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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 33-31717-A
QUORUM HEALTH GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 62-1406040
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(State of incorporation) (I.R.S. Employer
Identification No.)
103 Continental Place, Brentwood, Tennessee 37027
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(Address of principal executive offices) (Zip Code)
(615) 371-7979
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at February 10, 1999
- ----- --------------------------------
Common Stock, $.01 Par Value 72,281,990 Shares
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS
ENDED DECEMBER 31
----------------------------------
1998 1997
--------- ----------
Revenue:
Net patient service revenue $ 349,335 $ 373,503
Hospital management/professional services 20,798 19,743
Reimbursable expenses 15,944 15,649
---------- ----------
Net operating revenue 386,077 408,895
Salaries and benefits 169,610 162,947
Reimbursable expenses 15,944 15,649
Supplies 56,044 55,338
Fees 38,324 37,479
Other operating expenses 38,754 33,302
Provision for doubtful accounts 32,887 29,474
Equity in earnings of affiliates (4,942) --
Depreciation and amortization 23,134 22,533
Interest 12,743 10,859
Write-down of assets and investigation and
litigation related costs 30,976 --
Minority interest (5,167) 832
---------- ----------
Income (loss) before income taxes (22,230) 40,482
Provision (benefit) for income taxes (3,488) 16,071
---------- ----------
Net income (loss) $ (18,742) $ 24,411
========== ==========
Earnings (loss) per share:
Basic $ (0.26) $ 0.33
========== ==========
Diluted $ (0.26) $ 0.32
========== ==========
Weighted average shares outstanding:
Basic 72,839 74,406
Common stock equivalents -- 2,394
---------- ----------
Diluted 72,839 76,800
========== ==========
See accompanying notes.
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS
ENDED DECEMBER 31
----------------------------------
1998 1997
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Revenue:
Net patient service revenue $ 701,794 $ 730,620
Hospital management/professional services 41,590 39,438
Reimbursable expenses 32,054 31,658
---------- ----------
Net operating revenue 775,438 801,716
Salaries and benefits 327,456 318,544
Reimbursable expenses 32,054 31,658
Supplies 107,363 110,010
Fees 73,495 71,866
Other operating expenses 72,306 66,580
Provision for doubtful accounts 60,683 59,884
Equity in earnings of affiliates (10,267) --
Depreciation and amortization 44,459 44,062
Interest 21,876 21,229
Write-down of assets and investigation and
litigation related costs 30,976 --
Minority interest (4,593) 1,976
---------- ----------
Income before income taxes 19,630 75,907
Provision for income taxes 12,879 30,135
---------- ----------
Net income $ 6,751 $ 45,772
========== ==========
Earnings per share:
Basic $ 0.09 $ 0.62
========== ==========
Diluted $ 0.09 $ 0.60
========== ==========
Weighted average shares outstanding:
Basic 74,216 74,309
Common stock equivalents 1,118 2,417
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Diluted 75,334 76,726
========== ==========
See accompanying notes.
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
DECEMBER 31 JUNE 30
1998 1998
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ASSETS
Current assets:
Cash $ 5,163 $ 17,549
Accounts receivable, less allowance for doubtful
accounts of $81,043 at December 31, 1998
and $65,561 at June 30, 1998 299,514 273,376
Supplies 37,590 29,336
Net assets held for sale 18,311 --
Other 62,297 34,245
--------- ----------
Total current assets 422,875 354,506
Property, plant and equipment, at cost:
Land 71,232 66,424
Buildings and improvements 387,156 291,258
Equipment 506,929 464,577
Construction in progress 18,409 72,676
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983,726 894,935
Less accumulated depreciation 251,137 216,229
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732,589 678,706
Cost in excess of net assets acquired, net 138,035 144,315
Unallocated purchase price 148,451 4,020
Investments in unconsolidated entities 251,994 245,551
Other 58,032 63,855
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Total assets $1,751,976 $1,490,953
========== ==========
See accompanying notes.
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31 JUNE 30
1998 1998
--------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 102,916 $ 70,483
Accrued salaries and benefits 67,812 64,196
Other current liabilities 35,224 27,533
Current maturities of long-term debt 929 1,273
---------- ----------
Total current liabilities 206,881 163,485
Long-term debt, less current maturities 847,537 617,377
Deferred income taxes 22,268 29,470
Professional liability risks and other liabilities
and deferrals 30,473 30,882
Minority interests in consolidated entities 60,927 27,473
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value;
300,000 shares authorized; 72,211
issued and outstanding at December 31,
1998 and 75,478 at June 30, 1998 722 755
Additional paid-in capital 245,055 290,149
Retained earnings 338,113 331,362
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583,890 622,266
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Total liabilities and stockholders' equity $1,751,976 $1,490,953
========== ==========
See accompanying notes.
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS
ENDED DECEMBER 31
----------------------------------
1998 1997
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Net cash provided by operating activities $ 52,063 $ 51,673
Investing activities:
Purchase of acquired companies (165,455) (83,467)
Purchase of property, plant and equipment (72,153) (68,190)
Proceeds from sale of assets -- 14,695
Other (750) (3,447)
---------- ----------
Net cash used in investing activities (238,358) (140,409)
Financing activities:
Borrowings under bank debt 405,500 250,200
Repayments of bank debt (174,900) (164,100)
Repurchases of common stock (48,102) --
Other (8,589) (1,443)
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Net cash provided by financing activities 173,909 84,657
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Decrease in cash (12,386) (4,079)
Cash at beginning of period 17,549 19,008
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Cash at end of period $ 5,163 $ 14,929
========== ==========
Supplemental cash flow information:
Interest paid $ (19,725) $ (22,027)
========== ==========
Income taxes paid $ (28,936) $ (37,597)
========== ==========
See accompanying notes.
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Quorum
Health Group, Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months and six months ended December
31, 1998, are not necessarily indicative of the results that may be expected for
the year ending June 30, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended June 30, 1998. Certain
reclassifications have been made to the fiscal 1998 financial presentation to
conform with fiscal 1999.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes reporting standards for
operating segment information disclosed in annual financial statements and in
interim financial reports issued to shareholders. Under existing accounting
standards, the Company has reported its operations as one line of business
because substantially all of its revenue and operating profits have been derived
from its acute care hospitals, affiliated health care entities and health care
management services. The Company will adopt SFAS No. 131 during its fiscal year
ending June 30, 1999 and is presently evaluating the new standard to determine
its effect, if any, on the way the Company might report its operations in the
future.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. For interest rate swap agreements
that qualify as
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hedges, changes in fair value will be offset against the change in fair value of
the hedged assets, liabilities, or firm commitments through earnings. The
Company will adopt SFAS No. 133 beginning with its fiscal year ending June 30,
2000 and is presently evaluating the new standard to determine its effect on the
earnings and financial position of the Company.
3. ACQUISITIONS, JOINT VENTURES AND SALES
During the six months ended December 31, 1998, the Company acquired three
hospitals and affiliated health care entities and entered into operating lease
agreements to lease certain land and buildings with an estimated fair value of
$102.5 million in connection with the acquisitions. In addition, a
majority-owned subsidiary of the Company and a subsidiary of Columbia/HCA
Healthcare Corp. (Col/HCA) formed River Region Health System, a joint venture in
Vicksburg, Mississippi. Col/HCA contributed Vicksburg Medical Center. The
Company's subsidiary and its existing physician shareholders contributed
ParkView Regional Medical Center and affiliated businesses. The Company, through
its subsidiary, has a majority equity interest in the joint venture and is the
manager. During the six months ended December 31, 1997, the Company acquired one
hospital and affiliated health care entities and sold its remaining interest in
a hospital. Hospital and affiliated business acquisitions are summarized as
follows (in thousands):
SIX MONTHS
ENDED
DECEMBER 31
-----------
1998 1997
---- ----
Fair value of assets acquired $ 180,974 $ 90,066
Fair value of liabilities assumed (15,519) (6,599)
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Net cash used for acquisitions $ 165,455 $ 83,467
========= =========
The foregoing acquisitions were accounted for using the purchase method of
accounting. The allocation of the purchase price associated with certain of the
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.
The following unaudited pro forma results of operations give effect to the
operations of the joint ventures and the entities acquired, sold and contributed
to joint ventures in fiscal 1999 and 1998 as if the respective transactions had
occurred at the beginning of the period presented (in thousands, except per
share data):
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THREE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31 DECEMBER 31
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1998 1997 1998 1997
---- ---- ---- ----
Net operating revenue $408,870 $426,423 $840,030 $852,515
Net income (loss) (19,552) 19,237 4,120 38,229
Earnings (loss) per
common share:
Basic (0.27) 0.26 0.06 0.51
Diluted (0.27) 0.25 0.05 0.50
The pro forma results of operations do not purport to represent what the
Company's results of operations would have been had such transactions in fact
occurred at the beginning of the periods presented or to project the Company's
results of operations in any future period.
4. NET ASSETS HELD FOR SALE
The Company is in the process of negotiating the sale of Park Medical Center and
expects the sale to be completed in fiscal 1999. Accordingly, net assets held
for sale have been classified as current assets.
