<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 March 31, 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)
DELAWARE 62-1406040
(State of incorporation) (IRS Employer Identification No.)
103 CONTINENTAL PLACE, BRENTWOOD, TENNESSEE 37027
(Address of principal executive offices) (Zip Code)
(615) 371-7979
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 1, 1997
- ----- --------------------------
Common Stock, $.01 Par Value 49,334,858 Shares
Exhibit Index on Page 22
Page 1 of 23
<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 March 31
----------------------
1997 1996
-------- --------
<S> <C> <C>
Revenue:
Net patient service revenue $340,958 $251,424
Hospital management/professional services 20,125 19,470
Reimbursable expenses 16,013 15,113
-------- --------
Net operating revenue 377,096 286,007
Expenses:
Salaries and benefits 146,491 109,174
Reimbursable expenses 16,013 15,113
Supplies 53,926 42,183
Fees 32,848 25,381
Other operating expenses 31,769 24,505
Provision for doubtful accounts 25,010 13,156
Depreciation and amortization 19,003 14,294
Interest 11,794 9,337
Minority interest 301 147
Net gain on sale of assets -- (826)
-------- --------
337,155 252,464
-------- --------
Income before income taxes 39,941 33,543
Provision for income taxes 15,857 13,618
-------- --------
Net income $ 24,084 $ 19,925
======== ========
Net income per common share:
Primary $ 0.47 $ 0.40
======== ========
Fully diluted $ 0.47 $ 0.40
======== ========
Weighted average shares used in net income
per common share computations:
Primary 50,802 49,820
======== ========
Fully diluted 50,809 49,820
======== ========
</TABLE>
See accompanying notes
2
<PAGE> 3
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months
Ended March 31
-----------------------
1997 1996
--------- --------
<S> <C> <C>
Revenue:
Net patient service revenue $ 931,814 $713,932
Hospital management/professional services 58,317 57,049
Reimbursable expenses 45,103 41,982
--------- --------
Net operating revenue 1,035,234 812,963
Expenses:
Salaries and benefits 408,377 311,957
Reimbursable expenses 45,103 41,982
Supplies 145,126 120,551
Fees 91,738 76,659
Other operating expenses 86,058 68,412
Provision for doubtful accounts 66,589 38,539
Depreciation and amortization 55,111 41,345
Interest 34,222 27,227
Minority interest 558 622
Net gain on sale of assets -- (826)
--------- --------
932,882 726,468
--------- --------
Income before income taxes 102,352 86,495
Provision for income taxes 40,634 35,117
--------- --------
Net income $ 61,718 $ 51,378
========= ========
Net income per common share:
Primary $ 1.22 $ 1.03
========= ========
Fully diluted $ 1.22 $ 1.03
========= ========
Weighted average shares used in net income
per common share computations:
Primary 50,446 49,648
========= ========
Fully diluted 50,516 49,673
========= ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
March 31 June 30
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,278 $ 20,382
Accounts receivable, less allowance for doubtful
accounts of $54,611 at March 31, 1997
and $39,752 at June 30, 1996 241,259 185,743
Supplies 31,545 27,170
Other 36,089 25,772
---------- ----------
Total current assets 323,171 259,067
Property, plant and equipment:
Land 62,192 53,273
Buildings and improvements 310,286 237,359
Equipment 435,757 362,007
Construction in progress 30,063 17,796
---------- ----------
838,298 670,435
Less accumulated depreciation 167,458 119,740
---------- ----------
670,840 550,695
Cost in excess of net assets acquired 157,563 142,708
Unallocated purchase price 17,416 15,138
Other 68,813 52,953
---------- ----------
Total assets $1,237,803 $1,020,561
========== ==========
</TABLE>
4
<PAGE> 5
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31 June 30
1997 1996
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 65,460 $ 47,049
Accrued salaries and benefits 58,695 42,694
Deferred revenue 5,695 4,965
Other current liabilities 3,043 1,509
Current maturities of long-term debt 1,713 2,441
---------- ----------
Total current liabilities 134,606 98,658
Long-term debt 519,516 430,877
Deferred income taxes 36,133 33,343
Other liabilities and deferrals 25,389 19,855
Minority interest in consolidated entities 20,332 5,964
Commitments and contingencies -- Note 5
Stockholders' equity:
Common stock, $.01 par value;
100,000 shares authorized; 49,268
issued and outstanding at March 31,
1997 and 48,646 at June 30,1996 493 486
Additional paid-in capital 270,819 262,581
Retained earnings 230,515 168,797
---------- ----------
501,827 431,864
---------- ----------
Total liabilities and stockholders' equity $1,237,803 $1,020,561
========== ==========
</TABLE>
See accompanying notes.
