1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
---------------------------
PROVINCE HEALTHCARE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 0-23639 62-1710772
(State or other jurisdiction of (Commission File Number) (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 OCTOBER 31, 1998
COMMON STOCK, $.01 PAR VALUE 15,699,751
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PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Page
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997.........................1
Condensed Consolidated Statements of Income
Three Months Ended September 30, 1998 and 1997...................2
Condensed Consolidated Statements of Income
Nine Months Ended September 30, 1998 and 1997....................3
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997....................4
Notes to Condensed Consolidated Financial Statements.................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...............................................12
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 30, December 31,
1998 1997
------------- ------------
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 4,622 $ 4,186
Accounts receivable, less allowance for doubtful
accounts of $8,524 at September 30, 1998 and
$4,749 at December 31, 1997 49,534 30,902
Inventories 6,372 3,655
Prepaid expenses and other 12,403 8,334
-------- --------
Total current assets 72,931 47,077
Property, plant and equipment, net 110,380 65,974
Other assets:
Unallocated purchase price 122 760
Cost in excess of net assets acquired, net 142,900 53,624
Other assets 9,488 9,026
-------- --------
Total assets $335,821 $176,461
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,627 $ 6,524
Accrued salaries and benefits 10,796 8,720
Accrued expenses 3,047 4,422
Current maturities of long-term obligations 2,371 6,053
-------- --------
Total current liabilities 21,841 25,719
Long-term obligations, less current maturities 133,076 83,043
Third-party settlements 4,076 4,680
Other liabilities 9,976 13,088
Minority interest 795 825
-------- --------
Total noncurrent liabilities 147,923 101,636
Mandatory redeemable preferred stock -- 50,162
Common stockholders' equity:
Common stock--no par value at December 31, 1997;
$0.01 par value at September 30, 1998; authorized
25,000,000 shares; issued and outstanding
15,699,751 shares and 6,330,614 shares at
September 30, 1998 and December 31, 1997,
respectively 157 2,116
Additional paid-in-capital 162,858 --
Retained earnings 3,042 (3,172)
-------- --------
Total common stockholders' equity 166,057 (1,056)
-------- --------
Total liabilities, redeemable preferred stock
and common stockholders' equity $335,821 $176,461
======== ========
NOTE: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date, but does not include all of
the financial information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes.
1
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended September 30,
--------------------------------------------
Actual Pro Forma
------------------------ (Note 9)
1998 1997 1998
-------- -------- --------
Revenue:
Net patient service revenue $ 61,977 $ 37,944 $ 61,977
Management and professional services 2,889 2,748 2,889
Reimbursable expenses 1,639 1,618 1,639
Other 766 777 766
-------- -------- --------
Net operating revenue 67,271 43,087 67,271
Expenses:
Salaries, wages and benefits 27,202 16,523 27,202
Reimbursable expenses 1,639 1,618 1,639
Purchased services 7,192 6,743 7,192
Supplies 6,862 4,273 6,862
Provision for doubtful accounts 5,988 2,905 5,988
Other operating expenses 5,263 4,063 5,263
Rentals and leases 1,584 1,253 1,584
Depreciation and amortization 3,826 1,766 3,826
Interest expense 3,132 2,206 2,915
Minority interest 33 144 33
Loss on sale of assets -- 3 --
-------- -------- --------
Total expenses 62,721 41,497 62,504
-------- -------- --------
Income before provision for income taxes 4,550 1,590 4,767
Provision for income taxes 2,019 773 2,115
-------- -------- --------
Net income 2,531 817 2,652
Preferred stock dividends and accretion -- (1,437) --
-------- -------- --------
Net income to common shareholders $ 2,531 $ (620) $ 2,652
======== ======== ========
Basic earnings per common share:
Net income $ 0.17 $ 0.13 $ 0.17
Preferred stock dividends and accretion -- (0.23) --
-------- -------- --------
Net income to common shareholders $ 0.17 $ (0.10) $ 0.17
======== ======== ========
Diluted earnings per common share:
Net income $ 0.16 $ 0.13 $ 0.16
Preferred stock dividends and accretion -- (0.23) --
-------- -------- --------
Net income to common shareholders $ 0.16 $ (0.10) $ 0.16
======== ======== ========
See accompanying notes.
