-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, sbZt8JC0xN/GGdQrSI7BykwpmjKlvXjZiUhw52jo6TgNM+JNpHolmBNVNyBkqtpP k7tHMvmPBdrluA0tPXygjQ== 0000950144-94-001349.txt : 19940721 0000950144-94-001349.hdr.sgml : 19940721 ACCESSION NUMBER: 0000950144-94-001349 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19940720 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORNDA HEALTHCORP CENTRAL INDEX KEY: 0000719242 STANDARD INDUSTRIAL CLASSIFICATION: 8060 IRS NUMBER: 751776092 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-54651 FILM NUMBER: 94539350 BUSINESS ADDRESS: STREET 1: 3401 W END AVE STE 700 CITY: NASHVILLE STATE: TN ZIP: 37203-1042 BUSINESS PHONE: 6153838599 MAIL ADDRESS: STREET 2: 3401 WEST END AVE, SUITE 700 CITY: NASHVILLE STATE: TN ZIP: 37203-1042 FORMER COMPANY: FORMER CONFORMED NAME: REPUBLIC HEALTH CORP DATE OF NAME CHANGE: 19920415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUMMIT HEALTH LTD CENTRAL INDEX KEY: 0000725555 STANDARD INDUSTRIAL CLASSIFICATION: 8062 IRS NUMBER: 953154694 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-54651-01 FILM NUMBER: 94539351 BUSINESS ADDRESS: STREET 1: 2600 W MAGNOLIA BLVD STREET 2: PO BOX 2110 CITY: BURBANK STATE: CA ZIP: 91505-2100 BUSINESS PHONE: 8188414044 S-3 1 ORNDA S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1994 REGISTRATION NO. 33- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- ORNDA HEALTHCORP SUMMIT HEALTH LTD. (Exact name of registrants as specified in its charter) DELAWARE 75-1776092 CALIFORNIA 95-3154694 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
3401 WEST END AVENUE, SUITE 700 NASHVILLE, TENNESSEE 37203 (615) 383-8599 (Address, including zip code, and telephone number, including area code, of registrants' principal executive offices) --------------------- RONALD P. SOLTMAN, ESQ. SENIOR VICE PRESIDENT AND GENERAL COUNSEL ORNDA HEALTHCORP 3401 WEST END AVENUE, SUITE 700 NASHVILLE, TENNESSEE 37203 (615) 383-8599 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- COPIES TO: MARK C. SMITH, ESQ. MORTON A. PIERCE, ESQ. SKADDEN, ARPS, DEWEY BALLANTINE SLATE, MEAGHER & FLOM 1301 AVENUE OF THE AMERICAS 919 THIRD AVENUE NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10022 (212) 259-8000 (212) 735-3000
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, please check the following box. / / CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO PROPOSED MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED(1) OFFERING PRICE(1) OFFERING PRICE(1) REGISTRATION FEE - ------------------------------------------------------------------------------------------------- % Senior Subordinated Notes due 2004................... $100,000,000 100% $100,000,000 $34,483 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933. --------------------- THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 *************************************************************************** * * * Information contained herein is subject to completion or amendment. A * * registration statement relating to these securities has been filed * * with the Securities and Exchange Commission. These securities may not * * be sold nor may offers to buy be accepted prior to the time the * * registration statement becomes effective. This prospectus shall not * * constitute an offer to sell or the solicitation of an offer to buy * * nor shall there be any sale of these securities in any State in which * * such offer, solicitation or sale would be unlawful prior to * * registration or qualification under the securities laws of any such * * State. * * * *************************************************************************** SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED JULY 20, 1994 PROSPECTUS $100,000,000 [LOGO] % SENIOR SUBORDINATED NOTES DUE 2004 --------------------- The % Senior Subordinated Notes due 2004 (the "Notes") are being offered by OrNda HealthCorp (the "Company") and its wholly owned subsidiary, Summit Health Ltd. ("Summit" and, together with the Company, the "Co-Obligors"). The Notes are the joint and several obligations of the Co-Obligors. The Company will receive all of the net proceeds from the offering of the Notes. Interest on the Notes will be payable semi-annually on and of each year, commencing , 1995. The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after , 1999 at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. Upon a Change of Control (as defined herein) and the satisfaction of certain conditions regarding Designated Senior Debt (as defined herein), each holder of the Notes may require the Company to repurchase such Notes at 100% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of repurchase. The Notes will be subordinated in right of payment to all existing and future Senior Debt (as defined herein) of the Co-Obligors and effectively subordinated in right of payment to all existing and future liabilities of the Company's subsidiaries (other than Summit). As of May 31, 1994, the amount of Senior Debt and obligations of the Company's subsidiaries (excluding intercompany indebtedness) that effectively ranked senior to the Notes was approximately $622.4 million. As of May 31, 1994, after giving effect to the proposed acquisition of Fountain Valley Regional Hospital and Medical Center ("Fountain Valley"), the offering of the Notes and the use of proceeds therefrom as described herein, and assuming the repurchase of 100% of the aggregate outstanding principal amount of the Company's 10 1/4% Senior Subordinated Notes due 2003 (the "10 1/4% Notes") pursuant to the Change of Control Offer (as defined herein), such amount would have been approximately $619.6 million. The offering of the Notes is not contingent upon the proposed acquisition of Fountain Valley and there can be no assurance that such acquisition will be consummated. The Notes will rank pari passu in right of payment to the Company's 12 1/4% Senior Subordinated Notes due 2002 (the "12 1/4% Notes") and the 10 1/4% Notes. As of May 31, 1994, there was $500 million aggregate principal amount of indebtedness outstanding which would rank pari passu in right of payment to the Notes. As of May 31, 1994, after giving effect to the offering of the Notes and the use of proceeds therefrom as described herein, and assuming the repurchase of 100% of the aggregate outstanding principal amount of the 10 1/4% Notes pursuant to the Change of Control Offer, there would have been $400 million aggregate principal amount of indebtedness outstanding which would rank pari passu in right of payment to the Notes. See "Description of the Notes -- Subordination." FOR INFORMATION CONCERNING CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, SEE "INVESTMENT CONSIDERATIONS." --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ PRICE TO PROCEEDS TO PUBLIC(1) UNDERWRITING COMPANY(1)(3) DISCOUNT(2) - ------------------------------------------------------------------------------------------------------ Per Note............................... % % % - ------------------------------------------------------------------------------------------------------ Total.................................. $ $ $ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from , 1994. (2) The Co-Obligors have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (3) Before deducting expenses of the offering payable by the Company, estimated at $ . --------------------- The Notes are offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by the Underwriters, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify any such offer and to reject orders in whole or in part. It is expected that delivery of the Notes will be made in New York, New York on or about , 1994. --------------------- MERRILL LYNCH & CO. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SALOMON BROTHERS INC CITICORP SECURITIES, INC. --------------------- The date of this Prospectus is , 1994. 3 [MAP] --------------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this Prospectus or incorporated herein by reference. The term the "Company" as used herein refers to OrNda HealthCorp and its direct and indirect subsidiaries, unless otherwise stated or indicated by context. References herein to the Company's "EBITDA" refer to the Company's earnings before interest, taxes, depreciation, amortization, minority interest, income (loss) from investments in Houston Northwest Medical Center and non-recurring items. References herein to Fountain Valley's "EBITDA" refer to Fountain Valley's earnings before interest, taxes, depreciation, amortization and non-recurring items. References herein to Summit's "EBITDA" refer to Summit's earnings before interest, taxes, depreciation, amortization and minority interest. References herein to American Healthcare Management, Inc.'s ("AHM") EBITDA refer to AHM's earnings before interest, taxes, depreciation, amortization and non-recurring items. References herein to the Company's "fiscal year" refer to the fiscal year ended August 31 of such year. THE COMPANY The Company is a leading provider of health care services in the United States, delivering a broad range of inpatient and outpatient health care services principally through the operation of 45 hospitals located in urban and suburban communities in 15 states, primarily in the southern and western United States. Services provided by the Company's hospitals include general surgery, internal medicine, obstetrics, emergency room care, radiology, diagnostic services, coronary care, pediatric services and psychiatric services. On an outpatient basis, the Company's services include, among others, same-day surgery, diagnostic radiology (e.g. magnetic resonance imaging, CT scanning, X-ray), rehabilitative therapy, clinical laboratory services, pharmaceutical services and psychiatric services. The Company also operates a number of free-standing surgery centers, which provide a cost-effective alternative to inpatient care for the performance of minor surgeries. Certain of the Company's hospitals offer other specialized services, including cardiac surgery, home health services, hemodialysis, rehabilitation, AIDS treatment and clinics specializing in the treatment of industrial accidents and women's health. In addition, the Company operates a managed health care plan (the "Medicaid HMO") pursuant to which the Company currently provides health care services, under a fixed price contract, to over 20,000 members of the Arizona state Medicaid system. Since January 1992, when Charles N. Martin, Jr. was elected Chairman, President and Chief Executive Officer, the Company has (i) substantially increased its revenue while improving operating profitability and (ii) actively participated in the consolidation of the health care industry through a series of strategic acquisitions. Through such acquisitions the Company has diversified into new markets and expanded its service capabilities in order to position the Company as a leading provider of low cost, high quality health care services. The Company has grown in size from 11 hospitals at August 31, 1991 to 45 hospitals at June 30, 1994 and its revenue has grown from approximately $460 million for the 1991 fiscal year (prior to giving effect to the Mergers described below) to approximately $1.5 billion for the 1993 fiscal year (after giving pro forma effect to the Mergers but not the proposed acquisition of Fountain Valley). The operating margin of its hospitals has grown from 12.2% for the 1991 fiscal year (prior to giving effect to the Mergers) to 14.5% for the nine months ended May 31, 1994 (after giving effect to the Mergers but not the proposed acquisition of Fountain Valley). On April 19, 1994, the Company completed a merger with AHM, which operated 16 acute care hospitals providing basic primary care services (the "AHM Merger"), and acquired Summit, which operated 12 hospitals and a variety of outpatient specialty health care clinics and programs (the "Summit Merger" and, together with the AHM Merger, the "Mergers"). The Company believes that the Mergers have created a company positioned to compete more effectively in the changing health care environment. The Company's revenue, EBITDA and income from continuing operations for the 1993 fiscal year approximated $1.5 billion, $206.4 million, and $26.0 million, respectively (after giving pro forma effect to the Mergers but not the 3 5 proposed acquisition of Fountain Valley) and approximated $1.6 billion, $223.7 million, and $30.4 million, respectively (after giving pro forma effect to the Mergers, the Offering and the proposed acquisition of Fountain Valley and assuming the Company's repurchase of 100% of the aggregate principal amount of the 10 1/4% Notes pursuant to the Change of Control Offer). The Mergers enhanced the Company's position in several of its existing markets, primarily Southern California, by allowing the Company to coordinate the services provided by the hospitals acquired with those provided by its existing hospitals and thereby eliminate redundant services and benefit from other operating efficiencies and economies of scale. In addition, the Mergers provided the Company with access to new markets, including Arizona and Nevada, and new health care delivery capabilities, such as the Medicaid HMO and outpatient specialty service clinics. The Mergers also strengthened the Company's management team through the addition of management personnel from Summit and AHM with experience in improving operating performance. The Company recently entered into a letter of intent to acquire Fountain Valley, a provider of tertiary care services, for a total purchase price of approximately $145 million, of which approximately $95 million will be paid in cash. Fountain Valley, located in Fountain Valley, California, comprises a 413-bed acute care hospital, a surgery center, an imaging center and four medical office buildings. For the fiscal year ended October 31, 1993, Fountain Valley's total revenues, EBITDA and income from continuing operations were approximately $120.8 million, $21.6 million and $8.0 million, respectively. The proposed acquisition of Fountain Valley is subject to the execution of definitive agreements, the approval of the board of directors of Fountain Valley Medical Development Co. ("FVMDC"), the consent of the lenders under the Company's existing bank credit facility (the "Bank Credit Facility") and certain other regulatory approvals. There can be no assurance that the proposed acquisition of Fountain Valley will be consummated. The Company intends to continue to increase revenue and market share through implementation of the following business strategies: - Development of Integrated Health Care Delivery Networks. In order to succeed in the changing health care environment, the Company is developing relationships with managed care organizations, other health care providers and physicians in each of its markets to offer a full range of integrated patient services on a cost effective basis. The Company believes that the establishment of integrated networks will allow it to, among other things, (i) improve the quality of care provided by concentrating specialized service expertise within each market and (ii) reduce costs through consolidation of facilities, increased purchasing power and other economies of scale. Through the development of health care networks, the Company believes it will augment revenues and market share by attracting an increasing share of large, sophisticated governmental and private sector managed care contracts. In addition, the Company intends to continue to pursue strategic acquisitions of health care providers in geographic areas and with service capabilities that will facilitate the development of integrated networks. The Company believes that the acquisition of Fountain Valley will further the development of a health care network in the greater Los Angeles, California area by allowing the Company to integrate the tertiary care services provided by Fountain Valley with the primary care services provided by the Company's existing 13 hospitals in neighboring communities. - Outpatient Services. The Company has responded to the recent shift toward increased outpatient care by enhancing its hospitals' outpatient facilities and services. The Company will emphasize those outpatient services that it believes will grow in demand and which can be provided on a cost effective, high revenue growth basis. The Company believes that it is well positioned to compete effectively with alternate site providers of outpatient services because its acute care hospitals are able to offer a broader range of services at competitive prices. - Cost Reduction. The Company intends to continue to position itself as a low cost provider of health care services in each of its markets by implementing programs designed to improve financial performance and efficiency. These programs include, among others, (i) monitoring and adjusting staffing levels and equipment usage in response to resource consumption; (ii) more efficient use of professional and paraprofessional staff such as nurses and nurses' aides; (iii) improving patient management and 4 6 reporting procedures; and (iv) improving the collection and sharing of utilization and patient mix data with providers, employers and payors. In addition, the Company intends to take advantage of reductions in corporate overhead and other economies of scale from the Mergers and any future acquisitions. The Company estimates realizing annualized operating cost savings of approximately $15 million from improved operating efficiencies resulting from the Mergers. - Community Based Services. The Company intends to continue to implement specialty programs on a selective basis to maintain and enhance the range and quality of its health care services. The Company focuses on the particular needs of each community it serves and tailors its services based upon local conditions and the Company's ability to provide such services on a competitive basis. Examples of specialty services provided by the Company in response to local demand include rehabilitation services, home health services, AIDS treatment, cardiac surgery, weight loss services, pain treatment programs and women's health clinics. - Modernization of Facilities. The Company believes that maintaining and modernizing its facilities is an important means of continuing revenue and market share growth. After giving pro forma effect to the Mergers, the Company's capital expenditures have totalled approximately $200 million over the past three fiscal years. Such spending resulted in hospital renovations and equipment purchases to expand and enhance the Company's range of services as well as the expansion of high growth outpatient facilities and other specialty services, including outpatient surgery and home health services. The Company believes that capital expenditures (exclusive of hospital acquisitions) during the 12 months following the Mergers will not exceed $75 million, and will be used for expansion of services at existing facilities and the replacement of outdated equipment. - Management Information Systems. The Company believes that the ability to collect and analyze information on the quality of care and to develop appropriate responses thereto is critical to achieving growth in the managed care environment. Prior to the Mergers, the Company, Summit and AHM each designed or successfully implemented systems which measure selected outcome quality indicators and identify needed improvements to patient care. For example, these systems help identify and track quality indicators such as unplanned transfers to intensive care units and returns to the operating room. This information, which is shared with physicians and other health care professionals, is being utilized to develop improved protocols of care and to direct treatment to the most appropriate level of care. The Company is consolidating its quality and utilization system with that of each of AHM and Summit to enhance its operational efficiency and reduce costs. The Company's and Summit's principal executive offices are located at 3401 West End Avenue, Suite 700, Nashville, Tennessee 37203, and their telephone number is (615) 383-8599. 5 7 THE OFFERING Notes Offered.............. $100,000,000 principal amount of % Senior Subordinated Notes due 2004. Co-Obligors................ The Notes are the joint and several obligations of the Company and its wholly owned subsidiary, Summit. Maturity Date.............. , 2004. Interest Payment Dates..... and of each year, commencing , 1995. Optional Redemption........ The Notes are redeemable at the option of the Company, in whole or in part, on or after , 1999, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. Change of Control.......... Upon the occurrence of a Change of Control and the satisfaction of certain conditions regarding Designated Senior Debt (as defined herein), each holder of the Notes may require the Company to repurchase all or a portion of such holder's Notes at a purchase price in cash equal to 100% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of repurchase. See "Description of the Notes -- Restrictive Covenants." Ranking.................... The Notes will be senior subordinated obligations of the Co-Obligors and, as such, will be subordinated to all existing and future Senior Debt (as defined herein) of the Co-Obligors. The Notes will also be effectively subordinated in right of payment to all existing and future liabilities of the Company's subsidiaries other than Summit. As of May 31, 1994, the amount of Senior Debt and obligations of the Company's subsidiaries (excluding intercompany indebtedness) that effectively ranked senior to the Notes was approximately $622.4 million. As of May 31, 1994, after giving effect to the proposed acquisition of Fountain Valley, the offering of the Notes (the "Offering") and the use of proceeds therefrom as described in "Use of Proceeds," and assuming the repurchase of 100% of the aggregate outstanding principal amount of the 10 1/4% Notes pursuant to the Change of Control Offer, such amount would have been approximately $619.6 million. The Notes will rank pari passu in right of payment to the Company's 12 1/4% Notes and the 10 1/4% Notes and will rank senior to all other subordinated indebtedness of the Co-Obligors. As of May 31, 1994, there was $500 million aggregate principal amount of indebtedness outstanding which ranked pari passu in right of payment to the Notes. As of May 31, 1994, after giving effect to the proposed acquisition of Fountain Valley, the Offering and the use of proceeds therefrom as described in "Use of Proceeds," and assuming the repurchase of 100% of the aggregate outstanding principal amount of the 10 1/4% Notes pursuant to the Change of Control Offer, there would have been $400 million aggregate principal amount of indebtedness outstanding, which would have ranked pari passu in right of payment to the Notes. See "Description of the Notes -- Subordination." Restrictive Covenants...... The Indenture will contain certain covenants, including, but not limited to, covenants with respect to the following matters: (i) limitation on additional indebtedness; (ii) limitation on restricted payments; (iii) limitation on liens securing indebtedness; (iv) limitation on the 6 8 creation of any restriction on the ability of the Company's subsidiaries to make distributions; (v) limitation on transactions with affiliates; (vi) limitation on other subordinated indebtedness; and (vii) restrictions on mergers, consolidations and the transfer of all or substantially all of the assets of the Company to another person. See "Description of the Notes -- Restrictive Covenants." Use of Proceeds............ The net proceeds to the Company from the sale of the Notes are estimated to be approximately $ million. The Company intends to use the net proceeds from the Offering to reduce amounts outstanding under the revolving facility of the Bank Credit Facility, which amounts the Company has utilized or anticipates utilizing in connection with the repurchase of the 10 1/4% Notes, the financing of the proposed acquisition of Fountain Valley and other strategic acquisitions and for general corporate purposes. Pursuant to the terms of the indenture under which the 10 1/4% Notes were issued, the AHM Merger constituted a "Change of Control" and the Company was required to offer to purchase (the "Change of Control Offer") the $100 million aggregate principal amount of the 10 1/4% Notes at a purchase price of 101% of the principal amount thereof plus accrued interest. As of July 18, 1994, the expiration date of the Change of Control Offer, approximately $99.3 million aggregate principal amount of the outstanding 10 1/4% Notes were tendered and were purchased by the Company on July 19, 1994 pursuant to the Change of Control Offer. The Offering is not contingent on the proposed acquisition of Fountain Valley. See "Use of Proceeds." Absence of Public Market... There is no public market for the Notes and the Co-Obligors do not intend to list the Notes on any securities exchange or for quotation of the Notes through the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). The Co-Obligors have been advised by the Underwriters (as defined herein) that, following the completion of the offering of the Notes, the Underwriters presently intend to make a market in the Notes. However, the Underwriters are under no obligation to do so and may discontinue any market making activities at any time without notice. There can be no assurance as to the liquidity of the trading market for the Notes or that an active public market for the Notes will develop or, if developed, will continue. INVESTMENT CONSIDERATIONS See "Investment Considerations" for a discussion of certain factors that should be considered by prospective purchasers in evaluating an investment in the Notes. 7 9 SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA The following table presents summary pro forma condensed combined financial data derived from the unaudited pro forma condensed combined financial statements included elsewhere in this Prospectus. The summary pro forma condensed combined financial data gives effect to the following transactions and events as if all such transactions had occurred, in the case of statement of operations and operating data, on September 1, 1992 and in the case of balance sheet data, on April 19, 1994 for the Summit Merger and on May 31, 1994 for all other transactions: (i) the acquisition of Florida Medical Center (applying the purchase method of accounting) on June 30, 1993; (ii) the Summit Merger (applying the purchase method of accounting); (iii) the proposed acquisition of Fountain Valley (applying the purchase method of accounting); (iv) the consummation of the Offering and the application of the net proceeds therefrom; and (v) the Company's repurchase of 100% of the aggregate outstanding principal amount of the 10 1/4% Notes pursuant to the Change of Control Offer. Because the Company accounted for the AHM Merger as a pooling-of-interests transaction, the historical financial data of the Company include AHM's historical results of operations. The following summary unaudited pro forma financial data does not reflect cost savings, if any, which may be realized by the Company from the consummation of the Mergers or the proposed acquisition of Fountain Valley. The summary pro forma financial data are unaudited and do not purport to represent what the Company's results of operations would actually have been if the transactions assumed therein had in fact occurred at the times assumed or to project the Company's results of operation for any future periods or its financial condition at any future date. The summary pro forma condensed combined financial data should be read in conjunction with the respective historical financial statements of the Company, Summit and Fountain Valley incorporated by reference or included herein and the Unaudited Pro Forma Condensed Combined Financial Statements included herein.
FOR THE FOR THE NINE MONTHS YEAR ENDED ENDED MAY 31, AUGUST 31, 1994(1) 1993(2) ------------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS: Total revenue(3).......................................................................... $ 1,256,340 $1,605,951 Costs and expenses Operating expenses...................................................................... 1,001,607 1,287,176 Provision for doubtful accounts......................................................... 73,562 95,046 Depreciation and amortization........................................................... 66,676 81,644 Interest expense........................................................................ 80,973 106,978 Interest income......................................................................... (3,455) (5,115) Minority interest....................................................................... 4,230 4,601 Special executive compensation.......................................................... 2,530 -- Loss on sale of asset................................................................... 9,761 -- ------------- ---------- 20,456 35,621 Income (loss) from investments in Houston Northwest Medical Center........................ (136) 173 ------------- ---------- Income from continuing operations before income tax....................................... 20,320 35,794 Income tax expense........................................................................ 5,609 5,431 ------------- ---------- Income from continuing operations......................................................... 14,711 30,363 Preferred stock dividend requirements..................................................... (1,462) (1,699) ------------- ---------- Income from continuing operations applicable to common and common equivalent shares....... $ 13,249 $ 28,664 ============ ========= Earnings per common and common equivalent share from continuing operations................ $ 0.30 $ 0.67 ============ ========= Shares used in earnings per common and common equivalent share computations (in thousands).............................................................................. 44,398 42,560 OPERATING DATA: Number of hospitals owned at period end................................................... 46 46 Licensed beds at period end............................................................... 8,031 8,031 Interest expense, net..................................................................... 77,518 101,863 EBITDA(4)................................................................................. $ 181,171 $ 223,729 EBITDA margin(5).......................................................................... 14.4% 13.9% Capital expenditures...................................................................... $ 38,742 $ 59,160 Ratio of EBITDA to interest expense, net.................................................. 2.34x 2.20x Ratio of earnings to fixed charges(6)..................................................... 1.21x 1.30x MAY 31, 1994 ------------- BALANCE SHEET DATA: Total assets.............................................................................. $ 1,906,985 Working capital........................................................................... 53,537 Long-term debt, excluding amounts due within one year..................................... 1,110,558 Total stockholders' equity................................................................ 362,012
(footnotes on following page) 8 10 (footnotes from previous page) - --------------- (1) The summary pro forma statement of operations and operating data for the nine months ended May 31, 1994 includes the Company's historical results of operations for the nine months ended May 31, 1994 (which include the results of operations of AHM); Summit's historical results of operations for the nine months ended March 31, 1994; and Fountain Valley's historical results of operations for the nine months ended April 30, 1994. The unaudited pro forma condensed combined balance sheet data presents the historical balance sheet of the Company as of May 31, 1994 (which includes the effect of the Mergers) and the historical balance sheet of Fountain Valley as of April 30, 1994. Without giving effect to the proposed acquisition of Fountain Valley, total revenue, EBITDA, income from continuing operations, total assets, long-term debt and stockholders' equity for the nine months ended May 31, 1994 would have been approximately $1.2 billion, $170.0 million, $13.0 million, $1.8 billion, $1.0 billion and $362.0 million, respectively. (2) The summary pro forma statement of operations and operating data for the year ended August 31, 1993 includes the Company's historical results of operations for the fiscal year ended August 31, 1993 (which include the results of operations of AHM) (adjusted on a pro forma basis to include the acquisition of Florida Medical Center); Summit's historical results of operations for the fiscal year ended June 30, 1993; and Fountain Valley's historical results of operations for the fiscal year ended October 31, 1993. Without giving effect to the proposed acquisition of Fountain Valley, total revenue, EBITDA and income from continuing operations for the year ended August 31, 1993 would have been approximately $1.5 billion, $206.4 million, and $26.0 million, respectively. (3) Total revenue is comprised of patient revenue, net of contractual adjustments, and other revenue. (4) While EBITDA should not be construed as a substitute for income from operations or a better indicator of liquidity than cash flow from operating 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. (5) EBITDA divided by total revenue. (6) The ratio of earnings to fixed charges 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 and the portion of rental expense which is deemed to be representative of the interest component of rental expense. 9 11 INVESTMENT CONSIDERATIONS Prospective investors should consider carefully, in addition to the other information contained in or incorporated by reference in this Prospectus, the following factors before purchasing the Notes offered hereby. CERTAIN FINANCIAL CONSIDERATIONS The Company has substantial indebtedness and, as a result, significant debt service obligations. As of May 31, 1994, the Company had approximately $1.0 billion of long-term indebtedness which approximated 73.5% of its total capitalization. As of May 31, 1994, after giving effect to the proposed acquisition of Fountain Valley, the Offering and the use of proceeds therefrom and assuming the repurchase of 100% of the aggregate outstanding principal amount of the 10 1/4% Notes pursuant to the Change of Control Offer, the Company's long-term indebtedness would have been approximately $1.1 billion, representing approximately 75.4% of its total capitalization. The Offering is not contingent upon the proposed acquisition of Fountain Valley and there can be no assurance that such acquisition will be consummated. See "Capitalization." The degree to which the Company is leveraged could have important consequences to holders of the Notes, including the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of principal and interest on its indebtedness, thereby reducing the funds available to the Company for its operations; (iii) certain of the Company's borrowings are and will continue to be at variable rates of interest, which causes the Company to be vulnerable to increases in interest rates; and (iv) certain of the Company's indebtedness contains numerous financial and other restrictive covenants, including those restricting the incurrence of additional indebtedness, the creation of liens, the payment of dividends, sales of assets and minimum net worth requirements. Failure by the Company to comply with such covenants may result in an event of default which, if not cured or waived, could have a material adverse effect on the Company. The Company's ability to make scheduled payments or to refinance its obligations with respects to its indebtedness depends on its financial and operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond its control. Although the Company's cash flow from its operations has been sufficient to meet its debt service obligations in the past, there can be no assurance that the Company's operating results will continue to be sufficient for payment of the Company's indebtedness. SUBORDINATION; EFFECT OF ENCUMBRANCES The Notes will be subordinated in right of payment to all existing and future Senior Debt (as defined herein) of the Co-Obligors and will rank pari passu in right of payment with the Company's 12 1/4% Notes and the 10 1/4% Notes. The 10 1/4% Notes are the joint and several obligations of the Company and AHM Acquisition Co., Inc. ("AHM Acquisition Co."), a wholly owned subsidiary of the Company, and, therefore, holders of any of the 10 1/4% Notes outstanding following the Change of Control Offer will be entitled to satisfy their claims out of the assets of AHM Acquisition Co. prior to holders of the Notes. AHM Acquisition Co. owns substantially all of the operations acquired by the Company from AHM in the AHM Merger. The Notes also will be effectively subordinated to all existing and future liabilities of the Company's subsidiaries (other than Summit). As of May 31, 1994, the amount of Senior Debt and obligations of the Company's subsidiaries (excluding intercompany indebtedness) that effectively ranked senior to the Notes was approximately $622.4 million. As of May 31, 1994, after giving effect to the proposed acquisition of Fountain Valley, the Offering and the use of proceeds therefrom and assuming the repurchase of 100% of the aggregate outstanding principal amount of the 10 1/4% Notes pursuant to the Change of Control Offer, the amount of Senior Debt and obligations of the Company's subsidiaries (excluding intercompany indebtedness) that effectively ranked senior to the Notes would have been approximately $619.6 million. All indebtedness incurred under the Bank Credit Facility constitutes Senior Debt. The 12 1/4% Notes, the 10 1/4% Notes and indebtedness under the Bank Credit Facility will mature prior to the Notes. 10 12 The Co-Obligors may not pay the principal of, premium, if any, or interest on, the Notes or repurchase, redeem or otherwise retire the Notes if any Senior Debt is not paid when due or any other default on any Senior Debt occurs and the maturity of such Senior Debt is accelerated in accordance with its terms unless, in either case, the default has been cured or waived, any such acceleration has been rescinded or such Senior Debt has been paid in full. In addition, if any default exists with respect to certain Senior Debt and certain other conditions are satisfied, the Co-Obligors may not make any payments on the Notes for a designated period of time. Upon any payment or distribution of assets of the Company upon liquidation, dissolution, reorganization or any similar proceeding, the holders of Senior Debt will be entitled to receive payment in full before the holders of the Notes are entitled to receive any payment. See "Description of the Notes -- Subordination." The Company has granted the lenders under the Bank Credit Facility a senior security interest in the capital stock of the Company's subsidiaries, including Summit, the partnership interests in partnerships in which the Company owns a majority interest and instruments evidencing indebtedness owed to the Company by its subsidiaries, including Summit. As of May 31, 1994, there was approximately $451.7 million outstanding under the Bank Credit Facility. As of May 31, 1994, after giving effect to the proposed acquisition of Fountain Valley, the Offering and the use of proceeds therefrom and assuming the repurchase of 100% of the aggregate outstanding principal amount of the 10 1/4% Notes pursuant to the Change of Control Offer, there would have been approximately $543.7 million outstanding under the Bank Credit Facility. The Offering is not contingent upon the proposed acquisition of Fountain Valley and there can be no assurance that such acquisition will be consummated. The Notes will be unsecured. If the Company becomes insolvent or is liquidated, or if its indebtedness is accelerated, the lenders under the Bank Credit Facility will be entitled to payment in full from the proceeds of their security prior to any payment to the holders of Notes. In such event, it is possible that there would be no assets remaining from which claims of the holders of Notes could be satisfied or, if any assets remain, such assets may be insufficient to satisfy fully such claims. See "Description of the Notes." SUBSIDIARY OPERATIONS Since substantially all of the Co-Obligors' operations are conducted, and substantially all of the Co-Obligors' assets are owned, by their respective subsidiaries, the Notes will effectively be subordinated to all existing and future liabilities of the Company's subsidiaries (other than Summit but including Summit's subsidiaries), including the subsidiaries' guarantees of indebtedness incurred under the Bank Credit Facility. Any right of the Company's subsidiaries upon the liquidation, reorganization or insolvency of such subsidiary (and the consequent right of the holders of the Notes to participate in those assets) will be subject to the claims of the creditors (including trade creditors) and preferred stockholders, if any, of such subsidiary, except to the extent the Company or Summit has a claim against such subsidiary as a creditor of such subsidiary. In addition, in the event that claims of the Company or Summit as a creditor of a subsidiary are recognized, such claims would be subordinate to any security interest in the assets of such subsidiary and any indebtedness of such subsidiary senior to that held by the Company or Summit. The ability of the Co-Obligors and their respective subsidiaries to incur indebtedness is limited by certain of the restrictive covenants set forth in the Bank Credit Facility and in the indentures relating to certain of the Company's other long-term indebtedness, including the indenture governing the Notes. Additionally, the indenture governing the Notes does not prohibit the Company from transferring or disposing of the assets of Summit, and thereby diminishing the assets available to satisfy the claims of holders of the Notes against Summit. In addition, the Co-Obligors' ability to make required principal and interest payments with respect to the Co-Obligors' indebtedness, including the Notes, depends on the earnings of their respective subsidiaries and on their ability to receive funds from such subsidiaries through dividends or other payments. Since the Notes are obligations of the Co-Obligors only, the Co-Obligors' subsidiaries are not obligated or required to pay any amounts due pursuant to the Notes or to make funds available therefor in the form of dividends or advances to the Co-Obligors. 11 13 HEALTH CARE REFORM On November 20, 1993, President Clinton submitted proposed comprehensive health care reform legislation to Congress. A key component of the President's proposal is the restructuring of health insurance markets through the use of "managed competition." Under the proposal, states would be required to establish regional purchasing cooperatives to act as the exclusive source of coverage for individuals and employers with less than 5,000 employees. These cooperatives would contract with health plans that demonstrate an ability to provide a full range of benefits. All employers would be required to make coverage available to their employees, and individuals would be required to enroll in approved health plans. The costs of the President's proposal would be funded in significant part by reductions in payments to providers by the Medicare and Medicaid programs. The President's proposal would also impose stringent limits on increases in the premiums of health plans, which would indirectly impact the fees paid to health care providers. In addition, other comprehensive health care reform bills have been and are expected to be introduced in Congress. These bills contain and are expected to contain benefit standards, coverage guarantees, cost controls and financing that differ from the President's proposal. The Company is unable to predict whether any reforms will be adopted or when any such reforms will be implemented. No assurance can be given that such reforms will not have a material adverse effect on the Company. REIMBURSEMENT AND REGULATION The Company derives a substantial portion of its revenue from third party payors, including the Medicare and Medicaid programs. Changes in existing government reimbursement programs 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 reimbursement levels. In addition, private payors are increasingly demanding discounts from health care providers. Significant limits on reimbursement rates could adversely affect the Company's results of operations. Effective January 1, 1995, the California Department of Health Services will begin changing the payment system for participants in the California Medicaid program ("Medi-Cal") in certain counties, including those in which the Company principally operates, from fee-for-service arrangements to managed care plans. The Company is unable to predict the effect these changes will have on its operations. No assurance can be given that such reforms will not have a material adverse effect on the Company. The health care industry is subject to extensive federal, state and local regulation relating to licensure, conduct of operations, addition of facilities and services and prices for services. Antifraud and abuse amendments codified under the Social Security Act of 1935, as amended (the "Social Security Act"), prohibit certain business practices and relationships that may affect the provision and cost of health care services reimbursable under the Medicare and Medicaid programs. The U.S. Department of Health and Human Services ("HHS") has issued regulations defining practices and business arrangements which are permissible under such amendments. Certain of the Company's current financial arrangements with physicians and other providers do not qualify for the safe harbor exemptions and therefore risk scrutiny by HHS and may be subject to enforcement action. In addition, Section 1877 under the Social Security Act has recently been amended to significantly broaden the scope of prohibited physician referrals to providers with which they have a financial arrangement, effective January 1, 1995. The Company's participation in and development of joint ventures and other financial arrangements with physicians could be adversely affected by these amendments. The Company is unable to predict the future course of federal, state and local regulation. Further changes in the regulatory framework could have an adverse impact on the Company. COMPETITION The health care industry is highly competitive and subject to excess capacity. In recent years, competition among health care providers for patients has intensified as hospital occupancy rates in the United States have declined due to, among other things, regulatory and technological changes, increasing use of managed care payment systems, cost containment pressures, a shift toward outpatient treatment and an increasing supply of physicians. Certain of the Company's competitors have greater financial resources and offer a broader range of services than the Company. In addition, hospitals owned by governmental agencies and other tax-exempt 12 14 entities benefit from endowments, charitable contributions and tax-exempt financing, which advantages are not enjoyed by the Company's facilities. ACQUISITION STRATEGY The Company has recently completed several acquisitions of health care providers, and intends to use a portion of the proceeds from the Offering to reduce amounts outstanding under the Bank Credit Facility, which amounts the Company anticipates utilizing, among other things, to finance additional strategic acquisitions of businesses with facilities and service capabilities that will enhance the Company's operations. See "Business -- Business Strategy." There can be no assurance that the Company will be able to realize expected operating and economic efficiencies from its recent acquisitions or from any future acquisitions. In addition, there can be no assurance that the Company will be able to locate suitable acquisition candidates, consummate acquisitions on favorable terms, or successfully integrate newly acquired businesses and facilities with the Company's operations. The consummation of acquisitions could result in the incurrence or assumption by the Company of additional indebtedness. POTENTIAL SUMMIT INCOME TAX LIABILITY The Internal Revenue Service (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 became a wholly owned subsidiary of 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 with the district director 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. For the taxable years prior to 1988, most of the Summit Subsidiaries primarily reported taxable income using the cash method of accounting. The cash method was prevalent within the hospital industry and the Summit Subsidiaries applied the method in accordance with prior agreements reached with the IRS. The IRS now asserts that an accrual method of accounting should have been used. The Tax Reform Act of 1986 (the "1986 Act") requires most large corporate taxpayers (including Summit) to use an accrual method of accounting beginning in 1987. Consequently, the Summit Subsidiaries changed to the accrual method beginning July 1, 1987. In accordance with the provisions of the 1986 Act, income that was deferred by use of the cash method at the end of 1986 is being recognized as taxable income by the Summit Subsidiaries in equal annual installments over ten years beginning on July 1, 1987. The Company believes that Summit properly reported its income and paid its taxes in accordance with applicable laws and in accordance with previous agreements established with the IRS. The Company believes that the final outcome of the IRS's examinations of prior years' income taxes will not have a material adverse effect on the results of operations or financial position of the Company. CONCENTRATION OF MARKETS Of the 45 hospitals operated by the Company, 13 hospitals are located in the greater Los Angeles, California area and 17 hospitals, which generated approximately 37% of the Company's revenue for the 1993 fiscal year (after giving pro forma effect to the Mergers), are located in California. In addition, five hospitals which generated approximately 24% of the Company's revenue for the 1993 fiscal year (after giving pro forma effect to the Mergers) are located in Florida. The concentration of hospitals in California and Florida increases the risk that any adverse economic, regulatory or other developments that may occur in such areas may adversely affect the Company's operations or financial condition. In addition, the Company has experienced, and expects that it will continue to experience, delays in payment and in rate increases by Medi-Cal. Although these delays have not had a material adverse effect on the Company, there can be no assurance that future delays will not have such an effect. DEPENDENCE ON KEY PERSONNEL AND PHYSICIANS The Company's operations are dependent on the efforts, ability and experience of certain key management personnel, including Charles N. Martin, Jr., Chief Executive Officer and Chairman of the Board of Directors of the Company, and Donald J. Amaral, President and Chief Operating Officer of the Company. An event of default occurs under the Bank Credit Facility if either Mr. Martin or Mr. Amaral is no longer a 13 15 member of the Company's senior management, unless replaced within 120 days with an executive reasonably satisfactory to the bank lenders. In addition, since physicians generally control the majority of hospital admissions, the success of the Company, in part, is dependent upon the number and quality of physicians on its hospitals' medical staffs. The loss of some or all of the Company's key management personnel or an inability to attract and retain sufficient numbers of qualified physicians could have an adverse impact on the Company's future results of operations. LIABILITY AND INSURANCE As is typical in the health care industry, the Company is subject to claims and legal actions by patients and others in the ordinary course of business. The Company is partially self-insured for its hospital professional liability and comprehensive general liability risks and maintains an unfunded reserve for such risks. For hospital professional liability and comprehensive general liability claims asserted, the Company assumes such liability risks under its self-insured retention up to $3 million per claim, or $30 million in the aggregate, for claims reported after June 1, 1994. The Company also purchases excess levels of coverage above such self-insured retention. For the twelve months ending June 1, 1995, the Company purchased a $50 million layer of excess insurance above self-insured retentions that may be applied towards hospital professional liability and comprehensive general liability claims. Although the Company's cash flow and reserves for self-insured liabilities have been adequate in the past to provide for such self-insured liabilities, and the Company believes that it has adequately provided for future self-insured liabilities, there can be no assurance that the Company's cash flow and reserves will continue to be adequate. If actual payments of claims with respect to the Company's self-insured liabilities exceed projected payments of claims, the result of operations of the Company could be adversely affected. In addition, while the Company's professional and other liability insurance have been adequate in the past to provide for liability claims, there can be no assurance that adequate insurance will continue to be available at favorable price levels. LACK OF PUBLIC MARKET FOR SECURITIES There is no public market for the Notes and the Co-Obligors do not intend to list the Notes on any securities exchange or for quotation through NASDAQ. The Co-Obligors have been advised by Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), Salomon Brothers Inc ("Salomon") and Citicorp Securities, Inc. ("Citicorp") (together, the "Underwriters") that, following the completion of the Offering, the Underwriters presently intend to make a market in the Notes. However, the Underwriters are under no obligation to do so and may discontinue any market making activity at any time without notice. No assurance can be given as to the liquidity of the trading market for the Notes or that an active public market for the Notes will develop or, if developed, will continue. If an active public market does not develop or is not maintained, the market price and liquidity of the Notes may be adversely affected. USE OF PROCEEDS The Company will receive all of the net proceeds from the Offering. The net proceeds to the Company from the sale of the Notes in the Offering (after deducting estimated expenses and underwriting discount and commissions) are estimated to be approximately $ million. The Company intends to apply such net proceeds to reduce amounts outstanding under the revolving facility of the Bank Credit Facility, which amounts the Company has utilized or anticipates utilizing in connection with the repurchase of the 10 1/4% Notes, the financing of the proposed acquisition of Fountain Valley and other strategic acquisitions and for general corporate purposes. Pursuant to the terms of the indenture under which the 10 1/4% Notes were issued, the AHM Merger constituted a "Change of Control" and the Company was required to make the Change of Control Offer for the $100 million aggregate principal amount of the 10 1/4% Notes at a purchase price of 101% of the principal amount thereof plus accrued interest. As of July 18, 1994, the expiration date of the Change of Control Offer, approximately $99.3 million aggregate principal amount of the outstanding 10 1/4% Notes were tendered and were purchased by the Company on July 19, 1994 pursuant to the Change of Control Offer. In May 1994, the Company announced that it had executed a letter of intent to acquire Fountain Valley. See "Business -- Recent Acquisitions." The Company currently has no definitive agreements with respect to any 14 16 acquisition, and there can be no assurance that any acquisitions (including the proposed acquisition of Fountain Valley) will be consummated. Borrowings under the revolving facility of the Bank Credit Facility bear interest at a fluctuating rate equal to either (i) the alternate base rate (as defined) plus 1.0% or (ii) LIBOR plus 2.0%, in each case subject on or after November 1, 1994 to potential decreases or increases dependent upon the Company's interest coverage and debt to cash flow ratios. The revolving facility of the Bank Credit Facility expires on April 19, 2000. The Offering is contingent upon the Company's receipt of a consent from the lenders under the Bank Credit Facility. The Company is in the process of seeking to obtain such consent. The Offering is not contingent upon the proposed acquisition of Fountain Valley. 15 17 CAPITALIZATION The following table sets forth the capitalization of the Company at May 31, 1994 and as adjusted to give pro forma effect to (i) the consummation of the Offering and the application of the net proceeds therefrom, (ii) the proposed acquisition of Fountain Valley and (iii) the assumed repurchase of 100% of the aggregate outstanding principal amount of the 10 1/4% Notes pursuant to the Change of Control Offer.
MAY 31, 1994 ----------------------------- ACTUAL AS ADJUSTED(1) ---------- -------------- (IN THOUSANDS) Short-term debt: Current maturities of long-term debt............................ $ 7,368 $ 9,064 ========= =========== Long-term debt: Capitalized lease obligations, interest at 8.8% to 17.2%........ $ 21,789 $ 27,021 Bank Credit Facility: Revolving Credit Facility.................................... 58,200 150,222 Term Loan.................................................... 325,000 325,000 Delayed Term Loan............................................ 68,500 68,500 Notes payable, effective interest at 9.3% to 14.5%, maturities through 2004................................................. 48,879 48,879 % Senior Subordinated Notes due 2004.......................... -- 100,000 12 1/4% Notes................................................... 400,000 400,000 10 1/4% Notes(2)................................................ 100,000 -- Less current maturities......................................... (7,368) (9,064) ---------- -------------- Total long-term debt (excluding current maturities)(3)....................................... 1,015,000 1,110,558 ---------- -------------- Stockholders' equity: Payable In Kind Cumulative Redeemable Convertible Preferred Stock........................................................ 19,341 19,341 Common Stock.................................................... 432 432 Additional paid-in capital...................................... 403,751 403,751 Retained Deficit................................................ (136,322) (139,822) Unrealized gains on securities available-for-sale............... 78,310 78,310 ---------- -------------- Total stockholders' equity.............................. 365,512 362,012 ---------- -------------- Total capitalization.................................... $1,380,512 $1,472,570 ========= ===========
- --------------- (1) Without giving effect to the proposed acquisition of Fountain Valley, current maturities of long-term debt, total long-term debt (excluding current maturities), total stockholders' equity and total capitalization would have been approximately $7.4 million, $1.0 billion, $362.0 million and $1.4 billion, respectively. (2) Pursuant to the terms of the indenture under which the 10 1/4% Notes were issued, the AHM Merger constituted a "Change of Control" and the Company was required to make the Change of Control Offer. On May 19, 1994, the Company commenced the Change of Control Offer for all of the outstanding 10 1/4% Notes at 101% of the principal amount thereof plus accrued interest. As of July 18, 1994, the expiration date of the Change of Control Offer, approximately $99.3 million aggregate principal amount of the outstanding 10 1/4% Notes were tendered and were purchased by the Company on July 19, 1994 pursuant to the Change of Control Offer. See "Use of Proceeds." (3) Summit, a wholly owned subsidiary of the Company, currently owns 38.6% of Summit Care Corporation ("Summit Care"). At May 31, 1994 approximately $37.4 million aggregate principal amount of Summit's 7 1/2% Exchangeable Subordinated Notes due 2003 (the "7 1/2% Notes"), which are exchangeable, at the option of the holders, into Summit's 38.6% interest in the Summit Care Common Stock, were outstanding. The 7 1/2% Notes have not been included in long-term debt as the investment in Summit Care and related debt has been accounted for as an asset held for sale. 16 18 SELECTED HISTORICAL FINANCIAL DATA ORNDA HEALTHCORP AND SUBSIDIARIES The following table sets forth selected historical financial data and other operating information of the Company giving effect to the Mergers. The selected historical financial data for the five fiscal years ended August 31, 1993 are derived from the consolidated financial statements of the Company. The selected historical financial data for the nine months ended May 31, 1994 and 1993 are derived from the unaudited condensed consolidated financial statements of the Company and reflect all adjustments (consisting of normal recurring adjustments) that, in the opinion of the Company, are necessary for a fair presentation of such information. Operating results for the nine months ended May 31, 1994 are not necessarily indicative of the results that may be expected for the Company's fiscal year ending August 31, 1994. Because the Company accounted for the AHM Merger as a pooling-of-interests transaction, the historical financial data of the Company include AHM's historical results of operations. The nine months ended May 31, 1994 include financial data for the Company for the nine months ended May 31, 1994 and the financial data of Summit from the date of the Mergers, April 19, 1994, through May 31, 1994. All information contained in the following table should be read in conjunction with the consolidated financial statements and related notes of the Company included or incorporated by reference herein.
FOR THE NINE MONTHS ENDED MAY 31, FOR THE YEARS ENDED AUGUST 31, ------------------- ----------------------------------------------------- 1994 1993 1993 1992 1991 1990 1989 -------- -------- -------- -------- -------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS: Total Revenue(1)............................... $882,917 $702,551 $961,795 $808,523 $752,164 $ 793,251 $796,725 Costs and Expenses Operating expenses........................... 697,537 562,098 765,743 674,174 618,826 668,004 648,888 Provision for doubtful accounts.............. 57,443 43,968 63,907 52,426 40,979 52,846 50,652 Depreciation and amortization................ 45,918 34,246 47,669 40,003 32,115 40,185 49,205 Interest expense............................. 59,331 49,948 68,660 40,229 59,167 80,815 104,378 Interest income.............................. (2,032) (3,167) (3,380) (3,226) (3,541) (8,332) (3,500) Minority interest............................ 4,230 2,988 4,601 7,610 3,955 5,315 8,289 Special executive compensation(2)............ 2,530 -- -- 6,140 -- -- -- Severance agreements......................... -- -- -- 5,090 -- -- -- Merger transaction expense................... 29,992 -- -- -- -- -- -- Loss (gain) on asset sale.................... 9,761 -- -- 44,903 11,412 76,504 (536) Costs associated with 1990 recapitalization........................... -- -- -- -- -- 6,245 5,124 Corporate office relocation expense.......... -- -- -- 1,800 -- -- -- -------- -------- -------- -------- -------- --------- -------- (21,793) 12,470 14,595 (60,626) (10,749) (128,331) (65,775) Income (loss) from investments in Houston Northwest Medical Center..................... (136) (775) 173 (8,210) (6,147) (1,834) -- -------- -------- -------- -------- -------- --------- -------- Income (loss) before income tax expense and extraordinary item........................... (21,929) 11,695 14,768 (68,836) (16,896) (130,165) (65,775) Income tax expense (benefit)................... 1,048 930 1,129 1,266 364 -- (5,444) -------- -------- -------- -------- -------- --------- -------- Income (loss) before extraordinary item........ (22,977) 10,765 13,639 (70,102) (17,260) (130,165) (60,331) Extraordinary item, net of tax................. (8,191) -- (3,842) 49,667 -- 30,545 -- -------- -------- -------- -------- -------- --------- -------- Net income (loss).............................. (31,168) 10,765 9,797 (20,435) (17,260) (99,620) (60,331) Preferred stock dividend requirements.......... (1,462) (1,259) (1,699) (1,363) -- (3,931) (12,182) -------- -------- -------- -------- -------- --------- -------- Net income (loss) applicable to common and common equivalent shares..................... $(32,630) $ 9,506 $ 8,098 $(21,798) $(17,260) $(103,551) $(72,513) ======== ======== ======== ======== ======== ========= ======== Net income (loss) per common and common equivalent share before extraordinary item(3)...................................... $ (0.68) $ 0.27 $ 0.34 $ (2.32) $ (1.15) $ -- $ -- ======== ======== ======== ======== ======== ========= ======== Net income (loss) per common and common equivalent share(3).......................... $ (0.91) $ 0.27 $ 0.23 $ (0.71) $ (1.15) $ -- $ -- ======== ======== ======== ======== ======== ========= ======== Shares used in earnings per common and common equivalent share computations (in thousands)(3)................................ 36,047 34,743 34,960 30,741 15,014 -- -- (continued on the following page)
17 19
FOR THE NINE MONTHS ENDED MAY 31, FOR THE YEARS ENDED AUGUST 31, ------------------- ----------------------------------------------------- 1994 1993 1993 1992 1991 1990 1989 -------- -------- -------- -------- -------- --------- -------- (DOLLARS IN THOUSANDS) OPERATING DATA: EBITDA(4)...................................... $127,937 $ 96,485 $132,145 $ 81,923 $ 92,359 $ 72,401 $ 97,185 EBITDA margin(5)............................... 14.5% 13.7% 13.7% 10.1% 12.3% 9.1% 12.2% Capital expenditures........................... $ 31,556 $ 27,300 $ 35,558 $ 52,823 $ 32,200 $ 27,282 $ 42,664 Ratio of earnings to fixed charges(7).......... -- 1.20x 1.18x -- -- -- --
AUGUST 31, MAY 31, ---------------------------------------------------------- 1994 1993 1992 1991 1990 1989 ---------- ---------- -------- -------- -------- -------- BALANCE SHEET DATA: Cash and cash equivalents........................ $ 16,342 $ 25,914 $ 60,908 $ 29,102 $ 39,783 $ 83,796 Working capital.................................. 52,324 26,173 46,669 10,881 (20,684) (548,283)(6) Net property, plant, and equipment............... 1,020,946 803,994 677,440 570,558 597,508 606,641 Total assets..................................... 1,789,704 1,205,137 994,407 852,029 937,128 986,022 Long-term debt (excluding current maturities).... 1,015,000 705,425 570,971 522,837 629,971 131,445(6) Preferred stock.................................. 19,341 18,062 16,363 -- -- -- Total shareholders' equity (deficit)............. 365,512 212,108 185,882 98,306 71,814 (446,923)
- --------------- (1) Total revenue is comprised of patient revenue, net of contractual adjustments, and other revenue. (2) Special executive compensation for 1992 includes: (i) $3.0 million of compensation expense related to the Company's sale of the Company's Common Stock and granting of options to Mr. Martin on January 15, 1992 and (ii) a non-cash reserve of $1.9 million established for payments to be made in connection with the termination of employment with the Company of Mr. Bryan P. Marsal and Mr. Joseph A. Bondi in 1992. The payments related to the Marsal and Bondi terminations will be made monthly through October 1994. Special executive compensation for 1994 represents compensation expense related to the Company's granting of options to key members of senior management during the second quarter of 1994. (3) Per share information for the years August 31, 1990 and 1989 is not presented because a different capital structure existed. (4) While EBITDA should not be construed as a substitute for income from operations or a better indicator of liquidity than cash flow from operating 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. (5) EBITDA divided by total revenue. (6) Long-term debt of $493,510 for the Company is classified as current at August 31, 1989. (7) The ratio of earnings to fixed charges 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 and the portion of rental expense which is deemed to be representative of the interest component of rental expense. Earnings were inadequate to cover fixed charges by approximately $67,000, $130,000, $17,000, $69,000, and $23,000 for the years ended August 31, 1989, 1990, 1991, 1992, and for the nine months ended May 31, 1994, respectively. 18 20 SUMMIT HEALTH LTD. The following table sets forth selected historical financial data and other operating information of Summit prior to giving effect to the Summit Merger. The selected historical financial data for the five years ended June 30, 1993 are derived from the consolidated financial statements of Summit. The selected historical financial data for the nine months ended March 31, 1994 and 1993 are derived from the unaudited condensed consolidated financial statements of Summit and reflect all adjustments (consisting of normal recurring adjustments) that, in the opinion of the Company, are necessary for a fair presentation of such information. Operating results for the nine months ended March 31, 1994 are not necessarily indicative of the results that may be expected for Summit's fiscal year ending June 30, 1994. The information contained in the following table should be read in conjunction with the consolidated financial statements and related notes of Summit.
