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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A No. 1
AMENDMENT TO APPLICATION OR REPORT
Filed pursuant to Section 12, 13 or 15(d)
of
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-11591
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ORNDA HEALTHCORP
(Exact name of Registrant as specified in its charter)
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AMENDMENT NO. 1
The undersigned Registrant hereby amends the following items of its
Annual Report for the fiscal year ended August 31, 1995 on Form 10-K (the "Form
10-K") as set forth in the pages attached hereto:
(1) The Registrant hereby deletes the information set forth under
Item 1 on its Form 10-K dated November 2, 1995 and replaces
such Item 1 in its entirety with the following new Item 1.
(2) The Registrant hereby deletes the information set forth under
Item 7 on its Form 10-K dated November 2, 1995 and replaces
such Item 7 in its entirety with the following new Item 7.
(3) The Registrant hereby deletes the information set forth under
Items 8 and 14(a)(1) and (2) (including the "f" pages referred
to therein) on its Form 10-K dated November 2, 1995 and
replaces such Items and "f" pages with the following Items 8
and 14(a)(1) and (2) and "f" pages.
(4) The Registrant hereby amends Item 14(a)(3) on its Form 10-K
dated November 2, 1995 by adding a new Exhibit 23.1 (Consent
of Ernst & Young LLP) thereto.
<PAGE>
Item 1. Business.
The Company(1)
The Company is a leading provider of health care services in the United
States, delivering a broad range of inpatient and outpatient health care
services in 14 states, primarily in urban and suburban communities in the
southern and western United States. At August 31, 1995, the Company operated 45
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 33,000 participants. The Company
has a significant presence in the greater Los Angeles area, south Florida and
the greater Phoenix area. Over the last four years, the Company has
substantially increased its revenue, primarily through acquisitions, while
improving operating profitability. The Company's revenue has grown from
approximately $809 million for the 1992 fiscal year to approximately $1.8
billion for the 1995 fiscal year, representing an annual compound growth rate of
approximately 31.6%. As a result of cost containment initiatives taken by new
management and strategic acquisitions, the EBITDA margin of the Company's
hospitals has grown from approximately 9.2% for the 1992 fiscal year to
approximately 14.2% for the 1995 fiscal year.(2)
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 33,000 principally
indigent members of the Arizona Health Care Cost Containment System. In
addition, the Company, working with physicians and other health care providers,
has entered into so-called "capitated contracts" where it has the financial
responsibility for hospital services at October 31, 1995 for in excess of
200,000 covered lives. Under "capitated contracts" the Company's hospitals are
paid a fixed amount per covered life per period, whether or not any hospital
services are performed in the period, but the Company is then responsible for
providing all hospital services needed by such covered life during such period.
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(1)The term "the Company" as used herein refers to OrNda HealthCorp and
its direct and indirect subsidiaries, unless otherwise stated or indicated by
context.
(2)EBITDA margin is the Company's EBITDA divided by its total revenue.
References herein to the Company's "EBITDA" refer to the Company's earnings
before interest, taxes, depreciation, amortization, income (loss) from
investments in Houston Northwest and non-recurring items. While EBITDA should
not be construed as a substitute for net income or a better indicator of
liquidity than cash flow from operating, investing or financing activities which
are determined in accordance with generally accepted accounting principles, it
is included herein to provide additional information with respect to the ability
of the Company to meet its future debt service, capital expenditure and working
capital requirements. Non-recurring charges in 1995 consisted of $973,000 of
loss on asset sales. Non-recurring charges in 1994 consisted of $2.5 million of
special executive compensation, $30.0 million of merger transaction expenses,
$45.3 million of loss on asset sales and $12.3 million of extraordinary items.
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The Company has expanded its service capabilities and broadened its
geographic presence in core markets through a series of strategic acquisitions
of hospital management companies and individual facilities and medical centers
over the last two years. These acquisitions have provided the basis for the
Company's strategy of developing integrated health care delivery networks to
provide low cost, high quality health care services. The Company intends to
continue to pursue strategic acquisitions of health care providers in geographic
areas and with service capabilities that will further the Company's development
of integrated health care delivery networks, and that offer opportunities for
cost reduction and increased operating efficiencies. The Company presently has
pending one strategic acquisition of a hospital, Houston Northwest Medical
Center, which it believes will complement its existing operations, strengthen
the development of integrated delivery networks and better position the Company
to attract additional managed care contracts. See "Recent Acquisitions" and
"Pending Acquisitions.
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.
Business Strategy
The Company intends to increase revenues and expand market share
through 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 will
continue to selectively acquire 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 in each of its markets. This will enable the Company to offer a full
range of integrated patient services on a cost effective basis. For example, the
Company has recently acquired several providers of tertiary care services in key
markets and has successfully integrated such services with the primary care
services provided by the Company's existing hospitals. The Company believes that
the establishment of integrated networks will allow it to (i) improve the
quality of care provided by concentrating expertise in the provision of
specialized services within each market; (ii) extend the Company's services into
new geographic areas and provide the Company with access to a broader base of
patients; (iii) consolidate expensive equipment and procedures into fewer
facilities and 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. Through the development of integrated health care delivery networks,
the Company believes it will augment revenues and expand market share by
attracting an increasing share of large governmental and private sector managed
care contracts. The Company intends to continue to utilize the following
approaches in connection with its development of integrated health care delivery
networks:
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o Hospitals as "Hubs" for Delivery Systems. The Company intends to
establish relationships with other health care providers in the markets
it serves by building upon the primary and tertiary care provided by
the Company's hospitals in such markets, and integrating these services
with the outpatient and specialty services of other providers. The
Company believes that hospitals are the logical hubs for the
development of integrated health care delivery systems due to their
highly developed infrastructure, extensive base of services,
sophisticated equipment and skilled personnel.
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 markets in which the Company operates a large
number of hospitals, it intends to take a leadership role in
establishing relationships with other providers to develop fully
integrated networks. In markets in which the Company is not one of the
dominant providers of acute care services, the Company intends to
participate in networks by integrating its service capabilities with
the local providers of complementary health care services. In addition,
through its Medicaid HMO in Phoenix, Arizona and its national and
regional managed care contracts (which number in excess of 30), the
Company has demonstrated its ability to successfully 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 markets. In addition, the Company
continually analyzes whether each of its hospitals fits within its
strategic plans and may divest itself of hospitals that do not so fit.
o Physician Alliances. The Company intends to further its development
of integrated networks by expanding its alliances with physicians to
create long-term hospital/physician linkages. These arrangements will
allow physicians to participate in the delivery of health care at the
network level. For example, in the southern California and south
Florida markets, 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 markets.
o Operations in Key Markets. The Company has developed its operations
in several key geographic locations which the Company recognized 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. The Company intends to continue to
identify and expand within markets offering unique growth
opportunities.
o Managed Care Contracts. As cost containment pressures in the health
care industry have increased and managed care arrangements have
proliferated, the Company has successfully attracted new managed care
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contracts in its key markets. The Company's geographic diversity,
ability to provide a full range of medical services and cost-effective
operations have led to risk contracts totaling in excess of 200,000
capitated lives. In its fiscal year ended August 31, 1995, the Company
signed in excess of 30 regional and three national contracts with
managed care organizations including HMOs. 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.
Strategic Acquisitions. The Company intends to continue to pursue
strategic acquisitions of health care providers in geographic areas and with
service capabilities that will facilitate the development of integrated
networks. For example, in August 1994 the Company acquired Fountain Valley
Regional Hospital and Medical Center ("Fountain Valley") and in February 1995
acquired the St. Luke's Health System ("St. Luke's"), providers of tertiary care
services in southern California and Phoenix, respectively. The Company had a
significant primary care presence in these areas prior to such acquisitions and
is in the process of integrating the tertiary care services provided by Fountain
Valley and St. Luke's 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 pending
acquisition of Houston Northwest Medical Center, a leading provider of tertiary
care services in the northwest Houston market, will enhance its presence in that
market and provide the Company with an opportunity to develop an integrated
health care delivery network by establishing relationships with other health
care providers in the area. The recent acquisition by the Company of Universal
Medical Center will, in the Company's view, enhance the Company's market share
position 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
which can be provided on a cost effective, high revenue growth basis. The
Company believes that it is well positioned to compete effectively with
alternate site providers of outpatient services because its 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 low cost provider of health care services in each of
its markets. As cost containment pressures increase, the Company will continue
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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) continued focus on
reducing uncollectible accounts. 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,
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. For example, the Company has
recently opened the first pediatric sub-acute care unit in California, providing
health care services to newborns on a cost effective basis. The Company plans to
continue to devote capital resources to the expansion and modernization of its
specialty service capacity.
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 two years.
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 Merger. Concurrently with the AHM Merger, the Company acquired
Summit Health Ltd. ("Summit") in a merger transaction accounted for as a
purchase (the "Summit Merger" and, together with the AHM Merger, the "Mergers").
Stockholders of Summit 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 common stock. Prior to the Summit Merger, Summit 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. The total purchase price of approximately $105.2 million was paid
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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.
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.
In addition, effective November 1, 1994, the Company acquired Suburban
Medical Center, a 184-bed general acute care hospital located in Paramount,
California. The facility is the Company's 15th hospital in the greater Los
Angeles, California area.
Also, effective November 1, 1995, the Company acquired Universal
Medical Center, a 202-bed general acute care hospital located in Plantation,
Florida. The hospital is the Company's fifth hospital in south Florida and the
second facility in Broward County.
Through these acquisitions the Company has expanded its service
capabilities and broadened its geographic presence in core markets in order to
position the Company as a leading provider of low cost, high quality health care
services. The Company intends to continue to pursue strategic acquisitions of
health care providers in geographic areas and with service capabilities that
will further the Company's development of integrated health care delivery
networks, and that offer opportunities for cost reduction and increased
operating efficiency.
Pending Acquisitions
At November 1, 1995, the Company has pending one strategic acquisition
which is described below.
On September 28, 1995, the Company announced the execution of a letter of
intent to acquire from the HNW Employee Stock Ownership Plan (the "ESOP") all of
its controlling capital stock ownership interest (the "ESOP Shares") in Houston
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Northwest Medical Center, Inc. ("HNW"), whose principal asset is a 494-bed
tertiary care hospital in Houston, Texas, 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. The Company already owns
mortgage debt of, and preferred stock in, HNW which is included on the Company's
balance sheet as of August 31, 1995, as a $73.8 million investment. If the
proposed transaction is consummated, the Company will own 100% of the
outstanding capital stock of HNW. Closing of the proposed transaction is subject
to execution of definitive sales documentation and other customary closing
conditions as well as approval of the transaction by the HNW Board of Directors,
the ESOP trustee and the holders of the HNW capital stock.
To obtain financing for the pending 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 (Summit 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 replaces 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 Agreement 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 the debt 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 debt under the Previous Credit
Agreement, payable in quarterly installments, commencing February 29, 1996. At
November 1, 1995, the Company had approximately $511 million of borrowings and
letters of credit outstanding under the Restated Credit Facility.
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
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Company's operations. The consummation of acquisitions could result in the
incurrence or assumption by the Company of additional indebtedness.
Health Care Facilities
At August 31, 1995, the Company operated 45 general acute care
("general" or "acute care") hospitals, one psychiatric hospital, numerous
outpatient and specialty clinics and six surgery centers, primarily in the
southern and western United States, and has a significant presence in several
large markets. The hospitals are owned or leased by subsidiaries of the Company
or through joint venture arrangements with subsidiaries of the Company. At
August 31, 1995, the Company operated 15 hospitals in the greater Los Angeles,
California area, and, therefore, believes that it is able to offer high quality,
cost effective health care services by integrating its primary and tertiary care
facilities in the area. The August 1994 acquisition of Fountain Valley and the
November 1994 acquisition of Suburban Medical Center have added to the Company's
presence in the greater Los Angeles, California area. In the Phoenix, Arizona
area, the Company operated at August 31, 1995, 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.
The February 1995 acquisition of the three St. Luke's hospitals have added to
the Company's presence in the greater Phoenix, Arizona area. At August 31, 1995,
the Company operated five hospitals in Florida and six hospitals in Texas. The
Company also operated at August 31, 1995 hospitals in the following states:
Indiana, Iowa, Louisiana, Mississippi, Missouri, Nevada, Oregon, Washington,
West Virginia and Wyoming. In addition, at August 31, 1995, the Company owned or
leased all or a substantial part of approximately 70 medical office buildings
located in proximity to its hospitals. In the Company's experience, the
proximity of a physician's office to a hospital encourages a physician to admit
patients to that hospital and to utilize its ancillary services. See Item
2-"Properties".
Of the 46 hospitals operated by the Company at August 31, 1995, 15
hospitals are located in the greater Los Angeles, California area and 18
hospitals are located in California. The Company's 18 California acute care
hospitals generated approximately 40.5% of its total revenue for the year ended
August 31, 1995. In addition, five hospitals which generated approximately 19.3%
of the Company's total revenue for the 1995 fiscal year are located in Florida
and six hospitals which generated approximately 8.9% of the Company's total
revenue for the 1995 fiscal year are located in Arizona. The concentration of
hospitals in Arizona, California and Florida increases the risk that any adverse
economic, regulatory or other developments that may occur in such areas may
adversely affect the Company's operations or financial condition. In addition,
the Company has experienced, and expects that it will continue to experience,
delays in payment and in rate increases by Medi-Cal, 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,
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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 has also established utilization review
committees which monitor patient care. Additionally, the Company requires that
each of its hospitals have 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.
