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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2001 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 AUGUST 6, 2001
COMMON STOCK, $.01 PAR VALUE 31,494,922
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets
June 30, 2001 and December 31, 2000.........................1
Condensed Consolidated Statements of Income
Three Months Ended June 30, 2001 and 2000...................2
Condensed Consolidated Statements of Income
Six Months Ended June 30, 2001 and 2000.....................3
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2001 and 2000.....................4
Notes to Condensed Consolidated Financial Statements............5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................21
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
June 30, December 31,
2001 2000
--------- ---------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 7,447 $ --
Accounts receivable, less allowance for doubtful accounts
of $24,050 in 2001 and $8,321 in 2000 87,073 89,208
Inventories 12,395 11,805
Prepaid expenses and other 12,526 7,282
--------- ---------
Total current assets 119,441 108,295
Property, plant and equipment, net 226,636 210,277
Other assets:
Cost in excess of net assets acquired 183,525 183,331
Other assets 28,012 28,949
--------- ---------
Total assets $ 557,614 $ 530,852
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,197 $ 12,359
Accrued salaries and benefits 15,940 14,736
Accrued expenses 11,402 15,655
Current maturities of long-term obligations 1,972 2,179
--------- ---------
Total current liabilities 41,511 44,929
Long-term obligations, less current maturities 162,875 162,086
Other liabilities 9,852 7,343
Minority interest 1,949 1,780
Stockholders' equity:
Common stock - $0.01 par value; 50,000,000
shares authorized; issued and outstanding
31,482,094 and 30,908,588 shares at June 30, 2001
and December 31, 2000, respectively 315 309
Additional paid-in-capital 284,597 273,858
Accumulated other comprehensive loss (272) --
Retained earnings 56,787 40,547
--------- ---------
Total stockholders' equity 341,427 314,714
--------- ---------
Total liabilities and stockholders' equity $ 557,614 $ 530,852
========= =========
See accompanying notes.
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended June 30,
---------------------------
2001 2000
-------- --------
Revenue:
Net patient service revenue $118,556 $111,226
Management and professional services 2,227 3,132
Reimbursable expenses 1,395 1,608
Other 1,350 1,869
-------- --------
Net operating revenue 123,528 117,835
Expenses:
Salaries, wages and benefits 47,607 44,554
Reimbursable expenses 1,395 1,608
Purchased services 11,942 12,256
Supplies 13,399 14,059
Provision for doubtful accounts 11,893 11,485
Other operating expenses 12,823 11,445
Rentals and leases 1,879 1,828
Depreciation and amortization 6,905 6,700
Interest expense 2,142 4,198
Minority interest 71 18
Loss on sale of assets 141 12
-------- --------
Total expenses 110,197 108,163
-------- --------
Income before provision for income taxes 13,331 9,672
Income taxes 5,599 4,111
-------- --------
Net income $ 7,732 $ 5,561
======== ========
Net income per common share:
Basic $ 0.25 $ 0.19
======== ========
Diluted $ 0.24 $ 0.18
======== ========
See accompanying notes.
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Six Months Ended June 30,
-------------------------
2001 2000
-------- --------
Revenue:
Net patient service revenue $235,442 $214,639
Management and professional services 4,863 6,271
Reimbursable expenses 2,876 3,318
Other 2,783 2,708
-------- --------
Net operating revenue 245,964 226,936
Expenses:
Salaries, wages and benefits 94,562 88,760
Reimbursable expenses 2,876 3,318
Purchased services 23,124 22,748
Supplies 27,174 26,411
Provision for doubtful accounts 22,812 19,554
Other operating expenses 25,117 21,245
Rentals and leases 3,608 3,631
Depreciation and amortization 13,587 13,033
Interest expense 4,764 9,410
Minority interest 169 53
Loss on sale of assets 171 13
-------- --------
Total expenses 217,964 208,176
-------- --------
Income before provision for income taxes 28,000 18,760
Income taxes 11,760 7,973
-------- --------
Net income $ 16,240 $ 10,787
======== ========
Net income per common share:
Basic $ 0.52 $ 0.41
======== ========
Diluted $ 0.50 $ 0.39
======== ========
See accompanying notes.
