<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________________ to ______________________
Commission file number 33-31717-A
QUORUM HEALTH GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 62-1406040
------------------------ ----------------
(State of incorporation) (I.R.S. 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)
- --------------------------------------------------------------------------------
(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 9, 2000
----- --------------------------
Common Stock, $.01 Par Value 71,217,989 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
------------------------
2000 1999
--------- ---------
<S> <C> <C>
Revenue:
Net patient service revenue $ 420,193 $ 411,668
Hospital management/professional services 18,694 20,443
Reimbursable expenses 16,735 16,270
--------- ---------
Net operating revenue 455,622 448,381
Salaries and benefits 185,062 184,522
Reimbursable expenses 16,735 16,270
Supplies 66,000 61,992
Fees 41,341 42,543
Other operating expenses 33,989 32,832
Provision for doubtful accounts 31,200 34,067
Equity in earnings of affiliates (7,034) (6,300)
Leases and rentals 9,217 9,217
Depreciation and amortization 28,468 24,985
Interest 17,079 14,939
Investigation and litigation related costs 3,485 2,664
Minority interest 1,612 518
--------- ---------
Income before income taxes 28,468 30,132
Provision for income taxes 11,131 11,782
--------- ---------
Net income $ 17,337 $ 18,350
========= =========
Earnings per share:
Basic $ 0.24 $ 0.25
========= =========
Diluted $ 0.22 $ 0.25
========= =========
Weighted average shares outstanding:
Basic 70,849 72,498
========= =========
Diluted 84,590 72,909
========= =========
</TABLE>
See accompanying notes.
2
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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
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenue:
Net patient service revenue $ 1,214,235 $ 1,113,462
Hospital management/professional services 58,526 62,032
Reimbursable expenses 47,000 48,325
----------- -----------
Net operating revenue 1,319,761 1,223,819
Salaries and benefits 543,918 511,978
Reimbursable expenses 47,000 48,325
Supplies 191,460 169,354
Fees 118,438 116,038
Other operating expenses 96,030 89,864
Provision for doubtful accounts 100,060 94,749
Equity in earnings of affiliates (11,922) (16,566)
Leases and rentals 27,529 24,492
Depreciation and amortization 81,713 69,444
Interest 50,692 36,815
Write down of assets and investigation and
litigation related costs 6,420 33,639
Minority interest 1,805 (4,075)
----------- -----------
Income before income taxes 66,618 49,762
Provision for income taxes 26,048 24,661
----------- -----------
Net income $ 40,570 $ 25,101
=========== ===========
Earnings per share:
Basic $ 0.57 $ 0.34
=========== ===========
Diluted $ 0.53 $ 0.34
=========== ===========
Weighted average shares outstanding:
Basic 71,652 73,652
=========== ===========
Diluted 82,277 74,534
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 4
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
March 31 June 30
2000 1999
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 13,081 $ 22,258
Accounts receivable, less allowance for
doubtful accounts of $91,066 at
March 31, 2000 and $83,896 at
June 30, 1999 343,018 332,312
Supplies 41,123 39,003
Other 52,633 46,838
---------- ----------
Total current assets 449,855 440,411
Property, plant and equipment, at cost:
Land 89,165 88,157
Buildings and improvements 461,696 435,525
Equipment 642,939 584,017
Construction in progress 27,122 24,875
---------- ----------
1,220,922 1,132,574
Less accumulated depreciation 369,004 297,454
---------- ----------
851,918 835,120
Cost in excess of net assets acquired, net 224,889 226,038
Investments in unconsolidated entities 250,515 259,709
Other 80,066 70,670
---------- ----------
Total assets $1,857,243 $1,831,948
========== ==========
</TABLE>
4
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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
2000 1999
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 93,207 $ 96,904
Accrued salaries and benefits 66,178 72,558
Other current liabilities 31,316 34,841
Current maturities of long-term debt 1,026 913
---------- ----------
Total current liabilities 191,727 205,216
Long-term debt, less current maturities 877,980 872,213
Deferred income taxes 27,555 33,422
Professional liability risks and other
liabilities and deferrals 43,384 36,456
Minority interests in consolidated entities 64,405 59,975
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value;
300,000 shares authorized; 71,167
issued and outstanding at March 31,
2000 and 73,166 at June 30, 1999 712 732
Additional paid-in capital 240,689 253,714
Retained earnings 410,791 370,220
---------- ----------
652,192 624,666
---------- ----------
Total liabilities and stockholders' equity $1,857,243 $1,831,948
========== ==========
</TABLE>
See accompanying notes.
5
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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
------------------------
2000 1999
--------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 93,519 $ 81,711
Investing activities:
Purchase of acquired companies, net of
working capital settlements (20,016) (216,433)
Purchase of property, plant and equipment (79,123) (96,108)
Proceeds from sale of assets 6,906 --
Other 790 (348)
--------- ---------
Net cash used in investing activities (91,443) (312,889)
Financing activities:
Borrowings under bank debt 279,800 573,600
Repayments of bank debt (423,400) (279,000)
Borrowing under convertible subordinated
debentures 150,000 --
Change in outstanding checks and overnight
investment (5,887) (5,316)
Proceeds from issuance of common stock, net 5,374 7,238
Repurchases of common stock (18,636) (48,102)
Other 1,496 (18,287)
--------- ---------
Net cash (used in) provided by financing activities (11,253) 230,133
--------- ---------
Decrease in cash (9,177) (1,045)
Cash at beginning of period 22,258 17,549
--------- ---------
Cash at end of period $ 13,081 $ 16,504
========= =========
Supplemental cash flow information:
Interest paid $ (46,645) $ (31,309)
========= =========
Income taxes paid $ (24,049) $ (29,684)
========= =========
</TABLE>
See accompanying notes.
6
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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,
2000 are not necessarily indicative of the results that may be expected for the
year ending June 30, 2000. 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, 1999. Certain prior year amounts
have been reclassified to conform to the current year presentation.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This standard will require the Company to
recognize all derivatives on the balance sheet at their fair value. Derivatives
that are not hedges must be adjusted to fair value through changes to the
Company's income statement. For interest rate swap agreements that qualify as
hedges, the Company will offset changes in fair value against the change in fair
value of the hedged assets, liabilities, or firm commitments through changes to
the Company's earnings. The Company will adopt this new FASB standard on July 1,
2000. The Company is presently evaluating the new standard to determine its
effect on the earnings and financial position of the Company.
On March 31, 2000, the FASB issued its final interpretation of APB Opinion No.
25 "Accounting for Certain Transactions involving Stock Compensation." The
interpretation requires variable-award accounting for stock options granted six
months before or after the cancellation or settlement of options if the new
options have a lower exercise price. The interpretation will be effective July
1, 2000 and covers certain events that occurred after December 15, 1998. No
adjustments are to be made to financial statements for periods prior to the
effective date and no expense is to be recognized for any additional
compensation costs attributable to periods before the effective date.
In March 1999, the Company's board of directors approved a plan to allow
employees to exchange "underwater" stock options. These stock options had
exercise prices higher than the market price of the Company's common stock.
Based on the exchange, on March 26, 1999, the Company canceled 5.2 million
options at exercise prices ranging from $12.09 to $33.06 and issued 3.6 million
options at an exercise price of $9.00. The effect was to reduce the
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<PAGE> 8
number of options held to offset the benefit of a lower exercise price. The
estimated economic value of the grants was generally unchanged as a result of
the exchange. The March 26, 1999 options, under the terms of their agreement,
will vest and terminate thirty days after the Company gives notice to its
employees that the Company is required to apply variable award accounting to
these options. There would be no variable-award accounting for the March 26,
1999 repriced options after termination. The Company also granted 1.4 million
options on March 11, 1999. Under the final interpretation of APB 25, the Company
believes most of the options granted on that date will be subject to variable
award accounting.
As of March 31, 2000, there were a total of 7.5 million stock options
outstanding with a weighted average exercise price of $9.13. The Company is
currently evaluating all stock option grants to determine which grants will be
subject to variable award accounting and the effect of the new interpretation on
the Company's earnings.
3. ACQUISITIONS, JOINT VENTURES AND SALES
Effective March 1, 2000, the Company transferred its operating lease of Clinton
County Hospital in Frankfort, Indiana to an Indianapolis, Indiana health care
system.
Effective December 1, 1999, the Company acquired Caylor-Nickel Medical Center in
Bluffton, Indiana.
During fiscal 1999, the Company acquired four hospitals and affiliated health
care entities. In connection with the acquisitions, the Company entered into
operating lease agreements to lease certain land and buildings with an estimated
fair value of $108.7 million. Effective April 8, 1999, the Company sold Park
Medical Center in Columbus, Ohio.
Effective November 1, 1998, a majority-owned subsidiary of the Company and a
subsidiary of Columbia/HCA Healthcare Corp. (Col/HCA) formed a joint venture in
Vicksburg, Mississippi. Col/HCA contributed Vicksburg Medical Center. The
Company's subsidiary and its existing physician shareholders contributed
Parkview Regional Medical Center and affiliated businesses. The Company, through
its subsidiary, has a majority equity interest in the joint venture and is the
manager.
Hospital and affiliated business acquisitions are summarized as follows (in
thousands):
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<TABLE>
<CAPTION>
Nine Months Ended
March 31
-----------------------
2000 1999
-------- ---------
<S> <C> <C>
Fair value of assets acquired $ 23,655 $ 238,713
Fair value of liabilities assumed (3,639) (18,155)
Contributions from minority investors -- (4,125)
-------- ---------
Net cash used for acquisitions $ 20,016 $ 216,433
======== =========
</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, joint ventures and sales have been
consolidated in the accompanying condensed consolidated statements of income for
the periods subsequent to acquisition and for the periods prior to sales.
The following unaudited pro forma results of operations give effect to the
operations of the joint venture and the entities acquired and sold in fiscal
2000 and 1999 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
--------------------- ---------------------------
2000 1999 2000 1999
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net operating revenue $ 452,429 $ 442,194 $ 1,318,963 $ 1,287,555
Net income 18,883 20,267 43,141 28,328
Earnings per share:
Basic 0.27 0.28 0.60 0.38
Diluted 0.24 0.28 0.56 0.38
</TABLE>
The pro forma results of operations do not purport to represent what the
Company's results of operations would have been had such transactions in fact
occurred at the beginning of the periods presented or to project the Company's
results of operations in any future period.
