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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
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 000-22766
QUORUM HEALTH GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1406040
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
103 CONTINENTAL PLACE, BRENTWOOD, TENNESSEE 37027
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(615) 371-7979
(COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
COMMON STOCK, PAR VALUE $.01
TITLE OF CLASS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $412,413,673 as of September 22, 1999. The number of Shares of
Common Stock outstanding as of such date was 73,232,106.
The following documents are incorporated by reference into Part III, Items
10, 11, 12 and 13 of this Form 10-K: Registrant's definitive proxy materials for
its 1999 Annual Meeting of Stockholders.
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TABLE OF CONTENTS
ITEM 1. BUSINESS......................................................
Who We Are....................................................
What We Do....................................................
Our Owned Hospital Markets....................................
Our Business Strategy.........................................
Recent Developments...........................................
Quorum Business Ethics Program................................
Owned Hospitals...............................................
Hospital Management Services..................................
National Supply Contracts.....................................
Government Regulation.........................................
Payment.......................................................
Competition...................................................
Employees ....................................................
Professional Liability........................................
ITEM 2. PROPERTIES....................................................
ITEM 3. LEGAL PROCEEDINGS.............................................
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS...................................
ITEM 6. SELECTED FINANCIAL DATA.......................................
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION............................
Forward-Looking Information...................................
Overview......................................................
Impact of Acquisitions, Joint Ventures and Sales..............
Results of Operations.........................................
Liquidity and Capital Resources...............................
Seasonality and Inflation.....................................
Market Risks Associated With Financial Instruments............
Year 2000 Issues..............................................
General.......................................................
Inflation.....................................................
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE........................
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS..............................
ITEM 11. EXECUTIVE COMPENSATION........................................
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K...........................................................
SIGNATURES.................................................................
PART I
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ITEM 1. BUSINESS
OVERVIEW
WHO WE ARE
Quorum Health Group, Inc. is a leading provider of health care services
through our owned acute care hospitals and regional health care systems located
throughout the United States. We are also the largest provider of management
services to acute care hospitals in the United States, primarily through our
subsidiary, Quorum Health Resources, LLC. During the fiscal year ended June 30,
1999, we produced $1,652.6 million in net operating revenue and $252.1 million
in EBITDA. EBITDA means our earnings before interest, minority interest, income
taxes, depreciation and amortization expense, write-down of assets and
investigation and litigation related costs.
As of June 30, 1999, we owned and operated 21 acute care hospitals with
4,551 licensed beds. We are also a minority investor in three joint ventures
that own and operate seven acute care hospitals with 1,362 licensed beds. During
the year ended June 30, 1999, our owned hospitals produced $1,505.0 million in
net operating revenue and $215.7 million in EBITDA. This accounted for 91% of
our total net operating revenue and 86% of our total EBITDA.
At June 30, 1999, we provided management services to 223 hospitals with
approximately 27,000 licensed beds. We also had 129 contracts to provide
selected consulting and support services to approximately 105 hospitals. During
the fiscal year ended June 30, 1999, our hospital management services produced
$147.6 million in net operating revenue and $36.4 million in EBITDA. This
accounted for 9% of our total net operating revenue and 14% of our total EBITDA.
WHAT WE DO
Our owned hospitals typically provide a full range of inpatient and
outpatient services. These services include internal medicine, general surgery,
cardiology, oncology, neurosurgery, orthopedics, obstetrics, diagnostic and
emergency room services, outpatient surgery, laboratory, radiology, respiratory
therapy, physical therapy and rehabilitation services. In addition, some of our
owned hospitals provide psychiatric, skilled nursing and home health services.
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(1) We use "we", "us" and "our" to refer to Quorum Health Group, Inc. and
its subsidiaries. The term "subsidiaries" includes affiliated partnerships and
affiliated limited liability companies. References to "our hospitals" or "our
owned hospitals" refer to hospitals that we consolidate for financial reporting
purposes since we own a majority of the equity interests in the subsidiaries
that operate these hospitals. The land and buildings used by these hospitals may
be owned or leased by us.
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Through Quorum Health Resources, we manage hospitals under management
contracts and provide selected consulting, educational and related services. We
manage hospitals in 44 states through 24 regional group offices. We typically
provide our managed hospitals with people who serve as the chief executive
officer and chief financial officer. Although these people are our employees,
they remain under the direction and control of the hospital's governing body.
Together with the managed hospitals' governing bodies, these officers develop
management plans to address the specific needs of our managed hospitals. Our
hospital management business helps us develop stronger relationships with
communities and knowledge of local market conditions. It also gives us state of
the art administrative and management training programs. It is also a source of
leads for possible hospital purchases.
OUR OWNED HOSPITAL MARKETS
Our owned hospitals are generally located in mid-size markets with a
population of 50,000 to 500,000 people. We prefer these mid-size markets because
we believe that these markets are most attractive for long-term growth. We also
believe that they are subject to fewer managed care pressures than urban areas.
We also prefer these mid-size markets because they are small enough to allow us,
with the ownership of only one or two hospitals, to be a significant provider of
health care services within these markets.
OUR BUSINESS STRATEGY
Our business strategy is to provide high quality health care services and
to grow through the following actions:
- - Expand and Enhance the Scope of Services Provided by Our Owned Hospitals
We seek to expand the scope, geographic reach and quality of the health
care services performed by our owned hospitals in response to the needs of our
local communities. We believe that expansion and enhancement of our inpatient
and outpatient services will attract more patients and permit us to continue to
grow our business and increase our profitability. For example, during the past
fiscal year, we added cardiac catheterization labs, women's centers,
neurosurgery capabilities and cancer care programs in several hospitals. In our
largest hospital, we built a new children's center offering surgical services.
As a result of new technology and increased efforts to contain health care
costs, many services that in the past required a patient to be admitted to a
hospital are being performed on an outpatient basis. In response, we continue to
enhance our outpatient services and capabilities to provide quality care in a
changing environment. To support the expansion of inpatient and outpatient
services and to maintain the quality of our care, we are actively recruiting
primary care and specialty physicians and other medical personnel.
- - Improve Operating Efficiency
We seek to improve the financial performance of our owned hospitals by
adopting a number of measures to increase revenues and reduce operating costs.
These measures include:
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- obtaining proper payment for our services from managed care payors
by (1) employing managed care professionals to help us negotiate
reasonable rates, (2) installing within the next 18 months a
standard managed care information system at all of our owned
hospitals and (3) enforcing payors' compliance with their contracts
with us;
- using flexible staffing plans by adjusting human resource levels to
patient volumes;
- controlling supply costs by (1) using national purchasing
arrangements, (2) reducing waste, (3) improving electronic database
communications with our vendors and (4) simplifying and
standardizing the types of supplies used by our hospitals;
- increasing collections and reducing bad debts by (1) improving our
billing and collections systems and processes, (2) training our
personnel on collection management and (3) improving our personnel
retention programs;
- working with our hospitals' physicians to provide quality care while
using medically appropriate tests and procedures that have a lower
cost; and
- combining procedures and services in markets where we have recently
combined hospitals' operations.
- - Grow Through Selective Acquisitions
As part of our strategy to grow our business, we intend to selectively
acquire acute care hospitals in new and existing markets. Our typical targets
are hospitals with 100 to 400 beds which are significant providers of health
care services in mid-size markets. We believe that this type of hospital allows
us to play a major role in the health care delivery system of these mid-size
markets. An example of this strategy is our purchase in July 1998 of St. Joseph
Medical Center in Fort Wayne, Indiana, a 191 bed facility located in an area
with a population of approximately 300,000 people.
The hospital industry continues to experience pressure on payments from
government and private payors. Continuing cost containment measures imposed by
the Medicare and Medicaid programs and by private payors over the past several
years have placed economic strains on many hospitals as they have attempted to
operate within an increasingly competitive environment. We believe that these
pressures may cause many acute care hospitals to consider other management and
ownership alternatives. We intend to make acquisitions that will either enhance
our position within our existing markets or enable us to enter into new markets
consistent with our strategic criteria. In light of changes in payments from
Medicare and managed care payors, increased pricing pressures for acquired
hospitals and the substantial number of transactions completed in fiscal 1999,
we intend to be selective in pursuing acquisitions. There can be no assurances
that we can continue to grow through hospital acquisitions and successfully
integrate acquired hospitals into our system.
- - Maintain and Enhance Our Competitive Position Through Relationships with
Other Providers
In order to enhance our competitive position, we seek to respond to
particular market conditions and community needs. We may consider combining,
where appropriate, some or all of our operations with acute care hospitals,
physician groups, outpatient centers or other health care providers in the
communities in which we operate. We believe these combinations may reduce costs,
improve the quality and scope of services and make our owned hospitals more
attractive to patients, physicians and payors. In fiscal 1999, together with
local physicians, we acquired Summit Hospital in Baton Rouge, Louisiana. We also
formed a joint venture with Columbia/HCA in Vicksburg, Mississippi in which we
are the majority owner.
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In some communities, we may be a minority owner of the combined
operations. For example, in fiscal 1998, we formed two joint ventures with
Universal Health Systems in Las Vegas, Nevada and a joint venture with
Columbia/HCA in Macon, Georgia.
- - Use the Resources and National Presence of Quorum Health Resources
We seek to use Quorum Health Resources' presence throughout the United
States to enhance our business. As the hospital industry consolidates, the
demand for our management services may be affected by the declining number of
independent hospitals. In response, we seek to develop and market new services,
provide additional services to existing managed hospitals and increase fees,
when appropriate. For example, we provide specialized services to hospitals and
health systems facing significant financial or operational challenges through a
subsidiary of Quorum Health Resources. We also use our national network of
hospital employees to generate leads for new contract clients and target larger
hospitals for contract relationships. Quorum Health Resources also allows us to
buy supplies and services at lower cost because of economies of scale.
RECENT DEVELOPMENTS
On August 31, 1999, we sold $150.0 million of convertible subordinated
debentures due 2009 to Welsh, Carson, Anderson & Stowe, VIII, LP and certain
WCAS VIII affiliates. The debentures bear interest at 6.0% per annum. Interest
is payable quarterly. The debentures are convertible into common shares at a
conversion price of $11.25 per share. The debentures will automatically convert
at any time after three years if the average of the closing price of our stock
over any 90 day period is more than 150% of the conversion price. Debentures are
callable at our option at par at any time after August 31, 2001. In the event of
a merger, consolidation or sale of more than 50% of our assets, the holder of
the debentures has the option to have the debentures prepaid in full. The
debentures have antidilution protection, including, under certain circumstances,
issuance of common stock below the then applicable conversion price. The shares
into which the debentures are convertible have certain voting restrictions and
must be held for a two-year period beginning August 1999. The debentures are
subordinated in right of payment to all our debt.
In connection with the convertible subordinated debenture agreement, we
amended our stockholders' rights plan. Under the amended plan, the rights become
exercisable only if (1) Welsh, Carson, Anderson & Stowe, VIII, L.P., WCAS
Management Corporation and certain parties which purchase the convertible
debentures from these entities acquire beneficial ownership of 30% or more of
our common stock or start an offer which would result in those entities owning
30% or more of our common stock or (2) any other person or group acquires
beneficial ownership of 15% or more of our common stock or starts an offer which
would result in that person or group owning 15% or more of our common stock. We
may redeem the rights at $.01 per right at any time until the tenth day
following public announcement that an ownership position as described above has
been acquired.
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QUORUM BUSINESS ETHICS PROGRAM
Our policy is to conduct our business with integrity and in compliance
with the law. We formally adopted an ethics program in 1991. Our current ethics
program has been in place since 1995. We adopted our ethics program to help us
meet and maintain high standards in the operation of our business.
Our Vice President of Ethics and Business Conduct and her staff, with the
assistance of our legal and internal audit departments, special counsel and
health care consultants, manage and implement our ethics program on a day-to-day
basis. In addition, our compliance committee (which consists of some of our
executive officers) and the audit committee of our board of directors, oversee
and monitor the program and, where appropriate, suggest ways to strengthen it.
Under our ethics program, we annually distribute our business practices
materials, known as "Our Code of Conduct," to all of our employees. We also
provide annual legal compliance and ethics training to all of our employees. We
continuously review our operations and, with the assistance of management and
the compliance officers on staff at each of our owned hospitals, develop and
implement policies and procedures designed to provide reasonable assurance that
our employees, in performing their duties, comply with applicable laws,
regulations and our policies. We encourage all of our employees to report,
without fear of retaliation, any suspected legal or ethical violation to their
supervisors, the compliance officer on staff in our owned hospitals or our
ethics and business conduct or legal departments. In addition, we maintain a
toll-free telephone hotline so that our employees can report suspected
violations anonymously. We cannot give assurance, however, that we have
identified or will in the future identify all conduct that the government may
later allege fails to comply with applicable law. See "Government Regulation"
and "Item 3. Legal Proceedings."
We also provide some compliance related services to managed hospitals.
Although we assist managed hospitals in creating and implementing compliance
programs, it is our opinion that the governing body of each managed hospital is
responsible for insuring that its hospital conducts its business with integrity
and in compliance with the law. The government may, however, try to hold us
responsible for the conduct of business at our managed hospitals.
OWNED HOSPITALS
OPERATIONS. Our owned hospitals are general acute care hospitals offering
a wide range of facilities and inpatient and outpatient medical services.
Inpatient services include operating and recovery rooms, intensive care and
coronary care units, and diagnostic and emergency services. Outpatient services
include same-day surgery, laboratory, pharmacy and rehabilitation services and
respiratory therapy.
In addition, our owned hospitals provide specialty services which differ
at each hospital. These services include cancer treatment, open heart surgery,
skilled nursing, treatment for chemical dependency and home health care
services.
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Our owned hospitals are not engaged in extensive medical research or educational
programs.
Each of our owned hospitals is governed by a board of trustees, which
includes members of the hospital's medical staff. The board of trustees
establishes policies concerning the hospital's medical, professional and ethical
practices, monitors these practices, and is responsible for ensuring that these
practices conform to legally required standards. We maintain quality assurance
programs to support and monitor quality of care standards and to meet Medicare
and Medicaid accreditation and regulatory requirements.
We have historically experienced a shift from inpatient to outpatient
care. This shift has occurred primarily as a result of improvements in
technology and clinical practices, as well as payment reductions for hospital
services made under the Medicare program and by insurance and managed care
companies and other persons who pay us for services. Reductions in payment
levels generally encourage, whenever possible, the use of outpatient, rather
than inpatient, services. In fiscal 1999, this shift was affected by a reduction
in home health volumes in response to the reduction in Medicare payments to home
health agencies. Excluding the impact of home health volumes, we continued to
experience a shift from inpatient to outpatient care in fiscal 1999. We have
responded to the outpatient trend by improving and expanding our hospitals'
outpatient services.
We continue to experience a significant increase in patients who are
covered by managed care insurance and other plans. Managed care and insurance
companies, HMOs, PPOs and other third party payors are actively negotiating to
pay rates lower than our standard rates. Some of these payors pay us less
than the rate we negotiate. We responded to this trend by employing managed
care experts to help our management teams to evaluate and negotiate contracts
with these payors and obtain better rates. Also, we plan to install information
systems to improve the information available to our management teams and insure
that we are paid the negotiated rates by these payors. The trend toward managed
care has and may continue to adversely affect our ability to grow net operating
revenue and improve operating margins.
The following table sets forth certain information with respect to each of
our owned hospitals as of June 30, 1999.
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LICENSED BEDS IN DATE OF
HOSPITAL AND LOCATION BEDS(1) SERVICE(2) ACQUISITION
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ParkView Regional Medical Center (3) 231 193 November 1990
Vicksburg, Mississippi
Flowers Hospital 400 400 June 1992
Dothan, Alabama
Gadsden Regional Medical Center 346 257 December 1993
Gadsden, Alabama
Abilene Regional Medical Center 160 160 May 1994
Abilene, Texas
Medical Center Enterprise 135 117 May 1994
Enterprise, Alabama
Carolinas Hospital System - Florence 424 368 February 1995
Florence, South Carolina
Carolinas Hospital System - Lake City (4) 48 40 June 1995
Lake City, South Carolina
Lutheran Hospital of Indiana 437 432 August 1995
Fort Wayne, Indiana
Jacksonville Hospital 89 56 June 1996
Jacksonville, Alabama
Mary Black Memorial Hospital (5) 235 222 July 1996
Spartanburg, South Carolina
Carolinas Hospital System - Kingstree (4) 78 42 August 1996
Kingstree, South Carolina
Doctors Hospital of Stark County (6) 166 166 November 1996
Massillon, Ohio
Barberton Citizens Hospital (6) 347 245 December 1996
Barberton, Ohio
Clinton County Hospital (4) 88 53 June 1997
Frankfort, Indiana
Wesley Medical Center 211 182 September 1997
Hattiesburg, Mississippi
Unimed Medical Center (7) March 1998
Minot, North Dakota 185 165
Kenmare, North Dakota 42 42
St. Joseph Medical Center (7) 191 191 July 1998
Ft. Wayne, Indiana
Summit Hospital (8) 227 166 October 1998
Baton Rouge, Louisiana
Vicksburg Medical Center (3) 154 92 November 1998
Vicksburg, Mississippi
Northwest Health System (7) December 1998
Bentonville, Arkansas 63 54
Springdale, Arkansas 222 217
Kosciusko Community Hospital (7) 72 72 February 1999
Warsaw, Indiana
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(1) Licensed beds are the number of beds for which a facility has been
licensed by the appropriate state agency regardless of whether the beds
are actually available for patient use.
(2) Beds in service are the number of beds that are readily available for
patient use.
(3) Owned by a limited liability company in which our majority owned
subsidiary owns a 65% interest and is the manager.
(4) Carolinas Hospital System - Lake City, Carolinas Hospital System
- Kingstree and Clinton County Hospital are held pursuant to operating
leases with initial terms of ten years and two renewal options of five
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years each, except Clinton County Hospital, which provides for two renewal
options of ten years each.
(5) Owned by a limited liability company in which we own an 89% interest and
are the manager.
(6) Owned by limited liability companies in which we own a 95% interest and
are the manager.
(7) The land and buildings used by each of these hospitals have been leased by
us under our end loaded lease financing facility.
(8) Owned by a limited liability company in which we own a 62% interest and
are the manager.
The following table sets forth certain information with respect to hospitals
that are owned by joint venture entities in which we have a minority interest as
of June 30, 1999.
LICENSED BEDS IN
Hospital and Location BEDS(1) SERVICE(1)
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Desert Springs Hospital 233 233
Las Vegas, Nevada
Valley Hospital Medical Center 417 415
Las Vegas, Nevada
Summerlin Hospital Medical Center 148 148
Las Vegas, Nevada
Macon Northside Hospital 103 103
Macon, Georgia
Middle Georgia Hospital 119 119
Macon, Georgia
Coliseum Medical Center 250 210
Macon, Georgia
Coliseum Psychiatric Center 92 31
Macon, Georgia
(1) This information was provided by the majority owner and manager of each
joint venture.
SELECTED OPERATING STATISTICS. The following table sets forth operating
statistics for our owned hospitals for each of the years presented. Statistics
for fiscal 1999 include a full period of operations for sixteen hospitals and
the Las Vegas and Macon joint ventures and partial periods for one hospital
sold, four hospitals acquired and one hospital contributed by Columbia/HCA to a
joint venture that we control. Statistics for fiscal 1998 include a full year of
operations for fifteen hospitals and partial periods for one hospital sold, the
Las Vegas and Macon joint ventures, three hospitals contributed to those joint
ventures and two hospitals acquired during the year. Statistics for fiscal 1997
include a full year of operations for fifteen hospitals and partial periods for
four hospitals acquired during the year. Statistics for fiscal 1996 include a
full year of operations for twelve hospitals and partial periods for two
hospitals acquired and one hospital sold during the year. Statistics for fiscal
1995 include a full year of operations for ten hospitals and partial periods for
three hospitals acquired during the year.
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YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Number of hospitals (1) 21 17 19 14 13
Licensed beds (1)(2) 4,551 3,966 4,205 3,281 2,909
Beds in service (1)(3) 3,932 3,240 3,481 2,691 2,368
Admissions (4) 136,058 128,235 119,551 94,872 73,338
Average length of stay
(days) 5.6 5.6 5.6 5.8 6.2
Patient days (5) 764,184 713,906 666,353 548,772 451,501
Adjusted patient days (6) 1,300,425 1,193,701 1,046,657 830,955 665,657
Occupancy rate (licensed
beds) (7) 45.8% 46.8% 46.8% 46.2% 47.6%
Occupancy rate (beds in
service) (8) 55.2% 56.9% 56.5% 56.2% 58.9%
Gross inpatient revenue
(in thousands) $1,616,458 $1,513,805 $1,447,771 $1,115,363 $ 888,811
Gross outpatient revenue
(in thousands) $1,134,296 $1,017,383 $ 826,279 $ 573,529 $ 421,582
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(1) At end of period.
(2) Licensed beds are the number of beds for which a facility has been
licensed by the appropriate state agency regardless of whether the beds
are actually available for patient use.
(3) Beds in service are the number of beds that are readily available for
patient use.
(4) Admissions represent the number of patients admitted for inpatient
treatment.
(5) Patient days represent the total number of days of patient care provided
to inpatients.
(6) Adjusted patient days have been calculated based on an industry-accepted,
revenue-based formula (multiplying actual patient days by the sum of gross
inpatient revenue and gross outpatient revenue and dividing the result by
gross inpatient revenue) to reflect an approximation of the number of
inpatients and outpatients served.
(7) Percentages are calculated by dividing the average daily census by
weighted average licensed beds.
(8) Percentages are calculated by dividing the average daily census by
weighted average beds in service.
SOURCES OF REVENUE. We receive payment for health care services provided
by our owned hospitals from (1) the federal Medicare program, (2) state Medicaid
programs, (3) health care insurance carriers, health maintenance organizations,
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or "HMOs," and preferred provider organizations, or "PPOs," and other managed
care programs and self-insured employers, (4) the Civilian Health and Medical
Program of the Uniformed Services, or "CHAMPUS", and (5) patients directly.
The following table presents the approximate percentages of gross revenue
(revenue before deducting contractual adjustments, policy discounts and charity
care deductions) from Medicare, Medicaid and other sources for the periods
indicated. The data is not directly comparable between years due to the
significant effect that hospital acquisitions, joint ventures and dispositions
have had on us. See Item 7. "Management's Discussion and Analysis of Results of
Operation and Financial Condition."
Year Ended June 30
------------------------------------------
1999 1998 1997
---- ---- ----
Medicare 45.9% 47.2% 47.5%
Medicaid 8.0 7.5 7.6
Other sources 46.1 45.3 44.9
------ ------ ------
Total 100.0% 100.0% 100.0%
====== ====== ======
As shown above, we receive a substantial portion of our revenue from the
Medicare and Medicaid programs.
Medicare is a federal program that provides limited medical insurance
benefits to persons age 65 and over, some disabled persons and persons with an
end-stage renal disease. Medicaid is a federal-state funded program administered
by the states which provides hospital benefits to some individuals who are
unable to afford health care. All of our owned hospitals are certified as
providers of Medicare and Medicaid services. Both of these programs are heavily
regulated and use complex methods for determining our payments. These programs
also actively seek to recover amounts they believe they have overpaid. See
"Government Regulation" and "Payment" below. Amounts received under the Medicare
and Medicaid programs are generally significantly less than the hospital's
customary charges for the services provided. In recent years, changes made to
the Medicare and Medicaid programs have further reduced payments to hospitals.
Lower payments from Medicare and Medicaid as a result of the Balanced Budget Act
of 1997 (BBA 97) contributed to a decline in our net operating revenue in fiscal
1999 compared to fiscal 1998. This trend may continue. Since a majority of our
revenues comes from patients covered under Medicare and Medicaid programs, our
ability to operate our business successfully in the future will depend in large
measure on our ability to adapt to changes in these programs.
