Information with respect to our hospitals and our other properties can be found in Item 1 of this report under the caption, "Business - Properties."
(a) Includes charges related to impairment of long-lived assets of $25.4 million ($16.2 million after-tax) and $26.1 million ($15.9 million after-tax) for the years ended December 31, 1999 and 1998, respectively, gain on impairment of long-lived assets of $0.5 million ($0.3 million after-tax), $1.4 million ($0.8 million after-tax) for the years ended December 31, 2001 and 2000, respectively and an extraordinary item of $1.6 million (net of $1.0 million of income taxes for the year ended December 31, 2001.
(b) EBITDA is defined as income from continuing operations before depreciation and amortization, interest expense, management fees, impairment of long-lived assets, ESOP expense, minority interests in earnings of consolidated entities, extraordinary items and income taxes. EBITDA is commonly used as an analytical indicator within the healthcare industry and also serves as a measure of leverage capacity and debt service ability. EBITDA should not be considered as a measure of financial performance under accounting principles generally accepted in the United States, and the items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA should not be considered in isolation or as an alternative to net income, cash flows generated by operating, investing or financing activities or other financial statement data presented in the consolidated financial statements as an indicator of financial performance or liquidity. Because EBITDA is not a measurement determined in accordance with accounting principles generally accepted in the United States and is thus susceptible to varying calculations, EBITDA as presented may not be comparable to other similarly titled measures of other companies.
(e) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to our hospitals and is used by management and investors as a general measure of inpatient volume.
dividing the resulting amount by gross inpatient revenue. The equivalent 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.
(h) Represents the total number of hospital based emergency room visits.
You should read this discussion together with our consolidated historical financial statements and related notes included elsewhere in this report.
- the possibility that any favorable governmental reimbursement changes will be delayed or abandoned due to the focus of Congress on the recent terrorist attacks and the resulting reallocation of governmental resources;
- successful development (or license) of software and management information systems used for effective claims processing;
- limitations placed on us to preserve the tax treatment of the distribution of our common stock from HCA;
We anticipate our patient volumes and related revenues will continue to increase as a result of the following factors:
Although we anticipate our patient volumes to increase, the resulting revenue will likely be offset in part by the following factors:
- Revenues from Medicare, Medicaid and Managed Care Plans. We derive a significant portion of our business from Medicare, Medicaid and managed care plans. Admissions related to Medicare, Medicaid and managed care plan patients were 91.5% and 90.4% of total admissions for the years ended December 31, 2001 and 2000, respectively. These payors receive significant discounts.
- Efforts to Reduce Payments. Other third-party payors also negotiate discounted fees rather than paying standard prices. In addition, an increasing proportion of our services are reimbursed under predetermined payment amounts regardless of the cost incurred.
- Growth in Outpatient Services. We anticipate that the growth trend in outpatient services will continue. A number of procedures once performed only on an inpatient basis have been, and will likely continue to be, converted to outpatient procedures. This conversion has occurred through continuing advances in pharmaceutical and medical technologies and as a result of efforts made by payors to control costs. Generally, the payments we receive for outpatient procedures are less than those for similar procedures performed in an inpatient setting. Net outpatient revenues as a percentage of total patient revenues was 48.5% for the year ended December 31, 2001.
We seek to control costs by, among other things, reducing labor costs by improving labor productivity and decreasing the use of contracted labor, controlling supply expenses through the use of a group purchasing organization and reducing uncollectible revenues. We have implemented cost control initiatives including adjusting staffing levels according to patient volumes, modifying supply purchases according to usage patterns and providing training to hospital staff in more efficient billing and collection processes. For the year ending December 31, 2001 compared to the year ended December 31, 2000, total operating expenses decreased as a percentage of revenue to 78.8% from 81.0%. We believe that as our company grows, we will likely benefit from our ability to spread fixed administrative costs over a larger base of operations.