4. LONG-TERM DEBT
On August 31, 1999, the Company issued $150.0 million of convertible
subordinated debentures due 2009 to Welsh, Carson, Anderson & Stowe, VIII, LP
and certain WCAS VIII affiliates, including Russell L. Carson, Chairman of the
9
<PAGE> 10
Company's Board of Directors. The debentures were sold for cash at their face
value. The debentures bear interest at 6.0% per annum. Interest is payable
quarterly. The debentures are convertible into common shares at a conversion
price of $11.25 per share. The debentures will automatically convert at any time
after three years if the average of the closing price of the Company's stock
over any 90 day period is more than 150% of the conversion price. The debentures
are callable at the Company's option at any time after August 31, 2001. In the
event of a merger, consolidation or sale of more than 50% of the Company's
assets, the holder of the debentures has the option to have the debentures
prepaid in full. The debentures have antidilution protection, including, under
certain circumstances, issuance of common stock below the then applicable
conversion price. The shares into which the debentures are convertible have
certain voting restrictions and must be held until August 2001. The debentures
are subordinated in right of payment to all debt. The proceeds were used to
reduce the Company's outstanding debt under its revolving credit facility.
5. WRITE-DOWN OF ASSETS AND INVESTIGATION AND LITIGATION RELATED COSTS
The Company incurred write-down of assets and investigation and litigation
related costs as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
March 31, March 31,
----------------- ------------------
2000 1999 2000 1999
------ ------ ------ -------
<S> <C> <C> <C> <C>
Investigation and litigation related
costs $3,485 $2,664 $6,420 $ 3,766
Write-down of assets -- -- -- 29,873
------ ------ ------ -------
Total $3,485 $2,664 $6,420 $33,639
====== ====== ====== =======
</TABLE>
Investigation and litigation related costs related primarily to the qui tam and
shareholder actions against the Company (See Note 9).
During the nine months ended March 31, 1999, the Company recorded $25.6 million
intangible asset write-downs relating to certain physician practices and a $4.3
million write-down of assets primarily related to Park Medical Center which was
subsequently sold. The write-down of assets resulted primarily from (1) the
review of expected future cash flows of the Company's physician practices and
(2) the write-down of the carrying value of Park Medical Center to estimated
fair value based on divestiture negotiations. The Company's review of its
physician practices was a result of recent changes in the physician practice
management industry and the accumulation of sufficient historical financial
information as a basis for changing estimated future cash flows.
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6. INCOME TAXES
The provision for income taxes for the three months and nine months ended March
31, 2000 and 1999 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.
7. EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of common
shares outstanding. Diluted earnings per share is based on the weighted average
number of common shares outstanding, and the effect of dilutive securities which
are convertible subordinated debentures and stock options. Outstanding options
to purchase 0.6 million and 4.4 million shares of common stock for the three
months ended March 31, 2000 and 1999, respectively, and 3.5 million and 4.0
million shares of common stock for the nine months ended March 31, 2000 and
1999, respectively, were not included in the computation of earnings per share
because the options' exercise prices were greater than the average market price
of the common stock.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
March 31 March 31
------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income $17,337 $18,350 $40,570 $25,101
Interest expense on convertible
subordinated debentures, net of taxes 1,370 -- 3,198 --
------- ------- ------- -------
Numerator for dilutive earnings
per share $18,707 $18,350 $43,768 $25,101
======= ======= ======= =======
Denominator:
Shares used for basic earnings
per share 70,849 72,498 71,652 73,652
Effect of dilutive securities:
Convertible subordinated debentures 13,333 -- 10,370 --
Stock options 408 411 255 882
------- ------- ------- -------
Shares used for dilutive earnings
per share 84,590 72,909 82,277 74,534
======= ======= ======= =======
Basic earnings per share $ 0.24 $ 0.25 $ 0.57 $ 0.34
======= ======= ======= =======
Diluted earnings per share $ 0.22 $ 0.25 $ 0.53 $ 0.34
======= ======= ======= =======
</TABLE>
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8. STOCKHOLDERS' EQUITY AND STOCK BENEFIT PLANS
During the nine months ended March 31, 2000, the Company repurchased 2.8 million
shares of common stock for an aggregate purchase price of $18.6 million. All of
these shares were purchased in open market transactions. There are approximately
1.6 million shares remaining for repurchase under the existing 5.0 million share
stock repurchase program authorized in October 1998.
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 in connection with
its examination of the Company's federal income tax returns for the fiscal years
ending June 30, 1993 through 1995. The most significant adjustments involve 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 has protested 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.
Litigation
The Company is currently, and from time to time expects to be, subject to claims
and suits arising in the ordinary course of business, including claims for
personal injuries and breach of management contracts. Plaintiffs in these
matters may request punitive or other damages that may not be covered by
insurance. Except for the litigation described below and other litigation,
administrative proceedings or investigations which may arise under the False
Claims Act or similar laws, the Company is not aware that it is currently a
party to any such proceeding which, in management's opinion, if adversely
decided, would have a material effect on the Company's results of operations or
financial position.
Professional Liability Judgment
On December 17, 1999, a final trial judgment was entered against the Company's
subsidiary, Quorum Health Resources, LLC ("QHR"), in the amount of
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approximately $47 million in the case of David X. and Veronica Rodriguez,
Individually and as Next Friends of Cristina Rodriguez, a minor v Quorum Health
Resources, LLC, in the 365th District Court, Maverick County, Texas. The lawsuit
arose out of the treatment provided beginning July 2, 1994 at Fort Duncan
Medical Center, an acute care hospital managed by QHR. QHR is appealing the
decision. Interest accrues on the judgment at 10% annually. The Company
currently believes that all or a substantial portion of this judgment, if not
overturned, will be covered by the Company's insurance carriers and/or other
interested parties. However, the Company cannot guarantee that the judgment will
be overturned or that the Company will receive any insurance proceeds. If the
Company were required to pay the judgment from its own funds, it could have a
material adverse effect on the Company.
False Claims Act Litigation
In June 1993, the Office of the Inspector General 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 United States Department of Justice issued a Civil
Investigative Demand which also requested information from the Company in
connection with the same investigation. As a part of the government's
investigation, several former and current employees 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 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.
These lawsuits, commonly known as qui tam actions, are filed "under seal." That
means that the claims are kept secret until the government decides whether to
join the case. The person who files the lawsuit is called a "relator". At a
meeting in September 1998, the Company learned from the government that it would
likely join in the case. The government joined the case against the Company in
October 1998. The former employee's lawsuit named the Company and its
subsidiary, Quorum Health Resources, Columbia/HCA Healthcare Corporation and all
hospitals that the Company or Columbia/HCA owned, operated or managed from 1984
through 1997, as defendants. The unsealed complaint, prepared by the relator,
alleged that the Company knowingly prepared and caused to be filed cost reports
which claimed payments from Medicare and other government payment programs
greater than the amounts due.
In January 1999, the Company filed motions with the court asking to be separated
from the case against co-defendant Columbia/HCA. The government did not oppose
the motion to separate the cases against the Company and Columbia/HCA. On
February 2, 1999, the government filed an amended complaint. On that date, the
government also filed a notice of non-intervention advising the Court that it
would not proceed on some of the relator's allegations, and that it would not
sue individual managed hospital clients. The government's complaint did not name
as defendants any hospital the Company managed. It does name the Company, Quorum
Health Resources and each subsidiary which now
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<PAGE> 14
owns or has ever owned a hospital. Subsequently, the court granted the
Company's motion to be separated, dismissed the Company from the case, and
directed plaintiffs to file a new action against the Company alone. Plaintiffs
did so on February 24, 1999.
The February 24, 1999 complaint alleges that the Company, on behalf of hospitals
it managed between 1985 and 1995 and hospitals it owned from 1990 to the date of
the complaint, 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 these cost report filings were prepared as the result of Company
policy.
In March 1999, as the Company had requested, the court appointed a mediator to
facilitate settlement discussions between the Company and the government. The
parties have held several meetings with the mediator.
In April 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. The government and the relator replied to the Company's motions in
June, 1999 and the Company filed a reply in July, 1999. In December 1999, the
Company filed a motion to move the litigation to the U.S. District Court for the
Middle District of Tennessee located in Nashville, Tennessee. The government and
the relator oppose this motion. The court has not ruled on the Company's
motions.
This qui tam action seeks three times the amount of damages caused to the United
States by the Company's submission of any alleged false claims to the
government, civil penalties of not less than $5,000 nor more than $10,000 for
each false claim, and attorneys' fees and costs.
Other Qui Tam Actions and Related Investigations
In May 1998, the Company was informed that it was a defendant in another qui tam
action involving home health services provided by two of the Company's owned
hospitals and alleging that the Company had violated Medicare laws. This action
was filed under seal in June 1996 by a former employee, whom the Company fired
in April 1996. The United States Attorney's Office allowed the Company an
opportunity to review the results of the government's investigations and discuss
the allegations made in the action prior to the government making a decision to
intervene as a plaintiff. The lawsuit remains under seal for all other purposes.
The Company has cooperated fully with the United States Attorney's Office and
provided additional information and made employees available for interviews. The
Company is now engaged in settlement discussions with the government.
As part of its ongoing discussions, the Company has learned from the same U.S.
Attorney that there are two additional unrelated qui tam complaints against the
Company alleging Medicare violations at one owned and two managed hospitals.
Both matters remain under seal. The government has stated that it intends to
investigate these allegations. At this time the Company cannot take a position
on how it will respond to these matters.
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<PAGE> 15
The Company from time to time may be the subject of additional investigations or
a party to additional litigation which alleges violations of law. The Company
may not know about such investigations, or about qui tam actions filed against
it.
The Class and Derivative Actions
In October and November 1998, some of the Company's stockholders filed
lawsuits against the Company in the U.S. District Court for the Middle
District of Tennessee. In January 1999, the court consolidated these cases
into a single lawsuit. (M.D. Tenn. No. 3-98-1004) The plaintiffs filed an
amended complaint in March 1999. The plaintiffs seek to represent a class of
plaintiffs who purchased the Company's common stock from October 25, 1995
through October 21, 1998, except for insiders of the Company and their
immediate families. The consolidated complaint names the Company, several of
its officers and one of its outside directors, as defendants.
The complaint alleges that defendants violated 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 the Company'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." In May 1999, the Company filed a motion
to dismiss the complaint. The plaintiffs have filed papers opposing the motion,
and the judge has not yet ruled on the motion. The Company intends to vigorously
defend 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.
(M.D. Tenn. No. 3-99-0055) On February 16, 1999, the defendants filed a motion
to dismiss the original complaint. The court then granted the plaintiff
permission to file a first amended complaint, which, when filed, mooted the
original motion to dismiss. On April 30, 1999, the defendants moved to dismiss
the first amended complaint. The court on July 1, 1999, granted plaintiff's
motion for leave to file a second amended complaint and denied as moot the
motion to dismiss the first amended complaint. The second amended complaint
asserts four claims: a shareholders' derivative claim for breach of fiduciary
duty, a shareholders' derivative claim for violations of the Racketeer
Influenced and Corrupt Organizations Act, a shareholders' derivative claim for
injunctive relief, and a purported class action claim for breach of fiduciary
duty. As the basis for each of these claims, plaintiff alleges that the
defendants in 1993 were aware that the Company was filing allegedly false cost
reports and that the defendants "mandated" that the illegal acts continue in
violation of applicable Medicare and Medicaid laws. The defendants filed a
motion to dismiss the second amended complaint, which the court has granted.
