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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, 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) (I.R.S. Employer
Identification No.)
103 Continental Place, Brentwood, Tennessee 37027
----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(615) 371-7979
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(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 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 February 10, 1998
- ----- --------------------------------
Common Stock, $.01 Par Value 74,837,246 Shares
- -------------------------------------------------------------------------------
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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 DECEMBER 31
---------------------------
1997 1996
---------- ----------
Revenue:
Net patient service revenue $373,503 $ 308,806
Hospital management/professional services 19,743 18,821
Reimbursable expenses 15,649 14,510
-------- ---------
Net operating revenue 408,895 342,137
Expenses:
Salaries and benefits 162,947 136,455
Reimbursable expenses 15,649 14,510
Supplies 55,338 46,619
Fees 37,479 31,544
Other operating expenses 33,302 27,680
Provision for doubtful accounts 29,474 22,259
Depreciation and amortization 22,533 18,297
Interest 10,859 11,435
Minority interest 832 (8)
-------- ---------
368,413 308,791
-------- ---------
Income before income taxes 40,482 33,346
Provision for income taxes 16,071 13,238
-------- ---------
Net income $ 24,411 $ 20,108
======== =========
Net income per common share:
Basic $ 0.33 $ 0.27
======== =========
Diluted $ 0.32 $ 0.27
======== =========
Weighted average common shares :
Basic 74,406 73,148
======== =========
Diluted 76,800 75,413
======== =========
See accompanying notes.
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS
ENDED DECEMBER 31
------------------------
1997 1996
-------- --------
Revenue:
Net patient service revenue $730,620 $590,856
Hospital management/professional services 39,438 38,192
Reimbursable expenses 31,658 29,090
-------- --------
Net operating revenue 801,716 658,138
Expenses:
Salaries and benefits 318,544 261,886
Reimbursable expenses 31,658 29,090
Supplies 110,010 91,200
Fees 71,866 58,890
Other operating expenses 66,580 54,289
Provision for doubtful accounts 59,884 41,579
Depreciation and amortization 44,062 36,108
Interest 21,229 22,428
Minority interest 1,976 257
-------- --------
725,809 595,727
-------- --------
Income before income taxes 75,907 62,411
Provision for income taxes 30,135 24,777
-------- --------
Net income $ 45,772 $ 37,634
======== ========
Net income per common share:
Basic $ 0.62 $ 0.51
======== ========
Diluted $ 0.60 $ 0.50
======== ========
Weighted average common shares:
Basic 74,309 73,096
======== ========
Diluted 76,726 75,217
======== ========
See accompanying notes.
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
DECEMBER 31 JUNE 30
1997 1997
---------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 14,929 $ 19,008
Accounts receivable, less allowance for doubtful
accounts of $74,892 at December 31, 1997
and $55,360 at June 30, 1997 289,472 248,732
Supplies 34,432 31,622
Other 46,287 31,739
---------- ----------
Total current assets 385,120 331,101
Property, plant and equipment, at cost:
Land 63,185 62,109
Buildings and improvements 321,883 324,450
Equipment 479,784 462,726
Construction in progress 52,327 21,192
---------- ----------
917,179 870,477
Less accumulated depreciation 218,032 183,705
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699,147 686,772
Cost in excess of net assets acquired, net 190,860 185,932
Unallocated purchase price 72,151 7,831
Other 70,010 67,355
---------- ----------
Total assets $1,417,288 $1,278,991
========== ==========
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31 JUNE 30
1997 1997
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 84,951 $ 77,225
Accrued salaries and benefits 66,715 61,936
Other current liabilities 9,939 9,589
Current maturities of long-term debt 1,200 1,869
---------- ----------
Total current liabilities 162,805 150,619
Long-term debt, less current maturities 602,886 519,940
Deferred income taxes 28,778 38,249
Other liabilities and deferrals 28,188 25,450
Minority interests in consolidated entities 26,195 26,618
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value;
300,000 shares authorized; 74,515
issued and outstanding at December 31,
1997 and 74,137 at June 30, 1997 745 741
Additional paid-in capital 277,237 272,692
Retained earnings 290,454 244,682
---------- ----------
568,436 518,115
---------- ----------
Total liabilities and stockholders' equity $1,417,288 $1,278,991
========== ==========
See accompanying notes.
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS
ENDED DECEMBER 31
-----------------------------
1997 1996
---------- ------------
Net cash provided by operating activities $ 51,673 $ 72,801
Investing activities:
Purchase of acquired companies (83,467) (170,413)
Purchase of property, plant and equipment (68,190) (35,881)
Proceeds from sale of assets 14,695 --
Other (3,447) (1,335)
---------- ----------
Net cash used in investing activities (140,409) (207,629)
Financing activities:
Borrowings under bank debt 250,200 241,000
Repayments of bank debt (164,100) (113,000)
Proceeds from issuance of common stock, net 3,263 1,493
Other (4,706) 500
---------- ----------
Net cash provided by financing activities 84,657 129,993
---------- ----------
Decrease in cash and cash equivalents (4,079) (4,835)
Cash and cash equivalents at beginning of period 19,008 20,382
---------- ----------
Cash and cash equivalents at end of period $ 14,929 $ 15,547
========== ==========
Supplemental cash flow information:
Interest paid $ (22,027) $ (21,111)
========== ==========
Income taxes paid $ (37,597) $ (23,975)
========== ==========
See accompanying notes.
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months and six months ended
December 31, 1997, are not necessarily indicative of the results that may be
expected for the year ending June 30, 1998. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended June 30, 1997. Certain
reclassifications have been made to the fiscal 1997 financial presentation to
conform with fiscal 1998.
