<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______ to ______
Commission file number 33-31717-A
QUORUM HEALTH GROUP, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 62-1406040
---------------------- ------------------
(State of incorporation) (I.R.S. Employer
Identification No.)
103 Continental Place, Brentwood, Tennessee 37027
--------------------------------------------------
(Address of principal executive offices) (Zip Code)
(615) 371-7979
--------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at February 6, 1997
- ----- -------------------------------
Common Stock, $.01 Par Value 48,966,421 Shares
- -------------------------------------------------------------------------------
Exhibit Index on Page 20
Page 1 of 21
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended December 31
-----------------------
1996 1995
--------- ---------
(In thousands, except per
share data)
<S> <C> <C>
Revenue:
Net patient service revenue $ 308,806 $ 240,845
Hospital management/professional services 18,821 18,893
Reimbursable expenses 14,510 13,506
--------- --------
Net operating revenue 342,137 273,244
Expenses:
Salaries and benefits 136,455 104,341
Reimbursable expenses 14,510 13,506
Supplies 46,619 40,025
Fees 31,544 27,015
Other operating expenses 27,680 23,117
Provision for doubtful accounts 22,259 13,003
Depreciation and amortization 18,297 14,118
Interest 11,435 9,553
Minority interest (8) 160
--------- ---------
308,791 244,838
--------- ---------
Income before income taxes 33,346 28,406
Provision for income taxes 13,238 11,533
--------- ---------
Net income $ 20,108 $ 16,873
========= =========
Net income per common share:
Primary $ 0.40 $ 0.34
========= =========
Fully diluted $ 0.40 $ 0.34
========= =========
Weighted average shares used in earnings
per share computations:
Primary 50,432 49,562
========= =========
Fully diluted 50,631 49,591
========= =========
</TABLE>
See accompanying notes.
2
<PAGE> 3
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Six Months
Ended December 31
1996 1995
-------- --------
(In thousands, except per
share data)
<S> <C> <C>
Revenue:
Net patient service revenue $590,856 $462,508
Hospital management/professional services 38,192 37,579
Reimbursable expenses 29,090 26,869
-------- --------
Net operating revenue 658,138 526,956
Expenses:
Salaries and benefits 261,886 202,783
Reimbursable expenses 29,090 26,869
Supplies 91,200 78,368
Fees 58,890 51,278
Other operating expenses 54,289 43,907
Provision for doubtful accounts 41,579 25,383
Depreciation and amortization 36,108 27,051
Interest 22,428 17,890
Minority interest 257 475
-------- --------
595,727 474,004
-------- --------
Income before income taxes 62,411 52,952
Provision for income taxes 24,777 21,499
-------- --------
Net income $ 37,634 $ 31,453
======== ========
Net income per common share:
Primary $ 0.75 $ 0.63
======== ========
Fully diluted $ 0.75 $ 0.63
======== ========
Weighted average shares used in earnings
per share computations:
Primary 50,271 49,563
======== ========
Fully diluted 50,372 49,601
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
December 31 June 30
1996 1996
----------- ----------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,547 $ 20,382
Accounts receivable, less allowance for doubtful
accounts of $51,191,954 at December 31, 1996
and $39,752,284 at June 30, 1996 234,280 185,743
Supplies 31,828 27,170
Other 39,693 25,772
---------- ----------
Total current assets 321,348 259,067
Property, plant and equipment:
Land 57,853 53,273
Buildings and improvements 278,739 237,359
Equipment 397,783 362,007
Construction in progress 22,918 17,796
---------- ----------
757,293 670,435
Less accumulated depreciation 151,196 119,740
---------- ----------
606,097 550,695
Cost in excess of net assets acquired 152,877 142,708
Unallocated purchase price 91,176 15,138
Other 64,539 52,953
---------- ----------
Total assets $1,236,037 $1,020,561
========== ==========
</TABLE>
4
<PAGE> 5
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
December 31 June 30
1996 1996
---------- ----------
(In thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 48,295 $ 47,049
Accrued salaries and benefits 65,647 42,694
Deferred revenue 6,002 4,965
Other current liabilities 4,247 1,509
Current maturities of long-term debt 2,821 2,441
---------- ----------
Total current liabilities 127,012 98,658
Long-term debt 558,954 430,877
Deferred income taxes 36,352 33,343
Other liabilities and deferrals 22,617 19,855
Minority interest in consolidated entities 20,112 5,964
Commitments and contingencies -- Note 5
Stockholders' equity:
Common stock, $.01 par value;
100,000,000 shares authorized; 48,833,723
issued and outstanding at December 31,
1996 and 48,645,750 at June 30,1996 488 486
Additional paid-in capital 264,071 262,581
Retained earnings 206,431 168,797
---------- ----------
470,990 431,864
---------- ----------
Total liabilities and stockholders' equity $1,236,037 $1,020,561
========== ==========
</TABLE>
See accompanying notes.
