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Filed Pursuant to Rule 424(b)(1)
Registration No. 33-54651
PROSPECTUS
$125,000,000
[LOGO]
ORNDA
HEALTHCORP
11 3/8% SENIOR SUBORDINATED NOTES DUE 2004
---------------------
The 11 3/8% Senior Subordinated Notes due 2004 (the "Notes") are being
offered by OrNda HealthCorp (the "Company") and its wholly owned subsidiary,
Summit Health Ltd. ("Summit" and, together with the Company, the "Co-Obligors").
The Notes are the joint and several obligations of the Co-Obligors. The Company
will receive all of the net proceeds from the offering of the Notes.
Interest on the Notes will be payable semi-annually on February 15 and
August 15 of each year, commencing February 15, 1995. The Notes are redeemable
at the option of the Company, in whole or in part, at any time on or after
August 15, 1999 at the redemption prices set forth herein, together with accrued
and unpaid interest, if any, to the date of redemption. Upon a Change of Control
(as defined herein) and the satisfaction of certain conditions regarding
Designated Senior Debt (as defined herein), each holder of the Notes may require
the Company to repurchase such Notes at 100% of the principal amount thereof,
together with accrued and unpaid interest, if any, to the date of repurchase.
The Notes will be subordinated in right of payment to all existing and
future Senior Debt (as defined herein) of the Co-Obligors and effectively
subordinated in right of payment to all existing and future liabilities of the
Company's subsidiaries (other than Summit). As of May 31, 1994, the amount of
Senior Debt and obligations of the Company's subsidiaries (excluding
intercompany indebtedness) that effectively ranked senior to the Notes was
approximately $622.4 million. As of May 31, 1994, after giving effect to the
Company's acquisition of Fountain Valley Regional Hospital and Medical Center
("Fountain Valley"), the offering of the Notes and the use of proceeds therefrom
as described herein, and assuming the repurchase of 100% of the aggregate
outstanding principal amount of the Company's 10 1/4% Senior Subordinated Notes
due 2003 (the "10 1/4% Notes") pursuant to the Change of Control Offer (as
defined herein), such amount would have been approximately $603.0 million. The
Notes will rank pari passu in right of payment to the Company's 12 1/4% Senior
Subordinated Notes due 2002 (the "12 1/4% Notes") and the 10 1/4% Notes. As of
May 31, 1994, there was $500 million aggregate principal amount of indebtedness
outstanding which would rank pari passu in right of payment to the Notes. As of
May 31, 1994, after giving effect to the offering of the Notes and the use of
proceeds therefrom as described herein, and assuming the repurchase of 100% of
the aggregate outstanding principal amount of the 10 1/4% Notes pursuant to the
Change of Control Offer, there would have been $400 million aggregate principal
amount of indebtedness outstanding which would rank pari passu in right of
payment to the Notes. See "Description of the Notes -- Subordination."
FOR INFORMATION CONCERNING CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "INVESTMENT CONSIDERATIONS."
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The Underwriters have agreed to purchase the Notes from the Co-Obligors at
97.5% of the principal amount thereof (resulting in $121,875,000 aggregate
proceeds to the Company before deducting expenses payable by the Company
estimated at $1,000,000) subject to the terms and conditions set forth in the
Purchase Agreement. See "Underwriting."
The Underwriters propose to offer the Notes from time to time for sale in
one or more negotiated transactions or otherwise, at market prices prevailing at
the time of sale, at prices related to such market prices or at negotiated
prices. For further information with respect to any discounts, commissions or
profits on resale that may be deemed underwriting discounts or commissions, see
"Underwriting" herein. The Co-Obligors have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, as amended.
---------------------
The Notes are offered by the several Underwriters, subject to prior sale,
when, as and if issued to and accepted by the Underwriters, subject to approval
of certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify any
such offer and to reject orders in whole or in part. It is expected that
delivery of the Notes will be made in New York, New York on or about August 23,
1994.
---------------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SALOMON BROTHERS INC
CITICORP SECURITIES, INC.
---------------------
The date of this Prospectus is August 16, 1994.
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[MAP]
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information appearing elsewhere in this
Prospectus or incorporated herein by reference. The term the "Company" as used
herein refers to OrNda HealthCorp and its direct and indirect subsidiaries,
unless otherwise stated or indicated by context. References herein to the
Company's "EBITDA" refer to the Company's earnings before interest, taxes,
depreciation, amortization, minority interest, income (loss) from investments in
Houston Northwest Medical Center and non-recurring items. References herein to
Fountain Valley's "EBITDA" refer to Fountain Valley's earnings before interest,
taxes, depreciation, amortization and non-recurring items. References herein to
Summit's "EBITDA" refer to Summit's earnings before interest, taxes,
depreciation, amortization and minority interest. References herein to American
Healthcare Management, Inc.'s ("AHM") EBITDA refer to AHM's earnings before
interest, taxes, depreciation, amortization and non-recurring items. References
herein to the Company's "fiscal year" refer to the fiscal year ended August 31
of such year.
THE COMPANY
The Company is a leading provider of health care services in the United
States, delivering a broad range of inpatient and outpatient health care
services principally through the operation of 46 hospitals located in urban and
suburban communities in 15 states, primarily in the southern and western United
States. Services provided by the Company's hospitals include general surgery,
internal medicine, obstetrics, emergency room care, radiology, diagnostic
services, coronary care, pediatric services and psychiatric services. On an
outpatient basis, the Company's services include, among others, same-day
surgery, diagnostic radiology (e.g. magnetic resonance imaging, CT scanning,
X-ray), rehabilitative therapy, clinical laboratory services, pharmaceutical
services and psychiatric services. The Company also operates a number of
free-standing surgery centers, which provide a cost-effective alternative to
inpatient care for the performance of minor surgeries. Certain of the Company's
hospitals offer other specialized services, including cardiac surgery, home
health services, hemodialysis, rehabilitation, AIDS treatment and clinics
specializing in the treatment of industrial accidents and women's health. In
addition, the Company operates a managed health care plan (the "Medicaid HMO")
pursuant to which the Company currently provides health care services, under a
fixed price contract, to over 20,000 members of the Arizona state Medicaid
system.
Since January 1992, when Charles N. Martin, Jr. was elected Chairman,
President and Chief Executive Officer, the Company has (i) substantially
increased its revenue while improving operating profitability and (ii) actively
participated in the consolidation of the health care industry through a series
of strategic acquisitions. Through such acquisitions the Company has diversified
into new markets and expanded its service capabilities in order to position the
Company as a leading provider of low cost, high quality health care services.
The Company has grown in size from 11 hospitals at August 31, 1991 to 46
hospitals at August 9, 1994 and its revenue has grown from approximately $460
million for the 1991 fiscal year (prior to giving pro forma effect to the
Mergers and the acquisition of Fountain Valley described below) to approximately
$1.6 billion for the 1993 fiscal year (after giving pro forma effect to the
Mergers and the acquisition of Fountain Valley). The operating margin of its
hospitals has grown from 12.2% for the 1991 fiscal year (prior to giving pro
forma effect to the Mergers and the acquisition of Fountain Valley) to 14.4% for
the nine months ended May 31, 1994 (after giving pro forma effect to the Mergers
and the acquisition of Fountain Valley).
On April 19, 1994, the Company completed a merger with AHM, which operated
16 acute care hospitals providing basic primary care services (the "AHM
Merger"), and acquired Summit, which operated 12 hospitals and a variety of
outpatient specialty health care clinics and programs (the "Summit Merger" and,
together with the AHM Merger, the "Mergers"). The Company believes that the
Mergers have created a company positioned to compete more effectively in the
changing health care environment. The Company's revenue, EBITDA and income from
continuing operations for the 1993 fiscal year approximated $1.6 billion, $223.7
million, and $28.5 million, respectively, after giving pro forma effect to the
Mergers, the offering of the
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Notes (the "Offering") and the acquisition of Fountain Valley and assuming the
Company's repurchase of 100% of the aggregate principal amount of the 10 1/4%
Notes pursuant to the Change of Control Offer.
The Mergers enhanced the Company's position in several of its existing
markets, primarily Southern California, by allowing the Company to coordinate
the services provided by the hospitals acquired with those provided by its
existing hospitals and thereby eliminate redundant services and benefit from
other operating efficiencies and economies of scale. In addition, the Mergers
provided the Company with access to new markets, including Arizona and Nevada,
and new health care delivery capabilities, such as the Medicaid HMO and
outpatient specialty service clinics. The Mergers also strengthened the
Company's management team through the addition of management personnel from
Summit and AHM with experience in improving operating performance.
The Company recently acquired Fountain Valley, a provider of tertiary care
services, from Fountain Valley Medical Development Co. ("FVMDC"). Fountain
Valley, located on a 38-acre campus in Fountain Valley, California, contains a
413-bed acute care hospital, a surgery center, an imaging center and four
medical office buildings aggregating approximately 250,000 square feet of office
space. The aggregate consideration paid for Fountain Valley was approximately
$145 million, approximately $104 million of which was paid in cash by Summit.
The balance of the purchase price, approximately $41 million, was paid by an
unrelated real estate investment trust(the "REIT") which, pursuant to a Real
Estate Purchase Agreement (the "Real Estate Purchase Agreement"), purchased and
is leasing to the Company certain of Fountain Valley's real estate, including
the four medical office buildings. For the fiscal year ended October 31, 1993,
Fountain Valley's total revenues, EBITDA and income from continuing operations
were approximately $120.8 million, $21.6 million and $8.0 million, respectively.
See "Business -- Recent Acquisitions."
The Company intends to continue to increase revenue and market share
through implementation of the following business strategies:
- Development of Integrated Health Care Delivery Networks. In order
to succeed in the changing health care environment, the Company is
developing relationships with managed care organizations, other health care
providers and physicians in each of its markets to offer a full range of
integrated patient services on a cost effective basis. The Company believes
that the establishment of integrated networks will allow it to, among other
things, (i) improve the quality of care provided by concentrating
specialized service expertise within each market and (ii) reduce costs
through consolidation of facilities, increased purchasing power and other
economies of scale. Through the development of health care networks, the
Company believes it will augment revenues and market share by attracting an
increasing share of large, sophisticated governmental and private sector
managed care contracts. In addition, the Company intends to continue to
pursue strategic acquisitions of health care providers in geographic areas
and with service capabilities that will facilitate the development of
integrated networks. The Company believes that the recently completed
acquisition of Fountain Valley will further the development of a health
care network in the greater Los Angeles, California area by allowing the
Company to integrate the tertiary care services provided by Fountain Valley
with the primary care services provided by the Company's 13 other hospitals
in neighboring communities.
- Outpatient Services. The Company has responded to the recent shift
toward increased outpatient care by enhancing its hospitals' outpatient
facilities and services. The Company will emphasize those outpatient
services that it believes will grow in demand and which can be provided on
a cost effective, high revenue growth basis. The Company believes that it
is well positioned to compete effectively with alternate site providers of
outpatient services because its acute care hospitals are able to offer a
broader range of services at competitive prices.
- Cost Reduction. The Company intends to continue to position itself
as a low cost provider of health care services in each of its markets by
implementing programs designed to improve financial performance and
efficiency. These programs include, among others, (i) monitoring and
adjusting staffing levels and equipment usage in response to resource
consumption; (ii) more efficient use of professional and paraprofessional
staff such as nurses and nurses' aides; (iii) improving patient management
and reporting procedures; and (iv) improving the collection and sharing of
utilization and patient mix data
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with providers, employers and payors. In addition, the Company intends to
take advantage of reductions in corporate overhead and other economies of
scale from the Mergers and any future acquisitions. The Company estimates
realizing annualized operating cost savings of approximately $15 million
from improved operating efficiencies resulting from the Mergers.
- Community Based Services. The Company intends to continue to
implement specialty programs on a selective basis to maintain and enhance
the range and quality of its health care services. The Company focuses on
the particular needs of each community it serves and tailors its services
based upon local conditions and the Company's ability to provide such
services on a competitive basis. Examples of specialty services provided by
the Company in response to local demand include rehabilitation services,
home health services, AIDS treatment, cardiac surgery, weight loss
services, pain treatment programs and women's health clinics.
- Modernization of Facilities. The Company believes that maintaining
and modernizing its facilities is an important means of continuing revenue
and market share growth. After giving pro forma effect to the Mergers, the
Company's capital expenditures have totalled approximately $200 million
over the past three fiscal years. Such spending resulted in hospital
renovations and equipment purchases to expand and enhance the Company's
range of services as well as the expansion of high growth outpatient
facilities and other specialty services, including outpatient surgery and
home health services. The Company believes that capital expenditures
(exclusive of hospital acquisitions) during the 12 months following the
Mergers will not exceed $75 million, and will be used for expansion of
services at existing facilities and the replacement of outdated equipment.
- Management Information Systems. The Company believes that the
ability to collect and analyze information on the quality of care and to
develop appropriate responses thereto is critical to achieving growth in
the managed care environment. Prior to the Mergers, the Company, Summit and
AHM each designed or successfully implemented systems which measure
selected outcome quality indicators and identify needed improvements to
patient care. For example, these systems help identify and track quality
indicators such as unplanned transfers to intensive care units and returns
to the operating room. This information, which is shared with physicians
and other health care professionals, is being utilized to develop improved
protocols of care and to direct treatment to the most appropriate level of
care. The Company is consolidating its quality and utilization system with
that of each of AHM and Summit to enhance its operational efficiency and
reduce costs.
The Company's and Summit's principal executive offices are located at 3401
West End Avenue, Suite 700, Nashville, Tennessee 37203, and their telephone
number is (615) 383-8599.
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THE OFFERING
Notes Offered.............. $125,000,000 principal amount of 11 3/8% Senior
Subordinated Notes due 2004.
Co-Obligors................ The Notes are the joint and several obligations of
the Company and its wholly owned subsidiary,
Summit.
Maturity Date.............. August 15, 2004.
Interest Payment Dates..... February 15 and August 15 of each year, commencing
February 15, 1995.
Optional Redemption........ The Notes are redeemable at the option of the
Company, in whole or in part, on or after August
15, 1999, at the redemption prices set forth
herein, together with accrued and unpaid interest,
if any, to the date of redemption.
Change of Control.......... Upon the occurrence of a Change of Control and the
satisfaction of certain conditions regarding
Designated Senior Debt (as defined herein), each
holder of the Notes may require the Company to
repurchase all or a portion of such holder's Notes
at a purchase price in cash equal to 100% of the
principal amount thereof, together with accrued and
unpaid interest, if any, to the date of repurchase.
See "Description of the Notes -- Restrictive
Covenants."
Ranking.................... The Notes will be senior subordinated obligations
of the Co-Obligors and, as such, will be
subordinated to all existing and future Senior Debt
(as defined herein) of the Co-Obligors. The Notes
will also be effectively subordinated in right of
payment to all existing and future liabilities of
the Company's subsidiaries other than Summit. As of
May 31, 1994, the amount of Senior Debt and
obligations of the Company's subsidiaries
(excluding intercompany indebtedness) that
effectively ranked senior to the Notes was
approximately $622.4 million. As of May 31, 1994,
after giving pro forma effect to the acquisition of
Fountain Valley, the Offering and the use of
proceeds therefrom as described in "Use of
Proceeds," and assuming the repurchase of 100% of
the aggregate outstanding principal amount of the
10 1/4% Notes pursuant to the Change of Control
Offer, such amount would have been approximately
$603.0 million. The Notes will rank pari passu in
right of payment to the Company's 12 1/4% Notes and
the 10 1/4% Notes and will rank senior to all other
subordinated indebtedness of the Co-Obligors. As of
May 31, 1994, there was $500 million aggregate
principal amount of indebtedness outstanding which
ranked pari passu in right of payment to the Notes.
As of May 31, 1994, after giving pro forma effect
to the acquisition of Fountain Valley, the Offering
and the use of proceeds therefrom as described in
"Use of Proceeds," and assuming the repurchase of
100% of the aggregate outstanding principal amount
of the 10 1/4% Notes pursuant to the Change of
Control Offer, there would have been $400 million
aggregate principal amount of indebtedness
outstanding which would have ranked pari passu in
right of payment to the Notes. See "Description of
the Notes -- Subordination."
Restrictive Covenants...... The Indenture will contain certain covenants,
including, but not limited to, covenants with
respect to the following matters: (i) limitation on
additional indebtedness; (ii) limitation on
restricted payments; (iii) limitation on liens
securing indebtedness; (iv) limitation on the
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creation of any restriction on the ability of
the Company's subsidiaries to make distributions;
(v) limitation on transactions with affiliates;
(vi) limitation on other subordinated
indebtedness; and (vii) restrictions on mergers,
consolidations and the transfer of all or
substantially all of the assets of the Company to
another person. See "Description of the Notes --
Restrictive Covenants."
Use of Proceeds............ The net proceeds to the Company from the sale of
the Notes are estimated to be approximately
$120,875,000 (after deducting estimated expenses
and underwriting discounts and commissions). The
Company intends to use the net proceeds from the
Offering to reduce amounts outstanding under the
revolving facility of the Company's existing bank
credit facility (the "Bank Credit Facility"), which
amounts the Company has utilized or anticipates
utilizing in connection with the repurchase of the
10 1/4% Notes, the financing of the acquisition of
Fountain Valley and other strategic acquisitions
and for general corporate purposes. Pursuant to the
terms of the indenture under which the 10 1/4%
Notes were issued, the AHM Merger constituted a
"Change of Control" and the Company was required to
offer to purchase (the "Change of Control Offer")
the $100 million aggregate principal amount of the
10 1/4% Notes at a purchase price of 101% of the
principal amount thereof plus accrued interest. As
of July 18, 1994, the expiration date of the Change
of Control Offer, approximately $99.3 million
aggregate principal amount of the outstanding
10 1/4% Notes were tendered and were purchased by
the Company on July 19, 1994 pursuant to the Change
of Control Offer. See "Use of Proceeds."
Absence of Public Market... There is no public market for the Notes and the
Co-Obligors do not intend to list the Notes on any
securities exchange or for quotation through the
National Association of Securities Dealers
Automated Quotation System ("NASDAQ"). The
Co-Obligors have been advised by the Underwriters
(as defined herein) that, following the completion
of the Offering, the Underwriters presently intend
to make a market in the Notes. However, the
Underwriters are under no obligation to do so and
may discontinue any market making activities at any
time without notice. There can be no assurance as
to the liquidity of the trading market for the
Notes or that an active public market for the Notes
will develop or, if developed, will continue.
INVESTMENT CONSIDERATIONS
See "Investment Considerations" for a discussion of certain factors that
should be considered by prospective purchasers in evaluating an investment in
the Notes.
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SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following table presents summary pro forma condensed combined financial
data derived from the unaudited pro forma condensed combined financial
statements included elsewhere in this Prospectus. The summary pro forma
condensed combined financial data gives effect to the following transactions and
events as if all such transactions had occurred, in the case of statement of
operations and operating data, on September 1, 1992 and in the case of balance
sheet data, on April 19, 1994 for the Summit Merger and on May 31, 1994 for all
other transactions: (i) the acquisition of Florida Medical Center (applying the
purchase method of accounting) on June 30, 1993; (ii) the Summit Merger
(applying the purchase method of accounting); (iii) the acquisition of Fountain
Valley (applying the purchase method of accounting); (iv) the consummation of
the Offering and the application of the net proceeds therefrom; and (v) the
Company's repurchase of 100% of the aggregate outstanding principal amount of
the 10 1/4% Notes pursuant to the Change of Control Offer. Because the Company
accounted for the AHM Merger as a pooling-of-interests transaction, the
historical financial data of the Company include AHM's historical results of
operations. The following summary unaudited pro forma condensed combined
financial data does not reflect cost savings, if any, which may be realized by
the Company from the consummation of the Mergers or the acquisition of Fountain
Valley.
The summary pro forma condensed combined financial data are unaudited and
do not purport to represent what the Company's results of operations would
actually have been if the transactions assumed therein had in fact occurred at
the times assumed or to project the Company's results of operation for any
future periods or its financial condition at any future date. The summary pro
forma condensed combined financial data should be read in conjunction with the
respective historical financial statements of the Company, Summit and Fountain
Valley incorporated by reference or included herein and the unaudited pro forma
condensed combined financial statements included herein.
<TABLE>
<CAPTION>
FOR THE FOR THE
NINE MONTHS YEAR ENDED
ENDED MAY 31, AUGUST 31,
1994(1) 1993(2)
------------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
STATEMENT OF OPERATIONS:
Total revenue(3).......................................................................... $ 1,256,340 $1,605,951
Costs and expenses
Operating expenses...................................................................... 1,001,607 1,287,176
Provision for doubtful accounts......................................................... 73,562 95,046
Depreciation and amortization........................................................... 66,723 81,707
Interest expense........................................................................ 82,644 109,207
Interest income......................................................................... (3,455) (5,115)
Minority interest....................................................................... 4,230 4,601
Special executive compensation.......................................................... 2,530 --
Loss on sale of asset................................................................... 9,761 --
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18,738 33,329
Income (loss) from investments in Houston Northwest Medical Center........................ (136) 173
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Income from continuing operations before income tax....................................... 18,602 33,502
Income tax expense........................................................................ 5,266 4,973
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Income from continuing operations......................................................... 13,336 28,529
Preferred stock dividend requirements..................................................... (1,462) (1,699)
------------- ----------
Income from continuing operations applicable to common and common equivalent shares....... $ 11,874 $ 26,830
============ =========
Earnings per common and common equivalent share from continuing operations................ $ 0.27 $ 0.63
============ =========
Shares used in earnings per common and common equivalent share computations (in
thousands).............................................................................. 44,398 42,560
OPERATING DATA:
Number of hospitals owned at period end................................................... 46 46
Licensed beds at period end............................................................... 8,031 8,031
Interest expense, net..................................................................... $ 79,189 $ 104,092
EBITDA(4)................................................................................. $ 181,171 $ 223,729
EBITDA margin(5).......................................................................... 14.4% 13.9%
Capital expenditures...................................................................... $ 38,742 $ 59,160
Ratio of EBITDA to interest expense, net.................................................. 2.29x 2.15x
Ratio of earnings to fixed charges(6)..................................................... 1.19x 1.27x
<CAPTION>
MAY 31, 1994
-------------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets.............................................................................. $ 1,914,378
Working capital........................................................................... 59,233
Long-term debt, excluding amounts due within one year..................................... 1,120,647
Total stockholders' equity................................................................ 361,012
</TABLE>
(footnotes on following page)
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(footnotes from previous page)
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(1) The summary unaudited pro forma condensed combined statement of operations
and operating data for the nine months ended May 31, 1994 include the
Company's historical results of operations for the nine months ended May 31,
1994 (which include the results of operations of AHM); Summit's historical
results of operations for the nine months ended March 31, 1994; and Fountain
Valley's historical results of operations for the nine months ended April
30, 1994. The unaudited pro forma condensed combined balance sheet data
presents the historical balance sheet of the Company as of May 31, 1994
(which includes the effect of the Mergers) and the historical balance sheet
of Fountain Valley as of April 30, 1994.
(2) The summary unaudited pro forma condensed combined statement of operations
and operating data for the year ended August 31, 1993 include the Company's
historical results of operations for the fiscal year ended August 31, 1993
(which include the results of operations of AHM) (adjusted on a pro forma
basis to include the acquisition of Florida Medical Center); Summit's
historical results of operations for the fiscal year ended June 30, 1993;
and Fountain Valley's historical results of operations for the fiscal year
ended October 31, 1993.
(3) Total revenue is comprised of patient revenue, net of contractual
adjustments, and other revenue.
(4) While EBITDA should not be construed as a substitute for income from
operations or a better indicator of liquidity than cash flow from operating
activities, which are determined in accordance with generally accepted
accounting principles, it is included herein to provide additional
information with respect to the ability of the Company to meet its future
debt service, capital expenditure and working capital requirements.
(5) EBITDA divided by total revenue.
(6) The ratio of earnings to fixed charges is calculated by dividing earnings
before income taxes plus fixed charges by the sum of fixed charges which
consists of interest expense, amortization of financing costs and the
portion of rental expense which is deemed to be representative of the
interest component of rental expense.
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INVESTMENT CONSIDERATIONS
Prospective investors should consider carefully, in addition to the other
information contained in or incorporated by reference in this Prospectus, the
following factors before purchasing the Notes offered hereby.
CERTAIN FINANCIAL CONSIDERATIONS
The Company has substantial indebtedness and, as a result, significant debt
service obligations. As of May 31, 1994, the Company had approximately $1.0
billion of long-term indebtedness which approximated 73.5% of its total
capitalization. As of May 31, 1994, after giving effect to the acquisition of
Fountain Valley, the Offering and the use of proceeds therefrom and assuming the
repurchase of 100% of the aggregate outstanding principal amount of the 10 1/4%
Notes pursuant to the Change of Control Offer, the Company's long-term
indebtedness would have been approximately $1.1 billion, representing
approximately 75.5% of its total capitalization. See "Capitalization."
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including the following: (i) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions or general corporate purposes may be
impaired; (ii) a substantial portion of the Company's cash flow from operations
must be dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available to the Company for its operations; (iii)
certain of the Company's borrowings are and will continue to be at variable
rates of interest, which causes the Company to be vulnerable to increases in
interest rates; and (iv) certain of the Company's indebtedness contains numerous
financial and other restrictive covenants, including those restricting the
incurrence of additional indebtedness, the creation of liens, the payment of
dividends, sales of assets and minimum net worth requirements. Failure by the
Company to comply with such covenants may result in an event of default which,
if not cured or waived, could have a material adverse effect on the Company.
The Company's ability to make scheduled payments or to refinance its
obligations with respects to its indebtedness depends on its financial and
operating performance, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors beyond its control.
Although the Company's cash flow from its operations has been sufficient to meet
its debt service obligations in the past, there can be no assurance that the
Company's operating results will continue to be sufficient for payment of the
Company's indebtedness.
SUBORDINATION; EFFECT OF ENCUMBRANCES
The Notes will be subordinated in right of payment to all existing and
future Senior Debt (as defined herein) of the Co-Obligors and will rank pari
passu in right of payment with the Company's 12 1/4% Notes and the 10 1/4%
Notes. The 10 1/4% Notes are the joint and several obligations of the Company
and AHM Acquisition Co., Inc. ("AHM Acquisition Co."), a wholly owned subsidiary
of the Company, and, therefore, holders of any of the 10 1/4% Notes outstanding
following the Change of Control Offer will be entitled to satisfy their claims
out of the assets of AHM Acquisition Co. prior to holders of the Notes. AHM
Acquisition Co. owns substantially all of the operations acquired by the Company
from AHM in the AHM Merger. The Notes also will be effectively subordinated to
all existing and future liabilities of the Company's subsidiaries (other than
Summit). As of May 31, 1994, the amount of Senior Debt and obligations of the
Company's subsidiaries (excluding intercompany indebtedness) that effectively
ranked senior to the Notes was approximately $622.4 million. As of May 31, 1994,
after giving effect to the acquisition of Fountain Valley, the Offering and the
use of proceeds therefrom and assuming the repurchase of 100% of the aggregate
outstanding principal amount of the 10 1/4% Notes pursuant to the Change of
Control Offer, the amount of Senior Debt and obligations of the Company's
subsidiaries (excluding intercompany indebtedness) that effectively ranked
senior to the Notes would have been approximately 603.0 million. All
indebtedness incurred under the Bank Credit Facility constitutes Senior Debt.
The 12 1/4% Notes, the 10 1/4% Notes and indebtedness under the Bank Credit
Facility will mature prior to the Notes.
The Co-Obligors may not pay the principal of, premium, if any, or interest
on, the Notes or repurchase, redeem or otherwise retire the Notes if any Senior
Debt is not paid when due or any other default on any
10
<PAGE> 11
Senior Debt occurs and the maturity of such Senior Debt is accelerated in
accordance with its terms unless, in either case, the default has been cured or
waived, any such acceleration has been rescinded or such Senior Debt has been
paid in full. In addition, if any default exists with respect to certain Senior
Debt and certain other conditions are satisfied, the Co-Obligors may not make
any payments on the Notes for a designated period of time. Upon any payment or
distribution of assets of the Company upon liquidation, dissolution,
reorganization or any similar proceeding, the holders of Senior Debt will be
entitled to receive payment in full before the holders of the Notes are entitled
to receive any payment. See "Description of the Notes -- Subordination."
The Company has granted the lenders under the Bank Credit Facility a senior
security interest in the capital stock of the Company's subsidiaries, including
Summit, the partnership interests in partnerships in which the Company owns a
majority interest and instruments evidencing indebtedness owed to the Company by
its subsidiaries, including Summit. As of May 31, 1994, there was approximately
$451.7 million outstanding under the Bank Credit Facility. As of May 31, 1994,
after giving effect to the acquisition of Fountain Valley, the Offering and the
use of proceeds therefrom and assuming the repurchase of 100% of the aggregate
outstanding principal amount of the 10 1/4% Notes pursuant to the Change of
Control Offer, there would have been approximately $532.3 million outstanding
under the Bank Credit Facility. The Notes will be unsecured. If the Company
becomes insolvent or is liquidated, or if its indebtedness is accelerated, the
lenders under the Bank Credit Facility will be entitled to payment in full from
the proceeds of their security prior to any payment to the holders of Notes. In
such event, it is possible that there would be no assets remaining from which
claims of the holders of Notes could be satisfied or, if any assets remain, such
assets may be insufficient to satisfy fully such claims. See "Description of the
Notes."
SUBSIDIARY OPERATIONS
Since substantially all of the Co-Obligors' operations are conducted, and
substantially all of the Co-Obligors' assets are owned, by their respective
subsidiaries, the Notes will effectively be subordinated to all existing and
future liabilities of the Company's subsidiaries (other than Summit but
including Summit's subsidiaries), including the subsidiaries' guarantees of
indebtedness incurred under the Bank Credit Facility. Any right of the Company's
subsidiaries upon the liquidation, reorganization or insolvency of such
subsidiary (and the consequent right of the holders of the Notes to participate
in those assets) will be subject to the claims of the creditors (including trade
creditors) and preferred stockholders, if any, of such subsidiary, except to the
extent the Company or Summit has a claim against such subsidiary as a creditor
of such subsidiary. In addition, in the event that claims of the Company or
Summit as a creditor of a subsidiary are recognized, such claims would be
subordinate to any security interest in the assets of such subsidiary and any
indebtedness of such subsidiary senior to that held by the Company or Summit.
The ability of the Co-Obligors and their respective subsidiaries to incur
indebtedness is limited by certain of the restrictive covenants set forth in the
Bank Credit Facility and in the indentures relating to certain of the Company's
other long-term indebtedness, including the indenture governing the Notes.
Additionally, the indenture governing the Notes does not prohibit the Company
from transferring or disposing of the assets of Summit, and thereby diminishing
the assets available to satisfy the claims of holders of the Notes against
Summit.
In addition, the Co-Obligors' ability to make required principal and
interest payments with respect to the Co-Obligors' indebtedness, including the
Notes, depends on the earnings of their respective subsidiaries and on their
ability to receive funds from such subsidiaries through dividends or other
payments. Since the Notes are obligations of the Co-Obligors only, the
Co-Obligors' subsidiaries are not obligated or required to pay any amounts due
pursuant to the Notes or to make funds available therefore in the form of
dividends or advances to the Co-Obligors.
HEALTH CARE REFORM
On November 20, 1993, President Clinton submitted proposed comprehensive
health care reform legislation to Congress. A key component of the President's
proposal is the restructuring of health insurance markets through the use of
"managed competition." Under the proposal, states would be required to establish
regional purchasing cooperatives to act as the exclusive source of coverage for
individuals and employers with
11
<PAGE> 12
less than 5,000 employees. These cooperatives would contract with health plans
that demonstrate an ability to provide a full range of benefits. All employers
would be required to make coverage available to their employees, and individuals
would be required to enroll in approved health plans. The costs of the
President's proposal would be funded in significant part by reductions in
payments to providers by the Medicare and Medicaid programs. The President's
proposal would also impose stringent limits on increases in the premiums of
health plans, which would indirectly impact the fees paid to health care
providers. In addition, other comprehensive health care reform bills have been
and are expected to be introduced in Congress. These bills contain and are
expected to contain benefit standards, coverage guarantees, cost controls and
financing that differ from the President's proposal. The Company is unable to
predict whether any reforms will be adopted or when any such reforms will be
implemented. No assurance can be given that such reforms will not have a
material adverse effect on the Company.
