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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission file number 000-22766 QUORUM
HEALTH GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1406040
(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
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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 $1,696,634,252 as of September 22, 1998. The number of Shares of
Common Stock outstanding as of such date was 75,701,192.
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 1998 Annual Meeting of Stockholders.
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TABLE OF CONTENTS
<TABLE>
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Page
<S> <C> <C>
ITEM 1. BUSINESS...................................................... 5
Overview...................................................... 5
Business Strategies........................................... 5
The Quorum Business Ethics Program............................ 10
Owned Hospitals............................................... 12
Management Services........................................... 18
Government Payment Programs................................... 19
Government Regulation......................................... 23
Competition................................................... 27
National Purchasing Contracts................................. 29
Employees and Physicians...................................... 30
Professional Liability........................................ 30
ITEM 2. PROPERTIES.................................................... 31
ITEM 3. LEGAL PROCEEDINGS............................................. 32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS....................................................... 33
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS................................... 33
ITEM 6. SELECTED FINANCIAL DATA....................................... 34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION............................ 36
Impact of Acquisitions, Joint Ventures and
Divestitures.................................................. 36
Results of Operations......................................... 37
Liquidity and Capital Resources............................... 40
Market Risks Associated With Financial
Instruments................................................... 43
Year 2000 Issues.............................................. 44
General....................................................... 46
Inflation..................................................... 49
Forward-Looking Statements.................................... 50
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................... 51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE........................ 51
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.............................. 51
ITEM 11. EXECUTIVE COMPENSATION........................................ 51
</TABLE>
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<TABLE>
<S> <C> <C>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................ 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 51
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K........................................... 11-1
SIGNATURES.................................................................. Sig-1
</TABLE>
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PART I
ITEM 1. BUSINESS
OVERVIEW
Quorum Health Group, Inc., through its subsidiaries, owns and operates
acute care hospitals and local and regional healthcare systems throughout the
United States. At June 30, 1998 Quorum(1) owned, managed under contract or
provided consulting services to acute care hospitals in 44 states. At such date,
the Company owned and operated seventeen acute care hospitals with 3,966
licensed beds, was a minority investor in joint ventures that owned and operated
seven acute care hospitals, and provided management services to 236 hospitals
with approximately 27,500 licensed beds. As of June 30, 1998, the Company had
183 contracts to provide selected consulting and support services. Quorum's
subsidiary, Quorum Health Resources, LLC, is the largest contract manager of
not-for-profit hospitals in the United States.
As discussed in more detail under "Owned Hospitals" below, Quorum
acquired two acute care hospitals during fiscal 1998 and entered into joint
ventures to which it contributed three of its hospitals. Quorum acquired one
additional acute care hospital in July 1998.
BUSINESS STRATEGIES
The Company's business strategies are (i) to acquire additional acute
care hospitals, primarily in medium-sized markets, and to achieve additional
market penetration in such markets, including, where appropriate, forming joint
ventures with other healthcare providers, (ii) to continue to improve the
financial performance and the scope and quality of healthcare services of its
owned hospitals, and (iii) to use the Company's network of hospital management
professionals to identify strategic hospital acquisitions and other
opportunities to create networks with other hospitals and health care providers
while maintaining the Company's management contract business as an important
line of business. The Company believes that its experience and position as a
leading
- --------
(1) The term "Quorum" or "the Company" as used herein refers to Quorum Health
Group, Inc. and its direct and indirect subsidiaries, unless otherwise stated or
indicated by context. The term "subsidiaries" as used herein also means
affiliated partnerships and affiliated limited liability companies.
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provider of management services to acute care hospitals in the United States
affords it a competitive advantage in acquiring and operating hospitals and in
creating healthcare service networks in local markets. In implementing its
strategies, the Company seeks to operate with integrity and in compliance with
the law.
Acquisition and Joint Venture Strategy
The hospital industry continues to experience consolidation in response
to increasing competitive pressure, as well as pressure on payments from
government and private payors. Over the past several years, alternative health
care delivery systems, such as home health services, inpatient and outpatient
rehabilitation facilities, outpatient surgery and emergency and diagnostic
centers, have grown substantially, as health care providers, government agencies
and private insurance companies have sought means of providing quality health
care in a cost efficient manner. Notwithstanding these developments, the Company
believes that patients and physicians will continue to rely on acute care
hospitals as the primary source of sophisticated health care.
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. The Company believes that these pressures
have caused many acute care hospitals to consider other management and ownership
alternatives. Some sponsors of tax-exempt acute care hospitals are reassessing
their ability to provide health care as independent providers and are seeking to
align themselves with larger health systems. The Company anticipates that such
reassessments may lead owners to sell or merge a significant number of hospitals
and will create opportunities for the Company to make strategic acquisitions of
facilities.
A significant element of Quorum's strategy is to actively pursue
acquisitions of acute care hospitals because it believes that well-positioned,
efficiently managed acute care hospitals will continue to be the center of the
health care delivery system in the United States. Acquisition candidates will
typically be hospitals ranging in size from 100 to 400 beds, that are generally
located in markets that will support more than one hospital. The Company's
acquisition efforts are directed at identifying hospitals whose financial and
operating performance would be enhanced by the Company's management expertise
and resources. The Company is primarily interested in medium-sized markets with
population bases of between 50,000 and 500,000 people. The Company intends to
make acquisitions that will either enhance the Company's position within
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its existing markets or enable it to enter into new markets consistent with its
strategic criteria. The Company's acquisitions of St. Joseph Medical Center
(Fort Wayne, Indiana), Wesley Health System (Hattiesburg, Mississippi) and
Unimed Medical Center (Minot and Kenmare, North Dakota) represent entries into
such target markets.
The Company intends to enter markets that are large enough to permit
the creation of medical service networks with the ability to effectively and
profitably serve patient and payor needs. The Company is primarily interested in
markets in which the ownership of one or possibly two hospitals would give the
Company sufficient market position to permit the Company to play a significant
role in the health care delivery system in such communities. The Company's
acquisition strategy is not directed at markets in which ownership of a greater
number of hospitals is required to be an effective competitor in that market.
In certain cases, local market conditions make it desirable for
hospital owners to integrate their operations with physician groups, outpatient
centers or other medical service providers in the community, including other
acute care hospitals. The Company seeks to adapt its strategy to the needs of
each community in which it operates. Thus, integration may take different forms.
Integration of services can enable providers to respond to payor demands for
more cost-effective care through more effective case management and more
extensive use of outpatient services. Integration also allows hospitals and
physicians to work in closer collaboration to enhance the quality of care and
expand available services in the local market. Integration with other acute care
hospitals also permits cost reduction through elimination of duplication as well
as provision of new services and geographic distribution which makes the
hospitals more attractive to purchasers of healthcare.
In two cases, Mary Black Memorial Hospital (Spartanburg, South
Carolina) and ParkView Regional Medical Center (Vicksburg, Mississippi), the
Company and local physicians have consolidated the operations of the acute care
hospital and their respective practices under common ownership. During fiscal
1998 the Company formed joint ventures with other hospitals. In February 1998,
the Company contributed Desert Springs Hospital (Las Vegas, Nevada) and other
assets to two joint ventures with two Las Vegas hospitals contributed by
Universal Health Systems ("UHS"). The Company holds 26% and 28% interests in the
two joint ventures, which are managed by UHS. In May 1998, the Company
contributed Macon Northside Hospital and Middle Georgia Hospital (Macon,
Georgia) to a joint venture with two Macon hospitals contributed by Columbia/HCA
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Healthcare Corporation ("Columbia"). The Company holds a 38% interest in the
joint venture, which is managed by Columbia.
Although the Company concentrates its acquisition efforts primarily in
medium-sized markets, attractive acquisition opportunities may also arise in
smaller markets. These smaller market hospitals may be in proximity to one of
the Company's medium-sized markets or in a separate, independent market. The
Company's acquisition of Clinton County Hospital (Frankfort, Indiana) is an
example of a smaller market purchase.
The Company believes that its nationwide network of hospital management
employees provides a competitive advantage in identifying suitable hospital
acquisition candidates and in understanding the local markets in which such
hospitals operate. The Company's experience has been that the financial
performance and prospects of hospitals within the size range and in the markets
targeted by the Company vary widely, and the Company believes that acquisition
prices will vary accordingly.
Over time, the Company's results of operations have been positively
affected by acquisitions of acute care hospitals. The Company has completed
acquisitions of several acute care hospitals in recent years, and intends to
pursue additional acquisitions. The Company faces competition, from
not-for-profit hospitals as well as one or more of the for-profit acute care
hospital companies, for most of the hospitals it seeks to purchase. Some of
these competitors may have financial resources greater than the Company's. Such
competition increases the difficulty of purchasing hospitals on favorable terms.
Additionally, some hospitals are sold through an auction process, which may
result in higher purchase prices being paid by competitors for those properties
than the Company believes are reasonable. In addition, the Year 2000 problem may
reduce the number of suitable hospital acquisition candidates.
During fiscal 1998, cash used for acquisitions was $131.7 million. The
Company acquired two hospitals and affiliated health care entities, contributed
three hospitals in exchange for equity interests in joint ventures that own and
operate seven hospitals, and sold its remaining interest in a Nebraska hospital.
During fiscal 1997, the Company acquired five hospitals and affiliated health
care entities for approximately $184.6 million and sold a minority interest in a
hospital. During fiscal 1996, the Company acquired two hospitals and affiliated
health care entities for approximately $205.3 million and sold one hospital and
a minority interest in another hospital.
As the Company grows, it depends on a greater volume of acquisitions,
or acquisitions of larger size, to achieve its growth
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targets. There can be no assurance that the Company will be able to locate
suitable acquisition candidates in the future, consummate acquisitions on
favorable terms or successfully integrate newly acquired businesses and
facilities with the Company's operations. In particular, some not-for-profit
hospitals may be unwilling to consider selling to a for-profit purchaser.
Additionally, sales of not-for-profit hospitals to for-profit buyers are coming
under increasing scrutiny by state attorneys general in a number of states. Such
reviews could result in lengthening the time required to complete acquisitions,
and could make not-for-profit hospitals less willing to sell to for-profit
purchasers.
Additionally, acquired facilities must show improved operating results
more quickly than in the past for the Company to achieve its growth targets.
There can be no assurance that the Company will be able to realize expected
operating and economic efficiencies from its recent acquisitions or from any
future acquisitions.
Operating Strategy for Owned Hospitals
The Company believes that its management expertise, access to capital,
financial and operating systems, national purchasing strength, and educational
and training programs will enable the Company's owned hospitals to compete
successfully against other hospitals and health care providers. In addition, the
Company believes that its experience in working with physicians, hospital owners
and managed care plans enhances the ability of its owned hospitals to attract
patients and to recruit and retain physicians and other medical personnel, which
are critical to the success of any hospital.
In attempting to improve the financial performance of its owned
hospitals, the Company typically takes a number of steps to lower operating
costs and enhance revenues. Initiatives include application of purchasing
economies, implementation of flexible staffing plans, improved length of stay
management, and increased focus on resource consumption. The Company also
generally seeks to improve the operations of its acquired hospitals by expanding
and improving the quality of the services provided by a hospital to make it more
attractive to physicians, patients and third-party payors. The Company also
recruits additional physicians and markets the hospital's services directly to
businesses, governments, managed care organizations and others. In addition, the
Company seeks opportunities to form networks or alliances with other health care
providers in appropriate markets. These network relationships may be in the form
of purchase, joint venture, lease, management or other contracts. As Medicare
and other payors seek to reduce their
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health care expenditures, the ability to reduce and control operating costs will
become more important to the Company's results of operations and future growth.
Management Services Strategy
As the hospital industry consolidates, the demand for the Company's
management services may be affected by the reduction in the number of
independent hospitals. To reduce the effects of industry consolidation, the
Company's strategy for increasing the revenue and profitability of its
management services business involves developing and marketing new services,
providing additional services to existing managed hospitals and seeking
appropriate fee increases. As an example, the Company provides specialized
services to hospitals and health systems facing significant financial or
operational challenges through its Intensive Resources Group subsidiary. The
Company also continues to use its national network of hospital employees for the
generation of leads for new contract clients; targeting larger hospitals for
contract relationships; and pursuing network, managed care and joint venture
opportunities with its client hospitals, other healthcare providers, and
insurers.
THE QUORUM BUSINESS ETHICS PROGRAM
It is the Company's policy that its business be conducted with
integrity and in compliance with the law. The Company first formally adopted its
"Policy on Business Practices" in 1991 as a statement of the proper standards of
behavior for its employees. To further the objective of legal and ethical
behavior, the Company established its current Business Ethics Program in 1995.
The Program is managed and implemented on a day-to-day basis by the Company's
Vice President/Ethics & Business Conduct and her staff who work with the
Company's legal department and outside law firms who act as special counsel to
the Company, as well as other health care consultants. The Program runs under
the oversight of a management Compliance Committee made up of the Company's
Chief Executive Officer, Chief Operating Officer, General Counsel, Vice
President/Internal Audit, Vice President/Controller, Vice President/Financial
Operations, and Vice President/Ethics and Business Conduct. The Program is also
overseen by the Audit Committee of the Company's Board of Directors, which
monitors compliance with the Program, and suggests ways to strengthen the
Program. The Business Ethics Program was adopted to help assure that high
standards of conduct are met in the operation of the Company's business and to
help assure that the Company has implemented policies and procedures so that the
Company's employees
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will act in full compliance with all applicable laws, regulations and Company
policies.
Under the Business Ethics Program, the Company distributes its business
practices policy, which has been revised several times and is now known as "Our
Code of Conduct," annually to all Company employees. The Business Ethics Program
provides initial and periodic legal compliance and ethics training to every
Company employee. Under the Business Ethics Program, the Company also reviews
various areas of the Company's operations and develops and implements, with
management, policies and procedures designed to foster compliance with the law.
Each owned hospital has a compliance officer who assists in developing and
implementing such policies and procedures. The Company's Internal Audit
department, as a part of its regular audit function, monitors the implementation
of such policies and procedures as well as management's controls to help assure
ongoing compliance. All employees are encouraged to report, without fear of
retaliation, any suspected legal or ethical violations to their supervisors,
designated compliance officers in the Company's hospitals or the Company's
Ethics and Business Conduct or Legal departments. In addition, employees may
report suspected violations to a toll-free telephone hotline, on an anonymous
basis if they desire.
The Company also provides certain compliance-related services to its
managed hospitals. While each hospital's governing body retains responsibility
for the facility's compliance with laws and regulations, the Company has
developed a package of services designed to assist its managed hospitals in
creating and implementing a compliance program, including a Compliance Plan
Development Guide, educational materials and programs for boards, medical
staffs, and hospital personnel, including hospital compliance officers, and
sample policy and procedure manuals which can be customized for each hospital's
use. In addition, the Company has negotiated volume discount contracts with
providers of additional compliance-related services which the managed hospitals
may desire to use.
The Company is subject to a complex framework of federal, state and
local laws. Although the Company believes that it is in material compliance with
such laws, a determination that the Company has violated such laws, or even the
public announcement that the Company was being investigated concerning possible
violations, could have a material adverse effect on the Company. See "Government
Regulation" and "Item 3. Legal Proceedings."
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OWNED HOSPITALS
Acquisitions, Joint Ventures and Sales
The Company acquired its first acute care hospital in fiscal 1991. The
Company acquired three facilities in fiscal 1992 (one of which has been sold),
eleven facilities in fiscal 1994 (ten of which were acquired in a single
transaction; of which five have been sold; two exchanged for two other hospitals
and in fiscal 1998 three contributed to joint ventures), three facilities in
fiscal 1995 (one of which was sold in fiscal 1998), two facilities in fiscal
1996; five facilities during fiscal 1997 and two facilities in fiscal 1998. In
July 1998, the Company acquired St. Joseph Medical Center, a 191-bed acute care
hospital in Fort Wayne, Indiana.
As of September 22, 1998, the Company owned and operated eighteen
hospitals. Of the Company's owned hospitals, seventeen are located in small or
medium-sized markets and one is located in the larger market of Columbus, Ohio.
The Company also is a minority investor in joint ventures (to which it
contributed three hospitals) that own and operate seven hospitals. The Company
regularly evaluates the performance of each of its owned hospitals in light of
its business strategies. The Company is always looking for ways that its
hospitals can better contribute to healthcare delivery in their communities
while improving shareholder value.
Operations
The Company's owned hospitals are general acute care hospitals and, as
such, offer a wide range of facilities and inpatient medical services such as
operating/recovery rooms, intensive care and coronary care units, diagnostic
services and emergency room services, as well as outpatient services such as
same-day surgery, laboratory, pharmacy and rehabilitation services and
respiratory therapy.
The Company's hospitals provide certain specialty services which differ
at each hospital, but which include cancer treatment, open heart surgery,
skilled nursing, treatment for chemical dependency and home health care
services. The Company's owned hospitals are not engaged in extensive medical
research or educational programs.
The following table sets forth certain information with respect to each
of the Company's owned hospitals as of June 30, 1998.
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<TABLE>
<CAPTION>
LICENSED BEDS IN DATE OF
HOSPITAL AND LOCATION BEDS(1) SERVICE(2) ACQUISITION
- --------------------- -------- ---------- -----------
<S> <C> <C> <C>
ParkView Regional Medical Center 231 193 November 1990
Vicksburg, Mississippi(3)
Park Medical Center 404 165 February 1992
Columbus, Ohio
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 424 380 February 1995
Florence, South Carolina
Carolinas Hospital System -- Lake City(4) 48 40 June 1995
Lake City, South Carolina
Lutheran Hospital of Indiana 377 357 August 1995
Fort Wayne, Indiana
Jacksonville Hospital 89 56 June 1996
Jacksonville, Alabama
Mary Black Memorial Hospital 235 222 July 1996
Spartanburg, South Carolina (5)
Carolinas Hospital System -- Kingstree (4) 78 40 August 1996
Kingstree, South Carolina
Doctors Hospital of Stark County 166 166 November 1996
Massillon, Ohio (6)
Barberton Citizens Hospital 347 245 December 1996
Barberton, Ohio (6)
Clinton County Hospital 88 53 June 1997
Frankfort, Indiana (4)
Wesley Medical Center 211 182 September 1997
Hattiesburg, Mississippi
Unimed Medical Center March 1998
Minot, North Dakota 185 165
Kenmare, North Dakota 42 42
</TABLE>
(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 corporation in which a Quorum subsidiary owns a 67% interest and
is the manager.
(4) Held pursuant to operating leases, each of which has an initial term of ten
years and two renewal options of five 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 a Quorum subsidiary owns an
89% interest and is the managing partner.
(6) Owned by limited liability companies in which Quorum subsidiaries own a 95%
interest and are the managing members.
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Selected Operating Statistics
The following table sets forth certain operating statistics for the
Company's owned hospitals for each of the years presented. The statistics for
the year ended June 30, 1998 include a full year of operations for fifteen
hospitals and partial periods for one hospital divested, three hospitals
contributed to the joint ventures and two hospitals acquired during such year.
The statistics for the year ended June 30, 1997 include a full year of
operations for fifteen hospitals and partial periods for four hospitals acquired
during such year. The statistics for the year ended June 30, 1996 include a full
year of operations for twelve hospitals and partial periods for two hospitals
acquired and one hospital divested during such year. The statistics for the year
ended June 30, 1995 include a full year of operations for ten hospitals and
partial periods for three hospitals acquired during such year. The statistics
for the year ended June 30, 1994 include a full year of operations for four
hospitals and partial periods for nine hospitals acquired, three of which were
divested or exchanged during such year.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of hospitals(1) 17 19 14 13 10
Licensed beds(1)(2) 3,966 4,205 3,281 2,909 2,229
Beds in service(1)(3) 3,240 3,481 2,691 2,368 1,796
Admissions(4) 128,235 119,551 94,872 73,338 55,522
Average length of stay
(days) 5.6 5.6 5.8 6.2 6.0
Patient days(5) 713,906 666,353 548,772 451,501 335,807
Adjusted patient days(6) 1,193,701 1,046,657 830,955 665,657 480,098
Occupancy rate (licensed
beds)(7) 46.8% 46.8% 46.2% 47.6% 47.6%
Occupancy rate (beds
in service)(8) 56.9% 56.5% 56.2% 58.9% 61.5%
Gross inpatient revenue
(in thousands) $1,513,805 $1,447,771 $1,115,363 $888,811 $622,037
Gross outpatient revenue
(in thousands) $1,017,383 $ 826,279 $ 573,529 $421,582 $267,278
</TABLE>
(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.