5. WRITE-DOWN OF ASSETS AND INVESTIGATION AND LITIGATION RELATED COSTS
During the six months ended December 31, 1998, the Company recorded the
following pre-tax write-down of assets and investigation and litigation related
costs (in thousands):
Write-down of assets $ 29,874
Investigation and litigation related costs 1,102
--------
Total $ 30,976
========
The Company recorded $25.6 million intangible asset write-downs relating to
certain physician practices and a $4.2 million write-down of assets primarily
related to the hospital held for sale. The write-down of assets resulted
primarily from (1) the review of expected future cash flows of the Company's
physician practices and (2) the write-down of the carrying value of assets held
for sale to their estimated fair value based on divestiture negotiations with
third parties. There can be no assurance, however, that the ultimate loss from
the sale will not exceed such estimates. The Company's review of its physician
practices was a result of recent changes in the physician practice management
industry and the
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accumulation of sufficient historical financial information as a basis for
changing estimated future cash flows. In addition, the Company incurred $1.1
million in investigation and litigation related costs related primarily to the
qui tam and shareholder actions against the Company (See Note 9).
6. INCOME TAXES
The provision (benefit) for income taxes for the three months and six months
ended December 31, 1998 and 1997 is different from that which would be obtained
by applying the statutory federal income tax rate to income (loss) before income
taxes due to permanent differences and the provision for state income taxes. The
provision (benefit) for income taxes for the three months and six months ended
December 31, 1998 also differs from the expected income tax provision (benefit)
due to nondeductible intangible assets included in the asset write-downs.
7. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is based on the weighted average number of shares of
common stock outstanding and dilutive common stock equivalents consisting of
stock options. Outstanding options to purchase 3,810,930 shares of common stock
were not included in the computation of earnings per share for the six months
ended December 31, 1998 because the options' exercise prices were greater than
the average market price of the common stock.
8. STOCK REPURCHASE
In August 1998, the Board of Directors authorized the repurchase of up to
3,000,000 shares of common stock. In October 1998, the Board of Directors
authorized the repurchase of up to 5,000,000 additional shares of common stock.
Shares purchased under the program may be used, among other purposes, to offset
the effects of the Company's stock-based employee benefit plans. As of December
31, 1998, the Company had repurchased 3,585,000 million shares for an aggregate
purchase price of $48.1 million. All such shares were purchased in open market
transactions.
9. CONTINGENCIES
Management continually evaluates contingencies based on the best available
evidence and believes that provision for losses has been provided to the extent
necessary.
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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. In the opinion of
management, adequate provision has been made for adjustments that may result
from such routine audits and appeals.
Income Taxes
The Internal Revenue Service (IRS) is in the process of conducting examinations
of the Company's federal income tax returns for the fiscal years ended June 30,
1993 through 1997. The IRS has proposed certain adjustments in connection with
its examination of the Company's federal income tax returns for the fiscal years
ending June 30, 1993 through 1995. The most significant adjustments involved the
tax accounting methods adopted for computing bad debt expense and the valuation
of purchased hospital property, plant and equipment and related depreciable
lives. The Company intends to protest substantially all of the proposed
adjustments through the appeals process of the IRS. In the opinion of
management, the ultimate outcome of the IRS examinations will not have a
material effect on the Company's results of operations or financial position.
Impact of Year 2000
As with most other industries, hospitals and affiliated health care entities use
information systems that may misidentify dates beginning January 1, 2000 or
earlier, thereby, resulting in system or equipment failures or miscalculations.
Information systems include computer programs, building infrastructure
components and computer-aided biomedical equipment. The Company's position is
that it is not responsible for ensuring Year 2000 compliance by its managed
hospitals, but the Company cannot provide assurance that its managed hospitals
will not seek to hold it responsible, or that it will not ultimately be found
liable, for any losses they incur arising out of the Year 2000 problem. The
Company has a Year 2000 strategy for its owned hospitals that includes phases
for education, inventory and assessment of applications and equipment at risk,
conversion/remediation/replacement, validation and post-implementation. The
Company can provide no assurances that applications and equipment the Company
believes to be Year 2000 compliant will not experience difficulties or that the
Company will not experience difficulties obtaining resources needed to make
modifications to or replace the Company's affected systems and equipment.
Failure by the Company or third parties on which it
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relies to resolve Year 2000 issues could have a material adverse effect on the
Company's results of operations and its ability to provide health care services.
Consequently, the Company can give no assurances that issues related to Year
2000 will not have a material adverse effect on the Company's financial
condition or results of operations.
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. The Company is not
currently a party to any such proceeding which, in management's opinion, would
have a material effect on the Company's results of operations or financial
position.
False Claims Act Litigation
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 were
interviewed. The Company cooperated fully with the investigation. The Company
received no communication from the government on this matter from approximately
June 1996 until August 1998.
In August 1998, the government informed the Company that the investigation was
prompted by a qui tam lawsuit filed under the False Claims Act. The suit was
filed in January 1993 by a former employee of a hospital managed by a Company
subsidiary ("the relator"). The suit named as defendants the Company and its
subsidiary, Quorum Health Resources, Columbia/HCA and all hospitals owned or
managed by Columbia or Quorum from 1984 through 1997. The case was unsealed, and
the government formally elected to join the suit, in October 1998. The unsealed
complaint, prepared by the relator, alleged that the Company knowingly prepared
and caused to be filed cost reports which claimed payments from Medicare and
other government payment programs greater than the amounts due.
On February 2, 1999, the government filed an amended complaint providing its
allegations. On that date, the government also filed a notice of
non-intervention advising the Court that it would not
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proceed on some of the relator's allegations, and that it would not sue
individual managed hospital clients.
The government filed that amended complaint after extensive discussions with the
Company about how to proceed. The government had proposed that the case be
stayed while the government obtained from Quorum and reviewed extensive
additional documents. The Company declined the government's request and asked
the government for a specific settlement proposal, which the government declined
to provide.
Accordingly, in January 1999, the Company filed motions with the court asking to
be separated from the case against co-defendant Columbia/HCA, and asking the
court to appoint a mediator to help achieve a quick and fair resolution of the
case. The government has not opposed the motion to separate the cases against
Columbia/HCA and the Company. The government did, however, oppose the request
for a mediator, arguing that it was premature because the government needed to
first obtain and review additional documents.
The government's complaint does not name as defendants any hospital managed by
the Company. It does name the Company, Quorum Health Resources and each
subsidiary which now owns or has ever owned a hospital.
The new complaint alleges that the Company, on behalf of hospitals it managed
between 1985 and 1995 and hospitals it owned from 1990 to the present, violated
the False Claims Act by filing false Medicare cost reports. The government
asserts that the false claims in the cost reports are reflected in "reserve
analyses" created by the Company. The new complaint also alleges that such
filings were the result of Company policy.
The Company believes that the government has incorrectly interpreted Company
policies and the purpose of allowances under generally accepted accounting
principles. The Company is examining the government's complaint to determine how
to respond. The Company intends to continue to seek ways to expedite a fair
resolution of the case.
In May 1998, the Company learned that it is a named defendant in a separate qui
tam case when it received a letter from a U.S. Attorney. The complaint alleges
violations of Medicare laws governing the home health operations at two of the
Company's hospitals. The complaint was filed under seal in June 1996 by a former
employee who was discharged by the Company in April 1996. The purpose of the
letter from the U.S. Attorney was to allow the
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Company an opportunity to evaluate the results of the government's investigation
to date and to discuss with the government the allegations made in the
complaint, prior to the government making a decision as to whether it will
intervene as a plaintiff in the case. The lawsuit remains under seal for all
other purposes. The Company is cooperating fully with the U.S. Attorney's
Office. The Company has responded to requests for documents and made several of
its employees available for interview. If any violation of the law is found, the
Company intends to pursue an amicable settlement.
The Company cannot at this time predict the outcome of these cases or estimate
their ultimate impact on the Company's business or operating results. If the
outcome of either case were unfavorable, the Company could be subject to fines,
penalties and damages and also could be excluded from Medicare and other
government reimbursement programs. These and other results of these cases could
have a material adverse effect on the Company's financial condition or results
of operations.
Although the Company believes that it is in material compliance with the laws
and regulations governing the Medicare and Medicaid programs, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties and exclusion from the Medicare and Medicaid programs.
Shareholder Litigation
On October 23, November 2 and November 23, 1998, lawsuits were filed by separate
stockholders in the U.S. District Court for the Middle District of Tennessee. In
each complaint, plaintiff seeks to represent a class of plaintiffs comprised of
all individuals who purchased the Company's common stock from October 25, 1995
through October 21, 1998, exclusive of insiders of the Company and their
immediate families. Each complaint alleges that the defendants violated Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10(b)(5)
promulgated thereunder by recklessly reporting in filings with the Securities
and Exchange Commission and in releases disseminated to the investing public
during the class period financial results that were materially overstated and
that were not presented in accordance with generally accepted accounting
principles. Plaintiffs specifically allege that, as a result of a company wide
scheme to overbill the Medicare and Medicaid programs, the Company's net
accounts receivable, net operating revenue, net patient service revenue, net
income, and net income per common share during the class period were materially
overstated and were not in compliance with generally accepted accounting
principles. On January 5, 1999, the court consolidated
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these cases into a single lawsuit. The court gave the plaintiffs until March 8,
1999 to file an amended complaint. The Company intends to defend vigorously the
claims and allegations in these actions.