5
<PAGE> 6
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months
Ended December 31
----------------------------
1996 1995
--------- ---------
(In thousands)
<S> <C> <C>
Net cash provided by operating activities $ 72,801 $ 56,752
Cash flows used by investing activities:
Purchase of acquired companies (170,413) (173,565)
Purchase of property, plant and equipment (35,881) (27,070)
Other (1,335) 790
--------- ---------
Net cash used by investing activities (207,629) (199,845)
Cash flows provided by financing activities:
Proceeds from issuance of senior subordinated notes -- 150,000
Borrowings under bank debt 241,000 257,750
Repayments of bank debt (113,000) (256,000)
Proceeds from issuance of notes 4,698 4,053
Repayments of notes (2,866) (2,317)
Proceeds from issuance of common stock, net 1,493 892
Loan origination costs (74) (4,877)
Other (1,258) (380)
--------- ---------
Net cash provided by financing activities 129,993 149,121
--------- ---------
Increase (decrease) in cash and cash equivalents (4,835) 6,028
Cash and cash equivalents at beginning of period 20,382 27,475
--------- ---------
Cash and cash equivalents at end of period $ 15,547 $ 33,503
========= =========
Supplemental cash flow information:
Interest paid $ (21,111) (14,448)
Income taxes paid (23,975) (18,649)
</TABLE>
See accompanying notes.
6
<PAGE> 7
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months and six months ended
December 31, 1996 are not necessarily indicative of the results that may be
expected for the year ending June 30, 1997. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended June 30, 1996. Certain
reclassifications have been made to the fiscal 1996 financial presentation to
conform with fiscal 1997.
2. ACQUISITIONS AND DIVESTITURES
The number of hospitals acquired were four and one for the six months ended
December 31, 1996 and 1995, respectively. Hospital and affiliated business
acquisitions are summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Fair value of assets acquired $205,809 $177,105
Fair value of liabilities assumed (21,675) (3,540)
Contributions from minority investors (13,721) --
-------- --------
Net cash used for acquisitions $170,413 $173,565
======== ========
</TABLE>
All of the foregoing acquisitions were accounted for using the purchase method
of accounting. The allocation of the purchase price associated with certain of
the acquisitions has been determined by the Company based upon available
information and is subject to further refinement. The operating results of the
acquired entities have been included in the accompanying condensed consolidated
statements of income from the respective dates of acquisition.
7
<PAGE> 8
The following unaudited pro forma results of operations give effect to the
operations of the entities acquired and divested in fiscal 1996 and 1997 as if
the respective transactions had occurred at the beginning of the periods
presented. The pro forma results of operations do not purport to represent what
the Company's results of operations would have been had such transactions in
fact occurred at the beginning of the periods presented or to project the
Company's results of operations in any future period.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31 DECEMBER 31
---------------- ----------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net operating revenue $360,852 $326,849 $710,869 $647,984
Net income 19,261 13,867 36,140 27,282
Net income per common share:
Primary .38 .28 .72 .55
Fully diluted .38 .28 .72 .55
</TABLE>
3. NET INCOME PER COMMON SHARE
Net income per common share is based on the weighted average number of shares of
common stock outstanding, and common stock equivalents consisting of dilutive
stock options.
4. INCOME TAXES
The income tax provision recorded for the three months and six months ended
December 31, 1996 and 1995 differs from the expected income tax provision due to
permanent differences and the provision for state income taxes.
5. COMMITMENTS AND CONTINGENCIES
Management continually evaluates contingencies based on the best available
evidence and believes that adequate provision for losses has been provided to
the extent necessary. In the opinion of management, the ultimate resolution of
the following contingencies will not have a material effect on the Company's
results of operations or financial position.
