UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended May 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 1-11591
OrNda HealthCorp
(Exact name of registrant as specified in its charter)
DELAWARE 75-1776092
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3401 West End Avenue, Suite 700
(Address of principal executive offices)
37203-1042
(Zip Code)
Registrant's telephone number, including area code: 615-383-8599
------------
Former name, former address and former fiscal year, if changed since last
report: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[x] No[ ]
Number of shares of common stock ($.01 par value) outstanding as of
June 30, 1996: 58,173,233
<PAGE>
ORNDA HEALTHCORP
FORM 10-Q
May 31, 1996
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the Three
Months Ended May 31, 1995 and 1996..................................3
Consolidated Statements of Income for the Nine Months
Ended May 31, 1995 and 1996.........................................4
Consolidated Balance Sheets as of August 31, 1995
and May 31, 1996....................................................5
Consolidated Statements of Cash Flows for the Nine
Months Ended May 31, 1995 and 1996 .................................6
Notes to Consolidated Financial Statements..........................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................12
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................22
SIGNATURE....................................................................23
EXHIBIT 10(a)
EXHIBIT 10(b)
EXHIBIT 11
EXHIBIT 27
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ORNDA HEALTHCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MAY 31, 1995 AND 1996
(Unaudited)
(in thousands, except per share data)
<TABLE>
Three Months Ended May 31,
--------------------------
1995 1996
---- ----
<S> <C> <C>
Total Revenue $ 497,890 $ 557,866
Costs and Expenses:
Salaries and benefits 217,384 243,515
Supplies 66,774 77,012
Purchased services 51,851 46,515
Provision for doubtful accounts 29,910 35,308
Other operating expenses 60,357 62,615
Depreciation and amortization 21,579 25,749
Interest expense 26,928 26,386
Interest income (1,387) (1,135)
Gain on asset sales (973) --
Minority interest 161 1,778
---------- ----------
25,306 40,123
Income from investments in Houston
Northwest Medical Center 3,531 --
---------- ----------
Income before income tax expense 28,837 40,123
Income tax expense 6,746 10,833
---------- ----------
Net income 22,091 29,290
Preferred stock dividend requirements (487) --
---------- ----------
Net income applicable to common shares $ 21,604 $ 29,290
========== ==========
Net income per common and common
equivalent share $ 0.47 $ 0.49
========== ==========
Net income per common share
assuming full dilution $ 0.47 $ 0.49
========== ==========
Weighted average common and dilutive
common equivalent shares outstanding 45,601 60,371
========== ==========
Weighted average common shares outstanding
assuming full dilution 46,995 60,371
========== ==========
</TABLE>
3
<PAGE>
ORNDA HEALTHCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED MAY 31, 1995 AND 1996
(Unaudited)
(in thousands, except per share data)
<TABLE>
Nine Months Ended May 31,
-------------------------
1995 1996
---- ----
<S> <C> <C>
Total Revenue $1,358,636 $ 1,594,319
Costs and Expenses:
Salaries and benefits 597,109 687,391
Supplies 173,635 215,223
Purchased services 149,417 150,476
Provision for doubtful accounts 89,054 103,610
Other operating expenses 152,796 184,021
Depreciation and amortization 61,988 73,801
Interest expense 81,910 79,850
Interest income (3,593) (3,423)
Gain on asset sales (973) --
Minority interest 260 4,724
---------- ----------
57,033 98,646
Income from investments in Houston
Northwest Medical Center 10,479 5,128
---------- ----------
Income before income tax expense 67,512 103,774
Income tax expense 12,152 27,110
---------- ----------
Net income 55,360 76,664
Preferred stock dividend requirements (1,490) (332)
---------- ----------
Net income applicable to common shares $ 53,870 $ 76,332
========== ==========
Net income per common and common
equivalent share $ 1.20 $ 1.35
========== ==========
Net income per common share
assuming full dilution $ 1.20 $ 1.34
========== ==========
Weighted average common and dilutive
common equivalent shares outstanding 45,028 56,633
========== ==========
Weighted average common shares outstanding
assuming full dilution 45,050 57,255
========== ==========
</TABLE>
4
<PAGE>
ORNDA HEALTHCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
<TABLE>
August 31, May 31,
-------------------------
1995 1996
---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,963 $ 13,826
Patient accounts receivable, net of allowance for
uncollectibles of $58,632 at August 31, 1995
and $69,272 at May 31, 1996 307,601 362,436
Supplies, at cost 34,097 39,275
Other 57,052 51,485
---------- ----------
Total Current Assets 403,713 467,022
Property, Plant and Equipment, at cost:
Land 126,436 138,211
Buildings and improvements 870,352 976,547
Equipment and fixtures 359,979 414,875
---------- ----------
1,356,767 1,529,633
Less accumulated depreciation and amortization 288,410 346,189
---------- ----------
1,068,357 1,183,444
Investments in Houston Northwest Medical Center 73,755 --
Excess of Purchase Price Over Net Assets Acquired,
net of accumulated amortization 318,029 419,471
Other Assets 82,550 116,161
---------- ----------
$1,946,404 $2,186,098
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 117,258 $ 134,190
Accrued expenses and other liabilities 220,851 198,363
Current maturities of long-term debt 60,182 57,561
---------- ----------
Total Current Liabilities 398,291 390,114
Long-term Debt 1,013,423 1,008,303
Other Liabilities 141,552 171,995
Shareholders' Equity:
Convertible preferred stock,
$.01 par value, 10,000,000 authorized shares,
issued 1,329,701 shares at August 31, 1995 20,112 --
Common stock, $.01 par value,
authorized 200,000,000 shares, issued and
outstanding 44,877,804 shares at August 31, 1995
and 58,173,233 shares at May 31, 1996 449 582
Additional paid-in capital 414,805 632,460
Retained earnings (deficit) (94,020) (17,356)
Unrealized gains on available-for-sale
securities, net of tax 51,792 --
---------- ----------
393,138 615,686
---------- ----------
$1,946,404 $2,186,098
========== ==========
</TABLE>
5
<PAGE>
ORNDA HEALTHCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
Nine Months Ended May 31,
-------------------------
1995 1996
---- ----
<S> <C> <C>
CASH FLOW PROVIDED BY OPERATING ACTIVITIES:
Net income $ 55,360 $ 76,664
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash portion of income from investments in
Houston Northwest Medical Center (7,908) (4,213)
Depreciation and amortization 61,988 73,801
Provision for doubtful accounts 89,054 103,610
Gain on asset sales (973) --
Changes in assets and liabilities net of effects from
acquisitions and dispositions of hospitals:
Patient accounts receivable (96,808) (129,715)
Other current assets (10,105) (9,950)
Other assets (940) 202
Accounts payable, accrued
expenses and other current liabilities 6,061 (35,951)
Other liabilities (6,350) 11,875
Proceeds from sales of trading investment security --- 20,625
---------- ----------
Net cash provided by operating activities 89,379 106,948
---------- ----------
CASH FLOW USED IN INVESTING ACTIVITIES:
Acquisitions of hospitals and related assets (51,615) (214,952)
Capital expenditures (44,101) (64,373)
Proceeds on disposals of hospitals and sales of investments 18,110 2,967
Increase in notes receivable (2,344) (4,213)
Payments received on long-term notes and other receivables 4,228 4,871
Other investing activities (2,438) (2,124)
---------- ----------
Net cash used in investing activities (78,160) (277,824)
---------- ----------
CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of common stock 5,664 197,788
Principal payments on long-term debt borrowings (114,842) (106,581)
Proceeds received on long-term debt borrowings 99,840 95,000
Financing costs incurred in connection with
long-term borrowings (637) (3,797)
Other ( 984) (2,671)
---------- ----------
Net cash provided by (used in) financing activities ( 10,959) 179,739
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 260 8,863
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,374 4,963
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,634 $ 13,826
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 90,926 $ 88,588
Income taxes 1,608 28,606
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Preferred stock dividends 1,490 332
Conversion of preferred stock to common stock -- 20,333
Capital lease obligations incurred 2,602 196
Stock issued for acquisitions of health care facilities 3,563 --
Exchange of minority ownership in hospitals for minority
interest ownership in physician practices -- 9,400
</TABLE>
6
<PAGE>
ORNDA HEALTHCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
May 31, 1996
NOTE 1 - 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 AHM
Merger was accounted for as a pooling-of-interests. 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.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying unaudited consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for fair presentation have been included.
Certain prior year amounts have been reclassified to conform to the current year
presentation. Operating results for the nine months ended May 31, 1996 are not
necessarily indicative of the results that may be expected for the entire year.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended August 31, 1995.
Earnings Per Share. Earnings per common and common equivalent share is
based on the Company's weighted average number of outstanding shares adjusted
for the dilutive effect of common stock equivalents outstanding during the
period. Dilutive common stock equivalents consist of stock options and warrants
representing 1.1 million and 2.2 million equivalent shares for the three months
ended May 31, 1995 and 1996, respectively, and 1.0 million and 1.8 million
shares for the nine months ended May 31, 1995 and 1996, respectively. Earnings
per common share assuming full dilution for the three months ended May 31, 1995
and nine months ended May 31, 1996 assumes the conversion of the Company's
redeemable convertible preferred stock into common shares.
Recently Issued Accounting Standard. In March 1995, the FASB issued
Statement No 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of ("SFAS No. 121"), which requires impairment
7
<PAGE>
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. SFAS No. 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. The Company will adopt SFAS No. 121 in the first quarter of fiscal 1997 and,
based on current circumstances, does not believe the effect of adoption will be
material.