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Six Months Ended June 30,
---------------------------
2001 2000
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 26,742 $ 14,926
INVESTING ACTIVITIES
Purchase of property, plant and equipment (28,321) (18,376)
Purchase of hospitals -- (31,712)
--------- ---------
Net cash used in investing activities (28,321) (50,088)
FINANCING ACTIVITIES
Proceeds from long-term debt 49,433 84,532
Repayments of debt (48,851) (139,315)
Issuance of common stock 8,444 5,579
Proceeds from stock offering -- 94,784
Other -- 41
--------- ---------
Net cash provided by financing activities 9,026 45,621
--------- ---------
Net increase in cash and cash equivalents 7,447 10,459
Cash and cash equivalents at beginning of period -- --
--------- ---------
Cash and cash equivalents at end of period $ 7,447 $ 10,459
========= =========
ACQUISITIONS
Fair value of assets acquired $ -- $ 35,697
Liabilities assumed -- (3,985)
--------- ---------
Cash paid $ -- $ 31,712
========= =========
See accompanying notes.
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2001
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. Interim results
are not necessarily indicative of results that may be expected for the full
year. In the opinion of management, the accompanying interim financial
statements contain all material adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position,
results of operations and cash flows of Province Healthcare Company (the
"Company").
The balance sheet at December 31, 2000, has been derived from the
audited consolidated financial statements at that date, but does not include all
of the financial information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements.
On September 28, 2000, the Company completed a three-for-two stock
split in the form of a 50% common stock dividend to shareholders of record on
September 15, 2000. All historical references in this document to transactions
in the common stock and earnings per share data have been restated to reflect
the stock split.
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, 2000.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, effective
for fiscal years beginning after December 15, 2001. Under the new rules,
goodwill and indefinite lived intangible assets will no longer be amortized, but
will be subject to annual impairment tests. Other intangible assets will
continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of 2002. Application of
the nonamortization provisions of
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED)
SFAS No. 142 is expected to result in an increase in net income of approximately
$4.4 million ($0.13 per share) per year, based upon the Company's 2001 projected
net income and diluted shares. During 2002, the Company will perform the first
of the required impairment tests of goodwill and indefinite lived intangible
assets as of January 1, 2002 and has not yet determined what the effect of these
tests will be on the earnings and financial position of the Company.
3. ACQUISITIONS AND DIVESTITURES
ENNIS REGIONAL HOSPITAL
In February 2000, the Company acquired, through a long-term capital
lease agreement, the assets and business of the City of Ennis Hospital in Ennis,
Texas. The hospital had been closed prior to its acquisition by the Company and
was reopened in April 2000.
BOLIVAR MEDICAL CENTER
In April 2000, the Company acquired, through a long-term capital lease
agreement, the assets and business of Bolivar Medical Center in Cleveland,
Mississippi.
OJAI VALLEY COMMUNITY HOSPITAL
In October 2000, the Company sold substantially all of the assets of
Ojai Valley Community Hospital, a 110-bed general acute-care facility located in
Ojai, California, to the Ojai Valley Community Hospital Foundation.
GENERAL HOSPITAL
In December 2000, the Company completed the sale of substantially all
of the assets of General Hospital, a 75-bed acute-care hospital located in
Eureka, California, to St. Joseph Health System.
OTHER INFORMATION
In accordance with its stated policy, management of the Company
evaluates all acquisitions independently to determine the appropriate
amortization period for cost in excess of net assets acquired. Each evaluation
includes an analysis of factors such as historic and projected financial
performance, evaluation of the estimated useful lives of buildings and fixed
assets acquired, the indefinite lives of certificates of need and licenses
acquired, the competition within local markets, and lease terms where
applicable.
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED)
The foregoing acquisitions were accounted for using the purchase method
of accounting. The operating results of the acquired companies have been
included in the accompanying consolidated statements of income from the
respective dates of acquisition.
4. LONG-TERM OBLIGATIONS
On March 31, 2001, the $295.0 million revolving credit facility was
permanently reduced to $270.0 million. On June 30, 2001, the revolving credit
facility was permanently reduced to $245.0 million. The aggregate reductions
will continue quarterly until March 31, 2003.
At June 30, 2001, the Company had $6.1 million outstanding under its
revolving credit facility and $198.0 million available, which includes
availability under the end-loaded lease facility that can be converted to
revolver availability at the Company's option.
5. COMPREHENSIVE INCOME
The following table presents the components of comprehensive income,
net of related taxes (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income $ 7,732 $ 5,561 $ 16,240 $ 10,787
Net change in fair value of interest
rate swap 15 -- (272) --
-------- -------- -------- --------
Comprehensive income $ 7,747 $ 5,561 $ 15,968 $ 10,787
======== ======== ======== ========
6. INCOME TAXES
The income tax provision for the three and six months ended June 30,
2001 and 2000, differs from the statutory income tax computation primarily due
to permanent differences and the provision for state income taxes.
