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FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE
REQUIRED]
For the fiscal year ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from _______ to _________
Commission file number 000-22766
QUORUM HEALTH GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1406040
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
103 Continental Place, Brentwood, Tennessee 37027
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(Address of principal executive offices)
(Zip Code)
(615) 371-7979
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(Company's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, par value $.01
----------------------------
Title of Class
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 requirement for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $916,778,085 as of September 24, 1996. The number of Shares of
Common Stock outstanding as of such date was 48,732,661.
The following documents are incorporated by reference into Part III,
Items 10, 11, 12 and 13 of this Form 10-K: Registrant's definitive proxy
materials for its 1996 Annual Meeting of Stockholders.
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TABLE OF CONTENTS
Page
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Owned Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Management Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
National Purchasing Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Government Payment Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Professional Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . 19
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Impact of Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Industry Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sig-1
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PART I
ITEM 1. BUSINESS
Overview
Quorum is a leading hospital management company which at July 1,
1996 owned, managed under contract or provided consulting services to acute
care hospitals in 43 states. At such date, the Company owned and operated
fifteen acute care hospitals with 3,507 licensed beds and provided
comprehensive management services to 253 hospitals with approximately 26,000
licensed beds. During fiscal 1996, the Company had contracts with 161
additional hospitals to provide selected consulting and support services.
Over the past several years, alternative health care delivery
systems, such as home health services, outpatient surgery and emergency and
diagnostic centers, have grown substantially, as health care providers,
government agencies and private insurance companies have sought means of
providing quality health care in a cost efficient manner. Notwithstanding
these developments, the Company believes that patients and physicians will
continue to rely on acute care hospitals as the primary source of sophisticated
health care.
In recent years, the rapidly rising cost of health care has placed
economic strains on many hospitals as they have attempted to operate within
the cost containment measures imposed by the Medicare and Medicaid programs
and by private insurance companies in an increasingly competitive environment.
The Company believes that these pressures have caused many acute care
hospitals to consider other management and ownership alternatives. Some
sponsors of tax-exempt acute care hospitals are reassessing their ability
to provide health care as independent providers and are seeking to align
themselves with larger health systems. The Company anticipates that such
reassessments may lead owners to sell or merge a significant number of
hospitals and will create opportunities for the Company to make strategic
acquisitions of facilities.
Business Strategy
The Company's strategy is (i) to continue to improve the financial
performance and the services of its owned hospitals, (ii) to acquire
additional acute care hospitals, primarily in medium-sized markets, and to
achieve additional market penetration in such markets, (iii) to utilize the
Company's network of hospital management professionals to identify
strategic hospital acquisitions and other opportunities to create networks
with other hospitals and health care providers and (iv) to maintain the
Company's management contract business as an essential line of business and as
a source of market knowledge and stable cash flow. The Company believes that
its experience and position as a leading provider of management services to
acute care hospitals in the United States affords it a competitive advantage
in acquiring and operating hospitals and in creating medical service networks
in local markets.
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Acquisition Strategy
The hospital industry is experiencing some consolidation in
response to increasing competitive and regulatory pressures. The Company
anticipates that such consolidation will create acquisition opportunities for
the Company as hospital groups attempt to rationalize their hospital
ownership and as independent hospitals seek affiliations with a hospital
network such as Quorum's.
A significant element of Quorum's strategy is to actively pursue
acquisitions of acute care hospitals because it believes that
well-positioned, efficiently managed acute care hospitals will continue to
be the center of the health care delivery system in the United States.
Acquisition candidates will typically be hospitals ranging in size from 100
to 400 beds, that are generally located in markets that will support more than
one hospital. The Company's acquisition efforts are directed at identifying
hospitals whose financial and operating performance would be enhanced by the
Company's management expertise and resources. The Company is primarily
interested in medium-sized markets with population bases of between 50,000
and 500,000 people. The Company intends to make acquisitions that will either
enhance the Company's position within its existing markets or enable it to
enter into new markets consistent with its strategic criteria. The Company's
recent acquisitions of Lutheran Hospital of Indiana (in Fort Wayne, Indiana)
in August 1995 and Mary Black Memorial Hospital (in Spartanburg, South
Carolina) in July 1996 represent entries into such targeted markets.
The Company also believes that, as a result of industry consolidation,
hospital owners must be prepared to integrate their operations with physician
groups, outpatient centers and other medical service providers in the community.
Accordingly, the Company intends to enter markets that are large enough to
permit the creation of medical service networks with the ability to effectively
and profitably serve patient and payor needs. The Company is primarily
interested in markets in which the ownership of one or possibly two hospitals
would give the Company sufficient market position to permit the Company to play
a significant role in the health care delivery systems in such communities.
The Company's acquisition strategy is not directed at markets in which
ownership of a greater number of hospitals is required to be an effective
competitor in that market. Although the Company concentrates its acquisition
efforts primarily in medium-sized markets, attractive acquisition opportunities
may also arise in other smaller markets. These smaller market hospitals may be
in proximity to one of the Company's medium-sized markets or in a separate,
independent market.
The Company believes that its nationwide network of hospital
management employees provides a competitive advantage in identifying
suitable hospital acquisition candidates and in understanding the local
markets in which such hospitals operate. The Company's experience has been
that the financial performance and prospects of hospitals within the size range
and in the markets targeted by the Company vary widely, and the Company
believes that acquisition prices will vary accordingly.
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Operating Strategy for Owned Hospitals
The Company believes that its management expertise, its access
to capital, its financial and operating systems, its national purchasing
strength, and its educational and training programs will enable the Company's
owned hospitals to compete successfully against other hospitals and health
care providers. In addition, the Company considers its experience in working
with physicians, hospital owners and managed care plans as enhancing the
ability of its owned hospitals to attract patients and to recruit and
retain physicians and other medical personnel, which are critical to the
success of any hospital.
In attempting to improve the financial performance of its owned
hospitals, the Company typically takes a number of steps to lower operating
costs and enhance revenues. Initiatives include application of purchasing
economies, enhancement of payment and accounts receivable practices,
implementation of flexible staffing plans, improved length of stay
management, and increased focus on resource consumption. The Company also
generally seeks to improve the operations of its acquired hospitals by
expanding and improving the quality of the services provided by a
hospital to make it more attractive to physicians, patients and
third-party payors. The Company also recruits additional physicians and
markets the hospital's services directly to businesses, governments, managed
care organizations and others. In addition, the Company seeks opportunities
to form networks or alliances with other health care providers in
appropriate markets. These network relationships may be in the form of
purchase, joint venture, lease or management contracts.
Management Services Strategy
The Company's strategy for the growth of its management services
business includes continuing to utilize its national network of hospital
employees for the generation of leads for new contract clients; targeting
larger hospitals for contract relationships; and pursuing network, managed
care and joint venture opportunities with its client hospitals, other
healthcare providers, and insurers. As the hospital industry consolidates,
the demand for the Company's management services may be affected by the
reduction in the number of independent hospitals. To minimize the effects
of such consolidation, the Company's strategy for increasing the revenue
and profitability of its management services business involves providing
additional services to existing managed hospitals, seeking appropriate fee
increases, and developing and marketing new services, in addition to obtaining
new contracts.
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Owned Hospitals
Acquisitions
The Company acquired its first acute care hospital in fiscal
1991. The Company acquired three facilities in fiscal 1992 (one of which
has been divested), eleven facilities in fiscal 1994 (ten of which were
acquired in a single transaction-five of which have been divested and two
of which were exchanged for two other hospitals), three facilities in fiscal
1995, two facilities in fiscal 1996, and two facilities during the two
months ended August 31, 1996. As of August 31, 1996, the Company owned and
operated sixteen hospitals. Of the Company's owned hospitals, thirteen are
located in medium-sized markets and three are located in the larger markets
of Columbus, Ohio; Las Vegas, Nevada; and Omaha, Nebraska. The Company
from time-to-time considers proposals to acquire additional hospitals or to
enter into joint venture arrangements.
Operations
The Company's owned hospitals are general acute care hospitals and,
as such, offer a wide range of facilities and inpatient medical services such
as operating/recovery rooms, intensive care and coronary care units,
diagnostic services and emergency room services, as well as outpatient
services such as same-day surgery, laboratory, pharmacy and rehabilitation
services and respiratory therapy. The outpatient services of the Company's
owned hospitals may be affected by certain proposed regulatory changes
regarding payment for outpatient services. See "--Government Regulation" and
"--Government Payment Programs".
The Company's hospitals provide certain specialty services which
differ at each hospital, but which include cancer treatment, open heart
surgery, skilled nursing, treatment for chemical dependency and home health
care services. The Company's owned hospitals are not engaged in
extensive medical research or educational programs.
The following table sets forth certain information with respect
to each of the Company's owned hospitals as of August 31, 1996.
Licensed Beds in Date of
Hospital and Location Beds(1) Service(2) Acquisition
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ParkView Regional Medical Center . . . . . . . . . . . . . 231 193 November 1990
Vicksburg, Mississippi
Park Medical Center . . . . . . . . . . . . . . . . . . . . 404 145 February 1992
Columbus, Ohio
Flowers Hospital . . . . . . . . . . . . . . . . . . . . . 400 400 June 1992
Dothan, Alabama
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Licensed Beds in Date of
Hospital and Location Beds(1) Service(2) Acquisition
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Desert Springs Hospital . . . . . . . . . . . . . . . . . . 225 219 October 1993
Las Vegas, Nevada
Macon Northside Hospital . . . . . . . . . . . . . . . . . 103 103 October 1993
Macon, Georgia
Middle Georgia Hospital . . . . . . . . . . . . . . . . . . 119 119 October 1993
Macon, Georgia
Gadsden Regional Medical Center . . . . . . . . . . . . . . 346 257 December 1993
Gadsden, Alabama
Abilene Regional Medical Center . . . . . . . . . . . . . . 160 160 May 1994
Abilene, Texas
Medical Center Enterprise . . . . . . . . . . . . . . . . . 135 117 May 1994
Enterprise, Alabama
Midlands Community Hospital . . . . . . . . . . . . . . . . 208 160 August 1994
Papillion, Nebraska
Carolinas Hospital System . . . . . . . . . . . . . . . . . 424 380 February 1995
Florence, South Carolina
Carolinas Hospital System -- Lake City(3) . . . . . . . . . 48 40 June 1995
Lake City, South Carolina
Lutheran Hospital of Indiana . . . . . . . . . . . . . . . 389 342 August 1995
Fort Wayne, Indiana
Jacksonville Hospital . . . . . . . . . . . . . . . . . . . 89 56 June 1996
Jacksonville, Alabama
Mary Black Memorial Hospital . . . . . . . . . . . . . . . 226 226 July 1996
Spartanburg, South Carolina
Carolinas Hospital System -- Kingstree (3) . . . . . . . . 78 40 August 1996
Kingstree, South Carolina
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(1) Licensed beds are the number of beds for which a facility has been
licensed by the appropriate state agency regardless of whether the
beds are actually available for patient use.
(2) Beds in service are the number of beds that are readily available for
patient use.
(3) The hospitals in Lake City and Kingstree, South Carolina, are held
pursuant to operating leases, each of which has an initial term of
ten years and two renewal options of five years each.
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Selected Operating Statistics
The following table sets forth certain operating statistics for
the Company's owned hospitals for each of the periods presented. The
statistics for the year ended June 30, 1996 include a full year of
operations for twelve hospitals and partial periods for two hospitals
acquired and one hospital divested during such year. The statistics for the
year ended June 30, 1995 include a full year of operations for ten hospitals
and partial periods for three hospitals acquired during such year. The
results for the year ended June 30, 1994 include a full year of operations
for four hospitals and partial periods for nine hospitals acquired, three of
which were divested or exchanged during such year. The results for the year
ended June 30, 1993 include a full year of operations for all four of the
hospitals owned by the Company in that period. The results for the year
ended June 30, 1992 include a full year of operations for the hospital owned
during that period and partial periods for three hospitals acquired during that
period.
Year Ended June 30
------------------
1996 1995 1994 1993 1992
---------- --------- ---------- ---------- ----------
Number of hospitals (1) . . . . . . . . . 14 13 10 4 4
Licensed beds (1) (2) . . . . . . . . . . 3,281 2,909 2,229 1,041 1,041
Beds in service (1) (3) . . . . . . . . . 2,691 2,368 1,796 705 710
Admissions (4) . . . . . . . . . . . . . 94,872 73,338 55,522 26,331 10,869
Average length of stay (days) . . . . . . 5.8 6.2 6.0 6.4 7.1
Patient days (5) . . . . . . . . . . . . 548,772 451,501 335,807 169,669 77,090
Adjusted patient days (6) . . . . . . . . 830,955 665,657 480,098 254,349 110,315
Occupancy rate (licensed beds) (7) . . . 46.2% 47.6% 47.6% 44.7% 38.7%
Occupancy rate (beds in service) (8) . . 56.2% 58.9% 61.5% 65.5% 58.3%
Gross inpatient revenue (in thousands) . $1,115,363 $888,811 $622,037 $239,848 $87,397
Gross outpatient revenue (in thousands) . $ 573,529 $421,582 $267,278 $119,706 $37,714
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(1) At end of period.
(2) Licensed beds are the number of beds for which a facility has been
licensed by the appropriate state agency regardless of whether the
beds are actually available for patient use.
(3) Beds in service are the number of beds that are readily available for
patient use.
(4) Admissions represent the number of patients admitted for inpatient
treatment.
(5) Patient days represent the total number of days of patient care
provided to inpatients.
(6) Adjusted patient days have been calculated based on an
industry-accepted, revenue-based formula (multiplying actual patient
days by the sum of gross inpatient revenue and gross outpatient
revenue and dividing the result by gross inpatient revenue) to
reflect an approximation of the number of inpatients and outpatients
served.
(7) Percentages are calculated by dividing average daily census by
weighted average licensed beds.
(8) Percentages are calculated by dividing average daily census by
weighted average beds in service.
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Sources of Revenue
The sources of the Company's hospital revenues are charges related
to the services provided by the hospitals and their staffs, such as
radiology, operating room, pharmacy, physiotherapy and laboratory
procedures, and basic charges for the hospital room and related services such
as general nursing care, meals, maintenance and housekeeping. The Company's
hospitals receive payments for health care services from (i) the federal
Medicare program, (ii) state Medicaid programs, (iii) private health care
insurance carriers, HMOs, PPOs and other managed care programs, and
self-insured employers, and (iv) patients directly.
The following table sets forth the percentage of gross revenue
(revenue before deducting contractual adjustments, policy and charity
discounts) of the Company's owned hospitals from such payors for the periods
indicated. The data for the periods presented are not strictly comparable due
to the significant effect that acquisitions have had on the Company. See "Item
7. Management's Discussion and Analysis of Results of Operations and Financial
Condition".
Year Ended June 30
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1996 1995 1994
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Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . 48.5% 49.8% 49.7%
Medicaid . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5 7.4 6.5
Other sources . . . . . . . . . . . . . . . . . . . . . . . . 44.0 42.8 43.8
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Total . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
===== ===== =====
Amounts received from certain payors, such as Medicare, Medicaid and
managed care organizations, such as HMOs and PPOs, generally are less than
the hospitals' customary charges for the services provided. Patients are
generally not responsible for any difference between customary hospital
charges and amounts paid under these programs for such services, but are
responsible to the extent of any exclusions, deductibles or coinsurance
features of their coverage. As a result of initiatives to control
health care costs, an increasing number of third-party payors are
negotiating the amounts they will pay for services performed rather than
simply paying health care providers the amounts billed.