General and Professional Liability Risks
The reserve for the self-insured portion of general and professional liability
risks is included in "Other liabilities and deferrals" and is based on
actuarially determined estimates.
8
<PAGE> 9
Litigation
The Company currently, and from time to time, is expected to be subject to
claims and suits arising in the ordinary course of business.
Net Patient Service Revenue
Final determination of amounts earned under the Medicare and Medicaid programs
often occurs in subsequent years because of audits by the programs, rights of
appeal and the application of numerous technical provisions.
Income Taxes
The Internal Revenue Service (IRS) is in the process of conducting examinations
of the Company's federal income tax returns for the years ended 1993 through
1995. During fiscal 1996, the IRS proposed certain adjustments in connection
with its examination of the Company's federal income tax returns for the fiscal
years ended June 30, 1990 through 1992. The most significant adjustment involves
the amortization deductions claimed on certain acquired intangible assets in
conjunction with the acquisition of Quorum Health Resources, Inc. The Company is
currently protesting all of the proposed adjustments through the appeals process
of the IRS.
Other
In June 1993, the Office of the Inspector General (OIG) of the Department of
Health and Human Services requested information from the Company in connection
with an investigation involving the Company's procedures for preparing Medicare
cost reports. In January 1995, the U.S. Department of Justice issued a Civil
Investigative Demand which also requested information from the Company in
connection with that same investigation. As a part of the government's
investigation, several former and current employees of the Company have been
interviewed. The Company has provided information and is cooperating fully with
the investigation. The Company cannot predict whether the government will
commence litigation regarding this matter.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
IMPACT OF ACQUISITIONS
The Company was formed in July 1989 to acquire a hospital contract
management business established in the mid-1970s. Since that acquisition, the
Company has expanded the scope of its business by acquiring acute care
hospitals. During the six months ended December 31, 1996, the Company acquired
four facilities. During fiscal 1996, the Company acquired two facilities (one
during the six months ended December 31, 1995) and divested one facility.
Because of the financial impact of the Company's recent acquisitions and
divestitures, it is difficult to make meaningful comparisons between the
Company's financial statements for the fiscal periods presented. In addition,
due to the current number of owned hospitals, each additional hospital
acquisition can affect the overall operating margin of the Company. Upon the
acquisition of a hospital, the Company has typically taken a number of immediate
steps, including staffing adjustments, to lower operating costs. The impact of
such actions can be partially offset by cost increases to expand the hospital's
services, strengthen its medical staff and improve its market position. The
benefits of these investments and of other activities to improve operating
margins may not occur immediately. Consequently, the financial performance of an
acquired hospital may adversely affect overall operating margins in the
near-term. As the Company makes additional hospital acquisitions, the Company
expects that this effect will be mitigated by the expanded financial base of
existing hospitals.
SELECTED OPERATING STATISTICS - OWNED HOSPITALS
The following table sets forth certain operating statistics for the
Company's owned hospitals for each of the periods presented. The results of the
owned hospitals for the three months ended December 31, 1996 include three
months of operations for sixteen hospitals and a partial period for two
hospitals acquired during such period. The results of the owned hospitals for
the three months ended December 31, 1995 include three months of operations for
fourteen hospitals. The results of the owned hospitals for the six months ended
December 31, 1996 include six months of operations for fifteen hospitals and a
partial period for three hospitals acquired during such period. The results of
the owned hospitals for the six months ended December 31, 1995 include six
months of operations for thirteen hospitals and a partial period for one
hospital acquired during such period.
10
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
December 31 December 31
----------- -----------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of hospitals at end of period 18 14 18 14
Licensed beds at end of period 4,113 3,298 4,113 3,298
Beds in service at end of period 3,416 2,691 3,416 2,691
Admissions 28,881 23,561 55,621 45,588
Average length of stay (days) 5.5 5.7 5.5 5.8
Patient days 160,043 134,927 307,524 263,478
Adjusted patient days 250,400 204,171 482,022 402,453
Occupancy rates (average licensed beds) 45.6% 44.5% 45.3% 44.3%
Occupancy rates (average beds in service) 55.2% 54.1% 55.1% 53.9%
Gross inpatient revenues (in thousands) $346,075 $273,180 $667,807 $528,040
Gross outpatient revenues (in thousands) $195,378 $140,275 $378,933 $278,522
</TABLE>
RESULTS OF OPERATIONS
The table below reflects the percentage of net operating revenue
represented by various categories in the Condensed Consolidated Statements of
Income and the percentage change in the related dollar amounts. The results of
operations for the periods presented include hospitals from their acquisition
dates as discussed above.