REIMBURSEMENT AND REGULATION
The Company derives a substantial portion of its revenue from third party
payors, including the Medicare and Medicaid programs. Changes in existing
government reimbursement programs have resulted in reduced levels of
reimbursement for health care services, and additional changes are anticipated.
Such changes are likely to result in further reductions in reimbursement levels.
In addition, private payors are increasingly demanding discounts from health
care providers. Significant limits on reimbursement rates could adversely affect
the Company's results of operations. Effective January 1, 1995, the California
Department of Health Services will begin changing the payment system for
participants in the California Medicaid program ("Medi-Cal") in certain
counties, including those in which the Company principally operates, from
fee-for-service arrangements to managed care plans. The Company is unable to
predict the effect these changes will have on its operations. No assurance can
be given that such reforms will not have a material adverse effect on the
Company.
The health care industry is subject to extensive federal, state and local
regulation relating to licensure, conduct of operations, addition of facilities
and services and prices for services. Antifraud and abuse amendments codified
under the Social Security Act of 1935, as amended (the "Social Security Act"),
prohibit certain business practices and relationships that may affect the
provision and cost of health care services reimbursable under the Medicare and
Medicaid programs. The U.S. Department of Health and Human Services ("HHS") has
issued regulations defining practices and business arrangements which are
permissible under such amendments. Certain of the Company's current financial
arrangements with physicians and other providers do not qualify for the safe
harbor exemptions and therefore risk scrutiny by HHS and may be subject to
enforcement action. In addition, Section 1877 under the Social Security Act has
recently been amended to significantly broaden the scope of prohibited physician
referrals to providers with which they have a financial arrangement, effective
January 1, 1995. The Company's participation in and development of joint
ventures and other financial arrangements with physicians could be adversely
affected by these amendments. The Company is unable to predict the future course
of federal, state and local regulation. Further changes in the regulatory
framework could have an adverse impact on the Company.
COMPETITION
The health care industry is highly competitive and subject to excess
capacity. In recent years, competition among health care providers for patients
has intensified as hospital occupancy rates in the United States have declined
due to, among other things, regulatory and technological changes, increasing use
of managed care payment systems, cost containment pressures, a shift toward
outpatient treatment and an increasing supply of physicians. Certain of the
Company's competitors have greater financial resources and offer a broader range
of services than the Company. In addition, hospitals owned by governmental
agencies and other tax-exempt entities benefit from endowments, charitable
contributions and tax-exempt financing, which advantages are not enjoyed by the
Company's facilities.
12
<PAGE> 13
ACQUISITION STRATEGY
The Company has recently completed several acquisitions of health care
providers, and intends to use a portion of the proceeds from the Offering to
reduce amounts outstanding under the Bank Credit Facility, which amounts the
Company anticipates utilizing, among other things, to finance additional
strategic acquisitions of businesses with facilities and service capabilities
that will enhance the Company's operations. See "Business -- Business Strategy."
There can be no assurance that the Company will be able to realize expected
operating and economic efficiencies from its recent acquisitions or from any
future acquisitions. In addition, there can be no assurance that the Company
will be able to locate suitable acquisition candidates, consummate acquisitions
on favorable terms, or successfully integrate newly acquired businesses and
facilities with the Company's operations. The consummation of acquisitions could
result in the incurrence or assumption by the Company of additional
indebtedness.
POTENTIAL SUMMIT INCOME TAX LIABILITY
The Internal Revenue Service (the "IRS") is currently engaged in an
examination of the Federal income tax returns for fiscal years 1984, 1985 and
1986 of Summit, which subsequent to the Company's acquisition thereof became a
wholly owned subsidiary of the Company. Summit has received a revenue agent's
report with proposed adjustments for the years 1984 through 1986 and Summit has
filed a protest with the district director opposing the proposed adjustments.
The IRS has challenged, among other things, the propriety of certain accounting
methods utilized by Summit for tax purposes, including the use of the cash
method of accounting by certain of Summit's subsidiaries (the "Summit
Subsidiaries") prior to fiscal year 1988. For the taxable years prior to 1988,
most of the Summit Subsidiaries primarily reported taxable income using the cash
method of accounting. The cash method was prevalent within the hospital industry
and the Summit Subsidiaries applied the method in accordance with prior
agreements reached with the IRS. The IRS now asserts that an accrual method of
accounting should have been used. The Tax Reform Act of 1986 (the "1986 Act")
requires most large corporate taxpayers (including Summit) to use an accrual
method of accounting beginning in 1987. Consequently, the Summit Subsidiaries
changed to the accrual method beginning July 1, 1987. In accordance with the
provisions of the 1986 Act, income that was deferred by use of the cash method
at the end of 1986 is being recognized as taxable income by the Summit
Subsidiaries in equal annual installments over ten years beginning on July 1,
1987. The Company believes that Summit properly reported its income and paid its
taxes in accordance with applicable laws and in accordance with previous
agreements established with the IRS. The Company believes that the final outcome
of the IRS's examinations of prior years' income taxes will not have a material
adverse effect on the results of operations or financial position of the
Company.
CONCENTRATION OF MARKETS
Of the 46 hospitals operated by the Company, 14 hospitals are located in
the greater Los Angeles, California area and 18 hospitals, which generated
approximately 41.0% of the Company's revenue for the 1993 fiscal year (after
giving pro forma effect to the Mergers and the acquisition of Fountain Valley),
are located in California. In addition, five hospitals which generated
approximately 18.9% of the Company's revenue for the 1993 fiscal year (after
giving pro forma effect to the Mergers) are located in Florida. The
concentration of hospitals in California and Florida increases the risk that any
adverse economic, regulatory or other developments that may occur in such areas
may adversely affect the Company's operations or financial condition. In
addition, the Company has experienced, and expects that it will continue to
experience, delays in payment and in rate increases by Medi-Cal. Although these
delays have not had a material adverse effect on the Company, there can be no
assurance that future delays will not have such an effect.
DEPENDENCE ON KEY PERSONNEL AND PHYSICIANS
The Company's operations are dependent on the efforts, ability and
experience of certain key management personnel, including Charles N. Martin,
Jr., Chief Executive Officer and Chairman of the Board of Directors of the
Company, and Donald J. Amaral, President and Chief Operating Officer of the
Company. An event of default occurs under the Bank Credit Facility if either Mr.
Martin or Mr. Amaral is no longer a
13
<PAGE> 14
member of the Company's senior management, unless replaced within 120 days with
an executive reasonably satisfactory to the bank lenders. In addition, since
physicians generally control the majority of hospital admissions, the success of
the Company, in part, is dependent upon the number and quality of physicians on
its hospitals' medical staffs. The loss of some or all of the Company's key
management personnel or an inability to attract and retain sufficient numbers of
qualified physicians could have an adverse impact on the Company's future
results of operations.
LIABILITY AND INSURANCE
As is typical in the health care industry, the Company is subject to claims
and legal actions by patients and others in the ordinary course of business. The
Company is partially self-insured for its hospital professional liability and
comprehensive general liability risks and maintains an unfunded reserve for such
risks. For hospital professional liability and comprehensive general liability
claims asserted, the Company assumes such liability risks under its self-insured
retention up to $3 million per claim, or $30 million in the aggregate, for
claims reported after June 1, 1994. The Company also purchases excess levels of
coverage above such self-insured retention. For the twelve months ending June 1,
1995, the Company purchased a $50 million layer of excess insurance above
self-insured retentions that may be applied towards hospital professional
liability and comprehensive general liability claims. Although the Company's
cash flow and reserves for self-insured liabilities have been adequate in the
past to provide for such self-insured liabilities, and the Company believes that
it has adequately provided for future self-insured liabilities, there can be no
assurance that the Company's cash flow and reserves will continue to be
adequate. If actual payments of claims with respect to the Company's
self-insured liabilities exceed projected payments of claims, the result of
operations of the Company could be adversely affected. In addition, while the
Company's professional and other liability insurance have been adequate in the
past to provide for liability claims, there can be no assurance that adequate
insurance will continue to be available at favorable price levels.
LACK OF PUBLIC MARKET FOR SECURITIES
There is no public market for the Notes and the Co-Obligors do not intend
to list the Notes on any securities exchange or for quotation through NASDAQ.
The Co-Obligors have been advised by Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), Donaldson, Lufkin & Jenrette Securities
Corporation, Salomon Brothers Inc and Citicorp Securities, Inc. (together, the
"Underwriters") that, following the completion of the Offering, the Underwriters
presently intend to make a market in the Notes. However, the Underwriters are
under no obligation to do so and may discontinue any market making activity at
any time without notice. No assurance can be given as to the liquidity of the
trading market for the Notes or that an active public market for the Notes will
develop or, if developed, will continue. If an active public market does not
develop or is not maintained, the market price and liquidity of the Notes may be
adversely affected.
USE OF PROCEEDS
The Company will receive all of the net proceeds from the Offering. The net
proceeds to the Company from the sale of the Notes in the Offering (after
deducting estimated expenses and underwriting discounts and commissions) are
estimated to be approximately $120,875,000. The Company intends to apply such
net proceeds to reduce amounts outstanding under the revolving facility of the
Bank Credit Facility, which amounts the Company has utilized or anticipates
utilizing in connection with the repurchase of the 10 1/4% Notes, the financing
of the acquisition of Fountain Valley and other strategic acquisitions and for
general corporate purposes. Pursuant to the terms of the indenture under which
the 10 1/4% Notes were issued, the AHM Merger constituted a "Change of Control"
and the Company was required to make the Change of Control Offer for the $100
million aggregate principal amount of the 10 1/4% Notes at a purchase price of
101% of the principal amount thereof plus accrued interest. As of July 18, 1994,
the expiration date of the Change of Control Offer, approximately $99.3 million
aggregate principal amount of the outstanding 10 1/4% Notes were tendered and
were purchased by the Company on July 19, 1994 pursuant to the Change of Control
Offer. The
14
<PAGE> 15
Company currently has no definitive agreements with respect to any acquisition,
and there can be no assurance that any acquisitions will be consummated.
Borrowings under the revolving facility of the Bank Credit Facility bear
interest at a fluctuating rate equal to either (i) the alternate base rate (as
defined) plus 1.0% or (ii) LIBOR plus 2.0%, in each case subject on or after
November 1, 1994 to potential decreases or increases dependent upon the
Company's interest coverage and debt to cash flow ratios. The revolving facility
of the Bank Credit Facility expires on April 19, 2000.
15
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company at May 31,
1994 and as adjusted to give pro forma effect to (i) the consummation of the
Offering and the application of the net proceeds therefrom, (ii) the acquisition
of Fountain Valley and (iii) the assumed repurchase of 100% of the aggregate
outstanding principal amount of the 10 1/4% Notes pursuant to the Change of
Control Offer.
<TABLE>
<CAPTION>
MAY 31, 1994
--------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current maturities of long-term debt.............................. $ 7,368 $ 7,368
========= =========
Long-term debt:
Capitalized lease obligations, interest at 8.8% to 17.2%.......... $ 21,789 $ 21,789
Bank Credit Facility:
Revolving Credit Facility...................................... 58,200 138,847
Term Loan...................................................... 325,000 325,000
Delayed Term Loan.............................................. 68,500 68,500
Notes payable, effective interest at 9.3% to 14.5%, maturities
through 2004................................................... 48,879 48,879
11 3/8% Senior Subordinated Notes due 2004........................ -- 125,000
12 1/4% Notes..................................................... 400,000 400,000
10 1/4% Notes(1).................................................. 100,000 --
Less current maturities........................................... (7,368) (7,368)
---------- -----------
Total long-term debt (excluding current maturities)(2).... 1,015,000 1,120,647
---------- -----------
Stockholders' equity:
Payable In Kind Cumulative Redeemable Convertible Preferred
Stock.......................................................... 19,341 19,341
Common Stock...................................................... 432 432
Additional paid-in capital........................................ 403,751 403,751
Retained Deficit.................................................. (136,322) (140,822)
Unrealized gains on securities available-for-sale................. 78,310 78,310
---------- -----------
Total stockholders' equity................................ 365,512 361,012
---------- -----------
Total capitalization...................................... $1,380,512 $ 1,481,659
========= =========
</TABLE>
- ---------------
(1) Pursuant to the terms of the indenture under which the 10 1/4% Notes were
issued, the AHM Merger constituted a "Change of Control" and the Company was
required to make the Change of Control Offer. On May 19, 1994, the Company
commenced the Change of Control Offer for all of the outstanding 10 1/4%
Notes at 101% of the principal amount thereof plus accrued interest. As of
July 18, 1994, the expiration date of the Change of Control Offer,
approximately $99.3 million aggregate principal amount of the outstanding
10 1/4% Notes were tendered and were purchased by the Company on July 19,
1994 pursuant to the Change of Control Offer. See "Use of Proceeds."
(2) Summit, a wholly owned subsidiary of the Company, currently owns 38.6% of
Summit Care Corporation ("Summit Care"). At May 31, 1994 approximately
$37,440 aggregate principal amount of Summit's 7 1/2% Exchangeable
Subordinated Notes due 2003 (the "7 1/2% Notes"), which are exchangeable, at
the option of the holders, into Summit's 38.6% interest in the Summit Care
Common Stock, were outstanding. The 7 1/2% Notes have not been included in
long-term debt as the investment in Summit Care and related debt has been
accounted for as an asset held for sale.
16
<PAGE> 17
SELECTED HISTORICAL FINANCIAL DATA
ORNDA HEALTHCORP AND SUBSIDIARIES
The following table sets forth selected historical financial data and other
operating information of the Company giving effect to the Mergers. The selected
historical financial data for the five fiscal years ended August 31, 1993 are
derived from the consolidated financial statements of the Company. The selected
historical financial data for the nine months ended May 31, 1994 and 1993 are
derived from the unaudited condensed consolidated financial statements of the
Company and reflect all adjustments (consisting of normal recurring adjustments)
that, in the opinion of the Company, are necessary for a fair presentation of
such information. Operating results for the nine months ended May 31, 1994 are
not necessarily indicative of the results that may be expected for the Company's
fiscal year ending August 31, 1994. Because the Company accounted for the AHM
Merger as a pooling-of-interests transaction, the historical financial data of
the Company include AHM's historical results of operations. The nine months
ended May 31, 1994 include financial data for the Company for the nine months
ended May 31, 1994 and the financial data of Summit from the date of the
Mergers, April 19, 1994, through May 31, 1994. All information contained in the
following table should be read in conjunction with the consolidated financial
statements and related notes of the Company included or incorporated by
reference herein.
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED MAY 31, FOR THE YEARS ENDED AUGUST 31,
------------------- -----------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS:
Total Revenue(1)............................... $882,917 $702,551 $961,795 $808,523 $752,164 $ 793,251 $796,725
Costs and Expenses
Operating expenses........................... 697,537 562,098 765,743 674,174 618,826 668,004 648,888
Provision for doubtful accounts.............. 57,443 43,968 63,907 52,426 40,979 52,846 50,652
Depreciation and amortization................ 45,918 34,246 47,669 40,003 32,115 40,185 49,205
Interest expense............................. 59,331 49,948 68,660 40,229 59,167 80,815 104,378
Interest income.............................. (2,032) (3,167) (3,380) (3,226) (3,541) (8,332) (3,500)
Minority interest............................ 4,230 2,988 4,601 7,610 3,955 5,315 8,289
Special executive compensation(2)............ 2,530 -- -- 6,140 -- -- --
Severance agreements......................... -- -- -- 5,090 -- -- --
Merger transaction expense................... 29,992 -- -- -- -- -- --
Loss (gain) on asset sale.................... 9,761 -- -- 44,903 11,412 76,504 (536)
Costs associated with 1990
recapitalization........................... -- -- -- -- -- 6,245 5,124
Corporate office relocation expense.......... -- -- -- 1,800 -- -- --
-------- -------- -------- -------- -------- --------- --------
(21,793) 12,470 14,595 (60,626) (10,749) (128,331) (65,775)
Income (loss) from investments in Houston
Northwest Medical Center..................... (136) (775) 173 (8,210) (6,147) (1,834) --
-------- -------- -------- -------- -------- --------- --------
Income (loss) before income tax expense and
extraordinary item........................... (21,929) 11,695 14,768 (68,836) (16,896) (130,165) (65,775)
Income tax expense (benefit)................... 1,048 930 1,129 1,266 364 -- (5,444)
-------- -------- -------- -------- -------- --------- --------
Income (loss) before extraordinary item........ (22,977) 10,765 13,639 (70,102) (17,260) (130,165) (60,331)
Extraordinary item, net of tax................. (8,191) -- (3,842) 49,667 -- 30,545 --
-------- -------- -------- -------- -------- --------- --------
Net income (loss).............................. (31,168) 10,765 9,797 (20,435) (17,260) (99,620) (60,331)
Preferred stock dividend requirements.......... (1,462) (1,259) (1,699) (1,363) -- (3,931) (12,182)
-------- -------- -------- -------- -------- --------- --------
Net income (loss) applicable to common and
common equivalent shares..................... $(32,630) $ 9,506 $ 8,098 $(21,798) $(17,260) $(103,551) $(72,513)
======== ======== ======== ======== ======== ========= ========
Net income (loss) per common and common
equivalent share before extraordinary
item(3)...................................... $ (0.68) $ 0.27 $ 0.34 $ (2.32) $ (1.15) $ -- $ --
======== ======== ======== ======== ======== ========= ========
Net income (loss) per common and common
equivalent share(3).......................... $ (0.91) $ 0.27 $ 0.23 $ (0.71) $ (1.15) $ -- $ --
======== ======== ======== ======== ======== ========= ========
Shares used in earnings per common and common
equivalent share computations (in
thousands)(3)................................ 36,047 34,743 34,960 30,741 15,014 -- --
(continued on the following page)
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED MAY 31, FOR THE YEARS ENDED AUGUST 31,
------------------- -----------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
OPERATING DATA:
EBITDA(4)...................................... $127,937 $ 96,485 $132,145 $ 81,923 $ 92,359 $ 72,401 $ 97,185
EBITDA margin(5)............................... 14.5% 13.7% 13.7% 10.1% 12.3% 9.1% 12.2%
Capital expenditures........................... $ 31,556 $ 27,300 $ 35,558 $ 52,823 $ 32,200 $ 27,282 $ 42,664
Ratio of earnings to fixed charges(7).......... -- 1.20x 1.18x -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31,
MAY 31, ----------------------------------------------------------
1994 1993 1992 1991 1990 1989
---------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 16,342 $ 25,914 $ 60,908 $ 29,102 $ 39,783 $ 83,796
Working capital.................................. 52,324 26,173 46,669 10,881 (20,684) (548,283)(6)
Net property, plant, and equipment............... 1,020,946 803,994 677,440 570,558 597,508 606,641
Total assets..................................... 1,789,704 1,205,137 994,407 852,029 937,128 986,022
Long-term debt (excluding current maturities).... 1,015,000 705,425 570,971 522,837 629,971 131,445(6)
Preferred stock.................................. 19,341 18,062 16,363 -- -- --
Total shareholders' equity (deficit)............. 365,512 212,108 185,882 98,306 71,814 (446,923)
</TABLE>
- ---------------
(1) Total revenue is comprised of patient revenue, net of contractual
adjustments, and other revenue.
(2) Special executive compensation for 1992 includes: (i) $3,000 of compensation
expense related to the Company's sale of the Company's Common Stock and
granting of options to Mr. Martin on January 15, 1992 and (ii) a non-cash
reserve of $1,900 established for payments to be made in connection with the
termination of employment with the Company of Mr. Bryan P. Marsal and Mr.
Joseph A. Bondi in 1992. The payments related to the Marsal and Bondi
terminations will be made monthly through October 1994. Special executive
compensation for 1994 represents compensation expense related to the
Company's granting of options to key members of senior management during the
second quarter of 1994.
(3) Per share information for the years August 31, 1990 and 1989 is not
presented because a different capital structure existed.
(4) While EBITDA should not be construed as a substitute for income from
operations or a better indicator of liquidity than cash flow from operating
activities, which are determined in accordance with generally accepted
accounting principles, it is included herein to provide additional
information with respect to the ability of the Company to meet its future
debt service, capital expenditure and working capital requirements.
(5) EBITDA divided by total revenue.
(6) Long-term debt of $493,510 for the Company is classified as current at
August 31, 1989.
(7) The ratio of earnings to fixed charges is calculated by dividing earnings
before income taxes plus fixed charges by the sum of fixed charges which
consists of interest expense, amortization of financing costs and the
portion of rental expense which is deemed to be representative of the
interest component of rental expense. Earnings were inadequate to cover
fixed charges by approximately $66,518, $130,165, $17,095, $68,836, and
$23,111 for the years ended August 31, 1989, 1990, 1991, 1992, and for the
nine months ended May 31, 1994, respectively.
18
<PAGE> 19
SUMMIT HEALTH LTD.
The following table sets forth selected historical financial data and other
operating information of Summit prior to giving effect to the Summit Merger. The
selected historical financial data for the five years ended June 30, 1993 are
derived from the consolidated financial statements of Summit. The selected
historical financial data for the nine months ended March 31, 1994 and 1993 are
derived from the unaudited condensed consolidated financial statements of Summit
and reflect all adjustments (consisting of normal recurring adjustments) that,
in the opinion of the Company, are necessary for a fair presentation of such
information. Operating results for the nine months ended March 31, 1994 are not
necessarily indicative of the results that may be expected for Summit's fiscal
year ending June 30, 1994. The information contained in the following table
should be read in conjunction with the consolidated financial statements and
related notes of Summit.
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED JUNE 30,
------------------- ----------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS:
Total Revenue(1).................. $404,650 $382,844 $508,504 $475,218 $415,667 $393,566 $394,064
Costs and Expenses
Operating expenses.............. 332,452 319,279 425,242 406,632 355,631 344,842 358,559
Provision for doubtful
accounts...................... 17,202 19,447 23,113 23,584 23,389 18,278 18,240
Depreciation and amortization... 15,879 13,492 19,185 14,620 13,940 13,379 17,066
Interest expense, net........... 5,080 4,174 5,772 8,291 10,819 12,838 14,489
Minority interest............... 2,138 1,773 2,421 519 -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income tax
expense and extraordinary
item(2)......................... 31,899 24,679 32,771 21,572 11,888 4,229 (14,290)
Income tax expense (benefit)...... 14,759 10,707 14,201 8,629 4,703 1,848 (5,904)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
item............................ 17,140 13,972 18,570 12,943 7,185 2,381 (8,386)
Extraordinary item, net of
taxes(3)........................ -- -- -- (1,779) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)................. $ 17,140 $ 13,972 $ 18,570 $ 11,164 $ 7,185 $ 2,381 $ (8,386)
========= ========= ========= ========= ========= ========= =========
Net income (loss) per common and
common equivalent share before
extraordinary item.............. $ 0.51 $ 0.42 $ 0.56 $ 0.40 $ 0.23 $ 0.08 $ (0.27)
========= ========= ========= ========= ========= ========= =========
Net income (loss) per common and
common equivalent share......... $ 0.51 $ 0.42 $ 0.56 $ 0.34 $ 0.23 $ 0.08 $ (0.27)
========= ========= ========= ========= ========= ========= =========
Shares used in earnings per common
and common equivalent share
computations (in thousands)..... 33,870 33,217 33,201 32,750 31,251 31,250 31,250
OPERATING DATA:
EBITDA(4)......................... $ 54,996 $ 44,118 $ 60,149 $ 45,002 $ 36,647 $ 30,466 $ 17,265
EBITDA margin(5).................. 13.6% 11.5% 11.8% 9.5% 8.8% 7.7% 4.4%
Capital expenditures.............. $ 23,033 $ 39,051 $ 50,391 $ 23,933 $ 17,895 $ 10,300 $ 15,514
</TABLE>
<TABLE>
<CAPTION>
MARCH JUNE 30,
31, ----------------------------------------------------
1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 19,350 $ 40,857 $ 24,937 $ 5,766 $ 3,727 $ 8,049
Working capital.............................. 20,447 10,057 1,138 21,788 23,364 45,837
Net property, plant, and equipment........... 236,548 221,945 187,051 175,577 171,822 174,352
Total assets................................. 406,265 394,559 353,568 296,566 299,019 323,514
Long-term debt (excluding current
maturities)................................ 87,186 84,711 62,300 101,302 112,457 136,676
Total shareholders' equity................... 132,229 114,123 98,628 79,169 71,956 69,575
</TABLE>
(footnotes on the following page)
19
<PAGE> 20
(footnotes from the previous page)
- ---------------
(1) Total revenue is comprised of patient revenue, net of contractual
adjustments, and other revenue.
(2) Includes losses of $15,532 and $1,056 in fiscal 1989 and 1990, respectively,
resulting principally from the closure of a 76-bed hospital located in
Lubbock, Texas and the sale of a 78-bed hospital located in Levelland,
Texas, the closure of a 122-bed hospital located in Colorado Springs,
Colorado, and the sale of a partnership interest involving eight hospitals
which were managed in the Kingdom of Saudi Arabia.
(3) Net of income tax benefit of $1,186 from the redemption and retirement of
Summit's 14% Senior Subordinated Debentures due 2005.
(4) While EBITDA should not be construed as a substitute for income from
operations or a better indicator of liquidity than cash flow from operating
activities, which are determined in accordance with generally accepted
accounting principles, it is included herein to provide additional
information with respect to the ability of Summit to meet its future debt
service, capital expenditure and working capital requirements.
(5) EBITDA divided by total revenue.
20
<PAGE> 21
SELECTED OPERATING STATISTICS
The following table sets forth certain operating statistics for the
hospitals operated by the Company, AHM, and Summit for each of the periods
indicated without giving effect to the Mergers.
ORNDA HEALTHCORP
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MAY 31, YEARS ENDED AUGUST 31,
--------------------- ----------------------------------
1994 1993 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Number of hospitals at period end............. 18 17 18 15 11
Licensed beds at period end................... 4,086 3,627 4,086 3,182 2,543
Patient days.................................. 394,533 343,633 547,571 475,295 430,535
Adjusted patient days(1)...................... 553,892 493,601 762,837 685,575 600,471
Average length of stay (days)................. 6.4 6.7 6.9 6.9 8.4
Admissions.................................... 61,637 51,619 79,463 68,936 51,452
Adjusted admissions(2)........................ 86,534 74,145 110,703 99,433 71,759
Occupancy rate(3)............................. 35.2% 34.6% 36.7% 40.9% 46.4%
</TABLE>
AMERICAN HEALTHCARE MANAGEMENT, INC.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MAY 31, TWELVE MONTHS ENDED SEPTEMBER 30,
--------------------- ----------------------------------
1994 1993 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Number of hospitals at period end............. 16 16 16 16 16
Licensed beds at period end................... 2,028 2,028 2,028 2,028 2,028
Patient days.................................. 198,462 194,026 258,381 251,931 254,792
Adjusted patient days(1)...................... 258,001 254,950 340,783 333,213 334,418
Average length of stay (days)................. 5.0 5.3 5.2 5.2 5.3
Admissions.................................... 39,652 36,908 49,982 48,312 48,214
Adjusted admissions(2)........................ 51,548 48,497 65,926 63,917 63,305
Occupancy rate(3)............................. 35.7% 34.9% 34.9% 34.0% 34.4%
</TABLE>
SUMMIT HEALTH LTD.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH 31, YEARS ENDED JUNE 30,
--------------------- ----------------------------------
1994 1993 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Number of hospitals at period end............. 12 12 12 12 12
Licensed beds at period end................... 1,618 1,641 1,641 1,629 1,648
Patient days.................................. 143,969 147,356 193,560 203,626 217,541
Adjusted patient days(1)...................... 209,368 211,939 281,171 297,837 306,395
Average length of stay (days)................. 4.3 4.4 4.4 4.6 5.0
Admissions.................................... 33,727 33,461 44,238 44,083 43,790
Adjusted admissions(2)........................ 49,048 48,126 64,261 64,479 61,676
Occupancy rate(3)............................. 32.5% 32.7% 32.3% 34.2% 36.2%
</TABLE>
- ---------------
(1) Total patient days for the period multiplied by the ratio of total patient
revenue divided by total inpatient revenue.
(2) Total admissions for the period multiplied by the ratio of total patient
revenue divided by total inpatient revenue.
(3) Average daily census for the period divided by licensed beds.
21
<PAGE> 22
BUSINESS
THE COMPANY
The Company is a leading provider of health care services in the United
States, delivering a broad range of inpatient and outpatient health care
services principally through the operation of 46 hospitals located in urban and
suburban communities in 15 states, primarily in the southern and western United
States. Services provided by the Company's hospitals include general surgery,
internal medicine, obstetrics, emergency room care, radiology, diagnostic
services, coronary care, pediatric services and psychiatric services. On an
outpatient basis, the Company's services include, among others, same day
surgery, diagnostic radiology (e.g. magnetic resonance imaging, CT scanning,
X-ray), rehabilitative therapy, clinical laboratory services, pharmaceutical
services and psychiatric services. The Company also operates a number of
free-standing surgery centers, which provide a cost-effective alternative to
inpatient care for the performance of minor surgeries. Certain of the Company's
hospitals offer other specialized services, including cardiac surgery, home
health services, hemodialysis, rehabilitation, AIDS treatment and clinics
specializing in the treatment of industrial accidents and women's health. In
addition, the Company operates the Medicaid HMO, pursuant to which the Company
currently provides health care services, under a fixed price contract, to over
20,000 members of the Arizona state Medicaid system.
Since January 1992, when Charles N. Martin, Jr. was elected Chairman,
President and Chief Executive Officer, the Company has (i) substantially
increased its revenue while improving operating profitability and (ii) actively
participated in the consolidation of the health care industry through a series
of strategic acquisitions. Through such acquisitions the Company has diversified
into new markets and expanded its service capabilities in order to position the
Company as a leading provider of low cost, high quality health care services.
The Company has grown in size from 11 hospitals at August 31, 1991 to 46
hospitals at August 9, 1994 and its revenue has grown from approximately $460
million for the 1991 fiscal year (prior to giving pro forma effect to the
Mergers and the acquisition of Fountain Valley) to approximately $1.6 billion
for the 1993 fiscal year (after giving pro forma effect to the Mergers and the
acquisition of Fountain Valley). The operating margin of its hospitals has grown
from 12.2% for the 1991 fiscal year (prior to giving pro forma effect to the
Mergers and the acquisition of Fountain Valley) to 14.4% for the nine months
ended May 31, 1994 (after giving pro forma effect to the Mergers and the
acquisition of Fountain Valley).
RECENT ACQUISITIONS
On April 19, 1994, the Company completed a merger with AHM, which operated
16 acute care hospitals providing basic primary care services, and acquired
Summit, which operated 12 hospitals and a variety of outpatient specialty health
care clinics and programs. The Company believes that the Mergers have created a
company positioned to compete more effectively in the changing health care
environment.
The Mergers increased the number of hospitals operated by the Company from
17 to 45 and enhanced the Company's position in several of its existing markets,
primarily Southern California. The services provided by the additional
facilities are being coordinated with the hospitals previously operated by the
Company and will allow the Company to eliminate redundant services and benefit
from other operating efficiencies and economies of scale. In addition, the
Mergers provided the Company with access to new markets, including Arizona and
Nevada, and new health care delivery capabilities, such as the Medicaid HMO and
outpatient specialty service clinics. The Mergers also strengthened the
Company's management team through the addition of management personnel from
Summit and AHM with experience in improving operating performance. Prior to the
Mergers, the EBITDA margin of Summit improved from 8.8% to 11.8% and the EBITDA
margin of AHM improved from 11.4% to 13.4% during each company's most recently
completed three fiscal years.
