A listing of our owned acute hospitals is included in Item 1 of this report under the caption “Business-Our Facilities”. We also own or lease space for outpatient service facilities complementary to our hospitals and own and operate certain medical office buildings (some of which are joint ventures) associated with our hospitals that are occupied primarily by physicians who practice at our hospitals. The most significant of these complementary outpatient healthcare facilities are two surgery centers in Orange County, California, five diagnostic imaging centers in metropolitan Phoenix, Arizona and five diagnostic imaging centers in San Antonio, Texas. Most of these outpatient facilities are in leased facilities, and the surgery centers and the diagnostic imaging centers in San Antonio are owned and operated in joint ventures where we have minority partners.
The discussion contains forward-looking statements that involve risks and uncertainties. For additional information regarding some of the risks and uncertainties that affect our business and the industry in which we operate, please read “Item 1. Business - Risk Factors” included elsewhere herein. Our actual results may differ materially from those estimated or projected in any of these forward-looking statements.
On September 23, 2004, The Blackstone Group and certain of its affiliates (collectively “Blackstone”) purchased approximately 66% of our equity interests (the “merger”). Certain investment funds affiliated with Morgan Stanley Capital Partners (collectively “MSCP”) and certain of our senior members of management and other shareholders (collectively the “Rollover Management Investors”) own the remaining 34% of our equity interests. The transaction was treated as a leveraged buyout purchase for accounting purposes. In connection with the merger, we repaid $299.0 million of our outstanding $300.0 million 9.75% senior subordinated notes, our outstanding $17.6 million 8.18% subordinated notes and the $300.0 million Term B loans outstanding under our 2004 senior secured credit facility. We financed the merger by issuing $575.0 million of 9.0% senior subordinated notes (the “9.0% Notes”), by issuing 11.25% senior discount notes (the “11.25% Notes”) having an aggregate principal amount at maturity of $216.0 million, by borrowing $475.0 million of initial Term B loans under our new senior secured credit facilities and with equity proceeds totaling approximately $749.0 million (valued at approximately $635.7 million for accounting purposes). Certain members of senior management also purchased $5.7 million of the equity incentive units in VHS Holdings LLC. Our new senior secured credit facilities include a $250.0 million revolving credit facility, of which $23.0 million was borrowed and $33.4 million of capacity was utilized for letters of credit as of June 30, 2005. Our new senior credit facilities also include $325.0 million in delayed draw term loan facilities. We borrowed $60.0 million under the delayed draw term loan facilities to finance the acquisition of three acute-care hospitals and related healthcare businesses in Massachusetts from subsidiaries of Tenet Healthcare Corporation on December 31, 2004, and we borrowed $90.0 million to fund the working capital buildup of the Massachusetts hospitals and to fund capital expenditures on February 18, 2005. We are allowed to borrow the remaining $175.0 million under the delayed draw term loan facilities at any time prior to September 23, 2005.
We have implemented multiple operating strategies to achieve our objective of providing high-quality, cost-effective healthcare services in the communities we serve. These strategies include quality control, expansion of services, partnering with physicians and healthcare professionals and identifying growing geographic areas that
provide opportunities for acquisitions or expansions. If we achieve these strategies, we expect to realize the patient volume and revenue growth that is key to our operating performance. We must also identify and manage the risks associated with our growth strategies including acquisition risks, payer reimbursement risks, case and resource management risks and competition. Recent trends that management will continue to monitor and address include fluctuations in bad debts due to payer mix changes and difficulties in collecting self-pay accounts receivable, newly enacted Medicare regulations, expanded charity care and self-pay discount programs, potential Medicaid funding cuts, volatile professional liability risks and related costs, nurse staffing regulations and resource constraints and increased cost of compliance in the healthcare industry. The following paragraphs more fully describe the strategies, risks and trends mentioned above.