2. NEWLY ISSUED ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes reporting standards for
operating segment information disclosed in annual financial statements and in
interim financial reports issued to shareholders. Under existing accounting
standards, the Company has reported its operations as one line of business since
its inception because substantially all of its revenues and operating profits
have been derived from its acute care hospitals, affiliated health care entities
and health care management services. The Company will adopt SFAS No. 131
beginning with its fiscal year ending June 30, 1999 and is presently evaluating
the new standard in order to determine its effect, if any, on the way the
Company might report its operations in the future.
3. ACQUISITIONS AND DIVESTITURES
During the six months ended December 31, 1997, the Company acquired one hospital
and affiliated health care entities and sold its remaining interest in a
hospital. During the six months ended December 31, 1996, the Company acquired
four hospitals and affiliated health care entities. Hospital and affiliated
business acquisitions are summarized as follows (in thousands):
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SIX MONTHS
ENDED
DECEMBER 31
------------
1997 1996
---- ----
Fair value of assets acquired $ 90,066 $ 205,809
Fair value of liabilities assumed (6,599) (21,675)
Contributions from minority investors -- (13,721)
-------- ---------
Net cash used for acquisitions $ 83,467 $ 170,413
======== =========
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 1998 and 1997 as if
the respective transactions had occurred at the beginning of the periods
presented (in thousands, except per share data):
THREE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31 DECEMBER 31
----------- -----------
1997 1996 1997 1996
---- ---- ---- ----
Net operating revenue $ 405,632 $ 377,813 $ 803,796 $ 743,960
Net income 21,892 19,071 42,001 35,513
Net income per common share:
Basic .29 .26 .57 .49
Diluted .29 .25 .55 .47
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.
4. LONG-TERM DEBT
On December 15, 1997, the Company redeemed its remaining $2.2 million 11.875%
Senior Subordinated Notes at 1.05875%.
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5. STOCKHOLDERS' EQUITY AND STOCK BENEFIT PLANS
On August 19, 1997, the Board of Directors approved a three-for-two stock split
effected in the form of a stock dividend payable on or about September 16, 1997
to shareholders of record on September 2, 1997. The shares of common stock,
price per share, the number of shares subject to options and the exercise prices
have been retroactively restated to give effect to the stock dividend for all
periods presented.
On November 10, 1997, the Company's stockholders approved an amendment to
increase the number of authorized shares of common stock from 100,000,000 to
300,000,000. The additional shares of common stock are identical to the shares
of common stock previously authorized.
On November 10, 1997, the Company's stockholders approved an amendment to the
Company's qualified employee stock purchase plan to increase the number of
shares reserved for issuance from 3,000,000 to 3,750,000.
On November 10, 1997, the Company's stockholders approved the 1997 Stock Option
Plan. Under the plan, non-qualified and incentive stock options to purchase
common stock may be granted to executive officers, other key employees and
consultants. Stock options are generally granted at an exercise price equal to
the fair market value at the date of grant and are exercisable over a period not
to exceed ten years. The number of shares initially reserved for issuance was
3,000,000. No further options will be granted pursuant to the Company's Restated
Stock Option Plan.
6. NET INCOME PER COMMON SHARE
In 1997, the FASB issued SFAS No. 128, "Earnings per Share." Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted earnings per
share:
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THREE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31 DECEMBER 31
------------ -----------
1997 1996 1997 1996
---- ---- ---- ----
Numerator:
Net income $24,411 $20,108 $45,772 $37,634
======= ======= ======= =======
Denominator:
Basic earnings per share -
weighted-average shares 74,406 73,148 74,309 73,096
Effect of dilutive stock options 2,394 2,265 2,417 2,121
------- ------- ------- -------
Diluted earnings per share -
adjusted weighted-average shares 76,800 75,413 76,726 75,217
======= ======= ======= =======
Basic earnings per share $ 0.33 $ 0.27 $ 0.62 $ 0.51
======= ======= ======= =======
Diluted earnings per share $ 0.32 $ 0.27 $ 0.60 $ 0.50
======= ======= ======= =======
7. LEASES
On November 26, 1997, the Company entered into a five-year $150 million End
Loaded Lease Financing (ELLF) agreement to provide a financing option for future
acquisitions and/or construction. This financing option is in addition to the
Company's $850 million revolving line of credit. The ELLF interest rate margins
and facility fee rates are substantially the same as the Company's revolving
line of credit. All lease payments under the agreement are guaranteed by the
Company. In connection with the ELLF, the Company amended its unsecured
revolving line of credit to extend the credit agreement expiration date by six
months to November 26, 2002 to coincide with the expiration date of the ELLF.
8. INCOME TAXES
The income tax provision recorded for the three months and six months ended
December 31, 1997 and 1996 differs from the expected income tax provision due to
permanent differences and the provision for state income taxes.
9. 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.
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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 fiscal years ended June 30,
1993 through 1995. The Company has reached a settlement with the IRS in
connection with its examination of the Company's federal income tax returns for
the fiscal years ended June 30, 1990 through 1992. The settlement did not have a
material effect on the Company's results of operations or financial position.
Financial Instruments
Interest rate swap agreements are used on a limited basis to manage the
Company's interest rate exposure. The agreements are contracts to periodically
exchange fixed and floating interest rate payments over the life of the
agreements. The floating-rate payments are based on LIBOR and fixed-rate
payments are dependent upon market levels at the time the swap agreement was
consummated. In fiscal 1997, the Company amended its 1993 interest rate swap
agreements to effectively convert two borrowings of $50 million each from
fixed-rate to floating-rate through September 16, 2001 and December 1, 2001,
respectively. In addition, the Company entered into interest rate swap
agreements which effectively convert $100 million and $200 million of
floating-rate borrowings to fixed-rate borrowings through December 12, 2001 and
March 20, 2002, respectively. During the six months ended December 31, 1997, the
Company entered into interest rate swap agreements which effectively convert two
borrowings of $50 million each from floating-rate to fixed-rate through December
30, 2002. For the six months ended December 31, 1997 and 1996, the Company
received a weighted average rate of 5.8% and 5.8%, respectively, and paid a
weighted average rate of 6.1% and 5.6%, respectively.
