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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 March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From _____________ To ____________
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PROVINCE HEALTHCARE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 0-23639 62-1710772
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) 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 No X
------- -------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT APRIL 17, 1998
COMMON STOCK, $.01 PAR VALUE 13,009,768
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS)
March 31, December 31,
1998 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 6,675 $ 4,186
Accounts receivable, less allowance for doubtful
accounts of $5,562 at March 31, 1998 and
$4,749 at December 31, 1997 35,705 30,902
Inventories 3,848 3,655
Prepaid expenses and other 6,028 8,334
--------- ---------
Total current assets 52,256 47,077
Property, plant and equipment, net 66,804 65,974
Other assets:
Unallocated purchase price 760 760
Cost in excess of net assets acquired, net 53,146 53,624
Other assets 8,256 9,026
--------- ---------
Total assets $ 181,222 $ 176,461
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,029 $ 6,524
Accrued salaries and benefits 6,968 8,720
Accrued expenses 2,311 4,422
Current maturities of long-term obligations 2,255 6,053
--------- ---------
Total current liabilities 16,563 25,719
Long-term obligations, less current maturities 52,166 83,043
Third-party settlements 7,255 4,680
Other liabilities 8,506 13,088
Minority interest 888 825
Mandatory redeemable preferred stock -- 50,162
Common stockholders' equity (deficit):
Common stock--no par value at December 31, 1997; $0.01 par value at March 31,
1998; authorized 20,000,000 shares; issued and outstanding 13,009,768
shares and 6,330,614 shares at
March 31, 1998 and December 31, 1997, respectively 130 2,116
Additional paid-in-capital 97,338 --
Retained deficit (1,624) (3,172)
--------- ---------
Total common stockholders' equity (deficit) 95,844 (1,056)
--------- ---------
Total liabilities, redeemable preferred stock
and common stockholders' equity $ 181,222 $ 176,461
========= =========
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 March 31,
-------------------------------------------
Actual Pro Forma
-------------------------- (Note 9)
1998 1997 1998
-------- -------- -------
Revenue:
Net patient service revenue $ 42,750 $ 34,504 $42,750
Management and professional services 2,930 3,253 2,930
Reimbursable expenses 1,562 1,707 1,562
Other 609 995 609
-------- -------- -------
Net operating revenue 47,851 40,459 47,851
Expenses:
Salaries, wages and benefits 18,606 15,400 18,606
Reimbursable expenses 1,562 1,707 1,562
Purchased services 6,035 5,045 6,035
Supplies 4,627 3,817 4,627
Provision for doubtful accounts 3,082 2,410 3,082
Other operating expenses 4,257 4,353 4,257
Rentals and leases 1,474 1,323 1,474
Depreciation and amortization 2,205 1,770 2,205
Interest expense 1,855 1,761 1,381
Minority interest 68 68 68
Loss on sale of assets 33 87 33
-------- -------- -------
Total expenses 43,804 37,741 43,330
Income before provision for income taxes 4,047 2,718 4,521
Provision for income taxes 1,772 1,211 1,961
-------- -------- -------
Net income 2,275 1,507 2,560
Preferred stock dividends and accretion (696) (1,115) --
-------- -------- -------
Net income to common shareholders $ 1,579 $ 392 $ 2,560
======== ======== =======
Basic earnings per common share:
Net income $ 0.24 $ 0.28 $ 0.20
Preferred stock dividends and accretion (0.07) (0.21) --
-------- -------- -------
Net income per common share $ 0.17 $ 0.07 $ 0.20
======== ======== =======
Diluted earnings per common share:
Net income $ 0.23 $ 0.24 $ 0.19
Preferred stock dividends and accretion (0.07) (0.18) --
-------- -------- -------
Net income per common share $ 0.16 $ 0.06 $ 0.19
======== ======== =======
See accompanying notes.