In addition to government programs, we are paid by private payors, which
include insurance companies, HMOs, PPOs, other managed care companies and
employers, and by patients directly. Patients are generally responsible for
services not covered by those programs or plans, as well as deductibles or
co-insurance under their coverage. After taking these amounts into account,
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patients are generally not responsible for any difference between customary
hospital charges and amounts paid for hospital services paid by Medicare and
Medicaid programs, insurance companies, HMOs, PPOs and other managed care
companies. The amount of deductibles and co-insurance obligations has increased
in recent years. Collection of amounts due from individuals is typically more
difficult than that from government or business payors. For more information on
the payment programs on which our revenues depend, see "Payment" below.
Hospital revenues depend upon inpatient occupancy levels, the volume of
outpatient procedures and the charges or negotiated payment rates for hospital
services provided. Charges and payment rates for inpatient routine services vary
significantly depending on the type of service performed and the geographic
location of the hospital. In recent years, we have experienced a significant
increase in revenue received from outpatient services. In fiscal 1999, this
increase was partially offset by decreases in home health revenues as a result
of the BBA 97. We attribute this increase to:
- - advances in technology, which have permitted us to provide more services
on an outpatient basis;
- - pressure from Medicare or Medicaid programs, insurance companies and
managed care plans to reduce hospital stays and provide more outpatient
services, which are less expensive; and
- - the combination of physician practices into some of our owned and operated
hospitals.
An increasing number of insurance companies, HMOs, PPOs and other managed
care companies are negotiating discounted fee structures or fixed payments
rather than paying health care providers the amounts billed. If an increased
number of insurance companies, HMOs, PPOs and other managed care companies are
successful in negotiating discounted fee structures or fixed amounts, or in
negotiating larger discounts or lower fixed payments, we may have reduced
earnings. In order to increase volume, we offer discounts from standard charges
to large group purchasers of health care services, including insurance
companies, HMOs, PPOs, other managed care companies and employers. These
discount programs limit our ability to increase net revenues in response to
increasing costs.
In exchange for offering discounts, we expect that these companies and
employers will encourage their members to use our hospitals. However, some
payors sell the discounts to other payors who have no direct contract with our
hospitals and whose members are not necessarily encouraged to use our hospitals.
This practice is commonly known as "silent PPO" discounting and is difficult for
us to detect. Undetected silent PPO discounting results in higher discounts and
lower net revenues. In order to protect ourselves from "silent PPO" discounting,
we are canceling contracts with payors we believe are engaging in "silent PPO"
discounting in several markets and are investigating other markets in which we
may take similar actions. The managed care information system we are installing
should help us detect "silent PPOs."
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ACQUISITIONS AND SALES. In fiscal 1995, we acquired three hospitals, one
of which was sold. We acquired two hospitals in fiscal 1996, five in fiscal 1997
and two in fiscal 1998. In fiscal 1999, we acquired four hospitals and sold one
hospital. In July 1998, we acquired St. Joseph Medical Center, a 191 bed acute
care hospital located in Fort Wayne, Indiana. In October 1998, we acquired
Summit Hospital, a 227 bed acute care hospital located in Baton Rouge,
Louisiana. In December 1998, we acquired Northwest Health System, which consists
of two hospitals, a 63 bed acute care hospital located in Bentonville, Arkansas
and a 222 bed acute care hospital located in Springdale, Arkansas. In February
1999, we acquired Kosciusko Community Hospital, a 72 bed acute care hospital in
Warsaw, Indiana. In April 1999, we sold Park Medical Center, a 404 bed facility
located in Columbus, Ohio.
JOINT VENTURES. We formed three joint ventures in fiscal 1998 and one
joint venture during fiscal 1999 with other hospital management companies. In
February 1998, we contributed Desert Springs Hospital (Las Vegas, Nevada) to a
joint venture with a Las Vegas hospital contributed by Universal Health Systems.
This joint venture is called Valley Health System, in which we hold a 28%
interest. We also paid approximately $23 million for a 26% interest in another
joint venture in Las Vegas which is called Summerlin Hospital Medical Center.
These joint ventures are managed by Universal. In May 1998, we contributed Macon
Northside Hospital and Middle Georgia Hospital (Macon, Georgia) to a joint
venture with Columbia/HCA Healthcare Corporation, which also contributed two
Macon hospitals. This joint venture is called Macon Healthcare, in which we hold
a 38% interest. This joint venture is managed by Columbia/HCA. In November 1998,
one of our subsidiaries and a subsidiary of Columbia/HCA formed another joint
venture in Vicksburg, Mississippi, called River Region Health System. Columbia's
subsidiary contributed Vicksburg Medical Center in exchange for a 35% interest
in the joint venture. Our subsidiary contributed ParkView Regional Medical
Center, including a $31 million note receivable from us, in exchange for a 65%
interest in the joint venture. We manage this joint venture.
HOSPITAL MANAGEMENT SERVICES
We are a leading provider of management services to acute care hospitals,
providing management services to 223 hospitals at the end of fiscal 1999. Based
on industry data published in 1998, the second ranked hospital management
organization managed 51 hospitals and the third ranked hospital management
organization managed 19 hospitals. We believe that our industry reputation and
leading market position provide us with a competitive advantage in seeking
additional management contracts.
Most of the hospitals for which we perform management, consulting or
support services are not-for-profit hospitals. These hospitals are generally
located in non-urban areas. 65% of these hospitals have less than 100 beds.
We provide management services to hospitals under management contracts and
provide selected consulting, educational and related services to address the
specific needs of hospitals. We assist hospitals in improving their financial
performance and the scope and quality of their services.
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Upon entering into a management contract, we first assess the operations
of the hospital, including the hospital's financial management, the economic and
population related factors affecting the hospital's market, physician
relationships and staffing requirements. Then, based on our assessment, we
develop and recommend to the hospital's governing board a management plan
tailored to the specific needs of the hospital. The plan may involve the
adoption of new financial and operating systems and various management
initiatives. These initiatives may include establishing a local or regional
provider network to meet a community's health care needs. We review the
management plan annually with the hospital's governing body and prepare an
annual progress report to identify issues and achievements.
To implement the management plan adopted for each hospital, we provide the
hospital with people who serve as a hospital's chief executive officer and,
typically, a chief financial officer. Although these people are our employees,
they remain under the direction and control of the hospital's governing body,
and the balance of the hospital staff remains employees of the hospital under
the control and supervision of the hospital. Our hospital-based team is
supported by our regional and corporate management staff. We currently have 24
regional group offices located throughout the United States. Our regional office
staff has broad experience in managing hospitals of all sizes in diverse markets
throughout the United States. Each regional office is responsible for the
management services provided within its geographic area. The national presence
of our regional offices and our staff's knowledge of the economic,
population-related and regulatory factors affecting local markets afford us a
significant marketing advantage in responding to new business opportunities. See
"Competition."
Our hospital management contracts generally have a term of three to five
years. Our management contract fees are based on amounts agreed upon by us and
the hospital's governing body, and generally are not related to the hospital's
revenues or other variables. Under our hospital management contracts, we are not
responsible for hospital licensure, liability coverage, capital expenditures or
for other functions which are normally the responsibility of a hospital's
governing body. We are not responsible for paying any hospital expenses. In
providing our management services, we are not considered a health care provider
for hospital licensure and certificate of need purposes. See "Government
Regulation." The number of management contracts terminated prior to the agreed
upon termination date has averaged approximately 10.9% of total hospitals
managed during the year for the two fiscal years ended June 30, 1999. This
percentage represents an increase from 8.3% for the two fiscal years ended June
30, 1998 and the 7.5% rate reported for the two fiscal years ended June 30,
1997. Over the same periods, we generally have been able to offset the effects
of early contract termination by obtaining additional management contracts and
other practices. See "Our Business Strategy" above.
We offer consulting and related educational and management services to
hospitals that are not part of our contract management program. Our consulting
services are directed at many of the operational needs of hospitals, including
business office management, quality improvement programs, health information
management, human resources, surgical and nursing services, facilities design
and various operational services. We provide consulting services to large,
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sophisticated medical institutions that need hospital management advice for
specific issues.
NATIONAL SUPPLY CONTRACTS
As a result of our management and consulting contracts with hospitals
throughout the United States, we have many opportunities to provide a wide range
of national purchasing arrangements with various vendors of medical supplies,
equipment, pharmaceuticals and certain services. The collective buying power of
our managed hospitals has allowed many of these hospitals to benefit from these
arrangements through volume discounts, rebates and other cost savings. Our owned
hospitals also benefit from similar savings. In some cases we have the
opportunity to earn administrative fees from vendors in return for our group
purchasing activities.
During fiscal 1996, we entered into a five-year purchasing arrangement
with Premier Purchasing Partners, L.P. Premier is a for-profit limited
partnership that was formed by not-for-profit health systems. Premier provides
group purchasing, along with other services to its clients. The purchasing
arrangement with Premier combines the purchasing power of our owned hospitals,
and many of our managed hospitals, with the purchasing power of more than 1,700
hospitals affiliated with the Premier program. This increased purchasing power
has resulted in reductions in the prices paid by our hospitals for medical
supplies, equipment, pharmaceuticals and other services. Under the Premier
purchasing arrangement, we have agreed to use Premier as our exclusive national
group purchasing organization. Under a June 1997 amendment, Premier agreed to
pay us an annual administrative fee of $6.4 million if the amount paid by our
owned hospitals, and many of our managed hospitals, for products purchased
through the purchasing arrangement satisfied a minimum threshold. The minimum
threshold was $484 million for calendar year 1999. This minimum threshold
increases 10% annually. The administrative fee is adjusted proportionately for
purchases below the threshold. We met the minimum purchasing threshold for
calendar year 1998. In addition, Premier agreed to pay us up to $500,000
annually as reimbursement for expenses. Either we or Premier may terminate the
purchasing arrangement without cause upon delivery of twelve months' written
notice.
GOVERNMENT REGULATION
OVERVIEW. The health care industry is required to comply with extensive
government regulation at the federal, state and local levels. Under these
regulations, hospitals must meet requirements to be certified as hospitals and
qualify to participate in government programs, including the Medicare and
Medicaid programs. These requirements relate to the adequacy of medical care,
equipment, personnel, operating policies and procedures, maintenance of adequate
records, hospital use, rate-setting, compliance with building codes and
environmental protection laws. There are also extensive regulations that affect
a hospital's continued participation in these government programs.
If we are found to have failed to comply with applicable laws and
regulations, we are subject to criminal penalties and civil sanctions, our owned
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hospitals can lose their licenses and we could lose our ability to participate
in these government programs. In addition, government regulations may change. If
that happens, we may have to make changes in our facilities, equipment,
personnel and services in order for our owned hospitals to remain certified as
hospitals and qualified to participate in these programs.
In recent years there has been increased regulatory scrutiny of the health
care industry. 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 and other government health care programs. At the
same time, regulatory and law enforcement authorities are taking an increasingly
strict view of the requirements imposed on providers by federal and state laws
and regulations. A determination that we have violated such laws, or even the
public announcement that we were being investigated concerning possible
violations, could have a material adverse effect on us. See "Quorum Business
Ethics Program" above and "Item 3. Legal Proceedings."
FALSE CLAIMS. The False Claims Act and the Social Security Act each impose
criminal and civil penalties for willfully making false claims to Medicare and
Medicaid for services not rendered or for misrepresenting actual services
rendered in order to obtain higher payment. Hospitals must carefully and
accurately prepare Medicare cost reports and code and bill claims for payment to
avoid liability under these federal statutes. At the same time, the complexity
of the regulations, the dependence of hospitals on physician documentation of
medical records and the subjective judgment involved make accurate billing
difficult. Violation of these federal statutes may subject a hospital to treble
damages, fines of up to $10,000 per false claim and exclusion from the Medicare
and Medicaid programs. See "Payment - Annual Cost Reports" below.
FEDERAL AND STATE FRAUD AND ABUSE LAWS. The Social Security Act also
prohibits offering, paying, soliciting or receiving renumeration intended to
induce referrals of patients. Financial arrangements between hospitals and
anyone who can refer Medicare or Medicaid patients or influence purchases of any
goods or services paid for by the Medicare or Medicaid programs, must comply
with the "fraud and abuse" anti-kickback provisions of the Social Security Act
(the "Antifraud Amendments"). In addition to felony criminal penalties (fines of
up to $25,000 and imprisonment for up to five years per referral), the Social
Security Act establishes civil monetary penalties and the sanction of excluding
violators from Medicare and Medicaid participation.
The Antifraud Amendments have been interpreted broadly by federal
regulators and the courts to prohibit the intentional payment of anything of
value if even one purpose of the payment is to influence the referral of
Medicare or Medicaid business. Many commonplace commercial arrangements between
hospitals and physicians could be considered by the government to violate this
broad interpretation of the Antifraud Amendments. Many states have also passed
laws similar to the Antifraud Amendments, which apply to both
government-sponsored and private healthcare plans.
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We provide financial incentives to recruit physicians into the communities
served by our hospitals, including minimum revenue guarantees. We also enter
into other financial relationships with physicians, and in some cases employ
physicians. Although we believe that our arrangements with physicians comply
with current anti-kickback and other applicable laws, we cannot assure you that
regulatory authorities who enforce the law will not disagree with us. If that
happens, we could be liable under the Social Security Act, and may be required
to pay civil monetary penalties, subject to criminal penalties and/or excluded
from participating in Medicare, Medicaid or other federal health care programs.
Any of these results could have a material adverse effect on our business,
financial condition or results of operations.
SELF-REFERRAL PROHIBITIONS. Portions of the Budget Reconciliation Act of
1993 (the "1993 Act")also affect providers who receive payments under the
Medicare and Medicaid programs. One of the provisions of the 1993 Act is known
as "Stark II". This provision is an expansion of the previous prohibition on
self-referral by physicians. "Stark I" prohibited physicians from referring
their Medicare patients to any clinical laboratory in which they or any member
of their immediate family had a financial interest. "Stark II" expanded the
prohibited patient base to both Medicare and Medicaid patients, and expanded the
prohibited health care service from clinical laboratories to add a number of
"designated health services", including home health and inpatient and outpatient
hospital services. There are certain exceptions in the 1993 Act, including
exceptions for prepaid health plans and ownership by a referring physician of an
investment interest in an entire hospital, as opposed to ownership of a
subdivision or department of a hospital. To date, no final regulations have been
promulgated interpreting "Stark II". Sanctions for violating "Stark I" or "Stark
II" include civil money penalties up to $15,000 per prohibited service provided,
assessments equal to 200% of the dollar value on each such service provided and
exclusion from the Medicare and Medicaid programs. In addition to the federal
prohibition, many states have enacted similar anti-self-referral statutes
applicable to all patient referrals, including private pay patients, as well as
Medicare and Medicaid patients. In three of our markets, physicians have
acquired ownership interests in hospitals and other health care providers owned
by us. We plan to enter into similar arrangements in the future.
We exercise care in an effort to conduct our business in compliance with
applicable laws and seek to structure our arrangements with health care
providers to comply with the Antifraud Amendments and Stark I and II. We cannot
guarantee that such laws will ultimately be interpreted in a manner consistent
with our practices. We could be materially adversely affected if we were to be
found in violation of the False Claims Act, the Social Security Act, the
Antifraud Amendments or "Stark I/Stark II". See "Quorum Business Ethics Program"
above and "Item 3. Legal Proceedings".
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996. The Health
Insurance Portability and Accountability Act of 1996 ("HIPAA") includes a number
of amendments or supplements to the Antifraud Amendments. It also contains
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provisions relating to portability of health insurance coverage and limitations
on preexisting condition exclusions. Most of the provisions of
HIPAA became effective January 1, 1998.
HIPAA is intended to enhance federal health care law enforcement by
creating and funding three new health care fraud and abuse enforcement programs:
The Fraud and Abuse Control Program, The Medicare Integrity Program and the
Beneficiary Incentive Program. The Fraud and Abuse Control Program calls for the
coordination of federal, state and local authorities to control fraud and abuse
with respect to not only Medicare and Medicaid but, for the first time, with
respect to private health insurance plans as well. The Medicare Integrity
Program directs the Department of Health and Human Services ("HHS") to enter
into separate contracts with private entities to carry out certain fraud and
abuse detection activities.
Through the Beneficiary Incentive Program, HIPAA authorizes the Secretary
of HHS to provide payments to individuals who report information leading to the
imposition of civil monetary penalties under the fraud and abuse laws or make
suggestions that result in Medicare and Medicaid program savings. Under HIPAA,
health care fraud is a federal criminal offense. Health care fraud is defined as
knowingly and willfully executing or attempting to execute a "scheme or device"
to defraud any health care benefit program. In addition, for the first time,
federal enforcement officials may exclude from Medicare and Medicaid any
investors, officers and managing employees associated with business entities
that have committed health care fraud, even if the investor, officer or employee
had no knowledge of the fraud. HIPAA also establishes a new violation for the
payment of inducements to Medicare and Medicaid beneficiaries in order to
influence those beneficiaries to order or receive services from a particular
provider or practitioner. HIPAA also required HHS to establish a national health
care fraud and abuse data collection program. This program will collect reports
of final adverse actions (including civil, criminal, license and certification
sanctions and any other publicly available negative findings) against health
care providers, suppliers or licensed practitioners. Governmental agencies and
private plans will both report and have access to the information collected by
the program. Also, HIPAA requires the Secretary of HHS to issue advisory
opinions with respect to whether particular transactions violate the Medicare
and Medicaid anti-kickback laws.
CERTIFICATE OF NEED LAWS. State certificate of need laws, which vary from
state to state, may place limitations on a hospital's ability to expand
services, add new equipment, or construct new facilities. However, we have not
experienced, and do not expect to experience, any material adverse effects from
state certificate of need requirements or from the imposition, elimination or
relaxation of such requirements. See "Competition" below.
HOSPITAL LICENSING. Hospitals are subject to periodic inspection by
federal, state and local authorities in order to determine their compliance with
applicable regulations and standards. Such compliance must be demonstrated to
maintain licensure and to participate as a certified health care provider in the
Medicare and Medicaid programs. All of our owned hospitals are licensed under
appropriate state laws and are certified to participate in the Medicare program.
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In addition, it is our policy that all our owned hospitals apply for
accreditation by the appropriate accreditation body, such as the Joint
Commission on Accreditation of Healthcare Organizations or the American
Osteopathic Association. All of the Company's owned hospitals are so accredited,
with the exception of the 42-bed facility at Kenmare, North Dakota, which is one
of the two facilities comprising Unimed Medical Center. Accreditation indicates
that a hospital meets certain minimum standards and generally satisfies the
applicable health and administrative standards for Medicare certification,
although accreditation is not required to obtain Medicare certification. We
believe that our owned hospitals are in substantial compliance with current
licensing regulations and standards. But, as is the case with all businesses and
individuals, the possibility always exists that government officials will allege
or find that we have in some respect failed to comply with applicable laws and
regulations, even if in our opinion we are in compliance. Although we intend to
continue to maintain our licensure and certifications, we cannot guarantee that
our owned hospitals will be able to comply with all future requirements or that
failure to so comply would not adversely affect the Company.
HEALTH CARE REFORM. The health care industry continues to attract much
legislative interest and public attention. In recent years, an increasing number
of legislative proposals have been introduced or proposed in Congress and in
some state legislatures that would make major changes in the health care system.
Proposals that have been considered include expansion of Medicare coverage to
include prescription drugs, cost controls on hospitals, insurance market reforms
to increase the availability of group health insurance to small businesses, and
mandatory health insurance coverage for employees. The costs of implementing
some of these proposals could be financed, in part, by reductions in payments to
health care providers under Medicare, Medicaid and other federal government
programs. We cannot predict the course of future health care legislation or
other changes in the administration or interpretation of governmental health
care programs and the effect that any legislation, interpretation or change may
have on us.
CONVERSION LEGISLATION. Many states have enacted or are considering
enacting laws affecting the conversion or sale of not-for-profit hospitals.
These laws generally require prior approval from state attorney generals,
advance notification and community involvement. In addition, state attorneys
general in states without specific conversion legislation may exercise authority
over these transactions based upon existing law. States are showing an increased
interest in overseeing the sales or conversions of not-for-profit hospitals.
These factors may make it more difficult for us to acquire not-for-profit-
hospitals, or could increase our acquisition costs in the future. This could
have an adverse impact on our acquisition strategy. See "Our Business Strategy."
PAYMENT
MEDICARE. Under the Medicare program, we are paid for inpatient and
outpatient services performed by our owned hospitals.
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Payments for inpatient services are made under a prospective payment
system, commonly known as "PPS." Under PPS, we are paid a set amount per
inpatient discharge based on the category assigned to the patient's diagnosis.
This diagnosis category system is commonly known as "DRG." DRGs classify
treatments for illnesses according to the estimated amount of hospital resources
necessary to treat each principal diagnosis. DRG rates have been established for
each hospital participating in the Medicare program. Only when the cost of
patient treatment substantially exceeds the payment for that particular DRG, do
we receive additional payments called "outlier payments". The threshold to
qualify for outlier payments is expected to increase, resulting in decreased
payments to hospitals effective October 1, 1999.
We also receive additional payments for: (1) treating a large number of
indigent patients (called disproportionate share), and (2) the added cost from
physician residency training (called indirect medical education). DRG payments
are based on the actual costs incurred by an individual hospital, but are
adjusted according to salary levels paid in the area in which the hospital is
located.
DRG rates are adjusted annually. The index used to adjust the DRG rates
takes into account the inflation experienced by hospitals and entities outside
of the health care industry in purchasing goods and services. However, for
several years increases to the DRG rates have been lower than the increases in
the costs of goods and services purchased by hospitals. The DRG rates are
adjusted each federal fiscal year, which begins on October 1. DRG rate increases
were 2.0% for federal fiscal year 1997, zero for federal fiscal year 1998 and
0.5% for federal fiscal year 1999. The rate increase for federal fiscal year
2000 is expected to be 1.1%. The contemplated adjustments for federal fiscal
years 2001 and 2002 are the percentage increases in the cost of goods and
services purchased by hospitals, minus 1.1%. We anticipate that future
legislation may decrease the rate of increase for DRG payments, but we are not
able to predict the amount of the reduction or the effect that the reduction
will have on our financial condition or results of operations. These reductions
make it more difficult for us to grow net revenue and to maintain or improve our
operating margins. See "Owned Hospitals-Sources of Revenue".
In addition to the DRG payments for inpatient operating costs, Medicare
makes separate payments to hospitals for inpatient capital costs. Capital
related costs generally include depreciation, capital interest, lease and rental
expense, property taxes and insurance related to the plant and equipment. Since
1992, hospitals have been paid under one of two methodologies. Hospitals with
cost less than the base year federal rate transition up to the federal rate over
a ten year period. Hospitals with cost over the base year federal rate
transition down to the federal rate over a ten year period, or they may chose to
transition to 100% of the federal rate sooner. The payment methodology for
capital is similar to DRGs in that the federal rate is multiplied by the DRG
weight to arrive at a predetermined payment. In addition to the change in
payment methodology for capital, BBA 97 reduced inpatient capital rates in the
aggregate by 15.3% effective October 1, 1997.
Medicare pays for outpatient laboratory services based on a fee schedule.
Medicare generally pays for other outpatient services at the lesser of (i) 94.2%
of costs, (ii) charges or (iii) a blend of fees and costs for ambulatory
surgery, diagnostic radiology and other services. BBA 97 changed the formula for
determining payment amounts (the "formula driven overpayment" or "FDO") for
other outpatient services rendered on and after October 1, 1997. This formula
change
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reduces payments in comparison to payments that would have been received under
previous law.
BBA 97 required Medicare to implement outpatient PPS effective January 1,
1999. The Health Care Financing Administration's current plan is to implement
outpatient PPS by July 1, 2000. We believe that outpatient PPS may be delayed
until January 2001. Outpatient PPS, when implemented, may have a material
adverse effect on the Company's results of operations. We are unable to predict
the effect on us of the new payment system.
As of July 31, 1999, we own ten facilities that operate hospital-based
home health agencies. BBA 97 mandated home health payments at the lesser of
three levels for cost reporting periods beginning on and after October 1, 1997.