While we were able to control our costs during 2001 there is no guarantee that we can contain certain costs in 2002 and beyond. Due to the general shortage of nurses and technicians in the industry we may experience an increase in salaries and benefits expense as we may be forced to hire additional contract health professionals.
Effective October 1, 2001, we acquired Athens Regional Medical Center in Athens, Tennessee for approximately $19.7 million in cash, including working capital. The purchase price is subject to adjustment pending the final working capital settlement.
Because of the relatively small number of hospitals we own, each hospital acquisition can materially affect our overall operating margin. We typically take a number of steps to lower operating costs when we acquire a hospital. The impact of our actions may be offset by other cost increases to expand services, strengthen medical staff and attract additional patients to our facilities. The benefits of our investments and of other activities to improve operating margins generally do not occur immediately. Consequently, the financial performance of a newly acquired hospital may adversely affect our overall operating margins in the short term. As we acquire additional hospitals, this effect should be mitigated by the expanded financial base of our existing hospitals and the allocation of corporate overhead among a larger number of hospitals.
(h) Outpatient surgeries are those surgeries that do not require admission to our hospitals.
(i) Same hospital information excludes the operations of hospitals which we either acquired or divested during the years presented. The costs of corporate overhead are included in same hospital information.
Revenues increased 15.3% to $164.3 million for the three months ended December 31, 2001 compared to $142.5 million for the three months ended December 31, 2000 primarily as a result of our acquisition of two hospitals during the three months ended December 31, 2001 and an 8.7% increase in same hospital revenues. The 8.7% increase in same hospital revenues resulted primarily from a 3.6% increase in same hospital inpatient admissions and a 4.6% increase in same hospital equivalent admissions. In addition, total surgeries, outpatient surgeries and emergency room visits increased 13.3%, 16.1% and 5.5%, respectively, on a same hospital basis for the three months ended December 31, 2001 over the same period last year. The growth in outpatient surgeries and emergency room visits increased our revenue; however, these outpatient revenues lower our growth in revenues per equivalent admission as revenues from outpatient services are generally lower than inpatient services. Revenues per equivalent admissions increased 3.9% on a same hospital basis for the three months ended December 31, 2001 compared to the three months ended December 31, 2000.
Other operating expenses decreased as a percentage of revenues to 19.6% for the three months ended December 31, 2001 from 20.6% for the three months ended December 31, 2000. The decrease was primarily the result of an increase in volumes and revenues per equivalent admission and a decrease in professional fees and contract services as a percentage of revenues. On a same hospital basis, other operating expenses decreased as a percentage of revenues to 20.0% for the three months ended December 31, 2001 from 21.3% over the same period last year.
Net interest expense decreased to $3.9 million for the three months ended December 31, 2001 from $7.8 million for the three months ended December 31, 2000. This decrease was primarily the result of our repayment of the remaining bank debt borrowings outstanding during the first half of 2001.
ESOP expense decreased to $2.4 million for the three months ended December 31, 2001 from $2.7 million for the three months ended December 31, 2000. This decrease was primarily because of a lower average fair market value of our common stock for the three months ended December 31, 2001 compared to the same period last year. We recognize ESOP expense based on the average fair market value of the shares committed to be released during the period.
Net income increased to $10.3 million for the three months ended December 31, 2001 compared to $5.4 million for the three months ended December 31, 2000 because of the reasons described above.
Our total costs did not increase at the same rate as our revenues. The increase in volumes and revenues per equivalent admission contributed to the reduction of our total operating expenses as a percentage of revenues because we were able to spread our operating costs over an increased base of revenues.
Provision for doubtful accounts decreased slightly as a percentage of revenues to 7.4% for the year ended December 31, 2001 from 7.5% for the year ended December 31, 2000. On a same hospital basis, provision for doubtful accounts increased as a percentage of revenues to 6.6% for the year ended December 31, 2001 from 6.3% over the same period last year.