5
<PAGE> 6
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Ended March 31
-----------------------
1997 1996
--------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 119,636 $ 85,349
Cash flows used in investing activities:
Purchase of acquired companies (170,877) (187,735)
Purchase of property, plant and equipment (51,117) (42,324)
Other 1,592 796
--------- ---------
Net cash used in investing activities (220,402) (229,263)
Cash flows provided by financing activities:
Proceeds from issuance of senior subordinated notes -- 150,000
Borrowings under bank debt 268,000 305,750
Repayments of bank debt (179,000) (311,000)
Proceeds from issuance of common stock, net 8,245 5,355
Loan origination costs (144) (5,016)
Other (2,439) (72)
--------- ---------
Net cash provided by financing activities 94,662 145,017
--------- ---------
Increase (decrease) in cash and cash equivalents (6,104) 1,103
Cash and cash equivalents at beginning of period 20,382 27,475
--------- ---------
Cash and cash equivalents at end of period $ 14,278 $ 28,578
========= =========
Supplemental cash flow information:
Interest paid $ (26,173) $ (17,363)
Income taxes paid (36,338) (23,585)
</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 nine months ended
March 31, 1997, 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. NEWLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement 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 third quarter
ended March 31, 1997 and March 31, 1996 will be $.02 and $.01 per share,
respectively more than primary earnings per share. Basic earnings per share for
the nine months ended March 31, 1997 and March 31, 1996 will be $.04 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.
3. ACQUISITIONS AND DIVESTITURES
During the nine months ended March 31, 1997, the Company acquired certain assets
and the business of four hospitals and affiliated health care entities. During
the nine months ended March 31, 1996, the Company acquired certain assets and
the business of one hospital and affiliated health care entities and sold one
hospital and a minority interest in another hospital for approximately $6.3
million in cash and notes receivable. Hospital and affiliated business
acquisitions are summarized as follows:
7
<PAGE> 8
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
MARCH 31
--------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Fair value of assets acquired $ 206,273 $ 191,306
Fair value of liabilities assumed (21,675) (3,571)
Contributions from minority investors (13,721) --
------------ ------------
Net cash used for acquisitions $ 170,877 $ 187,735
============ ============
</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 and divested in fiscal 1997 and 1996 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 NINE MONTHS
ENDED ENDED
MARCH 31 MARCH 31
-------- --------
1996 1997 1996
---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C>
Net operating revenue $345,697 $1,087,965 $993,681
Net income 19,608 60,224 46,891
Net income per common share:
Primary .39 1.19 .94
Fully diluted .39 1.19 .94
</TABLE>
8
<PAGE> 9
4. 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.
5. INCOME TAXES
The income tax provision recorded for the three months and nine months ended
March 31, 1997 and 1996 differs from the expected income tax provision due to
permanent differences and the provision for state income taxes.
6. COMMITMENTS
The Company has entered into a $60 million contract to construct a hospital and
medical office building in Florence, South Carolina. The facilities are to be
completed in fiscal 1999.
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.
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.