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
Three Months Ended March 31,
1998 1997
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: $ 233 ($ 1,264)
INVESTING ACTIVITIES
Purchase of property, plant and equipment (2,524) (2,420)
Net capital contributions and withdrawals-investments (15) (61)
-------- --------
Net cash used in investing activities (2,539) (2,481)
FINANCING ACTIVITIES
Proceeds from long-term debt 61,000 --
Repayments of debt (95,649) (431)
Net proceeds from issuance of common stock 77,067 --
Exchange of Junior Preferred Stock (14,884) --
Redemption of Senior Preferred Stock (22,739) --
-------- --------
Net cash provided by (used in) financing activities 4,795 (431)
-------- --------
Net increase (decrease) in cash and cash equivalents 2,489 (4,176)
Cash and cash equivalents at beginning of period 4,186 11,256
-------- --------
Cash and cash equivalents at end of period $ 6,675 $ 7,080
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid during the period $ 1,966 $ 1,433
======== ========
Income taxes paid during the period $ 166 $ 41
======== ========
NONCASH TRANSACTIONS
Dividends and accretion on preferred stock $ 696 $ 1,115
Conversion and redemption of preferred stock 33,138 --
Property and equipment acquired through capital leases -- 706
See accompanying notes.
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. Interim results are not necessarily
indicative of results that may be expected for the full year.
In the opinion of management, the accompanying interim financial
statements contain all material adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position,
results of operations and cash flows of Province Healthcare Company (the
"Company").
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, 1997.
2. LONG-TERM DEBT
On March 30, 1998, the Company amended and restated its Credit
Agreement and increased its credit facilities to $260 million, including a
five-year $35 million End-Loaded Lease Facility ("ELLF"). At March 31, 1998, the
Company had $48 million outstanding under its revolving line of credit and no
amounts outstanding under the ELLF.
The Amended and Restated Credit Agreement contains limitations on the
Company's ability to incur additional indebtedness (including contingent
obligations), sell material assets, retire, redeem or otherwise reacquire its
capital stock, acquire the capital stock or assets of another business, and pay
dividends. The Amended and Restated Credit Agreement also requires the Company
to maintain a specified net worth and meet or exceed certain coverage, leverage,
and indebtedness ratios. Indebtedness under the Amended and Restated Credit
Agreement is secured by substantially all assets of the Company.
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3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share date):
Three Months Ended March 31,
-------------------------------------------
Actual Pro Forma
-------------------------- (Note 9)
1998 1997 1998
-------- -------- -------
Numerator:
Net income $ 2,275 $ 1,507 $ 2,560
Preferred stock dividends and accretion (696) (1,115) --
------- -------- -------
Net income to common shareholders $ 1,579 $ 392 $ 2,560
======= ======== =======
Denominator:
Denominator for basic earnings per share to
common shareholders - weighted-average shares 9,343 5,371 13,010
Effect of dilutive securities -
Incentive stock options 272 311 272
July stock issuance -- 672 --
------- -------- -------
Denominator for diluted earnings per share 9,615 6,354 13,282
Basic earnings per common share:
Net income $ 0.24 $ 0.28 $ 0.20
Preferred stock dividends and accretion (0.07) (0.21) --
------- -------- -------
Net income per common share $ 0.17 $ 0.07 $ 0.20
======= ======== =======
Diluted earnings per common share:
Net income $ 0.23 $ 0.24 $ 0.19
Preferred stock dividends and accretion (0.07) (0.18) --
------- -------- -------
Net income per common share $ 0.16 $ 0.06 $ 0.19
======= ======== =======
4. INCOME TAXES
The income tax provision recorded for the three months ended March 31, 1998
and 1997 differs from the expected income tax provision due to permanent
differences and the provision for state income taxes.
5. ACQUISITIONS
In August 1997, the Company acquired Colorado River Medical Center ("CRMC")
(formerly Needles Desert Communities Hospital) in Needles, California by paying
cash of $3,191,000 and assuming liabilities totaling $518,000. The operating
results of CRMC are included in the Company's results of operations from the
date of purchase; therefore, the results of operations for the first quarter
of 1998 include CRMC.
6. 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.
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GENERAL AND PROFESSIONAL LIABILITY RISKS
The reserve for the self-insured portion of general and professional
liability risks is included in "Other liabilities" and is based on actuarially
determined estimates.
LITIGATION
The Company currently, and from time to time, is expected to be subject to
claims and suits arising in the ordinary course of business.
NET PATIENT SERVICE REVENUE
Final determination of amounts earned under the Medicare and Medicaid
programs often occurs in subsequent periods because of audits by the programs,
rights of appeal and the application of numerous technical provisions.
