<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
----------
Commission file number 33-31717-A
----------
QUORUM HEALTH GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1406040
(State of incorporation) (IRS Employer Identification No.)
103 CONTINENTAL PLACE, BRENTWOOD, TENNESSEE 37027
(Address of principal executive offices) (Zip Code)
(615) 371-7979
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 11, 1998
- - ----- --------------------------------
Common Stock, $.01 Par Value 72,174,938 Shares
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30
------------------------------
1998 1997
--------- --------
<S> <C> <C>
Revenue:
Net patient service revenue $ 352,459 $357,117
Hospital management/professional services 20,792 19,695
Reimbursable expenses 16,110 16,009
--------- --------
Net operating revenue 389,361 392,821
Salaries and benefits 157,846 155,597
Reimbursable expenses 16,110 16,009
Supplies 51,319 54,673
Fees 35,171 34,387
Other operating expenses 33,552 33,276
Provision for doubtful accounts 27,796 30,411
Equity in earnings of affiliates (5,325) --
Depreciation and amortization 21,325 21,529
Interest 9,133 10,370
Minority interest 574 1,144
--------- --------
Income before income taxes 41,860 35,425
Provision for income taxes 16,367 14,064
--------- --------
Net income $ 25,493 $ 21,361
========= ========
Earnings per share:
Basic $ 0.34 $ 0.29
========= ========
Diluted $ 0.33 $ 0.28
========= ========
Weighted average shares outstanding:
Basic 75,593 74,212
Common stock equivalents 1,726 2,440
--------- --------
Diluted 77,319 76,652
========= ========
</TABLE>
See accompanying notes.
2
<PAGE> 3
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30
1998 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 11,604 $ 17,549
Accounts receivable, less allowance for doubtful
accounts of $70,078 at September 30, 1998
and $65,561 at June 30, 1998 289,917 273,376
Supplies 31,197 29,336
Net assets held for sale 22,035 --
Other 48,522 34,245
---------- ----------
Total current assets 403,275 354,506
Property, plant and equipment, at cost:
Land 65,026 66,424
Buildings and improvements 290,262 291,258
Equipment 458,467 464,577
Construction in progress 85,456 72,676
---------- ----------
899,211 894,935
Less accumulated depreciation 220,408 216,229
---------- ----------
678,803 678,706
Cost in excess of net assets acquired, net 140,423 144,315
Unallocated purchase price 46,512 4,020
Investments in unconsolidated entities 251,616 245,551
Other 61,574 63,855
---------- ----------
Total assets $1,582,203 $1,490,953
========== ==========
</TABLE>
3
<PAGE> 4
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30
1998 1998
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 92,748 $ 70,483
Accrued salaries and benefits 62,711 64,196
Other current liabilities 28,115 27,533
Current maturities of long-term debt 992 1,273
---------- ----------
Total current liabilities 184,566 163,485
Long-term debt, less current maturities 659,566 617,377
Deferred income taxes 32,290 29,470
Professional liability risks and other liabilities
and deferrals 28,002 30,882
Minority interests in consolidated entities 27,686 27,473
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value;
300,000 shares authorized; 75,738
issued and outstanding at September 30,
1998 and 75,478 at June 30, 1998 757 755
Additional paid-in capital 292,481 290,149
Retained earnings 356,855 331,362
---------- ----------
650,093 622,266
---------- ----------
Total liabilities and stockholders' equity $1,582,203 $1,490,953
========== ==========
</TABLE>
See accompanying notes.
4
<PAGE> 5
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30
-------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 31,027 $ 31,315
Investing activities:
Purchase of acquired companies (44,120) (81,879)
Purchase of property, plant and equipment (31,009) (31,634)
Other (331) (5,522)
--------- ---------
Net cash used in investing activities (75,460) (119,035)
Financing activities:
Borrowings under bank debt 149,100 173,300
Repayments of bank debt (106,700) (90,200)
Other (3,912) 1,030
--------- ---------
Net cash provided by financing activities 38,488 84,130
--------- ---------
Decrease in cash (5,945) (3,590)
Cash at beginning of period 17,549 19,008
--------- ---------
Cash at end of period $ 11,604 $ 15,418
========= =========
Supplemental cash flow information:
Interest paid $ (8,212) $ (6,754)
========= =========
Income taxes paid $ (143) $ (13,027)
========= =========
</TABLE>
See accompanying notes.
5
<PAGE> 6
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Quorum
Health Group, Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended September 30, 1998, are
not necessarily indicative of the results that may be expected for the year
ending June 30, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended June 30, 1998. Certain reclassifications
have been made to the fiscal 1998 financial presentation to conform with fiscal
1999.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes reporting standards for
operating segment information disclosed in annual financial statements and in
interim financial reports issued to shareholders. Under existing accounting
standards, the Company has reported its operations as one line of business
because substantially all of its revenue and operating profits have been derived
from its acute care hospitals, affiliated health care entities and health care
management services. The Company will adopt SFAS No. 131 during its fiscal year
ending June 30, 1999 and is presently evaluating the new standard to determine
its effect, if any, on the way the Company might report its operations in the
future.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. For interest rate swap agreements
that qualify as 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.
6
<PAGE> 7
3. ACQUISITIONS, JOINT VENTURES AND SALES
During the three months ended September 30, 1998, the Company acquired one
hospital and affiliated health care entities. During the three months ended
September 30, 1997, the Company acquired one hospital and affiliated health care
entities. Hospital and affiliated business acquisitions are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
Fair value of assets acquired $ 45,717 $ 86,833
Fair value of liabilities assumed (1,597) (4,954)
-------- --------
Net cash used for acquisitions $ 44,120 $ 81,879
======== ========
</TABLE>
Both 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 based upon available
information and is subject to further refinement. The operating results of the
acquired companies have been included in the accompanying consolidated
statements of income from the respective dates of acquisition.
The following unaudited pro forma results of operations give effect to the
operations of the joint ventures and the entities acquired, sold and contributed
to joint ventures in fiscal 1999 and 1998 as if the respective transactions had
occurred at the beginning of the period presented (in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30
1997
------------
<S> <C>
Net operating revenue $ 385,712
Net income 20,991
Earnings per common share:
Basic 0.28
Diluted 0.27
</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 periods presented or to project the Company's
results of operations in any future period.
7
<PAGE> 8
4. NET ASSETS HELD FOR SALE
The Company is in the process of negotiating the sale of Park Medical Center and
expects the sale to be completed in fiscal 1999. Accordingly, net assets held
for sale have been classified as current assets.
5. INCOME TAXES
The income tax provision recorded for the three months ended September 30, 1998
and 1997 differs from the expected income tax provision due to permanent
differences and the provision for state income taxes.
