<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
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)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 62-1406040
(State of incorporation) (IRS Employer Identification No.)
</TABLE>
103 CONTINENTAL PLACE, BRENTWOOD, TENNESSEE 37027
(Address of principal executive offices) (Zip Code)
(615) 371-7979
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 6, 1997
- ----- -------------------------------
Common Stock, $.01 Par Value 74,420,145 Shares
- ------------------------------------------------------------------------------
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30
------------------------------------
1997 1996
-------- -------
<S> <C> <C>
Revenue:
Net patient service revenue $357,117 $282,050
Hospital management/professional services 19,695 19,371
Reimbursable expenses 16,009 14,580
-------- --------
Net operating revenue 392,821 316,001
Expenses:
Salaries and benefits 155,597 125,431
Reimbursable expenses 16,009 14,580
Supplies 54,673 44,581
Fees 34,387 27,346
Other operating expenses 33,276 26,609
Provision for doubtful accounts 30,411 19,320
Depreciation and amortization 21,529 17,811
Interest 10,370 10,993
Minority interest 1,144 265
-------- --------
357,396 286,936
-------- --------
Income before income taxes 35,425 29,065
Provision for income taxes 14,064 11,539
-------- --------
Net income $ 21,361 $ 17,526
======== ========
Net income per common share $ 0.28 $ 0.23
======== ========
Weighted average common shares 77,038 75,164
======== ========
</TABLE>
See accompanying notes.
2
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30
1997 1997
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,418 $ 19,008
Accounts receivable, less allowance for doubtful
accounts of $70,491 at September 30, 1997
and $55,360 at June 30, 1997 276,603 248,732
Supplies 33,796 31,622
Other 49,517 31,739
---------- ----------
Total current assets 375,334 331,101
Property, plant and equipment, at cost:
Land 62,513 62,109
Buildings and improvements 326,554 324,450
Equipment 473,295 462,726
Construction in progress 32,297 21,192
---------- ----------
894,659 870,477
Less accumulated depreciation 200,512 183,705
---------- ----------
694,147 686,772
Cost in excess of net assets acquired, net 188,746 185,932
Unallocated purchase price 71,906 7,831
Other 71,369 67,355
---------- ----------
Total assets $1,401,502 $1,278,991
========== ==========
</TABLE>
3
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30
1997 1997
------------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 90,175 $ 77,225
Accrued salaries and benefits 67,412 61,936
Other current liabilities 12,121 9,589
Current maturities of long-term debt 1,889 1,869
---------- ----------
Total current liabilities 171,597 150,619
Long-term debt, less current maturities 602,878 519,940
Deferred income taxes 30,702 38,249
Other liabilities and deferrals 27,575 25,450
Minority interests in consolidated entities 27,701 26,618
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value;
100,000 shares authorized; 74,282
issued and outstanding at September 30,
1997 and 74,137 at June 30, 1997 743 741
Additional paid-in capital 274,262 272,692
Retained earnings 266,044 244,682
---------- ----------
541,049 518,115
---------- ----------
Total liabilities and stockholders' equity $1,401,502 $1,278,991
========== ==========
</TABLE>
See accompanying notes.
4
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30
-----------------------------------
1997 1996
----------- ----------
<S> <C> <C>
Net cash provided by operating activities $ 31,315 $ 38,350
Investing activities:
Purchase of acquired companies (81,879) (71,947)
Purchase of property, plant and equipment (31,634) (20,523)
Other (5,522) (837)
--------- ---------
Net cash used in investing activities (119,035) (93,307)
Financing activities:
Borrowings under bank debt 173,300 101,000
Repayments of bank debt (90,200) (44,000)
Other 1,030 3,554
--------- ---------
Net cash provided by financing activities 84,130 60,554
--------- ---------
Increase (decrease) in cash and cash equivalents (3,590) 5,597
Cash and cash equivalents at beginning of period 19,008 20,382
--------- ---------
Cash and cash equivalents at end of period $ 15,418 $ 25,979
========= =========
Supplemental cash flow information:
Interest paid $ (6,754) $ (3,763)
========= =========
Income taxes paid (13,027) (1,798)
========= =========
</TABLE>
See accompanying notes.