Management Services
The Company's management services business consists of managing
hospitals under management contracts and providing selected consulting,
educational and related services to address the specific needs of
hospitals. During fiscal 1996, fees received by the Company's management
services business accounted for approximately 12% of the Company's net
operating revenues.
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With 253 managed hospitals, the Company is a leading provider of
management services to acute care hospitals. Based on industry data published
in 1995, the second and third ranked contract management organizations managed
60 and 24 hospitals, respectively. The Company believes that its industry
reputation and leading market position provide a competitive advantage in
seeking additional management contracts.
The Company provides hospital owners with a comprehensive range of
management and professional services. Upon entering into a management
contract, the Company assesses the operations of the hospital and, based on
such assessment, develops a management plan tailored to the specific needs of
the hospital. The plan may involve instituting new financial and operating
systems and various management initiatives such as establishing a local or
regional provider network to efficiently meet a community's health care needs.
The Company annually reviews the management plan with the hospital's governing
board and prepares an annual progress report to identify cost savings and
achievements.
To implement the management plan adopted for each hospital, the Company
provides the hospital with the services of a hospital administrator and,
typically, a chief financial officer. Although the hospital administrator and
chief financial officer are employees of the Company, such employees remain
under the direction and control of the client hospital's governing board, and
the balance of the hospital staff remain employees of the hospital, under the
control and supervision of the hospital.
The Company's hospital management team is supported by the Company's
regional and corporate management staff, which has broad experience in managing
hospitals of all sizes in diverse markets throughout the United States. The
Company's regional group offices are located throughout the United States, with
each office being responsible for the management services provided within its
geographic area. Such locations also afford the Company a significant
marketing advantage in responding to new business opportunities because the
Company's staff is knowledgeable of the economic, demographic and regulatory
factors affecting local markets.
The Company's hospital management contracts generally provide for a
term of three to five years. As of the end of each of the last two fiscal
years of the Company, the rate of attrition for the management contracts at the
commencement of such period has averaged approximately 8% per year. Over the
same period, the Company has generally offset any attrition by obtaining
additional management contracts.
The Company believes that, generally, the fees paid under its
management contracts are not directly affected by hospital industry trends.
Management contract fees are based on amounts agreed upon by the Company and
the hospital's governing board and are usually not based on census levels,
payment programs, revenue of the hospital or other variables. As the agent of
the hospital's governing board, the Company is not directly responsible for
hospital licensure, liability coverage or capital expenditures or for other
functions normally the responsibility of the governing board.
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The Company is not obligated to fund and is not responsible for paying any
hospital expenses. In providing its management services, the Company is not
considered a health care provider for regulatory purposes. See "--Government
Regulation".
In addition to management contracts, the Company offers consulting
services and related educational and management programs to meet the specific
needs of hospitals that may or may not be part of the Company's contract
management program. The Company's consulting services are directed at many of
the strategic and operational needs of hospitals, including integration and
integrated delivery system strategies, business office management, continuous
quality improvement and re-engineering programs, health information management,
human resources, surgical and nursing services, facilities design and other
operational services. The Company's experience in the health care industry has
been enhanced by providing consulting services to large, sophisticated medical
institutions that need hospital management expertise for specific issues.
National Purchasing Contracts
As a result of its management and consulting contracts with hospitals
throughout the United States, the Company has been able to provide a wide range
of national purchasing contracts with various vendors of medical supplies,
equipment, pharmaceuticals and certain services. The collective buying power
of the Company's managed hospitals has allowed many of such hospitals to
benefit from the contracts through volume discounts, rebates and other cost
savings. The Company's owned hospitals also benefit from similar savings. The
Company does not make any purchases under these supply contracts on behalf of
its managed hospitals; instead, the managed hospitals purchase directly from
the suppliers, at prices pre-negotiated on their behalf. The Company requests
its managed hospitals to make a commitment to use the Company's purchasing
contracts, and, as a result, the prices the Company can provide are generally
substantially lower than the prices the hospitals would otherwise be able to
negotiate on their own. The Company annually notifies each hospital of any
rebates the Company receives under its purchasing contracts as a result of the
hospital's purchases.
For the year ended June 30, 1996, the Company's supply contract with
Baxter Healthcare Corporation ("Baxter") accounted for the largest volume of
purchases made pursuant to the Company's national purchasing contracts.
Purchases for the Company's managed and owned hospitals amounted to
approximately $256 million during calendar year 1995, the amount on which
Baxter paid rebates during fiscal 1996. Under the Baxter contract, which
expired as of January 1, 1996, the Company recommended the use of Baxter
supplies and equipment to its managed hospitals and, in return, Baxter paid a
rebate to the Company, depending on the volume of the hospitals' purchases from
Baxter. These rebates amounted to approximately 1.2% of the amount paid by the
hospitals for Baxter supplies and equipment.
During fiscal 1996, the Company entered into a purchasing alliance with
Premier, Inc. ("Premier"), formerly APS Healthcare Systems, a for-profit
corporation which provides group purchasing and other services to its clients.
The purchasing alliance combines the purchasing power of the Company's owned
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and managed facilities with the purchasing power of the more than 1,700
hospitals affiliated with the Premier program. The increased purchasing power
has created opportunities for reductions in the prices of hospital supplies,
equipment, and pharmaceuticals to the Company's hospitals. Under the Premier
purchasing alliance, the Company has agreed to use Premier as its exclusive
national group purchasing organization, and Premier has agreed to pay the
Company a fee equal to .98% of the amount paid by the Company's owned and
managed hospitals for products purchased through the purchasing alliance.
Government Regulation
Hospitals are subject to extensive governmental regulation at the
federal, state and local levels. These laws and regulations require that
hospitals meet various detailed standards relating to the adequacy of medical
care, equipment, personnel, operating policies and procedures, maintenance
of adequate records, utilization, rate setting, compliance with building
codes and environmental protection laws, and numerous other matters. Failure
to comply with applicable regulations can jeopardize a hospital's licensure,
ability to participate in the Medicare and Medicaid programs, and ability to
operate as a hospital.
State certificate of need laws, which vary from state to state, may
place limitations on a hospital's ability to expand services, add new
equipment, or construct new facilities. However, the Company has not
experienced, and does not expect to experience, any material adverse effects
from state certificate of need requirements or from the imposition, elimination
or relaxation of such requirements. See "--Competition".
Most hospitals (including all of the Company's owned hospitals) derive
a substantial portion of their revenue from Medicare and Medicaid programs.
Changes in these programs could have an adverse impact upon the Company. See
"--Government Payment Programs".
Hospitals are subject to periodic inspection by federal, state and
local authorities in order to determine their compliance with applicable
regulations and standards. Such compliance must be demonstrated to maintain
licensure and to participate as a certified health care provider in the
Medicare and Medicaid programs. All of the Company's owned hospitals are
licensed under appropriate state laws and are certified to participate in the
Medicare program. In addition, it is a policy of the Company that all its owned
hospitals apply for accreditation by the appropriate accreditation body, such
as the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO")
or the American Osteopathic Association. All of the Company's owned hospitals
are accredited with the exception of Carolinas Hospital System-Lake City and
- -Kingstree, which are in the process of applying for accreditation.
Accreditation indicates that a hospital meets certain minimum standards and
generally satisfies the applicable health and administrative standards for
Medicare certification, although accreditation is not required to obtain
Medicare certification.
10
13
The Company believes that its owned hospitals are in substantial
compliance with current federal, state, local and independent review body
regulations and standards. However, these requirements are subject to
administrative and judicial interpretation and legislative change, and it may
be necessary for the Company to effect changes in its facilities, equipment,
personnel and services in order to remain qualified. Although the Company
intends to continue to maintain its licensure and certifications, there can
be no assurance that its owned hospitals will be able to comply with all
future requirements or that failure to so comply would not adversely affect
the Company.
In recent years, due to escalating health care costs, there has
been an increased scrutiny of the health care industry, and an increase in
new federal and state legislation aimed at controlling health care costs.
Such legislation generally precludes physicians from having a financial
interest in medical facilities to which they refer patients or otherwise
regulates such ownership, on the grounds that over utilization can result
from physician ownership. There is an exception to the federal self-referral
statute which allows physicians to have an ownership interest in an entire
hospital, as opposed to an ownership interest in a department of a hospital.
The Company has implemented, and may in the future implement, arrangements by
which physicians and other local investors obtain ownership interests in
particular hospitals or permitted health care providers. To date, such
legislation has not had a material adverse effect on the operations of the
Company, but there can be no assurance that future health care reform
legislation will not have such a material adverse effect.
Reducing the cost of health care continues to be a major goal of both
federal and state legislators. To achieve this end, various legislative
proposals have been introduced or discussed, including insurance market reforms
to increase the availability of group health insurance to small businesses,
requirements that all businesses offer health insurance coverage to their
employees and the creation of a federal governmental health insurance plan that
would cover all citizens. Other proposals include various managed care
proposals, national rate review, a single payor system, tort reform,
restrictions on ownership in (or referrals to) health care facilities by health
care providers, cost reductions in the Medicare program through a substantial
restructuring of the program, and restructuring the Medicaid program as a
"block grant" program, which would give the states more control over Medicaid
spending.
On August 21, 1996, President Clinton signed into law a bill known as
The Health Insurance Portability and Accountability Act of 1996 ("H.R. 3103"),
sponsored by Senators Kennedy and Kassebaum. This Act establishes minimal
federal standards intended to make health insurance coverage more portable and
continuous, requires that persons meeting specified eligibility conditions be
accepted into a group or individual plan, and limits the ability of insurance
companies to reject coverage due to pre-existing health conditions. H.R. 3103
establishes a Medicare Integrity Program, which allows the Health Care
Financing Administration ("HCFA") to contract with private companies to perform
Medicare fraud and abuse reviews now being performed by Medicare contractors
(generally insurance companies). The Act expands the Medicare and Medicaid
anti-kickback statute to other federal health care programs and expands the
available sanctions applicable to health care fraud. In addition, H.R. 3103
11
14
establishes a procedure whereby the Office of Inspector General of the
Department of Health and Human Services (the "OIG"), in consultation with the
Department of Justice, is required to issue advisory opinions to requesting
parties regarding whether specific activities and practices violate the
anti-kickback laws. These advisory opinions, which can be requested after
January 1, 1997, will be made available to the public, but are binding only
upon the government and the party requesting the opinion. It is unclear what,
if any, additional health care reform legislation will be enacted in future
months, and the Company cannot predict whether any legislative proposals will
be ultimately adopted or, if adopted, what effect such proposals would have on
the Company's business.
Government Payment Programs
The federal government provides two major health care programs:
(1) the Medicare program for the elderly and disabled, and (2) the Medicaid
program for the poor. Medicare is the health insurance component of Social
Security, while Medicaid is a program that differs considerably from state to
state.
Most hospitals, including the Company's owned hospitals, derive a
substantial portion of their revenue from the Medicare and Medicaid programs.
Both programs were enacted in 1965 and were intended to pay participating
hospitals the cost of providing covered services to beneficiaries. Legislative
action and related regulations during the past thirty years have resulted in
significant changes in the way these programs compensate hospitals for services
provided. Most of these changes have reduced payments to hospitals.
Medicare
Medicare is a federal health insurance program primarily designed for
individuals entitled to Social Security who are age 65 or older. The Medicare
program consists of Part A and Part B. Part A covers inpatient hospital
services and services furnished by other institutional health care providers,
such as nursing homes and home health agencies. Part B covers the services of
doctors, suppliers of medical items and outpatient hospital services. HCFA
administers the Medicare program through local intermediaries and carriers.
Pursuant to the Social Security Amendments of 1983 and subsequent
legislation and regulation, Congress adopted a prospective payment system
("PPS") for the Medicare program to cover the routine and ancillary operating
costs of most Medicare inpatient hospital services. Under this system, hospital
discharges are classified into 495 diagnosis related group categories (known as
"DRGs"), which categorize illnesses and injuries according to estimated
intensity of hospital resources necessary to furnish care. A hospital's DRG
payment is determined by multiplying a standard federal rate by the weight
assigned to one of the 495 DRGs. Additional add-on payments are made for: (1)
hospital stays that are extremely long or costly (outliers), (2) treating a
large number of indigent patients (disproportionate share), and (3) the added
cost incurred as a result of residency training (indirect medical education).
12
15
Under the PPS, if a facility's costs of providing care to the
beneficiary are less than the predetermined DRG payment, the facility
retains the difference. Conversely, if the facility's costs are more than the
DRG payment, the facility must absorb the loss.
Currently, there are only two standard federal rates; one for large
metropolitan areas (population over one million) and one for all other
areas. The applicable rate need only be adjusted by a local "wage index", as
provided by HCFA, prior to being multiplied by the applicable DRG weight. At
the beginning of the PPS, Congress intended to update these standard amounts
by the hospital market basket percentage. Market basket is the mix of goods
and services used to produce hospital care. The percentage change in the
market basket reflects the average change in the price of goods and services
hospitals purchase to furnish inpatient care. Due to various federal
budget reconciliation enactments, hospitals have received updates equal to
market basket minus 2.5% to, as in the current year, market basket minus .5%.
The Company cannot predict how future enactments by Congress and HCFA will
affect these updates and the profitability of its health care facilities.
Payments for capital cost under the Medicare program were made at
cost prior to cost reporting periods beginning on and after October 1,
1991. Capital-related costs generally include depreciation, capital
interest, lease and rental expense, property taxes and insurance related to
the plant and equipment. Effective with cost reporting periods beginning
on and after October 1, 1991, Medicare implemented a prospective payment
system for capital-related costs. Under this system hospitals are to
transition to a per-discharge standard federal rate for capital over a
ten year period. The standard federal rate for capital is used much like
the standard federal rate for operating cost in that the federal rate is
multiplied by the DRG weight to arrive at a predetermined payment.
Hospitals whose cost was under the "base year" federal rate transition up to
the federal rate over a ten year period. Hospitals whose cost was over the
"base year" federal rate transition down to the federal rate over a ten year
period. The latter hospitals may choose an early transition to 100% of the
federal rate.
Medicare payment for skilled nursing services continues to be based
on cost, with regional per diem cost limitations for room and board.
Applicable ancillary services are cost reimbursed at the present time. Of
the Company's sixteen owned facilities, eight have skilled nursing
facilities. Medicare payment for psychiatric and rehabilitation services
continues to be cost reimbursed, with a limitation on total cost per
discharge determined in a base year. In the Company's sixteen owned
facilities, there are five hospital-based psychiatric units and one
rehabilitation unit. Although payment for skilled nursing, rehabilitation,
and psychiatric services is currently not under a prospective payment
system, HCFA is evaluating prospective payment systems for these services. The
Company cannot predict when such prospective payment systems will be
implemented nor how the Company will be affected.
The Clinton Administration and Congress have proposed different
forms of prospective payment systems that would alter the present cost
reimbursement methodology of home health
13
16
agencies ("HHA"). Under the present methodology, hospitals are able to
recover cost for HHA service if cost is under treatment limitations
established by Medicare. Of the Company's sixteen owned facilities, seven
have hospital-based home health agencies. The Company cannot predict when a
prospective payment system for Medicare home health services will be
implemented nor what effect such a system might have on the Company.
With the exception of most laboratory services, which are on a fee
schedule basis, all outpatient services are reimbursed at the lower of cost
or a blend of cost and the prevailing fees. Congress has asked HCFA to
design and recommend a prospective payment system for outpatient services.
The Company cannot predict when such a prospective payment system for
outpatient services will be implemented or what effect it will have on the
Company.