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Nine Months Ended September 30,
-----------------------------------------
Actual Pro Forma
------------------------ (Note 8)
1998 1997 1998
-------- -------- ---------
Revenue:
Net patient service revenue $155,968 $107,712 $ 155,968
Management and professional services 8,783 8,729 8,783
Reimbursable expenses 4,752 4,997 4,752
Other 2,250 2,196 2,250
-------- ------- --------
Net operating revenue 171,753 123,634 171,753
Expenses:
Salaries, wages and benefits 67,910 46,640 67,910
Reimbursable expenses 4,752 4,997 4,752
Purchased services 20,353 17,260 20,353
Supplies 17,024 12,032 17,024
Provision for doubtful accounts 13,367 8,808 13,367
Other operating expenses 14,333 12,141 14,333
Rentals and leases 4,267 3,831 4,267
Depreciation and amortization 9,373 5,377 9,373
Interest expense 7,792 6,177 4,569
Minority interest 129 291 129
Loss (gain) on sale of assets 45 (47) 45
-------- ------- --------
Total expenses 159,345 117,507 156,122
-------- ------- --------
Income before provision for income taxes 12,408 6,127 15,631
Provision for income taxes 5,468 2,818 6,889
-------- ------- --------
Net income 6,940 3,309 8,742
Preferred stock dividends and accretion (696) (3,708) --
-------- ------- --------
Net income to common shareholders $ 6,244 $ (399) $ 8,742
======== ======= ========
Basic earnings per common share:
Net income $ 0.55 $ 0.59 $ 0.56
Preferred stock dividends and accretion (0.05) (0.66) --
-------- ------- --------
Net income to common shareholders $ 0.50 $ 0.07 $ 0.56
======== ======= ========
Diluted earnings per common share:
Net income $ 0.54 $ 0.59 $ 0.55
Preferred stock dividends and accretion (0.06) (0.66) --
-------- ------- --------
Net income to common shareholders $ 0.48 $ 0.07 $ 0.55
======== ======= ========
See accompanying notes.
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
Nine Months Ended
September 30,
-----------------------------
1998 1997
--------- --------
NET CASH USED IN OPERATING ACTIVITIES $ (6,302) $ (2,096)
INVESTING ACTIVITIES
Purchase of property, plant and equipment (10,778) (12,708)
Purchase of acquired companies (130,869) (2,562)
Other (111) --
--------- -------
Net cash used in investing activities (141,758) (15,270)
FINANCING ACTIVITIES
Proceeds from long-term debt 228,580 9,000
Repayments of debt (185,075) (1,402)
Net proceeds from issuance of common stock 142,614 442
Issuance of Junior and Senior Preferred Stock -- 3,755
Proceeds from common stock note -- 211
Exchange of Junior Preferred Stock (14,884) --
Redemption of Senior Preferred Stock (22,739) --
--------- --------
Net cash provided by financing activities 148,496 12,006
--------- --------
Net decrease in cash and cash equivalents 436 (5,360)
Cash and cash equivalents at beginning of period 4,186 11,256
--------- --------
Cash and cash equivalents at end of period $ 4,622 $ 5,896
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid during the period $ 5,957 $ 4,970
========= ========
Income taxes paid during the period $ 4,239 $ 4,137
========= ========
NONCASH TRANSACTIONS
Dividends and accretion on preferred stock $ 696 $ 3,708
Conversion and redemption of preferred stock 33,138 --
Property and equipment acquired through
capital leases 765 1,305
ACQUISITIONS
Fair value of assets acquired $ 133,710 $ 2,683
Liabilities assumed (2,841) (121)
--------- --------
Cash paid $ 130,869 $ 2,562
========= ========
See accompanying notes.
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 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 September 30, 1998, the Company
had $126.7 million outstanding under its revolving line of credit and no amounts
outstanding under the ELLF. In July 1998, the Company completed a public
offering of common stock and used the net proceeds therefrom to reduce debt by
approximately $65.7 million. (See Note 7.)
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.
On September 4, 1998, the Company entered into an interest rate swap
agreement, which effectively converted for a five-year period $45.0 million of
floating-rate borrowings to fixed-rate borrowings. This interest rate swap
agreement will be used to manage the Company's interest rate exposure. The
agreement is a contract to periodically exchange floating interest rate payments
for fixed interest rate payments over the life of the agreement. The Company
secured a 5.625% fixed interest rate.
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)- (CONTINUED)
3. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share date):
Three Months Ended September 30,
--------------------------------------
Actual Pro Forma
-------------------- ---------
(Note 8)
1998 1997 1998
---- ---- -----
Numerator:
Net income $ 2,531 $ 817 $ 2,652
Preferred stock dividends and accretion -- (1,437) --
------- ------- -------
Net income (loss) to common shareholders $ 2,531 $ (620) $ 2,652
======= ======= =======
Denominator:
Denominator for basic earnings per share to
common shareholders-weighted-average shares 15,251 6,162 15,697
Effect of dilutive securities -
Incentive stock options 386 366 385
Stock purchase rights -- -- --
------- ------- -------
Denominator for diluted earnings per share 15,637 6,528 16,082
Basic earnings (loss) per common share:
Net income $ 0.17 $ 0.13 $ 0.17
Preferred stock dividends and accretion -- (0.23) --
------- ------- -------
Net income (loss) per common share $ 0.17 $ (0.10) $ 0.17
======= ======= =======
Diluted earnings (loss) per common share:(1)
Net income $ 0.16 $ 0.13 $ 0.16
Preferred stock dividends and accretion -- (0.23) --
------- ------- -------
Net income (loss) per common share $ 0.16 $ (0.10) $ 0.16
======= ======= =======
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)- (CONTINUED)
Nine Months Ended September 30,
-------------------------------------
Actual Pro Forma
------------------ ---------
(Note 8)
1998 1997 1998
---- ---- -----
Numerator:
Net income $ 6,940 $ 3,309 $ 8,742
Preferred stock dividends and accretion (696) (3,708) --
------- ------- -------
Net income (loss) to common shareholders $ 6,244 $ (399) $ 8,742
======= ======= =======
Denominator:
Denominator for basic earnings per share to
common shareholders-weighted-average shares 12,549 5,637 15,696
Effect of dilutive securities -
Incentive stock options 330 379 330
Stock purchase rights -- 450 --
------- ------- -------
Denominator for diluted earnings per share 12,879 6,466 16,026
Basic earnings (loss) per common share:
Net income $ 0.55 $ 0.59 $ 0.56
Preferred stock dividends and accretion (0.05) (0.66) --
------- ------- -------
Net income (loss) per common share $ 0.50 $ (0.07) $ 0.56
======= ======= =======
Diluted earnings (loss) per common share:(1)
Net income $ 0.54 $ 0.59 $ 0.55
Preferred stock dividends and accretion (0.06) (0.66) --
------- ------- -------
Net income (loss) per common share $ 0.48 $ (0.07) $ 0.55
======= ======= =======
(1) Diluted loss per share amounts for 1997 have been calculated using the
same denominator as used in the basic earnings (loss) per share
calculation, as the inclusion of dilutive securities in the denominator
would have an anti-dilutive effect.