These three levels, known as the interim payment system, are (i) cost, (ii) a
per visit cap that is lower than the previous cap, and (iii) a new annual per
beneficiary cap. Additionally, coverage for services provided solely related to
the need for venipuncture was eliminated effective February 5, 1998. The
combination of these changes has significantly reduced our home health volumes
and net revenues. BBA 97 required Medicare payments for home health services to
transition to PPS beginning October 1, 1999. Subsequent legislation changed the
effective date of the transition to October 1, 2000.
As of July 1, 1999, we own eight hospitals that operate hospital-based
skilled nursing beds. Effective for cost reporting periods beginning July 1,
1998, BBA 97 required skilled nursing facilities be paid on a prospective per
diem basis. This payment method is to be phased in over four years for most
facilities. The BBA 97 changes have reduced our payments for skilled nursing
services. In respect to these reduced payments, three of our hospitals have
stopped admitting patients into their skilled nursing facilities.
BBA 97 includes other provisions which will reduce payments that would
have otherwise been received by hospitals. The reductions include payments
related to transfers from an acute-care setting and payments related to
reimbursement of uncollectible deductibles and coinsurance from Medicare
patients. In general, all of the changes resulting from BBA 97 have resulted in
lower payments from the Medicare program to our owned hospitals.
Further reductions in Medicare spending, or other changes to the program,
may be required to maintain the solvency of the Medicare program or the Social
Security system as a whole. While we expect further reductions in Medicare
payments, we cannot predict the timing, magnitude or effect of such reductions.
Our ability to operate our business successfully in the future will depend in
large measure on our ability to adapt to changes as a result of BBA 97 and any
subsequent legislation and regulations.
MEDICAID. Most state Medicaid payments are made under PPS or under
programs which negotiate payment levels with individual hospitals. Medicaid
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payments are often less than a hospital's cost of services. Medicaid is
currently funded jointly by state and federal governments. The federal
government and many states are currently considering significant reductions in
Medicaid funding, while at the same time expanding Medicaid benefits. This could
adversely affect future levels of Medicaid payments received by our owned
hospitals.
In November 1991, Congress enacted the Medicaid Voluntary Contribution and
Provider-Specific Tax Amendments. As a result of these amendments, some states
in which we operate have imposed taxes to fund their Medicaid programs. These
taxes have not had a material adverse affect on us. However, we cannot predict
whether the states in which we operate will impose any additional taxes.
Therefore, we are not able to assess the effect of these taxes on us.
ANNUAL COST REPORTS. All hospitals participating in the Medicare program
must submit annual cost reports. These reports cover the hospital's costs and
expenses of patient care for Medicare and some Medicaid beneficiaries. Review of
previously submitted cost reports and the cost report preparation process are
areas included in the ongoing qui tam litigation against us. It is too early for
us to predict the outcome of this qui tam litigation, but if we, or any of our
facilities, are found to be in violation of federal or state laws relating to
Medicare, Medicaid or similar programs, we could be subject to substantial
monetary fines, civil and criminal penalties and exclusion from participating in
the Medicare, Medicaid or similar government sponsored programs. Any of these
outcomes could have a material adverse effect on us. See Item 3. "Legal
Proceedings. Cost Report Litigation."
Annual cost reports required under the Medicare and Medicaid programs are
subject to routine audits, which may result in adjustments to the amounts
ultimately determined to be due to us under the Medicare and Medicaid programs.
These audits often take several years. Hospitals may appeal any final
determination made in connection with an audit. We believe that we have made
adequate provisions in our financial statements for any adjustments that may
result from these audits and related appeals. Cost reports are subject to
complex regulations, administrative rulings and fiscal intermediary
interpretations, all of which change frequently and are not always consistent.
Significant issues may arise years after we provide care to the patient and
previously determined allowances could be more or less than ultimately required.
See "Government Regulation-False Claims".
COMMERCIAL INSURANCE. Our owned hospitals provide services to individuals
covered by private health care insurance. Private insurance carriers pay our
hospitals, or in some cases reimburse their policyholders, based on the
hospital's established charges and the coverage provided in the insurance
policy. Commercial insurers are trying to limit the costs of hospital services
by negotiating discounts, including prospective payment systems, which would
reduce payments by commercial insurers to our owned hospitals. Reductions in
payments for services provided by our owned hospitals to individuals covered by
commercial insurers could adversely affect us.
COMPETITION
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OWNED HOSPITALS. The hospital industry is highly competitive and
competition among hospitals and other health care providers has intensified in
recent years. We believe that competition has increased in part as a result of
declines in payment levels under government programs, the adoption of
prospective payment systems and changes in government regulation. We face
competition from other hospitals, tax-supported providers and specialized care
providers.
The areas served by our owned hospitals are also served by other
for-profit and not-for-profit hospitals or facilities that provide inpatient or
outpatient services similar to those offered by our owned hospitals. In some
cases, these competing hospitals are more established, better equipped, offer a
wider range of services than our owned hospitals or have greater financial
resources than we do. Some competing hospitals are owned by tax-supported
government agencies or by tax-exempt, not-for-profit entities that may be
supported by endowments and charitable contributions. These providers have a
competitive advantage since they can make capital expenditures without paying
sales or property taxes. They also generally do not pay income taxes. Also, we
face competition from other specialized care providers, including outpatient
surgery, cardiac, orthopedic, oncology services and diagnostic centers. These
providers offer specialized services in highly profitable areas of the health
care industry.
The competitive position of a hospital may also be affected by its ability
to provide services to insurance and managed care companies, including HMOs and
PPOs. These companies attempt to direct and control the use of hospital services
through managed care programs and discounts from established hospital charges.
Each of our owned hospitals currently has contracts with insurance and managed
care companies which continue to select hospitals based on the fee structure
they offer. We expect this trend to intensify.
The number and quality of the physicians on a hospital's staff is an
important factor in a hospital's competitive advantage, because physicians
decide whether a patient is admitted to the hospital and the procedures to be
performed on the patient. Admitting physicians are usually on the medical staffs
of several hospitals in addition to those of our owned hospitals. We attempt to
attract our physicians' patients to our owned hospitals by offering quality
services and facilities, convenient locations and state-of-the-art equipment.
We believe that our hospitals compete within local markets on the basis of
many factors, including the quality of care, ability to attract and retain
qualified physicians, location, breadth of services and technology offered and,
to a lesser extent, prices charged. We believe that the quality of our
hospitals' physicians, quality services, systems, technology and convenient
locations provide us with a competitive advantage.
MANAGEMENT SERVICES. In seeking management services, hospitals have
various alternatives to those offered by us and other hospital management
companies. Hospitals managed by hospital management companies represent less
than 10% of the total acute care hospitals in the United States. This is
primarily
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because most hospitals have their own management staff. Some hospitals choose to
obtain management services from large, tertiary care facilities that create
referral networks with smaller surrounding hospitals. We believe that our
industry reputation and leading marketing position provide us with a competitive
advantage over our competitors in seeking additional management contracts.
EMPLOYEES AND PHYSICIANS
As of June 30, 1999, our owned hospitals had approximately 20,000
employees. As of that date, we also had approximately 150 employees on our
corporate staff and approximately 750 employees providing hospital management
and consulting services. With the exception of approximately 160 employees at
Barberton Citizens Hospital, our employees are not represented by any labor
union. We believe that our relations with our employees are good.
Physicians on the medical staffs of our hospitals are generally not our
employees. A small number of physicians have been historically employed by or
have contracted with us primarily to staff emergency rooms, to provide certain
ancillary services and to serve in administrative capacities, such as directors
of special services. We also employ physicians, primarily primary care
physicians, in selected markets. In addition, physicians are employees of the
entities formed by the consolidations of three of our hospitals with physician
practices in their respective communities (Park View Regional Medical Center
and Vicksburg Medical Center, Vicksburg, Mississippi and Mary Black Memorial
Hospital, Spartanburg, South Carolina).
Members of the medical staffs of our hospitals often also are members of
the medical staffs of hospitals we do not own and each may terminate his or her
affiliation with our hospital at any time. Generally, a patient is admitted to a
hospital only at the request of a member of the hospital's medical staff.
Medical staff members, including physicians we employ, have sole discretion over
where to admit their patients.
PROFESSIONAL LIABILITY
As part of our business of owning and operating hospitals, we are subject
to legal actions alleging liability on our part. To cover claims relating to
both our owned and our managed hospitals, we generally maintain professional
malpractice liability insurance and general liability insurance on a claims
made basis in amounts that we believe to be sufficient for our operations. We
also maintain umbrella insurance which covers claims, which due to their nature
or amount, are not covered by our specialized insurance policies. Since the
cost of malpractice and other liability insurance has risen significantly in
recent years, we cannot assure you that professional liability insurance will
continue to be available or will be available at reasonable costs for us to
maintain adequate levels of insurance.
In the hospital management area, we attempt to protect ourselves from
liability by requiring managed hospitals in our management contracts to
maintain appropriate insurance coverage and name us as an additional insured
party. Coverage generally includes professional liability, comprehensive
general liability, workers' compensation and fidelity insurance. In addition,
our management contracts usually require the hospital to indemnify us for
claims that arise out of the actions of hospital employees, medical staff
members and others who are not employees. This type of provision helps protect
us against claims that may not be covered by insurance. These claims include
medical staff antitrust claims and employment related claims.
Although the majority of our management contracts contain our standard
insurance and indemnification provisions, a small number of them do not. This
is because the laws of some states limit the ability of public hospitals to
reimburse private companies. In these cases, we attempt to negotiate for the
maximum protection permitted by law. In other states, public hospitals have
total or
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partial immunity against legal actions and, as a result, do not purchase
insurance except to the extent of their limited liability. Although we treat the
managed hospital's insurance and reimbursement obligations as our primary
coverage, we also maintain our own insurance.
ITEM 2. PROPERTIES
For a description of our owned hospital properties, see "Item 1.
"Business-Owned Hospitals". We also lease our principal corporate offices in
Brentwood, Tennessee. The lease expires in 2005. The field offices of Quorum
Health Resources, LLC are also leased, with terms ranging from one to five
years. We believe our properties are adequate for our business purposes.
ITEM 3. LEGAL PROCEEDINGS
We are currently, and from time to time expect to be, subject to claims,
suits and investigations arising in the ordinary course of business. We may not
know about investigations or qui tam actions filed against us by private parties
on behalf of the federal or state governments. Plaintiffs in these matters may
request punitive or other damages that may not be covered by insurance. Except
for the litigation described below, we are not currently involved in any
litigation that we believe could have a material adverse effect on our results
of operations or financial position.
LITIGATION
COST REPORT LITIGATION. (M.D. Fla. No. 99-413-CIV-T-23B) In June 1993,
the Office of the Inspector General of the Department of Health and Human
Services requested information from us in connection with an investigation
involving our procedures for preparing Medicare cost reports. In January 1995,
the United States Department of Justice issued a Civil Investigative Demand
which also requested information from us in connection with the same
investigation. As a part of the government's investigation, several former and
current employees were interviewed. We cooperated fully with the investigation.
We received no communication from the government on this matter from
approximately June 1996 through August 1998.
In August 1998, the government informed us that the investigation was
prompted by a lawsuit filed under the False Claim Act. The suit was filed in
January 1993 by a former employee of a hospital we managed. These lawsuits,
commonly known as qui tam actions, are filed "under seal." That means that the
claims are kept secret until the government decides whether to join the case.
The person who files the lawsuit is called a "relator." At a meeting in
September, 1998, we learned from the government that it would likely join in the
lawsuit. The government joined the case against us in October 1998. The former
employee's lawsuit named us, our subsidiary Quorum Health Resources,
Columbia/HCA Healthcare Corporation and all hospitals that we or Columbia/HCA
owned, operated or managed from 1984 through 1997, as defendants. The unsealed
complaint, prepared by the relator, alleged that we knowingly prepared and
caused to be filed cost reports which claimed payments from Medicare and other
government payment programs greater than the amounts due.
In January 1999, we filed motions with the court asking to be separated
from the case against co-defendant Columbia/HCA. The government did not oppose
the motion to separate the cases against us and Columbia/HCA. On February 2,
1999, the government filed an amended complaint. 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 did not name as
defendants any hospital we managed. It does name us, Quorum Health Resources and
each subsidiary which now owns or has ever owned a hospital.
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The government filed that amended complaint after extensive discussions
with us about how to proceed. The government had proposed that the case be
stayed while the government obtained from us and reviewed extensive additional
documents. We declined the government's request and asked the government for a
specific settlement proposal, which the government declined to provide.
The February 2, 1999 complaint alleges that we, on behalf of hospitals we
managed between 1985 and 1995 and hospitals we 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" we created. The complaint also alleges that these cost
report filings were prepared as the result of our policy.
We believe that the government has incorrectly interpreted our policies
and the purpose of allowances under generally accepted accounting principles.
On February 16, 1999, we learned that the court granted our motion to
separate the cases against us and Columbia/HCA. The court further ordered the
government to file a new complaint against us by February 24, 1999, which it
did. The government's new complaint is similar to the one filed on February 2,
1999.
On March 9, 1999, the court appointed a mediator to facilitate settlement
discussions between us and the government. We had earlier requested that a
mediator be appointed, a request that the government had opposed. The first
meeting with the mediator was held on June 11, 1999.
On April 15, 1999, we filed several motions to dismiss the government's
complaint in whole or in part as well as a motion to dismiss the relator from
the case. The government and the relator replied to our motions in June, 1999
and we filed a reply in July, 1999. The court has not ruled on our motions.
This qui tam action seeks three times the amount of damages caused to the
United States by our submission of any Medicare or other government health care
program alleged false claims to the government, civil penalties of not less
than $5,000 nor more than $10,000 for each false claim, and attorneys' fees and
costs.
OTHER QUI TAM ACTIONS AND RELATED INVESTIGATION. In May 1998, we were
informed that we were a defendant in another qui tam action involving home
health services provided by two of our owned hospitals and alleging that we had
violated Medicare laws. This action was filed under seal in June 1996 by a
former employee, whom we fired in April 1996. The United States Attorney's
Office gave us the opportunity to review the results of the government's
investigations and discuss the allegations made in the action prior to the
government making a decision to intervene as a plaintiff. The lawsuit remains
under seal for all other purposes. We have cooperated fully with the United
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States Attorney's Office and provided additional information and made employees
available for interviews. We have started preliminary settlement discussions
with the government.
As a part of our ongoing discussions, we have learned from the same U.S.
Attorney that there are two additional unrelated qui tam complaints against us
alleging Medicare violations at one owned and two managed hospitals. Both
matters remain under seal. We have not seen the complaint in either matter. The
government has told us that it intends to investigate these allegations. We
intend to cooperate with the government's investigation.
THE CLASS AND DERIVATIVE ACTIONS. In October and November 1998, some of
our stockholders filed lawsuits against us in the U.S. District Court for the
Middle District of Tennessee. In January 1999, the court consolidated these
cases into a single lawsuit. (M.D. Tenn. No. 3-98-1004) The plaintiffs filed an
amended complaint in March 1999. The plaintiffs seek to represent a class of
plaintiffs who purchased our common stock from October 25, 1995 through October
21, 1998, except for insiders of the Company and their immediate families. The
consolidated complaint names as defendants us, several of our officers and one
of our outside directors.
The complaint alleges that defendants violated the Securities Exchange Act
of 1934. The plaintiffs claim that we materially inflated our net revenues
during the class period by including in those net revenues amounts received from
the settlement of cost reports that had allegedly been filed in violation of
applicable Medicare regulations years earlier and that, because of this
practice, this statement, which first appeared in our Form 10-K filed in
September 1996, was false: "The Company believes that its owned hospitals are in
substantial compliance with current federal, state, local, and independent
review body regulations and standards." In May 1999, we filed a motion to
dismiss the complaint. We intend to defend vigorously the claims and allegations
in this action.
On November 2, 1998, a lawsuit was filed against the us, all of our
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. (M.D. Tenn. No. 3-99-0055) On February 16, 1999, the defendants filed
a motion to dismiss the original complaint. The court then granted the plaintiff
permission to file a first amended complaint, which, when filed, mooted the
original motion to dismiss. On April 30, 1999, the defendants moved to dismiss
the first amended complaint. The court on July 1, 1999, granted plaintiff's
motion for leave to file a second amended complaint and denied as moot the
motion to dismiss the first amended complaint. The second amended 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 in the amended
complaint that the defendants in 1993 were aware that we were filing allegedly
false cost reports and that the defendants "mandated" that the illegal acts
continue in violation of applicable Medicare and Medicaid reimbursement laws.
The defendants have filed a new motion to dismiss
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the second amended complaint. All of the defendants plan to vigorously defend
this litigation.
It is too early to predict the effect or outcome of any of the ongoing
investigations or the qui tam, class or stockholders' derivative actions, or
whether any additional investigations or litigation will be commenced. If we are
found to have violated federal or state laws relating to Medicare, Medicaid or
other government programs, then we may be required to pay substantial fines and
civil and criminal penalties. We also may be excluded from participating in the
Medicare and Medicaid programs and other government programs. Similarly, the
amount of damages sought in the qui tam actions are substantial. We could be
subject to substantial costs resulting from an adverse outcome of any of these
actions. In an effort to promptly resolve one or more of these matters, we may
choose to negotiate a settlement. Amounts we pay to settle any of these matters
may be material. Any one or more of these actions or costs could have a material
adverse effect on our results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock became listed on the Nasdaq Stock Market National Market
("Nasdaq") under the symbol "QHGI" on May 26, 1994. On September 22, 1999, the
last reported sales price of the Common Stock on Nasdaq was $6.56.
As of June 30, 1999, the Company had approximately 2,945 holders of
record and we estimated an additional 3,600 beneficial owners. The following
table shows the high and low bid information for the Common Stock as reported by
Nasdaq for each quarter of the fiscal year ended June 30, 1999 and June 30,
1998:
1998 HIGH LOW
---- ---- ---
First Quarter 26 21 45/64
Second Quarter 28 1/4 20 3/4
Third Quarter 33 3/4 22 3/4
Fourth Quarter 33 13/16 26 1/2
1999 HIGH LOW
---- ---- ---
First Quarter 29 15/64 14 3/8
Second Quarter 17 7/8 9 1/2
Third Quarter 13 1/4 7 1/2
Fourth Quarter 13 1/2 9 9/16
We have never paid any cash dividends on our Common Stock. We presently
intend to retain our earnings for use in our business, and do not anticipate
paying any cash dividends in the foreseeable future. The declaration of
dividends is within the discretion of the Board of Directors, which will review
this dividend policy from time to time; however, the declaration of dividends is
currently prohibited by our bank credit facility and certain other agreements.
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See Item 7. "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and Note 4 of Notes to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
The following table of selected financial data should be read in
conjunction with our Consolidated Financial Statements and the notes thereto
included elsewhere in this report.
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QUORUM HEALTH GROUP, INC.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended June 30
------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------
Summary of Operations (1)
Net operating revenue $ 1,652,584 $ 1,572,352 $ 1,413,946 $ 1,098,547 $ 850,167
Operating expenses 1,388,606 1,253,543 1,130,804 873,078 681,036
Equity in earnings of affiliates 22,348 6,993 -- -- --
Leases and rentals 34,192 26,679 22,227 17,125 12,823
Depreciation and amortization 95,427 87,020 75,134 55,901 37,566
Interest expense 53,683 40,606 45,601 36,568 22,209
Minority interest (4,501) 3,118 741 109 1,046
Write-down of assets, net gain on
sale of assets and investigation
and litigation related costs 35,173 22,850 -- 787 --
Income before income taxes and
extraordinary item 72,352 145,529 139,439 116,553 95,487
Provision for income taxes 33,494 58,849 55,357 47,321 39,532
Income before extraordinary item 38,858(3) 86,680(2) 84,082 69,232 55,955
Per common share:
Income before extraordinary
item - basic 0.53 1.16 1.14 0.96 0.79
Income before extraordinary
item - diluted 0.52(3) 1.12(2) 1.11 0.93 0.76
Cash dividends declared -- -- -- -- --
Financial Position at Year End (1)
Total assets $ 1,831,948 $ 1,490,953 $ 1,278,991 $ 1,020,561 $ 773,502
Long-term debt excluding
current maturities 872,213 617,377 519,940 430,877 287,364
Stockholders' equity 624,666 622,266 518,115 431,864 356,389
(1) The Company's financial statements for the years presented are not
strictly comparable due to the significant effect that acquisitions, joint
ventures and sales have had on such statements. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition."
(2) Excluding the write-down of assets, net income was $101.5 million and
diluted earnings per share was $1.32.
(3) Excluding the write-down of assets and investigation and litigation
related costs, net income was was $64.1 million and diluted earnings per
share was $0.86.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
You should read the following along with the Selected Financial Data and
the Consolidated Financial Statements and accompanying notes and other financial
information.
FORWARD-LOOKING INFORMATION
This discussion includes "forward-looking statements." Forward-looking
statements include all statements that do not relate solely to historical or
current facts, and can be identified by the use of some words, including "may,"
"believe," "will," "expect," "project," "estimate," "anticipate," "plan" or
"continue." We have based these forward-looking statements on our current plans
and expectations and projections about future events. However, risks,
uncertainties and assumptions that would cause or contribute to material
differences in our future financial condition and results of operations include:
- possible changes in Medicare and Medicaid that may further limit
payments to our owned hospitals;
- the efforts of insurers, managed care companies, patients and other
payors to reduce their payments to our owned hospitals;
- potential adverse impact of known and unknown government
investigations and litigation;
- the possible enactment of federal, state or local health care
reforms;
- changes in federal, state or local regulations affecting the health
care industry;
- difficulties in reducing costs in response to lower payments from
our payors;
- difficulties in finding attractive acquisitions and integrating
acquired hospitals into our operations;
- market and geographic concentration of operations;
- the highly competitive nature of the health care business;
- potential loss of physicians or other key personnel;
- claims and legal actions relating to professional liability;
- the ability to address internal and external Year 2000 issues,
including disruptions from system conversions;
- our substantial indebtedness and difficulty raising capital
in the future;
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- fluctuations in the market value of our common stock;
- changes in accounting pronouncements; and
- changes in general economic conditions.
OVERVIEW
We are a leading provider of health care services through our owned acute
care hospitals and regional health care systems located throughout the United
States. We are also the largest provider of management services to acute care
hospitals in the United States, primarily through our subsidiary, Quorum Health
Resources, LLC.
In fiscal 1999, our owned hospitals accounted for 91% of our net operating
revenue compared to 91% in fiscal 1998 and 90% in fiscal 1997. In fiscal 1999,
the Dothan, Alabama and Ft. Wayne, Indiana areas accounted for approximately 32%
of owned hospital revenue and 50% of owned hospital EBITDA. EBITDA means our
earnings before interest, minority interest, income taxes, depreciation and
amortization expense, write-down of assets and investigation and litigation
related costs.
We received from the Medicare and Medicaid programs approximately 54%, 55%
and 55% of gross patient service revenue for the years ended June 30, 1999, 1998
and 1997, respectively.
In each of fiscal 1998 and fiscal 1997, our net income grew 21% over the
prior fiscal year, before write-down of assets and extraordinary charges. For
fiscal 1999, our net income before write-down of assets and investigation and
litigation related costs was lower than we initially projected and 37% lower
than fiscal 1998. We believe this was principally due to the following issues:
- We received lower payments from the government under the Medicare
program as a result of the Balanced Budget Act of 1997 (BBA 97).
- We experienced increased discounts to insurance and managed care
companies and increased charity care.
- We were unable to reduce our costs proportionately with the decline
in net operating revenue.
- Our estimated current year and final settlements from the government
under Medicare and Medicaid programs and from insurance and managed
care companies were lower in fiscal 1999 compared to fiscal 1998.
- The hospitals we acquired during fiscal 1999 reduced net income.