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(4) Admissions represent the number of patients admitted for inpatient
treatment.
(5) Patient days represent the total number of days of patient care provided to
inpatients.
(6) Adjusted patient days have been calculated based on an industry-accepted,
revenue-based formula (multiplying actual patient days by the sum of gross
inpatient revenue and gross outpatient revenue and dividing the result by
gross inpatient revenue) to reflect an approximation of the number of
inpatients and outpatients served.
(7) Percentages are calculated by dividing average daily census by weighted
average licensed beds.
(8) Percentages are calculated by dividing average daily census by weighted
average beds in service.
The Company's owned hospitals accounted for 91% of the Company's net
operating revenue in fiscal 1998 compared to 90% in fiscal 1997 and 88% in
fiscal 1996. In fiscal 1998, the Dothan, Alabama and Fort Wayne, Indiana markets
accounted for approximately 25% of the Company's owned hospital revenue and 40%
of the Company's owned hospital earnings before interest, minority interest,
write-down of assets, income taxes, depreciation and amortization expense and
extraordinary charges ("EBITDA"). Due to the current number of owned hospitals,
changes in any individual market can affect the overall operating results of the
Company. Furthermore, concentration of results of operations in the Dothan,
Alabama and Fort Wayne, Indiana markets increases the risks that adverse
developments at these facilities will have a material adverse effect on the
Company's operations or financial condition. In addition, the amounts expected
to be derived from the Fort Wayne, Indiana market will increase as a result of
the acquisition of St. Joseph Hospital.
Sources of Revenue
The sources of the Company's owned hospital revenues are charges
related to the services provided by the hospitals and their staffs, such as
radiology, operating room, pharmacy, physiotherapy and laboratory procedures,
and basic charges for the hospital room and related services such as general
nursing care, meals, maintenance and housekeeping. The Company's hospitals
receive payments for health care services from (i) the federal Medicare program,
(ii) state Medicaid programs, (iii) private health care insurance carriers,
HMOs, PPOs and other managed care programs, and
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self-insured employers, (iv) the Civilian Health and Medical Program of the
Uniformed Services ("CHAMPUS"), and (v) patients directly.
The following table sets forth the percentage of gross revenue (revenue
before deducting contractual adjustments, policy and charity discounts) of the
Company's owned hospitals from Medicare, Medicaid and other sources for the
periods indicated. The data for the years presented are not strictly comparable
due to the significant effect that hospital acquisitions joint ventures and
divestitures have had on the Company. See "Item 7. Management's Discussion and
Analysis of Results of Operations and Financial Condition".
<TABLE>
<CAPTION>
Year Ended June 30
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Medicare 47.2% 47.5% 48.5%
Medicaid 7.5 7.6 7.5
Other sources 45.3 44.9 44.0
----- ----- -----
Total 100.0% 100.0% 100.0%
====== ===== =====
</TABLE>
The gross revenues of each of the Company's owned hospitals are
affected by a number of factors. Among these are inpatient occupancy levels, the
type of ancillary services and therapy programs ordered by physicians for their
hospital patients, the volume of outpatient procedures and the charges for the
services provided by the hospital. Payment rates for inpatient routine services
vary significantly depending on the type of service (e.g., acute care, intensive
care or psychiatric) and the geographic location of the hospital. The Company
has experienced an increase in the percentage of patient revenues attributable
to outpatient services in recent years. This increase is primarily the result of
advances in technology (which allow more services to be provided on an
outpatient basis); increased pressures from Medicare, Medicaid, HMOs, PPOs and
other insurers to reduce hospital stays and provide services, where possible, on
a less expensive outpatient basis and the integration of physician practices
into certain of the Company's hospitals. The Company's experience with respect
to increased outpatient volume mirrors the trend in the hospital industry.
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Amounts received from most payors are less than the hospitals'
customary charges for the services provided. All of the Company's hospitals (as
do most acute care hospitals) derive a substantial portion of their revenue from
the Medicare and Medicaid programs, which pay participating health care
providers for covered services rendered and items furnished to qualified
beneficiaries. Both of these are governmental programs which are heavily
regulated and use complex methods for determining payments to providers. These
programs are subject to frequent changes which in recent years have reduced, and
in future years are expected to continue to reduce, payments to hospitals. In
light of its hospitals' high percentage of Medicare and Medicaid patients, the
Company's ability in the future to operate its business successfully will depend
in large measure on its ability to adapt to changes in these programs. See
"Government Payment Programs".
An increasing number of payors are actively negotiating the amounts
they will pay for services performed to further reduce their health care costs.
Payors, especially managed care payors, attempt to reduce payments to hospitals
by demanding discounted fee structures or per diem payment rates, instituting
prospective payment or DRG-based systems or, in some cases, requiring health
care providers to assume the financial risk through prepaid capitation
arrangements. To the extent such efforts are successful, and to the extent that
such payors fail to pay amounts which are adequate to cover the costs of
providing services to their beneficiaries, such efforts may have a negative
impact on the results of operations of the Company's hospitals.
Typically, a hospital negotiates with a managed care payor for payment
rates for a specific group of covered members. In exchange for providing
services at a discounted rate, the hospital expects that the payor will
encourage the members to use the facility. This process occurs though the use of
provider directories and identification cards, as well as specific incentives in
the members' benefit design. However, some managed care payors sell the
negotiated discounts to other payors who have no direct contract with the
hospital and whose members have already been admitted to the hospital under
another plan, or who would use the hospital without the discounted rates. The
process of reselling negotiated discounts is known as "silent PPO" discounting,
and refers to an array of transactions that involve buying and selling provider
discounts without an obligation by the buying managed care payor to encourage
members to use the hospital. This practice is difficult for hospitals to detect.
Undetected silent PPO discounting results in higher managed care discounts and
lower net revenues.
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MANAGEMENT SERVICES
The Company's management services business consists of managing
hospitals owned by others under management contracts. In addition, the Company
offers a variety of operational and strategic consulting services and related
educational and management programs to meet the specific needs of hospitals that
may or may not be part of the Company's contract management program. The Company
attempts to focus such consulting services on health care providers located in
identified strategic markets. During fiscal 1998, fees received by the Company's
management services business accounted for approximately 9% of the Company's net
operating revenues.
With 236 managed hospitals as of June 30, 1998, the Company is the
largest provider of management services to acute care hospitals in the United
States. Based on industry data published in 1998, the second and third ranked
contract management organizations managed 51 and 19 hospitals, respectively. The
Company believes that its industry reputation and leading market position
provide a competitive advantage in seeking additional management contracts.
The Company makes available to hospital owners a comprehensive range of
management and professional services. The focus of the Company is to assist its
clients in their goals of improving their financial performance and the scope
and quality of healthcare provided at their facilities. Upon entering into a
management contract, the Company assesses the operations of the hospital and,
based on such assessment, develops a management plan tailored to the specific
needs of the hospital. The Company annually reviews the management plan with the
hospital's governing board and prepares an annual progress report to identify
cost savings and achievements.
To implement the management plan adopted for each hospital, the Company
provides the hospital with the services of a hospital administrator and,
typically, a chief financial officer. Although the hospital administrator and
chief financial officer are employees of the Company, such employees remain
under the direction and control of the client hospital's governing board, and
the balance of the hospital staff remain employees of the hospital, under the
control and supervision of the hospital.
The Company's hospital management team is supported by the Company's
group and division management staff, which has broad experience in managing
hospitals of all sizes in diverse markets throughout the United States. Such
locations also afford the Company a significant marketing advantage in
responding to new business opportunities because the Company's staff is
knowledgeable
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of the economic, demographic and regulatory factors affecting local markets.
See "Competition".
The Company's hospital management contracts generally provide for a
term of three to five years. The rate of attrition for management contracts has
averaged approximately 8.3% for two years ended June 30, 1998, an increase from
the 7.5% attrition rate reported for two years ended June 30, 1997. Over the
same periods, the Company has generally been able to offset the effects of such
attrition by obtaining additional management contracts and increasing revenue
from other sources.
The Company believes that, generally, the fees paid under its
management contracts are not directly affected by hospital industry trends.
Management contract fees are based on amounts agreed upon by the Company and the
hospital's governing board and are usually not based on census levels, payment
programs, revenue of the hospital or other variables. As the agent of the
hospital's governing board, the Company is not directly responsible for hospital
licensure, liability coverage or capital expenditures or for other functions
normally the responsibility of the governing board. The Company is not obligated
to fund and is not responsible for paying any hospital expenses. In providing
its management services, the Company is not considered a health care provider
for regulatory purposes. See "Government Regulation".
GOVERNMENT PAYMENT PROGRAMS
The federal government provides two major health care programs: (1) the
Medicare program for the elderly and disabled, and (2) the Medicaid program for
the poor. Medicare is the health insurance component of Social Security, while
Medicaid is a program that differs considerably from state to state.
Most hospitals, including the Company's owned hospitals, derive a
substantial portion of their revenue from the Medicare and Medicaid programs.
Both programs were enacted in 1965 and were to pay participating hospitals for
providing covered services to beneficiaries. Legislative action and related
regulations during the past thirty years have resulted in significant changes in
the way these programs pay hospitals for services provided. Most of these
changes have reduced payments to hospitals.
Medicare
Most Medicare inpatient hospital operating costs are paid under a
prospective payment system ("PPS") Under this system, general hospital
discharges are classified into approximately 500
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diagnosis related group categories (known as "DRG's"), which categorize
illnesses and injuries according to estimated intensity of hospital resources
necessary to furnish care. A hospital's DRG payment is determined by multiplying
a standard federal rate by the weight assigned to the applicable DRG. There are
two standard federal rates: one for large metropolitan areas (population over
one million) and one for all other areas. The applicable rate is adjusted by a
local wage index. Additional add-on payments are made for: (1) hospital stays
that are unusually costly (called outliers), (2) treating a large number of
indigent patients (called disproportionate share), and (3) the added cost
incurred as a result of residency training (called indirect medical education).
At the inception of PPS, Congress intended to update the DRG payments
annually by the increase in the cost of goods and services used to produce
hospital care (the "Market Basket"). In practice, the DRG rate increases have
seldom matched increases in the Market Basket. Under the Balanced Budget Act of
1997 (the "Budget Act"), there was no increase for the year ending September 30,
1998. For the following four years, the Budget Act calls for increases in DRG
rates equal to Market Basket minus 1.9%, 1.8%, 1.1% and 1.1%, respectively. The
reductions make it more difficult for the Company to achieve its current rate of
net revenue growth and to maintain or improve its 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. First, 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. The Budget Act reduced 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. The Budget Act
changed the formula for determining payment amounts (the "formula driven
overpayment" or "FDO") for such other outpatient services rendered on and after
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October 1, 1997. This formula change has the effect of reducing payment amounts
in comparison to amounts that would have been received under previous law.
The Budget Act requires Medicare to implement outpatient PPS effective
January 1, 1999. The Health Care Financing Administration ("HCFA") has requested
that Congress postpone this deadline to enable the agency to focus efforts on
its Year 2000 compliance efforts. Outpatient PPS, when implemented, may have a
material adverse effect on the Company's results of operations. However, the
Company is unable to predict when outpatient PPS will be implemented or its
effect on the Company when implemented.
At the date of this report, the Company owns eleven facilities that
operate hospital-based home health agencies. The Budget Act 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 the
Company's home health volumes. The Company expects net revenue derived from its
home health agencies will be substantially lower in future years under the
interim payment system. The Budget Act requires Medicare payments for home
health services to transition to PPS beginning October 1, 1999. The Company
expects payments under PPS to be more favorable than the interim payment system.
However, this transition is also expected to be delayed due to HCFA's request
for delay in order to focus on Year 2000 compliance.
Including the July 1998 acquisition, the Company owns ten hospitals
that operate hospital-based skilled nursing beds. Effective for cost reporting
periods beginning July 1, 1998, the Budget Act requires skilled nursing
facilities be paid on a prospective per diem basis, which is to be phased in
over four years for most facilities. The Company expects the Budget Act changes
to reduce its payments for skilled nursing services.
The Budget Act 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, the Company anticipates that all of the changes resulting
from the Budget Act will result in lower payments from the Medicare program than
would have been received.
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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 the Company expects further reductions
in Medicare payments, it cannot predict the timing, magnitude or effect of such
reductions. The Company's ability in the future to operate its business
successfully will depend in large measure on its ability to adapt to changes as
a result of the Budget Act and any subsequent legislation and regulations.
Medicaid
Medicaid funding is shared between the state and the federal
government. On the average, Medicaid funding is split evenly between the state
and the Federal government with the Federal government "matching" state
spending. Although each state must meet federal guidelines, the states have wide
latitude as it pertains to additional individuals covered and additional
benefits provided.
Hospital payment methodologies vary from state to state but most pay
for inpatient services based on DRGs and outpatient services based on a fee
schedule. Generally, Medicaid payment is less than the cost of providing the
services. The federal government and the states continue to look for ways to
reduce, or limit increases in, Medicaid spending. The Company cannot predict
what actions the federal government or the states may take, and therefore is
unable to predict the impact on the Company of changes to the Medicaid program.
See "Owned Hospitals-Sources of Revenue" and "Government Payment
Programs-Medicare".
Cost Reports
The Company's facilities are required to file cost reports annually
with Medicare and Medicaid. These reports are subject to audit and often require
several years before a final settlement is received. Preparation of cost reports
is subject to complex regulations, administrative rulings and fiscal
intermediary interpretations, all of which change frequently. Management
believes adequate provision has been made in its financial statements for any
retroactive adjustment resulting from such final settlement. Until final
settlement, however, significant issues remain unresolved and previously
determined allowances could be more or less than ultimately required. See
"Government Regulation-False Claims" and Item 3. "Legal Proceedings."
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GOVERNMENT REGULATION
The health care industry is subject to extensive governmental
regulation at the federal, state and local levels. These laws and regulations
require that hospitals meet various detailed standards relating to the adequacy
of medical care, equipment, personnel, operating policies and procedures,
maintenance of adequate records, utilization, rate setting, compliance with
building codes and environmental protection laws, and numerous other matters.
There are also extensive and complex regulations governing a hospital's
participation in government programs such as Medicare and Medicaid. Failure to
comply with applicable laws and regulations can expose the Company to criminal
penalties and civil sanctions, and jeopardize a hospital's licensure, ability to
participate in the Medicare and Medicaid and other government programs and
ability to operate as a hospital.
In recent years there has been increased scrutiny of the health care
industry, in part due to escalating health care costs, particularly in the
Medicare program, and concern over the Federal budget deficit. The federal
government and a number of states are rapidly increasing the resources devoted
to investigating allegations of fraud and abuse in the Medicare and Medicaid
programs. At the same time, regulatory and law enforcement authorities are
taking an increasingly strict view of the requirements imposed on providers by
the Social Security Act and Medicare and Medicaid regulations.
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. Careful and accurate coding and billing of
claims for payment is required in order 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
"Government Payment Programs-Cost Reports".
Federal and State Fraud and Abuse Laws
The Social Security Act also prohibits offering, paying, soliciting or
receiving renumeration intended to induce referrals
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of patients whose care is paid for by the Medicare or Medicaid programs. Thus,
financial arrangements between hospitals and persons, such as physicians, who
are in a position to refer patients or induce the acquisition 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 the 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.
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", and is an
expansion of the previous prohibition on self-referral by physicians. "Stark I"
prohibited physicians from referring their Medicare patients to any clinical
laboratory in which they or any member of their immediate family had a financial
interest. "Stark II" 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 for, among other things, prepaid health plans and
ownership by a referring physician of an investment interest in an entire
hospital, as opposed to ownership of a subdivision or department of a hospital.
Currently, physicians hold ownership interests in two of the Company's
hospitals. 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
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referrals, including private pay patients, as well as Medicare and Medicaid
patients.
Although the Company exercises care in an effort to conduct its
business in compliance with all applicable laws and to structure its
arrangements with health care providers to comply with the Antifraud Amendments
and Stark I and II, there can be no assurance that such laws will ultimately be
interpreted in a manner consistent with the practices of the Company. The
Company could be materially adversely affected if it were to be found in
violation of the False Claims Act, the Social Security Act, the Antifraud
Amendments or "Stark I/Stark II". See "The Quorum Business Ethics Program" and
"Item 3. Legal Proceedings".
Health Insurance Portability and Accountability Act of 1996
The Health Insurance Portability and Accountability Act of 1996
("HIPAA") became law in August 1996. The new law includes a number of amendments
or supplements to the Antifraud Amendments. It also contains 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 (i) report information
leading to the imposition of civil monetary penalties under the fraud and abuse
laws or (ii) make suggestions that result in Medicare and Medicaid program
savings. Under HIPAA, health care fraud, now defined as knowingly and willfully
executing or attempting to execute a "scheme or device" to defraud any health
care benefit program, is made a federal criminal offense. In addition, for the
first time, federal enforcement officials will have the ability to exclude from
Medicare and Medicaid any investors, officers and managing employees associated
with business
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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, the Company has not experienced, and does
not expect to experience, any material adverse effects from state certificate of
need requirements or from the imposition, elimination or relaxation of such
requirements. See "Competition".
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 the Company's owned hospitals are licensed under
appropriate state laws and are certified to participate in the Medicare program.
In addition, it is a general policy of the Company that all its owned hospitals
apply for accreditation by the appropriate accreditation body, such as the Joint
Commission on Accreditation of Healthcare Organizations or the American
Osteopathic Association. All of the Company's owned hospitals are so accredited,
with the exception of the 42-bed facility at Kenmore, 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.
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The Company believes that its owned hospitals are in substantial
compliance with current federal, state, local and independent review body
regulations and standards. However, these requirements are subject to
administrative and judicial interpretation and legislative change, and it may be
necessary for the Company to effect changes in its facilities, equipment,
personnel and services in order to remain qualified. Although the Company
intends to continue to maintain its licensure and certifications, there can be
no assurance that its owned hospitals will be able to comply with all future
requirements or that failure to so comply would not adversely affect the
Company.
COMPETITION
Owned Hospitals
The hospital industry is highly competitive. Moreover, competition
among hospitals and other health care providers for patients and physicians has
intensified in recent years as hospital occupancy rates have declined in the
United States as a result of cost containment pressures from both government and
private payors, changing technology, changes in government regulation, changes
in practice patterns (e.g., shifting from inpatient to outpatient treatments)
and other factors. These changes have led to significant unused inpatient
hospital capacity. New competitive strategies of hospitals and other health care
providers place increasing emphasis on the use of alternative health care
delivery systems (such as home health services, outpatient surgery and emergency
and diagnostic centers) that eliminate or reduce lengths of hospital stays. In
some cases, these strategies include the use of larger regional facilities that
employ equipment and services more specialized than those available at the
Company's owned hospitals. The Company expects that these competitive trends
will continue, and may intensify.
The areas served by the Company's hospitals are also served by other
hospitals or facilities that provide inpatient or outpatient services similar to
those offered by the Company's hospitals. In some cases, competing hospitals are
more established, better equipped or offer a wider range of services than those
of the Company or have financial resources greater than those of the Company. In
addition, certain competing hospitals are owned by tax- supported government
agencies or by tax-exempt, not-for-profit corporations that may be supported by
endowments and charitable contributions.
The competitive position of a hospital may also be affected by its
ability to negotiate service contracts with managed care
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organizations, including HMOs and PPOs, and employers. These organizations
attempt to direct and control the use of hospital services through managed care
programs and discounts from established charges. The Company's owned hospitals
are generally located in less developed managed care markets, but all currently
have contracts with managed care organizations.
The number and quality of the physicians on a hospital's staff is an
important factor in providing a competitive advantage to a hospital because
physicians direct many hospital admissions and services. Admitting physicians
are usually on the medical staffs of several hospitals in an area. Therefore,
the Company attempts to attract patient referrals to the Company's hospital by
offering quality services, current technological capabilities, convenient
location, quality facilities and equipment, and participation in payor
contracts.