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED)
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
------- ------- ------- -------
Numerator:
Net income $ 7,732 $ 5,561 $16,240 $10,787
======= ======= ======= =======
Denominator:
Denominator for basic income per share--
Weighted-average shares 31,324 29,433 31,191 26,544
Effective of dilutive securities--
Employee stock options 1,293 1,103 1,292 920
------- ------- ------- -------
Denominator for diluted income per share--
Adjusted weighted average shares 32,617 30,536 32,483 27,464
======= ======= ======= =======
Basic net income per share $ 0.25 $ 0.19 $ 0.52 $ 0.41
======= ======= ======= =======
Diluted net income per share $ 0.24 $ 0.18 $ 0.50 $ 0.39
======= ======= ======= =======
During the three-month period ended June 30, 2001, employees exercised
options to acquire 183,660 shares of common stock at an average exercise price
of $18.81 per share. During the six-month period ended June 30, 2001, employees
exercised options to acquire 385,664 shares of common stock at an average
exercise price of $16.72 per share, and issued 189,388 shares of common stock at
a price of $10.77 per share under its Employee Stock Purchase Plan. There were
7% and 18% more diluted shares outstanding in the three and six-month periods
ended June 30, 2001, respectively.
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED)
8. CONTINGENCIES
Management continually evaluates contingencies based on the best
available evidence and believes that adequate provision for losses has been
provided to the extent necessary. In the opinion of management, the ultimate
resolution of the following contingencies will not have a material effect on the
Company's results of operations or financial position.
GENERAL AND PROFESSIONAL LIABILITY RISKS
Effective January 1, 2001, the Company purchased a professional
liability unlimited claim reporting policy. This coverage is subject to a
$50,000 deductible per occurrence and limited to an annual deductible cap of
$500,000. The policy provides coverage up to $51,000,000 for claims incurred
during the annual policy term.
LITIGATION
The Company currently is, and from time to time is expected to be,
subject to claims and suits arising in the ordinary course of business.
NET PATIENT SERVICE REVENUE
Final determination of amounts earned under the Medicare and Medicaid
programs often occurs in subsequent periods because of audits by the programs,
rights of appeal and the application of numerous technical provisions.
Differences between original estimates and subsequent revisions (including
settlements) are included in the consolidated statements of income in the period
in which revisions are made, and resulted in minimal adjustments for the
three-month and six-month periods ended June 30, 2001 and 2000.
FINANCIAL INSTRUMENTS
Interest rate swap agreements are used to manage the Company's interest
rate exposure under the credit facility. In 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. In January
2001, the Company terminated $16.5 million of the $45.0 million swap agreement,
leaving a notional amount of $28.5 million converted to fixed-rate borrowings.
The Company secured a 5.625% fixed interest rate on the swap agreement. This
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED)
agreement exposes the Company to credit losses in the event of non-performance
by the counterparty to the financial instrument. The Company anticipates that
the counterparty will fully satisfy its obligations under the contract.
9. SUBSEQUENT EVENT
On July 2, 2001, the Company acquired the assets and business of the
214-bed Selma Baptist Hospital in Selma, Alabama, for approximately $31.0
million, exclusive of working capital. To finance the acquisition, the Company
borrowed $34.0 million under its revolving credit facility. In accordance with
SFAS No. 141 and No. 142, the acquisition will be accounted for as a purchase
business combination, and any goodwill resulting from the acquisition will not
be amortized. The results of Selma Baptist Hospital will be included in the
operations of the Company from the purchase date forward.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following along with the Condensed Consolidated
Financial Statements and accompanying notes.
OVERVIEW
We are a healthcare services company focused on acquiring and operating
hospitals in attractive non-urban markets in the United States. As of June 30,
2001, we owned and operated 14 general acute care hospitals in nine states with
a total of 1,393 licensed beds, and managed 36 hospitals in 13 states, with a
total of 2,981 licensed beds.
Our owned and leased hospitals accounted for 97.0% and 95.6% of our net
operating revenue in the three months ended June 30, 2001 and 2000,
respectively, and 96.8% and 95.6% of our net operating revenue in the six months
ended June 30, 2001 and 2000, respectively.
IMPACT OF ACQUISITIONS AND DIVESTITURES
2000 Acquisitions
In February 2000, we acquired through a long-term capital lease
agreement, the assets and business of the 45-bed City of Ennis Hospital from the
City of Ennis, Texas. The aggregate rental payments required under the
thirty-year lease total $3.0 million, including a prepayment of $2.0 million. To
finance the lease prepayment, we borrowed $2.0 million under our revolving
credit facility. The hospital had been closed prior to our acquisition, and we
reopened the hospital in April 2000.