5
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
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 ended September
30, 1997, are not necessarily indicative of the results that may be
expected for the year ending June 30, 1998. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year
ended June 30, 1997. Certain reclassifications have been made to the
fiscal 1997 financial presentation to conform with fiscal 1998.
2. NEWLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS) No. 128,
"Earnings per Share," which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating basic earnings per
share, the dilutive effect of stock options will be excluded. Basic
earnings per share for the quarter ended September 30, 1997 and
September 30, 1996 will be $.01 per share more than primary earnings
per share. The amount of dilutive earnings per share will be the same
as the amount of fully diluted earnings per share for all periods.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes
reporting standards for operating segment information disclosed in
annual financial statements and in interim financial reports issued to
shareholders. Under existing accounting standards, the Company has
reported its operations as one line of business since its inception
because substantially all of its revenues and operating profits have
been derived from its acute care hospitals, affiliated health care
entities and health care management services. The Company will adopt
SFAS No. 131 beginning with its fiscal year ending June 30, 1999 and
is presently evaluating the new standard in order to determine its
effect, if any, on the way the Company might report its operations in
the future.
3. STOCK SPLIT
On August 19, 1997, the Board of Directors approved a three-for-two
stock split effected in the form
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of a stock dividend payable on or about September 16, 1997 to
shareholders of record on September 2, 1997. The shares of common
stock, price per share, the number of shares subject to options and
the exercise prices have been retroactively restated to give effect to
the stock dividend for all periods presented.
4. ACQUISITIONS AND DIVESTITURES
During the three months ended September 30, 1997, the Company acquired
one hospital and affiliated health care entities. During the three
months ended September 30, 1996, the Company acquired two hospitals
and affiliated health care entities. Hospital and affiliated business
acquisitions are summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30
------------
1997 1996
---- ----
<S> <C> <C>
Fair value of assets acquired $ 86,833 $ 90,280
Fair value of liabilities assumed (4,954) (9,569)
Contributions from minority investors -- (8,764)
-------- --------
Net cash used for acquisitions $ 81,879 $ 71,947
======== ========
</TABLE>
All of the foregoing acquisitions were accounted for using the
purchase method of accounting. The allocation of the purchase price
associated with certain of the acquisitions has been determined by the
Company based upon available information and is subject to further
refinement. The operating results of the acquired entities have been
included in the accompanying condensed consolidated statements of
income from the respective dates of acquisition.
The following unaudited pro forma results of operations give effect to
the operations of the entities acquired in fiscal 1998 and 1997 as if
the respective transactions had occurred at the beginning of the
periods presented (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30
------------
1997 1996
---- ----
<S> <C> <C>
Net operating revenue $407,576 $373,640
Net income 20,784 16,659
Net income per common share .27 .22
</TABLE>
7
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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.
On September 25, 1997, the Company signed a letter of intent to form a
joint venture with Universal Health Services, Inc. (UHS) to combine
UHS's Valley Hospital and Summerlin Hospital with the Company's Desert
Springs Hospital. The combined company will operate as a limited
partnership, with UHS as the managing general partner with a 64
percent equity interest and the Company as the limited partner holding
a 36 percent equity interest. The proposed transaction is subject to
the completion of customary closing conditions and obtaining certain
regulatory approvals.
5. 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.
6. INCOME TAXES
The income tax provision recorded for the three months ended September
30, 1997 and 1996 differs from the expected income tax provision due
to permanent differences and the provision for state income taxes.
7. 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.
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
8
<PAGE> 9
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.