Fostering a partnership culture with physicians and healthcare professionals. We believe that the keys to providing the most effective and efficient healthcare services are effective recruiting and retention programs, continual training and education support for physicians and other healthcare professionals and maintenance of facilities and equipment that are desirable vehicles for the practice of medicine. Our relationships with the University of Chicago at our MacNeal and Weiss hospitals in metropolitan Chicago, Illinois, demonstrate our commitment to professional development for physicians and other healthcare professionals. We believe these initiatives will serve as a cornerstone to build partnering relationships with employees and physicians to ensure we have the expertise necessary to carry out our mission in all areas of our healthcare facilities. We also intend to increase our participation, consistent with applicable laws, in the development of joint venture partnerships with physicians in those situations where such relationships fit our strategic objectives.
Identifying geographic markets that provide a strategic fit with our goals and objectives and leveraging population growth in existing markets. We expect to continue pursuing acquisition activities in existing or new markets where we can obtain significant market share and capture additional business from the aging U.S. population. According to the U.S. Census Bureau there were approximately 35 million
Americans aged 65 or older in the United States in 2000, comprising approximately 12.4% of the total U.S. population. By the year 2010 the number of these elderly persons is expected to climb to 40 million, or 13.0% of the total population. We believe our initiatives will position us to capitalize on this demographic trend. Obtaining significant market share in key geographic markets and improving market share in existing markets provide opportunities to expand services to those communities, provide flexibility in negotiations with managed care and other third party payers and strengthen recruiting initiatives.
Many procedures once performed exclusively on an inpatient basis at hospitals are now being provided on an outpatient basis. Advances in technology and the focus of payers on treating lower acuity patients in a less expensive setting have driven the increase in outpatient utilization. During the year ended June 30, 2005, 66% of total surgeries performed in our facilities were performed on an outpatient basis. Outpatient revenues as a percentage of total gross patient revenues were 35.1% and 38.5% during the years ended June 30, 2004 and 2005, respectively. The significance of outpatient utilization is offset somewhat by the aging of the baby boomer population, which we expect to increase demand for inpatient services. Typically, the payments we receive for outpatient procedures are less than those for the same procedures performed in an inpatient setting. Additionally, even our less expensive outpatient surgery volumes are threatened by an increasing number of outpatient surgery centers and specialty hospitals that have commenced operations in the past few years. We anticipate that competition for outpatient services will remain intense during the foreseeable future.
that future reimbursement rates, even if improved, will sufficiently cover potential increases in the cost of providing healthcare services to our patients.
Includes uninsured patients and those patient co-insurance and deductible amounts for which payment has been received from the primary payer.
The total accounts receivable balances reflected on these tables differ from the net accounts receivable balances as stated on the consolidated balance sheets for those respective periods because the aging reports include certain accounts for which the applicable contractual discounts have yet to be deducted from the account balance.
Our combined allowance for bad debts and allowance for charity care covered 76.4% and 90.5% of self-pay accounts receivable as of June 30, 2004 and 2005, respectively.
The increase in self-pay accounts receivable has led to increased write-offs and older accounts receivable outstanding, resulting in the need for an increased allowance for doubtful accounts. The increase in self-pay accounts receivable results from a combination of factors including increased patient volumes, price increases, higher levels of patient deductibles and co-insurance under managed care programs and the increased difficulties of uninsured patients who do not qualify for charity care programs to pay for escalating healthcare costs. We have implemented policies and procedures designed to expedite upfront cash collections and promote repayment plans from our patients. Our upfront cash collections increased by 24.8% on a same hospital basis during fiscal 2005. However, we believe bad debts will remain sensitive to changes in payer mix, pricing and general economic conditions for the hospital industry during the foreseeable future.
