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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X] SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended August 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the
Transition period from __________ to __________
Commission file number: 1-11591
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ORNDA HEALTHCORP
(Exact name of Registrant as specified in its charter)
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DELAWARE 75-1776092
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3401 West End Avenue, Nashville, Tennessee 37203
(Address of principal executive offices) (Zip Code)
(615) 383-8599
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of October 31, 1996, there were 58,362,456 shares of the Registrant's common
stock, $.01 par value, outstanding. The aggregate market value of the shares of
common stock held by non-affiliates of the Registrant, based on the $27.25
closing price of these shares on the New York Stock Exchange on October 31,
1996, was approximately $1.351 billion.
DOCUMENTS INCORPORATED BY REFERENCE
None
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<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Business........................................................... 1
Item 2. Properties.........................................................31
Item 3. Legal Proceedings..................................................33
Item 4. Submission of Matters to a Vote of Security-Holders................33
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
...................................................................34
Item 6. Selected Financial Data............................................35
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................36
Item 8. Financial Statements and Supplementary Data........................45
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................45
PART III
Item 10. Directors and Executive Officers of the Registrant.................46
Item 11. Executive Compensation.............................................50
Item 12. Security Ownership of Certain Beneficial Owners and Management.....57
Item 13. Certain Relationships and Related Transactions.....................58
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...60
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PART I
Item 1. Business.
The Company(1)
The Company is a provider of health care services in the United States,
delivering a broad range of inpatient and outpatient health care services in 15
states, primarily in urban and suburban communities in the southern and western
United States. At August 31, 1996, the Company operated 49 general acute care
hospitals, six surgery centers, numerous outpatient and specialty clinics, one
psychiatric hospital and a managed health care Medicaid plan (the "Medicaid
HMO") with approximately 34,000 participants.
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's surgery centers provide a
cost-effective alternative to inpatient care for the performance of minor
surgeries. Certain of the Company's hospitals offer other specialized and
community-based services, including cardiac surgery, home health services,
pediatric care, rehabilitation, AIDS treatment and clinics specializing in the
treatment of industrial accidents and women's health. The Company also operates
the Medicaid HMO pursuant to which the Company currently provides health care
services, under fixed price contracts, to approximately 34,000 principally
indigent members of the Arizona Health Care Cost Containment System.
The Company has expanded its service capabilities and broadened its
geographic presence in key geographic areas through a series of strategic
acquisitions of hospital management companies and individual facilities and
medical centers over the last three years. These acquisitions have provided the
basis for the Company's strategy of developing integrated health care delivery
networks to provide cost-effective, quality health care services.
The Company was incorporated under the laws of the State of Delaware in
1981. The Company's principal executive offices are located at 3401 West End
Avenue, Nashville, Tennessee 37203 and its telephone number is (615) 383-8599.
Recent Developments-Proposed Merger
On October 16, 1996, the Company entered into a definitive Agreement
and Plan of Merger with Tenet Healthcare Corporation ("Tenet") and OHC
Acquisition Co., a wholly-owned subsidiary of Tenet ("Merger Sub"), pursuant to
which, subject to the terms and conditions set forth therein, Merger Sub will
merge with and into the Company (the "Merger"). It is expected that the
transaction will be tax-free and accounted for as a pooling-of-interests. Under
the terms of the Agreement, which was approved by the Boards of Directors of the
Company and Tenet, the Company's stockholders will receive in the Merger 1.35
shares of common stock of Tenet and the associated preferred stock purchase
rights in exchange for each
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(1)The term "the Company" as used herein refers to OrNda HealthCorp and
its direct and indirect subsidiaries, affiliated partnerships and affiliated
limited liability companies, unless otherwise stated or indicated by context.
The term "subsidiaries" as used herein shall also mean affiliated partnerships
and affiliated limited liability companies.
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share of common stock of the Company. The shares of Tenet common stock to be
issued in the Merger will be registered under the Securities Act of 1933, as
amended. Consummation of the Merger is subject to a number of conditions,
including approval of the Company's and Tenet's stockholders and regulatory
approvals. See Note 10 to the Company's consolidated financial statements for
more information about the Merger.
Tenet is headquartered in Santa Barbara , California, and at October
31, 1996 owned or leased and operated, through its subsidiaries, 76 acute care
hospitals and related businesses in 13 states.
On October 17, 1996, the Company entered into a Stock Option Agreement
with Tenet whereby the Company has granted to Tenet an option to purchase up to
11,608,358 shares of the Company's common stock at a price of $29.869 per share,
exercisable only upon the occurrence of certain events. Also, on October 17,
1996 Tenet entered into a Stock Option Agreement with the Company whereby Tenet
has granted to the Company an option to purchase up to 28,388,098 shares of
Tenet's common stock at a price of $22.125 per share, exercisable only upon the
occurrence of certain events.
In addition, on October 17, 1996, Tenet and certain stockholders of the
Company representing approximately 14% of the Company's outstanding shares
entered into certain Stockholder Voting Agreements providing, subject to the
terms and conditions set forth therein, that such stockholders will vote the
shares of common stock of the Company held by them in favor of the Merger.
Business Strategy
In fiscal 1996 the Company operated with 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 has
selectively acquired health care providers with complementary geographic
locations and service capabilities, while continuing to develop relationships
with managed care organizations, other health care providers and physicians with
the goal of establishing integrated health care delivery networks. The Company
believes that the establishment of integrated networks will allow it to (i)
improve the quality of care provided by sharing expertise in the provision of
specialized services within each geographic area; (ii) extend the Company's
services into new geographic areas and provide the Company with access to a
broader base of patients; (iii) rationalize the use of expensive equipment by
sharing such equipment among nearby facilities and further reduce costs through
increased purchasing power and other economies of scale; and (iv) manage entire
episodes of illness on a coordinated, cost-effective basis, rather than through
the provision of costly, isolated treatments. The Company has utilized the
following approaches in connection with its development of integrated health
care delivery networks:
o Hospitals as "Hubs" for Delivery Systems. The Company has established
relationships with other health care providers in certain areas which
it serves by building upon the primary and tertiary care provided by
the Company's hospitals in such areas, 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.
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o 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 areas in which the Company operates a large
number of hospitals, it generally takes a leadership role in
establishing relationships with other providers to develop integrated
networks. In areas in which the Company is not one of the key providers
of acute care services, the Company generally participates in networks
by integrating its service capabilities with the local providers of
complementary health care services. In addition, through its Medicaid
HMO in Phoenix, Arizona and its national and regional managed care
contracts, the Company has demonstrated its ability to provide health
care services on a fixed rate contract basis in conjunction with both
governmental and private payors. The Company intends to pursue
opportunities for similar arrangements in connection with the
development of networks in its other areas. 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.
o Physician Alliances. The Company generally furthers its development
of integrated networks by expanding its alliances with physicians to
create long-term hospital/physician linkages. These arrangements allow
physicians to participate in the delivery of health care at the network
level. The alliances include: (i) encouraging physicians practicing at
its hospitals to form independent physician associations ("IPAs"), (ii)
having the Company join with those IPAs, physicians and physician group
practices to form physician hospital organizations ("PHOs") to contract
with managed care and other payors and (iii) forming management
services organizations ("MSOs") to (A) purchase physician practices or
their assets, as appropriate, (B) provide management and administrative
services to physicians, physician group practices and IPAs and (C)
enter into managed care contracts both on behalf of those groups and,
in certain circumstances, on behalf of PHOs. For example, in southern
California and south Florida, the Company has formed relationships with
physician groups to participate in capitated health care contracts. The
Company is pursuing similar arrangements with other physician groups
and in other areas.
o Operations in Key Geographic Areas. The Company has developed its
operations in several key geographic areas that the Company recognizes
as presenting growth opportunities. For example, the Company has
developed and expects to continue to develop an integrated health care
delivery network in California, which possesses a high concentration of
managed care payors. Similarly, the Company is building health care
delivery networks in Florida and Arizona, areas with dense populations
and a significant managed care presence.
o Managed Care Contracts. As cost containment pressures in the health
care industry have increased and managed care arrangements have
proliferated, the Company has attracted new contracts with managed care
organizations including HMOs. The Company's geographic diversity,
ability to provide a full range of medical services and cost-effective
operations have led to its execution of a number of one important type
of managed care contracts, risk sharing contracts that cover capitated
lives. In its fiscal year ended August 31, 1996, the Company signed
additional regional and national contracts with managed care
organizations, including both risk sharing and non-risk sharing
contracts. The Company believes its strategy of developing integrated
health care delivery networks while reducing costs and increasing
operating efficiencies positions it to attract additional managed care
contracts in the future.
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Strategic Acquisitions. The Company has pursued strategic acquisitions
of health care providers in geographic areas and with service capabilities that
will facilitate the development of integrated networks. For example, in August
1996 the Company acquired Centinela Hospital Medical Center ("Centinela"), a
provider of tertiary care services in a 400-bed acute care facility located in
Inglewood, California. The Company had a primary care presence in this area
prior to such acquisition and is in the process of integrating the tertiary care
services provided by Centinela with those provided by its primary care hospitals
in nearby communities, thereby furthering the development of an integrated
network of providers in these areas. Similarly, the Company believes that its
January 1996 acquisition of Houston Northwest Medical Center, a provider of
tertiary care services in the Houston area, provided the Company with an
opportunity to develop an integrated health care delivery network by
establishing relationships with other health care providers in the area. In
furtherance of this strategy in the northwest Houston area, the Company also
acquired Cypress Fairbanks Medical Center in July 1996. Also, the November 1995
acquisition by the Company of Universal Medical Center (now, Florida Medical
Center, South) in Plantation, Florida will, in the Company's view, enhance the
Company's integrated network in the south Florida area and permit the Company to
provide cost effective obstetric and pediatric specialty services in the area.
See "Recent Acquisitions" and "Pending Acquisitions."
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 that
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 general acute care hospitals are
able to offer a broader range of services at competitive prices. The Company
intends to continue to make capital expenditures to expand and upgrade its
outpatient facilities.
Cost Reduction Programs. An important component of the Company's
strategy is to position itself as a cost-effective provider of health care
services in each of its markets. As cost containment pressures have increased,
the Company has continued to focus on improving operating performance and
efficiency through the following key operating initiatives: (i) rationalization
of services and technologies in all facilities; (ii) standardization of medical
supply purchasing practices and usage; (iii) improvement of patient management,
resource consumption and reporting procedures; (iv) improvement in salary and
wage expenses by monitoring staff levels and developing productivity standards;
and (v) reduction in purchased services expense through more effective use of
outsourcing arrangements. The Company intends to continue to apply these
operating initiatives throughout its existing networks and facilities and in
connection with any future acquisitions.
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, pediatric care,
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hemodialysis and women's health services. 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.
Recent Acquisitions
The Company has expanded its service capabilities and broadened its
geographic presence in core markets through a series of strategic acquisitions
of health care providers over the last three years.
Fiscal 1994
AHM Merger. On April 19, 1994, the Company acquired American Healthcare
Management, Inc. ("AHM") in a merger transaction (the "AHM Merger") accounted
for as a pooling of interests. Stockholders of AHM received an aggregate of 16.6
million newly-issued shares of the Company's common stock for their outstanding
shares of AHM common stock. Prior to the AHM Merger, AHM was a publicly-held
hospital management company operating 16 general acute care hospitals.
Summit Health Merger. Concurrently with the AHM Merger, the Company
acquired Summit Health Ltd. ("Summit Health") in a merger transaction accounted
for as a purchase (the "Summit Merger" and, together with the AHM Merger, the
"1994 Mergers"). Stockholders of Summit Health received an aggregate of $192.1
million in cash and 7.5 million newly-issued shares of the Company's common
stock for their outstanding shares of Summit Health common stock. Prior to the
Summit Merger, Summit Health was a publicly-held hospital management company
which operated 12 general acute care hospitals and a variety of outpatient
specialty health care clinics and programs.
Fountain Valley. On August 9, 1994, the Company purchased Fountain
Valley Regional Hospital and Medical Center ("Fountain Valley"), a provider of
tertiary care services in Orange County, California. The total purchase price of
approximately $105.2 million was paid in cash. The transaction also included
approximately $41.0 million paid by an unrelated real estate investment trust
which, at the Company's direction, purchased and is leasing to the Company
certain of Fountain Valley's real estate. Fountain Valley, located in Fountain
Valley, California, comprises a 413-bed tertiary care hospital, a surgery
center, an imaging center and four medical office buildings.
Fiscal 1995
St. Lukes. On February 13, 1995, the Company acquired three hospitals
and related health care businesses located in the Phoenix, Arizona metropolitan
area that comprised substantially all of the health care businesses of the St.
Luke's Health System ("St. Luke's"). The three hospitals acquired were St.
Luke's Medical Center, a 221-bed acute care hospital in Phoenix; Tempe St.
Luke's Hospital, a 110-bed acute care hospital in Tempe; and St. Luke's
Behavioral Health Center, an 86-bed psychiatric hospital in Phoenix. Other
related businesses acquired include a 55-bed skilled nursing care unit in
Phoenix, Advantage Health, a Medicaid HMO plan which was merged with the
Company's Medicaid HMO, and certain rehabilitation and clinic businesses. The
aggregate consideration paid for St. Luke's was approximately $120.3 million,
subject to certain post-closing adjustments. Approximately $3.0 million of the
purchase price was paid through the issuance of the Company's common stock and
approximately $65.0 million was paid in cash by an unrelated real estate
investment trust which, at the Company's direction, purchased and is leasing to
the Company substantially all of St. Luke's real estate, with the balance paid
by the Company in cash.
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Fiscal 1996
Houston Northwest. Effective January 1, 1996, the Company acquired from
the HNW Employee Stock Ownership Plan (the "ESOP") all of its controlling
capital stock ownership interest (the "ESOP Shares") in Houston Northwest
Medical Center, Inc. ("HNW"), whose principal asset is a 498-bed tertiary care
hospital in Houston, Texas, known as Houston Northwest Medical Center, for a
purchase price of approximately $125 million in cash and the assumption or
repayment of approximately $29 million of HNW third party, long-term
indebtedness. At the time of the acquisition, the Company already owned mortgage
debt of, and preferred stock in, HNW which was included on the Company's balance
sheet as of August 31, 1995, as a $73.8 million investment. As a result of the
acquisition of the ESOP Shares, the Company obtained ownership of 100% of the
capital stock of HNW.
To obtain financing for the acquisition of HNW as well as other
strategic acquisitions, in October 1995 the Company executed a $900 million
Amended and Restated Credit, Security, Guaranty and Pledge Agreement (the
"Restated Credit Facility") among the Company and two subsidiaries of the
Company (OrNda Hospital Corporation and AHM Acquisition Co., Inc.) as Borrowers,
the Guarantors named therein, the Lenders named therein, The Bank of Nova Scotia
("Scotiabank") as Administrative Agent for the Lenders, Scotiabank and Citicorp
USA Inc. ("Citicorp") as Co-Syndication Agents for the Lenders, Citicorp as
Documentation Agent for the Lenders, General Electric Capital Corporation, The
Industrial Bank of Japan, Limited, New York Branch, The Long-Term Credit Bank of
Japan, Limited, New York Branch, NationsBank N.A., The Toronto-Dominion Bank and
Wells Fargo Bank, as Co-Agents for the Lenders, and AmSouth Bank of Alabama,
Bank of America NT & SA, CoreStates Bank, N.A., Credit Lyonnais Cayman Island
Branch, Creditanstalt-Bankverein and Deutsche Bank AG, New York and/or Cayman
Islands Branch, as Lead Managers for the Lenders. The Restated Credit Facility
amended the Company's previous Credit, Security, Guaranty and Pledge Agreement,
dated April 19, 1994 (the "Previous Credit Facility"), and increased the
facility from $660 million to $900 million. The Restated Credit Facility became
effective on October 30, 1995.
The Restated Credit Facility, which matures October 30, 2001, consists
of (i) a revolving commitment of $440 million to refinance a portion of the debt
outstanding under the Previous Credit Facility, for general corporate purposes
(including, without limitation, acquisitions) and to issue up to $50 million of
letters of credit and (ii) a $460 million term loan to refinance a portion of
the debt outstanding under the Previous Credit Facility, payable in quarterly
installments, which commenced February 29, 1996. At October 31, 1996, the
Company had approximately $742.6 million of borrowings and letters of credit
outstanding under the Restated Credit Facility.
Centinela. Effective August 1, 1996, the Company acquired Centinela
Hospital Medical Center ("Centinela"), a 400-bed acute care hospital located in
Inglewood, California. Also, acquired in this acquisition were eight primary
care clinics owned and operated by Centinela in the vicinity of the hospital.
This acquisition added another tertiary care hospital and some primary care
clinics to the Company's sixteen other hospitals in southern California.
Saint Vincent/Fallon Healthcare System. Effective September 1, 1996,
the Company acquired Saint Vincent Healthcare System, an integrated health care
delivery system, consisting of a 432-bed acute care teaching hospital in
Worcester, Massachusetts, three skilled nursing facilities and other health
related
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companies, and a minority interest in a 280-member multi-specialty group
physician practice, the Fallon Clinic.
Also, in connection with this acquisition, the Company has agreed to
fund the construction of a new replacement hospital known as Medical City, which
will be located in downtown Worcester, Massachusetts. Once the facility is
operational, a majority of services currently provided at Saint Vincent Hospital
will be transferred to the new medical center, which will include 299 acute care
inpatient beds, a Level II trauma center, physician offices and diagnostic and
other ancillary services.
This integrated health care delivery system consists of Saint Vincent
Healthcare System, the Fallon Clinic and the Fallon Community Health Plan. It is
a physician-directed model that allows physicians to coordinate care for their
patients within a seamless delivery system. Although the Health Plan was not
acquired by the Company, there are long-term contracts among the Health Plan and
Saint Vincent Hospital and the Fallon Clinic.
Other Fiscal Year 1996 Acquisitions.
Also, the Company acquired the following additional hospitals in its
fiscal year ended August 31, 1996, each of which hospitals complements existing
operations of the Company's other hospitals:
<TABLE>
<S> <C> <C> <C> <C>
State Name Location Effective Licensed
Date Beds
Florida Universal Medical Center Plantation, FL 11/1/95 202
(now, Florida Medical Center, South)
California Westside Hospital Los Angeles, CA 7/1/96 68
Texas Cypress Fairbanks Medical Center Houston, TX 7/1/96 149
</TABLE>
Through these acquisitions in the last three years the Company has
expanded its service capabilities and broadened its geographic presence in
certain strategic areas in order to position the Company as a provider of
cost-effective quality health care services.
Pending Acquisitions
At November 12, 1996, the Company has pending two strategic
acquisitions which are described below.
In October 1996 the Company and United Western Medical Centers
("United"), a not-for-profit corporation headquartered in Santa Ana, California,
executed definitive agreements for the Company to acquire substantially all of
United's assets which consist primarily of Western Medical Center, a 288-bed
acute care hospital in Santa Ana, California; Western Medical Center-Anaheim, a
193-bed acute care hospital in Anaheim, California; and Western Medical
Center-Bartlett, a 202-bed skilled nursing facility in Santa Ana, California.
These facilities will further enhance the Company's integrated delivery network
in southern California by becoming the Company's 18th and 19th hospitals in the
area. The closing of this transaction
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is subject to customary closing conditions, Board of Directors' approvals,
review by the California Attorney General and review under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
Additionally, on October 25, 1996, the George Washington University and
the Company executed a letter of intent to form a partnership to operate the
University's 170-year old academic medical hospital in Washington, D.C. in which
the Company would have a 80% partnership interest and the George Washington
University would have a 20% partnership interest. Under the proposed agreement,
which is subject to board and regulatory approvals, the hospital will continue
its educational mission and charity care, as well as improve its facilities and
create an integrated health care delivery network. The George Washington
University Medical Center is an acute care teaching facility located in the
Foggy Bottom area of Washington, D.C.
Risks Associated with Acquisition Strategy
The Company has recently completed several acquisitions of health care
providers and intends to pursue additional acquisitions. See "Recent
Acquisitions" and "Pending Acquisitions." 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 in the future, 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, subject to
debt incurrence restrictions set forth in the Restated Credit Facility.
Health Care Facilities
At August 31, 1996, the Company operated 49 general acute care
("general" or "acute care") hospitals, one psychiatric hospital, numerous
outpatient and specialty clinics and six surgery centers in 15 states, primarily
in the southern and western United States. The hospitals are owned or leased by
subsidiaries of the Company or through joint venture arrangements with
subsidiaries of the Company. At August 31, 1996, the Company operated 17
hospitals in southern California, and believes that it is able to offer quality,
cost-effective health care services by integrating its primary and tertiary care
facilities in the area. In the greater Phoenix, Arizona area, the Company
operated at August 31, 1996, five hospitals, two surgery centers and a Medicaid
HMO (Health Choice Arizona) which provides services principally to indigents in
the State of Arizona under fixed price contracts. At August 31, 1996, the
Company operated five hospitals in Florida and eight hospitals in Texas. The
Company also operated at August 31, 1996 hospitals in the following states:
Indiana, Iowa, Louisiana, Mississippi, Missouri, Nevada, Oregon, Washington,
West Virginia and Wyoming. Effective September 1, 1996, the Company began
operating its first hospital in Massachusetts. In addition, at August 31, 1996,
the Company owned or leased all or a substantial part of approximately 70
medical office buildings located in proximity to its hospitals. See Item
2-"Properties."
Of the 50 hospitals operated by the Company at August 31, 1996, 17
hospitals are located in southern California and two hospitals are located
elsewhere in California. The Company's 19 California acute care hospitals
generated approximately 36.4% of its total revenue for the year ended August 31,
1996. In addition, five hospitals which generated approximately 16.5% of the
Company's total revenue for the 1996 fiscal year are located in Florida, six
hospitals which generated approximately 9.7% of the Company's total revenue for
the 1996 fiscal year are located in Arizona and eight hospitals which generated
approximately 16.0% of the Company's total revenue for the 1996 fiscal year are
located in Texas. The concentration of
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hospitals in Arizona, California, Florida and Texas 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, the name of the
state Medicaid program in California. 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.
Hospital Operations
Services provided by the Company's general 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.
Each Company hospital 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 medical, professional and ethical practices (including the
performance of medical and surgical procedures) of each of the Company's
hospitals are generally supervised and regulated by the hospital's Board of
Trustees, which generally includes practicing physicians, members of the
community and representatives of the Company management, and by the hospital's
medical staff. Subject to the control of the hospital's Board of Trustees, the
medical staff of each hospital supervises and regulates its members and the
medical activities of the hospital. In turn, the Board of Trustees is subject to
the general control of the board of directors of the Company's subsidiary which
owns the hospital.
In addition to providing capital resources, 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. Also, all major capital expenditure decisions
must be approved by senior corporate management.
The Company also has established a quality assurance committee at each
of its hospitals under the direction of a physician to review and to set
standards for medical practices and nursing care and to assure compliance with
regulatory standards. These committees develop quality assurance programs
involving all departments, medical staffs, patients and services, and
periodically monitor patient care, including admissions, discharges, length of
stay and treatment. The Company also has established utilization review
committees that monitor patient care. Additionally, the Company requires that
each of its hospitals has a plan for continuous quality improvement in its
delivery of health care services.
Like most hospitals, the Company's hospitals do not engage in extensive
medical research and medical education programs. However, some of the Company's
hospitals have an affiliation with medical schools, including the clinical
rotation of medical students.
-9-
<PAGE>
The following table sets forth certain combined historical operating
statistics for the hospitals operated by the Company, including AHM, for each of
the periods indicated:
<TABLE>
Years Ended August 31,
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Number of hospitals at period end................. 31 34 46 46 50
Licensed beds at period end....................... 5,210 6,114 8,025 8,069 9,685
Patient days...................................... 727,226 711,621 871,938 1,076,782 1,187,421
Adjusted patient days(1).......................... 1,018,788 991,760 1,201,98 1,512,070 1,732,203
Average length of stay(days)...................... 6.2 6.0 4.9 5.3 5.0
Admissions........................................ 117,248 118,284 179,085 204,204 237,669
Adjusted admissions(2)............................ 163,350 164,845 246,872 286,753 346,711
Occupancy rate(3)................................. 38.2% 35.7% 35.2% 36.4% 38.1%
- ------------------
<FN>
(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.
</FN>
</TABLE>
Consistent with industry trends, the Company's hospitals have
experienced a significant shift from inpatient to outpatient care as well as
decreases in average lengths of inpatient stay primarily as a result of hospital
payment changes by Medicare, insurance carriers and self-insured employers.
These changes generally encourage the utilization of outpatient, rather than
inpatient, services whenever possible, and shortened lengths of stay for
inpatient care. As a result, outpatient utilization has increased over the past
five years and represents approximately 31.3% of gross patient revenues for the
year ended August 31, 1996 while average lengths of patient stay have decreased
from 6.2 days for fiscal 1992 to 5.0 days for fiscal 1996. Another factor
affecting hospital utilization levels is improved treatment protocols as a
result of medical technology and pharmacological advances. The Company's growth
in outpatient gross revenue and more intensive utilization of ancillary
services, along with inpatient price increases, have resulted in net revenue
growth despite decreases in inpatient volume and decreases in average length of
inpatient stay. The Company is unable to predict whether such trends will
continue.
The Company's hospitals experience seasonal fluctuations in occupancy,
with the highest number of admissions taking place in January through April, and
the lowest in November and December. Seasonal fluctuations result from various
factors, including seasonal cycles of illness, climate and weather conditions,
vacation patterns of both hospital patients and admitting physicians and other
factors relating to the timing of elective hospital procedures.
Medicaid HMO. With its acquisitions of Summit Health and St. Luke's,
the Company obtained ownership of two Medicaid HMO's which have been merged and
are run under the name Health Choice Arizona ("HCA"). Since October 1990, HCA
has had a contract with the State of Arizona to provide health care services to
members of the Arizona Health Care Cost Containment System ("AHCCCS"). AHCCCS
administers the Medicaid and other state health care assistance programs in
Arizona and also contracts for health care services for certain other groups
such as employers with less than 40 employees. HCA's current contract covers
approximately 34,000 members in Maricopa County and Pima County, Arizona which
contain the Phoenix and Tucson metropolitan areas. HCA's business represents a
significant percent of the net revenues of the Company's six hospitals and two
surgery centers in Arizona.
-10-
<PAGE>
Sources of Revenue
In General. The sources of the Company's hospital revenues are charges
related to the services provided by the hospitals and their staffs, such as
radiology, operation rooms, pharmacy, physiotherapy and laboratory procedures,
and basic charges for the hospital room and related services such as general
nursing care, meals, maintenance and housekeeping. The Company receives payment
for health care services from (i) the federal government under the Medicare
program, (ii) state governments under their respective federally-regulated
Medicaid programs, (iii) managed care operators, including health maintenance
organizations ("HMOs") and preferred provider organization ("PPOs") and (iv)
other private payors including commercial insurers like Blue Cross and patients
directly. In addition, some states, such as California and Washington, are
contracting with private HMOs to provide benefits to Medicaid recipients.
Further, Medicare also contracts with private HMOs to provide benefits to
Medicare beneficiaries. The following table sets forth the approximate
percentages of total gross operating revenue of the Company from the sources
indicated for each of its three most recently completed fiscal years:
1994 1995 1996
---- ---- ----
Medicare........................ 45.4% 40.4% 37.7%
Medicaid/Medi-Cal............... 18.3% 18.3% 18.4%
Managed Care.................... 23.3% 26.9% 31.4%
All Other Payors................ 13.0% 14.4% 12.5%
----- ----- -----
Total:....................... 100.0% 100.0% 100.0%
====== ====== ======
Hospital gross revenues depend upon inpatient occupancy levels, the
extent to which ancillary services and therapy programs are ordered by
physicians and provided to patients and the volume of outpatient procedures.
Reimbursement rates for inpatient routine services vary significantly depending
on the type of service (e.g., acute care, intensive care or psychiatric) and the
geographic location of the hospital. The Company has experienced an increase in
the percentage of patient revenues attributable to outpatient services in recent
years. This increase is primarily the result of advances in technology (which
allow more services to be provided on an outpatient basis), construction or
acquisition of additional outpatient facilities and increased pressures from
Medicare, Medicaid, HMOs, PPOs and insurers to reduce hospital stays and provide
services, where possible, on a less expensive outpatient basis. The Company's
experience with respect to increased outpatient volume mirrors the trend in the
hospital industry.
Most hospitals (including all of the Company's hospitals) derive a
substantial portion of their revenue from the Medicare and Medicaid programs,
which are governmental programs designed to reimburse participating health care
providers for covered services rendered and items furnished to qualified
beneficiaries. Both of these governmental programs are heavily regulated and
subject to frequent changes which in recent years have reduced, and in future
years are expected to continue to reduce, Medicare and Medicaid payments to
hospitals. In light of its hospitals' high percentage of Medicare and Medicaid
patients, the Company's ability in the future to operate its business
successfully will depend in large measure on its ability to adapt to changes in
these programs. See "Governmental Regulation - Health Care Reform".
The Medicare program is designed primarily to provide health care
services to persons aged 65 and over and those who are chronically disabled or
who have End Stage Renal Disease. The Medicaid program is designed to provide
medical assistance to the medically indigent. Medicaid is a joint federal and
state program in which states voluntarily participate. Payment rates under the
Medicaid program are set by each
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<PAGE>
participating state, and rates and covered services may vary from state to
state, although such variations are subject to a framework of federal
requirements. Over 50% of Medicaid funding comes from the federal government,
with the balance shared by state and local governments. The Medicare program is
administered by the federal government, primarily the Department of Health and
Human Services ("HHS") and the Health Care Financing Administration ("HCFA"),
while the Medicaid program is administered by individual state governments,
subject to compliance with federally mandated requirements in order to obtain
federal financial participation.
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.
Medicare. Beginning in 1983, reimbursement to hospitals under the
Medicare program changed significantly and these changes have had, and are
expected to continue to have, significant adverse effects on the Company's
hospitals and the health care industry in general. Prior to 1983, Medicare
reimbursed general hospitals on a cost-based system for inpatient services,
capital costs and outpatient services. In 1983, in the most significant change,
Medicare established a prospective payment system for inpatient services under
which inpatient discharges from general hospitals are classified into categories
of treatments, known as Diagnosis Related Groups ("DRGs"), which classify
illnesses according to the estimated intensity of hospital resources necessary
to furnish care for each principal diagnosis. Under this prospective payment
system hospitals generally receive a fixed amount based upon a value assigned to
the DRG, which amount is calculated on a per discharge basis for each Medicare
patient (as adjusted for area wage differentials). The DRG payment is a set rate
(the "DRG rate"), and is generally paid regardless of how long the patient
actually stays in the hospital or what costs are actually incurred in providing
care to a particular Medicare patient. If the actual cost of caring for a
patient is less than the DRG payment, the hospital is allowed to keep the excess
payment as profit; if the cost is more than the DRG payment, the hospital must
generally absorb the loss. (For extremely unusual cases, known as "outliers,"
additional payments may be made to the hospital.) The purpose of the prospective
payment system is to encourage hospitals to operate more efficiently and to
avoid unnecessary utilization of health care services.
Primarily as a result of federal budget deficit considerations, for
several years the annual percentage increases to the DRG rates have been lower
than both the inflationary percentage increases in the cost of goods and
services purchased by all general hospitals and the inflationary increases in
the Company's costs. The index used by HCFA to adjust the DRG rates gives
consideration to the annual increases in the cost of goods and services
purchased by hospitals (the "Market Basket"). The increase in the Market Basket
for the fiscal years beginning October 1, 1995 and October 1, 1996 were
established as 3.5% and 2.5%, respectively. However, in recent years federal
legislation has reduced the increases in the DRG rates below the Market Basket
amounts. Thus, pursuant to the Omnibus Budget Reconciliation Act of 1993 ("OBRA
1993"), the DRG rates for hospitals it classifies as "large urban" (the class
hospital from which more than 90% of the
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<PAGE>
Company's revenue comes) were or will be adjusted by the annual Market Basket
percentage change: (1) minus 2.0%, effective October 1, 1995, (2) minus 0.5%,
effective October 1, 1996, and (3) without reduction, effective October 1, 1997
and each year thereafter, unless, in each case, altered by subsequent
legislation (which the Company deems likely given the current emphasis on
decreasing the federal budget deficit). Unless changed by subsequent
legislation, the result will be an increase of 2.0% in the DRG rates for federal
fiscal year ("FFY") 1997 over what such rates were for FFY 1996. At November 12,
1996, Congress is in the process of establishing the health care budget for
future periods, including FFY 1997. The Company anticipates that payments to
hospitals will be reduced as a result of future legislation but is unable to
predict what the amount of the final reduction will be. See "Governmental
Regulation - Health Care Reform".
The Company's one psychiatric hospital, as well as the psychiatric and
rehabilitation units in some of its hospitals that are certified by the
respective state licensure bureaus as distinct part units of such general
hospitals, are currently exempt from the prospective payment system and are
reimbursed on a cost-based system wherein target rates for each facility are
used in applying various limitations and incentives. Such facilities received a
Market Basket increase of 3.4% in target rates effective for cost reporting
periods commencing in FFY 1996 and such increase is expected to be 2.5% in FFY
1997. Based on OBRA 1993, the target rates for such facilities exempt from the
prospective payment system are scheduled to be adjusted in cost reporting years
FFY 1996 and FFY 1997 by the applicable annual Market Basket percentage change
minus 1%. Proposals have been made that would change the method of payment for
services provided at these facilities to a prospective payment system. The
Omnibus Budget Reconciliation Act of 1990 ("OBRA 1990") requires HHS to develop
a proposal to modify the current target rate system or to replace it with a
prospective payment system. It cannot be predicted by the Company if any such
proposals will be implemented.
Prior to October 1, 1990, Medicare payments for outpatient
hospital-based services were generally the lower of hospital costs or customary
charges. Due to federal budget restraints, OBRA 1990 and OBRA 1993 reduced the
cost component by 5.8% for FFY's 1991 through 1998 so that currently Medicare
payments for the majority of outpatient services generally are the lower of
94.2% of hospital costs, customary charges or a blend of 94.2% of hospital costs
and a fee schedule (such fee schedule generally being lower than hospital
costs). Outpatient laboratory services are paid based on a fee schedule which is
substantially lower than customary charges. Certain ambulatory surgery
procedures are paid for at a rate based on a blend of hospital costs and the
rate paid by Medicare for similar procedures performed in free-standing
ambulatory surgery centers. Certain radiology and other diagnostic services are
paid on a blend of actual cost and prevailing area charge.
The provisions of OBRA 1990 required the Secretary of HHS to develop a
proposal for a prospective payment system for all hospital-based outpatient
services. The Secretary's report, which was due on September 1, 1991, was
submitted to Congress on March 17, 1995. The Secretary's report recommends a
phase-in of a prospective payment system for outpatient services with
prospective payment rates, known as Ambulatory Payment Groups ("APGs"), being
established initially for surgical and radiological services and other
diagnostic procedures that account for almost half of hospital outpatient
Medicare charges. Other groups of outpatient services would be brought under a
prospective payment system as appropriate methodologies are developed. The
report also addressed changes to beneficiary coinsurance and the computation of
coinsurance under the current blended payment method. Implementation of the
Secretary's proposals would require Congress to enact legislation. The effect on
the Company of a change to a prospective payment system or other changes to the
existing payment system for Medicare outpatients, if legislation were to be
enacted, cannot be predicted by the Company at this time. Gross Medicare
outpatient
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<PAGE>
revenues were approximately 30.3% of the Company's total gross outpatient
revenues, or approximately 9.5% of the Company's total gross operating revenues,
for the year ended August 31, 1996.
In addition to the operating payments described above, the Medicare
program historically provided reimbursement to hospitals for certain costs of
capital (such as depreciation, property taxes, rent and interest) on a
reasonable cost basis. However, pursuant to final HHS regulations issued in
August 1991, reimbursement for capital expenditures related to inpatient care
was incorporated into a prospective payment system which will be phased in over
a ten-year transition period beginning October 1, 1991 during which many
hospitals actual capital costs will be given less consideration and the Federal
Rate (as defined below) will be given more consideration each year. The
regulations establish a standard federal rate per discharge for capital-related
inpatient hospital costs (the "Federal Rate"). The Federal Rate is based on the
estimated FFY 1992 national average Medicare inpatient capital-related cost per
discharge under cost reimbursement. A hospital is paid under one of the
following two different payment methodologies during this transition period: (i)
hospitals with a hospital-specific rate (the rate established for a hospital
based on the cost report ending on or before December 31, 1990) below the
Federal Rate would be paid on a fully prospective payment methodology and (ii)
hospitals with a hospital-specific rate above the Federal Rate would be paid
based on a hold-harmless payment methodology or 100% of the Federal Rate
whichever results in a higher payment, subject to a 90% cap through FFY 1995
enacted by OBRA 1990 which is described in the following sentence. As required
by OBRA 1990, however, the Federal Rate was adjusted in FFY 1992 through FFY
1995 so that aggregate payments for capital did not exceed 90% of the amounts
that would have been payable under a reasonable cost reimbursement basis. This
adjustment mandated by OBRA 1990 expired on September 30, 1995. The expiration
of this OBRA 1990 provision reset the total capital payments in FY 1996 to 100%
of aggregate capital costs.
To date the impact of prospective payment system capital reimbursement
related to inpatient care has not been material to the Company's Medicare
capital reimbursement. The established Federal Rate for FFY 1994 was reduced by
9.33% to $378 per patient discharge, and for FFY 1995 was reduced by 0.4% to
$377 per patient discharge. The established Federal Rate for FFY 1996 increased
22.5% to $461.96 per patient discharge. This increase was primarily the result
of the expiration of the "90% adjustment" provision of OBRA 1990 on September
30, 1995 that is mentioned above. (Legislation passed by Congress in 1995 and
vetoed by the President would have resulted in a reduction of the capital
payment rate for FFY 1996 rather than the increase caused by such OBRA 1990
provision expiring.) In FFY 1997 the Federal Rate will fall by 4.99% to $438.92
due to budget neutrality adjustments. Thus, based upon these changes and the
Company's analysis of the manner in which these regulations have been applied by
HHS, the Company does not believe that, in aggregate, its hospitals have been
materially affected by these regulations in recent years. Payments for future
years, however, including those related to new capital expenditures, will be
affected by annual updates in the Federal Rate and the possibility of future
legislation reducing capital reimbursement which the Company feels is likely.
However, management cannot predict the effect of such changes on the Company's
results of operations or financial condition.
The Medicare program also reimburses each hospital on a reasonable cost
basis for the Medicare program's pro rata share of the hospital's allowable
capital costs related to outpatient services. Outpatient capital reimbursement
was reduced by 15% (i.e., 85% of outpatient capital costs) during FFY 1990 and
OBRA 1990 extended the 15% reduction through FFY 1991. OBRA 1990 further
directed that outpatient capital reimbursement be reduced by only 10% beginning
FFY 1992 through FFY 1995. OBRA 1993 extended the 10% reduction through FFY
1998.
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<PAGE>
During the 1980's automatic spending cuts occurred in Medicare program
payments under the "Gramm-Rudman-Hollings Amendment" enacted by Congress in
December 1985. Pursuant to OBRA 1990, Congress revised the Gramm-Rudman budget
and sequestration process and established a "pay-as-you-go" system for
entitlement programs, including Medicare. Thus, legislation increasing
entitlements and/or reducing revenues must be deficit-neutral (i.e., it must pay
for itself by a reduction in entitlement spending elsewhere or additional
revenues). Legislation violating the pay-as-you-go principle would trigger a
sequestration of entitlement program funds in the same amount that such
legislation added to the deficit. Up to a maximum of 4% of Medicare program
funds would be included among those sequestered. Medicaid program funds,
however, continue to be exempt from sequestration. In recent federal fiscal
years payment reductions under the revised sequestration process have not been
implemented. If implemented in future years, these reductions could have a
material adverse effect on the Company's operating revenues. However, because
the actual amount of the reduction for any fiscal year may vary according to the
federal deficit, the financial impact of the revised process on the Company
cannot be predicted.
The Medicare program makes additional payments to those hospitals that
serve a disproportionate share of low income patients. The Company has a
significant number of hospitals that receive these disproportionate share
payments. The qualification and funding for disproportionate share payments can
vary by fiscal year. Disproportionate share payments to the Company for future
years could be significantly lower than historical payments.
Considerable uncertainty surrounds the future determination of payment
levels for DRGs and for other services currently being reimbursed on a cost
basis. OBRA 1993 provides for certain federal budget targets through FFY 1997
which, if not achieved, may result in further legislative reductions in Medicare
payments. Further legislation in the prospective payment area which could arise
could be additional reductions or eliminations of DRG rate increases or
otherwise revising DRG rates downward to take into account evidence of
historical reductions in hospital operating costs. In addition, in past years
automatic spending cuts in Medicare program payments occurred
under"Gramm-Rudman" and such spending cuts could occur in future years under the
"pay-as-you-go" system created by OBRA 1990 or under similar new legislation.
Also, substantial areas of the Medicare program are subject to legislative and
regulatory changes, administrative rulings, interpretations, administrative
discretion, governmental funding restrictions and requirements for utilization
review (such as second opinions for surgery and pre-admission criteria). These
matters, as well as more general governmental budgetary concerns, may
significantly reduce payments made to the Company's hospitals under the Medicare
program, and there can be no assurance that future Medicare payment rates will
be sufficient to cover cost increases in providing services to Medicare
patients. Moreover, reductions in the future could have a material adverse
impact on the revenues of the Company's hospitals. However, because the actual
amount of the reduction for any particular fiscal year may vary according to the
federal deficit, the financial impact of future reductions on the Company's
hospitals cannot be predicted. See "Governmental Regulation - Health Care
Reform".
