SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2002 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________________ to __________________
Commission File Number 0-23639
PROVINCE HEALTHCARE COMPANY
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 62-1710772
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
105 WESTWOOD PLACE
SUITE 400
BRENTWOOD, TENNESSEE 37027
(Address of Principal Executive Offices) (Zip Code)
(615) 370-1377
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ -------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 11, 2002
COMMON STOCK, $.01 PAR VALUE 48,579,825 SHARES
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets
September 30, 2002 and December 31, 2001.........................1
Condensed Consolidated Statements of Income
Three Months Ended September 30, 2002 and 2001...................2
Condensed Consolidated Statements of Income
Nine Months Ended September 30, 2002 and 2001....................3
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001....................4
Notes to Condensed Consolidated Financial Statements.................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.....................................................19
ITEM 4. CONTROLS AND PROCEDURES.............................................19
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 30, December 31,
2002 2001
------------- ------------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 12,203 $ 39,375
Accounts receivable, less allowance for doubtful accounts
of $69,048 in 2002 and $49,678 in 2001 124,611 109,826
Inventories 19,888 15,926
Prepaid expenses and other 10,848 21,515
-------- --------
Total current assets 167,550 186,642
Property, plant and equipment, net 434,291 306,494
Goodwill 331,882 180,497
Unallocated purchase price -- 49,013
Other 37,108 37,251
-------- --------
Total assets $970,831 $759,897
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,641 $ 17,515
Accrued salaries and benefits 23,837 18,867
Accrued expenses 19,033 12,139
Current maturities of long-term obligations 1,693 1,879
-------- --------
Total current liabilities 70,204 50,400
Long-term obligations, less current maturities 466,975 330,838
Other liabilities 22,282 14,000
Minority interest 2,670 2,654
Stockholders' equity:
Common stock - $0.01 par value; 150,000,000 and 50,000,000
shares authorized at September 30, 2002 and December
31, 2001, respectively; issued and outstanding 48,571,102
and 47,488,984 shares at September 30, 2002 and December
31, 2001, respectively 486 475
Additional paid-in-capital 302,691 288,948
Retained earnings 105,523 72,582
-------- --------
Total stockholders' equity 408,700 362,005
-------- --------
Total liabilities and stockholders' equity $970,831 $759,897
======== ========
See accompanying notes.
1
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended September 30,
--------------------------------
2002 2001
-------- ---------
Revenue:
Net patient service revenue $178,111 $ 126,393
Other 5,851 5,377
-------- ---------
Net operating revenue 183,962 131,770
Expenses:
Salaries, wages and benefits 72,115 51,586
Purchased services 19,305 12,731
Supplies 23,396 14,562
Provision for doubtful accounts 14,042 13,578
Other operating expenses 21,576 15,130
Rentals and leases 2,165 1,871
Depreciation and amortization 9,419 7,596
Interest expense 6,218 2,833
Minority interest 16 (10)
Loss on sale of assets -- 5
-------- ---------
Total expenses 168,252 119,882
-------- ---------
Income before provision for income taxes 15,710 11,888
Income taxes 6,284 4,993
-------- ---------
Net income $ 9,426 $ 6,895
======== =========
Net income per share:
Basic $ 0.19 $ 0.15
======== =========
Diluted $ 0.19 $ 0.14
======== =========
See accompanying notes.
2
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Nine Months Ended September 30,
-------------------------------
2002 2001
-------- --------
Revenue:
Net patient service revenue $506,125 $361,836
Other 17,438 15,898
-------- --------
Net operating revenue 523,563 377,734
Expenses:
Salaries, wages and benefits 201,743 146,148
Purchased services 54,605 35,855
Supplies 63,606 41,736
Provision for doubtful accounts 41,533 36,389
Other operating expenses 60,275 43,124
Rentals and leases 6,518 5,479
Depreciation and amortization 25,751 21,184
Interest expense 15,959 7,597
Minority interest 72 159
Loss on sale of assets 53 175
-------- --------
Total expenses 470,115 337,846
-------- --------
Income before provision for income taxes 53,448 39,888
Income taxes 21,379 16,753
-------- --------
Net income $ 32,069 $ 23,135
======== ========
Net income per share:
Basic $ 0.67 $ 0.49
======== ========
Diluted $ 0.64 $ 0.47
======== ========
See accompanying notes.