Medicaid
Every state has a Medicaid or similar program that provides a wide
variety of health care to welfare recipients, indigent individuals who meet
state eligibility standards, and certain individuals who meet federally
specified poverty guidelines. Each Medicaid program is financed with federal
and state funds and is operated by the state within federal guidelines
requiring coverage of certain individuals and services and allowing states
wide latitude in covering additional individuals and services.
Payment rates under the Medicaid program are set by each state, and
rates and covered services vary from state to state. Most states pay
hospitals under prospective payment systems for inpatient and outpatient
services. Many states use a DRG system in paying for inpatient services
and fee schedules in paying for outpatient services.
Many states impose taxes on providers and are in turn able to
obtain federal matching funds. As a result some hospitals receive
substantially more Medicaid funds than others. Congress enacted the
Medicaid Contribution Act, effective on January 1, 1992, which effectively
"grandfathered" many such state provider-specific tax/donation programs. The
Medicaid Contribution Act also established a framework for determining which
tax/donation programs are acceptable as a source of a state's expenditures
for which federal matching funds are available. HCFA has issued new
regulations implementing the Medicaid Contribution Act. These regulations
limit to 25% the amount of revenue states can use from tax programs to
draw federal matching funds. These regulations bar most donation programs and
limit the amount of donations that are acceptable.
Two of the states in which the Company owns hospitals currently have
provider donations programs or impose a tax on providers participating in the
Medicaid program. The Company cannot predict how these plans might be
modified in the future or how the states would respond to such modification.
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Regulatory Compliance
The field of health care law and regulation is a constantly changing
one; in recent years, there have been an increasing number of legislative
proposals and enactments which directly impact the health care industry.
An area which has attracted considerable scrutiny is the issue of
over-utilization, fraud and abuse in the health care industry. Portions of
the Budget Reconciliation Act of 1993 (the "1993 Act") affect providers
who receive payments under the Medicare and Medicaid programs. One of the
provisions of the 1993 Act is known as "Stark II", and is an expansion of
the previous prohibition on self-referral by physicians. "Stark I" prohibited
physicians from referring their Medicare patients to any clinical laboratory
in which they or any member of their immediate family had a financial interest.
"Stark II" expands the prohibited patient base to both Medicare and Medicaid
patients, and expands the prohibited health care service from clinical
laboratories to add a number of "designated health care services", including
inpatient and outpatient hospital services. There are certain exceptions in the
1993 Act for, among other things, prepaid health plans and ownership by a
referring physician of an investment interest in an entire hospital, as opposed
to ownership of a subdivision or department of a hospital. In addition to the
federal prohibition, many states have enacted similar anti-referral statutes
applicable to all patient referrals, including private pay patients, as
well as Medicare and Medicaid patients.
Another important area of regulation is the section of the Social
Security Act commonly known as the "anti-kickback" or "fraud and abuse" statute.
This law prohibits offering, paying, soliciting or receiving remuneration
intended to induce or influence referrals of business paid under the Medicare
or Medicaid programs, and violation of the fraud and abuse statute subjects an
offender to a variety of criminal and civil penalties, one of which is
exclusion from participation in the Medicare and Medicaid programs. The fraud
and abuse statute has been very broadly interpreted by the federal government,
and many health care providers are concerned that commonplace commercial
arrangements may be technically covered by the statute.
Although the Company exercises care in an effort to conduct its
business in compliance with all applicable laws and to structure its
arrangements with health care providers to comply with fraud and abuse laws,
there can be no assurance that such laws will ultimately be interpreted in a
manner consistent with the practices of the Company. The Company would be
adversely affected if it were to be found in violation of the fraud and abuse
law, which could exclude the Company from participation in the Medicare and
Medicaid programs and could subject to other civil and criminal penalties.
The OIG is responsible for enforcing the fraud and abuse laws;
recently, the OIG has increased its investigative and enforcement activity in
this area, and a number of providers (including the Company) have been
requested to furnish information and documentation relevant to various
investigations. See "Item 3. Legal Proceedings".
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18
Competition
Owned Hospitals
The hospital industry is highly competitive. Moreover, competition
among hospitals and other health care providers has intensified in recent
years as hospital occupancy rates have declined in the United States as a
result of cost containment pressures, changing technology, changes in
government regulation and payment programs, changes in practice patterns
(e.g., shifting from inpatient to outpatient treatments) and other factors.
New competitive strategies of hospitals and other health care providers place
increasing emphasis on the use of alternative health care delivery systems
(such as home health services, outpatient surgery and emergency and
diagnostic centers) that eliminate or reduce lengths of hospital stays. In
some cases, these strategies include the use of larger regional facilities
that employ equipment and services more specialized than those available at
the Company's owned hospitals.
The areas served by the Company's hospitals are also served by
other hospitals or facilities that provide inpatient or outpatient services
similar to those offered by the Company's hospitals. In some cases, competing
hospitals are more established, better equipped or offer a wider range of
services than those of the Company or have financial resources greater than
those of the Company. In addition, certain competing hospitals are owned by
tax-supported government agencies or by tax-exempt, not-for-profit
corporations that may be supported by endowments and charitable contributions.
The competitive position of a hospital may also be affected by its
ability to provide services to managed care organizations, including HMOs
and PPOs. These organizations attempt to direct and control the use of
hospital services through managed care programs and discounts from
established charges. The Company's owned hospitals are generally located in
less developed managed care markets, but all currently have contracts
with HMOs and PPOs.
The number and quality of the physicians on a hospital's staff is an
important factor in providing a competitive advantage to a hospital because
physicians direct the majority of hospital admissions and services.
Admitting physicians are usually on the medical staffs of several hospitals in
an area; therefore, the Company attempts to attract its physicians' patient
referrals to the Company's hospital by offering quality services, current
technological capabilities, convenient location, quality facilities and
equipment, and participation in payor contracts.
The Company believes that its hospitals compete within local markets
on the basis of many factors, including the quality of care, ability to
attract and retain qualified physicians, location, breadth of services and
technology offered and, to a lesser extent, prices charged. The Company's
competition ranges from large multi-facility companies to small single-hospital
owners and may be investor-owned or non-profit.
16
19
State certificate of need laws, which place limitations on a
hospital's ability to expand hospital services and to add new equipment
without regulatory approval, may have the effect of restricting
competition. The application process for approval of covered services,
facilities, changes in operations and capital expenditures is, therefore,
highly competitive. In those states that do not have a certificate of need
law or that set relatively high levels of expenditures before such
expenditures become reviewable by state authorities, competition in the
form of new services, facilities and capital spending is more
prevalent.
With the exception of Texas and Indiana, each of the states in which
the Company owns hospitals has certificate of need requirements, and the
Company may acquire hospitals in other states having such requirements.
The Company has not experienced, and does not expect to experience, any
material adverse effects from state certificate of need requirements or from
the imposition, elimination or relaxation of such requirements. See "--
Government Regulation".
Management Services
In seeking management services, hospitals have various alternatives
to those offered by the Company and other hospital management companies.
Hospitals managed by hospital management companies represent less than 10%
of the total acute care hospitals in the United States, primarily because most
hospitals have their own management staff. Some hospitals choose to obtain
management services from the many large, tertiary care facilities that create
referral networks with smaller surrounding hospitals.
Employees
As of June 30, 1996, the Company's owned facilities employed
approximately 13,470 employees. As of such date, the Company also had 76
employees on its corporate staff and approximately 777 employees providing
hospital management and consulting services. The Company's employees are not
represented by any labor union, with the exception of 370 registered nurses at
Desert Springs Hospital who are covered by a union contract.
Hospital staff physicians are generally not employees of the Company
and often have staff privileges at several other hospitals in the area. A
patient is usually admitted to the Company's hospital at the request of
one of its staff physicians; therefore, significant terminations of staff
physicians could have an adverse effect on the Company.
Professional Liability
As part of the business of owning and managing hospitals, the Company
is subject to the assertion of liability for events occurring as part of the
ordinary course of hospital operations. To cover claims arising out of the
operations of both managed and owned hospitals, the Company generally
maintains professional malpractice liability insurance and general liability
insurance on
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20
a claims made basis in amounts which management believes to be sufficient
for its operations. The Company also maintains umbrella coverage. At various
times in the past, the cost of malpractice and other liability insurance has
risen significantly. Therefore, there can be no assurance that such insurance
will continue to be available or will be available at a reasonable price
for the Company to maintain adequate levels of insurance.
Through its typical hospital management contract, the Company
attempts to protect itself from such liability by requiring the hospital to
maintain certain specified limits of insurance coverage, including
professional liability, comprehensive general liability, workers' compensation
and fidelity insurance, and by requiring the hospital to name the Company as
an additional insured party on the hospital's professional and comprehensive
general liability policies.
The Company's management contracts also usually provide for the
indemnification of the Company by the hospital against claims that arise out
of the actions of hospital employees, medical staff members and other
non-Company personnel. The indemnification provisions help protect the Company
against claims not covered by insurance, such as medical staff antitrust
claims and employment-related claims.
Although the majority of the Company's management contracts contain
the Company's standard insurance and indemnification provisions, a small
portion do not, for various reasons. In some states, state law limits a
public hospital's ability to indemnify a private company. In those cases, the
Company attempts to negotiate for the maximum protection permitted by law. In
other states, public hospitals still enjoy total or partial sovereign immunity
and, as a result, do not purchase insurance except to the extent of their
limited liability. Although the Company treats the hospitals' insurance and
indemnification obligations as the Company's primary coverage, the Company also
maintains its own insurance.
ITEM 2. PROPERTIES
The Company currently leases approximately 63,620 square feet of
office space in two buildings located in Brentwood, Tennessee, for its
principal corporate offices, at a current annual base rent of approximately
$939,000. The space is leased for a term of ten years, to expire
December 15, 2005. The Company terminated its lease for its former corporate
office space effective January 1, 1996.
The Company also leases approximately 61,000 square feet of office
space in one of the buildings for the principal corporate offices of Quorum
Health Resources, Inc. The current annual rent is approximately $868,500,
and the ten year lease will expire January 1, 2005.
The field offices of Quorum Health Resources, Inc. are also leased,
with terms ranging from one to five years.
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For a description of the Company's owned hospital properties,
see "Item 1. Business--Owned Hospitals.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time subject to claims and suits
arising in the ordinary course of business, including claims for damages for
personal injuries, breach of management contracts or for wrongful restriction
of or interference with physicians' staff privileges. In certain of such
actions, plaintiffs request punitive or other damages that may not be covered
by insurance. The Company is not currently a party to any proceeding which,
in management's opinion, would have a material adverse effect on the
Company's financial position or results of operations.
In June 1993, the OIG requested information from the Company in
connection with an investigation involving the Company's procedures for
preparing Medicare cost reports. In January 1995, the U.S. Department of
Justice issued a Civil Investigative Demand which also requested
information from the Company in connection with that same investigation.
As a part of the government's investigation, several former and current
employees of the Company have been interviewed. The Company is continuing to
provide information and is cooperating fully with the investigation. The
Company cannot predict whether the government will commence litigation
regarding this matter. However, management believes that any claims likely to
be asserted by the government as a result of its investigation would not
have a material adverse effect on the Company's financial position or
results of operation.
In July 1996, the Company entered into a settlement agreement
in connection with the OIG's investigation of the outpatient geriatric
psychiatric day program operated by a subcontractor at Park Medical Center.
In the settlement agreement, the Company agreed to pay amounts which would
not have a material adverse effect on the Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock became listed on the Nasdaq Stock Market
National Market ("Nasdaq") under the symbol "QHGI" on May 26, 1994. On
September 24, 1996, the last reported sales price of the Common Stock on Nasdaq
was $25.13. As of June 30, 1996, the Company had approximately 1,690 holders
of record and the Company estimated an additional 3,500 beneficial owners.
The following table shows the high and low bid information for the Common Stock
as reported by Nasdaq for each quarter of the fiscal year ended June 30, 1996:
1995 High Low
---- ---- ---
First Quarter . . . . . . . . . . . . . . . . . . . . . . 20 16 3/4
Second Quarter . . . . . . . . . . . . . . . . . . . . . . 23 16 1/2
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . 20 3/4 17
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . 21 5/8 19 1/8
1996 High Low
---- ---- ---
First Quarter . . . . . . . . . . . . . . . . . . . . . . 24 19 7/8
Second Quarter . . . . . . . . . . . . . . . . . . . . . . 22 5/8 19 3/4
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . 28 3/4 21 3/4
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . 27 1/2 23 1/2
Quorum has not paid any cash dividends on its Common Stock since its
inception, presently intends to retain its earnings for use in its
business, and does not anticipate paying any cash dividends in the
foreseeable future. The declaration of dividends is within the discretion of
the Board of Directors, which will review this dividend policy from time to
time; however, the declaration of dividends is currently prohibited by
Quorum's bank credit facility and certain other agreements. See "Item
7. Management's Discussion and Analysis of Results of Operations and
Financial Condition" and Note 3 of Notes to Consolidated Financial Statements.
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ITEM 6. SELECTED FINANCIAL DATA
The following table of selected financial data should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto included elsewhere in this report.
QUORUM HEALTH GROUP, INC.
SELECTED FINANCIAL DATA
(In thousands, except per share data)
Year Ended June 30
--------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
SUMMARY OF OPERATIONS (1)
Net operating revenue $1,098,547 $850,167 $641,040 $343,132 $173,219
Operating expenses 890,203 693,859 524,962 286,873 150,282
Depreciation and amortization 55,901 37,566 28,153 14,809 15,482
Interest expense 36,568 22,209 25,066 13,954 4,065
Minority interest 109 1,046 1,035 1,174 1,480
Net gain on sale of assets
787 -- -- -- --
Income before income taxes, extraordinary
loss and cumulative effect of a change in
accounting principle 116,553 95,487 61,824 26,322 1,910
Income taxes 47,321 39,532 25,610 10,432 1,421
Income before extraordinary
loss and cumulative effect of a
change in accounting principle 69,232 55,955 36,214 15,890 489
Per common share:
Income before extraordinary loss
and cumulative effect of a change in
accounting principle-primary 1.39 1.14 0.96 0.50 0.02
Cash dividends declared 0 0 0 0 0
FINANCIAL POSITION AT YEAR END (1)
Total assets $1,020,561 $773,502 $625,802 $275,037 $220,603
Long-term debt excluding current maturities 430,877 287,364 225,444 138,765 132,124
Stockholders' equity 431,864 356,389 294,053 79,561 43,990
(1) The Company's financial statements for the periods presented are not
strictly comparable due to the significant effect that acquisitions
and divestitures have had on such statements. See "Item 7.
Management's Discussion and Analysis of Results of Operations and
Financial Condition".
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Impact of Acquisitions
The Company was formed in July 1989 to acquire a hospital contract
management business established in the mid-1970s. Since that acquisition, the
Company has expanded the scope of its business by acquiring acute care
hospitals, four facilities in fiscal 1991 and 1992 (one of which has been
divested), eleven facilities in fiscal 1994 (ten of which were acquired in a
single transaction--five of which have been divested and two of which were
exchanged for two other hospitals), three facilities in fiscal 1995, two
facilities in fiscal 1996 and two additional facilities during the two months
ended August 1996.
Because of the financial impact of the Company's recent
acquisitions and divestitures, it is difficult to make meaningful
comparisons between the Company's financial statements for the fiscal years
presented. In addition, due to the current number of owned hospitals, each
additional hospital acquisition can affect the overall operating margin of the
Company. Upon the acquisition of a hospital, the Company has typically taken
a number of immediate steps, including staffing adjustments, to lower
operating costs. The impact of such actions can be partially offset by
cost increases to expand the hospitals services, strengthen its medical
staff and improve its market position. The benefits of these investments and
of other activities to improve operating margins may not occur immediately.