Summit and AHM have also contributed to the Company's expertise in certain
important sectors of the health care industry. Summit provided the Company with
additional experience operating in a managed care environment and expertise in
the development of specialty service programs. The Company believes that the
delivery of health care will be increasingly influenced by managed care payment
systems and that it will
22
<PAGE> 23
benefit from Summit's experience in this area. AHM provided the Company with
strong financial and information system controls designed to effectively monitor
and reduce resource consumption, as well as additional expertise in providing
high quality basic primary care services.
On August 9, 1994 the Company acquired Fountain Valley, a provider of
tertiary care services, from FVMDC. Fountain Valley, located on a 38-acre campus
in Fountain Valley, California, contains a 413-bed acute care hospital, a
surgery center, an imaging center and four medical office buildings aggregating
approximately 250,000 square feet of office space. For the fiscal year ended
October 31, 1993, Fountain Valley's total revenues, EBITDA and net income from
continuing operations were approximately $120.8 million, $21.6 million and $8.0
million, respectively. See the Consolidated Financial Statements of Fountain
Valley included elsewhere in this Prospectus.
Pursuant to the Stock Purchase Agreement, FVMDC sold to Summit all of the
outstanding shares and partnership interests of certain corporations and
partnerships relating to Fountain Valley. Pursuant to the Real Estate Purchase
Agreement, the REIT purchased and is leasing to the Company certain of Fountain
Valley's real estate, including the four medical office buildings. The aggregate
consideration paid for Fountain Valley was approximately $145 million (the
"Purchase Price"), subject to certain post-closing adjustments. Approximately
$104 million of the Purchase Price was paid in cash by Summit under the Stock
Purchase Agreement and the balance of the Purchase Price, approximately $41
million, was paid by the REIT pursuant to the Real Estate Purchase Agreement.
BUSINESS STRATEGY
The Company intends to increase revenues and continue market share growth
through implementation of the following business strategies:
DEVELOPMENT OF INTEGRATED HEALTH CARE DELIVERY NETWORKS. The health care
industry has become increasingly dominated by governmental fixed reimbursement
programs and managed health care plans, causing cost containment pressure to
rise. In order to succeed in this environment, the Company is developing
relationships with managed care organizations, other health care providers and
physicians in each of its markets to offer a full range of integrated patient
services on a cost effective basis. The Company believes that the establishment
of integrated networks will allow it to (i) improve the quality of care provided
by concentrating expertise in the provision of specialized services within each
market; (ii) consolidate expensive equipment and procedures into fewer
facilities and reduce costs through increased purchasing power and other
economies of scale; and (iii) manage entire episodes of illness on a
coordinated, cost effective basis, rather than through the provision of costly,
isolated treatments. Through the development of health care networks, the
Company believes it will augment revenues and market share by attracting an
increasing share of large, sophisticated governmental and private sector managed
care contracts. The Company intends to continue to utilize the following
approaches in connection with its development of integrated health care
networks:
- Hospitals as "Hubs" for Delivery Systems. The Company intends to
establish relationships with other health care providers in the markets it
serves by building upon the primary and tertiary care provided by the
Company's hospitals in such markets, and integrating these services with
the outpatient and specialty services of other providers. The Company
believes that hospitals are the logical hubs for the development of
integrated health care delivery systems due to their highly developed
infrastructure, extensive base of services, sophisticated equipment and
skilled personnel.
- Flexibility to Participate in Varying Capacities in Different
Networks. The Company's broad range of delivery capabilities provides it
with the flexibility to participate in different capacities in the
networks. For example, in markets in which the Company operates a large
number of hospitals, it intends to take a leadership role in establishing
relationships with other providers to develop fully integrated networks. In
markets in which the Company is not one of the dominant providers of acute
care services, the Company intends to participate in networks by
integrating its service capabilities with the local providers of
complementary health care services. In addition, through the Medicaid HMO,
the Company has demonstrated its ability to successfully provide health
care services on a fixed rate contract basis in conjunction with a
governmental payor. The Company intends to pursue opportunities for similar
23
<PAGE> 24
arrangements in connection with the development of networks in its other
markets. In addition, the Company continually analyzes whether each of its
hospitals fits within its strategic plans and may divest itself of
hospitals that do not so fit.
- Strategic Acquisitions. The Company intends to continue to pursue
strategic acquisitions of health care providers in geographic areas and
with service capabilities that will facilitate the development of
integrated networks. For example, the Company recently acquired Fountain
Valley, a provider of tertiary care services in Southern California. See
"-- Recent Acquisitions." The Company has a significant primary care
presence in that area and intends to integrate the tertiary care services
provided by Fountain Valley with those provided by its primary care
hospitals in nearby communities, thereby furthering the development of an
integrated network of providers in the area.
- Physician Alliances. The Company intends to further its development
of integrated networks by expanding its alliances with physicians to create
long term hospital/physician linkages. These arrangements will allow
physicians to participate in the delivery of health care at the network
level. For example, in the Los Angeles market, the Company has formed a
relationship with a group of physicians to participate in capitated health
care contracts. The Company is pursuing similar arrangements with other
physician groups and in other markets.
- California Operations. The Company believes that California
represents a unique opportunity for the early development of an integrated
network due to the high concentration of managed care operators in the
state. The Company presently operates 18 hospitals in California.
Consequently, the Company believes that it is in a position to offer
managed care payors in the state a broad selection of locations and
services on a cost effective basis. The Company believes that the recently
completed acquisition of Fountain Valley will further the development of a
health care network in the greater Los Angeles, California area by allowing
the Company to integrate the tertiary care services provided by Fountain
Valley with the primary care services provided by the Company's 13 other
hospitals in the area.
OUTPATIENT SERVICES. Pressures to contain health care costs and
technological developments allowing more procedures to be performed on an
outpatient basis have led payors to demand a shift to ambulatory or outpatient
care wherever possible. The Company has responded to this trend by enhancing its
hospitals' outpatient capabilities through (i) selective conversion of excess
acute care bed capacity for use in outpatient treatment; (ii) improvement of
outpatient diagnostic services; (iii) a more efficient outpatient admissions
process; and (iv) a restructuring of existing surgical capacity to allow greater
concentration in the outpatient area. The Company's facilities will emphasize
those outpatient services that the Company believes will grow in demand and
which can be provided on a cost effective, high revenue growth basis. The
Company believes that it is well positioned to compete effectively with
alternate site providers of outpatient services because its acute care hospitals
are able to offer a broader range of services at competitive prices.
COST REDUCTION. An important component of the Company's strategy is to
position itself as a low cost provider of health care services in each of its
markets. As cost containment pressures increase, the Company will continue to
implement programs designed to improve financial performance and efficiency.
These programs include: (i) monitoring and adjusting staffing levels and
equipment usage in response to resource consumption; (ii) more efficient use of
professional and paraprofessional staff such as nurses and nurses' aides; (iii)
renegotiation of purchasing contracts and revision of purchasing practices to
take advantage of volume purchasing and low cost, quality products; (iv)
improving patient management and reporting procedures; (v) improving the
collection and sharing of utilization and patient mix data with providers,
employers and payors; and (vi) more efficient billing and collection procedures.
In addition, the Company intends to take advantage of reductions in corporate
overhead and other economies of scale from the Mergers and any future
acquisitions. The Company estimates realizing annualized operating cost savings
of approximately $15 million from improved operating efficiencies resulting from
the Mergers.
COMMUNITY BASED SERVICES. The Company intends to continue to implement
specialty programs on a selective basis to maintain and enhance the range and
quality of its health care services. The Company focuses on the particular needs
of each community it serves and tailors its services based upon local conditions
and the Company's ability to provide such services on a competitive basis.
Examples of specialty services provided by
24
<PAGE> 25
the Company in response to local demand include rehabilitation services, home
health services, AIDS treatment, cardiac surgery, weight loss services, pain
treatment programs and women's health clinics. In designing and implementing
such programs, the Company analyzes general demographic information and specific
demand data generated by its hospitals, and seeks to work with physicians,
employers and other members of the local community.
MODERNIZATION OF FACILITIES. The Company believes that maintaining and
modernizing its facilities is an important means of continuing revenue and
market share growth. After giving pro forma effect to the Mergers, the Company's
capital expenditures have totalled approximately $200 million over the past
three fiscal years. Such spending resulted in hospital renovations and equipment
purchases to expand and enhance the Company's range of services, as well as
customary equipment replacement. In addition, such expenditures have expanded
high growth outpatient facilities and other specialty services, including
outpatient surgery and home health services. The Company believes that capital
expenditures (exclusive of hospital acquisitions) during the 12 months following
the Mergers will not exceed $75 million, and will be used for expansion of
services at existing facilities and the replacement of outdated equipment.
MANAGEMENT INFORMATION SYSTEMS. The Company believes that the ability to
collect and analyze information on the quality of care and to develop
appropriate responses thereto is critical to achieving growth in the managed
care environment. Prior to the Mergers, the Company, Summit and AHM each
designed or successfully implemented systems which measure selected outcome
quality indicators and identify needed improvements to patient care. For
example, these systems help identify and track quality indicators such as
unplanned transfers to intensive care units and returns to the operating room.
The Company utilizes this information, which is shared with physicians and other
health care professionals, to develop improved protocols of care and to direct
treatment to the most appropriate level of care. The Company is consolidating
its quality and utilization system with that of each of AHM and Summit to
enhance its operational efficiency and reduce costs.
OPERATIONS
Health Care Facilities
The Company operates 45 general acute care hospitals, one psychiatric
hospital and four surgery centers in 15 states, primarily in the southern and
western United States, and has a significant presence in several large markets.
The Company operates 14 hospitals in the greater Los Angeles, California area,
and, therefore, believes that it is able to offer high quality, cost-effective
health care services by integrating its primary and tertiary care facilities in
the area. The recently completed acquisition of Fountain Valley has added to the
Company's presence in the greater Los Angeles, California area. In Phoenix,
Arizona, the Company operates two hospitals, two surgery centers and the
Medicaid HMO which provides services under a fixed price contract expiring on
September 30, 1994. The Company operates five hospitals in Florida and seven
hospitals in Texas. The Company also operates hospitals in the following states:
Indiana, Iowa, Louisiana, Mississippi, Missouri, Nevada, Oregon, Tennessee,
Washington, West Virginia and Wyoming. In addition, the Company owns or leases
all or a substantial part of over 50 medical office buildings located in
proximity to its hospitals. All of the Company's hospitals are accredited by the
Joint Commission on Accreditation of Health Care Organizations (except for one
hospital which is accredited by the American Osteopathic Association) and are
certified for participation in the Medicare and Medicaid program.
The Company owns all outstanding shares of two series of redeemable
preferred stock of Houston Northwest Medical Center ("Houston Northwest"), a
tertiary medical complex and trauma center located in Houston with 494 licensed
beds. The preferred stock has a redemption value of $62.5 million plus accrued
and unpaid dividends. In addition, the Company has a mortgage note receivable
from an affiliate of Houston Northwest with a balance of $8.2 million as of May
31, 1994. The Company also owns 43% of Horizon Mental Health Services, Inc.,
which at May 31, 1994 operated 60 specialty psychiatric units at various
hospitals in the United States.
25
<PAGE> 26
Sources of Revenue
The Company receives payment for health care services from (i) the federal
government under the Medicare program, (ii) state governments under their
respective Medicaid programs, (iii) managed care operators, including health
maintenance organizations and preferred provider organizations, (iv) other
private insurance payors and (v) patients directly. The following table sets
forth the approximate percentages of combined total gross operating revenue of
the Company, Summit and AHM from the sources indicated for each of their three
most recently completed fiscal years:
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Medicare................................................ 42.6% 44.0% 45.2%
Medicaid/Medi-Cal....................................... 17.5% 14.6% 11.7%
Managed Care............................................ 19.4% 18.9% 17.1%
All Other Payors........................................ 20.5% 22.5% 26.0%
------ ------ ------
Total......................................... 100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
Amounts received under Medicare, Medicaid and from managed care
organizations and certain other private insurers generally are less than the
hospital's customary charges for the services provided. Patients are not
generally responsible for any differences between customary charges and amounts
reimbursed under these programs for such services, but are responsible to the
extent of any exclusions, deductibles or co-insurance features of their
coverage. In recent years, the Company's facilities have experienced an increase
in the amount of such exclusions, deductibles and co-insurance. In addition, the
major governmental and private purchasers of health care are increasingly
negotiating the amounts they will pay for services performed, and managed care
operators, which offer prepaid and discounted medical service packages,
represent a growing segment of health care payors. The Company believes that its
recent acquisition activity, together with the business strategies described
above, will position the Company to compete more effectively in this changing
environment.
Medical Staffs and Employees
As of May 31, 1994, the Company had approximately 20,000 employees. In
addition, as of such date, approximately 15,000 active licensed physicians were
members of the medical staffs of the Company's facilities. Medical staff members
are generally independent contractors and not employees of the hospital.
However, a patient is usually admitted to a hospital only at the request of a
member of the medical staff. Medical staff members may also serve on the staffs
of other nearby hospitals.
Each of the Company's hospitals is managed on a day-to-day basis by a
hospital chief executive officer and chief financial officer. The Company has
implemented incentive compensation programs designed to reward hospital
management personnel for accomplishing established performance goals.
The Company provides a variety of management services to its hospitals,
including information systems, human resource management, reimbursement, finance
and technical accounting support, purchasing support, legal and tax services and
construction management. The Company establishes fiscal and accounting policies
at the corporate level for use at each of its facilities.
26
<PAGE> 27
PROPERTIES
The following table sets forth the name, location and the number of
licensed beds in the Company's hospitals as of August 10, 1994. All of the
hospitals are acute care hospitals, except for the one hospital indicated in
footnote (6) below which is a psychiatric hospital.
<TABLE>
<CAPTION>
STATE NAME LOCATION BEDS(1)
- -------------------------- ----------------------------------------- ---------------- -------
<S> <C> <C> <C>
Arizona................... Community Hospital Medical Center Phoenix 75
Mesa General Hospital Medical Center(2) Mesa 138
Tucson General Hospital Tucson 213
California................ Brotman Medical Center Culver City 495
Chapman General Hospital(3) Orange 99
Coastal Communities Hospital(4) Santa Ana 165
Community Hospital of Huntington Park(5) Huntington Park 99
Doctors Hospital of Santa Ana Santa Ana 54
Fountain Valley Regional Hospital and
Medical Center Fountain Valley 413
French Hospital Medical Center San Luis Obispo 138
Greater El Monte Community Hospital South El Monte 115
Harbor View Medical Center San Diego 176
Midway Hospital Medical Center Los Angeles 230
Mission Hospital of Huntington Park Huntington Park 127
Monterey Park Hospital Monterey Park 102
Ross Hospital(6) Kentfield 93
Santa Ana Hospital Medical Center(7) Santa Ana 93
St. Luke Medical Center Pasadena 179
Valley Community Hospital(8) Santa Maria 70
Whittier Hospital Medical Center Whittier 179
Woodruff Community Hospital Long Beach 96
Florida................... Coral Gables Hospital Coral Gables 285
Florida Medical Center Fort Lauderdale 459
Golden Glades Regional Medical Center Miami 352
North Bay Medical Center New Port Richey 122
Parkway Regional Medical Center(9) North Miami 412
Indiana................... Midwest Medical Center Indianapolis 405
Iowa...................... Davenport Medical Center Davenport 150
Louisiana................. Minden Medical Center Minden 108
Mississippi............... Gulf Coast Medical Center Biloxi 189
Missouri.................. Twin Rivers Regional Medical Center Kennett 116
Nevada.................... Lake Mead Hospital Medical Center(10) North Las Vegas 163
Oregon.................... Eastmoreland Hospital Portland 100
Woodland Park Hospital(11) Portland 209
Tennessee................. Gibson General Hospital Trenton 101
Lewisburg Community Hospital Lewisburg 119
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
STATE NAME LOCATION BEDS(1)
- -------------------------- ----------------------------------------- ---------------- -------
<S> <C> <C> <C>
Texas..................... Garland Community Hospital Garland 118
Lake Pointe Medical Center(12) Rowlett 92
Pasadena General Hospital Pasadena 146
Sharpstown General Hospital Houston 190
South Park Hospital & Medical Center Lubbock 99
Southwest General Hospital San Antonio 274
Trinity Valley Medical Center Palestine 114
Washington................ Puget Sound Hospital Tacoma 160
West Virginia............. Plateau Medical Center Oak Hill 91
Wyoming................... Lander Valley Medical Center(13) Lander 102
</TABLE>
- ---------------
(1) The number of licensed beds represents the maximum number of beds permitted
in the facility under its state license. The total number of beds for all
facilities is 8,025.
(2) Leased facility. The lease expires July 31, 2003, subject to renewal by the
Company until July 31, 2023.
(3) Leased facility. The lease expires December 31, 2003, subject to renewal by
the Company until December 31, 2013.
(4) Joint venture with minority interests aggregating approximately 50%.
(5) Leased facility. The lease expires November 25, 2023.
(6) Psychiatric facility.
(7) Leased facility. The lease expires August 31, 2003, subject to renewal by
the Company until August 31, 2013.
(8) Leased facility. The lease expires July 31, 2003, subject to renewal by the
Company until July 31, 2023.
(9) Joint venture with minority interests aggregating approximately 45%.
(10) A portion of the land on which the facility is located is leased, and such
ground lease expires on December 31, 2009, subject to renewal by the
Company until December 31, 2024.
(11) The land on which the facility is located is leased, and such ground lease
expires December 31, 2019.
(12) Joint venture with minority interests aggregating approximately 50%.
(13) Joint venture with minority interests aggregating approximately 7%.
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<PAGE> 29
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
SERVED AS OFFICER
OR DIRECTOR OF
NAME AGE POSITION THE COMPANY SINCE
- ---------------------------- --- ------------------------------------------- -----------------
<S> <C> <C> <C>
Charles N. Martin, Jr....... 51 Chairman of the Board and Chief Executive January 1992
Officer
Donald J. Amaral............ 41 President, Chief Operating Officer and April 1994
Director
Keith B. Pitts.............. 36 Executive Vice President & Chief Financial August 1992
Officer
Beverly S. Anderson......... 41 Senior Vice President -- Operations April 1992
Bryan D. Burklow............ 37 Senior Vice President -- Operations April 1994
Raymond Denson.............. 52 Senior Vice President -- Operations September 1986
Paula Y. Eleazar............ 41 Senior Vice President -- Chief Information April 1992
Officer
Gale E. Gascho.............. 48 Senior Vice President -- Operations April 1994
Anthony C. Krayer........... 50 Senior Vice President -- Acquisitions and June 1994
Development
Carol A. Murdock............ 33 Senior Vice President -- Business April 1994
Development
Ronald P. Soltman........... 48 Senior Vice President and General Counsel April 1994
Mark Werber................. 39 Senior Vice President -- Operations April 1994
Yvonne V. Cliff............. 33 Director October 1991
Richard A. Gilleland........ 49 Director October 1991
Leonard Green............... 67 Director April 1992
Peter A. Joseph............. 41 Director October 1991
Paul S. Levy................ 46 Director October 1991
Angus C. Littlejohn, Jr..... 42 Director October 1991
John F. Nickoll............. 60 Director April 1994
John J. O'Shaughnessy....... 49 Director April 1994
M. Lee Pearce, M.D.......... 62 Director March 1993
</TABLE>
Charles N. Martin, Jr. has served as Chairman of the Board of Directors and
Chief Executive Officer of the Company since January 1992. He was also President
of the Company from January 1992 until April 1994. Mr. Martin was President and
Chief Operating Officer of Healthtrust, Inc. -- The Hospital Company, a hospital
management company, from September 1987 until October 1991. From September 1980
to September 1987, Mr. Martin held a number of executive positions at Hospital
Corporation of America ("HCA"), and from April 1987 to August 1987 served as a
director of HCA.
Donald J. Amaral has been President and Chief Operating Officer and a
Director of the Company since April 1994. Previously he was President and Chief
Executive Officer of Summit from October 1991 to April 1994 and President and
Chief Operating Officer from October 1989 to October 1991. Prior to joining
Summit, Mr. Amaral was President and Chief Operating Officer of Mediplex Group,
Inc. ("Mediplex"), a health care subsidiary of Avon Products, Inc., from 1986
until October 1989. For a period of ten years prior to joining Mediplex, Mr.
Amaral worked for the Hospital Group of National Medical Enterprises, Inc.
("NME") in
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<PAGE> 30
various senior financial management positions. Mr. Amaral was appointed to the
Board of Directors pursuant to the Agreement and Plan of Merger, dated as of
December 2, 1993 and amended as of January 14, 1994, among the Company, Summit
and SHL Acquisition Co. Mr. Amaral is also Chairman of the Board of Summit Care.
Keith B. Pitts has served as Executive Vice President and Chief Financial
Officer of the Company since August 1992. From July 1991 to August 1992, Mr.
Pitts was a partner in Ernst & Young's Southeast Region Health Care Consulting
Group, and from January 1988 to July 1991 he was a partner and Regional Director
in Ernst & Young's Western Region Health Care Consulting Group. Mr. Pitts was a
Regional Vice President and Treasurer of Amherst Associates, a health care
consulting firm, from July 1986 until it merged into Ernst & Young in January
1988. Mr. Pitts is also a director of Summit Care.
Beverly S. Anderson has served as Senior Vice President -- Operations of
the Company since April 1994. From April 1992, when she joined the Company,
until April 1994, she was Senior Vice President -- Operations Improvement of the
Company. For more than five years prior to joining the Company, Ms. Anderson was
a partner and senior manager in Ernst & Young's Southern Region Health Care
Consulting Group.
Bryan D. Burklow has been Senior Vice President -- Operations of the
Company since April 1994. Prior thereto he was Chief Executive Officer
responsible for Summit's Midway Hospital Medical Group. In June 1993, Mr.
Burklow became Summit's Senior Vice President responsible for California
hospital operations. Mr. Burklow joined Summit in August 1984 as Assistant
Administrator at Mesa General Hospital Medical Center in Mesa, Arizona, and he
held various positions with Summit between August 1984 and June 1993.
Raymond Denson has served as Senior Vice President -- Operations of the
Company since April 1990. Mr. Denson served as a Vice President-Operations of
the Company from September 1986 until April 1990.
Paula Y. Eleazar has been Senior Vice President and Chief Information
Officer of the Company since April 1994. Prior thereto she served as Vice
President and Chief Information Office of the Company from April 1992 until
April 1994. For more than five years prior to joining the Company, Ms. Eleazar
was employed by HCA, principally in its information systems division and as the
Assistant Administrator of Henrico Doctors Hospital, Richmond, Virginia.
Gale E. Gascho has been Senior Vice President -- Operations of the Company
since June 1994. From 1991 until May 1994, Mr. Gascho was the Chief Executive
Officer of Alhambra Hospital, a 157-bed acute care hospital located in Alhambra,
California. From 1975 through 1991, Mr. Gascho served in various capacities with
the corporate staff and with the hospital operations of NME, including serving
from 1987 to 1991 as Chief Executive Officer of NME's Garfield Medical Center, a
229-bed acute care hospital located in Monterey Park, California.
Anthony C. Krayer has been Senior Vice President -- Acquisitions and
Development of the Company since June 1994. Prior thereto he served as Senior
Vice President of OrNda of South Florida, Inc., a subsidiary of the Company,
from July 1993 to June 1994. From January 1992 until June 1993, Mr. Krayer was
Chief Operating Officer of Florida Medical Center ("FMC"), a 459-bed acute care
hospital located in Fort Lauderdale, Florida which was purchased by a subsidiary
of the Company in June 1993. From October 1989 until December 1991, Mr. Krayer
was Chief Financial Officer of FMC. From 1980 until October 1989 Mr. Krayer was
a partner of Ernst & Whinney (predecessor to Ernst & Young), independent
auditors.
Carol A. Murdock has been Senior Vice President -- Business Development of
the Company since April 1994. Prior thereto she was Vice President, Marketing of
Summit from June 1993 until April 1994. From November 1992 until May 1993, Ms.
Murdock was Assistant Vice President/Marketing of NME and from December 1990
until November 1992 she was Director, Product Line Development, of NME. From
1988 until 1990, Ms. Murdock was employed in various marketing positions with
subsidiaries of LINC Financial Services.
Ronald P. Soltman has been Senior Vice President and General Counsel of the
Company since April 1994. From 1984 until February 1994, he was Vice President
and Assistant General Counsel of HCA. From
30
<PAGE> 31
February 1994 until March 1994 he was Vice President and Assistant General
Counsel of Columbia/HCA Healthcare Corporation.
Mark Werber has been Senior Vice President of the Company since April 1994.
Prior thereto he was Summit's Senior Vice President in charge of its Arizona,
Texas and Iowa hospital operations from October 1990 until April 1994. Prior to
October 1990 he was Chief Executive Officer of Summit's Tucson General Hospital,
Tucson, Arizona.
Yvonne V. Cliff has served as a Director of the Company since October 1991.
Ms. Cliff has been a general partner of JLL Associates, L.P. ("JLL Associates")
since January 1992 and a principal of Joseph Littlejohn & Levy ("JLL"), a
merchant banking firm and the sponsor of the JLL Fund, since June 1988. Ms.
Cliff has served as Vice President -- Corporate Development of Lancer
Industries, Inc., ("Lancer Industries"), an industrial holding company and the
limited partner of JLL Associates, since July 1989. Lancer Industries also owns
100% of the capital stock of JLL Inc., which pursuant to contract manages the
JLL Fund. Ms. Cliff is also a director of Doskocil Companies Incorporated
("Doskocil").
Richard A. Gilleland has served as a Director of the Company since October
1991. Mr. Gilleland has been the Chairman, President, and Chief Executive
Officer of Kendall International, Inc. ("Kendall International") since July
1990. Mr. Gilleland served as Chairman, President, and Chief Executive Officer
of American Medical International, Inc. from January 1989 to November 1989 and
of Intermedics, Inc. from August 1986 to January 1989.
Leonard Green has served as a Director of the Company since April 1992. Mr.
Green has been President and Chief Executive Officer of Green Management and
Investment Co., a private investment management company, since 1985. From 1980
to 1985, Mr. Green served as President and Chief Executive Officer of Yuma
Management Corp., the general partner of Universal Home Health Care Associates,
which was subsequently merged into Quality Care, Inc., a home health care
company.
Peter A. Joseph has served as a Director of the Company since October 1991.
Mr. Joseph has been a general partner of JLL Associates, which is the general
partner of the JLL Fund, since November 1990 and a partner of JLL (and its
predecessors), since July 1987. Mr. Joseph has served as President of Lancer
Industries since April 1992 and as Secretary and director of Lancer Industries
since July 1989. Mr. Joseph is also a director of Doskocil and Fairfield
Manufacturing Company, Inc. ("Fairfield").
Paul S. Levy has served as a Director of the Company since October 1991.
Mr. Levy has been a general partner of JLL Associates since November 1990 and a
partner of JLL (and its predecessors) since May 1988. Mr. Levy has served as
Chairman of the Board of Directors and Chief Executive Officer of Lancer
Industries since July 1989. Mr. Levy is also a director of Doskocil, Fairfield
and Kendall International.
Angus C. Littlejohn, Jr. has served as a Director of the Company since
October 1991. Mr. Littlejohn has been a general partner of JLL Associates since
November 1990 and a partner of JLL (and its predecessors) since July 1987. Mr.
Littlejohn has served as Vice Chairman of Lancer Industries since April 1992 and
as Chief Financial Officer and director of Lancer Industries since July 1989.
From July 1989 until April 1992, Mr. Littlejohn served as President of Lancer
Industries. Mr. Littlejohn is also a director of Doskocil and Fairfield.
John F. Nickoll has served as a Director of the Company since April 1994.
He has been President and Co-Chief Executive Officer of The Foothill Group,
Inc., since 1970. Mr. Nickoll also is a director of American Shared Hospital
Services, Inc., an owner/lessor of mobile CAT-scan equipment, CIM-High Yield
Securities, Inc., a closed-end investment company, and Care Enterprises, Inc., a
nursing home chain. Mr. Nickoll was appointed to the Board of Directors pursuant
to the Amended and Restated Agreement and Plan of Merger dated as of January 14,
1994 between the Company and AHM (the "AHM Merger Agreement").
John J. O'Shaughnessy has served as a Director of the Company since April
1994. He has been President of Strategic Management Associates, Inc.,
Washington, D.C. since 1988. From 1986 to 1988, he was Senior Vice President of
the Greater New York Hospital Association, and from 1983 to 1986 he was
Assistant
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<PAGE> 32
Secretary for Management and Budget of the Department of Health and Human
Services, Washington, D.C. Mr. O'Shaughnessy was appointed to the Board of
Directors pursuant to the AHM Merger Agreement.
M. Lee Pearce, M.D. has served as a Director of the Company since March
1993. Dr. Pearce is a private investor. Dr. Pearce also serves as a director of
IVAX Corporation.
32
<PAGE> 33
DESCRIPTION OF THE NOTES
The Notes are to be issued under an indenture dated as of August 23, 1994
(the "Indenture") among the Company, Summit and NationsBank of Tennessee, N.A.,
as Trustee (the "Trustee"), a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following summary
of certain provisions of the Indenture does not purport to be complete and is
qualified in its entirety by reference to the Indenture. Wherever particular
sections or defined terms of the Indenture are referred to, such sections or
defined terms are incorporated herein by reference. Capitalized terms not
otherwise defined below or elsewhere in this Prospectus have the meanings given
to them in the Indenture.
GENERAL
The Notes represent unsecured general joint and several obligations of the
Co-Obligors subordinate in right of payment to certain other debt obligations of
the Co-Obligors, as described below under "Subordination," and are limited to
$125 million in aggregate principal amount. The Notes are issuable only in
registered form, without coupons, in denominations of $1,000 or any integral
multiple thereof.
MATURITY, INTEREST AND PRINCIPAL
The Notes will mature on August 15, 2004. Interest on the Notes will be
payable in cash semi-annually, in arrears, on each February 15 and August 15
(each an "Interest Payment Date"), commencing February 15, 1995, to the Persons
in whose names the Notes are registered at the close of business on the
preceding February 1 and August 1 (each an "Interest Record Date"). Interest
will accrue from the most recent Interest Payment Date to which interest has
been paid or duly provided for or, if no interest has been paid or duly provided
for, from the original date of issuance. Interest will be computed on the basis
of a 360-day year of twelve 30-day months. The Notes will bear interest until
maturity at the rate of 11 3/8% per annum.
Principal and premium, if any, and interest on each Note will be payable,
and the Notes may be presented for transfer or exchange, at the office or agency
of the Co-Obligors maintained for such purpose. At the option of the
Co-Obligors, payment of interest may be made by check mailed to registered
holders of the Notes at the addresses set forth on the registry books maintained
by the Trustee, which will initially act as registrar for the Notes. No service
charge will be made for any exchange or registration of transfer of Notes, but
the Co-Obligors may require payment of a sum sufficient to cover any tax or
other governmental charge payable in connection therewith. Unless otherwise
designated by the Co-Obligors, the Co-Obligors' office or agency will be the
corporate trust office of the Trustee.
REDEMPTION
The Notes may not be redeemed prior to August 15, 1999. The Company, at its
option, may redeem the Notes as a whole, or from time to time in part, on or
after August 15, 1999 at a redemption price equal to 105.69% of principal
amount, declining ratably to par on August 15, 2002 (in each case together with
accrued and unpaid interest to the redemption date).
If less than all of the Notes are to be redeemed, the Trustee shall select,
by lot or pro rata or as otherwise directed by the Company in a manner which is
appropriate and fair, the Notes or portions thereof to be redeemed. Notes may be
redeemed in part in multiples of $1,000 principal amount only. The Notes will
not have the benefit of any sinking fund.