NOTE 3 - LONG-TERM DEBT
On October 27, 1995, the Company executed an amended and restated credit
agreement (the "Restated Credit Facility") which increased the Company's
borrowing capacity under its credit facility from approximately $660.0 million
to $900.0 million, of which $477.5 million was outstanding on May 31, 1996 and
of which commitment availability had been reduced by issued letters of credit of
$27.4 million and scheduled principal payments of $22.5 million. The Restated
Credit Facility, which amends the Company's previous credit agreement dated
April 19, 1994, will mature on October 30, 2001 and consists of the following
facilities (the "Senior Credit Facilities"): (i) a revolving commitment of $440
million to refinance the debt under the previous credit agreement, for general
corporate purposes, to issue up to $50 million of letters of credit, and for
strategic acquisitions; and (ii) a $460 million term loan to refinance debt
under the previous credit agreement payable in incremental quarterly
installments.
Loans under the Restated Credit Facility bear interest, at the option of
the Company, at a rate equal to either (i) the "alternate base rate" plus 0.25%
or (ii) LIBOR plus 1.25%, in each case subject to potential decreases or
increases dependent on the Company's leverage ratio. Interest is payable
quarterly if a rate based on the alternate base rate is elected or at the end of
the LIBOR period (but in any event not to exceed 90 days) if a rate based on
LIBOR is elected. The weighted average interest rate on the Company's borrowings
under the Senior Credit Facilities at May 31, 1996 was 6.7%.
In certain circumstances, the Company is required to make principal
prepayments on the Senior Credit Facilities, including the receipt of proceeds
from the issuance of additional subordinated indebtedness, certain asset sale
proceeds not used to acquire additional assets within a specified period, and
50% of the proceeds in excess of $50 million from the issuance of additional
equity not used to acquire additional assets, fund capital expenditures or repay
subordinated debt within one year. The Company may prepay at any time all or
part of the outstanding Senior Credit Facilities without penalty.
The Restated Credit Facility limits, under certain circumstances, the
Company's ability to incur additional indebtedness, sell material assets,
acquire the capital stock or assets of another business, or pay dividends. The
Restated Credit Facility also requires the Company to maintain a specified net
worth and meet or exceed certain coverage, leverage, and indebtedness ratios.
Indebtedness under the Restated Credit Facility is secured by a perfected, first
priority security interest in the stock of all existing and future subsidiaries
of the Company, intercompany notes of indebtedness, majority-owned partnerships
and certain specified investments.
8
<PAGE>
NOTE 4 - INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under SFAS No. 109, an asset and liability approach for financial
accounting and reporting for income taxes is required.
The AHM Merger 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 net operating losses ("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 of Summit as
disclosed below. Furthermore, the Company's federal income tax returns for
taxable years through August 31, 1992 are no longer subject to IRS audit, with
certain limited exceptions and except in respect of NOL's for prior years which
may be subject to IRS audit as they 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 then 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 through June 30, 1987 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.
9
<PAGE>
NOTE 5 - HOUSTON NORTHWEST MEDICAL CENTER
Houston Northwest Medical Center ("HNW"), in which the Company held only
certain non-controlling investments until January, 1996, is a 498-bed acute care
facility located in Houston, Texas. Effective January 1, 1996, the Company
acquired the controlling equity interests in HNW for a total cash purchase price
of $153.9 million and commenced operation of the facility.
Prior to January 1996, the Company's investments in HNW consisted of (i)
two classes of mandatorily redeemable preferred stock with a redemption value of
$62.5 million; and, (ii) a mortgage note receivable with a balance of $7.4
million at December 31, 1995.
The Company continued to apply the income recognition method described
in Note 3 to the consolidated financial statements included in the Company's
Form 10-K for the year ended August 31, 1995, for the Company's investment in
HNW's mandatorily redeemable preferred stock until January 1996, at which time
the Company began consolidating the operations of HNW. Income from investments
in Houston Northwest Medical Center consists of the following (in thousands):
<TABLE>
Three Months Ended May 31 Nine Months Ended May 31
------------------------- ------------------------
1995 1996 1995 1996
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Accretion of discount on mandatorily
redeemable preferred stock $ 522 $ -- $ 1,565 $ 757
Dividend income on mandatorily
redeemable preferred stock 2,814 -- 8,443 4,123
Interest income on mortgage note
receivable 195 -- 471 248
----------- ----------- ----------- ----------
$ 3,531 $ -- $ 10,479 $ 5,128
=========== =========== =========== ==========
</TABLE>
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 $85.5 million increase in
shareholders' equity on the date of adoption (which primarily related to the HNW
mandatorily redeemable preferred stock classified as "available-for-sale") with
no impact on net income. There was no income tax effect because of the
availability of book tax attribute carryforwards to offset the excess book basis
over the tax basis of the investments. The unrealized gain on available for sale
HNW securities was $45.8 million at December 31, 1995. The reduction from the
original amount is due primarily to an increase in the book value of the
investment and changes in long-term interest rates used to discount future cash
flows.
If the acquisition of HNW and the February 1995 acquisition of St. Luke's
Health System occurred on September 1, of the respective fiscal years, pro forma
results of operations for the nine months ended May 31, 1995 and 1996, would
have been as reflected below (in thousands, except per share data):
<TABLE>
1995 1996
-------------- --------------
<S> <C> <C>
Total revenue $ 1,534,760 $ 1,647,316
Net income 52,732 73,201
Net income applicable to common shares 51,242 72,869
Net income per common share 1.14 1.29
Net income per common share
assuming full dilution $ 1.14 $ 1.28
</TABLE>
10
<PAGE>
NOTE 6 - SHAREHOLDERS' EQUITY
On November 6, 1995, the Company completed the sale of 10,000,000 shares
of its Common Stock at a $17.625 per share public offering price. On November 9,
1995, the underwriters exercised an option to purchase an additional 1,500,000
shares to cover over-allotments. The net proceeds of approximately $192.3
million, after deducting offering expenses and underwriting discounts, were used
to reduce all of the indebtedness under the revolving portion of the Restated
Credit Facility in the amount of $27.2 million. The remaining proceeds were used
for general corporate purposes. Assuming the HNW acquisition and the offering
were completed on September 1, 1995, 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 $1.23 and earnings per share
assuming full dilution would have been $1.22 for the nine months ended May 31,
1996.
On November 7, 1995, the Company issued a notice of redemption to the
holders of its Payable in Kind Cumulative Redeemable Convertible Preferred Stock
(the "PIK Preferred") for $15 per share with a redemption date of December 8,
1995. In the fiscal quarter ended November 30, 1995, 1,355,519 shares of PIK
Preferred were converted into 1,355,519 shares of the Company's Common Stock. On
December 8, 1995, the remaining 7,416 shares of PIK Preferred were redeemed for
$15 per share plus dividends of $0.16 per share accrued through the redemption
date.
On November 29, 1995, nonqualified options to purchase 790,500 shares of
Common Stock at an exercise price of $18.75 per share were granted to officers
and key employees of the Company under the 1994 Management Equity Plan. On April
25, 1996, nonqualified options to purchase 729,000 shares of Common Stock at an
exercise price of $27.125 per share were granted to officers and key employees
of the Company under the 1994 Management Equity Plan.
NOTE 7 - CONTINGENCIES
The Company continually evaluates contingencies based upon the best
available information. Final determination of amounts earned from certain
third-party payors is subject to review by appropriate governmental authorities
or their agents. In the opinion of management, adequate provision has been made
for any adjustments that may result from such reviews.
Broad provisions in the Medicare and Medicaid laws deal with fraud and
abuse, false claims and physician self-referrals as well as similar provisions
in many state laws. In recent years, government investigations of alleged
violations of these laws have become common place in the health care industry.
As with all health care providers participating to any significant extent in the
Medicare and Medicaid programs, the Company could be materially adversely
affected if it were to be found in violation of the fraud and abuse, false
claims or physician self-referral laws as a result of its current or past
business operations.
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
11
<PAGE>
the Company's financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company's operating results for the three and nine months ended May
31, 1996, as compared to the same periods of the prior year, were impacted by
the January 1996 acquisition of Houston Northwest Medical Center ("HNW"). The
Company's operating results for the nine months ended May 31, 1996, as compared
to the same period in the prior year, were also impacted by the February 1995
acquisition of three hospitals and related businesses that comprise the St.
Luke's Health System ("St. Luke's") in Arizona.
Geographic Market Concentration. The Company's hospitals in greater Los
Angeles, South Florida and Arizona generated the following percentages of the
Company's total revenue for the nine months ended May 31, 1995 and 1996,
respectively;
<TABLE>
Number Percentage of Number Percentage of
of 5/31/95 of 5/31/96
Hospitals Total Revenue Hospitals Total Revenue
<S> <C> <C> <C> <C>
Greater Los Angeles 15 35.1% 15 32.1%
South Florida 4 18.0% 5 17.0%
Arizona 6 8.9% 6 10.2%
</TABLE>
To the extent favorable or unfavorable changes in regulations or market
conditions occur in 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 and equity structure. The
Company's results of operations have also been impacted by the acquisitions of
St. Luke's and HNW discussed above.
Industry Trends. Outpatient services accounted for 31.7% and 30.6% of
actual gross patient revenue for the three and nine months ended May 31, 1996,
respectively, compared to 28.8% and 28.0% in the same periods in the prior year
reflecting the industry trend towards greater use of outpatient services and the
expansion of the Company's outpatient services primarily achieved through
activities including surgery, diagnostics, physician clinics and home health.
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 St. Luke's and HNW
12
<PAGE>
acquisitions noted above ("same hospitals basis"), total revenues have
increased, reflecting higher utilization of outpatient and ancillary services
and increased acuity of patients admitted in the quarter and year to date
periods and an increase in admissions for inpatient procedures in the nine
months ended May 31, 1996. 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. The
Company's gross revenue from fixed reimbursement third party payors represented
approximately 88.4% of the Company's total gross revenue for the first nine
months of fiscal 1996. 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 Company also has programs designed to improve the margins
associated with the revenues derived from government payors and managed care
providers as well as programs designed to enhance overall hospital margins. The
Company's operations may also be enhanced through strategic 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.
