-----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, c/qbYvU9b+Qiu6ZuZEsuJDgu1v3VclvZLAFn8vSvd9FKJ7N4Qz8g/aZsfift1vhq O+6yjW+T6T1PVcEMNFakuA== 0000950144-94-001402.txt : 19940803 0000950144-94-001402.hdr.sgml : 19940803 ACCESSION NUMBER: 0000950144-94-001402 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19940802 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/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-54651 FILM NUMBER: 94541211 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/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-54651-01 FILM NUMBER: 94541212 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/A 1 ORNDA HEALTHCORP AMENDMENT #1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 2, 1994 REGISTRATION NO. 33-54651 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- AMENDMENT NO. 1 TO 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................... $125,000,000 100% $125,000,000 $43,104(2) - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933. (2) Of this amount, $34,483 has previously been paid. --------------------- 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 AUGUST 2, 1994 PROSPECTUS $125,000,000 [LOGO] ORNDA HEALTHCORP % 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 $603.0 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 UNDERWRITING PROCEEDS TO PUBLIC(1) DISCOUNT(2) COMPANY(1)(3) - ------------------------------------------------------------------------------------------------------ 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 pro forma 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 $29.3 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 and Summit recently entered into a definitive agreement (the "Stock Purchase Agreement") with Fountain Valley Medical Development Co. ("FVMDC") to acquire Fountain Valley, a provider of tertiary care services. Fountain Valley, located on a 38-acre campus in Fountain Valley, California, contains a 413-bed acute care hospital, a surgery center, an imaging center and four medical office buildings aggregating approximately 250,000 square feet of office space. The aggregate consideration for the proposed acquisition of Fountain Valley is approximately $145 million, approximately $104 million of which will be paid in cash by Summit. The balance of the purchase price, approximately $41 million, will be paid by an unrelated real estate investment trust(the "REIT") which, pursuant to a Real Estate Purchase Agreement (the "Real Estate Purchase Agreement"), will purchase and lease to the Company certain of Fountain Valley's real estate, including the 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 consent of the lenders under the Company's existing bank credit facility (the "Bank Credit Facility"), certain regulatory approvals and other customary conditions. The Company has received the consent of the lenders under the Bank Credit Facility, conditioned upon there being no adverse change to the terms of the transactions. The transactions contemplated by the Stock Purchase Agreement and the Real Estate Purchase Agreement are conditioned upon each other and are expected to occur simultaneously. There can be no assurance that the proposed acquisition of Fountain Valley will be consummated. See "Business -- Recent Acquisitions." 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, 4 6 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 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.............. $125,000,000 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 $603.0 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 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, 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 condensed combined 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........................................................... 66,723 81,707 Interest expense........................................................................ 81,941 108,269 Interest income......................................................................... (3,455) (5,115) Minority interest....................................................................... 4,230 4,601 Special executive compensation.......................................................... 2,530 -- Loss on sale of asset................................................................... 9,761 -- ------------- ---------- 19,441 34,267 Income (loss) from investments in Houston Northwest Medical Center........................ (136) 173 ------------- ---------- Income from continuing operations before income tax....................................... 19,305 34,440 Income tax expense........................................................................ 5,406 5,160 ------------- ---------- Income from continuing operations......................................................... 13,899 29,280 Preferred stock dividend requirements..................................................... (1,462) (1,699) ------------- ---------- Income from continuing operations applicable to common and common equivalent shares....... $ 12,437 $ 27,581 ============ ========= Earnings per common and common equivalent share from continuing operations................ $ 0.28 $ 0.65 ============ ========= 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..................................................................... $ 78,486 $ 103,154 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.................................................. 2.31x 2.17x Ratio of earnings to fixed charges(6)..................................................... 1.20x 1.28x MAY 31, 1994 ------------- BALANCE SHEET DATA: Total assets.............................................................................. $ 1,914,378 Working capital........................................................................... 59,233 Long-term debt, excluding amounts due within one year..................................... 1,120,647 Total stockholders' equity................................................................ 361,012
(footnotes on following page) 8 10 (footnotes from previous page) - --------------- (1) The summary unaudited pro forma condensed combined statement of operations and operating data for the nine months ended May 31, 1994 include 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 $1,164,278, $169,952, $11,830, $1,789,829, $1,019,625 and $361,012, respectively. (2) The summary unaudited pro forma condensed combined statement of operations and operating data for the year ended August 31, 1993 include 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 $1,485,174, $206,367, and $24,439, 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 75.5% 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 603.0 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 $532.3 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, Salomon Brothers Inc and Citicorp Securities, Inc. (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. The Company and Summit recently entered into a definitive agreement to acquire Fountain Valley. See "Business -- Recent Acquisitions." The Company currently has no definitive agreements with respect to any 14 16 other 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 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 $ 7,368 ========= =========== Long-term debt: Capitalized lease obligations, interest at 8.8% to 17.2%........ $ 21,789 $ 21,789 Bank Credit Facility: Revolving Credit Facility.................................... 58,200 138,847 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.......................... -- 125,000 12 1/4% Notes................................................... 400,000 400,000 10 1/4% Notes(2)................................................ 100,000 -- Less current maturities......................................... (7,368) (7,368) ---------- -------------- Total long-term debt (excluding current maturities)(3)....................................... 1,015,000 1,120,647 ---------- -------------- 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) (140,822) Unrealized gains on securities available-for-sale............... 78,310 78,310 ---------- -------------- Total stockholders' equity.............................. 365,512 361,012 ---------- -------------- Total capitalization.................................... $1,380,512 $1,481,659 ========= ===========
- --------------- (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 $7,368, $1,019,625, $361,012 and $1,380,637, 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 $37,440 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) $3,000 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 $19,000 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 $66,518, $130,165, $17,095, $68,836, and $23,111 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
MARCH JUNE 30, 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 and $1,056 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 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 pro forma 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 22 24 benefit from Summit's experience in this area. AHM provided the Company with strong financial and 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 and Summit recently entered into the Stock Purchase Agreement to acquire Fountain Valley, a provider of tertiary care services, from FVMDC. Fountain Valley, located on a 38-acre campus in Fountain Valley, California, contains a 413-bed acute care hospital, a surgery center, an imaging center and four medical office buildings aggregating approximately 250,000 square feet of office space. 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 following is a summary of certain provisions of the Stock Purchase Agreement and the Real Estate Purchase Agreement which set forth the terms and conditions for the Company's proposed acquisition of Fountain Valley. This summary does not purport to be complete and is qualified in its entirety by reference to the Stock Purchase Agreement and the Real Estate Purchase Agreement, copies of which are filed as exhibits to the Registration Statement of which this Prospectus is a part. The Stock Purchase Agreement provides that FVMDC will sell and Summit will buy all of the outstanding shares and partnership interests of certain corporations and partnerships relating to Fountain Valley. Pursuant to the Real Estate Purchase Agreement, the REIT will purchase and lease to the Company certain of Fountain Valley's real estate, including the four medical office buildings. The aggregate consideration for the proposed acquisition of Fountain Valley is approximately $145 million (the "Purchase Price"), subject to certain adjustments detailed in the Stock Purchase Agreement and the Real Estate Purchase Agreement. Approximately $104 million of the Purchase Price will be paid in cash by Summit under the Stock Purchase Agreement and the balance of the Purchase Price, approximately $41 million, will be paid by the REIT pursuant to the Real Estate Purchase Agreement. The Company has agreed to guarantee Summit's obligations pursuant to the Stock Purchase Agreement. In addition, the Company has agreed to guarantee the performance of the REIT's obligations under the Real Estate Purchase Agreement and the lease payments contemplated by such agreement. If the Company were required to perform under its guarantee of the REIT's obligations, approval by the lenders under the Bank Credit Facility would be required. The obligations of the Co-Obligors to consummate the proposed acquisition of Fountain Valley are conditioned on the satisfaction or waiver of, among others, the following conditions: (i) the absence of proceedings or other actions relating to the proposed acquisition, (ii) the representations and warranties of the parties being true and correct in all material respects and the parties having complied with and performed all covenants and obligations required to be complied with or performed prior to the closing date of the proposed acquisition, (iii) no material adverse change in the results of operations, financial condition or business of Fountain Valley having occurred and (iv) the consent of the lenders under the Bank Credit Facility. The Company has received the consent of the lenders under the Bank Credit Facility, conditioned upon there being no adverse change to the terms of the transactions. The transactions contemplated by the Stock Purchase Agreement and the Real Estate Purchase Agreement are conditioned upon each other and are expected to occur simultaneously. The Stock Purchase Agreement may be terminated by either party if the proposed acquisition has not been consummated before September 1, 1994 and under certain other conditions. There can be no assurance that the proposed acquisition of Fountain Valley will be consummated. 23 25 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 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. 24 26 - 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 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 25 27 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 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 26 28 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. 27 29 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
28 30
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%. 29 31 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 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 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 30 32 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. 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 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 31 33 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 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 32 34 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. 33 35 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 $125 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 Co-Obligors maintained for such purpose. At the option of the Co-Obligors, 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 Co-Obligors may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Unless otherwise designated by the Co-Obligors, the Co-Obligors' 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. 34 36 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 $603.0 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 35 37 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 36 38 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 Company 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 37 39 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, (b) altering the issuer or obligor (except that the Company may incur Debt to replace Debt of a Subsidiary), or (c) shortening the maturity of subordinated debt 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 provisions, (b) amounts payable by the Company to its employees pursuant to the Stock Appreciation Rights 38 40 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 deliver to the Trustee a written opinion of a nationally recognized investment firm to the effect that such 39 41 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 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 guarantee of payment by the Company or any of its Subsidiaries of any Debt, whether such Debt or guarantee existed at the 40 42 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), 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 default with respect to any covenant or provision which cannot be modified or amended without the consent of 41 43 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. Other characterizations of a defeasance under clause (b) are also possible. 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. 42 44 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 43 45 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. 44 46 "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 45 47 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. 46 48 "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 47 49 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 48 50 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 49 51 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. 50 52 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............................................................. $125,000,000 ===========
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. In addition, Citicorp USA Inc., an affiliate of Citicorp Securities, Inc., is a managing agent and a lender to the Company under the Bank Credit Facility. Under the Rules of Fair Practice of the National Association of Securities Dealers, Inc. (the "NASD"), when more than 10% of the net proceeds of a public offering of debt securities are to be paid to NASD members participating in the distribution of the offering or associated or affiliated persons of such members, the yield at which the debt securities are distributed to the public must be no lower than that recommended by a "qualified independent underwriter" meeting certain standards. Citicorp USA Inc., an affiliate of Citicorp Securities, Inc., will in the aggregate receive more than 10% of the net proceeds from the Offering as a result of the use of proceeds by the Company to repay loans made under the revolving facility of the Bank Credit Facility. See "Use of Proceeds." Accordingly, Merrill Lynch has agreed to act as the qualified independent underwriter in connection with the Offering. The yield on the Notes, when sold to the public at the public offering price set forth on the cover of this Prospectus, will be no lower than that recommended by Merrill Lynch. 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 51 53 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 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. 52 54 (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) Current Report on Form 8-K dated July 21, 1994. (13) Quarterly Report on Form 10-Q for the quarter ended May 31, 1994. 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). 53 55 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 Interim 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
54 56 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 herein.
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 $ 98,022(1) $ -- $ 16,342 (104,000)(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) -- 387,984 Property plant and equipment, net of accumulated depreciation and amortization....................... 1,020,946 46,456 49,609(2) -- 1,117,011 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) 61,482 (2,873)(2) 3,625(3) ---------- --------------- --------------- ----------- ---------- TOTAL ASSETS................ $1,789,704 $82,314 $ 42,235 $ 125 $1,914,378 ========== ============== ============== =========== ========== 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 (4,886)(2) -- 7,368 ---------- --------------- --------------- ----------- ---------- Total current liabilities... 310,066 20,071 (1,386) -- 328,751 Long-term debt....................... 1,015,000 51,134 101,022(1) 125,000(3) 1,120,647 (51,134)(2) (100,000)(3) (20,375)(3) Other liabilities.................... 99,126 4,842 -- -- 103,968 Shareholders' equity(5).............. 365,512 6,267 (6,267)(2) (1,000)(3) 361,012 (3,500)(4) ---------- --------------- --------------- ----------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $1,789,704 $82,314 $ 42,235 $ 125 $1,914,378 ========== ============== ============== =========== ==========
See notes to unaudited pro forma condensed combined balance sheet. P-1 57 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............................................ $104,000 Cash for transaction costs................................................ 3,000 Less Fountain Valley's cash............................................... (5,978) -------- Additional debt adjustment.............................................. 101,022 Less cash paid for transaction costs...................................... (3,000) -------- Net cash adjustment..................................................... $ 98,022 ========
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............................. $ 104,000 Less adjustments of Fountain Valley's historical balances of assets and liabilities to fair value: Prepaids....................................................... 1,523 Property, plant and equipment, net............................. (49,609) Other assets................................................... 2,873 Accrued expenses and other liabilities......................... 3,500 Current maturities of long-term debt........................... (4,886) Long-term debt................................................. (51,134) Partners' capital.............................................. (6,267) (104,000) ------- --------- To record excess cost of the net assets acquired from Fountain Valley over fair market value.................................. $ -- =========
NOTE 3 To record the issuance of the Notes and repayment of existing indebtedness (in thousands): Issuance of the Notes.................................................... $ 125,000 Repurchase of the 10 1/4% Notes.......................................... (100,000) Payment on Bank Credit Facility.......................................... (20,375) --------- Net increase in debt........................................... 4,625 Payment of debt issue costs relating to the Notes........................ (3,625) Payment of premium upon repurchase of the 10 1/4% Notes.................. (1,000) --------- Net change in cash............................................. $ -- =========
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 58 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET -- (CONTINUED) NOTE 5 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 59 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 herein.
SUMMIT NINE MONTHS FOUNTAIN ENDED VALLEY MARCH 31, ORNDA NINE MONTHS FOUNTAIN 1994 SUMMIT SUMMIT ENDED VALLEY OFFERING PRO (AS PRO FORMA PRO FORMA APRIL 30, PRO FORMA PRO FORMA FORMA ORNDA 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) 17(2) 66,723 (2,147)(6) Interest expense....... 59,331 6,088 13,520(3) 74,748 3,723 2,033(3) 1,437(3) 81,941 (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) (1,454) 19,441 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) (1,454) 19,305 Income tax expense......... 1,048 14,759 (7,779)(4) 5,180 -- 517(4) (291)(4) 5,406 (2,848)(6) -------- ----------- ----------- ---------- ----------- ----------- ----------- --------- Income from continuing operations...... 7,015 11,343 (5,365) 12,993 4,597 (2,528) (1,163) 13,899 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) $(1,163) $ 12,437 ======== ========= ======== ========= ========= ======== ======== ========= Earnings per common and common equivalent shares from continuing operations...... $ (0.15) $ 0.33 $ 0.26 $ 0.28 ======== ========= ========= ========= 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 60 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 herein.
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) 23(2) 81,707 (2,308)(6) Interest expense... 75,511 7,377 18,027 (3) 98,663 4,980 2,710 (3) 1,916(3) 108,269 (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) (1,939) 34,267 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) (1,939) 34,440 Income tax expense..... 1,129 14,201 (7,875)(4) 4,338 754 456(4) (388)(4) 5,160 (3,117)(6) --------- ------- ------- --------- --------- ----- ----- --------- Income from continuing operations... 19,087 18,570 (11,667) 25,990 7,977 (3,136) (1,551) 29,280 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) $(1,551) $ 27,581 ========= ======= ======== ========= ========= ===== ===== ========= Earnings per common and common equivalent share from continuing operations... $ 0.50 $ 0.56 $ 0.57 $ 0.65 ========= ======= ========= ========= 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 61 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 62 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 $6.0 million increase in deferred financing costs assuming a 6 year life............ 750 1,000 To record depreciation on the $65.0 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 $2.0 million increase in deferred financing costs assuming a 6 year life........... $ 250 $ 333 To adjust depreciation on the $45.8 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 $3.6 million increase in deferred financing costs assuming a 10 year life.......... $ 272 $ 363 To eliminate amortization on the 10 1/4% Notes.............. (255) (340) ------------ ----------- $ 17 $ 23 ========= =========
P-7 63 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 $101.0 million related to the Bank Credit Facility (assumes a 6.7% interest rate).... $ 5,076 $ 6,768 To eliminate historical interest expense related to Fountain Valley debt to be retired in connection with the acquisition................................................ (3,043) (4,058) ------------ ------------ $ 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)...................................................... $ 9,961 $ 13,281 To eliminate historical interest expense related to the 10 1/4% Notes............................................. (7,500) (10,000) To eliminate interest expense related to payment of $20.4 million on Bank Credit Facility (assumes a 6.7% interest rate)...................................................... (1,024) (1,365) ------------ ------------ $ 1,437 $ 1,916 ========= =========
NOTE 4 To record pro forma provision for income taxes on the pro forma adjustments at a rate of 20% 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 64 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 Real Estate Purchase Agreement with the REIT for approximately $41 million of the real estate to be acquired from Fountain Valley. If such sale is consummated, the Company would lease such real estate from the REIT under an operating lease agreement.
FOR THE FOR THE NINE YEAR ENDED MONTHS ENDED AUGUST 31, MAY 31, 1994 1993 ------------ ---------- (IN THOUSANDS) To record $41 million of new lease commitments (assumes a 10.25% interest rate)........................................ $3,150 $4,200 ========= ========
P-9 65 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 66 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 67 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 68 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 69 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 70 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 71 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 72 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 73 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 adjustments. 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 74 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 75 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 76 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 77 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 78 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 79 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 80 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 81 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 82 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 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............................. 28 Management............................. 30 Description of the Notes............... 34 Underwriting........................... 51 Legal Matters.......................... 51 Experts................................ 52 Available Information.................. 52 Incorporation of Certain Documents by Reference............................ 52 Index to Financial Statements.......... 54
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ $125,000,000 [LOGO] ORNDA HEALTHCORP % 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.............................................................. $ 43,104 NASD filing fee................................................................... 13,000 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.*** 2.1 -- Stock Purchase Agreement, dated as of July 20, 1994, among Summit, the Company and FVMDC. The Company will furnish supplementally a copy of all omitted schedules and exhibits to Exhibit 2.1 upon request of the Securities and Exchange Commission.* 2.2 -- Agreement of Sale and Purchase, dated as of July 21, 1994, by and among FVMDC, the Company and Healthcare Realty Trust Incorporated. The Company will furnish supplementally a copy of all omitted schedules and exhibits to Exhibit 2.2 upon request of the Securities and Exchange Commission.*
II-2 99
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- ------------------------------------------------------------------------------------ 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.** 4.5 -- Credit, Security, Guaranty and Pledge Agreement, dated as of April 19, 1994, among the Company, Summit, AHM Acquisition Co., The Bank of Nova Scotia and Citicorp USA Inc., as Managing Agents, and the Lenders named therein.(2) 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 attorneys-in-fact.** 24.3 -- Certified resolutions of Summit's Board of Directors relating to the appointment of Ronald P. Soltman and Keith B. Pitts as attorneys-in-fact.* 25 -- Statement of Eligibility and Qualification of Trustee on Form T-1 of NationsBank of Tennessee, N.A.*
- --------------- * filed herewith ** previously filed *** to be filed by amendment (1) Incorporated by reference to exhibits filed with the Company's Report on Form 8-K dated as of May 28, 1992. (2) Incorporated by reference to exhibits filed with the Company's Report on Form 8-K dated as of April 19, 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 II-3 100 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-4 101 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 2nd day of August, 1994. ORNDA HEALTHCORP By: /s/ CHARLES N. MARTIN, JR.* ------------------------------------ Charles N. Martin, Jr. Chairman of the Board and Chief Executive Officer 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 August 2, 1994 - ----------------------------------------------- Chief Executive Officer Charles N. Martin, Jr. (Principal Executive Officer) /s/ DONALD J. AMARAL* President, Chief Operating August 2, 1994 - ----------------------------------------------- Officer and Director Donald J. Amaral /s/ KEITH B. PITTS* Executive Vice President and August 2, 1994 - ----------------------------------------------- Chief Financial Officer Keith B. Pitts (Principal Financial Officer) /s/ PHILLIP W. ROE Controller August 2, 1994 - ----------------------------------------------- Phillip W. Roe /s/ YVONNE V. CLIFF* Director August 2, 1994 - ----------------------------------------------- Yvonne V. Cliff /s/ RICHARD A. GILLELAND* Director August 2, 1994 - ----------------------------------------------- Richard A. Gilleland *By: /s/ RONALD P. SOLTMAN, ESQ. - ----------------------------------------------- Ronald P. Soltman, Esq. Attorney-in-fact
II-5 102
SIGNATURE TITLE DATE - ----------------------------------------------- ----------------------------- --------------- /s/ LEONARD GREEN* Director August 2, 1994 - ----------------------------------------------- Leonard Green /s/ PETER A. JOSEPH* Director August 2, 1994 - ----------------------------------------------- Peter A. Joseph /s/ PAUL S. LEVY* Director August 2, 1994 - ----------------------------------------------- Paul S. Levy /s/ ANGUS C. LITTLEJOHN, JR.* Director August 2, 1994 - ----------------------------------------------- Angus C. Littlejohn, Jr. /s/ JOHN F. NICKOLL* Director August 2, 1994 - ----------------------------------------------- John F. Nickoll /s/ JOHN J. O'SHAUGHNESSY* Director August 2, 1994 - ----------------------------------------------- John J. O'Shaughnessy Director - ----------------------------------------------- M. Lee Pearce, M.D. *By: /s/ RONALD P. SOLTMAN, ESQ. - ----------------------------------------------- Ronald P. Soltman, Esq. Attorney-in-fact
II-6 103 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 2nd day of August, 1994. SUMMIT HEALTH LTD. By: /s/ CHARLES N. MARTIN, JR.* ------------------------------------ Charles N. Martin, Jr. Chairman of the Board and Chief Executive Officer 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 August 2, 1994 - ----------------------------------------------- Chief Executive Officer Charles N. Martin, Jr. (Principal Executive Officer) /s/ DONALD J. AMARAL* President, Chief Operating August 2, 1994 - ----------------------------------------------- Officer and Director Donald J. Amaral /s/ KEITH B. PITTS* Executive Vice President and August 2, 1994 - ----------------------------------------------- Chief Financial Officer and Keith B. Pitts Director (Principal Financial Officer) /s/ PHILLIP W. ROE Controller August 2, 1994 - ----------------------------------------------- Phillip W. Roe *By: /s/ RONALD P. SOLTMAN, ESQ. - ----------------------------------------------- Ronald P. Soltman, Esq. Attorney-in-fact
II-7 104 INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE - ------ ---------------------------------------------------------------------- ------------- 1.1 -- Form of Purchase Agreement.*** 2.1 -- Stock Purchase Agreement, dated as of July 20, 1994, among Summit, the Company and FVMDC. The Company will furnish supplementally a copy of all omitted schedules and exhibits to Exhibit 2.1 upon request of the Securities and Exchange Commission.* 2.2 -- Agreement of Sale and Purchase, dated as of July 21, 1994, by and among FVMDC, the Company and Healthcare Realty Trust Incorporated. The Company will furnish supplementally a copy of all omitted schedules and exhibits to Exhibit 2.2 upon request of the Securities and Exchange Commission.* 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.** 4.5 -- Credit, Security, Guaranty and Pledge Agreement, dated as of April 19, 1994, among the Company, Summit, AHM Acquisition Co., The Bank of Nova Scotia and Citicorp USA Inc., as Managing Agents, and the Lenders named therein.(2) 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 attorneys-in-fact.** 24.3 -- Certified resolutions of Summit's Board of Directors relating to the appointment of Ronald P. Soltman and Keith B. Pitts as attorneys-in-fact.* 25 -- Statement of Eligibility and Qualification of Trustee on Form T-1 of NationsBank of Tennessee, N.A.*