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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>
<CAPTION>
Years Ended August 31,
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Number of hospitals at period end 27 31 34 46 46
Licensed beds at period end....................... 4,571 5,210 6,114 8,025 8,069
Patient days...................................... 685,327 727,226 711,621 871,938 1,076,782
Adjusted patient days(1).......................... 934,889 1,018,788 991,760 1,201,980 1,512,070
Average length of stay(days)...................... 6.9 6.2 6.0 4.9 5.3
Admissions........................................ 99,666 117,248 118,284 179,085 204,204
Adjusted admissions(2)............................ 135,064 163,350 164,845 246,872 286,753
Occupancy rate(3)................................. 41.1% 38.2% 35.7% 35.2% 36.4%
</TABLE>
(1) Total patient days for the period multiplied by the ratio of total patient
revenue divided by total inpatient revenue.
(2) Total admissions for the period multiplied by the ratio of total patient
revenue divided by total inpatient revenue.
(3) Average daily census for the period divided by licensed beds.
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
four years and represents approximately 28.8% of gross patient revenues for the
year ended August 31, 1995 while average lengths of patient stay have decreased
from 6.9 days for fiscal 1991 to 5.3 days for fiscal 1995. 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.
Medicaid HMO. With its acquisitions of Summit and St. Luke's, the
Company obtained ownership of two Medicaid HMO's which have been merged and are
now 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 program in Arizona and also contracts for health care
services for certain other groups like small employers (40 or less employees).
HCA's current contract with the AHCCCS covers approximately 33,000 members of
the Arizona Medicaid system and small employers in Maricopa and Pima Counties,
Arizona and provides a significant percent of the net revenues of the Company's
six hospitals and two surgery centers in Arizona.
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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:
1993 1994 1995
---- ---- ----
Medicare............................... 44.3% 45.4% 40.4%
Medicaid/Medi-Cal...................... 17.2% 18.3% 18.3%
Managed Care........................... 16.9% 23.3% 26.9%
All Other Payors....................... 21.6% 13.0% 14.4%
------ ------ ------
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
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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 ("ESRD"). 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 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, 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. At
August 31, 1995, there were 495 DRGs. 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. 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
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<PAGE>
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, 1994 and October 1, 1995 were
established as 3.6% and 3.5%, 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 Company's revenue comes) were or will
be adjusted by the annual Market Basket percentage change: (1) minus 2.5%,
effective October 1, 1994, (2) minus 2.0%, effective October 1, 1995, (3) minus
0.5%, effective October 1, 1996, and (4) without reduction, effective October 1,
1997 and each year thereafter, unless, in each case, altered by subsequent
legislation. The Company deems such subsequent legislation likely given the
current emphasis on decreasing the federal budget deficit. For example, budget
bills passed by the Senate and House in the Fall of 1995 provide for the
following reductions in the DRG adjustments pursuant to OBRA 1993 set forth
above: the Senate version provides for Market Basket minus 2.5% in each of the
seven federal fiscal years commencing October 1, 1995 and ending September 30,
2002 while the House bill provides for Market Basket minus 2.5% for the fiscal
year commencing October 1, 1995 and Market Basket minus 2.0% for the six federal
fiscal years commencing October 1, 1996 and ending September 30, 2002. President
Clinton has threatened to veto this proposed budget legislation unless certain
changes are made including scaling back some of the proposed Medicare
reductions. See "Governmental Regulation Health Care Reform".
The Company's one psychiatric hospital as well as its psychiatric and
rehabilitation units that are certified by the respective state licensure
bureaus as distinct part units of its general hospitals are currently exempt
from the prospective payment system and are reimbursed on a cost-based system,
subject to certain cost caps.
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, the Omnibus Budget
Reconciliation Act of 1990 ("OBRA 1990") reduced the cost component by 5.8%
for federal fiscal years ("FFY") 1991 through 1995 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). OBRA 1993 extended the 94.2% provision through FFY
1998. 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-
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<PAGE>
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 revenues were approximately 31.8% of the Company's total gross
outpatient revenues, or approximately 9.2% of the Company's total gross
operating revenues, for the year ended August 31, 1995.
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 the 90% cap through FFY 1995 enacted in OBRA 1990
which is described in the following sentence. As required by OBRA 1990, however,
the Federal Rate has and will be adjusted in FFY 1992 through FFY 1995 so that
aggregate payments for capital will not exceed 90% of the amounts that would
have been payable under a reasonable cost reimbursement basis. This reduction
mandated by OBRA 1990 is set to expire on September 30, 1995. The expiration of
this provision should, in theory, reset the total capital payments to 100% of
aggregate capital costs. Congress, however, is in the process of establishing
the health care budget for future periods, which budget may include a reduction
rather than an increase in the prospective payment system for capital costs.
Until this process is completed, the final increase or decrease, if any, to the
15
<PAGE>
prospective payment system for capital costs will not be known. However, in the
Company's opinion the impact of prospective payment system capital reimbursement
in FFY 1994 and FFY 1995 has not been material to Medicare capital
reimbursement. The hospital-specific rates for FFY 1994 decreased 2.16%. 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.
Thus, based upon these small rate reductions 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 were materially affected by these
regulations for the year ended August 31, 1995. Payments for future years,
however, including those related to new capital expenditures, will be affected
by annual updates in the Federal Rate. Management cannot predict the effect of
such changes on the Company's results of operations or financial condition.
The Medicare program 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.
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 for the next four
years 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 the "Gramm-
Rudman-Hollings Amendment" enacted by Congress in December 1985 and such
spending cuts could occur in future years under this or 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
16
<PAGE>
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
required to be paid to hospitals defined as providing a disproportionate amount
of Medicaid and low-income inpatient services). 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 increase in the level 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.
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.
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
17
<PAGE>
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, 1995 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. 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, 1993, 1994 and 1995, the Company derived an aggregate of 61.5%, 63.7%
and 58.7%, 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 especially since, in
order to reach a balanced budget by the year 2002, in October 1995 the U.S.
House of Representatives and the U.S. Senate passed budget reconciliation bills
providing for $270 billion in savings under the Medicare program over seven
years by reducing the growth rate of the program to approximately 6% a year from
10% and $169 billion and $172 billion in savings under the Medicaid program in
the House and Senate versions, respectively, by converting the federal share of
the program to a block grant to the states and by gradually reducing growth to
approximately 5% to 6% a year from 10%. 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
18
<PAGE>
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 advances in medical technology,
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 and changes in physician
practice patterns. 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 and to organize and structure integrated
health care delivery networks with other health care providers and physician
practice groups. There can be no assurance that 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 or to organize and structure
integrated health care delivery networks, for which other health care companies
with greater financial resources or 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,
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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. 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 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 traditional health
insurers are increasingly interested in containing costs through negotiations
with hospitals for managed care programs and discounts from established charges.
The importance to a hospital of its ability to obtain contracts with PPOs and
HMOs and other 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 market strength 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, may also
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. 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, 1995, 10 of the 14 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
20
<PAGE>
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 an 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 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.
Medical Staffs and Employees
As of August 31, 1995, approximately 10,000 licensed physicians were
members of the medical staffs of the Company's hospitals. Medical staff members
are generally independent contractors and not employees of the hospital. 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 has also begun employing
physicians, primarily primary care physicians. Those physicians who serve in
administrative capacities 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.
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At August 31, 1995, the Company and its subsidiaries had approximately
22,000 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. 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.
Federal and State Anti-Fraud 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 also 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 many relatively innocuous, or even beneficial, commercial arrangements with
their physicians may technically violate this broad interpretation of the
Antifraud Amendments.
In 1976, Congress established the Office of Inspector General ("OIG")
at HHS 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.
22
<PAGE>
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.
The Social Security Act also 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. Like the Antifraud Amendments, this statute is very broad.
23
<PAGE>
Careful and accurate coding of claims for reimbursement must be performed to
avoid liability under the false claims statutes.
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 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. 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.
24
<PAGE>
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 have been
cost controls on hospitals, insurance market reforms to increase the
availability of group health insurance to small businesses, requirements that
all businesses offer health insurance coverage to their employees and the
creation of a single government health insurance plan that would cover all
citizens. 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, President
Clinton's or any other large-scale federal reform failed to pass the U.S.
Congress in 1994.
Despite the failure to pass large scale health care reform in 1994, the
Congressional debate about health care has continued in 1995, largely in the
context of reducing Medicare and Medicaid payments as part of the overall
attempt to reduce federal budget deficits. Thus, in order to attempt to reach a
balanced budget by the year 2002, in October 1995 the U.S. House of
Representatives and the U.S. Senate passed budget reconciliation bills providing
for $270 billion in savings under the Medicare program over seven years by
reducing the growth rate of the program to approximately 6% a year from 10% and
approximately $169 billion and $172 billion in savings under the Medicaid
program in the House and Senate versions, respectively, by converting the
federal share of the program to a block grant to the states and by gradually
reducing growth to approximately 5% to 6% a year from 10%. With respect to
Medicaid, (i) the funding reductions differ in the House and Senate versions
with respect to their impact on individual states depending upon the allocation
formulas and (ii) the bills contain provisions eliminating most federal
standards and requirements for the state programs which will allow the states
themselves largely to define eligibility, minimum benefits and provider
reimbursement rates. With respect to Medicare, the bills contain provisions to
encourage Medicare beneficiaries to enroll in private health plans, reduce
payments to providers and raise premiums and deductibles for beneficiaries to
achieve the targeted Medicare savings. President Clinton has threatened to veto
the proposed budget legislation unless certain changes are made including
scaling back some of the proposed Medicaid and Medicare reductions.
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. For current federal proposals, see the Medicare
and Medicaid provisions in the budget reconciliation bills discussed in the
immediately preceding paragraph. In addition, a number of states are considering
the enactment of managed care initiatives designed to provide universal low-cost
coverage and/or additional taxes on hospitals to help finance or expand the
states' Medicaid systems. However, it is uncertain at this time what legislation
on health care reform may ultimately be proposed or 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
25
<PAGE>
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 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, except for one hospital which is accredited by the American
Osteopathic Association. 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. 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.
26
<PAGE>
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 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 1,630 beds in Florida as of August 31, 1995.
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 or not. PROs may deny payment for services
provided, 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.
27
<PAGE>
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, 1994 to June 1, 1996. The Company also purchases excess levels of
coverage above such self-insured retention. For the twelve months ending June 1,
1995 and June 1, 1996, 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
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, 1996, the results of operations of the Company could be
adversely affected.
Other Litigation
The Company is currently, and from time to time, 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 is usually 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.
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 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, 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.
28
<PAGE>
The Company has approximately $235 million of NOL's which expire from
1996 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-merger tax
years of AHM may only be applied against the prospective taxable income of the
AHM entities which incurred the losses in prior years. 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 IRS is currently engaged in an examination of the federal income
tax returns for fiscal years 1984, 1985 and 1986 of Summit, which became a
wholly-owned subsidiary of the Company in April 1994 and merged into the Company
in September 1994. Summit has received a revenue agent's report with proposed
adjustments for the years 1984 through 1986 aggregating, as of August 31, 1995,
approximately $16.6 million of income tax, $58.1 million of interest on the tax,
$43.9 million of penalties and $18.7 million of interest on the penalties.
Summit has filed a protest opposing the proposed adjustments. The IRS has
challenged, among other things, the propriety of certain accounting methods
utilized by Summit for tax purposes, including the use of the cash method of
accounting by certain of Summit's subsidiaries (the "Summit Subsidiaries") prior
to fiscal year 1988. The cash method was prevalent within the hospital industry
during such period and the Summit Subsidiaries applied the cash method in
accordance with prior agreements reached with the IRS. The IRS now asserts that
an accrual method of accounting should have been used. The Tax Reform Act of
1986 (the "1986 Act") requires most large corporate taxpayers (including Summit)
to use an accrual method of accounting beginning in 1987. Consequently, the
Summit Subsidiaries changed to the accrual method beginning July 1, 1987. In
accordance with the provisions of the 1986 Act, income that was deferred by use
of the cash method at the end of 1986 is being recognized as taxable income by
the Summit Subsidiaries in equal annual installments over ten years beginning on
July 1, 1987. The Company believes that Summit properly reported its income and
paid its taxes in accordance with applicable laws and in accordance with
previous agreements established with the IRS. The Company believes that the
final outcome of the IRS's examinations of Summit's prior years' income taxes
will not have a material adverse effect on the results of operations or
financial position of the Company.
29
<PAGE>
Executive Officers of the Registrant
The following table sets forth certain information as of November 1,
1995 regarding the executive officers of the Company.
<TABLE>
<S> <C> <C> <C>
Served as Officer
Name Age Position of the Company since
- ---- --- -------- --------------------
Charles N. Martin, Jr....... 52 Chairman, President & Chief Executive Officer January 1992
William L. Hough............. 44 Executive Vice President & Chief Operating Officer July 1995
Keith B. Pitts.............. 38 Executive Vice President & Chief Financial Officer August 1992
Dominick Bianco.............. 42 Senior Vice President - Operations September 1995
Raymond Denson............... 54 Senior Vice President - Operations September 1986
Paula Y. Eleazar............ 42 Senior Vice President - Chief Information Officer April 1992
Gale E. Gascho.............. 50 Senior Vice President - Operations June 1994
Anthony C. Krayer........... 51 Senior Vice President - Acquisitions and Development June 1994
Carol A. Murdock............ 35 Senior Vice President - Business Development
and Managed Care April 1994
William M. Murray............ 50 Senior Vice President - Operations March 1995
Ronald P. Soltman........... 49 Senior Vice President, General Counsel and Secretary April 1994
Alan G. Thomas............... 41 Senior Vice President - Hospital Financial Operations April 1994
Mark Werber.................. 41 Senior Vice President - Operations April 1994
</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 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 of Summit Care Corporation.