Medicaid. State Medicaid payment methodology varies from state to state
but very common are state Medicaid prospective payment systems or state programs
that negotiate payment rates with individual hospitals. Generally, however,
Medicaid payments are less than Medicare payments and are substantially less
than a hospital's cost of services. In 1991 Congress passed legislation limiting
the states' use of provider-specific taxes and donated funds to obtain federal
Medicaid matching funds. As a result of the legislation, certain states in which
the Company operates have adopted broad-based provider taxes to fund their
Medicaid programs. Congress has also established a national limit on
disproportionate share hospital adjustments (which are additional amounts of
Medicaid funds required to be paid to hospitals which provide
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<PAGE>
a disproportionate amount of Medicaid and low-income inpatient services).
Disproportionate share payments for future years could be significantly less
than the payments received by the Company's hospitals in prior years. This
legislation and the resulting state broad-based provider taxes have adversely
affected the Company's net Medicaid payments, but to date the net impact has not
been materially adverse.
The federal government and many states are currently considering
additional ways to limit the increases in their levels of Medicaid funding,
which also could adversely affect future levels of Medicaid payments received by
the Company's hospitals. Because the Company cannot predict precisely what
action the federal government or the states will take as a result of existing
and future legislation, the Company is unable to assess the effect of such
legislation on its business. Like Medicare funding, Medicaid funding may also be
affected by health care reform legislation, and it is impossible to predict the
effect such legislation might have on the Company. See "Governmental Regulation
- - Health Care Reform".
Effective January 1, 1995, the California Department of Health Services
began 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 contractual 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 Medi-Cal payment changes
will not have a material adverse effect on the Company's financial position or
results of operations.
Annual Cost Reports. The Company's annual cost reports which are
required under the Medicare and Medicaid programs are subject to audit, which
may result in adjustments to the amounts ultimately determined to be due the
Company under these reimbursement programs. These audits often require several
years to reach the final determination of amounts earned under the programs.
Providers also have rights of appeal, and the Company is currently contesting
certain issues raised in audits of prior years' reports. Management believes
that adequate provision has been made in its financial statements for any
material retroactive adjustments that might result from all of such audits and
that final resolution of all of these issues will not have a material adverse
effect upon the Company's results of operations or financial position. Due to
the implementation of the Medicare prospective payment system in 1983, the
amount of reimbursement to the Company's general acute care hospitals
potentially affected by audit adjustments has substantially diminished in recent
years.
Managed Care. The Company has been and will be increasingly affected by
the amount of health care provided through managed care organizations. Managed
care arrangements typically reimburse providers based on a percent of charges or
on a per diem basis. In certain markets, the Company's hospitals are now
entering into risk sharing, or capitated, arrangements. These arrangements
reimburse the hospital based on a fixed fee per participant in a managed care
plan with the hospital assuming the cost of services provided, regardless of the
level of utilization. If utilization is higher than anticipated and/or costs are
not effectively controlled, such arrangements could produce low or negative
operating margins. As of August 31, 1996 the portion of the Company's revenues
derived from risk sharing contracts is not material.
Commercial Insurance. The Company's hospitals provide services to
individuals covered by private health care insurance. Private insurance carriers
either reimburse their policy holders or make direct payments to the Company's
hospitals based upon the particular hospital's established charges and the
particular coverage provided in the insurance policy. Blue Cross is a health
care financing program that provides its subscribers with hospital benefits
through independent organizations that vary from state to state.
-16-
<PAGE>
The Company's hospitals are paid directly by local Blue Cross organizations on
the basis agreed to by each hospital and Blue Cross by a written contract.
Recently, several commercial insurers have undertaken efforts to limit
the costs of hospital services by adopting prospective payment or DRG-based
systems. To the extent such efforts are successful, and to the extent that the
insurers' systems fail to reimburse hospitals for the costs of providing
services to their beneficiaries, such efforts may have a negative impact on the
results of operations of the Company's hospitals.
Limits on Reimbursement
As stated above, the Company derives a substantial portion of its
revenue from the Medicare and Medicaid programs. During its fiscal years ended
August 31, 1994, 1995 and 1996, the Company derived an aggregate of 63.7%,
58.7%, and 56.1%, respectively, of its gross revenue from the Medicare and
Medicaid programs.
Changes in existing governmental reimbursement programs in recent years
have resulted in reduced levels of reimbursement for health care services, and
additional changes are anticipated. See "Sources of Revenue-Medicare." Such
changes are likely to result in further reductions in the rate of increase in
reimbursement levels especially since both Congress and the current
Administration have proposed health care budgets that reduce federal payments to
hospitals and other providers. The Company anticipates that payments to
hospitals will be reduced as a result of future legislation but is unable to
predict what the amount of the final reduction will be. See "Governmental
Regulation - Health Care Reform."
In addition, private payors, especially managed care payors,
increasingly are demanding discounted fee structures or the assumption by health
care providers of all or a portion of the financial risk through prepaid
capitation arrangements. Inpatient utilization, average lengths of stay and
occupancy rates continue to be negatively affected by payor-required
pre-admission authorization and utilization review and by payor pressure to
maximize outpatient and alternative health care delivery services for less
acutely ill patients. In addition, efforts to impose reduced allowances, greater
discounts and more stringent cost controls by government and other payors are
expected to continue.
Significant limits on reimbursement rates could adversely affect the
Company's result of operations. 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. See
"Governmental Regulation - Health Care Reform."
Competition
The health care industry is highly competitive and has been
characterized in recent years by increased competition for patients and staff
physicians, excess capacity at general hospitals, a shift from inpatient to
outpatient settings and increased consolidation. The principal factors
contributing to these trends are cost-containment efforts by managed care
payors, employers and traditional health insurers, changes in regulations and
reimbursement policies, increases in the number and type of competing health
care providers, changes in physician practice patterns and advances in medical
technology. The Company's future success will depend, in part, on the ability of
the Company's hospitals to continue to attract staff physicians, to enter into
managed care contracts, to organize and structure integrated health care
delivery networks with other
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<PAGE>
health care providers and physician practice groups and to acquire hospitals.
There can be no assurance that the Company or the Company's hospitals will
continue to be able, on terms favorable to the Company, to attract physicians to
their staffs, to enter into managed care contracts, to organize and structure
integrated health care delivery networks or to acquire hospitals, for which
other health care companies with greater financial resources, with more
facilities in a given geographic area or offering a wider range of services may
be competing.
The Company's ability to continue to compete successfully for such
contracts or to form or participate in such systems also may depend upon, among
other things, the Company's ability to increase the number of its facilities and
services offered through the acquisition of hospitals, groups of hospitals,
other health care businesses, ancillary health care providers, physician
practices and physician practice assets and the Company's ability to finance
such acquisitions.
Generally, other hospitals in the local markets served by most of the
Company's hospitals provide services that are offered by the Company's
hospitals. Certain of the Company's local competitors have greater financial
resources, are better equipped 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.
The Company believes that its hospitals compete within local markets on
the basis of many factors, including the quality of care, ability to attract and
retain quality physicians, location, breadth of services and technology offered
and prices charged. The Company's competition ranges from large, multi-facility
companies to small single-hospital owners. The Company also competes with
free-standing outpatient surgery and diagnostic centers. The competition among
hospitals and other health care providers has intensified in recent years as
hospital occupancy rates have declined. The Company's strategies are designed,
and management believes that its hospitals are positioned, to be competitive
under these changing circumstances.
In large part, hospital revenues depend on the physicians on staff who
admit or refer patients to the hospital. Physicians refer patients to hospitals
on the basis of the quality of services provided by the hospital to patients and
their physicians, the hospital's location, the quality of the medical staff
affiliated with the hospital and the quality of the hospital's facilities,
equipment and employees. The Company attracts physicians to its hospitals by
equipping its hospitals with sophisticated equipment, providing physicians with
a large degree of independence in conducting their hospital practices and
sponsoring training programs to educate physicians on advanced medical
procedures and otherwise creating a health care environment within which
physicians prefer to practice. While physicians may terminate their association
with a hospital at any time, the Company believes that by striving to maintain
and improve the level of care at its hospitals and by maintaining high ethical
and professional standards, it will retain qualified physicians with a variety
of specialties.
The competitive position of a hospital is increasingly affected by its
ability to negotiate managed care service contracts with purchasers of group
health care services. Such purchasers include employers, PPOs and HMOs. PPOs and
HMOs attempt to direct and control the use of hospital services through
management of care and either receive discounts from a hospital's established
charges or pay based on a fixed per diem or on a capitated basis where hospitals
receive fixed periodic payments based on the number of members of the
organization regardless of the actual services provided. In addition, employers
and
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<PAGE>
traditional health insurers are increasingly interested in containing costs
through negotiations with hospitals for managed care programs and discounts from
established charges. A hospital's ability to compete for such contracts is
affected by many factors, including the scope, breadth and quality of services a
hospital offers in a given geographic area, its ability to form its own, or to
join with other health care providers to form, integrated health care delivery
systems and the scope, breadth and quality of services offered by competing
hospitals and/or systems. The Company evaluates changing circumstances in each
geographic area on an ongoing basis and positions itself to compete in the
managed care market by forming its own or joining with others to form integrated
health care delivery systems.
The importance to a hospital of its ability to obtain contracts with
PPOs and HMOs and other managed care organizations which purchase health care
varies from market to market, depending on the degree of market penetration of
such organizations, but such market penetration is increasing each year in
almost every local market as these payors attempt to control rising health care
costs. In geographic areas where such managed care penetration is strong, the
failure of a hospital to obtain managed care contracts could negatively impact
that hospital's volume of patients and revenues and therefore could have a
material adverse impact on such hospital's results of operations and cash flow.
State certificate of need ("CON") laws, which place limitations on a
hospital's ability to expand hospital services and add new equipment, also may
have the effect of restricting competition. The application process for approval
of covered services, facilities, changes in operations and capital expenditures
is, therefore, highly competitive in states with CON laws. Competition in the
form of new services, facilities and capital spending is more prevalent in those
states which have no CON laws (which at the current time include the states of
Arizona, California and Texas) or which set relatively high levels of
expenditures before they become reviewable by state authorities. At August 31,
1996, 11 of the 15 states in which the Company owned hospitals had CON
requirements applicable to general hospitals. See "Governmental Regulation -
Certificates of Need."
The Company, and the health care industry as a whole, face the
challenge of continuing to provide quality patient care while dealing with
rising costs, strong competition for patients and a general reduction of
reimbursement rates by both private and government payors. As both private and
government payors reduce the scope of what may be reimbursed and reduce
reimbursement levels for what is covered, federal and state efforts to reform
the United States health care system may further impact reimbursement rates.
Changes in medical technology, existing and future legislation, regulations and
interpretations and competitive contracting for provider services by private and
government payors may require changes in the Company's facilities, equipment,
personnel, rates and/or services in the future. See "Governmental Regulation -
Health Care Reform".
The general hospital industry and the Company's general hospitals
continue to have significant unused capacity, and, thus, there is substantial
competition for patients. Inpatient utilization, average lengths of stay and
average occupancy rates continue to be negatively affected by payor-required
pre-admission authorization, utilization review and by payor pressure to
maximize outpatient and alternative health care delivery services for less
acutely ill patients. Increased competition, admissions constraints and payor
pressures are expected to continue. There continue to be increases in inpatient
acuity and intensity of services as less intensive services shift from an
inpatient to an outpatient basis or to alternative health care delivery services
because of technology improvements and as cost controls by payors become
greater. Allowances and discounts are expected to continue to rise, and to cause
decreases in revenues, because of increasing cost controls by government and
private group payors and because of the increasing percentage
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of business (and related discounts) from group purchasers of health care. To
meet these challenges, the Company has expanded many of its general hospitals'
facilities to include outpatient centers, offers discounts to private payor
groups, enters into capitation contracts in some service areas, upgrades
facilities and equipment and offers new programs and services.
There has been significant consolidation in the hospital industry over
the past decade due, in large part, to continuing pressures on payments from
government and private payors and increasing shifts away from the provision of
traditional in-patient services. Those economic trends have caused many
hospitals to consolidate either through merger or affiliation. Some hospitals
have even closed. It is expected that these cost-containment pressures will
continue and will lead to further consolidation in the hospital industry. On
October 16, 1996, the Company entered into a definitive Agreement and Plan of
Merger with Tenet and Merger Sub. See "Recent Developments-Proposed Merger."
Medical Staffs and Employees
As of August 31, 1996, approximately 15,000 licensed physicians were
members of the medical staffs of the Company's hospitals. Medical staff members
are generally independent contractors and not generally employees of the
Company's hospitals. A small number of physicians, however, have been
historically employed by, or have contracted with, the Company primarily to
staff emergency rooms, to provide certain ancillary services and to serve in
administrative capacities, such as directors of special services. Recently, the
Company also has begun employing physicians, primarily primary care physicians,
where permitted by law. Those physicians who serve in administrative capacities
at the Company's hospitals are primarily part-time employees or independent
contractors who usually have private practices in addition to their
responsibilities to the Company. Members of the medical staffs of the Company's
hospitals often also are members of the medical staffs of hospitals not owned by
the Company and each may terminate his or her affiliation with a Company
hospital at any time. Generally, a patient is admitted to a hospital only at the
request of a member of the hospital's medical staff. Applications for staff
privileges at each of the Company's hospitals are approved by the Board of
Trustees at each hospital. Any licensed physician may apply to be admitted to
the medical staff of any of the Company's hospitals. Nurses, therapists, lab
technicians, facility maintenance staff and the administrative staff of
hospitals, however, normally are employees of the Company.
At August 31, 1996, the Company and its subsidiaries had approximately
26,000 employees. The Company believes it has good labor relations with its
employees. A small percentage of the Company's employees are represented by
labor unions. While the Company's hospitals experience additional union
organizational activity from time to time, the Company does not expect such
efforts to materially affect its future operations. The Company's hospitals,
like most hospitals, have experienced labor costs rising faster than the general
inflation rate. In recent years, the Company generally has not experienced
material difficulty in recruiting and retaining employees, including nurses and
professional staff members, primarily as a result of staff retention programs
and general economic conditions. However, there can be no assurance as to future
availability and cost of qualified medical personnel.
Governmental Regulation
General. The health care industry is subject to extensive federal,
state and local regulation relating to licensure, conduct of operations,
ownership of facilities, addition of facilities and services and prices for
services, as described below. Participation in the Medicare program is heavily
regulated by federal statute
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and regulation. If a hospital provider fails substantially to comply with the
numerous conditions of participation in the Medicare program or performs certain
prohibited acts (e.g., (i) making false claims to Medicare for services not
rendered or misrepresenting actual services rendered in order to obtain higher
reimbursement (see discussion below); (ii) paying remuneration for Medicare
referrals (so called "fraud and abuse" which is prohibited by the
"anti-kickback" provisions of the Social Security Act and which is discussed
below); (iii) physicians making referrals to entities with which the physician
has a financial relationship (actions prohibited by the so-called
"anti-referral" laws discussed below) or (iv) denying treatment to any
individual who comes to its emergency room who has an "emergency medical
condition," whether or not any such individual is eligible for Medicare (so
called "patient dumping", which is prohibited by the federal "COBRA" law which
is discussed below).
The Company is unable to predict the future course of federal, state
and local regulation or legislation, including Medicare and Medicaid statutes
and regulations. Further changes in the regulatory framework could have a
material adverse effect on the financial results of the Company's operations.
False Claims. The Social Security Act imposes criminal and civil
penalties for making false claims to Medicare and Medicaid for services not
rendered or for misrepresenting actual services rendered in order to obtain
higher reimbursement. This statute is very broad. Careful and accurate coding of
claims for reimbursement must be performed to avoid liability under the federal
false claims statute.
COBRA. In 1986 Congress passed Title IX of the Consolidated Omnibus
Budget Reconciliation Act of 1985 (commonly known as "COBRA", but also known as
the Emergency Medical Treatment and Labor Act). COBRA prohibits generally the
practice known as "patient dumping" --- hospitals denying treatment to emergency
patients or women in labor, often by transferring them to another hospital in
unstable medical condition. More specifically, COBRA prohibits (i) failing to
stabilize all individuals who come to a hospital's emergency room who have an
"emergency medical condition," whether or not any such individual is eligible
for Medicare; (ii) transferring any stabilized patient to another health care
facility before such other facility has agreed to the transfer of such patient,
while such other facility does not have sufficient room and staff to treat the
patient, without the patient's emergency department medical records, or without
appropriate life support equipment; and (iii) transferring any unstabilized
patient except those transferred at the patient's request or with physician
certification that the medical risks from the transfer are less harmful than
continued treatment at the transferring facility. Hospitals that violate COBRA
may be terminated from the Medicare program and may be fined up to $50,000 for
each violation.
Federal and State Fraud and Abuse and Anti-Referral Legislation. The
Social Security Act contains prohibitions on offering, paying, soliciting or
receiving remuneration intended to induce business reimbursed under the Medicare
or Medicaid programs. Thus, financial arrangements between hospitals and
persons, such as physicians, who are in a position to refer patients or induce
the acquisition of any goods or services paid for by the Medicare or Medicaid
programs, must comply with the "fraud and abuse" anti- kickback provisions of
the Social Security Act (presently codified in Section 1128B(b) of the Social
Security Act, hereinafter the "Antifraud Amendments"). In addition to felony
criminal penalties (fines of up to $25,000 and imprisonment for up to five years
per referral), the Social Security Act establishes civil monetary penalties and
the sanction of excluding violators from Medicare and Medicaid participation.
The Antifraud Amendments have been interpreted broadly by the federal
regulators and the courts to prohibit the intentional payment of anything of
value if one purpose is to influence the referral of Medicare or Medicaid
business. Health care providers generally have been concerned in recent years
that
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many of its customary, and even relatively innocuous, commercial arrangements
with their physicians may technically violate this broad interpretation of the
Antifraud Amendments.
In 1976, Congress established the Office of Inspector General of the
United States Department of Health and Human Services ("OIG") to identify and
eliminate fraud, abuse and waste in HHS programs and to promote efficiency and
economy in HHS departmental operations. The OIG carries out this mission through
a nationwide program of audits, investigations and inspections. The OIG also
operates a 24-hour 800 number "hotline" where persons with information on health
care fraud are encouraged to report their information to the OIG and may even
remain anonymous in the process.
In order to provide guidance to health care providers on ways to engage
in legitimate business practices and avoid scrutiny under the Antifraud
Amendments, the OIG has from time to time issued "Special Fraud Alerts"
identifying features of transactions, which, if present, may indicate that the
transaction violates the Antifraud Amendments. In May 1992, the OIG issued a
Special Fraud Alert regarding hospital incentives to physicians. The alert
identified the following incentive arrangements as potential violations of the
statute: (a) payment of any sort of incentive by the hospital each time a
physician refers a patient to the hospital, (b) the use of free or significantly
discounted office space or equipment (in facilities usually located close to the
hospital), (c) provision of free or significantly discounted billing, nursing or
other staff services, (d) free training for a physician's office staff in areas
such as management techniques, CPT coding and laboratory techniques, (e)
guarantees which provide that, if the physician's income fails to reach a
predetermined level, the hospital will supplement the remainder up to a certain
amount, (f) low-interest or interest-free loans, or loans which may be forgiven
if a physician refers patients (or some number of patients) to the hospital, (g)
payment of the costs of a physician's travel and expenses for conferences, (h)
payment for a physician's continuing education courses, (i) coverage on the
hospital's group health insurance plan at an inappropriately low cost to the
physician and (j) payment for services which require few, if any, substantive
duties by the physician, or payment for services in excess of the fair market
value of services rendered. In this fraud alert the OIG encouraged persons
having information about hospitals who offer the above types of incentives to
physicians to report such information to the OIG on the "hotline" or through
other means.
In addition, the OIG has issued regulations outlining certain "safe
harbor" practices, which, although potentially capable of inducing prohibited
referrals of business under the Medicare or Medicaid programs, would not be
subject to enforcement action under the Social Security Act. The practices
covered by the regulations include certain physician joint venture transactions,
rental of space and equipment, personal services and management contracts, sales
of physician practices, referral services, warranties, discounts, payments to
employees, group purchasing organizations and waivers of beneficiary deductibles
and co- payments. Additional proposed safe harbors are published by the OIG from
time to time. Certain of the Company's current arrangements with physicians,
including joint ventures, do not qualify for the current safe harbor exemptions
and, as a result, such arrangements risk scrutiny by the OIG and may be subject
to enforcement action. The failure of these arrangements to satisfy all of the
conditions of the applicable safe harbor criteria does not mean that the
arrangements are illegal. Nevertheless, certain of the Company's current
financial arrangements with physicians, including joint ventures, and the
Company's future development of joint ventures and other financial arrangements
with physicians, could be adversely affected by the failure of such arrangements
to comply with the safe harbor regulations, or the future adoption of other
legislation or regulation in these areas.
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The Company has a Compliance Program to educate its employees on the
contents and meaning of the OIG's Special Fraud Alerts and "safe harbors." See
"Governmental Regulation - The Company's Compliance Program."
The federal Medicaid regulations also prohibit fraudulent and abusive
practices including kickbacks and authorize the exclusion from such program of
providers in violation of such regulations.
On August 21, 1996, President Clinton signed significant new federal
health reform legislation known as the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"). Most important for health care providers,
the new law includes comprehensive and far-reaching amendments or supplements to
the Antifraud Amendments. It also contains substantive provisions relating to
portability of health insurance coverage and limitations on preexisting
condition exclusions. Most of the provisions of HIPAA become effective January
1, 1997.
As to the amendments or supplements to the Antifraud Amendments, HIPAA
is intended to enhance federal health care law enforcement by creating and
funding three new health care fraud and abuse enforcement programs: The Fraud
and Abuse Control Program, The Medicare Integrity Program and the Beneficiary
Incentive Program. The Fraud and Abuse Control Program calls for the
coordination of federal, state and local authorities to control fraud and abuse
with respect to not only Medicare and Medicaid but, for the first time, with
respect to private health insurance plans as well. The Medicare Integrity
Program directs HHS to enter into separate contracts with private entities to
carry out certain fraud and abuse detection activities. Through the Beneficiary
Incentive Program, HIPAA authorizes the Secretary of HHS to provide payments to
individuals who (i) report information leading to the imposition of civil
monetary penalties under the fraud and abuse laws or (ii) make suggestions that
result in Medicare and Medicaid program savings. Under HIPAA, health care fraud,
now defined as knowingly and willfully executing or attempting to execute a
"scheme or device" to defraud any health care benefit program, is made a federal
criminal offense. In addition, for the first time, federal enforcement officials
will have the ability to exclude from Medicare and Medicaid any investors,
officers and managing employees associated with business entities that have
committed health care fraud, even if the investor, officer or employee had no
knowledge of the fraud. HIPAA also establishes a new violation for the payment
of inducements to Medicare or Medicaid beneficiaries in order to influence those
beneficiaries to order or receive services from a particular provider or
practitioner. HIPAA requires HHS to establish a significant new national health
care fraud and abuse data collection program by January 1, 1997. This program
will collect reports of final adverse actions (including civil, criminal,
license and certification sanctions and any other publicly available negative
findings) against health care providers, suppliers or licensed practitioners.
Governmental agencies and private plans will both report and have access to the
information collected by the program. Also, HIPAA requires the Secretary of HHS
to issue advisory opinions with respect to whether particular transactions
violate the Medicare and Medicaid anti-kickback laws. The Secretary is also
required to request suggestions for the issuance of additional safe harbors
under the Antifraud Amendments. One important new safe harbor already contained
in HIPAA exempts certain risk-sharing arrangements from the Antifraud
Amendments.
Effective January 1, 1991, Section 1877 of the Social Security Act
(commonly known as "Stark I") prohibited referrals of Medicare and Medicaid
patients to clinical laboratories with which a referring physician has a
financial relationship. OBRA 1993 included certain amendments to Section 1877
(such amendments commonly known as "Stark II") which substantially broadened the
scope of prohibited physician self-referrals to include referrals by physicians
to entities with which the physician has a financial relationship and which
provide certain "designated health services" which are reimbursable by Medicare
or
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Medicaid. "Designated health services" include not only the clinical laboratory
services which were the only such services covered by Stark I, but also, among
other things, physical and occupational therapy services, radiology services,
DME, home health, and inpatient and outpatient hospital services. Sanctions for
violating Stark I or II include civil money penalties up to $15,000 per
prohibited service provided, assessments equal to 200% of the dollar value on
each such service provided and exclusion from the Medicare and Medicaid
programs. Stark II contains certain exceptions to the self-referral prohibition,
including an exception if the physician has an ownership interest in the entire
hospital. Stark II became effective January 1, 1995 and contemplates the
promulgation of regulations implementing the new provisions. The Company cannot
predict the final form that such regulations will take or the effect that Stark
II or the regulations to be promulgated thereunder will have on the Company.
Many states in which the Company operates also have laws that prohibit
payments to physicians for patient referrals with statutory language similar to
the Antifraud Amendments, but with broader effect since they apply regardless of
the source of the payment for the care. These statutes typically provide
criminal and civil penalties as well as loss of licensure. Many states also have
passed legislation similar to Stark II, but also with broader effect since the
legislation applies regardless of the source of the payment for the care. The
scope of these state laws is broad, and little precedent exists for their
interpretation or enforcement.
Certain of the Company's current financial arrangements with
physicians, including joint ventures, and the Company's future development of
joint ventures and other financial arrangements with physicians, could be
adversely affected by the failure of such arrangements to comply with the
Antifraud Amendments, Section 1877, current state laws or other legislation or
regulation in these areas adopted in the future. The Company is unable to
predict the effect of such regulations or whether other legislation or
regulations at the federal or state level in any of these areas will be adopted,
what form such legislation or regulations may take or their impact on the
Company. The Company is continuing to enter into new financial arrangements with
physicians and other providers in a manner structured to comply in all material
respects with these laws. Under the Company's joint venture arrangements,
physician investors are not and will not be under any obligation to refer or
admit their patients, including Medicare or Medicaid beneficiaries, to receive
services at the Company's facilities, nor are distributions to those physician
investors contingent upon or calculated with reference to referrals by the
investors. On this basis, the Company does not believe the ownership of
interests in or receipt of distributions from the Company's joint ventures would
be construed to be knowing and willful payments to the physician investors to
induce them to refer patients in violation of the Antifraud Amendments. There
can be no assurance, however, that (i) governmental officials charged with the
responsibility for enforcing these laws will not assert that the Company is in
violation thereof or (ii) such statutes will ultimately be interpreted by the
courts in a manner consistent with the Company's interpretation.
The Company's Compliance Program. The Company maintains a multi-faceted
Corporate Compliance and Ethics Program which it formally established in 1995.
The Program is managed and implemented on a day-to-day basis by the Company's
Vice President-Compliance & Ethics and his staff who work with experienced
health care lawyers both in the Company's Legal Department and in outside law
firms who act as special counsel to the Company. The Program runs under the
oversight of a high-level management Compliance Committee made up of the
Company's Chief Operating Officer, Chief Financial Officer, General Counsel and
its Vice President-Compliance & Ethics as well as Board oversight by the Audit,
Ethics and Quality Assurance Committee of the Company's Board of Directors. The
Compliance Program was adopted to ensure that high ethical and conduct standards
are met in the operation of the Company's business and to ensure that the
Company has implemented policies and procedures so that the Company's employees
will act in full compliance with all applicable laws, regulations and Company
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policies. Under the Program a 45-page Corporate Compliance Handbook was prepared
and distributed to all Company employees. The Program provides initial and
periodic compliance and ethics training to every Company employee and encourages
all employees to report any legal or ethical violations to a toll-free telephone
hotline, even on an anonymous basis, without fear of retaliation. Also, under
the Program each of the Company's hospitals is subjected to an internal legal
audit for regulatory compliance with the Antifraud Amendments and the other
fraud and abuse laws at least annually.
Summit Health OIG Investigation. In February 1996, the Company's Midway
Hospital Medical Center ("Midway") in Los Angeles, California, which was
acquired from Summit Health in April 1994, received an investigative subpoena
from the Office of the Inspector General of the United States Department of
Health and Human Services (the "OIG"). The subpoena called for the production of
all of Midway's agreements or other financial arrangements with physicians and
documents related thereto from January 1, 1992 to the present. The subpoena
states that it was issued in connection with an investigation being conducted by
the OIG concerning possible violations of Medicare rules and regulations. The
Company has been advised that the investigation is in connection with a civil
investigation under the direction of the Civil Division of the Department of
Justice. The Company has hired an outside law firm to conduct an independent
review of the matter. The Company is fully cooperating with the government
investigation. In June 1996 the government expanded this civil investigation to
arrangements between physicians and the remaining eleven hospitals which the
Company acquired from Summit Health in 1994. As a consequence of agreements to
cooperate in the investigation, the Company is voluntarily producing the same
type of documentation from these additional hospitals. Also, in an apparently
unrelated matter, the government has requested and the Company has agreed to
provide similar records from a single hospital outside the group acquired from
Summit Health in 1994.
The government investigation is in its early stages. The Company has
made, and is expected to continue to make, extensive production of documents and
other information to the government in response to this investigation.
Additionally, the Company and its outside counsel have held numerous meetings
with the governmental attorneys in respect of this matter and, as a result, the
Company believes that at this time this investigation is focused primarily on
its hospitals' physician arrangements and not the hospitals' Medicare or
Medicaid billing practices. Although no proceedings have been instituted, in the
event that the OIG believes that any wrongdoing has occurred, civil and possibly
criminal proceedings could be instituted. If any such proceedings were
instituted and the outcome were unfavorable, the Company could be subject to
fines, penalties and damages ("Monetary Payments") and also could be excluded
from Medicare and other government reimbursement programs. The aggregate amount
of the Monetary Payments and any such exclusion could have a material adverse
effect on the Company's financial position or results of operations. The result
of this investigation and its impact, if any, cannot be predicted or estimated
at this time. Based on information currently available to it, management
believes that if the investigation remains limited to physician arrangements,
remains civil in nature and, with the single exception noted above, relates only
to the practices of the hospitals of an acquired corporation, the final outcome
of this investigation will not have a material adverse effect on the Company's
financial position or results of operations.
Health Care Reform. Health care, as one of the largest industries in
the United States, continues to attract much legislative interest and public
attention. In recent years, an increasing number of legislative proposals have
been introduced or proposed in Congress and in some state legislatures that
would effect major changes in the health care system, either nationally or at
the state level. Reform proposals under consideration in recent years at the
federal level have been price or cost controls on hospitals, insurance market
reforms to increase the availability of group health insurance to small
businesses, requirements that
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all businesses offer health insurance coverage to their employees, the creation
of a single government health insurance plan that would cover all citizens and
reductions in payments to hospitals providing a disproportionate amount of care
to indigent patients. The costs of certain proposals would be funded in
significant part by reductions in payments by governmental programs, including
Medicare and Medicaid, to health care providers such as hospitals.
During 1994, President Clinton repeatedly stated that one of his
primary objectives was to reform the nation's health care system to insure
universal coverage and address the rising costs of care. However, no large-scale
federal reform was passed by the U.S. Congress in 1994. Despite the failure to
pass large scale health care reform in 1994, the Congressional debate about
health care continued in 1995 and 1996, but this time largely in the context of
reducing Medicare and Medicaid payments as part of the overall attempt to reduce
federal budget deficits. Although in October 1995 both the U.S. House of
Representatives and the U.S. Senate passed budget bills providing for large
savings under the Medicare and Medicaid programs over the subsequent seven years
(e.g., $270 million in Medicare savings) in order to reach a balanced budget by
2002, President Clinton vetoed such legislation and proposed significantly
lesser cuts in Medicare and Medicaid spending. As a result of the deadlock, the
Medicare and Medicaid cuts adopted by Congress failed to become law in FFY 1996.
There continue to be federal and state proposals that would, and
actions that do, impose more limitations on government and private payments to
providers such as the Company and proposals to increase copayments and
deductibles from program and private patients. At the federal level, both
Congress and the current Administration have continued to propose health care
budgets that substantially reduce payments under the Medicare and Medicaid
programs. Indeed, both Houses of Congress in May 1996 passed budget resolutions
proposing large savings in Medicare and Medicaid funding over the next six years
(e.g., $168 million in Medicare savings) in order to reach a balanced budget by
2002, but again President Clinton has proposed cuts substantially below those
proposed by Congress. Once again, it is not clear whether final legislation
cutting Medicare and Medicaid costs will result in FFY 1997. In addition, a
number of states are considering the enactment of managed care initiatives
designed to reduce their Medicaid expenditures, to provide universal low-cost
coverage, additional care and/or additional taxes on hospitals to help finance
or expand the states' Medicaid systems.
While the Company anticipates that payments to hospitals will be
reduced as a result of future federal and state legislation, it is uncertain at
this time what legislation on health care reform may ultimately be enacted or
whether other changes in the administration or interpretation of governmental
health care programs will occur. There can be no assurance that future health
care legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on the
Company's business, financial condition or results of operations.
Licensure and Accreditation. Health care facility construction and
operation is subject to extensive federal, state and local legislation and
regulation relating to the adequacy of medical care, equipment, personnel,
hygiene, operating policies and procedures, fire prevention, rate-setting and
compliance with building codes and environmental protection laws. Hospitals must
maintain strict standards in order to obtain their state hospital licenses from
a department of health or other applicable agency in each state. In granting and
renewing licenses, a department of health considers, among other things, the
physical buildings and equipment, the qualifications of the administrative
personnel and nursing staff, the quality of care and continuing compliance with
the laws and regulations relating to the operation of the facilities. State
licensing of facilities is a prerequisite to certification under the Medicare
and Medicaid programs. Various other
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licenses and permits also are required in order to dispense narcotics, operate
pharmacies, handle radioactive materials and operate certain equipment. Hospital
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with the various standards necessary
for their licensing and accreditation. All of the Company's health care
facilities are properly licensed under appropriate state laws, are certified for
participation under the Medicare and Medicaid programs and are accredited by the
Joint Commission on Accreditation of Health Care Organizations ("JCAHO"), except
for one hospital which is accredited by the American Osteopathic Association.
JCAHO regularly conducts an on-site review and inspection of every hospital
seeking to obtain or maintain its accreditation. JCAHO accreditation usually
runs for three year periods. Hospitals accredited by JCAHO are deemed to be in
compliance with the standards for participation in the Medicare program,
although Medicare can conduct its own compliance reviews.
In addition to JCAHO inspections and inspections conducted by certain
state and local regulatory authorities, HCFA, generally in response to specific
complaints from patients but also occasionally on a random basis, causes
hospitals participating in the Medicare program to be inspected.
Some of the Company's hospitals were inspected by JCAHO, HCFA and state
licensing authorities during its fiscal year ended August 31, 1996, and none of
these hospitals lost their ability to participate in the Medicare program or a
state Medicaid program as a result of such inspections, although any such
inspection in the future could have a different result.
Management believes that the Company's facilities are in substantial
compliance with current applicable federal, state, local and independent review
body regulations and standards. The requirements for licensure and accreditation
are subject to change and, in order to remain qualified, it may be necessary for
the Company to effect changes in its facilities, equipment, personnel and
services. Although the Company intends to continue its licensing and
qualifications, there is no assurance that its hospitals will be able to comply
in the future.
Certificates of Need. The construction of new facilities, the
acquisition of existing facilities, and the addition of new beds or services may
be reviewable by state regulatory agencies under a CON program. The Company
operates hospitals in some states that require approval under a CON program.
Such laws generally require appropriate state agency determination of public
need and approval prior to beds or services being added, or a related capital
amount being spent. This requirement can increase the cost (in time and money)
of a project and may affect the feasibility of some projects. Following a number
of years of decline, the number of states requiring CONs is once again on the
rise. State legislators once again are looking at the CON process as a way to
contain rising health care costs. Failure to obtain necessary state approval can
result in the inability to complete an acquisition or change of ownership, the
imposition of civil or, in some cases, criminal sanctions, the inability to
receive Medicare or Medicaid reimbursement or the revocation of a facility's
license. See "Competition".
State Rate Review. A few states in which the Company owns hospitals
have adopted legislation mandating rate or budget review for hospitals or have
adopted taxes on hospital revenues, assessments or licensure fees to fund
indigent health care within the state.
In Florida, a budget review process and a Maximum Allowable Rate
Increase ("MARI") on revenue increases per admission has been in effect with
respect to the Company's hospitals since 1986. MARI limits hospital net revenue
per admission increases to an administratively determined cost of health care
index plus
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an additional percentage in excess thereof. This law has limited the Company's
ability to increase rates at its Florida hospitals. The Company owned five
hospitals aggregating 1,755 beds in Florida as of August 31, 1996.
In the aggregate, state rate or budget review and indigent tax
provisions have not to date materially adversely affected the Company's results
of operations. The Company is unable to predict whether any additional state
rate or budget review or indigent tax provisions will be adopted and,
accordingly, is unable to assess the effect thereof on its results of operations
or financial condition.
Utilization Review. The Company's facilities in recent years have been
negatively affected by controls imposed by governmental and private payors
designed to reduce admissions and lengths of stay. Such controls, including what
is commonly referred to as "utilization review", have resulted in a reduction of
patient access to certain treatments and procedures by reviewing the necessity
of the admission or outpatient procedure and the course of treatment. Federal
law contains numerous provisions designed to ensure that services rendered by
hospitals to Medicare and Medicaid patients meet professionally recognized
standards, are medically necessary and that claims for reimbursement are
properly filed. These provisions include a requirement that a sampling of
admissions of Medicare and Medicaid patients must be reviewed by peer review
organizations ("PROs"), which review the appropriateness of Medicare and
Medicaid patient admissions and discharges, the quality of care provided, the
validity of DRG classifications and the appropriateness of cases of
extraordinary length of stay. PROs may deny payment for services provided, may
assess fines and also have the authority to recommend to HHS that a provider
which is in substantial noncompliance with the standards of the PRO be excluded
from participating in the Medicare program. Utilization review is also a
requirement of most non-governmental managed care organizations.
Environmental Matters. The Company is subject to various federal, state
and local statutes and ordinances regulating the discharge of materials into the
environment. The Company's hospitals generate pathological wastes, biohazardous
(infectious) wastes, chemical wastes, waste oil and other solid wastes. The
Company usually incinerates or contracts for disposal of its wastes. No
litigation currently exists against the Company related to waste disposal, and
the Company is not aware of any ongoing investigation by any government agencies
in this area. The Company believes that the Company and its facilities are
currently in compliance, in all material respects, with applicable federal,
state and local statutes and ordinances regulating the discharge of materials
into the environment. The Company does not believe that it will be required to
expend any material amounts in order to remain in compliance with these laws and
regulations or that compliance will materially affect its capital expenditures,
earnings or competitive position.
Professional 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, comprehensive general liability and excess casualty claims and
maintains an unfunded reserve for such risks. For hospital professional
liability, comprehensive general liability and excess casualty claims asserted,
the Company assumes such liability risks under its self-insured retention up to
$3 million per claim, and $30 million in the aggregate, for claims reported from
June 1, 1995 to June 1, 1997. The Company also purchases excess levels of
coverage above such self-insured retention. For the twelve months ending June 1,
1996 and June 1, 1997, the Company purchased for each such year a layer of
excess insurance above these self-insured retentions in the amount of $50
million per claim and $50 million in the aggregate that may be applied towards
hospital professional liability, comprehensive general liability and excess
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<PAGE>
casualty 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 results of operations of the Company could be adversely affected. In
addition, while the Company's layer of excess insurance has been adequate in the
past to provide for liability and casualty claims, there can be no assurance
that adequate insurance will continue to be available at favorable price levels.
If new insurance is not provided to replace existing insurance upon its
expiration on June 1, 1997, the results of operations of the Company could be
adversely affected.
Other Litigation
The Company currently, and from time to time, is subject to claims and
suits arising in the ordinary course of business, including claims for damages
for personal injuries or for wrongful restriction of, or interference with,
physicians' staff privileges. In certain of these actions the claimants have
asked for punitive damages against the Company, which usually are not covered by
insurance. In the opinion of management, the ultimate resolution of any of these
pending claims and legal proceedings will not have a material adverse effect on
the Company's financial position or results of operations.
Broad provisions in the Medicare and Medicaid laws, as well as similar
provisions in many state laws, deal with fraud and abuse, false claims and
physician self-referrals. In recent years, government investigations of alleged
violations of these laws have become common place in the health care industry.
As with all health care providers participating to any significant extent in the
Medicare and Medicaid programs, the Company could be materially adversely
affected if it were to be found in violation of the fraud and abuse, false
claims or physician self-referral laws as a result of its current or past
business operations. See "Summit Health OIG Investigation."
Certain Income Tax Matters
The Company's federal income tax returns are not presently under audit
by the Internal Revenue Service (the "IRS"), except in respect of Summit Health
as disclosed below. Furthermore, the Company's federal income tax returns for
taxable years through August 31, 1992 are no longer subject to IRS audit, with
certain limited exceptions and except in respect of net operating loss
carryforwards for income tax purposes ("NOL's") for prior years, which may be
subject to IRS audit as NOL's are utilized in subsequent tax years. Also, Summit
Health has extended the statute of limitations for fiscal years 1987 to 1992
through March 31, 1997.
The Company has approximately $199 million of NOL's which expire from
2001 to 2009 and which are available on a limited basis to offset federal net
taxable income. The AHM Merger caused an "ownership change" within the meaning
of Section 382(g) of the Internal Revenue Code for both the Company and AHM.
Consequently, allowable federal deductions relating to NOL's of the Company and
AHM arising in periods prior to the AHM Merger are thereafter subject to annual
limitations of approximately $19 million and $16 million for the Company and
AHM, respectively. In addition, approximately $55 million of the NOL's are
subject to an annual limitation of approximately $3 million due to prior
"ownership changes" of the Company. The annual limitations may be increased in
order to offset certain built-in gains which are recognized during the five-year
period following an ownership change. In addition, the NOL's from pre-
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<PAGE>
merger tax years of AHM may only be applied against the prospective taxable
income of the AHM entities group. The limitations described above are not
currently expected to significantly affect the ability of the Company to
ultimately recognize the benefit of these NOL's in future years.