Notice of redemption will be sent, by first-class mail, at least 30 days
and not more than 60 days prior to the date fixed for redemption to each holder
of Notes to be redeemed at the last address for such holder then shown on the
registry books. Any notice that relates to a Note to be redeemed only in part
shall state the portion of the principal amount to be redeemed and that on and
after the redemption date, upon surrender of the Note, a new Note or Notes will
be issued in a principal amount equal to the unredeemed portion thereof. On and
after the redemption date (unless the Company shall default in the payment of
such Notes at the redemption price, together with accrued interest to the
redemption date), interest will cease to accrue on the Notes or part thereof
called for redemption.
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<PAGE> 34
SUBORDINATION
Payment of the principal of and interest on the Notes is expressly
subordinate and subject in right of payment to the prior payment in full in cash
of all Senior Debt (as defined), whether outstanding upon the issuance of the
Notes or thereafter incurred. In addition, as a result of the holding company
structures of the Company and Summit, the creditors of the Co-Obligors,
including the holders of the Notes, effectively rank junior to all creditors of
the Company's Subsidiaries (other than Summit, but including Summit's
subsidiaries). As of May 31, 1994, the amount of Senior Debt and obligations of
the Company's subsidiaries (excluding intercompany indebtedness) that
effectively ranked senior to the Notes was $622.4 million. As of May 31, 1994,
after giving pro forma effect to the acquisition of Fountain Valley, the
Offering and the use of proceeds therefrom as described in "Use of Proceeds,"
and assuming the repurchase of 100% of the aggregate outstanding principal
amount of the 10 1/4% Notes pursuant to the Change of Control Offer, the amount
of Senior Debt and obligations of the Company's Subsidiaries (excluding
intercompany indebtedness) that effectively ranked senior to the Notes would
have been approximately $603.0 million. The Notes will rank pari passu in right
of payment to the Company's 12 1/4% Notes and the 10 1/4% Notes. As of May 31,
1994, there was $500 million aggregate principal amount of indebtedness
outstanding which would rank pari passu in right of payment to the Notes. As of
May 31, 1994, after giving pro forma effect to the Offering and the use of the
proceeds therefrom and the acquisition of Fountain Valley and assuming the
Company's repurchase of 100% of the aggregate outstanding principal amount of
the 10 1/4% Notes pursuant to the Change of Control Offer, there would have been
$400 million aggregate principal amount of indebtedness outstanding which would
rank pari passu in right of payment to the Notes. The 10 1/4% Notes are the
joint and several obligations of the Company and AHM Acquisition Co., a wholly
owned subsidiary of the Company, and, therefore, holders of any of the 10 1/4%
Notes outstanding following the Change of Control Offer will be entitled to
satisfy their claims out of the assets of AHM Acquisition Co. prior to holders
of the Notes. AHM Acquisition Co. owns substantially all of the operations
acquired by the Company from AHM in the AHM Merger. Subject to certain
restrictions contained in the Bank Credit Facility, the Indenture and certain
other indebtedness, the Co-Obligors and their respective Subsidiaries are
permitted to incur additional indebtedness, including Senior Debt. Additionally,
the indenture governing the Notes does not prohibit the Company from
transferring or disposing of the assets of Summit, and thereby diminishing the
assets available to satisfy the claims of holders of the Notes against Summit.
The Indenture provides that no payment or distribution of cash, property or
securities of the Co-Obligors will be made on account of principal of, or
interest on the Notes, or to defease or acquire any of the Notes or on account
of the redemption provisions of the Notes, (a) upon the maturity of any Senior
Debt by lapse of time, acceleration or otherwise, until all Senior Debt shall
first be paid in full in cash, or such payments have been duly made in a manner
satisfactory to the holders of such Senior Debt or (b) if the Co-Obligors
default in the payment of any principal of, premium if any, or interest on or
other amounts payable on or in connection with any Senior Debt when it becomes
due and payable, whether at maturity or at a date fixed for prepayment or by
declaration or otherwise, unless and until such default has been cured or waived
in writing or has ceased to exist; provided, however, that the Co-Obligors may
make such payment or distribution in respect of the Notes without regard to the
foregoing if the Co-Obligors and the Trustee receive written notice from the
Senior Agent and any other Senior Representatives approving such payment.
Upon the happening of an event of default (or if an event of default would
result upon any payment with respect to the Notes) with respect to any
Designated Senior Debt, as such event of default is defined in the Bank Credit
Facility and in any other instrument evidencing the Designated Senior Debt or
under which it is outstanding, permitting holders thereof to accelerate its
maturity (if the default is other than a default in payment of the principal of,
premium, if any, or interest on or other amount due in connection with such
Designated Senior Debt), upon written notice of such event of default to the
Trustee and the Co-Obligors by the Senior Agent on behalf of the Lenders or by
any Senior Representative for the holders of such other Designated Senior Debt,
then outstanding, then, unless and until such event of default has been cured,
waived in writing, or has ceased to exist, and no event of default exists under
any other Designated Senior Debt or any other event of default has also been
waived in writing or has ceased to exist, no payment or distribution of cash,
property or securities of the Co-Obligors will be made by the Co-Obligors with
respect to the principal of, or interest on the Notes or to defease or acquire
any of the Notes or on account of the redemption
34
<PAGE> 35
provisions of the Notes; provided that nothing in the above-described provision
will prevent the making of any payment for a period of more than 180 days after
the date written notice of the event of default is given unless the payment
thereof would be prohibited by the provisions of the immediately preceding
paragraph. If, upon the expiration of such 180-day period, the payment thereof
would not be prohibited by the provisions of the immediately preceding
paragraph, promptly after the end of such 180-day period, the Co-Obligors will
pay to the Trustee all sums not paid in respect of the Notes during such 180-day
period. During any consecutive 360-day period, only one 180-day period may
commence during which payment of principal of or interest on the Notes may not
be made and the duration of such period may not exceed 180 days.
Upon any distribution of assets of the Co-Obligors upon any dissolution,
winding up, liquidation or reorganization of the Co-Obligors (whether voluntary
or involuntary, in bankruptcy, insolvency, receivership or similar proceeding
related to the Co-Obligors or their respective property or upon an assignment
for the benefit of creditors or otherwise): (a) the holders of all Senior Debt
will first be entitled to receive payment in full in cash of the Senior Debt and
other amounts due in connection with Senior Debt before the holders of Notes are
entitled to receive any payment or distribution of any kind or character on
account of principal of or interest on the Notes; (b) any payment or
distribution of assets of the Co-Obligors, whether in cash, Property or
securities, to which the holders of the Notes or the Trustee on behalf of the
holders would be entitled except for the subordination provisions of the
Indenture, will be paid by the liquidating trustee or agent or other Person
making such a payment or distribution directly to the holders of Senior Debt or
their respective Senior Agent or Senior Representatives to the extent necessary
to make payment in full of all Senior Debt remaining unpaid, after giving effect
to any concurrent payment or distribution to the holder of such Senior Debt; and
(c) if, notwithstanding the foregoing provisions, any payment or distribution of
assets of the Co-Obligors of any kind or character, whether in cash, Property or
securities is received by the Trustee or the holders of the Notes or any paying
agent on account of principal, premium, if any, or interest on the Notes before
all Senior Debt is paid in full in cash, or effective provision made for its
payment in cash, such payment or distribution will be received and held in trust
for and will be promptly paid over to the holders of the Senior Debt which
remains unpaid or to their respective Senior Agent or Senior Representative for
application to the payment of such Senior Debt (pro rata as to each of such
holders on the basis of the respective amounts of Senior Debt which is held by
them) until all such Senior Debt is paid in full in cash. Nothing in the
Indenture or in the Notes, however, affects the joint and several obligations of
the Co-Obligors, which are unconditional and absolute, to pay the principal of
and interest on the Notes as and when they became due and payable in accordance
with their terms.
By reason of the subordination provisions described above, in certain
events funds that would otherwise by payable to holders of Notes will be paid to
holders of Senior Debt to the extent necessary to pay the Senior Debt in full.
As result, the Co-Obligors may not be able to fully meet their obligations with
respect to the Notes.
RESTRICTIVE COVENANTS
The Indenture contains, among other things, the following covenants:
Change of Control
Upon the occurrence of a Change of Control (as defined under "-- Certain
Definitions") (the "Change of Control Date"), each holder of a Note shall have
the right to require the repurchase of such Noteholder's Notes pursuant to the
offer described in the next paragraph (the "Change of Control Offer") at a
purchase price equal to 100% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of purchase. Prior to the mailing of the
notice to Noteholders provided for below but in any event within 30 days
following any Change of Control, the Company covenants to (i) repay in full in
cash any Designated Senior Debt which by its terms would require such repayment
or to offer to repay in full in cash all such Debt and to repay the Debt of each
Person who has accepted such offer or (ii) obtain the requisite consents under
such Designated Senior Debt to permit the repurchase of the Notes as provided
for in the immediately following paragraph. The Company shall first comply with
the covenant in the preceding sentence before it shall be required to repurchase
Notes pursuant to this covenant.
Within 30 days following any Change of Control, the Company shall mail or
at the Company's request the Trustee shall mail a notice to each Noteholder
stating: (i) that the Change of Control Offer is being made
35
<PAGE> 36
pursuant to this covenant and that all Notes tendered will be accepted for
payment; (ii) the purchase price and the purchase date (which shall be no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Change of Control Payment Date"); (iii) that any Note not tendered will
continue to accrue interest; (iv) that any Note accepted for payment pursuant to
the Change of Control Offer will cease to accrue interest after the Change of
Control Payment Date; (v) that Noteholders electing to have a Note purchased
pursuant to a Change of Control Offer will be required to surrender the Note,
with the form entitled "Option of Holder to Elect Purchase" on the reverse of
the Note completed, to the Trustee at the address specified in the notice prior
to the close of business on the Change of Control Payment Date; (vi) that
Noteholders will be entitled to withdraw their election if the Trustee receives,
not later than the close of business on the third Business Day (or such shorter
period as may be required by applicable law) preceding the Change of Control
Payment Date, a telegram, telex, facsimile transmission or letter setting forth
the name of the Noteholder, the principal amount of Notes the Noteholder
delivered for purchase and a statement that such Noteholder is withdrawing his
election to have such Notes purchased; and (vii) that Noteholders whose Notes
are purchased only in part will be issued new Notes in a principal amount equal
to the unpurchased portion of the Notes surrendered. In the event a Change of
Control occurs and the holders of Notes exercise their right to require the
Company to repurchase Notes, and assuming that such a repurchase constitutes a
"tender offer" for purposes of Rule 14e-1 under the Securities Exchange Act of
1934, as amended (the "1934 Act"), at the time it is required, the Company will
comply with the requirements of Rule 14e-1 as then in effect and any other
applicable securities law or regulations with respect to such repurchase.
On the Change of Control Payment Date, subject to the "Subordination"
Article of the Indenture, the Company will (i) accept for payment the Notes or
portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit
with the Trustee money sufficient to pay the purchase price of all the Notes or
portions thereof so tendered and (iii) deliver or cause to be delivered to the
Trustee, Notes so accepted together with an officers' certificate describing the
Notes or portions thereof tendered to the Company. The Trustee shall promptly
mail to each holder of the Notes so accepted payment in an amount equal to the
purchase price of such Notes, and the Trustee shall promptly authenticate and
mail to such holder a new Note in the principal amount equal to any unpurchased
portion of the Notes surrendered by such Noteholder. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
Limitation on Debt
The Indenture provides that the Company will not and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, assume or guarantee
or otherwise become liable for, any Debt, except (i) Debt evidenced by the
Notes; (ii) Debt under the Credit Agreement in an aggregate principal amount at
any time outstanding not to exceed $700 million; (iii) Debt incurred for working
capital purposes at any time outstanding not to exceed $300 million; provided
that the amount of such Debt outstanding at any time pursuant to this clause
(iii) may not, together with any amounts outstanding or subject to a commitment
of the Lenders under the Credit Agreement, exceed the amount that is permitted
to be outstanding under the Credit Agreement pursuant to clause (ii); (iv) Debt
of the Company to any Consolidated Subsidiary or of any Consolidated Subsidiary
to the Company or to any other Consolidated Subsidiary; (v) Debt of the Company
and its Subsidiaries outstanding on the Closing Date; (vi) Debt evidenced by
letters of credit which are issued in the ordinary course of business of the
Company and its Subsidiaries; (vii) Debt in respect of performance bonds
provided by the Company in the ordinary course of business; (viii) Purchase
Money Obligations incurred in the ordinary course of business; (ix) Debt
representing additional shares of PIK Preferred payable as dividends on such PIK
Preferred; (x) Physician Support Obligations; (xi) Capitalized Lease Obligations
and Attributable Debt (without duplication) in an aggregate amount outstanding
at any time not to exceed 10% of the Company's Consolidated Net Tangible Assets,
(xii) Debt incurred to purchase or to finance the purchase of any Person's
ownership interest in a Permitted Joint Venture in accordance with the terms of
the agreement creating such interest or on terms no more favorable to such
Person than that provided for by such agreement on the Closing Date, (xiii) Debt
assumed in connection with the acquisition of Fountain Valley in an aggregate
principal amount not exceeding $20 million; (xiv) any extension, renewal or
replacement of any of clauses (i), (iii), (v) or (xii) above without (a)
increasing the principal amount of any Debt then outstanding (unless such Debt
is issued at a discount in which case the issuance price of such discount Debt
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shall not exceed the principal amount of Debt being so refinanced) plus the
amount of any premium required to be paid under the terms of the instrument
governing such Debt being refinanced or the amount of any premium reasonably
determined by the Company as necessary to accomplish such refinancing through
means of a tender offer or privately negotiated transactions and, in each case,
actually paid, (b) altering the issuer or obligor (except that the Company may
incur Debt to replace Debt of a Subsidiary), or (c) shortening the maturity of
subordinated debt and (xv) Debt, other than Debt permitted under clauses (i)
through (xiii), provided that the aggregate principal amount (or liquidation
preference) of such Debt may not exceed $125 million at any time outstanding,
which Debt may be incurred under the Credit Agreement.
Notwithstanding the foregoing, the Company and its Consolidated
Subsidiaries may create, incur or assume Debt (including Acquisition Debt) if,
at the time such Debt is so created, incurred or assumed and after giving effect
thereto and the application of the proceeds thereof, and after giving pro forma
effect to any acquisition or disposition by the Company or any Subsidiary of (i)
a hospital or (ii) any assets with a value in excess of $10 million, whether by
merger, stock purchase or sale, or asset purchase or sale, as if such
acquisition or disposition occurred on the first day of the Reference Period,
the Company's Pro Forma Coverage Ratio shall not be less than 2.0 to 1.0 for the
period beginning on the date of the Indenture through August 31, 1995 and 2.25
to 1.0 thereafter; provided that, if the Company and its Consolidated
Subsidiaries are unable to incur or assume Acquisition Debt pursuant to the
foregoing clause the Company and its Consolidated Subsidiaries may nonetheless
create, incur, or assume Acquisition Debt so long as, after giving effect
thereto and the application of the proceeds thereof, and after giving pro forma
effect to any acquisition or disposition by the Company or any Subsidiary of (i)
a hospital or (ii) any assets with a value in excess of $10 million, whether by
merger, stock purchase or sale, or asset purchase or sale, as if such
acquisition or disposition occurred on the first day of the Reference Period,
the Company's Pro Forma Coverage Ratio (i) is not less than 2.0 to 1.0 and (ii)
is not less than the ratio of the Company's Consolidated Cash Flow to Fixed
Charges (applying the provisions of clauses (2) and (3) of the definition of Pro
Forma Coverage Ratio) for the period with respect to which the Pro Forma
Coverage Ratio was calculated.
Limitation on Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly make any Restricted Payment, if,
after giving effect thereto: (i) an Event of Default, or an event that through
the passage of time or the giving of notice, or both, would become an Event of
Default, shall have occurred and be continuing, (ii) the Company could not incur
an additional $1.00 of Debt (other than permitted Debt) in accordance with the
"Limitation on Debt" covenant or (iii) the aggregate amount of all Restricted
Payments made by the Company and its Subsidiaries (the amount expended or
distributed for such purposes, if other than in cash, to be determined in good
faith by the Board of Directors) from and after the Closing Date shall exceed
the sum of: (a) the aggregate of 50% of the Consolidated Net Income of the
Company (determined by excluding any amounts included in such Consolidated Net
Income which were received by the Company or a Subsidiary from an Unrestricted
Subsidiary) accrued for the period (taken as one accounting period) commencing
with the first full month after the Closing Date to and including the first full
month ending immediately prior to the date of such calculation (or, in the event
Consolidated Net Income is a deficit, then minus 100% of such deficit), (b) the
aggregate net proceeds to the Company, including the fair market value of
property other than cash (as determined in good faith by the Board of
Directors), received by the Company from the issuance or sale (other than to a
Subsidiary of the Company) of its capital stock (other than Redeemable Stock)
from and after the date of the Indenture, and options, warrants and rights to
purchase its capital stock other than Redeemable Stock and (c) the aggregate
amount received by the Company or a Subsidiary of the Company from its
Unrestricted Subsidiaries (excluding all amounts received by the Company or any
Subsidiary from all such Unrestricted Subsidiaries which represent a repayment
of the principal portion of any loan or advance or any return of contributed
capital in respect of any previous advance).
The foregoing clauses (i), (ii) and (iii) will not prevent Permitted
Payments and the foregoing clauses (ii) and (iii) will not prevent (a) the
payment of any dividend within 60 days after the date of its declaration if such
dividend could have been made on the date of its declaration in compliance with
the foregoing provisions, (b) amounts payable by the Company to its employees
pursuant to the Stock Appreciation Rights
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and (c) the repurchase or redemption of shares of capital stock from any
officer, director or employee of the Company or its Subsidiaries whose
employment has been terminated or who has died or become disabled in an
aggregate amount not to exceed $7.5 million per annum.
Limitation on Liens Securing Debt
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries, directly or indirectly, to create, incur, assume or permit
to exist any Lien upon or with respect to any of the Property of the Company or
any such Subsidiary, whether owned at the date of the Indenture or thereafter
acquired, or on any income or profits therefrom, to secure any Debt which is
pari passu with or subordinate in right of payment to the Notes unless the Notes
are secured equally and ratably simultaneously with or prior to the creation,
incurrence or assumption of such Lien.
This restriction does not apply to, and does not give the Noteholder any
rights in respect of the creation, incurrence, assumption or existence of any,
(i) Liens existing on the date of the Indenture and renewals and extensions
thereof; (ii) Liens granted to secure obligations under or in respect of the
Credit Agreement; (iii) rights of banks to set off deposits against debts owed
to said banks; (iv) Purchase Money Obligations incurred in the normal and
ordinary course of the Company's business; (v) Liens in respect of Debt incurred
in connection with the sale of receivables; and (vi) Liens on the Property of
any entity existing at the time such Property is acquired by the Company or any
of its Subsidiaries, whether by merger, consolidation, purchase of assets or
otherwise; provided in the case of this clause (vi) that such Liens (x) are not
created, incurred or assumed in contemplation of such assets being acquired by
the Company and (y) do not extend to any other assets of the Company or any of
its Subsidiaries.
Limitation on Restricting Subsidiary Dividends
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, create, assume or suffer to exist any consensual
encumbrance or restriction on the ability of any Subsidiary to pay dividends or
otherwise transfer assets or make loans to the Company or any other Subsidiary,
except (i) those contained in the Credit Agreement; (ii) consensual encumbrances
or restrictions binding upon any Person at the time that such Person becomes a
Subsidiary of the Company so long as such encumbrances or restrictions are not
created, incurred or assumed in contemplation of such Person becoming a
Subsidiary of the Company; (iii) restrictions contained in security agreements
permitted by the Indenture securing Debt permitted by the Indenture to the
extent such restrictions restrict the transfer of Property subject to such
security agreements; (iv) any encumbrance or restriction consisting of customary
non-assignment provisions in leases to the extent such provisions restrict the
transfer of the leases; (v) any encumbrance or restriction pursuant to an
agreement in effect at or entered into on the date of this Indenture; or (vi)
any encumbrance or restriction relating to a Permitted Joint Venture or (vii)
any restrictions with respect to a Subsidiary imposed pursuant to an agreement
which has been entered into for the sale or disposition of all or substantially
all the capital stock or assets of such Subsidiary.
Limitation on Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, enter into any transactions with Affiliates of the
Company unless (i) such transactions are between or among the Company and its
Subsidiaries or Unrestricted Subsidiaries, (ii) such transactions are in the
ordinary course of business and consistent with past practice or (iii) the terms
of such transactions are fair and reasonable to the Company or such Subsidiary
or Unrestricted Subsidiary, as the case may be, and are at least as favorable as
the terms which could be obtained by the Company or such Subsidiary or
Unrestricted Subsidiary, as the case may be, in a comparable transaction made on
an arm's-length basis between unaffiliated parties. In the event of any
transaction or series of transactions occurring subsequent to the date of the
Indenture with an Affiliate of the Company which involves in excess of $5
million and is not permitted under clause (i) or (ii) of the preceding sentence,
the majority of the disinterested members of the Board of Directors shall by
resolution determine that such transaction or series of transactions meets the
criteria set forth in clause (iii) of the preceding sentence; provided, further,
that if such transaction or series of transactions involves in excess of $10
million and is not permitted under clause (i) or (ii) of the preceding sentence,
the Company shall also deliver to the Trustee a written opinion of a nationally
recognized investment firm to the effect that such
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business or transaction is fair to the Company from a financial point of view.
Notwithstanding the foregoing, such provisions do not prohibit (i) the making of
Physician Support Obligations, (ii) transactions with Permitted Joint Ventures
or (iii) the payment of regular fees to directors of the Company who are not
employees of the Company.
Limitation on Other Subordinated Debt
The Indenture provides that the Company is prohibited from incurring any
Debt which is by its terms subordinate in right of payment to any Senior Debt
and senior in right of payment to the Notes.
LIMITATION ON CONSOLIDATION AND MERGER
The Indenture provides that the Company may not consolidate with or merge
with or into another Person or sell, lease or convey all or substantially all of
its assets to another Person unless: (i)(a) the Company is the continuing
corporation in the case of a merger or (b) the resulting, surviving or
transferee person (the "Surviving Entity") is a corporation or partnership
organized under the laws of the United States, one of the states thereof or the
District of Columbia and shall expressly assume by supplemental indenture
(satisfactory in form to the Trustee) all of the obligations of the Company
under the Indenture and the Notes; (ii) no Event of Default (or event or
condition which after notice or lapse of time or both would become an Event of
Default) shall have occurred and be continuing immediately after giving effect
to such transaction; (iii) the Net Worth of the Company or the Surviving Entity,
as the case may be, on a pro forma basis after giving effect to such
consolidation, merger or sale, lease or conveyance of assets is at least as
great as the Net Worth of the Company immediately prior to the date of the
transaction, and (iv) immediately after giving effect to such transaction, the
Company or the Surviving Entity, as the case may be, would be able to incur $1
of additional Debt (other than permitted debt) under the "Limitation on Debt"
covenant.
Notwithstanding the foregoing, clauses (iii) and (iv) shall not prohibit a
transaction, the principal purpose of which is (as determined in good faith by
the Board of Directors of the Company and evidenced by a resolution thereof) to
change the state of incorporation of the Company, and such transaction does not
have as one of its purposes the evasion of the restrictions of this section.
SUPPLEMENTAL INDENTURES
The Indenture permits the Company and the Trustee to amend or supplement
the Indenture or any supplemental indenture or modify the rights of the holders
of the Notes, in certain cases without the consent of holders of the Notes and
in general with consent of the holders of not less than a majority in principal
amount of the Notes at the time outstanding, provided that no such modification,
amendment or supplemental indenture shall, without the consent of holders of all
Notes then outstanding, (a) extend the final maturity of any Note, or reduce the
principal amount thereof (including the amount payable upon redemption), reduce
the rate or extend the time of payment of interest thereon, or impair or affect
the right of any holder of Notes to institute suit for the payment of any of the
Notes, or (b) reduce the aforesaid percentage of Notes, the consent of holders
of which is required for any such supplemental indenture.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as being: (a) any failure to pay
an installment of interest on the Notes as and when the same becomes due and
payable, and the continuance of such failure for 30 days; (b) failure to pay all
or any part of the principal on the Notes when and as the same shall become due
and payable at maturity, redemption, by declaration or otherwise; (c) failure by
the Company duly to observe or perform any covenant or agreement contained in
the Notes or the Indenture and the continuance of such failure for a period of
60 days after written notice specifying such failure and demanding that the
Company remedy the same shall have been given to the Company by the Trustee or
to the Company and the Trustee by holders of at least 40% in aggregate principal
amount of Notes then outstanding; (d) certain events of bankruptcy, insolvency
or reorganization in respect of the Company or any of the Company's Material
Subsidiaries; (e) any acceleration of the maturity of Debt of the Company or any
of its Material Subsidiaries or a failure to pay any such Debt at its stated
maturity, or (upon demand for payment) under any guarantee of payment by the
Company or any of its Subsidiaries of any Debt, whether such Debt or guarantee
existed at the
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Closing Date or was thereafter created, aggregating at least $25 million,
provided that such acceleration or failure to pay is not cured or waived within
10 days after such acceleration or failure to pay; and (f) final judgments not
covered by insurance aggregating in excess of $10 million rendered against the
Company or any of its Subsidiaries and not stayed or discharged within 60 days
after such judgments become final and nonappealable. The Indenture provides that
if a default (the term "default" for purposes of this provision being defined as
any event or condition which is, or with notice or lapse of time or both would
be, an Event of Default) occurs and is continuing and if it is known to the
Trustee, the Trustee must, within 90 days after the occurrence of such default,
give to the holders of Notes notice of such default, provided that, except in
the case of a default in payment of principal or interest in respect of such
Notes, the Trustee will be protected in withholding such notice if it in good
faith determines that the withholding of such notice is in the interests of the
holders of Notes.
If an Event of Default shall occur and be continuing (other than an Event
of Default described in clause (d) of the preceding paragraph relating to the
Company), unless the principal of all the Notes shall have already become due
and payable, either the Trustee or the holders of not less than 25% in aggregate
principal amount of the Notes then outstanding, by notice in writing to the
Company (and to the Trustee if given by holders of Notes) (the "Acceleration
Notice"), may declare the principal of all Notes and the interest accrued
thereon to be due and payable (i) immediately if no Designated Senior Debt is
outstanding or (ii) if any Designated Senior Debt is outstanding, upon the
earlier of (x) 10 days after such Acceleration Notice is received by the Senior
Agent and each Senior Representative with respect to Designated Senior Debt at
their last address specified by the Company pursuant to the "Notice" Section of
the Indenture or (y) the acceleration of such Designated Senior Debt, and upon
any such declaration the same shall become due and payable on the date specified
in the foregoing clause (i) or (ii), as applicable; provided, that (a) prior to
the expiration of such period, such acceleration shall be automatically
rescinded and annulled without further action required on the part of the
holders in the event that any default specified in the Acceleration Notice under
the Notes shall have been cured, waived or otherwise remedied and (b) at any
time before the entry of a judgment or decree or the payment of moneys due under
the Indenture, the holders of a majority in aggregate principal amount of the
Notes may waive all defaults except (i) a default in the payment of principal or
interest on the Notes or (ii) in respect of a covenant or provisions hereof
which cannot be modified or amended without the consent of each holder of the
Note affected. If an Event of Default specified in clause (d) above relating to
the Company occurs, the principal of and accrued interest on all outstanding
Notes shall become immediately due and payable without any declaration or other
act on the part of the Trustee or any holder of Notes.
The provisions described in the preceding paragraph, however, are subject
to the condition that if, at any time after the principal of the Notes shall
have been so declared due and payable, and before any judgment or decree for the
payment of the moneys due shall have been obtained or entered, the Company or
Summit shall pay or shall deposit with the Trustee a sum sufficient to pay all
matured installments of interest upon all the Notes and the principal of any and
all Notes which shall have become due otherwise than by acceleration (with
interest upon such principal and, to the extent that payment of such interest is
enforceable under applicable law, on overdue installments of interest, at the
rate borne by the Notes, to the date of such payment or deposit) and such amount
as shall be sufficient to cover reasonable compensation to the Trustee and each
predecessor Trustee, their respective agents, attorneys and counsel, and all
other expenses and liabilities incurred, and all advances made, by the Trustee
and each predecessor Trustee except as a result of negligence of bad faith, and
if any and all Events of Default under this Indenture, other than the
non-payment of the principal of Notes which shall have become due be
acceleration, shall have been cured, waived or otherwise remedied as provided in
the Indenture then and in every such case, holders of a majority in aggregate
principal amount of the Notes then outstanding, by written notice to the Company
and the Trustee, may waive all defaults and rescind and annul such declaration
and its consequences, but no such waiver or rescission and annulment shall
extend to or shall affect any subsequent default or impair any right consequent
thereon.
Prior to the declaration of acceleration of the maturity of the Notes, the
holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the holders of Notes any past default, or
Event of Default, except a default in the payment of principal of or interest on
any Notes or a default with respect to any covenant or provision which cannot be
modified or amended without the consent of
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the holder of each outstanding Note affected. The Trustee is under no obligation
to exercise any of its rights or powers under the Indenture at the request or
direction of any of the holders of Notes, unless such holders of Notes have
offered to the Trustee reasonable security or indemnity. Subject to all the
provisions of the Indenture and applicable law, the holders of a majority in
aggregate principal amount of the Notes at the time outstanding have the right
to direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred on the
Trustee.
The Company is required to furnish the Trustee, within 120 days after the
end of each fiscal year, an officers' certificate to the effect that such
officers have conducted, or supervised, a review of the activities of the
Company and its Subsidiaries and of performance under the Indenture and that, to
the best of such officers' knowledge, based on their review, the Co-Obligors
have fulfilled all their obligations under the Indenture, or, if there has been
a default, specifying each default known to them, its nature and its status.
DEFEASANCE
Under the terms of the Indenture and the Notes, the Company, at its option,
(a) will be Discharged (as defined in the Indenture) from any and all
obligations in respect of the Notes (except in each case for certain obligations
to register the transfer or exchange of Notes, replace stolen, lost or mutilated
Notes, maintain paying agencies and hold moneys for payment in trust) or (b)
need not comply with certain specified covenants of the Indenture nor be subject
to the operation of the cross acceleration provision described under "Events of
Default and Remedies," in each case, if the Company irrevocably deposits with
the Trustee, in trust, money or U.S. Government Obligations (as defined in the
Indenture) which through the payment of interest thereon and principal thereof
in accordance with their terms will provide money in an amount sufficient to pay
the principal of and interest on the Notes on the dates such payments are due in
accordance with the terms of the Notes.
To exercise the option under clause (a) above, the Company is required to
deliver to the Trustee an opinion of counsel, based upon a ruling of the
Internal Revenue Service or a change in applicable Federal income tax law
occurring after the date of this Prospectus, that the holders of the Notes will
not recognize income, gain or loss for Federal income tax purposes as a result
of such defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such defeasance had not occurred. No opinion of counsel is required to effect a
defeasance under clause (b) above and, under current Federal income tax law, a
defeasance under clause (b) may be treated as a taxable exchange of the Notes
for an interest in the trust. If a taxable exchange is deemed to have occurred,
each Noteholder would recognize gain or loss equal to the difference between the
Noteholder's cost or other tax basis for the Notes and the value of the
Noteholder's interest in the trust, and thereafter would be required to include
in income his share of the income, gain and loss of the trust. Other
characterizations of a defeasance under clause (b) are also possible.
Prospective investors are urged to consult their own tax advisors as to the
specific consequences of such a defeasance.
In the event the Company exercises its option under clause (b) of the
second preceding paragraph and the Notes are declared due and payable because of
the occurrence of any Event of Default (other than the cross acceleration
provisions described under "Events of Default and Remedies" which will be
inapplicable), the amount of money and U.S. Government Obligations on deposit
with the Trustee will be sufficient to pay amounts due on the Notes at the time
of their stated maturity but may not be sufficient to pay amounts due on the
Notes at the time of the acceleration resulting from such Event of Default.
However, the Company shall remain liable for such payments.
If the Credit Agreement is in effect, the Company shall have delivered to
the Trustee any required consent of the Senior Agent or the Lenders to the
transactions contemplated by the provision on "Defeasance."