a provision increasing our reimbursement by reducing the labor share percentage from 71% to 62% for hospitals with wage indices less than 1.0;
The 2003 Act also decreases hospital reimbursement in a few areas, including, but not limited to, a provision denying updates to hospitals with “high-cost” direct medical education programs. In addition, for federal fiscal years 2005, 2006 and 2007, the Act confirms current law that hospitals are to receive full market basket updates for these years, but now conditions such update amounts upon a hospital providing CMS with specific quality data relating to the quality of services provided. Those hospitals failing to provide CMS with the required data will receive an update equal to the market basket minus 0.4%. Our hospitals are complying with this reporting requirement. Overall, we believe that the 2003 Act may have a positive impact on our operating results, especially if future legislation does not decrease the full market basket updates for federal fiscal years 2006 and 2007 for those hospitals complying with the new reporting requirement.
Many states, including certain states in which we operate, have reported budget deficits as a result of increased costs and lower than expected tax collections. Health and human service programs, including Medicaid and similar programs, represent a significant component of state spending. To address these budgetary concerns, certain states have decreased funding for these programs and other states may make similar funding cuts. These cuts may include tightened participant eligibility standards, reduction of benefits, enrollment caps or payment reductions.
Additionally, pressure exists at the federal level to reduce Medicaid matching funds provided to states. We are unable to assess the financial impact of enacted or proposed state or federal funding cuts at this time.
The hospital industry continues to face a nationwide shortage of nurses. We have experienced particular difficulties in retaining and recruiting nurses in our metropolitan Phoenix, Arizona, and Orange County, California markets. As a result of this shortage, we have utilized more contract labor resources that are typically more costly and less reliable than employed nurses. Recent reports forecast this shortage to continue for the foreseeable future. We believe that our comprehensive recruiting and retention plan for nurses, which focuses on competitive salaries and benefits, employee satisfaction, best practices, nursing program educational opportunities, leadership training and our focus on clinical and service excellence has partially mitigated the effects of the nursing shortage.
We operate the School of Health Professionals (“SHP”) in San Antonio, which is primarily a school of nursing. The SHP trains approximately 72 nurses each year, of whom approximately 80% choose permanent employment with us. Plans are underway to transition SHP’s current diploma program to a degree granting program that will be more attractive to potential students. In January 2005, we began training 25 nursing students in our metropolitan Phoenix market using state of the art distance learning technology maximizing utilization of SHP instructors. Students are provided with company-funded scholarships that cover tuition, books and equipment expenses in return for a commitment to work at one of our hospitals for a defined period of time. Should we be unsuccessful in our attempts to maintain nursing coverage adequate for our present and future needs, our future operating results could be adversely impacted.
We conduct business in a heavily regulated industry. Accordingly, we maintain a comprehensive, company-wide compliance program to address healthcare regulatory and other compliance requirements since if a determination were ever made that we were in material violation of any of the federal or state statutes regulating our healthcare operations, our operations and financial results could be materially adversely affected. This compliance
We do not pursue collection of amounts due from uninsured patients that qualify for charity care under our guidelines (currently those uninsured patients whose incomes are equal to or less than 200% of the current federal poverty guidelines set forth by the Department of Health and Human Services). We deduct charity care accounts from revenues when we determine that the account meets our charity care guidelines. In June 2004, we adopted revised policies that provide expanded discounts from billed charges and alternative payment structures for uninsured patients who do not qualify for charity care but meet certain other minimum income guidelines, primarily those uninsured patients with incomes between 200% and 500% of the federal poverty guidelines. During the years ended June 30, 2003, 2004 and 2005, we deducted $27.4 million, $37.1 million and $55.6 million of charity care from revenues, respectively.
