<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 33-31717-A
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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 7, 1999
- ----- --------------------------
Common Stock, $.01 Par Value 73,052,128 Shares
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended March 31
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenue:
Net patient service revenue $ 411,668 $ 361,630
Hospital management/professional services 20,443 19,852
Reimbursable expenses 16,270 16,838
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Net operating revenue 448,381 398,320
Salaries and benefits 184,522 159,485
Reimbursable expenses 16,270 16,838
Supplies 61,992 52,925
Fees 42,543 35,585
Other operating expenses 32,832 25,138
Provision for doubtful accounts 34,067 24,670
Equity in earnings of affiliates (6,300) (2,038)
Leases and rentals 9,217 6,699
Depreciation and amortization 24,985 21,792
Interest 14,939 9,211
Write-down of assets and investigation and
litigation related costs 2,664 22,850
Minority interest 518 769
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Income before income taxes 30,132 24,396
Provision for income taxes 11,782 10,759
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Net income $ 18,350 $ 13,637
========== ==========
Earnings per share:
Basic $ 0.25 $ 0.18
========== ==========
Diluted $ 0.25 $ 0.18
========== ==========
Weighted average shares outstanding:
Basic 72,498 74,933
Common stock equivalents 411 2,308
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Diluted 72,909 77,241
========== ==========
</TABLE>
See accompanying notes.
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months
Ended March 31
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenue:
Net patient service revenue $1,113,462 $1,092,250
Hospital management/professional services 62,032 59,291
Reimbursable expenses 48,325 48,495
---------- ----------
Net operating revenue 1,223,819 1,200,036
Salaries and benefits 511,978 478,028
Reimbursable expenses 48,325 48,495
Supplies 169,354 162,935
Fees 116,038 107,451
Other operating expenses 89,864 78,327
Provision for doubtful accounts 94,749 84,555
Equity in earnings of affiliates (16,566) (2,038)
Leases and rentals 24,492 20,092
Depreciation and amortization 69,444 65,853
Interest 36,815 30,439
Write-down of assets and investigation and
litigation related costs 33,639 22,850
Minority interest (4,075) 2,746
---------- ----------
Income before income taxes 49,762 100,303
Provision for income taxes 24,661 40,894
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Net income $ 25,101 $ 59,409
========== ==========
Earnings per share:
Basic $ 0.34 $ 0.80
========== ==========
Diluted $ 0.34 $ 0.77
========== ==========
Weighted average shares outstanding:
Basic 73,652 74,514
Common stock equivalents 882 2,381
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Diluted 74,534 76,895
========== ==========
</TABLE>
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
March 31 June 30
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 16,504 $ 17,549
Accounts receivable, less allowance for
doubtful accounts of $79,660 at
March 31, 1999 and $65,561 at June 30, 1998 330,945 273,376
Supplies 39,145 29,336
Net assets held for sale 16,410 --
Other 50,257 34,245
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Total current assets 453,261 354,506
Property, plant and equipment, at cost:
Land 75,469 66,424
Buildings and improvements 400,985 291,258
Equipment 551,855 464,577
Construction in progress 19,046 72,676
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1,047,355 894,935
Less accumulated depreciation 274,024 216,229
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773,331 678,706
Cost in excess of net assets acquired, net 213,915 144,315
Unallocated purchase price 76,308 4,020
Investments in unconsolidated entities 255,787 245,551
Other 57,605 63,855
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Total assets $1,830,207 $1,490,953
========== ==========
</TABLE>
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31 June 30
1999 1998
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 99,634 $ 70,483
Accrued salaries and benefits 71,677 64,196
Other current liabilities 23,895 27,533
Current maturities of long-term debt 945 1,273
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Total current liabilities 196,151 163,485
Long-term debt, less current maturities 911,401 617,377
Deferred income taxes 21,827 29,470
Professional liability risks and other
liabilities and deferrals 32,973 30,882
Minority interests in consolidated entities 60,483 27,473
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value;
300,000 shares authorized; 72,925
issued and outstanding at March 31,
1999 and 75,478 at June 30, 1998 729 755
Additional paid-in capital 250,179 290,149
Retained earnings 356,464 331,362
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607,372 622,266
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Total liabilities and stockholders' equity $1,830,207 $1,490,953
========== ==========
</TABLE>
See accompanying notes.
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Ended March 31
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net cash provided by operating activities $ 81,711 $ 85,738
Investing activities:
Purchase of acquired companies (216,433) (141,357)
Purchase of property, plant and equipment (96,108) (105,726)
Proceeds from sale of assets -- 14,695
Purchase of asset held for sale -- (11,000)
Other (348) (4,052)
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Net cash used in investing activities (312,889) (247,440)
Financing activities:
Borrowings under bank debt 573,600 391,500
Repayments of bank debt (279,000) (248,400)
Repurchases of common stock (48,102) --
Proceeds from issuance of common stock, net 7,238 10,654
Other (23,603) (5,021)
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Net cash provided by financing activities 230,133 148,733
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Decrease in cash (1,045) (12,969)
Cash at beginning of period 17,549 19,008
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Cash at end of period $ 16,504 $ 6,039
========== ==========
Supplemental cash flow information:
Interest paid $ (31,309) $ (29,410)
========== ==========
Income taxes paid $ (29,684) $ (55,558)
========== ==========
</TABLE>
See accompanying notes.
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Quorum
Health Group, Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months and nine months ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
year ending June 30, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended June 30, 1998. Certain reclassifications
have been made to the fiscal 1998 financial presentation to conform with fiscal
1999.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes reporting standards for
operating segment information disclosed in annual financial statements and in
interim financial reports issued to shareholders. Under existing accounting
standards, the Company has reported its operations as one line of business
because substantially all of its revenue and operating profits have been derived
from its acute care hospitals, affiliated health care entities and health care
management services. The Company will adopt SFAS No. 131 during its fourth
quarter of fiscal 1999 and is presently evaluating the new standard to determine
its effect, if any, on the way the Company might report its operations in the
future.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. For interest rate swap agreements
that qualify as hedges, changes in fair value will be offset against the change
in fair value of the hedged assets, liabilities, or firm commitments through
earnings. The Company will adopt SFAS No. 133 beginning with its fiscal year
ending June 30, 2000 and is presently evaluating the new standard to determine
its effect on the earnings and financial position of the Company.
On March 31, 1999, the FASB released a proposed interpretation of APB Opinion
No. 25 "Accounting for Certain Transactions involving Stock Compensation," which
requires variable-award accounting for repriced stock options and fair value
accounting for stock options granted to non-employees such as
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independent members of the Company's board of directors. The proposed
interpretation would be effective upon issuance (expected to be in September
1999) but generally would cover events that occur after December 15, 1998.
Accordingly, no adjustments would be made to financial statements for periods
prior to the effective date and no expense would be recognized for any
additional compensation costs attributable to periods before the effective date.
3. ACQUISITIONS, JOINT VENTURES AND SALES
During the nine months ended March 31, 1999, the Company acquired four hospitals
and affiliated health care entities. Also, in connection with the acquisitions,
the Company entered into operating lease agreements to lease certain land and
buildings with an estimated fair value of $108.7 million. In addition, a
majority-owned subsidiary of the Company and a subsidiary of Columbia/HCA
Healthcare Corp. (Col/HCA) formed River Region Health System, a joint venture in
Vicksburg, Mississippi. Col/HCA contributed Vicksburg Medical Center. The
Company's subsidiary and its physician shareholders contributed ParkView
Regional Medical Center and affiliated businesses. The Company, through its
subsidiary, has a majority equity interest in the joint venture and is the
manager. During the nine months ended March 31, 1998, the Company acquired two
hospitals and affiliated health care entities and sold its remaining interest in
a hospital. In addition, the Company contributed one hospital and paid
approximately $23 million in exchange for equity interests in joint ventures
that own and operate three hospitals in Las Vegas, Nevada. Hospital and
affiliated business acquisitions are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months
Ended
March 31
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Fair value of assets acquired $ 238,713 $ 155,080
Fair value of liabilities assumed (18,155) (13,723)
Contributions from minority investors (4,125) --
--------- ---------
Net cash used for acquisitions $ 216,433 $ 141,357
========= =========
</TABLE>
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 acquisitions,
sales and hospitals contributed to joint ventures have been included in the
accompanying consolidated statements of income for periods subsequent to
acquisition and for periods prior to disposal of controlling interests. The
operating results of the Las Vegas joint venture which is
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accounted for on the equity method has been included in the accompanying
consolidated statements of income for periods subsequent to the formation of the
joint venture.
The following unaudited pro forma results of operations give effect to the
operations of the joint ventures and the entities acquired, sold and contributed
to joint ventures in fiscal 1999 and 1998 as if the respective transactions had
occurred at the beginning of the period presented (in thousands, except per
share data):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
March 31 March 31
----------------------------- ---------------------------------
1999 1998 1999 1998
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Net operating revenue $ 452,567 $ 447,725 $ 1,317,037 $ 1,323,066
Net income 18,403 29,319 23,201 68,338
Earnings per common
share:
Basic 0.25 0.39 0.32 0.92
Diluted 0.25 0.38 0.31 0.89
</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
In March 1999, the Company amended its credit facility to provide increased
flexibility. The amended credit facility consists of an $850 million secured
revolving credit facility expiring November 26, 2002. The Company has the option
to request an incremental one-year extension subject to approval of 100% of the
lenders on each anniversary date of the initial execution of the credit
agreement. The revolving line of credit bears interest, at the Company's option,
at generally the lender's base rate, swing-line rate, or a fluctuating rate
ranging from .55 to 1.55 percentage points above LIBOR. The Company pays a
facility fee ranging from .20 to .45 percentage points on the commitment. The
interest rate margins and facility fee rates are based on the Company's leverage
ratio. The maximum permitted leverage ratio increased from 3.5 to 4.0 with a
further contingent increase to 4.5 subject to the issuance of a minimum of
$150.0 in subordinated debt. The net worth covenant was reset to a minimum level
of $500.0 million. Substantially all stock of the Company's subsidiaries has
been pledged under the terms of the amended credit facility. The Company may
prepay the amount outstanding at any time.
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5. WRITE-DOWN OF ASSETS AND INVESTIGATION AND LITIGATION RELATED COSTS
During the nine months ended March 31, 1999, the Company recorded the following
pre-tax write-down of assets and investigation and litigation related costs (in
thousands):
<TABLE>
<S> <C>
Write-down of assets $29,873
Investigation and litigation related costs 3,766
-------
Total $33,639
=======
</TABLE>
The Company recorded $25.6 million intangible asset write-downs relating to
certain physician practices and a $4.2 million write-down of assets primarily
related to Park Medical Center (See note 10). The write-down of assets resulted
primarily from (1) the review of expected future cash flows of the Company's
physician practices and (2) the write-down of the carrying value of Park Medical
Center to estimated fair value. The revised carrying value of Park Medical
Center was based on discussions the Company had with a third party interested in
buying the facility. The Company's review of its physician practices was a
result of recent changes in the physician practice management industry and the
accumulation of sufficient historical financial information as a basis for
changing estimated future cash flows. In addition, the Company incurred $3.8
million in investigation and litigation related costs related primarily to the
qui tam and shareholder actions against the Company (See Note 9).
6. INCOME TAXES
The provision for income taxes for the three months and nine months ended March
31, 1999 and 1998 is different from that which would be obtained by applying the
statutory federal income tax rate to income before income taxes due to permanent
differences and the provision for state income taxes. The provision for income
taxes for the nine months ended March 31, 1999 also differs from the expected
income tax provision due to nondeductible intangible assets included in the
asset write-downs.
7. EARNINGS PER SHARE
Earnings per share is based on the weighted average number of common shares
outstanding and dilutive common stock equivalents consisting of stock options.
Outstanding options to purchase 4,449,000 and 4,023,000 shares of common stock
were not included in the computation of earnings per share for the three and
nine months ended March 31, 1999 and 1998, respectively, because the options'
exercise prices were greater than the average market price of the common stock
(See Note 8).
8. STOCKHOLDERS' EQUITY AND STOCK BENEFIT PLANS
Common stock: In August 1998, the Board of Directors authorized the repurchase
of up to 3,000,000 shares of common stock. In October 1998, the Board of
Directors authorized the repurchase of up to 5,000,000 additional
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shares of common stock. Shares purchased under the program may be used, to
satisfy the Company's obligations under its stock-based employee benefit plans.
As of March 31, 1999, the Company had repurchased 3,585,000 million shares for
an aggregate purchase price of $48.1 million. All of these shares were purchased
in open market transactions. The Company has not repurchased any shares since
November 11, 1998.
Stock options: In March 1999, the Company's Board of Directors approved a plan
to allow employees to exchange "underwater" stock options, which had exercise
prices higher than the market price of the Company's common stock. Based on the
exchange, the Company canceled 5,158,000 options at exercise prices ranging from
$12.09 to $33.06 and issued 3,580,000 options at an exercise price of $9.00.
Using the Black-Scholes option valuation model, the number of options
outstanding was reduced to offset the lower exercise prices of the options. The
estimated economic value of the grants was generally unchanged as a result of
the exchange. Under the proposed interpretation of APB Opinion No. 25, repriced
options would receive variable-award accounting. Should the proposed
interpretation become effective, the repriced options will vest and terminate
thirty days after the effective date of the interpretation, removing
variable-award accounting (See Note 2). As of March 31, 1999, there were
6,407,000 options outstanding with a weighted average exercise price of $9.70.
9. CONTINGENCIES
Management continually evaluates contingencies based on the best available
evidence and believes that provision for losses has been provided to the extent
necessary.