3
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Nine Months Ended September 30,
-------------------------------
2002 2001
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 75,235 $ 37,628
INVESTING ACTIVITIES
Purchase of property, plant and equipment (36,109) (49,519)
Purchase of acquired hospitals (171,707) (40,363)
--------- ---------
Net cash used in investing activities (207,816) (89,882)
FINANCING ACTIVITIES
Proceeds from long-term debt 134,355 125,060
Repayments of debt (39,451) (70,216)
Issuance of common stock 10,505 11,706
--------- ---------
Net cash provided by financing activities 105,409 66,550
--------- ---------
Net increase (decrease) in cash and cash
equivalents (27,172) 14,296
Cash and cash equivalents at beginning of period 39,375 --
--------- ---------
Cash and cash equivalents at end of period $ 12,203 $ 14,296
========= =========
See accompanying notes.
4
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2002
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. Interim results
are not necessarily indicative of results that may be expected for the full
year. In the opinion of management, the accompanying interim financial
statements contain all material adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position,
results of operations and cash flows of Province Healthcare Company (the
"Company").
The balance sheet at December 31, 2001, has been derived from the
audited consolidated financial statements at that date, but does not include all
of the financial information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.
On April 30, 2002, the Company effected a three-for-two stock split, in
the form of a 50% stock dividend, to stockholders of record on April 20, 2002.
The stock split resulted in the issuance of 15.9 million shares of common stock
and a transfer between additional paid in capital and common stock of $159,000.
All historical references to common share and earnings per share amounts
included in the condensed consolidated financial statements and notes thereto
have been restated to reflect the three-for-two split.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management of the
Company to make estimates and assumptions that affect the amounts reported in
the condensed consolidated financial statements. Actual results could differ
from the estimates.
5
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED)
3. ACQUISITIONS AND GOODWILL
2001 ACQUISITIONS
During the last six months of 2001, the Company acquired five
hospitals: Selma Regional Medical Center, acquired in July 2001; Ashland
Regional Medical Center, acquired in August 2001; Vaughan Regional Medical
Center, acquired in October 2001; Medical Center of Southern Indiana, acquired
in October 2001; and Teche Regional Medical Center, acquired in December 2001.
In the second quarter of 2002, the Company consolidated the operations
of Selma Regional Medical Center and Vaughan Regional Medical Center. The
consolidation of the operations of these hospitals resulted in a regional
hospital (Vaughan Regional Medical Center) that provides more intensive services
to the large area it serves.
MEMORIAL HOSPITAL OF MARTINSVILLE AND HENRY COUNTY
In May 2002, the Company acquired Memorial Hospital of Martinsville and
Henry County in Martinsville, Virginia, for approximately $129.2 million,
including working capital. To finance this acquisition, the Company borrowed
$86.0 million under its revolving credit facility and used approximately $43.2
million of available cash. The preliminary allocation of the purchase price has
been determined based upon currently available information and is subject to
further refinement pending final appraisal. This is the Company's first Virginia
hospital and is the only hospital in the county, serving a population in excess
of 100,000.
LOS ALAMOS MEDICAL CENTER
In June 2002, the Company acquired Los Alamos Medical Center in Los
Alamos, New Mexico, for approximately $39.0 million, including working capital.
To finance this acquisition, the Company borrowed $37.0 million under its
revolving credit facility. The preliminary allocation of the purchase price has
been determined based upon currently available information and is subject to
further refinement pending final appraisal. This is the Company's first New
Mexico hospital and is the only hospital in the community, serving a population
of approximately 50,000.
The operating results of the hospitals acquired in 2001 and 2002 have
been included in the accompanying condensed consolidated statements of income
from the respective dates of acquisition.
6
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED)
The following pro forma information reflects the operations of the
entities acquired in 2002 and 2001, as if the respective transactions had
occurred as of the first day of the fiscal year immediately preceding the year
of the acquisitions (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net operating revenue $ 183,962 $ 180,872 $ 567,151 $ 546,319
Net income 9,426 3,054 34,069 21,613
Earnings per share:
Basic 0.19 0.06 0.71 0.46
Diluted 0.19 0.06 0.55 0.44
The pro forma results of operations do not purport to represent what
the Company's results would have been had such transactions, in fact, occurred
at the beginning of the periods presented or to project the Company's results of
operations in any future period.