REPORTS
So long as the Notes are outstanding, the Company will furnish to the
holders thereof such quarterly and annual financial reports that the Company is
required to file with the SEC under the 1934 Act or similar reports in the event
the Company is not at the time required to file such reports with the SEC.
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CERTAIN DEFINITIONS
In addition to the terms defined above, the Indenture contains, among other
things, the following definitions:
"Acquisition Debt" means (i) Debt or Preferred Stock of any Person
existing at the time such Person becomes a Subsidiary of the Company,
including but not limited to Debt or Preferred Stock incurred or created in
connection with, or in contemplation of, such Person becoming a Subsidiary
of the Company (but excluding Debt of such Person which is extinguished,
retired or repaid in connection with such Person becoming a Subsidiary of
the Company), (ii) Debt incurred or created by the Company or any of its
Subsidiaries in connection with the transaction or series of transactions
pursuant to which such Person became a Subsidiary of the Company or (iii)
Debt incurred or created by the Company or any of its Subsidiaries in
connection with the acquisition of substantially all of the assets of an
operating unit or business of another Person.
"Affiliate" of any Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such Person. For the purposes of this definition, "control"
when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and
the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Attributable Debt" in respect of a sale-leaseback transaction means,
at the time of determination, the present value (discounted at the interest
rate implicit in the lease, compounded semiannually) of the obligation of
the lessee of the property or asset subject to such sale-leaseback
transaction for rental payments during the remaining term of the lease
included in such transaction including any period for which such lease has
been extended or may, at the option of the lessor, be extended or until the
earliest date on which the lessee may terminate such lease without penalty
or upon payment of penalty (in which case the rental payments shall include
such penalty), after excluding all amounts required to be paid on account
of maintenance and repairs, insurance, taxes, assessments, water, utilities
and similar charges. For purposes of the foregoing, a "sale-leaseback
transaction" means an arrangement with any lender or investor or to which
such lender or investor is a party providing for the leasing by a Person of
any property or asset which has been or is being sold or transferred by
such Person more than 270 days after the acquisition thereof or the
completion of construction or commencement of operation thereof to such
lender or investor or to any Person to whom funds have been or are to be
advanced by such lender or investor on the security of such property or
asset.
"Board of Directors" means the Board of Directors of the Company or
any committee of such Board duly authorized to act hereunder.
"Business Day" means a day which in the City of New York or in the
cities in which the corporate trust office or the corporate trust
operations office of the Trustee is located, is neither a legal holiday nor
a day on which banking institutions are required or authorized by law or
regulation to close.
"Capitalized Lease Obligation" means the discounted present value of
the rental obligations of any Person under any lease of Property, which in
accordance with GAAP, is required to be capitalized on the balance sheet of
such Person.
"Change of Control" means (i) the direct or indirect, sale, lease or
other transfer of all or substantially all of the assets of the Company to
any Person or entity or group of Persons or entities acting in concert as a
partnership or other group (a "Group of Persons") other than (a) Joseph
Littlejohn & Levy Fund, L.P., a Delaware limited partnership, and its
Affiliates or (b) Charles N. Martin, Jr. and his Affiliates, (ii) during
any period of two consecutive calendar years, individuals who at the
beginning of such period constituted the Company's Board of Directors
(together with any new directors whose election by the Company's Board of
Directors or whose nomination for election by the Company's shareholders
was approved by a vote of at least two-thirds of the directors then still
in office who either were directors at the beginning of such period or
whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the directors then in office,
(iii) a Person or
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Group of Persons (other than (a) Joseph Littlejohn & Levy Fund, L.P., a
Delaware limited partnership, and its Affiliates or (b) Charles N. Martin,
Jr. and his Affiliates) shall, as a result of a merger or consolidation, a
tender or exchange offer, open market purchases, privately negotiated
purchases or otherwise, have become the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of securities of the Company
or the entity surviving the merger or consolidation representing 50% or
more of the combined voting power of the then outstanding securities of the
Company ordinarily (and apart from rights accruing under special
circumstances) having the right to vote in the election of directors.
"Closing Date" means the date on which the Notes are originally
issued.
"Consolidated Cash Flow" for any Person, for any period, means,
without duplication, the Consolidated Net Income of such Person plus the
sum of (a) Consolidated Tax Expense, (b) Consolidated Interest Expense, (c)
Consolidated Non-cash Charges, (d) one-third of the rental expense on
Attributable Debt and (e) Consolidated Pooling Expenses.
"Consolidated Interest Expense" of any Person means for any period,
without duplication, the sum of (a) the aggregate of the interest expense
of such Person and its Consolidated Subsidiaries for such period, on a
consolidated basis, as determined in accordance with GAAP, plus (b) net
payments in respect of Interest Swap Obligations (if any such payment
applies to a period in excess of one year it shall be amortized
accordingly) for such Person and its Consolidated Subsidiaries.
"Consolidated Net Income" of any Person, for any period, means the net
income (loss) of such Person and its Consolidated Subsidiaries for such
period, determined in accordance with GAAP, adjusted by excluding (a) net
extraordinary gains or net extraordinary losses as the case may be
(including any gain or loss from the purchase, redemption acquisition or
other retirement of Debt) and (b) net gains or losses in respect of
dispositions of assets, provided that, without duplication, (i) the net
income of any Person, other than a Consolidated Subsidiary, in which the
Company or any of its Consolidated Subsidiaries has a joint interest with a
third party shall be included only to the extent of the amount of dividends
or distributions actually paid to the Company or a Consolidated Subsidiary
during such period, (ii) the net income of any Unrestricted Subsidiary
shall be included for the purpose of determining net income to the extent
of the amount of cash, Property, dividends or distributions actually paid
by such Unrestricted Subsidiary to the Company or a Subsidiary of the
Company, (iii) the tax benefits of any net operating loss carryforwards
added directly to retained earnings and not otherwise included for the
purpose of determining net income in accordance with GAAP for such period
shall be included, (iv) the net income of any Person acquired in a pooling
of interests transaction for any period prior to the date of such
acquisition shall be excluded and (v) the net income of any Subsidiary of
such Person shall be excluded to the extent such Subsidiary is prohibited,
directly or indirectly, from distributing such net income or any portion
thereof to such Person.
"Consolidated Net Tangible Assets" of any Person, for any period
means, the assets of such Person and its Subsidiaries, less intangible
assets of such Person and its Subsidiaries (including, without limitation,
trademarks and tradenames, goodwill, excess reorganization value, research
and development expenses, and write-ups in the book value of any intangible
assets), on a consolidated basis, determined in accordance with GAAP.
"Consolidated Non-cash Charges" of any Person means, for any period,
the aggregate depreciation, amortization and other non-cash charges (other
than reserves or expenses established in anticipation of future cash
requirements such as reserves for taxes and uncollectible accounts) of such
Person and its Consolidated Subsidiaries, on a consolidated basis, for such
period, as determined in accordance with GAAP, provided, that (i) any
charges which are not included for the purpose of determining Consolidated
Net Income shall be excluded from Consolidated Non-cash Charges and (ii)
any charges which are included for the purpose of determining Consolidated
Interest Expense or Consolidated Tax Expense shall be excluded from
Consolidated Non-cash Charges.
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<PAGE> 44
"Consolidated Pooling Expenses" of any Person for any period means,
with respect to such Person and its Consolidated Subsidiaries on a
consolidated basis, the expenses for such period in connection with a
pooling of interests transaction, determined in accordance with GAAP, but
only to the extent that such expenses would have been capitalized, in
accordance with GAAP, if such transaction had been a purchase transaction.
"Consolidated Subsidiary" of any Person means a Person which for
financial reporting purposes is or, in accordance with GAAP, should be
accounted for by such Person as a consolidated subsidiary.
"Consolidated Tax Expense" of any Person means for any period the
aggregate of the tax expense of such Person and its Consolidated
Subsidiaries for such period, determined in accordance with GAAP.
"Credit Agreement" means (a) the Credit, Security, Guaranty and Pledge
Agreement, dated as of April 19, 1994, among the Company, Summit Health,
Ltd. and AHM Acquisition Co., Inc., the Guarantors named therein, the
Lenders named therein, The Bank of Nova Scotia, as Administrative Agent and
Managing Agent, Citicorp USA Inc., as Managing Agent, and the other
financial institution described therein (the "Scotiabank Credit
Agreement"), together with all agreements, documents and instruments from
time to time delivered in connection with the Scotiabank Credit Agreement,
as in effect on the date hereof, and as the Scotiabank Credit Agreement and
such other agreements, documents and instruments may be amended, amended
and restated, renewed, extended, restructured, supplemented or otherwise
modified from time to time, and (b) any credit agreement, loan agreement,
note purchase agreement, indenture or other agreement, document or
instrument refinancing, refunding or otherwise replacing the Scotiabank
Credit Agreement or any other agreement deemed a Credit Agreement under
clause (a) or (b) hereof, whether or not with the same agents, trustee,
representative lenders or holders, and irrespective of any changes in the
terms and conditions thereof. Without limiting the generality of the
foregoing, the term "Credit Agreement" shall include any amendment,
amendment and restatement, renewal, extension, restructuring, supplement or
modification to any Credit Agreement and all refundings, refinancings and
replacements of any Credit Agreement, including any agreement (i) extending
the maturity of any Debt incurred thereunder or contemplated thereby, (ii)
adding or deleting borrowers or guarantors thereunder, so long as such
borrowers and issuers include one or more of the Company and its
Subsidiaries and their respective successors and assigns, (iii) increasing
the amount of Debt incurred thereunder or available to be borrowed
thereunder, or (iv) otherwise altering the terms and conditions thereof in
a manner not prohibited by the terms thereof.
"Currency Agreements" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement designed to
protect the Company or any of its Subsidiaries against fluctuations in
currency values.
"Debt" means, as to any Person without duplication (a) any
indebtedness of such Person, including accrued and unpaid interest, for
borrowed money (including net overdrafts in any bank to the extent such
overdrafts are not extinguished within three Business Days of their
incurrence), (b) all indebtedness of such Person evidenced by bonds,
debentures, notes, letters of credit or similar instruments, (c) all
indebtedness of such Person to pay the deferred purchase price of property
or services, except accounts payable arising in the ordinary course of
business that are not overdue by more than 180 days or that are being
contested in good faith, if and to the extent any of the foregoing
indebtedness described in clauses (a)-(c) inclusive would appear as a
liability upon a balance sheet of such Person, prepared on a consolidated
basis in accordance with GAAP, and shall also include to the extent not
otherwise included, (d) all Capitalized Lease Obligations of such Person,
(e) all Debt of others secured by a Lien on any asset of such Person,
whether or not such Debt is assumed by such Person or guaranteed by such
Person, (f) Attributable Debt of such Person, (g) Preferred Stock issued by
a Subsidiary of such Person, (h) Redeemable Stock, (i) all Debt of others
guaranteed by such Person, and (j) all indebtedness due to the Senior Agent
or any Lender under or in respect of the Credit Agreement or otherwise due
to any Lender.
"Designated Senior Debt" means all obligations under or in respect of
the Credit Agreement and any other single issue of Debt constituting Senior
Debt which at the time of determination has an
44
<PAGE> 45
aggregate principal amount of at least $40,000,000 and is specifically
designated in the instrument evidencing such Senior Debt as "Designated
Senior Debt" of the Company.
"Fixed Charges" for any period are, without duplication, the
Consolidated Interest Expense, the interest component of capital leases and
one-third of the rental expense on Attributable Debt (without duplication)
plus, the product of (x) the sum of (i) cash dividends paid on any
Preferred Stock of such Person plus (ii) cash dividends paid on any
Preferred Stock of any Subsidiary of such Person, times (y) a fraction, the
numerator of which is one and the denominator of which is one minus the
then current effective aggregate federal, state and local tax rate of such
Person, expressed as a decimal, but excluding (a) the amortization of debt
issuance costs, (b) amortization of original issue discount (the excess of
stated redemption price at maturity over the issue price) which, with
respect to any Debt, is not greater than 1/4% times the number of full
years from issuance to maturity, and (c) noncash dividends paid on any
Preferred Stock of such Person. For purposes of this definition, interest
on a capital lease shall be deemed to accrue at an interest rate reasonably
determined to be the rate of interest implicit in such capital lease in
accordance with GAAP (including Statement of Financial Accounting Standards
No. 13 of the Financial Accounting Standards Board).
"GAAP" means generally accepted accounting principles.
"Interest Swap Obligations" means the obligations of any Person,
pursuant to any arrangement with any other Person, whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of
interest on a stated notional amount in exchange for periodic payments made
by such other Person calculated by applying a fixed or a floating rate of
interest on the same notional amount.
"Investment" means any direct or indirect advance, loan (other than
advances to customers in the ordinary course of business, which are
recorded as accounts receivable on the balance sheet of any Person or its
Subsidiaries) or other extension of credit or capital contribution to (by
means of any transfer of cash or other property to others or any payment
for property or services for the account or use of others), or any purchase
or acquisition of capital stock, bonds, notes, debentures or other
securities issued by any other Person. For the purposes of the "Limitation
on Restricted Payments" covenant, (i) "Investment" shall include the fair
market value of the net assets of any Subsidiary at the time that such
Subsidiary is designated an Unrestricted Subsidiary and shall exclude the
fair market value of the net assets of any Unrestricted Subsidiary that is
designated a Subsidiary and (ii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at fair market value at the time of
such transfer, in each case as determined by the Board of Directors of such
Person in good faith.
"Lender" means any lender or other holder of Senior Debt from time to
time incurred or issued under the Credit Agreement.
"Lien" means, with respect to any Property, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of
such Property.
"Material Subsidiary" of any Person means, as of any date, any
Subsidiary of such Person (a) the value of whose assets, as such assets
would appear on a consolidated balance sheet of such Subsidiary and its
Consolidated Subsidiaries prepared on such date in accordance with
generally accepted accounting principles, is at least 10% of the value of
the assets of such Person and its Consolidated Subsidiaries, determined as
aforesaid, or (b) whose Consolidated Cash Flow for the most recently
completed fiscal quarter immediately preceding such date was at least 10%
of the Consolidated Cash Flow of such Person for such fiscal quarter.
"Measurement Date," when used with respect to any calculation, means
the date of the transaction giving rise to the need to make such
calculation.
"Net Worth" means, at any date, the aggregate of capital, surplus and
retained earnings of the Company and its Consolidated Subsidiaries as would
be shown on a consolidated balance sheet of the Company and its
Consolidated Subsidiaries prepared in accordance with GAAP.
45
<PAGE> 46
"Permitted Investments" means Investments in Unrestricted Subsidiaries
(A) in a cumulative aggregate amount not to exceed the sum of (1)
$25,000,000 (less previous Investments in Unrestricted Subsidiaries
pursuant to this clause (A) (1)) plus (2) any amounts received by the
Company or any Subsidiary from any Unrestricted Subsidiary which represents
a repayment of the principal portion of any loan or advance or any return
of contributed capital in respect of any previous Permitted Investment and
(B) through the contribution or other transfer of the Company's or its
Subsidiaries' interest in HNMC, Inc. and Horizon Health Group, Inc. or any
successors thereto.
"Permitted Joint Venture" means all the Company's existing joint
ventures on the Closing Date or a Person which owns, operates or services a
health care business or facility or manufacturers or markets health care
products and (i) is formed by the Company or a Subsidiary of the Company to
offer an equity participation in the assets or businesses owned or to be
acquired by such Person primarily to physicians or employees of the Company
or any of its Subsidiaries or to any other Person involved directly or
indirectly in the health care industry and (ii) of which the Company or any
Subsidiary of the Company is a general partner or controls the general
partner.
"Permitted Payments" means, with respect to the Company or any of its
Subsidiaries, (i) the redemption, repurchase or other acquisition or
retirement of any shares of any class of capital stock in exchange for
(including any exchange pursuant to the exercise of a conversion right or
privilege in connection with which cash is paid in lieu of the issuance of
fractional shares), or out of the proceeds of a substantially concurrent
issue and sale (other than to a Subsidiary) of, shares of capital stock
(other than Redeemable Stock) of the Company; (ii) any dividend or other
distribution payable to the Company or any of its Subsidiaries, (iii) the
repurchase or redemption by a wholly owned Subsidiary of its capital stock,
(iv) the declaration and payment of dividends on the PIK Preferred (A) in
additional shares of PIK Preferred or (B) to the extent required by the
terms of the PIK Preferred as of the Closing Date, in cash or (v) any
dividend on or distribution of the capital stock or Property of an
Unrestricted Subsidiary.
"Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a
government or political subdivision or an agency or instrumentality
thereof.
"Physician Support Obligation" means any obligation or guarantee to
any physician or allied health care professional pursuant to a written
agreement for a period not in excess of five years incurred in connection
with recruiting, redirecting or retaining such physician or allied health
care professional to provide service to patients in the service area of any
health care facility owned or operated by any Consolidated Subsidiary of
the Company or any Permitted Joint Venture, but excluding actual
compensation for services provided by such physician or allied health care
professional to any health care facility owned or operated by the Company
or any of its Subsidiaries or any Permitted Joint Venture.
"PIK Preferred" means the $.01 par value Payable In Kind Cumulative
Redeemable Preferred Stock of the Company outstanding on the Closing Date
or issued subsequent to the Closing Date as a Permitted Payment.
"Preferred Stock" means, with respect to any Person, any and all
shares, interest, participations or other equivalents (however designated)
of such Person's preferred or preference stock whether now outstanding or
issued after the date of the Indenture, and including, without limitation,
all classes and series of preferred or preference stock.
"Property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included
on the most recent consolidated balance sheet of such Person in accordance
with GAAP.
"Pro Forma Coverage Ratio" of any Person means the pro forma ratio of
such Person's Consolidated Cash Flow to its Fixed Charges for the Reference
Period immediately prior to the Measurement Date. The Pro Forma Coverage
Ratio shall as applicable, be calculated on the following basis:
(1) notwithstanding clause (iv) of the definition of Consolidated
Net Income, if the Debt which is being created, incurred or assumed is
Acquisition Debt, the Pro Forma Coverage Ratio
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<PAGE> 47
shall be determined after giving effect to both the Fixed Charges
related to the creation, incurrence or assumption of such Acquisition
Debt and the Consolidated Cash Flow (x) of the Person becoming a
Subsidiary of such Person or (y) in the case of an acquisition of
assets which constitute substantially all of an operating unit or
business, relating to the assets being acquired by such Person;
(2) there shall be excluded from Fixed Charges any Fixed Charges
related to Debt repaid during and subsequent to the Reference Period and
which is not outstanding on the Measurement Date; and
(3) the creation, incurrence or assumption of any Debt during the
Reference Period or subsequent to the Reference Period and prior to the
Measurement Date, and the application of the proceeds therefrom, shall
be assumed to have occurred on the first day of the Reference Period.
"Purchase Money Obligations" means Debt of the Company or its
Subsidiaries secured by Liens (i) on Property purchased, acquired, or
constructed after the Closing Date and used in the ordinary course of
business by the Company and its Subsidiaries and (ii) securing the payment
of all or any part of the purchase price or construction cost of such
assets and limited to the Property so acquired and improvements thereof.
"Redeemable Stock" means, with respect to any Person, any class or
series of capital stock of such Person which is redeemable at the option of
the holder (except pursuant to a change in control provision that does not
(i) cause such capital stock to become redeemable in circumstances in which
the Company would not be required to make a Change of Control Offer and
(ii) require the Company to pay the redemption price therefor prior to the
Change of Control Payment Date) or is subject to mandatory redemption prior
to the maturity of the Notes.
"Reference Period" means the four fiscal quarters ending with the most
recent fiscal quarter for which financial information is available and
which ended immediately preceding the Measurement Date.
"Restricted Payments" means with respect to any Person (i) any
dividend or other distribution on any shares of such Person's capital stock
(except dividends or distributions in additional shares of capital stock
other than Redeemable Stock), (ii) any payment on account of the purchase,
redemption or other acquisition of (a) any shares of such Person's capital
stock or (b) any option, warrant or other right to acquire shares of such
Person's capital stock, or (iii) any Investment in an Unrestricted
Subsidiary which is not a Permitted Investment; provided that distributions
to joint venture participants or repurchases of interests in Permitted
Joint Ventures (other than distributions or repurchases of joint venture
interests of Affiliates of the Company and its Subsidiaries) shall not
constitute Restricted Payments; provided, further, an individual shall not
be deemed to be an Affiliate of the Company or any Subsidiary solely
because such individual is employed by the Company or any Subsidiary.
"Senior Agent" means The Bank of Nova Scotia, any successor to The
Bank of Nova Scotia under the Credit Agreement and any other agent, trustee
or representative of the holders of Debt under or in respect of the Credit
Agreement serving in such capacity from time to time and, if there is no
such agent, trustee or representative, "Senior Agent" shall mean,
collectively, the holders from time to time of Debt incurred under or in
respect of the Credit Agreement.
"Senior Debt" means (i) all obligations of the Company and its
Subsidiaries, now or hereafter existing, under or in respect of the Credit
Agreement, whether for principal, interest (including without limitation,
interest accruing after filing of a bankruptcy petition initiating
bankruptcy proceedings of the Company or any of its Subsidiaries at the
rates prescribed in the Credit Agreement, whether or not interest is an
allowed claim enforceable against the debtor), reimbursement of amounts
drawn under letters of credit issued or arranged for pursuant thereto,
guaranties in respect thereof, and all charges, fees, expenses (including
reasonable fees and expenses of counsel) and other amounts incurred by or
owing to the Senior Agent and the Lenders under or in respect of the Credit
Agreement, and all other obligations of the Company and its Subsidiaries
incurred under or in respect of the Credit Agreement including, without
limitation, in respect of premiums, indemnities or otherwise, and all
indebtedness under the Credit Agreement which is disallowed, avoided or
subordinated pursuant to Section 548 of
47
<PAGE> 48
Title 11, United States Code or any applicable state fraudulent conveyance
law; (ii) the principal of, premium if any, and interest on indebtedness
for money borrowed by the Company or Summit, as applicable, (other than the
Notes), whether outstanding on the date of the Indenture or hereafter
created or incurred, unless such indebtedness, by its terms or the terms of
the instrument creating or evidencing it is subordinate in right of payment
to or pari passu with the Notes; (iii) any obligations of the Company or
Summit, as applicable, in respect of capital leases of the Company or
Summit, as applicable, whether outstanding on the date of this Indenture or
hereafter created or incurred; (iv) any obligations of the Company or
Summit, as applicable, in respect of (x) any indebtedness for money
borrowed by another Person or (y) any capital leases of any other Person,
in either case which is guaranteed in whole or in part directly or
indirectly by the Company or Summit, as applicable, (whether such guarantee
is outstanding on the date of the Indenture or hereafter created or
incurred); (v) the principal of, premium if any, and interest on any
indebtedness constituting Purchase Money Obligations for the payment of
which the Company or Summit, as applicable, is directly or contingently
liable (whether such Purchase Money Obligations are outstanding on the date
of this Indenture or hereafter created or incurred); (vi) any obligation of
the Company or Summit, as applicable, to compensate, reimburse or indemnify
an issuer with respect to any letter of credit issued at the request of or
for the account of such the Company or Summit, as applicable; (vii) any
obligation of the Company or Summit, as applicable, under any Interest Swap
Obligations or Currency Agreements; (viii) any obligation of the Company or
Summit, as applicable, to any Person in respect of surety or similar bonds
issued by such Person; (ix) all charges, fees, expenses (including
reasonable fees and expenses of counsel) and other amounts incurred by or
owing to the holders of indebtedness referred to in clauses (ii) - (viii)
above in connection with such indebtedness; and (x) all interest payable
during the pendency of a proceeding under Title 11, United States Code on
indebtedness referred to in clauses (ii) - (viii) above incurred prior to
the commencement of such proceeding; provided that the term "Senior Debt"
shall not include any indebtedness of the Company or Summit, as applicable,
to an Affiliate of the Company or Summit, as applicable, except to the
extent any such indebtedness is pledged to the Senior Agent as security for
Senior Debt incurred under or in respect of the Credit Agreement.
"Senior Representative" means any agent, trustee or other
representative of the holders of any Senior Debt other than Senior Debt
incurred under or in respect of the Credit Agreement and, if there is no
such agent, trustee or other representative with respect to any such Senior
Debt, "Senior Representative" shall mean, collectively, the holders of at
least a majority in dollar amount of any such Senior Debt.
"Stock Appreciation Rights" means a payment of cash in lieu of shares
of the Company's common stock by the Company to an employee of the Company
to an employee of the Company in accordance with a stock option plan
approved by the Board of Directors.
"Subsidiary" means, with respect to any Person, any corporation or
other entity of which a majority of the capital stock or other ownership
interests having ordinary voting power to elect a majority of Board of
Directors or other Persons performing similar functions is at the time
directly or indirectly owned by such Person or one or more of the other
Subsidiaries of that Person or a combination thereof; provided that an
Unrestricted Subsidiary shall not be deemed to be a Subsidiary of the
Company for purposes of the Indenture.
"Unrestricted Subsidiary" means (1) any Subsidiary of the Company
which at the time of determination shall be an Unrestricted Subsidiary (as
designated by the Board of Directors of the Company, as provided below) and
(2) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors
may designate each Subsidiary of the Company (including any newly acquired
or newly formed Subsidiary) to be an Unrestricted Subsidiary not more than
one time during any 24-month period, that a Subsidiary which owns any
capital stock of, or owns, or holds any Lien on, any property of, any other
Subsidiary of the Company which is not a Subsidiary of such Subsidiary may
not be so designated; provided further that immediately after giving effect
to such designation, no default or Event of Default shall have occurred and
be continuing. The Board of Directors may designate each Unrestricted
Subsidiary to be a Subsidiary not more than one time during any 24-month
period; provided that immediately after giving effect to such designation,
no default or Event of Default shall have occurred
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<PAGE> 49
and be continuing. Any such designation by the Board of Directors giving
effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions; provided that no
Subsidiary of the Company shall be (and, if such Subsidiary is an
Unrestricted Subsidiary, it shall immediately cease to be) an Unrestricted
Subsidiary if, any time, the Company or any other Subsidiary of the Company
shall create, incur, issue, assume, guarantee or in any other manner
whatsoever be or become liable with respect to any claim against or any
contractual obligation or indebtedness of, such Subsidiary.
49
<PAGE> 50
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement") among the Company, Summit and the Underwriters, each of
the Underwriters has severally agreed to purchase from the Co-Obligors, and the
Co-Obligors have agreed to sell to each of the Underwriters, the principal
amount of the Notes set forth opposite its name below. Pursuant to the Purchase
Agreement, the Underwriters will be obligated to purchase all of the Notes if
any are purchased.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
- ------------------------------------------------------------------------------- ------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................................... $ 75,000,000
Donaldson, Lufkin & Jenrette Securities Corporation............................ 18,750,000
Salomon Brothers Inc........................................................... 18,750,000
Citicorp Securities, Inc....................................................... 12,500,000
------------
Total............................................................. $125,000,000
===========
</TABLE>
The Underwriters have advised the Co-Obligors that they propose to offer
the Notes for sale from time to time in one or more negotiated transactions or
otherwise, at market prices prevailing at the time of sale, at prices related to
such market prices or at negotiated prices. The Underwriters may effect such
transactions by selling the Notes to or through dealers, and such dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriters or purchasers of the Notes for whom they may
act as agent. Any dealers that participate with the Underwriters in the
distribution of the Notes may be deemed to be underwriters, and any discounts or
commissions received by them or the Underwriters and any profit on the resale of
the Notes by them or the Underwriters may be deemed to be underwriting discounts
or commissions, under the Securities Act of 1933, as amended (the "Securities
Act").
There is no public market for the Notes and the Co-Obligors do not intend
to list the Notes on any securities exchange or for quotation through NASDAQ.
The Co-Obligors have been advised by the Underwriters that, following the
completion of the offering of the Notes, the Underwriters presently intend to
make a market in the Notes. However, the Underwriters are under no obligation to
do so and may discontinue any market making activities at any time without
notice. No assurance can be given as to the liquidity of the trading market for
the Notes or that an active public market for the Notes will develop or, if
developed, will continue. If an active public market does not develop or is not
maintained, the market price and liquidity of the Notes may be adversely
affected.
The Co-Obligors have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
Each of the Underwriters, from time to time, performs investment banking
and other financial services for the Company. In addition, Citicorp USA Inc., an
affiliate of Citicorp Securities, Inc., is a managing agent and a lender to the
Company under the Bank Credit Facility.
Under the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. (the "NASD"), when more than 10% of the net proceeds of a public
offering of debt securities are to be paid to NASD members participating in the
distribution of the offering or associated or affiliated persons of such
members, the yield at which the debt securities are distributed to the public
must be no lower than that recommended by a "qualified independent underwriter"
meeting certain standards. Citicorp USA Inc., an affiliate of Citicorp
Securities, Inc., will in the aggregate receive more than 10% of the net
proceeds from the Offering as a result of the use of proceeds by the Company to
repay loans made under the revolving facility of the Bank Credit Facility. See
"Use of Proceeds." Accordingly, Merrill Lynch has agreed to act as the qualified
independent underwriter in connection with the Offering. The yield on the Notes
when sold will be no lower than that recommended by Merrill Lynch.
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<PAGE> 51
LEGAL MATTERS
Certain legal matters as to the validity of the Notes offered hereby will
be passed upon for the Company by Skadden, Arps, Slate, Meagher & Flom, New
York, New York and Ronald P. Soltman, Esq., General Counsel for the Company.
Certain legal matters in connection with the Offering will be passed upon for
the Underwriters by Dewey Ballantine, New York, New York. Mr. Soltman currently
has options to purchase 30,000 shares of the Company's common stock.
EXPERTS
The consolidated financial statements and schedules of OrNda HealthCorp at
August 31, 1993 and 1992, and for each of the three years in the period ended
August 31, 1993, appearing in OrNda HealthCorp's Current Report on Form 8-K
dated July 11, 1994, and the consolidated financial statements and schedules of
Summit Health Ltd. at June 30, 1993 and 1992 and for each of the three years in
the period ended June 30, 1993, appearing in Summit Health Ltd.'s Annual Report
(Form 10-K) for the year ended June 30, 1993 (with schedules) and OrNda
HealthCorp's Current Report on Form 8-K dated July 11, 1994 (without schedules),
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon included therein and incorporated by reference herein.
Such consolidated financial statements are incorporated herein by reference in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing. The consolidated financial statements of Fountain
Valley Medical Development Company for the years ended October 31, 1992 and 1993
included in this Prospectus and the Registration Statement have been audited by
BDO Seidman, independent certified public accountants, as set forth in their
report thereon included therein and are included herein in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company and Summit are subject to the informational requirements of the
Exchange Act, and in accordance therewith file reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). The reports, proxy statements and other information filed by the
Company and Summit with the Commission may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at Room 3190, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and 7 World Trade Center, New York, New York 10048.
Copies of such material may be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. Such reports, proxy statements and other information
concerning the Company and Summit also may be inspected at the offices of the
National Association of Securities Dealers, Inc. at 1735 K Street, Washington,
D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant
to the Exchange Act (File No. 0-11290) are incorporated in this Prospectus by
reference and are made a part hereof:
(1) Annual Report on Form 10-K for the fiscal year ended August 31,
1993 as amended by Form 10-K/A No. 1, filed on December 23, 1993, 10-K/A
No. 2, filed on January 19, 1994, 10-K/A No. 3, filed on March 11, 1994,
and 10-K/A No. 4, filed on March 14, 1994.
(2) Current Report on Form 8-K dated December 2, 1993.
(3) Quarterly Report on Form 10-Q for the quarter ended November 30,
1993 as amended by Form 10-Q/A No. 1, filed on March 11, 1994.
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<PAGE> 52
(4) Current Report on Form 8-K dated July 1, 1993 as amended by Form
8-K/A No. 1, filed on September 13, 1993, Form 8-K/A No. 2, filed on
February 7, 1994, and Form 8-K/A No. 3, filed on March 11, 1994.
(5) Quarterly Report on Form 10-Q for the quarter ended February 28,
1994.