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
9
<PAGE> 10
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. During the nine months ended March 31, 1997, the Company amended
its 1993 interest rate swap agreements to effectively convert two borrowings of
$50.0 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 $100.0 million and $200.0 million of
floating-rate borrowings to fixed-rate borrowings through December 12, 2001 and
March 20, 2002, respectively. For the nine months ended March 31, 1997, the
Company received a weighted average rate of 5.8% and paid a weighted average
rate of 5.6%. For the nine months ended March 31, 1996, the Company received a
weighted average rate of 5.8% and paid a weighted average rate of 4.8%.
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 April 16, 1997, the Company adopted a Stockholder Rights Plan and declared a
dividend of one right for each share of common stock held as of the close of
business on April 28, 1997. Each right entitles stockholders to acquire
one-third of a share of common stock at an exercise price of $150, subject to
adjustment. Such rights become exercisable only if a person or group acquires
beneficial ownership of 15 percent or more of the Company's common stock or
commences a tender or exchange offer which would result in that person or group
owning 15 percent or more of the Company's common stock. After any person has
acquired 15 percent or more of the Company's common stock, each right not owned
by such person or certain related parties will entitle its holder to purchase a
number of shares of the Company's common stock (or any combination of common
10
<PAGE> 11
stock, preferred stock, debt securities and cash, as determined by the Board of
Directors) having a market value of two times the then-current exercise price of
the right. In the event the Company is involved in a merger or other business
combination transaction with another person or sells 50 percent or more of its
assets or earning power to another person, each right will entitle its holder to
purchase a number of shares of the Company's common stock or the acquiring
company's common stock having a market value of two times the then-current
exercise price of the right. The rights may be redeemed at $.01 per right at any
time until the tenth day following public announcement that a 15 percent
position has been acquired. The rights expire on April 28, 2007.
On April 18, 1997, the Company replaced its secured $600.0 million revolving
credit facility with a new unsecured five-year revolving credit facility in the
amount of $850.0 million. The credit agreement provides for two consecutive
one-year extensions subject to approval of 100% of the lenders. The loan bears
interest, at the Company's option, at generally the lender's base rate or a
fluctuating rate ranging from .25 to .75 percentage points above LIBOR. The
Company must pay a facility fee ranging from .18 to .25 percentage points on the
commitment. The interest rate margins and facility fee rates fluctuate based on
the Company's leverage ratio. The Company may prepay the principal amount
outstanding at any time. The credit facility contains financial covenants
relating to the prohibition of dividend payments and other distributions,
limitations on capital expenditures, repurchase of common stock, additional
indebtedness, investments, asset dispositions, liens, engaging in transactions
with affiliates, 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 and a leverage ratio.
On April 24, 1997, the Company commenced a tender offer to purchase for cash all
of its outstanding 11 7/8% Senior Subordinated Notes due December 15, 2002,
$100,000,000 in principal amount. Under the terms of the offer, the Company will
purchase the outstanding Notes at $1,087.05 per $1,000 principal amount if
tendered on or before May 7, 1997 (the "Consent Time") and $1,077.05 if later.
The Company is also seeking amendments to eliminate certain restrictive
covenants contained in the Indenture. As of the Consent Time, the Company had
received sufficient consents from holders of the Notes to amend the Indenture as
requested. The tender offer will expire on May 21, 1997, unless it is extended
or terminated earlier.
On April 29, 1997, the Company was notified by Alegent Health ("Alegent") that
Alegent was exercising its option to acquire an additional 14% limited
partnership interest in the limited partnership which owns Midlands Hospital,
Papillion, Nebraska. Alegent also advised the Company of its intention to
exercise its option to acquire in fiscal 1998 the remaining partnership
interest.