The Company adopted Statement of Financial Accounting Standards No. 142
("SFAS No. 142"), Goodwill and Other Intangible Assets, effective January 1,
2002. Under SFAS No. 142, goodwill is no longer amortized, but is subject to
annual impairment tests, or more frequently if certain indicators arise. The
transitional impairment tests have been completed, and the results of the tests
had no effect on the operations or financial position of the Company. Had the
Company been accounting for its goodwill under SFAS No. 142 for all periods
presented, the Company's pro forma net income and earnings per share would have
been as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------------
2002 2001 2002 2001
--------- --------- ---------- ----------
Reported net income $ 9,426 $ 6,895 $ 32,069 $ 23,135
Add: Goodwill amortization, net of tax -- 1,064 -- 3,273
--------- --------- ---------- ----------
Pro forma adjusted net income $ 9,426 $ 7,959 $ 32,069 $ 26,408
========= ========= ========== ==========
Basic earnings per share:
Reported net income $ 0.19 $ 0.15 $ 0.67 $ 0.49
Add: Goodwill amortization, net of tax -- 0.02 -- 0.07
--------- --------- ---------- ----------
Pro forma adjusted net income $ 0.19 $ 0.17 $ 0.67 $ 0.56
========= ========= ========== ==========
Diluted earnings per share:
Reported net income $ 0.19 $ 0.14 $ 0.64 $ 0.47
Add: Goodwill amortization, net of tax -- 0.02 -- 0.07
--------- --------- ---------- ----------
Pro forma adjusted net income $ 0.19 $ 0.16 $ 0.64 $ 0.54
========= ========= ========== ==========
7
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED)
At September 30, 2002, and December 31, 2001, goodwill totaled $355.4
million and $204.0 million, respectively. The $151.4 million increase in
goodwill resulted primarily from the allocation of purchase price for the
Vaughan Regional Medical Center, Memorial Hospital of Martinsville and Henry
County and Los Alamos Medical Center acquisitions. The Company has no other
intangible assets.
4. LONG-TERM OBLIGATIONS
At September 30, 2002, the Company had letters of credit totaling
approximately $4.3 million outstanding, and $103.0 million available under its
credit facility. During the first quarter of 2002, the Company made the decision
to modify the terms of the end-loaded lease facility to enable it to account for
the related properties and borrowings on the balance sheet. The Company recorded
approximately $46.7 million in property and equipment and approximately $40.2
million in long-term debt on the balance sheet related to this modification of
the end-loaded lease facility.
5. COMPREHENSIVE INCOME
The following table presents the components of comprehensive income,
net of related taxes (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2002 2001 2002 2001
-------- ------- ------- --------
Net income $ 9,426 $ 6,895 $32,069 $ 23,135
Net change in fair value of interest rate swap (177) (602) 4 (874)
------- ------- ------- --------
Comprehensive income $ 9,249 $ 6,293 $32,073 $ 22,261
======= ======= ======= ========
The net change in fair value of interest rate swap is included in
retained earnings on the condensed consolidated balance sheets.
6. INCOME TAXES
The income tax provision for the three and nine-month periods ended
September 30, 2002 and 2001, differs from the statutory income tax computation
primarily due to permanent differences and the provision for state income taxes.
These provisions reflect effective income tax rates of 40.0% for the 2002
periods and 42.0% for the 2001 periods.
8
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED)
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Numerator:
Net income $ 9,426 $ 6,895 $32,069 $23,135
Add convertible notes interest, net of tax -- -- 7,302 --
------- ------- ------- -------
Adjusted net income $ 9,426 $ 6,895 $39,371 $23,135
======= ======= ======= =======
Denominator:
Denominator for basic income per share--
Weighted-average shares 48,544 47,310 48,002 46,962
Effective of dilutive securities--
Employee stock options 1,063 2,531 1,523 2,034
Convertible notes -- -- 11,899 --
------- ------- ------- -------
Denominator for diluted income per share--
Adjusted weighted average shares 49,607 49,841 61,424 48,996
======= ======= ======= =======
Basic net income per share $ 0.19 $ 0.15 $ 0.67 $ 0.49
======= ======= ======= =======
Diluted net income per share $ 0.19 $ 0.14 $ 0.64 $ 0.47
======= ======= ======= =======
During the three-month period ended September 30, 2002, employees
exercised options to acquire 98,774 shares of common stock at an average
exercise price of $9.05 per share. During the nine-month period ended September
30, 2002, employees exercised options to acquire 1,021,550 shares of common
stock at an average exercise price of $9.76 per share, and the Company issued
59,022 shares of common stock at a price of $17.49 per share under its Employee
Stock Purchase Plan. The convertible subordinated notes were antidilutive in the
third quarter of 2002, resulting in comparable diluted shares outstanding for
the three-month periods ending September 30, 2002 and 2001. There were 25% more
diluted shares outstanding in the nine-month period ended September 30, 2002,
than in the comparable period of 2001, primarily as a result of the Company's
two outstanding series of convertible subordinated notes.
8. CONTINGENCIES
Management continually evaluates contingencies based on the best
available evidence and believes that adequate provision for losses has been
provided to the extent necessary. In the
9
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED)
opinion of management, the ultimate resolution of the following contingencies
will not have a material effect on the Company's results of operations or
financial position.
GENERAL AND PROFESSIONAL LIABILITY RISKS
Effective January 1, 2002, the Company purchased a liability claims
made reporting policy for professional and general liability risks. This
coverage is subject to a $750,000 deductible per occurrence for general and
professional liability and an additional $2.0 million self-insured retention for
general and professional liability. The policy provides coverage up to $51.0
million for claims incurred during the annual policy term. The Company has
established reserves for estimated claims within the deductible and self-insured
retention.
