-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WPVU3q9yhtRq/Dn3eNeeLmfbMnQGdh1cI4d4Ijg5MTd8KTTv3VdPe0VvAxx4doKu /Rs7pY2w8eY2dYHh73kYyQ== 0000950144-98-009889.txt : 19980817 0000950144-98-009889.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950144-98-009889 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROVINCE HEALTHCARE CO CENTRAL INDEX KEY: 0001044942 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-GENERAL MEDICAL & SURGICAL HOSPITALS, NEC [8062] IRS NUMBER: 621710772 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23639 FILM NUMBER: 98689422 BUSINESS ADDRESS: STREET 1: 105 WESTPARK DR STREET 2: STE 400 CITY: BRENTWOOD STATE: TN ZIP: 37027 BUSINESS PHONE: 6153701377 MAIL ADDRESS: STREET 1: 109 WESTPARK DR SUITE 180 STREET 2: 109 WESTPARK DR SUITE 180 CITY: BRENTWOOD STATE: TN ZIP: 37207 10-Q 1 PROVINCE HEALTHCARE COMPANY 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------- FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended June 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From _____________ To ____________ --------------------------- PROVINCE HEALTHCARE COMPANY (Exact name of registrant as specified in its charter) DELAWARE 0-23639 62-1710772 (State or other jurisdiction of (Commission File Number) (I.R.S. Employer incorporation or organization) Identification No.) 105 WESTWOOD PLACE SUITE 400 BRENTWOOD, TENNESSEE 37027 (Address of principal executive offices) (zip code) (615) 370-1377 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at July 23, 1998 COMMON STOCK, $.01 PAR VALUE 15,695,268 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
Page ---- Condensed Consolidated Balance Sheets June 30, 1998 and December 31, 1997 1 Condensed Consolidated Statements of Income Three Months Ended June 30, 1998 and 1997 2 Condensed Consolidated Statements of Income Six Months Ended June 30, 1998 and 1997 3 Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 1998 and 1997 4 Notes to Condensed Consolidated Financial Statements 5
3 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN THOUSANDS)
June 30, December 31, 1998 1997 -------- --------- ASSETS Current assets: Cash and cash equivalents $ 3,664 $ 4,186 Accounts receivable, less allowance for doubtful accounts of $6,679 at June 30, 1998 and $4,749 at December 31, 1997 51,924 30,902 Inventories 6,008 3,655 Prepaid expenses and other 5,861 8,334 -------- --------- Total current assets 67,457 47,077 Property, plant and equipment, net 107,167 65,974 Other assets: Unallocated purchase price 2,075 760 Cost in excess of net assets acquired, net 142,345 53,624 Other assets 8,284 9,026 -------- --------- Total assets $327,328 $ 176,461 ======== ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,314 $ 6,524 Accrued salaries and benefits 10,394 8,720 Accrued expenses 3,594 4,422 Current maturities of long-term obligations 2,355 6,053 -------- --------- Total current liabilities 22,657 25,719 Long-term obligations, less current maturities 191,435 83,043 Third-party settlements 6,195 4,680 Other liabilities 8,201 13,088 Minority interest 862 825 Mandatory redeemable preferred stock -- 50,162 Common stockholders' equity: Common stock--no par value at December 31, 1997; $0.01 par value at June 30, 1998; authorized 25,000,000 shares; issued and outstanding 13,009,768 shares and 6,330,614 shares at June 30, 1998 and December 31, 1997, respectively 130 2,116 Additional paid-in-capital 97,338 -- Retained earnings 510 (3,172) -------- --------- Total common stockholders' equity 97,978 (1,056) -------- --------- Total liabilities, redeemable preferred stock and common stockholders' equity $327,328 $ 176,461 ======== =========
See accompanying notes. 1 4 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended June 30, --------------------------- 1998 1997 ------- -------- Revenue: Net patient service revenue $51,242 $ 35,264 Management and professional services 2,964 2,728 Reimbursable expenses 1,551 1,672 Other 875 425 ------- -------- Net operating revenue 56,632 40,089 Expenses: Salaries, wages and benefits 22,102 14,717 Reimbursable expenses 1,551 1,672 Purchased services 7,128 5,472 Supplies 5,535 3,943 Provision for doubtful accounts 4,296 3,493 Other operating expenses 4,814 3,722 Rentals and leases 1,208 1,255 Depreciation and amortization 3,342 1,841 Interest expense 2,805 2,210 Minority interest 28 78 Loss (gain) on sale of assets 12 (135) ------- -------- Total expenses 52,821 38,268 ------- -------- Income before provision for income taxes 3,811 1,821 Provision for income taxes 1,677 833 ------- -------- Net income 2,134 988 Preferred stock dividends and accretion -- (1,156) ------- -------- Net (loss) income to common shareholders $ 2,134 $ (168) ======= ======== Basic earnings (loss) per common share: Net income $ 0.16 $ 0.18 Preferred stock dividends and accretion -- (0.21) ------- -------- Net income (loss) to common shareholders $ 0.16 $ (0.03) ======= ======== Diluted earnings (loss) per common share: Net income $ 0.16 $ 0.18 Preferred stock dividends and accretion -- (0.21) ------- -------- Net (loss) income to common shareholders $ 0.16 $ (0.03) ======= ========
See accompanying notes. 2 5 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Six Months Ended June 30, --------------------------------------------------- Actual Pro Forma ------------------------------ (Note 9) 1998 1997 1998 --------- -------- -------- Revenue: Net patient service revenue $ 93,992 $ 69,769 $ 93,992 Management and professional services 5,894 5,980 5,894 Reimbursable expenses 3,112 3,379 3,112 Other 1,484 1,420 1,484 --------- -------- -------- Net operating revenue 104,482 80,548 104,482 Expenses: Salaries, wages and benefits 40,708 30,117 40,708 Reimbursable expenses 3,112 3,379 3,112 Purchased services 13,162 10,517 13,162 Supplies 10,162 7,760 10,162 Provision for doubtful accounts 7,378 5,903 7,378 Other operating expenses 9,071 8,075 9,071 Rentals and leases 2,683 2,578 2,683 Depreciation and amortization 5,547 3,612 5,547 Interest expense 4,660 3,971 4,186 Minority interest 96 147 96 Loss gain on sale of assets 45 (51) 45 --------- -------- -------- Total expenses 96,624 76,008 96,150 --------- -------- -------- Income before provision for income taxes 7,858 4,540 8,332 Provision for income taxes 3,449 2,044 3,638 --------- -------- -------- Net income 4,409 2,496 4,694 Preferred stock dividends and accretion (696) (2,271) -- --------- -------- -------- Net income to common shareholders $ 3,713 $ 225 $ 4,694 ========= ======== ======== Basic earnings per common share: Net income $ 0.39 $ 0.46 $ 0.36 Preferred stock dividends and accretion (0.06) (0.42) -- --------- -------- -------- Net income to common shareholders $ 0.33 $ 0.04 $ 0.36 ========= ======== ======== Diluted earnings per common share: Net income $ 0.38 $ 0.39 $ 0.35 Preferred stock dividends and accretion (0.06) (0.35) -- --------- -------- -------- Net income to common shareholders $ 0.32 $ 0.04 $ 0.35 ========= ======== ========