Consequently, the financial performance of an acquired hospital may
adversely affect overall operating margins in the near-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.
Results of Operations
The table below reflects the percentage of net operating revenue
represented by various categories in the Consolidated Statements of Income and
the percentage change in the related dollar amounts. The results of
operations for the year ended June 30, 1996 include a full year of
operations for twelve hospitals and partial periods for two hospitals
acquired and one hospital divested during the year. The results of
operations for the year ended June 30, 1995 include a full year of operations
for ten hospitals and partial periods for three hospitals acquired during the
year. The results of operations for the year ended June 30, 1994 include a
full year of operations for four hospitals and partial periods for nine
hospitals acquired, three of which were divested or exchanged during the year.
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Percentage Increase
(Decrease) of
Dollars Amounts
---------------
Fiscal Year 1996 1995
1996 1995 1994 vs. 1995 vs. 1994
---- ---- ---- -------- --------
Net operating revenue 100.0% 100.0% 100.0% 29.2% 32.6%
Operating expenses before
depreciation and amortization 81.0 81.6 81.9 28.3 32.2
----- ----- ----- ----- -----
EBITDA (1) 19.0 18.4 18.1 33.8 34.7
Depreciation and amortization 5.1 4.5 4.4 48.8 33.4
Interest expense 3.3 2.6 3.9 64.7 (11.4)
Minority interest 0.0 0.1 0.2 (89.6) 1.1
----- ----- ----- ----- -----
Income before income taxes 10.6 11.2 9.6 22.1 54.4
Provision for income taxes 4.3 4.6 4.0 19.7 54.4
----- ----- ----- ----- -----
Net income 6.3% 6.6% 5.6% 23.7% 54.5%
===== ===== ===== ===== =====
- --------------------
(1) EBITDA represents earnings before interest, minority interest,
income taxes, depreciation and amortization expense. The Company
has included EBITDA data because such data is used by certain
investors to measure a company's ability to service debt. EBITDA
is not a measure of financial performance under generally
accepted accounting principles and should not be considered
an alternative to net income as a measure of operating performance
or to cash flows from operating activities as a measure of
liquidity.
Fiscal 1996 Compared to Fiscal 1995
The Company's net operating revenue was $1,098.5 million in fiscal
1996, compared to $850.2 million in fiscal 1995, an increase of $248.3 million
or 29%. This increase was attributable to, among other things, two hospital
acquisitions, a full year of revenue from three hospital acquisitions during
fiscal 1995, a 4% increase in revenue generated by hospitals owned during
both periods (calculated by comparing the same periods in both fiscal
years for hospitals owned as of June 30, 1996) and a 7% increase in
management services revenue. The Company's owned hospitals accounted for 88%
of the Company's net operating revenue in fiscal 1996 compared to 85% in
fiscal 1995.
Operating expenses before depreciation and amortization as a
percent of net operating revenue decreased from 81.6% in fiscal 1995 to
81.0% for fiscal 1996. Operating expenses before depreciation and
amortization as a percent of net operating revenue for the Company's owned
hospitals decreased from 82.6% in fiscal 1995 to 81.6% for fiscal 1996.
Operating expenses before depreciation and amortization as a percent of net
operating revenue for the Company's hospitals owned during both periods
decreased from 81.8% in fiscal 1995 to 81.3% for fiscal 1996 which was
primarily attributable to relative reductions in supplies expense. Operating
expenses before depreciation and amortization as a percent of net
operating revenue for the Company's management services business increased
from 75.7% in fiscal 1995 to 76.1% for fiscal 1996 which was primarily
attributable to the costs of new services.
23
26
EBITDA as a percent of net operating revenue was 19.0% for fiscal
1996 compared to 18.4% in fiscal 1995. EBITDA as a percent of net operating
revenue for the Company's owned hospitals was 18.4% compared to 17.4% in
fiscal 1995. EBITDA as a percent of net operating revenue for the Company's
owned hospitals during both periods was 18.7% compared to 18.2% in fiscal
1995. EBITDA as a percent of net operating revenue for the Company's
management services business was 23.9% compared to 24.3% in fiscal 1995
which was primarily attributable to the costs of new services.
Depreciation and amortization expense as a percent of net operating
revenue increased from 4.5% in fiscal 1995 to 5.1% in fiscal 1996 primarily
due to the fiscal 1995 and 1996 acquisitions and the Company's investment in
hospital management information systems. Interest expense as a percent
of net operating revenue increased from 2.6% in fiscal 1995 to 3.3% in
fiscal 1996 due to the fiscal 1995 and 1996 acquisitions and the
issuance of the Senior Subordinated Notes in November 1995. The provision
for income taxes as a percent of net revenue decreased from 4.6% in
fiscal 1995 to 4.3% in fiscal 1996 which is primarily attributable to a
lower effective tax rate and a relative change in pretax income.
Net income as a percent of net operating revenue was 6.3% in fiscal
1996 compared to 6.6% in fiscal 1995. This decrease was primarily
attributable to the fiscal 1995 and fiscal 1996 acquisitions.
Fiscal 1995 Compared to Fiscal 1994
The Company's net operating revenue was $850.2 million in fiscal
1995, compared to $641.0 million in fiscal 1994, an increase of $209.2
million or 33%. This increase was attributable to, among other things,
three hospital acquisitions, a full year of revenue from six hospital
acquisitions during fiscal 1994, a 5% increase in revenue generated by
hospitals owned during both periods and a 4% increase in management services
revenue. The Company's owned hospitals accounted for 85% of the Company's
net operating revenue in fiscal 1995 compared to 81% in fiscal 1994.
Operating expenses before depreciation and amortization as a
percent of net operating revenue decreased from 81.9% in fiscal 1994 to
81.6% for fiscal 1995. Operating expenses before depreciation and
amortization as a percent of net operating revenue for the Company's owned
hospitals decreased from 82.9% in fiscal 1994 to 82.6% for fiscal 1995.
Operating expenses before depreciation and amortization as a percent of net
operating revenue for the Company's hospitals owned during both periods
decreased from 82.8% in fiscal 1994 to 81.3% for fiscal 1995 which was
primarily attributable to relative reductions in supplies expense and the
provision for doubtful accounts. Operating expenses before depreciation and
amortization as a percent of net operating revenue for the Company's
management services business decreased from 77.4% in fiscal 1994 to 75.7%
for fiscal 1995 which was primarily attributable to relative reductions
in salaries and benefits expense.
EBITDA as a percent of net operating revenue was 18.4% for fiscal
1995 compared to 18.1% in fiscal 1994. EBITDA as a percent of net operating
revenue for the Company's owned hospitals
24
27
was 17.4% in fiscal 1995 compared to 17.1% in fiscal 1994. EBITDA as a percent
of net operating revenue for the Company's hospitals owned during both periods
was 18.7% in fiscal 1995 compared to 17.2% in fiscal 1994. EBITDA as a percent
of net operating revenue for the Company's management services business was
24.3% in fiscal 1995 compared to 22.6% in fiscal 1994.
Depreciation and amortization expense as a percent of net operating
revenue increased from 4.4% in fiscal 1994 to 4.5% in fiscal 1995. Interest
expense as a percent of net operating revenue decreased from 3.9% in fiscal
1994 to 2.6% in fiscal 1995. This decrease was primarily due to the reduction
in debt attributable to the fiscal 1994 initial public offering of common
stock. The provision for income taxes as a percentage of net revenue increased
from 4.0% in fiscal 1994 to 4.6% in fiscal 1995 primarily due to a relative
change in pre-tax income.
Net income as a percent of net operating revenue was 6.6% in fiscal
1995 compared to 5.6% in fiscal 1994. This increase was primarily attributable
to the increased profitability of the Company s owned hospitals and the
management services business, as discussed above.
Liquidity and Capital Resources
At June 30, 1996, the Company had working capital of $160.4 million,
including cash and cash equivalents of $20.4 million. The ratio of current
assets to current liabilities was 2.6 to 1.0 at June 30, 1996 and June 30,
1995.
The Company's cash requirements excluding acquisitions have
historically been funded by cash generated from operations. Cash generated
from operations was $114.2 million, $88.2 million and $71.8 million for the
years ended June 30, 1996, 1995 and 1994, respectively. The increase is
primarily due to the cash generated from the hospitals acquired in fiscal 1995
and 1996.
Capital expenditures excluding hospital acquisitions for the years
ended June 30, 1996, 1995 and 1994, were $62.1 million, $58.3 million, and
$35.9 million respectively. The management services business does not require
significant capital expenditures. Capital expenditures for owned hospitals may
vary from year to year depending on facility improvements and service
enhancements undertaken by the hospitals. In fiscal 1997, the Company expects
to make capital expenditures of up to $75 million, excluding acquisitions. In
addition, the Company anticipates construction of a replacement hospital in
Florence, South Carolina.
The Company intends to acquire additional acute care facilities, and
the Company 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 June 30, 1996,
the Company had $423.0 million available under its Revolving Line of Credit.
On July 1, 1996, a limited liability company controlled by the
Company acquired the assets and business of Mary Black Memorial Hospital, Inc.
25
28
and affiliated businesses in Spartanburg, South Carolina for approximately
$82.9 million. On August 1, 1996, a subsidiary of the Company acquired certain
assets and the business of Williamsburg County Memorial Hospital in Kingstree,
South Carolina for approximately $1.3 million.
On June 21, 1996, the Company signed a letter of intent to form a joint
venture controlled by the Company to acquire the assets and business of
Barberton Citizens Hospital in Barberton, Ohio. On July 5, 1996, the Company
signed a letter of intent to form a joint venture controlled by the Company to
acquire the assets and business of Doctors Hospital in Massillon, Ohio. The
proposed transactions are subject to the completion of customary closing
conditions and obtaining certain regulatory approvals.
In fiscal 1996, the Company invested approximately $205.3 million in
hospital and affiliated business acquisitions. On August 1, 1995, a subsidiary
of the Company acquired certain assets and businesses of The Lutheran Hospital
of Indiana, Inc. in Fort Wayne, Indiana for approximately $172.0 million. On
February 1, 1996, a subsidiary of the Company acquired certain assets and
businesses of Fort Wayne Center Equipment, Inc. and affiliate for approximately
$13.6 million. On February 1, 1996, a subsidiary of the Company sold a
minority ownership interest in Midlands Community Hospital in Papillion,
Nebraska to Alegent Health. On March 1, 1996, a subsidiary of the Company sold
certain assets and the business of Concho Valley Regional Hospital in San
Angelo, Texas. On June 1, 1996, a subsidiary of the Company acquired the
assets and business of Jacksonville Hospital in Jacksonville, Alabama for
approximately $18.5 million.
In fiscal 1995, the Company invested approximately $99.7 million in
hospital and affiliated business acquisitions. On August 1, 1994, a subsidiary
of the Company acquired the assets and business of Midlands Community Hospital
in Papillion, Nebraska for approximately $11.0 million. On February 1, 1995, a
subsidiary of the Company acquired the assets and business of Carolinas
Hospital System in Florence, South Carolina for approximately $86.0 million. On
June 1, 1995, a subsidiary of the Company acquired certain personal property
and the business of Lake City Community Hospital in Lake City, South Carolina
for approximately $2.0 million.
In fiscal 1994, the Company invested approximately $387.5 million in
hospital and affiliated business acquisitions, including assets held for sale
of approximately $37.3 million. On September 30, 1993, a subsidiary of the
Company acquired ten hospitals from Charter Medical Corporation for
approximately $340.0 million. Of the ten hospitals, (i) four were divested,
which were identified as being held for sale at the date of acquisition by the
Company, (ii) one was sold in April 1994, which was identified for sale
subsequent to its acquisition by the Company and (iii) two hospitals were
exchanged in May 1994 for two other hospitals. On December 1, 1993, a
subsidiary of the Company acquired from Baptist Health Services, Inc. and
affiliates, the assets and business of Baptist Memorial Hospital of Gadsden,
Alabama, for approximately $70.0 million. Included in the acquisition were
three medical office buildings which were identified at the date of acquisition
by the Company as being held for sale.
In May 1995, the Company amended its Revolving Line of Credit to
increase the maximum borrowing amount to $600.0 million and reduce the interest
26
29
rate margins. The total commitment under the five-year agreement reduces to
$500.0 million in the fourth year and $350.0 million in the fifth year and
provides for two one-year extensions subject to approval of 100% of the
lenders. The loan bears interest, at the Company's option, at the lender's
base rate or a fluctuating rate ranging from .5 to 1.25 percentage points
above LIBOR, adjusted based upon certain financial covenant requirements. The
Company must pay a commitment fee of three-sixteenths to three-eighths of one
percent on the unused portion of the revolving credit line. The Company may
prepay the principal amount outstanding under the Revolving Line of Credit at
any time. The interest rate in effect at June 30, 1996 and June 30, 1995 was
6.8% and 7.2%, respectively.
On November 9, 1995, the Company issued $150.0 million in Senior
Subordinated Notes maturing on November 1, 2005 and bearing interest at
8.75%. The Notes are subject to redemption at the option of the Company at
a price of 104.375% on or after November 1, 2000, 102.188% on or after
November 1, 2001 and at par on or after November 1, 2002. The Notes are
unsecured obligations and are subordinated in right of payment to all
existing and future senior indebtedness. The majority of the proceeds of
the Senior Subordinated Notes was used to pay down the Revolving Line of
Credit.
On December 15, 1992, the Company issued $100.0 million in Senior
Subordinated Notes maturing on December 15, 2002 and bearing interest at
11.875%. The Notes are subject to redemption at the option of the Company at
prices declining from 105.875% at December 15, 1997 to par on December 15,
1999. The Notes are unsecured obligations and are subordinated in right
of payment to all existing and future senior indebtedness.
At June 30, 1996 and 1995, respectively, substantially all assets of
the Company were pledged under the terms of the Company's bank credit
facility. The credit facilities, including the Senior Subordinated Notes,
contain financial covenants relating to the prohibition of dividend payments
and other distributions, limitations on capital expenditures, repurchase of
common stock, additional indebtedness, investments, asset dispositions,
liens, engaging in transactions with affiliates, the ability to merge or
consolidate with or transfer assets to another entity, the maintenance of
net worth and cash accounts and various financial ratios, including a
fixed charge ratio and a leverage ratio. The Company is required to
repurchase all Senior Subordinated Notes at 101% upon a change in control.
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. The floating-rate payments are based on LIBOR and fixed-rate
payments are dependent upon market levels. In fiscal 1993, the Company entered
into interest rate swap agreements which effectively convert for a seven-year
period $50.0 million of fixed-rate borrowings to floating-rate borrowings. In
fiscal 1994, the Company entered into interest rate swap agreements which
effectively convert for a two and one-half year period $50.0 million of
floating-rate borrowings to fixed-rate borrowings. For the year ended June 30,
1996, the Company received a weighted average rate of 5.8% and paid a weighted
average rate of 4.8%. For the years ended June 30, 1995 and June 30, 1994, the
Company received a weighted average rate of 5.6% and 5.2% and paid a weighted
average rate of 4.2% and 3.6%, respectively.
27
30
Fiscal 1994 common stock issuances include 7,187,500 shares sold
through a public offering on May 26, 1994. The net proceeds were used to
provide funds for acquisitions, to reduce debt outstanding under the Company's
credit facilities, to retire subordinated debt held by the Company's
principal stockholders and for general working capital purposes. On June 2,
1994, the $12.0 million convertible debentures were converted into 3,200,000
shares of common stock.