6. EARNINGS PER SHARE
In 1997, the FASB issued 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 prior periods have been restated to conform to
SFAS No. 128 requirements.
7. CONTINGENCIES
Management continually evaluates contingencies based on the best available
evidence and believes that provision for losses has been provided to the extent
necessary.
Net Patient Service Revenue
Final determination of amounts earned under the Medicare and Medicaid programs
often occurs in subsequent years because of audits by the programs, rights of
appeal and the application of numerous technical provisions. In the opinion of
management, adequate provision has been made for adjustments that may result
from such routine audits and appeals.
Income Taxes
The Internal Revenue Service (IRS) is in the process of conducting examinations
of the Company's federal income tax returns for the fiscal years ended June 30,
1993 through 1997. In the opinion of management, the ultimate outcome of the IRS
examination will not have a material effect on the Company's results of
operations or financial position.
Impact of Year 2000
As with most other industries, hospitals and affiliated health care entities use
information systems that may misidentify dates beginning January 1, 2000 or
earlier, thereby, resulting in system or equipment
8
<PAGE> 9
failures or miscalculations. Information systems include computer programs,
building infrastructure components and computer-aided biomedical equipment. The
Company's position is that it is not responsible for ensuring Year 2000
compliance by its managed hospitals, but the Company cannot provide assurance
that its managed hospitals will not seek to hold it responsible, or that it will
not ultimately be found liable, for any losses they incur arising out of the
Year 2000 problem. The Company has a Year 2000 strategy for its owned hospitals
that includes phases for education, inventory and assessment of applications and
equipment at risk, conversion/remediation/replacement, validation and
post-implementation. The Company can provide no assurances that applications and
equipment the Company believes to be Year 2000 compliant will not experience
difficulties or that the Company will not experience difficulties obtaining
resources needed to make modifications to or replace the Company's affected
systems and equipment. Failure by the Company or third parties on which it
relies to resolve Year 2000 issues could have a material adverse effect on the
Company's results of operations and its ability to provide health care services.
Consequently, the Company can give no assurances that issues related to Year
2000 will not have a material adverse effect on the Company's financial
condition or results of operations.
Litigation
The Company currently, and from time to time, is expected to be subject to
claims and suits arising in the ordinary course of business. The Company is not
currently a party to any such proceeding which, in management's opinion, would
have a material effect on the Company's results of operations or financial
position.
False Claims Act Litigation
In June 1993, the Office of the Inspector General (OIG) of the Department of
Health and Human Services requested information from the Company in connection
with an investigation involving the Company's procedures for preparing Medicare
cost reports. In January 1995, the U.S. Department of Justice issued a Civil
Investigative Demand which also requested information from the Company in
connection with that same investigation. As a part of the government's
investigation, several former and current employees of the Company were
interviewed. The Company cooperated fully with the investigation. The Company
received no communication from the government on this matter from approximately
June 1996 until August 1998.
In August 1998, the government informed the Company that the investigation was
prompted by 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 all owned and managed
hospitals of the Company during the period beginning in 1984 and continuing
through 1997. At a meeting to discuss the case, held on September 24, 1998, the
Company learned that the government would likely commence litigation under the
False Claims Act on or about October 5, 1998. In October 1998, the government
filed with the court its election to intervene in the qui tam lawsuit filed by
the former employee under the False Claims Act in January 1993. In its present
form, the complaint in this case presents a large number of complex factual and
legal questions. The Company intends to look for ways to cooperate with the
government in efficiently resolving this Litigation. If appropriate, the Company
will try to reach a settlement of this case.
9
<PAGE> 10
In May 1998, the Company learned that it is a named defendant in a separate qui
tam case when it received a letter from a U.S. Attorney. The complaint alleges
violations of Medicare laws governing the home health operations at two of the
Company's hospitals. The complaint was filed under seal in June 1996 by a former
employee who was discharged by the Company in April 1996. The purpose of the
letter from the U.S. Attorney was to allow the Company an opportunity to
evaluate the results of the government's investigation to date and to discuss
with the government the allegations made in the complaint, prior to the
government making a decision as to whether it will intervene as a plaintiff in
the case. The lawsuit remains under seal for all other purposes. The Company is
cooperating fully with the U.S. Attorney's Office. The Company has responded to
requests for documents and made several of its employees available for
interview. If any violation of the law is found, the Company intends to pursue
an amicable settlement.
The Company cannot at this time predict the outcome of these cases or estimate
their ultimate impact on the Company's business or operating results. If the
outcome of either case were unfavorable, the Company could be subject to fines,
penalties and damages and also could be excluded from Medicare and other
government reimbursement programs. These and other results of these cases could
have a material adverse effect on the Company's financial condition or results
of operations.
Although the Company believes that it is in material compliance with the laws
and regulations governing the Medicare and Medicaid programs, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties and exclusion from the Medicare and Medicaid programs.
9. SUBSEQUENT EVENTS
Effective October 1, 1998, the Company acquired Columbia Medical Center of Baton
Rouge in Louisiana. The Company is the majority partner and manager of the
hospital.
Effective November 1, 1998, a majority-owned subsidiary of the Company and a
subsidiary of Columbia/HCA Healthcare Corp. (Col/HCA) formed River Region Health
System, a joint venture in Vicksburg, Mississippi. Col/HCA contributed Vicksburg
Medical Center in exchange for a 35% equity interest in the joint venture. The
Company's subsidiary and its existing physician partners contributed River
Region Medical Corporation including a $31 million note receivable from the
Company. The Company, through its subsidiary, has a 51% equity interest in the
joint venture and is the manager. There will be working capital settlements to
maintain the respective ownership interests of each party.
On October 23 and November 2, 1998, lawsuits were filed by separate stockholders
in the United States District Court for the Middle District of Tennessee. In
each Complaint, plaintiff seeks to represent a class of plaintiffs comprised of
all individuals who purchased the Company's common stock from October 25, 1995
through October 21, 1998, exclusive of insiders of the Company and their
immediate families. Both Complaints allege that the defendants violated Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10(b)(5)
promulgated thereunder by recklessly reporting in filings with the Securities
and Exchange Commission and in releases disseminated to the investing public
during the class period financial results that were materially overstated and
that were
10
<PAGE> 11
not presented in accordance with generally accepted accounting principles.
Plaintiffs specifically allege that, as a result of a company-wide scheme to
overbill the Medicare and Medicaid programs, the Company's net accounts
receivable, net operating revenue, net patient service revenue, net income, and
net income per common share during the class period were materially overstated
and were not in compliance with generally accepted accounting principles. The
Company intends to defend vigorously the claims and allegations in these
actions.