IMPACT OF ACQUISITIONS, JOINT VENTURES AND SALES
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In fiscal 1999, we acquired four hospitals and affiliated health care
entities. We also entered into a joint venture in Vicksburg, Mississippi. We
manage and have a controlling interest in the joint venture. Some of these
entities did not perform as well as we initially expected. This was due to some
of the same factors we experienced in our other owned hospitals. Also, we had
difficulties integrating some of the acquired hospitals into our operations. In
fiscal 1999, we sold Park Medical Center in Columbus, Ohio.
In fiscal 1998, we acquired two hospitals and affiliated health care
entities. We also contributed three hospitals and cash for equity interests in
joint ventures in Las Vegas, Nevada and Macon, Georgia. We sold our interest in
a Nebraska hospital.
Because of the financial impact of acquisitions, joint ventures and sales,
it is difficult to make meaningful comparisons between our financial statements
for the periods presented. Due to the current number of owned hospitals, each
additional hospital we acquire can affect our overall operating margins or
results of operations.
LITIGATION
We are currently, and from time to time expect to be, subject to claims,
suits and investigations arising in the ordinary course of business. We may not
know about investigations or qui tam actions filed against us by private parties
on behalf of the federal or state governments. Plaintiffs in these matters may
request punitive or other damages that may not be covered by insurance. Except
for the litigation described below, we are not currently involved in any
litigation that we believe could have a material adverse effect on our results
of operations or financial position.
In June 1993, the Office of the Inspector General of the Department of
Health and Human Services requested information from us in connection with an
investigation involving our procedures for preparing Medicare cost reports. In
January 1995, the United States Department of Justice issued a Civil
Investigative Demand which also requested information from us in connection
with the same investigation. As a part of the government's investigation,
several former and current employees were interviewed. We cooperated fully
with the investigation. We received no communication from the government on
this matter from approximately June 1996 through August 1998.
In August 1998, the government informed us that the investigation was
prompted by a lawsuit filed under the False Claims Act. The suit was filed in
January 1993 by a former employee of a hospital we managed. These lawsuits,
commonly known as qui tam actions, are filed "under seal." That means that
the claims are kept secret until the government decides whether to join the
case. The person who files the lawsuit is called a "relator." At a meeting in
September 1998, we learned from the government that it would likely join in the
case. The government joined the case against us in October 1998. The former
employee's lawsuit named us, our subsidiary Quorum Health Resources,
Columbia/HCA Healthcare Corporation and all hospitals that we or Columbia/HCA
owned, operated or managed from 1984 through 1997, as defendants. The unsealed
complaint, prepared by the relator, alleged that we knowingly prepared and
caused to be filed cost reports which claimed payments from Medicare and other
government payment programs greater than the amounts due.
In January 1999, we filed motions with the court asking to be separated
from the case against co-defendant Columbia/HCA. The government did not oppose
the motion to separate the cases against us and Columbia/HCA. On February 2,
1999, the government filed an amended complaint. 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 did not name as
defendants any hospital we managed. It does name us, Quorum Health Resources
and each subsidiary which now owns or has ever owned a hospital.
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35
The February 2, 1999 complaint alleges that we, on behalf of hospitals we
managed between 1985 and 1995 and hospitals we 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" we created. The complaint also alleges that these cost
report filings were prepared as the result of our policy.
On April 15, 1999, we filed several motions to dismiss the government's
complaint in whole or in part as well as a motion to dismiss the relator from
the case. The government and the relator replied to our motions in June, 1999
and we filed a reply in July, 1999. The court has not ruled on our motions.
This qui tam action seeks three times the amount of damages caused to the
United States by our submission of any Medicare or other government health care
program alleged false claims to the government, civil penalties of not less
than $5,000 nor more than $10,000 for each false claim, and attorneys' fees and
costs.
In May 1998, we were informed that we were a defendant in another qui tam
action involving home health services provided by two of our owned hospitals
and alleging that we had violated Medicare laws. This action was filed under
seal in June 1996 by a former employee, whom we fired in April 1996. The United
States Attorney's Office gave us the opportunity to review the results of the
government's investigations and discuss the allegations made in the action
prior to the government making a decision to intervene as a plaintiff. The
lawsuit remains under seal for all other purposes. We have cooperated fully
with the United States Attorney's Office and provided additional information
and made employees available for interviews. We have started preliminary
settlement discussions with the government.
As a part of our ongoing discussions, we have learned from the same U.S.
Attorney that there are two additional unrelated qui tam complaints against us
alleging Medicare violations at one owned and two managed hospitals. Both
matters remain under seal. We have not seen the complaint in either matter.
The government has told us that it intends to investigate these allegations. We
intend to cooperate with the government's investigation.
We were named as a defendant in a class action brought by some of our
stockholders. In the class action, the plaintiffs allege that we violated the
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36
Securities Exchange Act of 1934 by materially overstating our financial results.
We were also named as a defendant, along with some of our current directors and
two of our former directors, in a stockholders' derivative action. In the
stockholders' derivative action, the plaintiffs allege that our directors knew
in 1993 that we were filing false Medicare cost reports and that the directors
"mandated" that this practice continue. We and the other defendants intend to
vigorously defend these lawsuits.
It is too early to predict the effect or outcome of any of the ongoing
investigations or the qui tam, class or stockholders' derivative actions, or
whether any additional investigations or litigation will be commenced. If we
are found to have violated federal or state laws relating to Medicare, Medicaid
or other government programs, then we may be required to pay substantial fines
and civil and criminal penalties. We also may be excluded from participating in
the Medicare and Medicaid programs and other government programs. Similarly,
the amount of damages sought in the qui tam actions are substantial. We could be
subject to substantial costs resulting from an adverse outcome of any of these
actions. In an effort to promptly resolve one or more of these matters, we may
choose to negotiate a settlement. Amounts we pay to settle any of these matters
may be material. Any one or more of these actions or costs could have a
material adverse effect on our results of operations or financial position.
(See Part 1, Item 3, "Legal Proceedings" and Note 10 - Contingencies in the
Notes to Consolidated Financial Statements.)
RESULTS OF OPERATIONS
The following table reflects the percentage of net operating revenue
represented by various categories in our Consolidated Statements of Income for
fiscal years 1999, 1998 and 1997. Results of operations for fiscal 1999 include
a full year of operations for sixteen hospitals and the Las Vegas and Macon
joint ventures and partial periods for one hospital sold, four hospitals
acquired by us and one contributed by Columbia/HCA to a joint venture that we
control. Results of operations for fiscal 1998 include a full year of operations
for fifteen hospitals and partial periods for one hospital sold, the Las Vegas
and Macon joint ventures, three hospitals contributed to joint ventures and two
hospitals acquired during the year. Results of operations for fiscal 1997
include a full year of operations for fifteen hospitals and partial periods for
four hospitals acquired during the year.
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Fiscal Year
1999 1998 1997
------- ------- ------
Net operating revenue 100.0% 100.0% 100.0%
Operating expenses (1) 84.1 79.7 79.9
Equity in earnings of affiliates (1.4) (0.4) --
------- ------- ------
EBITDAR (2) 17.3 20.7 20.1
Leases and rentals 2.0 1.7 1.6
------- ------- ------
EBITDA (2) 15.3 19.0 18.5
Depreciation and amortization 5.9 5.5 5.3
Interest expense 3.2 2.6 3.2
Write-down of assets
and investigation and litigation
related costs 2.1 1.5 --
Minority interest (0.3) 0.2 0.1
------- ------- ------
Income before income taxes and
extraordinary items 4.4 9.2 9.9
Provision for income taxes 2.0 3.7 3.9
------- ------ ------
Income before extraordinary
items 2.4 5.5 6.0
Extraordinary charges -- -- 0.6
------- ------ ------
Net income 2.4% 5.5% 5.4%
======= ======= ======
- ---------------
(1) Operating expenses represent expenses before leases and rentals, interest,
minority interest, income taxes, depreciation and amortization expense,
write-down of assets and investigation and litigation related costs.
(2) EBITDA represents earnings before interest, minority interest, income taxes,
depreciation and amortization expense, write-down of assets and investigation
and litigation related costs. EBITDAR represents EBITDA before leases and
rentals. EBITDA and EBITDAR are commonly used as analytical indicators, and also
serve as a measure of indebtedness capacity and debt service ability. We have
included EBITDA and EBITDAR data because they are typically used by investors to
measure a company's ability to service debt. EBITDA and EBITDAR should not be
considered measures of financial performance under generally accepted accounting
principles, and the items excluded from EBITDA and EBITDAR are significant
components in understanding and assessing financial performance. EBITDA and
EBITDAR should not be considered in isolation or as alternatives to net income,
cash flows generated by operating, investing or financing activities or other
financial statement data
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presented in the consolidated financial statements as an indicator of financial
performance or liquidity. Because EBITDA and EBITDAR are not measurements
determined in accordance with generally accepted accounting principles and are
susceptible to varying calculations, EBITDA and EBITDAR as presented may not be
comparable to other similarly titled measures of other companies.
Fiscal 1999 Compared to Fiscal 1998
Net Operating Revenue. Net operating revenue was $1,652.6 million in
fiscal 1999, compared to $1,572.3 million in fiscal 1998. This represents an
increase of $80.3 million or 5.1%. We attribute this increase to (1) the
acquisition of six hospitals during fiscal 1999 and fiscal 1998, (2) the
hospital contributed by Columbia/HCA in fiscal 1999 to a joint venture that we
control and (3) a 2.2% increase in revenue from our hospital management
services. The increase in net operating revenue was partially offset by
decreases due to (1) the sales of our Columbus hospital in fiscal 1999 and
Nebraska hospital in fiscal 1998, (2) the contribution in fiscal 1998 of three
hospitals to joint ventures in which we hold a minority interest and (3) a 0.8%
decrease in net operating revenue produced by same store hospitals. We attribute
this 0.8% decrease principally to:
- lower payments from the government under the Medicare program as a
result of BBA 97;
- increased discounts to insurance and managed care companies and
increased charity care; and
- decreased estimated current year and final settlements from the
government under Medicare and Medicaid programs and from insurance
and managed care companies (Estimated third-party payor settlements
are discussed under the caption "General").
Operating Expenses. Operating expenses were $1,388.6 million in fiscal
1999, compared to $1,253.5 million in fiscal 1998. This represents an increase
of $135.1 million or 10.8%. Operating expenses as a percentage of net operating
revenue increased to 84.1% for fiscal 1999 from 79.7% for fiscal 1998. Operating
expenses as a percentage of net operating revenue for our owned hospitals was
85.1% for fiscal 1999, compared to 80.3% for fiscal 1998. For our same store
hospitals, operating expenses as a percentage of net operating revenue increased
to 83.0% for fiscal 1999, from 79.2% for fiscal 1998. We attribute the same
store hospital increase to the reduction in net operating revenue discussed in
the previous paragraph, higher costs in certain local markets due to specific
operational issues, and our overall difficulty in reducing our costs
proportionately with the lower payments we receive.
Equity in Earnings of Affiliates. Equity in earnings of affiliates
represents our share of earnings from joint ventures in which we hold a minority
interest. Equity in earnings of affiliates was $22.3 million in fiscal 1999,
compared to $7.0 million for fiscal 1998, an increase of $15.3 million. This
increase was due to a full year of operations for the joint ventures in fiscal
1999 compared to partial years in fiscal 1998. We formed our Las Vegas joint
venture on February 1, 1998 and our Macon joint venture on May 1, 1998. Equity
in earnings
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of affiliates represented 1.4% of our net operating revenue in fiscal 1999,
compared to 0.4% of our net operating revenue in fiscal 1998.
Leases and rentals. Leases and rentals were $34.2 million in fiscal 1999,
compared to $26.7 million in fiscal 1998, an increase of $7.5 million, or 28.2%.
Leases and rentals as a percentage of net operating revenue increased to 2.0% in
fiscal 1999, compared to 1.7% in fiscal 1998. This increase was due primarily to
an increase in assets leased in connection with hospital acquisitions in fiscal
1999 and 1998.
EBITDA. EBITDA for fiscal 1999 was $252.1 million, compared to $299.1
million in fiscal 1998, a decrease of $47.0 million or 15.7%. EBITDA as a
percentage of net operating revenue was 15.3% in fiscal 1999, compared to 19.0%
in fiscal 1998. EBITDA as a percentage of net operating revenue for our owned
hospitals was 14.3% in fiscal 1999, compared to 18.5% in fiscal 1998. EBITDA as
a percentage of net operating revenue for our same store hospitals was 15.3% in
fiscal 1999, compared to 19.2% in fiscal 1998. EBITDA as a percentage of net
operating revenue for our management services business was 24.7% in fiscal 1999,
compared to 23.9% in fiscal 1998. We attribute the decrease in EBITDA
principally to (1) the decrease in net operating revenue of our same store
hospitals from BBA 97, managed care and decreased estimated payor settlements
and (2) the increase in operating expenses.
Depreciation and Amortization. Depreciation and amortization expense in
fiscal 1999 was $95.4 million, compared to $87.0 million in fiscal 1998, an
increase of $8.4 million, or 9.7%. Depreciation and amortization expense as a
percentage of net operating revenue increased to 5.9% in fiscal 1999 from 5.5%
in fiscal 1998. The increase in depreciation and amortization as a percentage of
net operating revenue was due principally to the decrease in net operating
revenue of our same store hospitals and the opening of a replacement facility in
Florence, South Carolina.
Interest Expense. Interest expense in fiscal 1999 was $53.7 million,
compared to $40.6 million in fiscal 1998, an increase of $13.1 million, or
32.2%. Interest expense as a percentage of net operating revenue increased to
3.2% in fiscal 1999 from 2.6% in fiscal 1998. The increase was due principally
to additional borrowings related to acquisitions, share repurchases, and the
opening of the replacement facility in fiscal 1999. The increase was partially
offset by the termination of two interest rate swap agreements on terms
favorable to us.
Write-down of Assets and Investigation and Litigation Related Costs.
During fiscal 1999, we recorded write-downs of assets and investigation and
litigation related costs of approximately $35.2 million.
- - Approximately $25.6 million consisted of the write-down of intangible
assets related to physician practices based on our review of expected
future cash flows. We reviewed physician practices as a result of recent
changes in the physician practice management industry and because we had
enough historical financial information to give us additional data for
changing estimated future cash flows.
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- - Approximately $4.3 million consisted principally of the write-down of the
book value of Park Medical Center, which was subsequently sold, to its
estimated fair market value.
- - The remaining $5.3 million consisted of costs of the False Claims Act and
stockholders' litigation.
During fiscal 1998, we recorded a write-down of goodwill of approximately
$22.9 million at our hospital contributed to the Las Vegas joint venture.
Minority Interest Income and Expense. Minority interest income was $4.5
million in fiscal 1999, compared to expense of $3.1 million in fiscal 1998, a
change of $7.6 million. Minority interest income as a percentage of net
operating revenue was 0.3% in fiscal 1999, compared to expense of 0.2% in fiscal
1998. We attribute this change primarily to the write-down of intangible assets
and operational issues in some of our local markets.
Income Taxes. The provision for income taxes in fiscal 1999 was $33.5
million compared to $58.8 million in fiscal 1998, a decrease of $25.3 million,
or 43.1%. The provision for income taxes as a percentage of net operating
revenue decreased to 2.0% in fiscal 1999, from 3.7% in fiscal 1998. Excluding
the effect of the write-downs of assets discussed above, our effective income
tax rate was 39.1% in fiscal 1999, compared to 39.7% in fiscal 1998.
Net Income. Net income during fiscal 1999 was $38.9 million, compared to
$86.7 million in fiscal 1998, a decrease of $47.8 million, or 55.2%. Net income
as a percentage of net operating revenue was 2.4% in fiscal 1999, compared to
5.5% in fiscal 1998. Excluding the write-downs of assets and the investigation
and litigation related costs, net income as a percentage of net operating
revenue was 3.9% in fiscal 1999, compared to 6.5% in fiscal 1998.
Fiscal 1998 Compared to Fiscal 1997
Net Operating Revenue. Net operating revenue was $1,572.3 million in
fiscal 1998, compared to $1,413.9 million in fiscal 1997, an increase of $158.4
million, or 11.2%. We attribute this increase principally to (1) the acquisition
of six hospitals during fiscal 1998 and 1997, (2) a 7.3% increase in revenue
produced by same store hospitals and (3) a 3.5% increase in revenue from our
hospital management services. The increase in revenue produced by same store
hospitals was principally due to (1) higher volumes of patients, (2) an increase
in the prices we charge for our services and (3) an increase in estimated third
party payor settlements. The increase in net operating revenue was partially
offset by (1) a reduction in net operating revenue due to the sale of our
Nebraska hospital and our contribution in fiscal 1998 of three hospitals to
joint ventures in which we hold a minority interest, (2) increased managed care
and charity discounts and (3) the effects of BBA 97.
Operating Expenses. Operating expenses were $1,253.5 million in fiscal
1998, compared to $1,130.8 million in fiscal 1997. This represents an increase
of $122.7 million, or 10.9%. Operating expenses as a percentage of net operating
revenue decreased to 79.7% in fiscal 1998 from 79.9% in fiscal 1997. Operating
expenses as a percentage of net operating revenue for our owned hospitals
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decreased to 80.3% in fiscal 1998 from 80.5% for fiscal 1997. Operating expenses
as a percentage of net operating revenue for same store hospitals decreased to
79.2% in fiscal 1998 from 80.0% in fiscal 1997. We attribute this same store
decrease to a reduction in salaries and benefits expenses, and to decreased
supply costs.
Equity in Earnings of Affiliates. Equity in earnings of affiliates was
$7.0 million in fiscal 1998 representing 0.4% of our net operating revenue.
These amounts were due to our investment in our Las Vegas and Macon joint
ventures. Since we formed these joint ventures in fiscal 1998, there is no
comparable amount for fiscal 1997.
Leases and Rentals. Leases and rentals were $26.7 million in fiscal 1998
compared to $22.2 million in fiscal 1997, an increase of $4.5 million, or 20.3%.
Leases and rentals as a percentage of net operating revenue increased to 1.7%
for fiscal 1998 compared to 1.6% for fiscal 1997. The increase was due
principally to an increase in assets leased in connection with hospital
acquisitions.
EBITDA. EBITDA for fiscal 1998 was $299.1 million, compared to $260.9
million for fiscal 1997, an increase of $38.2 million or 14.6%. EBITDA as a
percentage of net operating revenue was 19.0% for fiscal 1998, compared to 18.5%
in fiscal 1997. EBITDA as a percentage of net operating revenue for our owned
hospitals was 18.5% in fiscal 1998 compared to 18.0% in fiscal 1997. EBITDA as a
percentage of net operating revenue for same store hospitals was 19.3% in fiscal
1998, compared to 18.5% in fiscal 1997. EBITDA as a percentage of net operating
revenue for our management services business was 23.9% in fiscal 1998, compared
to 22.7% in fiscal 1997.
Depreciation and Amortization. Depreciation and amortization expense for
fiscal 1998 was $87.0 million, compared to $75.1 million in fiscal 1997, an
increase of $11.9 million, or 15.8%. Depreciation and amortization expense as a
percentage of net operating revenue increased to 5.5% in fiscal 1998 from 5.3%
in fiscal 1997.
Interest Expense. Interest expense for fiscal 1998 was $40.6 million
compared to $45.6 million in fiscal 1997, a decrease of $5.0 million, or 11.0%.
Interest expense as a percentage of net operating revenue decreased to 2.6% in
fiscal 1998 from 3.2% in fiscal 1997. The decrease was due principally to (1)
lower interest rates as we repaid debt with higher interest rates with the
proceeds of debt with lower interest rates, (2) a reduction in interest rates,
(3) the impact of the IRS examinations and (4) repayments of bank debt with cash
received from operations.
Write-down of Assets. The write-down of assets is due to the write-down of
goodwill of approximately $22.9 million at our hospital contributed to the Las
Vegas joint venture.
Minority Interest Expense. Minority interest expense for fiscal 1998 was
$3.1 million compared to $0.7 million in fiscal 1997, an increase of $2.4
million. Minority interest expense as a percentage of net operating revenue
increased to 0.2% in fiscal 1998 from 0.1% in fiscal 1997. This increase was due
primarily
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to our acquisition of hospitals in fiscal 1997 with minority investors and
improved profitability of other hospitals with minority investors.
Income Taxes. The provision for income taxes for fiscal 1998 was $58.8
million compared to $55.4 million in fiscal 1997, an increase of $3.4 million,
or 6.1%. The provision for income taxes as a percentage of net operating revenue
was 3.7% in fiscal 1998. Excluding the write-down of assets, the provision for
income taxes as a percentage of net operating revenue increased to 4.3% in
fiscal 1998 from 3.9% for fiscal 1997. The increase was due to an increase in
pretax income. Our effective income tax rate was 39.7% for fiscal 1998 and
fiscal 1997.
Net Income. Net income during fiscal 1998 was $86.7 million compared to
$75.9 million in fiscal 1997, an increase of $10.8 million, or 14.2%. Net income
as a percentage of net operating revenue was 5.5% in fiscal 1998. Excluding the
extraordinary charge in fiscal 1997 and the write-down of assets in fiscal 1998,
net income as a percentage of net operating revenue was 6.5% in fiscal 1998
compared to 6.0% for fiscal year 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, our working capital was $235.2 million. Our ratio of
current assets to current liabilities was 2.1 to 1.0 at June 30, 1999.
Our principal sources of cash are net cash provided by operating
activities and cash available under our bank revolving line of credit facility.
Our principal uses of funds are hospital acquisitions, payments of principal and
interest on our long-term debt, capital expenditures and share repurchases.
Fiscal 1999 Cash Flows Compared To Fiscal 1998 Cash Flows
Cash provided by operating activities totaled $129.1 million in fiscal
1999, compared to $124.7 million in fiscal 1998, an increase of $4.4 million, or
3.5%. This increase was due primarily to lower tax payments related to IRS
examinations of previous years tax returns and a lower increase in accounts
receivable compared to the increase in fiscal 1998.
Net cash used for investing activities in fiscal 1999 totaled $329.0
million, compared to $253.1 million in fiscal 1998. Our primary investment
activities in fiscal 1999 were our acquisition of four hospitals and capital
expenditures. Capital expenditures were $124.0 million in fiscal 1999 compared
to $131.8 million in fiscal 1998. These amounts include $32.6 million for the
replacement facility in Florence, South Carolina in fiscal 1999 and $51.8
million in fiscal 1998. Capital expenditures may vary from period to period
depending on facility and service improvements undertaken by our owned
hospitals. Capital expenditures are discussed further under the caption "Capital
Expenditures." Proceeds from sale of assets relate to the sale of the Columbus
hospital in fiscal 1999 and the Nebraska hospital in fiscal 1998.
Fiscal 1998 Cash Flows Compared to Fiscal 1997 Cash Flows
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Cash provided by operating activities totaled $124.7 million in fiscal
1998, compared to $173.4 million in fiscal 1997, a decrease of $48.7 million, or
28.1%, compared to fiscal 1997. The decrease was due primarily to (1) an
increase in tax payments for fiscal 1998 operations, (2) current year tax
payments related to the IRS examinations of previous years tax returns and (3) a
delay in the collection of accounts receivable. This delay in the collection of
accounts receivable was due primarily to the disruption of the computer systems
of Medicare intermediaries, patient accounting computer systems at one hospital
and slower collections.
Net cash used for investing activities in fiscal 1998 totaled $253.1
million compared to $259.4 million in fiscal 1997. Our primary investment
activities in fiscal 1998 were the acquisition of two hospitals and capital
expenditures. Capital expenditures were $131.8 million during fiscal 1998
compared to $83.0 in fiscal 1997 and are discussed further under the caption
"Capital Expenditures." Proceeds from sale of assets relate to the sale of our
remaining interests in the Nebraska hospital in fiscal 1998 and the sale of a
minority interest in the same hospital in fiscal 1997.