- --------------- * filed herewith ** previously filed *** 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. (2) Incorporated by reference to exhibits filed with the Company's Report on Form 8-K dated as of April 19, 1992. EX-2.1 2 STOCK PURHASE AGREEMENT 1 STOCK PURCHASE AGREEMENT AMONG SUMMIT HEALTH, LTD., AS BUYER, ORNDA HEALTHCORP, AS GUARANTOR, AND FOUNTAIN VALLEY MEDICAL DEVELOPMENT CO., AS SELLER Dated as of July 20, 1994 2 TABLE OF CONTENTS 1. SALE AND TRANSFER OF THE SHARES; PURCHASE PRICE . . . . . . . . . . .3 1.1 Sale and Transfer of the Shares. . . . . . . . . . . . . . . . .3 1.2 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . .3 1.3 Payment of Purchase Price at Closing . . . . . . . . . . . . . .4 1.4 Post-Closing Adjustments . . . . . . . . . . . . . . . . . . . .4 1.5 Dispute of Adjustments . . . . . . . . . . . . . . . . . . . . .4 1.6 New Directors and Officers . . . . . . . . . . . . . . . . . . .5 1.7 Definitions; Interpretation. . . . . . . . . . . . . . . . . . .5 1.8 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 1.9 WARN Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 1.10 Excluded Assets. . . . . . . . . . . . . . . . . . . . . . . . 15 1.11 Physical Inventory . . . . . . . . . . . . . . . . . . . . . . 15 2. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.1 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.2 Actions of Seller at Closing . . . . . . . . . . . . . . . . . 16 2.3 Action of Buyer at Closing . . . . . . . . . . . . . . . . . . 17 3. REPRESENTATIONS AND WARRANTIES OF SELLER. . . . . . . . . . . . . . 18 3.1 Organization and Capacity. . . . . . . . . . . . . . . . . . . 18 3.2 Corporate Powers; Consents; Absence of Conflicts With Other Agreements, Etc. . . . . . . . . . . . . . . . 19 3.3 Capital Stock of the Seller Companies. . . . . . . . . . . . . 19 3.4 Subsidiaries; Investments; Third Party Options . . . . . . . . 20 3.5 Financial Statements.. . . . . . . . . . . . . . . . . . . . . 20 3.6 Extraordinary Liabilities. . . . . . . . . . . . . . . . . . . 21 3.7 Post-Balance Sheet Results . . . . . . . . . . . . . . . . . . 21 3.8 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . 23 3.9 Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . 23 3.10 Real Property. . . . . . . . . . . . . . . . . . . . . . . . . 23 3.11 Environmental Matters. . . . . . . . . . . . . . . . . . . . . 25 3.12 Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . 27 3.13 Trademarks, Computer Software, etc . . . . . . . . . . . . . . 27 3.14 Agreements and Commitments . . . . . . . . . . . . . . . . . . 28 3.15 The Contracts. . . . . . . . . . . . . . . . . . . . . . . . . 29 3.16 Certain Affiliate Transactions . . . . . . . . . . . . . . . . 30 3.17 Title to Personal Property . . . . . . . . . . . . . . . . . . 30 3.18 Healthcare License . . . . . . . . . . . . . . . . . . . . . . 30 3.19 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . 30 3.20 Employees and Employee Relations . . . . . . . . . . . . . . . 33 i 3 3.21 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 3.22 Medicare Participation/Accreditation . . . . . . . . . . . . . 35 3.23 Legal and Regulatory Compliance. . . . . . . . . . . . . . . . 36 3.24 Litigation or Proceedings. . . . . . . . . . . . . . . . . . . 37 3.25 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 37 3.26 Board and Medical Staff Matters. . . . . . . . . . . . . . . . 37 3.27 Special Funds. . . . . . . . . . . . . . . . . . . . . . . . . 38 3.28 Brokers and Finders. . . . . . . . . . . . . . . . . . . . . . 38 3.29 Experimental Procedures. . . . . . . . . . . . . . . . . . . . 38 3.30 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 3.31 Operation of the Facilities. . . . . . . . . . . . . . . . . . 39 3.32 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . 39 4. REPRESENTATIONS AND WARRANTIES OF BUYER . . . . . . . . . . . . . . 39 4.1 Corporate Capacity . . . . . . . . . . . . . . . . . . . . . . 39 4.2 Corporate Powers; Consents; Absence of Conflicts With Other Agreements, Etc. . . . . . . . . . . . . . . . 39 4.3 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . 40 4.4 Brokers and Finders. . . . . . . . . . . . . . . . . . . . . . 40 4.5 Purchase for Investment. . . . . . . . . . . . . . . . . . . . 40 5. COVENANTS OF SELLER . . . . . . . . . . . . . . . . . . . . . . . . 40 5.1 Intercompany Liabilities . . . . . . . . . . . . . . . . . . . 40 5.2 Access to and Provision of Additional Information. . . . . . . 40 5.3 Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 41 5.4 Negative Covenants . . . . . . . . . . . . . . . . . . . . . . 42 5.5 Governmental Approvals . . . . . . . . . . . . . . . . . . . . 43 5.6 FTC Notification . . . . . . . . . . . . . . . . . . . . . . . 44 5.7 No-Shop Clause . . . . . . . . . . . . . . . . . . . . . . . . 44 5.8 Insurance Ratings. . . . . . . . . . . . . . . . . . . . . . . 44 5.9 Consolidation. . . . . . . . . . . . . . . . . . . . . . . . . 45 5.10 Real Estate Purchase Agreement . . . . . . . . . . . . . . . . 45 5.11 Real Estate Option Agreement . . . . . . . . . . . . . . . . . 45 5.12 Closing Conditions . . . . . . . . . . . . . . . . . . . . . . 45 5.13 Tail Insurance . . . . . . . . . . . . . . . . . . . . . . . . 45 5.14 Key Employee Agreements. . . . . . . . . . . . . . . . . . . . 46 5.15 Change of Partnership Name, etc. . . . . . . . . . . . . . . . 46 5.16 Adverse Actions After Closing. . . . . . . . . . . . . . . . . 46 5.17 Further Acts and Assurances. . . . . . . . . . . . . . . . . . 46 6. COVENANTS OF BUYER. . . . . . . . . . . . . . . . . . . . . . . . . 47 6.1 FTC Notification . . . . . . . . . . . . . . . . . . . . . . . 47 6.2 Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . 47 ii 4 6.3 Closing Conditions . . . . . . . . . . . . . . . . . . . . . . 47 6.4 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . 47 6.5 Employee Matters . . . . . . . . . . . . . . . . . . . . . . . 48 6.6 Consolidated Tax Return. . . . . . . . . . . . . . . . . . . . 48 6.7 Adverse Actions After Closing. . . . . . . . . . . . . . . . . 49 6.8 Real Estate Purchase Agreement . . . . . . . . . . . . . . . . 49 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER. . . . . . . . . . . . 49 7.1. Representations/Warranties . . . . . . . . . . . . . . . . . . 49 7.2. Opinion of Seller's Counsel. . . . . . . . . . . . . . . . . . 49 7.3 Pre-Closing Confirmations. . . . . . . . . . . . . . . . . . . 49 7.4 Action/Proceeding. . . . . . . . . . . . . . . . . . . . . . . 50 7.5 Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . 50 7.6 Extraordinary Liabilities/Obligations. . . . . . . . . . . . . 50 7.7 Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . 50 7.8 Title Policy and Survey. . . . . . . . . . . . . . . . . . . . 50 7.9 Recent Agreements and Commitments. . . . . . . . . . . . . . . 51 7.10 Closing Documents. . . . . . . . . . . . . . . . . . . . . . . 51 7.11 UCC Searches . . . . . . . . . . . . . . . . . . . . . . . . . 51 7.12 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 51 7.13 Focus Survey . . . . . . . . . . . . . . . . . . . . . . . . . 51 7.14 Assessments; Property Taxes. . . . . . . . . . . . . . . . . . 51 7.15 Full Sale. . . . . . . . . . . . . . . . . . . . . . . . . . . 52 7.16 Lender Approval. . . . . . . . . . . . . . . . . . . . . . . . 52 7.17 Real Estate Transaction. . . . . . . . . . . . . . . . . . . . 52 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER . . . . . . . . . . . 52 8.1 Representations/Warranties . . . . . . . . . . . . . . . . . . 52 8.2 Opinion of Buyer's Counsel . . . . . . . . . . . . . . . . . . 52 8.3 Action/Proceeding. . . . . . . . . . . . . . . . . . . . . . . 52 8.4 Pre-Closing Confirmations. . . . . . . . . . . . . . . . . . . 53 8.5 Extraordinary Liabilities/Obligations. . . . . . . . . . . . . 53 8.6 Real Estate Transaction. . . . . . . . . . . . . . . . . . . . 53 9. NONCOMPETITION. . . . . . . . . . . . . . . . . . . . . . . . . . . 53 10. ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . 54 10.1 Casualty . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 10.2 Allocation of Purchase Price . . . . . . . . . . . . . . . . . 54 10.3 Tax and Medicare Effect. . . . . . . . . . . . . . . . . . . . 54 10.4 Post-Closing Tax Returns . . . . . . . . . . . . . . . . . . . 54 10.5 Termination Prior to Closing . . . . . . . . . . . . . . . . . 56 10.6 Post-Closing Maintenance of and Access to Information. . . . . 56 iii 5 10.7 Reproduction of Documents. . . . . . . . . . . . . . . . . . 57 10.8 Misdirected Payments, etc. . . . . . . . . . . . . . . . . . 58 10.9 Government Reimbursement Program Prior Period Adjustments. . 58 11. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . 59 11.1 Indemnification by Seller. . . . . . . . . . . . . . . . . . 59 11.2 Limitations/Seller . . . . . . . . . . . . . . . . . . . . . 60 11.3 Indemnification by Buyer . . . . . . . . . . . . . . . . . . 61 11.4 Limitations/Buyer. . . . . . . . . . . . . . . . . . . . . . 61 11.5 Notice and Procedure . . . . . . . . . . . . . . . . . . . . 61 11.6 Treatment of Indemnification Payments. . . . . . . . . . . . 64 11.7 Survival of Representations and Warranties; Indemnity Period. 65 12. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 12.1 Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . 65 12.2 Consented Assignment . . . . . . . . . . . . . . . . . . . . 66 12.3 Time of Essence. . . . . . . . . . . . . . . . . . . . . . . 66 12.4 CON Disclaimer . . . . . . . . . . . . . . . . . . . . . . . 66 12.5 Consents, Approvals and Discretion . . . . . . . . . . . . . 66 12.6 Expenses; Legal Fees and Costs . . . . . . . . . . . . . . . 66 12.7 Choice of Law. . . . . . . . . . . . . . . . . . . . . . . . 67 12.8 Benefit/Assignment . . . . . . . . . . . . . . . . . . . . . 67 12.9 Accounting Date . . . . . . . . . . . . . . . . . . . . . . 67 12.10 No Third Party Beneficiary . . . . . . . . . . . . . . . . . 67 12.11 Waiver of Breach . . . . . . . . . . . . . . . . . . . . . . 67 12.12 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 67 12.13 Severability . . . . . . . . . . . . . . . . . . . . . . . . 68 12.14 Gender and Number . . . . . . . . . . . . . . . . . . . . . 69 12.15 Divisions and Headings . . . . . . . . . . . . . . . . . . . 69 12.16 Entire Agreement/Amendment . . . . . . . . . . . . . . . . . 69 12.17 Press Releases . . . . . . . . . . . . . . . . . . . . . . . 69 12.18 Drafting . . . . . . . . . . . . . . . . . . . . . . . . . . 69 12.19 Waiver of Trial by Jury . . . . . . . . . . . . . . . . . . 70 iv 6 LIST OF SCHEDULES Schedule 1.3 . . . . . . .Company's Indebtedness to be Satisfied at Closing Schedule 3.1 . . . . . . . . . . . . . . . . . . . . . .Knowledge of Seller Schedule 3.1 . . . . . . . . . . . . . . . . . . .Organization and Capacity Schedule 3.3 . . . . . . . . . . . . .Capital Stock of the Seller Companies Schedule 3.4 . . . . . . . . Subsidiaries; Investments; Third Party Options Schedule 3.5 . . . . . . . . . . . . . . . . . . . . .Financial Statements Schedule 3.6 . . . . . . . . . . . . . . . . . . .Extraordinary Liabilities Schedule 3.7 . . . . . . . . . . . . . . . . . . Post-Balance Sheet Results Schedule 3.10 . . . . . . . . . . . . . . . . . . . . . . . .Real Property Schedule 3.11 . . . . . . . . . . . . . . . . . . . .Environmental Matters Schedule 3.12 . . . . . . . . . . . . . . . . . . . . . . . . . .Equipment Schedule 3.13 . . . . . . . . . . . . .Trademarks, Computer Software, etc. Schedule 3.14 . . . . . . . . . . . . . . . . . Agreements and Commitments Schedule 3.16 . . . . . . . . . . . . . . . Certain Affiliate Transactions Schedule 3.18 . . . . . . . . . . . . . . . . . . . . .Healthcare Licenses Schedule 3.19 . . . . . . . . . . . . . . . . . . . Employee Benefit Plans Schedule 3.20 . . . . . . . . . . . . . . Employees and Employee Relations Schedule 3.21 . . . . . . . . . . . . . . . . . . . . . . . . . . . .Taxes Schedule 3.22 . . . . . . . . . . . Medicare Participation; Accreditations Schedule 3.23 . . . . . . . . . . . . . . .Legal and Regulatory Compliance Schedule 3.24 . . . . . . . . . . . . . . . . . .Litigation or Proceedings Schedule 3.25 . . . . . . . . . . . . . . . . . . . . . . . . . .Insurance Schedule 3.26 . . . . . . . . . . . . . . .Board and Medical Staff Matters Schedule 3.28. . . . . . . . . . . . . . . . . . . . . .Brokers and Finders Schedule 5.4 . . . . . . . . . . . . . . . . .Approved Capital Expenditures Schedule 7.9 . . . . . . . . . . . . . . .Recent Agreements and Commitments Schedule 10.2. . . . . . . . . . . . . . . . . Allocation of Purchase Price Exhibit A . . . . . . . . . . . . . . . . . . . . . . . . Escrow Agreement Exhibit B . . . . . . . . . . . . . . . . . . Real Estate Option Agreement Exhibit C . . . . . . . . . . . . . . . . . . . . .Key Employee Agreements Exhibit D . . . . . . . . . . . . . . . . .Litigation Assumption Agreement v 7 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement ("Agreement") is made and entered into effective as of July 20, 1994, by and among SUMMIT HEALTH, LTD., a California corporation ("Buyer"), ORNDA HEALTHCORP, a Delaware corporation ("Guarantor"), and FOUNTAIN VALLEY MEDICAL DEVELOPMENT CO., a California limited partnership ("Seller"). WITNESSETH: A. Seller is owner of: (1) 100% of the issued and outstanding shares (the "Company Shares") of the common stock of Fountain Valley Regional Hospital and Medical Center, a California corporation (the "Company"), which at the time of the Closing (as defined below) will constitute one hundred percent (100%) of the issued and outstanding capital stock of the Company; (2) 100% of the issued and outstanding shares (the "MCS Shares") of capital stock of MCS Administrative Services, Inc. ("MCS"), a California corporation engaged in the business of providing management services to independent practice associations, including Personal Care Medical Group, Inc. ("PCMG"), an independent practice association comprised of physicians most of whom practice at the Hospital; (3) 100% of the issued and outstanding shares (the "FVHC Shares") of capital stock of Fountain Valley Health Care, Inc ("FVHC"), a California corporation which, as general partner, owns 1% of the partnership interests in Fountain Valley Outpatient Surgical Center Limited Partnership, a California limited partnership ("FVOSCLP"); (4) 100% of the issued and outstanding shares (the FVIC Shares") of capital stock of Fountain Valley Imaging Corp. ("FVIC"), a California corporation which, as general partner, owns 1% of the partnership interests in Fountain Valley Imaging Center Limited Partnership, a California limited partnership ("FVICLP"); (5) as limited partner, 99% of the partnership interests in FVOSCLP; and (6) as limited partner, 99% of the partnership interests in FVICLP (MCS, FVHC, FVIC, each a "Seller Sub"and collectively, the "Seller Subs"; FVOSCLP and FVICLP each a "Seller Partnership" and collectively the "Seller Partnerships"; and the Company, the Seller Subs and the Seller Partnerships, collectively, the "Seller Companies"); B. Seller and the Seller Companies own the assets and operations constituting the following healthcare facilities or businesses: 8 (1) Fountain Valley Regional Hospital and Medical Center (the "Hospital"), a tertiary care hospital located on a campus (the "Campus") of approximately 37.5 contiguous acres at the intersection of Euclid and Warner Avenues in the City of Fountain Valley, Orange County, California; (2) a 9,000 square foot outpatient surgery center located on the Campus adjacent to the Hospital (the "Surgery Center"); (3) a 7,000 square foot imaging center located on the Campus adjacent to the Hospital (the "Imaging Center") (the Hospital, the Surgery Center and the Imaging Center being hereinafter sometimes called the "Facilities"); and (4) four medical office buildings (the "MOBs") and a Living Care Center located on the Campus and more particularly described in the Real Estate Purchase Agreement (as defined below); C. Prior to Closing, Seller intends to convey, transfer and deliver to the Seller Companies all of the real and personal property, tangible and intangible, owned or held by Seller for use in the businesses of the Facilities (excluding the property subject to the Real Estate Purchase Agreement and the Excluded Assets (as defined below)) and certain liabilities owed by Seller, so that, as of Closing, all such properties are owned and such liabilities are owed solely by the Seller Companies (the "Consolidation"); D. At Closing, Seller intends to convey to Buyer, and Buyer intends to accept from Seller, on the terms and conditions more particularly set forth in this Agreement, all right, title and interest of Seller in and to the Company Shares, the MCS Shares, the FVHC Shares, the FVIC Shares (collectively, the "Shares"), and the partnership interests in and to FVOSCLP and FVICLP (the "Partnership Interests"). E. Pursuant to that certain Agreement of Sale and Purchase of even date herewith among Seller, Healthcare Realty Trust Incorporated ("HRT"), and Guarantor (the "Real Estate Purchase Agreement"), Seller intends to convey, assign, transfer and deliver to HRT or its Affiliate all right, title and interest in and to the real property, and improvements thereon and fixtures therein, constituting the MOBs, the Living Care Center, all as more particularly described in the Real Estate Purchase Agreement; F. Buyer desires to purchase all of the Shares and Partnership Interest from Seller on the terms and subject to the conditions hereinafter set forth and Seller desires to sell the Shares and Partnership Interests to Buyer on such terms and conditions. 2 9 NOW, THEREFORE, for and in consideration of the premises, and the agreements, covenants, representations and warranties hereinafter set forth, and other good and valuable consideration, the receipt and adequacy of which are forever acknowledged and confessed, the parties hereto agree as follows: 1. SALE AND TRANSFER OF THE SHARES; PURCHASE PRICE. 1.1 Sale and Transfer of the Shares. Subject to the terms and conditions of this Agreement, Seller shall sell, convey and deliver to Buyer, and Buyer shall purchase and accept from Seller, all of the right, title and interest of Seller in and to the Shares and Partnership Interests. 1.2 Purchase Price. Subject to the terms and conditions hereof, in reliance upon the representations, warranties and covenants of Seller herein set forth, and as consideration for the sale of the Shares and Partnership Interests as herein contemplated, Buyer shall tender to Seller at Closing, as the purchase price hereunder (collectively, the "Purchase Price"), and in the manner hereinafter provided, an amount equal to (i) One Hundred Four Million and No/100 Dollars ($104,000,000.00) (the "Base Purchase Price"), plus (ii) the amount, if any, by which the Current Assets minus Current Liabilities of Seller and the Seller Companies (other than current liabilities relating to "current portion of long-term debt" and "current portion of obligations under capital leases") ("Net Working Capital"), as shown on the Final Balance Sheet, exceeds $19,033,000, plus (iii) the net book value on the Final Balance Sheet of all Approved Capital Expenditures (as defined in Section 5.4(j)) of the Company since the Balance Sheet Date (as defined in Section 3.5), minus (iv) the amount, if any, by which Net Working Capital, as shown on the Final Balance Sheet, is less than $19,033,000, minus (v) the net book value as of the Closing Date of long-term debt and capitalized lease obligations of the Seller Companies (including the current portions thereof) that are not the Company's Indebtedness to be Satisfied at Closing (as defined in Section 1.3(b)) (such adjustments to the Base Purchase Price being called herein the "Purchase Price Adjustment"). The Initial Purchase Price Adjustment (herein so called) shall be an amount agreed to by Buyer and Seller at Closing based upon the accounting entries in the most recently available balance sheet of Seller prepared by Seller prior to the Closing Date (the "Closing Balance Sheet"). The Purchase Price shall be further adjusted, if necessary, by the Final Purchase Price Adjustment (as defined in Section 1.4) based upon the relevant accounting entries in the Final Balance Sheet. To the extent not already 3 10 reflected on the Closing Balance Sheet, the Closing Balance Sheet shall include as liabilities thereon amounts required by this Agreement to be paid by the Company to the extent unpaid at Closing and shall exclude any assets or liabilities that are to be satisfied at and as of Closing. 1.3 Payment of Purchase Price at Closing. The Purchase Price shall be due and payable at Closing: (a) by wire transfer to Escrow Agent of the Escrow Amount for the purpose of securing the indemnification obligations of Seller contained in Article 11, which amount shall be deposited by Escrow Agent in an interest bearing account (with interest accruing to the benefit of Seller), pursuant to an escrow agreement substantially in the form of Exhibit A (the "Escrow Agreement"); (b) by wire transfer to Escrow Agent (or such other Person as the parties may agree) of immediately available funds in an amount equal to the outstanding principal amount of, and accrued and unpaid interest on, the indebtedness (including indebtedness relating to capital leases) described on Schedule 1.3 (the "Company's Indebtedness to be Satisfied at Closing"); and (c) by wire transfer to Seller of immediately available funds in an amount equal to the Purchase Price minus the sum of (a) and (b) above (the "Purchase Price Payable to Seller at Closing"). 1.4 Post-Closing Adjustments. On a date not later than 60 days after the Closing Date Buyer shall deliver to Seller a balance sheet of the Seller Companies as of the Closing Date (the "Final Balance Sheet"), prepared in accordance with the terms of this Agreement and otherwise in accordance with generally accepted accounting principles consistently applied, and the actual final amount of additions to or subtractions from the Purchase Price shall be determined from the Final Balance Sheet (subject to adjustment as provided in Section 1.5, the "Final Purchase Price Adjustment"). If, as a result of the Final Purchase Price Adjustment, Seller owes Buyer a portion of the Purchase Price paid by Buyer at Closing, then Seller shall pay Buyer such amount. If, as a result of the Final Purchase Price Adjustment, Buyer owes Seller an additional portion of the Purchase Price, then Buyer shall pay Seller such amount. Any such additional payment shall be by wire transfer of immediately available funds to payee and shall be due and payable not later than ten business days after the date Buyer delivers the Final Balance Sheet or, if there exists any dispute of the Final Purchase Price Adjustment, not later than ten business days after the independent accountants issue their decision pursuant to Section 1.5. 1.5 Dispute of Adjustments. In the event that Seller, Buyer or both shall dispute the Final Purchase Price Adjustment and such dispute is not resolved to the mutual satisfaction of Seller and Buyer within one hundred twenty (120) days after the Closing Date, Seller and Buyer shall each have the right to require that such dispute be submitted to Arthur Anderson or, if Arthur Anderson is unable or unwilling to participate, another mutually acceptable independent "big six" certified public accounting firm, in any event acting as experts and not as arbitrators, for computation or verification of the Final Purchase Price Adjustment in accordance with the provisions of this Agreement and 4 11 otherwise where applicable in accordance with generally accepted accounting principles applied on a consistent basis. The foregoing provisions for certified public accounting firm review shall be specifically enforceable by the parties; the decision of such accounting firm shall be final and binding upon Seller and Buyer; there shall be no right of appeal from such decision; and such accounting firm's fees and expenses shall be borne by the party whose determination has been adversely modified by such accounting firm's decision or by both parties in proportion to the relative amount each party's determination has been adversely modified. 1.6 New Directors and Officers. On the Closing Date, Seller shall cause a meeting of the Board of Directors of each of the Companies and the Seller Subs to be held upon due notice or waiver thereof, at which time the resignations of the officers and directors of each of the Company and the Seller Subs shall be accepted, effective immediately, and the vacancies created by such resignations shall be filled by the persons designated by Buyer. 1.7 Definitions; Interpretation. In this Agreement, unless the context otherwise requires: (1) the term "Accounts Receivable" shall have the meaning ascribed to it in Section 3.8 of this Agreement; (2) the term "Affiliate" means any Person that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with another Person and includes the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of securities, by contract or otherwise; (3) the term "Affiliated Group" shall have the meaning ascribed to it in Section 3.21(a) of this Agreement; (4) the term "Agency Receivables" shall have the meaning ascribed to it in Section 3.22 of this Agreement; (5) "Agreement" means this Agreement and all Exhibits and Schedules hereto; (6) the term "Approved Capital Expenditures" shall have the meaning ascribed to it in Section 5.4(j) of this Agreement; (7) the term "Associate" shall have the meaning ascribed to it in Section 3.16(a) of this Agreement; 1.8 the term "Assumed Litigation" shall mean the litigation set forth on Schedule 3.24 hereto; 1.9 the term "Audited Balance Sheet" shall have the meaning ascribed to it in Section 3.5(a)(i) of this Agreement; 5 12 1.10 the term "Balance Sheet Date" shall mean October 31, 1993; 1.11 the term "Base Purchase Price" shall have the meaning ascribed to it in Section 1.2(i) of this Agreement; 1.12 the term "Building Defects" shall mean conditions relating to the structural soundness of any building located on the Real Property or the soundness of the underlying Real Property, each which existed prior to the Closing Date; 1.13 the term "Buyer's Indemnified Persons" shall have the meaning ascribed to it in Section 11.1 of this Agreement; 1.14 the term "Campus" shall mean approximately 37.5 contiguous acres at the intersection of Euclid and Warner Avenues in the City of Fountain Valley, Orange County, California upon which the Hospital resides; 1.15 the term "Claim Notice" shall have the meaning ascribed to it in Section 11.5(e) of this Agreement; 1.16 the term "Closing" shall have the meaning ascribed to it in Section 2.1 of this Agreement; 1.17 the term "Closing Balance Sheet" shall have the meaning ascribed to it in Section 1.2 of this Agreement; 1.18 the term "Closing Date" shall have the meaning ascribed to it in Section 2.1 of this Agreement; 1.19 the term "Code" shall have the meaning ascribed to it in Section 3.19(a) of this Agreement; (20) the term "Company" means Fountain Valley Regional Hospital and Medical Center, a California corporation. (21) the term "Company's Indebtedness to be Satisfied at Closing" shall have the meaning ascribed to it in Section 1.3(b) of this Agreement; (22) the term "Company Shares" means 100% of the issued and outstanding shares of the common stock of the Company. (23) the term "Confidential Information" shall have the meaning ascribed to it in Section 6.4 of this Agreement. 6 13 (24) the term "Consolidation" shall have the meaning ascribed to it in Paragraph C of the Recitals; (25) the term "Contracts" shall have the meaning ascribed to it in Section 3.14 of this Agreement; (26) the term "Controlled Group of Corporations" shall have the meaning ascribed to it in Section 3.19(a) of this Agreement; (27) the term "Cost Report Reconciliation Statement" shall have the meaning ascribed to it in Section 10.9(a) of this Agreement; (28) the term "Cost Reports" shall have the meaning ascribed to it in Section 3.22 of this Agreement; (29) the term "Disclosed Litigation" shall mean such litigation listed on Schedule 3.24 hereto; (30) the term "Due Date" shall have the meaning ascribed to it in Section 10.4(b) of this Agreement; (31) the term "Effective Time" shall have the meaning ascribed to it in Section 2.1 of this Agreement; (32) the term "Employee Benefit Plan" shall have the meaning ascribed to it in Section 3.19(a) of this Agreement; (33) the term "Employee Pension Benefit Plan" shall have the meaning ascribed to it in Section 3.19(a) of this Agreement; (34) the term "Employee Welfare Benefit Plan" shall have the meaning ascribed to it in Section 3.19(a) of this Agreement; (35) the term "Encumbrances" means liabilities, levies, claims, charges, assessments, mortgages, security interests, liens, pledges, conditional sales agreements, title retention contracts, leases, subleases, rights of first refusal, options to purchase, restrictions and other encumbrances and agreements to give any of the foregoing; (36) the term "Environmental Claim" shall have the meaning ascribed to it in Section 3.11(a) of this Agreement; (37) the term "Environmental Laws" shall have the meaning ascribed to it in Section 3.11(a) of this Agreement; 7 14 (38) the term "Environmental Reports" shall have the meaning ascribed to it in Section 3.11(a) of this Agreement; (39) the term "ERISA" shall have the meaning ascribed to it in Section 3.19(a) of this Agreement; (40) the term "Escrow Agent" shall mean a bank or other person acceptable to the parties; (41) the term "Escrow Agreement" shall have the meaning ascribed to it in Section 1.3(a) of this Agreement; (42) the term "Escrow Amount" shall mean an amount equal to $5 million deposited with Escrow Agent pursuant to the Escrow Agreement; (43) the term "Excluded Assets" shall have the meaning ascribed to it in Section 1.10 of this Agreement; (44) the term "Excluded Real Property" means the approximately 17 acres of undeveloped land described on Schedule 3.10 hereto; (45) the term "Facilities" shall mean the Hospital, the Surgery Center and the Imaging Center; (46) the term "Fiduciary" shall have the meaning ascribed to it in Section 3.19(a) of this Agreement; (47) the term "Final Balance Sheet" shall have the meaning ascribed to it in Section 1.4 of this Agreement; (48) the term "Final Purchase Price Adjustment" shall have the meaning ascribed to it in Section 1.4 of this Agreement; (49) the term "Financial Statements" shall have the meaning ascribed to it in Section 3.5(a) of this Agreement; (50) the term "FTC" shall have the meaning ascribed to it in Section 5.6 of this Agreement; (51) the term "FVHC" means Fountain Valley Health Care, Inc., a California corporation. 