(6) Current Report on Form 8-K dated March 7, 1994.
(7) Current Report on Form 8-K dated April 19, 1994.
(8) Current Report on Form 8-K dated May 5, 1994.
(9) Current Report on Form 8-K dated June 7, 1994.
(10) Current Report on Form 8-K dated July 1, 1994.
(11) Current Report on Form 8-K dated July 11, 1994.
(12) Current Report on Form 8-K dated July 21, 1994.
(13) Current Report on Form 8-K dated August 10, 1994.
(14) Quarterly Report on Form 10-Q for the quarter ended May 31, 1994.
The following documents filed by Summit with the Commission pursuant to the
Exchange Act (File No. 0-11479) are incorporated in this Prospectus by reference
and made a part hereof:
(1) Annual Report on Form 10-K for the fiscal year ended June 30,
1993.
(2) Quarterly Report on Form 10-Q for the quarterly periods ended
September 30, 1993, December 31, 1993 and March 31, 1994.
(3) Current Report on Form 8-K dated December 2, 1993.
(4) Current Report on Form 8-K dated April 19, 1994.
All documents filed by the Company and Summit with the Commission pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
of this Prospectus and prior to the termination of the offering of the
securities made hereby shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the date of the filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is incorporated or deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon oral or written
request, a copy of any or all of the documents incorporated herein by reference
(other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents). Written or telephone requests
should be directed to OrNda HealthCorp, 3401 West End Ave., Suite 700,
Nashville, Tennessee 37203, Attention: Secretary (telephone (615) 383-8599).
52
<PAGE> 53
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Unaudited Pro Forma Condensed Combined Balance Sheet................................ P-1
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet....................... P-2
Unaudited Pro Forma Condensed Combined Income Statement for the Nine Months Ended
May 31, 1994..................................................................... P-4
Unaudited Pro Forma Condensed Combined Income Statement for the Year Ended August
31, 1993......................................................................... P-5
Notes to Unaudited Pro Forma Condensed Combined Income Statement.................... P-6
ORNDA HEALTHCORP
Interim (Unaudited)
Condensed Consolidated Statements of Operations for the Three Months and the Nine
Months Ended May 31, 1993 and 1994............................................... F-1
Condensed Consolidated Balance Sheets as of August 31, 1993 and May 31, 1994........ F-2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended May 31,
1993 and 1994.................................................................... F-3
Notes to Condensed Consolidated Financial Statements................................ F-4
Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... F-10
FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY
Interim (Unaudited)
Consolidated Statements of Income for the Six Months Ended April 30, 1993 and
1994............................................................................. F-14
Consolidated Balance Sheets as of October 31, 1993 and April 30, 1994............... F-15
Consolidated Statements of Cash Flows for the Six Months Ended April 30, 1993 and
1994............................................................................. F-16
Notes to Consolidated Interim Financial Statements.................................. F-17
Annual
Independent Auditors' Report........................................................ F-19
Consolidated Balance Sheets as of October 31, 1993 and 1992......................... F-20
Consolidated Statements of Income for the Years Ended October 31, 1993 and 1992..... F-21
Consolidated Statements of Partners' Equity for the Years Ended October 31, 1993 and
1992............................................................................. F-22
Consolidated Statements of Cash Flows for the Years Ended October 31, 1993 and
1992............................................................................. F-23
Summary of Accounting Policies...................................................... F-24
Notes to Consolidated Financial Statements.......................................... F-26
</TABLE>
53
<PAGE> 54
[This page intentionally left blank]
<PAGE> 55
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
The pro forma condensed combined balance sheet gives effect to the Mergers,
the acquisition of Fountain Valley, the Offering and the use of proceeds
therefrom and assumes the repurchase of 100% of the aggregate outstanding
principal amount of the 10 1/4% Notes pursuant to the Change of Control Offer by
combining (i) the balance sheet of the Company at May 31, 1994; and (ii) the
balance sheet of Fountain Valley at April 30, 1994. The pro forma condensed
combined balance sheet gives effect to the Summit Merger at April 19, 1994 and
all other transactions as if they had been consummated on May 31, 1994. Because
the Company accounted for the AHM Merger as a pooling-of-interests transaction,
the Company's historical financial data include AHM's balance sheet data and
results of operations for all periods presented. The pro forma condensed
combined balance sheet is presented for comparative purposes only and is not
necessarily indicative of what the combined financial position would have been
had the transactions assumed therein in fact occurred at the times assumed. The
pro forma condensed combined balance sheet should be read in conjunction with
the respective historical financial statements of the Company, Summit and
Fountain Valley incorporated by reference or included herein.
<TABLE>
<CAPTION>
ORNDA FOUNTAIN VALLEY FOUNTAIN VALLEY OFFERING
MAY 31, APRIL 30, PRO FORMA PRO FORMA PRO FORMA
1994 1994 ADJUSTMENTS ADJUSTMENTS COMBINED
---------- --------------- --------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............ $ 16,342 $ 5,978 $ 98,022(1) $ -- $ 16,342
(104,000)(2)
Patients accounts receivable net of
allowance for uncollectibles....... 268,922 21,628 -- -- 290,550
Supplies, at cost.................... 26,620 1,713 -- -- 28,333
Other................................ 50,506 3,776 (1,523)(2) -- 52,759
---------- --------------- --------------- ----------- ----------
Total current assets........ 362,390 33,095 (7,501) -- 387,984
Property plant and equipment, net of
accumulated depreciation and
amortization....................... 1,020,946 46,456 49,609(2) -- 1,117,011
Investments in Houston Northwest
Medical Center..................... 80,947 -- -- -- 80,947
Goodwill, net of accumulated
amortization....................... 266,954 -- -- -- 266,954
Other assets......................... 58,467 2,763 3,000(1) (3,500)(4) 61,482
(2,873)(2) 3,625(3)
---------- --------------- --------------- ----------- ----------
TOTAL ASSETS................ $1,789,704 $82,314 $ 42,235 $ 125 $1,914,378
========== ============== ============== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses and other
liabilities........................ $ 302,698 $15,185 $ 3,500(2) -- $ 321,383
Current maturities of long-term
debt............................... 7,368 4,886 (4,886)(2) -- 7,368
---------- --------------- --------------- ----------- ----------
Total current liabilities... 310,066 20,071 (1,386) -- 328,751
Long-term debt....................... 1,015,000 51,134 101,022(1) 125,000(3) 1,120,647
(51,134)(2) (100,000)(3)
(20,375)(3)
Other liabilities.................... 99,126 4,842 -- -- 103,968
Shareholders' equity(5).............. 365,512 6,267 (6,267)(2) (1,000)(3) 361,012
(3,500)(4)
---------- --------------- --------------- ----------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY...... $1,789,704 $82,314 $ 42,235 $ 125 $1,914,378
========== ============== ============== =========== ==========
</TABLE>
See notes to unaudited pro forma condensed combined balance sheet.
P-1
<PAGE> 56
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET
NOTE 1
To record the incremental borrowing related to the Fountain Valley
acquisition as follows (in thousands):
<TABLE>
<S> <C>
Cash for acquisition of assets............................................ $104,000
Cash for transaction costs................................................ 3,000
Less Fountain Valley's cash............................................... (5,978)
--------
Additional debt adjustment.............................................. 101,022
Less cash paid for transaction costs...................................... (3,000)
--------
Net cash adjustment..................................................... $ 98,022
========
</TABLE>
NOTE 2
To record the purchase of Fountain Valley common stock including the
adjustment of Fountain Valley's balance sheet to reflect assets acquired by the
Company (in thousands).
<TABLE>
<S> <C> <C>
Cash used to acquire Fountain Valley............................. $ 104,000
Less adjustments of Fountain Valley's historical balances of
assets and liabilities to fair value:
Prepaids....................................................... 1,523
Property, plant and equipment, net............................. (49,609)
Other assets................................................... 2,873
Accrued expenses and other liabilities......................... 3,500
Current maturities of long-term debt........................... (4,886)
Long-term debt................................................. (51,134)
Partners' capital.............................................. (6,267) (104,000)
------- ---------
To record excess cost of the net assets acquired from Fountain
Valley over fair market value.................................. $ --
=========
</TABLE>
NOTE 3
To record the issuance of the Notes and repayment of existing indebtedness
(in thousands):
<TABLE>
<S> <C>
Issuance of the Notes.................................................... $ 125,000
Repurchase of the 10 1/4% Notes.......................................... (100,000)
Payment on Bank Credit Facility.......................................... (20,375)
---------
Net increase in debt........................................... 4,625
Payment of debt issue costs relating to the Notes........................ (3,625)
Payment of premium upon repurchase of the 10 1/4% Notes.................. (1,000)
---------
Net change in cash............................................. $ --
=========
</TABLE>
The pro forma condensed combined balance sheet assumes the Company's
repurchase of 100% of the aggregate outstanding principal amount of the 10 1/4%
Notes pursuant to the Change of Control Offer. As of July 18, 1994, the
expiration date of the Change of Control Offer, 99.3% of the 10 1/4% Notes have
been tendered and were purchased by the Company on July 19, 1994 pursuant to the
Change of Control Offer. The difference between the amount tendered and the
amount assumed in the pro forma adjustment has an immaterial impact on the pro
forma condensed combined balance sheet.
NOTE 4
To write-off $3.5 million of debt issuance costs related to the 10 1/4%
Notes.
P-2
<PAGE> 57
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET -- (CONTINUED)
NOTE 5
As of May 31, 1994, the Company had 1.3 million shares of $.01 par value
Payable In Kind Cumulative Redeemable Convertible Preferred Stock (the "PIK
Preferred Stock") outstanding with an aggregate liquidation value of $19.3
million. Although the Company has received a financing commitment to enable the
Company to redeem the PIK Preferred Stock, the Company has not decided whether
to redeem the PIK Preferred Stock. Moreover, the PIK Preferred Stock is
convertible into the Company's Common Stock on a share for share basis.
Accordingly, because the PIK Preferred Stock redemption price is $15 per share,
the Company believes that if the Company's Common Stock price exceeds $15 per
share on the redemption date the holders of PIK Preferred Stock will convert
into the Company's Common Stock rather than accept the redemption price.
If the financing commitment were utilized, pro forma long-term debt would
increase approximately $19.3 million and shareholders' equity would be reduced
$19.3 million. If the holders of PIK Preferred Stock convert to the Company's
Common Stock, the components of shareholders' equity change but total pro forma
shareholders' equity would not change. The redemption of the PIK Preferred Stock
or the conversion of the PIK Preferred Stock into the Company's Common Stock
would not have a material impact on pro forma income.
P-3
<PAGE> 58
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE NINE MONTHS ENDED MAY 31, 1994
The pro forma condensed combined income statement for the nine months ended
May 31, 1994 gives effect to the acquisition of Fountain Valley, the Mergers,
the Offering and the use of proceeds therefrom and assumes the repurchase of
100% of the aggregate outstanding principal amount of the 10 1/4% Notes pursuant
to the Change of Control Offer as if such transactions had occurred on September
1, 1992 by combining (i) the results of operations of the Company for the nine
months ended May 31, 1994 (which, because the Company accounted for the AHM
Merger as a pooling-of-interests transaction, includes the results of operations
of AHM); (ii) the results of operations of Summit for the nine months ended
March 31, 1994 (as adjusted to exclude the 43 days included in the results of
operations for OrNda), applying the purchase method of accounting; and (iii) the
results of operations of the Company for the nine months ended May 31, 1994 and
the results of operations of Fountain Valley for the nine months ended April 30,
1994, applying the purchase method of accounting. This pro forma condensed
combined income statement is presented for comparative purposes only and is not
necessarily indicative of the combined results of operations in the future or of
what the combined results of operations would have been had the transactions
assumed therein been consummated during the period for which this statement is
presented. Pro forma earnings per common and common equivalent share and pro
forma weighted average shares outstanding give effect to the exchange of AHM and
Summit shares of common stock and common stock equivalents for the Company's
Common Stock and Common Stock equivalents as described by the respective merger
agreements. In addition, the pro forma condensed combined income statement does
not give effect to the cost savings, if any, which may be realized by the
Company after consummation of the Mergers or the acquisition of Fountain Valley.
This pro forma condensed combined income statement should be read in conjunction
with the historical financial statements and notes thereto of the Company and
Summit incorporated by reference herein, and those of Fountain Valley included
herein.
<TABLE>
<CAPTION>
SUMMIT
NINE MONTHS FOUNTAIN
ENDED VALLEY
MARCH 31, ORNDA NINE MONTHS FOUNTAIN
1994 SUMMIT SUMMIT ENDED VALLEY OFFERING PRO
(AS PRO FORMA PRO FORMA APRIL 30, PRO FORMA PRO FORMA FORMA
ORNDA ADJUSTED) ADJUSTMENTS COMBINED 1994 ADJUSTMENTS ADJUSTMENTS COMBINED
-------- ----------- ----------- ---------- ----------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue..... $882,917 $ 353,086 $ (71,725)(6) $1,164,278 $92,062 -- -- $1,256,340
Costs and expenses
Operating
expenses...... 697,537 291,681 (6,739)(5) 922,482 75,975 3,150(7) -- 1,001,607
(59,997)(6)
Provision for
doubtful
accounts...... 57,443 15,041 (640)(6) 71,844 1,718 -- -- 73,562
Depreciation and
amortization... 45,918 13,264 6,721(2) 63,756 6,234 (3,284)(2) 17(2) 66,723
(2,147)(6)
Interest
expense....... 59,331 6,088 13,520(3) 74,748 3,723 2,033(3) 2,140(3) 82,644
(4,191)(6)
Interest
income........ (2,032) (1,228) (428)(6) (3,382) (185) 112(3) -- (3,455)
306(3)
Minority
interest...... 4,230 2,138 (2,138)(6) 4,230 -- -- -- 4,230
Special
executive
compensation... 2,530 -- -- 2,530 -- -- -- 2,530
Loss on sale of
asset......... 9,761 -- -- 9,761 -- -- -- 9,761
-------- ----------- ----------- ---------- ----------- ----------- ----------- ----------
8,199 26,102 (15,992) 18,309 4,597 (2,011) (2,157) 18,738
Loss from
investment in
Houston
Northwest
Medical
Center.......... (136) -- -- (136) -- -- -- (136)
-------- ----------- ----------- ---------- ----------- ----------- ----------- ----------
Income (loss) from
continuing
operations
before income
tax expense..... 8,063 26,102 (15,992) 18,173 4,597 (2,011) (2,157) 18,602
Income tax
expense......... 1,048 14,759 (7,779)(4) 5,180 -- 517(4) (431)(4) 5,266
(2,848)(6)
-------- ----------- ----------- ---------- ----------- ----------- ----------- ----------
Income from
continuing
operations...... 7,015 11,343 (5,365) 12,993 4,597 (2,528) (1,726) 13,336
Preferred stock
dividend
requirements.... (1,462) -- -- (1,462) -- -- -- (1,462)
-------- ----------- ----------- ---------- ----------- ----------- ----------- ----------
Income from
continuing
operations
applicable to
common and
common
equivalent
shares.......... $ 5,553 $ 11,343 $ (5,365) $ 11,531 $ 4,597 $(2,528) $(1,726) $ 11,874
======== ========= ======== ========= ========= ======== ======== =========
Earnings per
common and
common
equivalent
shares from
continuing
operations...... $ 0.15 $ 0.33 $ 0.26 $ 0.27
======== ========= ========= =========
Shares used in
earnings per
common share and
common
equivalent share
computations (in
thousands)...... 36,047 33,870 44,398 44,398
</TABLE>
See notes to unaudited pro forma condensed combined income statement.
P-4
<PAGE> 59
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED AUGUST 31, 1993
The pro forma condensed combined income statement for the fiscal year ended
August 31, 1993 gives effect to the acquisition of Fountain Valley, the Mergers,
the Offering and the use of proceeds therefrom and assumes the repurchase of
100% of the aggregate outstanding principal amount of the 10 1/4% Notes pursuant
to the Change of Control Offer as if such transactions had occurred on September
1, 1992 by combining (i) the results of operations of the Company for the fiscal
year ended August 31, 1993 (adjusted on the pro forma basis to include the
acquisition of Florida Medical Center as described below)) (ii) the results of
operations of the Company for the fiscal year ended August 31, 1993 (adjusted as
described below) and the results of operations of Summit for the fiscal year
ended June 30, 1993, applying the purchase method of accounting; and, (iii) the
results of operations of the Company for the fiscal year ended August 31, 1993
(adjusted as described below) and the results of operations of Fountain Valley
for the fiscal year ended October 31, 1993, applying the purchase method of
accounting. Because the Company accounted for the AHM Merger as a pooling-of-
interests transaction, the historical financial data of the Company includes the
results of operations of AHM for all periods presented. This pro forma condensed
combined income statement is presented for comparative purposes only and is not
necessarily indicative of the combined results of operations in the future or of
what the combined results of operations would have been had the transaction
assumed therein been consummated during the period for which this statement is
presented. Pro forma earnings per common and common equivalent share and pro
forma weighted average shares outstanding give effect to the exchange of AHM and
Summit shares of common stock and common stock equivalents for the Company's
Common Stock and Common Stock equivalents as described by the respective merger
agreements. In addition, the pro forma condensed combined income statement does
not give effect to the cost savings, if any, which may be realized by the
Company after consummation of the Mergers or the acquisition of Fountain Valley.
The Company acquired Florida Medical Center on June 30, 1993 in a
transaction accounted for as a purchase. The Company's pro forma condensed
combined income statement for the year ended August 31, 1993 reflects the
operating results of the Company for the fiscal year ended August 31, 1993 as if
the acquisition of Florida Medical Center had occurred on September 1, 1992.
This pro forma condensed combined income statement should be read in
conjunction with the historical financial statements and notes thereto of the
Company and Summit incorporated by reference herein, and those of Fountain
Valley included herein.
<TABLE>
<CAPTION>
FOUNTAIN
SUMMIT ORNDA VALLEY
YEAR ENDED SUMMIT PRO SUMMIT YEAR ENDED FOUNTAIN VALLEY OFFERING
ORNDA JUNE 30, FORMA PRO FORMA OCTOBER 31, PRO FORMA PRO FORMA PRO FORMA
PRO FORMA 1993 ADJUSTMENTS COMBINED 1993 ADJUSTMENTS ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------- ----------- --------------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total
revenue..... $1,060,662 $508,504 $ (83,992)(6) $1,485,174 $ 120,777 -- $1,605,951
Costs and
expenses
Operating
expenses... 842,065 425,242 (8,985)(5) 1,186,499 96,477 4,200(7) 1,287,176
(71,823)(6)
Provision
for
doubtful
accounts... 69,729 23,113 (534)(6) 92,308 2,738 -- 95,046
Depreciation
and
amortization...52,093 19,185 8,962(2) 77,932 8,131 (4,379)(2) 23(2) 81,707
(2,308)(6)
Interest
expense... 75,511 7,377 18,027(3) 98,663 4,980 2,710(3) 2,854(3) 109,207
(2,252)(6)
Interest
income.... (3,380) (1,605) (408)(6) (4,984) (280) 149(3) (5,115)
409(3)
Minority
interest... 4,601 2,421 (2,421)(6) 4,601 -- -- 4,601
---------- ---------- ----------- ---------- ----------- ------- ----------- ----------
20,043 32,771 (22,659) 30,155 8,731 (2,680) (2,877) 33,329
Income from
investments
in Houston
Northwest
Medical
Center...... 173 -- -- 173 -- -- -- 173
---------- ---------- ----------- ---------- ----------- ------- ----------- ----------
Income from
continuing
operations
before
income tax
expense..... 20,216 32,771 (22,659) 30,328 8,731 (2,680) (2,877) 33,502
Income tax
expense..... 1,129 14,201 (7,875)(4) 4,338 754 456(4) (575)(4) 4,973
(3,117)(6)
---------- ---------- ----------- ---------- ----------- ------- ----------- ----------
Income from
continuing
operations... 19,087 18,570 (11,667) 25,990 7,977 (3,136) (2,302) 28,529
Preferred
stock
dividend
requirements.. (1,699) -- -- (1,699) -- -- -- (1,699)
---------- ---------- ----------- ---------- ----------- ------- ----------- ----------
Income from
continuing
operations
applicable
to common
and common
equivalent
shares...... $ 17,388 $ 18,570 $ (11,667) $ 24,291 $ 7,977 $(3,136) $(2,302) $ 26,830
========= ======== ======== ========= ======== =========== ======== =========
Earnings per
common and
common
equivalent
share from
continuing
operations... $ 0.50 $ 0.56 $ 0.57 $ 0.63
========= ======== ========= =========
Shares used in
earnings per
common and
common
equivalent
share
computations
(in
thousands)... 34,960 33,201 42,560 42,560
</TABLE>
See notes to unaudited pro forma condensed combined income statement.
P-5
<PAGE> 60
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED INCOME STATEMENT
NOTE 1
The Company will continue to report its financial information on a fiscal
year basis ending on August 31. The Summit and Fountain Valley results of
operations, which are included in the accompanying unaudited pro forma condensed
combined income statement, have been presented on a fiscal year basis ending on
June 30 and October 31, respectively.
The pro forma condensed combined income statement assumes the Company's
repurchase of 100% of the aggregate outstanding principal amount of the 10 1/4%
Notes pursuant to the Change of Control Offer. As of July 18, 1994, the
expiration date of the Change of Control Offer, 99.3% of the 10 1/4% Notes have
been tendered and were purchased by the Company on July 19, 1994 pursuant to the
Change of Control Offer. The difference between the amount tendered and the
amount assumed in the pro forma adjustment has an immaterial impact on the pro
forma condensed combined income statement.
The Company acquired Florida Medical Center on June 30, 1993, for an
aggregate purchase price of $113.1 million. The unaudited pro forma condensed
combined income statement for the year ended August 31, 1993, reflects the pro
forma operations of the Company as if its acquisition of Florida Medical Center
had occurred on September 1, 1992. The historical results of Florida Medical
Center have been adjusted using purchase accounting to give effect to the
acquisition by the Company and to eliminate the effect of significant
nonrecurring transactions.
The following combined unaudited pro forma condensed income statement for
the year ended August 31, 1993 presents the historical operations of the
Company, and the incremental pro forma operations of Florida Medical Center as
if the acquisition of Florida Medical Center by the Company had occurred on
September 1, 1992.
ORNDA HEALTHCORP AND FLORIDA MEDICAL CENTER
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED AUGUST 31, 1993
<TABLE>
<CAPTION>
FLORIDA
ORNDA MEDICAL CENTER ORNDA
HISTORICAL PRO FORMA PRO FORMA
---------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total revenue.............................................. $ 961,795 $ 98,867 $1,060,662
Cost and Expenses
Operating expenses....................................... 765,743 76,322 842,065
Provision for doubtful accounts.......................... 63,907 5,822 69,729
Depreciation and amortization............................ 47,669 4,424 52,093
Interest expense......................................... 68,660 6,851 75,511
Interest income.......................................... (3,380) -- (3,380)
Minority interest........................................ 4,601 -- 4,601
---------- -------------- ----------
14,595 5,448 20,043
Income from investments in Houston Northwest Medical
Center................................................... 173 -- 173
---------- -------------- ----------
Income from continuing operations before income tax
expense.................................................. 14,768 5,448 20,216
Income tax expense......................................... 1,129 -- 1,129
---------- -------------- ----------
Income from continuing operations.......................... 13,639 5,448 19,087
Preferred stock dividend requirement....................... (1,699) -- (1,699)
---------- -------------- ----------
Income (loss) from continuing operations applicable to
common and common equivalent shares...................... $ 11,940 $ 5,448 17,388
======== =========== =========
Earnings (loss) per common and common equivalent share from
continuing operations.................................... $ (0.34) $ 0.50
======== =========
Shares used in earnings (loss) per common and common
equivalent share computation (in thousands).............. 34,960 34,960
</TABLE>
P-6
<PAGE> 61
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED INCOME STATEMENT -- (CONTINUED)
NOTE 2
To adjust amortization for the Summit Merger as follows:
<TABLE>
<CAPTION>
FOR THE NINE FOR THE YEAR
MONTHS ENDED ENDED
MAY 31, AUGUST 31,
1994 1993
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
To record amortization related to the $190.1 million increase
in excess of costs of net assets acquired over fair value
for Summit assuming a 30 year life......................... $4,752 $6,337
To record amortization on the $6.0 million increase in
deferred financing costs assuming a 6 year life............ 750 1,000
To record depreciation on the $65.0 million of properties
acquired, net of land costs, assuming a 30 year life....... 1,219 1,625
--------- ---------
$6,721 $8,962
========= =========
</TABLE>
The pro forma condensed combined income statement assumes that the net
assets acquired from Summit over fair market value will be amortized over 30
years. The amortization period was determined based upon the estimated economic
life of the property, plant, and equipment acquired. The Company evaluates the
amortization period of intangible assets on an annual basis.
To adjust amortization for the acquisition of Fountain Valley as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
FOR THE NINE ENDED
MONTHS ENDED AUGUST 31,
MAY 31, 1994 1993
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
To record amortization on the $2.0 million increase in
deferred financing costs assuming a 6 year life........... $ 250 $ 333
To adjust depreciation on the $45.8 million of properties to
be acquired assuming lives between 7 and 30 years......... (3,534) (4,712)
---------- ---------
$ (3,284) $ (4,379)
========= =========
</TABLE>
To adjust amortization for the issuance of the Notes:
<TABLE>
<S> <C> <C>
To record amortization on the $3.6 million increase in
deferred financing costs assuming a 10 year life.......... $ 272 $ 363
To eliminate amortization on the 10 1/4% Notes.............. (255) (340)
--------- --------
$ 17 $ 23
========= ========
</TABLE>
P-7
<PAGE> 62
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED INCOME STATEMENT -- (CONTINUED)
NOTE 3
To adjust interest expense for the Summit Merger as follows:
<TABLE>
<CAPTION>
FOR THE NINE FOR THE YEAR
MONTHS ENDED ENDED
MAY 31, AUGUST 31,
1994 1993
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
To record interest on borrowings of $269.1 million related to
the Bank Credit Facility (assumes a 6.7% interest rate) for
the Summit merger.......................................... $ 13,520 $ 18,027
========= =========
To eliminate interest income on excess Summit cash........... $ 306 $ 409
========= =========
</TABLE>
To adjust interest expense for the acquisition of Fountain Valley as
follows:
<TABLE>
<CAPTION>
FOR THE NINE FOR THE YEAR
MONTHS ENDED ENDED
MAY 31, AUGUST 31,
1994 1993
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
To record interest on borrowings of $101.0 million related to
the Bank Credit Facility (assumes a 6.7% interest rate).... $ 5,076 $ 6,768
To eliminate historical interest expense related to Fountain
Valley debt to be retired in connection with the
acquisition................................................ (3,043) (4,058)
--------- ---------
$ 2,033 $ 2,710
========= =========
To eliminate interest income on excess Fountain Valley
cash....................................................... $ 112 $ 149
========= =========
</TABLE>
To adjust interest expense for the issuance of the Notes:
<TABLE>
<S> <C> <C>
To record interest on the Notes.............................. $ 10,664 $ 14,219
To eliminate historical interest expense related to the
10 1/4%
Notes...................................................... (7,500) (10,000)
To eliminate interest expense related to payment of $20.4
million on Bank Credit Facility (assumes a 6.7% interest
rate)...................................................... (1,024) (1,365)
--------- ---------
$ 2,140 $ 2,854
========= =========
</TABLE>
NOTE 4
To record pro forma provision for income taxes on the pro forma adjustments
at a rate of 20% except for amortization adjustments related to excess costs of
net assets acquired over fair value which will not be deductible for tax
purposes and to adjust Summit tax rate for net operating loss utilization.
P-8
<PAGE> 63
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED INCOME STATEMENT -- (CONTINUED)
NOTE 5
The pro forma financial statements give effect to the Company's acquisition
of approximately $65 million (of a total of $85.4 million) of the Summit
properties currently under lease. The Company entered into an agreement with a
third party purchaser for approximately $20.4 million of the remaining real
estate. The Company will lease such real estate from the third party under an
operating lease agreement.
<TABLE>
<CAPTION>
FOR THE NINE FOR THE YEAR
MONTHS ENDED ENDED
MAY 31, AUGUST 31,
1994 1993
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
To eliminate operating lease expense under previous lease
commitments........................................................ $ (8,307) $(11,076)
To record new lease commitments (assumes a 10 1/4% interest rate).... 1,568 2,091
------------ ------------
$ (6,739) $ (8,985)
========= =========
</TABLE>
NOTE 6
To record the effect of accounting for the investment in Summit Care
Corporation as if the 7 1/2% Notes are exchanged for Summit Care common stock as
described below:
<TABLE>
<CAPTION>
FOR THE NINE FOR THE YEAR
MONTHS ENDED ENDED
MARCH 31, 1994 JUNE 30,1993
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Total revenues............................................. $(71,725) $ (83,992)
Operating expenses......................................... (59,997) (71,823)
Provision for doubtful accounts............................ (640) (534)
Depreciation and amortization.............................. (2,147) (2,308)
Interest expense........................................... (4,191) (2,252)
Interest income............................................ (428) (408)
Minority interest.......................................... (2,138) (2,421)
Income tax................................................. (2,848) (3,117)
</TABLE>
$37.4 million aggregate principal amount of the 7 1/2% Notes which are
exchangeable into Summit's 38.6% interest in the Summit Care common stock, were
outstanding at May 31, 1994. The pro forma condensed combined income statements
for the fiscal year ended August 31, 1993 and for the nine months ended May 31,
1994 give effect to the investment in Summit Care as if the holders of the
7 1/2% Notes exchanged for the Summit Care common stock on September 1, 1992.
NOTE 7
Pursuant to the Real Estate Purchase Agreement, the REIT acquired certain
real estate from Fountain Valley for approximately $41 million. The Company
leases such real estate from the REIT pursuant to an operating lease agreement.
<TABLE>
<CAPTION>
FOR THE
FOR THE NINE YEAR ENDED
MONTHS ENDED AUGUST 31,
MAY 31, 1994 1993
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
To record $41 million of new lease commitments (assumes a
10.25% interest rate)........................................ $3,150 $4,200
========= ========
</TABLE>
P-9
<PAGE> 64
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED INCOME STATEMENT -- (CONTINUED)
NOTE 8
No provision has been reflected in the unaudited pro forma condensed
combined financial statements for expenses incurred by the Company and AHM in
connection with the AHM Merger. These expenses, consisting primarily of amounts
related to investment advisory and professional fees, expenses for printing and
distributing proxy materials and certain severance and relocation costs have
been estimated at $30 million (of which approximately $16 million is a cash
expense) and were expensed upon completion of the AHM Merger.
P-10
<PAGE> 65
ORNDA HEALTHCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31 MAY 31
------------------- -------------------
1993 1994 1993 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
TOTAL REVENUE......................................... $245,820 $330,469 $702,551 $882,917
COSTS AND EXPENSES
Operating expenses.................................. 193,571 264,901 562,098 697,537
Provision for doubtful accounts..................... 16,634 17,488 43,968 57,443
Depreciation and amortization....................... 11,671 16,759 34,246 45,918
Interest expense.................................... 16,802 20,976 49,948 59,331
Interest income..................................... (887) (815) (3,167) (2,032)
Special executive compensation...................... -- 1,043 -- 2,530
Merger transaction expenses......................... -- 29,992 -- 29,992
Loss on asset sale.................................. -- 9,761 -- 9,761
Minority interest................................... 2,247 1,127 2,988 4,230
-------- -------- -------- --------
5,782 (30,763) 12,470 (21,793)
Income (loss) from investments in Houston Northwest
Medical Center...................................... (691) 3,218 (775) (136)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE AND
EXTRAORDINARY ITEM.................................. 5,091 (27,545) 11,695 (21,929)
Income tax expense.................................... 404 515 930 1,048
-------- -------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM................................................ 4,687 (28,060) 10,765 (22,977)
Extraordinary item.................................... -- 8,316 -- 8,191
-------- -------- -------- --------
NET INCOME (LOSS)..................................... 4,687 (36,376) 10,765 (31,168)
Preferred stock dividends............................. 430 550 1,259 1,462
-------- -------- -------- --------
Net income (loss) applicable to common shares......... $ 4,257 $(36,926) $ 9,506 $(32,630)
======== ======== ======== ========
Net income (loss) per common and common equivalent
share before extraordinary item..................... $ 0.12 $ (0.74) $ 0.27 $ (0.68)
======== ======== ======== ========
Net income (loss) per common and common equivalent
share............................................... $ 0.12 $ (0.95) $ 0.27 $ (0.91)
======== ======== ======== ========
</TABLE>
See the accompanying notes.
