-----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, O/1tvcruSeIeWa1IXx9ApQL2qU85JM2GNdwsYcfzPhePZZ14It6SyDfVd3PTg7YG w0V2qIQyUA6tG4KQvd8yYg== 0000950144-02-011824.txt : 20021114 0000950144-02-011824.hdr.sgml : 20021114 20021114132335 ACCESSION NUMBER: 0000950144-02-011824 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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: 1934 Act SEC FILE NUMBER: 001-31320 FILM NUMBER: 02823683 BUSINESS ADDRESS: STREET 1: 105 WESTPARK DR STREET 2: STE 400 CITY: BRENTWOOD STATE: TN ZIP: 37027 BUSINESS PHONE: 6153701377 MAIL ADDRESS: STREET 1: 105 WESTPARK DR STREET 2: SUITE 180 CITY: BRENTWOOD STATE: TN ZIP: 37207 10-Q 1 g79310e10vq.txt PROVINCE HEALTHCARE COMPANY 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 September 30, 2002 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________________ to __________________ Commission File Number 0-23639 PROVINCE HEALTHCARE COMPANY (Exact Name of Registrant as Specified in Its Charter) DELAWARE 62-1710772 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 105 WESTWOOD PLACE SUITE 400 BRENTWOOD, TENNESSEE 37027 (Address of Principal Executive Offices) (Zip Code) (615) 370-1377 (Registrant's Telephone Number, Including Area Code) 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 NOVEMBER 11, 2002 COMMON STOCK, $.01 PAR VALUE 48,579,825 SHARES
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Condensed Consolidated Balance Sheets September 30, 2002 and December 31, 2001.........................1 Condensed Consolidated Statements of Income Three Months Ended September 30, 2002 and 2001...................2 Condensed Consolidated Statements of Income Nine Months Ended September 30, 2002 and 2001....................3 Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2002 and 2001....................4 Notes to Condensed Consolidated Financial Statements.................5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................................19 ITEM 4. CONTROLS AND PROCEDURES.............................................19
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
September 30, December 31, 2002 2001 ------------- ------------ (Unaudited) (Note 1) ASSETS Current assets: Cash and cash equivalents $ 12,203 $ 39,375 Accounts receivable, less allowance for doubtful accounts of $69,048 in 2002 and $49,678 in 2001 124,611 109,826 Inventories 19,888 15,926 Prepaid expenses and other 10,848 21,515 -------- -------- Total current assets 167,550 186,642 Property, plant and equipment, net 434,291 306,494 Goodwill 331,882 180,497 Unallocated purchase price -- 49,013 Other 37,108 37,251 -------- -------- Total assets $970,831 $759,897 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 25,641 $ 17,515 Accrued salaries and benefits 23,837 18,867 Accrued expenses 19,033 12,139 Current maturities of long-term obligations 1,693 1,879 -------- -------- Total current liabilities 70,204 50,400 Long-term obligations, less current maturities 466,975 330,838 Other liabilities 22,282 14,000 Minority interest 2,670 2,654 Stockholders' equity: Common stock - $0.01 par value; 150,000,000 and 50,000,000 shares authorized at September 30, 2002 and December 31, 2001, respectively; issued and outstanding 48,571,102 and 47,488,984 shares at September 30, 2002 and December 31, 2001, respectively 486 475 Additional paid-in-capital 302,691 288,948 Retained earnings 105,523 72,582 -------- -------- Total stockholders' equity 408,700 362,005 -------- -------- Total liabilities and stockholders' equity $970,831 $759,897 ======== ========
See accompanying notes. 1 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended September 30, -------------------------------- 2002 2001 -------- --------- Revenue: Net patient service revenue $178,111 $ 126,393 Other 5,851 5,377 -------- --------- Net operating revenue 183,962 131,770 Expenses: Salaries, wages and benefits 72,115 51,586 Purchased services 19,305 12,731 Supplies 23,396 14,562 Provision for doubtful accounts 14,042 13,578 Other operating expenses 21,576 15,130 Rentals and leases 2,165 1,871 Depreciation and amortization 9,419 7,596 Interest expense 6,218 2,833 Minority interest 16 (10) Loss on sale of assets -- 5 -------- --------- Total expenses 168,252 119,882 -------- --------- Income before provision for income taxes 15,710 11,888 Income taxes 6,284 4,993 -------- --------- Net income $ 9,426 $ 6,895 ======== ========= Net income per share: Basic $ 0.19 $ 0.15 ======== ========= Diluted $ 0.19 $ 0.14 ======== =========
See accompanying notes. 2 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Nine Months Ended September 30, ------------------------------- 2002 2001 -------- -------- Revenue: Net patient service revenue $506,125 $361,836 Other 17,438 15,898 -------- -------- Net operating revenue 523,563 377,734 Expenses: Salaries, wages and benefits 201,743 146,148 Purchased services 54,605 35,855 Supplies 63,606 41,736 Provision for doubtful accounts 41,533 36,389 Other operating expenses 60,275 43,124 Rentals and leases 6,518 5,479 Depreciation and amortization 25,751 21,184 Interest expense 15,959 7,597 Minority interest 72 159 Loss on sale of assets 53 175 -------- -------- Total expenses 470,115 337,846 -------- -------- Income before provision for income taxes 53,448 39,888 Income taxes 21,379 16,753 -------- -------- Net income $ 32,069 $ 23,135 ======== ======== Net income per share: Basic $ 0.67 $ 0.49 ======== ======== Diluted $ 0.64 $ 0.47 ======== ========
See accompanying notes. 3 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Nine Months Ended September 30, ------------------------------- 2002 2001 ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 75,235 $ 37,628 INVESTING ACTIVITIES Purchase of property, plant and equipment (36,109) (49,519) Purchase of acquired hospitals (171,707) (40,363) --------- --------- Net cash used in investing activities (207,816) (89,882) FINANCING ACTIVITIES Proceeds from long-term debt 134,355 125,060 Repayments of debt (39,451) (70,216) Issuance of common stock 10,505 11,706 --------- --------- Net cash provided by financing activities 105,409 66,550 --------- --------- Net increase (decrease) in cash and cash equivalents (27,172) 14,296 Cash and cash equivalents at beginning of period 39,375 -- --------- --------- Cash and cash equivalents at end of period $ 12,203 $ 14,296 ========= =========
See accompanying notes. 4 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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"). The balance sheet at December 31, 2001, has been derived from the audited consolidated financial statements at that date, but does not include all of the financial information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. 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, 2001. On April 30, 2002, the Company effected a three-for-two stock split, in the form of a 50% stock dividend, to stockholders of record on April 20, 2002. The stock split resulted in the issuance of 15.9 million shares of common stock and a transfer between additional paid in capital and common stock of $159,000. All historical references to common share and earnings per share amounts included in the condensed consolidated financial statements and notes thereto have been restated to reflect the three-for-two split. 2. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management of the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from the estimates. 5 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) 3. ACQUISITIONS AND GOODWILL 2001 ACQUISITIONS During the last six months of 2001, the Company acquired five hospitals: Selma Regional Medical Center, acquired in July 2001; Ashland Regional Medical Center, acquired in August 2001; Vaughan Regional Medical Center, acquired in October 2001; Medical Center of Southern Indiana, acquired in October 2001; and Teche Regional Medical Center, acquired in December 2001. In the second quarter of 2002, the Company consolidated the operations of Selma Regional Medical Center and Vaughan Regional Medical Center. The consolidation of the operations of these hospitals resulted in a regional hospital (Vaughan Regional Medical Center) that provides more intensive services to the large area it serves. MEMORIAL HOSPITAL OF MARTINSVILLE AND HENRY COUNTY In May 2002, the Company acquired Memorial Hospital of Martinsville and Henry County in Martinsville, Virginia, for approximately $129.2 million, including working capital. To finance this acquisition, the Company borrowed $86.0 million under its revolving credit facility and used approximately $43.2 million of available cash. The preliminary allocation of the purchase price has been determined based upon currently available information and is subject to further refinement pending final appraisal. This is the Company's first Virginia hospital and is the only hospital in the county, serving a population in excess of 100,000. LOS ALAMOS MEDICAL CENTER In June 2002, the Company acquired Los Alamos Medical Center in Los Alamos, New Mexico, for approximately $39.0 million, including working capital. To finance this acquisition, the Company borrowed $37.0 million under its revolving credit facility. The preliminary allocation of the purchase price has been determined based upon currently available information and is subject to further refinement pending final appraisal. This is the Company's first New Mexico hospital and is the only hospital in the community, serving a population of approximately 50,000. The operating results of the hospitals acquired in 2001 and 2002 have been included in the accompanying condensed consolidated statements of income from the respective dates of acquisition. 6 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) The following pro forma information reflects the operations of the entities acquired in 2002 and 2001, as if the respective transactions had occurred as of the first day of the fiscal year immediately preceding the year of the acquisitions (in thousands, except per share data):