FINANCIAL INSTRUMENTS
Interest rate swap agreements are used on a limited basis to manage the
Company's interest rate exposure. The agreements are contracts to periodically
exchange fixed and floating interest rate payments over the life of the
agreements. On March 10, 1997, as required by the Credit Agreement, the Company
entered into an interest rate swap agreement, which effectively converted for a
five-year period $35 million of floating-rate borrowings to fixed-rate
borrowings. The floating-rate payments are based on LIBOR, and fixed-rate
payments are dependent upon market levels at the time the swap agreement was
consummated. For the three months ended March 31, 1998 and 1997, the Company
received a weighted average rate of 5.88% and 5.72% and paid a weighted average
rate of 6.27% and 6.27%, respectively.
7. STOCKHOLDERS' EQUITY
REINCORPORATION
On February 4, 1998, the Company merged with a wholly-owned subsidiary in
order to change its jurisdiction of incorporation to Delaware and change its
name to Province Healthcare Company. In the Merger, the Company exchanged 1.83
shares of its no par common stock for each share of the subsidiary's $0.01 par
value common stock. All common share and per share data included in the
condensed consolidated financial statements and footnotes thereto have been
restated to reflect this reincorporation. As a result of the reincorporation,
$2,053,000 was reclassified from common stock to additional paid-in-capital upon
conversion from no par to $0.01 par value Common Stock.
PUBLIC OFFERING OF COMMON STOCK
On February 17, 1998, the Company closed its initial public offering of
common stock. In connection with the offering, the Series B redeemable junior
preferred stock was converted into common stock at the public offering price of
the common stock. The net proceeds from the offering were used to redeem the
outstanding balance of the Series A redeemable senior preferred stock plus
accrued dividends, reduce the balance of the outstanding term and revolving
credit loans, and repurchase a portion of the common stock which was issued upon
conversion of the Series B redeemable junior preferred stock.
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The following table sets forth the changes in the stockholders' equity
accounts as a result of the reincorporation and the initial public offering of
common stock (in thousands):
No Par Value
Common Stock
-------------------------- Additional Retained
Shares Amount Paid-in-Capital Deficit Total
---------- ------ --------------- --------- --------
Balance at December 31, 1997 6,330,614 $2,116 $ -- ($3,172) $ (1,056)
Reincorporation -- (2,053) 2,053 -- --
Conversion of the junior preferred stock
and initial public offering of
common stock 6,679,154 67 95,285 (31) 95,321
Preferred stock dividends and accretion -- -- -- (696) (696)
Net income -- -- -- 2,275 2,275
---------- ------ ------- ------- --------
Balance at March 31, 1998 13,009,768 $ 130 $97,338 ($1,624) $ 95,844
========== ====== ======= ======= ========
8. SUBSEQUENT EVENT
On May 1, 1998, the Company acquired the assets and business of Havasu
Samaritan Regional Hospital ("Havasu") in Lake Havasu City, Arizona for
approximately $105.5 million. To finance the acquisition, the Company borrowed
$106 million under its revolving credit facility. The acquisition will be
accounted for as a purchase business combination, and the results of operations
of Havasu will be included in the results of operations of the Company from the
purchase date forward.
9. PRO FORMA FINANCIAL INFORMATION
The condensed consolidated pro forma statement of income for the three
months ended March 31, 1998, gives effect to (i) the conversion of junior
preferred stock into common stock and (ii) the sale of common stock in the
offering and the application of net proceeds thereof to the repurchase of
certain shares of common stock, the redemption of senior preferred stock and the
repayment of debt, as if all such transactions had been completed as of January
1, 1998, at the initial public offering price of $16.00 per share, as follows:
- The elimination of interest expense associated with the $39.5 million of
long-term obligations repaid with the net proceeds of the offering, and the
elimination of the related income tax benefit based on the combined federal
and state statutory rate of 39%.
- The elimination of the dividends and the accretion of issuance costs on
the senior preferred stock redeemed with a portion of the net proceeds of
the offering, and the junior preferred stock converted into common stock in
connection with the offering.
