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 February 29, 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 Identification No.)
incorporation or organization)
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
March 31, 1996: 58,156,258
<PAGE>
ORNDA HEALTHCORP
FORM 10-Q
February 29, 1996
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the Three
Months Ended February 28, 1995 and February 29, 1996................3
Consolidated Statements of Income for the Six Months
Ended February 28, 1995 and February 29, 1996...................... 4
Consolidated Balance Sheets as of August 31, 1995
and February 29, 1996...............................................5
Consolidated Statements of Cash Flows for the Six
Months Ended February 28, 1995 and February 29, 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 4. Submission of Matters to a Vote of Security Holders.................21
Item 6. Exhibits and Reports on Form 8-K....................................22
SIGNATURE....................................................................23
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 FEBRUARY 28, 1995
AND FEBRUARY 29, 1996
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
February 28, 1995 February 29, 1996
------------------ ------------------
<S> <C> <C>
Total Revenue $ 442,725 $ 542,888
Costs and Expenses:
Salaries and benefits 195,725 233,511
Supplies 53,482 73,321
Purchased services 51,421 51,742
Provision for doubtful accounts 30,406 35,095
Other operating expenses 46,287 61,453
Depreciation and amortization 19,767 24,591
Interest expense 27,832 26,278
Interest income (1,171) (1,134)
Minority interest (123) 1,593
--------- ----------
19,099 36,438
Income from investments in Houston
Northwest Medical Center 3,472 1,344
--------- ----------
Income before income tax expense 22,571 37,782
Income tax expense 2,652 10,327
--------- ----------
Net income 19,919 27,455
Preferred stock dividend requirements (508) --
--------- ----------
Net income applicable to common shares $ 19,411 $ 27,455
========= ==========
Net income per common and common
equivalent share $ 0.43 $ 0.46
========= ==========
Net income per common share
assuming full dilution $ 0.43 $ 0.46
========= ==========
Weighted average common and dilutive
common equivalent shares outstanding 44,642 59,972
========= ==========
Weighted average common shares outstanding
assuming full dilution 46,195 60,208
========= ==========
</TABLE>
3
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ORNDA HEALTHCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED FEBRUARY 28, 1995
AND FEBRUARY 29, 1996
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------------
February 28, 1995 February 29, 1996
----------------- -----------------
<S> <C> <C>
Total Revenue $ 860,746 $1,036,453
Costs and Expenses:
Salaries and benefits 379,725 443,876
Supplies 106,861 138,211
Purchased services 97,566 103,961
Provision for doubtful accounts 59,144 68,302
Other operating expenses 92,439 121,406
Depreciation and amortization 40,409 48,052
Interest expense 54,982 53,464
Interest income (2,206) (2,288)
Minority interest 99 2,946
---------- ---------
31,727 58,523
Income from investments in Houston
Northwest Medical Center 6,948 5,128
---------- ---------
Income before income tax expense 38,675 63,651
Income tax expense 5,406 16,277
---------- ---------
Net income 33,269 47,374
Preferred stock dividend requirements (1,003) (332)
---------- ---------
Net income applicable to common shares $ 32,266 $ 47,042
========== =========
Net income per common and common
equivalent share $ 0.72 $ 0.86
========== =========
Net income per common share
assuming full dilution $ 0.72 $ 0.85
========== =========
Weighted average common and dilutive
common equivalent shares outstanding 44,715 54,745
========== =========
Weighted average common shares outstanding
assuming full dilution 44,813 55,815
========== =========
</TABLE>
4
<PAGE>
ORNDA HEALTHCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
August 31, February 29,
1995 1996
----------- ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,963 $ 17,787
Patient accounts receivable, net of allowance for
uncollectibles of $58,632 at August 31, 1995
and $73,155 at February 29, 1996 307,601 370,165
Supplies, at cost 34,097 40,082
Other 57,052 46,684
----------- ------------
Total Current Assets 403,713 474,718
Property, Plant and Equipment, at cost:
Land 126,436 138,178
Buildings and improvements 870,352 967,783
Equipment and fixtures 359,979 395,376
----------- ------------
1,356,767 1,501,337
Less accumulated depreciation and amortization 288,410 324,616