In recent years the IRS was examining the federal income tax returns
for fiscal years 1984, 1985 and 1986 of Summit Health, which became a
wholly-owned subsidiary of the Company in April 1994 and merged into the Company
in September 1994. Summit Health received a revenue agent's report from the IRS
with proposed adjustments for the years 1984 through 1986 aggregating as of
August 31, 1996 approximately $16.6 million of income tax, $66.4 million of
interest on the tax, $43.9 million of penalties and $25.6 million of interest on
the penalties. After receiving the revenue agent's report, Summit Health filed a
protest contesting the proposed adjustments. On October 28, 1996, the Company
entered into a Closing Agreement on Final Determination with the IRS for the
above audit period, by agreeing and paying additional tax of $647,000 and
interest of $888,000 to close the audit of Summit Health for the fiscal years
1984 through 1986. The Closing Agreement is subject to review by the Joint
Congressional Committee on Taxation since the matter relates to a refund of
taxes to Summit Health in excess of $1 million.
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<PAGE>
Item 2. Properties.
The following table sets forth the name of, location of and the number
of licensed beds in the Company's hospitals as of August 31, 1996. All of the
hospitals are general acute care hospitals, except for the one hospital
indicated in footnote (3) below which is a psychiatric hospital. Of the
Company's 50 hospitals, 40 are owned (of which four are operated pursuant to
joint ventures) and 10 are leased as of August 31, 1996. See Item 1 -
"Business-Recent Acquisitions" and "Business-Pending Acquisitions."
<TABLE>
<S> <C> <C> <C>
Licensed
State Name Location Beds(1)
Arizona............. Community Hospital Medical Center Phoenix 59
Mesa General Hospital Medical Center(2) Mesa 138
St. Luke's Behavioral Health Center(3)(4) Phoenix 86
St. Luke's Medical Center(4) Phoenix 276
Tempe St. Luke's Hospital(4) Tempe 90
Tucson General Hospital Tucson 146
California.......... Brotman Medical Center Culver City 438
Centinela Hospital Medical Center Inglewood 400
Chapman Medical Center(5) Orange 135
Coastal Communities Hospital(6) Santa Ana 177
Community Hospital of Huntington Park(7) Huntington Park 99
Fountain Valley Regional Hospital and Fountain Valley 413
Medical Center
French Hospital Medical Center San Luis Obispo 147
Greater El Monte Community Hospital South El Monte 113
Harbor View Medical Center San Diego 156
Midway Hospital Medical Center Los Angeles 225
Mission Hospital of Huntington Park Huntington Park 127
Monterey Park Hospital Monterey Park 102
Santa Ana Hospital Medical Center(8) Santa Ana 90
St. Luke Medical Center Pasadena 162
Suburban Medical Center(9) Paramount 184
Valley Community Hospital(10) Santa Maria 70
Westside Hospital Los Angeles 68
Whittier Hospital Medical Center Whittier 159
Woodruff Community Hospital Long Beach 96
Florida............. Coral Gables Hospital(11) Coral Gables 273
Florida Medical Center(12) Fort Lauderdale 459
Florida Medical Center, South Plantation 202
North Bay Medical Center New Port Richey 122
Parkway Regional Medical Center(13) North Miami 699
Indiana............. Winona Memorial Hospital Indianapolis 317
Iowa................ Davenport Medical Center Davenport 150
Louisiana........... Minden Medical Center Minden 121
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<PAGE>
Licensed
State Name Location Beds(1)
Massachusetts....... Saint Vincent Hospital(14) Worcester 432
Mississippi......... Gulf Coast Medical Center Biloxi 189
Missouri............ Twin Rivers Regional Medical Center Kennett 126
Nevada.............. Lake Meade Hospital Medical Center North Las Vegas 198
Oregon.............. Eastmoreland Hospital Portland 100
Woodland Park Hospital(15) Portland 209
Texas............... Cypress Fairbanks Medical Center Houston 149
Garland Community Hospital Garland 113
Houston Northwest Medical Center Houston 498
Lake Pointe Medical Center Rowlett 92
Sharpstown General Hospital Houston 190
South Park Hospital & Medical Center Lubbock 101
Southwest General Hospital San Antonio 286
Trinity Valley Medical Center Palestine 150
Washington.......... Puget Sound Hospital Tacoma 160
West Virginia....... Plateau Medical Center Oak Hill 91
Wyoming............. Lander Valley Medical Center(16) Lander 102
- ------------------
<FN>
(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 9,685.
(2) Leased facility. The lease expires July 31, 2003, subject to renewal by
the Company until July 31, 2023.
(3) Psychiatric facility.
(4) Leased facility. The lease expires January 31, 2010, subject to
renewal by the Company until January 31, 2015.
(5) Leased facility. The lease expires December 31, 2013.
(6) Joint venture with minority interests owned by physicians.
(7) Leased facility. The lease expires November 25, 2023.
(8) Leased facility. The lease expires August 31, 2003, subject to renewal
by the Company until August 31, 2013.
(9) Leased facility. The lease expires October 31, 2004, subject to
renewal by the Company until October 31, 2020.
(10) Leased facility. The lease expires July 31, 2003, subject to renewal
by the Company until July 31, 2023.
(11) Joint venture with minority interests owned by physicians.
(12) Joint venture with minority interests owned by physicians.
(13) Effective September 1, 1996, the 352 bed license of Golden Glades
Medical Center was combined with the license of this nearby hospital
resulting in this hospital's licensed beds increasing to 699 licensed
beds.
(14) This hospital was acquired by the Company effective September 1, 1996.
(15) The land on which the facility is located is leased, and such ground
lease expires December 31, 2019.
(16) Joint venture with minority interests owned by physicians.
</FN>
</TABLE>
The Company maintains its corporate headquarters in approximately
50,000 square feet of leased office space at 3401 West End Avenue, Nashville,
Tennessee. In addition to the hospitals identified as owned or leased in the
table above, and various parcels of undeveloped land, mostly adjacent to its
hospitals, the Company owns or leases approximately 70 medical office buildings
typically adjacent to its hospitals. The Company also operates six outpatient
ambulatory surgery centers, two in Mesa and Phoenix, Arizona
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<PAGE>
and four in Fountain Valley, San Luis Obispo, Westminster and Whittier,
California. Three of such surgery centers are located in leased facilities and
three are located in buildings owned by the Company.
Of the $1.3 billion net book value of the Company's property, plant and
equipment at August 31, 1996, approximately $143.4 million of these assets were
subject to mortgages or liens as collateral for approximately $71.9 million of
indebtedness. At August 31, 1996, four of the Company's hospitals were owned
subject to mortgage or other liens. The Company's headquarters, hospitals and
other facilities are suitable for their respective uses and are, in general,
adequate for the Company's present needs.
Item 3. Legal Proceedings.
Information with respect to this Item is incorporated herein by
reference to Item 1 - "Business- Governmental Regulation - Summit Health OIG
Investigation"; Item 1 - "Business-Professional Liability and Insurance"; Item 1
- - "Business-Other Litigation"; and Item 1 - "Business-Certain Income Tax
Matters.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock currently trades on the New York Stock
Exchange under the symbol ORN. The Company began trading on The New York Stock
Exchange on December 20, 1995.
The following table sets forth the high and low sale prices for the
Company's common stock for the fiscal periods beginning September 1, 1995 and
ending August 31, 1996 as indicated below and as reported by the Nasdaq Stock
Market (prior to December 20, 1995) and by The New York Stock Exchange (on and
after December 20, 1995).
1995 High Low
---- ----
First Quarter........................... $17 3/4 $12 5/8
Second Quarter.......................... 16 3/8 10 1/2
Third Quarter........................... 18 7/8 15
Fourth Quarter.......................... 21 15 1/4
1996
First Quarter........................... $23 1/4 $17 1/4
Second Quarter.......................... 26 7/8 19 1/4
Third Quarter........................... 29 5/8 24
Fourth Quarter.......................... 26 1/2 19 1/2
There were 1,435 holders of record of shares of the Company's common
stock as of October 31, 1996. The Company's registrar and transfer agent for its
common stock is Society National Bank, Dallas, Texas.
The Company has not paid any cash dividends on its common stock in the
past three years. The Company currently intends to retain all earnings for
working capital, capital expenditures, general corporate purposes and reduction
of outstanding indebtedness. Accordingly, the Company does not expect to pay any
cash dividends in the foreseeable future. The declaration and payment of future
dividends, if any, will be at the sole discretion of the Board of Directors and
will depend upon the Company's profitability, financial condition, cash
requirements, future prospects and other factors deemed relevant by the Board of
Directors. In addition, the terms of the Company's Restated Credit Facility and
certain of the Company's other long-term indebtedness contain substantial
restrictions on the Company's ability to pay dividends.
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<PAGE>
Item 6. Selected Financial Data.
The following table sets forth selected historical financial data and
other operating information of the Company giving effect to the 1994 Mergers.
The selected historical financial data for the five fiscal years ended August
31, 1996 are derived from the consolidated financial statements of the Company.
Because the Company accounted for the 1994 AHM Merger as a pooling-of-interests
transaction, the historical financial data of the Company includes AHM's
historical results of operations. All information contained in the following
table should be read in conjunction with the consolidated financial statements
and related notes of the Company included herein.
<TABLE>
SELECTED FINANCIAL DATA
(in thousands, except per share data)
Years Ended August 31,
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Statement of Operations:
Total revenue(1) $ 808,523 $ 961,795 $1,274,359 $1,842,701 $2,147,232
Interest expense 40,229 68,660 83,428 109,100 107,243
Interest income (3,226) (3,380) (2,862) (4,582) (4,399)
Income (loss) from investments in Houston
Northwest Medical Center (8,210) 173 3,634 14,006 5,128
Income (loss) before income tax expense
and extraordinary item (68,836) 14,768 (45,985) 87,084 135,113
Income tax expense 1,266 1,129 1,057 15,772 35,242
Income (loss) before extraordinary item (70,102) 13,639 (47,042) 71,312 99,871
Net income (loss) (20,435) 9,797 (59,338) 71,312 99,871
Net income (loss) applicable to common
and common equivalent shares (21,798) 8,098 (61,205) 69,312 99,539
Net income (loss) per common and
common equivalent share (0.71) 0.23 (1.62) 1.53 1.73
Net income (loss) per common share
assuming full dilution (2) $ (0.71) $ 0.23 $ (1.62) $ 1.51 $ 1.72
August 31,
--------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $ 46,669 $ 26,173 $ 6,801 $ 5,422 $ 88,137
Total assets 994,407 1,205,137 1,846,543 1,946,404 2,466,528
Long-term debt
(excluding current maturities) 570,971 705,425 1,067,088 1,013,423 1,229,930
Total shareholders' equity(3) 185,882 212,108 328,106 393,138 640,417
- ------------------
<FN>
(1) Total revenue is comprised of patient revenue, net of contractual
adjustments, and other revenue.
(2) Per share information for the years ended August 31, 1992, 1993, and 1994 is
based on primary shares because earnings per share assuming full dilution
is anti-dilutive.
(3) The Company adopted Financial Accounting Standards (SFAS) Statement No. 115
"Accounting for Certain Investments in Debt and Equity Securities"
effective September 1, 1993, which resulted in a $70.9 million and $51.8
million increase in shareholders' equity at August 31, 1994 and 1995,
respectively, with no impact on income. There are no income tax effects
because of the availability of net operating loss carryforwards. All
investments accounted for under SFAS No. 115 are classified as
available-for-sale.
</FN>
</TABLE>
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Proposed Tenet Merger. On October 16, 1996, the Company entered into a
definitive agreement to merge with Tenet Healthcare Corporation ("Tenet"). Under
the terms of the definitive agreement, which was approved by the Board of
Directors of both companies, stockholders owning OrNda common stock would
receive 1.35 shares of Tenet common stock and the associated preferred stock
purchase rights for each share of OrNda common stock and the Company will become
a wholly-owned subsidiary of Tenet. The merger transaction will be tax-free and
accounted for as a pooling of interests and is expected to close in March 1997.
Consummation of the merger is subject to a number of conditions,
including stockholder approval of both companies. The merger is also subject to
the applicable waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act, local regulatory approvals, and confirmation that the
transaction qualifies as a pooling-of-interests for accounting purposes and as a
tax-free reorganization under the Internal Revenue Code.
Other Mergers and Acquisitions. The Company's recent operating results
were significantly affected by mergers, acquisitions and divestitures as
discussed below.As discussed in Note 2 to the accompanying consolidated
financial statements, OrNda HealthCorp ("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 consolidated financial statements. The Summit
Merger was accounted for as a purchase and, accordingly, its operations have
been included since 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 consolidated financial statements and including Summit Health
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 operations of OrNda and AHM,
prior to the Mergers, are referred to as "OrNda" and "AHM", respectively.
In addition to the AHM and Summit Mergers, the Company's results of
operations have been impacted by the August 1994 acquisition of Fountain Valley
Regional Hospital and Medical Center ("Fountain Valley") and related businesses
in Fountain Valley, California, the February 1995 acquisition of three hospitals
and related businesses that comprise the St. Luke's Health System ("St. Luke's")
in Arizona, the January 1996 acquisition of Houston Northwest Medical Center
("HNW"), the July 1996 acquisition of Cypress Fairbanks Medical Center in
Houston, Texas ("Cypress Fairbanks") and the August 1996 acquisition of
Centinela Medical Center in Inglewood, California ("Centinela").
Cost in excess of net assets acquired ("Goodwill"), net of
amortization, increased approximately $179.8 million in fiscal 1996 primarily
from goodwill associated with the acquisitions of HNW ($100.0 million), Cypress
Fairbanks ($24.4 million) and Centinela ($52.1 million). Goodwill, net of
amortization, increased approximately $43.9 million in fiscal 1995 primarily
from the acquisition of St. Luke's of $4.0 million; adjustments associated with
the acquisition of Fountain Valley of $2.9 million; in connection with the buy
out of a joint venture at one of the Company's hospitals of $11.5 million; and,
final adjustments to the acquisition of Summit Health of $31.6 million. The
adjustments to the Summit Health goodwill resulted principally from the
finalization of appraisals on fixed assets acquired, resolution of certain
assumed litigation, and receipt of actuarial estimates on termination of pension
plans.
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<PAGE>
Divestitures. Effective in the third quarter of fiscal 1994, the
Company's management decided upon a plan of disposition to sell Decatur Hospital
in Decatur, Georgia. During the fourth quarter of fiscal 1994, management also
entered into plans to dispose of Lewisburg Community Hospital in Lewisburg,
Tennessee, Gibson General Hospital in Trenton, Tennessee, and Pasadena General
Hospital in Pasadena, Texas. These four hospitals have a total of 486 licensed
beds. The Company consummated the sale of the Decatur Hospital in June 1994 and
the sale of the Gibson Hospital effective October 31, 1994. Effective December
31, 1994, the Company sold Ross Hospital, a 92-bed psychiatric facility in
Kentfield, California.
The Company sold the hospital in Lewisburg on March 1, 1995 and had
definitive agreements to lease the Pasadena General Hospital real property and
sell the operations of Pasadena General Hospital to the lessee. The lessee
assumed ownership of operations and began leasing Pasadena General Hospital on
March 3, 1995. On or about March 27, 1995, the Company became aware that the
buyer/lessee of Pasadena had failed to perform under its contractual agreement.
On March 31, 1995, the Company re-assumed management of the facility until the
facility was closed on May 14, 1995. On July 7, 1995, the Company entered into a
definitive agreement to sell the real property of Pasadena General Hospital to a
third party. The sales price resulted in an additional loss on sale of $5.7
million which was recorded in the third quarter of fiscal 1995. The above noted
divestitures did not have a significant impact on subsequent operations.
Geographic Concentration. The Company operates hospitals in greater
southern California, South Florida, Arizona and Texas which generated the
following percentages of the Company's total revenue for the years ended August
31, 1995 and 1996, respectively:
<TABLE>
<S> <C> <C> <C> <C>
Number Percentage of Fiscal Number Percentage of Fiscal
of 1995 of 1996
Hospitals Total Revenue Hospitals Total Revenue
Southern California 15 34.8% 17 31.6%
South Florida 5 19.3% 5 16.5%
Arizona 6 8.9% 6 9.7%
Texas 6 10.2% 8 16.0%
</TABLE>
To the extent favorable or unfavorable changes in regulations or market
conditions occur in the these areas, such changes would likely have a
corresponding impact on the Company's results of operations.
RESULTS OF OPERATIONS
General Trends. During the periods discussed below, the Company's
results of operations were affected by certain industry trends, changing
components of total revenue, and changes in the Company's debt structure. The
Company's results of operations have also been impacted by the mergers,
acquisitions and divestitures discussed above.
Industry Trends. Outpatient services accounted for 31.3% and 28.8% of
actual gross patient revenue for the years ended August 31, 1996 and 1995,
respectively, reflecting the industry trend towards greater use of outpatient
services and the expansion of the Company's outpatient services primarily
achieved through the opening of new outpatient clinics in key markets in fiscal
1996 and 1995. The Company expects the industry trend towards outpatient
services to continue as procedures currently being performed on an
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<PAGE>
inpatient basis become available on an outpatient basis through technological
and pharmaceutical advances. The Company plans to provide quality health care
services as an extension of its hospitals through a variety of outpatient
activities including surgery, diagnostics, physician clinics and home health.
As discussed below, excluding the effect of the acquisitions and the
divestitures noted above ("same hospitals basis"), total revenues have
increased, reflecting higher utilization of outpatient and ancillary services,
increased acuity of patients admitted, and an increase in admissions for
inpatient procedures. The impact on revenue of increased patient acuity and
general price increases has been partially offset by the increasing proportion
of revenues derived from managed care providers. These major payors
substantially pay on a fixed payment rate on a per patient or a per diem basis
instead of a cost or charge reimbursement methodology. Fixed payments limit the
ability of the Company to increase revenues through price increases. While these
fixed payment rates have increased annually, the increases have historically
been at a rate less than the Company's increases in costs, and have been
inadequate to reflect increases in costs associated with improved medical
technologies. The Company has been able to mitigate such inflationary pressures
through cost control programs, as well as utilization management programs which
reduce the number of days that patients stay in the hospital and the amount of
hospital services provided to the patient. The average length of stay has
decreased from 5.3 days for the year ended August 31, 1995 to 5.0 days for the
year ended August 31, 1996. The Company has programs designed to improve the
margins associated with the revenues derived from government payors and managed
care providers. In addition, the Company has programs designed to enhance
overall hospital margins.
Year Ended August 31, 1996 Compared With The Year Ended August 31, 1995.
Total revenue for the year ended August 31, 1996 increased over the
same period in the prior year by $304.5 million or 16.5% to $2.1 billion. The
16.5% increase is primarily a result of the acquisitions discussed above as well
as an increase in same hospitals revenue as discussed below. The increase in
total revenue attributable to acquisitions, net of divestitures, was $179.9
million. Net income applicable to common shares for the year ended August 31,
1996 was $99.5 million, or $1.73 per share, compared to $69.3 million, or $1.53
per share, in the same period last year.
Operating expenses in the year ended August 31, 1996 increased 14.1%
($222.1 million) compared to the same period in the prior year primarily as a
result of acquisitions and the increase in same hospital revenues and volumes
discussed below.
On a same hospitals basis, total revenue increased 7.6% ($124.6
million) primarily as a result of a 2.9% increase in admissions and a 13.5%
increase in gross outpatient revenue. On a same hospitals basis, salaries and
benefits increased as a percent of total revenue from 45.3% in fiscal 1995 to
45.4% in fiscal 1996. Supplies expense increased 11.4% ($24.1 million) and as a
percentage of total revenue increased from 12.8% in fiscal 1995 to 13.3% in
fiscal 1996. Purchased services decreased 5.6% ($10.6 million) and as a
percentage of total revenue decreased from 11.6% in fiscal 1995 to 10.2% in
fiscal 1996 primarily due to a reclassification in fiscal 1996 of the supply
component of major contracts from purchased services to supplies expense. The
provision for doubtful accounts increased 1.1% ($1.3 million) but decreased from
7.1% of total revenue for year ended August 31, 1995 to 6.7% for the year ended
August 31, 1996. Other operating expenses increased 7.0% ($9.5 million) and as a
percentage of total revenue was 8.3% in fiscal 1995 and 1996.
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<PAGE>
The effect of price increases implemented by the Company's hospitals
was nominal as gross revenue from fixed reimbursement third party payors
represented approximately 87.5% of the Company's total gross revenue in 1996.
Over the last several years, the portion of the Company's total revenue derived
from fixed reimbursement third party payors has increased while rates of
increases from these payors have generally been less than medical-related
inflation, resulting in increased efforts by the Company to implement cost
containment initiatives and re-evaluate hospital programs for adequacy of
profitability. Since these trends are likely to continue, the Company's ability
to improve operating results at its existing hospitals is dependent on its
continued effectiveness in reducing its costs of services. The Company's
operations may also be enhanced through strategic acquisitions as was
particularly evident in fiscal 1994 and fiscal 1995 with the mergers with AHM
and Summit Health and the individual hospital acquisitions. The Company intends
to pursue strategic acquisitions of health care providers in geographic areas
and with service capabilities that will facilitate the development of integrated
networks.
Depreciation and amortization for fiscal 1996, increased 21.9% ($18.7
million) over the prior year primarily as a result of the acquisitions of St.
Luke's, HNW, Cypress Fairbanks and Centinela. The increase in depreciation and
amortization attributable to acquisitions, net of divestitures, was $11.1
million. In addition, amortization on intangibles increased as a result of new
business units.
Interest expense for the fiscal 1996 as compared to the same period
last year decreased 1.7% ($1.9 million) primarily as a result of a decline in
the average debt balance outstanding and improved pricing under the Restated
Credit Facility. Such decrease was partially reduced by the effect of a $2.2
million reduction in interest expense in the third quarter of fiscal 1995
related to an interest rate swap agreement. Of the Company's total indebtedness
of $1.3 billion at August 31, 1996, approximately $692.2 million bears interest
at rates that fluctuate with market rates, such as the Prime Rate or LIBOR.
Increases in market interest rates will adversely affect the Company's net
income.
Minority interest, which represents the amounts paid or payable to
physicians pursuant to the Company's joint venture arrangements, increased $7.5
million in fiscal 1996 as compared to fiscal 1995, primarily as a result of a
$9.4 million exchange of minority interest ownership in two hospitals for
minority interest investment in two group physician practices in the first
quarter of fiscal 1996 and the acquisition of HNW which had existing joint
ventures.
In fiscal 1996, the Company recorded income of $5.1 million, compared
to $14.0 million in fiscal 1995, related to its investments in HNW which
primarily represented non-cash income related to the Company's investment in HNW
redeemable preferred stock. Effective January 1, 1996, the Company acquired HNW
from the hospital's ESOP. Following the transaction, HNW became a wholly owned
subsidiary of the Company. See Note 2 to the accompanying consolidated financial
statements for further discussion of the Company's investments in HNW as well as
the acquisition of HNW.
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 $198.9 million of tax loss and credit carryforwards at August 31,
1996, which the Company has available to offset future taxable income. The AHM
Merger (see Note 2 to the consolidated financial statements) 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
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are thereafter subject to annual limitations (OrNda - $19.0 million; AHM - $16.0
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 August 31,
1996, net of the valuation allowance, will be realized through reversal of
deferred tax liabilities.
For the year ended August 31, 1996 the Company recorded income tax
expense of $35.2 million on pre-tax income of $135.1 million, an amount less
than the statutory rate, primarily due to the availability of net operating loss
carryforwards.
Year Ended August 31, 1995 Compared with the Year Ended August 31, 1994.
Total revenue for the year ended August 31, 1995, increased over the
prior year by $568.3 million or 44.6% to $1.8 billion. The 44.6% increase is
primarily a result of the Summit Merger and other hospital acquisitions
discussed above. The increase in total revenue attributable to acquisitions, net
of divestitures was $496.5 million. Net income applicable to common shares for
the year ended August 31, 1995 was $69.3 million, or $1.53 per share compared to
a net loss of $61.2 million, or $(1.62) per share in prior year.
Operating expenses for the year ended August 31, 1995, increased 44.4%
($485.8 million) over the prior year primarily as a result of the acquisitions
discussed above. Actual salaries and benefits as a percentage of total revenue
declined from 45.1% in fiscal 1994 to 43.6% in fiscal 1995 mainly as a result of
reductions in corporate office personnel attained in combining the OrNda and AHM
corporate offices and due to labor efficiencies achieved at certain facilities.
Actual other operating expenses increased 35.2% ($55.1 million). This
category of expense increased at a rate greater than other categories due to the
1994 acquisition of Summit Health, which owns a Medicaid HMO that includes the
majority of its non-salary expenses in other operating expense. In addition, the
St. Luke's acquisition in fiscal 1995 also included a Medicaid HMO. Operating
expenses for the year ended August 31, 1995, increased approximately $17.4
million for claims payments made by the Medicaid HMO to third party providers.
In addition, other operating expenses increased $12.3 million for rent expense
related to acquisitions financed through leasing agreements with third parties.
On a same hospitals basis, total revenue increased 6.9% ($71.9 million)
primarily as a result of a 3.9% increase in admissions and a 18.7% ($105.2
million) increase in gross outpatient revenue. On a same hospitals basis,
salaries and benefits increased 8.7% ($41.7 million) primarily due to
inflationary increases and an increase in same hospital revenue. Supplies
expense increased 3.9% ($5.0 million) and as a percentage of total revenue
decreased from 12.4% in fiscal 1994 to 12.1% in fiscal 1995, primarily as a
result of favorable reductions in expenses under supply contracts in
pharmaceuticals and other areas. Purchased services increased 3.5% ($4.0
million) but as a percentage of total revenue remained at 14.4% in fiscal 1994
and fiscal 1995 primarily as a result of increases in marketing and rent
expenses. Other operating expenses increased 10.1% ($9.2 million) and as a
percentage of total revenue increased from 8.8% in fiscal 1994 to 9.0% in fiscal
1995, primarily as a result of increases in marketing and rent expenses. The
provision for doubtful accounts increased 17.0% ($12.4 million) and increased
from 7.0% of total revenue in 1994 to 7.6% in 1995. In connection with the
Mergers, during the year ended August 31, 1994, the Company changed the
methodologies used by the previously separate companies to calculate the
allowance for doubtful accounts
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to conform to a single method for OrNda and AHM which resulted in a $3.3
million favorable impact on the provision for doubtful accounts in 1994.
Depreciation and amortization for the year ended August 31, 1995,
increased 27.6% ($18.4 million) over the prior year primarily as a result of the
Summit Merger and other acquisitions discussed previously. The increase in
depreciation and amortization attributable to acquisitions, net of divestitures,
was $19.1 million.
Interest expense increased 30.8% ($25.7 million) as a result of
additional indebtedness incurred to finance the acquisitions discussed above as
well as increases in market interest rates. Such increase was partially offset
by a decrease in interest expense of $2.2 million related to an interest rate
swap agreement in the third quarter of fiscal 1995. Of the Company's total
indebtedness of $1.1 billion at August 31, 1995, approximately $480.2 million
bore interest at rates that fluctuate with market rates, such as the Prime Rate
or LIBOR. Market interest rates increased from 1994 to 1995 causing the
Company's interest expense to increase.
Minority interest, which represents the amounts paid or payable to
physicians pursuant to the Company's joint venture arrangements, decreased 94.0%
($3.8 million) in fiscal 1995 as compared to fiscal 1994, primarily as a result
of the repurchase of joint venture interests and a decline in operations at
certain of the Company's joint ventures.
In fiscal 1995, the Company recorded income of $14.0 million, compared
to $3.6 million in fiscal 1994, related to its investments in HNW which
primarily represented non-cash income related to the Company's investment in HNW
redeemable preferred stock. See Note 2 to the accompanying consolidated
financial statements for further discussion of the Company's investments in HNW.
For the year ended August 31, 1995, the Company recorded income tax
expense of $15.8 million on pretax income of $87.1 million, an amount less than
the statutory rate, primarily due to the availability of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1996, the Company had working capital of $88.1 million,
of which $17.4 million was cash, compared with $5.4 million at August 31, 1995.
The Company's cash portion of working capital is primarily managed through a
revolving credit arrangement, whereby excess cash generated through operations
or otherwise is generally used to reduce the outstanding revolving credit
facility. When cash requirements arise, the revolving credit facility is drawn
upon as needed. On October 27, 1995, the Company executed the Restated Credit
Facility to increase the borrowing capacity of the Company from $660.0 million
to $900.0 million. Under the terms of the Restated Credit Facility, as of August
31, 1996, the Company had $146.6 million of borrowing capacity available for
general corporate purposes and acquisitions. See Note 5 to the accompanying
consolidated financial statements for further discussion of the Restated Credit
Facility. The revolving credit facility matures on October 30, 2001 and is
classified as long-term debt on the Company's balance sheet.
In fiscal 1996, the Company's operating activities provided cash of
$154.4 million. Cash from operations was used for the $16.2 million
increase in patient accounts receivable, net of the provision for doubtful
accounts. The increase in patient accounts receivable resulted primarily
from the increase in same
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<PAGE>
store revenues, delays in payment from certain state Medicaid/Medicare
programs and due to the acquisition and start up of new business units during
fiscal 1996. Cash from operations was used for income tax payments of $28.9
million and interest payments of $107.4 million. Such uses were partially offset
by $20.6 million of proceeds from sales of an investment security classified as
trading.
Net cash used in investing activities of $532.6 million during fiscal
1996 consisted primarily of capital expenditures of $102.6 million and $431.2
million for the acquisitions of hospitals and related assets.
The Company's management currently expects to incur approximately $125.0
million of capital expenditures in fiscal 1997 for replacement equipment and
construction at existing facilities.
Net cash provided by financing activities for the year ended August 31,
1996 of $390.7 million resulted primarily from $199.3 million sale of common
stock and exercise of stock options and the $200.6 million excess of long term
debt borrowings over principal payments on long term debt. On November 6, 1995,
the Company completed the sale of 10,000,000 shares of its common stock at a
$17.625 per share public offering price. On November 9, 1995, the underwriters
exercised an option to purchase an additional 1,500,000 shares to cover
over-allotments. The net proceeds of approximately $192.3 million, after
deducting offering expenses and underwriting discounts, was used to reduce the
indebtedness under the revolving portion of the Restated Credit Facility in the
amount of $27.2 million and for general corporate purposes.
On November 7, 1995, the Company issued a notice of redemption to the
holders of its Payable in Kind Cumulative Redeemable Convertible Preferred Stock
(the "PIK Preferred") for $15 per share with a redemption date of December 8,
1995. In the quarter ended November 30, 1995, 1,355,519 shares of PIK Preferred
were converted into 1,355,519 shares of the Company's common stock and 7,416
shares of the PIK Preferred remained outstanding. On December 8, 1995, the
remaining 7,416 shares of PIK Preferred were redeemed for $15 per share plus
dividends of $0.16 per share accrued through the redemption date.
The Company believes that its cash flows generated by operations
together with availability of credit under the Restated Credit Facility will be
sufficient to meet the Company's short and long-term operational cash needs.
However, the Company's net debt-to-total-capitalization ratio at August 31, 1996
is 66.5%. Such leverage limits the amount of additional indebtedness available
to the Company for acquisitions (including certain announced and pending
acquisitions) requiring capital in excess of amounts currently available under
the Restated Credit Facility. The Company is currently in discussion with its
current syndicate of banks to increase its credit facility to an amount
sufficient to finance the Company's announced and pending acquisitions.
Alternative financing may also be available under other arrangements, such as
off-balance-sheet financing arrangements.
As of August 31, 1996, the Company had approximately $692.2 million of
debt outstanding under the Restated Credit Facility with an interest rate of
LIBOR plus 1.25%. Interest rates in the future may be subject to upward and
downward adjustments based on the Company's leverage ratio. To the extent that
interest rates increase in the future, the Company may experience higher
interest rates on such debt. A 1% increase in the prime rate or LIBOR would
result in approximately a $6.9 million increase in annual interest expense based
upon the Company's credit facility indebtedness outstanding at August 31, 1996.
The ratio of earnings to fixed charges and preferred stock dividends
was 0.51, 1.61 and 1.99 for the years ended August 31, 1994, 1995 and 1996,
respectively. The ratio of earnings to fixed charges and preferred stock
dividends is calculated by dividing earnings before income taxes plus fixed
charges by the
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sum of fixed charges which consists of interest expense, amortization of
financing costs, preferred stock dividends and the portion of rental expense
which is deemed to be representative of the interest component. The ratio of
earnings to fixed charges and preferred stock dividends is an indication of the
Company's ability to pay interest expense and other fixed charges.
In recent years the IRS was examining the federal income tax returns
for fiscal years 1984, 1985 and 1986 of Summit Health, which became a
wholly-owned subsidiary of the Company in April 1994 and merged into the Company
in September 1994. Summit Health received a revenue agent's report from the IRS
with proposed adjustments for the years 1984 through 1986 aggregating as of
August 31, 1996 approximately $16.6 million of income tax, $66.4 million of
interest on the tax, $43.9 million of penalties and $25.6 million of interest on
the penalties. After receiving the revenue agent's report, Summit Health filed a
protest contesting the proposed adjustments. On October 28, 1996, the Company
entered into a Closing Agreement on Final Determination with the IRS for the
above audit period, by agreeing and paying additional tax of $647,000 and
interest of $888,000 to close the audit of Summit Health for the fiscal years
1984 through 1986. The Closing Agreement is subject to review by the Joint
Congressional Committee on Taxation since the matter relates to a refund of
taxes to Summit Health in excess of $1 million.
Inflation. A significant portion of the Company's operating expenses
are subject to inflationary increases, the impact of which the Company has
historically been able to substantially offset through charge increases,
expanding services and increased operating efficiencies. To the extent that
inflation occurs in the future, the Company may not be able to pass on the
increased costs associated with providing health care services to patients with
government or managed care payors, unless such payors correspondingly increase
reimbursement rates.
GENERAL
Revenue Trends. Future trends for revenue and profitability are
difficult to predict. The Company believes, however, there will be continuing
pressure to reduce costs and develop integrated delivery systems with
geographically concentrated service capabilities. Accomplishment of these
objectives can be achieved through the continuation of strategic acquisitions
and affiliations with other health care providers. Such acquisitions and
affiliations enhance the Company's ability to 1) negotiate with managed care
providers in each area of geographic concentration; 2) negotiate reduced costs
with vendors; 3) acquire or create physician groups; and 4) reduce duplication
of services in local communities. The Company believes acquisitions and
affiliations are likely to continue as investor-owned hospitals represent
less than 15% of the hospital industry as of August 31, 1996.
Health Care Reform. The Company derives a substantial portion of its
revenue from third party payors, including the Medicare and Medicaid programs.
During fiscal 1994, 1995 and, 1996, the Company derived an aggregate of 63.7%,
58.7% and 56.2%, respectively, of its gross revenue from the Medicare and
Medicaid programs.
Changes in existing governmental reimbursement programs in recent years
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 the rate of increase in reimbursement levels. In addition, private
payors, including managed care payors, increasingly are demanding discounted fee
structures or the assumption by health care providers of all or a portion of the
financial risk through prepaid capitation arrangements. Inpatient utilization,
average lengths of stay and occupancy rates continue to be negatively
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affected by payor-required pre-admission authorization and utilization review
and by payor pressure to maximize outpatient and alternative health care
delivery services for less acutely ill patients. In addition, efforts to impose
reduced allowances, greater discounts and more stringent cost controls by
government and other payors are expected to continue.
Significant limits on reimbursement rates could adversely affect the
Company's results of operations. 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.
Technological Changes. The rapid technological changes in health care
services will continue to require significant expenditures for new equipment and
updating of physical facilities. The Company believes that the cash flows
generated by its operations together with availability of credit under the
Restated Credit Facility will be sufficient to meet the Company's short and
long-term cash needs for capital expenditures and operations.
Excess Capacity. Excess capacity in general acute care hospitals will
require the Company to continue to shift resources from traditional inpatient
care to various outpatient activities. The Company's ability to effectively
shift those resources and maintain market share will have a direct impact on the
continued profitability of the Company.
Tax Rate. The Company expects its effective tax rate to increase to
approximately 32% for fiscal 1997 due to recent acquisitions. This estimated
rate does not reflect the effect of any pending acquisitions which may cause the
rate to increase. Additionally, the Company expects its effective tax rate to
approximate the statutory tax rate by fiscal 1998.
Stock. The Company's stock price is subject to significant volatility.
If revenues or earnings fail to meet expectations of the investment community or
if the regulators allege that the Company is materially in violation of the
fraud and abuse, false claims or physician self-referral laws, there could be an
immediate and significant impact on the trading price for the Company's stock.
Because of stock market forces beyond the Company's control and the nature of
its business, such shortfalls can be sudden. The Tenet merger noted above could
have an impact on the price of the Company's stock.
New Accounting Standards. In March 1995, the Financial Accounting
Standards Board issued Financial Accounting Standard No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," (SFAS No. 121) which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. SFAS No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company currently plans to adopt SFAS No. 121 in the first quarter of fiscal
1997 and, based on current circumstances, does not believe the effect of
adoption will be material.
Forward-Looking Statements. Certain statements contained in this
Report, including without limitation statements containing the words "believes"
"anticipates" "intends" "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company or industry results to be
materially different from any future results, performance or achievements
expressed or implied
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by such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, both nationally and in the
regions in which the Company operates; industry capacity; demographic changes;
existing government regulations and changes in, or the failure to comply with,
governmental regulations; legislative proposals for health care reform; the
ability to enter into managed care provider arrangements on acceptable terms;
changes in Medicare and Medicaid reimbursement levels; liability and other
claims asserted against the Company; competition; the loss of any significant
customers; changes in business strategy or development plans; the ability to
attract and retain qualified personnel, including physicians; the availability
and terms of capital to fund the expansion of the Company's business, including
the acquisition of additional facilities; and other factors referenced in this
Report. Certain of these factors are discussed in more detail elsewhere in this
Report, including without limitation under "Business Strategy", "Risks
Associated with Acquisition Strategy", "Limits on Reimbursement", "Competition"
and "Governmental Regulation". Given these uncertainties, prospective investors
are cautioned not to place undue reliance on such forward-looking statements.
The Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
Item 8. Financial Statements and Supplementary Data.
The response to this Item is submitted in a separate section of this
report. See page F-1 and pages F-3 through F-23.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant.
Information About Executive Officers and Directors
The following table sets forth certain information as of
November 1, 1996 regarding the executive officers and directors of the Company.
<TABLE>
<S> <C> <C> <C>
Served as Director or
Executive Officer of
Name Age Position the Company since
- ---- --- -------- -----------------
Charles N. Martin, Jr........ 53 Chairman, President & Chief Executive Officer January 1992
William L. Hough............. 45 Executive Vice President & Chief Operating Officer July 1995
Keith B. Pitts............... 39 Executive Vice President & Chief Financial Officer August 1992
Raymond Denson............... 55 Senior Vice President - Operations September 1986
Paula Y. Eleazar............. 43 Senior Vice President - Chief Information Officer April 1992
James Johnston............... 52 Senior Vice President - Human Resources November 1995
Anthony C. Krayer............ 52 Senior Vice President - Operations June 1994
Carol A. Murdock............. 36 Senior Vice President - Business Development April 1994
& Managed Care
William M. Murray............ 51 Senior Vice President - Operations March 1995
Phillip W. Roe............... 35 Senior Vice President, Controller & September 1996
Chief Accounting Officer
Ronald P. Soltman............ 50 Senior Vice President, General Counsel and Secretary April 1994
Alan G. Thomas............... 42 Senior Vice President - Hospital Financial Operations April 1995
William V.B. Webb............ 44 Senior Vice President - Acquisitions & Development September 1996
Kenneth K. Westbrook......... 46 Senior Vice President - Operations June 1996
Richard A. Gilleland......... 52 Director October 1991
Leonard Green................ 70 Director April 1992
Peter A. Joseph.............. 44 Director October 1991
Paul S. Levy................. 49 Director October 1991
Angus C. Littlejohn, Jr...... 46 Director October 1991
John F. Nickoll.............. 61 Director April 1994
John J. O'Shaughnessy........ 52 Director April 1994
M. Lee Pearce, M.D........... 65 Director March 1993
</TABLE>
Charles N. Martin, Jr. has served as Chairman of the Board of
Directors, President and Chief Executive Officer of the Company since January
1992 except during the period April 1994 until August 1995 he was Chairman of
the Board and Chief Executive Officer. Mr. Martin was President and Chief
Operating Officer of HealthTrust, Inc., 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,
and from April 1987 to August 1987 served as a director of Hospital Corporation
of America.
William L. Hough has served as Executive Vice President and Chief
Operating Officer of the Company since August 1995. Prior thereto, Mr. Hough
was Executive Vice President - Hospital Operations after joining the Company in
May 1995. From September 1987 to April 1995, Mr. Hough served in various
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executive positions with HealthTrust, Inc. including Group Vice President from
May 1994 to April 1995 and Regional Vice President from April 1990 to April
1994.
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 LLP's Southeast Region Health
Care Consulting Group, and from January 1988 to July 1991 he was a partner and
Regional Director in Ernst & Young LLP'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 LLP in January 1988. Mr. Pitts is also a director of Horizon
Mental Health Management, Inc. and Summit Care Corporation.
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 Officer of the Company from April 1992 until
April 1994. For more than ten years prior to joining the Company, Ms. Eleazar
was employed by Hospital Corporation of America, a hospital management company,
principally in its information systems division and as the Assistant
Administrator of Henrico Doctors Hospital, Richmond, Virginia.
James Johnston has been Senior Vice President - Human Resources of the
Company since November 1995. From 1984 until November 1995 Mr. Johnston served
as the Company's Vice President - Human Resources.
Anthony C. Krayer has been Senior Vice President - Operations of the
Company since September 1996. Prior thereto he served as Senior Vice President -
Acquisitions and Development of the Company from June 1994 until September 1996.
From July 1993 to June 1994 Mr. Krayer was Senior Vice President of OrNda of
South Florida, Inc., a subsidiary of the Company. 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 LLP).
Carol A. Murdock has been Senior Vice President - Business Development
& Managed Care of the Company since April 1995. From April 1994 until April
1995, Ms. Murdock was the Company's Senior Vice President - Business
Development. Prior thereto she was Vice President, Marketing of Summit Health,
Ltd., a hospital management company, from June 1993 until April 1994. From
November 1992 until May 1993, Ms. Murdock was Assistant Vice President/
Marketing of National Medical Enterprises, Inc. (now known as Tenet Healthcare
Corporation ) ("Tenet"), a hospital management company, and from December 1990
until November 1992 she was Director, Product Line Development, of Tenet.