During fiscal 1996, the Internal Revenue Service (IRS) completed
an examination of the Company's federal income tax returns for the fiscal
years ending June 30, 1990 through 1992. Federal income tax on the proposed
adjustments amounts to $10.9 million, excluding interest. The most
significant adjustment involves the amortization deductions claimed on certain
acquired intangible assets in conjunction with the acquisition of Quorum
Health Resources, Inc. The Company has protested all of the proposed
adjustments through the appeals process of the IRS. Management believes that
the final outcome of the IRS examination will not have a material effect on
the Company's results of operations or financial position.
In June 1993, the Office of the Inspector General (OIG) requested
information from the Company in connection with an investigation involving the
Company's procedures for preparing Medicare cost reports. In January 1995,
the U.S. Department of Justice issued a Civil Investigative Demand
which also requested information from the Company in connection with that
same investigation. As a part of the government's investigation, several
former and current employees of the Company have been interviewed. The
Company is continuing to provide information and is cooperating fully with
the investigation. The Company cannot predict whether the government will
commence litigation regarding this matter. Management believes that any
claims likely to be asserted by the government as a result of its
investigation would not have a material effect on the Company's results of
operations or financial position.
The Company will adopt FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
in the first quarter of fiscal 1997 and, based on current circumstances,
does not believe the effect of adoption will be material.
Industry Trends
The Company's owned hospitals derive a substantial portion of their
revenue from the federal Medicare program and the state Medicaid programs.
The payment rates under the Medicare program for inpatients are
prospective, based upon the diagnosis of a patient. While these rates are
indexed for inflation annually, the 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. The
Company is unable to predict what, if any, future health reform legislation
may be enacted at the federal or state level. Changes in the Medicare or
Medicaid programs and other proposals to limit health care spending could
have an adverse impact upon the health care industry and the Company.
28
31
In addition, states, insurance companies and employers are
actively negotiating amounts paid to hospitals, which are typically lower
than their standard rates. The trend toward managed care, including health
maintenance organizations, preferred provider organizations and various other
forms of managed care, may affect 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 for the years
ended June 30, 1996, 1995 and 1994, was approximately 34.0%, 32.2% and 30.1% of
gross patient service revenue, respectively.
Inflation
The health care industry is labor intensive. Wages and other
expenses increase during periods of inflation and when shortages in
marketplaces occur. 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, expanding
services and implementing cost control measures to curb increases in
operating costs and expenses. The Company cannot predict its ability to
offset or control future cost increases.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements are submitted in a
separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information concerning this Item is incorporated by reference to the
Company's definitive proxy materials for the Company's 1996 Annual Meeting of
Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning this Item is incorporated by reference to the
Company's definitive proxy materials for the Company's 1996 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information concerning this Item is incorporated by reference to the
Company's definitive proxy materials for the Company's 1996 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning this Item is incorporated by reference to
the Company's definitive proxy materials for the Company's 1996 Annual
Meeting of Stockholders.
30
33
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2) AND (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
QUORUM HEALTH GROUP, INC.
BRENTWOOD, TENNESSEE
JUNE 30, 1996
F-1
34
Quorum Health Group, Inc. and Subsidiaries
Form 10-K -- Item 8 and Item 14(a)(1) and (2), and (d)
Index to Financial Statements and Financial Statement Schedule
The following consolidated financial statements of Quorum Health Group, Inc.
and subsidiaries are included in Item 8:
Page No.
--------
Consolidated Statements of Income-- Years Ended
June 30, 1996, 1995 and 1994 F- 4
Consolidated Balance Sheets-- June 30, 1996 and 1995 F- 5
Consolidated Statements of Stockholders' Equity--
Years Ended June 30, 1996, 1995 and 1994 F- 7
Consolidated Statements of Cash Flows-- Years Ended
June 30, 1996, 1995 and 1994 F- 8
Notes to Consolidated Financial Statements--
June 30, 1996 F-10
The following consolidated financial statement schedule of Quorum Health Group,
Inc. and subsidiaries is included in Item 14(d):
Schedule II-- Valuation and Qualifying Accounts S- 1
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
F-2
35
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Quorum Health Group, Inc.
We have audited the accompanying consolidated balance sheets of Quorum Health
Group, Inc. and subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Quorum Health
Group, Inc. and subsidiaries at June 30, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Nashville, Tennessee
August 7, 1996
F-3
36
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30
1996 1995 1994
(In thousands, except per share data)
Revenue:
Net patient service revenue $ 963,485 $724,287 $520,242
Hospital management/professional services 78,409 73,913 73,026
Reimbursable expenses 56,653 51,967 47,772
Net operating revenue 1,098,547 850,167 641,040
Expenses:
Salaries and benefits 420,904 319,736 235,257
Reimbursable expenses 56,653 51,967 47,772
Supplies 160,849 121,869 89,721
Fees 102,690 83,443 56,012
Other operating expenses 92,624 68,064 56,796
Provision for doubtful accounts 56,483 48,780 39,404
Depreciation and amortization 55,901 37,566 28,153
Interest 36,568 22,209 25,066
Minority interest 109 1,046 1,035
Net gain on sale of assets (787) -- --
981,994 754,680 579,216
Income before income taxes 116,553 95,487 61,824
Provision for income taxes 47,321 39,532 25,610
Net income $ 69,232 $ 55,955 $ 36,214
Net income per common share:
Primary $ 1.39 $ 1.14 $ 0.96
Fully diluted $ 1.39 $ 1.14 $ 0.90
Weighted average shares used in earnings per
share computation:
Primary 49,759 49,158 37,767
Fully diluted 49,797 49,188 41,170
See accompanying notes.
F-4
37
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30
1996 1995
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 20,382 $ 27,475
Accounts receivable, less allowance for
doubtful accounts of $39,752,284 at
June 30, 1996 and $44,827,559 at
June 30, 1995 185,743 144,787
Supplies 27,170 21,336
Other 25,772 24,788
Total current assets 259,067 218,386
Property, plant and equipment, at cost:
Land 53,273 34,983
Buildings and improvements 237,359 169,239
Equipment 362,007 272,392
Construction in progress 17,796 13,862
670,435 490,476
Less accumulated depreciation 119,740 71,789
550,695 418,687
Cost in excess of net assets acquired 142,708 111,206
Unallocated purchase price 15,138 4,717
Other 52,953 20,506
Total assets $1,020,561 $ 773,502
F-5
38
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
June 30
1996 1995
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 47,049 $ 40,544
Accrued salaries and benefits 42,694 35,762
Deferred income 4,965 5,845
Other current liabilities 1,509 1,386
Current maturities of long-term debt 2,441 1,537
Total current liabilities 98,658 85,074
Long-term debt 430,877 287,364
Deferred income taxes 33,343 23,891
Other liabilities and deferrals 19,855 15,121
Minority interest in consolidated entities 5,964 5,663
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $.01 par value; 100,000,000
shares authorized; 48,645,750 issued
and outstanding at June 30, 1996
and 47,783,984 at June 30, 1995 486 478
Additional paid-in capital 262,581 256,346
Retained earnings 168,797 99,565
431,864 356,389
Total liabilities and stockholders' equity $ 1,020,561 $773,502
See accompanying notes.
F-6
39
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
(In thousands)
Balance at July 1, 1993 26,754 $ 268 $ 71,897 $ 7,396 $ 79,561
Common stock issued 16,335 163 163,208 -- 163,371
Subordinated debentures
converted 3,200 32 11,968 -- 12,000
Options exercised and
related tax benefits 201 2 418 -- 420
Stock issued under employee
stock purchase plan 419 4 2,483 -- 2,487
Net income -- -- -- 36,214 36,214
Balance at June 30, 1994 46,909 469 249,974 43,610 294,053
Options exercised and
related tax benefits 595 6 3,226 -- 3,232
Stock issued under employee
stock purchase plan 280 3 3,146 -- 3,149
Net income -- -- -- 55,955 55,955
Balance at June 30, 1995 47,784 478 256,346 99,565 356,389
Options exercised and
related tax benefits,
net of shares tendered
in payment 646 6 2,768 -- 2,774
Stock issued under employee
stock purchase plan 216 2 3,467 -- 3,469
Net income -- -- -- 69,232 69,232
Balance at June 30, 1996 48,646 $ 486 $262,581 $168,797 $431,864
See accompanying notes.
F-7
40
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30
1996 1995 1994
(In thousands)
Cash flows from operating activities:
Net income $ 69,232 $ 55,955 $ 36,214
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 51,191 33,630 24,187
Amortization of intangible assets 4,710 3,936 3,966
Amortization of deferred loan costs 1,537 836 744
Provision for doubtful accounts 56,483 48,780 39,404
Provision for deferred taxes 13,893 11,369 3,765
Reserves for general and professional
liability risks 737 1,268 2,301
Gain on sale of assets (787) -- --
Other 817 1,046 1,035
Changes in operating assets and liabilities,
net of effects from acquisitions:
Accounts receivable (71,219) (56,790) (50,937)
Supplies and other current assets (4,736) (3,232) (6,480)
Other assets (13,790) (5,174) (1,569)
Accounts payable, accrued expenses
and income taxes 2,005 (3,983) 15,818
Other current liabilities 102 (2,846) 4,707
Other liabilities 3,996 3,409 (1,349)
Net cash provided by operating activities 114,171 88,204 71,806
Cash flows from investing activities:
Purchase of acquired companies (205,326) (99,721) (350,183)
Purchase of property, plant and equipment (62,122) (58,298) (35,901)
Assets held for sale -- 2,833 (37,328)
Proceeds from sale of assets 870 3,695 67,355
Other 148 82 (636)
Net cash used by investing activities (266,430) (151,409) (356,693)
F-8
41
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended June 30
1996 1995 1994
(In thousands)
Cash flows from financing activities:
Borrowings under bank debt $ 363,750 $ 269,083 $ 381,001
Repayments of bank debt (368,000) (212,275) (268,888)
Proceeds from issuance of Senior Subordinated Notes 150,000 -- --
Principal payments of subordinated debentures -- -- (18,000)
Loan origination costs (5,194) (2,137) (1,374)
Proceeds from issuance of common stock, net 6,243 (6,381) 166,278
Other (1,633) (681) (544)
Net cash provided by financing activities 145,166 (60,371) 258,473
Increase (decrease) in cash and cash equivalents (7,093) (2,834) (26,414)
Cash and cash equivalents at beginning of year 27,475 (30,309) 56,723
Cash and cash equivalents at end of year $ 20,382 $ 27,475 $ 30,309
Supplemental cash flow information
Interest paid $ (32,198) $ (21,877) $ (23,768)
Income taxes paid (34,483) (30,398) (17,723)
Noncash transactions
Conversion of subordinated debentures into
common stock $ -- $ -- $ 12,000
Acquisitions:
Fair value of assets acquired $ 210,099 $ 118,910 $ 378,988
Cash paid (205,326) (99,721) (350,183)
Liabilities assumed $ 4,773 $ 19,189 $ 28,805
Divestitures:
Cash received and notes receivable $ 6,324 $ -- $ 31,625
Fair value of assets sold (5,849) -- (31,413)
Excess of proceeds over carrying value (787) -- ( 1,723)
Liabilities sold $ (312) $ -- $ (1,511)
See accompanying notes.
F-9
42
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. ACCOUNTING POLICIES
Quorum Health Group, Inc. (the Company) is engaged primarily in hospital
ownership and hospital management and consulting for third party owners.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of
Quorum Health Group, Inc. and its majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
The Company's cash equivalents are invested primarily in securities either
issued or insured by the United States of America, time deposits and
certificates of deposit of banks having at least a debt rating of BBB by
Standard and Poor's Investors Services, Inc. and capital and surplus of $100.0
million, repurchase securities and commercial paper rated A-1. The Company
invests in securities with maturities no longer than three months and limits
the amount of credit exposure with commercial issuers.
Accounts Receivable
Accounts receivable consist primarily of amounts due from (i) the federal
government and state governments under Medicare, Medicaid and other government
programs and (ii) other payors including commercial insurance companies, health
maintenance organizations, preferred provider organizations, self-insured
employers and individual patients. The concentration of net accounts
receivable from government programs as a percent of total net accounts
receivable is 33% and 32% for the years ended June 30, 1996 and 1995,
respectively. Concentration of credit risk relating to accounts receivable is
limited to some extent by the diversity and number of patients and payors and
the geographic dispersion of the Company's operations.
F-10
43
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Supplies
Supplies are stated at the lower of cost (first-in, first-out method) or
market.
Property, Plant and Equipment
Depreciation is computed on a straight-line basis principally with a range of
depreciable lives from 20-40 years for buildings and improvements and 5-20
years for equipment, or over the lives of leases if shorter.
Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired (or goodwill) consists of the excess
purchase price over the fair value of acquired tangible and identifiable
intangible assets. Goodwill is amortized on a straight-line basis primarily
over 40 years. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable based on the undiscounted cash flows of the
entity acquired over the remaining amortization period, the Company's carrying
value of the goodwill will be reduced to estimated fair value. Accumulated
amortization of cost in excess of net assets acquired was $10.1 million and
$6.1 million at June 30, 1996 and 1995, respectively.
Impairment of Long-Lived Assets
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" was issued in March 1995. Statement
121 requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt Statement
121 in the first quarter of fiscal 1997 and, based on current circumstances,
does not believe the effect of adoption will be material.
Deferred Loan Costs
Deferred loan costs are included in other non-current assets and are amortized
over the term of the related debt by the interest method. Accumulated
amortization of deferred loan costs was $3.5 million and $2.0 million at June
30, 1996 and 1995, respectively.
F-11
44
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net Operating Revenue
Net patient service revenue is received primarily from the federal Medicare and
state Medicaid programs and from commercial insurance carriers. Net patient
service revenue is reported at the estimated net realizable amounts from
patients, third-party payors, and others for services rendered, including
estimated retroactive adjustments under agreements with third-party payors.
Retroactive adjustments are accrued on an estimated basis in the period the
related services are rendered and adjusted in future periods as final
settlements are determined.
Net patient service revenue is net of contractual adjustments and policy
discounts of $746.8 million, $602.2 million and $378.2 million for the years
ended 1996, 1995 and 1994, respectively. Approximately 56%, 57% and 56% of
gross patient service revenue was from Medicare and Medicaid for the years
ended 1996, 1995 and 1994, respectively.
Stock-Based Compensation
The Company grants stock options, generally for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for stock option grants in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees," and,
accordingly, recognizes no compensation expense for the stock option grants.
Financial Instruments
The Company enters into interest rate swap agreements as a means of managing
its interest rate exposure. The differential to be paid or received is
recognized over the life of the agreement as an adjustment to interest expense.
Income Per Common Share
Income per common share is based on the weighted average number of shares of
common stock outstanding, and common stock equivalents consisting of dilutive
stock options. Fully diluted income per common share also assumes the 10.4%
convertible subordinated debentures were converted at the beginning of fiscal
1994 and the interest expense thereon, net of income taxes, was added to net
income.
F-12
45
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reclassifications
Certain reclassifications have been made in the fiscal 1995 and 1994 financial
statements to conform to the 1996 presentation. These reclassifications had no
effect on the results of operations previously reported.