In April 2000, we acquired, through a long-term capital lease
agreement, the assets and business of the 165-bed Bolivar Medical Center in
Cleveland, Mississippi, from Bolivar County. Aggregate rental payments required
under the forty-year lease total $26.4 million, and were prepaid at the date of
the acquisition. To finance the prepaid lease payment and the purchase of
working capital, we borrowed $24.6 million under our revolving credit facility.
2001 Acquisitions
In July 2001, we acquired the assets and business of the 214-bed Selma
Baptist Hospital in Selma, Alabama, for approximately $31.0 million, exclusive
of working capital. To finance the acquisition and the purchase of working
capital, we borrowed $34.0 million under our revolving credit facility.
The acquisitions described above were accounted for as purchase
business combinations, and the results of operations of the hospitals have been
or will be included in our results of operations from the purchase dates
forward. The June 30, 2001 results include City of Ennis Hospital and Bolivar
Medical Center for the entire period. The June 30, 2000 results include
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four and one-half months of start-up operations for City of Ennis Hospital and
two and one-half months of operations for Bolivar Medical Center.
Due to the relatively small number of hospitals owned and leased by us,
each hospital acquisition can affect materially our overall operating margin.
Upon the acquisition of a hospital, we typically take a number of steps to lower
operating costs. The impact of such actions may be offset by 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 we make additional hospital
acquisitions, we expect that this effect will be mitigated by the expanded
financial base of existing hospitals and the allocation of corporate overhead
among a larger number of hospitals.
Divestitures
In October 2000, we sold substantially all of the assets of Ojai Valley
Community Hospital, a 110-bed general acute-care facility located in Ojai,
California, to the Ojai Valley Community Hospital Foundation. In December 2000,
we completed the sale of substantially all of the assets of General Hospital, a
75-bed acute-care hospital located in Eureka, California, to St. Joseph Health
System. The June 30, 2000 results include six months of operations for the sold
hospitals.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, information
expressed as a percentage of net operating revenue. Such information has been
derived from our unaudited Condensed Consolidated Statements of Income included
elsewhere in this report. The results of operations for the periods presented
include hospitals from their acquisition dates, as discussed above.
Three Months Ended June 30, Percentage
--------------------------------------- Increase(Decrease)
2001 2000 of Dollar Amounts
----------------- ----------------- -----------------
Net operating revenue 100.0% 100.0% 4.8%
Operating expenses (1) (81.7) (82.5) 3.8
---------- ----------
EBITDA (2) 18.3 17.5 9.7
Depreciation and amortization (5.6) (5.7) 3.1
Interest (1.7) (3.6) (49.0)
Other (0.1) - 294.4
---------- ---------
Income before income taxes 10.9 8.2 37.8
Provision for income taxes (4.6) (3.5) 36.2
---------- ---------
Net income 6.3% 4.7% 39.0%
========= =========
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Six Months Ended June 30, Percentage
--------------------------------------- Increase(Decrease)
2001 2000 of Dollar Amounts
----------------- ----------------- -----------------
Net operating revenue 100.0% 100.0% 8.4%
Operating expenses (1) (81.0) (81.8) 7.3
---------- ----------
EBITDA (2) 19.0 18.2 13.1
Depreciation and amortization (5.5) (5.7) 4.3
Interest (1.9) (4.1) (49.4)
Other (0.1) (0.1) 218.9
---------- ----------
Income before income taxes 11.5 8.3 49.3
Provision for income taxes (4.9) (3.5) 47.5
---------- ---------
Net income 6.6% 4.8% 50.6%
========= =========
(1) Operating expenses represent expenses before interest, minority
interest, loss on sale of assets, income taxes, depreciation and
amortization expense.
(2) EBITDA represents the sum of income before income taxes, interest,
minority interest, depreciation and amortization, and loss on sale of
assets. We understand that industry analysts generally consider EBITDA
to be one measure of the financial performance of a company that is
presented to assist investors in analyzing the operating performance of
the Company and its ability to service debt. We believe that an
increase in EBITDA level is an indicator of our improved ability to
service existing debt, to sustain potential future increases in debt
and to satisfy capital requirements. However, EBITDA is not a measure
of financial performance under accounting principles generally accepted
in the United States and should not be considered an alternative to net
income as a measure of operating performance or to cash flows from
operating, investing, or financing activities as a measure of
liquidity. Given that EBITDA is not a measurement determined in
accordance with accounting principles generally accepted in the United
States and is thus susceptible to varying calculations, EBITDA, as
presented, may not be comparable to other similarly titled measures of
other companies.