4. INCOME TAXES
The income tax provision for the three months and nine months ended
September 30, 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 three
months and nine months ended September 30, 1998 include CRMC.
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)- (CONTINUED)
On May 1, 1998, the Company acquired Havasu Samaritan Regional Hospital
("Havasu") in Lake Havasu City, Arizona, from Samaritan Health System for
approximately $105.5 million. On June 11, 1998, the Company acquired certain net
assets and assumed certain liabilities of Elko General Hospital ("Elko") for a
purchase price of approximately $21.7 million. To finance these acquisitions,
the Company borrowed $106.0 million and $22.0 million, respectively, under its
revolving credit facility. These acquisitions were accounted for as purchase
business combinations, and the results of operations of the two hospitals have
been included in the results of operations of the Company from the respective
dates of acquisition. Cost in excess of net assets acquired in these
acquisitions totaled approximately $89.1 million. The allocation of the purchase
price associated with these acquisitions has been determined based upon
available information and is subject to further refinement.
The following pro forma information for the Company includes the
operations of the entities acquired in 1998 and 1997, as if the respective
transactions had occurred at the beginning of the periods presented (in
thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
1998 1997 1998 1997
------- ------- -------- --------
Net operating revenue $67,271 $63,812 $205,797 $189,693
Net income 2,531 (23) 7,294 1,142
Net income (loss) to common shareholders 2,531 (1,460) 6,598 (2,566)
Basic earnings (loss) per common share:
Net income $0.17 $ 0.00 $0.58 $ 0.20
Net income (loss) to common shareholders 0.17 (0.24) 0.53 (0.46)
Diluted earnings (loss) per common share:
Net income $0.16 $ 0.00 $0.57 $ 0.18
Net income (loss) to common shareholders 0.16 (0.22) $0.51 (0.40)
The pro forma results of operations do not purport to represent what
the Company's results of operations would have been had such transactions, in
fact, occurred at the beginning of the periods presented or to project the
Company's results of operations in any future period.
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.
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.
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)- (CONTINUED)
LITIGATION
The Company currently, and from time to time, is expected to be subject
to claims and suits arising in the ordinary course of business.
NET PATIENT SERVICE REVENUE
Final determination of amounts earned under the Medicare and Medicaid
programs often occurs in subsequent periods because of audits by the programs,
rights of appeal and the application of numerous technical provisions.
Differences between original estimates and subsequent revisions (including
settlements) are included in the statement of income in the period in which
revisions are made, and resulted in increases in net patient service revenue of
$2.2 million and $3.4 million, or 3.5% and 2.2%, respectively, of net operating
revenue, for the Company in the three and nine-month periods ended September 30,
1998. This compared to an increase of $0.8 million in both the three and
nine-month periods ended September 30, 1997.
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 based on market levels at the time the swap agreement was
consummated. For the three months ended September 30, 1998 and 1997, the Company
received a weighted average rate of 5.67% and 5.79% and paid a weighted average
rate of 6.27% and 6.27%, respectively. For the nine months ended September 30,
1998 and 1997, the Company received a weighted average rate of 5.74% and 5.69%
and paid a weighted average rate of 6.27% and 6.27%, respectively.
On September 4, 1998, the Company entered into an interest rate swap
agreement, which effectively converted for a five-year period $45 million of
floating-rate borrowings to fixed-rate borrowings. The floating-rate payments
are based on LIBOR, and fixed-rate payments are based on market levels at the
time the swap agreement was consummated. For the three months ended September
30, 1998, the Company received a weighted average rate of 5.59% and paid a
weighted average rate of 5.625%.
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.
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED)
PUBLIC OFFERINGS OF COMMON STOCK
On February 17, 1998, the Company closed its initial public offering of
5,405,000 shares of common stock at an offering price of $16.00 per share. 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.
In July 1998, the Company completed its public offering of 2,685,500
shares of common stock at an offering price of $26.00 per share. The net
proceeds from the offering of approximately $66.0 million were used primarily to
reduce debt.