Our ability to collect outstanding receivables from third party payers is critical to our operating performance and cash flows. The allowance for doubtful accounts was approximately 22.0% and 24.0% of accounts receivable, net of contractual discounts, as of June 30, 2004 and 2005, respectively. The primary collection risk relates to uninsured patient accounts and patient accounts for which primary insurance has paid but patient deductibles or co-insurance portions remain outstanding. We estimate the allowance for doubtful accounts primarily using a standard policy that reserves 100% of accounts receivable that remain outstanding for a pre-determined number of days subsequent to discharge date and reserves a pre-determined percentage of accounts receivable due from patients. We continually monitor our accounts receivable balances and utilize multiple tools to ensure that our allowance for doubtful accounts policy provides a reasonable basis for our estimate. These tools include a quarterly hindsight calculation that utilizes write-off data from the previous twelve-month period to estimate the allowance for doubtful accounts at a point in time, cash collections analyses and other key ratios that consider payer mix and other relevant data. We believe that our standard policy is flexible to adapt to changing collection trends and our procedures for testing the standard policy provide timely and accurate information. Significant changes in payer mix, business office operations, general economic conditions or healthcare coverage provided by federal or state governments or private insurers may have a significant impact on our estimates.
Given the nature of our operating environment, we are subject to professional and general liability and workers compensation claims and related lawsuits in the ordinary course of business. Effective June 1, 2002, we established a wholly owned captive subsidiary to insure our professional and general liability risks at a $10.0 million retention level. We maintain excess coverage from independent third party insurers on a claims-made basis for individual claims exceeding $10.0 million up to $75.0 million, but limited to total annual payments of $65.0 million in the aggregate. We estimate our reserve for professional and general liability and workers compensation risks using historical claims data, demographic factors, severity factors, current incident and case logs and other actuarial data. We adjust these reserves from time to time as we receive updated information. As of June 30, 2004 and 2005, our professional and general liability accrual for asserted and unasserted claims was approximately $40.9 million and $50.5 million, respectively. During the years ended June 30, 2003, 2004 and 2005, our total provision for professional and general liability losses was approximately $17.6 million, $22.0 million and $18.8 million, respectively. During the years ended June 30, 2003, 2004 and 2005, we paid approximately $7.4 million, $7.6 million and $9.2 million, respectively, in professional and general liability claims and expenses. The estimated accrual for professional and general liability and workers compensation 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 many of our healthcare facilities as occurrence data under previous ownership or for the industry as a whole may not necessarily reflect occurrence data under our ownership. While management monitors current claims closely and considers outcomes when estimating its reserve, the complexity of the claims and wide range of potential outcomes often hamper timely adjustments to the assumptions used in the estimates.
During the years ended June 30, 2003, 2004 and 2005, medical claims expense was approximately $160.8 million, $211.8 million and $237.2 million, respectively, primarily representing medical claims of PHP. We estimate our reserve for medical claims incurred but not reported using historical claims experience (including severity and payment lag time) and other actuarial data including number of enrollees, age of enrollees and certain enrollee health indicators. The reserve for medical claims, including incurred but not reported claims, for our health plans was approximately $41.6 million and $51.2 million as of June 30, 2004 and 2005, respectively. While
management believes that its estimation methodology effectively captures trends in medical claims costs, actual payments could differ significantly from its estimates given changes in the healthcare cost structure or adverse experience. During the years ended June 30, 2003, 2004 and 2005, approximately $24.9 million, $29.0 million and $36.6 million, respectively, of accrued and paid claims for services provided to our health plan enrollees by our hospitals and our other healthcare facilities were eliminated in consolidation. Our operating results and cash flows could be materially affected by increased or decreased utilization of our healthcare facilities by enrollees in our health plans.
We believe that our tax return provisions are accurate and supportable, but certain tax matters require interpretations of tax law that may be subject to future challenge and may not be upheld under tax audit. To reflect the possibility that all of our tax positions may not be sustained, we maintain tax reserves that are subject to adjustment as updated information becomes available or as circumstances change. We record the impact of tax reserve changes to our income tax provision in the period in which the additional information, including the progress of tax audits, is obtained. We also estimate a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized in future periods. When establishing a valuation allowance, we consider all relative information including ongoing feasible tax planning strategies. We adjust our valuation allowance estimate and record the impact of such change to our income tax provision in the period in which management determines that the realization of the deferred tax assets has changed.