William M. Murray has been Senior Vice President - Operations of the
Company since March 1995. Prior thereto, from 1988 until March 1995, Mr. Murray
was President and Chief Executive Officer of the St. Luke's Health System, a
not-for-profit multi-institutional health care delivery system serving the
Phoenix, Arizona metropolitan area and central Arizona.
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Phillip W. Roe has been Senior Vice President, Controller and Chief
Accounting Officer of the Company since September 1996. Prior thereto, from
October 1994 until September 1996, Mr. Roe was Vice President, Controller and
Chief Accounting Officer of the Company. From July 1994 until October 1994, Mr.
Roe was Assistant Vice President and Controller of the Company. Mr. Roe joined
the Company in March 1992 and from March 1992 to July 1994 he was the Director,
Financial Reporting, of the Company. From 1988 to March 1992 Mr. Roe was Senior
Manager in the Dallas, Texas office of Ernst & Young LLP.
Ronald P. Soltman has been Senior Vice President and General Counsel of
the Company since April 1994 and Secretary of the Company since September 1994.
From 1984 until February 1994, he was Vice President and Assistant General
Counsel of Hospital Corporation of America. From February 1994 until March 1994
he was Vice President and Assistant General Counsel of Columbia/HCA Healthcare
Corporation, a hospital management company.
Alan G. Thomas has been Senior Vice President - Hospital Financial
Operations of the Company since April 1995. Prior thereto, Mr. Thomas was Vice
President - Reimbursement and Revenue Enhancement of the Company from June 1994
until April 1995, Assistant Vice President of Reimbursement from December 1992
to June 1994, Director of Reimbursement from August 1992 to December 1992 and
Assistant Division Controller from March 1990 until August 1992.
William V.B. Webb has been Senior Vice President - Acquisitions and
Development of the Company since September 1996. Prior thereto, from February
1992 when he joined the Company until September 1996 Mr. Webb was Vice President
- - Development of the Company. From November 1991 to February 1992 Mr. Webb was
employed by The Martin Companies (a health care management and investment
company) as a development executive.
Kenneth K. Westbrook has been Senior Vice President - Operations of the
Company since June 1996. Prior thereto, Mr. Westbrook was from September 1995 to
June 1996 Chief Operating Officer of the Pacific Division of Columbia/HCA
Healthcare Corporation, which Division was responsible for overseeing more than
15 California hospitals. From August 1991 until August 1995 Mr. Westbrook was
Chief Executive Officer of Chino Valley Medical Center, a 130-bed acute care
hospital in Chino, California.
Richard A. Gilleland has served as a director of the Company since
October 1991. Mr. Gilleland is a private investor. Mr. Gilleland was the
President and Chief Executive Officer of AMSCO International, Inc., a
manufacturer of medical sterilizers, from July 1995 until July 1996. Prior
thereto, Mr. Gilleland was Chairman, President and Chief Executive Officer of
Kendall International, Inc. ("Kendall"), a manufacturer of health care
supplies, from July 1990 to July 1995. Mr. Gilleland was also Chairman 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.
Mr. Gilleland is also a of DuPuy, Inc., Physicians Resource Group, Quest
Medical Inc., Remington Arms and Tyco International, Ltd.
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. Mr. Green is also a director of Apria Healthcare Group, Inc., Cyro
Cell International, Inc. and Nu-Tech Bio-Med, Inc.
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Peter A. Joseph has served as a director of the Company since October
1991. Mr. Joseph has been a general partner of JLL Associates L.P. ("JLL
Associates"), which is a general partner of the Joseph Littlejohn & Levy Fund,
L.P. (the "JLL Fund"), since November 1990 and a partner of Joseph Littlejohn
and Levy ("JLL") and its predecessors, a merchant banking firm and the sponsor
of the JLL Fund, since July 1987. Mr. Joseph has also served as President of
Lancer Industries, Inc. ("Lancer Industries"), an industrial holding company,
since April 1992 and as Secretary and director of Lancer Industries since July
1989. Lancer Industries owns 100% of the capital stock of JLL Inc., which
pursuant to contract manages the JLL Fund. Mr. Joseph is also a director of
Fairfield Manufacturing Company, Inc. ("Fairfield") and Hayes Wheels
International ("Hayes").
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 Fairfield, Foodbrands
America, Inc. ("Foodbrands") and Hayes.
Angus C. Littlejohn, Jr. has served as a director of the Company since
October 1991. Mr. Littlejohn has been the Chairman of the Board and Chief
Executive Officer of Littlejohn & Co., Inc., a merchant banking firm, since
September 1996. Prior thereto he was a general partner of JLL Associates from
November 1990 to September 1996 and a partner of JLL (and its predecessors) from
July 1987 until September 1996. From July 1989 until April 1992, Mr. Littlejohn
also served as President of Lancer Industries. Mr. Littlejohn is also a director
of Foodbrands and Freedom Chemical Company.
John F. Nickoll has served as a director of the Company since April 1994.
He has been Chairman of the Board of Directors, President and Chief Executive
Officer of The Foothill Group, Inc. ("Foothill"), an asset-based lender
and asset management company, since October 1995. From 1984 to October
1995 Mr. Nickoll was President, Vice Chairman of the Board of Directors,
Co-Chief Executive Officer and Chief Operating Officer of Foothill. From
1977 to 1984, he was President and Vice Chairman of the Board of Directors
of Foothill and from 1970 to 1976, he was Executive Vice President and
Vice Chairman of the Board of Directors of Foothill. Mr. Nickoll also is a
director of CIM-High Yield Securities, Inc. and Regency Health Services.
John J. O'Shaughnessy has served as a director of the Company since
April 1994. He has been President of Strategic Management Associates, Inc., a
health care consulting firm in 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 Secretary for Management and Budget of the
Department of Health and Human Services, Washington, D.C.
M. Lee Pearce, M.D. has served as a director of the Company since March
1993. Dr. Pearce is and has been for the last five years a private investor.
Dr. Pearce also serves as a director of IVAX Corporation.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers and directors, and
persons who own more than 10% of a registered class of the Company's equity
securities, to file with the Securities and Exchange Commission ("SEC") reports
of ownership and reports of changes in ownership in the Company's common stock
and other equity
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<PAGE>
securities of the Company. Such officers, directors and greater than 10%
stockholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) reports they file.
Based solely on review of the copies of such reports furnished to the
Company and written representations that no other reports were required during
its fiscal year ended August 31, 1996, the Company believes that none of its
officers, directors and greater than 10% stockholders failed to file on a timely
basis, as disclosed in such reports, reports required by Section 16(a) of the
Exchange Act during the Company's fiscal year ended August 31, 1996, except that
two directors of the Company (Messrs. Leonard Green and John F. Nickoll) each
filed one Form 4 late failing in each case to report one transaction on a timely
basis, in Mr. Green's case about one week late and in Mr. Nickoll's case about
one month late.
Item 11. Executive Compensation.
The following table sets forth, for the three fiscal years ended August
31, 1996, the compensation paid by the Company and its subsidiaries to the
Company's Chief Executive Officer and its four other most highly compensated
executive officers (the "Named Executive Officers"):
<TABLE>
SUMMARY COMPENSATION TABLE
Long -Term
Compensation
------------
Annual Compensation Awards
----------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Securities All Other
Fiscal Other Annual Underlying Compensation
Name and Principal Position Year Salary($) Bonus($) Compensation($)(a) Options(#) ($)(a)(b)
- --------------------------------------- ------ -------- -------- ------------------ ------------ ------------
Charles N. Martin, Jr................. 1996 800,000 825,000 (c) -- 3,306
Chairman of the Board, President and 1995 750,000 685,125 (c) -- 6,198
Chief Executive Officer 1994 600,000 820,000 1,244,755 1,400,000 8,649
William L. Hough(d)................... 1996 550,000 550,000 (c) 175,000 3,515
Executive Vice President and 1995 102,899 -- (c) 175,000 --
Chief Operating Officer 1994 -- -- -- -- --
Keith B. Pitts........................ 1996 466,668 475,000 (c) 50,000 2,836
Executive Vice President and 1995 450,000 450,000 (c) -- 1,980
Chief Financial Officer 1994 363,333 300,000 211,145 335,000 7,122
Anthony C. Krayer..................... 1996 290,000 159,500 (c) 60,000 2,714
Senior Vice President-Operations 1995 290,000 145,000 (c) -- 6,514
1994 291,474 -- (c) 30,000 4,497
Raymond Denson........................ 1996 275,000 203,500 (c) 15,000 2,714
Senior Vice President-Operations 1995 271,667 165,000 (c) -- 6,531
1994 256,667 100,000 (c) 55,000 7,869
- ------------------
<FN>
(a) Other Annual Compensation for Mr. Martin in 1994 includes $1,233,675
related to principal and accrued interest forgiven under a loan made by the
Company to Mr. Martin pursuant to his January 15, 1992 employment
agreement. Other Annual Compensation for Mr. Pitts in 1994 includes
$200,000 in a special relocation payment to reimburse him for losses on the
sale of his residence in order for him to move to Nashville, Tennessee to
commence employment with the Company. The 1994 loan forgiveness granted to
Mr. Martin and the 1994 special relocation payment to Mr. Pitts were
approved by the Compensation Committee of the Company's Board of Directors.
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<PAGE>
(b) The amounts disclosed under All Other Compensation in the Summary
Compensation Table represent for the Named Executive Officers in
fiscal 1996 (i) the following amounts of the Company's matching
contributions made under the Company's 401(k) Plan: Mr. Martin: $2,714;
Mr. Hough: $3,199; Mr. Pitts: $2,714; Mr. Krayer: $2,714; and
Mr. Denson: $2,714; and (ii) the following amounts of insurance premiums
paid by the Company with respect to group term life insurance: Mr. Martin:
$592; Mr. Hough: $326; Mr. Pitts: $122; Mr. Krayer: $0; and Mr.
Denson: $0.
(c) No such compensation was paid other than perquisites which have not been
included because their aggregate value did not meet the reporting threshold
of the lesser of $50,000 or 10 percent of salary plus bonus.
(d) Mr. Hough's employment by the Company commenced on May 30, 1995.
</FN>
</TABLE>
Stock Option Grants Fiscal Year 1996
In the fiscal year ended August 31, 1996, the grants of stock options
under the Company's stock- based employee benefit plans to the Named Executive
Officers were as follows:
<TABLE>
OPTION GRANTS IN FISCAL YEAR 1996
Individual Grants
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Number of Percent of Potential Realizable Value
Securities Total Options At Assumed Annual Rates of
Underlying Granted to Market Price Stock Price Appreciation
Options Employees in Exercise on Date of Expiration for Option Term(a)
Name Granted(#) Fiscal Year Price ($/Sh) Grant ($/Sh) Date 0%($) 5%($) 10%($)
- ---- ---------- ----------- ------------ ------------ ---- ----- ----- ------
Charles N. Martin, Jr......... -0- -- -- -- -- -- -- --
William L. Hough.............. 125,000(b) 15.8 18.75 18.75 12/29/05 -0- 1,473,750 3,513,750
50,000(c) 6.9 27.125 27.125 06/01/06 -0- 853,000 2,161,000
Keith B. Pitts................ 50,000(c) 6.9 27.125 27.125 06/01/06 -0- 853,000 2,161,000
Anthony C. Krayer............. 45,000(b) 5.7 18.75 18.75 12/29/05 -0- 530,550 1,264,950
15,000(c) 2.1 27.125 27.125 06/01/06 -0- 255,900 648,300
Raymond Denson................ 15,000(c) 2.1 27.125 27.125 06/01/06 -0- 255,900 648,300
- ------------------
<FN>
(a) The dollar amounts under these columns are the results of calculations at
0%, and at the 5% and 10% annual appreciation rates set by the
Securities and Exchange Commission for illustrative purposes and,
therefore, are not intended to forecast future financial performance or
possible future appreciation, if any, in the price of the Company's common
stock. Stockholders are, therefore, cautioned against drawing any
conclusions from the appreciation data shown, aside from the fact that the
optionees will only realize value from the option grants if the price
of the Company's common stock appreciates, which would benefit all
stockholders commensurately. The Company did not use an alternative
formula for grant valuation as it is not aware of any formula which will
determine, with reasonable accuracy, a present value based on future
unknown or volatile factors. Also, these amounts do not take into account
provisions of the options relating to termination of the options
following termination of employment, nontransferability or the fact that
the options will vest and become exercisable only if certain other
events occur. See footnotes (b) and (c) below.
(b) These options become exercisable in full on November 29, 2005, provided
they may become exercisable earlier (i) 100% upon a change of control of
the Company, (ii) in whole or in part at any time at the discretion of the
Compensation Committee of the Board of Directors, (iii) in five equal
annual installments subject to the Company's satisfaction of certain
performance criteria for each of its five fiscal years ended August 31,
commencing August 31, 1996 and ending August 31, 2000, or (iv) 100% upon
the Company's meeting different performance criteria for two consecutive
fiscal years.
(c) These options become exercisable in full on May 1, 2006, provided they may
become exercisable earlier (i) 100% upon a change of control of the
Company, (ii) in whole or in part at any time at the discretion of the
Compensation Committee of the Board of Directors, or (iii) in five equal
annual installments subject to the Company's satisfaction of certain
performance criteria for each of its five fiscal years ended August 31,
commencing August 31, 1996 and ending August 31, 2000.
</FN>
</TABLE>
<PAGE>
Stock Option Exercises, Holdings and Year-End Values
The following table sets forth information with respect to the Named
Executive Officers concerning their exercise of stock options during the fiscal
year ended August 31, 1996 and in respect of the number and value of unexercised
options held by each of them as of August 31, 1996.
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<PAGE>
<TABLE>
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1996
AND OPTION VALUES AT AUGUST 31, 1996
<S> <C> <C> <C> <C>
Shares Number of Securities
Acquired Underlying Unexercised Value of Unexercised
On Value Options At Fiscal In-The-Money Options At
Exercise Realized Year-End(#) Fiscal Year-End($)(a)
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --- --- ----------- ------------- ----------- -------------
Charles N. Martin, Jr............... -0- -0- 1,450,000 700,000 18,775,000 7,525,000
William L. Hough.................... -0- -0- -- 350,000 -- 1,968,750
Keith B. Pitts...................... -0- -0- 210,000 175,000 2,873,750 1,343,750
Anthony C. Krayer................... -0- -0- 12,000 78,000 129,000 508,500
Raymond Denson...................... -0- -0- 89,400 48,000 1,689,482 354,750
- ------------------
<FN>
(a) The closing price for the Company's common stock as reported by the New
York Stock Exchange on August 30, 1996, was $25.75. Value is calculated on
the basis of the difference between the option exercise price and $25.75
multiplied by the number of shares of the Company's common stock underlying
the options.
</FN>
</TABLE>
Compensation of Directors
Each director who is neither a Company employee nor officer is entitled
to receive $20,000 per year and each director is entitled to reimbursement for
all out-of-pocket expenses to attend meetings. In addition, each non-employee
member of a committee of the Board is entitled to receive $1,000 for each
committee meeting he attends that is not held in conjunction with a meeting of
the Board of Directors. Also, pursuant to the OrNda HealthCorp Outside Directors
Stock Option Plan, upon initial election to the Board of Directors, a
non-employee director is granted an option to acquire 5,000 shares of the
Company's common stock on the last Friday of the month of such director's
election to the Board and on the last Friday of January of each year thereafter
each non-employee director is granted an option to acquire 2,500 shares of the
Company's common stock. Such options are granted at fair market value, that is,
at a price equal to the closing price per share of the Company's common stock on
the New York Stock Exchange on the last trading day immediately before the day
on which the option is granted.
Employment Contracts and Termination of Employment Arrangements
In January 1992, the Company entered into an employment agreement with
Charles N. Martin, Jr., which was amended in June 1995 (the "Martin Agreement"),
pursuant to which Mr. Martin agreed to serve as Chairman of the Board and Chief
Executive Officer of the Company. The Martin Agreement is for a five year term
expiring January 15, 1997 and is automatically extended thereafter for
additional one year terms unless either the Company or Mr. Martin elects not to
extend the term (the "Martin Term").
The Martin Agreement provides that Mr. Martin will receive a base
salary of $500,000 per year (or such greater amount as the Board of Directors of
the Company may determine -- as of November 1, 1996, Mr. Martin's base salary
was $825,000), annual bonuses in such amounts as the Board of Directors of the
Company may determine, reimbursement for certain expenses incurred by Mr. Martin
and pension, medical and other customary employee benefits.
Upon the Company's termination of Mr. Martin's employment prior to a
Change of Control (as defined in the Martin Agreement) other than for Cause or
Disability (each as defined in the Martin Agreement) (a) prior to January 15,
1997, Mr. Martin will receive an amount equal to three times, and (b)
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<PAGE>
on and after January 15, 1997, Mr. Martin will receive an amount equal to two
times his base salary and an amount equal to the average of his annual bonuses
actually paid to him with respect to the two years immediately preceding the
year in which such termination of employment occurs, such amount payable in
substantially equal monthly installments over the remainder of the Martin Term.
Also, the Company will continue to provide Mr. Martin with medical, life
insurance and certain other employee benefits over the remainder of the Martin
Term.
Upon termination of Mr. Martin's employment with the Company after a
Change of Control (i) by the Company other than for Cause or Disability or (ii)
by Martin for Good Reason (as defined in the Martin Agreement), Mr. Martin will
receive a lump-sum payment (payable not later than five days after his
termination of employment) in an amount equal to three times his base salary and
an amount equal to the average of his annual bonuses paid to him with respect to
the two years immediately preceding the year in which such termination of
employment occurs. Also, the Company will continue to provide Mr. Martin with
medical, life insurance and certain other employee benefits over the remainder
of the Martin Term.
Pursuant to the Martin Agreement (i) in January 1992 Mr. Martin
purchased from the Company 1,000,000 shares of the Company's common stock (the
"Martin 1992 Stock Purchase") for a purchase price of $7.75 per share ($5.50
less than the closing price of the shares on the Nasdaq National Market System
on such date) by delivering to the Company $10,000 and a promissory note (the
"Purchase Money Promissory Note") in the amount of $7,740,000 due January 1993,
bearing interest at the prime rate as announced by Citibank, N.A. from time to
time, (ii) the Company adopted certain amendments to its 1991 Stock Option Plan
and granted to Mr. Martin an option (the "1992 Option") thereunder to purchase
750,000 shares of Common Stock at an exercise price per share of $10.75, and
(iii) the Company adopted its 1992 Management Equity Plan (the "1992 Plan") and
agreed to grant to Mr. Martin, upon his request, an option under the 1992 Plan
to purchase up to 2.2 million shares of the Company's common stock at $20.00 per
share. However, in April 1994 the Company terminated the 1992 Plan and received
stockholders approval for adoption of its 1994 Management Equity Plan under
which the Company satisfied its obligations to Mr. Martin in this regard by
granting him an option in June 1994 to purchase 1,400,000 shares of the
Company's common stock under the 1994 Management Equity Plan (the "1994
Option"). The Company recorded a $4.2 million non-cash charge for the fiscal
year ended August 31, 1992 related to Mr. Martin's 1992 purchase of the
Company's common stock and the grant to Mr. Martin of the 1992 Option. The 1994
Option was granted with an exercise price equal to the market price of the
shares on the date of grant ($15.00) and, as a result, the Company recorded no
charge related to the grant of the 1994 Option. On January 15, 1993, Mr. Martin
repaid the full amount of the Purchase Money Promissory Note plus accrued
interest.
Generally, the 1992 Option became exercisable as to one-third of the
shares covered thereby on each of the first three anniversaries of the date the
1992 Option was granted, and terminates on the tenth anniversary of such date of
grant or upon the earlier termination of Mr. Martin's employment with the
Company. The 1992 Option is currently exercisable in respect of all 750,000
shares. Upon termination of Mr. Martin's employment by the Company in breach of
the Martin Agreement or by Mr. Martin for Good Reason (as defined in the Martin
Agreement) the expiration of the 1992 Option will be delayed until one year
following such termination of employment.
The 1994 Option is currently exercisable in respect of 840,000 shares
(i.e. it is 60% vested) and becomes exercisable in full on June 22, 2004,
provided the 1994 Option may become exercisable earlier (i) 100% upon a change
of control of the Company, (ii) in whole or in part at any time at the
discretion of the Compensation Committee of the Board of Directors, (iii) in two
20% installments subject to the Company's
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<PAGE>
satisfaction of certain performance criteria for its fiscal years ending August
31, 1997 and August 31, 1998, or (iv) 100% upon the Company's meeting different
performance criteria for two consecutive fiscal years.
Pursuant to the Martin Agreement, at Mr. Martin's request in 1992 the
Company loaned to Mr. Martin $1,375,000 (the "1992 Martin Loan") which was an
amount sufficient to pay Mr. Martin's income taxes with respect to the Martin
1992 Stock Purchase due as a result of the shares being purchased at a price
less than their fair market value on the date of purchase. The principal of the
1992 Martin Loan was due February 13, 1997 and bore interest at a rate equal to
the prime rate announced by Citibank, N.A. from time to time which interest was
due annually on each February 13 after the loan was made. The 1992 Martin Loan
was forgiven by the Company on June 22, 1994 on which date $1,176,617 in
principal and $57,058 in accrued interest was outstanding on such loan. In
addition, the Martin Agreement provides certain registration rights with respect
to the shares of the Company's common stock purchased by Mr. Martin pursuant to
the Martin Agreement, as well as the shares of the Company's common stock which
may be acquired by him pursuant to the 1992 Option and the 1994 Option. The
Company was obligated under the Martin Agreement to reimburse Mr. Martin for up
to $300,000 of reasonable expenses incurred by Mr. Martin in connection with a
business controlled by Mr. Martin during the period from September 1, 1991 until
January 15, 1992 and reasonable legal fees incurred by Mr. Martin in connection
with the Martin Agreement.
Effective May 1, 1996, the Company entered into an employment agreement
with William L. Hough (the "Hough Agreement") pursuant to which Mr. Hough agreed
to serve as Executive Vice President and Chief Operating Officer of the Company.
The Hough Agreement is for a three year term expiring May 1, 1999, provided
until May 1, 1998, at the end of each day the term of the Hough Agreement shall
automatically be extended for an additional day (the "Hough Term"). Also, the
Hough Term is automatically extended on May 1, 2001 and each May 1 thereafter
for additional one year terms unless either the Company or Mr. Hough elects not
to extend the Hough Term.
The Hough Agreement provides that Mr. Hough will receive a base salary
of $550,000 per year or such greater amount as the Board of Directors of the
Company may determine. As of November 1, 1996, Mr. Hough's base salary under the
Hough Agreement was $550,000. Pursuant to the Hough Agreement Mr. Hough is also
to receive annual bonuses in such amounts as the Board of Directors of the
Company may determine, and pension, medical and other customary employee
benefits.
Upon termination of Mr. Hough's employment with the Company by the
Company prior to a Change of Control (as defined in the Hough Agreement) other
than for Cause or Disability (each as defined in the Hough Agreement), Mr. Hough
will receive an amount equal to the lesser of (i) three times and (ii) the
greater of two and the number of years remaining in the Hough Term, times his
base salary and an amount equal to the average of his annual bonuses actually
paid to him with respect to the two years immediately preceding the year in
which such termination of employment occurs, such amount payable in
substantially equal monthly installments over the remainder of the Hough Term.
Also, in such event the Company will continue to provide Mr. Hough with medical,
life insurance and certain other employee benefits over the remainder of the
Hough Term.
Upon termination of Mr. Hough's employment with the Company after a
Change of Control (i) by the Company other than for Cause or Disability or (ii)
by Mr. Hough for Good Reason (as defined in the Hough Agreement), Mr. Hough will
receive a lump-sum payment (payable not later than five days after his
termination of employment) in an amount equal to three times his base salary and
an amount generally equal
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<PAGE>
to the average of his annual bonuses paid to him with respect to the two years
immediately preceding the year in which such termination of employment occurs.
Also, the Company will provide Mr. Hough with medical, life insurance and
certain other employee benefits over the remainder of the Hough Term.
Effective March 1, 1995, the Company entered into an employment
agreement with Keith B. Pitts (the "Pitts Agreement") pursuant to which Mr.
Pitts agreed to serve as Executive Vice President and Chief Financial Officer of
the Company. The Pitts Agreement is for a three year term expiring March 1,
1998, provided until March 1, 1997, at the end of each day the term of the Pitts
Agreement shall automatically be extended for an additional day (the "Pitts
Term"). Also, the Pitts Term is automatically extended on March 1, 2000 and each
March 1 thereafter for additional one year terms unless either the Company or
Mr. Pitts elects not to extend the Pitts Term.
The Pitts Agreement provides that Mr. Pitts will receive a base salary
of $450,000 per year or such greater amount at the Board of Directors of the
Company may determine. As of November 1, 1996, Mr. Pitts' base salary under the
Pitts Agreement was $475,000. Pursuant to the Pitts Agreement Mr. Pitts is also
to receive annual bonuses in such amounts as the Board of Directors of the
Company may determine, and pension, medical and other customary employee
benefits.
Upon termination of Mr. Pitts' employment with the Company by the
Company prior to a Change of Control (as defined in the Pitts Agreement) other
than for Cause or Disability (each as defined in the Pitts Agreement), Mr. Pitts
will receive an amount equal to the lesser of (i) three times and (ii) the
greater of two and the number of years remaining in the Pitts Term, times his
base salary and an amount equal to the average of his annual bonuses actually
paid to him with respect to the two years immediately preceding the year in
which such termination of employment occurs, such amount payable in
substantially equal monthly installments over the remainder of the Pitts Term.
Also, in such event the Company will continue to provide Mr. Pitts with medical,
life insurance and certain other employee benefits over the remainder of the
Pitts Term.
Upon termination of Mr. Pitts' employment with the Company after a
Change of Control (i) by the Company other than for Cause or Disability or (ii)
by Mr. Pitts for Good Reason (as defined in the Pitts Agreement), Mr. Pitts will
receive a lump-sum payment (payable not later than five days after his
termination of employment) in an amount equal to three times his base salary and
an amount equal to the average of his annual bonuses paid to him with respect to
the two years immediately preceding the year in which such termination of
employment occurs. Also, the Company will provide Mr. Pitts with medical, life
insurance and certain other employee benefits over the remainder of the Pitts
Term.
Each of the Martin, Hough and Pitts Agreements contains a provision
insuring that the payments made thereunder are fully deductible by the Company
for federal income tax purposes by reducing the payments which are actually made
to the extent necessary to make such payments fully deductible by the Company.
Severance Protection Agreements
Since the hospital management company industry is in a consolidation
era and since the threat of a change of control of the Company may result in the
distraction or even the departure of senior management personnel to the
detriment of the Company and its stockholders, the Company has executed with
(or, in a few cases, is in the process of executing with) 30 members of its
senior management (including two of the
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<PAGE>
Named Executive Officers, Messrs. Denson and Krayer) so-called "severance
protection agreements" ("SPA's") which provide such executives upon loss of
their employment with reasonable severance payments and a reasonable
continuation of their health care and related benefits which will induce such
executives to remain in the Company's employ and encourage their continued
attention to their assigned duties without concern for their individual personal
financial and employment security. In order to obtain severance payments and
other benefits under the SPA's, there would have to be both a Change in Control
(as defined in the SPA's) of the Company plus the employment of the executive
would have to be terminated (i) by the Company or by the successor entity other
than for Cause (as defined in the SPA's), death, disability or reitrement or
(ii) by the executive for Good Reason (as defined in the SPA's) and not by the
executive without Good Reason. Good Reason includes, without limitation, (i) any
adverse change in the executive's title, authorities and responsibilities; (ii)
a reduction in base salary except for across-the-board salary reductions
similarly affecting all senior executives; and (iii) a relocation of the
executive's office of more than 30 miles.
The term of each SPA is until December 31, 1997 provided on January 1,
1998 and on each January 1 thereafter the term shall automatically be extended
for one additional year unless the Company gives notice by September 30 of the
preceding year that it does not want to extend the term. Once a Change of
Control occurs, the SPA's extend for three (3) years after the Change of
Control. However, each SPA terminates if the executive leaves the employ of the
Company prior to a Change of Control.
The SPA's provide that if any such executive's employment is terminated
within three years after a Change in Control of the Company (other than a
termination for Cause, etc. as set forth above), such executive will receive:
(a) a lump-sum payment equal to, with respect to the Company's Senior Vice
Presidents (which includes two of the Named Executive Officers, Messrs. Denson
and Krayer), two times, and with respect to its Vice Presidents, 1 1/2 times the
sum of (1) such executive's annual base salary plus (2) the executive's target
annual incentive bonus and (b) health care and related benefits as provided in
the Company's plans until the earlier of (i) 18 months after termination of
employment and (ii) new employment being obtained by the executive and the new
employer commencing these types of benefits for the executive. Also, the SPA's
contain a provision insuring that the payments made thereunder are fully
deductible by the Company for federal income tax purposes by reducing the
payments which are actually made to the extent necessary to make such payments
fully deductible by the Company.
Indemnification Agreements
The Company has entered into indemnification agreements with each of
its directors and officers (an "Indemnitee") to provide contractual right to
indemnification, to the maximum extent permitted by law, for expenses (including
attorney's fees), judgments, penalties, fines and amounts paid in settlement
actually and reasonably incurred by the Indemnitee in connection with any
proceeding (including to the extent permitted by applicable law, any derivative
action) to which he or she is, or is threatened to be made, a party by reason of
his or her status as a director or officer.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee of the Company's Board of
Directors during the Company's fiscal year ended August 31, 1996 were Messrs.
Peter A. Joseph, Richard A. Gilleland and M. Lee Pearce, M.D. None of these
individuals was at any time during the fiscal year ended August 31, 1996, or at
any time prior or subsequent thereto, an officer or employee of the Company or
any of its subsidiaries.
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<PAGE>
There were no Compensation Committee interlocks or insider (employee)
participation during the Company's fiscal year ended August 31, 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information, as of October 31,
1996, concerning shares of the Company's common stock held by (a) each director
of the Company, (b) each executive officer of the Company named in the Summary
Compensation Table (a "Named Executive Officer") set forth below, (c) all
directors and executive officers of the Company as a group and (d) each other
stockholder owning beneficially at least 5% of the outstanding common stock of
the Company.
<TABLE>
<S> <C> <C>
Number of Shares Percentage
Directors Beneficially Owned (a) Ownership(b)(c)
- --------- ---------------------- ---------------
Richard A. Gilleland.................................. 5,000(d) *
Leonard Green......................................... 6,000(e) *
Peter A. Joseph....................................... 7,111,774(f) 12.2%
Paul S. Levy.......................................... 7,119,561(f) 12.2%
Angus C. Littlejohn, Jr............................... 5,000(g) *
Charles N. Martin, Jr................................. 2,575,000(h) 4.4%
John F. Nickoll....................................... 40,498(d) *
John J. O'Shaughnessy................................. 41,000(d) *
M. Lee Pearce, M.D.................................... 600,000(i) 1.0%
Other Named Executive Officers
Raymond Denson........................................ 106,914(j) *
William L. Hough...................................... 70,759(k) *
Anthony C. Krayer..................................... 30,667(l) *
Keith B. Pitts........................................ 250,764(m) *
Other
All directors and executive officers as a group
(22 persons)....................................... 11,134,746(n) 19.1%
Joseph Littlejohn & Levy Fund, L.P.
450 Lexington Avenue
New York, NY 10017................................ 7,111,774(o) 12.2%
- ------------------
<FN>
(a) Unless other indicated, each stockholder shown in the table has sole voting
and investment power with respect to the shares beneficially owned. The
number of shares shown as beneficially owned includes all options, warrants
and convertible securities held by such person, entity or group which are
exercisable or convertible within 60 days.
(b) The percentages of beneficial ownership as to each person, entity or group
assume that all options, warrants and convertible securities held by such
person, entity or group which are exercisable or convertible within 60
days, but not those held by others shown in the table, have been exercised
or converted.
(c) An asterisk (*) in the table means percentage ownership of less than one
percent. Percentages are calculated based on 58,362,456 shares of the
Company's common stock outstanding as of October 31, 1996.
(d) Includes exercisable options in respect of 5,000 shares.
(e) 1,000 of these shares are owned by Mr. Green's wife. Mr. Green disclaims
beneficial ownership of such 1,000
shares. Includes exercisable options in respect of 5,000 shares.
(f) Based on information set forth in the Schedule 13D Amendments No. 13 and 14
made by the JLL Fund and other reporting persons which were filed with the
Securities and Exchange Commission on October 21, 1996 and October
-57-
<PAGE>
28, 1996, respectively. All of such shares, other than 7,787 shares
beneficially owned by Mr. Levy, are owned by the JLL Fund. Messrs. Joseph
and Levy are officers and directors of Lancer Industries, limited partner
of JLL Associates and the owner of 100% of the capital stock of JLL Inc.
which pursuant to contract manages the JLL Fund. Messrs. Joseph and Levy
are each general partners of JLL Associates, which is the general partner
of the JLL Fund. Except with respect to 7,787 shares owned by Mr. Levy,
Messrs. Joseph and Levy disclaim beneficial ownership of all of such
shares. Includes exercisable options in respect of 15,000 shares. Messrs.
Joseph and Levy and Angus C. Littlejohn have entered into agreements or
arrangements intended to give the economic benefits of such options when
exercised to JLL, Inc., the manager of the JLL Fund, which may result in an
economic benefit to JLL Funds' investors. Thus, Messrs. Joseph, Levy and
Littlejohn disclaim beneficial ownership of such options. See Note (g)
below.
(g) Includes exercisable options in respect of 5,000 shares. Mr. Littlejohn has
entered into agreements or arrangements intended to give the economic
benefits of such options when exercised to JLL, Inc., the manager of the
JLL Fund, which may result in an economic benefit to JLL Funds' investors.
Thus, Mr. Littlejohn disclaims beneficial ownership of such options.
(h) Includes exercisable options in respect of 1,590,000 shares.
(i) Dr. Pearce has sole voting control over 200,000 of these shares which are
owned by a charitable organization and as to which shares Dr. Pearce
disclaims any beneficial ownership. By virtue of the Letter Agreement dated
February 9, 1993 among Dr. Pearce, Mr. Rudy Noriega and the JLL Fund, the
JLL Fund and Messrs. Joseph and Levy may be deemed to have a beneficial
ownership interest in all of such 600,000 shares. Each of such persons has
disclaimed beneficial ownership of such shares.
(j) Includes exercisable options in respect of 103,400 shares.
(k) Includes exercisable options in respect of 70,000 shares.
(l) Includes exercisable options in respect of 30,000 shares.
(m) Includes exercisable options in respect of 245,000 shares.
(n) Includes exercisable options in respect of 2,351,741 shares.
(o) Messrs. Joseph and Levy may be deemed to beneficially own such shares.
Each of such persons has disclaimed beneficial ownership of such shares.
See Note (f) above.
</FN>
</TABLE>
In answer to the information required by Item 403(c) of Regulation S-K,
the Company incorporates by reference herein the information set forth in Item
1-"Business-Recent Developments-Proposed Merger" of this Form 10-K.
Item 13. Certain Relationships and Related Transactions.
In 1995 the Company created a Corporate Compliance Program to ensure
that high ethical standards are observed in the operation of the Company's
business and to ensure that the Company and its employees act in full compliance
with all applicable laws and regulations. To assist the Company in this
endeavor, in May 1995 the Company engaged Strategic Management Systems, Inc.
("SMS") to give its expert advise (the "Compliance Consulting") to the Company
in the designing of the Program and in its initial implementation (including the
initiation of an 800 number "hotline" for employees to report compliance
matters, even on an anonymous basis if so desired by the employee) and to
head-up the Company's initial employee training program in respect of compliance
matters (the "Compliance Training"). In the Compliance Training, SMS assisted
the Company in educating the Company's 26,000 employees as to the standards of
conduct set forth in the Company's detailed Corporate Compliance Handbook and
also educated the Company's Human Resources professionals on how to handle
solely by themselves Handbook education in the future in respect of new
employees. SMS's President, Richard P. Kusserow, was the Inspector General of
the federal Department of Health and Human Services from 1981 to 1992. For the
Compliance Consulting, the Company paid SMS $12,000 a month for each of the 12
months commencing May 9, 1995 and ended May 8, 1996 and for Compliance
Consulting and Compliance Training the Company is paying SMS $6,000 a month for
each
-58-
<PAGE>
of the 12 months commencing June 1, 1996 and ending May 31, 1997 plus $200 per
hour for consulting work in excess of 33 hours per month; and for Compliance
Training during the period July 1995 until January 1996, the Company paid SMS
$230,000, in each case plus reasonable out-of-pocket expenses incurred in
performing the services for the Company. Also, in June 1995 the Company first
subscribed to the Fraud and Abuse Control Information System ("FACIS")(TM), a
computerized data base to assist those in the health care field to detect fraud
and abuse by identifying individuals and entities found by governmental agencies
to have engaged in fraudulent or abusive activities. Access to FACIS was
purchased by the Company from Governmental Management Services, Inc. ("GMS") at
an annual subscription cost of $5,000 for the twelve months ended June 30, 1996
plus the following additional charges: $10 for computer log-on and first 5
minutes of use; $1 each additional minute of on-line time; and $5 for
downloading of provider records. The Company purchased access to FACIS for the
twelve months ended July 31, 1997 for a total subscription cost of $10,000. John
J. O'Shaughnessy, a current director of the Company, is the Chairman of the
Board of SMS and of GMS and owns approximately 60% of the capital stock of each
of SMS and GMS.
-59-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) and (2) List of Financial Statements and Financial Statement
Schedules. The response to this portion of Item 14 is
submitted as a separate section of this report. See page
F-1.
(a)(3) List of Exhibits.(1)
Exhibit
No. Description
- ------- -----------
2.1 Agreement and Plan of Merger, dated as of October 16, 1996, among Tenet
Healthcare Corporation, OHC Acquisition Co. and the Company.
(Incorporated by reference to Exhibit 2.1 filed with the Company's Form
8-K dated October 16, 1996.)
3.1 Restated Certificate of Incorporation of the Company as currently in
effect. (Incorporated by reference to exhibits filed with the Company's
Current Report on Form 8-K dated October 15, 1991.)
3.2 Certificate of Amendment to the Company's Restated Certificate of
Incorporation. (Incorporated by reference to Exhibit 3 to the
Company's Current Report on Form 8-K dated April 19, 1994.)
3.3 By-Laws of the Company. (Incorporated by reference to Exhibit 4(c)
included in Company's Registration Statement on Form S-8 under the
Securities Act of 1933, as amended (the "Securities Act"),
File No. 33-81778.)
4.1 Certificate of Designation of Payable-in-Kind Cumulative Redeemable
Convertible Preferred Stock of the Company. (Incorporated by reference
to exhibits filed with the Company's Registration Statement on Form
S-1 under the Securities Act, File No. 33-46876.)
4.2 Certificate of Correction of Certificate of Designation of
Payable-in-Kind Cumulative Redeemable Convertible Preferred Stock.
(Incorporated by reference to exhibits filed with the Company's
Registration Statement on Form S-1 under the Securities Act,
File No. 33-46876.)
4.3 Certificate of Elimination of Provisions of the Restated Certificate of
Incorporation of OrNda HealthCorp Relating to the Preferences and
Rights of the Redeemable Convertible Preferred Stock. (Incorporated by
reference to exhibits filed with the Company's Annual Report on Form
10-K for the year ended August 31, 1993.)
- ------------------
(1)Copies of Exhibits to Form 10-K will be furnished upon the written
request of any stockholder of the Company at a charge of $.25 per page plus
postage.
-60-
<PAGE>
4.4 Indenture relating to the 12 1/4% Senior Subordinated Notes of the
Company (the "12 1/4% Notes") due 2002 dated as of May 15, 1992,
between the Company and U.S. Trust Company of Texas, N.A., as Trustee,
including form of Note. (Incorporated by reference to Exhibit 1 filed
with the Company's Current Report on Form 8-K dated May 28, 1992.)
4.5 First Supplemental Indenture relating to the 12 1/4% Notes, dated as of
April 19, 1994 by and among Company, Summit Health Ltd. and U.S. Trust
Company of Texas, N.A., as Trustee. (Incorporated by reference to
Exhibit 4.2 filed with the Company's Registration Statement on Form S-3
under the Securities Act, File No. 33-54651.)
4.6 Second Supplemental Indenture relating to the 12 1/4% Notes, dated as
of November 1, 1994, by and among the Company, Summit Hospital
Corporation and U.S. Trust Company of Texas, N.A., as Trustee.
(Incorporated by reference to Exhibit 4.6 filed with the Company's
Annual Report on Form 10-K for the year ended August 31, 1994.)
4.7 Amended and Restated Credit, Security, Guaranty and Pledge Agreement,
dated as of October 27, 1995, among the Company, Summit Hospital
Corporation and AHM Acquisition Co., Inc. as the Borrowers, the
Guarantors named therein, the Lenders named therein, The Bank of Nova
Scotia ("Scotiabank") as Administrative Agent for the Lenders,
Scotiabank and Citicorp USA, Inc. ("Citicorp") as Co-Syndication Agents
for the Lenders, and Citicorp as Documentation Agent for the Lenders.