The Company believes that its hospitals compete within local markets on
the basis of many factors, including the quality of care, ability to attract and
retain qualified physicians, location, breadth of services and technology
offered and prices charged. The Company's competition ranges from large
multi-facility companies to small single-hospital owners and may be
investor-owned or non-profit. The Company's hospitals must also compete with the
services available at outpatient surgery and diagnostic centers, physicians'
offices and other alternative delivery sites.
State certificate of need laws, which place limitations on a hospital's
ability to expand hospital services and to add new equipment without regulatory
approval, may have the effect of restricting competition. The application
process for approval of covered services, facilities, changes in operations and
capital expenditures is, therefore, highly competitive. In those states that do
not have a certificate of need law or that set relatively high levels of
expenditures before such expenditures become reviewable by state authorities,
competition in the form of new services, facilities and capital spending is more
prevalent.
With the exception of Texas and Indiana, each of the states in which
the Company owns hospitals has certificate of need requirements, and the Company
may acquire hospitals in other states having such requirements. The Company has
not experienced, and does not expect to experience, any material adverse effects
from state certificate of need requirements or from the imposition, elimination
or relaxation of such requirements. See "Government Regulation".
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Management Services
In seeking management services, hospitals have various alternatives to
those offered by the Company and other hospital management companies. Hospitals
managed by hospital management companies represent less than 10% of the total
acute care hospitals in the United States, primarily because most hospitals have
their own management staff. Some hospitals choose to obtain management services
from the many large, tertiary care facilities that create referral networks with
smaller surrounding hospitals.
NATIONAL PURCHASING CONTRACTS
As a result of its management and consulting contracts with hospitals
throughout the United States, the Company has 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 the Company's managed hospitals has allowed many of such hospitals to
benefit from these arrangements through volume discounts, rebates and other cost
savings. The Company's owned hospitals also benefit from similar savings. In
some cases the Company has the opportunity to earn administrative fees from
vendors in return for the Company's group purchasing activities. The Company
annually notifies each managed hospital of any administrative fees the Company
receives under its purchasing contracts as a result of the hospital's purchases.
During fiscal 1996, the Company entered into a five-year purchasing
alliance with Premier Purchasing Partners, L.P. ("Premier"), a for-profit
partnership formed by not-for-profit health systems which provides group
purchasing and other services to its clients. The purchasing alliance combines
the purchasing power of the Company's owned and managed facilities with the
purchasing power of the more than 1,700 hospitals affiliated with the Premier
program. The increased purchasing power has created opportunities for reductions
in the prices of hospital supplies, equipment, and pharmaceuticals to the
Company's hospitals. Under the Premier purchasing alliance, the Company has
agreed to use Premier as its exclusive national group purchasing organization.
The Company received $6.9 million in administrative fees and expense
reimbursement from Premier with respect to calendar year 1996 supply purchases.
Pursuant to an amendment entered into in June 1997, Premier agreed to pay the
Company an annual administrative fee of $6.4 million if the amount paid by the
Company's owned and managed hospitals for products purchased through the
purchasing alliance satisfied a minimum threshold. The minimum threshold was
$400 million for calendar year 1997 and
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escalates 10% annually. The administrative fee is adjusted proportionately for
purchases above or below the threshold. The Company met the purchasing threshold
for calendar year 1997. The Company is also paid up to $500,000 annually as
reimbursement for certain expenses. Either party may terminate the purchasing
alliance without cause on twelve months' written notice.
EMPLOYEES AND PHYSICIANS
As of June 30, 1998, the Company's owned facilities employed
approximately 18,000 employees. As of such date, the Company had approximately
130 employees on its corporate staff and approximately 760 employees providing
hospital management and consulting services. The Company's employees are not
represented by any labor union, with the exception of approximately 160
employees at Barberton Citizens Hospital. The Company believes that its
relations with its employees are generally good.
Physicians on the medical staffs of the Company's hospitals are
generally not employees of the Company. A small number of physicians have been
historically employed by or have contracted with the Company primarily to staff
emergency rooms, to provide certain ancillary services and to serve in
administrative capacities, such as directors of special services. Recently, the
Company also has employed physicians, primarily primary care physicians, in
selected markets. In addition, physicians are employees of the entities formed
by the consolidations of two of the Company's hospitals with physician practices
in their respective communities (ParkView Regional Medical Center, Vicksburg,
Mississippi and Mary Black Memorial Hospital, Spartanburg, South Carolina).
Members of the medical staffs of the Company's hospitals often also are
members of the medical staffs of hospitals not owned by the Company and each may
terminate his or her affiliation with a Company 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 employed
by the Company, have sole discretion over where to admit their patients.
PROFESSIONAL LIABILITY
As part of the business of owning and managing hospitals, the Company
is subject to the assertion of liability for events occurring as part of the
ordinary course of hospital operations. To cover claims arising out of the
operations of both managed and owned hospitals, the Company generally maintains
professional
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malpractice liability insurance and general liability insurance on a claims made
basis in amounts which management believes to be sufficient for its operations.
The Company also maintains additional insurance which provides coverage against
losses in excess of the coverage limits in its malpractice and general liability
policies. At various times in the past, the cost of malpractice and other
liability insurance has risen significantly. Therefore, there can be no
assurance that such insurance will continue to be available or will be available
at a reasonable price for the Company to maintain adequate levels of insurance.
Through its typical hospital management contract, the Company attempts
to protect itself from such liability by requiring the client hospital to
maintain certain specified limits of insurance coverage, including professional
liability, comprehensive general liability, workers' compensation and fidelity
insurance, and by requiring the client hospital to name the Company as an
additional insured party on the hospital's professional and comprehensive
general liability policies.
The Company's management contracts also usually provide for the
indemnification of the Company by the client hospital against claims that arise
out of the client hospital's activities. The indemnification provisions help
protect the Company against claims not covered by insurance, such as some
medical staff antitrust claims and employment-related claims.
Although the majority of the Company's management contracts contain the
Company's standard insurance and indemnification provisions, a small portion do
not for various reasons. In some states, state law limits a public hospital's
ability to indemnify a private company. In those cases, the Company attempts to
negotiate for the maximum protection permitted by law. In other states, public
hospitals still enjoy total or partial sovereign immunity and, as a result, do
not purchase insurance except to the extent of their limited liability. Although
the Company and its insurer treat the client hospitals' insurance and
indemnification obligations as the Company's primary coverage, the Company also
maintains its own insurance as secondary coverage.
ITEM 2. PROPERTIES
For a description of the Company's owned hospital properties, see
"Item 1. "Business-Owned Hospitals". Additionally, the Company currently leases
office space in two buildings located in Brentwood, Tennessee, for its principal
corporate offices. The space is leased for a term of ten years, to expire in
2005. The
31
<PAGE> 32
field offices of Quorum Health Resources, LLC are also leased, with terms
ranging from one to five years. The Company believes that its properties are
adequate for its business requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time subject to claims and suits arising in
the ordinary course of business, including claims for damages for personal
injuries to patients and others, breach of management contracts or for wrongful
restriction of or interference with physicians' staff privileges. In certain of
such actions, plaintiffs request punitive or other damages that may not be
covered by insurance. The Company is not currently a party to any such
proceeding which, in management's opinion, would have a material adverse effect
on the Company's financial position or results of operations.
In June 1993, the OIG requested information from the Company in
connection with an investigation involving the Company's procedures for
preparing Medicare cost reports. In January 1995, the U.S. Department of Justice
issued a Civil Investigative Demand which also requested information from the
Company in connection with that same investigation. As a part of the
government's investigation, several former and current employees of the Company
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 allegations made by a former employee of a
hospital managed by a Company subsidiary. The allegations concern the
preparation of cost reports for Medicare and other government payment programs
for owned and managed hospitals. At a meeting to discuss the case, held
September 24, 1998, the Company learned that the government would likely
commence litigation under the False Claims Act on or about October 5, 1998. The
Company intends to continue to cooperate with the government's inquiry, and, if
appropriate, will try to reach a settlement of this case.
On May 7, 1998, the Company learned that it is a named defendant in a
separate qui tam case when it received a letter from a U.S. Attorney. The
complaint alleges violations of Medicare laws governing the home health
operations at two of the Company's hospitals. The complaint was filed under seal
in June 1996 by a former employee who was discharged by the Company in April
1996. The purpose of the letter from the U.S. Attorney was to allow the Company
an opportunity to evaluate the results of the government's investigation to date
and to discuss with the government the allegations made in the complaint, prior
to the government making a decision as to whether it will intervene as a
plaintiff in the case. The lawsuit remains under seal for all other purposes.
The Company intends to cooperate fully and share information with the U.S.
Attorney's Office. If any violation of law is found, the Company intends to
pursue an amicable settlement. The case is in a very preliminary stage.
The Company cannot at this time predict the outcome of these cases or
their ultimate impact on the Company's business or operating results. If the
outcome of either case were unfavorable, the Company could be subject to fines,
penalties and damages and also could be excluded from Medicare and other
government reimbursement programs. These and other results of these cases could
have a material adverse effect on the Company's financial condition or results
of operations.
32
<PAGE> 33
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
The Company's Common Stock became listed on the Nasdaq Stock Market
National Market ("Nasdaq") under the symbol "QHGI" on May 26, 1994. On September
22, 1998, the last reported sales price of the Common Stock on Nasdaq was
$23.38.
As of June 30, 1998, the Company had approximately 2345 holders of
record and the Company estimated an additional 3600 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, 1998 and
June 30, 1997 (adjusted for the effect of a 3 for 2 stock dividend paid on
September 16, 1997):
<TABLE>
<CAPTION>
1997 HIGH LOW
---- ---- ---
<S> <C> <C>
First Quarter 17 53/64 15 1/4
Second Quarter 19 53/64 16 21/64
Third Quarter 23 18 53/64
Fourth Quarter 25 59/64 19 53/64
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
</TABLE>
Quorum has not paid any cash dividends on its Common Stock since its
inception, presently intends to retain its earnings for use in its business, and
does not anticipate paying any cash dividends in the foreseeable future. The
declaration of dividends is within the discretion of the Board of Directors,
which will review this dividend policy from time to time; however, the
33
<PAGE> 34
declaration of dividends is currently prohibited by Quorum's bank credit
facility and certain other agreements. See Item 7. "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and Note 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 the Company's Consolidated Financial Statements and the notes
thereto included elsewhere in this report.
34
<PAGE> 35
QUORUM HEALTH GROUP, INC.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS (1)
Net operating revenue $1,572,352 $1,413,946 $1,098,547 $850,167 $641,040
Operating expenses 1,280,222 1,153,031 890,203 693,859 524,962
Equity in earnings of affiliates 6,993 -- -- -- --
Depreciation and amortization 87,020 75,134 55,901 37,566 28,153
Interest expense 40,606 45,601 36,568 22,209 25,066
Minority interest 3,118 741 109 1,046 1,035
Net gain on sale of assets -- -- 787 -- --
Write-down of assets 22,850 -- -- -- --
Income before income taxes and extraordinary
item 145,529 139,439 116,553 95,487 61,824
Provision for income taxes 58,849 55,357 47,321 39,532 25,610
Income before extraordinary item 86,680(2) 84,082 69,232 55,955 36,214
Per common share:
Income before extraordinary item --
basic 1.16 1.14 0.96 0.79 0.67
Income before extraordinary item --
diluted 1.12(2) 1.11 0.93 0.76 0.64
Cash dividends declared 0 0 0 0 0
FINANCIAL POSITION AT YEAR END (1)
Total assets $1,490,953 $1,278,991 $1,020,561 $773,502 $625,802
Long-term debt excluding current maturities 617,377 519,940 430,877 287,364 225,444
Stockholders' equity 622,266 518,115 431,864 356,389 294,053
</TABLE>
- ----------
(1) The Company's financial statements for the years presented are not strictly
comparable due to the significant effect that acquisitions, joint ventures
and divestitures have had on such statements. Per share amounts are
adjusted to reflect a 3 for 2 stock dividend paid on September 16, 1997.
See Item 7. "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.
35
<PAGE> 36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
IMPACT OF ACQUISITIONS, JOINT VENTURES AND DIVESTITURES
During fiscal 1998, the Company acquired two hospitals and affiliated
health care entities and sold its remaining interest in a Nebraska hospital. In
addition, the Company entered into two joint ventures. The Company and Universal
Health Services, Inc. (UHS) formed Valley Health System LLC and Summerlin
Hospital Medical Center LLC, both located in Las Vegas. 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. These joint
ventures own and operate seven hospitals. The Company accounts for its
investments in the LLCs using the equity method of accounting, and accordingly,
the Company's net investment is included in "Investment in unconsolidated
entities" and the Company's share of the Las Vegas and Macon earnings is
included as "Equity in earnings of affiliates." 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. During fiscal 1997, the Company
acquired five hospitals and affiliated health care entities and sold a minority
interest in a hospital. During fiscal 1996, the Company acquired two hospitals
and affiliated health care entities and sold one hospital and a minority
interest in a hospital.
The Company regularly evaluates the performance of each of its owned
hospitals in light of its business strategies. The Company is always looking for
ways that its hospitals can better contribute to health care delivery in their
communities while improving shareholder value.
Because of the financial impact of the acquisitions, joint ventures and
divestitures, it is difficult to make meaningful comparisons between the
Company's financial statements for the fiscal years presented. In addition, due
to the current number of owned hospitals, each additional hospital acquisition
can affect the overall operating margin of the Company. During a transition
period after the acquisition of a hospital, the Company has typically taken a
number of steps to lower operating costs. The impact of such actions can be
partially offset by cost increases to expand the hospital's services, strengthen
its medical staff and improve its market position. The benefits of these
investments and of other activities to improve operating margins may not occur
immediately. Consequently, the financial performance of an acquired hospital may
adversely affect overall operating margins in the near-term. Acquired facilities
must show improved operating results more quickly than in the past for the
Company to achieve its growth targets.
36
<PAGE> 37
RESULTS OF OPERATIONS
The table below reflects the percentage of net operating revenue
represented by various categories in the Consolidated Statements of Income and
the percentage change in the related dollar amounts. The results of operations
for the year ended June 30, 1998 include a full year of operations for fifteen
hospitals and partial periods for the hospital divested, the joint ventures, the
hospitals contributed to the joint ventures and two hospitals acquired during
the year. The results of operations for the year ended June 30, 1997 include a
full year of operations for fifteen hospitals and partial periods for four
hospitals acquired during the year. The results of operations for the year ended
June 30, 1996 include a full year of operations for twelve hospitals and partial
periods for two hospitals acquired and one hospital divested during the year.
<TABLE>
<CAPTION>
Percentage
Increase
(Decrease) of
Dollar Amounts
---------------------------
1998 1997
Fiscal Year vs. vs.
1998 1997 1996 1997 1996
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net operating revenue 100.0% 100.0% 100.0% 11.2% 28.7%
Operating expenses (1) 81.4 81.5 81.0 11.1 29.5
Equity in earnings of affiliates (0.4) -- -- (100.0) --
----- ----- ----- ----- -----
EBITDA (2) 19.0 18.5 19.0 14.6 25.2
Depreciation and amortization 5.5 5.3 5.1 15.8 34.4
Interest 2.6 3.2 3.3 (11.0) 24.7
Minority interest 0.2 0.1 0.0 320.8 579.8
Write-down of assets 1.5 -- -- 100.0 --
----- ----- ----- ----- -----
Income before income taxes
and extraordinary item 9.2 9.9 10.6 4.4 19.6
Provision for income taxes 3.7 3.9 4.3 6.3 17.0
----- ----- ----- ----- -----
Income before extraordinary item 5.5 6.0 6.3 3.1 21.4
Extraordinary charges -- 0.6 -- (100.0) 100.0
----- ----- ----- ----- -----
Net income 5.5% 5.4% 6.3% 14.2% 9.6%
===== ===== ===== ===== =====
</TABLE>
- --------------------
(1) Operating expenses represent expenses before interest, minority interest,
write-down of assets, income taxes, depreciation and amortization expense.
(2) EBITDA represents earnings before interest, minority interest, write-down of
assets, income taxes, depreciation and amortization expense and extraordinary
charges. The Company has included EBITDA data because such data is used by
certain investors to measure a company's ability to service debt. EBITDA is not
a measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of operating performance or to cash flows from operating activities as a
measure of liquidity.
37
<PAGE> 38
Fiscal 1998 Compared to Fiscal 1997
The Company's 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%. This increase was attributable to, among other things, six hospital
acquisitions during fiscal 1998 and 1997, a 7.3% increase in revenue generated
by hospitals owned during both periods (calculated by comparing the same periods
in both fiscal periods for hospitals owned for one year or more), and a 3.5%
increase in management services revenue. The increase in revenue generated by
hospitals owned during both periods is due to higher volumes, prices and
additional revenue from final settlements with third party payors, partially
offset by increased managed care and charity care discounts and the effects of
the Balanced Budget Act of 1997 (the Budget Act). The Company's net operating
revenue increases were partially offset by a reduction in net revenue due to the
divestiture of the Nebraska hospital and the contribution of hospitals to joint
ventures, which were accounted for by the equity method.
Operating expenses as a percent of net operating revenue decreased to
81.4% in fiscal 1998 from 81.5% in fiscal 1997. Operating expenses as a percent
of net operating revenue for the Company's owned hospitals was 82.0% in fiscal
1998 and fiscal 1997. For the Company's hospitals owned during both periods,
operating expenses as a percent of net operating revenue decreased to 80.7% in
fiscal 1998 from 81.5% in fiscal 1997. The decrease was primarily attributable
to a reduction in salaries and benefits expense and supplies expense as a
percent of net operating revenue. Equity in earnings of affiliates, which was
primarily attributable to the Las Vegas and Macon operations, represented .4% of
the Company's net operating revenue for fiscal year 1998.
EBITDA as a percent of net operating revenue was 19.0% for fiscal 1998
compared to 18.5% in fiscal 1997. EBITDA as a percent of net operating revenue
for the Company's owned hospitals was 18.5% in fiscal 1998 compared to 18.0% in
fiscal 1997. EBITDA as a percent of net operating revenue for the Company's
hospitals owned during both periods was 19.3% in fiscal 1998 compared to 18.5%
in fiscal 1997. EBITDA as a percent of net operating revenue for the Company's
management services business was 23.9% in fiscal 1998 compared to 22.7% in
fiscal 1997.
Depreciation and amortization expense as a percent of net operating
revenue increased to 5.5% in fiscal 1998 from 5.3% in fiscal 1997. Interest
expense as a percent of net operating revenue decreased to 2.6% in fiscal 1998
from 3.2% in fiscal 1997 due to the replacement of subordinated debt with bank
debt in fiscal 1997 (as discussed below), a reduction in interest rates, the
impact of IRS examinations, and repayments of bank debt with cash flow generated
from operations. Minority interest expense as a percent of net operating revenue
increased to .2% in fiscal year 1998 from .1% in fiscal year 1997 which was
primarily attributable to minority ownership of the fiscal 1997 acquisitions.
The write-down of assets is due to the write-down of goodwill at the Company's
hospital contributed to Valley Health System LLC. The provision for income taxes
38
<PAGE> 39
as a percent of net operating revenue was 3.7% in fiscal 1998. Excluding the
write-down of assets, the provision for income taxes as a percent of net
operating revenue increased to 4.3% from 3.9% for fiscal year 1997, which was
attributable to the increase in pretax income.
Net income as a percent of net operating revenue was 5.5% in fiscal
1998. Excluding the extraordinary charge and write-down of assets, net income as
a percent of net operating revenue was 6.5% compared to 6.0% for fiscal year
1997.
Fiscal 1997 Compared to Fiscal 1996
The Company's net operating revenue was $1,413.9 million in fiscal
1997, compared to $1,098.5 million in fiscal 1996, an increase of $315.4 million
or 29%. This increase was attributable to, among other things, five hospital
acquisitions during fiscal 1997 and 1996, a full year of revenue from two
hospitals acquired during fiscal 1996, a 10% increase in revenue generated by
hospitals owned during both periods and a 3% increase in management services
revenue.