Three Months Ended May 31, 1996 Compared
With The Three Months Ended May 31, 1995
Total revenue for the quarter ended May 31, 1996, increased over the same
period in the prior year by $60.0 million or 12.0% to $557.9 million. The 12.0%
increase is primarily a result of the HNW acquisition discussed above as well as
an increase in same hospitals revenue as discussed below. The increase in total
revenue attributable to acquisitions, net of divestitures, was $50.3 million.
Operating expenses in the quarter ended May 31, 1996, increased 9.1% ($38.7
million) compared to the same period in prior year primarily as a result of the
HNW acquisition. Net income applicable to common shares for the quarter ended
May 31, 1996, was $29.3 million, or $0.49 per share, compared to $21.6 million,
or $ 0.47 per share, in the same period last year.
On a same hospitals basis, total revenue increased 1.9%($9.7 million)
primarily as a result of a 10.8% increase in gross outpatient revenue. On a same
hospitals basis, salaries and benefits increased as a percent of total revenue
from 43.7% in the third quarter of fiscal 1995 to 44.4% in the third quarter of
fiscal 1996 primarily due to one-time severance payments related to labor force
reductions at several of the hospitals in the third quarter. As reflected in the
year to date discussion, salaries and benefits as a percent of revenue have
decreased for the nine month period. Supplies expense as a percentage of total
revenue remained flat at 13.4% in the third quarter of fiscal 1995 and 1996
primarily as a result of savings from major supply contracts offset by the
fiscal 1996 reclassification of the supply component of major contracts from
purchased services to supplies expense. Purchased services decreased 17.0% ($8.8
million)
13
<PAGE>
and as a percentage of total revenue decreased from 10.4% in the third quarter
of fiscal 1995 to 8.5% in the third quarter of fiscal 1996 primarily due to a
reclassification in fiscal 1996 of the supply component of major contracts from
purchased services to supplies expense. The provision for doubtful accounts
increased 6.3% ($1.9 million) and increased from 6.0% of total revenue for the
quarter ended May 31, 1995 to 6.3% for the quarter ended May 31, 1996 due to
delays in payment from certain third party payors resulting in an increase in
the allowance for doubtful accounts. Other operating expenses decreased 2.6%
($1.5 million) and as a percentage of total revenue decreased from 12.1% in
fiscal 1995 to 11.6% in fiscal 1996.
Depreciation and amortization for the quarter ended May 31, 1996,
increased 19.3% ($4.2 million) over the prior year primarily as a result of the
acquisition of HNW. The increase in depreciation and amortization attributable
to acquisitions, net of divestitures, was $2.0 million. In addition,
amortization on intangibles increased as a result of new business units.
Interest expense for the third quarter of fiscal 1996 as compared to the
same period last year decreased 2.0% ($0.5 million) primarily as a result of a
decline in the average debt balance outstanding and improved pricing under the
Restated Credit Facility in the first quarter of fiscal 1996. Such decrease was
partially offset by a $2.2 million reduction in interest expense in the third
quarter of fiscal 1995 related to the termination of an interest rate swap
agreement. Of the Company's total indebtedness of $1.1 billion at May 31, 1996,
approximately $477.5 million bears interest at rates that fluctuate with market
rates, such as the Prime Rate or LIBOR. Increases in market interest rates will
adversely affect the Company's net income.
Minority interest, which represents the amounts paid or payable to
physicians pursuant to the Company's joint venture arrangements, increased $1.6
million in the third quarter of fiscal 1996 as compared to the same period in
fiscal 1995, primarily as a result of a $9.4 million exchange of minority
interest ownership in two hospitals for minority interest investment in two
group physician practices in the first quarter of fiscal 1996 and the
acquisition of HNW which had existing joint ventures.
In the third quarter of fiscal 1995, the Company recorded income of $3.5
million related to its investments in HNW which primarily represented non-cash
income related to the Company's investment in HNW redeemable preferred stock.
Effective January 1, 1996, the Company acquired HNW from the hospital's Employee
Stock Ownership Plan ("ESOP"). Following the transaction, HNW became a wholly
owned subsidiary of the Company. See Note 5 to the accompanying consolidated
financial statements for further discussion of the Company's investments in HNW
as well as the acquisition of HNW.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). The majority of the Company's deferred tax assets related to
approximately $174.4 million of tax loss and credit carryforwards at May 31,
1996, 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
14
<PAGE>
relating to tax attribute carryforwards of OrNda and AHM arising in periods
prior to the AHM 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 May 31, 1996, net of the valuation allowance, will be realized
through reversal of deferred tax liabilities.
For the quarter ended May 31, 1996, the Company recorded income tax
expense of $10.8 million on pre-tax income of $40.1 million, an amount less than
the statutory rate, primarily due to the availability of net operating loss
carryforwards.
Nine Months Ended May 31, 1996 Compared
With The Nine Months Ended May 31, 1995
Total revenue for the nine months ended May 31, 1996, increased over the
same period in the prior year by $235.7 million or 17.3% to $1.6 billion. The
17.3% increase is primarily a result of the acquisitions of HNW and St Luke's as
well as an increase in same hospitals revenue as discussed below. The increase
in total revenue attributable to acquisitions, net of divestitures, was $145.7
million. Net income applicable to common shares for the nine months ended May
31, 1996 was $76.3 million, or $1.35 per share, compared to $53.9 million, or
$1.20 per share, in the same period last year.
Operating expenses in the nine months ended May 31, 1996, increased 15.4%
($178.7 million) compared to the same period in the prior year primarily as a
result of acquisitions and the increase in same hospital revenues and volumes
discussed below. Actual salaries and benefits as a percentage of total revenue
decreased from 43.9% in the first nine months of fiscal 1995 to 43.1% in the
first nine months of fiscal 1996 mainly as a result of labor efficiencies
achieved at certain facilities.
Actual other operating expenses increased 20.4% ($31.2 million). This
category of expense increased at a rate greater than other categories due to
acquisitions of physician practice groups which include the majority of the 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 nine months ended May 31, 1996, increased approximately $12.4 million for
claims payments made by the Medicaid HMO to third party providers. In addition,
other operating expenses increased $3.1 million for rent expense related to
acquisitions financed through leasing agreements with third parties.
On a same hospitals basis, total revenue increased 7.2% ($90.0 million)
primarily as a result of a 2.7% increase in admissions and a 15.5% increase in
gross outpatient revenue. On a same hospitals basis, salaries and benefits
decreased as a percent of total revenue from 45.2% in the first nine months of
fiscal 1995 to 44.9% in the same period of fiscal 1996 due to labor efficiencies
achieved at certain hospitals partially offset by one-time severance payments
related to labor reductions. Supplies expense increased 10.0% ($16.1 million)
15
<PAGE>
and as a percentage of total revenue increased from 12.9% in the first nine
months of fiscal 1995 to 13.2% in the first nine months of fiscal 1996.
Purchased services decreased 3.3% ($4.6 million) and as a percentage of total
revenue decreased from 11.2% in the first nine months of fiscal 1995 to 10.1% in
the same period of fiscal 1996 primarily due to a reclassification in fiscal
1996 of the supply component of major contracts from purchased services to
supplies expense. The provision for doubtful accounts increased 3.0% ($2.6
million) but decreased from 6.9% of total revenue for the nine months ended May
31, 1995 to 6.6% for the nine months ended May 31, 1996. Other operating
expenses increased 10.5% ($11.6 million) and as a percentage of total revenue
increased from 8.9% in fiscal 1995 to 9.1% in fiscal 1996, primarily as a result
of increases in marketing and rent expenses.
Depreciation and amortization for the nine months ended May 31, 1996,
increased 19.1% ($11.8 million) over the prior year primarily as a result of the
acquisitions of St. Luke's and HNW. The increase in depreciation and
amortization attributable to acquisitions, net of divestitures, was $6.7
million. In addition, amortization on intangibles increased as a result of new
business units.
Interest expense for the first nine months of fiscal 1996 as compared to
the same period last year decreased 2.5% ($2.1 million) primarily as a result of
a decline in the average debt balance outstanding and improved pricing under the
Restated Credit Facility. Such decrease was partially offset by a $2.2 million
reduction in interest expense in the third quarter of fiscal 1995 related to the
termination of an interest rate swap agreement. Of the Company's total
indebtedness of $1.1 billion at May 31, 1996, approximately $477.5 million bears
interest at rates that fluctuate with market rates, such as the Prime Rate or
LIBOR. Increases in market interest rates will adversely affect the Company's
net income.
Minority interest, which represents the amounts paid or payable to
physicians pursuant to the Company's joint venture arrangements, increased $4.5
million in the first nine months of fiscal 1996 as compared to fiscal 1995,
primarily as a result of a $9.4 million exchange of minority interest ownership
in two hospitals for minority interest investment in two group physician
practices in the first quarter of fiscal 1996 and the acquisition of HNW which
had existing joint ventures.
In the first nine months of fiscal 1996, the Company recorded income of
$5.1 million, compared to $10.5 million in fiscal 1995, related to its
investments in HNW which primarily represented non-cash income related to the
Company's investment in HNW redeemable preferred stock. Effective January 1,
1996, the Company acquired HNW from the hospital's ESOP. Following the
transaction, HNW became a wholly owned subsidiary of the Company. See Note 5 to
the accompanying consolidated financial statements for further discussion of the
Company's investments in HNW as well as the acquisition of HNW.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). The majority of the Company's deferred tax assets related to
approximately $174.4 million of tax loss and credit carryforwards at May 31,
16
<PAGE>
1996, 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 May 31, 1996, net of the valuation allowance, will be realized
through reversal of deferred tax liabilities.
