-----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, SLk7yhwrM/B2ojOMlfzc0/Qm/8HLYqBOh6dBIaXO/2Gbd9gLfqx1xP6XmX9Hmmo8 eAXUTYjaBhu6/FqFn1jlAw== 0000950144-99-006275.txt : 19990518 0000950144-99-006275.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950144-99-006275 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99626431 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 SUITE 180 STREET 2: 105 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 March 31, 1999 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 APRIL 30, 1999 COMMON STOCK, $.01 PAR VALUE 15,722,961 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Condensed Consolidated Balance Sheets March 31, 1999 and December 31, 1998............................1 Condensed Consolidated Statements of Income Three Months Ended March 31, 1999 and 1998......................2 Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 1999 and 1998......................3 Notes to Condensed Consolidated Financial Statements................4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.............................10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................................20
3 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
March 31, December 31, 1999 1998 --------- ------------ (Unaudited) (Note 1) ASSETS Current assets: Cash and cash equivalents $ 12,656 $ 2,113 Accounts receivable, less allowance for doubtful accounts of $4,782 at March 31, 1999 and $9,033 at December 31, 1998 56,930 51,253 Inventories 7,501 7,083 Prepaid expenses and other 8,417 10,211 -------- -------- Total current assets 85,504 70,660 Property, plant and equipment, net 111,830 112,114 Other assets: Cost in excess of net assets acquired, net 140,846 142,017 Other assets 16,001 12,713 -------- -------- Total assets $354,181 $337,504 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,015 $ 6,786 Accrued salaries and benefits 10,232 8,655 Accrued expenses 5,473 2,710 Current maturities of long-term obligations 1,545 1,797 -------- -------- Total current liabilities 25,265 19,948 Long-term obligations, less current maturities 138,357 134,301 Third-party settlements 5,353 3,502 Other liabilities 10,795 9,862 Minority interest 787 700 -------- -------- Total noncurrent liabilities 155,292 148,365 Stockholders' equity: Common stock--$0.01 par value; authorized 25,000,000 shares; issued and outstanding 15,722,743 and 15,704,578 shares at March 31, 1999 and December 31, 1998, respectively 157 157 Additional paid-in-capital 163,294 162,926 Retained earnings 10,173 6,108 -------- -------- Total stockholders' equity 173,624 169,191 -------- -------- Total liabilities and stockholders' equity $354,181 $337,504 ======== ========
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 March 31, ---------------------------- 1999 1998 ------- ------- Revenue: Net patient service revenue $67,256 $ 42,750 Management and professional services 3,450 2,930 Reimbursable expenses 1,777 1,562 Other 764 609 ------- -------- Net operating revenue 73,247 47,851 Expenses: Salaries, wages and benefits 29,508 18,606 Reimbursable expenses 1,777 1,562 Purchased services 7,236 6,035 Supplies 8,217 4,627 Provision for doubtful accounts 4,676 3,082 Other operating expenses 6,145 4,257 Rentals and leases 1,683 1,474 Depreciation and amortization 4,177 2,205 Interest expense 2,575 1,855 Minority interest 58 68 Loss on sale of assets -- 33 ------- -------- Total expenses 66,052 43,804 ------- -------- Income before provision for income taxes 7,195 4,047 Provision for income taxes 3,130 1,772 ------- -------- Net income 4,065 2,275 Preferred stock dividends and accretion -- (696) ------- -------- Net income to common shareholders $ 4,065 $ 1,579 ======= ======== Basic earnings per common share: Net income $ 0.26 $ 0.24 Preferred stock dividends and accretion -- (0.07) ------- -------- Net income to common shareholders $ 0.26 $ 0.17 ======= ======== Diluted earnings per common share: Net income $ 0.25 $ 0.23 Preferred stock dividends and accretion -- (0.07) ------- -------- Net income to common shareholders $ 0.25 $ 0.16 ======= ========
See accompanying notes. 2 5 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
Three Months Ended March 31, ---------------------------- 1999 1998 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 13,318 $ 233 INVESTING ACTIVITIES Purchase of property, plant and equipment (2,254) (2,524) Purchase of acquired companies (4,920) -- Other 238 (15) -------- -------- Net cash used in investing activities (6,936) (2,539) FINANCING ACTIVITIES Proceeds from long-term debt 21,887 61,000 Repayments of debt (18,094) (95,649) Issuance of common stock 368 77,067 Repurchase of common stock -- (14,884) Redemption of Senior Preferred Stock -- (22,739) -------- -------- Net cash provided by financing activities 4,161 4,795 -------- -------- Net increase in cash and cash equivalents 10,543 2,489 Cash and cash equivalents at beginning of period 2,113 4,186 -------- -------- Cash and cash equivalents at end of period $ 12,656 $ 6,675 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION Interest paid during the period $ 2,660 $ 1,966 ======== ======== Income taxes paid during the period $ 1,067 $ 166 ======== ======== NONCASH TRANSACTIONS Dividends and accretion on preferred stock $ -- $ 696 Conversion and redemption of preferred stock -- 33,138 ACQUISITIONS Fair value of assets acquired $ 5,169 $ -- Liabilities assumed (249) -- -------- -------- Cash paid $ 4,920 $ -- ======== ========