FOR THE NINE MONTHS ENDED MARCH 31, FOR THE YEARS ENDED JUNE 30, ------------------- ---------------------------------------------------- 1994 1993 1993 1992 1991 1990 1989 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS: Total Revenue(1).................. $404,650 $382,844 $508,504 $475,218 $415,667 $393,566 $394,064 Costs and Expenses Operating expenses.............. 332,452 319,279 425,242 406,632 355,631 344,842 358,559 Provision for doubtful accounts...................... 17,202 19,447 23,113 23,584 23,389 18,278 18,240 Depreciation and amortization... 15,879 13,492 19,185 14,620 13,940 13,379 17,066 Interest expense, net........... 5,080 4,174 5,772 8,291 10,819 12,838 14,489 Minority interest............... 2,138 1,773 2,421 519 -- -- -- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income tax expense and extraordinary item(2)......................... 31,899 24,679 32,771 21,572 11,888 4,229 (14,290) Income tax expense (benefit)...... 14,759 10,707 14,201 8,629 4,703 1,848 (5,904) -------- -------- -------- -------- -------- -------- -------- Income (loss) before extraordinary item............................ 17,140 13,972 18,570 12,943 7,185 2,381 (8,386) Extraordinary item, net of taxes(3)........................ -- -- -- (1,779) -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss)................. $ 17,140 $ 13,972 $ 18,570 $ 11,164 $ 7,185 $ 2,381 $ (8,386) ========= ========= ========= ========= ========= ========= ========= Net income (loss) per common and common equivalent share before extraordinary item.............. $ 0.51 $ 0.42 $ 0.56 $ 0.40 $ 0.23 $ 0.08 $ (0.27) ========= ========= ========= ========= ========= ========= ========= Net income (loss) per common and common equivalent share......... $ 0.51 $ 0.42 $ 0.56 $ 0.34 $ 0.23 $ 0.08 $ (0.27) ========= ========= ========= ========= ========= ========= ========= Shares used in earnings per common and common equivalent share computations (in thousands)..... 33,870 33,217 33,201 32,750 31,251 31,250 31,250 OPERATING DATA: EBITDA(4)......................... $ 54,996 $ 44,118 $ 60,149 $ 45,002 $ 36,647 $ 30,466 $ 17,265 EBITDA margin(5).................. 13.6% 11.5% 11.8% 9.5% 8.8% 7.7% 4.4% Capital expenditures.............. $ 23,033 $ 39,051 $ 50,391 $ 23,933 $ 17,895 $ 10,300 $ 15,514
JUNE 30, MARCH 31, ---------------------------------------------------- 1994 1993 1992 1991 1990 1989 -------- -------- -------- -------- -------- -------- BALANCE SHEET DATA: Cash and cash equivalents.................... $ 19,350 $ 40,857 $ 24,937 $ 5,766 $ 3,727 $ 8,049 Working capital.............................. 20,447 10,057 1,138 21,788 23,364 45,837 Net property, plant, and equipment........... 236,548 221,945 187,051 175,577 171,822 174,352 Total assets................................. 406,265 394,559 353,568 296,566 299,019 323,514 Long-term debt (excluding current maturities)................................ 87,186 84,711 62,300 101,302 112,457 136,676 Total shareholders' equity................... 132,229 114,123 98,628 79,169 71,956 69,575
(footnotes on the following page) 19 21 (footnotes from the previous page) - --------------- (1) Total revenue is comprised of patient revenue, net of contractual adjustments, and other revenue. (2) Includes losses of $15,532,000 and $1,056,000 in fiscal 1989 and 1990, respectively, resulting principally from the closure of a 76-bed hospital located in Lubbock, Texas and the sale of a 78-bed hospital located in Levelland, Texas, the closure of a 122-bed hospital located in Colorado Springs, Colorado, and the sale of a partnership interest involving eight hospitals which were managed in the Kingdom of Saudi Arabia. (3) Net of income tax benefit of $1,186,000 from the redemption and retirement of Summit's 14% Senior Subordinated Debentures due 2005. (4) While EBITDA should not be construed as a substitute for income from operations or a better indicator of liquidity than cash flow from operating 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 Summit to meet its future debt service, capital expenditure and working capital requirements. (5) EBITDA divided by total revenue. 20 22 SELECTED OPERATING STATISTICS The following table sets forth certain operating statistics for the hospitals operated by the Company, AHM, and Summit for each of the periods indicated without giving effect to the Mergers. ORNDA HEALTHCORP
NINE MONTHS ENDED MAY 31, YEARS ENDED AUGUST 31, --------------------- ---------------------------------- 1994 1993 1993 1992 1991 -------- -------- -------- -------- -------- Number of hospitals at period end............. 18 17 18 15 11 Licensed beds at period end................... 4,086 3,627 4,086 3,182 2,543 Patient days.................................. 394,533 343,633 547,571 475,295 430,535 Adjusted patient days(1)...................... 553,892 493,601 762,837 685,575 600,471 Average length of stay (days)................. 6.4 6.7 6.9 6.9 8.4 Admissions.................................... 61,637 51,619 79,463 68,936 51,452 Adjusted admissions(2)........................ 86,534 74,145 110,703 99,433 71,759 Occupancy rate(3)............................. 35.2% 34.6% 36.7% 40.9% 46.4%
AMERICAN HEALTHCARE MANAGEMENT, INC.
NINE MONTHS ENDED MAY 31, TWELVE MONTHS ENDED SEPTEMBER 30, --------------------- ---------------------------------- 1994 1993 1993 1992 1991 -------- -------- -------- -------- -------- Number of hospitals at period end............. 16 16 16 16 16 Licensed beds at period end................... 2,028 2,028 2,028 2,028 2,028 Patient days.................................. 198,462 194,026 258,381 251,931 254,792 Adjusted patient days(1)...................... 258,001 254,950 340,783 333,213 334,418 Average length of stay (days)................. 5.0 5.3 5.2 5.2 5.3 Admissions.................................... 39,652 36,908 49,982 48,312 48,214 Adjusted admissions(2)........................ 51,548 48,497 65,926 63,917 63,305 Occupancy rate(3)............................. 35.7% 34.9% 34.9% 34.0% 34.4%
SUMMIT HEALTH LTD.
NINE MONTHS ENDED MARCH 31, YEARS ENDED JUNE 30, --------------------- ---------------------------------- 1994 1993 1993 1992 1991 -------- -------- -------- -------- -------- Number of hospitals at period end............. 12 12 12 12 12 Licensed beds at period end................... 1,618 1,641 1,641 1,629 1,648 Patient days.................................. 143,969 147,356 193,560 203,626 217,541 Adjusted patient days(1)...................... 209,368 211,939 281,171 297,837 306,395 Average length of stay (days)................. 4.3 4.4 4.4 4.6 5.0 Admissions.................................... 33,727 33,461 44,238 44,083 43,790 Adjusted admissions(2)........................ 49,048 48,126 64,261 64,479 61,676 Occupancy rate(3)............................. 32.5% 32.7% 32.3% 34.2% 36.2%
- --------------- (1) Total patient days for the period multiplied by the ratio of total patient revenue divided by total inpatient revenue. (2) Total admissions for the period multiplied by the ratio of total patient revenue divided by total inpatient revenue. (3) Average daily census for the period divided by licensed beds. 21 23 BUSINESS THE COMPANY The Company is a leading provider of health care services in the United States, delivering a broad range of inpatient and outpatient health care services principally through the operation of 45 hospitals located in urban and suburban communities in 15 states, primarily in the southern and western United States. Services provided by the Company's hospitals include general surgery, internal medicine, obstetrics, emergency room care, radiology, diagnostic services, coronary care, pediatric services and psychiatric services. On an outpatient basis, the Company's services include, among others, same day surgery, diagnostic radiology (e.g. magnetic resonance imaging, CT scanning, X-ray), rehabilitative therapy, clinical laboratory services, pharmaceutical services and psychiatric services. The Company also operates a number of free-standing surgery centers, which provide a cost-effective alternative to inpatient care for the performance of minor surgeries. Certain of the Company's hospitals offer other specialized services, including cardiac surgery, home health services, hemodialysis, rehabilitation, AIDS treatment and clinics specializing in the treatment of industrial accidents and women's health. In addition, the Company operates the Medicaid HMO, pursuant to which the Company currently provides health care services, under a fixed price contract, to over 20,000 members of the Arizona state Medicaid system. Since January 1992, when Charles N. Martin, Jr. was elected Chairman, President and Chief Executive Officer, the Company has (i) substantially increased its revenue while improving operating profitability and (ii) actively participated in the consolidation of the health care industry through a series of strategic acquisitions. Through such acquisitions the Company has diversified into new markets and expanded its service capabilities in order to position the Company as a leading provider of low cost, high quality health care services. The Company has grown in size from 11 hospitals at August 31, 1991 to 45 hospitals at June 30, 1994 and its revenue has grown from approximately $460 million for the 1991 fiscal year (prior to giving effect to the Mergers) to approximately $1.5 billion for the 1993 fiscal year (after giving pro forma effect to the Mergers but not the proposed acquisition of Fountain Valley). The operating margin of its hospitals has grown from 12.2% for the 1991 fiscal year (prior to giving effect to the Mergers) to 14.5% for the nine months ended May 31, 1994 (after giving effect to the Mergers but not the proposed acquisition of Fountain Valley). RECENT ACQUISITIONS On April 19, 1994, the Company completed a merger with AHM, which operated 16 acute care hospitals providing basic primary care services, and acquired Summit, which operated 12 hospitals and a variety of outpatient specialty health care clinics and programs. The Company believes that the Mergers have created a company positioned to compete more effectively in the changing health care environment. The Mergers increased the number of hospitals operated by the Company from 17 to 45 and enhanced the Company's position in several of its existing markets, primarily Southern California. The services provided by the additional facilities are being coordinated with the hospitals previously operated by the Company and will allow the Company to eliminate redundant services and benefit from other operating efficiencies and economies of scale. In addition, the Mergers provided the Company with access to new markets, including Arizona and Nevada, and new health care delivery capabilities, such as the Medicaid HMO and outpatient specialty service clinics. The Mergers also strengthened the Company's management team through the addition of management personnel from Summit and AHM with experience in improving operating performance. Prior to the Mergers, the EBITDA margin of Summit improved from 8.8% to 11.8% and the EBITDA margin of AHM improved from 11.4% to 13.4% during each company's most recently completed three fiscal years. Summit and AHM have also contributed to the Company's expertise in certain important sectors of the health care industry. Summit provided the Company with additional experience operating in a managed care environment and expertise in the development of specialty service programs. The Company believes that the delivery of health care will be increasingly influenced by managed care payment systems and that it will benefit from Summit's experience in this area. AHM provided the Company with strong financial and 22 24 information system controls designed to effectively monitor and reduce resource consumption, as well as additional expertise in providing high quality basic primary care services. The Company recently entered into a letter of intent to acquire Fountain Valley, a provider of tertiary care services, from FVMDC, for a total purchase price of approximately $145 million, of which approximately $95 million will be paid in cash. Fountain Valley, located in Fountain Valley, California, comprises a 413-bed acute care hospital, a surgery center, an imaging center and four medical office buildings. For the fiscal year ended October 31, 1993, Fountain Valley's total revenues, EBITDA and net income from continuing operations were approximately $120.8 million, $21.6 million and $8.0 million, respectively. See the Consolidated Financial Statements of Fountain Valley included elsewhere in this Prospectus. The proposed acquisition of Fountain Valley is subject to the execution of definitive agreements, the approval of the board of directors of FVMDC, the consent of the lenders under the Bank Credit Facility and certain regulatory approvals. There can be no assurance that the proposed acquisition of Fountain Valley will be consummated. BUSINESS STRATEGY The Company intends to increase revenues and continue market share growth through implementation of the following business strategies: DEVELOPMENT OF INTEGRATED HEALTH CARE DELIVERY NETWORKS. The health care industry has become increasingly dominated by governmental fixed reimbursement programs and managed health care plans, causing cost containment pressure to rise. In order to succeed in this environment, the Company is developing relationships with managed care organizations, other health care providers and physicians in each of its markets to offer a full range of integrated patient services on a cost effective basis. The Company believes that the establishment of integrated networks will allow it to (i) improve the quality of care provided by concentrating expertise in the provision of specialized services within each market; (ii) consolidate expensive equipment and procedures into fewer facilities and reduce costs through increased purchasing power and other economies of scale; and (iii) manage entire episodes of illness on a coordinated, cost effective basis, rather than through the provision of costly, isolated treatments. Through the development of health care networks, the Company believes it will augment revenues and market share by attracting an increasing share of large, sophisticated governmental and private sector managed care contracts. The Company intends to continue to utilize the following approaches in connection with its development of integrated health care networks: - Hospitals as "Hubs" for Delivery Systems. The Company intends to establish relationships with other health care providers in the markets it serves by building upon the primary and tertiary care provided by the Company's hospitals in such markets, and integrating these services with the outpatient and specialty services of other providers. The Company believes that hospitals are the logical hubs for the development of integrated health care delivery systems due to their highly developed infrastructure, extensive base of services, sophisticated equipment and skilled personnel. - Flexibility to Participate in Varying Capacities in Different Networks. The Company's broad range of delivery capabilities provides it with the flexibility to participate in different capacities in the networks. For example, in markets in which the Company operates a large number of hospitals, it intends to take a leadership role in establishing relationships with other providers to develop fully integrated networks. In markets in which the Company is not one of the dominant providers of acute care services, the Company intends to participate in networks by integrating its service capabilities with the local providers of complementary health care services. In addition, through the Medicaid HMO, the Company has demonstrated its ability to successfully provide health care services on a fixed rate contract basis in conjunction with a governmental payor. The Company intends to pursue opportunities for similar arrangements in connection with the development of networks in its other markets. In addition, the Company continually analyzes whether each of its hospitals fits within its strategic plans and may divest itself of hospitals that do not so fit. - Strategic Acquisitions. The Company intends to continue to pursue strategic acquisitions of health care providers in geographic areas and with service capabilities that will facilitate the development of integrated networks. For example, the Company recently entered into a letter of intent to acquire 23 25 Fountain Valley, a provider of tertiary care services in Southern California. See "-- Recent Acquisitions." The Company has a significant primary care presence in that area and intends to integrate the tertiary care services provided by Fountain Valley with those provided by its primary care hospitals in nearby communities, thereby furthering the development of an integrated network of providers in the area. - Physician Alliances. The Company intends to further its development of integrated networks by expanding its alliances with physicians to create long term hospital/physician linkages. These arrangements will allow physicians to participate in the delivery of health care at the network level. For example, in the Los Angeles market, the Company has formed a relationship with a group of physicians to participate in capitated health care contracts. The Company is pursuing similar arrangements with other physician groups and in other markets. - California Operations. The Company believes that California represents a unique opportunity for the early development of an integrated network due to the high concentration of managed care operators in the state. The Company presently operates 17 hospitals in California (18 hospitals assuming consummation of the proposed Fountain Valley acquisition). Consequently, the Company believes that it is in a position to offer managed care payors in the state a broad selection of locations and services on a cost effective basis. The Company believes that the proposed acquisition of Fountain Valley will further the development of a health care network in the greater Los Angeles, California area by allowing the Company to integrate the tertiary care services provided by Fountain Valley with the primary care services provided by the Company's existing 13 hospitals in the area. OUTPATIENT SERVICES. Pressures to contain health care costs and technological developments allowing more procedures to be performed on an outpatient basis have led payors to demand a shift to ambulatory or outpatient care wherever possible. The Company has responded to this trend by enhancing its hospitals' outpatient capabilities through (i) selective conversion of excess acute care bed capacity for use in outpatient treatment; (ii) improvement of outpatient diagnostic services; (iii) a more efficient outpatient admissions process; and (iv) a restructuring of existing surgical capacity to allow greater concentration in the outpatient area. The Company's facilities will emphasize those outpatient services that the Company believes will grow in demand and which can be provided on a cost effective, high revenue growth basis. The Company believes that it is well positioned to compete effectively with alternate site providers of outpatient services because its acute care hospitals are able to offer a broader range of services at competitive prices. COST REDUCTION. An important component of the Company's strategy is to position itself as a low cost provider of health care services in each of its markets. As cost containment pressures increase, the Company will continue to implement programs designed to improve financial performance and efficiency. These programs include: (i) monitoring and adjusting staffing levels and equipment usage in response to resource consumption; (ii) more efficient use of professional and paraprofessional staff such as nurses and nurses' aides; (iii) renegotiation of purchasing contracts and revision of purchasing practices to take advantage of volume purchasing and low cost, quality products; (iv) improving patient management and reporting procedures; (v) improving the collection and sharing of utilization and patient mix data with providers, employers and payors; and (vi) more efficient billing and collection procedures. In addition, the Company intends to take advantage of reductions in corporate overhead and other economies of scale from the Mergers and any future acquisitions. The Company estimates realizing annualized operating cost savings of approximately $15 million from improved operating efficiencies resulting from the Mergers. COMMUNITY BASED SERVICES. The Company intends to continue to implement specialty programs on a selective basis to maintain and enhance the range and quality of its health care services. The Company focuses on the particular needs of each community it serves and tailors its services based upon local conditions and the Company's ability to provide such services on a competitive basis. Examples of specialty services provided by the Company in response to local demand include rehabilitation services, home health services, AIDS treatment, cardiac surgery, weight loss services, pain treatment programs and women's health clinics. In designing and implementing such programs, the Company analyzes general demographic information and 24 26 specific demand data generated by its hospitals, and seeks to work with physicians, employers and other members of the local community. MODERNIZATION OF FACILITIES. The Company believes that maintaining and modernizing its facilities is an important means of continuing revenue and market share growth. After giving pro forma effect to the Mergers, the Company's capital expenditures have totalled approximately $200 million over the past three fiscal years. Such spending resulted in hospital renovations and equipment purchases to expand and enhance the Company's range of services, as well as customary equipment replacement. In addition, such expenditures have expanded high growth outpatient facilities and other specialty services, including outpatient surgery and home health services. The Company believes that capital expenditures (exclusive of hospital acquisitions) during the 12 months following the Mergers will not exceed $75 million, and will be used for expansion of services at existing facilities and the replacement of outdated equipment. MANAGEMENT INFORMATION SYSTEMS. The Company believes that the ability to collect and analyze information on the quality of care and to develop appropriate responses thereto is critical to achieving growth in the managed care environment. Prior to the Mergers, the Company, Summit and AHM each designed or successfully implemented systems which measure selected outcome quality indicators and identify needed improvements to patient care. For example, these systems help identify and track quality indicators such as unplanned transfers to intensive care units and returns to the operating room. The Company utilizes this information, which is shared with physicians and other health care professionals, to develop improved protocols of care and to direct treatment to the most appropriate level of care. The Company is consolidating its quality and utilization system with that of each of AHM and Summit to enhance its operational efficiency and reduce costs. OPERATIONS Health Care Facilities The Company operates 44 general acute care hospitals, one psychiatric hospital and four surgery centers in 15 states, primarily in the southern and western United States, and has a significant presence in several large markets. The Company operates 13 hospitals in the greater Los Angeles, California area, and, therefore, believes that it is able to offer high quality, cost-effective health care services by integrating its primary and tertiary care facilities in the area. The proposed acquisition of Fountain Valley would add to the Company's presence in the greater Los Angeles, California area. In Phoenix, Arizona, the Company operates two hospitals, two surgery centers and the Medicaid HMO which provides services under a fixed price contract expiring on September 30, 1994. The Company operates five hospitals in Florida and seven hospitals in Texas. The Company also operates hospitals in the following states: Indiana, Iowa, Louisiana, Mississippi, Missouri, Nevada, Oregon, Tennessee, Washington, West Virginia and Wyoming. In addition, the Company owns or leases all or a substantial part of over 50 medical office buildings located in proximity to its hospitals. All of the Company's hospitals are accredited by the Joint Commission on Accreditation of Health Care Organizations (except for one hospital which is accredited by the American Osteopathic Association) and are certified for participation in the Medicare and Medicaid program. The Company owns all outstanding shares of two series of redeemable preferred stock of Houston Northwest Medical Center ("Houston Northwest"), a tertiary medical complex and trauma center located in Houston with 494 licensed beds. The preferred stock has a redemption value of $62.5 million plus accrued and unpaid dividends. In addition, the Company has a mortgage note receivable from an affiliate of Houston Northwest with a balance of $8.2 million as of May 31, 1994. The Company also owns 43% of Horizon Mental Health Services, Inc., which at May 31, 1994 operated 60 specialty psychiatric units at various hospitals in the United States. Sources of Revenue The Company receives payment for health care services from (i) the federal government under the Medicare program, (ii) state governments under their respective Medicaid programs, (iii) managed care operators, including health maintenance organizations and preferred provider organizations, (iv) other private insurance payors and (v) patients directly. The following table sets forth the approximate percentages of 25 27 combined total gross operating revenue of the Company, Summit and AHM from the sources indicated for each of their three most recently completed fiscal years:
1993 1992 1991 ------ ------ ------ Medicare................................................ 42.6% 44.0% 45.2% Medicaid/Medi-Cal....................................... 17.5% 14.6% 11.7% Managed Care............................................ 19.4% 18.9% 17.1% All Other Payors........................................ 20.5% 22.5% 26.0% ------ ------ ------ Total......................................... 100.0% 100.0% 100.0% ====== ====== ======
Amounts received under Medicare, Medicaid and from managed care organizations and certain other private insurers generally are less than the hospital's customary charges for the services provided. Patients are not generally responsible for any differences between customary charges and amounts reimbursed under these programs for such services, but are responsible to the extent of any exclusions, deductibles or co-insurance features of their coverage. In recent years, the Company's facilities have experienced an increase in the amount of such exclusions, deductibles and co-insurance. In addition, the major governmental and private purchasers of health care are increasingly negotiating the amounts they will pay for services performed, and managed care operators, which offer prepaid and discounted medical service packages, represent a growing segment of health care payors. The Company believes that its recent acquisition activity, together with the business strategies described above, will position the Company to compete more effectively in this changing environment. Medical Staffs and Employees As of May 31, 1994, the Company had approximately 20,000 employees. In addition, as of such date, approximately 15,000 active licensed physicians were members of the medical staffs of the Company's facilities. Medical staff members are generally independent contractors and not employees of the hospital. However, a patient is usually admitted to a hospital only at the request of a member of the medical staff. Medical staff members may also serve on the staffs of other nearby hospitals. Each of the Company's hospitals is managed on a day-to-day basis by a hospital chief executive officer and chief financial officer. The Company has implemented incentive compensation programs designed to reward hospital management personnel for accomplishing established performance goals. The Company provides a variety of management services to its hospitals, including information systems, human resource management, reimbursement, finance and technical accounting support, purchasing support, legal and tax services and construction management. The Company establishes fiscal and accounting policies at the corporate level for use at each of its facilities. 26 28 PROPERTIES The following table sets forth the name, location and the number of licensed beds in the Company's hospitals as of June 30, 1994. All of the hospitals are acute care hospitals, except for the one hospital indicated in footnote (6) below which is a psychiatric hospital.
STATE NAME LOCATION BEDS(1) - -------------------------- ----------------------------------------- ---------------- ------- Arizona................... Community Hospital Medical Center Phoenix 75 Mesa General Hospital Medical Center(2) Mesa 138 Tucson General Hospital Tucson 213 California................ Brotman Medical Center Culver City 495 Chapman General Hospital(3) Orange 99 Coastal Communities Hospital(4) Santa Ana 165 Community Hospital of Huntington Park(5) Huntington Park 99 Doctors Hospital of Santa Ana Santa Ana 54 French Hospital Medical Center San Luis Obispo 138 Greater El Monte Community Hospital South El Monte 115 Harbor View Medical Center San Diego 176 Midway Hospital Medical Center Los Angeles 230 Mission Hospital of Huntington Park Huntington Park 127 Monterey Park Hospital Monterey Park 102 Ross Hospital(6) Kentfield 93 Santa Ana Hospital Medical Center(7) Santa Ana 93 St. Luke Medical Center Pasadena 179 Valley Community Hospital(8) Santa Maria 70 Whittier Hospital Medical Center Whittier 179 Woodruff Community Hospital Long Beach 96 Florida................... Coral Gables Hospital Coral Gables 285 Florida Medical Center Fort Lauderdale 459 Golden Glades Regional Medical Center Miami 352 North Bay Medical Center New Port Richey 122 Parkway Regional Medical Center(9) North Miami 412 Indiana................... Midwest Medical Center Indianapolis 405 Iowa...................... Davenport Medical Center Davenport 150 Louisiana................. Minden Medical Center Minden 108 Mississippi............... Gulf Coast Medical Center Biloxi 189 Missouri.................. Twin Rivers Regional Medical Center Kennett 116 Nevada.................... Lake Mead Hospital Medical Center(10) North Las Vegas 163 Oregon.................... Eastmoreland Hospital Portland 100 Woodland Park Hospital(11) Portland 209 Tennessee................. Gibson General Hospital Trenton 101 Lewisburg Community Hospital Lewisburg 119 Texas..................... Garland Community Hospital Garland 118 Lake Pointe Medical Center(12) Rowlett 92 Pasadena General Hospital Pasadena 146 Sharpstown General Hospital Houston 190 South Park Hospital & Medical Center Lubbock 99 Southwest General Hospital San Antonio 274 Trinity Valley Medical Center Palestine 114
27 29
STATE NAME LOCATION BEDS(1) - -------------------------- ----------------------------------------- ---------------- ------- Washington................ Puget Sound Hospital Tacoma 160 West Virginia............. Plateau Medical Center Oak Hill 91 Wyoming................... Lander Valley Medical Center(13) Lander 102
- --------------- (1) The number of licensed beds represents the maximum number of beds permitted in the facility under its state license. The total number of beds for all facilities is 7,612. (2) Leased facility. The lease expires July 31, 2003, subject to renewal by the Company until July 31, 2023. (3) Leased facility. The lease expires December 31, 2003, subject to renewal by the Company until December 31, 2013. (4) Joint venture with minority interests aggregating approximately 50%. (5) Leased facility. The lease expires November 25, 2023. (6) Psychiatric facility. (7) Leased facility. The lease expires August 31, 2003, subject to renewal by the Company until August 31, 2013. (8) Leased facility. The lease expires July 31, 2003, subject to renewal by the Company until July 31, 2023. (9) Joint venture with minority interests aggregating approximately 45%. (10) A portion of the land on which the facility is located is leased, and such ground lease expires on December 31, 2009, subject to renewal by the Company until December 31, 2024. (11) The land on which the facility is located is leased, and such ground lease expires December 31, 2019. (12) Joint venture with minority interests aggregating approximately 50%. (13) Joint venture with minority interests aggregating approximately 7%. 28 30 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the directors and executive officers of the Company.
SERVED AS OFFICER OR DIRECTOR OF NAME AGE POSITION THE COMPANY SINCE - ---------------------------- --- ------------------------------------------- ----------------- Charles N. Martin, Jr....... 51 Chairman of the Board and Chief Executive January 1992 Officer Donald J. Amaral............ 41 President, Chief Operating Officer and April 1994 Director Keith B. Pitts.............. 36 Executive Vice President & Chief Financial August 1992 Officer Beverly S. Anderson......... 41 Senior Vice President -- Operations April 1992 Bryan D. Burklow............ 37 Senior Vice President -- Operations April 1994 Bruce J. Colburn............ 39 Senior Vice President -- Finance & Chief April 1994 Accounting Officer Raymond Denson.............. 52 Senior Vice President -- Operations September 1986 Paula Y. Eleazar............ 41 Senior Vice President -- Chief Information April 1992 Officer Gale E. Gascho.............. 48 Senior Vice President -- Operations April 1994 Anthony C. Krayer........... 50 Senior Vice President -- Acquisitions and June 1994 Development Carol A. Murdock............ 33 Senior Vice President -- Business April 1994 Development Ronald P. Soltman........... 48 Senior Vice President and General Counsel April 1994 Mark Werber................. 39 Senior Vice President -- Operations April 1994 Yvonne V. Cliff............. 33 Director October 1991 Richard A. Gilleland........ 49 Director October 1991 Leonard Green............... 67 Director April 1992 Peter A. Joseph............. 41 Director October 1991 Paul S. Levy................ 46 Director October 1991 Angus C. Littlejohn, Jr..... 42 Director October 1991 John F. Nickoll............. 60 Director April 1994 John J. O'Shaughnessy....... 49 Director April 1994 M. Lee Pearce, M.D.......... 62 Director March 1993
Charles N. Martin, Jr. has served as Chairman of the Board of Directors and Chief Executive Officer of the Company since January 1992. He was also President of the Company from January 1992 until April 1994. Mr. Martin was President and Chief Operating Officer of Healthtrust, Inc. -- The Hospital Company, a hospital management company, from September 1987 until October 1991. From September 1980 to September 1987, Mr. Martin held a number of executive positions at Hospital Corporation of America ("HCA"), and from April 1987 to August 1987 served as a director of HCA. Donald J. Amaral has been President and Chief Operating Officer and a Director of the Company since April 1994. Previously he was President and Chief Executive Officer of Summit from October 1991 to April 1994 and President and Chief Operating Officer from October 1989 to October 1991. Prior to joining Summit, Mr. Amaral was President and Chief Operating Officer of Mediplex Group, Inc. ("Mediplex"), a health care subsidiary of Avon Products, Inc., from 1986 until October 1989. For a period of ten years prior to joining 29 31 Mediplex, Mr. Amaral worked for the Hospital Group of National Medical Enterprises, Inc. ("NME") in various senior financial management positions. Mr. Amaral was appointed to the Board of Directors pursuant to the Agreement and Plan of Merger, dated as of December 2, 1993 and amended as of January 14, 1994, among the Company, Summit and SHL Acquisition Co. Mr. Amaral is also Chairman of the Board of Summit Care. Keith B. Pitts has served as Executive Vice President and Chief Financial Officer of the Company since August 1992. From July 1991 to August 1992, Mr. Pitts was a partner in Ernst & Young's Southeast Region Health Care Consulting Group, and from January 1988 to July 1991 he was a partner and Regional Director in Ernst & Young's Western Region Health Care Consulting Group. Mr. Pitts was a Regional Vice President and Treasurer of Amherst Associates, a health care consulting firm, from July 1986 until it merged into Ernst & Young in January 1988. Mr. Pitts is also a director of Summit Care. Beverly S. Anderson has served as Senior Vice President -- Operations of the Company since April 1994. From April 1992, when she joined the Company, until April 1994, she was Senior Vice President -- Operations Improvement of the Company. For more than five years prior to joining the Company, Ms. Anderson was a partner and senior manager in Ernst & Young's Southern Region Health Care Consulting Group. Bryan D. Burklow has been Senior Vice President -- Operations of the Company since April 1994. Prior thereto he was Chief Executive Officer responsible for Summit's Midway Hospital Medical Group. In June 1993, Mr. Burklow became Summit's Senior Vice President responsible for California hospital operations. Mr. Burklow joined Summit in August 1984 as Assistant Administrator at Mesa General Hospital Medical Center in Mesa, Arizona, and he held various positions with Summit between August 1984 and June 1993. Bruce J. Colburn has been Senior Vice President -- Finance and Chief Accounting Officer of the Company since April 1994. Prior thereto he was Vice President and Controller of AHM from February 1993 until April 1994 and Controller, Hospital Financial Operations, of AHM from July 1990 to February 1993. From August 1985 to July 1990, Mr. Colburn served as an executive with Ernst & Young's National Accounting and Auditing Group in Cleveland, Ohio and New York, New York. Raymond Denson has served as Senior Vice President -- Operations of the Company since April 1990. Mr. Denson served as a Vice President-Operations of the Company from September 1986 until April 1990. Paula Y. Eleazar has been Senior Vice President and Chief Information Officer of the Company since April 1994. Prior thereto she served as Vice President and Chief Information Office of the Company from April 1992 until April 1994. For more than five years prior to joining the Company, Ms. Eleazar was employed by HCA, principally in its information systems division and as the Assistant Administrator of Henrico Doctors Hospital, Richmond, Virginia. Gale E. Gascho has been Senior Vice President -- Operations of the Company since June 1994. From 1991 until May 1994, Mr. Gascho was the Chief Executive Officer of Alhambra Hospital, a 157-bed acute care hospital located in Alhambra, California. From 1975 through 1991, Mr. Gascho served in various capacities with the corporate staff and with the hospital operations of NME, including serving from 1987 to 1991 as Chief Executive Officer of NME's Garfield Medical Center, a 229-bed acute care hospital located in Monterey Park, California. Anthony C. Krayer has been Senior Vice President -- Acquisitions and Development of the Company since June 1994. Prior thereto he served as Senior Vice President of OrNda of South Florida, Inc., a subsidiary of the Company, from July 1993 to June 1994. From January 1992 until June 1993, Mr. Krayer was Chief Operating Officer of Florida Medical Center ("FMC"), a 459-bed acute care hospital located in Fort Lauderdale, Florida which was purchased by a subsidiary of the Company in June 1993. From October 1989 until December 1991, Mr. Krayer was Chief Financial Officer of FMC. From 1980 until October 1989 Mr. Krayer was a partner of Ernst & Whinney (predecessor to Ernst & Young), independent auditors. Carol A. Murdock has been Senior Vice President -- Business Development of the Company since April 1994. Prior thereto she was Vice President, Marketing of Summit from June 1993 until April 1994. From 30 32 November 1992 until May 1993, Ms. Murdock was Assistant Vice President/Marketing of NME and from December 1990 until November 1992 she was Director, Product Line Development, of NME. From 1988 until 1990, Ms. Murdock was employed in various marketing positions with subsidiaries of LINC Financial Services. Ronald P. Soltman has been Senior Vice President and General Counsel of the Company since April 1994. From 1984 until February 1994, he was Vice President and Assistant General Counsel of HCA. From February 1994 until March 1994 he was Vice President and Assistant General Counsel of Columbia/HCA Healthcare Corporation. Mark Werber has been Senior Vice President of the Company since April 1994. Prior thereto he was Summit's Senior Vice President in charge of its Arizona, Texas and Iowa hospital operations from October 1990 until April 1994. Prior to October 1990 he was Chief Executive Officer of Summit's Tucson General Hospital, Tucson, Arizona. Yvonne V. Cliff has served as a Director of the Company since October 1991. Ms. Cliff has been a general partner of JLL Associates, L.P. ("JLL Associates") since January 1992 and a principal of Joseph Littlejohn & Levy ("JLL"), a merchant banking firm and the sponsor of the JLL Fund, since June 1988. Ms. Cliff has served as Vice President -- Corporate Development of Lancer Industries, Inc., ("Lancer Industries"), an industrial holding company and the limited partner of JLL Associates, since July 1989. Lancer Industries also owns 100% of the capital stock of JLL Inc., which pursuant to contract manages the JLL Fund. Ms. Cliff is also a director of Doskocil Companies Incorporated ("Doskocil"). Richard A. Gilleland has served as a Director of the Company since October 1991. Mr. Gilleland has been the Chairman, President, and Chief Executive Officer of Kendall International, Inc. ("Kendall International") since July 1990. Mr. Gilleland served as Chairman, President, and Chief Executive Officer of American Medical International, Inc. from January 1989 to November 1989 and of Intermedics, Inc. from August 1986 to January 1989. Leonard Green has served as a Director of the Company since April 1992. Mr. Green has been President and Chief Executive Officer of Green Management and Investment Co., a private investment management company, since 1985. From 1980 to 1985, Mr. Green served as President and Chief Executive Officer of Yuma Management Corp., the general partner of Universal Home Health Care Associates, which was subsequently merged into Quality Care, Inc., a home health care company. Peter A. Joseph has served as a Director of the Company since October 1991. Mr. Joseph has been a general partner of JLL Associates, which is the general partner of the JLL Fund, since November 1990 and a partner of JLL (and its predecessors), since July 1987. Mr. Joseph has served as President of Lancer Industries since April 1992 and as Secretary and director of Lancer Industries since July 1989. Mr. Joseph is also a director of Doskocil and Fairfield Manufacturing Company, Inc. ("Fairfield"). Paul S. Levy has served as a Director of the Company since October 1991. Mr. Levy has been a general partner of JLL Associates since November 1990 and a partner of JLL (and its predecessors) since May 1988. Mr. Levy has served as Chairman of the Board of Directors and Chief Executive Officer of Lancer Industries since July 1989. Mr. Levy is also a director of Doskocil, Fairfield and Kendall International. Angus C. Littlejohn, Jr. has served as a Director of the Company since October 1991. Mr. Littlejohn has been a general partner of JLL Associates since November 1990 and a partner of JLL (and its predecessors) since July 1987. Mr. Littlejohn has served as Vice Chairman of Lancer Industries since April 1992 and as Chief Financial Officer and director of Lancer Industries since July 1989. From July 1989 until April 1992, Mr. Littlejohn served as President of Lancer Industries. Mr. Littlejohn is also a director of Doskocil and Fairfield. John F. Nickoll has served as a Director of the Company since April 1994. He has been President and Co-Chief Executive Officer of The Foothill Group, Inc., since 1970. Mr. Nickoll also is a director of American Shared Hospital Services, Inc., an owner/lessor of mobile CAT-scan equipment, CIM-High Yield Securities, Inc., a closed-end investment company, and Care Enterprises, Inc., a nursing home chain. Mr. Nickoll was 31 33 appointed to the Board of Directors pursuant to the Amended and Restated Agreement and Plan of Merger dated as of January 14, 1994 between the Company and AHM (the "AHM Merger Agreement"). John J. O'Shaughnessy has served as a Director of the Company since April 1994. He has been President of Strategic Management Associates, Inc., Washington, D.C. since 1988. From 1986 to 1988, he was Senior Vice President of the Greater New York Hospital Association, and from 1983 to 1986 he was Assistant Secretary for Management and Budget of the Department of Health and Human Services, Washington, D.C. Mr. O'Shaughnessy was appointed to the Board of Directors pursuant to the AHM Merger Agreement. M. Lee Pearce, M.D. has served as a Director of the Company since March 1993. Dr. Pearce is a private investor. Dr. Pearce also serves as a director of IVAX Corporation. 32 34 DESCRIPTION OF THE NOTES The Notes are to be issued under an indenture dated as of , 1994 (the "Indenture") among the Company, Summit and NationsBank of Tennessee, N.A., as Trustee (the "Trustee"), a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. The following summary of certain provisions of the Indenture does not purport to be complete and is qualified in its entirety by reference to the Indenture. Wherever particular sections or defined terms of the Indenture are referred to, such sections or defined terms are incorporated herein by reference. Capitalized terms not otherwise defined below or elsewhere in this Prospectus have the meanings given to them in the Indenture. GENERAL The Notes represent unsecured general joint and several obligations of the Co-Obligors subordinate in right of payment to certain other debt obligations of the Co-Obligors, as described below under "Subordination," and are limited to $100 million in aggregate principal amount. The Notes are issuable only in registered form, without coupons, in denominations of $1,000 or any integral multiple thereof. MATURITY, INTEREST AND PRINCIPAL The Notes will mature on , 2004. Interest on the Notes will be payable in cash semi-annually, in arrears, on each , and (each an "Interest Payment Date"), commencing , 1995, to the Persons in whose names the Notes are registered at the close of business on the preceding and (each an "Interest Record Date"). Interest will accrue from the most recent Interest Payment Date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from the original date of issuance. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Notes will bear interest until maturity at the rate of % per annum. Principal and premium, if any, and interest on each Note will be payable, and the Notes may be presented for transfer or exchange, at the office or agency of the Company maintained for such purpose. At the option of the Company, payment of interest may be made by check mailed to registered holders of the Notes at the addresses set forth on the registry books maintained by the Trustee, which will initially act as registrar for the Notes. No service charge will be made for any exchange or registration of transfer of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Unless otherwise designated by the Company, the Company's office or agency will be the corporate trust office of the Trustee. REDEMPTION The Notes may not be redeemed prior to , 1999. The Company, at its option, may redeem the Notes as a whole, or from time to time in part, on or after at a redemption price equal to % of principal amount, declining ratably to par on (in each case together with accrued and unpaid interest to the redemption date). If less than all of the Notes are to be redeemed, the Trustee shall select, by lot or pro rata or as otherwise directed by the Company in a manner which is appropriate and fair, the Notes or portions thereof to be redeemed. Notes may be redeemed in part in multiples of $1,000 principal amount only. The Notes will not have the benefit of any sinking fund. Notice of redemption will be sent, by first-class mail, at least 30 days and not more than 60 days prior to the date fixed for redemption to each holder of Notes to be redeemed at the last address for such holder then shown on the registry books. Any notice that relates to a Note to be redeemed only in part shall state the portion of the principal amount to be redeemed and that on and after the redemption date, upon surrender of the Note, a new Note or Notes will be issued in a principal amount equal to the unredeemed portion thereof. On and after the redemption date (unless the Company shall default in the payment of such Notes at the redemption price, together with accrued interest to the redemption date), interest will cease to accrue on the Notes or part thereof called for redemption. 33 35 SUBORDINATION Payment of the principal of and interest on the Notes is expressly subordinate and subject in right of payment to the prior payment in full in cash of all Senior Debt (as defined), whether outstanding upon the issuance of the Notes or thereafter incurred. In addition, as a result of the holding company structures of the Company and Summit, the creditors of the Co-Obligors, including the holders of the Notes, effectively rank junior to all creditors of the Company's Subsidiaries (other than Summit, but including Summit's subsidiaries). As of May 31, 1994, the amount of Senior Debt and obligations of the Company's subsidiaries (excluding intercompany indebtedness) that effectively ranked senior to the Notes was $622.4 million. As of May 31, 1994, after giving effect to proposed acquisition of Fountain Valley, the Offering and the use of proceeds therefrom as described in "Use of Proceeds," and assuming the repurchase of 100% of the aggregate outstanding principal amount of the 10 1/4% Notes pursuant to the Change of Control Offer, the amount of Senior Debt and obligations of the Company's Subsidiaries (excluding intercompany indebtedness) that effectively ranked senior to the Notes would have been approximately $619.6 million. The Notes will rank pari passu in right of payment to the Company's 12 1/4% Notes and the 10 1/4% Notes. As of May 31, 1994, there was $500 million aggregate principal amount of indebtedness outstanding which would rank pari passu in right of payment to the Notes. As of May 31, 1994, after giving effect to the Offering and the use of the proceeds therefrom and the proposed acquisition of Fountain Valley and assuming the Company's repurchase of 100% of the aggregate outstanding principal amount of the 10 1/4% Notes pursuant to the Change of Control Offer, there would have been $400 million aggregate principal amount of indebtedness outstanding which would rank pari passu in right of payment to the Notes. The 10 1/4% Notes are the joint and several obligations of the Company and AHM Acquisition Co., a wholly owned subsidiary of the Company, and, therefore, holders of any of the 10 1/4% Notes outstanding following the Change of Control Offer will be entitled to satisfy their claims out of the assets of AHM Acquisition Co. prior to holders of the Notes. AHM Acquisition Co. owns substantially all of the operations acquired by the Company from AHM in the AHM Merger. Subject to certain restrictions contained in the Bank Credit Facility, the Indenture and certain other indebtedness, the Co-Obligors and their respective Subsidiaries are permitted to incur additional indebtedness, including Senior Debt. Additionally, the indenture governing the Notes does not prohibit the Company from transferring or disposing of the assets of Summit, and thereby diminishing the assets available to satisfy the claims of holders of the Notes against Summit. The Indenture provides that no payment or distribution of cash, property or securities of the Co-Obligors will be made on account of principal of, or interest on the Notes, or to defease or acquire any of the Notes or on account of the redemption provisions of the Notes, (a) upon the maturity of any Senior Debt by lapse of time, acceleration or otherwise, until all Senior Debt shall first be paid in full in cash, or such payments have been duly made in a manner satisfactory to the holders of such Senior Debt or (b) if the Co-Obligors default in the payment of any principal of, premium if any, or interest on or other amounts payable on or in connection with any Senior Debt when it becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise, unless and until such default has been cured or waived in writing or has ceased to exist; provided, however, that the Co-Obligors may make such payment or distribution in respect of the Notes without regard to the foregoing if the Co-Obligors and the Trustee receive written notice from the Senior Agent and any other Senior Representatives approving such payment. Upon the happening of an event of default (or if an event of default would result upon any payment with respect to the Notes) with respect to any Designated Senior Debt, as such event of default is defined in the Bank Credit Facility and in any other instrument evidencing the Designated Senior Debt or under which it is outstanding, permitting holders thereof to accelerate its maturity (if the default is other than a default in payment of the principal of, premium, if any, or interest on or other amount due in connection with such Designated Senior Debt), upon written notice of such event of default to the Trustee and the Co-Obligors by the Senior Agent on behalf of the Lenders or by any Senior Representative for the holders of such other Designated Senior Debt, then outstanding, then, unless and until such event of default has been cured, waived in writing, or has ceased to exist, and no event of default exists under any other Designated Senior Debt or any other event of default has also been waived in writing or has ceased to exist, no payment or distribution of cash, property or securities of the Co-Obligors will be made by the Co-Obligors with respect to the principal of, or interest on the Notes or to defease or acquire any of the Notes or on account of the redemption 34 36 provisions of the Notes; provided that nothing in the above-described provision will prevent the making of any payment for a period of more than 180 days after the date written notice of the event of default is given unless the payment thereof would be prohibited by the provisions of the immediately preceding paragraph. If, upon the expiration of such 180-day period, the payment thereof would not be prohibited by the provisions of the immediately preceding paragraph, promptly after the end of such 180-day period, the Co-Obligors will pay to the Trustee all sums not paid in respect of the Notes during such 180-day period. During any consecutive 360-day period, only one 180-day period may commence during which payment of principal of or interest on the Notes may not be made and the duration of such period may not exceed 180 days. Upon any distribution of assets of the Co-Obligors upon any dissolution, winding up, liquidation or reorganization of the Co-Obligors (whether voluntary or involuntary, in bankruptcy, insolvency, receivership or similar proceeding related to the Co-Obligors or their respective property or upon an assignment for the benefit of creditors or otherwise): (a) the holders of all Senior Debt will first be entitled to receive payment in full in cash of the Senior Debt and other amounts due in connection with Senior Debt before the holders of Notes are entitled to receive any payment or distribution of any kind or character on account of principal of or interest on the Notes; (b) any payment or distribution of assets of the Co-Obligors, whether in cash, Property or securities, to which the holders of the Notes or the Trustee on behalf of the holders would be entitled except for the subordination provisions of the Indenture, will be paid by the liquidating trustee or agent or other Person making such a payment or distribution directly to the holders of Senior Debt or their respective Senior Agent or Senior Representatives to the extent necessary to make payment in full of all Senior Debt remaining unpaid, after giving effect to any concurrent payment or distribution to the holder of such Senior Debt; and (c) if, notwithstanding the foregoing provisions, any payment or distribution of assets of the Co-Obligors of any kind or character, whether in cash, Property or securities is received by the Trustee or the holders of the Notes or any paying agent on account of principal, premium, if any, or interest on the Notes before all Senior Debt is paid in full in cash, or effective provision made for its payment in cash, such payment or distribution will be received and held in trust for and will be promptly paid over to the holders of the Senior Debt which remains unpaid or to their respective Senior Agent or Senior Representative for application to the payment of such Senior Debt (pro rata as to each of such holders on the basis of the respective amounts of Senior Debt which is held by them) until all such Senior Debt is paid in full in cash. Nothing in the Indenture or in the Notes, however, affects the joint and several obligations of the Co-Obligors, which are unconditional and absolute, to pay the principal of and interest on the Notes as and when they became due and payable in accordance with their terms. By reason of the subordination provisions described above, in certain events funds that would otherwise by payable to holders of Notes will be paid to holders of Senior Debt to the extent necessary to pay the Senior Debt in full. As result, the Co-Obligors may not be able to fully meet their obligations with respect to the Notes. RESTRICTIVE COVENANTS The Indenture contains, among other things, the following covenants: Change of Control Upon the occurrence of a Change of Control (as defined under "-- Certain Definitions") (the "Change of Control Date"), each holder of a Note shall have the right to require the repurchase of such Noteholder's Notes pursuant to the offer described in the next paragraph (the "Change of Control Offer") at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. Prior to the mailing of the notice to Noteholders provided for below but in any event within 30 days following any Change of Control, the Company covenants to (i) repay in full in cash any Designated Senior Debt which by its terms would require such repayment or to offer to repay in full in cash all such Debt and to repay the Debt of each Person who has accepted such offer or (ii) obtain the requisite consents under such Designated Senior Debt to permit the repurchase of the Notes as provided for in the immediately following paragraph. The Company shall first comply with the covenant in the preceding sentence before it shall be required to repurchase Notes pursuant to this covenant. Within 30 days following any Change of Control, the Company shall mail or at the Company's request the Trustee shall mail a notice to each Noteholder stating: (i) that the Change of Control Offer is being made 35 37 pursuant to this covenant and that all Notes tendered will be accepted for payment; (ii) the purchase price and the purchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Change of Control Payment Date"); (iii) that any Note not tendered will continue to accrue interest; (iv) that any Note accepted for payment pursuant to the Change of Control Offer will cease to accrue interest after the Change of Control Payment Date; (v) that Noteholders electing to have a Note purchased pursuant to a Change of Control Offer will be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, to the Trustee at the address specified in the notice prior to the close of business on the Change of Control Payment Date; (vi) that Noteholders will be entitled to withdraw their election if the Trustee receives, not later than the close of business on the third Business Day (or such shorter period as may be required by applicable law) preceding the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Noteholder, the principal amount of Notes the Noteholder delivered for purchase and a statement that such Noteholder is withdrawing his election to have such Notes purchased; and (vii) that Noteholders whose Notes are purchased only in part will be issued new Notes in a principal amount equal to the unpurchased portion of the Notes surrendered. In the event a Change of Control occurs and the holders of Notes exercise their right to require the Company to repurchase Notes, and assuming that such a repurchase constitutes a "tender offer" for purposes of Rule 14e-1 under the Securities Exchange Act of 1934, as amended (the "1934 Act"), at the time it is required, the Company will comply with the requirements of Rule 14e-1 as then in effect and any other applicable securities law or regulations with respect to such repurchase. On the Change of Control Payment Date, subject to the "Subordination" Article of the Indenture, the Company will (i) accept for payment the Notes or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the Trustee money sufficient to pay the purchase price of all the Notes or portions thereof so tendered and (iii) deliver or cause to be delivered to the Trustee, Notes so accepted together with an officers' certificate describing the Notes or portions thereof tendered to the Company. The Trustee shall promptly mail to each holder of the Notes so accepted payment in an amount equal to the purchase price of such Notes, and the Trustee shall promptly authenticate and mail to such holder a new Note in the principal amount equal to any unpurchased portion of the Notes surrendered by such Noteholder. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. Limitation on Debt The Indenture provides that the Company will not and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or guarantee or otherwise become liable for, any Debt, except (i) Debt evidenced by the Notes; (ii) Debt under the Credit Agreement in an aggregate principal amount at any time outstanding not to exceed $700 million; (iii) Debt incurred for working capital purposes at any time outstanding not to exceed $300 million; provided that the amount of such Debt outstanding at any time pursuant to this clause (iii) may not, together with any amounts outstanding or subject to a commitment of the Lenders under the Credit Agreement, exceed the amount that is permitted to be outstanding under the Credit Agreement pursuant to clause (ii); (iv) Debt of the Company to any Consolidated Subsidiary or of any Consolidated Subsidiary to the Company or to any other Consolidated Subsidiary; (v) Debt of the Company and its Subsidiaries outstanding on the Closing Date; (vi) Debt evidenced by letters of credit which are issued in the ordinary course of business of the Company and its Subsidiaries; (vii) Debt in respect of performance bonds provided by the Issuer in the ordinary course of business; (viii) Purchase Money Obligations incurred in the ordinary course of business; (ix) Debt representing additional shares of PIK Preferred payable as dividends on such PIK Preferred; (x) Physician Support Obligations; (xi) Capitalized Lease Obligations and Attributable Debt (without duplication) in an aggregate amount outstanding at any time not to exceed 10% of the Company's Consolidated Net Tangible Assets, (xii) Debt incurred to purchase or to finance the purchase of any Person's ownership interest in a Permitted Joint Venture in accordance with the terms of the agreement creating such interest or on terms no more favorable to such Person than that provided for by such agreement on the Closing Date, (xiii) Debt assumed in connection with the acquisition of Fountain Valley in an aggregate principal amount not exceeding $20 million; (xiv) any extension, renewal or replacement of any of clauses (i), (iii), (v) or (xii) above without (a) increasing the principal amount of any Debt then outstanding (unless such Debt is issued at a discount in which case the issuance price of such discount Debt shall not 36 38 exceed the principal amount of Debt being so refinanced) plus the amount of any premium required to be paid under the terms of the instrument governing such Debt being refinanced or the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing through means of a tender offer or privately negotiated transactions and, in each case, actually paid, (b) altering the issuer or obligor (except that the Company may incur Debt to replace Debt of a Subsidiary), (c) shortening the maturity of subordinated debt or (d) issuing Debt that is senior in right of payment to the Debt being extended, renewed or replaced and (xv) Debt, other than Debt permitted under clauses (i) through (xiii), provided that the aggregate principal amount (or liquidation preference) of such Debt may not exceed $125 million at any time outstanding, which Debt may be incurred under the Credit Agreement. Notwithstanding the foregoing, the Company and its Consolidated Subsidiaries may create, incur or assume Debt (including Acquisition Debt) if, at the time such Debt is so created, incurred or assumed and after giving effect thereto and the application of the proceeds thereof, and after giving pro forma effect to any acquisition or disposition by the Company or any Subsidiary of (i) a hospital or (ii) any assets with a value in excess of $10 million, whether by merger, stock purchase or sale, or asset purchase or sale, as if such acquisition or disposition occurred on the first day of the Reference Period, the Company's Pro Forma Coverage Ratio shall not be less than 2.0 to 1.0 for the period beginning on the date of the Indenture through August 31, 1995 and 2.25 to 1.0 thereafter; provided that, if the Company and its Consolidated Subsidiaries are unable to incur or assume Acquisition Debt pursuant to the foregoing clause the Company and its Consolidated Subsidiaries may nonetheless create, incur, or assume Acquisition Debt so long as, after giving effect thereto and the application of the proceeds thereof, and after giving pro forma effect to any acquisition or disposition by the Company or any Subsidiary of (i) a hospital or (ii) any assets with a value in excess of $10 million, whether by merger, stock purchase or sale, or asset purchase or sale, as if such acquisition or disposition occurred on the first day of the Reference Period, the Company's Pro Forma Coverage Ratio (i) is not less than 2.0 to 1.0 and (ii) is not less than the ratio of the Company's Consolidated Cash Flow to Fixed Charges (applying the provisions of clauses (2) and (3) of the definition of Pro Forma Coverage Ratio) for the period with respect to which the Pro Forma Coverage Ratio was calculated. Limitation on Restricted Payments The Indenture provides that the Company will not, and will not permit any of its Subsidiaries to, directly or indirectly make any Restricted Payment, if, after giving effect thereto: (i) an Event of Default, or an event that through the passage of time or the giving of notice, or both, would become an Event of Default, shall have occurred and be continuing, (ii) the Company could not incur an additional $1.00 of Debt (other than permitted Debt) in accordance with the "Limitation on Debt" covenant or (iii) the aggregate amount of all Restricted Payments made by the Company and its Subsidiaries (the amount expended or distributed for such purposes, if other than in cash, to be determined in good faith by the Board of Directors) from and after the Closing Date shall exceed the sum of: (a) the aggregate of 50% of the Consolidated Net Income of the Company (determined by excluding any amounts included in such Consolidated Net Income which were received by the Company or a Subsidiary from an Unrestricted Subsidiary) accrued for the period (taken as one accounting period) commencing with the first full month after the Closing Date to and including the first full month ending immediately prior to the date of such calculation (or, in the event Consolidated Net Income is a deficit, then minus 100% of such deficit), (b) the aggregate net proceeds to the Company, including the fair market value of property other than cash (as determined in good faith by the Board of Directors), received by the Company from the issuance or sale (other than to a Subsidiary of the Company) of its capital stock (other than Redeemable Stock) from and after the date of the Indenture, and options, warrants and rights to purchase its capital stock other than Redeemable Stock and (c) the aggregate amount received by the Company or a Subsidiary of the Company from its Unrestricted Subsidiaries (excluding all amounts received by the Company or any Subsidiary from all such Unrestricted Subsidiaries which represent a repayment of the principal portion of any loan or advance or any return of contributed capital in respect of any previous advance). The foregoing clauses (i), (ii) and (iii) will not prevent Permitted Payments and the foregoing clauses (ii) and (iii) will not prevent (a) the payment of any dividend within 60 days after the date of its declaration if such dividend could have been made on the date of its declaration in compliance with the foregoing 37 39 provisions, (b) amounts payable by the Company to its employees pursuant to the Stock Appreciation Rights and (c) the repurchase or redemption of shares of capital stock from any officer, director or employee of the Company or its Subsidiaries whose employment has been terminated or who has died or become disabled in an aggregate amount not to exceed $7.5 million per annum. Limitation on Liens Securing Debt The Indenture provides that the Company will not, and will not permit any of its Subsidiaries, directly or indirectly, to create, incur, assume or permit to exist any Lien upon or with respect to any of the Property of the Company or any such Subsidiary, whether owned at the date of the Indenture or thereafter acquired, or on any income or profits therefrom, to secure any Debt which is pari passu with or subordinate in right of payment to the Notes unless the Notes are secured equally and ratably simultaneously with or prior to the creation, incurrence or assumption of such Lien. This restriction does not apply to, and does not give the Noteholder any rights in respect of the creation, incurrence, assumption or existence of any, (i) Liens existing on the date of the Indenture and renewals and extensions thereof; (ii) Liens granted to secure obligations under or in respect of the Credit Agreement; (iii) rights of banks to set off deposits against debts owed to said banks; (iv) Purchase Money Obligations incurred in the normal and ordinary course of the Company's business; (v) Liens in respect of Debt incurred in connection with the sale of receivables; and (vi) Liens on the Property of any entity existing at the time such Property is acquired by the Company or any of its Subsidiaries, whether by merger, consolidation, purchase of assets or otherwise; provided in the case of this clause (vi) that such Liens (x) are not created, incurred or assumed in contemplation of such assets being acquired by the Company and (y) do not extend to any other assets of the Company or any of its Subsidiaries. Limitation on Restricting Subsidiary Dividends The Indenture provides that the Company will not, and will not permit any of its Subsidiaries to, create, assume or suffer to exist any consensual encumbrance or restriction on the ability of any Subsidiary to pay dividends or otherwise transfer assets or make loans to the Company or any other Subsidiary, except (i) those contained in the Credit Agreement; (ii) consensual encumbrances or restrictions binding upon any Person at the time that such Person becomes a Subsidiary of the Company so long as such encumbrances or restrictions are not created, incurred or assumed in contemplation of such Person becoming a Subsidiary of the Company; (iii) restrictions contained in security agreements permitted by the Indenture securing Debt permitted by the Indenture to the extent such restrictions restrict the transfer of Property subject to such security agreements; (iv) any encumbrance or restriction consisting of customary non-assignment provisions in leases to the extent such provisions restrict the transfer of the leases; (v) any encumbrance or restriction pursuant to an agreement in effect at or entered into on the date of this Indenture; or (vi) any encumbrance or restriction relating to a Permitted Joint Venture or (vii) any restrictions with respect to a Subsidiary imposed pursuant to an agreement which has been entered into for the sale or disposition of all or substantially all the capital stock or assets of such Subsidiary. Limitation on Transactions with Affiliates The Indenture provides that the Company will not, and will not permit any of its Subsidiaries to, enter into any transactions with Affiliates of the Company unless (i) such transactions are between or among the Company and its Subsidiaries or Unrestricted Subsidiaries, (ii) such transactions are in the ordinary course of business and consistent with past practice or (iii) the terms of such transactions are fair and reasonable to the Company or such Subsidiary or Unrestricted Subsidiary, as the case may be, and are at least as favorable as the terms which could be obtained by the Company or such Subsidiary or Unrestricted Subsidiary, as the case may be, in a comparable transaction made on an arm's-length basis between unaffiliated parties. In the event of any transaction or series of transactions occurring subsequent to the date of the Indenture with an Affiliate of the Company which involves in excess of $5 million and is not permitted under clause (i) or (ii) of the preceding sentence, the majority of the disinterested members of the Board of Directors shall by resolution determine that such transaction or series of transactions meets the criteria set forth in clause (iii) of the preceding sentence; provided, further, that if such transaction or series of transactions involves in excess of $10 million and is not permitted under clause (i) or (ii) of the preceding sentence, the Company shall also 38 40 deliver to the Trustee a written opinion of a nationally recognized investment firm to the effect that such business or transaction is fair to the Company from a financial point of view. Notwithstanding the foregoing, such provisions do not prohibit (i) the making of Physician Support Obligations, (ii) transactions with Permitted Joint Ventures or (iii) the payment of regular fees to directors of the Company who are not employees of the Company. Limitation on Other Subordinated Debt The Indenture provides that the Company is prohibited from incurring any Debt which is by its terms subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes. LIMITATION ON CONSOLIDATION AND MERGER The Indenture provides that the Company may not consolidate with or merge with or into another Person or sell, lease or convey all or substantially all of its assets to another Person unless: (i)(a) the Company is the continuing corporation in the case of a merger or (b) the resulting, surviving or transferee person (the "Surviving Entity") is a corporation or partnership organized under the laws of the United States, one of the states thereof or the District of Columbia and shall expressly assume by supplemental indenture (satisfactory in form to the Trustee) all of the obligations of the Company under the Indenture and the Notes; (ii) no Event of Default (or event or condition which after notice or lapse of time or both would become an Event of Default) shall have occurred and be continuing immediately after giving effect to such transaction; (iii) the Net Worth of the Company or the Surviving Entity, as the case may be, on a pro forma basis after giving effect to such consolidation, merger or sale, lease or conveyance of assets is at least as great as the Net Worth of the Company immediately prior to the date of the transaction, and (iv) immediately after giving effect to such transaction, the Company or the Surviving Entity, as the case may be, would be able to incur $1 of additional Debt (other than permitted debt) under the "Limitation on Debt" covenant. Notwithstanding the foregoing, clauses (iii) and (iv) shall not prohibit a transaction, the principal purpose of which is (as determined in good faith by the Board of Directors of the Company and evidenced by a resolution thereof) to change the state of incorporation of the Company, and such transaction does not have as one of its purposes the evasion of the restrictions of this section. SUPPLEMENTAL INDENTURES The Indenture permits the Company and the Trustee to amend or supplement the Indenture or any supplemental indenture or modify the rights of the holders of the Notes, in certain cases without the consent of holders of the Notes and in general with consent of the holders of not less than a majority in principal amount of the Notes at the time outstanding, provided that no such modification, amendment or supplemental indenture shall, without the consent of holders of all Notes then outstanding, (a) extend the final maturity of any Note, or reduce the principal amount thereof (including the amount payable upon redemption), reduce the rate or extend the time of payment of interest thereon, or impair or affect the right of any holder of Notes to institute suit for the payment of any of the Notes, or (b) reduce the aforesaid percentage of Notes, the consent of holders of which is required for any such supplemental indenture. EVENTS OF DEFAULT AND REMEDIES The Indenture defines an Event of Default as being: (a) any failure to pay an installment of interest on the Notes as and when the same becomes due and payable, and the continuance of such failure for 30 days; (b) failure to pay all or any part of the principal on the Notes when and as the same shall become due and payable at maturity, redemption, by declaration or otherwise; (c) failure by the Company duly to observe or perform any covenant or agreement contained in the Notes or the Indenture and the continuance of such failure for a period of 60 days after written notice specifying such failure and demanding that the Company remedy the same shall have been given to the Company by the Trustee or to the Company and the Trustee by holders of at least 40% in aggregate principal amount of Notes then outstanding; (d) certain events of bankruptcy, insolvency or reorganization in respect of the Company, Summit or any of the Company's Material Subsidiaries; (e) any acceleration of the maturity of Debt of the Company or any of its Material Subsidiaries or a failure to pay any such Debt at its stated maturity, or (upon demand for payment) under any 39 41 guarantee of payment by the Company or any of its Subsidiaries of any Debt, whether such Debt or guarantee existed at the Closing Date or was thereafter created, aggregating at least $25 million, provided that such acceleration or failure to pay is not cured or waived within 10 days after such acceleration or failure to pay; and (f) final judgments not covered by insurance aggregating in excess of $10 million rendered against the Company or any of its Subsidiaries and not stayed or discharged within 60 days after such judgments become final and nonappealable. The Indenture provides that if a default (the term "default" for purposes of this provision being defined as any event or condition which is, or with notice or lapse of time or both would be, an Event of Default) occurs and is continuing and if it is known to the Trustee, the Trustee must, within 90 days after the occurrence of such default, give to the holders of Notes notice of such default, provided that, except in the case of a default in payment of principal or interest in respect of such Notes, the Trustee will be protected in withholding such notice if it in good faith determines that the withholding of such notice is in the interests of the holders of Notes. If an Event of Default shall occur and be continuing (other than an Event of Default described in clause (d) of the preceding paragraph relating to the Company or Summit), unless the principal of all the Notes shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding, by notice in writing to the Company (and to the Trustee if given by holders of Notes) (the "Acceleration Notice"), may declare the principal of all Notes and the interest accrued thereon to be due and payable (i) immediately if no Designated Senior Debt is outstanding or (ii) if any Designated Senior Debt is outstanding, upon the earlier of (x) 10 days after such Acceleration Notice is received by the Senior Agent and each Senior Representative with respect to Designated Senior Debt at their last address specified by the Company pursuant to the "Notice" Section of the Indenture or (y) the acceleration of such Designated Senior Debt, and upon any such declaration the same shall become due and payable on the date specified in the foregoing clause (i) or (ii), as applicable; provided, that (a) prior to the expiration of such period, such acceleration shall be automatically rescinded and annulled without further action required on the part of the holders in the event that any default specified in the Acceleration Notice under the Notes shall have been cured, waived or otherwise remedied and (b) at any time before the entry of a judgment or decree or the payment of moneys due under the Indenture, the holders of a majority in aggregate principal amount of the Notes may waive all defaults except (i) a default in the payment of principal or interest on the Notes or (ii) in respect of a covenant or provisions hereof which cannot be modified or amended without the consent of each holder of the Note affected. If an Event of Default specified in clause (d) above relating to the Company occurs, the principal of and accrued interest on all outstanding Notes shall become immediately due and payable without any declaration or other act on the part of the Trustee or any holder of Notes. The provisions described in the preceding paragraph, however, are subject to the condition that if, at any time after the principal of the Notes shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered, the Company or Summit shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Notes and the principal of any and all Notes which shall have become due otherwise than by acceleration (with interest upon such principal and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest, at the rate borne by the Notes, to the date of such payment or deposit) and such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence of bad faith, and if any and all Events of Default under this Indenture, other than the non-payment of the principal of Notes which shall have become due be acceleration, shall have been cured, waived or otherwise remedied as provided in the Indenture then and in every such case, holders of a majority in aggregate principal amount of the Notes then outstanding, by written notice to the Company and the Trustee, may waive all defaults and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or impair any right consequent thereon. Prior to the declaration of acceleration of the maturity of the Notes, the holders of a majority in aggregate principal amount of the Notes at the time outstanding may waive on behalf of all the holders of Notes any past default, or Event of Default, except a default in the payment of principal of or interest on any Notes or a 40 42 default with respect to any covenant or provision which cannot be modified or amended without the consent of the holder of each outstanding Note affected. The Trustee is under no obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the holders of Notes, unless such holders of Notes have offered to the Trustee reasonable security or indemnity. Subject to all the provisions of the Indenture and applicable law, the holders of a majority in aggregate principal amount of the Notes at the time outstanding have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee. The Company is required to furnish the Trustee, within 120 days after the end of each fiscal year, an officers' certificate to the effect that such officers have conducted, or supervised, a review of the activities of the Company and its Subsidiaries and of performance under the Indenture and that, to the best of such officers' knowledge, based on their review, the Co-Obligors have fulfilled all their obligations under the Indenture, or, if there has been a default, specifying each default known to them, its nature and its status. DEFEASANCE Under the terms of the Indenture and the Notes, the Company, at its option, (a) will be Discharged (as defined in the Indenture) from any and all obligations in respect of the Notes (except in each case for certain obligations to register the transfer or exchange of Notes, replace stolen, lost or mutilated Notes, maintain paying agencies and hold moneys for payment in trust) or (b) need not comply with certain specified covenants of the Indenture nor be subject to the operation of the cross acceleration provision described under "Events of Default and Remedies," in each case, if the Company irrevocably deposits with the Trustee, in trust, money or U.S. Government Obligations (as defined in the Indenture) which through the payment of interest thereon and principal thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of and interest on the Notes on the dates such payments are due in accordance with the terms of the Notes. To exercise the option under clause (a) above, the Company is required to deliver to the Trustee an opinion of counsel, based upon a ruling of the Internal Revenue Service or a change in applicable Federal income tax law occurring after the date of this Prospectus, that the holders of the Notes will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred. No opinion of counsel is required to effect a defeasance under clause (b) above and, under current Federal income tax law, a defeasance under clause (b) may be treated as a taxable exchange of the Notes for an interest in the trust. If a taxable exchange is deemed to have occurred, each Noteholder would recognize gain or loss equal to the difference between the Noteholder's cost or other tax basis for the Notes and the value of the Noteholder's interest in the trust, and thereafter would be required to include in income his share of the income, gain and loss of the trust. Prospective investors are urged to consult their own tax advisors as to the specific consequences of such a defeasance. In the event the Company exercises its option under clause (b) of the second preceding paragraph and the Notes are declared due and payable because of the occurrence of any Event of Default (other than the cross acceleration provisions described under "Events of Default and Remedies" which will be inapplicable), the amount of money and U.S. Government Obligations on deposit with the Trustee will be sufficient to pay amounts due on the Notes at the time of their stated maturity but may not be sufficient to pay amounts due on the Notes at the time of the acceleration resulting from such Event of Default. However, the Company shall remain liable for such payments. If the Credit Agreement is in effect, the Company shall have delivered to the Trustee any required consent of the Senior Agent or the Lenders to the transactions contemplated by the provision on "Defeasance." REPORTS So long as the Notes are outstanding, the Company will furnish to the holders thereof such quarterly and annual financial reports that the Company is required to file with the SEC under the 1934 Act or similar reports in the event the Company is not at the time required to file such reports with the SEC. 41 43 CERTAIN DEFINITIONS In addition to the terms defined above, the Indenture contains, among other things, the following definitions: "Acquisition Debt" means (i) Debt or Preferred Stock of any Person existing at the time such Person becomes a Subsidiary of the Company, including but not limited to Debt or Preferred Stock incurred or created in connection with, or in contemplation of, such Person becoming a Subsidiary of the Company (but excluding Debt of such Person which is extinguished, retired or repaid in connection with such Person becoming a Subsidiary of the Company), (ii) Debt incurred or created by the Company or any of its Subsidiaries in connection with the transaction or series of transactions pursuant to which such Person became a Subsidiary of the Company or (iii) Debt incurred or created by the Company or any of its Subsidiaries in connection with the acquisition of substantially all of the assets of an operating unit or business of another Person. "Affiliate" of any Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Attributable Debt" in respect of a sale-leaseback transaction means, at the time of determination, the present value (discounted at the interest rate implicit in the lease, compounded semiannually) of the obligation of the lessee of the property or asset subject to such sale-leaseback transaction for rental payments during the remaining term of the lease included in such transaction including any period for which such lease has been extended or may, at the option of the lessor, be extended or until the earliest date on which the lessee may terminate such lease without penalty or upon payment of penalty (in which case the rental payments shall include such penalty), after excluding all amounts required to be paid on account of maintenance and repairs, insurance, taxes, assessments, water, utilities and similar charges. For purposes of the foregoing, a "sale-leaseback transaction" means an arrangement with any lender or investor or to which such lender or investor is a party providing for the leasing by a Person of any property or asset which has been or is being sold or transferred by such Person more than 270 days after the acquisition thereof or the completion of construction or commencement of operation thereof to such lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such property or asset. "Board of Directors" means the Board of Directors of the Company or any committee of such Board duly authorized to act hereunder. "Business Day" means a day which in the City of New York or in the city in which the corporate trust office of the Trustee is located, is neither a legal holiday nor a day on which banking institutions are required or authorized by law or regulation to close. "Capitalized Lease Obligation" means the discounted present value of the rental obligations of any Person under any lease of Property, which in accordance with GAAP, is required to be capitalized on the balance sheet of such Person. "Change of Control" means (i) the direct or indirect, sale, lease or other transfer of all or substantially all of the assets of the Company to any Person or entity or group of Persons or entities acting in concert as a partnership or other group (a "Group of Persons") other than (a) Joseph Littlejohn & Levy Fund, L.P., a Delaware limited partnership, and its Affiliates or (b) Charles N. Martin, Jr. and his Affiliates, (ii) during any period of two consecutive calendar years, individuals who at the beginning of such period constituted the Company's Board of Directors (together with any new directors whose election by the Company's Board of Directors or whose nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors then in office, (iii) a Person or 42 44 Group of Persons (other than (a) Joseph Littlejohn & Levy Fund, L.P., a Delaware limited partnership, and its Affiliates or (b) Charles N. Martin, Jr. and his Affiliates) shall, as a result of a merger or consolidation, a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, have become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company or the entity surviving the merger or consolidation representing 50% or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors. "Closing Date" means the date on which the Notes are originally issued. "Consolidated Cash Flow" for any Person, for any period, means, without duplication, the Consolidated Net Income of such Person plus the sum of (a) Consolidated Tax Expense, (b) Consolidated Interest Expense, (c) Consolidated Non-cash Charges, (d) one-third of the rental expense on Attributable Debt and (e) Consolidated Pooling Expenses. "Consolidated Interest Expense" of any Person means for any period, without duplication, the sum of (a) the aggregate of the interest expense of such Person and its Consolidated Subsidiaries for such period, on a consolidated basis, as determined in accordance with GAAP, plus (b) net payments in respect of Interest Swap Obligations (if any such payment applies to a period in excess of one year it shall be amortized accordingly) for such Person and its Consolidated Subsidiaries. "Consolidated Net Income" of any Person, for any period, means the net income (loss) of such Person and its Consolidated Subsidiaries for such period, determined in accordance with GAAP, adjusted by excluding (a) net extraordinary gains or net extraordinary losses as the case may be (including any gain or loss from the purchase, redemption acquisition or other retirement of Debt) and (b) net gains or losses in respect of dispositions of assets, provided that, without duplication, (i) the net income of any Person, other than a Consolidated Subsidiary, in which the Company or any of its Consolidated Subsidiaries has a joint interest with a third party shall be included only to the extent of the amount of dividends or distributions actually paid to the Company or a Consolidated Subsidiary during such period, (ii) the net income of any Unrestricted Subsidiary shall be included for the purpose of determining net income to the extent of the amount of cash, Property, dividends or distributions actually paid by such Unrestricted Subsidiary to the Company or a Subsidiary of the Company, (iii) the tax benefits of any net operating loss carryforwards added directly to retained earnings and not otherwise included for the purpose of determining net income in accordance with GAAP for such period shall be included, (iv) the net income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded and (v) the net income of any Subsidiary of such Person shall be excluded to the extent such Subsidiary is prohibited, directly or indirectly, from distributing such net income or any portion thereof to such Person. "Consolidated Net Tangible Assets" of any Person, for any period means, the assets of such Person and its Subsidiaries, less intangible assets of such Person and its Subsidiaries (including, without limitation, trademarks and tradenames, goodwill, excess reorganization value, research and development expenses, and write-ups in the book value of any intangible assets), on a consolidated basis, determined in accordance with GAAP. "Consolidated Non-cash Charges" of any Person means, for any period, the aggregate depreciation, amortization and other non-cash charges (other than reserves or expenses established in anticipation of future cash requirements such as reserves for taxes and uncollectible accounts) of such Person and its Consolidated Subsidiaries, on a consolidated basis, for such period, as determined in accordance with GAAP, provided, that (i) any charges which are not included for the purpose of determining Consolidated Net Income shall be excluded from Consolidated Non-cash Charges and (ii) any charges which are included for the purpose of determining Consolidated Interest Expense or Consolidated Tax Expense shall be excluded from Consolidated Non-cash Charges. 43 45 "Consolidated Pooling Expenses" of any Person for any period means, with respect to such Person and its Consolidated Subsidiaries on a consolidated basis, the expenses for such period in connection with a pooling of interests transaction, determined in accordance with GAAP, but only to the extent that such expenses would have been capitalized, in accordance with GAAP, if such transaction had been a purchase transaction. "Consolidated Subsidiary" of any Person means a Person which for financial reporting purposes is or, in accordance with GAAP, should be accounted for by such Person as a consolidated subsidiary. "Consolidated Tax Expense" of any Person means for any period the aggregate of the tax expense of such Person and its Consolidated Subsidiaries for such period, determined in accordance with GAAP. "Credit Agreement" means (a) the Credit, Security, Guaranty and Pledge Agreement, dated as of April 19, 1994, among the Company, Summit Health, Ltd. and AHM Acquisition Co., Inc., the Guarantors named therein, the Lenders named therein, The Bank of Nova Scotia, as Administrative Agent and Managing Agent, Citicorp USA Inc., as Managing Agent, and the other financial institution described therein (the "Scotiabank Credit Agreement"), together with all agreements, documents and instruments from time to time delivered in connection with the Scotiabank Credit Agreement, as in effect on the date hereof, and as the Scotiabank Credit Agreement and such other agreements, documents and instruments may be amended, amended and restated, renewed, extended, restructured, supplemented or otherwise modified from time to time, and (b) any credit agreement, loan agreement, note purchase agreement, indenture or other agreement, document or instrument refinancing, refunding or otherwise replacing the Scotiabank Credit Agreement or any other agreement deemed a Credit Agreement under clause (a) or (b) hereof, whether or not with the same agents, trustee, representative lenders or holders, and irrespective of any changes in the terms and conditions thereof. Without limiting the generality of the foregoing, the term "Credit Agreement" shall include any amendment, amendment and restatement, renewal, extension, restructuring, supplement or modification to any Credit Agreement and all refundings, refinancings and replacements of any Credit Agreement, including any agreement (i) extending the maturity of any Debt incurred thereunder or contemplated thereby, (ii) adding or deleting borrowers or guarantors thereunder, so long as such borrowers and issuers include one or more of the Company and its Subsidiaries and their respective successors and assigns, (iii) increasing the amount of Debt incurred thereunder or available to be borrowed thereunder, or (iv) otherwise altering the terms and conditions thereof in a manner not prohibited by the terms thereof. "Currency Agreements" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any of its Subsidiaries against fluctuations in currency values. "Debt" means, as to any Person without duplication (a) any indebtedness of such Person, including accrued and unpaid interest, for borrowed money (including net overdrafts in any bank to the extent such overdrafts are not extinguished within three Business Days of their incurrence), (b) all indebtedness of such Person evidenced by bonds, debentures, notes, letters of credit or similar instruments, (c) all indebtedness of such Person to pay the deferred purchase price of property or services, except accounts payable arising in the ordinary course of business that are not overdue by more than 180 days or that are being contested in good faith, if and to the extent any of the foregoing indebtedness described in clauses (a)-(c) inclusive would appear as a liability upon a balance sheet of such Person, prepared on a consolidated basis in accordance with GAAP, and shall also include to the extent not otherwise included, (d) all Capitalized Lease Obligations of such Person, (e) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person or guaranteed by such Person, (f) Attributable Debt of such Person, (g) Preferred Stock issued by a Subsidiary of such Person, (h) Redeemable Stock, (i) all Debt of others guaranteed by such Person, and (j) all indebtedness due to the Senior Agent or any Lender under or in respect of the Credit Agreement or otherwise due to any Lender. "Designated Senior Debt" means all obligations under or in respect of the Credit Agreement and any other single issue of Debt constituting Senior Debt which at the time of determination has an 44 46 aggregate principal amount of at least $40,000,000 and is specifically designated in the instrument evidencing such Senior Debt as "Designated Senior Debt" of the Company. "Fixed Charges" for any period are, without duplication, the Consolidated Interest Expense, the interest component of capital leases and one-third of the rental expense on Attributable Debt (without duplication) plus, the product of (x) the sum of (i) cash dividends paid on any Preferred Stock of such Person plus (ii) cash dividends paid on any Preferred Stock of any Subsidiary of such Person, times (y) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective aggregate federal, state and local tax rate of such Person, expressed as a decimal, but excluding (a) the amortization of debt issuance costs, (b) amortization of original issue discount (the excess of stated redemption price at maturity over the issue price) which, with respect to any Debt, is not greater than 1/4% times the number of full years from issuance to maturity, and (c) noncash dividends paid on any Preferred Stock of such Person. For purposes of this definition, interest on a capital lease shall be deemed to accrue at an interest rate reasonably determined to be the rate of interest implicit in such capital lease in accordance with GAAP (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board). "GAAP" means generally accepted accounting principles. "Interest Swap Obligations" means the obligations of any Person, pursuant to any arrangement with any other Person, whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such other Person calculated by applying a fixed or a floating rate of interest on the same notional amount. "Investment" means any direct or indirect advance, loan (other than advances to customers in the ordinary course of business, which are recorded as accounts receivable on the balance sheet of any Person or its Subsidiaries) or other extension of credit or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of capital stock, bonds, notes, debentures or other securities issued by any other Person. For the purposes of the "Limitation on Restricted Payments" covenant, (i) "Investment" shall include the fair market value of the net assets of any Subsidiary at the time that such Subsidiary is designated an Unrestricted Subsidiary and shall exclude the fair market value of the net assets of any Unrestricted Subsidiary that is designated a Subsidiary and (ii) any property transferred to or from an Unrestricted Subsidiary shall be valued at fair market value at the time of such transfer, in each case as determined by the Board of Directors of such Person in good faith. "Lender" means any lender or other holder of Senior Debt from time to time incurred or issued under the Credit Agreement. "Lien" means, with respect to any Property, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such Property. "Material Subsidiary" of any Person means, as of any date, any Subsidiary of such Person (a) the value of whose assets, as such assets would appear on a consolidated balance sheet of such Subsidiary and its Consolidated Subsidiaries prepared on such date in accordance with generally accepted accounting principles, is at least 10% of the value of the assets of such Person and its Consolidated Subsidiaries, determined as aforesaid, or (b) whose Consolidated Cash Flow for the most recently completed fiscal quarter immediately preceding such date was at least 10% of the Consolidated Cash Flow of such Person for such fiscal quarter. "Measurement Date," when used with respect to any calculation, means the date of the transaction giving rise to the need to make such calculation. "Net Worth" means, at any date, the aggregate of capital, surplus and retained earnings of the Company and its Consolidated Subsidiaries as would be shown on a consolidated balance sheet of the Company and its Consolidated Subsidiaries prepared in accordance with GAAP. 45 47 "Permitted Investments" means Investments in Unrestricted Subsidiaries (A) in a cumulative aggregate amount not to exceed the sum of (1) $25,000,000 (less previous Investments in Unrestricted Subsidiaries pursuant to this clause (A) (1)) plus (2) any amounts received by the Company or any Subsidiary from any Unrestricted Subsidiary which represents a repayment of the principal portion of any loan or advance or any return of contributed capital in respect of any previous Permitted Investment and (B) through the contribution or other transfer of the Company's or its Subsidiaries' interest in HNMC, Inc. and Horizon Health Group, Inc. or any successors thereto. "Permitted Joint Venture" means all the Company's existing joint ventures on the Closing Date or a Person which owns, operates or services a health care business or facility or manufacturers or markets health care products and (i) is formed by the Company or a Subsidiary of the Company to offer an equity participation in the assets or businesses owned or to be acquired by such Person primarily to physicians or employees of the Company or any of its Subsidiaries or to any other Person involved directly or indirectly in the health care industry and (ii) of which the Company or any Subsidiary of the Company is a general partner or controls the general partner. "Permitted Payments" means, with respect to the Company or any of its Subsidiaries, (i) the redemption, repurchase or other acquisition or retirement of any shares of any class of capital stock in exchange for (including any exchange pursuant to the exercise of a conversion right or privilege in connection with which cash is paid in lieu of the issuance of fractional shares), or out of the proceeds of a substantially concurrent issue and sale (other than to a Subsidiary) of, shares of capital stock (other than Redeemable Stock) of the Company; (ii) any dividend or other distribution payable to the Company or any of its Subsidiaries, (iii) the repurchase or redemption by a wholly owned Subsidiary of its capital stock, (iv) the declaration and payment of dividends on the PIK Preferred (A) in additional shares of PIK Preferred or (B) to the extent required by the terms of the PIK Preferred as of the Closing Date, in cash or (v) any dividend on or distribution of the capital stock or Property of an Unrestricted Subsidiary. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Physician Support Obligation" means any obligation or guarantee to any physician or allied health care professional pursuant to a written agreement for a period not in excess of five years incurred in connection with recruiting, redirecting or retaining such physician or allied health care professional to provide service to patients in the service area of any health care facility owned or operated by any Consolidated Subsidiary of the Company or any Permitted Joint Venture, but excluding actual compensation for services provided by such physician or allied health care professional to any health care facility owned or operated by the Company or any of its Subsidiaries or any Permitted Joint Venture. "PIK Preferred" means the $.01 par value Payable In Kind Cumulative Redeemable Preferred Stock of the Company outstanding on the Closing Date or issued subsequent to the Closing Date as a Permitted Payment. "Preferred Stock" means, with respect to any Person, any and all shares, interest, participations or other equivalents (however designated) of such Person's preferred or preference stock whether now outstanding or issued after the date of the Indenture, and including, without limitation, all classes and series of preferred or preference stock. "Property" of any Person means all types of real, personal, tangible, intangible or mixed property owned by such Person whether or not included on the most recent consolidated balance sheet of such Person in accordance with GAAP. "Pro Forma Coverage Ratio" of any Person means the pro forma ratio of such Person's Consolidated Cash Flow to its Fixed Charges for the Reference Period immediately prior to the Measurement Date. The Pro Forma Coverage Ratio shall as applicable, be calculated on the following basis: (1) notwithstanding clause (iv) of the definition of Consolidated Net Income, if the Debt which is being created, incurred or assumed is Acquisition Debt, the Pro Forma Coverage Ratio 46 48 shall be determined after giving effect to both the Fixed Charges related to the creation, incurrence or assumption of such Acquisition Debt and the Consolidated Cash Flow (x) of the Person becoming a Subsidiary of such Person or (y) in the case of an acquisition of assets which constitute substantially all of an operating unit or business, relating to the assets being acquired by such Person; (2) there shall be excluded from Fixed Charges any Fixed Charges related to Debt repaid during and subsequent to the Reference Period and which is not outstanding on the Measurement Date; and (3) the creation, incurrence or assumption of any Debt during the Reference Period or subsequent to the Reference Period and prior to the Measurement Date, and the application of the proceeds therefrom, shall be assumed to have occurred on the first day of the Reference Period. "Purchase Money Obligations" means Debt of the Company or its Subsidiaries secured by Liens (i) on Property purchased, acquired, or constructed after the Closing Date and used in the ordinary course of business by the Company and its Subsidiaries and (ii) securing the payment of all or any part of the purchase price or construction cost of such assets and limited to the Property so acquired and improvements thereof. "Redeemable Stock" means, with respect to any Person, any class or series of capital stock of such Person which is redeemable at the option of the holder (except pursuant to a change in control provision that does not (i) cause such capital stock to become redeemable in circumstances in which the Company would not be required to make a Change of Control Offer and (ii) require the Company to pay the redemption price therefor prior to the Change of Control Payment Date) or is subject to mandatory redemption prior to the maturity of the Notes. "Reference Period" means the four fiscal quarters ending with the most recent fiscal quarter for which financial information is available and which ended immediately preceding the Measurement Date. "Restricted Payments" means with respect to any Person (i) any dividend or other distribution on any shares of such Person's capital stock (except dividends or distributions in additional shares of capital stock other than Redeemable Stock), (ii) any payment on account of the purchase, redemption or other acquisition of (a) any shares of such Person's capital stock or (b) any option, warrant or other right to acquire shares of such Person's capital stock, or (iii) any Investment in an Unrestricted Subsidiary which is not a Permitted Investment; provided that distributions to joint venture participants or repurchases of interests in Permitted Joint Ventures (other than distributions or repurchases of joint venture interests of Affiliates of the Company and its Subsidiaries) shall not constitute Restricted Payments; provided, further, an individual shall not be deemed to be an Affiliate of the Company or any Subsidiary solely because such individual is employed by the Company or any Subsidiary. "Senior Agent" means The Bank of Nova Scotia, any successor to The Bank of Nova Scotia under the Credit Agreement and any other agent, trustee or representative of the holders of Debt under or in respect of the Credit Agreement serving in such capacity from time to time and, if there is no such agent, trustee or representative, "Senior Agent" shall mean, collectively, the holders from time to time of Debt incurred under or in respect of the Credit Agreement. "Senior Debt" means (i) all obligations of the Company and its Subsidiaries, now or hereafter existing, under or in respect of the Credit Agreement, whether for principal, interest (including without limitation, interest accruing after filing of a bankruptcy petition initiating bankruptcy proceedings of the Company or any of its Subsidiaries at the rates prescribed in the Credit Agreement, whether or not interest is an allowed claim enforceable against the debtor), reimbursement of amounts drawn under letters of credit issued or arranged for pursuant thereto, guaranties in respect thereof, and all charges, fees, expenses (including reasonable fees and expenses of counsel) and other amounts incurred by or owing to the Senior Agent and the Lenders under or in respect of the Credit Agreement, and all other obligations of the Company and its Subsidiaries incurred under or in respect of the Credit Agreement including, without limitation, in respect of premiums, indemnities or otherwise, and all indebtedness under the Credit Agreement which is disallowed, avoided or subordinated pursuant to Section 548 of 47 49 Title 11, United States Code or any applicable state fraudulent conveyance law; (ii) the principal of, premium if any, and interest on indebtedness for money borrowed by the Company or Summit, as applicable, (other than the Notes), whether outstanding on the date of the Indenture or hereafter created or incurred, unless such indebtedness, by its terms or the terms of the instrument creating or evidencing it is subordinate in right of payment to or pari passu with the Notes; (iii) any obligations of the Company or Summit, as applicable, in respect of capital leases of the Company or Summit, as applicable, whether outstanding on the date of this Indenture or hereafter created or incurred; (iv) any obligations of the Company or Summit, as applicable, in respect of (x) any indebtedness for money borrowed by another Person or (y) any capital leases of any other Person, in either case which is guaranteed in whole or in part directly or indirectly by the Company or Summit, as applicable, (whether such guarantee is outstanding on the date of the Indenture or hereafter created or incurred); (v) the principal of, premium if any, and interest on any indebtedness constituting Purchase Money Obligations for the payment of which the Company or Summit, as applicable, is directly or contingently liable (whether such Purchase Money Obligations are outstanding on the date of this Indenture or hereafter created or incurred); (vi) any obligation of the Company or Summit, as applicable, to compensate, reimburse or indemnify an issuer with respect to any letter of credit issued at the request of or for the account of such the Company or Summit, as applicable; (vii) any obligation of the Company or Summit, as applicable, under any Interest Swap Obligations or Currency Agreements; (viii) any obligation of the Company or Summit, as applicable, to any Person in respect of surety or similar bonds issued by such Person; (ix) all charges, fees, expenses (including reasonable fees and expenses of counsel) and other amounts incurred by or owing to the holders of indebtedness referred to in clauses (ii) - (viii) above in connection with such indebtedness; and (x) all interest payable during the pendency of a proceeding under Title 11, United States Code on indebtedness referred to in clauses (ii) - (viii) above incurred prior to the commencement of such proceeding; provided that the term "Senior Debt" shall not include any indebtedness of the Company or Summit, as applicable, to an Affiliate of the Company or Summit, as applicable, except to the extent any such indebtedness is pledged to the Senior Agent as security for Senior Debt incurred under or in respect of the Credit Agreement. "Senior Representative" means any agent, trustee or other representative of the holders of any Senior Debt other than Senior Debt incurred under or in respect of the Credit Agreement and, if there is no such agent, trustee or other representative with respect to any such Senior Debt, "Senior Representative" shall mean, collectively, the holders of at least a majority in dollar amount of any such Senior Debt. "Stock Appreciation Rights" means a payment of cash in lieu of shares of the Company's common stock by the Company to an employee of the Company to an employee of the Company in accordance with a stock option plan approved by the Board of Directors. "Subsidiary" means, with respect to any Person, any corporation or other entity of which a majority of the capital stock or other ownership interests having ordinary voting power to elect a majority of Board of Directors or other Persons performing similar functions is at the time directly or indirectly owned by such Person or one or more of the other Subsidiaries of that Person or a combination thereof; provided that an Unrestricted Subsidiary shall not be deemed to be a Subsidiary of the Company for purposes of the Indenture. "Unrestricted Subsidiary" means (1) any Subsidiary of the Company which at the time of determination shall be an Unrestricted Subsidiary (as designated by the Board of Directors of the Company, as provided below) and (2) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate each Subsidiary of the Company (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary not more than one time during any 24-month period, that a Subsidiary which owns any capital stock of, or owns, or holds any Lien on, any property of, any other Subsidiary of the Company which is not a Subsidiary of such Subsidiary may not be so designated; provided further that immediately after giving effect to such designation, no default or Event of Default shall have occurred and be continuing. The Board of Directors may designate each Unrestricted Subsidiary to be a Subsidiary not more than one time during any 24-month period; provided that immediately after giving effect to such designation, no default or Event of Default shall have occurred 48 50 and be continuing. Any such designation by the Board of Directors giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions; provided that no Subsidiary of the Company shall be (and, if such Subsidiary is an Unrestricted Subsidiary, it shall immediately cease to be) an Unrestricted Subsidiary if, any time, the Company or any other Subsidiary of the Company shall create, incur, issue, assume, guarantee or in any other manner whatsoever be or become liable with respect to any claim against or any contractual obligation or indebtedness of, such Subsidiary. 49 51 UNDERWRITING Subject to the terms and conditions set forth in a purchase agreement (the "Purchase Agreement") among the Company, Summit and the Underwriters, each of the Underwriters has severally agreed to purchase from the Co-Obligors, and the Co-Obligors have agreed to sell to each of the Underwriters, the principal amount of the Notes set forth opposite its name below. Pursuant to the Purchase Agreement, the Underwriters will be obligated to purchase all of the Notes if any are purchased.
PRINCIPAL UNDERWRITER AMOUNT - ------------------------------------------------------------------------------- ------------ Merrill Lynch, Pierce, Fenner & Smith Incorporated...................................................... $ Donaldson, Lufkin & Jenrette Securities Corporation............................ Salomon Brothers Inc........................................................... Citicorp Securities, Inc....................................................... ------------ Total............................................................. $100,000,000 ===========
The several Underwriters propose to offer the Notes to the public at the public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of % of the principal amount of the Notes. The Underwriters may allow, and such dealers may reallow, a discount not in excess of % of the principal amount of the Notes to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. There is no public market for the Notes and the Co-Obligors do not intend to list the Notes on any securities exchange or for quotation through NASDAQ. The Co-Obligors have been advised by the Underwriters that, following the completion of the offering of the Notes, the Underwriters presently intend to make a market in the Notes. However, the Underwriters are under no obligation to do so and may discontinue any market making activities at any time without notice. No assurance can be given as to the liquidity of the trading market for the Notes or that an active public market for the Notes will develop or, if developed, will continue. If an active public market does not develop or is not maintained, the market price and liquidity of the Notes may be adversely affected. The Co-Obligors have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. Each of the Underwriters, from time to time, performs investment banking and other financial services for the Company. LEGAL MATTERS Certain legal matters as to the validity of the Notes offered hereby will be passed upon for the Company by Skadden, Arps, Slate, Meagher & Flom, New York, New York and Ronald P. Soltman, Esq., General Counsel for the Company. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Dewey Ballantine, New York, New York. Mr. Soltman currently has options to purchase 30,000 shares of the Company's common stock. EXPERTS The consolidated financial statements and schedules of OrNda HealthCorp at August 31, 1993 and 1992, and for each of the three years in the period ended August 31, 1993, appearing in OrNda HealthCorp's Current Report on Form 8-K dated July 11, 1994, and the consolidated financial statements and schedules of Summit Health Ltd. at June 30, 1993 and 1992 and for each of the three years in the period ended June 30, 1993, appearing in Summit Health Ltd.'s Annual Report (Form 10-K) for the year ended June 30, 1993 (with schedules) and OrNda HealthCorp's Current Report on Form 8-K dated July 11, 1994 (without schedules), have been audited by Ernst & Young, independent auditors, as set forth in their reports thereon included 50 52 therein and incorporated by reference herein. Such consolidated financial statements are incorporated herein by reference in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of Fountain Valley Medical Development Company for the years ended October 31, 1992 and 1993 included in this Prospectus and the Registration Statement have been audited by BDO Seidman, independent certified public accountants, as set forth in their report thereon included therein and are included herein in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company and Summit are subject to the informational requirements of the Exchange Act, and in accordance therewith file reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). The reports, proxy statements and other information filed by the Company and Summit with the Commission may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at Room 3190, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, New York, New York 10048. Copies of such material may be obtained from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such reports, proxy statements and other information concerning the Company and Summit also may be inspected at the offices of the National Association of Securities Dealers, Inc. at 1735 K Street, Washington, D.C. 20006. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission pursuant to the Exchange Act (File No. 0-11290) are incorporated in this Prospectus by reference and are made a part hereof: (1) Annual Report on Form 10-K for the fiscal year ended August 31, 1993 as amended by Form 10-K/A No. 1, filed on December 23, 1993, 10-K/A No. 2, filed on January 19, 1994, 10-K/A No. 3, filed on March 11, 1994, and 10-K/A No. 4, filed on March 14, 1994. (2) Current Report on Form 8-K dated December 2, 1993. (3) Quarterly Report on Form 10-Q for the quarter ended November 30, 1993 as amended by Form 10-Q/A No. 1, filed on March 11, 1994. (4) Current Report on Form 8-K dated July 1, 1993 as amended by Form 8-K/A No. 1, filed on September 13, 1993, Form 8-K/A No. 2, filed on February 7, 1994, and Form 8-K/A No. 3, filed on March 11, 1994. (5) Quarterly Report on Form 10-Q for the quarter ended February 28, 1994. (6) Current Report on Form 8-K dated March 7, 1994. (7) Current Report on Form 8-K dated April 19, 1994. (8) Current Report on Form 8-K dated May 5, 1994. (9) Current Report on Form 8-K dated June 7, 1994. (10) Current Report on Form 8-K dated July 1, 1994. (11) Current Report on Form 8-K dated July 11, 1994. (12) The Company's Proxy Statement/Prospectus contained in the Company's Registration Statement on Form S-4 (file no. 33-76452) filed with the Commission on March 14, 1994. (13) Quarterly Report on Form 10-Q for the quarter ended May 31, 1994. 51 53 The following documents filed by Summit with the Commission pursuant to the Exchange Act (File No. 0-11479) are incorporated in this Prospectus by reference and made a part hereof: (1) Annual Report on Form 10-K for the fiscal year ended June 30, 1993. (2) Quarterly Report on Form 10-Q for the quarterly periods ended September 30, 1993, December 31, 1993 and March 31, 1994. (3) Current Report on Form 8-K dated December 2, 1993. (4) Current Report on Form 8-K dated April 19, 1994. All documents filed by the Company and Summit with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering of the securities made hereby shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of the filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated herein by reference shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is incorporated or deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person, including any beneficial owner, to whom this Prospectus is delivered, upon oral or written request, a copy of any or all of the documents incorporated herein by reference (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference in such documents). Written or telephone requests should be directed to OrNda HealthCorp, 3401 West End Ave., Suite 700, Nashville, Tennessee 37203, Attention: Secretary (telephone (615) 383-8599). 52 54 INDEX TO FINANCIAL STATEMENTS
PAGE ---- UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS Unaudited Pro Forma Condensed Combined Balance Sheet................................ P-1 Notes to Unaudited Pro Forma Condensed Combined Balance Sheet....................... P-2 Unaudited Pro Forma Condensed Combined Income Statement for the Nine Months Ended May 31, 1994..................................................................... P-4 Unaudited Pro Forma Condensed Combined Income Statement for the Year Ended August 31, 1993......................................................................... P-5 Notes to Unaudited Pro Forma Condensed Combined Income Statement.................... P-6 ORNDA HEALTHCORP Interim (Unaudited) Condensed Consolidated Statements of Operations for the Three Months and the Nine Months Ended May 31, 1993 and 1994............................................... F-1 Condensed Consolidated Balance Sheets as of August 31, 1993 and May 31, 1994........ F-2 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended May 31, 1993 and 1994.................................................................... F-3 Notes to Condensed Consolidated Financial Statements................................ F-4 Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................... F-10 FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY Interim (Unaudited) Consolidated Statements of Income for the Six Months Ended April 30, 1993 and 1994............................................................................. F-14 Consolidated Balance Sheets as of October 31, 1993 and April 30, 1994............... F-15 Consolidated Statements of Cash Flows for the Six Months Ended April 30, 1993 and 1994............................................................................. F-16 Notes to Consolidated Financial Statements.......................................... F-17 Annual Report of Independent Auditors...................................................... F-18 Consolidated Balance Sheets as of October 31, 1993 and 1992......................... F-19 Consolidated Statements of Income for the Years Ended October 31, 1993 and 1992..... F-20 Consolidated Statements of Partners' Equity for the Years Ended October 31, 1993 and 1992............................................................................. F-21 Consolidated Statements of Cash Flows for the Years Ended October 31, 1993 and 1992............................................................................. F-22 Summary of Accounting Policies...................................................... F-23 Notes to Consolidated Financial Statements.......................................... F-25
53 55 UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET The pro forma condensed combined balance sheet gives effect to the Mergers, the proposed acquisition of Fountain Valley, the Offering and the use of proceeds therefrom and assumes the repurchase of 100% of the aggregate outstanding principal amount of the 10 1/4% Notes pursuant to the Change of Control Offer by combining (i) the balance sheet of the Company at May 31, 1994; and (ii) the balance sheet of Fountain Valley at April 30, 1994. The pro forma condensed combined balance sheet gives effect to the Summit Merger at April 19, 1994 and all other transactions as if they had been consummated on May 31, 1994. Because the Company accounted for the AHM Merger as a pooling-of-interests transaction, the Company's historical financial data include AHM's balance sheet data and results of operations for all periods presented. The pro forma condensed combined balance sheet is presented for comparative purposes only and is not necessarily indicative of what the combined financial position would have been had the transactions assumed therein in fact occurred at the times assumed. The pro forma condensed combined balance sheet should be read in conjunction with the respective historical financial statements of the Company, Summit and Fountain Valley incorporated by reference or included herewith.