For the nine months ended May 31, 1996, the Company recorded income tax
expense of $27.1 million on pre-tax income of $103.8 million, an amount less
than the statutory rate, primarily due to the availability of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1996, the Company had working capital of $76.9 million, of
which $13.8 million was cash, compared with $5.4 million at August 31, 1995. The
Company's cash portion of working capital is primarily managed through a
revolving credit arrangement, whereby excess cash generated through operations
or otherwise is generally used to reduce the outstanding revolving credit
facility. When cash requirements arise, the revolving credit facility is drawn
upon as needed. The revolving credit facility matures on October 30, 2001 and is
classified as long-term debt on the Company's balance sheet. At May 31, 1996,
the Company had $372.6 million of borrowing capacity available for general
corporate purposes and acquisitions under its Restated Credit Facility.
In the nine months ended May 31, 1996, the Company's operating activities
provided cash of $106.9 million. Cash from operations was used for the $26.1
million increase in patient accounts receivable, net of the provision for
doubtful accounts. The increase in patient accounts receivable resulted
primarily from delays in payment from certain state Medicaid/Medicare programs
and due to the acquisition and start up of new business units during the first
nine months of fiscal 1996. In addition, cash from operations was used for
income tax payments of $28.6 million and interest payments of $88.6 million.
Such uses were partially offset by $20.6 million of proceeds from sales of an
investment security classified as trading.
Net cash used in investing activities of $277.8 million during the nine
months ended May 31, 1996, consisted primarily of capital expenditures of $64.4
million and $215.0 million for the acquisitions of hospitals and related assets,
including $153.9 million for the acquisition of HNW. The Company's Restated
Credit Facility has a covenant limiting the Company's annual capital
expenditures to $100.0 million, plus carry-overs of certain unused amounts as
specified in the Restated Credit Facility. The Company's management currently
expects to incur
17
<PAGE>
approximately $100.0 million of capital expenditures in fiscal 1996. Net cash
provided by financing activities for the nine months ended May 31, 1996 of
$179.7 million resulted primarily from $197.8 million sale of common stock and
exercise of stock options.
On October 27, 1995, the Company executed the Restated Credit Facility to
increase the borrowing capacity of the Company from $660.0 million to $900.0
million. Under the terms of the Restated Credit Facility, as of May 31, 1996,
the Company had $372.6 million of borrowing capacity available for general
corporate purposes and acquisitions. See Note 3 to the accompanying consolidated
financial statements for further discussion of the Restated Credit Facility.
On November 6, 1995, the Company completed the sale of 10,000,000 shares
of its Common Stock at a $17.625 per share public offering price. On November 9,
1995, the underwriters exercised an option to purchase an additional 1,500,000
shares to cover over-allotments. The net proceeds of approximately $192.3
million, after deducting offering expenses and underwriting discounts, was used
to reduce the indebtedness under the revolving portion of the Restated Credit
Facility in the amount of $27.2 million and for general corporate purposes.
On November 7, 1995, the Company issued a notice of redemption to the
holders of its Payable in Kind Cumulative Redeemable Convertible Preferred Stock
(the "PIK Preferred") for $15 per share with a redemption date of December 8,
1995. In the quarter ended November 30, 1995, 1,355,519 shares of PIK Preferred
were converted into 1,355,519 shares of the Company's Common Stock and 7,416
shares of the PIK Preferred remained outstanding. On December 8, 1995, the
remaining 7,416 shares of PIK Preferred were redeemed for $15 per share plus
dividends of $0.16 per share accrued through the redemption date.
The Company believes that its cash flows generated by operations together
with availability of credit under the Restated Credit Facility will be
sufficient to meet the Company's short and long-term cash needs. However, the
Company's net debt-to-total-capitalization ratio at May 31, 1996 is 63.1%. 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 and income
from investments in Houston Northwest Medical Center ("Adjusted EBITDA") for the
nine months ended May 31, 1996 increased 26.7% from the same period last year to
$248.9 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 are as follows:
18
<PAGE>
<TABLE>
Three Months Ended May 31 Nine Months Ended May 31
------------------------- ------------------------
1995 1996 1995 1996
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Total Revenue $ 497,890 $ 557,866 $ 1,358,636 $1,594,319
Less: Salaries and benefits 217,384 243,515 597,109 687,391
Supplies 66,774 77,012 173,635 215,223
Purchased services 51,851 46,515 149,417 150,476
Provision for doubtful accounts 29,910 35,308 89,054 103,610
Other operating expenses 60,357 62,615 152,796 184,021
Minority interest 161 1,778 260 4,724
----------- ----------- ----------- ----------
Adjusted EBITDA $ 71,453 $ 91,123 $ 196,365 $ 248,874
=========== =========== =========== =========
</TABLE>
The ratio of earnings to fixed charges and preferred stock dividends was
1.83 and 2.17 for the three months ended May 31, 1995 and 1996, respectively,
and 1.63 and 1.99 for the nine months ended May 31, 1995 and 1996, respectively.
The ratio of earnings to fixed charges and preferred stock dividends is
calculated by dividing earnings before income taxes plus fixed charges by the
sum of fixed charges which consists of interest expense, amortization of
financing costs, preferred stock dividends, and the portion of rental expense
which is deemed to be representative of the interest component. The ratio of
earnings to fixed charges and preferred stock dividends is an indication of the
Company's ability to pay interest expense and other fixed charges.
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 May 31, 1996 approximately
$16.6 million of income tax, $64.2 million of interest on the tax, $43.9 million
of penalties and $23.8 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 May 31, 1996, the Company had approximately $477.5 million of debt
outstanding under the Restated Credit Facility with an interest rate of LIBOR
plus 1.50%. Interest rates in the future may be subject to upward and downward
adjustments based on the Company's leverage ratio. To the extent that interest
rates increase in the future, the Company may experience higher interest rates
19
<PAGE>
on such debt. A 1% increase in the prime rate or LIBOR would result in
approximately a $4.8 million increase in annual interest expense based upon the
Company's credit facility indebtedness outstanding at May 31, 1996.
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
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 investor-owned hospitals represent less than 25.0% of the hospital
industry as of May 31, 1996.
Health Care Reform. The Company derives a substantial portion of its
revenue from third party payors, including the Medicare and Medicaid programs.
During the nine months ended May 31, 1995 and 1996, the Company derived an
aggregate of 59.1% and 57.0%, respectively, of its gross revenue from the
Medicare and Medicaid programs.
Changes in existing governmental reimbursement programs in recent years
have resulted in reduced levels of reimbursement for health care services, and
additional changes are anticipated. Such changes are likely to result in further
reductions in the rate of increase in reimbursement levels. In addition, private
payors, including managed care payors, increasingly are demanding discounted fee
structures or the assumption by health care providers of all or a portion of the
financial risk through prepaid capitation arrangements. Inpatient utilization,
average lengths of stay and occupancy rates continue to be negatively affected
by payor-required pre-admission authorization and utilization review and by
payor pressure to maximize outpatient and alternative health care delivery
services for less acutely ill patients. In addition, efforts to impose reduced
allowances, greater discounts and more stringent cost controls by government and
other payors are expected to continue.
Significant limits on reimbursement rates could adversely affect the
Company's results of operations. The Company is unable to predict the effect
these changes will have on its operations. No assurance can be given that such
reforms will not have a material adverse effect on the Company.
Technological Changes. The rapid technological changes in health care
services will continue to require significant expenditures for new equipment and
updating of physical facilities. The Company believes that the cash flows
generated by its operations together with availability of credit under the
Restated Credit Facility will be sufficient to meet the Company's short and
long-term cash needs for capital expenditures and operations.
Excess Capacity. Excess capacity in medical/surgical hospitals will require
20
<PAGE>
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.
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 its facilities from their competitors.
Tax Rate. The Company expects its effective tax rate to increase to
approximately 27% for fiscal 1996 due to the January 1996 acquisition of HNW.
This estimated rate does not reflect the effect of any pending acquisitions
which may cause the rate to increase. Additionally, the Company expects its
effective tax rate to approximate the statutory tax rate by fiscal 1998.
Stock. The Company's stock price is subject to significant volatility. If
revenues or earnings fail to meet expectations of the investment community or if
the regulators allege that the Company is materially in violation of the fraud
and abuse, false claims or physician self-referral laws, there could be an
immediate and significant impact on the trading price for the Company's stock.
Because of stock market forces beyond the Company's control and the nature of
its business, such shortfalls can be sudden.
The Company believes it has the asset portfolio, financial resources and
compliance procedures necessary for continued success, but revenue and
profitability trends cannot be precisely determined at this time.
21
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT INDEX
NO. SUBJECT MATTER
10(a)............. Form of Stock Option Agreement between the Company and its
executive officer stock option grantees for its April 1996
stock option grants
10(b)............. Employment Agreement dated as of May 1, 1996 between the
Company and William L. Hough
11................ Computation of per share earnings
27................ Financial Data Schedule (included only in filings under the
Electronic Data Gathering Analysis and Retrieval System)
(b) Reports on Form 8-K. One report on Form 8-K was filed by the
Company during the fiscal quarter ended May 31, 1996, as follows:
Date of Current Report Item(s) Reported Any Financial Statements Filed
March 26, 1996 Item 5-Other Events No
Item 7(c)-Exhibits
22
<PAGE>
ORNDA HEALTHCORP AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OrNda HealthCorp
(Registrant)
July 12, 1996 BY: /S/ PHILLIP W. ROE
PHILLIP W. ROE
Vice President and Controller
(Principal accounting officer
and authorized signatory)
23
Exhibit 10(a)
STOCK OPTION AGREEMENT
AGREEMENT dated as of May 1, 1996, by and between OrNda HealthCorp, a
Delaware corporation (the "Company"), and __________ (the "Executive").
WHEREAS, the Company has adopted the OrNda HealthCorp 1994 Management
Equity Plan (the "Plan") and the Company's stockholders have ratified such
adoption; and
WHEREAS, the Company desires to grant to the Executive an option under the
Plan to acquire an aggregate of _____ shares of the Company's Common stock, $.01
par value (the "Common Stock"), on the terms set forth herein.
