-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FE0TCmoWoE8CsLd0PksLhHA8zhkwNxU00CHPH7G+K5s8hQiJDRpcZ8EXKC7z9LLf rfwufG9CQqjwOi7tJMmXOg== 0000719242-96-000013.txt : 19960715 0000719242-96-000013.hdr.sgml : 19960715 ACCESSION NUMBER: 0000719242-96-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960712 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORNDA HEALTHCORP CENTRAL INDEX KEY: 0000719242 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 751776092 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11591 FILM NUMBER: 96593915 BUSINESS ADDRESS: STREET 1: 3401 W END AVE STE 700 CITY: NASHVILLE STATE: TN ZIP: 37203-1042 BUSINESS PHONE: 6153838599 MAIL ADDRESS: STREET 1: 3401 WEST END AVE STREET 2: SUITE 700 CITY: NASHVILLE STATE: TN ZIP: 37203-1042 FORMER COMPANY: FORMER CONFORMED NAME: REPUBLIC HEALTH CORP DATE OF NAME CHANGE: 19920415 10-Q 1 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 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 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) Three Months Ended May 31, -------------------------- 1995 1996 ---- ---- 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 ========== ==========
3 ORNDA HEALTHCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME NINE MONTHS ENDED MAY 31, 1995 AND 1996 (Unaudited) (in thousands, except per share data) Nine Months Ended May 31, ------------------------- 1995 1996 ---- ---- 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 ========== ==========
4 ORNDA HEALTHCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share data) August 31, May 31, ------------------------- 1995 1996 ---- ---- ASSETS 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 ========== ==========
5 ORNDA HEALTHCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended May 31, ------------------------- 1995 1996 ---- ---- 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
6 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 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 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 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): Three Months Ended May 31 Nine Months Ended May 31 ------------------------- ------------------------ 1995 1996 1995 1996 ----------- ----------- ----------- ---------- 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 =========== =========== =========== ==========
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): 1995 1996 -------------- -------------- 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
10 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 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; Number Percentage of Number Percentage of of 5/31/95 of 5/31/96 Hospitals Total Revenue Hospitals Total Revenue Greater Los Angeles 15 35.1% 15 32.1% South Florida 4 18.0% 5 17.0% Arizona 6 8.9% 6 10.2%
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 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 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 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 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 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 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 Three Months Ended May 31 Nine Months Ended May 31 ------------------------- ------------------------ 1995 1996 1995 1996 ----------- ----------- ----------- ---------- 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 =========== =========== =========== =========
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 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 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 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 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 EX-10 2 FORM OF STOCK OPTION AGREEMENT 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- (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- 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. -3- 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. -4- 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) -5- EX-10 3 EMPLOYMENT AGREEMENT OF WILLIAM L. HOUGH 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. -1- 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) -2- 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 -3- 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 -4- 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 -5- (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 -6- 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; -7- (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 -8- 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. -9- (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- 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- 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- 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- 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- EX-11 4 COMPUTATION OF PER SHARE EARNINGS ORNDA HEALTHCORP AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (in thousands, except per share amounts) Three Months Ended May 31 Nine Months Ended May 31 ------------------------- ------------------------ 1995 1996 1995 1996 ----------- ----------- ----------- ---------- 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 =========== =========== =========== ==========
EX-27 5 FINANCIAL DATA SCHEDULE
5 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. 1,000 6-MOS AUG-31-1996 MAY-31-1996 13,826 0 431,708 69,272 39,275 467,022 1,529,633 346,189 2,186,098 390,114 1,008,303 0 0 582 615,104 2,186,098 0 1,594,319 0 1,315,636 0 103,610 79,850 103,774 27,110 76,664 0 0 0 76,664 1.35 1.34
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