F-1
<PAGE> 66
ORNDA HEALTHCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1993 1994
---------- ----------
(NOTE 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................... $ 25,914 $ 16,342
Patient accounts receivable net of allowance for uncollectibles of
$47,289 at August 31, 1993 and $57,153 at May 31, 1994........... 180,604 268,922
Supplies, at cost................................................... 18,533 26,620
Other............................................................... 22,716 50,506
---------- ----------
TOTAL CURRENT ASSETS............................................. 247,767 362,390
PROPERTY, PLANT AND EQUIPMENT, net.................................... 803,994 1,020,946
INVESTMENTS IN HOUSTON NORTHWEST MEDICAL CENTER....................... 10,912 80,947
OTHER ASSETS.......................................................... 64,058 58,467
GOODWILL, NET......................................................... 78,406 266,954
---------- ----------
$1,205,137 $1,789,704
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses and other liabilities.............................. $ 212,247 $ 302,698
Current maturities of long-term debt................................ 9,347 7,368
---------- ----------
TOTAL CURRENT LIABILITIES........................................ 221,594 310,066
LONG-TERM DEBT........................................................ 705,425 1,015,000
OTHER LIABILITIES..................................................... 66,010 99,126
SHAREHOLDERS EQUITY
Convertible preferred stock; 10,000,000 authorized shares; 1,193,896
and 1,278,452 shares issued and outstanding at August 31, 1993
and May 31, 1994, respectively................................... 18,062 19,341
Common stock, $.01 par value; 100,000,000 authorized shares;
34,483,433 and 43,161,743 issued and outstanding at August 31,
1993 and May 31, 1994, respectively.............................. 345 432
Additional paid-in capital.......................................... 299,137 403,751
Retained deficit.................................................... (105,436) (136,322)
Unrealized gains on available-for-sale securities, net of tax....... -- 78,310
---------- ----------
212,108 365,512
---------- ----------
$1,205,137 $1,789,704
========= =========
</TABLE>
See the accompanying notes.
F-2
<PAGE> 67
ORNDA HEALTHCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MAY 31,
---------------------
1993 1994
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................................................ $ 10,765 $(31,168)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Non-cash portion of loss on investments in Houston Northwest Medical
Center................................................................. 1,525 2,328
Non-cash special executive compensation................................. -- 2,530
Loss on sale of assets.................................................. -- 9,761
Extraordinary item...................................................... -- 8,191
Increase (decrease) to disposition reserve.............................. (99) --
Depreciation and amortization........................................... 34,246 45,918
Provision for doubtful accounts......................................... 43,968 57,443
Amortization of debt discount........................................... 977 82
Changes in assets and liabilities net of effects from
acquisitions/dispositions:
Increase in net patient accounts receivable........................... (68,771) (81,660)
Decrease (increase) in other current assets........................... (2,269) (5,933)
Decrease (increase) in other assets................................... (1,639) (1,316)
Increase (decrease) in accrued expenses and other liabilities......... (9,235) (8,424)
(Decrease) increase in other liabilities.............................. (1,566) (6,663)
-------- --------
Net cash provided by (used in) operating activities........................ 7,902 (8,911)
========= =========
INVESTING ACTIVITIES:
Purchase of Summit Health, Ltd. common stock and real estate................... -- (256,671)
Purchase of Golden Glades common stock, net of cash acquired of $1,011......... (24,623) --
Capital expenditures........................................................... (27,300) (31,556)
Decrease (increase) in restricted funds........................................ 258 --
Increase in notes receivable................................................... (4,105) --
Payments received on long-term notes and other receivables..................... 5,014 4,865
Other investing activities..................................................... (3,852) (17,038)
-------- --------
Net cash used in investing activities.......................................... (54,608) (300,400)
-------- --------
FINANCING ACTIVITIES:
Issuance of stock.............................................................. 44 3,489
Refinancing of borrowings under term loan...................................... (372) --
Principal payments on long-term debt and term loan............................. (11,505) (13,243)
Borrowings on notes payable.................................................... -- 325,192
Borrowings under revolving credit agreements................................... 56,337 200,097
Payments on revolving credit agreements........................................ (54,447) (215,796)
Payment received on stockholder note receivable................................ 7,740 --
-------- --------
Net cash used in financing activities................................... (2,203) 299,739
-------- --------
NET DECREASE IN CASH............................................................. (48,909) (9,572)
-------- --------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 60,908 25,914
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 11,999 $ 16,342
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized)......................................... $ 58,569 $ 71,249
Income taxes................................................................. 1,359 160
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Preferred stock dividends...................................................... 1,259 1,462
Capital lease obligations incurred............................................. 1,916 397
Issuance of stock options...................................................... -- 2,530
Stock issued for acquisition of Golden Glades.................................. 8,250 --
Stock issued for acquisition of Summit Health, Ltd............................. -- 99,167
</TABLE>
See the accompanying notes.
F-3
<PAGE> 68
ORNDA HEALTHCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1994
NOTE 1 -- REPORTING ENTITY
OrNda HealthCorp (the "Company" or "OrNda") is incorporated in the State of
Delaware. On April 19, 1994, the Company exchanged shares of its common stock
for all of the outstanding common stock of American Healthcare Management, Inc.
("AHM"), and merged AHM with and into OrNda. The transaction was accounted for
as a pooling-of-interests and, accordingly, the accompanying condensed
consolidated financial statements give retroactive effect to the merger and
therefore include the combined operations of OrNda and AHM. (see Note 3). Also
on April 19, 1994, the Company purchased all of the outstanding common stock of
Summit Health Ltd. ("Summit") pursuant to a merger of SHL Acquisition Co., a
wholly owned subsidiary of the Company, with and into Summit. The transaction
was accounted for as a purchase (see Note 3).
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements have been prepared in conformity 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 fair presentation have been included. Operating results for the
three-and nine-month periods ended May 31, 1994 are not necessarily indicative
of the results that may be expected for the year ended August 31, 1994. For
further information, refer to the consolidated financial statements and
footnotes thereto included in OrNda's annual report on Form 10-K/A No. 4 for the
year ended August 31, 1993 and AHM's annual reports on Forms 10-K, as amended,
for the years ended December 31, 1993 and 1992.
Earnings Per Share. The computation of earnings per share is based on the
weighted average number of outstanding shares and dilutive equivalents
outstanding during the period. Dilutive stock equivalents consist of stock
options and warrants representing 1.0 million and 1.1 million equivalent shares
for the three-and nine-month periods ended May 31, 1993, respectively. Prior
year weighted average shares have been restated for the proportionate amount of
AHM's weighted average shares outstanding (see Note 3).
NOTE 3 -- MERGER, ACQUISITION AND DISPOSITION TRANSACTIONS
On April 19, 1994, the Company completed a merger with AHM, a health care
services company engaged in the operation of general acute care hospitals. AHM
owned or leased 16 hospitals in 9 states, with a total of 2,028 licensed beds.
These hospitals provide a range of medical and surgical inpatient and outpatient
services, with particular focus on primary care services such as obstetrics,
pediatrics and minimally invasive and routine surgeries.
The merger has been accounted for as a pooling of interests. Shareholders
of AHM received 0.6 of a share of OrNda common stock, representing 16.6 million
additional OrNda shares issued, in exchange for each share of AHM common stock
held. The accompanying condensed consolidated financial statements give
retroactive effect to the merger, combining operations of OrNda and AHM for all
periods presented. Because each company had different fiscal year ends, AHM's
net income for September 1993, representing $558,000, is included in reported
net income both for the year ended August 31, 1993 and the nine months ended May
31, 1994. However, retained earnings appropriately reflects September 1993 net
income for only one period. Further, only operating results of OrNda for the
nine months ended May 31, 1993 were combined with operations of AHM for the nine
months ended June 30, 1993. Consequently, the operating results of AHM for the
month of September 1992 are excluded from reported results of the combined
company for the nine
F-4
<PAGE> 69
ORNDA HEALTHCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
months ended May 31, 1993 and the operating results of AHM for the month of June
1993 are included. Following is a summary of AHM s operating results for those
periods (in thousands).
<TABLE>
<CAPTION>
SEPTEMBER JUNE
1992 1993
--------- -------
<S> <C> <C>
Total revenue................................................... $25,566 $28,135
Net income...................................................... 559 1,038
</TABLE>
Following is a summary of the results of the separate operations of OrNda
and AHM included in the combined results of operations for periods presented
prior to the merger (in thousands):
<TABLE>
<CAPTION>
ORNDA AHM CONSOLIDATED
-------- -------- ------------
<S> <C> <C> <C>
One month ended March 31, 1994:
Total revenue....................................... $ 76,204 $ 30,923 $107,127
Net income.......................................... 2,619 1,415 4,034
Seven months ended March 31, 1994:
Total revenues...................................... $454,531 $205,044 $659,575
Net income.......................................... 1,696 7,546 9,242
Three months ended May 31, 1993:
Total revenues...................................... $161,319 $ 84,501 $245,820
Net income.......................................... 785 3,902 4,687
Nine months ended May 31, 1993:
Total revenues...................................... $450,529 $252,022 $702,551
Net income (loss)................................... (807) 11,572 10,765
</TABLE>
In the third quarter of 1994, the Company recorded the following
nonrecurring charges in connection with the AHM merger (in thousands):
<TABLE>
<CAPTION>
CASH NONCASH
EXPENSE EXPENSE TOTAL
------- ------- -------
<S> <C> <C> <C>
Employee benefit and certain severance actions............ $ 8,456 $ 999 $ 9,455
Investment advisory and professional fees................. 6,077 -- 6,077
Costs of information systems consolidations primarily
related to the write-down of assets..................... 1,000 10,260 11,260
Other..................................................... 1,293 1,907 3,200
------- ------- -------
$16,826 $13,166 $29,992
======= ======= =======
</TABLE>
On April 19, 1994, the Company completed a merger with Summit, a health
care services company engaged in the operation of (i) general acute care
hospitals, (ii) a managed care entity contracting to provide services to the
Arizona Health Care Cost Containment System, and (iii) outpatient surgery
centers. Summit owned or leased 12 acute care hospitals in 4 states with a total
of 1,611 licensed beds. These hospitals provide general health care services,
including operating and recovery rooms, diagnostic radiology, intensive care and
coronary care, outpatient services and emergency departments, pharmacies,
clinical laboratories and rehabilitative therapy.
The merger has been accounted for as a purchase and, accordingly, the
condensed consolidated financial statements give effect to and include the
combined operations of the Company and Summit as of the date of the acquisition.
Summit shareholders received $5.50 in cash and 0.2157 shares of OrNda common
stock for each share of Summit common stock held, representing $192.1 million of
cash paid and 7.5 million additional OrNda shares issued. Furthermore, OrNda
assumed or paid $21.9 million of Summit s debt resulting in a total
F-5
<PAGE> 70
ORNDA HEALTHCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition cost of approximately $313.2 million. In connection with the merger
with Summit, $190.1 million of goodwill was recorded by OrNda. This amount is
being amortized over a period of 30 years.
In connection with the mergers, the Company changed the methodologies used
by the previously separate companies to calculate the allowance for doubtful
accounts to conform OrNda and AHM to a single method. The Company also changed
the methodology for recognition of charity care expense. As a result of these
changes, the operations of the Company for the three months ended May 31, 1994
were favorably impacted by $3.3 million.
On June 30, 1993, the Company acquired Florida Medical Center, a 459
licensed-bed hospital in Fort Lauderdale Florida, for $113.1 million in cash in
a transaction accounted for as a purchase.
Pro forma results of operations for the year ended August 31, 1993 and the
nine months ended May 31, 1994 assuming the Summit merger and FMC acquisition
were completed September 1, 1992, and excluding $30.0 million of expenses
directly attributable to the merger transaction, are presented below (in
thousands, except per share data).
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
AUGUST 31, MAY 31,
1993 1994
---------- -----------------
<S> <C> <C>
Total revenue............................................ $1,485,175 $ 1,164,278
Income from continuing operations........................ 22,946 13,339
Income from continuing operations applicable to common
shares................................................. 21,247 11,877
Income from continuing operations applicable to common
equivalent shares...................................... $ 0.50 $ 0.27
</TABLE>
Effective in the third quarter of 1994, the Company's management decided
upon a plan of disposition to sell Decatur Hospital, a 120-bed acute care
hospital located in Decatur, Georgia. Losses relating to the future operations
of the hospital and the loss on sale totalling $9.8 million were recorded in the
third quarter of 1994. On June 10, 1994, the Company completed the sale of the
property, equipment and inventory of the hospital for $6.0 million in cash.
NOTE 4 -- LONG-TERM DEBT
A summary of long-term debt follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1993 1994
---------- ----------
<S> <C> <C>
Parent Company:
Senior Credit Facilities:
Revolving Credit Facilities............................... $ 103,200 $ 58,200
Term Loans................................................ 42,500 393,500
12.25% Senior Subordinated Notes due 2002.................... 400,000 400,000
10.25% Senior Subordinated Notes due 2003.................... 100,000 100,000
Subsidiaries:
Secured Debt -- other (including capitalized leases); rates,
generally fixed, average 11.9%; payable in periodic
installments through 2004................................. 69,072 70,668
---------- ----------
714,772 1,022,368
Less current portions.......................................... 9,347 7,368
---------- ----------
$ 705,425 $1,015,000
======== =========
</TABLE>
On April 19, 1994 the Company entered into a Credit, Security, Guarantee
and Pledge Agreement (the "Credit Agreement") with a syndicate of lenders to
borrow up to $700 million, of which $451.7 million was
F-6
<PAGE> 71
ORNDA HEALTHCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding on May 31, 1994 and of which commitment availability had been
reduced by $13.5 million as a result of issued letters of credit. The proceeds
were used to (i) repay $159.6 million of previously outstanding senior secured
debt; (ii) pay for $192.1 million representing the cash portion of the purchase
price for all of the outstanding shares of Summit Health Ltd.; (iii) acquire
real estate previously leased by Summit Health Ltd., for $65.0 million; (iv)
repay $9.1 million of subsidiary indebtedness; and, (v) pay transaction fees and
expenses. In connection with the extinguishment of the previously outstanding
senior secured debt, the Company recorded an extraordinary loss of $8.3 million,
net of income tax benefit of $251,000, primarily as a result of the elimination
of related debt issuance costs.
The Credit Agreement consists of the following facilities (the "Senior
Credit Facilities"): (i) a revolving commitment of $200 million maturing April
19, 2000, to refinance certain previously existing senior secured debt, for
general corporate purposes, and to issue up to $30 million of letters of credit,
(ii) a revolving commitment of $100 million maturing April 19, 2000 for
acquisitions and other specified transactions, (iii) a $325 million term loan to
refinance certain previously existing senior secured debt and the cash portion
of the purchase price paid to acquire Summit Health Ltd., payable in
incremental, quarterly installments beginning July 31, 1994 and maturing April
19, 2000, and (iv) a $75 million term loan for specified transactions payable in
incremental quarterly installments beginning January 31, 1995 and maturing April
19, 2000.
Funds advanced under the Credit Agreement bear interest on the outstanding
principal at a fluctuating rate based on either (i) the base rate of the Bank of
Nova Scotia for U.S. Dollar loans in the United States (the "Prime Rate") or
(ii) London Interbank Borrowing Rate ("LIBOR"), as elected from time to time by
the Company. Interest is payable quarterly if a rate based on the Prime Rate is
elected or at the end of the LIBOR period (but in any event not to exceed 90
days) if a rate based on LIBOR is elected. The Company has elected various rates
on the initial borrowings of the Senior Credit Facilities representing a
weighted average annual interest rate at May 31, 1994 of 6.7%.
In certain circumstances, the Company is required to make principal
prepayments on the Senior Credit Facilities, including the receipt of proceeds
from the issuance of additional subordinated indebtedness, certain asset sale
proceeds not used to acquire additional assets within a specified period, and
50% of the proceeds in excess of $50 million from the issuance of additional
equity not used to acquire additional assets within a specific period. The
Company may prepay all or part of the outstanding Senior Credit Facilities
without penalty.
The Credit Agreement limits, under certain circumstances, the Company's
ability to incur additional indebtedness, sell material assets, acquire the
capital stock or assets of another business, or pay dividends. The Credit
Agreement also requires the Company to maintain a specified net worth and meet
or exceed certain coverage, leverage, and indebtedness ratios. Indebtedness
under the Credit Agreement is secured by a perfected, first priority security
interest in the stock of all existing and future subsidiaries of the Company,
intercompany notes of indebtedness, and majority-owned partnerships.
Pursuant to a Waiver and Consent Agreement dated February 3, 1994 by and
among the Company and the holders of a majority in principal amount of the
10.25% Notes, as consideration for their agreement to make certain changes to
the Notes Indenture to effect the merger with AHM (see Note 3) and other
matters, the Company (i) paid to the holders on the closing date of the merger
$15.00 for each $1,000 principal amount of the outstanding Notes and (ii)
increased the rate of interest on the Notes from 10% per annum to 10.25% per
annum. The merger caused a "change of control," as defined in the Notes
Indenture, which required the Company to make a prompt offer to repurchase all
or any portion of the Notes owned by the holders thereof at 101% of the
principal amount, together with accrued interest thereon, to the date of
repurchase. The Company made the required offer to repurchase the Notes on May
19, 1994. Such offer expires on July 18, 1994.
F-7
<PAGE> 72
ORNDA HEALTHCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No.
109). Under SFAS No. 109, an asset and liability approach for financial
accounting and reporting for income taxes is required.
The AHM merger (see Note 3) caused an "ownership change" within the meaning
of Section 382(g) of the Internal Revenue Code (the "IRC") for both OrNda and
AHM. Consequently, allowable federal deductions relating to tax attribute
carryforwards of OrNda and AHM arising in periods prior to the merger are
thereafter subject to annual limitations (OrNda $19 million; AHM $16 million).
For AHM, such tax attribute carryforwards can only be applied against the
prospective taxable income of the entities that previously comprised AHM. These
limitations may be increased for "built-in gains," as defined under the IRC,
recognized during a five-year period following the date of the merger. These
annual limitations currently are not expected to affect the ability of either
OrNda or AHM to ultimately utilize tax attribute carryforwards available at the
date of the merger and which, therefore, continue to be available to offset book
deferred tax liabilities.
As a result of examinations by the Internal Revenue Service (the "Service")
of Summit's federal income tax returns, Summit received a revenue agent's report
with proposed adjustments for the years 1984 through 1986. A protest has been
filed with the district director opposing the proposed adjustments. The
principal issue involves accounting methods used by Summit to report taxable
income.
For the taxable years prior to 1988, most of Summit's subsidiaries (the
"Subsidiaries") primarily reported taxable income using the cash method of
accounting. The cash method was prevalent within the hospital industry and the
Subsidiaries applied the method in accordance with prior agreements reached with
the Service. The Service now asserts that an accrual method of accounting should
have been used. The Tax Reform Act of 1986 (the "1986 Act") requires most large
corporate taxpayers (including Summit) to use an accrual method of accounting
beginning in 1987. Consequently, the Subsidiaries changed to the accrual method
beginning July 1, 1987. In accordance with the provisions of the 1986 Act,
income that was deferred by use of the cash method at the end of 1986 is being
recognized as taxable income by the Subsidiaries in equal annual installments
over ten years beginning on July 1, 1987.
The Company is of the opinion that Summit has properly reported its income
and paid its taxes in accordance with applicable laws (and in accordance with
previous agreements established with the Service). In management's opinion, the
final outcome resulting from the Service's examinations of prior years income
taxes will not have a material adverse effect on the results of operations or
financial position of the Company.
NOTE 6 -- HOUSTON NORTHWEST MEDICAL CENTER
Houston Northwest Medical Center ("HNW"), which is not operated by the
Company, is a 494-bed acute care facility located in Houston, Texas. Prior to
February 28, 1994, the Company's investments in HNW consisted of (i) 100% of
HNW's common stock; (ii) two classes of mandatorily redeemable preferred stock
with a redemption value of $62.5 million; and, (iii) a mortgage note receivable
with a balance of $8.4 million. In applying the equity method of accounting for
the investment prior to February 28, 1994, the Company's investment in
mandatorily redeemable preferred stock of HNW was considered an "advance" to HNW
and was combined with the common stock. As a result, 100% of HNW's losses
attributable to its common stock were recognized as losses to the Company and
reduced the Company's combined investments in HNW.
On February 28, 1994, the Company irrevocably transferred its investment in
common stock of HNW to the HNW ESOP and HNW for nominal consideration. The
effect of this transfer was to eliminate the requirement for the Company to
apply the equity method of accounting subsequent to the quarter ended February
28, 1994. Accordingly, beginning March 1, 1994, the Company no longer recognizes
HNW income or losses on the equity method. The Company will continue to apply
the income recognition method described
F-8
<PAGE> 73
ORNDA HEALTHCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in Note 1 to the financial statements included in the Company's Form 10-K/A No.
4, for the year ended August 31, 1993, for the Company's investment in HNW's
mandatorily redeemable preferred stock.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting of Certain Investments in
Debt and Equity Securities" (SFAS No. 115). The Company adopted SFAS No. 115 on
September 1, 1993, which resulted in an $81.7 million increase in shareholders
equity (of which $79.7 million related to the HNW mandatorily redeemable
preferred stock classified as "available-for-sale") with no impact on net
income. There was no income tax effect because of the availability of book tax
attribute carryforwards to offset the excess book basis over the tax basis of
the investments. At May 31, 1994, the increase to equity was reduced to $78.3
million (of which $76.3 related to HNW) due to changes in long-term interest
rates used to discount future cash flows.
NOTE 7 -- CONTINGENCIES
The Company continually evaluates contingencies based upon the best
available information. In addition, allowances for losses are provided for
unresolved items which have continuing significance such as certain third-party
reimbursements.
The Company presently has unresolved various legal proceedings in which it
is a defendant and various unresolved claims. In the opinion of management, the
ultimate liability, if any, with respect to any such litigation or claim will
not materially affect the financial position or results of operations of the
Company.
NOTE 8 -- OTHER
On May 5, 1994, the Company announced it had entered into a letter of
intent to acquire Fountain Valley Regional Hospital and Medical Center, a
413-licensed bed acute care hospital in Fountain Valley, California. The
transaction will be accounted as a purchase and is expected to have a total
purchase price of approximately $145 million, of which approximately $95 million
will be paid in cash. The transaction, which is expected to be completed during
the fourth quarter of fiscal 1994, is subject to execution of a definitive
agreement, consent of the lenders under the Credit Agreement and other customary
closing conditions.
F-9
<PAGE> 74
ORNDA HEALTHCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Mergers and Acquisition. As discussed in Note 3 to the accompanying
condensed consolidated financial statements, OrNda completed the AHM and Summit
mergers on April 19, 1994. The AHM merger was accounted for as a
pooling-of-interests and, accordingly, the operations of AHM and OrNda have been
combined in the accompanying condensed consolidated financial statements. The
Summit merger was accounted for as a purchase and, accordingly, their operations
have been included effective upon the date of the merger. The discussion herein
is based upon the combined operations of OrNda and AHM for all periods presented
in the accompanying condensed consolidated financial statements and including
Summit effective April 19, 1994. To enhance understandability, discussion and
analysis of financial condition and results of operations of the separate
companies is included, where necessary. Hereafter, the combined entity of OrNda
and AHM is referred to as the "Company," while the separate operation of OrNda,
prior to the mergers, is referred to as "OrNda." Nonrecurring charges related to
the AHM merger of $30.0 million primarily consisting of severance and benefit
payments, investment advisory and professional fees, and costs of consolidating
management information systems, were recorded in the third quarter of 1994.
Also, in connection with the mergers, the Company extinguished certain senior
secured debt and replaced it with new senior credit facilities. Consequently,
the Company recorded an extraordinary loss of $8.3 million primarily as a result
of the elimination of related debt issuance costs. The Company estimates
approximately $15 million of annualized reduction in expenses due to the
elimination of duplicate overhead and to reductions in malpractice and other
insurance premiums resulting from the mergers. By the end of the fourth quarter
of fiscal 1994, the Company will have begun implementation of the plans
necessary to realize these savings.
In addition to the mergers, the Company's results of operations also have
been impacted by the acquisition of Florida Medical Center ("FMC") , a 459
licensed-bed acute care hospital in Fort Lauderdale, Florida, in June 1993.
Divestiture. Effective in the third quarter of 1994, the Company's
management decided upon a plan of disposition to sell Decatur Hospital, a
120-bed acute care hospital located in Decatur, Georgia. Losses relating to the
future operations of the hospital and the loss on sale totalling $9.8 million
were recorded in the third quarter of 1994. On June 10, 1994, the Company
completed the sale of the property, equipment, and inventory of the hospital for
$6.0 million. The operations of the hospital were not material to the three-and
nine-month periods ended May 31, 1994 and 1993.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 1994 COMPARED WITH THE THREE MONTHS ENDED MAY 31,
1993.
Total revenue for the three months ended May 31, 1994 increased $84.6
million or 34.4% to $330.5 million and earnings before interest, taxes,
depreciation, amortization, minority interest, income (loss) from investments in
Houston Northwest Medical Center and nonrecurring charges ("EBITDA") increased
35.0% to $48.1 million. Because of nonrecurring charges of $40.8 million and an
extraordinary charge of $8.3 million, net of income tax expense, the Company
reported a net loss for the three months ended May 31, 1994 of $36.4 million
compared with net income of $4.7 million for the three months ended May 31,
1993.
The principal reasons for the total revenue growth during this period
compared with the year-earlier period are (i) the inclusion of the total revenue
of FMC amounting to $28.2 million for the three months ended May 31, 1994 not
included in the prior-year period, (ii) the inclusion of the total revenue of
Summit from the date of the merger amounting to $51.6 million not included in
the prior-year period, and (iii) an increase in the Company's admissions,
exclusive of FMC and Summit, of 2.3%. Total surgeries and outpatient volume of
the Company remained relatively flat during the period. The effect of price
increases implemented
F-10
<PAGE> 75
ORNDA HEALTHCORP AND SUBSIDIARIES
by the Company's hospitals was nominal as gross revenue (total revenue before
contractual allowances and other deductions) currently paid by fixed
reimbursement third party payors represented approximately 86.0% of the
Company's total gross revenue. These payors, who generally reimburse providers
of health care services at discounts (often substantial) to providers' listed
charges for services, negotiate (or dictate as in the case of the Medicare
program) price increases exclusive of any price increases implemented by
providers.
The increase in EBITDA for the three months ended May 31, 1994 principally
resulted from the increase in total revenue, discussed above. In connection with
mergers, the Company changed the methodologies used by the previously separate
companies to calculate the allowance for doubtful accounts to conform to a
single method for OrNda and AHM. The Company also changed the methodology for
recognition of charity care expense. As a result of these changes, the
operations of the Company for the three months ended May 31, 1994 were favorably
impacted by $3.3 million. Otherwise, the provision for doubtful accounts as a
percentage of total revenue increased to 7.1% from 6.8% in the prior-year
period. Exclusive of the adjustment to the Company's allowance for doubtful
accounts, the rate of increase in EBITDA was less than the rate of increase in
total revenue, despite cost containment initiatives implemented by the Company,
because (i) rate increases from various fixed reimbursement third party payors
were below the rate of medical-related inflation increases applicable to
salaries, benefits and supplies, and (ii) the percentage of the Company's gross
revenue derived from fixed reimbursement third party payors, increased to 86.0%
from 81.0% in the prior year period, partially offsetting the effect of the
increase in admissions.
Depreciation and amortization for the three months ended May 31, 1994
increased by $5.1 million, as compared to the same period in the prior year,
primarily due to $1.4 million of depreciation and amortization attributable to
the operations of FMC and $2.6 million of depreciation and amortization
attributable to the operations of Summit not included in the prior year.
Interest expense for the same period increased by $4.2 million as a result of
the financing of these transactions.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No.
109). The majority of the Company's deferred tax assets related to approximately
$285.6 million of tax attribute carryforwards at May 31, 1994 which the Company
has available to offset future taxable income. The AHM merger (see Note 3)
caused an "ownership change" within the meaning of Section 382 (g) of the
Internal Revenue Code (the "IRC") for both OrNda and AHM. Consequently,
allowable federal deductions relating to tax attribute carryforwards of OrNda
and AHM arising in periods prior to the merger are thereafter subject to annual
limitations (OrNda -- $19 million; AHM -- $16 million). For AHM, such tax
attribute carryforwards can only be applied against the prospective taxable
income of the entities that previously comprised AHM. These limitations may be
increased for "built-in-gains," as defined under the IRC, recognized during a
five-year period following the date of the merger. Management assesses the
realizability of the deferred tax assets on at least a quarterly basis and
currently is satisfied, despite the annual limitations, that it is more likely
than not that the deferred tax assets recorded at May 31, 1994 will be realized
through reversal of deferred tax liabilities.
For the three months ended May 31, 1994, the Company recorded income tax
expense of $515,000 on a pretax loss of $27.5 million primarily due to state
income taxes and federal alternative minimum tax.
NINE MONTHS ENDED MAY 31, 1994 COMPARED WITH THE NINE MONTHS ENDED MAY 31, 1993.
Total revenue for the nine months ended May 31, 1994 increased $180.4
million or 25.7% to $882.9 million and EBITDA increased 32.6% to $127.9 million.
Because of the nonrecurring charges and extraordinary item recorded in the third
quarter of fiscal 1994, the Company reported a net loss for the nine months
ended May 31, 1994 of $31.2 million compared with net income of $10.8 million
for the nine months ended May 31, 1993. Historical and pro forma income and
earnings per share before extraordinary item, exclusive of expenses directly
attributed to the merger, nonrecurring special executive compensation and loss
on asset sales
F-11
<PAGE> 76
ORNDA HEALTHCORP AND SUBSIDIARIES
for the nine months ended May 31, 1994 assuming the Summit merger occurred
September 1, 1993 is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
1994 1994
---------- ---------
<S> <C> <C>
Income before extraordinary item, as adjusted for preferred stock
dividends...................................................... $ 17,774 $24,168
Income per share before extraordinary item....................... $ 0.47 $ 0.54
</TABLE>
The principal reasons for the total revenue growth during this period
compared with the prior-year period are (i) the inclusion of the total revenue
of FMC amounting to $82.3 million for the nine months ended May 31, 1994 not
included in the prior year period; (ii) the inclusion of the total revenue of
Summit from the date of the merger amounting to $51.6 million not included in
the prior year period; (iii) an increase in the Company's admissions, exclusive
of FMC and Summit, of 6.2%; and, (iv) an increase in outpatient revenue of
10.6%, exclusive of FMC and Summit, representing a volume increase of
approximately 4.6%. Total surgeries remained relatively flat during the period.
The increase in EBITDA of 32.6% for the nine months ended May 31, 1994
principally resulted from the increase in total revenue discussed above and cost
containment initiatives implemented by the Company during the year.
Depreciation and amortization for the nine months ended May 31, 1994
increased by $11.7 million, as compared to the same period in the prior year,
primarily due to $4.0 million of depreciation and amortization attributable to
the operations of FMC and $2.6 million of depreciation and amortization
attributable to the operations of Summit. Interest expense for the same periods
increased by $9.4 million as a result of the financing of these transactions.
For the nine months ended May 31, 1994, the Company recorded income tax
expense of $1.0 million on a pretax loss of $21.9 million primarily due to
issues previously discussed.