Financial Instruments
Interest rate swap agreements are used on a limited basis to manage
the Company's interest rate exposure. The agreements are contracts to
periodically exchange fixed and floating interest rate payments over
the life of the agreements. The floating-rate payments are based on
LIBOR and fixed-rate payments are dependent upon market levels at the
time the swap agreement was consummated. In fiscal 1997, the Company
amended its 1993 interest rate swap agreements to effectively convert
two borrowings of $50 million each from fixed-rate to floating-rate
through September 16, 2001 and December 1, 2001. In addition, the
Company entered into interest rate swap agreements which effectively
convert $100 million and $200 million of floating-rate borrowings to
fixed-rate borrowings through December 12, 2001 and March 20, 2002,
respectively. For the three months ended September 30, 1997 and 1996,
the Company received a weighted average rate of 5.8%, and paid a
weighted average rate of 6.1% and 5.2%, respectively.
Other
In June 1993, the Office of the Inspector General (OIG) of the
Department of Health and Human Services requested information from the
Company in connection with an investigation involving the 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.
8. SUBSEQUENT EVENTS
On October 31, 1997, the Company sold its remaining interest in an
acute care hospital in Papillion, Nebraska.
On November 10, 1997, the Company's stockholders approved an amendment
to increase the number of authorized shares of common stock from
100,000,000 to 300,000,000. The additional shares of common stock are
identical to the shares of common stock previously authorized.
On November 10, 1997, the Company's stockholders approved an amendment
to the Company's qualified employee stock purchase plan to increase
the number of shares reserved for issuance from 3,000,000 to
3,750,000.
9
<PAGE> 10
On November 10, 1997, the Company's stockholders approved the 1997
Stock Option Plan. Under the plan, non-qualified and incentive stock
options to purchase common stock may be granted to executive officers,
other key employees and consultants. Stock options are generally
granted at an exercise price equal to the fair market value at the
date of grant and are exercisable over a period not to exceed ten
years. The number of shares initially reserved for issuance was
3,000,000. No further options will be granted pursuant to the
Company's Restated Stock Option Plan.
10
<PAGE> 11
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. On September 25, 1997, the Company
signed a letter of intent to form a joint venture with Universal
Health Services, Inc. (UHS) to combine UHS's Valley Hospital and
Summerlin Hospital and the Company's Desert Springs Hospital with the
Company owning a 36 percent limited partnership interest. The proposed
transaction is subject to the completion of customary closing
conditions and obtaining certain regulatory approvals. During the
three months ended September 30, 1997, the Company acquired one
hospital and affiliated health care entities. During fiscal 1997, the
Company acquired five hospitals and affiliated health care entities
(two during the three months ended September 30, 1996).
Because of the financial impact of the Company's recent
acquisitions and divestitures, it is difficult to make meaningful
comparisons between the Company's financial statements for the fiscal
periods presented. In addition, due to the current number of owned
hospitals, each additional hospital acquisition can affect the overall
operating margin of the Company. During a one to three year transition
period after the acquisition of a hospital, the Company has typically
taken a number of steps to lower operating costs. The impact of such
actions can be partially offset by cost increases to expand the
hospital's services, strengthen its medical staff and improve its
market position. The benefits of these investments and of other
activities to improve operating margins may not occur immediately.
Consequently, the financial performance of an acquired hospital may
adversely affect overall operating margins in the near-term. As the
Company makes additional hospital acquisitions, the Company expects
that this effect will be mitigated by the expanded financial base of
existing hospitals.
SELECTED OPERATING STATISTICS - OWNED HOSPITALS
The following table sets forth certain operating statistics
for the Company's owned hospitals for each of the periods presented.
The results of the owned hospitals for the three months ended
September 30, 1997 include three months of operations for nineteen
hospitals and a partial period for one hospital acquired during such
period. The results of the owned hospitals for the three months ended
September 30, 1996 include three months of operations for fifteen
hospitals and a partial period for one hospital acquired during such
period.