LITIGATION
The Company currently is, and from time to time is expected to be,
subject to claims and suits arising in the ordinary course of business.
NET PATIENT SERVICE REVENUE
Final determination of amounts earned under the Medicare and Medicaid
programs often occurs in subsequent periods because of audits by the programs,
rights of appeal and the application of numerous technical provisions.
Differences between original estimates and subsequent revisions (including
settlements) are included in the consolidated statements of income in the period
in which revisions are made, and resulted in increases in net patient service
revenue of approximately $1.2 million and $1.3 million for the three and
nine-month periods ended September 30, 2002, respectively. The impact for the
three and nine-month periods ended September 30, 2001 was minimal.
FINANCIAL INSTRUMENTS
Interest rate swap agreements are used to manage the Company's interest
rate exposure under the revolving credit facility. The Company maintains a $28.5
million interest rate swap agreement with a 5.625% fixed interest rate. In
September 2002, the Company extended the term of its' swap agreement for an
additional two-year period and reduced the fixed interest rate to 4.45%. All
other terms and conditions of the swap agreement remained unchanged. This
agreement exposes the Company to credit losses in the event of non-performance
by the counterparty to the financial instrument. The Company anticipates that
the counterparty will fully satisfy its obligations under the contract.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following along with the Condensed Consolidated
Financial Statements and accompanying notes.
OVERVIEW
We are a healthcare services company focused on acquiring and operating
hospitals in attractive non-urban markets in the United States. As of September
30, 2002, we owned or leased 20 general acute care hospitals in 13 states with a
total of 2,315 licensed beds, and managed 35 hospitals in 14 states, with a
total of 2,863 licensed beds.
Our owned and leased hospitals accounted for 98.1% and 97.2% of our net
operating revenue in the three months ended September 30, 2002 and 2001,
respectively, and 97.0% and 97.9% of our net operating revenue in the nine
months ended September 30, 2002 and 2001, respectively.
IMPACT OF ACQUISITIONS
An integral part of our strategy is to acquire non-urban acute care
hospitals. Because of the financial impact of our recent acquisitions, it is
difficult to make meaningful comparisons between our financial statements for
the fiscal periods presented. In addition, because of the relatively small
number of owned and leased hospitals, each hospital acquisition can materially
affect our overall operating performance. Upon the acquisition of a hospital, we
typically take a number of steps to lower operating costs. The impact of such
actions may be offset by cost increases to expand services, strengthen medical
staff and improve market position. The benefits of these investments and of
other activities to improve operating margins generally do not occur
immediately. Consequently, the financial performance of a newly-acquired
hospital may adversely affect overall operating margins in the near term. As we
make additional hospital acquisitions, we expect that this effect will be
mitigated by the expanded financial base of existing hospitals and the
allocation of corporate overhead among a larger number of hospitals. We may also
divest certain hospitals in the future, if we determine a hospital no longer
fits within our strategy.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, information
expressed as a percentage of net operating revenue. Such information has been
derived from our unaudited Condensed Consolidated Statements of Income included
elsewhere in this report. The results of operations for the periods presented
include hospitals from their acquisition dates, as discussed in the notes to the
condensed consolidated financial statements.
11
Three Months Ended September 30, Percentage
-------------------------------- Increase (Decrease)
2002 2001 of Dollar Amounts
---------- --------- ------------------
Net operating revenue 100.0% 100.0% 39.6%
Operating expenses (1) (83.0) (83.1) 39.4
--------- ---------
EBITDA (2) 17.0 16.9 40.6
Depreciation and amortization (5.1) (5.8) 24.0
Interest (3.4) (2.1) 119.5
Other -- -- --
--------- ---------
Income before income taxes 8.5 9.0 32.2
Provision for income taxes (3.4) (3.8) 25.9
--------- ---------
Net income 5.1% 5.2% 36.7
========= =========
Nine Months Ended September 30, Percentage
--------------------------------- Increase (Decrease)
2002 2001 of Dollar Amounts
---------- ---------- -----------------
Net operating revenue 100.0% 100.0% 38.6%
Operating expenses (1) (81.8) (81.7) 38.7
--------- ---------
EBITDA (2) 18.2 18.3 38.1
Depreciation and amortization (4.9) (5.6) 21.6
Interest (3.0) (2.0) 110.1
Other -- (0.2) 62.6
--------- ---------
Income before income taxes 10.2 10.5 34.0
Provision for income taxes (4.1) (4.4) 27.6
--------- ---------
Net income 6.1% 6.1% 38.6
========= =========
(1) Operating expenses represent expenses before income taxes, interest,
minority interest, depreciation and amortization expense and loss on
sale of assets.