ORNDA FOUNTAIN VALLEY FOUNTAIN VALLEY OFFERING MAY 31, APRIL 30, PRO FORMA PRO FORMA PRO FORMA 1994 1994 ADJUSTMENTS ADJUSTMENTS COMBINED ---------- --------------- --------------- ----------- ---------- (IN THOUSANDS) ASSETS CURRENT ASSETS Cash and cash equivalents............ $ 16,342 $ 5,978 $89,022(1) $ (4,000)(5) $ 12,342 (95,000)(2) Patients accounts receivable net of allowance for uncollectibles....... 268,922 21,628 -- -- 290,550 Supplies, at cost.................... 26,620 1,713 -- -- 28,333 Other................................ 50,506 3,776 (1,523)(2) -- 52,759 ---------- --------------- --------------- ----------- ---------- Total current assets........ 362,390 33,095 (7,501) (4,000) 383,984 Property plant and equipment, net of accumulated depreciation and amortization....................... 1,020,946 46,456 45,841(2) 1,113,243 Investments in Houston Northwest Medical Center..................... 80,947 -- -- -- 80,947 Goodwill, net of accumulated amortization....................... 266,954 -- -- -- 266,954 Other assets......................... 58,467 2,763 3,000(1) (3,500)(4) 61,857 (2,873)(2) 4,000(5) ---------- --------------- --------------- ----------- ---------- TOTAL ASSETS................ $1,789,704 $82,314 $38,467 $ (3,500) $1,906,985 ========== ============== ============== =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accrued expenses and other liabilities........................ $ 302,698 $15,185 $ 3,500(2) -- $ 321,383 Current maturities of long-term debt............................... 7,368 4,886 (3,190)(2) -- 9,064 ---------- --------------- --------------- ----------- ---------- Total current liabilities... 310,066 20,071 310 -- 330,447 Long-term debt....................... 1,015,000 51,134 92,022(1) 100,000(3) 1,110,558 (47,598)(2) (100,000)(3) Other liabilities.................... 99,126 4,842 103,968 Shareholders' equity(6).............. 365,512 6,267 (6,267)(2) (3,500)(4) 362,012 ---------- --------------- --------------- ----------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $1,789,704 $82,314 $38,467 $ (3,500) $1,906,985 ========== ============== ============== =========== ==========
See notes to unaudited pro forma condensed combined balance sheet. P-1 56 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET NOTE 1 To record the incremental borrowing related to the Fountain Valley acquisition as follows (in thousands): Cash for acquisition of assets............................................. $95,000 Cash for transaction costs................................................. 3,000 Less Fountain Valley's cash................................................ (5,978) ------- Additional debt adjustment............................................... 92,022 Less cash paid for transaction costs....................................... (3,000) ------- Net cash adjustment...................................................... $89,022 =======
NOTE 2 To record the purchase of Fountain Valley common stock including the adjustment of Fountain Valley's balance sheet to reflect assets acquired by the Company (in thousands). Cash used to acquire Fountain Valley............................... $95,000 Less adjustments of Fountain Valley's historical balances of assets and liabilities to fair value: Prepaids......................................................... 1,523 Property, plant and equipment, net............................... (45,841) Other assets..................................................... 2,873 Accrued expenses and other liabilities........................... 3,500 Current maturities of long-term debt............................. (3,190) Long-term debt................................................... (47,598) Partners' capital................................................ (6,267) (95,000) ------- ------- To record excess cost of the net assets acquired from Fountain Valley over fair market value.................................... $ 0 =======
NOTE 3 To record the issuance of the Notes and repayment of existing indebtedness (in thousands): Issuance of the Notes.................................................... $ 100,000 Repurchase of the 10 1/4% Notes.......................................... (100,000) --------- Net increase in debt........................................... -- =========
The pro forma condensed combined balance sheet assumes the Company's repurchase of 100% of the aggregate outstanding principal amount of the 10 1/4% Notes pursuant to the Change of Control Offer. As of July 18, 1994, the expiration date of the Change of Control Offer, 99.3% of the 10 1/4% Notes have been tendered and were purchased by the Company on July 19, 1994 pursuant to the Change of Control Offer. The difference between the amount tendered and the amount assumed in the pro forma adjustment has an immaterial impact on the pro forma condensed combined balance sheet. NOTE 4 To write-off $3.5 million of debt issuance costs related to the 10 1/4% Notes. P-2 57 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET -- (CONTINUED) NOTE 5 Payment of debt issue costs relating to the Notes (in thousands)............ $3,000 Payment of premium upon repurchase of the 10 1/4% Notes (in thousands)...... 1,000 ------ $4,000 ======
NOTE 6 As of May 31, 1994, the Company had 1.3 million shares of $.01 par value Payable In Kind Cumulative Redeemable Convertible Preferred Stock (the "PIK Preferred Stock") outstanding with an aggregate liquidation value of $19.3 million. Although the Company has received a financing commitment to enable the Company to redeem the PIK Preferred Stock, the Company has not decided whether to redeem the PIK Preferred Stock. Moreover, the PIK Preferred Stock is convertible into the Company's Common Stock on a share for share basis. Accordingly, because the PIK Preferred Stock redemption price is $15 per share, the Company believes that if the Company's Common Stock price exceeds $15 per share on the redemption date the holders of PIK Preferred Stock will convert into the Company's Common Stock rather than accept the redemption price. If the financing commitment were utilized, pro forma long-term debt would increase approximately $19.3 million and shareholders' equity would be reduced $19.3 million. If the holders of PIK Preferred Stock convert to the Company's Common Stock, the components of shareholders' equity change but total pro forma shareholders' equity would not change. The redemption of the PIK Preferred Stock or the conversion of the PIK Preferred Stock into the Company's Common Stock would not have a material impact on pro forma income. P-3 58 UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE NINE MONTHS ENDED MAY 31, 1994 The pro forma condensed combined income statement for the nine months ended May 31, 1994 gives effect to the proposed acquisition of Fountain Valley, the Mergers, the Offering and the use of proceeds therefrom and assumes the repurchase of 100% of the aggregate outstanding principal amount of the 10 1/4% Notes pursuant to the Change of Control Offer as if such transactions had occurred on September 1, 1992 by combining (i) the results of operations of the Company for the nine months ended May 31, 1994 (which, because the Company accounted for the AHM Merger as a pooling-of-interests transaction, includes the results of operations of AHM); (ii) the results of operations of Summit for the nine months ended March 31, 1994 (as adjusted to exclude the 43 days included in the results of operations for OrNda), applying the purchase method of accounting; and (iii) the results of operations of the Company for the nine months ended May 31, 1994 and the results of operations of Fountain Valley for the nine months ended April 30, 1994, applying the purchase method of accounting. This pro forma condensed combined income statement is presented for comparative purposes only and is not necessarily indicative of the combined results of operations in the future or of what the combined results of operations would have been had the transactions assumed therein been consummated during the period for which this statement is presented. Pro forma earnings per common and common equivalent share and pro forma weighted average shares outstanding give effect to the exchange of AHM and Summit shares of common stock and common stock equivalents for the Company's Common Stock and Common Stock equivalents as described by the respective merger agreements. In addition, the pro forma condensed combined income statement does not give effect to the cost savings, if any, which may be realized by the Company after consummation of the Mergers or the proposed acquisition of Fountain Valley. This pro forma condensed combined income statement should be read in conjunction with the historical financial statements and notes thereto of the Company and Summit incorporated by reference herein, and those of Fountain Valley included herewith.
SUMMIT NINE MONTHS FOUNTAIN ENDED VALLEY MARCH 31, ORNDA NINE MONTHS FOUNTAIN ORNDA 1994 SUMMIT SUMMIT ENDED VALLEY OFFERING PRO PRO (AS PRO FORMA PRO FORMA APRIL 30, PRO FORMA PRO FORMA FORMA FORMA ADJUSTED) ADJUSTMENTS COMBINED 1994 ADJUSTMENTS ADJUSTMENTS COMBINED -------- ----------- ----------- ---------- ----------- ----------- ----------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total revenue.... $882,917 $ 353,086 $ (71,725)(6) $1,164,278 $92,062 -- -- $1,256,340 Costs and expenses Operating expenses..... 697,537 291,681 (6,739)(5) 922,482 75,975 3,150(7) -- 1,001,607 (59,997)(6) Provision for doubtful accounts..... 57,443 15,041 (640)(6) 71,844 1,718 -- -- 73,562 Depreciation and amortization... 45,918 13,264 6,721(2) 63,756 6,234 (3,284)(2) (30)(2) 66,676 (2,147)(6) Interest expense...... 59,331 6,088 13,520(3) 74,748 3,723 2,033(3) 469(3) 80,973 (4,191)(6) Interest income....... (2,032) (1,228) (428)(6) (3,382) (185) 112(3) -- (3,455) 306(3) Minority interest..... 4,230 2,138 (2,138)(6) 4,230 -- -- -- 4,230 Special executive compensation... 2,530 -- -- 2,530 -- -- -- 2,530 Loss on sale of asset........ 9,761 -- -- 9,761 -- -- -- 9,761 -------- ----------- ----------- ---------- ----------- ----------- ----------- ---------- 8,199 26,102 (15,992) 18,309 4,597 (2,011) (439) 20,456 Loss from investment in Houston Northwest Medical Center......... (136) -- -- (136) -- -- -- (136) -------- ----------- ----------- ---------- ----------- ----------- ----------- ---------- Income (loss) from continuing operations before income tax expense.... 8,063 26,102 (15,992) 18,173 4,597 (2,011) (439) 20,320 Income tax expense........ 1,048 14,759 (7,779)(4) 5,180 -- 517(4) (88)(4) 5,609 (2,848)(6) -------- ----------- ----------- ---------- ----------- ----------- ----------- ---------- Income from continuing operations..... 7,015 11,343 (5,365) 12,993 4,597 (2,528) (351) 14,711 Preferred stock dividend requirements... (1,462) -- -- (1,462) -- -- -- (1,462) -------- ----------- ----------- ---------- ----------- ----------- ----------- ---------- Income from continuing operations applicable to common and common equivalent shares......... $ 5,553 $ 11,343 $ (5,365) $ 11,531 $ 4,597 $(2,528) $(351) $ 13,249 ======== ========= ======== ========= ========= ======== ======== ========= Earnings per common and common equivalent shares from continuing operations..... $ (0.15) $ 0.33 $ 0.26 $ 0.30 ======== ========= ========= ========= Shares used in earnings per common share and common equivalent share computations (in thousands)..... 36,047 33,870 44,398 44,398
See notes to unaudited pro forma condensed combined income statement. P-4 59 UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE YEAR ENDED AUGUST 31, 1993 The pro forma condensed combined income statement for the fiscal year ended August 31, 1993 gives effect to the proposed acquisition of Fountain Valley, the Mergers, the Offering and the use of proceeds therefrom and assumes the repurchase of 100% of the aggregate outstanding principal amount of the 10 1/4% Notes pursuant to the Change of Control Offer as if such transactions had occurred on September 1, 1992 by combining (i) the results of operations of the Company for the fiscal year ended August 31, 1993 (adjusted on the pro forma basis to include the acquisition of Florida Medical Center as described below)) (ii) the results of operations of the Company for the fiscal year ended August 31, 1993 (adjusted as described below) and the results of operations of Summit for the fiscal year ended June 30, 1993, applying the purchase method of accounting; and, (iii) the results of operations of the Company for the fiscal year ended August 31, 1993 (adjusted as described below) and the results of operations of Fountain Valley for the fiscal year ended October 31, 1993, applying the purchase method of accounting. Because the Company accounted for the AHM Merger as a pooling-of-interests transaction, the historical financial data of the Company includes the results of operations of AHM for all periods presented. This pro forma condensed combined income statement is presented for comparative purposes only and is not necessarily indicative of the combined results of operations in the future or of what the combined results of operations would have been had the transaction assumed therein been consummated during the period for which this statement is presented. Pro forma earnings per common and common equivalent share and pro forma weighted average shares outstanding give effect to the exchange of AHM and Summit shares of common stock and common stock equivalents for the Company's Common Stock and Common Stock equivalents as described by the respective merger agreements. In addition, the pro forma condensed combined income statement does not give effect to the cost savings, if any, which may be realized by the Company after consummation of the Mergers. The Company acquired Florida Medical Center on June 30, 1993 in a transaction accounted for as a purchase. The Company's pro forma condensed combined income statement for the year ended August 31, 1993 reflects the operating results of the Company for the fiscal year ended August 31, 1993 as if the acquisition of Florida Medical Center had occurred on September 1, 1992. This pro forma condensed combined income statement should be read in conjunction with the historical financial statements and notes thereto of the Company and Summit incorporated by reference herein, and those of Fountain Valley included herewith.
FOUNTAIN SUMMIT ORNDA VALLEY YEAR ENDED SUMMIT PRO SUMMIT YEAR ENDED FOUNTAIN VALLEY OFFERING ORNDA JUNE 30, FORMA PRO FORMA OCTOBER 31, PRO FORMA PRO FORMA PRO FORMA PRO FORMA 1993 ADJUSTMENTS COMBINED 1993 ADJUSTMENTS ADJUSTMENTS COMBINED ---------- ---------- ----------- ---------- ----------- --------------- ----------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total revenue..... $1,060,662 $508,504 $ (83,992)(6) $1,485,174 $ 120,777 -- $1,605,951 Costs and expenses Operating expenses... 842,065 425,242 (8,985)(5) 1,186,499 96,477 4,200(7) 1,287,176 (71,823)(6) Provision for doubtful accounts... 69,729 23,113 (534)(6) 92,308 2,738 -- 95,046 Depreciation and amortization...52,093 19,185 8,962(2) 77,932 8,131 (4,379)(2) (40)(2) 81,644 (2,308)(6) Interest expense... 75,511 7,377 18,027(3) 98,663 4,980 2,710(3) 625(3) 106,978 (2,252)(6) Interest income.... (3,380) (1,605) (408)(6) (4,984) (280) 149(3) (5,115) 409(3) Minority interest... 4,601 2,421 (2,421)(6) 4,601 -- -- 4,601 ---------- ---------- ----------- ---------- ----------- ------- ----------- ---------- 20,043 32,771 (22,659) 30,155 8,731 (2,680) (585) 35,621 Income from investments in Houston Northwest Medical Center...... 173 -- -- 173 -- -- -- 173 ---------- ---------- ----------- ---------- ----------- ------- ----------- ---------- Income from continuing operations before income tax expense..... 20,216 32,771 (22,659) 30,328 8,731 (2,680) (585) 35,794 Income tax expense..... 1,129 14,201 (7,875)(4) 4,338 754 456(4) (117)(4) 5,431 (3,117)(6) ---------- ---------- ----------- ---------- ----------- ------- ----------- ---------- Income from continuing operations... 19,087 18,570 (11,667) 25,990 7,977 (3,136) (468) 30,363 Preferred stock dividend requirements... (1,699) -- -- (1,699) -- -- -- (1,699) ---------- ---------- ----------- ---------- ----------- ------- ----------- ---------- Income from continuing operations applicable to common and common equivalent shares...... $ 17,388 $ 18,570 $ (11,667) $ 24,291 $ 7,977 $(3,136) $(468) $ 28,664 ========= ======== ======== ========= ======== =========== ======== ========= Earnings per common and common equivalent share from continuing operations... $ 0.50 $ 0.56 $ 0.57 $ 0.67 ========= ======== ========= ========= Shares used in earnings per common and common equivalent share computations (in thousands)... 34,960 33,201 42,560 42,560
See notes to unaudited pro forma condensed combined income statement. P-5 60 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT NOTE 1 The Company will continue to report its financial information on a fiscal year basis ending on August 31. The Summit and Fountain Valley results of operations, which are included in the accompanying unaudited pro forma condensed combined income statement, have been presented on a fiscal year basis ending on June 30 and October 31, respectively. The pro forma condensed combined income statement assumes the Company's repurchase of 100% of the aggregate outstanding principal amount of the 10 1/4% Notes pursuant to the Change of Control Offer. As of July 18, 1994, the expiration date of the Change of Control Offer, 99.3% of the 10 1/4% Notes have been tendered and were purchased by the Company on July 19, 1994 pursuant to the Change of Control Offer. The difference between the amount tendered and the amount assumed in the pro forma adjustment has an immaterial impact on the pro forma condensed combined income statement. The Company acquired Florida Medical Center on June 30, 1993, for an aggregate purchase price of $113.1 million. The unaudited pro forma condensed combined income statement for the year ended August 31, 1993, reflects the pro forma operations of the Company as if its acquisition of Florida Medical Center had occurred on September 1, 1992. The historical results of Florida Medical Center have been adjusted using purchase accounting to give effect to the acquisition by the Company and to eliminate the effect of significant nonrecurring transactions. The following combined unaudited pro forma condensed income statement for the year ended August 31, 1993 presents the historical operations of the Company, and the incremental pro forma operations of Florida Medical Center as if the acquisition of Florida Medical Center by the Company had occurred on September 1, 1992. ORNDA HEALTHCORP AND FLORIDA MEDICAL CENTER UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE YEAR ENDED AUGUST 31, 1993
FLORIDA ORNDA MEDICAL CENTER ORNDA HISTORICAL PRO FORMA PRO FORMA ---------- -------------- ---------- (IN THOUSANDS) Total revenue.............................................. $ 961,795 $ 98,867 $1,060,662 Cost and Expenses Operating expenses....................................... 765,743 76,322 842,065 Provision for doubtful accounts.......................... 63,907 5,822 69,729 Depreciation and amortization............................ 47,669 4,424 52,093 Interest expense......................................... 68,660 6,851 75,511 Interest income.......................................... (3,380) -- (3,380) Minority interest........................................ 4,601 -- 4,601 ---------- -------------- ---------- 14,595 5,448 20,043 Income from investments in Houston Northwest Medical Center................................................... 173 -- 173 ---------- -------------- ---------- Income from continuing operations before income tax expense.................................................. 14,768 5,448 20,216 Income tax expense......................................... 1,129 -- 1,129 ---------- -------------- ---------- Income from continuing operations.......................... 13,639 5,448 19,087 Preferred stock dividend requirement....................... (1,699) -- (1,699) ---------- -------------- ---------- Income (loss) from continuing operations applicable to common and common equivalent shares...................... $ 11,940 $ 5,448 17,388 ======== =========== ========= Earnings (loss) per common and common equivalent share from continuing operations.................................... $ (0.34) $ 0.50 ======== ========= Shares used in earnings (loss) per common and common equivalent share computation (in thousands).............. 34,960 34,960
P-6 61 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT -- (CONTINUED) NOTE 2 To adjust amortization for the Summit Merger as follows:
FOR THE NINE FOR THE YEAR MONTHS ENDED ENDED MAY 31, AUGUST 31, 1994 1993 ------------ ------------ (IN THOUSANDS) To record amortization related to the $190.1 million increase in excess of costs of net assets acquired over fair value for Summit assuming a 30 year life......................... $4,752 $6,337 To record amortization on the $6 million increase in deferred financing costs assuming a 6 year life..................... 750 1,000 To record depreciation on the $65 million of properties acquired, net of land costs, assuming a 30 year life....... 1,219 1,625 ------------ ------------ $6,721 $8,962 ========= =========
The pro forma condensed combined income statement assumes that the net assets acquired from Summit over fair market value will be amortized over 30 years. The amortization period was determined based upon the estimated economic life of the property, plant, and equipment acquired. The Company evaluates the amortization period of intangible assets on an annual basis. To adjust amortization for the proposed acquisition of Fountain Valley as follows:
FOR THE YEAR FOR THE NINE ENDED MONTHS ENDED AUGUST 31, MAY 31, 1994 1993 ------------ ------------ (IN THOUSANDS) To record amortization on the $2 million increase in deferred financing costs assuming a 6 year life........... $ 250 $ 333 To adjust depreciation on the $46 million of properties to be acquired assuming lives between 7 and 30 years......... (3,534) (4,712) ------------ ------------ $ (3,284) $ (4,379) ========= =========
To adjust amortization for the issuance of the Notes: To record amortization on the $3 million increase in deferred financing costs assuming a 10 year life.......... $ 225 $ 300 To eliminate amortization on the 10 1/4% Notes.............. (255) (340) ------------ ----------- $ (30) $ (40) ========= =========
P-7 62 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT -- (CONTINUED) NOTE 3 To adjust interest expense for the Summit Merger as follows:
FOR THE NINE FOR THE YEAR MONTHS ENDED ENDED MAY 31, AUGUST 31, 1994 1993 ------------ ------------ (IN THOUSANDS) To record interest on borrowings of $269.1 million related to the Bank Credit Facility (assumes a 6.7% interest rate) for the Summit merger.............................................. $ 13,520 $ 18,027 ========= ========= To eliminate interest income on excess Summit cash........... $ 306 $ 409 ========= =========
To adjust interest expense for the proposed acquisition of Fountain Valley as follows:
FOR THE NINE FOR THE YEAR MONTHS ENDED ENDED MAY 31, AUGUST 31, 1994 1993 ------------ ------------ (IN THOUSANDS) To record interest on borrowings of $92 million related to the Bank Credit Facility (assumes a 6.7% interest rate).... $ 4,624 $ 6,165 To eliminate historical interest expense related to Fountain Valley debt to be retired in connection with the acquisition...... (2,591) (3,455) ------------ ------------ $ 2,033 $ 2,710 ========= ========= To eliminate interest income on excess Fountain Valley cash....................................................... $ 112 $ 149 ========= =========
To adjust interest expense for the issuance of the Notes: To record interest on the Notes (assumes a 10 5/8% interest rate)...................................................... $ 7,969 $ 10,625 To eliminate historical interest expense related to the 10 1/4% Notes...................................................... (7,500) (10,000) ------------ ------------ $ 469 $ 625 ========= =========
NOTE 4 To record pro forma provision for income taxes on the pro forma adjustments at a statutory rate of 40% except for amortization adjustments related to excess costs of net assets acquired over fair value which will not be deductible for tax purposes and to adjust Summit tax rate for net operating loss utilization. P-8 63 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT -- (CONTINUED) NOTE 5 The pro forma financial statements give effect to the Company's acquisition of approximately $65 million (of a total of $85.4 million) of the Summit properties currently under lease. The Company entered into an agreement with a third party purchaser for approximately $20.4 million of the remaining real estate. The Company will lease such real estate from the third party under an operating lease agreement.
FOR THE NINE FOR THE YEAR MONTHS ENDED ENDED MAY 31, AUGUST 31, 1994 1993 ------------ ------------ (IN THOUSANDS) To eliminate operating lease expense under previous lease commitments........................................................ $ (8,307) $(11,076) To record new lease commitments (assumes a 10 1/4% interest rate).... 1,568 2,091 ------------ ------------ $ (6,739) $ (8,985) ========= =========
NOTE 6 To record the effect of accounting for the investment in Summit Care Corporation as if the 7 1/2% Notes are exchanged for Summit Care common stock as described below:
FOR THE NINE FOR THE YEAR MONTHS ENDED ENDED MARCH 31, 1994 JUNE 30,1993 -------------- ------------- (IN THOUSANDS) Total revenues............................................. $(71,725) $ (83,992) Operating expenses......................................... (59,997) (71,823) Provision for doubtful accounts............................ (640) (534) Depreciation and amortization.............................. (2,147) (2,308) Interest expense........................................... (4,191) (2,252) Interest income............................................ (428) (408) Minority interest.......................................... (2,138) (2,421) Income tax................................................. (2,848) (3,117)
$37.4 million aggregate principal amount of the 7 1/2% Notes which are exchangeable into Summit's 38.6% interest in the Summit Care common stock, were outstanding at May 31, 1994. The pro forma condensed combined income statements for the fiscal year ended August 31, 1993 and for the nine months ended May 31, 1994 give effect to the investment in Summit Care as if the holders of the 7 1/2% Notes exchanged for the Summit Care common stock on September 1, 1992. NOTE 7 The Company and Fountain Valley have entered into a preliminary agreement with a third party purchaser for approximately $40 million of the real estate to be acquired by the Company. If such sale is consummated, the Company would lease such real estate from the third party under an operating lease agreement.
FOR THE FOR THE NINE YEAR ENDED MONTHS ENDED AUGUST 31, MAY 31, 1994 1993 ------------ ---------- (IN THOUSANDS) To record $40 million of new lease commitments (assumes a 10.50% interest rate)........................................ $3,150 $4,200 ========= ========
P-9 64 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT -- (CONTINUED) NOTE 8 No provision has been reflected in the unaudited pro forma condensed combined financial statements for expenses incurred by the Company and AHM in connection with the AHM Merger. These expenses, consisting primarily of amounts related to investment advisory and professional fees, expenses for printing and distributing proxy materials and certain severance and relocation costs have been estimated at $30 million (of which approximately $16 million is a cash expense) and were expensed upon completion of the AHM Merger. P-10 65 ORNDA HEALTHCORP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED MAY 31 MAY 31 ------------------- ------------------- 1993 1994 1993 1994 -------- -------- -------- -------- TOTAL REVENUE......................................... $245,820 $330,469 $702,551 $882,917 COSTS AND EXPENSES Operating expenses.................................. 193,571 264,901 562,098 697,537 Provision for doubtful accounts..................... 16,634 17,488 43,968 57,443 Depreciation and amortization....................... 11,671 16,759 34,246 45,918 Interest expense.................................... 16,802 20,976 49,948 59,331 Interest income..................................... (887) (815) (3,167) (2,032) Special executive compensation...................... -- 1,043 -- 2,530 Merger transaction expenses......................... -- 29,992 -- 29,992 Loss on asset sale.................................. -- 9,761 -- 9,761 Minority interest................................... 2,247 1,127 2,988 4,230 -------- -------- -------- -------- 5,782 (30,763) 12,470 (21,793) Income (loss) from investments in Houston Northwest Medical Center...................................... (691) 3,218 (775) (136) -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE AND EXTRAORDINARY ITEM.................................. 5,091 (27,545) 11,695 (21,929) Income tax expense.................................... 404 515 930 1,048 -------- -------- -------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM................................................ 4,687 (28,060) 10,765 (22,977) Extraordinary item.................................... -- 8,316 -- 8,191 -------- -------- -------- -------- NET INCOME (LOSS)..................................... 4,687 (36,376) 10,765 (31,168) Preferred stock dividends............................. 430 550 1,259 1,462 -------- -------- -------- -------- Net income (loss) applicable to common shares......... $ 4,257 $(36,926) $ 9,506 $(32,630) ======== ======== ======== ======== Net income (loss) per common and common equivalent share before extraordinary item..................... $ 0.12 $ (0.74) $ 0.27 $ (0.68) ======== ======== ======== ======== Net income (loss) per common and common equivalent share............................................... $ 0.12 $ (0.95) $ 0.27 $ (0.91) ======== ======== ======== ========
See the accompanying notes. F-1 66 ORNDA HEALTHCORP AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS)
AUGUST 31, MAY 31, 1993 1994 ---------- ---------- (NOTE 2) ASSETS CURRENT ASSETS Cash and cash equivalents........................................... $ 25,914 $ 16,342 Patient accounts receivable net of allowance for uncollectibles of $47,289 at August 31, 1993 and $57,153 at May 31, 1994........... 180,604 268,922 Supplies, at cost................................................... 18,533 26,620 Other............................................................... 22,716 50,506 ---------- ---------- TOTAL CURRENT ASSETS............................................. 247,767 362,390 PROPERTY, PLANT AND EQUIPMENT, net.................................... 803,994 1,020,946 INVESTMENTS IN HOUSTON NORTHWEST MEDICAL CENTER....................... 10,912 80,947 OTHER ASSETS.......................................................... 64,058 58,467 GOODWILL, NET......................................................... 78,406 266,954 ---------- ---------- $1,205,137 $1,789,704 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accrued expenses and other liabilities.............................. $ 212,247 $ 302,698 Current maturities of long-term debt................................ 9,347 7,368 ---------- ---------- TOTAL CURRENT LIABILITIES........................................ 221,594 310,066 LONG-TERM DEBT........................................................ 705,425 1,015,000 OTHER LIABILITIES..................................................... 66,010 99,126 SHAREHOLDERS EQUITY Convertible preferred stock; 10,000,000 authorized shares; 1,193,896 and 1,278,452 shares issued and outstanding at August 31, 1993 and May 31, 1994, respectively................................... 18,062 19,341 Common stock, $.01 par value; 100,000,000 authorized shares; 34,483,433 and 43,161,743 issued and outstanding at August 31, 1993 and May 31, 1994, respectively.............................. 345 432 Additional paid-in capital.......................................... 299,137 403,751 Retained deficit.................................................... (105,436) (136,322) Unrealized gains on available-for-sale securities, net of tax....... -- 78,310 ---------- ---------- 212,108 365,512 ---------- ---------- $1,205,137 $1,789,704 ========= =========
See the accompanying notes. F-2 67 ORNDA HEALTHCORP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED MAY 31, --------------------- 1993 1994 -------- -------- OPERATING ACTIVITIES: Net income (loss)................................................................ $ 10,765 $(31,168) Adjustments to reconcile net income (loss) to net cash used in operating activities: Non-cash portion of loss on investments in Houston Northwest Medical Center................................................................. 1,525 2,328 Non-cash special executive compensation................................. -- 2,530 Loss on sale of assets.................................................. -- 9,761 Extraordinary item...................................................... -- 8,191 Increase (decrease) to disposition reserve.............................. (99) -- Depreciation and amortization........................................... 34,246 45,918 Provision for doubtful accounts......................................... 43,968 57,443 Amortization of debt discount........................................... 977 82 Changes in assets and liabilities net of effects from acquisitions/dispositions: Increase in net patient accounts receivable........................... (68,771) (81,660) Decrease (increase) in other current assets........................... (2,269) (5,933) Decrease (increase) in other assets................................... (1,639) (1,316) Increase (decrease) in accrued expenses and other liabilities......... (9,235) (8,424) (Decrease) increase in other liabilities.............................. (1,566) (6,663) -------- -------- Net cash provided by (used in) operating activities........................ 7,902 (8,911) ========= ========= INVESTING ACTIVITIES: Purchase of Summit Health, Ltd. common stock and real estate................... -- (256,671) Purchase of Golden Glades common stock, net of cash acquired of $1,011......... (24,623) -- Capital expenditures........................................................... (27,300) (31,556) Decrease (increase) in restricted funds........................................ 258 -- Increase in notes receivable................................................... (4,105) -- Payments received on long-term notes and other receivables..................... 5,014 4,865 Other investing activities..................................................... (3,852) (17,038) -------- -------- Net cash used in investing activities.......................................... (54,608) (300,400) -------- -------- FINANCING ACTIVITIES: Issuance of stock.............................................................. 44 3,489 Refinancing of borrowings under term loan...................................... (372) -- Principal payments on long-term debt and term loan............................. (11,505) (13,243) Borrowings on notes payable.................................................... -- 325,192 Borrowings under revolving credit agreements................................... 56,337 200,097 Payments on revolving credit agreements........................................ (54,447) (215,796) Payment received on stockholder note receivable................................ 7,740 -- -------- -------- Net cash used in financing activities................................... (2,203) 299,739 -------- -------- NET DECREASE IN CASH............................................................. (48,909) (9,572) -------- -------- CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 60,908 25,914 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 11,999 $ 16,342 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized)......................................... $ 58,569 $ 71,249 Income taxes................................................................. 1,359 160 SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: Preferred stock dividends...................................................... 1,259 1,462 Capital lease obligations incurred............................................. 1,916 397 Issuance of stock options...................................................... -- 2,530 Stock issued for acquisition of Golden Glades.................................. 8,250 -- Stock issued for acquisition of Summit Health, Ltd............................. -- 99,167
See the accompanying notes. F-3 68 ORNDA HEALTHCORP AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MAY 31, 1994 NOTE 1 -- REPORTING ENTITY OrNda HealthCorp (the "Company" or "OrNda") is incorporated in the State of Delaware. On April 19, 1994, the Company exchanged shares of its common stock for all of the outstanding common stock of American Healthcare Management, Inc. ("AHM"), and merged AHM with and into OrNda. The transaction was accounted for as a pooling-of-interests and, accordingly, the accompanying condensed consolidated financial statements give retroactive effect to the merger and therefore include the combined operations of OrNda and AHM. (see Note 3). Also on April 19, 1994, the Company purchased all of 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 transaction was accounted for as a purchase (see Note 3). NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation. The accompanying unaudited condensed 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 (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three-and nine-month periods ended May 31, 1994 are not necessarily indicative of the results that may be expected for the year ended August 31, 1994. For further information, refer to the consolidated financial statements and footnotes thereto included in OrNda's annual report on Form 10-K/A No. 4 for the year ended August 31, 1993 and AHM's annual reports on Forms 10-K, as amended, for the years ended December 31, 1993 and 1992. Earnings Per Share. The computation of earnings per share is based on the weighted average number of outstanding shares and dilutive equivalents outstanding during the period. Dilutive stock equivalents consist of stock options and warrants representing 1.0 million and 1.1 million equivalent shares for the three-and nine-month periods ended May 31, 1993, respectively. Prior year weighted average shares have been restated for the proportionate amount of AHM's weighted average shares outstanding (see Note 3). NOTE 3 -- MERGER, ACQUISITION AND DISPOSITION TRANSACTIONS On April 19, 1994, the Company completed a merger with AHM, a health care services company engaged in the operation of general acute care hospitals. AHM owned or leased 16 hospitals in 9 states, with a total of 2,028 licensed beds. These hospitals provide a range of medical and surgical inpatient and outpatient services, with particular focus on primary care services such as obstetrics, pediatrics and minimally invasive and routine surgeries. The merger has been accounted for as a pooling of interests. Shareholders of AHM received 0.6 of a share of OrNda common stock, representing 16.6 million additional OrNda shares issued, in exchange for each share of AHM common stock held. The accompanying condensed consolidated financial statements give retroactive effect to the merger, combining operations of OrNda and AHM for all periods presented. Because each company had different fiscal year ends, AHM's net income for September 1993, representing $558,000, is included in reported net income both for the year ended August 31, 1993 and the nine months ended May 31, 1994. However, retained earnings appropriately reflects September 1993 net income for only one period. Further, only operating results of OrNda for the nine months ended May 31, 1993 were combined with operations of AHM for the nine months ended June 30, 1993. Consequently, the operating results of AHM for the month of September 1992 are excluded from reported results of the combined company for the nine F-4 69 ORNDA HEALTHCORP AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) months ended May 31, 1993 and the operating results of AHM for the month of June 1993 are included. Following is a summary of AHM s operating results for those periods (in thousands).
SEPTEMBER JUNE 1992 1993 --------- ------- Total revenue................................................... $25,566 $28,135 Net income...................................................... 559 1,038
Following is a summary of the results of the separate operations of OrNda and AHM included in the combined results of operations for periods presented prior to the merger (in thousands):
ORNDA AHM CONSOLIDATED -------- -------- ------------ One month ended March 31, 1994: Total revenue....................................... $ 76,204 $ 30,923 $107,127 Net income.......................................... 2,619 1,415 4,034 Seven months ended March 31, 1994: Total revenues...................................... $454,531 $205,044 $659,575 Net income.......................................... 1,696 7,546 9,242 Three months ended May 31, 1993: Total revenues...................................... $161,319 $ 84,501 $245,820 Net income.......................................... 785 3,902 4,687 Nine months ended May 31, 1993: Total revenues...................................... $450,529 $252,022 $702,551 Net income (loss)................................... (807) 11,572 10,765
In the third quarter of 1994, the Company recorded the following nonrecurring charges in connection with the AHM merger (in thousands):
CASH NONCASH EXPENSE EXPENSE TOTAL ------- ------- ------- Employee benefit and certain severance actions............ $ 8,456 $ 999 $ 9,455 Investment advisory and professional fees................. 6,077 -- 6,077 Costs of information systems consolidations primarily related to the write-down of assets..................... 1,000 10,260 11,260 Other..................................................... 1,293 1,907 3,200 ------- ------- ------- $16,826 $13,166 $29,992 ======= ======= =======
On April 19, 1994, the Company completed a merger with Summit, a health care services company engaged in the operation of (i) general acute care hospitals, (ii) a managed care entity contracting to provide services to the Arizona Health Care Cost Containment System, and (iii) outpatient surgery centers. Summit owned or leased 12 acute care hospitals in 4 states with a total of 1,611 licensed beds. These hospitals provide general health care services, including operating and recovery rooms, diagnostic radiology, intensive care and coronary care, outpatient services and emergency departments, pharmacies, clinical laboratories and rehabilitative therapy. The merger has been accounted for as a purchase and, accordingly, the condensed consolidated financial statements give effect to and include the combined operations of the Company and Summit as of the date of the acquisition. Summit shareholders received $5.50 in cash and 0.2157 shares of OrNda common stock for each share of Summit common stock held, representing $192.1 million of cash paid and 7.5 million additional OrNda shares issued. Furthermore, OrNda assumed or paid $21.9 million of Summit s debt resulting in a total F-5 70 ORNDA HEALTHCORP AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) acquisition cost of approximately $313.2 million. In connection with the merger with Summit, $190.1 million of goodwill was recorded by OrNda. This amount is being amortized over a period of 30 years. In connection with the mergers, the Company changed the methodologies used by the previously separate companies to calculate the allowance for doubtful accounts to conform OrNda and AHM to a single method. The Company also changed the methodology for recognition of charity care expense. As a result of these changes, the operations of the Company for the three months ended May 31, 1994 were favorably impacted by $3.3 million. On June 30, 1993, the Company acquired Florida Medical Center, a 459 licensed-bed hospital in Fort Lauderdale Florida, for $113.1 million in cash in a transaction accounted for as a purchase. Pro forma results of operations for the year ended August 31, 1993 and the nine months ended May 31, 1994 assuming the Summit merger and FMC acquisition were completed September 1, 1992, and excluding $30.0 million of expenses directly attributable to the merger transaction, are presented below (in thousands, except per share data).