8 15 (52) the term "FVHC Shares" means 100% of issued and outstanding shares of the common stock of FVHC. (53) the term "FVIC" shall mean Fountain Valley Imaging Corp., a California corporation; (54) the term "FVIC Shares" shall mean 100% of the issued and outstanding shares of capital stock of FVIC; (55) the term "FVICLP" shall mean Fountain Valley Imaging Center Limited Partnership, a California limited partnership; (56) the term "FVOSCLP" shall mean Fountain Valley Outpatient Surgical Center Limited Partnership, a California limited partnership; (57) the term "Government Reimbursement Programs" shall have the meaning ascribed to it in Section 3.22 of this Agreement; (58) the term "Health Law Violation" shall mean a violation by any of the Seller Companies of the Medicare fraud and abuse provisions of Title XVIII of the Social Security Act or any comparable California anti-kickback law relating to the ownership or operation of the Facilities prior to the Closing Date, and knowledge that a particular arrangement does not satisfy the Medicare fraud and abuse safe harbors shall not constitute de facto knowledge of a Health Care Violation; (59) the terms "hereof," "herein," "hereby," and derivative or similar words refer to this entire Agreement; (60) the term "Hill-Burton Act" shall have the meaning ascribed to it in Section 3.27 of this Agreement; (61) the term "Hospital" shall mean Fountain Valley Regional Hospital and Medical Center, a tertiary care hospital; (62) the term "HRT" shall mean Healthcare Realty Trust Incorporated, a real estate investment trust; (63) the term "HSR Act" shall have the meaning ascribed to it in Section 5.6 of this Agreement; (64) the term "Imaging Center" shall mean a 7,000-square-foot imaging center located on the Campus; 9 16 (65) the term "include" or "including" means including without limitation; (66) the term "Indemnified Party" shall have the meaning ascribed to it in Section 11.5(a)(i) of this Agreement; (67) the term "Indemnifying Party" shall have the meaning ascribed to it in Section 11.5(a)(i) of this Agreement; (68) the term "Indemnity Notice" shall have the meaning ascribed to it in Section 11.5(f) of this Agreement; (69) the term "Initial Purchase Price Adjustment" shall have the meaning ascribed to it in Section 1.2 of this Agreement; (70) the term "Intellectual Properties" shall have the meaning ascribed to it in Section 3.14(c) of the Agreement. (71) the term "Interest Commencement Date" shall have the meaning ascribed to it in Section 1.8 of this Agreement; (72) the term "Interim Balance Sheet" shall have the meaning ascribed to it in Section 3.5(a)(ii) of this Agreement; (73) the term "Interim Balance Sheet Date" shall mean May 31, 1994; (74) the term "Investments" shall have the meaning ascribed to it in Section 3.4(b) of this Agreement; (75) the term "JCAHO" shall mean Joint Commission on Accreditation of Healthcare Organizations; (76) the term "judgment" includes any order, writ, injunction, decree, determination or award of any court, governmental agency or authority or tribunal (including arbitration panels); (77) the term "Justice Department" shall have the meaning ascribed to it in Section 5.6 of this Agreement; (78) the term "Key Employee Agreements" shall have the meaning ascribed to it in Section 5.14 of this Agreement; (79) the term "Living Care Center" shall mean the facility known as the Living Care Center which is located on the Campus; 10 17 (80) the term "Losses" shall have the meaning ascribed to it in Section 11.1 of this Agreement; (81) the term "Malpractice Litigation" shall mean all litigation, arbitration or other proceedings by third parties relating to the professional services rendered at the Facilities by the Seller Companies prior to the Closing Date; (82) the term "Materials of Environmental Concern" shall have the meaning ascribed to it in Section 3.11(a) of this Agreement; (83) the term "MCS" means MCS Administrative Services, Inc., a California corporation; (84) the term "MCS Shares" means 100% of the issued and outstanding shares of common stock of MCS; (85) the term "MOBs" means the four medical office buildings located on the Campus; (86) the term "Multi-Employer Plan" shall have the meaning ascribed to it in Section 3.19(a) of this Agreement; (87) the term "Net Favorable Adjustments" shall have the meaning ascribed to it in Section 10.9(a) of this Agreement; (88) the term "Net Unfavorable Adjustments" shall have the meaning ascribed to it in Section 10.9(a) of this Agreement; (89) the term "Net Working Capital" shall have the meaning ascribed to it in Section 1.2(ii) of this Agreement; (90) the term "Notice Period" shall have the meaning ascribed to it in Section 11.5(a)(i) of this Agreement; (91) the term "Other Permitted Encumbrances" shall have the meaning ascribed to it in Section 3.17 of this Agreement; (92) the term "Other Plan" shall have the meaning ascribed to it in Section 3.19(a) of this Agreement; (93) the term "Owner's Title Insurance Policy for the Real Property" shall have the meaning ascribed to it in Section 7.8 of this Agreement; 11 18 (94) the term "partner" includes general and limited partners; (95) the term "Partnership Interest" shall mean the partnership interests in and to FVOSCLP and FVICLP; (96) the term "party" means any party to this Agreement, its respective successors and permitted assigns; (97) the term "PBGC" shall have the meaning ascribed to it in Section 3.19(a) of this Agreement; (98) the term "PCMG" means Personal Care Medical Group, Inc., a California professional corporation; (99) the term "Permitted Encumbrances" shall have the meaning ascribed to it in Section 3.10(a) of this Agreement; (100) the term "Person" means any individual, company, body corporate, association, partnership, firm, joint venture, trust and governmental agency; (101) the term "Pre-Closing Period" shall have the meaning ascribed to it in Section 10.4(a) of this Agreement; (102) the term "Prior Period Adjustments" shall have the meaning ascribed to it in Section 10.9(a) of this Agreement; (103) the term "Prohibited Transaction" shall have the meaning ascribed to it in Section 3.19(a) of this Agreement; (104) the term "Purchase Price" shall have the meaning ascribed to it in Section 1.2 of this Agreement; (105) the term "Purchase Price Adjustment" shall have the meaning ascribed to it in Section 1.2 of this Agreement; (106) the term "Purchase Price Payable to Seller at Closing" shall have the meaning ascribed to it in Section 1.3 of this Agreement; (107) the term "Real Estate Option Agreement" shall have the meaning ascribed to it in Section 5.11 to this Agreement; (108) the term "Real Property" shall have the meaning ascribed to it in Section 3.10 of this Agreement; 12 19 (109) the term "Reportable Event" shall have the meaning ascribed to it in Section 3.19(a) of this Agreement; (110) the term "Required Lenders" shall have the meaning ascribed to it in Section 7.16 of the Agreement; (111) the term "Seller Companies" shall mean the Company, the Seller Subs and the Seller Partnerships; (112) the term "Seller Partnerships" shall mean FVOSCLP and FVICLP; (113) the term "Seller Subs" shall mean MCS, FVHC and FVIC; (114) the term "Seller's Credits" shall have the meaning ascribed to it in Section 10.9(a) of this Agreement; (115) the term "Seller's Indemnified Persons" shall have the meaning ascribed to it in Section 11.3 of this Agreement; (116) the term "Shares" shall mean the Company Shares, the MCS Shares and the FVIC Shares; (117) the term "Stocktake" shall have the meaning ascribed to it in Section 1.11 of this Agreement; (118) the term "Straddle Period" shall have the meaning ascribed to it in Section 10.4(b) of this Agreement; (119) the term "Subsidiary" shall have the meaning ascribed to it in Section 3.4(a) of this Agreement; (120) the term "Surgery Center" shall mean a 9,000-square-foot outpatient surgery center located on the Campus; (121) the term "Survey" shall have the meaning ascribed to it in Section 3.10(f) of the Agreement; (122) the term "Tax" shall have the meaning ascribed to it in Section 3.21(a) of this Agreement; (123) the term "Tax Return" shall have the meaning ascribed to it in Section 3.21(a) of this Agreement; 13 20 (124) the term "Third Party Claim" shall have the meaning ascribed to it in Section 11.5(a)(i) of this Agreement; and (125) the term "UNAC" shall have the meaning ascribed to it in Section 3.20 of the Agreement; (126) the term "WARN Act" shall have the meaning ascribed to it in Section 1.9 of this Agreement. (127) references to any document (including this Agreement) are references to that document as amended, consolidated, supplemented, novated or replaced by the parties from time to time in accordance with this Agreement; (128) references to any law are references to that law as amended, consolidated, supplemented or replaced from time to time prior to the Closing Date and all rules and regulations promulgated thereunder prior to the Closing Date; (129) the mere listing (or inclusion of a copy) of a document or other item shall not be deemed adequate to disclose the contents of such document as an exception to a representation or warranty made herein unless the representation or warranty has to do with the existence of the document or other item itself or unless the listing of a document or other item is prefaced with the words "the contents of" which shall put Buyer on notice that the contents of such document or other item are being disclosed; (130) each representation, warranty and covenant contained herein shall have independent significance. If any party has breached any representation, warranty or covenant contained herein in any respect, the fact that there exists another representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) that such party has not breached shall not detract from or mitigate the fact that the party is in breach of the first representation, warranty or covenant; (131) references to time are references to Los Angeles, California time; (132) references to "knowledge of Seller" or "Seller's knowledge" mean the current actual knowledge of those Persons described on Schedule 1.7; and (133) "Articles" and "Sections" are references to articles and sections of this Agreement. 1.8 Interest. Unless otherwise provided herein to the contrary, any payment required to be made by any party pursuant to this Agreement, if not paid before twenty (20) business days after the date such payment is required to be made (the "Interest Commencement Date"), shall include interest from the Interest Commencement Date to the date such payment is made, computed at an 14 21 annual rate equal to the average prime rate of Citibank, N.A., during such period plus one percent (1%) per annum. All requests for payment pursuant to this Section shall be accompanied by a certificate of an officer of the party entitled to receive such payment setting forth the amount of the payment due pursuant to this Agreement (without regard to any amounts payable through operation of this Section), the applicable Interest Commencement Date and applicable interest rate. 1.9 WARN Act. Buyer shall continue the employment of a legally sufficient number of employees of the Seller Companies after Closing for at least sixty-one days. The parties do not expect that the Worker Adjustment and Retraining Act, 29 U.S.C. Section Section 2101-2109 (the "WARN Act") shall be applicable to the sale of the Shares and Partnership Interests hereunder. 1.10 Excluded Assets. Seller's interest in and to the Excluded Real Property, except to the extent provided in the Real Estate Option Agreement (as defined in Section 5.11), and PCMG (collectively, the "Excluded Assets") are excluded from the assets of the Seller Companies being acquired by or transferred to Buyer at the Closing through the acquisition of the Shares and Partnership Interests. 1.11 Physical Inventory. Seller conducted on June 17, 18 and 19, 1994 a physical count (the "Stocktake") of all items of inventory and supplies of a quality usable or saleable in the ordinary course of business of the Facilities. In conducting the Stocktake, all items of inventory and supplies which were obsolete, below standard quality or in the process of repair on such date were excluded or reserved for as of such date. The book value of all items inventory and supplies shall be restated as of the date of the Stocktake at the lower of cost (on a first-in, first-out basis) or market. From and after the date of the Stocktake until the Closing Date, Seller shall account for all dispositions of items of inventory and supplies in accordance with normal business and accounting policies and practices such that, as of the Closing Date, the book value of the inventory and supplies will be reasonably accurate. The book value of the inventory and supplies as of the Closing Date determined in accordance with this Section shall be stated as such in the Final Balance Sheet. 2. CLOSING. 2.1 Closing. Subject to the satisfaction or waiver by the appropriate party of all the conditions precedent to Closing specified in Articles 7 and 8, the consummation of the sale and purchase of the Shares and Partnership Interests and the other transactions contemplated by and described in this Agreement (the "Closing") shall take place at the offices of Manatt, Phelps & Phillips, 11355 West Olympic Boulevard, Los Angeles, California 90064-1614, Los Angeles, California, at 10:00 A.M. on August 1, 1994, or on such later date or at such other location as the parties may mutually agree in writing (the "Closing Date"). The Closing shall be effective as of 12:01 A.M. on the Closing Date (the "Effective Time"). 15 22 2.2 Actions of Seller at Closing. At the Closing and unless otherwise waived in writing by Buyer, Seller shall deliver to Buyer: (a) a certificate or certificates representing all of the Shares, in genuine and unaltered form, accompanied by duly executed stock powers endorsed in blank for transfer with requisite stock transfer stamps, if any, attached, in sufficient form to transfer to Buyer good and valid title in and to the Shares, free of all Encumbrances; (b) an assignment of partnership interests, in form and substance acceptable to Buyer, fully executed by Seller, in form sufficient to transfer to Buyer good and valid title in and to the Partnership Interests, free of all Encumbrances; (c) the Owner's Policy of Title Insurance for the Real Property, as provided in Section 7.8; (d) copies of resolutions duly adopted by the partners and executive committee of Seller authorizing and approving the consummation of the transactions contemplated hereby and the execution and delivery of this Agreement and the documents described herein, certified as true and in full force and effect as of the Closing Date by the appropriate partners of Seller; (e) certificates of a duly authorized partner of Seller certifying that each representation and warranty of Seller set forth herein is true and correct in all material respects as of the Closing Date, and that each covenant and agreement of Seller to be complied with or performed on or prior to the Closing Date pursuant to this Agreement has been complied with or performed in all material respects; (f) certificates of incumbency for the respective partners of Seller executing this Agreement or making certifications for Closing, dated as of the Closing Date; (g) certificates of existence of Seller and each of the Seller Partnerships, and certificates of existence and good standing of each of the Seller Companies from the State of California, each dated the most recent practical date prior to Closing; (h) an opinion of Seller's counsel in a form acceptable to Seller and Buyer; (i) the Escrow Agreement, fully executed by Seller; (j) the Real Estate Option Agreement, fully executed by Seller; (k) the Key Employee Agreements (as defined in Section 5.14), fully executed by Messrs. Ways and Butler; (l) such other instruments and documents as Buyer reasonably deems necessary to effect the transactions contemplated hereby; and 16 23 (m) the Litigation Assumption Agreement, in the form attached hereto as Exhibit D, fully executed by Seller. 2.3 Action of Buyer at Closing. At the Closing and unless otherwise waived in writing by Seller, Buyer shall deliver to Seller: (a) the Purchase Price Payable to Seller at Closing; (b) copies of resolutions duly adopted by the board of directors of Buyer authorizing and approving Buyer's performance of the transactions contemplated hereby and the execution and delivery of this Agreement and the documents described herein, certified as true and in full force and effect as of the Closing Date by an appropriate officer of Buyer; (c) certificates of the duly authorized President or a Vice President of Buyer certifying that each representation and warranty of Buyer set forth herein is true and correct in all material respects as of the Closing Date, and that each covenant and agreement of Buyer to be complied with or performed on or prior to the Closing Date pursuant to this Agreement has been complied with or performed in all material respects; (d) certificates of incumbency for the respective officers of Buyer executing this Agreement or making certifications for Closing, dated as of the Closing Date; (e) certificates of existence and good standing of Buyer from the state of its incorporation, dated the most recent practical date prior to Closing; (f) an opinion of Buyer's counsel, in a form acceptable to Seller and Buyer; (g) the Real Estate Option Agreement, fully executed by Buyer; (h) the Escrow Agreement, fully executed by Buyer; (i) the Key Employee Agreements, fully executed by Guarantor; (j) the Litigation Assumption Agreement, in the form attached hereto as Exhibit D, fully executed by Seller; and (k) such other instruments and documents as Seller reasonably deems necessary to effect the transactions contemplated hereby. 17 24 3. REPRESENTATIONS AND WARRANTIES OF SELLER. As of the date hereof and as of the Closing Date, Seller represents and warrants to Buyer that the following facts and circumstances are and, except as contemplated hereby, at all times up to the Closing Date will be, true and correct, and hereby acknowledges that such facts and circumstances constitute the basis upon which Buyer has been induced to enter into and perform this Agreement: 3.1 Organization and Capacity. (a) Seller is a limited partnership duly organized and validly existing as a limited partnership under the laws of the State of California. Seller has the requisite power and authority to enter into this Agreement, sell the Shares and Partnership Interests to Buyer at Closing, perform its other obligations hereunder, and conduct its businesses as now being conducted. A true and complete copy of the partnership agreement of Seller, and a complete and accurate list of the names, residence or office addresses and percentage interests of all partners in Seller, have been provided to Buyer. (b) Each of the Company and the Seller Subs is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Each of the Seller Partnerships is a limited partnership duly organized and validly existing as a limited partnership under the laws of the State of California. None of the Seller Companies is licensed, qualified or admitted to do business in any jurisdiction other than the State of California, and there is no other jurisdiction in which the ownership, use or leasing of any of the Seller Companies's assets or properties, or the conduct or nature of their businesses, makes such licensing, qualification or admission necessary. The information concerning each of the Seller Companies set forth on Schedule 3.3 is accurate in all respects. True and complete copies of the articles or certificate of incorporation, bylaws and all other agreements, instruments or other documents relating to the creation and governance of the Company are attached to Schedule 3.1. (c) The minute books and other similar records of each of the Seller Companies have been made available to Buyer prior to the effective date hereof, and contain a true, correct and complete record of all action taken at all meetings, and by all written consents in lieu of meetings, of the stockholders, the boards of directors and committees of the boards of directors of each of the Seller Companies, excluding the Board of Governors of the Company. The stock and partnership transfer ledgers and other similar records of each of the Seller Companies have been made, or prior to Closing will be made, available to Buyer, are true, correct and complete, and accurately reflect all transactions in the capital stock or partnership interests of the Seller Companies. 3.2 Corporate Powers; Consents; Absence of Conflicts With Other Agreements, Etc. (a) The execution, delivery and performance of this Agreement by Seller and all other agreements referenced in or ancillary hereto to which it is a party and the consummation of the transactions contemplated herein by Seller: 18 25 (i) are within Seller's partnership powers, are not in contravention of law or of the terms of its agreement of partnership and amendments thereto, or the articles or certificate of incorporation and bylaws or partnership agreements of any of the Seller Companies, and have been duly authorized by all appropriate corporate or partnership action; (ii) except as otherwise expressly herein provided or listed on Schedule 3.2, do not require any approval or consent of, or filing with, any governmental agency or authority bearing on the validity of this Agreement; (iii) except for liabilities included in the Company's Indebtedness to be Satisfied at Closing as expressly provided in Section 3.10, do not conflict, result in any breach or contravention of, or permit the acceleration of the maturity of any liabilities of Seller or of the Seller Companies, and do not create or permit the creation of any Encumbrance on or affecting any of the assets of Seller or the Seller Companies; (iv) do not violate any statute, law, rule or regulation of any governmental authority to which the any of the Seller Companies or its assets may be subject (including any bulk transfer law); (v) do not violate any judgment to which Seller or any of the Seller Companies may be subject; and (vi) except as expressly provided in Section 3.10 to the contrary with respect to the Company's Indebtedness to be Satisfied at Closing, do not conflict with or result in a breach or violation of any material agreement to which Seller or any of the Seller Companies is a party or to which any of them is bound. (b) This Agreement and all agreements to which Seller becomes a party hereunder are valid and legally binding obligations of Seller, enforceable against Seller in accordance with the respective terms hereof or thereof, except as enforceability may be restricted, limited or delayed by applicable bankruptcy or other laws affecting creditors' rights generally and except as enforceability may be subject to general principles of equity. 3.3 Capital Stock of the Seller Companies. The authorized capital stock or partnership equity of each of the Seller Companies is set forth on Schedule 3.3 and is accurate in all respects. The Shares and Partnership Interests are duly authorized, validly issued, outstanding, fully paid and non-assessable, and the Shares constitute 100% of the issued and outstanding equity securities of each of the Seller Subs and the Partnership Interests, together with FVHC's partnership interest in FVOSCLP and FVIC's partnership interest in FVICLP, constitute 100% of the partnership interests of each of the Seller Partnerships. Seller owns the Shares and Partnership Interests beneficially and of record, free and clear of all Encumbrances. There are no outstanding securities, rights, subscriptions, warrants, calls, options, "phantom" stock rights or (except for this Agreement) other contracts, commitments obligations or claims of any kind that give any Person the right to (a) 19 26 purchase or otherwise receive or be issued any shares of capital stock of the Company or any of the Seller Subs, partnership interests in the Seller Partnerships, or any security or liability of any kind convertible into or exchangeable for any such shares or partnership interests, (b) receive any benefits or rights similar to any rights enjoyed by or accruing to the holder of shares of capital stock or partnership interests of the Seller Companies, or (c) participate in the equity, income or election of directors, officers or partners of any of the Seller Companies (except by virtue of Seller's equity interest in the Seller Companies). Except as set forth on Schedule 3.3, Seller has full voting power over the Shares and Partnership Interests, subject to no proxy, shareholders' or partners' agreement, voting trust or other agreement relating to the voting of any of the Shares or Partnership Interests. Other than this Agreement, there is no agreement between Seller and any Person with respect to the disposition of the Shares or Partnership Interests. At the Closing, Seller will transfer to Buyer good and valid title to all Shares and Partnership Interests, free and clear of all Encumbrances. 3.4 Subsidiaries; Investments; Third Party Options. Except as set forth on Schedule 3.4, (a) none of the Seller Companies (i) owns a majority of the common stock of any corporation or (ii) has the power to vote or direct the voting of sufficient securities to elect a majority of the directors of any corporation (each such corporation described in clause (i) or (ii) above, a "Subsidiary"). (b) None of the Seller Companies owns any shares of capital stock of any corporation, interests in general or limited partnerships, and interests in joint ventures, or other equity or debt instruments in any such Persons (collectively, "Investments"). (c) There are no existing agreements, options, commitments or rights with, of or to any Person to acquire, directly or indirectly, any of the Seller Companies' assets or any interest therein. 3.5 Financial Statements. (a) Seller attaches hereto (Schedule 3.5) copies of the following financial statements prepared on an accrual-basis (together with the Closing Balance Sheet and the financial information delivered pursuant to Section 5.2(b), collectively, the "Financial Statements"): (i) an audited consolidated balance sheet of Seller as of October 31, 1993 (including the notes thereto, the "Audited Balance Sheet"), audited consolidated balance sheets and notes thereto of Seller as of October 31, 1992, and October 31, 1991, and the related consolidated statements of income and notes thereto, partners' equity and cash flows and notes thereto for the years then ended, together with the report thereon of BDO Seidman, independent auditors; and (ii) an unaudited consolidated balance sheet of Seller as of May 31, 1994 (including any notes thereto, the "Interim Balance Sheet"), and the related unaudited consolidated statements of income and cash flows for the seven months then ended. 20 27 (b) The Financial Statements are true, complete and accurate and fairly present in all material respects the financial condition and results of operations of Seller and the Seller Companies as of the respective dates thereof and for the periods therein referred to, all in accordance with generally accepted United States accounting principles, subject in the case of interim financial statements, to normal recurring year-end adjustments (the effect of which will not, individually or in the aggregate, be materially adverse) and the absence of notes (which, if presented, would not differ materially from those included in the Audited Balance Sheet); and the Financial Statements reflect the consistent application of such accounting principles throughout the periods involved, except as otherwise expressly set forth therein. 3.6 Extraordinary Liabilities. Seller attaches hereto an accurate list (Schedule 3.6) of all liabilities of the Seller Companies not included within Schedule 3.5 which are of the kind and character required in financial statements prepared in accordance with generally accepted accounting principles, whether accrued, absolute, contingent or otherwise, together with, in the case of those liabilities which are not fixed in amount, a reasonable estimate of the maximum amount which may be payable in respect thereof. Except as disclosed in Schedules 3.5, 3.6 and 3.24 and to Seller's knowledge, none of the Seller Companies has liabilities of any nature, whether accrued, absolute, contingent or otherwise. To Seller's knowledge, there are no facts that are not fully disclosed in Schedule 3.5, 3.6 or 3.24 which might serve as the basis for any liability or obligation of the Seller Companies. 3.7 Post-Balance Sheet Results. Since the Balance Sheet Date and except as set forth on Schedule 3.7, there has not been: (a) any material adverse change in the financial condition, assets, liabilities (contingent or otherwise), working capital reserves, income or business of Seller, the Seller Companies or the Facilities; (b) any damage, destruction or loss (whether or not covered by insurance) affecting any assets of the Seller Companies; (c) any increase in the compensation payable or to become payable by any of the Seller Companies to any of its employees or agents, or any bonus payment or arrangement made to or with any employees or agents, except in the ordinary course of business in accordance with existing personnel policies, and none of the Seller Companies has employed any additional management personnel; (d) any labor dispute, enactment of law or adoption of regulation or any event or condition of any character materially adversely affecting the business of Seller; (e) any sale, assignment, transfer, distribution or other disposition of any asset of the Seller Companies, except in the ordinary course of their business; 21 28 (f) the incurrence of any material liability or obligation of any nature (whether absolute, accrued, contingent or otherwise) except in the ordinary and regular course of the business of the Seller Companies or except as otherwise described in or contemplated by this Agreement; (g) the payment, discharge or satisfaction of any liability or obligation (whether absolute, accrued, contingent or otherwise) other than by payment, discharge or satisfaction in the ordinary and regular course of the business of the Seller Companies, except as otherwise described in or contemplated by this Agreement; (h) the imposition on any of Seller Companies' assets of any mortgage, pledge, lien, security interest, encumbrance or restriction; (i) the cancellation or waiver of any rights in respect of any of the Seller Companies' assets, except in the ordinary and regular course of their business; (j) the incurrence of any individual capital expenditure or commitment for additions to property, plant or equipment of the Facilities in excess of Fifty Thousand Dollars ($50,000), except Approved Capital Expenditures; (k) any change in any method of accounting or accounting practice; (l) other than compensation paid in the ordinary course of employment or pursuant to the Contracts, the payment of any amount to, the payment of any amount on behalf of, the sale of any assets to, or the entering into of any agreement or arrangement with, any officer, director, shareholder or partner of Seller or the Seller Companies, or any Affiliate or Associate (as defined in Section 3.16) of any officer, director, shareholder or partner of Seller or the Company; (m) the payment of any amount to any Person in respect of any claim, obligation, liability, loss, damage or expense, of whatever kind or nature, based upon any provision of federal, state or local law or regulations or common law pertaining to environmental protection; or (n) the initiation or prosecution of any transaction by the Company outside the ordinary course of business which creates a liability or obligation in excess of Fifty Thousand Dollars ($50,000) other than the Approved Capital Expenditures. 3.8 Accounts Receivable. The accounts receivable of Seller and the Seller Companies (including the Agency Receivables; the "Accounts Receivable") to the extent uncollected, arose from bona fide commercial transactions and are not subject to any Encumbrances; there are not any refunds, discounts or setoffs payable or assessable with respect to the Accounts Receivable (taken as a whole) not reflected in reserves or allowances in the Financial Statements; Seller adequately records on the Financial Statements all estimates for future Cost Report settlements under the Government Reimbursement Programs for all years open to settlement; Seller has heretofore delivered to Buyer the following information about the Accounts Receivable as of May 19, 1994: (a) 22 29 the aging of the Accounts Receivable by financial classification; (b) each Account Receivable in excess of $10,000; and (c) each Account Receivable (other than Agency Receivables) in excess of $2,000 that is more than 90 days past due. 3.9 Inventory. The inventory and supplies of the Seller Companies are valued on the Financial Statements at the lower of cost (on a first-in, first-out basis) or market and are properly stated in the Balance Sheet as of the Balance Sheet Date. 3.10 Real Property. The Company owns, or at Closing will own, fee or leasehold title to the real property described in Schedule 3.10 as the "Real Property", together with all buildings, improvements and fixtures thereon and all appurtenances and rights thereto (the "Real Property"), and neither Seller, nor the Company, nor any Affiliate of Seller has created or may assert any rights in respect of any Encumbrances which will interfere with the Company's use of the Real Property after Closing; and (a) the Real Property is subject only to Encumbrances of record, each as more particularly described in Schedule 3.10, and at Closing will be subject only to those Encumbrances of record relating to capital leases and indebtedness which is not the Company's Indebtedness to be Satisfied at Closing, and other Encumbrances approved by Buyer in writing after the effective date hereof (the "Permitted Encumbrances"). (b) except as set forth on Schedule 3.10, the buildings standing on the Real Property are in a state of good condition and repair, to the knowledge of Seller are structurally sound, and are in need of no maintenance or repairs except for ordinary, routine maintenance; (c) the Real Property comprises all of the real property owned or leased by Seller and the Seller Companies associated with or employed in the operation of the Facilities or other businesses of the Seller Companies (other than the Excluded Real Property, which is not employed in the operation of the Facilities, and the real property subject to the Real Estate Purchase Agreement); (d) to Seller's knowledge, none of Seller and the Seller Companies has received a written notice (or reduced to writing an oral notice) of a violation of any applicable ordinance or other law, order, regulation or requirement, and none has received a written notice (or reduced to writing an oral notice) of condemnation or similar proceeding relating to any part of the Real Property or the operation thereof; (e) to Seller's knowledge, the Real Property and its operation are in compliance in all material respects with all planning, zoning and building codes and ordinances; to Seller's knowledge, none of Seller and the Seller Companies has received any outstanding or uncured notice alleging that the Facilities violate local planning, zoning and building codes and ordinances; and to Seller's knowledge the consummation of the transactions contemplated herein will not result in a violation of any applicable planning, zoning or building code or ordinance, or the termination of any applicable zoning variances or "grandfathering" now existing; 23 30 (f) Seller has delivered to Buyer a true and genuine copy of (i) an A.L.T.A Survey, last revised on July 26, 1991, prepared by Robert Bein, William Frost & Associates ("BW&F"), (ii) an A.L.T.A. Survey, dated June 21, 1994, prepared by B,W & F, and (iii) an A.L.T.A. Survey, dated July 1, 1994, prepared by B,W & F (collectively, the "Survey"), which Survey is the latest prepared survey of the Real Property in the possession or control of Seller or any of the Seller Companies; (g) to Seller's knowledge and except as set forth on the Survey or disclosed on Schedule 3.10, no part of the Real Property contains, is located within or abuts any flood plain, navigable water or other body of water, tideland, wetland, marshland or any other area which is subject to special State, federal or municipal regulation, control or protection; (h) except for those tenants in possession of the Real Property under Contracts described in Schedule 3.14, there are no parties in possession of, or claiming any possession, adverse or not, to or other interest in, any portion of the Real Property as lessees, tenants at sufferance, trespassers or otherwise; (i) no tenant is entitled to any rebate, concession, or free rent, other than as reflected in the Contract with such tenant; no commitments have been made to any Tenant for repairs or improvements other than for normal repairs and maintenance in the future or improvements required by the tenant Contract; and no rents due under any of the tenant Contracts have been assigned or hypothecated to, or encumbered by, any Person, other than pursuant to the Encumbrances of the Company's Indebtedness to be Satisfied at Closing, or Permitted Encumbrances, as additional security for the payment thereof; (j) except as set forth on Schedule 3.10, all painting, repairs, alterations and other work required to be performed by the Seller Companies as landlord under each of the tenant Contracts, and all of the other obligations of the Seller Companies as landlord required to be performed thereunder, have been, or will be as of the Closing Date, fully performed and either paid for or accrued on the Final Balance Sheet; and (k) to the knowledge of Seller, all essential utilities (including water, sewer, gas, electricity and telephone service) are available to the Real Property, as currently developed by Seller, and, to the knowledge of Seller, there are no conditions existing which could result in the termination or reduction of the current access from the Real Property to existing roadways. 