11
<PAGE> 12
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 nine months ended March 31, 1997, the Company acquired
certain assets and the business of four hospitals and affiliated health care
entities. On April 29, 1997, the Company was notified by Alegent Health
("Alegent") that Alegent was exercising its option to acquire an additional 14%
limited partnership interest in the limited partnership which owns Midlands
Community Hospital, Papillion, Nebraska, and of Alegent's intention to exercise
its option to acquire the remaining partnership interest in fiscal 1998. During
fiscal 1996, the Company acquired certain assets and the business of two
hospitals and affiliated health care entities (one during the nine months ended
March 31, 1996) and divested one hospital.
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 March 31, 1997 include three months
of operations for eighteen hospitals. The results of the owned hospitals for the
three months ended March 31, 1996 include three months of operations for
thirteen hospitals and a partial period for one hospital divested during such
period. The results of the owned hospitals for the nine months ended March 31,
1997 include nine 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 nine months ended March 31, 1996 include nine months of
operations for twelve hospitals and partial periods for one hospital acquired
and one hospital divested during such period.
12
<PAGE> 13
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
March 31 March 31
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of hospitals at end of period 18 13 18 13
Licensed beds at end of period 4,113 3,192 4,113 3,192
Beds in service at end of period 3,421 2,635 3,421 2,635
Admissions 31,969 25,061 87,590 70,649
Average length of stay (days) 5.8 5.9 5.6 5.8
Patient days 184,098 147,322 491,622 410,800
Adjusted patient days 284,598 217,764 766,620 620,217
Occupancy rates (average licensed beds) 49.7% 49.0% 46.9% 45.9%
Occupancy rates (average beds in service) 59.7% 59.6% 56.7% 55.9%
Gross inpatient revenues (in thousands) $394,591 $299,972 $1,062,398 $828,012
Gross outpatient revenues (in thousands) $215,339 $143,581 $ 594,272 $422,103
</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
March 31 (Decrease)
------------------ of Dollar
1997 1996 Amounts
---- ---- ----------
<S> <C> <C> <C>
Net operating revenue 100.0% 100.0% 31.8%
Operating expenses (1) 81.2 80.2 33.4
----- ----- ------
EBITDA (2) 18.8 19.8 25.7
Depreciation and amortization 5.0 5.0 32.9
Interest expense 3.1 3.3 26.3
Minority interest .1 -- 104.8
Net gain on sale of assets -- (.3) (100.0)
----- ----- ------
Income before income taxes 10.6 11.8 19.1
Provision for income taxes 4.2 4.8 16.4
----- ----- ------
Net income 6.4% 7.0% 20.9%
===== ===== ======
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
Nine Months Percentage
Ended Increase
March 31 (Decrease) of
--------------- Dollar
1997 1996 Amounts
---- ---- ------------
<S> <C> <C> <C>
Net operating revenue 100.0% 100.0% 27.3%
Operating expenses (1) 81.4 81.0 28.1
----- ----- ------
EBITDA (2) 18.6 19.0 24.1
Depreciation and amortization 5.3 5.1 33.3
Interest expense 3.3 3.3 25.7
Minority interest 0.1 0.1 (10.3)
Net gain on sale of assets 0.0 (0.1) (100.0)
----- ----- ------
Income before income taxes 9.9 10.6 18.3
Provision for income taxes 3.9 4.3 15.7
----- ----- ------
Net income 6.0% 6.3% 20.1%
===== ===== ======
</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 and net gain on sale of assets. 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 March 31, 1997 Compared to Three Months Ended March
31, 1996
The Company's net operating revenue was $377.1 million for the three
months ended March 31, 1997, compared to $286.0 million for the comparable
period of fiscal 1996, an increase of $91.1 million or 32%. 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 4% 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 March 31, 1997 compared to 88% for the three months ended
March 31, 1996.