----------- ------------
1,068,357 1,176,721
Investments in Houston Northwest Medical Center 73,755 --
Excess of Purchase Price Over Net Assets Acquired,
net of accumulated amortization 318,029 422,449
Other Assets 82,550 104,848
----------- ------------
$ 1,946,404 $ 2,178,736
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 117,258 $ 140,506
Accrued expenses and other liabilities 220,851 195,948
Current maturities of long-term debt 60,182 55,736
----------- ------------
Total Current Liabilities 398,291 392,190
Long-term Debt 1,013,423 1,023,651
Other Liabilities 141,552 177,242
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 58,096,258 shares at February 29, 1996 449 581
Additional paid-in capital 414,805 631,718
Retained earnings (deficit) (94,020) (46,646)
Unrealized gains on available-for-sale
securities, net of tax 51,792 --
----------- ------------
393,138 585,653
----------- ------------
$ 1,946,404 $ 2,178,736
=========== ============
</TABLE>
5
<PAGE>
ORNDA HEALTHCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------------
February 28, 1995 February 29, 1996
----------------- -----------------
<S> <C> <C>
CASH FLOW PROVIDED BY OPERATING ACTIVITIES:
Net income $ 33,269 $ 47,374
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash portion of (income)loss from investments in
Houston Northwest Medical Center (6,672) (4,213)
Depreciation and amortization 40,409 48,052
Provision for doubtful accounts 59,144 68,302
Changes in assets and liabilities net of effects from
acquisitions and dispositions of hospitals:
Patient accounts receivable (91,470) (102,159)
Other current assets (5,600) (4,189)
Other assets (876) 2,638
Accounts payable, accrued
expenses and other liabilities (8,714) (14,157)
Other liabilities (1,009) (8,053)
Proceeds from sales of trading investment security --- 20,625
----------- ----------
Net cash provided by operating activities 18,481 54,220
----------- ----------
CASH FLOW USED IN INVESTING ACTIVITIES:
Acquisitions of hospitals and related assets (31,234) (200,198)
Capital expenditures (25,701) (36,216)
Increase in notes receivable (2,128) (5,050)
Payments received on long-term notes and other receivables 1,734 4,048
Other investing activities 491 1,975
----------- ----------
Net cash used in investing activities (56,838) (235,441)
----------- ----------
CASH FLOW PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of common stock 3,541 197,045
Principal payments on long-term debt borrowings (80,940) (62,975)
Proceeds received on long-term debt borrowings 99,840 65,000
Financing costs incurred in connection with
long-term borrowings (637) (3,797)
Other 240 (1,228)
----------- ----------
Net cash provided by financing activities 22,044 194,045
----------- ----------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (16,313) 12,824
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,374 4,963
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,061 $ 17,787
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 55,639 $ 54,012
Income taxes 1,158 22,365
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Preferred stock dividends 1,003 332
Conversion of preferred stock to common stock -- 20,333
Capital lease obligations incurred 1,729 133
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)
February 29, 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 six months ended February 29, 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 0.7 million and 1.9 million equivalent shares for the three months
ended February 28, 1995 and February 29, 1996, respectively, and 1.0 million and
1.7 million shares for the six months ended February 28, 1995 and February 29,
1996, respectively. Earnings per common share assuming full dilution for the
three months ended February 28, 1995, and six months ended February 29, 1996
assumes the conversion of the Company's redeemable convertible preferred stock
into common shares.
7
<PAGE>
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 $488.8 million was outstanding on February 29, 1996
and of which commitment availability had been reduced by issued letters of
credit of $28.4 million and a scheduled principal payment of $11.2
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 beginning February 29, 1996.
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 1.50%, 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 February 29, 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.
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
8
<PAGE>
"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, 1991 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.