3.11 Environmental Matters. (a) The following definitions apply to this Section: (i) "Environmental Claim" means any written notice (or oral notice reduced to writing by Seller) by a Person alleging potential liability of Seller or any of the Seller Companies (including potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries or penalties) arising out of, based on or resulting from (1) the presence, or release into the environment, of any Materials of Environmental Concern (as defined below) at any location, whether 24 31 or not owned by the Company, or (2) circumstances forming the basis of any violation, or alleged violation, of any Environmental Laws; (ii) "Environmental Laws" means any and all federal, state, local and foreign laws and regulations (including common law) relating to pollution or protection of human health or the environment (including ground water, land surface or subsurface strata), including laws and regulations relating to emissions, discharges, releases or threatened releases of Materials of Environmental Concern, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, recycling, reporting or handling of Materials of Environmental Concern; (iii) "Materials of Environmental Concern" means pollutants, contaminants, hazardous waste, medical waste, toxic substances, petroleum and petroleum products; and (iv) "Environmental Reports" means (1) that certain Phase I Environmental Assessment, dated June 1994, including all appendices attached thereto, prepared for Guarantor by Gresham, Smith and Partners, and (2) that certain Preliminary Site Assessment dated May 17, 1989 (Job #18552-001-128) prepared by Dames & Moore, as amended; that certain Report Asbestos Consulting Services Bulk Sampling and Analysis for Drywall and Mud dated August 23, 1989 (Job No. 18552-003-136) prepared by Dames & Moore; that certain Underground Storage Tank Compliance Plan dated September 14, 1989 (Job No. 18552-004-015) prepared by Dames & Moore; that certain Report of Liquefaction Studies Proposed Hospital Addition dated July 11, 1978 (Job No. D-78214) prepared by LeRoy Crandall & Associates; that certain Letter dated June 15, 1993 re Results of Supplemental Geotechnical Investigation (ESE Project No. 6-92-4839) prepared by Environmental Science & Engineering, Inc.; that certain Preliminary Geotechnical Investigation Proposed Emergency Room Expansion dated February 5, 1993 (Project No. 6-92-4042) prepared by Environmental Science & Engineering, Inc.; that certain Geotechnical Investigation Report dated March 29, 1993 (Project No. 6-92-4839) prepared by Environmental Science & Engineering, Inc.; that certain undated Phase I Preliminary Site Assessment (HLA Project No. 22831-1) prepared by Harding Lawson Associates; that certain Report Engineering Review for Refinancing Medical Office Buildings dated February 9, 1993 (Job No. 08-19-92-48) prepared by Seismic Design Consultants, Inc.; and all attachments and appendices and amendments to each of the above-listed documents. Seller has delivered to Buyer complete and genuine copies of the Environmental Reports, and Buyer acknowledges receipt of copies of the Environmental Reports. Buyer further acknowledges that it contracted for the Phase I Environmental Assessment, dated June, 1994 prepared by Gresham, Smith and Partners and, notwithstanding the fact that such report expressly prohibits the reliance by third Persons on the matters set forth therein, as between Buyer and Seller, Seller and the Seller Companies are relying on such report in connection with the representations and warranties contained in this Section 3.11. (b) To Seller's knowledge, each of Seller and the Seller Companies, and the conduct of their businesses, is in compliance in all material respects with all applicable Environmental Laws. Except as described in the Environmental Reports or on Schedule 3.11, neither Seller nor any of the Seller Companies has received any written communication (or reduced to writing any oral communication), whether from a governmental authority, employee or other Person, that alleges that Seller or any of the Seller Companies is not in full compliance with all applicable Environmental Laws. Each of Seller and the Seller Companies has all material permits, licenses and approvals required under applicable Environmental Laws to own its properties and to conduct its business 25 32 thereon. All such permits and other governmental authorizations currently held by Seller and the Seller Companies pursuant to the Environmental Laws are identified in Schedules 3.11 and 3.18. (c) There is no Environmental Claim pending or, to Seller's knowledge, threatened against Seller, the Seller Companies or, to Seller's knowledge without investigation, against any Person whose liability for any Environmental Claim Seller or any of the Seller Companies has or may have retained or assumed either contractually or by operation of law. (d) To Seller's knowledge or except as set forth in the Environmental Reports and on Schedule 3.11, during the period Seller and the Seller Companies have operated any of the Facilities, no actions, activities, circumstances, conditions, events or incidents, including the release, emission, discharge or disposal of any Materials of Environmental Concern, have occurred that could reasonably be expected to form the basis of any Environmental Claim against Seller or any of the Seller Companies. (e) Without in any way limiting the generality of the foregoing, (i) all on-site and off-site locations where Seller and the Seller Companies currently stores, disposes or arranges for the disposal of Materials of Environmental Concern are identified in Schedule 3.11, (ii) to Seller's knowledge, all Contracts dealing with the removal, storage, disposal and handling of Materials of Environmental Concern are with properly licensed vendors, (iii) to Seller's knowledge, all underground storage tanks, and the capacity and contents of such tanks, located on the Real Property are identified in the Environmental Reports or on Schedule 3.11, (iv) to Seller's knowledge and except as set forth in the Environmental Reports or on Schedule 3.11, there is no asbestos contained in or forming part of Real Property, (v) except as set forth on Schedule 3.11, no polychlorinated biphenyls (PCBs) are used or stored at any Real Property, and (vi) to Seller's knowledge, all cleanup and disposal efforts undertaken by Seller and the Seller Companies as a result of the leaking underground storage tank have been performed and completed in accordance with all applicable laws, rules, regulations and judgments in effect at the time of such clean-up. 3.12 Equipment. Seller attaches hereto a depreciation schedule as of the Balance Sheet Date (Schedule 3.12) which, to Seller's knowledge, takes into consideration all the equipment associated with, or constituting any part of, the assets and businesses of Seller and the Seller Companies. Since the Balance Sheet Date, neither Seller nor any of the Seller Companies has sold or otherwise disposed of any item of equipment having a value in excess of $500, except with a comparable replacement thereof. The Seller Companies own (or have valid leasehold titles to) all equipment located on the Real Property or within the Facilities and which is ordinarily and typically required by any hospital, imaging center or surgery center, as the case may be, providing a similar scope and level of care as the Seller Companies. Except as set forth on Schedule 3.12, all equipment, whether reflected in the Financial Statements or otherwise, is well maintained and in good operating condition, except for reasonable wear and tear and except for items which have been written down in the Financial Statements to a realizable market value or for which adequate reserves have been provided therein. Except as set forth on Schedule 3.12, all medical and leased equipment is maintained in accordance with manufacturer and lessor requirements, and complete and accurate 26 33 maintenance logs or journals have been maintained at all times. Except as set forth on Schedule 3.12, all equipment (except for leased equipment as to which the lessors have valid security interests) is held by the Company free and clear of any Encumbrance. No Person other than Company owns any equipment situated on the Real Property, except for (i) items leased by the Company pursuant to Contracts described on Schedule 3.14, (i) ordinary items customarily owned or leased by tenants of the Facilities and wholly within their respective leased premises, and (iii) other items with an aggregate value of less than $5,000. The Hospital's acute psychiatric unit presently occupies 40 beds on the second floor of the Living Care Center, but is equipped and licensed for a 40-bed acute psychiatric unit. The third floor of the Living Care Center is properly equipped to operate 40 licensed skilled nursing care beds. The fourth floor of the Living Care Center is licensed to operate 40 licensed skilled nursing care beds. 3.13 Trademarks, Computer Software, etc. Except as set forth on Schedule 3.13, each of the Seller Companies has the right to use, free and clear of any royalty or other payment obligations, claims of infringement or other Encumbrances, (a) all Intellectual Properties used or needed by it in the conduct of its business or at the Facilities, including those Intellectual Properties described in Schedule 3.13; and (b) all computer software, programs and similar systems owned by or licensed under Contracts to the such company or used in the conduct of the business of the Facilities, including those computer software, programs and similar systems described in Schedule 3.13; and, except as set forth on Schedule 3.13, none of the Seller Companies is in conflict with or violation or infringement of, nor has Seller or any of the Seller Companies received any notice alleging any conflict with, or violation or infringement of, any Contract or other alleged rights of any Person with respect to any such Intellectual Properties or any computer software, programs or similar systems. To the knowledge of Seller, no other Person is in conflict with or in violation or infringement of any Contract or other rights of the Seller Companies in and to the Intellectual Properties, or any computer software, programs or similar systems. Except as set forth in Schedule 3.13, the Seller Companies will, subsequent to the Closing, without further action or the payment of additional fees, royalties or other compensation to any Person, be entitled to unrestricted (except as provided in the Contracts) use of all Intellectual Properties, computer software, programs and similar systems currently used in the Facilities. The computer software, programs and similar systems currently used in the Facilities support the accounting and operational requirements of the Facilities. 3.14 Agreements and Commitments. Seller attaches hereto an accurate list (Schedule 3.14) of all commitments, contracts, leases, licenses, agreements and understandings, and all outstanding offers or solicitations to enter into any of the foregoing (hereinafter called "Contracts"), written or oral, relating to the Facilities or operation thereof, to which Seller or any of the Seller Companies is a party, or by which any of them or any of their assets are bound (including provider based physician agreements, managed care agreements, agreements with health maintenance organizations, independent practice organizations, preferred provider organizations or other alternative delivery systems, joint venture or partnership agreements, employment agreements, tenant leases, property management agreements, equipment leases and schedules, equipment maintenance agreements and schedules, agreements with municipalities and labor organizations, loan agreements, bonds, mortgages, liens and other security agreements). Seller has delivered true and correct copies of the 27 34 Contracts to Buyer. Except as set forth on Schedule 3.14, there are no Contracts which render, or after Closing would render, Seller unable to perform its obligations under this Agreement. Except for Contracts listed on Schedule 3.14, there are not: (a) any Contracts to which any of the Seller Companies is a party, or affecting its assets or business, which cannot, or in reasonable probability will not, be performed or terminated before ninety (90) days after the Closing Date without the payment of a penalty or other monies; (b) any Contracts affecting ownership of, title to, use of, or any interest in any Real Property, excluding this Agreement and the Real Estate Purchase Agreement; (c) any Contracts with respect to marks, names (including the names "Fountain Valley Regional Hospital and Medical Center", "Fountain Valley Hospital", Fountain Valley Medical Center", "Fountain Valley Outpatient Surgery Center", "The Women's and Children's Hospital at Fountain Valley", "Regional Care Center", "Living Care Center" and "Fountain Valley Imaging Center"), trademarks, service marks, patents, patent rights, assumed names, logos and copyrights (including variants thereof and applications therefor) (collectively, "Intellectual Properties") used in connection with the ownership and operation of the Facilities; (d) any Contracts relating to computer or data processing programs, software or source codes utilized by any of the Seller Companies in the conduct of its business; (e) any collective bargaining agreements or other Contracts with labor unions or other employee representatives or groups of employees affecting or which could affect any of the Seller Companies; (f) any employment or other Contracts with individual employees or agents of any of the Seller Companies, and any Contracts between or among Affiliates of Seller; (g) any Contracts providing for payments based in any manner on the revenues, purchases or profits of any of the Seller Companies, or its business; (h) any Contracts relating to the Consolidation; (i) any Contracts with referral sources to any of the Facilities, indicating specifically on Schedule 3.14 all such Contracts; or (j) any Contracts, whether in the ordinary course of business or not, which involve the future payment, performance of services or delivery of goods or materials to or by any of the Seller Companies of any amount or value in excess of Ten Thousand Dollars ($10,000) in the aggregate affecting or which could affect the assets or business of any of the Seller Companies. 28 35 3.15 The Contracts. (a) Except as set forth on Schedule 3.15, the Contracts constitute lawful, valid and legally binding obligations of Seller or one or more of the Seller Companies, as the case may be, and are enforceable against Seller or the respective Seller Company, as the case may be, in accordance with their terms; (b) each Contract constitutes the entire agreement by and between the parties thereto; (c) in all material respects, all obligations required to be performed under the terms of the Contracts by Seller or the respective Seller Company, as the case may be, and, to Seller's knowledge, by the other parties to the Contracts, have been performed, no act or omission has occurred or failed to occur which, with the giving of notice, the lapse of time or both would constitute a default under the Contracts, and each of such Contracts is in full force and effect; (d) except as expressly set forth on Schedule 3.14, none of the Contracts requires the consent of any Person to the purchase by Buyer of the Shares and the Partnership Interests; and (e) exept as set forth on Schedule 3.14, the purchase of the Shares and Partnership Interests by Buyer at Closing will not result in any penalty, premium or material variation of the rights, remedies, benefits or obligations of any party to the Contracts. 3.16 Certain Affiliate Transactions. Except as set forth in Schedule 3.16: (a) the Company is not indebted, either directly or indirectly, to any partner, officer or director of Seller or the Seller Companies, or to any other Person in which any of the foregoing has a financial interest ("Associate"), in any amount whatsoever relating to the business of the Seller Companies or the Facilities, other than current obligations for payments of salaries, bonuses and other fringe benefits for past services rendered or payments under any Contract disclosed on Schedule 3.14; and (b) no partner, officer or director of Seller or the Seller Companies, and no Associate, is indebted to any of the Seller Companies. 3.17 Title to Personal Property. The Seller Companies own, or at Closing will own, and hold good and valid title to all assets (other than the Real Property), tangible or intangible, constituting, associated with or employed in the operation of the Facilities or located on the Real Property, free and clear of any and all Encumbrances other than Permitted Encumbrances and those other Encumbrances described on Schedule 3.17 (the "Other Permitted Encumbrances"). 3.18 Healthcare License. The Hospital is duly licensed by the California Department of Health Services as a 413-bed general acute care hospital, allocated as follows: general acute care-209; skilled nursing-80; acute psychiatric-40; intensive care-29; pediatric-23; perinatal-18; and 29 36 neonatal ICU-14. The ancillary departments located at the Facilities which are required to be specifically licensed (including the Surgery Center) are duly licensed by the appropriate state health agencies. The Facilities are in compliance in all material respects with such licensing requirements. Seller attaches hereto an accurate list and summary description and copy (Schedule 3.18) of all material licenses, permits, franchises and certificates of need owned or held by the Seller Companies relating to the ownership, development or operations of the Facilities, all of which are, to Seller's knowledge, in good standing and not subject to meritorious challenge. There are no provisions in or agreements relating to any such licenses, permits, franchises and certificates of need which would preclude or limit the Seller Companies from operating the Facilities and using all the beds therein as they are currently classified. Attached to Schedule 3.18 is a copy of all licensure survey reports of the California Department of Health Services, and all fire marshall reports, relating to the Facilities issued after January 1, 1992. All violations set forth in such reports, if any, or of which Seller or any of the Seller Companies has notice or knowledge, have been or prior to Closing will be corrected in all material respects. Schedule 3.18 also lists the Hospital's peer review organizations. 3.19 Employee Benefit Plans. (a) As used herein, the term: (i) "Code" means the Internal Revenue Code of 1986, as amended; (ii) "ERISA" means the Employment Retirement Income Security Act of 1974, as amended; (iii) "Employee Pension Benefit Plan" has the meaning set forth in ERISA Sec. 3(2); (iv) "Employee Welfare Benefit Plan" has the meaning set forth in ERISA Sec. 3(1); (v) "Employee Benefit Plan" means any (1) nonqualified deferred compensation or retirement plan or arrangement which is an Employee Pension Benefit Plan, (2) qualified defined contribution retirement plan or arrangement which is an Employee Pension Benefit Plan, (3) qualified defined benefit retirement plan or arrangement which is an Employee Pension Benefit Plan (including any Multiemployer Plan), or (4) Employee Welfare Benefit Plan or material fringe benefit plan or program; (vi) "Other Plan" means any Contract or program (other than those described on Schedule 3.20) which provides cash or non-cash benefits or perquisites to employees of any of the Seller Companies, but which is not an Employee Benefit Plan; (vii) "Fiduciary" has the meaning set forth in ERISA Section 3(21); (viii) "Multiemployer Plan" has the meaning set forth in ERISA Sec. 3(37); (ix) "Controlled Group of Corporations" has the meaning set forth in Code Sec. 1563; (x) "PBGC" means the Pension Benefit Guaranty Corporation; (xi) "Prohibited Transaction" has the meaning set forth in ERISA Sec. 406 and Code Sec. 4975; and (xii) "Reportable Event" has the meaning set forth in ERISA Sec. 4043; (b) Schedule 3.19 lists each Employee Benefit Plan and Other Plan that the Seller Companies maintain or to which any of them contributes. (i) Except as set forth in Schedule 3.19, each Employee Benefit Plan (and related trust, insurance contract or fund) complies in form and in operation in all material respects with the applicable requirements of ERISA, the Code, and other applicable laws, and has been administered and operated in accordance with the terms of the Plan; 30 37 (ii) all required reports and descriptions (including Form 5500 Annual Reports, Summary Annual Reports, PBGC-1's and Summary Plan Descriptions) have been filed or distributed appropriately with respect to each Employee Benefit Plan, and the requirements of Part 6 of Subtitle B to Title I of ERISA and of Code Sec. 4980B have been met with respect to each Employee Benefit Plan which is an Employee Welfare Benefit Plan; (iii) all contributions (including employer contributions and employee salary reduction contributions) to each Employee Benefit Plan which is an Employee Pension Benefit Plan that are required to be paid prior to the Closing Date have been paid, and all contributions in respect of periods ending the day prior to the Closing Date that are not required to be paid prior to the Closing Date have been accrued on the Final Balance Sheet in accordance with applicable laws and consistent with the past custom and practice of Seller; all premiums or other payments for all periods ending on or before the Closing Date have been paid with respect to each Employee Benefit Plan which is an Employee Welfare Benefit Plan; (iv) each Employee Benefit Plan which is an Employee Pension Benefit Plan meets the requirements of a "qualified plan" under Code Sec. 401(a) and has received a favorable determination letter from the Internal Revenue Service, copies of which have been provided to Buyer; (v) the market value of assets under each Employee Benefit Plan which is an Employee Pension Benefit Plan equals or exceeds the present value of all vested and nonvested liabilities thereunder determined in accordance with PBGC methods, factors and assumptions applicable to an Employee Pension Benefit Plan terminating on the date for determination; and (vi) Seller has delivered to Buyer correct and complete copies of the plan documents and summary plan descriptions, the most recent determination letters received from the Internal Revenue Service, the most recent Form 5500 Annual Report, and all related trust agreements, insurance contracts and other funding agreements which implement each Employee Benefit Plan. (c) With respect to each Employee Benefit Plan that Seller, any of the Seller Companies, or the Controlled Group of Corporations which includes Seller or any of the Seller Companies, maintains or ever has maintained or to which any of them contributes, ever has contributed, or ever has been required to contribute: (i) no such Employee Benefit Plan which is an Employee Pension Benefit Plan has been completely or partially terminated or the subject of a Reportable Event as to which notices would be required to be filed with the PBGC. No proceeding by the PBGC to terminate any Employee Pension Benefit Plan has been instituted or threatened; 31 38 (ii) there have been no Prohibited Transactions with respect to any Employee Benefit Plan; no Fiduciary has any material liability for breach of fiduciary duty or any other failure to act or comply in connection with the administration or investment of the assets of any such Employee Benefit Plan; no action, suit, proceeding, hearing or investigation with respect to the administration or the investment of the assets of any Employee Benefit Plan (other than routine claims for benefits) is pending or threatened; and, to Seller's knowledge, there exists no basis for any such action, suit, proceeding, hearing or investigation; and (iii) none of the Seller Companies has incurred, and, to Seller's knowledge, there is no reason to expect that any of the Seller Companies will incur or be responsible for, any material liability to the PBGC (other than PBGC premium payments) or otherwise under Title IV of ERISA (including any withdrawal liability) or under the Code with respect to any Employee Benefit Plan which is an Employee Pension Benefit Plan. (d) None of the Seller Companies, and none of the other members of the Controlled Group of Corporations that includes any of the Seller Companies, contributes to, ever has contributed to, or ever has been required to contribute to any Multiemployer plan or has any liability (including withdrawal liability) under any Multiemployer Plan. (e) None of the Seller Companies, and none of the other members of the Controlled Group of Corporations that includes the Seller Companies, maintains or contributes, or ever has maintained or contributed, or ever has been required to contribute to any Employee Welfare Benefit Plan providing medical, health or life insurance or other welfare-type benefits for current or future retired or terminated employees, their spouses, or their dependents (other than in accordance with Code Sec. 4980B). (f) Seller has delivered to Buyer true and genuine copies of all plan documents relating to the Company's "Money Purchase Pension Plan". 3.20 Employees and Employee Relations. Schedule 3.20 attached hereto sets forth a complete list (as of the date set forth therein) of names, positions, current annual salaries or wage rates, and bonus and other compensation arrangements of all full-time and part-time employees of Seller and the Seller Companies employed in the operation of the Facilities and businesses of Seller and the Seller Companies (indicating whether each employee is part-time or full-time). Pursuant to a judgment of the United States Court of Appeals for the Ninth Circuit, the Company is negotiating with the United Nurses Association of California ("UNAC"), as the duly elected bargaining agent for the nonprofessional medical staff of the Hospital. To Seller's knowledge, the Company's relations with its employees and UNAC are good. There is no pending or, to Seller's knowledge, threatened employee strike, work stoppage or labor dispute. Other than as set forth in the UNAC Contract or above, to Seller's knowledge, no union representation question exists respecting any employees of Seller or any of the Seller Companies, no collective bargaining agreement exists or is currently being negotiated by Seller or any of the Seller Companies, no demand has been made for recognition by a labor organization by or with respect to any employees of Seller or any of the Seller Companies, no 32 39 union organizing activities by or with respect to any employees of Seller or any of the Seller Companies are taking place, and none of the employees of Seller or any of the Seller Companies is represented by any labor union or organization. Except as set forth on Schedule 3.20, there is no unfair practice claim against Seller or any of the Seller Companies before the National Labor Relations Board, or any strike, dispute, slowdown, or stoppage pending or, to Seller's knowledge, threatened against or involving the Facilities, and none has occurred. The Seller Companies are in compliance in all material respects with all federal and state laws respecting employment and employment practices, terms and conditions of employment, and wages and hours. To Seller's knowledge, none of Seller and the Seller Companies is engaged in any unfair labor practices. Except as set forth on Schedule 3.20 or 3.24, there are no pending or, to Seller's knowledge, threatened EEOC, wage and hour, unemployment compensation, workers' compensation or similar claims against Seller or any of the Seller Companies or the Facilities. Schedule 3.20 also sets forth a complete list of employees whose employment with Seller or any of the Seller Companies has terminated for any reason (i) as of the effective date hereof, at any time during the 90 day period ending no earlier than two business days prior to the effective date hereof, and (ii) as of the Closing Date, since date of the immediately preceding list. Except with respect to the Key Employee Agreements, none of the Seller Companies will be subject to any claim or liability for severance pay as a result of the transactions contemplated by this Agreement. All claims of present and former employees of Seller and the Seller Companies on the account of or for (a) overtime pay for any period on or before the Closing Date, (b) wages, salary, bonuses or amounts accruing under any Employee Benefit Plan or Other Plan, or (c) sick pay, severance pay, claim for unlawful discharge, holiday or vacation pay or paid time off, have been or will be fully accrued on the Financial Statements 3.21 Taxes. (a) As used herein, the term (i) "Tax" means any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code Sec. 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, stamp, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, tax, assessment, charge, levy or fee of any kind whatsoever, including any interest or penalties thereon and additions thereto, which are due or alleged to be due to any taxing authority, whether disputed or not; (ii) "Tax Return" means any federal, state or local return, declaration, report, claim for refund, information return or statement, including any schedule or attachment thereto and amendments relating to Taxes; and (iii) "Affiliated Group" means any affiliated group within the meaning of Code Sec. 1504 or any similar group defined under a similar provision of state, local or foreign law. (b) The Seller Companies have filed all Tax Returns required to be filed by or on behalf of any of them, all such Tax Returns are correct and complete in all material respects, and the Seller Companies have duly paid or made provision in the Financial Statements for the payment of all Taxes; except as set forth on Schedule 3.21, none of the Seller Companies currently is the beneficiary of any extension of time within which to file any Tax Return; no claim has ever been made by a taxing 33 40 authority in a jurisdiction where any of the Seller Companies does not file Tax Returns that it is or may be subject to Tax by that jurisdiction; and there are no Encumbrances on any assets of any of the Seller Companies that arose in connection with any failure (or alleged failure) to pay any Tax. (c) Each of the Seller Companies have withheld proper and accurate amounts from its employees' compensation in full and complete compliance with all withholding and similar provisions of the Code and any and all other applicable laws, and has withheld and paid, or caused to be withheld and paid, all Taxes on monies paid by the Seller Companies to independent contractors, creditors, stockholders, partners and other Persons for which withholding or payment is required by law. (d) None of the Seller Companies expects any taxing authority to assess any additional Taxes for any period for which Tax Returns have been filed; except as set forth on Schedule 3.21 or 3.24, there is no dispute or claim concerning any Tax liability of the Seller Companies either (i) claimed or raised by any authority in writing, or (ii) as to which either Seller or any of the Seller Companies has notice or knowledge based upon personal contact with any agent of such authority; Schedule 3.21 lists all federal, state, local and foreign income Tax Returns filed with respect to the Seller Companies for taxable periods ended on or after October 31, 1986, indicates those Tax Returns that have been audited and those that currently are the subject of audit or that have not been audited; Seller has provided to Buyer access to all Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by any of the Seller Companies prior to October 31, 1986. (e) There is not currently in effect any waiver of a statute of limitations in respect of Taxes Seller or any of the Seller Companies or any agreement to extend the time with respect to a Tax assessment or deficiency. (f) None of the Seller Companies has filed a consent under Code Sec. 341(f) concerning collapsible corporations; none of the Seller Companies has made any payments, is obligated to make any payments, and is a party to any Contract that under certain circumstances could obligate it to make any payments, that will not be deductible under Code Sec. 280G; none of the Seller Companies has been a United States real property holding corporation within the meaning of Code Sec. 897(c)(2) during the applicable period specified in Code Sec. 897(c)(1)(A)(ii); the Seller Companies have disclosed on their federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Code Sec. 6662; none of the Seller Companies is a party to any Tax allocation or sharing agreement; none of the Seller Companies is or has been a member of an Affiliated Group filing a consolidated federal income Tax Return. (g) Schedule 3.21 sets forth the basis of the Seller Companies in their assets as of April 30, 1994. (h) The Taxes of the Seller Companies for the current fiscal year (i) do not exceed, as of the Interim Balance Sheet Date, the amount of estimated tax payments for such fiscal year set forth on the Interim Balance Sheet, and (ii) do not exceed such estimated tax payments, adjusted for the passage of time through the Closing Date, in accordance with the past custom and practice of the 34 41 Seller Companies in preparing monthly balance sheets, paying estimated taxes, and filing their Tax returns. (i) None of the Seller Companies has any liability for the Taxes of any Person other than the Seller Companies (i) under Reg. Section 1.1502-6 (or any similar provision of state, local, or foreign law), (ii) as a transferee or successor, (iii) by contract, or (iv) otherwise. (j) For federal income Tax purposes, the Consolidation shall constitute a taxable exchange of those assets described in the Consolidation documentation for additional shares of common stock in the Company and the assumption by the Company of those liabilities of Seller described in the Consolidation documents. 