On November 2, 1998, a lawsuit was filed against the Company, all of its
current directors and two former directors in the United States District Court
for the Northern District of Alabama. The Complaint asserts four claims: a
shareholders' derivative claim for breach of fiduciary duty, a shareholders'
derivative claim for violations of the Racketeer Influenced and Corrupt
Organizations Act, a shareholders' derivative claim for injunctive relief, and
a purported class action claim for breach of fiduciary duty. As the basis for
each of these claims, plaintiff alleges that the defendants intentionally or
negligently failed to make sure that the Company was in compliance with
applicable Medicare and Medicaid reimbursement laws. All of the defendants
plan to vigorously defend this litigation.
In August 1998, the Board of Directors authorized the repurchase of up to
3,000,000 shares of common stock. In October 1998, the Board of Directors
authorized the repurchase of up to 5,000,000 additional shares of common stock.
Shares purchased under the program may be used, among other purposes, to offset
the effects of the Company's stock-based employee benefit plans. As of November
11, 1998, the Company repurchased 3,585,000 million shares for an aggregate
purchase price of $48.1 million. All such shares were purchased in open market
transactions.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
The following management's discussion and analysis in this quarterly
report contains "forward looking statements." These are statements about
Quorum's(1) current expectations or forecasts of future events. Some examples
would be comments about future operating results, future acquisitions, future
financial performance and the outcome of contingencies such as litigation. The
Company from time to time will also make forward looking statements in other
written materials and in oral statements to the public. Forward looking
statements use words such as "anticipate," "believe," "expect," "intend,"
"plan," "project" and words of similar meaning in discussions which do not
involve simply reporting historical or current facts. The Company does not
promise to update any forward looking statement. Forward looking statements made
by the Company may turn out to be wrong. Actual results may differ materially.
Forward looking statements depend on assumptions which may prove incorrect and
on risks and facts which the Company may not know. As permitted by the Private
Securities Litigation Reform Act of 1995, in the following discussion and
analysis the Company has identified a number of risks and uncertainties. These
are factors which the Company believes could cause actual results to differ
materially from historical and expected results. These are not the only factors
which may be important.
On October 22, 1998, the Company issued a press release in which the
Company said it expected its operating results for fiscal 1999 to be below its
earlier expectations. The Company attributes these lowered expectations to
several factors. The most important of these are (1) the failure of hospitals
purchased in calendar 1998 to positively impact the Company's results of
operations; (2) the inability of hospitals previously owned to improve their
operating results as much as budgeted; (3) the poor performance of Park Medical
Center in Columbus, Ohio; (4) limits on revenue growth resulting from changes
in Medicare reimbursement arising out of the Balanced Budget Act; and (5) the
completion of only two hospital purchases in fiscal 1998.
IMPACT OF ACQUISITIONS, JOINT VENTURES AND SALES
During the three months ended September 30, 1998, the Company acquired
one hospital and affiliated health care entities. During fiscal 1998, the
Company acquired two hospitals and affiliated health care entities, contributed
three hospitals in exchange for equity interests in joint ventures that own and
operate seven hospitals and sold its remaining interest in a Nebraska hospital.
Effective October 1, 1998, the Company acquired Columbia Medical Center
of Baton Rouge in Louisiana. The Company is the majority partner and manager of
the hospital. Effective November 1, 1998, a majority-owned subsidiary of the
Company and a subsidiary of Columbia/HCA Healthcare Corp. (Col/HCA) formed River
Region Health System, a joint venture in Vicksburg, Mississippi. Col/HCA
contributed Vicksburg Medical Center in exchange for a 35% equity interest in
the joint venture. The Company's subsidiary and its existing physician partners
contributed River Region Medical Corporation including a $31 million note
receivable from the Company. The
- - -----------------
(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.
12
<PAGE> 13
Company, through its subsidiary, has a 51% equity interest in the joint venture
and is the manager. There will be working capital settlements to maintain the
respective ownership interests of each party.
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. The Company is in the process of
negotiating the sale of Park Medical Center and expects the sale to be completed
in fiscal 1999. Accordingly, net assets held for sale have been classified as
current assets. The Company expects its operating margin and results of
operations to be adversely affected by Park Medical Center until the sale is
completed. Sales of hospitals such as Park Medical Center are inherently
difficult. Therefore the timing and ultimate price of the sale cannot be
assured.
Because of the financial impact of the acquisitions, joint ventures and
sales, it is difficult to make meaningful comparisons between the Company's
financial statements for the fiscal periods presented. In addition, due to the
current number of owned hospitals, each additional hospital acquisition can
affect the overall operating margin or results of operations of the Company.
During a transition period after the acquisition of a hospital, the Company has
typically taken a number of steps to lower operating costs. The impact of such
actions can be partially offset by cost increases to expand the hospital's
services, strengthen its medical staff and improve its market position. The
benefits of these investments and of other activities to improve operating
margins may not occur immediately. Additionally, operations at acquired
hospitals may deteriorate before or after the purchase date. This may be a
result of physician practice patterns, loss of physicians, local management
focus or turnover.
The financial performance of the Company's acquisitions completed in
February and July 1998 adversely affected the Company's operating margin and
results of operations during the three months ended September 30, 1998.
Furthermore, the Company expects that its 1998 acquisitions already completed
and acquisitions it now expects to complete in fiscal 1999 will continue to
reduce its operating margins and results of operations during the three months
ended December 31, 1998. There is a significant risk that the financial
performance of these acquisitions may not improve to the extent necessary to
positively impact the Company's results of operations for the remainder of
fiscal 1999. Acquired facilities must show improved operating results more
quickly than in the past for the Company to achieve its historical growth
targets. Additionally, as the Company grows, it depends on a greater volume of
acquisitions, or acquisitions of a larger size, to achieve its growth targets.
SELECTED OPERATING STATISTICS - OWNED HOSPITALS
The following table sets forth certain operating statistics for the
Company's owned hospitals for each of the periods presented. The results of the
owned hospitals for the three months ended September 30, 1998
13
<PAGE> 14
include three months of operations for eighteen hospitals, the Las Vegas joint
ventures and the Macon joint venture and excludes the hospital sold and the
three hospitals contributed to the joint ventures. The results of the owned
hospitals for the three months ended September 30, 1997 include three months of
operations for nineteen hospitals and a partial period for one hospital acquired
during such period.