The pro forma condensed consolidated financial information does not purport
to represent what the Company's results of operations would have been had such
transactions in fact occurred as of January 1, 1998, or to project the Company's
results of operations in any future period.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
IMPACT OF ACQUISITIONS
An integral part of the Company's strategy is to acquire non-urban
acute-care hospitals. In August 1997, the Company acquired Colorado River
Medical Center ("CRMC") (formerly Needles Desert Communities Hospital) in
Needles, California (the "CRMC acquisition"). The operating results of CRMC are
included in the Company's results of operations from the date of purchase;
therefore, the results of operations for the first quarter 1998 include CRMC.
On May 1, 1998, the Company acquired the assets and business of Havasu
Samaritan Regional Hospital ("Havasu"), a 119-bed general acute-care hospital in
Lake Havasu City, Arizona, for approximately $105.5 million. To finance the
acquisition, the Company borrowed $106 million under its revolving credit
facility. The acquisition has been accounted for as a purchase business
combination, and the results of operations of Havasu will be included in the
results of operations of the Company from the purchase date forward.
Due to the relatively small number of owned and leased hospitals, each
hospital acquisition can materially affect the overall operating margin of the
Company. Upon the acquisition of a hospital, the Company typically takes a
number of steps to lower operating costs. The impact of such actions may be
offset by other cost increases to expand services, strengthen medical staff and
improve market position. The benefits of these investments and of other
activities to improve operating margins generally do not occur immediately.
Consequently, the financial performance of a newly acquired hospital may
adversely affect overall operating margins in the short term. As the Company
makes additional hospital acquisitions, the Company expects that this effect
will be mitigated by the expanded financial base of existing hospitals and the
allocation of corporate overhead among a larger number of hospitals.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, information
expressed as a percentage of net operating revenue. Such information has been
derived from the Condensed Consolidated Statements of Income of the Company
included elsewhere in this report. The results of operations for the periods
presented include hospitals from their acquisition dates, as discussed above.
THREE MONTHS PERCENTAGE
ENDED INCREASE (DECREASE)
MARCH 31, AMOUNTS
------------------- -------------------
1998 1997
Net operating revenue 100.0% 100.0% 18.3%
Operating expenses (1) 82.8 84.2 16.4
----- ----
EBITDA (2) 17.2 15.8 28.2
Depreciation and amortization 4.6 4.4 24.6
Interest 3.9 4.4 5.3
Minority interest 0.1 0.1 --
Loss on sale of assets 0.1 0.2 62.1
----- ----
Income before income taxes 8.5 6.7 48.9
Provision for income taxes 3.7 3.0 46.3
----- ----
Net income 4.8% 3.7% 51.0%
===== ====
(1) Operating expenses represent expenses before interest, minority interest,
loss on sale of assets, income taxes, depreciation and amortization expense.
(2) EBITDA represents the sum of income before income tax expense, interest,
minority interest, depreciation and amortization, and loss on sale of assets.
Management
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understands that industry analysts generally consider EBITDA to be one measure
of the financial performance of a company that is presented to assist investors
in analyzing the operating performance of the Company and its ability to service
debt. Management believes that an increase in EBITDA level is an indicator of
the Company's improved ability to service existing debt, to sustain potential
future increases in debt and to satisfy capital requirements. However, EBITDA is
not a measure of financial performance under generally accepted accounting
principles and should not be considered an alternative (i) to net income as a
measure of operating performance or (ii) to cash flows from operating,
investing, or financing activities as a measure of liquidity. Given that EBITDA
is not a measurement determined in accordance with generally accepted accounting
principles and is thus susceptible to varying calculations, EBITDA, as
presented, may not be comparable to other similarly titled measures of other
companies.
SELECTED OPERATING STATISTICS - OWNED HOSPITALS
The following table sets forth certain operating statistics for the
Company's owned hospitals for each of the periods presented. The results of the
owned hospitals for the three months ended March 31, 1998 and 1997 include three
months of operations for eight hospitals and seven hospitals, respectively.