The following table sets forth the changes in the stockholders' equity
accounts as a result of the reincorporation and the public offerings of common
stock (in thousands):
Retained
Common Stock Additional Earnings
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 junior preferred stock
and initial public offering of
common stock 6,679,154 67 95,285 (30) 95,322
Issuance of common stock from
follow-on stock offering 2,685,500 27 65,500 -- 65,527
Exercise of stock options 4,483 -- 20 -- 20
Preferred stock dividends and accretion -- -- -- (696) (696)
Net income -- -- -- 6,940 6,940
---------- ------- -------- ------- --------
Balance at September 30, 1998 15,699,751 $ 157 $162,858 $ 3,042 $166,057
========== ======= ======== ======= ========
8. PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated statements of income for
the three and nine months ended September 30, 1998, give effect to (i) the
conversion of junior preferred stock into common stock at the initial public
offering price of $16.00 per share; (ii) the sale of common stock in the initial
public offering (IPO)in February 1998, 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; and (iii) the sale of common
stock at $26.00 per share in a public offering completed in July, 1998, and the
application of net proceeds thereof to reduce debt; as if all such transactions
had been completed as of January 1, 1998, as follows:
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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED)
- The elimination of interest expense associated with the $39.6 million of
long-term obligations repaid with the net proceeds of the IPO, and the
elimination of the related income tax benefit.
- 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 IPO, and the junior preferred stock converted into common stock in
connection with the IPO.
- The elimination of interest expense associated with the $65.7 million of
long-term obligations repaid with the net proceeds of the July 1998 public
stock offering, and the elimination of the related income tax benefit.
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.
11
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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 three-month and nine-month periods
ended September 30, 1998 include CRMC and the results of operations for the
three-month and nine-month periods ended September 30, 1997 include CRMC for two
months.
On May 1, 1998, the Company acquired Havasu Samaritan Regional Hospital
("Havasu") in Lake Havasu City, Arizona, from Samaritan Health System for
approximately $105.5 million. On June 11, 1998, the Company acquired certain net
assets and assumed certain liabilities of Elko General Hospital ("Elko") for a
purchase price of $21.7 million. To finance these acquisitions, the Company
borrowed $106.0 million and $22.0 million, respectively, under its revolving
credit facility. These acquisitions were accounted for as purchase business
combinations, and the results of operations of the two hospitals have been
included in the results of operations of the Company from the purchase dates
forward. Therefore, the Company's operations for the three-month and nine-month
periods ended September 30, 1998 includes Havasu and Elko, and the operations
for the nine-month period ended September 30, 1998 include five months'
operations of Havasu and three and a half months' for Elko. The CRMC, Havasu and
Elko acquisitions are collectively referred to in this discussion as "the
acquisitions."
Due to the relatively small number of owned and leased hospitals, each
hospital acquisition can materially affect the overall operating margin of the
Company. Upon the acquisition of a hospital, the Company typically takes a
number of steps to lower operating costs. The impact of such actions may be
offset by other cost increases to expand services, strengthen medical staff and
improve market position. The benefits of these investments and of other
activities to improve operating margins generally do not occur immediately.
Consequently, the financial performance of a newly acquired hospital may
adversely affect overall operating margins in the short term. As the Company
makes additional hospital acquisitions, the Company expects that this effect
will be mitigated by the expanded financial base of existing hospitals and the
allocation of corporate overhead among a larger number of hospitals.
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)
SEPTEMBER 30, OF DOLLAR AMOUNTS
-------------------- ------------------
1998 1997
----- -----
Net operating revenue 100.0% 100.0% 56.1%
Operating expenses (1) 82.8 86.8 49.1
----- -----
EBITDA (2) 17.2 13.2 102.2
Depreciation and amortization 5.7 4.1 116.6
Interest 4.7 5.1 42.0
Minority interest 0.0 0.3 (77.1)
Income before income taxes 6.8 3.7 186.2
Provision for income taxes 3.0 1.8 161.2
----- -----
Net income 3.8% 1.9% 209.8%
===== =====
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NINE MONTHS PERCENTAGE
ENDED INCREASE (DECREASE)
SEPTEMBER 30, OF DOLLAR AMOUNTS
---------------------- -------------------
1998 1997
----- -----
Net operating revenue 100.0% 100.0% 38.9%
Operating expenses (1) 82.7 85.5 34.3
----- -----
EBITDA (2) 17.3 14.5 66.0
Depreciation and amortization 5.5 4.3 74.3
Interest 4.5 5.0 26.1
Minority interest 0.1 0.2 (55.7)
Income before income taxes 7.2 5.0 102.5
Provision for income taxes 3.2 2.3 94.0
----- -----
Net income 4.0% 2.7% 109.7%
===== =====
(1) Operating expenses represent expenses before interest, minority interest,
loss on sale of assets, income taxes, depreciation and amortization expense.
(2) EBITDA represents the sum of income before income tax expense, interest,
minority interest, depreciation and amortization, and loss on sale of assets.
Management understands that industry analysts generally consider EBITDA to be
one measure of the financial performance of a company that is presented to
assist investors in analyzing the operating performance of the Company and its
ability to service debt. Management believes that an increase in EBITDA level is
an indicator of the Company's improved ability to service existing debt, to
sustain potential future increases in debt and to satisfy capital requirements.