<TABLE>
<CAPTION>
Three Months
Ended September 30
-------------------------------------
1998 1997
-------- --------
<S> <C> <C>
Number of hospitals at end of period 18 20
Licensed beds at end of period 4,217 4,410
Beds in service at end of period 3,461 3,656
Admissions 30,522 32,066
Average length of stay (days) 5.5 5.5
Patient days 168,994 176,030
Adjusted patient days 295,678 291,182
Occupancy rates (average licensed beds) 44.0% 44.8%
Occupancy rates (average beds in service) 53.7% 54.2%
Gross inpatient revenues (in thousands) $351,963 $389,614
Gross outpatient revenues (in thousands) $263,844 $254,870
</TABLE>
RESULTS OF OPERATIONS
The table below reflects the percentage of net operating revenue
represented by various categories in the Condensed Consolidated Statements of
Income and the percentage change in the related dollar amounts. The results of
operations for the periods presented include hospitals from their acquisition
dates as discussed above.
<TABLE>
<CAPTION>
Three Months Percentage
Ended Increase
September 30 (Decrease)
--------------------------- of Dollar
1998 1997 Amounts
----- ----- -------
<S> <C> <C> <C>
Net operating revenue 100.0% 100.0% (.9)%
Operating expenses (1) 82.7 82.6 (2.4)
Equity in earnings of affiliates (1.4) -- (100.0)
----- ----- -----
EBITDA (2) 18.7 17.4 6.5
Depreciation and amortization 5.5 5.5 (.9)
Interest 2.3 2.6 (11.9)
Minority interest .2 .3 (49.8)
----- ----- -----
Income before income taxes 10.7 9.0 18.2
Provision for income taxes 4.2 3.6 16.4
----- ----- -----
Net income 6.5% 5.4% 19.3%
===== ===== =====
</TABLE>
14
<PAGE> 15
(1) Operating expenses represent expenses before interest, minority interest,
income taxes, depreciation and amortization expense.
(2) EBITDA represents earnings before interest, minority interest, income taxes,
depreciation and amortization expense. The Company has included EBITDA data
because such data is used by certain investors to measure a company's ability to
service debt. EBITDA is not a measure of financial performance under generally
accepted accounting principles and should not be considered an alternative to
net income as a measure of operating performance or to cash flows from operating
activities as a measure of liquidity.
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
The Company's net operating revenue was $389.4 million for the three
months ended September 30, 1998, compared to $392.8 million for the comparable
period of fiscal 1998, a decrease of $3.4 million or 0.9%. This decrease was
attributable to, among other things, the transfer of three hospitals to joint
ventures (which are accounted for by the equity method), the sale of the
Nebraska hospital, the effect of the Balanced Budget Act of 1997 (the Budget
Act) including its impact on home health and skilled nursing facility revenues
and increased managed care and charity care discounts. The Company's net
operating revenue decrease was partially offset by an increase in net revenue
due to three hospital acquisitions during fiscal 1999 and 1998, a 1.2% 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), including additional revenues from estimated settlements with
third-party payors, and a 3% increase in management services revenue. If the net
revenues for the three months ended September 30, 1997 were recast to reflect
the earnings for the hospitals contributed to the joint ventures using the
equity method of accounting and excluding the hospital sold, consolidated net
revenues would have increased 15.9%.
Operating expenses as a percent of net operating revenue increased to
82.7% for the three months ended September 30, 1998 from 82.6% for the three
months ended September 30, 1997. Operating expenses as a percentage of net
operating revenue for the Company's owned hospitals increased to 83.3% for the
three months ended September 30, 1998 from 83.1% for the three months ended
September 30, 1997. For the Company's hospitals owned during both periods,
operating expenses as a percentage of net operating revenue decreased to 81.5%
for the three months ended September 30, 1998 from 82.4% for the three months
ended September 30, 1997. The decrease was primarily attributable to a relative
reduction in salaries and benefits expense, supplies and bad debt expense.
Equity in earnings of affiliates, which was primarily attributable to the Las
Vegas and Macon operations, represented 1.4% of the Company's net operating
revenue for the three months ended September 30, 1998.
EBITDA as a percent of net operating revenue was 18.7% for the three
15
<PAGE> 16
months ended September 30, 1998 compared to 17.4% for the three months ended
September 30, 1997. EBITDA as a percent of net operating revenue for the
Company's owned hospitals was 18.2% for the three months ended September 30,
1998 compared to 16.9% for the three months ended September 30, 1997. EBITDA as
a percent of net operating revenue for the Company's hospitals owned during both
periods was 18.5% for the three months ended September 30, 1998 compared to
17.6% for the three months ended September 30, 1997. EBITDA as a percent of net
operating revenue for the Company's management services business was 23.7% for
the three months ended September 30, 1998 compared to 22.4% for the three months
ended September 30, 1997. If EBITDA for the three months ended September 30,
1997 were recast to reflect the earnings for the hospitals contributed to the
joint ventures using the equity method of accounting and excluding the hospital
sold, consolidated EBITDA would have increased 15.9%.
Depreciation and amortization expense as a percent of net operating
revenue was 5.5% for the three months ended September 30, 1998 and September 30,
1997. Interest expense as a percent of net operating revenue decreased to 2.3%
for the three months ended September 30, 1998 from 2.6% for the three months
ended September 30, 1997 due to termination of two interest rate swap
agreements, repayments of bank debt with cash flow generated from operations and
a reduction in interest rates. Minority interest expense as a percent of net
operating revenue decreased to 0.2% for the three months ended September 30,
1998 from 0.3% for the three months ended September 30, 1997 which was primarily
attributable to the sale of the Nebraska hospital. The provision for income
taxes as a percent of net operating revenue increased to 4.2% for the three
months ended September 30, 1998 from 3.6% for the three months ended September
30, 1997 which was primarily attributable to the increase in pretax income.
Net income as a percent of net operating revenue was 6.5% for the three
months ended September 30, 1998 compared to 5.4% for the three months ended
September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had working capital of $218.7
million, including cash of $11.6 million. The ratio of current assets to current
liabilities was 2.2 to 1.0 at September 30, 1998 and June 30, 1998.
The Company's cash requirements excluding acquisitions have
historically been funded by cash generated from operations. Cash generated from
operations was $31.0 million and $31.3 million for the three months ended
September 30, 1998 and 1997, respectively. The decrease is primarily due to the
funding of working capital for the first quarter fiscal 1999 acquisition.
The complexity of the Medicare and Medicaid regulations, increases in
managed care, hospital personnel turnover, including business office managers,
hospital and Medicare intermediary computer system conversions, dependence of
hospitals on physician documentation of medical records, and
16
<PAGE> 17
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 three months ended
September 30, 1998 and 1997 were $31.0 million and $31.6 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 capital expenditures of approximately $11
million for the three months ended September 30, 1998 and a total project cost
of approximately $100 million. In fiscal 1999, excluding acquisitions, the
Company expects to make capital expenditures from $125 million to $150 million,
including costs of approximately $40 million for the Carolinas construction
project.