On November 2, 1998, a lawsuit was filed against the Company, all of its current
directors and two former directors in the U.S. District Court for the Northern
District of Alabama. On January 14, 1999, this suit was transferred by agreement
of the parties to the U.S. District Court for the Middle District of Tennessee.
The Complaint asserts four claims: a shareholders' derivative claim for breach
of fiduciary duty, a shareholders' derivative claim for violations of the
Racketeer Influenced and Corrupt Organizations Act, a shareholders' derivative
claim for injunctive relief, and a purported class action claim for breach of
fiduciary duty. As the basis for each of these claims, plaintiff alleges that
the defendants intentionally or negligently failed to make sure that the Company
was in compliance with applicable Medicare and Medicaid reimbursement laws. All
of the defendants plan to vigorously defend this litigation.
10. SUBSEQUENT EVENTS
Effective February 1, 1999, the Company acquired Kosciusko Community Hospital in
Warsaw, Indiana.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
The following management's discussion and analysis in this quarterly
report contains "forward looking statements." These are statements about
Quorum's(1) current expectations or forecasts of future events. Some examples
would be comments about future operating results, future acquisitions, future
financial performance and the outcome of contingencies such as litigation. The
Company from time to time will also make forward looking statements in other
written materials and in oral statements to the public. Forward looking
statements use words such as "anticipate," "believe," "expect," "intend,"
"plan," "project" and words of similar meaning in discussions which do not
involve simply reporting historical or current facts. The Company does not
promise to update any forward looking statement. Forward looking statements made
by the Company may turn out to be wrong. Actual results may differ materially.
Forward looking statements depend on assumptions which may prove incorrect and
on risks and facts which the Company may not know. As permitted by the Private
Securities Litigation Reform Act of 1995, in the following discussion and
analysis the Company has identified a number of risks and uncertainties. These
are factors which the Company believes could cause actual results to differ
materially from historical and expected results. These are not the only factors
which may be important.
On October 22, 1998, the Company issued a press release announcing that
it expected its operating results for fiscal 1999 to be below its earlier
expectations. On December 11, 1998 the Company stated in a press release that it
had further reduced its expectations for fiscal 1999. In its January 26, 1999
press release, the Company stated that it foresaw sustained pressure on revenues
and margins through the remainder of fiscal 1999.
The Company attributes these lowered expectations to several factors.
The most important of these are (1) the Company's inability to maintain the
historical operating margins of hospitals owned more than one year primarily due
to higher discounts to non-governmental payors, unfavorable estimated
third-party payor settlements in the second quarter of fiscal 1999 and changes
in Medicare payments arising out of the Balanced Budget Act of 1997 (the Budget
Act); (2) the failure of hospitals purchased in
- -----------------
(1) The term "Quorum" or "the Company" as used herein refers to Quorum Health
Group, Inc. and its direct and indirect subsidiaries, unless otherwise stated or
indicated by context. The term "subsidiaries" as used herein also means
affiliated partnerships and affiliated limited liability companies.
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calendar 1998 to positively impact the Company's results of operations; (3) the
poor performance of Park Medical Center in Columbus, Ohio; and (4) the
completion of only two hospital purchases in fiscal 1998.
IMPACT OF ACQUISITIONS, JOINT VENTURES AND SALES
Effective February 1, 1999, the Company acquired Koscuisko Community
Hospital in Warsaw, Indiana.
During the six months ended December 31, 1998, the Company acquired
three hospitals and affiliated health care entities and entered into operating
lease agreements to lease certain land and buildings in connection with the
acquisitions. In addition, a majority-owned subsidiary of the Company and a
subsidiary of Columbia/HCA Healthcare Corp. (Col/HCA)formed River Region Health
System, a joint venture in Vicksburg, Mississippi. Col/HCA contributed Vicksburg
Medical Center. The Company's subsidiary and its existing physician shareholders
contributed ParkView Regional Medical Center and affiliated businesses. The
Company, through its subsidiary, has a majority equity interest in the joint
venture and is the manager. During fiscal 1998, the Company acquired two
hospitals and affiliated health care entities, contributed three hospitals in
exchange for equity interests in joint ventures that own and operate seven
hospitals and sold its remaining interest in a Nebraska hospital.
The Company regularly evaluates the performance of each of its owned
hospitals in light of its business strategies. The Company is always looking for
ways that its hospitals can better contribute to health care delivery in their
communities while improving shareholder value. Also, the Company is continually
evaluating various structures to serve existing local health care delivery
markets. These structures could include joint ventures with other hospital
owners or physicians.
The Company is in the process of negotiating the sale of Park Medical
Center and expects the sale to be completed in fiscal 1999. The Company expects
its operating margin and results of operations to be adversely affected by Park
Medical Center until the sale is completed. Hospital sales are inherently
difficult. Therefore, the timing and ultimate price of the sale cannot be
assured.
Because of the financial impact of the acquisitions, joint ventures and
sales, it is difficult to make meaningful comparisons between the Company's
financial statements for the fiscal periods presented. In addition, due to the
current number of owned hospitals, each additional hospital acquisition can
affect the overall operating margin or results of operations of the Company.
During a transition period after the acquisition of a hospital, the
Company has typically taken a number of steps to lower operating costs. The
impact of such actions can be partially
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offset by cost increases to expand the hospital's 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.
Additionally, operations at acquired hospitals may deteriorate before or after
the purchase date. This may be a result of physician practice patterns, loss of
physicians, local management focus or turnover. In addition, higher discounts to
non-governmental payors and changes in Medicare payments arising out of the
Budget Act have made it more difficult to improve operating margins at acquired
hospitals.
The financial performance of the Company's hospitals acquired in
calendar 1998 adversely affected the Company's operating margin and results of
operations during the three months and six months ended December 31, 1998.
Furthermore, the Company expects that its 1998 acquisitions and acquisitions it
now expects to complete in fiscal 1999 will continue to reduce its operating
margins and results of operations during the remainder of fiscal 1999. In light
of changes in payments from Medicare and managed care payors, increased pricing
pressures for acquired hospitals and the substantial number of transactions
already completed in fiscal 1999, the Company intends to be selective in
pursuing acquisitions.
For the Company to maintain its historical growth rates, acquired
facilities must show improved operating results more quickly than in the past.
Additionally, as the Company grows, it depends on a greater volume of
acquisitions, or acquisitions of a larger size, to maintain its historical
growth rate.
SELECTED OPERATING STATISTICS - OWNED HOSPITALS
The following table sets forth certain operating statistics for the
Company's owned hospitals for each of the periods presented. The results of the
owned hospitals for the three months ended December 31, 1998 (i) include three
months of operations for nineteen hospitals and the Las Vegas and Macon joint
ventures accounted for using the equity method, (ii) include partial periods for
one hospital acquired and one hospital contributed by Columbia Healthcare Corp.
(Col/HCA) to a joint venture controlled by the Company and (iii) exclude the
hospital sold and the three hospitals contributed to joint ventures in fiscal
1998. The results of the owned hospitals for the three months ended December 31,
1997 include three months of operations for nineteen hospitals and a partial
period for one hospital divested during such period.
The results of the owned hospitals for the six months ended December
31, 1998 (i) include six months of operations for eighteen hospitals and the Las
Vegas and Macon joint ventures accounted for using the equity method, (ii)
include partial periods for two hospitals acquired and one hospital contributed
by Col/HCA to a joint venture controlled by the Company, and (iii) exclude the
hospital sold and the three hospitals contributed to joint ventures in fiscal
1998. The results of the owned hospitals for the six months ended December 31,
1997 include six months of operations for
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eighteen hospitals and a partial period for one hospital acquired and one
hospital divested during such period.
Three Months Six Months
Ended Ended
December 31 December 31
----------- -----------
1998 1997 1998 1997
---- ---- ---- ----
Number of hospitals at end of period 21 19 21 19
Licensed beds at end of period 4,883 4,202 4,883 4,202
Beds in service at end of period 3,991 3,466 3,991 3,466
Admissions 32,811 33,350 63,333 65,416
Average length of stay (days) 5.6 5.5 5.6 5.5
Patient days 184,517 182,412 353,511 358,442
Adjusted patient days 314,120 299,705 609,798 590,887
Occupancy rates (average licensed beds) 43.2% 46.4% 43.6% 45.6%
Occupancy rates (average beds in service) 53.0% 56.0% 53.4% 55.1%
Gross inpatient revenues (in thousands) $388,207 $401,417 $740,170 $791,031
Gross outpatient revenues (in thousands) $272,762 $258,103 $536,606 $512,973
RESULTS OF OPERATIONS
The table below reflects the percentage of net operating revenue
represented by various categories in the Condensed Consolidated Statements of
Income. The results of operations for the periods presented include hospitals
from their acquisition dates as discussed above.