3.22 Medicare Participation/Accreditation. The Facilities are qualified for participation in the Medicare, MediCal and CHAMPUS programs (together with their respective intermediaries or carriers, the "Government Reimbursement Programs") are entitled to reimbursement under the Medicare Program for services rendered to qualified Medicare beneficiaries, and comply in all material respects with the conditions of participation in, and have received all approvals or qualifications necessary for capital reimbursement on the assets of the Seller Companies from, all Government Reimbursement Programs. The Hospital voluntarily terminated its contract with MediCal in 1990, and, therefore, does not currently hold a contract with MediCal. The acute psychiatric unit has been reimbursed on a cost basis since November 1, 1993. There is no pending or, to Seller's knowledge, threatened proceeding or investigation by any of the Government Reimbursement Programs, or for reimbursement of amounts due or to become due to the Seller Companies from the Government Reimbursement Programs (the "Agency Receivables"). The cost reports of the Facilities for which cost reports may be filed under the Government Reimbursement Programs, and for reimbursement of any other Agency Receivables ("Cost Reports") for all Cost Report periods through October 31, 1993, have been filed and have been audited through the Cost Report period ending October 31, 1992. The Cost Reports since October 31, 1980 were filed when due and do not claim, and the Facilities have not received, reimbursement in excess of the amount provided by law or any applicable agreement, except to the extent set forth in the Financial Statements. Except as set forth on Schedule 3.22, there exists no dispute or issue under appeal between Seller or any of the Seller Companies and any governmental authority, fiscal intermediary or carrier or other Person regarding the Government Reimbursement Programs for Cost Report periods subsequent to October 31, 1980, other than with respect to adjustments made in the ordinary course of business for open Cost Report years which do not involve more than $100,000 in the aggregate. All liabilities and contractual adjustments of the Facilities under the Government Reimbursement Programs have been properly reflected and adequately reserved in the Financial Statements. The inpatient acute psychiatric program of the Hospital has applied for designation as an involuntary unit with the Orange County Mental Health Department under the Lanterman-Petris-Short Act. Schedule 3.22 lists all accreditations and trade memberships held by the Seller Companies. The Hospital is duly accredited with no contingencies (except as set forth in Schedule 3.22), by the JCAHO for the three (3) year period ending July 31, 1994 and, to Seller's knowledge, no circumstances exist which could result in the Hospital's failure to receive accreditation without 35 42 contingencies by the JCAHO for the three year period ending July 31, 1997. Seller has attached to Schedule 3.22 true and complete copies of the most recent JCAHO and other accreditation survey reports and deficiency lists, Statement of Deficiencies and Plan of Correction, and state licensing report and list of deficiencies, if any. The Company has taken all reasonable steps to correct all material deficiencies noted therein. 3.23 Legal and Regulatory Compliance. Except as set forth on Schedule 3.23, each of the Seller Companies is in compliance in all material respects with all applicable laws of federal, state and local authorities and all applicable rules, regulations and requirements of all federal, state and local commissions, boards, bureaus and agencies having jurisdiction over the Facilities and the operations thereof, including the Internal Revenue Service, the California Franchise Tax Board, the Office of Statewide Health Planning and Development, the South Coast Air Quality Management Association, and the California Department of Health Services; and the Seller Companies have timely filed all reports, data and other information required to be filed with such commissions, boards, bureaus and agencies where a failure to file timely would have an adverse effect on the Company's business or assets. Except as set forth on Schedule 3.23, neither Seller nor any of the Seller Companies has received written notice of, nor to Seller's knowledge is there threatened, any investigation by governmental authorities regarding a violation of the Medicare fraud and abuse provisions of the federal Social Security Act or any comparable state legislation. 3.24 Litigation or Proceedings. Seller attaches hereto an accurate list and summary description (Schedule 3.24) of all litigation, arbitration or other proceedings with respect to the Facilities and businesses of the Seller Companies to which any of the Seller Companies, or any insurer of any of the Seller Companies is a party. None of the matters disclosed in Schedule 3.24 will result in any cost, expense, damage or liability (including court costs or attorneys fees) to the Seller Companies after Closing, other than Assumed Litigation specifically identified as such on Schedule 3.24, that is not covered by the insurance policies described in Section 3.25, and the ultimate result of all such proceedings will not have a material adverse effect on the financial condition of any of the Seller Companies. Except as set forth on Schedule 3.24, none of the Seller Companies is in default under any judgment of any court, arbitration tribunal or federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality wherever located. Except to the extent set forth on Schedule 3.24, there are no claims, actions, suits, proceedings or investigations pending, or to Seller's knowledge, threatened against or affecting the Company, at law or in equity, or before or by any court, arbitration tribunal, federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality wherever located and, to Seller's knowledge, there exist no facts that might reasonably form the basis of any such claim, action, suit, proceeding or investigation on or after the Closing Date. 3.25 Insurance. Seller attaches hereto an accurate schedule (Schedule 3.25) disclosing the insurance policies covering the ownership and operations of the assets and operations of the Company, which Schedule reflects the policies' numbers, terms, identity of insurers, amounts and coverage. All of such policies are outstanding and in full force and effect with insurers unaffiliated with Seller, with no premium arrearages. Except as described on Schedule 3.25, to Seller's 36 43 knowledge, since January 1, 1989, no liability insurance carrier has cancelled or reduced, or given notice of its intention to cancel or reduce, the policy limit (including an increase in the self-insured retention) of any liability insurance coverage with respect to the Facilities and, to Seller's knowledge, there exist no grounds to cancel or avoid any such policies or the coverages provided thereby. True and correct copies of all such policies and any endorsements thereto have been or will be delivered to Buyer prior to Closing. 3.26 Board and Medical Staff Matters. (a) Attached to Schedule 3.26 are copies of the annual management letters from Seller's independent certified accountants for the last three fiscal years. Seller has provided to Buyer (i) true and correct copies of those portions of the minutes of meetings since April 1, 1991, of the partners and executive committees of Seller relating to the ownership and operation of the Facilities and the Assets, (ii) access to the minutes of all meetings of the directors, partners and executive and other committees of the Seller Companies, excluding the Board of Governors of the Company. (b) Attached to Schedule 3.26 are true, correct and complete copies of the bylaws and rules and regulations of the medical staff and medical executive committee of the Facilities. As of February 28, 1993, there were 757 members on the Hospital's active, associate and courtesy medical staffs and, as of July 13, 1994, there were 828 members on the Hospital's active, associate and courtesy medical staffs. Except as set forth on Schedule 3.26, there are no pending or, to Seller's knowledge, threatened disputes with medical staff members or applicants or allied health professionals, and, except as set forth on Schedule 3.26, all appeal periods in respect of any medical staff member or applicant against whom an adverse action has been taken have expired. Schedule 3.26 sets forth a complete and accurate list and description of (a) the name of each member of the medical staff (active, associate, courtesy or other) of the Facilities since January 1, 1992, (b) the age of each current medical staff member, (c) the title, specialty and board certification, if any, of each medical staff member, (d) the names of medical staff members (current and former) in respect of whom any of the Seller Companies has made a report to the National Practitioners Data Bank during the last three years, and (e) the number of current medical staff members in respect of whom any committee of the medical staff has recommended adverse action which is not yet final. 3.27 Special Funds. None of the Seller Companies or their assets (including restricted cash) are subject to any liability in respect of funds received by any Person for the purchase or improvement of any of the Seller Companies's assets under restricted or conditioned grants or donations, including monies received under the Public Health Service Act, 42 U.S.C. Section 291 et seq. (the "Hill-Burton Act"). 3.28 Brokers and Finders. Except as set forth on Schedule, 3.28, none of Seller, the Seller Companies, any Affiliate of Seller, and any officer, director, employee or agent thereof, has engaged any finder or broker in connection with the transactions contemplated hereunder. 37 44 3.29 Experimental Procedures. Except as set forth on Schedule 3.29, since January 1, 1990, the Company has not performed or authorized the performance of any experimental or research procedures or studies involving patients in the Facilities. 3.30 Solvency. Seller is not, and after Closing as a result of the transactions contemplated hereby will not be, rendered insolvent or otherwise unable to pay its debts as they become due; Seller has no intention of filing in any court pursuant to any statute either of the United States or of any state a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of all or any portion of Seller's property; and, to Seller's knowledge, no other Person has filed or threatened to file such a petition against Seller. 3.31 Operation of the Facilities. The assets, properties, goodwill and businesses owned or leased by Seller and the Seller Companies on the effective date hereof and by the Seller Companies after the Consolidation constitute all assets, properties, goodwill and business necessary to operate the Facilities in all material respects in the manner in which they have been operated prior to the effective date hereof. 3.32 Full Disclosure. This Agreement and Schedules hereto and all other documents and information furnished to Buyer and Buyer's representatives by Seller pursuant hereto do not and will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements made and to be made not misleading. 4. REPRESENTATIONS AND WARRANTIES OF BUYER. As of the date hereof, Buyer represents and warrants to Seller the following: 4.1 Corporate Capacity. Buyer is a for-profit corporation duly organized and validly existing in good standing under the laws of the State of California. Buyer has the requisite power and authority to enter into this Agreement, perform its obligations hereunder and to conduct its businesses as now being conducted. 4.2 Corporate Powers; Consents; Absence of Conflicts With Other Agreements, Etc. The execution, delivery and performance of this Agreement by Buyer and all other agreements referenced in or ancillary hereto to which Buyer is a party and the consummation of the transactions contemplated herein by Buyer: (a) are within Buyer's corporate powers and are not in contravention of the terms of its Articles or Certificate of Incorporation and Bylaws, or any amendments thereto, and have been approved by all requisite corporate action; (b) except as otherwise expressly herein provided, do not require any approval or consent of, or filing with, any governmental agency or authority bearing on the validity of this Agreement; 38 45 (c) do not conflict with or result in any breach or contravention of, or the creation of any Encumbrance under, any indenture, agreement, lease, instrument or understanding to which Buyer is a party or by which Buyer is bound; (d) do not violate any statute, law, rule or regulation of any governmental authority to which Buyer may be subject and which may have an effect on the Shares subsequent to Closing; (e) do not violate any judgment to which Buyer may be subject and which may have an effect on the Shares subsequent to Closing; and (f) do not conflict with or result in a breach or violation of any material agreement or commitment to which Buyer is a party. 4.3 Binding Effect. This Agreement and all other agreements to which Buyer becomes a party hereunder are valid and legally binding obligations of Buyer, enforceable against Buyer in accordance with the respective terms hereof and thereof, except as enforceability against Buyer may be restricted, limited or delayed by applicable bankruptcy or other laws affecting creditors' rights generally and except as enforceability may be subject to general principles of equity. 4.4 Brokers and Finders. Neither Buyer nor any Affiliate of Buyer, nor any officer, director, employees or agent thereof, has engaged any finder or broker in connection with the transactions contemplated hereunder. 4.5 Purchase for Investment. The Shares and the Partnership Interests are being acquired by Buyer (or, if applicable, its assignee pursuant to Section 12.8), for its own account for the purpose of investment, it being understood that the ability to dispose of such Shares or the Partnership Interests shall be entirely within the discretion of Buyer, provided that Buyer will refrain from transferring or otherwise disposing of any of the Shares, or any interest therein, in such manner as to violate any registration provision of the Securities Act of 1933, as amended, or the qualification provisions of the California Corporate Securities Act of 1968, as amended. 5. COVENANTS OF SELLER. 5.1 Intercompany Liabilities. On or before thirty (30) calendar days after the effective date hereof, Seller will furnish Buyer with a true and complete list and description of all intercompany liabilities between any of the Seller Companies, on the one hand, and Seller, any Affiliate of Seller, or any officer, director or partner of Seller or the Seller Companies, on the other hand, which are expected to be outstanding immediately prior to Closing. Seller will cause the Seller Companies to not enter into, modify or amend any Contract, and to not engage in any transaction with Seller, any Affiliate of Seller or any officer, director or partner of Seller or the Seller Companies, provided that the foregoing limitation shall not apply to (i) the Company's entering into of the Key Employee Agreements, (ii) transactions required to consummate the Consolidation, and (iii) actions necessary to comply with the following sentence. On or prior to the Closing Date, Seller will terminate, and 39 46 will cause its officers, directors, partners and Affiliates to terminate, each such Contract with the Seller Companies without penalty or further liability of any kind or nature. 5.2 Access to and Provision of Additional Information. (a) From the effective date hereof until the Closing Date and except where prohibited by law or when necessary to preserve attorney-client privilege, Seller shall provide, and cause its agents (including counsel and accountants) to provide, to the officers and agents of Buyer full and complete access to and the right to inspect the plants, properties, books and records of the Seller Companies, and will furnish and cause to be furnished to Buyer all material information concerning the Seller Companies or their businesses not otherwise disclosed pursuant to this Agreement, and such additional financial, operating and other data and information regarding the Seller Companies and their businesses as Buyer may from time to time reasonably request, without regard to where such information may be located. (b) Within 20 days following the end of each calendar month prior to the Closing Date, and within 30 days following the end of each calendar quarter prior to the Closing Date, Seller will deliver to Buyer true and complete copies of the unaudited balance sheets and the related unaudited statements of income and cash flow of, or relating to, the Seller Companies for each such month or quarter then ended, together with any notes thereto. (c) From the effective date hereof until the Closing Date, Seller shall cause the Seller Companies's officers and employees to confer on a regular and frequent basis with one or more representatives of Buyer to report material operational matters in respect of the Seller Companies and the Facilities and to report the general status of on-going operations. Seller shall notify Buyer in writing of any material changes in the operations, financial condition or businesses of the Facilities or the Seller Companies and of any complaints, investigations, hearings or adjudicatory proceedings (or communications indicating that the same may be contemplated) of any Person which would materially and adversely affect the businesses of the Seller Companies, and shall keep Buyer fully informed of such events and permit its representatives to participate in all discussions relating thereto. 5.3 Operations. From the effective date hereof until the Closing Date and except as otherwise provided in this Agreement, Seller will cause the Seller Companies to use their best efforts to: (a) carry on the Seller Companies' businesses in substantially the same manner as the Seller Companies have heretofore and not make any material change in personnel, operations, finances, accounting policies, or real or personal property of the Facilities; (b) maintain the Seller's Companies's assets and all parts thereof in as good working order and condition as at present, ordinary wear and tear excepted; 40 47 (c) operate the Seller Companies and the Facilities in accordance with all applicable laws, rules, regulations and judgments; (d) perform all of the Seller Companies' obligations under the Contracts as they become due; (e) take all actions necessary and appropriate to render title to the Shares, the Partnership Interests and the Seller Companies's assets free and clear of all Encumbrances (except for the Permitted Encumbrances) and to obtain appropriate releases, consents, estoppels and other instruments as Buyer may reasonably request; (f) keep in full force and effect present insurance policies or other comparable insurance and maintain sufficient liquid assets to meet all deductible, self-insurance or copayment requirements under present insurance policies; (g) maintain and preserve the Seller Companies' business organizations and operations intact; retain the present employees at the Facilities; maintain the Seller Companies' relationships with physicians, suppliers, customers and others having business relations with the Seller Companies; and take such actions as are necessary and to cause the smooth, efficient and successful transition to Buyer of such business organizations and operations and employee and other relations at Closing; and (h) permit and allow reasonable access by Buyer to discuss post-Closing employment with any of Seller or Seller Companies' personnel, and to establish relationships with physicians and others having business relations with the Seller Companies, provided that such actions do not materially and adversely interfere with the business of the Seller Companies. 5.4 Negative Covenants. From the effective date hereof until the Closing Date and except as otherwise expressly provided in this Agreement, Seller will not, in the case of clauses (b) and (g) below, and will cause the Seller Companies not to, in the case of all clauses below other than (b), without the prior written consent of Buyer: (a) amend or terminate any of the Contracts, enter into any Contract or incur or agree to incur any liability, except in the ordinary course of business, and in no event that requires the payment by the Seller Companies of an amount greater than Fifty Thousand Dollars ($50,000) per Contract or $1,000,000 in the aggregate, or that is not terminable without cause or penalty within ninety (90) days following the Closing Date; (b) make offers of employment to any employees of the Seller Companies for employment with Seller or any Affiliate of Seller after Closing; (c) increase compensation payable or to become payable to, make a bonus payment to, or otherwise enter into one or more bonus agreements with, any employee or agent of the Seller Companies, except in the ordinary course of business in accordance with existing personnel policies; 41 48 (d) create, assume or permit to exist any new Encumbrance upon any of the Seller Companies' assets; (e) sell, assign, transfer, distribute or otherwise dispose of any property, plant or equipment of the Seller Companies, except in the normal course of business with comparable replacement thereof; (f) take any action outside the ordinary course of business; (g) amend the articles or certificate of incorporation, bylaws or partnership agreements of the Seller Companies, or take any action relating to any such amendment or any liquidation or dissolution of the Seller Companies or Seller; (h) authorize or issue any shares of the stock of the Seller Companies or other equity securities; enter into any Contract or grant any option, warrant, or right calling for the authorization or issuance of any such shares or other equity securities; create or issue any securities directly or indirectly convertible into or exchangeable for any such shares or other equity securities; or issue any options, warrants, or rights to purchase any such convertible or exchangeable securities; (i) declare, set aside or pay any dividend or other distribution in respect of the capital stock of the Seller Companies or partnership equity of Seller, or directly or indirectly redeem, purchase, or otherwise acquire any capital stock of the Seller Companies or any interest in or right to acquire such stock, provided that Seller may distribute on or prior to the Closing Date all distributions to partners accrued by Seller in the ordinary course of Seller's business. (j) either (i) acquire or agree to acquire a block of business or all or substantially all the assets or properties or capital stock or other equity securities of any Person, (ii) otherwise acquire or agree to acquire control or ownership of any Person by merger, consolidation or other combination, or (iii) make any capital expenditures except in the ordinary course of business and consistent with past practice and in an amount not exceeding $50,000; provided that Buyer hereby consents to, and Seller shall cause the Company to incur and pay or accrue prior to Closing, the capital expenditures described on Schedule 5.4 (the "Approved Capital Expenditures"); or (k) create, incur, assume, guarantee or otherwise become liable for, cancel, pay, agree to cancel or pay, otherwise provide for a complete or partial discharge in advance of a scheduled payment date with respect to, or waive any right of any of the Seller Companies to receive any direct or indirect payment or other benefit under, any liability of any of the Seller Companies, except in the ordinary course of business consistent with past practices and in an amount not exceeding $50,000 individually or $500,000 in the aggregate. 5.5 Governmental Approvals. From the effective date hereof until the Closing Date, Seller shall, and shall cause each of the Seller Companies to, (a) promptly apply for and use its best efforts to obtain prior to Closing all consents, approvals, authorizations and clearances of governmental and 42 49 regulatory authorities required of Seller or the Seller Companies to consummate the transactions contemplated hereby, (b) provide such information and communications to governmental and regulatory authorities as Buyer or such authorities may reasonably request, and (c) assist and cooperate with Buyer to obtain all consents, licenses, permits, approvals, authorizations and clearances of governmental and regulatory authorities that Buyer reasonably deems necessary or appropriate, and to prepare any document or other information required of Seller or the Seller Companies by any such authorities, to consummate the transactions contemplated herein. 5.6 FTC Notification. The parties acknowledge that on June 14, 1994, a Notification and Report Form was filed by each of Buyer and Seller with the Federal Trade Commission ("FTC") and the United States Department of Justice ("Justice Department") under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). From the effective date hereof until the Closing Date, Seller shall file, if and to the extent required by law, file, all reports or other documents required or requested by the FTC or the Justice Department concerning the transactions contemplated hereby, and comply promptly with any requests by the FTC or Justice Department for additional information concerning such transactions, so that the waiting period specified in the HSR Act will expire as soon as reasonably possible after the effective date of this Agreement. Seller shall furnish to Buyer such information concerning the Seller Companies as Buyer needs to perform its obligations under Section 6.1. 5.7 No-Shop Clause. From the effective date hereof until the earlier of the termination of this Agreement or August 31, 1994 (unless the Closing Date is extended beyond such date by the parties), Seller shall not, and will not authorize any of the Seller Companies, any Affiliate of Seller or any other Person acting for or on behalf of Seller, the Seller Companies or any Affiliate of Seller to, without the prior written consent of Buyer: (i) offer for sale the Shares or Partnership Interests, or any portion thereof, or any of the assets of any of the Seller Companies, (ii) solicit offers to buy the Shares or Partnership Interests, or any portion thereof, or any of the assets of any of the Seller Companies, (iii) hold discussions with any Person looking toward such an offer or solicitation, or looking toward a merger, consolidation or other combination with the Seller Companies, Seller or any Affiliate of Seller (provided this clause shall not prohibit Seller from answering unsolicited calls or requests from any Person), (iv) enter into any agreement with any Person with respect to the sale of the Shares or the Partnership Interests, or any portion thereof, or any of the assets of any of the Seller Companies, or with respect to any merger, consolidation, or other combination with the Seller Companies, Seller or any Affiliate of Seller, or (v) furnish or permit or cause to be furnished any information with respect to Seller or the Seller Companies to any Person that Seller knows or has reason to believe is in the process of considering any one of the transactions described above. If Seller, any Affiliate of Seller, any of the Seller Companies, or any other Person acting for or on behalf of any of the foregoing persons receives from any Person (other than Buyer or a representative thereof) any offer, inquiry or informational request referred to above, Seller will promptly advise such Person, by written notice, of the substantive terms of this Section. 5.8 Insurance Ratings. From the effective date hereof until the Closing Date, Seller will take all action reasonably requested by Buyer to enable the Seller Companies to maintain and preserve 43 50 the Workmen's Compensation and Unemployment Insurance ratings, insurance policies, deposits and other interests of the Seller Companies and the Facilities for insurance or other purposes. Buyer shall not be obligated to succeed to any such rating, insurance policy, deposit or other interest, except as it may elect to do so. 5.9 Consolidation. From the effective date hereof until the Closing Date, Seller shall enter into, and shall cause the Seller Companies and any other Affiliates to enter into, all agreements, instruments and takes all actions required to cause the assets and businesses owned by Seller and Seller's Affiliates and constituting a part of the assets or businesses of the Facilities to be fully and effectively conveyed, assigned, transferred, delivered and vested in and to the Seller Companies prior to the Closing so that, upon delivery of the Shares and Partnership Interests hereunder, Buyer shall be in complete and lawful possession and ownership of the Facilities and all other assets, properties and rights described in or contemplated by this Agreement (except the property conveyed pursuant to the Real Estate Purchase Agreement). Seller shall provide to Buyer for its review and approval genuine copies of all agreements, instruments or other documents relating to the Consolidation that Seller proposes any of the Seller Companies to execute or pursuant to which any of the Seller Companies may incur any liability or obligation (including indemnity obligations) after the Closing. 5.10 Real Estate Purchase Agreement. From the effective date hereof until the Closing Date, Seller shall take, and shall cause its Affiliates to enter take, all actions required in order to cause the MOBs, Living Care Center and other assets described in the Real Estate Purchase Agreement to be fully and effectively conveyed, assigned, transferred, delivered and vested in and to HRT or its designee as of the Closing Date so that, concurrently upon delivery of the Shares and Partnership Interests hereunder, HRT or its designee shall be in complete and lawful possession and ownership of the MOBs, Living Care Center and other assets, properties and rights described in or contemplated by the Real Estate Purchase Agreement, and Seller shall otherwise perform all obligations of Seller under the Real Estate Purchase Agreement. 5.11 Real Estate Option Agreement. Seller shall grant and convey to Buyer or the Company at Closing an option to purchase the Excluded Real Property, pursuant to a Real Estate Option Agreement in the form attached hereto as Exhibit B (the "Real Estate Option Agreement"). 5.12 Closing Conditions. From the effective date hereof until the Closing Date, Seller will use its reasonable best efforts, and will cause each of the Seller Companies to use its reasonable best efforts, to cause the conditions specified in Articles 7 and 8 over which it or any of the Seller Companies has control to be satisfied as soon as reasonably practicable, but in all events before the Closing Date. 5.13 Tail Insurance. On or prior to the Closing Date, Seller will cause the Seller Companies to obtain "tail" insurance for the professional and general liability insurance policies in effect since December 1, 1993, in form and substance acceptable to Buyer, to insure against professional and general liability claims made on or after the Closing Date resulting from or arising out of events occurring at the Facilities or on the Real Property prior to the Closing Date. The 44 51 minimum coverage under such "tail" insurance shall be $20,000,000 in the aggregate with not more than a $10,000 self-insured retention per incident, and the policy shall otherwise meet the requirements described in Section 3.25. 5.14 Key Employee Agreements. Seller shall deliver to Buyer at Closing originals of employment agreements with Messrs. Thomas M. Ways, Chief Executive Officer, and Richard E. Butler, Administrator, substantially in the form of Exhibit C (the "Key Employee Agreements"), fully executed by Messrs. Ways and Butler. 5.15 Change of Partnership Name, etc. None of Seller, and any Affiliate, director or officer of Seller shall use after the Closing Date the words "Fountain Valley" or any similar name in the conduct of a healthcare trade or business. Seller acknowledges that the name "Fountain Valley", as used in the conduct of the businesses of the Seller Companies, is an Asset being acquired by Buyer as a result of the consummation of the transactions described in this Agreement. Seller desires, however, to continue to conduct its non-healthcare business without changing its name after Closing, if the same can be done without confusing the public. Subject to the following sentence, Buyer consents, therefore, to the conduct of non-healthcare business by Seller after Closing without changing its name. Notwithstanding the foregoing, Buyer shall have the right, at any time and for any reason, to notify Seller that Buyer desires Seller to change its name. Upon receipt of such notice, Seller shall change its name with reasonable promptness to a name not containing the words "Fountain Valley". Each party shall take such reasonable steps requested by the other party to notify the public or others that Seller, on the one hand, and Buyer and the Seller Companies, on the other hand, are not related or liable for any actions of the other after the Closing Date. 5.16 Adverse Actions After Closing. Seller shall not take, or fail to take, any action after Closing that would render Seller unable to perform its post-Closing obligations under this Agreement. After Closing, Seller shall satisfy all liabilities of Seller, the failure of which would have a material adverse effect on Buyer or the Seller Companies. 5.17 Further Acts and Assurances. At any time and from time to time at and after the Closing, upon request of Buyer, Seller shall do, execute, acknowledge and deliver, or cause to be done, executed, acknowledged and delivered, such further acts, deeds, assignments, transfers, conveyances, powers of attorney, confirmations and assurances as Buyer may reasonably request to more effectively convey, assign and transfer to and vest in Buyer, its successors and assigns, full legal right, title and interest in and actual possession of the Shares, the Partnership Interests, and the assets, Facilities and other businesses of Seller and the Seller Companies, to confirm Seller's capacity and ability to perform its post-Closing covenants and agreements under this Agreement, and to generally carry out the purposes and intent of this Agreement. Seller shall also furnish, and shall cause each of the Seller Companies to furnish, Buyer with such information and documents in its possession or under its control, or which Seller or the Seller Companies can execute or cause to be executed, as will enable Buyer to prosecute any and all petitions, applications, claims and demands relating to or constituting a part of the assets and businesses of the Seller Companies. 