NOTE 5 - HOUSTON NORTHWEST MEDICAL CENTER
Houston Northwest Medical Center ("HNW"), which was not operated by the
Company until January, 1996, is a 498-bed acute care facility located in
Houston, Texas. Effective January 1, 1996, the Company acquired the remaining
equity interests in HNW for a total cash purchase price of $153.9 million.
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):
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
February 28, February 29, February 28, February 29,
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Accretion of discount on mandatorily
redeemable preferred stock $ 522 $ 189 $ 1,043 $ 757
Dividend income on mandatorily
redeemable preferred stock 2,814 1,031 5,629 4,123
Interest income on mortgage note
receivable 136 124 276 248
--------- --------- --------- ---------
$ 3,472 $ 1,344 $ 6,948 $ 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 effects of the Company's November 1995
sale of common stock (see Note 6) and Restated Credit Facility had occurred on
September 1, 1995, results of operations for the six months ended February 29,
1996 on a pro forma basis, would have been as reflected below (in thousands,
except per share data):
Total revenue $ 1,089,449
Net income 47,111
Net income applicable to common shares 46,779
Net income per common share 0.79
Net income per common share assuming full dilution $ 0.78
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.
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.
10
<PAGE>
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.
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 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 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 the Company's financial position or results of operations.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company's operating results for the three and six months ended
February 29, 1996, as compared to the same periods of the prior year, were
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
and the January 1996 acquisition of Houston Northwest Medical Center ("HNW").
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 six months ended February 28, 1995 and February
29, 1996, respectively;
Number Percentage of Number Percentage of
of 2/28/95 of 2/29/96
Hospitals Total Revenue Hospitals Total Revenue
--------- ------------- --------- -------------
Greater Los Angeles 15 35.8% 15 32.7%
South Florida 5 20.4% 6 18.8%
Arizona 3 6.1% 6 10.4%
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 structure. The Company's
results of operations have also been impacted by the acquisition of St. Luke's
and HNW discussed above.
Industry Trends. Outpatient services accounted for 29.4% and 30.0% of
actual gross patient revenue for the three and six months ended February 29,
1996, respectively, compared to 27.3% and 27.6% 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
acquisitions noted above ("same hospitals basis"), total revenues have
increased, reflecting higher utilization of outpatient and ancillary
services, increased acuity of patients admitted, and an increase in
admissions for inpatient procedures. The impact on revenue of increased
patient acuity and general price increases has been partially offset by the
increasing proportion of revenues derived from Medicare, Medicaid and
managed care providers. The Company's gross revenue from fixed
reimbursement third party payors represented approximately 88.0% of the
Company's total gross revenue for the first six 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
12
<PAGE>
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 February 29, 1996 Compared
With The Three Months Ended February 28, 1995
Total revenue for the quarter ended February 29, 1996, increased over the
same period in the prior year by $100.2 million or 22.6% to $542.9 million. The
22.6% increase is a result of the acquisitions discussed above as well as an
increase in same hospitals revenue as discussed below. The increase in total
revenue attributable to acquisitions, net of divestitures, was $64.2 million.
Net income applicable to common shares for the quarter ended February 29, 1996,
was $27.5 million, or $0.46 per share, compared to $19.4 million, or $0.43 per
share, in the same period last year.
Operating expenses in the quarter ended February 29, 1996, increased
20.6% ($77.8 million) compared to the same period in prior year primarily as a
result of the acquisitions discussed above and the increase in same hospital
revenues and volumes discussed below. Actual salaries and benefits as a
percentage of total revenue decreased from 44.2% in the second quarter of fiscal
1995 to 43.0% in the second quarter of fiscal 1996 mainly as a result of labor
efficiencies achieved at certain facilities.
Actual other operating expenses increased 32.8% ($15.2 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 quarter ended February 29, 1996, increased approximately $3.7 million for
claims payments made by the Medicaid HMOs to third party providers. In addition,
other operating expenses increased $1.8 million for rent expense related to
acquisitions financed through leasing agreements with third parties.