Other
In June 1993, the Office of the Inspector General (OIG) of the Department of
Health and Human Services requested information from the Company in connection
with an investigation involving the Company's procedures for preparing Medicare
cost reports. In January 1995, the U.S. Department of Justice issued a Civil
Investigative Demand which also requested information from the Company in
connection with that same investigation. As a part of the government's
investigation, several former and current employees of the Company have been
interviewed. The Company has provided
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information and is cooperating fully with the investigation. The Company cannot
predict whether the government will commence litigation regarding this matter.
10. SUBSEQUENT EVENTS
Effective February 1, 1998, the Company and Universal Health Services, Inc.
(UHS) formed Valley Health System LLC and Summerlin Hospital Medical Center LLC.
UHS contributed Valley Hospital Medical Center and the Company contributed
Desert Springs Hospital in exchange for equity interests of 72.5 percent and
27.5 percent, respectively, in Valley Health System LLC. The Company paid
approximately $23 million in exchange for a 26.1 percent interest in Summerlin
Hospital Medical Center LLC. There will be working capital settlements to
maintain the respective ownership interests of each party. The Company will
account for its investment in the joint ventures using the equity method of
accounting and anticipates a $15 to $17 million charge after taxes related to
the writedown of goodwill.
In January 1998, the Company entered into interest rate swap agreements
effective March 1998 to replace its existing $100 million and $200 million
agreements. The new five year agreements allow the Company to convert $100
million and $200 million of floating-rate borrowings to fixed-rate borrowings
with effective rates of 5.71% and 5.97%, respectively, and allow the
counterparty a one-time option at the end of the initial term to extend the
swaps for an incremental five years.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
IMPACT OF ACQUISITIONS
During the six months ended December 31, 1997, the Company acquired one
hospital and affiliated health care entities and sold its remaining interest in
a hospital. During fiscal 1997, the Company acquired five hospitals and
affiliated health care entities (four during the six months ended December 31,
1996).
Because of the financial impact of the Company's recent acquisitions
and divestitures, it is difficult to make meaningful comparisons between the
Company's financial statements for the fiscal periods presented. In addition,
due to the current number of owned hospitals, each additional hospital
acquisition can affect the overall operating margin of the Company. During a one
to three year transition period after the acquisition of a hospital, the Company
has typically taken a number of steps to lower operating costs. The impact of
such actions can be partially offset by cost increases to expand the hospital's
services, strengthen its medical staff and improve its market position. The
benefits of these investments and of other activities to improve operating
margins may not occur immediately. Consequently, the financial performance of an
acquired hospital may adversely affect overall operating margins in the
near-term. As the Company makes additional hospital acquisitions, the Company
expects that this effect will be mitigated by the expanded financial base of
existing hospitals.
SELECTED OPERATING STATISTICS - OWNED HOSPITALS
The following table sets forth certain operating statistics for the
Company's owned hospitals for each of the periods presented. The results of the
owned hospitals for the three months ended December 31, 1997 include three
months of operations for nineteen hospitals and a partial period for one
hospital divested during such period. 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 six months ended December 31,
1997 include six months of operations for eighteen hospitals and a partial
period for one hospital acquired and one hospital divested during such period.
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.
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Three Months Six Months
Ended Ended
December 31 December 31
----------- -----------
1997 1996 1997 1996
---- ---- ---- ----
Number of hospitals at end of period 19 18 19 18
Licensed beds at end of period 4,202 4,113 4,202 4,113
Beds in service at end of period 3,466 3,416 3,466 3,416
Admissions 33,350 28,881 65,416 55,621
Average length of stay (days) 5.5 5.5 5.5 5.5
Patient days 182,412 160,043 358,442 307,524
Adjusted patient days 299,705 250,400 590,887 482,022
Occupancy rates (average licensed beds) 46.4% 45.6% 45.6% 45.3%
Occupancy rates (average beds in service) 56.0% 55.2% 55.1% 55.1%
Gross inpatient revenues (in thousands) $401,417 $346,075 $791,031 $667,807
Gross outpatient revenues (in thousands) $258,103 $195,378 $512,973 $378,933
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.
Percentage
Three Months Increase
Ended (Decrease)
December 31 of Dollar
----------- Amounts
1997 1996 -------
---- ----
Net operating revenue 100.0% 100.0% 19.5%
Operating expenses (1) 81.7 81.6 19.8
----- ----- ----
EBITDA (2) 18.3 18.4 18.4
Depreciation and amortization 5.5 5.3 23.2
Interest 2.7 3.3 (5.0)
Minority interest 0.2 0.0
----- ----- ----
Income before income taxes 9.9 9.8 21.4
Provision for income taxes 3.9 3.9 21.4
----- ----- ----
Net income 6.0% 5.9% 21.4%
===== ===== ====
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Percentage
Six Months Increase
Ended (Decrease)
December 31 of Dollar
----------- Amounts
-------
1997 1996
---- ----
Net operating revenue 100.0% 100.0% 21.8%
Operating expenses (1) 82.1 81.6 22.6
----- ----- ----
EBITDA (2) 17.9 18.4 18.1
Depreciation and amortization 5.5 5.5 22.0
Interest 2.7 3.4 (5.3)
Minority interest 0.2 0.0 --
----- ----- ----
Income before income taxes 9.5 9.5 21.6
Provision for income taxes 3.8 3.8 21.6
----- ----- ----
Net income 5.7% 5.7% 21.6%
===== ===== ====
- --------------------
(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, 1997 Compared to Three Months Ended
December 31, 1996
The Company's net operating revenue was $408.9 million for the three
months ended December 31, 1997, compared to $342.1 million for the comparable
period of fiscal 1996, an increase of $66.8 million or 20%. This increase was
attributable to, among other things, four hospital acquisitions, an 8% 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), including additional revenues from Medicare and Medicaid
programs, and a 6% increase in management services revenue.