See accompanying notes. 3 6 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1999 1. BASIS OF PRESENTATION The accompanying audited 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"). The balance sheet at December 31, 1998, has been derived from the audited financial statements at that date, but does not include all of the financial information and footnotes required by generally accepted accounting principles 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, 1998. 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued, and is required to be adopted in years beginning after June 15, 1999. This Statement requires all derivatives to be recorded on the balance sheet at fair value. This results in the offsetting changes in fair values or cash flows of both the hedge and the hedged item being recognized in earnings in the same period. Changes in fair value of derivatives not meeting the Statement's hedge criteria are included in income. The Company expects to adopt the new Statement January 1, 2000. The Company does not expect the adoption of this Statement to have a significant effect on its results of operations or financial position. 3. ACQUISITIONS HAVASU SAMARITAN REGIONAL HOSPITAL In May 1998, the Company acquired Havasu Samaritan Regional Hospital in Lake 4 7 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) Havasu City, Arizona, for approximately $107.5 million. To finance this acquisition, the Company borrowed $106.0 million under its revolving credit facility. Cost in excess of net assets acquired in the acquisition totaled approximately $76.5 million and is being amortized over 35 years. ELKO GENERAL HOSPITAL In June 1998, the Company acquired Elko General Hospital in Elko, Nevada, for a purchase price of approximately $23.3 million. To finance this acquisition, the Company borrowed $22.0 million under its revolving credit facility. Cost in excess of net assets acquired in the acquisition totaled approximately $14.3 million and is being amortized over 35 years. The allocation of the purchase price has been determined based upon currently available information and is subject to further refinement, pending the final settlement of the working capital acquired. The Company has committed to spend a minimum of $30.0 million on a replacement facility within thirty-six months of the acquisition close date. EUNICE COMMUNITY MEDICAL CENTER In February 1999, the Company entered into a "special services agreement" for the lease of Eunice Community Medical Center ("Eunice") in Eunice, Louisiana, by purchasing certain assets, assuming certain liabilities and entering into a ten-year lease agreement, with a five-year renewal option. The transaction was accounted for as a purchase business combination, with an estimated purchase price of approximately $4.9 million. The Company has refined the previous estimate of the purchase price of the facility based upon its determination of amounts of certain obligations and liabilities it agreed to assume under the Asset Purchase Agreement. The allocation of the purchase price associated with this acquisition has been determined based upon available information and is subject to further refinement, pending final settlement of working capital acquired. The Company is obligated under the lease to construct a replacement facility (currently estimated to cost approximately $20.0 million) at such time as the net patient service revenue of the hospital reaches a pre-determined level. The lease will terminate at the time the replacement facility commences operations. The following pro forma information reflects the operations of the entities acquired in 1999 and 1998, as if the respective transactions had occurred at the beginning of the periods presented (in thousands, except per share data): 5 8 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Three Months Ended March 31, ---------------------------- 1999 1998 --------- --------- Net operating revenue $ 74,043 $ 73,593 Net income 3,494 2,136 Net income to common shareholders 3,494 1,440 Basic earnings per common share: Net income $ 0.22 $ 0.23 Net income to common shareholders 0.22 0.15 Diluted earnings per common share: Net income $ 0.22 $ 0.22 Net income to common shareholders 0.22 0.15