During the three months ended September 30, 1998, cash used for
acquisitions was $44.1 million. The Company acquired one hospital and affiliated
health care entities. 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
and sold its remaining interest in a Nebraska hospital.
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.
In August 1998, the Board of Directors authorized the repurchase of up
to 3,000,000 shares of common stock. In October 1998, the Board of Directors
authorized the repurchase of up to 5,000,000 additional shares of common stock.
Shares purchased under the program may be used, among other purposes, to offset
the effects of the Company's stock-based employee benefit plans. As of November
11, 1998 the Company repurchased 3,585,000 million shares for an aggregate
purchase price of $48.1 million. All such shares were purchased in open market
transactions.
At November 10, 1998, the Company had $272.1 million available under
its $850.0 million revolving credit facility and $91.2 million available under
its $150.0 million ELLF agreement.
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
17
<PAGE> 18
as fixed rate in nature either by borrowing on a long-term basis or entering
into interest rate swap transactions. The interest rate swap agreements are
contracts to periodically exchange fixed and floating interest rate payments
over the life of the agreements. The floating-rate payments are based on LIBOR
and fixed-rate payments are dependent upon market levels at the time the swap
agreement was consummated. The interest rate swap agreements do not constitute
positions independent of the underlying exposures. The Company's policy is to
not hold or issue derivative instruments for trading purposes and to not be a
party to any instruments with leverage features. Certain swap agreements allow
the counterparty a one-time option at the end of the initial term to cancel the
agreement or a one-time option at the end of the initial term to extend the
swaps for an incremental period of up to five years. The Company is exposed to
credit losses in the event of nonperformance by the counterparties to its
financial instruments. The counterparties are creditworthy financial
institutions and the Company anticipates that the counterparties will be able to
fully satisfy their obligations under the contracts. For the three months ended
September 30, 1998 and 1997, the Company received a weighted average rate of
5.7% and 5.8% and paid a weighted average rate of 5.8% and 6.1%, respectively.
The table below presents information about the Company's market-
sensitive financial instruments, including long-term debt and interest rate
swaps as of September 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
September 30, 1998. The fair values of long-term debt and interest rate swaps
were determined based on quoted market prices at September 30, 1998 for the same
or similar debt issues.
Maturity Date, Fiscal Year Ending June 30
<TABLE>
<CAPTION>
Sept. 30,
1998
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 $ 0.8 $ 0.9 $ 0.7 $ 0.6 $ 0.6 $ 152.2 $ 155.8 $ 155.4
Average interest rates 7.6% 7.6% 7.7% 7.7% 7.7% 8.7%
Variable rate long-term
debt $ 504.8 $ 504.8 $ 504.8
Average interest rates 6.0%
Interest rate swaps:
Pay fixed/receive
variable notional amounts $ 100.0 $ 400.0 $ 500.0 $ 27.8
Average pay rate 4.9% 5.9%
Average receive rate 5.3% 5.5%
</TABLE>
18
<PAGE> 19
YEAR 2000 ISSUES
The "Year 2000 problem" describes computer programs which use two
rather than four digits to define the applicable year. These programs are
present in software applications running on desktop computers and network
servers. These programs are also present in microchips and microcontrollers
incorporated into equipment. The Company's computer hardware and software,
building infrastructure components (e.g. alarm systems and HVAC systems) and
medical devices that are date sensitive may contain programs with the Year 2000
problem. If uncorrected, the problem could result in computer system and program
failures or equipment and medical device malfunctions that could result in a
disruption of business operations or affect patient diagnosis and treatment. The
Company purchases from others substantially all of the software it uses.
The Company's Year 2000 strategy is led by its Vice President of
Corporate Services. In July 1998, the Company retained an external firm to
provide consulting services and to assist the Company in implementing its Year
2000 strategy. The Company also has a Year 2000 steering committee to assist in
coordinating the Year 2000 implementation. The Company's Year 2000 strategy
addresses hospitals it owns and those it manages.
Managed Hospitals
The Company is recommending to the owners of the managed hospitals that
the owners of each managed hospital establish an oversight committee of local
board members. The Company also 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 also intends to identify additional
third-party resources which the managed hospitals may use to assist them in
addressing the Year 2000 problem.
The Company's position is that it is not responsible for ensuring
Year 2000 compliance by its managed hospitals. The Company can provide no
assurance, however, that its managed hospitals will not seek to hold it
responsible for losses they incur arising out of the Year 2000 problem. Nor can
the Company provide assurance that it will not ultimately be found liable for
such losses, if they occur, which may be material.
The Company does not know the status of remediation efforts at its
managed hospitals. Therefore, the Company is not able to evaluate the most
reasonably likely Year 2000 worst case scenario for managed hospitals. Because
the Company provides only management services, it does not pay expenses of the
hospitals it manages and, therefore, does not expect to incur any significant
Year 2000 remediation costs for its managed hospitals.
19
<PAGE> 20
Owned Hospitals and Corporate Office
The Company has a Year 2000 strategy for its owned hospitals that
includes phases for education, inventory and assessment of applications and
equipment at risk, conversion/remediation/replacement, validation and post-
implementation. The Company's strategy also includes development of contingency
plans to address potential disruption of operations arising from the Year 2000
problem. Park Medical Center is not included in these plans, since it is an
asset held for sale.
Education
The Company has substantially completed the education phase of its Year
2000 strategy. Education will continue to be provided throughout the Year 2000
implementation process.
Financial Application Software and Hardware - Owned Hospitals
The Company has completed an initial assessment of financial
application software used in its owned hospitals in such areas as patient
accounting and financial reporting. Nine hospitals have been advised by the
manufacturers of its financial software systems that such software is
substantially Year 2000 compliant. Three owned hospitals are scheduled to
convert by September 1999 to a financial software system which is represented by
the manufacturer to be Year 2000 compliant. The Company has scheduled upgrades
for the remaining six hospitals to be completed by June 1999.
Clinical and Other Software and Hardware - Owned Hospitals
With respect to other software and related computer equipment, such as
patient care and ancillary software, the owned hospitals are in the inventory
and assessment stage. The Company expects the inventory and assessment to be
completed by February 1999 and intends for critical remediation to be
substantially completed by September 1999.
Biomedical Equipment and Building Infrastructure - Owned Hospitals
The Company is in the inventory and assessment phase of its analysis of
owned hospital systems such as biomedical equipment and building infrastructure
components. The Company anticipates completing this phase by February 1999. The
Company plans to use an outside vendor for its initial assessment of biomedical
equipment. This is scheduled to be completed in January 1999. 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 hospitals plan to
schedule the remaining Year 2000 dates for biomedical equipment after the vendor
information is received.
