<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 March 31, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
----- -----
----------
Commission file number 33-31717-A
----------
QUORUM HEALTH GROUP, INC.
(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 May 8, 1998
- ----- --------------------------
Common Stock, $.01 Par Value 75,362,713 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 MARCH 31
---------------------------
1998 1997
--------- --------
<S> <C> <C>
Revenue:
Net patient service revenue $ 361,630 $340,958
Hospital management/professional services 19,852 20,125
Reimbursable expenses 16,838 16,013
--------- --------
Net operating revenue 398,320 377,096
Salaries and benefits 159,485 146,491
Reimbursable expenses 16,838 16,013
Supplies 52,925 53,926
Fees 35,585 32,848
Other operating expenses 31,837 31,769
Provision for doubtful accounts 24,670 25,010
Equity in earnings of affiliates (2,038) --
Depreciation and amortization 21,792 19,003
Interest 9,211 11,794
Minority interest 769 301
Write-down of assets 22,850 --
--------- --------
Income before income taxes 24,396 39,941
Provision for income taxes 10,759 15,857
--------- --------
Net income $ 13,637 $ 24,084
========= ========
Net income per common share:
Basic $ 0.18 $ 0.33
========= ========
Diluted $ 0.18 $ 0.32
========= ========
Weighted average common shares :
Basic 74,933 73,568
========= ========
Diluted 77,241 75,920
========= ========
</TABLE>
See accompanying notes.
2
<PAGE> 3
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH 31
---------------------------
1998 1997
--------- --------
<S> <C> <C>
Revenue:
Net patient service revenue $1,092,250 $ 931,814
Hospital management/professional services 59,291 58,317
Reimbursable expenses 48,495 45,103
--------- ---------
Net operating revenue 1,200,036 1,035,234
Salaries and benefits 478,028 408,377
Reimbursable expenses 48,495 45,103
Supplies 162,935 145,126
Fees 107,451 91,738
Other operating expenses 98,419 86,058
Provision for doubtful accounts 84,555 66,589
Equity in earnings of affiliates (2,038) --
Depreciation and amortization 65,853 55,111
Interest 30,439 34,222
Minority interest 2,746 558
Write-down of assets 22,850 --
--------- ---------
Income before income taxes 100,303 102,352
Provision for income taxes 40,894 40,634
--------- ---------
Net income $ 59,409 $ 61,718
========= =========
Net income per common share:
Basic $ 0.80 $ 0.84
========= =========
Diluted $ 0.77 $ 0.82
========= =========
Weighted average common shares:
Basic 74,514 73,251
========= =========
Diluted 76,895 75,449
========= =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,039 $ 19,008
Accounts receivable, less allowance for doubtful
accounts of $67,397 at March 31, 1998
and $55,360 at June 30, 1997 283,077 248,732
Supplies 31,456 31,622
Other 59,624 31,739
---------- ----------
Total current assets 380,196 331,101
Property, plant and equipment, at cost:
Land 69,466 62,109
Buildings and improvements 314,334 324,450
Equipment 483,022 462,726
Construction in progress 65,281 21,192
---------- ----------
932,103 870,477
Less accumulated depreciation 220,335 183,705
---------- ----------
711,768 686,772
Cost in excess of net assets acquired, net 138,388 185,932
Unallocated purchase price 33,006 7,831
Investments in affiliates 172,640 9,751
Other 54,847 57,604
---------- ----------
Total assets $1,490,845 $1,278,991
========== ==========
</TABLE>
4
<PAGE> 5
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30
1998 1997
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 83,527 $ 77,225
Accrued salaries and benefits 66,487 61,936
Other current liabilities 8,653 9,589
Current maturities of long-term debt 933 1,869
---------- ----------
Total current liabilities 159,600 150,619
Long-term debt, less current maturities 662,442 519,940
Deferred income taxes 23,422 38,249
Other liabilities and deferrals 27,229 25,450
Minority interests in consolidated entities 26,972 26,618
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value;
300,000 shares authorized; 75,272
issued and outstanding at March 31,
1998 and 74,137 at June 30, 1997 753 741
Additional paid-in capital 286,336 272,692
Retained earnings 304,091 244,682
---------- ----------
591,180 518,115
---------- ----------
Total liabilities and stockholders' equity $1,490,845 $1,278,991
========== ==========
</TABLE>
See accompanying notes.
5
<PAGE> 6
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH 31
----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 85,738 $ 119,636
Investing activities:
Purchase of acquired companies (141,357) (170,877)
Purchase of property, plant and equipment (105,726) (51,117)
Proceeds from sale of assets 14,695 --
Purchase of asset held for sale (11,000) --
Other (4,052) 1,592
--------- ---------
Net cash used in investing activities (247,440) (220,402)
Financing activities:
Borrowings under bank debt 391,500 268,000
Repayments of bank debt (248,400) (179,000)
Proceeds from issuance of common stock, net 10,654 8,245
Other (5,021) (2,583)
--------- ---------
Net cash provided by financing activities 148,733 94,662
--------- ---------
Decrease in cash and cash equivalents (12,969) (6,104)
Cash and cash equivalents at beginning of period 19,008 20,382
--------- ---------
Cash and cash equivalents at end of period $ 6,039 $ 14,278
========= =========
Supplemental cash flow information:
Interest paid $ (29,410) $ (26,173)
========= =========
Income taxes paid $ (55,558) $ (36,338)
========= =========
</TABLE>
See accompanying notes.
6
<PAGE> 7
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months and nine months ended
March 31, 1998, are not necessarily indicative of the results that may be
expected for the year ending June 30, 1998. 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, 1997. Certain
reclassifications have been made to the fiscal 1997 financial presentation to
conform with fiscal 1998.
2. NEWLY ISSUED ACCOUNTING STANDARDS
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 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 in order to determine its effect, if any, on the way the
Company might report its operations in the future.
3. ACQUISITIONS AND DIVESTITURES
During the nine months ended March 31, 1998, the Company acquired two hospitals
and affiliated health care entities and sold its remaining interest in a
Nebraska hospital. In addition, the Company and Universal Health Services, Inc.
(UHS) formed Valley Health System LLC and Summerlin Hospital Medical Center LLC
in Las Vegas, Nevada. UHS contributed Valley Hospital Medical Center and the
Company contributed Desert Springs Hospital in exchange for equity interests of
72.5% and 27.5%, respectively, in Valley Health System LLC. The Company paid
approximately $23 million in exchange for a 26.1% interest in Summerlin Hospital
Medical Center LLC. The Company recorded a $15 million charge after taxes
related to the write-down of goodwill. There will be working capital settlements
to maintain the respective ownership interests of each party. During
7
<PAGE> 8
the nine months ended March 31, 1997, the Company acquired four hospitals and
affiliated health care entities. Hospital and affiliated business acquisitions
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
MARCH 31
----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Fair value of assets acquired $ 155,080 $ 206,273
Fair value of liabilities assumed (13,723) (21,675)
Contributions from minority investors -- (13,721)
--------- ---------
Net cash used for acquisitions $ 141,357 $ 170,877
========= =========
</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 based upon available
information and is subject to further refinement. The operating results of the
acquired entities have been included in the accompanying condensed 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 in fiscal 1998 and 1997 as if
the respective transactions had occurred at the beginning of the periods
presented (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31 MARCH 31
------------------------------ -----------------------------------
1998 1997 1998 1997
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Net operating revenue $ 393,742 $ 373,165 $ 1,164,929 $ 1,090,743
Net income 27,382 21,683 71,150 59,086
Net income per common share:
Basic .37 .29 .95 .81
Diluted .35 .28 .93 .78
</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.
4. LONG-TERM DEBT
On December 15, 1997, the Company redeemed its remaining $2.2 million 11.875%
Senior Subordinated Notes at 1.05875%.
8
<PAGE> 9
5. STOCKHOLDERS' EQUITY AND STOCK BENEFIT PLANS
On August 19, 1997, 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 to give effect to the stock dividend for all periods
presented.
On November 10, 1997, 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. The additional shares of common stock are identical to the shares
of common stock previously authorized.
On November 10, 1997, the Company's stockholders approved an amendment to the
Company's qualified employee stock purchase plan to increase the number of
shares reserved for issuance from 3,000,000 to 3,750,000.
On November 10, 1997, the Company's stockholders approved the 1997 Stock Option
Plan. Under the plan, non-qualified and incentive stock options to purchase
common stock may be granted to executive officers, other key employees and
consultants. 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 Restated
Stock Option Plan.