On a same hospitals basis, total revenue increased 8.3%($36.0 million)
primarily as a result of a 4.3% increase in admissions and a 16.2% increase in
gross outpatient revenue. On a same hospitals basis, salaries and benefits
decreased as a percent of total revenue from 44.9% in the second quarter of
fiscal 1995 to 44.4% in the second quarter of fiscal 1996 due to labor
efficiencies achieved at certain hospitals. Supplies expense increased 16.4%
($8.7 million) and as a percentage of total revenue increased from 12.3% in the
second quarter of fiscal 1995 to 13.2% in the second quarter of fiscal 1996.
Purchased services decreased 8.1% ($4.1 million) and as a percentage of total
revenue decreased from 11.8% in the second quarter of fiscal 1995 to 10.0% in
the second 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 4.1% ($1.2
million) but
13
<PAGE>
decreased from 7.0% of total revenue for the quarter ended February 28,
1995 to 6.7% for the quarter ended February 29, 1996. Other operating expenses
increased 12.0% ($4.6 million) and as a percentage of total revenue increased
from 9.0% in fiscal 1995 to 9.3% in fiscal 1996, primarily as a result of
increases in marketing and rent expenses.
Depreciation and amortization for the quarter ended February 29, 1996,
increased 24.4% ($4.8 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 $2.5
million. In addition, amortization on intangibles increased as a result of new
business units.
Interest expense for the second quarter of fiscal 1996 as compared to the
same period last year decreased 5.6% ($1.6 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. Of the Company's
total indebtedness of $1.1 billion at February 29, 1996, approximately $488.8
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 $1.7
million in the second 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 has several specialty joint ventures.
In the second quarter of fiscal 1996, the Company recorded income of $1.3
million, compared to $3.5 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 Employee Stock Ownership Plan (ESOP);
therefore, the $1.3 million of income referred to above represents income
recorded for the month of December 1995 prior to obtaining control. 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
$197.2 million of tax loss and credit carryforwards at February 29, 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 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 February 29,
1996 will be realized through reversal of deferred tax liabilities.
14
<PAGE>
For the quarter ended February 29, 1996, the Company recorded income tax
expense of $10.3 million on pre-tax income of $37.8 million, an amount less than
the statutory rate, primarily due to the availability of net operating loss
carryforwards.
Six Months Ended February 29, 1996 Compared
With The Six Months Ended February 28, 1995
Total revenue for the six months ended February 29, 1996, increased over
the same period in the prior year by $175.7 million or 20.4% to $1.0 billion.
The 20.4% increase is a result of the acquisitions previously discussed as well
as an increase in same hospitals revenue as discussed below. The increase in
total revenue attributable to acquisitions, net of divestitures, was $110.9
million. Net income applicable to common shares for the six months ended
February 29, 1996 was $47.0 million, or $0.86 per share, compared to $32.3
million, or $0.72 per share, in the same period last year.
Operating expenses in the six months ended February 29, 1996, increased
19.0% ($140.0 million) compared to the same period in prior year primarily as a
result of the acquisitions discussed above and the increase in same hospital
revenues and volumes discussed below. Actual salaries and benefits as a
percentage of total revenue decreased from 44.1% in the first six months of
fiscal 1995 to 42.8% in the first six months of fiscal 1996 mainly as a result
of labor efficiencies achieved at certain facilities.
Actual other operating expenses increased 31.3% ($29.0 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 six months ended February 29, 1996, increased approximately $8.0 million for
claims payments made by the Medicaid HMOs to third party providers. In addition,
other operating expenses increased $3.6 million for rent expense related to
acquisitions financed through leasing agreements with third parties.