45 52 6. COVENANTS OF BUYER. 6.1 FTC Notification. From the effective date hereof until the Closing Date, Buyer shall file, if and to the extent required by law, all reports or other documents required or requested by the FTC or the Justice Department under the HSR Act concerning the transactions contemplated hereby, and comply promptly with any requests by the FTC or Justice Department for additional information concerning such transactions, so that the waiting period specified in the HSR Act will expire as soon as reasonably possible after the effective date of this Agreement. Buyer shall furnish to Seller such information concerning Buyer as Seller needs to perform its obligations under Section 5.6. 6.2 Regulatory Approvals. From the effective date hereof until the Closing Date, Buyer shall (a) promptly apply for and use its best efforts to obtain prior to Closing all consents, licenses, permits, approvals (including planning approvals), authorizations and clearances of governmental and regulatory authorities required of it to consummate the transactions contemplated hereby, (b) provide such information and communications to governmental and regulatory authorities as Seller, the Seller Companies or such authorities may reasonably request, and (c) assist and cooperate with Seller and the Seller Companies to obtain all consents, approvals, authorizations and clearances of governmental and regulatory authorities that Seller or the Seller Companies reasonably deem necessary or appropriate, and to prepare any document or other information required of Buyer by any such authorities, to consummate the transactions contemplated hereby. 6.3 Closing Conditions. From the effective date hereof until the Closing Date, Buyer will use its reasonable best efforts to cause the conditions specified in Articles 7 and 8 over which Buyer has control to be satisfied as soon as reasonably practicable, but in all events before the Closing Date. 6.4 Confidentiality. From the effective date hereof until the Closing Date, Buyer will, and will use its best efforts to cause its employees, representatives and agents to, hold in strict confidence, unless compelled to disclose by judicial or administrative process or, in the opinion of counsel, by other requirements of law, all Confidential Information (as defined below); and Buyer will not disclose Confidential Information to any Person, except as otherwise may be reasonably necessary to carry out the transactions contemplated by this Agreement, including any business or the diligence review by or on behalf of Buyer. If this Agreement is terminated prior to Closing, then, upon Seller's written request, Buyer will promptly return or cause to be returned to Seller all documents and copies thereof furnished by Seller or the Seller Companies and held by Buyer, its representatives or agents containing such Confidential Information, shall not use such information to the detriment of Seller or the Seller Companies. For the purposes hereof, "Confidential Information" means all information of any kind concerning Seller or the Seller Companies obtained directly or indirectly from Seller or the Seller Companies in connection with the transactions contemplated by this Agreement except information: (a) ascertainable or obtained from public or published information; (b) received from a third party not known by Buyer to be under an obligation to Seller or the Seller Companies to keep such information confidential; (c) that is or becomes known to the public (other than through a breach by Buyer of this Section); or (d) that was in Buyer's possession prior to the disclosure by Seller or 46 53 the Seller Companies of such information in connection with the transactions contemplated by this Agreement. 6.5 Employee Matters. (a) Subject to the exclusions set forth in this Section, and in reliance upon the representations and warranties of Seller made in Section 3.20, Buyer will cause the Seller Companies after Closing to retain the employment of a sufficient number of its employees working at the Facilities immediately prior to Closing so that Seller and the Seller Companies may avoid the imposition of any liability under WARN. (b) Buyer shall give, or cause the Seller Companies to give, all employees of the Seller Companies as of the Closing Date credit for their years of service with the Seller Companies prior to Closing for purposes of determining how much vacation, holiday and sick time such employees are entitled to under the applicable Employee Welfare Benefit Plan of Buyer or the Seller Companies after Closing. For purposes of determining eligibility to participate in and vesting percentages in Buyer's Employee Pension Benefit Plans, Buyer will give, or cause the Seller Companies to give, all employees of the Seller Companies as of the Closing Date the same credit after Closing for years of service with Seller Companies as the Seller Companies or Seller gives such employees under their or its Employee Pension Benefit Plans immediately prior to Closing. (c) Buyer shall make contributions after Closing for all eligible employees of the Seller Companies to the Company's Money Purchase Pension Plan for the 1994 plan year, subject to and in accordance with the terms of such plan, and shall continue the Company's Money Purchase Pension Plan until at least the end of the 1994 plan year. Nothing in this Section shall require Buyer to make contributions on behalf of non-employees, regardless of the practice of Seller prior to Closing. 6.6 Consolidated Tax Return. Buyer shall include the Seller Companies as part of its Affiliated Group for federal income Tax purposes on and after the Closing Date. For purposes of Treasury Regulations Section 1.1502-76(b), the Closing shall be deemed to occur at 11:59 p.m. on the day prior to the Closing Date, and all transactions on the Closing Date shall not be reported on the separate tax returns of the Seller Companies for the pre-Closing period, but rather shall be reported on Buyer's consolidated income tax return for the year that includes the Closing Date. Without the written consent of Seller, Buyer shall not permit any of the Seller Companies to undertake any transaction on the Closing Date that is outside the ordinary and regular course of business of the Seller Companies, except as provided in or contemplated by this Agreement. After Closing, Buyer shall not amend any Tax Return of the Seller Companies in any manner that would have a material adverse effect on Seller (Buyer having regard for Seller's indemnification obligations in respect of Taxes described in this Agreement), unless (i) such amendment is required by applicable law, rule, regulation or judgment, or (ii) Buyer receives an opinion of counsel to the effect that such amendment is required. 47 54 6.7 Adverse Actions After Closing. Buyer shall not take, or fail to take, any action after Closing that would render Buyer unable to perform its post-Closing obligations under this Agreement. After Closing, Buyer shall satisfy or cause the Seller Companies to satisfy all of their liabilities, the failure of which would have a material adverse effect on Seller. 6.8 Real Estate Purchase Agreement. In the event that HRT fails to perform any obligation under the Real Estate Purchase Agreement, Buyer shall perform such obligation in accordance wih the Real Estate Purchase Agreement. 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER. The obligations of Buyer hereunder are, at the option of Buyer, subject to the satisfaction, on or prior to the Closing Date, of the following conditions unless waived in writing by Buyer: 7.1. Representations/Warranties. The representations and warranties of Seller contained in this Agreement shall be true when made and true and correct in all material respects on and as of the Closing Date as though such representations and warranties had been made on and as of the Closing Date; and each and all of the terms, covenants and conditions of this Agreement to be complied with or performed by Seller or the Company on or before the Closing Date pursuant to the terms hereof shall have been duly complied with and performed in all material respects. 7.2. Opinion of Seller's Counsel. Buyer shall have received an opinion from counsel to Seller dated as of the Closing Date and addressed to Buyer, in a form agreed by the parties. 7.3 Pre-Closing Confirmations. Buyer shall have obtained documentation or other evidence reasonably satisfactory to Buyer that Buyer has (a) received all consents, permits, approvals, authorizations and clearances of governmental and regulatory authorities required to complete the transactions herein contemplated; (b) obtained Government Reimbursement Programs certification of the Facilities for their operation by the Company as of the Closing Date so that the Company may participate in and receive reimbursement from such programs as of the Closing Date; (c) obtained such other consents and approvals as may be legally or contractually required for Buyer's consummation of the transactions described herein; and (d) complied with all waiting periods under the HSR Act. 7.4 Action/Proceeding. No action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the transactions herein contemplated, wherein an unfavorable judgment would prevent or make materially unfavorable the carrying out of this Agreement or render any of the transactions described herein subject to rescission, 48 55 and there shall not be in effect any order restraining, enjoining or otherwise preventing consummation of the sale of the Shares or Partnership Interests and other transactions contemplated herein. 7.5 Adverse Change. No material adverse change in the results of operations, financial condition or businesses of the Company or the Facilities shall have occurred, and Buyer shall not have elected to terminate this Agreement pursuant to Section 10.1 with respect to destroyed, damaged or lost assets. 7.6 Extraordinary Liabilities/Obligations. Except as required to consummate the Consolidation, the Company shall not have incurred any liability or obligation outside the ordinary course of business since the effective date hereof which materially affects its assets; neither Seller nor the Company shall (a) be in receivership or dissolution, (b) have made any assignment for the benefit of creditors, (c) have admitted in writing its inability to pay its debts as they mature, (d) have been adjudicated a bankrupt, (e) have filed a petition in voluntary bankruptcy, a petition or answer seeking reorganization, or an arrangement with creditors under the federal bankruptcy law or any other similar law or statute of the United States or any state, nor shall any such petition have been filed against any of them, or (f) have entered into any Contract to do or permit the doing of any of the foregoing on or after the Closing Date. 7.7 Transfer of Shares. Seller shall have furnished to Buyer, in form reasonably acceptable to Buyer and approved by Buyer's counsel, stock powers, assignments or other instruments of transfer, and consents and waivers by others, necessary or appropriate to transfer to and effectively vest in Buyer all of Seller's right, title and interest in and to the Shares. 7.8 Title Policy and Survey. Buyer shall have received commitments or endorsements, satisfactory to Buyer, from the local issuing agent of Chicago Title Insurance Company to issue to the Company as of the Closing Date an owner's title insurance policy for the Real Property (the "Owner's Title Insurance Policy for the Real Property "), together with improvements, buildings and fixtures thereon, in an amount acceptable to Buyer and Seller, and in the customary form prescribed for use in the state in which the Real Property is located. The commitment shall provide for the issuance of said policy to the Company as of the Closing Date and shall insure good and marketable fee or, as to Real Property leased by Seller, leasehold title to the Real Property in the Company subject only to (i) the lien of real property Taxes for the year in which the Closing Date occurs, not yet due and payable, (ii) Encumbrances, if any, that secure indebtedness of the Company that is not the Company's Indebtedness to be Satisfied at Closing, (iii) Encumbrances that are created by Buyer, and (iv) the Permitted Encumbrances. The title policy provided to Buyer shall include the following endorsements, if applicable and available: (i) insurance that the Real Property insured is the same as the property shown on the survey; (ii) insurance that any multiple parcels are contiguous if so shown by the survey; (iii) insurance on any specified access issues reasonably identified by Buyer prior to Closing; (iv) insurance on specific locations of easements and improvements identified by survey; and (v) insurance that there are no encroachments of improvements by or onto the Real Property, or easements or setback lines thereon. Additionally, Buyer shall have received an as-built survey of the Real Property for the purpose of deleting the standard survey exceptions as provided above and 49 56 reflecting all improvements visible on the grounds and all easements, rights of way, means of ingress or egress, encroachments and drainage ditches, whether abutting or interior, of record or on the grounds. The survey shall reflect whether and the extent to which any portion of the Real Property lies within flood prone areas or flood plains. The survey shall be certified to the title company and Buyer and shall be in a form satisfactory to both. The costs of such survey and title policy (including the survey exception deletion) shall be shared equally by Buyer and the Company. 7.9 Recent Agreements and Commitments. Seller shall have delivered to Buyer an accurate list and substantially complete description (Schedule 7.9), as of the Closing Date, showing all Contracts entered into by the Company since the effective date hereof. 7.10 Closing Documents. Seller shall have executed and delivered to Buyer all agreements, instruments, certificates or other documents required to be executed by Seller or any of the Seller Companies pursuant to any term or provision of this Agreement (including the Escrow Agreement, the Real Estate Option Agreement and the Key Employee Agreements). 7.11 UCC Searches. Seller or the Company shall have obtained and delivered to Buyer UCC lien, judgment and tax searches showing no Encumbrances on any assets of the Seller Companies except for Encumbrances that secure the Company's Indebtedness to be Satisfied at Closing and the Permitted Encumbrances and the Other Permitted Encumbrances which Buyer accepts in writing. 7.12 Insurance. Seller or the Seller Companies shall have purchased the "tail" insurance required by Section 5.13, and shall have delivered certificates evidencing the same and naming the Seller Companies and Buyer as insureds thereunder. 7.13 Focus Survey. The most recent focus survey report of the Hospital shall have been delivered to, and be in a form satisfactory to, Buyer. 7.14 Assessments; Property Taxes. If, as of the Closing Date, any of the Real Property shall be or shall have been affected by an assessment or assessments which are or may become payable in annual installments, of which the first installment is then a charge or lien, or has been paid, then all unpaid installments of any such assessments, including those which are to become due and payable after Closing, shall have been paid and discharged by Seller or the Seller Companies prior to the Closing Date or accrued on the Final Balance Sheet. The Seller Companies shall have paid all property taxes and assessments on the Assets for all calendar years prior to Closing, and shall have accrued on the Final Balance Sheet any real property Taxes for the calendar year in which Closing occurs, prorated to the Closing Date. 7.15 Full Sale. Seller shall have fully and effectively sold to Buyer all of the Shares and Partnership Interests, it being understood and agreed that the obligation of Buyer to purchase the Shares and Partnership Interests is conditioned upon the full and effective sale by Seller of all of the 50 57 Shares and Partnership Interests so that upon Closing each of the Seller Companies becomes a wholly-owned subsidiary of Buyer. 7.16 Lender Approval. Buyer shall have obtained the approval of the "Required Lenders", as such term is defined in the U.S. $700,000,000 Credit, Security, Guaranty and Pledge Agreement dated April 19, 1994, among Guarantor and certain other entities, including, without limitation, The Bank of Nova Scotia, as Administrative Agent. 7.17 Real Estate Transaction. The closing under the Real Estate Purchase Agreement shall have occurred or occur simultaneously with the Closing of this transaction. 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER. The obligations of Seller hereunder are, at the option of Seller, subject to the satisfaction, on or prior to the Closing Date, of the following conditions unless waived in writing by Seller: 8.1 Representations/Warranties. The representations and warranties of Buyer contained in this Agreement shall be true when made and true and correct in all material respects as of the Closing Date as though such representations and warranties had been made on and as of the Closing Date; and each and all of the terms, covenants and conditions of this Agreement to be complied with or performed by Buyer on or before the Closing Date shall have been duly complied with and performed. 8.2 Opinion of Buyer's Counsel. Seller shall have received from counsel to Buyer (which may be house counsel) an opinion dated as of the Closing Date and addressed to Seller, in a form agreeed by the parties. 8.3 Action/Proceeding. No action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the transactions herein contemplated, wherein an unfavorable judgment would prevent or make materially unfavorable the carrying out of this Agreement or render any of the transactions described herein subject to rescission, and there shall not be in effect any order restraining, enjoining or otherwise preventing consummation of the sale of the Shares or Partnership Interests. 8.4 Pre-Closing Confirmations. Seller shall have obtained documentation or other evidence reasonably satisfactory to Seller that Buyer has: (a) received all consents, approvals, authorizations and clearances of governmental and regulatory authorities required of it to consummate the transactions contemplated hereby; (b) obtained such other consents and approvals as may be legally or contractually required for Seller's consummation of the transactions described herein; and 51 58 (c) complied with all waiting periods under the HSR Act. 8.5 Extraordinary Liabilities/Obligations. Neither Buyer nor Guarantor shall (a) be in receivership or dissolution; (b) have made any assignment for the benefit of creditors; (c) have admitted in writing its inability to pay its debts as they mature; (d) have been adjudicated a bankrupt; (e) have filed a petition in voluntary bankruptcy, a petition or answer seeking reorganization, or an arrangement with creditors under the federal bankruptcy law or any other similar law or statute of the United States or any state, nor shall any such petition have been filed against Buyer; or (f) have entered into any Contract to do or permit the doing of any of the foregoing on or after the Closing Date. 8.6 Real Estate Transaction. The closing under the Real Estate Purchase Agreement shall have occurred or occur simultaneously with the Closing of this transaction. 9. NONCOMPETITION. Seller and Buyer recognize that (i) Buyer's entering into this Agreement is induced primarily because of the covenants and assurances made by Seller and Buyer hereunder and under the Non-Competition Agreement, (ii) Seller's covenant not to compete is necessary to insure the continuation of the businesses of the Seller Companies subsequent to Closing, and (iii) irreparable harm and damage will be done to Buyer and the Seller Companies in the event that Seller competes with the Seller Companies within the area or areas specified in this Section. Therefore, in consideration of the premises and as an inducement for Buyer to enter into this Agreement and consummate the transactions contemplated herein, Seller covenants that, for a period of three (3) years from and after the Closing Date, Seller shall not, directly or indirectly, in any capacity: (i) employ, engage or seek to employ or engage any Person employed by the Seller Companies on or after the Closing Date and who, within the prior twelve months, had been an officer, director, employee or medical staff member of the Seller Companies, unless such officer, director, employee or medical staff member (i) resigns voluntarily (without any solicitation from Seller or any of its Affiliates) and Buyer consents in writing to such employment or engagement, or (ii) is terminated by the Seller Companies after the Closing Date; (ii) or cause or attempt to cause any Person to replace or terminate any Contract for the provision or arrangement of healthcare services from the Facilities with products or services of any other Person at any time after the Closing Date; or (iii) own, manage, operate, control, participate in the management, operation or control of, be employed by or under contract with, or maintain or continue any interest whatsoever in any Person within Orange County, California, engaged in any business similar to the business of the Seller Companies at the Facilities immediately after Closing. 52 59 The parties hereto acknowledge and agree that any remedy at law for any breach of the provisions of this Article 9 would be inadequate, and Seller hereby consents to the granting by any court of an injunction or other equitable relief, without the necessity of actual monetary loss being proved, in order that a breach or threatened breach of such provisions may be effectively restrained. For purposes of this Article 9, Seller shall mean the Person comprised of all partners of Seller and shall not be defined as a smaller group of partners acting on their own behalf. 10. ADDITIONAL AGREEMENTS. 10.1 Casualty. If any part of the assets of the Company are destroyed, damaged or lost (whether by fire, theft, vandalism or other cause or casualty) prior to the Closing Date, and the fair market value of such destruction, damage or loss is $1,000,000 or more, Buyer may, at its option, either (i) close this transaction in accordance with its terms, and retain the proceeds (or the right to receive the proceeds) of the applicable insurance policy, or (ii) terminate this Agreement in its entirety without penalty. In the event Buyer elects to close this transaction, Seller and, after the Closing, Buyer shall cause the Company to accrue, be liable for, set aside and reserve as of the Closing Date, any and all applicable deductibles or coinsurance amounts due or to become due on or after the Closing Date. 10.2 Allocation of Purchase Price. The Purchase Price shall be allocated in accordance with Schedule 10.2. Any Tax Returns or other tax information the parties may file or cause to be filed with any governmental agency shall be prepared and filed consistent with such agreed upon allocation. 10.3 Tax and Medicare Effect. None of the parties (nor such parties' counsel or accountants) has made or is making any representations to any other party (nor such party's counsel or accountants) concerning any of the Tax or Medicare effects on such other party of the transactions provided for in this Agreement. Each party represents and warrants to the other that it has obtained, or may obtain, independent Tax and Medicare advice with respect thereto and upon which it, if so obtained, has solely relied. 10.4 Post-Closing Tax Returns. (a) Seller shall prepare or cause to be prepared, deliver to the Seller Companies for review, approval and execution not less than 30 days before the Due Date (as defined below), and timely file, all Tax Returns of the Seller Companies with respect to any taxable period ending prior to the Closing Date (a "Pre-Closing Period") and, to the extent not accrued on the Final Balance Sheet, shall pay all Taxes with respect to the Pre-Closing Period. (b) If the taxable period of the Seller Companies that includes the day immediately prior to the Closing Date does not terminate on such date (a "Straddle Period"), the parties will, to the extent permitted by applicable law, elect with the relevant governmental or regulatory authority to treat a portion of any such Straddle Period as a short taxable period ending as of the close of business 53 60 on the day immediately prior to the Closing Date and such short taxable period shall be treated as a Pre-Closing Period for purposes of this Agreement. In any case where applicable law does not permit such an election to be made, Taxes with respect to the Seller Companies for the Straddle Period shall be allocated to the Pre-Closing Period using an interim closing-of-the-books method that is consistent with the priniciples of Treas. Reg. Section 1.1502- 76(b)(4)(i) (assuming that such taxable period ended at the close of business on the day immediately preceding the Closing Date), and treating such period as a Pre-Closing Period, except that (i) exemptions, allowances or deductions that are calculated on an annual basis (such as the deduction for depreciation) shall be apportioned on a per-diem basis, and (ii) real property Taxes shall be allocated in accordance with Section 164(d) of the Code. In the case of any Straddle Period described in the preceding sentence, Buyer shall provide Seller and its authorized representatives with copies of the completed Tax Return for such period and a statement certifying the amount of Taxes shown on such Tax Return that are chargeable to the Seller Companies at least thirty (30) days prior to the due date for the filing of such Tax Return (including any extensions thereof; the "Due Date"), and Seller and its authorized representatives shall have the right to review such Tax Return and statement prior to the filing of such Tax Return. Seller and Buyer agree to consult and resolve in good faith any issues arising as a result of the review of such Tax Return and Tax statement by Seller or its authorized representatives and to mutually consent to the filing of such Tax Return. If Seller disputes any amount, item, allocation or election set forth in the Tax Return or the statement, Seller shall notify Buyer of such dispute, setting forth with reasonable particularity the matter or matters in dispute. If the parties are unable to resolve the dispute within ten (10) business days prior to the Due Date, the parties shall jointly request Arthur Anderson, or another mutually acceptable independent certified "big six" accounting firm to resolve any issue as promptly as possible. If such accounting firm is unable to make a determination with respect to any disputed issue prior to the Due Date, Buyer, the Seller Companies or Buyer's Affiliate, as the case may be, may file such Tax Return without the consent of Seller, subject, however, to the obligation thereafter to file an amended Tax Return reflecting the final decision of the accounting firm (which decision shall be rendered prior to the expiration of the period during which an amended Tax Return may validly be filed with respect to the applicable taxable period). Not later than five (5) business days before the Due Date, Seller shall pay to Buyer or the Seller Companies an amount equal to the Taxes shown on the statement as being chargeable to Seller pursuant to this Section. If Seller has disputed any such amount, item, allocation or election, the appropriate amounts in dispute may be withheld by Seller, subject to Seller's obligation to pay to Buyer or the Seller Companies appropriate amounts to reflect the decision of the accounting firm in immediately available funds not later than five (5) days after such decision has been rendered. (c) Buyer, in its discretion, may cause any of the Seller Companies to make an election under Section 338(g) of the Code and/or corresponding provisions of state tax law; provided that the economic and tax consequences of any such election shall be imposed solely on Buyer and its Affiliates, shall not reduce the amounts payable to Seller under this Agreement, and shall not be allocated as a cost or responsibility of Seller under subsection (b) above. 54 61 (d) Buyer and Seller acknowledge that Tax authorities may make adjustments to Tax Returns for one or more of the Seller Companies that increase Taxes for the Seller Companies for one or more Pre-Closing Periods and also create a related decrease in Taxes for the Seller Companies for one or more periods after the Closing. In determining the extent to which Buyer is entitled to indemnification under Section 11.1, Seller shall be given credit for post-Closing favorable Tax adjustments which Buyer will realize during the three year period after the Closing Date as a result of the pre-Closing unfavorable Tax (except for interest and penalties) adjustment. 10.5 Termination Prior to Closing. Notwithstanding anything herein to the contrary, this Agreement may be terminated at any time: (i) on or prior to the Closing Date by mutual consent of Buyer and Seller; (ii) on or prior to the Closing Date by Buyer, if there has been a material adverse change in the operations, financial condition, businesses or prospects for future results of operations of the Facilities, taken as a whole, since the effective date hereof; (iii) on the Closing Date by Buyer if any of the conditions specified in Article 7 of this Agreement have not been satisfied by Seller or the Seller Companies or waived in writing by Buyer; (iv) on the Closing Date by Seller if any of the conditions specified in Article 8 of this Agreement have not been satisfied by Buyer or waived in writing by Seller; and (v) by Buyer or Seller if the Closing shall not have taken place on or before 11:59 p.m. on August 31, 1994 (which date may be extended by mutual written agreement of Buyer and Seller), in any event unless the party desiring to terminate this Agreement is in default hereunder. 10.6 Post-Closing Maintenance of and Access to Information. (a) Seller and Buyer acknowledge that after Closing each party may need access to information or documents in the control or possession of the other party for the purposes of concluding the transactions herein contemplated, Tax Returns or audits, compliance with the Government Reimbursement Programs and other laws and regulations, and the prosecution or defense of third party claims. Accordingly, each party shall keep, preserve and maintain in the ordinary course of business, and as required by law and relevant insurance carriers, all books, records (including patient medical records), documents and other information in the possession or control of such party and relevant to the foregoing purposes at least until the expiration of any applicable statute of limitations or extensions thereof. (b) Each party shall cooperate fully with, and make available for inspection and copying by, the other party, its employees, agents, counsel and accountants or governmental agencies, upon written request and at the expense of the requesting party, such books, records documents and other information to the extent reasonably necessary to facilitate the foregoing purposes. In addition, each party shall cooperate with, and shall permit and use its best efforts to cause its respective former and present directors, officers and employees to cooperate with, the other party on and after Closing in furnishing information, evidence, testimony and other assistance in connection with any action, proceeding, arrangement or dispute of any nature with respect to the subject matters of this Agreement and pertaining to periods prior to the Closing Date. 55 62 (c) Upon the Company's receipt of appropriate consents and authorizations, Seller shall be entitled to remove from the Facilities, at Seller's sole risk and expense, any patient records solely for purposes of pending litigation involving a patient to whom and services to which such records refer, as certified in writing prior to removal by counsel retained by Seller in connection with such litigation. Any records so removed from the Facilities shall be promptly returned to Company following their use by Seller. (d) The exercise by Seller of any right of access granted herein shall not materially interfere with the business operations of Company. (e) Buyer shall permit, and shall permit the Seller Companies to permit, Mr. Thomas M. Ways, so long as he is employed by Guarantor or any Affiliate of Guarantor, to assist Seller in post-Closing matters relating to the transactions contemplated by this Agreement. Such assistance shall be limited to eight hours each month for one year after the Closing Date at no cost to Seller (except for reimbursable expenses as described below). Seller shall reimburse Buyer for assistance provided by Mr. Ways in excess of eight hours each month or after one year at the rate of $150.00 per hour. In no event shall Mr. Ways be required to provide any assistance pursuant to this Section for more than 24 hours in any one month or after one year. Seller shall reimburse Mr. Ways, Buyer or its Affiliate for all direct, out-of-pocket expenses incurred by Mr. Ways or by Buyer or its Affiliate on behalf of Mr. Ways in connection with such assistance. 10.7 Reproduction of Documents. This Agreement and all documents relating hereto, including, without limitation, (a) consents, waivers and modifications which may hereafter be executed, (b) the agreements, instruments and other documents delivered at the Closing, and (c) financial statements, certificates and other information previously or hereafter furnished to Seller or to Buyer, may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process and Seller and Buyer may destroy any original documents so reproduced. Seller and Buyer stipulate that any such reproduction shall be admissible in evidence as the original itself in any judicial, arbitral or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by Seller or Buyer in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. 