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Three Months Six Months
Ended Ended
December 31 December 31
----------- -----------
1998 1997 1998 1997
---- ---- ---- ----
Net operating revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses (1) 91.1 81.7 86.8 82.1
Equity in earnings of affiliates (1.3) -- (1.3) --
----- ----- ------ -----
EBITDA (2) 10.2 18.3 14.5 17.9
Depreciation and amortization 6.0 5.5 5.7 5.5
Interest 3.3 2.7 2.8 2.7
Write-down of assets and
investigation and litigation
related costs 8.0 -- 4.0 --
Minority interest (1.3) 0.2 (0.6) 0.2
----- ----- ------ -----
Income (loss) before income taxes (5.8) 9.9 2.6 9.5
Provision (benefit) for income
taxes (0.9) 3.9 1.7 3.8
----- ----- ------ -----
Net income(loss) (4.9)% 6.0% 0.9% 5.7%
===== ===== ====== =====
(1) Operating expenses represent expenses before interest, minority interest,
income taxes, depreciation and amortization expense and write-down of assets and
investigation and litigation related costs.
(2) EBITDA represents earnings before interest, minority interest, income taxes,
depreciation and amortization expense and write-down of assets and investigation
and litigation related costs. 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.
Three Months Ended December 31, 1998 Compared to Three Months Ended December
31, 1997
The Company's net operating revenue was $386.1 million for the three
months ended December 31, 1998, compared to $408.9 million for the comparable
period of fiscal 1998, a decrease of $22.8 million or 5.6%. This decrease was
attributable to, among other things, the transfer of three hospitals to joint
ventures (which are accounted for using the equity method), the sale of the
Nebraska hospital, and a 7.4% decrease in net operating revenue generated by
hospitals owned during both periods (calculated by comparing the same periods in
both fiscal periods for hospitals owned for one year or more).
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The decrease in net operating revenue of hospitals owned during both
periods was primarily attributable to the effect of increased managed care
discounts, unfavorable estimated third-party payor settlements and the Budget
Act including its impact on home health and skilled nursing facility revenues.
Based on information received during the quarter ended December 31, 1998, the
Company recorded unfavorable estimated third-party payor settlements of $10.6
million. The adjustments included (1) governmental and non-governmental
third-party payors settlements, (2) differences between settlement estimates for
previously filed cost reports and final settlements and (3) revised estimates of
settlements on Medicare and Medicaid cost reports not yet settled or filed. In
response to the Budget Act, the Company has consolidated certain home health
agencies, implemented cost-reduction strategies at its home health agencies and
ceased admitting patients to a skilled nursing facility at one hospital.
The Company's net operating revenue decrease was partially offset by an
increase in net operating revenue due to four hospital acquisitions during
fiscal 1999 and 1998, the hospital contributed by Col/HCA to a joint venture
controlled by the Company, and a 3.8% increase in management services revenue.
If net operating revenues for the three months ended December 31, 1997 were
recast using the equity method of accounting for the Company's hospitals
contributed to joint ventures and to exclude the hospital sold, consolidated net
operating revenues would have increased 8.7%.
Operating expenses as a percent of net operating revenue increased to
91.1% for the three months ended December 31, 1998 from 81.7% for the three
months ended December 31, 1997. Operating expenses as a percent of net operating
revenue for the Company's owned hospitals increased to 92.7% for the three
months ended December 31, 1998 from 82.4% for the three months ended December
31, 1997. For the Company's hospitals owned during both periods, operating
expenses as a percent of net operating revenue increased to 91.7% for the three
months ended December 31, 1998 from 81.5% for the three months ended December
31, 1997. The increase reflects the impact of the decrease in net operating
revenues, as discussed above, operational issues in certain local markets and
costs related to the opening of the replacement hospital in South Carolina.
Equity in earnings of affiliates, which was primarily attributable to
the Las Vegas and Macon operations, represented 1.3% of the Company's net
operating revenue for the three months ended December 31, 1998.
EBITDA as a percent of net operating revenue was 10.2% for the three
months ended December 31, 1998 compared to 18.3% for the three months ended
December 31, 1997. EBITDA as a percent of net operating revenue for the
Company's owned hospitals was 8.7% for the three months ended December 31, 1998
compared to 17.6% for the three months ended December 31, 1997. EBITDA as a
percent of net operating revenue for the Company's hospitals owned during both
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periods was 8.4% for the three months ended December 31, 1998 compared to 18.5%
for the three months ended December 31, 1997. EBITDA as a percent of net
operating revenue for the Company's management services business was 24.8% for
the three months ended December 31, 1998 compared to 25.5% for the three months
ended December 31, 1997. If EBITDA for the three months ended December 31, 1997
were recast using the equity method of accounting for the Company's hospitals
contributed to joint ventures and to exclude the hospital sold, consolidated
EBITDA would have decreased 44.4%.
Depreciation and amortization expense as a percent of net operating
revenue increased to 6.0% for the three months ended December 31, 1998 from 5.5%
for the three months ended December 31, 1997 which was primarily attributable to
the decrease in net operating revenue and the opening of the new facility in
Florence, South Carolina. Interest expense as a percent of net operating revenue
increased to 3.3% for the three months ended December 31, 1998 from 2.7% for the
three months ended December 31, 1997, which was primarily due to fiscal 1998 and
1999 acquisitions, the opening of the new South Carolina hospital and the
decrease in net operating revenue.
During the second quarter of fiscal 1999, the Company recorded
write-downs of assets and investigation and litigation related costs of
approximately $31.0 million. The Company recorded $25.6 million intangible asset
write-downs relating to certain physician practices and a $4.2 million
write-down of assets primarily related to the hospital held for sale. The
write-down of assets resulted primarily from (1) the review of expected future
cash flows of the Company's physician practices and (2) the write-down of the
carrying value of assets held for sale to their estimated fair value based on
divestiture negotiations with third parties. There can be no assurance, however,
that the ultimate loss from the sale will not exceed such estimates. The
Company's review of its physician practices was a result of recent changes in
the physician practice management industry and the accumulation of sufficient
historical financial information as a basis for changing estimated future cash
flows. In addition, the Company incurred $1.1 million in investigation and
litigation related costs related primarily to the qui tam and shareholder
actions against the Company.
Minority interest income as a percent of net operating revenue was 1.3%
for the three months ended December 31, 1998 compared to minority interest
expense of 0.2% for the three months ended December 31, 1997. This was primarily
attributable to the intangible asset write-downs and operational issues in
certain local markets with minority ownership.
Excluding the asset write-downs, the effective income tax rate was
39.1%. The asset write-downs were tax effected at 21.0% due to the effect of
certain permanent nondeductible intangible assets.
Net loss as a percent of net operating revenue was 4.9% for the three
months ended December 31, 1998. Excluding the write-down of assets and
investigation and litigation related costs, net
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income as a percent of net operating revenue was 1.0% compared to 6.0% for the
three months ended December 31, 1997.
Six Months Ended December 31, 1998 Compared to Six Months Ended December 31,
1997
The Company's net operating revenue was $775.4 million for the six
months ended December 31, 1998, compared to $801.7 million for the comparable
period of fiscal 1998, a decrease of $26.3 million or 3.3%. This decrease was
attributable to, among other things, the transfer of three hospitals to joint
ventures (which are accounted for using the equity method), the sale of the
Nebraska hospital, and a 3.2% decrease in revenue generated by hospitals owned
during both periods. The decrease in net operating revenue of hospitals owned
during both periods was primarily attributable to the effect of increased
managed care discounts, the Budget Act including its impact on home health and
skilled nursing facility revenues, estimated third-party payor settlements and
charity care discounts. In response to the Budget Act, the Company has
consolidated certain home health agencies, implemented cost-reduction
strategies at its home health agencies and ceased admitting patients to a
skilled nursing facility at one hospital. The Company's net operating revenue
decrease was partially offset by an increase in net revenue due to five hospital
acquisitions during fiscal 1999 and 1998, the hospital contributed by Col/HCA to
a joint venture controlled by the Company and a 4% increase in management
services revenue. If net operating revenues for the six months ended December
31, 1997 were recast using the equity method of accounting to reflect the
earnings for the Company's hospitals contributed to the joint ventures and to
exclude the hospital sold, consolidated net operating revenues would have
increased 12.2%.
Operating expenses as a percent of net operating revenue increased to
86.8% for the six months ended December 31, 1998 from 82.1% for the six months
ended December 31, 1997. Operating expenses as a percent of net operating
revenue for the Company's owned hospitals increased to 88.0% for the six months
ended December 31, 1998 from 82.7% for the six months ended December 31, 1997.
For the Company's hospitals owned during both periods, operating expenses as a
percent of net operating revenue increased to 86.5% for the six months ended
December 31, 1998 from 81.9% for the six months ended December 31, 1997. The
increase reflects the impact of the decrease in net operating revenues, as
discussed above, and operational issues in certain local markets.
Equity in earnings of affiliates, which was primarily attributable to
the Las Vegas and Macon operations, represented 1.3% of the Company's net
operating revenue for the six months ended December 31, 1998.
EBITDA as a percent of net operating revenue was 14.5% for the six
months ended December 31, 1998 compared to 17.9% for the six months ended
December 31, 1997. EBITDA as a percent of net operating revenue for the
Company's owned hospitals was 13.5% for the six months ended December 31, 1998
compared to 17.3% for the
23
24
six months ended December 31, 1997. EBITDA as a percent of net operating revenue
for the Company's hospitals owned during both periods was 13.5% for the six
months ended December 31, 1998 compared to 18.1% for the six months ended
December 31, 1997. EBITDA as a percent of net operating revenue for the
Company's management services business was 24.3% for the six months ended
December 31, 1998 compared to 23.9% for the six months ended December 31, 1997.