Operating expenses as a percent of net operating revenue increased to
81.2% for the three months ended March 31, 1997 from 80.2% for the three months
ended March 31, 1996 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 81.7% for the
three months ended March 31, 1997 from 80.6% for the three months ended March
31, 1996 which was primarily attributable to the fiscal
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<PAGE> 15
1997 acquisitions of owned hospitals. 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 March 31, 1997 from 80.3% for the
three months ended March 31, 1996 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 18.8% for the three
months ended March 31, 1997 compared to 19.8% for the three months ended March
31, 1996. EBITDA as a percent of net operating revenue for the Company's owned
hospitals was 18.3% for the three months ended March 31, 1997 compared to 19.4%
for the three months ended March 31, 1996. 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 March 31, 1997 compared to 19.7% for the three months ended
March 31, 1996. EBITDA as a percent of net operating revenue for the Company's
management services business was 24.3% for the three months ended March 31, 1997
compared to 22.4% for the three months ended March 31, 1996.
Depreciation and amortization expense as a percent of net operating
revenue was 5.0% for the three months ended March 31, 1997 and the three months
ended March 31, 1996. Interest expense as a percent of net operating revenue
decreased to 3.1% for the three months ended March 31, 1997 from 3.3% for the
three months ended March 31, 1996 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 4.2% for the
three months ended March 31, 1997 from 4.8% for the three months ended March 31,
1996 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 6.4% for the three
months ended March 31, 1997 compared to 7.0% for the three months ended March
31, 1996. This decrease was primarily attributable to the fiscal 1997
acquisitions and was partially offset by the increased profitability of the
Company's hospitals owned during both periods and management services business,
as discussed above.
Nine Months Ended March 31, 1997 Compared to Nine Months Ended March 31,
1996
The Company's net operating revenue was $1,035.2 million for the nine
months ended March 31, 1997 compared to $813.0 million for the comparable period
of fiscal 1996, an increase of $222.2 million or 27%. This increase was
attributable to, among other things, five hospital acquisitions, a full nine
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 nine months ended March 31, 1997
compared to 88% for the nine months ended March 31, 1996.
15
<PAGE> 16
Operating expenses as a percent of net operating revenue increased to
81.4% for the nine months ended March 31, 1997 from 81.0% for the nine months
ended March 31, 1996. Operating expenses as a percentage of net operating
revenue for the Company's owned hospitals increased to 81.8% for the nine months
ended March 31, 1997 from 81.7% for the nine months ended March 31, 1996.
Operating expenses as a percentage of net operating revenue for the Company's
hospitals owned during both periods decreased to 80.4% for the nine months ended
March 31, 1997 from 81.4% for the nine months ended March 31, 1996 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 18.6% for the nine
months ended March 31, 1997 compared to 19.0% for the nine months ended March
31, 1996. EBITDA as a percent of net operating revenue for the Company's owned
hospitals was 18.2% for the nine months ended March 31, 1997 compared to 18.3%
for the nine months ended March 31, 1996. EBITDA as a percent of net operating
revenue for the Company's hospitals owned during both periods was 19.6% for the
nine months ended March 31, 1997 compared to 18.6% for the nine months ended
March 31, 1996. EBITDA as a percent of net operating revenue for the Company's
management services business was 22.3% for the nine months ended March 31, 1997
compared to 24.3% for the nine months ended March 31, 1996 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 nine months ended March 31, 1997 from 5.1% for
the nine months ended March 31, 1996 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 3.3% for the nine
months ended March 31, 1997 and the nine months ended March 31, 1996. The
provision for income taxes as a percent of net operating revenue decreased to
3.9% for the nine months ended March 31, 1997 from 4.3% for the nine months
ended March 31, 1996 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 6.0% for the nine
months ended March 31, 1997 compared to 6.3% for the nine months ended March 31,
1996. This decrease was primarily attributable to the fiscal 1997 acquisitions
and was partially offset by the increased profitability of the Company's
hospitals owned during both periods, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had working capital of $188.6 million,
including cash and cash equivalents of $14.3 million. The ratio of current
assets to current liabilities was 2.4 to 1.0 at March 31, 1997 compared to 2.6
to 1.0 at June 30, 1996.