Capital Resources
Our revolving credit facility consists of an $850.0 million secured credit
facility expiring November 26, 2002, which coincides with the expiration date of
the end loaded lease facility. On November 26 of each year, we can request an
incremental one-year extension, which is subject to approval of all of the
lenders. The credit facility bears interest at our option at generally the
lender's base rate, swing-line rate or a fluctuating rate ranging from .55 to
1.55 percentage points above LIBOR. Also, we pay a facility fee ranging from .20
to .45 percentage points on the commitment. The interest rate margins and
facility fee rates are based on our leverage ratio. Substantially all stock of
our subsidiaries has been pledged under the terms of the credit facility. We may
prepay the amount outstanding at any time. At July 31, 1999, we had $121.6
million available under our credit facility.
We also have a $150.0 million end loaded lease financing agreement to
provide a financing option for acquisition and/or construction. This agreement
provides for interest rate margins and facility fee rates that are substantially
similar to those under our credit facility. Under this agreement, we have
guaranteed all lease payments, including contingent lease payments, of up to 85%
of the amount utilized under this agreement. At July 31, 1999, $7.1 million was
available under this agreement.
We have $150.0 million of 8 3/4% senior subordinated notes, which mature
on November 1, 2005. We have the option to redeem these notes at 104.375% of the
principal amount on or after November 1, 2000, at 102.188% of the principal
amount on or after November 1, 2001, or at par value on or after November 1,
2002. Upon a change of control, we must make an offer to purchase these notes at
101% of the principal amount. These notes are unsecured and subordinated in
right of payment to all existing and future senior debt.
On August 31, 1999, we issued $150.0 million of convertible subordinated
debentures due 2009 to Welsh, Carson, Anderson & Stowe, VIII, LP and certain
WCAS VIII affiliates.
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The debentures bear interest at 6.0% per annum. Interest is payable quarterly.
The debentures are convertible into common shares at a conversion price of
$11.25 per share. The debentures will automatically convert at any time after
three years if the average of the closing price of our stock over any 90 day
period is more than 150% of the conversion price. The debentures are callable at
our option at par at any time after August 31, 2001. In the event of a merger,
consolidation or sale of more than 50% of our assets, the holder of the
debentures has the option to have the debentures prepaid in full. The debentures
have antidilution protection, including, under certain circumstances, issuance
of common stock below the then applicable conversion price. The shares into
which the debentures are convertible have certain voting restrictions and must
be held for a two-year period beginning August 1999. The debentures are
subordinated in right of payment to all our debt.
The credit facilities contain certain financial covenants including but
not limited to a limitation on debt levels, the prohibition of dividend payments
and other distributions and restrictions on investments, repurchases of common
stock, asset dispositions, the ability to merge or consolidate with or transfer
assets to another entity, and the maintenance of various financial ratios,
including a net worth ratio, a fixed charge ratio and a leverage ratio.
In August 1998, our board of directors authorized the repurchase of up to
3,000,000 shares of common stock. In October 1998, our board of directors
authorized the repurchase of up to 5,000,000 additional shares of common stock.
We may use the shares purchased to offset the effects of our stock-based
employee benefit plans. As of July 31, 1999, we had repurchased 3,585,000 shares
for an aggregate purchase price of $48.1 million. We repurchased all of these
shares in open market transactions in October and November 1998.
As of July 31, 1999, there were 5,901,000 options outstanding with a
weighted average exercise price of $9.66. In March 1999, our board of directors
approved a plan to allow employees to exchange "underwater" stock options. These
stock options had exercise prices higher than the market price of our common
stock. Based on the exchange, we canceled 5,158,000 options at exercise prices
ranging from $12.09 to $33.06 and issued 3,580,000 options at an exercise price
of $9.00. The effect was to reduce the number of options held to offset the
benefit of a lower exercise price. The estimated economic value of the grants
was generally unchanged as a result of the exchange. Under the proposed
interpretation of APB Opinion No. 25, repriced options would receive
variable-award accounting. Should we be required to apply variable-award
accounting to the repriced options, such options will vest and terminate thirty
days after we give notice to our employees. During this thirty day period,
variable award accounting could cause an increase in our compensation expense.
During fiscal 1998, our board of directors approved a three-for-two stock
split effected in the form of a stock dividend paid on September 16, 1997, to
shareholders of record on September 2, 1997. In addition, our stockholders
approved (1) an amendment to our charter to increase the number of authorized
shares of common stock from 100,000,000 to 300,000,000, (2) an increase in the
number of shares reserved for issuance under our qualified employee stock
purchase plan to 3,750,000 and (3) the 1997 Stock Option Plan. Under the 1997
Stock Option Plan, we can grant non-qualified and incentive stock options. Stock
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options are generally granted at an exercise price equal to the fair market
value at the date of grant and are exercisable over a period not to exceed ten
years. The number of shares reserved for issuance under outstanding options and
future grants was 8,064,845 at July 31, 1999.
We adopted a stockholder rights plan in fiscal 1997 and declared a
dividend of one right for each share of common stock. The plan was amended in
August 1999. Each right entitles stockholders to acquire one-third of a share of
common stock at an exercise price of $100, subject to adjustment. The rights
become exercisable only if (1) Welsh, Carson, Anderson & Stowe VIII, L.P., WCAS
Management Corporation and certain parties which purchase the convertible
debentures from these entities acquire beneficial ownership of 30% or more of
our common stock or start an offer which would result in those entities owning
30% or more of our common stock or (2) any other person or group acquires
beneficial ownership of 15% or more of our common stock or starts an offer which
would result in that person or group owning 15% or more of our common stock. At
that time, each right owned by unaffiliated others entitles its holder to
purchase common stock (or any combination of common stock, preferred stock, debt
securities and cash, as determined by our board of directors) worth two times
the exercise price of the right. If we are involved in a business combination
transaction with another person or if we sell 50% or more of our assets or
earning power to another person, each right entitles its holder to purchase
shares of our common stock or the acquiring company's common stock worth two
times the exercise price of the right. We may redeem the rights for $.01 each at
any time until the tenth day following public announcement that an ownership
position as described above has been acquired. The rights expire on April 28,
2007.
Capital Expenditures
Capital expenditures excluding acquisitions in fiscal 1999 totaled $124.0
million. Of this total, we used approximately $32.6 million to complete the
construction of the replacement hospital in Florence, South Carolina, which had
a total cost of approximately $95 million. We expect to make routine capital
expenditures excluding acquisitions for fiscal 2000 of approximately $90 to $100
million.
Capital expenditures excluding acquisitions for fiscal 1998 totaled $131.8
million. These capital expenditures consisted primarily of the construction of a
replacement hospital and two medical office buildings in Florence, South
Carolina of approximately $51.8 million and routine capital expenditures in the
amount of $80.0 million.
During fiscal 1999, we used $217.2 million in cash for acquisitions. We
acquired four hospitals and affiliated healthcare entities and entered into
operating lease agreements to lease land and buildings used by three of these
hospitals. The estimated fair market value of the leased land and buildings was
$108.7 million. In addition, through one of our subsidiaries, we contributed a
hospital and related business to acquire a controlling interest in a joint
venture in Vicksburg, Mississippi. We manage the joint venture.
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During fiscal 1998, we used $131.7 million in cash for acquisitions. We
acquired two hospitals and affiliated health care entities and entered into
operating lease agreements to lease land and buildings used by one hospital. The
estimated fair market value of the leased land and buildings was $23.7 million.
Also, we contributed three hospitals and paid approximately $23 million in
exchange for minority interests in joint ventures in Las Vegas, Nevada and
Macon, Georgia. These joint ventures own and operate seven hospitals and are
managed by our joint venture partners.
SEASONALITY AND INFLATION
Our business is seasonal, with higher patient volumes and net operating
revenues in the third quarter of our fiscal year than in the remainder of the
year. This seasonality happens because more people get sick during the winter,
which in turn increases the number of patients in our owned hospitals.
The health care industry is labor intensive. This means that our owned
hospitals need many employees, who we pay salaries and other benefits. These
salaries and benefits increase during periods of inflation and shortages of
qualified potential employees. In addition, our suppliers pass along rising
costs to us in the form of higher prices. Until fiscal 1999, we generally were
able to offset these cost increases by expanding, and increasing charges for,
our hospital services and procedures. As discussed earlier, in fiscal 1999, we
were not able to reduce costs proportionately with reductions in payments from
our payors. We cannot assure you that we will be able to offset or control
future cost increases.
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
Our interest expense is sensitive to changes in the general level of
interest rates. To mitigate the impact of fluctuations in interest rates, we
generally maintain 50%-75% of our debt at a fixed rate, either by borrowing on a
long-term basis or entering into interest rate swap transactions. Interest rate
swap agreements are contracts which allow us to periodically exchange fixed and
floating interest rate payments over the life of the agreements. Floating-rate
payments are based on LIBOR and fixed-rate payments are dependent upon market
levels at the time we execute the swap agreement. Our policy is to not hold or
issue derivatives for trading purposes and to avoid derivatives with leverage
features. Some of our swap agreements allow the counter party 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. If our counter parties do not comply with their obligations under
our financial instruments, we may suffer losses. Our counter parties are
creditworthy financial institutions and we anticipate that they will be able to
fully satisfy their obligations under the contracts. For the years ended June
30, 1999, 1998 and 1997, we received a weighted average rate of 5.3%, 5.8% and
5.8% and paid a weighted average rate of 5.7%, 6.0% and 5.9%, respectively.
The following table presents information about our market-sensitive
financial instruments, including long-term debt and interest rate swaps as of
June 30, 1999. For debt obligations, the table presents principal cash flows and
related
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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 or cancel are not exercised) and weighted
average interest rates based on rates in effect at June 30, 1999. The fair
values of long-term debt and interest rate swaps were determined based on quoted
market prices at June 30, 1999 for the same or similar issues.
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Maturity Date, Fiscal Year Ending June 30
- -----------------------------------------
(Dollars in millions)
June 30,
1999
Fair Value
There- of
2000 2001 2002 2003 2004 after Total Liabilities
---- ---- ---- ---- ---- ------ ----- -----------
Long-term debt:
Fixed rate long-term
debt $0.9 $0.8 $0.6 $ 0.6 $0.6 $151.6 $155.1 $150.6
Average interest rates 7.6% 7.7% 7.7% 7.7% 7.8% 8.7%
Variable rate long-
term debt $718.0 $718.0 $718.0
Average interest rates 6.2%
Interest rate swaps:
Pay fixed/receive
variable notional
amounts $400.0 $400.0 $ 1.5
Average pay rate 5.9%
Average receive rate 5.3%
YEAR 2000 ISSUES
The "Year 2000 problem" refers to the inability of computers and related
software to correctly interpret and process Year 2000 dated transactions. This
occurs because some computer programs and embedded-chip systems use two digits
instead of four to define the applicable year. Computer systems that are not
Year 2000 compliant may not process data accurately for transactions dated after
the year 1999. Any of our computer programs, embedded-chip systems, building
infrastructure components or medical devices that have date sensitive software
may recognize "00" as the year 1900 rather than the year 2000. Our computer
programs, embedded-chip systems or equipment, and medical devices could fail if
we do not correct this problem in time. This could in turn disrupt our business
operations or affect patient diagnosis and treatment.
Our Year 2000 strategy is led by our Vice President of Corporate Services.
As part of our strategy, in July 1998, we retained an external firm to provide
consulting services and to assist us in implementing our Year 2000 strategy. We
have a Year 2000 steering committee to assist us in implementing our Year 2000
strategy. Our Year 2000 strategy addresses our owned and managed hospitals and
our corporate offices.
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Owned Hospitals and Corporate Office
Our owned hospitals and the corporate office Year 2000 strategy includes
phases for education, inventory and assessment, validation (including testing)
and conversion/remediation/replacement. We are also developing contingency plans
to address potential disruption of operations arising from the Year 2000
problem.
Education. We have completed the education phase of our Year 2000
strategy. Education will continue to be provided throughout the Year 2000
implementation process.
Inventory and Assessment. We have substantially completed the inventory
and assessment phase of our Year 2000 strategy.
Testing and Remediation.
Tier Approach - Owned Hospitals. We have adopted a "tier approach" for
Year 2000 project completion. Tier 1 addresses applications and equipment that
have a direct impact on patient safety and health or are essential to our daily
operations. Tier 2 represents applications and equipment that are critical to
continued business operations, but not required to provide day-to-day service to
the patients and for which a viable alternative exists. Tier 3 indicates
applications and equipment not essential to our daily operations.
We have given first priority in our testing and remediation efforts to
date to Tier 1 applications and equipment as described below. However, we are
also currently validating and remediating Tier 2 devices, components and
systems. We currently expect to substantially complete validation and
remediation of Tier 2 devices, components and systems by the end of 1999. In
addition to our own testing, we are also using an outside vendor to gather and
monitor manufacturer Year 2000 compliance information of biomedical devices,
building infrastructure components and information systems. In general, we are
relying on vendor verification of Year 2000 compliance for Tier 2 devices,
components and systems, rather than testing these items.
Financial Application Software and Hardware - Owned Hospitals. Third
parties supply and support the financial application software used in our owned
hospitals in such areas as patient accounting and financial reporting. We use
very little in-house developed software. Sixteen hospitals have been advised by
the manufacturers of our financial software systems that such software is
substantially Year 2000 compliant. We have scheduled two owned hospitals to
convert in October 1999 (revised from December 1999) to a financial software
system which is represented by the manufacturer to be Year 2000 compliant. We
have scheduled upgrades of the financial systems for one hospital to be
completed in October 1999 and the two remaining hospitals (which share one
system) by early December 1999.
The vendors of our owned hospitals' financial application software have
tested the standard versions of their software. We have discussed with the
vendors their testing procedures and test results, and considered their written
representation of Year 2000 compliance. We believe that the vendors have
sufficiently tested the standard software. Some of our hospitals have customized
47
50
the standard software. In addition, all of our hospitals have interfaces which
permit information to be transferred among different software programs and
computer equipment. We have inventoried and are now evaluating the level of risk
in the customized versions of the standard financial application software and
the interfaces to determine whether any further testing or remediation is
required.
Clinical and Other Software and Hardware - Owned Hospitals. We also
use clinical software and hardware such as laboratory and pharmacy systems and
related computer equipment in our owned hospitals. We are now testing and
remediating the computer equipment which we have designated as Tier 1 systems.
For Tier 1 clinical software and hardware which cannot be tested without taking
it out of service, we currently plan to follow a process similar to that
outlined above for verifying Year 2000 readiness for financial application
software. We currently expect to complete testing and validation of all Tier 1
clinical systems in September 1999. We believe that approximately 94% of the
Tier 1 systems requiring Year 2000 validation are now Year 2000 compliant. We
currently expect to complete remediation of the remaining 6% by the end of 1999.
Biomedical Equipment and Building Infrastructure - Owned Hospitals. We
have substantially completed testing and validation of all Tier 1 biomedical
equipment. We have not tested devices where the manufacturer has advised us
against testing such equipment and represented Year 2000 compliance in writing.
We believe that approximately 98% of the Tier 1 devices requiring Year 2000
validation are now Year 2000 compliant. We currently expect to complete
remediation for the remaining 2% by the end of 1999 (revised from September
1999). Our policy is that we will not use any Tier 1 biomedical device without
reasonable assurance that it will perform properly in light of the Year 2000
problem. Such assurance may take the form of testing, vendor assurances of Year
2000 compliance or, where feasible, developing a work around procedure for the
device in case of a possible malfunction.
We expect to complete testing and validation of Year 2000-related Tier 1
building infrastructure components of our owned hospitals in September 1999.
Remediation has been ongoing during the testing phase. We believe that
approximately 90% of the Tier 1 components requiring Year 2000 validation are
now Year 2000 compliant. We currently expect approximately 99% of the Tier 1
components requiring Year 2000 validation to be Year 2000 compliant by October
1999. The remaining 1% is scheduled to be completed by early December 1999
(revised from September 1999).
Corporate Office. We believe that our corporate office network is
substantially Year 2000 compliant. We have been advised by the manufacturer that
the financial software applications used by our corporate office are
substantially Year 2000 compliant. We have substantially completed the
education, inventory, remediation and testing phases with respect to other
corporate office and satellite office computer equipment, including desktop
computers and building infrastructure.
48
51
Managed Hospitals
In December 1998, we notified the owners of our managed hospitals that we
did not have the necessary expertise to assist hospitals with their Year 2000
problem. We advised the owners of our managed hospitals that they should engage
outside consultants to assist them in their Year 2000 compliance efforts. We
also recommended that each managed hospital create 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 body of each
managed hospital receive regular monthly reports from its Year 2000 committee.
We have distributed educational materials about the Year 2000 problem to the
owners of our managed hospitals. We monitor the progress of the response of our
managed hospitals to the Year 2000 problem by asking them to report to us the
status of their Year 2000 strategy. We do not independently verify their
reports. We have also identified third-party resources which our managed
hospitals may choose to use to assist them in addressing their Year 2000
problem.
We believe we are not responsible for ensuring the Year 2000 compliance of
our managed hospitals. We are not able to verify the status of remediation
efforts at our managed hospitals. Therefore, we are not able to evaluate the
most reasonably likely Year 2000 worst case scenario for our managed hospitals.
Because we provide only management services, we do not pay the expenses of our
managed hospitals and, therefore, we do not expect to incur any significant Year
2000 remediation costs for our managed hospitals. We cannot assure you that our
managed hospitals will not seek to hold us responsible for losses they incur
arising out of their Year 2000 problem. Nor can we assure you that we will not
ultimately be found liable for the losses which, if they occur, may be
material.
Reliance on Third Parties
We rely heavily on third parties in operating our business. In addition to
our reliance on software, hardware and other equipment vendors to verify the
Year 2000 compliance of their products, we also depend on (1) fiscal
intermediaries which process claims and make payments for the Medicare and
Medicaid programs, (2) insurance companies, managed care entities and other
third party payors, (3) third party processors which submit our Medicare claims
for payment, (4) utilities which provide electricity, water, gas and telephone
services and (5) vendors of medical supplies and pharmaceuticals used in patient
care. We are contacting the most critical third parties to determine whether
they believe they are Year 2000 compliant and if not, the extent to which our
operations may be adversely affected. We will modify contingency plans as
necessary. We cannot assure you that the systems or products of third parties on
which we rely will be converted on a timely basis or that their failure to
become Year 2000 compliant would not have a material adverse effect on our
results of operation or financial condition. In its June 30, 1999 Quarterly
Progress Report, the Health Care Financing Administration stated that all of its
25 internal mission critical systems and 75 mission critical external claims
processing systems were Year 2000 compliant. We are seeking assurances from
fiscal intermediaries, third party claims processors, and other payors that
their systems are Year 2000 compliant. We expect this process to continue
through the remainder of 1999.
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52
Costs to Address Year 2000 Issue
We currently estimate that the total cost to implement our Year 2000
strategy will be about $20 million. This does not include payroll costs for
certain internal employees because we do not separately track these costs. It
also does not include the costs of implementing contingency plans, if required.
We incurred approximately $2 million in operating costs and $5 million in
capital costs during the first six months of calendar 1999. Prior to this time,
we were not able to reasonably estimate our Year 2000 costs incurred. We believe
that 80% to 90% of the remaining costs will be capital costs. We set aside a
portion of our fiscal 2000 capital budget as Year 2000 costs and expect that
substantially all of our Year 2000 capital costs can be accommodated within our
budget. All cost estimates are preliminary and are expected to be revised as the
project progresses. There can be no guarantees that these estimates will be
achieved and actual results could differ materially from those anticipated.
Worst Case Scenarios
We believe that the most reasonably likely worst case scenarios would
involve (1)malfunctions in clinical computer software and hardware at our owned
hospitals, (2)malfunctions in biomedical equipment at our owned hospitals,
(3)temporary disruptions in the delivery of medical supplies and utility
services to our owned hospitals and (4)temporary disruptions in payments to our
owned hospitals. Any of these worst case scenarios could materially disrupt our
business and operations. In addition, if any of these things occur, we will have
increased costs, as the affected hospital will have to refer patients and
procedures to other health care providers, contact alternative suppliers and
increase staffing to assure adequate patient care. We could also lose revenue
for procedures which our hospitals are unable to perform. For example, our
hospitals plan to suspend a service if Year 2000 compliant equipment required
for that service is unavailable. Our cash flow will be adversely affected if we
experience disruptions in payments. We are basing the above assessment on
information currently available to us. Our actual results may differ materially.
Contingency Plans
We developed contingency plans in all of our owned hospitals that we
believe will reduce disruption in service that may be caused by the Year 2000
problem. As part of our contingency plan, each of our owned hospitals has a
disaster plan, which we review regularly. These disaster plans are designed to
enable the hospital to continue to function during natural disasters and other
crises. The plans contemplate moving patients to other facilities if the
hospital is not able to continue to care for them. In some cases, we 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. We are also developing a contingency plan for our corporate
offices.
Risks of Year 2000 Issues
50
53
We can provide no assurances that applications and equipment we believe to
be Year 2000 compliant will not experience difficulties, that Year 2000 issues
will not arise that we did not contemplate or erroneously assigned a low level
of risk, or that we will not experience difficulties obtaining resources needed
to make modifications to or replace affected systems and equipment. Failure by
us or third parties on which we rely to resolve Year 2000 issues could have a
material adverse effect on our results of operations and our ability to provide
health care services. Consequently, we can give no assurances that issues
related to Year 2000 will not have a material adverse effect on our financial
condition or results of operations. Our 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 projected
cost of the Year 2000 program and the dates on which we believe the phases of
the program will be completed are based on our best estimates, which were
derived using numerous assumptions of future events. Factors that could cause
such changes include availability of qualified personnel and consultants, the
actions of third parties and changes in governmental regulations. We can give no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated.
GENERAL
Under BBA 97, there were no increases in the inpatient operating payment
rates to acute care hospitals for services from October 1, 1997 through
September 30, 1998. Inpatient operating payment rates increased 0.5% for October
1, 1998 through September 30, 1999 and are expected to increase 1.1% effective
October 1, 1999 through September 30, 2000. These increases are less than
inflation and subsequent increases are also expected to be less than inflation.
Also, the threshold to qualify for additional payments for treating costly
inpatient cases (outliers) increased, resulting in decreased payments to
hospitals effective October 1, 1999. BBA 97 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. BBA 97 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.
The Health Care Financing Administration's current plan is to implement PPS for
outpatients by July 1, 2000 and for home health on October 1, 2000. We believe
that outpatient PPS may be delayed until January 2001.
We experienced reductions in payments for outpatient services beginning in
fiscal 1998. We also experienced reductions in home health volumes and payment
levels because of changes in home health reimbursement prior to implementation
of PPS, as well as reductions in payments under PPS for skilled nursing
facilities. Our home health visits have begun to stabilize. In response to BBA
97, we have consolidated certain home health agencies and skilled nursing
facilities, reduced costs at our home health agencies and ceased admitting
patients to skilled nursing facilities at two hospitals.
The federal government now estimates that BBA 97 will reduce health care
spending by approximately double the government's original estimate. BBA 97 has
51
54
reduced our ability to maintain our historical rate of net revenue growth and
operating margins. BBA 97 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 our hospitals. We expect
continuing pressure to limit expenditures by governmental health care programs.
We are continuing to experience an increase in managed care. Managed care
includes indemnity insurance and employer plans which pay less than full
charges, health maintenance organizations, preferred provider organizations and
various other forms of managed care. An increasing number of payors are actively
negotiating amounts paid to hospitals, which are lower than the hospitals'
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 and
obtaining better pricing, we employ managed care experts. In several markets, we
have canceled contracts with PPOs who allow discounts we believe are not
justified. We are reviewing other markets for similar activity. Additionally, we
plan to install managed care information systems in our owned hospitals to
improve the information available to management and to help ensure that we are
paid at the contracted amounts. The trend toward managed care has and may
continue to adversely affect our ability to grow net operating revenue and
improve operating margins.
Our 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 volumes continue 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. Over the long term, we expect the industry trend from
inpatient to outpatient services to continue due to the increased focus on
managed care and advances in technology. We also expect increased competition
and admission constraints to continue. 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 our ability to grow net
operating revenue and improve operating margins.
