<PAGE> 1
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
---------- ----------
Commission file number 000-22766
QUORUM HEALTH GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1406040
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
103 CONTINENTAL PLACE, BRENTWOOD, TENNESSEE 37027
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(615) 371-7979
(COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
COMMON STOCK, PAR VALUE $.01
TITLE OF CLASS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
1
<PAGE> 2
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $847,922,486 as of September 22, 2000. The number of Shares of
Common Stock outstanding as of such date was 71,471,279.
The following documents are incorporated by reference into Part III,
Items 10, 11, 12 and 13 of this Form 10-K: Registrant's definitive proxy
materials for its 2000 Annual Meeting of Stockholders.
2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
ITEM 1. BUSINESS................................................................................... 5
Who We Are................................................................................. 5
What We Do................................................................................. 5
Our Owned Hospital Markets................................................................. 6
Our Business Strategy...................................................................... 6
Recent Developments-Strategic Alternatives................................................. 7
Owned Hospitals............................................................................ 8
Hospital Management Services............................................................... 14
National Supply Contracts.................................................................. 15
Government Regulation...................................................................... 16
Payment.................................................................................... 19
Competition................................................................................ 22
Employees and Medical Staffs............................................................... 23
Professional Liability..................................................................... 23
ITEM 2. PROPERTIES................................................................................. 23
ITEM 3. LEGAL PROCEEDINGS.......................................................................... 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 27
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS................................................................ 27
ITEM 6. SELECTED FINANCIAL DATA.................................................................... 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION......................................................... 29
Forward-Looking Information................................................................ 29
Strategic Alternatives..................................................................... 30
Overview................................................................................... 30
Impact of Acquisitions, Joint Ventures and Sales........................................... 31
Results of Operations...................................................................... 32
Liquidity and Capital Resources............................................................ 38
Seasonality and Inflation.................................................................. 42
Market Risks Associated With Financial
Instruments................................................................................ 43
Litigation................................................................................. 44
General.................................................................................... 47
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................ 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..................................................... 51
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS........................................................... 51
ITEM 11. EXECUTIVE COMPENSATION..................................................................... 51
</TABLE>
3
<PAGE> 4
<TABLE>
<S> <C>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................................................. 52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 52
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K........................................................................................ II-1
SIGNATURES................................................................................................... Sig-1
</TABLE>
4
<PAGE> 5
PART I
ITEM 1. BUSINESS
OVERVIEW
WHO WE ARE
Quorum Health Group, Inc. is 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 through our subsidiary,
Quorum Health Resources, LLC. During the fiscal year ended June 30, 2000, we
produced $1,762.8 million in net operating revenue and $277.5 million in EBITDA.
EBITDA means our earnings before interest, minority interest, income taxes,
depreciation and amortization expense, write-down of assets and investigation
and litigation related costs.
As of June 30, 2000, we owned and operated 21 acute care hospitals with
4,519 licensed beds. We are also a minority investor in three joint ventures
that own and operate seven acute care hospitals with 1,330 licensed beds. During
the year ended June 30, 2000, our owned hospitals produced $1,620.4 million in
net operating revenue and $247.6 million in EBITDA. This accounted for 92% of
our total net operating revenue and 89% of our total EBITDA.
At June 30, 2000, we provided management services to 212 hospitals with
approximately 24,195 licensed beds. We also had 197 contracts to provide
selected consulting and support services to approximately 137 hospitals. During
the fiscal year ended June 30, 2000, our hospital management services produced
$142.4 million in net operating revenue and $29.9 million in EBITDA. This
accounted for 8% of our total net operating revenue and 11% of our total EBITDA.
WHAT WE DO
Our owned hospitals typically provide a full range of inpatient and
outpatient services. These services include internal medicine, general surgery,
cardiology, oncology, neurosurgery, orthopedics, obstetrics, diagnostic and
emergency room services, outpatient surgery, laboratory, radiology, respiratory
therapy, physical therapy and rehabilitation services. In addition, some of our
owned hospitals provide psychiatric, skilled nursing and home health services.
----------
(1) We use "we", "us" and "our" to refer to Quorum Health Group, Inc. and its
subsidiaries. The term "subsidiaries" includes affiliated partnerships and
affiliated limited liability companies. References to "our hospitals" or "our
owned hospitals" refer to hospitals that we consolidate for financial reporting
purposes since we own a majority of the equity interests in the subsidiaries
that operate these hospitals. We may own or lease the land and buildings used by
these hospitals.
5
<PAGE> 6
Through Quorum Health Resources we provide management services and
selected consulting, educational and related services to hospitals. We provide
management services to hospitals in 43 states. We typically provide hospitals
receiving management services with people who serve as the chief executive
officer and chief financial officer. Although these people are our employees,
they remain under the direction and control of the hospital's governing body.
Together with the hospitals' governing bodies, these officers develop management
plans to address the specific needs of the hospitals. Our hospital management
business helps us develop stronger relationships with communities and knowledge
of local market conditions.
OUR OWNED HOSPITAL MARKETS
Our owned hospitals are generally located in mid-size markets with a
population of 50,000 to 500,000. We prefer these mid-size markets because we
believe that these markets are the most attractive for long-term growth. They
are large enough to support higher intensity services and larger hospitals than
rural areas. We believe that they are subject to fewer managed care pressures
than urban areas. We also prefer these mid-size markets because they are small
enough to allow us to be a significant provider of health care services within
these markets.
OUR BUSINESS STRATEGY
Our business strategy is to improve our operating and financial results
through the following actions:
- Expand and Enhance the Scope of Services Provided by Our Owned
Hospitals
We seek to expand our health care services in response to the needs of
our local communities. We believe that patients and employers prefer local
health care. We believe that expansion and enhancement of our inpatient and
outpatient services will attract more patients and permit us to continue to grow
our business and increase our profitability. For example, during the past fiscal
year, we began building a new 87 bed hospital in Fort Wayne, Indiana and a 211
bed replacement hospital in Vicksburg, Mississippi. We also opened a new women's
center, began a new comprehensive cardiac care program and created a pediatric
speciality facility. We actively recruit primary care and specialty physicians
and other medical personnel. During fiscal year 2000, we recruited 229 doctors.
- Improve Operating Efficiency and Effectiveness
We seek to improve the financial performance of our owned hospitals
through a number of measures intended to increase revenues and reduce operating
costs. These measures include:
- enhancing payments from managed care payors by using the
standard managed care information system now being installed
at 12 of our owned hospitals and which we plan to install at
all of our
6
<PAGE> 7
owned hospitals during fiscal 2001 (1) to enforce payors'
compliance with their contracts with us and (2) to provide us
with information which we believe will enable us to negotiate
rates;
- using flexible staffing plans by adjusting human resource
levels to patient volumes;
- controlling supply costs by (1) using national purchasing
arrangements, (2) reducing waste, (3) improving electronic
database communications with our vendors and (4) simplifying
and standardizing the types of supplies used by our hospitals;
- increasing collections and reducing bad debts by (1) improving
our billing and collections systems and processes, (2)
training our personnel on accounts receivable management and
(3) improving our personnel retention programs;
- working with our hospitals' physicians to provide care using
lower cost, medically appropriate tests and procedures;
- combining procedures and services in localities where we have
more than one hospital; and
- improving the financial results of physician practices we own
by (1) recruiting doctors without employing them; (2)
transitioning out of contracts with doctors with mature
practices and (3) changing the ways we pay employed
doctors.
- Actively Manage Our Owned Hospital Portfolio Through Selective
Purchases and Sales
We regularly review our owned hospitals' performance and their fit with
our business strategy. We intend to selectively buy and sell acute care
hospitals as we seek to best allocate our resources. We intend to concentrate on
opportunities to buy hospitals which complement health care facilities we
already own. An example of this strategy is our purchases in December 1999 and
July 2000 of Caylor-Nickel Medical Center (107 beds) and Wells Community
Hospital (38 beds). Both hospitals are located in Bluffton, Indiana, a community
near Fort Wayne, Indiana, where we own other hospitals. In March 2000, we also
sold Clinton County Hospital, located in Frankfort, Indiana, a facility which
did not complement any of our other owned hospitals.
RECENT DEVELOPMENTS - STRATEGIC ALTERNATIVES
On August 11, 2000, we announced that our Board of Directors was
actively exploring various strategic alternatives, including a possible merger,
sale or recapitalization. Goldman, Sachs & Co. is acting as our financial
advisor. As of the date of this report, we have not decided whether to enter
into any transaction or what form any transaction might take. We may determine,
at any time, not to proceed with any of the alternatives under consideration.
7
<PAGE> 8
OWNED HOSPITALS
OPERATIONS. Our owned hospitals are general, acute care hospitals
offering a wide range of facilities and inpatient and outpatient medical
services. Inpatient services include operating and recovery rooms, intensive
care and coronary care units and diagnostic and emergency services. Outpatient
services include same-day surgery, laboratory, pharmacy and rehabilitation
services and respiratory therapy.
In addition, our owned hospitals provide specialty services which
differ at each hospital. These services include cancer treatment, open heart
surgery, skilled nursing, treatment for chemical dependency and home health care
services. Our owned hospitals are not engaged in extensive medical research or
educational programs.
Each of our owned hospitals is governed by a board of trustees, which
includes members of the hospital's medical staff. The board of trustees
establishes policies concerning the hospital's medical, professional and ethical
practices, monitors these practices, and is responsible for ensuring that these
practices conform to legally required standards. We maintain quality assurance
programs intended to support and monitor quality of care standards and to help
our owned hospitals meet Medicare and Medicaid accreditation and regulatory
requirements.
Physicians on the medical staffs of our hospitals are generally not our
employees. Some physicians have been historically employed by or have contracted
with us primarily to staff emergency rooms, to provide certain ancillary
services and to serve in administrative capacities, such as directors of special
services. Some of our hospitals also own physician practices. In addition,
physicians are employees of the entities formed by the consolidations of three
of our facilities with physician practices in their respective communities
(ParkView Regional Medical Center and Vicksburg Medical Center, Vicksburg,
Mississippi and Mary Black Memorial Hospital, Spartanburg, South Carolina). In
fiscal 2000, we experienced a significant increase in losses from our owned
physician clinics. In response, we have begun to transition out of contracts
with doctors with mature practices and change the way we pay employed doctors.
We also intend to recruit physicians without employing them, whenever possible.
We have historically experienced a shift from inpatient to outpatient
care. This shift has occurred primarily as a result of the development of new
drugs and improvements in technology and clinical practices, as well as payment
reductions for hospital services made under the Medicare program and by
insurance and managed care companies and other persons who pay us for services.
Reductions in payment levels generally encourage, whenever possible, the use of
outpatient, rather than inpatient, services. We continued to experience a shift
from inpatient to outpatient care in fiscal 2000. We have responded to the
outpatient trend by improving and expanding our hospitals' outpatient services.
A significant number of our patients are covered by managed care plans.
Managed care includes insurance companies, health maintenance organizations
("HMOs"), preferred provider organizations ("PPOs") and other third party payors
who pay rates lower than our standard rates. We employ managed care experts to
help our management teams evaluate and negotiate contracts with these payors and
8
<PAGE> 9
obtain better rates. Also, we have begun to use, in 12 of our owned hospitals,
an information system which we believe will improve the information available to
our management teams in negotiating new contracts and evaluating current
contracts. The system is intended to help monitor whether payors are paying us
at the rates we have negotiated with them. We plan to finish installing the
managed care information system in all of our owned hospitals during fiscal
2001. The trend toward managed care has adversely affected and may continue to
adversely affect our ability to grow net operating revenue and improve operating
margins.
The following table lists each of our owned hospitals as of June 30,
2000.
<TABLE>
<CAPTION>
LICENSED BEDS IN DATE OF
HOSPITAL AND LOCATION BEDS(1) SERVICE(2) ACQUISITION
--------------------- --------- ---------- --------------
<S> <C> <C> <C>
ParkView Regional Medical Center (3) 231 193 November 1990
Vicksburg, Mississippi
Flowers Hospital 400 400 June 1992
Dothan, Alabama
Gadsden Regional Medical Center 346 257 December 1993
Gadsden, Alabama
Abilene Regional Medical Center 187 187 May 1994
Abilene, Texas
Medical Center Enterprise 135 117 May 1994
Enterprise, Alabama
Carolinas Hospital System - Florence 372 362 February 1995
Florence, South Carolina
Carolinas Hospital System - Lake City (4) 48 40 June 1995
Lake City, South Carolina
Lutheran Hospital of Indiana 437 403 August 1995
Fort Wayne, Indiana
Jacksonville Hospital 89 56 June 1996
Jacksonville, Alabama
Mary Black Memorial Hospital (5) 235 222 July 1996
Spartanburg, South Carolina
Carolinas Hospital System - Kingstree (4) 78 42 August 1996
Kingstree, South Carolina
Doctors Hospital of Stark County (6) 166 166 November 1996
Massillon, Ohio
Barberton Citizens Hospital (6) 347 245 December 1996
Barberton, Ohio
Wesley Medical Center 211 182 September 1997
Hattiesburg, Mississippi
Unimed Medical Center (7) March 1998
Minot, North Dakota 185 165
Kenmare, North Dakota 42 42
St. Joseph Hospital (7) 191 191 July 1998
Fort Wayne, Indiana
Summit Hospital (8) 201 50 October 1998
Baton Rouge, Louisiana
Vicksburg Medical Center (3) 154 92 November 1998
Vicksburg, Mississippi
Northwest Health System (7) December 1998
Bentonville, Arkansas 63 54
Springdale, Arkansas 222 217
Kosciusko Community Hospital (7) 72 72 February 1999
Warsaw, Indiana
Caylor-Nickel Medical Center 107 95 December, 1999
Bluffton, Indiana
</TABLE>
-----------
9
<PAGE> 10
(1) Licensed beds are the number of beds for which a facility has been
licensed by the appropriate state agency regardless of whether the beds
are actually available for patient use.
(2) Beds in service are the number of beds that are readily available for
patient use.
(3) Owned by a limited liability company in which our majority owned
subsidiary owns a 65% interest and is the manager.
(4) Carolinas Hospital System - Lake City and Carolinas Hospital System -
Kingstree are held pursuant to operating leases with initial terms of
ten years and two renewal options of five years each.
(5) Owned by a limited liability company in which we own an 89% interest
and are the manager.
(6) Owned by limited liability companies in which we own a 95% interest and
are the manager.
(7) The land and buildings used by each of these hospitals have been leased
by us under our end loaded lease financing facility.
(8) Owned by a limited liability company in which we own a 62% interest and
are the manager.
The following table lists the hospitals that were owned by joint venture
entities in which we are the minority owner, and our percentage ownership
interest as of June 30, 2000. Information on licensed beds and beds in service
was provided by the majority owner and manager of each joint venture. Universal
Health Systems is the majority owner of the Las Vegas, Nevada joint ventures.
HCA is the majority owner of the Macon, Georgia joint venture.
<TABLE>
<CAPTION>
DATE JOINT
LICENSED BEDS IN VENTURE
HOSPITAL AND LOCATION BEDS SERVICE FORMED
--------------------- -------- ------- ------
<S> <C> <C> <C>
Desert Springs Hospital (28%) 233 233 FEBRUARY 1998
Las Vegas, Nevada
Valley Hospital Medical Center (28%) 417 415 FEBRUARY 1998
Las Vegas, Nevada
Summerlin Hospital Medical Center (26%) 148 148 FEBRUARY 1998
Las Vegas, Nevada
Macon Northside Hospital (38%) 103 103 MAY 1998
Macon, Georgia
Middle Georgia Hospital (38%) 119 93 MAY 1998
Macon, Georgia
Coliseum Medical Center (38%) 250 193 MAY 1998
Macon, Georgia
Coliseum Psychiatric Center (38%) 60 31 MAY 1998
Macon, Georgia
</TABLE>
SELECTED OPERATING STATISTICS. The following table contains operating statistics
for our owned hospitals for the last five fiscal years. Statistics for fiscal
2000 include a full year of operations for twenty hospitals and the joint
ventures, a partial year for one hospital acquired and one hospital sold during
the year. Statistics for fiscal 1999 include a full year of operations for
sixteen hospitals and the joint ventures and partial periods for one hospital
sold, four hospitals acquired and one hospital contributed by HCA during the
year to a joint venture that we control. Statistics for fiscal 1998 include a
full year of operations for fifteen hospitals and partial periods for one
hospital sold and the
10
<PAGE> 11
Las Vegas and Macon joint ventures, three hospitals we contributed to joint
ventures and two hospitals acquired during the year. Statistics for fiscal 1997
include a full year of operations for fifteen hospitals and partial periods for
four hospitals acquired during the year. Statistics for fiscal 1996 include a
full year of operations for twelve hospitals and partial periods for two
hospitals acquired and one hospital sold during the year.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Number of Hospitals (1) 21 21 17 19 14
Licensed Beds (1)(2) 4,519 4,551 3,966 4,205 3,281
Beds In Service (1)(3) 3,850 3,932 3,240 3,481 2,691
Admissions (4) 143,268 136,058 128,235 119,551 94,872
Average Length Of Stay
(Days) 5.5 5.6 5.6 5.6 5.8
Patient Days (5) 790,500 764,184 713,906 666,353 548,772
Adjusted Patient Days (6) 1,356,983 1,300,425 1,193,701 1,046,657 830,955
Occupancy Rate
(Licensed Beds) (7) 47.3% 45.8% 46.8% 46.8% 46.2%
Occupancy Rate (Beds In
Service) (8) 55.4% 55.2% 56.9% 56.5% 56.2%
Gross Inpatient Revenue
(in thousands) $1,793,358 $1,616,458 $1,513,805 $1,447,771 $1,115,363
Gross Outpatient
Revenue
(in thousands) $1,285,144 $1,134,296 $1,017,383 $ 826,279 $ 573,529
</TABLE>
----------
(1) At end of period.
(2) Licensed beds are the number of beds for which a facility has been
licensed by the appropriate state agency regardless of whether the beds
are actually available for patient use.
(3) Beds in service are the number of beds that are readily available for
patient use.
(4) Admissions represent the number of patients admitted for inpatient
treatment.
(5) Patient days represent the total number of days of patient care
provided to inpatients.
(6) Adjusted patient days have been calculated based on an
industry-accepted, revenue-based formula (multiplying actual patient
days by the sum of gross inpatient revenue and gross outpatient revenue
and dividing the result by gross inpatient revenue) to reflect an
approximation of the number of inpatients and outpatients served.
11
<PAGE> 12
(7) Percentages are calculated by dividing the average daily census by
weighted average licensed beds.
(8) Percentages are calculated by dividing the average daily census by
weighted average beds in service.