However, EBITDA is not a measure of financial performance under generally
accepted accounting principles and should not be considered an alternative (i)
to net income as a measure of operating performance or (ii) to cash flows from
operating, investing, or financing activities as a measure of liquidity. Given
that EBITDA is not a measurement determined in accordance with generally
accepted accounting principles and is thus susceptible to varying 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.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
CONSOLIDATED HOSPITALS:
Number of hospitals end of period 10 8 10 8
Licensed beds end of period 713 570 713 570
Beds in service end of period 633 468 633 468
Inpatient admissions 5,709 3,599 15,445 11,008
Patient days 28,382 20,582 80,485 61,443
Adjusted patient days 52,143 38,014 141,848 109,866
Average length of stay (days) 5.0 5.7 5.2 5.6
Occupancy rates (licensed beds) 43.3% 39.2% 41.4% 39.5%
Occupancy rates (beds in service) 48.7% 47.8% 46.6% 48.5%
Gross inpatient revenue $54,920,042 $33,409,656 $150,079,705 $100,797,339
Gross outpatient revenue 45,977,458 28,296,658 114,423,400 81,976,556
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THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net operating revenue was $67.3 million for the three months ended
September 30, 1998, compared to $43.1 million for the comparable period of 1997,
an increase of $24.2 million or 56.1%. Revenue generated by hospitals owned
during both periods ("same store hospitals") increased $2.7 million, or 7.1%,
resulting from inpatient and outpatient volume increases, as well as price
increases. Also, cost report settlements and the filing of cost reports in the
current quarter resulted in positive revenue adjustments of $2.2 million (3.5%
of net patient service revenue) and $0.8 million for the three months ended
September 30, 1998 and 1997, respectively. The remaining increase of $21.5
million was primarily attributable to the acquisitions.
Operating expenses were $55.7 million, or 82.8% of net operating revenue, for
the three months ended September 30, 1998, compared to $37.4 million, or 86.8%
of net operating revenue, for the comparable period of 1997. Operating expenses
of same store hospitals increased $1.9 million, primarily as a result of volume
increases, and change in case mix. The remaining $16.4 million increase was
primarily attributable to the acquisitions.
EBITDA was $11.5 million or 17.2% of net operating revenue for the three months
ended September 30, 1998, compared to $5.7 million, or 13.2% of net operating
revenue, for the comparable period of 1997. EBITDA for the Company's hospitals
owned during both periods increased 12.3%, and as a percent of net operating
revenue was 18.5% for the three months ended September 30, 1998, compared to
17.7% for the comparable period of 1997.
Depreciation and amortization expense was $3.8 million, or 5.7% of net operating
revenue, for the three months ended September 30, 1998, compared to $1.8
million, or 4.1% of net operating revenue for the comparable period of 1997. The
increase in depreciation and amortization resulted from the acquisitions and
increased capital expenditures. Interest expense as a percent of net operating
revenue decreased to 4.7% for the three months ended September 30, 1998,
compared to 5.1% for the comparable period of 1997.
Net income was $2.5 million, or 3.8% of net operating revenue, for the three
months ended September 30, 1998, compared to $0.8 million, or 1.9% of net
operating revenue for the comparable period of 1997.
NINE MONTHS ENDED SEPTEMBER 30,1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net operating revenue was $171.8 million for the nine months ended
September 30, 1998, compared to $123.6 million for the comparable period of
1997, an increase of $48.1 million or 38.9%. Revenue generated by hospitals
owned during both periods ("same store hospitals") increased $7.5 million, or
6.8%, resulting from inpatient and outpatient volume increases, as well as price
increases. Also, cost report settlements and the filing of cost reports resulted
in positive revenue adjustments of $3.4 million (2.2% of net patient service
revenue) and $0.8 million for the nine months ended September 30, 1998 and 1997,
respectively. The remaining increase of $40.6 million was primarily attributable
to the acquisitions.
Operating expenses were $142.0 million, or 82.7% of net operating revenue, for
the nine months ended September 30, 1998, compared to $105.7 million, or 85.5%
of net operating revenue, for the comparable period of 1997. Operating expenses
of same store hospitals increased $5.1 million, primarily as a result of volume
increases, change in case mix and an increase in salaries, wages and benefits.
The remaining $31.2 million increase was primarily attributable to the
acquisitions.
EBITDA was $29.7 million or 17.3% of net operating revenue for the nine months
ended September 30, 1998, compared to $17.9 million, or 14.5% of net operating
revenue, for the comparable period of 1997. EBITDA for the Company's hospitals
owned during both periods increased 11.4%, and as a percent of net operating
revenue was 19.9% for the nine months ended September 30, 1998, compared to
19.1% for the comparable period of 1997.
Depreciation and amortization expense was $9.4 million, or 5.5% of net operating
revenue, for the nine months ended September 30, 1998, compared to $5.4 million,
or 4.3% of net operating revenue for the comparable period of 1997. The increase
in depreciation and amortization resulted from the acquisitions and increased
capital expenditures. Interest expense as a percent of net operating revenue
decreased to 4.5%
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for the nine months ended September 30, 1998, compared to 5.0% for the
comparable period of 1997.
Net income was $6.9 million, or 4.0% of net operating revenue, for the nine
months ended September 30, 1998, compared to $3.3 million, or 2.7% of net
operating revenue for the comparable period of 1997.