Operating expenses as a percent of net operating revenue increased to
81.5% in fiscal 1997 from 81.0% for fiscal 1996 which was primarily attributable
to the fiscal 1997 acquisitions of owned hospitals. Operating expenses as a
percent of net operating revenue for the Company's owned hospitals increased to
82.0% in fiscal 1997 from 81.7% for fiscal 1996. For the Company's hospitals
owned during both periods, operating expenses as a percent of net operating
revenue decreased to 80.8% in fiscal 1997 from 81.5% for fiscal 1996 which was
primarily attributable to a reduction in salaries and benefits, fees and
supplies expense as a percent of net operating revenue.
EBITDA as a percent of net operating revenue was 18.5% in fiscal 1997
compared to 19.0% in fiscal 1996. EBITDA as a percent of net operating revenue
for the Company's owned hospitals was 18.0% in fiscal 1997 compared to 18.3% in
fiscal 1996. EBITDA as a percent of net operating revenue for the Company's
hospitals owned during both periods was 19.2% in fiscal 1997 compared to 18.5%
in fiscal 1996. EBITDA as a percent of net operating revenue for the Company's
management services business was 22.7% in fiscal 1997 compared to 23.9% in
fiscal 1996.
Depreciation and amortization expense as a percent of net operating
revenue increased to 5.3% in fiscal 1997 from 5.1% in fiscal 1996 primarily due
to the fiscal 1996 and 1997 acquisitions and the Company's investment in
management information systems. Interest expense as a percent of net operating
revenue decreased to 3.2% in fiscal 1997 from 3.3% in fiscal 1996 due to the
replacement of subordinated debt with bank debt, a reduction in interest rates
and repayments of bank debt with cash flow generated from operations. The
provision for income taxes as a percent of net operating revenue decreased to
3.9% in fiscal 1997 from 4.3% in fiscal 1996 primarily attributable to a lower
effective tax rate and a relative change in pretax income.
39
<PAGE> 40
Income before extraordinary item as a percent of net operating revenue
was 6.0% in fiscal 1997 compared to 6.3% in fiscal 1996. This decrease was
primarily attributable to the fiscal 1997 acquisitions and was partially offset
by the increased profitability of the Company's hospitals owned during both
periods, as discussed above.
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% Senior Subordinated Notes, transaction costs, the write-off of
unamortized loan costs of the Notes and the write-off of unamortized loan costs
of the $600 million secured revolving credit facility. The Notes were purchased
through a tender offer and the revolving credit facility was replaced with the
new unsecured revolving credit facility.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had working capital of $191.0 million,
including cash and cash equivalents of $17.5 million. The ratio of current
assets to current liabilities was 2.2 to 1.0 at June 30, 1998 and June 30, 1997.
The Company's cash requirements excluding acquisitions have
historically been funded by cash generated from operations. Cash generated from
operations was $124.7 million, $173.4 million and $114.2 million for the years
ended June 30, 1998, 1997 and 1996, respectively. The 1998 decrease is primarily
due to an increase in current year tax payments, payments related to the IRS
examinations and accounts receivable. The increase in accounts receivable is
primarily due to Medicare intermediary computer system conversions, the patient
accounting computer system conversion at one hospital and slower collections,
which the Company is addressing. The 1997 increase is primarily due to the
fiscal 1996 and 1997 acquisitions.
The complexity of the Medicare and Medicaid regulations, increases in
managed care, hospital personnel turnover, including business office managers,
dependence of hospitals on physician documentation of medical records and the
subjective judgment involved complicates billing and collections of accounts
receivable by hospitals. There can be no assurance that this complexity will not
negatively impact the Company's future cash flow or results of operations.
Capital expenditures excluding acquisitions for the years ended June
30, 1998, 1997 and 1996, were $131.8 million, $83.0 million and $62.1 million,
respectively. Capital expenditures may vary from year to year depending on
facility improvements and service enhancements undertaken by the owned
hospitals. The Company is constructing a replacement hospital and two medical
office buildings in Florence, South Carolina with fiscal 1998 and 1997 capital
expenditures of approximately $52 million and $8 million, respectively, and a
total project cost of approximately $100
40
<PAGE> 41
million. In fiscal 1999, excluding acquisitions, the Company expects to make
capital expenditures from $130 million to $150 million, including costs of
approximately $40 million for the replacement hospital.
During fiscal 1998, cash used for acquisitions was $131.7 million. The
Company acquired two hospitals and affiliated health care entities, contributed
three hospitals in exchange for equity interests in joint ventures that own and
operate seven hospitals and sold its remaining interest in a Nebraska hospital.
During fiscal 1997, the Company acquired five hospitals and affiliated health
care entities for approximately $184.6 million and sold a minority interest in a
hospital. During fiscal 1996, the Company acquired two hospitals and affiliated
health care entities for approximately $205.3 million and sold one hospital and
a minority interest in another hospital.
Effective July 1, 1998, the Company acquired St. Joseph Medical Center
in Fort Wayne, Indiana. Certain land and buildings were financed through the
Company's End Loaded Lease Financing (ELLF) Agreement discussed below.
The Company intends to acquire additional acute care facilities, and is
actively seeking out such acquisitions. The Company is continually evaluating
various structures to serve existing local health care delivery markets. These
structures could include joint ventures with other hospital owners or
physicians. Also, the Company continually reviews its capital needs and
financing opportunities and may seek additional equity or debt financing for its
acquisition program or other needs.
During fiscal 1998, the Company amended its unsecured $850.0 million
revolving credit facility to extend the credit agreement expiration date by six
months to November 26, 2002 to coincide with the expiration date of the ELLF
agreement discussed below. On each anniversary date of the inception of the
credit agreement, the Company has the option to request an incremental one-year
extension, subject to approval of 100% of the lenders. 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 .25 to .75 percentage
points above LIBOR. The Company pays a facility fee ranging from .18 to .25
percentage points on the commitment. The interest rate margins and facility fee
rates are based on the Company's leverage ratio. The Company may prepay the
amount outstanding at any time. The interest rate in effect at June 30, 1998 was
6.1%. At June 30, 1998, the Company had $462.4 million outstanding under its
Revolving Line of Credit.
During fiscal 1998, the Company entered into a five-year $150 million
ELLF agreement to provide a financing option for future acquisitions and/or
construction. This financing option is in addition to the Company's $850 million
Revolving Line of Credit. The ELLF interest rate margins and facility fee rates
are substantially the same as the Revolving Line of Credit. All lease payments
under the agreement are guaranteed by the Company. At June 30, 1998, $126.3
million was available under the ELLF
41
<PAGE> 42
agreement.
During fiscal 1996, the Company issued $150.0 million in Senior
Subordinated Notes maturing on November 1, 2005 and bearing 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 is required to
repurchase the Senior Subordinated Notes at 101% upon a change in control. The
8.75% Notes are unsecured obligations and are subordinated in right of payment
to all existing and future senior indebtedness.
During fiscal 1997, the Company purchased for cash $97.8 million of its
11.875% Senior Subordinated Notes through a tender offer at a price of $1,087
per $1,000 principal amount. During fiscal 1998, the Company redeemed the
remaining 11.875% Notes at $1,059 per $1,000 principal amount.
The credit facilities contain certain financial covenants including but not
limited to the prohibition of dividend payments and other distributions and
restrictions on repurchases of common stock, investments, 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.
In August 1998, the Board of Directors authorized the repurchase of up
to 3,000,000 shares of common stock. Shares repurchased under the program may be
used, among other purposes, to offset the effects of the Company's stock option
and employee stock purchase plans.
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. In addition, 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 and to increase the number of
shares reserved for issuance under the Company's qualified employee stock
purchase plan from 3,000,000 to 3,750,000.
During fiscal 1998, the Company's stockholders approved the 1997 Stock
Option Plan. Under the plan, 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 number of shares initially reserved for issuance was
3,000,000. No further options will be granted pursuant to the Company's previous
stock option plan.
In fiscal 1997, the Company adopted a Stockholder Rights Plan and
declared a dividend of one right for each share of common stock held as of the
close of business on April 28, 1997. Each right entitles stockholders to acquire
one-third of a share of common stock at an exercise price of $100, subject to
adjustment. Such rights become exercisable only if a person or group acquires
beneficial ownership of 15% or more of the
42
<PAGE> 43
Company's common stock or commences a tender or exchange offer which would
result in that person or group owning 15% or more of the Company's common stock.
After any person has acquired 15% or more of the Company's common stock, each
right not owned by such person or certain related parties will entitle its
holder to purchase a number of shares of the Company's common stock (or any
combination of common stock, preferred stock, debt securities and cash, as
determined by the Board of Directors) having a market value of two times the
then-current exercise price of the right. In the event the Company is involved
in a merger or other business combination transaction with another person or
sells 50 percent or more of its assets or earning power to another person, each
right will entitle its holder to purchase a number of shares of the Company's
common stock or the acquiring company's common stock having a market value of
two times the then-current 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.
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
The Company's interest expense is sensitive to changes in the general
level of U.S. interest rates. To mitigate the impact of fluctuations in U.S.
interest rates, the Company generally maintains 50%-75% of its debt as fixed
rate in nature either by borrowing on a long-term basis or entering into
interest rate swap transactions. The interest rate swap agreements are contracts
to periodically exchange fixed and floating interest rate payments over the life
of the agreements. The floating-rate payments are based on LIBOR and fixed-rate
payments are dependent upon market levels at the time the swap agreement was
consummated. The interest rate swap agreements do not constitute positions
independent of the underlying exposures. The Company does not hold or issue
derivative instruments for trading purposes and is not a party to any
instruments with leverage features. Certain swap agreements allow the
counterparty a one-time option at the end of the initial term to cancel the
agreement or a one-time option at the end of the initial term to extend the
swaps for an incremental 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, 1998, 1997 and
1996, the Company received a weighted average rate of 5.8% in each year and paid
a weighted average rate on its interest rate swap agreements of 6.0%, 5.9% and
4.8%, respectively.
The table below presents information about the Company's market-
sensitive financial instruments, including long-term debt and interest rate
swaps as of June 30, 1998. For debt obligations, the table presents principal
cash flows and related weighted-average interest rates by expected maturity
dates. For interest rate swap agreements, the table presents notional amounts by
expected maturity date (assuming the options to extend are not exercised) and
weighted average interest rates based on rates in effect at June 30, 1998. The
fair values of long-term debt and
43
<PAGE> 44
interest rate swaps were determined based on quoted market prices at June 30,
1998 for the same or similar debt issues.
<TABLE>
<CAPTION>
Maturity Date, Fiscal Year Ending June 30
-----------------------------------------
There- Fair Value of
(Dollars in millions) 1999 2000 2001 2002 2003 after Total Liabilities
---- ---- ---- ---- ---- ----- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed rate long-term debt $1.3 $0.9 $0.7 $0.6 $0.6 $152.2 $156.3 $161.5
Average interest rates 7.6% 7.6% 7.7% 7.7% 7.7% 8.7%
Variable rate long-term
debt $462.4 $462.4 $462.4
Average interest rates 6.1%
Interest rate swaps:
Pay fixed/receive
variable notional
amounts $400.0 $400.0 $8.3
Average pay rate 5.9%
Average receive rate 5.7%
Pay variable/receive
fixed notional amounts $100.0 $100.0 $0.2
Average pay rate 5.8%
Average receive rate 6.1%
</TABLE>
YEAR 2000 ISSUES
The "Year 2000 problem" describes computer programs which use two
rather than four digits to define the applicable year. These programs are
present in software applications running on desktop computers and network
servers. These programs are also present in microchips and microcontrollers
incorporated into equipment. Certain of the Company's computer hardware and
software, building infrastructure components (e.g. alarm systems and HVAC
systems) and medical devices that are date sensitive, may contain programs with
the Year 2000 problem. If uncorrected, the problem could result in computer
system and program failures or equipment and medical device malfunctions that
could result in a disruption of business operations or affect patient diagnosis
and treatment.
The Company has a Year 2000 strategy for its owned hospitals that
includes phases for education, inventory and assessment of applications and
equipment at risk, analysis and planning, testing, conversion/remediation/
replacement and post-implementation. The Company's strategy also includes
development of contingency plans to address potential disruption of operations
arising from the Year 2000 problem.
The Company has developed educational materials to inform the owners of
the hospitals it manages about the Year 2000 problem. The Company intends to
monitor the progress of the response by the hospitals it manages to the Year
2000 problem. The Company does not believe that it is responsible for ensuring
Year 2000 compliance by its managed hospitals. The Company can provide no
assurance, however, that its managed hospitals will not seek to hold it
responsible for losses they incur arising out of
44
<PAGE> 45
the Year 2000 problem. Nor can the Company provide assurance that it will not
ultimately be found liable for such losses, if they occur.
The Company has completed an initial assessment of financial
application software used in its owned hospitals in such areas as patient
accounting and financial reporting. Three owned hospitals are scheduled to
convert to Year 2000 compliant financial software systems by summer 1999. The
Company is in the process of evaluating financial software alternatives for
resolution of the Year 2000 problem for one hospital. Upgrades have been
scheduled for the remaining hospitals for financial application software which
is not Year 2000 compliant. With respect to other software and computer
equipment, such as patient care and ancillary software, some hospitals are still
evaluating the Year 2000 problem. Others have begun upgrading or replacing such
software and equipment. The Company expects this evaluation to be completed in
fall 1998 and intends for critical remediation to be substantially completed by
summer 1999. The Company's corporate office and management services business are
scheduled to convert to compliant financial software applications by June 1999.
The Company believes that the corporate office network is Year 2000 compliant.
Other management services and corporate office computer software and equipment
are currently being tested.
The Company is in the inventory and assessment phase of its analysis of
other owned hospital systems such as biomedical equipment and building
infrastructure components. The Company anticipates completing this phase by
December 1998. Because the Company has not completed the inventory and
assessment phase, it is unable to establish an estimated date for completing
subsequent phases with respect to equipment and infrastructure in its owned
hospitals.
The Company believes that Year 2000-related remediation costs incurred
through fiscal 1998 have not been material to its results of operations. The
Company is not able to reasonably estimate the total costs to be incurred for
completion of its Year 2000 strategy at this time. Some replacements and
upgrades would take place in the normal course of business.
The Company relies heavily on third parties in operating its business.
In addition to its reliance on software, hardware and other equipment vendors to
verify Year 2000 compliance of their products, the Company also depends on (i)
fiscal intermediaries which process claims and make payments for the Medicare
program, (ii) insurance companies, HMO's and other private payors, (iii)
utilities which provide electricity, water, natural gas and telephone services
and (iv) vendors of medical supplies and pharmaceuticals used in patient care.
As a part of its Year 2000 strategy, the Company intends to seek assurances from
these parties that their services and products will not be interrupted or
malfunction due to the Year 2000 problem. Failure of these third parties to
resolve their Year 2000 issues could have a material adverse effect on the
Company's results of operations and ability to provide health care services. The
Company intends to complete its initial contingency plan by June 1999. However,
45
<PAGE> 46
in some instances (e.g. loss of water supply), the Company may not be able to
develop contingency plans which allow the affected hospital to continue to
operate. Each of the Company's owned hospitals has a disaster plan which will be
reviewed as a part of the Company's contingency planning process.
The foregoing assessment is based on information currently available to
the Company. The Company will revise its assessment as it implements its Year
2000 strategy. The Company can provide no assurances that applications and
equipment the Company believes to be Year 2000 compliant will not experience
difficulties or that the Company will not experience difficulties obtaining
resources needed to make modifications to or replace the Company's affected
systems and equipment. Failure by the Company or third parties on which it
relies to resolve Year 2000 issues could have a material adverse effect on the
Company's results of operations and its ability to provide health care services.
Consequently, the Company can give no assurances that issues related to Year
2000 will not have a material adverse effect on the Company's financial
condition or results of operations.
GENERAL
The federal Medicare program and state Medicaid programs accounted for
approximately 55%, 55% and 56% of gross patient service revenue for the years
ended June 30, 1998, 1997 and 1996, respectively. The payment rates under the
Medicare program for inpatients are prospective, based upon the diagnosis of a
patient.
Under the Budget Act, there are no increases in the inpatient operating
payment rates to acute care hospitals for services through September 30, 1998
and subsequent increases are expected to be less than inflation. The Budget Act
reduced inpatient capital payments in the aggregate by 15.3% effective October
1, 1997. Payments for Medicare outpatient services, home health services and
skilled nursing facility services historically have been paid based on costs,
subject to certain adjustments and limits. The Budget Act requires that the
payment for those services be converted to prospective payment systems (PPS),
which are scheduled to be phased in over various periods, beginning July 1,
1998. The Company expects a reduction in payments for outpatient and home health
in the interim period prior to implementation of PPS and skilled nursing
facility services under PPS. The Budget Act is expected to reduce the Company's
ability to maintain its current rate of net revenue growth and operating
margins. The Budget Act and further changes in the Medicare or Medicaid programs
and other proposals to limit health care spending could have a material adverse
impact upon the health care industry and the Company. The Company expects
continuing pressure to limit expenditures by governmental health care programs.
The Company is continuing to experience an increase in managed care. An
increasing number of payors are actively negotiating amounts paid to hospitals,
which are typically lower than their standard rates. Additionally, some managed
care payors pay less than the negotiated rate which, if undetected, results in
lower net revenues. The trend toward managed care, including health maintenance
organizations, preferred
46
<PAGE> 47
provider organizations and various other forms of managed care, may adversely
affect the Company's ability to maintain its current rate of net revenue growth
and operating margins.
The Company's acute care hospitals, like most acute care hospitals in
the United States, have significant unused capacity. The result is substantial
competition for patients and physicians. Inpatient utilization continues to be
negatively affected by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative health care delivery services
for less acutely ill patients. The Company expects increased competition and
admission constraints to continue in the future. The ability to successfully
respond to these trends, as well as spending reductions in governmental health
care programs, will play a significant role in determining hospitals' ability to
maintain their current rate of net revenue growth and operating margins.
The Company expects the industry trend from inpatient to outpatient
services to continue due to the increased focus on managed care and advances in
technology. Outpatient revenue of the Company's owned hospitals was
approximately 40.2%, 36.3% and 34.0% of gross patient service revenue for the
years ended June 30, 1998, 1997 and 1996, respectively.
The Company's historical financial trend has been favorably impacted by
the Company's ability to successfully acquire acute care hospitals. The Company
believes that trends in the health care industry described above may create
possible future acquisition opportunities. The Company faces competition in
acquiring hospitals from a number of well-capitalized organizations. Many states
have implemented new review processes by the Attorneys General of not-for profit
hospital acquisitions, resulting in delays to close an acquisition.
Additionally, some hospitals are sold through an "auction" process, which may
result in higher purchase prices being paid by competitors for those properties
than the Company believes are reasonable. The Year 2000 problem may reduce the
number of suitable hospital acquisition candidates. As the Company grows, it
depends on a greater volume of acquisitions, or acquisitions of a larger size,
to achieve its growth targets. There can be no assurances that the Company can
continue to maintain its current growth rate through hospital acquisitions and
the successful integration of hospitals into its system.
The Company's owned hospitals accounted for 91% of the Company's net
operating revenue in fiscal 1998 compared to 90% in fiscal 1997 and 88% in
fiscal 1996. In fiscal 1998, the Dothan, Alabama and Fort Wayne, Indiana markets
accounted for approximately 25% of the Company's owned hospital revenue and 40%
of the Company's owned hospital EBITDA. Due to the current number of owned
hospitals, changes in any individual market can affect the overall operating
results of the Company. Furthermore, concentration of results of operations in
the Dothan, Alabama and Fort Wayne, Indiana markets increases the risks that
adverse developments at these facilities will have a material adverse effect on
the Company's operations or financial condition. In addition, the amounts
expected to be derived from the Fort Wayne, Indiana market will increase as a
result of the acquisition
47
<PAGE> 48
of St. Joseph Medical Center.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the amounts reported in its financial statements.
Resolution of matters, for example, final settlements with third party payors,
may result in changes from those estimates. The timing and amount of such
changes in estimates may cause fluctuations in the Company's quarterly or annual
operating results.
