31, 2004, we had $186.7 million, net of outstanding revolver borrowings of $55.0 million and letters of credit of $8.3 million, available for borrowing under the senior bank credit facility. Loans under the senior bank credit facility bear interest, at our option, at the adjusted base rate or at the adjusted LIBOR rate. We pay a commitment fee, which varies from three-eighths to one-half of one percent of the unused portion, depending on our compliance with certain financial ratios. We may prepay any principal amount outstanding under the senior bank credit facility at any time before the maturity date of November 13, 2006. In May 2003, we completed a public offering of $200.0 million aggregate principal amount of 7 1/2% Senior Subordinated Notes due June 1, 2013. Net proceeds of the offering totaling $194.2 million were used to repay $114.3 million in existing borrowings under the senior bank credit facility and to repurchase $74.0 million of our 4 1/2% Convertible Subordinated Notes due 2005. The 7 1/2% Notes bear interest from May 27, 2003 at the rate of 7 1/2% per year, payable semi-annually on June 1 and December 1, beginning on December 1, 2003. We may redeem all or a portion of the 7 1/2% Notes on or after June 1, 2008, at the then current redemption prices, plus accrued and unpaid interest. In addition, at any time prior to June 1, 2006, we may redeem up to 35% of the aggregate principal amount of the 7 1/2% Notes within 60 days of one or more common stock offerings with the net proceeds of such offerings at a redemption price of 107.5% of the principal amount, plus accrued and unpaid interest. Note holders may require us to repurchase all of the holder's notes at 101% of their principal amount plus accrued and unpaid interest in some circumstances involving a change of control. The 7 1/2% Notes are unsecured and subordinated to our existing and future senior indebtedness. The 7 1/2% Notes rank equal in right of payment to our 4 1/2% Convertible Subordinated Notes due 2005 and our 4 1/4% Convertible Subordinated Notes due 2008. The 7 1/2% Notes effectively rank junior to our subsidiary liabilities. The indenture contains limitations on our ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire its capital stock, acquire the capital stock or assets of another business, and pay dividends. In October 2001, we sold $172.5 million of 4 1/4% Convertible Subordinated Notes due October 10, 2008. Net proceeds of approximately $166.4 million were used to reduce the outstanding balance on our senior bank credit facility and for acquisitions. The 4 1/4% Notes bear interest at the rate of 4 1/4% per year, payable semi-annually on each April 10 and October 10. The 4 1/4% Notes are convertible at the option of the holder at any time on or prior to maturity into shares of our common stock at a conversion price of $27.70 per share. The conversion price is subject to adjustment. We may redeem all or a portion of the 4 1/4% Notes on or after October 10, 2004, at the then current redemption prices, plus accrued and unpaid interest. Note holders may require us to repurchase all of the holder's notes at 100% of their principal amount plus accrued and unpaid interest in some circumstances involving a change of control. The 4 1/4% Notes are unsecured and subordinated to our existing and future senior indebtedness. The 4 1/4% Notes rank equal in right of payment to our 4 1/2% Convertible Subordinated Notes due 2005 and our 7 1/2% Senior Subordinated Notes due 2013. The 4 1/4% Notes effectively rank junior to our subsidiary liabilities. The indenture does not contain any financial covenants. A total of 6,226,767 shares of our common stock have been reserved for issuance upon conversion of the 4 1/4% Notes. In November and December 2000, we sold $150.0 million aggregate principal amount of 4 1/2% Convertible Subordinated Notes due November 20, 2005. The 4 1/2% Notes bear interest at the rate of 4 1/2% per year, payable semi-annually on each May 20 and November 20. The 4 1/2% Notes are convertible at the option of the holder at any time on or prior to maturity