See accompanying notes. 3 6 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
Six Months Ended June 30 1998 1997 --------- -------- NET CASH USED IN OPERATING ACTIVITIES: $ (5,813) $ (1,259) INVESTING ACTIVITIES Purchase of property, plant and equipment (6,928) (4,307) Purchase of acquired companies (129,196) -- Other (81) (121) --------- -------- Net cash used in investing activities (136,205) (4,428) FINANCING ACTIVITIES Proceeds from long-term debt 211,342 1,315 Repayments of debt (109,290) (899) Net proceeds from issuance of common stock 77,067 -- Exchange of Junior Preferred Stock (14,884) -- Redemption of Senior Preferred Stock (22,739) -- --------- -------- Net cash provided by financing activities 141,496 416 --------- -------- Net decrease in cash and cash equivalents (522) (5,271) Cash and cash equivalents at beginning of period 4,186 11,256 --------- -------- Cash and cash equivalents at end of period $ 3,664 $ 5,985 ========= ======== SUPPLEMENTAL CASH FLOW INFORMATION Interest paid during the period $ 3,072 $ 3,169 ========= ======== Income taxes paid during the period $ 1,538 $ 2,783 ========= ======== NONCASH TRANSACTIONS Dividends and accretion on preferred stock $ 696 $ 2,271 Conversion and redemption of preferred stock 33,138 -- Property and equipment acquired through capital leases -- 706 ACQUISITIONS Fair value of assets acquired $ 131,537 $ -- Liabilities assumed 2,341 -- --------- -------- Cash paid $ 129,196 $ -- ========= ========
See accompanying notes. 4 7 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1998 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Interim results are not necessarily indicative of results that may be expected for the full year. In the opinion of management, the accompanying interim financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows of Province Healthcare Company (the "Company"). For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 2. LONG-TERM DEBT On March 30, 1998, the Company amended and restated its Credit Agreement and increased its credit facilities to $260 million, including a five-year $35 million End-Loaded Lease Facility ("ELLF"). At June 30, 1998, the Company had $185.1 million outstanding under its revolving line of credit and no amounts outstanding under the ELLF. In July 1998, the Company completed a public offering of common stock and used the net proceeds therefrom to reduce debt by approximately $65.7 million. (See Note 8.) The Amended and Restated Credit Agreement contains limitations on the Company's ability to incur additional indebtedness (including contingent obligations), sell material assets, retire, redeem or otherwise reacquire its capital stock, acquire the capital stock or assets of another business, and pay dividends. The Amended and Restated Credit Agreement also requires the Company to maintain a specified net worth and meet or exceed certain coverage, leverage, and indebtedness ratios. Indebtedness under the Amended and Restated Credit Agreement is secured by substantially all assets of the Company. 5 8 3. EARNINGS (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share date):
Three Months Ended June 30, 1998 1997 ------- ------- Numerator: Net income $ 2,134 $ 988 Preferred stock dividends and accretion -- (1,156) ------- ------- Net income (loss) to common shareholders $ 2,134 $ (168) ======= ======= Denominator: Denominator for basic earnings per share to common shareholders-weighted-average shares 13,010 5,371 Effect of dilutive securities - Incentive stock options 368 406 Stock purchase rights -- 663 ------- ------- Denominator for diluted earnings per share 13,378 6,440 Basic earnings (loss) per common share: Net income $ 0.16 $ 0.18 Preferred stock dividends and accretion -- (0.21) ------- ------- Net income (loss) per common share $ 0.16 $ (0.03) ======= ======= Diluted earnings (loss) per common share:(1) Net income $ 0.16 $ 0.18 Preferred stock dividends and accretion -- (0.21) ------- ------- Net income (loss) per common share $ 0.16 $ (0.03) ======= =======
(1) Diluted loss per share amounts for 1997 have been calculated using the same denominator as used in the basic earnings (loss) per share calculation, as the inclusion of dilutive securities in the denominator would have an anti-dilutive effect. 6 9
Six Months Ended June 30, -------------------------------------------------- Actual Pro Forma ------------------------------ (Note 9) 1998 1997 1998 --------- -------- -------- Numerator: Net income $ 4,409 $ 2,496 $ 4,694 Preferred stock dividends and accretion (696) (2,271) -- ---------- ------- ------- Net income to common shareholders $ 3,713 $ 225 $ 4,694 ========== ======= ======= Denominator: Denominator for basic earnings per share to common shareholders-weighted-average shares 11,176 5,371 13,010 Effect of dilutive securities - Incentive stock options 317 353 317 Stock purchase rights -- 663 -- ---------- ------- ------- Denominator for diluted earnings per share 11,493 6,387 13,327 Basic earnings per common share: Net income $ 0.39 $ 0.46 $ 0.36 Preferred stock dividends and accretion (0.06) (0.42) -- ---------- ------- ------- Net income per common share $ 0.33 $ 0.04 $ 0.36 ========== ======= ======= Diluted earnings per common share: Net income $ 0.38 $ 0.39 $ 0.35 Preferred stock dividends and accretion (0.06) (0.35) -- ---------- ------- ------- Net income per common share $ 0.32 $ 0.04 $ 0.35 ========== ======= =======