YEAR ENDED NINE MONTHS ENDED AUGUST 31, MAY 31, 1993 1994 ---------- ----------------- Total revenue............................................ $1,485,175 $ 1,164,278 Income from continuing operations........................ 22,946 13,339 Income from continuing operations applicable to common shares................................................. 21,247 11,877 Income from continuing operations applicable to common equivalent shares...................................... $ 0.50 $ 0.27
Effective in the third quarter of 1994, the Company's management decided upon a plan of disposition to sell Decatur Hospital, a 120-bed acute care hospital located in Decatur, Georgia. Losses relating to the future operations of the hospital and the loss on sale totalling $9.8 million were recorded in the third quarter of 1994. On June 10, 1994, the Company completed the sale of the property, equipment and inventory of the hospital for $6.0 million in cash. NOTE 4 -- LONG-TERM DEBT A summary of long-term debt follows (in thousands):
AUGUST 31, MAY 31, 1993 1994 ---------- ---------- Parent Company: Senior Credit Facilities: Revolving Credit Facilities............................... $ 103,200 $ 58,200 Term Loans................................................ 42,500 393,500 12.25% Senior Subordinated Notes due 2002.................... 400,000 400,000 10.25% Senior Subordinated Notes due 2003.................... 100,000 100,000 Subsidiaries: Secured Debt -- other (including capitalized leases); rates, generally fixed, average 11.9%; payable in periodic installments through 2004................................. 69,072 70,668 ---------- ---------- 714,772 1,022,368 Less current portions.......................................... 9,347 7,368 ---------- ---------- $ 705,425 $1,015,000 ======== =========
On April 19, 1994 the Company entered into a Credit, Security, Guarantee and Pledge Agreement (the "Credit Agreement") with a syndicate of lenders to borrow up to $700 million, of which $451.7 million was F-6 71 ORNDA HEALTHCORP AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) outstanding on May 31, 1994 and of which commitment availability had been reduced by $13.5 million as a result of issued letters of credit. The proceeds were used to (i) repay $159.6 million of previously outstanding senior secured debt; (ii) pay for $192.1 million representing the cash portion of the purchase price for all of the outstanding shares of Summit Health Ltd.; (iii) acquire real estate previously leased by Summit Health Ltd., for $65.0 million; (iv) repay $9.1 million of subsidiary indebtedness; and, (v) pay transaction fees and expenses. In connection with the extinguishment of the previously outstanding senior secured debt, the Company recorded an extraordinary loss of $8.3 million, net of income tax benefit of $251,000, primarily as a result of the elimination of related debt issuance costs. The Credit Agreement consists of the following facilities (the "Senior Credit Facilities"): (i) a revolving commitment of $200 million maturing April 19, 2000, to refinance certain previously existing senior secured debt, for general corporate purposes, and to issue up to $30 million of letters of credit, (ii) a revolving commitment of $100 million maturing April 19, 2000 for acquisitions and other specified transactions, (iii) a $325 million term loan to refinance certain previously existing senior secured debt and the cash portion of the purchase price paid to acquire Summit Health Ltd., payable in incremental, quarterly installments beginning July 31, 1994 and maturing April 19, 2000, and (iv) a $75 million term loan for specified transactions payable in incremental quarterly installments beginning January 31, 1995 and maturing April 19, 2000. Funds advanced under the Credit Agreement bear interest on the outstanding principal at a fluctuating rate based on either (i) the base rate of the Bank of Nova Scotia for U.S. Dollar loans in the United States (the "Prime Rate") or (ii) London Interbank Borrowing Rate ("LIBOR"), as elected from time to time by the Company. Interest is payable quarterly if a rate based on the Prime Rate is elected or at the end of the LIBOR period (but in any event not to exceed 90 days) if a rate based on LIBOR is elected. The Company has elected various rates on the initial borrowings of the Senior Credit Facilities representing a weighted average annual interest rate at May 31, 1994 of 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 within a specific period. The Company may prepay all or part of the outstanding Senior Credit Facilities without penalty. The Credit Agreement limits, under certain circumstances, the Company's ability to incur additional indebtedness, sell material assets, acquire the capital stock or assets of another business, or pay dividends. The Credit Agreement also requires the Company to maintain a specified net worth and meet or exceed certain coverage, leverage, and indebtedness ratios. Indebtedness under the Credit Agreement is secured by a perfected, first priority security interest in the stock of all existing and future subsidiaries of the Company, intercompany notes of indebtedness, and majority-owned partnerships. Pursuant to a Waiver and Consent Agreement dated February 3, 1994 by and among the Company and the holders of a majority in principal amount of the 10.25% Notes, as consideration for their agreement to make certain changes to the Notes Indenture to effect the merger with AHM (see Note 3) and other matters, the Company (i) paid to the holders on the closing date of the merger $15.00 for each $1,000 principal amount of the outstanding Notes and (ii) increased the rate of interest on the Notes from 10% per annum to 10.25% per annum. The merger caused a "change of control," as defined in the Notes Indenture, which required the Company to make a prompt offer to repurchase all or any portion of the Notes owned by the holders thereof at 101% of the principal amount, together with accrued interest thereon, to the date of repurchase. The Company made the required offer to repurchase the Notes on May 19, 1994. Such offer expires on July 18, 1994. F-7 72 ORNDA HEALTHCORP AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5 -- 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 (see Note 3) caused an "ownership change" within the meaning of Section 382(g) of the Internal Revenue Code (the "IRC") for both OrNda and AHM. Consequently, allowable federal deductions relating to tax attribute carryforwards of OrNda and AHM arising in periods prior to the merger are thereafter subject to annual limitations (OrNda $19 million; AHM $16 million). For AHM, such tax attribute carryforwards can only be applied against the prospective taxable income of the entities that previously comprised AHM. These limitations may be increased for "built-in gains," as defined under the IRC, recognized during a five-year period following the date of the merger. These annual limitations currently are not expected to affect the ability of either OrNda or AHM to ultimately utilize tax attribute carryforwards available at the date of the merger and which, therefore, continue to be available to offset book deferred tax liabilities. As a result of examinations by the Internal Revenue Service (the "Service") of Summit's federal income tax returns, Summit received a revenue agent's report with proposed adjustments for the years 1984 through 1986. A protest has been filed with the district director opposing the proposed adjustment. The principal issue involves accounting methods used by Summit to report taxable income. For the taxable years prior to 1988, most of Summit's subsidiaries (the "Subsidiaries") primarily reported taxable income using the cash method of accounting. The cash method was prevalent within the hospital industry and the Subsidiaries applied the method in accordance with prior agreements reached with the Service. The Service 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 Subsidiaries changed to the accrual method beginning July 1, 1987. In accordance with the provisions of the 1986 Act, income that was deferred by use of the cash method at the end of 1986 is being recognized as taxable income by the Subsidiaries in equal annual installments over ten years beginning on July 1, 1987. The Company is of the opinion that Summit has properly reported its income and paid its taxes in accordance with applicable laws (and in accordance with previous agreements established with the Service.) In management's opinion, the final outcome resulting from the Service's examinations of prior years income taxes will not have a material adverse effect on the results of operations or financial position of the Company. NOTE 6 -- HOUSTON NORTHWEST MEDICAL CENTER Houston Northwest Medical Center ("HNW"), which is not operated by the Company, is a 494-bed acute care facility located in Houston, Texas. Prior to February 28, 1994, the Company's investments in HNW consisted of (i) 100% of HNW's common stock; (ii) two classes of mandatorily redeemable preferred stock with a redemption value of $62.5 million; and, (iii) a mortgage note receivable with a balance of $8.4 million. In applying the equity method of accounting for the investment prior to February 28, 1994, the Company's investment in mandatorily redeemable preferred stock of HNW was considered an "advance" to HNW and was combined with the common stock. As a result, 100% of HNW's losses attributable to its common stock were recognized as losses to the Company and reduced the Company's combined investments in HNW. On February 28, 1994, the Company irrevocably transferred its investment in common stock of HNW to the HNW ESOP and HNW for nominal consideration. The effect of this transfer was to eliminate the requirement for the Company to apply the equity method of accounting subsequent to the quarter ended February 28, 1994. Accordingly, beginning March 1, 1994, the Company no longer recognizes HNW income or losses on the equity method. The Company will continue to apply the income recognition method described F-8 73 ORNDA HEALTHCORP AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) in Note 1 to the financial statements included in the Company's Form 10-K/A No. 4, for the year ended August 31, 1993, for the Company's investment in HNW's mandatorily redeemable preferred stock. In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting of Certain Investments in Debt and Equity Securities" (SFAS No. 115). The Company adopted SFAS No. 115 on September 1, 1993, which resulted in an $81.7 million increase in shareholders equity (of which $79.7 million 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. At May 31, 1994, the increase to equity was reduced to $78.3 million (of which $76.3 related to HNW) due to changes in long-term interest rates used to discount future cash flows. NOTE 7 -- CONTINGENCIES The Company continually evaluates contingencies based upon the best available information. In addition, allowances for losses are provided for unresolved items which have continuing significance such as certain third-party reimbursements. The Company presently has unresolved various legal proceedings in which it is a defendant and various unresolved claims. In the opinion of management, the ultimate liability, if any, with respect to any such litigation or claim will not materially affect the financial position or results of operations of the Company. NOTE 8 -- OTHER On May 5, 1994, the Company announced it had entered into a letter of intent to acquire Fountain Valley Regional Hospital and Medical Center, a 413-licensed bed acute care hospital in Fountain Valley, California. The transaction will be accounted as a purchase and is expected to have a total purchase price of approximately $145 million, of which approximately $95 million will be paid in cash. The transaction, which is expected to be completed during the fourth quarter of fiscal 1994, is subject to execution of a definitive agreement, consent of the lenders under the Credit Agreement and other customary closing conditions. F-9 74 ORNDA HEALTHCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Mergers and Acquisition. As discussed in Note 3 to the accompanying condensed consolidated financial statements, OrNda completed the AHM and Summit mergers on April 19, 1994. The AHM merger was accounted for as a pooling-of-interests and, accordingly, the operations of AHM and OrNda have been combined in the accompanying condensed consolidated financial statements. The Summit merger was accounted for as a purchase and, accordingly, their operations have been included effective upon the date of the merger. The discussion herein is based upon the combined operations of OrNda and AHM for all periods presented in the accompanying condensed consolidated financial statements and including Summit effective April 19, 1994. To enhance understandability, discussion and analysis of financial condition and results of operations of the separate companies is included, where necessary. Hereafter, the combined entity of OrNda and AHM is referred to as the "Company," while the separate operation of OrNda, prior to the mergers, is referred to as "OrNda." Nonrecurring charges related to the AHM merger of $30.0 million primarily consisting of severance and benefit payments, investment advisory and professional fees, and costs of consolidating management information systems, were recorded in the third quarter of 1994. Also, in connection with the mergers, the Company extinguished certain senior secured debt and replaced it with new senior credit facilities. Consequently, the Company recorded an extraordinary loss of $8.3 million primarily as a result of the elimination of related debt issuance costs. The Company estimates approximately $15 million of annualized reduction in expenses due to the elimination of duplicate overhead and to reductions in malpractice and other insurance premiums resulting from the mergers. By the end of the fourth quarter of fiscal 1994, the Company will have begun implementation of the plans necessary to realize these savings. In addition to the mergers, the Company's results of operations also have been impacted by the acquisition of Florida Medical Center ("FMC") , a 459 licensed-bed acute care hospital in Fort Lauderdale, Florida, in June 1993. Divestiture. Effective in the third quarter of 1994, the Company's management decided upon a plan of disposition to sell Decatur Hospital, a 120-bed acute care hospital located in Decatur, Georgia. Losses relating to the future operations of the hospital and the loss on sale totalling $9.8 million were recorded in the third quarter of 1994. On June 10, 1994, the Company completed the sale of the property, equipment, and inventory of the hospital for $6.0 million. The operations of the hospital were not material to the three-and nine-month periods ended May 31, 1994 and 1993. RESULTS OF OPERATIONS THREE MONTHS ENDED MAY 31, 1994 COMPARED WITH THE THREE MONTHS ENDED MAY 31, 1993. Total revenue for the three months ended May 31, 1994 increased $84.6 million or 34.4% to $330.5 million and earnings before interest, taxes, depreciation, amortization, minority interest, income (loss) from investments in Houston Northwest Medical Center and nonrecurring charges ("EBITDA") increased 35.0% to $48.1 million. Because of nonrecurring charges of $40.8 million and an extraordinary charge of $8.3 million, net of income tax expense, the Company reported a net loss for the three months ended May 31, 1994 of $36.4 million compared with net income of $4.7 million for the three months ended May 31, 1993. The principal reasons for the total revenue growth during this period compared with the year-earlier period are (i) the inclusion of the total revenue of FMC amounting to $28.2 million for the three months ended May 31, 1994 not included in the prior-year period, (ii) the inclusion of the total revenue of Summit from the date of the merger amounting to $51.6 million not included in the prior-year period, and (iii) an increase in the Company's admissions, exclusive of FMC and Summit, of 2.3%. Total surgeries and outpatient volume of the Company remained relatively flat during the period. The effect of price increases implemented F-10 75 ORNDA HEALTHCORP AND SUBSIDIARIES by the Company's hospitals was nominal as gross revenue (total revenue before contractual allowances and other deductions) currently paid by fixed reimbursement third party payors represented approximately 86.0% of the Company's total gross revenue. These payors, who generally reimburse providers of health care services at discounts (often substantial) to providers' listed charges for services, negotiate (or dictate as in the case of the Medicare program) price increases exclusive of any price increases implemented by providers. The increase in EBITDA for the three months ended May 31, 1994 principally resulted from the increase in total revenue, discussed above. In connection with mergers, the Company changed the methodologies used by the previously separate companies to calculate the allowance for doubtful accounts to conform to a single method for OrNda and AHM. The Company also changed the methodology for recognition of charity care expense. As a result of these changes, the operations of the Company for the three months ended May 31, 1994 were favorably impacted by $3.3 million. Otherwise, the provision for doubtful accounts as a percentage of total revenue increased to 7.1% from 6.8% in the prior-year period. Exclusive of the adjustment to the Company's allowance for doubtful accounts, the rate of increase in EBITDA was less than the rate of increase in total revenue, despite cost containment initiatives implemented by the Company, because (i) rate increases from various fixed reimbursement third party payors were below the rate of medical-related inflation increases applicable to salaries, benefits and supplies, and (ii) the percentage of the Company's gross revenue derived from fixed reimbursement third party payors, increased to 86.0% from 81.0% in the prior year period, partially offsetting the effect of the increase in admissions. Depreciation and amortization for the three months ended May 31, 1994 increased by $5.1 million, as compared to the same period in the prior year, primarily due to $1.4 million of depreciation and amortization attributable to the operations of FMC and $2.6 million of depreciation and amortization attributable to the operations of Summit not included in the prior year. Interest expense for the same period increased by $4.2 million as a result of the financing of these transactions. 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 $285.6 million of tax attribute carryforwards at May 31, 1994 which the Company has available to offset future taxable income. The AHM merger (see Note 3) caused an "ownership change" within the meaning of Section 382 (g) of the Internal Revenue Code (the "IRC") for both OrNda and AHM. Consequently, allowable federal deductions relating to tax attribute carryforwards of OrNda and AHM arising in periods prior to the merger are thereafter subject to annual limitations (OrNda -- $19 million; AHM -- $16 million). For AHM, such tax attribute carryforwards can only be applied against the prospective taxable income of the entities that previously comprised AHM. These limitations may be increased for "built-in-gains," as defined under the IRC, recognized during a five-year period following the date of the merger. Management assesses the realizability of the deferred tax assets on at least a quarterly basis and currently is satisfied, despite the annual limitations, that it is more likely than not that the deferred tax assets recorded at May 31, 1994 will be realized through reversal of deferred tax liabilities. For the three months ended May 31, 1994, the Company recorded income tax expense of $515,000 on a pretax loss of $27.5 million primarily due to state income taxes and federal alternative minimum tax. NINE MONTHS ENDED MAY 31, 1994 COMPARED WITH THE NINE MONTHS ENDED MAY 31, 1993. Total revenue for the nine months ended May 31, 1994 increased $180.4 million or 25.7% to $882.9 million and EBITDA increased 32.6% to $127.9 million. Because of the nonrecurring charges and extraordinary item recorded in the third quarter of fiscal 1994, the Company reported a net loss for the nine months ended May 31, 1994 of $31.2 million compared with net income of $10.8 million for the nine months ended May 31, 1993. Historical and pro forma income and earnings per share before extraordinary item, exclusive of expenses directly attributed to the merger, nonrecurring special executive compensation and loss on asset sales F-11 76 ORNDA HEALTHCORP AND SUBSIDIARIES for the nine months ended May 31, 1994 assuming the Summit merger occurred September 1, 1993 is as follows (in thousands, except per share amounts):
HISTORICAL PRO FORMA 1994 1994 ---------- --------- Income before extraordinary item, as adjusted for preferred stock dividends...................................................... $ 17,774 $24,168 Income per share before extraordinary item....................... $ 0.47 $ 0.54
The principal reasons for the total revenue growth during this period compared with the prior-year period are (i) the inclusion of the total revenue of FMC amounting to $82.3 million for the nine months ended May 31, 1994 not included in the prior year period; (ii) the inclusion of the total revenue of Summit from the date of the merger amounting to $51.6 million not included in the prior year period; (iii) an increase in the Company's admissions, exclusive of FMC and Summit, of 6.2%; and, (iv) an increase in outpatient revenue of 10.6%, exclusive of FMC and Summit, representing a volume increase of approximately 4.6%. Total surgeries remained relatively flat during the period. The increase in EBITDA of 32.6% for the nine months ended May 31, 1994 principally resulted from the increase in total revenue discussed above and cost containment initiatives implemented by the Company during the year. Depreciation and amortization for the nine months ended May 31, 1994 increased by $11.7 million, as compared to the same period in the prior year, primarily due to $4.0 million of depreciation and amortization attributable to the operations of FMC and $2.6 million of depreciation and amortization attributable to the operations of Summit. Interest expense for the same periods increased by $9.4 million as a result of the financing of these transactions. For the nine months ended May 31, 1994, the Company recorded income tax expense of $1.0 million on a pretax loss of $21.9 million primarily due to issues previously discussed. OTHER In December 1993, the Company granted options to purchase 500,000 shares of common stock to certain officers under the provisions of the Company's 1991 stock option plan. The option exercise prices range from $7.75 to $10.75. During the three and nine months ended May 31, 1994, the Company recorded $1.0 million, and $2.5 million, respectively, of noncash expense related to the issuance of such options. The expense related to the issuance of such options is reflected in the Company's Statement of Operations as special executive compensation. Minority interest expense represents the amount paid to physicians pursuant to the Company's joint venture arrangements. Currently, four of the Company's hospitals are joint ventured with physicians. Minority interest expense decreased by $1.1 million for the three months ended May 31, 1994 compared to the prior year period primarily due to the buyout of a joint venture arrangement at a hospital for $9.7 million in March 1994. Minority interest expense increased $1.2 million for the nine months ended May 31, 1994 compared to the prior year period primarily due to increased EBITDA at the joint-ventured hospitals. The increase would have been greater but for the buyout of a joint venture as previously discussed. The Company's investment in the common stock of Houston Northwest Medical Center ("HNW") was divested on February 28, 1994. Subsequent to February 28, 1994, the Company is not required to account for the investment on the equity method. Consequently, HNW losses, recorded in previous periods, related to the Company's investment in HNW common stock have not been recorded. The third quarter of fiscal 1994 reflected $3.2 million of income from the Company's investments in HNW. Such income primarily F-12 77 ORNDA HEALTHCORP AND SUBSIDIARIES represented $3.1 million of income (of which $2.6 million is noncash) related to the Company's investment in HNW redeemable preferred stock. The third quarter of 1993 included $691,000 of losses related to the HNW investments which was comprised of $3.6 million of losses related to the investment in common stock offset by $2.8 million of income related to redeemable preferred stock. LIQUIDITY AND CAPITAL RESOURCES At May 31, 1994, the Company's primary source of liquidity was $16.3 million in cash, and availability under the Credit Agreement of $138.0 million for general corporate purposes and $90.3 million for acquisitions. At May 31, 1994, the working capital of the Company increased to $52.3 million from $26.2 million at August 31, 1993. Total assets during that period increased to $1,790 million from $1,205 million. The changes in working capital and total assets primarily are attributable to the Company's purchase of Summit on April 19, 1994. In connection with this purchase, the Company used $256.7 million of funds available under the Credit Agreement in addition to issuing 7.5 million shares of the Company's common stock. On May 5, 1994, the Company announced it had entered into a letter of intent to acquire Fountain Valley Regional Hospital and Medical Center, a 413-licensed bed acute care hospital in Fountain Valley, California. The total purchase price is expected to be approximately $145 million, of which approximately $95 million will be paid in cash. The transaction, which is expected to be completed during the fourth quarter of fiscal 1994, is subject to execution of a definitive agreement, consent of the lenders under the Credit Agreement and other customary closing conditions. Management believes that the Company's cash and capital resources, and cash flow from operations, will be sufficient to finance current and forecasted operations. The Company is, however, actively seeking potential acquisitions in addition to Fountain Valley and, depending upon the size and terms of any such acquisitions, additional financing or equity capital may be required. F-13 78 FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED APRIL 30, ------------------- 1993 1994 ------- ------- (IN THOUSANDS) Net patient revenue...................................................... $53,031 $58,356 Medical building rent and other revenue.................................. 4,321 2,824 ------- ------- Total operating revenue........................................ 57,352 61,180 ------- ------- Operating expenses Payroll and benefits................................................... 28,413 31,103 Supplies............................................................... 8,866 9,609 Purchased services..................................................... 5,607 6,901 Other.................................................................. 3,681 3,347 Depreciation and amortization.......................................... 4,058 4,017 Interest............................................................... 2,463 2,424 Provision for bad debts................................................ 987 891 ------- ------- Total operating expenses....................................... 54,075 58,292 ------- ------- Net income............................................................... $ 3,277 $ 2,888 ======= =======
See the accompanying notes F-14 79 FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY CONSOLIDATED BALANCE SHEETS
OCTOBER 31, APRIL 30, 1993 1994 ----------- ------------- (UNAUDITED) (IN THOUSANDS) ASSETS CURRENT ASSETS Cash and cash equivalents........................................ $ 8,917 $ 5,978 Patient accounts receivable, less estimated allowances and uncollectibles of $20,314 and $24,128......................... 21,145 21,628 Inventory........................................................ 1,763 1,713 Prepaid expenses................................................. 1,084 1,743 Other current assets............................................. 2,187 2,033 ----------- ------------- TOTAL CURRENT ASSETS..................................... 35,096 33,095 Property and equipment: Land and improvements............................................ 3,298 3,298 Buildings and improvements....................................... 62,537 64,171 Equipment........................................................ 24,125 23,877 Equipment under capital leases................................... 11,840 12,718 Construction in progress......................................... 614 -- ----------- ------------- 102,414 104,064 Less accumulated depreciation and amortization................... 53,898 57,608 ----------- ------------- Net property and equipment....................................... 48,516 46,456 Other assets Other assets..................................................... 696 981 Deferred charges, net of accumulated amortization of $1,240 and $1,372........................................................ 1,270 1,052 Excess purchase price and intangibles, net of accumulated amortization of $512 and $674................................. 892 730 ----------- ------------- TOTAL OTHER ASSETS....................................... 2,858 2,763 ----------- ------------- TOTAL ASSETS............................................. $ 86,470 $ 82,314 ========= ========== LIABILITIES AND PARTNERS' EQUITY CURRENT LIABILITIES Current portion of obligations under capital leases.............. $ 1,673 $ 1,696 Current portion of long-term debt................................ 5,121 3,190 Accounts payable................................................. 4,914 7,491 Reimbursement settlements due to third-party payors.............. 2,140 770 Accrued expenses................................................. 6,807 5,936 Income taxes payable............................................. 589 (4) Accrued distributions to partners................................ 877 367 Deferred income taxes............................................ 736 625 ----------- ------------- TOTAL CURRENT LIABILITIES................................ 22,857 20,071 Reimbursement settlements due to third-party payors.............. 1,623 1,623 Deferred income taxes............................................ 3,148 2,901 Obligations under capital leases, less current portion........... 3,522 3,536 Long-term debt, less current portion............................. 49,290 47,598 Other liabilities................................................ 485 318 ----------- ------------- TOTAL LIABILITIES........................................ 80,925 76,047 ----------- ------------- Partners' equity................................................. 5,545 6,267 ----------- ------------- TOTAL LIABILITIES AND PARTNERS' EQUITY................... $ 86,470 $ 82,314 ========= ==========
See the accompanying notes F-15 80 FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
SIX MONTHS ENDED APRIL 30, ------------------ 1993 1994 ------- ------ (IN THOUSANDS) OPERATING ACTIVITIES: Net income................................................................ $ 3,277 $2,888 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................................... 4,058 4,017 Provision for bad debts................................................. 987 891 Gain on termination of lease............................................ (534) -- Changes in operating assets and liabilities: Increase in patient accounts receivable.............................. (1,460) (1,374) (Increase) decrease in supplies...................................... (41) 50 Increase in other current assets..................................... (835) (505) Increase (decrease) in noncurrent other assets....................... (293) (212) Increase in accounts payable......................................... 1,011 2,577 Decrease in accrued expenses......................................... (540) (871) Decrease in health care insurance programs settlements............... 1,605 (1,370) Decrease in deferred revenues........................................ (1,203) -- Decrease in income taxes payable..................................... (4) (593) Decrease in deferred intangibles..................................... -- (358) (Decrease) increase in other liabilities............................. (322) 5 ------- ------ Net cash provided by operating expenses................................. 5,706 5,145 ------- ------ INVESTING ACTIVITY: Capital expenditures (net of disposals)................................... (598) (91) ------- ------ Net cash used in investing activity..................................... (598) (91) ------- ------ FINANCING ACTIVITIES: Repayment of long-term debt and capital leases............................ (5,926) (5,317) Distributions to partners................................................. (3,726) (2,676) Withdrawals from partnership.............................................. (53) -- ------- ------ Net cash used in financing activities................................... (9,705) (7,993) ------- ------ NET DECREASE IN CASH...................................................... (4,597) (2,939) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................ 14,122 8,917 ------- ------ CASH AND CASH EQUIVALENTS, END OF PERIOD.................................. $ 9,525 $5,978 ======= ====== Supplemental disclosure of cash flow information Cash paid during the period for interest.................................. $ 2,359 $2,522
See the accompanying notes F-16 81 FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) APRIL 30, 1994 1. BASIS OF PRESENTATION The accompanying unaudited interim financial statements of Fountain Valley Medical Development Company (the "Partnership") have been prepared in accordance with generally accepted accounting principles for interim financial information. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the fiscal year 1994 interim period presented are not necessarily indicative of the results that may be expected for the twelve months ended October 31, 1994. The balance sheet at October 31, 1993, was derived from the audited financial statements of the Partnership. 2. INCOME TAXES The Partnership is not subject to federal or state income taxes. The results of the Partnership's operations are allocated to and included in the tax returns of the partners. Accordingly, no income tax provision is reflected in the accompanying financial statements. Net income for financial reporting purposes differs from taxable income to be reported by the partners due to differences between tax accounting methods and generally accepted accounting principles which are used for financial reporting. 3. SUBSEQUENT EVENT On May 5, 1994, the Partnership entered into a letter of intent to be acquired by OrNda HealthCorp for $145 million. The transaction is subject to execution of a definitive agreement, consent of certain of OrNda HealthCorp's lenders and other customary closing conditions. F-17 82 [This page intentionally left blank] 83 INDEPENDENT AUDITORS' REPORT Executive Committee and Partners Fountain Valley Medical Development Company and Subsidiaries Fountain Valley, California We have audited the accompanying consolidated balance sheets of Fountain Valley Medical Development Company and Subsidiaries as of October 31, 1993 and 1992, and the related consolidated statements of income, partners' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated 1993 and 1992 financial statements referred to above present fairly, in all material respects, the financial position of Fountain Valley Medical Development Company and Subsidiaries at October 31, 1993 and 1992, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. As discussed in Note 4 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1993. BDO SEIDMAN January 21, 1994 F-18 84 FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
OCTOBER 31, ---------------------- 1993 1992 -------- ------- (IN THOUSANDS) ASSETS Current assets Cash and cash equivalents..................................................... $ 8,917 $14,122 Restricted cash (Note 7)...................................................... -- 583 Patient accounts receivable, less estimated allowances and uncollectibles of $20,314 and $19,828 (Note 2)................................................ 21,145 19,822 Inventory (Note 2)............................................................ 1,763 1,877 Prepaid expenses.............................................................. 1,084 1,093 Other current assets.......................................................... 2,187 1,059 -------- ------- Total current assets................................................... 35,096 38,556 -------- ------- Property and equipment (Note 3) Land and improvements......................................................... 3,298 3,298 Buildings and improvements.................................................... 62,537 59,733 Equipment..................................................................... 24,125 26,785 Equipment under capital leases................................................ 11,840 9,200 Construction in progress...................................................... 614 528 -------- ------- 102,414 99,544 Less accumulated depreciation and amortization................................ 53,898 49,849 -------- ------- Net property and equipment............................................. 48,516 49,695 -------- ------- Other assets Other assets.................................................................. 696 1,101 Deferred charges, (net of accumulated amortization of $1,240 and $835)........ 1,270 1,221 Excess purchase price and intangibles, (net of accumulated amortization of $512 and $189).............................................................. 892 1,215 -------- ------- Total other assets..................................................... 2,858 3,537 -------- ------- $ 86,470 $91,788 ========= ======== LIABILITIES AND PARTNERS' EQUITY Current liabilities Current portion of obligations under capital leases (Note 3).................. $ 1,673 $ 1,734 Current portion of long-term debt (Note 2).................................... 5,121 6,306 Accounts payable.............................................................. 4,914 4,441 Reimbursement settlements due to third-party payors........................... 2,140 3,505 Accrued expenses.............................................................. 6,807 6,048 Income taxes payable (Note 4)................................................. 589 -- Accrued distributions to partners............................................. 877 1,844 Deferred revenue (Note 7)..................................................... -- 1,661 Deferred income taxes (Note 4)................................................ 736 -- -------- ------- Total current liabilities.............................................. 22,857 25,539 Reimbursement settlements due to third-party payors............................. 1,623 1,077 Deferred income taxes (Note 4).................................................. 3,148 3,160 Obligations under capital leases, less current portion (Note 3)................. 3,522 2,112 Long-term debt, less current portion (Note 2)................................... 49,290 54,277 Deferred revenue (Note 7)....................................................... -- 698 Other liabilities............................................................... 485 976 -------- ------- Total liabilities...................................................... 80,925 87,839 -------- ------- Contingencies (Note 6) Partners' equity (Note 5)....................................................... 5,545 3,949 -------- ------- $ 86,470 $91,788 ========= ========
See accompanying summary of accounting policies and notes to consolidated financial statements. F-19 85 FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, --------------------- 1993 1992 -------- -------- (IN THOUSANDS) Net patient service revenue............................................ $112,444 $103,641 Medical building rent and other revenue (Note 7)....................... 7,915 8,734 -------- -------- Total operating revenue...................................... 120,359 112,375 -------- -------- Operating expenses Payroll and benefits................................................. 58,270 53,807 Supplies............................................................. 18,116 16,733 Purchased services................................................... 11,740 11,062 Other................................................................ 8,351 7,560 Depreciation and amortization........................................ 8,131 7,770 Interest............................................................. 4,980 5,510 Provision for bad debts.............................................. 2,738 2,390 -------- -------- Total operating expenses..................................... 112,326 104,832 -------- -------- Income from operations................................................. 8,033 7,543 Nonoperating income (Note 7)........................................... 698 643 -------- -------- Income before provision for income taxes and cumulative effect of change in accounting principle....................................... 8,731 8,186 Provision for income taxes (Note 4).................................... 754 113 -------- -------- Income before cumulative effect of change in accounting principle...... 7,977 8,073 Cumulative effect on prior years of change in accounting principle (Note 4)............................................................. 1,368 -- -------- -------- Net income................................................... $ 6,609 $ 8,073 ======== ========
See accompanying summary of accounting policies and notes to consolidated financial statements. F-20 86 FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
YEARS ENDED OCTOBER 31, 1993 AND 1992 (NOTE 2) -------------- (IN THOUSANDS) Partners' equity, at November 1, 1991.......................................... $1,932 Add: Net income................................................................... 8,073 Less: Distributions to partners.................................................... 6,056 ------- Partners' equity, at October 31, 1992.......................................... 3,949 Add: Net income................................................................... 6,609 Less: Distributions to partners.................................................... 4,957 Withdrawals from partnership................................................. 56 ------- Partners' equity, at October 31, 1993.......................................... $5,545 ===========
See accompanying summary of accounting policies and notes to consolidated financial statements. F-21 87 FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (NOTE 8)
YEARS ENDED OCTOBER 31, ------------------- 1993 1992 ------- ------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................................................................... $ 6,609 $ 8,073 ------- ------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................................. 8,131 7,770 Provision for bad debt......................................................... 2,738 2,390 Income from investment in partnership.......................................... -- (75) Gain on sale of equipment...................................................... (23) (2) Gain on termination of lease................................................... (698) (643) (Increase) decrease in assets: Patient accounts receivable.................................................... (4,061) (498) Inventory...................................................................... 114 (73) Prepaid expenses............................................................... 9 (134) Other assets................................................................... (1,176) (572) Increase (decrease) in liabilities: Accounts payable............................................................... 473 (2,616) Reimbursement settlements due to third-party payors............................ (819) 3,618 Accrued expenses............................................................... 759 289 Income taxes payable........................................................... 589 (161) Deferred income taxes.......................................................... 724 (330) Deferred revenue............................................................... (1,661) 1,661 Other liabilities.............................................................. (491) 443 ------- ------- Total adjustments.................................................................. 4,608 11,067 ------- ------- Net cash provided by operating activities.......................................... 11,217 19,140 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid on purchase of investment in partnership............................... -- (166) Proceeds from sale of equipment.................................................. 27 6 Distribution from investment in partnership...................................... -- 500 Capital expenditures............................................................. (3,112) (3,288) Due from affiliate............................................................... -- 371 Restricted cash.................................................................. 583 (583) ------- ------- Net cash used in investing activities.............................................. (2,502) (3,160) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments under capital lease obligations............................... (1,767) (1,526) Principal payments on long-term debt............................................. (6,450) (6,095) Proceeds from long-term debt..................................................... 278 389 Distributions paid to partners................................................... (5,925) (5,355) Withdrawals from partnership..................................................... (56) -- ------- ------- Net cash used in financing activities.............................................. (13,920) (12,587) ------- ------- Net (decrease) increase in cash and cash equivalents............................... (5,205) 3,393 CASH AND CASH EQUIVALENTS, beginning of year....................................... 14,122 10,729 ------- ------- CASH AND CASH EQUIVALENTS, end of year............................................. $ 8,917 $14,122 ======== ========
See accompanying summary of accounting policies and notes to consolidated financial statements. F-22 88 FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES Basis of Presentation. The consolidated financial statements include the accounts of the parent, Fountain Valley Medical Development Company (the "Company"), a California limited partnership and its wholly owned California corporate subsidiaries, Fountain Valley Regional Hospital and Medical Center (the "Hospital"), MCS Administrative Services, Inc. ("MCS"), Fountain Valley Health Care ("FVHC"), and Fountain Valley Imaging Corporation ("FVI Corp."), Fountain Valley Outpatient Surgery Center ("FVOSC"), a California limited partnership, and Fountain Valley Imaging Center ("FVIC"), a California limited partnership. FVHC was formed in January 1992 and FVI Corp. was formed in June 1993. FVOSC was an operating division of the Company and on January 1, 1992 became a separate legal entity and is now included as a subsidiary. The Company owns a 99% limited partnership interest in FVOSC and FVHC owns the sole 1% general partnership interest in FVOSC. The Company was a 50% partner in FVIC and accounted for this joint venture under the equity method of accounting through March 31, 1992. Effective April 1, 1992, the Company purchased the remaining 50% ownership in FVIC and includes FVIC in consolidation. The Company owns a 99% limited partnership interest in FVIC and FVI Corp. owns the sole 1% general partnership interest in FVIC. All significant intercompany transactions and stockholdings have been eliminated. Third-Party Reimbursement Programs. Approximately 47% and 44% of the gross revenue of the Hospital is derived from patient charges under the Medicare and Medi-Cal programs for 1993 and 1992. The provisions of these agreements stipulate that services are to be reimbursed at prospective rates, daily rates or costs rather than regular rates. The estimated rates or costs are paid to the Hospital at a tentative rate, and final reimbursement for these services is determined after submission of annual cost reports by the Hospital and audits by the program intermediaries. Provision for estimated final reimbursement has been provided for in the financial statements. The Hospital also provides, as an adjustment to its provision for contractual allowances, for the results of prior year audits by agencies administering the programs and agreed upon by the Hospital in the year of the audit. Cost reports have been filed through the 1992 fiscal year and audited through the 1991 fiscal year. Allowances and Uncollectibles. The Hospital records its accounts receivable at their gross amount with an appropriate allowance until collection. Inventory. Inventory is valued at the lower of cost (first-in, first-out basis) or market. Property and Equipment. Property and equipment are stated at cost and are depreciated using accelerated and straight-line methods over the estimated useful lives as follows:
ESTIMATED CLASSIFICATION USEFUL LIVES ----------------------------------------------------------------------- ------------- Land improvements...................................................... 5 to 15 years Buildings and improvements............................................. 3 to 30 years Equipment.............................................................. 3 to 15 years Equipment under capital leases......................................... 5 to 10 years
Maintenance and repairs are charged to expense as incurred. Expenditures which materially increase the value of properties or extend useful lives are capitalized. Deferred Charges. Deferred charges consist primarily of deferred loan fees which are amortized over the life of the related loans. Also included are capitalized costs incurred for the start-up of additional operating units. These costs are amortized over five years. Excess Purchase Price and Intangibles. The excess purchase price of FVIC which is amortized over two years for medical records portion and forty years for excess purchase price over book value relates to the purchase of the remaining 50% ownership purchased in 1992. F-23 89 Net Patient Service Revenue. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Income Taxes. The Company and its subsidiaries file separate federal and California income tax returns. Investment and job tax credits are recorded by the subsidiaries under the flow-through method of accounting as a reduction of the provision for income taxes when the credits are realized. Related party receivables/payables relating to rent, which eliminate on a consolidated basis, are accounted for on a cash basis for income tax purposes. Employee Savings Plan. Under the Employee Savings Plan (the "Plan"), eligible participating employees of the Company may elect to contribute up to 10% of their prior calendar year compensation to a trust for investment in marketable securities. The Company contributes amounts equal to 50% of up to 6% of their respective participants' contributions, which are also invested in the trust fund. The contributions are fully vested to the participants after seven years of credited service. The Company's contribution to the Plan was $576,000 and $445,000 for the years ended October 31, 1993 and 1992. Self-Insurance. The Company provides certain benefits to its employees and others under health and other insurance programs and is self-insured for certain benefits under such programs. In the opinion of management, adequate provision has been made in the financial statements for losses relating to all known and estimated claims as of October 31, 1993 and 1992. MCS Administrative Services, Inc. is the administrator of the program. Reclassifications. Certain amounts in 1992 have been reclassified to conform to current year presentation. The reclassifications have no effect upon net income as previously reported in 1992. Cash and Cash Equivalents. The Company invests excess cash in treasury bills, short term commercial paper and a money market account, all of which mature within 90 days. These are stated at cost, which approximates market. F-24 90 FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS The Company owns and operates a 289 bed for profit acute care hospital, medical office buildings, an outpatient surgery center, a transitional care unit and a geopsychiatric unit in the Southern California area. Revenues of the Company are derived from hospital operations and suite rentals within the medical office buildings. 2. LONG-TERM DEBT
OCTOBER 31, ----------------- 1993 1992 ------- ------- (IN THOUSANDS) First trust deed collateralized by original hospital building, land, equipment, inventory and accounts receivable and assignment of hospital stock; interest payable quarterly based on the "alternate base rate III," as defined within the Credit Agreement; the rate at October 31, 1993 was 6%. A) Term Loan: Principal balance due in monthly installments of $291,667 for year ending October 31, 1994; $416,667 for year ending October 31, 1995; $633,333 for years ending October 31, 1996 and 1997; $650,000 for nine months ending July 31, 1998 and last installment due July 31, 1998. Interest at Alternate Base Rate III plus 1% per annum.................... $33,000 $36,500 B) Revolving Facility: Principal of up to $15,000,000 due November 1, 1995. Interest at Alternate Base Rate III plus .75% per annum.................. 10,000 10,000 Note payable, payable in quarterly installments of $166,667 plus interest at 6% due January 1, 1995................................................ 833 1,500 Notes payable, collateralized by equipment, payable $87,000 monthly, including interest of approximately 10% due at various dates through 1997..................................................................... 2,302 2,955 First trust deeds collateralized by medical office buildings, payable $91,000 monthly, including interest at 12.125%, due November 1, 1994..... 8,276 9,531 Note payable, collateralized by equipment, payable $16,000 monthly, principal only, due in 1993.............................................. -- 97 ------- ------- 54,411 60,583 Less current portion....................................................... 5,121 6,306 ------- ------- $49,290 $54,277 ======= =======
On August 20, 1990, the Company obtained a $50,000,000 senior secured revolving credit facility (the "Revolving Facility"), of which $40,000,000 converted to a term loan (the "Term Loan") upon the execution of a Second Amendment to the Credit Agreement dated October 31, 1991, with monthly principal payments commencing November 1, 1991 through July 31, 1998. The Revolving Commitment increased from $10,000,000 to $15,000,000 and is due November 1, 1995. The Company must pay a commitment fee on any unused portion of the revolving commitment at a rate of 1/2 of 1% per annum. As part of the Credit Agreement, the Company is required to maintain certain financial and other covenants including a restriction on the amount of distributions made to the partners. As of October 31, 1993 and for the year then ended, the Company was not in compliance with two of these covenants. The Company received a bank waiver for the two covenants they were not in compliance with at October 31, 1993 and for the year then ended. F-25 91 FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Principal maturities on long-term debt are as follows:
Year ending October 31, (IN THOUSANDS) 1994........................................................ $ 5,121 1995........................................................ 14,094 1996........................................................ 18,083 1997........................................................ 7,802 1998........................................................ 9,311 -------------- Total........................................ $ 54,411 ===========
3. CAPITAL LEASES The Company is currently leasing various pieces of equipment under capital leases due on various dates through 1998. Approximately $11,840,000 and $9,200,000 of equipment has been capitalized, and $6,980,000 and $5,690,000 of amortization has been taken as of October 31, 1993 and 1992. The following is a schedule by years of future minimum lease payments under the capital leases, together with the present value of the net minimum lease payments as of October 31, 1993:
Year ending October 31, (IN THOUSANDS) 1994........................................................ $2,043 1995........................................................ 1,468 1996........................................................ 954 1997........................................................ 765 1998........................................................ 693 Thereafter.................................................. 30 ------- Total net minimum lease payments............................ 5,953 Less amount representing interest........................... 758 ------- Present value of net minimum lease payments................. 5,195 Less current portion of obligations under capital leases.... 1,673 ------- Obligations under capital leases............................ $3,522 ===========
4. PROVISION FOR INCOME TAXES Effective November 1, 1992, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." As permitted under the new rule, prior years' financial statements have not been restated. The adoption of the new standard had no effect on the tax provision for 1993. (The cumulative effect of this adoption was a $1,368,000 decrease in net income.) F-26 92 FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision for federal and state income taxes consists of the following:
1993 1992 ------ ----- (IN THOUSANDS) Current Federal............................................. $1,059 $ 263 State............................................... 339 180 ------ ----- 1,398 443 ------ ----- Deferred Federal............................................. (543) (280) State............................................... (101) (50) ------ ----- (644) (330) ------ ----- $ 754 $ 113 ====== =====
The variation in the customary relationship between income tax expense and pretax accounting income arises because the Company consists of partnerships and corporations and therefore income taxes are paid by the individual partners and corporations. The tax effects of the significant temporary differences which comprise the deferred tax assets and liabilities at October 31, 1993 are as follows: ASSETS Provision for doubtful accounts................................ $ 476 Accrued rent................................................... 169 ------ Gross deferred tax assets........................................ 645 ------ LIABILITIES Section 481.................................................... 3,753 Medicare settlement............................................ 443 Depreciation................................................... 333 ------ Gross deferred tax liabilities................................... 4,529 ------ $3,884 ======
5. PARTNERSHIP UNITS HELD FOR RESALE AND NOTES RECEIVABLE FROM PARTNERS FOR SALE OF UNITS In February 1985, the Partnership purchased certain partnership units from existing partners. The Partnership initially paid $4,431,000 in February 1985 for approximately 5% of the units then outstanding. Through October 31, 1993, the Company purchased a total of approximately $6,131,000 partnership units and resold a total of approximately $3,545,000 partnership units. All resales have been at the same per unit price as the Partnership paid in February 1985. The majority of the units were sold in exchange for notes receivable from the partners. The notes receivable from partners were approximately $2,162,000 and $2,361,000 as of October 31, 1993 and 1992 and are recorded as a reduction of equity. 6. CONTINGENCIES The Company and Hospital maintain a $500,000 per occurrence medical malpractice insurance policy. Occurrence basis insurance covers claims that occur during the policy term regardless of when the claim was reported. F-27 93 FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Additionally, the Company and Hospital have claims-made medical malpractice insurance policies which cover the Company and Hospital for claims from $500,000 to $20,000,000 with 7-year prepaid discovery. Claims-made insurance covers only those claims covered by the policy and reported to the insurance carrier during the policy term. As of October 31, 1993, the Hospital has no malpractice loss accruals. The Hospital and the Company have a deductible reserve exposure of up to $247,000 for deductible liability on claims made, but not settled as of October 31, 1993. During a prior year, the Company was joined by 118 other hospitals, as well as another organization, in an action which was originally against four workers' compensation insurance carriers and three other defendants alleging conspiracy to suppress prices paid by workers' compensation insurance companies. The action and a subsequent counterclaim between the defendants were settled in December 1993. The settlement resulted in no liability to the Company. 7. LEASE REVENUE The Company's principle leasing activities consist of renting suites in four medical office buildings. Lease terms for the medical office buildings range from 1 to 5 years. Rental income for the years ended October 31, 1993 and 1992 was approximately $5,144,000 and $6,048,000. This rental income includes the rent from the regional care center ("RCC") whose lease was terminated effective June 1, 1992. The following is a schedule of future minimum lease revenue for the four medical office building leases:
Year ending October 31, (IN THOUSANDS) 1994........................................................ $ 3,953 1995........................................................ 3,287 1996........................................................ 2,389 1997........................................................ 1,554 1998........................................................ 621 -------------- Total............................................. $ 11,804 ===========
The Company leased to the RCC under a long-term lease agreement which the tenant terminated effective June 1, 1992. An agreement was arrived at in which the tenant agreed to 1) pay thirteen months additional rent and expenses from the date of termination, 2) leave all the equipment valued at $206,000 to the Company, and 3) leave all the leasehold improvements valued at $1,135,000 to the Company. The Company agreed to return to the lessee any rents paid on the RCC during the thirteen month period if a nonrelated party rented the facility, as adjusted for various expenses to the Company. Additionally, a restricted cash account of approximately $583,000 was established with a portion of the cash paid by the lessee in the settlement in the event the facility was leased during the thirteen month period. As the RCC was not leased during the thirteen month period, the restricted cash became unrestricted during the year ended October 31, 1993. The Company recorded deferred revenue and recognized the rent and value of the leasehold improvements ratably on a monthly basis over the thirteen month period which expired during the year ended October 31, 1993. Rent is included in medical building rent and other revenue. The leasehold improvements and equipment value is included in nonoperating income. F-28 94 FOUNTAIN VALLEY MEDICAL DEVELOPMENT COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
OCTOBER 31, ----------------- 1993 1992 ------ ------ (IN THOUSANDS) Cash paid during the period for: Interest (net of interest capitalized of $25 in 1993 and $17 in 1992)......................................................... $5,001 $5,838 Income taxes..................................................... $ 743 $ 480
Schedule of non-cash investing and financing activities (in thousands): Capital lease obligations of approximately $2,178 and $1,522 were incurred when the Company entered into leases for new equipment in 1993 and 1992. Lease settlement of $1,135,000 in leasehold improvements and $206,000 in equipment. Fifty percent interest in FVIC purchased included a note payable of $1,834,000. F-29 95 - ------------------------------------------------------ - ------------------------------------------------------ NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. --------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary..................... 3 Investment Considerations.............. 10 Use of Proceeds........................ 14 Capitalization......................... 16 Selected Historical Financial Data..... 17 Selected Operating Statistics.......... 21 Business............................... 22 Properties............................. 27 Management............................. 29 Description of the Notes............... 33 Underwriting........................... 50 Legal Matters.......................... 50 Experts................................ 50 Available Information.................. 51 Incorporation of Certain Documents by Reference............................ 51 Index to Financial Statements.......... 53
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ $100,000,000 [Graphic] % SENIOR SUBORDINATED NOTES DUE 2004 --------------------- PROSPECTUS --------------------- MERRILL LYNCH & CO. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SALOMON BROTHERS INC CITICORP SECURITIES, INC. , 1994 - ------------------------------------------------------ - ------------------------------------------------------ 96 APPENDIX TO ELECTRONIC FORMAT DOCUMENT -------------------------------------- A map displaying the approximate geographic location of the Company's hospitals is displayed on page 2 of the prospectus. This map appears in the paper format of the document and not in this electronic filing. 97 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered, other than underwriting discounts and commissions. All of the amounts shown are estimated except the SEC registration fee and the NASD filing fee. The Company will bear all of such expenses. SEC registration fee.............................................................. $ 34,483 NASD filing fee................................................................... 10,500 Rating Agency Fees................................................................ * Blue sky fees and expenses........................................................ * Printing and engraving expenses................................................... * Legal fees and expenses........................................................... * Accounting fees and expenses...................................................... * Trustee fees...................................................................... * Miscellaneous..................................................................... * -------- Total................................................................... $ * ========
- --------------- * To be supplied by amendment. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law ("Delaware Law") provides generally and in pertinent part that a Delaware corporation may indemnify its directors and officers against expenses, judgments, fines, and settlements actually and reasonably incurred by them in connection with any civil suit or action, except actions by or in the right of the corporation, or any administrative or investigative proceeding if, in connection with the matters in issue, they acted in good faith and in a manner they reasonably believed to be in, or not opposed to, the best interests of the corporation, and in connection with any criminal suit or proceeding, if in connection with the matters in issue, they had no reasonable cause to believe their conduct was unlawful. Section 145 further provides that, in connection with the defense or settlement of any action by or in the right of the corporation, a Delaware corporation may indemnify its directors and officers against expenses actually and reasonably incurred by them if, in connection with the matters in issue, they acted in good faith, in a manner they reasonably believed to be in, or not opposed to, the best interest of the corporation, and without negligence or misconduct in the performance of their duties to the corporation. Section 145 further permits a Delaware corporation to grant its directors and officers additional rights of indemnification through by-law provisions and otherwise. Article Seven of the Restated Certificate of Incorporation of the Company and Article VI of the By-Laws of the Company provide that the Company shall indemnify its directors and officers to the fullest extent permitted by Delaware Law. The Company has entered into indemnification agreements with each of its directors and executive officers. Such indemnification agreements are intended to provide a contractual right to indemnification, to the maximum extent permitted by law, for expenses (including attorneys' fees) judgments, penalties, fines, and amounts paid in settlement actually and reasonably incurred by the person to be indemnified in connection with any proceeding (including, to the extent permitted by applicable law, any derivative action) to which they are, or are threatened to be made, a party by reason of their status in such positions. Such indemnification agreements do not change the basic legal standards for indemnification set forth under Delaware Law or the Restated Certificate of Incorporation of the Company. Such agreements are intended to be in furtherance, and not in limitation of, the general right to indemnification provided in the Company's Restated Certificate of Incorporation. In addition, pursuant to an Indemnification Trust Agreement, the Company has deposited with Texas Commerce Bank National Association, as trustee under such agreement, $1,450,000 in cash and has agreed to deposit $1,750,000 within two business days following a II-1 98 change in control of the Company in support of the Company's obligations under the foregoing indemnification agreements. Section 102(b)(7) of the Delaware law provides that a certificate of incorporation may contain a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware Law (relating to liability for unauthorized acquisitions or redemptions of, or dividends on, capital stock) or (iv) for any transaction from which the director derived an improper personal benefit. Article Eight of the Company's Restated Certificate of Incorporation contains such a provision. Summit's Articles of Incorporation, as amended, state that Summit is authorized to provide indemnification of agents (as defined in Section 317 of the California General Corporation Law) for a breach of duty to Summit and its shareholders through by-law provisions or through agreements with agents, or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California General Corporation Law, subject to limits on such excess indemnification set forth in Section 204 of the California General Corporation Law. The general effect of Section 317 of the California General Corporation Law and Summit's By-laws, as amended, is to provide the indemnification of its agents to the fullest extent permissible under California law. The rights to indemnification provided by Section 317 of the California General Corporation Law and by the By-Laws are not exclusive of any other right which any person may have or acquire under a statute, by-law, agreement, vote of shareholders or of disinterested directors or otherwise. The officers and directors of Summit are parties to the indemnification agreements referred to above. Such indemnification agreements do not change the basic legal standards for indemnification set forth under California Law or Summit's Articles of Incorporation. Such agreements are intended to be in furtherance, and not in limitation of, the general right to indemnification provided in Summit's Articles of Incorporation. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling either of the Co-Obligors pursuant to the foregoing provisions, the Co-Obligors have been informed that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. The form of Purchase Agreement, filed as Exhibit 1.1 to this Registration Statement, obligates the underwriters to indemnify the Co-Obligors, their officers who sign the Registration Statement and directors, and persons who control either of the Co-Obligors under certain circumstances. The foregoing summaries are necessarily subject to the complete text of the statutes, the Company's Restated Certificate of Incorporation, the Company's By-Laws, Summit's Articles of Incorporation, Summit's By-Laws and the agreements referred to above and are qualified in their entirety by reference thereto. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- ------------------------------------------------------------------------------------ 1.1 -- Form of Purchase Agreement.** 4.1 -- Indenture relating to the 12 1/4% Notes, dated as of May 15, 1992, by and among OrNda HealthCorp and U.S. Trust Company of Texas, N.A. (the "OrNda Trustee")(1) 4.2 -- First Supplemental Indenture relating to the 12 1/4% Notes, dated as of April 19, 1994, by and among OrNda HealthCorp, Summit Health Ltd. and the OrNda Trustee.* 4.3 -- First Supplemental Indenture relating to the 10 1/4% Notes, dated as of April 19, 1994, by and among OrNda HealthCorp, AHM Acquisition Co., Inc. and the AHM Trustee.*
II-2 99
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- ------------------------------------------------------------------------------------ 4.4 -- Form of Indenture relating to the Notes between OrNda HealthCorp, Summit Health Ltd. and NationsBank of Tennessee, N.A., as Trustee.* 5 -- Opinion of Ronald P. Soltman, Esq. (including the consent of such counsel) regarding legality of securities being offered.** 12 -- Statement re Computation of Ratio of Earnings to Fixed Charges.* 23.1 -- Consents of Independent Auditors.* 23.2 -- Consent of Ronald P. Soltman, Esq. (included as part of opinion filed pursuant to Exhibit 5 hereof).** 24.1 -- Original Powers of Attorney of certain directors and officers of the Company authorizing Keith B. Pitts and Ronald P. Soltman to sign the Registration Statement and amendments thereto on their behalf. (See Signature Page)* 24.2 -- Certified resolutions of the Company's Board of Directors relating to the appointment of Ronald P. Soltman and Keith B. Pitts as attorney-in-fact.* 25 -- Statement of Eligibility and Qualification of Trustee on Form T-1 of NationsBank of Tennessee, N.A.**
- --------------- * filed herewith ** to be filed by amendment (1) Incorporated by reference to exhibits filed with the Registrant's Report on Form 8-K dated as of May 28, 1992. ITEM 17. UNDERTAKINGS. (a) The undersigned Registrants hereby undertake that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrants' annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrants pursuant to the foregoing provisions, the DGCL, the Amended and Restated Certificate of Incorporation and the Bylaws, or otherwise, the Registrants have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in such Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by the Registrants of expenses incurred or paid by a director, officer or controlling person of the Registrants in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrants will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in such Securities Act and will be governed by the final adjudication of such issue. (c) The Registrants hereby undertake that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of Prospectus filed by the Registrants pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 100 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement on Form S-3 or amendment thereto to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Nashville, State of Tennessee, on the 20th day of July, 1994. ORNDA HEALTHCORP By: /s/ CHARLES N. MARTIN, JR. --------------------------- Charles N. Martin, Jr. Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Keith B. Pitts and Ronald P. Soltman, Esq. and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons on the 20th day of July, 1994 in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - ----------------------------------------------- ------------------------------ -------------- /s/ CHARLES N. MARTIN, JR. Chairman of the Board and July 20, 1994 - ----------------------------------------------- Chief Executive Officer Charles N. Martin, Jr. (Principal Executive Officer) /s/ DONALD J. AMARAL President, Chief Operating July 20, 1994 - ----------------------------------------------- Officer and Director Donald J. Amaral /s/ KEITH B. PITTS Executive Vice President and July 20, 1994 - ----------------------------------------------- Chief Financial Officer Keith B. Pitts (Principal Financial Officer) /s/ BRUCE J. COLBURN Senior Vice July 20, 1994 - ----------------------------------------------- President -- Finance and Bruce J. Colburn Chief Accounting Officer (Principal Accounting Officer) /s/ YVONNE V. CLIFF Director July 20, 1994 - ----------------------------------------------- Yvonne V. Cliff /s/ RICHARD A. GILLELAND Director July 20, 1994 - ----------------------------------------------- Richard A. Gilleland
II-4 101
SIGNATURE TITLE DATE - ----------------------------------------------- ------------------------------ -------------- /s/ LEONARD GREEN Director July 20, 1994 - ----------------------------------------------- Leonard Green /s/ PETER A. JOSEPH Director July 20, 1994 - ----------------------------------------------- Peter A. Joseph /s/ PAUL S. LEVY Director July 20, 1994 - ----------------------------------------------- Paul S. Levy /s/ ANGUS C. LITTLEJOHN, JR. Director July 20, 1994 - ----------------------------------------------- Angus C. Littlejohn, Jr. /s/ JOHN F. NICKOLL Director July 20, 1994 - ----------------------------------------------- John F. Nickoll /s/ JOHN J. O'SHAUGHNESSY Director July 20, 1994 - ----------------------------------------------- John J. O'Shaughnessy Director - ----------------------------------------------- M. Lee Pearce, M.D.
