The following table contains selected historical financial data for each of the years in the five year period ended December 31, 2001. You should read this table in conjunction with the consolidated financial statements and related notes included elsewhere in this report and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(c) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency.
(d) Represents the average number of licensed beds weighted based on periods operated.
(f) Equivalent admissions is used by management and investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions is computed by multiplying admissions (inpatient volume) by the sum gross inpatient revenue and gross outpatient revenue and then
(i) Outpatient surgeries are those surgeries that do not require admission to our hospitals.
At December 31, 2001, we operated 23 general, acute care hospitals in the states of Alabama, Florida, Kansas, Kentucky, Louisiana, Tennessee, Utah and Wyoming. For the year ended December 31, 2001, we generated $619.4 million in net revenues.
- the efforts of insurers, healthcare providers and others to contain healthcare costs;
- the ability to attract and retain qualified management and personnel, including physicians, nurses and technicians, consistent with our expectations and targets;
- changes in federal, state or local regulations affecting the healthcare industry;
- the availability and terms of capital to fund our business strategy;
- our ongoing efforts to monitor, maintain and comply with applicable laws, regulations, policies and procedures including those required by the corporate integrity agreement that we entered into with the government in December, 2000 and those that, if violated, could cause any of our facilities to lose its state license or its ability to receive payments under the Medicare, Medicaid and TRICARE programs;
- claims and legal actions relating to professional liabilities and other matters;
- fluctuations in the market value of our common stock and resulting costs to us to administer our ESOP;
As a consequence, current plans, anticipated actions and future financial conditions and results may differ from those expressed in any forward-looking statements made by or on behalf of our company. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report.
- Expanding Service Offerings. We believe our efforts to improve the quality and broaden the scope of healthcare services available at our facilities will lead to increased patient volumes. Recruiting and retaining both general practitioners and specialists for our non-urban communities is a key to the success of these efforts. Between the date of the distribution of our stock from HCA and December 31, 2001, we recruited 207 physicians,
of which approximately 64% are specialists. Adding new physicians should help increase both inpatient and outpatient volumes which, in turn, should increase revenues. Continuing to add specialists should also allow us to grow by offering new services. In addition, increases in capital expenditures in our hospitals should increase local market share and help persuade patients to stay within their communities rather than leaving town for healthcare services.
- Improving Managed Care Position. We believe we have been able to negotiate contract terms that are generally more favorable for our facilities than terms available in urban markets.
- Aging U.S. Population. In general, the population of the United States and of the communities that we serve is aging. At the end of 2001, approximately 13% of the U.S. population was 65 years old or older compared to 11% of the population at the end of 1980. This aging trend is projected to continue so that by 2025, approximately 18% of the U.S. population is expected to be older than 65. Generally, the older population tends to use healthcare services more frequently than the younger population.
- Medicare Rate Increases. The Medicare, Medicaid and SCHIP Benefit Improvement and Protection Act of 2000 was enacted in December 2000. Under BIPA, we have experienced Medicare rate increases that began in April 2001.
Pressure on payment levels, the increase in outpatient services and the large number of our patients who participate in managed care plans will present ongoing challenges for us. These challenges are exacerbated by our inability to control these trends and the associated risks. To maintain or improve operating margins in the future, we must, among other things, increase patient volumes while controlling the costs of providing services. If we are not able to achieve these improvements and the trend toward declining reimbursements and payments continues, results of operations and cash flow will deteriorate.
Effective December 1, 2001, we acquired Ville Platte Medical Center in Ville Platte, Louisiana for approximately $11.0 million in cash, including working capital and the assumption of long-term liabilities of approximately $2.6 million. Pursuant to the asset purchase agreement, we also agreed to make certain capital improvements which, including the initial cash payment and liabilities assumed, is not required to exceed $25.0 million. The capital improvements must be completed by December 1, 2004. The allocation of the full purchase price had not been determined as of December 31, 2001. Unallocated purchase price of approximately $12.6 million is included in other long-term assets in the accompanying consolidated balance sheet as of December 31, 2001 pending final appraisal from a third party.
Effective January 2, 2001, we entered into a two-year lease to operate Bluegrass Community Hospital, a 25-bed critical access hospital located in Versailles, Kentucky, which the parties may mutually agree to extend.