Depreciation and amortization expense increased to $34.7 million for the year ended December 31, 2001 from $34.1 million for the year ended December 31, 2001 primarily due to the hospitals we acquired during fiscal 2000 and 2001 offset by the sale of five hospitals during fiscal 2000.
Net interest expense decreased to $18.1 million for the year ended December 31, 2001 from $30.7 million for the year ended December 31, 2000. This decrease was primarily the result of our repayment of the remaining bank debt borrowings outstanding during April and May 2001.
Minority interests in earnings of consolidated entities increased to $2.7 million for the year ended December 31, 2001 compared to $2.2 million for the year ended December 31, 2000 primarily because of an increase in the pretax income of our non-wholly owned hospital.
In June 2001, we completed a $200 million, five-year amended and restated credit agreement with a syndicate of banks, which increased our available credit under our revolving credit agreement from $65 million to $200 million. Upon consummation of this amended and restated agreement, we wrote off $2.6 million of deferred loan costs related to our original credit agreement, which resulted in an extraordinary charge of $1.6 million, net of a tax benefit of $1.0 million.
Supply costs decreased as a percentage of revenues to 12.0% for the year ended December 31, 2000 from 12.5% for the year ended December 31, 1999. The decrease related primarily to the increase in revenues per equivalent admission and a lower number of high intensity services provided during the year ended December 31, 2000 compared to the same period last year. On a same hospital basis, supply costs decreased as a percentage of revenues to 12.1% for the year ended December 31, 2000 from 12.3% over the same period last year.
Other operating expenses decreased as a percentage of revenues to 21.3% for the year ended December 31, 2000 from 22.7% for the year ended December 31, 1999. The decrease was primarily the result of an increase in volumes and revenues per equivalent admission as discussed above and a decrease in contract services as a percentage of revenues. On a same hospital basis, other operating expenses decreased as a percentage of revenues to 21.3% for the year ended December 31, 2000 from 22.0% over the same period last year.
Provision for doubtful accounts increased slightly as a percentage of revenues to 7.5% for the year ended December 31, 2000 from 7.4% for the year ended December 31, 1999. On a same hospital basis, provision for doubtful accounts decreased as a percentage of revenues to 6.3% for the year ended December 31, 2000 from 6.7% over the same period last year.
Depreciation and amortization expense increased to $34.1 million for the year ended December 31, 2000 from $31.4 million for the year ended December 31, 1999 primarily due to the opening of a replacement facility in Bartow, Florida in December 1999 and the acquisition of two hospitals in fiscal 2000. This increase was partially offset by a decrease in depreciation and amortization expense related to the sale of hospitals during 2000.
During the year ended December 31, 2000, we recorded a $1.4 million pre-tax gain related to the favorable settlement on the sale of a facility that we previously held for sale. During the year ended December 31, 1999, we recorded a $25.4 million impairment charge related to the three facilities we identified as held for sale during 1998. We sold the three hospital facilities held for sale during the year ended December 31, 2000. We recorded the impairment charge and the gain in the accompanying consolidated statements of operations as impairment of long-lived assets. For the year ended December 31, 2000 and 1999, these facilities had net revenues of $14.4 million and $42.6 million, EBITDA of $(1.0) million and $(0.7) million, admissions of 1,140 and 4,689 and equivalent admissions of 2,781 and 8,722, respectively.
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. As further discussed in Note 1 to the consolidated financial statements, in preparing our financial statements, we make estimates, judgements and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We believe that, of the accounting policies that are most important to the portrayal of our financial condition and results, the following accounting policies require our most difficult, subjective or complex estimates and assessments:
Our reserve for professional and general liability risks was $8.9 million and $15.9 million at December 31, 2000 and 2001, respectively. Our total cost of professional and general liability coverage for the years ended December 31, 1999, 2000 and 2001, was approximately $7.1 million, $8.2 million and $11.4 million, respectively.