Operating expenses as a percent of net operating revenue increased to
81.7% for the three months ended December 31, 1997 from 81.6% for the three
months ended December 31, 1996 which was primarily attributable to the fiscal
1997 and 1998 acquisitions of owned hospitals. Operating expenses as a
percentage of net operating revenue for the Company's owned hospitals increased
to 82.4% for the three months ended December
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31, 1997 from 82.0% for the three months ended December 31, 1996. For the
Company's hospitals owned during both periods, operating expenses as a
percentage of net operating revenue decreased to 82.0% for the three months
ended December 31, 1997 from 82.1% for the three months ended December 31, 1996.
EBITDA as a percent of net operating revenue was 18.3% for the three
months ended December 31, 1997 compared to 18.4% for the three months ended
December 31, 1996. EBITDA as a percent of net operating revenue for the
Company's owned hospitals was 17.6% for the three months ended December 31, 1997
compared to 18.0% for the three months ended December 31, 1996. EBITDA as a
percent of net operating revenue for the Company's hospitals owned during both
periods was 18.0% for the three months ended December 31, 1997 compared to 17.9%
for the three months ended December 31, 1996. EBITDA as a percent of net
operating revenue for the Company's management services business was 25.5% for
the three months ended December 31, 1997 compared to 22.1% for the three months
ended December 31, 1996.
Depreciation and amortization expense as a percent of net operating
revenue increased to 5.5% for the three months ended December 31, 1997 from 5.3%
for the three months ended December 31, 1996 primarily due to the completion of
various construction and renovation projects. Interest expense as a percent of
net operating revenue decreased to 2.7% for the three months ended December 31,
1997 from 3.3% for the three months ended December 31, 1996 due to the
replacement of subordinated debt with bank debt in fiscal 1997, 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
was 3.9% for the three months ended December 31, 1997 and 1996. Minority
interest expense as a percent of net operating revenue increased to 0.2% for the
three months ended December 31, 1997 from 0.0% for the three months ended
December 31, 1996 which was primarily attributable to the fiscal 1997
acquisitions.
Net income as a percent of net operating revenue was 6.0% for the three
months ended December 31, 1997 compared to 5.9% for the three months ended
December 31, 1996.
Six Months Ended December 31, 1997 compared to Six Months Ended December
31, 1996
The Company's net operating revenue was $801.7 million for the six
months ended December 31, 1997 compared to $658.1 million for the comparable
period of fiscal 1997, an increase of $143.6 million or 22%. This increase was
attributable to, among other things, five hospital acquisitions, a 9% increase
in revenue generated by hospitals owned during both periods, including
additional revenues from Medicare and Medicaid programs, and a 6% increase in
management services revenue.
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Operating expenses as a percent of net operating revenue increased to
82.1% for the six months ended December 31, 1997 from 81.6% for the six months
ended December 31, 1996 which was primarily attributable to the fiscal 1997 and
1998 acquisitions of owned hospitals and an increase in bad debt expense.
Operating expenses as a percentage of net operating revenue for the Company's
owned hospitals increased to 82.7% for the six months ended December 31, 1997
from 81.9% for the six months ended December 31, 1996. For the Company's
hospitals owned during both periods, operating expenses as a percentage of net
operating revenue increased to 82.3% for the six months ended December 31, 1997
from 82.1% for the six months ended December 31, 1996 which was primarily
attributable to an increase in bad debt expense.
EBITDA as a percent of net operating revenue was 17.9% for the six
months ended December 31, 1997 compared to 18.4% for the six months ended
December 31, 1996. EBITDA as a percent of net operating revenue for the
Company's owned hospitals was 17.3% for the six months ended December 31, 1997
compared to 18.1% for the six months ended December 31, 1996. EBITDA as a
percent of net operating revenue for the Company's hospitals owned during both
periods was 17.7% for the six months ended December 31, 1997 compared to 17.9%
for the six months ended December 31, 1996. EBITDA as a percent of net operating
revenue for the Company's management services business was 23.9% for the six
months ended December 31, 1997 compared to 21.3% for the six months ended
December 31, 1996.
Depreciation and amortization expense as a percent of net operating
revenue was 5.5% for the six months ended December 31, 1997 and 1996. Interest
expense as a percent of net operating revenue decreased to 2.7% for the six
months ended December 31, 1997 from 3.4% for the six months ended December 31,
1996 due to the replacement of subordinated debt with bank debt in fiscal 1997,
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 was 3.8% for the six months ended December 31, 1997 and 1996.
Minority interest expense as a percent of net operating revenue increased to .2%
for the six months ended December 31, 1997 from 0.0% for the six months ended
December 31, 1996 which was primarily attributable to the fiscal 1997
acquisitions.
Net income as a percent of net operating revenue was 5.7% for the six
months ended December 31, 1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had working capital of $222.3
million, including cash and cash equivalents of $14.9 million. The ratio of
current assets to current liabilities was 2.4 to 1.0 at December 31, 1997
compared to 2.2 to 1.0 at June 30, 1997.
17
18
The Company's cash requirements excluding acquisitions have
historically been funded by cash generated from operations. Cash generated from
operations was $50.4 million and $72.8 million for the six months ended December
31, 1997 and 1996, respectively. The decrease is primarily due to a fiscal 1998
increase in accounts receivable at three hospitals, which the Company is
addressing.
Capital expenditures excluding acquisitions for the six months ended
December 31, 1997 and 1996 were $68.2 million and $35.9 million, respectively.
Capital expenditures may vary from year to year depending on facility
improvements and service enhancements undertaken by the owned hospitals. The
Company has begun construction of a replacement hospital in Florence, South
Carolina with fiscal 1998 capital expenditures of up to $60 million and a total
project cost of approximately $85 million. In fiscal 1998, the Company expects
to make capital expenditures from $130 million to $150 million, including the
replacement hospital and excluding acquisitions.