The following tables present summaries of results of operations for the three months ended December 31, 2000 and 2001 and for the years ended December 31, 1999, 2000 and 2001 (dollars in millions):
(a) Represents our cost of salaries and benefits, including employee health benefits and workers compensation insurance, for all hospital and corporate employees and contract labor.
(b) Includes our hospitals' costs for pharmaceuticals, blood, surgical instruments and all general supply items, including the cost of freight.
(c) Consists primarily of contract services, physician recruitment, professional fees, repairs and maintenance, rents and leases, utilities, insurance, marketing and non-income taxes.
(d) EBITDA is defined as income 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 susceptible to varying calculations, EBITDA as presented may not be comparable to other similarly titled measures of other companies.
(f) Management and investors use equivalent admissions as a general measure of combined inpatient and outpatient volume. We compute equivalent admissions by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then 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.
(j) The 2000 same hospital % changes from prior year are based on hospitals owned for all twelve months during 1999 and 2000.
Salaries and benefits decreased as a percentage of revenues to 39.1% for the three months ended December 31, 2001 from 39.2% for the three months ended December 31, 2000 primarily as a result of improvements in labor productivity and an increase in revenues per equivalent admission. Man-hours per equivalent admission decreased 2.3% over the same period last year. The decrease in salaries and benefits as a percentage of revenues was partially offset by a 4.4% increase in salaries and benefits per man-hour for the three months ended December 31, 2001 compared to the three months ended December 31, 2000. On a same hospital basis, salaries and benefits decreased as a percentage of revenues to 38.2% for the three months ended December 31, 2001 from 38.5% over the same period last year.
Supply costs increased as a percentage of revenues to 12.7% for the three months ended December 31, 2001 from 11.8% for the three months ended December 31, 2000. The cost of supplies per equivalent admission increased 9.5% primarily as a result of increases in the number of surgeries performed by us during the three months ended December 31, 2001 compared to the three months ended December 31, 2000 as supply costs incurred in connection with surgeries are higher than supply costs incurred for other procedures. Total surgeries increased 15.5% over the same period last year. In addition, the increase is partially due to increases in pharmaceutical costs and new product development costs as well as general inflation. On a same hospital basis, supply costs increased as a percentage of revenues to 12.6% for the three months ended December 31, 2001 from 11.7% over the same period last year.
Provision for doubtful accounts decreased as a percentage of revenues to 7.1% for the three months ended December 31, 2001 from 7.5% for the three months ended December 31, 2000 primarily as a result of an improvement in collections. On a same hospital basis, provision for doubtful accounts decreased as a percentage of revenues to 5.8% for the three months ended December 31, 2001 from 6.1% over the same period last year.
Depreciation and amortization expense increased to $9.9 million for the three months ended December 31, 2001 compared to $8.8 million for the three months ended December 31, 2000 primarily due to the hospitals we acquired during the three months ended December 31, 2001.
Minority interests in earnings of consolidated entities increased to $0.8 million for the three months ended December 31, 2001 compared to $0.4 million for the three months ended December 31, 2000 primarily because of an increase in the pre-tax income of our non-wholly owned hospital.
The provision for income taxes increased to $8.0 million for the three months ended December 31, 2001 compared to $4.6 million for the three months ended December 31, 2000 primarily as a result of higher pre-tax income for the three months ended December 31, 2001 compared to the three months ended December 31, 2000.
Revenues increased 11.2% to $619.4 million for the year ended December 31, 2001 compared to $557.1 million for the year ended December 31, 2000 primarily as a result of a 7.8% increase in equivalent admissions, a 3.1% increase in revenues per equivalent admission. In addition, total surgeries, outpatient surgeries and emergency room visits increased 13.9%, 15.5% and 6.2% respectively for the year 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. On a same hospital basis, revenues increased 9.5% for the year ended December 31, 2001 compared to the same period last year.