Cash flows - Year Ended December 31, 2001 Compared to Year Ended December 31,
Our working capital increased to $82.7 million at December 31, 2001 compared to $65.4 million at December 31, 2000, and our cash provided by operating activities increased to $114.1 million in 2001 from $83.4 million in 2000 resulting primarily from increased patient volumes and effective management of our working capital. Working capital was negatively impacted by increases in accounts payable and accrued salaries as a result of timing of payments.
The use of our cash in investing activities decreased to $68.3 million in 2001 from $91.8 million in 2000, resulting primarily from smaller outlays of cash for acquisitions during 2001, compared to 2000 and $30.0 million in proceeds from the sale of hospitals during 2000. Capital expenditures, excluding acquisitions, increased to $35.8 million during 2001 compared to $31.4 million during 2000. At December 31, 2001, we had projects under construction that had an estimated additional cost to complete and equip of approximately $32.7 million. We anticipate that these projects will be completed over the next thirty-six months. We anticipate total capital expenditures in 2002 of approximately $65 million, excluding acquisitions. We anticipate funding these expenditures through cash provided by operating activities and borrowings under our revolving credit facility. In connection with our acquisition of Ville Platte Medical Center, we have committed to spend up to $25 million, including the purchase price, over the next three years, a portion of which is included in the anticipated 2002 capital expenditures.
Cash flows - Year Ended December 31, 2000 Compared to Year Ended December 31,
Our cash and cash equivalents increased to $39.7 million at December 31, 2000, from $12.5 million at December 31, 1999. The increase is primarily from $83.4 million and $35.6 million provided by operating and financing activities, respectively, offset in part by $91.8 million used in investing activities.
Our working capital increased to $65.4 million at December 31, 2000 compared to $42.2 million at December 31, 1999, resulting primarily from increased patient volumes and effective management of our working capital. The increase in working capital was partially offset by increases in current maturities of long-term debt.
Our cash provided by financing activities increased to $35.6 million in 2000 compared to $22.0 million in 1999. This increase resulted primarily from an increase in long-term debt to pay for acquisitions.
In June 2001, we completed a $200 million, five-year amended and restated credit agreement with a syndicate of lenders, which increased our available credit under the revolving credit facility from $65 million to $200 million. As of December 31, 2001, we had a $3.0 million letter of credit, which reduced the amount available under the revolving credit facility to $197.0 million. The revolving credit facility requires that we comply with various financial ratios and tests and contains covenants, including but not limited to restrictions on new indebtedness, the ability to merge or consolidate, asset sales, capital expenditures and dividends, for which we are in compliance as of December 31, 2001.
We do not consider the sale of any assets to be necessary to repay our indebtedness or to provide working capital. However, for other reasons, we may sell facilities in the future from time to time. Our management anticipates that operations and amounts available under our revolving credit facility will provide sufficient liquidity for the next twelve months.
Our interest expense is sensitive to changes in the general level of interest rates. We do not currently use derivatives to alter the interest rate characteristics of our debt instruments.
With respect to our interest-bearing liabilities, all of our long-term debt at December 31, 2001 is subject to a fixed interest rate of 10.75%. The fair value of our total long-term debt was approximately $166.5 million at December 31, 2001. We determined the fair value using the quoted market price at December 31, 2001. Since all of our long-term debt at December 31, 2001 is subject to a fixed interest rate we did not estimate changes to our interest expense or fair value of long-term debt based on a hypothetical increase in interest rates. As discussed above, we do have a $200 million revolving credit facility that is subject to variable interest rates; however, at December 31, 2001, the only amount reducing the revolving credit facility is a $3.0 million letter of credit. In the event we increase our amount outstanding under the revolving credit facility and there is a change in interest rates of significant magnitude, management would expect to take actions intended to further mitigate its exposure to such change. For further information, see the discussion above of our long-term debt.
SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations. In addition, it further clarifies the criteria for recognition of intangible assets separately from goodwill. SFAS 141 was effective for transactions completed subsequent to June 30, 2001. The application of SFAS 141 did not have a material effect on our results of operations or financial position.
SFAS 143, Accounting for Asset Retirement Obligations, was issued in August 2001 by the FASB and is effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier application is encouraged. SFAS 143 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated retirement costs. SFAS 143 applies to all entities and to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. We do not expect SFAS 143 to have a material effect on our results of operations or financial position.
Hospitals participating in the Medicare and some Medicaid programs, whether paid on a reasonable cost basis or under a PPS, are required to meet certain financial reporting requirements. Federal and, where applicable, state regulations require submission of annual cost reports identifying medical costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients. Since implementation of outpatient PPS in August 2000, the filing of all Medicare cost reports have been postponed until certain government reports are issued. We anticipate filing several of these postponed cost reports during 2002. Because of the postponement, the magnitude of potential adjustments and changes in estimates is significantly greater at December 31, 2001 and for the year then ended than in recent years.
For the year ended December 31, 2001, we derived 48.4% of our revenues from the Medicare and Medicaid programs. In recent years, federal and state governments made significant changes in the Medicare and Medicaid programs. These changes have decreased the amounts of money we receive for our services to patients who participate in these programs.
All participants in the healthcare industry are required to comply with many laws and regulations at the federal, state and local government levels. These laws and regulations require that hospitals meet various requirements, including those relating to the adequacy of medical care, equipment, personnel, operating policies and procedures, billing and cost reports, payment for services and supplies, maintenance of adequate records, privacy, compliance with building codes and environmental protection. These laws often contain safe harbor provisions which describe some of the conduct and business relationships that are immune from prosecution. Not all of our business arrangements fit wholly within safe harbors. This does not automatically render our arrangements illegal. However, we may be subject to scrutiny by enforcement authorities. If we fail to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to operate our hospitals and our ability to participate in the Medicare, Medicaid and other federal and state healthcare programs.
We may be subjected to actions brought by individuals on the government's behalf under the False Claims Act's "qui tam" or whistleblower provisions.
Whistleblower provisions allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded the Federal government. Defendants determined to be liable under the False Claims Act may be required to pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim.
There are many potential bases for liability under the False Claims Act. Liability often arises when an entity knowingly submits a false claim for reimbursement to the Federal government. The False Claims Act defines the term "knowingly" broadly. Thus, although simple negligence will not give rise to liability under the False Claims Act, submitting a claim with reckless disregard to its truth or falsity constitutes a "knowing" submission under the False Claims Act and, therefore, will qualify for liability.
In some cases, whistleblowers or the Federal government have taken the position that providers who allegedly have violated other statutes, such as the anti-kickback statute and the Stark Law, have thereby submitted false claims under the False Claims Act. In addition, a number of states have adopted their own false claims provisions as well as their own whistleblower provisions whereby a private party may file a civil lawsuit in state court.
If we fail to effectively recruit and retain physicians and nurses our ability to deliver healthcare services efficiently will suffer.
Our revenue is heavily concentrated in Kentucky and Tennessee, which makes us particularly sensitive to regulatory and economic changes in those states.
We may have difficulty acquiring hospitals on favorable terms, avoiding unknown or contingent liabilities of acquired hospitals and, because of regulatory scrutiny, acquiring nonprofit entities.
- make us more vulnerable to economic downturns and to adverse changes in business conditions, such as further limitations on reimbursement under Medicare and Medicaid programs;
Any substantial increase in our debt levels could also affect our ability to borrow funds at favorable interest rates and our future operating cash flow.
HCA is currently the subject of various federal and state investigations, qui tam actions, shareholder derivative and class action suits, patient/payor actions and general liability claims. HCA is also the subject of a formal order of investigation by the SEC. Based on the Company's review of HCA's public filings, the Company understands that the SEC's investigation of HCA includes the anti-fraud, insider trading, periodic reporting and internal accounting control provisions of the federal securities laws. These investigations, actions and claims relate to HCA and its subsidiaries, including subsidiaries that, before the Company's formation as an independent company, owned the facilities the Company now owns.