4. INCOME TAXES The income tax provision recorded for the three months and six months ended June 30, 1998 and 1997 differs from the expected income tax provision due to permanent differences and the provision for state income taxes. 5. ACQUISITIONS In August 1997, the Company acquired Colorado River Medical Center ("CRMC") (formerly Needles Desert Communities Hospital) in Needles, California by paying cash of $3,191,000 and assuming liabilities totaling $518,000. The operating results of CRMC are included in the Company's results of operations from the date of purchase; therefore, the results of operations for the three months and six months ended June 30, 1998 include CRMC. On May 1, 1998, the Company acquired Havasu Samaritan Regional Hospital ("Havasu") in Lake Havasu City, Arizona, from Samaritan Health System for approximately $105.5 million. On June 11, 1998, the Company acquired certain net assets and assumed certain liabilities of Elko General Hospital ("Elko") for a purchase price of approximately $21.7 million. To finance these acquisitions, the Company borrowed $106.0 million and 7 10 $22.0 million, respectively, under its revolving credit facility. These acquisitions were accounted for as purchase business combinations, and the results of operations of the two hospitals have been included in the results of operations of the Company from the respective dates of acquisition. Cost in excess of net assets acquired in these acquisitions totaled approximately $89.1 million. The allocation of the purchase price associated with these acquisitions has been determined based upon available information and is subject to further refinement. The following pro forma information reflects the operations of the entities acquired in 1998, as if the respective transactions had occurred at the beginning of the periods presented (in thousands, except per share data):
Three Months Ended Six Months Ended June 30, June 30, -------------------------------- ---------------------------------- 1998 1997 1998 1997 ---------- ---------- ----------- ----------- Net operating revenue $ 67,010 $ 59,693 $ 137,579 $ 120,120 Net income (loss) 1,881 (1,647) 3,816 (1,720) Net income (loss) to common shareholders 1,881 (2,803) 3,120 (3,991) Basic earnings (loss) per common share: Net income (loss) $ 0.14 $ (0.31) $ 0.34 $ (0.32) Net income (loss) to common shareholders 0.14 (0.52) 0.28 (0.74) Diluted earnings (loss) per common share: Net income (loss) $ 0.14 $ (0.26) $ 0.33 $ (0.27) Net income (loss) to common shareholders 0.14 (0.44) 0.27 (0.62)
The pro forma results of operations do not purport to represent what the Company's results of operations would have been had such transactions, in fact, occurred at the beginning of the periods presented or to project the Company's results of operations in any future period. 6. CONTINGENCIES Management continually evaluates contingencies based on the best available evidence and believes that adequate provision for losses has been provided to the extent necessary. In the opinion of management, the ultimate resolution of the following contingencies will not have a material effect on the Company's results of operations or financial position. GENERAL AND PROFESSIONAL LIABILITY RISKS The reserve for the self-insured portion of general and professional liability risks is included in "Other liabilities" and is based on actuarially determined estimates. LITIGATION The Company currently, and from time to time, is expected to be subject to claims and suits arising in the ordinary course of business. 8 11 NET PATIENT SERVICE REVENUE Final determination of amounts earned under the Medicare and Medicaid programs often occurs in subsequent periods because of audits by the programs, rights of appeal and the application of numerous technical provisions. Differences between original estimates and subsequent revisions (including settlements) are included in the statement of operations in the period in which revisions are made, and resulted in increases in net patient services revenue of $1.1 million, or 1.9% of net operating revenue, for the Company in the second quarter of 1998. There were no increases or decreases recorded in the second quarter of 1997. FINANCIAL INSTRUMENTS Interest rate swap agreements are used on a limited basis to manage the Company's interest rate exposure. The agreements are contracts to periodically exchange fixed and floating interest rate payments over the life of the agreements. On March 10, 1997, as required by the Credit Agreement, the Company entered into an interest rate swap agreement, which effectively converted for a five-year period $35 million of floating-rate borrowings to fixed-rate borrowings. The floating-rate payments are based on LIBOR, and fixed-rate payments are dependent upon market levels at the time the swap agreement was consummated. For the three months ended June 30, 1998 and 1997, the Company received a weighted average rate of 5.69% and 5.62% and paid a weighted average rate of 6.27% and 6.27%, respectively. For the six months ended June 30, 1998 and 1997, the Company received a weighted average rate of 5.78% and 5.61% and paid a weighted average rate of 6.27% and 6.27%, respectively. 7. STOCKHOLDERS' EQUITY REINCORPORATION On February 4, 1998, the Company merged with a wholly-owned subsidiary in order to change its jurisdiction of incorporation to Delaware and change its name to Province Healthcare Company. In the Merger, the Company exchanged 1.83 shares of its no par common stock for each share of the subsidiary's $0.01 par value common stock. All common share and per share data included in the condensed consolidated financial statements and footnotes thereto have been restated to reflect this reincorporation. As a result of the reincorporation, $2,053,000 was reclassified from common stock to additional paid-in-capital upon conversion from no par to $0.01 par value Common Stock. PUBLIC OFFERING OF COMMON STOCK On February 17, 1998, the Company closed its initial public offering of common stock. In connection with the offering, the Series B redeemable junior preferred stock was converted into common stock at the public offering price of the common stock. The net proceeds from the offering were used to redeem the outstanding balance of the Series A redeemable senior preferred stock plus accrued dividends, reduce the balance of the outstanding term and revolving credit loans, and repurchase a portion of the common stock which was issued upon conversion of the Series B redeemable junior preferred stock. 9 12 The following table sets forth the changes in the stockholders' equity accounts as a result of the reincorporation and the initial public offering of common stock (in thousands):