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<TABLE>
<CAPTION>
Three Months
Ended
September 30
------------
1997 1996
---- ----
<S> <C> <C>
Number of hospitals at end of period 20 16
Licensed beds at end of period 4,410 3,585
Beds in service at end of period 3,656 2,939
Admissions 32,066 26,740
Average length of stay (days) 5.5 5.5
Patient days 176,030 147,481
Adjusted patient days 291,182 231,622
Occupancy rates (average licensed beds) 44.8% 45.0%
Occupancy rates (average beds in service) 54.2% 55.0%
Gross inpatient revenues (in thousands) $389,614 $321,732
Gross outpatient revenues (in thousands) $254,870 $183,555
</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>
Percentage
Three Months Increase
Ended (Decrease)
September 30 of Dollar
------------ Amounts
1997 1996 ----------
---- ----
<S> <C> <C> <C>
Net operating revenue 100.0% 100.0% 24.3%
Operating expenses (1) 82.6 81.6 25.8
----- ----- -----
EBITDA (2) 17.4 18.4 17.8
Depreciation and amortization 5.5 5.6 20.9
Interest 2.6 3.5 (5.7)
Minority interest .3 .1 331.7
----- ----- -----
Income before income taxes 9.0 9.2 21.9
Provision for income taxes 3.6 3.7 21.9
----- ----- -----
Net income 5.4% 5.5% 21.9%
===== ===== =====
</TABLE>
- --------------------
(1) Operating expenses represent expenses before interest, minority
interest, income taxes, depreciation and amortization expense.
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(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 September 30, 1997 Compared to Three Months Ended
September 30, 1996
The Company's net operating revenue was $392.8 million for
the three months ended September 30, 1997, compared to $316.0 million
for the comparable period of fiscal 1996, an increase of $76.8 million
or 24%. This increase was attributable to, among other things, five
hospital acquisitions, a 10% 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 5% increase in management services revenue.
Operating expenses as a percent of net operating revenue
increased to 82.6% for the three months ended September 30, 1997 from
81.6% for the three months ended September 30, 1996 which was
primarily attributable to the fiscal 1997 and 1998 acquisitions of
owned hospitals. Operating expenses as a percentage of net operating
revenue for the Company's owned hospitals increased to 83.1% for the
three months ended September 30, 1997 from 81.8% for the three months
ended September 30, 1996. For the Company's hospitals owned during
both periods, operating expenses as a percentage of net operating
revenue increased to 82.4% for the three months ended September 30,
1997 from 82.2% for the three months ended September 30, 1996, which
was primarily attributable to an increase in bad debt expense.
EBITDA as a percent of net operating revenue was 17.4% for
the three months ended September 30, 1997 compared to 18.4% for the
three months ended September 30, 1996. EBITDA as a percent of net
operating revenue for the Company's owned hospitals was 16.9% for the
three months ended September 30, 1997 compared to 18.2% for the three
months ended September 30, 1996. EBITDA as a percent of net operating
revenue for the Company's hospitals owned during both periods was
17.6% for the three months ended September 30, 1997 compared to 17.8%
for the three months ended September 30, 1996. EBITDA as a percent of
net operating revenue for the Company's management services business
was 22.4% for the three months ended September 30, 1997 compared to
20.4% for the three months ended September 30, 1996.
Depreciation and amortization expense as a percent of net
operating revenue decreased to 5.5% for the three months ended
September 30, 1997
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from 5.6% for the three months ended September 30, 1996. Interest
expense as a percent of net operating revenue decreased to 2.6% for
the three months ended September 30, 1997 from 3.5% for the three
months ended September 30, 1996 due to the replacement of subordinated
debt with bank debt in fiscal 1997 and 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 3.6% for the three months ended September 30, 1997 from
3.7% for the three months ended September 30, 1996 which was primarily
attributable to a relative change in pretax income. Minority interest
expense as a percent of net operating revenue increased to .3% for the
three months ended September 30, 1997 from .1% for the three months
ended September 30, 1996 which was primarily attributable to the sale
of a minority interest at one hospital and the fiscal 1997
acquisitions.
Net income as a percent of net operating revenue was 5.4% for
the three months ended September 30, 1997 compared to 5.5% for the
three months ended September 30, 1996. This decrease was primarily
attributable to the fiscal 1997 and 1998 acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had working capital of
$203.7 million, including cash and cash equivalents of $15.4 million.
The ratio of current assets to current liabilities was 2.2 to 1.0 at
September 30, 1997 and June 30, 1997.