SOURCES OF REVENUE. We receive payment for health care services
provided by our owned hospitals from (1) the federal Medicare program, (2) state
Medicaid programs, (3) health care insurance carriers, HMOS, and PPOs, and other
managed care programs and self-insured employers, (4) the TriCare Program,
formerly called the Civilian Health and Medical Program of the Uniformed
Services or "CHAMPUS" ("TriCare"), and (5) patients directly.
The following table presents the approximate percentages of net patient
service revenue from Medicare, Medicaid and other sources for the periods
indicated. The data is not comparable between years due to the significant
effect of hospital acquisitions, joint ventures and dispositions. For
information concerning geographic concentration of our sources of revenue, see
Item 7."Management's Discussion and Analysis of Results of Operation and
Financial Condition."
<TABLE>
<CAPTION>
Year Ended June 30
-------------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Medicare 36.6% 36.6% 39.1%
Medicaid 5.8% 6.0 5.7
Other sources 57.6% 57.4 55.2
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
As shown above, we receive a substantial portion of our revenue from
the federal Medicare program for the elderly and state Medicaid programs for the
indigent. All of our owned hospitals are certified as providers of Medicare and
Medicaid services. Both of these programs are heavily regulated and use complex
methods for determining our payments. These programs also actively seek to
recover amounts they believe they have overpaid. Amounts received under the
Medicare and Medicaid programs are generally significantly less than the
hospital's customary charges for the services provided. In recent years, changes
made to the Medicare and Medicaid programs have further reduced payments to
hospitals. Lower payments from Medicare and Medicaid as a result of the Balanced
Budget Act of 1997 (BBA 97) reduced the growth in our net operating revenue in
each of the last three fiscal years. Since a large portion of our revenues comes
from patients covered under the Medicare and Medicaid programs, our ability to
operate our business successfully in the future will depend in large measure on
our ability to adapt to changes in these programs.
In addition to government programs, we are paid by private payors,
which include insurance companies, HMOs, PPOs, other managed care companies and
employers, and by patients directly. Patients are generally responsible for
services not covered by those programs or plans, as well as deductibles or
co-insurance under their coverage. After taking these amounts into account,
patients are generally not
12
<PAGE> 13
responsible for any difference between customary hospital charges and amounts
paid for hospital services by Medicare and Medicaid programs, insurance
companies, HMOs, PPOs and other managed care companies. Collection of amounts
due from individuals is typically more difficult than that from government or
business payors. For more information on the payment programs on which our
revenues depend, see "Payment" below.
Hospital revenues depend upon inpatient occupancy levels, the volume of
outpatient procedures and the charges or negotiated payment rates for hospital
services provided. Charges and payment rates for inpatient routine services vary
significantly depending on the type of service performed and the geographic
location of the hospital. In recent years, we have experienced a significant
increase in revenue received from outpatient services. We attribute this
increase to:
- advances in technology and drugs, which have permitted us to provide
more services on an outpatient basis;
- pressure from Medicare or Medicaid programs, insurance companies and
managed care plans to reduce hospital stays and provide more outpatient
services, which are less expensive; and
- the combination of physician practices into some of our owned and
operated hospitals.
In order to increase volume, we offer discounts from standard charges
to large group purchasers of health care services, including insurance
companies, HMOs, PPOs, other managed care companies and employers. These
discount programs limit our ability to increase net revenues in response to
increasing costs. Our success in maintaining or increasing our net revenues
largely depends on our ability to negotiate better rates.
13
<PAGE> 14
HOSPITAL MANAGEMENT SERVICES
We are a leading provider of management services to acute care
hospitals, providing management services to 212 hospitals at the end of fiscal
2000. We believe that our industry reputation and leading market position
provide us with a competitive advantage in seeking additional management
contracts.
Most of the hospitals for which we perform management, consulting or
support services are not-for-profit hospitals. These hospitals are generally
located in nonurban areas. 65% of these hospitals have less than 100 beds.
We provide management services to hospitals under management contracts
and provide selected consulting, educational and related services. We assist
hospitals in improving their financial performance and the scope of their
services.
Upon entering into a management contract, we first assess the
operations of the hospital, including the hospital's financial management, the
economic and population related factors affecting the hospital's market,
physician relationships and staffing requirements. Then, based on our
assessment, we develop and recommend a management plan to the hospital's
governing board.
To implement the management plan adopted for each hospital, we provide
the hospital with people who serve as the hospital's chief executive officer
and, typically, a chief financial officer. Although these people are our
employees, they remain under the direction and control of the hospital's
governing body, and the balance of the hospital staff remains employees of the
hospital under the control and supervision of the hospital. Our hospital-based
team is supported by our regional and corporate management staff. We currently
have 23 regional offices located throughout the United States. Our regional
office staff has broad experience in providing management services to hospitals
of all sizes in diverse markets throughout the United States. Each regional
office is responsible for the management services provided within its geographic
area. The national presence of our regional offices and our staff's knowledge of
the economic, population-related and regulatory factors affecting local markets
are significant marketing assets in responding to new business opportunities.
Our hospital management contracts generally have a term of three to
five years. Our management contract fees are based on amounts agreed upon by us
and the hospital's governing body, and generally are not related to the
hospital's revenues or other variables. Under our hospital management contracts,
we are not responsible for hospital licensure, liability coverage, capital
expenditures or for other functions which are normally the responsibility of a
hospital's governing body. We are not
14
<PAGE> 15
responsible for funding any hospital expenses. In providing our management
services, we are not considered a health care provider for hospital licensure
and certificate of need purposes. The number of management contracts terminated
prior to the agreed upon termination date has averaged approximately 16.0% of
total hospitals managed by us during the year for the two fiscal years ended
June 30, 2000. This percentage represents an increase from 10.9% for the two
fiscal years ended June 30, 1999 and the 8.3% rate reported for the two fiscal
years ended June 30, 1998. The increase in contract termination contributed to
the reduced earnings from our management services business in fiscal 2000.
We offer consulting and related educational and management services to
hospitals that are not part of our contract management program. Our consulting
services are directed at many of the operational needs of hospitals, including
accounts receivable management, health information management, human resources,
facilities design and various operational services. We also provide consulting
services to large, sophisticated medical institutions that need hospital
management advice for specific issues.
NATIONAL SUPPLY CONTRACTS
As a result of our management and consulting contracts with hospitals
throughout the United States, we have many opportunities to provide a wide range
of national purchasing arrangements with various vendors of medical supplies,
equipment, pharmaceuticals and certain services. The collective buying power of
our managed hospitals has allowed many of these hospitals to benefit from these
arrangements through volume discounts, rebates and other cost savings. Our owned
hospitals also benefit from similar savings. In some cases we have the
opportunity to earn administrative fees from vendors in return for our group
purchasing activities.
During fiscal 1996, we entered into a five-year purchasing arrangement
with Premier Purchasing Partners, L.P. Premier is a for-profit limited
partnership that was formed by not-for-profit health systems. Premier provides
group purchasing, along with other services to its clients. The purchasing
arrangement with Premier combines the purchasing power of our owned hospitals,
and many of our managed hospitals, with the purchasing power of more than 1,700
hospitals affiliated with the Premier program. This increased purchasing power
has resulted in reductions in the prices paid by our hospitals for medical
supplies, equipment, pharmaceuticals and other services. Under the Premier
purchasing arrangement, we have agreed to use Premier as our exclusive national
group purchasing organization. Under a June 1997 amendment, Premier agreed to
pay us an annual administrative fee of $6.4 million if the amount paid by our
owned hospitals, and many of our managed hospitals, for products purchased
through the purchasing arrangement satisfied a minimum threshold. The minimum
threshold was $484 million for calendar year 1999. This minimum threshold
increases 10% annually. The administrative fee is adjusted proportionately for
purchases below the threshold. We met the minimum purchasing threshold for
calendar year 1999. In addition, Premier agreed to pay us up to $500,000
annually as reimbursement for expenses. Under amendments dated December 31,
1999, April 13, 2000 and June 13, 2000, Premier has agreed to pay us, as its
total compensation and regardless of purchasing volume, 50% of the net group
purchasing fees it receives from Quorum owned and participating managed
hospitals for the fiscal year beginning July 1, 1999 and for the quarter ending
September 30, 2000. After September 30, 2000, Premier will once again pay us in
accordance with the June 1997 amendment unless another amendment is negotiated
and signed by us and Premier. The purchasing arrangement automatically renews
for
15
<PAGE> 16
successive one year periods, but either we or Premier may terminate the
purchasing arrangement without cause upon delivery of twelve months' written
notice.
GOVERNMENT REGULATION
OVERVIEW. The health care industry must comply with extensive
government regulation at the federal, state and local levels. Under these
regulations, hospitals must meet requirements to be certified as hospitals and
qualify to participate in government programs, including the Medicare and
Medicaid programs. These requirements relate to the adequacy of medical care,
equipment, personnel, operating policies and procedures, maintenance of adequate
records, hospital use, rate-setting, compliance with building codes and
environmental protection laws. There are also extensive regulations that affect
a hospital's continued participation in these government programs. There is
generally little judicial or administrative interpretation to guide us in
complying with these regulations.
If we are found to have not complied with applicable laws and
regulations, we could be subject to criminal penalties and civil sanctions, our
owned hospitals could lose their licenses and we could lose our ability to
participate in these government programs. In addition, government regulations
may change. If that happens, we may have to make changes in our facilities,
equipment, personnel and services in order for our owned hospitals to remain
certified as hospitals and qualified to participate in these programs.
In recent years there has been increased regulatory scrutiny of the
health care industry. The federal government and a number of states are rapidly
increasing the resources devoted to investigating allegations of fraud and abuse
in the Medicare and Medicaid and other government health care programs. At the
same time, regulatory and law enforcement authorities are taking an increasingly
strict view of the requirements imposed on providers by federal and state laws
and regulations. A determination that we have violated such laws, or even the
public announcement that we were being investigated concerning possible
violations, could have a material adverse effect on us.
FALSE CLAIMS. The False Claims Act and the Social Security Act each
impose criminal and civil penalties for willfully making false claims to
Medicare and Medicaid for services not rendered or for misrepresenting actual
services rendered in order to obtain higher payment. Hospitals must carefully
and accurately prepare Medicare cost reports and code and bill claims for
payment to avoid liability under these federal statutes. At the same time, the
complexity of the regulations, the dependence of hospitals on physician
documentation of medical records and the subjective judgment involved make
accurate billing difficult. Violation of these federal statutes may subject a
hospital to treble damages, fines of up to $10,000 per false claim and exclusion
from the Medicare and Medicaid programs.
FEDERAL AND STATE FRAUD AND ABUSE LAWS. The Social Security Act also
prohibits offering, paying, soliciting or receiving remuneration intended to
induce referrals of patients. Financial arrangements between hospitals and
anyone who can refer Medicare or Medicaid patients or influence purchases of any
goods or services paid for by the Medicare or Medicaid programs must comply
with the "fraud and abuse" antikickback provisions of the Social Security Act
(the "Antifraud Amendments"). In addition to felony criminal penalties (fines of
up to $25,000 and imprisonment for up to five years per referral), the Social
Security Act establishes civil monetary
16
<PAGE> 17
penalties and the sanction of excluding violators from Medicare and Medicaid
participation.
The Antifraud Amendments have been interpreted broadly by federal
regulators and the courts to prohibit the intentional payment of anything of
value if even one purpose of the payment is to influence the referral of
Medicare or Medicaid business. Many commonplace commercial arrangements between
hospitals and physicians could be considered by the government to violate this
broad interpretation of the Antifraud Amendments. Many states have also passed
laws similar to the Antifraud Amendments, which apply to both
government-sponsored and private healthcare plans.
We provide financial incentives to recruit physicians into the
communities served by our hospitals, including minimum revenue guarantees. We
also enter into other financial relationships with physicians, and in some cases
we employ physicians. Regulatory authorities who enforce the law may decide that
one or more of our arrangements with physicians do not comply with current
anti-kickback and other applicable laws. If that happens, we may be required to
pay civil monetary penalties, be subject to criminal penalties and/or excluded
from participating in Medicare, Medicaid or other federal health care programs.
Any of these results could have a material adverse effect on our business,
financial condition or results of operations.
SELF-REFERRAL PROHIBITIONS. Portions of the Budget Reconciliation Act
of 1993 (the "1993 Act")also affect providers who receive payments under the
Medicare and Medicaid programs. One of the provisions of the 1993 Act is known
as "Stark II". This provision is an expansion of the previous prohibition on
self-referral by physicians. "Stark I" prohibited physicians from referring
their Medicare patients to any clinical laboratory in which they or any member
of their immediate family had a financial interest. "Stark II" expanded the
prohibited patient base to both Medicare and Medicaid patients, and expanded the
prohibited health care service from clinical laboratories to add a number of
"designated health services", including home health and inpatient and outpatient
hospital services. There are certain exceptions in the 1993 Act, including
exceptions for prepaid health plans and ownership by a referring physician of an
investment interest in an entire hospital, as opposed to ownership of a
subdivision or department of a hospital. To date, no final regulations have been
promulgated interpreting "Stark II". Sanctions for violating "Stark I" or "Stark
II" include civil money penalties up to $15,000 per prohibited service provided,
assessments equal to 200% of the dollar value on each such service provided and
exclusion from the Medicare and Medicaid programs. In addition to the federal
prohibition, many states have enacted similar anti-self-referral statutes
applicable to all patient referrals, including private pay patients, as well as
Medicare and Medicaid patients. In three of our locations, physicians have
acquired ownership interests in hospitals and other health care providers owned
by us. Physicians are also part owners of the hospital we are building in Fort
Wayne, Indiana.
We could be materially adversely affected if we were to be found in
violation of the False Claims Act, the Social Security Act, the Antifraud
Amendments, "Stark I/Stark II" or comparable state laws. Amounts we may pay to
settle claims that we violated any of these laws, even without a finding that we
were in violation, could be material. The terms of agreements entered into as a
part of such settlement could also materially adversely affect us.
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996. The Health
Insurance Portability and Accountability Act of 1996 ("HIPAA") includes a number
of amendments or supplements to the Antifraud Amendments. It also contains
provisions relating to portability of health insurance coverage and limitations
on preexisting
17
<PAGE> 18
condition exclusions. Most of the provisions of HIPAA became effective January
1, 1998.
HIPAA is intended to enhance federal health care law enforcement by
creating and funding three new health care fraud and abuse enforcement programs:
The Fraud and Abuse Control Program, The Medicare Integrity Program and the
Beneficiary Incentive Program. The Fraud and Abuse Control Program calls for the
coordination of federal, state and local authorities to control fraud and abuse
with respect to not only Medicare and Medicaid but with respect to private
health insurance plans as well. The Medicare Integrity Program directs the
Department of Health and Human Services ("HHS") to enter into separate contracts
with private entities to carry out certain fraud and abuse detection activities.
Through the Beneficiary Incentive Program, HIPAA authorizes the
Secretary of HHS to provide payments to individuals who report information
leading to the imposition of civil monetary penalties under the fraud and abuse
laws or make suggestions that result in Medicare and Medicaid program savings.
Under HIPAA, health care fraud is a federal criminal offense. Health care fraud
is defined as knowingly and willfully executing or attempting to execute a
"scheme or device" to defraud any health care benefit program. In addition,
federal enforcement officials may exclude from Medicare and Medicaid any
investors, officers and managing employees associated with business entities
that have committed health care fraud, even if the investor, officer or employee
had no knowledge of the fraud. HIPAA also establishes a new violation for the
payment of inducements to Medicare and Medicaid beneficiaries in order to
influence those beneficiaries to order or receive services from a particular
provider or practitioner. HIPAA also required HHS to establish a national health
care fraud and abuse data collection program. This program will collect reports
of final adverse actions (including civil, criminal, license and certification
sanctions and any other publicly available negative findings) against health
care providers, suppliers or licensed practitioners. Governmental agencies and
private plans will both report and have access to the information collected by
the program. Also, HIPAA requires the Secretary of HHS to issue advisory
opinions with respect to whether particular transactions violate the Medicare
and Medicaid anti-kickback laws.
HIPAA also mandates the adoption of standards for the exchange of
electronic health information in an effort to encourage overall administrative
simplification and enhance the effectiveness and efficiency of the health care
industry. HIPAA will bring about significant and costly changes in health care.
It mandates new security measures, sets standards for electronic signatures,
standardizes a method for identifying providers, employers, health plans and
patients and requires that the health care industry use the most efficient
method to codify data. HIPAA will significantly change the manner in which
hospitals communicate with payors.
HIPAA's security and privacy regulations currently are scheduled to be
finalized by HHS in September 2000. Once the regulations are finalized, we will
have approximately two years to be fully compliant. Sanctions for failing to
comply with HIPAA include criminal penalties and civil sanctions.
We have formed a working group to evaluate the impact of HIPAA and to
begin planning how we will comply with the HIPAA regulations when they are
finally adopted. Since the HIPAA regulations have not yet been finalized, we
cannot at this time estimate the cost or difficulty of HIPAA compliance.
18
<PAGE> 19
CERTIFICATE OF NEED LAWS. State certificate of need laws, which vary
from state to state, may place limitations on a hospital's ability to expand
services, add new equipment, or construct new facilities. However, we have not
experienced any material adverse effects from state certificate of need
requirements or from the imposition, elimination or relaxation of such
requirements.
HOSPITAL LICENSING. Hospitals are subject to periodic inspection by
federal, state and local authorities to determine their compliance with
applicable regulations and standards. Such compliance must be demonstrated to
maintain licensure and to participate as a certified health care provider in the
Medicare and Medicaid programs. A hospital may not operate without a license
from the state licensing authority. All of our owned hospitals are licensed
under appropriate state laws and are certified to participate in the Medicare
program. In addition, it is our policy that all our owned hospitals apply for
accreditation by the appropriate accreditation body, such as the Joint
Commission on Accreditation of Healthcare Organizations or the American
Osteopathic Association. All of the Company's owned hospitals are so accredited,
with the exception of the 42-bed facility at Kenmare, North Dakota, which is one
of the two facilities comprising Unimed Medical Center. Accreditation indicates
that a hospital meets certain minimum standards and generally satisfies the
applicable health and administrative standards for Medicare certification,
although accreditation is not required to obtain Medicare certification.
HEALTH CARE REFORM. The health care industry continues to attract much
legislative interest and public attention. In recent years, an increasing number
of legislative proposals have been introduced or proposed in Congress and in
some state legislatures that would make major changes in the health care system.