<TABLE>
<CAPTION>
Three Months Percentage
Ended Increase
December 31 (Decrease) of
-------------------- Dollar
1996 1995 Amounts
---- ---- ------------
<S> <C> <C> <C>
Net operating revenue 100.0% 100.0% 25.2%
Operating expenses (1) 81.6 80.9 26.3
----- ----- ----
EBITDA (2) 18.4 19.1 20.7
Depreciation and amortization 5.3 5.2 29.6
Interest expense 3.3 3.5 19.7
Minority expense 0.0 0.0 0.0
----- ----- ----
Income before income taxes 9.8 10.4 17.4
Provision for income taxes 3.9 4.2 14.8
----- ----- ----
Net income 5.9% 6.2% 19.2%
===== ===== ====
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
Six Months Percentage
Ended Increase
December 31 (Decrease) of
-------------------- Dollar
1996 1995 Amounts
---- ---- ------------
<S> <C> <C> <C>
Net operating revenue 100.0% 100.0% 24.9%
Operating expenses (1) 81.6 81.3 25.3
----- ----- ----
EBITDA (2) 18.4 18.7 23.2
Depreciation and amortization 5.5 5.1 33.5
Interest expense 3.4 3.4 25.4
Minority expense 0.0 0.1 (45.9)
----- ----- ----
Income before income taxes 9.5 10.1 17.9
Provision for income taxes 3.8 4.1 15.2
----- ----- ----
Net income 5.7% 6.0% 19.7%
===== ===== ====
</TABLE>
- --------------------
(1) Operating expenses represent expenses before interest, minority interest,
income taxes, depreciation and amortization expense.
(2) EBITDA represents earnings before interest, minority interest, income taxes,
depreciation and amortization expense. The Company has included EBITDA data
because such data is used by certain investors to measure a company's ability to
service debt. EBITDA is not a measure of financial performance under generally
accepted accounting principles and should not be considered an alternative to
net income as a measure of operating performance or to cash flows from operating
activities as a measure of liquidity.
Three Months Ended December 31, 1996 Compared to Three Months Ended
December 31, 1995
The Company's net operating revenue was $342.1 million for the three months
ended December 31, 1996, compared to $273.2 million for the comparable period of
fiscal 1996, an increase of $68.9 million or 25%. This increase was attributable
to, among other things, five hospital acquisitions, an 11% increase in revenue
generated by hospitals owned during both periods (calculated by comparing the
same periods in both fiscal periods for hospitals owned for one year or more)
and a 3% increase in management services revenue. The Company's owned hospitals
accounted for 90% of the Company's net operating revenue for the three months
ended December 31, 1996 compared to 88% for the three months ended December 31,
1995.
Operating expenses as a percent of net operating revenue increased to 81.6%
for the three months ended December 31, 1996 from 80.9% for the
12
<PAGE> 13
three months ended December 31, 1995 which was primarily attributable to the
fiscal 1997 acquisitions of owned hospitals. Operating expenses as a percentage
of net operating revenue for the Company's owned hospitals increased to 82.0%
for the three months ended December 31, 1996 from 81.7% for the three months
ended December 31, 1995. For the Company's hospitals owned during both periods,
operating expenses as a percentage of net operating revenue decreased to 80.1%
for the three months ended December 31, 1996 from 81.5% for the three months
ended December 31, 1995 which was primarily attributable to a reduction in
salaries and benefits, fees and supplies expense as a percent of net operating
revenue.
EBITDA as a percent of net operating revenue was 18.4% for the three months
ended December 31, 1996 compared to 19.1% for the three months ended December
31, 1995. EBITDA as a percent of net operating revenue for the Company's owned
hospitals was 18.0% for the three months ended December 31, 1996 compared to
18.3% for the three months ended December 31, 1995. EBITDA as a percent of net
operating revenue for the Company's hospitals owned during both periods was
19.9% for the three months ended December 31, 1996 compared to 18.5% for the
three months ended December 31, 1995. EBITDA as a percent of net operating
revenue for the Company's management services business was 22.1% for the three
months ended December 31, 1996 compared to 25.4% for the three months ended
December 31, 1995 which was primarily attributable to the costs of new services.