6. NET INCOME PER COMMON SHARE
In 1997, the FASB issued SFAS No. 128, "Earnings per Share." Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted earnings per
share:
9
<PAGE> 10
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31 MARCH 31
----------------------- -----------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income $13,637 $24,084 $59,409 $61,718
======= ======= ======= =======
Denominator:
Basic earnings per share -
weighted-average shares 74,933 73,568 74,514 73,251
Effect of dilutive stock options 2,308 2,352 2,381 2,198
------- ------- ------- -------
Diluted earnings per share -
adjusted weighted-average shares 77,241 75,920 76,895 75,449
======= ======= ======= =======
Basic earnings per share $ 0.18 $0.33 $ 0.80 $ 0.84
======= ======= ======= =======
Diluted earnings per share $ 0.18 $0.32 $ 0.77 $ 0.82
======= ======= ======= =======
</TABLE>
7. LEASES
On November 26, 1997, 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. 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 Company's revolving
line of credit. All lease payments under the agreement are guaranteed by the
Company. In connection with the ELLF, the Company amended its unsecured
revolving line of credit to extend the credit agreement expiration date by six
months to November 26, 2002 to coincide with the expiration date of the ELLF. At
March 31, 1998, $23.7 million was outstanding under the ELLF agreement.
8. INCOME TAXES
The income tax provision recorded for the three months and nine months ended
March 31, 1998 and 1997 differs from the expected income tax provision due to
permanent differences and the provision for state income taxes.
9. CONTINGENCIES
Management continually evaluates contingencies based on the best available
evidence and believes that adequate provision for losses has been provided to
the extent necessary. In the opinion of management, the ultimate resolution of
the following contingencies will not have a material effect on the Company's
results of operations or financial position.
10
<PAGE> 11
Litigation
The Company currently, and from time to time, is expected to be subject to
claims and suits arising in the ordinary course of business.
Net Patient Service Revenue
Final determination of amounts earned under the Medicare and Medicaid programs
often occurs in subsequent years because of audits by the programs, rights of
appeal and the application of numerous technical provisions.
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 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.
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. In fiscal 1997, the Company amended its 1993 interest rate swap
agreements to effectively convert two borrowings of $50 million each from
fixed-rate to floating-rate through September 2001 and December 2001,
respectively. In addition, the Company entered into interest rate swap
agreements which effectively convert $100 million and $200 million of
floating-rate borrowings to fixed-rate borrowings. During the nine months ended
March 31, 1998, the Company entered into interest rate swap agreements which
effectively convert two borrowings of $50 million each from floating-rate to
fixed-rate through December 2002 and allows the counterparty of one agreement a
one-time option at the end of the initial term to extend the swap for an
incremental five years. In addition, the Company replaced its existing $100
million and $200 million interest rate swap agreements with new five year
agreements, effective March 1998, to allow the Company to convert $100 million
and $200 million of floating-rate borrowings to fixed-rate borrowings and allow
the counterparty a one-time option at the end of the initial term to extend the
swaps for an incremental five years. For the nine months ended March 31, 1998
and 1997, the Company received a weighted average rate of 5.9% and 5.8%,
respectively, and paid a weighted average rate of 6.1% and 5.6%, respectively.
Other
In June 1993, the Office of the Inspector General (OIG) of the Department of
Health and Human Services requested information from the Company in connection
with an investigation involving the
11
<PAGE> 12
Company's procedures for preparing Medicare cost reports. In January 1995, the
U.S. Department of Justice issued a Civil Investigative Demand which also
requested information from the Company in connection with that same
investigation. As a part of the government's investigation, several former and
current employees of the Company have been interviewed. The Company has provided
information and is cooperating fully with the investigation. The Company cannot
predict whether the government will commence litigation regarding this matter.
10. SUBSEQUENT EVENTS
Effective May 1, 1998, the Company and Columbia/HCA Healthcare Corp. (Col/HCA)
formed Macon Healthcare LLC. Col/HCA contributed Coliseum Medical Centers and
Coliseum Psychiatric Center while the Company contributed Macon Northside
Hospital and Middle Georgia Hospital in exchange for equity interests of 62% and
38%, respectively, in the joint venture. There will be working capital
settlements to maintain the respective ownership interests of each party. The
Company will account for its investment in the joint venture using the equity
method of accounting.
On May 7, 1998, the Company learned that it is a named defendant in a 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, and the Company
cannot at this time predict the outcome of the case or its ultimate impact on
the Company's business or operating results. If the outcome were unfavorable,
the Company could be subject to fines, penalties and damages and also could be
excluded from Medicare and other government reimbursement programs which could
have a material adverse effect on the Company's financial condition or results
of operations.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
IMPACT OF ACQUISITIONS
During the nine months ended March 31, 1998, the Company acquired two
hospitals and affiliated health care entities and sold its remaining interest in
a Nebraska hospital. In addition, the Company and Universal Health Services,
Inc. (UHS) formed Valley Health System LLC and Summerlin Hospital Medical Center
LLC in Las Vegas, Nevada. UHS contributed Valley Hospital Medical Center and the
Company contributed Desert Springs Hospital in exchange for equity interests of
72.5% and 27.5%, respectively, in Valley Health System LLC. The Company paid
approximately $23 million in exchange for a 26.1% interest in Summerlin Hospital
Medical Center LLC. The Company accounts for its investment in the joint venture
using the equity method of accounting, and accordingly, the Company's net
investment is included in "Investment in affiliates" and the Company's share of
the Las Vegas operations is included as "Equity in earnings." The Company
recorded a $15 million charge after taxes related to the write-down of goodwill.
During fiscal 1997, the Company acquired five hospitals and affiliated health
care entities (four during the nine months ended March 31, 1997) and sold a
minority interest in a hospital.
Because of the financial impact of the Company's recent acquisitions
and divestitures, it is difficult to make meaningful comparisons between the
Company's financial statements for the fiscal periods 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 one
to three year 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. As the Company makes additional hospital acquisitions, the Company
expects that this effect will be mitigated by the expanded financial base of
existing hospitals.
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 March 31, 1998 include three months
of operations for eighteen hospitals and partial periods for the Las Vegas
exchange and the hospital acquired during such period. The results of the owned
hospitals for the three months ended March 31, 1997 include three months of
operations for eighteen hospitals. The results of the owned hospitals for the
nine months ended March 31, 1998 include nine
13
<PAGE> 14
months of operations for seventeen hospitals and partial periods for the
hospital divested, the Las Vegas exchange and two hospitals acquired during such
period. The results of the owned hospitals for the nine months ended March 31,
1997 include nine months of operations for fifteen hospitals and a partial
period for three hospitals acquired during such period.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
March 31 March 31
-------------------------- ------------------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Number of hospitals at end of period 19 18 19 18
Licensed beds at end of period 4,188 4,113 4,188 4,113
Beds in service at end of period 3,420 3,421 3,420 3,421
Admissions 32,995 31,969 98,411 87,590
Average length of stay (days) 5.7 5.8 5.5 5.6
Patient days 187,185 184,098 545,627 491,622
Adjusted patient days 308,690 284,598 899,577 766,620
Occupancy rates (average licensed beds) 50.5% 49.7% 47.2% 46.9%
Occupancy rates (average beds in service) 61.6% 59.7% 57.2% 56.7%
Gross inpatient revenues (in thousands) $390,051 $394,591 $1,181,082 $1,062,398
Gross outpatient revenues (in thousands) $253,198 $215,339 $ 766,171 $ 594,272
</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.
14
<PAGE> 15
<TABLE>
<CAPTION>
Three Months Percentage
Ended Increase
March 31 (Decrease)
--------------------- of Dollar
1998 1997 Amounts
----- ----- ---------
<S> <C> <C> <C>
Net operating revenue 100.0% 100.0% 5.6%
Operating expenses (1) 80.7 81.2 5.0
Equity in earnings of affiliates (.5) -- (100.0)
----- ----- -----
EBITDA (2) 19.8 18.8 11.2
Depreciation and amortization 5.5 5.0 14.7
Interest 2.3 3.1 (21.9)
Minority interest .2 .1 155.5
Write-down of assets 5.7 -- 100.0%
----- ----- -----
Income before income taxes 6.1 10.6 (38.9)
Provision for income taxes 2.7 4.2 (32.1)
----- ----- -----
Net income 3.4% 6.4% (43.4)%
===== ----- =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Percentage
Ended Increase
March 31 (Decrease)
--------------------- of Dollar
1998 1997 Amounts
----- ----- -----
<S> <C> <C> <C>
Net operating revenue 100.0% 100.0% 15.9%
Operating expenses (1) 81.7 81.4 16.2
Equity in earnings of affiliates (.2) -- (100.0)
----- ----- -----
EBITDA (2) 18.5 18.6 15.6
Depreciation and amortization 5.5 5.3 19.5
Interest 2.5 3.3 (11.1)
Minority interest .2 .1 392.1
Write-down of assets 1.9 -- 100.0
----- ----- -----
Income before income taxes 8.4 9.9 (2.0)
Provision for income taxes 3.4 3.9 .6
----- ----- -----
Net income 5.0% 6.0% (3.7)%
===== ===== =====
</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. 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.
