<PAGE> 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
<PAGE> 2
PART I.
FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
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
</TABLE>
<PAGE> 3
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(Unaudited) (Note 1)
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes.
1
<PAGE> 4
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
------- -------
<S> <C> <C>
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
======= ========
</TABLE>
See accompanying notes.
2
<PAGE> 5
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
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 $ --
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 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
<PAGE> 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
<PAGE> 8
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
--------- ---------
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
------- --------
<S> <C> <C>
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
======= =========
</TABLE>
7
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
Percentage
Increase (Decrease)
Three Months Ended March 31, of Dollar Amounts
---------------------------- -----------------
1999 1998
---- ----
<S> <C> <C> <C>
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%
===== =====
</TABLE>
(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
<PAGE> 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.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
-------- ------
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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
<PAGE> 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
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
<S> <C>
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)
</TABLE>
- -------------------------
(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
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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<CASH> 12,656
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<RECEIVABLES> 61,712
<ALLOWANCES> 4,782
<INVENTORY> 7,501
<CURRENT-ASSETS> 85,504
<PP&E> 130,056
<DEPRECIATION> 18,226
<TOTAL-ASSETS> 354,181
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0
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<COMMON> 157
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