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SELECTED OPERATING STATISTICS - OWNED OR LEASED HOSPITALS
The following table sets forth certain operating statistics for our
company's owned or leased hospitals for each of the periods presented.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ -----------------------------------
2001 2000 2001 2000
---------------- ----------------- ---------------- ----------------
CONSOLIDATED HOSPITALS:
Number of hospitals at end of period 14 16 14 16
Licensed beds at end of period 1,393 1,560 1,393 1,560
Beds in service at end of period 1,291 1,401 1,291 1,401
Inpatient admissions 12,501 11,684 25,914 22,633
Patient days 53,963 54,547 110,800 106,106
Adjusted patient days 88,552 95,119 181,232 182,975
Average length of stay (days) 4.3 4.7 4.3 4.7
Occupancy rates (average licensed beds) 42.6% 38.4% 43.9% 37.6%
Occupancy rates (average beds in service) 45.9% 42.8% 47.4% 41.8%
Gross inpatient revenue $ 148,217,091 $128,442,469 $297,324,707 $255,655,975
Gross outpatient revenue 94,987,243 95,480,596 188,961,118 185,098,311
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Net operating revenue was $123.5 million for the three months ended
June 30, 2001, compared to $117.8 million for the comparable period of 2000, an
increase of $5.7 million or 4.8%. We divested two hospitals in the fourth
quarter of 2000, which adversely impacted total revenue comparisons. Excluding
those two hospitals from both quarters, net operating revenues increased 16.7%
in the second quarter of 2001, compared to the same quarter in the prior year.
Cost report settlements and the filing of cost reports resulted in minimal
revenue adjustments for the three months ended June 30, 2001 and 2000. Net
patient service revenue generated by hospitals owned during both periods
increased $17.4 million, or 18.7%, resulting from inpatient volume increases,
new services and price increases.
Operating expenses were $100.9 million, or 81.7% of net operating
revenue, for the three months ended June 30, 2001, compared to $97.2 million, or
82.5% of net operating revenue, for the comparable period of 2000. Salaries and
benefits, as a percentage of revenue, increased to 38.5% for the three months
ended June 30, 2001, compared to 37.8% in the second quarter of 2000, as a
result of shifting expense from purchased services. The provision for doubtful
accounts decreased to 9.6% of net operating revenue in 2001 from 9.7% of net
operating revenue in 2000.
EBITDA was $22.6 million, or 18.3% of net operating revenue, for the
three months ended June 30, 2001, compared to $20.6 million, or 17.5% of net
operating revenue, for the
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comparable period of 2000, primarily as a result of improved operations at
hospitals owned during both periods.
Depreciation and amortization expense was $6.9 million, or 5.6% of net
operating revenue, for the three months ended June 30, 2001, compared to $6.7
million, or 5.7% of net operating revenue for the comparable period of 2000. The
increase in depreciation and amortization resulted primarily from capital
expenditures at hospitals owned during both periods.
Interest expense was $2.1 million for the three months ended June 30,
2001, compared to $4.2 million for the comparable period of 2000, a decrease of
$2.1 million or 49.0%. This was a result of our using the net proceeds of the
common stock offering in April 2000 to reduce the amount of indebtedness
outstanding under the revolving credit facility. Also, proceeds from the sale of
our 4 1/2% convertible subordinated notes were used to reduce the higher-rate
amount of indebtedness outstanding under the revolving credit facility.
Income before provision for income taxes was $13.3 million for the
three months ended June 30, 2001, compared to $9.7 million for the comparable
period of 2000, an increase of $3.6 million or 37.8%.
Our provision for income taxes was $5.6 million for the three months
ended June 30, 2001, compared to $4.1 million for the comparable period of 2000.
These provisions reflect effective income tax rates of 42.0% for the 2001
period, compared to 42.5% for the 2000 period. As a result of the foregoing, our
net income was $7.7 million, or 6.3% of net operating revenue, for the three
months ended June 30, 2001, compared to $5.6 million, or 4.7% of net operating
revenue for the comparable period of 2000.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Net operating revenue was $246.0 million for the six months ended June
30, 2001, compared to $226.9 million for the comparable period of 2000, an
increase of $19.0 million or 8.4%. Excluding the two hospitals sold in the
fourth quarter of 2000, net operating revenues increased 20.3% in the six months
ended June 30, 2001, compared to the same period of 2000. Cost report
settlements and the filing of cost reports resulted in minimal revenue
adjustments for the six months ended June 30, 2001 and 2000. Net patient service
revenue generated by hospitals owned during both periods increased $31.9
million, or 17.3%, resulting from inpatient volume increases, new services and
price increases.