On a same hospitals basis, total revenue increased 7.9% ($64.8 million)
primarily as a result of a 3.3% increase in admissions and a 17.4% increase in
gross outpatient revenue. On a same hospitals basis, salaries and benefits
decreased as a percent of total revenue from 44.9% in the first six months of
fiscal 1995 to 44.3% in the same period of fiscal 1996 due to labor efficiencies
achieved at certain hospitals. Supplies expense increased 12.2% ($12.8 million)
and as a percentage of total revenue increased from 12.7% in the first six
months of fiscal 1995 to 13.2% in the first six months of fiscal 1996. Purchased
services decreased 0.9% ($0.8 million) and as a percentage of total revenue
decreased from 11.6% in the same period of fiscal 1995 to 10.6% in the first six
months 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 3.3% ($1.9 million) but decreased
from 7.0% of total revenue for the six months ended February 28, 1995 to 6.7%
for the six months ended February 29, 1996. Other operating expenses increased
9.4% ($7.0 million) and as a percentage of total revenue increased from 9.1% in
fiscal 1995 to 9.2% in fiscal 1996, primarily as a result of increases in
marketing and rent expenses.
Depreciation and amortization for the six months ended February 29, 1996,
increased 18.9% ($7.6 million) over the prior year primarily as a result of the
acquisition of St. Luke's and HNW. The increase in depreciation and amortization
attributable to acquisitions, net of divestitures, was $4.6 million. In
addition, amortization on intangibles increased as a result of new business
units.
15
<PAGE>
Interest expense for the first six months of fiscal 1996 as compared to
the same period last year decreased 2.8% ($1.5 million) primarily as a result
of a decline in the average debt balance outstanding and improved pricing under
the Restated Credit Facility. Of the Company's total indebtedness of $1.1
billion at February 29, 1996, approximately $488.8 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 $2.8
million in the first six 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
has several specialty joint ventures.
In the first six months of fiscal 1996, the Company recorded income of
$5.1 million, compared to $6.9 million in fiscal 1995, related to its
investments in Houston Northwest Medical Center ("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
$197.2 million of tax loss and credit carryforwards at February 29, 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 February 29,
1996 will be realized through reversal of deferred tax liabilities.
For the six months ended February 29, 1996, the Company recorded income
tax expense of $16.3 million on pre-tax income of $63.7 million, an amount less
than the statutory rate, primarily due to the availability of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At February 29, 1996, the Company had working capital of $82.5 million,
of which $17.8 million is 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
16
<PAGE>
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 February 29,
1996, the Company had $371.6 million of borrowing capacity available for general
corporate purposes and acquisitions under its Restated Credit Facility.
In the six months ended February 29, 1996, the Company's operating
activities provided cash of $54.2 million. Cash from operations was used for the
$33.9 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
and second fiscal quarters. The Company anticipates the receipt of the payments
from Medicaid/Medicare programs in the third and fourth quarters of fiscal 1996.
The Company also believes the collection of patient accounts receivable on new
business units to improve in the third quarter. In addition, cash from
operations was used for income tax payments of $22.4 million and interest
payments of $54.0 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 $235.4 million during the six
months ended February 29, 1996 consisted primarily of capital expenditures of
$36.2 million and $200.2 million for the acquisition of hospitals and related
assets including $153.9 million for the acquisition of HNW. The Company's
Restated Credit Facility limits its 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
approximately $115.0 million of capital expenditures in fiscal 1996. Net cash
provided by financing activities for the six months ended February 29, 1996 of
$194.0 million resulted primarily from $197.0 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 February 29,
1996, the Company had $371.6 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.