Same hospital total revenues represent revenues from entities owned (including health plans) for the full 12 months of both years presented.
outsourced nursing personnel. We believe that our comprehensive recruiting and retention plan for nurses which focuses on competitive salaries and benefits, employee satisfaction, best practices, nursing program educational opportunities, leadership training and our commitment to clinical and service excellence have mitigated some of the effects of the nursing shortage. However, should we be unsuccessful in our attempts to maintain nursing coverage adequate for our present and future needs, and especially if additional states in which we operate enact new laws mandating nurse-staffing ratios, our future operating results could be adversely impacted by increased salaries and benefits.
Supplies. Supplies as a percentage of total revenues increased to 16.5% in total and 16.3% on a same hospital basis during fiscal 2005 compared to 15.9% during fiscal 2004 primarily due to increased acuity of services provided to our patients and increased costs of supplies and pharmaceuticals. Our same hospital orthopedic and cardiac surgical volumes, which typically utilize more costly supplies, increased year over year. We expect this ratio to stabilize as we continue to implement our materials management strategies. These improvements may be offset, however, by continued price increases for pharmaceuticals and medical supplies, including the impact of increased use of drug eluting stents.
Provision for doubtful accounts. During fiscal 2005, the provision for doubtful accounts as a percentage of patient service revenues decreased to 7.8% from 7.9% during fiscal 2004. During fiscal 2005, our self-pay revenues as a percentage of patient service revenues decreased to 11.1% from 11.7% during fiscal 2004 partly due to lower self pay utilization at our Massachusetts hospitals. On a same hospital basis, the provision for doubtful accounts as a percentage of patient service revenues increased to 8.2% during fiscal 2005. Collecting outstanding self-pay accounts remains difficult; however, we have experienced improved up front cash collections and success in qualifying patients for coverage under Medicaid or similar programs. Our provision for doubtful accounts as a percentage of patient service revenues is reduced by our policy of deducting charity accounts from revenues at the time in which those accounts meet our charity care guidelines. In June 2004, we expanded our charity care guidelines resulting in a decrease in revenues and a reduction in bad debts. During fiscal 2004 and 2005, we recorded $37.1 million and $55.6 million of charity care revenue deductions, respectively. On a combined basis, the provision for doubtful accounts and charity care expense as a percentage of patient service revenues increased to 10.7% during fiscal 2005 compared to 10.4% during fiscal 2004. On a same hospital basis, the combined provision for doubtful accounts and charity care expense as a percentage of patient service revenues increased from 10.4% during fiscal 2004 to 11.1% during fiscal 2005.
Other. Depreciation and amortization remained consistent year over year at 3.6% of total revenues. We adjusted the values and lives of our property, plant and equipment as of the merger date based upon an independent appraisal. Net interest as a percentage of total revenues increased to 3.9% during fiscal 2005 compared to 2.4% during fiscal 2004 as a result of the additional debt incurred to finance the merger and the $150.0 million in delayed draw term loan borrowings subsequent to the merger. As a result of the merger, we incurred $62.2 million in debt extinguishment costs during fiscal 2005, an increase of $57.3 million from fiscal 2004, and $23.3 million in merger expenses.
Income taxes. Our effective tax rate decreased from approximately 38.3% during fiscal 2004 to approximately 30.1% during fiscal 2005 primarily as a result of certain merger-related costs that were not deductible for tax purposes.
Net income. The $118.2 million year over year decrease in net income resulted primarily from our improved operating results offset by increased interest expense and the merger-related costs incurred during the current year.
Membership in PHP increased from approximately 78,700 at June 30, 2003 to approximately 94,600 at June 30, 2004. The membership increase primarily related to the increased number of individuals eligible for coverage under the Arizona Medicaid program since the enactment of Proposition 204 and the decisions by competing plans to discontinue their services in the counties we serve during October 2003.