Dominick Bianco has been Senior Vice President - Operations of the
Company since September 1995. Prior thereto, Mr. Bianco was Chief Executive
Officer of the Company's Coral Gables Hospital, a 285 bed general hospital
located in Coral Gables, Florida, since 1993. Previously, Mr. Bianco was Chief
Operating Officer of Coral Gables Hospital from 1991 to 1993 and Assistant
Administrator of the hospital from 1988 to 1991.
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<PAGE>
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 five 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.
Gale E. Gascho has been Senior Vice President - Operations of the
Company since June 1994. From 1991 until May 1994, Mr. Gascho was the Chief
Executive Officer of Alhambra Hospital, a 157-bed general hospital located in
Alhambra, California. From 1975 through 1991, Mr. Gascho served in various
capacities with the corporate staff and with the hospital operations of National
Medical Enterprises, Inc. (now known as Tenet Healthcare Corporation) ("NME"), a
hospital management company, including serving from 1987 to 1991 as Chief
Executive Officer of NME's Garfield Medical Center, a 229-bed general hospital
located in Monterey Park, California.
Anthony C. Krayer has been Senior Vice President - Acquisitions and
Development of the Company since June 1994. Prior thereto he served as Senior
Vice President of OrNda of South Florida, Inc., a subsidiary of the Company,
from July 1993 to June 1994. From January 1992 until June 1993, Mr. Krayer was
Chief Operating Officer of Florida Medical Center ("FMC"), a 459-bed acute care
hospital located in Fort Lauderdale, Florida, which was purchased by a
subsidiary of the Company in June 1993. From October 1989 until December 1991,
Mr. Krayer was Chief Financial Officer of FMC. From 1980 until October 1989 Mr.
Krayer was a partner of Ernst & Whinney (predecessor to Ernst & Young LLP).
Carol A. Murdock has been Senior Vice President - Business Development
and 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. ("Summit"), a hospital management company, from June 1993 until April 1994.
From November 1992 until May 1993, Ms. Murdock was Assistant Vice President/
Marketing of NME and from December 1990 until November 1992 she was Director,
Product Line Development, of NME. From 1988 until 1990, Ms. Murdock was employed
in various marketing positions with subsidiaries of LINC Financial Services.
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.
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
31
<PAGE>
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.
Mark Werber has been Senior Vice President - Operations of the Company
since April 1994. Prior thereto, Mr. Werber was Summit's Senior Vice President
in charge of its Arizona, Texas and Iowa hospital operations from October 1990
until April 1994. Prior to October 1990, Mr. Werber was Chief Executive Officer
of Summit's Tucson General Hospital, Tucson, Arizona.
In general, officers are elected by the Company's Board of Directors
annually and serve at the discretion of the Board of Directors. There are no
family relationships between any of the Company's executive officers or
directors.
32
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company's recent operating results were significantly affected by
mergers, acquisitions and divestitures as discussed below.
Mergers and Acquisitions. 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 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 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 and the February 1995 acquisition of three hospitals
and related businesses that comprise the St. Luke's Health System ("St. Luke's")
in Arizona.
Goodwill, net of amortization, increased approximately $43.9 million in
fiscal 1995 primarily from goodwill associated with the acquisition of St.
Luke's of $4.0 million; adjustments to goodwill associated with the acquisition
of Fountain Valley of $2.9 million; goodwill recorded 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 goodwill on the acquisition of Summit of $31.6 million. The
adjustments to the Summit 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.
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.
33
<PAGE>
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.
At August 31, 1994, the Company accrued $2.0 million for estimated
future operating losses of Pasadena General Hospital between the date of the
plan of disposition was committed to and the anticipated sales date. The accrual
for future operating losses was included as a component of the loss on asset
sales in fiscal year 1994. Pasadena General Hospital's financial operating
results are not included in the consolidated statement of operations for the
period September 1, 1994 through January 31, 1995 because they were charged to
the accrual. At January 31, 1995, the $2.0 million accrual was completely
utilized. Operating results for Pasadena General Hospital are included in other
operating expenses beginning with the month of February 1995, including the
costs of closing the facility, and will continue to be reported as such until
the hospital is sold. The operating results for Pasadena General Hospital for
the seven months ended August 31, 1995, were immaterial to the consolidated
operations of the Company. On November 17, 1994, the Emerging Issues Task Force
released a consensus on Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity" (EITF 94-3).
EITF 94-3 superseded previous accounting literature which required the accrual
of future operating losses on assets held for sale. If EITF 94-3 had been in
effect at August 31, 1994, the Company would have been required to include the
results of operations of Pasadena General Hospital in the consolidated statement
of operations and would have increased revenues by $4.6 million and operating
expenses would have increased $6.6 million resulting in a decrease in income
before income tax expense of $2.0 million for the year ended August 31, 1995.
The Company does not expect the above noted divestitures to have a
significant impact on future operations; however, any impact on future
operations is expected to be favorable since these facilities, on a combined
basis, incurred operating losses in the fiscal year ended August 31, 1994.
Geographic Market Concentration. The Company owns hospitals in greater
Los Angeles, South Florida and Arizona which generated the following percentages
of the Company's total revenue for the years ended August 31, 1995 and 1994,
respectively:
Number Percentage of Number Percentage of
of Fiscal 1994 of Fiscal 1995
Hospitals Total Revenue Hospitals Total Revenue
--------- ------------- --------- -------------
Greater Los Angeles 14 28.5% 15 34.8%
South Florida 5 26.4% 5 19.3%
Arizona 3 3.2% 6 8.9%
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To the extent favorable or unfavorable changes in regulations or market
conditions occur in the these markets, 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 28.8% and 27.5% of
actual gross patient revenue for the years ended August 31, 1995 and 1994,
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
1995. The Company expects the industry trend towards outpatient services to
continue as procedures currently being performed on an 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 Summit, Fountain Valley
and St. Luke's 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 Medicare, Medicaid and
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 5.7 days for the year
ended August 31, 1994 to 5.3 days for the year ended August 31, 1995. 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, 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.
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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 prior year primarily as a result of the acquisitions
discussed above. During fiscal 1995, the Company realized a reduction in
operating expenses of approximately $15.2 million as compared to the prior year
from efficiencies of combining the OrNda, AHM, and Summit corporate offices.
Actual salaries and benefits as a percentage of total revenue declined from
42.3% in fiscal 1994 to 41.4% 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, which owns or manages physician practice groups and
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
HMOs to third party providers. In addition, other operating expenses increased
$12.3 million of 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 8.1% ($36.3 million) primarily due to
inflationary increases; the Company's expansion into the management of physician
practice groups that typically employ higher salaried personnel than acute care
hospitals; 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 supply contracts in pharmaceuticals and other areas. Purchased
services increased 6.3% ($9.4 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 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.
The effect of price increases implemented by the Company's hospitals was
nominal as gross revenue from fixed reimbursement third party payors represented
approximately 85.6% of the Company's total gross revenue in 1995. Over the last
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<PAGE>
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 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 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 the termination of
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 bears interest at rates that fluctuate with market rates, such as
the Prime Rate or LIBOR. Over the past year, market interest rates have risen
causing the Company's interest expense to increase. Continuing 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, 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 is investments in Houston Northwest
Medical Center ("HNW") which primarily represented non-cash income related to
the Company's investment in HNW redeemable preferred stock. On February 28,
1994, the Company discontinued the equity method of accounting for the Company's
investment in HNW. See Note 3 to the accompanying consolidated financial
statements for further discussion of the Company's investments in HNW. HNW is
obligated to redeem the preferred stock in May 2002 and 2004 for the redemption
value of $62.5 million plus accrued cumulative dividends. If such preferred
stock were redeemed, the Company would discontinue recording any income on the
investment in HNW. Based on current projections, the redemption of the preferred
stock in fiscal years 2002 and 2004 would result in additional liquidity of
$21.5 million and $193.8 million, respectively, in those years. The redemption
of the preferred stock would have an insignificant impact on financial position
at the date of redemption as the investment in HNW is accounted for in
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<PAGE>
accordance with statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS No.
115) as an available-for-sale security. Under SFAS No. 115 the redemption of the
preferred stock would result in recognition of a realized gain on the redemption
with a corresponding decrease in unrealized gains under SFAS No. 115 with no
significant impact on financial position.
On September 27, 1995, the Company executed a letter of intent to
acquire the controlling equity interests in Houston Northwest Medical Center,
Inc. (HNMC) from the hospital's Employee Stock Ownership Plan (ESOP). Following
the transaction, HNMC would be a wholly owned subsidiary of the Company. The
Company's philosophy is to own and operate the significant hospitals in its
portfolio and not be a passive investor in such assets. Consistent with that
philosophy, the Company sought to acquire the remaining equity interests of HNW
and obtain 100% ownership to gain control of its investment and the operations
of the hospital itself. Obtaining control of the operations of HNW will result
in the non-cash income currently recorded on the Company's investment in HNW
preferred stock being converted to operating cash income. Such control would
also provide the Company with further assurance of realizing the liquidity of
its investment over the next few years as opposed to waiting until the preferred
stock redemption date in 2002 and 2004 as noted above. Once the Company controls
HNW, the hospital can participate in group purchasing contracts, utilization
management programs, negotiations with third party payors, and capital resource
management of a health care system and thereby improve the operating results of
the facility. In addition, the acquisition of HNW will result in the Company
owning a tertiary care facility in the Houston, Texas market to serve as the hub
for developing an integrated delivery system in that market. The acquisition, if
consummated, would result in significant changes in the balance sheet and
statement of operations in future periods. See Note 3 to the accompanying
consolidated financial statements for further discussion of the Company's
investments in HNW and the pending acquisition.
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
$235.0 million of tax loss and credit carryforwards at August 31, 1995, which
the Company has available to offset future taxable income. The AHM Merger (see
Note 1 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 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,
1995 will be realized through reversal of deferred tax liabilities.
38
<PAGE>
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.
Year Ended August 31, 1994 Compared with the Year Ended August 31, 1993.
Total revenue for the year ended August 31, 1994 increased over the
prior year by $312.6 million or 32.5% to $1.3 billion. The Company incurred a
$59.3 million net loss, $(1.62) per share, in fiscal 1994, which includes $90.1
million of non-recurring and extraordinary charges, compared to net income of
$9.8 million, $0.23 per share, in fiscal 1993.
The 32.5% increase in total revenue was primarily a result of (i) the
inclusion of $109.4 million total revenue of Florida Medical Center ("FMC") for
the year ended August 31, 1994 compared with $17.9 million in the prior-year
period; (ii) the inclusion of $176.8 million total revenue of Summit from the
date of the Summit Merger not included in the prior-year period; and, (iii) an
increase in the Company's admissions, exclusive of FMC and Summit, of 3.2%.
These increases were partially offset by a decrease in revenue from disposed
hospitals of $19.9 million.
Operating expenses for the year ended August 31, 1994 increased $343.0
million compared to fiscal 1993 primarily due to the inclusion of the following
in fiscal 1994 (i) $2.5 million of special executive compensation, (ii) $30.0
million of AHM Merger transaction expenses discussed previously, (iii) $45.3
million of loss on asset sales, (iv) $91.0 million of FMC expenses compared to
$14.8 million in the prior year period, (v) expenses of Summit facilities from
the date of the Summit Merger of $145.3 million not included in the prior-year
period. These increases were partially offset by a $15.0 million decrease in
expenses related to disposed facilities. Actual other operating expenses as a
percent of total revenue increased from 10.3% in fiscal 1993 to 12.3% in fiscal
1994 due to the acquisition of Summit on April 19, 1994. Summit owned or managed
physician practice groups and a Medicaid HMO which record the majority of
non-salary expenses as other operating expense. Other operating expenses in
fiscal 1994 includes approximately $9.9 million of claims payments made by the
Medicaid HMO to third party providers.
Actual salaries and benefits as a percentage of total revenue declined
from 42.5% in fiscal 1993 to 42.3% in fiscal 1994 mainly as a result of
reductions in corporate office personnel attained in combining the OrNda and AHM
Corporate offices.
On a same hospital basis total revenue increased $64.2 million. Same
hospital operating expense increased $58.7 million (8%) primarily as a result of
the increase in same hospital total revenue. On a same hospital basis, salaries
and benefits increased $33.0 million and as a percent of same hospital revenue
increased from 42.6% to 43.2% primarily due to the Company's expansion into the
management of physician practice groups that typically have higher salaried
employees than acute care hospitals. Supplies expense increased $7.8 million but
remained flat as a percent of same hospital revenue at 11.5%. Purchased services
increased $13.0 million and increased as a percent of same hospital revenue from
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14.9% to 15.2%, primarily due to implementation of new patient care programs
managed by outside vendors. The Company's other operating expenses on a same
hospital basis decreased approximately $2.9 million primarily related to savings
achieved in combining the insurance programs of "OrNda" and "AHM".