15
<PAGE> 16
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
The Company's net operating revenue was $398.3 million for the three
months ended March 31, 1998, compared to $377.1 million for the comparable
period of fiscal 1997, an increase of $21.2 million or 5.6%. This increase was
attributable to, among other things, three hospital acquisitions, a 7.4%
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 settlements with third-party
payors, and a 1.5% increase in management services revenue. These increases were
partially offset by a reduction in net revenue due to the divestiture of the
Nebraska hospital and the Las Vegas exchange, which is accounted for by the
equity method.
Operating expenses as a percent of net operating revenue decreased to
80.7% for the three months ended March 31, 1998 from 81.2% for the three months
ended March 31, 1997 which was primarily attributable to decreased supplies, bad
debt and other expenses. Operating expenses as a percentage of net operating
revenue for the Company's owned hospitals decreased to 81.2% for the three
months ended March 31, 1998 from 81.7% for the three months ended March 31,
1997. For the Company's hospitals owned during both periods, operating expenses
as a percentage of net operating revenue decreased to 80.5% for the three months
ended March 31, 1998 from 82.6% for the three months ended March 31, 1997.
Equity in earnings of affiliates, which was primarily attributable to the Las
Vegas operations, represented 0.5% of the Company's net operating revenue for
the three months ended March 31, 1998.
EBITDA as a percent of net operating revenue was 19.8% for the three
months ended March 31, 1998 compared to 18.8% for the three months ended March
31, 1997. EBITDA as a percent of net operating revenue for the Company's owned
hospitals was 19.4% for the three months ended March 31, 1998 compared to 18.3%
for the three months ended March 31, 1997. EBITDA as a percent of net operating
revenue for the Company's hospitals owned during both periods was 19.5% for the
three months ended March 31, 1998 compared to 17.4% for the three months ended
March 31, 1997. EBITDA as a percent of net operating revenue for the Company's
management services business was 24.5% for the three months ended March 31, 1998
compared to 24.3% for the three months ended March 31, 1997.
Depreciation and amortization expense as a percent of net operating
revenue increased to 5.5% for the three months ended March 31, 1998 from 5.0%
for the three months ended March 31, 1997 primarily due to the completion of
various construction and renovation projects. Interest expense as a percent of
net operating revenue decreased to 2.3% for the three months ended March 31,
1998 from 3.1% for the three months ended March 31, 1997 primarily due to the
impact of IRS examinations, the replacement of subordinated debt with bank debt
in fiscal 1997, a reduction in interest rates and repayments of bank debt with
cash flow generated from
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<PAGE> 17
operations. Minority interest expense as a percent of net operating revenue
increased to 0.2% for the three months ended March 31, 1998 from 0.1% for the
three months ended March 31, 1997 which was primarily attributable to the fiscal
1997 acquisitions. Write-down of assets of $22.8 million is due to the
write-down of goodwill at Desert Springs Hospital. The provision for income
taxes as a percent of net operating revenue was 2.7% for the three months ended
March 31, 1998. Excluding the write-down of assets, the provision for income
taxes as a percent of net operating revenue increased to 4.7% from 4.2% for the
three months ended March 31, 1997, which was attributable to the increase in
pretax income.
Net income as a percent of net operating revenue was 3.4% for the three
months ended March 31, 1998. Excluding the write-down of assets, net income as a
percent of net operating revenue was 7.2% for the three months ended March 31,
1998 compared to 6.4% for the three months ended March 31, 1997.
Nine Months Ended March 31, 1998 compared to Nine Months Ended March 31,
1997
The Company's net operating revenue was $1,200.0 million for the nine
months ended March 31, 1998 compared to $1,035.2 million for the comparable
period of fiscal 1997, an increase of $164.8 million or 15.9%. This increase was
attributable to, among other things, six hospital acquisitions, an 8.3% increase
in revenue generated by hospitals owned during both periods, including
additional revenues from settlements with third-party payors, and a 4.2%
increase in management services revenue. These increases were partially offset
by a reduction in net revenue due to the divestiture of the Nebraska hospital
and the Las Vegas exchange.
Operating expenses as a percent of net operating revenue increased to
81.7% for the nine months ended March 31, 1998 from 81.4% for the nine months
ended March 31, 1997 which was primarily attributable to the fiscal 1997 and
1998 acquisitions and an increase in bad debt expense. Operating expenses as a
percentage of net operating revenue for the Company's owned hospitals increased
to 82.2% for the nine months ended March 31, 1998 from 81.8% for the nine months
ended March 31, 1997. For the Company's hospitals owned during both periods,
operating expenses as a percentage of net operating revenue decreased to 81.1%
for the nine months ended March 31, 1998 from 81.5% for the nine months ended
March 31, 1997 which was primarily attributable to decreases in supplies. Equity
in earnings of affiliates, which was primarily attributable to the Las Vegas
operations, represented 0.2% of the Company's net operating revenue for the nine
months ended March 31, 1998.
EBITDA as a percent of net operating revenue was 18.5% for the nine
months ended March 31, 1998 compared to 18.6% for the nine months ended March
31, 1997. EBITDA as a percent of net operating revenue for the Company's owned
hospitals was 18.0% for the nine months ended March 31, 1998 compared to 18.2%
for the nine months ended March 31, 1997. EBITDA
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<PAGE> 18
as a percent of net operating revenue for the Company's hospitals owned during
both periods was 18.9% for the nine months ended March 31, 1998 compared to
18.5% for the nine months ended March 31, 1997. EBITDA as a percent of net
operating revenue for the Company's management services business was 24.1% for
the nine months ended March 31, 1998 compared to 22.3% for the nine months ended
March 31, 1997.
Depreciation and amortization expense as a percent of net operating
revenue increased to 5.5% for the nine months ended March 31, 1998 from 5.3% for
the nine months ended March 31, 1997. Interest expense as a percent of net
operating revenue decreased to 2.5% for the nine months ended March 31, 1998
from 3.3% for the nine months ended March 31, 1997 due to the impact of IRS
examinations, the replacement of subordinated debt with bank debt in fiscal
1997, a reduction in interest rates and repayments of bank debt with cash flow
generated from operations. Minority interest expense as a percent of net
operating revenue increased to 0.2% for the nine months ended March 31, 1998
from 0.1% for the nine months ended March 31, 1997 which was primarily
attributable to the fiscal 1997 acquisitions. Write-down of assets of $22.8
million is due to the write-down of goodwill at Desert Springs Hospital. The
provision for income taxes as a percent of net operating revenue was 3.4% for
the nine months ended March 31, 1998. Excluding the write-down of assets, the
provision for income taxes as a percent of net operating revenue increased to
4.1% from 3.9% for the nine months ended March 31, 1997, which was attributable
to the increase in pretax income.
Net income as a percent of net operating revenue was 5.0% for the nine
months ended March 31, 1998. Excluding the write-down of assets, net income as a
percent of net operating revenue was 6.2% compared to 6.0% for the nine months
ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of $220.6 million,
including cash and cash equivalents of $6.0 million. The ratio of current assets
to current liabilities was 2.4 to 1.0 at March 31, 1998 compared to 2.2 to 1.0
at June 30, 1997.
The Company's cash requirements excluding acquisitions have
historically been funded by cash generated from operations. Cash generated from
operations was $85.7 million and $119.6 million for the nine months ended March
31, 1998 and 1997, respectively. The decrease is primarily due to an increase in
current year tax payments, payments related to the IRS examinations and accounts
receivable at three hospitals, which the Company is addressing.