The time for plaintiffs to appeal has expired.
15
<PAGE> 16
The Company cannot at this time predict the effect or outcome of any of the
ongoing investigations or the class or qui tam actions. If the Company is found
to have violated federal or state laws relating to Medicare, Medicaid or other
government programs, then it may be required to pay substantial fines and civil
and criminal penalties and also may be excluded from participating in the
Medicare and Medicaid programs and other government programs. Similarly, the
amount of damages sought in the qui tam actions are or in the future may be
substantial. The Company could be subject to substantial costs resulting from
defending, or from an adverse outcome in, any current or future investigations,
administrative proceedings or litigation. In an effort to resolve one or more of
these matters, the Company may choose to negotiate a settlement. Amounts the
Company pays to settle any of these matters may be material. Any current or
future investigations or actions could have a material adverse effect on the
Company's results of operations or financial position.
10. SEGMENT INFORMATION
The Company's segments consist of (i) healthcare systems owned and operated by
the Company and (ii) management of hospitals and healthcare systems for other
owners. The Company evaluates performance based on operating earnings of the
respective business units.
The Company's net revenues, EBITDA, depreciation and amortization, capital
expenditures and assets are summarized in the following table (EBITDA is defined
as earnings before interest, income taxes, depreciation and amortization
expense, minority interest, write-down of assets and investigation and
litigation related costs)(in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000
--------------------------------------
Owned Management
Hospitals Services Total
---------- -------- ----------
<S> <C> <C> <C>
Net revenues $ 420,193 $ 35,429 $ 455,622
EBITDA $ 72,112 $ 7,000 $ 79,112
Depreciation & amortization $ 28,022 $ 446 $ 28,468
Capital expenditures $ 21,762 $ 32 $ 21,794
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
--------------------------------------
Owned Management
Hospitals Services Total
---------- -------- ----------
<S> <C> <C> <C>
Net revenues $ 411,668 $ 36,713 $ 448,381
EBITDA $ 65,120 $ 8,118 $ 73,238
Depreciation & amortization $ 24,613 $ 372 $ 24,985
Capital expenditures $ 23,857 $ 98 $ 23,955
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
Nine Months Ended March 31, 2000
--------------------------------------
Owned Management
Hospitals Services Total
---------- -------- ----------
<S> <C> <C> <C>
Net revenues $1,214,235 $105,526 $1,319,761
EBITDA $ 185,448 $ 21,800 $ 207,248
Assets $1,811,346 $ 45,897 $1,857,243
Depreciation & amortization $ 80,352 $ 1,361 $ 81,713
Capital expenditures $ 78,499 $ 624 $ 79,123
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended March 31, 1999
--------------------------------------
Owned Management
Hospitals Services Total
---------- -------- ----------
<S> <C> <C> <C>
Net revenues $1,113,462 $110,357 $1,223,819
EBITDA $ 159,575 $ 26,010 $ 185,585
Assets $1,786,904 $ 43,303 $1,830,207
Depreciation & amortization $ 68,307 $ 1,137 $ 69,444
Capital expenditures $ 95,767 $ 341 $ 96,108
</TABLE>
EBITDA for owned hospitals include equity in earnings of affiliates of $7.0
million and $6.3 million for the three months ended March 31, 2000 and 1999,
respectively. EBITDA for owned hospitals include equity in earnings of
affiliates of $11.9 million and $16.6 million for the nine months ended March
31, 2000 and 1999, respectively. Assets of owned hospitals include investments
in unconsolidated subsidiaries of $250.5 million and $255.8 million at March 31,
2000 and 1999, respectively.
Write-down of assets and investigation and litigation related costs are not
included in EBITDA. Investigation and litigation related costs for the three
months ended March 31, 2000 are comprised of $0.3 million related to owned
hospitals and $3.2 million related to management services. Investigation and
litigation related costs for the three months ended March 31, 1999 are comprised
of $1.7 million related to owned hospitals and $1.0 million related to
management services. Investigation and litigation related costs for the nine
months ended March 31, 2000 are comprised of $0.6 million related to owned
hospitals and $5.8 million related to management services. Write-down of assets
and investigation and litigation related costs for the nine months ended March
31, 1999 is comprised of $32.0 million related to owned hospitals and $1.6
million related to management services.
A reconciliation of EBITDA to income before income taxes follows (in thousands):
17
<PAGE> 18
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
March 31 March 31
------------------- ----------------------
2000 1999 2000 1999
------- ------- -------- ---------
<S> <C> <C> <C> <C>
Total EBITDA for reportable segments $79,112 $73,238 $207,248 $ 185,585
Depreciation and amortization 28,468 24,985 81,713 69,444
Interest expense 17,079 14,939 50,692 36,815
Write-down of assets and
investigation and litigation
related costs 3,485 2,664 6,420 33,639
Minority interest 1,612 518 1,805 (4,075)
------- ------- -------- ---------
Income before income taxes $28,468 $30,132 $ 66,618 $ 49,762
======= ======= ======== =========
</TABLE>
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
You should read the following along with the Condensed Consolidated
Financial Statements and accompanying notes.
FORWARD-LOOKING INFORMATION
This discussion includes "forward-looking statements." Forward-looking
statements include all statements that do not relate solely to historical or
current facts, and can be identified by the use of some words, including "may,"
"believe," "will," "expect," "project," "estimate," "anticipate," "plan" or
"continue." We have based these forward-looking statements on our current plans
and expectations and projections about future events. However, risks,
uncertainties and assumptions that would cause or contribute to material
differences in our future financial condition and results of operations include:
- possible changes in Medicare and Medicaid that may further
limit payments to our owned hospitals;
- difficulties in adjusting services and financial systems to
the Medicare outpatient prospective payments system;
- the efforts of insurers, managed care companies, patients and
other payors to reduce their payments to our owned hospitals;
- potential adverse impact of known and unknown litigation and
government investigations;
- the possible enactment of federal, state or local health care
reforms;
- changes in federal, state or local regulations affecting the
health care industry;
- difficulties in containing costs in relation to changes in
payments from our payors;
- difficulties in billing and collecting accounts receivable and
the related impact upon cash flow and bad debt expense;
- difficulties in finding attractive acquisitions and
integrating acquired hospitals into our operations;
- market and geographic concentration of operations;
- the highly competitive nature of the health care business;
- potential loss of physicians or other key personnel;
- claims and legal actions relating to professional liability;
19
<PAGE> 20
- disruptions from information system conversions;
- our substantial indebtedness and difficulty raising capital in
the future;
- fluctuations in interest rates;
- fluctuations in the market value of our common stock;
- changes in accounting pronouncements; and
- changes in general economic conditions.
OVERVIEW
We are a leading provider of health care services through our owned
acute care hospitals and regional health care systems located throughout the
United States. We are also the largest provider of management services to acute
care hospitals in the United States, primarily through our subsidiary, Quorum
Health Resources, LLC.
For the nine months ended March 31, 2000 and 1999, our owned hospitals
accounted for 92% and 91% of our net operating revenue, respectively. For the
nine months ended March 31, 2000 and 1999, the Dothan, Alabama and Ft. Wayne,
Indiana areas (comprised of six hospitals) accounted for approximately 34% and
30% of owned hospital revenue and 53% and 48% of owned hospital EBITDA,
respectively. EBITDA means our earnings before interest, income taxes,
depreciation and amortization expense, minority interest and write-down of
assets and investigation and litigation related costs.
For the nine months ended March 31, 2000, our net income before
write-down of assets and investigation and litigation related costs was 10%
lower than the nine months ended March 31, 1999. We believe this was principally
due to the following issues:
- Lower earnings from our Las Vegas joint venture; and
- Higher capital costs, consisting primarily of depreciation
expense and interest expense.
We also experienced (1) increased discounts to insurance and managed care
companies, (2) increased charity care, (3) lower payments from the government
under the Medicare program as a result of the Balanced Budget Act of 1997 (BBA
97) and (4) increased supplies expense. This decrease was partially offset by
favorable estimated third-party payor settlements for the nine months ended
March 31, 2000 compared to unfavorable estimated third-party payor settlements
for the nine months ended March 31, 1999. (Estimated third-party payor
settlements are discussed under the caption General").
20
<PAGE> 21
Our objective is to continue to improve our operating and financial
consistency and stability. We plan to use the following operating tactics:
- Strengthen our owned hospitals by including the addition of a
third regional management team in 1999 and building on the
calendar 1999 computer system installations and upgrades;
- Grow existing markets;
- Enhance managed care contracting;
- Improve management of accounts receivable/bad debts; and
- Focus on cost control.
IMPACT OF ACQUISITIONS, JOINT VENTURES AND SALES
Effective March 1, 2000, we transferred Clinton County Hospital in
Frankfort, Indiana to an Indianapolis, Indiana health care system.
Effective December 1, 1999, we acquired Caylor-Nickel Medical Center in
Bluffton, Indiana, which is included in our Ft. Wayne market.
In fiscal 1999, we acquired four hospitals and affiliated health care
entities. We also entered into a joint venture in Vicksburg, Mississippi. We
manage and have a controlling interest in the joint venture. Some of these
entities did not perform as well as we initially expected. This was due to some
of the same factors we experienced in our other owned hospitals. Also, we
initially had difficulties integrating some of the acquired hospitals into our
operations. In fiscal 2000, we have improved the financial performance of our
acquired hospitals and joint ventures. In fiscal 1999, we sold Park Medical
Center in Columbus, Ohio.
Because of the financial impact of acquisitions, joint ventures and
sales, it is difficult to make meaningful comparisons between our financial
statements for the periods presented. Due to the current number of owned
hospitals, each additional hospital we acquire can affect our overall operating
margins or results of operations.
LITIGATION
We are currently, and from time to time expect to be, subject to claims
and suits arising in the ordinary course of business, including claims for
personal injuries and breach of management contracts. Plaintiffs in these
matters may request punitive or other damages that may not be covered by
insurance. Except for the litigation described below and other litigation,
administrative proceedings or investigations which may arise under the False
Claims Act or similar laws, we are not aware that we are currently a party to
any litigation that we believe could have a material adverse effect on our
results of operations or financial position.
Professional Liability Judgment
21
<PAGE> 22
On December 17, 1999, a final trial judgment was entered against our
subsidiary, Quorum Health Resources, LLC ("QHR"), in the amount of approximately
$47 million in the case of David X. and Veronica Rodriguez, Individually and as
Next Friends of Cristina Rodriguez, a minor v Quorum Health Resources, LLC, in
the 365th District Court, Maverick County, Texas. The lawsuit arose out of the
treatment provided beginning July 2, 1994 at Fort Duncan Medical Center, an
acute care hospital managed by QHR. QHR is appealing the decision. Interest
accrues on the judgment at 10% annually. We currently believe that all or a
substantial portion of this judgment, if not overturned, will be covered by our
insurance carriers and/or other interested parties. However, we cannot guarantee
that the judgment will be overturned or that we will receive any insurance
proceeds. If we were required to pay the judgment from our own funds, it could
have a material adverse effect on us.