Proposals that have been considered include expansion of Medicare coverage to
include prescription drugs, cost controls on hospitals, insurance market reforms
to increase the availability of group health insurance to small businesses, and
mandatory health insurance coverage for employees. The costs of implementing
some of these proposals could be financed, in part, by reductions in payments to
health care providers under Medicare, Medicaid and other federal government
programs. We cannot predict the course of future health care legislation or
other changes in the administration or interpretation of governmental health
care programs and the effect that any legislation, interpretation or change may
have on us.
PAYMENT
MEDICARE. Under the Medicare program, we are paid for inpatient and
outpatient services performed by our owned hospitals. Payments for inpatient
services are made under a prospective payment system, commonly known as "PPS."
Under PPS, we are paid a set amount per inpatient discharge based on the
category assigned to the patient's diagnosis. This diagnosis category system is
commonly known as "DRG." DRGs classify treatments for illnesses according to the
estimated amount of hospital resources necessary to treat each principal
diagnosis. DRG rates have been established for each hospital participating in
the Medicare program. Only when the cost of patient treatment substantially
exceeds the payment for that particular DRG, do we receive additional payments
called "outlier payments". The threshold to qualify for outlier payments
increased October 1, 1999 and is expected to increase again on October 1, 2000.
Increases in this threshold result in decreased payments to hospitals. We also
receive additional payments for treating a large number of indigent patients
(called disproportionate share).
19
<PAGE> 20
DRG rates are adjusted annually. The index used to adjust the DRG rates
takes into account the inflation experienced by hospitals and entities outside
of the health care industry in purchasing goods and services. However, for many
years increases to the DRG rates have been lower than the increases in the costs
of goods and services purchased by hospitals. The DRG rates are adjusted each
federal fiscal year, which begins on October 1. DRG rate increases were 2.0% for
federal fiscal year 1997, zero for federal fiscal year 1998, 0.5% for federal
fiscal year 1999 and 1.1% for federal fiscal year 2000. The rate increase for
federal fiscal year 2001 is expected to be 2.3%. The contemplated adjustment for
federal fiscal year 2002 is scheduled to be the percentage increase in the cost
of goods and services purchased by hospitals, minus 1.1%. Future legislation may
decrease the rate of increase for DRG payments. Reductions make it more
difficult for us to grow net revenue and to maintain or improve our operating
margins.
In addition to the DRG payments for inpatient operating costs, Medicare
makes separate payments to hospitals for inpatient capital costs. Since 1992,
hospitals have been paid under one of two methodologies. Hospitals with capital
costs less than the base year federal rate transition up to the federal rate
over a ten year period. Hospitals with capital costs higher than the base year
federal rate transition down to the federal rate over a ten year period, or they
may chose to transition to 100% of the federal rate sooner. The payment
methodology for capital is similar to DRGs in that the federal rate is
multiplied by the DRG weight to arrive at a predetermined payment. BBA 97
reduced inpatient capital rates in the aggregate by 15.3% effective October 1,
1997.
Medicare pays for outpatient laboratory services based on a fee schedule.
Medicare generally pays for other outpatient services at the lesser of (i) 94.2%
of costs, (ii) charges or (iii) a blend of fees and costs for ambulatory
surgery, diagnostic radiology and other services. BBA 97 changed the formula for
determining payment amounts (the "formula driven overpayment" or "FDO") for
other outpatient services rendered on and after October 1, 1997. This formula
change reduces payments in comparison to payments that would have been received
under previous law.
Medicare implemented outpatient PPS effective August 1, 2000. We estimate
that approximately 6% of our net patient revenue will be paid under Medicare
outpatient PPS. Medicare outpatient PPS is a complex system which has required
many changes in our systems and processes. We are billing claims under
outpatient PPS. We are also analyzing outpatient product lines, the impact of
changes on patient coinsurance and the financial impact of outpatient PPS.
The fiscal intermediaries are having difficulties processing payments
timely and accurately under outpatient PPS. HCFA has identified certain
information system issues relating to the processing of payments for outpatient
PPS claims. HCFA is addressing these issues but has indicated that some of these
issues may not be resolved until October 1, 2000 and other issues may not be
resolved until January 1, 2001.
As of June 30, 2000, we owned 10 hospitals that operated hospital-based
home health agencies. BBA 97 mandated home health payments at the lesser of
three levels for cost reporting periods beginning on and after October 1, 1997.
These three levels, known as the interim payment system, are (1) cost, (2) a per
visit cap, and (3) an annual per beneficiary cap. Additionally, coverage for
services provided solely related to the need for venipuncture was eliminated
effective February 5, 1998. The combination of these changes has
20
<PAGE> 21
significantly reduced our home health volumes and net revenues. Medicare
payments for home health services are scheduled to transition to PPS beginning
October 1, 2000.
As of June 30, 2000, we owned eight hospitals that operated
hospital-based skilled nursing beds. Effective for cost reporting periods
beginning July 1, 1998, BBA 97 required skilled nursing facilities be paid on a
prospective per diem basis. This payment method is to be phased in over four
years for most facilities. The BBA 97 changes have reduced our payments for
skilled nursing services. As a result, we have closed, or stopped admitting
patients into, skilled nursing facilities at four of our owned hospitals.
BBA 97 includes other provisions which reduce payments that would have
otherwise been received by hospitals. The reductions include payments related to
transfers from an acute-care setting and payments related to reimbursement of
uncollectible deductibles and coinsurance from Medicare patients. In general,
all of the changes resulting from BBA 97 have resulted in lower payments from
the Medicare program to our owned hospitals. The most significant reductions in
our payments resulting from BBA 97 occurred by June 30, 1999. The Balanced
Budget Refinement Act, which became law in November 1999, offset some of the
payment reductions resulting from BBA 97.
Further reductions in Medicare spending, or other changes to the program,
may be required to maintain the solvency of the Medicare program or the Social
Security system as a whole. Our ability to operate our business successfully in
the future will depend in large measure on our ability to adapt to changes as a
result of BBA 97 and any subsequent Medicare legislation and regulations.
MEDICAID. Most state Medicaid payments are made under PPS or under
programs which negotiate payment levels with individual hospitals. Medicaid
payments are often less than a hospital's cost of services. Medicaid is
currently funded jointly by state and federal governments. Some states in which
we operate have imposed taxes to fund their Medicaid programs. The federal
government and many states are currently considering significant reductions in
Medicaid funding, while at the same time expanding Medicaid benefits. This could
adversely affect future levels of Medicaid payments received by our owned
hospitals.
ANNUAL COST REPORTS. All hospitals participating in the Medicare
program must submit annual cost reports detailing the hospital's costs and
expenses of patient care for Medicare and some Medicaid beneficiaries. Review of
previously submitted cost reports and the cost report preparation process are
areas included in the ongoing qui tam litigation against us. It is too early for
us to predict the outcome of this qui tam litigation, but if we, or any of our
facilities, are found to be in violation of federal or state laws relating to
Medicare, Medicaid or similar programs, we could be subject to substantial
monetary fines, civil and criminal penalties and exclusion from participating in
the Medicare, Medicaid or similar government sponsored programs. Any of these
outcomes could have a material adverse effect on us. Amounts to settle this
litigation may be material. Agreements we enter into as a part of any settlement
could also materially adversely affect us. For a more complete discussion of
this litigation, see Item 3. "Legal Proceedings. False Claims Act Litigation."
Annual cost reports required under the Medicare and Medicaid programs are
subject to routine audits, which may result in adjustments to the amounts
ultimately determined to be due to us under the Medicare and Medicaid programs.
These audits
21
<PAGE> 22
often take several years. Hospitals may appeal any final determination made in
connection with an audit. We have attempted to provide in our financial
statements for any adjustments that may result from these routine audits and
related appeals. Cost reports are subject to complex regulations, administrative
rulings and fiscal intermediary interpretations, all of which change frequently
and are not always consistent. Significant issues may arise years after we
provide care to the patient and previously determined allowances could be more
or less than ultimately required.
COMPETITION
OWNED HOSPITALS. The hospital industry is highly competitive. We believe
that competition among hospitals and other health care providers has intensified
in recent years, in part as a result of declines in payment levels under
government programs, the adoption of prospective payment systems and changes in
government regulation. We face competition from other hospitals and specialized
care providers.
The areas served by our owned hospitals are also served by other
for-profit and not-for-profit hospitals or facilities that provide inpatient or
outpatient services similar to those offered by our owned hospitals. In some
cases, these competing hospitals are more established, better equipped, offer a
wider range of services than our owned hospitals or have greater financial
resources than we do. Some competing hospitals are owned by tax-supported
government agencies or by tax-exempt, not-for-profit entities that may be
supported by endowments and charitable contributions. These providers have a
competitive advantage since they can make capital expenditures without paying
sales or property taxes. They also generally do not pay income taxes. Also, we
face competition from other specialized care providers, including outpatient
surgery, women's, cardiac, orthopedic, oncology services and diagnostic centers.
These providers offer specialized services in highly profitable areas of the
health care industry.
The competitive position of a hospital may also be affected by its
ability to provide services to insurance and managed care companies, including
HMOs and PPOs. These companies attempt to direct and control the use of hospital
services through managed care programs and discounts from established hospital
charges. Each of our owned hospitals currently has contracts with insurance and
managed care companies which continue to select hospitals based on the fee
structure they offer.
The number and quality of the physicians on a hospital's staff is an
important factor in a hospital's competitive position, because physicians decide
whether a patient is admitted to the hospital and the procedures to be performed
on the patient. Admitting physicians are usually on the medical staffs of
several hospitals in addition to those of our owned hospitals. We attempt to
attract our physicians' patients to our owned hospitals by offering quality
services and facilities, convenient locations and state-of-the-art equipment.
We believe that our hospitals compete within local markets on the basis
of many factors, including the quality of care, ability to attract and retain
qualified physicians, location, breadth of services and technology offered and,
to a lesser extent, prices charged.
MANAGEMENT SERVICES. In seeking management services, hospitals have a
variety of alternatives. Hospitals managed by hospital management companies
represent less than 10% of the total acute care hospitals in the United States.
Most hospitals have their own management staff. Some hospitals choose to obtain
management services from
22
<PAGE> 23
large, tertiary care facilities that create referral networks with smaller
surrounding hospitals.
EMPLOYEES AND MEDICAL STAFFS
As of June 30, 2000, our owned hospitals had approximately 19,500
employees. As of that date, we also had approximately 120 employees on our
corporate staff and approximately 650 employees providing hospital management
and consulting services. With the exception of approximately 160 employees at
Barberton Citizens Hospital, our employees are not represented by any labor
union.
Physicians on the medical staffs of our hospitals are generally not our
employees. Members of the medical staffs of our hospitals often also are members
of the medical staffs of hospitals we do not own and each may terminate his or
her affiliation with our hospital, or stop admitting patients to our hospital,
at any time. Generally, a patient is admitted to a hospital only at the request
of a member of the hospital's medical staff. Medical staff members, including
physicians we employ, have sole discretion over where to admit their patients.
PROFESSIONAL LIABILITY
To cover liability claims relating to both our owned and our managed
hospitals, we generally maintain hospital and professional liability, errors and
omissions liability and general liability insurance on a claims made basis. We
also maintain umbrella insurance which covers claims, which due to their nature
or amount, are not covered by our specialized insurance policies. Since the cost
of malpractice and other liability insurance has risen significantly in recent
years, we cannot assure you that professional liability insurance will continue
to be available or will be available at reasonable costs for us to maintain
adequate levels of insurance.
We require most of our managed hospitals in our management contracts to
maintain insurance coverage and to name us as an additional insured party.
Coverage generally includes professional liability, comprehensive general
liability, workers' compensation and fidelity insurance. In addition, our
management contracts usually require the hospital to indemnify us for claims
that arise out of the actions of hospital employees, medical staff members and
others who are not our employees. This type of provision helps protect us
against claims that may not be covered by insurance. These claims include
medical staff antitrust claims and employment related claims.
Although the majority of our management contracts contain our standard
insurance and indemnification provisions, a small number of them do not. This is
because the laws of some states limit the ability of public hospitals to
reimburse private companies. In these cases, we attempt to negotiate for the
maximum protection permitted by law. In other states, public hospitals have
total or partial immunity against legal actions and, as a result, do not
purchase insurance except to the extent of their limited liability.
ITEM 2. PROPERTIES
For a description of our owned hospital properties, see Item 1. "Business
- Owned Hospitals". We also lease our principal corporate offices in Brentwood,
Tennessee. The lease expires in 2005. The field offices of Quorum Health
Resources, LLC are also leased, with terms ranging from one to five years. We
believe our properties are adequate for our business purposes.
23
<PAGE> 24
ITEM 3. LEGAL PROCEEDINGS
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 such proceeding which, in our opinion, if adversely decided, would have a
material effect on our results of operations or financial position.
PROFESSIONAL LIABILITY JUDGMENT
On February 29, 2000, an amended final trial judgment was entered against
our subsidiary, Quorum Health Resources, LLC ("QHR"), in the amount of
approximately $57 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.
On July 20, 2000, a federal district court ruled that Maverick County
Hospital District (the owner of Fort Duncan Medical Center) was obligated to
indemnify QHR against all liabilities and costs that it may incur as a result of
the jury's finding of ordinary negligence in the Rodriguez litigation (W.D.
Texas No. A 99 CA 580SS). The Hospital District has appealed this decision. In
addition, Continental Insurance Company, which provides excess coverage of $15
million above QHR's primary insurance of $35 million, has denied coverage on
this judgment. QHR has filed an action seeking a declaratory judgment that
Continental Insurance Company is obligated to insure its portion of the judgment
(M.D. Tenn. No. 3-00-0806).
We currently believe that all or a substantial portion of the 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 or other funds. 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
24
<PAGE> 25
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
until 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 relator's
lawsuit named us and our subsidiary, Quorum Health Resources, HCA and all
hospitals that we or 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 HCA. The government did not oppose the motion
to separate the cases against us and HCA. On February 2, 1999, the government
filed an amended complaint. On that date, the government also filed a notice of
nonintervention 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, 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. A magistrate judge has recommended to the court that it deny the request
to move the litigation to Tennessee, and has recommended instead that the case
be moved to Atlanta. 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
25
<PAGE> 26
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 allowed us 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. 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 stated 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 or
a party to additional litigation which alleges violations of law. We may not
know about such investigations, or about qui tam actions filed against us.
STOCKHOLDER CLASS ACTION
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.
We cannot at this time predict the effect or outcome of any of the
ongoing investigations or the class or qui tam actions. If we are found to have
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 and also may be excluded from participating in the
Medicare and Medicaid programs and
26
<PAGE> 27
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.
Agreements we enter into as a part of any settlement could also materially
adversely affect us. Any current or future investigations or actions could have
a material adverse effect on our results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock became listed on the Nasdaq Stock Market National Market
("Nasdaq") under the symbol "QHGI" on May 26, 1994. On September 22, 2000, the
last reported sales price of the Common Stock on Nasdaq was $13 11/16.
As of June 30, 2000, the Company had approximately 3342 holders of record
and we estimated an additional 5000 beneficial owners. The following table shows
the high and low bid information for the Common Stock as reported by Nasdaq for
each quarter of the fiscal year ended June 30, 2000 and June 30, 1999:
<TABLE>
<CAPTION>
HIGH LOW
-------- ------
<S> <C> <C>
1999
First Quarter 29 15/64 14 3/8
Second Quarter 17 7/8 9 1/2
Third Quarter 13 1/4 7 1/2
Fourth Quarter 13 1/2 9 9/16
<CAPTION>
HIGH LOW
-------- ------
<S> <C> <C>
2000
First Quarter 12 3/4 6 1/4
Second Quarter 10 3/16 6
Third Quarter 11 15/16 8 1/16
Fourth Quarter 11 1/2 8 5/8
</TABLE>
We have never paid any cash dividends on our Common Stock. We presently
intend to retain our earnings for use in our business, and do not anticipate
paying any cash dividends in the foreseeable future. The declaration of
dividends is within the discretion of the Board of Directors, which will review
this dividend policy from time to time; however, the declaration of dividends is
currently prohibited by our bank credit facility and certain other agreements.
ITEM 6. SELECTED FINANCIAL DATA
The following table of selected financial data should be read in conjunction
with our Consolidated Financial Statements and the notes thereto included
elsewhere in this report.
27
<PAGE> 28
QUORUM HEALTH GROUP, INC.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended June 30
---------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations(1)
Net operating revenue $ 1,762,772 $ 1,652,584 $ 1,572,352 1,413,946 $ 1,098,547
Salaries and benefits 730,598 687,090 628,090 561,327 420,904
Reimbursable expenses 62,768 64,859 64,846 60,740 56,653
Supplies 254,276 231,299 210,056 198,469 160,849
Fees 162,889 156,885 140,859 125,720 102,690
Other operating expenses 128,426 121,948 102,959 94,629 75,499
Provision for doubtful accounts 127,631 126,525 106,733 89,919 56,483
Equity in earnings of affiliates (18,233) (22,348) (6,993) -- --
Leases and rentals 36,937 34,192 26,679 22,227 17,125
Depreciation and amortization 108,475 95,427 87,020 75,134 55,901
Interest expense 67,211 53,683 40,606 45,601 36,568
Minority interest 2,145 (4,501) 3,118 741 109
Write-down of assets, net (gain) on
sale of assets and investigation
and litigation related costs 8,534 35,173 22,850 -- (787)
Income before income taxes and
extraordinary item 91,115 72,352 145,529 139,439 116,553
Provision for income taxes 35,626 33,494 58,849 55,357 47,321
Income before extraordinary item 55,489(4) 38,858(3) 86,680(2) 84,082 69,232
Per common share:
Income before extraordinary
item - basic 0.78 0.53 1.16 1.14 0.96
Income before extraordinary
item - diluted 0.72(4) 0.52(3) 1.12(2) 1.11 0.93
Cash dividends declared -- -- -- -- --
Financial Position at Year End(1)
Total assets $ 1,856,438 $ 1,831,948 $ 1,490,953 $ 1,278,991 $ 1,020,561
Long-term debt excluding
current maturities 851,045 872,213 617,377 519,940 430,877
Stockholders' equity 668,089 624,666 622,266 518,115 431,864
</TABLE>
(1) The Company's financial statements for the years presented are not
strictly comparable due to the significant effect that acquisitions,
joint ventures and sales have had on such statements. See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition."
(2) Excluding the write-down of assets, net income was $101.5 million and
diluted earnings per share was $1.32.
(3) Excluding the write-down of assets and investigation and litigation
related costs, net income was $64.1 million and diluted earnings per
share was $0.86.
(4) Excluding the investigation and litigation related costs, net income was
$60.7 million and diluted earnings per share was $0.79.