into shares of our common stock at a conversion price of $26.45 per share. The conversion price is subject to adjustment. We may redeem all or a portion of the 4 1/2% Notes on or after November 20, 2003, at the then current redemption prices, plus accrued and unpaid interest. Note holders may require us to repurchase all of the holder's notes at 100% of their principal amount plus accrued and unpaid interest in some circumstances involving a change of control. The 4 1/2% Notes are unsecured obligations and rank junior in right of payment to all of our existing and future senior indebtedness. The 4 1/2% Notes rank equal in right of payment to our 4 1/4% Convertible Subordinated Notes due 2008 and our 7 1/2% Senior Subordinated Notes due 2013. The 4 1/2% Notes effectively rank junior to our subsidiary liabilities. The indenture does not contain any financial covenants. At December 31, 2004, approximately $76.0 million principal amount of the 4 1/2% Notes remained outstanding, and a total of 2,872,760 shares of common stock have been reserved for issuance upon conversion of the remaining 4 1/2% Notes. Our Board of Directors has authorized the repurchase from time to time and subject to market conditions of our outstanding 4 1/2% Notes and 4 1/4% Notes in the open market or in privately negotiated transactions. During 2003, we repurchased $74.0 million principal amount of the 4 1/2% Notes. We recorded a $0.5 million pretax loss associated with the early extinguishment of debt related to the repurchase of the 4 1/2% Notes. We did not repurchase any of the 4 1/2% Notes during 2004 and have not repurchased any of the 4 1/4% Notes. On March 18, 2005, in connection with the pending acquisition by LifePoint, the Company commenced a cash tender offer and consent solicitation for any and all of its 7 1/2% Senior Subordinated Notes. The tender offer consideration for each $1,000 principal amount of 7 1/2% Senior Subordinated Notes validly tendered and accepted for purchase will be based on a fixed spread of 50 basis points over the yield on the price, as of April 12, 2005, of the 2.625% U.S. Treasury Note due May 15, 2008, plus accrued interest minus a consent payment equal to $20 per $1,000 principal amount tendered and accepted for purchase. The tender offer is scheduled to expire on April 15, 2005, unless extended or terminated earlier. Our shelf registration statement, providing for the offer, from time to time, of common stock and/or debt securities up to an aggregate of $300.0 million remains effective with the Securities and Exchange Commission. Following the issuance of $200.0 million aggregate principal amount of our 7 1/2% Senior Subordinated Notes due 2013, the shelf registration statement remains available for the issuance of up to $100.0 million of additional securities, subject to market conditions and our capital needs. Capital expenditures for our owned and leased hospitals may vary from year to year depending on facility improvements and service enhancements undertaken by the hospitals. We expect to make total capital expenditures in 2005 of approximately $51.0 million, exclusive of new hospital construction projects. Planned capital expenditures for 2005 consist principally of capital improvements to owned and leased hospitals. In addition, we expect our new hospital construction projects in Ft. Mohave, Arizona and Eunice, Louisiana will total $40.9 million in 2005. We anticipate opening the Arizona hospital in the third quarter of 2005 and the Louisiana hospital in the second quarter of 2006. We expect to fund these expenditures through cash provided by operating activities and borrowings under our senior bank credit facility. Our management anticipates that cash flows from operations, amounts available under our senior bank credit facility, and our anticipated access to capital markets are sufficient to meet expected liquidity needs, planned capital expenditures and other expected operating needs for the next twelve months. The following tables reflect a summary of our obligations and commitments outstanding as of December 31, 2004.