Salaries and benefits decreased as a percentage of revenues to 39.3% for the year ended December 31, 2001 from 40.2% for the year ended December 31, 2000 primarily as a result of improvements in labor productivity and an increase in revenues per equivalent admission. Man-hours per equivalent admission decreased 5.0% over the same period last year. The decrease in salaries and benefits as a percentage of revenue was partially offset by a 5.9% increase in salaries and benefits per man-hour for the year ended December 31, 2001 compared to the year ended December 31, 2000. On a same hospital basis, salaries and benefits decreased as a percentage of revenues to 38.7% for the year ended December 31, 2001 from 39.3% over the same period last year.
Supply costs increased as a percentage of revenues to 12.6% for the year ended December 31, 2001 from 12.0% for the year ended December 31, 2000. The cost of supplies per equivalent admission increased 8.2% primarily as a result of increases in the number of surgeries performed by us during the year ended December 31, 2001 compared to the year ended December 31, 2000 as supply costs incurred in connection with surgeries are higher than supply costs incurred for other procedures. In addition, the increase is partially due to increases in pharmaceutical costs and new product development costs as well as general inflation. On a same hospital basis, supply costs increased as a percentage of revenues to 12.6% for the year ended December 31, 2001 from 12.1% over the same period last year.
Other operating expenses decreased as a percentage of revenues to 19.5% for the year ended December 31, 2001 from 21.3% for the year ended December 31, 2000. The decrease was primarily the result of an increase in volumes and revenues per equivalent admission as discussed above 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 19.5% for the year ended December 31, 2001 from 21.3% over the same period last year.
ESOP expense increased to $10.4 million for the year ended December 31, 2001 from $7.1 million for the year ended December 31, 2000. This increase was because of a higher average fair market value of our common stock for the year 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.
During the year ended December 31, 2001 and 2000, we recorded a $0.5 million and $1.4 million pre-tax gain, respectively, related to the favorable settlement on the sale of a facility on which we had previously recorded an impairment charge.
The provision for income taxes increased to $31.1 million for the year ended December 31, 2001 compared to $15.2 million for the year ended December 31, 2000 primarily as a result of higher pre-tax income for the year ended December 31, 2001 compared to the year ended December 31, 2000. These provisions reflect effective income tax rates of 47.4% for 2001 compared to 46.1% for 2000. The increase in the effective rate primarily resulted from the increase in the nondeductible portion of ESOP expense due to the higher average fair market value of the shares committed to be released during 2001 compared to 2000. The ESOP expense deductible for tax purposes is fixed at $3.2 million per year.
Net income increased to $33.3 million for the year ended December 31, 2001 compared to $17.9 million for the year ended December 31, 2000 because of the reasons described above.
Salaries and benefits decreased as a percentage of revenues to 40.2% for the year ended December 31, 2000 from 42.2% for the year ended December 31, 1999 primarily as a result of improvements in labor productivity and an increase in revenues per equivalent admission, as discussed above. In addition, man-hours per equivalent admission decreased 5.4% over the same period last year. On a same hospital basis, salaries and benefits decreased as a percentage of revenues to 39.3% for the year ended December 31, 2000 from 40.5% over the same period last year.
Minority interests in earnings of consolidated entities increased slightly to $2.2 million for the year ended December 31, 2000 from $1.9 million for the year ended December 31, 1999.
The provision (benefit) for income taxes for the year ended December 31, 2000 was $15.2 million compared to $(2.7) million for the year ended December 31, 1999. These provisions reflect effective income tax rates of 46.1% for 2000 and 26.7% for 1999. The increase in the effective rate relates primarily to the impairment charge taken in the fourth quarter of 1999 as discussed above and also due to the increase in the nondeductible portion of ESOP expense due to the higher average fair market value of the shares committed to be released during 2000 compared to 1999. The ESOP expense deductible for tax purposes is fixed at $3.2 million per year.
Net income (loss) increased to $17.9 million for the year ended December 31, 2000 compared to $(7.4) million for the year ended December 31, 1999 because of the reasons described above.
Our ability to collect outstanding receivables from third party payors is critical to our operating performance and cash flows. The primary collection risk lies with uninsured patient accounts and deductibles, co-payments or other amounts due from individual patients. Our allowance for doubtful accounts is estimated based primarily upon the age of patient accounts receivable, the patient's economic inability to pay and the effectiveness of our collection efforts. We routinely monitor our accounts receivable balances and utilize historical collection experience to support the basis for our estimates of the provision for doubtful accounts. Significant changes in payor mix or business office operations could have a significant impact on our results of operations and cash flows.