Net Patient Service Revenue
Final determination of amounts earned under the Medicare and Medicaid programs
often occurs in subsequent years because of audits by the programs, rights of
appeal and the application of numerous technical provisions. In the opinion of
management, adequate provision has been made for adjustments that may result
from such routine audits and appeals.
Income Taxes
The Internal Revenue Service (IRS) is in the process of conducting examinations
of the Company's federal income tax returns for the fiscal years ended June 30,
1993 through 1998. The IRS has proposed certain adjustments to the Company's
federal income tax returns for the fiscal years ending June 30, 1993 through
1995. The most significant adjustments involved the tax accounting methods
adopted for computing bad debt expense and the valuation of purchased hospital
property, plant and equipment and related depreciable lives. The Company intends
to protest substantially all of the proposed adjustments through the appeals
process of the IRS. In the opinion of management, the ultimate outcome of the
IRS examinations will not have a material effect on the Company's results of
operations or financial position.
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Impact of Year 2000
As with most other industries, hospitals and affiliated health care entities use
information systems that may misidentify dates beginning January 1, 2000 or
earlier, thereby resulting in system or equipment failures or miscalculations.
Information systems include computer programs, building infrastructure
components and computer-aided biomedical equipment. The Company's position is
that it is not responsible for ensuring Year 2000 compliance by its managed
hospitals, but the Company cannot provide assurance that its managed hospitals
will not seek to hold it responsible, or that it will not ultimately be found
liable, for any losses they incur arising out of the Year 2000 problem. The
Company has a Year 2000 strategy for its owned hospitals that includes phases
for education, inventory and assessment of applications and equipment at risk,
conversion/remediation/replacement, validation and post-implementation. The
Company can provide no assurances that applications and equipment the Company
believes to be Year 2000 compliant will not experience difficulties or that the
Company will not experience difficulties obtaining resources needed to make
modifications to or replace the Company's affected systems and equipment.
Failure by the Company or third parties on which it relies to resolve Year 2000
issues could have a material adverse effect on the Company's results of
operations and its ability to provide health care services. Consequently, the
Company can give no assurances that issues related to Year 2000 will not have a
material adverse effect on the Company's financial condition or results of
operations.
Litigation
The Company currently, and from time to time, is expected to be subject to
claims, suits and investigations arising in the ordinary course of business.
Except as described below, the Company is not currently a party to any such
proceeding which, in management's opinion, could have a material effect on the
Company's results of operations or financial position.
False Claims Act Litigation
In June 1993, the Office of the Inspector General (OIG) of the Department of
Health and Human Services requested information from the Company in connection
with an investigation involving the Company's procedures for preparing Medicare
cost reports. In January 1995, the U.S. Department of Justice issued a Civil
Investigative Demand which also requested information from the Company in
connection with that same investigation. As a part of the government's
investigation, several former and current employees of the Company were
interviewed. The Company cooperated fully with the investigation. The Company
received no communication from the government on this matter from approximately
June 1996 until August 1998.
In August 1998, the government informed the Company that the investigation was
prompted by a qui tam lawsuit filed under the False Claims Act. The suit was
filed in January 1993 by a former employee of a hospital managed by a Company
subsidiary ("the relator"). The suit named as defendants the Company and its
subsidiary, Quorum Health Resources, Columbia/HCA and all hospitals owned or
managed by Columbia or Quorum from 1984 through 1997. The case was unsealed,
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and the government formally elected to join the suit, in October 1998. The
unsealed complaint, prepared by the relator, alleged that the Company knowingly
prepared and caused to be filed cost reports which claimed payments from
Medicare and other government payment programs greater than the amounts due.
On February 2, 1999, the government filed an amended complaint providing its
allegations. On that date, the government also filed a notice of
non-intervention advising the Court that it would not proceed on some of the
relator's allegations, and that it would not sue individual managed hospital
clients. The government's complaint does not name as defendants any hospital
managed by the Company. It does name the Company, Quorum Health Resources and
each subsidiary which now owns or has ever owned a hospital.
The government filed that amended complaint after extensive discussions with the
Company about how to proceed. The government had proposed that the case be
stayed while the government obtained from Quorum and reviewed extensive
additional documents. The Company declined the government's request and asked
the government for a specific settlement proposal, which the government declined
to provide.
Accordingly, in January 1999, the Company filed motions with the court asking to
be separated from the case against co-defendant Columbia/HCA. The government did
not oppose the motion to separate the cases against Columbia/HCA and the
Company.
The February 2, 1999 complaint alleges that the Company, on behalf of hospitals
it managed between 1985 and 1995 and hospitals it owned from 1990 to the
present, violated the False Claims Act by filing false Medicare cost reports.
The government asserts that the false claims in the cost reports are reflected
in "reserve analyses" created by the Company. The complaint also alleges that
such filings were the result of Company policy.
The Company believes that the government has incorrectly interpreted Company
policies and the purpose of allowances under generally accepted accounting
principles.
On February 16, 1999, the Company learned that the court granted the Company's
motion to separate the cases against it and Columbia/HCA. The court further
ordered the government to file a new complaint against the Company by February
24, 1999, which it did. The government's new complaint is similar to the one
filed on February 2, 1999.
On March 9, 1999, the court appointed a mediator to facilitate settlement
discussions between the Company and the government. The Company had earlier
requested that a mediator be appointed, a request that the government had
opposed. The first meeting with the mediator is scheduled for June 11, 1999.
On April 15, 1999, the Company filed several motions to dismiss the government's
complaint in whole or in part as well as a motion to dismiss the relator from
the case.
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On March 31, 1999, the plaintiffs caused subpoenas to be issued to approximately
200 current and former managed hospitals seeking various documents. On April 21,
1999, the court granted the Company's motion to stay these subpoenas temporarily
pending a ruling on the Company's motion for a longer stay which, if granted,
would remain in place until the court ruled on the Company's motions to dismiss.
The Company's objective is a timely and fair resolution of the case.
In May 1998, the Company learned that it is a named defendant in a separate qui
tam case when it received a letter from a U.S. Attorney. The complaint alleges
violations of Medicare laws governing the home health operations at two of the
Company's hospitals. The complaint was filed under seal in June 1996 by a former
employee who was discharged by the Company in April 1996. The purpose of the
letter from the U.S. Attorney was to allow the Company an opportunity to
evaluate the results of the government's investigation to date and to discuss
with the government the allegations made in the complaint, prior to the
government making a decision as to whether it will intervene as a plaintiff in
the case. The lawsuit remains under seal for all other purposes. The Company is
cooperating fully with the U.S. Attorney's Office. The Company has responded to
requests for documents and made several of its employees available for
interviews. If any violation of the law is found, the Company intends to pursue
an amicable settlement.
The Company cannot at this time predict the outcome of these cases or estimate
their ultimate impact on the Company's business or operating results. If the
outcome of either case were unfavorable, the Company could be subject to fines,
penalties and damages and also could be excluded from Medicare and other
government reimbursement programs. These and other results of these cases could
have a material adverse effect on the Company's financial condition or results
of operations.
Although the Company believes that it is in material compliance with the laws
and regulations governing the Medicare and Medicaid programs, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties and exclusion from the Medicare and Medicaid programs.
Shareholder Litigation
On October 23, November 2 and November 23, 1998, lawsuits were filed by separate
stockholders in the U.S. District Court for the Middle District of Tennessee. On
January 5, 1999, the court consolidated these cases into a single lawsuit. The
plaintiffs filed an amended complaint on March 5, 1999. The plaintiffs seek to
represent a class comprised of all individuals who purchased the Company's
common stock from October 25, 1995 through October 21, 1998, exclusive of
insiders of the Company and their immediate families. The consolidated complaint
names as defendants several officers of the Company and one of its outside
directors. The complaint alleges that defendants violated Sections 10(b) and
20(a) of the Securities Exchange Act of 1934. The plaintiffs claim that the
Company materially inflated its net revenues during the class period by
including in those net revenues amounts received from the
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settlement of cost reports that had allegedly been filed in violation of
applicable Medicare regulations years earlier and that, because of this
practice, this statement, which first appeared in Quorum's Form 10-K filed in
September 1996, was false: "The Company believes that its owned hospitals are in
substantial compliance with current federal, state, local, and independent
review body regulations and standards." On May 7, 1999, the Company filed a
motion to dismiss the complaint. The Company intends to defend vigorously the
claims and allegations in this action.
On November 2, 1998, a lawsuit was filed against the Company, all of its current
directors and two former directors in the U.S. District Court for the Northern
District of Alabama. On January 14, 1999, this suit was transferred by agreement
of the parties to the U.S. District Court for the Middle District of Tennessee.
On February 16, 1999, the defendants filed a motion to dismiss the complaint. In
response, the plaintiff amended his complaint. The amended complaint asserts
four claims: a shareholders' derivative claim for breach of fiduciary duty, a
shareholders' derivative claim for violations of the Racketeer Influenced and
Corrupt Organizations Act, a shareholders' derivative claim for injunctive
relief, and a purported class action claim for breach of fiduciary duty. As the
basis for each of these claims, plaintiff alleges in the amended complaint that
the defendants were in 1993 made specifically aware that the Company was filing
illegal cost reports and that the defendants "mandated" that the illegal acts
continue in violation of applicable Medicare and Medicaid reimbursement laws.
All of the defendants plan to vigorously defend this litigation. The defendants
filed a new motion to dismiss on April 30, 1999.
10. SUBSEQUENT EVENTS
Effective April 8, 1999, the Company sold Park Medical Center in Columbus, Ohio,
which was previously identified as held for sale, for amounts approximating its
carrying amounts at March 31, 1999.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
The following management's discussion and analysis in this quarterly
report contains "forward looking statements." These are statements about
Quorum's(1) current expectations or forecasts of future events. Some examples
would be comments about future operating results, future acquisitions, future
financial performance and the outcome of contingencies such as litigation. The
Company from time to time will also make forward looking statements in other
written materials and in oral statements to the public. Forward looking
statements use words such as "anticipate," "believe," "expect," "intend,"
"plan," "project" and words of similar meaning in discussions which do not
involve simply reporting historical or current facts. The Company does not
promise to update any forward looking statement. Forward looking statements made
by the Company may turn out to be wrong. Actual results may differ materially.
Forward looking statements depend on assumptions which may prove incorrect and
on risks and facts which the Company may not know. As permitted by the Private
Securities Litigation Reform Act of 1995, in the following discussion and
analysis the Company has identified a number of risks and uncertainties. These
are factors which the Company believes could cause actual results to differ
materially from historical and expected results. These are not the only factors
which may be important.
On October 22, 1998, the Company issued a press release announcing that
it expected its operating results for fiscal 1999 to be below its earlier
expectations. On December 11, 1998 the Company stated in a press release that it
had further reduced its expectations for fiscal 1999. In its January 26, 1999
press release, the Company stated that it foresaw sustained pressure on revenues
and margins through the remainder of fiscal 1999. In its April 22, 1999 earnings
press release, the Company announced projected earnings growth, excluding
investigation and litigation related costs, of 10-15 percent for fiscal 2000.
The Company attributes its lowered fiscal 1999 expectations to several
factors. The most important of these are: (1) the Company has not maintained the
historical operating margins of hospitals owned more than one year, primarily
due to increased managed care discounts, changes in Medicare payments arising
out of the Balanced Budget Act of 1997 (the Budget Act), and unfavorable changes
in estimated third-party payor settlements in the second quarter of fiscal 1999;
(2) hospitals purchased in calendar 1998 did not positively impact the Company's
results of operations; (3) Park Medical Center in Columbus, Ohio performed
poorly; and (4) the Company completed only two hospital purchases in fiscal
1998. The Company expects continued
- ---------------
(1) The term "Quorum" or "the Company" as used herein refers to Quorum
Health Group, Inc. and its direct and indirect subsidiaries, unless otherwise
stated or indicated by context. The term "subsidiaries" as used herein also
means affiliated partnerships and affiliated limited liability companies.
16
<PAGE> 17
pressure on operating margins due to increased managed care discounts and
changes in payments due to the Budget Act. The Company expects the decline in
the growth rate of net revenue due to these factors to be less in fiscal 2000
than in fiscal 1999. The Company sold Park Medical Center in April 1999. The
Company completed four acquisitions and the joint venture in Vicksburg,
Mississippi in fiscal 1999 and does not expect these hospitals to adversely
affect earnings in fiscal 2000. While variation in changes in estimated
third-party payor settlements is normal in the hospital industry, the Company
does not expect on-going settlements to negatively impact the earnings growth
rate in fiscal 2000.
IMPACT OF ACQUISITIONS, JOINT VENTURES AND SALES
During the nine months ended March 31, 1999, the Company acquired four
hospitals and affiliated health care entities and entered into operating lease
agreements to lease certain land and buildings in connection with the
acquisitions. In addition, a majority-owned subsidiary of the Company and a
subsidiary of Columbia/HCA Healthcare Corp.(Col/HCA)formed River Region Health
System, a joint venture in Vicksburg, Mississippi. Col/HCA contributed Vicksburg
Medical Center. The Company's subsidiary and its physician shareholders
contributed ParkView Regional Medical Center and affiliated businesses. The
Company, through its subsidiary, has a majority equity interest in the joint
venture and is the manager of the joint venture. During fiscal 1998, the Company
acquired two hospitals and affiliated health care entities, contributed three
hospitals in exchange for equity interests in joint ventures that own and
operate seven hospitals and sold its remaining interest in a Nebraska hospital.
Effective April 8, 1999 the Company sold Park Medical Center in
Columbus, Ohio, which was previously identified as held for sale.