10.8 Misdirected Payments, etc. Each of Seller and Buyer shall remit to the other with reasonable promptness any payments received, which payments are on or in respect of accounts or notes receivable owned by and due to (or are otherwise payable to) the other. In addition, if any Government Reimbursement Program or other Person determines that funds previously paid or credited to Seller, any of the Seller Companies, any other Affiliate of Seller, or the Facilities in respect of services rendered prior to the Closing Date have resulted in an overpayment or must be repaid, Seller shall be responsible for, and reimburse the Seller Companies and Buyer for, the repayment of said monies (and the defense of such actions). Subject to the provisions of Section 10.9, if Buyer or any of the Seller Companies suffers any deduction to or offset against amounts due Buyer or the Seller Companies of funds previously paid or credited to Seller, the Seller Companies, any other 56 63 Affiliate of Seller, or the Facilities in respect of services rendered prior to the Closing Date, Seller shall immediately pay to Buyer or the Seller Companies the amounts so billed or offset upon demand. 10.9 Government Reimbursement Program Prior Period Adjustments. (a) As used herein, the term (i) "Prior Period Adjustments" means any and all Cost Report adjustments suffered by Buyer or any of the Seller Companies after Closing and relating to Cost Report periods ending prior to the Closing Date, (ii) "Net Favorable Adjustments" means the difference between favorable Prior Period Adjustments, and unfavorable Prior Period Adjustments, (iii) "Net Unfavorable Adjustments" means the difference between unfavorable Prior Period Adjustments and favorable Prior Period Adjustments, (iv) "Seller's Credits" means all indemnification payments made by Seller to Buyer pursuant to Article 11 in respect of adverse Prior Period Adjustments only, and (iv) "Cost Report Reconciliation Statement" means the statement prepared by Buyer setting forth either the Net Favorable Adjustments or Net Unfavorable Adjustments, as the case may be. (b) On the second anniversary of the Closing Date (or as soon thereafter as is reasonably practicable), Buyer shall provide to Seller the Cost Report Reconcilation Statement. If the Cost Report Reconcilation Statement shows a Net Favorable Adjustment and there exist any Seller Credits, Buyer shall pay to Seller the amount of Seller Credits. If the Cost Report Reconciliation Statement shows a Net Unfavorable Adjustment and the Net Unfavorable Adjustments exceed the Seller Credits, then Seller shall pay to Buyer the difference. If the Cost Report Reconciliation Statement shows a Net Unfavorable Adjustment and the Seller Credits exceed the Net Unfavorable Adjustments, then Buyer shall pay to Seller the difference. Any amounts due hereunder shall be paid within twenty business days after delivery of the Cost Report Reconciliation Statement If Seller disputes the figures in the Cost Report Adjustment Statement and the dispute is not resolved to the mutual satisfaction of Seller and Buyer within 30 days after the delivery of the Cost Report Reconciliation Statement, such dispute shall be submitted to Arthur Anderson or, if Arthur Anderson is unable or unwilling to participate, another mutually acceptable independent "big six" certified public accounting firm, in any event acting as experts and not as arbitrators, for verification of the Cost Report Adjustment Statement in accordance with the provisions of this Agreement. The decision of the accounting firm shall be final and binding upon Seller and Buyer; there shall be no right of appeal from such decision; and such accounting firm's fees and expenses shall be borne equally by the parties. (c) Amounts due Buyer or Seller pursuant to this Section shall not be taken into account when determining whether the "buckets" described in Sections 11.2(a)(i) and 11.4(a)(i) have been exceeded, it being the intention of the parties that the provisions of this Section be observed without regard to such buckets. 57 64 11. INDEMNIFICATION. 11.1 Indemnification by Seller. Subject to and to the extent provided in this Article 11, from and after the Closing, Seller shall indemnify, defend and hold harmless Buyer, the Company, and each of Buyer's and the Company's subsidiaries, stockholders, Affiliates, officers, directors, employees, successors and assigns after Closing (Buyer, the Company and such persons, collectively, "Buyer's Indemnified Persons"), from and against any damages, claims, costs, losses, liabilities, expenses or obligations (including interest, penalties, court costs, costs of preparation and investigation, reasonable attorneys', accountants' and other professional advisors' fees and associated expenses) (collectively, "Losses") incurred or suffered by Buyer's Indemnified Persons, directly or indirectly, as a result of or arising from: (a) any breach of any representation or warranty of Seller contained herein, whether or not Buyer's Indemnified Persons relied thereon or had knowledge thereof, or the nonfulfillment of any covenant, agreement or other obligation of Seller, set forth in this Agreement, or any agreement, instrument, certificate or other document delivered or to be delivered pursuant hereto; (b) the Company's Indebtedness to be Satisfied at Closing; (c) all Taxes and Government Reimbursement Program obligations or liabilities of the Seller Companies or Seller arising out of or resulting from the Consolidation; (d) all Taxes and Government Reimbursement Program obligations in respect of all periods ending prior to the Closing Date, to the extent not set forth on the Final Balance Sheet (other than Medicare recapture arising as a result of the sale of the Living Care Center to HRT); (e) all intercompany accounts between the Seller and any of the Seller Companies as of the Closing Date; (f) all Building Defects if Seller had knowledge of such Building Defects and failed to disclose to Buyer such Building Defects in the Schedules hereto; (g) all liabilities arising out of Disclosed Litigation, excluding Assumed Litigation; (h) all Environmental Claims relating to the ownership of the Real Property or the operation of the Facilities prior to the Closing Date if Seller had knowledge of such Environmental Claims (or facts which would form the basis of such a claim) and failed to disclose to Buyer such Environmental Claims (or facts which would form the basis of such a claim) in the Schedules hereto or in the Environmental Reports; (i) all Malpractice Litigation; 58 65 (j) all Health Law Violations if Seller had knowledge of such Health Law Violations and failed to disclose to Buyer such Health Law Violations in the Schedules; (k) all Health Law Violations which are not reasonably ascertainable from the terms of any Contract upon which liability is based; (l) all liabilities arising out of or in connection with litigation or other proceedings by third parties for acts or omissions relating to the ownership or operation of the Facilities prior to the Closing Date, excluding Environmental Claims, claims relating to Building Defects and Health Law Violations, if Seller had knowledge of such acts or omissions and failed to disclose such acts or omissions in the Schedules; or (m) all liabilities arising out of or in connection with litigation or other proceedings for acts or omissions relating to the ownership or operation of the Facilities prior to the Closing Date, excluding Environmental Claims, claims based on Building Defects and Health Law Violations. 11.2 Limitations/Seller. (a) Seller shall have no liability under Section 11.1 and no claim under Section 11.1 of this Agreement shall: (i) accrue to any of Buyer's Indemnified Persons against Seller under Section 11.1(a) unless and until the total liability of Seller in respect of claims under Section 11.1(a) exceeds $150,000 in the aggregate; provided that there shall be no $150,000 minimum Loss requirement, and liability of Seller shall arise from and after $1.00 of Losses, in respect of Losses resulting from Seller's intentional, willful or reckless nonfulfillment or breach of any covenant in this Agreement or Seller's intentional misrepresentation or fraud; (ii) be made unless notice thereof shall have been given by or on behalf of any of Buyer's Indemnified Persons to Seller in the manner provided in Section 11.5, and (iii) be made for a breach of Section 3.14 if (i) the liability or obligation of Buyer arising as a result of such breach was incurred by Seller in the ordinary course of Seller's business (ii) the liability or obligation of Seller arising under the Contract prior to Closing was accrued or expensed on the Financial Statements of Seller, and (iii) if the Contract is terminable by Buyer without penalty and within twelve months of the Closing Date. 11.3 Indemnification by Buyer. Subject to and to the extent provided in this Article 11, from and after the Closing Date, Buyer shall indemnify, defend and hold harmless Seller and each of Seller's subsidiaries, stockholders, Affiliates, officers, directors, employees, successors and assigns after Closing (Seller and such persons, collectively, "Seller's Indemnified Persons") from and against any Losses incurred or suffered by Seller's Indemnified Persons, directly or indirectly, as a result of 59 66 or arising from (i) any breach of any representation or warranty of Buyer contained herein, whether or not Seller's Indemnified Persons relied thereon or had knowledge thereof, or the nonfulfillment of any covenant, agreement or other obligation of Buyer, set forth in this Agreement, or any agreement, instrument, certificate or other document delivered or to be delivered pursuant hereto, and (ii) any Medicare recapture arising out of the sale by Seller of the Living care Center to HRT. 11.4 Limitations/Buyer. (a) Buyer shall have no liability under Section 11.3 and no claim under Section 11.3 of this Agreement shall: (i) accrue to any of Seller's Indemnified Persons against Buyer under Section 11.3(a) unless the total liability of Buyer in respect of claims under Section 11.3(a) exceeds $150,000 in the aggregate; provided that there shall be no $150,000 minimum Loss requirement, and liability of Buyer shall arise from and after $1.00 of Losses, in respect of Losses resulting from Buyer's intentional, willful or reckless nonfulfillment or breach of any covenant in this Agreement or Buyer's intentional misrepresentation or fraud; and (ii) be made unless notice thereof shall have been given by or on behalf of any of Seller's Indemnified Persons to Buyer in the manner provided in Section 11.5. 11.5 Notice and Procedure. All claims for indemnification by any Person against whom claims of indemnification are being asserted (an "Indemnifying Party") under any provision of Article 11 hereof shall be asserted and resolved as follows: (a)(i) If any claim or demand for which an Indemnifying Party would be liable for Losses to a Person claiming indemnification (an "Indemnified Party") is asserted against or sought to be collected from the Indemnified Party by a Person other than Buyer or Seller or any Affiliate thereof (a "Third Party Claim"), the Indemnified Party shall deliver a Claim Notice (as defined below) with reasonable promptness to the Indemnifying Party. If the Indemnified Party fails to deliver the Claim Notice to the Indemnifying Party within 30 days after the Indemnified Party receives notice of such Third Party Claim, the Indemnifying Party will not be obligated to indemnify the Indemnified Party with respect to such Third Party Claim if and only to the extent that the Indemnifying Party's ability to defend the Third Party Claim has been irreparably prejudiced by such failure. The Indemnifying Party will notify the Indemnified Party within 11 days after receipt of the Claim Notice (the "Notice Period") whether the Indemnifying Party intends, at the sole cost and expense of the Indemnifying Party, to defend the Indemnified Party against the Third Party Claim. The assumption by the Indemnifying Party of the defense of the Third Party Claim constitutes an admission by the Indemnifying Party that the claim is one for which the Indemnifying Party is ultimately liable under this Article 11. (ii) If the Indemnifying Party notifies the Indemnified Party within the Notice Period that the Indemnifying Party intends to defend the Indemnified Party against the Third 60 67 Party Claim, then the Indemnifying Party will have the right to defend, at its sole cost and expense, the Third Party Claim by all appropriate proceedings, which proceedings will be diligently prosecuted by the Indemnifying Party to a final conclusion or settled at the discretion of the Indemnifying Party (with the consent of the Indemnified Party, which consent will not be unreasonably withheld). The Indemnifying Party will have full control of such defense and proceedings; provided that the Indemnified Party may file during the Notice Period, at the sole cost and expense of the Indemnifying Party, any motion, answer or other pleading that the Indemnified Party may deem necessary or appropriate to protect its interests and not irrevocably prejudicial to the Indemnifying Party (it being understood and agreed that, except as provided in Section 11.5(a)(iii), if an Indemnified Party takes any such action that is irrevocably prejudicial and conclusively causes a final adjudication that is materially adverse to the Indemnifying Party, the Indemnifying Party will be relieved of its obligations hereunder with respect to that portion of the Third Party Claim prejudiced by the Indemnified Party's action); and provided further that, if requested by the Indemnifying Party, the Indemnified Party shall cooperate, at the sole cost and expense of the Indemnifying Party, with the Indemnifying Party and its counsel in contesting any Third Party Claim that the Indemnifying Party elects to contest or, if appropriate in the judgment of the Indemnified Party and related to the Third Party Claim, in making any counterclaim or cross-claim against any Person (other than the Indemnified Party). The Indemnified Party may participate in, but not control, any defense or settlement of any Third Party Claim assumed by the Indemnifying Party pursuant to this Section 11.5(a)(ii) and, except as provided in the preceding sentence, the Indemnified Party will bear its own costs and expenses with respect to such participation. Notwithstanding the foregoing, the Indemnifying Party may not assume the defense of the Third Party Claim if (1) the Persons against whom the claim is made, or any impleaded Persons, include both the Indemnifying Party and any Indemnified Party, and (2) representation of both such Persons by the same counsel would be inappropriate due to actual or potential differing interests between them, in which case any Indemnified Party shall have the right to defend the Third Party Claim and to employ counsel at the expense of the Indemnifying Party. (iii) If the Indemnifying Party fails to notify the Indemnified Party within the Notice Period that the Indemnifying Party intends to defend the Indemnified Party against the Third Party Claim, or if the Indemnifying Party gives such notice but fails to diligently prosecute or settle the Third Party Claim, or if the Indemnifying Party fails to give any notice whatsoever within the Notice Period, then the Indemnified Party will have the right (but not the obligation) to defend, at the sole cost and expense of the Indemnifying Party, the Third Party Claim by all appropriate proceedings, which proceedings will be diligently prosecuted by the Indemnified Party to a final conclusion or settled at the discretion of the Indemnified Party. The Indemnified Party will have full control of such defense and proceedings, including any compromise or settlement thereof; provided that, if requested by the Indemnified Party, the Indemnifying Party shall cooperate, at the sole cost and expense of the Indemnifying Party, with the Indemnified Party and its counsel in contesting the Third Party Claim which the Indemnified Party is contesting, or, if appropriate in the judgment of the Indemnified Party 61 68 and related to the Third Party Claim, in making any counterclaim or cross claim against any Person (other then the Indemnifying Party). (iv) Notwithstanding the foregoing provisions of Section 11.5(a)(iii), if the Indemnifying Party notifies the Indemnified Party within the Notice Period that the Indemnifying Party disputes its obligation to indemnify the Indemnified Party against the Third Party Claim, and if such dispute is resolved pursuant to Section 11.5(c) in favor of the Indemnifying Party, the Indemnifying Party will not be required to bear the costs and expenses of the Indemnified Party's defense pursuant to this Section 11.5(a)(iii) or of the Indemnifying Party's participation therein at the Indemnified Party's request, and the Indemnified Party will reimburse the Indemnifying Party in full for all such costs and expenses. The Indemnifying Party may participate in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to Section 11.5(a)(iii), but the Indemnifying Party will bear its own costs and expenses with respect thereto if such participation is not at the request of the Indemnifying Party. (b) In the event any Indemnified Party should have a claim against any Indemnifying Party hereunder that is not a Third Party Claim, the Indemnified Party shall deliver an Indemnity Notice (as defined below) with reasonable promptness to the Indemnifying Party. The failure by any Indemnified Party to give the notice referred to in the preceding sentence shall not impair such party's rights hereunder except to the extent that an Indemnifying Party demonstrates that it has been irreparably prejudiced thereby. If the Indemnifying Party fails to notify the Indemnified Party within ten (10) days following its receipt of the Indemnity Notice that the Indemnifying Party disputes its obligation to indemnify the Indemnified Party hereunder, the claim will be conclusively deemed a liability of the Indemnifying Party hereunder. (c) If the Indemnifying Party timely disputes its liability with respect to claim described in a Claim Notice or an Indemnity Notice, the Indemnifying Party and the Indemnified Party shall proceed promptly and in good faith to negotiate a resolution of such dispute within sixty (60) days following receipt of a Claim Notice or an Indemnity Notice and, if such dispute is not resolved through negotiations during such 60-day period, it shall be resolved pursuant to the provisions of Article 12. (d) The Indemnifying Party shall pay the amount of any liability to the Indemnified Party within thirty (30) days following its receipt of a Claim Notice or an Indemnity Notice, or on such later date (i) in the case of a Third Party Claim, as the Indemnified Party suffers Losses in respect of the Third Party Claim, or (ii) in the case of an Indemnity Notice in which the amount of the claim is estimated, promptly after the amount of such claim becomes finally determined. In the event the Indemnified Party is not paid in full for its claim in a timely manner after the Indemnifying Party's obligation to indemnify and the amount thereof has been determined in accordance with this Article 11, the amount due shall bear interest from the date that the Indemnifying Party received the Claim Notice or the Indemnity Notice until paid at the interest rate provided in Section 1.8, and in addition to any other rights it may have against the Indemnifying Party, the Indemnified Party shall have the 62 69 right to set-off the unpaid amount of such claim against any amounts owed by it to the Indemnifying Party. (e) The term "Claim Notice" means written notification of a Third Party Claim by an Indemnified Party to an Indemnifying Party under Article 11, enclosing a copy of all papers served, if any, and specifying the nature of and alleged basis for the Third Party Claim and, to the extent then feasible, the alleged amount or the estimated amount of the Third Party Claim. (f) The term "Indemnity Notice" means written notification of a claim for indemnity under Article 11 hereof other than a Third Party Claim by an Indemnified Party to an Indemnifying Party pursuant to Section 11.5(b) hereof, specifying the nature of and specific basis for the claim and, to the extent then feasible, the amount or the estimated amount of the claim. (g) Any estimated amount of a claim submitted in a Claim Notice or an Indemnity Notice shall not be conclusive of the final amount of such claim, and the giving of a Claim Notice when an Indemnity Notice is properly due, or the giving of an Indemnity Notice when a Claim Notice is properly due, shall not impair such Indemnified Party's rights hereunder except to the extent that an Indemnifying Party demonstrates that it has been irreparably prejudiced thereby. Notice of any claim comprised in part of Third Party Claims and claims that are not Third Party Claims may be given pursuant to either Section 11.5(a) or 11.5(b). (h) For purposes of this Article 11 and with respect to Taxes, a Third Party Claim includes a Revenue Agent's Report, Statutory Notice of Deciency, Notice of Proposed Assessment, or any other official written notice from a Taxing authority that Taxes are due or that a Tax audit will be conducted. 11.6 Treatment of Indemnification Payments. Any indemnification payment made by either party pursuant to this Article 11 shall be treated by the parties as an adjustment to that portion of the Purchase Price allocated to the Company Shares and the Partnership Interests. 11.7 Survival of Representations and Warranties; Indemnity Period Notwithstanding any right of Buyer (whether or not exercised) to investigate the affairs of Seller or Company or any right of any party (whether or not exercised) to investigate the accuracy of the representations and warranties of the other party contained in this Agreement, Seller has, on the one hand, and Buyer has, on the other hand, the right to rely fully upon the representations, warranties, covenants and agreements of the other contained in this Agreement. The representations, warranties, covenants and agreements respectively made by Seller, on the one hand, and Buyer, on the other hand, in this Agreement or in any certificate respectively delivered by Seller or Buyer pursuant to Section 7.1 or 8.1 will survive the Closing (a) indefinitely with respect to matters covered by Sections 3.1, 4.1 and 11.1(b), 11.1(e) and11.1(g), (b) until sixty (60) calendar days after the expiration of all applicable statutes of limitations (including all periods of extension, whether automatic or permissive) with respect to matters covered by Sections 3.19, 3.24, 11.1(c), 11.1(d), 11.1(i), 11.1(j) and 11.1(l), and 63 70 (c) until the second anniversary of the Closing Date in the case of Sections 11.1(f), 11.1(h), 11.1(k), 11.1(m), and all other representations, warranties, covenants and agreements, provided that: (i) any representation, warranty, covenant or agreement that would otherwise terminate in accordance with clause (b) or (c) above shall survive if (and only with respect to the matters set forth in) a Claim Notice or an Indemnity Notice shall have been given on or prior to such termination date, until the related claim for indemnification has been satisfied or otherwise resolved in accordance with Article 12; (ii) in the event of fraud in the making of any representation or warranty, or intentional, willful or reckless nonfulfillment or breach of any covenant in this Agreement, all representations, warranties, covenants and agreements that are the subject of the fraud, willful or reckless nonfulfillment or breach, shall survive until sixty (60) calendar days after the expiration of all applicable statutes of limitations (including all periods of extension, whether automatic or permissive) with respect to matters covered thereby; (iii) covenants and agreements to be performed after the Closing Date will survive the Closing for the term specified therein, or, if no term is specified, indefinitely; (iv) rights to indemnification under Article 11 will survive until any claims brought thereunder shall have been satisfied or otherwise resolved as provided therein; and (v) rights to indemnification by Buyer pursuant to Section 11(k) and (m) shall be limited to recovery against the Escrow Amount. 12. GENERAL. 12.1 Schedules. The Schedules and all exhibits and documents referred to in or attached to this Agreement are integral parts of this Agreement as if fully set forth herein and all statements appearing therein shall be deemed to be representations. Seller shall have the right to update the Schedules after the effective date of this Agreement for matters arising between the effective date of this Agreement and the Closing Date and, subject to Buyer's right to terminate this Agreement pursuant to Section 10.5(ii), such updated Schedules shall constitute the Schedules on and as of the Closing Date. Except as set forth in the Schedules, Seller represents and warrants to Buyer that Seller has provided to Buyer complete and genuine copies of all Contracts, instruments and other documents described in, attached to or referenced in the Schedules. 12.2 Consented Assignment. Anything contained herein to the contrary notwithstanding, this Agreement shall not constitute an agreement to assign any Contract if an attempted assignment thereof without the consent of another Person would (i) constitute a breach thereof or in any material way affect the rights of the Company thereunder, (ii) be ineffective, or (iii) materially affect the Company's rights thereunder so that after Closing the Company would not in fact maintain or receive all such rights. In any such event, Seller shall cooperate in any reasonable arrangement designed to 64 71 provide for the Company after Closing the benefits of the Contracts, including enforcement of any and all rights of Seller against the other Person arising out of the breach or cancellation by such other Person or otherwise. 12.3 Time of Essence. Time is of the essence in the performance of this Agreement. This Section may not be waived except in a writing expressly referring hereto. 12.4 CON Disclaimer. This Agreement shall not be deemed to be an acquisition or obligation of a capital expenditure or of funds within the meaning of the certificate of need statute of any state, until the appropriate governmental agencies shall have granted a certificate of need or other appropriate approval or ruling. 12.5 Consents, Approvals and Discretion. Except as herein expressly provided to the contrary, whenever this Agreement requires any consent or approval to be given by any party or any party must or may exercise discretion, such consent or approval shall not be unreasonably withheld or delayed and such discretion shall be reasonably exercised. 12.6 Expenses; Legal Fees and Costs. (a) Except as otherwise expressly set forth in this Agreement, all expenses of the preparation of this Agreement and of the purchase of the Shares, including counsel fees, accounting fees, brokerage or finder fees and commissions, investment advisor's fees and disbursements, shall be borne by the party incurring such expense, whether or not such transactions are consummated. (b) Seller shall pay all stock transfer and stamp taxes arising out of the transfer of the Shares. Buyer shall pay any HSR Act filing fee. (c) In the event any party incurs legal expenses to enforce any provision of this Agreement, the prevailing party will be entitled to recover such legal expenses, including attorney's fees, costs and necessary disbursements, in addition to any other relief to which such party shall be entitled at law or in equity. 12.7 Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to such state's conflicts of laws rules. 12.8 Benefit/Assignment. Subject to provisions herein to the contrary, this Agreement shall inure to the benefit of and be binding upon the parties and their respective legal representatives, successors and assigns; provided that no party may assign this Agreement or any part hereof, or delegate any duty or obligation to be performed hereunder, to another Person without the prior written consent of the other party; provided further that, prior to Closing Buyer may, without the prior written consent of Seller, assign this Agreement, or any part hereof, and delegate its duties and obligations to be performed hereunder, to one or more Persons controlled by Guarantor which Person shall become Buyer hereunder. 65 72 12.9 Accounting Date. The transactions contemplated hereby shall be effective for accounting purposes as of the Effective Time, unless otherwise agreed in writing by Seller and Buyer. 12.10 No Third Party Beneficiary. The terms and provisions of this Agreement (including Section 6.5) are intended solely for the benefit of Buyer and Seller and their respective successors or assigns, and it is not the intention of the parties to confer third-party beneficiary rights upon any other Person. 12.11 Waiver of Breach. The waiver by either party of a breach or violation by another party of any provision of this Agreement shall not operate as, or be construed to constitute, a waiver of any subsequent breach or violation of the same, or a breach or violation of any other, provision hereof. All remedies, either under this Agreement, or by law or otherwise afforded, will be cumulative and not alternative. 12.12 Notices. Any notice, demand or communication required, permitted or desired to be given hereunder shall be deemed effectively given when personally delivered, when received by facsimile or other electronic means, including telegraph and telex (other than for a Claim Notice or Indemnity Notice) , when delivered by overnight courier, or five (5) days after being deposited in the United States mail, with postage prepaid thereon, certified or registered mail, return receipt requested, in any event addressed as follows: Buyer: c/o OrNda HealthCorp 3401 West End Avenue Suite 700 Nashville, Tennessee 37203 Attn: General Counsel Facsimile: 615/783-1232 Seller (prior to Closing): Fountain Valley Medical Development Co 11180 Warner Avenue Fountain Valley, California 92708 Attn: Thomas M. Ways - Chief Executive Office Facsimile: 714/435-1225 Seller (after Closing): Fountain Valley Medical Development Co. c/o BDO Seidman 1900 Avenue of the Stars, 11th Floor Los Angeles, California 90067 Attention: Arthur R. Nemiroff 66 73 In either case, with a copy to: Sherwin L. Memel, Esq. Manatt, Phelps & Phillips 11355 West Olympic Blvd. Los Angeles, California 90064-4267 Facsimile: 310/312-4224 or to such other address or number, or to the attention of such other Person, as any party may designate, at any time, in writing in conformity with these notice provisions. 12.13 Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future law, and if the rights or obligations of Buyer or Seller under this Agreement will not be materially and adversely affected thereby, (a) such provision will be fully severable, (b) this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, (c) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom, and (d) in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible. 12.14 Gender and Number. Whenever the context of this Agreement requires, the gender of all words herein shall include the masculine, feminine and neuter, and the number of all words herein shall include the singular and plural. 12.15 Divisions and Headings. The Table of Contents, the divisions of this Agreement into sections and subsections and the use of captions and headings in connection therewith are solely for convenience and shall have no legal effect in construing the provisions of this Agreement. 12.16 Entire Agreement/Amendment. This Agreement supersedes all previous contracts, and constitutes the entire agreement of whatsoever kind or nature existing between or among the parties representing the within subject matter and no party shall be entitled to benefits other than those specified herein. As between or among the parties, no oral statement or prior written material not specifically incorporated herein shall be of any force and effect. The parties specifically acknowledge that in entering into and executing this Agreement, the parties rely solely upon the representations and agreements contained in this Agreement and no others. All prior representations or agreements, whether written or verbal, not expressly incorporated herein are superseded unless and until made in writing and signed by the parties. The representations and warranties set forth in this Agreement shall survive the Closing and remain in full force and effect as provided in Article 11, and shall survive the execution and delivery of all other agreements, instruments or other documents described, referenced or contemplated herein and shall not be merged herewith or therewith. This Agreement may be executed in two or more counterparts, each and all of which shall be deemed an 67 74 original and all of which together shall constitute but one and the same instrument. This Agreement may not be amended or otherwise modified except in a writing duly executed by the parties. 12.17 Press Releases. At all times at or prior to the Closing, Seller, on the one hand, and Buyer, on the other hand, will consult with the other before issuing or making any reports, statements or releases to the public with respect to this Agreement or the transactions contemplated hereby and will use good faith efforts to obtain the other party's approval of the text of any public report, statement or release to be made on behalf of such party. If either party is unable to obtain the approval of its public report, statement, or release from the other party and such report, statement, or release is, in the opinion of legal counsel to such party, required by law to discharge such party's disclosure obligations, then the party may make or issue the legally required report, statement, or release and promptly furnish the other party with a copy thereof. 12.18 Drafting. No provision of this Agreement shall be interpreted for or against any party hereto on the basis that such party was the draftsman of such provision, both parties having participated equally in the drafting hereof, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. 