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. 4. COMPREHENSIVE INCOME The Company had no items of other comprehensive income in 1999 or 1998, and accordingly, comprehensive income is equivalent to net income. 5. INCOME TAXES The income tax provision for the three months ended March 31, 1999 and 1998, differs from the statutory income tax computation due to permanent differences and the provision for state income taxes. The IRS is currently engaged in an examination of the predecessor company's federal income tax returns for 1995 and 1996. Finalization of the examination is not expected to have a significant effect on the financial condition or results of operations of the Company. 6 9 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) 6. 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 March 31, ---------------------------- 1999 1998 ------- -------- Numerator: Net income $ 4,065 $ 2,275 Preferred stock dividends and accretion -- (696) ------- --------- Net income to common shareholders $ 4,065 $ 1,579 ======= ========= Denominator: Denominator for basic earnings per share - weighted-average shares 15,709 9,343 Effect of dilutive securities - Incentive stock options 312 272 ------- --------- Denominator for diluted earnings per share 16,021 9,615 Basic earnings per common share: Net income $ 0.26 $ 0.24 Preferred stock dividends and accretion -- (0.07) ------- --------- Net income per common share $ 0.26 $ 0.17 ======= ========= Diluted earnings per common share: Net income $ 0.25 $ 0.23 Preferred stock dividends and accretion -- (0.07) ------- --------- Net income per common share $ 0.25 $ 0.16 ======= =========
7 10 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) During the first quarter of 1999, employees exercised options to acquire 7,343 shares of common stock at an average exercise price of $11.13 per share. Also, during the first quarter of 1999, the Company issued 10,822 shares of common stock at a price of $22.73 per share under its Employee Stock Purchase Plan. In February 1998, the Company issued 5,405,000 shares of common stock in its initial public offering. In July 1998, the Company issued 2,685,500 shares of common stock in its follow-on offering. 7. 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. 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 income in the period in which revisions are made, and resulted in increases in net patient service revenue of $0.9 million, or 1.2% of net operating revenue, in the three-month period ended March 31, 1999. The increase in the three-month period ended March 31, 1998 was minimal. 8 11 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) 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 $35.0 million of floating-rate borrowings to fixed-rate borrowings. The floating-rate payments are based on LIBOR, and fixed-rate payments are based on market levels at the time the swap agreement was consummated. For the three months ended March 31, 1999 and 1998, the Company received a weighted average rate of 5.22% and 5.88% and paid a weighted average rate of 6.27%, respectively. On September 4, 1998, the Company entered into an interest rate swap agreement, which effectively converted for a five-year period $45.0 million of floating-rate borrowings to fixed-rate borrowings. The floating-rate payments are based on LIBOR, and fixed-rate payments are based on market levels at the time the swap agreement was consummated. For the three months ended March 31, 1999, the Company received a weighted average rate of 5.28% and paid a weighted average rate of 5.625%. 8. SUBSEQUENT EVENT On April 15, 1999, the Company acquired the assets and business of Glades General Hospital ("Glades"), in Belle Glade, Florida for approximately $15.3 million, excluding working capital. To finance this acquisition, the Company borrowed $13.5 million under its revolving credit facility. The acquisition will be accounted for as a purchase business combination, and the results of operations of Glades will be included in the results of operations of the Company from the purchase date forward. The Company is obligated under the Asset Purchase Agreement to build a replacement hospital following the fifth year after the closing, at a cost of not less than $25.0 million, contingent upon Glades meeting certain financial targets following the closing. 9 12 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 May 1998, the Company acquired Havasu Samaritan Regional Hospital ("Havasu") in Lake Havasu City, Arizona, for approximately $107.5 million. In June 1998, the Company acquired Elko General Hospital ("Elko") in Elko, Nevada for a purchase price of approximately $23.3 million. To finance these acquisitions, the Company borrowed $106.0 million and $22.0 million, respectively, under its revolving credit facility. In February 1999, the Company entered into a "special services agreement" for the lease of Eunice Community Medical Center ("Eunice") in Eunice, Louisiana by purchasing certain assets, assuming certain liabilities, and entering into a ten-year lease agreement, with a five-year renewal option, for an estimated purchase price of approximately $4.9 million. The Company has refined the previous estimate of the purchase price of the facility based upon its determination of amounts of certain obligations and liabilities it agreed to assume under the Asset Purchase Agreement. All of the acquisitions described above were accounted for as purchase business combinations, and the results of operations of the hospitals have been included in the results of operations of the Company from the purchase dates forward. The March 31, 1999 results include three months of operations for Havasu and Elko, and one month and six days of operations for Eunice. The March 31, 1998 results do not include the operations of any of the three acquired hospitals. The Havasu, Elko and Eunice 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. 10 13 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.