The Company regularly evaluates the performance of each of its owned
hospitals in light of its business strategies. The Company is always looking for
ways that its hospitals can better contribute to health care delivery in their
communities while improving shareholder value. Also, the Company is continually
evaluating various structures to serve existing local health care delivery
markets. These structures could include joint ventures with other hospital
owners or physicians.
Because of the financial impact of the acquisitions, joint ventures and
sales, it is difficult to make meaningful comparisons between the Company's
financial statements for the fiscal periods presented. In addition, due to the
current number of owned hospitals, each additional hospital acquisition can
affect the overall operating margin or results of operations of the Company.
During a transition period after the acquisition of a hospital, the
Company has typically taken a number of steps to lower operating costs. The
impact of such actions can be partially offset by cost increases to expand the
hospital's services, strengthen its medical staff and improve its market
position. The benefits of these investments and of other activities to improve
operating margins may not occur immediately. Additionally, operations at
acquired hospitals may deteriorate before or after the purchase date. This may
17
<PAGE> 18
be a result of physician practice patterns, loss of physicians, decreased local
management focus or turnover. In addition, higher discounts to non-governmental
payors and changes in Medicare payments arising out of the Budget Act have made
it more difficult to improve operating margins at acquired hospitals.
The financial performance of the Company's hospitals acquired in
calendar 1998 adversely affected the Company's operating margin and results of
operations during the nine months ended March 31, 1999. Furthermore, the Company
expects that its recent acquisitions will continue to reduce its operating
margins and may reduce results of operations during the remainder of fiscal
1999. In light of changes in payments from Medicare and managed care payors,
increased pricing pressures for acquired hospitals and the substantial number of
transactions already completed in fiscal 1999, the Company expects fewer
hospitals to meet its acquisition criteria in the near future.
For the Company to achieve its targeted growth rates, acquired
facilities must show improved operating results more quickly than in the past.
Additionally, as the Company grows, it depends on a greater volume of
acquisitions, or acquisitions of a larger size, to maintain its targeted growth
rate.
SELECTED OPERATING STATISTICS - OWNED HOSPITALS
The following table sets forth certain operating statistics for the
Company's owned hospitals for each of the periods presented. The results of the
owned hospitals for the three months ended March 31, 1999 (i) include three
months of operations for twenty-one hospitals and the Las Vegas and Macon joint
ventures accounted for using the equity method, (ii) include a partial period
for one hospital acquired and (iii) exclude the hospital sold and the three
hospitals contributed to joint ventures in fiscal 1998. The results of the owned
hospitals for the three months ended March 31, 1998 include three months of
operations for eighteen hospitals and partial periods for the Las Vegas joint
venture accounted for using the equity method, the hospital contributed to the
joint venture and one hospital acquired during such period.
The results of the owned hospitals for the nine months ended March 31,
1999 (i) include nine months of operations for eighteen hospitals and the Las
Vegas and Macon joint ventures accounted for using the equity method, (ii)
include partial periods for three hospitals acquired and one hospital
contributed by Col/HCA to a joint venture controlled by the Company, and (iii)
exclude the hospital sold and the three hospitals contributed to joint ventures
in fiscal 1998. The results of the owned hospitals for the nine months ended
March 31, 1998 include nine months of operations for seventeen hospitals and
partial periods for the Las Vegas joint venture accounted for using the equity
method, the hospital contributed to the joint venture, the hospital divested and
two hospitals acquired during such period.
18
<PAGE> 19
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
March 31 March 31
------------------------- -----------------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Number of hospitals at end of period 22 19 22 19
Licensed beds at end of period 4,955 4,188 4,955 4,188
Beds in service at end of period 4,063 3,420 4,063 3,420
Admissions 37,940 32,995 101,273 98,411
Average length of stay (days) 5.7 5.7 5.6 5.5
Patient days 216,355 187,185 569,866 545,627
Adjusted patient days 356,485 308,690 966,283 899,577
Occupancy rates (average licensed beds) 48.8% 50.5% 45.4% 47.2%
Occupancy rates (average beds in service) 59.5% 61.6% 55.5% 57.2%
Gross inpatient revenues (in thousands) $459,261 $390,051 $1,199,431 $1,181,082
Gross outpatient revenues (in thousands) $297,756 $253,198 $ 834,362 $ 766,171
</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. The results of operations for the periods presented include hospitals
acquired and sold and joint ventures as discussed above.
19
<PAGE> 20
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
March 31 March 31
------------------- -------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net operating revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses (1) 83.0 79.0 84.2 80.0
Equity in earnings of affiliates (1.4) (.5) (1.4) (.2)
----- ----- ----- -----
EBITDAR (2) 18.4 21.5 17.2 20.2
Leases and rentals 2.1 1.7 2.0 1.7
----- ----- ----- -----
EBITDA (2) 16.3 19.8 15.2 18.5
Depreciation and amortization 5.6 5.5 5.7 5.5
Interest 3.3 2.3 3.0 2.5
Write-down of assets and
investigation and litigation
related costs 0.6 5.7 2.7 1.9
Minority interest 0.1 0.2 (0.3) 0.2
----- ----- ----- -----
Income before income taxes 6.7 6.1 4.1 8.4
Provision for income taxes 2.6 2.7 2.0 3.4
----- ----- ----- -----
Net income 4.1% 3.4% 2.1% 5.0%
===== ===== ===== =====
</TABLE>
- ---------------
(1) Operating expenses represent expenses before leases and rentals, interest,
minority interest, income taxes, depreciation and amortization expense and
write-down of assets and investigation and litigation related costs.
(2) EBITDA represents earnings before interest, minority interest, income taxes,
depreciation and amortization expense and write-down of assets and investigation
and litigation related costs. EBITDAR represents EBITDA before leases and
rentals. EBITDA and EBITDAR are commonly used as analytical indicators, and also
serve as a measure of leverage capacity and debt service ability. EBITDA and
EBITDAR should not be considered measures of financial performance under
generally accepted accounting principles, and the items excluded from EBITDA and
EBITDAR are significant components in understanding and assessing financial
performance. EBITDA and EBITDAR should not be considered in isolation or as
alternatives to net income, cash flows generated by operating, investing or
financing activities or other financial statement data presented in the combined
financial statements as an indicator of financial performance or liquidity.
Because EBITDA and EBITDAR are not measurements determined in accordance with
generally accepted accounting principles and are thus susceptible to varying
calculations, EBITDA and EBITDAR as presented may not be comparable to other
similarly titled measures of other companies.
20
<PAGE> 21
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
The Company's net operating revenue was $448.4 million for the three
months ended March 31, 1999, compared to $398.3 million for the three months
ended March 31, 1998, an increase of $50.1 million or 12.6%. This increase was
primarily attributable to five hospital acquisitions during fiscal 1999 and
1998, the hospital contributed by Col/HCA to a joint venture controlled by the
Company, and a 1.0% increase in net operating revenue generated by same store
hospitals. "Same store hospitals" was calculated by comparing the same periods
in both fiscal periods for hospitals owned for one year or more and excluding
Park Medical Center. The Company's net operating revenue increase was partially
offset by the transfer of three hospitals to joint ventures which are accounted
for using the equity method and make no contribution to net operating revenue
from the date of transfer.
The increase in net operating revenue of same store hospitals was
primarily attributable to higher volumes, partially offset by lower net
operating revenue due to increased managed care discounts and the Budget Act. In
fiscal 1999, the Budget Act reduced payments for home health and skilled nursing
facility services. In response to payment pressures associated with the Budget
Act, the Company has combined some of its home health agencies, reduced costs at
its home health agencies and ceased admitting patients to a skilled nursing
facility at one hospital.
Operating expenses were $372.2 million for the three months ended March
31, 1999, compared to $314.6 million for the three months ended March 31, 1998.
This was an increase of $57.6 million or 18.3%. Operating expenses as a percent
of net operating revenue increased to 83.0% for the three months ended March 31,
1999 from 79.0% for the three months ended March 31, 1998. The Company believes
that pressure on hospital payment rates will continue and expenses will have to
be lowered to improve margins and achieve the Company's earnings growth targets.
Operating expenses as a percent of net operating revenue for owned hospitals
increased to 83.6% for the three months ended March 31, 1999 from 79.6% for the
three months ended March 31, 1998. This increase was primarily attributable to
acquisitions and same store hospitals. Operating expenses as a percent of net
operating revenue for recent acquisitions are typically higher than the
Company's same store hospitals. For same store hospitals, operating expenses as
a percent of net operating revenue increased to 81.7% for the three months ended
March 31, 1999 from 79.0% for the three months ended March 31, 1998. The
increase was primarily attributable to increases in bad debt, supplies, fees and
other operating expenses as a percent of net operating revenue.
Equity in earnings of affiliates, which was primarily attributable to
the Las Vegas and Macon operations, was $6.3 million for the three months ended
March 31, 1999, compared to $2.0 million for the three months ended March 31,
1998. This represents an increase of $4.3 million. Equity in earnings of
affiliates represented 1.4% of the Company's net operating revenue for the three
months ended March 31, 1999 and 0.5% of the Company's net operating revenue for
the three months ended March 31, 1998.
21
<PAGE> 22
Leases and rentals were $9.2 million for the three months ended March
31, 1999, compared to $6.7 million for the three months ended March 31, 1998.
This represents an increase of $2.5 million or 37.6%. Leases and rentals as a
percent of net operating revenue increased to 2.1% for the three months ended
March 31, 1999 from 1.7% for the three months ended March 31, 1998. This
increase was primarily attributable to fiscal 1998 and 1999 acquisitions
financed using the Company's End Loaded Lease Financing (ELLF) Agreement.
EBITDA was $73.2 million for the three months ended March 31, 1999,
compared to $79.0 million for the three months ended March 31, 1998. This
represents a decrease of $5.8 million or 7.3%. EBITDA as a percent of net
operating revenue was 16.3% for the three months ended March 31, 1999 compared
to 19.8% for the three months ended March 31, 1998. EBITDA as a percent of net
operating revenue for owned hospitals was 15.8% for the three months ended March
31, 1999 compared to 19.4% for the three months ended March 31, 1998. EBITDA as
a percent of net operating revenue for same store hospitals was 16.7% for the
three months ended March 31, 1999 compared to 19.5% for the three months ended
March 31, 1998. EBITDA as a percent of net operating revenue for the Company's
management services business was 22.1% for the three months ended March 31, 1999
compared to 24.5% for the three months ended March 31, 1998.
Depreciation and amortization expense was $25.0 million for the three
months ended March 31, 1999, compared to $21.8 million for the three months
ended March 31, 1998, an increase of $3.2 million or 14.7%. Depreciation and
amortization expense as a percent of net operating revenue increased to 5.6% for
the three months ended March 31, 1999 from 5.5% for the three months ended March
31, 1998. This increase was primarily attributable to the opening of the new
facility in Florence, South Carolina.
Interest expense was $14.9 million for the three months ended March 31,
1999, compared to $9.2 million for the three months ended March 31, 1998. This
represents an increase of $5.7 million or 62.2%. Interest expense as a percent
of net operating revenue increased to 3.3% for the three months ended March 31,
1999 from 2.3% for the three months ended March 31, 1998. This increase was due
to fiscal 1998 and 1999 additional borrowings related primarily to acquisitions,
the opening of the new South Carolina hospital and the shares repurchased.
Write-down of assets and investigation and litigation-related costs
were $2.7 million for the three months ended March 31, 1999 compared to $22.9
million for the three months ended March 31, 1998. During the three months ended
March 31, 1999, the Company incurred $2.7 million in investigation and
litigation related costs related primarily to the qui tam and shareholder
actions against the Company. During the three months ended March 31, 1998, the
Company recorded a write-down of goodwill at its hospital contributed to Valley
Health System LLC.
Minority interest expense was $0.5 million for three months ended March
31, 1999, compared to $0.8 million for the three months ended March 31, 1998.
This represents a decrease of $0.3 million. Minority interest expense as a
percent of net operating revenue decreased to 0.1% for the three months ended
March 31, 1999 from 0.2% for the three months ended March 31, 1998.
22
<PAGE> 23
The provision for income taxes was $11.8 million for the three months
ended March 31, 1999, compared to $10.8 million for the three months ended March
31, 1998. This represents an increase of $1.0 million or 9.5%. Excluding the
write-down of assets, the effective income tax rate was 39.1% for the three
months ended March 31, 1999 compared to 39.7% for the three months ended March
31, 1998.
Net income was $18.4 million for the three months ended March 31, 1999,
compared to $13.6 million for the three months ended March 31, 1998. This
represents an increase of $4.8 million or 34.6%. Net income as a percent of net
operating revenue was 4.1% for the three months ended March 31, 1999 compared to
3.4% for the three months ended March 31, 1998. Excluding the write-down of
assets and investigation and litigation related costs, net income as a percent
of net operating revenue was 4.5% for the three months ended March 31, 1999
compared to 7.2% for the three months ended March 31, 1998.
Nine Months Ended March 31, 1999 Compared to Nine Months Ended March 31, 1998
The Company's net operating revenue was $1,223.8 million for the nine
months ended March 31, 1999, compared to $1,200.0 million for the comparable
period of fiscal 1998. This represents an increase of $23.8 million or 2.0%. The
increase in net operating revenue was primarily attributable to six hospital
acquisitions during fiscal 1999 and 1998, the hospital contributed by Col/HCA to
a joint venture controlled by the Company and a 2.4% increase in management
services revenue. The Company's net operating revenue increase was partially
offset by a decrease in net operating revenue due to the transfer of three
hospitals to joint ventures which are accounted for on the equity method, the
sale of the Nebraska hospital, and a 1.5% decrease in net operating revenue
generated by same store hospitals.