Effective February 1, 1998, the Company and Universal Health Services,
Inc. (UHS) formed Valley Health System LLC and Summerlin Hospital Medical Center
LLC. UHS contributed Valley Hospital Medical Center and the Company contributed
Desert Springs Hospital in exchange for equity interests of 72.5 percent and
27.5 percent, respectively, in Valley Health System LLC. The Company paid
approximately $23 million in exchange for a 26.1 percent interest in Summerlin
Hospital Medical Center LLC. There will be working capital settlements to
maintain the respective ownership interests of each party. The Company will
account for its investment in the joint ventures using the equity method of
accounting and anticipates a $15 to $17 million charge after taxes related to
the writedown of goodwill.
During the six months ended December 31, 1997, the Company acquired one
hospital and affiliated health care entities for approximately $90.1 million and
sold the remaining interest in an acute care hospital in Papillion, Nebraska.
During fiscal 1997, the Company acquired five hospitals and affiliated health
care entities for approximately $184.6 million. The Company also sold a minority
interest in the hospital in Nebraska in fiscal 1997.
The Company intends to acquire additional acute care facilities, and is
actively seeking out such acquisitions. The Company is continually evaluating
various structures to serve existing local healthcare delivery markets. These
structures could include joint ventures with other hospital owners or
physicians.
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, 1997, the Company had $450
million outstanding under its Revolving Line of Credit.
18
19
On November 26, 1997, the Company entered into a five-year $150 million
End Loaded Lease Financing (ELLF) agreement to provide a financing option for
future acquisitions and/or construction. This financing option is in addition to
the Company's $850 million revolving line of credit. The ELLF interest rate
margins and facility fee rates are substantially the same as the Company's
revolving line of credit. All lease payments under the agreement are guaranteed
by the Company. In connection with the ELLF, the Company amended its unsecured
revolving line of credit to extend the credit agreement expiration date by six
months to November 26, 2002 to coincide with the expiration date of the ELLF.
On December 15, 1997, the Company redeemed its remaining $2.2 million
11.875% Senior Subordinated Notes at 1.05875%.
On August 19, 1997, the Board of Directors approved a three-for-two
stock split effected in the form of a stock dividend payable on or about
September 16, 1997 to shareholders of record on September 2, 1997. The shares of
common stock, price per share, the number of shares subject to options and the
exercise prices have been retroactively restated to give effect to the stock
dividend for all periods presented.
On November 10, 1997, the Company's stockholders approved an amendment
to increase the number of authorized shares of common stock from 100,000,000 to
300,000,000. The additional shares of common stock are identical to the shares
of common stock previously authorized.
On November 10, 1997, the Company's stockholders approved an amendment
to the Company's qualified employee stock purchase plan to increase the number
of shares reserved for issuance from 3,000,000 to 3,750,000.
On November 10, 1997, the Company's stockholders approved the 1997
Stock Option Plan. Under the plan, non-qualified and incentive stock options to
purchase common stock may be granted to executive officers, other key employees
and consultants. Stock options are generally granted at an exercise price equal
to the fair market value at the date of grant and are exercisable over a period
not to exceed ten years. The number of shares initially reserved for issuance
was 3,000,000. No further options will be granted pursuant to the Company's
Restated Stock Option Plan.
The Internal Revenue Service (IRS) is in the process of conducting
examinations of the Company's federal income tax returns for the fiscal years
ended June 30, 1993 through 1995. The Company has reached a settlement with the
IRS in connection with its examination of the Company's federal income tax
returns for the fiscal years ended June 30, 1990 through 1992. The settlement
did not have a material effect on the Company's results of operations or
financial position.
19
20
Interest rate swap agreements are used on a limited basis to manage the
Company's interest rate exposure. The agreements are contracts to periodically
exchange fixed and floating interest rate payments over the life of the
agreements. The floating-rate payments are based on LIBOR and fixed-rate
payments are dependent upon market levels at the time the swap agreement was
consummated. In fiscal 1997, the Company amended its 1993 interest rate swap
agreements to effectively convert two borrowings of $50 million each from
fixed-rate to floating-rate through September 16, 2001 and December 1, 2001,
respectively. In addition, the Company entered into interest rate swap
agreements which effectively convert $100 million and $200 million of
floating-rate borrowings to fixed-rate borrowings through December 12, 2001 and
March 20, 2002, respectively. During the six months ended December 31, 1997, the
Company entered into interest rate swap agreements which effectively convert two
borrowings of $50 million each from floating-rate to fixed-rate through December
30, 2002. For the six months ended December 31, 1997 and 1996, the Company
received a weighted average rate of 5.8% and 5.8%, respectively, and paid a
weighted average rate of 6.1% and 5.6%, respectively. In January 1998, the
Company entered into interest rate swap agreements effective March 1998 to
replace its existing $100 million and $200 million agreements. The new five year
agreements allow the Company to convert $100 million and $200 million of
floating-rate borrowings to fixed-rate borrowings with effective rates of 5.71%
and 5.97%, respectively, and allow the counterparty a one-time option at the end
of the initial term to extend the swaps for an incremental five years.
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 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes reporting standards
for operating segment information disclosed in annual financial statements and
in interim financial reports issued to shareholders. Under existing accounting
standards, the Company has reported its operations as one line of business since
its inception because substantially all of its revenues and operating profits
have been derived from its acute care hospitals, affiliated health care entities
and health care management services. The Company will adopt SFAS No. 131
beginning with its fiscal year ending June 30, 1999 and is
20
21
presently evaluating the new standard in order to determine its effect, if any,
on the way the Company might report its operations in the future.
In 1997, the FASB issued SFAS No. 128, "Earnings per Share." Statement
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is similar to
the previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented to conform to the Statement 128
requirements.
GENERAL
The federal Medicare program and state Medicaid programs accounted for
approximately 55% and 56% of gross patient service revenue for the years ended
June 30, 1997 and 1996, respectively. The payment rates under the Medicare
program for inpatients are prospective, based upon the diagnosis of a patient.