Based on our review of HCA's public filings, we understand that, in December 2000, HCA entered into a Plea Agreement with the Criminal Division of the Department of Justice and various U.S. Attorney's Offices (which we will refer to as the plea agreement) and a Civil and Administrative Settlement Agreement with the Civil Division of the Department of Justice (which we will refer to as the civil agreement). Based on our review of HCA's public filings, we understand that the agreements resolve all Federal criminal issues outstanding against HCA and certain issues involving Federal civil claims by or on behalf of the government against HCA relating to diagnosis related group, or DRG, coding, outpatient laboratory billing and home health issues. Pursuant to the plea agreement, HCA paid the government $95 million during the first quarter of 2001. The civil agreement was approved by the Federal District Court of the District of Columbia in August 2001. Pursuant to the civil agreement, HCA agreed to pay the government $745 million plus interest, which was paid in the third quarter of 2001. Based on our review of HCA's public filings, we understand that certain civil issues are not covered by the civil agreement and remain outstanding, including claims related to costs reports and physician relations issues. The plea agreement and the civil agreement announced in December 2000 relate only to conduct that was the subject of the federal investigations resolved in the agreements and do not resolve various qui tam actions filed by private parties against HCA, or pending state actions.
The extent to which the Company may or may not continue to be affected by the ongoing investigations of HCA and the initiation of additional investigations, if any, cannot be predicted. These matters could have a material adverse effect on the Company's business, financial condition, results of operations or prospects in future periods.
Competition among hospitals and other healthcare providers for patients has intensified in recent years. All but one of our hospitals operate in geographic areas where we are currently the sole provider of hospital services in these communities. While our hospitals face less direct competition in our immediate service areas, we do compete with other hospitals, including larger tertiary care centers. Although these competing hospitals may be in excess of 30 to 50 miles away from our facilities, patients in these markets may migrate to, may be referred by local physicians to, or may be lured by incentives from managed care plans to travel to these distant hospitals. Some of these competing hospitals use equipment and services more specialized than those available at our hospitals. In addition, some of the hospitals that compete with us are owned by tax-supported governmental agencies or not-for-profit entities supported by endowments and charitable contributions. These hospitals can make capital expenditures without paying sales, property and income taxes. We also face competition from other specialized care providers, including outpatient surgery, orthopedic, oncology and diagnostic centers.
Prior to May 11, 1999, we operated as the America Group division of HCA. Accordingly, we do not have a long operating history as an independent, publicly-traded company. Before the distribution of our stock from HCA, we historically relied on HCA for various financial, administrative and managerial expertise relevant to the conduct of our business. HCA continues to provide some support services to us on a contractual basis. We did not generate a profit for 1999. Although we generated a profit in 2000 and 2001, we may not have net profits in the future. See "Business -- Arrangements Relating to the Distribution" for more information regarding our arrangements with HCA and see "Management's Discussion and Analysis of Financial Condition and Results of Operations" for factors that could affect our ability to generate profits.
If we fail to comply with our corporate integrity agreement, we could be required to pay significant monetary penalties.
We depend on dividends and other intercompany transfers of funds to meet our financial obligations.
- the issuance of "blank check" preferred stock by the board of directors without stockholder approval;
- higher stockholder voting requirements for some transactions, including business combinations with related parties (i.e., a "fair price provision");
- classification of the board of directors into three classes; and
We have never paid a cash dividend and we do not anticipate paying any cash dividends in the foreseeable future. Our senior credit facility also restricts the payment of cash dividends. If we incur any future indebtedness to refinance our existing indebtedness or to fund our future growth, our ability to pay dividends may be further restricted by the terms of this indebtedness.
Our stock price has been and may continue to be volatile.