Outpatient revenue of our owned hospitals was approximately 40.6%, 40.2%
and 36.3% of gross patient service revenue for the years ended June 30, 1999,
1998 and 1997, respectively.
Until fiscal 1999, our historical financial trend has been favorably
impacted by our ability to successfully acquire acute care hospitals. During
fiscal 1999, the financial performance of our recent acquisitions adversely
affected our operating margin and results of operations. We believe that trends
in the health care industry described above may create possible future
acquisition opportunities. We face competition in acquiring hospitals from a
number of well-capitalized organizations. A recent national study indicates that
acute care hospital margins peaked in 1998 and are expected to decline for the
next several years. The pricing expected by hospital sellers may not yet reflect
lower margins. Additionally, some hospitals are sold through an "auction"
process, which may
52
55
result in competitors paying higher prices for those properties than we believe
is reasonable. In light of changes in payments from Medicare and managed care
payors, increased pricing pressures for acquired hospitals and the substantial
number of transactions completed in fiscal 1999, we intend to be selective in
pursuing acquisitions. The Year 2000 problem may reduce the number of suitable
hospital acquisition candidates. Many states have implemented review processes
by the Attorneys General of not-for-profit hospital acquisitions, resulting in
delays to close an acquisition. There can be no assurances that we can continue
to grow through hospital acquisitions and successfully integrate acquired
hospitals into our system.
In accordance with generally accepted accounting principles, we estimate
settlements with third party payors. These estimates are based on assumptions
and affect the amounts we report in our financial statements. For example, we
report net patient service revenue at net amounts we expect to receive from our
hospital patients, third party payors, and others for services rendered,
including estimated retroactive adjustments under agreements with third party
payors. We make estimates of settlements under agreements with third party
payors in the period we provide the related services. We then adjust the
settlements as final settlements are determined or additional information is
obtained from the third party payor. Our quarterly or annual operating results
fluctuate based on the timing and amount of changes in estimates. Our
adjustments to estimated final settlements increased revenue by $10.2 million
and $11.3 million for the years ended June 30, 1999 and 1998, respectively.
The IRS is examining our federal income tax returns for fiscal years 1993
through 1998. The IRS has proposed to adjust our federal income tax returns for
fiscal years 1993 through 1995. The most significant adjustments relate to how
we compute bad debt expense and how we value property, plant and equipment of
hospitals we acquire and their related depreciable lives. We intend to protest
substantially all of the proposed adjustments through the appeals process of the
IRS. In our opinion, the ultimate outcome of the IRS examinations will not have
a material effect on our results of operations or financial condition.
In 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This standard will require us to recognize
all derivatives on the balance sheet at their fair value. Derivatives that are
not hedges must be adjusted to fair value through changes to our income
statement. For interest rate swap agreements that qualify as hedges, we will
offset changes in fair value against the change in fair value of the hedged
assets, liabilities, or firm commitments through changes to our earnings. We
will adopt this new FASB standard on July 1, 2000. We are presently evaluating
the new standard to determine its effect on our earnings and financial position.
On March 31, 1999, the FASB released a proposed interpretation relating to
"Accounting for Certain Transactions involving Stock Compensation". This
proposed interpretation requires variable-award accounting for repriced stock
options. The FASB expects the proposed interpretation to be effective in the
fourth calendar quarter of 1999. However, it would apply to transactions that
occur after December 15, 1998. No adjustments would be made to financial
statements for periods prior to the effective date and no expense would be
53
56
recognized for any additional compensation costs attributable to periods before
the effective date (See "Capital Resources").
54
57
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7. "Management's Discussion and Analysis of Results of
Operations and Financial Condition. Markets Risks Associated With Financial
Instruments."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements are submitted in a
separate section of this report. See pages F-1, F-2, and F-4 through F-33.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information concerning this Item is incorporated by reference to the
Company's definitive proxy materials for the Company's 1999 Annual Meeting of
Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning this Item is incorporated by reference to the
Company's definitive proxy materials for the Company's 1999 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning this Item is incorporated by reference to the
Company's definitive proxy materials for the Company's 1999 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning this Item is incorporated by reference to the
Company's definitive proxy materials for the Company's 1999 Annual Meeting of
Stockholders.
58
ANNUAL REPORT ON FORM 10-K
Item 8, Item 14(a)(1) and (2) and (d)
List of Financial Statements and Financial Statement Schedule
Financial Statements and Supplementary Data
Certain Exhibits
Financial Statement Schedule
Quorum Health Group, Inc.
Brentwood, Tennessee
June 30, 1999
F-1
59
Quorum Health Group, Inc. and Subsidiaries
Form 10-K -- Item 8 and Item 14(a) (1) and (2) and (d)
Index to Financial Statements and Financial Statement Schedule
The following consolidated financial statements of Quorum Health Group, Inc. and
subsidiaries are included in Item 8:
Page No.
--------
Report of Independent Auditors F- 3
Consolidated Statements of Income-- Years Ended
June 30, 1999, 1998 and 1997 F- 4
Consolidated Balance Sheets-- June 30, 1999 and 1998 F- 5
Consolidated Statements of Changes in Stockholders' Equity--
Years Ended June 30, 1999, 1998 and 1997 F- 7
Consolidated Statements of Cash Flows-- Years Ended
June 30, 1999, 1998 and 1997 F- 8
Notes to Consolidated Financial Statements F- 9
The following consolidated financial statement schedule of Quorum Health Group,
Inc. and subsidiaries is included in Item 14(d):
Schedule II-- Valuation and Qualifying Accounts S- 1
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
F-2
60
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Quorum Health Group, Inc.
We have audited the accompanying consolidated balance sheets of Quorum Health
Group, Inc. and subsidiaries as of June 30, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended June 30, 1999. Our audits also included
the financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Quorum Health
Group, Inc. and subsidiaries at June 30, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Nashville, Tennessee
August 9, 1999,
except for Notes 10 and 14, as to which the date is
August 20, 1999
F-3
61
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year Ended June 30
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenue:
Net patient service revenue $ 1,505,027 $ 1,427,969 $ 1,274,498
Hospital management/professional services 82,698 79,537 78,708
Reimbursable expenses 64,859 64,846 60,740
----------- ----------- -----------
Net operating revenue 1,652,584 1,572,352 1,413,946
Salaries and benefits 687,090 628,090 561,327
Reimbursable expenses 64,859 64,846 60,740
Supplies 231,299 210,056 198,469
Fees 156,885 140,859 125,720
Other operating expenses 121,948 102,959 94,629
Provision for doubtful accounts 126,525 106,733 89,919
Equity in earnings of affiliates (22,348) (6,993) --
Leases and rentals 34,192 26,679 22,227
Depreciation and amortization 95,427 87,020 75,134
Interest 53,683 40,606 45,601
Write-down of assets and investigation and
litigation related costs 35,173 22,850 --
Minority interest (4,501) 3,118 741
----------- ----------- -----------
Income before income taxes and extraordinary
item 72,352 145,529 139,439
Provision for income taxes 33,494 58,849 55,357
----------- ----------- -----------
Income before extraordinary item 38,858 86,680 84,082
Extraordinary charges from retirement of debt -- -- (8,197)
----------- ----------- -----------
Net income $ 38,858 $ 86,680 $ 75,885
=========== =========== ===========
Basic earnings per share:
Income before extraordinary item $ 0.53 $ 1.16 $ 1.14
Extraordinary charges from retirement of debt -- -- (0.11)
----------- ----------- -----------
Net income $ 0.53 $ 1.16 $ 1.03
=========== =========== ===========
Diluted earnings per share:
Income before extraordinary item $ 0.52 $ 1.12 $ 1.11
Extraordinary charges from retirement of debt -- -- (0.11)
----------- ----------- -----------
Net income $ 0.52 $ 1.12 $ 1.00
=========== =========== ===========
Weighted average shares outstanding:
Basic 73,500 74,733 73,442
Common stock equivalents 930 2,434 2,235
----------- ----------- -----------
Diluted 74,430 77,167 75,677
=========== =========== ===========
See accompanying notes.
F-4
62
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30
------------------------
1999 1998
---------- ----------
ASSETS
Current assets:
Cash $ 22,258 $ 17,549
Accounts receivable, less allowance for
doubtful accounts of $83,896 at June 30,
1999 and $65,561 at June 30, 1998 332,312 273,376
Supplies 39,003 29,336
Other 46,838 34,245
---------- ----------
Total current assets 440,411 354,506
Property, plant and equipment, at cost:
Land 88,157 66,424
Buildings and improvements 435,525 291,258
Equipment 584,017 464,577
Construction in progress 24,875 72,676
---------- ----------
1,132,574 894,935
Less accumulated depreciation 297,454 216,229
---------- ----------
835,120 678,706
Cost in excess of net assets acquired, net 226,038 144,315
Investments in unconsolidated entities 259,709 245,551
Other 70,670 67,875
---------- ----------
Total assets $1,831,948 $1,490,953
========== ==========
F-5
63
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except per share amounts)
June 30
------------------------
1999 1998
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 96,904 $ 70,483
Accrued salaries and benefits 72,558 64,196
Other current liabilities 34,841 27,533
Current maturities of long-term debt 913 1,273
---------- ----------
Total current liabilities 205,216 163,485
Long-term debt, less current maturities 872,213 617,377
Deferred income taxes 33,422 29,470
Professional liability risks and other
liabilities and deferrals 36,456 30,882
Minority interests in consolidated entities 59,975 27,473
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 300,000
shares authorized; 73,166 issued
and outstanding at June 30, 1999
and 75,478 at June 30, 1998 732 755
Additional paid-in capital 253,714 290,149
Retained earnings 370,220 331,362
---------- ----------
624,666 622,266
---------- ----------
Total liabilities and stockholders' equity $1,831,948 $1,490,953
========== ==========
See accompanying notes.
F-6
64
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Common Stock Additional
-------------------------- Paid-in Retained
Shares Amount Capital Earnings Total
--------- --------- --------- --------- ---------
Balance at July 1, 1996 72,969 $ 730 $ 262,337 $ 168,797 $ 431,864
Options exercised and
related tax benefits,
net of shares tendered
in payment 888 9 6,430 -- 6,439
Stock issued under employee
stock purchase plan 280 2 3,925 -- 3,927
Net income -- -- -- 75,885 75,885
--------- --------- --------- --------- ---------
Balance at June 30, 1997 74,137 741 272,692 244,682 518,115
Options exercised and
related tax benefits,
net of shares tendered
in payment 1,098 12 12,993 -- 13,005
Stock issued under employee
stock purchase plan 243 2 4,464 -- 4,466
Net income -- -- -- 86,680 86,680
--------- --------- --------- --------- ---------
Balance at June 30, 1998 75,478 755 290,149 331,362 622,266
Repurchases of common stock (3,585) (36) (48,066) -- (48,102)
Options exercised and
related tax benefits,
net of shares tendered
in payment 675 8 6,936 -- 6,944
Stock issued under employee
stock purchase plan 598 5 4,695 -- 4,700
Net income -- -- -- 38,858 38,858
--------- --------- --------- --------- ---------
Balance at June 30, 1999 73,166 $ 732 $ 253,714 $ 370,220 $ 624,666
========= ========= ========= ========= =========
See accompanying notes.
F-7
65
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended June 30
-------------------------------------
1999 1998 1997
--------- --------- ---------
OPERATING ACTIVITIES:
Net income $ 38,858 $ 86,680 $ 75,885
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 87,802 78,208 66,907
Amortization of intangible assets 7,624 8,812 8,227
Extraordinary charges from retirement of debt -- -- 13,307
Write-down of assets 27,721 22,850 --
Provision for doubtful accounts 126,525 106,733 89,919
Provision for deferred taxes 4,028 (7,816) 5,106
Undistributed earnings of affiliates (16,163) (6,993) --
Other 125 5,371 5,032
Changes in operating assets and liabilities,
net of effects from acquisitions and
divestitures:
Accounts receivable (148,719) (161,872) (114,589)
Supplies and other current assets (10,067) (5,363) (93)
Other assets (365) 5,400 (8,646)
Accounts payable and accrued expenses 13,044 8,019 27,630
Other current and long-term liabilities (1,358) (15,315) 4,701
--------- --------- ---------
Net cash provided by operating activities 129,055 124,714 173,386
INVESTING ACTIVITIES:
Purchase of acquired companies (217,236) (131,741) (184,575)
Purchase of property, plant and equipment (124,024) (131,766) (82,977)
Proceeds from sale of assets 13,368 14,695 8,060
Other (1,107) (4,238) 44
--------- --------- ---------
Net cash used in investing activities (328,999) (253,050) (259,448)
FINANCING ACTIVITIES:
Borrowings under bank debt 641,300 458,900 691,700
Repayments of bank debt (385,700) (360,400) (504,800)
Repurchase of Senior Subordinated Notes -- (2,224) (106,380)
Repurchases of common stock (48,102) -- --
Proceeds from issuance of common stock, net 9,173 13,235 10,366
Change in outstanding checks and overnight investment 6,721 20,199 --
Other (18,739) (2,833) (6,198)
--------- --------- ---------
Net cash provided by financing activities 204,653 126,877 84,688
--------- --------- ---------
Increase (decrease) in cash 4,709 (1,459) (1,374)
Cash at beginning of year 17,549 19,008 20,382
--------- --------- ---------
Cash at end of year $ 22,258 $ 17,549 $ 19,008
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ (52,858) $ (44,353) $ (42,601)
========= ========= =========
Income taxes paid $ (34,152) $ (73,205) $ (44,489)
========= ========= =========
See accompanying notes.
F-8
66
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
1. ORGANIZATION AND ACCOUNTING POLICIES
Quorum Health Group, Inc. through its subsidiaries owns and operates
acute care hospitals and health systems nationwide. At June 30, 1999,
Quorum Health Group, Inc. and subsidiaries (the Company) owned 21
hospitals and managed 223 hospitals. The Company's subsidiaries also
are a minority investor in joint ventures that own and operate seven
hospitals.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and all subsidiaries and entities controlled by the
Company. All significant intercompany accounts and transactions have been
eliminated. Investments in entities which the Company does not control, but in
which it has a substantial ownership interest and can exercise significant
influence, are accounted for using the equity method.
Use of Estimates: The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Accounts Receivable: Accounts receivable consist primarily of amounts due from
the federal government and state governments under Medicare, Medicaid and other
government programs and other payors including commercial insurance companies,
health maintenance organizations, preferred provider organizations, self-insured
employers and individual patients. The Dothan, Alabama and Ft. Wayne, Indiana
markets accounted for approximately 32% of the Company's owned hospital revenue
for the year ended June 30, 1999.
Supplies: Supplies are stated at the lower of cost (first-in, first-
out)or market.
Property, Plant and Equipment: Depreciation is computed using the straight-line
method principally with a range of depreciable lives from 20-40 years for
buildings and improvements and 3-20 years for equipment, or over the lives of
leases if shorter.
Cost in Excess of Net Assets Acquired: Cost in excess of net assets acquired (or
goodwill) consists of the excess purchase price over the fair value of acquired
tangible and identifiable intangible assets.
F-9
67
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill is amortized using the straight-line method primarily over 15 to 40
years. Accumulated amortization of cost in excess of net assets acquired was
$15.4 million and $11.8 million at June 30, 1999 and 1998, respectively. The
carrying value of goodwill is reviewed if the facts and circumstances suggest
that it may be impaired. If this review indicates that goodwill will not be
recoverable based on undiscounted cash flows of the related assets, the Company
writes down the goodwill to estimated fair value (See Note 5).
Deferred Loan Costs: Deferred loan costs are included in other
noncurrent assets and are amortized over the term of the related debt.
Other Current Liabilities: Outstanding checks included in other current
liabilities was $26.9 million and $20.2 million at June 30, 1999 and 1998,
respectively.
Risk Management: The Company maintains self-insured medical plans for certain
employees and has entered into reinsurance agreements with independent insurance
companies to limit its losses. Unpaid claims are accrued based on the estimated
ultimate cost of settlement in accordance with past experience.
The Company generally is insured for professional liability based on a
claims-made policy purchased in the commercial market. The provision for
professional liability and comprehensive general liability claims include
estimates of the ultimate costs for claims incurred but not reported. The
liability is estimated in accordance with actuarial projections based on past
experience.
Net Operating Revenue: Net patient service revenue is received primarily from
the federal Medicare and state Medicaid programs and from commercial insurance
carriers. Net patient service revenue is reported at the estimated net
realizable amounts from patients, third-party payors, and others for services
rendered, including estimated retroactive adjustments under agreements with
third-party payors. Settlements with third-party payors are estimated in the
period the related services are rendered and adjusted in future periods as final
settlements are determined. The adjustments to estimated final settlements
resulted in increases to revenue of $10.2 million, $11.3 million and $5.5
million for the years ended June 30, 1999, 1998 and 1997, respectively.
Approximately 54%, 55% and 55% of gross patient service revenue for the years
ended June 30, 1999, 1998 and 1997, respectively relates to services rendered to
patients covered by Medicare and Medicaid programs.
Net patient service revenue is net of contractual adjustments and policy
discounts of $1,286.3 million, $1,135.1 million and $1,026.3
F-10
68
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
million for the years ended June 30, 1999, 1998 and 1997, respectively. For
patients who are unable to pay, the Company provides care without charge or at
amounts less than established rates. Because the Company does not pursue
collection of charity care, it is not reported in revenue.
Interest Rate Swap Agreements: The Company enters into interest rate swap
agreements to manage its interest rate exposure. The differential to be paid or
received is recognized over the life of the agreement as an adjustment to
interest expense (the accrual accounting method). The fair value of the swap
agreements and changes in the fair value are not recognized in the financial
statements.
Stock Based Compensation: The Company accounts for stock option grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees".
The Company recognizes no compensation expense for grants when the exercise
price equals or exceeds the market price of the underlying stock on the date of
grant.
Earnings Per Share: Earnings per share (EPS) is based on the weighted average
number of common shares outstanding and dilutive common stock equivalents
consisting of stock options (See Note 7). EPS amounts for all periods presented
have been restated, where appropriate, to conform to the Statement of Financial
Accounting Standards (SFAS) No.
128 "Earnings per Share".
Disclosures about Segments of an Enterprise: In fiscal 1999, the Company adopted
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 131 establishes reporting standards for disclosing
operating segment information.
Recently Issued Accounting Pronouncements: In 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This standard will require the Company to
recognize all derivatives on the balance sheet at their fair value. Derivatives
that are not hedges must be adjusted to fair value through changes to the
Company's income statement. For interest rate swap agreements that qualify as
hedges, the Company will offset changes in fair value against the change in fair
value of the hedged assets, liabilities, or firm commitments through changes to
the Company's earnings. The Company will adopt this new FASB standard on July 1,
2000. The Company is presently evaluating the new standard to determine its
effect on the earnings and financial position of the Company.
On March 31, 1999, the FASB released a proposed interpretation relating to
"Accounting for Certain Transactions involving Stock
F-11
69
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Compensation". This proposed interpretation requires variable-award accounting
for repriced stock options. The FASB expects the proposed interpretation to be
effective in the fourth calendar quarter of 1999. However, the proposed
interpretation would apply to transactions that occur after December 15, 1998.
No adjustments would be made to financial statements for periods prior to the
effective date and no expense would be recognized for any additional
compensation costs attributable to periods before the effective date.
Reclassifications: Certain prior year amounts have been reclassified to conform
to the current year presentation.
2. ACQUISITIONS, JOINT VENTURES AND SALES
During fiscal 1999, the Company acquired four hospitals and affiliated health
care entities. In connection with the acquisitions, the Company entered into
operating lease agreements to lease certain land and buildings with an estimated
fair value of $108.7 million. Effective April 8, 1999, the Company sold Park
Medical Center in Columbus, Ohio (See Note 5).
A majority-owned subsidiary of the Company and a subsidiary of Columbia/HCA
Healthcare Corp. (Col/HCA) formed 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 and sold its remaining interest in a hospital. In connection with
the acquisitions, the Company entered into an operating lease agreement to lease
certain land and buildings with an estimated fair value of $23.7 million. In
addition, the Company contributed three hospitals and paid approximately $23
million in exchange for equity interests in joint ventures that own and operate
seven hospitals (See Note 3).
During fiscal 1997, the Company acquired five hospitals and affiliated health
care entities and sold a minority interest in a Nebraska hospital.
Hospital and affiliated business acquisitions excluding operating leases are
summarized as follows (in thousands):
F-12
70
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year Ended June 30
------------------
1999 1998 1997
--------- --------- ---------
Fair value of assets acquired $ 288,613 $ 145,623 $ 233,582
Fair value of liabilities assumed (18,879) (13,882) (29,943)
Contributions from minority investors (52,498) -- (19,064)
--------- --------- ---------
Net cash used for acquisitions $ 217,236 $ 131,741 $ 184,575
========= ========= =========
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. Included in the acquisitions were costs in
excess of net assets acquired of approximately $107.2 million, $41.9 million and
$48.5 million for the years ended June 30, 1999, 1998, and 1997, respectively.
The operating results of the acquisitions, joint ventures and sales have been
consolidated in the accompanying consolidated statements of income for periods
subsequent to acquisition and for periods prior to disposal of controlling
interests.
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, 1998 and 1997 as if the respective
transactions had occurred at the beginning of the period presented (in
thousands, except per share data):
F-13
71
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year Ended June 30
-------------------
1999 1998 1997
---- ---- ----
Net operating revenue $ 1,707,554 $ 1,706,937 $ 1,389,463
Income before extraordinary item 41,762 95,975 82,100
Net income 41,762 95,975 73,903
Basic earnings per share:
Income before extraordinary item 0.57 1.34 1.12
Net income 0.57 1.34 1.01
Diluted earnings per share:
Income before extraordinary item 0.56 1.30 1.08
Net income 0.56 1.30 .98
The pro forma results of operations do not purport to represent what the
Company's results of operations would have been had such transactions in fact
occurred at the beginning of the years presented or to project the Company's
results of operations in any future period.
3. INVESTMENTS
Effective February 1, 1998, the Company and Universal Health Services formed
Valley Health System LLC and Summerlin Hospital Medical Center LLC. Effective
May 1, 1998, the Company and Columbia/HCA Healthcare Corp. formed Macon
Healthcare LLC. The Company has equity interests of 27.5% in Valley Health
System LLC, 26.1% in Summerlin Hospital Medical Center LLC and 38% in Macon
Healthcare LLC. During fiscal 1998, the Company recorded a $15 million charge
after taxes related to the write-down of goodwill at its hospital contributed to
Valley Health System LLC. The Company accounts for its investments in the LLCs
using the equity method of accounting. Unaudited financial information of all
affiliated companies as of and for the years ended June 30, 1999 and 1998 is as
follows (in thousands):
1999 1998
---- ----
Total assets $575,600 $531,800
Total liabilities 42,400 36,500
Net operating revenue 552,900 433,200
Net income 38,500 26,700
F-14
72
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The difference between the carrying value of the investments and the underlying
net book value is approximately $87.7 million at June 30, 1999. This amount is
amortized on a straight-line basis over thirty-six years.
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
June 30
--------
1999 1998
---- ----
Revolving Line of Credit $ 718,000 $ 462,400
8.75% Senior Subordinated Notes 150,000 150,000
Other debt 5,126 6,250
--------- ---------
873,126 618,650
Less current maturities (913) (1,273)
--------- ---------
$ 872,213 $ 617,377
========= =========
Revolving Line of Credit: In March 1999, the Company amended its credit facility
to provide increased flexibility under certain terms and conditions in the
agreement. The amended credit facility consists of an $850 million secured
revolving credit facility expiring November 26, 2002. The Company has the option
to request an incremental one-year extension subject to approval of 100% of the
lenders on each anniversary date of the inception of the credit agreement. The
revolving line of credit bears interest, at the Company's option, at generally
the lender's base rate, swing-line rate, or a fluctuating rate ranging from .55
to 1.55 percentage points above LIBOR. The Company pays a facility fee ranging
from .20 to .45 percentage points on the commitment. The interest rate margins
and facility fee rates are based on the Company's leverage ratio. Substantially
all stock of the Company's subsidiaries has been pledged under the terms of the
amended credit facility. The Company may prepay the amount outstanding at any
time. The interest rate in effect at June 30, 1999 was 6.2%.