Depreciation and amortization expense as a percent of net operating revenue
increased to 5.3% for the three months ended December 31, 1996 from 5.2% for the
three months ended December 31, 1995 primarily due to the fiscal 1996 and 1997
acquisitions and the Company's investment in management information systems.
Interest expense as a percent of net operating revenue decreased to 3.3% for the
three months ended December 31, 1996 from 3.5% for the three months ended
December 31, 1995 due to a reduction in interest rates and repayments of bank
debt with cash flow generated from operations. The provision for income taxes as
a percent of net operating revenue decreased to 3.9% for the three months ended
December 31, 1996 from 4.2% for the three months ended December 31, 1995 which
is primarily attributable to a lower effective tax rate and a relative change in
pretax income.
Net income as a percent of net operating revenue was 5.9% for the three
months ended December 31, 1996 compared to 6.2% for the three months ended
December 31, 1995. This decrease was primarily attributable to the fiscal 1997
acquisitions which was partially offset by the increased profitability of the
Company's hospitals owned during both periods, as discussed above.
13
<PAGE> 14
Six Months Ended December 31, 1996 Compared to Six Months Ended December
31, 1995
The Company's net operating revenue was $658.1 million for the six months
ended December 31, 1996 compared to $527.0 million for the comparable period of
fiscal 1996, an increase of $131.1 million or 25%. This increase was
attributable to, among other things, five hospital acquisitions, a full six
months of revenue from one hospital acquired during fiscal 1996, a 10% increase
in revenue generated by hospitals owned during both periods and a 4% increase in
management services revenue. The Company's owned hospitals accounted for 90% of
the Company's net operating revenue for the six months ended December 31, 1996
compared to 88% for the six months ended December 31, 1995.
Operating expenses as a percent of net operating revenue increased to 81.6%
for the six months ended December 31, 1996 from 81.3% for the six months ended
December 31, 1995. Operating expenses as a percentage of net operating revenue
for the Company's owned hospitals decreased to 81.9% for the six months ended
December 31, 1996 from 82.2% for the six months ended December 31, 1995.
Operating expenses as a percentage of net operating revenue for the Company's
hospitals owned during both periods decreased to 80.6% for the six months ended
December 31, 1996 from 82.0% for the six months ended December 31,1995 which was
primarily attributable to a reduction in salaries and benefits, fees and
supplies expense as a percent of net operating revenue.
EBITDA as a percent of net operating revenue was 18.4% for the six months
ended December 31, 1996 compared to 18.7% for the six months ended December 31,
1995. EBITDA as a percent of net operating revenue for the Company's owned
hospitals was 18.1% for the six months ended December 31, 1996 compared to 17.8%
for the six months ended December 31, 1995. EBITDA as a percent of net operating
revenue for the Company's hospitals owned during both periods was 19.4% for the
three months ended December 31, 1996 compared to 18.0% for the three months
ended December 31, 1995. EBITDA as a percent of net operating revenue for the
Company's management services business was 21.3% for the six months ended
December 31, 1996 compared to 25.2% for the six months ended December 31, 1995
which was primarily attributable to the costs of new services.
Depreciation and amortization expense as a percent of net operating revenue
increased to 5.5% for the six months ended December 31, 1996 from 5.1% for the
six months ended December 31, 1995 primarily due to the fiscal 1996 and 1997
acquisitions and the Company's investment in management information systems.
Interest expense as a percent of net operating revenue was 3.4% for the six
months ended December 31, 1996 and 1995. The provision for income taxes as a
percent of net operating revenue decreased to 3.8% for the three months ended
December 31, 1996 from 4.1% for the six months ended December 31, 1995 which is
primarily attributable to a lower effective tax rate and a relative change in
14
<PAGE> 15
pretax income.
Net income as a percent of net operating revenue was 5.7% for the six
months ended December 31, 1996 compared to 6.0% for the six months ended
December 31, 1995. This decrease was primarily attributable to the fiscal 1997
acquisitions which was partially offset by the increased profitability of the
Company's hospitals owned during both periods, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had working capital of $194.3 million,
including cash and cash equivalents of $15.5 million. The ratio of current
assets to current liabilities was 2.5 to 1.0 at December 31, 1996 compared to
2.6 to 1.0 at June 30, 1996.