2. ACQUISITIONS AND DIVESTITURES
Fiscal 1997 Acquisitions and Letters of Intent
On July 1, 1996, a limited liability company controlled by the Company acquired
the assets and business of Mary Black Memorial Hospital, Inc. and affiliated
businesses in Spartanburg, South Carolina for approximately $82.9 million. On
August 1, 1996, a subsidiary of the Company acquired certain assets and the
business of Williamsburg County Memorial Hospital in Kingstree, South Carolina
for approximately $1.3 million.
On June 21, 1996, the Company signed a letter of intent to form a joint venture
controlled by the Company to acquire the assets and business of Barberton
Citizens Hospital in Barberton, Ohio. On July 5, 1996, the Company signed a
letter of intent to form a joint venture controlled by the Company to acquire
the assets and business in Doctors Hospital of Massillon, Ohio. The proposed
transactions are subject to the completion of customary closing conditions and
obtaining certain regulatory approvals.
Fiscal 1996 Acquisitions and Divestitures
On August 1, 1995, a subsidiary of the Company acquired certain assets and
businesses of The Lutheran Hospital of Indiana, Inc. in Fort Wayne, Indiana for
approximately $172.0 million. On February 1, 1996, a subsidiary of the Company
acquired certain assets and businesses of Fort Wayne Center Equipment, Inc. and
affiliate for approximately $13.6 million.
On February 1, 1996, a subsidiary of the Company sold a minority ownership
interest in Midlands Community Hospital in Papillion, Nebraska to Alegent
Health.
On March 1, 1996, a subsidiary of the Company sold certain assets and the
business of Concho Valley Regional Hospital in San Angelo, Texas.
On June 1, 1996, a subsidiary of the Company acquired the assets and business
of Jacksonville Hospital in Jacksonville, Alabama for approximately $18.5
million.
F-13
46
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal 1995 Acquisitions and Divestitures
On August 1, 1994, a subsidiary of the Company acquired the assets and business
of Midlands Community Hospital in Papillion, Nebraska for approximately $11.0
million.
As discussed below, a hospital which had been identified for sale in the prior
fiscal year, was sold on October 31, 1994 (see Note 7).
On February 1, 1995, a subsidiary of the Company acquired the assets and
business of Carolinas Hospital System in Florence, South Carolina for
approximately $86.0 million.
On June 1, 1995, a subsidiary of the Company acquired certain personal property
and the business of Lake City Community Hospital in Lake City, South Carolina
for $2.0 million.
Fiscal 1994 Acquisitions and Divestitures
On September 30, 1993, a subsidiary of the Company acquired all of the capital
stock of Charter Medical Corporation's subsidiaries that owned ten acute care
hospitals, various medical office buildings and related assets for
approximately $340.0 million. Included were (i) four acute care hospitals
which were identified at the date of acquisition as being held for sale, (ii)
one acute care hospital which was placed for sale subsequent to its acquisition
and (iii) two acute care hospitals which were subsequently exchanged for two
other acute care hospitals.
Of the four Charter hospitals which were identified for sale at
the date of their acquisition, three hospitals were divested
during fiscal 1994 and the fourth hospital was divested during
fiscal 1995 (see Note 7).
On April 30, 1994, the former Charter hospital which was
identified for sale subsequent to its acquisition was sold for
approximately $31.6 million to Bon Secours Health System, Inc.
On May 1, 1994, a subsidiary of the Company exchanged the
property, equipment, building, inventory and certain liabilities
of two former Charter hospitals for the property, equipment,
building, inventory and certain liabilities of two hospitals
owned by Columbia/HCA Healthcare Corporation. The consideration
for this transaction was the assets exchanged. No gain or loss
resulted from the transaction.
On December 1, 1993, a subsidiary of the Company acquired from Baptist
F-14
47
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Health Services, Inc. and affiliates the assets and the business of Baptist
Memorial Hospital of Gadsden, Alabama, for approximately $70.0 million.
Included in the acquisition were three medical office buildings which were
identified at the date of acquisition by the Company as being held for sale
(see Note 7).
Other Information Regarding Acquisitions and Divestitures
All of the foregoing acquisitions were accounted for using the purchase method
of accounting. The allocation of the purchase price associated with the fiscal
1996 acquisitions has been determined by the Company based upon available
information and is subject to further refinement. The operating results of the
acquired companies have been included in the accompanying consolidated
statements of income from the respective dates of acquisition (with the
exception of assets held for sale as discussed in Note 7).
The following unaudited pro forma information reflects the operations of the
entities acquired and divested in fiscal 1996, 1995 and 1994 as if the
respective transactions had occurred as of the first day of the fiscal year
immediately preceding the year of the transactions. 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
years presented or to project the Company's results of operations in any future
period.
Year Ended June 30
---------------------------------
1996(1) 1995(2) 1994(3)
---------- ---------- ---------
(In thousands, except per
share data)
Net operating revenue $1,109,507 $1,061,350 $885,894
Net income 69,815 62,307 41,869
Net income per common share:
Primary 1.40 1.27 1.11
Fully diluted 1.40 1.27 1.03
- ------------------------------
(1) Includes The Lutheran Hospital of Indiana, Inc. and Jacksonville
Hospital and excludes the hospital divested.
(2) Includes Midlands Community Hospital, Carolinas Hospital System, Lake
City Community Hospital, The Lutheran Hospital of Indiana, Inc. and
Jacksonville Hospital and excludes the hospital divested in fiscal 1996.
(3) Includes the ten hospitals acquired from Charter (but excluding the
results of hospitals held for sale as of the acquisition date), the
hospital acquired from Baptist, the two hospitals
F-15
48
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
obtained in the exchange, Midlands Community Hospital, Carolinas Hospital
System and Lake City Community Hospital and excludes the hospital
divested and the two hospitals divested in the exchange.
3. LONG-TERM DEBT
Long-term debt consists of the following:
June 30
-------
1996 1995
---- ----
(In thousands)
Revolving Line of Credit $177,000 $172,000
8.75% Senior Subordinated Notes 150,000 --
11.875% Senior Subordinated Notes 100,000 100,000
Other debt 6,318 16,901
-------- --------
433,318 288,901
Less current maturities (2,441) (1,537)
-------- --------
$430,877 $287,364
======== ========
Revolving Line of Credit
In May 1995, the Company amended its Revolving Line of Credit to increase the
maximum borrowing amount to $600.0 million and reduce the interest rate
margins. The total commitment under the five-year agreement reduces to $500.0
million in the fourth year and $350.0 million in the fifth year and provides
for two one-year extensions subject to approval of 100% of the lenders. The
loan bears interest, at the Company's option, at the lender's base rate or a
fluctuating rate ranging from .5 to 1.25 percentage points above LIBOR,
adjusted based upon certain financial covenant requirements. The Company must
pay a commitment fee of three-sixteenths to three-eighths of one percent on
the unused portion of the revolving credit line. The Company may prepay the
principal amount outstanding under the Revolving Line of Credit at any time.
The interest rate in effect at June 30, 1996 and June 30, 1995 was 6.8% and
7.2%, respectively.
8.75% Senior Subordinated Notes
On November 9, 1995, the Company issued $150.0 million in Senior Subordinated
Notes maturing on November 1, 2005 and bearing interest at 8.75%. The Notes
are subject to redemption at the option of the Company at 104.375% on or after
November 1, 2000, 102.188% on or after November 1, 2001 and at par on or after
November 1, 2002. The Notes are unsecured
F-16
49
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
obligations and are subordinated in right of payment to all existing and future
senior indebtedness. The majority of the proceeds of the Senior Subordinated
Notes was used to pay down the Revolving Line of Credit.
11.875% Senior Subordinated Notes
On December 15, 1992, the Company issued $100.0 million in Senior Subordinated
Notes maturing on December 15, 2002 and bearing interest at 11.875%. The Notes
are subject to redemption at the option of the Company at prices declining from
105.875% at December 15, 1997 to par on December 15, 1999. The Notes are
unsecured obligations and are subordinated in right of payment to all existing
and future senior indebtedness.
Other Debt
Other debt consists primarily of subsidiary secured debt, capital leases and
various notes payable. Principal and interest payments are paid in periodic
installments through 2008. Interest rates are fixed and range from 6.3% to
7.0%.
Other Long-Term Debt Information
At June 30, 1996 and 1995, respectively, substantially all assets of the
Company were pledged under the terms of the foregoing credit facilities. The
credit facilities contain financial covenants relating to the prohibition of
dividend payments and other distributions, limitations on capital expenditures,
repurchase of common stock, additional indebtedness, investments, asset
dispositions, liens, engaging in transactions with affiliates, the ability to
merge or consolidate with or transfer assets to another entity, the maintenance
of net worth and cash accounts and various financial ratios, including a fixed
charge ratio and a leverage ratio. The Company is required to repurchase all
Senior Subordinated Notes at 101% upon a change in control.
Maturities of long-term debt for the fiscal years subsequent to June 30, 1996
are as follows: 1997 - $2.4 million; 1998 - $.8 million; 1999 - $.6 million;
2000 - $177.4 million; 2001 - $.2 million and thereafter - $251.9 million.
4. SUBORDINATED LONG-TERM DEBT -- RELATED PARTIES
On June 2, 1994, 10.4% unsecured convertible subordinated debentures totaling
$12.0 million held by WCAS Capital Partners II, L.P., were converted into
3,200,000 common shares in connection with the public
F-17
50
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
offering of common stock. On June 3, 1994, 10.4% unsecured subordinated
debentures held by WCAS Capital Partners II, L.P. totaling $18.0 million were
repaid in connection with the public offering of common stock as required by
the loan agreement. (See Note 6).
5. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED JUNE 30
------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
Current:
Federal $28,379 $24,609 $19,044
State and local 5,049 3,554 2,801
------- ------- -------
33,428 28,163 21,845
Deferred:
Federal $12,680 $ 9,966 $ 4,044
State and local 1,213 1,403 (279)
------- ------- -------
13,893 11,369 3,765
------- ------- -------
$47,321 $39,532 $25,610
======= ======= =======
A reconciliation of the actual income tax expense and income taxes computed by
applying the statutory federal income tax rate to income before income taxes is
as follows:
YEAR ENDED JUNE 30
------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
Federal statutory rate $40,794 $33,420 $21,638
State and local income
taxes, net of federal
income tax benefit 4,070 3,222 1,639
Nondeductible amortization
of coast in excess of net
assets acquired 109 197 204
Other 2,348 2,693 2,129
------- ------- -------
$47,321 $39,532 $25,610
======= ======= =======
Deferred income taxes result from temporary differences in the recognition of
F-18
51
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assets, liabilities, revenues and expenses for financial accounting and tax
purposes. Sources of these differences and the related tax effects are as
follows:
JUNE 30
-------
1996 1995
---- ----
(IN THOUSANDS)
Deferred tax liabilities:
Depreciation and amortization $(34,697) $(27,040)
Provision for doubtful accounts (5,867) --
Other (951) --
-------- --------
Total deferred tax liabilities (41,515) (27,040)
-------- --------
Deferred tax assets:
Provision for doubtful accounts -- 1,087
Accrued expenses 6,016 5,994
Net operating losses 362 498
Employee compensation 4,300 1,503
Other -- 1,014
-------- --------
Total deferred tax assets 10,678 10,096
-------- --------
Net deferred tax liabilities $(30,837) $(16,944)
======== ========
Management believes that the deferred tax assets will ultimately be realized.
Management's conclusion is based on future taxable income that will result from
the reversal of the existing taxable temporary differences. Additionally,
management expects future taxable income from operations, exclusive of the
reversal of temporary differences.
A deferred tax liability of $1.7 million was established during fiscal 1995 as
a result of an acquisition.
F-19
52
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The balance sheet classification of deferred income taxes is as follows:
JUNE 30
-------
1996 1995
---- ----
(IN THOUSANDS)
Current $ 2,506 $ 6,947
Long-term (33,343) (23,891)
-------- --------
Total $(30,837) $(16,944)
======== ========
6. STOCKHOLDERS' EQUITY AND STOCK OPTIONS
Issuances of Common Stock
During the year ended June 30, 1994, the Company issued 9,147,000 unregistered
shares of common stock at prices ranging from $6.00 to $7.50 per share to
certain affiliates of WCAS, certain investment limited partnerships in which
affiliates of The Goldman Sachs Group, L.P. are the general partner or managing
general partner, certain affiliates of Furman Selz Incorporated, HCA, and
management of the Company. On May 26, 1994, the Company issued 7,187,500
common shares through a public offering.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan under which the sale of
2,000,000 shares of its common stock has been authorized. The purchase price
of the shares under the plan is 85% of the lesser of the fair market value on
the first day (March 1) or the last day (February 28) of the plan year.
Employees may designate up to 10% of their compensation (not to exceed $25,000
in any calendar year) for the purchase of stock. During fiscal year 1996,
216,082 shares were issued at $16.05 per share, yielding net proceeds of
approximately $3.5 million. During fiscal year 1995, 279,676 shares were
issued at $11.25 per share, yielding net proceeds of approximately $3.1 million
and during fiscal year 1994, 419,328 shares were issued at $6.00 per share,
yielding net proceeds of approximately $2.5 million. At June 30, 1996, 555,486
shares were available for grant.
Employee Stock Option Plan
The Company has reserved 6,666,667 shares of common stock under employee
non-qualified and incentive stock option plans. A summary of the status of the
plans follows:
F-20
53
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Year Ended June 30
------------------
1996 1995 1994
---- ---- ----
Outstanding at beginning of
year 2,602,556 2,616,893 2,189,926
Granted 2,099,280 655,500 758,264
Exercised (715,500) (586,309) (196,311)
Canceled (206,925) (83,528) (134,986)
------------ ------------ ------------
Outstanding at end of year 3,779,411 2,602,556 2,616,893
============ ============ ============
Exercisable at end of year 703,159 820,593 987,959
============ ============ ============
Option price range per
share at end of year $1.00-$26.00 $1.00-$20.75 $1.50-$11.25
============ ============ ============
Stock options are exercisable over a period determined by the Board of
Directors, but no longer than ten years after the date of the grant. At
June 30, 1996, options to purchase 715,598 shares were available for grant.
Directors Stock Option Plan
The Company has a Directors Stock Option Plan that provides for a maximum of
400,000 shares of the Company's common stock for grant to non-management
members of the Board of Directors. Options to purchase a total of 177,523,
170,842 and 140,001 shares of common stock with exercise prices ranging from
$3.75 to $20.00 per share were outstanding at June 30, 1996, 1995 and 1994,
respectively. Options exercisable under the plan were 89,997, 63,329 and
37,495 at June 30, 1996, 1995 and 1994, respectively.
7. NET ASSETS HELD FOR SALE
Included in the fiscal 1994 acquisitions were four acute care hospitals, three
medical office buildings and related assets which were identified at the date
of acquisition by the Company as being held for sale (see Note 2). During the
year ended June 30, 1995, the Company divested one hospital for approximately
$4.0 million, excluding accounts receivable. During the year ended June 30,
1994, the Company divested three hospitals for approximately $19.2 million and
three medical office buildings for approximately $11.7 million. The excess of
the proceeds over the carrying value of the net assets sold of approximately
$.3 million was recorded as an adjustment to the original purchase price. The
results of operations of the net assets held for sale ($.5 million gain in 1995
and $.3 million loss in 1994) were excluded from the consolidated statements of
income.
F-21
54
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS
The Company sponsors defined contribution employee benefit plans which cover
substantially all employees. Employees may contribute up to 15% of eligible
compensation subject to Internal Revenue Service (IRS) limits. The plans permit
the Company to make a discretionary base contribution and a discretionary match
to employee deferrals. The Company's contribution to the plans is determined
annually by the Board of Directors. Base contributions under the plans vest at
the end of each plan year and matching contributions vest after five years of
qualifying service. Benefit plan expense for the years ended June 30, 1996,
1995 and 1994 totaled approximately $9.2 million, $8.2 million and $5.7
million, respectively.