The federal government and a number of states are rapidly increasing
the resources devoted to investigating allegations of fraud and abuse in the
Medicare and Medicaid programs. At the same time, regulatory and law enforcement
authorities are taking an increasingly strict view of the requirements imposed
on providers by the Social Security Act and Medicare and Medicaid regulations.
Although the Company believes that it is in material compliance with such laws,
a determination that the Company has violated such laws, or even the public
announcement that the Company was being investigated concerning possible
violations, could have a material adverse effect on the Company.
The IRS is in the process of conducting examinations of the Company's
federal income tax returns for the fiscal years ended June 30, 1993 through
1995. The Company has reached a settlement with the IRS in connection with its
examination of the Company's federal income tax returns for the fiscal years
ended June 30, 1990 through 1992. The settlement did not have a material effect
on the Company's results of operations or financial position.
In June 1993, the OIG requested information from the Company in
connection with an investigation involving the Company's procedures for
preparing Medicare cost reports. In January 1995, the U.S. Department of Justice
issued a Civil Investigative Demand which also requested information from the
Company in connection with that same investigation. As a part of the
government's investigation, several former and current employees of the Company
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 allegations made by a former employee of a
hospital managed by a Company subsidiary. The allegations concern the
preparation of cost reports for Medicare and other government payment programs
for owned and managed hospitals. At a meeting to discuss the case, held
September 24, 1998, the Company learned that the government would likely
commence litigation under the False Claims Act on or about October 5, 1998. The
Company intends to continue to cooperate with the government's inquiry, and, if
appropriate, will try to reach a settlement of this case.
On May 7, 1998, the Company learned that it is a named defendant in a
separate qui tam case when it received a letter from a U.S. Attorney. The
complaint alleges violations of Medicare laws governing the home health
operations at two of the Company's hospitals. The complaint was filed under seal
in June 1996 by a former employee who was discharged by the Company in April
1996. The purpose of the letter from the U.S. Attorney was to allow the Company
an opportunity to evaluate the results of the government's investigation to date
and to discuss with the government the allegations made in the complaint, prior
to the government making a decision as to whether it will intervene as a
plaintiff in the case. The lawsuit remains under seal for all other purposes.
The Company intends to cooperate fully and share information with the U.S.
Attorney's Office. If any violation of law is found, the Company intends to
pursue an amicable settlement. The case is in a very preliminary stage.
The Company cannot at this time predict the outcome of these cases or
their ultimate impact on the Company's business or operating results. If the
outcome of either case were unfavorable, the Company could be subject to fines,
penalties and damages and also could be excluded from Medicare and other
government reimbursement programs. These and other results of these cases could
have a material adverse effect on the Company's financial condition or results
of operations.
48
<PAGE> 49
In 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS No.
128 replaced the calculation of primary and fully diluted earnings per share
(EPS) with basic and diluted EPS. Unlike primary EPS, basic EPS excludes any
dilutive effects of options, warrants, and convertible securities. Diluted EPS
is similar to the previously reported fully diluted EPS. All EPS amounts for all
periods have been presented to conform to the Statement 128 requirements.
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes reporting standards
for operating segment information disclosed in annual financial statements and
in interim financial reports issued to shareholders. Under existing accounting
standards, the Company has reported its operations as one line of business since
its inception because substantially all of its revenues and operating profits
have been derived from its acute care hospitals, affiliated health care entities
and health care management services. The Company will adopt SFAS No. 131
beginning with its fiscal year ending June 30, 1999 and is presently evaluating
the new standard to determine its effect, if any, on the way the Company might
report its operations in the future.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will require the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. For interest rate swap
agreements that qualify as hedges, changes in fair value will be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings. The Company will adopt SFAS No. 133 beginning with its fiscal
year ending June 30, 2000 and is presently evaluating the new standard to
determine its effect on the earnings and financial position of the Company.
INFLATION
The health care industry is labor intensive. Wages and other expenses
increase during periods of inflation and when shortages in marketplaces occur.
In addition, suppliers pass along rising costs to the Company in the form of
higher prices. The Company has generally been able
49
<PAGE> 50
to offset increases in operating costs by increasing charges, expanding services
and implementing cost control measures to curb increases in operating costs and
expenses. The Company cannot predict its ability to offset or control future
cost increases.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, both nationally and in the
regions in which the Company operates; deterioration in performance of any of
the Company's larger hospitals; industry capacity; demographic changes; existing
government regulations and changes in, or the failure to comply with,
governmental regulations; legislative proposals for health care reform; the
ability to enter into managed care provider arrangements on acceptable terms;
changes in Medicare and Medicaid payment levels including changes from the
Budget Act and subsequent regulations; an increase in managed care or the types
of managed care in the regions in which the Company operates; liability and
other claims asserted against the Company; competition; the loss of any
significant customers; changes in business strategy or development plans; the
ability to attract and retain qualified personnel, including physicians; the
availability and terms of capital to fund the expansion of the Company's
business, including the acquisition of additional facilities. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. The Company disclaims any obligation to
update any such factors or to publicly announce the result of any revisions to
any of the forward-looking statements contained herein to reflect future events
or developments.
50
<PAGE> 51
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-25.
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 1998 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 1998 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 1998 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 1998 Annual Meeting of
Stockholders.
51
<PAGE> 52
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, 1998
F-1
<PAGE> 53
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:
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Independent Auditors F- 3
Consolidated Statements of Income -- Years Ended June
30, 1998, 1997 and 1996 F- 4
Consolidated Balance Sheets -- June 30, 1998 and 1997 F- 5
Consolidated Statements of Changes in Stockholders'
Equity -- Years Ended June 30, 1998, 1997 and 1996 F- 7
Consolidated Statements of Cash Flows -- Years Ended June
30, 1998, 1997 and 1996 F- 8
Notes to Consolidated Financial Statements F- 9
</TABLE>
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
<PAGE> 54
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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended June 30, 1998. 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, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Nashville, Tennessee
August 7, 1998,
except for Note 10, as to which the date is
September 24, 1998
F-3
<PAGE> 55
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue:
Net patient service revenue $ 1,427,969 $ 1,274,498 $ 963,485
Hospital management/professional services 79,537 78,708 78,409
Reimbursable expenses 64,846 60,740 56,653
----------- ----------- -----------
Net operating revenue 1,572,352 1,413,946 1,098,547
Salaries and benefits 628,090 561,327 420,904
Reimbursable expenses 64,846 60,740 56,653
Supplies 210,056 198,469 160,849
Fees 140,859 125,720 102,690
Other operating expenses 129,638 116,856 92,624
Provision for doubtful accounts 106,733 89,919 56,483
Equity in earnings of affiliates (6,993) -- --
Depreciation and amortization 87,020 75,134 55,901
Interest 40,606 45,601 36,568
Minority interest 3,118 741 109
Net gain on sale of assets -- -- (787)
Write-down of assets 22,850 -- --
----------- ----------- -----------
Income before income taxes and
extraordinary item 145,529 139,439 116,553
Provision for income taxes 58,849 55,357 47,321
----------- ----------- -----------
Income before extraordinary item 86,680 84,082 69,232
Extraordinary charges from retirement of debt -- (8,197) --
----------- ----------- -----------
Net income $ 86,680 $ 75,885 $ 69,232
=========== =========== ===========
Basic earnings per share:
Income before extraordinary item $ 1.16 $ 1.14 $ 0.96
Extraordinary charges from retirement of debt -- (0.11) --
----------- ----------- -----------
Net income $ 1.16 $ 1.03 $ 0.96
=========== =========== ===========
Diluted earnings per share:
Income before extraordinary item $ 1.12 $ 1.11 $ 0.93
Extraordinary charges from retirement of debt -- (0.11) --
----------- ----------- -----------
Net income $ 1.12 $ 1.00 $ 0.93
=========== =========== ===========
Weighted average shares outstanding:
Basic 74,733 73,442 72,191
Common stock equivalents 2,434 2,235 2,448
----------- ----------- -----------
Diluted 77,167 75,677 74,639
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 56
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
JUNE 30
------------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash $ 17,549 $ 19,008
Accounts receivable, less allowance for
doubtful accounts of $65,561 at June 30,
1998 and $55,360 at June 30, 1997 273,376 248,732
Supplies 29,336 31,622
Other 34,245 31,739
------------ -----------
Total current assets 354,506 331,101
Property, plant and equipment, at cost:
Land 66,424 62,109
Buildings and improvements 291,258 324,450
Equipment 464,577 462,726
Construction in progress 72,676 21,192
------------ -----------
894,935 870,477
Less accumulated depreciation 216,229 183,705
------------ -----------
678,706 686,772
Cost in excess of net assets acquired, net 144,315 185,932
Investments in unconsolidated entities 245,551 9,751
Other 67,875 65,435
------------ -----------
Total assets $ 1,490,953 $ 1,278,991
============ ===========
</TABLE>
F-5
<PAGE> 57
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
JUNE 30
--------------------------------
1998 1997
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 70,483 $ 77,225
Accrued salaries and benefits 64,196 61,936
Other current liabilities 27,533 9,589
Current maturities of long-term debt 1,273 1,869
------------ ------------
Total current liabilities 163,485 150,619
Long-term debt, less current maturities 617,377 519,940
Deferred income taxes 29,470 38,249
Professional liability risks and other
liabilities and deferrals 30,882 25,450
Minority interests in consolidated entities 27,473 26,618
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 300,000
shares authorized; 75,478 issued
and outstanding at June 30, 1998
and 74,137 at June 30, 1997 755 741
Additional paid-in capital 290,149 272,692
Retained earnings 331,362 244,682
------------ ------------
622,266 518,115
------------ ------------
Total liabilities and stockholders' equity $ 1,490,953 $ 1,278,991
============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 58
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1995 71,676 $ 717 $256,107 $ 99,565 $356,389
Options exercised and
related tax benefits,
net of shares tendered
in payment 969 10 2,764 -- 2,774
Stock issued under employee
stock purchase plan 324 3 3,466 -- 3,469
Net income -- -- -- 69,232 69,232
------- ------- -------- -------- --------
Balance at June 30, 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
======= ======= ======== ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE> 59
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 86,680 $ 75,885 $ 69,232
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 78,208 66,907 51,191
Amortization of intangible assets 8,812 8,227 4,710
Extraordinary charges from retirement of debt -- 13,307 --
Write-down of assets 22,850 -- --
Provision for doubtful accounts 106,733 89,919 56,483
Provision for deferred taxes (7,816) 5,106 13,893
Undistributed earnings of affiliates (6,993) -- --
Other 5,371 5,032 2,304
Changes in operating assets and liabilities,
net of effects from acquisitions
and divestitures:
Accounts receivable (161,872) (114,589) (71,219)
Supplies and other current assets (5,363) (93) (4,736)
Other assets 5,400 (8,646) (13,790)
Accounts payable and accrued expenses 8,019 27,630 2,005
Other current and long-term liabilities (15,315) 4,701 4,098
--------- --------- ---------
Net cash provided by operating activities 124,714 173,386 114,171
INVESTING ACTIVITIES:
Purchase of acquired companies (131,741) (184,575) (205,326)
Purchase of property, plant and equipment (131,766) (82,977) (62,122)
Proceeds from sale of assets 14,695 8,060 870
Other (4,238) 44 148
--------- --------- ---------
Net cash used in investing activities (253,050) (259,448) (266,430)
FINANCING ACTIVITIES:
Borrowings under bank debt 458,900 691,700 363,750
Repayments of bank debt (360,400) (504,800) (368,000)
Repurchase of Senior Subordinated Notes (2,224) (106,380) --
Proceeds from issuance of Senior Subordinated Notes -- -- 150,000
Proceeds from issuance of common stock, net 13,235 10,366 6,243
Change in outstanding checks and overnight investment 20,199 -- --
Other (2,833) (6,198) (6,827)
--------- --------- ---------
Net cash provided by financing activities 126,877 84,688 145,166
--------- --------- ---------
Decrease in cash (1,459) (1,374) (7,093)
Cash at beginning of year 19,008 20,382 27,475
--------- --------- ---------
Cash at end of year $ 17,549 $ 19,008 $ 20,382
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ (44,353) $ (42,601) $ (32,198)
========= ========= =========
Income taxes paid $ (73,205) $ (44,489) $ (34,483)
========= ========= =========
</TABLE>
See accompanying notes.
F-8
<PAGE> 60
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
Quorum Health Group, Inc. through its subsidiaries owns and operates acute care
hospitals and local and regional health care systems nationwide. At June 30,
1998, Quorum Health Group, Inc. and subsidiaries (the Company) owned 17
hospitals and managed 236 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 its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
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. While the Company's concentration of credit
risk is limited to some extent by the diversity and number of patients and
payors, the Dothan, Alabama and Fort Wayne, Indiana markets accounted for
approximately 25% of the Company's owned hospital revenue for the year ended
June 30, 1998.
Supplies: Supplies are stated at the lower of cost, determined by the first-in,
first-out method, or market.
Property, Plant and Equipment: Depreciation is computed on a straight-line basis
principally with a range of depreciable lives from 20-40 years for buildings and
improvements and 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
<PAGE> 61
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Goodwill is amortized on a straight-line basis primarily over 15 to 40 years.
Accumulated amortization of cost in excess of net assets acquired was $11.8
million and $15.7 million at June 30, 1998 and 1997, 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 the undiscounted cash flows of the entity acquired over the remaining
amortization period, the Company's carrying value of the goodwill will be
reduced to estimated fair value.
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 $20.2 million at June 30, 1998.
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, 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 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 $11.3 million, $5.5 million and $3.5 million for the years ended June 30,
1998, 1997 and 1996, respectively.
Net patient service revenue is net of contractual adjustments and policy
discounts of $1,135.1 million, $1,026.3 million and $746.8 million for the years
ended June 30, 1998, 1997 and 1996, respectively. Approximately 55%, 55% and 56%
of gross patient service revenue was from Medicare and Medicaid for the years
ended June 30, 1998, 1997 and 1996, respectively.
F-10
<PAGE> 62
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company provides care to patients who meet certain criteria under its
charity care policy without charge or at amounts less than its established
rates. Because the Company does not pursue collection of amounts determined to
qualify as charity care, they are not reported in revenue.
Financial Instruments: The Company enters into interest rate swap agreements as
a means of managing its interest rate exposure. The differential to be paid or
received is recognized over the life of the agreement as an adjustment to
interest expense (the accrual accounting method). The fair value of the swap
agreements and changes in the fair value as a result of changes in market
interest rates 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,"
and, accordingly, recognizes no compensation expense for the stock option 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 shares of common stock outstanding, and common stock equivalents
consisting of dilutive stock options.
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." SFAS No. 128
replaced the calculation of primary and fully diluted EPS with basic and diluted
EPS. Unlike primary EPS, basic EPS excludes any dilutive effects of options,
warrants and convertible securities. Diluted EPS is similar to the previously
reported fully diluted EPS. All EPS amounts for all periods have been presented
and, where appropriate, restated to conform to SFAS No. 128 requirements.
Recently Issued Accounting Pronouncements: In 1997, the FASB issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes reporting standards for operating segment information
disclosed in annual financial statements and in interim financial reports issued
to shareholders. Under existing accounting standards, the Company has reported
its operations as one line of business because substantially all of its revenue
and operating profits have been derived from its acute care hospitals,
affiliated health care entities and health care management services. The Company
will adopt SFAS No. 131 beginning with its fiscal year ending June 30, 1999 and
is presently evaluating the new standard to determine its
F-11
<PAGE> 63
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
effect, if any, on the way the Company might report its operations in
the future.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. For interest rate swap agreements
that qualify as hedges, changes in fair value will be offset against the change
in fair value of the hedged assets, liabilities, or firm commitments through
earnings. The Company will adopt SFAS No. 133 beginning with its fiscal year
ending June 30, 2000 and is presently evaluating the new standard to determine
its effect on the earnings and financial position of the Company.
Reclassifications: Certain prior year amounts have been reclassified to conform
to the current year presentation.
2. ACQUISITIONS AND DIVESTITURES
During fiscal 1998, the Company acquired two hospitals and affiliated health
care entities and sold its remaining interest in a Nebraska hospital. 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 hospital in Nebraska. During
fiscal 1996, the Company acquired two hospitals and affiliated health care
entities and sold one hospital and a minority interest in the hospital in
Nebraska.
Hospital and affiliated business acquisitions are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fair value of assets acquired $145,623 $233,582 $210,099
Fair value of liabilities assumed (13,882) (29,943) (4,773)
Contributions from minority investors -- (19,064) --
-------- -------- --------
Net cash used for acquisitions $131,741 $184,575 $205,326
======== ======== ========
</TABLE>
All of 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
F-12
<PAGE> 64
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
based upon available information and is subject to further refinement. Included
in the acquisitions were costs in excess of net assets acquired of approximately
$41.9 million, $48.5 million and $37.6 million for the years ended June 30,
1998, 1997, and 1996, respectively. The operating results of the acquired
companies have been included in the accompanying consolidated statements of
income from the respective dates of acquisition.
The following unaudited pro forma results of operations give effect to the
operations of the entities acquired and divested, including joint ventures, in
fiscal 1998, 1997 and 1996 as if the respective transactions had occurred as of
the first day of the fiscal year immediately preceding the year of the
transactions (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net operating revenue $1,472,858 $1,389,463 $1,358,293
Income before extraordinary item 99,937 82,100 64,459
Net income 99,937 73,903 64,459
Basic earnings per share:
Income before extraordinary item 1.34 1.12 .89
Net income 1.34 1.01 .89
Diluted earnings per share:
Income before extraordinary item 1.30 1.08 .86
Net income 1.30 .98 .86
</TABLE>
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. 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 year ended June 30, 1998 is as follows (in
thousands): total assets $531.8 million, total liabilities $36.5 million, net
operating
F-13
<PAGE> 65
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
revenue $433.2 million and net income $26.7 million.
The investment in the LLCs has been determined by the Company based upon
available information and is subject to further refinement. The difference
between the carrying value of the investments and the underlying net book value
of approximately $85.9 million is amortized on a straight-line basis over
thirty-six years.
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30
-------
1998 1997
---- ----
<S> <C> <C>
Revolving Line of Credit $ 462,400 $ 363,900
8.75% Senior Subordinated Notes 150,000 150,000
11.875% Senior Subordinated Notes -- 2,224
Other debt 6,250 5,685
---------- ---------
618,650 521,809
Less current maturities (1,273) (1,869)
---------- ---------
$ 617,377 $ 519,940
========== =========
</TABLE>
Revolving Line of Credit: During fiscal 1998, the Company amended its unsecured
$850.0 million revolving credit facility to extend the credit agreement
expiration date by six months to November 26, 2002 to coincide with the
expiration date of the End Loaded Lease Financing agreement (see Note 8). On
each anniversary date of the inception of the credit agreement, the Company has
the option to request an incremental one-year extension subject to approval of
100% of the lenders. 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 .25 to .75 percentage points above LIBOR. The
Company pays a facility fee ranging from .18 to .25 percentage points on the
commitment. The interest rate margins and facility fee rates are based on the
Company's leverage ratio. The Company may prepay the amount outstanding at any
time. The interest rate in effect at June 30, 1998 was 6.1%.
8.75% Senior Subordinated Notes: During fiscal 1996, the Company issued $150.0
million in Senior Subordinated Notes maturing on November 1, 2005 and bearing
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 8.75% Notes
are unsecured obligations and are subordinated in right of payment to all
existing and future senior indebtedness.
F-14
<PAGE> 66
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11.875% Senior Subordinated Notes: During fiscal 1997, the Company purchased for
cash $97.8 million of its 11.875% Senior Subordinated Notes (Notes) through a
tender offer at a price of $1,087 per $1,000 principal amount. During fiscal
1998, the Company redeemed the remaining Notes at $1,059 per $1,000 principal
amount.
Other Long-Term Debt Information: The credit facilities contain certain
financial covenants including but not limited to the prohibition of dividend
payments and other distributions and repurchases of common stock, restrictions
on investments, 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. The
Company is required to repurchase the Senior Subordinated Notes at 101% upon a
change in control.