The Company's cash requirements excluding acquisitions have historically
been funded by cash generated from operations. Cash generated from operations
was $72.8 million and $56.8 million for the six months ended December 31, 1996
and 1995, respectively. The increase is primarily due to the fiscal 1996 and
1997 acquisitions.
Capital expenditures excluding acquisitions for the six months ended
December 31, 1996 and 1995 were $35.9 million and $27.1 million, respectively.
The management services business does not require significant capital
expenditures. Capital expenditures for owned hospitals may vary from year to
year depending on facility improvements and service enhancements undertaken by
the hospitals. The Company anticipates construction of a replacement hospital in
Florence, South Carolina with fiscal 1997 capital expenditures of up to $25
million and a total project cost of $75 million to $80 million plus capitalized
interest. In fiscal 1997, the Company expects to make capital expenditures from
$75 million to $85 million, excluding acquisitions and the replacement hospital.
The Company intends to acquire additional acute care facilities, and the
Company is actively seeking out such acquisitions. There can be no assurance
that the Company will not require additional debt or equity financing for any
particular acquisition. Also, the Company continually reviews its capital needs
and financing opportunities and may seek additional equity or debt financing for
its acquisition program or other needs. At December 31, 1996, the Company had
$295.0 million available under its Revolving Line of Credit.
During the six months ended December 31, 1996, the Company acquired four
hospitals and affiliated businesses for approximately $170.4 million. During
fiscal 1996, the Company acquired two hospitals and affiliated businesses for
approximately $205.3 million. Also, during fiscal 1996, the Company sold certain
assets and the business of one hospital and a minority interest in another
hospital.
15
<PAGE> 16
The Internal Revenue Service (IRS) is in the process of conducting
examinations of the Company's federal income tax returns for the years ended
1993 through 1995. During fiscal 1996, the IRS proposed certain adjustments in
connection with its examination of the Company's federal income tax returns for
the fiscal years ended June 30, 1990 through 1992. The most significant
adjustment involves the amortization deductions claimed on certain acquired
intangible assets in conjunction with the acquisition of Quorum Health
Resources, Inc. The Company is currently protesting all of the proposed
adjustments through the appeals process of the IRS and does not expect the
resolution of this contingency to materially affect the Company's results of
operations or financial position.
In June 1993, the OIG of the Department of Health and Human Services
requested information from the Company in connection with an investigation
involving the Company's procedures for preparing Medicare cost reports. In
January 1995, the U.S. Department of Justice issued a Civil Investigative Demand
which also requested information from the Company in connection with that same
investigation. As a part of the government's investigation, several former and
current employees of the Company have been interviewed. The Company has provided
information and is cooperating fully with the investigation. The Company cannot
predict whether the government will commence litigation regarding this matter.
Management believes that any claims likely to be asserted by the government as a
result of its investigation would not have a material effect on the Company's
results of operations or financial position.
INDUSTRY TRENDS
The Company's owned hospitals derive a substantial portion of their revenue
from the federal Medicare program and the state Medicaid programs. The payment
rates under the Medicare program for inpatients are prospective, based upon the
diagnosis of a patient. While these rates are indexed for inflation annually,
the increases have historically been less than actual inflation.
Both federal and state legislators are continuing to scrutinize the health
care industry for the purpose of reducing health care costs. The Company is
unable to predict what, if any, future health reform legislation may be enacted
at the federal or state level. Changes in the Medicare or Medicaid programs and
other proposals to limit health care spending could have an adverse impact upon
the health care industry and the Company.
In addition, states, insurance companies and employers are actively
negotiating the amounts paid to hospitals, which are typically lower than their
standard rates. The trend toward managed care, including health maintenance
organizations, preferred provider organizations and various other forms of
managed care, may affect hospitals' ability to
16
<PAGE> 17
maintain their current rate of net revenue growth and operating margins.
The Company expects the industry trend from inpatient to outpatient
services to continue due to the increased focus on managed care and advances in
technology. Outpatient revenue of the Company's owned hospitals was
approximately 36.2% and 34.5% of gross patient service revenue for the six
months ended December 31, 1996 and 1995, respectively.
INFLATION
The health care industry is labor intensive. Wages and other expenses
increase during periods of inflation and when shortages in marketplaces occur.