(2) EBITDA represents the sum of income before income taxes, interest,
minority interest, depreciation and amortization, and loss on sale of
assets. We understand that industry analysts generally consider EBITDA
to be one measure of the financial performance of a company that is
presented to assist investors in analyzing the operating performance of
the Company and its ability to service debt. We believe that an
increase in EBITDA level is an indicator of our improved ability to
service existing debt, to sustain potential future increases in debt
and to satisfy capital requirements. However, EBITDA is not a measure
of financial performance under accounting principles generally accepted
in the United States and should not be considered an alternative to net
income as a measure of operating performance or to cash flows from
operating, investing, or financing activities as a measure of
liquidity. Given that EBITDA is not a measurement determined in
accordance with accounting principles generally accepted in the United
States and is thus susceptible to varying calculations, EBITDA, as
presented, may not be comparable to other similarly titled measures of
other companies.
12
SELECTED OPERATING STATISTICS - OWNED OR LEASED HOSPITALS
The following table sets forth certain operating statistics for our
company's owned or leased hospitals for each of the periods presented.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
------------ ------------- ------------ -------------
CONSOLIDATED HOSPITALS:
Number of hospitals at end of period 20 16 20 16
Licensed beds at end of period 2,315 1,751 2,315 1,751
Beds in service at end of period 1,905 1,530 1,905 1,530
Inpatient admissions 18,584 13,638 54,432 39,552
Patient days 77,738 59,025 234,492 169,825
Adjusted patient days 140,250 97,839 403,590 279,071
Average length of stay (days) 4.2 4.3 4.3 4.3
Occupancy rates (average licensed beds) 36.5% 36.6% 37.1% 35.5%
Occupancy rates (average beds in service) 44.4% 41.9% 45.1% 40.7%
Gross inpatient revenue $213,509,766 $157,215,349 $633,588,204 $454,540,055
Gross outpatient revenue 171,600,436 103,367,565 457,009,523 292,328,682
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
Net operating revenue was $184.0 million for the three months ended
September 30, 2002, compared to $131.8 million for the comparable period of
2001, an increase of $52.2 million, or 39.6%. Cost report settlements and the
filing of cost reports resulted in an increase in net patient service revenue of
approximately $1.2 million for the three-month period ended September 30, 2002.
The impact for the three-month period ended September 30, 2001 was minimal. Net
patient service revenue generated by hospitals owned during both periods
increased $0.9 million. Included in net patient service revenue growth was an
approximate 1.1% growth in net patient service revenues, excluding closed units,
of hospitals owned during both periods. The remaining increase is due primarily
to net operating revenues generated by the hospitals acquired in 2001 and 2002.
Operating expenses were $152.6 million, or 83.0% of net operating
revenue, for the three months ended September 30, 2002, compared to $109.5
million, or 83.1% of net operating revenue, for the comparable period of 2001.
Salaries and benefits, as a percentage of net operating revenue, was comparable
between the 2002 and 2001 three-month periods. Decreases related to unearned
incentive compensation totaled $1.3 million for the three months ended September
30, 2002, and $1.4 million in the comparable period of 2001. Purchased services,
as a percentage of net operating revenue, increased to 10.5% for the three
months ended September 30, 2002, compared to 9.7% for the comparable period of
the prior year. This increase is primarily attributable to the hospitals
acquired in the second quarter of 2002. Also, temporary outside vendors are
being utilized to assist with accounts receivable management, resulting in
intensive collection efforts and reductions in accounts receivable days.
Supplies increased to 12.7% of net operating revenue, for the three months ended
September 30, 2002, compared to 11.1% of net operating revenue, for the
comparable period of 2001, due primarily to the hospitals acquired in 2001 and
13
2002. The provision for doubtful accounts was 7.6% of net operating revenue for
the three months ended September 30, 2002, compared to 10.3% for the comparable
period of 2001. This improvement resulted primarily from an intensive program to
increase front-end collections and reduce overall days outstanding.
EBITDA was $31.4 million, or 17.0% of net operating revenue, for the
three months ended September 30, 2002, compared to $22.3 million, or 16.9% of
net operating revenue, for the comparable period of 2001.
Depreciation and amortization expense was $9.4 million, or 5.1% of net
operating revenue, for the three months ended September 30, 2002, compared to
$7.6 million, or 5.8% of net operating revenue for the comparable period of
2001. The increase in depreciation and amortization resulted primarily from
capital expenditures at hospitals owned during both periods, offset by a
decrease in amortization expense related to our adoption of SFAS No. 142.