Maturities of long-term debt for the fiscal years subsequent to June 30, 1998
are as follows: 1999 - $1.3 million; 2000 - $.9 million; 2001 - $.7 million;
2002 - $463.0 million; 2003 - $.6 million and thereafter - $152.2 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 Notes, transaction costs, the write-off of
unamortized loan costs of the Notes and the write-off of unamortized loan costs
of the $600.0 million secured revolving credit facility. The Notes were
repurchased through a tender offer and the revolving credit facility was
replaced with a new unsecured five-year revolving credit facility in the amount
of $850.0 million.
Financial Instruments: Interest rate swap agreements are used on a limited basis
to manage the Company's interest rate exposure. The agreements are contracts to
periodically exchange fixed and floating interest rate payments over the life of
the agreements. The floating-rate payments are based on LIBOR and fixed-rate
payments are dependent upon market levels at the time the swap agreement was
consummated. The swap agreements effectively convert an aggregate notional
amount of $100 million of fixed-rate borrowings to floating-rate borrowings and
$400 million of floating-rate borrowings to fixed-rate borrowings at June 30,
1998. 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 five years. For the years
ended June 30, 1998, 1997 and
F-15
<PAGE> 67
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1996, the Company received a weighted average rate of 5.8%, 5.8% and 5.8%,
respectively and paid a weighted average rate of 6.0%, 5.9% and 4.8%,
respectively.
The Company is exposed to credit losses in the event of nonperformance by the
counterparties to its financial instruments. The Company anticipates that the
counterparties will be able to fully satisfy their obligations under the
contracts.
5. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 58,320 $ 43,580 $ 28,379
State and local 8,345 6,671 5,049
-------- -------- ---------
66,665 50,251 33,428
Deferred:
Federal (6,611) 4,451 12,680
State and local (1,205) 655 1,213
-------- -------- ---------
(7,816) 5,106 13,893
-------- -------- ---------
$ 58,849 $ 55,357 $ 47,321
======== ======== =========
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State and local income
taxes, net of federal
income tax benefit 3.2 3.4 3.5
Nondeductible amortization
of cost in excess of net
assets acquired .3 .3 .1
Other 1.9 1.0 2.0
------- ------ ------
40.4% 39.7% 40.6%
======= ====== ======
</TABLE>
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
F-16
<PAGE> 68
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
related tax effects are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30
-------
1998 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization $(40,202) $(42,932)
Provision for doubtful accounts (6,086) (6,579)
Other (588) (756)
-------- --------
Total deferred tax liabilities (46,876) (50,267)
-------- --------
Deferred tax assets:
Accrued expenses 9,958 5,907
Employee compensation 9,427 5,928
Other 2,261 961
-------- --------
Total deferred tax assets 21,646 12,796
-------- --------
Net deferred tax liabilities $(25,230) $(37,471)
======== ========
</TABLE>
The balance sheet classification of deferred income taxes is as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30
-------
1998 1997
---- ----
<S> <C> <C>
Current $ 4,240 $ 778
Long-term (29,470) (38,249)
-------- --------
Total $(25,230) $(37,471)
======== ========
</TABLE>
6. STOCKHOLDERS' EQUITY AND STOCK BENEFIT PLANS
Common stock: 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.
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: During fiscal 1998, the Company's stockholders
approved the 1997 Stock Option Plan. Under the plan, 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
F-17
<PAGE> 69
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of grant and are exercisable over a period not to exceed ten years. The number
of shares initially reserved for issuance was 3,000,000. No further options will
be granted pursuant to the Company's previous stock option plan. The Company has
reserved 8,764,726 shares of common stock under these plans.
In 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation"
which, if fully adopted, changes the method for recognition of costs in an
entity's financial statements. The Company has adopted the disclosure-only
provisions of SFAS No. 123 and, accordingly, recognizes no compensation expense
for the Company's stock option plans.
Under SFAS No. 123, the fair value of each option grant was estimated on the
date of grant using the Black-Scholes option-pricing model with the following
range of assumptions used for the option grants which occurred during 1998, 1997
and 1996:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Volatility .186 .172 .176
Interest rate 5%-6% 6%-7% 6%-7%
Expected life (years) 4.3 4.4 4.6
Forfeiture rate 4.8% 5.6% 5.6%
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Because the Company's stock options have characteristics different
than those of traded options and because the assumptions are subjective and
changes in such assumptions can materially affect the fair value estimate, the
existing models, in management's opinion, do not necessarily provide a reliable
single measure of the fair value of its employee stock options. Because the SFAS
No. 123 method of accounting has not been applied to options granted prior to
July 1, 1995, the resulting pro forma disclosures may not be representative of
that to be expected in future years.
Had compensation expense for the stock option plan been determined consistent
with the provisions of SFAS No. 123, the Company's net earnings and earnings per
share would have been as follows (in thousands, except per share data):
F-18
<PAGE> 70
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------
1998 1997 1996
---------------------- ----------------------- --------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 86,680 $ 82,019 $ 75,885 $ 73,235 $ 69,232 $ 68,050
EPS:
Basic 1.16 1.10 1.03 1.00 .96 .94
Diluted 1.12 1.06 1.00 .97 .93 .91
</TABLE>
Stock-based compensation costs on a pro forma basis would have reduced pretax
income by $6.6 million, $3.4 million and $1.3 million in fiscal 1998, 1997 and
1996, respectively.
Information regarding these option plans for fiscal 1998, 1997, and 1996 are
summarized below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
STOCK OPTION PRICE WEIGHTED AVERAGE
OPTIONS PER SHARE EXERCISE PRICE
------- --------- --------------
<S> <C> <C> <C>
Balances, July 1, 1995 4,160 $ .67- 13.83 $ 5.19
Granted 3,200 10.13- 17.33 15.06
Exercised (1,101) 1.00- 13.67 2.86
Cancelled (323) 1.00- 15.67 10.65
------- ------------- --------
Balances, June 30, 1996 5,936 .67- 17.33 10.65
Granted 1,776 .67- 23.83 17.66
Exercised (926) 1.00- 13.67 5.85
Cancelled (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
Cancelled (247) 4.00- 25.00 14.22
------- ------------- --------
Balances, June 30, 1998 7,255 $ .67- 33.06 $ 17.07
======= ============= ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average fair value for options
granted during the year $ 6.82 $ 6.49 $ 4.19
Options exercisable 2,221 1,692 1,190
Options available for grant 1,518 3,747 1,359
</TABLE>
The following table summarizes information regarding the options
F-19
<PAGE> 71
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
outstanding at June 30, 1998 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING RANGE OF AVERAGE AVERAGE
CONTRACT EXERCISE NUMBER EXERCISE NUMBER EXERCISABLE
LIFE (YRS) PRICES OUTSTANDING PRICE EXERCISABLE PRICE
- ---------- ------ ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
1 $ 5.00-11.75 139 6.30 132 5.99
2 1.00-13.67 708 8.86 547 7.85
3 13.33-17.50 699 14.51 238 14.49
4 21.00-24.00 65 23.08 5 21.00
6 4.00- 5.00 371 4.29 120 4.34
7 .67 45 .67 30 .67
8 .67-17.50 2,157 15.24 697 15.17
9 12.63-23.83 985 20.12 250 18.42
10 16.97-33.06 2,077 24.36 203 16.97
-------- -------
7,246 2,222
======== =======
</TABLE>
Employee Stock Purchase Plan: The Company has a qualified and nonqualified
employee stock purchase plan. The purchase price of the shares under the
qualified plan is 85% of the lesser of the fair market value on the first day
(March 1) or the last day (February 28) of the plan year. The purchase price of
the shares under the nonqualified plan is the fair market value on 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 1,434,053 at June
30, 1998.
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
held as of the close of business on April 28, 1997. Each right entitles
stockholders to acquire one-third of a share of common stock at an exercise
price of $100, subject to adjustment. Such rights become exercisable only if a
person or group acquires beneficial ownership of 15% or more of the Company's
common stock or commences a tender or exchange offer which would result in that
person or group owning 15% or more of the Company's common stock. After any
person has acquired 15% or more of the Company's common stock, each right not
owned by such person or certain related parties will entitle its holder to
purchase a number of shares of the Company's common stock (or any combination of
common stock, preferred stock, debt securities and cash, as determined by the
Board of Directors) having a market value of two times the then-current exercise
price of the right. In the event the Company is involved in a merger or other
business combination
F-20
<PAGE> 72
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
transaction with another person or sells 50% or more of its assets or earning
power to another person, each right will entitle its holder to purchase a number
of shares of the Company's common stock or the acquiring company's common stock
having a market value of two times the then-current 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.
7. 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, 1998, 1997
and 1996 totaled approximately $14.4 million, $13.0 million and $9.2 million,
respectively.
8. LEASES
During fiscal 1998, the Company entered into a five-year $150 million End Loaded
Lease Financing (ELLF) agreement to provide a financing option for future
acquisitions and/or construction. The ELLF interest rate margins and facility
fee rates are substantially the same as the Company's revolving line of credit
(see Note 4). All lease payments under the agreement are guaranteed by the
Company. At June 30, 1998, $126.3 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 $26.7 million, $22.2 million,
and $17.1 million for the years ended June 30, 1998, 1997 and 1996,
respectively.
Future minimum rental commitments under noncancelable operating leases
at June 30, 1998 are as follows: 1999 - $15.5 million; 2000 - $11.7
F-21
<PAGE> 73
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
million; 2001 - $10.3 million; 2002 - $8.8 million; 2003 - $6.9 million and
thereafter - $13.1 million.
9. COMMITMENTS
The Company has a commitment outstanding of approximately $60 million to
construct a hospital and two medical office buildings in Florence, South
Carolina. At June 30, 1998, costs of approximately $50 million have been
incurred under the contract. The facilities are to be completed in fiscal 1999.
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. Unless otherwise noted, in the opinion of management, the ultimate
resolution of the following contingencies will not have a material effect on the
Company's results of operations or financial position.
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.
Income Taxes: The IRS is in the process of conducting examinations of the
Company's federal income tax returns for the fiscal years ended June 30, 1993
through 1995. The Company has reached a settlement with the IRS in connection
with its examination of the Company's federal income tax returns for the fiscal
years ended June 30, 1990 through 1992. The settlement did 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 health care
systems use information systems that may misidentify dates beginning January 1,
2000 and result 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, analysis and planning, testing,
conversion/remediation/replacement and post-implementation. The Company can
provide no assurances that applications and equipment the Company believes to be
Year 2000 compliant will not experience difficulties or that the Company will
not experience difficulties obtaining resources needed to make modifications to
or replace the Company's affected
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
systems and equipment. Failure by the Company or third parties on which it
relies to resolve Year 2000 issues could have a material adverse effect on the
Company's results of operations and its ability to provide health care services.
Consequently, the Company can give no assurances that issues related to Year
2000 will not have a material adverse effect on the Company's financial
condition or results of operations.
Litigation: The Company currently, and from time to time, is expected
to be subject to claims and suits arising in the ordinary course of
business.
Other: In June 1993, the OIG requested information from the Company in
connection with an investigation involving the Company's procedures for
preparing Medicare cost reports. In January 1995, the U.S. Department of
Justice issued a Civil Investigative Demand which also requested information
from the Company in connection with that same investigation. As a part of the
government's investigation, several former and current employees of the
Company 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 allegations made by a former employee of a hospital managed by a
Company subsidiary. The allegations concern the preparation of cost reports for
Medicare and other government payment programs for owned and managed hospitals.
At a meeting to discuss the case, held September 24, 1998, the Company learned
that the government would likely commence litigation under the False Claims Act
on or about October 5, 1998. The Company intends to continue to cooperate with
the government's inquiry, and, if appropriate, will try to reach a settlement of
this case.
On May 7, 1998, the Company learned that it is a named defendant in a separate
qui tam case when it received a letter from a U.S. Attorney. The complaint
alleges violations of Medicare laws governing the home health operations at two
of the Company's hospitals. The complaint was filed under seal in June 1996 by
a former employee who was discharged by the Company in April 1996. The purpose
of the letter from the U.S. Attorney was to allow the Company an opportunity to
evaluate the results of the government's investigation to date and to discuss
with the government the allegations made in the complaint, prior to the
government making a decision as to whether it will intervene as a plaintiff in
the case. The lawsuit remains under seal for all other purposes. The Company
intends to cooperate fully and share information with the U.S. Attorney's
Office. If any violation of law is found, the Company intends to pursue an
amicable settlement. The case is in a very preliminary stage.
The Company cannot at this time predict the outcome of these cases or their
ultimate impact on the Company's business or operating results. If the outcome
of either case were unfavorable, the Company could be subject to fines,
penalties and damages and also could be excluded from Medicare and other
government reimbursement programs. These and other results of these cases could
have a material adverse effect on the Company's financial condition or results
of operations.
Although the Company believes that it is in material compliance with the
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
11. FAIR VALUES 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 $618.7 and
$521.8 million for the years ended June 30, 1998 and 1997, respectively. The
fair value of long-term debt was $632.4 million and $531.1 million for the years
ended June 30, 1998 and 1997, respectively. The fair value of publicly traded
notes has been determined using the quoted market price at June 30, 1998 and
1997. 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 $8.5 million and $5.0 million which would be
incurred in the event of termination of the interest rate swap agreements at
June 30, 1998 and 1997, respectively.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended June 30, 1998 and 1997 is
summarized below (in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER
1ST 2ND 3RD 4TH
--- --- --- ---
<S> <C> <C> <C> <C>
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
</TABLE>
The third quarter results include a $15 million after tax charge related to the
write-down of goodwill.
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1997
- ----
Net operating revenue $316,001 $342,137 $377,096 $378,712
Income before income taxes
and extraordinary item 29,065 33,346 39,941 37,087
Net income 17,526 20,108 24,084 14,167
Basic earnings per share:
Income before extraordinary
item .24 .27 .33 .30
Net income .24 .27 .33 .19
Diluted earnings per share:
Income before extraordinary
item .23 .27 .32 .29
Net income .23 .27 .32 .18
</TABLE>
13. Subsequent Event
Effective July 1, 1998, the Company acquired St. Joseph Medical Center in Fort
Wayne, Indiana. Certain land and buildings were financed through the ELLF
agreement.
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<PAGE> 77
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION and QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
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
Year ended June 30, 1996:
Allowance for doubtful accounts $44,828 $ 56,483 $ 9,210(a) $ 70,769(b) $39,752
</TABLE>
(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.
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<PAGE> 78
PART IV
EXHIBIT INDEX
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) and (2). Financial statements and schedules of the
Company and its subsidiaries required to be included in Part II, Item 8 are
indexed on Page F-1 and submitted as a separate section of this report.
(a)(3) Exhibits.
3.1 Certificate of Incorporation of the Company filed with
Secretary of State of Delaware July 14, 1989, as amended
by Certificate of Amendment of Certificate of
Incorporation filed with Secretary of State of Delaware
on July 28, 1989. (Incorporated by reference to Exhibit
3.1 to the Company's Registration Statement No. 33-31717-
A on Form S-18.)
3.2 Certificate of Amendment of Certificate of Incorporation
effective with the Secretary of State of Delaware on June
1, 1990. (Incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1990.)
3.3 Certificate of Amendment of Certificate of Incorporation
effective with the Secretary of State of Delaware on
November 1, 1990. (Incorporated by reference to Exhibit
3.3 to the Company's Annual Report on Form 10-K for the
year ended June 30, 1991.)
3.4 Certificate of Amendment of Certificate of Incorporation
effective with the Secretary of State of Delaware on
December 17, 1991. (Incorporated by reference to Exhibit
3.4 to the Company's Annual Report on Form 10-K for the
year ended June 30, 1992.)
3.5 Form of Certificate of Amendment of Certificate of
Incorporation effective with the Secretary of State of
Delaware on April 12, 1994. (Incorporated by reference to
Exhibit 3.1.5 to the Company's Registration Statement No.
33-77674 on Form S-1.)
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<PAGE> 79
3.6 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.)
3.7 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.)
3.8 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.)
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, 1997.)
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
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<PAGE> 80
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.)
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
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<PAGE> 81
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.)
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
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<PAGE> 82
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.)
4.5 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.
4.5.4 Fourth 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.
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<PAGE> 83
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.
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.)
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<PAGE> 84
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. Severance Agreement and General Release between the
Company and Robert A. Yeager. (Incorporated by
reference to Exhibit 10.1(I) to the Company's
Report on Form 10-K for the year ended June 30,
1996.)
J. Letter Agreement between the Company and Robert D.
Huseby. (Incorporated by reference to Exhibit
10.1(J) to the Company's Report on Form 10-K for
the year ended June 30, 1996.)
K. 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.)
L. Quorum Health Group, Inc. Deferred Compensation
Plan.
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 Baxter Supply Agreement dated as of December 1, 1989 by
and among Baxter Health care Corporation, HCA,
HealthTrust, Inc. and Quorum Health Resources, Inc.
(Incorporated by reference to Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1990.)
10.3 Amendment to Supply Agreement effective January 1, 1991
by and among Baxter Health care Corporation, HCA,
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<PAGE> 85
HealthTrust, Inc., and Quorum Health Resources, Inc.
(Incorporated by reference to Exhibit 10.51 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1992.)
10.4 Pharmacy Products Group Agreement dated as of January 1,
1990 between Quorum Health Resources, Inc. and Baxter
Health care Corporation. (Incorporated by reference to
Exhibit 10.21 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1990.)
10.5 Foodservice Distribution Agreement dated September 1,
1989 by and between Baxter Health care Corporation, HCA,
Quorum Health Resources, Inc. and HealthTrust.
(Incorporated by reference to Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1990.)
10.6 Quorum Health Resources, Inc. Model Hospital Management
Agreement. (Incorporated by reference to Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the year
ended June 30, 1997.)
10.7 Incorporation, Conveyance and Stock Purchase Agreement
dated as of August 16, 1993, as amended September 30,
1993, by and among Quorum, Inc. as Purchaser, Charter
Medical Corporation ("Charter"), a Delaware corporation;
Charter Northside Hospital, Inc. ("CNH"), a Georgia
corporation; Middle Georgia Hospital, Inc. ("MGH"), a
Georgia corporation; Shallowford Community Hospital, Inc.
("SCHI"), a Georgia corporation; Metropolitan Hospital,
Inc. ("MHI"), a Georgia corporation; Physicians &
Surgeons Hospital, Inc. ("PSH"), a Louisiana corporation;
Charter Regional Medical Center, Inc. ("CMRC"), a Texas
corporation; Desert Springs Hospital, Inc. ("DSH"), a
Nevada corporation; Charter Suburban Hospital, Inc.
("CSH"), a California corporation; Charter Community
Hospital of Des Moines, Inc. ("CCH"), an Iowa
corporation; and Stuart Circle Hospital Corporation
("SCHC"), a Virginia corporation. (Incorporated by
reference to Exhibit 2.1 to the Company's Report on Form
8-K dated October 13, 1993.)
10.8 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.)
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10.9 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.)
10.10 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.)
10.11 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.)
10.12 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.)
10.13 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.)
10.14 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.)
10.15 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.)
10.16 Asset Purchase and Sale Agreement dated as of September 20,
1991, by and between Quorum Health Group, Inc., as
II-9
<PAGE> 87
buyer, and St. John's Hospital & Health Center, Inc. and
Incarnate Word Health Services, as seller. (Incorporated
by reference to Exhibit 2.1 to the Company's Report on
Form 8-K dated September 30, 1991.)
10.17 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.)
10.18 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.)
10.19 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.)
10.20 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).
10.21 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.)
10.22 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.)
10.23 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.)
II-10
<PAGE> 88
10.24 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.)
10.25 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.)
10.26 Purchase Agreement dated as of November 5, 1993 between
the Company and HCA, Inc. (Incorporated by reference to
Exhibit 10.12 to the Company's Registration Statement No.
33-77674 on Form S-1.)
10.27 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.)
10.28 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.)
10.30 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.)
10.31 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 of the
Company's Annual Report on Form 10-K for the year ended on
June 30, 1997.)
10.32 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
II-11
<PAGE> 89
reference to Exhibit 10.31 to the Company's Report on Form
10-K for the year ended June 30, 1996.)
10.33 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.)
10.34 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.)