OTHER
In December 1993, the Company granted options to purchase 500,000 shares of
common stock to certain officers under the provisions of the Company's 1991
stock option plan. The option exercise prices range from $7.75 to $10.75. During
the three and nine months ended May 31, 1994, the Company recorded $1.0 million,
and $2.5 million, respectively, of noncash expense related to the issuance of
such options. The expense related to the issuance of such options is reflected
in the Company's Statement of Operations as special executive compensation.
Minority interest expense represents the amount paid to physicians pursuant
to the Company's joint venture arrangements. Currently, four of the Company's
hospitals are joint ventured with physicians. Minority interest expense
decreased by $1.1 million for the three months ended May 31, 1994 compared to
the prior year period primarily due to the buyout of a joint venture arrangement
at a hospital for $9.7 million in March 1994. Minority interest expense
increased $1.2 million for the nine months ended May 31, 1994 compared to the
prior year period primarily due to increased EBITDA at the joint-ventured
hospitals. The increase would have been greater but for the buyout of a joint
venture as previously discussed.
The Company's investment in the common stock of Houston Northwest Medical
Center ("HNW") was divested on February 28, 1994. Subsequent to February 28,
1994, the Company is not required to account for the investment on the equity
method. Consequently, HNW losses, recorded in previous periods, related to the
Company's investment in HNW common stock have not been recorded. The third
quarter of fiscal 1994 reflected $3.2 million of income from the Company's
investments in HNW. Such income primarily
F-12
<PAGE> 77
ORNDA HEALTHCORP AND SUBSIDIARIES
represented $3.1 million of income (of which $2.6 million is noncash) related to
the Company's investment in HNW redeemable preferred stock. The third quarter of
1993 included $691,000 of losses related to the HNW investments which was
comprised of $3.6 million of losses related to the investment in common stock
offset by $2.8 million of income related to redeemable preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1994, the Company's primary source of liquidity was $16.3
million in cash, and availability under the Credit Agreement of $138.0 million
for general corporate purposes and $90.3 million for acquisitions. At May 31,
1994, the working capital of the Company increased to $52.3 million from $26.2
million at August 31, 1993. Total assets during that period increased to $1,790
million from $1,205 million. The changes in working capital and total assets
primarily are attributable to the Company's purchase of Summit on April 19,
1994. In connection with this purchase, the Company used $256.7 million of funds
available under the Credit Agreement in addition to issuing 7.5 million shares
of the Company's common stock.
On May 5, 1994, the Company announced it had entered into a letter of
intent to acquire Fountain Valley Regional Hospital and Medical Center, a
413-licensed bed acute care hospital in Fountain Valley, California. The total
purchase price is expected to be approximately $145 million, of which
approximately $95 million will be paid in cash. The transaction, which is
expected to be completed during the fourth quarter of fiscal 1994, is subject to
execution of a definitive agreement, consent of the lenders under the Credit
Agreement and other customary closing conditions.
Management believes that the Company's cash and capital resources, and cash
flow from operations, will be sufficient to finance current and forecasted
operations. The Company is, however, actively seeking potential acquisitions in
addition to Fountain Valley and, depending upon the size and terms of any such
acquisitions, additional financing or equity capital may be required.
F-13
<PAGE> 78
FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
-------------------
1993 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net patient revenue...................................................... $53,031 $58,356
Medical building rent and other revenue.................................. 4,321 2,824
------- -------
Total operating revenue........................................ 57,352 61,180
------- -------
Operating expenses
Payroll and benefits................................................... 28,413 31,103
Supplies............................................................... 8,866 9,609
Purchased services..................................................... 5,607 6,901
Other.................................................................. 3,681 3,347
Depreciation and amortization.......................................... 4,058 4,017
Interest............................................................... 2,463 2,424
Provision for bad debts................................................ 987 891
------- -------
Total operating expenses....................................... 54,075 58,292
------- -------
Net income............................................................... $ 3,277 $ 2,888
======= =======
</TABLE>
See the accompanying notes
F-14
<PAGE> 79
FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1993 1994
----------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................ $ 8,917 $ 5,978
Patient accounts receivable, less estimated allowances and
uncollectibles of $20,314 and $24,128......................... 21,145 21,628
Inventory........................................................ 1,763 1,713
Prepaid expenses................................................. 1,084 1,743
Other current assets............................................. 2,187 2,033
----------- -------------
TOTAL CURRENT ASSETS..................................... 35,096 33,095
Property and equipment:
Land and improvements............................................ 3,298 3,298
Buildings and improvements....................................... 62,537 64,171
Equipment........................................................ 24,125 23,877
Equipment under capital leases................................... 11,840 12,718
Construction in progress......................................... 614 --
----------- -------------
102,414 104,064
Less accumulated depreciation and amortization................... 53,898 57,608
----------- -------------
Net property and equipment....................................... 48,516 46,456
Other assets
Other assets..................................................... 696 981
Deferred charges, net of accumulated amortization of $1,240 and
$1,372........................................................ 1,270 1,052
Excess purchase price and intangibles, net of accumulated
amortization of $512 and $674................................. 892 730
----------- -------------
TOTAL OTHER ASSETS....................................... 2,858 2,763
----------- -------------
TOTAL ASSETS............................................. $ 86,470 $ 82,314
========= ==========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Current portion of obligations under capital leases.............. $ 1,673 $ 1,696
Current portion of long-term debt................................ 5,121 3,190
Accounts payable................................................. 4,914 7,491
Reimbursement settlements due to third-party payors.............. 2,140 770
Accrued expenses................................................. 6,807 5,936
Income taxes payable............................................. 589 (4)
Accrued distributions to partners................................ 877 367
Deferred income taxes............................................ 736 625
----------- -------------
TOTAL CURRENT LIABILITIES................................ 22,857 20,071
Reimbursement settlements due to third-party payors.............. 1,623 1,623
Deferred income taxes............................................ 3,148 2,901
Obligations under capital leases, less current portion........... 3,522 3,536
Long-term debt, less current portion............................. 49,290 47,598
Other liabilities................................................ 485 318
----------- -------------
TOTAL LIABILITIES........................................ 80,925 76,047
----------- -------------
Partners' equity................................................. 5,545 6,267
----------- -------------
TOTAL LIABILITIES AND PARTNERS' EQUITY................... $ 86,470 $ 82,314
========= ==========
</TABLE>
See the accompanying notes
F-15
<PAGE> 80
FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
------------------
1993 1994
------- ------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................................ $ 3,277 $2,888
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................... 4,058 4,017
Provision for bad debts................................................. 987 891
Gain on termination of lease............................................ (534) --
Changes in operating assets and liabilities:
Increase in patient accounts receivable.............................. (1,460) (1,374)
(Increase) decrease in supplies...................................... (41) 50
Increase in other current assets..................................... (835) (505)
Increase (decrease) in noncurrent other assets....................... (293) (212)
Increase in accounts payable......................................... 1,011 2,577
Decrease in accrued expenses......................................... (540) (871)
Decrease in health care insurance programs settlements............... 1,605 (1,370)
Decrease in deferred revenues........................................ (1,203) --
Decrease in income taxes payable..................................... (4) (593)
Decrease in deferred intangibles..................................... -- (358)
(Decrease) increase in other liabilities............................. (322) 5
------- ------
Net cash provided by operating expenses................................. 5,706 5,145
------- ------
INVESTING ACTIVITY:
Capital expenditures (net of disposals)................................... (598) (91)
------- ------
Net cash used in investing activity..................................... (598) (91)
------- ------
FINANCING ACTIVITIES:
Repayment of long-term debt and capital leases............................ (5,926) (5,317)
Distributions to partners................................................. (3,726) (2,676)
Withdrawals from partnership.............................................. (53) --
------- ------
Net cash used in financing activities................................... (9,705) (7,993)
------- ------
NET DECREASE IN CASH...................................................... (4,597) (2,939)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................ 14,122 8,917
------- ------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................. $ 9,525 $5,978
======= ======
Supplemental disclosure of cash flow information
Cash paid during the period for interest.................................. $ 2,359 $2,522
</TABLE>
See the accompanying notes
F-16
<PAGE> 81
FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 1994
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Fountain Valley
Medical Development Company (the "Partnership") have been prepared in accordance
with generally accepted accounting principles for interim financial information.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the fiscal year 1994
interim period presented are not necessarily indicative of the results that may
be expected for the twelve months ended October 31, 1994. The balance sheet at
October 31, 1993, was derived from the audited financial statements of the
Partnership.
2. INCOME TAXES
The Partnership is not subject to federal or state income taxes. The
results of the Partnership's operations are allocated to and included in the tax
returns of the partners. Accordingly, no income tax provision is reflected in
the accompanying financial statements. Net income for financial reporting
purposes differs from taxable income to be reported by the partners due to
differences between tax accounting methods and generally accepted accounting
principles which are used for financial reporting.
3. SUBSEQUENT EVENT
On May 5, 1994, the Partnership entered into a letter of intent to be
acquired by OrNda HealthCorp for $145 million. The transaction is subject to
execution of a definitive agreement, consent of certain of OrNda HealthCorp's
lenders and other customary closing conditions.
F-17
<PAGE> 82
[This page intentionally left blank]
F-18
<PAGE> 83
INDEPENDENT AUDITORS' REPORT
Executive Committee and Partners
Fountain Valley Medical Development Company
and Subsidiaries
Fountain Valley, California
We have audited the accompanying consolidated balance sheets of Fountain Valley
Medical Development Company and Subsidiaries as of October 31, 1993 and 1992,
and the related consolidated statements of income, partners' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated 1993 and 1992 financial statements referred to
above present fairly, in all material respects, the financial position of
Fountain Valley Medical Development Company and Subsidiaries at October 31, 1993
and 1992, and the results of its operations and its cash flows for the years
then ended, in conformity with generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial statements, the Company
changed its method of accounting for income taxes in 1993.
BDO SEIDMAN
January 21, 1994
F-19
<PAGE> 84
FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
1993 1992
-------- -------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents..................................................... $ 8,917 $14,122
Restricted cash (Note 7)...................................................... -- 583
Patient accounts receivable, less estimated allowances and uncollectibles of
$20,314 and $19,828 (Note 2)................................................ 21,145 19,822
Inventory (Note 2)............................................................ 1,763 1,877
Prepaid expenses.............................................................. 1,084 1,093
Other current assets.......................................................... 2,187 1,059
-------- -------
Total current assets................................................... 35,096 38,556
-------- -------
Property and equipment (Note 3)
Land and improvements......................................................... 3,298 3,298
Buildings and improvements.................................................... 62,537 59,733
Equipment..................................................................... 24,125 26,785
Equipment under capital leases................................................ 11,840 9,200
Construction in progress...................................................... 614 528
-------- -------
102,414 99,544
Less accumulated depreciation and amortization................................ 53,898 49,849
-------- -------
Net property and equipment............................................. 48,516 49,695
-------- -------
Other assets
Other assets.................................................................. 696 1,101
Deferred charges, (net of accumulated amortization of $1,240 and $835)........ 1,270 1,221
Excess purchase price and intangibles, (net of accumulated amortization of
$512 and $189).............................................................. 892 1,215
-------- -------
Total other assets..................................................... 2,858 3,537
-------- -------
$ 86,470 $91,788
========= ========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities
Current portion of obligations under capital leases (Note 3).................. $ 1,673 $ 1,734
Current portion of long-term debt (Note 2).................................... 5,121 6,306
Accounts payable.............................................................. 4,914 4,441
Reimbursement settlements due to third-party payors........................... 2,140 3,505
Accrued expenses.............................................................. 6,807 6,048
Income taxes payable (Note 4)................................................. 589 --
Accrued distributions to partners............................................. 877 1,844
Deferred revenue (Note 7)..................................................... -- 1,661
Deferred income taxes (Note 4)................................................ 736 --
-------- -------
Total current liabilities.............................................. 22,857 25,539
Reimbursement settlements due to third-party payors............................. 1,623 1,077
Deferred income taxes (Note 4).................................................. 3,148 3,160
Obligations under capital leases, less current portion (Note 3)................. 3,522 2,112
Long-term debt, less current portion (Note 2)................................... 49,290 54,277
Deferred revenue (Note 7)....................................................... -- 698
Other liabilities............................................................... 485 976
-------- -------
Total liabilities...................................................... 80,925 87,839
-------- -------
Contingencies (Note 6)
Partners' equity (Note 5)....................................................... 5,545 3,949
-------- -------
$ 86,470 $91,788
========= ========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-20
<PAGE> 85
FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER
31,
---------------------
1993 1992
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net patient service revenue............................................ $112,444 $103,641
Medical building rent and other revenue (Note 7)....................... 7,915 8,734
-------- --------
Total operating revenue...................................... 120,359 112,375
-------- --------
Operating expenses
Payroll and benefits................................................. 58,270 53,807
Supplies............................................................. 18,116 16,733
Purchased services................................................... 11,740 11,062
Other................................................................ 8,351 7,560
Depreciation and amortization........................................ 8,131 7,770
Interest............................................................. 4,980 5,510
Provision for bad debts.............................................. 2,738 2,390
-------- --------
Total operating expenses..................................... 112,326 104,832
-------- --------
Income from operations................................................. 8,033 7,543
Nonoperating income (Note 7)........................................... 698 643
-------- --------
Income before provision for income taxes and cumulative effect of
change in accounting principle....................................... 8,731 8,186
Provision for income taxes (Note 4).................................... 754 113
-------- --------
Income before cumulative effect of change in accounting principle...... 7,977 8,073
Cumulative effect on prior years of change in accounting principle
(Note 4)............................................................. 1,368 --
-------- --------
Net income................................................... $ 6,609 $ 8,073
======== ========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-21
<PAGE> 86
FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED
OCTOBER 31,
1993 AND 1992
(NOTE 2)
--------------
(IN THOUSANDS)
<S> <C>
Partners' equity, at November 1, 1991.......................................... $1,932
Add:
Net income................................................................... 8,073
Less:
Distributions to partners.................................................... 6,056
-------
Partners' equity, at October 31, 1992.......................................... 3,949
Add:
Net income................................................................... 6,609
Less:
Distributions to partners.................................................... 4,957
Withdrawals from partnership................................................. 56
-------
Partners' equity, at October 31, 1993.......................................... $5,545
=======
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-22
<PAGE> 87
FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (NOTE 8)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER
31,
-------------------
1993 1992
------- -------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................................... $ 6,609 $ 8,073
------- -------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................. 8,131 7,770
Provision for bad debt......................................................... 2,738 2,390
Income from investment in partnership.......................................... -- (75)
Gain on sale of equipment...................................................... (23) (2)
Gain on termination of lease................................................... (698) (643)
(Increase) decrease in assets:
Patient accounts receivable.................................................... (4,061) (498)
Inventory...................................................................... 114 (73)
Prepaid expenses............................................................... 9 (134)
Other assets................................................................... (1,176) (572)
Increase (decrease) in liabilities:
Accounts payable............................................................... 473 (2,616)
Reimbursement settlements due to third-party payors............................ (819) 3,618
Accrued expenses............................................................... 759 289
Income taxes payable........................................................... 589 (161)
Deferred income taxes.......................................................... 724 (330)
Deferred revenue............................................................... (1,661) 1,661
Other liabilities.............................................................. (491) 443
------- -------
Total adjustments.................................................................. 4,608 11,067
------- -------
Net cash provided by operating activities.......................................... 11,217 19,140
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid on purchase of investment in partnership............................... -- (166)
Proceeds from sale of equipment.................................................. 27 6
Distribution from investment in partnership...................................... -- 500
Capital expenditures............................................................. (3,112) (3,288)
Due from affiliate............................................................... -- 371
Restricted cash.................................................................. 583 (583)
------- -------
Net cash used in investing activities.............................................. (2,502) (3,160)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations............................... (1,767) (1,526)
Principal payments on long-term debt............................................. (6,450) (6,095)
Proceeds from long-term debt..................................................... 278 389
Distributions paid to partners................................................... (5,925) (5,355)
Withdrawals from partnership..................................................... (56) --
------- -------
Net cash used in financing activities.............................................. (13,920) (12,587)
------- -------
Net (decrease) increase in cash and cash equivalents............................... (5,205) 3,393
CASH AND CASH EQUIVALENTS, beginning of year....................................... 14,122 10,729
------- -------
CASH AND CASH EQUIVALENTS, end of year............................................. $ 8,917 $14,122
======== ========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-23
<PAGE> 88
FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements include the
accounts of the parent, Fountain Valley Medical Development Company (the
"Company"), a California limited partnership and its wholly owned California
corporate subsidiaries, Fountain Valley Regional Hospital and Medical Center
(the "Hospital"), MCS Administrative Services, Inc. ("MCS"), Fountain Valley
Health Care ("FVHC"), and Fountain Valley Imaging Corporation ("FVI Corp."),
Fountain Valley Outpatient Surgery Center ("FVOSC"), a California limited
partnership, and Fountain Valley Imaging Center ("FVIC"), a California limited
partnership. FVHC was formed in January 1992 and FVI Corp. was formed in June
1993. FVOSC was an operating division of the Company and on January 1, 1992
became a separate legal entity and is now included as a subsidiary. The Company
owns a 99% limited partnership interest in FVOSC and FVHC owns the sole 1%
general partnership interest in FVOSC. The Company was a 50% partner in FVIC and
accounted for this joint venture under the equity method of accounting through
March 31, 1992. Effective April 1, 1992, the Company purchased the remaining 50%
ownership in FVIC and includes FVIC in consolidation. The Company owns a 99%
limited partnership interest in FVIC and FVI Corp. owns the sole 1% general
partnership interest in FVIC. All significant intercompany transactions and
stockholdings have been eliminated.
Third-Party Reimbursement Programs. Approximately 47% and 44% of the gross
revenue of the Hospital is derived from patient charges under the Medicare and
Medi-Cal programs for 1993 and 1992. The provisions of these agreements
stipulate that services are to be reimbursed at prospective rates, daily rates
or costs rather than regular rates. The estimated rates or costs are paid to the
Hospital at a tentative rate, and final reimbursement for these services is
determined after submission of annual cost reports by the Hospital and audits by
the program intermediaries. Provision for estimated final reimbursement has been
provided for in the financial statements. The Hospital also provides, as an
adjustment to its provision for contractual allowances, for the results of prior
year audits by agencies administering the programs and agreed upon by the
Hospital in the year of the audit. Cost reports have been filed through the 1992
fiscal year and audited through the 1991 fiscal year.
Allowances and Uncollectibles. The Hospital records its accounts
receivable at their gross amount with an appropriate allowance until collection.
Inventory. Inventory is valued at the lower of cost (first-in, first-out
basis) or market.
Property and Equipment. Property and equipment are stated at cost and are
depreciated using accelerated and straight-line methods over the estimated
useful lives as follows:
<TABLE>
<CAPTION>
ESTIMATED
CLASSIFICATION USEFUL LIVES
----------------------------------------------------------------------- -------------
<S> <C>
Land improvements...................................................... 5 to 15 years
Buildings and improvements............................................. 3 to 30 years
Equipment.............................................................. 3 to 15 years
Equipment under capital leases......................................... 5 to 10 years
</TABLE>
Maintenance and repairs are charged to expense as incurred. Expenditures which
materially increase the value of properties or extend useful lives are
capitalized.
Deferred Charges. Deferred charges consist primarily of deferred loan fees
which are amortized over the life of the related loans. Also included are
capitalized costs incurred for the start-up of additional operating units. These
costs are amortized over five years.
Excess Purchase Price and Intangibles. The excess purchase price of FVIC
which is amortized over two years for medical records portion and forty years
for excess purchase price over book value relates to the purchase of the
remaining 50% ownership purchased in 1992.
F-24
<PAGE> 89
Net Patient Service Revenue. Net patient service revenue is reported at
the estimated net realizable amounts from patients, third-party payors, and
others for services rendered, including estimated retroactive adjustments under
reimbursement agreements with third-party payors. Retroactive adjustments are
accrued on an estimated basis in the period the related services are rendered
and adjusted in future periods as final settlements are determined.
Income Taxes. The Company and its subsidiaries file separate federal and
California income tax returns. Investment and job tax credits are recorded by
the subsidiaries under the flow-through method of accounting as a reduction of
the provision for income taxes when the credits are realized.
Related party receivables/payables relating to rent, which eliminate on a
consolidated basis, are accounted for on a cash basis for income tax purposes.
Employee Savings Plan. Under the Employee Savings Plan (the "Plan"),
eligible participating employees of the Company may elect to contribute up to
10% of their prior calendar year compensation to a trust for investment in
marketable securities. The Company contributes amounts equal to 50% of up to 6%
of their respective participants' contributions, which are also invested in the
trust fund.
The contributions are fully vested to the participants after seven years of
credited service. The Company's contribution to the Plan was $576,000 and
$445,000 for the years ended October 31, 1993 and 1992.
Self-Insurance. The Company provides certain benefits to its employees and
others under health and other insurance programs and is self-insured for certain
benefits under such programs. In the opinion of management, adequate provision
has been made in the financial statements for losses relating to all known and
estimated claims as of October 31, 1993 and 1992. MCS Administrative Services,
Inc. is the administrator of the program.
Reclassifications. Certain amounts in 1992 have been reclassified to
conform to current year presentation. The reclassifications have no effect upon
net income as previously reported in 1992.
Cash and Cash Equivalents. The Company invests excess cash in treasury
bills, short term commercial paper and a money market account, all of which
mature within 90 days. These are stated at cost, which approximates market.
F-25
<PAGE> 90
FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
The Company owns and operates a 289 bed for profit acute care hospital,
medical office buildings, an outpatient surgery center, a transitional care unit
and a geopsychiatric unit in the Southern California area. Revenues of the
Company are derived from hospital operations and suite rentals within the
medical office buildings.
2. LONG-TERM DEBT
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------
1993 1992
------- -------
(IN THOUSANDS)
<S> <C> <C>
First trust deed collateralized by original hospital building, land,
equipment, inventory and accounts receivable and assignment of hospital
stock; interest payable quarterly based on the "alternate base rate III,"
as defined within the Credit Agreement; the rate at October 31, 1993 was
6%.
A) Term Loan: Principal balance due in monthly installments of $291,667 for
year ending October 31, 1994; $416,667 for year ending October 31, 1995;
$633,333 for years ending October 31, 1996 and 1997; $650,000 for nine
months ending July 31, 1998 and last installment due July 31, 1998.
Interest at Alternate Base Rate III plus 1% per annum.................... $33,000 $36,500
B) Revolving Facility: Principal of up to $15,000,000 due November 1, 1995.
Interest at Alternate Base Rate III plus .75% per annum.................. 10,000 10,000
Note payable, payable in quarterly installments of $166,667 plus interest
at 6% due January 1, 1995................................................ 833 1,500
Notes payable, collateralized by equipment, payable $87,000 monthly,
including interest of approximately 10% due at various dates through
1997..................................................................... 2,302 2,955
First trust deeds collateralized by medical office buildings, payable
$91,000 monthly, including interest at 12.125%, due November 1, 1994..... 8,276 9,531
Note payable, collateralized by equipment, payable $16,000 monthly,
principal only, due in 1993.............................................. -- 97
------- -------
54,411 60,583
Less current portion....................................................... 5,121 6,306
------- -------
$49,290 $54,277
======= =======
</TABLE>
On August 20, 1990, the Company obtained a $50,000,000 senior secured
revolving credit facility (the "Revolving Facility"), of which $40,000,000
converted to a term loan (the "Term Loan") upon the execution of a Second
Amendment to the Credit Agreement dated October 31, 1991, with monthly principal
payments commencing November 1, 1991 through July 31, 1998. The Revolving
Commitment increased from $10,000,000 to $15,000,000 and is due November 1,
1995. The Company must pay a commitment fee on any unused portion of the
revolving commitment at a rate of 1/2 of 1% per annum.
As part of the Credit Agreement, the Company is required to maintain
certain financial and other covenants including a restriction on the amount of
distributions made to the partners. As of October 31, 1993 and for the year then
ended, the Company was not in compliance with two of these covenants.
The Company received a bank waiver for the two covenants they were not in
compliance with at October 31, 1993 and for the year then ended.
F-26
<PAGE> 91
FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principal maturities on long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending October 31, (IN THOUSANDS)
<S> <C>
1994........................................................ $ 5,121
1995........................................................ 14,094
1996........................................................ 18,083
1997........................................................ 7,802
1998........................................................ 9,311
-----------
Total........................................ $ 54,411
===========
</TABLE>
3. CAPITAL LEASES
The Company is currently leasing various pieces of equipment under capital
leases due on various dates through 1998. Approximately $11,840,000 and
$9,200,000 of equipment has been capitalized, and $6,980,000 and $5,690,000 of
amortization has been taken as of October 31, 1993 and 1992.
The following is a schedule by years of future minimum lease payments under
the capital leases, together with the present value of the net minimum lease
payments as of October 31, 1993:
<TABLE>
<CAPTION>
Year ending October 31, (IN THOUSANDS)
<S> <C>
1994........................................................ $2,043
1995........................................................ 1,468
1996........................................................ 954
1997........................................................ 765
1998........................................................ 693
Thereafter.................................................. 30
-------
Total net minimum lease payments............................ 5,953
Less amount representing interest........................... 758
-------
Present value of net minimum lease payments................. 5,195
Less current portion of obligations under capital leases.... 1,673
-------
Obligations under capital leases............................ $3,522
===========
</TABLE>
4. PROVISION FOR INCOME TAXES
Effective November 1, 1992, the Company changed its method of accounting
for income taxes from the deferred method to the liability method required by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." As permitted under the new rule, prior years' financial statements have
not been restated. The adoption of the new standard had no effect on the tax
provision for 1993. (The cumulative effect of this adoption was a $1,368,000
decrease in net income.)
F-27
<PAGE> 92
FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for federal and state income taxes consists of the following:
<TABLE>
<CAPTION>
1993 1992
------ -----
(IN THOUSANDS)
<S> <C> <C>
Current
Federal............................................. $1,059 $ 263
State............................................... 339 180
------ -----
1,398 443
------ -----
Deferred
Federal............................................. (543) (280)
State............................................... (101) (50)
------ -----
(644) (330)
------ -----
$ 754 $ 113
====== =====
</TABLE>
The variation in the customary relationship between income tax expense and
pretax accounting income arises because the Company consists of partnerships and
corporations and therefore income taxes are paid by the individual partners and
corporations.
The tax effects of the significant temporary differences which comprise the
deferred tax assets and liabilities at October 31, 1993 are as follows:
<TABLE>
<S> <C>
ASSETS
Provision for doubtful accounts................................ $ 476
Accrued rent................................................... 169
------
Gross deferred tax assets........................................ 645
------
LIABILITIES
Section 481.................................................... 3,753
Medicare settlement............................................ 443
Depreciation................................................... 333
------
Gross deferred tax liabilities................................... 4,529
------
$3,884
======
</TABLE>
5. PARTNERSHIP UNITS HELD FOR RESALE AND NOTES RECEIVABLE FROM PARTNERS FOR SALE
OF UNITS
In February 1985, the Partnership purchased certain partnership units from
existing partners. The Partnership initially paid $4,431,000 in February 1985
for approximately 5% of the units then outstanding. Through October 31, 1993,
the Company purchased a total of approximately $6,131,000 partnership units and
resold a total of approximately $3,545,000 partnership units. All resales have
been at the same per unit price as the Partnership paid in February 1985. The
majority of the units were sold in exchange for notes receivable from the
partners. The notes receivable from partners were approximately $2,162,000 and
$2,361,000 as of October 31, 1993 and 1992 and are recorded as a reduction of
equity.
6. CONTINGENCIES
The Company and Hospital maintain a $500,000 per occurrence medical
malpractice insurance policy. Occurrence basis insurance covers claims that
occur during the policy term regardless of when the claim was reported.
F-28
<PAGE> 93
FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, the Company and Hospital have claims-made medical malpractice
insurance policies which cover the Company and Hospital for claims from $500,000
to $20,000,000 with 7-year prepaid discovery. Claims-made insurance covers only
those claims covered by the policy and reported to the insurance carrier during
the policy term.
As of October 31, 1993, the Hospital has no malpractice loss accruals. The
Hospital and the Company have a deductible reserve exposure of up to $247,000
for deductible liability on claims made, but not settled as of October 31, 1993.
During a prior year, the Company was joined by 118 other hospitals, as well
as another organization, in an action which was originally against four workers'
compensation insurance carriers and three other defendants alleging conspiracy
to suppress prices paid by workers' compensation insurance companies.
The action and a subsequent counterclaim between the defendants were
settled in December 1993. The settlement resulted in no liability to the
Company.
7. LEASE REVENUE
The Company's principle leasing activities consist of renting suites in
four medical office buildings. Lease terms for the medical office buildings
range from 1 to 5 years. Rental income for the years ended October 31, 1993 and
1992 was approximately $5,144,000 and $6,048,000. This rental income includes
the rent from the regional care center ("RCC") whose lease was terminated
effective June 1, 1992.
The following is a schedule of future minimum lease revenue for the four
medical office building leases:
<TABLE>
<CAPTION>
Year ending October 31, (IN THOUSANDS)
<S> <C>
1994........................................................ $ 3,953
1995........................................................ 3,287
1996........................................................ 2,389
1997........................................................ 1,554
1998........................................................ 621
-----------
Total............................................. $ 11,804
===========
</TABLE>
The Company leased to the RCC under a long-term lease agreement which the
tenant terminated effective June 1, 1992. An agreement was arrived at in which
the tenant agreed to 1) pay thirteen months additional rent and expenses from
the date of termination, 2) leave all the equipment valued at $206,000 to the
Company, and 3) leave all the leasehold improvements valued at $1,135,000 to the
Company. The Company agreed to return to the lessee any rents paid on the RCC
during the thirteen month period if a nonrelated party rented the facility, as
adjusted for various expenses to the Company. Additionally, a restricted cash
account of approximately $583,000 was established with a portion of the cash
paid by the lessee in the settlement in the event the facility was leased during
the thirteen month period. As the RCC was not leased during the thirteen month
period, the restricted cash became unrestricted during the year ended October
31, 1993. The Company recorded deferred revenue and recognized the rent and
value of the leasehold improvements ratably on a monthly basis over the thirteen
month period which expired during the year ended October 31, 1993. Rent is
included in medical building rent and other revenue. The leasehold improvements
and equipment value is included in nonoperating income.
F-29
<PAGE> 94
FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------
1993 1992
------ ------
(IN THOUSANDS)
<S> <C> <C>
Cash paid during the period for:
Interest (net of interest capitalized of $25 in 1993 and $17 in
1992)......................................................... $5,001 $5,838
Income taxes..................................................... $ 743 $ 480
</TABLE>
Schedule of non-cash investing and financing activities (in thousands):
Capital lease obligations of approximately $2,178 and $1,522 were incurred
when the Company entered into leases for new equipment in 1993 and 1992.
Lease settlement of $1,135,000 in leasehold improvements and $206,000 in
equipment.
Fifty percent interest in FVIC purchased included a note payable of
$1,834,000.
F-30
<PAGE> 95
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Investment Considerations.............. 10
Use of Proceeds........................ 14
Capitalization......................... 16
Selected Historical Financial Data..... 17
Selected Operating Statistics.......... 21
Business............................... 22
Properties............................. 27
Management............................. 29
Description of the Notes............... 33
Underwriting........................... 50
Legal Matters.......................... 51
Experts................................ 51
Available Information.................. 51
Incorporation of Certain Documents by
Reference............................ 51
Index to Financial Statements.......... 53
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$125,000,000
[LOGO]
ORNDA
HEALTHCORP
11 3/8% SENIOR SUBORDINATED
NOTES DUE 2004
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SALOMON BROTHERS INC
CITICORP SECURITIES, INC.
AUGUST 16, 1994
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 96
APPENDIX TO ELECTRONIC FORMAT DOCUMENT
--------------------------------------
A map displaying the approximate geographic location of the Company's
hospitals is displayed on page 2 of the prospectus. This map appears in the
paper format of the document and not in this electronic filing.