The decrease in net operating revenue of same store hospitals was
primarily attributable to increased managed care discounts, unfavorable
estimated third-party payor settlements in the second quarter of fiscal 1999 and
the Budget Act. In fiscal 1999, the Budget Act reduced payments for home health
and skilled nursing facility services. In response to payment pressures
associated with the Budget Act, the Company has combined some of its home health
agencies, reduced costs at its home health agencies and ceased admitting
patients to a skilled nursing facility at one hospital. The decrease in net
operating revenue at same store hospitals was partially offset by higher
volumes.
Operating expenses were $1,030.3 million for the nine months ended
March 31, 1999, compared to $959.8 million for the nine months ended March 31,
1998. This represents an increase of $70.5 million or 7.3%. Operating expenses
as a percent of net operating revenue increased to 84.2% for the nine months
ended March 31, 1999 from 80.0% for the nine months ended March 31, 1998.
Operating expenses as a percent of net operating revenue for owned hospitals
increased to 85.2% for the nine months ended March 31, 1999 from 80.6% for the
nine months ended March 31, 1998. This increase was primarily attributable to
hospital acquisitions and same store hospitals. Operating expenses as a percent
of net operating revenue for recent acquisitions are typically higher than the
Company's same store hospitals. For same store hospitals, operating
23
<PAGE> 24
expenses as a percent of net operating revenue increased to 83.2% for the nine
months ended March 31, 1999 from 79.4% for the nine months ended March 31, 1998.
The increase reflects the lower net operating revenue, as discussed above, and
operational issues in certain local markets.
Equity in earnings of affiliates, which was primarily attributable to
the Las Vegas and Macon operations, was $16.6 million for the nine months ended
March 31, 1999, compared to $2.0 million for the nine months ended March 31,
1998. This represents an increase of $14.6 million. Equity in earnings of
affiliates represented 1.4% of the Company's net operating revenue for the nine
months ended March 31, 1999 and 0.2% of the Company's net operating revenue for
the nine months ended March 31, 1998.
Leases and rentals were $24.5 million for the nine months ended March
31, 1999, compared to $20.1 million for the nine months ended March 31, 1998.
This represents an increase of $4.4 million or 21.9%. Leases and rentals as a
percent of net operating revenue increased to 2.0% for the nine months ended
March 31, 1999 from 1.7% for the nine months ended March 31, 1998. This increase
was primarily attributable to fiscal 1998 and 1999 acquisitions financed using
the Company's ELLF Agreement.
EBITDA was $185.6 million for the nine months ended March 31, 1999,
compared to $222.2 million for the nine months ended March 31, 1998. This
represents a decrease of $36.6 million or 16.5%. EBITDA as a percent of net
operating revenue was 15.2% for the nine months ended March 31, 1999 compared to
18.5% for the nine months ended March 31, 1998. EBITDA as a percent of net
operating revenue for owned hospitals was 14.3% for the nine months ended March
31, 1999 compared to 18.0% for the nine months ended March 31, 1998. EBITDA as a
percent of net operating revenue for same store hospitals was 15.3% for the nine
months ended March 31, 1999 compared to 19.1% for the nine months ended March
31, 1998. EBITDA as a percent of net operating revenue for the Company's
management services business was 23.5% for the nine months ended March 31, 1999
compared to 24.1% for the nine months ended March 31, 1998.
Depreciation and amortization expense was $69.4 million for the nine
months ended March 31, 1999, compared to $65.9 million for the nine months ended
March 31, 1998, an increase of $3.5 million or 5.5%. Depreciation and
amortization expense as a percent of net operating revenue increased to 5.7% for
the nine months ended March 31, 1999 from 5.5% for the nine months ended March
31, 1998. This increase was primarily attributable to the opening of the new
facility in Florence, South Carolina and the decrease in net operating revenue
of same store hospitals, as discussed above.
Interest expense was $36.8 million for the nine months ended March 31,
1999, compared to $30.4 million for the nine months ended March 31, 1998. This
represents an increase of $6.4 million or 20.9%. Interest expense as a percent
of net operating revenue increased to 3.0% for the nine months ended March 31,
1999 from 2.5% for the nine months ended March 31, 1998. This increase was due
to additional borrowings in fiscal 1998 and part of fiscal 1999 primarily
related to acquisitions and shares repurchased. This increase in interest
expense was partially offset by the termination of two interest rate swap
agreements in September 1998.
During the nine months ended March 31, 1999, the Company recorded
write-downs of assets and investigation and litigation related costs of
24
<PAGE> 25
approximately $33.6 million compared to $22.9 million for the nine months ended
March 31, 1998. The Company recorded $25.6 million intangible asset write-downs
relating to certain physician practices and a $4.2 million write-down of assets
primarily related to Park Medical Center. The write-down of assets resulted
primarily from (1) the review of expected future cash flows of the Company's
physician practices and (2) the write-down of the carrying value of Park Medical
Center to estimated fair value. The revised carrying value of Park Medical
Center was based upon discussions the Company had with a third party interested
in buying the facility. The Company's review of its physician practices was a
result of recent changes in the physician practice management industry and the
accumulation of sufficient historical financial information as a basis for
changing estimated future cash flows. In addition, the Company incurred $3.8
million in investigation and litigation related costs related primarily to the
qui tam and shareholder actions against the Company. During the nine months
ended March 31, 1998 the Company recorded a write-down of goodwill at its
hospital contributed to Valley Health System LLC.
Minority interest income was $4.1 million for the nine months ended
March 31, 1999, compared to minority interest expense of $2.7 million for the
nine months ended March 31, 1998. This represents a decrease of $6.8 million.
Minority interest income as a percent of net operating revenue was 0.3% for the
nine months ended March 31, 1999 compared to minority interest expense of 0.2%
for the nine months ended March 31, 1998. This increase was primarily
attributable to the intangible asset write-downs and operational issues in
certain local markets with minority ownership.
The provision for income taxes was $24.7 million for the nine months
ended March 31, 1999, compared to $40.9 million for the nine months ended March
31, 1998. This represents a decrease of $16.2 million or 39.7%. Excluding the
asset write-downs, the effective income tax rate was 39.1% for the nine months
ended March 31, 1999 compared to 39.7% for the nine months ended March 31, 1998.
The asset write-downs were tax effected at 21.0% due to the effect of certain
intangible assets which the Company is not able to deduct.
Net income was $25.1 million for the nine months ended March 31, 1999,
compared to $59.4 million for the nine months ended March 31, 1998. This
represents a decrease of $34.3 million or 57.7%. Net income as a percent of net
operating revenue was 2.1% for the nine months ended March 31, 1999 compared to
5.0% for the nine months ended March 31, 1998. Excluding the write-down of
assets and investigation and litigation related costs, net income as a percent
of net operating revenue was 4.0% for the nine months ended March 31, 1999
compared to 6.2% for the nine months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had working capital of $257.1 million,
including cash of $16.5 million. The ratio of current assets to current
liabilities was 2.3 to 1.0 at March 31, 1999 compared to 2.2 to 1.0 at June 30,
1998.
25
<PAGE> 26
The Company's cash requirements excluding acquisitions and the
replacement hospital have historically been funded by cash generated from
operations. Cash generated from operations was $81.7 million for the nine months
ended March 31, 1999 and $85.7 million for the nine months ended March 31, 1998.
The billing and collection of accounts receivable by hospitals is very
difficult because of the complexity of the Medicare and Medicaid regulations,
increases in managed care, hospital personnel turnover including business office
managers, computer system conversions by hospital and government authorities,
dependence of hospitals on physician documentation of medical records, and the
subjective judgment involved in submitting Medicare and Medicaid bills. There
can be no assurance that this complexity will not negatively impact the
Company's future cash flow or results of operations.
Capital expenditures excluding acquisitions for the nine months ended
March 31, 1999 were $96.1 million as compared to $105.7 million for the nine
months ended March 31, 1998. Capital expenditures may vary from year to year
depending on facility and service improvements made by the owned hospitals. In
November 1998, the Company completed construction of and opened a replacement
hospital and two medical office buildings in Florence, South Carolina. This was
done using capital expenditures of approximately $32.6 million for the nine
months ended March 31, 1999. The total project cost was approximately $95
million. In fiscal 1999, excluding acquisitions, the Company expects to make
capital expenditures from $125 million to $135 million. These capital
expenditures include costs for the Carolinas construction project. In fiscal
2000, excluding acquisitions, the Company expects to make capital expenditures
from $90 million to $100 million.
During the nine months ended March 31, 1999, the Company used $216.4
million in cash for acquisitions. The Company acquired four hospitals and
affiliated health care entities in connection with the acquisitions. The Company
also entered into operating lease agreements to lease certain land and buildings
with an estimated fair value of $108.7 million. In addition, the Company
acquired a majority equity interest in a hospital contributed by Col/HCA to a
joint venture controlled by the Company. During fiscal 1998, the Company used
$131.7 million in cash for acquisitions. The Company acquired two hospitals and
affiliated health care entities, contributed three hospitals in exchange for
equity interests in joint ventures and sold its remaining interest in a Nebraska
hospital.
Effective April 8, 1999 the Company sold Park Medical Center in
Columbus, Ohio, which was previously identified as held for sale for amounts
approximating its carrying amounts at March 31, 1999.
In August 1998, the Board of Directors authorized the repurchase of up
to 3,000,000 shares of common stock. In October 1998, the Board of Directors
authorized the repurchase of up to 5,000,000 additional shares of common stock.
Shares purchased under the program may be used to satisfy the Company's
obligations under its stock-based employee benefit plans. As of May 1, 1999 the
Company had repurchased 3,585,000 million shares for an aggregate purchase price
of $48.1 million. All of these shares were purchased in open
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<PAGE> 27
market transactions. The Company has not repurchased any shares since
November 11, 1998.
In March 1999, the Company's Board of Directors approved a plan to
allow employees to exchange "underwater" stock options, which had exercise
prices higher than the market price of the Company's common stock. Based on the
exchange, the Company canceled 5,158,000 options at exercise prices ranging from
$12.09 to $33.06 and issued 3,580,000 options at an exercise price of $9.00.
Using the Black-Scholes option valuation model, the number of options
outstanding was reduced to offset the lower exercise prices of the options. The
estimated economic value of the grants was generally unchanged as a result of
the exchange. Under the proposed interpretation of APB Opinion No. 25, repriced
options would receive variable-award accounting. Should the proposed
interpretation become effective, the terms of the repriced options provide that
they will vest and be terminated thirty days after the effective date of the
interpretation, removing variable-award accounting. As of March 31, 1999, there
were 6,407,000 million options outstanding with a weighted average exercise
price of $9.70.
The Company intends to acquire additional acute care facilities, and is
actively seeking out such acquisitions. In light of changes in payments from
Medicare and managed care payors, increased pricing pressures for acquired
hospitals and the substantial number of transactions already completed in fiscal
1999, the Company expects fewer hospitals to meet its acquisition criteria in
the near future.
In March 1999, the Company amended its credit facility to provide
increased flexibility. The amended credit facility consists of an $850 million
secured revolving credit facility expiring November 26, 2002. The Company has
the option to request an incremental one-year extension subject to approval of
100% of the lenders on each anniversary date of the initial execution of the
credit agreement. The revolving line of credit bears interest, at the Company's
option, at generally the lender's base rate, swing-line rate, or a fluctuating
rate ranging from .55 to 1.55 percentage points above LIBOR. The Company pays a
facility fee ranging from .20 to .45 percentage points on the commitment. The
interest rate margins and facility fee rates are based on the Company's leverage
ratio. The maximum permitted leverage ratio was increased from 3.5 to 4.0 with a
further contingent increase to 4.5 subject to the issuance of a minimum of
$150.0 in subordinated debt. The net worth covenant was reset to a minimum level
of $500.0 million. Substantially all stock of the Company's subsidiaries has
been pledged under the terms of the amended credit facility. The Company may
prepay the amount outstanding at any time.
At May 4, 1999, the Company had $113.3 million available under its
$850.0 million revolving credit facility and $9.7 million available under its
$150.0 million ELLF agreement. The Company continually reviews its capital
needs. The Company may need to seek additional equity or debt financing to be
prepared for attractive acquisition opportunities and to meet other needs.
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<PAGE> 28
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
The Company's interest expense is sensitive to changes in the general
level of U.S. interest rates. To mitigate the impact of fluctuations in U.S.
interest rates, the Company generally maintains 50%-75% of its debt as fixed
rate in nature either by borrowing on a long-term basis or entering into
interest rate swap transactions. The interest rate swap agreements are contracts
to periodically exchange fixed and floating interest rate payments over the life
of the agreements. The floating-rate payments are based on LIBOR and fixed-rate
payments are dependent upon market levels at the time the swap agreement was
consummated. The interest rate swap agreements do not constitute positions
independent of the underlying exposures. The Company's policy is to not hold or
issue derivative instruments for trading purposes and to not be a party to any
instruments with leverage features. Certain swap agreements allow the
counter-party a one-time option at the end of the initial term to cancel the
agreement or a one-time option at the end of the initial term to extend the
swaps for an incremental period of up to five years. The Company is exposed to
credit losses in the event of nonperformance by the counter-parties to its
financial instruments. The counter-parties are creditworthy financial
institutions and the Company anticipates that the counter-parties will be able
to fully satisfy their obligations under the contracts. For the nine months
ended March 31, 1999 and 1998, the Company received a weighted average rate of
5.4% and 5.9% and paid a weighted average rate of 5.7% and 6.1%, respectively.