Capital expenditures excluding acquisitions for the nine months ended
March 31, 1998 and 1997 were $105.7 million and $51.1 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 in Florence,
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<PAGE> 19
South Carolina with fiscal 1998 capital expenditures of up to $60 million and a
total project cost of approximately $85 million. In fiscal 1998, the Company
expects to make capital expenditures from $130 million to $150 million,
including the replacement hospital and excluding acquisitions.
Effective May 1, 1998, the Company and Columbia/HCA Healthcare Corp.
(Col/HCA) formed Macon Healthcare LLC. Col/HCA contributed Coliseum Medical
Centers and Coliseum Psychiatric Center while the Company contributed Macon
Northside Hospital and Middle Georgia Hospital in exchange for equity interests
of 62% and 38%, respectively, in the joint venture. There will be working
capital settlements to maintain the respective ownership interests of each
party. The Company will account for its investment in the joint venture using
the equity method of accounting.
During the nine months ended March 31, 1998, the Company acquired two
hospitals and affiliated health care entities for approximately $141.4 million
and sold its remaining interest in a Nebraska hospital. In addition, the Company
and Universal Health Services, Inc. (UHS) formed Valley Health System LLC and
Summerlin Hospital Medical Center LLC. UHS contributed Valley Hospital Medical
Center and the Company contributed Desert Springs Hospital and paid
approximately $23 million. There will be working capital settlements to maintain
the respective ownership interests of each party. 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.
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 healthcare 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. At March 31, 1998, the Company had $507.0
million outstanding under its Revolving Line of Credit.
On November 26, 1997, 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. 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 Company's
revolving line of credit. All lease payments under the agreement are guaranteed
by the Company. In connection with the ELLF, the Company amended its unsecured
revolving line of credit to extend the credit agreement expiration date by six
months to November 26, 2002 to coincide with the expiration date of the ELLF. At
March 31, 1998, $23.7 million was outstanding under the ELLF agreement.
On December 15, 1997, the Company redeemed its remaining $2.2 million
11.875% Senior Subordinated Notes at 1.05875%.
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<PAGE> 20
On August 19, 1997, the Board of Directors approved a three-for-two
stock split effected in the form of a stock dividend payable on or about
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 to give effect to the stock
dividend for all periods presented.
On November 10, 1997, 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. The additional shares of common stock are identical to the shares
of common stock previously authorized.
On November 10, 1997, the Company's stockholders approved an amendment
to the Company's qualified employee stock purchase plan to increase the number
of shares reserved for issuance from 3,000,000 to 3,750,000.
On November 10, 1997, the Company's stockholders approved the 1997
Stock Option Plan. Under the plan, non-qualified and incentive stock options to
purchase common stock may be granted to executive officers, other key employees
and consultants. 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
Restated Stock Option Plan.
The Internal Revenue Service 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.
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. In fiscal 1997, the Company amended its 1993 interest rate swap
agreements to effectively convert two borrowings of $50 million each from
fixed-rate to floating-rate through September, 2001 and December, 2001,
respectively. In addition, the Company entered into interest rate swap
agreements which effectively convert $100 million and $200 million of
floating-rate borrowings to fixed-rate borrowings. During the nine months ended
March 31, 1998, the Company entered into interest rate swap agreements which
effectively convert two borrowings of $50 million each from floating-rate to
fixed-rate through December, 2002 and allows the counterparty of one agreement a
one-time option at the end of the initial term to extend the swap for an
incremental five years. In
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<PAGE> 21
addition, the Company replaced its existing $100 million and $200 million
interest rate swap agreements with new five year agreements, effective March
1998, to allow the Company to convert $100 million and $200 million of
floating-rate borrowings to fixed-rate borrowings and allow the counterparty a
one-time option at the end of the initial term to extend the swaps for an
incremental five years. For the nine months ended March 31, 1998 and 1997, the
Company received a weighted average rate of 5.9% and 5.8%, respectively, and
paid a weighted average rate of 6.1% and 5.6%, respectively.
In June 1993, the OIG of the Department of Health and Human Services
requested information from the Company in connection with an investigation
involving the Company's procedures for preparing Medicare cost reports. In
January 1995, the U.S. Department of Justice issued a Civil Investigative Demand
which also requested information from the Company in connection with that same
investigation. As a part of the government's investigation, several former and
current employees of the Company have been interviewed. The Company has provided
information and is cooperating fully with the investigation. The Company cannot
predict whether the government will commence litigation regarding this matter.
Management believes that any claims likely to be asserted by the government as a
result of its investigation would not have a material effect on the Company's
results of operations or financial position.
On May 7, 1998, the Company learned that it is a named defendant in a
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, and the Company
cannot at this time predict the outcome of the case or its ultimate impact on
the Company's business or operating results. If the outcome were unfavorable,
the Company could be subject to fines, penalties and damages and also could be
excluded from Medicare and other government reimbursement programs which could
have a material adverse effect on the Company's financial condition or results
of operations.
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
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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 in order to determine its
effect, if any, on the way the Company might report its operations in the
future.
In 1997, the FASB issued SFAS No. 128, "Earnings per Share." Statement
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is similar to
the previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented to conform to the Statement 128
requirements.
YEAR 2000 ISSUES
As with most other industries, hospitals and health care systems use
information systems that may misidentify dates beginning January 1, 2000. This
could result in system or equipment failures or miscalculations. In addition to
the impact on the Company's computer programs and building infrastructure
components, the Company may also experience malfunctions with computer-aided
biomedical equipment used in patient care.
The Company has a Year 2000 strategy that includes phases for
education, inventory and assessment of applications at risk, analysis and
planning, testing, conversion/remediation/replacement and post-implementation.
With respect to the Company's core information systems, the Company has
completed its inventory and assessment and has determined that all but three
hospitals require only one upgrade to become Year 2000 compliant, which is
scheduled for completion in fiscal 1999. The remaining three hospitals are
scheduled to convert in fiscal 1999 to new information systems which will be
Year 2000 compliant. The Company is in the inventory and assessment phase of its
analysis of other systems, such as biomedical equipment, building infrastructure
components (elevators, HVAC, etc.) and systems that interface with the core
information systems.
The costs for upgrades and conversions of core information systems are
included in the Company's existing budget. The Company is not able to reasonably
estimate the costs to be incurred for the review and modification of the medical
equipment and infrastructure elements at this time.
The Company can provide no assurances that applications the Company
believes to be Year 2000 compliant will not experience difficulties, that
companies on which the Company relies will resolve all Year 2000 issues on a
timely basis or that the Company will not experience difficulties obtaining
resources needed to make modifications to the Company's systems. Consequently,
the Company can give no assurances that issues related to
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<PAGE> 23
Year 2000 will not have a material adverse effect on the Company.
GENERAL
The federal Medicare program and state Medicaid programs accounted for
approximately 55% and 56% of gross patient service revenue for the years ended
June 30, 1997 and 1996, respectively. The payment rates under the Medicare
program for inpatients are prospective, based upon the diagnosis of a patient.
The payment rate increases have historically been less than actual inflation.
Federal and state legislators are continuing to scrutinize the health
care industry for the purpose of reducing health care costs. While the Company
is unable to predict what, if any, future health reform legislation may be
enacted at the federal or state level, the Company expects continuing pressure
to limit expenditures by governmental health care programs. Under the Balanced
Budget Act of 1997 (the 1997 Act), there are no increases in the rates paid to
acute care hospitals for inpatient care through September 30, 1998. Payments for
Medicare outpatient services provided at acute care hospitals, home health
services and skilled nursing facility services historically have been paid based
on costs, subject to certain limits. The 1997 Act requires that the payment for
those services be converted to a prospective payment system, which will be
phased in over various periods, beginning June 30, 1998. The 1997 Act also
includes a managed care option which could direct Medicare patients to only
managed care providers. 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 is continuing to experience an increase in managed care.
States, insurance companies and employers are actively negotiating amounts paid
to hospitals, which are typically lower than their standard rates. The trend
toward managed care, including health maintenance organizations, preferred
provider organizations and various other forms of managed care, may adversely
affect hospitals' ability, including the Company's hospitals, to maintain their
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
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<PAGE> 24
hospitals was approximately 39.3% and 35.9% of gross patient service revenue for
the nine months ended March 31, 1998 and 1997, respectively.
The complexity of the Medicare and Medicaid regulations, increases in
managed care, hospital personnel turnover, 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.
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.