NOW, THEREFORE, the parties agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein shall
have the meanings set forth in the Plan.
2. Grant of Option. The Executive is hereby granted a Nonqualified
Stock Option (the "Option") to purchase an aggregate of _____ shares of Common
Stock pursuant to the terms of this Agreement and the provisions of the Plan.
3. Option Price. The exercise price of the Option shall be $27.125 per
share of Common Stock issuable thereunder.
4. Conditions to Exercisability.
(a) If the Executive continues to be employed by the Company on the
tenth anniversary of the date hereof, the Option shall become exercisable in
full on such date. Notwithstanding the foregoing, the Option will become
exercisable with respect to twenty percent (20%) of the shares of Common Stock
covered thereby as of the last day of each fiscal year of the Company set forth
on the table below if (1) the Executive continues to be employed by the Company
on such date and (2) the Company's Earnings Per Share (as defined below) for
such fiscal year (the "Required Earnings Per Share") equals or exceeds the
amounts set forth in the table below:
Fiscal Year Required
Ending On Earnings Per Share
--------------- ------------------
August 31, 1996 $1.62
August 31, 1997 To be determined by Committee
August 31, 1998 To be determined by Committee
August 31, 1999 To be determined by Committee
August 31, 2000 To be determined by Committee
-1-
<PAGE>
(b) Notwithstanding the foregoing, the Option shall become
exercisable in full upon the occurrence of a Change in Control of the Company.
(c) Notwithstanding the foregoing, the Option shall become
exercisable, in whole or in part, at any time at the discretion of the
Compensation Committee of the Company's Board of Directors (the "Committee").
(d) The term "Earnings Per Share" shall mean the Company's publicly
reported primary earnings per share for a fiscal year period excluding (each an
"Exclusion") (i) extraordinary gains and losses; (ii) all gains and losses from
acquisitions and dispositions; (iii) pooling expenses, special executive
compensation charges and other non-recurring charges provided each such
Exclusion from said publicly reported primary earnings per share must be
approved by the Committee, in its sole discretion, as the type of non-operating
gain or loss properly excluded from the Company's publicly reported primary
earnings per share in arriving at a per share earnings number for the Company
which more accurately indicates the Company's operating earnings for each such
year to apply against the Required Earnings Per Share target for such year.
5. Period of Option. The Option shall expire on the earliest to occur
of:
(a) the expiration of one (l) month following the tenth anniversary
of the date hereof:
(b) the first anniversary of the Executive's death or termination
of employment for Disability; and
(c) three months after the Executive's termination of employment
other than for death or Disability.
Notwithstanding the foregoing, upon any termination from employment the
Option shall immediately terminate in respect of any portion thereof
nonexercisable at the time of such termination.
6. Exercise of Option.
(a) The Option shall be exercised in the following manner: the
Executive, or the person or persons having the right to exercise the Option upon
the death or Disability of the Executive, shall deliver to the Company written
notice specifying the number of shares of Common Stock which the Executive
elects to purchase. The Executive (or such other person) must either (i) include
with such notice full payment of the exercise price for the Common Stock being
purchased pursuant to such notice or (ii) provide for a broker-dealer to forward
such full payment to the Company, in a manner and in a period of time acceptable
to the Company, in a cashless exercise procedure. Payment of the exercise price
must be made (i) in cash, (ii) by certified or cashier's check, (iii) by
delivery to the Company of Common Stock previously owned for at least six months
and having a Fair Market Value equal to the aggregate exercise price, or (iv) in
a combination of cash, check and Common Stock. In lieu of the payment of the
exercise price as set forth in the foregoing
-2-
<PAGE>
sentence, upon request of the Executive (or such other person), the Company may,
in its sole discretion, allow the Executive to exercise the Option or a portion
thereof by tendering shares of Common Stock previously owned for less than six
months, including shares received upon exercise of such Option.
(b) Upon the request of the Executive, or the person or persons
having the right to exercise the Option upon the death or Disability of the
Executive, the Company may, in its sole discretion, in lieu of a normal issuance
of shares upon exercise of the Option in whole or in part, pay the Executive in
cash, Common Stock or a combination of cash and Common Stock, as the Company
shall determine, in an amount determined by multiplying (i) the excess of the
Fair Market Value of a share of Common Stock on the date of exercise of such
Option over the per share exercise price of the Option by (ii) the number of
shares of Common Stock as to which the Option is being exercised.
(c) Full payment of the exercise price for shares subject to the
Option and any applicable federal and state withholding tax shall be made at the
time of exercise of any portion of the Option. No shares shall be issued until
full payment has been made, and the Executive shall have none of the rights of a
stockholder until shares are issued to him. The Company may authorize, but shall
have no obligation to permit, the payment of any applicable federal or state
withholding tax by the tender of shares of Common Stock, including the tender of
shares which otherwise would be issued to the Executive upon exercise of the
Option, provided, however, that any such payment by a director or officer
subject to Section 16(b) of the Exchange Act shall be in compliance with Rule
16b-3.
(d) If the Plan or any law, regulation or interpretation requires
the Company to take any action regarding the Common Stock before the Company
issues certificates for the Common Stock being purchased, the Company may delay
delivering the certificates for the Common Stock for the period necessary to
take such action. The certificate or certificates representing the Common Stock
acquired pursuant to the Option may bear a legend restricting the transfer of
such Common Stock, and the Company may impose stop transfer instructions to
implement such restrictions, if applicable.
(e) The Executive will not be deemed to be a holder of any shares
pursuant to exercise of the Option until the date of the issuance of a stock
certificate to him for such shares of Common Stock and until the shares of
Common Stock are paid for in full.
7. Representations. (a) The Company represents and warrants that this
Agreement has been authorized by all necessary corporate action of the Company
and is a valid and binding agreement of the Company enforceable against the
Company in accordance with its terms.
(b) The Executive represents and warrants that he is not a party to
any agreement or instrument which would prevent him from entering into or
performing his duties in any way under this Agreement.
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8. Entire Agreement. This Agreement contains all the understandings
between the parties hereto pertaining to the matters referred to herein, and
supersedes all undertakings and agreements, whether oral or in writing,
previously entered into by them with respect thereto. The Executive represents
that, in executing this Agreement, he does not rely and has not relied upon any
representation or statement not set forth herein made by the Company with regard
to the subject matter, bases or effect of this Agreement or otherwise.
9. Amendment or Modification Waiver. No provision of this Agreement
may be amended or waived unless such amendment or waiver is agreed to in
writing, signed by the Executive and by a duly authorized officer of the
Company. No waiver by any party hereto or any breach by another party hereto of
any condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
10. Notices. Any notice to be given hereunder shall be in writing and
shall be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:
To Executive at:
The Executive's residence address
then on file with the Company's or its affiliates'
Human Resources Department
To the Company at:
OrNda HealthCorp
3401 West End Avenue
Nashville, Tennessee 37203
Attn: General Counsel
Telecopy: (615) 783-1232
Any notice delivered personally or by courier under this Section 10 shall
be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.
11. Severability. If any provision of this Agreement or the application
of any such provision to any party or circumstances shall be determined by any
court of competent jurisdiction to be invalid and unenforceable to any extent,
the remainder of this Agreement or the application of such provision to such
person or circumstances other than those to which it is so determined to be
invalid and unenforceable, shall not be affected thereby, and each provision
hereof shall be validated and shall be enforced to the fullest extent permitted
by law.
12. Nontransferability. This Option (or any portion thereof) is not
transferable by the Executive otherwise than by will or by the laws of descent
and distribution.
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13. Survivorship. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
14. Governing Law. This agreement will be governed by and construed in
accordance with the laws of the State of Tennessee, without regard to its
conflicts of laws principles.
15. Headings. All descriptive headings of sections and paragraphs in
this Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
16. Construction. This Agreement is made under and subject to the
provisions of the Plan, and all of the provisions of the Plan are hereby
incorporated herein as provisions of this Agreement. If there is a conflict
between the provisions of this Agreement and the provisions of the Plan, the
provisions of the Plan will govern. By signing this Agreement, the Executive
confirms that he has received a copy of the Plan and has had an opportunity to
review the contents thereof.
17. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ORNDA HEALTHCORP
By:________________________________________
Ronald P. Soltman
Senior Vice President
Executive:
___________________________________________
(Name)
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Exhibit 10(b)
EMPLOYMENT AGREEMENT
AGREEMENT made as of May 1, 1996, by and between OrNda Healthcorp, a
Delaware corporation (the "Company"), and William L. Hough (the "Executive").
WHEREAS, the Executive currently serves as Executive Vice President
and Chief Operating Officer of the Company and has served in such capacity since
August 1995;
WHEREAS, the Company desires to secure for itself the continuing
services of the Executive from and after the date hereof and the Executive
desires to render such services, in each case pursuant to the terms and
conditions hereof;
WHEREAS, the Compensation Committee (the "Compensation Committee")
of the Company's Board of Directors (the "Board") has approved and authorized
the Company's entry into this Agreement with the Executive; and
WHEREAS, the parties desire to enter into this Agreement setting
forth the terms and conditions of the employment relationship of the Executive
with the Company.
NOW, THEREFORE, the parties agree as follows:
1. Employment. The Company hereby employs the Executive, and the
Executive hereby accepts employment with the Company, upon the terms and subject
to the conditions set forth herein.