The payment rate increases have historically been less than actual inflation.
Both federal and state legislators are continuing to scrutinize the
health care industry for the purpose of reducing health care costs. While the
Company is unable to predict what, if any, future health reform legislation may
be enacted at the federal or state level, the Company expects continuing
pressure to limit expenditures by governmental health care programs. Under the
Balanced Budget Act of 1997 (the 1997 Act), there are no increases in the rates
paid to acute care hospitals for inpatient care through September 30, 1998.
Payments for Medicare outpatient services provided at acute care hospitals and
home health services historically have been paid based on costs, subject to
certain limits. The 1997 Act requires that the payment for those services be
converted to a prospective payment system, which will be phased in over time.
The 1997 Act also includes a managed care option which could direct Medicare
patients to only managed care providers. Further changes in the Medicare or
Medicaid programs and other proposals to limit health care spending could have a
material adverse impact upon the health care industry and the Company.
In addition, states, insurance companies and employers are actively
negotiating amounts paid to hospitals, which are typically lower than their
standard rates. The trend toward managed care, including health maintenance
organizations, preferred provider organizations and various other forms of
managed care, may adversely affect hospitals' ability, including the Company's
hospitals, to maintain their current rate of net revenue growth and operating
margins.
The Company's acute care hospitals, like most acute care hospitals
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22
in the United States, have significant unused capacity. The result is
substantial competition for patients and physicians. Inpatient utilization
continues to be negatively affected by payor-required pre-admission
authorization and by payor pressure to maximize outpatient and alternative
health care delivery services for less acutely ill patients. The Company expects
increased competition and admission constraints to continue in the future. The
ability to successfully respond to these trends, as well as spending reductions
in governmental health care programs, will play a significant role in
determining hospitals' ability to maintain their current rate of net revenue
growth and operating margins.
The Company expects the industry trend from inpatient to outpatient
services to continue due to the increased focus on managed care and advances in
technology. Outpatient revenue of the Company's owned hospitals was
approximately 39.3% and 36.2% of gross patient service revenue for the six
months ended December 31, 1997 and 1996, respectively.
The complexity of the Medicare and Medicaid regulations, increases in
managed care, hospital personnel turnover, the dependence of hospitals on
physician documentation of medical records and the subjective judgment involved
complicates the billing and collections of accounts receivable by hospitals.
There can be no assurance that this complexity will not negatively impact the
Company's future cash flow or results of operations.
The Company's historical financial trend has been favorably impacted by
the Company's ability to successfully acquire acute care hospitals. While the
Company believes that trends in the health care industry described above may
create possible future acquisition opportunities, there can be no assurances
that it can continue to maintain its current growth rate through hospital
acquisitions and successfully integrate the hospitals into its system.
The Company's owned hospitals accounted for 91% of the Company's net
operating revenue for the six months ended December 31, 1997 compared to 90% for
the six months ended December 31, 1996. Carolinas Hospital System, Desert
Springs Hospital, Flowers Hospital, Gadsden Regional Medical Center and Lutheran
Hospital of Indiana accounted for approximately 46% of the Company's net
operating revenue for the six months ended December 31, 1997.
The federal government and a number of states are rapidly increasing
the resources devoted to investigating allegations of fraud and abuse in the
Medicare and Medicaid programs. At the same time, regulatory and law enforcement
authorities are taking an increasingly strict view of the requirements imposed
on providers by the Social Security Act and Medicare and Medicaid regulations.
Although the Company believes that it is in material compliance with such laws,
a determination that the Company has violated such laws, or even the public
announcement that the Company was being investigated concerning
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23
possible violations, could have a material adverse effect on the Company.
INFLATION
The health care industry is labor intensive. Wages and other expenses
increase during periods of inflation and when shortages in marketplaces occur.
In addition, suppliers pass along rising costs to the Company in the form of
higher prices. The Company has generally been able to offset increases in
operating costs by increasing charges, expanding services and implementing cost
control measures to curb increases in operating costs and expenses. The Company
cannot predict its ability to offset or control future cost increases.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, both nationally and in the
regions in which the Company operates; industry capacity; demographic changes;
existing government regulations and changes in, or the failure to comply with,
governmental regulations; legislative proposals for health care reform; the
ability to enter into managed care provider arrangements on acceptable terms;
changes in Medicare and Medicaid payment levels; liability and other claims
asserted against the Company; competition; the loss of any significant
customers; changes in business strategy or development plans; the ability to
attract and retain qualified personnel, including physicians; the availability
and terms of capital to fund the expansion of the Company's business, including
the acquisition of additional facilities. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the result of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
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24
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 10, 1997, the annual meeting of the stockholders of the
Company was held to elect directors, to vote on four other proposals presented
by the Company, and to ratify the selection of the Company's independent
auditors. Voting results are given below.
Election of Directors. The following were elected to serve as directors until
the next annual meeting of the stockholders:
Name For Against Abstain
---- --- ------- -------
Sam A. Brooks, Jr. 61,194,715 32,357
Russell L. Carson 61,200,552 26,520
James E. Dalton, Jr. 61,197,473 29,599
C. Edward Floyd, M.D. 61,197,555 29,517
Joseph C. Hutts 61,197,559 29,513
Kenneth J. Melkus 61,201,405 25,667
Thomas J. Murphy, Jr 61,201,555 29,517
Rocco A. Ortenzio 61,174,243 52,829
S. Douglas Smith 61,197,323 29,749
Colleen Conway Welch, Ph.D. 61,182,038 45,034
Increase in Authorized Shares. Stockholders approved an increase in the shares
authorized for issuance by the Company, to a total of 300,000,000 shares of
common stock. The votes cast were as follows: 42,229,134 shares voted for the
increase; 18,967,411 shares against; and 30,527 shares abstained.