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. 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 for the nine months ended March 31, 1998 compared to 90% for
the nine months ended March 31, 1997. Carolinas Hospital System, Flowers
Hospital, Gadsden Regional Medical Center, Lutheran Hospital of Indiana and Mary
Black Hospital accounted for approximately 50% of the Company's owned hospital
revenue for the nine months ended March 31, 1998.
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.
INFLATION
The health care industry is labor intensive. Wages and other expenses
increase during periods of inflation and when shortages in marketplaces occur.
In addition, suppliers pass along rising costs to the Company in the form of
higher prices. The Company has generally been able to offset increases in
operating costs by increasing charges, expanding services and implementing cost
control measures to curb increases in operating costs and expenses. The Company
cannot predict its ability to offset or control future cost increases.
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<PAGE> 25
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; 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; 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.
25
<PAGE> 26
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
On May 7, 1998, the Company learned that it is a named defendant in a
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, and the Company cannot at this
time predict the outcome of the case or its ultimate impact on the Company's
business or operating results. If the outcome were unfavorable, the Company
could be subject to fines, penalties and damages and also could be excluded from
Medicare and other government reimbursement programs which could have a material
adverse effect on the Company's financial condition or results of operations.
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) No reports on Form 8-K were filed during the quarter ended March
31, 1998.
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: May 14, 1998 By: /s/Steve B. Hewett
--------------------------------------
Steve B. Hewett
Vice President/Chief Financial Officer
<PAGE> 27
Exhibit Index
Exhibit No.
- -----------
3 Amended and Restated Certificate of Incorporation of
the Company, 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
Shareholders held on November
10, 1997.)
10.1(A) 1997 Stock Option Plan (Incorporated by reference to
Exhibit B to the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders held on November
10, 1997.)
10.1(B) Employee Stock Purchase Plan, as amended
(Incorporated by reference to Exhibit C to the
Company's definitive Proxy Statement for the Annual
Meeting of Shareholders held on November 10, 1997.)
10.1(C) Form of Executive Employment Agreement with certain
executives of the Company.
27 Financial Data Schedule (for SEC use only)
<PAGE> 1
EXHIBIT 10.1(C)
EXECUTIVE EMPLOYMENT AGREEMENT
This EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") is dated as of January 30,
1998, and is between Quorum Health Group, a Delaware corporation ("Company"),
and (INSERT FULL NAME OF EMPLOYEE)("Executive").
WITNESSETH:
WHEREAS, Company desires to employ Executive, and Executive is willing
to accept such employment on the terms and conditions hereinafter set forth,
NOW, THEREFORE, the parties agree as follows:
1. TERM OF EMPLOYMENT. The Company shall employ Executive for an
initial period of two (2) years, beginning on the date set forth above, subject
to the termination provisions set out in Sections 7 and 8 of this Agreement.
This Agreement shall automatically renew for successive two (2) year terms if
neither party gives the other written notice of intent to terminate not less
than ninety (90) days prior to expiration of this or any succeeding two (2) year
term.
2. EXECUTIVE'S DUTIES. Executive is hereby employed as (INSERT TITLE)
and his/her duties shall include any and all duties and responsibilities
normally associated with said position. The Executive shall have such additional
duties as may be assigned to him/her, from time to time, by the Board of
Directors of the Company or its designee(s). The Executive shall devote his/her
full time, attention and energy to the business of the Company, shall diligently
pursue the best interests of the Company, and shall not engage in any other
business activities.
3. COMPENSATION AND BENEFITS. For all services rendered by
Executive hereunder on behalf of Company, its parents, subsidiaries, and
affiliates, Company agrees to pay and Executive agrees to accept:
A. An annual salary of $_________________, or such salary as Executive
and the Board of Directors or its designee(s) may from time to time agree upon
(such salary shall be paid in accordance with the Company's normal payroll
practices);
B. Participation in any Executive bonus program(s) that the Company
provides to similarly situated Executives, as such program(s) may be
discontinued, modified, or amended from time to time in the Company's
sole discretion;
C. Participation in or receipt of benefits under any benefit plan(s)
that the Company generally makes available to similarly situated Executives, as
such plan(s) may be discontinued, modified, or amended from time to time in the
Company's sole discretion; and
D. ________ stock options granted under the Quorum 1997 Stock
Option Plan; such grant being pursuant to or evidenced by an Executive
Stock Option Agreement dated the date hereof.
<PAGE> 2
4. CONFIDENTIAL INFORMATION AND TRADE SECRETS.
A. For purposes of this Section 4 of this Agreement, the term "Company"
includes the Company, its subsidiaries, and their subsidiaries and affiliated
and managed corporations and entities as well as corporations in which the
Company holds an equity interest.
B. Executive recognizes that Executive's position with the Company
requires significant responsibility and trust, and, in reliance on Executive's
loyalty, the Company will entrust Executive with highly sensitive confidential,
restricted, and proprietary information involving Trade Secrets and Confidential
Information.
C. For purposes of this Agreement, a "Trade Secret" is any scientific
or technical information, design, process, procedure, formula or improvement
that is valuable, and not generally known to competitors of the Company.
"Confidential Information" is any data or information, other than Trade Secrets,
that is important, competitively sensitive, and not generally known by the
public. Trade Secrets and Confidential Information include, but are not limited
to, the Company's business plan(s), business prospects, training materials,
product development plans, bidding and pricing procedures, market strategies,
internal performance statistics, financial data, confidential personnel
information concerning employees of the Company, supplier data, operational or
administrative plans, policy manuals, terms and conditions of contracts and
agreements, information pertaining to actual and prospective customers, and any
similar such information pertaining to the Company. The terms "Trade Secret" and
"Confidential Information" shall not apply to information which is (i) already
in Executive's possession (unless such information used in connection with
formulating the Company's initial business plan, obtained by Executive from the
Company or was obtained by Executive in the course of Executive's employment by
the Company), (ii) received by Executive from a third party with no restriction
on disclosure, or (iii) required to be disclosed by any applicable law.
D. Except as required to perform Executive's duties hereunder,
Executive will not use or disclose any Trade Secret or Confidential Information
as defined above at any time after termination of employment until such time as
such information or property ceases to be a Trade Secret or Confidential
Information through no act of Executive in violation of this section.
E. Upon the request of the Company, and, in any event, upon the
termination of employment hereunder, Executive will surrender to the Company all
memoranda, notes, records, drawings, manuals or other documents pertaining to
the Company's business or Executive's employment (including all hard copies
thereof). Executive will also leave with the Company all materials involving
Secrets or Confidential Information as defined above. All such information and
materials, whether or not made or developed by Executive, shall be the sole and
exclusive property of the Company, and Executive hereby assigns to the Company
all of
<PAGE> 3
Executive's right, title and interest in and to any and all of such information
and materials.
5. COVENANT NOT TO COMPETE.
A. For purposes of this Section 5 of this Agreement, the term "Company"
includes the Company, its subsidiaries, and their subsidiaries and affiliated or
managed corporations and entities as well as corporations in which the Company
holds an equity interest.
B. Executive hereby covenants and agrees with Company that commencing
on the date hereof and ending twelve (12) months after the Executive leaves the
employment of the Company, Executive will not directly or indirectly, anywhere
in the United States or Canada:
(i) Operate, develop, or own any interest in (other than ownership of
less than 5% of the equity securities of a publicly-traded company) any business
which has activities relating to the ownership, management or operation of, or
consultation regarding, any business that the Company is engaged in, including
but not limited to hospital construction, health care consulting, and owning or
managing, directly or indirectly, hospitals, health care networks, or
out-patient health facilities;
(ii) Compete with the Company in the operation or development of
any of the businesses in which it is engaged as of the date of
Executive's termination;
(iii) Be employed by or consult with any business which competes with
any of the businesses engaged in by the Company as of the date of Executive's
termination;
(iv) Interfere with, solicit, disrupt, or attempt to disrupt any past,
present, or prospective relationship, contractual or otherwise, between the
Company and any customer, client, supplier, or employee of the Company;
(v) Solicit any employee of the Company to leave his/her
employment;
(vi) Solicit contracts on behalf of himself/herself or any third party
regarding services or products sold or provided by the Company from any health
care facility or group of facilities to which the Company has provided
management, products, or services at any time during the twelve (12) months
preceding the solicitation, or which the Company has identified in its internal
documents as being a potential purchaser of services or products from the
Company;
(vii) Discuss with any existing customer/client of the Company the
present or future availability of services or products by a business, if
Executive has or expects to acquire a proprietary interest in such business or
is or expects to be an executive, officer, or director of such business, where
such services or products are competitive with services or products which the
Company provides or expects to provide; or
<PAGE> 4
(viii) Without the prior written consent of the Company, accept an
offer of employment from, or enter into any type of contractual or other
arrangement to provide services to, a health care facility located within thirty
(30) miles of any health care facility owned or managed by the Company, by any
subsidiary of Company, or by any affiliated corporation of Company or its
subsidiaries.