The provision for doubtful accounts on a same hospital basis increased
$8.1 million and as a percent of same hospital revenue increased from 6.6% in
fiscal 1993 to 7.0% in fiscal 1994 due to efforts to migrate billing and
collection activities for five hospitals from a central billing office back to
the individual hospitals. Such migration resulted in delays in billing and
collection activity which subjected the balances to the Company's reserving
methodology.
The effect of price increases implemented by the Company's hospitals
during these periods was nominal as gross revenue from fixed reimbursement third
party payors represented approximately 87.0% of the Company's total gross
revenue for fiscal 1994. Over the last several years, the portion of the
Company's total revenue derived from fixed reimbursement third party payors has
increased while rate 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 to 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 1993 and 1994 with the mergers with AHM and
Summit and the individual hospital acquisitions of FMC and Fountain Valley. 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 the year ended August 31, 1994
increased 40.1% ($19.1 million) over the prior year primarily due to $5.4
million of depreciation and amortization attributable to the operations of FMC
in fiscal 1994 compared with $0.9 million in the prior year, $6.4 million of
depreciation and amortization attributable to the operations of Summit not
included in the prior year, and $8.2 million for depreciation and amortization
of fiscal 1994 capital expenditures and debt issuance costs.
Interest expense for fiscal 1994 increased 21.5% ($14.8 million) as a
result of additional indebtedness incurred to finance the merger and acquisition
transactions and increases in market interest rates. Of the Company's total
indebtedness of $1.1 billion at August 31, 1994, approximately $511.4 million
bears interest at rates that fluctuate with market rates, such as the Prime Rate
or LIBOR. Over the past year, market interest rates have risen causing the
Company's interest expense to increase. Continuing increases in market rates
will adversely affect the Company's net income.
Minority interest expense decreased by approximately $0.6 million in
fiscal 1994 as compared to fiscal 1993, primarily as a result of the Company's
repurchase of joint venture interests.
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In fiscal years 1994 and 1993, the Company recorded $3.6 million and
$0.2 million of income respectively, related to its investments in Houston
Northwest Medical Center ("HNW"). On February 28, 1994, the Company discontinued
the equity method of accounting for its investments in HNW. See Note 3 to the
accompanying consolidated financial statements for further discussion of the
Company's investments in HNW. HNW is obligated to redeem the preferred stock in
May 2002 and 2004 for the redemption value of $62.5 million plus accrued
cumulative dividends. If such preferred stock were redeemed, the Company would
discontinue recording any income on the investment in HNW. See Note 3 to the
consolidated financial statements for further discussion of the Company's
investments in 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
$293.0 million of tax attribute carryforwards at August 31, 1994, which the
Company has available to offset future taxable income. The AHM Merger (see Note
2 to the accompanying 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 are thereafter subject to annual limitations (OrNda - $19
million; AHM - $16 million). For AHM, such tax attribute carryforwards can only
be applied against the prospective taxable income of the entities that
previously comprised AHM. These limitations may be increased for
"built-in-gains," as defined under the IRC, recognized during a five-year period
following the date of the merger. Management assesses the realizability of the
deferred tax assets on at least a quarterly basis and currently is satisfied,
despite the annual limitations, that it is more likely than not that the
deferred tax assets recorded at August 31, 1994 will be realized through
reversal of deferred tax liabilities.
For the year ended August 31, 1994, the Company recorded income tax
expense of $1.1 million on a pretax loss of $46.0 million primarily due to state
income taxes and federal alternative minimum tax.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1995, the Company had working capital of $5.4 million
compared with $6.8 million at August 31, 1994. The Company's cash portion of
working capital is managed primarily 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. The revolving
credit facility matures on October 30, 2001 and is classified as long-term debt
on the Company's balance sheet. At August 31, 1995, the Company had $157.3
million of borrowing capacity available for general corporate purposes and
acquisitions under its previous Credit Agreement. Such Credit Agreement was
amended and restated effective October 30, 1995, as noted below, to increase the
Company's borrowing capacity available to $388.9 million at October 30, 1995.
In fiscal 1995, the Company's operating activities provided cash of
$132.7 million. Cash from operations was used for the $21.2 million increase in
patient accounts receivable, net of the provision for doubtful accounts and cash
of $9.7 million was provided by the net change in other assets and liabilities.
In addition to net income, cash provided by operating activities is partially
attributable to reduced days revenue in accounts receivable. On an actual basis,
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the patient accounts receivable balance has increased due to the acquisition of
St. Luke's in February 1995. The revenues of St.Luke's have been included from
the date of purchase through August 31, 1995. Therefore, it appears on an actual
basis that days revenue in accounts receivable have increased significantly;
however, based on pro forma revenues which give effect to the acquisitions
during fiscal 1994 and 1995 as if they occurred on September 1 of each year,
days revenue in accounts receivable decreased from 59.9 days at August 31, 1994
to 58.9 days at August 31, 1995.
Net cash used in investing activities of $109.4 million during fiscal
1995 consisted primarily of capital expenditures of $71.9 million and $60.3
million for the acquisition of hospitals and related assets partially offset by
$18.9 million of proceeds related to asset sales and $12.5 million of payments
received on notes receivable. The Company's previous Credit Agreement limited
its annual capital expenditures to $75.0 million, plus carry-overs of certain
unused amounts from prior years as specified in the Credit Agreement. Net cash
used in financing activities for fiscal 1995 of $35.8 million resulted primarily
from the $40.9 million net decrease in revolving credit facilities and scheduled
principal payments on other debt offset by $7.0 million received from the
issuance of the Company's common stock.
On April 19, 1994, the Company entered into the Credit Agreement with a
syndicate of lenders to borrow up to $700.0 million, under which $480.2 million
of indebtedness was outstanding on August 31, 1995. On October 27, 1995, the
Company executed an amended and restated credit agreement (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, on October
30, 1995, the Company had $388.9 million of borrowing capacity available for
general corporate purposes and acquisitions. See Note 6 to the accompanying
consolidated financial statements for further discussion of the Restated Credit
Facility.
On August 23, 1994, the Company issued $125.0 million aggregate
principal amount of 11.375% senior subordinated notes due August 15, 2004. Net
proceeds of $121.0 million from the sale of the these notes was used to reduce
the Company's outstanding indebtedness under the Credit Agreement.
As of August 31, 1995, the Company has 1.3 million shares of PIK
preferred stock outstanding. The Company currently records paid in kind
dividends at the rate of 10% of the liquidation value of the PIK preferred. As
discussed in Note 8 to the accompanying consolidated financial statements, the
Company has the option to redeem the PIK preferred for $15 per share. Management
has not determined when to exercise its option to redeem the PIK preferred.
However, management believes that if the common stock price exceeds the $15 per
share redemption price, the PIK preferred shareholders will convert to common
stock rather than accept the $15 per share redemption price upon any redemption
by the Company.
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The Company believes that the cash flows generated by the Company's
operations together with availability of credit under the Company's Restated
Credit Facility will be sufficient to meet the Company's short and long-term
cash needs. However, the Company's net debt-to-total-capitalization ratio at
August 31, 1995 is 73.1%. Such leverage may limit the amount of additional
indebtedness available to the Company for acquisitions requiring capital in
excess of amounts currently available under the Restated Credit Facility.
Alternative financing may be available under other arrangements, such as
off-balance-sheet financing arrangements or additional equity offerings.
Earnings before interest, taxes, depreciation, amortization, income
(loss) from investments in Houston Northwest Medical Center and non-recurring
charges(1) ("Adjusted EBITDA") for the year ended August 31, 1995 increased
49.2% from the prior year to $261.8 million. While Adjusted EBITDA should not be
construed as a substitute for net income or a better indicator of liquidity than
cash flow from operating, investing or financing activities, which are
determined in accordance with generally accepted accounting principles, it is
included herein to provide additional information with respect to the ability of
the Company to meet its future debt service, capital expenditure and working
capital requirements. The calculations of Adjusted EBITDA for the years ended
August 31, 1993, 1994 and 1995 are as follows:
1993 1994 1995
---- ---- ----
Total Revenue $961,795 $1,274,359 $1,842,701
Less:Salaries and benefits 408,770 539,325 762,879
Supplies 112,487 158,884 236,189
Purchased Services 145,150 153,922 247,801
Provision for doubtful accounts 63,907 86,249 122,193
Other operating expenses 99,336 156,474 211,606
Minority Interest 4,601 3,999 240
-------- ---------- ----------
Adjusted EBITDA $127,544 $ 175,506 $ 261,793
======== ========== ==========
The ratio of earnings to fixed charges and preferred stock dividends
for the years ended August 31, 1993, 1994 and 1995 was 1.14, 0.51, and 1.61,
respectively. Fixed charges and preferred stock dividends exceeded earnings by
$49.1 million in fiscal 1994 as earnings were reduced by non-recurring
charges(1) of $77.8 million consisting of $45.3 million of loss on asset sales,
$30.0 million of merger transaction expenses and $2.5 million of special
executive compensation. The ratio of earnings to fixed charges and preferred
stock dividends is calculated by dividing earnings before income taxes plus
fixed charges by the sum of fixed charges which consists of interest expense,
amortization of financing costs, preferred stock dividends, and the portion of
rental expense which is deemed to be representative of the interest component of
rental expense. 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.
On October 2, 1995, the Company filed a S-3 Registration Statement with the
Securities and Exchange Commission (the "SEC") to sell 10,000,000 million shares
- ----------
(1) Non-recurring charges in 1995 consisted of $973,000 of
loss on asset sales. Non-recurring charges in 1994 consisted of $2.5 million of
special executive compensation, $30.0 million of merger transaction expenses,
$45.3 million of loss on asset sales and $12.3 million of extraordinary items.
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of common stock. On October 31, 1995, the Registration Statement was declared
effective by the SEC and the public offering of the shares commenced at a
$17.625 per share price. The net proceeds of approximately $168.0 million to the
Company from its sale of the 10,000,000 shares of common stock in the offering,
after deducting estimated offering expenses and the underwriting discounts, will
be used to reduce indebtedness under the Restated Credit Facility, which matures
on October 30, 2001, and for general corporate purposes, including acquisitions.
Any unused capacity under the Restated Credit Facility (including the increased
capacity available due to the amount repaid with the net proceeds of the
offering), will be available for general corporate purposes, including strategic
acquisitions.
As discussed in more detail in Note 4 to the accompanying consolidated
financial statements, the IRS is currently engaged in an examination of the
federal income tax returns for fiscal years 1984, 1985 and 1986 of Summit, which
subsequent to the Company's acquisition thereof in April 1994 merged into the
Company. Summit has received a revenue agent's report with proposed adjustments
for the years 1984 through 1986 aggregating as of August 31, 1995 approximately
$16.6 million of income tax, $58.1 million of interest on the tax, $43.9 million
of penalties and $18.7 million of interest on the penalties. Summit has filed a
protest opposing the proposed adjustments. The Company believes that Summit
properly reported its income and paid its taxes in accordance with applicable
laws and in accordance with previous agreements established with the IRS. The
Company believes that the final outcome of the IRS's examinations of Summit's
prior years' income taxes will not have a material adverse effect on the results
of operations or financial position of the Company.
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.
As of August 31, 1995, the Company had approximately $480.2 million of
debt outstanding under the previous Credit Agreement with an interest rate of
Prime plus 1.25% or LIBOR plus 2.25% subject to upward and downward adjustments
based on certain financial ratios. The Restated Credit Facility provides
improved interest rates based on the Company's leveraged 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 $5.0 million increase in annual interest expense based
upon the Company's indebtedness outstanding at August 31, 1995.
OUTLOOK
Revenue Trends. Future trends for revenue and profitability are difficult
to predict; however, the Company believes there will be continuing pressure to
reduce costs and develop integrated delivery systems with geographically
concentrated service capabilities. Accomplishment of these objectives can be
44
<PAGE>
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 still highly
probable as the investor-owned hospitals represent only approximately 13.5% of
the hospital industry as of December 31, 1993.
Health Care Reform. The Company derives a substantial portion of its
revenue from third party payors, including the Medicare and Medicaid programs.
During its fiscal years ended August 31, 1993, 1994, and 1995 the Company
derived an aggregate of 61.5%, 63.7%, and 58.7%, 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 especially since, in
order to reach a balanced budget by the year 2002, in June 1995 the U.S. House
of Representatives and the U.S. Senate passed budget reconciliation bills
providing for $270 billion in savings under the Medicare program over seven
years by reducing the growth rate of the program to approximately 6% a year from
10% and $169 billion and $172 billion in savings under the Medicaid program in
the House and Senate versions, respectively, by converting the federal share of
the program to a block grant to the states and by gradually reducing growth to
approximately 5% to 6% a year from 10%. 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 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 healthcare
services will continue to require significant expenditures for new equipment and
updating of physical facilities. The Company believes that the cash flows
generated by the Company's operations together with availability of credit under
the Company's 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 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.
45
<PAGE>
Marketing Expense. Marketing expense is expected to increase in the
future as the Company increases efforts to gain market share in its areas of
geographic concentration. Additional marketing will be necessary to increase
awareness of the services provided by the Company's facilities in the local
market place and distinguish it's facilities from their competitors.
Tax Rate. The Company expects its effective tax rate to increase to
approximately 24% for fiscal 1996 due to a reduction of net operating losses
available for utilization as compared to prior periods. This estimated rate does
not reflect the effect of any pending acquisitions which may cause the rate to
increase.
Stock. The Company's stock price is subject to significant volatility.