PAYMENTS DUE BY PERIOD ----------------------------------------------------------- LESS THAN 1 YEAR 1-2 YEARS 3-4 YEARS THEREAFTER TOTAL ----------- --------- --------- ---------- ----- (IN THOUSANDS) CONTRACTUAL CASH OBLIGATIONS: Long-term debt $ 75,970 $ 55,000 $172,500 $198,337 $501,807 Capital lease obligations, with interest 479 940 892 2,311 4,622 Operating leases 7,609 12,127 7,693 15,538 42,967 -------- -------- -------- -------- -------- Subtotal $ 84,058 $ 68,067 $181,085 $216,186 $549,396

AMOUNT OF COMMITMENT EXPIRATION PER PERIOD ------------------------------------------------------------- LESS THAN 1 YEAR 1-2 YEARS 3-4 YEARS THEREAFTER TOTAL ----------- --------- --------- ---------- ------- (IN THOUSANDS) OTHER COMMITMENTS: Letters of credit $ -- $ 8,277 $ -- $ -- $ 8,277 Construction and improvement commitments 69,643 12,394 -- -- 82,037 Physician commitments(1) 15,982 5,607 1,306 -- 22,895 -------- -------- -------- -------- -------- Subtotal $ 85,625 $ 26,278 $ 1,306 $ -- $113,209 -------- -------- -------- -------- -------- Total obligations and commitments $169,683 $ 94,345 $182,391 $216,186 $662,605 -------- -------- -------- -------- --------
- ------------ (1) Represents the aggregate of our contractual obligations for advances to physicians as reflected in physician recruiting agreements. Amounts shown are calculated based on the full extent of the obligation set forth in the agreements, although the actual amount of such advances often depends on the financial performance of the physician's practice during the first year after relocating to the community and whether the physician remains in the community. In most cases, the amounts advanced under the agreements are significantly less than the contractual commitment. CRITICAL ACCOUNTING POLICIES Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and judgments on an ongoing basis. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates, and different assumptions or conditions may yield different estimates. The following represent the estimates that we consider most critical to our operating performance and involve the most complex assumptions and assessments. Allowance for Doubtful Accounts Substantially all of our accounts receivable are related to providing healthcare services to our hospitals' patients. Our ability to collect outstanding receivables from third-party payors and others is critical to our operating performance and cash flows. The primary collection risk lies with uninsured patient accounts or patient accounts for which a balance remains after primary insurance has paid. Insurance coverage is verified prior to treatment for all procedures scheduled in advance and walk-in patients. Insurance coverage is not verified in advance of procedures for emergency room patients. Deductibles and co-payments are generally determined prior to the patient's discharge with emphasis on collection efforts before discharge. Once these amounts are determined, any remaining patient balance is identified and collection activity is initiated before the patient is discharged. Our standard collection procedures are then followed until such time that management determines the account is uncollectible, at which point the account is written off. For hospitals that we have owned in excess of one year, our policy with respect to estimating our allowance for doubtful accounts is to reserve 50% of all self-pay accounts receivable aged between 121 and 150 days and 100% of all self-pay accounts that have aged greater than 150 days. For hospitals that the Company has owned less than one year, the Company estimates the allowance for doubtful accounts by applying a hospital-specific reserve percentage for each self-pay and non self-pay aging category, beginning with the 0-30 day aging category, with all self-pay and non-self pay accounts fully reserved at 150 days. Accordingly, substantially all of our bad debt expense is related to uninsured patient accounts and patient accounts for which a balance remains after primary insurance has paid. We continually monitor our accounts receivable balances and utilize cash collections data and other analytical tools to support the basis for our estimates of the provision for doubtful accounts. In addition, we perform hindsight procedures on historical collection and write-off experience to determine the reasonableness of our policy for estimating the allowance for doubtful accounts. Significant changes in payor mix or business office operations, or deterioration in aging accounts receivable could result in a significant increase in this allowance. In general, the standard collection cycle at our hospitals is as follows: - - Upfront cash collection of deductibles, co-payments, and self-pay accounts. - - From the time the account is billed until the period 120 days after the billing, internal business office collections and early out program collections are performed. - - From the time the account is 121 days after billing until the period one year after billing, uncollected accounts are turned over to one of two primary collection agencies utilized by our company. - - One year following the date of billing, any uncollected accounts are written off and the accounts are turned over to our secondary collection agency. The following table summarizes our days revenue outstanding on a same-store basis as of the dates indicated:
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002 - ----------------- ----------------- ----------------- ~~54 54 62~~
Our target for days revenue outstanding ranges from 53 to 58 days. Uncollected accounts are manually written off: (a) if the balance is less than $10.00, (b) when turned over to an outside secondary collection agency at 365 days, or (c) earlier than 365 days if all collection efforts indicate an account is uncollectible. Once accounts have been written off, they are not included in our gross accounts receivable or allowance for doubtful accounts. The approximate percentage of total gross accounts receivable summarized by aging categories is as follows:
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002 ----------------- ----------------- ----------------- 0 to 60 days 59.8% 57.7% 52.9% 61 to 150 days 18.7 17.2 17.3 Over 150 days 21.5 25.1 29.8 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== =====
The approximate percentage of total gross accounts receivable summarized by payor is as follows:
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002 ----------------- ----------------- ----------------- Medicare 24.5% 25.5% 23.3% Medicaid 11.1 11.6 12.5 Managed Care and Other 30.1 25.4 26.2 Self-Pay 34.3 37.5 38.0 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== =====
We owned or leased three hospitals in Texas, which accounted for 16.1% and 16.6% of net accounts receivable in 2004 and 2003, respectively. We owned or leased four hospitals in Louisiana, which accounted for 9.5% and 13.2% of net accounts receivable in 2004 and 2003, respectively. We owned or leased two hospitals in New Mexico, one of which was acquired in 2004, which accounted for 16.2% and 3.6% of net accounts receivable in 2004 and 2003, respectively. Same-store upfront cash collections for the year ended December 31, 2004 were approximately $13.5 million compared to $11.5 million and $8.1 million for the years ended December 31, 2003 and 2002, respectively. Allowance for Contractual Discounts We derive a significant portion of our revenues from Medicare, Medicaid and other payors that receive discounts from our standard charges. The Medicare and Medicaid regulations and various managed care contracts under which these discounts must be calculated are often complex and subject to interpretation and adjustment. In addition, the services authorized and provided and resulting reimbursement, are often subject to interpretation. These interpretations sometimes result in payments that differ from our estimates. Additionally, updated regulations and contract negotiations occur frequently, necessitating our continual review and assessment of the estimation process. Our hospitals' computerized billing systems do not automatically calculate and record contractual allowances. Rather, we utilize an internally developed contractual model to estimate the allowance for contractual discounts on a payor - specific basis, given our interpretation of the applicable regulations or contract terms. Our contractual model for Medicare and Medicaid inpatient services utilizes the application of actual diagnosis related group ("DRG") data to individual patient accounts to calculate contractual allowances. For all inpatient and outpatient non-Medicare and non-Medicaid services, our contractual model utilizes six month historical paid claims data by payor for such services to calculate the contractual allowances. Differences between the contractual allowances estimated by our contractual model and actual paid claims are adjusted when the individual claims are paid. Our contractual model is updated each quarter. In addition to the contractual allowances estimated and recorded by our contractual model, we also record an allowance equal to 100% of all Medicare, Medicaid, and other insurance payors accounts receivable that are aged greater than 365 days. General and Professional Liability Reserves We purchased a professional liability claims-made reporting policy effective January 1, 2004. This coverage is subject to a $5.0 million self-insured retention per occurrence for general and professional liability and provides coverage up to $50.0 million for claims incurred during the annual policy term. This retention amount increases our exposure for claims occurring prior to December 31, 2002, and reported on or after January 1, 2004, due to the increased retention amount as compared to prior years. In 2002, our company had a claims-made reporting policy subject to a $750,000 deductible and a $2.0 million self-insured retention per occurrence, providing coverage up to $51.0 million for claims incurred during the annual policy term in 2002. In 2001, we maintained insurance for individual malpractice claims exceeding $50,000 per medical incident, subject to an annual maximum of $500,000 for claims occurring and reported in 2001. We purchased a tail policy that provides an unlimited claim reporting period for our professional liability for claims incurred in 2000 and prior years. We estimate our self-insured retention portion of the malpractice risks using an outside actuary which uses historical claims data, demographic factors, severity factors and other actuarial assumptions. The estimated accrual for malpractice claims could be significantly affected should current and future occurrences differ from historical claims trends. The estimation process is also complicated by the relatively short period of time in which we have owned some of our healthcare facilities, as occurrence data under previous ownership may not necessarily reflect occurrence data under our ownership. While management monitors current claims closely and considers outcomes when estimating our insurance accruals, the complexity of the claims and wide range of potential outcomes often hampers timely adjustments to the assumptions used in the estimates. We maintain a reserve to cover both reported claims and claims that have been incurred but not yet reported within our self-insured retention. Workers' Compensation Reserves Workers' compensation claims are insured with a deductible with stop loss limits of $100,000 per accident and a $1.9 million and $2.2 million minimum cap on total losses for the 1999 and 2000 years, respectively, and $250,000 per accident and a $6.6 million and $3.0 million