C. If a judicial determination is made that any of the provisions of
this Section 5 constitutes an unreasonable or otherwise unenforceable
restriction against Executive, the parties hereto hereby agree that any judicial
authority construing this Agreement shall modify Section 5A hereof to the extent
necessary to protect Employer's interests. The time period during which the
prohibitions set forth in this Section 5 shall apply shall be tolled and
suspended as to Executive for a period equal to the aggregate quantity of time
during which Executive violates such prohibitions in any respect.
6. REMEDIES. Executive specifically acknowledges and agrees that the
restrictions set forth in Sections 4 and 5 hereof are reasonable and necessary
to protect the legitimate interest of the Company and that the Company would not
have entered into this Agreement in the absence of such restrictions. Executive
further acknowledges and agrees that any violation of the provisions of Sections
4 and 5 hereof will result in irreparable injury to the Company, that the remedy
at law for any violation or threatened violation of such Sections will be
inadequate and that in the event of any such breach, the Company, in addition to
any other remedies or damages available to it at law or in equity, shall be
entitled to temporary injunctive relief before trial from any court of competent
jurisdiction as a matter of course and to permanent injunctive relief without
the necessity or proving actual damages. In addition to equitable relief, the
Company shall also be entitled to recover all provable damages caused by
Executive's breach of this Agreement. Indeed, nothing herein shall be construed
as precluding the Company from pursuing any and all remedies at law, including
damages, resulting from Executives breach of any provision of this Agreement.
7. TERMINATION (OTHER THAN FOLLOWING A CHANGE IN CONTROL). Except
as otherwise set out in Section 8 of this Agreement, this Agreement and
Executive's employment may be terminated under the following
circumstances:
A. TERMINATION BY EXECUTIVE.
(i) Executive may, at any time, terminate his/her employment by giving
the Company ninety (90) days prior written notice of his intent to terminate
this Agreement.
(ii) If Executive terminates his/her employment and this Agreement, the
Company shall pay Executive any unpaid salary, accrued but unpaid bonus, and
accrued but unused and unpaid vacation, and shall have no further obligation
with respect to Executive except as may be called for under Company's benefit
plans in which Executive participates.
<PAGE> 5
B. TERMINATION DUE TO DEATH, DISABILITY, OR RETIREMENT OF
EXECUTIVE.
(i) Executive's employment and this Agreement will automatically
terminate upon the death, disability, or retirement of Executive.
(ii) If Executive's employment and this Agreement are terminated due to
Executive's death, disability, or retirement, the Company shall pay Executive or
his/her estate any unpaid salary, accrued but unpaid bonus, and accrued but
unused and unpaid vacation, and shall have no further obligation with respect to
Executive or Executive's estate except as may be called for under Company's
benefit plans in which Executive participates.
C. TERMINATION FOR CAUSE.
(i) The Company shall have the right at any time to terminate the
Executive's employment and this Agreement immediately for cause, which for
purposes of this Section 7 shall mean any of the following:
(a) If Executive breaches any material term of this Agreement
including, but not limited to, the requirements of Sections 4 and 5 hereof;
(b) If Executive engages in conduct demonstrably and
materially injurious to the Company; or
(c) If Executive engages in conduct which the Company
reasonably determines either might have violated any applicable civil or
criminal law or did violate any written corporate rules of ethical corporate
conduct for officers and employees of the Company or its subsidiaries as set
forth in the Company's personnel procedures and/or Policy on Business Practices
(or any successors or supplements to such Policy).
(ii) If Executive's employment and this Agreement are terminated for
cause, the Company shall pay Executive any unpaid salary, accrued but unpaid
bonus, and accrued but unused and unpaid vacation, and shall have no further
obligation with respect to Executive except as may be called for under Company's
benefit plans in which Executive participates.
D. TERMINATION FOLLOWING FAILURE TO RENEW AGREEMENT.
(i) Company shall have the right to terminate Executive's employment
with or without cause at any time following expiration/termination of this
Agreement as described in Section 1 of this Agreement.
(ii) If Company terminates Executive's employment without cause at any
time after expiration of this Agreement as a result of Company's election not to
renew this Agreement as provided in Section 1, and, provided further that
Executive executes and does not revoke a General Release in substantially the
same form as set out in the General Release attached hereto as Attachment A,
Company will pay Executive any unpaid
<PAGE> 6
salary, accrued but unpaid bonus, and accrued but unused and unpaid vacation. In
addition, Executive shall be entitled to the payments and benefits described in
subsections 7D(ii)(a) and (b) below:
(a) A severance allowance in an amount equal to the product of
two (2) times the sum of Executive's Annual Base Salary as established pursuant
to Section 3A of this Agreement. Said severance allowance will be paid in twelve
(12) equal monthly installments beginning at the Company's regular payday next
following the expiration of any revocation period referred to in the General
Release executed by Executive.
(b) Provided that the Executive has properly exercised his or
her rights under COBRA to continue participating in the Company's group health
and dental insurance plan(s) in which he or she participates as of the
termination date, the Company will pay the Executive as additional compensation
an amount equal to the cost of the premium for such coverage for eighteen months
following the date of termination. Such additional compensation will cease as of
the first day of the month in which the Executive (I) becomes eligible for any
other group health or dental insurance plan(s) (provided such eligibility occurs
within the twelve months after the date of termination) or (ii) in any way
becomes ineligible for COBRA continuation benefits. The Company will have no
obligation to pay any insurance premiums on behalf of the Executive.
(iii) It is understood and agreed that the payments and benefits set
out in subsection 7D(ii) are the only payments and benefits to which Executive
will be entitled under this Agreement in the event of a termination by Company
without cause following its decision not to renew this Agreement.
E. TERMINATION WITHOUT CAUSE.
(i) The Company shall have the right at any time to terminate
Executive's employment and this Agreement without cause.
(ii) In the event the Company terminates Executive's employment without
cause prior to expiration/termination of this Agreement, and provided further
that Executive executes and does not revoke a General Release in substantially
the same form as set out in the General Release attached hereto as Attachment A,
the Company will pay Executive any unpaid salary, accrued but unpaid bonus, and
accrued but unused and unpaid vacation. In addition, Executive shall be entitled
to the payments and benefits described in subsections 7E(ii)(a) and (b) below:
(a) A severance allowance in an amount equal to the product of
two (2) times the sum of Executive's Annual Base Salary as established pursuant
to Section 3A of this Agreement. Said severance allowance will be paid in twelve
(12) equal monthly installments beginning at the Company's regular payday next
following the expiration of any revocation period referred to in the General
Release executed by Executive.
(b) Provided that the Executive has properly exercised his or
her rights under COBRA to continue participating in the Company's group health
and dental insurance plan(s) in which he or she participates as
<PAGE> 7
of the termination date, the Company will pay the Executive as additional
compensation an amount equal to the cost of the premium for such coverage for
eighteen months following the date of termination. Such additional compensation
will cease as of the first day of the month in which the Executive (I) becomes
eligible for any other group health or dental insurance plan(s) (provided such
eligibility occurs within the twelve months after the date of termination) or
(ii) in any way becomes ineligible for COBRA continuation benefits. The Company
will have no obligation to pay any insurance premiums on behalf of the
Executive.
(iii) It is understood and agreed that the payments and benefits set
out in subsection 7E(ii) are the only payments and benefits to which Executive
will be entitled under this Agreement in the event of a termination of
Executive's employment and this Agreement without cause.
8. CHANGE IN CONTROL.
A. For purposes of this Agreement, a "Change in Control" shall occur on
the first date on which either (1) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended
("Exchange Act")) becomes the "beneficial owner" (as defined in rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of Company representing
at least 50% of the combined voting power of Company's then outstanding
securities, or (2) a majority of the individuals comprising Company's Board of
Directors have not served in such capacity for the entire two-year period
immediately preceding such date, or (3) Company is combined (by merger, share
exchange, consolidation, or otherwise) with another corporation and as a result
of such combination, less than 50% of the outstanding securities of the
surviving or resulting corporation are owned in the aggregate by the former
shareholders of Company, or (4) Company sells, leases, or otherwise transfers
all or substantially all of its properties or assets to another person or
entity.