28
<PAGE> 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
You should read the following along with the Selected Financial Data and
the Consolidated Financial Statements and accompanying notes and other financial
information.
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 often can be identified by the use of certain words, such as
"may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan"
or "continue." We have based these forward-looking statements on our current
plans and expectations and our 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 limit payments to our
owned hospitals;
- difficulties in adjusting services and financial systems to the Medicare
outpatient prospective payment 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;
- difficulties in containing costs in relation to changes in payments from
our payors;
- difficulties in improving financial results of our physician clinics;
- difficulties in billing and collecting accounts receivable and the
related impact on cash flow and bad debt expense;
- difficulties in finding attractive acquisitions and integrating acquired
hospitals into our operations;
- geographic concentration of operations;
- claims and legal actions relating to professional liability;
- disruptions from information system conversions;
- our substantial indebtedness and difficulty raising capital in the
future;
- the possible enactment of federal, state or local health care reforms;
29
<PAGE> 30
- changes in federal, state or local regulations affecting the health care
industry;
- the highly competitive nature of the health care business;
- potential loss of physicians or other key personnel;
- fluctuations in interest rates;
- fluctuations in the market value of our common stock;
- changes in accounting pronouncements; and
- changes in general economic conditions.
STRATEGIC ALTERNATIVES
On August 11, 2000, we announced that our Board of Directors was
actively exploring various strategic alternatives, including a possible merger,
sale or recapitalization. Goldman, Sachs & Co. is acting as our financial
advisor. No decision has been made to enter into any transaction or as to what
form any transaction might take. We may determine, at any time, not to proceed
with any of the alternatives under consideration.
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.
In fiscal 2000, our owned hospitals accounted for 92% of our net
operating revenue compared to 91% in fiscal 1999 and fiscal 1998. In fiscal
2000, the Dothan, Alabama and Ft. Wayne, Indiana service areas accounted for
approximately 34% of owned hospital revenue and 52% of owned hospital EBITDA.
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.
In fiscal 1999, our net income before write-down of assets and
investigation and litigation related costs was 37% lower than fiscal 1998. We
believe this was principally due to the following issues:
- We received lower payments from the government under the Medicare
program as a result of the Balanced Budget Act of 1997 (BBA 97).
- We experienced increased discounts to insurance and managed care
companies and increased charity care.
- We were unable to reduce our costs proportionately with the decline in
net operating revenue.
30
<PAGE> 31
- Our estimated current year and final settlements from the government
under Medicare and Medicaid programs and from insurance and managed care
companies were lower in fiscal 1999 compared to fiscal 1998.
- The hospitals we acquired during fiscal 1999 reduced net income.
In fiscal 2000, earnings from our same store hospitals increased.
Operating results of same store hospitals include all of our owned hospitals
except (1) those we sold, (2) the Las Vegas and Macon joint ventures, and (3)
acquired hospitals until we owned them for 12 months. Our increased same store
earnings was primarily due to:
- increases in patient volumes,
- price increases, and
- better control over our costs relative to our increase in revenue,
including better management of accounts receivable.
The improvement in our same store earnings was offset by:
- higher capital costs,
- higher physician clinic losses,
- lower earnings from our management services business, and
- lower earnings from our Las Vegas joint venture.
As a result, our net income before write-down of assets and investigation and
litigation related costs was 5% lower than fiscal 1999.
Our objective is to continue to improve our operating and financial
consistency and stability. We focus on the following operating tactics:
- Grow existing markets;
- Enhance managed care contracting;
- Focus on cost control;
- Improve management of accounts receivable and bad debts; and
- Reduce losses from physician clinics.
IMPACT OF ACQUISITIONS, JOINT VENTURES AND SALES
In fiscal 2000, we acquired Caylor-Nickel Medical Center in Bluffton,
Indiana. 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. During fiscal 1999,
31
<PAGE> 32
some of these entities did not perform as well as we had expected. This was due
to the impact of BBA and increases in managed care discounts, which we also
experienced in our same store hospitals. In addition, we initially had
difficulties integrating some of the acquired hospitals into our operations. In
fiscal 2000, we have improved the financial performance of the hospitals and
joint ventures we acquired in fiscal 1999. In fiscal 1998, we acquired two
hospitals and affiliated health care entities.
In fiscal 2000, we transferred our operating lease of Clinton County
Hospital in Frankfort, Indiana to an Indianapolis, Indiana health care system.
In fiscal 1999, we sold Park Medical Center in Columbus, Ohio. In fiscal 1998,
we contributed three hospitals and cash for equity interests in joint ventures
in Las Vegas, Nevada and Macon, Georgia. We also sold our interest in a Nebraska
hospital.
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 number of owned hospitals, each
hospital we acquire or sell can affect our overall operating margins or results
of operations.
RESULTS OF OPERATIONS
The following table reflects the percentage of net operating revenue
represented by various categories in our Consolidated Statements of Income for
fiscal years 2000, 1999 and 1998.
32
<PAGE> 33
<TABLE>
<CAPTION>
Fiscal Year
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Net operating revenue 100.0% 100.0% 100.0%
Salaries and benefits 41.5 41.6 39.9
Reimbursable expenses 3.6 3.9 4.1
Supplies 14.4 14.0 13.4
Fees 9.2 9.5 9.0
Other expenses 7.3 7.4 6.5
Provision for doubtful accounts 7.2 7.7 6.8
Equity in earnings of affiliates (1.0) (1.4) (0.4)
Leases and rentals 2.1 2.0 1.7
Depreciation and amortization 6.2 5.9 5.5
Interest expense 3.8 3.2 2.6
Write-down of assets and
investigation and litigation
related costs 0.5 2.1 1.5
Minority interest 0.1 (0.3) 0.2
------ ------ ------
Income before income taxes 5.1 4.4 9.2
Provision for income taxes 2.0 2.0 3.7
------ ------ ------
Net income 3.1% 2.4% 5.5%
====== ====== ======
</TABLE>
Fiscal 2000 Compared to Fiscal 1999
Net Operating Revenue. Net operating revenue was $1,762.8 million in
fiscal 2000, compared to $1,652.6 million in fiscal 1999. This represents an
increase of $110.2 million or 6.7%. We attribute this increase to (1) the
hospitals we purchased during fiscal 2000 and fiscal 1999, (2) the hospital
contributed by 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
2000 and fiscal 1999, and a 3.5% decrease in revenue from our hospital
management services.
We attribute the 3.3% same store net operating revenue increase
principally to (1) a 0.6% increase in same store admissions, (2) price
increases, (3) increases in outpatient volumes and (4) an increase in favorable
estimated settlements from the government under Medicare and Medicaid programs.
Our same store net operating revenue would have increased more, except for (1)
higher patient volumes from discounted payors and (2) lower Medicare payments 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
33
<PAGE> 34
operating expenses totaled $1,466.6 million in fiscal 2000, compared to $1,388.6
million in fiscal 1999. This represents an increase of $78.0 million or 5.6%.
These expenses as a percentage of net operating revenue decreased to 83.2% for
fiscal 2000 from 84.1% for fiscal 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 was
83.7% for fiscal 2000, compared to 85.1% for fiscal 1999. For our same store
hospitals, these expenses as a percentage of net operating revenue decreased to
83.2% for fiscal 2000 from 84.2% for fiscal 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 implemented programs to reduce costs, to mitigate
the impact of salaries and wage rate pressures through increased productivity
and to improve management of accounts receivable and bad debts.
Our decrease in same store hospital expenses as a percent of net
operating revenue would have been greater, except for increases in our physician
clinic expenses and supplies expense. We are focusing efforts on reducing the
losses of our physician clinics. We have been selectively exiting physician
contracts, except when the contract is core to our service area strategy. We
plan to have fewer employed physicians by recruiting physicians without
employing them, whenever possible, and by negotiating or transitioning out of
contracts with physicians with mature practices. We also plan to lower physician
clinic losses by changing the ways we pay employed physicians. Supplies expense
increased due to new products and technology, primarily drugs, implants and
blood. We are focusing efforts on improving our supplies utilization and are
requesting more payments from managed care companies for high cost supplies.
Equity in Earnings of Affiliates. Equity in earnings of affiliates was
$18.2 million in fiscal 2000, compared to $22.3 million in fiscal 1999, a
decrease of $4.1 million. Equity in earnings of affiliates represented 1.0% of
our net operating revenue for fiscal 2000, compared to 1.4% of our net operating
revenue for fiscal 1999. This decrease was due primarily to lower earnings at
our Las Vegas joint venture.
Leases and Rentals. Leases and rentals were $36.9 million in fiscal
2000, compared to $34.2 million in fiscal 1999, an increase of $2.7 million, or
8%. Leases and rentals as a percentage of net operating revenue increased to
2.1% in fiscal 2000 compared to 2.0% in fiscal 1999. This increase was due
primarily to an increase in assets leased under our End Loaded Lease Financing
agreement in connection with our fiscal 1999 hospital acquisitions.
Depreciation and Amortization. Depreciation and amortization expense in
fiscal 2000 was $108.5 million compared to $95.4 million in fiscal 1999. This
represents an increase of $13.1 million or 13.7%. We attribute this increase
primarily to (1) the hospitals we purchased during fiscal 1999 and fiscal 2000,
(2) the hospital contributed by HCA in fiscal 1999 to a joint venture that we
control, (3) the replacement facility we opened in Florence, South Carolina in
34
<PAGE> 35
November 1998 and (4) depreciation related to routine capital expenditures,
including medical equipment, information technology and Year 2000-related
capital expenditures. This increase was partially offset by a decrease in
depreciation and amortization expense related to the sale of two hospitals in
fiscal 2000 and fiscal 1999 and amortization expense related to the physician
practice intangibles which we wrote off in December 1998. Depreciation and
amortization expense as a percentage of net operating revenue increased to 6.2%
for fiscal 2000 from 5.9% for fiscal 1999.
Interest Expense. Interest expense in fiscal 2000 was $67.2 million,
compared to $53.7 million in fiscal 1999, an increase of $13.5 million, or
25.2%. Interest expense as a percentage of net operating revenue increased to
3.8% in fiscal 2000 from 3.2% in fiscal 1999. The increase was due principally
to (1) additional borrowings related to fiscal 2000 and fiscal 1999
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 the rate on our revolving line of credit, and the effect of our
interest rate swap agreements.
Write-down of Assets and Investigation and Litigation Related Costs. We
incurred investigation and litigation related costs of approximately $8.5
million and $5.3 million during fiscal 2000 and fiscal 1999, respectively. We
also recorded write-downs of assets of approximately $29.9 million during fiscal
1999 (See Note 5 - Write Down of Assets and Investigation and Litigation Related
Costs in the Notes to Consolidated Financial Statements).
Minority Interest Expense and Income. Minority interest expense was $2.1
million in fiscal 2000, compared to income of $4.5 million in fiscal 1999, a
change of $6.6 million. Minority interest expense as a percentage of net
operating revenue was 0.1% in fiscal 2000, compared to income of 0.3% in fiscal
1999. We attribute this change primarily to the intangible assets write-downs
during fiscal 1999 and improved profitability in fiscal 2000 of one market with
minority investors.
Income Taxes. The provision for income taxes in fiscal 2000 was $35.6
million compared to $33.5 million in fiscal 1999, an increase of $2.1 million,
or 6.4%. Our effective income tax rate was 39.1% in fiscal 2000 compared to
46.3% in fiscal 1999. The asset write-downs in fiscal 1999 were tax effected at
21.0% due to the effect of certain permanent nondeductible intangible assets.
Excluding the effect of the asset write-downs, our effective income tax rate was
39.1% for both years.
Net Income. Net income during fiscal 2000 was $55.5 million, compared to
$38.9 million in fiscal 1999, an increase of $16.6 million, or 42.8%. Net income
as a percentage of net operating revenue was 3.1% in fiscal 2000, compared to
2.4% in fiscal 1999. Excluding the write-down of assets and the investigation
and litigation related costs, net income as a percentage of net operating
revenue was 3.4% in fiscal 2000, compared to 3.9% in fiscal 1999.
35
<PAGE> 36
Fiscal 1999 Compared to Fiscal 1998
Net Operating Revenue. Net operating revenue was $1,652.6 million in
fiscal 1999, compared to $1,572.3 million in fiscal 1998. This represents an
increase of $80.3 million or 5.1%. We attribute this increase to (1) the
hospitals we purchased during fiscal 1999 and fiscal 1998, (2) the hospital
contributed by HCA in fiscal 1999 to a joint venture that we control and (3) a
2.2% increase from our hospital management services. The increase in net
operating revenue was partially offset by decreases due to (1) the sales of our
Columbus hospital in fiscal 1999 and Nebraska hospital in fiscal 1998, (2) the
contribution in fiscal 1998 of three hospitals to joint ventures in which we
hold a minority interest and (3) a 0.8% decrease in same store hospital net
operating revenue.
We attribute the 0.8% same store net operating revenue decrease
principally to (1) lower Medicare payments as a result of BBA 97, (2) increased
discounts to insurance and managed care companies and increased charity care,
and (3) decreased estimated current year and final settlements from the
government under Medicare and Medicaid programs and from insurance and managed
care companies.
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 were $1,388.6 million in fiscal 1999, compared to $1,253.5
million in fiscal 1998. This represents an increase of $135.1 million or 10.8%.
Salaries and benefits, reimbursable expenses, supplies, fees, provision for
doubtful accounts and other operating expenses as a percentage of net operating
revenue increased to 84.1% for fiscal 1999 from 79.7% for fiscal 1998. These
expenses as a percentage of net operating revenue for our owned hospitals was
85.1% for fiscal 1999, compared to 80.3% for fiscal 1998. For our same store
hospitals, these expenses as a percentage of net operating revenue increased to
83.0% for fiscal 1999, from 79.2% for fiscal 1998.
We attribute the same store hospital increase in these expenses to the
reduction in net operating revenue discussed above, higher costs in certain
local markets due to specific operational issues, and our overall difficulty in
reducing our costs proportionately with the lower payments we receive.
Equity in Earnings of Affiliates. Equity in earnings of affiliates was
$22.3 million in fiscal 1999, compared to $7.0 million for fiscal 1998, an
increase of $15.3 million. This increase was due to a full year of operations
for the joint ventures in fiscal 1999 compared to a partial year in fiscal 1998.
We formed our Las Vegas joint venture on February 1, 1998 and our Macon joint
venture on May 1, 1998. Equity in earnings of affiliates represented 1.4% of our
net operating revenue in fiscal 1999, compared to 0.4% of our net operating
revenue in fiscal 1998.
Leases and Rentals. Leases and rentals were $34.2 million in fiscal
1999, compared to $26.7 million in fiscal 1998, an increase of $7.5 million, or
28.2%. Leases and rentals as a percentage of net operating revenue increased to
2.0% in fiscal 1999, compared to 1.7% in fiscal 1998. This increase was due
primarily
36
<PAGE> 37
to an increase in assets leased under our End Loaded Lease Financing agreement
in connection with hospital acquisitions in fiscal 1999 and 1998.
Depreciation and Amortization. Depreciation and amortization expense was
$95.4 million in fiscal 1999 compared to $87.0 million in fiscal 1998. This
represents an increase of $8.4 million or 9.7%. We attribute this increase
primarily to (1) the hospitals we purchased during fiscal 1999 and 1998, (2) the
hospital contributed by HCA in fiscal 1999 to a joint venture that we control,
(3) the replacement facility we opened in Florence, South Carolina and (4)
depreciation related to routine capital expenditures. This increase was
partially offset by a decrease in depreciation and amortization expense due to
(1) our contribution of three hospitals in fiscal 1998 to joint ventures which
are accounted for using the equity method and (2) the reduction of amortization
expense related to the physician practice intangibles which were written off
during fiscal 1999. Depreciation and amortization expense as a percentage of net
operating revenue increased to 5.9% for fiscal 1999 from 5.5% in fiscal 1998.
Interest Expense. Interest expense in fiscal 1999 was $53.7 million,
compared to $40.6 million in fiscal 1998, an increase of $13.1 million, or
32.2%. Interest expense as a percentage of net operating revenue increased to
3.2% in fiscal 1999 from 2.6% in fiscal 1998. The increase was due principally
to additional borrowings related to acquisitions, share repurchases, and the
opening of the replacement facility in fiscal 1999. The increase was partially
offset by the termination of two interest rate swap agreements on terms
favorable to us.
Write-down of Assets and Investigation and Litigation Related Costs.
During fiscal 1999, we recorded write-downs of assets and investigation and
litigation related costs of approximately $35.2 million.
- Approximately $25.6 million consisted of the write-down of intangible assets
related to physician practices based on our review of expected future cash
flows. Our review considered recent changes in the industry, including
announcements by physician practice management and other hospital companies
that they were divesting or exiting certain physician clinic operations and
also recording impairment charges relating to physician practices. As a
result, the market for physician clinics declined and indicated a potential
impairment of the fair value of our physician practice assets. We also
reviewed historical financial information and determined that we had owned
the practices for a sufficient time to accumulate reliable data for changing
our estimated future cash flows.
For those practices with projected negative or break-even future cash flows,
we wrote off all intangible assets. These intangible assets were comprised
of goodwill, non-competition agreements and employment contract costs. The
tangible assets of these physician practices consisted primarily of medical
office buildings and medical equipment. We concluded that these assets could
be transferred to another facility, leased or sold at or above carrying
value. Therefore, we did not consider the tangible assets to be impaired.
37
<PAGE> 38
Some of our physician practices were producing positive cash flows and were
projected to continue to produce positive cash flows. No impairment was
indicated for these practices and no write-downs were recorded.
- Approximately $4.3 million consisted principally of the write-down of the
book value of Park Medical Center, which was subsequently sold, to its
estimated fair market value.
- The remaining $5.3 million consisted of costs of the False Claims Act and
stockholders' litigation.
During fiscal 1998, we recorded a $22.9 million pre-tax charge related
to the contribution of our Las Vegas hospital to a joint venture. The impairment
consisted of a write-down of a portion of the goodwill at our contributed
hospital, based on the relative fair values of the nonmonetary assets
contributed by the parties and the ownership interest we obtained in the joint
venture.
Minority Interest Income and Expense. Minority interest income was $4.5
million in fiscal 1999, compared to expense of $3.1 million in fiscal 1998, a
change of $7.6 million. Minority interest income as a percentage of net
operating revenue was 0.3% in fiscal 1999, compared to expense of 0.2% in fiscal
1998. We attribute this change primarily to the write-down of intangible assets
and operational issues in some of our local markets during fiscal 1999.