Three Months Ended
March 31,
-------------------------------
1998 1997
----------- -----------
CONSOLIDATED HOSPITALS:
Number of hospitals end of period 8 7
Licensed beds end of period 570 517
Beds in service end of period 463 405
Inpatient admissions 4,575 3,910
Patient days 25,570 20,904
Adjusted patient days 42,295 36,437
Average length of stay (days) 5.6 5.3
Occupancy rates (licensed beds) 49.8% 44.9%
Occupancy rates (beds in service) 61.4% 57.4%
Gross inpatient revenue $45,052,328 $35,187,373
Gross outpatient revenue $30,010,142 $25,860,236
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Net operating revenue was $47.9 million for the three months ended March 31,
1998, compared to $40.5 million for the comparable period of 1997, an increase
of $7.4 million or 18.3%. Revenue generated by hospitals owned during both
periods ("same store hospitals") increased $3.3 million, or 9.4%, resulting from
inpatient and outpatient volume increases, as well as price increases. The
remaining increase of $4.1 million was primarily attributable to the CRMC
acquisition, offset by decreases in revenue in the management company of $0.5
million, resulting primarily from a decrease in the number of management
contracts, and a decrease in various other revenue.
Operating expenses were $39.6 million, or 82.8% of net operating revenue, for
the three months ended March 31, 1998, compared to $34.1 million, or 84.2% of
net operating revenue, for the comparable period of 1997. Operating expenses of
same store hospitals increased $2.4 million, primarily as a result of volume
increases, change in case mix and an increase in bad debt expense. The remaining
$3.1 million increase was primarily attributable to the CRMC acquisition.
EBITDA was $8.2 million or 17.2% of net operating revenue for the three months
ended March 31, 1998, compared to $6.4 million, or 15.8% of net operating
revenue, for the comparable period of 1997. EBITDA for the Company's hospitals
owned during both
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periods increased 11.7%, and as a percent of net operating revenue was 22.2%
for the three months ended March 31, 1998, compared to 21.8% for the comparable
period of 1997.
Depreciation and amortization expense was $2.2 million, or 4.6% of net operating
revenue, for the three months ended March 31, 1998, compared to $1.8 million, or
4.4% of net operating revenue for the comparable period of 1997. The increase in
depreciation and amortization resulted from increased capital expenditures.
Interest expense as a percent of net operating revenue decreased to 3.9% for the
three months ended March 31, 1998, compared to 4.4% for the comparable period of
1997.
Net income was $2.3 million, or 4.8% of net operating revenue, for the three
months ended March 31, 1998, compared to $1.5 million, or 3.7% of net operating
revenue for the comparable period of 1997.
The unaudited pro forma condensed consolidated statement of income for the three
months ended March 31, 1998, gives effect to (i) the conversion of junior
preferred stock into common stock and (ii) the sale of common stock in the
offering and the application of net proceeds thereof to the repurchase of
certain shares of common stock, the redemption of senior preferred stock and the
repayment of debt, as if all such transactions had been completed as of January
1, 1998, at the initial public offering price of $16.00 per share, as follows:
- - The elimination of interest expense associated with the $39.5 million of
long-term obligations repaid with the net proceeds of the offering, and
the elimination of the related income tax benefit based on the combined
federal and state statutory rate of 39%.
- - The elimination of the dividends and the accretion of issuance costs on
the senior preferred stock redeemed with a portion of the net proceeds of
the offering and the junior preferred stock converted into common stock in
connection with the offering.
The pro forma condensed consolidated income statement does not purport to
represent what the Company's results of operations would have been had such
transactions in fact occurred as of January 1, 1998, or to project the Company's
results of operations in any future period.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of $35.7 million,
including cash and cash equivalents of $6.7 million. The ratio of current assets
to current liabilities was 3.2 to 1.0 and 1.8 to 1.0 at March 31, 1998 and 1997,
respectively.
In February 1998, the Company completed its initial public offering
("IPO") of common stock. In connection with the offering, the Series B
redeemable junior preferred stock was converted into common stock at the public
offering price of the common stock. The net proceeds from the offering were used
to reduce the balance of the outstanding term and revolving credit loans ($39.5
million), redeem the outstanding balance of the Series A redeemable senior
preferred stock plus accrued dividends ($22.7 million) and repurchase a portion
of the common stock which was issued upon conversion of the Series B junior
preferred stock ($14.9 million).