II-5 102 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement on Form S-3 or amendment thereto to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Nashville, State of Tennessee, on the 20th day of July, 1994. SUMMIT HEALTH LTD. By: /s/ CHARLES N. MARTIN, JR. ------------------------------ Charles N. Martin, Jr. Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Keith B. Pitts and Ronald P. Soltman, Esq. and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - ----------------------------------------------- ------------------------------- -------------- /s/ CHARLES N. MARTIN, JR. Chairman of the Board and Chief July 20, 1994 - ----------------------------------------------- Executive Officer (Principal Charles N. Martin, Jr. Executive Officer) /s/ DONALD J. AMARAL President, Chief Operating July 20, 1994 - ----------------------------------------------- Officer and Director Donald J. Amaral /s/ KEITH B. PITTS Executive Vice President and July 20, 1994 - ----------------------------------------------- Chief Financial Officer and Keith B. Pitts Director (Principal Financial Officer) /s/ BRUCE J. COLBURN Senior Vice July 20, 1994 - ----------------------------------------------- President -- Finance and Bruce J. Colburn Chief Accounting Officer and Director (Principal Accounting Officer)
II-6 103 INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE - ------ ---------------------------------------------------------------------- ------------- 1.1 -- Form of Purchase Agreement.** 4.1 -- Indenture relating to the 12 1/4% Notes, dated as of May 15, 1992, by and among OrNda HealthCorp and U.S. Trust Company of Texas, N.A. (the "OrNda Trustee")(1) 4.2 -- First Supplemental Indenture relating to the 12 1/4% Notes, dated as of April 19, 1994, by and among OrNda HealthCorp, Summit Health Ltd. and the OrNda Trustee.* 4.3 -- First Supplemental Indenture relating to the 10 1/4% Notes, dated as of April 19, 1994, by and among OrNda HealthCorp, AHM Acquisition Co., Inc. and the AHM Trustee.* 4.4 -- Form of Indenture relating to the Notes between OrNda HealthCorp, Summit Health Ltd. and NationsBank of Tennessee, N.A., as Trustee.* 5 -- Opinion of Ronald P. Soltman, Esq. (including the consent of such counsel) regarding legality of securities being offered.** 12 -- Statement re Computation of Ratio of Earnings to Fixed Charges.* 23.1 -- Consents of Independent Auditors.* 23.2 -- Consent of Ronald P. Soltman, Esq. (included as part of opinion filed pursuant to Exhibit 5 hereof).** 24.1 -- Original Powers of Attorney of certain directors and officers of the Company authorizing Keith B. Pitts and Ronald P. Soltman to sign the Registration Statement and amendments thereto on their behalf. (See Signature Page)* 24.2 -- Certified resolutions of the Company's Board of Directors relating to the appointment of Ronald P. Soltman and Keith B. Pitts as attorney-in-fact.* 25 -- Statement of Eligibility and Qualification of Trustee on Form T-1 of NationsBank of Tennessee, N.A.**
- --------------- * Filed herewith ** To be filed by amendment (1) Incorporated by reference to exhibits filed with the Registrant's Report on Form 8-K dated as of May 28, 1992. EX-4.2 2 SUPPLEMENTAL INDENTURE 1 Exhibit 4.2 ________________________________________________________________________________ ORNDA HEALTHCORP SUMMIT HEALTH LTD. AND U.S. TRUST COMPANY OF TEXAS, N.A. Trustee _________________ FIRST SUPPLEMENTAL INDENTURE Dated as of April 19, 1994 _________________ Supplemental to Indenture dated as of May 15, 1992 between OrNda HealthCorp and U.S. Trust Company of Texas, N.A., as Trustee, relating to OrNda HealthCorp's $400,000,000 principal amount of 12-1/4% Senior Subordinated Notes due 2002 ________________________________________________________________________________ 2 FIRST SUPPLEMENTAL INDENTURE FIRST SUPPLEMENTAL INDENTURE, dated as of April 19, 1994, among, ORNDA HEALTHCORP, a corporation duly organized and existing under the laws of the State of Delaware (the "Issuer"), SUMMIT HEALTH LTD., a corporation duly organized and existing under the laws of the State of California (the "Co-Obligor") and U.S. TRUST COMPANY OF TEXAS, N.A., a national banking association duly organized and existing under the laws of the United States (the "Trustee"), as Trustee under the Indenture hereinafter mentioned. WITNESSETH WHEREAS, the Issuer heretofore executed and delivered to the Trustee an Indenture dated as of May 15, 1992 (the "Indenture"), providing for the issuance of $400,000,000 principal amount of the Issuer's 12-1/4% Senior Subordinated Notes due 2002 (the "Securities"); WHEREAS, Section 10.01 of the Indenture, "Supplemental Indentures Without Consent of Holders", provides that provisions of the Indenture may be amended or supplemented without the consent of the Holders with respect to certain matters therein identified; WHEREAS, the Co-Obligor desires in and by the First Supplemental Indenture to expressly assume with the Issuer the obligation to pay the principal and interest on the Securities; WHEREAS, all conditions necessary to authorize the execution and delivery of this First Supplemental Indenture and to make this First Supplemental Indenture valid and binding have been complied with or have been done or performed; NOW, THEREFORE, in consideration of the above premises, and in order to comply with the terms of Section 10.01(d) of the Indenture, the Issuer covenants with the Trustee as follows: 3 ARTICLE ONE DEFINITIONS Section 1.01. For all purposes of the Indenture and this First Supplemental Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the words "herein", "hereof" and "hereunder" and other words of similar import refer to the Indenture and this First Supplemental Indenture as a whole and not to any particular Article, Section or subdivision; and (b) capitalized terms used but not defined herein shall have the meanings assigned to them in the Indenture. ARTICLE TWO AMENDMENTS Section 2.01. Section 1.01 of the Indenture is hereby amended to include the definition of "Co-Obligor" which will follow the definition of "Consolidated Tax Expense" and will state: ""Co-Obligor" means Summit Health Ltd., a corporation duly organized under the laws of the State of California." Section 2.02. The definition of Senior Debt in Section 101 of the Indenture shall be amended by adding the following sentence at the end thereof: "For the purpose of determining the obligations of the Co-Obligor to make payments with respect to the Securities and the relative rights of any holder of Senior Debt and any holder of a Security against the Co-Obligor and for no other purpose, each reference to "Issuer" in the definition of "Senior Debt" contained in this Indenture shall be deemed to be a reference to "Co-Obligor" and each reference to "Senior Debt" in any provision in this Indenture or in any Security shall be deemed to be a reference to such definition as so modified." 2 4 Section 2.03. Section 4.01 of the Indenture is hereby amended to read, in its entirety, the following: "Section 4.01. Payment of Securities. The Issuer or the Co-Obligor shall pay the principal of and interest on the Securities on the dates and in the manner provided in the Securities. An installment of principal or interest shall be considered paid on the due date if the Trustee or Paying Agent (other than the Issuer, the Co- Obligor,any Subsidiary of the Issuer or the Co-Obligor, or any Affiliate of any thereof) holds on that date money, in immediately available funds, deposited for and sufficient to pay the installment. The Issuer or the Co-Obligor shall pay interest on overdue principal at the rate borne by the Securities and they shall pay interest on overdue installments of interest at the same rate, to the extent lawful. The obligations of each of the Issuer and the Co-Obligor under this Section shall to be joint and several." Section 2.04. Section 9.01 of the Indenture shall be amended by adding the following new paragraph at the end thereof: "Co-Obligor agrees to be bound by and comply with the terms and conditions of this Article Nine as if each reference to "Issuer" in this Article Nine were a reference to "Co-Obligor"." ARTICLE THREE MISCELLANEOUS Section 3.01. All of the terms and conditions of the Indenture shall remain in full force and effect. Section 3.02. The Trustee accepts the modification of the Indenture effected by this First Supplemental Indenture, but only upon the terms and conditions set forth in the Indenture. Without limiting the generality of the foregoing, the Trustee assumes no responsibility for the correctness of the recitals 3 5 herein contained, which shall be taken as the statements of the Issuer. The Trustee makes no representation and shall have no responsibility as to the validity of this First Supplemental Indenture. Section 3.03. In case any provision in this First Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions of this First Supplemental Indenture or of the Indenture shall not in any way be affected or impaired thereby. Section 3.04. This First Supplemental Indenture shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of laws. Section 3.05. This First Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but such counterparts shall together constitute but one and the same instrument. 4 6 IN WITNESS WHEREOF, the Issuer, the Co-Obligor and the Trustee have caused their names to be signed hereto by their respective officers thereunder duly authorized and their respective corporate seals, duly attested, to be hereunto duly affixed, all as of the day and the year first above written. ORNDA HEALTHCORP [SEAL] By: /s/ Keith B. Pitts --------------------------------- Name: Keith B. Pitts Title: Executive VP & CFO Attest: /s/ James H. Johnson - -------------------------------------------- SUMMIT HEALTH LTD. [SEAL] By: /s/ Keith B. Pitts --------------------------------- Name: Keith B. Pitts Title: Executive VP & CFO Attest: /s/ James H. Johnson - -------------------------------------------- U.S. TRUST COMPANY OF TEXAS, N.A. [SEAL] By: /s/ Gerard F. Facendola -------------------------------- Name: Gerard F. Facendola Title: Vice President Attest: /s/ Joe Stith - -------------------------------------------- 5 7 STATE OF NEW YORK ) ss.: COUNTY OF NEW YORK ) On the 19th day of April, 1994, before me personally came Keith B. Pitts ____________________________________________, to me known, who, being duly Executive VP & CEO sworn, did depose and say that he is the____________________________ of ORNDA HEALTHCORP, one of the corporations described in and which executed the foregoing instrument; that the seal affixed to said instrument is such corporate seal; that is was so affixed by the authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. /s/ Daniel Weisberg ______________________________________ Daniel Weisberg Notary Public, State of New York STATE OF NEW YORK ) ss.: COUNTY OF NEW YORK ) On the 19th day of April, 1994, before me personally came Keith B. Pitts _______________________________________________, to me known, who, being duly Executive VP & CFO sworn, did depose and say that he is the _________________________ of SUMMIT HEALTH LTD., one of the corporations describe in and which executed the foregoing instrument; that the seal affixed to said instrument is such corporate seal; that is was so affixed by the authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. /s/ Daniel Weisberg ______________________________________ Daniel Weisberg Notary Public, State of New York 6 8 STATE OF TEXAS ) ss.: COUNTY OF DALLAS ) On the 13th day of April, 1994, before me personally came GERALD F. FACENDOCA, to me known, who, being duly sworn, did depose and say that he is the VICE PRESIDENT of U.S. TRUST COMPANY OF TEXAS, N.A., one of the corporations describe in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that is was so affixed by the authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. /s/ A. M. Hayes ---------------- (SEAL) A. M. HAYES NOTARY PUBLIC State of Texas Comm. Exp. 12-31-97 7 EX-4.3 3 SUPPLEMENTAL INDENTURE 1 - -------------------------------------------------------------------------------- Exhibit 4.3 AMERICAN HEALTHCARE MANAGEMENT, INC. ORNDA HEALTHCORP AHM ACQUISITION CO., INC. AND NATIONSBANK OF TENNESSEE, NATIONAL ASSOCIATION Trustee ----------------- FIRST SUPPLEMENTAL INDENTURE Dated as of April 19, 1994 ----------------- Supplemental to Indenture dated as of July 28, 1993 between American Healthcare Management, Inc. and NationsBank of Tennessee, National Association, as Trustee, relating to American Healthcare Management, Inc.'s $100,000,000 principal amount of 10% Senior Subordinated Notes due 2003 - -------------------------------------------------------------------------------- 2 FIRST SUPPLEMENTAL INDENTURE FIRST SUPPLEMENTAL INDENTURE, dated as of April 19, 1994, among AMERICAN HEALTHCARE MANAGEMENT, INC., a corporation duly organized and existing under the laws of the State of Delaware ("AHM"), ORNDA HEALTHCORP, a corporation duly organized and existing under the laws of the State of Delaware (the "Company"), AHM ACQUISITION CO., INC., a corporation duly organized and existing under the laws of the State of Delaware (the "Co-Obligor") and NATIONSBANK OF TENNESSEE, NATIONAL ASSOCIATION, a national banking association duly organized and existing under the laws of the United States (the "Trustee"), as Trustee under the Indenture hereinafter mentioned. WITNESSETH WHEREAS, AHM heretofore executed and delivered to the Trustee an Indenture dated as of July 28, 1993 (the "Indenture"), providing for the issuance of $100,000,000 principal amount of AHM's 10% Senior Subordinated Notes due 2003 (the "Securities"); WHEREAS, in connection with the merger of AHM with and into the Company pursuant to an Agreement and Plan of Merger between the Company, AHM Acquisition Co., Inc. and AHM, dated as of November 18, 1993 as amended and restated as of January 14, 1994, the Company assumed and became liable for, by operation of law, at the closing of such merger on the date hereof, all of AHM's debts, liabilities, duties and obligations, including AHM's obligations under the Indenture; WHEREAS, the Company desires in and by this First Supplemental Indenture, pursuant to and contemplated by Sections 801 and 901(1) of the Indenture, to expressly assume all the obligations of AHM under the Securities and the Indenture; WHEREAS, the Co-Obligor desires in and by the First Supplemental Indenture to expressly assume with the Company the due and punctual payment of the principal and interest on the Securities; WHEREAS, Section 901 of the Indenture, "Supplemental Indentures Without Consent of Holders", provides that provisions of the Indenture may 3 be amended or supplemented without the consent of the Holders with respect to certain matters therein identified; WHEREAS, Section 902 of the Indenture, "Supplemental Indentures with Consent of Holders", provides that provisions of the Indenture may be amended or supplemented with the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities with respect to matters therein identified; WHEREAS, the Company and Holders of a majority in aggregate principal amount of the outstanding Securities have entered into a Waiver and Consent Agreement dated as of February 3, 1994 (the "Waiver and Consent Agreement") pursuant to which such Holders consented to the amendments of the Indenture set forth in Article Four hereof and the waiver of Section 1009 of the Indenture as described in the Waiver and Consent Agreement, and the Company agreed to pay interest on the Securities at the rate of 10-1/4% per annum from and after the date hereof. WHEREAS, all conditions necessary to authorize the execution and delivery of this First Supplemental Indenture and to make this First Supplemental Indenture valid and binding have been complied with or have been done or performed; NOW, THEREFORE, in consideration of the above premises, and in order to comply with the terms of Sections 801 and 901(1) of the Indenture and to effect the applicable provisions of the Waiver and Consent Agreement, the Company covenants with the Trustee as follows: ARTICLE ONE DEFINITIONS Section 1.01. For all purposes of the Indenture and this First Supplemental Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the words "herein", "hereof" and "hereunder" and other words of similar import refer to the Indenture and this First Supplemental Indenture as a whole and not to any particular Article, Section or subdivision; and 2 4 (b) capitalized terms used but not defined herein shall have the meanings assigned to them in the Indenture. ARTICLE TWO ASSUMPTION OF CERTAIN OBLIGATIONS BY THE COMPANY Section 2.01. The Company and the Co-Obligor hereby expressly and unconditionally assumes the due and punctual payment of the principal of (and premium, if any) and interest on all the Securities and the Company hereby expressly and unconditionally assumes the performance of every covenant of the Indenture to be performed or observed by AHM as if the Company had been originally named in the Indenture as the "Company" (as such term is defined therein). ARTICLE THREE REPRESENTATIONS OF THE COMPANY Section 3.01. The Company hereby represents and warrants to the Trustee and to the Holders of the Notes as follows: (a) The Company is a corporation organized and existing under the laws of the State of Delaware. (b) On the date hereof, AHM has been merged with and into the Company. (c) Immediately after giving effect to the aforementioned merger, no Event of Default and no event which, after notice or lapse of time, or both, would become an Event of Default has happened and is continuing. ARTICLE FOUR AMENDMENTS Section 4.01. The definition of Consolidated Cash Flow Ratio in Section 101 of the Indenture shall be amended to read, in its entirety, as follows: 3 5 ""Consolidated Cash Flow Ratio" means for any period the ratio of (i) Consolidated Cash Flow Available for Fixed Charges of a Person for such period to (ii) the sum of (A) Consolidated Interest Expense of such Person for such period plus (B) the annual interest expense (including the amortization of debt discount and all items which would be included in Consolidated Interest Expense) with respect to any Debt Incurred or proposed to be Incurred by such Person or its Consolidated Subsidiaries during such period or since the end of such period to the extent not included in Clause (ii)(A) calculated as if incurred at the beginning of such period (variable rate debt shall be assumed to bear interest at the rate in effect or, in the case of proposed Debt, which would be in effect, at the time of calculation) minus (C) Consolidated Interest Expense of such Person with respect to any Debt that is no longer outstanding, or will no longer be outstanding as a result of the Incurrence of the Debt proposed to be Incurred, in each case to the extent included in Clause (ii) (A). The Consolidated Cash Flow Ratio shall be calculated on the assumption that the transactions or series of transactions pursuant to which any Debt had been Incurred during such period or since the end of such period (including any acquisition of the stock or assets of another Person consummated in connection with the Incurrence of such Debt) shall have occurred on the first day of such period." Section 4.02. Section 101 of the Indenture is hereby amended to include the definition of "Co-Obligor" which will follow the definition of "Controlling Person" and will state: ""Co-Obligor" means AHM Acquisition Co., Inc., a corporation duly organized under the laws of the State of Delaware." Section 4.03. The definition of Senior Debt in Section 101 of the Indenture shall be amended by adding the following sentence at the end thereof: "For the purpose of determining the obligations of the Co-Obligor to make payments with respect to the Securities and the relative rights of any holder of Senior Debt and any holder of a Security against the Co-Obligor and for no other purpose, each reference to "Company" in the definition of " Senior Debt" contained in this Indenture shall be deemed to be a reference to "Co-Obligor" and 4 6 each reference to "Senior Debt" in any provision in this Indenture or in any Security shall be deemed to be a reference to such definition as so modified." Section 4.04. Section 202 of the Indenture is hereby amended to read, in its entirety, the following: "Section 202. Form of Face of Security. ORNDA HEALTHCORP 10-1/4% Senior Subordinated Note due 2003 No. __________ $__________ OrNda HealthCorp, a corporation duly organized and existing under the laws of Delaware (herein called the "Company," which term includes any successor Person under the Indenture hereinafter referred to), or AHM Acquisition Co., Inc., a corporation duly organized and existing under the laws of Delaware (herein called the "Co-Obligor"), for value received, hereby promises to pay to ________________, or registered assigns, the principal sum of _______________ Dollars on August 1, 2003, and to pay interest thereon from July 28, 1993, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on February 1 and August 1 in each year, commencing February 1, 1994, at the rate of 10% per annum and from and after the date of the execution and delivery of the First Supplemental Indenture, at the rate of 10-1/4% per annum, until the principal hereof is paid or made available for payment, and (to the extent that the payment of such interest shall be legally enforceable) at the same rate per annum on any overdue principal and premium and on any overdue installment of interest until paid as specified on the reverse hereof. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of 5 7 business on the Regular Record Date for such interest, which shall be January 15 or July 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which this Security may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Principal of (and premium, if any) and interest on this Security will be payable at the Corporate Trust Operations Office and at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, The City of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company or the Co-Obligor, payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. Interest on this Security shall be computed on the basis of a 360-day year comprised of twelve 30-day months. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. 6 8 IN WITNESS WHEREOF, the Company and the Co-Obligor have caused this instrument to be duly executed by the manual or facsimile signatures of its authorized officers and its corporate seal to be affixed or reproduced hereon. Date of Authentication: ORNDA HEALTHCORP By: _________________________ (SEAL) AHM ACQUISITION CO., INC. By: _________________________ (SEAL) This is one of the Securities referred to in the within-mentioned Indenture. NATIONSBANK OF TENNESSEE, NATIONAL ASSOCIATION as Trustee By: _________________________ Authorized Officer" Section 4.05. Section 1001 of the Indenture is hereby amended to read, in its entirety, the following: "Section 1001. Payment of Principal, Premium and Interest. The Company or the Co-Obligor shall duly and punctually pay the principal of (and premium, if any) and interest on the Securities in accordance with the terms of the Securities and this Indenture, and the obligation of each of the Company and the Co-Obligor under this Section shall be joint and several." 7 9 Section 4.06. Section 1015 of the Indenture is hereby amended to read, in its entirety, the following: "Section 1015. Limitation on Certain Asset Dispositions. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, make any Asset Disposition (other than an Asset Disposition permitted under Article Eight, Section 801 hereof) in one or more transactions in any fiscal year unless: (i) The Company (or such Subsidiary, as the case may be) receives consideration at the time of such disposition at least equal to the fair market value of the shares or the assets disposed of, as determined in good faith by the Board of Directors; and (ii) 100% of the Net Available Proceeds from such disposition, less Reinvested Amounts (as hereinafter defined), are applied by the Company (or such Subsidiary, as the case may be) (A) first, within 360 days of such disposition (or, in the case of Net Available Proceeds received after the time of such disposition, within 360 days of receipt thereof), to repayment of Senior Debt then outstanding under any agreements or instruments which would require such application or which would prohibit payments pursuant to Clause (B) following; (B) second, to the extent Net Available Proceeds are not required to be applied to Senior Debt as specified in Clause (A), to purchases of Outstanding Securities (to the extent such an offer is not prohibited by the terms of any Senior Debt) pursuant to an Offer to Purchase at a purchase price equal to 100% of their principal amount plus accrued interest to the date of purchase (provided, however, that installments of interest whose Stated Maturity is on or prior to the Purchase Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Regular Record Dates or Special Record Dates, as the case may be, according to their terms and the provisions of Article Three, Section 307 hereof); and (C) third, to the extent of any remaining Net Available Proceeds following completion of the Offer to Purchase referred to in Clause (B) above, to the repayment, within 10 days after the Purchase Date of such Offer to Purchase, of other Senior Debt and, to the extent there is no such Senior 8 10 Debt, Company Debt that is pari passu with the Securities and, to the extent there is no such Company Debt, other Debt of the Company or a Restricted Subsidiary. Notwithstanding the foregoing, the Company shall not be required to repurchase or to redeem Debt pursuant to Clause (ii) above if the Net Available Proceeds, less any amounts ("Reinvested Amounts") invested within 360 days of the disposition (or, in the case of Net Available Proceeds received after the time of disposition, within 360 days of receipt thereof) in assets that will be used in the business of the Company or any Wholly Owned Restricted Subsidiary as such business is conducted prior to such Asset Disposition or in any business principally engaged in providing medical or health care services, are less than $5 million (such lesser amount to be carried forward on a cumulative basis for purposes of determining the application of this paragraph). Notwithstanding the foregoing, if any Restricted Subsidiary in which a Reinvested Amount is invested becomes an Unrestricted Subsidiary thereafter, then such change in status will be deemed an Asset Disposition with Net Available Proceeds of cash in an amount equal to such Reinvested Amount, and such amount of cash will be applied pursuant to Clause (ii) above (subject to this paragraph). (b) The Company shall mail the Offer Document for an Offer to Purchase required pursuant to Section 1015(a) not more than 360 days after consummation of the disposition or, if proceeds are received after the time of the disposition, within 360 days of receipt of such proceeds giving rise to such requirement referred to in Section 1015(a). The aggregate principal amount of the Securities to be offered to be purchased pursuant to the Offer to Purchase shall equal the Net Available Proceeds, less Reinvested Amounts, required to be made available therefor pursuant to Clause (ii) (B) (rounded down to the next lowest integral multiple of $1,000). Each Holder shall be entitled to tender all or any portion of the Securities owned by such Holder pursuant to the Offer to Purchase, subject to the requirement that any portion of a Security tendered must be tendered in an integral multiple of $1,000 principal amount. The Company shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Securities pursuant to this Section. The Company shall not be entitled to any credit against its obligations under this Section hereof for the principal amount of any Securities acquired by the Company otherwise than pursuant to the Offer to Purchase pursuant to this Section. 9 11 (c) Not later than the date of the Offer Document with respect to an Offer to Purchase pursuant to this Section, the Company shall deliver to the Trustee an Officers' Certificate as to (i) the Purchase Amount, (ii) the allocation of the Net Available Proceeds from the Asset Disposition pursuant to which such offer is being made, including, if amounts are invested in assets for the business, the actual assets acquired and a statement that such assets shall be used in the business as such business was conducted prior to such Asset Disposition or in any business principally engaged in providing medical or health care services and (iii) the compliance of such allocation with the provisions of Section 1015(a). The Company shall perform its obligations specified in the Offer Document for the Offer to Purchase. On or prior to the Purchase Date, the Company shall (i) accept for payment (pro rata, if necessary, and in no case in an aggregate principal amount exceeding the Purchase Amount) Securities or portions thereof tendered pursuant to the Offer to Purchase, (ii) deposit with the Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Article Ten, Section 1003 hereof) money sufficient to pay the purchase price of all Securities or portions thereof so accepted and (iii) deliver or cause to be delivered to the Trustee all Securities so accepted together with an Officers' Certificate stating the Securities or portions thereof accepted for payment by the Company. The Paying Agent (or the Company, if so acting) shall promptly mail or deliver to Holders of Securities so accepted payment in an amount equal to the purchase price specified in Section 1015(a)(ii)(B), and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Security equal in principal amount to any unpurchased portion of the Security surrendered. Any Security not accepted for payment shall be promptly mailed or delivered by the Company to the Holder thereof. The Company shall publicly announce the results of the Offer to Purchase on or as soon as practicable after the Purchase Date. (d) Notwithstanding the foregoing, this Section shall not apply to any Asset Disposition which constitutes a transfer, conveyance, sale, lease or other disposition of all or substantially all of the Company's properties or assets within the meaning of Article Eight, Section 801 hereof." 10 12 Section 4.07. Section 1201 of the Indenture shall be amended by adding the following new paragraph at the end thereof: "Co-Obligor agrees to be bound by and comply with the terms and conditions of this Article Twelve as if each reference to "Company" in this Article Twelve were a reference to "Co-Obligor"." ARTICLE FIVE MISCELLANEOUS Section 5.01. All of the terms and conditions of the Indenture shall remain in full force and effect. Section 5.02. The Trustee accepts the modification of the Indenture effected by this First Supplemental Indenture, but only upon the terms and conditions set forth in the Indenture. Without limiting the generality of the foregoing, the Trustee assumes no responsibility for the correctness of the recitals herein contained, which shall be taken as the statements of the Company. The Trustee makes no representation and shall have no responsibility as to the validity of this First Supplemental Indenture. Section 5.03. In case any provision in this First Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 5.04. This First Supplemental Indenture shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of laws. Section 5.05. This First Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but such counterparts shall together constitute but one and the same instrument. 11 13 Section 5.06. From and after the date hereof, all Securities shall bear the following notation which may be stamped or typewritten thereon: "On April 19, 1994, American Healthcare Management, Inc. was merged with and into OrNda Healthcorp which has, along with AHM Acquisition Co., Inc., assumed the due and punctual payment of the principal of (any premium, if any) and interest on the 10% Senior Subordinated Notes due 2003; and the performance by OrNda HealthCorp of every covenant of the Indenture on the part of American Healthcare Management, Inc. to be performed or observed. From and after April 19, 1994, OrNda HealthCorp or AHM Acquisition Co., Inc. shall pay interest on the 10% Senior Subordinated Notes due 2003 at the rate of 10-1/4% per annum." If the Company shall so determine, new Securities so modified as to conform to the Indenture as hereby supplemented, in form satisfactory to the Trustee, may at any time hereafter be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Securities then Outstanding, and thereafter the notation herein provided shall no longer be required. Anything herein or in the Indenture to the contrary notwithstanding, the failure to affix the notation herein provided to any Security or to exchange any Security for a new Security modified as herein provided shall not affect any of the rights of the Holder of such Security. 12 14 IN WITNESS WHEREOF, AHM, the Company, the Co-Obligor and the Trustee have caused their names to be signed hereto by their respective officers thereunder duly authorized and their respective corporate seals, duly attested, to be hereunto duly affixed, all as of the day and the year first above written. AMERICAN HEALTHCARE MANAGEMENT, INC. By: /s/ Steven L. Volla [SEAL] _____________________________ Name: Steven L. Volla Title: Chairman, President & CEO Attest: /s/ Robert M. Dubbs ______________________________________________ ORNDA HEALTHCORP [SEAL] By: /s/ Keith B. Pitts _____________________________ Name: Keith B. Pitts Title: Executive Vice President & CEO Attest: /s/ James H. Johnson ______________________________________________ 13 15 AHM ACQUISITION CO., INC. By: /s/ Keith B. Pitt [SEAL] _____________________________ Name: Title: Attest: /s/ James H. Johnson ______________________________________________ NATIONSBANK OF TENNESSEE, NATIONAL ASSOCIATION By: /s/ Tamara L. Johnston [SEAL] _____________________________ Name: Tamara L. Johnston Title: Vice President Attest: /s/ Gina Ewley ______________________________________________ 14 16 STATE OF NEW YORK ) ss.: COUNTY OF NEW YORK ) On the 19th day of April, 1994, before me personally came Steven L. Volla _________________, to me known, who, being by me duly sworn, did depose and say President & CEO that he is the _____________________ of AMERICAN HEALTHCARE MANAGEMENT, INC., one of the corporations described in and which executed the foregoing instrument; that the seal affixed to said instrument is such corporate seal; that is was so affixed by the authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. /s/ Daniel Weisberg __________________________ Daniel Weisberg Notary Public, State of New York STATE OF NEW YORK ) ss.: COUNTY OF NEW YORK ) On the 19th day of April, 1994, before me personally came Keith B. Pitts __________________, to me known, who, being duly sworn, did depose and say that Executive VP & CFO he is the _____________________ of ORNDA HEALTHCORP, one of the corporations describe in and which executed the foregoing instrument; that the seal affixed to said instrument is such corporate seal; that is was so affixed by the authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. /s/ Daniel Weisberg __________________________ Daniel Weisberg Notary Public, State of New York 15 17 STATE OF NEW YORK ) ss.: COUNTY OF NEW YORK ) On the 19th day of April, 1994, before me personally came Keith B. Pitts __________________, to me known, who, being duly sworn, did depose and say that Executive VP & CEO he is the _____________________ of AHM ACQUISITION CO., INC. one of the corporations describe in and which executed the foregoing instrument; that the seal affixed to said instrument is such corporate seal; that is was so affixed by the authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. /s/ Daniel Weisberg __________________________ Notary Public, State of New York STATE OF TENNESSEE ) ss.: COUNTY OF DAVIDSON ) 19th April On the ___ day of ________, 1994, before me personally came Tamara L. Johnston __________________, to me known, who, being duly sworn, did depose and say that Vice President he is the _____________________ of NATIONSBANK OF TENNESSEE, NATIONAL ASSOCIATION, one of the corporations describe in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that is was so affixed by the authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. /s/ Laye McElliston __________________________ Commission expires 16 EX-4.4 4 FORM OF INDENTURE 1 Exhibit 4.4 ================================================================================ Draft of 7/19/94 OrNda HealthCorp and Summit Health Ltd. as Joint and Several Obligors $100,000,000 _____% Senior Subordinated Notes due 2004 ____________________ INDENTURE Dated as of __________, 1994 ____________________ ================================================================================ 2 CROSS-REFERENCE TABLE TIA Section Indenture Section - ----------- ----------------- Section 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.08; 7.10; 11.02 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. Section 311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. Section 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.05 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.03 Section 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 (b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06; 11.02 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 Section 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.08; 4.09 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.04 (c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.04 (c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.05 (f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.09 Section 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01(b) (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.05; 11.02 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01(a) (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01(c) (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.12 Section 316(a)(last sentence) . . . . . . . . . . . . . . . . . . . . . . . . . 11.06 (a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.09 (a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.10 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.07 Section 317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.02 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.02 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.04
i 3 TIA Section Indenture Section - ----------- ----------------- Section 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.01
_______________ N.A. means Not Applicable. NOTE: This Cross-Reference Table shall not, for any purpose, be deemed to be a part of this Indenture. ii 4 TABLE OF CONTENTS
Section Heading Page ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.02. Other Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1.03. Incorporation by Reference of Trust Indenture Act . . . . . . . . . . . . . . . . . . . . 16 1.04. Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE II THE SECURITIES 2.01. Form and Dating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.02. Execution and Authentication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.03. Registrar and Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.04. Paying Agent to Hold Money in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.05. Securityholder Lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.06. Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2.07. Replacement Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2.08. Outstanding Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2.09. Temporary Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2.10. Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2.11. Defaulted Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2.12. Ownership. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE III REDEMPTION 3.01. Right of Optional Redemption; Prices . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.02. Notice of Redemption; Partial Redemptions . . . . . . . . . . . . . . . . . . . . . . . . 22 3.03. Payment of Securities Called for Redemption . . . . . . . . . . . . . . . . . . . . . . . 24 3.04. Exclusion of Certain Securities from Eligibility for Selection for Redemption . . . . . . 24 ARTICLE IV COVENANTS 4.01. Payment of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 4.02. Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 4.03. Limitation on Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4.04. Limitation on Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4.05. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries . . . . . . 29
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Section Heading Page 4.06. Limitations on Liens Securing Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 4.07. Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 4.08. Officers' Certificates as to Default and as to Compliance . . . . . . . . . . . . . . . . 31 4.09. Reports to Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 4.10. Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 4.11. Maintenance of Properties, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 4.12. Limitation on Other Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . 35 ARTICLE V CONSOLIDATION, MERGER, SALE OR CONVEYANCE 5.01. When Company May Merge, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 5.02. Opinion of Counsel to Trustee; Officers' Certificate . . . . . . . . . . . . . . . . . . 36 5.03. Successor Corporation Substituted . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 ARTICLE VI REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT 6.01. Event of Default Defined; Acceleration of Maturity; Waiver of Default . . . . . . . . . . 36 6.02. Collection of Indebtedness by Trustee; Trustee May Prove Debt . . . . . . . . . . . . . . 39 6.03. Application of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 6.04. Suits for Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 6.05. Restoration of Rights and Abandonment of Proceedings . . . . . . . . . . . . . . . . . . 43 6.06. Limitations on Suits by Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . 43 6.07. Unconditional Right of Securityholders to Institute Certain Suits . . . . . . . . . . . . 44 6.08. Powers and Remedies Cumulative; Delay or Omission Not Waiver of Default . . . . . . . . . 44 6.09. Control by Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 6.10. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 6.11. Right of Court to Require Filing of Undertaking to Pay Costs . . . . . . . . . . . . . . 46 ARTICLE VII TRUSTEE 7.01. Duties of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 7.02. Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 7.03. Individual Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 7.04. Trustee's Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 7.05. Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 7.06. Reports by Trustee to Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
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Section Heading Page 7.07. Compensation and Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 7.08. Replacement of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 7.09. Successor Trustee by Merger, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 7.10. Eligibility; Disqualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 7.11. Preferential Collection of Claims Against Issuers . . . . . . . . . . . . . . . . . . . . . . . . . . 52 ARTICLE VIII DEFEASANCE 8.01. Defeasance upon Deposit of Moneys or U.S. Government Obligations . . . . . . . . . . . . . . . . . . 52 8.02. Survival of Issuers' Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 8.03. Application of Trust Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 8.04. Repayment to Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 8.05. Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 ARTICLE IX SUBORDINATION OF SECURITIES 9.01. Securities Subordinated to Senior Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 9.02. No Payment on Securities in Certain Circumstances . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 9.03. Securities Subordinated to Prior Payment of All Senior Debt on Dissolution, Liquidation or Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 9.04. Holders of Securities to Be Subrogated to Rights of Holders of Senior Debt . . . . . . . . . . . . . . 58 9.05. Obligations of the Issuers Unconditional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 9.06. Trustee and Paying Agent Entitled to Assume Payments Not Prohibited in Absence of Notice . . . . . . . 59 9.07. Application by Trustee of Moneys Deposited with It . . . . . . . . . . . . . . . . . . . . . . . . . . 60 9.08. Subordination Rights Not Impaired by Acts or Omissions of the Issuers or Holders of Senior Debt . . . . 60 9.09. Securityholders Authorize Trustee to Effectuate Subordination of Securities . . . . . . . . . . . . . . 61 9.10. Right of Trustee and Paying Agent to Hold Senior Debt . . . . . . . . . . . . . . . . . . . . . . . . . 61 9.11. This Article Not to Prevent Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 9.12. No Fiduciary Duty Created to Holders of Senior Debt . . . . . . . . . . . . . . . . . . . . . . . . . . 62 9.13. Trustee's Compensation Not Prejudiced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 9.14. Representative of Senior Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
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Section Heading Page ARTICLE X SUPPLEMENTAL INDENTURES 10.01. Supplemental Indentures Without Consent of Securityholders . . . . . . . . . . . . . . . 62 10.02. Supplemental Indentures with Consent of Securityholders . . . . . . . . . . . . . . . . 64 10.03. Effect of Supplemental Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 10.04. Documents to Be Given to Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 10.05. Notation on Securities in Respect of Supplemental Indenture . . . . . . . . . . . . . . 66 ARTICLE XI MISCELLANEOUS 11.01. Trust Indenture Act Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 11.02. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 11.03. Communication by Holders with Other Holders . . . . . . . . . . . . . . . . . . . . . . 67 11.04. Certificate and Opinion as to Conditions Precedent . . . . . . . . . . . . . . . . . . . 67 11.05. Statements Required in Certificate or Opinion . . . . . . . . . . . . . . . . . . . . . 67 11.06. When Treasury Securities Disregarded . . . . . . . . . . . . . . . . . . . . . . . . . . 68 11.07. Rules by Trustee and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 11.08. Payments Due on Saturdays, Sundays and Holidays . . . . . . . . . . . . . . . . . . . . 68 11.09. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 11.10. No Adverse Interpretation of Other Agreements . . . . . . . . . . . . . . . . . . . . . 68 11.11. No Recourse Against Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 11.12. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 11.13. Duplicate Originals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 11.14. Separability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
iv 8 INDENTURE, dated as of __________, 1994, among OrNda HealthCorp, a Delaware corporation (the "Company"), Summit Health Ltd., a California corporation and a wholly owned subsidiary of the Company (the "Co-Obligor" and, together with the Company, the "Issuers") and NationsBank of Tennessee, N.A., as Trustee (the "Trustee"). WHEREAS, the Issuers have duly authorized the creation of an issue of _____% Senior Subordinated Notes due 2004 (the "Securities") in the aggregate principal amount of $100,000,000 and to provide therefor the Issuers have duly authorized the execution and delivery of this Indenture. Therefore, intending to be legally bound hereby, each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the _____% Senior Subordinated Notes due 2004. ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions. "Acceleration Notice" shall have the meaning specified in Section 6.01. "Acquisition Debt" means (i) Debt or Preferred Stock of any Person existing at the time such Person becomes a Subsidiary of the Company, including but not limited to Debt or Preferred Stock incurred or created in connection with, or in contemplation of, such Person becoming a Subsidiary of the Company (but excluding Debt of such Person which is extinguished, retired or repaid in connection with such Person becoming a Subsidiary of the Company), (ii) Debt incurred or created by the Company or any of its Subsidiaries in connection with the transaction or series of transactions pursuant to which such Person became a Subsidiary of the Company or (iii) Debt incurred or created by the Company or any of its Subsidiaries in connection with the acquisition of substantially all of the assets of an operating unit or business of another Person. "Affiliate" of any Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms 9 "controlling" and "controlled" have meanings correlative to the foregoing. "Agent" means any Registrar, Paying Agent or co-Registrar. See Section 2.03. "Attributable Debt" in respect of a sale-leaseback transaction means, at the time of determination, the present value (discounted at the interest rate implicit in the lease, compounded semiannually) of the obligation of the lessee of the property or asset subject to such sale-leaseback transaction for rental payments during the remaining term of the lease included in such transaction including any period for which such lease has been extended or may, at the option of the lessor, be extended or until the earliest date on which the lessee may terminate such lease without penalty or upon payment of penalty (in which case the rental payments shall include such penalty), after excluding all amounts required to be paid on account of maintenance and repairs, insurance, taxes, assessments, water, utilities and similar charges. For purposes of the foregoing, a "sale-leaseback transaction" means an arrangement with any lender or investor or to which such lender or investor is a party providing for the leasing by a Person of any property or asset which has been or is being sold or transferred by such Person more than 270 days after the acquisition thereof or the completion of construction or commencement of operation thereof to such lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such property or asset. "Board of Directors" means the Board of Directors of the Company or any committee of such Board duly authorized to act hereunder. "Business Day" means a day which in the City of New York or in the city in which the Corporate Trust office of the Trustee is located, is neither a legal holiday nor a day on which banking institutions are required or authorized by law or regulation to close. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's capital stock whether now outstanding or issued after the date of this Indenture, including, without limitation, all Common Stock and all Preferred Stock and all equity rights with respect thereto. "Capitalized Lease Obligation" means the discounted present value of the rental obligations of any Person under any lease of Property which, in accordance with 2 10 generally accepted accounting principles, is required to be capitalized on the balance sheet of such Person. "Change of Control" means (i) the direct or indirect, sale, lease or other transfer of all or substantially all of the assets of the Company to any Person or entity or group of Persons or entities acting in concert as a partnership or other group (a "Group of Persons") other than (a) Joseph Littlejohn & Levy Fund, L.P., a Delaware limited partnership, and its Affiliates or (b) Charles N. Martin, Jr. and his Affiliates, (ii) during any period of two consecutive calendar years, individuals who at the beginning of such period constituted the Company's Board of Directors (together with any new directors whose election by the Company's Board of Directors or whose nomination for election by the Company's shareholders was approved by a vote of at least two- thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors then in office, (iii) a Person or Group of Persons (other than (a) Joseph Littlejohn & Levy Fund, L.P., a Delaware limited partnership, and its Affiliates or (b) Charles N. Martin, Jr. and his Affiliates) shall, as a result of a merger or consolidation, a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, have become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company or the entity surviving the merger or consolidation representing 50% or more of the combined voting power of the then outstanding securities of the Company or the entity surviving the merger or consolidation ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors. "Closing Date" means the date on which the Securities are originally issued. "Commission" means the Securities and Exchange Commission. "Common Stock" means, with respect to any Person, any and all shares, interests, participations and other equivalents (however designated, whether voting or non-voting) of such Person's common stock, whether now outstanding or issued after the date of this Indenture, and includes, without limitation, all series and classes of such common stock. "Consolidated Cash Flow" for any Person, for any period, means, without duplication, the Consolidated Net Income of such Person plus the sum of (a) Consolidated Tax 3 11 Expense, (b) Consolidated Interest Expense, (c) Consolidated Non-cash Charges, (d) one/third of the rental expense on Attributable Debt and (e) Consolidated Pooling Expenses. "Consolidated Interest Expense" of any Person means, for any period, without duplication, the sum of (a) the aggregate of the interest expense of such Person and its Consolidated Subsidiaries for such period, on a consolidated basis, as determined in accordance with generally accepted accounting principles, plus (b) net payments in respect of Interest Swap Obligations (if any such payment applies to a period in excess of one year it shall be amortized accordingly) of such Person and its Consolidated Subsidiaries. "Consolidated Net Income" of any Person, for any period, means the net income (loss) of such Person and its Consolidated Subsidiaries for such period, determined in accordance with generally accepted accounting principles, adjusted by excluding (a) net extraordinary gains or net extraordinary losses, as the case may be (including any gain or loss from the purchase, redemption, acquisition or other retirement of Debt) and (b) net gains or losses in respect of dispositions of assets, provided that, without duplication, (i) the net income of any Person, other than a Consolidated Subsidiary, in which the Company or any of its Consolidated Subsidiaries has a joint interest with a third party shall be included only to the extent of the amount of dividends or distributions actually paid to the Company or a Consolidated Subsidiary during such period, (ii) the net income of any Unrestricted Subsidiary shall be included for the purpose of determining net income to the extent of the amount of cash, Property, dividends or distributions actually paid by such Unrestricted Subsidiary to the Company or a Subsidiary of the Company, (iii) the tax benefits of any net operating loss carryforwards added directly to retained earnings and not otherwise included for the purpose of determining net income in accordance with generally accepted accounting principles for such period shall be included, (iv) the net income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded and (v) the net income of any Subsidiary of such Person shall be excluded to the extent such Subsidiary is prohibited, directly or indirectly, from distributing such net income or any portion thereof to such Person. "Consolidated Net Tangible Assets" of any Person, for any period means, the assets of such Person and its Subsidiaries, less intangible assets of such Person and its Subsidiaries (including, without limitation, trademarks and tradenames, goodwill, excess reorganization value, research and development expenses, and write-ups in the book value of 4 12 any intangible assets), on a consolidated basis, determined in accordance with generally accepted accounting principles. "Consolidated Non-cash Charges" of any Person means, for any period, the aggregate depreciation, amortization and other non-cash charges (other than reserves or expenses established in anticipation of future cash requirements such as reserves for taxes and uncollectible accounts) of such Person and its Consolidated Subsidiaries, on a consolidated basis, for such period, as determined in accordance with generally accepted accounting principles, provided that (i) any charges which are not included for the purpose of determining Consolidated Net Income shall be excluded from Consolidated Non-cash Charges and (ii) any charges which are included for the purpose of determining Consolidated Interest Expense or Consolidated Tax Expense shall be excluded from Consolidated Non-cash Charges. "Consolidated Pooling Expenses" of any Person for any period means, with respect to such Person and its Consolidated Subsidiaries on a consolidated basis, the expenses for such period in connection with a pooling of interests transaction, determined in accordance with generally accepted accounting principles, but only to the extent that such expenses would have been capitalized, in accordance with generally accepted accounting principles, if such transaction had been a purchase transaction. "Consolidated Subsidiary" of any Person means a Person which for financial reporting purposes is or, in accordance with generally accepted accounting principles, should be accounted for by such Person as a consolidated subsidiary. "Consolidated Tax Expense" of any Person means, for any period the aggregate of the tax expense of such Person and its Consolidated Subsidiaries for such period, determined in accordance with generally accepted accounting principles. "Co-Obligor" means Summit Health Ltd., a corporation duly organized under the laws of the State of California. "Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date as of which this Indenture is dated, located in ____________________. "Credit Agreement" means (a) the Credit, Security, Guaranty and Pledge Agreement, dated as of April 19, 1994, among the Company, Summit Health, Ltd. and AHM Acquisition 5 13 Co., Inc., the Guarantors named therein, the lenders named therein, The Bank of Nova Scotia, as Administrative Agent and Managing Agent, Citicorp USA Inc., as Managing Agent, and the other financial institutions described therein (the "Scotiabank Credit Agreement"), together with all agreements, documents and instruments from time to time delivered in connection with the Scotiabank Credit Agreement, as in effect on the date hereof, and as the Scotiabank Credit Agreement and such other agreements, documents and instruments may be amended, amended and restated, renewed, extended, restructured, supplemented or otherwise modified from time to time, and (b) any credit agreement, loan agreement, note purchase agreement, indenture or other agreement, document or instrument refinancing, refunding or otherwise replacing the Scotiabank Credit Agreement or any other agreement deemed a Credit Agreement under clause (a) or (b) hereof, whether or not with the same agent, trustee, representative lenders or holders, and irrespective of any changes in the terms and conditions thereof. Without limiting the generality of the foregoing, the term "Credit Agreement" shall include any amendment, amendment and restatement, renewal, extension, restructuring, supplement or modification to any Credit Agreement and all refundings, refinancings and replacements of any Credit Agreement, including any agreement (i) extending the maturity of any Debt incurred thereunder or contemplated thereby, (ii) adding or deleting borrowers or guarantors thereunder, so long as such borrowers and issuers include one or more of the Company and its Subsidiaries and their respective successors and assigns, (iii) increasing the amount of Debt incurred thereunder or available to be borrowed thereunder , or (iv) otherwise altering the terms and conditions thereof in a manner not prohibited by the terms hereof. "Currency Agreements" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any of its Subsidiaries against fluctuations in currency values. "Debt" means, as to any Person, without duplication, (a) any indebtedness of such Person, including accrued and unpaid interest, for borrowed money (including net overdrafts in any bank to the extent such overdrafts are not extinguished within three Business days of their incurrence), (b) all indebtedness of such Person evidenced by bonds, debentures, notes, letters of credit or similar instruments, (c) all indebtedness of such Person to pay the deferred purchase price of property or services, except accounts payable arising in the ordinary course of business that are not overdue by more than 180 days or that are being contested in good faith, if and to the extent any of the foregoing indebtedness described in clauses (a)-(c) 6 14 inclusive would appear as a liability upon a balance sheet of such Person, prepared on a consolidated basis in accordance with generally accepted accounting principles, and shall also include, to the extent not otherwise included, (d) all Capitalized Lease Obligations of such Person, (e) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person or guaranteed by such Person, (f) Attributable Debt of such Person, (g) Preferred Stock issued by a Subsidiary of such Person, (h) Redeemable Stock, (i) all Debt of others guaranteed by such Person and (j) all indebtedness due to the Senior Agent or any Lender under or in respect of the Credit Agreement or otherwise due to any Lender. "Designated Senior Debt" means all obligations under or in respect of the Credit Agreement and any other single issue of Debt constituting Senior Debt which at the time of determination has an aggregate principal amount of at least $40,000,000 and is specifically designated in the instrument evidencing such Senior Debt as "Designated Senior Debt" of the Company. "Event of Default" means any event or condition specified as such in Section 6.01 which shall have continued for the period of time, if any, therein designated. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fixed Charges" for any period are, without duplication, the Consolidated Interest Expense, the interest component of capital leases and one-third of the rental expense on Attributable Debt (without duplication) plus the product of (x) the sum of (i) cash dividends paid on any Preferred Stock of such Person plus (ii) cash dividends paid on any Preferred Stock of any Subsidiary of such Person, times (y) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective aggregate federal, state and local tax rate of such Person, expressed as a decimal, but excluding (a) the amortization of debt issuance costs, (b) amortization of original issue discount (the excess of stated redemption price at maturity over the issue price) which, with respect to any Debt, may not be greater than 1/4% times the number of full years from issuance to maturity, and (c) non-cash dividends paid on any Preferred Stock of such Person. For purposes of this definition, interest on a capital lease shall be deemed to accrue at an interest rate reasonably determined to be the rate of interest implicit in such capital lease in accordance with generally accepted accounting principles (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board). 7 15 "Fountain Valley" means Fountain Valley Regional Hospital and Medical Center and the related health care businesses of Fountain Valley Medical Development Co. ("FVMD") to be acquired by the Company pursuant to the Stock Purchase Agreement, dated ______, 1994, between the Company and FVMD. "Holder," "Securityholder" or any other similar term means the registered holder of any Security. "Indenture" means this instrument as originally executed and delivered or, if amended or supplemented as herein provided, as so amended or supplemented. "Interest Swap Obligations" means the obligations of any Person, pursuant to any arrangement with any other Person, whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such other Person calculated by applying a fixed or a floating rate of interest on the same notional amount. "Investment" means any direct or indirect advance, loan (other than advances to customers in the ordinary course of business, which are recorded as accounts receivable on the balance sheet of any Person or its Subsidiaries) or other extension of credit or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities issued by any other Person. For the purposes of Section 4.04 hereof, (i) "Investment" shall include the fair market value of the net assets of any Subsidiary at the time that such Subsidiary is designated an Unrestricted Subsidiary and shall exclude the fair market value of the net assets of any Unrestricted Subsidiary that is designated a Subsidiary and (ii) any property transferred to or from an Unrestricted Subsidiary shall be valued at fair market value at the time of such transfer, in each case as determined by the Board of Directors of such Person in good faith. "Lender" means any lender or other holder of Senior Debt from time to time incurred or issued under the Credit Agreement. "Lien" means, with respect to any Property, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such Property. 8 16 "Material Subsidiary" of any Person means, as of any date, any Subsidiary of such Person (a) the value of whose assets, as such assets would appear on a consolidated balance sheet of such Subsidiary and its Consolidated Subsidiaries prepared on such date in accordance with generally accepted accounting principles, is at least 10% of the value of the assets of such Person and its Consolidated Subsidiaries, determined as aforesaid, or (b) whose Consolidated Cash Flow for the most recently completed fiscal quarter immediately preceding such date was at least 10% of the Consolidated Cash Flow of such Person for such fiscal quarter. "Measurement Date," when used with respect to any calculation, means the date of the transaction giving rise to the need to make such calculation. "Net Worth" means, at any date, the aggregate of capital, surplus and retained earnings of the Company and its Consolidated Subsidiaries as would be shown on a consolidated balance sheet of the Company and its Consolidated Subsidiaries prepared in accordance with generally accepted accounting principles. "Officers' Certificate" means a certificate signed, in the case of the Company, by the Chairman of the Board of Directors or the President or any Vice President (whether or not designated by a number or numbers or a word or words added before or after the title "Vice President") and by the Treasurer or the Secretary or any Assistant Secretary and delivered to the Trustee. Each such certificate shall include the statements provided for in Section 11.05. "Opinion of Counsel" means an opinion in writing signed by legal counsel who may be an employee of or counsel to the Company or who may be other counsel reasonably satisfactory to the Trustee. Each such opinion shall include the statements provided for in Section 11.05, if and to the extent required hereby. "Permitted Investments" means Investments in Unrestricted Subsidiaries (A) in a cumulative aggregate amount not to exceed the sum of (1) $25,000,000 (less previous Investments in Unrestricted Subsidiaries pursuant to this clause (A)(1)) plus (2) any amounts received by the Company or any Subsidiary from any Unrestricted Subsidiary which represents a repayment of the principal portion of any loan or advance or any return of contributed capital in respect of any previous Permitted Investment and (B) through the contribution or other transfer of the Company's, or its Subsidiaries', interest in HNMC, Inc. and Horizon Health Group, Inc. or any successors thereto. 9 17 "Permitted Joint Venture" means all of the Company's existing joint ventures on the Closing Date or a Person which owns, operates or services a health care business or facility or manufactures or markets health care products and (i) is formed by the Company or a Subsidiary of the Company to offer an equity participation in the assets or businesses owned or to be acquired by such Person primarily to physicians or employees of the Company or any of its Subsidiaries or to any other Person involved directly or indirectly in the health care industry and (ii) of which the Company or any Subsidiary of the Company is a general partner or controls the general partner. "Permitted Liens" with respect to the Company and its Subsidiaries means: (1) Liens existing on the date of this Indenture and renewals and extensions thereof; (2) Liens granted to secure obligations under or in respect of the Credit Agreement; (3) rights of banks to set off deposits against debts owed to said banks; (4) Purchase Money Obligations incurred in the normal and ordinary course of the Company's business; (5) Liens in respect of Debt incurred in connection with the sale by the Company or any Subsidiary of the Company of receivables; and (6) Liens on the Property of any entity existing at the time such Property is acquired by the Company or any of its Subsidiaries, whether by merger, consolidation, purchase of assets or otherwise, provided in the case of this clause (6) that such Liens (x) are not created, incurred or assumed in contemplation of such assets being acquired by the Company or any of its Subsidiaries and (y) do not extend to any other Property of the Company or any of its Subsidiaries. "Permitted Payments" means, with respect to the Company or any of its Subsidiaries, (i) the redemption, repurchase or other acquisition or retirement of any shares of any class of Capital Stock in exchange for (including any exchange pursuant to the exercise of a conversion right or privilege in connection with which cash is paid in lieu of the issuance of fractional shares), or out of the proceeds of a substantially concurrent issue and sale (other than to a Subsidiary) of, shares of Capital Stock (other than Redeemable Stock) of the Company, (ii) any dividend or other distribution payable to the Company or any of its Subsidiaries, (iii) the repurchase or redemption by a wholly owned Subsidiary of its Capital Stock, (iv) the declaration and payment of dividends on the PIK Preferred (A) in additional shares of PIK Preferred or (B) to the extent required by the terms of the PIK Preferred as of the Closing Date, in cash or (v) any dividend on, or distribution of, the Capital Stock or Property of an Unrestricted Subsidiary. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or 10 18 organization, including a government or political subdivision or an agency or instrumentality thereof. "Physician Support Obligation" means any obligation or guarantee to any physician or allied health care professional pursuant to a written agreement for a period not in excess of five years incurred in connection with recruiting, redirecting or retaining such physician or allied health care professional to provide service to patients in the service area of any health care facility owned or operated by any Consolidated Subsidiary of the Company or any Permitted Joint Venture, but excluding actual compensation for services provided by such physician or allied health care professional to any health care facility owned or operated by the Company or any of its Subsidiaries or any Permitted Joint Venture. "PIK Preferred" means the $.01 par value Payable in Kind Cumulative Redeemable Preferred Stock of the Company outstanding on the Closing Date or issued subsequent to the Closing Date as a Permitted Payment. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's preferred or preference stock whether now outstanding or issued after the date of this Indenture, and including, without limitation, all classes and series of preferred or preference stock. "principal" wherever used with reference to the Securities or any Security or any portion thereof, shall be deemed to include "and premium, if any". "Pro Forma Coverage Ratio" of any Person means the pro forma ratio of such Person's Consolidated Cash Flow to its Fixed Charges for the Reference Period immediately prior to the Measurement Date. The Pro Forma Coverage Ratio shall, as applicable, be calculated on the following basis: (1) notwithstanding clause (iv) of the definition of Consolidated Net Income, if the Debt which is being created, incurred or assumed is Acquisition Debt, the Pro Forma Coverage Ratio shall be determined after giving effect to both the Fixed Charges related to the creation, incurrence or assumption of such Acquisition Debt and the Consolidated Cash Flow (x) of the Person becoming a Subsidiary of such Person or (y) in the case of an acquisition of assets which constitute substantially all of an operating unit or business, relating to the assets being acquired by such Person; 11 19 (2) there shall be excluded from Fixed Charges any Fixed Charges related to Debt repaid during and subsequent to the Reference Period and which is not outstanding on the Measurement Date; and (3) the creation, incurrence or assumption of any Debt during the Reference Period or subsequent to the Reference Period and prior to the Measurement Date, and the application of the proceeds therefrom, shall be assumed to have occurred on the first day of the Reference Period. "Property" of any Person means all types of real, personal, tangible, intangible or mixed property owned by such Person whether or not included on the most recent consolidated balance sheet of such Person in accordance with generally accepted accounting principles. "Purchase Money Obligations" means Debt of the Company or its Subsidiaries secured by Liens (i) on Property purchased, acquired, or constructed after the Closing Date and used in the ordinary course of business by the Company and its Subsidiaries and (ii) securing the payment of all or any part of the purchase price or construction cost of such assets and limited to the Property so acquired and improvements thereof. "Redeemable Stock" means, with respect to any Person, any class or series of Capital Stock of such Person which is redeemable at the option of the holder (except pursuant to a change in control provision that does not (i) cause such Capital Stock to become redeemable in circumstances in which the Company would not be required to make a Change in Control Offer and (ii) require the Company to pay the redemption price therefor prior to the Change of Control Payment Date) or is subject to mandatory redemption prior to the maturity of the Securities. "Reference Period" means the four fiscal quarters ending with the most recent fiscal quarter for which financial information is available and which ended immediately preceding the Measurement Date. "Responsible Officer" when used with respect to the Trustee means any officer in its Corporate Trust Office, or any other officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Payments" means with respect to any Person (i) any dividend or other distribution on any shares 12 20 of such Person's Capital Stock (except dividends or distributions in additional shares of Capital Stock other than Redeemable stock), (ii) any payment on account of the purchase, redemption or other acquisition of (a) any shares of such Person's Capital Stock or (b) any option, warrant or other right to acquire shares of such Person's Capital Stock, or (iii) any Investment in an Unrestricted Subsidiary which is not a Permitted Investment; provided that distributions to joint venture participants or repurchases of interests in Permitted Joint Ventures (other than distributions or repurchases of joint venture interests of Affiliates of the Company and its Subsidiaries) shall not constitute Restricted Payments; provided, further, that an individual shall not be deemed to be an Affiliate of the Company or any Subsidiary solely because such individual is employed by the Company or any Subsidiary. "Security" or "Securities" means any of the Senior Subordinated Notes due 2004 authenticated and delivered under this Indenture. "Senior Agent" means, collectively, The Bank of Nova Scotia and Citibank USA, Inc., any successor to The Bank of Nova Scotia and Citibank USA Inc., respectively, under the Scotiabank Credit Agreement and any other agent, trustee or representative of the holders of Debt under or in respect of the Credit Agreement serving in such capacity from time to time and, if there is no such agent, trustee or representative, "Senior Agent" shall mean, collectively, the holders from time to time of Debt incurred under or in respect of the Credit Agreement. "Senior Debt" means (i) all obligations of the Company and its Subsidiaries, now or hereafter existing under or in respect of the Credit Agreement, whether for principal, interest (including without limitation, interest accruing after filing of a bankruptcy petition initiating bankruptcy proceedings of the Company or any of its Subsidiaries at the rates prescribed in the Credit Agreement, whether or not interest is an allowed claim enforceable against the debtor), reimbursement of amounts drawn under letters of credit issued or arranged for pursuant thereto, guaranties in respect thereof, and all charges, fees, expenses (including reasonable fees and expenses of counsel) and other amounts incurred by or owing to the Senior Agent and the Lenders under or in respect of the Credit Agreement, and all other obligations of the Company and its Subsidiaries incurred under or in respect of the Credit Agreement including, without limitation, in respect of premiums, indemnities or otherwise, and all indebtedness under the Credit Agreement which is disallowed, avoided or subordinated pursuant to Section 548 of Title 11, United States Code or any applicable state fraudulent 13 21 conveyance law; (ii) the principal of, premium if any, and interest on indebtedness for money borrowed by the Company or the Co- Obligor, as applicable (other than the Securities), whether outstanding on the date of this Indenture or hereafter created or incurred, unless such indebtedness, by its terms or the terms of the instrument creating or evidencing it is subordinate in right of payment to or pari passu with the Securities; (iii) any obligations of the Company or the Co-Obligor, as applicable, in respect of capital leases of the Company or the Co-Obligor, as applicable, whether outstanding on the date of this Indenture or hereafter created or incurred; (iv) any obligations of the Company or the Co-Obligor, as applicable, in respect of (x) any indebtedness for money borrowed by another Person or (y) any capital leases of any other Person, in either case which is guaranteed in whole or in part directly or indirectly by the Company or the Co-Obligor, as applicable, (whether such guarantee is outstanding on the date of this Indenture or hereafter created or incurred); (v) the principal of, premium if any, and interest on any indebtedness constituting Purchase Money Obligations for the payment of which the Company or the Co-Obligor, as applicable, is directly or contingently liable (whether such Purchase Money Obligations are outstanding on the date of this Indenture or hereafter created or incurred); (vi) any obligation of the Company or the Co-Obligor, as applicable, to compensate, reimburse or indemnify an issuer with respect to any letter of credit issued at the request of or for the account of the Company or the Co-Obligor, as applicable; (vii) any obligation of the Company or the Co-Obligor, as applicable, under any Interest Swap Obligations or Currency Agreements; (viii) any obligation of the Company or the Co-Obligor, as applicable, to any Person in respect of surety or similar bonds issued by such Person; (ix) all charges, fees, expenses (including reasonable fees and expenses of counsel) and other amounts incurred by or owing to the holders of indebtedness referred to in clauses (ii)-(viii) above in connection with such indebtedness; and (x) all interest payable during the pendency of a proceeding under Title 11, United States Code on indebtedness referred to in clauses (ii)-(viii) above incurred prior to the commencement of such proceeding; provided that the term "Senior Debt" shall not include any indebtedness of the Company or the Co-Obligor, as applicable, to an Affiliate of the Company or the Co-Obligor, as applicable, except to the extent any such indebtedness is pledged to the Senior Agent as security for Senior Debt incurred under or in respect of the Credit Agreement. "Senior Representative" means any agent, trustee or other representative of the holders of any Senior Debt other than Senior Debt incurred under or in respect of the 14 22 Credit Agreement and, if there is no such agent, trustee or other representative with respect to any such Senior Debt, "Senior Representative" shall mean, collectively, the holders of at least a majority in dollar amount of any such Senior Debt. "Stock Appreciation Rights" means a payment of cash in lieu of shares of Common Stock by the Company to an employee of the Company in accordance with a stock option plan approved by the Board of Directors. "Subsidiary" means, with respect to any Person, any corporation or other entity of which a majority of the Capital Stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions is at the time directly or indirectly owned by such Person or one or more of the other Subsidiaries of that Person or a combination thereof; provided that an Unrestricted Subsidiary shall not be deemed to be a Subsidiary of the Company for purposes of this Indenture. "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Section Section 77aaa-77bbbb) as in force at the date of this Indenture. "Trust Officer" means any vice president, assistant vice president or any other officer or assistant officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "Trustee" means the entity identified as "Trustee" in the first paragraph hereof and, subject to the provisions of Article Seven, shall also include any successor trustee. "Unrestricted Subsidiary" means (1) any Subsidiary of the Company which at the time of determination shall be an Unrestricted Subsidiary (as designated by the Board of Directors of the Company, as provided below) and (2) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate each Subsidiary of the Company (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary not more than one time during any 24 month period, provided that a Subsidiary which owns any Capital Stock of, or owns, or holds any Lien on, any Property of, any other Subsidiary of the Company which is not a Subsidiary of such Subsidiary may not be so designated; provided, further, that immediately after giving effect to such designation, no default or Event of Default shall have occurred and be continuing. The Board of Directors may designate each Unrestricted Subsidiary to be a Subsidiary not more than one time during any 24 month period; provided that immediately after giving effect to 15 23 such designation, no default or Event of Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the resolution of the Board of Directors giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions; provided that no Subsidiary of the Company shall be (and, if such Subsidiary is an Unrestricted Subsidiary, it shall immediately cease to be) an Unrestricted Subsidiary if, at any time, the Company or any other Subsidiary of the Company shall create, incur, issue, assume, guarantee or in any other manner whatsoever be or become liable with respect to any claim against or any contractual obligation or indebtedness of, such Subsidiary. "U.S. Government Obligations" means securities which are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligations or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt. SECTION 1.02. Other Definitions. Term Defined in Section ---- ------------------ "Change of Control Date" 4.11 "Change of Control Offer" 4.11 "Change of Control Payment Date" 4.11 "Discharge" 8.01 "Paying Agent" 2.03 "Registrar" 2.03 "Scotiabank Credit Agreement" 1.01 SECTION 1.03. Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by 16 24 reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "Commission" means the SEC. "indenture securities" means the Securities. "indenture security holder" means a Securityholder. "indenture to be qualified" means this indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means each of the Issuers. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule have the meanings so assigned to them. SECTION 1.04. Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles in effect on the date hereof, and any other reference in this Indenture to "generally accepted accounting principles" refers to generally accepted accounting principles on the date hereof; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. 17 25 ARTICLE II THE SECURITIES SECTION 2.01. Form and Dating. The Senior Subordinated Notes and the Trustee's certificate of authentication for such Series shall be substantially in the form set forth in Exhibit A, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule or usage. The Company shall approve the form of the Securities and any notation, legend or endorsement on them. Each Security shall be dated the date of its authentication. The terms and provisions contained in the form of the Securities annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a part of this Indenture. SECTION 2.02. Execution and Authentication. Two Officers of the Issuers shall execute the Securities by manual or facsimile signature. The seal of the Issuers shall be reproduced on the Securities. If an Officer whose signature is on a Security no longer holds that office at the time the Trustee authenticates the Security, the Security shall be valid nevertheless. A Security shall not be valid until the Trustee manually signs the certificate of authentication on the Security. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate Senior Subordinated Notes for original issue in the aggregate principal amount of up to $100,000,000 upon a written order of the Issuers signed by two officers or by an Officer and an Assistant Treasurer of each of the Issuers. The aggregate principal amount of Senior Subordinated Notes outstanding at any time may not exceed $100,000,000 except as provided in Sections 2.07 and 2.08. The initial written authentication order delivered by the Issuers to the Trustee shall specify the amount of Senior Subordinated Notes to be issued on the Closing Date. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Securities. The Company shall pay all fees payable to the authenticating agent. Any authenticating agent appointed hereunder shall be entitled to the benefits of Section 7.07. An 18 26 authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate of the Company. The Securities shall be issuable only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. SECTION 2.03. Registrar and Paying Agent. The Company shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange (the "Registrar") and an office or agency where Securities may be presented for payment (the "Paying Agent"). The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may have one or more additional paying agents. The term "Paying Agent" includes any additional paying agent. The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee in writing of the name and address of any such Agent and any change in the address of such Agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such. The Company initially appoints the Trustee as Registrar and Paying Agent. The Trustee shall have the right to designate one of its Affiliates as Registrar and Paying Agent. SECTION 2.04. Paying Agent to Hold Money in Trust. The Company shall require each Paying Agent other than the Trustee to agree in writing to hold in trust for the benefit of the Securityholders or the Trustee all moneys held by the Paying Agent for the payment of principal of or interest on the Securities, and the Issuers and the Paying Agent shall notify the Trustee of any default by the Issuers in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money of the Issuers held by it to the Trustee. If an Issuer or its Affiliates acts as Paying Agent, it shall segregate the money and hold it as a separate trust fund. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon doing so the Paying Agent shall have no further liability for the money. SECTION 2.05. Securityholder Lists. The Trustee shall preserve in as current a form as is reasonably practi- 19 27 cable the most recent list available to it of the names and addresses of Securityholders. If the Trustee is not the Registrar, the Company shall furnish to the Trustee at least 10 days before each semi-annual interest payment date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require, of the names and addresses of Securityholders. SECTION 2.06. Transfer and Exchange. When a Security is presented to the Registrar with a request to register a transfer, the Registrar shall register the transfer as requested if duly endorsed or accompanied by a proper instrument or instruments of assignment and transfer thereof. When Securities are presented to the Registrar with a request to exchange them for an equal principal amount of Securities of other denominations, the Registrar shall make the exchange as requested if the same requirements are met. To permit transfers and exchanges, the Trustee shall authenticate Securities at the Registrar's request. Any exchange or transfer shall be without charge, except that the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto (other than any such transfer taxes or similar governmental charges payable upon exchanges pursuant to Section 2.09, 3.02 or 10.05). The Registrar need not transfer or exchange any Security or portion of a Security selected for redemption other than that portion not called for redemption, or transfer or exchange any Securities for a period of 15 days before a selection of Securities to be redeemed. SECTION 2.07. Replacement Securities. In case any Security shall become mutilated, defaced or be apparently destroyed, lost or stolen, the Issuers shall execute, and upon the written request of an officer of the Issuers the Trustee shall authenticate a replacement Security of like date, maturity, denomination and interest rate as such mutilated, lost, stolen or destroyed Security if its requirements as well as requirements of applicable law are met. In every case the applicant for a substitute security shall furnish to the Company and the Trustee and any agent of the Company or the Trustee such security or indemnity (which may be in the form of a bond) as may be required by them to indemnify and defend and to save each of them harmless, and in every such case of destruction, loss or theft, the applicant shall also furnish to the Company and the Trustee evidence to their satisfaction of the destruction, loss or theft of such Security and the ownership thereof. The Company and the Trustee may charge for their expenses in replacing a Security mutilated, lost, stolen or destroyed. Every replacement Security is an additional obligation of the Issuers. 20 28 SECTION 2.08. Outstanding Securities. Securities outstanding at any time are all Securities that have been authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation, Securities for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee, provided that if Securities are to be redeemed prior to the maturity thereof, notice of such redemption shall have been duly given or provision satisfactory to the Trustee shall have been made for giving such notice, and those described in this Section as not outstanding. A Security does not cease to be outstanding because an Issuer or one of its Affiliates holds the Security. If a Security is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a Person in whose hands such Security is a legal, valid and binding obligation of the Issuers. If the Paying Agent (other than the Company or any Subsidiary) holds on a redemption date or maturity date money sufficient to pay principal of and accrued interest on Securities payable on that date, then on and after that date such Securities shall be deemed to be no longer outstanding and interest on them shall cease to accrue. SECTION 2.09. Temporary Securities. Until definitive Securities are ready for delivery, the Issuers may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Issuers consider appropriate for temporary Securities. Without unreasonable delay, the Issuers shall prepare and the Trustee shall authenticate definitive Securities in exchange for the temporary Securities. SECTION 2.10. Cancellation. The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Securities surrendered to them for transfer, exchange or payment. The Trustee and no one else shall cancel and destroy all Securities surrendered for transfer, exchange, payment or cancellation and deliver a certificate of such destruction to the Company. The Issuers may not issue new Securities to replace Securities which the Issuers have redeemed or paid, or that have been delivered to the Trustee for cancellation. SECTION 2.11. Defaulted Interest. If the Issuers default in a payment of interest on the Securities, subject to the provisions of Article Nine hereof, they shall pay the defaulted interest, plus to the extent permitted by law, any 21 29 interest payable on the defaulted interest, to the persons who are Securityholders on a subsequent special record date. The Issuers shall fix such special record date and payment date, provided that there shall be at least five days between the special record date and payment date unless the Issuers and the Trustee shall agree otherwise. At least 15 days before such special record date, the Issuers shall mail to each Securityholder a notice that states the special record date, the payment date and the amount of defaulted interest to be paid. The Issuers may pay defaulted interest in any other lawful manner. SECTION 2.12. Ownership. The Trustee, the Issuers and the Registrar and Paying Agent shall deem and regard the person in whose name any Security shall be registered on the registration books as the owner thereof for all purposes, and payment of or on account of the principal of any such Security and the interest thereon shall be made only to or upon the order of the registered owner thereof or his legal representative. All payments made to the persons designated by this Section 2.12 to be the owner of any Security shall be valid and effective to satisfy and discharge the liability of the Issuers and the Trustee upon such Security, including the interest thereon, to the extent of the sum or sums so paid. ARTICLE III REDEMPTION SECTION 3.01. Right of Optional Redemption; Prices. The Securities may not be redeemed prior to __________, 1999. On and after __________, 1999, the Company at its option may redeem all, or from time to time any part of, the Securities upon payment of the redemption price as set forth in the Securities, together with accrued and unpaid interest to the date fixed for redemption. SECTION 3.02. Notice of Redemption; Partial Redemptions. Notice of redemption to the Holders of Securities to be redeemed pursuant Section 3.01 as a whole or (subject to Section 3.01) in part shall be given by mailing notice of such redemption by first-class mail, postage prepaid, at least 30 and not more than 60 days prior to the date fixed for redemption to such Holders of Securities at their last addresses as they shall appear upon the registry books. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the Holder receives the notice. Failure to give notice by mail, or any defect in the notice to the Holder of any Security designated for 22 30 redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security. The notice of redemption to each such Holder shall specify the principal amount of each Security held by such Holder to be redeemed, the date fixed for redemption, the redemption price, the place or places of payment, that payment will be made upon presentation and surrender of such Securities, that interest accrued to the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. In case any Security is to be redeemed in part only the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Security, a new Security or Securities in principal amount equal to the unredeemed portion thereof will be issued. The notice of redemption of Securities to be redeemed at the option of the Company or pursuant to Section 4.11 shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. The Company shall notify the Trustee of such redemption at least 15 days (or five days in the case of any notice of redemption pursuant to Section 4.11) prior to the date the notice of redemption is to be sent to the Holders and shall specify in such notice whether the Trustee is to give such notice. On or prior to the redemption date specified in the notice of redemption given as provided in this Section, the Company will deposit with the Trustee or with the Paying Agent (or, if the Company is acting as Paying Agent, the Company will set aside, segregate and hold in trust) an amount of money sufficient to redeem in immediately available funds on the redemption date all the Securities so called for redemption at the appropriate redemption price, together with accrued interest to the date fixed for redemption. If less than all the outstanding Securities are to be redeemed the Company will deliver to the Trustee at least 45 days prior to the date fixed for redemption an Officers' Certificate stating the aggregate principal amount of Securities to be redeemed. If less than all the Securities are to be redeemed, the Trustee shall select, by lot or pro rata, or as otherwise directed by the Company in a manner which is appropriate and fair, the Securities or portions thereof to be redeemed. Securities may be redeemed in part in multiples of $1,000 principal amount only. The Trustee shall promptly notify the Company in writing of the 23 31 Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed. SECTION 3.03. Payment of Securities Called for Redemption. If notice of redemption has been given as above provided, the Securities or portions of Securities specified in such notice shall become due and payable on the date and at the place stated in such notice at the applicable redemption price, together with interest accrued to the date fixed for redemption, and on and after said date (unless the Company shall default in the payment of such Securities at the redemption price, together with interest accrued to said date) interest on the Securities or portions of Securities so called for redemption shall cease to accrue and such Securities shall cease from and after the date fixed for redemption to be entitled to any benefit or security under this Indenture. On presentation and surrender of such Securities at a place of payment specified in said notice, said Securities or the specified portions thereof shall be paid and redeemed by the Company at the applicable redemption price, together with interest accrued thereon to the date fixed for redemption; provided that if the date fixed for redemption is after a record date for the payment of interest on the Securities and on or before the corresponding semiannual interest payment date, such accrued interest shall be payable to the Holders of such Securities registered as such on the relevant record date. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal shall, until paid or duly provided for, bear interest from the date fixed for redemption at the rate borne by the Securities then in effect. Upon presentation of any Security redeemed in part only, the Issuers shall execute and the Trustee shall authenticate and deliver to or on the order of the Holder thereof, at the expense of the Company, a new Security or Securities, of authorized denominations, in principal amount equal to the unredeemed portion of the Security so presented. SECTION 3.04. Exclusion of Certain Securities from Eligibility for Selection for Redemption. Securities shall be excluded from eligibility for selection for redemption if they are identified by registration and certificate number in a written statement signed by an 24 32 authorized officer of the Company and delivered to the Trustee at least 40 days prior to the last date on which notice of redemption may be given as being owned of record and beneficially by, and not pledged or hypothecated by, (a) the Company or (b) an entity specifically identified in such written statement as directly or indirectly controlling or controlled by or under direct or indirect common control with the Company. ARTICLE IV COVENANTS SECTION 4.01. Payment of Securities. The Company or the Co-Obligor shall pay the principal of and interest on the Securities on the dates and in the manner provided in the Securities. An installment of principal or interest shall be considered paid on the due date if the Trustee or Paying Agent (other than the Company, the Co-Obligor, any Subsidiary of the Company or the Co-Obligor, or any Affiliate of any thereof) holds on that date money, in immediately available funds, deposited for and sufficient to pay the installment. The Company or the Co-Obligor shall pay interest on overdue principal at the rate borne by the Securities and they shall pay interest on overdue installments of interest at the same rate, to the extent lawful. The obligations of each of the Company and the Co-Obligor under this Section shall be joint and several. SECTION 4.02. Maintenance of Office or Agency. The Company will maintain in The City of New York, an office or agency where Securities nay be surrendered for registration of transfer or exchange or tendered for payment and where notices and demands to or upon the Issuers in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee as set forth in Section 11.02. The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations. The Company will give prompt written notice to the Trustee of 25 33 any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby initially designates the Corporate Trust Office of the Trustee or its designated Affiliate located in the Borough of Manhattan, The City of New York, as such office of the Company in accordance with Section 2.03. SECTION 4.03. Limitation on Debt. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume, guarantee or otherwise become liable for, any Debt, except: (a) Debt evidenced by the Securities; (b) Debt under the Scotiabank Credit Agreement in an aggregate principal amount at any time outstanding not to exceed $700,000,000; (c) Debt of the Company to any Consolidated Subsidiary or of any Consolidated Subsidiary to the Company or to any other Consolidated Subsidiary; (d) Debt of the Company and its Subsidiaries outstanding on the Closing Date; (e) Debt evidenced by letters of credit which are issued in the ordinary course of business of the Company and its Subsidiaries; (f) Debt incurred to purchase or to finance the purchase of any Person's ownership interest in a Permitted Joint venture in accordance with the terms of the agreement creating such interest or on terms no more favorable to such Person than that provided for by such agreement on the Closing Date; (g) Debt in respect of performance bonds provided by the Company in the ordinary course of business; (h) Purchase Money Obligations incurred in the ordinary course of business; (i) Debt representing additional shares of PIK Preferred payable as dividends on such PIK Preferred; (j) Physician Support Obligations; (k) Capitalized Lease Obligations and Attributable Debt (without duplication) in an aggregate amount outstanding at any time not to exceed 10% of the Company's Consolidated Net Tangible Assets; 26 34 (l) Debt assumed in connection with the acquisition of Fountain Valley in an aggregate principal amount not exceeding $20,000,000; (m) Any extension, renewal or replacement of any of clauses (a), (b), (d) or (f) above (without (i) increasing the principal amount of any Debt then outstanding (unless such Debt is issued at a discount in which case the issuance price of such discount Debt shall not exceed the principal amount of Debt being so refinanced) plus the amount of any premium required to be paid under the terms of the instrument governing such Debt being refinanced or the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing through means of a tender offer or privately negotiated transactions and, in each case, actually paid, (ii) altering the issuer or obligor (except that the Company may incur Debt to replace Debt of a Subsidiary), (iii) shortening the maturity of subordinated debt or (iv) issuing Debt that is senior in right of payment to the Debt being extended, renewed or replaced; and (n) Debt, other than Debt permitted under clauses (a) through (l), provided that the aggregate principal amount (or liquidation preference) of such Debt may not exceed $125,000,000 at any time outstanding, which Debt may be incurred under the Credit Agreement. Notwithstanding the foregoing, the Company and its Consolidated Subsidiaries may create, incur or assume Debt (including Acquisition Debt) if, at the time such Debt is so created, incurred or assumed and after giving effect thereto and the application of the proceeds thereof, and after giving pro forma effect to any acquisition or disposition by the Company or any Subsidiary of (i) a hospital or (ii) any assets with a value in excess of $10,000,000, whether by merger, stock purchase or sale, or asset purchase or sale, as if such acquisition or disposition occurred on the first day of the Reference Period, the Company's Pro Forma Coverage Ratio shall not be less than 2.0 to 1.0 for the period beginning on the date of the Indenture through August 31, 1995 and 2.25 to 1.0 thereafter; provided that, if the Company and its Consolidated Subsidiaries are unable to incur or assume Acquisition Debt pursuant to the foregoing clause, the Company and its Consolidated Subsidiaries may nonetheless create, incur or assume Acquisition Debt so long as, after giving effect thereto and the application of the proceeds thereof, and after giving pro forma effect to any acquisition or disposition by the Company or any Subsidiary of (i) a hospital or (ii) any assets with a value in excess of $10,000,000, whether by merger, stock purchase or sale, or asset purchase or sale, 27 35 as if such acquisition or disposition occurred on the first day of the Reference Period, the Company's Pro Forma Coverage Ratio (i) is not less than 2.0 to 1.0 and (ii) is not less than the ratio of the Company's Consolidated Cash Flow to Fixed Charges (applying the provisions of (2) and (3) of the definition of Pro Forma Coverage Ratio) for the period with respect to which the Pro Forma Coverage Ratio was calculated. For purposes of this Section 4.03, any waiver, extension or continuation under the Credit Agreement of any or all mandatory prepayments or installment payments or maturity date of any of the Debt referred to in clause (b) above shall not be or be deemed to be the creation, incurrence or assumption of Debt by the Company. SECTION 4.04. Limitation on Restricted Payments. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly make any Restricted Payment, if, after giving effect thereto: (a) an Event of Default, or an event that through the passage of time or the giving of notice, or both, would become an Event of Default, shall have occurred and be continuing, (b) the Company could not incur an additional $1.00 of Debt (other than permitted or Acquisition Debt) in accordance with Section 4.03; or (c) the aggregate amount of all Restricted Payments made by the Company and its Subsidiaries (the amount expended or distributed for such purposes, if other than in cash, to be determined in good faith by the Board of Directors) from and after the Closing Date shall exceed the sum of: (i) the aggregate of 50% of the Consolidated Net Income of the Company (determined by excluding any amounts included in such Consolidated Net Income which were received by the Company or a Subsidiary from an Unrestricted Subsidiary) accrued for the period (taken as one accounting period) commencing with the first full month after the Closing Date to and including the first full month ended immediately prior to the date of such calculation (or, in the event Consolidated Net Income is a deficit, then minus 100% of such deficit), (ii) the aggregate net proceeds to the Company, including the fair market value of Property other than cash (as determined in good 28 36 faith by the Board of Directors), received by the Company from the issuance or sale (other than to a Subsidiary of the Company) of its Capital Stock (other than Redeemable Stock) from and after the date of this Indenture, and options, warrants and rights to purchase its Capital Stock other than Redeemable Stock, and (iii) the aggregate amount received by the Company or a Subsidiary of the Company from its Unrestricted Subsidiaries (excluding all amounts received by the Company or any Subsidiary from all such Unrestricted Subsidiaries which represent a repayment of the principal portion of any loan or advance or any return of contributed capital in respect of any previous advance). The foregoing clauses (a), (b) and (c) will not prevent Permitted Payments and the foregoing clauses (b) and (c) will not prevent (i) the payment of any dividend within 60 days after the date of its declaration if such dividend could have been made on the date of its declaration in compliance with the foregoing provisions, (ii) amounts payable by the Company to its employees pursuant to the Stock Appreciation Rights, and (iii) the repurchase or redemption of shares of Capital Stock from any officer, director or employee of the Company or its Subsidiaries whose employment has been terminated, or who has died or become disabled in an aggregate amount not to exceed $7,500,000 per annum. SECTION 4.05. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries. The Company will not, and will not permit any of its Subsidiaries to, create, assume or otherwise cause or suffer to exist or to become effective any consensual encumbrance or restriction on the ability of any Subsidiary to (A) pay dividends or make any other distributions on its Capital Stock to the Company or any Subsidiary; (B) make payments in respect of any Debt owed to the Company or any Subsidiary; or (C) make loans or advances to the Company or any of the Company's Subsidiaries; provided, however, that the following restrictions shall not be prohibited pursuant to this Section 4.05: (i) those contained in the Credit Agreement; (ii) consensual encumbrances or restrictions binding upon any Person at the time such Person becomes a Subsidiary of the Company so long as such encumbrances or restrictions are not created, incurred or assumed in contemplation of such Person becoming a Subsidiary of the Company; (iii) restrictions contained in security agreements permitted by this Indenture securing Debt permitted by this Indenture to the extent such restrictions restrict the transfer of Property subject to such security agreements; (iv) any 29 37 encumbrance or restriction consisting of customary non-assignment provisions in leases to the extent such provisions restrict the transfer of the leases; (v) any encumbrance or restriction pursuant to an agreement in effect at or entered into on the date of this Indenture; (vi) any encumbrance or restriction relating to a Permitted Joint Venture; or (vii) any restrictions with respect to a Subsidiary imposed pursuant to an agreement which has been entered into for the sale or disposition of all or substantially all the capital stock or assets of such Subsidiary. SECTION 4.06. Limitations on Liens Securing Debt. (a) The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or permit to exist any Lien upon or with respect to any of the Property of the Company or any such Subsidiary whether now owned or hereafter acquired, or on any income or profits therefrom, to secure any Debt which is pari passu with or subordinate in right of payment to the Securities unless, contemporaneously therewith or prior thereto, effective provision shall be made whereby the Securities are secured equally and ratably with such other Debt; provided that the restrictions in this Section 4.06 shall not prohibit Permitted Liens and it is expressly understood the creation, incurrence, assumption or existence of any Permitted Lien shall not give rise to any rights of the Holders pursuant to this Section 4.06. (b) If at any time the Company or any of its Subsidiaries shall incur any Lien requiring that the Securities be equally and ratably secured pursuant to the covenant in subsection (a) of this Section 4.06, the Company shall promptly deliver to the Trustee an Officers' Certificate, stating that such covenant has been complied with, and an Opinion of Counsel, stating that in such counsel's opinion such covenant has been complied with and that any instruments executed by the Company or any Subsidiary in their performance of such covenant complied with the requirements thereof. SECTION 4.07. Transactions with Affiliates. The Company will not, and will not permit any of its Subsidiaries to, enter into any transactions with Affiliates of the Company unless (i) such transactions are between or among the Company and its Subsidiaries or Unrestricted Subsidiaries, (ii) such transactions are in the ordinary course of business and consistent with past practice or (iii) the terms of such transactions are fair and reasonable to the Company or such Subsidiary or Unrestricted Subsidiary, as the case may be, and are at least as favorable as the terms which could be obtained by the Company or such Subsidiary or Unrestricted Subsidiary, as 30 38 the case may be, in a comparable transaction made on an arm's-length basis between unaffiliated parties. In the event of any transaction or series of transactions occurring subsequent to the date of this Indenture with an Affiliate of the Company which involves in excess of $5,000,000 and is not permitted under clause (i) or (ii) of the preceding sentence, the majority of the disinterested members of the Board of Directors shall by resolution determine that such transaction or series of transactions meets the criteria set forth in clause (iii) of the preceding sentence; provided, further, that if such transaction or series of transactions involves in excess of $10,000,000 and is not permitted under clause (i) or (ii) of the preceding sentence, the Company shall also deliver to the Trustee a written opinion of a nationally recognized investment banking firm to the effect that such business or transaction is fair to the Company from a financial point of view. Notwithstanding the foregoing, such provisions do not prohibit (i) the making of Physician Support Obligations, (ii) transactions with Permitted Joint Ventures or (iii) the payment of regular fees to directors of the Company who are not employees of the Company. SECTION 4.08. Officers' Certificates as to Default and as to Compliance. The Company will, so long as any of the Securities are outstanding, deliver to the Trustee within 120 days after the end of each fiscal year of the Company beginning with the fiscal year ending August 31, 1994, an Officers' Certificate to the effect that: (1) a review of the activities of the Company and its Subsidiaries during such year and of performance under this Indenture has been made under such officers' supervision, and (2) to the best of such officers' knowledge, based on such review, the Issuers have fulfilled all their obligations under this Indenture throughout such year, or if there has been a default in the fulfillment of any such obligation, specifying each such default known to them and the nature and status thereof. SECTION 4.09. Reports to Securityholders. (a) Within 15 days after the Company files with the SEC copies of its annual reports and other information, documents and reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which it is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act the Company shall file the same with the Trustee. If the Company is not required to file reports or other documents with the SEC pursuant to Section 13 or 15(d) of the Exchange Act, the Company shall file with the Trustee reports or other documents containing 31 39 information substantially equivalent to that which the Company would have been required to file with the SEC had it been subject to such filing requirements within the same 15 days after the last date on which it would have been required to make such filing with the SEC. The Company also shall comply with the other provisions of TIA Section 314(a). (b) The Company will mail or cause to be mailed to each Holder of Securities, at its registered address, annual audited financial statements of the Company and its Consolidated Subsidiaries and quarterly financial statements of the Company and its Consolidated Subsidiaries which, to the extent that the Company may be required to file annual and quarterly reports with the SEC under the Exchange Act, may be copies of such reports. If the Company is not, or ceases to be, subject to the requirements of Section 13 or 15(d) of the Exchange Act, it shall mail or cause to be mailed, copies of the reports filed with the Trustee pursuant to the second sentence on Section 4.10(a) (in lieu of comparable reports pursuant to the Exchange Act) to each holder of record at the end of the fiscal period involved. SECTION 4.10. Change of Control. (a) Upon the occurrence of a Change of Control (the "Change of Control Date"), each Holder of a Security shall have the right to require the repurchase of all or part of such Securityholder's Securities pursuant to the offer described in Section 4.10(b) (the "Change of Control Offer") at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. Prior to the mailing of the notice to Securityholders provided for below, but in any event within 30 days following any Change of Control, the Company covenants to (i) repay in full in cash any Designated Senior Debt which by its terms would require such repayment or to offer to repay in full in cash all such Debt and to repay the Debt of each Person who has accepted such offer or (ii) obtain the requisite consents under such Designated Senior Debt to permit the repurchase of the Securities as provided for in Section 4.10(b). The Company shall first comply with the covenant in the preceding sentence before it shall be required to repurchase Securities pursuant to this covenant. (b) Within 30 days following any Change of Control, the Company shall mail or at the Company's request the Trustee shall mail a notice to each Securityholder stating: (i) that the Change of Control Offer is being made pursuant to Section 4.10 and that all Securities tendered will be accepted for payment; 32 40 (ii) the purchase price and the purchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Change of Control Payment Date"); (iii) that any Security not tendered will continue to accrue interest; (iv) that any Security accepted for payment pursuant to the Change of Control Offer will cease to accrue interest after the Change of Control Payment Date; (v) that Securityholders electing to have a Security purchased pursuant to a Change of Control Offer will be required to surrender the Security, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Security completed, to the Trustee at the address specified in the notice prior to the close of business on the Change of Control Payment Date; (vi) that Securityholders will be entitled to withdraw their election if the Trustee receives, not later than the close of business on the third Business Day (or such shorter period as may be required by applicable law) preceding the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Securityholder, the principal amount of Securities the Securityholder delivered for purchase and a statement that such Securityholder is withdrawing his election to have such Securities purchased; and (vii) that Securityholders whose Securities are purchased only in part will be issued new Securities in a principal amount equal to the unpurchased portion of the Securities surrendered. In the event a Change of Control occurs and the Holders of Securities exercise their right to require the Company to repurchase Securities, and assuring that such a repurchase constitutes a "tender offer" for purposes of Rule 14e-1 under the Exchange Act at the time it is required, the Company will comply with the requirements of Rule 14e-1 as then in effect and any other applicable securities law or regulations with respect to such repurchase. On the Change of Control Payment Date, subject to the provisions of Article Nine hereof, the Company will (i) accept for payment the Securities or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the Trustee money sufficient to pay the purchase price of all the Securities or portions thereof so 33 41 tendered and (iii) deliver or cause to be delivered to the Trustee, Securities so accepted together with an Officers' Certificate describing the Securities or portions thereof tendered to the Company. The Trustee shall promptly mail to each Holder of the Securities so accepted payment in an amount equal to the purchase price of such Securities, and the Trustee shall promptly authenticate and mail to such Holder a new Security in the principal amount equal to any unpurchased portion of the Securities surrendered by such Securityholder. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. SECTION 4.11. Maintenance of Properties, etc. The Company shall, and shall cause each of its Subsidiaries to, maintain its material properties and assets in normal working order and condition and make all necessary repairs, renewals, replacements, additions, betterments and improvements thereto, ordinary wear and tear excepted, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be conducted at all times; provided, however, that nothing in this Section 4.11 shall prevent the Company or one of its Subsidiaries from discontinuing the operation and maintenance of any of its properties or assets if such discontinuance is, in the judgment of the Company or such Subsidiary, desirable in the conduct of its business. The Company shall, and shall cause each of its Subsidiaries to, maintain with insurers which the Company believes in good faith to be financially sound and reputable such insurance as may be required by law and such other insurance (or self insurance), to such extent and against such hazards and liabilities, as it in good faith determines is customarily maintained by companies similarly situated with like properties. The Company shall, and shall cause each of its Subsidiaries to, use its commercially reasonable efforts to do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights and franchises, except to the extent permitted by this Indenture and except in such cases where the Company determines in good faith that failure to do so would not have a material adverse effect on the business, earnings, properties, assets, financial condition or results of operation of the Company and its Subsidiaries taken as a whole. The Company shall, and shall cause each of its Subsidiaries to, in good faith attempt to comply with all statutes, laws, ordinances, or government rules and regulations to which it is subject, noncompliance with which would materially adversely affect the business, earnings, 34 42 properties, assets, financial condition or results of operation of the Company and its Subsidiaries taken as a whole. The Company shall, and shall cause each of its Subsidiaries to, pay prior to delinquency all taxes, assessments and governmental levies which if not paid would have a material adverse effect on the business, earnings, properties, assets, financial condition or results of operations of the Company and its Subsidiaries taken as a whole, except as contested in good faith by appropriate proceedings. SECTION 4.12. Limitation on Other Subordinated Debt. The Company will not incur any Debt that is by its terms subordinate in right of payment to any Senior Debt and senior in right of payment to the Securities. ARTICLE V CONSOLIDATION, MERGER, SALE OR CONVEYANCE SECTION 5.01. When Company May Merge, etc. The Company shall not consolidate with, or merge with or into, or sell, lease or convey all or substantially all of its assets to, another Person unless (i) (x) the Company is the continuing corporation in the case of a merger or (y) the resulting, surviving or transferee Person (the "Surviving Entity") shall be a corporation or partnership organized under the laws of the United States, one of the States thereof or the District of Columbia and shall expressly assume by supplemental indenture (satisfactory in form to the Trustee) all the obligations of the Company under the Securities and this Indenture; (ii) immediately after giving effect to such transaction, no Event of Default or event or condition which through the giving of notice or lapse of time or both would become an Event of Default shall have occurred and be continuing; (iii) the Net Worth of the Company or the Surviving Entity, as the case may be, on a pro forma basis after giving effect to such consolidation, merger or sale, lease or conveyance of assets is at least as great as the Net Worth of the Company immediately prior to the date of such transaction; and (iv) immediately after giving effect to such transaction, the Company or the Surviving Entity, as 35 43 the case may be, would be able to incur $1 of additional Debt under Section 4.03 (other than pursuant to Section 4.03(a) through (n). Notwithstanding the foregoing, clauses (iii) and (iv) shall not prohibit a transaction, the principal purpose of which is (as determined in good faith by the Board of Directors of the Company and evidenced by a resolution thereof) to change the state of incorporation of the Company, and such transaction does not have as one of its purposes the evasion of the restrictions of this Section 5.01. SECTION 5.02. Opinion of Counsel to Trustee; Officers' Certificate. The Trustee, subject to the provisions of Sections 7.01 and 7.02, shall receive an Officers' Certificate and an Opinion of Counsel each stating that such consolidation, merger, sale, lease or conveyance, and any such assumption, complies with the applicable provisions of this Indenture and that all conditions precedent herein provided relating to such transaction have been complied with. SECTION 5.03. Successor Corporation Substituted. Upon any consolidation, merger, sale, lease or conveyance in accordance with Sections 5.01 and 5.02, the successor corporation or partnership formed by such consolidation or into which the Company is merged or the Person to which any such transfer is made shall succeed to, and be substituted for and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor corporation had been named as the Company herein, all without any further act or deed on the part of such successor being required. ARTICLE VI REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 6.01. Event of Default Defined; Acceleration of Maturity; Waiver of Default. In case one or more of the following Events of Default (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) shall have occurred and be continuing: (a) default in the payment of any installment of interest upon any of the Securities as and when the 36 44 same becomes due and payable, and continuance of such default for a period of 30 days; or (b) default in the payment of all or any part of the principal on any of the Securities as and when the sane shall become due and payable either at maturity, upon any redemption, by declaration or otherwise; or (c) failure on the part of the Company to observe, perform or comply with any of the covenants or agreements contained in the Securities or in this Indenture and the continuance of such failure for a period of 60 days after written notice specifying such failure stating that such notice is a "Notice of Default" hereunder and demanding that the Company remedy the same shall have been given by registered or certified mail, return receipt requested, to the Company by the Trustee or to the Company and the Trustee by Holders of at least 40% in aggregate principal amount of the Securities at the time outstanding; or (d) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of an Issuer or any of its Material Subsidiaries in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of an Issuer or any of its Material Subsidiaries or for any substantial part of the property of an Issuer or any of its Material Subsidiaries or ordering the winding up or liquidation of the affairs of an Issuer or any of its Material Subsidiaries, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (e) an Issuer or any of its Material Subsidiaries shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of an Issuer or any of its Material Subsidiaries or for any substantial part of the property of an Issuer or any of its Material Subsidiaries, or an Issuer or any of its Material Subsidiaries shall make any general assignment for the benefit of creditors; or (f) any acceleration of the maturity of Debt of the Company or any of its Material Subsidiaries for a 37 45 failure to pay any such Debt at its stated maturity, or (upon demand for payment) under any guarantee of payment by the Company or any of its Subsidiaries of any Debt, whether such Debt or guarantee existed at the Closing Date or as thereafter created, aggregating at least $25,000,000 provided that such acceleration or failure to pay is not cured or waived within 10 days after such acceleration or failure to pay; or (g) final judgments not covered by insurance (which coverage shall be in full force and effect) or the payment of money which in the aggregate at any one time exceed $10,000,000 shall be rendered against the Company or any of its Subsidiaries by a court of competent jurisdiction and shall remain undischarged for a period (during which execution shall not be effectively stopped by appeal or otherwise) of 60 days after such judgments become final and nonappealable; then, and in each and every such case (other than an Event of Default described in clause (d) or (e) of the preceding paragraph relating to an Issuer), unless the principal of all the Securities shall have already become due and payable, either the Trustee or the Holders of not less than 25% in the aggregate principal amount of the Securities then outstanding, by notice in writing to the Company (and to the Trustee if given by the Securityholders) (the "Acceleration Notice") may declare the principal of all Securities and the interest accrued thereon to be due and payable (i) immediately if no Designated Senior Debt is outstanding or (ii) if any Designated Senior Debt is outstanding, upon the earlier of (x) 10 days after such Acceleration Notice is received by the Senior Agent and each Senior Representative with respect to Designated Senior Debt at their last address specified pursuant to Section 11.02 or (y) the acceleration of such Designated Senior Debt, and upon any such declaration the same shall become due and payable on the date specified in the foregoing clause (i) or (ii), as applicable; provided, that (i) prior to the expiration of such period, such acceleration shall be automatically rescinded and annulled without further action required on the part of the Holders in the event that any default specified in the Acceleration Notice under the Securities shall have been cured, waived or otherwise remedied and (ii) at any time before the entry of a judgment or decree for the payment of moneys due under the Indenture, the Holders of a majority in aggregate principal amount of the Securities may waive all defaults except (a) a default in the payment of principal or interest on the Securities or (b) in respect of a covenant or provision hereof which cannot be modified or amended without the consent of each Holder of the Security affected. If an Event of Default specified in clause (d) or (e) above relating to an Issuer occurs, the principal of and 38 46 accrued interest on all outstanding Securities shall become immediately due and payable without any declaration or other act on the part of the Trustee or any Holder of Securities. The provisions of this Section 6.01, however, are subject to the condition that if, at any time after the principal of the Securities shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered, the Company or the Co-Obligor shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Securities and the principal of any and all Securities which shall have become due otherwise than by acceleration (with interest upon such principal and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest, at the rate borne by the Securities, to the date of such payment or deposit) and such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith, and if any and all Events of Default under this Indenture, other than the non-payment of the principal of Securities which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided herein -- then and in every such case, Holders of a majority in aggregate principal amount of the Securities then outstanding, by written notice to the Company and the Trustee, may waive all defaults and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or impair any right consequent thereon. The Company shall promptly upon receipt of an Acceleration Notice provide written notice to the Senior Agent and any Senior Representative of the receipt of such Acceleration Notice. Failure to deliver such notice shall not affect the validity of the notice delivered by the Holders in accordance with the provisions referred to above. SECTION 6.02. Collection of Indebtedness by Trustee; Trustee May Prove Debt. The Issuers covenant that (a) in case default shall be made in the payment of any installment of interest on any of the Securities when such interest shall have become due and payable, and such default shall have continued for a period of 30 days or (b) in case default shall be made in the payment of all or any part of the principal of any of the Securities when the same shall have become due and payable, whether upon maturity or upon any redemption or by declaration or otherwise -- then upon 39 47 demand by the Trustee, the Company or the Co-Obligor will pay to the Trustee for the benefit of the Holders of the Securities, subject to the provisions of Article Nine hereof, the whole amount that then shall have become due and payable on all such Securities for principal or interest, as the case may be (with interest to the date of such payment upon the overdue principal and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest at the rate borne by the Securities); and in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and any expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee, except as a result of its negligence or bad faith. Until such demand is made by the Trustee, the Company or the Co-Obligor may pay the principal of and interest on the Securities to the registered Holders, whether or not the Securities be overdue. In case the Issuers shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any action or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceedings to judgment or final decree, and may enforce any such judgment or final decree against the Issuers or other obligor upon the Securities and collect in the manner provided by law out of the property of the Issuers or other obligor upon the Securities, wherever situated, the moneys adjudged or decreed to be payable. In case there shall be pending proceedings relative to the Issuers or any other obligor upon the Securities under Title 11 of the United States Code or any other applicable Federal or state bankruptcy, insolvency or other similar law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Issuers or the property of the Issuers or such other obliger, or in case of any other judicial proceedings relative to the Issuers or other obligor upon the Securities, or to the creditors or property of the Issuers or such other obligor, the Trustee, irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the 40 48 provisions of this Section, shall be entitled and empowered, by intervention in such proceedings or otherwise: (a) to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Securities, and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee, except as a result of negligence or bad faith) and of the Securityholders allowed in any judicial proceedings relative to the Issuers or other obligor upon the Securities, or to the creditors or property of the Issuers or such other obligor; (b) unless prohibited by applicable law and regulations, to vote on behalf of the Holders of the Securities in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or person performing similar functions in comparable proceedings; and (c) subject to the provisions of Article Nine, to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute all amounts received with respect to the claims of the Securityholders and of the Trustee on their behalf; and any trustee, receiver, liquidator, custodian or other similar official is hereby authorized by each of the Securityholders to make payments to the Trustee, and, in the event that the Trustee shall consent to the making of payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee, except as a result of negligence or bad faith. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or vote for or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding 41 49 except, as aforesaid, to vote for the election of a trustee in bankruptcy or similar person. All rights of action and of asserting claims under this Indenture, or under any of the Securities, may be enforced by the Trustee without the possession of any of the Securities or the production thereof on any trial or other proceedings relative thereto, and any such action or proceedings instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment, subject to the payment of the expenses, disbursements and compensation of the Trustee, each predecessor Trustee and their respective agents and attorneys, shall be for the ratable benefit of the Holders of the Securities. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the Holders of the Securities, and it shall not be necessary to make any Holders of the Securities parties to any such proceedings. SECTION 6.03. Application of Proceeds. Any moneys collected by the Trustee pursuant to this Article shall, subject to the provisions of Article Nine hereof, be applied in the following order at the date or dates fixed by the Trustee and, in case of the distribution of such moneys on account of principal or interest, upon presentation of the several Securities and stamping (or otherwise noting) thereon the payment, or issuing Securities in reduced principal amounts in exchange for the presented Securities if only partially paid, or upon surrender thereof if fully paid: FIRST: To the payment of costs and expenses, including reasonable compensation to the Trustee and each predecessor Trustee and their respective agents and attorneys and of all expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith; SECOND: In case the principal of the Securities shall not have become and be then due and payable, to the payment of interest in default in the order of the maturity of the installments of such interest, with interest (to the extent that such interest has been collected by the Trustee) upon the overdue installments of interest at the interest rate borne by the Securities, such payments to be made ratably to the 42 50 persons entitled thereto, without discrimination or preference; THIRD: In case the principal of the Securities shall have become and shall be then due and payable, to the payment of the whole amount then owing and unpaid upon all the Securities for principal and interest, with interest upon the overdue principal, and (to the extent that such interest has been collected by the Trustee) upon overdue installments of interest at the interest rate born by the Securities; and in case such moneys shall be insufficient to pay in full the whole amount so due and unpaid upon the Securities, then to the payment of such principal and interest, without preference or priority of principal over interest, or of interest over principal, or of any installment of interest over any other installment of interest, or of any Security over any other Security, ratably to the aggregate of such principal and accrued and unpaid interest; and FOURTH: To the payment of the remainder, if any, to the Company or any other person lawfully entitled thereto. SECTION 6.04. Suits for Enforcement. In case an Event of Default has occurred, has not been waived and is continuing, the Trustee shall proceed, unless otherwise directed by the Holders of a majority in aggregate principal amount of the Securities then outstanding, to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either in law or in equity or in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 6.05. Restoration of Rights and Abandonment of Proceedings. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely to the Trustee, then and in every such case the Issuers and the Trustee shall be restored respectively to their former positions and rights hereunder, and all rights, remedies and powers of the Issuers, the Trustee and the Securityholders shall continue as though no such proceedings had been taken. SECTION 6.06. Limitations on Suits by Securityholders. No Holder shall have any right by virtue 43 51 or by availing of any provision of this Indenture to institute any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to this Indenture or for the appointment of a trustee, receiver, liquidator, custodian or other similar official or for any other remedy hereunder, unless such Holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof, as hereinbefore provided, and unless the Holders of not less than 25% in aggregate principal amount of the Securities then outstanding shall have made written request upon the Trustee to institute such action or proceeding in its own name as trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein and thereby and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action or proceedings and no direction inconsistent with such written request shall have been given to the Trustee pursuant to Section 6.09; it being understood and intended, and being expressly covenanted by the taker and Holder of every Security with every other taker and Holder and the Trustee, that no one or more Holders of Securities shall have any right in any manner whatever by virtue or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other Holder of Securities, or to obtain or seek to obtain priority over or preference to any other such Holder or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all Holders of Securities. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. SECTION 6.07. Unconditional Right of Securityholders to Institute Certain Suits. Notwithstanding any other provision in this Indenture and any provision of any Security, the right of any Holder to receive payment of the principal of and interest on such Security on or after the respective due dates expressed in such Security, or to institute suit for the enforcement of any such payment on or after such respective dates shall not be impaired or affected without the consent of such Holder. SECTION 6.08. Powers and Remedies Cumulative; Delay or Omission Not Waiver of Default. Except as provided in Section 6.06, no right or remedy herein conferred upon or reserved to the Trustee or to the Securityholders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law 44 52 or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. No delay or omission of the Trustee or of any Holder to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein; and subject to Section 6.06, every power and remedy given by this Indenture or by laws to the Trustee or to the Securityholders nay be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. SECTION 6.09. Control by Securityholders. The Holders of a majority in aggregate principal amount of the Securities at the time outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee by this Indenture; provided that such direction shall not be otherwise than in accordance with law and the provisions of this Indenture; and provided, further, that (subject to the provisions of Section 6.01) the Trustee shall have the right to decline to follow any such direction if the Trustee, being advised by counsel, shall determine that the action or proceeding so directed may not lawfully be taken or if the Trustee in good faith by its board of directors, the executive committee or a trust committee of directors or Responsible Officers of the Trustee shall determine that the action or proceeding so directed would involve the Trustee in personal liability or if the Trustee in good faith shall so determine that the actions or forbearances specified in or pursuant to such direction shall be unduly prejudicial to the interests of holders of the Securities not joining in the giving of said direction, it being understood that (subject to Section 7.01) the Trustee shall have no duty to ascertain whether or not such actions or forbearances are unduly prejudicial to such Holders. Nothing in this Indenture shall impair the right of the Trustee in its discretion to take any action deemed proper by the Trustee and which is not inconsistent with such direction by Securityholders. SECTION 6.10. Waiver of Past Defaults Prior to the declaration of the acceleration of maturity of the Securities as provided in Section 6.01, the Holders of a majority in aggregate principal amount of the Securities at the time outstanding may on behalf of all Holders waive any past default or Event of Default hereunder and its 45 53 consequences, except a default (a) in the payment of principal of or interest on any of the Securities or (b) in respect of a covenant or provisions hereof which cannot be modified or amended without the consent of the Holder of each Security affected. In the case of any such waiver, the Issuers, the Trustee and the Holders of the Securities shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. Upon any such waiver, such default shall cease to exist and be deemed to have been cured and not to have occurred, and any Event of Default arising therefrom shall be deemed to have been cured, and not to have occurred for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 6.11. Right of Court to Require Filing of Undertaking to Pay Costs. All parties to this Indenture agree, and each Holder by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder or group of Securityholders holding in the aggregate more than 10% in aggregate principal amount of the Securities outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of or interest on any Security on or after the due date expressed in such Security. ARTICLE VII TRUSTEE SECTION 7.01. Duties of Trustee. (a) The Trustee, except during the continuance of any Event of Default, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and 46 54 skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (1) The Trustee shall not be liable except for the performance of those duties as are specifically set forth in this Indenture and no others. (2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (1) This paragraph does not limit the effects of paragraph (b) of this Section 7.01. (2) The Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (3) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.09. (d) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (e) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), (c) and (d) of this Section 7.01. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree with the Company. Money held in trust by the Trustee need 47 55 not be segregated from other funds except to the extent required by law. SECTION 7.02. Rights of Trustee. Subject to Section 7.01: (a) The Trustee may rely on and shall be protected in acting or refraining from acting upon any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel, which shall conform to the provisions of Section 11.05. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Certificate or Opinion. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent (other than an agent who is an employee of the Trustee) appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it reasonably believes to be authorized or within its rights or powers. (e) The Trustee may consult with counsel and the advice or opinion of such counsel as to matters of law shall be full and complete authorization and protection in respect of any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the written request or direction of any of the Securityholders pursuant to this Indenture, unless such Securityholder shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction. (g) The Trustee shall not be bound to make any investigation into, the facts or matters stated in any document but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit. 48 56 SECTION 7.03. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Issuers or their Affiliates with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to Sections 7.10 and 7.11. SECTION 7.04. Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture, the Securities or any statements in the registration statement pursuant to which the Securities were issued; it shall not be accountable for the Company's use of the proceeds from the Securities; and it shall not be responsible for any statement in the Securities other than its certificate of authentication. SECTION 7.05. Notice of Defaults. If a default (the term "default" for the purposes of this Section being hereby defined to mean any event or condition which is, or with notice or lapse of time or both would become, an Event of Default) or an Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Securityholder, the Senior Agent and any Senior Representative notice of the default or Event of Default within 90 days after it occurs. Except in the case of a default or an Event of Default in payment of principal of or interest on any Security, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interest of Securityholders. SECTION 7.06. Reports by Trustee to Holders. Within 60 days after each _________ beginning with ________, 1994, the Trustee shall mail to (i) each Securityholder, (ii) such other holders of Securities as have within the two years preceding such mailing filed their names with the Trustee for that purpose or whose names and addresses have been supplied to or received by the Trustee pursuant to TIA Section 312, and (iii) the Issuer a brief report dated as of such _______ that complies with TIA Section 313(a). The Trustee also shall comply with TIA Section 313(b). A copy of each such report at the time of its mailing to Securityholders shall be filed with the SEC and each stock exchange, if any, on which the Securities are listed. The Company shall notify the Trustee if the Securities become listed on any stock exchange. SECTION 7.07. Compensation and Indemnity. The Company shall pay to the Trustee from time to time 49 57 reasonable compensation for its services. The Trustee's compensation shall not be limited by any law on compensation relating to the trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable disbursements and expenses incurred or made by it. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel and any taxes or other expenses incurred by a trust created pursuant to Section 8.01 hereof. The Company shall indemnify the Trustee for, and hold it harmless against any loss, liability or expense incurred by it in connection with the administration of this Indenture and its duties hereunder, including the reasonable expenses of defending itself against any claim of liability arising hereunder. The Trustee shall notify the Company promptly of any claim asserted against the Trustee for which it may seek indemnity. However, the failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder. The Company need not pay for any settlement made without its written consent; provided, however, that consent of the Company shall not be required if the Company shall have instituted proceedings to be adjudicated a bankrupt or insolvent, or is otherwise subject to proceedings under Title 11 of the U.S. Bankruptcy Code, or has consented to the appointment of a receiver, liquidator, assignee, trustee, sequestrator or similar official of the Company or of any substantial part of its property, or has made an assignment for the benefit of its creditors, or has admitted in writing to its inability to pay its debts generally as they become due, or has taken corporate action in furtherance of any such action. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through gross negligence or bad faith. To secure the Company's payment obligations in this Section 7.07, the Trustee shall have a senior claim prior to the Securities against all money or property held or collected by the Trustee in its capacity as Trustee except money or property held in trust to pay principal of or interest on particular Securities. Such lien shall survive satisfaction and discharge of the Indenture. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.06 occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. SECTION 7.08. Replacement of Trustee. A resignation or removal of the Trustee and the appointment of a successor Trustee shall become effective only upon the 50 58 successor Trustee's acceptance of appointment as provided in this Section 7.08. The Trustee may at any time resign and be discharged from the trust hereby created by so notifying the Company in writing. The Holders of a majority in principal amount of the outstanding Securities may remove the Trustee by so notifying the Trustee and the Company in writing and may appoint a successor Trustee with the Company' consent. The Company may remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged a bankrupt or an insolvent; (3) a receiver or other public officer takes charge of the Trustee or its property; or (4) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the Company or the Holders of at least 10% of the principal amount of the outstanding Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Company. Any removal of the Trustee and any appointment of a successor Trustee pursuant to any of the provisions of this Section 7.08 shall become effective upon acceptance of appointment by the successor Trustee as provided by this Section 7.08. A successor Trustee appointed as provided in this Section 7.08 shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company, and thereupon the removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance shall become vested with all the rights, powers and duties of its predecessor hereunder. Immediately after that, the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee, subject to the senior claim provided in Section 7.07, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Securityholder. 51 59 If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of at least 10% in principal amount of the outstanding Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligations under Section 7.07 shall continue for the benefit of the retiring Trustee. SECTION 7.09. Successor Trustee by Merger, etc. If the Trustee consolidates with, merges or converts into or transfers all or substantially all of its corporate trust business to, another corporation, the resulting, surviving or transferee corporation without any further act shall be the successor Trustee. SECTION 7.10. Eligibility; Disqualification. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1) and (2). The Trustee together with its Affiliate shall have at all times a combined capital and surplus of at least $150,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA Section 310(b), including the optional provision permitted by the second sentence of TIA Section 310(b)(9). SECTION 7.11. Preferential Collection of Claims Against Issuers. The Trustee shall comply with TIA Section 311(a); provided, however, that the operation of TIA Section 311(a) shall not apply to any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. ARTICLE VIII DEFEASANCE SECTION 8.01. Defeasance upon Deposit of Moneys or U.S. Government Obligations. This Indenture shall cease to be of further effect (except that the Company's obligations under Sections 7.07 and 8.04 hereof shall survive) when all outstanding Securities theretofore authenticated and issued (other than Securities which have 52 60 been destroyed, lost or stolen and which have been replaced as provided in Section 2.07 hereof) have been delivered to the Trustee for cancellation and the Issuers have paid all sums payable hereunder. Notwithstanding the first paragraph of this Section 8.01, at the Company's option indicated by notice to the Trustee, either (a) the Company shall be deemed to have been Discharged (as defined below) from its obligations with respect to the Securities on the 91st day after the applicable conditions set forth below have been satisfied or (b) the Company shall cease to be under any obligation to comply with any term, provision or condition set forth in Sections 4.03 through 4.07 and Section 4.10, 4.11 and 4.12 and shall cease to be subject to the provisions of Section 6.01(c) with respect to Sections 4.03 through 4.07 and Section 4.10 and Section 6.01(f) with respect to the Securities at any time after the applicable conditions set forth below have been satisfied: (1) the Company shall have deposited or caused to be deposited irrevocably with the Trustee as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities (i) money in an amount, or (ii) U.S. Government Obligations which through the payment of interest and principal in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (iii) a combination of (i) and (ii), sufficient, in the opinion with respect to (ii) and (iii) of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge each installment of principal of and interest on the outstanding Securities on the dates such installments of interest or principal are due; (2) if the Company has elected to be deemed Discharged from its obligations with respect to the Securities pursuant to option (a) above in this paragraph, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (y) since the Closing Date there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the outstanding Securities will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as 53 61 would have been the case if such defeasance had not occurred; and (3) if the Credit Agreement is in effect, the Company shall have delivered to the Trustee any required consent of the Senior Agent or the Lenders to the transactions contemplated by this Section 8.01. "Discharged" shall mean that the Issuers shall be deemed to have paid and discharged the entire indebtedness represented by, and obligations under, the Securities and to have satisfied all the obligations under this Indenture relating to the Securities (and the Trustee, upon the request of the Company and at the expense of the Company, shall execute proper instruments acknowledging the same). SECTION 8.02. Survival of Issuers' Obligations. Notwithstanding the satisfaction and discharge of the Indenture under Section 8.01, the obligations of the Company and the Co-Obligor, as the case may be, in Sections 2.04, 2.05, 2.06, 2.07, 2.08, 4.01, 4.02, 7.07, 7.08, 8.04 and 8.05, however, shall survive until the Securities are no longer outstanding. Thereafter, the obligations of the Company and the Co-Obligor, as the case may be, in Sections 7.07, 8.04 and 8.05 shall survive. SECTION 8.03. Application of Trust Money. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 8.01. It shall apply the deposited money and the money from U.S. Government Obligations in accordance with this Indenture to the payment of principal of and interest on the Securities. SECTION 8.04. Repayment to Company. The Trustee and the Paying Agent shall promptly pay to the Company upon request any excess money or securities held by them at any time. The Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal or interest that remains unclaimed for two years; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once in a newspaper of general circulation in the City of New York or mail to each such Holder notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication or mailing, any unclaimed balance of such money then remaining will be repaid to the Company. After payment to the Company, Securityholders entitled to the money must look to the Company for payment as general creditors unless applicable abandoned property law designates another person. 54 62 The Company shall indemnify Trustee to the fullest extent permissible by law for Trustee's failure to comply with any abandoned property or escheat law by acting in accordance with this Section 8.04. SECTION 8.05. Reinstatement. If the Trustee is unable to apply any money or U.S. Government Obligations in accordance with Section 8.01 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Issuers' obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.01 until such time as the Trustee is permitted to apply all such money or U.S. Government Obligations in accordance with Section 8.01; provided, however, that if the Issuers have made any payment of interest on or principal of any Securities because of the reinstatement of their obligations, the Issuers shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee. ARTICLE IX SUBORDINATION OF SECURITIES SECTION 9.01. Securities Subordinated to Senior Debt. The Issuers, for themselves and their successors, and each Holder, by his acceptance of the Securities, agrees that the payment of the principal of and interest on the Securities by the Issuers is subordinated and subject in right of payment, to the extent and in the manner provided in this Article, to the prior payment in full in cash of Senior Debt, whether outstanding upon the issuance of the Securities or thereafter incurred. This Article will constitute a continuing offer to all persons who become holders of, or continue to hold, Senior Debt, and such provisions are made for the benefit of the holders of Senior Debt, and such holders are made obligees under this Article and they and/or each of them may enforce its provisions. SECTION 9.02. No Payment on Securities in Certain Circumstances. (a) No payment or distribution of cash, Property or securities of the Issuers will be made on account of principal of or interest on the Securities, or to defease or acquire any of the Securities, or on account of the redemption provisions of the Securities, (x) upon the maturity of any Senior Debt by lapse of time, acceleration or otherwise, unless and until all Senior Debt shall first 55 63 be paid in full in cash, or such payment duly made in a manner satisfactory to the holders of such Senior Debt or (y) in the event that the Issuers default in the payment of any principal of, premium, if any, or interest on or any other amounts payable on or in connection with any Senior Debt when it becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise, unless and until such default has been cured or waived in writing or has ceased to exist; provided, however, that the Issuers may make such payment or distribution in respect of the Securities without regard to the foregoing if the Issuers and the Trustee receive written notice from the Senior Agent and any other Senior Representatives approving such payment. (b) Upon the happening of an event of default (or if an event of default would result upon any payment with respect to the Securities) with respect to any Designated Senior Debt, as such event of default is defined in the Credit Agreement and in any other instrument evidencing the Designated Senior Debt or under which it is outstanding, permitting the holders to accelerate its maturity (if the event of default is other than a default in payment of the principal of, premium, if any, or interest on or other amount due in connection with such Designated Senior Debt), upon written notice of the event of default given to the Issuers and the Trustee by the Senior Agent on behalf of the Lenders or by any Senior Representative for the holders of other Designated Senior Debt then outstanding, then, unless and until such event of default has been cured or waived in writing or has ceased to exist and no event of default exists under any other Designated Senior Debt or any such other event of default has also been waived in writing or has ceased to exist, no payment or distribution of cash, Property or securities of the Issuers will be made by the Issuers with respect to the principal of or interest on the Securities or to defease or acquire any of the Securities or on account of the redemption provisions of the Securities; provided that this paragraph (b) will not prevent the making of any payment for a period of more than 180 days after the date the written notice of the event of default is given unless the payment thereof would be prohibited by Section 9.02(a) hereof. If, upon the expiration of such 180-day period, the payment thereof would not be prohibited by Section 9.02(a) hereof, promptly after the end of such 180-day period, the Issuers will pay to the Trustee all sums not paid during such 180-day period because of this Section 9.02(b). Only one such 180-day period during which payment of principal of or interest on the Securities may not be made pursuant to this subsection (b) may commence during any consecutive 360-day period. 56 64 (c) The Issuers will give prompt written notice to the Trustee of any event of default under any Senior Debt or under any agreement pursuant to which Senior Debt may have been issued, and in the event of any such event of default, will provide to the Trustee in the form of an Officers' Certificate the names and addresses of the holders of such Senior Debt, and the name and address of the Senior Agent or Senior Representative acting on their behalf. The Trustee will be entitled to rely conclusively on such Officers' Certificate without independent investigation unless it shall have received notice to the contrary from the Senior Agent on behalf of the Lenders or by the Senior Representative of the holders of such other Designated Senior Debt then outstanding. The Trustee shall not be deemed to have notice of any default under any Senior Debt until it receives written notice thereof from any holder of Senior Debt or from the issuer as set forth above. (d) If any payment or distribution of assets of the Issuers is received by the Trustee or any Holder or any paying agent at a time when that payment or distribution should not have been made because of Section 9.02(a) or 9.02(b), such payment or distribution will be promptly paid over to the Senior Agent on behalf of the Lenders and to the respective Senior Representatives for the holders of all other Senior Debt for application to the payment of such Senior Debt (pro rata as to each of such holders on the basis of the respective amounts of Senior Debt outstanding) until all such Senior Debt has been paid in full, after giving effect to any concurrent payment or distribution or provision therefor to the holders of such Senior Debt. SECTION 9.03. Securities Subordinated to Prior Payment of All Senior Debt on Dissolution, Liquidation or Reorganization. Upon any distribution of assets of the Issuers upon any dissolution, winding up, liquidation or reorganization of the Issuers (whether voluntary or involuntary, in bankruptcy, insolvency, receivership or similar proceeding related to the Issuers or its property or upon an assignment for the benefit of creditors or otherwise): (a) the holders of all Senior Debt will first be entitled to receive payment in full in cash of the Senior Debt before the Holders are entitled to receive any payment or distribution of any kind or character on account of principal of or interest on the Securities; (b) any payment or distribution of assets of the Issuers of any kind or character, whether in cash, Property or securities, to which the Holders or the Trustees on behalf of the Holders would be entitled except for the provisions of this Article will be paid 57 65 by the liquidating trustee or agent or other Person making such a payment or distribution directly to the holders of Senior Debt or their respective Senior Agent or Senior Representatives to the extent necessary to make payment in full of all Senior Debt remaining unpaid, after giving effect to any concurrent payment or distribution to the holder of such Senior Debt; and (c) if, notwithstanding the foregoing, any payment or distribution of assets of the Issuers of any kind or character, whether in cash, Property or securities is received by the Trustee or the Holders or any Paying Agent on account of principal of, premium, if any, or interest on the Securities before all Senior Debt is paid in full in cash, or effective provision made for its payment in cash, such payment or distribution will be received and held in trust for and will be promptly paid over to the holders of the Senior Debt which remains unpaid or to their respective Senior Agent or Senior Representative for application to the payment of such Senior Debt pro rata as to each of such holders on the basis of the respective amounts of Senior Debt which is held by then,) until all such Senior Debt has been paid in full in cash. The Issuers will give prompt written notice to the Trustee of any dissolution, winding up, liquidation or reorganization of it or any assignment for the benefit of its creditors. SECTION 9.04. Holders of Securities to Be Subrogated to Rights of Holders of Senior Debt. Subject to the prior payment in full in cash of all Senior Debt, the Holders shall be subrogated to the rights of the holders of Senior Debt to receive payments or distributions of assets, cash, Property or securities of the Issuers applicable to the Senior Debt until all amounts owing on the principal of and interest on the Securities shall be paid in full; and, for the purposes of such subrogation, (a) no such payments or distributions to the holders of the Senior Debt of any cash, Property or securities to which the Holders of the Securities or the Trustee on their behalf would be entitled except for the provisions of this Article, and no payment over pursuant to the provisions of this Article to the holders of Senior Debt by Holders of the Securities or the Trustee on their behalf shall, as between the Issuers, their creditors other than holders of Senior Debt, and the Holders of the Securities, be deemed to be a payment by the Issuers to or on account of the Senior Debt, and (b) no payment or distributions of cash, Property or securities to or for the benefit of the Holders of the Securities pursuant to the subrogation provision of this Article which would otherwise have been paid to the holders of Senior Debt shall be deemed 58 66 to be a payment by the Issuers to or for the account of the Securities. It is understood that the provisions of this Article are intended solely for the purpose of defining the relative rights of the Holders of the Securities, on the one hand, and the holders of the Senior Debt, on the other hand. SECTION 9.05. Obligations of the Issuers Unconditional. Nothing contained in this Article or elsewhere in this Indenture or in the Securities is intended to or will impair, as between the Issuers and the Holders of the Securities, the obligations of the Issuers, which are absolute and unconditional, to pay to the Holders of the Securities the principal of and interest on the Securities as and when they become due and payable in accordance with their terms, or is intended to or will affect the relative rights of the Holders of the Securities and creditors of the Issuers other than the holders of the Senior Debt, nor will anything herein or therein prevent the Trustee or any Holder of the Securities from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article of the holders of Senior Debt in respect of cash, Property or securities of the Issuers received upon the exercise of any such remedy. So long as the provisions of this Article Nine have been brought to the attention of the court of competent jurisdiction, tribunal, trustee or other person making the payment or distribution, upon any distribution of assets of the Issuers referred to in this Article, the Trustee and the Holders of the Securities will be entitled to rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding up, liquidation, reorganization or similar proceedings are pending, or a certificate of the liquidating trustee or agent or other person making any distribution to the Trustee or to the Holders of the Securities for the purpose of ascertaining the persons entitled to participate in such distribution, the amounts distributed or to be distributed to them and all other facts pertinent to this Article. SECTION 9.06. Trustee and Paying Agent Entitled to Assume Payments Not Prohibited in Absence of Notice. The Issuers shall give prompt written notice to the Trustee of any fact known to the Issuers that would prohibit the making of any payment to or by the Trustee in respect of the Securities. Notwithstanding any other provision of this Indenture, the Trustee and Paying Agent will not at any time be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee or the Paying Agent unless and until a Responsible Officer of the Trustee or the Paying Agent has received such a written notice thereof from the Issuers or from the Senior Agent or a Senior Representative for one or more holders of Senior Debt or from the Senior Agent or a Senior 59 67 Representative therefor and, prior to the receipt of any such written notice, the Trustee and Paying Agent will be entitled in all respects conclusively to assume that no such fact exists. The Trustee will be entitled to rely on the delivery to it of a written notice by a person representing himself, herself, or itself to be a holder of Senior Debt for the Senior Agent or a Senior Representative for such holder). Nothing contained in this Section 9.06 limits the respective rights of the holders of Designated Senior Debt and other Senior Debt to recover payments as contemplated by Section 9.02. SECTION 9.07. Application by Trustee of Moneys Deposited with It. Any deposit of moneys by the Issuers with the Trustee or any Paying Agent for the payment of principal of or interest on the Securities, will be subject to the provisions of Sections 9.01, 9.02, 9.03 and 9.04 except that, prior to the receipt of the notice provided for in Section 9.06, the Trustee will be entitled to assume that no such facts exist; provided, however, that if on a date not less than two Business Days prior to the date on which by the terms of this Indenture any such moneys may become payable for any purpose (including, without limitation, the payment of either principal of or interest on the Securities) the Trustee or such Paying Agent has not received with respect to such moneys the notice provided for in Section 9.06, then the Trustee or such Paying Agent will have full power and authority to receive such moneys and to apply the same to the purpose for which they were received, and will not be affected by any notice to the contrary which may be received by it after such date. Nothing herein will be construed to relieve any Holders from duties imposed upon them under Section 9.03(c) with respect to moneys received in violation of the provisions of this Article. SECTION 9.08. Subordination Rights Not Impaired by Acts or Omissions of the Issuers or Holders of Senior Debt. No right of the Senior Agent, any Senior Representative or any present or future holders of any Senior Debt to enforce subordination as provided herein will at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Issuers or by any act or failure to act, in good faith, by the Senior Agent, any Senior Representative or any such holder, or by any noncompliance by the Issuers with the terms of this Indenture, regardless of any knowledge thereof which the Senior Agent, any Senior Representative or any such holder may have or otherwise be charged with. Without limiting the generality of the foregoing, the Senior Agent, any Senior 60 68 Representative or the holders of Senior Debt may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring responsibility to the Holders of the Securities and without impairing or releasing the subordination provisions in this Article Nine or the obligations hereunder of the Holders of the Securities to the holders of Senior Debt, do any one or more of the following: (1) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Debt or the Credit Agreement or any other document, instrument or agreement evidencing Senior Debt or under which Senior Debt is outstanding, (2) sell, exchange, release or otherwise deal with any Property pledged, mortgaged or otherwise securing Senior Debt, (3) release any Person liable in any manner for the collection or payment of Senior Debt, (4) exercise or refrain from exercising or waive any rights against the Issuers, any of its Subsidiaries and any other Person, and (5) otherwise deal freely with the Issuers, all without affecting the liabilities and obligations of the parties to the Indenture or the Holders of the Securities. No provision in any supplemental indenture which affects the superior position of the holders of the Senior Debt will be effective against the holders of the Senior Debt who have not consented thereto. SECTION 9.09. Securityholders Authorize Trustee to Effectuate Subordination of Securities. Each Holder of Securities by his acceptance of them authorizes and expressly directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article, and appoints the Trustee his attorney-in-fact for such purposes, including, in the event of any dissolution, winding up, liquidation or reorganization of the Issuers (whether in bankruptcy, insolvency, receivership, reorganization or similar proceedings or upon an assignment for the benefit of creditors or otherwise) tending towards liquidation of the business and assets of the Issuers or the filing of a claim for the unpaid balance of its or his Securities in the form required in those proceedings. If the Trustee does not file a proper claim or proof of debt in the form required in such proceeding at least 30 days before the expiration of the time to file such claim or claims, then the Senior Agent and the Senior Representatives for the holders of Senior Debt shall have the right to file and are hereby authorized to file an appropriate claim for and on behalf of the Holders of Securities. SECTION 9.10. Right of Trustee and Paying Agent to Hold Senior Debt. Subject to the provisions of TIA Section 310(b) and 311, the Trustee and the Paying Agent will be entitled to all of the rights set forth in this Article in 61 69 respect of any Senior Debt at any time held by either of them to the same extent as any other holder of Senior Debt, and nothing in this Indenture will be construed to deprive the Trustee or the paying agent of any of its rights as such holder. SECTION 9.11. This Article Not to Prevent Events of Default. The failure to make a payment on account of principal of or interest on the Securities by reason of any provision of this Article will not be construed as preventing the occurrence of an Event of Default. SECTION 9.12. No Fiduciary Duty Created to Holders of Senior Debt. With respect to the holders of Senior Debt, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article, and no implied obligations or covenants with respect to the holders of Senior Debt will be read into this Indenture against the Trustee. The Trustee will not be deemed to owe any fiduciary duty to holders of Senior Debt. SECTION 9.13. Trustee's Compensation Not Prejudiced. Nothing in this Article will apply to amounts due to the Trustee pursuant to other sections in the Indenture. SECTION 9.14. Representative of Senior Debt. Any notices to be given or payments to be made to any holders of Senior Debt pursuant to this Indenture may be made or given to the Senior Agent and to any other Senior Representatives. ARTICLE X SUPPLEMENTAL INDENTURES SECTION 10.01. Supplemental Indentures Without Consent of Securityholders. The Company, when authorized by a resolution of its Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the TIA) for one or more of the following purposes: (a) to the extent not prohibited by the terms of the Credit Agreement or any other agreement, document or instrument evidencing or governing Senior Debt, to convey, transfer, assign, mortgage or pledge to the Trustee as security for the Securities any property or assets; 62 70 (b) to evidence the succession of another corporation or partnership to the Company or successive successions, and the assumption by the successor corporation or partnership of the covenants, agreements and obligations of the Company pursuant to Article Five; (c) to the extent not prohibited by the terms of the Credit Agreement or any other agreement, document or instrument evidencing or governing Senior Debt, to add to the covenants of the Company such further covenants, restrictions, conditions or provisions as the Company's Board of Directors and the Trustee shall consider to be for the protection of the holders of Securities, and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions, conditions or provisions an Event of Default permitting the enforcement of all or any of the several remedies provided in this indenture as herein set forth; provided that in respect of any such additional covenant, restriction, condition or provision such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such an Event of Default or may limit the remedies available to the Trustee upon such an Event of Default or may limit the right of the Holders of a majority in aggregate principal amount of the Securities to waive such an Event of Default; (d) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture; or to make such other provisions in regard to matters or questions arising under this Indenture or under any supplemental indenture as the Company's Board of Directors deems necessary or desirable and which shall not adversely affect the interests of the holders of the Securities; (e) to provide for the issuance under this Indenture of uncertificated Securities in addition to or in place of certificated Securities, and to make all appropriate changes for such purpose; and (f) to comply with the provisions of the TIA. The Trustee is hereby authorized to join in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be 63 71 therein contained and to accept the conveyance, transfer, assignment, mortgage or pledge of any property thereunder, but the Trustee shall not be obligated to enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section may be executed without the consent of the holders of any of the Securities at the time outstanding, notwithstanding any of the provisions of Section 10.02. SECTION 10.02. Supplemental Indentures with Consent of Securityholders. With the consent (evidenced as provided in Article Seven) of the Holders of not less than a majority in aggregate principal amount of the Securities at the time outstanding, the Company, when authorized by a resolution of its Board of Directors, and the Trustee may, from time to time and at any time, enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the TIA) for the purpose of adding any provisions to or chancing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Securities; provided that no such supplemental indenture shall, without the consent of the Holders of all Securities then outstanding (a) extend the final maturity of any Security, or reduce the principal amount thereof (including the amount payable upon redemption), reduce the rate or extend the time of payment of interest thereon, or impair or affect the right of any holder of Securities to institute suit for the payment of any Securities or (b) reduce the aforesaid percentage of Securities, the consent of the Holders of which is required for any such supplemental indenture. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any indenture supplemental hereto. If a record date is fixed, then those persons who were Holders at such record date (or their duly designated proxies), and only those persons, shall be entitled to consent to such supplemental Indenture or to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. Upon the request of the Company accompanied by a copy of a resolution of the Board of Directors certified by the Secretary or an Assistant Secretary of the Company authorizing the execution of any such supplemental indenture 64 72 and receipt of the consent of the Holders as set forth above, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Company shall mail a notice thereof by first-class mail to the Holders of Securities at their addresses as they shall appear on the registry books of the Company, setting forth in general terms the substance of such supplemental indenture. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 10.03. Effect of Supplemental Indenture. Upon the execution of any supplemental indenture pursuant to the provisions hereof, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Issuers and the Holders of Securities shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 10.04. Documents to Be Given to Trustee. In connection with the execution and delivery of any supplemental indenture pursuant to this Article Ten, the Trustee shall receive an Officers' Certificate and an Opinion of Counsel and subject to the provisions of Sections 7.01 and 7.02, may rely thereon as conclusive evidence that any such supplemental indenture complies with the applicable provisions of this Indenture. The Opinion of Counsel delivered pursuant to this Section 10.04 shall include a statement that the execution, delivery and performance of such supplemental indenture by the Company will not result in a breach or violation of, or constitute a default under this Indenture or the Credit Agreement, which breach, violation or default could have a material adverse effect on 65 73 the business or financial condition of the Company and its Subsidiaries in the aggregate. SECTION 10.05. Notation on Securities in Respect of Supplemental Indenture. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article may bear a notation in form approved by the Trustee as to any matter provided for by such supplemental indenture or as to any action taken at any such meeting. If the Company or the Trustee shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Issuers, authenticated by the Trustee and delivered in exchange for the Securities then outstanding. ARTICLE XI MISCELLANEOUS SECTION 11.01. Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. SECTION 11.02. Notices. Any notice or communication shall be sufficiently given if in writing and delivered in person or mailed by first-class mail addressed as follows: (a) if to OrNda HealthCorp or Summit Health Ltd.: 3401 West End Avenue Suite 700 Nashville, Tennessee 37203 Attention: General Counsel; and (b) if to the Trustee: NationsBank of Tennessee, N.A. One National Plaza Nashville, Tennessee 37239 Attention: Corporate Trust Department in each case with a copy to the Senior Agent and any Senior Representative. The Issuers shall promptly notify the Holders and the Trustee of the identity and address of the Senior Agent and any Senior Representative. 66 74 The Issuers, the Senior Agent, any Senior Representative or the Trustee by notice to the others may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Securityholder shall be mailed by first class mail to such Securityholder at the address which appears on the registration books of the Registrar and shall be sufficiently given to such Securityholder if so mailed within the time prescribed. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. Except for a notice to the Trustee, which is deemed given only when received, if a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. If an Issuer mails a notice or communication to Securityholders, it shall mail a copy of such notice to the Trustee and each Agent at the same time. All other notices or communications shall be in writing. SECTION 11.03. Communication by Holders with Other Holders. Securityholders may communicate in accordance with TIA Section 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Issuers, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 11.04. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (1) an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. SECTION 11.05. Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than certificates provided pursuant to Section 4.09(b)) shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition; 67 75 (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 11.06. When Treasury Securities Disregarded. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by an Issuer or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with an Issuer shall be disregarded, except that for the purpose of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which the Trustee knows are so owned shall be so disregarded. SECTION 11.07. Rules by Trustee and Agents. The Trustee may make reasonable rules for action by, or at a meeting of, Securityholders. The Registrar or Paying Agent may make reasonable rules for its functions. SECTION 11.08. Payments Due on Saturdays, Sundays and Holidays. If the date of maturity of interest on or principal of the Securities or the date fixed for redemption of any Security shall not be a Business Day, then payment of interest or principal need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date of maturity or the date fixed for redemption, and no interest shall accrue for the period after such date. SECTION 11.09. GOVERNING LAW. THIS INDENTURE SHALL BE DEEMED TO BE A CONTRACT UNDER THE LAWS OF THE STATE OF NEW YORK, AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS (OTHER THAN CHOICE OF LAW RULES) OF SAID STATE. SECTION 11.10. No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Issuers. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. 68 76 SECTION 11.11. No Recourse Against Others. Liabilities of directors, officers, employees, stockholders and limited partners, as such, of the Issuers or the Trustee is waived and released as provided in paragraph 17 of the Securities. SECTION 11.12. Successors. All agreements of the Issuers in this Indenture and the Securities shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 11.13. Duplicate Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 11.14. Separability. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby, and a Holder shall have no claim therefor against any party hereto. 69 77 SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be executed in their respective corporate names as of the __th day of ________, 1994. ORNDA HEALTHCORP, a Delaware corporation [CORPORATE SEAL] By:___________________________ Name: Attest: Title: By:____________________________________ SUMMIT HEALTH LTD. a California corporation [CORPORATE SEAL] By:___________________________ Name: Title: Attest: By:____________________________________ NATIONSBANK OF TENNESSEE, N.A., as Trustee [CORPORATE SEAL] By:___________________________ Name: Title: Attest: By:____________________________________ 70 78 EXHIBIT A [FACE OF SECURITY] No. $ ORNDA HEALTHCORP and SUMMIT HEALTH LTD. ____ % Senior Subordinated Note Due 2004. OrNda HealthCorp and Summit Health Ltd., as joint and several obligors, promise to pay to or registered assigns the principal sum of ____________ Dollars on Interest Payment Dates: ______ and ______ Record Dates: ______ and _______ OrNda HealthCorp, a Delaware corporation [CORPORATE SEAL] By:_______________________________ By:________________________________ Summit Health Ltd., a California corporation [CORPORATE SEAL] By:________________________________ By:________________________________ DATED: CERTIFICATE OF AUTHENTICATION This is one of the Notes described in the Indenture referred to herein: NationsBank of Tennessee, N.A., as Trustee By:_______________________________________ Authorized Officer A-1 79 (REVERSE OF SECURITY) ORNDA HEALTHCORP and SUMMIT HEALTH LTD. as Joint and Several Obligors ______% SENIOR SUBORDINATED NOTE DUE 2004 1. Interest. OrNda HealthCorp (the "Company") and Summit Health Ltd., a wholly owned subsidiary of the Company (the "Co-Obligor" and, together with the Company, the "Issuers"), promise to pay interest on the principal amount of this Note at the rate per annum shown above. The Issuers will pay interest semi-annually on _________ and _________ of each year, commencing _________, 1994. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment. The Issuers will pay interest on the Notes (except defaulted interest) to the persons who are registered holders of Notes at the close of business on the __________ or _________ next preceding the interest payment date. Principal and interest will be payable and transfer of the Notes will be registrable at the office of the Trustee's designated affiliate in New York, New York, or at other agencies maintained for that purpose. The Issuers will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Issuers may, however, pay principal and interest by check payable in such money. They may mail an interest check to a holder's registered address. 3. Paying Agent and Registrar. Initially, NationsBank of Tennessee, N.A. (the "Trustee") will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice. The Company or any of its subsidiaries may act as Registrar or, except in certain circumstances set forth in the Indenture, Paying Agent. 4. Indenture. The Issuers issued the Notes under an Indenture dated as of __________, 1994 (the "Indenture") between the Issuers and the Trustee which provides for the issuance of the Notes provided that the aggregate principal amount of the Notes outstanding at any time may not exceed $100,000,000, except as otherwise provided in the Indenture. The terms of the Notes include those stated in the Indenture and those made part of the A-2 80 Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code Section Section 77aaa-77bbbb) as in effect on the date of the Indenture. The Notes are subject to all such terms, and Noteholders are referred to the Indenture and the Act for a statement of them. The Notes are general joint and several unsecured obligations of the Issuers, subordinate in right of payment to Senior Debt as set forth in the Indenture. Capitalized terms contained in this Note to the extent not defined herein shall have the meanings assigned to them in the Indenture. As used herein, Notes and Noteholders means Securities and Securityholders, respectively, each as defined in the indenture. 5. Optional Redemption. The Notes will be redeemable at the option of the Company, in whole or in part, on not less than 30 nor more than 60 days' notice mailed by first class mail to a Holder's last address as shall appear upon the register, at the following prices (expressed as percentages of principal amount), plus interest accrued to the redemption date, if redeemed during the 12-month period beginning _________ of the years indicated below; provided, however, that the Notes will not be redeemable prior to _________, 1999: Year Percentage 6. Selection and Notice of Redemption. If less than all the Notes are to be redeemed, the Trustee shall select, by lot or pro rata, or as otherwise directed by the Company in a manner which is appropriate and fair, the Notes or portions thereof to be redeemed. Notes in denominations larger than $1,000 may be redeemed in part, but only in integral multiples of $1,000. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at its registered address. On and after the redemption date, interest ceases to accrue on Notes or portions thereof called for redemption. 7. Change of Control. If a Change of Control occurs, each Holder has a right to require the Company to repurchase such Holder's Notes at a redemption price of 100% plus accrued and unpaid interest. 8. Denominations, Transfer, Exchange. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. A Holder may transfer or exchange Notes in accordance with the Indenture. A-3 81 The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not transfer or exchange any Note or portion of a Note selected for redemption, or transfer or exchange any Notes for a period of 15 days before a selection of Notes to be redeemed, or need not transfer or exchange any Note after it is called for redemption, other than that portion not called for redemption. 9. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 10. Unclaimed Money. If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent will pay the money back to the Company at its request. After that, Holders entitled to the money must look to the Company for payment as general creditors unless an "abandoned property" law designates another person. 11. Defeasance. The Indenture contains certain provisions pertaining to defeasance, which provisions shall for all purposes have the same effect as if set forth herein. 12. Supplemental Indentures. The Indenture may be amended, or supplemented or modified in certain cases without the consent of Holders and in general with the consent of the Holders of not less than a majority in principal amount of the Notes at the time outstanding, provided that no such modification, amendment or supplemental indenture shall, without the consent of Holders of all Notes then outstanding, (a) extend the final maturity of any Note, or reduce the principal amount thereof (including the amount payable upon redemption), reduce the rate or extend the time of payment of interest thereon, or impair or affect the right of any Holder of Notes to institute suit for the payment of any of the Notes or (b) reduce the aforesaid percentage of Notes, the consent of Holders of which is required for any such supplemental indenture. 13. Restrictive Covenants. The Indenture contains certain restrictive covenants that are applicable to the Company. 14. Successors. When a successor assumes all the obligations of its predecessor under the Notes and the Indenture pursuant to the terms of the Indenture, the predecessor will be released from those obligations. A-4 82 15. Defaults and Remedies. An Event of Default is: (i) (a) any failure to pay an installment of interest on the Notes as and when the same becomes due and payable, and the continuance of such failure for 30 days; (b) failure to pay all or any part of the principal on the Notes when and as the same shall become due and payable at maturity, redemption, by declaration or otherwise; (c) failure by the Company duly to, observe or perform any covenant or agreement contained in the Notes or the Indenture and the continuance of such failure for a period of 60 days after written notice specifying such failure and demanding that the Company remedy the same shall have been given to the Company by the Trustee or to the Company and the Trustee by Holders of at least 40% in aggregate principal amount of Notes then outstanding; (d) certain events of bankruptcy, insolvency or reorganization in respect of an Issuer or any of its Material Subsidiaries; (e) any acceleration of the maturity of Debt of the Company or any of its Material Subsidiaries or a failure to pay any such Debt at its stated maturity, or (upon demand for payment) under any guarantee of payment by the Company or any of its Subsidiaries of any Debt, whether such Debt or guarantee existed at the Closing Date or was thereafter created, aggregating at least $25,000,000, provided that such acceleration or failure to pay is not cured within 10 days after such acceleration or failure to pay; and (f) final judgments not covered by insurance aggregating in excess of $10,000,000 rendered against the Company or any of its Subsidiaries and not stayed or discharged within 60 days after such judgments become final and nonappealable. The Indenture provides that if a default (the term "default" for purposes of this provision being defined as any event or condition which is, or with notice or lapse of time or both would be, an Event of Default) occurs and is continuing and if it is known to the Trustee, the Trustee must, within 90 days after the occurrence of such default, give to the Holders of Notes notice of such default, provided that, except in the case of a default in payment of principal or interest in respect of such Notes, the Trustee will be protected in withholding such notice if it in good faith determines that the withholding of such notice is in the interests of the Holders of Notes. If an Event of Default shall occur and be continuing (other than an Event of Default described in clause (d) of the preceding paragraph relating to an Issuer); unless the principal of all the Notes shall have already become due and payable, either the Trustee or the Holders of not less than 25% in aggregate principal amount of the Notes then outstanding, by notice in writing to the Company (and to the Trustee if given by Holders of Notes) A-5 83 (the "Acceleration Notice"), may declare the principal of all Notes and the interest accrued thereon to be due and payable (i) immediately if no Designated Senior Debt is outstanding or (ii) if any Designated Senior Debt is outstanding, upon the earlier of (x) 10 days after such Acceleration Notice is received by the Senior Agent and each Senior Representative with respect to Designated Senior Debt at their last addresses specified pursuant to the Indenture or (y) the acceleration of such Designated Senior Debt, and upon any such declaration the same shall become due and payable on the date specified in the foregoing clause (i) or (ii), as applicable; provided, that (i) prior to the expiration of such period, such acceleration shall be automatically rescinded and annulled without further action required on the part of the Holders in the event that any default specified in the Acceleration Notice under the Notes shall have been cured, waived or otherwise remedied and (ii) at any time before the entry of a judgment or decree or the payment of moneys due under the Indenture, the Holders of a majority in aggregate principal amount of the Notes may waive all defaults except (a) a default in the payment of principal or interest on the Notes or (b) in respect of a covenant or provisions hereof which cannot be modified or, amended without the consent of each Holder of the Notes affected. If an Event of Default specified in clause (d) above relating to an Issuer occurs, the principal of and accrued interest on all outstanding Notes shall become immediately due and payable without any declaration or other act on the part of the Trustee or any Holder of Notes. Prior to the declaration of acceleration of the maturity of the Notes, the Holders of a majority in aggregate principal amount of the Notes at the time outstanding may waive on behalf of all the Holders of Notes any past default, or Event of Default, except a default in the payment of principal of or interest on any Notes or a default with respect to any covenant or provision which cannot be modified or amended without the consent of the Holder of each outstanding Note affected. The Trustee is under no obligation to exercise any of its rights or powers under the Indenture at the request, order of direction of any of the Holders of Notes unless such Holders of Notes have offered to the Trustee reasonable security or indemnity. Subject to all the provisions of the Indenture and applicable law, the Holders of a majority in aggregate principal amount of the Notes at the time outstanding have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee. The Company is required to furnish the Trustee, within 120 days after the end of each fiscal year, an Officers' Certificate to the effect that such officers have A-6 84 conducted, or supervised, a review of the activities of the Company and its Subsidiaries and of performance under the Indenture and that, to the best of such officers' knowledge, based on their review, the Issuers have fulfilled all their obligations under the Indenture, or, if there has been a default, specifying each default known to them, its nature and its status. 16. Trustee Dealings with Issuers. Subject to the provisions of the TIA, NationsBank of Tennessee, N.A., the Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for, the Company, the Co-Obligor or their Affiliates, and may otherwise deal with the Company, the Co-Obligor or their Affiliates, as if it were not Trustee. 17. No Recourse Against Others. A director, officer, employee, stockholder or limited or general partner, as such, of the Issuers or the Trustee shall not have any liability for any obligations of the Issuers under the Notes or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Noteholder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 18. Authentication. This Note shall not be valid until the Trustee or its agents sign the certificate of authentication on the other side of this Note. 19. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= custodian), and U/G/M/A (= Uniform Gifts to Minors Act). The Issuers will furnish to any Noteholder upon written request and without charge a copy of the Indenture. Requests may be made to: OrNda HealthCorp, 3401 West End Avenue, Suite 700, Nashville, Tennessee 37203, Attn: Vice President, Finance. A-7 85 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Security purchased by the Company pursuant to Section 4.10 of the Indenture, check this Box: [ ] If you wish to have a portion of this Security purchased by the Company pursuant to Section 4.10 of the Indenture, state the amount: $____________________ Date: ________________ Your Signature:____________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee: _____________________________ A-8 86 ASSIGNMENT FORM If you the Holder want to assign this Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Note to - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Insert assignee's social security or tax ID number) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint - ------------------------------------------------------------------------------- agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date: _______________ Your Signature:_____________________ (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: _____________________________ A-9 EX-12 5 STATEMENT RE COMPUTATION OF EARNINGS 1 ORNDA HEALTHCORP EXHIBIT 12 -- COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
YEAR ENDED AUGUST 31, NINE MONTHS ENDED MAY 31, --------------------------------------------------------------------- -------------------------------- PRO FORMA PRO FORMA 1989 1990 1991 1992 1993 1993 1993 1994 1994 -------- --------- -------- -------- ------- --------- ------- -------- --------- Fixed Charges: Amortization of debt expenses.......... $ 7,805 $ 1,495 $ 237 $ 1,209 $ 3,800 $ 5,093 $ 2,850 $ 2,764 $ 3,734 Interest expenses... 104,378 80,815 59,167 40,229 68,661 107,644 49,948 59,331 80,973 Implicit interest in rent.............. 3,519 3,587 3,309 3,472 3,530 4,473 2,648 2,714 3,422 Capitalized interest.......... 743 0 199 0 908 933 681 1,182 1,182 -------- --------- -------- -------- ------- --------- ------- -------- --------- $116,445 $ 85,897 $ 62,912 $ 44,910 $76,899 $118,143 $56,127 $ 65,991 $ 89,311 ======== ========= ======== ======== ======= ========= ======= ======== ========= Earnings: Income (loss) before income taxes and extraordinary item.............. $(65,775) $(130,165) $(16,896) $(68,836) $14,768 $ 35,794 $11,695 $(21,929) $ 20,320 Fixed charges (excluding capitalized interest and preferred stock dividends)........ 115,702 85,897 62,713 44,910 75,991 117,210 55,446 64,809 88,129 -------- --------- -------- -------- ------- --------- ------- -------- --------- $ 49,927 $ (44,268) $ 45,817 $(23,926) $90,759 $153,004 $67,141 $ 42,880 $108,449 ======== ========= ======== ======== ======= ========= ======= ======== ========= Ratio of earnings to fixed charges..... (1) (1) (1) (1) 1.18 1.30 1.20 (1) 1.21 ======== ========= ======== ======== ======= ========= ======= ======== =========
- --------------- (1) Earnings were inadequate to cover fixed charges. EX-23.1 6 CONSENTS OF INDEPENDENT AUDITORS 1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Fountain Valley Medical Development Company and Subsidiaries Fountain Valley, California We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated January 21, 1994, relating to the consolidated financial statements of Fountain Valley Medical Development Company and Subsidiaries which is contained in that Prospectus. We also consent to the reference to us under the caption "Experts" in the Prospectus. BDO SEIDMAN Orange, California July 19, 1994 2 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-3) and related Prospectus of OrNda HealthCorp/Summit Health Ltd. for the registration of $100,000,000 Senior Subordinated Notes due 2004 and to the incorporation by reference therein of: a. our report dated June 30, 1994, with respect to the consolidated financial statements and schedules of OrNda HealthCorp at August 31, 1993 and 1992, and for each of the three years in the period ended August 31, 1993, restated to give retroactive effect to the OrNda HealthCorp merger with American Healthcare Management, Inc., effective April 19, 1994, which was accounted for as a pooling of interests, included in its Current Report on Form 8-K dated July 11, 1994, filed with the Securities and Exchange Commission; b. our report dated October 15, 1993, except for Note 14 as to which the date is November 18, 1993, and Note 1 as to which the date is March 5, 1994, with respect to the consolidated financial statements and schedules of OrNda HealthCorp included in its Annual Report (Form 10-K as amended by Form 10-K/A No. 4) for the year ended August 31, 1993, filed with the Securities and Exchange Commission, which have subsequently been restated to give retroactive effect to the OrNda HealthCorp merger with American Healthcare Management, Inc. effective April 19, 1994, which was accounted for as a pooling of interests; c. our report dated October 29, 1993, with respect to the consolidated financial statements and schedules of Houston Northwest Medical Center, Inc. included in the OrNda HealthCorp Annual Report (Form 10-K/A No. 4) for the year ended August 31, 1993, filed with the Securities and Exchange Commission; d. our report dated September 8, 1993, with respect to the consolidated financial statements of Summit Health Ltd. for the three years ended June 30, 1993, included in OrNda HealthCorp's Current Report on Form 8-K dated July 11, 1994, filed with the Securities and Exchange Commission; e. our reports dated September 8, 1993, with respect to the consolidated financial statements and schedules of Summit Health Ltd. included in its Annual Report (Form 10-K) for the year ended June 30, 1993, filed with the Securities and Exchange Commission; and f. our reports dated February 11, 1993, with respect to the financial statements of MCF, Inc., Florida Medical Center, Ltd., and Florida Medical Center, Inc. for the year ended December 31, 1992, included in the Form 8-K as amended by Form 8-K/A No. 3, of OrNda HealthCorp dated March 11, 1994, filed with the Securities and Exchange Commission.
ERNST & YOUNG Nashville, Tennessee July 19, 1994 EX-24.2 7 CERTIFIED RESOLUTIONS 1 Exhibit 24.2 ORNDA HEALTHCORP SECRETARY'S CERTIFICATE I, Karen H. Abbott, Assistant Secretary of OrNda HealthCorp, a Delaware corporation ("the Company"), DO HEREBY CERTIFY that the following is a true and correct excerpt from the minutes of a meeting of the Board of Directors of the Company duly called, convened and held June 14, 1994, and that the resolutions therein contained are still in full force and as of the date hereof have not been in any respect altered, revised, or repealed, and that the resolutions do not in any manner contravene the Articles of Incorporation or the ByLaws of the Company. RESOLVED, that each offer and director of the Corporation who may be required to execute such Registration Statement or any amendment thereof (whether on behalf of the Corporation or as an officer or director thereof) be and hereby is authorized to execute a power of attorney appointing Keith B. Pitts and Ronald P. Soltman, and each of them, as true and lawful attorneys and agents, to execute in his name, place and stead (in any such capacity) said Registration Statement and any and all amendments thereto, and any and all documents in connection therewith, and to file the same with the Commission, each of said attorneys and agents to have power to act with or without the other and to have the full power and authority to do and perform in the name and on behalf of each of said officers and directors, or both, as the case may be, every act whatsoever necessary or advisable to be done as fully and to all intents and purposes as any such officer and director might or could do in person; IN WITNESS WHEREOF, I have hereunto set my hand and the Seal of the Corporation this seventh day of July, 1994. /s/ Karen H. Abbott ---------------------- Karen H. Abbott Assistant Secretary -----END PRIVACY-ENHANCED MESSAGE-----