Percentage Increase (Decrease) Three Months Ended March 31, of Dollar Amounts ---------------------------- ----------------- 1999 1998 ---- ---- Net operating revenue 100.0% 100.0% 53.1% Operating expenses (1) 80.9 82.8 49.4 ----- ----- EBITDA (2) 19.1 17.2 70.6 Depreciation and amortization 5.7 4.6 89.4 Interest 3.5 3.9 38.8 Minority interest 0.1 0.1 (14.7) Loss on sale of assets -- 0.1 (100.0) ----- ----- Income before income taxes 9.8 8.5 76.3 Provision for income taxes 4.3 3.7 76.6 ----- ----- Net income 5.5% 4.8% 78.7% ===== =====
(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 EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying 11 14 calculations, EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. SELECTED OPERATING STATISTICS - OWNED OR LEASED HOSPITALS The following table sets forth certain operating statistics for the Company's owned or leased hospitals for each of the periods presented.
Three Months Ended March 31, ---------------------------- 1999 1998 -------- ------ CONSOLIDATED HOSPITALS: Number of hospitals (at end of period) 11 8 Licensed beds (at end of period) 802 570 Beds in service (at end of period) 732 463 Admissions 7,099 4,575 Patient days 36,266 25,570 Adjusted patient days 61,049 42,295 Average length of stay (days) 5.1 5.6 Occupancy rates (% licensed beds) 50.2% 49.8% Occupancy rates (% of beds in service) 55.0% 61.4% Gross inpatient revenue $75,239,271 $45,052,328 Gross outpatient revenue 51,432,780 30,010,142
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 Net operating revenue was $73.2 million for the three months ended March 31, 1999, compared to $47.9 million for the comparable period of 1998, an increase of $25.3 million or 53.1%. Net patient revenue generated by hospitals owned during both periods increased $1.6 million, or 3.8%, 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 $0.9 million for the three months ended March 31, 1999; the increase in the three-month period ended March 31, 1998 was minimal. The remaining increase of $23.7 million was primarily attributable to the Acquisitions. Operating expenses were $59.2 million, or 80.9% of net operating revenue, for the three months ended March 31, 1999, compared to $39.6 million, or 82.8% of net operating revenue, for the comparable period of 1998. The increase in operating expenses of hospitals owned during both periods resulted primarily from volume increases, change in case mix and increased recruiting expenses, offset by a decrease in bad debt expense. The majority of the increase in operating expenses was attributable to the Acquisitions. 12 15 EBITDA was $14.0 million or 19.1% of net operating revenue for the three months ended March 31, 1999, compared to $8.2 million, or 17.2% of net operating revenue, for the comparable period of 1998. Depreciation and amortization expense was $4.2 million, or 5.7% of net operating revenue, for the three months ended March 31,1999, compared to $2.2 million, or 4.6% of net operating revenue for the comparable period of 1998. The increase in depreciation and amortization resulted primarily from the Acquisitions. Interest expense as a percent of net operating revenue decreased to 3.5% for the three months ended March 31, 1999, compared to 3.9% for the comparable period of 1998. Income before provision for income taxes was $7.2 million for the three months ended March 31, 1999, compared to $4.0 million for the comparable period of 1998, an increase of $3.2 million or 80.0%. The increase resulted primarily from the Acquisitions. The Company's provision for income taxes was $3.1 million for the 1999 period, compared to $1.8 million for the 1998 period. These provisions reflect effective income tax rates of 43.5% for the 1999 period, compared to 43.8% for the 1998 period. As a result of the foregoing, the Company's net income was $4.1 million, or 5.5% of net operating revenue, for the three months ended March 31, 1999, compared to $2.3 million, or 4.8% of net operating revenue for the comparable period of 1998. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1999, the Company had working capital of $60.2 million, including cash and cash equivalents of $12.7 million. The ratio of current assets to current liabilities was 3.4 to 1.0 at March 31, 1999, and 3.5 to 1.0 at December 31, 1998. At March 31, 1999, total long-term obligations increased to $138.4 million from $134.3 million at December 31, 1998. The increase resulted primarily from working capital borrowings, offset by a decrease in capital lease obligations. Cash provided by operations was $13.3 million for the three months ended March 31, 1999. Cash used in investing activities was $6.9 million for the three months ended March 31, 1999, relating primarily to the Eunice acquisition and capital expenditures. Net cash provided by financing activities was $4.2 million for the three months ended March 31, 1999, primarily as a result of net borrowings on the revolving line of credit. 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 March 31, 1999, the Company had $133.2 million outstanding under its revolving line of credit and $123.0 million available. 