9. LEASES
The Company leases hospitals, medical office buildings and equipment under
agreements that generally require the Company to pay all maintenance, property
taxes and insurance costs and that expire on various dates extending to the
year 2007. Certain leases include options to purchase the leased property
during or at the end of the lease term at fair market value.
Rental expense for all operating leases totaled $17.1 million, $12.8 million,
and $7.2 million for the years ended June 30, 1996, 1995 and 1994,
respectively.
Future minimum rental commitments under noncancelable operating leases at June
30, 1996 are as follows: 1997 - $10.3 million; 1998 - $9.0 million; 1999 - $6.2
million; 2000 - $5.4 million; 2001 - $5.0 million and thereafter - $17.1
million.
10. COMMITMENTS AND CONTINGENCIES
Management continually evaluates contingencies based on the best available
evidence and believes that 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 Company maintains general and professional liability insurance with
independent insurance carriers generally on a claims-made basis. The insurance
for the Company's subsidiaries provides coverage ranging from
F-22
55
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
first dollar coverage to amounts in excess of $.3 million. The insurance
coverage has limits ranging from $50.0 million per occurrence and in the
aggregate to unlimited coverage. The reserve for the self-insured portion of
general and professional liability risks is included in "Other liabilities and
deferrals" 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 years 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. The floating-rate payments are based on LIBOR and fixed-rate
payments are dependent upon market levels. In fiscal 1993, the Company entered
into interest rate swap agreements which effectively convert for a seven-year
period $50.0 million of fixed-rate borrowings to floating-rate borrowings. In
fiscal 1994, the Company entered into interest rate swap agreements which
effectively convert for a two and one-half year period $50.0 million of
floating-rate borrowings to fixed-rate borrowings. For the year ended June 30,
1996, the Company received a weighted average rate of 5.8% and paid a weighted
average rate of 4.8%. For the years ended June 30, 1995 and 1994, the Company
received a weighted average rate of 5.6% and 5.2% and paid a weighted average
rate of 4.2% and 3.6%, respectively.
The Company is exposed to credit losses in the event of nonperformance by the
counterparty to its financial instruments. The Company anticipates that the
counterparty will be able to fully satisfy its obligations under the contracts.
Income Taxes
During fiscal 1996, the IRS completed an examination of the Company's federal
income tax returns for the fiscal years ending June 30, 1990
F-23
56
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
through 1992. Federal income tax on the proposed adjustments amounts to $10.9
million, excluding interest. The most significant adjustment involves the
amortization deductions claimed on certain acquired intangible assets in
conjunction with the acquisition of Quorum Health Resources, Inc. The Company
has protested all of the proposed adjustments through the appeals process of the
IRS.
Other
In June 1993, the Office of the Inspector General (OIG) of the Department of
Health and Human Services requested information from the Company in connection
with an investigation involving the Company's procedures for preparing Medicare
cost reports. In January 1995, the U.S. Department of Justice issued a Civil
Investigative Demand which also requested information from the Company in
connection with that same investigation. As a part of the government's
investigation, several former and current employees of the Company have been
interviewed. The Company is continuing to provide information and is
cooperating fully with the investigation. The Company cannot predict whether
the government will commence litigation regarding this matter.
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments, with the
exception of long-term debt, approximate their carrying amounts in the
consolidated balance sheets.
The carrying value of long-term debt (including current portion) was $433.3 and
$288.9 million for the years ended June 30, 1996 and 1995, respectively. The
fair value of long-term debt was $443.5 million and $298.1 million for the
years ended June 30, 1996 and 1995, respectively. The fair value of publicly
traded notes has been determined using the quoted market price at June 30, 1996
and 1995. The fair values of the remaining long-term debt are estimated using
discounted cash flows, based on the Company's incremental borrowing rates. The
estimates of fair value include the effect of the interest rate swap
agreements.
F-24
57
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the two years ended June 30, 1996 is
summarized below:
Quarter
-------
1st 2nd 3rd 4th
--- --- --- ---
1996 (In thousands, except per share data)
- ----
Net operating revenue $253,712 $273,244 $286,007 $285,584
Income before income taxes 24,546 28,406 33,543 30,058
Net income 14,580 16,873 19,925 17,854
Income per common share:
Primary .29 .34 .40 .36
Fully diluted .29 .34 .40 .36
1995
- ----
Net operating revenue 193,141 198,873 227,513 230,640
Income before income taxes 19,534 23,512 27,512 24,929
Net income 11,452 13,772 16,126 14,605
Income per common share:
Primary .23 .28 .33 .30
Fully diluted .23 .28 .33 .30
F-25
58
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION and QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- -------------------------------------------------------------------------------------------------------
Additions
-------------------------
(1) (2) (3)
Balance at Charged to Charged to Balance
Beginning Costs and Other Account Deductions at End of
Description of Period Expenses Describe Describe Period
- -------------------------------------------------------------------------------------------------------
(In thousands)
Year ended June 30, 1996:
Allowance for doubtful accounts $44,828 $56,483 $ 9,210 (a) $70,769 (b) $39,752
Year ended June 30, 1995:
Allowance for doubtful accounts $31,384 $48,780 $12,803 (c) $48,139 (b) $44,828
Year ended June 30, 1994:
Allowance for doubtful accounts $13,871 $39,404 $16,808 (a) $38,699 (b) $31,384
(a) Allowance for doubtful accounts of acquired companies.
(b) Accounts written off, net of recoveries.
(c) Allowance for doubtful accounts of acquired hospitals
and allowance for doubtful accounts not sold in connection
with the divestiture of a hospital identified at the date
of acquisition as being held for sale.
S-1
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Brentwood, State of Tennessee on September 26, 1996.
QUORUM HEALTH GROUP, INC.
By: /s/ Steve B. Hewett
-------------------------------
Steve B. Hewett
Title: Vice President and Treasurer
(Chief Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated below:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ James E. Dalton, Jr. President and Chief Executive September 26, 1996
- -------------------------------------- Officer and Director (Principal
James E. Dalton, Jr. Executive Officer)
/s/ Steve B. Hewett Vice President and Treasurer September 26, 1996
- -------------------------------------- (Chief Financial Officer)
Steve B. Hewett
/s/ Terry E. Allison Vice President, Assistant Treasurer and September 26, 1996
- -------------------------------------- and Controller (Chief Accounting
Terry E. Allison Officer)
/s/ Russell L. Carson Chairman of the Board September 26, 1996
- --------------------------------------
Russell L. Carson
/s/ Jack O. Bovender, Jr. Director September 26, 1996
- --------------------------------------
Jack O. Bovender, Jr.
/s/ Sam A. Brooks, Jr. Director September 26, 1996
- --------------------------------------
Sam A. Brooks, Jr.
Sig-1
60
/s/ Joseph C. Hutts Director September 26, 1996
- --------------------------------------
Joseph C. Hutts
/s/ Kenneth J. Melkus Director September 26, 1996
- --------------------------------------
Kenneth J. Melkus
/s/ Thomas S. Murphy, Jr. Director September 26, 1996
- --------------------------------------
Thomas S. Murphy, Jr.
/s/ Rocco A. Ortenzio Director September 26, 1996
- --------------------------------------
Rocco A. Ortenzio
/s/ Douglas Smith Director September 26, 1996
- --------------------------------------
S. Douglas Smith
/s/ Dr. C. Edward Floyd Director September 26, 1996
- --------------------------------------
Dr. C. Edward Floyd
Sig-2
61
PART IV
EXHIBIT INDEX
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a)(1) and (2). Financial statements and schedules of
the Company and its subsidiaries required to be
included in Part II, Item 8 are indexed on Page F-1
and submitted as a separate section of this report.
(a)(3) Exhibits.
3.1 Certificate of Incorporation of the Company filed with
Secretary of State of Delaware July 14, 1989, as
amended by Certificate of Amendment of Certificate of
Incorporation filed with Secretary of State of Delaware
on July 28, 1989. (Incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement No.
33-31717-A on Form S-18.)
3.2 Certificate of Amendment of Certificate of
Incorporation effective with the Secretary of State of
Delaware on June 1, 1990. (Incorporated by reference
to Exhibit 3.2 to the Company's Annual Report on Form
10-K for the year ended June 30, 1990.)
3.3 Certificate of Amendment of Certificate of
Incorporation effective with the Secretary of State of
Delaware on November 1, 1990. (Incorporated by
reference to Exhibit 3.3 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1991.)
3.4 Certificate of Amendment of Certificate of
Incorporation effective with the Secretary of State of
Delaware on December 17, 1991. (Incorporated by
reference to Exhibit 3.4 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1992.)
3.5 Form of Certificate of Amendment of Certificate of
Incorporation effective with the Secretary of State of
Delaware on April 12, 1994. (Incorporated by reference
to Exhibit 3.1.5 to the Company's Registration
Statement No. 33-77674 on Form S-1.)
3.6 Bylaws of the Company as amended April 12, 1994.
(Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement No. 33-77674 on Form
S-1.)
31
62
4.1.1 Indenture, dated as of December 15, 1992, between
Quorum Health Group, Inc. and United States Trust
Company of New York, as Trustee relating to the
Company's $100,000,000 11-7/8% Senior Subordinated
Notes due December 15, 2002. (Incorporated by
reference to Exhibit 4 to the Company's Amendment to
Application or Report on Form 8 dated February 17,
1993, amending the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1992.)
4.1.2 Indenture, dated as of November 1, 1995, between Quorum
Health Group, Inc. and United States Trust Company of
New York, as Trustee relating to the Company's
$150,000,000 8-3/4% Senior Subordinated Notes due
November 1, 2005. (Incorporated by reference to Exhibit
4.1.2 to the Company's Registration Statement No.
33-98274 on Form S-3.)
4.2.1 Credit Agreement dated as of May 22, 1995 between
Quorum Health Group, Inc. and certain subsidiaries, as
borrowers, and AmSouth Bank of Alabama, as agent, and
certain banks, as lenders. (Incorporated by reference
to Exhibit 2.2 to the Company's Form 8-K dated August
1, 1995.)
4.2.2 Note dated as of May 22, 1995 in the amount of
$50,000,000 by Quorum Health Group, Inc. and certain
subsidiaries payable to the order of Mellon Bank, N.A.,
a national banking association. (Incorporated by
reference to Exhibit 4.2.2 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1995.)
4.2.3 Note dated as of May 22, 1995 in the amount of
$40,000,000 by Quorum Health Group, Inc. and certain
subsidiaries payable to the order of National City
Bank, Kentucky, a national banking association.
(Incorporated by reference to Exhibit 4.2.3 to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1995.)
4.2.4 Note dated as of May 22, 1995 in the amount of
$30,000,000 by Quorum Health Group, Inc. and certain
subsidiaries payable to the order of Corestates Bank,
N.A., a national banking association. (Incorporated by
reference to Exhibit 4.2.4 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1995.)
4.2.5 Note dated as of May 22, 1995 in the amount of
$25,000,000 by Quorum Health Group, Inc. and certain
subsidiaries payable to the order of Shawmut
Connecticut Bank, N.A., a national banking association.
(Incorporated by reference to Exhibit 4.2.5 to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1995.)
32
63
4.2.6 Note dated as of May 22, 1995 in the amount of
$20,000,000 by Quorum Health Group, Inc. and certain
subsidiaries payable to the order of First Tennessee
Bank, National Association, a national banking
association. (Incorporated by reference to Exhibit
4.2.6 to the Company's Annual Report on Form 10-K for
the year ended June 30, 1995.)
4.2.7 Note dated as of May 22, 1995 in the amount of
$20,000,000 by Quorum Health Group, Inc. and certain
subsidiaries payable to the order of First American
National Bank, a national banking association.
(Incorporated by reference to Exhibit 4.2.7 to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1995.)
4.2.8 Note dated as of May 22, 1995 in the amount of
$25,000,000 by Quorum Health Group, Inc. and certain
subsidiaries payable to the order of PNC Bank,
Kentucky, Inc., a national banking association.
(Incorporated by reference to Exhibit 4.2.8 to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1995.)
4.2.9 Amended and Restated Pledge Agreement dated as of May
22, 1995 executed by Quorum Health Group, Inc. in favor
of AmSouth Bank of Alabama, with Stock Certificate and
Stock Power as to stock of Quorum Health Resources,
Inc. and Quorum, Inc. (Incorporated by reference to
Exhibit 4.2.9 to the Company's Annual Report on Form
10-K for the year ended June 30, 1995.)
4.2.10 Amended and Restated Pledge Agreement dated as of May
22, 1995 executed by Quorum, Inc. in favor of AmSouth
Bank of Alabama with Stock Certificate and Stock Power
as to certain subsidiaries of Quorum, Inc.
(Incorporated by reference to Exhibit 4.2.10 to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1995.)
4.2.11 Amended and Restated Pledge Agreement dated as of May
22, 1995 executed by Quorum Health Resources, Inc. in
favor of AmSouth Bank of Alabama with Stock Certificate
and Stock Power as to Hospital Management
Professionals, Inc. (Incorporated by reference to
Exhibit 4.2.11 to the Company's Annual Report on Form
10-K for the year ended June 30, 1995.)
4.2.12 Amended and Restated Subrogation and Contribution
Agreement dated as of May 22, 1995 among Quorum Health
Group, Inc. and certain subsidiaries. (Incorporated by
reference to Exhibit 4.2.12 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1995.)
33
64
4.2.13 Amended and Restated Note dated as of May 22, 1995 in
the amount of $170,000,000 by Quorum Health Group, Inc.
and certain subsidiaries payable to the order of
AmSouth Bank of Alabama. (Incorporated by reference to
Exhibit 4.2.13 to the Company's Annual Report on Form
10-K for the year ended June 30, 1995.)
4.2.14 Amended and Restated Note dated as of May 22, 1995 in
the amount of $60,000,000 by Quorum Health Group, Inc.
and certain subsidiaries payable to the order of First
Union National Bank of North Carolina. (Incorporated
by reference to Exhibit 4.2.14 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1995.)
4.2.15 Amended and Restated Note dated as of May 22, 1995 in
the amount of $60,000,000 by Quorum Health Group, Inc.
and certain subsidiaries payable to the order of
Citicorp USA, Inc. (Incorporated by reference to
Exhibit 4.2.15 to the Company's Annual Report on Form
10-K for the year ended June 30, 1995.)
4.2.16 Amended and Restated Note dated as of May 22, 1995 in
the amount of $50,000,000 by Quorum Health Group, Inc.
and certain subsidiaries payable to the order of Third
National Bank in Nashville. (Incorporated by reference
to Exhibit 4.2.16 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1995.)
4.2.17 Amended and Restated Note dated as of May 22, 1995 in
the amount of $50,000,000 by Quorum Health Group, Inc.
and certain subsidiaries payable to the order of The
Bank of Nova Scotia. (Incorporated by reference to
Exhibit 4.2.17 to the Company's Annual Report on Form
10-K for the year ended June 30, 1995.)
4.3.1 Form of Subscription Agreement dated July 31, 1989
between the Company and its Original Stockholders.
(Incorporated by reference to Exhibit 4.4 to the
Company's Registration Statement No. 33-31717-A on Form
S-18.)
4.3.2 Form of Subscription Agreement dated as of July 25,
1990 among the Company and its Subsequent Stockholders.