Interest expense was $6.2 million for the three months ended September
30, 2002, compared to $2.8 million for the comparable period of 2001, an
increase of $3.4 million or 119.5%, primarily related to interest on the 4 1/4%
convertible subordinated notes issued in October 2001.
Income before provision for income taxes was $15.7 million for the
three months ended September 30, 2002,
compared to $11.9 million for the comparable period of 2001, an increase of $3.8
million or 32.2%. Our provision for income taxes was $6.3 million for the three
months ended September 30, 2002, compared to $5.0 million for the comparable
period of 2001. This reflects an effective income tax rate of 40.0% in the 2002
quarter, compared to 42.0% in the 2001 quarter.
As a result of the foregoing, our net income was $9.4 million, or 5.1%
of net operating revenue, for the three months ended September 30, 2002,
compared to $6.9 million, or 5.2% of net operating revenue for the comparable
period of 2001. The comparison of net income for the three months ended
September 30, 2002, to the comparable period of 2001, was materially impacted by
the adoption of Statement of Financial Accounting Standards No. 142 ("SFAS No.
142"), Goodwill and Other Intangible Assets, effective January 1, 2002, which
requires that goodwill no longer be amortized.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2001
Net operating revenue was $523.6 million for the nine months ended
September 30, 2002, compared to $377.7 million for the comparable period of
2001, an increase of $145.8 million or 38.6%. Cost report settlements and the
filing of cost reports resulted in an increase in net patient service revenue of
$1.3 million for the nine months ended September 30, 2002. The impact for the
nine-month period ended September 30, 2001 was minimal. Net patient service
revenue generated by hospitals owned during both periods increased $12.5
million, or 3.6%, resulting from inpatient volume increases, new services and
price increases. The remaining increase relates to hospitals acquired in 2001
and 2002.
14
Operating expenses were $428.3 million, or 81.8% of net operating
revenue, for the nine months ended September 30, 2002, compared to $308.7
million, or 81.7% of net operating revenue, for the comparable period of 2001.
Purchased services, as a percentage of net operating revenue, increased to 10.4%
for the nine months ended September 30, 2002, compared to 9.5% for the
comparable period of the prior year, primarily attributable to hospitals
acquired in 2001 and 2002. Also, temporary outside vendors are being utilized to
assist with accounts receivable management, resulting in aggressive collection
efforts and reduction in days outstanding. Supplies increased to 12.1% of net
operating revenue for the nine months ended September 30, 2002, compared to
11.1% for the comparable period of the prior year, due primarily to the
hospitals acquired in 2001 and 2002. The provision for doubtful accounts
decreased to 7.9% of net operating revenue in 2002 from 9.6% of net operating
revenue in 2001, primarily as a result of the focus on accounts receivable
management.
EBITDA was $95.3 million, or 18.2% of net operating revenue, for the
nine months ended September 30, 2002, compared to $69.0 million, or 18.3% of net
operating revenue, for the comparable period of 2001.
Depreciation and amortization expense was $25.8 million, or 4.9% of net
operating revenue, for the nine months ended September 30, 2002, compared to
$21.2 million, or 5.6% of net operating revenue for the comparable period of
2001. The increase in depreciation and amortization resulted primarily from
hospitals acquired in 2001, offset by a decrease in amortization expense related
to our adoption of SFAS No. 142, which requires that goodwill no longer be
amortized.
Interest expense was $16.0 million for the nine months ended September
30, 2002, compared to $7.6 million for the comparable period of 2001, an
increase of $8.4 million or 110.1%, primarily related to interest on the 4 1/4%
convertible subordinated notes issued in October 2001.
Income before provision for income taxes was $53.4 million for the nine
months ended September 30, 2002, compared to $39.9 million for the comparable
period of 2001, an increase of $13.5 million or 34.0%. Our provision for income
taxes was $21.4 million for the nine months ended September 30, 2002, compared
to $16.8 million for the comparable period of 2001. This reflects an effective
income tax rate of 40.0% in the 2002 period, compared to 42.0% in the 2001
period.
As a result of the foregoing, our net income was $32.1 million, or 6.1%
of net operating revenue, for the nine months ended September 30, 2002, compared
to $23.1 million, or 6.1% of net operating revenue for the comparable period of
2001. The comparison of net income for the nine months ended September 30, 2002,
to the comparable period of 2001, was materially impacted by the adoption of
SFAS No. 142, effective January 1, 2002, which requires that goodwill no longer
be amortized.
15
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, we had working capital of $97.3 million,
including cash and cash equivalents of $12.2 million. The ratio of current
assets to current liabilities was 2.4 to 1.0 at September 30, 2002, compared to
3.7 to 1.0 at December 31, 2001.