The Company's cash requirements excluding acquisitions have
historically been funded by cash generated from operations. Cash
generated from operations was $31.3 million and $38.4 million for the
three months ended September 30, 1997 and 1996, respectively. The
decrease is primarily due to income tax payments.
Capital expenditures excluding acquisitions for the three
months ended September 30, 1997 and 1996 were $31.6 million and $20.5
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 has begun construction of a replacement hospital in Florence,
South Carolina with fiscal 1998 capital expenditures of up to $60
million and a total project cost of approximately $85 million. In
fiscal 1998, the Company expects to make capital expenditures from
$130 million to $150 million, including the replacement hospital and
excluding acquisitions.
During the three months ended September 30, 1997, the Company
acquired one hospital and affiliated health care entities for
approximately $81.9 million. During fiscal 1997, the Company acquired
five hospitals and affiliated health care entities for approximately
$184.6 million. The Company also sold a minority interest in an acute
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<PAGE> 15
care hospital in Papillion, Nebraska in fiscal 1997 and sold its
remaining interests on October 31, 1997.
On September 25, 1997, the Company signed a letter of intent
to form a joint venture with UHS to combine UHS's Valley Hospital and
Summerlin Hospital with the Company's Desert Springs Hospital. The
combined company will operate as a limited partnership, with UHS as
the managing general partner with a 64 percent equity interest and the
Company as the limited partner holding a 36 percent equity interest.
The proposed transaction is subject to the completion of customary
closing conditions and obtaining certain regulatory approvals.
The Company intends to acquire additional acute care
facilities, and 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 September 30, 1997, the Company had $447.0
million outstanding under its Revolving Line of Credit.
On August 19, 1997, the Board of Directors approved a
three-for-two stock split effected in the form of a stock dividend
payable on or about September 16, 1997 to shareholders of record on
September 2, 1997. The shares of common stock, price per share, the
number of shares subject to options and the exercise prices have been
retroactively restated to give effect to the stock dividend for all
periods presented.
On November 10, 1997, the Company's stockholders approved an
amendment to increase the number of authorized shares of common stock
from 100,000,000 to 300,000,000. The additional shares of common stock
are identical to the shares of common stock previously authorized.
On November 10, 1997, the Company's stockholders approved an
amendment to the Company's qualified employee stock purchase plan to
increase the number of shares reserved for issuance from 3,000,000 to
3,750,000.
On November 10, 1997, the Company's stockholders approved the
1997 Stock Option Plan. Under the plan, non-qualified and incentive
stock options to purchase common stock may be granted to executive
officers, other key employees and consultants. Stock options are
generally granted at an exercise price equal to the fair market value
at the date of grant and are exercisable over a period not to exceed
ten years. The number of shares initially reserved for issuance was
3,000,000. No further options will be granted pursuant to the
Company's Restated Stock Option Plan.
The Internal Revenue Service (IRS) is in the process of
conducting examinations of the Company's federal income tax returns
for the years
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<PAGE> 16
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.
Interest rate swap agreements are used on a limited basis to
manage the Company's interest rate exposure. The agreements are
contracts to periodically exchange fixed and floating interest rate
payments over the life of the agreements. The floating-rate payments
are based on LIBOR and fixed-rate payments are dependent upon market
levels at the time the swap agreement is consummated. During fiscal
year 1997, the Company amended its 1993 interest rate swap agreements
to effectively convert two borrowings of $50 million each from
fixed-rate to floating-rate through September 16, 2001 and December 1,
2001. In addition, the Company entered into interest rate swap
agreements which effectively convert $100 million and $200 million of
floating-rate borrowings to fixed-rate borrowings through December 12,
2001 and March 20, 2002, respectively. For the three months ended
September 30, 1997 and 1996, the Company received a weighted average
rate of 5.8% and paid a weighted average rate of 6.1% and 5.2%,
respectively.