The Company's cash requirements excluding acquisitions have
16
<PAGE> 17
historically been funded by cash generated from operations. Cash generated from
operations was $119.6 million and $85.3 million for the nine months ended March
31, 1997 and 1996, respectively. The increase is primarily due to the fiscal
1996 and 1997 acquisitions.
Capital expenditures excluding acquisitions for the nine months ended
March 31, 1997 and 1996 were $51.1 million and $42.3 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 1997 capital expenditures of up to $15 million and a total
project cost of approximately $85 million. In fiscal 1997, the Company expects
to make capital expenditures from $75 million to $85 million, excluding
acquisitions and the replacement hospital.
During the nine months ended March 31, 1997, the Company acquired
certain assets and the business of four hospitals and affiliated health care
entities for approximately $206.3 million. On April 29, 1997, the Company was
notified by Alegent that Alegent was exercising its option to acquire an
additional 14% limited partnership interest in the limited partnership which
owns Midlands Hospital, Papillion, Nebraska. Alegent also advised the Company
of its intention to exercise its option to acquire in fiscal 1998 the remaining
partnership interest. During fiscal 1996, the Company acquired certain assets
and the business of two hospitals and affiliated health care entities 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.
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 March 31, 1997, the Company had
$266.0 million outstanding under its Revolving Line of Credit.
On April 18, 1997, the Company replaced its secured $600.0 million
revolving credit facility with a new unsecured five-year revolving credit
facility in the amount of $850.0 million. The credit agreement provides for two
consecutive one-year extensions subject to approval of 100% of the lenders. The
loan bears interest, at the Company's option, at generally the lender's base
rate or a fluctuating rate ranging from .25 to .75 percentage points above
LIBOR. The Company must pay a facility fee ranging from .18 to .25 percentage
points on the commitment. The interest rate margins and facility fee ratios
fluctuate based on the Company's leverage ratio. The Company may prepay the
principal amount outstanding at any time. The added capacity will be used to
fund acquisitions and for other
17
<PAGE> 18
general corporate purposes. The credit facility contains financial covenants
relating to the prohibition of dividend payments and other distributions,
limitations on capital expenditures, repurchase of common stock, additional
indebtedness, investments, asset dispositions, liens, engaging in transactions
with affiliates, 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 and a leverage ratio.
On April 16, 1997, the Company adopted a Stockholder Rights Plan and
declared a dividend of one right for each share of common stock held as of the
close of business on April 28, 1997. Each right entitles stockholders to acquire
one-third of a share of common stock at an exercise price of $150, subject to
adjustment. Such rights become exercisable only if a person or group acquires
beneficial ownership of 15 percent or more of the Company's common stock or
commences a tender or exchange offer which would result in that person or group
owning 15 percent or more of the Company's common stock. After any person has
acquired 15 percent or more of the Company's common stock, each right not owned
by such person or certain related parties will entitle its holder to purchase a
number of shares of the Company's common stock (or any combination of common
stock, preferred stock, debt securities and cash, as determined by the Board of
Directors) having a market value of two times the then-current exercise price of
the right. In the event the Company is involved in a merger or other business
combination transaction with another person or sells 50 percent or more of its
assets or earning power to another person, each right will entitle its holder to
purchase a number of shares of the Company's common stock or the acquiring
company's common stock having a market value of two times the then-current
exercise price of the right. The rights may be redeemed at $.01 per right at any
time until the tenth day following public announcement that a 15 percent
position has been acquired. The rights expire on April 28, 2007.
On April 24, 1997, the Company commenced a tender offer to purchase for
cash all of its outstanding 11 7/8% Senior Subordinated Notes due December 15,
2002, $100,000,000 in principal amount. Under the terms of the offer, the
Company will purchase the outstanding Notes at $1,087.05 per $1,000 principal
amount if tendered on or before May 7, 1997 (the "Consent Time") and $1,077.05
if later. The Company is also seeking amendments to eliminate certain
restrictive covenants contained in the Indenture. As of the Consent Time, the
Company had received sufficient consents from holders of the Notes to amend the
Indenture as requested. The tender offer will expire on May 21, 1997, unless it
is extended or terminated earlier.