10.35 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.)
10.36 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.)
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, 1998.
II-12
<PAGE> 90
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, 1998.
QUORUM HEALTH GROUP, INC.
By: /s/ Steve B. Hewett
-------------------------------
Steve B. Hewett
Title: 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:
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C> <C>
/s/ James E. Dalton, Jr. President, Chief Executive Officer Sept. 24, 1998
- ------------------------ and Director
James E. Dalton, Jr. (Principal Executive Officer)
/s/ Steve B. Hewett Vice President (Chief Financial Sept. 24, 1998
- ------------------------- Officer)
Steve B. Hewett
/s/ Terry E. Allison Vice President and Assistant Sept. 24, 1998
- ------------------------- Treasurer
Terry E. Allison (Chief Accounting Officer)
/s/ Russell L. Carson Chairman of the Board Sept. 24, 1998
- -------------------------
Russell L. Carson
/s/ Sam A. Brooks, Jr. Director Sept. 24, 1998
- -------------------------
Sam A. Brooks, Jr.
/s/ Dr. C. Edward Floyd Director Sept. 24, 1998
- -------------------------
Dr. C. Edward Floyd
/s/ Joseph C. Hutts Director Sept. 24, 1998
- -------------------------
Joseph C. Hutts
/s/ Kenneth J. Melkus Director Sept. 24, 1998
- -------------------------
Kenneth J. Melkus
/s/ Thomas S. Murphy, Jr. Director Sept. 24, 1998
- -------------------------
Thomas S. Murphy, Jr.
/s/ Rocco A. Ortenzio Director Sept. 24, 1998
- -------------------------
Rocco A. Ortenzio
/s/ S. Douglas Smith Director Sept. 24, 1998
- -------------------------
S. Douglas Smith
/s/ Colleen Conway Welch Director Sept. 24, 1998
- -------------------------
Colleen Conway Welch
</TABLE>
Sig-1
<PAGE> 1
EXHIBIT 4.5.3
THIRD AMENDMENT
This THIRD AMENDMENT (the "Amendment") dated April 29, 1998 is entered
into by and among QUORUM HEALTH GROUP, INC., a corporation organized under the
laws of Delaware (the "Borrower"), the LENDERS referred to in the Credit
Agreement (the "Lenders") and FIRST UNION NATIONAL BANK (f/k/a First Union
National Bank of North Carolina) as Agent for the Lenders (hereinafter defined
the "Agent").
STATEMENT OF PURPOSE
The Borrower, the Lenders and the Agent are parties to that certain
Credit Agreement dated as of April 22, 1997 (such agreement, as previously
amended, and as further amended from time to time, herein referred to as the
"Credit Agreement") pursuant to which the Lenders have agreed to extend certain
credit facilities to the Borrower. Capitalized terms used in this Amendment not
otherwise defined herein have the respective meanings attributed to such terms
in the Credit Agreement.
The Borrower has requested that the Lenders amend the Credit Agreement
as more fully described below. Subject to the terms and conditions set forth
below, the Lenders are willing to agree to the requested amendments.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the parties hereto, the Borrower,
each of the Lenders and the Agent agree as follows:
1. AMENDMENT TO SECTION 11.2(A). Section 11.2(a) of the Credit
Agreement is hereby amended by deleting such Section 11.2(a)
in its entirety and substituting the following in lieu
thereof:
"(a) Acceleration; Termination of Facilities. Declare
the principal of and interest on the Loans, the Notes and the
Reimbursement Obligations at the time outstanding, and all
other amounts owed to the Lenders and to the Agent under this
Agreement or any of the other Loan Documents (including,
without limitation, all L/C Obligations, whether or not the
beneficiaries of the then outstanding Letters of Credit shall
have presented the documents required thereunder, but
excluding any amounts owed under any Hedging Agreement) and
all other Obligations (other than amounts owed under any
Hedging Agreement), to be forthwith due and payable, whereupon
the same shall immediately become due and payable without
presentment, demand, protest or other notice of any kind, all
of which are expressly waived, anything in this Agreement or
the other Loan Documents to the contrary notwithstanding, and
terminate the Credit Facility and any right of the Borrower to
request borrowings or Letters of Credit thereunder; provided,
that upon the occurrence of an Event of Default specified in
Section 11.1(h) or (i) the Credit Facility shall be
automatically terminated and all Obligations (other than
amounts owed under any Hedging Agreement) shall automatically
become due and payable."
2. AMENDMENT TO SECTION 13.11. Section 13.11 of the Credit
Agreement is hereby amended by inserting the following text
immediately after the words "Loan Documents" in the second
line of such Section 13.11:
"(other than Hedging Agreements, the terms and conditions of
which may be amended, modified or waived by the parties
thereto)"
<PAGE> 2
3. AGREEMENTS CONCERNING HEDGING AGREEMENTS. Notwithstanding
anything to the contrary contained in the Credit Agreement,
the parties hereto hereby agree that (a) any Hedging Agreement
of the Borrower existing on the date hereof is hereby
expressly permitted under the Credit Agreement; (b) any
Hedging Agreement entered of the Borrower subsequent to the
date hereof shall be permitted under the Credit Agreement;
provided that each such Hedging Agreement is with a
counterparty satisfactory to the Administrative Agent (unless
the counterparty is (i) a Lender, (ii) an Affiliate of a
Lender or (iii) an Eligible Assignee) and such Hedging
Agreement is upon terms and conditions no less favorable than
are generally available in the market; (c) all existing and
future Hedging Agreements shall be subject to the provisions
of Section 10.12 of the Credit Agreement; and (d) the Borrower
shall not enter into or permit to exist any agreement with
respect to an interest rate swap, collar, cap, floor or a
forward rate agreement that does not constitute a Hedging
Agreement under the definition thereof contained in the Credit
Agreement.
4. CONDITIONS.
(a) The effectiveness of the Amendments set forth in
Paragraphs 1 and 2 hereof shall be conditioned upon
receipt by the Agent of a copy of this Amendment duly
executed by the Agent, the Borrower and all of the
Lenders.
(b) The effectiveness of the Amendments set forth in
Paragraph 3 hereof shall be conditioned upon receipt
by the Agent of a copy of this Amendment duly
executed by the Agent, the Borrower and the Required
Lenders.
5. BRINGDOWN; REFERENCES TO CREDIT AGREEMENT. The Borrower hereby
represents and warrants that (a) the representations and
warranties contained in Article VI of the Credit Agreement are
true and correct in all material respects as of the date
hereof (except and to the extent that such representations and
warranties relate to an earlier date, in which case such
representations and warranties shall be true and correct as of
such earlier date) and (b) no Default or Event of Default has
occurred and is continuing as of the date hereof. All
references in the Loan Documents to "Credit Agreement" shall
refer to the Credit Agreement as amended by this Amendment and
as the Credit Agreement may be further amended from time to
time.
6. MISCELLANEOUS. Except as amended hereto, the Credit Agreement
shall remain in full force and effect in accordance with its
terms. This Amendment may be executed in one or more
counterparts each of which shall be deemed to be an original
and all of which, when taken together, shall constitute one
and the same instrument and no single counterpart of this
Amendment need be executed by all the parties hereto. The
covenants and agreements contained in this Amendment shall
apply to and inure to the benefit of and be binding upon the
parties hereto and their respective successors and assigns.
This Amendment shall be governed by the laws of the State of
North Carolina.
[Signature Pages Follow]
<PAGE> 3
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have
executed this Amendment to Credit Agreement as of the date first above written.
QUORUM HEALTH GROUP, INC.
By: ______________________________________
Name:________________________________
Title:_______________________________
<PAGE> 4
FIRST UNION NATIONAL BANK
By: ______________________________________
Name: _______________________________
Title: _______________________________
TORONTO DOMINION (TEXAS), INC.
By: ______________________________________
Name: _______________________________
Title: _______________________________
SCOTIABANC INC.
By: ______________________________________
Name: _______________________________
Title: _______________________________
AMSOUTH BANK OF ALABAMA
By: ______________________________________
Name: _______________________________
Title: _______________________________
CITICORP USA, INC.
By: ______________________________________
Name: _______________________________
Title: _______________________________
[Third Amendment]
<PAGE> 5
SUNTRUST BANK, NASHVILLE, N.A.
By: ______________________________________
Name: _______________________________
Title: _______________________________
CORESTATES BANK, N.A.
By: ______________________________________
Name: _______________________________
Title: _______________________________
NATIONSBANK, N.A.
By: ______________________________________
Name: _______________________________
Title: _______________________________
MELLON BANK, N.A.
By: ______________________________________
Name: _______________________________
Title: _______________________________
[Third Amendment]
<PAGE> 6
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: ______________________________________
Name: _______________________________
Title: _______________________________
FLEET NATIONAL BANK
By: ______________________________________
Name: _______________________________
Title: _______________________________
ABN AMRO BANK N.V.
By: ______________________________________
Name: _______________________________
Title: _______________________________
By: ______________________________________
Name: _______________________________
Title: _______________________________
COOPERATIEVE CENTRALE RAIFFEISEN
BOERENLEENBANK B.A.
"RABOBANK NEDERLAND,"
NEW YORK BRANCH
By: ______________________________________
Name: _______________________________
Title: _______________________________
By: ______________________________________
Name: _______________________________
Title: _______________________________
[Third Amendment]
<PAGE> 7
NATIONAL CITY BANK OF KENTUCKY
By: ______________________________________
Name: _______________________________
Title: _______________________________
UNION BANK OF CALIFORNIA, N.A.
By: ______________________________________
Name: _______________________________
Title: _______________________________
BANQUE PARIBAS
By: ______________________________________
Name: _______________________________
Title: _______________________________
By: ______________________________________
Name: _______________________________
Title: _______________________________
LTCB TRUST COMPANY
By: ______________________________________
Name: _______________________________
Title: _______________________________
THE SUMITOMO BANK, LIMITED
By: ______________________________________
Name: _______________________________
Title: _______________________________
[Third Amendment]
<PAGE> 8
CREDIT LYONNAIS NEW YORK BRANCH
By: ______________________________________
Name: _______________________________
Title: _______________________________
BANK ONE, DAYTON, NA
By: ______________________________________
Name: _______________________________
Title: _______________________________
THE SANWA BANK LIMITED,
ATLANTA AGENCY
By: ______________________________________
Name: _______________________________
Title: _______________________________
FBTC LEASING CORP.
By: ______________________________________
Name: _______________________________
Title: _______________________________
THE SUMITOMO TRUST AND
BANKING CO., LTD.,
NEW YORK BRANCH
By: ______________________________________
Name: _______________________________
Title: _______________________________
[Third Amendment]
<PAGE> 9
KREDIETBANK N.V.,
GRAND CAYMAN BRANCH
By: ______________________________________
Name: _______________________________
Title: _______________________________
FIRST TENNESSEE BANK
NATIONAL ASSOCIATION
By: ______________________________________
Name: _______________________________
Title: _______________________________
FIRST AMERICAN NATIONAL BANK
By: ______________________________________
Name: _______________________________
Title: _______________________________
BANK OF TOKYO - MITSUBISHI
TRUST COMPANY
By: ______________________________________
Name: _______________________________
Title: _______________________________
By: ______________________________________
Name: _______________________________
Title: _______________________________
[Third Amendment]
<PAGE> 1
EXHIBIT 4.5.4
FOURTH AMENDMENT
This FOURTH AMENDMENT (the "Amendment") dated April, 29, 1998 is
entered into by and among QUORUM HEALTH GROUP, INC., a corporation organized
under the laws of Delaware (the "Borrower"), the LENDERS referred to in the
Credit Agreement (the "Lenders") and FIRST UNION NATIONAL BANK (f/k/a First
Union National Bank of North Carolina) as Agent for the Lenders (hereinafter
defined the "Agent").
STATEMENT OF PURPOSE
The Borrower, the Lenders and the Agent are parties to that certain
Credit Agreement dated as of April 22, 1997 (such agreement, as previously
amended, and as further amended from time to time, herein referred to as the
"Credit Agreement") pursuant to which the Lenders have agreed to extend certain
credit facilities to the Borrower. Capitalized terms used in this Amendment not
otherwise defined herein have the respective meanings attributed to such terms
in the Credit Agreement.
The Borrower has requested that the Lenders amend the Credit Agreement
as more fully described below. Subject to the terms and conditions set forth
below, the Lenders are willing to agree to the requested amendments.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the parties hereto, the Borrower,
each of the Lenders and the Agent agree as follows:
1. AMENDMENTS TO ARTICLE I. The definition of "Eligible Assignee"
is hereby amended by deleting the period at the end of such
definition and inserting the following text in lieu thereof:
"and so long as no Default or Event of Default shall
have occurred and be continuing, approved in writing by the
Borrower, such approvals not to be unreasonably withheld."
2. AMENDMENTS TO ARTICLE VII.
(a) Section 7.1(a) is hereby amended by deleting the
number "45" on the first line thereof and substituting the
number "50" in lieu thereof; and.
(b) Section 7.1(b) is hereby amended by deleting the
number "100" in the first line thereof and substituting the
number "105" in lieu thereof.
3. AMENDMENTS TO ARTICLE IX.
(a) Section 9.1 is hereby amended by deleting the
number "3.25" in the last line thereof and substituting the
number "3.50" in lieu thereof.
(b) Section 9.2 shall be deleted and the phrase
"[Intentionally Omitted]" shall be substituted in lieu
thereof.
<PAGE> 2
(c) Section 9.4 shall be deleted and the phrase
"[Intentionally Omitted]" shall be substituted in lieu
thereof.
4. AMENDMENTS TO ARTICLE X.
(a) Section 10.1 is hereby amended by deleting the
word "and" at the end of clause (g) thereof and deleting the
period at the end of clause (h) thereof and substituting the
following text in lieu thereof.
"and (i) other Debt not to exceed $200,000,000 in the
aggregate amount outstanding at any time pursuant to senior
unsecured notes in form and substance and on terms and
conditions satisfactory to the Agent and Required Lenders."
(b) Section 10.7 is hereby amended by inserting the
following new clause (e) immediately after clause (d) thereof:
"(e) so long as no Default or Event of
Default has occurred and is continuing, or would result
therefrom, the Borrower may purchase on the open market
(and/or through private purchases) shares of its Capital Stock
not otherwise permitted hereunder; provided that (i) the
aggregate total consideration paid for such shares during the
term hereof does not exceed $100,000,000 and (ii) such
repurchases are made in accordance with a formal share
repurchase plan in form and substance satisfactory to the
Administrative Agent and adopted by the Board of Directors of
the Borrower."
5. AMENDMENT TO SECTION 13.10.
(a) Section 13.10(b)(ii) is hereby deleted and the
following text inserted in lieu thereof:
"(ii) if less than all of the assigning
Lender's Commitment is to be assigned, the amount of the
Commitment so assigned, plus the amount of the commitment of
such Lender under the Quorum ELLF Credit Agreement required to
be assigned pursuant to Section 13.10(b)(vi) hereof shall not
be less than $10,000,000 in the aggregate;"
(b) Section 13.10(f)(i) is hereby deleted and the
following text inserted in lieu thereof:
"(i) each such participation plus the amount
of any corresponding participation of such Lender under the
Quorum ELLF Credit Agreement required pursuant to Section
13.10(f)(viii) shall not be less than $5,000,000 in the
aggregate;"
6. WAIVER OF COVENANTS LIMITING INVESTMENTS AND ASSET
DISPOSITION. The Agent and the Lenders hereby consent to a
series of transactions by which NC-CNH, Inc., NC-MGH, Inc.,
respectively, will convey Macon Northside Hospital and Middle
Georgia Hospital, both located in Macon, Georgia, and related
assets and properties to a joint venture to be formed with
Columbia/HCA (the "Macon Joint Venture"), in exchange for
which the Borrower shall
2
<PAGE> 3
receive an interest in such joint venture commensurate with
its Investment, and waive compliance with the provisions of
Sections 10.4 and 10.6 of the Credit Agreement to the extent,
but only to the extent, necessary to permit such conveyance
and Investment; provided, that (a) (i) the amount of any items
incurred by the Macon Joint Venture which would constitute
Debt (if incurred by the Borrower or any Consolidated Entity),
in the aggregate, shall not exceed $20,000,000, or (ii) if
such items which would constitute Debt exceed, in the
aggregate, $20,000,000, Consolidated Net Income shall
thereafter exclude the net income from such Macon Joint
Venture and any related tax effect thereof (b) if the
distribution policy of such joint venture as of the date of
such Investment by the Borrower shall be amended or otherwise
modified in a manner adverse to the Borrower, then
Consolidated Net Income shall thereafter exclude the net
income from such Macon Joint Venture and any related tax
effect thereof.
7. CONDITIONS. The effectiveness of the Amendments set forth
herein shall be conditioned upon receipt by the Agent of a
copy of this Amendment duly executed by the Agent, the
Borrower and the Required Lenders.
8. BRINGDOWN; REFERENCES TO CREDIT AGREEMENT. The Borrower hereby
represents and warrants that (a) the representations and
warranties contained in Article VI of the Credit Agreement are
true and correct in all material respects as of the date
hereof (except and to the extent that such representations and
warranties relate to an earlier date, in which case such
representations and warranties shall be true and correct as of
such earlier date) and (b) no Default or Event of Default has
occurred and is continuing as of the date hereof. All
references in the Loan Documents to "Credit Agreement" shall
refer to the Credit Agreement as amended by this Amendment and
as the Credit Agreement may be further amended from time to
time.
7. MISCELLANEOUS. Except as amended hereto, the Credit Agreement
shall remain in full force and effect in accordance with its
terms. This Amendment may be executed in one or more
counterparts each of which shall be deemed to be an original
and all of which, when taken together, shall constitute one
and the same instrument and no single counterpart of this
Amendment need be executed by all the parties hereto. The
covenants and agreements contained in this Amendment shall
apply to and inure to the benefit of and be binding upon the
parties hereto and their respective successors and assigns.
This Amendment shall be governed by the laws of the State of
North Carolina.
[Signature Pages Follow]
3
<PAGE> 4
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have
executed this Amendment to Credit Agreement as of the date first above written.
QUORUM HEALTH GROUP, INC.
By: ______________________________________
Name: _______________________________
Title: _______________________________
<PAGE> 5
FIRST UNION NATIONAL BANK
By: ______________________________________
Name: _______________________________
Title: _______________________________
TORONTO DOMINION (TEXAS), INC.
By: ______________________________________
Name: _______________________________
Title: _______________________________
SCOTIABANC INC.
By: ______________________________________
Name: _______________________________
Title: _______________________________
AMSOUTH BANK OF ALABAMA
By: ______________________________________
Name: _______________________________
Title: _______________________________
CITICORP USA, INC.
By: ______________________________________
Name: _______________________________
Title: _______________________________
[Fourth Amendment]
<PAGE> 6
SUNTRUST BANK, NASHVILLE, N.A.
By: ______________________________________
Name: _______________________________
Title: _______________________________
CORESTATES BANK, N.A.
By: ______________________________________
Name: _______________________________
Title: _______________________________
NATIONSBANK, N.A.
By: ______________________________________
Name: _______________________________
Title: _______________________________
MELLON BANK, N.A.
By: ______________________________________
Name: _______________________________
Title: _______________________________
[Fourth Amendment]
<PAGE> 7
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: ______________________________________
Name: _______________________________
Title: _______________________________
FLEET NATIONAL BANK
By: ______________________________________
Name: _______________________________
Title: _______________________________
ABN AMRO BANK N.V.
By: ______________________________________
Name: _______________________________
Title: _______________________________
By: ______________________________________
Name: _______________________________
Title: _______________________________
COOPERATIEVE CENTRALE RAIFFEISEN
BOERENLEENBANK B.A.
"RABOBANK NEDERLAND,"
NEW YORK BRANCH
By: ______________________________________
Name: _______________________________
Title: _______________________________
By: ______________________________________
Name: _______________________________
Title: _______________________________
4
<PAGE> 8
NATIONAL CITY BANK OF KENTUCKY
By: ______________________________________
Name: _______________________________
Title: _______________________________
UNION BANK OF CALIFORNIA, N.A.