No Par Value Common Stock Additional ---------------------- Paid-in- Retained Shares Amount Capital Deficit Total ---------- ------- ------- ------- -------- Balance at December 31, 1997 6,330,614 $ 2,116 $ -- $(3,172) $ (1,056) Reincorporation -- (2,053) 2,053 -- -- Conversion of junior preferred stock and initial public offering of common stock 6,679,154 67 95,285 (31) 95,321 Preferred stock dividends and accretion -- -- -- (696) (696) Net income -- -- -- 4,409 4,409 ---------- ------- ------- ------- -------- Balance at June 30, 1998 13,009,768 $ 130 $97,338 $ 510 $ 97,978 ========== ======= ======= ======= ========
8. SUBSEQUENT EVENT In July 1998, the Company completed its public offering of 2,685,500 shares of common stock at an offering price of $26.00 per share. The net proceeds from the offering of approximately $66.0 million were used primarily to reduce debt. 9. PRO FORMA FINANCIAL INFORMATION The condensed consolidated pro forma statement of income for the six months ended June 30, 1998, gives effect to (i) the conversion of junior preferred stock into common stock and (ii) the sale of common stock in the initial public offering and the application of net proceeds thereof to the repurchase of certain shares of common stock, the redemption of senior preferred stock and the repayment of debt, as if all such transactions had been completed as of January 1, 1998, at the initial public offering price of $16.00 per share, as follows: - The elimination of interest expense associated with the $39.6 million of long-term obligations repaid with the net proceeds of the offering, and the elimination of the related income tax benefit based on the combined federal and state statutory rate of 39%. - The elimination of the dividends and the accretion of issuance costs on the senior preferred stock redeemed with a portion of the net proceeds of the offering, and the junior preferred stock converted into common stock in connection with the offering. The pro forma condensed consolidated financial information gives effect to the initial public offering completed in February 1998, and does not pro forma the effect of the Company's public stock offering completed in July 1998 (See Note 8) or any other transaction. The pro forma condensed consolidated financial information does not purport to represent what the Company's results of operations would have been had such transactions in fact occurred as of January 1, 1998, or to project the Company's results of operations in any future period. 10 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IMPACT OF ACQUISITIONS An integral part of the Company's strategy is to acquire non-urban acute-care hospitals. In August 1997, the Company acquired Colorado River Medical Center ("CRMC") (formerly Needles Desert Communities Hospital) in Needles, California (the "CRMC Acquisition"). The operating results of CRMC are included in the Company's results of operations from the date of purchase; therefore, the results of operations for the three-month and six-month periods ended June 30, 1998 include CRMC. On May 1, 1998, the Company acquired Havasu Samaritan Regional Hospital ("Havasu") in Lake Havasu City, Arizona, from Samaritan Health System for approximately $105.5 million. On June 11, 1998, the Company acquired certain net assets and assumed certain liabilities of Elko General Hospital ("Elko") for a purchase price of $21.7 million. To finance these acquisitions, the Company borrowed $106.0 million and $22.0 million, respectively, under its revolving credit facility. These acquisitions were accounted for as purchase business combinations, and the results of operations of the two hospitals have been included in the results of operations of the Company from the purchase dates forward. Therefore, the Company's operations for the three-month and six-month periods ended June 30, 1998 include two months' operations of Havasu and a partial month for Elko. The CRMC, Havasu and Elko acquisitions are collectively referred to in this discussion as "the acquisitions." Due to the relatively small number of owned and leased hospitals, each hospital acquisition can materially affect the overall operating margin of the Company. Upon the acquisition of a hospital, the Company typically takes a number of steps to lower operating costs. The impact of such actions may be offset by other cost increases to expand services, strengthen medical staff and improve market position. The benefits of these investments and of other activities to improve operating margins generally do not occur immediately. Consequently, the financial performance of a newly acquired hospital may adversely affect overall operating margins in the short term. As the Company makes additional hospital acquisitions, the Company expects that this effect will be mitigated by the expanded financial base of existing hospitals and the allocation of corporate overhead among a larger number of hospitals. RESULTS OF OPERATIONS The following table presents, for the periods indicated, information expressed as a percentage of net operating revenue. Such information has been derived from the Condensed Consolidated Statements of Income of the Company included elsewhere in this report. The results of operations for the periods presented include hospitals from their acquisition dates, as discussed above. 11 14
THREE MONTHS PERCENTAGE ENDED INCREASE (DECREASE) JUNE 30, AMOUNTS -------------------- ------- 1998 1997 ----- ----- Net operating revenue 100.0% 100.0% 41.3% Operating expenses (1) 82.3 85.5 36.1 ----- ----- ----- EBITDA (2) 17.7 14.5 71.9 Depreciation and amortization 5.9 4.6 81.5 Interest 5.0 5.4 26.9 Minority interest 0.0 0.2 -- Loss (gain) on sale of assets 0.0 (0.3) (108.9) ----- ----- ----- Income before income taxes 6.8 4.6 109.2 Provision for income taxes 3.0 2.1 101.3 ----- ----- ----- Net income 3.8% 2.5% 116.0% ===== ===== =====
SIX MONTHS PERCENTAGE ENDED INCREASE (DECREASE) JUNE 30, AMOUNTS -------------------- ------------------- 1998 1997 ----- ----- Net operating revenue 100.0% 100.0% 29.7% Operating expenses (1) 82.6 84.9 26.3 ----- ----- ----- EBITDA (2) 17.4 15.1 49.0 Depreciation and amortization 5.3 4.5 53.6 Interest 4.5 4.9 17.4 Minority interest 0.1 0.2 (34.7) Loss on sale of assets 0.0 0.1 188.2 ----- ----- ----- Income before income taxes 7.5 5.6 73.1 Provision for income taxes 3.3 2.5 68.7 ----- ----- ----- Net income 4.2% 3.1% 76.6% ===== ===== =====