The unaudited pro forma condensed consolidated statements of income for the
three and nine months ended September 30, 1998 give effect to (i) the conversion
of junior preferred stock into common stock at the initial public offering price
of $16.00 per share; and (ii) the sale of common stock in the February 1998
initial public offering (IPO) 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; and (iii) the sale of common stock at $26.00
per share in the July 1998 public offering, and the application of net proceeds
to reduce debt; as if all such transactions had been completed as of January 1,
1998, as follows:
- The elimination of interest expense associated with the $39.6
million of long-term obligations repaid with the net proceeds of
the IPO, and the elimination of the related income tax benefit.
- 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 IPO and the junior preferred stock converted
into common stock in connection with the IPO.
- The elimination of interest expense associated with the $65.7
million of long-term obligations repaid with the net proceeds of
the July 1998 public offering, and the elimination of the related
income tax benefit.
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 September 30, 1998, the Company had working capital of $51.1 million,
including cash and cash equivalents of $4.6 million. The ratio of current assets
to current liabilities was 3.3 to 1.0 and 1.8 to 1.0 at September 30, 1998 and
December 31, 1997, respectively.
In February 1998, the Company completed its 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 ($39.6 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 July 1998, the Company completed its public offering of 2,685,500
shares of common stock at an offering price of $26.00 per share. The net
proceeds from the offering of approximately $66.0 million were primarily used to
reduce amounts outstanding on the revolving line of credit.
At September 30, 1998, total long-term obligations increased to $133.1
million from $83.0 million at December 31, 1997. The increase resulted primarily
from the borrowing to finance the Havasu and Elko acquisitions, offset by a
reduction in debt from application of stock offering proceeds. 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").
On September 4, 1998, the Company entered into an interest rate swap
agreement, which effectively converted for a five-year period $45.0 million of
floating-rate borrowings to fixed-rate borrowings. This interest rate swap
agreement will be used to manage the Company's interest rate exposure. The
agreement is a contract to periodically exchange floating interest rate payments
for fixed interest rate payments over the life of the agreement. The Company
secured a 5.625% fixed interest rate.
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Cash used in operations was $6.3 million for the nine months ended
September 30, 1998. Cash used in investing activities was $141.7 million for the
nine months ended September 30, 1998, relating primarily to the Havasu and Elko
acquisitions and capital expenditures. Net cash provided by financing activities
was $148.5 million for the nine months ended September 30, 1998, primarily as a
result of the IPO, the follow-on public offering, and the Havasu and Elko
acquisitions.
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 September 30, 1998, the Company had
$126.7 million outstanding under its revolving line of credit and no amounts
outstanding under the ELLF.
Capital expenditures, excluding acquisitions for the nine months ended
September 30, 1998 and 1997 were $10.8 million and $12.7 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 $14 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 accounted for approximately 54.5% and 57.3%
of hospital patient days for the three months and nine months ended September
30, 1998, respectively. The state Medicaid programs accounted for approximately
11.1% and 11.0% of hospital patient days for the three months and nine months
ended September 30, 1998, respectively. The payment rates under the Medicare
program for inpatients are prospective, based upon the diagnosis of a patient.
The Medicare payment rate increases have historically been less than actual
inflation.
Both federal and state legislators are continuing to scrutinize the
health care industry for the purpose of reducing health care costs. While the
Company is unable to predict what, if any, future health reform legislation may
be enacted at the federal or state level, the Company expects continuing
pressure to limit expenditures by governmental health care programs. The
Balanced Budget Act of 1997 (the "1997 Act") imposed certain limitations on
increases in the inpatient Medicare rates paid to acute care hospitals. Payments
for Medicare outpatient services provided at acute care hospitals and home
health services historically have been paid based on costs, subject to certain
limits. The 1997 Act requires that the payment for those services be converted
to a prospective payment system, which will be phased in over time. The 1997 Act
also includes a managed care option which could direct Medicare patients to
managed care organizations. Further changes in the Medicare or Medicaid programs
and other proposals to limit health care spending could have a material adverse
impact upon the health care industry and the Company.
The Company's acute care hospitals, like most acute care hospitals in the
United States, have significant unused capacity. The result is substantial
competition for patients and physicians. Inpatient utilization continues to be
negatively affected by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative health care delivery services
for less acutely ill patients. The Company expects increased competition and
admission constraints to continue in the future. The ability to respond
successfully to these trends, as well as spending reductions in governmental
health care programs, will play a significant role in determining hospitals'
ability to maintain their current rate of net revenue growth and operating
margins.
The Company expects the industry trend in increased outpatient services
to continue due to the increased focus on managed care and advances in
technology. Outpatient revenue of the Company's owned hospitals was
approximately 45.6% and 45.9% of gross patient service revenue for the three
months ended September 30, 1998 and 1997, respectively, and approximately 43.3%
and 44.9% for the nine months ended September 30, 1998 and 1997, respectively.
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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 93.2% and 92.1% of the
Company's net operating revenue for the three months and nine months ended
September 30, 1998, respectively, compared to 89.3% and 88.4% for the three
months and nine months ended September 30, 1997, respectively.