20
<PAGE> 21
Corporate Office
The Company believes that its corporate office network is substantially
Year 2000 compliant. The Company has been advised by the manufacturer of its
corporate office financial software applications that such software is
substantially Year 2000 compliant. The Company's management services business is
scheduled to convert to compliant financial software applications by June 1999.
The Company has substantially completed the inventory, remediation and
validation phases with respect to other corporate office computer equipment
(such as desktop computers) and the corporate office building infrastructure.
The Company is currently validating its other corporate office computer software
and management services computer software and equipment in satellite offices and
intends for critical remediation to be substantially completed by February 1999.
Costs
The Company believes that Year 2000-related remediation costs incurred
through September 30, 1998 have not been material to its results of operations.
The Company's consultants have initially estimated the total costs to be
incurred for completion of its Year 2000 strategy between $16 million and $37
million. This estimate is primarily based on industry averages and excludes
costs associated with the accelerated purchase of financial application software
and hardware upgrades and conversions. Approximately half is estimated to be
capital costs and half is estimated to be operating costs. The Company earmarked
a portion of its current year capital budget as contingency funds and expects
that substantially all of the capital costs can be accommodated within the
current budget. Most of the estimated additional operating costs were not
budgeted as separate Year 2000 expenses given the early and tentative nature of
the estimates. The Company is reviewing to what extent existing resources can be
reallocated to the Year 2000 problem and how otherwise to fund these operating
costs. All cost estimates are preliminary and are expected to be revised as the
project progresses.
Reliance on Third Parties
The Company relies heavily on third parties in operating its business.
In addition to its reliance on software, hardware and other equipment vendors to
verify Year 2000 compliance of their products, the Company also depends on (i)
fiscal intermediaries which process claims and make payments for the Medicare
program, (ii) insurance companies, HMO's and other private payors, (iii)
utilities which provide electricity, water, natural gas and telephone services
and (iv) vendors of medical equipment, supplies and pharmaceuticals used in
patient care. As a part of its Year 2000 strategy, the Company intends to seek
assurances from these parties that their services and products will not be
interrupted or malfunction due to the Year 2000 problem. Failure of some or all
of these third parties to resolve their Year 2000 issues could have a material
adverse effect on the Company's results of operations and ability to provide
health care services at certain owned hospitals. The Company is coordinating
closely with its trade associations and other parties to monitor HCFA's progress
toward Year 2000 compliance.
Contingency Plans
The Company intends to complete its initial contingency plan by June
21
<PAGE> 22
1999. Each of the Company's owned hospitals has a disaster plan which will be
reviewed as a part of the Company's contingency planning process and
supplemented as necessary to accomodate Year 2000 compliancy issues. These
disaster plans are designed to enable the hospital to continue to function
during natural disasters and other crises. The plans also have contingencies for
moving patients to other facilities if the hospital is not able to continue to
care for them. In some cases, the Company may not be able to develop contingency
plans which allow the hospital to continue to operate. For example, the affected
hospital may not be able to secure supplies of fuel to operate its backup
generators if electrical supplies fail for an extended period.
Risks of Year 2000 Issues
The Company believes today that the most reasonably likely worst case
scenario will involve (1) malfunctions in clinical computer software and
hardware at owned hospitals, (2) malfunctions in biomedical equipment at owned
hospitals, (3) temporary disruptions in delivery of medical supplies and utility
services to owned hospitals and (4) temporary disruptions in payments,
especially payments from Medicare and other government programs. The Company
expects these events will result in increased expense as the affected
hospital(s) refer tests and other procedures to other parties, access
alternative suppliers and increase staffing to assure adequate patient care.
These events may also cause lost revenue for procedures which its hospitals are
unable to perform. For example, a hospital will suspend a service if Year 2000
compliant equipment required for that service is unavailable. Disruptions in
payments will adversely affect the Company's cash flow.
The foregoing assessment is based on information currently available to
the Company. The Company will revise its assessment as it implements its Year
2000 strategy. The Company can provide no assurances that applications and
equipment the Company believes to be Year 2000 compliant will not experience
difficulties or that the Company will not experience difficulties obtaining
resources needed to make modifications to or replace the Company's affected
systems and equipment. Failure by the Company or third parties on which it
relies to resolve Year 2000 issues could have a material adverse effect on the
Company's results of operations and its ability to provide health care services.
Consequently, the Company can give no assurances that issues related to Year
2000 will not have a material adverse effect on the Company's financial
condition or results of operations.
The Company's Year 2000 readiness program is an ongoing process and
the risk assessments and estimates of costs and completion dates for various
phases of the program are subject to change. The cost of the Year 2000 program
and the dates on which the Company believes the phases of the program will be
completed are based on management's best estimates, which were derived using
numerous assumptions of future events. Factors that could cause such changes
include, among other things, availability of qualified personnel and
consultants, the actions of third parties and material changes in governmental
regulations. There can be no guarantee that these estimates will be achieved
and actual results could differ materially from those anticipated.
GENERAL
The federal Medicare program and state Medicaid programs accounted for
approximately 55% of gross patient service revenue for the years ended June 30,
1998 and 1997. The payment rates under the Medicare program for inpatients are
prospective, based upon the diagnosis of a patient.
Under the Budget Act, there were no increases in the inpatient
operating payment rates to acute care hospitals for services through September
30, 1998. Inpatient operating payment rates were increased 0.5%
22
<PAGE> 23
effective October 1, 1998 through September 30, 1999 and subsequent increases
are expected to be less than inflation. The Budget Act reduced inpatient capital
payments in the aggregate by approximately 15% effective October 1, 1997.
Payments for Medicare outpatient services, home health services and skilled
nursing facility services historically have been paid based on costs, subject to
certain adjustments and limits. The Budget Act requires that the payment for
those services be converted to prospective payment systems (PPS). PPS for
skilled nursing facilities began for cost reporting periods beginning on and
after July 1, 1998. However, the implementation of PPS for outpatient and home
health has been delayed. The Company 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 number of home health
visits has declined for both the industry and the Company. The Budget Act has
and is expected to continue to reduce the Company's ability to maintain its
historical rate of net revenue growth and operating margins. The Budget Act and
further changes in the Medicare or Medicaid programs and other proposals to
limit health care spending could have a material adverse impact upon the health
care industry and the Company. The Company expects continuing pressure to limit
expenditures by governmental health care programs.
The 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 indemnity insurance
and employer plans which pay less than full charges, health maintenance
organizations, preferred provider organizations and various other forms of
managed care, may adversely affect the Company's ability to maintain its
historical rate of net revenue growth and operating margins.