17
<PAGE>
The Company believes that the cash flows generated by the Company's
operations together with availability of credit under the Company's Restated
Credit Facility will be sufficient to meet the Company's short and long-term
cash needs. However, the Company's net debt-to-total-capitalization ratio at
February 29, 1996 is 64.4%. 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
(loss) from investments in Houston Northwest Medical Center ("Adjusted
EBITDA") for the six months ended February 29, 1996 increased 26.3% from the
same period last year to $157.8 million. While Adjusted EBITDA should not be
construed as a substitute for net income or a better indicator of liquidity
than cash flow from operating, investing or financing activities, which are
determined in accordance with generally accepted accounting principles, it is
included herein to provide additional information with respect to the ability of
the Company to meet its future debt service, capital expenditure and working
capital requirements. The calculations of Adjusted EBITDA are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------------------------
February 28, February 29, February 28, February 29,
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total Revenue $ 442,725 $ 542,888 $ 860,746 $ 1,036,453
Less: Salaries and benefits 195,725 233,511 379,725 443,876
Supplies 53,482 73,321 106,861 138,211
Purchased services 51,421 51,742 97,566 103,961
Provision for doubtful accounts 30,406 35,095 59,144 68,302
Other operating expenses 46,287 61,453 92,439 121,406
Minority interest (123) 1,593 99 2,946
----------- ----------- ----------- -----------
Adjusted EBITDA $ 65,527 $ 86,173 $ 124,912 $ 157,751
=========== =========== =========== ===========
</TABLE>
The ratio of earnings to fixed charges and preferred stock dividends was
1.62 and 2.10 for the three months ended February 28, 1995 and February 29,
1996, respectively, and 1.54 and 1.91 for the six months ended February 28, 1995
and February 29, 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 of rental expense. The ratio of earnings to fixed charges and
preferred stock dividends is an indication of the Company's ability to pay
interest expense and other fixed charges.
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 February 29, 1996
approximately $16.6 million of income tax, $62.1 million of interest on the tax,
18
<PAGE>
$43.9 million of penalties and $22.1 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 February 29, 1996, the Company had approximately $488.8 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 on such debt. A 1% increase in the prime rate or LIBOR would
result in approximately a $4.9 million increase in annual interest expense based
upon the Company's credit facility indebtedness outstanding at February 29,
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 the investor-owned hospitals represent only approximately 13.8% of
the hospital industry as of December 31, 1994.
Health Care Reform. The Company derives a substantial portion of its
revenue from third party payors, including the Medicare and Medicaid programs.
During the six months ended February 28, 1995 and February 29, 1996, the Company
derived an aggregate of 59.2% and 57.5%, 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
19
<PAGE>
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 the Company's operations together with availability of credit under
the Company's Restated Credit Facility will be sufficient to meet the Company's
short and long-term cash needs for capital expenditures and operations.
Excess Capacity. Excess capacity in medical/surgical hospitals will require
the Company to continue to shift resources from traditional inpatient care to
various outpatient activities. The Company's ability to effectively shift those
resources and maintain market share will have a direct impact on the continued
profitability of the Company.
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 28% 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 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.
20
<PAGE>
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company's Annual Meeting of Stockholders was held on January 19,
1996. The following proposals were voted upon and approved:
Proposal 1. To elect the following four persons to the Company's
Board of Directors as Class III directors to hold office for terms expiring at
the 1999 Annual Meeting of Stockholders or until their respective successors are
duly elected and qualified.
The results of the voting of the Company's stockholders on Proposal 1
were as follows:
Nominee For Withheld Authority
Peter A. Joseph 47,903,462 537,540
Angus C. Littlejohn 47,902,257 538,745
Charles N. Martin, Jr. 47,932,383 508,619
John J. O'Shaughnessy 47,930,727 510,225
The name of each other director of the Company whose term of office as
a director continued after the meeting is as follows:
CLASS I- DIRECTOR TERMS EXPIRING AT THE 1997 ANNUAL MEETING
OF STOCKHOLDERS
Paul S. Levy
John F. Nickoll
M. Lee Pearce, M.D.
CLASS II- DIRECTOR TERMS EXPIRING AT THE 1998 ANNUAL MEETING
OF STOCKHOLDERS
Richard A. Gilleland
Leonard Green
Proposal 2. To approve adoption of the Company's Employee Stock
Purchase Plan.
The results of the voting of the Company's stockholders on Proposal 2
were as follows:
For Against Abstained
38,228,560 1,256,111 276,026
Proposal 3. To approve an amendment to the Company's 1994 Management
Equity Plan.
The results of the voting of the Company's stockholders on Proposal 3
were as follows:
For Against Abstained
26,750,342 12,715,570 294,785
Proposal 4. To approve adoption of the Company's Outside Directors
Stock Option Plan.