False Claims Act Litigation
In June 1993, the Office of the Inspector General of the Department of
Health and Human Services requested information from us in connection with an
investigation involving our procedures for preparing Medicare cost reports. In
January 1995, the United States Department of Justice issued a Civil
Investigative Demand which also requested information from us in connection with
the same investigation. As a part of the government's investigation, several
former and current employees were interviewed. We cooperated fully with the
investigation. We received no communication from the government on this matter
from approximately June 1996 through August 1998.
In August 1998, the government informed us that the investigation was
prompted by a lawsuit filed under the False Claims Act. The suit was filed in
January 1993 by a former employee of a hospital we managed. These lawsuits,
commonly known as qui tam actions, are filed "under seal." That means that the
claims are kept secret until the government decides whether to join the case.
The person who files the lawsuit is called a "relator". At a meeting in
September 1998, we learned from the government that it would likely join in the
case. The government joined the case against us in October 1998. The former
employee's lawsuit named us, our subsidiary Quorum Health Resources,
Columbia/HCA Healthcare Corporation and all hospitals that we or Columbia/HCA
owned, operated or managed from 1984 through 1997, as defendants. The unsealed
complaint, prepared by the relator, alleged that we knowingly prepared and
caused to be filed cost reports which claimed payments from Medicare and other
government payment programs greater than the amounts due.
In January 1999, we filed motions with the court asking to be separated
from the case against co-defendant Columbia/HCA. The government did not oppose
the motion to separate the cases against us and Columbia/HCA. On February 2,
1999, the government filed an amended complaint. On that date, the government
also filed a notice of non-intervention advising the Court that it would not
proceed on some of the relator's allegations, and that it would not sue
individual managed hospital clients. The government's complaint did not name as
defendants any hospital we managed. It does name us, Quorum Health Resources and
each subsidiary which now owns or has ever owned a hospital. Subsequently, the
court granted our motion to be separated,
22
<PAGE> 23
dismissed us from the case, and directed plaintiffs to file a new action
against us alone. Plaintiffs did so on February 24, 1999.
The February 24, 1999 complaint alleges that we, on behalf of hospitals
we managed between 1985 and 1995 and hospitals we owned from 1990 to the date of
the complaint, violated the False Claims Act by filing false Medicare cost
reports. The government asserts that the false claims in the cost reports are
reflected in "reserve analyses" we created. The complaint also alleges that
these cost report filings were prepared as the result of our policy.
In March 1999, as we had requested, the court appointed a mediator to
facilitate settlement discussions between us and the government. The parties
have held several meetings with the mediator.
In April 1999, we filed several motions to dismiss the government's
complaint in whole or in part as well as a motion to dismiss the relator from
the case. The government and the relator replied to our motions in June, 1999
and we filed a reply in July, 1999. In December 1999, we filed a motion to move
the litigation to the U.S. District Court for the Middle District of Tennessee
located in Nashville, Tennessee. The government and the relator oppose this
motion. The court has not ruled on our motions.
This qui tam action seeks three times the amount of damages caused to
the United States by our submission of any alleged false claims to the
government, civil penalties of not less than $5,000 nor more than $10,000 for
each false claim, and attorneys' fees and costs.
Other Qui Tam Actions and Related Investigations
In May 1998, we were informed that we were a defendant in another qui
tam action involving home health services provided by two of our owned hospitals
and alleging that we had violated Medicare laws. This action was filed under
seal in June 1996 by a former employee, whom we fired in April 1996. The United
States Attorney's Office gave us the opportunity to review the results of the
government's investigations and discuss the allegations made in the action prior
to the government making a decision to intervene as a plaintiff. The lawsuit
remains under seal for all other purposes. We have cooperated fully with the
United States Attorney's Office and provided additional information and made
employees available for interviews. We are now engaged in settlement discussions
with the government.
As part of our ongoing discussions, we have learned from the same U.S.
Attorney that there are two additional unrelated qui tam complaints against us
alleging Medicare violations at one owned and two managed hospitals. Both
matters remain under seal. The government has told us that it intends to
investigate these allegations. At this time we cannot take a position on how we
will respond to these matters.
From time to time we may be the subject of additional investigations.
In the future, we may also be a party to additional litigation which alleges
23
<PAGE> 24
that we have violated the law. We may not know about these investigations or
about qui tam actions filed against us.
The Class and Derivative Actions
In October and November 1998, some of our stockholders filed lawsuits
against us in the U.S. District Court for the Middle District of Tennessee. In
January 1999, the court consolidated these cases into a single lawsuit (M.D.
Tenn. No. 3-98-1004). The plaintiffs filed an amended complaint in March
1999. The plaintiffs seek to represent a class of plaintiffs who purchased our
common stock from October 25, 1995 through October 21, 1998, except for our
insiders and their immediate families. The consolidated complaint names us,
several of our officers and one of our outside directors, as defendants.
The complaint alleges that defendants violated the Securities Exchange
Act of 1934. The plaintiffs claim that we materially inflated our net revenues
during the class period by including in those net revenues amounts received from
the settlement of cost reports that had allegedly been filed in violation of
applicable Medicare regulations years earlier and that, because of this
practice, this statement, which first appeared in our Form 10-K filed in
September 1996, was false: "The Company believes that its owned hospitals are in
substantial compliance with current federal, state, local, and independent
review body regulations and standards." In May 1999, we filed a motion to
dismiss the complaint. The plaintiffs have filed papers opposing the motion, and
the judge has not yet ruled on the motion. We intend to vigorously defend the
claims and allegations in this action.
On November 2, 1998, a lawsuit was filed against us, all of our current
directors and two former directors in the U.S. District Court for the Northern
District of Alabama. On January 14, 1999, this suit was transferred by agreement
of the parties to the U.S. District Court for the Middle District of Tennessee
(M.D. Tenn. No. 3-99-0055). On February 16, 1999, the defendants filed a motion
to dismiss the original complaint. The court then granted the plaintiff
permission to file a first amended complaint, which, when filed, mooted the
original motion to dismiss. On April 30, 1999, the defendants moved to dismiss
the first amended complaint. The court on July 1, 1999, granted plaintiff's
motion for leave to file a second amended complaint and denied as moot the
motion to dismiss the first amended complaint. The second amended complaint
asserts four claims: a shareholders' derivative claim for breach of fiduciary
duty, a shareholders' derivative claim for violations of the Racketeer
Influenced and Corrupt Organizations Act, a shareholders' derivative claim for
injunctive relief, and a purported class action claim for breach of fiduciary
duty. As the basis for each of these claims, plaintiff alleges that the
defendants in 1993 were aware that we were filing allegedly false cost reports
and that the defendants "mandated" that the illegal acts continue in violation
of applicable Medicare and Medicaid laws. The defendants filed a motion to
dismiss the second amended complaint, which the court has granted. The time for
plaintiffs to appeal has expired.
It is too early to predict the effect or outcome of any of the ongoing
investigations or the class or qui tam actions. If we are found to have
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<PAGE> 25
violated federal or state laws relating to Medicare, Medicaid or other
government programs, then we may be required to pay substantial fines and civil
and criminal penalties. We also may be excluded from participating in the
Medicare and Medicaid programs and other government programs. Similarly, the
amount of damages sought in the qui tam actions are or in the future may be
substantial. We could be subject to substantial costs resulting from defending,
or from an adverse outcome in, any current or future investigations,
administrative proceedings or litigation. In an effort to resolve one or more of
these matters, we may choose to negotiate a settlement. Amounts we pay to settle
any of these matters may be material. Any current or future investigations or
actions could have a material adverse effect on our results of operations or
financial position (See Note 9 - Contingencies in the Notes to Condensed
Consolidated Financial Statements).
SELECTED OPERATING STATISTICS - OWNED HOSPITALS
The following table sets forth operating statistics for our owned
hospitals for each of the periods presented. Statistics for the three months
ended March 31, 2000 include a full period of operations for twenty-one
hospitals and the joint ventures and a partial period for one hospital divested.
Statistics for the three months ended March 31, 1999 include three months of
operations for twenty-one hospitals and the joint ventures and partial periods
for one hospital acquired.
Statistics for the nine months ended March 31, 2000 include a full
period of operations for twenty hospitals and the joint ventures, a partial
period for one hospital acquired, and a partial period for one hospital
divested. Statistics for the nine months ended March 31, 1999 include nine
months of operations for eighteen hospitals and the joint ventures and partial
periods for three hospitals acquired and one hospital contributed by Col/HCA to
a joint venture that we control.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
March 31 March 31
-------------------- ------------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Number of hospitals 21 22 21 22
Licensed beds 4,519 4,955 4,519 4,955
Beds in service 3,870 4,063 3,870 4,063
Admissions 37,926 37,940 108,134 101,273
Average length of stay 5.6 5.7 5.6 5.6
Patient days 212,567 216,355 600,465 569,866
Adjusted patient days 358,499 356,485 1,023,491 966,283
Occupancy rates (licensed beds) 51.0% 48.8% 47.7% 45.4%
Occupancy rates (beds in service) 59.8% 59.5% 55.8% 55.5%
Gross inpatient revenue (in thousands) $475,638 $459,261 $1,347,415 $1,199,431
Gross outpatient revenue (in thousands) $326,498 $297,756 $ 949,250 $ 834,362
</TABLE>
25
<PAGE> 26
RESULTS OF OPERATIONS
The following table reflects the percentage of net operating revenue
represented by various categories in our Condensed Consolidated Statements of
Income.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
March 31 March 31
------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net operating revenue 100.0% 100.0% 100.0% 100.0%
Salaries and benefits 40.6 41.2 41.2 41.8
Reimbursable expenses 3.7 3.6 3.5 4.1
Supplies 14.5 13.8 14.5 13.8
Fees 9.1 9.5 9.0 9.5
Other expenses 7.4 7.3 7.3 7.3
Provision for doubtful accounts 6.8 7.6 7.6 7.7
Equity in earnings of affiliates (1.5) (1.4) (0.9) (1.4)
Leases and rentals 2.0 2.1 2.1 2.0
Depreciation and amortization 6.2 5.6 6.2 5.7
Interest expense 3.8 3.3 3.8 3.0
Write-down of assets and
investigation and litigation
related costs 0.8 0.6 0.5 2.7
Minority interest 0.4 0.1 0.1 (0.3)
------ ------ ------ ------
Income before income taxes 6.2 6.7 5.1 4.1
Provision for income taxes 2.4 2.6 2.0 2.0
------ ------ ------ ------
Net income 3.8% 4.1% 3.1% 2.1%
====== ====== ====== ======
</TABLE>
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31,
1999
Net Operating Revenue. Net operating revenue was $455.6 million for the
three months ended March 31, 2000, compared to $448.4 million for the three
months ended March 31, 1999. This represents an increase of $7.2 million or
1.6%. We attribute this increase to (1) the acquisition of two hospitals during
fiscal 1999 and fiscal 2000 and (2) a 2.8% increase in same store hospital net
operating revenue. "Same store hospitals" was calculated by comparing the same
periods in both fiscal periods for hospitals owned for one year or more. The
increase in net operating revenue was partially offset by the sale of two
hospitals in fiscal 1999 and fiscal 2000, and a 3.5% decrease in revenue from
our hospital management services.