(1) Operating expenses represent expenses before interest, minority interest, loss on sale of assets, income taxes, depreciation and amortization expense. (2) EBITDA represents the sum of income before income tax expense, interest, minority interest, depreciation and amortization, and loss on sale of assets. Management understands that industry analysts generally consider EBITDA to be one measure of the financial performance of a company that is presented to assist investors in analyzing the operating performance of the Company and its ability to service debt. Management believes that an increase in EBITDA level is an indicator of the Company's improved ability to service existing debt, to sustain potential future increases in debt and to satisfy capital requirements. However, EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative (i) to net income as a measure of operating performance or (ii) to cash flows from operating, investing, or financing activities as a measure of liquidity. Given that 12 15 EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. SELECTED OPERATING STATISTICS - OWNED HOSPITALS The following table sets forth certain operating statistics for the Company's owned hospitals for each of the periods presented.
Three Months Ended Six Months Ended June 30, June 30, ----------------------------------- ----------------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- CONSOLIDATED HOSPITALS: Number of hospitals end of period 10 7 10 7 Licensed beds end of period 746 517 746 517 Beds in service end of period 633 405 633 405 Inpatient admissions 5,161 3,535 9,736 7,445 Patient days 26,533 19,933 52,103 40,837 Adjusted patient days 46,785 36,219 89,080 72,656 Average length of stay (days) 5.1 5.6 5.4 5.5 Occupancy rates (licensed beds) 43.8% 42.4% 46.6% 43.6% Occupancy rates (beds in service) 52.9% 54.1% 56.8% 55.7% Gross inpatient revenue $50,107,334 $32,200,309 $95,159,662 $67,387,683 Gross outpatient revenue 38,435,799 27,819,663 68,445,942 53,679,899
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997 Net operating revenue was $56.6 million for the three months ended June 30, 1998, compared to $40.1 million for the comparable period of 1997, an increase of $16.5 million or 41.1%. Revenue generated by hospitals owned during both periods ("same store hospitals") increased $1.5 million, or 4.1%, resulting from inpatient and outpatient volume increases, as well as price increases. Also, cost report settlements and the filing of costs reports in the current quarter resulted in positive revenue adjustments of $1.1 million (1.9% of net patient service revenue) and $0 for the three months ended June 30, 1998 and 1997, respectively. The remaining increase of $15.0 million was primarily attributable to the acquisitions. Operating expenses were $46.6 million, or 82.3% of net operating revenue, for the three months ended June 30, 1998, compared to $34.3 million, or 85.5% of net operating revenue, for the comparable period of 1997. Operating expenses of same store hospitals increased $0.7 million, primarily as a result of volume increases, and change in case mix, offset by a decrease in bad debt expense. The remaining $11.7 million increase was primarily attributable to the acquisitions. EBITDA was $10.0 million or 17.7% of net operating revenue for the three months ended June 30, 1998, compared to $5.8 million, or 14.5% of net operating revenue, for the 13 16 comparable period of 1997. EBITDA for the Company's hospitals owned during both periods increased 10.2%, and as a percent of net operating revenue was 18.9% for the three months ended June 30, 1998, compared to 17.9% for the comparable period of 1997. Depreciation and amortization expense was $3.3 million, or 5.9% of net operating revenue, for the three months ended June 30, 1998, compared to $1.8 million, or 4.6% of net operating revenue for the comparable period of 1997. The increase in depreciation and amortization resulted from the acquisitions and increased capital expenditures. Interest expense as a percent of net operating revenue decreased to 5.0% for the three months ended June 30, 1998, compared to 5.5% for the comparable period of 1997. Net income was $2.1 million, or 3.8% of net operating revenue, for the three months ended June 30, 1998, compared to $1.0 million, or 2.5% of net operating revenue for the comparable period of 1997. SIX MONTHS ENDED JUNE 30,1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997 Net operating revenue was $104.5 million for the six months ended June 30, 1998, compared to $80.5 million for the comparable period of 1997, an increase of $24.0 million or 29.8%. Revenue generated by hospitals owned during both periods ("same store hospitals") increased $4.8 million, or 6.7%, resulting from inpatient and outpatient volume increases, as well as price increases. Also, cost report settlements and the filing of cost reports resulted in positive revenue adjustments of $1.1 million (1.9% of net patient service revenue) and $0 for the six months ended June 30, 1998 and 1997, respectively. The remaining increase of $19.2 million was primarily attributable to the acquisitions, offset by decreases in revenue in the management company of $0.4 million, resulting primarily from a decrease in the number of management contracts, and a decrease in various other revenue. Operating expenses were $86.3 million, or 82.6% of net operating revenue, for the six months ended June 30, 1998, compared to $68.3 million, or 84.9% of net operating revenue, for the comparable period of 1997. Operating expenses of same store hospitals increased $3.2 million, primarily as a result of volume increases, change in case mix and an increase in salaries, wages and benefits. The remaining $14.8 million increase was primarily attributable to the acquisitions. EBITDA was $18.2 million or 17.4% of net operating revenue for the six months ended June 30, 1998, compared to $12.2 million, or 15.2% of net operating revenue, for the comparable period of 1997. EBITDA for the Company's hospitals owned during both periods increased 11.0%, and as a percent of net operating revenue was 20.6% for the six months ended June 30, 1998, compared to 19.8% for the comparable period of 1997. Depreciation and amortization expense was $5.5 million, or 5.3% of net operating revenue, for the six months ended June 30, 1998, compared to $3.6 million, or 4.5% of net operating revenue for the comparable period of 1997. The increase in depreciation and amortization resulted from the acquisitions and increased capital expenditures. Interest expense as a percent of net operating revenue decreased to 4.5% for the six months ended June 30, 1998, compared to 4.9% for the comparable period of 1997. 