-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VnjBDZBTBhC4gLC6eE7+h4ngBAvHE62xnuMXPBNnL7Uvhm9dTmDbAbVQOmpbUgS7 zOQeZl+sS0/+51fjoSKClQ== 0000950144-97-001132.txt : 19970221 0000950144-97-001132.hdr.sgml : 19970221 ACCESSION NUMBER: 0000950144-97-001132 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970211 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUORUM HEALTH GROUP INC CENTRAL INDEX KEY: 0000854694 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-GENERAL MEDICAL & SURGICAL HOSPITALS, NEC [8062] IRS NUMBER: 621406040 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22766 FILM NUMBER: 97524995 BUSINESS ADDRESS: STREET 1: 103 CONTINENTAL PL CITY: BRENTWOOD STATE: TN ZIP: 37027 BUSINESS PHONE: 6153717979 FORMER COMPANY: FORMER CONFORMED NAME: HMC HOLDINGS CORP DATE OF NAME CHANGE: 19900701 10-Q 1 QUORUM HEALTH GROUP, INC. FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 1996 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______ to ______ Commission file number 33-31717-A QUORUM HEALTH GROUP, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 62-1406040 ---------------------- ------------------ (State of incorporation) (I.R.S. Employer Identification No.) 103 Continental Place, Brentwood, Tennessee 37027 -------------------------------------------------- (Address of principal executive offices) (Zip Code) (615) 371-7979 -------------------------------------------------- (Registrant's telephone number, including area code) -------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements Yes X No ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at February 6, 1997 - ----- ------------------------------- Common Stock, $.01 Par Value 48,966,421 Shares - ------------------------------------------------------------------------------- Exhibit Index on Page 20 Page 1 of 21 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended December 31 ----------------------- 1996 1995 --------- --------- (In thousands, except per share data) Revenue: Net patient service revenue $ 308,806 $ 240,845 Hospital management/professional services 18,821 18,893 Reimbursable expenses 14,510 13,506 --------- -------- Net operating revenue 342,137 273,244 Expenses: Salaries and benefits 136,455 104,341 Reimbursable expenses 14,510 13,506 Supplies 46,619 40,025 Fees 31,544 27,015 Other operating expenses 27,680 23,117 Provision for doubtful accounts 22,259 13,003 Depreciation and amortization 18,297 14,118 Interest 11,435 9,553 Minority interest (8) 160 --------- --------- 308,791 244,838 --------- --------- Income before income taxes 33,346 28,406 Provision for income taxes 13,238 11,533 --------- --------- Net income $ 20,108 $ 16,873 ========= ========= Net income per common share: Primary $ 0.40 $ 0.34 ========= ========= Fully diluted $ 0.40 $ 0.34 ========= ========= Weighted average shares used in earnings per share computations: Primary 50,432 49,562 ========= ========= Fully diluted 50,631 49,591 ========= =========
See accompanying notes. 2 3 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended December 31 1996 1995 -------- -------- (In thousands, except per share data) Revenue: Net patient service revenue $590,856 $462,508 Hospital management/professional services 38,192 37,579 Reimbursable expenses 29,090 26,869 -------- -------- Net operating revenue 658,138 526,956 Expenses: Salaries and benefits 261,886 202,783 Reimbursable expenses 29,090 26,869 Supplies 91,200 78,368 Fees 58,890 51,278 Other operating expenses 54,289 43,907 Provision for doubtful accounts 41,579 25,383 Depreciation and amortization 36,108 27,051 Interest 22,428 17,890 Minority interest 257 475 -------- -------- 595,727 474,004 -------- -------- Income before income taxes 62,411 52,952 Provision for income taxes 24,777 21,499 -------- -------- Net income $ 37,634 $ 31,453 ======== ======== Net income per common share: Primary $ 0.75 $ 0.63 ======== ======== Fully diluted $ 0.75 $ 0.63 ======== ======== Weighted average shares used in earnings per share computations: Primary 50,271 49,563 ======== ======== Fully diluted 50,372 49,601 ======== ========
See accompanying notes. 3 4 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