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<PAGE> 27
We attribute the 2.8% same store net operating revenue increase
principally to (1) increases in outpatient revenue, (2) a 0.5% increase in same
store admissions, (3) price increases and (4) increased favorable estimated
settlements from the government under Medicare and Medicaid programs and from
insurance and managed care companies during the three months ended March 31,
2000 compared to the three months ended March 31, 1999.(Estimated third-party
payor settlements are discussed under the caption "General"). Our same store net
operating revenue would have increased more, except for (1) increased discounts
to insurance and managed care companies and increased charity care and (2) lower
payments from the government under the Medicare program as a result of BBA 97.
Salaries and Benefits, Reimbursable Expenses, Supplies, Fees, Provision
for Doubtful Accounts and Other Operating Expenses. Salaries and benefits,
reimbursable expenses, supplies, fees, provision for doubtful accounts and other
operating expenses totaled $374.3 million for the three months ended March 31,
2000, compared to $372.2 million for the three months ended March 31, 1999. This
represents an increase of $2.1 million or 0.6%. These expenses as a percentage
of net operating revenue decreased to 82.1% for the three months ended March 31,
2000 from 83.0% for the three months ended March 31, 1999. Salaries and
benefits, reimbursable expenses, supplies, fees, provision for doubtful accounts
and other operating expenses as a percentage of net operating revenue for our
owned hospitals totaled 82.5% for the three months ended March 31, 2000,
compared to 83.6% for the three months ended March 31, 1999. For our same store
hospitals, these expenses as a percentage of net operating revenue decreased to
82.1% for the three months ended March 31, 2000, from 82.3% for the three months
ended March 31, 1999.
We attribute the same store hospital decrease in these expenses as a
percent of net operating revenue primarily to our growth in net operating
revenue, as discussed above, and our overall improvement in containing our costs
in proportion to our revenue growth. Our owned hospitals, hospital management
services and corporate office have cost containment programs to reduce costs. We
attempt to mitigate the impact of salaries and wage rate pressures through
improved productivity. We reduced our bad debt expense by improving cash
collections. During calendar 1999, many of our hospitals completed patient
accounting computer systems conversions or major upgrades to their systems which
had strained our business office resources. One of our key operating tactics is
to improve the management of accounts receivable/bad debts. We believe our
improved cash collections are due to training, best practices and problem
solving through user groups, applying more resources and enhanced incentive
programs. We continued to focus our efforts on collecting older accounts in
addition to collecting current accounts receivable. Our decrease in same store
hospital expenses as a percent of net operating revenue was partially offset by
increases in supplies expense due to new products and technology, primarily
drugs, implants and blood. We are focusing efforts on improving our supplies
utilization and are attempting to negotiate from managed care companies
additional payments for high cost supplies.
Equity in Earnings of Affiliates. Equity in earnings of affiliates
represents our share of earnings from joint ventures in which we hold a
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<PAGE> 28
minority interest. Equity in earnings of affiliates was $7.0 million for the
three months ended March 31, 2000, compared to $6.3 million for the three months
ended March 31, 1999, an increase of $0.7 million. Equity in earnings of
affiliates represented 1.5% of our net operating revenue for the three months
ended March 31, 2000, compared to 1.4% of our net operating revenue for the
three months ended March 31, 1999. This increase was due primarily to higher
earnings at our Macon joint venture which was partially offset by lower earnings
at our Las Vegas joint venture.
Leases and Rentals. Leases and rentals were $9.2 million for the three
months ended March 31, 2000, compared to $9.2 million for the three months ended
March 31, 1999. Leases and rentals as a percentage of net operating revenue
decreased to 2.0% for the three months ended March 31, 2000 from 2.1 % for the
three months ended March 31, 1999.
Depreciation and Amortization. Depreciation and amortization expense
was $28.5 million for the three months ended March 31, 2000, compared to $25.0
million for the three months ended March 31, 1999. This represents an increase
of $3.5 million, or 13.9%. We attribute this increase primarily to (1) the
acquisition of two hospitals during fiscal 1999 and fiscal 2000 and (2)
depreciation related to routine capital expenditures, including medical
equipment, information technology and Year 2000 capital expenditures. This
increase was partially offset by a decrease in depreciation and amortization
expense related to the sale of two hospitals in fiscal 1999 and fiscal 2000.
Depreciation and amortization expense as a percentage of net operating revenue
increased to 6.2% for the three months ended March 31, 2000 from 5.6% for the
three months ended March 31, 1999.
Interest Expense. Interest expense for the three months ended March 31,
2000 was $17.1 million, compared to $14.9 million for the three months ended
March 31, 1999, an increase of $2.2 million, or 14.3%. Interest expense as a
percentage of net operating revenue increased to 3.8% for the three months ended
March 31, 2000 from 3.3% for the three months ended March 31, 1999. The increase
was due principally to an increase in the interest rates of our revolving line
of credit. The interest rate increase was due to higher LIBOR rates, higher
pricing due to a March 1999 amendment, and a higher pricing tier due to calendar
1999 acquisitions and stock repurchases. This increase was partially offset by
the issuance of convertible subordinated debentures in August 1999 at 6%, which
is lower than our revolving line of credit interest rates, and the effect of our
interest rate swap agreements.
Investigation and Litigation Related Costs. During the three months
ended March 31, 2000 and 1999, respectively, we incurred investigation and
litigation related costs of approximately $3.5 million and $2.7 million (See
Note 5 - Write Down of Assets and Investigation and Litigation Related Costs in
the Notes to Condensed Consolidated Financial Statements).
Minority Interest Expense. Minority interest expense was $1.6 million
for the three months ended March 31, 2000, compared to $0.5 million for the
three months ended March 31, 1999, an increase of $1.1 million. Minority
interest expense as a percentage of net operating revenue was 0.4% for the
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<PAGE> 29
three months ended March 31, 2000, compared to 0.1% for the three months ended
March 31, 1999. We attribute this change primarily to improved profitability of
one market with minority investors.
Income Taxes. The provision for income taxes for the three months ended
March 31, 2000 was $11.1 million compared to $11.8 million for the three months
ended March 31, 1999, a decrease of $0.7 million, or 5.5%. Our effective income
tax rate was 39.1% for both periods.
Net Income. Net income for the three months ended March 31, 2000 was
$17.3 million, compared to $18.4 million for the three months ended March 31,
1999, a decrease of $1.1 million, or 5.5%. Net income as a percentage of net
operating revenue was 3.8% for the three months ended March 31, 2000, compared
to 4.1% for the three months ended March 31, 1999. Excluding the investigation
and litigation related costs, net income as a percentage of net operating
revenue was 4.3% for the three months ended March 31, 2000, compared to 4.5% for
the three months ended March 31, 1999.
Nine Months Ended March 31, 2000 Compared to Nine Months Ended March 31, 1999
Net Operating Revenue. Net operating revenue was $1,319.8 million for
the nine months ended March 31, 2000, compared to $1,223.8 million for the nine
months ended March 31, 1999. This represents an increase of $96.0 million or
7.8%. We attribute this increase to (1) the acquisition of four hospitals during
fiscal 1999 and fiscal 2000, (2) the hospital contributed by Col/HCA in fiscal
1999 to a joint venture that we control and (3) a 3.3% increase in same store
hospital net operating revenue. The increase in net operating revenue was
partially offset by the sale of two hospitals in fiscal 1999 and fiscal 2000,
and a 4.4% decrease in revenue from our hospital management services.
We attribute the 3.3% same store net operating revenue increase
principally to (1) a 0.9% increase in same store admissions, (2) price
increases, (3) increases in outpatient revenue and (4) favorable estimated
settlements from the government under Medicare and Medicaid programs and from
insurance and managed care companies for the nine months ended March 31, 2000
compared to unfavorable estimated third-party payor settlements for the nine
months ended March 31, 1999. Our same store net operating revenue would have
increased more, except for (1) increased discounts to insurance and managed care
companies and increased charity care and (2) lower payments from the government
under the Medicare program as a result of BBA 97.
Salaries and Benefits, Reimbursable Expenses, Supplies, Fees, Provision
for Doubtful Accounts and Other Operating Expenses. Salaries and benefits,
reimbursable expenses, supplies, fees, provision for doubtful accounts and other
operating expenses totaled $1,096.9 million for the nine months ended March 31,
2000, compared to $1,030.3 million for the nine months ended March 31, 1999.
This represents an increase of $66.6 million or 6.5%. These expenses as a
percentage of net operating revenue decreased to 83.1% for the nine months ended
March 31, 2000 from 84.2% for the nine months ended March 31, 1999. Salaries and
benefits, reimbursable expenses, supplies, fees,
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<PAGE> 30
provision for doubtful accounts and other operating expenses as a percentage of
net operating revenue for our owned hospitals totaled 83.6% for the nine months
ended March 31, 2000, compared to 85.2% for the nine months ended March 31,
1999. For our same store hospitals, these expenses as a percentage of net
operating revenue decreased to 82.9% for the nine months ended March 31, 2000,
from 84.2% for the nine months ended March 31, 1999.
We attribute the same store hospital decrease in these expenses as a
percent of net operating revenue primarily to our growth in net operating
revenue, as discussed above, and our overall improvement in containing our costs
in proportion to our revenue growth. Our owned hospitals, hospital management
services and corporate office have implemented cost containment programs to
reduce costs, to mitigate the impact of salaries and wage rate pressures through
increased productivity and to improve management of accounts receivable/bad
debts. Our decrease in same store hospital expenses as a percent of net
operating revenue was partially offset by increases in supplies expense due to
new products and technology, primarily drugs, implants and blood. We are
focusing efforts on improving our supplies utilization and are attempting to
negotiate from managed care companies additional payments for high cost
supplies.
Equity in Earnings of Affiliates. Equity in earnings of affiliates was
$11.9 million for the nine months ended March 31, 2000, compared to $16.6
million for the nine months ended March 31, 1999, a decrease of $4.7 million.
Equity in earnings of affiliates represented 0.9% of our net operating revenue
for the nine months ended March 31, 2000, compared to 1.4% of our net operating
revenue for the nine months ended March 31, 1999. This decrease was due
primarily to lower earnings at our Las Vegas joint venture.