2. Term. This Agreement is for the three-year period (the "Term")
commencing on May 1, 1995 (the "Effective Date") and terminating on the third
anniversary of the Effective Date, or upon the Executive's earlier death,
disability or other termination of employment pursuant to Section 10; provided,
however, that at the end of each day during the Extension Period (as defined
below) the Term shall automatically be extended for one additional day; and
provided, further, that commencing on the fifth anniversary of the Effective
Date and on each anniversary thereafter the Term shall automatically be extended
for one additional year unless, not later than 90 days prior to any such
anniversary, either party hereto shall have notified the other party hereto that
such extension shall not take effect. For purposes of this Section 2, the
Extension Period shall be the period beginning on the Effective Date and ending
on the earlier of (i) the Date of Termination (as defined below) and (ii) the
day preceding the second anniversary of the Effective Date.
3. Position. During the Term, the Executive shall serve as
Executive Vice President and Chief Operating Officer of the Company or in such
other senior executive position in the Company as the Executive should approve.
4. Duties and Reporting Relationship. During the Term, the
Executive shall, on a full time basis, use his skills and render services to the
best of his abilities in supervising and conducting the operations of the
Company.
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5. Place of Performance. The Executive shall perform his duties
and conduct his business at the principal executive offices of the Company,
except for required travel on the Company's business.
6. Salary and Annual Bonus.
(a) Base Salary. The Executive's base salary hereunder shall
be $550,000 a year, payable monthly. The Board shall review such base salary at
least annually and make such adjustment from time to time as it may deem
advisable, but the base salary shall not at any time be less than $550,000 a
year.
(b) Annual Bonus. The Compensation Committee shall provide
the Executive with an annual bonus plan providing the Executive with an
opportunity to earn annual bonus compensation and shall cause the Company to pay
to him any earned annual bonus in addition to his base salary.
7. Vacation, Holidays and Sick Leave. During the Term, the
Executive shall be entitled to paid vacation, paid holidays and sick leave in
accordance with the Company's standard policies for its senior executive
officers.
8. Business Expenses. The Executive will be reimbursed for all
ordinary and neces sary business expenses incurred by him in connection with his
employment upon timely submission by the Executive of receipts and other
documentation as required by the Internal Revenue Code and in conformance with
the Company's normal procedures.
9. Pension and Welfare Benefits. During the Term, the Executive
shall be eligible to participate fully in all health benefits, insurance
programs, pension and retirement plans and other employee benefit and
compensation arrangements available to senior officers of the Company generally.
10. Termination of Employment.
(a) General. The Executive's employment hereunder may be
terminated with out any breach of this Agreement only under the following
circumstances.
(b) Death or Disability.
(i) The Executive's employment hereunder shall
automatically terminate upon the death of the Executive.
(ii) If, as a result of the Executive's incapacity due
to physical or mental illness, the Executive shall have been absent from
his duties with the Company for any six (6) months (whether or not
consecutive) during any twelve (12)
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month period, the Company may terminate the Executive's employment
hereunder for any such incapacity (a "Disability").
(c) Cause. The Company may terminate the Executive's
employment hereunder for Cause. For purposes of this Agreement, "Cause" shall
mean (i) the willful failure or refusal by the Executive to perform his duties
hereunder (other than any such failure resulting from the Executive's incapacity
due to physical or mental illness), which has not ceased within ten (10) days
after a written demand for substantial performance is delivered to the Executive
by the Company, which demand identifies the manner in which the Company believes
that the Executive has not performed such duties, (ii) the willful engaging by
the Executive in misconduct which is materially injurious to the Company,
monetarily or otherwise (including, but not limited to, conduct described in
Section 14) or (iii) the conviction of the Executive of, or the entering of a
plea of nolo contendere by the Executive with respect to, a felony.
Notwithstanding the foregoing, the Executive's employment hereunder shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to the Executive a copy of a resolution duly adopted by the
affirmative vote of not less than a majority of the entire membership of the
Board at a meeting of the Board (after written notice to the Executive and a
reasonable opportunity for the Executive, together with the Executive's counsel,
to be heard before the Board), finding that in the good faith opinion of the
Board the Executive should be terminated for Cause.
(d) Termination by the Executive. The Executive shall be
entitled to terminate his employment hereunder (A) for Good Reason or (B) if his
health should become impaired to an extent that makes his continued performance
of his duties hereunder hazardous to his physical or mental health, provided
that the Executive shall have furnished the Company with a written statement
from a qualified doctor to such effect and provided, further, that, at the
Company's request, the Executive shall submit to an examination by a doctor
selected by the Company and such doctor shall have concurred in the conclusion
of the Executive's doctor. For purposes of this Agreement, "Good Reason" shall
mean, (i) without the Executive's express written consent, any failure by the
Company to comply with any material provision of this Agreement, which failure
has not been cured within ten (10) days after notice of such noncompliance has
been given by the Executive to the Company or (ii) the occurrence (without the
Executive's express written consent), following a Change of Control during the
term of this Agreement, of any one of the following acts by the Company, or
failures by the Company to act, unless, in the case of any act or failure to act
described below, such act or failure to act is corrected prior to the Date of
Termination specified in the Notice of Termination given in respect thereof:
(I) any change in the Executive's title, authorities,
responsibilities (including reporting responsibilities) which, in the
Executive's reasonable judgment, represents an adverse change from his
status, title, position or responsibilities (including reporting
responsibilities) which were in effect immediately prior to the Change in
Control or from his status, title, position or responsibilities (including
reporting responsibilities) which were in effect following a Change in
Control pursuant to the Executive's consent to accept any such change; the
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assignment to him of any duties or work responsibilities which, in his
reasonable judgment, are inconsistent with such status, title, position or
work responsibilities; or any removal of the Executive from, or failure to
reappoint or reelect him to any of such positions, except if any such
changes are because of Disability, retirement, death or Cause;
(II) a reduction by the Company in the Executive's
annual base salary as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary reductions
similarly affecting all senior executives of the Company and all senior
executives of any Person (as defined in Section 10(h)(i) below) in control
of the Company provided in no event shall any such reduction reduce the
Executive's base salary below $550,000;
(III) the relocation of the Executive's office at which
he is to perform his duties, to a location more than thirty (30) miles
from the location at which the Executive performed his duties prior to the
Change in Control, except for required travel on the Company's business to
an extent substantially consistent with his business travel obligations
prior to the Change in Control;
(IV) if the Executive had been based at the Company's
principal executive offices immediately prior to the Change of Control,
the relocation of the Company's principal executive offices to a location
more than 30 miles from the location of such offices immediately prior to
the Change in Control;
(V) the failure by the Company, without the Executive's
consent, to pay to the Executive any portion of the Executive's current
compensation, or to pay to the Executive any portion of an installment of
deferred compensation under any deferred compensation program of the
Company, within seven (7) days of the date such compensation is due;
(VI) the failure by the Company to continue in effect
any stock-based and/or cash annual or long-term incentive compensation
plan in which the Executive participates immediately prior to the Change
in Control, unless the Executive participates after the Change in Control
in other comparable plans generally available to senior executives of the
Company and senior executives of any Person in control of the Company;
(VII) the failure by the Company to continue to provide
the Executive with benefits substantially similar in value to the
Executive in the aggregate to those enjoyed by the Executive under any of
the Company's pension, life insurance, medical, health and accident, or
disability plans in which the Executive was participating immediately
prior to the Change in Control, unless the Executive participates after
the Change in Control in other comparable benefit plans generally
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available to senior executives of the Company and senior executives of any
Person in control of the Company;
(VIII) the adverse and substantial alteration of the
nature and quality of the office space within which the Executive
performed his duties prior to a Change in Control as well as in the
secretarial and administrative support provided to the Executive,
provided, however, that a reasonable alteration of the secretarial or
administrative support provided to the Executive as a result of reasonable
measures implemented by the Company to effectuate a cost-reduction or
consolidation program shall not constitute Good Reason hereunder; or
(IX) any purported termination of the Executive's
employment which is not effected pursuant to a Notice of Termination
satisfying the requirements of Section 10(f) below; for purposes of this
Agreement, no such purported termina tion shall be effective.
The Executive's continued employment shall not constitute consent to, or a
waiver of rights with respect to, any act or failure to act constituting Good
Reason hereunder.
(e) Voluntary Resignation. Should the Executive wish to
resign from his position with the Company or terminate his employment for other
than Good Reason during the Term, the Executive shall give sixty (60) days
written notice to the Company, setting forth the reasons and specifying the date
as of which his resignation is to become effective.
(f) Notice of Termination. Any purported termination of the
Executive's employment by the Company or by the Executive shall be communicated
by written Notice of Termination to the other party hereto in accordance with
Section 18. "Notice of Termination" shall mean a notice that shall indicate the
specific termination provision in this Agreement relied upon and shall set forth
in reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated.
(g) Date of Termination. "Date of Termination" shall mean (i)
if the Executive's employment is terminated because of death, the date of the
Executive's death, (ii) if the Executive's employment is terminated for
Disability, the date Notice of Termination is given, (iii) if the Executive's
employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for
any other reason (other than death or Disability), the date specified in the
Notice of Termination (which, in the case of a termination for Good Reason shall
not be less than fifteen (15) nor more than sixty (60) days from the date such
Notice of Termination is given, and in the case of a termination for any other
reason shall not be less than thirty (30) days (sixty (60) days in the case of a
termination under Subsection (e) hereof) from the date such Notice of
Termination is given).