December 31 June 30 1996 1996 ----------- ---------- (In thousands) ASSETS Current assets: Cash and cash equivalents $ 15,547 $ 20,382 Accounts receivable, less allowance for doubtful accounts of $51,191,954 at December 31, 1996 and $39,752,284 at June 30, 1996 234,280 185,743 Supplies 31,828 27,170 Other 39,693 25,772 ---------- ---------- Total current assets 321,348 259,067 Property, plant and equipment: Land 57,853 53,273 Buildings and improvements 278,739 237,359 Equipment 397,783 362,007 Construction in progress 22,918 17,796 ---------- ---------- 757,293 670,435 Less accumulated depreciation 151,196 119,740 ---------- ---------- 606,097 550,695 Cost in excess of net assets acquired 152,877 142,708 Unallocated purchase price 91,176 15,138 Other 64,539 52,953 ---------- ---------- Total assets $1,236,037 $1,020,561 ========== ==========
4 5 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
December 31 June 30 1996 1996 ---------- ---------- (In thousands) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 48,295 $ 47,049 Accrued salaries and benefits 65,647 42,694 Deferred revenue 6,002 4,965 Other current liabilities 4,247 1,509 Current maturities of long-term debt 2,821 2,441 ---------- ---------- Total current liabilities 127,012 98,658 Long-term debt 558,954 430,877 Deferred income taxes 36,352 33,343 Other liabilities and deferrals 22,617 19,855 Minority interest in consolidated entities 20,112 5,964 Commitments and contingencies -- Note 5 Stockholders' equity: Common stock, $.01 par value; 100,000,000 shares authorized; 48,833,723 issued and outstanding at December 31, 1996 and 48,645,750 at June 30,1996 488 486 Additional paid-in capital 264,071 262,581 Retained earnings 206,431 168,797 ---------- ---------- 470,990 431,864 ---------- ---------- Total liabilities and stockholders' equity $1,236,037 $1,020,561 ========== ==========
See accompanying notes. 5 6 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended December 31 ---------------------------- 1996 1995 --------- --------- (In thousands) Net cash provided by operating activities $ 72,801 $ 56,752 Cash flows used by investing activities: Purchase of acquired companies (170,413) (173,565) Purchase of property, plant and equipment (35,881) (27,070) Other (1,335) 790 --------- --------- Net cash used by investing activities (207,629) (199,845) Cash flows provided by financing activities: Proceeds from issuance of senior subordinated notes -- 150,000 Borrowings under bank debt 241,000 257,750 Repayments of bank debt (113,000) (256,000) Proceeds from issuance of notes 4,698 4,053 Repayments of notes (2,866) (2,317) Proceeds from issuance of common stock, net 1,493 892 Loan origination costs (74) (4,877) Other (1,258) (380) --------- --------- Net cash provided by financing activities 129,993 149,121 --------- --------- Increase (decrease) in cash and cash equivalents (4,835) 6,028 Cash and cash equivalents at beginning of period 20,382 27,475 --------- --------- Cash and cash equivalents at end of period $ 15,547 $ 33,503 ========= ========= Supplemental cash flow information: Interest paid $ (21,111) (14,448) Income taxes paid (23,975) (18,649)
See accompanying notes. 6 7 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and six months ended December 31, 1996 are not necessarily indicative of the results that may be expected for the year ending June 30, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 1996. Certain reclassifications have been made to the fiscal 1996 financial presentation to conform with fiscal 1997. 2. ACQUISITIONS AND DIVESTITURES The number of hospitals acquired were four and one for the six months ended December 31, 1996 and 1995, respectively. Hospital and affiliated business acquisitions are summarized as follows:
SIX MONTHS ENDED DECEMBER 31 1996 1995 ---- ---- (In thousands) Fair value of assets acquired $205,809 $177,105 Fair value of liabilities assumed (21,675) (3,540) Contributions from minority investors (13,721) -- -------- -------- Net cash used for acquisitions $170,413 $173,565 ======== ========
All of the foregoing acquisitions were accounted for using the purchase method of accounting. The allocation of the purchase price associated with certain of the acquisitions has been determined by the Company based upon available information and is subject to further refinement. The operating results of the acquired entities have been included in the accompanying condensed consolidated statements of income from the respective dates of acquisition. 7 8 The following unaudited pro forma results of operations give effect to the operations of the entities acquired and divested in fiscal 1996 and 1997 as if the respective transactions had occurred at the beginning of the periods presented. The pro forma results of operations do not purport to represent what the Company's results of operations would have been had such transactions in fact occurred at the beginning of the periods presented or to project the Company's results of operations in any future period.