Operating expenses were $199.3 million, or 81.0% of net operating
revenue, for the six months ended June 30, 2001, compared to $185.7 million, or
81.8% of net operating revenue, for the comparable period of 2000. The provision
for doubtful accounts increased to 9.3% of net operating revenue in 2001 from
8.6% of net operating revenue in 2000.
EBITDA was $46.7 million, or 19.0% of net operating revenue, for the
six months ended June 30, 2001, compared to $41.3 million, or 18.2% of net
operating revenue, for the comparable period of 2000, primarily as a result of
improved operations at hospitals owned during both periods.
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Depreciation and amortization expense was $13.6 million, or 5.5% of net
operating revenue, for the six months ended June 30, 2001, compared to $13.0
million, or 5.7% of net operating revenue for the comparable period of 2000. The
increase in depreciation and amortization resulted primarily from capital
expenditures at hospitals owned during both periods.
Interest expense was $4.8 million for the six months ended June 30,
2001, compared to $9.4 million for the comparable period of 2000, a decrease of
$4.6 million or 49.4%. This was a result of our using the net proceeds of the
common stock offering in April 2000 to reduce the amount of indebtedness
outstanding under the revolving credit facility. Also, proceeds from the sale of
our 4 1/2% convertible subordinated notes were used to reduce the higher-rate
amount of indebtedness outstanding under the revolving credit facility.
Income before provision for income taxes was $28.0 million for the six
months ended June 30, 2001, compared to $18.8 million for the comparable period
of 2000, an increase of $9.2 million or 49.3%.
Our provision for income taxes was $11.8 million for the six months
ended June 30, 2001, compared to $8.0 million for the comparable period of 2000.
These provisions reflect effective income tax rates of 42.0% for the 2001
period, compared to 42.5% for the 2000 period. As a result of the foregoing, our
net income was $16.2 million, or 6.6% of net operating revenue, for the six
months ended June 30, 2001, compared to $10.8 million, or 4.8% of net operating
revenue for the comparable period of 2000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, we had working capital of $77.9 million, including
cash and cash equivalents of $7.4 million. The ratio of current assets to
current liabilities was 2.9 to 1.0 at June 30, 2001, and 2.4 to 1.0 at December
31, 2000.
Cash provided by operations was $26.7 million for the six months ended
June 30, 2001. Cash used in investing activities was $28.3 million for the six
months ended June 30, 2001, relating to capital expenditures. Net cash provided
by financing activities was $9.0 million for the six months ended June 30, 2001,
primarily as a result of borrowings under our revolving credit facility and
issuance of common stock through exercises of stock options and through the
Employee Stock Purchase Plan.
The allowance for doubtful accounts increased to $24.1 million at June
30, 2001, from $8.3 million at December 31, 2000, an increase of $15.7 million,
or 189.0%. The allowance for doubtful accounts as a percent of accounts
receivable, net of contractuals, increased to 21.6% at June 30, 2001, compared
to 8.5% at December 31, 2000. This is the result of a change in the timing of
write-offs of fully-reserved patient accounts receivable to conform to industry
practice. Accounts are now written off when they are returned from the
collection agency, as opposed to the prior practice of writing off the account
when it was sent to the collection agency. There has been no change in our
policy related to the provision for bad debts.
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Total long-term obligations, less current maturities, increased to
$162.9 million at June 30, 2001, from $162.1 million at December 31, 2000. The
increase resulted primarily from additional borrowings under the revolving
credit facility, offset by capital lease payments.
We intend to acquire additional acute care facilities, and are actively
seeking out such acquisitions. There can be no assurance that we will not
require additional debt or equity financing for any particular acquisition.
Also, we continually review our capital needs and financing opportunities and
may seek additional equity or debt financing for our acquisition program or
other needs.
Capital expenditures, excluding acquisitions, for the six months ended
June 30, 2001 and 2000, were $28.3 million and $18.4 million, respectively,
inclusive of construction projects. Capital expenditures for the owned hospitals
may vary from year to year depending on facility improvements and service
enhancements undertaken by the hospitals. We expect to make total capital
expenditures in 2001 of approximately $53.2 million, exclusive of any
acquisitions of businesses. Planned capital expenditures for 2001 consist
principally of capital improvements to owned and leased hospitals. We expect to
fund these expenditures through cash provided by operating activities and
borrowings under our revolving credit facility.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, effective
for fiscal years beginning after December 15, 2001. Under the new rules,
goodwill and indefinite lived intangible assets will no longer be amortized, but
will be subject to annual impairment tests. Other intangible assets will
continue to be amortized over their useful lives.