(Incorporated by reference to Exhibit 4 filed with the Company's
Current Report on Form 8-K dated October 30, 1995.)(2)
10.1 1990 Stock Option Plan of the Company. (Incorporated by reference to
exhibits filed with the Company's Annual Report on Form 10-K for the
year ended August 31, 1990.)*
10.2 Form of Indemnification Agreement between the Company and each of its
directors and executive officers. (Incorporated by reference to
exhibits filed with the Company's Registration Statement on Form S-1
under the Securities Act, File No. 33-34712.)*
10.3 Employment Agreement dated as of January 15, 1992 between the Company
and Charles N. Martin, Jr. (Incorporated by reference to exhibits filed
with the Company's Registration Statement on Form S-1 under the
Securities Act, File No. 33-46876.)*
10.4 Amended 1991 Stock Option Plan. (Incorporated by reference to exhibits
filed with the Company's Registration Statement on Form S-1 under the
Securities Act, File No. 33-46876.)*
10.5 Amended 1991 Stock Accumulation Plan. (Incorporated by reference to
exhibits filed with the Company's Registration Statement on Form S-1
under the Securities Act, File No. 33-46876.)*
10.6 Amended and Restated Incentive Bonus Plan. (Incorporated by reference
from Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for
the quarter ended February 28, 1995.)*
- ------------------
(2)The Company hereby agrees to furnish to the Securities and Exchange
Commission, upon request, a copy of all other instruments defining the rights
of holders of its long-term debt. Such instruments are not being listed or filed
herein since the amount of debt with respect to any such instrument does not
exceed 10% of the total consolidated assets of the Company and its subsidiaries.
*Management compensatory plan or arrangement.
-61-
<PAGE>
10.7 Summit Health Ltd. Stock Option Plan. (Incorporated by reference to
Exhibit 10.12 filed with the Company's Annual Report on Form 10-K for
the year ended August 31, 1994.)*
10.8 Summit Health Ltd. 1992 Stock Option Plan. (Incorporated by reference
to Exhibit 10.13 filed with the Company's Annual Report on Form 10-K
for the year ended August 31, 1994.)*
10.9 American Healthcare Management, Inc. 1990 Non-Employee Directors'
Stock Plan. (Incorporated by reference to Exhibit 10.14 filed with the
Company's Annual Report on Form 10-K for the year ended August 31,
1994.)*
10.10 Description of car allowance plan for OrNda officers. (Incorporated by
reference to Exhibit 10.11 filed with the Company's Annual Report on
Form 10-K for the year ended August 31, 1995.)*
10.11 Tax Planning and Medical Expense Benefit Plan. (Incorporated by
reference to Exhibit 10.17 filed with the Company's Annual Report on
Form 10-K for the year ended August 31, 1995.)*
10.12 Asset Purchase Agreement, dated as of November 10, 1994, among St.
Luke's Health System, St. Luke's Rehabilitation Center, Inc., St.
Luke's La Ciudad Corporation and OrNda HealthCorp of Phoenix, Inc.
(Incorporated by reference to Exhibit 2.1 filed in the Company's
Current Report on Form 8-K dated February 13, 1995.)
10.13 First Amendment to Asset Purchase Agreement dated as of January 31,
1995 among St. Luke's Health System, St. Luke's Rehabilitation Center,
Inc., St. Luke's La Ciudad Corporation and OrNda HealthCorp of Phoenix,
Inc. (Incorporated by reference to Exhibit 2.2 filed in the Company's
Current Report on Form 8-K dated February 13, 1995.)
10.14 1994 Annual Incentive Plan for Officers of OrNda HealthCorp.
(Incorporated by reference to Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q for the quarter ended February 28, 1995.)*
10.15 Employment Agreement dated as of March 1, 1995 between the Company and
Keith B. Pitts. (Incorporated by reference to Exhibit 10(d) to the
Company's Quarterly Report on Form 10-Q for the quarter ended February
28, 1995.)*
10.16 Amendment No. 1 to Employment Agreement dated as of June 1, 1995,
between the Company and Charles N. Martin, Jr. (Incorporated by
reference to Exhibit 10.22 filed with the Company's Annual Report on
Form 10-K for the year ended August 31, 1995.)*
10.17 Forms of Stock Option Agreement between the Company and its officer
stock option grantees for its June 1994 and August 1995 stock option
grants. (Incorporated by reference to Exhibit 10.23 filed with the
Company's Annual Report on Form 10-K for the year ended August 31,
1995.)*
10.18 Resignation Agreement dated as of August 31, 1995, between the Company
and Donald J. Amaral. (Incorporated by reference to Exhibit 10.24 filed
with the Company's Annual Report on Form 10-K for the year ended
August 31, 1995.)*
- ------------------
*Management compensatory plan or arrangement.
-62-
<PAGE>
10.19 Registration Rights Agreement dated as of February 9, 1993, among the
Company, Rudy J. Noriega and M. Lee Pearce, M.D. (Incorporated by
reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K
for the year ended August 31, 1994.)
10.20 Registration Rights Agreement dated as of April 19, 1994, among the
Company, John W. Gildea, Gildea Management Co., The Network Company II
Limited, John F. Nickoll and The Foothill Group, Inc. (Incorporated by
reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K
for the year ended August 31, 1994.)
10.21 Employment Agreement dated as of March 1, 1996 between the Company and
William L. Hough.*
10.22 Form of Stock Option Agreement between the Company and its executive
office stock option grantees for its April 1996 stock option grants.
(Incorporated by reference to Exhibit 10(o) to the Company's Quarterly
Report on Form 10-Q for the quarter ended May 31, 1996.)*
10.23 OrNda HealthCorp Outside Directors Stock Option Plan. (Incorporated by
reference from Exhibit B to the Company's definitive proxy statement
for its 1996 Annual Meeting of Stockholders filed with the Securities
and Exchange Commission under the Securities Exchange Act of 1934 on
December 8, 1995.)*
10.24 OrNda HealthCorp 1994 Management Equity Plan, as amended on January 19,
1996. (Incorporated by reference from Exhibit 4(d) to the Company's
Registration Statement No. 333-399 on Form S-8, filed with the
Securities and Exchange Commission under the Securities Act of 1933 on
January 24, 1996.)*
10.25 Form of Stock Option Agreement between the Company and its executive
officer stock option grantees for its November 1995 stock option
grants. (Incorporated by reference from Exhibit 10 to the Company's
Quarterly Report Form 10-Q for the quarter ended November 30, 1995).*
10.26 Form of Stock Option Agreement between the Company and its directors
under its Outside Directors Stock Option Plan.*
10.27 First Amendment and Limited Waiver to Amended and Restated Credit,
Security, Guaranty and Pledge Agreement dated as of September 12, 1996
among the Company, OrNda Hospital Corporation and AHM Acquisition Co.,
Inc. as the Borrowers, the Guarantors named therein, the Lenders named
therein, Scotiabank as Administrative Agent for the Lenders and
Scotiabank and Citicorp as Co-Syndication Agents for the Lenders.
10.28 Stock Option Agreement, dated October 17, 1996, between the Company, as
Grantee, and Tenet Healthcare Corporation, as Issuer. (Incorporated by
reference to Exhibit 10.1 filed with the Company's Form 8-K dated
October 16, 1996.)
10.29 Stock Option Agreement, dated October 17, 1996, between the Company,
as Issuer, and Tenet Healthcare Corporation, as Grantee. (Incorporated
by reference to Exhibit 10.2 filed with the Company's Form 8-K dated
October 16, 1996.)
- ------------------
*Management compensatory plan or arrangement.
-63-
<PAGE>
11 Statement re computation of per share earnings.
21 List of Subsidiaries of the Company.
23 Consent of Ernst & Young LLP
24 Powers of Attorney
27 Financial Data Schedule (included only in filings under the Electronic
Data Gathering Analysis and Retrieval System)
99.1 Stockholder Voting Agreement, dated as of October 17, 1996, between
Tenet Healthcare Corporation and Charles N. Martin, Jr. (Incorporated
by reference to Exhibit 99.1 as filed with the Company's Form 8-K dated
October 16, 1996.)
99.2 Stockholder Voting Agreement, dated as of October 17, 1996, between
Tenet Healthcare Corporation and Joseph Littlejohn & Levy Fund, L.P.
(Incorporated by reference to Exhibit 99.2 as filed with the Company's
Form 8-K dated October 16, 1996.)
(b) Reports on Form 8-K. One report on Form 8-K was filed by the Company
during the fiscal quarter ended August 31, 1996 as follows:
Date of Any Financial
Current Report Item(s) Reported Statements Filed
- -------------- ---------------- ----------------
June 25, 1996 Item 5-Other Events No
Item 7(c)-Exhibits
(c) Exhibits. The exhibits required by Item 601 of Regulation S-K are filed
herewith with this report or are incorporated by reference and are
contained in the Exhibits listed in response to Item 14(a)(3).
(d) Financial Statement Schedules Required by Regulation S-X. Reference is
hereby made to pages F-1 and F-24 of this report for financial
statement schedules required by Regulation S-X.
-64-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ORNDA HEALTHCORP Date
(Registrant)
By: /s/ Charles N. Martin, Jr. November 13, 1996
Charles N. Martin, Jr.
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Signature Title Date
/s/ Charles N. Martin, Jr. Chairman of the Board, President and November 13, 1996
Charles N. Martin, Jr. Chief Executive Officer
(Principal Executive Officer)
/s/ Keith B. Pitts Executive Vice President & November 13, 1996
Keith B. Pitts Chief Financial Officer
(Principal Financial Officer)
/s/ Phillip W. Roe Senior Vice President, Controller & November 13, 1996
Phillip W. Roe Chief Accounting Officer
(Principal Accounting Officer)
</TABLE>
This report has been signed on behalf of the following directors,
constituting, together with the director signing above, at least a majority of
the Board of Directors, pursuant to powers of attorney duly executed by such
individuals, by Keith B. Pitts, Attorney-in-Fact, signing his name hereto:
Leonard Green
Peter A. Joseph
Paul S. Levy
John J. O'Shaughnessy
/Keith B. Pitts November 13, 1996
Keith B. Pitts Date
-65-
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 14(a) (1) and (2)
ORNDA HEALTHCORP AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of the Company and its
subsidiaries are included in Item 8:
Page No.
Consolidated Statements of Operations - Years Ended
August 31, 1994, 1995 and 1996..............................F-3
Consolidated Balance Sheets - August 31, 1995 and 1996............F-4
Consolidated Statements of Shareholders' Equity -
Years Ended August 31, 1994, 1995 and 1996..................F-5
Consolidated Statements of Cash Flows - Years Ended
August 31, 1994, 1995 and 1996..............................F-6
Notes to Consolidated Financial Statements........................F-7
The following consolidated financial statement schedule of the Company and its
subsidiaries is included in Item 14(d):
Schedule VIII - Valuation and Qualifying Accounts.................F-24
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions, are inapplicable or have been disclosed in the
notes to consolidated financial statements, and therefore, have been omitted.
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
OrNda HealthCorp
We have audited the accompanying consolidated balance sheets of OrNda
HealthCorp and Subsidiaries as of August 31, 1995 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended August 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
OrNda HealthCorp and Subsidiaries at August 31, 1995 and 1996, and the
consolidated results of operations and cash flows for each of the three years in
the period ended August 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Nashville, Tennessee
October 25, 1996
F-2
<PAGE>
<TABLE>
<CAPTION>
ORNDA HEALTHCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended August 31,
--------------------------------------------------
<S> <C> <C> <C>
1994 1995 1996
------------- ------------- -------------
Total Revenue $ 1,274,359 $ 1,842,701 $ 2,147,232
Costs and Expenses:
Salaries and benefits 574,152 803,081 935,386
Supplies 158,884 236,189 291,570
Purchased services 119,095 207,599 203,219
Provision for doubtful accounts 86,249 122,193 141,833
Other operating expenses 156,474 211,606 230,786
Depreciation and amortization 66,765 85,170 103,828
Interest expense 83,428 109,100 107,243
Interest income (2,862) (4,582) (4,399)
Special executive compensation 2,530 -- --
Merger transaction expenses 29,992 -- --
Loss (gain) on asset sales 45,272 (973) --
Minority interests 3,999 240 7,781
------------- ------------- -------------
(49,619) 73,078 129,985
Income from investments in Houston
Northwest Medical Center 3,634 14,006 5,128
------------- ------------- -------------
Income (loss) before income tax
expense and extraordinary items (45,985) 87,084 135,113
Income tax expense 1,057 15,772 35,242
------------- ------------- -------------
Income (loss) before extraordinary items (47,042) 71,312 99,871
Extraordinary items (12,296) -- --
------------- ------------- -------------
Net income (loss) ( 59,338) 71,312 99,871
Preferred stock dividend requirements (1,867) (2,000) (332)
------------- ------------- -------------
Net income (loss) applicable to common
and common equivalent shares $ (61,205) $ 69,312 $ 99,539
============= ============= =============
Earnings (loss) per common and
common equivalent share:
Income (loss) before extraordinary items $ (1.29) $ 1.53 $ 1.73
Extraordinary items (0.33) -- --
------------- ------------- -------------
Net income (loss) $ (1.62) $ 1.53 $ 1.73
============= ============= =============
Earnings (loss) per share assuming full dilution:
Income (loss) before extraordinary items $ (1.29) $ 1.51 $ 1.72
Extraordinary items (0.33) -- --
------------- ------------- -------------
Net income (loss) $ (1.62) $ 1.51 $ 1.72
============= ============= =============
Weighted average common and dilutive
common equivalent shares outstanding 37,879 45,294 57,509
============= ============= =============
Weighted average common shares outstanding
assuming full dilution 37,879 47,382 58,064
============= ============= =============
</TABLE>
See the accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
ORNDA HEALTHCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
As of August 31,
---------------------------------------
<S> <C> <C>
1995 1996
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 4,963 $ 17,435
Patient accounts receivable, net of allowance
for uncollectible accounts of $58,632 and
$78,447 at August 31, 1995 and 1996, respectively 307,601 379,874
Supplies, at cost 34,097 42,168
Other 57,052 86,338
------------- -------------
Total Current Assets 403,713 525,815
Property, Plant and Equipment, at cost:
Land 126,436 152,449
Buildings and improvements 870,352 1,062,953
Equipment and fixtures 359,979 490,498
------------- -------------
1,356,767 1,705,900
Less accumulated depreciation and amortization 288,410 370,707
------------- -------------
1,068,357 1,335,193
Investments in Houston Northwest Medical Center 73,755 --
Excess of Purchase Price Over Net Assets Acquired,
net of accumulated amortization 318,029 497,806
Other Assets 82,550 107,714
------------- -------------
$ 1,946,404 $ 2,466,528
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 117,258 $ 168,403
Accrued expenses and other liabilities 220,851 209,525
Current maturities of long-term debt 60,182 59,750
------------- -------------
Total Current Liabilities 398,291 437,678
Long-term Debt 1,013,423 1,229,930
Other Liabilities 141,552 158,503
Shareholders' Equity:
Convertible preferred stock,
$.01 par value, 10,000,000 authorized
shares, issued and outstanding 1,329,701
shares at August 31, 1995 20,112 --
Common stock, $.01 par value
authorized 200,000,000 shares,
issued and outstanding 44,877,804 and
58,250,996 shares at August 31, 1995 and 1996,
respectively 449 583
Additional paid-in capital 414,805 633,983
Retained earnings (deficit) (94,020) 5,851
Unrealized gains on available-for-sale
securities, net of tax 51,792 --
------------- -------------
393,138 640,417
------------- -------------
$ 1,946 404 $ 2,466,528
============= =============
</TABLE>
See the accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
ORNDA HEALTHCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<S> <C> <C> <C> <C> <C>
Convertible Additional Retained
Common Stock Preferred Stock Paid-In Earnings
Shares Amount Shares Amount Capital (Deficit) Other
------ ------- ------ -------- --------- --------- ---------
BALANCE AT AUGUST 31, 1993 34,483 $ 345 1,194 $ 18,062 $ 299,137 $(105,436) $ --
Issuance of common stock 8,961 89 -- -- 102,416 -- --
Paid-in-kind dividends on
PIK preferred -- -- 123 1,867 (1,867) -- --
Conversion of convertible preferred 7 -- (7) (104) 104 -- --
Stock option compensation -- -- -- -- 2,530 -- --
Net loss -- -- -- -- -- (59,338) --
Net unrealized gain on available-for-sale
securities, net of tax -- -- -- -- -- -- 70,859
Pooling adjustment to conform
AHM's fiscal year -- -- -- -- -- (558) --
------ ------- ------ -------- --------- --------- ---------
BALANCE AT AUGUST 31, 1994 43,451 434 1,310 19,825 402,320 (165,332) 70,859
Issuance of common stock 1,313 14 -- -- 10,980 -- --
Paid-in-kind dividend on
PIK preferred -- -- 134 2,000 (2,000) -- --
Conversion of convertible preferred 114 1 (114) (1,713) 1,712 -- --
Tax effect of Summit options -- -- -- -- 1,793 -- --
Net income -- -- -- -- -- 71,312 --
Decrease in unrealized gain on
available-for-sale securities,
net of tax -- -- -- -- -- -- (19,067)
------ ------- ------ -------- --------- --------- ---------
BALANCE AT AUGUST 31, 1995 44,878 449 1,330 20,112 414,805 (94,020) 51,792
Issuance of common stock 12,017 120 -- -- 199,192 -- --
Paid-in-kind dividend on
PIK preferred -- -- 33 332 (332) -- --
Conversion of convertible preferred 1,356 14 (1,356) (20,333) 20,319 -- --
Redemption of preferred stock -- -- (7) (111) (1) -- --
Net income -- -- -- -- -- 99,871 --
Decrease in unrealized gain on
available-for-sale securities,
net of tax -- -- -- -- -- -- (4,791)
Elimination of unrealized gain on
investment in HNW upon acquisition
of HNW -- -- -- -- -- -- (47,001)
------ ------- ------ -------- --------- --------- ---------
BALANCE AT AUGUST 31, 1996 58,251 $ 583 -- -- $ 633,983 $ 5,851 --
====== ======= ====== ======== ========= ========= =========
</TABLE>
See the accompanying notes.
F-5
<PAGE>
<TABLE>
<CAPTION>
ORNDA HEALTHCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended August 31
<S> <C> <C> <C>
1994 1995 1996
------------ ----------- ----------
CASH FLOW PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ (59,338) $ 71,312 $ 99,871
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Non-cash portion of income from investments in
Houston Northwest Medical Center (1,049) (11,344) (4,213)
Non-cash portion of special executive compensation 2,530 -- --
Loss (gain) on asset sales 45,272 (973) --
Extraordinary items 12,296 -- --
Depreciation and amortization 66,765 85,170 103,828
Provision for doubtful accounts 86,249 122,193 141,833
Amortization of debt discount 411 33 13
Noncash pooling expenses related to AHM Merger 13,166 -- --
Changes in assets and liabilities net of effects from
acquisitions and dispositions of hospitals:
Net patient accounts receivable (93,089) (143,348) (158,077)
Other current assets 5,943 (9,379) (19,894)
Other assets (5,230) (3,087) 400
Accounts payable, accrued expenses
and other current liabilities (10,744) 18,690 (36,105)
Other liabilities (25,017) 3,452 6,097
Other (2,162) -- --
Proceeds from sales of trading investment security -- -- 20,625
----------- ----------- ----------
Net cash provided by operating activities 36,003 132,719 154,378
----------- ----------- ----------
CASH FLOW USED IN INVESTING ACTIVITIES:
Acquisitions of hospitals and related assets (361,475) (60,251) (431,193)
Proceeds from sales of assets 6,893 18,912 3,037
Capital expenditures (47,724) (71,910) (102,573)
Issuance of notes receivable (7,025) (2,810) (6,213)
Payments received on long-term notes and other receivables 1,572 12,484 6,067
Other investing activities 7,453 (5,789) (1,719)
----------- ----------- ----------
Net cash used in investing activities (400,306) (109,364) (532,594)
----------- ----------- ----------
CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Issuance of stock 6,293 7,029 199,312
Principal payments on long-term debt borrowings (486,151) (142,071) (120,435)
Proceeds received on long-term debt borrowings 860,865 101,177 321,000
Financing costs incurred in connection with long-term borrowings (21,207) (637) (3,797)
Other (1,147) (1,264) (5,392)
----------- ----------- ----------
Net cash provided by (used in) financing activities 358,653 (35,766) 390,688
----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,650) (12,411) 12,472
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,914 17,374 4,963
Pooling adjustment to beginning of period balance to conform AHM's
fiscal year (2,890) -- --
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,374 $ 4,963 $ 17,435
=========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 86,575 $ 108,598 $ 107,432
Income taxes 387 1,825 28,920
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Preferred stock dividends 1,867 2,000 332
Stock issued for acquisitions of hospitals and related assets 96,212 3,965 --
Capital lease obligations incurred 4,346 2,605 196
</TABLE>
See the accompanying notes.
F-6
<PAGE>
ORNDA HEALTHCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1996
NOTE 1 - GENERAL AND ACCOUNTING POLICIES
Reporting Entity: OrNda HealthCorp ("Company"), which is incorporated in
the State of Delaware, is a provider of health care services through the
operation of general acute care hospitals located primarily in the southern and
western United States. Of the 49 general acute care hospitals operated by the
Company at August 31, 1996, 19 hospitals are located in California of which 17
hospitals are located in the southern California area. In addition, 5 hospitals
are located in southern Florida and 6 hospitals are located in Arizona. The
concentration of hospitals in California, southern Florida and Arizona 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.
Consolidation: The consolidated financial statements include the
accounts of the Company, its majority owned subsidiaries and limited liability
corporations and partnerships in which the Company or one of its subsidiaries is
a general partner and has a controlling interest. Limited partner distributions
are shown as "minority interests" in the Consolidated Statements of Operations.
All material intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform to
the current year presentation. The results of hospital operations acquired in
purchase transactions are included from their respective acquisition dates.
Use of Estimates in Financial Statements: Judgment and estimation is
exercised by management in certain areas of the preparation of financial
statements. Some of the more significant areas include the allowance for
uncollectible accounts, settlement amounts due to or receivable from fiscal
intermediaries, reserves for self-insurance risks, and reserves for litigation.
Management believes that such estimates are adequate.
Total Revenue: Total revenue represents net patient service revenue and
other revenue and is reported at the net realizable amounts due from patients,
third-party payors, and others for services rendered. Net patient service
revenue generated from Medicare and Medicaid/Medi-Cal reimbursement programs
accounted for approximately 57%, 51% and 52% of total net patient service
revenue for the years ended August 31, 1994, 1995 and 1996, respectively.
Settlement amounts due to or receivables from Medicare and Medicaid/Medi-Cal
programs are determined by fiscal intermediaries. The difference between the
final determination and estimated amounts accrued is accounted for as an
adjustment to revenue in the year of final determination. Management believes
that adequate provision has been made in the consolidated financial statements
for potential adjustments resulting from such examinations. Recapture amounts
due to or receivable from the Medicare program are determined by fiscal
intermediaries. The difference between the final determination and estimated
amounts accrued for recapture related to sold facilities is accounted for as an
adjustment to gain or loss on asset sales in the year of final determination.
Management believes that adequate provision has been made in the consolidated
financial statements for potential adjustments resulting from examinations of
such recapture amounts.
As stated above, the Company derives a substantial portion of its
revenue from the Medicare and Medicaid/Medi-Cal programs. Changes in existing
governmental reimbursement programs in recent years have resulted in reduced
levels of reimbursement for health care services. Additional changes are
anticipated which are likely to result in further reductions in the rate of
increase in reimbursement levels.
Earnings (Loss) Per Common Share: Earnings (loss) per common and common
equivalent share is based on the Company's weighted average number of shares of
common stock outstanding during the year adjusted
F-7
<PAGE>
to give effect to dilutive stock options and warrants using the treasury stock
method. The dilutive effect of stock options and warrants was 1.1 million shares
in fiscal 1995 and 1.9 million shares in fiscal 1996. The effect of stock
options and warrants was anti-dilutive for fiscal 1994.
Earnings (loss) per share assuming full dilution also assumes the
conversion of the Company's redeemable convertible preferred stock into common
shares in fiscal 1995 and 1996. The effect of the redeemable convertible
preferred stock was anti-dilutive in fiscal 1994.
Cash and Cash Equivalents: For purposes of the Consolidated Statements
of Cash Flows, the Company considers all highly liquid debt instruments with a
maturity of three months or less when purchased to be cash equivalents. The
carrying amount reported in the balance sheet for cash and cash equivalents
approximates fair value.
Supplies: Supplies are priced at cost (first-in, first-out method) and are
not in excess of market.
Property, Plant and Equipment: Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. The range of
useful lives estimated for buildings and improvements is 10 to 40 years, and for
equipment and fixtures is 3 to 25 years. Assets related to capital leases
including improvements are amortized on a straight-line basis over the terms of
the leases or the useful lives of the assets, whichever is shorter and the
amortization expense is included with depreciation expense. Buildings and
Improvements include construction in progress of $27.2 million and $31.0 million
at August 31, 1995 and 1996, respectively. The Company capitalized interest
costs of $1.3 million, $1.3 million and $1.5 million related to construction in
progress for the years ended August 31, 1994, 1995 and 1996, respectively.
Intangible Assets: Deferred financing costs of $29.8 million and $28.1
million at August 31, 1995 and 1996, respectively, are included in Other Assets
in the accompanying Consolidated Balance Sheets and are amortized over the life
of the related debt using the effective interest method. Deferred financing
costs are net of accumulated amortization of $7.1 million and $12.6 million at
August 31, 1995 and 1996, respectively.
Goodwill is amortized on a straight line basis and the amortization
period (20 to 40 years for hospitals and 5 to 10 years for non-hospital
acquisitions) is based upon the estimated economic lives of the hospital
buildings acquired which range from 25 to 40 years as determined by independent
appraisers, the indefinite useful life of any Certificates of Need acquired and
competition within the local markets. Goodwill is net of accumulated
amortization of $15.9 million and $30.8 million at August 31, 1995 and 1996,
respectively. The carrying value of goodwill is reviewed by the Company on a
quarterly basis if the facts and circumstances suggest that it may be impaired.
Factors considered in evaluating impairment include unexpected or adverse
changes in the following: (i) the economic, competitive or regulatory
environments in which the Company operates, (ii) profitability and (iii) cash
flows. If the review indicates that goodwill will not be recoverable, as
determined based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the Company's carrying value of the goodwill is
reduced by the estimated shortfall of cash flows.
Impairment of Long-Lived Assets: In March 1995, the Financial Accounting
Standards Board issued Financial Accounting Standard No 121, "Accounting for the
Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of,"
(SFAS No. 121) which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. SFAS No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company currently
plans to adopt SFAS No. 121 in the first quarter of fiscal 1997 and, based on
current circumstances, does not believe the effect of adoption will be material.
F-8
<PAGE>
Professional Liability Insurance: At August 31, 1994, 1995 and 1996, the
general and professional liability risks of the Company were self-insured up to
$3.0 million on a per-occurrence basis and up to $30.0 million on an
aggregate-per-claim-year basis. At August 31, 1996, the Company carried general
and professional liability insurance from an unrelated commercial carrier for
losses above the self-insurance limits to $50.0 million. Liabilities for
self-insured professional and general liability risks at August 31, 1996, for
both asserted and unasserted claims, are based on actuarially projected
estimates discounted at an average rate of 8.0% to their present value based on
historical loss payment patterns. Although the ultimate settlement of these
liabilities may vary from such estimates, management believes the amount
provided in the Company's financial statements is adequate.
NOTE 2 - MERGER, ACQUISITION AND DISPOSITION TRANSACTIONS
Fiscal 1996
Houston Northwest Medical Center
Houston Northwest Medical Center ("HNW") is a 498-bed acute care
facility located in Houston, Texas. Effective January 1, 1996, the Company
purchased the controlling equity interests in HNW for a total cash purchase
price of $153.9 million and commenced operation of the facility. In connection
with the acquisition, the Company recorded assets with a fair value of $90.4
million, liabilities of $36.5 million and goodwill of $100.0 million. Purchase
price adjustments have not been finalized as of August 31, 1996, but are not
expected to be material.
Prior to January 1996, the Company's investments in HNW consisted of (i)
two classes of mandatorily redeemable preferred stock with a redemption value of
$62.5 million; and, (ii) a mortgage note receivable with a balance of $7.4
million at December 31, 1995.
The Company recognized the following income related to it's investments
in HNW until January 1996, at which time the Company began consolidating the
operations of HNW (in thousands):
<TABLE>
Year Ended August 31,
-----------------------------------------
<S> <C> <C> <C>
1994 1995 1996
---------- ---------- ----------
Accretion of discount on mandatorily
redeemable preferred stock $ 1,918 $ 2,086 $ 757
Dividend income on mandatorily
redeemable preferred stock 10,266 11,258 4,123
Equity method losses from common
stock investment (9,135) -- --
Interest income on mortgage note
receivable 585 662 248
---------- ---------- ----------
$ 3,634 $ 14,006 $ 5,128
========== ========== ==========
</TABLE>
Cypress Fairbanks Medical Center
Effective July 1, 1996, the Company purchased Cypress Fairbanks Medical
Center ("Cypress Fairbanks"), a 149-bed acute care hospital in Houston, Texas,
and related healthcare facilities for $76.1 million. In connection with the
acquisition the Company recorded assets with a fair value of $60.0 million,
liabilities of $8.3 million and goodwill of $24.4 million. Purchase price
adjustments have not been finalized as of August 31, 1996, but are not expected
to be material.
F-9
<PAGE>
Centinela Hospital Medical Center
Effective August 1, 1996, the Company purchased Centinela Hospital Medical
Center ("Centinela"), a 400-bed acute care hospital in Inglewood, California,
and related healthcare businesses for $125.3 million. In connection with the
acquisition, the Company recorded assets with a fair value of $94.3 million,
liabilities of $21.1 million and goodwill of $52.1 million. Purchase price
adjustments have not been finalized as of August 31, 1996, but are not expected
to be material.
Others
Effective November 1, 1995, the Company completed the acquisition of
Universal Medical Center (renamed Florida Medical Center - South), a 202-bed
facility located in Plantation, Florida. Effective July 1, 1996, the Company
acquired Westside Hospital, a 68-bed facility located in Los Angeles,
California. The combinced cost of these acquisitions was $32.1 million. In
connection with these acquisitions, the Company acquired assets with a fair
value of $32.9 million, assumed liabilities of $3.6 million and recorded $2.7
million of goodwill. Purchase price adjustments have not been finalized as of
August 31, 1996, but are not expected to be material.
Fiscal 1995
St. Luke's Health System
Effective February 13,1995, the Company purchased three hospitals with
417 beds and related businesses that comprise the St. Luke's Health System ("St.
Luke's") in the Phoenix, Arizona metropolitan area for $120.3 million including
$3.0 million of the Company's common stock (195,122 shares). In connection with
the acquisition, the Company acquired assets with a fair value of $45.9 million
and assumed liabilities of $26.8 million and recorded $7.1 million of goodwill.
Suburban
Effective November 1, 1994, the Company purchased Suburban Medical Center,
a 184 licensed-bed hospital located in Paramount, California for $4.6 million.
In connection with the acquisition, the Company acquired assets with a fair
value or $5.2 million, assumed liabilities of $2.2 million and recorded $1.6
million of goodwill.
Other
During the third quarter of fiscal 1995, the Company sold all of its
common stock interest in Horizon Mental Health Management, Inc. for
approximately $8.4 million resulting in a gain on sale of $6.7 million. The gain
is included in gain on asset sales in the accompanying statement of operations,
net of the loss on the consummation of a sale entered into in fiscal 1994.
During fiscal 1995, the Company's investment in an independent non-public
company previously accounted for under the equity method was exchanged for
common stock of a publicly traded entity resulting in a $9.6 million non-cash
gain on exchange of securities and the new securities being classified as
trading under Statement of Financial Accounting Standard No. 115 "Accounting for
Certain Investments in Debt and Equity Securities". The Company also recorded
non-cash write-downs or reserves on certain non-operating assets of $9.6 million
for impairment or declines in value deemed to be other than temporary.
F-10
<PAGE>
Fiscal 1994
AHM
On April 19, 1994, the Company completed a merger with American Healthcare
Management, Inc. ("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. The AHM Merger was accounted for as
a pooling of interests in which shareholders of AHM received 0.6 of a share of
the Company's common stock, representing 16.6 million additional shares issued,
in exchange for each share of AHM common stock held. In connection with the AHM
Merger, the Company recorded $30.0 million of nonrecurring charges and an
extraordinary loss of $8.4 million as a result of refinancing OrNda's and AHM's
senior credit facilities. Prior to the AHM Merger, AHM used a fiscal year ending
December 31. Accordingly, the recast operating results of AHM for the year ended
September 30, 1993, were combined with the operating results of OrNda for the
year ended August 31, 1993, and the AHM balance sheet accounts at September 30,
1993, were combined with OrNda's balance sheet accounts at August 31, 1993, in
order to restate the accompanying financial statements for periods prior to the
AHM Merger. As a result of this restatement, an adjustment for AHM's net income
for the month of September 1993 is reflected as a 1994 adjustment to the
consolidated retained earnings (deficit) and the Consolidated Statement of Cash
Flows for fiscal 1994 includes an adjustment to the balance at the beginning of
the period for AHM's cash activity for the month of September 1993. The effect
of the differing fiscal years on the Company's financial statements is not
significant.
The following is a summary of the results of the separate operations of
OrNda and AHM included in the Consolidated Statements of Operations (in
thousands):
<TABLE>
<S> <C> <C> <C>
OrNda AHM Consolidated
------------- --------------- --------------
Seven months ended March 31, 1994:
Total revenue $ 454,531 $ 205,044 $ 659,575
Net income 1,696 7,546 9,242
</TABLE>
In the third quarter of fiscal 1994, the Company recorded the following
nonrecurring charges in connection with the AHM Merger, all of which have been
paid as of August 31, 1996. (in thousands):
<TABLE>
<S> <C> <C> <C>
Cash Noncash
Expense Expense Total
----------- ----------- ------------
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>
Summit
On April 19, 1994, the Company also completed a merger with Summit Health
Ltd. ( "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)
F-11
<PAGE>
outpatient surgery centers. Summit owned or leased 12 acute care hospitals
in 4 states with a total of 1,611 licensed beds. The Summit merger was accounted
for as a purchase in which Summit shareholders received $5.50 in cash and 0.2157
shares of the Company's common stock for each share of Summit common stock,
representing $192.1 million of cash paid and 7.5 million additional shares
issued at a market value of $96.2 million. In connection with the Summit Merger,
the Company also acquired real estate previously leased by Summit for $60.6
million. Furthermore, the Company assumed or paid $21.9 million of Summit's debt
resulting in a total acquisition cost of approximately $370.8 million. In
connection with the Summit Merger, the Company acquired assets with a fair value
of $320.9 million, assumed liabilities of $161.5 million and recorded $211.4
million of goodwill.
Fountain Valley
Effective July 31, 1994, the Company purchased Fountain Valley Regional
Hospital and Medical Center ("Fountain Valley"), located in Fountain Valley,
California for $105.2 million. The facilities include a 413-bed acute care
hospital, a surgery center, an imaging center and four medical office buildings.
In connection with the acquisition, the Company acquired assets with a fair
value of $104.2 million and assumed liabilities of $20.2 million and recorded
$21.2 million of goodwill.
Other
During fiscal 1994, the Company, in separate transactions, sold or entered
into agreements to sell four hospitals, resulting in a loss of $45.3 million.
Pro Forma Information
The following pro forma information reflects the fiscal 1996 acquisitions
as if they had occurred on September 1, 1994 and 1995, the fiscal 1995
acquisitions as if they had occurred on September 1, 1993 and 1994, and the
fiscal 1994 acquisitions as if they had occurred on September 1, 1993 (in
thousands, except per share data):
<TABLE>
<S> <C> <C> <C>
1994 1995 1996
------------ ------------ ------------
Total revenue $ 1,828,445 $ 2,312,765 $ 2,408,507
Net income (loss) (22,762) 72,955 99,717
Net income (loss)applicable
to common shares (24,629) 70,955 98,385
Net income (loss) per common share (0.58) 1.56 1.73
Net income (loss) per common share
assuming full dilution $ (0.58) $ 1.54 $ 1.72
</TABLE>
NOTE 3 - INCOME TAXES
The provision for income taxes for the years ended August 31 is as follows
(in thousands):
<TABLE>
<S> <C> <C> <C>
1994 1995 1996
------------ ------------ ------------
Current federal income tax $ 169 $ 14,657 $ 23,160
Current state income tax 888 4,750 8,938
Deferred federal income tax benefit -- (3,635) --
Deferred state income tax -- -- 3,144
------------ ------------ ------------
$ 1,057 $ 15,772 $ 35,242
============ ============ ============
</TABLE>
F-12
<PAGE>
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's federal deferred tax assets and liabilities for the
years ended August 31 are tax effected as follows (in thousands):
<TABLE>
<S> <C> <C> <C>
1994 1995 1996
------------ ------------ ------------
Deferred tax assets:
Net operating loss carryovers $ 98,358 $ 82,245 $ 69,620
Capital loss carryovers 1,593 -- --
Alternative minimum tax credit carryovers -- 1,036 2,691
General business credit carryovers 7,652 7,652 6,649
Excess tax basis over book basis of
accounts receivable 18,825 19,889 25,837
Excess tax basis over book basis of
other assets 10,051 -- --
Accrued expenses 19,590 18,894 20,745
Professional liability reserves 8,285 9,422 10,608
Capital lease liability 4,786 4,626 4,024
Other deferred tax assets 790 6,157 1,166
------------- ------------ ------------
Total deferred tax assets 169,930 149,921 141,340
Valuation allowances (53,375) (48,072) (41,506)
------------- ------------ -------------
Total deferred tax assets net of allowance 116,555 101,849 99,834
Deferred tax liabilities:
Tax in excess of book depreciation 76,432 79,449 106,185
Excess book basis over tax basis of
certain investments 34,779 21,896 --
Unamortized cash to accrual method adjustments 9,243 4,960 1,249
Other deferred tax liabilities 3,232 -- --
------------- ------------ ------------
Total deferred tax liabilities 123,686 106,305 107,434
------------- ------------ ------------
Net deferred tax liability $ 7,131 $ 4,456 $ 7,600
============= ============ ============
</TABLE>
At August 31, 1996, the Company has net current deferred federal tax
assets of $43.0 million and net noncurrent deferred federal tax liabilities of
$50.6 million.
The effective income tax rate before extraordinary items differed from
the federal statutory rate for the years ended August 31 as follows:
<TABLE>
<S> <C> <C> <C>
1994 1995 1996
------------- ------------ ------------
Income tax expense (benefit) at federal
statutory rate (35.0)% 35.0% 35.0%
Nondeductible goodwill amortization -- 3.2 2.9
Operating loss for which no
benefit was recognized 35.0 -- --
Benefit of prior year losses realized -- (23.7) (17.6)
State income tax 1.9 3.6 5.8
Federal alternative minimum tax 0.4 -- --
------------- ------------ -------------
Effective income tax rate 2.3 % 18.1% 26.1%
============= ============ =============
</TABLE>
F-13
<PAGE>
The following schedule summarizes approximate tax attribute carry
forwards from prior tax returns for both OrNda and AHM, which are available on a
limited basis to offset federal net taxable income (in thousands):
Expiration
Periods
----------
Net operating loss ("NOL") $ 198,915 2001-2009
General business credits 6,649 1997-2001
Alternative minimum tax credit 2,691 None
The AHM Merger caused an "ownership change" within the meaning of Section
382(g) of the Internal Revenue Code for both OrNda and AHM. Consequently,
allowable federal deductions relating to NOL's of OrNda and AHM arising in
periods prior to the AHM Merger are thereafter subject to annual limitations of
approximately $19 million and $16 million for OrNda and AHM, respectively. In
addition, approximately $55 million of the NOL's are subject to an annual
limitation of approximately $3 million due to prior "ownership changes" of
OrNda. The annual limitations may be increased in order to offset certain
built-in gains which are recognized during the five year period following an
ownership change. In addition, the NOL's from pre-merger tax years of AHM may
only be applied against the prospective taxable income of the AHM entities. The
limitations described above are not currently expected to significantly affect
the ability of the Company to ultimately recognize the benefit of these NOL's in
future years.
The Company's federal income tax returns are not presently under audit
by the Internal Revenue Service (the "IRS"), except in respect to Summit as
disclosed below. Furthermore, the Company's federal income tax returns for
taxable years through August 31, 1991 are no longer subject to IRS audit, except
for net operating loss and credit carry forwards for income tax purposes from
prior years which may be subject to IRS audit as net operating loss and credit
carry forwards are utilized in subsequent tax years. Also, Summit Health has
extended the statute of limitations for fiscal years 1987 to 1992 through March
31, 1997.
In recent years the IRS has been examining the federal income tax
returns for fiscal years 1984, 1985 and 1986 of Summit Health, which became a
wholly-owned subsidiary of the Company in April 1994 and merged into the Company
in September 1994. Summit Health received a revenue agent's report from the IRS
with proposed adjustments for the years 1984 through 1986 aggregating as of
August 31, 1996 approximately $16.6 million of income tax, $66.4 million of
interest on the tax, $43.9 million of penalties and $25.6 million of interest on
the penalties. After receiving the revenue agent's report, Summit Health filed a
protest contesting the proposed adjustments. On October 28, 1996, the Company
entered into a Closing Agreement on Final Determination with the IRS for the
above audit period, by agreeing and paying additional tax of $647,000 and
interest of $888,000 to close the audit of Summit Health for the fiscal years
1984 through 1986. The Closing Agreement is subject to review by the Joint
Congressional Committee on Taxation since the matter relates to a refund of
taxes to Summit Health in excess of $1 million.