We derive a significant portion of our revenues from Medicare, Medicaid and other payors that receive discounts from our standard charges. We must estimate the total amount of these discounts to prepare our financial statements. For the year ended December 31, 2001, Medicare, Medicaid and discounted plan patients accounted for 93.3% of our total gross revenues. The Medicare and Medicaid regulations and various managed care contracts under which these discounts must be calculated are complex and are subject to interpretation and adjustment. We estimate the allowance for contractual discounts on a payor-specific basis given our interpretation of the applicable regulations or contract terms. However, the services authorized and provided, and the resulting reimbursement, are often subject to interpretation. These interpretations sometimes result in payments that differ from our estimates. Additionally, updated regulations and contract renegotiations occur frequently necessitating continual review and assessment of the estimation process by management.
Given the nature of our operating environment, we are subject to medical malpractice lawsuits and other claims. To mitigate a portion of this risk, we maintained insurance for individual malpractice claims exceeding $1 million for the years ended December 31, 2001, 2000 and 1999. For fiscal year 2002, we increased our deductible to $10 million to mitigate increases in the cost of professional and general liability insurance. Our reserves for professional and general liability risks are based upon historical claims data, demographic factors, severity factors and other actuarial assumptions. This estimate is discounted to its present value using rates of 6.0% and 5.0% at December 31, 2000 and 2001, respectively. The rate changed to 5.0% reflecting lower market rates experienced during 2001. The estimated accrual for professional and general liability 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 owned our health care facilities as occurrence data under previous ownership may not necessarily reflect occurrence data under our ownership. While we monitor current claims closely and consider 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.
Our cash and cash equivalents increased to $57.2 million at December 31, 2001, from $39.7 million at December 31, 2000. The increase is primarily from $114.1 million provided by operating activities offset in part by $68.3 million and $28.3 million used in investing and financing activities, respectively.
In response to the increasing demand for outpatient care, we are reconfiguring some of our hospitals to more effectively accommodate outpatient services and restructuring existing surgical capacity in some of our hospitals to permit additional outpatient volume and a greater variety of outpatient services.
We used cash in financing activities of $28.3 million during 2001 compared to cash provided by financing activities of $35.6 million during 2000. We received $100.4 million from our public offering of common stock and we repaid $139.3 million of bank debt during 2001. In 2000, we borrowed $65.0 million to fund the acquisition of two hospitals and repaid $35.7 million of bank debt primarily from our proceeds from the sale of facilities.
Our cash provided by operating activities increased to $83.4 million in 2000 compared to $59.3 million in 1999. The increase resulted primarily from net income of $17.9 million in 2000 compared to a net loss of $7.4 million last year and receipt of an income tax refund of $4.4 million in 2000 compared to income tax payments of $15.4 million during 1999.
The cash used in investing activities increased to $91.8 million during 2000 compared to $68.8 million in 1999. The increase resulted primarily from our two hospital acquisitions during fiscal 2000. The increase was partially offset by proceeds of $30.0 million from the sale of facilities and by decreased capital expenditures of $31.4 million during 2000 compared to $64.8 million in 1999 which included the construction of a replacement facility.
In March 2001, we received approximately $100.4 million in net proceeds from a public offering of 3,680,000 shares of our common stock. During 2001, we used the proceeds, along with available cash, to repay the $139.3 million in borrowings outstanding under our existing credit agreement.
The applicable interest rate under the 2001 Agreement is based on either LIBOR plus a margin ranging from 1.25% to 2.25% or prime plus a margin ranging from 0% to 0.5% both depending on the Company's consolidated total debt to consolidated EBITDA ratio for the most recent four quarters. The Company also pays a commitment fee ranging from 0.3% to 0.5% of the average daily unused balance. The applicable commitment fee rate is based on the Company's consolidated total debt to consolidated EBITDA ratio for the most recent four quarters. The interest rate under the 2001 agreement was 3.13% at December 31, 2001.
The following table reflects a summary of our obligations and commitments outstanding at December 31, 2001.