In the first quarter of 1998, total long-term obligations declined to
$52.2 million from $83.0 million at year end. In March 1998, the Company amended
and restated its Credit Agreement and increased its credit facilities to $260
million, including a five-year $35 million End-Loaded Lease Facility ("ELLF").
Cash provided by operations was $0.2 million for the three months ended
March 31, 1998.
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Cash used in operations was $1.3 million for the three months ended March 31,
1997. Cash used in investing activities was $2.5 million for the three months
ended March 31, 1998 and 1997, primarily related to capital expenditures. Net
cash provided by financing activities was $4.8 million for the three months
ended March 31, 1998, primarily as a result of the IPO. Cash used in financing
activities was $0.4 million in 1997, as a result of the repayment of debt.
The Company intends to acquire additional acute care facilities, and is
actively seeking out such acquisitions. There can be no assurance that the
Company will not require additional debt or equity financing for any particular
acquisition. Also, the Company continually reviews its capital needs and
financing opportunities and may seek additional equity or debt financing for its
acquisition program or other needs. At March 31, 1998, the Company had $48
million outstanding under its revolving line of credit and no amounts
outstanding under the ELLF.
Capital expenditures, excluding acquisitions for the three months ended
March 31, 1998 and 1997 were $2.5 million and $2.4 million, respectively.
Capital expenditures for the owned hospitals may vary from year to year
depending on facility improvements and service enhancements undertaken by the
hospitals. The management services business does not require significant capital
expenditures. The Company expects to make capital expenditures in 1998 of
approximately $10 million, exclusive of any acquisitions of businesses. Planned
capital expenditures for 1998 consist principally of capital improvements to
owned and leased hospitals. The Company expects to fund these expenditures
through cash provided by operating activities and borrowings under its revolving
credit agreement.
GENERAL
The federal Medicare program and state Medicaid programs accounted for
approximately 71.4% and 73.4% of patient days for the three months ended March
31, 1998 and 1997, respectively. The payment rates under the Medicare program
for inpatients are prospective, based upon the diagnosis of a patient. The
payment rate increases have historically been less than actual inflation.
Both federal and state legislators are continuing to scrutinize the health
care industry for the purpose of reducing health care costs. While the Company
is unable to predict what, if any, future health reform legislation may be
enacted at the federal or state level, the Company expects continuing pressure
to limit expenditures by governmental health care programs. Under the Balanced
Budget Act of 1997 (the "1997 Act"), there are no increases in the rates paid to
acute care hospitals for inpatient care through September 30, 1998. Payments for
Medicare outpatient services provided at acute care hospitals and home health
services historically have been paid based on costs, subject to certain limits.
The 1997 Act requires that the payment for those services be converted to a
prospective payment system, which will be phased in over time. The 1997 Act also
includes a managed care option which could direct Medicare patients to only
managed care providers exclusively. Further changes in the Medicare or Medicaid
programs and other proposals to limit health care spending could have a material
adverse impact upon the health care industry and the Company.
The Company's acute care hospitals, like most acute care hospitals in the
United States, have significant unused capacity. The result is substantial
competition for patients and physicians. Inpatient utilization continues to be
negatively affected by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative health care delivery services
for less acutely ill patients. The Company expects increased competition and
admission constraints to continue in the future. The ability to respond
successfully to these trends, as well as spending reductions in governmental
health care programs, will play a significant role in determining hospitals'
ability to maintain their current rate of net revenue growth and operating
margins.
The Company expects the industry trend from inpatient to outpatient
services to continue due to the increased focus on managed care and advances in
technology. Outpatient revenue of the Company's owned hospitals was
approximately 40.0% and 42.4%
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of gross patient service revenue for the three months ended March 31, 1998 and
1997, respectively.
The complexity of the Medicare and Medicaid regulations, increases in
managed care, hospital personnel turnover, the dependence of hospitals on
physician documentation of medical records and the subjective judgment involved
complicates the billing and collections of accounts receivable by hospitals.
There can be no assurance that this complexity will not negatively impact the
Company's future cash flow or results of operations.
The Company's historical financial trend has been favorably impacted by
the Company's ability to successfully acquire acute care hospitals. While the
Company believes that trends in the health care industry described above may
create possible future acquisition opportunities, there can be no assurances
that it can continue to maintain its current growth rate through hospital
acquisitions and successfully integrate the hospitals into its system.