(h) Change in Control. For purposes of this Agreement, a
Change in Control of the Company shall have occurred if
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(i) any "Person" (as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act") as modified and used
in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the
Company or any of its subsidiaries, (2) any trustee or other fiduciary
holding securities under an employee benefit plan of the Company or any of
its subsidiaries, (3) an underwriter temporarily holding securities
pursuant to an offering of such securities, or (4) any corporation owned,
di rectly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of the Company's
common stock)), is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of
the Company representing more than 50% of the combined voting power of the
Company's then outstanding voting securities;
(ii) during any period of not more than two consecutive
years, not including any period prior to the date of this Agreement,
individuals who at the beginning of such period constitute the Board, and
any new director (other than a di rector designated by a person who has
entered into an agreement with the Company to effect a transaction
described in clause (i), (iii), or (iv) of this Section 10(h)) whose
election by the Board or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning
of the period or whose election or nomination for election was previously
so approved, cease for any reason to constitute at least a majority
thereof;
(iii) the stockholders of the Company approve a merger
or consolidation of the Company with any other corporation, other than
both (A)(1) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing
to represent (either by remaining outstanding or by being converted into
voting securities of the surviving or parent entity) 50% or more of the
combined voting power of the voting securities of the Company or such
surviving or parent entity outstanding immediately after such merg er or
consolidation or (2) a merger or consolidation in which no person acquires
50% or more of the combined voting power of the Company's then outstanding
securities; and (B) immediately after the consummation of such merger or
consolidation described in clause (A)(1) or (A)(2) above (and for at least
180 days thereafter) neither the Company's Chief Executive Officer nor its
Chief Financial Officer change from the people occupying such positions
immediately prior to such merger or consolidation except as a result of
their death or Disability and neither of such officers shall have changed
prior to such merger or consolidation at the direction of a Person who has
entered into an agreement with the Company the consummation of which will
constitute a Change in Control of the Company; or
(iv) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the
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Company of all or substantially all of the Company's assets (or any
transaction having a similar effect).
(i) Resignation as Member of Board. If the Executive's
employment by the Company is terminated for any reason, the Executive hereby
agrees that he shall simultaneously submit his resignation as a member of the
Board in writing on or before the Date of Termination if the Executive is a
member of the Board at such time. If the Executive fails to submit such required
resignation in writing, the provisions of this Subsection 10(i) may be deemed by
the Company to constitute the Executive's written resignation as a member of the
Board effective as of the Date of Termination.
11. Compensation During Disability, Death or Upon Termination.
(a) During any period that the Executive fails to perform his
duties hereunder as a result of incapacity due to physical or mental illness
("Disability Period"), the Executive shall continue to receive his full salary
at the rate then in effect for such period until his employment is terminated
pursuant to Section 10(b)(ii) hereof, provided that payments so made to the
Executive during the Disability Period shall be reduced by the sum of the
amounts, if any, payable to the Execu tive with respect to such period under
disability benefit plans of the Company or under the Social Security disability
insurance program, and which amounts were not previously applied to reduce any
such payment.
(b) If the Executive's employment is terminated by his death
or Disability, the Company shall pay (i) any amounts due to the Executive under
Section 6 through the date of such termination and (ii) all such amounts that
would have become due to the Executive under Section 6 had the Executive's
employment hereunder continued until the last day of the calendar year in which
such termination of employment occurred, in each case in accordance with Section
13(b), if applicable.
(c) If the Executive's employment shall be terminated by the
Company for Cause or by the Executive for other than Good Reason, the Company
shall pay the Executive his full salary through the Date of Termination at the
rate in effect at the time Notice of Termination is given, and the Company shall
have no further obligations to the Executive under this Agreement.
(d) If (A) following a Change of Control the Company shall
terminate the Executive's employment in breach of this Agreement, or (B)
following a Change of Control the Executive shall terminate his employment for
Good Reason, then
(i) the Company shall pay the Executive his full salary
through the Date of Termination at the rate in effect at the time Notice
of Termination is given and all other unpaid amounts, if any, to which the
Executive is entitled as of the Date of Termination under any compensation
plan or program of the Company, at the time such payments are due;
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(ii) in lieu of any further salary payments to the
Executive for periods subsequent to the Date of Termination, the Company
shall pay as liquidated damages to the Executive an aggregate amount equal
to the product of (A) the sum of (1) the Executive's annual salary rate in
effect as of the Date of Termination and (2) the average of the annual
bonuses actually paid to the Executive by the Company with respect to the
two fiscal years which immediately precede the year of the Term in which
the Date of Termination occurs provided if there was a bonus or bonuses
paid to the Executive with respect only to one fiscal year which
immediately precedes the year of the Term in which the Date of Termination
occurs, then such single year's bonus or bonuses shall be utilized in the
calculation pursuant to this clause (2) and (B) the number three (3);
(iii) the Company shall (x) continue coverage for the
Executive under the Company's life insurance, medical, health, disability
and similar welfare benefit plans (or, if continued coverage is barred
under such plans, the Company shall provide to the Executive substantially
similar benefits) for the remainder of the Term, and (y) provide the
benefits which the Executive would have been entitled to receive pursuant
to any supplemental retirement plan maintained by the Company had his
employment continued at the rate of compensation specified herein for the
remainder of the Term. Benefits otherwise receivable by the Executive
pursuant to clause (x) of this Subsection 11(d)(iii) shall be reduced to
the extent comparable benefits are actually received by the Executive from
a subsequent employer during the period during which the Company is
required to provide such benefits, and the Executive shall report any such
benefits actually received by him to the Company; and
(iv) the payments provided for in this Section 11(d)
(other than Section 11(d)(iii)) shall be made not later than the fifth day
following the Date of Termination, provided, however, that if the amounts
of such payments, and the limitation on such payments set forth in Section
15 hereof, cannot be finally deter mined on or before such day, the
Company shall pay to the Executive on such day an estimate, as determined
in good faith by the Company, of the minimum amount of such payments to
which the Executive is clearly entitled and shall pay the remainder of
such payments (together with interest at the rate provided in section
1274(b)(2)(B) of the Code (as defined in Section 15)) as soon as the
amount thereof can be determined but in no event later than the thirtieth
(30th) day after the Date of Termination. In the event that the amount of
the estimated payments exceeds the amount determined by the Company within
six (6) months after payment to have been due, such excess shall
constitute a loan by the Company to the Executive, payable no later than
the thirtieth (30th) business day after demand by the Company (together
with interest at the rate provided in section 1274(b)(2)(B) of the Code).
At the time that payments are made under this Section 11(d), the Company
shall provide the Executive with a written statement setting forth the
manner in which such payments were calculated and the basis for such
calculations including, without limitation, any
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opinions or other advice the Company has received from outside counsel,
auditors or consultants (and any such opinions or advice which are in
writing shall be attached to the statement).
(e) If prior to any Change of Control the Company shall
terminate the Executive's employment in breach of this Agreement, then
(i) the Company shall pay the Executive his full salary
through the Date of Termination at the rate in effect at the time Notice
of Termination is given and all other unpaid amounts, if any, to which the
Executive is entitled as of the Date of Termination under any compensation
plan or program of the Company, at the time such payments are due;
(ii) in lieu of any further salary payments to the
Executive for periods subsequent to the Date of Termination, the Company
shall pay as liquidated damages to the Executive an aggregate amount equal
to the product of (A) the sum of (1) the Executive's annual salary rate in
effect as of the Date of Termination and (2) the average of the annual
bonuses actually paid to the Executive by the Company with respect to the
two fiscal years which immediately precede the year of the Term in which
the Date of Termination occurs provided if there was a bonus or bonuses
paid to the Executive with respect only to one fiscal year which
immediately precedes the year of the Term in which the Date of Termination
occurs, then such single year's bonus or bonuses shall be utilized in the
calculation pursuant to this clause (2) and (B) the lesser of (x) the
number three (3) and (y) the greater of (aa) the number of years
(including partial years) remaining in the Term and (bb) the number two
(2); such amount to be paid in substantially equal monthly installments
during the period commencing with the month immediately following the
month in which the Date of Termination occurs and ending with the month
corresponding to the end of the Term hereunder; and
(iii) the Company shall (x) continue coverage for the
Executive under the Company's life insurance, medical, health, disability
and similar welfare benefit plans (or, if continued coverage is barred
under such plans, the Company shall provide to the Executive substantially
similar benefits) for the remainder of the Term, and (y) provide the
benefits which the Executive would have been entitled to receive pursuant
to any supplemental retirement plan maintained by the Company had his
employment continued at the rate of compensation specified herein for the
remainder of the Term. Benefits otherwise receivable by the Executive
pursuant to clause (x) of this Subsection 11(e)(iii) shall be reduced to
the extent comparable benefits are actually received by the Executive from
a subsequent employer during the period during which the Company is
required to provide such benefits, and the Executive shall report any such
benefits actually received by him to the Company.
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(f) If the Executive shall terminate his employment under
clause (C) of subsection 10(d) hereof, the Company shall pay the Executive his
full salary through the Date of Termination at the rate in effect at the time
Notice of Termination is given, and the Company shall have no further
obligations to the Executive under this Agreement.
(g) The Executive shall not be required to mitigate the amount
of any payment provided for in this Section 11 by seeking other employment or
otherwise, and, except as provided in Sections 11(d) and 11(e) hereof, the
amount of any payment or benefit provided for in this Section 11 shall (i) not
be reduced by any compensation earned by the Executive as the result of
employment by another employer or by retirement benefits and (ii) be the sole
amount due to the Executive from the Company upon such termination of
employment, the Executive hereby waiving any claim for other compensation or
related damages (whether consequential, punitive or other) as a result of such
termination.
12. Representations.
(a) The Company represents and warrants that this Agreement
has been autho rized by all necessary corporate action of the Company and is a
valid and binding agreement of the Company enforceable against it in accordance
with its terms.
(b) The Executive represents and warrants that he is not a
party to any agreement or instrument which would prevent him from entering into
or performing his duties in any way under this Agreement.
13. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
(b) This Agreement is a personal contract and the rights and
interests of the Executive hereunder may not be sold, transferred, assigned,
pledged, encumbered, or hypothecated by him, except as otherwise expressly
permitted by the provisions of this Agreement. This Agreement shall inure to the
benefit of and be enforceable by the Executive and his personal or legal
represen tatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die while any amount would still
be payable to him hereunder had the Executive continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to his devisee, legatee or other designee or, if there
is no such designee, to his estate.