F-14
<PAGE>
NOTE 4 - OTHER CURRENT ASSETS AND LIABILITIES
Other current assets and liabilities consist of the following at August
31 (in thousands):
<TABLE>
<S> <C> <C>
1995 1996
----------------- ----------------
Other Current Assets:
Other accounts receivable, net $ 27,021 $ 58,040
Trading security 14,920 --
Receivable for surplus rebate on
Centinela's bond defeasance -- 13,755
Other current assets 15,111 14,543
----------------- ----------------
$ 57,052 $ 86,338
================= ================
Accrued Expenses and Other Liabilities:
Due to third-party payors $ 99,833 $ 64,474
Salaries, benefits and other compensation 34,493 42,435
Vacation and sick pay 23,473 25,703
Interest 16,018 15,829
Other 47,034 61,084
----------------- ----------------
$ 220,851 $ 209,525
================= ================
</TABLE>
NOTE 5 - LONG-TERM DEBT
A summary of long-term debt at August 31 follows (in thousands):
<TABLE>
<S> <C> <C>
1995 1996
----------------- ----------------
Parent Company:
Senior Credit Facilities:
Revolving Credit Facilities $ 119,000 $ 266,000
Term Loans 361,175 426,250
12.25% Senior Subordinated Notes due 2002 400,000 400,000
10.25% Senior Subordinated Notes due 2003 511 511
11.375% Senior Subordinated Notes due 2004 125,000 125,000
Subsidiaries:
Secured Debt -- other (including capitalized
leases); rates, generally fixed, average
11.9%; payable in periodic installments
through 2023 67,919 71,919
----------------- ----------------
1,073,605 1,289,680
Less current portions 60,182 59,750
----------------- ----------------
$ 1,013,423 $ 1,229,930
================= ================
</TABLE>
Senior Credit Facilities
On October 27, 1995, the Company executed an amended and restated credit
agreement (the "Restated Credit Facility") which increased the Company's
borrowing capacity under its credit facility from approximately $660.0 million
to $900.0 million, of which $692.2 million was outstanding on August 31, 1996
and of which commitment availability had been reduced by issued letters of
credit of $27.4 million and scheduled principal payments of $33.8 million,
resulting in available credit of $146.6 million. The Restated Credit Facility,
which amends the Company's previous credit agreement dated April 19, 1994, will
F-15
<PAGE>
mature on October 30, 2001, and consists of the following facilities (the
"Senior Credit Facilities"): (i)revolving commitment of $440.0 million to
refinance the debt under the previous credit agreement, for general corporate
purposes, to issue up to $50 million of letters of credit, and for strategic
acquisitions; and (ii) a $460.0 million term loan to refinance debt under the
previous credit agreement payable in incremental quarterly installments.
Loans under the Restated Credit Facility bear interest, at the option of
the Company, at a rate equal to either (i) the "alternate base rate" plus 0.25%
or (ii) LIBOR plus 1.25%, in each case subject to potential decreases or
increases dependent on the Company's leverage ratio. Interest is payable
quarterly if a rate based on the alternate base 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 weighted average interest rate on the Company's borrowings
under the Senior Credit Facilities at August 31, 1996, was 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, fund capital expenditures or repay
subordinated debt within one year. The Company may prepay at any time all or
part of the outstanding Senior Credit Facilities without penalty.
The Restated Credit Facility 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
Restated Credit Facility also requires the Company to maintain a specified net
worth and meet or exceed certain coverage, leverage, and indebtedness ratios.
Indebtedness under the Restated Credit Facility 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, majority-owned partnerships
and certain specified investments.
12.25% Senior Subordinated Notes
In May 1992, OrNda issued $400 million aggregate principal amount of
12.25% senior subordinated notes due May 2002 ( the "12.25% Notes"). The 12.25%
Notes are subordinated to the Company's Senior Credit Facilities and to
indebtedness of the Company's subsidiaries. Interest on the 12.25% Notes is
payable semiannually on May 15 and November 15, commencing November 15, 1992.
The 12.25% Notes mature on May 15, 2002, but may be redeemed in whole or in part
at the option of the Company on or after June 1, 1997 through June 1, 2000, at
specified redemption prices in excess of par and thereafter at par.
10.25% Senior Subordinated Notes
On July 28, 1993, AHM issued $100 million aggregate principal amount of
10% senior subordinated notes due July 2003 (the "10% Notes"). Interest on the
10% Notes is payable semiannually on February 1 and August 1 of each year. The
10% Notes mature on August 1, 2003, but may be redeemed in whole or in part at
the option of the Company on or after August 1, 1998 through July 1, 2000 at
specified redemption prices in excess of par and thereafter at par.
Pursuant to the 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%
Notes, as consideration for their agreement to make certain changes to the
Notes' Indenture to effect the AHM Merger (see Note 2) and other matters, the
Company (i) paid to the holders on the closing date of the AHM Merger $15.00 for
each $1,000 principal
F-16
<PAGE>
amount of outstanding 10% Notes and (ii) increased the rate of interest on the
10% Notes from 10% per annum to 10.25% per annum (redefined as the "10.25%
Notes"). The AHM 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 10.25% Notes owned by the holders thereof at 101% of the
principal amount, together with accrued interest thereon, to the date of
repurchase. Pursuant to the offer, $99.3 million of 10.25% Notes were redeemed
through August 31, 1994, resulting in a loss on early extinguishment of debt of
$4.1 million. The 10.25% Notes are subordinated to the Company's Senior Credit
Facilities and subsidiary indebtedness.
11.375% Senior Subordinated Notes
On August 23, 1994, the Company issued $125 million aggregate principal
amount of 11.375% senior subordinated notes due August 15, 2004 (the "11.375%
Notes"). The 11.375% Notes are subordinated to the Company's Senior Credit
Facilities and subsidiary indebtedness but rank pari passu in right of payment
to the Company's 12.25% Notes and 10.25% Notes. Interest on the 11.375% Notes is
payable semiannually on February 15 and August 15 of each year. The 11.375%
Notes may be redeemed in whole or in part at the option of the Company on or
after August 15, 1999 through August 15, 2002, at specified redemption prices in
excess of par and thereafter at par. Net proceeds of $121.0 million from the
sale of the 11.375% Notes were used to reduce the Company's Senior Credit
Facilities.
Other
At August 31, 1996, approximately $143.4 million of the Company's assets
were subject to mortgage or liens as collateral for approximately $71.9 million
of indebtedness, including capital leases.
Maturities of debt, including capitalized lease obligations, for the
next five fiscal years and thereafter are as follows (in thousands):
1997 $ 59,750
1998 78,237
1999 89,493
2000 95,158
2001 125,970
Thereafter 841,072
-----------
$ 1,289,680
===========
In connection with the Summit merger (see Note 2), the Company acquired
a 38.6% interest in Summit Care Corporation ("Summit Care") which operates
nursing care and retirement centers. At August 31, 1994, approximately $37.4
million aggregate principal amount of the Company's 7.5% Exchangeable
Subordinated Notes due 2003 (the "7.5% Notes"), which were exchangeable, at the
option of the holders, into the Company's 38.6% interest in the Summit Care
Common Stock, were outstanding. The investment in Summit Care was increased
approximately $30.5 million in the Summit merger purchase price allocation to
estimated fair value of $37.4 million which was the carrying value of the 7.5%
Notes at the merger date. The 7.5% Notes, as well as accrued interest on the
7.5% Notes, and the investment in Summit Care common stock were accounted for as
an asset held for sale and the net investment was included in other assets.
F-17
<PAGE>
From September 1, 1994 through July 31, 1995, $9.6 million of the 7.5%
Notes were voluntarily exchanged for Summit Care common stock. Effective June 1,
1995, with the consent of the holders of the 7.5% Notes, the Indenture in
respect of the 7.5% Notes was amended to change the earliest redemption date of
the 7.5% Notes from April 1, 1996 to June 1, 1995. The Company issued a
redemption notice for 100% of the outstanding 7.5% Notes on August 3, 1995, and
the holders of $27.8 million of the 7.5 % Notes exchanged for Summit Care common
stock prior to the August 28, 1995, redemption date for the balance of the 7.5%
Notes. As a result, as of August 31, 1996, the Company owned 1,414 shares, .02%
of the common stock of Summit Care.
NOTE 6 - LEASES
The Company leases hospitals, office facilities and equipment under
agreements that generally require the Company to pay all maintenance, property
taxes and insurance costs and that expire on various dates extending to the year
2023. Certain leases include options to purchase the leased property during or
at the end of the lease term at specified amounts. Minimum rental commitments
under operating leases having an initial or remaining noncancelable term of more
than one year for the next five fiscal years and thereafter; minimum payments
under capital leases at August 31, 1996, for the next five fiscal years and
thereafter; and the related present value of future minimum payments under
capital leases are as follows (in thousands):
Capital Operating
Leases Leases
----------------- -----------------
1997 $ 5,663 $ 51,291
1998 4,248 43,073
1999 2,205 34,632
2000 1,337 31,263
2001 1,261 28,343
Thereafter 17,229 261,534
----------------- -----------------
Total minimum rental payments 31,943 $ 450,136
=================
Less amounts representing interest 14,838
-----------------
Present value of future
minimum lease payments 17,105
Less current portion 4,088
$ 13,017
=================
Operations for the years ended August 31, 1994, 1995, and 1996, include
rent expense on operating leases of $32.9 million, $58.1 million, and $62.2
million, respectively.
Property under capital lease at August 31 is as follows (in thousands):
1995 1996
----------------- -----------------
Building and improvements $ 37,220 $ 37,880
Equipment and fixtures 19,603 19,200
----------------- -----------------
56,823 57,080
Less accumulated amortization 18,707 23,392
----------------- -----------------
$ 38,116 $ 33,688
================= =================
F-18
<PAGE>
NOTE 7 - SHAREHOLDERS' EQUITY, WARRANTS AND EMPLOYEE STOCK OPTIONS
Common Stock
The Company has not paid any dividends on its common stock. Under the
terms of the Company's Restated Credit Facility, the Company may not pay
dividends on its common stock.
On November 6, 1995, the Company completed the sale of 10,000,000 shares
of its common stock at a $17.625 per share public offering price. On November 9,
1995, the underwriters exercised an option to purchase an additional 1,500,000
shares to cover over-allotments. The net proceeds of approximately $192.7
million, after deducting offering expenses and underwriting discounts, were used
to reduce all of the indebtedness under the revolving portion of the Restated
Credit Facility in the amount of $27.2 million. The remaining proceeds were used
for general corporate purposes.
Warrants
At August 31, 1996, the Company has warrants outstanding to purchase
92,600 shares of common stock at an exercise price of $17.89 per share. Warrants
can be exercised through April 30, 2000.
Stock Options and Stock Bonus Plans
On April 19, 1994, OrNda's shareholders approved the 1994 Management
Equity Plan to replace the 1992 Management Equity Plan. No awards were granted
under the 1992 Management Equity Plan. The 1994 Management Equity Plan provides
for the granting of stock options (either incentive or nonqualified), stock
appreciation rights, or limited stock appreciation rights to key employees and
consultants of the Company. Under the 1994 Management Equity Plan, the Company
may grant awards for up to 6,550,000 shares of common stock. Generally, the 1994
Management Equity Plan provides that options may be outstanding for a period of
up to ten years from the date of the grant and may become exercisable at such
time or under such conditions as the compensation committee of the Company's
Board of Directors shall determine. For incentive stock options granted, the
exercise price generally will equal the fair market value of the Company's
common stock on the date of the grant.
Effective November 29, 1995, OrNda's shareholders approved the Outside
Directors Stock Option Plan, under which the Company may grant options to
outside directors for up to 300,000 shares of common stock.
On April 19, 1994, the Company's shareholders approved the Incentive
Stock Bonus Plan which provides for the payment of cash and issuance of shares
of the Company's common stock to key employees as an annual incentive bonus
based upon the extent to which the Company achieves certain performance goals
specified in advance by the compensation committee of the Company's Board of
Directors. Under the Incentive Stock Bonus Plan, the Company may issue up to
600,000 shares of the Company's common stock. As of August 31, 1996, no options
have been granted under this plan.
In addition to the 7,450,000 shares of common stock reserved for
issuance under the 1994 Management Equity Plan, the Outside Directors Stock
Option Plan and the Incentive Stock Bonus Plan, the Company has reserved
1,434,958 shares of common stock at August 31, 1996, for issuance pursuant to
options granted under various stock option plans for OrNda, AHM and Summit prior
to the AHM Merger and the Summit merger. No options are available for future
grant under the stock option plans established prior to the April 19, 1994
mergers. On December 31, 1993, OrNda granted options to purchase 500,000
F-19
<PAGE>
shares of common stock to key employees at exercise prices ranging from $7.75 to
$10.75 per share. Since the exercise price was below the market value of the
Company's common stock on the date of grant, the Company recorded $2,530,000 of
noncash stock option compensation in fiscal 1994 with an offsetting increase to
Additional Paid-In Capital for the excess of the market price at the date of
grant over the exercise price.
The following is a summary of option transactions during fiscal 1994,
1995 and 1996:
<TABLE>
<S> <C> <C>
Price Range
--------------
Balance at August 31, 1993 2,823,479 $1.67 - $11.34
Options Granted 3,455,000 $7.75 - $15.00
Options Assumed in Summit Merger 245,553 $2.21 - $13.34
Options Exercised (918,808) $1.67 - $13.34
Options Forfeited (115,002) $4.80 - $15.00
--------------
Balance at August 31, 1994 5,490,222 $1.67 - $15.00
Options Granted 175,000 $19.50
Options Exercised (898,334) $3.92 - $13.34
Options Forfeited (450,542) $2.97 - $15.00
--------------
Balance at August 31, 1995 4,316,346
Options Granted 1,554,500 $18.75- $27.13
Options Exercised (470,280) $ 2.21- $15.00
Options Forfeited ( 210,108) $15.00- $27.13
--------------
Balance at August 31, 1996 5,190,458 $ 3.92- $27.13
==============
Exercisable at August 31, 1996 2,470,758 $ 3.92- $15.00
Available for Future Grant at
August 31, 1996 3,479,700
</TABLE>
Redeemable Convertible Preferred Stock
On October 15, 1991, OrNda issued 1 million shares of $.01 par value
Payable in Kind Cumulative Redeemable Convertible Preferred Stock (the "PIK
Preferred"). The PIK Preferred has an aggregate liquidation value of $15 million
and is entitled to dividends at the rate of 9% of the liquidation value thereof
until October 31, 1999, 9.9% from November 1, 1999 through October 31, 2000,
10.8% from November 1, 2000 through October 31, 2001, and 15% thereafter. The
Company issued additional shares of PIK Preferred as paid-in-kind dividends of
123,468 in fiscal 1994, 133,474 in fiscal 1995, and 33,234 in fiscal 1996.
On November 7, 1995, the Company issued a notice of redemption to the
holders of its PIK Preferred for $15 per share with a redemption date of
December 8, 1995. In the fiscal quarter ended November 30, 1995, 1,355,519
shares of PIK Preferred were converted into 1,355,519 shares of the Company's
common stock. On December 8, 1995, the remaining 7,416 shares of PIK Preferred
were redeemed for $15 per share plus dividends of $0.16 per share accrued
through the redemption date.
F-20
<PAGE>
NOTE 8 - OTHER
Effective July 1, 1986, OrNda adopted the OrNda HealthCorp Savings and
Investment Plan (the "401(k) Plan"). The 401(k) Plan is a defined contribution
plan whereby employees who have completed one year of service in which they have
worked a minimum of 1,000 hours and are age 21 or older are eligible to
participate. Through December 31, 1994, the 401(k) Plan allowed eligible
employees to make contributions of 2% to 7% of their annual compensation and
employer contributions were made at a rate of 50% of the employee contributions
up to a maximum of 3.5% of annual compensation. Effective January 1, 1995,
through December 31,1995, the 401(k) Plan was amended to allow eligible
employees to make contributions of 2% to 15% of their annual compensation and
employer contributions were made at a rate of 50% of the employee contributions
up to a maximum of 1.5% of annual compensation. Effective January 1, 1996, the
401(k) Plan was amended such that employer contributions are now made in the
Company's common stock at a rate of 50% of the employee contributions up to a
maximum of 2.0% of annual compensation. Employer contributions vest 20% after
three years of service and continue vesting at 20% per year until fully vested.
The Company's matching expense for fiscal years 1994, 1995, and 1996 was
approximately $3.2 million, $4.5 million, and $4.8 million, respectively.
The carrying amounts and fair values of certain financial instruments,
disclosed elsewhere, consisted of the following at August 31, 1996 (in
thousands):
<TABLE>
<S> <C> <C>
Carrying Amount Fair Value
--------------- -------------
Long-Term Debt (see Note 6):
Senior Credit Facilities $ 692,250 $ 692,250
12.25% Senior Subordinated Notes due 2002 400,000 430,500
10.25% Senior Subordinated Notes due 2003 511 511
11.375% Senior Subordinated Notes due 2004 125,000 138,750
Secured Debt - Other $ 71,919 $ 71,919
</TABLE>
The carrying amounts of the Company's borrowings at August 31, 1996
approximate their fair value based on discounted cash flow analyses, using the
Company's current incremental borrowing rates for similar types of borrowing
arrangements or quoted market prices, if available, except that the fair value
of the 12.25% Senior Subordinated Notes approximates 107.625% of par value and
the fair value of the 11.375% Senior Subordinated Notes approximates 111.0% of
par value based on recent bid/ask indications.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company continually evaluates contingencies based upon the best
available information. Final determination of amounts earned from certain
third-party payors is subject to review by appropriate governmental authorities
or their agents. In the opinion of management, adequate provision has been made
for any adjustments that may result from such reviews.
Broad provisions in the Medicare and Medicaid laws deal with fraud and
abuse, false claims and physician self-referrals as well as similar provisions
in many state laws. In recent years, government investigations of alleged
violations of these laws have become common place in the health care industry.
The Company is currently under civil investigation under the direction of the
Civil Division of the Department of Justice concerning possible violations of
Medicare rules and regulations. The investigation is primarily related to
arrangements between physicians and the twelve hospitals which the Company
acquired from Summit Health, Ltd. in 1994. The Company is fully cooperating with
the government
F-21
<PAGE>
investigation and is voluntarily producing documents related to the
investigation. Also, in an apparently unrelated matter, the government has
requested and the Company has agreed to provide similar records from a single
hospital outside the group acquired from Summit Health, Ltd. in 1994. Although
no proceedings have been instituted, in the event that the Office of the
Inspector General of the United States Department of Health and Human Services
believes that any wrongdoing has occurred, civil and possibly criminal
proceedings could be instituted. If any such proceedings were instituted and the
outcome were unfavorable, the Company could be subject to fines, penalties and
damages ("Monetary Payments") and also could be excluded from Medicare and other
government reimbursement programs. The aggregate amount of the Monetary Payments
and any such exclusion could have a material adverse effect on the Company's
financial position or results of operations. The result of this investigation
and its impact, if any, cannot be predicted or estimated at this time. Based on
information currently available to it, management believes that if the
investigation remains civil in nature and, with the single exception noted
above, relates to the practices of the hospitals of an acquired corporation, the
final outcome of this investigation will not have a material adverse effect on
the Company's financial position or results of operations.
The Company is subject to various legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
ultimate resolution of such pending legal proceedings will not have a material
effect on the Company's financial position or results of operations.
NOTE 10 - SUBSEQUENT EVENTS
Effective September 1, 1996, the Company completed the acquisition of
The Fallon Healthcare System's Saint Vincent Healthcare System, located in
Worcester, Massachusetts, consisting of a 432-bed acute care teaching hospital,
three skilled nursing facilities and other health related companies, and a
minority interest in the 280-member multi-specialty group physician practice,
The Fallon Clinic. The Company has committed to fund the construction, estimated
at $225.0 million, of a new replacement hospital, known as Medical City.
On October 8, 1996, the Company entered into a definitive agreement with
United Western Medical Centers, a not-for-profit corporation headquartered in
Santa Ana, California, to acquire substantially all of United's assets which
consist primarily of Western Medical Center, a 288-bed acute care hospital in
Santa Ana, California; Western Medical Center-Anaheim, a 193-bed acute care
hospital in Anaheim, California; and Western Medical Center-Bartlett, a 202-bed
skilled nursing facility in Santa Ana, California. United Western Medical
Centers has approximately $185 million in annual net revenues in its most recent
fiscal year. The closing of this transaction is subject to customary closing
conditions, Board of Directors' approvals and review by the California Attorney
General.
On October 16, 1996, the Company entered into a definitive agreement to
merge with Tenet Healthcare Corporation ("Tenet"). Under the terms of the
definitive agreement, which was unanimously approved by the Board of Directors
of both companies, shareholders of OrNda common stock would receive 1.35 shares
of Tenet common stock and the associated preferred stock purchase rights for
each share of OrNda common stock. The merger transaction will be tax-free and
accounted for as a pooling of interests and is expected to close in March 1997.
Consummation of the merger is subject to a number of conditions, including
shareholder approval of both companies. The merger is also subject to the
applicable waiting periods under the Hart-Scott- Rodino Antitrust Improvements
Act, local regulatory approvals, and confirmation that the transaction qualifies
as a pooling-of-interests for accounting purposes and as a tax-free
reorganization under the Internal Revenue Code.
F-22
<PAGE>
As of November 13, 1996, the Company is in discussion with its current
syndicate of banks to increase its credit facility to $1.2 billion, an amount
sufficient to cover the Company's pending acquisitions.
NOTE 11 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information for the years ended August 31, 1995 and
1996 is summarized below (in thousands, except per share data):
<TABLE>
Quarter Ended
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
November 30 February 28 May 31 August 31
------------- ------------- ------------- -------------
1995
Total revenue $ 418,021 $ 442,725 $ 497,890 $ 484,065
Income before income taxes
and extraordinary item $ 16,104 $ 22,571 $ 28,837 $ 19,572
Net income $ 13,350 $ 19,919 $ 22,091 $ 15,952
Net income per common and
common equivalent share $ 0.29 $ 0.43 $ 0.47 $ 0.34
Net income per common share
assuming full dilution $ 0.29 $ 0.43 $ 0.47 $ 0.33
1996
Total revenue $ 493,565 $ 542,888 $ 557,866 $ 552,913
Income before income taxes $ 25,869 $ 37,782 $ 40,123 $ 31,339
Net income $ 19,919 $ 27,455 $ 29,290 $ 23,207
Net income per common and
common equivalent share $ 0.40 $ 0.46 $ 0.49 $ 0.39
Net income per common share
assuming full dilution $ 0.39 $ 0.46 $ 0.49 $ 0.39
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VIII
ORNDA HEALTHCORP AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<S> <C> <C> <C> <C> <C>
Additions
-------------------------------
Balance Charged Charged to
at Beginning to Costs Other Balance at
Description of Period and Expenses Accounts Deductions End of Period
- ----------- ------------- ------------- ------------- ------------- -------------
Year ended August 31, 1996:
Allowance for
uncollectible
accounts $ 58,632 $ 140,923 $ -- $ (141,110) (1) $ 78,447
20,002 (3)
Allowance for
uncollectible
long-term
receivables $ 2,675 $ 1,000 $ -- $ -- $ 3,675
Year ended August 31, 1995:
Allowance for
uncollectible
accounts $ 59,855 $ 122,193 $ -- $ (131,031) (1) $ 58,632
7,615 (3)
Allowance for
uncollectible
long-term
receivables $ 7,659 $ -- $ -- $ (4,984) (1) $ 2,675
Year ended August 31, 1994:
Allowance for
uncollectible
accounts $ 47,289 $ 87,844 $ -- $ (92,217) (1) $ 59,855
(1,317) (2)
18,256 (3)
Allowance for
uncollectible
long-term
receivables $ 12,679 $ (1,595) $ 5,425) $ 2,000 (3) $ 7,659
<FN>
(1) Uncollectible accounts written off, net of recoveries.
(2) Allowances related to hospital sold.
(3) Allowances recorded in acquisitions.
</FN>
</TABLE>
F-24
<PAGE>
EXHIBIT INDEX
<TABLE>
Exhibit
No. Description Page No.
<S> <C> <C>
2.1 Agreement and Plan of Merger, dated as of October 16, 1996, among Tenet
Healthcare Corporation, OHC Acquisition Co. and the Company. (Incorporated by
reference to Exhibit 2.1 filed with the Company's Form 8-K dated October 16,
1996.)............................................................................................N/A
3.1 Restated Certificate of Incorporation of the Company as currently in effect.
(Incorporated by reference to exhibits filed with the Company's Current Report on
Form 8-K dated October 15, 1991.).................................................................N/A
3.2 Certificate of Amendment to the Company's Restated Certificate of Incorporation.
(Incorporated by reference to Exhibit 3 to the Company's Current Report on Form
8-K dated April 19, 1994.)........................................................................N/A
3.3 By-Laws of the Company. (Incorporated by reference to Exhibit 4(c) included in
Company's Registration Statement on Form S-8 under the Securities Act of 1933,
as amended (the "Securities Act"), File No. 33-81778.)............................................N/A
4.1 Certificate of Designation of Payable-in-Kind Cumulative Redeemable Convertible
Preferred Stock of the Company. (Incorporated by reference to exhibits filed with
the Company's Registration Statement on Form S-1 under the Securities Act, File
No. 33-46876.)....................................................................................N/A
4.2 Certificate of Correction of Certificate of Designation of Payable-in-Kind
Cumulative Redeemable Convertible Preferred Stock. (Incorporated by reference
to exhibits filed with the Company's Registration Statement on Form S-1 under the
Securities Act, File No. 33-46876.)...............................................................N/A
4.3 Certificate of Elimination of Provisions of the Restated Certificate of Incorporation
of OrNda HealthCorp Relating to the Preferences and Rights of the Redeemable
Convertible Preferred Stock. (Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the year ended August 31, 1993.).........................N/A
4.4 Indenture relating to the 12 1/4% Senior Subordinated Notes of the Company (the
"12 1/4% Notes") due 2002 dated as of May 15, 1992, between the Company and
U.S. Trust Company of Texas, N.A., as Trustee, including form of Note.
(Incorporated by reference to Exhibit 1 filed with the Company's Current Report on
Form 8-K dated May 28, 1992.).....................................................................N/A
4.5 First Supplemental Indenture relating to the 12 1/4% Notes, dated as of April 19,
1994 by and among Company, Summit Health Ltd. and U.S. Trust Company of
Texas, N.A., as Trustee. (Incorporated by reference to Exhibit 4.2 filed with the
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Company's Registration Statement on Form S-3 under the Securities Act, File No.
33-54651.)........................................................................................N/A
4.6 Second Supplemental Indenture relating to the 12 1/4% Notes, dated as of November
1, 1994, by and among the Company, Summit Hospital Corporation and U.S. Trust
Company of Texas, N.A., as Trustee. (Incorporated by reference to Exhibit 4.6 filed
with the Company's Annual Report on Form 10-K for the year ended August 31,
1994.)............................................................................................N/A
4.7 Amended and Restated Credit, Security, Guaranty and Pledge Agreement, dated as
of October 27, 1995, among the Company, Summit Hospital Corporation and AHM
Acquisition Co., Inc. as the Borrowers, the Guarantors named therein, the Lenders
named therein, The Bank of Nova Scotia ("Scotiabank") as Administrative Agent
for the Lenders, Scotiabank and Citicorp USA, Inc. ("Citicorp") as Co-Syndication
Agents for the Lenders, and Citicorp as Documentation Agent for the Lenders.
(Incorporated by reference to Exhibit 4 filed with the Company's Current Report on
Form 8-K dated October 30, 1995.).................................................................N/A
10.1 1990 Stock Option Plan of the Company. (Incorporated by reference to exhibits
filed with the Company's Annual Report on Form 10-K for the year ended August
31, 1990.)........................................................................................N/A
10.2 Form of Indemnification Agreement between the Company and each of its directors
and executive officers. (Incorporated by reference to exhibits filed with the
Company's Registration Statement on Form S-1 under the Securities Act, File No.
33-34712.)........................................................................................N/A
10.3 Employment Agreement dated as of January 15, 1992 between the Company and
Charles N. Martin, Jr. (Incorporated by reference to exhibits filed with the
Company's Registration Statement on Form S-1 under the Securities Act, File No.
33-46876.)........................................................................................N/A
10.4 Amended 1991 Stock Option Plan. (Incorporated by reference to exhibits filed with
the Company's Registration Statement on Form S-1 under the Securities Act, File
No. 33-46876.)....................................................................................N/A
10.5 Amended 1991 Stock Accumulation Plan. (Incorporated by reference to exhibits
filed with the Company's Registration Statement on Form S-1 under the Securities
Act, File No. 33-46876.)..........................................................................N/A
10.6 Amended and Restated Incentive Bonus Plan. (Incorporated by reference from
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter
ended February 28, 1995.).........................................................................N/A
10.7 Summit Health Ltd. Stock Option Plan. (Incorporated by reference to Exhibit 10.12
filed with the Company's Annual Report on Form 10-K for the year ended August
31, 1994.)........................................................................................N/A
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10.8 Summit Health Ltd. 1992 Stock Option Plan. (Incorporated by reference to Exhibit
10.13 filed with the Company's Annual Report on Form 10-K for the year ended
August 31, 1994.).................................................................................N/A
10.9 American Healthcare Management, Inc. 1990 Non-Employee Directors' Stock Plan.
(Incorporated by reference to Exhibit 10.14 filed with the Company's Annual
Report on Form 10-K for the year ended August 31, 1994.)..........................................N/A
10.10 Description of car allowance plan for OrNda officers. (Incorporated by reference
to Exhibit 10.11 filed with the Company's Annual Report on Form 10-K for the
year ended August 31, 1995.)......................................................................N/A
10.11 Tax Planning and Medical Expense Benefit Plan. (Incorporated by reference to
Exhibit 10.17 filed with the Company's Annual Report on Form 10-K for the year
ended August 31, 1995.)...........................................................................N/A
10.12 Asset Purchase Agreement, dated as of November 10, 1994, among St. Luke's
Health System, St. Luke's Rehabilitation Center, Inc., St. Luke's La Ciudad
Corporation and OrNda HealthCorp of Phoenix, Inc. (Incorporated by reference to
Exhibit 2.1 filed in the Company's Current Report on Form 8-K dated February 13,
1995.)............................................................................................N/A
10.13 First Amendment to Asset Purchase Agreement dated as of January 31, 1995 among
St. Luke's Health System, St. Luke's Rehabilitation Center, Inc., St. Luke's La
Ciudad Corporation and OrNda HealthCorp of Phoenix, Inc. (Incorporated by
reference to Exhibit 2.2 filed in the Company's Current Report on Form 8-K dated
February 13, 1995.)...............................................................................N/A
10.14 1994 Annual Incentive Plan for Officers of OrNda HealthCorp. (Incorporated by
reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the
quarter ended February 28, 1995.).................................................................N/A
10.15 Employment Agreement dated as of March 1, 1995 between the Company and
Keith B. Pitts. (Incorporated by reference to Exhibit 10(d) to the Company's
Quarterly Report on Form 10-Q for the quarter ended February 28, 1995.)...........................N/A
10.16 Amendment No. 1 to Employment Agreement dated as of June 1, 1995, between
the Company and Charles N. Martin, Jr. (Incorporated by reference to Exhibit 10.22
filed with the Company's Annual Report on Form 10-K for the year ended August
31, 1995.)........................................................................................N/A
10.17 Forms of Stock Option Agreement between the Company and its officer stock
option grantees for its June 1994 and August 1995 stock option grants.
(Incorporated by reference to Exhibit 10.23 filed with the Company's Annual
Report on Form 10-K for the year ended August 31, 1995.)..........................................N/A
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10.18 Resignation Agreement dated as of August 31, 1995, between the Company and
Donald J. Amaral. (Incorporated by reference to Exhibit 10.24 filed with the
Company's Annual Report on Form 10-K for the year ended August 31, 1995.).........................N/A
10.19 Registration Rights Agreement dated as of February 9, 1993, among the Company,
Rudy J. Noriega and M. Lee Pearce, M.D. (Incorporated by reference to Exhibit
10.23 to the Company's Annual Report on Form 10-K for the year ended August 31,
1994.)............................................................................................N/A
10.20 Registration Rights Agreement dated as of April 19, 1994, among the Company,
John W. Gildea, Gildea Management Co., The Network Company II Limited, John
F. Nickoll and The Foothill Group, Inc. (Incorporated by reference to Exhibit 10.25
to the Company's Annual Report on Form 10-K for the year ended August 31,
1994.)............................................................................................N/A
10.21 Employment Agreement dated as of March 1, 1996 between the Company and
William L. Hough.....................................................................................
10.22 Form of Stock Option Agreement between the Company and its executive office
stock option grantees for its April 1996 stock option grants. (Incorporated by
reference to Exhibit 10(o) to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1996.)......................................................................N/A
10.23 OrNda HealthCorp Outside Directors Stock Option Plan. (Incorporated by reference
from Exhibit B to the Company's definitive proxy statement for its 1996 Annual
Meeting of Stockholders filed with the Securities and Exchange Commission under
the Securities Exchange Act of 1934 on December 8, 1995.).........................................N/A
10.24 OrNda HealthCorp 1994 Management Equity Plan, as amended on January 19,
1996. (Incorporated by reference from Exhibit 4(d) to the Company's Registration
Statement No. 333-399 on Form S-8, filed with the Securities and Exchange
Commission under the Securities Act of 1933 on January 24, 1996.).................................N/A
10.25 Form of Stock Option Agreement between the Company and its executive officer
stock option grantees for its November 1995 stock option grants. (Incorporated by
reference from Exhibit 10 to the Company's Quarterly Report Form 10-Q for the
quarter ended November 30, 1995)..................................................................N/A
10.26 Form of Stock Option Agreement between the Company and its directors under its
Outside Directors Stock Option Plan..................................................................
10.27 First Amendment and Limited Waiver to Amended and Restated Credit, Security,
Guaranty and Pledge Agreement dated as of September 12, 1996 among the
Company, OrNda Hospital Corporation and AHM Acquisition Co., Inc. as the
Borrowers, the Guarantors named therein, the Lenders named therein, Scotiabank
as Administrative Agent for the Lenders and Scotiabank and Citicorp as Co-
Syndication Agents for the Lenders...................................................................
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10.28 Stock Option Agreement, dated October 17, 1996, between the Company, as
Grantee, and Tenet Healthcare Corporation, as Issuer. (Incorporated by reference
to Exhibit 10.1 filed with the Company's Form 8-K dated October 16, 1996.)........................N/A
10.29 Stock Option Agreement, dated October 17, 1996, between the Company, as Issuer,
and Tenet Healthcare Corporation, as Grantee. (Incorporated by reference to Exhibit
10.2 filed with the Company's Form 8-K dated October 16, 1996.)...................................N/A
11 Statement re computation of per share earnings.......................................................
21 List of Subsidiaries of the Company..................................................................
23 Consent of Ernst & Young LLP.........................................................................
24 Powers of Attorney...................................................................................
27 Financial Data Schedule (included only in filings under the Electronic Data
Gathering Analysis and Retrieval System).............................................................
99.1 Stockholder Voting Agreement, dated as of October 17, 1996, between Tenet
Healthcare Corporation and Charles N. Martin, Jr. (Incorporated by reference to
Exhibit 99.1 as filed with the Company's Form 8-K dated October 16, 1996.)........................N/A
99.2 Stockholder Voting Agreement, dated as of October 17, 1996, between Tenet
Healthcare Corporation and Joseph Littlejohn & Levy Fund, L.P. (Incorporated by
reference to Exhibit 99.2 as filed with the Company's Form 8-K dated October 16,
1996.)............................................................................................N/A
</TABLE>
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EXHIBIT 10.21
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of May 1, 1996, by and between OrNda
Healthcorp, a Delaware corporation (the "Company"), and William L. Hough (the
"Executive").
WHEREAS, the Executive currently serves as Executive Vice
President and Chief Operating Officer of the Company and has served in such
capacity since August 1995;
WHEREAS, the Company desires to secure for itself the
continuing services of the Executive from and after the date hereof and the
Executive desires to render such services, in each case pursuant to the terms
and conditions hereof;
WHEREAS, the Compensation Committee (the "Compensation
Committee") of the Company's Board of Directors (the "Board") has approved and
authorized the Company's entry into this Agreement with the Executive; and
WHEREAS, the parties desire to enter into this Agreement
setting forth the terms and conditions of the employment relationship of the
Executive with the Company.
NOW, THEREFORE, the parties agree as follows:
1. Employment. The Company hereby employs the Executive, and
the Executive hereby accepts employment with the Company, upon the terms and
subject to the conditions set forth herein.
2. Term. This Agreement is for the three-year period (the
"Term") commencing on May 1, 1996 (the "Effective Date") and terminating on the
third anniversary of the Effective Date, or upon the Executive's earlier death,
disability or other termination of employment pursuant to Section 10; provided,
however, that at the end of each day during the Extension Period (as defined
below) the Term shall automatically be extended for one additional day; and
provided, further, that commencing on the fifth anniversary of the Effective
Date and on each anniversary thereafter the Term shall automatically be extended
for one additional year unless, not later than 90 days prior to any such
anniversary, either party hereto shall have notified the other party hereto that
such extension shall not take effect. For purposes of this Section 2, the
Extension Period shall be the period beginning on the Effective Date and ending
on the earlier of (i) the Date of Termination (as defined below) and (ii) the
day preceding the second anniversary of the Effective Date.
3. Position. During the Term, the Executive shall serve as
Executive Vice President and Chief Operating Officer of the Company or in such
other senior executive position in the Company as the Executive should approve.
4. Duties and Reporting Relationship. During the Term, the
Executive shall, on a full time basis, use his skills and render services to the
best of his abilities in supervising and conducting the operations of the
Company.
<PAGE>
5. Place of Performance. The Executive shall perform his
duties and conduct his business at the principal executive offices of the
Company, except for required travel on the Company's business.
6. Salary and Annual Bonus.
(a) Base Salary. The Executive's base salary
hereunder shall be $550,000 a year, payable monthly. The Board shall review such
base salary at least annually and make such adjustment from time to time as it
may deem advisable, but the base salary shall not at any time be less than
$550,000 a year.
(b) Annual Bonus. The Compensation Committee shall
provide the Executive with an annual bonus plan providing the Executive with an
opportunity to earn annual bonus compensation and shall cause the Company to pay
to him any earned annual bonus in addition to his base salary.
7. Vacation, Holidays and Sick Leave. During the Term, the
Executive shall be entitled to paid vacation, paid holidays and sick leave in
accordance with the Company's standard policies for its senior executive
officers.
8. Business Expenses. The Executive will be reimbursed for all
ordinary and neces sary business expenses incurred by him in connection with his
employment upon timely submission by the Executive of receipts and other
documentation as required by the Internal Revenue Code and in conformance with
the Company's normal procedures.
9. Pension and Welfare Benefits. During the Term, the
Executive shall be eligible to participate fully in all health benefits,
insurance programs, pension and retirement plans and other employee benefit and
compensation arrangements available to senior officers of the Company generally.
10. Termination of Employment.
(a) General. The Executive's employment hereunder
may be terminated with out any breach of this Agreement only under the following
circumstances.
(b) Death or Disability.
(i) The Executive's employment hereunder
shall automatically terminate upon the death of the Executive.
(ii) If, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have
been absent from his duties with the Company for any six (6) months
(whether or not consecutive) during any twelve (12)
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month period, the Company may terminate the Executive's employment
hereunder for any such incapacity (a "Disability").
(c) Cause. The Company may terminate the
Executive's employment hereunder for Cause. For purposes of this Agreement,
"Cause" shall mean (i) the willful failure or refusal by the Executive to
perform his duties hereunder (other than any such failure resulting from the
Executive's incapacity due to physical or mental illness), which has not ceased
within ten (10) days after a written demand for substantial performance is
delivered to the Executive by the Company, which demand identifies the manner in
which the Company believes that the Executive has not performed such duties,
(ii) the willful engaging by the Executive in misconduct which is materially
injurious to the Company, monetarily or otherwise (including, but not limited
to, conduct described in Section 14) or (iii) the conviction of the Executive
of, or the entering of a plea of nolo contendere by the Executive with respect
to, a felony. Notwithstanding the foregoing, the Executive's employment
hereunder shall not be deemed to have been terminated for Cause unless and until
there shall have been delivered to the Executive a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the entire
membership of the Board at a meeting of the Board (after written notice to the
Executive and a reasonable opportunity for the Executive, together with the
Executive's counsel, to be heard before the Board), finding that in the good
faith opinion of the Board the Executive should be terminated for Cause.
(d) Termination by the Executive. The Executive
shall be entitled to terminate his employment hereunder (A) for Good Reason or
(B) if his health should become impaired to an extent that makes his continued
performance of his duties hereunder hazardous to his physical or mental health,
provided that the Executive shall have furnished the Company with a written
statement from a qualified doctor to such effect and provided, further, that, at
the Company's request, the Executive shall submit to an examination by a doctor
selected by the Company and such doctor shall have concurred in the conclusion
of the Executive's doctor. For purposes of this Agreement, "Good Reason" shall
mean, (i) without the Executive's express written consent, any failure by the
Company to comply with any material provision of this Agreement, which failure
has not been cured within ten (10) days after notice of such noncompliance has
been given by the Executive to the Company or (ii) the occurrence (without the
Executive's express written consent), following a Change of Control during the
term of this Agreement, of any one of the following acts by the Company, or
failures by the Company to act, unless, in the case of any act or failure to act
described below, such act or failure to act is corrected prior to the Date of
Termination specified in the Notice of Termination given in respect thereof:
(I) any change in the Executive's title,
authorities, responsibilities (including reporting responsibilities)
which, in the Executive's reasonable judgment, represents an adverse
change from his status, title, position or responsibilities (including
reporting responsibilities) which were in effect immediately prior to
the Change in Control or from his status, title, position or
responsibilities (including reporting responsibilities) which were in
effect following a Change in Control pursuant to the Executive's
consent to accept any such change; the assignment
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to him of any duties or work responsibilities which, in his reasonable
judgment, are inconsistent with such status, title, position or work
responsibilities; or any removal of the Executive from, or failure to
reappoint or reelect him to any of such positions, except if any such
changes are because of Disability, retirement, death or Cause;
(II) a reduction by the Company in the
Executive's annual base salary as in effect on the date hereof or as
the same may be increased from time to time except for across-the-
board salary reductions similarly affecting all senior executives of
the Company and all senior executives of any Person (as defined in
Section 10(h)(i) below) in control of the Company provided in no event
shall any such reduction reduce the Executive's base salary below
$550,000;
(III) the relocation of the Executive's
office at which he is to perform his duties, to a location more than
thirty (30) miles from the location at which the Executive performed
his duties prior to the Change in Control, except for required travel
on the Company's business to an extent substantially consistent with
his business travel obligations prior to the Change in Control;
(IV) if the Executive had been based at the
Company's principal executive offices immediately prior to the Change
of Control, the relocation of the Company's principal executive
offices to a location more than 30 miles from the location of such
offices immediately prior to the Change in Control;
(V) the failure by the Company, without the
Executive's consent, to pay to the Executive any portion of the
Executive's current compensation, or to pay to the Executive any
portion of an installment of deferred compensation under any deferred
compensation program of the Company, within seven (7) days of the date
such compensation is due;
(VI) the failure by the Company to continue
in effect any stock-based and/or cash annual or long-term incentive
compensation plan in which the Executive participates immediately
prior to the Change in Control, unless the Executive participates
after the Change in Control in other comparable plans generally
available to senior executives of the Company and senior executives of
any Person in control of the Company;
(VII) the failure by the Company to
continue to provide the Executive with benefits substantially similar
in value to the Executive in the aggregate to those enjoyed by the
Executive under any of the Company's pension, life insurance, medical,
health and accident, or disability plans in which the Executive was
participating immediately prior to the Change in Control, unless the
Executive participates after the Change in Control in other comparable
benefit plans
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generally available to senior executives of the Company and senior
executives of any Person in control of the Company;
(VIII) the adverse and substantial
alteration of the nature and quality of the office space within which
the Executive performed his duties prior to a Change in Control as
well as in the secretarial and administrative support provided to the
Executive, provided, however, that a reasonable alteration of the
secretarial or administrative support provided to the Executive as a
result of reasonable measures implemented by the Company to effectuate
a cost-reduction or consolidation program shall not constitute Good
Reason hereunder; or
(IX) any purported termination of the
Executive's employment which is not effected pursuant to a Notice of
Termination satisfying the requirements of Section 10(f) below; for
purposes of this Agreement, no such purported termina tion shall be
effective.