If EBITDA for the six months ended December 31, 1997 were recast using the
equity method of accounting for the Company's hospitals contributed to joint
ventures and to exclude the hospital sold, consolidated EBITDA would have
decreased 17.2%.
Depreciation and amortization expense as a percent of net operating
revenue increased to 5.7% for the six months ended December 31, 1998 from 5.5%
for the six months ended December 31, 1997, which was primarily attributable to
the decrease in net operating revenue. Interest expense as a percent of net
operating revenue increased to 2.8% for the six months ended December 31, 1998
from 2.7% for the six months ended December 31, 1997 which was primarily due to
fiscal 1998 and 1999 acquisitions.
As discussed above, during the second quarter of fiscal 1999, the
Company recorded write-downs of assets and investigation and litigation related
costs of approximately $31.0 million.
Minority interest income as a percent of net operating revenue was 0.6%
for the six months ended December 31, 1998 compared to minority interest expense
of 0.2% for the six months ended December 31, 1997. This was primarily
attributable to the intangible asset write-downs in the second quarter and
operational issues in certain local markets with minority ownership. Excluding
the asset write-downs, the effective income tax rate was 39.1%. The asset
write-downs were tax effected at 21.0% due to the effect of certain permanent
nondeductible intangible assets.
Net income as a percent of net operating revenue was .9% for the six
months ended December 31, 1998 compared to 5.7% for the six months ended
December 31, 1997. Excluding the write-down of assets and investigation and
litigation related costs, net income as a percent of net operating revenue was
3.8%.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had working capital of $216.0
million, including cash of $5.2 million. The ratio of current assets to current
liabilities was 2.0 to 1.0 at December 31, 1998 compared to 2.2 to 1.0 at June
30, 1998.
The Company's cash requirements excluding acquisitions and the
replacement hospital have historically been funded by cash generated from
operations. Cash generated from operations was $52.1 million and $51.7 million
for the six months ended December 31, 1998 and 1997, respectively.
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25
The complexity of the Medicare and Medicaid regulations, increases in
managed care, hospital personnel turnover including business office managers,
hospital and Medicare intermediary computer system conversions, dependence of
hospitals on physician documentation of medical records, and the subjective
judgment involved complicates billing and collections of accounts receivable by
hospitals. There can be no assurance that this complexity will not negatively
impact the Company's future cash flow or results of operations.
Capital expenditures excluding acquisitions for the six months ended
December 31, 1998 and 1997 were $72.2 million and $68.2 million, respectively.
Capital expenditures may vary from year to year depending on facility
improvements and service enhancements undertaken by the owned hospitals. In
November 1998, the Company completed construction of a replacement hospital and
two medical office buildings in Florence, South Carolina with capital
expenditures of approximately $35.2 million for the six months ended December
31, 1998. The total project cost was approximately $100 million. In fiscal 1999,
excluding acquisitions, the Company expects to make capital expenditures from
$125 million to $150 million, including costs for the Carolinas construction
project.
During the six months ended December 31, 1998, the Company used $165.5
million in cash for acquisitions. The Company acquired three hospitals and
affiliated health care entities and entered into operating lease agreements to
lease certain land and buildings with an estimated fair value of $102.5 million
in connection with the acquisitions. In addition, the Company acquired a
majority equity interest in a hospital contributed by Col/HCA to a joint venture
controlled by the Company. During fiscal 1998, the Company used $131.7 million
in cash for acquisitions. The Company acquired two hospitals and affiliated
health care entities, contributed three hospitals in exchange for equity
interests in joint ventures and sold its remaining interest in a Nebraska
hospital.
Effective February 1, 1999, the Company acquired Kosciusko Community
Hospital in Warsaw, Indiana.
In August 1998, the Board of Directors authorized the repurchase of up
to 3,000,000 shares of common stock. In October 1998, the Board of Directors
authorized the repurchase of up to 5,000,000 additional shares of common stock.
Shares purchased under the program may be used, among other purposes, to offset
the effects of the Company's stock-based employee benefit plans. As of February
1, 1999 the Company had repurchased 3,585,000 million shares for an aggregate
purchase price of $48.1 million. All such shares were purchased in open market
transactions.
The Company intends to acquire additional acute care facilities, and
is actively seeking out such acquisitions. In light of changes in payments from
Medicare and managed care payors, increased pricing pressures for acquired
hospitals and the substantial number of transactions already completed in fiscal
1999, the Company intends to be selective in pursuing acquisitions.
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26
At February 1, 1999, the Company had $98.0 million available under its
$850.0 million revolving credit facility and $14.1 million available under its
$150.0 million ELLF agreement. The Company continually reviews its capital
needs. In light of the fiscal 1999 capital expenditures described above, the
Company may need to seek additional equity or debt financing to be prepared for
attractive acquisition opportunities and to meet other needs.
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
The Company's interest expense is sensitive to changes in the general
level of U.S. interest rates. To mitigate the impact of fluctuations in U.S.
interest rates, the Company generally maintains 50%-75% of its debt as fixed
rate in nature either by borrowing on a long-term basis or entering into
interest rate swap transactions. The interest rate swap 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 at the time the swap agreement was
consummated. The interest rate swap agreements do not constitute positions
independent of the underlying exposures. The Company's policy is to not hold or
issue derivative instruments for trading purposes and to not be a party to any
instruments with leverage features. Certain swap agreements allow the
counterparty a one-time option at the end of the initial term to cancel the
agreement or a one-time option at the end of the initial term to extend the
swaps for an incremental period of up to five years. The Company is exposed to
credit losses in the event of nonperformance by the counterparties to its
financial instruments. The counterparties are creditworthy financial
institutions and the Company anticipates that the counterparties will be able to
fully satisfy their obligations under the contracts. For the six months ended
December 31, 1998 and 1997, the Company received a weighted average rate of 5.5%
and 5.8% and paid a weighted average rate of 5.7% and 6.1%, respectively.
The table below presents information about the Company's
market-sensitive financial instruments, including long-term debt and interest
rate swaps as of December 31, 1998. For debt obligations, the table presents
principal cash flows and related weighted-average interest rates by expected
maturity dates. For interest rate swap agreements, the table presents notional
amounts by expected maturity date (assuming the options to extend are not
exercised) and weighted average interest rates based on rates in effect at
December 31, 1998. The fair values of long-term debt and interest rate swaps
were determined based on quoted market prices at December 31, 1998 for the same
or similar issues.
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Maturity Date, Fiscal Year Ending June 30 Dec. 31, 1998
---------------------------------------------- There- Fair Value of
(Dollars in millions) 1999 2000 2001 2002 2003 after Total Liabilities
---- ---- ---- ---- ---- ----- ----- -------------
Long-term debt:
Fixed rate long-term debt $0.8 $0.9 $0.7 $0.6 $0.6 $152.2 $155.8 $151.0
Average interest rates 7.6% 7.6% 7.7% 7.7% 7.7% 8.7%
Variable rate long-term
debt $693.0 $693.0 $693.0
Average interest rates 5.6%
Interest rate swaps:
Pay fixed/receive
variable notional amounts $100.0 $400.0 $500.0 $ 23.1
Average pay rate 4.9% 5.9%
Average receive rate 5.3% 5.2%
YEAR 2000 ISSUES
The "Year 2000 problem" describes computer programs which use two
rather than four digits to define the applicable year. These programs are
present in software applications running on desktop computers and network
servers. These programs are also present in microchips and microcontrollers
incorporated into equipment. The Company's computer hardware and software,
building infrastructure components (e.g. alarm systems and HVAC systems) and
medical devices that are date sensitive may contain programs with the Year 2000
problem. If uncorrected, the problem could result in computer system and program
failures or equipment and medical device malfunctions that could result in a
disruption of business operations or affect patient diagnosis and treatment. The
Company purchases from others substantially all of the software it uses.
The Company's Year 2000 strategy is led by its Vice President of
Corporate Services. In July 1998, the Company retained an external firm to
provide consulting services and to assist the Company in implementing its year
2000 strategy. The Company also has a Year 2000 steering committee to assist in
coordinating the Year 2000 implementation. The company's year 2000 strategy
addresses hospitals it owns and those it manages.
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Managed Hospitals
In December 1998, the Company notified the owners of the managed
hospitals that the Company does not possess the consulting or other expertise
specifically designed to assist hospitals with their Year 2000 readiness. The
Company recommended that the managed hospitals engage outside consultants to
assist them in their Year 2000 compliance efforts. The Company also recommended
that each managed hospital create of a Year 2000 committee charged with the
design, implementation and day-to-day oversight of the managed hospital's Year
2000 compliance efforts and that the governing board of each managed hospital
receive regular monthly reports from such Year 2000 committee. The Company also
has developed educational materials to inform the owners of the hospitals it
manages about the Year 2000 problem. The Company is presently monitoring the
progress of the response by the hospitals it manages to the Year 2000 problem.
The Company is also identifying additional third-party resources which the
managed hospitals may use to assist them in addressing the Year 2000 problem.