Income Taxes. The provision for income taxes in fiscal 1999 was $33.5
million compared to $58.8 million in fiscal 1998, a decrease of $25.3 million,
or 43.1%. Excluding the effect of the write-downs of assets discussed above, our
effective income tax rate was 39.1% in fiscal 1999, compared to 39.7% in fiscal
1998.
Net Income. Net income during fiscal 1999 was $38.9 million, compared to
$86.7 million in fiscal 1998, a decrease of $47.8 million, or 55.2%. Net income
as a percentage of net operating revenue was 2.4% in fiscal 1999, compared to
5.5% in fiscal 1998. Excluding the write-downs of assets and the investigation
and litigation related costs, net income as a percentage of net operating
revenue was 3.9% in fiscal 1999, compared to 6.5% in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, our working capital was $253.9 million. Our ratio of
current assets to current liabilities was 2.3 to 1.0 at June 30, 2000.
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 funds 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 net cash
flow from operating activities. Billing and collecting accounts receivable by
hospitals is very difficult because of the complexity of Medicare and Medicaid
38
<PAGE> 39
regulations, increases in managed care, hospital personnel turnover, including
business office managers, computer system conversions and upgrades by hospital
and government authorities, dependence of hospitals on physician documentation
of medical records, and the subjective judgment 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.
Fiscal 2000 Cash Flows Compared to Fiscal 1999 Cash Flows
Cash provided by operating activities totaled $145.5 million in fiscal
2000, compared to $129.1 million in fiscal 1999. This represents an increase of
$16.4 million, or 12.7%, which was due primarily to higher EBITDA(1), cash
distributions received from our Macon and Las Vegas joint ventures and a lower
increase in patient accounts receivable compared to the increase in fiscal 1999.
Cash provided by operating activities would have increased more, except for
greater payments on accounts payable and accrued expenses.
EBITDA for fiscal 2000 was $277.5 million, compared to $252.1 million
for fiscal 1999, an increase of $25.4 million or 10.1%. EBITDA as a percentage
of net operating revenue was 15.7% for fiscal 2000, compared to 15.3% for fiscal
1999. EBITDA as a percentage of net operating revenue for our owned hospitals
was 15.3% for fiscal 2000, compared to 14.3% for fiscal 1999. EBITDA as a
percentage of net operating revenue for our same store hospitals was 15.0% for
fiscal 2000, compared to 13.7% for fiscal 1999. EBITDA as a percentage of net
operating revenue for our management services business was 21.0% for fiscal
2000, compared to 24.7% for fiscal 1999. We attribute the increase in
consolidated EBITDA principally to (1) growth in net operating revenue, (2)
overall improvement in containing our costs, including improvements in
receivables management and (3) our ongoing portfolio review which resulted in
selling two hospitals in fiscal 1999 and fiscal 2000. The EBITDA increase was
partially offset by (1) a $12.5 million increase in physician clinic losses, (2)
discounts to insurance and managed care companies, (3) the impact of BBA 97, (4)
lower earnings from our management services business and (5) lower earnings from
our Las Vegas joint venture. EBITDA as a percentage of net operating revenue for
our same store hospitals excluding physician clinics was 18.5% for fiscal 2000,
compared to 16.4% for fiscal 1999.
Net cash used for investing activities in fiscal 2000 totaled $113.9
million compared to $329.0 million in fiscal 1999. Our primary investment
activities in fiscal 2000 were acquisitions and capital expenditures. During
fiscal 2000, we acquired one hospital and affiliated health care entities for
$20.7 million. Capital expenditures excluding acquisitions were $100.8 million
during fiscal 2000 compared to $124.0 million in fiscal 1999 and are discussed
further under the caption "Capital Expenditures." Proceeds from sale of assets
relate to the transfer of the lease of the Frankfort, Indiana hospital in fiscal
2000 and the sale of the Columbus, Ohio hospital in fiscal 1999.
--------
(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 an alternative to net income, cash flows
generated by operating, investing or financing activities or other financial
statement data presented in the 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.
39
<PAGE> 40
Fiscal 1999 Cash Flows Compared To Fiscal 1998 Cash Flows
Cash provided by operating activities totaled $129.1 million in fiscal
1999, compared to $124.7 million in fiscal 1998, an increase of $4.4 million, or
3.5%. This increase was due primarily to lower tax payments related to IRS
examinations and a lower increase in accounts receivable compared to the
increase in fiscal 1998.
EBITDA for fiscal 1999 was $252.1 million, compared to $299.1 million
for fiscal 1998, a decrease of $47.0 million or 15.7%. EBITDA as a percentage of
net operating revenue was 15.3% in fiscal 1999, compared to 19.0% in fiscal
1998. EBITDA as a percentage of net operating revenue for our owned hospitals
was 14.3% in fiscal 1999, compared to 18.5% in fiscal 1998. EBITDA as a
percentage of net operating revenue for our same store hospitals was 15.3% in
fiscal 1999, compared to 19.2% in fiscal 1998. EBITDA as a percentage of net
operating revenue for our management services business was 24.7% in fiscal 1999,
compared to 23.9% in fiscal 1998. We attribute the decrease in EBITDA
principally to (1) the decrease in net operating revenue of our same store
hospitals from BBA 97, managed care and decreased estimated payor settlements
and (2) the increase in operating expenses.
Net cash used for investing activities in fiscal 1999 totaled $329.0
million, compared to $253.1 million in fiscal 1998. Our primary investment
activities in fiscal 1999 were acquisitions and capital expenditures. During
fiscal 1999, we acquired four hospitals and affiliated health care entities for
$217.2 million. In connection with three of these acquisitions, we entered into
operating lease agreements to lease land and buildings with estimated fair
market value of $108.7 million. We also entered into a joint venture in
Vicksburg, Mississippi. Capital expenditures excluding acquisitions were $124.0
million in fiscal 1999 compared to $131.8 million in fiscal 1998. These amounts
include $32.6 million for the replacement facility in Florence, South Carolina
in fiscal 1999 and $51.8 million in fiscal 1998. Proceeds from sale of assets
relate to the sale of the Columbus, Ohio hospital in fiscal 1999 and our
interest in the Nebraska hospital in fiscal 1998.
Capital Expenditures
Capital expenditures excluding acquisitions for fiscal 2000 totaled
$100.8 million. These capital expenditures consisted of $15.0 million for
constructing two hospitals and routine capital expenditures of $85.8 million. We
expect to make routine capital expenditures for 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. We expect to open this facility in summer 2001. We
expect to make construction capital expenditures of approximately $85 million
for fiscal 2001.
Capital expenditures excluding acquisitions for fiscal 1999 totaled
$124.0 million. These capital expenditures consisted of constructing a
replacement hospital and two medical office buildings in Florence, South
Carolina of approximately $32.6 million and routine capital expenditures of
$91.4 million.
40
<PAGE> 41
Capital Resources
Our revolving credit facility consists of an $850.0 million secured
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 August 31, 2000, we had
approximately $310.5 million committed and undrawn under our credit facility.
We also have a $150.0 million End Loaded Lease Financing (ELLF)
agreement to provide a financing option for acquisition and/or construction. The
interest rate margins, facility fee rates, the option to extend and financial
covenants are substantially the same as 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 August
31, 2000, we had approximately $1.6 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 the principal amount on or after November 1, 2000, 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
(WCAS VIII) 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.
41
<PAGE> 42
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, 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 $229 million at June 30, 2000.
During fiscal 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.
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.
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. Some of our hospitals are now experiencing
42
<PAGE> 43
pressures to increase salaries. 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. At June 30, 2000,
approximately 70% of our outstanding debt and ELLF amounts were effectively at a
fixed rate. 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 the interest rate swap was
consummated. Interest rate swaps are cash flow hedges, which effectively convert
an aggregate notional amount of $400 million of floating rate borrowings to
fixed rate borrowings at June 30, 2000. The initial term of the interest rate
swaps expire at various dates through fiscal 2003. Our policy is to not hold or
issue derivatives for trading purposes and to avoid derivatives with leverage
features. We are exposed to credit losses in the event of nonperformance by the
counterparties to our financial instruments. Our counterparties are
creditworthy financial institutions and we anticipate that they will be able to
fully satisfy their obligations under the contracts. For the years ended June
30, 2000, 1999 and 1998, we received a weighted average rate of 5.8%, 5.3% and
5.8% and paid a weighted average rate of 5.9%, 5.7% and 6.0%, respectively.
The following table presents information about our market-sensitive
financial instruments, including long-term debt and interest rate swaps as of
June 30, 2000. For debt obligations, the table presents principal cash flows and
related weighted-average interest rates by expected maturity dates. For interest
rate swaps, the table presents notional amounts by expected maturity date and
weighted average interest rates based on rates in effect at June 30, 2000. We
determined the fair value of our publicly traded notes using the quoted market
price at June 30, 2000. The fair value of the option feature in the convertible
debentures is estimated using an option pricing model. The fair values of the
remaining long-term debt are estimated using discounted cash flows based on our
incremental borrowing rates. The fair values of our interest rate swaps is based
on the cash which would be realized in the event of termination of the
agreements.
43
<PAGE> 44
Maturity Date, Fiscal Year Ending June 30
-----------------------------------------
(Dollars in millions)
<TABLE>
<CAPTION>
June 30,
2000
Fair Value
There- of
2001 2002 2003 2004 2005 after Total Liabilities
---- ------ ------ ---- ---- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed rate long-term
debt $0.8 $0.6 $0.6 $0.7 $0.6 $301.0 $304.3 $313.0
Average interest rates 7.9% 7.8% 7.7% 7.8% 7.7% 7.4%
Variable rate long-
term debt $547.6 $547.6 $547.6
Average interest rates 7.8%
Interest rate swaps:
Pay fixed/receive
variable notional
amounts $200.0 $200.0 $400.0 $(9.3)
Average pay rate 6.0% 5.7%
Average receive rate 6.8% 6.8%
</TABLE>
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 such proceeding which, in our opinion, if adversely decided, would have a
material effect on our results of operations or financial position.
Professional Liability Judgment
On February 29, 2000, an amended final trial judgment was entered
against our subsidiary, Quorum Health Resources, LLC ("QHR"), in the amount of
approximately $57 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.
On July 20, 2000, a federal district court ruled that Maverick County
Hospital District (the owner of Fort Duncan Medical Center) was obligated to
indemnify QHR against all liabilities and costs that it may incur as a result of
the jury's finding of ordinary negligence in the Rodriguez litigation (W.D.
Texas No. A 99 CA 580SS). The Hospital District has appealed this decision. In
addition, Continental Insurance Company, which provides excess coverage of $15
million above QHR's primary insurance of $35 million, has denied coverage on
this judgment. QHR has filed an action seeking a declaratory judgment that
Continental Insurance Company is obligated to insure its portion of the judgment
(M.D. Tenn. No. 3-00-0806).
We currently believe that all or a substantial portion of the judgment,
if not overturned, will be covered by our insurance carriers and/or other
interested
44
<PAGE> 45
parties. However, we cannot guarantee that the judgment will be overturned or
that we will receive any insurance proceeds or other funds. 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 until 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 relator's
lawsuit named us and our subsidiary, Quorum Health Resources, HCA and all
hospitals that we or 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 HCA. The government did not oppose the motion
to separate the cases against us and 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, 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.
45
<PAGE> 46
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. A magistrate judge has recommended to the court that it deny the request
to move the litigation to Tennessee, and has recommended instead that the case
be moved to Atlanta. 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 allowed us 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. 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 stated 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
or a party to additional litigation which alleges violations of law. We may not
know about such investigations, or about qui tam actions filed against us.
Stockholder Class Action
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
46
<PAGE> 47
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.
We cannot at this time predict the effect or outcome of any of the
ongoing investigations or the class or qui tam actions. If we are found to have
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 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. 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. Agreements we enter into as a part of any
settlement could also materially adversely affect us. Any current or future
investigations or actions could have a material adverse effect on our results of
operations or financial condition.
GENERAL
We received from the Medicare and Medicaid programs approximately 42%,
43% and 45% of net patient service revenue for the years ended June 30, 2000,
1999 and 1998, respectively.
Medicare inpatient operating payment rates are scheduled to increase
2.3% effective October 1, 2000. 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 increases through September 30, 2002 are also scheduled to be less
than inflation. Also, the threshold to qualify for additional payments for
treating costly inpatient cases (outlier) increased on October 1, 1999 and is
expected to increase again on October 1, 2000. Increases in this threshold
result in decreased payments to hospitals. Payments for Medicare skilled nursing
facility services, outpatient services and home health 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. PPS for outpatients began on August
1, 2000. The Health
47
<PAGE> 48
Care Financing Administration's(HCFA) current plan is to implement PPS 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 11.0% and 49.3% for fiscal 2000 and fiscal
1999, respectively, compared to the prior years. In response to BBA 97, we
consolidated certain home health agencies and skilled nursing facilities,
reduced costs at our home health agencies and skilled nursing facilities and
closed or ceased admitting patients to skilled nursing facilities at four
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.
HCFA estimates that hospital outpatient payments under the new
outpatient PPS system will be 4.6% more than hospitals would have received under
the cost-based system. HCFA's estimate was based on 1996 data. This data
excluded a substantial number of the hospital industry's claims from the claim
population. We estimate that approximately 6% of our net patient service revenue
will be paid under Medicare outpatient PPS. Medicare outpatient PPS is a complex
system which has required many changes in our systems and processes. We are
billing claims under outpatient PPS. We are also analyzing outpatient product
lines, the impact of changes on patient coinsurance and the financial impact of
outpatient PPS.
The fiscal intermediaries are having difficulties processing payments
timely and accurately under outpatient PPS. HCFA has identified certain
information system issues relating to the processing of payments for outpatient
PPS claims. HCFA is addressing these issues but has indicated that some of these
issues may not be resolved until October 1, 2000 and other issues may not be
resolved until January 1, 2001.
The federal government originally estimated that BBA 97 would reduce
Medicare spending by approximately $103 billion. In July 1999, the federal
government revised its estimate to $206 billion. In November 1999, the federal
government lowered its estimate to $195 billion due to the positive impact of
BBRA. In January 2000, the federal government further revised its estimate to
$227 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 the federal fiscal year that began on
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 health care industry and our hospitals. We expect continuing
pressure to limit expenditures by governmental health care programs.
More of our patients are participating in managed care plans. Managed
care includes indemnity insurance and employer plans which pay less than full
charges,
48
<PAGE> 49
health maintenance organizations, preferred provider organizations and various
other forms of managed care. We are negotiating higher rates from managed care
payors, averaging increases of 4% to 6%. We are beginning to use a managed care
information system in twelve 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 six 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 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 41.7%,
40.6% and 40.2% of gross patient service revenue for the years ended June 30,
2000, 1999 and 1998, 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 described above
may create possible future acquisition opportunities. We may need to obtain
additional financing to acquire hospitals in light of our hospital construction
projects and the amount currently available under our revolving line of credit.
We intend to concentrate on opportunities to buy hospitals which complement
health care facilities we already own.
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
49
<PAGE> 50
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 in the process of conducting examinations of our federal
income tax returns for the fiscal years ended June 30, 1996 through 1998. The
IRS has proposed certain adjustments in connection with its prior examination of
our federal income tax returns for the fiscal years ending June 30, 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 position.
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 our Consolidated Balance Sheet at their fair value.
Derivatives that are not hedges must be adjusted to fair value with changes in
fair value reflected in our Consolidated 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 Consolidated Income Statement. The adoption
of this new FASB standard on July 1, 2000 will result in a cumulative effect of
an accounting change of approximately $9.3 million. This change will be reported
as Other Comprehensive Income. Other Comprehensive Income is not reported in our
Consolidated Income Statement. Our interest rate swaps are cash flow hedges
which hedge the variability in expected cash flows from a portion of our
existing floating rate liabilities. We believe that our hedges are highly
effective with changes in effectiveness expected to be reported in Other
Comprehensive Income. Changes in any ineffectiveness will be reported in our
Consolidated Income Statement.
On March 31, 2000, FASB issued its final interpretation of APB Opinion
No. 25 "Accounting for Certain Transactions involving Stock Compensation." The
final 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 is effective
July 1, 2000 and covers certain events that occurred after December 15, 1998. No
adjustments will be made to financial statements for periods prior to the
effective date and no expense will 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. Based on the exchange, 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 on March 26, 1999.
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
50
<PAGE> 51
result of the exchange. We also granted 1.4 million options on March 11, 1999.
We included a provision in the March 26, 1999 option grants to vest and
terminate the repriced options thirty days after giving notice to our employees.
There would have been no variable award accounting after the options terminated.
The FASB subsequently changed the proposed interpretation of APB 25 to require
variable award accounting for most of the stock options granted on March 11,
1999. After considering the issues related to termination of the March 26, 1999
options, including the requirement to apply variable award accounting on the
March 11, 1999 options, we decided not to terminate the March 26, 1999 options.
Effective July 1, 2000, we will begin recording non-cash compensation
expense for the increase in our stock price after June 30, 2000. The number of
options subject to variable award accounting is the total of approximately 1.8
million vested options and a percentage of approximately 1.5 million unvested
options based on their vesting schedule. The number of options affected will
decrease for options exercised or canceled and will increase as unvested options
become vested.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7. "Management's Discussion and Analysis of Results of
Operations and Financial Condition. Markets Risks Associated With Financial
Instruments."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements are submitted in a
separate section of this report. See pages F-1, F-2, and F-4 through F-31.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information concerning this Item is incorporated by reference to the
Company's definitive proxy materials for the Company's 2000 Annual Meeting of
Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning this Item is incorporated by reference to the
Company's definitive proxy materials for the Company's 2000 Annual Meeting of
Stockholders.
51
<PAGE> 52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning this Item is incorporated by reference to the
Company's definitive proxy materials for the Company's 2000 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning this Item is incorporated by reference to the
Company's definitive proxy materials for the Company's 2000 Annual Meeting of
Stockholders.
52
<PAGE> 53
ANNUAL REPORT ON FORM 10-K
Item 8, Item 14(a)(1) and (2) and (d)
List of Financial Statements and Financial Statement Schedule
Financial Statements and Supplementary Data
Certain Exhibits
Financial Statement Schedule
Quorum Health Group, Inc.