8.75% Senior Subordinated Notes: The $150.0 million Senior Subordinated Notes
mature on November 1, 2005 and bear interest at 8.75%. The 8.75% Notes are
subject to redemption at the option of the Company at a price of 104.375% on or
after November 1, 2000, 102.188% on or after November 1, 2001 and at par on or
after November 1, 2002. The Company must offer to repurchase the 8.75% Notes at
101% upon a
F-15
73
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
change in control. The 8.75% Notes are unsecured obligations and are
subordinated in right of payment to all existing and future senior indebtedness.
Other Long-Term Debt Information: The credit facilities contain certain
financial covenants including but not limited to a limitation on debt levels,
the prohibition of dividend payments and other distributions and restrictions on
investments, repurchases of common stock, asset dispositions, the ability to
merge or consolidate with or transfer assets to another entity, the maintenance
of net worth and various financial ratios, including a fixed charge ratio and a
leverage ratio.
Maturities of long-term debt for the fiscal years subsequent to June 30, 1999
are as follows: 2000 - $0.9 million; 2001 - $0.8 million; 2002 - $0.6 million;
2003 - $718.6 million; 2004 - $0.6 million and thereafter - $151.6 million.
Extraordinary Charges from Retirement of Debt: During the fourth quarter of
fiscal 1997, the Company incurred extraordinary charges of $8.2 million (net of
applicable income taxes of $5.1 million). The charges consist of the premium
associated with the purchase of the 11.875% Notes, transaction costs, the
write-off of unamortized loan costs of the 11.875% Notes and the write-off of
unamortized loan costs of the $600.0 million secured revolving credit facility.
The 11.875% Notes were repurchased through a tender offer and the revolving
credit facility was replaced with a $850.0 million revolving credit facility.
Interest Rate Swap Agreements: Interest rate swap agreements are used on a
limited basis to manage the Company's interest rate exposure. The agreements are
contracts to periodically exchange fixed and floating interest rate payments
over the life of the agreements. The floating-rate payments are based on LIBOR
and fixed-rate payments are dependent upon market levels at the time the swap
agreement was consummated. The swap agreements effectively convert an aggregate
notional amount of $400 million of floating-rate borrowings to fixed-rate
borrowings at June 30, 1999. The initial term of the agreements expire at
various dates through 2003. 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 years ended June 30, 1999, 1998 and
1997, the Company received a weighted average
F-16
74
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
rate of 5.3%, 5.8% and 5.8%, respectively and paid a weighted average rate of
5.7%, 6.0% and 5.9%, respectively.
5. WRITE-DOWN OF ASSETS AND INVESTIGATION AND LITIGATION RELATED
COSTS
During fiscal 1999, the Company recorded the following pre-tax write-down of
assets and investigation and litigation related costs (in thousands):
Write-down of assets $29,873
Investigation and litigation related costs 5,300
-------
Total $35,173
=======
The Company recorded $25.6 million intangible asset write-downs relating to
certain physician practices and a $4.3 million write-down of assets primarily
related to Park Medical Center which was subsequently sold. 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 Park Medical Center to estimated fair value based on divestiture
negotiations. 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. The Company incurred $5.3 million in
investigation and litigation related costs related primarily to the qui tam and
shareholder actions against the Company (See Note 10).
6. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
F-17
75
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year ended June 30
------------------
1999 1998 1997
---- ---- ----
Current:
Federal $ 25,904 $ 58,320 $ 43,580
State and local 3,562 8,345 6,671
-------- -------- --------
29,466 66,665 50,251
Deferred:
Federal 3,407 (6,611) 4,451
State and local 621 (1,205) 655
-------- -------- --------
4,028 (7,816) 5,106
-------- -------- --------
$ 33,494 $ 58,849 $ 55,357
======== ======== ========
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate follows:
Year ended June 30
------------------
1999 1998 1997
---- ---- ----
Federal statutory rate 35.0% 35.0% 35.0%
State and local income
taxes, net of federal
income tax benefit 3.5 3.2 3.4
Write-down of nondeductible
physician practice
intangible assets 6.4 -- --
Nondeductible amortization
of cost in excess of net
assets acquired 0.6 0.3 0.3
Other 0.8 1.9 1.0
---- ---- ----
Effective income tax rate 46.3% 40.4% 39.7%
==== ==== ====
Deferred income taxes result from temporary differences in the recognition of
assets, liabilities, revenues and expenses for financial accounting and tax
purposes. Sources of these differences and the related tax effects are as
follows (in thousands):
F-18
76
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30
--------
1999 1998
---- ----
Deferred tax liabilities:
Depreciation and amortization $(40,964) $(40,202)
Provision for doubtful accounts (2,178) (6,086)
Other (4,126) (588)
-------- --------
Total deferred tax liabilities (47,268) (46,876)
-------- --------
Deferred tax assets:
Accrued expenses 10,321 9,958
Employee compensation 7,095 9,427
Other 594 2,261
-------- --------
Total deferred tax assets 18,010 21,646
-------- --------
Net deferred tax liabilities $(29,258) $(25,230)
======== ========
The balance sheet classification of deferred income taxes is as follows (in
thousands):
June 30
--------
1999 1998
---- ----
Current $ 4,164 $ 4,240
Long-term (33,422) (29,470)
-------- --------
Total $(29,258) $(25,230)
======== ========
7. STOCKHOLDERS' EQUITY AND STOCK BENEFIT PLANS
Common stock: 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
F-19
77
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of the Company's stock-based employee benefit plans. As of June 30, 1999, the
Company had repurchased 3,585,000 shares for an aggregate purchase price of
$48.1 million. All such shares were purchased in open market transactions. The
Company has not repurchased any shares since November 11, 1998.
During fiscal 1998, the Board of Directors approved a three-for-two stock split
effected in the form of a stock dividend paid on September 16, 1997 to
shareholders of record on September 2, 1997. The shares of common stock, price
per share, the number of shares subject to options and the exercise prices have
been retroactively restated for all periods presented, where appropriate.
During fiscal 1998, the Company's stockholders approved an amendment to increase
the number of authorized shares of common stock from 100,000,000 to 300,000,000.
Stock Option Plan: The Company's 1997 Stock Option Plan is the plan under which
non-qualified and incentive stock options may be granted. Stock options are
generally granted at an exercise price equal to the fair market value at the
date of grant and are exercisable over a period not to exceed ten years. The
plan provides for immediate and 100% vesting upon a change of control of the
Company. The Company has reserved 8,131,240 shares of common stock for stock
option issuances.
In March 1999, the Company's Board of Directors approved a plan to allow
employees to exchange "underwater" stock options. Based on the exchange, the
Company canceled 5,158,000 options at exercise prices ranging from $12.09 to
$33.06 and issued 3,580,000 options at an exercise price of $9.00. The effect
was to reduce the number of options held to offset the benefit of a lower
exercise price. The estimated economic value of the grants was generally
unchanged as a result of the exchange. Under the proposed interpretation of APB
Opinion No. 25, repriced options would have variable-award accounting (See Note
1). Should the Company be required to apply variable award accounting to the
repriced options, such options will vest and terminate thirty days after the
Company gives notice to the employees. Outstanding options to purchase 3,235,000
shares of common stock were not included in the computation of earnings per
share for the fiscal year ended June 30, 1999, because the options' exercise
prices were greater than the average market price of the common stock.
SFAS No. 123 "Accounting for Stock-Based Compensation" requires the Company to
disclose the pro forma net income and earnings per share as if compensation
expense were recognized for options granted
F-20
78
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
subsequent to June 30, 1995. These pro forma amounts are as follows
(in thousands, except per share data):
Year Ended June 30
------------------
1999 1998 1997
---- ---- ----
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ----- -------- ------
Net Income $ 38,858 $ 35,266 $ 86,680 $82,019 $ 75,885 $73,235
EPS:
Basic 0.53 0.48 1.16 1.10 1.03 1.00
Diluted 0.52 0.47 1.12 1.06 1.00 .97
Stock-based compensation costs on a pro forma basis would have reduced pretax
income by $5.4 million, $6.6 million and $3.4 million in fiscal 1999, 1998 and
1997, respectively.
The per share weighted-average fair value of stock options granted during fiscal
1999, 1998 and 1997 was $3.15, $6.82 and $6.49, respectively, on the date of
grant using a Black-Scholes option pricing model with the following assumptions:
Year Ended June 30
------------------
1999 1998 1997
---- ---- ----
Expected volatility .380 .186 .172
Risk-free interest rates 5%-6% 5%-6% 6%-7%
Expected lives (years) 2.3 4.3 4.4
Forfeiture rates 4.6% 4.8% 5.6%
Information regarding the Company's option plans for fiscal 1999, 1998, and 1997
are summarized below (in thousands, except per share amounts):
F-21
79
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Option Price Weighted Average
Options Per Share Exercise Price
-------- ------------ ----------------
Balances, July 1, 1996 5,936 $ .67- 17.33 $ 10.65
Granted 1,776 .67- 23.83 17.66
Exercised (926) 1.00- 13.67 5.85
Canceled (304) 1.00- 16.59 12.18
------ ------------ ------------
Balances, June 30, 1997 6,482 .67- 23.83 13.18
Granted 2,248 22.50- 33.06 24.01
Exercised (1,228) .67- 22.50 9.80
Canceled (247) 4.00- 25.00 14.22
------ ------------ ------------
Balances, June 30, 1998 7,255 .67- 33.06 17.07
Granted 5,699 .67- 27.13 9.19
Exercised (702) .67- 20.75 7.03
Canceled (6,230) .67- 33.06 18.20
------ ------------ ------------
Balances, June 30, 1999 6,022 $ .67- 33.06 $ 9.61
====== ============ ============
At June 30, 1999, 1998, and 1997, the number of options exercisable was
2,678,000, 2,221,000 and 1,692,000, respectively, and the options available for
grant were 2,113,000, 1,518,000 and 3,747,000, respectively.
The following table summarizes information regarding the options outstanding at
June 30, 1999 (in thousands, except per share amounts):
F-22
80
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Options Outstanding Options Exercisable
Weighted ------------------- -------------------
Average
Remaining Weighted Weighted
Contract Range of Average Average
Life Exercise Number Exercise Number Exercisable
(Yrs) Prices Outstanding Price Exercisable Price
--------- -------- ----------- -------- ----------- -----------
1 $1.00-12.92 347 $ 8.22 347 $ 8.22
2 0.67-14.67 983 10.08 850 9.72
3 21.00 20 21.00 10 21.00
4 24.00 35 24.00 9 24.00
5 4.00-27.13 299 7.77 156 4.36
6 0.67 45 0.67 45 0.67
7 9.00-17.33 1,068 10.21 550 10.30
8 9.00-20.75 640 10.66 295 10.76
9 9.00-33.06 1,121 9.41 387 9.69
10 8.81-15.00 1,464 9.05 29 11.23
----------- -----------
6,022 2,678
=========== ===========
Employee Stock Purchase Plan: The Company has qualified and nonqualified
employee stock purchase plans. The purchase price of the shares under these
plans is 85% of the lesser of the fair market value on the first day (March 1)
or the last day (February 28) of the plan year. Employees may designate up to
10% of their compensation (not to exceed $25,000 in any calendar year) for the
purchase of stock. Shares of common stock reserved under this plan were 835,988
at June 30, 1999.
Stockholder Rights Plan: In fiscal 1997, the Company adopted a Stockholder
Rights Plan and declared a dividend of one right for each share of common stock.
Each right entitles stockholders to acquire one-third of a share of common stock
at an exercise price of $100, subject to adjustment. The rights become
exercisable only if a person or group acquires beneficial ownership of 15% or
more of the Company's common stock or starts an offer which would result in that
person or group owning 15% or more of the Company's common stock. At that time,
each right owned by unaffiliated others entitles its holder to purchase the
Company's securities worth two times the exercise price of the right. If the
Company is involved in a business combination transaction with another person or
sells 50% or more of its assets or earning power to another person, each right
entitles its holder to
F-23
81
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
purchase shares of the Company's common stock or the acquiring company's common
stock worth two times the exercise price of the right. The rights may be
redeemed at $.01 per right at any time until the tenth day following public
announcement that a 15% position has been acquired. The rights expire on April
28, 2007.
8. EMPLOYEE BENEFIT PLANS
The Company sponsors defined contribution employee benefit plans covering
substantially all employees. Employees may contribute up to 15% of eligible
compensation subject to Internal Revenue Service limits. The plans permit the
Company to make a discretionary base contribution and a discretionary match to
employee deferrals. The Company's contribution to the plans is determined
annually by the Board of Directors. Base contributions under the plans vest at
the end of each plan year and matching contributions vest after five years of
qualifying service. Benefit plan expense for the years ended June 30, 1999, 1998
and 1997 totaled approximately $17.4 million, $14.4 million and $13.0 million,
respectively.
9. LEASES
During fiscal 1998, the Company entered into a five-year $150 million End Loaded
Lease Financing agreement to provide a financing option for acquisitions and/or
construction. The interest rate and facility fee rates are substantially the
same as the Company's revolving line of credit (See Note 4). Under this
agreement, the Company has guaranteed all lease payments, including contingent
lease payments of up to 85% of the amount utilized under this agreement. At June
30, 1999, $7.7 million was available under the ELLF agreement.
The Company leases hospitals, medical office buildings and equipment under
agreements that generally require the Company to pay all maintenance, property
taxes and insurance costs and that expire on various dates extending to the year
2007. Certain leases include options to purchase the leased property during or
at the end of the lease term at fair market value.
Rental expense for all operating leases totaled $34.2 million, $26.7 million,
and $22.2 million for the years ended June 30, 1999, 1998 and 1997,
respectively.
Future minimum rental commitments under noncancelable operating leases at June
30, 1999 are as follows: 2000 - $24.4 million; 2001 - $21.7 million; 2002 -
$19.2 million; 2003 - $156.8 million; 2004 - $8.0 million and thereafter - $8.9
million.
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. CONTINGENCIES
Management continually evaluates contingencies based on the best available
evidence and believes that provision for losses has been provided to the extent
necessary.
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 1998. 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 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, that Year 2000 issues will
not arise that the Company did not contemplate or erroneously assigned a low
level of risk, or that the Company will not experience difficulties obtaining
resources
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 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 is currently, and from time to time expects to be, subject to
claims, suits and investigations arising in the ordinary course of business. The
Company may not know about investigations or qui tam actions filed against the
Company by private parties on behalf of the federal or state governments. Except
as described below, the Company is not currently a party to any such proceeding
which, in management's opinion, if adversely decided, 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
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 oppose
the motion to separate the cases against Columbia/HCA and the Company.
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 the 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 the Company 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.
The February 2, 1999 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.
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, which it did. The government's new complaint is similar to the one
filed on February 2, 1999.
F-27
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On March 9, 1999, the court appointed a mediator to facilitate settlement
discussions between the Company and the government. The Company had earlier
requested that a mediator be appointed. The first meeting with the mediator
occurred on June 11, 1999.
On April 15, 1999, the Company filed several motions to dismiss the government's
complaint in whole or in part as well as a motion to dismiss the relator from
the case. In June 1999, the government and the relator filed responses opposing
these motions.
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 agencies 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 has
cooperated 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. The Company is now engaged in preliminary settlement discussions with
the government concerning these allegations.
As a part of its ongoing discussions, the Company has learned from the same U.S.
Attorney that there are two additional unrelated qui tam complaints against the
Company alleging Medicare violations at one owned and two managed hospitals.
Both matters remain under seal. The Company has not seen the complaint in either
matter. The government has stated that it intends to investigate these
allegations. The Company intends to cooperate with the government's
investigation into these allegations.
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 any of these cases 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. Amounts paid to settle any of these matters may be material.
Although the Company believes that it is in material compliance with
F-28
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. On
January 5, 1999, the court consolidated these cases into a single lawsuit. The
plaintiffs filed an amended complaint on March 5, 1999. The plaintiffs seek to
represent a class 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. The consolidated complaint
names as defendants several officers of the Company and one of its outside
directors. The complaint alleges that defendants violated Sections 10(b) and
20(a) of the Securities Exchange Act of 1934. The plaintiffs claim that the
Company materially inflated its net revenues during the class period by
including in those net revenues amounts received from the settlement of cost
reports that had allegedly been filed in violation of applicable Medicare
regulations years earlier and that, because of this practice, this statement,
which first appeared in Quorum's Form 10-K filed in September 1996, was false:
"The Company believes that its owned hospitals are in substantial compliance
with current federal, state, local, and independent review body regulations and
standards." On May 7, 1999, the Company filed a motion to dismiss the complaint,
which is scheduled to be argued in September, 1999. The Company intends to
defend vigorously the claims and allegations in this action.
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.
On February 16, 1999, the defendants filed a motion to dismiss the original
complaint. The court then granted the plaintiff permission to file a first
amended complaint, which, when filed, mooted the original motion to dismiss. On
April 30, 1999, the defendants moved to dismiss the first amended complaint. The
court on July 1, 1999, granted plaintiff's motion for leave to file a second
amended complaint and denied as moot the motion to dismiss the first amended
complaint. The second amended 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'
F-29
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 in the amended complaint that the defendants in 1993 were aware that the
Company was filing allegedly false cost reports and that the defendants
"mandated" that the illegal acts continue in violation of applicable Medicare
and Medicaid reimbursement laws. The defendants intend to file a new motion to
dismiss the second amended complaint. All of the defendants plan to vigorously
defend this litigation.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash,
accounts receivable and accounts payable approximates fair value.
The carrying value of long-term debt (including current portion) was $873.1 and
$618.7 million for the years ended June 30, 1999 and 1998, respectively. The
fair value of long-term debt was $870.1 million and $632.4 million for the years
ended June 30, 1999 and 1998, respectively. The fair value of publicly traded
notes has been determined using the quoted market price at June 30, 1999 and
1998. The fair values of the remaining long-term debt are estimated using
discounted cash flows, based on the Company's incremental borrowing rates. The
fair value included costs of $1.5 million and $8.5 million which would be
incurred in the event of termination of the interest rate swap agreements at
June 30, 1999 and 1998, respectively.
12. SEGMENT INFORMATION
During fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". Statement No. 131
established standards for the reporting of information about operating segments.
The Company's segments consist of (i) healthcare systems owned and operated by
the Company and (ii) management of hospitals and healthcare systems for other
owners.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on operating earnings of the respective business units.
The Company's net revenues, EBITDA and assets are summarized in the following
table (EBITDA is defined as earnings before interest, minority interest,
write-down of assets and investigation and litigation related costs, income
taxes, depreciation and amortization expense):
F-30
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30
-------
1999 1998 1997
---- ---- ----
Net revenues:
Owned hospitals $ 1,505,027 $ 1,427,969 $ 1,274,498
Management services 147,557 144,383 139,448
------------ ----------- -----------
$ 1,652,584 $ 1,572,352 $ 1,413,946
============ ============ ===========
EBITDA:
Owned hospitals $ 215,707 $ 264,568 $ 229,198
Management services 36,427 34,555 31,717
------------ ----------- -----------
$ 252,134 $ 299,123 $ 260,915
============ =========== ===========
Assets:
Owned hospitals $ 1,789,908 $ 1,451,008 $ 1,239,673
Management services 42,040 39,945 39,318
------------ ----------- -----------
$ 1,831,948 $ 1,490,953 $ 1,278,991
============ =========== ===========
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended June 30, 1999 and 1998 is
summarized below (in thousands, except per share data):
Quarter
-------
1st 2nd 3rd 4th
--- --- --- ---
1999
- ----
Net operating revenue $ 389,361 $ 386,077 $ 448,381 $ 428,765
Income (loss) before income
taxes 41,860 (22,230) 30,132 22,590
Net income (loss) 25,493 (18,742) 18,350 13,757
Earnings (loss) per common
share:
Basic .34 (.26) .25 .19
Diluted .33 (.26) .25 .19
F-31
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The second quarter results include a $22.7 million after tax charge related to
the write-down of assets and investigation and litigation related costs. The
third quarter results and fourth quarter results include $1.6 million and $1.0
million, respectively, of investigation and litigation related costs after
taxes.
Quarter
-------
1st 2nd 3rd 4th
--- --- --- ---
1998
- ----
Net operating revenue $392,821 $408,895 $398,320 $372,316
Income before income taxes 35,425 40,482 24,396 45,226
Net income 21,361 24,411 13,637 27,271
Earnings per common share:
Basic .29 .33 .18 .36
Diluted .28 .32 .18 .35
The third quarter results include a $14.9 million after tax charge related to
the write-down of goodwill.
14. SUBSEQUENT EVENTS
On August 18, 1999, the Company entered into an agreement to issue $150.0
million of convertible subordinated debentures due 2009 to Welsh, Carson,
Anderson & Stowe, VIII, LP and WCAS Management Corporation. The debentures bear
interest at 6.0% per annum. Interest is payable quarterly. The debentures are
convertible into common shares at a conversion price of $11.25 per share. The
debentures will automatically convert at any time after three years if the
average of the closing price of the Company's stock over any 90 day period is
more than 150% of the conversion price. Debentures are callable at the Company's
option at any time after two years. In the event of a merger, consolidation or
sale of more than 50% of the Company's assets, the holder of the debentures has
the option to have the debentures prepaid in full. The debentures have
antidilution protection, including, under certain circumstances, issuance of
common stock below the then applicable conversion price. The shares into which
the debentures are convertible have certain voting restrictions and must be held
for a two-year period beginning August 1999. The debentures are subordinated in
right of payment to all debt of Quorum.
In connection with the convertible subordinated debenture agreement, the
Company amended its stockholders' rights plan. Under the amended plan,
F-32
90
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the rights become exercisable only if (1) Welsh, Carson, Anderson & Stowe, VIII,
L.P., WCAS Management Corporation and certain parties which purchase the
convertible debentures from these entities acquire beneficial ownership of 30%
or more of the Company's common stock or start an offer which would result in
those entities owning 30% or more of the Company's common stock or (2) any other
person or group acquires beneficial ownership of 15% or more of the Company's
common stock or starts an offer which would result in that person or group
owning 15% or more of the Company's common stock. The rights may be redeemed at
$.01 per right at any time until the tenth day following public announcement
that an ownership position as described above has been acquired.
F-33
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION and QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------------------------------
Additions
----------------------------
(1) (2) (3)
Balance at Charged to Charged to Balance
Beginning Costs and Other Accounts Deductions at End of
Description of Period Expenses Describe Describe Period
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)
Year ended June 30, 1999:
Allowance for doubtful accounts $ 65,561 $126,525 $ 8,803 (a) $116,993 (b) $ 83,896
Year ended June 30, 1998:
Allowance for doubtful accounts $ 55,360 $106,733 $ 7,760 (a) $104,292 (c) $ 65,561
Year ended June 30, 1997:
Allowance for doubtful accounts $ 39,752 $ 89,919 $ 18,424 (a) $ 92,735 (b) $ 55,360
(a) Allowance for doubtful accounts of acquired companies.
(b) Accounts written off, net of recoveries.
(c) Accounts written off, net of recoveries and net of
$7,197 allowance of divested companies.
S-1
92
PART IV
EXHIBIT INDEX
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) and (2). Financial statements and schedules of the
Company and its subsidiaries required to be included in Part II, Item 8 are
indexed on Page F-1 and submitted as a separate section of this report.
(a)(3) Exhibits.
3.1 Form of Amended and Restated Certificate of Incorporation
effective with the Secretary of State of Delaware on December
15, 1997. (Incorporated by reference to Exhibit A to the
Company's definitive Proxy Statement for the Annual Meeting of
Stockholders held November 10, 1997.)
3.2 Bylaws of the Company as amended April 12, 1994. (Incorporated
by reference to Exhibit 3.2 to the Company's Registration
Statement No. 33-77674 on Form S-1.)