The federal government and a number of states are rapidly increasing the
resources devoted to investigating allegations of fraud and abuse in the
Medicare and Medicaid programs. At the same time, regulatory and law enforcement
authorities are taking an increasingly strict view of the requirements imposed
on providers by the Social Security Act and Medicare and Medicaid regulations.
Although the Company believes that it is in material compliance with such laws,
a determination that the Company has violated such laws, or even the public
announcement that the Company was being investigated concerning possible
violations, could have a material adverse effect on the Company.
INFLATION
The health care industry is labor intensive. Wages and other expenses
increase, especially during periods of inflation and labor shortages. In
addition, suppliers pass along rising costs to the Company in the form of higher
prices. The Company has generally been able to offset increases in operating
costs by increasing charges for services and expanding services. The Company has
also implemented cost control measures to curb increases in operating costs and
expenses. In light of cost containment measures imposed by government agencies
and private insurance companies, the Company is unable to predict its ability to
offset or control future cost increases, or its ability to pass on the increased
costs associated with providing health care services to patients with government
or managed care payors, unless such payors correspondingly increase
reimbursement rates.
IMPACT OF YEAR 2000
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF
THE YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS
Some older computer programs and systems were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognizes a date using "00" as the
year 1900 rather than the year 2000. Therefore, these computer programs or
systems do not properly recognize a year that begins with "20" instead of the
familiar "19," which could result in miscalculations or system failures
commencing January 1, 2000. These programs are present in software applications
running on desktop computers and network servers. These programs are also
present in microchips and microcontrollers incorporated into equipment. Certain
of the Company's computer hardware and software, facility equipment (e.g.,
communications equipment and environmental controls, such as HVAC systems and
elevators), and medical equipment that are date sensitive, may contain programs
with the Year 2000 problem. If uncorrected, the problem could result in computer
system and program failures or equipment and medical device malfunctions that
could result in a disruption of business operations or affect patient diagnosis
and treatment.
The Company's plan to resolve the Year 2000 issue involves the following
four phases: assessment, remediation, testing, and implementation. To date, the
Company has completed its assessment of all systems that could be significantly
affected by the Year 2000 issue. The Company has replaced the majority of its
key financial and operational systems as a part of its systems consolidation in
the normal course of business. This replacement has been a planned approach
during the last two years to enhance or better meet its functional business and
operational requirements. In
17
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addition to the replacement program, the Company will require modification of
some of its software and hardware so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter.
STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT, INCLUDING TIMETABLE FOR
COMPLETION OF EACH REMAINING PHASE.
The Company is currently working with outside consultants, who are
scheduled to visit each of the owned hospitals to determine the depth of the
problem as it relates to devices that are attached to the Company's information
systems. Their purpose is twofold: (1) They will be testing the hospital
computer networks to identify problem areas relative to the communications of
the information system hardware, the network servers, and various devices
attached to the network. This phase will be focused on identifying
conflict/problem areas and recommending solutions to address these problems; and
(2) They will then evaluate each PC for hardware and software related Year 2000
issues. The result of this process will be a report that will document a
physical layout of the network, any potential or existing network problems, and
an inventory of each system with its potential Year 2000 problems. Management
believes that this program will substantially address its Year 2000 issues, and
anticipates a completion date of in the first half of 1999.
In the area of medical equipment, the Company is working with a
consultant to identify issues impacting medical equipment items/systems. This
process will be completed in three phases: (1) identification of medical
equipment items/systems impacted by Year 2000 issue; (2) evaluation of such
medical equipment and (3) Year 2000 resolution. The Company has completed
Phase I of this process, and anticipates completion of the remaining phases in
the first half of 1999.
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE
YEAR 2000
The Company relies heavily on third parties in operating its business. In
addition to its reliance on software, hardware and other equipment vendors to
verify Year 2000 compliance of their products, the Company also depends on (i)
fiscal intermediaries which process claims and make payments on behalf of the
Medicare program, (ii) insurance companies, HMO's and other private payors,
(iii) utilities which provide electricity, water, natural gas and telephone
services and (iv) vendors of medical supplies and pharmaceuticals used in
patient care. As part of its Year 2000 strategy, the Company has been working
with its major software vendors and has received assurances such vendors are
addressing the Year 2000 issue. The Company has received assurances from four of
its largest vendors that their software modules will be in compliance by the end
of 1998. Failure of these third parties to resolve their Year 2000 issues could
have a material adverse effect on the Company's results of operations and
ability to provide health care services.
The Company uses various third-party software products to perform
electronic billing to Medicare, Medicaid, and certain other third-party payors.
These electronic billing systems allow for a direct electronic interface with
the computer systems of third-party payors, including Medicare and Medicaid.
This direct interface allows the individual electronic bills to be edited
on-line so that they can be successfully uploaded to the host system. In
addition, certain Medicare intermediaries transmit remittance advice data back
to the Company through these same electronic billing systems. The remittance
advice data transmitted back to the Company determines the amount of payment
that a particular hospital will receive for a particular remittance advice. In
addition, most of the Company's hospitals receive electronic funds transfer from
the Medicare intermediaries.