Cash provided by operations was $75.2 million for the nine months ended
September 30, 2002. Cash used in investing activities was $207.8 million for the
nine months ended September 30, 2002, relating primarily to the purchase of
Memorial Hospital of Martinsville and Henry County in May 2002, and Los Alamos
Medical Center in June 2002. Net cash provided by financing activities was
$105.4 million for the nine months ended September 30, 2002, primarily as a
result of borrowings under our revolving credit facility to fund acquisitions
and issuance of common stock through exercises of stock options under our
Long-Term Equity Incentive Plan and through our Employee Stock Purchase Plan.
Total long-term obligations, less current maturities, increased to
$467.0 million at September 30, 2002, from $330.8 million at December 31, 2001.
The increase resulted primarily from borrowings to finance the two hospitals
acquired in the second quarter of 2002 and the $40.2 million in long-term debt
related to the properties financed under our amended end-loaded lease facility
in the first quarter of 2002. At September 30, 2002, we had $106.4 million
available for borrowing under our senior credit facility.
On April 30, 2002, we effected a three-for-two stock split, in the form
of a 50% stock dividend, to stockholders of record on April 20, 2002. All
historical references to common share and earnings per share amounts included in
this Report and in our condensed consolidated financial statements and notes
thereto have been restated to reflect the three-for-two split.
We intend to acquire additional acute care facilities, and are actively
seeking out such acquisitions. There can be no assurance that we will not
require additional debt or equity financing for any particular acquisition.
Also, we continually review our capital needs and financing opportunities and
may seek additional equity or debt financing for our acquisition program or
other needs.
On June 14, 2002, the Securities and Exchange Commission ("SEC")
declared effective our shelf registration statement on Form S-3 providing for
the offer, from time to time, of common stock and debt securities, up to an
aggregate of $300.0 million. The shelf registration statement will enable us to
raise funds from the offering of any individual securities covered by the shelf
registration statement as well as any combination thereof, subject to market
conditions and our capital needs.
Capital expenditures, excluding acquisitions, for the nine months ended
September 30, 2002 and 2001, were $36.1 million and $49.5 million, respectively,
inclusive of construction projects. Capital expenditures for the owned hospitals
may vary from year to year depending on facility improvements and service
enhancements undertaken by the hospitals. We expect to make total capital
expenditures in 2002 of approximately $27.4 million, exclusive of any
acquisitions of businesses or construction projects. Planned capital
expenditures for 2002 consist principally of capital improvements to owned and
leased hospitals. We expect to fund these
16
expenditures through cash provided by operating activities and borrowings under
our revolving credit facility.
CRITICAL ACCOUNTING POLICIES AND IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
A description of our critical accounting policies is contained in our
Annual Report on Form 10-K for the year ended December 31, 2001. We have made no
changes in those policies since year end.
Effective January 1, 2002, we adopted SFAS No. 142. Under the new rules
in SFAS No. 142, goodwill and indefinite lived intangible assets are no longer
amortized, but are subject to annual impairment tests, or more frequently if
certain indicators arise. We have no intangible assets, other than goodwill.
We applied the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of SFAS No. 142 is expected to result in an increase
in net income of approximately $4.4 million ($.09 per share) per year. The
required impairment tests of goodwill as of January 1, 2002, were completed in
the second quarter of 2002, and the results of those tests had no effect on our
operations or financial position.
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
Our interest expense is sensitive to changes in the general level of
interest rates. To mitigate the impact of fluctuations in interest rates, we
generally maintain 50% - 75% of our debt at a fixed rate, either by borrowings
on a long-term basis or entering into an interest rate swap.
At September 30, 2002, approximately 76.0% of our outstanding debt
amounts were effectively at a fixed rate. Our interest rate swap contract allows
us to periodically exchange fixed rate and floating rate payments over the life
of the agreement. Floating-rate payments are based on LIBOR, and fixed-rate
payments are dependent upon market levels at the time the interest rate swap was
consummated. Our interest rate swap is a cash flow hedge, which effectively
converted an aggregate notional amount of $28.5 million of floating rate
borrowings to fixed rate borrowings at September 30, 2002. Our policy is not to
hold or issue derivatives for trading purposes and to avoid derivatives with
leverage features. We are exposed to credit losses in the event of
nonperformance by the counterparty to the financial instrument. We anticipate
that the counterparty will fully satisfy its obligations under the contract.
GENERAL
The Medicare program accounted for approximately 52.4% and 55.1% of
hospital patient days for the three and nine months ended September 30, 2002,
respectively. The Medicaid programs accounted for approximately 19.9% and 19.4%
of hospital patient days for the three and nine-month periods ended September
30, 2002. The payment rates under the Medicare program for inpatients are
prospective, based upon the diagnosis of a patient. The Medicare payment rate
increases historically have been less than actual inflation.
17
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that affect the amounts reported in our financial statements.