The table below presents information about the Company's
market-sensitive financial instruments, including long-term debt and interest
rate swaps as of March 31, 1999. For debt obligations, the table presents
principal cash flows and related weighted-average interest rates by expected
maturity dates. For interest rate swap agreements, the table presents notional
amounts by expected maturity date (assuming the options to extend are not
exercised) and weighted average interest rates based on rates in effect at March
31, 1999. The fair values of long-term debt and interest rate swaps were
determined based on quoted market prices at March 31, 1999 for the same or
similar issues.
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<PAGE> 29
Maturity Date, Fiscal Year Ending June 30
-----------------------------------------
<TABLE>
<CAPTION>
March 31,
1999
(Dollars in millions) Fair Value
There- of
1999 2000 2001 2002 2003 after Total Liabilities
---- ---- ---- ---- ---- ----- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed rate long-term debt $ 0.8 $0.9 $0.7 $ 0.6 $ 0.6 $151.7 $155.3 $153.1
Average interest rates 7.6% 7.6% 7.7% 7.7% 7.7% 8.7%
Variable rate long-
term debt $757.0 $757.0 $757.0
Average interest rates 6.1%
Interest rate swaps:
Pay fixed/receive
variable notional amounts $100.0 $400.0 $500.0 $ 12.3
Average pay rate 4.9% 5.9%
Average receive rate 5.0% 5.0%
</TABLE>
YEAR 2000 ISSUES
The "Year 2000 problem" describes computer programs which use two
rather than four digits to define the applicable year. These programs are
present in software applications running on desktop computers and network
servers. These programs are also present in microchips and microcontrollers
incorporated into equipment. The Company's computer hardware and software,
building infrastructure components (e.g. alarm systems and HVAC systems) and
medical devices that are date sensitive may contain programs with the Year 2000
problem. If uncorrected, the problem could result in computer system and program
failures or equipment and medical device malfunctions that could result in a
disruption of business operations or affect patient diagnosis and treatment. The
Company purchases from others substantially all of the software it uses.
The Company's Year 2000 strategy is led by its Vice President of
Corporate Services. In July 1998, the Company retained an outside firm to
provide consulting services and to assist the Company in implementing its Year
2000 strategy. The Company also has a Year 2000 steering committee to assist in
coordinating the Year 2000 implementation. The Company's Year 2000 strategy
addresses hospitals it owns and those it manages.
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<PAGE> 30
Managed Hospitals
In December 1998, the Company notified the owners of the managed
hospitals that the Company does not possess the consulting or other expertise
specifically designed to assist hospitals with their Year 2000 readiness. The
Company recommended that the managed hospitals engage outside consultants to
assist them in their Year 2000 compliance efforts. The Company also recommended
that each managed hospital create a Year 2000 committee charged with the design,
implementation and day-to-day oversight of the managed hospital's Year 2000
compliance efforts and that the governing board of each managed hospital receive
regular monthly reports from such Year 2000 committee. The Company also has
developed educational materials to inform the owners of the hospitals it manages
about the Year 2000 problem. The Company is presently monitoring the progress of
the response by the hospitals it manages to the Year 2000 problem. The Company
is also identifying additional third-party resources which the managed hospitals
may use to assist them in addressing the Year 2000 problem.
The Company's position is that it is not responsible for ensuring Year
2000 compliance by its managed hospitals. The Company can provide no assurance,
however, that its managed hospitals will not seek to hold it responsible for
losses they incur arising out of the Year 2000 problem. Nor can the Company
provide assurance that it will not ultimately be found liable for such losses
which, if they occur, may be material.
The Company is not able to verify the status of remediation efforts at
its managed hospitals. Therefore, the Company is not able to evaluate the most
reasonably likely Year 2000 worst case scenario for managed hospitals. Because
the Company provides only management services, it does not pay expenses of the
hospitals it manages and, therefore, does not expect to incur any significant
Year 2000 remediation costs for its managed hospitals.
Owned Hospitals and Corporate Office
The Company has a Year 2000 strategy for its owned hospitals that
includes phases for education, inventory and assessment of applications and
equipment at risk, conversion/remediation/ replacement, validation (including
testing) and post-implementation. The Company's strategy also includes
development of contingency plans to address potential disruption of operations
arising from the Year 2000 problem.
Education
The Company has completed the education phase of its Year 2000
strategy. Education will continue to be provided throughout the Year 2000
implementation process.
Tier Approach - Owned Hospitals
The Company has adopted a "tier approach" for Year 2000 project
completion. Tier 1 addresses applications and equipment that have a direct
impact on patient safety and health or is essential to daily operation of the
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<PAGE> 31
hospital. Tier 2 represents applications and equipment that are critical to
continued business operations, but not required to provide day-to-day service to
the patients and for which a viable alternative exists. Tier 3 indicates
applications and equipment not essential to daily operation of the hospital.
Financial Application Software and Hardware - Owned Hospitals
The Company has completed an initial assessment of financial
application software used in its owned hospitals in such areas as patient
accounting and financial reporting. Fourteen hospitals have been advised by the
manufacturers of their financial software systems that their software is
substantially Year 2000 compliant. Four owned hospitals are scheduled to convert
by December 1999 (revised from September 1999) to a financial software system
which is represented by the manufacturer to be Year 2000 compliant. The Company
has scheduled upgrades for the remaining three hospitals to be completed by
December, 1999, revised from September 1999. The Company has developed Year 2000
testing guidelines. The Company is currently evaluating testing costs and
software vendors' Year 2000 compliance assurances to define how and to what
extent it will conduct Year 2000 testing of these systems. A schedule for
testing of these systems has not yet been developed.
Clinical and Other Software and Hardware - Owned Hospitals
With respect to other software and related computer equipment,
including patient care and ancillary software, the owned hospitals are in the
inventory and assessment stage. The Company has substantially completed the
inventories and anticipates completing the inventory and assessment phase in May
1999 and Tier 1 remediation by December 1999, revised from September 1999.
Biomedical Equipment and Building Infrastructure - Owned Hospitals
The Company is completing the inventory and assessment phase and has
begun the conversion/remediation/replacement and validation phases of the owned
hospital systems such as biomedical equipment and building infrastructure
components. The Company has substantially completed the inventories and
anticipates completing the first round of assessments in May 1999, revised from
March 1999. The Company is using an outside vendor to gather and monitor
manufacturer Year 2000 compliance information of biomedical equipment and
building infrastructure. This information is used in the assessment phase of the
Company's Year 2000 program. The Company has submitted inventories to the vendor
for all of its hospitals.
The Company has developed testing guidelines designed to verify Year
2000 readiness. A third party vendor has been contracted to perform Year 2000
testing of Tier 1 devices. It is the Company's policy that no Tier 1 device will
be used without reasonable assurance that it will perform properly. Such
assurance may take the form of testing or assurance from the vendor of Year 2000
compliance.
The Company has estimated dates for completing subsequent phases with
respect to equipment and infrastructure in its owned hospitals. All phases of
the Year 2000 project for Tier 1 are estimated for completion by September 1999.
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<PAGE> 32
Business Partners Year 2000 Readiness
The Company has also developed an inventory of those business partners
which are most important to its ongoing operations. "Business partners" are
vendors that provide services, such as banks or utilities, or products, such as
medical supply manufacturers and drug distributors. The Company is using an
outside vendor to gather Year 2000 compliance and readiness information for
these business partners. The outside vendor is asking each Tier 1 business
partner to ascertain and report on their Year 2000 readiness, including
contingency plans. The Company is also communicating directly with certain key
business partners about Year 2000 readiness and contingency planning. The
Company anticipates this will be an ongoing activity for the balance of calendar
1999.
Costs
The Company believes that Year 2000-related remediation costs incurred
through March 31, 1999 have not been material to its results of operations. The
Company's consultants have initially estimated the total costs to be incurred
for completion of its Year 2000 strategy between $16 million and $37 million.
This estimate is primarily based on industry averages and excludes costs
associated with the accelerated purchase of financial application software and
hardware upgrades and conversions. Approximately half is estimated to be capital
costs and half is estimated to be operating costs. The Company earmarked a
portion of its current year capital budget as contingency funds and expects that
substantially all of the current year capital costs can be accommodated within
the current budget. Most of the estimated additional current year operating
costs were not budgeted as separate Year 2000 expenses given the early and
tentative nature of the estimates. The Company is reviewing to what extent
existing resources can be reallocated to the Year 2000 problem and how otherwise
to fund these operating costs. All cost estimates are preliminary and are
expected to be revised as the project progresses.
Reliance on Third Parties
The Company relies heavily on third parties in operating its business.
In addition to its reliance on software, hardware and other equipment vendors to
verify Year 2000 compliance of their products, the Company also depends on (i)
fiscal intermediaries which process claims and make payments for the Medicare
program, (ii) insurance companies, HMO's and other private payors, (iii)
utilities which provide electricity, water, natural gas and telephone services
and (iv) vendors of medical equipment, supplies and pharmaceuticals used in
patient care. As a part of its Year 2000 strategy, the Company intends to seek
assurances from these parties that their services and products will not be
interrupted or malfunction due to the Year 2000 problem. Failure of some or all
of these third parties to resolve their Year 2000 issues could have a material
adverse effect on the Company's results of operations and ability to provide
health care services at certain owned hospitals. The Company is coordinating
closely with its trade associations and other parties to monitor HCFA's progress
toward Year 2000 compliance. HCFA representatives
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<PAGE> 33
have advised the Company that HCFA systems are currently or soon will be Year
2000 compliant. Effective April 5, 1999, HCFA is requiring all hospitals to
submit Medicare claims electronically that are Year 2000 compliant. The
Company's hospitals used third party processors to submit Medicare claims. The
Company believes that most of these processors are able to comply with the HCFA
mandate. The Company is in the process of verifying and testing their Year 2000
compliance.
Contingency Plans
The Company intends to complete its initial contingency plan by June
1999. The Company is looking to third parties and industry associations in order
to identify and share best practices for Year 2000 contingency planning. Each of
the Company's owned hospitals has a disaster plan which will be reviewed as a
part of the Company's contingency planning process and supplemented as necessary
to accommodate Year 2000 compliancy issues. These disaster plans are designed to
enable the hospital to continue to function during natural disasters and other
crises. The plans also have contingencies for moving patients to other
facilities if the hospital is not able to continue to care for them. In some
cases, the Company may not be able to develop contingency plans which allow the
hospital to continue to operate. For example, the affected hospital may not be
able to secure supplies of fuel to operate its backup generators if electrical
supplies fail for an extended period.
Risks of Year 2000 Issues
The Company believes today that the most reasonably likely worst case
scenario will involve (1) malfunctions in clinical computer software and
hardware at owned hospitals, (2) malfunctions in biomedical equipment at owned
hospitals, (3) temporary disruptions in delivery of medical supplies and utility
services to owned hospitals and (4) temporary disruptions in payments,
especially payments from Medicare and other government programs. The Company
expects these events will result in increased expense as the affected
hospital(s) refer tests and other procedures to other parties, access
alternative suppliers and increase staffing to assure adequate patient care.
These events may also cause lost revenue for procedures which its hospitals are
unable to perform. For example, a hospital will suspend a service if Year 2000
compliant equipment required for that service is unavailable. Disruptions in
payments will adversely affect the Company's cash flow. The foregoing assessment
is based on information currently available to the Company. The Company will
revise its assessment as it implements its Year 2000 strategy. The Company can
provide no assurances that applications and equipment the Company believes to be
Year 2000 compliant will not experience difficulties or that the Company will
not experience difficulties obtaining resources needed to make modifications to
or replace the Company's affected systems and equipment. Failure by the Company
or third parties on which it relies to resolve Year 2000 issues could have a
material adverse effect on the Company's results of operations and its ability
to provide health care services. Consequently, the Company can give no
assurances that issues related to Year 2000 will not have a material adverse
effect on the Company's financial condition or results of operations. The
Company's Year 2000 readiness program
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<PAGE> 34
is an ongoing process and the risk assessments and estimates of costs and
completion dates for various phases of the program are subject to change. The
cost of the Year 2000 program and the dates on which the Company believes the
phases of the program will be completed are based on management's best
estimates, which were derived using numerous assumptions of future events.
Factors that could cause such changes include availability of qualified
personnel and consultants, the actions of third parties and material changes in
governmental regulations. There can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
GENERAL
The federal Medicare program and state Medicaid programs accounted for
approximately 55% of gross patient service revenue for the years ended June 30,
1998 and 1997. The payment rates under the Medicare program for inpatients are
prospective, based upon the diagnosis of a patient.
Under the Budget Act, there were no increases in the inpatient
operating payment rates to acute care hospitals for services through September
30, 1998. Inpatient operating payment rates were increased 0.5% effective
October 1, 1998 through September 30, 1999 and subsequent increases are expected
to be less than inflation. The Budget Act reduced inpatient capital payments in
the aggregate by approximately 15% effective October 1, 1997. Payments for
Medicare outpatient services, home health services and skilled nursing facility
services historically have been paid based on costs, subject to certain
adjustments and limits. The Budget Act requires that the payment for those
services be converted to prospective payment systems (PPS). PPS for skilled
nursing facilities began for cost reporting periods beginning on and after July
1, 1998. However, the implementation of PPS for outpatient and home health has
been delayed.
The Company has experienced reductions in payments for outpatient and
home health services in the interim period prior to implementation of PPS, as
well as reductions in payments under PPS for skilled nursing facilities. The
number of home health visits has declined for both the industry and the Company.
In response to the Budget Act, the Company has consolidated certain home health
agencies, reduced costs at its home health agencies and ceased admitting
patients to a skilled nursing facility at one hospital.
The Budget Act has reduced the Company's ability to maintain its
historical rate of net revenue growth and operating margins. The Budget Act and
further changes in the Medicare or Medicaid programs and other proposals to
limit health care spending could have a material adverse impact upon the health
care industry and the Company. The Company expects continuing pressure to limit
expenditures by governmental health care programs. The Clinton Administration
has proposed a federal budget under which acute care hospitals would receive no
increases for inpatient operating payment rates effective October 1, 1999
through September 30, 2000.