We will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of SFAS No. 142 is expected to result in an increase
in net income of approximately $4.4 million ($0.13 per share) per year, based
upon our 2001 projected net income and diluted shares. During 2002, we will
perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of January 1, 2002 and have not yet determined what
the effect of these tests will be on our earnings and financial position.
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
Our interest expense is sensitive to changes in the general level of
interest rates. To mitigate the impact of fluctuations in interest rates, we
generally maintain 50% - 75% of our debt at a fixed rate, either by borrowings
on a long-term basis or entering into an interest rate swap. At June 30, 2001,
approximately 100% of our outstanding debt and end-loaded lease facility amounts
were effectively at a fixed rate. Our interest rate swap contract allows us to
periodically exchange fixed rate and floating rate payments over the life of the
agreement. Floating-rate payments are based on LIBOR and fixed-rate payments are
dependent upon market levels at the time the interest rate swap was consummated.
Our interest rate swap is a cash flow hedge, which
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effectively converts an aggregate notional amount of $28.5 million of floating
rate borrowings to fixed rate borrowings at June 30, 2001. Our policy is not to
hold or issue derivatives for trading purposes and to avoid derivatives with
leverage features. We are exposed to credit losses in the event of
nonperformance by the counterparty to the financial instrument. We anticipate
that the counterparty will fully satisfy its obligations under the contract.
GENERAL
The Medicare program accounted for approximately 54.9% and 55.1% of
hospital patient days for the three and six month periods ended June 30, 2001,
respectively. The Medicaid programs accounted for approximately 17.9% and 18.3%
of hospital patient days for the three and six month periods ended June 30,
2001, respectively. The payment rates under the Medicare program for inpatients
are prospective, based upon the diagnosis of a patient. The Medicare payment
rate increases historically have been less than actual inflation.
Both federal and state legislatures are continuing to scrutinize the
healthcare industry for the purpose of reducing heath care costs. While we are
unable to predict what, if any, future health reform legislation may be enacted
at the federal or state level, we expect continuing pressure to limit
expenditures by governmental healthcare programs. The Balanced Budget Act of
1997 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, but now are reimbursed on prospective
payment systems as mandated by the Balanced Budget Act of 1997. The Balanced
Budget Act of 1997 also includes a managed care option that could direct
Medicare patients to managed care organizations. Further changes in the Medicare
or Medicaid programs and other proposals to limit healthcare spending could have
a material adverse effect on the healthcare industry and our company.
Some of our 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
affected negatively by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative health care delivery services
for less acutely ill patients. We expect 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 the ability of our
hospitals to maintain their current rate of net revenue growth and operating
margins.
We expect the industry trend in increased outpatient services to
continue because of the increased focus on managed care and advances in
technology. Outpatient revenue of our owned or leased hospitals was
approximately 39.1% and 38.9% of gross patient service revenue for the three and
six month periods ended June 30, 2001, respectively, compared to 42.6% and 42.0%
of gross patient service revenue for the three and six month periods ended June
30, 2000.
The billing and collection of accounts receivable by hospitals are
complicated by:
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o the complexity of the Medicare and Medicaid regulations;
o increases in managed care;
o hospital personnel turnover;
o the dependence of hospitals on physician documentation of
medical records; and
o the subjective judgment involved.
These factors, or any combination of them, may impact our ability to
bill and collect our accounts receivable at the rates we have anticipated, which
could negatively affect our future cash flows.
The federal government and a number of states are 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 we believe that we are in material compliance with such laws, a
determination that we have violated such laws, or even the public announcement
that we were being investigated concerning possible violations, could have a
material adverse effect on our company.
Our historical financial trend has been impacted favorably by our
success in acquiring acute care hospitals. While we believe that trends in the
healthcare industry described above may create possible future acquisition
opportunities, there can be no assurances that we can continue to maintain our
current growth rate through hospital acquisitions and successfully integrate the
hospitals into our system.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that affect the amounts reported in our financial statements.
Resolution of matters, for example, final settlements with third party payors,
may result in changes from those estimates. The timing and amount of such
changes in estimates may cause fluctuations in our quarterly or annual operating
results.
FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. Such statements may
include words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe" and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance. Any or all of
our forward-looking statements in this report may turn out to be wrong. They can
be affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Many factors mentioned in our discussion in this report will
be important in determining future results. Consequently, no forward-looking
statement
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can be guaranteed. Actual future results may vary materially. Factors that may
cause our plans, expectations, future financial condition and results to change
include, but are not limited to:
o the highly competitive nature of the healthcare business;
o the efforts of insurers, healthcare providers and others to
contain healthcare costs;
o possible changes in the levels and terms of reimbursement for
our charges by government programs, including Medicare and
Medicaid or other third-party payors;
o changes in or failure to comply with federal, state or local
laws and regulations affecting the healthcare industry;
o the possible enactment of federal or state healthcare reform;
o the departure of key members of our management;
o claims and legal actions relating to professional liability;
o our ability to implement successfully our acquisition and
development strategy;
o our ability to attract and retain qualified personnel and
recruit physicians;
o potential federal or state investigations;
o fluctuations in the market value of our common stock or notes;
o changes in accounting principles generally accepted in the
United States; and
o changes in demographic, general economic and business
conditions, both nationally and in the regions in which we
operate.