Amendment of Article NINTH of Certificate of Incorporation. The amendment of
Article NINTH, to provide for indemnification of the Company's officers,
directors, employees and agents to the fullest extent permitted by the Delaware
General Corporation Law, was approved. Votes cast on this matter were:
60,514,447 shares voted for; 678,003 shares against; and 34,622 shares
abstained.
Adoption of 1997 Stock Option Plan. Stockholders adopted a new stock option plan
which will be the vehicle for future employee stock option grants. A total of
40,488,947 votes were cast for approval of this Plan; 13,821,323 shares
against; 80,355 shares abstained; and 6,836,447 broker non-vote shares.
Amendment of Employee Stock Purchase Plan. Stockholders approved an amendment
which will increase the shares authorized for issuance under this Plan to a
total of 3,750,000 shares. Voting on this matter was as follows: 50,906,971
shares for; 3,423,333 shares against; 24,320 shares abstained; and 6,851,448
broker non-vote shares.
Independent Auditor. The accounting firm of Ernst & Young was ratified as the
Company's independent auditors for the fiscal year ending June 30, 1998, with
61,181,300 shares voted for ratification; 28,575 shares voted against; and
17,197 shares abstained.
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ITEM 5. OTHER INFORMATION.
The following information is included in this Item 5 by the Registrant
in lieu of a filing on Form 8-K.
INFORMATION REQUIRED BY ITEM 2 OF FORM 8-K:
Formation of Joint Ventures
Effective February 1, 1998, subsidiaries of the Registrant and
Universal Health Services, Inc. ("UHS") completed the formation of two joint
ventures for the operation of acute care hospitals in Las Vegas, Nevada. In the
first transaction, a subsidiary of the Registrant contributed substantially all
of the assets used in the operation of Desert Springs Hospital (a 241-bed
facility) and a UHS subsidiary contributed substantially all of the assets
comprising Valley Hospital (a 400-bed facility), to a newly-formed limited
liability company ("LLC1"). The Registrant and UHS subsidiary received interests
of 27.5% and 72.5%, respectively, in LLC1 in exchange for their respective asset
contributions.
Simultaneously, an affiliate of UHS contributed the assets of
Summerlin Hospital (a 148-bed facility) to a newly formed limited liability
company ("LLC2"), and a subsidiary of Registrant paid to the UHS affiliate
approximately $23 million in cash. As a result, the affiliate of UHS and the
subsidiary of Registrant own interests in LLC2 of approximately 73.9% and 26.1%
respectively.
The Quorum and UHS subsidiaries may make additional cash contributions
to LLC1 and LLC2 with respect to adjustments of inventories, accounts
receivable, accounts payable, and accrued liabilities pertaining to the
contributed facilities. Such cash contributions are intended to maintain the
respective ownership interests of each party in LLC1 and LLC2.
A UHS subsidiary will manage the operations of LLC1 and LLC2 pursuant
to a management agreement with each joint venture. The UHS subsidiary will
receive an annual fee equal to $1.5 million plus one percent (1%) of the
combined annual net revenues of LLC1 and LLC2 in excess of $300 million. Each
LLC has a five person governing board, on which the Registrant has two
representatives. Certain actions of each LLC require concurrence of the
Registrant's representatives.
The Registrant has the right to put its interest in LLC1 and LLC2 for
the fair market value of such interest upon the occurrence of certain events,
including failure to achieve certain financial operating results, failure to
make minimum cash distributions and failure to comply with certain provisions
of the management agreement. Such put rights generally begin to be exercisable
in March, 1999.
INFORMATION REQUIRED BY ITEM 7 OF FORM 8-K:
Item 7 (b) The following pro forma financial information for the
Registrant is included with this report immediately following the signatures
section:
Pro Forma Condensed Consolidated Financial Statements (Unaudited)
Pro Forma Condensed Consolidated Statement of Income for the Year
Ended June 30, 1997 (Unaudited)
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26
Pro Forma Condensed Consolidated Statement of Income for the Six
Months Ended December 31, 1997 (Unaudited)
Pro Forma Condensed Consolidated Balance Sheet at December 31, 1997
(Unaudited)
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
Item 7 (c) Exhibits
The required exhibits for the transaction are listed on the Exhibit
Index to this Report.
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 pro forma financials.
(b) Reports on Form 8-K No Reports on Form 8-K were filed during the
quarter ended December 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.
(Registrant)
Date: February 16, 1998 By: /s/ Steve B. Hewett
--------------------
Steve B. Hewett
Vice President/Chief
Financial Officer
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PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Effective February 1, 1998, the Company divested Desert Springs
Hospital in exchange for a 27.5 percent equity interest in Valley Health System
LLC (a joint venture combining Desert Springs Hospital and Universal Health
System, Inc.'s Valley Medical Center).
The unaudited pro forma condensed consolidated statements of income
for the year ended June 30, 1997 and the six months ended December 31, 1997
give effect to the divestiture of Desert Springs Hospital, as if such
transaction had been completed as of the beginning of the periods presented.
The pro forma results of operations do not take into account the operations of
the joint venture. The pro forma condensed consolidated statements of income
for the year ended June 30, 1997 and the six months ended December 31, 1997 are
based on the historical financial statements of the Company and its
subsidiaries.
The unaudited pro forma condensed consolidated balance sheet as of
December 31, 1997 gives effect to the disposition of Desert Springs Hospital as
if such transaction had been completed as of December 31, 1997.
The pro forma condensed consolidated financial information presented
herein does not purport to represent what the Company's results of operations
or financial position would have been had such transaction in fact occurred at
the beginning of the period presented or to project the Company's results of
operations in any future period. The unaudited pro forma condensed consolidated
financial statements should be read in conjunction with the audited financial
statements, including the notes thereto, of the Company.