(a) Includes capital and operating lease obligations; capital lease obligations are not material.
We are in compliance with all covenants or other requirements set forth in our credit agreements or indentures. Further, these agreements do not contain provisions that would accelerate the maturity dates of our debt upon a downgrade in our credit rating. However, a downgrade in our credit rating could adversely affect our ability to renew existing, or obtain access to new credit facilities in the future and could increase the cost of such facilities. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Our business plan contemplates the acquisition of additional hospitals and we continuously review potential acquisitions. These acquisitions may, however, require additional financing. We continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities from lenders, or restructure our long-term debt for strategic reasons or to further strengthen our financial position. We may, from time to time in the future, acquire senior subordinated notes in the open market. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders.
We do not expect to pay dividends on our common stock in the foreseeable future.
In July 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets, (the "Statements"). These Statements make significant changes to the accounting for business combinations, goodwill and intangible assets.
Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed at least annually for impairment. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, we are required to adopt SFAS 142 effective January 1, 2002. Application of the non-amortization provisions of SFAS 142 for goodwill would have resulted in an increase in pretax income of approximately $1.7 million ($0.8 million, after-tax or $0.02 per diluted share) for the year ended December 31, 2001. Pursuant to SFAS 142, we will complete our transition impairment tests of goodwill during the second quarter of 2002 anticipating no impairment and will perform our initial annual impairment test later in 2002.
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), which supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS 144 removes goodwill from its scope and clarified other implementation issues related to SFAS 121. SFAS 144 also provides a single framework for evaluating long-lived assets to be disposed of by sale. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years and, generally, are to be applied prospectively. We do not expect SFAS 144 to have a material effect on our results of operations or financial position.
The healthcare industry is labor intensive. Wages and other expenses increase during periods of inflation and when shortages in marketplaces occur. In addition, suppliers and insurers pass along rising costs to us in the form of higher prices. Our ability to pass on these increased costs is limited because of increasing regulatory and competitive pressures as discussed above. In the event we experience inflationary pressures, results of operations may be materially affected.
We adopted the Executive Stock Purchase Plan in 1999, in which 1,000,000 shares of our Common Stock were reserved and subsequently issued. The Executive Stock Purchase Plan grants a right to specified executives to purchase shares of Common Stock from us. We loaned each participant in the plan 100% of the purchase price of our Common Stock at the fair value based on the date of purchase (approximately $10.2 million), on a full recourse basis at interest rates ranging from 5.2% to 5.3%. The loans are reflected as notes receivable for shares sold to employees in our consolidated statements of stockholders' equity. As of December 31, 2001, approximately $4.5 million of such loans have been paid under the Executive Stock Purchase Plan.
Our revenues may decline if federal or state programs reduce our Medicare or Medicaid payments or managed care companies reduce our reimbursements.
A number of states have adopted legislation designed to reduce their Medicaid expenditures and to provide universal coverage and additional care to their residents. Some states propose to enroll Medicaid recipients in managed care programs and impose additional taxes on hospitals to help finance or expand the states' Medicaid systems.
We may be subjected to allegations that we failed to comply with governmental regulation which could result in sanctions that reduce our revenue and profitability.
Our revenue is particularly sensitive to regulatory and economic changes in the states of Kentucky and Tennessee. As of December 31, 2001, we operated 23 hospitals with seven located in the Commonwealth of Kentucky and seven located in the State of Tennessee. Based on those 23 hospitals, we generated 39.2% of our revenue from our Kentucky hospitals (including 4.3% from state-sponsored Medicaid programs) and 22.3% from our Tennessee hospitals (including 3.3% from state-sponsored TennCare programs) for the year ended December 31, 2001. Managed care organizations that participate in the Medicaid programs of Tennessee and Kentucky have been placed in receivership or encountered other financial difficulties. Other managed care organizations in the states in which we derive significant revenue may encounter similar difficulties in paying claims in the future.
One element of our business strategy is expansion through the acquisition of acute care hospitals in growing, non-urban markets. We face significant competition to acquire other attractive, rural hospitals. We may not find suitable acquisitions on favorable terms. We also may incur or assume additional indebtedness as a result of the consummation of any acquisitions. In addition, in order to ensure the tax-free treatment of the distribution of our stock from HCA, our ability to issue stock as consideration for acquisitions is limited. Our failure to acquire non-urban hospitals consistent with our growth plans could prevent us from increasing our revenues.