The Company's acute care hospitals, like most acute care hospitals in
the United States, have significant unused capacity. The result is substantial
competition for patients and physicians. Inpatient utilization continues to be
negatively affected by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative health care delivery services
for less acutely ill patients. The Company expects increased competition and
admission constraints to continue in the future. The ability to successfully
respond to these trends, as well as spending reductions in governmental health
care programs, will play a significant role in determining the Company's ability
to maintain its historical rate of net revenue growth and operating margins.
The Company expects the industry trend from inpatient to outpatient
services to continue due to the increased focus on managed care and advances in
technology. Outpatient revenue of the Company's owned hospitals was
approximately 42.8% and 39.5% of gross patient service revenue for the three
months ended September 30, 1998 and 1997, respectively.
The Company's historical financial trend has been favorably impacted
23
<PAGE> 24
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 financial
performance of the Company's recent acquisitions have adversely affected the
Company's operating margin and results of operations and are expected to
continue to do so in the near-term.
The Company's owned hospitals accounted for 91% of the Company's net
operating revenue for the three months ended September 30, 1998 and 1997. For
the three months ended September 30, 1998, the Dothan, Alabama and Ft. Wayne,
Indiana markets accounted for approximately 30% of the Company's owned hospital
revenue and 39% of the Company's owned hospital EBITDA. Due to the current
number of owned hospitals, changes in any individual market can affect the
overall operating results of the Company. Furthermore, concentration of results
of operations in the Dothan, Alabama and Fort Wayne, Indiana markets increases
the risks that adverse developments at these facilities will have a material
adverse effect on the Company's operations or financial condition.
The Company must prepare its financial statements in accordance with
generally accepted accounting principles. This means that the Company must make
estimates and assumptions which affect the amounts it reports in its financial
statements. For example, net patient service revenue is reported at the
estimated net realizable amount from patients, third-party payors, and others
for services rendered, including estimated retroactive adjustments under
agreements with third-party payors. Settlements are estimated in the period the
related services are rendered and adjusted in future periods as final
settlements are determined. The timing and amount of these changes in estimates
may cause fluctuations in the Company's quarterly or annual operating results.
The IRS is in the process of conducting examinations of the Company's
federal income tax returns for the fiscal years ended June 30, 1993 through
1997. In the opinion of management, the ultimate outcome of the IRS examination
will not have a material effect on the Company's results of operations or
financial position.
The Company currently, and from time to time, expects to be subject to
claims and suits arising in the ordinary course of business. Except as described
below, the Company is not currently a party to any such proceeding which, in
management's opinion, would have a material effect on the Company's results of
operations or financial position.
The federal government and a number of states are rapidly increasing
24
<PAGE> 25
the resources devoted to investigating allegations of fraud and abuse in the
Medicare and Medicaid programs. At the same time, regulatory and law enforcement
authorities are taking an increasingly strict view of the requirements imposed
on providers by the Social Security Act and Medicare and Medicaid regulations.
Although the Company believes that it is in material compliance with such laws,
a determination that the Company has violated such laws, or even the public
announcement that the Company was being investigated concerning possible
violations, could have a material adverse effect on the Company.
In June 1993, the office of the Inspector General (OIG) of the
Department of Health and Human Services requested information from the Company
in connection with an investigation involving the Company's procedures for
preparing Medicare cost reports. In January 1995, the U.S. Department of Justice
issued a Civil Investigative Demand which also requested information from the
Company in connection with that same investigation. As a part of the
government's investigation, several former and current employees of the Company
were interviewed. The Company cooperated fully with the investigation. The
Company received no communication from the government on this matter from
approximately June 1996 until August 1998.
In August 1998, the government informed the Company that the
investigation was prompted by 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 all owned and managed hospitals of the Company during the period beginning
in 1984 and continuing through 1997. At a meeting to discuss the case, held on
September 24, 1998, the Company learned that the government would likely
commence litigation under the False Claims Act on or about October 5, 1998. In
October 1998, the government filed with the court its election to intervene in
the qui tam lawsuit filed by the former employee under the False Claims Act in
January 1993. In its present form, the complaint in this case presents a large
number of complex factual and legal questions. The Company intends to look for
ways to cooperate with the government in efficiently resolving this litigation.
If appropriate, the Company will try to reach a settlement of this case.
In May 1998, the Company learned that it is a named defendant in a
separate qui tam case when it received a letter from a U.S. Attorney. The
complaint alleges violations of Medicare laws governing the home health
operations at two of the Company's hospitals. The complaint was filed under seal
in June 1996 by a former employee who was discharged by the Company in April
1996. The purpose of the letter from the U.S. Attorney was to allow the Company
an opportunity to evaluate the results of the government's investigation to date
and to discuss with the government the allegations made in the complaint, prior
to the government making a decision as to whether it will intervene as a
plaintiff in the case. The lawsuit remains under seal for all other purposes.
The Company is cooperating fully with the U.S. Attorney's Office. The Company
has responded to requests for documents and made several of its employees
available for interview. If any violation of law is found, the Company intends
to pursue an amicable settlement.
The Company cannot at this time predict the outcome of these cases or
estimate their ultimate impact on the Company's business or operating results.
If the outcome of either case were unfavorable, the Company could
25
<PAGE> 26
be subject to fines, penalties and damages and also could be excluded from
Medicare and other government payment programs. These and other results of these
cases could have a material adverse effect on the Company's financial condition
or results of operations.
On October 23 and November 2, 1998, lawsuits were filed by separate
stockholders in the United States District Court for the Middle District of
Tennessee. In each Complaint, plaintiff seeks to represent a class of plaintiffs
comprised of all individuals who purchased the Company's common stock from
October 25, 1995 through October 21, 1998, exclusive of insiders of the Company
and their immediate families. Both Complaints allege that the defendants
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10(b)(5) promulgated thereunder by recklessly reporting in filings with the
Securities and Exchange Commission and in releases disseminated to the investing
public during the class period financial results that were materially overstated
and that were not presented in accordance with generally accepted accounting
principles. Plaintiffs specifically allege that, as a result of a company-wide
scheme to overbill the Medicare and Medicaid programs, the Company's net
accounts receivable, net operating revenue, net patient service revenue, net
income, and net income per common share during the class period were materially
overstated and were not in compliance with generally accepted accounting
principles. The Company intends to defend vigorously the claims and allegations
in these actions.
On November 2, 1998 a lawsuit was filed against the Company, all of
its current directors and two former directors in the United States District
Court for the Northern District of Alabama. The Complaint asserts four claims:
a shareholders' derivative claim for breach of fiduciary duty, a shareholders'
derivative claim for violations of the Racketeer Influenced and Corrupt
Organizations Act, a shareholders' derivative claim for injunctive relief, and
a purported class action claim for breach of fiduciary duty. As the basis for
each of these claims, plaintiff alleges that the defendants intentionally or
negligently failed to make sure that the Company was in compliance with
applicable Medicare and Medicaid reimbursement laws. All of the defendants plan
to vigorously defend this litigation.