A significant portion of the Company's revenues are derived from the
Medicare program, which is administered by Health Care Financing Administration
(HCFA). HCFA employs more than 60 carriers and intermediaries to process
Medicare fee-for-service claims throughout the United States. There are several
hundred different computer systems involved in the every day work of HCFA, its
carriers and intermediaries. HCFA has, under its internal Year 2000 compliance
program, identified 99 mission critical systems, 25 of which are directly
managed by HCFA and 74 which are managed by outside carriers and intermediaries.
These 99 systems contain more than 50 million lines of computer code which must
possibly be re-written to ensure Year 2000 compliance. In a public statement on
its web page, HCFA has established December 31, 1998, as its target date to
complete testing of its mission critical systems and, at that time, will
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certify to the Secretary of Health and Human Services that its mission critical
systems will be Year 2000 compliant. There can be no assurance that HCFA will
meet that timetable or that it will have its mission critical systems, which
most directly affect the Company, Year 2000 compliant in time to prevent
disruptions to the Medicare payments received by the Company. Moreover, HCFA has
announced the delayed implementation of certain new regulations as well as the
possible postponement of scheduled rate increases while its resources are
re-directed towards Year 2000 compliance. While certain members of Congress have
taken strong exception to HCFA's announcement to delay rate increases it is
possible that rate increases, which were scheduled to take effect on October 1,
1999, could be delayed until after December 31, 1999 or later.
COSTS
The Company is utilizing both internal and external resources to complete
the Year 2000 modifications. The majority of the remaining costs relating to the
Year 2000 issues will be expensed as incurred. The Company believes that the
Year 2000-related remediation costs incurred through September 30, 1998 have not
been material to its results of operations. The estimated cost of the remaining
replacement and modification for the Year 2000 issue is not considered material
to the Company's earnings or financial position. However, there can be no
guarantee that actual expenses and results will not differ materially from those
anticipated.
RISK
Management of the Company believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner. As noted above, the Company
has not yet completed all necessary phases of the Year 2000 program, but expects
to complete the program in 1999. In the event that the Company does not complete
any additional phases, the Company may be unable to diagnose or treat patients,
bill for patient services, or collect and apply payments from patients or third
party payors. In addition, disruptions in the economy generally resulting from
the Year 2000 issues could materially adversely affect the Company. The amount
of potential liability and lost revenue cannot be reasonably estimated at this
time.
The Company believes that the most reasonably likely worst case Year 2000
scenario is that some of its material third party payors will not be year 2000
compliant, and will have difficulty processing and paying the Company's bills,
thereby possibly affecting the Company's cash flows. The Company intends to
develop a contingency plan to address this scenario. It is expected that such a
plan would involve establishing procedures whereby the Company would revert to
manual billing processes. In addition, the plan would involve ensuring the
Company's access to additional capital through, for example, its revolving line
of credit.
CONTINGENCY PLANS
The Company intends to complete its initial contingency plan by June
1999. Each of the Company's owned hospitals has a disaster plan which will be
reviewed as a part of the Company's overall contingency planning process, to
assure that each plan includes contingency planning for the Year 2000 issues.
However, failure by third parties to resolve their own Year 2000 issues may
render each hospital's contingency plan ineffective.
The foregoing assessment is based on information currently available to
the Company. The Company will revise its assessment as it implements its Year
2000 strategy. The Company can provide no assurances that applications and
equipment the Company believes to be Year 2000 compliant will not experience
difficulties or that the Company will not experience difficulties obtaining
resources needed to make modifications to or replace the Company's affected
systems and equipment. Failure by the Company or third parties on which it
relies to resolve Year 2000 issues could have a material adverse effect on the
Company's results of operations and its ability to provide health care services.
Consequently, the Company can give no assurances that issues related to Year
2000 will not have a material adverse effect on the Company's financial
condition or results of operations.
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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 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 5. OTHER INFORMATION.
The deadline for delivering to the Company notice of shareholder
proposals, other than proposals to be included in the proxy statement, for the
1999 Annual Meeting of Shareholders will be March 27, 1999, pursuant to Rule
14a-4. The persons named as proxies in the proxy statement may exercise
discretionary authority to vote on any proposals received after such date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Description of Exhibits
------- -----------------------
3.1 Amended and Restated Certificate of Incorporation of Province (a)
3.2 Amended and Restated Bylaws of Province (a)
4.1 Form of Common Stock Certificate (a)
4.2 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 (b)
4.3 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 (b)
27 Financial Data Schedule (for SEC use only)
- -------------------------
(a) Incorporated by reference to the exhibits filed with the
registrant's Registration Statement on Form S-1, Registration No.
333-34421.
(b) Incorporated by reference to the exhibits filed with the
registrant's Quarterly Report on Form 10-Q, for the quarterly
period ended March 31, 1998, Commission File No. 0-23639.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on June 26, 1998, in
connection with the Company's acquisition on June 11, 1998 of substantially all
the assets of Elko General Hospital in Elko, Nevada. On August 14, 1998, the
Company filed an Amendment No. 1 to such Current Report on Form 8-K/A,
containing the financial statements of Elko General Hospital and certain pro
forma financial information.
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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 its behalf by the undersigned
thereunto duly authorized.
PROVINCE HEALTHCARE COMPANY
By: /s/ BRENDA B. RECTOR
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Brenda B. Rector
Vice President and Controller
Date: November 12, 1998
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