The Company is continuing to experience an increase in managed care. An
increasing number of payors are actively negotiating amounts paid to
34
<PAGE> 35
hospitals, which are typically lower than their standard rates. Typically, a
hospital negotiates with a managed care payor for payment rates for a specific
group of covered members. In exchange for providing services at a discounted
rate, the hospital expects that the payor will encourage the members to use the
facility. This process occurs though the use of provider directories and
identification cards, as well as specific incentives in the members' benefit
design. However, some managed care payors sell the negotiated discounts to other
payors who have no direct contract with the hospital and whose members have
already been admitted to the hospital under another plan, or who would use the
hospital without the discounted rates. The process of reselling negotiated
discounts is known as "silent PPO" discounting, and refers to an array of
transactions that involve buying and selling provider discounts without an
obligation by the buying managed care payor to encourage members to use the
hospital. This practice is difficult for hospitals to detect. Undetected silent
PPO discounting results in higher managed care discounts and lower net revenues.
To assist the owned hospital management teams in evaluating and
negotiating contracts and obtaining better pricing, the Company employs managed
care experts. The Company has canceled silent PPO contracts in several markets
and is currently reviewing other markets for possible silent PPO activity.
Additionally, the Company plans to install managed care information systems in
its owned hospitals to improve the information available to management and to
help ensure that the Company is paid at the contracted amounts. The trend toward
managed care, including indemnity insurance and employer plans which pay less
than full charges, health maintenance organizations, preferred provider
organizations and various other forms of managed care, has and may continue to
adversely affect the Company's ability to maintain its historical rate of net
revenue growth and operating margins.
The Company's acute care hospitals, like most acute care hospitals in
the United States, have significant unused capacity. The result is substantial
competition for patients and physicians. Inpatient utilization continues to be
negatively affected by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative health care delivery services
for less acutely ill patients. The Company expects increased competition and
admission constraints to continue in the future. The ability to successfully
respond to these trends, as well as spending reductions in governmental health
care programs, will play a significant role in determining the Company's ability
to maintain its historical rate of net revenue growth and operating margins.
In fiscal 1999, there has been a substantial decline in volumes in the
Company's home care agencies. The Company believes that home care volumes have
begun to stabilize in recent months. Over the long term, the Company expects the
industry trend from inpatient to outpatient services to continue due to the
increased focus on managed care and advances in technology. Outpatient revenue
of the Company's owned hospitals was approximately 41.0% of gross patient
service revenue for the nine months ended March 31, 1999 and
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<PAGE> 36
39.3% of gross patient service revenue for the nine months ended March 31, 1998.
Until this fiscal year, the Company's historical financial trend has
been favorably impacted by the Company's ability to successfully acquire acute
care hospitals. The Company believes that trends in the health care industry
described above may create possible future acquisition opportunities. The
Company faces competition in acquiring hospitals from a number of well-
capitalized organizations. Many states have implemented new review processes by
the Attorneys General of not-for-profit hospital acquisitions, resulting in
delays to close an acquisition. Additionally, some hospitals are sold through an
"auction" process, which may result in higher purchase prices being paid by
competitors for those properties than the Company believes are reasonable. The
Year 2000 problem may reduce the number of suitable hospital acquisition
candidates. As the Company grows, it depends on a greater volume of
acquisitions, or acquisitions of a larger size, to achieve its target growth
rates. There can be no assurances that the Company can achieve its target growth
rate through hospital acquisitions and the successful integration of hospitals
into its system. The financial performance of the Company's recent acquisitions
has adversely affected the Company's operating margin and results of operations
during fiscal 1999. In light of changes in payments from Medicare and managed
care payors, increased pricing pressures for acquired hospitals and the
substantial number of transactions already completed in fiscal 1999, the Company
expects fewer hospitals to meet its acquisition criteria in the near future.
The Company's owned hospitals accounted for 91% of the Company's net
operating revenue for the nine months ended March 31, 1999 and 1998. For the
nine months ended March 31, 1999, the Dothan, Alabama and Ft. Wayne, Indiana
markets accounted for approximately 30% of owned hospital revenue and 48% of
owned hospital EBITDA. Due to the current number of owned hospitals, changes in
any individual market can affect the overall operating results of the Company.
Furthermore, concentration of results of operations in the Dothan, Alabama and
Fort Wayne, Indiana markets increases the risks that adverse developments at
these facilities will have a material adverse effect on the Company's operations
or financial condition.
The Company experiences seasonal fluctuations. The Company typically
experiences higher patient volumes and higher revenues in the third quarter of
its fiscal year.
The Company must prepare its financial statements in accordance with
generally accepted accounting principles. This means that the Company must make
estimates and assumptions which affect the amounts it reports in its financial
statements. For example, net patient service revenue is reported at the
estimated net realizable amount from patients, third-party payors, and others
for services rendered, including estimated retroactive adjustments under
agreements with third-party payors. Settlements under agreements with
third-party payors are estimated in the period the related services are rendered
and adjusted in future periods as final settlements are determined. The timing
and amount of changes in estimates may cause fluctuations in the Company's
quarterly or annual operating results.
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<PAGE> 37
The IRS is in the process of conducting examinations of the Company's
federal income tax returns for the fiscal years ended June 30, 1993 through
1998. The IRS has proposed certain adjustments to the Company's federal income
tax returns for the fiscal years ending June 30, 1993 through 1995. The most
significant adjustments involved the tax accounting methods adopted for
computing bad debt expense and the valuation of purchased hospital property,
plant and equipment and the related depreciable lives. The Company intends to
protest substantially all of the proposed adjustments through the appeals
process of the IRS. In the opinion of management, the ultimate outcome of the
IRS examinations will not have a material effect on the Company's results of
operations or financial position.
The Company currently, and from time to time, expects to be subject to
claims, suits and investigations arising in the ordinary course of business.
Except as described below, the Company is not currently a party to any such
proceeding which, in management's opinion, could have a material effect on the
Company's results of operations or financial position.
The federal government and a number of states are rapidly increasing
the resources devoted to investigating allegations of fraud and abuse in the
Medicare and Medicaid programs. At the same time, regulatory and law enforcement
authorities are taking an increasingly strict view of the requirements imposed
on providers by the Social Security Act and Medicare and Medicaid regulations.
Although the Company believes that it is in material compliance with such laws,
a determination that the Company has violated such laws, or even the public
announcement that the Company was being investigated concerning possible
violations, could have a material adverse effect on the Company.
In June 1993, the Office of the Inspector General (OIG) of the
Department of Health and Human Services requested information from the Company
in connection with an investigation involving the Company's procedures for
preparing Medicare cost reports. In January 1995, the U.S. Department of Justice
issued a Civil Investigative Demand which also requested information from the
Company in connection with that same investigation. As a part of the
government's investigation, several former and current employees of the Company
were interviewed. The Company cooperated fully with the investigation. The
Company received no communication from the government on this matter from
approximately June 1996 until August 1998.
In August 1998, the government informed the Company that the
investigation was prompted by a qui tam lawsuit filed under the False Claims
Act. The suit was filed in January 1993 by a former employee of a hospital
managed by a Company subsidiary ("the relator"). The suit named as defendants
the Company and its subsidiary, Quorum Health Resources, Columbia/HCA and all
hospitals owned or managed by Columbia or Quorum from 1984 through 1997. The
case was unsealed, and the government formally elected to join the suit, in
October 1998. The unsealed complaint, prepared by the relator, alleged that the
Company knowingly prepared and caused to be filed cost reports which claimed
payments from Medicare and other government payment programs greater than the
amounts due.
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<PAGE> 38
On February 2, 1999, the government filed an amended complaint
providing its allegations. On that date, the government also filed a notice of
non-intervention advising the Court that it would not proceed on some of the
relator's allegations, and that it would not sue individual managed hospital
clients. The government's complaint does not name as defendants any hospital
managed by the Company. It does name the Company, Quorum Health Resources and
each subsidiary which now owns or has ever owned a hospital.
The government filed that amended complaint after extensive
discussions with the Company about how to proceed. The government had proposed
that the case be stayed while the government obtained from Quorum and reviewed
extensive additional documents. The Company declined the government's request
and asked the government for a specific settlement proposal, which the
government declined to provide.
Accordingly, in January 1999, the Company filed motions with the court
asking to be separated from the case against co-defendant Columbia/HCA. The
government did not oppose the motion to separate the cases against Columbia/HCA
and the Company.
The February 2, 1999 complaint alleges that the Company, on behalf of
hospitals it managed between 1985 and 1995 and hospitals it owned from 1990 to
the present, violated the False Claims Act by filing false Medicare cost
reports. The government asserts that the false claims in the cost reports are
reflected in "reserve analyses" created by the Company. The complaint also
alleges that such filings were the result of Company policy.
The Company believes that the government has incorrectly interpreted
Company policies and the purpose of allowances under generally accepted
accounting principles.
On February 16, 1999, the Company learned that the court granted the
Company's motion to separate the cases against it and Columbia/HCA. The court
further ordered the government to file a new complaint against the Company by
February 24, 1999 which it did. The government's new complaint is similar to the
one filed on February 2, 1999.
On March 9, 1999, the court appointed a mediator to facilitate
settlement discussions between the Company and the government. The Company had
earlier requested that a mediator be appointed, a request that the government
had opposed. The first meeting with the mediator is scheduled for June 11, 1999.
On April 15, 1999, the Company filed several motions to dismiss the
government's complaint in whole or in part as well as a motion to dismiss the
relator from the case.
On March 31, 1999, the plaintiffs caused subpoenas to be issued to
approximately 200 current and former managed hospitals seeking various
documents. On April 21, 1999, the court granted the Company's motion to stay
these subpoenas temporarily pending a ruling on the Company's motion for a
longer stay which, if granted, would remain in place until the court ruled on
the Company's motions to dismiss.
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The Company's objective is a timely and fair resolution of the case.
In May 1998, the Company learned that it is a named defendant in a
separate qui tam case when it received a letter from a U.S. Attorney. The
complaint alleges violations of Medicare laws governing the home health
operations at two of the Company's hospitals. The complaint was filed under seal
in June 1996 by a former employee who was discharged by the Company in April
1996. The purpose of the letter from the U.S. Attorney was to allow the Company
an opportunity to evaluate the results of the government's investigation to date
and to discuss with the government the allegations made in the complaint, prior
to the government making a decision as to whether it will intervene as a
plaintiff in the case. The lawsuit remains under seal for all other purposes.
The Company is cooperating fully with the U.S. Attorney's Office. The Company
has responded to requests for documents and made several of its employees
available for interviews. If any violation of the law is found, the Company
intends to pursue an amicable settlement.
The Company cannot at this time predict the outcome of these cases or
estimate their ultimate impact on the Company's business or operating results.
If the outcome of either case were unfavorable, the Company could be subject to
fines, penalties and damages and also could be excluded from Medicare and other
government reimbursement programs. These and other results of these cases could
have a material adverse effect on the Company's financial condition or results
of operations.
Although the Company believes that it is in material compliance with
the laws and regulations governing the Medicare and Medicaid programs,
compliance with such laws and regulations can be subject to future government
review and interpretation as well as significant regulatory action including
fines, penalties and exclusion from the Medicare and Medicaid programs.
Shareholder Litigation
On October 23, November 2 and November 23, 1998, lawsuits were filed
by separate stockholders in the U.S. District Court for the Middle District of
Tennessee. On January 5, 1999, the court consolidated these cases into a single
lawsuit. The plaintiffs filed an amended complaint on March 5, 1999. The
plaintiffs seek to represent a class comprised of all individuals who purchased
the Company's common stock from October 25, 1995 through October 21, 1998,
exclusive of insiders of the Company and their immediate families. The
consolidated complaint names as defendants several officers of the Company and
one of its outside directors. The complaint alleges that defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The plaintiffs
claim that the Company materially inflated its net revenues during the class
period by including in those net revenues amounts received from the settlement
of cost reports that had allegedly been filed in violation of applicable
Medicare regulations years earlier and that, because of this practice, this
statement, which first appeared in Quorum's Form 10-K filed in September 1996,
was false: "The Company believes that its owned hospitals are in substantial
compliance with current federal, state, local, and independent review body
regulations and standards." On May 7, 1999, the Company filed a
39
<PAGE> 40
motion to dismiss the complaint. The Company intends to defend vigorously the
claims and allegations in this action.
On November 2, 1998, a lawsuit was filed against the Company, all of
its current directors and two former directors in the U.S. District Court for
the Northern District of Alabama. On January 14, 1999, this suit was transferred
by agreement of the parties to the U.S. District Court for the Middle District
of Tennessee. On February 16, 1999, the defendants filed a motion to dismiss the
complaint. In response, the plaintiff amended his complaint. The amended
complaint asserts four claims: a shareholders' derivative claim for breach of
fiduciary duty, a shareholders' derivative claim for violations of the Racketeer
Influenced and Corrupt Organizations Act, a shareholders' derivative claim for
injunctive relief, and a purported class action claim for breach of fiduciary
duty. As the basis for each of these claims, plaintiff alleges in the amended
complaint that the defendants were in 1993 made specifically aware that the
Company was filing illegal cost reports and that the defendants "mandated" that
the illegal acts continue in violation of applicable Medicare and Medicaid
reimbursement laws. All of the defendants plan to vigorously defend this
litigation. The defendants filed a new motion to dismiss on April 30, 1999.
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's ability to pass on these increased costs is limited
due to increasing regulatory and competitive pressures, as discussed above.