13 16 Capital expenditures, excluding acquisitions for the three months ended March 31, 1999 and 1998, were $2.3 million and $2.5 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 Company expects to make capital expenditures in 1999 of approximately $18.0 million, exclusive of any acquisitions of businesses. Planned capital expenditures for 1999 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. IMPACT OF YEAR 2000 GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS The following discussion is designated as Year 2000 readiness disclosure for purposes of the Year 2000 Information Readiness and Disclosure Act. Some older computer programs and systems were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognizes a date using "00" as the year 1900 rather than the year 2000. Certain of the Company's computer hardware and software, facility equipment (e.g., communications equipment, environmental controls such as heating and air conditioning systems, and elevators), and medical equipment that are date sensitive, may contain programs with the Year 2000 problem. If uncorrected, the problem could result in computer system and program failures or equipment and medical device malfunctions that could result in a disruption of business operations or affect patient diagnosis and treatment. STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT, INCLUDING TIMETABLE FOR COMPLETION OF EACH REMAINING PHASE The Company's plan to resolve the Year 2000 issue involves the following four phases: assessment, remediation, testing, and implementation. The Company has replaced the majority of its key financial and operational systems as a part of its systems consolidation in the normal course of business. This replacement has been a planned approach during the last two years to enhance or better meet its functional business and operational requirements. In addition to the replacement program, some of the Company's software and hardware is being modified so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The Company is currently working with outside consultants, who have visited each of the owned hospitals to determine the depth of the problem as it relates to devices that are attached to the Company's information systems. The purpose is twofold: (i) They are testing the hospital computer networks to identify problem areas relative to the communications of the information system hardware, the network servers and various devices attached to the network. This phase is 14 17 focused on identifying conflict/problem areas and recommending solutions to address these problems; and (ii) They are evaluating each personal computer for hardware and software related Year 2000 issues. The result of this process will be a report that will document a physical layout of the network, any potential or existing network problems, and an inventory of each system with its potential Year 2000 problems. In the area of medical equipment, the Company is working with a consultant to identify issues impacting medical equipment items/systems. This process will be completed in three phases: (i) identification of medical equipment items/systems impacted by Year 2000 issues; (ii) evaluation of such medical equipment; and (iii) Year 2000 resolution. The Company has completed all phases of the process. Management believes that this process substantially addresses its Year 2000 issues. The Year 2000 resolution phase will be a continuous process throughout the remainder of 1999, as the Company's vendors reach Year 2000 compliance. NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE YEAR 2000 The Company relies heavily on third parties in operating its business. In addition to its reliance on software, hardware and other equipment vendors to verify Year 2000 compliance of their products, the Company also depends on (i) fiscal intermediaries that process claims and make payments on behalf of the Medicare program, (ii) insurance companies, HMOs and other private payors, (iii) utilities that provide electricity, water, natural gas and telephone services and (iv) vendors of medical supplies and pharmaceuticals used in patient care. As part of its Year 2000 strategy, the Company has been working with its major vendors and has received assurances such vendors are addressing the Year 2000 issue. The Company has received assurances from four of its largest vendors that their software modules are fully compliant with software releases completed by the end of 1998. At this point, there have been no identified problems associated with this portion of the systems. Failure of these third parties to resolve their Year 2000 issues could have a material adverse effect on the Company's results of operations and ability to provide health care services. The Company uses various third-party software products to perform electronic billing to Medicare, Medicaid, and certain other third-party payors. These electronic billing systems allow for a direct electronic interface with the computer systems of third-party payors, including Medicare and Medicaid. This direct interface allows the individual electronic bills to be edited on-line so that they can be successfully uploaded to the host system. In addition, certain Medicare intermediaries transmit remittance advice data back to the Company through these same electronic billing systems. The remittance advice data transmitted back to the Company determines the amount of payment that a particular hospital will receive for a particular remittance advice. In addition, most of the Company's hospitals receive electronic funds transfers from the Medicare intermediaries. 