Revenues, exclusive of health plan premium and other non-hospital revenues, per adjusted discharge increased 2.8% during fiscal 2004. We continue to negotiate with managed care payers to receive favorable reimbursement for our services. We have made considerable progress in these negotiations during the past two years but challenges still remain to adjust these rates to appropriate levels to reflect rising healthcare costs. The acuity of care required by our patients also affects this statistic. We continually identify and implement services that enable us to maximize our return on investment and meet the needs of our patients.
Costs and Expenses. Total costs and expenses, exclusive of income taxes, were $1,717.8 million or 96.4% of total revenues during fiscal 2004, an improvement from 97.9% during fiscal 2003. Salaries and benefits, supplies, medical claims and provision for doubtful accounts represent our most significant costs and expenses or those subject to the greatest level of fluctuation period over period.
Salaries and benefits. Salaries and benefits as a percentage of total revenues decreased to 41.6% during fiscal 2004 from 43.2% during fiscal 2003. The decrease resulted partly from a $75.0 million increase in premium revenues, which did not result in a significant increase in related salaries and benefits. Absent the effect of the increased premium revenues, this ratio would have increased slightly to 43.4% during fiscal 2004 compared to 43.2% during fiscal 2003.
Medical claims expense. The $51.0 million increase in medical claims was due to the significant year over year increase in enrollees at PHP. Medical claims expense as a percentage of premium revenues decreased to 72.1% during fiscal 2004 compared to 73.5% during fiscal 2003 due to changes in the utilization of healthcare services by our enrollees. We added a significant number of new members
during fiscal 2004 resulting in a change in acuity of our average enrollee. Medical claims expense represents the amounts paid by the health plans for healthcare services provided to their members, including an estimate of incurred but not reported claims that is determined based upon lag data and other actuarial assumptions. Revenues and expenses between the health plans and our hospitals and related outpatient service providers of approximately $29.0 million, or 12.0% of gross health plan medical claims expense, were eliminated in consolidation during fiscal 2004.
Additionally, our provision for doubtful accounts was reduced in fiscal 2003 by the effects of greater than expected collections of accounts receivable included with hospital acquisitions. Our provision for doubtful accounts as a percentage of patient service revenues is reduced by our policy of deducting charity accounts from revenues at the time in which those accounts meet our charity care guidelines. During fiscal 2003 and 2004, we recorded $27.4 million and $37.1 million of charity care revenue deductions, respectively. Also, the implementation of Proposition 204 in Arizona, which expanded Medicaid coverage to include many previously uninsured patients, countered the trend of the increasing rate of self-pay revenues to patient service revenues.
Other operating expenses. Other operating expenses include, among others, purchased services, insurance, property taxes, rents and leases, repairs and maintenance and utilities. Other operating expenses as a percentage of total revenues decreased to 14.3% during fiscal 2004 compared to 16.1% during fiscal 2003 primarily as a result of our initiatives to eliminate outsourcing arrangements in certain departments of recently acquired hospitals and to utilize additional in-house resources in those departments.
Other. Depreciation and amortization as a percentage of total revenues increased to 3.6% during fiscal 2004 compared to 3.5% during fiscal 2003 as a result of our capital improvement and expansion initiatives. The slight decrease in net interest as a percentage of total revenues during fiscal 2004 resulted from our ability to fund capital expenditures for most of fiscal 2004 with operating cash. We did not make significant new debt borrowings until May 2004, when we refinanced our then existing senior credit facility. We incurred $4.9 million of debt extinguishment costs related to this refinancing.
Net income. The $23.2 million year over year increase in net income resulted from the increased revenues as described above in excess of increased expenses. Net income during fiscal 2004 was adversely affected by increases in depreciation and amortization, net interest and income taxes of $17.8 million, $8.2 million and $14.0 million, respectively, from fiscal 2003 amounts. We view these costs as products of our strategic growth initiative.