Brentwood, Tennessee
June 30, 2000
F-1
<PAGE> 54
Quorum Health Group, Inc. and Subsidiaries
Form 10-K -- Item 8 and Item 14(a) (1) and (2) and (d)
Index to Financial Statements and Financial Statement Schedule
The following consolidated financial statements of Quorum Health Group, Inc. and
subsidiaries are included in Item 8:
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Independent Auditors F-3
Consolidated Statements of Income-- Years Ended
June 30, 2000, 1999 and 1998 F-4
Consolidated Balance Sheets-- June 30, 2000 and 1999 F-5
Consolidated Statements of Changes in
Stockholders' Equity-- Years Ended June 30, 2000,
1999 and 1998 F-7
Consolidated Statements of Cash Flows-- Years Ended
June 30, 2000, 1999 and 1998 F-8
Notes to Consolidated Financial Statements F-9
</TABLE>
The following consolidated financial statement schedule of Quorum Health Group,
Inc. and subsidiaries is included in Item 14(d):
<TABLE>
<S> <C>
Schedule II-- Valuation and Qualifying Accounts S-1
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
F-2
<PAGE> 55
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Quorum Health Group, Inc.
We have audited the accompanying consolidated balance sheets of Quorum Health
Group, Inc. and subsidiaries as of June 30, 2000 and 1999, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 2000. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Quorum Health
Group, Inc. and subsidiaries at June 30, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Nashville, Tennessee
August 4, 2000
F-3
<PAGE> 56
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended June 30
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Net patient service revenue $ 1,620,409 $ 1,505,027 $ 1,427,969
Hospital management/professional services 79,595 82,698 79,537
Reimbursable expenses 62,768 64,859 64,846
----------- ----------- -----------
Net operating revenue 1,762,772 1,652,584 1,572,352
Salaries and benefits 730,598 687,090 628,090
Reimbursable expenses 62,768 64,859 64,846
Supplies 254,276 231,299 210,056
Fees 162,889 156,885 140,859
Other operating expenses 128,426 121,948 102,959
Provision for doubtful accounts 127,631 126,525 106,733
Equity in earnings of affiliates (18,233) (22,348) (6,993)
Leases and rentals 36,937 34,192 26,679
Depreciation and amortization 108,475 95,427 87,020
Interest 67,211 53,683 40,606
Write-down of assets and investigation and
litigation related costs 8,534 35,173 22,850
Minority interest 2,145 (4,501) 3,118
----------- ----------- -----------
Income before income taxes 91,115 72,352 145,529
Provision for income taxes 35,626 33,494 58,849
----------- ----------- -----------
Net income $ 55,489 $ 38,858 $ 86,680
=========== =========== ===========
Earnings per share:
Basic $ 0.78 $ 0.53 $ 1.16
=========== =========== ===========
Diluted $ 0.72 $ 0.52 $ 1.12
=========== =========== ===========
Weighted average shares outstanding:
Basic 71,543 73,500 74,733
=========== =========== ===========
Diluted 83,020 74,430 77,167
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 57
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 13,944 $ 22,258
Accounts receivable, less allowance for
doubtful accounts of $88,239 at June 30,
2000 and $83,896 at June 30, 1999 348,137 332,312
Supplies 41,072 39,003
Other 47,984 46,838
---------- ----------
Total current assets 451,137 440,411
Property, plant and equipment, at cost:
Land 88,922 88,157
Buildings and improvements 468,963 435,525
Equipment 657,400 584,017
Construction in progress 29,888 24,875
---------- ----------
1,245,173 1,132,574
Less accumulated depreciation 392,256 297,454
---------- ----------
852,917 835,120
Cost in excess of net assets acquired, net 222,191 226,038
Investments in unconsolidated entities 249,885 259,709
Other 80,308 70,670
---------- ----------
Total assets $1,856,438 $1,831,948
========== ==========
</TABLE>
F-5
<PAGE> 58
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 97,493 $ 96,904
Accrued salaries and benefits 72,495 72,558
Other current liabilities 26,407 34,841
Current maturities of long-term debt 817 913
---------- ----------
Total current liabilities 197,212 205,216
Long-term debt, less current maturities 851,045 872,213
Deferred income taxes 31,010 33,422
Professional liability risks and other
liabilities and deferrals 44,940 36,456
Minority interests in consolidated entities 64,142 59,975
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 300,000
shares authorized; issued and outstanding
71,281 at June 30, 2000
and 73,166 at June 30, 1999 713 732
Additional paid-in capital 241,667 253,714
Retained earnings 425,709 370,220
---------- ----------
668,089 624,666
---------- ----------
Total liabilities and stockholders' equity $1,856,438 $1,831,948
========== ==========
</TABLE>
See accompanying notes.
F-6
<PAGE> 59
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional
-------------------- Paid-in Retained
Shares Amount Capital Earnings Total
------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1997 74,137 $ 741 $ 272,692 $ 244,682 $ 518,115
Options exercised and
related tax benefits,
net of shares tendered
in payment 1,098 12 12,993 -- 13,005
Stock issued under employee
stock purchase plan 243 2 4,464 -- 4,466
Net income -- -- -- 86,680 86,680
------ --------- --------- --------- ---------
Balance at June 30, 1998 75,478 755 290,149 331,362 622,266
Repurchases of common stock (3,585) (36) (48,066) -- (48,102)
Options exercised and
related tax benefits,
net of shares tendered
in payment 675 8 6,936 -- 6,944
Stock issued under employee
stock purchase plan 598 5 4,695 -- 4,700
Net income -- -- -- 38,858 38,858
------ --------- --------- --------- ---------
Balance at June 30, 1999 73,166 732 253,714 370,220 624,666
Repurchases of common stock (2,814) (28) (18,608) -- (18,636)
Options exercised and
related tax benefits,
net of shares tendered
in payment 415 4 2,679 -- 2,683
Stock issued under employee
stock purchase plan 514 5 3,882 -- 3,887
Net income -- -- -- 55,489 55,489
------ --------- --------- --------- ---------
Balance at June 30, 2000 71,281 $ 713 $ 241,667 $ 425,709 $ 668,089
====== ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-7
<PAGE> 60
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended June 30
-----------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 55,489 $ 38,858 $ 86,680
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 100,883 87,802 78,208
Amortization of intangible assets 7,592 7,624 8,812
Write-down of assets -- 27,721 22,850
Provision for doubtful accounts 127,631 126,525 106,733
Provision for deferred taxes (3,402) 4,028 (7,816)
Undistributed earnings of affiliates 9,090 (16,163) (6,993)
Other 6,606 125 5,371
Changes in operating assets and liabilities,
net of effects from acquisitions and
divestitures:
Accounts receivable (148,619) (148,719) (161,872)
Supplies and other current assets (4,461) (10,067) (5,363)
Other assets (1,813) (365) 5,400
Accounts payable and accrued expenses (2,781) 13,044 8,019
Other current and long-term liabilities (720) (1,358) (15,315)
--------- --------- ---------
Net cash provided by operating activities 145,495 129,055 124,714
INVESTING ACTIVITIES:
Purchase of acquired companies (20,709) (217,236) (131,741)
Purchase of property, plant and equipment (100,801) (124,024) (131,766)
Proceeds from sale of assets 6,906 13,368 14,695
Other 735 (1,107) (4,238)
--------- --------- ---------
Net cash used in investing activities (113,869) (328,999) (253,050)
FINANCING ACTIVITIES:
Borrowings under bank debt 336,000 641,300 458,900
Repayments of bank debt (506,400) (385,700) (360,400)
Repurchase of Senior Subordinated Notes -- -- (2,224)
Borrowings under convertible subordinated debentures 150,000 -- --
Repurchases of common stock (18,636) (48,102) --
Proceeds from issuance of common stock, net 6,425 9,173 13,235
Change in outstanding checks and overnight investment (8,061) 6,721 20,199
Other 732 (18,739) (2,833)
--------- --------- ---------
Net cash provided by (used in) financing activities (39,940) 204,653 126,877
--------- --------- ---------
Increase (decrease) in cash (8,314) 4,709 (1,459)
Cash at beginning of year 22,258 17,549 19,008
--------- --------- ---------
Cash at end of year $ 13,944 $ 22,258 $ 17,549
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ (66,590) $ (52,858) $ (44,353)
========= ========= =========
Income taxes paid $ (31,254) (34,152) (73,205)
========= ========= =========
</TABLE>
See accompanying notes.
F-8
<PAGE> 61
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
1. ORGANIZATION AND ACCOUNTING POLICIES
Quorum Health Group, Inc. through its subsidiaries owns and operates acute
care hospitals and health systems nationwide. At June 30, 2000, Quorum Health
Group, Inc. and subsidiaries (the Company) owned 21 hospitals and managed 212
hospitals. The Company's subsidiaries also are minority investors in joint
ventures that own and operate seven hospitals.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and all subsidiaries and entities controlled by the
Company. All significant intercompany accounts and transactions have been
eliminated. Investments in entities which the Company does not control, but in
which it has a substantial ownership interest and can exercise significant
influence, are accounted for using the equity method.
Use of Estimates: The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Accounts Receivable: Accounts receivable consist primarily of amounts due from
the federal government and state governments under Medicare, Medicaid and other
government programs and other payors including commercial insurance companies,
health maintenance organizations, preferred provider organizations, self-insured
employers and individual patients. The Dothan, Alabama and Ft. Wayne, Indiana
markets accounted for approximately 34% and 32% of the Company's owned hospital
revenue for the years ended June 30, 2000 and 1999, respectively.
Supplies: Supplies are stated at the lower of cost (first-in, first-out)or
market.
Property, Plant and Equipment: Depreciation is computed using the straight-line
method principally with a range of depreciable lives from 20-40 years for
buildings and improvements and 3-20 years for equipment, or over the lives of
leases if shorter.
Cost in Excess of Net Assets Acquired: Cost in excess of net assets acquired (or
goodwill) consists of the excess purchase price over the fair value of acquired
tangible and identifiable intangible assets. Goodwill is amortized using the
straight-line method primarily over 15 to 40 years. Accumulated amortization of
cost in excess of net assets acquired was $22.5 million and $15.4 million at
June 30, 2000 and 1999, respectively. The carrying value of goodwill is reviewed
if the facts and circumstances suggest that it may be impaired. If this review
indicates that goodwill will not be recoverable based on undiscounted cash flows
of the related assets, the Company writes down the goodwill to estimated fair
value (See Note 5).
Deferred Loan Costs: Deferred loan costs are included in other noncurrent
assets and are amortized over the term of the related debt.
F-9
<PAGE> 62
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Current Liabilities: Outstanding checks included in other current
liabilities was $20.6 million and $26.9 million at June 30, 2000 and 1999,
respectively.
Risk Management: The Company maintains self-insured medical plans for certain
employees. Unpaid claims are accrued based on the estimated ultimate cost of
settlement in accordance with past experience.
The Company generally is insured for professional liability based on a
claims made policy purchased in the commercial market. The provision for
professional liability and comprehensive general liability claims include
estimates of the ultimate costs for claims incurred but not reported. The
liability is estimated in accordance with actuarial projections based on past
experience.
Net Operating Revenue: Net patient service revenue is received primarily from
the federal Medicare and state Medicaid programs and from commercial insurance
carriers. Net patient service revenue is reported at the estimated net
realizable amounts from patients, third-party payors, and others for services
rendered, including estimated retroactive adjustments under agreements with
third-party payors. Settlements with third-party payors are estimated in the
period the related services are rendered and adjusted in future periods as final
settlements are determined. The adjustments to estimated final settlements
resulted in increases to revenue of $10.9 million, $10.2 million and $11.3
million for the years ended June 30, 2000, 1999 and 1998, respectively.
Approximately 42%, 43% and 45% of net patient service revenue for the years
ended June 30, 2000, 1999 and 1998, respectively, relates to services rendered
to patients covered by Medicare and Medicaid programs.
Net patient service revenue is net of contractual adjustments and policy
discounts of $1,500.5 million, $1,286.3 million and $1,135.1 million for the
years ended June 30, 2000, 1999 and 1998, respectively. For patients who are
unable to pay, the Company provides care without charge or at amounts less than
established rates. Because the Company does not pursue collection of charity
care, it is not reported in revenue.
Interest Rate Swap Agreements: The Company enters into interest rate swap
agreements to manage its interest rate exposure. The differential to be paid or
received is recognized over the life of the agreement as an adjustment to
interest expense (the accrual accounting method). The fair value of the swap
agreements and changes in the fair value are not recognized in the financial
statements.
Stock Based Compensation: The Company accounts for stock option grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees".
The Company recognizes no compensation expense for grants when the exercise
price equals or exceeds the market price of the underlying stock on the date of
grant.
Recently Issued Accounting Pronouncements: In 1998, the Financial Accounting
Standards Board (FASB) issued 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.
F-10
<PAGE> 63
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivatives that are not hedges must be adjusted to fair value with changes
reflected in 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 adoption of this new FASB
standard on July 1, 2000, will result in a cumulative effect of an accounting
change of approximately $9.3 million being recognized as other comprehensive
income. The Company's interest rate swaps are cash flow hedges which hedge the
variability in expected cash flows from a portion of its existing floating rate
liabilities (See Note 4). The Company believes that its hedges are highly
effective with changes in effectiveness expected to be reported in Other
Comprehensive Income. Changes in any ineffectiveness will be reported through
earnings.
On March 31, 2000, the FASB issued its final interpretation of APB Opinion No.
25 "Accounting for Certain Transactions involving Stock Compensation." The final
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 is 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. Based on the exchange, 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 on March 26,
1999. 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 Company also granted 1.4
million options on March 11, 1999.
The Company included a provision in the March 26, 1999 option grants to vest and
terminate the repriced options thirty days after giving notice to its employees.
There would have been no variable award accounting after the options terminated.
The FASB subsequently changed the proposed interpretation of APB 25 to require
variable award accounting for most of the stock options granted on March 11,
1999. After considering the issues related to termination of the March 26, 1999
options, including the requirement to apply variable award accounting on the
March 11, 1999 options, the Company decided not to terminate the March 26, 1999
options.
Effective July 1, 2000, the Company will begin recording non-cash compensation
expense for the increase in its stock price after June 30, 2000. The number of
options subject to variable award accounting is the total of approximately 1.8
million vested options and a percentage of approximately 1.5 million unvested
options based on their vesting schedule. The number of options affected will
decrease for options exercised or canceled and will increase as unvested options
become vested. The Company is presently reviewing each option grant and their
related vesting periods to determine the number of options which will be subject
to variable award accounting.
F-11
<PAGE> 64
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reclassifications: Certain prior year amounts have been reclassified to
conform to the current year presentation.
2. ACQUISITIONS, JOINT VENTURES AND SALES
During fiscal 2000, the Company acquired one hospital and affiliated healthcare
entities. Effective March 1, 2000, the Company transferred its operating lease
of Clinton County Hospital in Frankfort, Indiana to an Indianapolis, Indiana
healthcare system.
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 (See Note 5).
Effective November 1, 1998, a majority-owned subsidiary of the Company and a
subsidiary of HCA formed a joint venture in Vicksburg, Mississippi. 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.
During fiscal 1998, the Company acquired two hospitals and affiliated health
care entities and sold its remaining interest in a hospital. In connection with
the acquisitions, the Company entered into an operating lease agreement to lease
certain land and buildings with an estimated fair value of $23.7 million. In
addition, the Company contributed three hospitals and paid approximately $23
million in exchange for equity interests in joint ventures that own and operate
seven hospitals (See Note 3).
Hospital and affiliated business acquisitions excluding operating leases are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended June 30
-----------------------------------------------
2000 1999 1998
-------- --------- ---------
<S> <C> <C> <C>
Fair value of assets acquired $ 24,336 $ 288,613 $ 145,623
Fair value of liabilities assumed (3,627) (18,879) (13,882)
Contributions from minority investors -- (52,498) --
-------- --------- ---------
Net cash used for acquisitions $ 20,709 $ 217,236 $ 131,741
======== ========= =========
</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. Included in the acquisitions were costs in
excess of net assets acquired of approximately $0.8 million, $107.2 million and
$41.9 million for the years ended June 30, 2000, 1999, and 1998, respectively.
The operating results of the acquisitions,
F-12
<PAGE> 65
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
joint ventures and sales have been included in the accompanying consolidated
statements of income for periods subsequent to acquisition and for periods prior
to disposal of controlling interests.
The following unaudited pro forma results of operations give effect to the
operations of the joint ventures and the entities acquired, sold and contributed
to joint ventures in fiscal 2000, 1999 and 1998 as if the respective
transactions had occurred at the beginning of the period presented (in
thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net operating revenue $1,761,460 $1,717,542 $1,706,937
Net income 57,827 41,961 95,975
Earnings per share:
Basic 0.81 0.57 1.29
Diluted 0.75 0.56 1.24
</TABLE>
The pro forma results of operations do not purport to represent what the
Company's results of operations would have been had such transactions in fact
occurred at the beginning of the years presented or to project the Company's
results of operations in any future period.
3. INVESTMENTS
Effective February 1, 1998, the Company and Universal Health Services formed
Valley Health System LLC and Summerlin Hospital Medical Center LLC (See Note 5).
Effective May 1, 1998, the Company and HCA formed Macon Healthcare LLC. The
Company has equity interests of 27.5% in Valley Health System LLC, 26.1% in
Summerlin Hospital Medical Center LLC and 38% in Macon Healthcare LLC. The
Company accounts for its investments in the LLCs using the equity method of
accounting. Summarized financial information of all affiliated companies is as
follows (in thousands):
F-13
<PAGE> 66
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Balance Sheet
--------------
<TABLE>
<CAPTION>
June 30
----------------------------
2000 1999
--------- ---------
<S> <C> <C>
Current assets $ 117,900 $ 129,500
Non-current assets 434,600 446,100
--------- ---------
$ 552,500 $ 575,600
========= =========
Current liabilities $ 43,100 $ 39,300
Non-current liabilities 2,900 3,100
Members' equity 506,500 533,200
--------- ---------
$ 552,500 $ 575,600
========= =========
</TABLE>
Income Statement
-----------------
<TABLE>
<CAPTION>
Year Ended June 30
---------------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Net operating revenue $ 553,500 $ 552,900 $ 180,800
========= ========= =========
Net income $ 58,900 $ 74,900 $ 26,700
========= ========= =========
</TABLE>
The difference between the carrying value of the investments and the underlying
net book value is approximately $86.0 million at June 30, 2000. This amount is
amortized on a straight-line basis over thirty-six years.
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
F-14
<PAGE> 67
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
June 30
-------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Revolving Line of Credit $ 547,600 $ 718,000
8.75% Senior Subordinated Notes 150,000 150,000
6.0% Convertible Subordinated Notes 150,000 --
Other debt 4,262 5,126
--------- ---------
851,862 873,126
Less current maturities (817) (913)
--------- ---------
$ 851,045 $ 872,213
========= =========
</TABLE>
Revolving Line of Credit: In March 1999, the Company amended its credit facility
to provide increased flexibility under certain terms and conditions in the
agreement. The amended credit facility consists of an $850 million secured
revolving credit facility expiring November 26, 2002. The Company has the option
to request an incremental one year extension subject to approval of 100% of the
lenders on each anniversary date of the inception of the credit agreement. The
revolving line of credit bears interest, at the Company's option, at generally
the lender's base rate, swing-line rate, or a fluctuating rate ranging from .55
to 1.55 percentage points above LIBOR. The Company pays a facility fee ranging
from .20 to .45 percentage points on the commitment. The interest rate margins
and facility fee rates are based on the Company's leverage ratio. Substantially
all stock of the Company's subsidiaries has been pledged under the terms of the
amended credit facility. The Company may prepay the amount outstanding at any
time. The interest rate in effect at June 30, 2000 was 7.8%.