minimum cap on total losses for the 2002 and 2001 years, respectively. We increased our deductible loss amount to $500,000 per accident effective January 1, 2003. The minimum cap for total 2003 losses is $12.0 million. The minimum cap for total 2004 losses is $12.1 million. In 2002 and 2003 our arrangement with the insurance provider allows us to prepay the expected amounts of annual workers' compensation claims, which is based upon claims experience. The claims processor tracks payments for the policy year. At the end of the policy year, the claims processor compares the total amount prepaid by us to the actual amount paid by the claims processor. This comparison ultimately will result in a receivable from or a payable to the claims processor. For 2004, we elected not to prepay our expected workers' compensation losses. We estimate our deductible portion of the workers' compensation risk using an outside actuary which uses historical claims data, demographic factors, severity factors and other actuarial assumptions. The estimated accrual for workers' compensation claims could be significantly affected should current and future occurrences differ from historical claims trends. The estimation process also is complicated by the relatively short period of time in which we have owned some of our healthcare facilities, as occurrence data under previous ownership may not necessarily reflect occurrence data under our ownership. While management monitors current claims closely and considers outcomes when estimating our insurance accruals, the complexity of the claims and wide range of potential outcomes often hampers timely adjustments to the assumptions used in the estimates. We maintain a reserve to cover both reported claims and claims that have been incurred but not yet reported within our deductible levels. We are fully insured in the commercial marketplace for workers' compensation claims prior to January 1, 1999. We utilize loss run reports provided by the claims administrator to determine the appropriate range of loss reserves for the 1999 and subsequent years. Our accruals are calculated to cover the risk from both reported claims and claims that have been incurred but not yet reported. Goodwill and Long-Lived Assets, Including Impairment Our consolidated financial statements primarily include the following types of long-lived assets: property and equipment, goodwill and other intangible assets. Property and equipment purchased in the normal course of business are recorded at the cost of the purchase and a useful life is assigned based upon the nature of the asset in comparison to our policy. We also, in connection with our acquisition of businesses, acquire property and equipment, goodwill and other intangible assets. We use outside firms to perform a valuation of these acquired assets for the purpose of allocating the purchase price of the acquisition. As a result of the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"), we have obtained valuation reports to identify property and equipment, as well as any intangible assets purchased in our acquisitions. Based on the valuation reports completed to date, the only identifiable intangible assets valued have been non-compete agreements and licenses and accreditations, which have had minimal associated value; the remainder was goodwill. In accordance with SFAS No. 142, goodwill resulting from acquisitions after June 30, 2001 has not been amortized. Impairment of goodwill is governed by SFAS No. 142. In accordance with the adoption of SFAS No. 142, we completed our annual impairment test as of October 1, 2004. The results of our 2004 review indicated no impairment of our long-lived assets. Our annual impairment test is based upon a combination of market capitalization and a projected run-rate for income from continuing operations before provision for income taxes, depreciation and amortization, interest, minority interests, loss on sale of assets and loss on extinguishment of debt (adjusted for a multiple of earnings) for the consolidated company. Impairment of long-lived assets other than goodwill is governed by Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We adopted this statement effective January 1, 2002. In accordance with the standard, in connection with the sale of Glades General Hospital, which was effective April 30, 2004, the Company recorded an after tax impairment charge of $9.0 million related to the write-off of goodwill associated with the hospital, the write-off of the net book value of physician recruiting costs and the write down of other assets of the hospital to their net realizable value, less costs to sell. INFLATION The healthcare industry is labor intensive. Wages and other expenses increase, especially during periods of inflation and labor shortages. In addition, suppliers pass along to us rising costs in the form of higher prices. We generally have been able to offset increases in operating costs by increasing charges for services, expanding services, and implementing cost control measures to curb increases in operating costs and expenses. In light of cost containment measures imposed by government agencies and private insurance companies, we do not know whether we will be able to offset or control future cost increases, or be able to pass on the increased costs associated with providing healthcare services to patients with government or managed care payors, unless such payors correspondingly increase reimbursement rates. ~~-----END PRIVACY-ENHANCED MESSAGE-----~~

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o	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)


o	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)


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	Province Healthcare Company
	/s/ Steven R. Brumfield
Date: March 21, 2005	Vice President and Controller