In addition, suppliers pass along rising costs to the Company in the form of
higher prices. The Company has generally been able to offset increases in
operating costs by increasing charges, expanding services, and implementing cost
control measures to curb increases in operating costs and expenses. The Company
cannot predict its ability to offset or control future cost increases.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 20, 1996, the annual meeting of the stockholders of the Company
was held to elect directors to hold office until the next annual meeting and to
ratify the selection of the Company's independent auditors.
The following were elected to serve as directors until the next annual
meeting of the stockholders:
<TABLE>
<CAPTION>
Name For Against Abstain
- ---- --- ------- -------
<S> <C> <C> <C>
Jack O. Bovender 42,076,101 43,259
Sam A. Brooks, Jr. 42,076,556 42,804
Russell L. Carson 42,076,599 42,761
James E. Dalton, Jr. 42,076,276 43,084
C. Edward Floyd, M.D. 42,047,488 71,872
Joseph C. Hutts 42,066,865 52,495
Kenneth J. Melkus 42,076,458 42,902
Thomas J. Murphy, Jr. 42,076,599 42,761
Rocco A. Ortenzio 42,037,518 81,842
S. Douglas Smith 42,068,257 51,103
</TABLE>
The accounting firm of Ernst & Young was ratified as the Company's
independent auditors for the 1997 fiscal year, with 42,050,954 shares voted for
ratification and 56,907 shares voted against; 11,499 shares abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits filed as part of this Report are listed in the
Index to Exhibits immediately following the signature page.
(b) Reports on Form 8-K. A report on Form 8-K was filed with the Commission
on December 17, 1996, to inform the Market of the acquisition of Barberton
Citizens Hospital, an acute care hospital located in Barberton, Ohio. A
previously released press announcement of the acquisition was filed in
connection with the report.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUORUM HEALTH GROUP, INC.
(Registrant)
Date: February 11, 1997 By: /s/ Steve B. Hewett
-------------------
Steve B. Hewett
Vice President and Treasurer
(Chief Financial Officer)
19
<PAGE> 20
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Page
- ----------- ----
<S> <C> <C>
11 Computation of Earnings Per Share 21
27 Financial Data Schedule (for SEC use only)
</TABLE>
20
<PAGE> 1
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31 Ended December 31
-------------------- --------------------
1996 1995 1996 1995
------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 48,766 47,927 48,731 47,884
Net effect of dilutive stock options based
on the treasury stock method using
average market price 1,666 1,635 1,540 1,679
------- ------- ------- -------
Totals 50,432 49,562 50,271 49,563
======= ======= ======= =======
Net income $20,108 $16,873 $37,634 $31,453
======= ======= ======= =======
Net income per common share $ 0.40 $ 0.34 $ 0.75 $ 0.63
======= ======= ======= =======
FULLY DILUTED
Average shares outstanding 48,766 47,927 48,731 47,884
Net effect of dilutive stock options based
on the treasury stock method using
the higher of ending or average market
price 1,865 1,664 1,641 1,717
------- ------- ------- -------
Totals 50,631 49,591 50,372 49,601
======= ======= ======= =======
Net income $20,108 $16,873 $37,634 $31,453
======= ======= ======= =======
Net income per common share $ 0.40 $ 0.34 $ 0.75 $ 0.63
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED DECEMBER
31, 1996 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 15,547
<SECURITIES> 0
<RECEIVABLES> 285,472
<ALLOWANCES> 51,192
<INVENTORY> 31,828
<CURRENT-ASSETS> 321,348
<PP&E> 757,293
<DEPRECIATION> 151,196
<TOTAL-ASSETS> 1,236,037
<CURRENT-LIABILITIES> 127,012
<BONDS> 558,954
0
0
<COMMON> 488
<OTHER-SE> 470,502
<TOTAL-LIABILITY-AND-EQUITY> 1,236,037
<SALES> 0
<TOTAL-REVENUES> 658,138
<CGS> 0
<TOTAL-COSTS> 495,355
<OTHER-EXPENSES> 36,365
<LOSS-PROVISION> 41,579
<INTEREST-EXPENSE> 22,428
<INCOME-PRETAX> 62,411
<INCOME-TAX> 24,777
<INCOME-CONTINUING> 37,634
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,634
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.75
</TABLE>