In June 1993, the OIG of the Department of Health and Human
Services requested information from the Company in connection with an
investigation involving the Company's procedures for preparing
Medicare cost reports. In January 1995, the U.S. Department of Justice
issued a Civil Investigative Demand which also requested information
from the Company in connection with that same investigation. As a part
of the government's investigation, several former and current
employees of the Company have been interviewed. The Company has
provided information and is cooperating fully with the investigation.
The Company cannot predict whether the government will commence
litigation regarding this matter. Management believes that any claims
likely to be asserted by the government as a result of its
investigation would not have a material effect on the Company's
results of operations or financial position.
In February 1997, the FASB issued SFAS No. 128, "Earnings per
Share," which is required to be adopted on December 31, 1997. At that
time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under
the new requirements for calculating basic earnings per share, the
dilutive effect of stock options will be excluded. Basic earnings per
share for the first quarter ended September 30, 1997 and September 30,
1996 will be $.01 per share more than primary earnings per share. The
amount of dilutive earnings per share will be the same as the amount
of
16
<PAGE> 17
fully diluted earnings per share for all periods.
In June 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which
establishes reporting standards for operating segment information
disclosed in annual financial statements and in interim financial
reports issued to shareholders. Under existing accounting standards,
the Company has reported its operations as one line of business since
its inception because substantially all of its revenues and operating
profits have been derived from its acute care hospitals, affiliated
health care entities and health care management services. The Company
will adopt SFAS No. 131 beginning with its fiscal year ending June 30,
1999 and is presently evaluating the new standard in order to
determine its effect, if any, on the way the Company might report its
operations in the future.
GENERAL
The federal Medicare program and state Medicaid programs
accounted for approximately 55% and 56% of gross patient service
revenue for the years ended June 30, 1997 and 1996, respectively. The
payment rates under the Medicare program for inpatients are
prospective, based upon the diagnosis of a patient. The payment rate
increases have historically been less than actual inflation.
Both federal and state legislators are continuing to
scrutinize the health care industry for the purpose of reducing health
care costs. While the Company is unable to predict what, if any,
future health reform legislation may be enacted at the federal or
state level, the Company expects continuing pressure to limit
expenditures by governmental health care programs. Under the Balanced
Budget Act of 1997 (the 1997 Act), there will be no increases in the
rates paid to acute care hospitals for inpatient care through
September 30, 1998. Payments for Medicare outpatient services provided
at acute care hospitals and home health services historically have
been paid based on costs, subject to certain limits. The 1997 Act
requires that the payment for those services be converted to a
prospective payment system, which will be phased in over time. Further
changes in the Medicare or Medicaid programs and other proposals to
limit health care spending could have a material adverse impact upon
the health care industry and the Company.
In addition, states, insurance companies and employers are
actively negotiating amounts paid to hospitals, which are typically
lower than their standard rates. The trend toward managed care,
including health maintenance organizations, preferred provider
organizations and various other forms of managed care, may adversely
affect hospitals' ability, including the Company's hospitals, to
maintain their current rate of net revenue growth and operating
margins.
17
<PAGE> 18
The Company's acute care hospitals, like most acute care
hospitals in the United States, have significant unused capacity. The
result is substantial competition for patients and physicians.
Inpatient utilization continues to be negatively affected by
payor-required pre-admission authorization and by payor pressure to
maximize outpatient and alternative health care delivery services for
less acutely ill patients. The Company expects increased competition
and admission constraints to continue in the future. The ability to
successfully respond to these trends, as well as spending reductions
in governmental health care programs, will play a significant role in
determining hospitals' ability to maintain their current rate of net
revenue growth and operating margins.
The Company expects the industry trend from inpatient to
outpatient services to continue due to the increased focus on managed
care and advances in technology. Outpatient revenue of the Company's
owned hospitals was approximately 39.5% and 36.3% of gross patient
service revenue for the three months ended September 30, 1997 and
1996, respectively.
The Company's results of operations are also significantly
affected in a positive manner over time by the Company's ability to
acquire acute care hospitals at acceptable prices. While the Company
believes that trends in the health care industry described above may
create possible future acquisition opportunities, it can give no
assurances that it can continue to purchase acute care hospitals.