14 17 Net income was $4.4 million, or 4.2% of net operating revenue, for the six months ended June 30, 1998, compared to $2.5 million, or 3.1% of net operating revenue for the comparable period of 1997. The unaudited pro forma condensed consolidated statement of income for the six months ended June 30, 1998 gives effect to (i) the conversion of junior preferred stock into common stock and (ii) the sale of common stock in the initial public offering and the application of net proceeds thereof to the repurchase of certain shares of common stock, the redemption of senior preferred stock and the repayment of debt, as if all such transactions had been completed as of January 1, 1998, at the initial public offering price of $16.00 per share, as follows: - The elimination of interest expense associated with the $39.6 million of long-term obligations repaid with the net proceeds of the offering, and the elimination of the related income tax benefit based on the combined federal and state statutory rate of 39%. - The elimination of the dividends and the accretion of issuance costs on the senior preferred stock redeemed with a portion of the net proceeds of the offering and the junior preferred stock converted into common stock in connection with the offering. The pro forma condensed consolidated financial information gives effect to the initial public offering completed in February, 1998, and does not pro forma the effect of the Company's public stock offering completed in July 1998 or any other transaction. The pro forma condensed consolidated income statement does not purport to represent what the Company's results of operations would have been had such transactions in fact occurred as of January 1, 1998, or to project the Company's results of operations in any future period. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1998, the Company had working capital of $44.8 million, including cash and cash equivalents of $3.7 million. The ratio of current assets to current liabilities was 3.0 to 1.0 and 1.8 to 1.0 at June 30, 1998 and December 31, 1997, respectively. In February 1998, the Company completed its initial public offering ("IPO") of common stock. In connection with the offering, the Series B redeemable junior preferred stock was converted into common stock at the public offering price of the common stock. The net proceeds from the offering were used to reduce the balance of the outstanding term and revolving credit loans ($39.6 million), redeem the outstanding balance of the Series A redeemable senior preferred stock plus accrued dividends ($22.7 million) and repurchase a portion of the common stock which was issued upon conversion of the Series B junior preferred stock ($14.9 million). At June 30, of 1998, total long-term obligations increased to $191.4 million from $83.0 million at year end. The increase resulted primarily from the borrowing to finance the Havasu and Elko acquisitions, offset by a reduction in debt from application of IPO proceeds. In March 1998, the Company amended and restated its Credit Agreement and 15 18 increased its credit facilities to $260 million, including a five-year $35 million End-Loaded Lease Facility ("ELLF"). Cash used in operations was $5.8 million for the six months ended June 30, 1998. Cash used in operations was $1.3 million for the six months ended June 30,1997. Cash used in investing activities was $136.2 million for the six months ended June 30, 1998, primarily as a result of the Havasu and Elko acquisitions and capital expenditures. Cash used in investing activities was $4.4 million for the six months ended June 30, 1997, primarily as a result of capital expenditures. Net cash provided by financing activities was $141.5 million for the six months ended June 30, 1998, primarily as a result of the IPO and the Havasu and Elko acquisitions. Net cash provided by financing activities was $0.4 million in 1997, primarily as a result of proceeds from debt. The Company intends to acquire additional acute care facilities, and is actively seeking out such acquisitions. There can be no assurance that the Company will not require additional debt or equity financing for any particular acquisition. Also, the Company continually reviews its capital needs and financing opportunities and may seek additional equity or debt financing for its acquisition program or other needs. At June 30, 1998, the Company had $185.1 million outstanding under its revolving line of credit and no amounts outstanding under the ELLF. Capital expenditures, excluding acquisitions for the six months ended June 30, 1998 and 1997 were $6.9 million and $4.3 million, respectively. Capital expenditures for the owned hospitals may vary from year to year depending on facility improvements and service enhancements undertaken by the hospitals. The management services business does not require significant capital expenditures. The Company expects to make capital expenditures in 1998 of approximately $12 million, exclusive of any acquisitions of businesses. Planned capital expenditures for 1998 consist principally of capital improvements to owned and leased hospitals. The Company expects to fund these expenditures through cash provided by operating activities and borrowings under its revolving credit agreement. In July 1998, the Company completed its public offering of 2,685,500 shares of common stock at an offering price of $26.00 per share. The net proceeds from the offering of approximately $66.0 million were primarily used to reduce amounts outstanding on the revolving line of credit. GENERAL The federal Medicare program accounted for approximately 57.3% and 58.8% of hospital patient days for the three months and six months ended June 30, 1998, respectively. The state Medicaid programs accounted for approximately 11.1% and 11.0% of hospital patient days for the three months and six