3.3 Bylaws of the Company as amended April 16, 1997. (Incorporated
by reference to Exhibit 3(ii) to the Company's Report on Form
8-K dated April 16, 1997.)
93
4.1.1 Indenture, dated as of December 15, 1992, between Quorum
Health Group, Inc. and United States Trust Company of New
York, as Trustee relating to the Company's $100,000,000
11-7/8% Senior Subordinated Notes due December 15, 2002.
(Incorporated by reference to Exhibit 4 to the Company's
Amendment to Application or Report on Form 8 dated February
17, 1993, amending the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1992.)
4.1.2 Indenture, dated as of November 1, 1995, between Quorum Health
Group, Inc. and United States Trust Company of New York, as
Trustee relating to the Company's $150,000,000 8-3/4% Senior
Subordinated Notes due November 1, 2005. (Incorporated by
reference to Exhibit 4.1.2 to the Company's Registration
Statement No. 33-98274 on Form S-3.)
4.1.3 First Supplemental Indenture, dated as of May 7, 1997, between
Quorum Health Group, Inc. and United States Trust Company of
New York, as Trustee relating to the Company's $100,000,000
11-7/8% Senior Subordinated Notes due December 1, 2005.
(Incorporated by reference to Exhibit 4.1.3 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998.)
4.3.1 Form of Subscription Agreement dated July 31, 1989 between the
Company and its Original Stockholders. (Incorporated by
reference to Exhibit 4.4 to the Company's Registration
Statement No. 33- 31717-A on Form S-18.)
4.3.2 Form of Subscription Agreement dated as of July 25, 1990 among
the Company and its Subsequent Stockholders. (Incorporated by
reference to Exhibit 4.10 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1990.)
4.4.1 Form of Registration Rights Agreement dated July 31, 1989
between the Company and its Original Stockholders.
(Incorporated by reference to Exhibit 4.6 to the Company's
Registration Statement No. 33-31717-A on Form S-18.)
4.4.2 Amendment dated as of July 25, 1990 to Registration Rights
Agreement dated July 31, 1989 among the Company and its
Original Stockholders. (Incorporated by reference to Exhibit
4.8 to the Company's Annual Report on Form 10-K for the year
ended June 30, 1990.)
4.4.3 Amendment dated as of February 25, 1991 to Registration Rights
Agreement dated July 31, 1989 among the Company and its
Original Stockholders. (Incorporated by reference to Exhibit
10.7.3 to the Company's Registration Statement No. 33-77674 on
Form S-1.)
4.4.4 Amendment dated as of April 23, 1991 to Registration Rights
Agreement dated July 31, 1989 among the Company and its
Original Stockholders. (Incorporated by reference to Exhibit
10.7.4 to the Company's Registration Statement No. 33-77674 on
Form S-1.)
94
4.4.5 Amendment and Restatement dated as of December 20, 1991 to
Registration Rights Agreement dated July 31, 1989 among the
Company and its Original Stockholders. (Incorporated by
reference to Exhibit 10.7.5 to the Company's Registration
Statement No. 33- 77674 on Form S-1.)
4.4.6 Amendment and Restatement dated as of January 15, 1992 to
Registration Rights Agreement dated July 31, 1989 among the
Company and its Original Stockholders. (Incorporated by
reference to Exhibit 10.7.6 to the Company's Registration
Statement No. 33-77674 on Form S-1.)
4.4.7 Amendment and Restatement dated as of May 7, 1992 to
Registration Rights Agreement dated July 31, 1989 among the
Company and its Original Stockholders. (Incorporated by
reference to Exhibit 10.7.7 to the Company's Registration
Statement No. 33-77674 on Form S-1.)
4.4.8 Amendment and Restatement dated as of June 1, 1992 to
Registration Rights Agreement dated July 31, 1989 among the
Company and its Original Stockholders. (Incorporated by
reference to Exhibit 10.7.8 to the Company's Registration
Statement No. 33-77674 on Form S-1.)
4.4.9 Amendment and Restatement dated as of July 1, 1992 to
Registration Rights Agreement dated July 31, 1989 among the
Company and its Original Stockholders. (Incorporated by
reference to Exhibit 4.12 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1992.)
4.4.10 Amendment and Restatement dated as of September 29, 1992 to
Registration Rights Agreement dated July 31, 1989 among the
Company and its Original Stockholders. (Incorporated by
reference to Exhibit 10.75 to the Company's Registration
Statement No. 33- 52910 on Form S-1.)
4.4.11 Amendment and Restatement dated as of September 30, 1992 to
Registration Rights Agreement dated July 31, 1989 among the
Company and its Original Stockholders. (Incorporated by
reference to Exhibit 10.74 to the Company's Registration
Statement No. 33- 52910 on Form S-1.)
4.4.12 Form of Amendment and Restatement dated as of January 28, 1993
to Registration Rights Agreement dated July 31, 1989 among the
Company and its Original Stockholders. (Incorporated by
reference to Exhibit 10.7.12 to the Company's Registration
Statement No. 33- 77674 on Form S-1.)
4.4.13 Amendment No. 1 dated as of September 28, 1993 to the
Amendment and Restatement of Registration Rights Agreement
dated as of September 30, 1992. (Incorporated by reference to
Exhibit 10.7.13 to the Company's Registration Statement No.
33-77674 on Form S-1.)
95
4.4.14 Amendment No. 2 dated as of October 15, 1993 to the Amendment
and Restatement of Registration Rights Agreement dated as of
September 30, 1992 as amended. (Incorporated by reference to
Exhibit 10.7.14 to the Company's Registration Statement No.
33-77674 on Form S-1.)
4.4.15 Amendment No. 3 dated as of November 5, 1993 to the Amendment
and Restatement of Registration Rights Agreement dated as of
September 30, 1992 as amended. (Incorporated by reference to
Exhibit 10.7.15 to the Company's Registration Statement No.
33-77674 on Form S-1.)
4.4.16 Form of Rights Agreement dated as of April 16, 1997, between
Quorum Health Group, Inc. and First Union National Bank of
North Carolina, including the form of Rights Certificate as
Exhibit A and the form of Summary of Rights to Purchase Common
Stock as Exhibit B. (Incorporated by reference to Exhibit 4 to
the Company's Report on Form 8-K dated April 16, 1997.)
4.4.17 Form of Letter to Stockholders of Quorum Health Group, Inc.
regarding the adoption of the Rights Plan pursuant to the
Rights Agreement. (Incorporated by reference to the Company's
Report on Form 8-K dated April 16, 1997.)
4.4.18 Amendment No. 1 dated as of August 18, 1999, to the Rights
Agreement dated as of April 16, 1997, between Quorum Health
Group, Inc. and First Union National Bank of North Carolina.
4.5 Credit Agreement dated as of April 22, 1997, by and among
Quorum Health Group, Inc., as Borrower, certain banks as
Lenders, and First Union National Bank of North Carolina, as
agent. (Incorporated by reference to Exhibit 4.4.18 to the
Company's Report on Form 10-K for the year ended June 30,
1997.)
4.5.1 First Amendment to Credit Agreement effective as of June 30,
1997, by and among Quorum Health Group, Inc., as Borrower,
certain banks as Lenders, and First Union National Bank of
North Carolina, as agent. (Incorporated by reference to
Exhibit 4.4.19 to the Company's Report on Form 10-K for the
year ended June 30, 1997.)
4.5.2 Second Amendment to Credit Agreement, dated November 26, 1997,
by and among Quorum Health Group, Inc. as Borrower, Lenders as
referred to in the Credit Agreement, and First Union National
Bank as Agent for the Lenders. (Incorporated by reference to
Exhibit 4.2 to the Company's Report on Form 10-Q for the
quarter ended December 31, 1997.)
4.5.3 Third Amendment to Credit Agreement, effective as of April 29,
1998, by and among Quorum Health Group, Inc. as Borrower,
Lenders as referred to in the Credit Agreement, and First
Union National Bank as Agent for the Lenders. (Incorporated by
reference to Exhibit 4.5.3 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998.)
4.5.4 Fourth Amendment to Credit Agreement, effective as of April
29, 1998, by and among Quorum Health Group, Inc. as Borrower,
Lenders
96
as referred to in the Credit Agreement, and First Union
National Bank as Agent for the Lenders. (Incorporated by
reference to Exhibit 4.5.4 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998.)
4.5.5 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. (Incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998.)
4.5.6 Sixth Amendment to Credit Agreement, dated November 26, 1998,
as subsequently amended, by and among Quorum Health Group,
Inc. as Borrower, Lenders as referred to in the credit
Agreement, and First Union National Bank as Agent for the
Lenders. (Incorporated by reference to Exhibit 10 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999.)
4.6 Participation Agreement dated November 26, 1997, among Quorum
ELF, Inc. as Construction Agent and Lessee; First Security
Bank, National Association as Owner Trustee under the Quorum
Real Estate Trust 1997-1; Various other banks and lending
institutions which are parties from time to time as Holders or
Lenders; and First Union National Bank as Agent for the
Lenders and Holders. (Incorporated by reference to Exhibit 4.1
to the Company's Report on Form 10-Q for the quarter ended
December 31, 1997.)
4.6.1 First Amendment to Participation Agreement, effective as of
January 26, 1998, among Quorum ELF, Inc. as Construction Agent
and Lessee; First Security Bank, National Association as Owner
Trustee under the Quorum Real Estate Trust 1997-1; Various
other banks and lending institutions which are parties from
time to time as Holders or Lenders; and First Union National
Bank as Agent for the Lenders and Holders. (Incorporated by
reference to Exhibit 4.6.1 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998.)
4.7 Securities Purchase Agreement dated as of August 18, 1999,
among Quorum Health Group, Inc., Welsh, Carson, Anderson &
Stowe VIII, L.P., and other purchasers named therein, relating
to the purchase of $150,000,000 aggregate principal amount of
6% Convertible Subordinated Debentures.
4.7.1 Form of Quorum Health Group, Inc. 6% Convertible Subordinated
Debenture due August 31, 2009.
4.7.2 Form of Registration Rights Agreement dated as of August 31,
1999, relating to the Company's 6% Convertible Subordinated
Debenture due August 31, 2009.
4.7.3 Form of Stockholders Agreement dated as of August 31, 1999,
relating to the Company's 6% Convertible Subordinated
Debenture due August 31, 2009.
97
10.1 Compensation Plans and Arrangements
A. Restated Stock Option Plan, as amended. (Incorporated
by reference to Exhibit B to the Company's definitive
Proxy Statement for the Annual Meeting of
Stockholders held November 15, 1994.)
B. Directors Stock Option Plan, as amended.
(Incorporated by reference to Exhibit A to the
Company's definitive Proxy Statement for the Annual
Meeting of Stockholders held November 15, 1994.)
C. Letter dated February 23, 1990 regarding employment
of James E. Dalton, Jr. (Incorporated by reference to
Exhibit 10.1.D to the Company's Annual Report on Form
10-K for the year ended June 30, 1993.)
D. Employee Stock Purchase Plan, as amended.
(Incorporated by reference to Exhibit C to the
Company's definitive Proxy Statement for the Annual
Meeting of Stockholders held November 10, 1997.)
E. Quorum Health Group, Inc. 401(k) Savings and
Retirement Plan. (Incorporated by reference to
Exhibit 10.1.6 to the Company's Registration
Statement No. 33-77674 on Form S-1.)
F. Form of Quorum Health Group, Inc. Non-qualified
Deferred Compensation Plan. (Incorporated by
reference to Exhibit 10.1.7 to the Company's
Registration Statement No. 33-77674 on Form S-1.)
G. Form of Severance Agreement with certain executive
officers of the Company. (Incorporated by reference
to Exhibit 10.1 (G) to the Company's Annual Report on
Form 10-K for the year ended June 30, 1995.)
H. Employment Agreement between the Company and Eugene
C. Fleming. (Incorporated by reference to Exhibit
10.1(H) to the Company's Annual Report on Form 10-K
for the year ended June 30, 1996.)
I. 1997 Stock Option Plan. (Incorporated by reference to
Exhibit B to the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders held November
10, 1997.)
J. Severance Agreement and General Release between the
Company and Eugene C. Fleming
K. Severance Agreement and General Release between the
Company and Steve B. Hewett
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L. Quorum Health Group, Inc. Deferred Compensation Plan.
(Incorporated by reference to Exhibit 10.1 L. to the
Company's Annual Report on Form 10-K for the year
ended June 30, 1998.)
M. Form of Employment Agreement with certain executive
officers of the Company. (Incorporated by reference
to Exhibit 10.1(c) to the Company's Report on Form
10-Q for the quarter ended March 31, 1998.)
10.2 Incorporation, Conveyance and Stock Purchase Agreement dated
as of August 16, 1993, as amended September 30, 1993, by and
among Quorum, Inc. as Purchaser, Charter Medical Corporation
("Charter"), a Delaware corporation; Charter Northside
Hospital, Inc. ("CNH"), a Georgia corporation; Middle Georgia
Hospital, Inc. ("MGH"), a Georgia corporation; Shallowford
Community Hospital, Inc. ("SCHI"), a Georgia corporation;
Metropolitan Hospital, Inc. ("MHI"), a Georgia corporation;
Physicians & Surgeons Hospital, Inc. ("PSH"), a Louisiana
corporation; Charter Regional Medical Center, Inc. ("CMRC"), a
Texas corporation; Desert Springs Hospital, Inc. ("DSH"), a
Nevada corporation; Charter Suburban Hospital, Inc. ("CSH"), a
California corporation; Charter Community Hospital of Des
Moines, Inc. ("CCH"), an Iowa corporation; and Stuart Circle
Hospital Corporation ("SCHC"), a Virginia corporation.
(Incorporated by reference to Exhibit 2.1 to the Company's
Report on Form 8-K dated October 13, 1993.)
99
10.3 Asset Purchase Agreement dated as of December 1993 among Mercy
Health Center of Central Iowa, as Buyer, and NC-CCH, Inc., as
Seller, and Quorum Health Group, Inc. (Incorporated by
reference to Exhibit 10.28 to the Company's Registration
Statement No. 33- 77674 on Form S-1.)
10.4 Asset Purchase Agreement dated as of October 7, 1993 as
amended November 30, 1993, among Baptist Health Services, Inc.
and Baptist Hospital of Gadsden, Inc. as Sellers and QHG of
Gadsden, Inc. as Buyer. (Incorporated by reference to Exhibit
2 to the Company's Report on Form 8-K dated December 14,
1993.)
10.5 Asset Purchase Agreement dated as of December 31, 1993 among
Cleveland Regional Medical Center, L.P., as Buyer, and Dynamic
Health, Inc., and NC-CRMC, Inc., as Seller, and Quorum Health
Group, Inc. (Incorporated by reference to Exhibit 10.30 to the
Company's Registration Statement No. 33-77674 on Form S-1.)
10.6 Lease dated September 21, 1989 by and between DJ Investments
which subsequently assigned its interest to A.G. Dorsey,
Capricon II 1989 Trust and J. Cutler Roberts, Trustee, and
Desert Springs Hospital, Inc. (Incorporated by reference to
Exhibit 10.39 to the Company's Registration Statement No.
33-77674 on Form S-1.)
10.7 Lease dated January 21, 1994 by and between QB Partners I and
Quorum Health Resources, Inc. (Incorporated by reference to
Exhibit 10.42 to the Company's Registration Statement No.
33-77674 on Form S-1.)
10.8 Asset Purchase Agreement dated April 29, 1994 by and between
NC- PSH, Inc., and Sisters of Charity of the Incarnate Word,
Shreveport, Louisiana, doing business as Schumpert Medical
Center (Incorporated by reference to Exhibit 10.45.1 to the
Company's Registration Statement No. 33-77674 on Form S-1.)
10.9 Lease Agreement dated December 8, 1994 by and between QB
Partners I and Quorum Health Group, Inc., as amended by
Addendum dated March 25, 1995. (Incorporated by reference to
Exhibit 10.22 to the Company's Annual Report on Form 10-K for
the year ended June 30, 1995.)
10.10 Asset Purchase Agreement dated November 1, 1990 by and between
Mercy Regional Medical Center, Sisters of Mercy Health
Systems, St. Louis, Inc. and ParkView Medical Associates, L.P.
(Incorporated by reference to the Company's Report on Form 8-K
filed November 15, 1990.)
10.11 Asset Purchase and Sale Agreement dated as of September 20,
1991, by and between Quorum Health Group, Inc., as buyer, and
St. John's Hospital & Health Center, Inc. and Incarnate Word
Health Services, as seller. (Incorporated by reference to
Exhibit 2.1 to the Company's Report on Form 8-K dated
September 30, 1991.)
100
10.12 Asset Purchase Agreement dated as of January 31, 1992 between
QHG of Ohio, Inc. and St. Anthony Medical Center, Inc. and its
members regarding Park Medical Center. (Incorporated by
reference to Exhibit 2.3 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1992.)
10.13 Asset Purchase Agreement dated as of May 31, 1992, by and
between QHG of Alabama, Inc., as buyer, its ultimate parent,
Quorum Health Group, Inc. and Flowers Hospital, Incorporated,
as seller. (Incorporated by reference to Exhibit 2.1 to the
Company's Report on Form 8-K dated June 1, 1992.)
10.14 Agreement and Plan of Share Exchange dated June 19, 1992 among
Hospital Management Professionals, Inc., Robert D. Huseby,
Sheldon L. Krizelman and Thomas W. Singleton and Quorum Health
Resources, Inc. (Incorporated by reference to Exhibit 2.1 to
the Company's Report on Form 8-K dated July 14, 1992.)
10.15 Asset Purchase Agreement dated as of January 4, 1995, by and
between QHG of South Carolina, Inc., as buyer and Carolinas
Hospital System, Inc., as seller. (Incorporated by reference
to Exhibit 2.1 to the Company's Report on Form 8-K dated
February 1, 1995).
10.16 Asset Purchase Agreement dated April 21, 1995, as amended by
Amendment No. 1, Amendment No. 2, and Amendment No. 3, by and
between QHG of Indiana, Inc., et al., as buyers, and The
Lutheran Hospital of Indiana, Inc., et al., as sellers.
(Incorporated by reference to Exhibit 2.1 to the Company's
Report on Form 8-K dated August 1, 1995.)
10.17 Purchase Agreement dated as of January 28, 1993 between the
Company and HCA, Inc. (Incorporated by reference to Exhibit
10.8 to the Company's Registration Statement No. 33-77674 on
Form S-1.)
10.18 Purchase Agreement dated as of September 28, 1993 among the
Company and Certain Shareholders. (Incorporated by reference
to Exhibit 10.9 to the Company's Registration Statement No.
33-77674 on Form S-1.)
10.19 Purchase Agreement dated as of October 15, 1993 among the
Company and Certain Shareholders. (Incorporated by reference
to Exhibit 10.10 to the Company's Registration Statement No.
33-77674 on Form S-1.)
10.20 Purchase Agreement dated as of October 26, 1993 between the
Company and HCA, Inc. (Incorporated by reference to Exhibit
10.11 to the Company's Registration Statement No. 33-77674 on
Form S-1.)
10.21 Purchase Agreement dated as of November 5, 1993 between the
Company and HCA, Inc. (Incorporated by reference to Exhibit
10.12 to the Company's Registration Statement No. 33-77674 on
Form S-1.)
101
10.22 Asset Purchase Agreement dated as of April 6, 1994 by and
between Quorum, Inc. and Bon Secours Health System, Inc. for
the purchase of the capital stock of NC-SCHC, Inc. and Stuart
Circle MOB, Inc. (Incorporated by reference to Exhibit 10.13
to the Company's Registration Statement No. 33-77674 on Form
S-1.)
10.23 Asset Exchange Agreement dated as of April 8, 1994 by and
among NC-SCHI, Inc., Dunwoody MOB, Inc., NC-MHI, Inc., Quorum
Health Group, Inc., Galen Hospitals of Texas, Inc., Galen
Medical Corporation, American Medicorp Development Co. and
Columbia/HCA Health care Corporation for the like kind
exchange of Abilene Regional Medical Center and Medical Center
Enterprise for Dunwoody Medical Center and Metropolitan
Hospital. (Incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement No. 33-77674 on Form S-1.)
10.24 Group Purchasing Organization Participating Agreement between
APS Healthcare Purchasing Partners, L.P. and Quorum Health
Group, Inc. dated November 30, 1995. (Incorporated by
reference to Exhibit 10.30 to the Company's Report on Form
10-K for the year ended June 30, 1996.)
10.25 First Amendment effective as of June 1, 1997, to Group
Purchasing Organization Participating Agreement between
Premier Purchasing Partners, L.P., f/k/a APS Healthcare
Purchasing Partners, L.P. dated November 30, 1995.
(Incorporated by reference to Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998.)
10.26 Lease Agreement by and between QHG of South Carolina, Inc., a
subsidiary of the Company, and C. Edward Floyd, M.D., a
Director of the Company. (Incorporated by reference to Exhibit
10.31 to the Company's Report on Form 10-K for the year ended
June 30, 1996.)
10.27 Contribution Agreement dated as of February 1, 1998, by and
between Valley Hospital Medical System, Inc. and NC-DSH, Inc.
(Incorporated by reference to Exhibit 10.1 to the Company's
Report on Form 10-Q for the quarter ended December 31, 1997.)
10.28 Limited Liability Company Agreement of Valley Health System
LLC, dated as of January 19, 1998. (Incorporated by reference
to Exhibit 10.2 to the Company's Report on Form 10-Q for the
quarter ended December 31, 1997.)
10.29 Contribution Agreement dated as of February 1, 1998, by and
among Summerlin Hospital Medical Center, L.P., UHS Holding
Company, Inc. and NC-DSH, Inc. (Incorporated by reference to
Exhibit 10.3 to the Company's Report on Form 10-Q for the
quarter ended December 31, 1997.)
10.30 Limited Liability Company Agreement of Summerlin Hospital
Medical Center LLC, dated as of January 19, 1998.
(Incorporated by reference to Exhibit 10.4 to the Company's
Report on Form 10-Q for the quarter ended December 31, 1997.)
102
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K. No reports on Form 8-K were filed
during the last quarter of the fiscal year ended June 30, 1999.
103
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of
Brentwood, State of Tennessee on September 24, 1999.
QUORUM HEALTH GROUP, INC.
By: /s/ Terry Allison Rappuhn
-------------------------
Terry Allison Rappuhn
Title: Senior Vice President (Chief Financial
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated below:
SIGNATURE TITLE
/s/ James E. Dalton, Jr. President, Chief Executive Officer and Director Sept. 24, 1999
- ------------------------ (Principal Executive Officer)
James E. Dalton, Jr.
/s/ Terry Allison Rappuhn Senior Vice President and Chief Financial Officer Sept. 24, 1999
- -------------------------
Terry Allison Rappuhn
/s/ Karen Harrison Vice President-Controller Sept. 24, 1999
- ------------------------- (Chief Accounting Officer)
Karen Harrison
/s/ Russell L. Carson Chairman of the Board Sept. 24, 1999
- ---------------------
Russell L. Carson
/s/ Sam A. Brooks, Jr. Director Sept. 24, 1999
- ----------------------
Sam A. Brooks, Jr.
/s/ Dr. C. Edward Floyd Director Sept. 24, 1999
- -----------------------
Dr. C. Edward Floyd
/s/ Joseph C. Hutts Director Sept. 24, 1999
- -------------------
Joseph C. Hutts
/s/ Kenneth J. Melkus Director Sept. 24, 1999
- ---------------------
Kenneth J. Melkus
/s/ Thomas S. Murphy,Jr. Director Sept. 24, 1999
- ------------------------
Thomas S. Murphy, Jr.
/s/ Rocco A. Ortenzio Director Sept. 24, 1999
- ---------------------
Rocco A. Ortenzio
/s/ S. Douglas Smith Director Sept. 24, 1999
- --------------------
S. Douglas Smith
/s/ Colleen Conway Welch Director Sept. 24, 1999
- ------------------------
Colleen Conway Welch