8.75% Senior Subordinated Notes: The $150.0 million Senior Subordinated Notes
mature on November 1, 2005 and bear interest at 8.75% payable semi-annually. The
8.75% Notes are subject to redemption at the option of the Company at a price of
104.375% on or after November 1, 2000, 102.188% on or after November 1, 2001 and
at par on or after November 1, 2002. The Company must offer to repurchase the
8.75% Notes at 101% upon a change in control. The 8.75% Notes are unsecured
obligations and are subordinated in right of payment to all existing and future
senior indebtedness.
6.0% Convertible Subordinated Debentures: On August 31, 1999, the Company issued
$150.0 million of convertible subordinated debentures due 2009 to Welsh, Carson,
Anderson & Stowe, VIII, LP (WCAS VIII) and certain WCAS VIII affiliates,
including Russell L. Carson, Chairman of the 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
F-15
<PAGE> 68
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. In connection with the convertible
subordinated debenture agreement, the Company amended its Stockholders' Rights
Plan. (See Note 8).
Other Long-Term Debt Information: The credit facilities governing the revolving
line of credit and senior subordinated notes contain certain financial covenants
including but not limited to limitations on debt levels, 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, the maintenance of net worth and various
financial ratios, including a fixed charge ratio and a leverage ratio.
Maturities of long-term debt for the fiscal years subsequent to June 30, 2000
are as follows: 2001 - $0.8 million; 2002 - $0.6 million; 2003 - $548.2 million;
2004 - $0.7 million; 2005 - $0.6 million and thereafter - $301.0 million.
Interest Rate Swap Agreements: Interest rate swap agreements are used on a
limited basis to manage the Company's interest rate exposure. The agreements are
contracts to periodically exchange fixed and floating interest rate payments
over the life of the agreements. Floating-rate payments are based on LIBOR and
fixed-rate payments are dependent upon market levels at the time the swap
agreement was consummated. The swap agreements are cash flow hedges, which
effectively convert an aggregate notional amount of $400 million of
floating-rate borrowings to fixed-rate borrowings at June 30, 2000. The initial
term of the agreements expire at various dates through fiscal 2003. The Company
is exposed to credit losses in the event of nonperformance by the counterparties
to its financial instruments. The counterparties are creditworthy financial
institutions and the Company anticipates that the counterparties will be able to
fully satisfy their obligations under the contracts. For the years ended June
30, 2000, 1999 and 1998, the Company received a weighted average rate of 5.8%,
5.3% and 5.8%, respectively and paid a weighted average rate of 5.9%, 5.7% and
6.0%, respectively.
5. WRITE-DOWN OF ASSETS AND INVESTIGATION AND LITIGATION RELATED COSTS
The Company recorded the following pre-tax write-down of assets and
investigation and litigation related costs (in thousands):
F-16
<PAGE> 69
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Year Ended June 30
-------------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Investigation and litigation related costs $ 8,534 $ 5,300 $ --
Write-down of assets -- 29,873 22,850
-------- -------- --------
Total $ 8,534 $ 35,173 $ 22,850
======== ======== ========
</TABLE>
Investigation and litigation related costs related primarily to the qui tam and
shareholder actions against the Company (See Note 11).
During fiscal 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.
During fiscal 1998, the Company recorded a $22.9 million pre-tax charge related
to the contribution of its Las Vegas hospital to Valley Health System, LLC. The
impairment consisted of a write-down of a portion of the goodwill at the
Company's contributed hospital, based on the relative fair values of the
nonmonetary assets contributed by the parties and the ownership interest
obtained in the joint venture.
6. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
F-17
<PAGE> 70
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 34,891 $ 25,904 $ 58,320
State and local 4,137 3,562 8,345
-------- -------- --------
39,028 29,466 66,665
Deferred:
Federal (3,055) 3,407 (6,611)
State and local (347) 621 (1,205)
-------- -------- --------
(3,402) 4,028 (7,816)
-------- -------- --------
$ 35,626 $ 33,494 $ 58,849
======== ======== ========
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate follows:
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State and local income
taxes, net of federal
income tax benefit 3.4 3.5 3.2
Write-down of nondeductible
physician practice
intangible assets -- 6.4 --
Nondeductible amortization
of cost in excess of net
assets acquired -- 0.6 0.3
Other 0.7 0.8 1.9
------ ------ ------
Effective income tax rate 39.1% 46.3% 40.4%
====== ====== ======
</TABLE>
Deferred income taxes result from temporary differences in the recognition of
assets, liabilities, revenues and expenses for financial accounting and tax
purposes. Sources of these differences and the related tax effects are as
follows (in thousands):
F-18
<PAGE> 71
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
June 30
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization $ (38,486) $ (40,964)
Provision for doubtful accounts (1,889) (2,178)
Other (4,542) (4,126)
---------- ----------
Total deferred tax liabilities (44,917) (47,268)
---------- ----------
Deferred tax assets:
Accrued expenses 10,025 10,321
Employee compensation 7,909 7,095
Other 1,127 594
---------- ----------
Total deferred tax assets 19,061 18,010
---------- ----------
Net deferred tax liabilities $ (25,856) $ (29,258)
========== ==========
</TABLE>
The balance sheet classification of deferred income taxes is as follows (in
thousands):
<TABLE>
<CAPTION>
June 30
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
Current $ 5,154 $ 4,164
Long-term (31,010) (33,422)
---------- ----------
Total $ (25,856) $ (29,258)
========== ==========
</TABLE>
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 2.7 million and 3.2 million shares of common stock for fiscal 2000
and 1999, respectively, were not included in the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market price of the common stock (See Note 8).
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
F-19
<PAGE> 72
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Year Ended June 30,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Net income $ 55,489 $ 38,858 $ 86,680
Interest expense on convertible
subordinated debentures, net of taxes 4,567 -- --
---------- ---------- ----------
Numerator for diluted earnings per share $ 60,056 $ 38,858 $ 86,680
========== ========== ==========
Denominator:
Shares used for basic earnings per share 71,543 73,500 74,733
Effect of diluted securities:
Convertible subordinated debentures 11,111 -- --
Stock options 366 930 2,434
---------- ---------- ----------
Shares used for diluted earnings per share 83,020 74,430 77,167
========== ========== ==========
Basic earnings per share $ 0.78 $ 0.53 $ 1.16
========== ========== ==========
Diluted earnings per share $ 0.72 $ 0.52 $ 1.12
========== ========== ==========
</TABLE>
8. STOCKHOLDERS' EQUITY AND STOCK BENEFIT PLANS
Common stock: In August 1998, the Board of Directors authorized the repurchase
of up to 3.0 million shares of common stock. In October 1998, the Board of
Directors authorized the repurchase of up to 5.0 million additional shares of
common stock. Shares purchased under the program may be used, among other
purposes, to offset the effects of the Company's stock-based employee benefit
plans. During fiscal 2000, the Company repurchased 2.8 million shares of common
stock for an aggregate purchase price of $18.6 million. During fiscal 1999, the
Company repurchased 3.6 million shares for an aggregate purchase price of $48.1
million. All such 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.
During fiscal 1998, the Board of Directors approved a three-for-two stock split
effected in the form of a stock dividend paid on September 16, 1997 to
shareholders of record on September 2, 1997.
During fiscal 1998, the Company's stockholders approved an amendment to increase
the number of authorized shares of common stock from 100.0 million to 300.0
million.
Stock Option Plan: The Company's 1997 Stock Option Plan is the plan under
which non-qualified and incentive stock options may be granted. Stock options
F-20
<PAGE> 73
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
are generally granted at an exercise price equal to the fair market value at the
date of grant and are exercisable over a period not to exceed ten years. The
plan provides for immediate and 100% vesting upon a change of control of the
Company. The Company has reserved 7.9 million shares of common stock for stock
option issuances.
SFAS No. 123 "Accounting for Stock-Based Compensation" requires the Company to
disclose the pro forma net income and earnings per share as if compensation
expense were recognized for options granted subsequent to June 30, 1995. These
pro forma amounts are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended June 30
---------------------------------------------------------------------------
2000 1999 1998
----------------------- ----------------------- -----------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 55,489 $ 52,564 $ 38,858 $ 35,266 $ 86,680 $ 82,019
EPS:
Basic 0.78 0.73 0.53 0.48 1.16 1.10
Diluted 0.72 0.69 0.52 0.47 1.12 1.06
</TABLE>
Stock-based compensation costs on a pro forma basis would have reduced pretax
income by $4.7 million, $5.4 million and $6.6 million in fiscal 2000, 1999 and
1998, respectively.
The per share weighted-average fair value of stock options granted during fiscal
2000, 1999 and 1998 was $3.43, $3.15 and $6.82, respectively, on the date of
grant using a Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
Year Ended June 30
---------------------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Expected volatility .416 .380 .186
Risk-free interest rates 5%-6% 5%-6% 5%-6%
Expected lives (years) 3.1 2.3 4.3
Forfeiture rates 6.1% 4.6% 4.8%
</TABLE>
Information regarding the Company's option plans for fiscal 2000, 1999 and 1998
are summarized below (in thousands, except per share amounts):
F-21
<PAGE> 74
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Stock Option Price Weighted Average
Options Per Share Exercise Price
------- ------------- ----------------
<S> <C> <C> <C>
Balances, July 1, 1997 6,482 $ .67- 23.83 $13.18
Granted 2,248 22.50- 33.06 24.01
Exercised (1,228) .67- 22.50 9.80
Canceled (247) 4.00- 25.00 14.22
------ ------------- ------
Balances, June 30, 1998 7,255 .67- 33.06 17.07
Granted 5,699 .67- 27.13 9.19
Exercised (702) .67- 20.75 7.03
Canceled (6,230) .67- 33.06 18.20
------ ------------- ------
Balances, June 30, 1999 6,022 .67- 33.06 9.61
Granted 2,498 6.50- 12.56 8.48
Exercised (463) .67- 9.00 6.20
Canceled (785) 1.00- 33.06 12.33
------ ------------- ------
Balances, June 30, 2000 7,272 $ .67- 27.13 $ 9.15
====== ============= ======
</TABLE>
At June 30, 2000, 1999, and 1998, the number of options exercisable was 3.0
million, 2.7 million and 2.2 million, respectively, and the options available
for grant were 0.6 million, 2.1 million and 1.5 million, respectively.
The following table summarizes information regarding the options outstanding at
June 30, 2000 (in thousands, except per share amounts):
F-22
<PAGE> 75
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------- ---------------------------------
Weighted
Average Weighted Weighted
Remaining Range of Average Average
Contract Exercise Number Exercise Number Exercisable
Life Prices Outstanding Price Exercisable Price
(Yrs) ------------ ----------- -------- ----------- -----------
---------
<S> <C> <C> <C> <C> <C>
1 $9.00- 14.67 778 $ 10.28 778 $ 10.28
2 8.94- 21.00 75 12.15 66 11.68
3 24.00 45 24.00 23 24.00
4 4.00- 27.13 217 8.96 183 5.61
5 0.67- 12.56 90 6.62 45 0.67
6 9.00- 17.33 888 9.29 670 9.31
7 8.31- 17.50 2,785 8.65 349 9.83
8 9.00- 16.97 992 9.08 552 9.14
9 8.81- 15.00 1,344 9.06 362 9.24
10 6.61- 10.94 58 8.56 17 6.61
------ ------
7,272 3,045
====== ======
</TABLE>
Employee Stock Purchase Plan: The Company has qualified and nonqualified
employee stock purchase plans. The purchase price of the shares under these
plans is 85% of the lesser of the fair market value on the first day (March 1)
or the last day (February 28) of the plan year. Employees may designate up to
10% of their compensation (not to exceed $25,000 in any calendar year) for the
purchase of stock. Shares of common stock reserved under this plan were 1.6
million at June 30, 2000.
Stockholder Rights Plan: The Company 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 the Company is involved in a
business combination transaction with another person or if the Company sells 50%
or more of its assets or earning power to another person, each right entitles
its holder to purchase shares of our common stock or the acquiring
F-23
<PAGE> 76
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
company's common stock worth two times the exercise price of the right. The
Company 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.
9. EMPLOYEE BENEFIT PLANS
The Company sponsors defined contribution employee benefit plans covering
substantially all employees. Employees may contribute up to 15% of eligible
compensation subject to Internal Revenue Service limits. The plans permit the
Company to make a discretionary base contribution and a discretionary match to
employee deferrals. The Company's contribution to the plans is determined
annually by the Board of Directors. Base contributions under the plans vest at
the end of each plan year and matching contributions vest after five years of
qualifying service. Benefit plan expense for the years ended June 30, 2000, 1999
and 1998 totaled approximately $16.4 million, $16.0 million and $14.4 million,
respectively.
10. LEASES
During fiscal 1998, the Company entered into a five-year $150 million End Loaded
Lease Financing agreement (ELLF) to provide a financing option for acquisitions
and/or construction. The interest rates, facility fee rates, the option to
extend and financial covenants are substantially the same as the Company's
revolving line of credit (See Note 4). Outstanding borrowings under this
agreement have been secured by certain real property of the Company. At June 30,
2000, $3.1 million was available under the ELLF agreement.
The Company leases hospitals, medical office buildings and equipment under
agreements that generally require the Company to pay all maintenance, property
taxes and insurance costs and that expire on various dates extending to the year
2011. Certain leases include options to purchase the leased property during or
at the end of the lease term at fair market value.
Rental expense for all operating leases totaled $36.9 million, $34.2 million,
and $26.7 million for the years ended June 30, 2000, 1999 and 1998,
respectively. This includes rent expense under the ELLF agreement of $10.8
million, $7.0 million and $0.5 million for the years ended June 30, 2000, 1999
and 1998, respectively.
Future minimum rental commitments under noncancellable operating leases at June
30, 2000 are as follows: 2001 - $27.5 million; 2002 - $24.5 million; 2003 -
$15.3 million; 2004 - $8.1 million; 2005 - $4.9 million and thereafter - $8.3
million.
11. 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
F-24
<PAGE> 77
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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,
1996 through 1998. The IRS has proposed certain adjustments in connection with
its prior 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 February 29, 2000, an amended final trial judgment was entered against the
Company's subsidiary, Quorum Health Resources, LLC ("QHR"), in the amount of
approximately $57 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.
On July 20, 2000, a federal district court ruled that Maverick County Hospital
District (the owner of Fort Duncan Medical Center) was obligated to indemnify
QHR against all liabilities and costs that it may incur as a result of the
jury's finding of ordinary negligence in the Rodriguez litigation (W.D. Texas
No. A 99 CA 580SS). The Hospital District may appeal this decision. In addition,
Continental Insurance Company, which provides excess coverage of $15 million
above QHR's primary insurance of $35 million, has denied coverage on this
judgment. QHR has filed an action seeking a declaratory judgment that
Continental Insurance Company is obligated to insure its portion of the judgment
(Chancery Court Davidson County, TN 20th Judicial Dist. Case No. 00-2367-11).
F-25
<PAGE> 78
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company currently believes that all or a substantial portion of the
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 or other funds. 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 relator's lawsuit named the Company and its subsidiary, Quorum
Health Resources, HCA and all hospitals that the Company or 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 HCA. The government did not oppose the motion
to separate the cases against the Company and 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 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
F-26
<PAGE> 79
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. A magistrate judge has recommended to the court
that it deny the request to move the litigation to Tennessee, and has
recommended instead that the case be moved to Atlanta. 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.
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.
F-27
<PAGE> 80
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stockholder Class Action
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.
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. Agreements we enter
into as a part of any settlement could also materially affect us. Any current or
future investigations or actions could have a material adverse effect on the
Company's results of operations or financial position.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash,
accounts receivable and accounts payable approximates fair value.
The carrying value of long-term debt (including current portion) was $851.9 and
$873.1 million for the years ended June 30, 2000 and 1999, respectively. The
fair value of long-term debt was $851.3 million and $870.1 million for the years
ended June 30, 2000 and 1999, respectively. The fair value of publicly traded
notes has been determined using the quoted market price at June 30, 2000 and
1999. The fair value of the option feature in the convertible debentures is
estimated using an option pricing model. The fair values of the remaining
long-term debt are estimated using discounted cash flows, based on the Company's
incremental borrowing rates. The fair value included income (costs) of $9.3
F-28
<PAGE> 81
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
million and $(1.5) million which would be realized in the event of termination
of the interest rate swap agreements at June 30, 2000 and 1999, respectively.
13. 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 accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on operating earnings of the respective business units. All segment
revenues are from external customers.
The Company's net revenues, EBITDA and assets are summarized in the following
table (EBITDA is defined as earnings before interest, minority interest,
write-down of assets and investigation and litigation related costs, income
taxes, depreciation and amortization expense)(in thousands):
<TABLE>
<CAPTION>
Year Ended June 30, 2000
------------------------------------------------
Owned Management
Hospitals Services Total
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues $ 1,620,409 $ 142,363 $ 1,762,772
EBITDA 247,575 29,905 277,480
Assets 1,813,167 43,271 1,856,438
Depreciation & amortization 106,696 1,779 108,475
Capital expenditures 100,089 712 100,801
<CAPTION>
Year Ended June 30, 1999
------------------------------------------------
Owned Management
Hospitals Services Total
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues $ 1,505,027 $ 147,557 $ 1,652,584
EBITDA 215,707 36,427 252,134
Assets 1,789,908 42,040 1,831,948
Depreciation & amortization 93,850 1,577 95,427
Capital expenditures 121,499 2,525 124,024
</TABLE>
F-29
<PAGE> 82
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Year Ended June 30, 1998
------------------------------------------------
Owned Management
Hospitals Services Total
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues $ 1,427,969 $ 144,383 $ 1,572,352
EBITDA 264,568 34,555 299,123
Assets 1,451,008 39,945 1,490,953
Depreciation & amortization 85,561 1,459 87,020
Capital expenditures 131,328 438 131,766
</TABLE>
EBITDA for owned hospitals include equity in earnings of affiliates of $18.2
million, $22.3 million, and $7.0 million for fiscal 2000, 1999, and 1998,
respectively. Assets of owned hospitals include investments in unconsolidated
subsidiaries of $249.9 million, $259.7 million, and $245.6 million at June 30,
2000, 1999 and 1998, respectively.