months ended June 30, 1998, respectively. The payment rates under the Medicare program for inpatients are prospective, based upon the diagnosis of a patient. The Medicare payment rate increases have historically been less than actual inflation. Both federal and state legislators are continuing to scrutinize the health care industry for the purpose of reducing health care costs. While the Company is unable to predict what, if any, future health reform legislation may be enacted at the federal or 16 19 state level, the Company expects continuing pressure to limit expenditures by governmental health care programs. Under the Balanced Budget Act of 1997 (the "1997 Act"), there are no scheduled increases in the inpatient Medicare rates paid to acute care hospitals for inpatient care through September 30, 1998. Payments for Medicare outpatient services provided at acute care hospitals and home health services historically have been paid based on costs, subject to certain limits. The 1997 Act requires that the payment for those services be converted to a prospective payment system, which will be phased in over time. The 1997 Act also includes a managed care option which could direct Medicare patients to managed care organizations. Further changes in the Medicare or Medicaid programs and other proposals to limit health care spending could have a material adverse impact upon the health care industry and the Company. The Company's acute care hospitals, like most acute care hospitals in the United States, have significant unused capacity. The result is substantial competition for patients and physicians. Inpatient utilization continues to be negatively affected by payor-required pre-admission authorization and by payor pressure to maximize outpatient and alternative health care delivery services for less acutely ill patients. The Company expects increased competition and admission constraints to continue in the future. The ability to respond successfully to these trends, as well as spending reductions in governmental health care programs, will play a significant role in determining hospitals' ability to maintain their current rate of net revenue growth and operating margins. The Company expects the industry trend from inpatient to outpatient services to continue due to the increased focus on managed care and advances in technology. Outpatient revenue of the Company's owned hospitals was approximately 43.4% and 46.4% of gross patient service revenue for the three months ended June 30, 1998 and 1997, respectively, and approximately 41.8% and 44.3% for the six months ended June 30, 1998 and 1997, respectively. The complexity of the Medicare and Medicaid regulations, increases in managed care, hospital personnel turnover, the dependence of hospitals on physician documentation of medical records and the subjective judgment involved complicates the billing and collections of accounts receivable by hospitals. There can be no assurance that this complexity will not negatively impact the Company's future cash flow or results of operations. The Company's historical financial trend has been favorably impacted by the Company's ability to successfully acquire acute care hospitals. While the Company believes that trends in the health care industry described above may create possible future acquisition opportunities, there can be no assurances that it can continue to maintain its current growth rate through hospital acquisitions and successfully integrate the hospitals into its system. The Company's owned hospitals accounted for 92.0% and 91.4% of the Company's net operating revenue for the three months and six months ended June 30, 1998, respectively, compared to 89.0% and 88.4% for the three months and six months ended June 30, 1997, respectively. The federal government and a number of states are rapidly increasing the resources devoted to investigating allegations of fraud and abuse in the Medicare and Medicaid 17 20 programs. At the same time, regulatory and law enforcement authorities are taking an increasingly strict view of the requirements imposed on providers by the Social Security Act and Medicare and Medicaid regulations. Although the Company believes that it is in material compliance with such laws, a determination that the Company has violated such laws, or even the public announcement that the Company was being investigated concerning possible violations, could have a material adverse effect on the Company. INFLATION The health care industry is labor intensive. Wages and other expenses increase, especially during periods of inflation and labor shortages. In addition, suppliers pass along rising costs to the Company in the form of higher prices. The Company has generally been able to offset increases in operating costs by increasing charges for services and expanding services. The Company has also implemented cost control measures to curb increases in operating costs and expenses. In light of cost containment measures imposed by government agencies and private insurance companies, the Company is unable to predict its ability to offset or control future cost increases, or its ability to pass on the increased costs associated with providing health care services to patients with government or managed care payors, unless such payors correspondingly increase reimbursement rates. FORWARD-LOOKING STATEMENTS Certain statements contained in this discussion, including without limitation, statements containing the words "believes," "anticipates," "intends," "expects," and words of similar import, constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and in regions where the Company operates; demographic changes; the effect of existing or future governmental regulation and federal and state legislative and enforcement initiatives on the Company's business, including the recently-enacted Balanced Budget Act of 1997; changes in Medicare and Medicaid reimbursement levels; the Company's ability to implement successfully its acquisition and development strategy and changes in such strategy; the availability and terms of financing to fund the expansion of the Company's business, including the acquisition of additional hospitals; the Company's ability to attract and retain qualified management personnel and to recruit and retain physicians and other health care personnel to the non-urban markets it serves; the effect of managed care initiatives on the non-urban markets served by the Company's hospitals and the Company's ability to enter into managed care provider arrangements on acceptable terms; the effect of liability and other claims asserted against the Company; the effect of competition in the markets served by the Company's hospitals; and other factors referenced in this report. Certain of these factors are discussed in more detail elsewhere in this report. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 18 21 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On Friday, June 5, 1998, the Company held its 1998 Annual Meeting of Shareholders. At such meeting, the shareholders voted on the following four proposals. First, the shareholders voted on the election of six nominees to the Board of Directors. Prior to the Annual Meeting, the incumbent Board of Directors had determined that the size of the Board of Directors should be set at six directors. The incumbent Board of Directors also nominated all six of its current directors, Martin S. Rash, Bruce V. Rauner, Joseph P. Nolan, A.E. Brim, Michael T. Willis and David L. Steffey, for election at such Annual Meeting to serve until the annual meeting of shareholders in 1999. The directors were elected by the following votes:
NAME FOR AGAINST ABSTAIN BROKER NON-VOTES - ---- --- ------- ------- ---------------- Martin S. Rash 10,267,001 0 50 1,390,399 Bruce V. Rauner 10,267,001 0 50 1,390,399 Joseph P. Nolan 10,267,001 0 50 1,390,399 A.E. Brim 10,267,001 0 50 1,390,399 Michael T. Willis 10,267,001 0 50 1,390,399 David L. Steffey 10,267,001 0 50 1,390,399
Second, the shareholders voted to approve adoption of the Province Healthcare Company Employee Stock Purchase Plan ("ESPP"). Prior to the Annual Meeting, the Board of Directors had adopted, subject to shareholder approval, the ESPP, which grants to all eligible employees an option to purchase shares of Company Common Stock at a discount from fair market value and is intended to qualify as an employee stock purchase plan under section 423 of the Internal Revenue Code. At the Annual Meeting, the shareholders voted to approve the ESPP, with 10,267,001 votes for, 50 votes against, 0 abstentions, and 1,390,399 broker non-votes. Third, the shareholders voted to approve an amendment to the Company's 1997 Long-Term Equity Incentive Plan (the "1997 Plan"). Prior to the Annual Meeting, the Board of Directors had adopted, subject to shareholder approval, an amendment to the 1997 Plan to increase the number of authorized shares of Common Stock available for incentive awards by 250,000 shares. At the Annual Meeting, the shareholders voted to approve the amendment to the 1997 Plan, with 10,084,036 votes for, 182,895 votes against, 120 abstentions, and 1,390,399 broker non-votes. Fourth, the shareholders voted to approve the appointment of the Company's auditors. Prior to the Annual Meeting, the Board of Directors had selected the accounting firm of Ernst & Young LLP as independent auditors of the Company for the year ending 19 22 December 31, 1998, subject to ratification by the Shareholders. At the Annual Meeting, the shareholders voted to ratify the appointment of Ernst & Young LLP, with 10,265,051 votes for, 0 votes against, 2,000 abstentions, and 1,390,399 broker non-votes. ITEM 5. OTHER INFORMATION. The deadline for delivering to the Company notice of shareholder proposals, other than proposals to be included in the proxy statement, for the 1999 Annual Meeting of Shareholders will be March 27, 1999, pursuant to Rule 14a-4 under the Securities Exchange Act of 1934. The persons named as proxies in the proxy statement may exercise discretionary authority to vote on any proposals received after such date. 20 23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits Exhibit Number Description of Exhibits - ------ ----------------------- 10.1 Asset Purchase Agreement, dated April 29, 1998, between Province, PHC-Lake Havasu, Inc. and Samaritan Health System (a) 10.2 Asset Purchase Agreement, dated June 8, 1998, between Province and the County of Elko (b) 10.3 Amendment to the Province Healthcare Company Long-Term Equity Incentive Plan, effective March 24, 1998 (c) 10.4 Province Healthcare Company Employee Stock Purchase Plan, effective March 24, 1998 (c) 27 Financial Data Schedule (for SEC use only) - ------------------------- (a) Incorporated by reference to Exhibit 2.1 filed with the registrant's Current Report on Form 8-K, dated May 14, 1998, Commission File No. 0-23639. 21 24 (b) Incorporated by reference to Exhibit 10.26 filed with the registrant's Registration Statement on Form S-1, Registration No. 333-56663. (c) Incorporated by reference to the exhibits filed with the registrant's Proxy Statement on Schedule 14A, dated May 11, 1998, Commission File No. 0-23639. (b) Reports on Form 8-K. During the three months ended June 30, 1998, the Company filed the following reports on Form 8-K: (i) Form 8-K dated May 14, 1998, in connection with the Company's acquisition on May 1, 1998 of substantially all the assets of Havasu Samaritan Regional Hospital in Lake Havasu City, Arizona. On June 15, 1998, the Company filed an Amendment No. 1 to such Current Report on Form 8-K/A, containing the financial statements of Havasu Samaritan Regional Hospital and certain pro forma financial information. (ii) Form 8-K dated June 26, 1998, in connection with the Company's acquisition on June 11, 1998 of substantially all the assets of Elko General Hospital in Elko, Nevada. On August 14, 1998, the Company filed an Amendment No. 1 to such Current Report on Form 8-K/A, containing the financial statements of Elko General Hospital and certain pro forma financial information. 22 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on behalf by the undersigned thereunto duly authorized. PROVINCE HEALTHCARE COMPANY By: /s/ BRENDA B. RECTOR ----------------------------------- Brenda B. Rector Vice President and Controller Date: August 14, 1998 23 EX-27 2 FINANCIAL DATA SCHEDULE (FOR SEC USE ONLY)
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 3-MOS DEC-31-1998 APR-01-1998 JUN-30-1998 1 3,664 0 58,603 6,679 6,008 67,457 117,066 9,899 327,328 22,657 191,435 0 0 130 97,848 327,328 55,757 56,632 0 45,720 0 4,296 2,805 3,811 1,677 2,134 0 0 0 2,134 0.16 0.16
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