Resolution of matters, for example, final settlements with third party payors,
may result in changes from those estimates. The timing and amount of such
changes in estimates may cause fluctuations in our quarterly or annual operating
results.
FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. Such statements may
include words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe" and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance. Any or all of
our forward-looking statements in this report may turn out to be wrong. They can
be affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Many factors mentioned in our discussion in this report will
be important in determining future results. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially. Factors
that may cause our plans, expectations, future financial condition and results
to change include, but are not limited to:
- the highly competitive nature of the healthcare business;
- the efforts of insurers, healthcare providers and others to contain
healthcare costs;
- the financial condition of managed care organizations that pay
us for healthcare services;
- possible changes in the levels and terms of reimbursement for our
charges by government programs, including Medicare and Medicaid or
other third-party payors;
- changes in or failure to comply with federal, state or local laws
and regulations affecting the healthcare industry;
- the possible enactment of federal or state healthcare reform;
- the departure of key members of our management;
- claims and legal actions relating to professional liability;
- our ability to implement successfully our acquisition and
development strategy;
- our ability to attract and retain qualified personnel and to
recruit and retain physicians;
- potential federal or state investigations;
- the impact of recently announced federal and state investigations
into the activities of Tenet Healthcare Corp. on the for-profit
healthcare industry generally and the market for the securities of
companies in that industry;
18
- fluctuations in the market value of our common stock or notes;
- changes in accounting principles generally accepted in the United
States or in our critical accounting policies;
- changes in demographic, general economic and business conditions,
both nationally and in the regions in which we operate; and
- other risks described in this report.
Except as required by law, we undertake no obligation to publicly
update any forward-looking statements, whether as a result of new information,
future events or otherwise. You are advised, however, to consult any additional
disclosures and discussions of risks we make in our Form 10-K, 10-Q and 8-K
reports and other filings with the Securities and Exchange Commission. These are
factors that we think could cause our actual results to differ materially from
expected results. Other factors besides those listed here also could affect us
adversely. This discussion is provided as permitted by the Private Securities
Litigation Reform Act of 1995.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the three and nine-month periods ended September 30, 2002, there
were no material changes in the quantitative and qualitative disclosures about
market risks presented in our Annual Report on Form 10-K for the year ended
December 31, 2001. Our only derivative instrument relates to an interest rate
swap agreement.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Within 90 days prior to the date of this report, our company carried
out an evaluation, under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rule 13a-14(c)). Based on their
evaluation of such controls and procedures, our chief executive officer and
chief financial officer concluded that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by our company
in the reports we file under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission and that such
information is accumulated and communicated to management, including our chief
executive officer and chief financial officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Controls
There have been no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation referred to above.
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PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The deadline for delivering your notice of a shareholder proposal,
other than a proposal to be included in the proxy statement, for the 2003 annual
meeting of shareholders will be March 7, 2003, pursuant to Rule 14a-4 under the
Securities Exchange Act of 1934. The persons named as proxies in the proxy
statement may exercise discretionary voting authority with respect to any matter
that is not submitted to us by such date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Exhibits
------ -----------------------
3.1 Amended and Restated Certificate of Incorporation of
Province Healthcare Company, as filed with the Delaware
Secretary of State on June 16, 2000 (i)
3.2 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Province Healthcare
Company, as filed with the Delaware Secretary of State
on May 22, 2002 (ii)
3.3 Amended and Restated Bylaws of Province Healthcare
Company (ii)
10.1 Executive Severance Agreement by and between Province
Healthcare Company and Samuel Moody, dated August 22,
2002(*)(**)
- ------------------
(i) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report filed on Form 10-Q, for the quarterly period ended
June 30, 2000, Commission File No. 0-23639.
(ii) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-3/A, filed on June 11, 2002,
Registration Number 333-86578.
(*) Filed herewith.
(**) Management Compensatory Plan or Arrangement.
(b) Reports on Form 8-K
During the three months ended September 30, 2002, our company filed a
report on Form 8-K on August 14, 2002 with respect to the certifications of our
Chief Executive Officer and Chief Financial Officer required to comply with 18
U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROVINCE HEALTHCARE COMPANY
Date: November 14, 2002 By: /s/ Brenda B. Rector
-------------------------------
Brenda B. Rector
Vice President and Controller
21
PROVINCE HEALTHCARE COMPANY
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Martin S. Rash, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the
registrant, Province Healthcare Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
22
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Martin S. Rash
--------------------------------
Martin S. Rash
Chief Executive Officer
23
PROVINCE HEALTHCARE COMPANY
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher T. Hannon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the
registrant, Province Healthcare Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
24
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Christopher T. Hannon
--------------------------------
Christopher T. Hannon
Chief Financial Officer
25