B. In the event of a Change in Control, the term of this Agreement is
automatically modified to end (with no automatic renewal) twelve (12) months
after the end of the month in which the Change in Control occurs, and
termination of this Agreement and Executive's employment as well as Company's
obligation to pay any severance payments or benefits will be governed
exclusively by this Section 8 of this Agreement.
C. TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. In the event of
a Change in Control, Company may terminate Executive's employment and
this Agreement at any time without cause, and Executive may terminate
his/her employment and this Agreement at any time for "good reason."
(i) For purposes of this Section 8 of this Agreement only, Executive's
termination shall be considered to have been for "good reason" if Executive's
termination is by reason of the occurrence of any of the following events
following a "Change in Control" without Executive's express written consent:
(a) Any material change in Executive's title, authorities,
responsibilities (including reporting responsibilities) which represents
<PAGE> 8
an adverse change from his/her status, title, position, or responsibilities
(including reporting responsibilities) which were in effect immediately prior to
the Change in Control or from his/her status, title,position,or responsibilities
(including reporting responsibilities) which were in effect following a "Change
in Control" pursuant to Executive's consent; the assignment to him/her of any
duties or work responsibilities which are inconsistent with such status, title,
position or work responsibilities; or any removal of Executive from, or failure
to reappoint or reelect him/her to any of such positions, except if any such
changes are because of disability, retirement, death, or Cause;
(b) A reduction in or failure to pay any portion of
Executive's Annual Base Salary as in effect on the date of the Change in Control
or as the same may be increased from time to time thereafter;
(c) The relocation of Executive's office to a location more
than thirty (30) miles from the location at which Executive performed his/her
duties prior to the Change in Control, except for required travel on Company's
business to an extent substantially consistent with his/her business travel
obligations prior to the Change in Control;
(d) The adverse and substantial alteration of the nature and
quality of the office space within which Executive performed his/her duties
prior to any "Change in Control" as well as in the secretarial and
administrative support provided to Executive, provided, however, that a
reasonable alteration of the secretarial or administrative support provided to
Executive as a result of reasonable measures implemented by Company to
effectuate a cost-reduction or consolidation program shall not constitute "good
reason" under this Agreement;
(e) The failure by Company to provide (until the expiration of
this Agreement as set automatically modified as set out in Section 8A above)
Executive with compensation and benefits (including, without limitation,
incentive, bonus, and other compensation plans and any vacation, medical,
hospitalization, life insurance, dental, or disability benefit plan), or cash
compensation in lieu thereof, which are, in the aggregate, no less favorable
than those provided by Company to Executive immediately prior to the occurrence
of the said Change in Control;
(f) Any breach by Company of any provision of this Agreement;
and
(g) The failure of the Company to obtain a satisfactory
agreement from any successor or assign of Company to assume and agree to perform
this Agreement.
(ii) In the event of Executive's termination without cause or for "good
reason' as set out in this subsection 8C, Executive will be entitled to be paid,
within five (5) days of the Date of Termination, any unpaid salary, accrued but
unpaid bonus, and accrued but unused and unpaid vacation. In addition, Executive
shall be entitled to the payments and benefits described in subsections
8C(ii)(a), (b), (c), and (d) below:
(a) Within five (5) days of the Date of Termination, a
severance allowance in a lump sum in an amount equal to the product of
<PAGE> 9
two (2) times the sum of Executive's Annual Base Salary as established pursuant
to Section 3A of this Agreement.
(b) Company shall maintain in full force and effect for the
benefit of Executive and Executive's dependents and beneficiaries, at Company's
expense (less the amount such individual would have paid for such coverage had
his/her employment not terminated) until the earlier of (a) the expiration of 24
months following the Date of Termination or (b) the effective date of
Executive's employment on a substantially full-time basis by a new employer
(whether as an employee, consultant or independent contractor), all medical
insurance, under plans and programs in which Executive and/or Executive's
dependents and beneficiaries participated immediately prior to the Date of
Termination, provided that continued participation is possible under the general
terms and provisions of such plans and programs. If participation in any such
plan or program is barred, the Company shall arrange at its own expense (less
the amount such individual would have paid for such coverage had his/her
employment not terminated) to provide Executive with benefits substantially
similar to those which he/she was entitled to receive under such plan and
programs.
(c) In the event it shall be determined that any payment or
benefit provided under this subsection 8C or pursuant to any stock option held
by Executive (a "Payment") would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986 ("Code"), or any similar or successor
provision of the Code, or any interest or penalties are incurred by Executive
with respect to such excise tax (such excise tax, together with any such
interest and penalties, hereinafter collectively referred to as the "Excise
Tax"), Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and the Excise Tax imposed upon the Gross- Up
Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise
Tax imposed upon the Payment. Subject to subsection 8C(ii)(d) below, the
determination of whether and when a Gross-Up Payment is required and the amount
of such Gross-Up Payment shall be made by the nationally recognized certified
public accounting firm retained at the time to provide the Company with external
audit, opinions, and advice. The Accounting Firm shall provide detailed
supporting calculations to Company and Executive within fifteen (15) business
days of being requested by Executive to make a Gross-Up Payment determination.
If the Accounting Firm determines that a Gross-Up Payment is required, the
Gross-up Payment so determined shall be paid within five (5) days after the
receipt of the Accounting Firm's determination. If the Accounting Firm
determines that no Excise Tax is payable by Executive, it shall so advise
Executive in writing. The Accounting Firm's determination shall be binding upon
Company and Executive. If, following the exhaustion of Company's remedies under
subsection 8C(ii)(d) below, Executive is required to pay an Excise Tax, the
Accounting Firm shall make a determination of the amount of any underpayment in
any previous Gross-Up Payment and any underpayment shall be paid promptly by
Company to Executive.
<PAGE> 10
(d) Executive shall notify Company in writing of any claim by
the Internal Revenue Service that, if successful, would require Company to make
a Gross-Up Payment. Such notification shall be given as soon as practicable but
no later than ten (10) business days after Executive is informed in writing of
such claim and shall apprise Company of the nature of such claim and the date on
which such claim is requested to be paid. Executive shall not pay such claim
prior to the expiration of the thirty (30) day period following the date on
which it gives such notice to the Company (or such shorter period ending on the
date that any payment of taxes with respect to such claim is due). If Company
notifies Executive in writing prior to the expiration of such period that it
desires to contest such claim, Executive shall (A) give Company any information
reasonably requested by Company relating to such claim, (B) take such action in
connection with contesting such claim as Company shall reasonably request in
writing, including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by Company, (C)
cooperate with Company in good faith in order to effectively contest such claim
and (D) permit Company to participate in any proceedings relating to such claim;
provided, however, that Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this subsection 8C(ii)(d), Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forego any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option either
direct Employer to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as Company shall determine;
provided, however, that if Company directs Executive to pay such claim and sue
for a refund, Company shall advance the amount of such payment to Executive on
an interest-free basis, and shall indemnify and hold Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and provided,
further that if Executive is required to extend the statute of limitations to
enable Company to contest such claim, Executive may limit this extension solely
to such contested amount. Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
Executive shall be entitled to settle or contest, as the case may be, any other
issues raised by the Internal Revenue Service or any other taxing authority. If,
after the receipt by Executive of an amount advanced by Company pursuant to this
subsection 8C(ii)(d), Executive becomes entitled to receive any refund with
respect to such claim, Executive shall (subject to Company's complying with the
requirements of this subsection 8C(ii)(d) promptly pay to Company the amount of
such refund (together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by Executive of an amount advanced by
the Company under this subsection
<PAGE> 11
8C(ii)(d), a determination is made that Executive shall not be entitled to any
refund with respect to such claim and Company does not notify Executive in
writing of its intent to contest such denial of refund prior to the expiration
of thirty (30) days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount of such advance
shall offset, to the extent thereof, the amount of Gross-Up Payment required to
be paid.
(D) TERMINATION FOR CAUSE.
(i) The Company shall have the right at any time, including following a
Change in Control, to terminate the Executive's employment and this Agreement
immediately for cause, which for purposes of this Section 8 shall mean any of
the following:
(a) If Executive breaches any material term of this Agreement
including, but not limited to, the requirements of Sections 4 and 5 hereof;
(b) If Executive willfully engages in conduct demonstrably and
materially injurious to the Company; or
(c) If Executive engages in conduct which the Company
reasonably determines either might have violated any applicable civil or
criminal law or did violate any written corporate rules of ethical corporate
conduct for officers and employees of the Company or its subsidiaries as set
forth in the Company's personnel procedures and/or Policy on Business Practices
(or any successors or supplements to such Policy).