If revenues or earnings fail to meet expectations of the investment community,
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 Company believes it has the asset portfolio and financial resources
necessary for continued success, but revenue and profitability trends cannot be
precisely determined at this time.
46
<PAGE>
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-27.
47
<PAGE>
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.
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
23.1 Consent of Ernst & Young LLP
27 Financial Data Schedule (included only in filings under the
Electronic Data Gathering Analysis and Retrieval System)
48
<PAGE>
SIGNATURE (Amendment No. 1)
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
ORNDA HEALTHCORP
BY: (Signature)
Phillip W. Roe
Vice President and Controller
Date: June 17, 1996
49
<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, 1993, 1994 and 1995 ........................ F-3
Consolidated Balance Sheets-August 31, 1994 and 1995 ....... F-4
Consolidated Statements of Shareholders' Equity-
Years Ended August 31, 1993, 1994 and 1995 ............ F-5
Consolidated Statements of Cash Flows-Years Ended
August 31, 1993, 1994 and 1995 ........................ 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-28
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, 1994 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended August 31, 1995. 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, 1994 and 1995, and the consolidated
results of operations and cash flows for each of the three years in the period
ended August 31, 1995, 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.
As discussed in Note 1 to the consolidated financial statements, OrNda
HealthCorp and Subsidiaries changed the method of accounting for certain
investments in debt and equity securities in the year ended August 31, 1994.
/s/
Ernst & Young LLP
Nashville, Tennessee
October 10, 1995, except for paragraph 7
of Note 6 and paragraph 9 of Note 8, as to
which the dates are October 27, 1995 and
October 31, 1995, respectively
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>
1993 1994 1995
---------- ----------- ------------
Total Revenue $ 961,795 $ 1,274,359 $ 1,842,701
Costs and Expenses:
Salaries and benefits 408,770 539,325 762,879
Supplies 112,487 158,884 236,189
Purchased services 145,150 153,922 247,801
Provision for doubtful accounts 63,907 86,249 122,193
Other operating expenses 99,336 156,474 211,606
Depreciation and amortization 47,669 66,765 85,170
Interest expense 68,660 83,428 109,100
Interest income (3,380) (2,862) (4,582)
Special executive compensation -- 2,530 --
Merger transaction expenses -- 29,992 --
Loss (gain) on asset sales -- 45,272 (973)
Minority interest 4,601 3,999 240
----------- ------------ -----------
14,595 (49,619) 73,078
Income from investments in Houston
Northwest Medical Center 173 3,634 14,006
----------- ------------ -----------
Income (loss) before income tax
expense and extraordinary items 14,768 (45,985) 87,084
Income tax expense 1,129 1,057 15,772
----------- ------------ -----------
Income (loss) before extraordinary items 13,639 (47,042) 71,312
Extraordinary items (3,842) (12,296) --
----------- ------------ -----------
Net income (loss) 9,797 (59,338) 71,312
Preferred stock dividend requirements (1,699) (1,867) (2,000)
----------- ------------ -----------
Net income (loss) applicable to common
and common equivalent shares $ 8,098 $ (61,205) $ 69,312
=========== ============ =============
Earnings (loss) per common and common equivalent share:
Income (loss) before extraordinary items $ 0.34 $ (1.29) $ 1.53
Extraordinary items (0.11) (0.33) --
----------- ------------ -------------
Net income (loss) $ 0.23 $ (1.62) $ 1.53
=========== ============ =============
Earnings (loss) per common share assuming full dilution:
Income (loss) before extraordinary items $ 0.34 $ (1.29) $ 1.51
Extraordinary items (0.11) (0.33) --
----------- ------------ -------------
Net income (loss) $ 0.23 $ (1.62) $ 1.51
=========== ============ =============
Weighted average common and dilutive
common equivalent shares outstanding 34,960 37,879 45,294
=========== ============ =============
Weighted average common shares outstanding
assuming full dilution 35,117 37,879 47,382
=========== ============ =============
</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>
1994 1995
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 17,374 $ 4,963
Patient accounts receivable net of allowance
for uncollectibles of $59,855 and $58,632 at
August 31, 1994 and 1995, respectively 276,536 307,601
Supplies, at cost 27,511 34,097
Other 39,344 57,052
------------ ------------
Total Current Assets 360,765 403,713
Property, Plant and Equipment, at cost:
Land 127,195 126,436
Buildings and improvements 845,633 870,352
Equipment and fixtures 301,246 359,979
------------ ------------
1,274,074 1,356,767
Less accumulated depreciation and amortization 222,924 288,410
------------ ------------
1,051,150 1,068,357
Investments in Houston Northwest Medical Center 82,134 73,755
Excess of Purchase Price Over Net Assets Acquired,
net of accumulated amortization 274,101 318,029
Other Assets 78,393 82,550
------------ ------------
$ 1,846,543 $ 1,946,404
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 102,610 $ 117,258
Accrued expenses and other liabilities 210,845 220,851
Current maturities of long-term debt 40,509 60,182
------------ ------------
Total Current Liabilities 353,964 398,291
Long-term Debt 1,067,088 1,013,423
Other Liabilities 97,385 141,552
Shareholders' Equity:
Convertible preferred stock,
$.01 par value, 10,000,000 authorized
shares, issued 1,310,413 and 1,329,701 shares at
August 31, 1994 and 1995, respectively 19,825 20,112
Common stock, $.01 par value,
authorized 200,000,000 shares,
issued and outstanding 43,450,576 and
44,877,804 shares at August 31, 1994 and 1995,
respectively 434 449
Additional paid-in capital 402,320 414,805
Retained earnings (deficit) (165,332) (94,020)
Unrealized gains on available-for-sale
securities, net of tax 70,859 51,792
------------ -------------
328,106 393,138
------------ -------------
$ 1,846,543 $ 1,946,404
============ =============
</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
Common Stock Preferred Stock Additional Retained
------------------- ------------------ Paid-In Earnings
Shares Amount Shares Amount Capital (Deficit) Other
------ ------ ------ ------ ---------- --------- -----
BALANCE AT AUGUST 31, 1992 33,355 $ 334 1,082 $ 16,363 $ 292,158 $ (115,233) $ (7,740)
Issuance of common stock 1,128 11 -- -- 8,678 -- --
Paid-in-kind dividends on
PIK preferred -- -- 112 1,699 (1,699) -- --
Payment of stock note receivable 7,740
Net income -- -- -- -- -- 9,797
------ --------- ----- -------- --------- ----------- ---------
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 dividends 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
====== ========= ===== ======== ========= =========== ==========
</TABLE>
See 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>
1993 1994 1995
---- ---- ----
CASH FLOW PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ $ 9,797 $ (59,338) $ 71,312
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Non-cash portion of (income) loss from investments in
Houston Northwest Medical Center 732 (1,049) (11,344)
Non-cash portion of special executive compensation -- 2,530 --
Loss (gain) on asset sales (99) 45,272 (973)
Extraordinary items 3,842 12,296 --
Depreciation and amortization 47,669 66,765 85,170
Provision for doubtful accounts 63,907 86,249 122,193
Amortization of debt discount 1,188 411 33
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 (83,565) (93,089) (143,348)
Other current assets (532) 5,943 (9,379)
Other assets (371) (5,230) (3,087)
Accounts payable, accrued
expenses and other current liabilities 7,489 (10,744) 18,690
Other liabilities (337) (25,017) 3,452
Other -- (2,162) --
----------- ----------- ----------
Net cash provided by operating activities 49,720 36,003 132,719
----------- ----------- ----------
CASH FLOW USED IN INVESTING ACTIVITIES:
Acquisitions of hospitals and related assets (159,333) (361,475) (60,251)
Proceeds from sales of assets -- 6,893 18,912
Capital expenditures (35,558) (47,724) (71,910)
Issuance of notes receivable (5,967) (7,025) (2,810)
Payments received on long-term notes and other receivables 5,030 1,572 12,484
Other investing activities (467) 7,453 (5,789)
----------- ----------- ----------
Net cash used in investing activities (196,295) (400,306) (109,364)
----------- ----------- ----------
CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Issuance of stock 440 6,293 7,029
Principal payments on long-term debt borrowings (161,563) (486,151) (142,071)
Proceeds received on long-term debt borrowings 264,964 860,865 101,177
Financing costs incurred in connection with long-term borrowings -- (21,207) (637)
Payments received on shareholder note receivable 7,740 -- --
Other -- (1,147) (1,264)
----------- ----------- ----------
Net cash provided by (used in) financing activities 111,581 358,653 (35,766)
----------- ----------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (34,994) (5,650) (12,411)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 60,908 25,914 17,374
Pooling adjustment to beginning of period balance to
conform AHM's fiscal year -- (2,890) --
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 25,914 $ 17,374 $ 4,963
=========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 62,845 $ 86,575 $ 108,598
Income taxes 1,415 387 1,825
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Preferred stock dividends 1,699 1,867 2,000
Stock issued for acquisitions of hospitals and related assets 8,250 96,212 3,965
Capital lease obligations incurred 7,047 4,346 2,605
</TABLE>
See the accompanying notes.
F-6
<PAGE>
ORNDA HEALTHCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1995
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 medical/surgical hospitals located primarily in the southern and
western United States. On April 19, 1994, the Company exchanged shares of its
common stock for all the outstanding common stock of American Healthcare
Management, Inc. ("AHM"), and merged AHM with and into the Company (the "AHM
Merger"). The transaction was accounted for as a pooling-of-interests and,
accordingly, the accompanying consolidated financial statements give retroactive
effect to the AHM Merger and, therefore, include the combined operations of the
Company and AHM (see Note 2). Where such reference is necessary to enhance the
understanding of the information presented, OrNda HealthCorp, excluding the
accounts of AHM, is hereafter referred to as "OrNda." Also on April 19, 1994,
OrNda purchased all the outstanding common stock of Summit Health Ltd.
("Summit") pursuant to a merger of SHL Acquisition Co., a wholly owned
subsidiary of the Company, with and into Summit (the "Summit Merger"). The
Summit Merger was accounted for as a purchase.
Consolidation: The consolidated financial statements include the accounts
of the Company, its majority owned subsidiaries 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 interest" 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.
Geographic Concentration: Of the 46 hospitals operated by the Company at
August 31, 1995, 18 hospitals are located in California of which 15 hospitals
are located in the greater Los Angeles, California area. In addition, five
hospitals are located in Florida and six hospitals are located in Arizona. The
concentration of hospitals in California, 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.
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 49%, 57%, and 51% of total net patient service
revenue for the years ended August 31, 1993, 1994, and 1995, respectively. The
provision for contractual adjustments and discounts on revenues from third party
payors was $0.8 billion, $1.3 billion and $2.2 billion for the years ended
August 31, 1993, 1994 and 1995, respectively. Such amounts were deducted from
gross patient revenue to determine net patient service revenue. 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 differences. The provision is an
estimate based upon published technical rules, historical experience,
F-7
<PAGE>
predetermined payment rates by diagnosis, fixed per diem rates and
discounts from established charges. The Company is contesting certain issues
raised in audits of prior year cost reports. Amounts related to contested issues
have been included in the provision.
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 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.
Income Taxes: In connection with the AHM Merger, the Company retroactively
applied the provisions of Statement of Financial Accounting Standards No.109
"Accounting for Income Taxes" (SFAS No. 109) as of September 1, 1990 to conform
its method of accounting with that of AHM. Under SFAS No. 109, an asset and
liability approach for financial accounting and reporting for income taxes is
required. The impact of the implementation of SFAS No. 109 was not significant
to the deferred tax balances or the consolidated income tax rate.
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 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 both fiscal 1993 and
1995. The effect of stock options and warrants was anti-dilutive for fiscal
1994.
Earnings (loss) per common share assuming full dilution assumes the
conversion of the Company's redeemable convertible preferred stock into common
shares in fiscal 1995. The effect of the redeemable convertible preferred stock
was anti-dilutive in fiscal 1993 and 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.
Investments: The Company adopted Statement of Financial Accounting Standard
No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS
No. 115) on September 1, 1993. All investments accounted for under SFAS No. 115
at August 31, 1995 were classified as available-for-sale or trading.
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 $29.9 million and $27.2 million
at August 31, 1994 and 1995, respectively. The Company capitalized interest
costs of $1.3 million related to construction in progress for the years ended
August 31, 1994 and 1995.
F-8
<PAGE>
Intangible Assets: Deferred financing costs of $33.3 million and $29.8
million at August 31, 1994 and 1995, 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 $2.9 million and $7.1 million at
August 31, 1994 and 1995, respectively.
The Excess of Purchase Price Over Net Assets Acquired ("goodwill") of
$274.1 million and $318.0 million at August 31, 1994 and 1995, respectively, is
primarily related to the acquisitions of St. Luke's Health System ("St. Luke's")
in fiscal 1995; Summit Health, Ltd. ("Summit") and Fountain Valley Regional
Hospital and Medical Center ("Fountain Valley") in fiscal 1994; and Florida
Medical Center and Golden Glades Regional Medical Center in fiscal 1993.
Goodwill is amortized on a straight line basis and the amortization period (30
years for goodwill related to the acquisitions of Summit and Fountain Valley; 20
years for goodwill related to the acquisition of St. Luke's; and, 40 years for
all other acquisitions) is based upon the estimated economic lives of the
hospital buildings acquired (except for leased facilities such as St. Luke's
whose amortization period is the lesser of the lease term or the estimated
economic life of the hospital building) 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 $5.4 million and $15.9 million at August
31, 1994 and 1995, 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," 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. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company currently plans to adopt
Statement 121 in the first quarter of fiscal 1997 and, based on current
circumstances, does not believe the effect of adoption will be material.