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Net operating revenue $ 183,962 $ 180,872 $ 567,151 $ 546,319 Net income 9,426 3,054 34,069 21,613 Earnings per share: Basic 0.19 0.06 0.71 0.46 Diluted 0.19 0.06 0.55 0.44
The pro forma results of operations do not purport to represent what the Company's results would have been had such transactions, in fact, occurred at the beginning of the periods presented or to project the Company's results of operations in any future period. The Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), Goodwill and Other Intangible Assets, effective January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized, but is subject to annual impairment tests, or more frequently if certain indicators arise. The transitional impairment tests have been completed, and the results of the tests had no effect on the operations or financial position of the Company. Had the Company been accounting for its goodwill under SFAS No. 142 for all periods presented, the Company's pro forma net income and earnings per share would have been as follows:
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- ----------------------------- 2002 2001 2002 2001 --------- --------- ---------- ---------- Reported net income $ 9,426 $ 6,895 $ 32,069 $ 23,135 Add: Goodwill amortization, net of tax -- 1,064 -- 3,273 --------- --------- ---------- ---------- Pro forma adjusted net income $ 9,426 $ 7,959 $ 32,069 $ 26,408 ========= ========= ========== ========== Basic earnings per share: Reported net income $ 0.19 $ 0.15 $ 0.67 $ 0.49 Add: Goodwill amortization, net of tax -- 0.02 -- 0.07 --------- --------- ---------- ---------- Pro forma adjusted net income $ 0.19 $ 0.17 $ 0.67 $ 0.56 ========= ========= ========== ========== Diluted earnings per share: Reported net income $ 0.19 $ 0.14 $ 0.64 $ 0.47 Add: Goodwill amortization, net of tax -- 0.02 -- 0.07 --------- --------- ---------- ---------- Pro forma adjusted net income $ 0.19 $ 0.16 $ 0.64 $ 0.54 ========= ========= ========== ==========
7 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) At September 30, 2002, and December 31, 2001, goodwill totaled $355.4 million and $204.0 million, respectively. The $151.4 million increase in goodwill resulted primarily from the allocation of purchase price for the Vaughan Regional Medical Center, Memorial Hospital of Martinsville and Henry County and Los Alamos Medical Center acquisitions. The Company has no other intangible assets. 4. LONG-TERM OBLIGATIONS At September 30, 2002, the Company had letters of credit totaling approximately $4.3 million outstanding, and $103.0 million available under its credit facility. During the first quarter of 2002, the Company made the decision to modify the terms of the end-loaded lease facility to enable it to account for the related properties and borrowings on the balance sheet. The Company recorded approximately $46.7 million in property and equipment and approximately $40.2 million in long-term debt on the balance sheet related to this modification of the end-loaded lease facility. 5. COMPREHENSIVE INCOME The following table presents the components of comprehensive income, net of related taxes (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, -------------------- --------------------- 2002 2001 2002 2001 -------- ------- ------- -------- Net income $ 9,426 $ 6,895 $32,069 $ 23,135 Net change in fair value of interest rate swap (177) (602) 4 (874) ------- ------- ------- -------- Comprehensive income $ 9,249 $ 6,293 $32,073 $ 22,261 ======= ======= ======= ========
The net change in fair value of interest rate swap is included in retained earnings on the condensed consolidated balance sheets. 6. INCOME TAXES The income tax provision for the three and nine-month periods ended September 30, 2002 and 2001, differs from the statutory income tax computation primarily due to permanent differences and the provision for state income taxes. These provisions reflect effective income tax rates of 40.0% for the 2002 periods and 42.0% for the 2001 periods. 8 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) 7. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------- 2002 2001 2002 2001 ------- ------- ------- ------- Numerator: Net income $ 9,426 $ 6,895 $32,069 $23,135 Add convertible notes interest, net of tax -- -- 7,302 -- ------- ------- ------- ------- Adjusted net income $ 9,426 $ 6,895 $39,371 $23,135 ======= ======= ======= ======= Denominator: Denominator for basic income per share-- Weighted-average shares 48,544 47,310 48,002 46,962 Effective of dilutive securities-- Employee stock options 1,063 2,531 1,523 2,034 Convertible notes -- -- 11,899 -- ------- ------- ------- ------- Denominator for diluted income per share-- Adjusted weighted average shares 49,607 49,841 61,424 48,996 ======= ======= ======= ======= Basic net income per share $ 0.19 $ 0.15 $ 0.67 $ 0.49 ======= ======= ======= ======= Diluted net income per share $ 0.19 $ 0.14 $ 0.64 $ 0.47 ======= ======= ======= =======
During the three-month period ended September 30, 2002, employees exercised options to acquire 98,774 shares of common stock at an average exercise price of $9.05 per share. During the nine-month period ended September 30, 2002, employees exercised options to acquire 1,021,550 shares of common stock at an average exercise price of $9.76 per share, and the Company issued 59,022 shares of common stock at a price of $17.49 per share under its Employee Stock Purchase Plan. The convertible subordinated notes were antidilutive in the third quarter of 2002, resulting in comparable diluted shares outstanding for the three-month periods ending September 30, 2002 and 2001. There were 25% more diluted shares outstanding in the nine-month period ended September 30, 2002, than in the comparable period of 2001, primarily as a result of the Company's two outstanding series of convertible subordinated notes. 8. 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 9 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) 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 Effective January 1, 2002, the Company purchased a liability claims made reporting policy for professional and general liability risks. This coverage is subject to a $750,000 deductible per occurrence for general and professional liability and an additional $2.0 million self-insured retention for general and professional liability. The policy provides coverage up to $51.0 million for claims incurred during the annual policy term. The Company has established reserves for estimated claims within the deductible and self-insured retention. LITIGATION The Company currently is, and from time to time is expected to be, subject to claims and suits arising in the ordinary course of business. 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 consolidated statements of income in the period in which revisions are made, and resulted in increases in net patient service revenue of approximately $1.2 million and $1.3 million for the three and nine-month periods ended September 30, 2002, respectively. The impact for the three and nine-month periods ended September 30, 2001 was minimal. FINANCIAL INSTRUMENTS Interest rate swap agreements are used to manage the Company's interest rate exposure under the revolving credit facility. The Company maintains a $28.5 million interest rate swap agreement with a 5.625% fixed interest rate. In September 2002, the Company extended the term of its' swap agreement for an additional two-year period and reduced the fixed interest rate to 4.45%. All other terms and conditions of the swap agreement remained unchanged. This agreement exposes the Company to credit losses in the event of non-performance by the counterparty to the financial instrument. The Company anticipates that the counterparty will fully satisfy its obligations under the contract. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following along with the Condensed Consolidated Financial Statements and accompanying notes. OVERVIEW We are a healthcare services company focused on acquiring and operating hospitals in attractive non-urban markets in the United States. As of September 30, 2002, we owned or leased 20 general acute care hospitals in 13 states with a total of 2,315 licensed beds, and managed 35 hospitals in 14 states, with a total of 2,863 licensed beds. Our owned and leased hospitals accounted for 98.1% and 97.2% of our net operating revenue in the three months ended September 30, 2002 and 2001, respectively, and 97.0% and 97.9% of our net operating revenue in the nine months ended September 30, 2002 and 2001, respectively. IMPACT OF ACQUISITIONS An integral part of our strategy is to acquire non-urban acute care hospitals. Because of the financial impact of our recent acquisitions, it is difficult to make meaningful comparisons between our financial statements for the fiscal periods presented. In addition, because of the relatively small number of owned and leased hospitals, each hospital acquisition can materially affect our overall operating performance. Upon the acquisition of a hospital, we typically take a number of steps to lower operating costs. The impact of such actions may be offset by 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 near term. As we make additional hospital acquisitions, we expect 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. We may also divest certain hospitals in the future, if we determine a hospital no longer fits within our strategy. 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 our unaudited Condensed Consolidated Statements of Income included elsewhere in this report. The results of operations for the periods presented include hospitals from their acquisition dates, as discussed in the notes to the condensed consolidated financial statements. 11
Three Months Ended September 30, Percentage -------------------------------- Increase (Decrease) 2002 2001 of Dollar Amounts ---------- --------- ------------------ Net operating revenue 100.0% 100.0% 39.6% Operating expenses (1) (83.0) (83.1) 39.4 --------- --------- EBITDA (2) 17.0 16.9 40.6 Depreciation and amortization (5.1) (5.8) 24.0 Interest (3.4) (2.1) 119.5 Other -- -- -- --------- --------- Income before income taxes 8.5 9.0 32.2 Provision for income taxes (3.4) (3.8) 25.9 --------- --------- Net income 5.1% 5.2% 36.7 ========= =========
Nine Months Ended September 30, Percentage --------------------------------- Increase (Decrease) 2002 2001 of Dollar Amounts ---------- ---------- ----------------- Net operating revenue 100.0% 100.0% 38.6% Operating expenses (1) (81.8) (81.7) 38.7 --------- --------- EBITDA (2) 18.2 18.3 38.1 Depreciation and amortization (4.9) (5.6) 21.6 Interest (3.0) (2.0) 110.1 Other -- (0.2) 62.6 --------- --------- Income before income taxes 10.2 10.5 34.0 Provision for income taxes (4.1) (4.4) 27.6 --------- --------- Net income 6.1% 6.1% 38.6 ========= =========
(1) Operating expenses represent expenses before income taxes, interest, minority interest, depreciation and amortization expense and loss on sale of assets. (2) EBITDA represents the sum of income before income taxes, interest, minority interest, depreciation and amortization, and loss on sale of assets. We understand 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. We believe that an increase in EBITDA level is an indicator of our 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 accounting principles generally accepted in the United States and should not be considered an alternative to net income as a measure of operating performance or to cash flows from operating, investing, or financing activities as a measure of liquidity. Given that EBITDA is not a measurement determined in accordance with accounting principles generally accepted in the United States and is thus susceptible to varying calculations, EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. 12 SELECTED OPERATING STATISTICS - OWNED OR LEASED HOSPITALS The following table sets forth certain operating statistics for our company's owned or leased hospitals for each of the periods presented.
Three Months Ended Nine Months Ended September 30, September 30, --------------------------------- --------------------------------- 2002 2001 2002 2001 ------------ ------------- ------------ ------------- CONSOLIDATED HOSPITALS: Number of hospitals at end of period 20 16 20 16 Licensed beds at end of period 2,315 1,751 2,315 1,751 Beds in service at end of period 1,905 1,530 1,905 1,530 Inpatient admissions 18,584 13,638 54,432 39,552 Patient days 77,738 59,025 234,492 169,825 Adjusted patient days 140,250 97,839 403,590 279,071 Average length of stay (days) 4.2 4.3 4.3 4.3 Occupancy rates (average licensed beds) 36.5% 36.6% 37.1% 35.5% Occupancy rates (average beds in service) 44.4% 41.9% 45.1% 40.7% Gross inpatient revenue $213,509,766 $157,215,349 $633,588,204 $454,540,055 Gross outpatient revenue 171,600,436 103,367,565 457,009,523 292,328,682
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2001 Net operating revenue was $184.0 million for the three months ended September 30, 2002, compared to $131.8 million for the comparable period of 2001, an increase of $52.2 million, or 39.6%. Cost report settlements and the filing of cost reports resulted in an increase in net patient service revenue of approximately $1.2 million for the three-month period ended September 30, 2002. The impact for the three-month period ended September 30, 2001 was minimal. Net patient service revenue generated by hospitals owned during both periods increased $0.9 million. Included in net patient service revenue growth was an approximate 1.1% growth in net patient service revenues, excluding closed units, of hospitals owned during both periods. The remaining increase is due primarily to net operating revenues generated by the hospitals acquired in 2001 and 2002. Operating expenses were $152.6 million, or 83.0% of net operating revenue, for the three months ended September 30, 2002, compared to $109.5 million, or 83.1% of net operating revenue, for the comparable period of 2001. Salaries and benefits, as a percentage of net operating revenue, was comparable between the 2002 and 2001 three-month periods. Decreases related to unearned incentive compensation totaled $1.3 million for the three months ended September 30, 2002, and $1.4 million in the comparable period of 2001. Purchased services, as a percentage of net operating revenue, increased to 10.5% for the three months ended September 30, 2002, compared to 9.7% for the comparable period of the prior year. This increase is primarily attributable to the hospitals acquired in the second quarter of 2002. Also, temporary outside vendors are being utilized to assist with accounts receivable management, resulting in intensive collection efforts and reductions in accounts receivable days. Supplies increased to 12.7% of net operating revenue, for the three months ended September 30, 2002, compared to 11.1% of net operating revenue, for the comparable period of 2001, due primarily to the hospitals acquired in 2001 and 13 2002. The provision for doubtful accounts was 7.6% of net operating revenue for the three months ended September 30, 2002, compared to 10.3% for the comparable period of 2001. This improvement resulted primarily from an intensive program to increase front-end collections and reduce overall days outstanding. EBITDA was $31.4 million, or 17.0% of net operating revenue, for the three months ended September 30, 2002, compared to $22.3 million, or 16.9% of net operating revenue, for the comparable period of 2001. Depreciation and amortization expense was $9.4 million, or 5.1% of net operating revenue, for the three months ended September 30, 2002, compared to $7.6 million, or 5.8% of net operating revenue for the comparable period of 2001. The increase in depreciation and amortization resulted primarily from capital expenditures at hospitals owned during both periods, offset by a decrease in amortization expense related to our adoption of SFAS No. 142. Interest expense was $6.2 million for the three months ended September 30, 2002, compared to $2.8 million for the comparable period of 2001, an increase of $3.4 million or 119.5%, primarily related to interest on the 4 1/4% convertible subordinated notes issued in October 2001. Income before provision for income taxes was $15.7 million for the three months ended September 30, 2002, compared to $11.9 million for the comparable period of 2001, an increase of $3.8 million or 32.2%. Our provision for income taxes was $6.3 million for the three months ended September 30, 2002, compared to $5.0 million for the comparable period of 2001. This reflects an effective income tax rate of 40.0% in the 2002 quarter, compared to 42.0% in the 2001 quarter. As a result of the foregoing, our net income was $9.4 million, or 5.1% of net operating revenue, for the three months ended September 30, 2002, compared to $6.9 million, or 5.2% of net operating revenue for the comparable period of 2001. The comparison of net income for the three months ended September 30, 2002, to the comparable period of 2001, was materially impacted by the adoption of Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), Goodwill and Other Intangible Assets, effective January 1, 2002, which requires that goodwill no longer be amortized. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001 Net operating revenue was $523.6 million for the nine months ended September 30, 2002, compared to $377.7 million for the comparable period of 2001, an increase of $145.8 million or 38.6%. Cost report settlements and the filing of cost reports resulted in an increase in net patient service revenue of $1.3 million for the nine months ended September 30, 2002. The impact for the nine-month period ended September 30, 2001 was minimal. Net patient service revenue generated by hospitals owned during both periods increased $12.5 million, or 3.6%, resulting from inpatient volume increases, new services and price increases. The remaining increase relates to hospitals acquired in 2001 and 2002. 14 Operating expenses were $428.3 million, or 81.8% of net operating revenue, for the nine months ended September 30, 2002, compared to $308.7 million, or 81.7% of net operating revenue, for the comparable period of 2001. Purchased services, as a percentage of net operating revenue, increased to 10.4% for the nine months ended September 30, 2002, compared to 9.5% for the comparable period of the prior year, primarily attributable to hospitals acquired in 2001 and 2002. Also, temporary outside vendors are being utilized to assist with accounts receivable management, resulting in aggressive collection efforts and reduction in days outstanding. Supplies increased to 12.1% of net operating revenue for the nine months ended September 30, 2002, compared to 11.1% for the comparable period of the prior year, due primarily to the hospitals acquired in 2001 and 2002. The provision for doubtful accounts decreased to 7.9% of net operating revenue in 2002 from 9.6% of net operating revenue in 2001, primarily as a result of the focus on accounts receivable management. EBITDA was $95.3 million, or 18.2% of net operating revenue, for the nine months ended September 30, 2002, compared to $69.0 million, or 18.3% of net operating revenue, for the comparable period of 2001. Depreciation and amortization expense was $25.8 million, or 4.9% of net operating revenue, for the nine months ended September 30, 2002, compared to $21.2 million, or 5.6% of net operating revenue for the comparable period of 2001. The increase in depreciation and amortization resulted primarily from hospitals acquired in 2001, offset by a decrease in amortization expense related to our adoption of SFAS No. 142, which requires that goodwill no longer be amortized. Interest expense was $16.0 million for the nine months ended September 30, 2002, compared to $7.6 million for the comparable period of 2001, an increase of $8.4 million or 110.1%, primarily related to interest on the 4 1/4% convertible subordinated notes issued in October 2001. Income before provision for income taxes was $53.4 million for the nine months ended September 30, 2002, compared to $39.9 million for the comparable period of 2001, an increase of $13.5 million or 34.0%. Our provision for income taxes was $21.4 million for the nine months ended September 30, 2002, compared to $16.8 million for the comparable period of 2001. This reflects an effective income tax rate of 40.0% in the 2002 period, compared to 42.0% in the 2001 period. As a result of the foregoing, our net income was $32.1 million, or 6.1% of net operating revenue, for the nine months ended September 30, 2002, compared to $23.1 million, or 6.1% of net operating revenue for the comparable period of 2001. The comparison of net income for the nine months ended September 30, 2002, to the comparable period of 2001, was materially impacted by the adoption of SFAS No. 142, effective January 1, 2002, which requires that goodwill no longer be amortized. 15 LIQUIDITY AND CAPITAL RESOURCES At September 30, 2002, we had working capital of $97.3 million, including cash and cash equivalents of $12.2 million. The ratio of current assets to current liabilities was 2.4 to 1.0 at September 30, 2002, compared to 3.7 to 1.0 at December 31, 2001. Cash provided by operations was $75.2 million for the nine months ended September 30, 2002. Cash used in investing activities was $207.8 million for the nine months ended September 30, 2002, relating primarily to the purchase of Memorial Hospital of Martinsville and Henry County in May 2002, and Los Alamos Medical Center in June 2002. Net cash provided by financing activities was $105.4 million for the nine months ended September 30, 2002, primarily as a result of borrowings under our revolving credit facility to fund acquisitions and issuance of common stock through exercises of stock options under our Long-Term Equity Incentive Plan and through our Employee Stock Purchase Plan. Total long-term obligations, less current maturities, increased to $467.0 million at September 30, 2002, from $330.8 million at December 31, 2001. The increase resulted primarily from borrowings to finance the two hospitals acquired in the second quarter of 2002 and the $40.2 million in long-term debt related to the properties financed under our amended end-loaded lease facility in the first quarter of 2002. At September 30, 2002, we had $106.4 million available for borrowing under our senior credit facility. On April 30, 2002, we effected a three-for-two stock split, in the form of a 50% stock dividend, to stockholders of record on April 20, 2002. All historical references to common share and earnings per share amounts included in this Report and in our condensed consolidated financial statements and notes thereto have been restated to reflect the three-for-two split. We intend to acquire additional acute care facilities, and are actively seeking out such acquisitions. There can be no assurance that we will not require additional debt or equity financing for any particular acquisition. Also, we continually review our capital needs and financing opportunities and may seek additional equity or debt financing for our acquisition program or other needs. On June 14, 2002, the Securities and Exchange Commission ("SEC") declared effective our shelf registration statement on Form S-3 providing for the offer, from time to time, of common stock and debt securities, up to an aggregate of $300.0 million. The shelf registration statement will enable us to raise funds from the offering of any individual securities covered by the shelf registration statement as well as any combination thereof, subject to market conditions and our capital needs. Capital expenditures, excluding acquisitions, for the nine months ended September 30, 2002 and 2001, were $36.1 million and $49.5 million, respectively, inclusive of construction projects. Capital expenditures for the owned hospitals may vary from year to year depending on facility improvements and service enhancements undertaken by the hospitals. We expect to make total capital expenditures in 2002 of approximately $27.4 million, exclusive of any acquisitions of businesses or construction projects. Planned capital expenditures for 2002 consist principally of capital improvements to owned and leased hospitals. We expect to fund these 16 expenditures through cash provided by operating activities and borrowings under our revolving credit facility. CRITICAL ACCOUNTING POLICIES AND IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS A description of our critical accounting policies is contained in our Annual Report on Form 10-K for the year ended December 31, 2001. We have made no changes in those policies since year end. Effective January 1, 2002, we adopted SFAS No. 142. Under the new rules in SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized, but are subject to annual impairment tests, or more frequently if certain indicators arise. We have no intangible assets, other than goodwill. We applied the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of SFAS No. 142 is expected to result in an increase in net income of approximately $4.4 million ($.09 per share) per year. The required impairment tests of goodwill as of January 1, 2002, were completed in the second quarter of 2002, and the results of those tests had no effect on our operations or financial position. MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS Our interest expense is sensitive to changes in the general level of interest rates. To mitigate the impact of fluctuations in interest rates, we generally maintain 50% - 75% of our debt at a fixed rate, either by borrowings on a long-term basis or entering into an interest rate swap. At September 30, 2002, approximately 76.0% of our outstanding debt amounts were effectively at a fixed rate. Our interest rate swap contract allows us to periodically exchange fixed rate and floating rate payments over the life of the agreement. Floating-rate payments are based on LIBOR, and fixed-rate payments are dependent upon market levels at the time the interest rate swap was consummated. Our interest rate swap is a cash flow hedge, which effectively converted an aggregate notional amount of $28.5 million of floating rate borrowings to fixed rate borrowings at September 30, 2002. Our policy is not to hold or issue derivatives for trading purposes and to avoid derivatives with leverage features. We are exposed to credit losses in the event of nonperformance by the counterparty to the financial instrument. We anticipate that the counterparty will fully satisfy its obligations under the contract. GENERAL The Medicare program accounted for approximately 52.4% and 55.1% of hospital patient days for the three and nine months ended September 30, 2002, respectively. The Medicaid programs accounted for approximately 19.9% and 19.4% of hospital patient days for the three and nine-month periods ended September 30, 2002. The payment rates under the Medicare program for inpatients are prospective, based upon the diagnosis of a patient. The Medicare payment rate increases historically have been less than actual inflation. 17 The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in our financial statements. Resolution of matters, for example, final settlements with third party payors, may result in changes from those estimates. The timing and amount of such changes in estimates may cause fluctuations in our quarterly or annual operating results. FORWARD-LOOKING STATEMENTS Our disclosure and analysis in this report contain some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Any or all of our forward-looking statements in this report may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this report will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. Factors that may cause our plans, expectations, future financial condition and results to change include, but are not limited to: - the highly competitive nature of the healthcare business; - the efforts of insurers, healthcare providers and others to contain healthcare costs; - the financial condition of managed care organizations that pay us for healthcare services; - possible changes in the levels and terms of reimbursement for our charges by government programs, including Medicare and Medicaid or other third-party payors; - changes in or failure to comply with federal, state or local laws and regulations affecting the healthcare industry; - the possible enactment of federal or state healthcare reform; - the departure of key members of our management; - claims and legal actions relating to professional liability; - our ability to implement successfully our acquisition and development strategy; - our ability to attract and retain qualified personnel and to recruit and retain physicians; - potential federal or state investigations; - the impact of recently announced federal and state investigations into the activities of Tenet Healthcare Corp. on the for-profit healthcare industry generally and the market for the securities of companies in that industry; 18 - fluctuations in the market value of our common stock or notes; - changes in accounting principles generally accepted in the United States or in our critical accounting policies; - changes in demographic, general economic and business conditions, both nationally and in the regions in which we operate; and - other risks described in this report. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any additional disclosures and discussions of risks we make in our Form 10-K, 10-Q and 8-K reports and other filings with the Securities and Exchange Commission. These are factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed here also could affect us adversely. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK During the three and nine-month periods ended September 30, 2002, there were no material changes in the quantitative and qualitative disclosures about market risks presented in our Annual Report on Form 10-K for the year ended December 31, 2001. Our only derivative instrument relates to an interest rate swap agreement. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Within 90 days prior to the date of this report, our company carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-14(c)). Based on their evaluation of such controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by our company in the reports we file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Controls There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to above. 19 PART II OTHER INFORMATION ITEM 5. OTHER INFORMATION The deadline for delivering your notice of a shareholder proposal, other than a proposal to be included in the proxy statement, for the 2003 annual meeting of shareholders will be March 7, 2003, pursuant to Rule 14a-4 under the Securities Exchange Act of 1934. The persons named as proxies in the proxy statement may exercise discretionary voting authority with respect to any matter that is not submitted to us by such date. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit Number Description of Exhibits ------ ----------------------- 3.1 Amended and Restated Certificate of Incorporation of Province Healthcare Company, as filed with the Delaware Secretary of State on June 16, 2000 (i) 3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Province Healthcare Company, as filed with the Delaware Secretary of State on May 22, 2002 (ii) 3.3 Amended and Restated Bylaws of Province Healthcare Company (ii) 10.1 Executive Severance Agreement by and between Province Healthcare Company and Samuel Moody, dated August 22, 2002(*)(**)
- ------------------ (i) Incorporated by reference to the exhibits filed with the Registrant's Quarterly Report filed on Form 10-Q, for the quarterly period ended June 30, 2000, Commission File No. 0-23639. (ii) Incorporated by reference to the exhibits filed with the Registrant's Registration Statement on Form S-3/A, filed on June 11, 2002, Registration Number 333-86578. (*) Filed herewith. (**) Management Compensatory Plan or Arrangement. (b) Reports on Form 8-K During the three months ended September 30, 2002, our company filed a report on Form 8-K on August 14, 2002 with respect to the certifications of our Chief Executive Officer and Chief Financial Officer required to comply with 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROVINCE HEALTHCARE COMPANY Date: November 14, 2002 By: /s/ Brenda B. Rector ------------------------------- Brenda B. Rector Vice President and Controller 21 PROVINCE HEALTHCARE COMPANY CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Martin S. Rash, certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant, Province Healthcare Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors: 22 a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Martin S. Rash -------------------------------- Martin S. Rash Chief Executive Officer 23 PROVINCE HEALTHCARE COMPANY CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Christopher T. Hannon, certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant, Province Healthcare Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors: 24 a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Christopher T. Hannon -------------------------------- Christopher T. Hannon Chief Financial Officer 25 EX-10.1 3 g79310exv10w1.txt PROVINCE HEALTHCARE COMPANY EXECUTIVE SEVERANCE EXHIBIT 10.1 PROVINCE HEALTHCARE COMPANY EXECUTIVE SEVERANCE AGREEMENT THIS EXECUTIVE SEVERANCE AGREEMENT ("Agreement") is entered into as of this 22nd day of August, 2002, by and between Province Healthcare Company (the "Company") and SAMUEL MOODY ("Employee"). W I T N E S S E T H: WHEREAS, Employee is employed as Senior Vice President, Operations of the Company; and WHEREAS, the Company desires to provide certain severance payments to Employee in the event that Employee's employment with the Company is terminated without cause or in connection with a change in control of the Company; NOW, THEREFORE, based upon the premises set forth herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: ARTICLE I. DEFINITIONS Terms used in this Agreement that are defined are indicated by initial capitalization of the term. References to an "Article" or a "Section" mean an article or a section of this Agreement. In addition to those terms that are specifically defined herein, the following terms are defined for purposes hereof: "Administrator" means a committee consisting of the Company's chief executive officer, the secretary of the Company, the vice president of human resources, and any other individuals appointed by the chief executive officer. The Administrator may delegate any of its duties or authorities to any person or entity. If a Change in Control occurs, as described in this Agreement, the Administrator shall be the committee of individuals who were committee members immediately prior to the Change in Control. "Benefit" means the benefits described in Article II and Article III. "Change in Control" means a transaction or circumstance in which any of the following have occurred: (a) any "person" as such term is used in sections 13(d) and 14(d) of the Exchange Act, other than the Company or a wholly-owned Subsidiary thereof or any employee benefit plan of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 50% of the total voting power represented by the Company's then outstanding Voting Securities (as defined below), or (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (c) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the Voting Securities (i.e., any securities of the entity which vote generally in the election of its directors) of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) more than 50% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (d) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of its assets. "Code" means the Internal Revenue Code of 1986, as amended. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Subsidiary" means any subsidiary of the Company or of any of its subsidiaries. ARTICLE II. CHANGE IN CONTROL TERMINATION PAYMENT SECTION 2.1 BENEFITS ON TERMINATION. (a) Amount. Subject to the conditions, limitations and adjustments that are provided for herein, the Company will provide Benefits to Employee equal to the sum of the amounts described below if, within the 24 month period following a Change in Control, Employee's employment with the Company terminates for any reason: (1) An amount equal to 200% of the Employee's annual base compensation determined by reference to his base salary in effect at the time of Change in Control. (2) An amount equal to 200% of the highest annual bonus that Employee would be eligible to receive during the fiscal year ending during which the Change in Control occurs. (3) For a period of 24 months, participation in medical, life, disability and similar benefit plans that are offered to similarly situated employees of the Company 2 immediately prior to the applicable Change in Control for the Eligible Employee and his dependents. Such participation may be pursuant to the continuation coverage rights of Eligible Employees pursuant to Part 6 of Title I of ERISA ("COBRA") or the Company may provide such benefits directly through the purchase of insurance or otherwise. Notwithstanding the foregoing, the period for participation in a self-funded medical plan pursuant to this paragraph 3 shall not exceed the maximum period of continuation coverage provided under COBRA. If benefits are provided pursuant to COBRA continuation rights, the Company shall pay a cash amount to the Eligible Employee at the time of severance that is sufficient to cover all premiums required for such COBRA coverage under the appropriate benefit plans. (4) For a period of 24 months, participation in general and executive fringe benefits offered to similarly situated executive employees immediately prior to the applicable Change in Control. (5) Upon the effective date of any Change in Control, any stock purchase options held by Employee pursuant to any qualified or nonqualified Company option plan shall immediately vest and become exercisable. The provisions of this Section 2.1 shall supersede any contrary provisions of any other agreement by and between the parties hereto, now existing or hereafter created, unless the provisions of this Section 2.1 shall be referred to specifically therein and modified, amended or waived by both parties hereto. (b) Adjustments to the Amount of Benefit. Notwithstanding anything herein to the contrary, the amounts due to Employee under Section 2.1(a) shall be adjusted in accordance with Section 2.2 if any payment provided to Employee is determined to be subject to the excise tax described in section 4999 of the Code. (c) Time for Payment; Interest. The cash Benefits payable made under this Section 2.1 shall be paid to Employee in a single lump sum within ten days following the date of termination. The Company's obligation to pay to Employee any amounts under this Section 2.1 will bear interest at the lesser of (i) 10% or (ii) the maximum rate allowed by law until paid by the Company, and all accrued and unpaid interest will bear interest at the same rate, all of which interest will be compounded annually. 2.2 BENEFIT ADJUSTMENTS. (a) Gross Up Payment. Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by or on behalf of the Company to or for the benefit of Employee as a result of a "change in control," as defined in section 280G of the Code, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section, (a "Payment") would be subject to the excise tax imposed by section 4999 of the Code or any interest or penalties are incurred by Employee with respect to such excise tax (such excise 3 tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Employee shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Tax Opinion. Subject to the provisions of Section 2.2(c), all determinations required to be made under this Section 2.2, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized accounting firm or law firm selected by the Company (the "Tax Firm"); provided, however, that the Tax Firm shall not determine that no Excise Tax is payable by Employee unless it delivers to Employee a written opinion (the "Tax Opinion") that failure to pay the Excise Tax and to report the Excise Tax and the payments potentially subject thereto on or with Employee's applicable federal income tax return will not result in the imposition of an accuracy-related or other penalty on Employee. All fees and expenses of the Tax Firm shall be borne solely by the Company. Within 15 business days of the receipt of notice from Employee that there has been a Payment, or such earlier time as is requested by the Company, the Tax Firm shall make all determinations required under this Section, shall provide to the Company and Employee a written report setting forth such determinations, together with detailed supporting calculations, and, if the Tax Firm determines that no Excise Tax is payable, shall deliver the Tax Opinion to Employee. Any Gross-Up Payment, as determined pursuant to this Section, shall be paid by the Company to Employee within fifteen days of the receipt of the Tax Firm's determination. Subject to the remainder of this Section 2.2, any determination by the Tax Firm shall be binding upon the Company and Employee; provided, however, that Employee shall only be bound to the extent that the determinations of the Tax Firm hereunder, including the determinations made in the Tax Opinion, are reasonable and reasonably supported by applicable law. As a result of the uncertainty in the application of section 4999 of the Code at the time of the initial determination by the Tax Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that it is ultimately determined in accordance with the procedures set forth in Section 2.2(c) that Employee is required to make a payment of any Excise Tax, the Tax Firm shall reasonably determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Employee. In determining the reasonableness of Tax Firm's determinations hereunder, and the effect thereof, Employee shall be provided a reasonable opportunity to review such determinations with Tax Firm and Employee's tax counsel. Tax Firm's determinations hereunder, and the Tax Opinion, shall not be deemed reasonable until Employee's reasonable objections and comments thereto have been satisfactorily accommodated by Tax Firm. (c) Notice of IRS Claim. Employee shall notify the Company in writing of any claims by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 30 4 calendar days after Employee actually receives notice in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid; provided, however, that the failure of Employee to notify the Company of such claim (or to provide any required information with respect thereto) shall not affect any rights granted to Employee under this Section 2.2 except to the extent that the Company is materially prejudiced in the defense of such claim as a direct result of such failure. Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Employee in writing prior to the expiration of such period that it desires to contest such claim, Employee shall do all of the following: (1) give the Company any information reasonably requested by the Company relating to such claim; (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company and reasonably acceptable to Employee; (3) cooperate with the Company in good faith in order effectively to contest such claim; (4) if the Company elects not to assume and control the defense of such claim, permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Employee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 2.2, the Company shall have the right, at its sole option, to assume the defense of and control all proceedings in connection with such contest, in which case it may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may either direct Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Employee, on an interest-free basis and shall indemnify and hold Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's right to assume the defense of and control the contest shall be limited to issues with respect to which a Gross-Up Payment 5 would be payable hereunder and Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) Right to Tax Refund. If, after the receipt by Employee of an amount advanced by the Company pursuant to Section 2.2 Employee becomes entitled to receive any refund with respect to such claim, Employee shall (subject to the Company's complying with the requirements of Section 2.2(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Employee of an amount advanced by the Company pursuant to Section 2.2(c), a determination is made that Employee is not entitled to a refund with respect to such claim and the Company does not notify Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall, to the extent of such denial, be forgiven and shall not be required to be repaid and the amount of forgiven advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. ARTICLE III. PAYMENT UPON TERMINATION WITHOUT CAUSE SECTION 3.1 BENEFITS ON TERMINATION. (a) Amount. Subject to the conditions, limitations and adjustments that are provided for herein, in the absence of a Change in Control, and in the event Employee's employment is terminated either by the Company without cause or by the Employee with cause, as described below, Employee shall be entitled to receive an amount equal to 200% of the Employee's annual base compensation determined by reference to his base salary in effect at the time of termination. (1) By Company Without Cause Termination of employment by the Company without cause shall occur if the Company provides oral or written notice to Employee of involuntary termination that is not on account of just cause. For this purpose, termination for "just cause" will only occur upon written notice to Employee that employment is involuntarily terminated due to any of the following: (i) conviction of Employee for a crime involving fraud, dishonesty or theft, or of any felony which, in the reasonable judgment of the Board, materially affects Employee's ability to perform his duties pursuant to this Agreement; (ii) commission by Employee of an act of fraud, embezzlement, or material dishonesty against the Company or its affiliates; or (iii) intentional neglect of or material inattention to Employee's duties, which neglect or inattention remains uncorrected for more than 30 days following written notice from the chief executive officer of the Company detailing the Company's concern. (2) By Employee With Cause. Termination of employment by Employee with cause shall occur if Employee terminates employment for any of the following reasons: 6 (i) A material adverse alteration in Employee's position, responsibilities or status. (ii) A reduction in Employee's base compensation or a substantial reduction in the benefits provided to Employee. (iii) Relocation of Employee by the Company to a location that is more than 35 miles from the Employee's current workplace. (iv) The material breach of the Company of any portion of its employment policies and/or any employment agreement with Employee. (b) Adjustments to the Amount of Benefit. Notwithstanding anything herein to the contrary, the amounts due to Employee under Section 3.1(a) shall be adjusted in accordance with Section 2.2 of this Agreement if any payment provided to Employee is determined to be subject to the excise tax described in section 4999 of the Code. (c) Time for Payment; Interest. The cash Benefits payable made under this Section 3.1 shall be paid to Employee in a single lump sum within ten days following the date of termination. The Company's obligation to pay to Employee any amounts under this Section 3.1 will bear interest at the lesser of (i) 10% or (ii) the maximum rate allowed by law until paid by the Company, and all accrued and unpaid interest will bear interest at the same rate, all of which interest will be compounded annually. SECTION 3.2 COMPETITION. (a) Agreement Not to Compete. Employee agrees that, for a period of 24 months after the termination of his employment as described in Section 3.1(a), he will not: (i) directly or indirectly, own, manage, control, participate in, consult with or render services for (i) any business, the operating facilities of which compete with the operating facilities of the Company or its Subsidiaries within the geographical area included in the 50-mile radius around each location where the Company or any Subsidiary owns, leases, manages or otherwise maintains an operating facility, engages in business or, on the date of Employee's termination, plans to own, lease, manage or otherwise maintain a facility or engage in business, or (ii) any business in which the Company or any of its Subsidiaries has entered into a letter of intent or is or has been within one year prior to the date of termination of Employee's employment in active negotiations relating to the acquisition of such business by the Company or its Subsidiaries; or (ii) interfere with, disrupt or attempt to disrupt any present or 7 prospective relationship, contractual or otherwise, between the Company and any customer, supplier or employee of the Company. (b) Remedies. Employee agrees and acknowledges that the violation by Employee of the agreements contained in this Section 3.2 would cause irreparable injury to the Company and that the remedy at law for any violation or threatened violation thereof by him would be inadequate and that the Company shall be entitled to temporary and permanent injunctive relief or other equitable relief without the necessity of proving actual damages. ARTICLE IV. ADMINISTRATION SECTION 4.1. The provisions of this Agreement are intended to provide severance benefits and protection to Employee. The Administrator has absolute discretion to interpret the terms of this Agreement and to make all determinations required in the administration hereof, including making determinations about eligibility for and the amounts of Benefits. All decisions of the Administrator are final, binding and conclusive on all parties. SECTION 4.2. Benefits can only be denied or forfeited if Employee does not satisfy the conditions for receiving payment that are described herein or if the Company validly amends the Agreement as described in Section 5.4. SECTION 4.3. If Employee's claim for Benefits is denied, the Administrator will furnish written notice of denial to Employee within 90 days of the date the claim is received, unless special circumstances require an extension of time for processing the claim. This extension will not exceed 90 days, and Employee must receive written notice stating the grounds for the extension and the length of the extension within the initial 90-day review period. If the Administrator does not provide written notice, Employee may deem the claim denied and seek review according to the appeals procedures set forth below. (a) Notice of Denial. The notice of denial to the Claimant shall state: (1) The specific reasons for the denial. (2) Specific references to pertinent provisions of the Agreement on which the denial was based. (3) A description of any additional material or information needed for Employee to perfect his claim and an explanation of why the material or information is needed. (4) A statement that Employee may request a review upon written application to the Administrator, review pertinent documents, and submit issues and comments in writing and that any appeal that Employee wishes to make of the adverse determination must be in writing to the Administrator within 60 days after Employee receives notice of denial of benefits. 