THREE MONTHS SIX MONTHS ENDED ENDED DECEMBER 31 DECEMBER 31 ---------------- ---------------- 1996 1995 1996 1995 ---- ---- ---- ---- (In thousands, except per share data) Net operating revenue $360,852 $326,849 $710,869 $647,984 Net income 19,261 13,867 36,140 27,282 Net income per common share: Primary .38 .28 .72 .55 Fully diluted .38 .28 .72 .55
3. NET INCOME PER COMMON SHARE Net income per common share is based on the weighted average number of shares of common stock outstanding, and common stock equivalents consisting of dilutive stock options. 4. INCOME TAXES The income tax provision recorded for the three months and six months ended December 31, 1996 and 1995 differs from the expected income tax provision due to permanent differences and the provision for state income taxes. 5. COMMITMENTS AND CONTINGENCIES Management continually evaluates contingencies based on the best available evidence and believes that adequate provision for losses has been provided to the extent necessary. In the opinion of management, the ultimate resolution of the following contingencies will not have a material effect on the Company's results of operations or financial position. General and Professional Liability Risks The reserve for the self-insured portion of general and professional liability risks is included in "Other liabilities and deferrals" and is based on actuarially determined estimates. 8 9 Litigation The Company currently, and from time to time, is expected to be subject to claims and suits arising in the ordinary course of business. Net Patient Service Revenue Final determination of amounts earned under the Medicare and Medicaid programs often occurs in subsequent years because of audits by the programs, rights of appeal and the application of numerous technical provisions. Income Taxes The Internal Revenue Service (IRS) is in the process of conducting examinations of the Company's federal income tax returns for the years ended 1993 through 1995. During fiscal 1996, the IRS proposed certain adjustments in connection with its examination of the Company's federal income tax returns for the fiscal years ended June 30, 1990 through 1992. The most significant adjustment involves the amortization deductions claimed on certain acquired intangible assets in conjunction with the acquisition of Quorum Health Resources, Inc. The Company is currently protesting all of the proposed adjustments through the appeals process of the IRS. Other In June 1993, the Office of the Inspector General (OIG) of the Department of Health and Human Services requested information from the Company in connection with an investigation involving the Company's procedures for preparing Medicare cost reports. In January 1995, the U.S. Department of Justice issued a Civil Investigative Demand which also requested information from the Company in connection with that same investigation. As a part of the government's investigation, several former and current employees of the Company have been interviewed. The Company has provided information and is cooperating fully with the investigation. The Company cannot predict whether the government will commence litigation regarding this matter. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION IMPACT OF ACQUISITIONS The Company was formed in July 1989 to acquire a hospital contract management business established in the mid-1970s. Since that acquisition, the Company has expanded the scope of its business by acquiring acute care hospitals. During the six months ended December 31, 1996, the Company acquired four facilities. During fiscal 1996, the Company acquired two facilities (one during the six months ended December 31, 1995) and divested one facility. Because of the financial impact of the Company's recent acquisitions and divestitures, it is difficult to make meaningful comparisons between the Company's financial statements for the fiscal periods presented. In addition, due to the current number of owned hospitals, each additional hospital acquisition can affect the overall operating margin of the Company. Upon the acquisition of a hospital, the Company has typically taken a number of immediate steps, including staffing adjustments, to lower operating costs. The impact of such actions can be partially offset by cost increases to expand the hospital's services, strengthen its medical staff and improve its market position. The benefits of these investments and of other activities to improve operating margins may not occur immediately. Consequently, the financial performance of an acquired hospital may adversely affect overall operating margins in the near-term. As the Company makes additional hospital acquisitions, the Company expects that this effect will be mitigated by the expanded financial base of existing hospitals. SELECTED OPERATING STATISTICS - OWNED HOSPITALS The following table sets forth certain operating statistics for the Company's owned hospitals for each of the periods presented. The results of the owned hospitals for the three months ended December 31, 1996 include three months of operations for sixteen hospitals and a partial period for two hospitals acquired during such period. The results of the owned hospitals for the three months ended December 31, 1995 include three months of operations for fourteen hospitals. The results of the owned hospitals for the six months ended December 31, 1996 include six months of operations for fifteen hospitals and a partial period for three hospitals acquired during such period. The results of the owned hospitals for the six months ended December 31, 1995 include six months of operations for thirteen hospitals and a partial period for one hospital acquired during such period. 10 11
Three Months Six Months Ended Ended December 31 December 31 ----------- ----------- 1996 1995 1996 1995 ---- ---- ---- ---- Number of hospitals at end of period 18 14 18 14 Licensed beds at end of period 4,113 3,298 4,113 3,298 Beds in service at end of period 3,416 2,691 3,416 2,691 Admissions 28,881 23,561 55,621 45,588 Average length of stay (days) 5.5 5.7 5.5 5.8 Patient days 160,043 134,927 307,524 263,478 Adjusted patient days 250,400 204,171 482,022 402,453 Occupancy rates (average licensed beds) 45.6% 44.5% 45.3% 44.3% Occupancy rates (average beds in service) 55.2% 54.1% 55.1% 53.9% Gross inpatient revenues (in thousands) $346,075 $273,180 $667,807 $528,040 Gross outpatient revenues (in thousands) $195,378 $140,275 $378,933 $278,522
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.