Professional Liability Insurance: At August 31, 1994 and 1995, 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, 1995, 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, 1995, 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.
At August 31, 1993, the general and professional liability risks of the
Company were self-insured on a per-occurrence basis (OrNda--up to $2.5 million;
AHM--up to $3.0 million) and on an aggregate-per-claim-year basis (OrNda--$17.0
million; AHM--$9.0 million). OrNda and AHM carried general and professional
liability insurance from an unrelated commercial carrier for losses above the
self-insurance limits to $25.0 million. Liabilities for self-insured
professional and general liability risks at August 31, 1993, for both asserted
and unasserted claims, are based on actuarially projected estimates discounted
at an average rate (OrNda--8.0% for fiscal 1993; AHM--7.5% for fiscal 1993) to
their present value based on historical loss payment patterns.
F-9
<PAGE>
NOTE 2 - MERGER, ACQUISITION AND DISPOSITION TRANSACTIONS
Fiscal 1995
St. Luke's Health System
Effective February 13, 1995, the Company acquired three hospitals and
related businesses that comprise the St. Luke's Health System ("St. Luke's") in
the Phoenix, Arizona metropolitan area. For the year ended June 30, 1994, the
total revenue and net income of St. Luke's were $144.2 million and $5.0 million,
respectively. The purchase price for St. Luke's was $120.3 million, subject to
certain adjustments, paid with $3.0 million of the Company's common stock, $65.0
million of cash from an unrelated real estate investment trust for the purchase
of certain St. Luke's realty which has been leased to the Company, $23.3 million
of cash financed under the Company's Credit Agreement and $29.0 million of cash
obtained in the acquisition of St. Luke's. In connection with the acquisition,
the Company acquired assets with a fair value of $45.9 million and assumed
liabilities of $23.6 million and recorded $4.0 million of goodwill. Purchase
price adjustments for St. Luke's have not been finalized as of August 31, 1995
and are not expected to be material.
Pro forma results of operations for the year ended August 31, 1994 and
1995 are summarized below (in thousands, except per share data). The pro forma
information assumes that the acquisition of St. Luke's, as well as the Summit
Merger and the fiscal 1994 acquisition of Fountain Valley, and the effects of
the Restated Credit Facility (see Note 6), occurred on September 1, 1993 and
1994, respectively.
1994 1995
--------------- -------------
Total revenue $ 1,828,445 $ 1,902,980
Income (loss) before extraordinary items (22,762) 73,744
Income (loss) applicable to common shares (24,629) 71,744
Net income (loss) per common share (0.58) 1.58
Net income (loss) per common share
assuming full dilution $ (0.58) $ 1.55
Suburban
Effective November 1, 1994, the Company acquired Suburban Medical Center,
a 184 licensed-bed hospital located in Paramount, California. The purchase was
financed with working capital of the Company and was accounted for using the
purchase method of accounting. In connection with the acquisition, the Company
acquired assets with a fair value of $5.2 million, assumed liabilities of $2.2
million and recorded $1.6 million of goodwill. Purchase price adjustments for
Suburban were finalized as of August 31, 1995.
Other
During the fourth quarter of fiscal 1994, management 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.
The Company consummated the sale of the Gibson Hospital effective October 31,
1994. 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 the facility 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 reassumed management of the facility until the facility was
closed on May 14, 1995. On July 7, 1995, the Company entered into a definitive
sale 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 approximately
$5.7 million which was recorded in the third quarter of fiscal 1995. At August
31, 1994, the Company accrued for $2.0 million of future operating losses of
F-10
<PAGE>
Pasadena General Hospital for estimated losses between the date of plan of
disposition was committed to and the anticipated sales date. The accrual of
future operating losses was included as a component of the loss on asset sales
in fiscal year 1994. Pasadena General Hospital's financial operating results
have not been included in the consolidated statement of operations for the
period September 1, 1994 through January 31, 1995 because they have been charged
to the accrual. At January 31, 1995, the $2.0 million accrual was completely
utilized. Operating results for Pasadena General Hospital were included as other
operating expense beginning with the month of February 1995, including the costs
of closing the facility, and will continue to be reported as such until the
hospital is sold. The operating results for Pasadena General Hospital for that
period were immaterial to consolidated operations. Effective December 31, 1994,
the Company sold Ross Hospital, a 92-bed psychiatric facility in Kentfield,
California. The Company does not expect the divestitures to have a significant
impact on future operations; however, any impact on future operations is
expected to be favorable since these facilities, on a combined basis, incurred
operating losses in the most recent fiscal year.
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 the gain on asset sales, net of the loss on the sale of Pasadena
General Hospital noted above.
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 SFAS 115. 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.
Fiscal 1994
AHM
On April 19, 1994, the Company completed a merger with AHM, a health care
services company engaged in the operation of general acute care hospitals. AHM
owned or leased 16 hospitals in 9 states, with a total of 2,028 licensed beds.
The AHM Merger was accounted for as a pooling of interests and the accompanying
consolidated financial statements give retroactive effect to the AHM Merger by
combining operations of OrNda and AHM. 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 operating results of AHM for the year ended
September 30, 1993 was 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.
F-11
<PAGE>
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
Year ended August 31, 1993:
Total revenue $ 624,847 $ 336,948 $ 961,795
Extraordinary items -- (3,842) (3,842)
Net income 770 9,027 9,797
In the third quarter of 1994, the Company recorded the following
nonrecurring charges in connection with the AHM Merger (in thousands):
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>
At August 31, 1995, all of the 80 employees identified for termination in
connection with the AHM Merger had been terminated. Termination benefits of $5.4
million and $3.5 million were paid under the termination plan in the years ended
August 31, 1994 and 1995, respectively. Accrued severance expenses of $0.6
million remains outstanding at August 31, 1995. In addition to the termination
benefits noted above, all other accruals for information systems consolidations,
investment advisory and professional fees and other merger expenses have been
paid as of August 31, 1995.
Summit
On April 19, 1994, the Company also completed a merger with Summit Health
Ltd. (the "Summit Merger"), a health care services company engaged in the
operation of (i) general acute care hospitals, (ii) a managed care entity
contracting to provide services to the Arizona Health Care Cost Containment
System, and (iii) outpatient surgery centers. Summit owned or leased 12 acute
care hospitals in 4 states with a total of 1,611 licensed beds. The Summit
Merger was accounted for as a purchase and, accordingly, the consolidated
financial statements give effect to and include the combined operations of the
Company and Summit as of the date of the acquisition. Summit shareholders
received $5.50 in cash and 0.2157 shares of 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. 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. Final adjustments to goodwill on the acquisition of Summit
of $31.6 million were recorded in fiscal 1995 and 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.
F-12
<PAGE>
Fountain Valley
Effective July 31, 1994, the Company acquired Fountain Valley Regional
Hospital and Medical Center ("Fountain Valley"), located in Fountain Valley,
California. The total purchase price of approximately $105.2 million was paid in
cash and accounted for as a purchase. The transaction also included
approximately $41.0 million paid by an unrelated real estate investment trust
which purchased and is leasing to the Company certain of Fountain Valley's real
estate. 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.
Purchase price adjustments for Fountain Valley were finalized as of August 31,
1995.
Other
During fiscal 1994, the Company, in separate transactions, sold or entered
into agreements to sell four hospitals for $11.5 million in cash and a long-term
lease agreement with an option to purchase one of the properties. The
dispositions resulted in a loss of $45.3 million.
Fiscal 1993
Golden Glades
In March 1993, OrNda acquired Golden Glades, a 352 licensed-bed hospital
in Miami, Florida, and related assets for one million shares of the Company's
common stock and $2.5 million in cash. In addition, the Company assumed and
retired $23.1 million of indebtedness of Golden Glades. The purchase was
financed with working capital of the Company and was accounted for using the
purchase method of accounting. In connection with the acquisition, the Company
acquired assets with a fair value of $32.0 million and assumed liabilities of
$14.8 million.
Florida Medical Center
In June 1993, OrNda acquired Florida Medical Center ("FMC"), a 459
licensed-bed hospital in Fort Lauderdale, Florida and related assets for $113.1
million in cash. The acquisition was financed through bank credit agreements and
has been accounted for using the purchase method of accounting. In connection
with the acquisition, the Company acquired assets with a fair value of $111.1
million and assumed liabilities of $37.6 million. Purchase price adjustments for
Golden Glades and FMC were finalized as of August 31, 1994.
If the acquisition of FMC had occurred on September 1, 1992, results of
operations for fiscal 1993, on a pro forma basis, would have been as reflected
below (in thousands except per share data):
Total revenue $ 1,060,662
Net income 17,388
Net income perare $ .50
Other
During fiscal 1993, OrNda, in separate transactions, terminated an
agreement to sell an acute medical-surgical hospital with 495 licensed beds that
was entered into in fiscal 1992. In November 1992, the Company reacquired Ross
General Hospital from Horizon Mental Health Services, Inc. ("Horizon") and
restructured the terms of the amounts due from Horizon. At the time, the Company
owned 44% of Horizon common stock and accounted for Horizon using the equity
method of accounting.
F-13
<PAGE>
NOTE 3-HOUSTON NORTHWEST ESOP AND OTHER HEALTH CARE-RELATED INVESTMENTS
Houston Northwest Medical Center ("HNW"), which is not operated by the
Company, is a 494-bed acute care facility located in Houston, Texas. Prior to
February 28, 1994, the Company's investments in HNW consisted of (i) 100% of
HNW's common stock; (ii) two classes of mandatorily redeemable preferred stock
with a redemption value of $62.5 million; and, (iii) a mortgage note receivable
with a balance of $7.5 million at August 31, 1995. In applying the equity method
of accounting for the investment prior to February 28, 1994, the Company's
investment in mandatorily redeemable preferred stock of HNW was considered an
"advance" to HNW and was combined with the common stock. As a result, 100% of
HNW's losses attributable to its common stock were recognized as losses to the
Company and reduced the Company's combined investments in HNW.
On February 28, 1994, the Company irrevocably transferred its investment
in common stock of HNW to the HNW Employee Stock Ownership Plan ("ESOP") and HNW
for nominal consideration. The effect of this transfer eliminated the
requirement for the Company to apply the equity method of accounting subsequent
to February 28, 1994. Accordingly, beginning March 1, 1994, the Company no
longer recognizes HNW income or losses on the equity method. The Company's
method of income recognition for its investments in HNW's mandatorily redeemable
preferred stock is described below.
a. Accretion of the HNW mandatorily redeemable preferred stock using the
interest method
b. Recognition of cash dividends paid by HNW
c. Accrual of cumulative, compounded, mandatorily redeemable dividends not
paid by HNW
Recognition of income is subject to such amounts being probable of
collection. For each reporting period, from the date of the Company's
reorganization to the current date, the Company has determined the carrying
amount of the preferred stock, including the amount recognized as income, was
probable of collection. In reaching its conclusion, the Company considered the
following factors:
a. HNW has experienced income from operations before ESOP contributions in
each fiscal year subsequent to the reorganization
b. HNW has experienced significant positive cash flows from
operations in each fiscal year subsequent to the reorganization
c. HNW has met all of its obligations, including scheduled payments of
the ESOP debt and cash dividends payable on the HNW Series A
mandatorily redeemable preferred stock (held by the Company), in each
fiscal year subsequent to the reorganization
d. As HNW pays down the ESOP debt, the probability that the
Company's investments in mandatorily redeemable preferred stock will be
realized is increased
e. Independent valuations of the mandatorily redeemable preferred stock
have consistently exceeded amounts recognized on a cumulative basis
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115). The Company adopted SFAS No. 115 on
September 1, 1993, which resulted in an $81.7 million increase in investments in
HNW and other assets and an offsetting increase in shareholders' equity for
unrealized gains (net of tax) on available-for-sale securities (of which $79.7
million related to the HNW mandatorily redeemable preferred stock). There was no
income tax effect because of the availability of book tax attribute
carryforwards to offset the excess book basis over the tax basis of the
investments. The Company reviews the fair value of
F-14
<PAGE>
its investments on a quarterly basis and in fiscal 1994 and 1995,
investments in HNW and other assets were reduced $10.8 million (of which $8.8
million related to the Company's investments in HNW) and $19.1 million,
respectively, to fair value at August 31, 1994 and 1995 (with an offsetting
reduction to shareholders' equity). Such reductions are primarily due to an
increase in the book value of the investment of $8.8 million and $10.7 million
in 1994 and 1995, respectively, and due to an increase in long-term interest
rates used to discount future cash flows from HNW's operations from 12.5% at
September 1, 1993 to 16.0% at August 31, 1995. To the extent long-term interest
rates continue to increase, the fair value of the Company's investments on HNW
will decrease in future periods. Such decreases would be offset to some extent
by the reduction in period of time until the redemption date and the impact that
reduction in time has on the discounted cash flow analysis.