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
18
<PAGE> 19
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 the nine months ended March 31, 1997, the Company amended
its 1993 interest rate swap agreements to effectively convert two borrowings of
$50.0 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 $100.0 million and $200.0 million of
floating-rate borrowings to fixed-rate borrowings through December 12, 2001 and
March 20, 2002, respectively. For the nine months ended March 31, 1997, the
Company received a weighted average rate of 5.8% and paid a weighted average
rate of 5.6%. For the nine months ended March 31, 1996, the Company received a
weighted average rate of 5.8% and paid a weighted average rate of 4.8%.
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 Financial Accounting Standards Board issued
Statement 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 third quarter ended March 31, 1997 and March 31, 1996 will be $.02 and
$.01 per share, respectively more than primary earnings per share. Basic
earnings per share for the nine months ended March 31, 1997 and March 31, 1996
will be $.04 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.
19
<PAGE> 20
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 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% and 34% of gross patient service revenue for the nine months
ended March 31, 1997 and 1996, 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.
20
<PAGE> 21
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) No reports on Form 8-K were filed during the quarter ended March 31,
1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUORUM HEALTH GROUP, INC.
Date: May 13, 1997 By: /s/ Steve B. Hewett
--------------------------
Steve B. Hewett
Vice President & Treasurer
(Chief Financial Officer)
21
<PAGE> 22
Exhibit Index
Exhibit No.
- ----------
11 Computation of Earnings Per Share
27 Financial Data Schedule (for SEC use only)
22
<PAGE> 1
QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31 Ended March 31
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Primary
Average shares outstanding 49,046 48,170 48,834 47,979
Net effect of dilutive stock options based
on the treasury stock method using
average market price 1,756 1,650 1,612 1,669
--------- --------- --------- ---------
Totals 50,802 49,820 50,446 49,648
========= ========= ========= =========
Net income $ 24,084 $ 19,925 $ 61,718 $ 51,378
========= ========= ========= =========
Net income per common share $ 0.47 $ 0.40 $ 1.22 $ 1.03
========= ========= ========= =========
Fully Diluted
Average shares outstanding 49,046 48,170 48,834 47,979
Net effect of dilutive stock options based
on the treasury stock method using
the higher of ending or average market
price 1,763 1,650 1,682 1,694
--------- --------- --------- ---------
Totals 50,809 49,820 50,516 49,673
========= ========= ========= =========
Net income $ 24,084 $ 19,925 $ 61,718 $ 51,378
========= ========= ========= =========
Net income per common share $ 0.47 $ 0.40 $ 1.22 $ 1.03
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 1997 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED MARCH 31,
1997 (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> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 14,278
<SECURITIES> 0
<RECEIVABLES> 295,870
<ALLOWANCES> 54,611
<INVENTORY> 31,545
<CURRENT-ASSETS> 323,171
<PP&E> 838,298
<DEPRECIATION> 167,458
<TOTAL-ASSETS> 1,237,803
<CURRENT-LIABILITIES> 134,606
<BONDS> 519,516
0
0
<COMMON> 493
<OTHER-SE> 501,334
<TOTAL-LIABILITY-AND-EQUITY> 1,237,803
<SALES> 0
<TOTAL-REVENUES> 1,035,234
<CGS> 0
<TOTAL-COSTS> 776,402
<OTHER-EXPENSES> 55,669
<LOSS-PROVISION> 66,589
<INTEREST-EXPENSE> 34,222
<INCOME-PRETAX> 102,352
<INCOME-TAX> 40,634
<INCOME-CONTINUING> 61,718
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,718
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.22
</TABLE>
