-----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, EzcFG4EaLvUWQBupaNc3y4JK2O0iO4dAAkcuS8FJ1vq1xi4/yU3x2sPfhTUJfUGy dXzGXyAcsZN0QSj4xvJ68g== 0000950144-97-005544.txt : 19970514 0000950144-97-005544.hdr.sgml : 19970514 ACCESSION NUMBER: 0000950144-97-005544 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 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: 97601826 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 3-31-97 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 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)
Three Months Ended March 31 ---------------------- 1997 1996 -------- -------- 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 ======== ========
See accompanying notes 2 3 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share amounts)
Nine Months Ended March 31 ----------------------- 1997 1996 --------- -------- 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 ========= ========
See accompanying notes. 3 4 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands)
March 31 June 30 1997 1996 ---------- ---------- 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 ========== ==========
4 5 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except per share amounts)
March 31 June 30 1997 1996 ---------- ---------- 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 ========== ==========
See accompanying notes. 5 6 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Nine Months Ended March 31 ----------------------- 1997 1996 --------- --------- 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)
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 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 8
NINE MONTHS ENDED MARCH 31 -------- 1997 1996 ---- ---- (In thousands) 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 ============ ============
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.
THREE MONTHS NINE MONTHS ENDED ENDED MARCH 31 MARCH 31 -------- -------- 1996 1997 1996 ---- ---- ---- (In thousands, except per share data) 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
8 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 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 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 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 13
Three Months Nine Months Ended Ended March 31 March 31 -------- -------- 1997 1996 1997 1996 ---- ---- ---- ---- 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
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 March 31 (Decrease) ------------------ of Dollar 1997 1996 Amounts ---- ---- ---------- 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% ===== ===== ======
13 14
Nine Months Percentage Ended Increase March 31 (Decrease) of --------------- Dollar 1997 1996 Amounts ---- ---- ------------ 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% ===== ===== ======
- -------------------- (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 14 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 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 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 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 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 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 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 22 Exhibit Index Exhibit No. - ---------- 11 Computation of Earnings Per Share 27 Financial Data Schedule (for SEC use only) 22 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 Nine Months Ended March 31 Ended March 31 ---------------------- ---------------------- 1997 1996 1997 1996 --------- --------- --------- --------- (In thousands, except per share data) 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 ========= ========= ========= =========
EX-27 3 FINANCIAL DATA SCHEDULE
5 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. 1,000 U.S. DOLLARS 9-MOS JUN-30-1997 JUL-01-1996 MAR-31-1997 1 14,278 0 295,870 54,611 31,545 323,171 838,298 167,458 1,237,803 134,606 519,516 0 0 493 501,334 1,237,803 0 1,035,234 0 776,402 55,669 66,589 34,222 102,352 40,634 61,718 0 0 0 61,718 1.22 1.22
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