The Executive's continued employment shall not constitute consent to, or a
waiver of rights with respect to, any act or failure to act constituting Good
Reason hereunder.
(e) Voluntary Resignation. Should the Executive
wish to resign from his position with the Company or terminate his employment
for other than Good Reason during the Term, the Executive shall give sixty (60)
days written notice to the Company, setting forth the reasons and specifying the
date as of which his resignation is to become effective.
(f) Notice of Termination. Any purported
termination of the Executive's employment by the Company or by the Executive
shall be communicated by written Notice of Termination to the other party hereto
in accordance with Section 18. "Notice of Termination" shall mean a notice that
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated.
(g) Date of Termination. "Date of Termination"
shall mean (i) if the Executive's employment is terminated because of death, the
date of the Executive's death, (ii) if the Executive's employment is terminated
for Disability, the date Notice of Termination is given, (iii) if the
Executive's employment is terminated pursuant to Subsection (c), (d) or
(e) hereof or for any other reason (other than death or Disability), the date
specified in the Notice of Termination (which, in the case of a termination for
Good Reason shall not be less than fifteen (15) nor more than sixty (60) days
from the date such Notice of Termination is given, and in the case of a
termination for any other reason shall not be less than thirty (30) days sixty
(60) days in the case of a under Subsection (e) hereof) from the date such
Notice of Termination is given).
(h) Change in Control. For purposes of this
Agreement, a Change in Control the Company shall have occurred if
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(i) any "Person" (as defined in Section
3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") as
modified and used in Sec tions 13(d) and 14(d) of the Exchange Act
(other than (1) the Company or any of its subsidiaries, (2) any
trustee or other fiduciary holding securities under an employee
benefit plan of the Company or any of its subsidiaries, (3)
an underwriter temporarily holding securities pursuant to an offering
of such securities, or (4) any corporation owned, directly or
indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of the Company's common stock)),
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the
Company representing more than 50% of the combined voting power of
the Company's then outstanding voting securities;
(ii) during any period of not more than two
consecutive years, not including any period prior to the date of this
Agreement, individuals who at the beginning of such period constitute
the Board, and any new director (other than a di rector designated by
a person who has entered into an agreement with the Company to effect
a transaction described in clause (i), (iii), or (iv) of this Section
10(h)) whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds
(2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to
constitute at least a majority thereof;
(iii) the stockholders of the Company
approve a merger or consolidation of the Company with any other
corporation, other than both (A)(1) a merger or consolidation which
would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the
surviving or parent entity) 50% or more of the combined voting power
of the voting securities of the Company or such surviving or parent
entity outstanding immediately after such merger or consolidation or
(2) a merger or consolidation in which no person acquires 50% or more
of the combined voting power of the Company's then outstanding
securities; and (B) immediately after the consummation of such merger
or consolidation described in clause (A)(1) or (A)(2) above (and for
at least 180 days thereafter) neither the Company's Chief Executive
Officer nor its Chief Financial Officer change from the people
occupying such positions immediately prior to such merger or
consolidation except as a result of their death or Disability and
neither of such officers shall have changed prior to
such merger or consolidation at the direction of a Person who has
entered into an agreement with the Company the consummation of which
will constitute a Change in Control of the Company; or
(iv) the stockholders of the Company
approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the
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Company of all or substantially all of the Company's assets (or any
transaction having a similar effect).
(i) Resignation as Member of Board. If the
Executive's employment by the is terminated for any reason, the
Executive hereby agrees that he shall submit his resignation as a
member of the Board in writing on or the Date of Termination if the
Executive is a member of the Board at such. If the Executive fails to
submit such required resignation in writing, the of this Subsection
10(i) may be deemed by the Company to constitute Executive's written
resignation as a member of the Board effective as of the of
Termination.
11. Compensation During Disability, Death or Upon Termination.
(a) During any period that the Executive fails to
perform his duties hereunder as a result of incapacity due to physical or mental
illness ("Disability Period"), the Executive shall continue to receive his full
salary at the rate then in effect for such period until his employment is
terminated pursuant to Section 10(b)(ii) hereof, provided that payments so made
to the Executive during the Disability Period shall be reduced by the sum of the
amounts, if any, payable to the Executive with respect to such period under
disability benefit plans of the Company or under the Social Security disability
insurance program, and which amounts were not previously applied to reduce any
such payment.
(b) If the Executive's employment is terminated by
his death or Disability, Company shall pay (i) any amounts due to the Executive
under Section 6 the date of such termination and (ii) all such amounts that
would have due to the Executive under Section 6 had the Executive's employment
hereunder continued until the last day of the calendar year in which such
termination of employment occurred, in each case in accordance with Section
13(b), if applicable.
(c) If the Executive's employment shall be
terminated by the Company for or by the Executive for other than Good Reason,
the Company shall pay the his full salary through the Date of Termination at the
rate in effect the time Notice of Termination is given, and the Company shall
have no obligations to the Executive under this Agreement.
(d) If (A) following a Change of Control the Company
shall terminate the employment in breach of this Agreement, or (B) following a
Change of the Executive shall terminate his employment for Good Reason, then
(i) the Company shall pay the Executive his
full salary through the Date of Termination at the rate in effect at
the time Notice of Termina tion is given and all other unpaid amounts,
if any, to which the Executive is entitled as of the Date of
Termination under any compensation plan or program of the Company, at
the time such payments are due;
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(ii) in lieu of any further salary payments
to the Executive for periods subsequent to the Date of Termination,
the Company shall pay as liquidated damages to the Executive an
aggregate amount equal to the product of (A) the sum of (1) the
Executive's annual salary rate in effect as of the Date of Termination
and (2) the average of the annual bonuses actually paid to the
Executive by the Company with respect to the two fiscal years which
immediately precede the year of the Term in which the Date of
Termination occurs provided if there was a bonus or bonuses paid to
the Executive with respect only to one fiscal year which immediately
precedes the year of the Term in which the Date of Termination occurs,
then such single year's bonus or bonuses shall be utilized in the
calculation pursuant to this clause (2) and (B) the number three
(3);
(iii) the Company shall (x) continue
coverage for the Executive under the Company's life insurance,
medical, health, disability and similar welfare benefit plans (or, if
continued coverage is barred under such plans, the Company shall
provide to the Executive substantially similar benefits) for the
remainder of the Term, and (y) provide the benefits which the
Executive would have been entitled to receive pursuant to any
supplemental retirement plan maintained by the Company had his
employment continued at the rate of compensation specified herein for
the remainder of the Term. Benefits otherwise receivable by the
Executive pursuant to clause (x) of this Subsection 11(d)(iii) shall
be reduced to the extent comparable benefits are actually received by
the Executive from a subsequent em ployer during the period during
which the Company is required to provide such benefits, and the
Executive shall report any such benefits actually received by him to
the Company; and
(iv) the payments provided for in this
Section 11(d) (other than Section 11(d)(iii)) shall be made not later
than the fifth day following the Date of Termination, provided,
however, that if the amounts of such payments, and the limitation on
such payments set forth in Section 15 hereof, cannot be finally
determined on or before such day, the Company shall pay to the
Executive on such day an estimate, as determined in good faith by the
Company, of the minimum amount of such payments to which the Executive
is clearly entitled and shall pay the remainder of such payments
(together with interest at the rate provided in section 1274(b)(2)(B)
of the Code (as defined in Section 15)) as soon as the amount thereof
can be determined but in no event later than the thirtieth (30th) day
after the Date of Termination. In the event that the amount of the
estimated payments exceeds the amount determined by the Company within
six (6) months after payment to have been due, such excess shall
constitute a loan by the Company to the Executive, payable no later
than the thirtieth (30th) business day after demand by the Company
(together with interest at the rate provided in section 1274(b)(2)(B)
of the Code). At the time that payments are made under this
Section 11(d), the Company shall provide the Executive with a written
statement setting forth the manner in which such
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<PAGE>
payments were calculated and the basis for such calculations
including, without limitation, any opinions or other advice the
Company has received from outside counsel, auditors or consultants
(and any such opinions or advice which are in writing shall be
attached to the statement).
(e) If prior to any Change of Control the Company
shall terminate the employment in breach of this Agreement, then
(i) the Company shall pay the Executive his
full salary through the Date of Termination at the rate in effect at
the time Notice of Termina tion is given and all other unpaid amounts,
if any, to which the Executive is entitled as of the Date of
Termination under any compensation plan or program of the Company, at
the time such payments are due;
(ii) in lieu of any further salary payments
to the Executive for periods subsequent to the Date of Termination,
the Company shall pay as liquidated damages to the Executive an
aggregate amount equal to the product of (A) the sum of (1) the
Executive's annual salary rate in effect as of the Date of Termination
and (2) the average of the annual bonuses actually paid to the
Executive by the Company with respect to the two fiscal years which
immediately precede the year of the Term in which the Date of
Termination occurs provided if there was a bonus or bonuses paid to
the Executive with respect only to one fiscal year which immediately
precedes the year of the Term in which the Date of Termination occurs,
then such single year's bonus or bonuses shall be utilized in the
calculation pursuant to this clause (2) and (B) the lesser of (x) the
number three (3) and (y) the greater of (aa) the number of years
(including partial years) remaining in the Term and (bb) the number
two (2); such amount to be paid in substantially equal monthly
installments during the period commencing with the month immediately
following the month in which the Date of Termination occurs and ending
with the month corresponding to the end of the Term hereunder; and
(iii) the Company shall (x) continue
coverage for the Executive under the Company's life insurance,
medical, health, disability and similar welfare benefit plans (or, if
continued coverage is barred under such plans, the Company shall
provide to the Executive substantially similar benefits) for the
remainder of the Term, and (y) provide the benefits which the
Executive would have been entitled to receive pursuant to any
supplemental retirement plan maintained by the Company had his
employment continued at the rate of compensation specified herein for
the remainder of the Term. Benefits otherwise receivable by the
Executive pursuant to clause (x) of this Subsection 11(e)(iii) shall
be reduced to the extent comparable benefits are actually received by
the Executive from a subsequent em ployer during the period during
which the Company is required to provide such bene-
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<PAGE>
fits, and the Executive shall report any such benefits actually
received by him to the Company.
(f) If the Executive shall terminate his employment
under clause (C) of 10(d) hereof, the Company shall pay the Executive his full
salary the Date of Termination at the rate in effect at the time Notice of
Termination is given, and the Company shall have no further obligations to the
Executive under this Agreement.
(g) The Executive shall not be required to mitigate
the amount of any payment provided for in this Section 11 by seeking other
employment or otherwise, and, except as provided in Sections 11(d) and 11(e)
hereof, the amount of any payment or benefit provided for in this Section 11
shall (i) not be reduced by any compensation earned by the Executive as the
result of employment by another employer or by retirement benefits and (ii) be
the sole amount due to the Executive from the Company upon such termination of
employment, the Executive hereby waiving any claim for other compensation or
related damages (whether consequential, punitive or other) as a result of such
termination.
12. Representations.
(a) The Company represents and warrants that this
Agreement has been authorized by all necessary corporate action of the Company
and is a valid and binding agreement of the Company enforceable against it in
accordance with its terms.
(b) The Executive represents and warrants that he
is not a party to any agreement or instrument which would prevent him from
entering into or performing his duties in any way under this Agreement.
13. Successors; Binding Agreement.
(a) The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
(b) This Agreement is a personal contract and the
rights and interests of the Executive hereunder may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him, except as otherwise
expressly permitted by the provisions of this Agreement. This Agreement shall
inure to the benefit of and be enforceable by the Executive and his personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and . If the Executive should die while any amount would
still be payable to him hereunder had the Executive continued to live, all such
amounts, unless otherwise provided herein, shall be paid in
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<PAGE>
accordance with the terms of this Agreement to his devisee, legatee or other
designee or, if there is no such designee, to his estate.
14. Confidentiality and Non-Competition Covenants.
(a) The Executive covenants and agrees that he will
not at any time during and after the end of the Term, directly or indirectly,
use for his own account, or disclose to any person, firm or corporation, other
than authorized officers, directors and employees of the Company or its
subsidiaries, Confidential Information (as hereinafter defined) of the Company.
As used herein, "Confidential Information" of the Company means information of
any kind, nature or description which is disclosed to or otherwise known to the
Executive as a direct or indirect consequence of his association with the
Company, which information is not generally known to the public or in the
businesses in which the Company is engaged or which information relates to
specific investment opportunities within the scope of the Company's business
which were considered by the Executive or the Company during the term of this
Agreement. During the Term and for a period of two years following the
termination of the Executive's employment, the Executive shall not induce any
employee of the Company or its subsidiaries to terminate his or her employment
by the Company or its subsidiaries in order to obtain employment by any person,
firm or corporation affiliated with the Executive.
(b) The Executive covenants and agrees that during
the Term and for a period of two (2) years following the termination of the
Executive's employment, the Executive shall not, directly or indirectly, own any
interest in, operate, join, control, or participate as a partner, director,
principal, officer, or agent of, enter into the employment of, act as a
consultant to, or perform any services for any entity which has material
operations which compete with any business in which the Company is engaged at
the time of the Executive's termination of employment unless such entity
disposes of the competing operations during the one-year period following the
commencement of the Executive's relationship with the entity that is prohibited
by this Section 14(b). Notwithstanding anything herein to the contrary, (1) the
foregoing provisions of this Section 14(b) shall not prevent the Executive from
acquiring securities representing not more than 5% of the outstanding voting
securities of any publicly held corporation and (2) the foregoing provisions of
this Section 14(b) shall not be applicable to a termination of the Executive's
employment (i) by the Company following a Change of Control in breach of this
Agreement, (ii) by the Executive for Good Reason following a Change of Control
or (iii) by the Company for Cause.
15. Prohibition on Parachute Payments.
(a) Notwithstanding any other provisions of this Agreement, in
the event that any payment or benefit received or to be received by the
Executive in connection with a Change in Control of the Company or the
termination of the Executive's employment (whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the Company, any
Person whose actions result in a Change in Control or any Person affiliated with
the Company or such Person) (all such payments and benefits, including, without
limitation, base salary and bonus
-11-
<PAGE>
payments, being hereinafter called "Total Payments") would not be deductible (in
whole or part), by the Company, an affiliate or any Person making such payment
or providing such benefit as a result of section 280G of the Internal Revenue
Code of 1986, as amended (the "Code"), then, to the extent necessary to make
such portion of the Total Payments deductible (and after taking into account any
reduction in the Total Payments provided by reason of section 280G of the Code
in such other plan, arrangement or agreement), (A) such cash payments shall
first be reduced (if necessary, to zero), and (B) all other non-cash payments by
the Company to the Executive shall next be reduced (if necessary, to zero). For
purposes of this limitation (i) no portion of the Total Payments the receipt or
enjoyment of which the Executive shall have effectively waived in writing prior
to the Date of Termination shall be taken into account, (ii) no portion of the
Total Payments shall be taken into account which in the opinion of tax counsel
selected by the Company's independent auditors and reasonably acceptable to the
Executive does not constitute a "parachute payment" within the meaning of
section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of
the Code, (iii) such payments shall be reduced only to the extent necessary so
that the Total Payments (other than those referred to in clauses (i) or (ii)) in
their entirety constitute reasonable compensation for services actually rendered
within the meaning of section 280G(b)(4)(B) of the Code or are otherwise not
subject to disallowance as deductions, in the opinion of the tax counsel
referred to in clause (ii); and (iv) the value of any non-cash benefit or any
deferred payment or benefit included in the Total Payments shall be determined
by the Company's independent auditors in accordance with the principles of
sections 280G(d)(3) and (4) of the Code.
(b) If it is established pursuant to a final
determination of a court or an Internal Revenue Service proceeding that,
notwithstanding the good faith of the Executive and the Company in applying the
terms of this Section 15, the aggregate "parachute payments" paid to or for the
Executive's benefit are in an amount that would result in any portion of such
"parachute payments" not being deductible by reason of section 280G of the Code,
then the Executive shall have an obligation to pay the Company upon demand an
amount equal to the sum of (i) the excess of the aggregate "parachute payments"
paid to or for the Executive's benefit over the aggregate "parachute payments"
that could have been paid to or for the Executive's benefit without any portion
of such "parachute payments" not being deductible by reason of section 280G of
the Code; and (ii) interest on the amount set forth in clause (i) of this
sentence at the rate provided in section 1274(b)(2)(B) of the Code from the date
of the Executive's receipt of such excess until the date of such payment.
16. Entire Agreement. This Agreement contains all the
understandings between the parties hereto pertaining to the matters referred to
herein, and on the Effective Date shall supersede all undertakings and
agreements, whether oral or in writing, previously entered into by them with
respect thereto. The Executive represents that, in executing this Agreement, he
does not rely and has not relied upon any representation or statement not set
forth herein made by the Company with regard to the subject matter, bases or
effect of this Agreement or otherwise.
17. Amendment or Modification, Waiver. No provision of this
Agreement may be amended or waived unless such amendment or waiver is agreed to
in writing, signed by the Executive and by a duly authorized officer of the
Company. No waiver by any party hereto of any breach
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<PAGE>
by another party hereto of any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same time, any prior time or any
subsequent time.
18. Notices. Any notice to be given hereunder shall be in
writing and shall be deemed given when delivered personally, sent by courier or
telecopy or registered or certified mail, postage prepaid, return receipt
requested, addressed to the party concerned at the address indicated below or to
such other address as such party may subsequently give notice of hereunder in
writing:
To Executive at: William L. Hough
704 Nantucket Circle
Franklin, TN 37064
To the Company at: OrNda HealthCorp
3401 West End Avenue
Suite 700
Nashville, Tennessee 37203
Attn: General Counsel
Telecopy: (615) 783-1232
Any notice delivered personally or by courier under this
Section 18 shall be deemed given on the date delivered and any notice sent by
telecopy or registered or certified mail, postage prepaid, return receipt
requested, shall be deemed given on the date telecopied or mailed.
19. Severability. If any provision of this Agreement or the
application of any such provision to any party or circumstances shall be
determined by any court of competent jurisdiction to be invalid and
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to such person or circumstances other than those to which it
is so determined to be invalid and unenforceable, shall not be affected thereby,
and each provision hereof shall be validated and shall be enforced to the
fullest extent permitted by law.
20. Survivorship. The respective rights and obligations of
the parties hereunder shall survive any termination of this Agreement to the
extent necessary to the intended preservation of such rights and obligations.
21. Governing Law; Attorney's Fees.
(a) This Agreement will be governed by and construed in
accordance with the laws of the State of New York, without regard to its
conflicts of laws principles.
(b) The prevailing party in any dispute arising out of this
Agreement shall be entitled to be paid its reasonable attorney's fees incurred
in connection with such dispute from the other party to such dispute.
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<PAGE>
22. Headings. All descriptive headings of sections and
paragraphs in this Agreement are intended solely for convenience, and no
provision of this Agreement is to be construed by reference to the heading of
any section or paragraph.
23. Withholdings. All payments to the Executive under this
Agreement shall be reduced by all applicable withholding required by federal,
state or local tax laws.
24. Severance Protection Agreement. The Severance Protection
Agreement dated as of July 27, 1995, between the Company and the Executive is
hereby terminated effective as of May 1, 1996.
25. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
ORNDA HEALTHCORP
BY: /s/ Ronald P. Soltman
Ronald P. Soltman
Senior Vice President
THE EXECUTIVE
/s/ William L. Hough
William L. Hough
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<PAGE>
EXHIBIT 10.26
<PAGE>
STOCK OPTION AGREEMENT
AGREEMENT dated as of __________ by and between OrNda HealthCorp, a
Delaware corporation (the "Company"), and __________ (the "Grantee").
WHEREAS, the Company has adopted the OrNda HealthCorp Outside Directors
Stock Option Plan (the "Plan") and the Company's stockholders approved the Plan
on January 19, 1996; and
WHEREAS, the parties wish to document herein the [initial] [annual]
automatic grant under the Plan to Grantee as an outside director of the Company
of a stock option to acquire an aggregate of [5,000] [2,500] shares of the
Company's Common stock, $.01 par value (the "Common Stock"), on the terms set
forth herein and in the Plan.
NOW, THEREFORE, the parties agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein
shall have the meanings set forth in the Plan.
2. Grant of Option. Pursuant to the Plan the Grantee is hereby
granted a nonqualified stock option (the "Option") to purchase an aggregate of
[5,000] [2,500] shares of Common Stock pursuant to the terms of this Agreement
and of the Plan.
3. Option Price. The exercise price of the Option shall be $_____
per share of Common Stock issuable thereunder.
4. Conditions to Exercisability.
(a) The Option shall become exercisable in full on and after
[insert date one year after grant].
(b) If for any reason during the term of an unexercised and
unexpired Option issued hereunder, the Grantee shall cease to be a voting member
of the Board, the Option shall terminate unless exercised prior to the end of
the 90 day period following the termination of Grantee's status as a voting
member of the Board (but in no event later than the expiration of the Option).
5. Period of Option. The Option shall expire on the earliest to
occur of:
(a) the tenth anniversary of the date hereof; and
(b) 90 days after the Grantee's termination as a voting member of
the Board.
6. Exercise of Option.
(a) The Option shall be exercised in the following manner: the
Grantee, or the person or persons having the right to exercise the Option upon
the death or disability of the Grantee, shall deliver to the Company written
notice specifying the number of shares of Common Stock which the Grantee elects
to purchase. The Grantee (or such other person) must either (i) include with
such notice full payment of the exercise price for the Common Stock being
purchased pursuant to such notice or (ii) provide for a broker-dealer to forward
such full payment to the Company, in a manner and in a period of time acceptable
to the
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<PAGE>
Company, in a cashless exercise procedure. Payment of the exercise price must be
made (i) in cash, (ii) by certified or cashier's check, (iii) by delivery to the
Company of Common Stock previously owned for at least six months and having a
Fair Market Value equal to the aggregate exercise price, or (iv) in a
combination of cash, check and Common Stock.
(b) The Company may defer making payment or delivery of any
benefits hereunder until satisfactory arrangements have been made for the
payment of any tax attributable to any amounts payable on shares deliverable
hereunder. The Grantee shall be entitled to elect to pay all or a portion of all
taxes arising in connection with the exercise of the Option by electing to (1)
have the Company withhold shares of Common Stock, or (2) deliver other shares of
Common Stock previously owned by the Grantee having a Fair Market Value equal to
the amount to be withheld; provided, however, that the amount to be withheld
shall not exceed the Grantee's estimated total Federal, State and local tax
obligations associated with the transaction. The Fair Market Value of fractional
shares remaining after payment of the withholding taxes shall be paid to the
Grantee in cash.
(c) No Grantee and no beneficiary or other person claiming
under or through Grantee will have any right, title or interest in or to any
shares of Common Stock allocated or reserved under the Plan or subject to the
Option except as to such shares of Common Stock, if any, that have been issued
or transferred to Grantee.
7. Entire Agreement. This Agreement contains all the understandings
between the parties hereto pertaining to the matters referred to herein, and
supersedes all undertakings and agreements, whether oral or in writing,
previously entered into by them with respect thereto. The Grantee represents
that, in executing this Agreement, he does not rely and has not relied upon any
representation or statement not set forth herein made by the Company with regard
to the subject matter, bases or effect of this Agreement or otherwise.
8. Amendment or Modification Waiver. No provision of this Agreement
may be amended or waived unless such amendment or waiver is agreed to in
writing, signed by the Grantee and by a duly authorized officer of the Company.
No waiver by any party hereto or any breach by another party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
9. Notices. Any notice to be given hereunder shall be in writing and
shall be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:
To Grantee at:
The Grantee's residence address
then on file with the Company
To the Company at:
OrNda HealthCorp
3401 West End Avenue
Nashville, Tennessee 37203
Attn: General Counsel
Telecopy: (615) 783-1232
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<PAGE>
Any notice delivered personally or by courier under this Section 9
shall be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.
10. Severability. If any provision of this Agreement or the
application of any such provision to any party or circumstances shall be
determined by any court of competent jurisdiction to be invalid and
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to such person or circumstances other than those to which it
is so determined to be invalid and unenforceable, shall not be affected thereby,
and each provision hereof shall be validated and shall be enforced to the
fullest extent permitted by law.
11. Nontransferability. This Option (or any portion thereof) is not
transferable by the Grantee otherwise than by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order as defined by
the Internal Revenue Code of 1986, as amended, or Title I of the Employee
Retirement Income Security Act, or the rules thereunder. The designation of a
beneficiary by Grantee does not constitute a transfer.
12. Survivorship. The respective rights and obligations of the
parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
13. Governing Law. This agreement will be governed by and construed
in accordance with the laws of the State of Tennessee, without regard to its
conflicts of laws principles.
14. Headings. All descriptive headings of sections and paragraphs in
this Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
15. Construction. This Agreement is made under and subject to the
provisions of the Plan, and all of the provisions of the Plan are hereby
incorporated herein as provisions of this Agreement. If there is a conflict
between the provisions of this Agreement and the provisions of the Plan, the
provisions of the Plan will govern. By signing this Agreement, the Grantee
confirms that he has received a copy of the Plan and has had an opportunity to
review the contents thereof.
16. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
ORNDA HEALTHCORP
By:_______________________________
Grantee:
__________________________________
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<PAGE>
EXHIBIT 10.27
<PAGE>
[CONFORMED COPY]
FIRST AMENDMENT AND LIMITED WAIVER TO
AMENDED AND RESTATED CREDIT,
SECURITY, GUARANTY AND PLEDGE AGREEMENT
This FIRST AMENDMENT AND LIMITED WAIVER TO AMENDED AND RESTATED CREDIT,
SECURITY, GUARANTY AND PLEDGE AGREEMENT, dated as of September 12, 1996 (this
"Amendment"), is entered into by and among ORNDA HEALTHCORP, a Delaware
corporation ("OrNda"), ORNDA HOSPITAL CORPORATION (formerly known as Summit
Hospital Corporation), a California corporation ("OHC"), and AHM ACQUISITION
CO., INC., a Delaware corporation ("AHM Acquisition") (individually, a
"Borrower" and collectively, the "Borrowers"), the Persons named as Guarantors
parties hereto (individually, a "Guarantor" and collectively, the "Guarantors"),
the Persons named as Lenders parties hereto (individually, a "Lender" and
collectively, the "Lenders"), THE BANK OF NOVA SCOTIA, a Canadian chartered bank
("Scotiabank"), as administrative agent (in such capacity, the "Administrative
Agent") for itself and the other Lenders, CITICORP USA INC., a Delaware
corporation, as Documentation Agent for the Lenders, Scotiabank and Citicorp, as
Co-Syndication Agents for themselves and the other Lenders , GENERAL ELECTRIC
CAPITAL CORPORATION, THE INDUSTRIAL BANK OF JAPAN, LIMITED, NEW YORK BRANCH, THE
LONG-TERM CREDIT BANK OF JAPAN LIMITED, NEW YORK BRANCH, NATIONSBANK N.A., THE
TORONTO-DOMINION BANK and WELLS FARGO BANK, as Co-Agents for themselves and the
other Lenders, and AMSOUTH BANK OF ALABAMA, BANK OF AMERICA NT & SA, CORESTATES
BANK, N.A., CREDIT LYONNAIS CAYMAN ISLAND BRANCH, CREDITANSTALT-BANKVEREIN and
DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCH, as Lead Managers for
themselves and the other Lenders.
W I T N E S S E T H:
WHEREAS, the Borrowers, the Guarantors, the Lenders and the Agents have
heretofore entered into the Amended and Restated Credit, Security, Guaranty and
Pledge Agreement, dated as of October 27, 1995 (together with all Exhibits,
Schedules and
<PAGE>
attachments thereto, in each case as amended or otherwise modified
prior to the date hereof, the "Credit Agreement");
WHEREAS, the Borrowers desire to combine and treat simultaneous
investments in hospital acquisitions and investments in related physician groups
as the total acquisition price of a hospital and if a hospital is a Joint
Venture, then to treat the amount invested in such physician group as an
investment in a Joint Venture;
WHEREAS, the Borrowers desire to treat the expenditures incurred in
connection with the construction of a new Fallon Medical City replacement
hospital as related to a Permitted Acquisition and not as expenditures related
to a Capital Expenditures;
WHEREAS, the Guarantors will derive substantial benefits from
the amendments effected hereby; and
WHEREAS, the Lenders and the Agents are willing, on and subject to the
terms and conditions set forth below, to amend and waive certain provisions of
the Credit Agreement as provided below (the Credit Agreement, as amended
pursuant to the terms of this Amendment, being referred to as the "Amended
Credit Agreement") below;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the Borrowers, the Guarantors, the Lenders and the
Agents hereby agree as follows:
PART I
DEFINITIONS
SUBPART 1.1. Certain Definitions. The following terms (whether or not
underscored) when used in this Amendment shall have the following meanings (such
meanings to be equally applicable to the singular and plural forms thereof):
"Administrative Agent" is defined in the preamble.
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<PAGE>
"AHM Acquisition" is defined in the preamble.
"Amended Credit Agreement" is defined in the fifth recital.
"Amendment" is defined in the preamble.
"Amendment No. 1" is defined in Subpart 3.1.
"Borrower" and "Borrowers" are defined in the preamble.
"Credit Agreement" is defined in the first recital.
"First Amendment Effective Date" is defined in Subpart 3.1.
"Guarantor" and "Guarantors" are defined in the preamble.
"Lender" and "Lenders" are defined in the preamble.
"OHC" is defined in the preamble.
"Scotiabank" is defined in preamble.
SUBPART 1.2. Other Definitions. Terms for which meanings are provided
in the Credit Agreement are, unless otherwise defined herein or the context
otherwise requires, used in this Amendment with such meanings.
PART II
AMENDMENTS AND LIMITED WAIVER
Effective on (and subject to the occurrence of) the First Amendment
Effective Date, the Credit Agreement is hereby amended and waived in accordance
with this Part II; except as so amended modified, or waived by this Amendment,
the Credit Agreement shall continue in full force and effect.
SUBPART 2.1. Amendments to Article I. Article I of the Credit Agreement
is hereby amended in accordance with Subparts 2.1.1 and 2.1.2.
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<PAGE>
SUBPART 2.1.1. Section 1.1 ("Definitions") of the Credit Agreement is
hereby amended by inserting in such Section the following definitions in the
appropriate alphabetical order:
"Fallon Acquisition" means, collectively, (i) the acquisition
contemplated under that certain Asset Purchase Agreement, dated as of
April 22, 1996, among S.V. Hospital, L.L.C., Provident Nursing Homes,
Inc., Clini-Tech Laboratories, Inc., collectively, as buyer, and Fallon
Foundation, Inc., Clinitech Services, Inc., Providence House Nursing
Home, Inc., Saint Vincent Health Care System, Inc., Saint Vincent
Hospital, Inc., Certified Nursing Services, Inc., SVH Services, Inc.,
Saint Vincent Faculty Practice, Inc., Saint Vincent Physician
Associates, Inc. and Saint Vincent Management Corp., as the sellers,
and (ii) the minority investment in the Fallon Clinic, Inc., as more
fully described in that certain Agreement and Plan of Merger, dated as
of April 22, 1996, among Fallon Clinic, Inc., OrNda Healthcorp of
Massachusetts, Inc. and OrNda Acquisition Corp.
"Fallon Project" means the construction of the new Fallon
Medical City replacement hospital to be located in Worcester,
Massachusetts, which is to be built in connection with the Fallon
Acquisition.
"First Amendment" means the First Amendment and Limited Waiver
to Amended and Restated Credit, Security, Guaranty and Pledge
Agreement, dated as of September 12, 1996, among the Borrowers, the
Guarantors parties thereto, the Lenders parties
thereto and the Agents.
"First Amendment Effective Date" is defined in
Subpart 3.1 of the First Amendment.
"Residual Amount" means the amount of any residual payment
which is (i) made or to be made in connection with an Operating Lease
which is a synthetic lease or a leveraged lease at the termination of
such synthetic lease or leveraged lease and (ii) a recourse obligation
of any Borrower and/or any other Credit Party.
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<PAGE>
SUBPART 2.1.2. Section 1.1 of the Credit Agreement is hereby further
amended as follows:
(a) The definition of "Acquisition" is hereby amended in its
entirety to read as follows:
"Acquisition" means any transaction, or any series of
related transactions, by which OrNda and/or any of its
Subsidiaries directly or indirectly
(a) acquires any ongoing business or all or
substantially all of the assets (including, without
limitation, any Health Care Assets) of any firm, partnership,
joint venture, corporation or division thereof, whether
through purchase of assets, merger or otherwise,
(b) acquires (in one transaction or as the most
recent transaction in a series of transactions) control of at
least a majority in ordinary voting power of the securities of
a corporation which have ordinary voting power for the
election of directors,
(c) acquires control of a 50% or more ownership
interest in any partnership or joint venture, other than
through repurchases of Joint Venture interests permitted by
Section 6.9(i),
(d) makes any other expenditure for the Fallon
Project which, in accordance with GAAP, is or should be
treated as a Capital Expenditure, but instead OrNda elects to
treat as an "Acquisition" for the purposes of this Agreement
so long as, and only so long as, the aggregate amount of all
such expenditures do not at any time exceed $225,000,000; or
(e) makes any other expenditure for the construction
of property, plant and equipment (other than in connection
with the Fallon Project) which, in accordance with GAAP, is or
should be treated as a Capital Expenditure, but instead OrNda
elects to treat as an
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<PAGE>
"Acquisition" for the purposes of this Agreement so long as,
and only so long as, the aggregate amount of all such
expenditures (other than in connection with the Fallon
Project) do not at any time exceed $50,000,000;
provided, however, that the amount of an acquisition of the type
described in clauses (a), (b) and (c) above of a Health Care Asset (of
the type described in clause (a) of the definition of Health Care
Asset) shall be deemed to include any majority or minority Investments
that are made or committed to be made in a physician group or joint
venture associated with such Health Care Asset and such Investments
shall be included as Investments permitted under clause (b) of Section
6.7; provided, further, however that an Acquisition shall not include
an exchange of Health Care Assets consummated in accordance with the
last paragraph of Section 6.4.
(b) Clause (b) of the definition of "Joint Venture" is hereby
amended in its entirety to read as follows:
(b) in which physicians, hospital personnel, hospitals,
integrated health delivery systems or companies involved in the
healthcare industry also have a direct or indirect equity or ownership
interest (other than solely as a result of the ownership by any such
physician, hospital personnel, hospital, integrated health delivery
system or company involved in the healthcare industry of any capital
stock of a Borrower) and
SUBPART 2.2. Amendments to Article V. Article V of the Credit Agreement
is hereby amended in accordance with Subpart 2.2.1.
SUBPART 2.2.1. Clause (i)(i)(A) of Section 5.1 ("Notice of Litigation")
of the Credit Agreement is hereby amended in its entirety to read as follows:
(A) with respect to any such Person which reasonably could be expected
to adversely affect such Person's right to receive a material portion
of Medicare and Medicaid reimbursements to which it would otherwise be
entitled, such Person's right to participate in Medicare and Medicaid
programs or otherwise
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have a material adverse effect on the receipt of Medicare and Medicaid
reimbursement by any such Person which in the aggregate represent 10%
or more of OrNda's Consolidated EBITDA for the immediately preceding
Rolling Period, or
SUBPART 2.3. Amendments to Article VI. Article VI of the Credit
Agreement is hereby amended in accordance with Subparts 2.3.1 through 2.3.3.
SUBPART 2.3.1. Clause (l) of Section 6.1 ("Limitation on Indebtedness")
of the Credit Agreement is hereby amended by deleting the figure "$100,000,000"
in the last line of such clause and inserting the figure "$175,000,000" in lieu
thereof.
SUBPART 2.3.2. Clause (k) of Section 6.7 ("Limitation on Investments")
of the Credit Agreement is hereby amended by deleting the figures "$60,000,000"
in the tenth line of such clause and "$10,000,000" in the last line of such
clause and inserting the figures $100,000,000" and "$50,000,000", respectively,
in lieu thereof.
SUBPART 2.3.3. Section 6.18 ("Limitation on Leases") of the Credit
Agreement is hereby amended in its entirety to read as follows:
SECTION 6.18. Limitation on Leases. Incur, create or assume
any commitment to make, or make, any Consolidated Operating Lease
Payments in any Fiscal Year of OrNda in excess of 5% of Consolidated
Total Revenues for such Fiscal Year of OrNda; provided, however, that
in connection with such permitted Operating Leases, OrNda and the other
Credit Parties that are Consolidated Subsidiaries of OrNda may enter
into one or more Guaranties for the payment of Residual Amounts not in
excess of $100,000,000; provided, further, that the Residual Amounts
actually paid by OrNda and such other Credit Parties, when aggregated
with all other Consolidated Operating Lease Payments made in any Fiscal
Year of OrNda, will not exceed 5% of Consolidated Total Revenues for
such Fiscal Year.
SUBPART 2.4. Limited Waiver and Approval. Subject to the
conditions and on the terms set forth herein, and in reliance on
the representations and warranties of the Borrowers contained
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herein, the Lenders hereby (a) waive, as of the First Amendment Effective Date,
the delivery of a pro forma Compliance Certificate relating to the Fallon
Project pursuant to the requirements of Section 5.1(s) of the Credit Agreement
and (b) approve the Fallon Project for the purposes of Section 6.6(c)(iv) of the
Credit Agreement.
SECTION 2.5. Limitation of Waiver. Subpart 2.4 of this Amendment shall
be limited precisely as written and relates solely to the waiver of the delivery
requirements of Section 5.1(s) of the Credit Agreement as such Section relates
to the delivery of a Compliance Certificate in connection with the Fallon
Acquisition, and nothing in this Amendment shall be deemed to:
(a) constitute a waiver of compliance by the Borrower with
respect to (i) Section 5.1(s) of the Credit Agreement for any future
Acquisitions or (ii) any other term, provision or condition of the
Credit Agreement or any other instrument or agreement referred to
therein or relating thereto, including compliance with the financial
covenants set forth in Article VI of the Credit Agreement; or
(b) prejudice any right or remedy that the Agent or any Lender
may now have or may have in the future under or in connection with the
Credit Agreement or any other instrument or agreement referred to
therein or relating thereto.
Except as expressly set forth herein, the terms, provisions and
conditions of the Credit Agreement and the other Loan Documents shall remain in
full force and effect and are in all respects hereby ratified and confirmed.
SUBPART 2.6. Conforming Amendments to Exhibit E to Credit Agreement.
Exhibit E (Form of Compliance Certificate) to the Credit Agreement is hereby
amended in its entirety to read as set forth in Annex I hereto.
SUBPART 2.7. Covenant Compliance and Rates and Fees in Respect of Loans
and Letters of Credit outstanding or issued prior to the First Amendment
Effective Date. Notwithstanding anything in the foregoing to the contrary, any
determination of applicable interest rates and fees in respect of Loans and
Letters of Credit
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outstanding or issued under the Credit Agreement prior to the First Amendment
Effective Date, and any determination of compliance with the provisions of the
Credit Agreement (including with the financial covenants set forth in Article VI
of the Credit Agreement) for any period prior to the First Amendment Effective
Date, shall be made pursuant to the terms of the Credit Agreement as in effect
immediately prior to the First Amendment Effective Date and the defined terms
applicable to any such determination shall have the meanings provided in the
Credit Agreement as in effect immediately prior to the First Amendment Effective
Date.
PART III
CONDITIONS TO EFFECTIVENESS; EXPIRATION
SUBPART 3.1. First Amendment Effective Date. This Amendment, and the
amendments and modifications contained herein, shall be and become effective on
the date (the "First Amendment Effective Date") when each of the conditions set
forth in this Subpart 3.1 shall have been fulfilled to the satisfaction of the
Administrative Agent and each of the Lenders; provided, that, such date shall
occur prior to the termination date set forth in Subpart 3.2 (whereupon this
Amendment shall be known and may be referred to as "Amendment No. 1").
SUBPART 3.1.1. Execution of Counterparts. The Administrative Agent
shall have received counterparts of this Amendment, duly executed and delivered
on behalf of the Borrowers, the Guarantors and the Required Lenders.
SUBPART 3.1.2. Material Adverse Change. There has been no material
adverse change in the consolidated financial condition, results of operations,
assets, business, properties or prospects of OrNda and the Consolidated
Subsidiaries, taken as a whole, from the circumstances as reflected in the
audited financial statements of OrNda and the Consolidated Subsidiaries, OHC and
its consolidated Subsidiaries, and AHM Acquisition and its consolidated
Subsidiaries, in each case as of August 31, 1995, true and correct copies of
which were delivered pursuant to Section 5.1(a) of the Credit Agreement.