(ii) In the event Executive's employment and this Agreement are
terminated for cause, the Company shall pay Executive any unpaid salary, accrued
but unpaid bonus, and accrued but unused and unpaid vacation, and shall have no
further obligation with respect to Executive except as may be called for under
Company's benefit plans in which Executive participates.
(E) TERMINATION DUE TO DEATH, DISABILITY, OR RETIREMENT OF
EXECUTIVE.
(i) Executive's employment and this Agreement will automatically
terminate upon the death, disability, or retirement of Executive.
(ii) At the Termination Date, the Company shall pay Executive any
unpaid salary, accrued but unpaid bonus, and accrued but unused and unpaid
vacation, and shall have no further obligation with respect to Executive except
as may be called for under Company's benefit plans in which Executive
participates.
(F) TERMINATION BY EXECUTIVE.
(i) Executive may, at any time including following a Change in Control,
terminate his/her employment for reasons other than "good reason" as set out
above by giving the Company ninety (90) days prior
<PAGE> 12
written notice of his intent to terminate this Agreement.
(ii) If Executive terminates his/her employment and this Agreement, the
Company shall pay Executive any unpaid salary, accrued but unpaid bonus, and
accrued but unused and unpaid vacation, and shall have no further obligation
with respect to Executive except as may be called for under Company's benefit
plans in which Executive participates.
(G) It is understood and agreed that the payments and benefits set out
in this Section 8 are the only payments and benefits to which Executive will be
entitled under this Agreement in the event of a termination following a Change
in Control.
9. OTHER EMPLOYMENT. Executive shall not be required to mitigate the
amount of any payment or benefit provided for under this Agreement by seeking
other employment or otherwise nor shall the amount of any such payment or
benefit provided for in this Agreement be reduced by any compensation earned by
Executive as a result of other employment. Payment to Executive pursuant to this
Agreement shall constitute the entire obligation of Company for severance pay
and full settlement of any claim for severance pay under law or in equity that
Executive might otherwise assert against Company or any of its employees,
officers or directors on account of Executive's termination.
10. NOTICE OF TERMINATION. Any purported termination by Company or by
Executive shall be communicated by a written Notice of Termination to the other
party which notice is given in accordance with Section 11 of this Agreement. No
purported termination shall be effective without such a Notice of Termination.
The Notice of Termination shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment and shall specify the Date of Termination. The "Date of Termination"
shall mean the date specified in the Notice of Termination provided that in no
case shall the date be less than thirty (30) days or more than sixty (60) days
after the date the Notice of Termination is given. If within thirty (30) days
after any Notice of Termination is given the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning the
termination, the Date of Termination shall be the date on which the dispute is
finally resolved either by mutual written agreement of the parties or by the
final decision of the Appeal Committee pursuant to Section 13.
11. NOTICE. Any notice or other communication provided for or required
by this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or three (3) days following its being sent by
certified mail, return receipt requested, postage prepaid, addressed to the
respective addresses last given by each party to the other or to such other
address as either party may have furnished to the other in writing.
12. MODIFICATIONS, WAIVERS, AND SURVIVAL OF OBLIGATIONS. No
provision of this Agreement may be modified, waived, or discharged unless
such modification, waiver, or discharge is agreed to in writing and
signed by Executive and the Company's Chief Executive Officer. A waiver
<PAGE> 13
of any condition or provision of this Agreement shall be limited to the terms
and conditions of such waiver and shall not be construed as a waiver of any
similar or dissimilar provisions or conditions at any time. The obligations of
the Company under Section 7D hereof shall survive the expiration of this
Agreement. The obligations of the Executive and the rights of the Company under
Sections 4, 5, and 6 hereof also survive the expiration of this Agreement.
13. CLAIMS PROCEDURE. Any claim for benefits under this Agreement by
Executive shall be made in writing and delivered to Company at its principal
office. If Executive, or any beneficiary following Executive's death
(collectively, the "Claimant"), believes he/she has been denied any benefits or
payments under this Agreement, either in total or in an amount less than the
full benefit or payment to which Claimant would normally be entitled, Company
shall advise Claimant in writing of the amount of the benefit, or payment, if
any, and the specific reasons for the denial within 30 days of the receipt of
Claimant's claim. Company shall also furnish Claimant at that time with a
written notice containing:
A. A specific reference to pertinent provisions of the Agreement;
B. A description of any additional material or information necessary
for Claimant to perfect the claim if possible, and an explanation of why such
material or information is needed; and
C. An explanation of the claim review procedure set forth in
Section 13.
Within 60 days of receipt of the information described above, Claimant shall, if
further review is desired, file a written request of reconsideration of
Company's decision with the Appeal Committee. The Appeal Committee shall consist
of those individuals who were serving as the Compensation Committee of the Board
of Directors of the Company immediately prior to the Change in Control. The
Appeal Committee shall select from its membership a chairperson and a secretary
and may adopt such rules and procedures as it deems necessary to carry out its
functions. In the event any individual is unable to serve on the Appeal
Committee, then the chairperson of the Appeal Committee shall appoint a
successor provided such successor must have been a member of the Board of
Directors of the Company prior to the Change in Control ("Prior Board Member").
So long as Claimant's request for review is pending with the Appeal Committee
(including such 60-day period), Claimant or his/her duly authorized
representative may review pertinent documents and may submit issues and comments
in writing to the Appeal Committee. A final and binding decision shall be made
by the Appeal Committee within 30 days of the filing by Claimant of the request
for reconsideration. The Appeal Committee's decision shall be conveyed to
Claimant in writing and shall include specific reasons for the decision and
specific references to the pertinent provisions of this Agreement on which the
decision is based. The Appeal Committee shall discharge its duties under this
claims procedure in accordance with the fiduciary standards of ERISA and in
doing so, to the extent permitted by law, shall be indemnified and held harmless
by Company (to the extent not indemnified or saved harmless
<PAGE> 14
under any liability insurance or other indemnification arrangement with Company)
for or against all liability to which the Appeal Committee may be subjected by
reason of any act done in good faith with respect to the adjudication of any
claim under this Agreement, including reasonable expenses.
14. GOVERNING LAW. The laws of Tennessee shall be controlling in
all matters relating to this Agreement to the extent not preempted by
ERISA.
15. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
16. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto and supersedes all prior agreements, understandings
and arrangements, oral or written, between the parties hereto with respect to
the subject matter hereof including. Without limiting the generality of the
foregoing, Executive specifically waives any rights he/she has or might have
under any previously executed severance or employment agreements, and any rights
he/she has or might have under any Company policy or practice relating to
termination of employment or severance pay or benefits upon termination of
employment.
17. ACTION BY COMPANY. Any action required of or permitted by Company
under this Agreement shall be by resolution of its Board of Directors, by
resolution of a duly authorized committee of its Board of Directors, or by a
person or persons authorized by resolutions of its Board of Directors or such
committee.
18. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
EXECUTED as of the day and year first above set forth.
QUORUM HEALTH GROUP, INC.
By: __________________________
Its: __________________________
(Insert full name of Executive)
--------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 1998 (UNAUDITED) AND THE
CONSENSED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED MARCH 31,
1998 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 6,039
<SECURITIES> 0
<RECEIVABLES> 350,474
<ALLOWANCES> 67,397
<INVENTORY> 31,456
<CURRENT-ASSETS> 380,196
<PP&E> 932,103
<DEPRECIATION> 220,335
<TOTAL-ASSETS> 1,490,845
<CURRENT-LIABILITIES> 159,600
<BONDS> 662,442
0
0
<COMMON> 753
<OTHER-SE> 590,427
<TOTAL-LIABILITY-AND-EQUITY> 1,490,845
<SALES> 0
<TOTAL-REVENUES> 1,200,036
<CGS> 0
<TOTAL-COSTS> 893,290
<OTHER-EXPENSES> 91,449
<LOSS-PROVISION> 84,555
<INTEREST-EXPENSE> 30,439
<INCOME-PRETAX> 100,303
<INCOME-TAX> 40,894
<INCOME-CONTINUING> 59,409
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,409
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.77
</TABLE>