The Company's owned hospitals accounted for 90.6% of the Company's net
operating revenue for the six months ended March 31, 1998 compared to 87.7% for
the three months ended March 31, 1997.
The federal government and a number of states are rapidly increasing the
resources devoted to investigating allegations of fraud and abuse in the
Medicare and Medicaid programs. At the same time, regulatory and law enforcement
authorities are taking an increasingly strict view of the requirements imposed
on providers by the Social Security Act and Medicare and Medicaid regulations.
Although the Company believes that it is in material compliance with such laws,
a determination that the Company has violated such laws, or even the public
announcement that the Company was being investigated concerning possible
violations, could have a material adverse effect on the Company.
INFLATION
The health care industry is labor intensive. Wages and other expenses
increase, especially during periods of inflation and labor shortages. In
addition, suppliers pass along rising costs to the Company in the form of higher
prices. The Company has generally been able to offset increases in operating
costs by increasing charges for services and expanding services. The Company has
also implemented cost control measures to curb increases in operating costs and
expenses. In light of cost containment measures imposed by government agencies
and private insurance companies, the Company is unable to predict its ability to
offset or control future cost increases, or its ability to pass on the increased
costs associates with providing health care services to patients with government
or managed care payors, unless such payors correspondingly increase
reimbursement rates.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this discussion, including without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects," and words of similar import, constitute forward-looking
statements. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, both nationally and in
regions where the Company operates; demographic changes; the effect of existing
or future governmental regulation and federal and state legislative and
enforcement initiatives on the Company's business, including the
recently-enacted Balanced Budget Act of 1997; changes in Medicare and Medicaid
reimbursement levels; the Company's ability to implement successfully its
acquisition and development strategy and changes in such strategy; the
availability and terms of financing to fund the expansion of the Company's
business, including the acquisition of additional hospitals; the Company's
ability to attract and retain qualified management personnel and to recruit and
retain physicians and other health care personnel to the non-urban markets it
serves; the effect of managed care initiatives on the non-urban markets served
by the Company's
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hospitals and the Company's ability to enter into managed care provider
arrangements on acceptable terms; the effect of liability and other claims
asserted against the Company; the effect of competition in the markets served by
the Company's hospitals; and other factors referenced in this report. Certain of
these factors are discussed in more detail elsewhere in this report. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. The Company disclaims any obligation to
update any such factors or to publicly announce the result of any revisions to
any of the forward-looking statements contained herein to reflect future events
or developments.
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PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On January 14, 1998, in anticipation of its initial public offering, the
shareholders of Province Healthcare Company took action by unanimous written
consent without a meeting and approved the proposed merger with Principal
Hospital Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Description of Exhibits
- ------ -----------------------
2.1 Amended and Restated Agreement and Plan of Merger, dated
as of January 15, 1998, between Principal Hospital
Company and Province Healthcare Company ("Province")*
3.1 Amended and Restated Certificate of Incorporation of Province*
3.2 Amended and Restated By-laws of Province*
4.5 Amended and Restated Credit Agreement, dated as of March
30, 1998, among Province, First Union National Bank, as
Agent and Issuing Bank, and various lenders thereto
4.6 Participation Agreement, dated as of March 30, 1998,
among Province, as Construction Agent and Lessee, various
parties as Guarantors, First Security Bank, National
Association, as Owner Trustee, various banks party
thereto, as Holders, various banks party thereto, as
Lenders, and First Union National Bank, as Agent.
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10.1 Lease Agreement, dated as of March 30, 1998, between
First Security Bank, National Association, as Owner
Trustee, and Province, as Lessee
27.1 Financial Data Schedule (for SEC use only)
- ------------------------
(*) Incorporated by reference to the exhibits filed with the registrant's
Registration Statement on Form S-1, Registration No. 333-34421.
(b) Reports on Form 8-K.
The Company has filed no reports on Form 8-K for the quarterly period
ending March 31, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on behalf by the undersigned
thereunto duly authorized.
PROVINCE HEALTHCARE COMPANY
By: /s/ BRENDA B. RECTOR
---------------------------------------
Brenda B. Rector
Vice President and Controller
Date: May 15, 1998