Leases and Rentals. Leases and rentals were $27.5 million for the nine
months ended March 31, 2000, compared to $24.5 million for the nine months ended
March 31, 1999, an increase of $3.0 million, or 12.4%. Leases and rentals as a
percentage of net operating revenue increased to 2.1% for the nine months ended
March 31, 2000, compared to 2.0% for the nine months ended March 31, 1999. This
increase was due primarily to an increase in assets leased under our end loaded
lease financing agreement in connection with hospital acquisitions in fiscal
1999.
Depreciation and Amortization. Depreciation and amortization expense
was $81.7 million for the nine months ended March 31, 2000, compared to $69.4
million for the nine months ended March 31, 1999. This represents an increase of
$12.3 million, or 17.7%. We attribute this increase primarily to (1) the
acquisition of four hospitals during fiscal 1999 and fiscal 2000, (2) the
hospital contributed by Columbia/HCA in fiscal 1999 to a joint venture that we
control, (3) the opening of a replacement facility in Florence, South Carolina
in November 1998 and (4) depreciation related to routine capital expenditures,
including medical equipment, information technology and Year 2000 capital
expenditures. This increase was partially offset by a decrease in depreciation
and amortization expense related to the sale of two hospitals in fiscal 1999 and
fiscal 2000 and amortization expense related to the physician practice
intangibles which were written off in December 1998.
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Depreciation and amortization expense as a percentage of net operating revenue
increased to 6.2% for the nine months ended March 31, 2000 from 5.7% for the
nine months ended March 31, 1999.
Interest Expense. Interest expense for the nine months ended March 31,
2000 was $50.7 million, compared to $36.8 million for the nine months ended
March 31, 1999, an increase of $13.9 million, or 37.7%. Interest expense as a
percentage of net operating revenue increased to 3.8% for the nine months ended
March 31, 2000 from 3.0% for the nine months ended March 31, 1999. The increase
was due principally to (1) additional borrowings related to fiscal 1999 and
fiscal 2000 acquisitions, share repurchases, and the opening of the replacement
facility in November 1998 and (2) an increase in the interest rates of our
revolving line of credit. The interest rate increase was due to higher LIBOR
rates, higher pricing due to a March 1999 amendment, and a higher pricing tier
due to calendar 1999 acquisitions and stock repurchases. This increase was
partially offset by the issuance of convertible subordinated debentures in
August 1999 at 6%, which is lower than our revolving line of credit interest
rates, and the effect of our interest rate swap agreements.
Write-Down of Assets and Investigation and Litigation Related Costs.
During the nine months ended March 31, 2000 and 1999, respectively, we incurred
investigation and litigation related costs of approximately $6.4 million and
$3.8 million. In addition, we recorded a $29.9 million write down of assets in
the nine months ended March 31, 1999 (See Note 5 - Write Down of Assets and
Investigation and Litigation Related Costs in the Notes to Condensed
Consolidated Financial Statements).
Minority Interest Expense (Income). Minority interest expense was $1.8
million for the nine months ended March 31, 2000, compared to income of $4.1
million for the nine months ended March 31, 1999, a change of $5.9 million.
Minority interest expense as a percentage of net operating revenue was 0.1% for
the nine months ended March 31, 2000, compared to income of 0.3% for the nine
months ended March 31, 1999. We attribute this change primarily to the
intangible asset write-downs during the nine months ended March 31, 1999 and
improved profitability of one market with minority investors.
Income Taxes. The provision for income taxes for the nine months ended
March 31, 2000 was $26.0 million compared to $24.7 million for the nine months
ended March 31, 1999, an increase of $1.3 million, or 5.6%. Excluding the asset
write-downs, our effective income tax rate was 39.1% for both periods. The asset
write-downs were tax effected at 21.0% due to the effect of certain permanent
nondeductible intangible assets.
Net Income. Net income for the nine months ended March 31, 2000 was
$40.6 million, compared to $25.1 million for the nine months ended March 31,
1999, an increase of $15.5 million, or 61.6%. Net income as a percentage of net
operating revenue was 3.1% for the nine months ended March 31, 2000, compared to
2.1% for the nine months ended March 31, 1999. Excluding the write-down of
assets and investigation and litigation related costs, net income as a
percentage of net operating revenue was 3.4% for the nine months
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ended March 31, 2000, compared to 4.0% for the nine months ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, our working capital was $258.1 million. Our ratio of
current assets to current liabilities was 2.3 to 1.0 at March 31, 2000 compared
to 2.1 to 1.0 at June 30, 1999.
Cash Flows
Our principal sources of cash are net cash provided by operating
activities and cash available under our bank revolving line of credit facility.
Our principal uses of cash are hospital acquisitions, capital expenditures,
payments of principal and interest on our long-term debt and share repurchases.
Accounts receivable collections contribute significantly to our cash
flow from operating activities. The billing and collection of accounts
receivable by hospitals is very difficult because of the complexity of 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 judgement involved in submitting and
collecting Medicare and Medicaid bills. Our cash flow can also be affected by
temporary delays in billing Medicare and Medicaid accounts receivable while
waiting for the government to process hospital change in ownership forms. There
can be no assurance that this complexity will not negatively impact our future
cash flow or results of operations.
Nine Months Ended March 31, 2000 Cash Flows Compared To Nine Months
Ended March 31, 1999 Cash Flows. Cash provided by operating activities totaled
$93.5 million for the nine months ended March 31, 2000, compared to $81.7
million for the nine months ended March 31, 1999. This represents an increase of
$11.8 million, or 14.4%, which was due primarily to higher EBITDA, cash
distributions received from our Macon and Las Vegas joint ventures and increased
accounts receivable collections. This increase was partially offset by increased
payments on accounts payable and accrued expenses.
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EBITDA. EBITDA(1) for the three months ended March 31, 2000 was $79.1
million, compared to $73.2 million for the three months ended March 31, 1999, an
increase of $5.9 million or 8.0%. EBITDA as a percentage of net operating
revenue was 17.4% for the three months ended March 31, 2000, compared to 16.3%
for the three months ended March 31, 1999. EBITDA as a percentage of net
operating revenue for our owned hospitals was 17.2% for the three months ended
March 31, 2000, compared to 15.8% for the three months ended March 31, 1999.
EBITDA as a percentage of net operating revenue for our same store hospitals was
16.0% for the three months ended March 31, 2000, compared to 15.7% for the three
months ended March 31, 1999. EBITDA as a percentage of net operating revenue for
our management services business was 19.8% for the three months ended March 31,
2000, compared to 22.1% for the three months ended March 31, 1999. We attribute
the increase in consolidated EBITDA principally to (1) growth in net operating
revenue, (2) overall improvement in containing our costs, in proportion to our
revenue growth and (3) our ongoing portfolio review which resulted in divesting
two hospitals in fiscal 1999 and fiscal 2000. The EBITDA increase was partially
offset by (1) discounts to insurance and managed care companies and (2) the
impact of BBA 97.
EBITDA for the nine months ended March 31, 2000 was $207.2 million,
compared to $185.6 million for the nine months ended March 31, 1999, an increase
of $21.6 million or 11.7%. EBITDA as a percentage of net operating revenue was
15.7% for the nine months ended March 31, 2000, compared to 15.2% for the nine
months ended March 31, 1999. EBITDA as a percentage of net operating revenue for
our owned hospitals was 15.3% for the nine months ended March 31, 2000, compared
to 14.3% for the nine months ended March 31, 1999. EBITDA as a percentage of net
operating revenue for our same store hospitals was 15.3% for the nine months
ended March 31, 2000, compared to 14.0% for the nine months ended March 31,
1999. EBITDA as a percentage of net operating revenue for our management
services business was 20.7% for the nine months ended March 31, 2000, compared
to 23.5% for the nine months ended March 31, 1999. We attribute the increase in
consolidated EBITDA principally to (1) the increase in net operating revenue and
(2) overall improvement in containing our costs, in proportion to our revenue
growth. The EBITDA increase was partially offset by (1) discounts to insurance
and managed care companies (2) the impact of BBA 97 and (3) the decrease in
equity in earnings of affiliates.
- --------
(1) EBITDA is commonly used as an analytical indicator, and also serves
as a measure of indebtedness capacity and debt service ability. EBITDA should
not be considered a measure of financial performance under generally accepted
accounting principles, and the items excluded from EBITDA are significant
components in understanding and assessing financial performance. EBITDA 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 condensed consolidated financial statements as
an indicator of financial performance or liquidity. Because EBITDA is not a
measurement determined in accordance with generally accepted accounting
principles and is susceptible to varying calculations, EBITDA as presented may
not be comparable to other similarly titled measures of other companies.
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Capital Expenditures
Capital expenditures excluding acquisitions for the nine months ended
March 31, 2000 totaled $79.1 million. These capital expenditures consisted of
the construction of two hospitals of $5.0 million and routine capital
expenditures of $74.1 million. We expect to make routine capital expenditures
for fiscal 2000 and fiscal 2001 of approximately $100 million before
acquisitions and before construction of new or replacement hospitals. We are
constructing a replacement hospital in Vicksburg, Mississippi and a new acute-
care hospital in Ft. Wayne, Indiana. The Vicksburg hospital has a total project
cost of approximately $110 million with an expected completion date of summer
2002. The Ft. Wayne hospital has a total project cost of approximately $45
million with an expected completion date of summer 2001. We expect to make
construction capital expenditures of approximately $15 million for fiscal 2000
and approximately $85 million for fiscal 2001.
Capital expenditures excluding acquisitions for the nine months ended
March 31, 1999 totaled $96.1 million. These capital expenditures consisted of
the construction of a replacement hospital and two medical office buildings in
Florence, South Carolina of approximately $32.6 million and routine capital
expenditures of $63.5 million.
Capital Resources
Our revolving credit facility consists of an $850.0 million credit
facility expiring November 26, 2002, which coincides with the expiration date of
our end loaded lease facility. On November 26 of each year, we can request an
incremental one-year extension, which is subject to approval of all of the
lenders. The credit facility bears interest at our option at generally the
lender's base rate, swing-line rate or a fluctuating rate ranging from .55 to
1.55 percentage points above LIBOR. Also, we pay a facility fee ranging from .20
to .45 percentage points on the commitment. The interest rate margins and
facility fee rates are based on our leverage ratio. Substantially all stock of
our subsidiaries has been pledged under the terms of the credit facility. We may
prepay the amount outstanding at any time. At April 30, 2000, we had
approximately $284.9 million committed and undrawn under our credit facility.
We also have a $150.0 million end loaded lease financing agreement to
provide a financing option for acquisition and/or construction. The interest
rate margins and facility fee rates are substantially similar to those under our
credit facility. Under this agreement, we have guaranteed all lease payments,
including contingent lease payments, of up to 85% of the amount utilized under
this agreement. At April 30, 2000, we had approximately $4.5 million available
under this agreement.