- limit our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes;
Federal and state investigations of HCA could subject our hospitals and operations to increased governmental scrutiny.
HCA is a defendant in several qui tam actions, or actions brought by private parties, known as relators, on behalf of the United States of America, which have been unsealed and served on HCA. The actions allege, in general, that HCA and certain subsidiaries and/or affiliated partnerships violated the False Clams Act, 31 U.S.C. ss. 3729 et seq., for improper claims submitted to the government for reimbursement. The lawsuits generally seek three times the amount of damages caused to the United States by the submission of any Medicare or Medicaid false claims presented by the defendants to the federal government, civil penalties of not less than $5,500 nor more than $11,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. HCA has disclosed that, on March 15, 2001, the Department of Justice filed a status report setting forth the government's decisions regarding intervention in existing qui tam actions against HCA and filed formal complains for those suits in which the government has intervened. HCA stated that, of the original 30 qui tam actions, the Department of Justice remains active and has elected to intervene in eight actions. HCA has also disclosed that it is aware of additional qui tam actions that remain under seal and believes that there may be other sealed qui tam cases of which it is unaware.
HCA has agreed to indemnify the Company for any losses, other than consequential damages, arising from the pending governmental investigations of HCA's business practices prior to the date of the distribution and losses arising from legal proceedings, present or future, related to the investigation or actions engaged in before the distribution that relate to the investigation. HCA has also agreed that, in the event that any hospital owned by the Company at the time of the spin-off is permanently excluded from participation in the Medicare and Medicaid programs as a result of the proceedings described above, then HCA will make a cash payment to the Company, in an amount (if positive) equal to five times the excluded hospital's 1998 income from continuing operations before depreciation and amortization, interest expense, management fees, minority interests and income taxes, as set forth on a schedule to the distribution agreement, less the net proceeds of the sale or other disposition of the excluded hospital. However, the Company could be held responsible for any claims that are not covered by the agreements reached with the Federal government or for which HCA is not required to, or fails to, indemnify the Company. If indemnified matters were asserted successfully against the company or any of the Company's facilities, and HCA failed to meet its indemnification obligations, then this event could have a material adverse effect on the Company's business, financial condition, results of operations or prospects.
We depend on the continued services and management experience of Kenneth C. Donahey and our other executive officers. If Mr. Donahey or any of our other executive officers resign their positions or otherwise are unable to serve, our management expertise and ability to deliver healthcare services efficiently could be weakened. In addition, if we fail to attract and retain managers at our hospitals and related facilities our operations will suffer.
Our business depends significantly on effective information systems to process clinical and financial information. Information systems require an ongoing commitment of significant resources to maintain and enhance existing systems and develop new systems in order to keep pace with continuing changes in information processing technology. We rely heavily on HCA for information systems. Under a contract with an initial term that will expire on May 11, 2006, HCA provides financial, clinical, patient accounting and network information services to us. If our access to these systems is limited in the future or if HCA develops systems more appropriate for the urban healthcare market and not suited for our hospitals, our operations could suffer. In addition, as new information systems are developed, we must integrate them into our existing systems. Evolving industry and regulatory standards, including the Health Insurance Portability and Accountability Act of 1996, commonly known as "HIPAA," may require changes to our information systems. We may not be able to integrate new systems or changes required to our existing systems in the future effectively.
- a prohibition on taking actions by the written consent of stockholders;
- the removal of directors only for cause and by a vote of 80% of the outstanding voting power.
These provisions may also have the effect of discouraging third parties from making proposals involving our acquisition or change of control, although a proposal, if made, might be considered desirable by a majority of our stockholders. These provisions could further have the effect of making it more difficult for third parties to cause the replacement of our board of directors.
- the operating and stock price performance of other companies that investors may deem comparable; and
Broad market and industry fluctuations may adversely affect the price of our common stock, regardless of our operating performance.
Information with respect to this Item is contained in our consolidated financial statements beginning with the Index on Page of this report.