40
<PAGE> 41
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1993, the Office of the Inspector General (OIG) of the
Department of Health and Human Services requested information from the Company
in connection with an investigation involving the Company's procedures for
preparing Medicare cost reports. In January 1995, the U.S. Department of Justice
issued a Civil Investigative Demand which also requested information from the
Company in connection with that same investigation. As a part of the
government's investigation, several former and current employees of the Company
were interviewed. The Company cooperated fully with the investigation. The
Company received no communication from the government on this matter from
approximately June 1996 until August 1998.
In August 1998, the government informed the Company that the
investigation was prompted by a qui tam lawsuit filed under the False Claims
Act. The suit was filed in January 1993 by a former employee of a hospital
managed by a Company subsidiary ("the relator"). The suit named as defendants
the Company and its subsidiary, Quorum Health Resources, Columbia/HCA and all
hospitals owned or managed by Columbia or Quorum from 1984 through 1997. The
case was unsealed, and the government formally elected to join the suit, in
October 1998. The unsealed complaint, prepared by the relator, alleged that the
Company knowingly prepared and caused to be filed cost reports which claimed
payments from Medicare and other government payment programs greater than the
amounts due.
On February 2, 1999, the government filed an amended complaint
providing its allegations. On that date, the government also filed a notice of
non-intervention advising the Court that it would not proceed on some of the
relator's allegations, and that it would not sue individual managed hospital
clients. The government's complaint does not name as defendants any hospital
managed by the Company. It does name the Company, Quorum Health Resources and
each subsidiary which now owns or has ever owned a hospital.
The government filed that amended complaint after extensive
discussions with the Company about how to proceed. The government had proposed
that the case be stayed while the government obtained from Quorum and reviewed
extensive additional documents. The Company declined the government's request
and asked the government for a specific settlement proposal, which the
government declined to provide.
Accordingly, in January 1999, the Company filed motions with the court
asking to be separated from the case against co-defendant Columbia/HCA. The
government did not oppose the motion to separate the cases against Columbia/HCA
and the Company.
The February 2, 1999 complaint alleges that the Company, on behalf of
hospitals it managed between 1985 and 1995 and hospitals it owned from 1990 to
the present, violated the False Claims Act by filing false Medicare cost
reports. The government asserts that the false claims in the cost reports are
reflected in "reserve analyses" created by the Company. The complaint also
alleges that such filings were the result of Company policy.
The Company believes that the government has incorrectly interpreted
Company policies and the purpose of allowances under generally accepted
accounting principles.
On February 16, 1999, the Company learned that the court granted the
Company's motion to separate the cases against it and Columbia/HCA. The court
further ordered the government to file a new complaint against the Company by
February
<PAGE> 42
24, 1999 which it did. The government's new complaint is similar to the one
filed on February 2, 1999.
On March 9, 1999, the court appointed a mediator to facilitate
settlement discussions between the Company and the government. The Company had
earlier requested that a mediator be appointed, a request that the government
had opposed. The first meeting with the mediator is scheduled for June 11, 1999.
On April 15, 1999, the Company filed several motions to dismiss the
government's complaint in whole or in part as well as a motion to dismiss the
relator from the case.
On March 31, 1999, the plaintiffs caused subpoenas to be issued to
approximately 200 current and former managed hospitals seeking various
documents. On April 21, 1999, the court granted the Company's motion to stay
these subpoenas temporarily pending a ruling on the Company's motion for a
longer stay which, if granted, would remain in place until the court ruled on
the Company's motions to dismiss.
The Company's objective is a timely and fair resolution of the case.
In May 1998, the Company learned that it is a named defendant in a
separate qui tam case when it received a letter from a U.S. Attorney. The
complaint alleges violations of Medicare laws governing the home health
operations at two of the Company's hospitals. The complaint was filed under seal
in June 1996 by a former employee who was discharged by the Company in April
1996. The purpose of the letter from the U.S. Attorney was to allow the Company
an opportunity to evaluate the results of the government's investigation to date
and to discuss with the government the allegations made in the complaint, prior
to the government making a decision as to whether it will intervene as a
plaintiff in the case. The lawsuit remains under seal for all other purposes.
The Company is cooperating fully with the U.S. Attorney's Office. The Company
has responded to requests for documents and made several of its employees
available for interviews. If any violation of the law is found, the Company
intends to pursue an amicable settlement.
The Company cannot at this time predict the outcome of these cases or
estimate their ultimate impact on the Company's business or operating results.
If the outcome of either case were unfavorable, the Company could be subject to
fines, penalties and damages and also could be excluded from Medicare and other
government reimbursement programs. These and other results of these cases could
have a material adverse effect on the Company's financial condition or results
of operations.
Although the Company believes that it is in material compliance with
the laws and regulations governing the Medicare and Medicaid programs,
compliance with such laws and regulations can be subject to future government
review and interpretation as well as significant regulatory action including
fines, penalties and exclusion from the Medicare and Medicaid programs.
On October 23, November 2 and November 23, 1998, lawsuits were filed
by separate stockholders in the U.S. District Court for the Middle District of
Tennessee. On January 5, 1999, the court consolidated these cases into a single
lawsuit. The plaintiffs filed an amended complaint on March 5, 1999. The
plaintiffs seek to represent a class comprised of all individuals who purchased
the Company's common stock from October 25, 1995 through October 21, 1998,
exclusive of insiders of the Company and their immediate families. The
consolidated complaint names as defendants several officers of the Company and
one of its outside directors. The complaint alleges that defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The plaintiffs
claim that the Company materially inflated its net revenues during the class
period by including in
<PAGE> 43
those net revenues amounts received from the settlement of cost reports that had
allegedly been filed in violation of applicable Medicare regulations years
earlier and that, because of this practice, this statement, which first appeared
in Quorum's Form 10-K filed in September 1996, was false: "The Company believes
that its owned hospitals are in substantial compliance with current federal,
state, local, and independent review body regulations and standards." On May 7,
1999, the Company filed a motion to dismiss the complaint. The Company intends
to defend vigorously the claims and allegations in this action.
On November 2, 1998, a lawsuit was filed against the Company, all of its current
directors and two former directors in the U.S. District Court for the Northern
District of Alabama. On January 14, 1999, this suit was transferred by agreement
of the parties to the U.S. District Court for the Middle District of Tennessee.
On February 16, 1999, the defendants filed a motion to dismiss the complaint. In
response, the plaintiff amended his complaint. The amended complaint asserts
four claims: a shareholders' derivative claim for breach of fiduciary duty, a
shareholders' derivative claim for violations of the Racketeer Influenced and
Corrupt Organizations Act, a shareholders' derivative claim for injunctive
relief, and a purported class action claim for breach of fiduciary duty. As the
basis for each of these claims, plaintiff alleges in the amended complaint that
the defendants were in 1993 made specifically aware that the Company was filing
illegal cost reports and that the defendants "mandated" that the illegal acts
continue in violation of applicable Medicare and Medicaid reimbursement laws.
All of the defendants plan to vigorously defend this litigation. The defendants
filed a new motion to dismiss on April 30, 1999.
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, 1999.
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 11, 1999 By: /s/Steve B. Hewett
----------------------------------------
Steve B. Hewett
Vice President/Chief Financial Officer
<PAGE> 44
EXHIBIT INDEX
Exhibit No.
- -----------
10 Sixth Amendment to Credit Agreement, dated November 26, 1997, as
subsequently amended, by and among Quorum Health Group, Inc. as
Borrower, Lenders as referred to in the Credit Agreement, and
First Union National Bank as Agent for the Lenders.
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10
SIXTH AMENDMENT
This SIXTH AMENDMENT (the "Amendment") dated March 16, 1999 is entered
into by and among QUORUM HEALTH GROUP, INC., a corporation organized under the
laws of Delaware (the "Borrower"), the LENDERS referred to in the Credit
Agreement (the "Lenders") and FIRST UNION NATIONAL BANK (f/k/a First Union
National Bank of North Carolina) as Agent for the Lenders (hereinafter defined
the "Agent").
STATEMENT OF PURPOSE
The Borrower, the Lenders and the Agent are parties to that certain
Credit Agreement dated as of April 22, 1997 (such agreement, as previously
amended, and as further amended from time to time, herein referred to as the
"Credit Agreement") pursuant to which the Lenders have agreed to extend certain
credit facilities to the Borrower. Capitalized terms used in this Amendment not
otherwise defined herein have the respective meanings attributed to such terms
in the Credit Agreement.
Pursuant to the Credit Agreement, the Lenders have made Extensions of
Credit to the Borrower. In consideration of making further Extensions of Credit
under the Credit Agreement, and as a condition thereof, the Lenders have
requested that the Borrower and certain of its Subsidiaries pledge to the Agent,
for the ratable benefit of itself and the Lenders, certain shares of capital
stock, partnership interests and limited liability company and other ownership
interests owned by the Borrower and such Subsidiaries. The Borrower and such
Subsidiaries have agreed to such pledges pursuant to the terms hereof.
Additionally the Borrower has requested that the Lenders amend the
Credit Agreement as more fully described below. Subject to the terms and
conditions set forth below, and in consideration for the pledges referred to
above, the Lenders are willing to agree to the requested amendments.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the parties hereto, the Borrower,
each of the Lenders and the Agent agree as follows:
1. AMENDMENTS TO ARTICLE I.
(a) Section 1.1 is hereby amended by deleting the following
defined terms and substituting the corresponding new defined term
therefore:
"Base Rate Loan" means any Loan bearing interest at a rate
based upon the Base Rate as provided in Section 4.1(a).
"LIBOR Rate Loan" means any Loan bearing interest at a rate
based upon the LIBOR Rate as provided in Section 4.1(a).
<PAGE> 2
"Loan Documents" means, collectively, this Agreement, the
Notes, the Guaranty, the Pledge Agreements, and any Hedging Agreements
executed by any Lender, the Applications and each other document,
instrument and agreement executed and delivered in connection with this
Agreement or otherwise referred to herein or contemplated hereby, all
as may be amended, restated or otherwise modified.
"Subordinated Debt" means the collective reference to Debt on
Schedule 6.1(t) hereof designated as Subordinated Debt (including,
without limitation, the 1995 Senior Subordinated Notes) and any other
Debt of the Borrower or any Subsidiary subordinated in right and time
of payment to the Obligations on terms and conditions (including such
subordination terms) satisfactory to the Required Lenders and approved
in writing by the Agent; provided that, for purposes of this
definition, any Subordinated Debt that (a) does not have scheduled
principal payments or a maturity date prior to the date which is
eighteen (18) months after the Termination Date of this Agreement, (b)
does not contain restrictive covenants or other terms more restrictive
than those contained in this Agreement and (c) contains subordination
provisions no less favorable to the holders of the Borrower's Senior
Debt than the subordination provisions contained in the Borrower's 1995
Senior Subordinated Notes, shall be deemed satisfactory to the Required
Lenders and approved by the Agent.
(b) Section 1.1 is hereby amended by inserting the following
new defined term in correct alphabetical order therein:
"Applicable Margin" shall have the meaning assigned thereto in
Section 4.1(c).
"Collateral" means any assets purported to be pledged by any
Loan Party or Subsidiary thereof, whether pursuant to any Pledge
Agreement or otherwise, to the Lenders or the Agent for the ratable
benefit of the Agent and the Lenders in order to secure the Obligations
or any portion thereof. Any reference to the term "collateral"
contained in the Credit Agreement (other than those references
contained in Sections 2.7(b), 4.5, 6.1(e) and 11.2(b)) as of the
effective date of the Sixth Amendment is hereby replaced with the term
"Collateral".
"Pledge Agreements" means the collective reference to the
Pledge Agreements executed in connection with the Sixth Amendment by
the Borrower or any Subsidiary thereof in favor of the Agent for the
ratable benefit of the Agent and the other Lenders, substantially in
the form of Exhibit A attached to the Sixth Amendment as amended,
restated or otherwise modified; "Pledge Agreement" means any such
Pledge Agreement.
"Pledgors" means the collective reference to each Person
executing a Pledge Agreement in connection with the Sixth Amendment;
"Pledgor" means any such Person.
"Sixth Amendment" means the Sixth Amendment to the Agreement,
dated as of March 16, 1999.
2
<PAGE> 3
(c) Section 1.1 is hereby amended by deleting the term "LIBOR
Margin". Any reference to the term "LIBOR Margin" contained in the
Credit Agreement as of the effective date of the Sixth Amendment is
hereby replaced with the phrase "Applicable Margin for LIBOR Rate
Loans".
2. AMENDMENTS TO ARTICLE II. Article II is hereby amended by
inserting the following new Section 2.11 in correct order therein:
"SECTION 2.11 Security. The Obligations of the Borrower and
each of the Guarantors under this Agreement shall be secured by the
Collateral described in the Pledge Agreements."
3. AMENDMENTS TO ARTICLE IV.
(a) Section 4.1(a) is hereby deleted and the following new Section
4.1(a) is hereby substituted in lieu thereof:
(a) Interest Rate Options. Subject to the provisions of this
Section 4.1, at the election of the Borrower in accordance with Article
II, the unpaid principal balance of (i) any Revolving Credit Loan shall
bear interest at (A) the Base Rate plus the Applicable Margin as set
forth below or (B) the LIBOR Rate plus the Applicable Margin as set
forth below, (ii) any Competitive Bid Loan shall bear interest at the
applicable Competitive Bid Rate established pursuant to Section 2.4 and
(iii) any Swingline Loan shall bear interest at the Swingline Rate. Any
Revolving Credit Loan as to which the Borrower has not duly specified
an interest rate as provided herein shall be deemed a Base Rate Loan."