In 1997, the FASB issued SFAS No. 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 prior periods have been restated to
conform to SFAS No. 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
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
26
<PAGE> 27
interest rate swap agreements that qualify as hedges, changes in fair value will
be offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings. The Company will adopt SFAS No. 133 beginning
with its fiscal year ending June 30, 2000 and is presently evaluating the new
standard to determine its effect on the earnings and financial position of the
Company.
INFLATION
The health care industry is labor intensive. Wages and other expenses
increase during periods of inflation and when shortages in marketplaces occur.
In addition, suppliers pass along rising costs to the Company in the form of
higher prices. The Company has generally been able to offset increases in
operating costs by increasing charges, expanding services and implementing cost
control measures to curb increases in operating costs and expenses. The Company
cannot predict its ability to offset or control future cost increases.
27
<PAGE> 28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In June 1993, the Office of the Inspector General (OIG) of the
Department of Health and Human Services requested information from the Company
in connection with an investigation involving the Company's procedures for
preparing Medicare cost reports. In January 1995, the U.S. Department of Justice
issued a Civil Investigative Demand which also requested information from the
Company in connection with that same investigation. As a part of the
government's investigation, several former and current employees of the Company
were interviewed. The Company cooperated fully with the investigation. The
Company received no communication from the government on this matter from
approximately June 1996 until August 1998.
In August 1998, the government informed the Company that the
investigation was prompted by 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 all owned and managed hospitals of the Company during the period beginning
in 1984 and continuing through 1997. At a meeting to discuss the case, held on
September 24, 1998, the Company learned that the government would likely
commence litigation under the False Claims Act on or about October 5, 1998. In
October 1998, the government filed with the court its election to intervene in
the qui tam lawsuit filed by the former employee under the False Claims Act in
January 1993. In its present form, the complaint in this case presents a large
number of complex factual and legal questions. The Company intends to look for
ways to cooperate with the government in efficiently resolving this Litigation.
If appropriate, the Company will try to reach a settlement of this case.
In May 1998, the Company learned that it is a named defendant in a
separate qui tam case when it received a letter from a U.S. Attorney. The
complaint alleges violations of medicare laws governing the home health
operations at two of the Company's hospitals. The complaint was filed under seal
in June 1996 by a former employee who was discharged by the Company in April
1996. The purpose of the letter from the U.S. Attorney was to allow the Company
an opportunity to evaluate the results of the government's investigation to date
and to discuss with the government the allegations made in the complaint, prior
to the government making a decision as to whether it will intervene as a
plaintiff in the case. The lawsuit remains under seal for all other purposes.
The Company is cooperating fully with the U.S. Attorney's Office. The Company
has responded to requests for documents and made several of its employees
available for interview. If any violation of the law is found, the Company
intends to pursue an amicable settlement.
The Company cannot at this time predict the outcome of these cases or
estimate their ultimate impact on the Company's business or operating results.
If the outcome of either case were unfavorable, the Company could be subject to
fines, penalties and damages and also could be excluded from Medicare and other
government reimbursement programs. These and other results of these cases could
have a material adverse effect on the Company's financial condition or results
of operations.
On October 23 and November 2, 1998, lawsuits were filed by separate
stockholders in the United States District Court for the Middle District of
Tennessee. In each complaint, plaintiff seeks to represent a class of plaintiffs
comprised of all individuals who purchased the Company's Common Stock from
October 25, 1995 through October 21, 1998, exclusive of insiders of the Company
and their immediate families. Both complaints allege that the defendants
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10(b)(5) promulgated thereunder by recklessly reporting in filings with the
Securities and Exchange Commission and in releases disseminated to the investing
public during the class period financial results that were materially overstated
and that were not presented in accordance with generally accepted accounting
principles. Plaintiffs specifically allege that, as a result of a company-wide
scheme to overbill the Medicare and Medicaid programs, the Company's net
accounts receivable, net operating revenue, net patient service revenue, net
income and net income per common share during the class period were materially
overstated and were not in compliance with generally accepted accounting
principles. The Company intends to defend vigorously against the claims and
allegations in these actions.
On November 2, 1998 a lawsuit was filed against the Company, all of
its current directors and two former directors in the United States District
Court for the Northern District of Alabama. The Complaint asserts four claims:
a shareholders' derivative claim for breach of fiduciary duty, a shareholders'
derivative claim for violations of the Racketeer Influenced and Corrupt
Organizations Act, a shareholders' derivative claim for injunctive relief, and
a purported class action claim for breach of fiduciary duty. As the basis for
each of these claims, plaintiff alleges that the defendants intentionally or
negligently failed to make sure that the Company was in compliance with
applicable Medicare and Medicaid reimbursement laws. All of the defendants plan
to vigorously defend this litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits filed as part of this Report are listed in
the Index to Exhibits immediately following the signature page.
(b) Reports on Form 8-K. A Report on Form 8-K was filed with the
Commission on August 28, 1998, to report that the Company had been authorized by
its Board of Directors to repurchase up to 3 million shares of the Company's
Common Stock. A copy of the related press release dated August 26, 1998, was
filed as an exhibit to the Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUORUM HEALTH GROUP, INC.
Date: November 13, 1998 By: /s/ Steve B. Hewett
--------------------------------
Steve B. Hewett
Vice President (Chief
Financial Officer)
<PAGE> 29
Exhibit Index
Exhibit No.
- - -----------
27 Financial Data Schedule (for SEC use only)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1998 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER
30, 1998 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 11,604
<SECURITIES> 0
<RECEIVABLES> 359,995
<ALLOWANCES> 70,078
<INVENTORY> 31,197
<CURRENT-ASSETS> 403,275
<PP&E> 899,211
<DEPRECIATION> 220,408
<TOTAL-ASSETS> 1,582,203
<CURRENT-LIABILITIES> 184,566
<BONDS> 659,566
0
0
<COMMON> 757
<OTHER-SE> 649,336
<TOTAL-LIABILITY-AND-EQUITY> 1,582,203
<SALES> 0
<TOTAL-REVENUES> 389,361
<CGS> 0
<TOTAL-COSTS> 288,673
<OTHER-EXPENSES> 21,899
<LOSS-PROVISION> 27,796
<INTEREST-EXPENSE> 9,133
<INCOME-PRETAX> 41,860
<INCOME-TAX> 16,367
<INCOME-CONTINUING> 25,493
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,493
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.33
</TABLE>