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<PAGE>
SUBPART 3.1.3. Legal Details, etc. All documents executed or submitted
pursuant hereto shall be satisfactory in form and substance to the
Administrative Agent and its counsel. The Administrative Agent and its counsel
shall have received all information and such counterpart originals or such
certified or other copies or such materials as the Administrative Agent or its
counsel may reasonably request, and all legal matters incident to the
transactions contemplated by this Amendment shall be satisfactory to the
Administrative Agent and its counsel.
SUBPART 3.2. Expiration. If the First Amendment Effective Date shall
not have occurred on or prior to September 18, 1996, the agreements of the
parties hereto contained in this Amendment shall terminate effective immediately
on such date and without any further action.
PART IV
MISCELLANEOUS; REPRESENTATIONS
SUBPART 4.1. Cross-References. References in this Amendment to any Part
or Subpart are, unless otherwise specified or otherwise required by the context,
to such Part or Subpart of this Amendment.
SUBPART 4.2. Loan Document Pursuant to Credit Agreement. This Amendment
is a Loan Document executed pursuant to the Credit Agreement and shall be
construed, administered and applied in accordance with all of the terms and
provisions of the Credit Agreement (and, following the First Amendment Effective
Date, the Amended Credit Agreement).
SUBPART 4.3. Full Force and Effect; Limited Amendment. Except as
expressly amended or waived hereby, all of the representations, warranties,
terms, covenants, conditions and other provisions of the Credit Agreement and
the other Loan Documents shall remain unamended and unwaived and shall continue
to be, and shall remain, in full force and effect in accordance with their
respective terms. The amendments and limited waiver set forth herein shall be
limited precisely as provided for herein to the provisions expressly amended
herein and shall not be deemed to be an amendment to, waiver of, consent to or
modification of any other term or
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<PAGE>
provision of the Credit Agreement, any other Loan Document referred to therein
or herein or of any transaction or further or future action on the part of any
Borrower or any other Obligor which would require the consent of the Lenders
under the Credit Agreement or any of the other Loan Documents.
SUBPART 4.4. Payment of Fees and Expenses. The Borrowers, jointly and
severally, hereby agree to pay and reimburse the Administrative Agent for all of
its reasonable fees and expenses incurred in connection with the negotiation,
preparation, execution and delivery of this Amendment and related documents,
including all reasonable fees and disbursements of counsel to the Administrative
Agent.
SUBPART 4.5. Successors and Assigns. This Amendment shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
SUBPART 4.6. Counterparts. This Amendment may be executed by the
parties hereto in several counterparts, each of which when executed and
delivered shall be deemed to be an original and all of which shall constitute
together but one and the same agreement.
SUBPART 4.7. Governing Law. THIS AMENDMENT SHALL BE DEEMED TO BE A
CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT
REGARD TO CONFLICTS OF LAWS PRINCIPLES (OTHER THAN SECTION 5-1401 OF THE NEW
YORK GENERAL OBLIGATION LAW).
SUBPART 4.8. Compliance with Warranties, No Default, etc. Both before
and after giving effect to the occurrence of the First Amendment Effective Date
and the amendments to the Credit Agreement set forth above, the Borrowers
represent and warrant the following statements shall be true and correct:
(a) the representations and warranties set forth in Article
III and in Sections 7.13 and 9.15 of the Credit Agreement (excluding,
however, Sections 3.6 and 3.17 of the Credit Agreement) shall, in each
case, be true and correct in all material respects with the same effect
as if made on and as of the First Amendment Effective Date (except to
the extent that such representations and warranties relate solely to an
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<PAGE>
earlier date, in which case such representations and warranties shall
be true and correct as of such earlier date).
(b) except as disclosed by the Borrowers to the
Co-Syndication Agents and Lenders pursuant to Sections 3.6 and
3.17 of the Credit Agreement,
(i) no labor controversy, litigation, arbitration or
governmental investigation or proceeding shall be pending or,
to the best knowledge of the Borrowers (after due inquiry),
threatened against the Borrowers or any of their Subsidiaries
which, in the opinion of the Required Lenders, would
reasonably be expected to have a Material Adverse Effect or
would adversely affect the legality, validity or
enforceability of this Agreement, the Notes or any other Loan
Document; and
(ii) no development shall have occurred in any labor
controversy, litigation, arbitration or governmental
investigation or proceeding disclosed pursuant to Sections 3.6
and 3.17 of the Credit Agreement which, in the opinion of the
Required Lenders, would reasonably be expected to have a
Material Adverse Effect; and
(c) No Default shall have then occurred and be continuing, and
neither the Borrowers nor any of their Subsidiaries is in material
violation of any law or governmental regulation or court order or
decree, which violation would, individually or in the aggregate, have a
Material Adverse Effect.
SUBPART 4.9. Additional General Representations. In order to
induce the Lenders and the Agents to enter into this Amendment, the
Borrowers hereby additionally represent and warrant as follows:
(a) the execution and delivery of this Amendment and the
performance by each of the Borrowers, each of their respective
Subsidiaries and each other Obligor of each of their respective
obligations hereunder, under each other Loan Document, under the Credit
Agreement as amended hereby and, upon the occurrence of the First
Amendment Effective Date,
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<PAGE>
under the Amended Credit Agreement are within such Person's corporate
powers, have been duly authorized by all necessary corporate action,
have received all necessary governmental approval (if any shall be
required), and do not (i) contravene such Person's organic documents,
(ii) contravene any contractual restriction, law or governmental
regulation or court decree or order binding on or affecting such Person
or (iii) result in, or require the creation or imposition of, any Lien
on any of such Person's properties (other than pursuant to a Loan
Document); and
(b) this Amendment, each other Loan Document, the Credit
Agreement as amended hereby and, upon the occurrence of the First
Amendment Effective Date, the Amended Credit Agreement are the legal,
valid and binding obligations of each of the Borrowers, each of their
respective Subsidiaries and each other Obligor enforceable in
accordance with their respective terms (except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally and by principles of
equity).
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective duly authorized officers as of the day and year
first above written.
BORROWERS:
ORNDA HEALTHCORP
By /s/ Russell F. Tonnies
Title: Vice President and Treasurer
ORNDA HOSPITAL CORPORATION (formerly
known as Summit Hospital
Corporation)
By /s/ Russell F. Tonnies
Title: Vice President and Treasurer
AHM ACQUISITION CO., INC.
By /s/ Russell F. Tonnies
Title: Vice President and Treasurer
GUARANTORS:
AHM CGH, INC.
AHM GEMCH, INC.
AHM JACKSON HOSPITAL INC.
AHM MINDEN HOSPITAL, INC.
AHM SMC, INC.
AHM WCH, INC.
AHMJV, INC.
AMERICAN HEALTHCARE MANAGEMENT
DEVELOPMENT COMPANY
BONE MARROW/STEM CELL TRANSPLANT
INSTITUTE OF FLORIDA, INC.
C G DIAGNOSTIC, INC.
CFMC LP, INC.
CGH REALTY HOLDING, INC.
CHHP, INC.
CHR SERVICE CORP.
CLINIC HOLDINGS, INC. (a Florida
Corporation)
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<PAGE>
CLINIC HOLDINGS, INC. (a Missouri
corporation)
COASTAL COMMUNITIES HEALTH SYSTEMS,
INC.
COMMONWEALTH CONTINENTAL HEALTH
CARE, INC.
COMMONWEALTH CONTINENTAL HEALTH
CARE III, INC.
CORAL GABLES HOSPITAL, INC.
CORAL GABLES HOSPITAL PARTNERS, INC.
CVHS HOSPITAL CORPORATION
CYPRESS FAIRBANKS MEDICAL CENTER,
INC.
DAVENPORT MEDICAL CENTER, INC.
DHPG OF GEORGIA, INC.
DOCTORS' HOSPITAL MEDICAL CENTER,
INC.
EGH, INC.
FMC ACQUISITION INC.
FOUNTAIN VALLEY HEALTH CARE, INC.
FOUNTAIN VALLEY IMAGING CORPORATION
FOUNTAIN VALLEY REGIONAL HOSPITAL &
MEDICAL CENTER
FRENCH HOSPITAL MEDICAL CENTER
GCPG, INC.
GGH, INC.
GULF COAST COMMUNITY HOSPITAL, INC.
HARBOR VIEW HEALTH SYSTEMS, INC.
HARBOR VIEW MEDICAL CENTER
HCW, INC.
HEALTH CHOICE ARIZONA, INC.
HEALTH CHOICE HMO, INC.
HEALTH CHOICE PARTNERS, INC.
HEALTH HOLDING COMPANY, INC.
HEALTH RESOURCES CORPORATION OF
AMERICA - CALIFORNIA
HEALTH RESOURCES CORPORATION OF
AMERICA - FLORIDA
HNMC, INC.
HNPG, INC.
HOUSTON NORTHWEST HEALTH SYSTEM,INC.
HOUSTON NORTHWEST HOME HEALTHCARE,
INC.
HOUSTON NORTHWEST MANAGEMENT
SERVICES, INC.
HOUSTON NORTHWEST MEDICAL CENTER,
INC.
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<PAGE>
HOUSTON NORTHWEST PROVIDER ALLIANCE,
INC.
INDIANAPOLIS HEALTH SYSTEMS, INC.
INDIANAPOLIS PHYSICIANS SERVICES,
INC.
LANDER VALLEY REGIONAL MEDICAL
CENTER
LBPG, INC.
LCMH, INC.
LEWISBURG COMMUNITY HOSPITAL, INC.
MANAGED HEALTH ALLIANCE
MATRIX ASSOCIATES, INC.
MCF, INC.
MCS ADMINISTRATIVE SERVICES, INC.
MEDI-HEALTH OF FLORIDA, INC.
MESA GENERAL HOSPITAL MEDICAL CENTER
CENTER, INC.
MIDWAY HOSPITAL MEDICAL CENTER, INC.
MONTEREY PARK HOSPITAL
MPH MANAGEMENT SERVICES, INC.
NAI COMMUNITY HOSPITAL OF PHOENIX,
INC.
NLVH, INC.
NLVPG OF NEVADA, INC.
ORNDA ACCESS, INC.
ORNDA HEALTH INITIATIVES, INC.
ORNDA HEALTH SERVICES, INC.
ORNDA HEALTHCHOICE, INC.
ORNDA HEALTHCORP OF FLORIDA, INC.
ORNDA HEALTHCORP OF PHOENIX, INC.
ORNDA INVESTMENTS, INC.
ORNDA MANAGEMENT SERVICES, INC.
ORNDA OF SOUTH FLORIDA, INC.
ORNDA OF SOUTH FLORIDA SERVICES
CORPORATION
PASADENA HOSPITAL CORPORATION
POWAY HEALTH SYSTEMS, INC.
PREMIER HEALTH RESOURCES, INC.
PSH, INC.
QUALICARE OF MISSISSIPPI, INC.
QUALICARE OF WYOMING, INC.
REPUBLIC HEALTH CORPORATION OF
CENTRAL GEORGIA
REPUBLIC HEALTH CORPORATION OF
INDIANAPOLIS
REPUBLIC HEALTH CORPORATION OF
MEREDIAN
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<PAGE>
REPUBLIC HEALTH CORPORATION OF
MESQUITE
REPUBLIC HEALTH CORPORATION OF NORTH
MIAMI
REPUBLIC HEALTH CORPORATION OF
ROCKWALL COUNTY
REPUBLIC HEALTH CORPORATION OF SAN
BERNARDINO
REPUBLIC HEALTH CORPORATION OF TEXAS
REPUBLIC HEALTH OF NORTH TEXAS, INC.
REPUBLIC HEALTH PARTNERS, INC.
RHC FLORIDA, INC.
RHC PARKWAY, INC.
RHCMS, INC.
RHPC, INC.
S.C. CAL., INC.
S.C. LANDER, INC.
S.C. LONGVIEW, INC.
S.C. MANAGEMENT, INC.
S.C. SAN ANTONIO, INC.
SAN JUAN MEDICAL CENTER, INC.
SANTA ANA HOSPITAL MEDICAL CENTER,
INC.
SHL/O CORP.
SNF PHARMACY, INC.
SOUTH FLORIDA PHYSICIANS SERVICES,
INC.
SOUTH PARK MEDICAL CENTER, INC.
ST. LUKE MEDICAL CENTER
STH CORPORATION
SUMMIT AMBULATORY NETWORK, INC.
SUMMIT RECEIVABLES CO.
THE DAVENPORT CLINIC, INC.
TUSCON GENERAL HOSPITAL, INC.
USDHC, INC.
VALLEY COMMUNITY HOSPITAL
WCH MANAGEMENT SERVICES, INC.
WEST LOS ANGELES HEALTH SYSTEMS,INC.
WESTCENTER REHABILITATION FACILITY,
INC.
WHITTIER HOSPITAL MEDICAL CENTER,
INC.
WOODLAND PARK HOSPITAL, INC.
WPH MANAGEMENT SERVICES, INC.
By /s/ Russell F. Tonnies
Title: Vice President and Treasurer
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<PAGE>
BROTMAN PARTNERS, L.P.
By West Los Angeles Health Systems,
Inc., its sole general partner
By /s/ Russell F. Tonnies
Title: Vice President and Treasurer
CCHC - GOLDEN GLADES, LTD.,
By Commonwealth Continental Health
Care, Inc., its sole general partner
By /s/ Russell F. Tonnies
Title: Vice President and Treasurer
FLORIDA MEDICAL CENTER, LTD.,
By MCF, Inc., its sole general
partner
By /s/ Russell F. Tonnies
Title: Vice President and Treasurer
FOUNTAIN VALLEY IMAGING CENTER
LIMITED PARTNERSHIP,
By Fountain Valley Imaging
Corporation, its sole general
partner
By /s/ Russell F. Tonnies
Title: Vice President and Treasurer
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<PAGE>
FOUNTAIN VALLEY OUTPATIENT SURGICAL
CENTER LIMITED PARTNERSHIP,
By Fountain Valley Health Care,
Inc., its sole general partner
By /s/ Russell F. Tonnies
Title: Vice President and Treasurer
GARLAND COMMUNITY HOSPITAL, LTD.,
By GCPG, Inc., its sole general
partner
By /s/ Russell F. Tonnies
Title: Vice President and Treasurer
GOLDEN GLADES HOSPITAL, LTD.,
By Commonwealth Continental Health
Care, Inc., its sole general
partner
By /s/ Russell F. Tonnies
Title: Vice President and Treasurer
HARBOR VIEW HEALTH PARTNERS, L.P.
By Harbor View Health Systems, Inc.,
its sole general partner
By /s/ Russell F. Tonnies
Title: Vice President and Treasurer
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LAKE POINTE MEDICAL CENTER, LTD.
By Republic Health Partners, Inc.,
its sole general partner
By /s/ Russell F. Tonnies
Title: Vice President and Treasurer
MMC CARDIOLOGY VENTURE
By Indianapolis Health Systems,
Inc., its sole general partner
By /s/ Russell F. Tonnies
Title: Vice President and Treasurer
NEW MEDICAL HORIZONS II, LTD.
By Cupress Fairbanks Medical
Center, Inc., its sole general
partner
By /s/ Russell F. Tonnies
Title: Vice President and Treasurer
WHITTIER SURGERY CENTER, L.P.
By Whittier Hospital Medical Center,
Inc., its sole general partner
By /s/ Russell F. Tonnies
Title: Vice President and Treasurer
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WINONA MEMORIAL HOSPITAL LIMITED
PARTNERSHIP,
By Republic Health Corporation of
Indianapolis, its sole general
partner
By /s/ Russell F. Tonnies
Title: Vice President and Treasurer
ADMINISTRATIVE AGENT:
THE BANK OF NOVA SCOTIA,
as Administrative Agent
By /s/ Carolyn A. Lopez
Title: Relationship Manager
DOCUMENTATION AGENT:
CITICORP USA INC.,
as Documentation Agent
By /s/ Margaret Au Brown
Title: Vice President
CO-SYNDICATION AGENTS:
THE BANK OF NOVA SCOTIA,
as Co-Syndication Agent
By /s/ Carolyn A. Lopez
Title: Relationship Manager
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CITICORP USA INC.,
as Co-Syndication Agent
By /s/ Margaret Au Brown
Title: Vice President
CO-AGENTS:
GENERAL ELECTRIC CAPITAL
CORPORATION, as Co-Agent
By /s/ Cheryl P. Boyd
Title: Authorized Signatory
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, NEW YORK BRANCH,
as Co-Agent
By /s/ Junri Oda
Title: Senior Vice President
and Senior Manager
THE LONG-TERM CREDIT BANK OF JAPAN
LIMITED, NEW YORK BRANCH,
as Co-Agent
By /s/ Satoru Otsubo
Title: Joint General Manager
NATIONSBANK N.A., as Co-Agent
By /s/ S. Walker Choppin
Title: Senior Vice President
THE TORONTO-DOMINION BANK,
as Co-Agent
By /s/ Frederic B. Hawley
Title: Manager, Credit
Administration
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WELLS FARGO BANK, as Co-Agent
By /s/ William J. Baird
Title: Senior Vice President
LEAD MANAGERS:
AMSOUTH BANK OF ALABAMA,
as Lead Manager
By /s/ Timothy L. Vardaman
Title: Officer
BANK OF AMERICA NT & SA,
as Lead Manager
By /s/ Wyatt R. Ritchie
Title: Managing Director
CORESTATES BANK, N.A.,
as Lead Manager
By /s/ Elizabeth D. Morris
Title: Vice President
CREDIT LYONNAIS CAYMAN ISLAND
BRANCH, as Lead Manager
By /s/ Farboud Tavangar
Title: Authorized Signature
CREDITANSTALT-BANKVEREIN,
as Lead Manager
By_________________________________
Title:
By_________________________________
Title:
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DEUTSCHE BANK AG, NEW YORK AND/OR
CAYMAN ISLANDS BRANCH,
as Lead Manager
By /s/ Colin T. Taylor
Title: Director
By /s/ Alka Goyal
Title: Assistant Vice President
LENDERS:
ABN-AMRO BANK
By_________________________________
Title:
By_________________________________
Title:
AMSOUTH BANK OF ALABAMA
By /s/ Timothy L. Vardaman
Title: Officer
BANC ONE
By_________________________________
Title:
BANK OF AMERICA NT & SA
By /s/ Wyatt R. Ritchie
Title: Managing Director
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BANK OF IRELAND, GRAND CAYMAN BRANCH
By_________________________________
Title:
THE BANK OF NOVA SCOTIA
By /s/ Carolyn A. Lopez
Title: Relationship Manager
CITICORP USA INC.
By /s/ Margaret Au Brown
Title: Vice President
CORESTATES BANK, N.A.
By /s/ Elizabeth D. Morris
Title: Vice President
CREDIT LYONNAIS CAYMAN ISLAND BRANCH
By /s/ Farboud Tavangar
Title: Authorized Signature
CREDITANSTALT-BANKVEREIN
By_________________________________
Title:
By_________________________________
Title:
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DEUTSCHE BANK AG, NEW YORK AND/OR
CAYMAN ISLANDS BRANCH
By /s/ Colin T. Taylor
Title: Director
By /s/ Alka Goyal
Title: Assistant Vice President
DRESDNER BANK, AG, NEW YORK BRANCH
AND GRAND CAYMAN BRANCH
By /s/ Andrew P. Nesi
Title: Vice President
By /s/ John D. Padilla
Title: Assistant Vice President
FIRST AMERICAN NATIONAL BANK
By_________________________________
Title:
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA
By /s/ Ann M. Dodd
Title: Senior Vice President
FLEET NATIONAL BANK
By /s/ Ginger Stolzenthaler
Title: Vice President
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GENERAL ELECTRIC CAPITAL CORPORATION
By /s/ Cheryl P. Boyd
Title: Authorized Signatory
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By /s/ Junri Oda
Title: Senior Vice President
and Senior Manager
THE LONG-TERM CREDIT BANK OF JAPAN
LIMITED, NEW YORK BRANCH
By /s/ Satoru Otsubo
Title: Joint General Manager
MERRILL LYNCH SENIOR FLOATING
RATE FUND, INC.
By /s/ R. Douglas Henderson
Title: Authorized Signatory
MICHIGAN NATIONAL BANK
By /s/ Lisa Davidson McKinnon
Title: Vice President
THE MITSUBISHI TRUST AND BANKING
CORPORATION, CHICAGO BRANCH
By /s/ Masaki Yamagishi
Title: Chief Manager
-27-
<PAGE>
FLEET BANK, N.A. successor to
NATWEST BANK N.A.
By /s/ Pauline McHugh
Title: Vice President
NATIONSBANK, N.A.
By /s/ S. Walker Choppin
Title: Senior Vice President
PNC BANK KENTUCKY, INC.
By /s/ Kathryn M. Bohr
Title: Assistant Vice President
RESTRUCTURED OBLIGATIONS BACKED BY
SENIOR ASSETS, B.V.
By ABN TRUSTCOMPANY (NEDERLAND)
B.V., its Managing Director
By_________________________________
Title:
By
Title:
STICHTING RESTRUCTURED OBLIGATIONS
BACKED BY SENIOR ASSETS 2,
(ROSA 2)
By ABN TRUSTCOMPANY (NEDERLAND)
B.V., its Managing Director
By_________________________________
Title:
By_________________________________
Title:
-28-
<PAGE>
THE SUMITOMO BANK, LTD., CHICAGO
BRANCH
By /s/ Teryll L. Herron
Title: Vice President
By /s/ E.B. Buchanan, Jr.
Title: Vice President
THE SUMITOMO TRUST & BANKING CO.,
LTD., NEW YORK BRANCH
By /s/ Suraj P. Bhatia
Title: Senior Vice President,
Manager
THE TORONTO-DOMINION BANK
By /s/ Frederic B. Hawley
Title: Manager,
Credit Administration
UNITED STATES NATIONAL BANK OF
OREGON
By /s/ Fiza Noordin
Title: Assistant Vice President
WELLS FARGO BANK
By /s/ William J. Baird
Title: Senior Vice President
-29-
<PAGE>
EXHIBIT 11
<PAGE>
<TABLE>
ORNDA HEALTHCORP AND SUBSIDIARIES
EXHIBIT 11 -- COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
Year Ended August 31,
<S> <C> <C> <C>
1994 1995 1996
------------- ------------- -------------
Primary
Average shares outstanding 37,879 44,197 55,654
Net effect of dilutive common stock
equivalents:
Stock options - treasury stock method -- (1) 1,097 1,855
------------- ------------- -------------
TOTAL 37,879 45,294 57,509
============= ============= =============
Net income (loss) before extraordinary
item, as adjusted for preferred
stock dividends $ (48,909) $ 69,312 $ 99,539
============= ============= =============
Per share amount before extraordinary
item $ (1.29) $ 1.53 $ 1.73
============= ============= =============
Net income (loss) as adjusted for
preferred stock dividends $ (61,205) $ 69,312 $ 99,539
============ ============= =============
Per share amount $ (1.62) $ 1.53 $ 1.73
============ ============= =============
Fully Diluted
Average shares outstanding 37,879 44,197 55,654
Net effect of dilutive common stock
equivalents:
Stock options - treasury stock method -- (1) 1,845 2,100
Assumed conversion of redeemable
preferred stock -- (1) 1,340 310
------------- ------------- -------------
TOTAL 37,879 47,382 58,064
============= ============= =============
Net income (loss) before extraordinary
item, as adjusted for preferred
stock dividends $ (48,909) $ 71,312 $ 99,871
============= ============= =============
Per share amount before extraordinary
item $ (1.29) $ 1.51 $ 1.72
============= ============= =============
Net income (loss) as adjusted for
preferred stock dividends $ (61,205) $ 71,312 $ 99,871
============= ============= =============
Per share amount $ (1.62) $ 1.51 $ 1.72
============= ============= =============
<FN>
(1) Shares issuable upon the exercise of stock options or conversion of
redeemable preferred stock have not been included in the calculation of loss per
share for fiscal 1994 because the effect of their inclusion would be
anti-dilutive.
</FN>
</TABLE>
<PAGE>
EXHIBIT 21
<PAGE>
ORNDA HEALTHCORP SUBSIDIARIES
<TABLE>
<S> <C> <C>
Subsidiary State of Incorporation Assumed Names
- ---------- ---------------------- -------------
AHM Acquisition , Inc. Delaware
AHM CGH, Inc. California Chapman General Hospital
Chapman Medical Center
Medtrust
AHM GEMCH, Inc. California Greater El Monte Community Hospital
Medtrust
AHM Jackson Hospital, Inc. Mississippi Doctor's Hospital, Inc.
AHMJV, Inc. California
AHM SMC, Inc. California Suburban Medical Center
AHM WCH, Inc. California Woodruff Community Hospital
AHM Minden Hospital, Inc. Louisiana Minden Medical Center
Medtrust
American Healthcare Management Development Company Texas Preston Recovery Co.
Biltmore Surgery Center, Inc. Arizona
Bone Marrow/Stem Cell Transplant Institute of Florida, Inc. Florida Stem Cell Institute
C G Diagnostic, Inc. Florida Coral Gables Diagnostic Center
Care Net Health Systems, Inc. Tennessee
CFMC LP, Inc. Nevada
CGH Realty Holding, Inc. Florida
CHHP, Inc. California Community Hospital of Huntington Park
Mission Hospital of Huntington Park
CHR Service Corp Arizona
Clinic Holdings, Inc. (Missouri) Missouri Parkway Regional MLA Clinic
Clini-Tech Laboratories, Inc. Massachusetts
Coastal Communities Health Systems, Inc. California
Commonwealth Continental Health Care III, Inc. Florida
Commonwealth Continental Health Care, Inc. Florida
Coral Gables Hospital, Inc. Florida Personal Care +
Coral Gables Hospital Partners, Inc. Florida
-1-
<PAGE>
Subsidiary State of Incorporation Assumed Names
- ---------- ---------------------- -------------
CVHS Hospital Corporation California Centinela Hospital Medical Center
Centinela Hospital Airport Medical Clinic
Intrastate Medical Collections
Cypress Fairbanks Medical Center, Inc. Texas
Davenport Medical Center, Inc. Iowa
Desert Communities Health Systems, Inc. California
DHPG of Georgia, Inc. Georgia
Doctors' Hospital Medical Center, Inc. Colorado
EGH, Inc. Oregon Eastmoreland General Hospital
Medtrust
Occu-Med Network
Southwest Family Clinic
Fountain Valley Health Care, Inc. California
Fountain Valley Imaging Corp California
Fountain Valley Pharmacy, Inc. California Private Care Pharmacy
Fountain Valley Regional Hospital & Medical Center California The Center for Breast Care
Women's and Children's Specialty Services
French Hospital Medical Center California
FMC Center, Inc. Delaware Oakland Medical Mall
FMC Medical, Inc. Florida
GCPG, Inc. Delaware Surgery-Associates-Garland (TX)
Youth Crossing (TX)
GGH, Inc. (formerly Gibson General Hospital, Inc.) Tennessee Medtrust
GMPG, Inc. California
Gulf Coast Community Health Care Systems, Inc. Mississippi
Gulf Coast Community Hospital, Inc. Mississippi Gulf Oaks Medical Center
Gulf Oaks Hospital
Gulf Oaks Psychiatric Hospital
Gulf Oaks Recovery Center
Harbor View Medical Center, Inc. California
-2-
<PAGE>
Subsidiary State of Incorporation Assumed Names
- ---------- ---------------------- -------------
Harbor View Health Systems, Inc. California
Harbor View Physicians Services, Inc. California
HCW, Inc. Texas Wylie Community Hospital
Health Choice Arizona, Inc. Arizona Managed Cre Stategies - Aizona
Health Choice HMO, Inc. Arizona
Health Choice Partners, Inc. Florida
Health Holding Company, Inc. Delaware
Health Resources Corporation of America-California California
Health Resources Corporation of America-Florida Delaware North Miami General Hospital
HNMC, Inc. Delaware Houston Northwest Medical Center(TX)
HNPG, Inc. Texas
HNW GP, Inc. Delaware
Horizon Health Group, Inc. Delaware
Houston Northwest Health System, Inc. Texas
Houston Northwest Home Health Care, Inc. Texas
Houston Northwest Management Services, Inc. Texas
Houston Northwest Medical Center, Inc. Delaware
Indianapolis Health Systems, Inc. Indiana
Indianapolis Physician Services, Inc. Indiana
LaHacienda Treatment Center, Inc. Delaware LaHacienda Treatment Center
Horizon Outpatient Services
Lander Valley Regional Medical Center Wyoming
LBPG, Inc. California
LCMH, Inc. Texas
Lewisburg Community Hospital, Inc. Tennessee
Life Visions, Inc. (Non-Profit) Missouri
Lewisburg Hospital Properties, Inc. Tennessee
Managed Health Alliance California
Matrix Associates, Inc. Arizona
MCS Administrative Services, Inc. California
MCF, Inc. Florida
-3-
<PAGE>
Subsidiary State of Incorporation Assumed Names
- ---------- ---------------------- -------------
Medi-Health of Florida, Inc. Florida
Meridian Regional Hospital, Inc. Mississippi
Mesa General Hospital Medical Center, Inc. Arizona
MGPG, Inc. California
Midway Hospital Medical Center, Inc. California
Monterey Park Hospital California Medtrust
MPC, Inc. West Virginia Plateau Medical Center, Inc.
Medtrust
NAI Community Hospital of Phoenix, Inc. Arizona
Newport Beach Health Systems, Inc. California
NLVH, Inc. Nevada North Las Vegas Hospital, Inc.
Community Hospital of North Las Vegas, Inc.
Lake Mead Hospital Medical Center, Inc.
Stewart Medical Center
NLVPG of Nevada, Inc. Nevada
Northwest Houston Providers Alliance, Inc. Texas
OHM Health Initiatives, Inc. Massachusetts
OHM Services, Inc. (Non-Profit) Massachusetts
OrNda FMC, Inc. Florida
OrNda Access, Inc. Arizona
OrNda Acquisition Corporation Massachusetts
OrNda Ambulatory Network, Inc. California
OrNda HealthChoice, Inc. Arizona
OrNda HealthCorp of Florida, Inc. California Florida Medical Center South
OrNda HealthCorp of Massachusetts, Inc. Massachusetts
-4-
<PAGE>
Subsidiary State of Incorporation Assumed Names
- ---------- ---------------------- -------------
OrNda HealthCorp of Phoenix, Inc. California Horizon Hospital
St. Luke's Medical Center (AZ)
St. Luke's Behavioral Health Center (AZ)
Tempe St. Luke's Hospital (AZ)
St. Luke's Skilled Nursing Facility (AZ)
St Luke's Rehabilitation Center (AZ)
St. Luke's Centre Medical Clinic (AZ)
Centre Clinic I (AZ)
Centre Clinic III (AZ)
East Valley Center for Primary Care (AZ)
Center For Primary Care (AZ)
OrNda Homecare, Inc. California
OrNda Hospital Corporation California
OrNda Hospital Investment Corp. Massachusetts
OrNda Health Initiatives, Inc. Delaware GCG Supplemental Staffing (TX)
High Tech Infusion (TX)
Home Health Management
Home Health Equipment (FL)
OrNda Investments, Inc. Nevada
OrNda Management Services, Inc. Delaware
OrNda of South Florida, Inc. Delaware
OrNda of South Florida Services Corporation Florida
OrNda Receivables Company California
Portland Health Centers, Inc. Oregon
Poway Health Systems, Inc. California
Premier Health Systems, Inc. Delaware
Provident Nursing Homes, Inc. Massachusetts
PSH, Inc. Washington Puget Sound Hospital
Puget Sound Hospital Volunteers
Puget Sound Hospital Gift Shop
Medtrust
-5-
<PAGE>
Subsidiary State of Incorporation Assumed Names
- ---------- ---------------------- -------------
Qualicare of Mississippi, Inc. Louisiana
Qualicare of Wyoming, Inc. Louisiana
Republic Health Corporation of Arizona Arizona
Republic Health Corporation of California Delaware
Republic Health Corporation of Central Georgia Georgia
Republic Health Corporation of Hayward California
Republic Health Corporation of Indianapolis Indiana Winona Memorial Hospital
Midwest Medical Center
Republic Health Corporation of Meridian Delaware
Republic Health Corporation of Mesquite Delaware Mesquite Physicians Hospital
Republic Health Corporation of North Miami Florida
Republic Health Corporation of Rockwall County Nevada
Republic Health Corporation of San Bernardino California
Republic Health Corporation of Texas Nevada Walnut Medical Center
Garland Community Hospital
GCG
Garland Diagnostic Center
Pulse Health Services
Republic Health of North Texas, Inc. Texas
Republic Health Partners, Inc. Delaware
RHC Florida, Inc. Delaware
RHC Parkway, Inc. Delaware
RHC Texas, Inc. (f/k/a Texas Regional Lab, Inc.) Texas OHRL, Inc.(Texas)
RHCMS, Inc. Delaware
RHPC, Inc. Florida Riverside Hospital, Inc.
North Bay Medical Center, Inc.
Medtrust
Rio Hondo Health Systems, Inc. California Rio Hondo Memorial Hospital
Rio Hondo Memorial Hospital California
-6-
<PAGE>
Subsidiary State of Incorporation Assumed Names
- ---------- ---------------------- -------------
Ross General Hospital California Ross Horizon Hospital
Ross Hospital
Ross Hospital, Inc. Delaware
Sacramento Community Hospital, Inc. California
San Juan Medical Center, Inc. Florida
Santa Ana Hospital Medical Center, Inc. California
S.C. Cal., Inc. Washington Trinity Valley Medical Center
Pulse Health Services
S.C. Management, Inc. Washington Twin Rivers Fitness Center
Twin Rivers Medical Center
Quality Care Medical Supply
S.C. San Antonio, Inc. Washington Southwest General Hospital
Generations
Impotence Center of South Texas
Safework Industrial Medicine Program
VIP Seniors Southwest MRI Imaging Center
Nurses Who Care Home Health Care Agency
S.V. Hospital, L.L.C. Massachusetts Saint Vincent Hospital
SHL/O Corp Delaware
SNF Pharmacy, Inc. California
South Florida Physician Services, Inc. Florida
Southwest Physician Management Services, Inc. Texas
South Park Medical Center, Inc. Texas South Park Medical Center
Lamesa Specialty Clinic
South Park Medical Center & Hospital
South Park Hospital & Medical Center
South Park Hospital
St. Luke Medical Center California
-7-
<PAGE>
Subsidiary State of Incorporation Assumed Names
- ---------- ---------------------- -------------
STH Corporation Texas Sharpstown General Hospital
Medtrust
Workfit
S.V. Hospital, L.L.C. Massachusetts Saint Vincent Hospital
The Davenport Clinic, Inc. Iowa
TriLink Provider Services Organization, Inc. Florida
Tucson General Hospital, Inc. Arizona
USDHC, Inc. California
Valley Community Hospital, Inc. California
WCH Management Services, Inc. California
West Los Angeles Health Systems, Inc. California Brotman Medical Center
Westcenter Rehabilitation Facility, Inc. Arizona Westcenter
Westside Hospital, LLC Delaware
Whittier Hospital Medical Center, Inc. California
Woodland Park Hospital, Inc. Oregon Medtrust
Pulse Health Services
WPH Management Services, Inc. Oregon
</TABLE>
-8-
<PAGE>
EXHIBIT 23
<PAGE>
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration
Statements:
a. Form S-8 Registration Statement (No. 33-37699) relating to 851,563 shares
of Common Stock issuable under the Republic Health Corporation Stock
Accumulation Plan, the Republic Health Corporation 1990 Stock Option Plan
and the Republic Health Corporation 1991 Stock Option Plan, filed on
November 9, 1990;
b. Form S-8 Registration Statement (No. 33-78620) relating to 860,002 shares
of Common Stock issuable under the American Healthcare Management, Inc.
1990 Non-Employee Directors' Stock Plan, the American Healthcare
Management, Inc. 1990 Stock Plan, and the American Healthcare Management,
Inc. 1990 Volla and Dubbs Executive Compensation Agreements, filed on May
4, 1994;
c. Form S-8 Registration Statement (No. 33-78618) relating to 245,512 shares
of Common Stock issuable under the Summit Health Ltd. Stock Option Plan,
the Summit Health Ltd. 1992 Stock Option Plan, and the Summit Health Ltd.
Stock Option Agreements, filed on May 4, 1994;
d. Form S-3 Registration Statement (No. 33-76700) relating to 1,376,755 shares
of Payable-In-Kind Cumulative Redeemable Convertible Preferred Stock and
4,321,651 shares of Common Stock of OrNda HealthCorp, effective on June 15,
1994;
e. Form S-8 Registration Statement (No. 33-81778) relating to 4,150,000 shares
of Common Stock issuable under the OrNda HealthCorp 1994 Management Equity
Plan and the OrNda HealthCorp Incentive Bonus Plan, filed on July 20, 1994;
f. Form S-4 Registration Statement (No. 33-89046) relating to 1,000,000 shares
of Common Stock issuable from time to time in certain of the acquisitions
of OrNda HealthCorp, effective on June 6, 1995;
g. Form S-8 Registration Statement (No. 333-00359) relating to 1,300,000
shares of Common Stock issuable under the OrNda HealthCorp Employee Stock
Purchase Plan and the OrNda HealthCorp Outside Directors Stock Option Plan,
filed on January 22, 1996;
<PAGE>
Page 2
h. Form S-8 Registration Statement (No. 333-00399) relating to 3,000,000
shares of Common Stock issuable under the OrNda HealthCorp 1994
Management Equity Plan, filed on January 24, 1996;
and in the related Prospectuses of our report dated October 25, 1996, with
respect to the consolidated financial statements and schedule of OrNda
HealthCorp included in the Annual Report (Form 10-K) for the year ended August
31, 1996.
ERNST & YOUNG LLP
Nashville, Tennessee
November 13, 1996
<PAGE>
EXHIBIT 24
<PAGE>
POWER OF ATTORNEY
ANNUAL REPORT ON FORM 10-K
FOR
ORNDA HEALTHCORP
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints each of Keith B. Pitts, Executive Vice President
and Chief Financial Officer of OrNda HealthCorp (hereinafter referred to as the
"Company"), and Ronald P. Soltman, Senior Vice President, General Counsel and
Secretary of the Company, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to execute and file, or cause to be filed,
with the Securities and Exchange Commission (herein referred to as the
"Commission") the Company's Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 on Form 10-K for the year ended August 31, 1996,
and all amendments thereto, and all matters required by the Commission in
connection with such report under The Securities Exchange Act of 1934, as
amended, granting unto each such attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
/s/ Leonard Green
Leonard Green
Director
November 7, 1996
<PAGE>
POWER OF ATTORNEY
ANNUAL REPORT ON FORM 10-K
FOR
ORNDA HEALTHCORP
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints each of Keith B. Pitts, Executive Vice President
and Chief Financial Officer of OrNda HealthCorp (hereinafter referred to as the
"Company"), and Ronald P. Soltman, Senior Vice President, General Counsel and
Secretary of the Company, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to execute and file, or cause to be filed,
with the Securities and Exchange Commission (herein referred to as the
"Commission") the Company's Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 on Form 10-K for the year ended August 31, 1996,
and all amendments thereto, and all matters required by the Commission in
connection with such report under The Securities Exchange Act of 1934, as
amended, granting unto each such attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
/s/ Peter A. Joseph
Peter A. Joseph
Director
November 7, 1996
<PAGE>
POWER OF ATTORNEY
ANNUAL REPORT ON FORM 10-K
FOR
ORNDA HEALTHCORP
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints each of Keith B. Pitts, Executive Vice President
and Chief Financial Officer of OrNda HealthCorp (hereinafter referred to as the
"Company"), and Ronald P. Soltman, Senior Vice President, General Counsel and
Secretary of the Company, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to execute and file, or cause to be filed,
with the Securities and Exchange Commission (herein referred to as the
"Commission") the Company's Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 on Form 10-K for the year ended August 31, 1996,
and all amendments thereto, and all matters required by the Commission in
connection with such report under The Securities Exchange Act of 1934, as
amended, granting unto each such attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
/s/ Paul S. Levy
Paul S. Levy
Director
November 7, 1996
<PAGE>
POWER OF ATTORNEY
ANNUAL REPORT ON FORM 10-K
FOR
ORNDA HEALTHCORP
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints each of Keith B. Pitts, Executive Vice President
and Chief Financial Officer of OrNda HealthCorp (hereinafter referred to as the
"Company"), and Ronald P. Soltman, Senior Vice President, General Counsel and
Secretary of the Company, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to execute and file, or cause to be filed,
with the Securities and Exchange Commission (herein referred to as the
"Commission") the Company's Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 on Form 10-K for the year ended August 31, 1996,
and all amendments thereto, and all matters required by the Commission in
connection with such report under The Securities Exchange Act of 1934, as
amended, granting unto each such attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
/s/ John J. O'Shaughnessy
John J. O'Shaughnessy
Director
November 7, 1996
<PAGE>
EXHIBIT 27
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Financial Data Schedule contains summary financial information extracted
from the Company's balance sheet and statement of income and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
<CASH> 17,435
<SECURITIES> 0
<RECEIVABLES> 458,321
<ALLOWANCES> 78,447
<INVENTORY> 42,168
<CURRENT-ASSETS> 525,815
<PP&E> 1,705,900
<DEPRECIATION> 370,707
<TOTAL-ASSETS> 2,466,528
<CURRENT-LIABILITIES> 437,678
<BONDS> 1,229,930
0
0
<COMMON> 583
<OTHER-SE> 639,834
<TOTAL-LIABILITY-AND-EQUITY> 2,466,528
<SALES> 0
<TOTAL-REVENUES> 2,147,232
<CGS> 0
<TOTAL-COSTS> 1,772,570
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 141,833
<INTEREST-EXPENSE> 107,243
<INCOME-PRETAX> 135,113
<INCOME-TAX> 35,242
<INCOME-CONTINUING> 99,871
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99,871
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.72
</TABLE>