At June 30, 2005, we had working capital of $77.7 million, including cash and cash equivalents of $79.2 million. Working capital at June 30, 2004 was $162.7 million. The decrease in working capital was primarily due to excess cash on hand as of June 30, 2004 from the 2004 credit facility refinancing proceeds. Cash provided by operating activities increased from $109.0 million during fiscal 2004 to $201.8 million during fiscal 2005. The significant increase was due to our improved operational performance during the current year combined with a $19.2 decrease in cash used to fund working capital items. Our net revenue days in accounts receivable decreased from 59 days during fiscal 2004 to 53 days during fiscal 2005 as a result of improved upfront cash collections and a decrease in self-pay utilization.
We spent $238.2 million for capital expenditures during fiscal 2005. In May 2004 and July 2005, our board of directors approved major expansion projects at six of our existing hospitals in San Antonio and metropolitan Phoenix. We estimate that these projects will cost a total of approximately $334.2 million, including capitalized interest costs. Through June 30, 2005, we have spent approximately $89.6 million related to these projects and expect to incur the remaining $244.6 million during our next three fiscal years. All of these projects will result in additional capacity at each of the six hospitals. In addition, most of the projects will facilitate an expansion of clinical service capabilities. The following table summarizes these major expansion projects as of September 1, 2005.
40 of these beds were added during the fourth quarter of fiscal 2005.
Our senior credit facilities consist of a revolving credit facility and term loan facilities. Our revolving credit facility provides for loans in a total principal amount of up to $250.0 million, and matures in September 2010. The initial term loan facility, which matures in September 2011, provides for loans in a total principal amount of up to $800.0 million as follows: (1) $475.0 million borrowed on September 23, 2004 to finance the merger, to refinance our existing indebtedness and to pay fees and expenses relating thereto; (2) up to $150.0 million available to finance the acquisition(s) of hospitals and related businesses provided that any such acquisition(s) occurred by February 20, 2005 and (3) until September 23, 2005, up to $175.0 million available for working capital, capital expenditures and other general corporate purposes. We borrowed $60.0 million under the $150.0 million acquisition delayed draw term loan facility on December 31, 2004 in order to fund the acquisition purchase price of the Massachusetts hospitals. On February 18, 2005, we borrowed the remaining $90.0 million to fund the working capital buildup at the Massachusetts hospitals and to fund capital expenditures. In addition, upon the occurrence of certain events, we may request that incremental term loans be added to our existing senior credit facilities in amounts not to exceed $300.0 million in the aggregate, subject to receipt of commitments by existing lenders or other financing institutions and to the satisfaction of certain other conditions.
The term borrowings under the senior credit facilities bear interest at a rate equal to, at our option, a base rate plus 2.25% per annum or LIBOR plus 3.25% per annum. The borrowings under the revolving credit facility currently bear interest at a rate equal to, at our option, a base rate plus 1.00% per annum or LIBOR plus 2.00% per annum, but are subject to increase by up to 50 basis points should our leverage ratio deteriorate.
The senior credit facilities contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability, and the ability of our subsidiaries, to sell assets, incur additional indebtedness or issue
The following table reflects a summary of obligations and commitments outstanding, including both the principal and interest portions of long-term debt and capital leases, with their payment dates as of June 30, 2005.
California has a statute and regulations that require hospitals to meet certain seismic performance standards. Hospitals that do not meet the standards may be required to retrofit their facilities. We have filed our required compliance plans with the State of California. We expect to comply with the initial seismic requirements at all of our California facilities by 2013. We expect to incur approximately $12.5 million in costs to meet our compliance plan. Upon completion of the $12.5 million in improvements, our California facilities will be compliant with the seismic regulations and standards through 2029. We estimate that the majority of the square footage in our California facilities will be compliant with the seismic regulations and standards that come into effect during 2030 once we have completed our $12.5 million in improvements, but we are unable at this time to estimate our costs for full compliance with the 2030 requirements.