The Company's position is that it is not responsible for ensuring Year
2000 compliance by its managed hospitals. The Company can provide no assurance,
however, that its managed hospitals will not seek to hold it responsible for
losses they incur arising out of the Year 2000 problem. Nor can the Company
provide assurance that it will not ultimately be found liable for such losses
which, if they occur, may be material.
The Company is not able to verify the status of remediation efforts at
its managed hospitals. Therefore, the Company is not able to evaluate the most
reasonably likely Year 2000 worst case scenario for managed hospitals. Because
the Company provides only management services, it does not pay expenses of the
hospitals it manages and, therefore, does not expect to incur any significant
Year 2000 remediation costs for its managed hospitals.
Owned Hospitals and Corporate Office
The Company has a Year 2000 strategy for its owned hospitals that
includes phases for education, inventory and assessment of applications and
equipment at risk, conversion/remediation/ replacement, validation and
post-implementation. The Company's strategy also includes development of
contingency plans to address potential disruption of operations arising from the
Year 2000 problem. Park Medical Center is not included in these plans, since it
is an asset held for sale.
Education
The Company has completed the education phase of its Year 2000
strategy. Education will continue to be provided throughout the Year 2000
implementation process.
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Financial Application Software and Hardware - Owned Hospitals
The Company has completed an initial assessment of financial
application software used in its owned hospitals in such areas as patient
accounting and financial reporting. Eleven hospitals have been advised by the
manufacturers of its financial software systems that such software is
substantially Year 2000 compliant. Five owned hospitals are scheduled to convert
between March 1999 and September 1999 to a financial software system which is
represented by the manufacturer to be Year 2000 compliant. The Company has
scheduled upgrades for the remaining five hospitals to be completed between
March 1999 and September 1999. The Company is currently developing testing
procedures designed to verify Year 2000 compliance.
Clinical and Other Software and Hardware - Owned Hospitals
With respect to other software and related computer equipment, such as
patient care and ancillary software, the owned hospitals are in the inventory
and assessment stage. The Company has substantially completed the inventories
and anticipates completing the inventory and assessment phase in March 1999 and
critical remediation by September 1999.
Biomedical Equipment and Building Infrastructure - Owned Hospitals
The Company is in the inventory and assessment phase of its analysis of
owned hospital systems such as biomedical equipment and building infrastructure
components. The Company has substantially completed the inventories and
anticipates completing the first round of assessments in March 1999. The Company
is using an outside vendor for its initial assessment of biomedical equipment
and building infrastructure which is expected to be completed in March 1999.
The Company has submitted inventories to the vendor for most of its hospitals.
It is now working with the vendor to refine the inventory information submitted
and the vendor's reports.
The hospitals plan to schedule the remaining Year 2000 dates for
biomedical equipment after the vendor information is received. The Company is
currently developing testing procedures designed to verify Year 2000 compliance.
Because the Company has not completed the assessment phase, it is unable to
establish an estimated date for completing subsequent phases with respect to
equipment and infrastructure in its owned hospitals.
Corporate Office
The Company believes that its corporate office network is substantially
Year 2000 compliant. The Company has been advised by the manufacturer of its
corporate office financial software applications that such software is
substantially Year 2000 compliant. The Company's management services business is
scheduled to convert to compliant financial software applications by June 1999.
The Company has substantially completed the inventory, remediation and
validation phases with respect to other corporate office computer equipment
(such as desktop computers) and the corporate office building infrastructure.
The Company is currently validating its other corporate office computer software
and management services computer software and equipment in satellite
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offices and intends for critical remediation to be substantially completed by
February 1999.
Costs
The Company believes that Year 2000-related remediation costs incurred
through December 31, 1998 have not been material to its results of operations.
The Company's consultants have initially estimated the total costs to be
incurred for completion of its Year 2000 strategy between $16 million and $37
million. This estimate is primarily based on industry averages and excludes
costs associated with the accelerated purchase of financial application software
and hardware upgrades and conversions. Approximately half is estimated to be
capital costs and half is estimated to be operating costs. The Company earmarked
a portion of its current year capital budget as contingency funds and expects
that substantially all of the current year capital costs can be accommodated
within the current budget. Most of the estimated additional current year
operating costs were not budgeted as separate Year 2000 expenses given the early
and tentative nature of the estimates. The Company is reviewing to what extent
existing resources can be reallocated to the Year 2000 problem and how otherwise
to fund these operating costs. All cost estimates are preliminary and are
expected to be revised as the project progresses.
Reliance on Third Parties
The Company relies heavily on third parties in operating its business.
In addition to its reliance on software, hardware and other equipment vendors to
verify Year 2000 compliance of their products, the Company also depends on (i)
fiscal intermediaries which process claims and make payments for the Medicare
program, (ii) insurance companies, HMO's and other private payors, (iii)
utilities which provide electricity, water, natural gas and telephone services
and (iv) vendors of medical equipment, supplies and pharmaceuticals used in
patient care. As a part of its Year 2000 strategy, the Company intends to seek
assurances from these parties that their services and products will not be
interrupted or malfunction due to the Year 2000 problem. Failure of some or all
of these third parties to resolve their Year 2000 issues could have a material
adverse effect on the Company's results of operations and ability to provide
health care services at certain owned hospitals.
The Company is coordinating closely with its trade associations and
other parties to monitor HCFA's progress toward Year 2000 compliance. HCFA
representatives have advised the Company that HCFA systems are currently or soon
will be Year 2000 compliant. Effective April 5, 1999, HCFA is requiring all
hospitals to submit Medicare claims electronically that are Year 2000 compliant.
The Company's hospitals used third party processors to submit Medicare claims.
The Company believes that most of these processors are able to comply with the
HCFA mandate. The Company is in the process of verifying and testing their Year
2000 compliance.
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Contingency Plans
The Company intends to complete its initial contingency plan by June
1999. The Company is looking to third parties and industry associations in order
to identify and share best practices for Year 2000 contingency planning. Each of
the Company's owned hospitals has a disaster plan which will be reviewed as a
part of the Company's contingency planning process and supplemented as necessary
to accommodate Year 2000 compliancy issues. These disaster plans are designed to
enable the hospital to continue to function during natural disasters and other
crises. The plans also have contingencies for moving patients to other
facilities if the hospital is not able to continue to care for them. In some
cases, the Company may not be able to develop contingency plans which allow the
hospital to continue to operate. For example, the affected hospital may not be
able to secure supplies of fuel to operate its backup generators if electrical
supplies fail for an extended period.
Risks of Year 2000 Issues
The Company believes today that the most reasonably likely worst case
scenario will involve (1) malfunctions in clinical computer software and
hardware at owned hospitals, (2) malfunctions in biomedical equipment at owned
hospitals, (3) temporary disruptions in delivery of medical supplies and utility
services to owned hospitals and (4) temporary disruptions in payments,
especially payments from Medicare and other government programs. The Company
expects these events will result in increased expense as the affected
hospital(s) refer tests and other procedures to other parties, access
alternative suppliers and increase staffing to assure adequate patient care.
These events may also cause lost revenue for procedures which its hospitals are
unable to perform. For example, a hospital will suspend a service if Year 2000
compliant equipment required for that service is unavailable. Disruptions in
payments will adversely affect the Company's cash flow.
The foregoing assessment is based on information currently available to
the Company. The Company will revise its assessment as it implements its Year
2000 strategy. The Company can provide no assurances that applications and
equipment the Company believes to be Year 2000 compliant will not experience
difficulties or that the Company will not experience difficulties obtaining
resources needed to make modifications to or replace the Company's affected
systems and equipment. Failure by the Company or third parties on which it
relies to resolve Year 2000 issues could have a material adverse effect on the
Company's results of operations and its ability to provide health care services.
Consequently, the Company can give no assurances that issues related to Year
2000 will not have a material adverse effect on the Company's financial
condition or results of operations.
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The Company's Year 2000 readiness program is an ongoing process and the
risk assessments and estimates of costs and completion dates for various phases
of the program are subject to change. The cost of the Year 2000 program and the
dates on which the Company believes the phases of the program will be completed
are based on management's best estimates, which were derived using numerous
assumptions of future events. Factors that could cause such changes include,
among other things, availability of qualified personnel and consultants, the
actions of third parties and material changes in governmental regulations. There
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those anticipated.
GENERAL
The federal Medicare program and state Medicaid programs accounted for
approximately 55% of gross patient service revenue for the years ended June 30,
1998 and 1997. The payment rates under the Medicare program for inpatients are
prospective, based upon the diagnosis of a patient.
Under the Budget Act, there were no increases in the inpatient
operating payment rates to acute care hospitals for services through September
30, 1998. Inpatient operating payment rates were increased 0.5% effective
October 1, 1998 through September 30, 1999 and subsequent increases are expected
to be less than inflation. The Budget Act reduced inpatient capital payments in
the aggregate by approximately 15% effective October 1, 1997. Payments for
Medicare outpatient services, home health services and skilled nursing facility
services historically have been paid based on costs, subject to certain
adjustments and limits. The Budget Act requires that the payment for those
services be converted to prospective payment systems (PPS). PPS for skilled
nursing facilities began for cost reporting periods beginning on and after July
1, 1998. However, the implementation of PPS for outpatient and home health has
been delayed.