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
YEAR ENDED JUNE 30, 1997
------------------------------------------------
HOSPITAL
DISPOSITION
PRO FORMA PRO FORMA
ACTUAL ADJUSTMENTS(a) CONSOLIDATED
------ -------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net operating revenue ............................... $1,413,946 $ (122,182) $1,291,764
Operating expenses .................................. 1,063,112 (94,199) 968,913
Provision for doubtful accounts ..................... 89,919 (14,695) 75,224
Depreciation and amortization ....................... 75,134 (6,353) 68,781
Interest expense .................................... 45,601 (22) 45,579
Minority interest ................................... 741 60 801
---------- ---------- ----------
Income before income taxes and
extraordinary item ............................... 139,439 (6,973) 132,466
Provision for income taxes .......................... 55,357 (2,441) 52,916
---------- ---------- ----------
Income before extraordinary item .................... $ 84,082 $ (4,532) $ 79,550
========== ========== ==========
Income before extraordinary item per common share:
Basic $ 1.14 $ 1.08
========== ==========
Diluted $ 1.11 $ 1.05
========== ==========
Weighted average common shares:
Basic 73,442 73,442
========== ==========
Diluted 75,677 75,677
========== ==========
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QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
SIX MONTHS ENDED DECEMBER 31, 1997
-------------------------------------------
HOSPITAL
DISPOSITION
PRO FORMA PRO FORMA
ACTUAL ADJUSTMENTS(a) CONSOLIDATED
------ -------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net operating revenue .............................. $801,716 $(61,420) $740,296
Operating expenses ................................. 598,658 (49,445) 549,213
Provision for doubtful accounts .................... 59,884 (5,113) 54,771
Depreciation and amortization ...................... 44,062 (3,763) 40,299
Interest expense ................................... 21,229 21,229
Minority interest .................................. 1,976 35 2,011
-------- -------- --------
Income before income taxes ......................... 75,907 (3,134) 72,773
Provision for income taxes ......................... 30,135 (1,097) 29,038
-------- -------- --------
Net income ......................................... $ 45,772 $ (2,037) $ 43,735
======== ======== ========
Income per common share:
Basic $ 0.62 $ 0.59
======== ========
Diluted $ 0.60 $ 0.57
======== ========
Weighted average common shares:
Basic 74,309 74,309
======== ========
Diluted 76,726 76,726
======== ========
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QUORUM HEALTH GROUP, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
DECEMBER 31, 1997
----------------------------------------------------
HOSPITAL
DISPOSITION
PRO FORMA PRO FORMA
ACTUAL ADJUSTMENTS(b) CONSOLIDATED
------ -------------- ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 14,929 $ $ 14,929
Accounts receivable, less allowance for
doubtful accounts 289,472 (28,548) 260,924
Supplies 34,432 (3,862) 30,570
Other 46,287 2,116 48,403
----------- ----------- -----------
Total current assets 385,120 (30,294) 354,826
Property, plant and equipment, at cost 917,179 (78,090) 839,089
Less accumulated depreciation 218,032 (16,651) 201,381
----------- ----------- -----------
699,147 (61,439) 637,708
Cost in excess of net assets acquired, net 190,860 (65,009) 125,851
Unallocated purchase price 72,151 72,151
Investment in affiliates 9,779 (409) 9,370
Investment in joint venture 131,585 131,585
Other 60,231 (3,537) 56,694
----------- ----------- -----------
Total assets $ 1,417,288 $ (29,103) $ 1,388,185
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 84,951 $ (12,225) $ 72,726
Accrued salaries and benefits 66,715 (1,863) 64,852
Other current liabilities 9,939 9,939
Current maturities of long-term debt 1,200 1,200
----------- ----------- -----------
Total current liabilities 162,805 (14,088) 148,717
Long-term debt, less current maturities 602,886 602,886
Deferred income taxes 28,778 28,778
Other liabilities and deferrals 28,188 (50) 28,138
Minority interests in consolidated entities 26,195 35 26,230
Commitments and contingencies
Stockholders' equity:
Common stock 745 745
Additional paid-in capital 277,237 277,237
Retained earnings 290,454 (15,000) 275,454
----------- ----------- -----------
Total stockholders' equity 568,436 (15,000) 553,436
=========== =========== ===========
Total liabilities and stockholders' equity $ 1,417,288 $ (29,103) $ 1,388,185
=========== =========== ===========
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QUORUM HEALTH GROUP, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(a) Reflects the elimination of revenues and expenses as a result of the
disposition.
(b) Reflects the elimination of assets and liabilities divested as a result
of the disposition, the contribution of such assets and liabilities to
acquire an investment in the joint venture and the related writedown of
goodwill of approximately $15 million after taxes.
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Exhibit Index
Exhibit No.
4.1 Participation Agreement dated November 26, 1997, among Quorum
ELF, Inc. As Construction Agent and Lessee; First Security
Bank, National Association as Owner Trustee under the Quorum
Real Estate Trust 1997-1; Various other banks and lending
institutions which are parties from time to time as Holders or
Lenders; and First Union National Bank as Agent for the
Lenders and Holders.
4.2 Second Amendment to Credit Agreement, dated November 26,
1997, by and among Quorum Health Group, Inc. as Borrower,
Lenders as referred to in the Credit Agreement, and First
Union National Bank as Agent for the Lenders.
10.1 Contribution Agreement dated as of February 1, 1998, by and
between Valley Hospital Medical System, Inc. and NC-DSH, Inc.
10.2 Limited Liability Company Agreement of Valley Health System
LLC, dated as of January 19, 1998.
10.3 Contribution Agreement dated as of February 1, 1998, by and
among Summerlin Hospital Medical Center, L.P., UHS Holding
Company, Inc. And NC-DSH, Inc.
10.4 Limited Liability Company Agreement of Summerlin Hospital
Medical Center LLC, dated as of January 19, 1998.
Exhibits to the Exhibits have been omitted but Registrant shall furnish
supplementally a copy of any omitted exhibit to the Commission upon request.
32