8 (5) The name and address of the Administrator to which Employee may forward an appeal. The notice may state that failure to appeal the action to the Administrator in writing within the 60-day period will render the determination final, binding and conclusive. (b) Appeals Procedure. If Employee appeals to the Administrator, Employee or his authorized representative may submit in writing whatever issues and comments he believes to be pertinent. The Administrator shall reexamine all facts related to the appeal and make a final determination of whether the denial of benefits is justified under the circumstances. The Administrator shall advise Employee in writing of: (1) The Administrator's decision on appeal. (2) The specific reasons for the decision. (3) The specific provisions of the Agreement on which the decision is based. Notice of the Administrator's decision shall be given within 60 days of the Claimant's written request for review, unless additional time is required due to special circumstances. In no event shall the Administrator render a decision on an appeal later than 120 days after receiving a request for a review. ARTICLE V. GENERAL TERMS SECTION 5.1 NOTICES. All notices and other communications hereunder will be in writing or by written telecommunication, and will be deemed to have been duly given if delivered personally or if sent by overnight courier or by written telecommunication, to the relevant address set forth below, or to such other address as the recipient of such notice or communication will have specified to the other party hereto in accordance with this Section: If to the Company to: Province Healthcare Company 105 Westwood Place, Suite 400 Brentwood, Tennessee 37027 Attn: Howard T. Wall, III, Senior Vice President and General Counsel 9 If to Employee, to: Samuel Moody Province Healthcare Company 105 Westwood Place, Suite 400 Brentwood, TN 37027 SECTION 5.2 WITHHOLDING; NO OFFSET. All payments required to be made by the Company under this Agreement to Employee will be subject to the withholding of such amounts, if any, relating to federal, state and local taxes as may be required by law. No payment under this Agreement will be subject to offset or reduction attributable to any amount Employee may owe to the Company or any other person, except as required by law. SECTION 5.3 ERISA RIGHTS AND INFORMATION. Attached hereto as Appendix A is a description of certain ERISA rights and other information applicable to this Agreement. SECTION 5.4 ENTIRE AGREEMENT; MODIFICATION. This Agreement and its attachments constitute the complete and entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements between the parties. The parties have executed this Agreement based upon the express terms and provisions set forth herein and have not relied on any communications or representations, oral or written, which are not set forth in this Agreement. SECTION 5.5 AMENDMENT. This Agreement may not be modified by an subsequent agreement unless the modifying agreement: (i) is in writing; (ii) contains an express provision referencing this Agreement; (iii) is signed and executed on behalf of the Company by an officer of the Company other than Employee; and (v) is signed by Employee. SECTION 5.6 CHOICE OF LAW. This Agreement and the performance hereof will be construed and governed in accordance with the laws of the State of Tennessee, without regard to its choice of law principles, except to the extent that federal law controls or preempts state law. SECTION 5.7 SUCCESSORS AND ASSIGNS. The obligations, duties and responsibilities of Employee under this Agreement are personal and shall not be assignable. In the event of Employee's death or disability, this Agreement shall be enforceable by Employee's estate, executors or legal representatives. The obligations, duties and responsibilities of Company hereunder shall be binding upon any successor of the Company (whether through a transaction described as a Change in Control or otherwise). SECTION 5.8 WAIVER OF PROVISIONS. Any waiver of any terms and conditions hereof must be in writing and signed by the parties hereto. The waiver of any of the terms and conditions of this Agreement shall not be construed as a waiver of any subsequent breach of the same or any other terms and conditions hereof. 10 SECTION 5.9 SEVERABILITY. The provisions of this Agreement and the amount of Benefits payable hereunder shall be deemed severable, and if any portion shall be held invalid, illegal or enforceable for any reason, the remainder of this Agreement and/or Benefit payment shall be effective and binding upon the parties. SECTION 5.10 COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which will be deemed an original, and all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, Company and Employee have caused this Agreement to be executed on the day and year indicated below to be effective on the day and year first written above. EMPLOYEE: /s/ Samuel Moody August 22, 2002 - -------------------------------- -------------------------- SAMUEL MOODY Date COMPANY: PROVINCE HEALTHCARE COMPANY By: /s/ Martin S. Rash August 22, 2002 -------------------------- --------------------------- Date Its: Chief Executive Officer -------------------------- 11 APPENDIX A ERISA RIGHTS AND INFORMATION The parties acknowledge that the following information is provided to Employee hereunder in connection with Employee's rights as a welfare plan participant under ERISA. The terms "you" and "yours" refer to Employee. As a participant in a welfare plan maintained by the Company, you are entitled to certain rights and protections under ERISA. ERISA provides that all plan participants shall be entitled to: - - Examine, without charge, at the Administrator's office and at other specified locations, all plan documents, including insurance contracts, and copies of all documents filed by the plan with the U.S. Department of Labor, such as detailed annual reports and plan descriptions. - - Obtain copies of all plan documents and other plan information upon written request to the Administrator. The Administrator may make a reasonable charge for the copies. - - Receive a summary of the plan's annual financial report. The Administrator is required by law to furnish each participant with a copy of this summary annual report. In addition to creating rights for plan participants, ERISA imposes duties upon the people who are responsible for the operation of the employee benefit plan. The people who operate your plan, called "fiduciaries" of the plan, have a duty to do so prudently and in the interest of you and other plan participants and beneficiaries. No one, including the Company or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a benefit under this plan or from exercising your rights under ERISA. If a claim for a Benefit is denied in whole or in part, you must receive a written explanation of the reason for the denial. You have the right to have the Administrator review and reconsider your claim. Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials from the plan and do not receive them within 30 days, you may file suit in a federal court. In such a case, the court may require the Administrator to provide the materials and pay you up to $100 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Administrator. If you have a claim for benefits that is denied or ignored, in whole or in part, you may file suit in a state or federal court. If it should happen that plan fiduciaries misuse the plan's 12 money or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor or you may file suit in a federal court. The court will decide who should pay court costs and fees. If you lose, the court may order you to pay these costs and fees, for example, if it finds your claim is frivolous. If you have any questions about your plan, you should contact the Administrator. If you have any questions about this statement or about your rights under ERISA, you should contact the nearest Area Office of the U.S. Labor-Management Services Administration, Department of Labor. SUMMARY OF ERISA INFORMATION Name of Plan: Province Healthcare Company Executive Severance Plan Name and Address of the Company: Province Healthcare Company 105 Westwood Place, Suite 400 Brentwood, Tennessee 37027 Who Pays for the Plan: The cost of the plan is paid entirely by the Company. The Company's Employer Identification No.: 62-1710772 Plan Number: 599 Plan Year: January 1 to December 31 Plan Administrator, Name, Address and Telephone No.: Administrator of the Province Healthcare Company Executive Severance Plan Province Healthcare Company 105 Westwood Place, Suite 400 Brentwood, Tennessee 37027 (615) 370-1377 Agent for Service of Legal Process on the Plan: Chief Executive Officer or Administrator. Benefits are paid out of the general assets of the Company. The Company may, in its discretion establish a "grantor trust" to fund the payment of Benefits. Otherwise, this plan does not give you any rights to any particular assets of the Company. Cash amounts paid under a severance plan are generally considered taxable income to the recipient. 13 -----END PRIVACY-ENHANCED MESSAGE-----