Three Months Percentage Ended Increase December 31 (Decrease) of -------------------- Dollar 1996 1995 Amounts ---- ---- ------------ Net operating revenue 100.0% 100.0% 25.2% Operating expenses (1) 81.6 80.9 26.3 ----- ----- ---- EBITDA (2) 18.4 19.1 20.7 Depreciation and amortization 5.3 5.2 29.6 Interest expense 3.3 3.5 19.7 Minority expense 0.0 0.0 0.0 ----- ----- ---- Income before income taxes 9.8 10.4 17.4 Provision for income taxes 3.9 4.2 14.8 ----- ----- ---- Net income 5.9% 6.2% 19.2% ===== ===== ====
11 12
Six Months Percentage Ended Increase December 31 (Decrease) of -------------------- Dollar 1996 1995 Amounts ---- ---- ------------ Net operating revenue 100.0% 100.0% 24.9% Operating expenses (1) 81.6 81.3 25.3 ----- ----- ---- EBITDA (2) 18.4 18.7 23.2 Depreciation and amortization 5.5 5.1 33.5 Interest expense 3.4 3.4 25.4 Minority expense 0.0 0.1 (45.9) ----- ----- ---- Income before income taxes 9.5 10.1 17.9 Provision for income taxes 3.8 4.1 15.2 ----- ----- ---- Net income 5.7% 6.0% 19.7% ===== ===== ====
- -------------------- (1) Operating expenses represent expenses before interest, minority interest, income taxes, depreciation and amortization expense. (2) EBITDA represents earnings before interest, minority interest, income taxes, depreciation and amortization expense. The Company has included EBITDA data because such data is used by certain investors to measure a company's ability to service debt. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Three Months Ended December 31, 1996 Compared to Three Months Ended December 31, 1995 The Company's net operating revenue was $342.1 million for the three months ended December 31, 1996, compared to $273.2 million for the comparable period of fiscal 1996, an increase of $68.9 million or 25%. This increase was attributable to, among other things, five hospital acquisitions, an 11% increase in revenue generated by hospitals owned during both periods (calculated by comparing the same periods in both fiscal periods for hospitals owned for one year or more) and a 3% increase in management services revenue. The Company's owned hospitals accounted for 90% of the Company's net operating revenue for the three months ended December 31, 1996 compared to 88% for the three months ended December 31, 1995. Operating expenses as a percent of net operating revenue increased to 81.6% for the three months ended December 31, 1996 from 80.9% for the 12 13 three months ended December 31, 1995 which was primarily attributable to the fiscal 1997 acquisitions of owned hospitals. Operating expenses as a percentage of net operating revenue for the Company's owned hospitals increased to 82.0% for the three months ended December 31, 1996 from 81.7% for the three months ended December 31, 1995. For the Company's hospitals owned during both periods, operating expenses as a percentage of net operating revenue decreased to 80.1% for the three months ended December 31, 1996 from 81.5% for the three months ended December 31, 1995 which was primarily attributable to a reduction in salaries and benefits, fees and supplies expense as a percent of net operating revenue. EBITDA as a percent of net operating revenue was 18.4% for the three months ended December 31, 1996 compared to 19.1% for the three months ended December 31, 1995. EBITDA as a percent of net operating revenue for the Company's owned hospitals was 18.0% for the three months ended December 31, 1996 compared to 18.3% for the three months ended December 31, 1995. EBITDA as a percent of net operating revenue for the Company's hospitals owned during both periods was 19.9% for the three months ended December 31, 1996 compared to 18.5% for the three months ended December 31, 1995. EBITDA as a percent of net operating revenue for the Company's management services business was 22.1% for the three months ended December 31, 1996 compared to 25.4% for the three months ended December 31, 1995 which was primarily attributable to the costs of new services. Depreciation and amortization expense as a percent of net operating revenue increased to 5.3% for the three months ended December 31, 1996 from 5.2% for the three months ended December 31, 1995 primarily due to the fiscal 1996 and 1997 acquisitions and the Company's investment in management information systems. Interest expense as a percent of net operating revenue decreased to 3.3% for the three months ended December 31, 1996 from 3.5% for the three months ended December 31, 1995 due to a reduction in interest rates and repayments of bank debt with cash flow generated from operations. The provision for income taxes as a percent of net operating revenue decreased to 3.9% for the three months ended December 31, 1996 from 4.2% for the three months ended December 31, 1995 which is primarily attributable to a lower effective tax rate and a relative change in pretax income. Net income as a percent of net operating revenue was 5.9% for the three months ended December 31, 1996 compared to 6.2% for the three months ended December 31, 1995. This decrease was primarily attributable to the fiscal 1997 acquisitions which was partially offset by the increased profitability of the Company's hospitals owned during both periods, as discussed above. 