(b) Section 4.1(c) is hereby deleted and the following new
Section 4.1(c) is hereby substituted in lieu thereof:
(c) Applicable Margin. The Applicable Margin provided for in
Section 4.1(a) with respect to the Loans (the "Applicable Margin")
shall (i) from the effective date of the Sixth Amendment until the
delivery of the applicable Margin Certificate and related financial
statements for the fiscal quarter ending on March 31, 1999 equal 0.250%
for Base Rate Loans and 1.150% for LIBOR Rate Loans, and (ii) for each
fiscal quarter thereafter be determined by reference to the Total
Leverage Ratio as of the end of the fiscal quarter immediately
preceding the delivery of the applicable Margin Certificate as follows:
3
<PAGE> 4
<TABLE>
<CAPTION>
Applicable Margin for
Total Leverage Ratio Base Rate Loans LIBOR Rate Loans
-------------------- --------------- ----------------
<S> <C> <C>
greater than or equal to 4.00 to 1.00 0.750% 1.550%
less than 4.00 to 1.00 but greater
than or equal to 3.50 to 1.00 0.250% 1.150%
less than 3.50 to 1.00 but greater
than or equal to 3.00 to 1.00 0.000% 0.950%
less than 3.00 to 1.00 but greater
than or equal to 2.50 to 1.00 0.000% 0.750%
less than 2.50 to 1.00 but greater
than or equal to 2.00 to 1.00 0.000% 0.650%
less than 2.00 0.000% 0.550%
</TABLE>
Adjustments, if any, in the Applicable Margin shall be made by the
Administrative Agent on the fifth (5th) Business Day after receipt by
the Agent of quarterly financial statements for the Borrower and its
Subsidiaries and the accompanying Officer's Compliance Certificate
setting forth the Total Leverage Ratio of the Borrower and its
Consolidated Entities as of the most recent fiscal quarter end. Subject
to Section 4.1(d), in the event the Borrower fails to deliver such
financial statements and certificate within the time required by
Section 7.1(c), the Applicable Margin shall be the highest Applicable
Margin set forth above until five (5) Business Days after receipt by
the Agent of such financial statements and certificate."
(c) Section 4.3(a) is hereby amended by deleting (i) the last
sentence of such Section and (ii) the pricing grid contained therein,
and substituting the following in lieu thereof:
"The Facility Fee Rate, from the effective date of the Sixth
Amendment until the receipt of the initial Margin Certificate and
related financial statements for the fiscal quarter ending on March 31,
1999, shall be 0.350% and thereafter shall be determined by reference
to the Total Leverage Ratio of the Borrower and its Consolidated
Entities set forth in the most recently delivered Margin Certificate as
follows:
<TABLE>
<CAPTION>
Total Leverage Ratio Facility Fee Rate (%)
-------------------- ---------------------
<S> <C>
greater than or equal to 4.00 to 1.00 0.450%
less than 4.00 to 1.00 but greater
than or equal to 3.50 to 1.00 0.350%
less than 3.50 to 1.00 but greater
than or equal to 3.00 to 1.00 0.300%
less than 3.00 to 1.00 but greater
than or equal to 2.50 to 1.00 0.250%
less than 2.50 to 1.00 but greater
than or equal to 2.00 to 1.00 0.225%
less than 2.00 0.200%"
</TABLE>
4
<PAGE> 5
4. AMENDMENTS TO ARTICLE VI. From and after the effective date of the
Sixth Amendment, the copies of Schedule 6.1(a) and Schedule 6.1(b) delivered in
connection with the closing of the Sixth Amendment shall be deemed substituted
for the copies of such Schedules delivered on the Closing Date.
5. AMENDMENTS TO ARTICLE VIII. Article VIII is hereby amended by
deleting Section 8.11 and the following new Section 8.11 is substituted in lieu
thereof:
SECTION 8.11 Wholly-Owned Entities. Within thirty (30) days after the
creation or acquisition of any Wholly-Owned Entity (a) cause it to execute and
deliver to the Agent a supplement to the Guaranty Agreement delivered on the
Closing Date substantially in the form of Exhibit A to such Guaranty Agreement,
(b) a supplement substantially in the form attached as Exhibit A to the Pledge
Agreement, or if applicable, a separate Pledge agreement substantially in the
form of the Pledge Agreement executed by the parent of such new Subsidiary and
(c) cause to be delivered to the Agent such other documents as the Agent or
Required Lenders shall reasonably request in connection therewith, including
without limitation, officers' certificates, financial statements, opinions of
counsel, resolutions, charter documents, certificates of existence and authority
to do business and any other closing certificates and documents described in
Section 5.2.
6. Amendments to Article IX.
(a) Section 9.1 is hereby deleted and the following new Section 9.1 is
substituted in lieu thereof:
"Total Leverage Ratio. As of any fiscal quarter end, permit the ratio
of (i) Total Debt as of such date to (ii) EBITDA for the period of four (4)
consecutive fiscal quarters ending on such date (the "Total Leverage Ratio"), to
exceed 4.00 to 1.00; provided that, upon issuance by the Borrower, of new
Subordinated Debt in an aggregate principal amount of at least $150,000,000
after the date of the Sixth Amendment, the Total Leverage Ratio shall not exceed
4.50 to 1.00 as of any fiscal quarter end."
(b) Section 9.2 is hereby amended by deleting the phrase
"[Intentionally Omitted]" and inserting the following in lieu thereof:
"Senior Leverage Ratio. As of any fiscal quarter end during any period
set forth below, permit the ratio of (i) Senior Debt as of such date to (ii)
EBITDA, for the period of four (4) consecutive fiscal quarters ending on such
date, to exceed the corresponding ratio set forth below:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Sixth Amendment effective 4.00 to 1.00
date through June 30, 2000
Thereafter 3.75 to 1.00
</TABLE>
5
<PAGE> 6
(c) Section 9.5 is hereby deleted and the following new Section 9.5
substituted in lieu thereof:
"Consolidated Net Worth. As of any fiscal quarter end, permit
Consolidated Net Worth to be less than the sum of (a) $500,000,000 plus (b) 80%
of cumulative positive Consolidated Net Income (calculated without excluding any
non-cash losses) after the Closing Date plus (c) 90% of the proceeds from any
equity offerings (net of offering and professional fees and expenses) and any
other capital contributions since the Closing Date less (d) the amount of any
stock repurchases or redemptions permitted pursuant to Section 10.7(e); provided
that in no event shall Consolidated Net Worth to be less than $500,000,000."
7. AMENDMENT FEE. In consideration of the amendments set forth herein,
the Borrower agrees to pay to the Agent, for the ratable benefit of the Lenders,
an amendment fee of 15 basis points on the Aggregate Commitment.
8. Conditions. The effectiveness of this Amendment shall be conditioned
upon receipt by the Agent of:
(a) a copy of (i) this Amendment duly executed by the Agent, the
Borrower and the Required Lenders and (ii) updated copies of Schedule 6.1(a) and
Schedule 6.1(b);
(b) payment of the Amendment Fee; and
(c) contemporaneous consent to this Amendment by the lenders under the
Quorum ELLF Credit Agreement and the execution and delivery of all requisite
amendments thereto.
9. Conditions Subsequent. The following items shall be delivered by the
Borrower to the Agent by March 31, 1999; provided that if such items are not
delivered, then such non-delivery shall constitute an immediate Event of Default
under the Credit Agreement:
(a) a copy of each Pledge Agreement pledging the capital
stock, limited liability company ownership interests, partnership
interests and other equity interests in each entity identified on
Schedule 1 hereto, the First Union National Bank, as collateral agent
and each issuer of any capital stock pledged thereunder;
(b) a certificate of the secretary or assistant secretary of
the Borrower and each other Pledgor certifying that attached thereto is
a true and complete copy of the articles of incorporation of such
Borrower or such Pledgor, as applicable, and all amendments thereto,
certified as of a recent date by the appropriate Governmental Authority
in its jurisdiction of incorporation; that attached thereto is a true
and complete copy of the bylaws of the
6
<PAGE> 7
Borrower or such Pledgor, as applicable, as in effect on the date of
such certification; that attached thereto is a true and complete copy
of resolutions duly adopted by the Board of Directors of the Borrower
or such Pledgor, as applicable, authorizing the transactions
contemplated hereunder and the execution, delivery and performance of
this Amendment, the Pledge Agreements and the other Loan Documents to
which it is a party; and as to the incumbency and genuineness of the
signature of each officer of the Borrower or such Pledgor executing the
Amendment, any Pledge Agreement or any other Loan Documents to which it
is a party;
(c) certificates as of a recent date of the good standing of
the Borrower and each Pledgor under the laws of its jurisdiction of
organization or formation;
(d) a favorable opinion of counsel to the Borrower addressed
to the Agent and the Lenders in form and substance reasonably
satisfactory to the Administrative Agent;
(e) original stock certificates evidencing the capital stock
pledged pursuant to the Pledge Agreements, together with an undated
stock for each certificate duly executed in blank by the registered
owner thereof;
(f) all necessary approvals, authorizations and consents, if
any be required, of any Person and of all Governmental Authorities and
courts having jurisdiction with respect to the transactions
contemplated by the Pledge Agreements.
10. Bringdown; References to Credit Agreement. The Borrower
hereby represents and warrants that immediately prior to giving effect
to this Amendment and upon and after the effectiveness hereof (a) the
representations and warranties contained in Article VI of the Credit
Agreement are true and correct in all material respects as of the date
hereof (except and to the extent that such representations and
warranties relate to an earlier date, in which case such
representations and warranties shall be true and correct as of such
earlier date) and (b) no Default or Event of Default has occurred and
is continuing as of the date hereof. All references in the Loan
Documents to "Credit Agreement" shall refer to the Credit Agreement as
amended by this Amendment and as the Credit Agreement may be further
amended from time to time.
11. Miscellaneous. Except as amended hereto, the Credit
Agreement shall remain in full force and effect in accordance with its
terms. This Amendment may be executed in one or more counterparts each
of which shall be deemed to be an original and all of which, when taken
together, shall constitute one and the same instrument and no single
counterpart of this Amendment need be executed by all the parties
hereto. The covenants and agreements contained in this Amendment shall
apply to and inure to the benefit of and be binding upon the parties
hereto and their respective successors and assigns. This Amendment
shall be governed by the laws of the State of North Carolina.
[Signature Pages Follow]
7
<PAGE> 8
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have
executed this Amendment to Credit Agreement as of the date first above written.
QUORUM HEALTH GROUP, INC.
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
8
<PAGE> 9
FIRST UNION NATIONAL BANK
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
9
<PAGE> 10
TORONTO DOMINION (TEXAS), INC.
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
10
<PAGE> 11
SCOTIABANC INC.
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
11
<PAGE> 12
AMSOUTH BANK
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
12
<PAGE> 13
CITICORP USA, INC.
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
13
<PAGE> 14
SUNTRUST BANK, NASHVILLE, N.A.
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
14
<PAGE> 15
NATIONSBANK, N.A.
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
15
<PAGE> 16
MELLON BANK, N.A.
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
16
<PAGE> 17
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
17
<PAGE> 18
FLEET NATIONAL BANK, N.A.
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
18
<PAGE> 19
ABN AMRO BANK N.V.
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
19
<PAGE> 20
COOPERATIEVE CENTRALE RAIFFEISEN
BOERENLEENBANK B.A.
"RABOBANK NEDERLAND,"
NEW YORK BRANCH
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
20
<PAGE> 21
NATIONAL CITY BANK OF KENTUCKY
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
21
<PAGE> 22
UNION BANK OF CALIFORNIA, N.A.
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
22
<PAGE> 23
PARIBAS
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
23
<PAGE> 24
LTCB TRUST COMPANY
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
24
<PAGE> 25
THE SUMITOMO BANK, LIMITED
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
25
<PAGE> 26
CREDIT LYONNAIS
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
26
<PAGE> 27
BANK ONE, NA
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
27
<PAGE> 28
THE SANWA BANK LIMITED,
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
28
<PAGE> 29
FBTC LEASING CORP.
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
29
<PAGE> 30
THE SUMITOMO TRUST AND
BANKING CO., LTD.,
NEW YORK BRANCH
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
30
<PAGE> 31
KBC BANK N.V.
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
31
<PAGE> 32
FIRST TENNESSEE BANK,
NATIONAL ASSOCIATION
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
32
<PAGE> 33
FIRST AMERICAN NATIONAL BANK
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
33
<PAGE> 34
BANK OF TOKYO - MITSUBISHI
TRUST COMPANY
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
34
<PAGE> 35
BANK HAPOALIM B.M.
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
[Signature Pages Continue]
35
<PAGE> 36
SOUTHTRUST BANK, N.A.
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
36
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED MARCH 31,
1999 (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-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 16,504
<SECURITIES> 0
<RECEIVABLES> 410,605
<ALLOWANCES> 79,660
<INVENTORY> 39,145
<CURRENT-ASSETS> 453,261
<PP&E> 1,047,355
<DEPRECIATION> 274,024
<TOTAL-ASSETS> 1,830,207
<CURRENT-LIABILITIES> 196,151
<BONDS> 911,401
0
0
<COMMON> 729
<OTHER-SE> 606,643
<TOTAL-LIABILITY-AND-EQUITY> 1,830,207
<SALES> 0
<TOTAL-REVENUES> 1,223,819
<CGS> 0
<TOTAL-COSTS> 943,485
<OTHER-EXPENSES> 99,008
<LOSS-PROVISION> 94,749
<INTEREST-EXPENSE> 36,815
<INCOME-PRETAX> 49,762
<INCOME-TAX> 24,661
<INCOME-CONTINUING> 25,101
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,101
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