The Company has experienced reductions in payments for outpatient
and home health services in the interim period prior to implementation of PPS,
as well as reductions in payments under PPS for skilled nursing facilities. The
number of home health visits has declined for both the industry and the Company.
In response to the Budget Act, the Company has consolidated certain home health
agencies, implemented cost-reduction strategies at its home health agencies and
ceased admitting patients to a skilled nursing facility at one hospital.
The Budget Act is expected to continue to reduce the Company's ability
to maintain its historical rate of net revenue growth and operating margins. The
Budget Act and further changes in the Medicare or Medicaid programs and other
proposals to limit health care spending could have a material adverse impact
upon the health care industry and the Company. The Company expects continuing
pressure to limit expenditures by governmental health care programs. The Clinton
Administration has proposed a federal budget
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under which acute care hospitals would receive no increases for inpatient
operating payment rates effective October 1, 1999 through September 30, 2000.
The Company is continuing to experience an increase in managed care. An
increasing number of payors are actively negotiating amounts paid to hospitals,
which are typically lower than their standard rates. Additionally, some managed
care payors pay less than the negotiated rate which, if undetected, results in
lower net revenues. To assist the owned hospital management teams in evaluating
and negotiating contracts, the Company employs managed care experts.
Additionally, the Company plans to install managed care information systems in
its owned hospitals to improve the information available to management and to
help ensure that the Company is paid at the contracted amounts. The trend toward
managed care, including indemnity insurance and employer plans which pay less
than full charges, health maintenance organizations, preferred provider
organizations and various other forms of managed care, has and may continue to
adversely affect the Company's ability to maintain its historical rate of net
revenue growth and operating margins.
The Company's acute care hospitals, like most acute care hospitals in
the United States, have significant unused capacity. The result is substantial
competition for patients and physicians. Inpatient utilization continues to be
negatively affected by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative health care delivery services
for less acutely ill patients. The Company expects increased competition and
admission constraints to continue in the future. The ability to successfully
respond to these trends, as well as spending reductions in governmental health
care programs, will play a significant role in determining the Company's ability
to maintain its historical rate of net revenue growth and operating margins.
The Company expects the industry trend from inpatient to outpatient
services to continue due to the increased focus on managed care and advances in
technology. Outpatient revenue of the Company's owned hospitals was
approximately 42.0% and 39.3% of gross patient service revenue for the six
months ended December 31, 1998 and 1997, respectively.
Until this fiscal year, the Company's historical financial trend has
been favorably impacted by the Company's ability to successfully acquire acute
care hospitals. The Company believes that trends in the health care industry
described above may create possible future acquisition opportunities. The
Company faces competition in acquiring hospitals from a number of well-
capitalized organizations. Many states have implemented new review processes by
the Attorneys General of not-for profit hospital acquisitions, resulting in
delays to close an acquisition. Additionally, some hospitals are sold through an
"auction" process,
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which may result in higher purchase prices being paid by competitors for those
properties than the Company believes are reasonable. The Year 2000 problem may
reduce the number of suitable hospital acquisition candidates. As the Company
grows, it depends on a greater volume of acquisitions, or acquisitions of a
larger size, to maintain its historical growth rates. There can be no assurances
that the Company can continue to maintain its historical growth rate through
hospital acquisitions and the successful integration of hospitals into its
system. The financial performance of the Company's recent acquisitions has
adversely affected the Company's operating margin and results of operations and
are expected to continue to do so in the near-term. In light of changes in
payments from Medicare and managed care payors, increased pricing pressures for
acquired hospitals and the substantial number of transactions already completed
in fiscal 1999, the Company intends to be selective in pursuing acquisitions.
The Company's owned hospitals accounted for 91% of the Company's net
operating revenue for the six months ended December 31, 1998 and 1997. For the
six months ended December 31, 1998, the Dothan, Alabama and Ft. Wayne, Indiana
markets accounted for approximately 30% of the Company's owned hospital revenue
and 51% of the Company's owned hospital EBITDA. Due to the current number of
owned hospitals, changes in any individual market can affect the overall
operating results of the Company. Furthermore, concentration of results of
operations in the Dothan, Alabama and Fort Wayne, Indiana markets increases the
risks that adverse developments at these facilities will have a material adverse
effect on the Company's operations or financial condition.
The Company must prepare its financial statements in accordance with
generally accepted accounting principles. This means that the Company must make
estimates and assumptions which affect the amounts it reports in its financial
statements. For example, net patient service revenue is reported at the
estimated net realizable amount from patients, third-party payors, and others
for services rendered, including estimated retroactive adjustments under
agreements with third-party payors. Settlements are estimated in the period the
related services are rendered and adjusted in future periods as final
settlements are determined. The timing and amount of these changes in estimates
may cause fluctuations in the Company's quarterly or annual operating results.
The IRS is in the process of conducting examinations of the Company's
federal income tax returns for the fiscal years ended June 30, 1993 through
1997. The IRS has proposed certain adjustments in connection with its
examination of the Company's federal income tax returns for the fiscal years
ending June 30, 1993 through 1995. The most significant adjustments involved the
tax accounting methods adopted for computing bad debt expense and the valuation
of purchased hospital property, plant and equipment and the related depreciable
lives. The Company intends to protest
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substantially all of the proposed adjustments through the appeals process of the
IRS. In the opinion of management, the ultimate outcome of the IRS examinations
will not have a material effect on the Company's results of operations or
financial position.
The Company currently, and from time to time, expects to be subject to
claims and suits arising in the ordinary course of business. Except as described
below, the Company is not currently a party to any such proceeding which, in
management's opinion, would have a material effect on the Company's results of
operations or financial position.
The federal government and a number of states are rapidly increasing
the resources devoted to investigating allegations of fraud and abuse in the
Medicare and Medicaid programs. At the same time, regulatory and law enforcement
authorities are taking an increasingly strict view of the requirements imposed
on providers by the Social Security Act and Medicare and Medicaid regulations.
Although the Company believes that it is in material compliance with such laws,
a determination that the Company has violated such laws, or even the public
announcement that the Company was being investigated concerning possible
violations, could have a material adverse effect on the Company.
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
were interviewed. The Company cooperated fully with the investigation. The
Company received no communication from the government on this matter from
approximately June 1996 until August 1998.
In August 1998, the government informed the Company that the
investigation was prompted by a qui tam lawsuit filed under the False Claims
Act. The suit was filed in January 1993 by a former employee of a hospital
managed by a Company subsidiary ("the relator"). The suit named as defendants
the Company and its subsidiary, Quorum Health Resources, Columbia/HCA and all
hospitals owned or managed by Columbia or Quorum from 1984 through 1997. The
case was unsealed, and the government formally elected to join the suit, in
October 1998. The unsealed complaint, prepared by the relator, alleged that the
Company knowingly prepared and caused to be filed cost reports which claimed
payments from Medicare and other government payment programs greater than the
amounts due.
On February 2, 1999, the government filed an amended complaint
providing its allegations. On that date, the government also filed
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36
a notice of non-intervention advising the Court that it would not proceed on
some of the relator's allegations, and that it would not sue individual managed
hospital clients. The government's complaint does not name as defendants any
hospital managed by the Company. It does name the Company, Quorum Health
Resources and each subsidiary which now owns or has ever owned a hospital.
The government filed that amended complaint after extensive discussions
with the Company about how to proceed. The government had proposed that the case
be stayed while the government obtained from Quorum and reviewed extensive
additional documents. The Company declined the government's request and asked
the government for a specific settlement proposal, which the government declined
to provide.
Accordingly, in January 1999, the Company filed motions with the court
asking to be separated from the case against co-defendant Columbia/HCA. The
government did not opposed the motion to separate the cases against Columbia/HCA
and the Company.
The new complaint alleges that the Company, on behalf of hospitals it
managed between 1985 and 1995 and hospitals it owned from 1990 to the present,
violated the False Claims Act by filing false Medicare cost reports. The
government asserts that the false claims in the cost reports are reflected in
"reserve analyses" created by the Company. The new complaint also alleges that
such filings were the result of Company policy.
The Company believes that the government has incorrectly interpreted
Company policies and the purpose of allowances under generally accepted
accounting principles. The Company is examining the government's complaint to
determine how to respond. The Company intends to continue to seek ways to
expedite a fair resolution of the case.
On February 16, 1999, the Company learned that the court granted the
Company's motion to separate the cases against it and Columbia/HCA. The court
further ordered the government to file a new complaint against the Company by
February 24, 1999.
In May 1998, the Company learned that it is a named defendant in a
separate qui tam case when it received a letter from a U.S. Attorney. The
complaint alleges violations of Medicare laws governing the home health
operations at two of the Company's hospitals. The complaint was filed under seal
in June 1996 by a former employee who was discharged by the Company in April
1996. The purpose of the letter from the U.S. Attorney was to allow the Company
an opportunity to evaluate the results of the government's investigation to date
and to discuss with the government the allegations made in the complaint, prior
to the government making
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37
a decision as to whether it will intervene as a plaintiff in the case. The
lawsuit remains under seal for all other purposes. The Company is cooperating
fully with the U.S. Attorney's Office. The Company has responded to requests for
documents and made several of its employees available for interview. If any
violation of the law is found, the Company intends to pursue an amicable
settlement.