13 14 Six Months Ended December 31, 1996 Compared to Six Months Ended December 31, 1995 The Company's net operating revenue was $658.1 million for the six months ended December 31, 1996 compared to $527.0 million for the comparable period of fiscal 1996, an increase of $131.1 million or 25%. This increase was attributable to, among other things, five hospital acquisitions, a full six months of revenue from one hospital acquired during fiscal 1996, a 10% increase in revenue generated by hospitals owned during both periods and a 4% increase in management services revenue. The Company's owned hospitals accounted for 90% of the Company's net operating revenue for the six months ended December 31, 1996 compared to 88% for the six months ended December 31, 1995. Operating expenses as a percent of net operating revenue increased to 81.6% for the six months ended December 31, 1996 from 81.3% for the six months ended December 31, 1995. Operating expenses as a percentage of net operating revenue for the Company's owned hospitals decreased to 81.9% for the six months ended December 31, 1996 from 82.2% for the six months ended December 31, 1995. Operating expenses as a percentage of net operating revenue for the Company's hospitals owned during both periods decreased to 80.6% for the six months ended December 31, 1996 from 82.0% for the six months ended December 31,1995 which was primarily attributable to a reduction in salaries and benefits, fees and supplies expense as a percent of net operating revenue. EBITDA as a percent of net operating revenue was 18.4% for the six months ended December 31, 1996 compared to 18.7% for the six months ended December 31, 1995. EBITDA as a percent of net operating revenue for the Company's owned hospitals was 18.1% for the six months ended December 31, 1996 compared to 17.8% for the six months ended December 31, 1995. EBITDA as a percent of net operating revenue for the Company's hospitals owned during both periods was 19.4% for the three months ended December 31, 1996 compared to 18.0% for the three months ended December 31, 1995. EBITDA as a percent of net operating revenue for the Company's management services business was 21.3% for the six months ended December 31, 1996 compared to 25.2% for the six months ended December 31, 1995 which was primarily attributable to the costs of new services. Depreciation and amortization expense as a percent of net operating revenue increased to 5.5% for the six months ended December 31, 1996 from 5.1% for the six months ended December 31, 1995 primarily due to the fiscal 1996 and 1997 acquisitions and the Company's investment in management information systems. Interest expense as a percent of net operating revenue was 3.4% for the six months ended December 31, 1996 and 1995. The provision for income taxes as a percent of net operating revenue decreased to 3.8% for the three months ended December 31, 1996 from 4.1% for the six months ended December 31, 1995 which is primarily attributable to a lower effective tax rate and a relative change in 14 15 pretax income. Net income as a percent of net operating revenue was 5.7% for the six months ended December 31, 1996 compared to 6.0% for the six months ended December 31, 1995. This decrease was primarily attributable to the fiscal 1997 acquisitions which was partially offset by the increased profitability of the Company's hospitals owned during both periods, as discussed above. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1996, the Company had working capital of $194.3 million, including cash and cash equivalents of $15.5 million. The ratio of current assets to current liabilities was 2.5 to 1.0 at December 31, 1996 compared to 2.6 to 1.0 at June 30, 1996. The Company's cash requirements excluding acquisitions have historically been funded by cash generated from operations. Cash generated from operations was $72.8 million and $56.8 million for the six months ended December 31, 1996 and 1995, respectively. The increase is primarily due to the fiscal 1996 and 1997 acquisitions. Capital expenditures excluding acquisitions for the six months ended December 31, 1996 and 1995 were $35.9 million and $27.1 million, respectively. The management services business does not require significant capital expenditures. Capital expenditures for owned hospitals may vary from year to year depending on facility improvements and service enhancements undertaken by the hospitals. The Company anticipates construction of a replacement hospital in Florence, South Carolina with fiscal 1997 capital expenditures of up to $25 million and a total project cost of $75 million to $80 million plus capitalized interest. In fiscal 1997, the Company expects to make capital expenditures from $75 million to $85 million, excluding acquisitions and the replacement hospital. The Company intends to acquire additional acute care facilities, and the Company is actively seeking out such acquisitions. There can be no assurance that the Company will not require additional debt or equity financing for any particular acquisition. Also, the Company continually reviews its capital needs and financing opportunities and may seek additional equity or debt financing for its acquisition program or other needs. At December 31, 1996, the Company had $295.0 million available under its Revolving Line of Credit. During the six months ended December 31, 1996, the Company acquired four hospitals and affiliated businesses for approximately $170.4 million. During fiscal 1996, the Company acquired two hospitals and affiliated businesses for approximately $205.3 million. Also, during fiscal 1996, the Company sold certain assets and the business of one hospital and a minority interest in another hospital. 15 16 The Internal Revenue Service (IRS) is in the process of conducting examinations of the Company's federal income tax returns for the years ended 1993 through 1995. During fiscal 1996, the IRS proposed certain adjustments in connection with its examination of the Company's federal income tax returns for the fiscal years ended June 30, 1990 through 1992. The most significant adjustment involves the amortization deductions claimed on certain acquired intangible assets in conjunction with the acquisition of Quorum Health Resources, Inc. The Company is currently protesting all of the proposed adjustments through the appeals process of the IRS and does not expect the resolution of this contingency to materially affect the Company's results of operations or financial position. In June 1993, the OIG of the Department of Health and Human Services requested information from the Company in connection with an investigation involving the Company's procedures for preparing Medicare cost reports. In January 1995, the U.S. Department of Justice issued a Civil Investigative Demand which also requested information from the Company in connection with that same investigation. As a part of the government's investigation, several former and current employees of the Company have been interviewed. The Company has provided information and is cooperating fully with the investigation. The Company cannot predict whether the government will commence litigation regarding this matter. Management believes that any claims likely to be asserted by the government as a result of its investigation would not have a material effect on the Company's results of operations or financial position. INDUSTRY TRENDS The Company's owned hospitals derive a substantial portion of their revenue from the federal Medicare program and the state Medicaid programs. The payment rates under the Medicare program for inpatients are prospective, based upon the diagnosis of a patient. While these rates are indexed for inflation annually, the increases have historically been less than actual inflation. Both federal and state legislators are continuing to scrutinize the health care industry for the purpose of reducing health care costs. The Company is unable to predict what, if any, future health reform legislation may be enacted at the federal or state level. Changes in the Medicare or Medicaid programs and other proposals to limit health care spending could have an adverse impact upon the health care industry and the Company. In addition, states, insurance companies and employers are actively negotiating the amounts paid to hospitals, which are typically lower than their standard rates. The trend toward managed care, including health maintenance organizations, preferred