15 18 Reimbursement under the Medicare program is administered by HCFA. HCFA employs more than 60 carriers and intermediaries to process Medicare fee-for-service claims throughout the United States. There are several hundred different computer systems involved in the daily work of HCFA, its carriers and intermediaries. HCFA, under its internal Year 2000 compliance program, identified 99 mission critical systems, 25 that are directly managed by HCFA and 74 that are managed by outside carriers and intermediaries. These 99 systems contain more than 50 million lines of computer code that require re-writing to ensure Year 2000 compliance. In a public statement on its web page, HCFA has stated that the major HCFA forms, utilized for claims submission by the Company, are Year 2000 compliant. This includes both paper and electronic claims submission. There can be no assurance that HCFA's mission critical systems, which most directly affect the Company, will be compliant in time to prevent disruptions to the Medicare payments received by the Company. Moreover, HCFA has announced the delayed implementation of certain new regulations as well as the possible postponement of scheduled rate increases while its resources are re-directed towards Year 2000 compliance. While certain members of Congress have taken strong exception to HCFA's announcement to delay rate increases, it is possible that rate increases that were scheduled to take effect on October 1, 1999, could be delayed until December 31, 1999 or later. COSTS The Company is utilizing both internal and external resources to complete the Year 2000 modifications. The Company believes that the Year 2000-related remediation costs incurred through March 31, 1999 have not been material to its results of operations. The majority of the costs incurred to date related to Year 2000 were in the area of consulting services to assess the impact of Year 2000, and to inventory the existing information technology and medical equipment to determine the level of Year 2000 compliance. The costs of Year 2000 software compliance were included in standard software maintenance agreements with the Company's major vendors. No additional costs were incurred to modify this software over and above those amounts incurred as part of the normal business process. During 1999, the consulting services have continued relative to the assessment of the Year 2000 project. The Company incurred consulting costs related to medical equipment compliance of approximately $54,000 in the first quarter of 1999, and expects to incur costs of approximately $60,000 in the second quarter of 1999. Assessment costs related to information technology compliance were approximately $30,000 in the first quarter of 1999, and are expected to be approximately $50,000 in the second quarter of 1999. These costs will be expensed as incurred, and have been included in the Company's 1999 internal operating budget. Based upon a review of completed hospital assessments, the Company expects approximately $2,000,000 in remediation/replacement capital expenditures for both information technology and medical equipment. These funds are part of a contingency budget. There can be 16 19 no guarantee that actual costs and results will not differ materially from those anticipated. No significant information systems projects have been delayed due to the Year 2000 project. By utilizing external consultants for the assessments associated with Year 2000, the Company has achieved independent verification and validation processes to assure the reliability of risk and cost estimates. RISK AND CONTINGENCY PLANS Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of the Year 2000 program, but expects to complete the program no later than June 30, 1999. In the event that the Company does not complete any additional phases, the Company may be unable to diagnose or treat patients, bill for patient services or collect and apply payments from patients or third party payors. In addition, disruptions in the economy generally resulting from Year 2000 issues could materially adversely affect the Company. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. The Company believes that the most reasonably likely worst case Year 2000 scenario is that some of its material third party payors will not be Year 2000 compliant, and will have difficulty processing and paying the Company's bills, thereby possibly affecting the Company's cash flows. The Company intends to develop a contingency plan to address this scenario. It is expected that such a plan would involve establishing procedures whereby the Company would revert to manual billing processes. In addition, the plan would involve ensuring the Company's access to additional capital through, for example, its revolving credit facility. The Company intends to complete its initial contingency plan by June 30, 1999. Each of the Company's owned hospitals has a disaster plan that will be reviewed as a part of the Company's overall contingency planning process, to assure that each plan includes contingency planning for the Year 2000 issues. However, failure by third parties to resolve their own Year 2000 issues may render each hospital's contingency plan ineffective. The foregoing assessment is based on information currently available to the Company. The Company will revise its assessment as it continues to implement its Year 2000 strategy. The Company can provide no assurances that applications and equipment the Company believes to be Year 2000 compliant will not experience difficulties, or that the Company will not experience difficulties obtaining resources needed to make modifications to or replace the Company's affected systems and equipment. Failure by the Company or third parties on which it relies to resolve Year 2000 issues could have a material adverse effect on the Company's results of operations and its ability to provide health care services. Consequently, the Company can give no assurances that issues related to the Year 2000 will not have a material adverse effect on the Company's financial condition or results of operations. The Company has established and distributed a set of guidelines and strategies for each of its managed hospitals to use in evaluating and planning for making their facilities Year 2000 17 20 compliant. The Company intends to monitor the progress of the response by the hospitals it manages to the Year 2000 problem. The Company does not believe that it is responsible for ensuring Year 2000 compliance by its managed hospitals. Ultimately, responsibility for implementing the individual Year 2000 compliance plan at each managed hospital rests with each managed hospital's board; the Company can only implement the boards' recommendations at their direction. GENERAL The federal Medicare program accounted for approximately 61.8% of hospital patient days for the three months ended March 31, 1999. The state Medicaid programs accounted for approximately 9.1% of hospital patient days for the three months ended March 31, 1999. 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 state level, the Company expects continuing pressure to limit expenditures by governmental health care programs. The Balanced Budget Act of 1997 (the "1997 Act") imposed certain limitations on increases in the inpatient Medicare rates paid to acute care hospitals. 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 in increased 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 40.6% of gross patient service revenue for the three months ended March 31, 1999, and approximately 40.0% for the three months ended March 31, 1998. 18 21 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 92.9% of the Company's net operating revenue for the three months ended March 31, 1999, compared to 90.6% for the three months ended March 31, 1998. 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 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. 19 22 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 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 1997 Act; changes in Medicare and Medicaid reimbursement levels; the Company's ability to implement successfully its acquisition and development strategy and changes in such strategy; Year 2000 compliance; 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK During the three months ended March 31, 1999, there were no material changes in the quantitative and qualitative disclosures about market risks presented in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 20 23 PART II OTHER INFORMATION 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 2000 Annual Meeting of Shareholders will be March 2, 2000, 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 the Company 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 (a) 3.2 Amended and Restated Bylaws of Province (a) 27 Financial Data Schedule (for SEC use only)
- ------------------------- (a) Incorporated by reference to the Exhibits filed with the Registrant's Registration Statement on Form S-1, Registration No. 333-34421 (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the three months ended March 31, 1999. 21 24 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: May 17, 1999 By: /s/ BRENDA B. RECTOR -------------------- ------------------------------- Brenda B. Rector Vice President and Controller 22 EX-27 2 FINANCIAL DATA SCHEDULE
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-31-1999 JAN-01-1999 MAR-31-1999 1 12,656 0 61,712 4,782 7,501 85,504 130,056 18,226 354,181 25,265 138,357 0 0 157 173,467 354,181 72,483 73,247 0 58,801 0 4,676 2,575 7,195 3,130 4,065 0 0 0 4,065 0.26 0.25
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