HNW's financial position as of August 31 and results of operations for the
years then ended are summarized below (in thousands):
<TABLE>
Year Ended August 31,
-------------------------------------
<S> <C> <C> <C>
1993 1994 1995
-------- -------- ---------
Results of Operations:
Total revenue $160,119 $152,640 $ 156,754
ESOP contribution expense 7,210 13,450 8,625
Other costs and expenses 149,004 142,766 143,238
Income (loss) before extraordinary
item and cumulative effect of
change in accounting for income taxes 2,665 (3,802) 2,781
Net income (loss) 3,753 (3,802) 2,781
Net loss applicable to common shareholders
(through February 28, 1994) $(11,352) $ (9,136) $ --
August 31,
----------------------
1994 1995
---------- ----------
Balance Sheet Data:
Current assets $ 40,196 $ 37,553
Noncurrent assets 145,919 138,440
Current liabilities 34,838 32,658
Noncurrent liabilities 129,354 111,704
Convertible preferred stock held by ESOP 46,806 59,300
Redeemable preferred stock owned by OrNda 102,616 106,404
Common shareholders' deficit $(127,499) $(134,073)
</TABLE>
Summarized below are the Company's income from investments in HNW for each
of the past three fiscal years and the Company's amortized cost basis of its
investments in HNW at August 31 (in thousands):
<TABLE>
<S> <C> <C> <C>
1993 1994 1995
---------- ----------- ----------
Company's equity in loss of HNW (non-cash) $ (11,352) $ (9,135) $ --
Non-cash income from investments in HNW 10,620 10,184 11,344
---------- ----------- ----------
(732) 1,049 11,344
Cash income from investments in HNW 905 2,585 2,662
---------- ----------- ----------
Income from investments in HNW $ 173 $ 3,634 $ 14,006
=========== ========== ==========
Company's amortized cost basis of investments
in HNW at August 31 $ 10,912 $ 11,275 $ 21,963
=========== ========== ==========
</TABLE>
F-15
<PAGE>
Subsequent Event - Letter of Intent to Acquire HNW
On September 27, 1995, the Company executed a letter of intent to acquire
HNW for a total purchase price of $153.6 million, subject to certain
adjustments, which will be payable in cash of $125.0 million to the ESOP
financed under the Company's Restated Credit Facility (as defined below) and the
assumption and repayment of $28.6 million of debt. The acquisition would include
the working capital of HNW and the assumption of $5.7 million in other long term
liabilities in addition to the $28.6 million of debt noted previously. The
proposed acquisition of HNW, which will result in the cancellation of the
mandatorily redeemable preferred stock, will be accounted for under the purchase
method of accounting resulting in the elimination of the unrealized gain on
available for sale securities from the equity section of the balance sheet and a
corresponding decrease in the book value of the investment in HNW to the
amortized cost basis of $22.0 million. The Company's amortized cost basis of the
investment in HNW and the additional proceeds paid to acquire 100% ownership
will become the basis of the Company's investment in HNW. If the acquisition of
HNW, as well as the acquisition of St. Lukes, mentioned previously, and the
effects of the Restated Credit Facility (see Note 6) had occurred on September
1, 1994, results of operations for fiscal 1995, on a pro forma basis, would have
been as reflected below (in thousands, except per share data):
Total revenue $ 2,059,734
Net income 69,246
Net income applicable to common shares 67,246
Net income per common share 1.48
Net income per common share
assuming full dilution $ 1.46
If the acquisition of HNW had occurred on August 31, 1995, the balance
sheet of the Company would have been as reflected below (in thousands):
Current Assets $ 439,618
Property, Plant and Equipment, net 1,155,025
Investments in HNW --
Excess of Purchase Price Over Net Assets
Acquired, net 393,604
Total Assets 2,072,971
Current liabilities 417,362
Long term liabilities 1,314,263
Equity $ 341,346
NOTE 4 - INCOME TAXES
The provision for income taxes for the years ended August 31 is as follows
(in thousands):
<TABLE>
<S> <C> <C> <C>
1993 1994 1995
---------- --------- ----------
Current federal income tax $ 142 $ 169 $ 14,657
Current state income tax 987 888 4,750
Deferred federal income tax benefit -- -- (3,635)
---------- --------- ----------
$ 1,129 $ 1,057 $ 15,772
========== ========= ==========
</TABLE>
F-16
<PAGE>
Deferred income taxes reflect the net tax effects 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>
1993 1994 1995
--------- -------- ----------
Deferred tax assets:
Net operating loss carryovers $ 90,119 $ 98,358 $ 82,245
Capital loss carryovers 1,593 1,593 --
Alternative minimum tax credit carryover -- -- 1,036
General business credit carryovers 7,652 7,652 7,652
Excess tax basis over book basis of
accounts receivable 11,401 18,825 19,889
Excess tax basis over book basis of
other assets 13,698 10,051 --
Accrued expenses 5,506 19,590 18,894
Professional liability reserves 10,918 8,285 9,422
Capital lease liability 5,232 4,786 4,626
Other deferred tax assets 466 790 6,157
---------- --------- ----------
Total deferred tax assets 146,585 169,930 149,921
Valuation allowance (52,531) (53,375) (48,072)
---------- --------- ----------
Total deferred tax assets net of allowance 94,054 116,555 101,849
Deferred tax liabilities:
Tax in excess of book depreciation 87,980 76,432 79,449
Excess book basis over tax basis of
certain investments -- 34,779 21,896
Unamortized cash to accrual method adjustments 5,328 9,243 4,960
Other deferred tax liabilities 746 3,232 --
Total deferred tax liabilities 94,054 123,686 106,305
---------- --------- ----------
Net deferred tax liability $ -- $ 7,131 $ 4,456
---------- --------- ----------
========== ========= ==========
</TABLE>
At August 31, 1995, the Company has net current deferred federal tax
assets of $30.9 million and net noncurrent deferred federal tax liabilities of
$35.4 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>
1993 1994 1995
---- ---- ----
Income tax expense (benefit) at federal
statutory rate 34.0% (35.0)% 35.0%
Nondeductible goodwill amortization -- -- 3.2
Operating loss for which no
benefit was recognized -- 35.0 --
Benefit of prior year losses realized (34.0) -- (23.7)
State income tax 6.6 1.9 3.6
Federal alternative minimum tax 1.0 0.4 --
------ ------ ------
Effective income tax rate 7.6% 2.3% 18.1%
====== ====== ======
</TABLE>
F-17
<PAGE>
The following schedule summarizes approximate tax attribute carryforwards
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") $234,986 1996-2009
General business credits 7,652 1996-2001
Alternative minimum tax credit $ 1,036 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 which
incurred the losses in prior years. 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 carryforwards for income tax purposes from
prior years which may be subject to IRS audit as net operating loss and credit
carryforwards are utilized in subsequent tax years.
The IRS is currently engaged in an examination of the federal income tax
returns for fiscal years 1984, 1985 and 1986 of Summit, which subsequent to the
Company's acquisition thereof in April 1994 merged into the Company. Summit has
received a revenue agent's report with proposed adjustments for the years 1984
through 1986 and Summit has filed a protest opposing the proposed adjustments.
The IRS has challenged, among other things, the propriety of certain accounting
methods utilized by Summit for tax purposes, including the use of the cash
method of accounting by certain of Summit's subsidiaries (the "Summit
Subsidiaries") prior to fiscal year 1988. The cash method was prevalent within
the hospital industry and the Summit Subsidiaries applied the method in
accordance with prior agreements reached with the IRS. The IRS now asserts that
an accrual method of accounting should have been used. The Tax Reform Act of
1986 (the "1986 Act") requires most large corporate taxpayers (including Summit)
to use an accrual method of accounting beginning in 1987. Consequently, the
Summit Subsidiaries changed to the accrual method beginning July 1, 1987. In
accordance with the provisions of the 1986 Act, income that was deferred by use
of the cash method at the end of 1986 is being recognized as taxable income by
the Summit Subsidiaries in equal installments over ten years beginning on July
1, 1987. The Company believes that Summit properly reported its income and paid
its taxes in accordance with applicable laws and in accordance with previous
agreements established with the IRS. The Company believes that the final outcome
of the IRS's examinations of Summit's prior years' income taxes will not have a
material adverse effect on the results of operations or financial position of
the Company.
F-18
<PAGE>
NOTE 5 - OTHER CURRENT ASSETS AND LIABILITIES
Other current assets and liabilities consist of the following at August 31
(in thousands):
<TABLE>
<S> <C> <C>
1994 1995
----------- ----------
Other Current Assets:
Other accounts receivable, net $ 24,293 $ 27,021
Trading security -- 14,920
Other current assets 15,051 15,111
----------- ----------
$ 39,344 $ 57,052
=========== ==========
Accrued Expenses and Other Liabilities:
Due to third-party payors $ 90,756 $ 99,833
Salaries, benefits and other compensation 23,259 34,493
Vacation and sick pay 19,877 23,473
Interest 15,516 16,018
Other 61,437 47,034
----------- ----------
$ 210,845 $ 220,851
=========== ==========
</TABLE>
NOTE 6 - LONG-TERM DEBT
A summary of long-term debt at August 31 follows (in thousands):
<TABLE>
<S> <C> <C>
1994 1995
----------- ----------
Parent Company:
Senior Credit Facilities:
Revolving Credit Facilities $ 117,700 $ 119,000
Term Loans 393,744 361,175
12.25% Senior Subordinated Notes due 2002 400,000 400,000
10.25% Senior Subordinated Notes due 2003 711 511
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 70,442 67,919
----------- ----------
1,107,597 1,073,605
Less current portions 40,509 60,182
----------- ----------
$ 1,067,088 $ 1,013,423
============ ============
</TABLE>
At August 31, 1995, approximately $136.2 million of the Company's assets
were subject to mortgages or liens as collateral for approximately $62.8 million
of indebtedness, including capital leases.
Senior Credit Facilities
On April 19, 1994, the Company entered into a Credit, Security, Guarantee
and Pledge Agreement (the "Credit Agreement") with a syndicate of lenders to
borrow up to $700.0 million, of which $480.2 million was outstanding on August
31, 1995 and of which commitment availability had been reduced by $23.7 million
as a result of issued letters of credit and $38.8 million as a result of
scheduled principal payments resulting in available borrowing capacity of $157.3
million.
F-19
<PAGE>
The Credit Agreement, which matures April 19, 2000, consists of the
following facilities (the "Senior Credit Facilities"): (i) a revolving
commitment of $200.0 million, to refinance certain previously existing senior
secured debt, for general corporate purposes, and to issue up to $30.0 million
of letters of credit; (ii) a revolving commitment of $100.0 million, for
acquisitions and other specified transactions; (iii) a $325.0 million term loan,
payable in incremental, quarterly installments; and, (iv) a $75.0 million term
loan payable in incremental quarterly installments beginning January 31, 1995.
Funds advanced under the Credit Agreement bear interest on the outstanding
principal at a fluctuating rate based on either (i) the base rate of the Bank of
Nova Scotia for U.S. Dollar loans in the United States (the "Prime Rate") or
(ii) London Interbank Offered Rate ("LIBOR"), as elected from time to time by
the Company. Interest is payable quarterly if a rate based on the Prime Rate is
elected or at the end of the LIBOR period (but in any event not to exceed 90
days) if a rate based on LIBOR is elected. The Company has elected various rates
on the initial borrowings of the Senior Credit Facilities representing a
weighted average annual interest rate at August 31, 1995 of 8.1%. Interest
expense for the year ended August 31, 1995 was reduced $2.2 million as a result
of the termination of the Company's only interest rate swap agreement.
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 $50.0 million from the issuance of additional
equity not used to acquire additional assets or repay subordinated debt within
120 days. The Company may prepay all or part of the outstanding Senior Credit
Facilities without penalty.
The Credit Agreement limits, under certain circumstances, the Company's
ability to incur additional indebtedness, sell material assets, acquire the
capital stock or assets of another business, or pay dividends. The Credit
Agreement also requires the Company to maintain a specified net worth and meet
or exceed certain coverage, leverage, and indebtedness ratios. Indebtedness
under the Credit Agreement is secured by a perfected, first priority security
interest in the stock of all existing and future subsidiaries of the Company,
intercompany notes of indebtedness, majority-owned partnerships, and certain
specified investments.
Subsequent Event - Restated Credit Facility
On October 27, 1995, the Company executed an amended and restated Credit
Agreement (the "Restated Credit Facility") which increases the borrowing
capacity of the Company from approximately $660.0 million to $900.0 million. The
Restated Credit Facility amends the Company's previous Credit Agreement dated
April 19, 1994 and will mature on October 30, 2001.
Loans under the Restated Credit Facility will bear interest, at the option
of the Company, at a rate equal to either (i) the "alternate base rate" plus
0.75% or (ii) LIBOR plus 1.75%, in each case subject to potential decreases or
increases dependent on the Company's leverage ratio. Loans under the Credit
Agreement bore interest at either (i) the "alternate base rate" plus 1.25% or
(ii) LIBOR plus 2.25%, in each case subject to potential decreases or increases
dependent on the Company's interest coverage and leverage ratios.
Except for additional flexibility on certain financial ratios, the
restrictions, covenants and security interests of the Restated Credit Facility
are substantially the same as the previous Credit Agreement.
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 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.
F-20
<PAGE>
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") and on July 29,
1993, amended and restated its Senior Credit Facility with a syndicate of
commercial bank lenders (the "Lenders") under which $42.5 million remained
outstanding and a credit facility of up to $80.0 million was made available.
Interest on the 10% Notes is payable semiannually on February 1 and August 1 of
each year. The 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. In
connection with these transactions, AHM recorded an extraordinary loss of $3.8
million, net of an income tax benefit of $125,000, on early extinguishment of
debt in the quarter ended August 31, 1993. The loss primarily related to the
write-off of unamortized debt issuance costs relating to the extinguished
indebtedness.