provider organizations and various other forms of managed care, may affect hospitals' ability to 16 17 maintain their current rate of net revenue growth and operating margins. The Company expects the industry trend from inpatient to outpatient services to continue due to the increased focus on managed care and advances in technology. Outpatient revenue of the Company's owned hospitals was approximately 36.2% and 34.5% of gross patient service revenue for the six months ended December 31, 1996 and 1995, respectively. INFLATION The health care industry is labor intensive. Wages and other expenses increase during periods of inflation and when shortages in marketplaces occur. In addition, suppliers pass along rising costs to the Company in the form of higher prices. The Company has generally been able to offset increases in operating costs by increasing charges, expanding services, and implementing cost control measures to curb increases in operating costs and expenses. The Company cannot predict its ability to offset or control future cost increases. 17 18 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On November 20, 1996, the annual meeting of the stockholders of the Company was held to elect directors to hold office until the next annual meeting and to ratify the selection of the Company's independent auditors. The following were elected to serve as directors until the next annual meeting of the stockholders:
Name For Against Abstain - ---- --- ------- ------- Jack O. Bovender 42,076,101 43,259 Sam A. Brooks, Jr. 42,076,556 42,804 Russell L. Carson 42,076,599 42,761 James E. Dalton, Jr. 42,076,276 43,084 C. Edward Floyd, M.D. 42,047,488 71,872 Joseph C. Hutts 42,066,865 52,495 Kenneth J. Melkus 42,076,458 42,902 Thomas J. Murphy, Jr. 42,076,599 42,761 Rocco A. Ortenzio 42,037,518 81,842 S. Douglas Smith 42,068,257 51,103
The accounting firm of Ernst & Young was ratified as the Company's independent auditors for the 1997 fiscal year, with 42,050,954 shares voted for ratification and 56,907 shares voted against; 11,499 shares abstained. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The exhibits filed as part of this Report are listed in the Index to Exhibits immediately following the signature page. (b) Reports on Form 8-K. A report on Form 8-K was filed with the Commission on December 17, 1996, to inform the Market of the acquisition of Barberton Citizens Hospital, an acute care hospital located in Barberton, Ohio. A previously released press announcement of the acquisition was filed in connection with the report. 18 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QUORUM HEALTH GROUP, INC. (Registrant) Date: February 11, 1997 By: /s/ Steve B. Hewett ------------------- Steve B. Hewett Vice President and Treasurer (Chief Financial Officer) 19 20 Exhibit Index
Exhibit No. Page - ----------- ---- 11 Computation of Earnings Per Share 21 27 Financial Data Schedule (for SEC use only)
20 EX-11 2 COMPUTATION OF EARNINGS PER SHARE 1 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
Three Months Six Months Ended December 31 Ended December 31 -------------------- -------------------- 1996 1995 1996 1995 ------- ------- ------- ------- (In thousands, except per share data) PRIMARY Average shares outstanding 48,766 47,927 48,731 47,884 Net effect of dilutive stock options based on the treasury stock method using average market price 1,666 1,635 1,540 1,679 ------- ------- ------- ------- Totals 50,432 49,562 50,271 49,563 ======= ======= ======= ======= Net income $20,108 $16,873 $37,634 $31,453 ======= ======= ======= ======= Net income per common share $ 0.40 $ 0.34 $ 0.75 $ 0.63 ======= ======= ======= ======= FULLY DILUTED Average shares outstanding 48,766 47,927 48,731 47,884 Net effect of dilutive stock options based on the treasury stock method using the higher of ending or average market price 1,865 1,664 1,641 1,717 ------- ------- ------- ------- Totals 50,631 49,591 50,372 49,601 ======= ======= ======= ======= Net income $20,108 $16,873 $37,634 $31,453 ======= ======= ======= ======= Net income per common share $ 0.40 $ 0.34 $ 0.75 $ 0.63 ======= ======= ======= =======
EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 (UNAUDITED) AND THE CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 6-MOS JUN-30-1997 JUL-01-1996 DEC-31-1996 1 15,547 0 285,472 51,192 31,828 321,348 757,293 151,196 1,236,037 127,012 558,954 0 0 488 470,502 1,236,037 0 658,138 0 495,355 36,365 41,579 22,428 62,411 24,777 37,634 0 0 0 37,634 0.75 0.75
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