By: ______________________________________
Name: _______________________________
Title: _______________________________
BANQUE PARIBAS
By: ______________________________________
Name: _______________________________
Title: _______________________________
By: ______________________________________
Name: _______________________________
Title: _______________________________
LTCB TRUST COMPANY
By: ______________________________________
Name: _______________________________
Title: _______________________________
5
<PAGE> 9
THE SUMITOMO BANK, LIMITED
By: ______________________________________
Name: _______________________________
Title: _______________________________
CREDIT LYONNAIS NEW YORK BRANCH
By: ______________________________________
Name: _______________________________
Title: _______________________________
BANK ONE, DAYTON, NA
By: ______________________________________
Name: _______________________________
Title: _______________________________
THE SANWA BANK LIMITED,
ATLANTA AGENCY
By: ______________________________________
Name: _______________________________
Title: _______________________________
FBTC LEASING CORP.
By: ______________________________________
Name: _______________________________
Title: _______________________________
6
<PAGE> 10
THE SUMITOMO TRUST AND
BANKING CO., LTD.,
NEW YORK BRANCH
By: ______________________________________
Name: _______________________________
Title: _______________________________
KREDIETBANK N.V.,
GRAND CAYMAN BRANCH
By: ______________________________________
Name: _______________________________
Title: _______________________________
FIRST TENNESSEE BANK
NATIONAL ASSOCIATION
By: ______________________________________
Name: _______________________________
Title: _______________________________
FIRST AMERICAN NATIONAL BANK
By: ______________________________________
Name: _______________________________
Title: _______________________________
7
<PAGE> 11
BANK OF TOKYO - MITSUBISHI
TRUST COMPANY
By: ______________________________________
Name: _______________________________
Title: _______________________________
By: ______________________________________
Name: _______________________________
Title: _______________________________
[Fourth Amendment]
<PAGE> 1
EXHIBIT 4.6.1
FIRST AMENDMENT TO PARTICIPATION AGREEMENT
THIS FIRST AMENDMENT TO PARTICIPATION AGREEMENT dated as of January 26,
1998 (the "Amendment") is by and among QUORUM ELF INC., a Delaware corporation
(the "Lessee" or the "Construction Agent"); the various parties listed on the
signature pages hereto as guarantors (subject to the definition of Guarantors in
Appendix A to the Participation Agreement referenced below, individually, a
"Guarantor" and collectively, the "Guarantors"); FIRST SECURITY BANK, NATIONAL
ASSOCIATION, a national banking association, not individually (in its individual
capacity, the "Trust Company"), except as expressly stated herein, but solely as
the Owner Trustee under the Quorum Real Estate Trust 1997-1 (the "Owner
Trustee", the "Borrower" or the "Lessor"); the various banks and other lending
institutions listed on the signature pages hereto (subject to the definition of
Lenders in Appendix A to the Participation Agreement referenced below,
individually, a "Lender" and collectively, the "Lenders"); FIRST UNION NATIONAL
BANK, a national banking association, as the agent for the Lenders and
respecting the Security Documents, as the agent for the Lenders and the Holders,
to the extent of their interests (in such capacity, the "Agent"); and the
various banks and other lending institutions listed on the signature pages
hereto as holders of certificates issued with respect to the Quorum Real Estate
Trust 1997-1 (subject to the definition of Holders in Appendix A to the
Participation Agreement referenced below, individually, a "Holder" and
collectively, the "Holders"). Capitalized terms used in this Amendment but not
otherwise defined herein shall have the meanings set forth in Appendix A to the
Participation Agreement (hereinafter defined).
W I T N E S S E T H:
WHEREAS, the parties to this Amendment are parties to the Participation
Agreement dated as of November 26, 1997 (the "Participation Agreement");
WHEREAS, the parties to this Amendment wish to amend the definition of
"Unused Fee Payment Date" set forth in Appendix A to the Participation
Agreement;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereby agree as follows:
1. The definition of "Unused Fee Payment Date" in Appendix A to the
Participation Agreement is hereby amended and modified to read as follows:
"Unused Fee Payment Date" shall mean the last Business Day of
each February, May, August and November (commencing February 27, 1998)
and the last Business Day of the Commitment Period, or such earlier
date as the Commitments shall terminate as provided in the Credit
Agreement or the Holder Commitment shall terminate as provided in the
Trust Agreement.
<PAGE> 2
2. Except as otherwise amended or modified pursuant to the terms of
this Amendment, all other terms, provisions, conditions, appendices, exhibits
and supplements to the Participation Agreement shall remain in full force and
effect.
3. Lessee hereby represents and warrants that as of the date of this
Amendment (i) all of the representations and warranties of the Credit Parties
contained in the Operative Agreements are true and correct in all material
respects and (ii) no Default or Event of Default exists and is continuing.
4. This Amendment may be executed in any number of counterparts, each
of which when executed and delivered shall be deemed to be an original and it
shall not be necessary in making proof of this Amendment to produce or account
for more than one such counterpart.
5. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NORTH CAROLINA.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.]
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized representatives as of the date first above
written.
CONSTRUCTION AGENT
AND LESSEE:
QUORUM ELF, INC., a Delaware corporation
By:
Name:
Title:
GUARANTORS:
QUORUM HEALTH GROUP, INC.,
a Delaware corporation
CAROLINAS MEDICAL ALLIANCE, INC.,
a South Carolina corporation
CLINTON COUNTY HEALTH SYSTEM LLC,
a Delaware limited liability company
FRANKFORT HEALTH PARTNER, INC.,
an Indiana corporation
GADSDEN REGIONAL PRIMARY CARE, INC.,
an Alabama corporation
HOSPITAL MANAGEMENT PROFESSIONALS, INC.,
a Tennessee corporation
MIDDLE GEORGIA MOB, INC.,
a Georgia corporation
NC-CNH, INC.,
a Georgia corporation
NC-DSH, INC.,
a Nevada corporation
NC-MGH, INC.,
a Georgia corporation
NC-SCHI, INC.,
a Georgia corporation
(GUARANTORS CONTINUED ON NEXT PAGE)
3
<PAGE> 4
NORTHSIDE MOB, INC.,
a Georgia corporation
NORTHSIDE VL, INC.,
a Georgia corporation
QHG OF ALABAMA, INC.,
an Alabama corporation
QHG OF BARBERTON, INC.,
an Ohio corporation
QHG OF CLINTON COUNTY, INC.,
an Indiana corporation
QHG OF ENTERPRISE, INC.,
an Alabama corporation
QHG OF FORREST COUNTY, INC.,
a Mississippi corporation
QHG OF FORT WAYNE, INC.,
an Indiana corporation
QHG OF GADSDEN, INC.,
an Alabama corporation
QHG OF HATTIESBURG, INC.,
a Mississippi corporation
QHG OF INDIANA, INC.,
an Indiana corporation
QHG OF JACKSONVILLE, INC.,
an Alabama corporation
QHG OF LAKE CITY, INC.,
a South Carolina corporation
QHG OF MASSILLON, INC.,
an Ohio corporation
QHG OF OHIO, INC.,
an Ohio corporation
QHG OF SOUTH CAROLINA, INC.,
a South Carolina corporation
QHG OF SPARTANBURG, INC.,
a South Carolina corporation
QHR OF DELAWARE, INC.,
a Delaware corporation
(GUARANTORS CONTINUED ON NEXT PAGE)
4
<PAGE> 5
QUORUM, INC.,
a Delaware corporation
QUORUM HEALTH GROUP OF VICKSBURG, INC.,
a Tennessee corporation
QUORUM HEALTH RESOURCES, INC.,
a Delaware corporation
QUORUM HEALTH SERVICES, INC.,
a Delaware corporation
SOFTWARE SALES CORP.,
a Tennessee corporation
WESLEY HEALTH SYSTEM LLC,
a Delaware limited liability company
By:
Name: David F. Grams, Jr.
Title: Vice President of each
of the foregoing Guarantors
IOM HEALTH SYSTEM, L.P.,
By: QHG OF INDIANA, INC., an Indiana
corporation, as general
partner
By:
Name: David F. Grams, Jr.
Title: Vice President
(SIGNATURES CONTINUED ON NEXT PAGE)
5
<PAGE> 6
OWNER TRUSTEE AND LESSOR:
FIRST SECURITY BANK, NATIONAL
ASSOCIATION, not individually,
except as expressly stated herein,
but solely as the Owner Trustee
under the Quorum Real Estate
Trust 1997-1
By:
Name:
Title:
THE AGENT
AND LENDERS:
FIRST UNION NATIONAL BANK, as the Agent
and a Lender
By:
Name:
Title:
CREDIT LYONNAIS NEW YORK BRANCH
By:
Name:
Title:
(SIGNATURES CONTINUED ON NEXT PAGE)
6
<PAGE> 7
FBTC LEASING CORP.
By:
Name:
Title:
ABN AMRO BANK, N.V.
By:
Name:
Title:
By:
Name:
Title:
AMSOUTH BANK
By:
Name:
Title:
7
<PAGE> 8
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:
Name:
Title:
SCOTIABANC INC.
By:
Name:
Title:
BANK OF TOKYO-MITSUBISHI
TRUST COMPANY
By:
Name:
Title:
(SIGNATURES CONTINUED ON NEXT PAGE)
8
<PAGE> 9
BANK ONE, N.A.
By:
Name:
Title:
BANQUE PARIBAS
By:
Name:
Title:
By:
Name:
Title:
CORESTATES BANK, N.A.
By:
Name:
Title:
9
<PAGE> 10
MELLON BANK, N.A.
By:
Name:
Title:
(SIGNATURES CONTINUED ON NEXT PAGE)
10
<PAGE> 11
KREDIETBANK N.V.
By:
Name:
Title:
By:
Name:
Title:
NATIONAL CITY BANK OF KENTUCKY
By:
Name:
Title:
THE SUMITOMO BANK, LIMITED
By:
Name:
Title:
11
<PAGE> 12
THE SUMITOMO TRUST & BANKING CO., LTD.,
NEW YORK BRANCH
By:
Name:
Title:
SUNTRUST BANK, NASHVILLE, N.A.
By:
Name:
Title:
(SIGNATURES CONTINUED ON NEXT PAGE)
12
<PAGE> 13
TORONTO DOMINION (TEXAS), INC.
By:
Name:
Title:
NATIONSBANK, N.A.
By:
Name:
Title:
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A., "RABOBANK
NEDERLAND", NEW YORK BRANCH
By:
Name:
Title:
By:
Name:
Title:
13
<PAGE> 14
THE SANWA BANK, LIMITED
By:
Name:
Title:
FIRST AMERICAN NATIONAL BANK
By:
Name:
Title:
(SIGNATURES CONTINUED ON NEXT PAGE)
14
<PAGE> 15
FIRST TENNESSEE BANK NATIONAL ASSOCIATION
By:
Name:
Title:
FLEET NATIONAL BANK
By:
Name:
Title:
UNION BANK OF CALIFORNIA, N.A.
By:
Name:
Title:
15
<PAGE> 16
LTCB TRUST COMPANY
By:
Name:
Title:
CITICORP USA, INC.
By:
Name:
Title:
(SIGNATURES CONTINUED ON NEXT PAGE)
16
<PAGE> 17
HOLDERS:
FIRST UNION NATIONAL BANK
By:
Name:
Title:
SUNTRUST BANK, NASHVILLE, N.A.
By:
Name:
Title:
NATIONSBANK, N.A.
By:
Name:
Title:
FIRST AMERICAN NATIONAL BANK
By:
Name:
Title:
FIRST TENNESSEE BANK NATIONAL
ASSOCIATION
By:
Name:
Title:
17
<PAGE> 1
EXHIBIT 10.1(l)
QUORUM HEALTH GROUP, INC.
DEFERRED COMPENSATION PLAN
PLAN YEAR JULY 1, 1998 - JUNE 30, 1999
PURPOSE
The purpose of this plan is to provide an opportunity to reward the senior
management of Quorum Health Group, Inc. (QHG), who contribute to the success of
QHG. The deferred compensation plan offers an opportunity to earn compensation
in addition to base pay based on the achievement of predetermined performance
targets.
DEFINITION OF TERMS
- - Earnings Per Share (EPS): The earnings of QHG divided by total shares
outstanding as adjusted by cash equivalents consisting of diluted stock
options.
- - Active Employee: An employee who is actively working or who is on Family
Medical Leave of Absence (FMLA) or similar legally protected leave status.
- - Regular Full-time Employee: Individuals who are scheduled to work a
minimum of 35 hours per week on a regularly scheduled basis with no
definite term of employment.
- - Stock Options: A right to purchase (exercise) a fixed number of shares
of company stock at a fixed price (grant price) over a specified time
period (exercise period) after certain requirements are met (vesting
period).
ELIGIBLE PARTICIPANTS
Eligibility for the Deferred Compensation Plan is determined by the Board of
Directors of QHG. Eligible participants include active employees hired on or
before June 30, 1998, and classified as regular full-time.
PLAN DESIGN
Base salary increases for plan year 1998-99 shall be deferred for the eligible
participants, the cumulative amount to be paid in full at the end of the plan
year if QHG meets or exceeds the EPS target set by the Board of Directors of
QHG.
Additionally, if QHG meets or exceeds its EPS target, eligible participants will
receive 200 percent of their scheduled annual base salary increase in the form
of nonqualified stock options pursuant to QHG's Discounted Stock Option
Program. Such options have no terms. The exercise price is equal to 75 percent
of the fair market value of QHG's Common Stock on the date of grant (date
determined after the close of the fiscal year). The dollar value of the 25
percent discount equals the dollar value of 200 percent of the scheduled base
salary increase.
1
<PAGE> 2
QUORUM HEALTH GROUP, INC.
DEFERRED COMPENSATION PLAN
PLAN YEAR JULY 1, 1998 - JUNE 30, 1999
ADMINISTRATION, INTERPRETATION AND DURATION
The plan is administered by QHG senior management. The plan shall be governed by
the Board of Directors of QHG and may be changed at any time.
CONDITIONS FOR RECEIVING PAYMENT
Compensation payout will be withheld for any employee whose actions are under
formal review for alleged ethical misconduct until such time that the matter is
favorably resolved. If the matter is not favorably resolved, management has the
discretion to deny all or part of the payout.
Incentive plan distributions are typically made within 90 days of the end of the
plan year, June 30, 1999. There will be no incentive compensation distribution
paid to any employee if employment is terminated, whether voluntary or
involuntary, prior to time of distribution. However, QHG senior management
retains sole authority to make exceptions in unusual or meritorious cases,
including, but not limited to, death of an employee or termination of employment
due to total or partial disability or retirement.
2
<PAGE> 1
EXHIBIT 21
DIRECT AND INDIRECT SUBSIDIARIES OF QUORUM HEALTH GROUP, INC.
<TABLE>
<CAPTION>
Name State of
- ---- Organization
------------
<S> <C>
American Health Facilities Development, LLC Delaware
Barberton Health System LLC Delaware
(d/b/a Barberton Citizens Hospital)
Baton Rouge Health System LLC Delaware
Carolinas Medical Alliance, Inc. South Carolina
Clinton County Health System LLC Delaware
(d/b/a Clinton County Hospital)
Frankfort Health Partner, Inc. Indiana
Gadsden Regional Primary Care, Inc. Alabama
Health Systems Associates, Inc. Tennessee
Hospital Management Professionals, Inc. Tennessee
IOM Health System, L.P. Indiana
(d/b/a Lutheran Hospital of Indiana)
Mary Black Health System LLC Delaware
(d/b/a Mary Black Memorial Hospital)
Massillon Health System LLC Delaware
(d/b/a Doctors Hospital of Stark County)
NC-CSH, Inc. California
NC-DSH, Inc. Nevada
NC-SCHI, Inc. Georgia
(d/b/a Abilene Regional Medical Center)
Pee Dee Family Practice, Inc. South Carolina
QHG Georgia Holdings, Inc. Georgia
QHG Georgia, LP Georgia
QHG of Alabama, Inc. Alabama
(d/b/a Flowers Hospital)
QHG of Barberton, Inc. Ohio
QHG of Baton Rouge, Inc. Louisiana
QHG of Clinton County, Inc. Indiana
QHG of Enterprise, Inc. Alabama
(d/b/a Medical Center Enterprise)
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
QHG of Forrest County, Inc. Mississippi
QHG of Fort Wayne, Inc. Indiana
QHG of Gadsden, Inc. Alabama
(d/b/a Gadsden Regional Medical Center)
QHG of Hattiesburg, Inc. Mississippi
QHG of Indiana, Inc. Indiana
QHG of Jacksonville, Inc. Alabama
(d/b/a Jacksonville Hospital)
QHG of Kenmare, Inc. North Dakota
(d/b/a Kenmare Community Hospital)
QHG of Lake City, Inc. South Carolina
(d/b/a Carolinas Hospital System - Lake City)
(d/b/a Carolinas Hospital System - Kingstree)
QHG of Massillon, Inc. Ohio
QHG of Minot, Inc. North Dakota
(d/b/a Unimed Medical Center-St. Joseph's Hospital)
QHG of Nebraska, Inc. Nebraska
QHG of Ohio, Inc. Ohio
(d/b/a Park Medical Center)
QHG of South Carolina, Inc. South Carolina
(d/b/a Carolinas Hospital System)
QHG of Spartanburg, Inc. South Carolina
QHG of Texas, Inc. Texas
QHR of Delaware, Inc. Delaware
Quorum ELF, Inc. Delaware
Quorum Health Group of Vicksburg, Inc. Tennessee
Quorum Health Resources, LLC Delaware
Quorum Health Services, Inc. Delaware
Quorum, Inc. Delaware
River Region Medical Corporation Mississippi
(d/b/a ParkView Regional Medical Center)
Rehab Hospital of Fort Wayne General Partnership Delaware
(d/b/a Rehabilitation Hospital of Fort Wayne)
Software Sales Corp. Tennessee
St. Joseph Health System LLC Delaware
(d/b/a St. Joseph Medical Center)
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
The Intensive Resource Group, LLC Delaware
Vicksburg Clinic, Inc. Mississippi
Vicksburg Healthcare, LLC Delaware
Wesley Health System LLC Delaware
(d/b/a Wesley Medical Center)
</TABLE>
<PAGE> 1
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements on
Form S-8 pertaining to the Quorum Health Group, Inc. Stock Option and Restated
Stock Purchase Plan (No. 33-38817), the Employee Stock Purchase Plan (No.
33-44474), the Directors Stock Option Plan (No. 33-46542), the Directors Stock
Option Plan (33- 89272), the Restated Stock Option Plan (No. 33-54868), the
Restated Stock Option Plan (No. 33-73288), the Restated Stock Option Plan (No.
33-89274), the Non-qualified Employee Stock Purchase Plan (No. 333-384), the
Restated Stock Option Plan (No. 333-24339), the 1997 Stock Option Plan (No.
333-42619) and the Employee Stock Purchase Plan (No. 333-42649) of our report
dated August 7, 1998, except for Note 10, as to which the date is September 24,
1998, with respect to the consolidated financial statements and the schedule of
Quorum Health Group, Inc. included in the Annual Report (Form 10-K) the year
ended June 30, 1998.
/s/ Ernst & Young LLP
Nashville, Tennessee
September 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1998 AND THE AUDITED CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 17,549
<SECURITIES> 0
<RECEIVABLES> 338,937
<ALLOWANCES> 65,561
<INVENTORY> 29,336
<CURRENT-ASSETS> 354,506
<PP&E> 894,935
<DEPRECIATION> 216,229
<TOTAL-ASSETS> 1,490,953
<CURRENT-LIABILITIES> 163,485
<BONDS> 617,377
0
0
<COMMON> 755
<OTHER-SE> 621,511
<TOTAL-LIABILITY-AND-EQUITY> 1,490,953
<SALES> 0
<TOTAL-REVENUES> 1,572,352
<CGS> 0
<TOTAL-COSTS> 1,166,496
<OTHER-EXPENSES> 112,988
<LOSS-PROVISION> 106,733
<INTEREST-EXPENSE> 40,606
<INCOME-PRETAX> 145,529
<INCOME-TAX> 58,849
<INCOME-CONTINUING> 86,680
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,680
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.12
</TABLE>