We have $150.0 million of 8 3/4% senior subordinated notes, which
mature on November 1, 2005. We have the option to redeem these notes at 104.375%
of
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the principal amount on or after November 1, 2000, at 102.188% of the principal
amount on or after November 1, 2001, or at par value on or after November 1,
2002. Upon a change of control, we must make an offer to purchase these notes at
101% of the principal amount. These notes are unsecured and subordinated in
right of payment to all existing and future senior debt.
On August 31, 1999, we issued $150.0 million of convertible
subordinated debentures due 2009 to Welsh, Carson, Anderson & Stowe, VIII, LP
and certain WCAS VIII affiliates, including Russell L. Carson, Chairman of our
Board of Directors. We sold the debentures for cash at their face value. The
debentures bear interest at 6.0% per annum. Interest is payable quarterly. The
debentures are convertible into common shares at a conversion price of $11.25
per share. The debentures automatically convert at any time after three years if
the average of the closing price of our stock over any 90 day period is more
than 150% of the conversion price. We can call the debentures at par after
August 31, 2001. In the event of a merger, consolidation or sale of more than
50% of our assets, the holder of the debentures has the option to have the
debentures prepaid in full. The debentures have antidilution protection,
including, under certain circumstances, issuance of common stock below the then
applicable conversion price. The shares into which the debentures are
convertible have certain voting restrictions and must be held until August 2001.
The debentures are subordinated in right of payment to all our debt. We did not
register the debentures under the Securities Act of 1933. The sale of the
debentures was exempt from registration under Section 4(2) of the Securities Act
because it was a privately negotiated transaction and did not involve a public
offering. We used the proceeds to reduce our outstanding debt under our
revolving credit facility.
The credit facilities governing our revolving line of credit and senior
subordinated notes contain certain financial covenants including but not limited
to a limitation on debt levels, the prohibition of dividend payments and other
distributions and restrictions on investments, repurchases of common stock,
asset dispositions, the ability to merge or consolidate with or transfer assets
to another entity, and the maintenance of various financial ratios, including a
net worth ratio, a fixed charge ratio and a leverage ratio. The amount available
under our revolving line of credit is based on our leverage ratio and was
approximately $200 million at March 31, 2000.
During the ten months ended April 30, 2000, we repurchased 2.8 million
shares of our common stock for an aggregate purchase price of $18.6 million. We
repurchased all of these shares in open market transactions. There are
approximately 1.6 million shares remaining for repurchase under the existing 5.0
million share repurchase program authorized in October 1998.
On March 31, 2000, the FASB issued its final interpretation of APB
Opinion No. 25 "Accounting for Certain Transactions involving Stock
Compensation." The interpretation requires variable-award accounting for stock
options granted six months before or after the cancellation or settlement of
options if the new options have a lower exercise price. The interpretation will
be effective July 1, 2000 and covers certain events that occurred after December
15, 1998. No adjustments are to be made to financial statements for
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periods prior to the effective date and no expense is to be recognized for any
additional compensation costs attributable to periods before the effective date.
In March 1999, our board of directors approved a plan to allow
employees to exchange "underwater" stock options. These stock options had
exercise prices higher than the market price of our common stock. Based on the
exchange, on March 26, 1999, we canceled 5.2 million options at exercise prices
ranging from $12.09 to $33.06 and issued 3.6 million options at an exercise
price of $9.00. The effect was to reduce the number of options held to offset
the benefit of a lower exercise price. The estimated economic value of the
grants was generally unchanged as a result of the exchange. The March 26, 1999
options, under the terms of their agreement, will vest and terminate thirty days
after we give notice to our employees that we are required to apply variable
award accounting to these options. There will be no variable-award accounting
for the March 26, 1999 repriced options after termination. We also granted 1.4
million options on March 11, 1999. Based on the proposed interpretation of APB
25, the March 11, 1999 options would not have been subject to variable award
accounting. Under the final interpretation of APB 25, we believe most of the
options granted on March 11, 1999 will be subject to variable award accounting
because we reduced the number of repriced options in return for repricing.
As of April 30, 2000, there were 7.5 million options outstanding with a
weighted average exercise price of $9.13. We are currently evaluating all stock
option grants to determine which will be subject to variable award accounting
and the effect of the new interpretation on our earnings.
We adopted a stockholder rights plan in fiscal 1997 and declared a
dividend of one right for each share of common stock. The plan was amended in
August 1999. Each right entitles stockholders to acquire one-third of a share of
common stock at an exercise price of $100, subject to adjustment. The rights
become exercisable only if (1) Welsh, Carson, Anderson & Stowe VIII, L.P., WCAS
Management Corporation and certain parties which purchase the convertible
debentures from these entities acquire beneficial ownership of 30% or more of
our common stock or start an offer which would result in those entities owning
30% or more of our common stock or (2) any other person or group acquires
beneficial ownership of 15% or more of our common stock or starts an offer which
would result in that person or group owning 15% or more of our common stock. At
that time, each right owned by unaffiliated others entitles its holder to
purchase common stock (or any combination of common stock, preferred stock, debt
securities and cash, as determined by our board of directors) worth two times
the exercise price of the right. If we are involved in a business combination
transaction with another person or if we sell 50% or more of our assets or
earning power to another person, each right entitles its holder to purchase
shares of our common stock or the acquiring company's common stock worth two
times the exercise price of the right. We may redeem the rights for $.01 each at
any time until the tenth day following public announcement that an ownership
position as described above has been acquired. The rights expire on April 28,
2007.
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SEASONALITY AND INFLATION
Our business is seasonal, with higher patient volumes and net operating
revenues in the third quarter of our fiscal year than in the remainder of the
year. This seasonality happens because more people become ill during the winter,
which in turn increases the number of patients in our owned hospitals.
The health care industry is labor intensive. This means that our owned
hospitals need many employees, who we pay salaries and other benefits. These
salaries and benefits increase during periods of inflation and shortages of
qualified potential employees. In addition, our suppliers raise prices. We
cannot assure you that we will be able to offset or control future cost
increases.
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
Our interest expense is sensitive to changes in the general level of
interest rates. To mitigate the impact of fluctuations in interest rates, we
generally maintain 50%-75% of our debt at a fixed rate, either by borrowing on a
long-term basis or entering into interest rate swaps. Interest rate swaps are
contracts which allow us to periodically exchange fixed and floating interest
rate payments over the life of the agreements. Floating-rate payments are based
on LIBOR and fixed-rate payments are dependent upon market levels at the time we
execute the swap agreement. Our policy is to not hold or issue derivatives for
trading purposes and to avoid derivatives with leverage features. One of our
swap agreements allows the counter party a one-time option at the end of the
initial term to cancel the agreement. If our counter parties do not comply with
their obligations under our financial instruments, we may suffer losses. Our
counter parties are creditworthy financial institutions and we anticipate that
they will be able to fully satisfy their obligations under the contracts. For
the nine months ended March 31, 2000 and 1999, we received a weighted average
rate of 5.7% and 5.4% and paid a weighted average rate of 5.9% and 5.7%,
respectively.
The following table presents information about our market-sensitive
financial instruments, including long-term debt and interest rate swaps as of
March 31, 2000. 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 and weighted average interest rates based on rates in effect at
March 31, 2000. We determined the fair values of long-term debt and interest
rate swaps based on quoted market prices at March 31, 2000 for the same or
similar issues.
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<TABLE>
<CAPTION>
Maturity Date, Fiscal Year Ending June 30
----------------------------------------------
(Dollars in millions)
March 31,
2000
There- Fair Value of
2000 2001 2002 2003 2004 after Total Liabilities
------ ------ ------ ------ ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed rate long-term
debt $ 0.4 $ 0.8 $ 0.6 $ 0.6 $ 0.6 $301.6 $304.6 $294.1
Average interest rates 7.6% 7.7% 7.7% 7.7% 7.8% 7.4%
Variable rate long-
term debt $574.4 $574.4 $574.4
Average interest rates 7.2%
Interest rate swaps:
Pay fixed/receive
variable notional
amounts $200.0 $200.0 $400.0 $(10.2)
Average pay rate 6.0% 5.7%
Average receive rate 6.2% 6.2%
</TABLE>
YEAR 2000 ISSUES
Our owned hospitals and corporate office have not experienced any
significant adverse consequences as a result of the Year 2000 issues.
We are not aware of any significant adverse consequences experienced by
our managed hospitals as a result of the Year 2000 issues. We believe we are not
responsible for ensuring Year 2000 compliance by our managed hospitals, but we
cannot provide assurance that our managed hospitals will not seek to hold us
responsible, or that we will not ultimately be found liable, for any losses they
incur arising out of the Year 2000 problem.
GENERAL
We received from the Medicare and Medicaid programs approximately 54%
and 55% of gross patient service revenue for the years ended June 30, 1999 and
1998, respectively.
There were no increases in the Medicare inpatient operating payment
rates to acute care hospitals for services from October 1, 1997 through
September 30, 1998. Medicare inpatient operating payment rates increased 0.5%
for October 1, 1998 through September 30, 1999 and 1.1% for October 1, 1999
through September 30, 2000. These increases are less than inflation and
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subsequent increases are also expected to be less than inflation. Also, the
threshold to qualify for additional payments for treating costly inpatient cases
(outliers) increased, resulting in decreased payments to hospitals effective
October 1, 1999. Payments for Medicare outpatient services, home health services
and skilled nursing facility services historically have been paid based on
costs, subject to certain adjustments and limits. BBA 97 required that the
payment for those services be converted to prospective payment systems (PPS).
PPS for skilled nursing facilities began for cost reporting periods beginning on
and after July 1, 1998. The Health Care Financing Administration's (HCFA)
current plan is to implement PPS for outpatients on July 1, 2000 and for home
health on October 1, 2000.
Due to BBA 97, we received lower Medicare payments for outpatient
services and home health visits. We also had lower payments under PPS for
skilled nursing facilities. The reduction in home health payments resulted in a
decline in our home health volumes of 11.1% and 53.0% for the nine months ended
March 31, 2000 and March 31, 1999, respectively, compared to the prior year
periods. In response to BBA 97, we have consolidated certain home health
agencies and skilled nursing facilities, reduced costs at our home health
agencies and skilled nursing facilities and ceased admitting patients to skilled
nursing facilities at three hospitals.
On November 29, 1999 the President signed into law the Medicare,
Medicaid, and State Children's Health Insurance Programs Balanced Budget
Refinement Act of 1999 (BBRA). For us, the most significant provision of BBRA is
a requirement to eliminate the BBA 97 5.7% reduction in outpatient payments and
to partially subsidize losses in the first 3 1/2 years of the new Medicare
outpatient PPS.
On April 7, 2000, HCFA released its final rule on Medicare outpatient
PPS. HCFA estimated that hospital outpatient payments under the new outpatient
PPS system will be 4.6% more than hospitals would have received under the
current system. HCFA's estimate was based on 1996 data. This data excluded a
substantial number of the industry's claims from the claim population.