The Company cannot at this time predict the outcome of these cases or
estimate their ultimate impact on the Company's business or operating results.
If the outcome of either case were unfavorable, the Company could be subject to
fines, penalties and damages and also could be excluded from Medicare and other
government reimbursement programs. These and other results of these cases could
have a material adverse effect on the Company's financial condition or results
of operations.
Although the Company believes that it is in material compliance with
the laws and regulations governing the Medicare and Medicaid programs,
compliance with such laws and regulations can be subject to future government
review and interpretation as well as significant regulatory action including
fines, penalties and exclusion from the Medicare and Medicaid programs.
On October 23, November 2 and November 23, 1998, lawsuits were filed by
separate stockholders in the U.S. District Court for the Middle District of
Tennessee. In each complaint, plaintiff seeks to represent a class of plaintiffs
comprised of all individuals who purchased the Company's common stock from
October 25, 1995 through October 21, 1998, exclusive of insiders of the Company
and their immediate families. Each complaint alleges that the defendants
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10(b)(5) promulgated thereunder by recklessly reporting in filings with the
Securities and Exchange Commission and in releases disseminated to the investing
public during the class period financial results that were materially overstated
and that were not presented in accordance with generally accepted accounting
principles. Plaintiffs specifically allege that, as a result of a company-wide
scheme to overbill the Medicare and Medicaid programs, the Company's net
accounts receivable, net operating revenue, net patient service revenue, net
income, and net income per common share during the class period were materially
overstated and were not in compliance with generally accepted accounting
principles. On January 5, 1999, the court consolidated these cases into a single
lawsuit. The court gave the plaintiffs until March 8, 1999 to file an amended
complaint. The Company intends to defend vigorously the claims and allegations
in these actions.
On November 2, 1998, a lawsuit was filed against the Company, all of
its current directors and two former directors in the U.S.
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District Court for the Northern District of Alabama. On January 14, 1999, this
suit was transferred by agreement of the parties to the U.S. District Court for
the Middle District of Tennessee. The Complaint asserts four claims: a
shareholders' derivative claim for breach of fiduciary duty, a shareholders'
derivative claim for violations of the Racketeer Influenced and Corrupt
Organizations Act, a shareholders' derivative claim for injunctive relief, and a
purported class action claim for breach of fiduciary duty. As the basis for each
of these claims, plaintiff alleges that the defendants intentionally or
negligently failed to make sure that the Company was in compliance with
applicable Medicare and Medicaid reimbursement laws. All of the defendants plan
to vigorously defend this litigation.
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes reporting standards
for operating segment information disclosed in annual financial statements and
in interim financial reports issued to shareholders. Under existing accounting
standards, the Company has reported its operations as one line of business
because substantially all of its revenues and operating profits have been
derived from its acute care hospitals, affiliated health care entities and
health care management services. The Company will adopt SFAS No. 131 beginning
with its fiscal year ending June 30, 1999 and is presently evaluating the new
standard to determine its effect, if any, on the way the Company might report
its operations in the future.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will require the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. For interest rate swap
agreements that qualify as hedges, changes in fair value will be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings. The Company will adopt SFAS No. 133 beginning with its fiscal
year ending June 30, 2000 and is presently evaluating the new standard to
determine its effect on the earnings and financial position of the Company.
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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
were interviewed. The Company cooperated fully with the investigation. The
Company received no communication from the government on this matter from
approximately June 1996 until August 1998.
In August 1998, the government informed the Company that the
investigation was prompted by a qui tam lawsuit filed under the False Claims
Act. The suit was filed in January 1993 by a former employee of a hospital
managed by a Company subsidiary ("the relator"). The suit named as defendants
the Company and its subsidiary, Quorum Health Resources, Columbia/HCA and all
hospitals owned or managed by Columbia or Quorum from 1984 through 1997. The
case was unsealed, and the government formally elected to join the suit, in
October 1998. The unsealed complaint, prepared by the relator, alleged that the
Company knowingly prepared and caused to be filed cost reports which claimed
payments from Medicare and other government payment programs greater than the
amounts due.
On February 2, 1999, the government filed an amended complaint
providing its allegations. On that date, the government also filed
a notice of non-intervention advising the Court that it would not proceed on
some of the relator's allegations, and that it would not sue individual managed
hospital clients. The government's complaint does not name as defendants any
hospital managed by the Company. It does name the Company, Quorum Health
Resources and each subsidiary which now owns or has ever owned a hospital.
The government filed that amended complaint after extensive discussions
with the Company about how to proceed. The government had proposed that the case
be stayed while the government obtained from Quorum and reviewed extensive
additional documents. The Company declined the government's request and asked
the government for a specific settlement proposal, which the government declined
to provide.
Accordingly, in January 1999, the Company filed motions with the court
asking to be separated from the case against co-defendant Columbia/HCA. The
government did not opposed the motion to separate the cases against Columbia/HCA
and the Company.
The new complaint alleges that the Company, on behalf of hospitals it
managed between 1985 and 1995 and hospitals it owned from 1990 to the present,
violated the False Claims Act by filing false Medicare cost reports. The
government asserts that the false claims in the cost reports are reflected in
"reserve analyses" created by the Company. The new complaint also alleges that
such filings were the result of Company policy.
The Company believes that the government has incorrectly interpreted
Company policies and the purpose of allowances under generally accepted
accounting principles. The Company is examining the government's complaint to
determine how to respond. The Company intends to continue to seek ways to
expedite a fair resolution of the case.
On February 16, 1999, the Company learned that the court granted the
Company's motion to separate the cases against it and Columbia/HCA. The court
further ordered the government to file a new complaint against the Company by
February 24, 1999.
In May 1998, the Company learned that it is a named defendant in a
separate qui tam case when it received a letter from a U.S. Attorney. The
complaint alleges violations of Medicare laws governing the home health
operations at two of the Company's hospitals. The complaint was filed under seal
in June 1996 by a former employee who was discharged by the Company in April
1996. The purpose of the letter from the U.S. Attorney was to allow the Company
an opportunity to evaluate the results of the government's investigation to date
and to discuss with the government the allegations made in the complaint, prior
to the government making a decision as to whether it will intervene as a
plaintiff in the case. The lawsuit remains under seal for all other purposes.
The Company is cooperating fully with the U.S. Attorney's Office. The Company
has responded to requests for documents and made several of its employees
available for interview. If any violation of the law is found, the Company
intends to pursue an amicable settlement.
The Company cannot at this time predict the outcome of these cases or
estimate their ultimate impact on the Company's business or operating results.
If the outcome of either case were unfavorable, the Company could be subject to
fines, penalties and damages and also could be excluded from Medicare and other
government reimbursement programs. These and other results of these cases could
have a material adverse effect on the Company's financial condition or results
of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 10, 1998, the annual meeting of the stockholders of the
Company was held to elect directors, to vote on one other proposal presented by
the Company, and to ratify the selection of the Company's independent auditors.
Voting results are given below.
Election of Directors: The following were elected to serve as directors until
the next annual meeting of the stockholders:
Name For Against Abstain
---- --- ------- -------
Sam A. Brooks, Jr. 57,090,834 313,688
Russell L. Carson 57,089,411 315,111
James E. Dalton, Jr. 57 090,894 313,628
C. Edward Floyd, M.D. 57,067,839 336,683
Joseph C. Hutts 57,082,922 321,600
Kenneth J. Melkus 57,090,991 313,531
Thomas J. Murphy, Jr 57,090,231 314,291
Rocco A. Ortenzio 57,087,436 317,086
S. Douglas Smith 57,084,120 320,402
Colleen Conway Welch, Ph.D. 57,084,548 319,974
Amendment of Article FOURTH of Certificate of Incorporation: The Shareholders
did not approve the amendment of Article FOURTH to authorize the issuance of an
aggregate 10,000,000 shares of a new class of preferred stock. Votes cast on
this matter were: 19,885,761 shares voted for; 30,184,952 shares against; and
37,856 shares abstained.
Independent Auditor: The accounting firm of Ernst & Young was ratified as the
Company's independent auditors for the fiscal year ending June 30, 1999, with
56,758,384 shares voted for ratification; 629,176 shares voted against; and
16,962 shares abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The Exhibits filed with this Report are listed on the
Exhibit Index immediately following the signature page.
(b) Reports on Form 8-K. No Reports on Form 8-K were filed during the
quarter ended December 31, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUORUM HEALTH GROUP, INC.
(Registrant)
Date: February 15, 1999 By: /s/ Steve B. Hewett
---------------------------------------
Steve B. Hewett
Vice President/Chief Financial Officer
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Exhibit Index
Exhibit No.
- -----------
10.1 Fifth Amendment, dated October 27, 1998, to Credit Agreement dated
April 22, 1997, by and among Quorum Health Group, Inc., the Lenders
referenced therein, and First Union National Bank as Agent for Lenders
27 Financial Data Schedule (for SEC use only)
Exhibits to the Exhibits have been omitted but Registrant shall furnish
supplementally a copy of any omitted exhibit to the Commission upon request.