A reconciliation of EBITDA to income before income taxes follows (in thousands):
<TABLE>
<CAPTION>
June 30
--------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Total EBITDA for reportable segments $ 277,480 $ 252,134 $ 299,123
Depreciation and amortization 108,475 95,427 87,020
Interest expense 67,211 53,683 40,606
Write-down of assets and investigation
and litigation related costs 8,534 35,173 22,850
Minority interest 2,145 (4,501) 3,118
--------- --------- ---------
Income before income taxes $ 91,115 $ 72,352 $ 145,529
========= ========= =========
</TABLE>
Write-down of assets and investigation and litigation related costs are not
included in EBITDA. Investigation and litigation related costs for fiscal 2000
are comprised of $1.0 million related to owned hospitals and $7.5 million
related to management services. Write-down of assets and investigation and
litigation related costs for fiscal 1999 is comprised of $31.1 million related
to owned hospitals and $4.1 million related to management services. Write-down
of assets for fiscal 1998 is comprised of $22.9 million related to owned
hospitals.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended June 30, 2000 and 1999 is
summarized below (in thousands, except per share data):
F-30
<PAGE> 83
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Quarter
----------------------------------------------------------
1st 2nd 3rd 4th
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
2000
----
Net operating revenue $ 431,285 $ 432,854 $ 455,622 $ 443,011
Income before income taxes 17,445 20,705 28,468 24,497
Net income 10,624 12,609 17,337 14,919
Earnings per common share:
Basic 0.15 0.18 0.24 0.21
Diluted 0.14 0.17 0.22 0.19
</TABLE>
The first, second, third and fourth quarter results include $0.7 million ($0.01
per diluted EPS), $1.1 million ($0.01 per diluted EPS), $2.1 million ($0.03 per
diluted EPS), and $1.3 million ($0.02 per diluted EPS), respectively, of
investigation and litigation related costs after taxes.
<TABLE>
<CAPTION>
Quarter
-----------------------------------------------------------
1st 2nd 3rd 4th
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1999
----
Net operating revenue $ 389,361 $ 386,077 $ 448,381 $ 428,765
Income (loss) before income taxes 41,860 (22,230) 30,132 22,590
Net income (loss) 25,493 (18,742) 18,350 13,757
Earnings (loss) per common share:
Basic 0.34 (0.26) 0.25 0.19
Diluted 0.33 (0.26) 0.25 0.19
</TABLE>
The second quarter results include a $22.7 million ($0.31 per diluted EPS) after
tax charge related to the write-down of assets and investigation and litigation
related costs. The third quarter results and fourth quarter results include $1.6
million ($0.02 per diluted EPS) and $1.0 million ($0.01 per diluted EPS),
respectively, of investigation and litigation related costs after taxes.
15. SUBSEQUENT EVENT
Effective July 1, 2000, the Company acquired Wells Community Hospital in
Bluffton, Indiana.
F-31
<PAGE> 84
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION and QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-----------------------------------------------------------------------------------------------------------------------
Additions
------------------------------
(1) (2) (3)
Balance at Charged to Charged to Balance
Beginning Costs and Other Accounts Deductions at End of
Description of Period Expenses Describe Describe Period
-----------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Year ended June 30, 2000:
Allowance for doubtful accounts $ 83,896 $ 127,631 $ 1,999 (a) $ 125,287 (b) $ 88,239
Year ended June 30, 1999:
Allowance for doubtful accounts $ 65,561 $ 126,525 $ 8,803 (a) $ 116,993 (b) $ 83,896
Year ended June 30, 1998:
Allowance for doubtful accounts $ 55,360 $ 106,733 $ 7,760 (a) $ 104,292 (c) $ 65,561
</TABLE>
(a) Allowance for doubtful accounts of acquired companies.
(b) Accounts written off, net of recoveries.
(c) Accounts written off, net of recoveries and net of $7,197 allowance of
divested companies.
S-1
<PAGE> 85
PART IV
EXHIBIT INDEX
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a)(1) and (2). Financial statements and schedules of the
Company and its subsidiaries required to be included in Part II, Item 8 are
indexed on Page F-1 and submitted as a separate section of this report.
(a)(3) Exhibits.
<TABLE>
<S> <C>
3.1 Form of Amended and Restated Certificate of Incorporation
effective with the Secretary of State of Delaware on December
15, 1997. (Incorporated by reference to Exhibit A to the
Company's definitive Proxy Statement for the Annual Meeting of
Stockholders held November 10, 1997.)
3.2 Bylaws of the Company as amended April 12, 1994. (Incorporated
by reference to Exhibit 3.2 to the Company's Registration
Statement No. 33-77674 on Form S-1.)
3.3 Bylaws of the Company as amended April 16, 1997. (Incorporated
by reference to Exhibit 3(ii) to the Company's Report on Form
8-K dated April 16, 1997.)
4.1.1 Indenture, dated as of December 15, 1992, between Quorum Health
Group, Inc. and United States Trust Company of New York, as
Trustee relating to the Company's $100,000,000 11-7/8% Senior
Subordinated Notes due December 15, 2002. (Incorporated by
reference to Exhibit 4 to the Company's Amendment to Application
or Report on Form 8 dated February 17, 1993, amending the
Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1992.)
4.1.2 Indenture, dated as of November 1, 1995, between Quorum Health
Group, Inc. and United States Trust Company of New York, as
Trustee relating to the Company's $150,000,000 8-3/4% Senior
Subordinated Notes due November 1, 2005. (Incorporated by
reference to Exhibit 4.1.2 to the Company's Registration
Statement No. 33-98274 on Form S-3.)
4.1.3 First Supplemental Indenture, dated as of May 7, 1997, between
Quorum Health Group, Inc. and United States Trust Company of New
York, as Trustee relating to the Company's $100,000,000 11-7/8%
Senior Subordinated Notes due December 1, 2005. (Incorporated by
reference to Exhibit 4.1.3 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998.)
</TABLE>
II-1
<PAGE> 86
<TABLE>
<S> <C>
4.4 Form of Rights Agreement dated as of April 16, 1997, between
Quorum Health Group, Inc. and First Union National Bank of North
Carolina, including the form of Rights Certificate as Exhibit A
and the form of Summary of Rights to Purchase Common Stock as
Exhibit B. (Incorporated by reference to Exhibit 4 to the
Company's Report on Form 8-K dated April 16, 1997.)
4.4.1 Form of Letter to Stockholders of Quorum Health Group, Inc.
regarding the adoption of the Rights Plan pursuant to the Rights
Agreement. (Incorporated by reference to the Company's Report on
Form 8-K dated April 16, 1997.)
4.4.2 Amendment No. 1 dated as of August 18, 1999, to the Rights
Agreement dated as of April 16, 1997, between Quorum Health
Group, Inc. and First Union National Bank of North Carolina.
(Incorporated by reference to Exhibit 4.4.18 to the Company's
Report on Form 10-K for the year ended June 30, 1999.)
</TABLE>
<PAGE> 87
<TABLE>
<S> <C>
4.5 Credit Agreement dated as of April 22, 1997, by and among Quorum
Health Group, Inc., as Borrower, certain banks as Lenders, and
First Union National Bank of North Carolina, as agent.
(Incorporated by reference to Exhibit 4.4.18 to the Company's
Report on Form 10-K for the year ended June 30, 1997.)
4.5.1 First Amendment to Credit Agreement effective as of June 30,
1997, by and among Quorum Health Group, Inc., as Borrower,
certain banks as Lenders, and First Union National Bank of North
Carolina, as agent. (Incorporated by reference to Exhibit 4.4.19
to the Company's Report on Form 10-K for the year ended June 30,
1997.)
4.5.2 Second Amendment to Credit Agreement, dated November 26, 1997,
by and among Quorum Health Group, Inc. as Borrower, Lenders as
referred to in the Credit Agreement, and First Union National
Bank as Agent for the Lenders. (Incorporated by reference to
Exhibit 4.2 to the Company's Report on Form 10-Q for the quarter
ended December 31, 1997.)
4.5.3 Third Amendment to Credit Agreement, effective as of April 29,
1998, by and among Quorum Health Group, Inc. as Borrower,
Lenders as referred to in the Credit Agreement, and First Union
National Bank as Agent for the Lenders. (Incorporated by
reference to Exhibit 4.5.3 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998.)
4.5.4 Fourth Amendment to Credit Agreement, effective as of April 29,
1998, by and among Quorum Health Group, Inc. as Borrower,
Lenders as referred to in the Credit Agreement, and First Union
National Bank as Agent for the Lenders. (Incorporated by
reference to Exhibit 4.5.4 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1999.)
4.5.5 Fifth Amendment, dated October 27, 1998, to Credit Agreement
dated April 22, 1997, by and among Quorum Health Group, Inc.,
the Lenders referenced therein, and First Union National Bank as
Agent for Lenders. (Incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998.)
4.5.6 Sixth Amendment to Credit Agreement, dated November 26, 1998, as
subsequently amended, by and among Quorum Health Group, Inc. as
Borrower, Lenders as referred to in the credit Agreement, and
First Union National Bank as Agent for the Lenders.
(Incorporated by reference to Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.)
4.6 Participation Agreement dated November 26, 1997, among Quorum
ELF, Inc. as Construction Agent and Lessee; First Security Bank,
National Association as Owner Trustee under the Quorum Real
Estate Trust 1997-1; Various other banks and lending
institutions which are parties from time to time as Holders or
Lenders; and First Union National Bank as Agent for the Lenders
and Holders.
</TABLE>
<PAGE> 88
<TABLE>
<S> <C>
(Incorporated by reference to Exhibit 4.1 to the Company's
Report on Form 10-Q for the quarter ended December 31, 1997.)
4.6.1 First Amendment to Participation Agreement, effective as of
January 26, 1998, among Quorum ELF, Inc. as Construction Agent
and Lessee; First Security Bank, National Association as Owner
Trustee under the Quorum Real Estate Trust 1997-1; Various other
banks and lending institutions which are parties from time to
time as Holders or Lenders; and First Union National Bank as
Agent for the Lenders and Holders. (Incorporated by reference to
Exhibit 4.6.1 to the Company's Annual Report on Form 10-K for
the year ended June 30, 1998.)
4.7 Securities Purchase Agreement dated as of August 18, 1999, among
Quorum Health Group, Inc., Welsh, Carson, Anderson & Stowe VIII,
L.P., and other purchasers named therein, relating to the
purchase of $150,000,000 aggregate principal amount of 6%
Convertible Subordinated Debentures. (Incorporated by reference
to Exhibit 4.7 to the Company's Report on Form 10-K for the year
ended June 30, 1999.)
4.7.1 Form of Quorum Health Group, Inc. 6% Convertible Subordinated
Debenture due August 31, 2009. (Incorporated by reference to
Exhibit 4.7.1 to the Company's Report on Form 10-K for the year
ended June 30, 1999.)
4.7.2 Form of Registration Rights Agreement dated as of August 31,
1999, relating to the Company's 6% Convertible Subordinated
Debenture due August 31, 2009. (Incorporated by reference to
Exhibit 4.7.2 to the Company's Report on Form 10-K for the year
ended June 30, 1999.)
4.7.3 Form of Stockholders Agreement dated as of August 31, 1999,
relating to the Company's 6% Convertible Subordinated Debenture
due August 31, 2009. (Incorporated by reference to Exhibit 4.7.3
to the Company's Report on Form 10-K for the year ended June 30,
1999.)
10.1 Compensation Plans and Arrangements
A. Restated Stock Option Plan, as amended. (Incorporated by
reference to Exhibit B to the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders held
November 15, 1994.)
B. Directors Stock Option Plan, as amended. (Incorporated by
reference to Exhibit A to the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders held
November 15, 1994.)
C. Letter dated February 23, 1990 regarding employment of
James E. Dalton, Jr. (Incorporated by reference to Exhibit
10.1.D to the Company's Annual Report on Form 10-K for the
year ended June 30, 1993.)
</TABLE>
<PAGE> 89
<TABLE>
<S> <C>
D. Employee Stock Purchase Plan, as amended. (Incorporated by
reference to Exhibit A to the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders held
November 16, 1999.)
E. Quorum Health Group, Inc. 401(k) Savings and Retirement
Plan. (Incorporated by reference to Exhibit 10.1.6 to the
Company's Registration Statement No. 33-77674 on Form S-1.)
F. Form of Quorum Health Group, Inc. Non-qualified Deferred
Compensation Plan. (Incorporated by reference to Exhibit
10.1.7 to the Company's Registration Statement No. 33-77674
on Form S-1.)
G. Form of Severance Agreement with certain executive officers
of the Company. (Incorporated by reference to Exhibit 10.1
(G) to the Company's Annual Report on Form 10-K for the
year ended June 30, 1995.)
H. 1997 Stock Option Plan. (Incorporated by reference to
Exhibit B to the Company's definitive Proxy Statement for
the Annual Meeting of Stockholders held November 10, 1997.)
I. Deferred Compensation Plan for Directors (Incorporated by
reference to Exhibit B to the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders held on
November 16, 1999.)
J. Form of Employment Agreement with certain executive officers
of the Company. (Incorporated by reference to Exhibit
10.1(c) to the Company's Report on Form 10-Q for the
quarter ended March 31, 1998.)
</TABLE>
<PAGE> 90
<TABLE>
<S> <C>
10.3 Lease Agreement dated December 8, 1994 by and between QB
Partners I and Quorum Health Group, Inc., as amended by Addendum
dated March 25, 1995. (Incorporated by reference to Exhibit
10.22 to the Company's Annual Report on Form 10-K for the year
ended June 30, 1995.)
10.4 Group Purchasing Organization Participating Agreement between
APS Healthcare Purchasing Partners, L.P. and Quorum Health
Group, Inc. dated November 30, 1995. (Incorporated by reference
to Exhibit 10.30 to the Company's Report on Form 10-K for the
year ended June 30, 1996.)
10.4.1 First Amendment effective as of June 1, 1997, to Group
Purchasing Organization Participating Agreement between the
Company and Premier Purchasing Partners, L.P., f/k/a APS
Healthcare Purchasing Partners, L.P. dated November 30, 1995.
(Incorporated by reference to Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998.)
10.4.2 Second Amendment dated as of January 11, 2000, to Group
Purchasing Organization Participating Agreement between the
Company and Premier Purchasing Partners, L.P. f/k/a APS
Healthcare Purchasing Partners, L.P., dated November 30, 1995
(Incorporated by reference to Exhibit 10.25.1 to the Company's
Report on Form 10-Q for the quarter ended December 31, 1999.)
10.4.3 Third Amendment dated as of April 13, 2000, to Group Purchasing
Organization Participating Agreement between the Company and
Premier Purchasing Partners, L.P. f/k/a APS Healthcare
Purchasing Partners, L.P., dated November 30, 1995 (Incorporated
by reference to Exhibit 10.25.2 to the Company's Report on Form
10-Q for the quarter ended March 31, 2000.)
10.4.4 Fourth Amendment dated as of June 13, 2000, to Group Purchasing
Organization Participating Agreement between the Company and
Premier Purchasing Partners, L.P. f/k/a APS Healthcare
Purchasing Partners, L.P., dated November 30, 1995
10.5 Lease Agreement by and between QHG of South Carolina, Inc., a
subsidiary of the Company, and C. Edward Floyd, M.D., a Director
of the Company. (Incorporated by reference to Exhibit 10.31 to
the Company's Report on Form 10-K for the year ended June 30,
1996.)
10.6 Contribution Agreement dated as of February 1, 1998, by and
between Valley Hospital Medical System, Inc. and NC-DSH, Inc.
(Incorporated by reference to Exhibit 10.1 to the Company's
Report on Form 10-Q for the quarter ended December 31, 1997.)
</TABLE>
<PAGE> 91
<TABLE>
<S> <C>
10.7 Limited Liability Company Agreement of Valley Health System LLC,
dated as of January 19, 1998. (Incorporated by reference to
Exhibit 10.2 to the Company's Report on Form 10-Q for the
quarter ended December 31, 1997.)
10.8 Contribution Agreement dated as of February 1, 1998, by and
among Summerlin Hospital Medical Center, L.P., UHS Holding
Company, Inc. and NC-DSH, Inc. (Incorporated by reference to
Exhibit 10.3 to the Company's Report on Form 10-Q for the
quarter ended December 31, 1997.)
10.9 Limited Liability Company Agreement of Summerlin Hospital
Medical Center LLC, dated as of January 19, 1998. (Incorporated
by reference to Exhibit 10.4 to the Company's Report on Form
10-Q for the quarter ended December 31, 1997.)
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K. No reports on Form 8-K were filed
during the last quarter of the fiscal year ended June 30, 2000.
</TABLE>
<PAGE> 92
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Brentwood, State of Tennessee on September 24, 1999.
QUORUM HEALTH GROUP, INC.
By: /s/ Terry Allison Rappuhn
------------------------------------------
Terry Allison Rappuhn
Title: Senior Vice President (Chief Financial
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated below:
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C> <C>
/s/ James E. Dalton, Jr. President, Chief Executive Officer and Director Sept. 27, 2000
-------------------------- (Principal Executive Officer)
James E. Dalton, Jr.
/s/ Terry Allison Rappuhn Senior Vice President and Chief Financial Officer Sept. 27, 2000
--------------------------
Terry Allison Rappuhn
/s/ Karen Harrison Vice President-Controller Sept. 27, 2000
-------------------------- (Chief Accounting Officer)
Karen Harrison
/s/ Russell L. Carson Chairman of the Board Sept. 27, 2000
--------------------------
Russell L. Carson
/s/ Sam A. Brooks, Jr. Director Sept. 27, 2000
--------------------------
Sam A. Brooks, Jr.
/s/ Dr. C. Edward Floyd Director Sept. 27, 2000
--------------------------
Dr. C. Edward Floyd
/s/ Joseph C. Hutts Director Sept. 27, 2000
--------------------------
Joseph C. Hutts
/s/ Kenneth J. Melkus Director Sept. 27, 2000
--------------------------
Kenneth J. Melkus
Director Sept. __, 2000
--------------------------
Thomas S. Murphy, Jr.
/s/ Rocco A. Ortenzio Director Sept. 27, 2000
--------------------------
Rocco A. Ortenzio
/s/ S. Douglas Smith Director Sept. 27, 2000
--------------------------
S. Douglas Smith
Director Sept. __, 2000
--------------------------
Colleen Conway Welch
</TABLE>
Sig-1