Pursuant to a Waiver and Consent Agreement dated February 3, 1994 by and
among the Company and the holders of a majority in principal amount of the 10%
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 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. Proceeds from the Credit Agreement were
used to redeem the 10.25% Notes. 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 was used to reduce the Company's Senior Credit
Facilities.
Other
Maturities of debt, excluding capitalized lease obligations, for the next
five fiscal years and thereafter are as follows (in thousands):
1996 $ 56,254
1997 69,899
1998 79,341
1999 94,815
2000 201,071
Thereafter 551,618
------------
$ 1,052,998
============
F-21
<PAGE>
The carrying amounts of the Company's borrowings at August 31, 1995
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 110.1% of par value and the
fair value of the 11.375% Senior Subordinated Notes approximates 100.7% of par
value based on recent bid/ask indications.
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 are accounted for as an asset held for
sale and the net investment is included in other assets. For the period April
19, 1994 (date of the Summit Merger) through August 31, 1995 the Company's
ownership percentage of Summit Care Corporation's net income was approximately
$2.9 million which was excluded from the Consolidated Statements of Operations.
The Company has not received any earnings or funded any losses of Summit Care
and has not adjusted the carrying value of its investment in Summit Care since
the date of the Summit Merger except to record the exchanges of the 7.5% Notes
mentioned below.
The Company's equity in the earnings of Summit Care have not been reported
in the Company's consolidated statement of operations as they would increase the
investment in Summit Care above the net realizable value. The interest expense
has been reported on the 7.5% Notes from April 19, 1995 forward. The effect of
the interest expense on the Company's results of operations is not material.
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 Notes was amended to change the earliest redemption date of the
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, 1995, the Company owned 1,414 shares, .02% of the
common stock of Summit Care.
F-22
<PAGE>
NOTE 7 - 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, 1995, 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
--------- ----------
1996 $ 6,223 $ 43,866
1997 5,341 40,284
1998 3,624 35,090
1999 2,039 30,653
2000 1,304 26,532
Thereafter 17,180 237,141
--------- ----------
Total minimum rental payments 35,711 $ 413,566
==========
Less amounts representing interest 15,104
Present value of future
minimum lease payments 20,607
Less current portion 3,928
---------
$ 16,679
Operations for the years ended August 31, 1993, 1994, and 1995, include
rent expense on operating leases of $23.5 million, $32.9 million, and $58.1
million, respectively.
Property under capital lease at August 31 follows (in thousands):
1994 1995
---- ----
Buildings and improvements $ 30,007 $ 37,220
Equipment and fixtures 21,517 19,603
--------- ---------
51,524 56,823
Less accumulated amortization 17,860 18,707
--------- ---------
$ 33,664 $ 38,116
========= =========
NOTE 8 - SHAREHOLDERS' EQUITY, WARRANTS AND EMPLOYEE STOCK OPTIONS
Common Stock
The Company has not paid any dividends on common stock. Under the terms of
the Company's Credit Agreement and Restated Credit Facility, the Company may not
pay dividends on its common stock.
F-23
<PAGE>
Warrants
At August 31, 1995, the Company has warrants outstanding to purchase
136,250 shares of common stock at an exercise price ranging from $2.67 per share
to $18.49 per share. Warrants can be exercised through April 30, 2000.
Employee Stock Options
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 3,550,000 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. On June 22, 1994, nonqualified options to
purchase 2,940,000 shares of common stock at an exercise price of $15.00 per
share were granted, including 1,400,000 to Charles N. Martin, Jr., the Company's
Chairman and CEO. As of August 31, 1995, additional nonqualified options to
purchase 175,000 shares of common stock at an exercise price of $19.50 have been
granted under the 1994 Management Equity Plan and nonqualified options to
purchase 424,000 shares have been forfeited.
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, 1995, no options have been granted
under this plan.
In addition to the 4,150,000 shares of common stock reserved for issuance
under the 1994 Management Equity Plan and the Incentive Stock Bonus Plan, the
Company has reserved 1,690,346 shares of common stock at August 31, 1995, for
issuance pursuant to options granted under various stock option plans of 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 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.
On January 15, 1992, OrNda entered into an employment agreement with
Charles N. Martin, Jr. (the "Martin Agreement") which provides for Mr. Martin to
serve as Chairman of the Board and Chief Executive Officer of the Company for a
period of five years. Pursuant to the Martin Agreement, (i) Mr. Martin purchased
1 million shares of the Company's common stock by delivering to the Company a
promissory note of $7.7 million ("the Stock Note") and cash of $10,000 and (ii)
Mr. Martin was granted options to purchase 750,000 shares of the Company's
common stock at an exercise price per share of $10.75. During 1993, Mr. Martin
paid $8.5 million to retire the Stock Note, reduce the promissory notes noted
below, and pay related interest through August 31, 1993. Pursuant to the Martin
Agreement, as of August 31, 1993, $1.2 million was loaned to Mr. Martin under
promissory notes and such loans were forgiven in fiscal 1994.
F-24
<PAGE>
The following is a summary of option transactions during fiscal 1993,
1994, and 1995:
<TABLE>
<S> <C> <C>
Option
Price Range
-----------
Balance at August 31, 1992 2,739,479 $1.67 - $11.34
Options Granted 228,000 $7.50 - $8.96
Options Exercised (136,000) $1.67 - $5.00
Options Forfeited (8,000) $1.67 - $4.80
----------
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
==========
Exercisable at August 31, 1995 2,515,342 $2.21 - $15.00
Available for Future Grant at
August 31, 1995 1,524,000
</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.
Dividends on the PIK Preferred shall be paid in kind until October 31, 1992 and
at any time thereafter, until October 31, 2001, during which the Company's cash
coverage ratio is below a defined level. Dividends on the PIK Preferred paid in
kind shall be paid at the rate of 10% of the liquidation value thereof through
October 31, 1999 and 11% thereafter through October 31, 2001. The PIK Preferred
may be redeemed by the Company at a price equal to $15.00 per share, plus
accrued and unpaid dividends thereon, at any time after October 15, 1992 and at
any time during which the average fair market value of the common stock during
the 20 day period preceding the redemption shall have been in excess of $19.50
per share. Upon the occurrence of a Board Action (which is defined as the
acquisition by any person or group (other than PAH, L.P. or Joseph Littlejohn &
Levy Fund, L.P.) of 50% or more of the Company's common stock pursuant to a
plan, arrangement or issuance of stock approved by the Board of Directors, or
certain other actions requiring approval of the Board of Directors and if
required, the stockholders) the Company is required to offer to repurchase the
PIK Preferred at $15.00 per share plus accrued dividends thereon. The PIK
Preferred is convertible at any time at the option of the holder into an
aggregate of 1,329,701 shares of common stock as of August 31, 1995. The Company
issued additional shares of PIK Preferred as paid-in-kind dividends of 112,285
in fiscal 1993, 123,468 in fiscal 1994, and 133,474 in fiscal 1995.
Subsequent Event - Common Stock Offering
On October 2, 1995, the Company filed a S-3 Registration Statement with the
Securities and Exchange Commission ("SEC") to sell 10,000,000 shares of common
stock. On October 31, 1995, the Registration was declared effective by the SEC
and the public offering of the shares commenced at a $17.625 per share price.
F-25
<PAGE>
The net proceeds of $168.0 million to the Company from its sale of the
10,000,000 shares of Common Stock in the offering, after deducting estimated
offering expenses and the underwriting discounts, will be used to reduce
indebtedness under the Restated Credit Facility with a current interest rate of
LIBOR plus 1.25%, which matures on October 30, 2001. Any unused capacity under
the Restated Credit Facility (including the increased capacity available due to
the amount repaid with the net proceeds of the offering), will be available for
general corporate purposes, including strategic acquisitions. The stock offering
is expected to close on November 6, 1995. Assuming the offering was completed on
September 1, 1994 and the net proceeds were used to reduce indebtedness under
the Restated Credit Facility, the Company's earnings per common and common
equivalent share would have been $1.43 for the year ended August 31, 1995 and
the Company's earnings per share assuming full dilution would have been $1.41
per share.
NOTE 9 - 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 50% of the employee contributions up
to a maximum of 3.5% of annual compensation. Effective January 1, 1995, the
401(k) Plan was amended to allow eligible employees to make contributions of 2%
to 15% of their annual compensation. Employer contributions are now made at a
rate of 50% of the employee contributions up to a maximum of 1.5% 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 the 401(k) plans for fiscal years 1993, 1994, and 1995 was
approximately $3.0 million, $3.2 million, and $4.5 million, respectively.
The carrying amounts and fair values of certain financial instruments,
disclosed elsewhere, consisted of the following at August 31, 1995 (in
thousands):
<TABLE>
<S> <C> <C>
Carrying Amount Fair Value
--------------- -----------
Investments:
Available-for-sale (see Note 3) $ 21,963 $ 73,755
Trading securities (see Note 2) 14,920 14,920
Long-Term Debt (see Note 6):
Senior Credit Facilities 480,175 480,175
12.25% Senior Subordinated Notes due 2002 400,000 440,400
10.25% Senior Subordinated Notes due 2003 511 511
11.375% Senior Subordinated Notes due 2004 125,000 125,875
Secured Debt - other $ 67,919 $ 67,919
</TABLE>
NOTE 10 - 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.
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.
F-26
<PAGE>
NOTE 11 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information for the years ended August 31, 1994
and 1995 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
------------- ------------- ------------- --------------
1994
- ----
Total revenue $ 268,609 $ 283,839 $ 330,469 $ 391,442
Income (loss) before income taxes
and extraordinary item $ 2,031 $ 3,585 $ (27,545) $ (24,056)
Net income (loss) $ 1,993 $ 3,215 $ (36,376) $ (28,170)
Net income (loss) per common and
common equivalent share $ .04 $ .07 $ (0.95) $ (0.66)
Net income (loss) per common
share assuming full dilution $ .04 $ .07 $ (0.95) $ (0.66)
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
</TABLE>
In the third quarter of fiscal 1994, the Company recorded nonrecurring
charges of $30.0 million in connection with the AHM Merger (see Note 2 to the
accompanying consolidated financial statements); loss on the sale of one
hospital of $9.8 million, and an extraordinary loss of $8.2 million for early
extinguishment of debt. Also, in the fourth quarter of fiscal 1994, the Company
recorded a $35.5 million loss on the sale of three hospitals and a $4.1 million
extraordinary loss on the early extinguishment of debt.
F-27
<PAGE>
SCHEDULE VIII
<TABLE>
<CAPTION>
ORNDA HEALTHCORP AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<S> <C> <C> <C> <C> <C>
Additions
------------------------
Balance Charged Balance
at Begin- to Costs Charged at
ning of and to Other End of
Description Period Expenses Accounts Deductions Period
---------- ---------- -------- ---------- ------
Year ended August 31, 1995:
Allowance for
uncollectible
accounts $ 59,855 $ 122,193 $ -- $(131,031) (1) $ 58,632
,615 (3)
Allowance for
uncollectible
long-term
receivables $ 7,659 $ -- $ -- $ (4,984) (1) $ 2,765
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
Year ended August 31, 1993:
Allowance for
uncollectible
accounts $ 25,296 $ 63,907 $ -- $ (54,665) (1) $ 47,289
12,751 (3)
Allowance for
uncollectible
long-term
receivables $ 13,858 $ (335) $ -- $ (844) (1) $ 12,679
<FN>
(1) Uncollectible accounts written off, net of recoveries.
(2) Allowances related to hospitals sold.
(3) Allowances recorded in acquisitions.
</FN>
</TABLE>
F-28
Exhibit 23.1
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. 33-76552) relating to 2,592,362
shares of Common Stock of Summit Care Corporation, effective on
October 11, 1994;
g. 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;
<PAGE>
Page 2
h. Form S-3 Registration Statement (No. 33-97620) relating to 10,000,000
shares of Common Stock of OrNda HealthCorp, effective on October 31, 1995;
and in the related Prospectuses of our report dated October 10, 1995, except
for paragraph 7 of Note 6 and paragraph 9 of Note 8, as to which the dates are
October 27, 1995 and October 31, 1995, respectively, with respect to the
consolidated financial statements and schedule of OrNda HealthCorp included in
the Annual Report (Form 10-K/A No. 1) for the year ended August 31, 1995.
/s/
Ernst & Young LLP
Nashville, Tennessee
June 17, 1996
<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-31-1995
<PERIOD-END> AUG-31-1995
<CASH> 4963
<SECURITIES> 0
<RECEIVABLES> 428,797
<ALLOWANCES> 58,632
<INVENTORY> 34,097
<CURRENT-ASSETS> 403,713
<PP&E> 1,356,767
<DEPRECIATION> 288,410
<TOTAL-ASSETS> 1,946,404
<CURRENT-LIABILITIES> 398,291
<BONDS> 1,013,423
0
20,112
<COMMON> 449
<OTHER-SE> 372,577
<TOTAL-LIABILITY-AND-EQUITY> 1,946,404
<SALES> 0
<TOTAL-REVENUES> 1,842,701
<CGS> 2
<TOTAL-COSTS> 1,542,912
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 122,193
<INTEREST-EXPENSE> 109,100
<INCOME-PRETAX> 87,084
<INCOME-TAX> 15,772
<INCOME-CONTINUING> 71,312
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71,312
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.51
</TABLE>