The results of the voting of the Company's stockholders on Proposal 4
were as follows:
For Against Abstained
36,851,170 3,519,895 290,316
21
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT INDEX
NO. SUBJECT MATTER
10(a)............. OrNda HealthCorp Outside Directors Stock Option Plan.
(Incorporated by reference from Exhibit B to the Company's
definitive proxy statement for its 1996 Annual Meeting of
Stockholders filed with the Securities and Exchange
Commission under the Securities Exchange Act of 1934 on
December 8, 1995.)
10(b)............. OrNda HealthCorp 1994 Management Equity Plan, as amended on
January 19, 1996. (Incorporated by reference from Exhibit
4(d) to the Company's Registration Statement No. 333-399 on
Form S-8, filed with the Securities and Exchange
Commission under the Securities Act of 1933 on January 24,
1996.)
11................ Computation of per share earnings
27................ Financial Data Schedule (included only in filings under the
Electronic Data Gathering Analysis and Retreival System)
(b) Reports on Form 8-K. Two reports on Form 8-K were filed by the
Registrant during the fiscal quarter ended February 29, 1996, as follows:
Date of
Current Report Item(s) Reported Any Financial Statements Filed
December 13, 1995 Item 5 - Other Events No
Item 7(c) - Exhibits
January 3, 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)
April 12, 1996 BY: /s/ PHILLIP W. ROE
Phillip W. Roe
Vice President and Controller
(Principal accounting officer
and authorized signatory)
23
ORNDA HEALTHCORP AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
<TABLE>
Three Months Ended Six Months Ended
------------------------- -------------------------
February 28 February 29 February 28 February 29
1995 1996 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Primary
Average shares outstanding............................ 43,906 58,058 43,722 53,094
Net effect of dilutive common
stock equivalents:
Stock options and warrants-
treasury stock method....................... 736 1,914 993 1,651
------ ------- ------- -------
TOTAL ............................................ 44,642 59,972 44,715 54,745
======= ======= ======= =======
Net income as adjusted for
preferred stock dividends....................... $19,411 $27,455 $ 32,266 $ 47,042
======= ======= ======== ========
Per share amount...................................... $ 0.43 $ 0.46 $ 0.72 $ 0.86
======= ======= ======== ========
Fully Diluted
Average shares outstanding............................ 43,906 58,058 43,722 53,094
Net effect of dilutive common
stock equivalents:
Stock options and warrants-
treasury stock method....................... 935 2,150 1,091 2,097
Assumed conversion of redeemable
preferred stock............................. 1,354 -- -- 624
------- ------- -------- -------
TOTAL ............................................ 46,195 60,208 44,813 55,815
======= ======= ======== =======
Net income............................................ $19,919 $27,455 $ 33,269 $ 47,374
Preferred stock dividend requirements -- -- (1,003) --
------- ------- -------- --------
Net income as adjusted for preferred
stock dividends................................... $19,919 $27,455 $ 32,266 $ 47,374
======= ======= ======== ========
Per share amount...................................... $ 0.43 $ 0.46 $ 0.72 $ 0.85
======= ======= ======== ========
</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> FEB-29-1996
<CASH> 17,787
<SECURITIES> 0
<RECEIVABLES> 443,320
<ALLOWANCES> 73,155
<INVENTORY> 40,082
<CURRENT-ASSETS> 474,718
<PP&E> 1,501,337
<DEPRECIATION> 324,616
<TOTAL-ASSETS> 2,178,736
<CURRENT-LIABILITIES> 392,190
<BONDS> 1,023,651
0
0
<COMMON> 581
<OTHER-SE> 585,072
<TOTAL-LIABILITY-AND-EQUITY> 2,178,736
<SALES> 0
<TOTAL-REVENUES> 1,036,453
<CGS> 0
<TOTAL-COSTS> 858,452
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 68,302
<INTEREST-EXPENSE> 53,464
<INCOME-PRETAX> 63,651
<INCOME-TAX> 16,277
<INCOME-CONTINUING> 47,374
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,374
<EPS-PRIMARY> .86
<EPS-DILUTED> .85
</TABLE>