(Incorporated by reference to Exhibit 4.10 to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1990.)
4.4.1 Form of Registration Rights Agreement dated July 31,
1989 between the Company and its Original Stockholders.
(Incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement No. 33-31717-A on Form
S-18.)
34
65
4.4.2 Amendment dated as of July 25, 1990 to Registration
Rights Agreement dated July 31, 1989 among the Company
and its Original Stockholders. (Incorporated by
reference to Exhibit 4.8 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1990.)
4.4.3 Amendment dated as of February 25, 1991 to Registration
Rights Agreement dated July 31, 1989 among the Company
and its Original Stockholders. (Incorporated by
reference to Exhibit 10.7.3 to the Company's
Registration Statement No. 33-77674 on Form S-1.)
4.4.4 Amendment dated as of April 23, 1991 to Registration
Rights Agreement dated July 31, 1989 among the Company
and its Original Stockholders. (Incorporated by
reference to Exhibit 10.7.4 to the Company's
Registration Statement No. 33-77674 on Form S-1.)
4.4.5 Amendment and Restatement dated as of December 20, 1991
to Registration Rights Agreement dated July 31, 1989
among the Company and its Original Stockholders.
(Incorporated by reference to Exhibit 10.7.5 to the
Company's Registration Statement No. 33-77674 on Form
S-1.)
4.4.6 Amendment and Restatement dated as of January 15, 1992
to Registration Rights Agreement dated July 31, 1989
among the Company and its Original Stockholders.
(Incorporated by reference to Exhibit 10.7.6 to the
Company's Registration Statement No. 33-77674 on Form
S-1.)
4.4.7 Amendment and Restatement dated as of May 7, 1992 to
Registration Rights Agreement dated July 31, 1989 among
the Company and its Original Stockholders.
(Incorporated by reference to Exhibit 10.7.7 to the
Company's Registration Statement No. 33-77674 on Form
S-1.)
4.4.8 Amendment and Restatement dated as of June 1, 1992 to
Registration Rights Agreement dated July 31, 1989 among
the Company and its Original Stockholders.
(Incorporated by reference to Exhibit 10.7.8 to the
Company's Registration Statement No. 33-77674 on Form
S-1.)
4.4.9 Amendment and Restatement dated as of July 1, 1992 to
Registration Rights Agreement dated July 31, 1989 among
the Company and its Original Stockholders.
(Incorporated by reference to Exhibit 4.12 to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1992.)
4.4.10 Amendment and Restatement dated as of September 29,
1992 to Registration Rights Agreement dated July 31,
1989 among the Company and its Original Stockholders.
(Incorporated by reference to Exhibit 10.75 to the
Company's Registration Statement No. 33-52910 on Form
S-1.)
35
66
4.4.11 Amendment and Restatement dated as of September 30,
1992 to Registration Rights Agreement dated July 31,
1989 among the Company and its Original Stockholders.
(Incorporated by reference to Exhibit 10.74 to the
Company's Registration Statement No. 33-52910 on Form
S-1.)
4.4.12 Form of Amendment and Restatement dated as of January
28, 1993 to Registration Rights Agreement dated July
31, 1989 among the Company and its Original
Stockholders. (Incorporated by reference to Exhibit
10.7.12 to the Company's Registration Statement No.
33-77674 on Form S-1.)
4.4.13 Amendment No. 1 dated as of September 28, 1993 to the
Amendment and Restatement of Registration Rights
Agreement dated as of September 30, 1992.
(Incorporated by reference to Exhibit 10.7.13 to the
Company's Registration Statement No. 33-77674 on Form
S-1.)
4.4.14 Amendment No. 2 dated as of October 15, 1993 to the
Amendment and Restatement of Registration Rights
Agreement dated as of September 30, 1992 as amended.
(Incorporated by reference to Exhibit 10.7.14 to the
Company's Registration Statement No. 33-77674 on Form
S-1.)
4.4.15 Amendment No. 3 dated as of November 5, 1993 to the
Amendment and Restatement of Registration Rights
Agreement dated as of September 30, 1992 as amended.
(Incorporated by reference to Exhibit 10.7.15 to the
Company's Registration Statement No. 33-77674 on Form
S-1.)
4.4.16 First Amendment to Credit Agreement effective as of
February 29, 1996 between Quorum Health Group, Inc. and
certain subsidiaries, as borrowers, and AmSouth Bank of
Alabama, as agent, and certain banks, as lenders.
10.1 Compensation Plans and Arrangements
A. Restated Stock Option Plan, as amended.
(Incorporated by reference to Exhibit B to the
Company's definitive Proxy Statement for the
Annual Meeting of Stockholders held November 15,
1994.)
B. Directors Stock Option Plan, as amended.
(Incorporated by reference to Exhibit A to the
Company's definitive Proxy Statement for the
Annual Meeting of Stockholders held November 15,
1994.)
C. Letter dated February 23, 1990 regarding
employment of James E. Dalton, Jr. (Incorporated
by reference to Exhibit 10.1.D to the Company's
Annual Report on Form 10-K for the year ended June
30, 1993.)
D. Employee Stock Purchase Plan, as amended.
(Incorporated by reference to Exhibit C to the
Company's definitive Proxy Statement for the
Annual Meeting of Stockholders held November 15,
1994.)
36
67
E. Quorum Health Group, Inc. 401(k) Savings and
Retirement Plan. (Incorporated by reference to
Exhibit 10.1.6 to the Company's Registration
Statement No. 33-77674 on Form S-1.)
F. Form of Quorum Health Group, Inc. Non-qualified
Deferred Compensation Plan. (Incorporated by
reference to Exhibit 10.1.7 to the Company's
Registration Statement No. 33-77674 on Form S-1.)
G. Form of Severance Agreement with certain executive
officers of the Company. (Incorporated by
reference to Exhibit 10.1 (G) to the Company's
Annual Report on Form 10-K for the year ended June
30, 1995.)
H. Employment Agreement between the Company and
Eugene Fleming.
I. Severance Agreement and General Release between
the Company and Robert A. Yeager.
J. Letter Agreement between the Company and Robert
D. Huseby.
10.2 Baxter Supply Agreement dated as of December 1, 1989 by
and among Baxter Healthcare Corporation, HCA,
HealthTrust, Inc. and Quorum Health Resources, Inc.
(Incorporated by reference to Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1990.)
10.3 Amendment to Supply Agreement effective January 1, 1991
by and among Baxter Healthcare Corporation, HCA,
HealthTrust, Inc., and Quorum Health Resources, Inc.
(Incorporated by reference to Exhibit 10.51 to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1992.)
10.4 Pharmacy Products Group Agreement dated as of January
1, 1990 between Quorum Health Resources, Inc. and
Baxter Healthcare Corporation. (Incorporated by
reference to Exhibit 10.21 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1990.)
10.5 Foodservice Distribution Agreement dated September 1,
1989 by and between Baxter Healthcare Corporation, HCA,
Quorum Health Resources, Inc. and HealthTrust.
(Incorporated by reference to Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1990.)
10.6 Quorum Health Resources, Inc. Model Hospital Management
Agreement. (Incorporated by reference to Exhibit 10.12
to the Company's Annual Report on Form 10-K for the
year ended June 30, 1993.)
37
68
10.7 Promissory Note dated June 1, 1992, in the principal
amount of $4,000,000 from the Company to Flowers
Hospital, Incorporated. (Incorporated by reference to
Exhibit 10.52 to the Company's Annual Report on Form
10-K for the year ended June 30, 1992.)
10.8 Incorporation, Conveyance and Stock Purchase Agreement
dated as of August 16, 1993, as amended September 30,
1993, by and among Quorum, Inc. as Purchaser, Charter
Medical Corporation ("Charter"), a Delaware
corporation; Charter Northside Hospital, Inc. ("CNH"),
a Georgia corporation; Middle Georgia Hospital, Inc.
("MGH"), a Georgia corporation; Shallowford Community
Hospital, Inc. ("SCHI"), a Georgia corporation;
Metropolitan Hospital, Inc. ("MHI"), a Georgia
corporation; Physicians & Surgeons Hospital, Inc.
("PSH"), a Louisiana corporation; Charter Regional
Medical Center, Inc. ("CMRC"), a Texas corporation;
Desert Springs Hospital, Inc. ("DSH"), a Nevada
corporation; Charter Suburban Hospital, Inc. ("CSH"),
a California corporation; Charter Community Hospital of
Des Moines, Inc. ("CCH"), an Iowa corporation; and
Stuart Circle Hospital Corporation ("SCHC"), a Virginia
corporation. (Incorporated by reference to Exhibit 2.1
to the Company's Report on Form 8-K dated October 13,
1993.)
10.9 Asset Purchase Agreement dated as of December 1993
among Mercy Health Center of Central Iowa, as Buyer,
and NC-CCH, Inc., as Seller, and Quorum Health Group,
Inc. (Incorporated by reference to Exhibit 10.28 to
the Company's Registration Statement No. 33-77674 on
Form S-1.)
10.10 Asset Purchase Agreement dated as of October 7, 1993 as
amended November 30, 1993, among Baptist Health
Services, Inc. and Baptist Hospital of Gadsden, Inc. as
Sellers and QHG of Gadsden, Inc. as Buyer.
(Incorporated by reference to Exhibit 2 to the
Company's Report on Form 8-K dated December 14, 1993.)
10.11 Asset Purchase Agreement dated as of December 31, 1993
among Cleveland Regional Medical Center, L.P., as
Buyer, and Dynamic Health, Inc., and NC-CRMC, Inc., as
Seller, and Quorum Health Group, Inc. (Incorporated by
reference to Exhibit 10.30 to the Company's
Registration Statement No. 33-77674 on Form S-1.)
10.12 Lease dated September 21, 1989 by and between DJ
Investments which subsequently assigned its interest to
A.G. Dorsey, Capricon II 1989 Trust and J. Cutler
Roberts, Trustee, and Desert Springs Hospital, Inc.
(Incorporated by reference to Exhibit 10.39 to the
Company's Registration Statement No. 33-77674 on Form
S-1.)
38
69
10.13 Lease dated January 21, 1994 by and between QB Partners
I and Quorum Health Resources, Inc. (Incorporated by
reference to Exhibit 10.42 to the Company's
Registration Statement No. 33-77674 on Form S-1.)
10.14 Asset Purchase Agreement dated April 29, 1994 by and
between NC-PSH, Inc., and Sisters of Charity of the
Incarnate Word, Shreveport, Louisiana, doing business
as Schumpert Medical Center (Incorporated by reference
to Exhibit 10.45.1 to the Company's Registration
Statement No. 33-77674 on Form S-1.)
10.15 Lease Agreement dated December 8, 1994 by and between
QB Partners I and Quorum Health Group, Inc., as amended
by Addendum dated March 25, 1995. (Incorporated by
reference to Exhibit 10.22 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1995.)
10.16 Asset Purchase Agreement dated November 1, 1990 by and
between Mercy Regional Medical Center, Sisters of Mercy
Health Systems, St. Louis, Inc. and ParkView Medical
Associates, L.P. (Incorporated by reference to the
Company's Report on Form 8-K filed November 15, 1990.)
10.17 Asset Purchase and Sale Agreement dated as of September
20, 1991, by and between Quorum Health Group, Inc., as
buyer, and St. John's Hospital & Health Center, Inc.
and Incarnate Word Health Services, as seller.
(Incorporated by reference to Exhibit 2.1 to the
Company's Report on Form 8-K dated September 30, 1991.)
10.18 Asset Purchase Agreement dated as of January 31, 1992
between QHG of Ohio, Inc. and St. Anthony Medical
Center, Inc. and its members regarding Park Medical
Center. (Incorporated by reference to Exhibit 2.3 to
the Company's Annual Report on Form 10-K for the year
ended June 30, 1992.)
10.19 Asset Purchase Agreement dated as of May 31, 1992, by
and between QHG of Alabama, Inc., as buyer, its
ultimate parent, Quorum Health Group, Inc. and Flowers
Hospital, Incorporated, as seller. (Incorporated by
reference to Exhibit 2.1 to the Company's Report on
Form 8-K dated June 1, 1992.)
10.20 Agreement and Plan of Share Exchange dated June 19,
1992 among Hospital Management Professionals, Inc.,
Robert D. Huseby, Sheldon L. Krizelman and Thomas W.
Singleton and Quorum Health Resources, Inc.
(Incorporated by reference to Exhibit 2.1 to the
Company's Report on Form 8-K dated July 14, 1992.)
10.21 Asset Purchase Agreement dated as of January 4, 1995,
by and between QHG of South Carolina, Inc., as buyer
and Carolinas Hospital System, Inc., as seller.
(Incorporated by reference to Exhibit 2.1 to the
Company's Report on Form 8-K dated February 1, 1995).
39
70
10.22 Asset Purchase Agreement dated April 21, 1995, as
amended by Amendment No. 1, Amendment No. 2, and
Amendment No. 3, by and between QHG of Indiana, Inc.,
et al., as buyers, and The Lutheran Hospital of
Indiana, Inc., et al., as sellers. (Incorporated by
reference to Exhibit 2.1 to the Company's Report on
Form 8-K dated August 1, 1995.)
10.23 Purchase Agreement dated as of January 28, 1993 between
the Company and HCA, Inc. (Incorporated by reference
to Exhibit 10.8 to the Company's Registration Statement
No. 33-77674 on Form S-1.)
10.24 Purchase Agreement dated as of September 28, 1993 among
the Company and Certain Shareholders. (Incorporated by
reference to Exhibit 10.9 to the Company's Registration
Statement No. 33-77674 on Form S-1.)
10.25 Purchase Agreement dated as of October 15, 1993 among
the Company and Certain Shareholders. (Incorporated by
reference to Exhibit 10.10 to the Company's
Registration Statement No. 33-77674 on Form S-1.)
10.26 Purchase Agreement dated as of October 26, 1993 between
the Company and HCA, Inc. (Incorporated by reference
to Exhibit 10.11 to the Company's Registration
Statement No. 33-77674 on Form S-1.)
10.27 Purchase Agreement dated as of November 5, 1993 between
the Company and HCA, Inc. (Incorporated by reference
to Exhibit 10.12 to the Company's Registration
Statement No. 33-77674 on Form S-1.)
10.28 Asset Purchase Agreement dated as of April 6, 1994 by
and between Quorum, Inc. and Bon Secours Health System,
Inc. for the purchase of the capital stock of NC-SCHC,
Inc. and Stuart Circle MOB, Inc. (Incorporated by
reference to Exhibit 10.13 to the Company's
Registration Statement No. 33-77674 on Form S-1.)
10.29 Asset Exchange Agreement dated as of April 8, 1994 by
and among NC-SCHI, Inc., Dunwoody MOB, Inc., NC-MHI,
Inc., Quorum Health Group, Inc., Galen Hospitals of
Texas, Inc., Galen Medical Corporation, American
Medicorp Development Co. and Columbia/HCA Healthcare
Corporation for the like kind exchange of Abilene
Regional Medical Center and Medical Center Enterprise
for Dunwoody Medical Center and Metropolitan Hospital.
(Incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement No. 33-77674 on Form
S-1.)
10.30 Group Purchasing Organization Participating Agreement
between APS Healthcare Purchasing Partners, L.P. and
Quorum Health Group, Inc. dated November 30, 1995.
40
71
10.31 Lease Agreement by and between QHG of South Carolina,
Inc., a subsidiary of the Company, and C. Edward
Floyd, M.D., a Director of the Company.
11 Computation of Earnings per Share.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K.
None.
41