-10-
<PAGE>
14. Confidentiality and Non-Competition Covenants.
(a) The Executive covenants and agrees that he will not at any
time during and after the end of the Term, directly or indirectly, use for his
own account, or disclose to any person, firm or corporation, other than
authorized officers, directors and employees of the Company or its subsidiaries,
Confidential Information (as hereinafter defined) of the Company. As used
herein, "Confidential Information" of the Company means information of any kind,
nature or description which is disclosed to or otherwise known to the Executive
as a direct or indirect consequence of his association with the Company, which
information is not generally known to the public or in the businesses in which
the Company is engaged or which information relates to specific investment
opportunities within the scope of the Company's business which were considered
by the Executive or the Company during the term of this Agreement. During the
Term and for a period of two years following the termination of the Executive's
employment, the Executive shall not induce any employee of the Company or its
subsidiaries to terminate his or her employment by the Company or its
subsidiaries in order to obtain employment by any person, firm or corporation
affiliated with the Executive.
(b) The Executive covenants and agrees that during the Term
and for a period of two (2) years following the termination of the Executive's
employment, the Executive shall not, directly or indirectly, own any interest
in, operate, join, control, or participate as a partner, director, principal,
officer, or agent of, enter into the employment of, act as a consultant to, or
perform any services for any entity which has material operations which compete
with any business in which the Company is engaged at the time of the Executive's
termination of employment unless such entity disposes of the competing
operations during the one-year period following the commencement of the
Executive's relationship with the entity that is prohibited by this Section
14(b). Notwithstanding anything herein to the contrary, (1) the foregoing
provisions of this Section 14(b) shall not prevent the Executive from acquiring
securities representing not more than 5% of the outstanding voting securities of
any publicly held corporation and (2) the foregoing provisions of this Section
14(b) shall not be applicable to a termination of the Executive's employment (i)
by the Company following a Change of Control in breach of this Agreement, (ii)
by the Executive for Good Reason following a Change of Control or (iii) by the
Company for Cause.
15. Prohibition on Parachute Payments.
(a) Notwithstanding any other provisions of this Agreement, in
the event that any payment or benefit received or to be received by the
Executive in connection with a Change in Control of the Company or the
termination of the Executive's employment (whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the Company, any
Person whose actions result in a Change in Control or any Person affiliated with
the Company or such Person) (all such payments and benefits, including, without
limitation, base salary and bonus payments, being hereinafter called "Total
Payments") would not be deductible (in whole or part), by the Company, an
affiliate or any Person making such payment or providing such benefit as a
result of section 280G of the Internal Revenue Code of 1986, as amended (the
"Code"), then, to the extent
-11-
<PAGE>
necessary to make such portion of the Total Payments deductible (and after
taking into account any reduction in the Total Payments provided by reason of
section 280G of the Code in such other plan, arrangement or agreement), (A) such
cash payments shall first be reduced (if necessary, to zero), and (B) all other
non-cash payments by the Company to the Executive shall next be reduced (if
necessary, to zero). For purposes of this limitation (i) no portion of the Total
Payments the receipt or enjoyment of which the Executive shall have effectively
waived in writing prior to the Date of Termination shall be taken into account,
(ii) no portion of the Total Payments shall be taken into account which in the
opinion of tax counsel selected by the Company's independent auditors and
reasonably acceptable to the Executive does not constitute a "parachute payment"
within the meaning of section 280G(b)(2) of the Code, including by reason of
section 280G(b)(4)(A) of the Code, (iii) such payments shall be reduced only to
the extent necessary so that the Total Payments (other than those referred to in
clauses (i) or (ii)) in their entirety constitute reasonable compensation for
services actually rendered within the meaning of section 280G(b)(4)(B) of the
Code or are otherwise not subject to disallowance as deductions, in the opinion
of the tax counsel referred to in clause (ii); and (iv) the value of any
non-cash benefit or any deferred payment or benefit included in the Total
Payments shall be determined by the Company's independent auditors in accordance
with the principles of sections 280G(d)(3) and (4) of the Code.
(b) If it is established pursuant to a final determination of
a court or an Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive and the Company in applying the terms of this Section 15,
the aggregate "parachute payments" paid to or for the Executive's benefit are in
an amount that would result in any portion of such "parachute payments" not
being deductible by reason of section 280G of the Code, then the Executive shall
have an obligation to pay the Company upon demand an amount equal to the sum of
(i) the excess of the aggregate "parachute payments" paid to or for the
Executive's benefit over the aggregate "parachute payments" that could have been
paid to or for the Executive's benefit without any portion of such "parachute
payments" not being deductible by reason of section 280G of the Code; and (ii)
interest on the amount set forth in clause (i) of this sentence at the rate
provided in section 1274(b)(2)(B) of the Code from the date of the Executive's
receipt of such excess until the date of such payment.
16. Entire Agreement. This Agreement contains all the understandings
between the parties hereto pertaining to the matters referred to herein, and on
the Effective Date shall supersede all undertakings and agreements, whether oral
or in writing, previously entered into by them with respect thereto. The
Executive represents that, in executing this Agreement, he does not rely and has
not relied upon any representation or statement not set forth herein made by the
Company with regard to the subject matter, bases or effect of this Agreement or
otherwise.
17. Amendment or Modification, Waiver. No provision of this
Agreement may be amended or waived unless such amendment or waiver is agreed to
in writing, signed by the Executive and by a duly authorized officer of the
Company. No waiver by any party hereto of any breach by another party hereto of
any condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
-12-
<PAGE>
18. Notices. Any notice to be given hereunder shall be in writing
and shall be deemed given when delivered personally, sent by courier or telecopy
or registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:
To Executive at: William L. Hough
704 Nantucket Circle
Franklin, TN 37064
To the Company at: OrNda HealthCorp
3401 West End Avenue
Suite 700
Nashville, Tennessee 37203
Attn: General Counsel
Telecopy: (615) 783-1232
Any notice delivered personally or by courier under this Section 18
shall be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.
19. Severability. If any provision of this Agreement or the
application of any such provision to any party or circumstances shall be
determined by any court of competent jurisdiction to be invalid and
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to such person or circumstances other than those to which it
is so determined to be invalid and unenforceable, shall not be affected thereby,
and each provision hereof shall be validated and shall be enforced to the
fullest extent permitted by law.
20. Survivorship. The respective rights and obligations of the
parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
21. Governing Law; Attorney's Fees.
(a) This Agreement will be governed by and construed in
accordance with the laws of the State of New York, without regard to its
conflicts of laws principles.
(b) The prevailing party in any dispute arising out of this
Agreement shall be entitled to be paid its reasonable attorney's fees incurred
in connection with such dispute from the other party to such dispute.
22. Headings. All descriptive headings of sections and paragraphs
in this Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
-13-
<PAGE>
23. Withholdings. All payments to the Executive under this
Agreement shall be reduced by all applicable withholding required by federal,
state or local tax laws.
24. Severance Protection Agreement. The Severance Protection
Agreement dated as of July 27, 1995, between the Company and the Executive is
hereby terminated effective as of May 1, 1996.
25. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
ORNDA HEALTHCORP
BY: /s/ Ronald P. Soltman
Ronald P. Soltman
Senior Vice President
THE EXECUTIVE
/s/ William L. Hough
William L. Hough
-14-
ORNDA HEALTHCORP AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
<TABLE>
Three Months Ended May 31 Nine Months Ended May 31
------------------------- ------------------------
1995 1996 1995 1996
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Primary
Average shares outstanding....................... 44,549 58,159 44,016 54,795
Net effect of dilutive common
stock equivalents:
Stock options and warrants-
treasury stock method.................. 1,052 2,212 1,012 1,838
----------- ----------- ----------- ----------
TOTAL ....................................... 45,601 60,371 45,028 56,633
=========== =========== =========== ==========
Net income as adjusted for
preferred stock dividends.................... $ 21,604 $ 29,290 $ 53,870 $ 76,332
=========== =========== =========== ==========
Per share amount................................. $ 0.47 $ 0.49 $ 1.20 $ 1.35
=========== =========== =========== ==========
Fully Diluted
Average shares outstanding....................... 44,549 58,159 44,016 54,795
Net effect of dilutive common
stock equivalents:
Stock options and warrants-
treasury stock method.................. 1,058 2,212 1,034 2,045
Assumed conversion of redeemable
preferred stock........................ 1,388 -- -- 415
----------- ----------- ----------- --------
TOTAL ....................................... 46,995 60,371 45,050 57,255
=========== =========== =========== ========
Net income....................................... $ 22,091 $ 29,290 $ 55,360 $ 76,664
Preferred stock dividend requirements -- -- (1,490) --
----------- ----------- ----------- ----------
Net income as adjusted for preferred
st!ock dividends.............................. $ 22,091 $ 29,290 $ 53,870 $ 76,664
=========== =========== =========== ==========
Per share amount................................. $ 0.47 $ 0.49 $ 1.20 $ 1.34
=========== =========== =========== ==========
</TABLE>
<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> 6-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 13,826
<SECURITIES> 0
<RECEIVABLES> 431,708
<ALLOWANCES> 69,272
<INVENTORY> 39,275
<CURRENT-ASSETS> 467,022
<PP&E> 1,529,633
<DEPRECIATION> 346,189
<TOTAL-ASSETS> 2,186,098
<CURRENT-LIABILITIES> 390,114
<BONDS> 1,008,303
0
0
<COMMON> 582
<OTHER-SE> 615,104
<TOTAL-LIABILITY-AND-EQUITY> 2,186,098
<SALES> 0
<TOTAL-REVENUES> 1,594,319
<CGS> 0
<TOTAL-COSTS> 1,315,636
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 103,610
<INTEREST-EXPENSE> 79,850
<INCOME-PRETAX> 103,774
<INCOME-TAX> 27,110
<INCOME-CONTINUING> 76,664
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,664
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.34
</TABLE>