Except as required by law, we undertake no obligation to publicly
update any forward-looking statements, whether as a result of new information,
future events or otherwise. We advise you, however, to consult any additional
disclosures we make in our Form 10-Q, 8-K and 10-K reports to the Securities and
Exchange Commission, as well as the discussion of risks and uncertainties under
the caption "Risk Factors" contained in our Registration Statement on Form S-3,
filed with the Securities and Exchange Commission on January 24, 2001
(Commission File No. 333-54192), and any amendments or supplements to such
registration statement. These are factors that we think could cause our actual
results to differ materially from expected results. Other factors besides those
listed here also could affect us adversely. This discussion is provided as
permitted by the Private Securities Litigation Reform Act of 1995.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the three and six-month periods ended June 30, 2001, there were
no material changes in the quantitative and qualitative disclosures about market
risks presented in our Annual Report on Form 10-K for the year ended December
31, 2000. Our only derivative instrument relates to an interest rate swap
agreement.
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PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On Wednesday, May 23, 2001, we held the Province Healthcare Company
2001 Annual Meeting of Shareholders. At such meeting, the shareholders voted on
the following two proposals:
First, the shareholders voted on the election of six nominees to the
Board of Directors. The incumbent Board of Directors, consisting of Martin S.
Rash, Richard D. Gore, Joseph P. Nolan, A.E. Brim, Winfield C. Dunn and David L.
Steffy, determined that the size of the Board of Directors be set at six
members. The Board of Directors then nominated Martin S. Rash, Richard D. Gore,
Joseph P. Nolan, A.E. Brim, Winfield C. Dunn and David L. Steffy for election at
such Annual Meeting to serve until the 2002 Annual Meeting of Shareholders. The
directors were elected by the following vote:
Withhold
Name For Against Abstain Authority
- ---- --- ------- ------- ---------
Martin S. Rash 24,899,736 0 0 1,023,463
Richard D. Gore 24,899,699 0 0 1,023,500
Joseph P. Nolan 25,884,094 0 0 39,105
A.E. Brim 25,884,094 0 0 39,105
Winfield C. Dunn 25,883,894 0 0 39,305
David L. Steffy 25,883,894 0 0 39,305
Second, the shareholders voted to approve the appointment of Ernst &
Young LLP as independent auditors of our company and its subsidiaries for the
fiscal year ending December 31, 2001. At the Annual Meeting, the shareholders
voted to ratify the appointment of Ernst & Young LLP, with 25,789,473 votes for,
128,666 votes against and 5,060 abstentions.
ITEM 5. OTHER INFORMATION
The deadline for delivering your notice of a shareholder proposal,
other than a proposal to be included in the proxy statement, for the 2002 Annual
Meeting of Shareholders will be March 11, 2002, pursuant to Rule 14a-4 under the
Securities Exchange Act of 1934. The persons named as proxies in the proxy
statement may exercise discretionary voting authority with respect to any matter
that is not submitted to us by such date.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Exhibits
3.1 Amended and Restated Certificate of Incorporation of
Province Healthcare Company, as filed with the
Delaware Secretary of State on June 16, 2000 (a)
3.2 Amended and Restated Bylaws of Province Healthcare
Company (b)
- ------------------
(a) Incorporated by reference to the exhibits filed with
the Registrant's Quarterly Report filed on Form 10-Q,
for the quarterly period ended June 30, 2000,
Commission File No. 0-23639.
(b) 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
During the three months ended June 30, 2001, we filed the following
reports on Form 8-K:
(i) Form 8-K, dated May 25, 2001, in connection with the
Company's announcement that Paul J. Feldstein was
appointed to the Company's Board of Directors and
announcing certain management changes.
(ii) Form 8-K, dated June 8, 2001, in connection with the
Company's announcement that the Company signed a
definitive agreement to acquire Selma Baptist
Hospital in Selma, Alabama, from Baptist Health of
Montgomery, Alabama.
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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: August 10, 2001 By: /s/ Brenda B. Rector
-----------------------------------
Brenda B. Rector
Vice President and Controller
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