The Company's owned hospitals accounted for 91% of the
Company's net operating revenue for the three months ended September
30, 1997 compared to 89% for the three months ended September 30,
1996. Carolinas Hospital System, Desert Springs Hospital, Flowers
Hospital, Gadsden Regional Medical Center and Lutheran Hospital of
Indiana accounted for approximately 50% of the Company's net operating
revenue for the three months ended September 30, 1997.
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.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report, including,
without limitation, statements containing the words "believes,"
"anticipates,"
18
<PAGE> 19
"intends," "expects" and words of similar import, constitute "forward-
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may
cause the actual results, performance or achievements of the Company
or industry results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, both nationally
and in the regions in which the Company operates; industry capacity;
demographic changes; existing government regulations and changes in,
or the failure to comply with, governmental regulations; legislative
proposals for health care reform; the ability to enter into managed
care provider arrangements on acceptable terms; changes in Medicare
and Medicaid payment levels; liability and other claims asserted
against the Company; competition; the loss of any significant
customers; changes in business strategy or development plans; the
ability to attract and retain qualified personnel, including
physicians; the availability and terms of capital to fund the
expansion of the Company's business, including the acquisition of
additional facilities. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to
update any such factors or to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to
reflect future events or developments.
19
<PAGE> 20
PART II. OTHER INFORMATION
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) The following Reports on Form 8-K were filed during the
quarter ended September 30, 1997:
1. The Company filed a Report on Form 8-K dated August 19,
1997, to report a stock dividend declared by the Board of
Directors to effect a 3-for-2 stock split, payable on
September 16, 1997, to all holders of record as of the Record
Date of September 2, 1997. The report included as an exhibit
the press release which announced the stock split.
1. The Company filed a Report on Form 8-K dated September 1,
1997, to report the acquisition by an affiliate of Methodist
Hospital of Hattiesburg, a 211-bed acute care hospital
located in Hattiesburg, Mississippi. The report included as
an exhibit the press release which announced the acquisition.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
QUORUM HEALTH GROUP, INC.
Date: November 12, 1997 By:/s/ Steve B. Hewett
-----------------------------
Steve B. Hewett
Vice President (Chief
Financial Officer)
<PAGE> 21
Exhibit Index
Exhibit No.
11 Computation of Earnings Per Share
27 Financial Data Schedule (for SEC use only)
<PAGE> 1
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30
1997 1996
---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
PRIMARY
Average shares outstanding 74,212 73,044
Net effect of dilutive stock options based
on the treasury stock method using
average market price 2,826 2,120
------- -------
Totals 77,038 75,164
======= =======
Net income $21,361 $17,526
======= =======
Net income per common share $ 0.28 $ 0.23
======= =======
FULLY DILUTED
Average shares outstanding 74,212 73,044
Net effect of dilutive stock options based
on the treasury stock method using
the higher of ending or average market
price 2,948 2,124
------- -------
Totals 77,160 75,168
======= =======
Net income $21,361 $17,526
======= =======
Net income per common share $ 0.28 $ 0.23
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME OF QUORUM HEALTH GROUP, INC FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 15,418
<SECURITIES> 0
<RECEIVABLES> 347,094
<ALLOWANCES> 70,491
<INVENTORY> 33,796
<CURRENT-ASSETS> 375,334
<PP&E> 894,659
<DEPRECIATION> 200,512
<TOTAL-ASSETS> 1,401,502
<CURRENT-LIABILITIES> 171,597
<BONDS> 602,878
0
0
<COMMON> 743
<OTHER-SE> 540,306
<TOTAL-LIABILITY-AND-EQUITY> 1,401,502
<SALES> 0
<TOTAL-REVENUES> 392,821
<CGS> 0
<TOTAL-COSTS> 293,942
<OTHER-EXPENSES> 22,673
<LOSS-PROVISION> 30,411
<INTEREST-EXPENSE> 10,370
<INCOME-PRETAX> 35,425
<INCOME-TAX> 14,064
<INCOME-CONTINUING> 21,361
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,361
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