We estimate that approximately 6% of our net patient revenue will
transition to Medicare outpatient PPS. Medicare outpatient PPS is a complex
system requiring many changes in our systems and processes. We are not aware of
any software currently available that includes the final outpatient PPS payment
rules. Until we have software which allows us to process current claims using
the final rules, it will be difficult for us to estimate the effect of Medicare
outpatient PPS.
We have a steering committee at our corporate office and each owned
hospital to coordinate our transition plan to Medicare outpatient PPS. We are in
the process of addressing the following issues:
- We are educating our staff, physicians, patients and vendors.
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- We have ambulatory payment classification (APC) grouper
software. This software contains the proposed rules and is
being updated by the vendor to incorporate the final rules.
- We are educating outpatient coders and billers.
- We are reviewing and updating our chargemasters.
- We are reviewing our methodology to record outpatient PPS net
revenue in our financial statements.
Our billing system vendors have not released the updated APC versions
of their software, which includes the interfaces with the APC grouper software.
As a result, we have not yet been able to evaluate our ability to process claims
under outpatient PPS. Our most common billing system is HBOC Star, and this
vendor says that its system updates will be released in June. For the other
systems, we are working with the vendors to determine their status. Our ability
to analyze outpatient product lines, analyze the impact of changes on patient
coinsurance and analyze the financial impact of outpatient PPS is limited until
additional software and data are available.
We cannot assure you that the systems of third party vendors on which
we rely will be upgraded for Medicare outpatient PPS on a timely basis or
released in time for us to install and test the upgrades before July 1, 2000. We
also cannot assure you that the fiscal intermediaries will be ready to process
payments under the new system. If the government implements the system as
planned on July 1, 2000, the industry, software vendors and the government
intermediaries will have had less than three months to implement the final
rules. There are various contingency plans under discussion to implement
outpatient PPS on July 1, 2000 even if HCFA, fiscal intermediaries, software
vendors and/or providers are not ready. These contingency plans tend to address
alleviating interruptions in payments to hospitals. They may or may not
adequately address the technical problems of processing millions of individual
claims without systems to accurately calculate outpatient PPS payments. The
difficulties could include not being able to calculate each patient's
coinsurance, which means we could not request payment from the patients.
We cannot assure you that the implementation of Medicare outpatient PPS
will not have a material adverse effect on our results of operations or
financial condition.
The federal government originally estimated that BBA 97 would reduce
Medicare spending by approximately $115 billion. In July 1999, the federal
government revised its estimate to $218 billion. In November 1999, the federal
government lowered its estimate to $203 billion due to the positive impact of
BBRA. In January 2000, the federal government further revised its estimate to
$265 billion. BBA 97 has reduced our ability to maintain our historical rate of
net revenue growth and operating margins. We believe the most significant
payment reductions were phased in by October 1, 1998. BBA 97 and further changes
in the Medicare or Medicaid programs and other proposals to limit health care
spending could have a material adverse impact upon the
40
<PAGE> 41
health care industry and our hospitals. We expect continuing pressure to limit
expenditures by governmental health care programs.
We are continuing to experience an increase in managed care discounts.
Managed care includes indemnity insurance and employer plans which pay less than
full charges, health maintenance organizations, preferred provider organizations
and various other forms of managed care. An increasing number of payers are
actively negotiating amounts paid to hospitals, which are lower than the
hospitals' standard rates. Additionally, some managed care payers pay less than
the negotiated rate which, if undetected, results in lower net revenues. To
assist the owned hospital management teams in evaluating and negotiating
contracts and obtaining better pricing, we employ managed care experts. In
several markets, we have canceled contracts with PPOs who allow discounts we
believe are not justified. We are reviewing other markets for similar activity.
Additionally, we are beginning to use managed care information systems in four
of our owned hospitals to improve the information available to management and to
help ensure that we are paid at the contracted amounts. We expect to install
these systems in fourteen additional owned hospitals in phases with most
hospitals having basic functionality during calendar year 2000. We plan to
install these systems in the remaining three owned hospitals by June 30, 2001.
The trend toward managed care has and may continue to adversely affect our
ability to grow net operating revenue and improve operating margins.
Our acute care hospitals, like most acute care hospitals in the United
States, have significant unused capacity. The result is substantial competition
for patients and physicians. Inpatient volumes continue to be negatively
affected by payer-required pre-admission authorization and by payer pressure to
maximize outpatient and alternative health care delivery services for less
acutely ill patients. Over the long term, we expect the industry trend from
inpatient to outpatient services to continue due to the increased focus on
managed care and advances in technology. More outpatient procedures are now
being provided in physician's offices. We expect increased competition and
admission constraints to continue. Our ability to successfully respond to these
trends, as well as spending reductions in governmental health care programs,
will be significant in determining our ability to grow net operating revenue and
improve operating margins.
Outpatient revenue of our owned hospitals was approximately 41.3% and
40.4% of gross patient service revenue for the nine months ended March 31, 2000
and 1999, respectively.
We face competition in acquiring hospitals from a number of well-
capitalized organizations. National studies indicate that acute care hospital
margins peaked in 1998 and are expected to decline for the next several years.
The pricing expected by hospital sellers may not yet reflect lower margins.
Additionally, some hospitals are sold through an "auction" process, which may
result in competitors paying higher prices for those properties than we believe
is reasonable. Many states have implemented review processes by the Attorneys
General of not-for-profit hospital acquisitions, resulting in delays to close an
acquisition. We believe that trends in the health care industry
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<PAGE> 42
described above may create possible future acquisition opportunities. In light
of changes in payments from Medicare and managed care payers, increased pricing
pressures for acquired hospitals and the substantial number of transactions
completed in fiscal 1999, we intend to be selective in pursuing acquisitions.
There can be no assurances that we can continue to grow through hospital
acquisitions and successfully integrate acquired hospitals into our system.
In accordance with generally accepted accounting principles, we
estimate settlements with third party payers. These estimates are based on
assumptions and affect the amounts we report in our financial statements. For
example, we report net patient service revenue at net amounts we expect to
receive from our hospital patients, third party payers, and others for services
rendered, including estimated retroactive adjustments under agreements with
third party payers. We make estimates of settlements under agreements with third
party payers in the period we provide the related services. We then adjust the
settlements as final settlements are determined or additional information is
obtained from the third party payer. Our quarterly or annual operating results
fluctuate based on the timing and amount of changes in estimates.
The IRS is examining our federal income tax returns for fiscal years
1993 through 1998. The IRS has proposed to adjust our federal income tax returns
for fiscal years 1993 through 1995. The most significant adjustments relate to
how we compute bad debt expense and how we value property, plant and equipment
of hospitals we acquire and their related depreciable lives. We have protested
substantially all of the proposed adjustments through the appeals process of the
IRS. In our opinion, the ultimate outcome of the IRS examinations will not have
a material effect on our results of operations or financial condition.
In 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This standard will require us to
recognize all derivatives on the balance sheet at their fair value. Derivatives
that are not hedges must be adjusted to fair value through changes to our income
statement. For interest rate swap agreements that qualify as hedges, we will
offset changes in fair value against the change in fair value of the hedged
assets, liabilities, or firm commitments through changes to our earnings. We
will adopt this new FASB standard on July 1, 2000. We are presently evaluating
the new standard to determine its effect on our earnings and financial position.
42
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Part I, Item 2. "Management's Discussion and
Analysis" under the caption "Litigation" is incorporated by reference in its
entirety into this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. Exhibits filed with this Report are listed on the Exhibit
Index following the signature page.
(b) Reports on Form 8-K. No Reports on Form 8-K were filed during the
quarter ended March 31, 2000.
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.
(Registrant)
Date: May 15, 2000 By: /s/ Terry Allison Rappuhn
--------------------------
Terry Allison Rappuhn
Senior Vice President
& Chief Financial Officer
<PAGE> 44
Exhibit Index
Exhibit No.
10.25.2. Third Amendment, dated as of April 13], 2000, to Group
Purchasing Organization Participating Agreement between
Premier Purchasing Partners, L.P., f/k/a APS Healthcare
Purchasing Partners, L.P.,dated November 30, 1995.
27 Financial Data Schedule (SEC use only)
<PAGE> 1
THIRD AMENDMENT TO
GROUP PURCHASING ORGANIZATION PARTICIPATION AGREEMENT
This Third Amendment to Group Purchasing Organization Participation
Agreement ("Amendment") is entered into as of the 13th day of April, 2000, by
and between QUORUM HEALTH GROUP, INC. ("Quorum"), a Delaware Corporation and
PREMIER PURCHASING PARTNERS L.P., f/k/a APS Healthcare Purchasing Partners, L.P.
(the "Partnership"), a California Limited Partnership.
WHEREAS, Quorum and the Partnership entered into a Group Purchasing
Organization Participation Agreement (the "GPO Agreement") dated November 30,
1995, which was amended by a First Amendment to Group Purchasing Organization
Participation Agreement (the "First Amendment") dated June 1, 1997 and a Second
Amendment to Group Purchasing Organization Agreement effective as of December
31, 1999 (the "Second Amendment") (the GPO Agreement, the First Amendment and
the Second Amendment are collectively referred to herein as the Agreement); and
WHEREAS, the parties have entered into discussions to extend and modify
their relationship and desire to further amend certain provisions of the
Agreement as further set forth herein.
NOW, THEREFORE, in consideration of the foregoing, the parties hereby
amend the Agreement as follows:
1. Section 3 of the Second Amendment is amended by replacing the date
"December 31, 1999" in subsection (a) thereof with the date "March 31, 2000."
2. Any provisions of the Agreement not amended herein shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties have caused this amendment to be executed
by their duly authorized representatives.
PREMIER PURCHASING PARTNERS, L. P.
BY: PREMIER PLANS, INC.
Its General Partner
By: ______________________
Name: ______________________
Title: ______________________
QUORUM HEALTH GROUP, INC.
By: _______________________
Name: _______________________
Title: _______________________
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000 AND THE
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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<S> <C>
<PERIOD-TYPE> 9-MOS
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<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
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<SECURITIES> 0
<RECEIVABLES> 434,084
<ALLOWANCES> 91,066
<INVENTORY> 41,123
<CURRENT-ASSETS> 449,855
<PP&E> 1,220,922
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<TOTAL-ASSETS> 1,857,243
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0
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<COMMON> 712
<OTHER-SE> 651,480
<TOTAL-LIABILITY-AND-EQUITY> 1,857,243
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<CGS> 0
<TOTAL-COSTS> 1,012,453
<OTHER-EXPENSES> 89,938
<LOSS-PROVISION> 100,060
<INTEREST-EXPENSE> 50,692
<INCOME-PRETAX> 66,618
<INCOME-TAX> 26,048
<INCOME-CONTINUING> 40,570
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