12.19 Waiver of Trial by Jury. Each party hereby knowingly, voluntarily and irrevocably waives any and all rights it may have to demand that any action, proceeding or counterclaim arising out of or in any way related to this Agreement or the relationships of the parties be tried by a jury. This waiver extends to any and all rights to demand a trial by jury arising from any source including, but not limited to, the Constitution of the United States, the Constitution of the State of California, common law or any applicable law, rule, or regulation. [Rest of Page Intentionally Blank] 68 75 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in multiple originals by their authorized officers, all as of the date and year first above written. BUYER: SUMMIT HEALTH, LTD. a California corporation By: /s/ Keith B. Pitts --------------------------------- Keith B. Pitts Executive Vice President & Chief Financial Officer SELLER: FOUNTAIN VALLEY MEDICAL DEVELOPMENT CO., a California limited partnership By: /s/ Richard W. Ayres -------------------------------------- Printed Name: Richard W. Ayres ------------------------ Title: General Partner By: /s/ Rudolph C. Baldoni -------------------------------------- Printed Name: Rudolph C. Baldoni ------------------------ Title: General Partner By: /s/ Christoper Smith -------------------------------------- Printed Name: Christoper Smith ------------------------ Title: General Partner By: /s/ Anthony D. Lodonne -------------------------------------- Printed Name: Anthony D. Lodonne ------------------------ Title: General Partner By: /s/ Stanley R. Mayberg -------------------------------------- Printed Name: Stanley R. Mayberg ------------------------ Title: General Partner 69 76 GUARANTY OF BUYER'S OBLIGATIONS In consideration of Fountain Valley Medical Development Co., a California limited partnership (the "Seller") entering into the Stock Purchase Agreement, dated as of July 20, 1994 (the "Agreement"), between Seller and Summit Health, Ltd. (the "Buyer"), OrNda HealthCorp, a Delaware corporation and the ultimate parent entity of Buyer (the "Parent"), as principal obligor and not merely as a surety, hereby unconditionally guarantees full, punctual and complete performance by Buyer of all of Buyer's obligations under or arising out of or in connection with the Agreement and so undertakes to Seller that, if and whenever Buyer is in default, the Parent: (a) will on demand duly and promptly perform or procure the performance of Buyer's obligations; and (b) will indemnify and at all times hold harmless Seller against all costs, charges and expenses which it may sustain or incur by reason of the failure of Buyer to perform any of its obligations in whole or in part. The foregoing guarantee: (a) is a continuing guarantee and will remain in full force and effect until the obligations and liabilities of Buyer under or arising out of or in connection with the Agreement have been duly performed or been discharged; (b) will continue to be effective or will be reinstated, as the case may be, if at any time any sum which has become payable to Seller hereunder and has been paid has to be restored by it upon the bankruptcy, liquidation or reorganization of Buyer or otherwise; and (c) will continue and survive any assignment of Buyer's rights, duties or obligations pursuant to Section 12.8. ORNDA HEALTHCORP By: /s/ Keith B. Pitts ------------------------------------------------- Executive Vice President, Chief Financial Officer 70 EX-2.2 3 AGREEMENT OF SALE AND PURCHASE 1 AGREEMENT OF SALE AND PURCHASE BY AND AMONG FOUNTAIN VALLEY MEDICAL DEVELOPMENT CO. a California limited partnership ("SELLER") AND ORNDA HEALTHCORP a Delaware corporation ("GUARANTOR") AND HEALTHCARE REALTY TRUST INCORPORATED A Maryland corporation ("PURCHASER") For the Sale and Purchase of Medical Office Buildings I-IV and Regional Care Center associated with Fountain Valley Regional Hospital and Medical Center July 21, 1994 2 TABLE OF CONTENTS ARTICLE I. Definitions . . . . . . . . . . . . . . . . . 1 ARTICLE II. Agreements to Sell, Purchase and Lease . . . . 7 2.1 Agreement to Sell and Purchase . . . . . . . . . 7 2.2 Agreement to Lease . . . . . . . . . . . . . . 7 ARTICLE III. Purchase Price . . . . . . . . . . . . . . . . 8 3.1 Payment of Purchase Price . . . . . . . . . . 8 ARTICLE IV. Items to be Furnished to Purchaser by Seller or Guarantor . . . . . . . . . . . . . 8 4.1 Due Diligence Materials . . . . . . . . . . . 8 4.2 Due Diligence Materials of Guarantor . . . . . 9 4.3 Due Diligence Review . . . . . . . . . . . . . 9 ARTICLE V. Title and Survey . . . . . . . . . . . . . . . 10 5.1 Title Commitment, Exception Documents and Survey . . . . . . . . . . . . . . . . . . . . 10 5.2 Review Period . . . . . . . . . . . . . . . . 10 5.3 Additional Exceptions . . . . . . . . . . . . 11 ARTICLE VI. Representations, Warranties, Covenants and Agreements . . . . . . . . . . . . . . . . . . 11 6.1 Representations and Warranties of Seller . . . 11 6.1.1 Indemnification by Seller . . . . . . . 17 6.1.2 Limitations/Seller . . . . . . . . . . 19 6.1.3 Survival of Representations and Warranties: Indemnity Period . . . . . 19 6.1.4 Notice and Procedure . . . . . . . . . 20 6.2 Covenants and Agreements of Seller . . . . . . 25 6.3 Representations and Warranties of Purchaser . . . . . . . . . . . . . . . . . . 27 ARTICLE VII. Conditions to the Purchaser's and Seller's Obligations . . . . . . . . . . . . . . . . . 28 7.1 Conditions to the Purchaser's Obligations . . 28 7.2 Failure of Conditions to Purchaser's Obli- gations . . . . . . . . . . . . . . . . . . . 30 7.3 Conditions to Seller's Obligations . . . . . . 30 i 3 ARTICLE VIII. Provisions with Respect to the Closing . . . . 30 8.1 Seller's Closing Obligations . . . . . . . . . 30 8.2 Purchaser's Closing Obligations . . . . . . . 32 8.3 Guarantor's Closing Obligations . . . . . . . 32 ARTICLE IX. Expenses of Closing . . . . . . . . . . . . . 33 9.1 Adjustments . . . . . . . . . . . . . . . . . 33 9.2 Closing Costs . . . . . . . . . . . . . . . . 33 9.3 Commissions/Broker's Fees . . . . . . . . . . 33 ARTICLE X. Default and Remedies . . . . . . . . . . . . . 34 10.1 Seller's Default; Purchaser's Remedies . . . . 34 10.2 Purchaser's Default; Seller's Remedies . . . . 34 ARTICLE XI. Miscellaneous . . . . . . . . . . . . . . . . 35 11.1 Survival . . . . . . . . . . . . . . . . . . . 35 11.2 Assignment . . . . . . . . . . . . . . . . . . 35 11.3 Notices . . . . . . . . . . . . . . . . . . . 35 11.4 Entire Agreement; Modifications . . . . . . . 37 11.5 Applicable Law . . . . . . . . . . . . . . . . 37 11.6 Captions . . . . . . . . . . . . . . . . . . . 38 11.7 Binding Effect . . . . . . . . . . . . . . . . 38 11.8 Time is of the Essence . . . . . . . . . . . . 38 11.9 Waiver of Conditions . . . . . . . . . . . . . 38 11.10 Guaranty of Purchaser's Obligations . . . . . 38 List of Exhibits. . . . . . . . . . . . . . . . . . . . . . . 41 ii 4 AGREEMENT OF SALE AND PURCHASE THIS AGREEMENT OF SALE AND PURCHASE (the "Agreement") is made and entered into by and among FOUNTAIN VALLEY MEDICAL DEVELOPMENT CO., a California limited partnership (hereinafter referred to as "Seller"), ORNDA HEALTHCORP, a Delaware corporation ("Guarantor" or "OrNda") and HEALTHCARE REALTY TRUST INCORPORATED, a Maryland corporation, and/or its assigns (hereinafter referred to as "Purchaser"). Seller, Purchaser and Guarantor are sometimes collectively referred to herein as the "Parties" and each of the Parties is sometimes singularly referred to herein as a "Party". WHEREAS, Seller is the owner of the Property (as hereinafter defined), consisting of certain real properties and improvements thereon located at and more particularly described on EXHIBIT "A" attached hereto and made a part hereof; and WHEREAS, Seller desires to sell and Purchaser desires to purchase the Property, and simultaneously therewith, to enter into a lease transaction pursuant to which Purchaser shall lease to Fountain Valley Regional Hospital and Medical Center, a California corporation ("Lessee"), and Lessee shall lease from Purchaser, the Property. NOW, THEREFORE, in consideration of the sum of Ten Dollars ($10.00), the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: ARTICLE I. DEFINITIONS As used herein (including any Exhibits attached hereto), the following terms shall have the meanings indicated: "Building Defects" shall mean conditions relating to the structural soundness of any building located on the Property or the soundness of the underlying Land, each which existed prior to the Closing Date. 5 "Business Day(s)" shall mean calendar days other than Saturdays, Sundays and legal holidays. "Certificate of Non-Foreign Status" shall mean a certificate dated as of the Closing Date, addressed to Purchaser and duly executed by Seller, in the form of EXHIBIT "C" attached hereto. "Claim" shall mean any obligation, liability, lien, encumbrance,loss, damage, cost, expense or claim, including, without limitation, any claim for damage to property or injury to or death of any person or persons. "Closing" shall mean the consummation of the sale and purchase provided for herein, to be held at the offices of Manatt, Phelps & Phillips, 11355 West Olympic Boulevard, Los Angeles, California 90064-4267, or such other place as the Parties may mutually agee. "Closing Certificate" shall mean a certificate in the form to be attached as EXHIBIT "D" wherein Seller shall represent that the representations and warranties of Seller contained in this Agreement are true and correct in all material respects as of the Closing Date as if made on and as of the Closing Date. "Closing Date" shall mean the actual day on which the transaction contemplated hereby is closed with the transfer of title to the Property. The Parties agree that the closing date shall be August 1, 1994, or such earlier or later date as shall be hereafter agreed upon by the Parties. "Deed" shall mean a deed containing general warranties by the Seller in content, form and substance complying with local law and custom acceptable to the Title Company executed by Seller, as grantor, in favor of Purchaser, as grantee, conveying the Land and Improvements to Purchaser, subject only to the Permitted Exceptions. "Due Diligence Materials" shall mean the information to be provided by Seller to Purchaser pursuant to the provisions of Section 4.1 hereof. "Effective Date" shall mean the later of two (2) dates on which this Agreement is signed and all 2 6 changes initialed by Seller and Purchaser, as indicated by their signatures below; provided, that in the event only one Party dates its signature, then the date of its signature shall be the Effective Date. "Engineering Documents" shall mean all site plans, surveys, soil and substrata studies, architectural drawings, plans and specifications, engineering plans and studies, floor plans, landscape plans, and other plans and studies that relate to the Land and the Improvements. "Exception Documents" shall mean true, correct and legible copies of each document listed as an exception to title on the Title Commitment. "Fixtures" shall mean all permanently affixed equipment, machinery, fixtures, and other items of real or personal property, now located in or on, and permanently affixed to or incorporated into the Improvements, including, without limitation, all furnaces, boilers, heaters, heating, plumbing, lighting, ventilating, refrigerating, incineration, air and water pollution control, waste disposal, air-cooling and air-conditioning systems and apparatus, sprinkler systems and fire and theft protection equipment, and built-in vacuum, cable transmission, oxygen and similar systems, all of which, to the greatest extent permitted by law, are hereby deemed by the parties hereto to constitute real estate, but specifically excluding all items described hereinabove which are leased by Seller from third parties, and included within the category of Seller's Personal Property and personal property owned or leased by the Tenants. "Guarantor" shall mean OrNda HealthCorp, a Delaware corporation. "Guaranty" shall mean a guaranty agreement in the form set forth on EXHIBIT "E" attached hereto pursuant to the terms of which Guarantor shall unconditionally and irrevocably guarantee the full, faithful and complete performance of each of Lessee's obligations under each of the Leases and each of the obligations of Guarantor or any affiliate of Guarantor to Purchaser. "Health Law Violation" shall mean a violation by the Seller of the Medicare fraud and abuse provisions of Title XVIII of the Social Security Act or any compara- 3 7 ble California anti-kickback law relating to the ownership or operation of the Property prior to the Closing Date. "Improvements" shall mean all buildings, improvements and structures now or on the Closing Date located on the Land, including, without limitation, landscaping, parking lots and structures, roads, drainage, and all above ground and underground utility structures, equipment systems and other so-called "infrastructure" improvements. "Knowledge of Seller" or "Seller's Knowledge" means the current actual knowledge of the Chief Executive Officer, Chief Financial Officer and members of the Executive Committee of Seller. "Land" means the real property more particularly described on EXHIBIT "A", attached hereto and made a part hereof, together with all covenants, licenses, privileges and benefits thereto. "Laws" means all federal, state and local laws, moratoria, initiatives, referenda, ordinances, rules, regulations, standards, orders and other governmental requirements, including, without limitation, those relating to the environment, health and safety, disabled or handicapped persons. "Leases" shall mean those five (5) lease agreements in the form set forth on EXHIBIT "F" attached hereto and made a part hereof, which shall be executed and delivered by Lessee and Purchaser at the Closing, and pursuant to the terms of which Purchaser shall lease the Property to Lessee following the Closing. A schedule of the annual and monthly rentals for each of the Leases is attached to EXHIBIT "F". "Lease Assignment" shall mean an Assignment of Rents and Leases in the form set forth on EXHIBIT "H" attached hereto to be executed by Lessee to Purchaser at Closing, pursuant to the terms of which Lessee shall assign to Purchaser each of the Tenant Leases, if any, as security for the obligations of Lessee under the Leases. 4 8 "Lessee" shall mean Fountain Valley Regional Hospital and Medical Center, a California corporation, the named lessee of the Leases. "Material" and "materially" shall mean a condition, noncompliance, defect or other fact which would: (a) cost, in excess of Fifty Thousand Dollars ($50,000.00) to correct or repair; or (b) result in a loss to Purchaser or a reduction in the value of the Property in excess of Fifty Thousand Dollars ($50,000.00). "Mortgagee Statement" shall mean a payoff letter deposited with the Title Company which Seller shall cause to be executed by any mortgagee with a security interest in the Property and delivered to Purchaser ten days prior to the Closing. "Permits" shall mean all permits, licenses (but excluding Seller's operating licenses,) approvals, entitlements and other governmental, quasi-governmental and non-governmental authorizations including, without limitation, certificates of occupancy or need, required in connection with the ownership, planning, development, construction, use, operation or maintenance of the Property. As used herein, "quasi-governmental" shall include the providers of all utilities services to the Property. "Permitted Exceptions" shall mean those title exceptions or defects which have been approved in writing by Purchaser. "Property" shall mean, collectively, the Land, the Improvements and the Fixtures. "Purchase Price" shall mean an amount equal to Forty-One Million and No/100 Dollars ($41,000,000.00). "Review Period" means a period commencing on the Effective Date and ending five (5) days from the date of the Purchaser's receipt of the last of the following documents: Title Commitment, Exception Documents, Search Reports, Survey, or Due Diligence Materials. "Search Reports" shall mean reports of searches made of the Uniform Commercial Code Records of the County in which the Property is located, and of the office of 5 9 the Secretary of State of the State in which the Property is located and in the State in which the principal office of Seller is located, which searches shall reflect that none of the Property is encumbered by liens. The Search Reports shall be updated, at Seller's expense, at or within one week prior to Closing. "Seller's Personal Property" shall mean all movable machinery and equipment, furniture, furnishings, movable walls or partitions, computers, signage, trade fixtures and all other personal property owned by Seller, including Seller's accounts receivable, bank accounts or similar accounts and operating licenses, deposits with vendors or utilities and consumable inventory and supplies, used or useful in Seller's business on the Property. "Survey" shall mean an "as-built ALTA survey, certified to ALTA requirements, prepared by Robert Bein, William Frost & Associates in such form sufficient to cause the Title Company to delete the standard survey exception from the Title Policy. "Tenant" shall mean the lessees or tenants under the Tenant Leases, if any. "Tenant Lease Estoppel" shall mean the tenant lease estoppel in the form set forth on EXHIBIT "J" attached hereto and made a part hereof which Seller shall cause to be executed by any Tenant and delivered to Purchaser five (5) days prior to the Closing. "Tenant Leases" mean all leases. subleases and other rental agreements, if any, (written or verbal, now or hereafter in effect) that grant a possessory interest in and to any space in the Improvements or that otherwise have rights with regard to the use of the Land or Improvements, and all security deposits or credit enhancements, if any, held in connection therewith. "Title Commitment" shall mean a current commitment issued by the Title Company to the Purchaser pursuant to the terms of which the Title Company shall commit to issue the Title Policy to Purchaser in accordance with the provisions of this Agreement, and reflecting all matters which would be listed as exceptions to coverage on the Title Policy. 6 10 "Title Company" shall mean the national service office of Chicago Title Insurance Company. "Title Policy" shall mean an ALTA Extended Coverage Owner's Policy of Title Insurance, together with such endorsements thereto as are reasonably and customarily required by institutional purchasers of real property similar to the Property, with liability in the amount of the Purchase Price, dated as of the Closing Date, issued by the Title Company, insuring title to the fee interest in the Real Property in Purchaser, subject only to the Permitted Exceptions and to the standard printed exceptions included in the ALTA standard form owner's extended coverage policy of title insurance, with the following modifications: (a) the exception for areas and boundaries shall be deleted; (b) the exception for mechanic's and materialmen's liens shall be deleted; (c) the exception for matters reflected by an accurate survey shall be deleted; (d) the exception for ad valorem taxes shall reflect only taxes for the current and subsequent years not yet delinquent; (e) any exception as to the parties in possession shall be limited to rights of tenants in possession, as tenants only, pursuant to the Leases and the Tenant Leases; (f) there shall be no general exception for visible and apparent easements or roads and highways or similar items (with any exception for visible and apparent easements or roads and highways or similar items to be specifically referenced to and shown on the Survey and identified by applicable recording information); and (g) all other exceptions shall be modified or endorsed in a manner acceptable to Purchaser. ARTICLE II. AGREEMENTS TO SELL, PURCHASE AND LEASE 2.1 Agreement to Sell and Purchase. On the Closing Date, Seller shall sell, convey, assign, transfer and deliver to Purchaser and Purchaser shall purchase, acquire and accept from Seller, the Property, for the Purchase Price and subject to the terms and conditions of this Agreement. 2.2 Agreement to Lease. On the Closing Date, and subject to performance by the Parties of the terms and provisions of this Agreement, Purchaser shall lease 7 11 to Lessee and Lessee shall lease from Purchaser, the Property at the rental and upon the terms and conditions set forth in the Leases. ARTICLE III. PURCHASE PRICE 3.1 Payment of Purchase Price. The Purchase Price shall be paid by Purchaser delivering to the Title Company at the Closing by wire transfer in immediately available funds payable to the order of the Title Company in the sum equal to the Purchase Price, subject to adjustment as herein provided. ARTICLE IV. ITEMS TO BE FURNISHED TO PURCHASER BY SELLER OR GUARANTOR 4.1 Due Diligence Materials. Seller has delivered and Purchaser acknowledges receipt of the following items: (a) True, correct, complete and legible copies of all Tenant Leases, Permits, and Engineering Documents; (b) A true, complete and correct rent roll of all existing Tenant Leases (the "Certified Rent Roll") attached as EXHIBIT "G" if any, setting forth with respect to each of the Tenant Leases; (c) True, correct, complete and legible copies of tax statements or assessments for all real estate and personal property taxes assessed against the Property for the current two prior calendar years; (d) True, correct, complete and legible copies of all existing fire and extended coverage insurance policies and any other insurance policies pertaining to the Property; (e) True, correct, complete and legible copies of current and prior three years audited financial state- 8 12 ments of Seller, prepared in accordance with generally accepted accounting principles consistently applied; (f) True, correct, complete and legible copies of any and all Environmental Reports (as defined in Section 6.1(u)); and (g) True, correct, complete and legible copies of any and all litigation files with respect to any pending litigation and claim files for any claims made or threatened, the outcome of which might have an adverse effect on the Property or the use and operation of the Property. 4.2 Due Diligence Materials of Guarantor. Guarantor has delivered to Purchaser for its review the following items: (a) True, correct, complete and legible copies of current and prior three (3) years audited financial statements of Guarantor, prepared in accordance with generally accepted accounting principles consistently applied. 4.3 Due Diligence Review. During the Review Period, Purchaser shall be entitled to review the Due Diligence Materials delivered by Seller to Purchaser pursuant to the provisions of Sections 4.1 and 4.2 above. If Purchaser shall, for any reason in Purchaser's sole discretion, judgment and opinion, disapprove or be dissatisfied with any aspect of such information, or the Property, then Purchaser shall be entitled to terminate this Agreement by giving written notice thereof to Seller on or before the expiration of the Review Period, whereupon this Agreement shall automatically be rendered null and void, all moneys which have been delivered by Purchaser to Seller or the Title Company shall be immediately returned to Purchaser and thereafter neither Party shall have any further obligations or liabilities to the other hereunder. Alternatively, Purchaser may give written notice setting forth any defect, deficiency or encumbrance and specify a time within which Seller may remedy or cure such default (before or after the expiration of the Review Period). If any defect, deficiency or encumbrance, so noticed, is not satisfied or resolved to the satisfaction of Purchaser, in Purchaser's sole discretion, within the time period specified in the written 9 13 notice, this Agreement shall automatically terminate as provided in this section. ARTICLE V. TITLE AND SURVEY 5.1 Title Commitment, Exception Documents and Survey. The Seller has delivered or caused to be delivered to Purchaser, the Title Commitment, Exception Documents, Survey, and Search Reports. 5.2 Review Period. Purchaser shall have the right to review the Title Commitment, Exception Documents, Search Reports and Survey for a period of five (5) days from the date of Purchaser's receipt of the last of such items. in the event any matters appear therein that are unacceptable to Purchaser, Purchaser shall, within said five (5) day period, notify Seller in writing of such fact. Upon the expiration of said five (5) day period, Purchaser shall be deemed to have accepted all exceptions to title referenced in the Title Commitment and all matters shown on the Survey except for matters which are the subject of a notification made under the preceding sentence, and such accepted exceptions shall be included in the term "Permitted Exceptions" as used herein. In the event that Purchaser objects to any such matters within the five (5) day Review Period, Seller shall have five (5) days from receipt of such notice within which to eliminate or modify any such unacceptable exceptions or items. In the event that Seller is unable to eliminate or modify such unacceptable items to the satisfaction of Purchaser on or before the expiration of said five (5) day period, Purchaser may either (a) waive such objections and accept title to the Property subject to such unacceptable items (which items shall then be deemed to constitute part of the "Permitted Exceptions"), or (b) terminate this Agreement by written notice to Seller, whereupon this Agreement shall automatically be rendered null and void, all moneys which have been delivered by Purchaser to Seller or the Title Company shall be immediately returned to Purchaser, and thereafter neither Party shall have any further obligations or liabilities to the other hereunder. 10 14 5.3 Additional Exceptions. In the event that at any time the Title Commitment, Exception Documents, Survey or Search Reports are modified (other than the deletion or elimination of any item as to which Purchaser has made an objection), Purchaser shall have the right to review and approve or disapprove any such modification and to terminate this Agreement in the event that Seller is unable to eliminate any such matters to the reasonable satisfaction of Purchaser in accordance with the provisions of Section 5.2 above, except that Purchaser's Review Period as to such additional items shall be for a period expiring on the date that is the earlier to occur of (a) five (5) days following the date of Purchaser's receipt of such modification, and (b) the date of Closing, and all other time periods referred to in Section 5.2 shall expire on the date that is the earlier of (i) the final day of the specified time period as set forth therein, and (ii) the Closing Date. ARTICLE VI. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS 6.1 Representations and Warranties of Seller. To induce Purchaser to enter into this Agreement and to purchase the Property, Seller represents and warrants to Purchaser that to Seller's Knowledge: (a) Seller owns and at the Closing will own, and will convey, transfer and assign to Purchaser, fee title to the Land, free and clear of all matters of record, except for the Permitted Exceptions. (b) Seller has duly and validly authorized and executed this Agreement, and the execution and performance of this Agreement are within Seller's partnership's powers. The execution by Seller of this Agreement and the consummation by Seller of the transactions contemplated hereby do not, and at the Closing will not, result in a breach of any of the terms or provisions of, or constitute a default or a condition which upon notice or lapse of time or both would result in a default under any indenture, agreement, instrument or obligation to which Seller is a party or by which the Property or any portion thereof is bound, and does not, and at the Closing will 11 15 not, constitute a violation of any Laws, order, rule or regulatory applicable to Seller or any portion of the Property of any court or of any federal, state or municipal regulatory body or administrative agency or other governmental body having jurisdiction over Seller or any portion of the Property. (c) There are no adverse or other parties in possession of the Property or of any part thereof except under the tenant leases scheduled on EXHIBIT "G". No party has been granted any license, lease or other right relating to the use or possession of the Property, except Tenants under Tenant Leases delivered to Purchaser pursuant to this Agreement. (d) Except as set forth in the Certified Rent Roll and the Tenant Estoppel Certificates, each Tenant Lease, if any, furnished to Purchaser pursuant to this Agreement has not been amended, modified or supplemented in any way that has not been disclosed to Purchaser in writing, and the Tenant Leases, if any, furnished to Purchaser pursuant to this Agreement constitute all written and oral agreements of any kind for the leasing, rental or occupancy of any portion of the Property. (e) Except as set forth on SCHEDULE 1 hereto, none of the Tenant Leases and none of the rents due thereunder have been assigned, pledged or encumbered. (f) Except as set forth in the Certified Rent Roll, no brokerage or leasing commissions are due or payable to any person, firm, corporation or other entity with respect to, or on account of, any Tenant Lease or any extensions or renewals thereof, if any. (g) Except as set forth on SCHEDULE 2 hereto, no notice has been received by Seller from any current issuing insurance company that any policies relating to any portion of the Property will not be renewed, or will be renewed only at a higher premium rate than is presently payable therefor. (h) No pending condemnation, eminent domain, assessment or similar proceeding or charge affecting the Property or any portion thereof exists. Seller has not heretofore received any written notice that any such proceeding or charge is contemplated. Seller has not 12 16 received any written notice of a proposed increase in the assessed valuation of the Property. (i) All Improvements (including all utilities) have been substantially completed and installed in accordance with the plans and specifications approved by the governmental authorities having jurisdiction to the extent applicable. Permanent certificates of occupancy, zoning approvals, all licenses, permits, certificates of need, authorizations and approvals (except for any medical permits required for Tenants) required by all governmental authorities having jurisdiction, and the requisite certificates of the local board of fire underwriters (or other body exercising similar functions) have been issued for the Improvements, and, as of the Closing, all of the same will be in full force and effect. (j) Without independent inquiry, the existing water, sewer, gas and electricity lines, storm sewer and other utility systems on the Land are adequate to serve the current utility needs of the Property. Without independent inquiry, all approvals, licenses and permits required for said utilities have been obtained and are, and will be up to but not after the Closing, in force and effect, except for those items to be required in connection with the change in ownership of the Property and all of said utilities are installed and operating, and all installation and connection charges have been paid in full. (k) Except as set forth on SCHEDULE 3 hereto, without independent inquiry, the Seller has not received any written notice notifying it that the location, construction, occupancy, operation and use of the Property (including the Improvements) violate any applicable law, statute, ordinance, rule, regulation, order or determination of any governmental authority or any board of fire underwriters (or other body exercising similar functions), judicial precedent or any restrictive covenant or deed restriction (recorded or otherwise) affecting the Property or the location, construction, occupancy, operation or use thereof, including, without limitation, all applicable zoning ordinances and building codes, flood disaster laws, health and environmental laws and regulations, the Americans with Disabilities Act and Section 504 of the Rehabilitation Act of 1973. 13 17 (l) Except as set forth in the Tenant Lease Estoppel documents which have been provided to Purchaser, the Improvements and Fixtures are in working order for the current operation of the Property. Except as set forth in the Tenant Lease Estoppels, no part of the Property has been destroyed or damaged by fire or other casualty. Except as set forth in the Tenant Lease Estoppels, there are no unsatisfied written requests for repairs, restorations or alterations with regard to the Property from any person, entity or authority, including but not limited to any Tenant, lender, insurance provider or governmental authority. (m) There exist no service contracts, management or other agreements applicable to the Property other than those furnished to Purchaser pursuant to Section 4.1. There are no agreements or understandings (whether oral or written) with respect to the Property or any portion thereof, to which Seller is a party, other than those delivered to Purchaser pursuant to Section 4.1. (n) Except as set forth on SCHEDULE 4 hereto, without independent inquiry, no default or breach exists by Seller, in any material respect, under any agreements, or any of the covenants, conditions, restrictions, rights-of-way or casements affecting the Property or any portion thereof. (o) There are no actions, suits or proceedings pending or, without independent inquiry, threatened against or affecting the Property or any portion thereof any of the Tenant Leases, or relating to or arising out of the ownership or operation of the Property, or by any federal, state, county or municipal department, commission, board, bureau or agency or other governmental instrumentality, other than those disclosed to Purchaser pursuant to Section 4.1. (p) The Property has free access to presently existing public highways and/or roads. No fact or condition exists which would result in the termination of the current access from the Property to any presently existing public highways and/or roads, adjoining or situated on the Property. (q) Without independent investigation, Seller is not aware of, and has received no notice concerning, 14 18 (i) any boundary line dispute with regard to the Property; or (ii) that all or any portion of the Property is located in an area defined as a wetland under applicable state or federal law. (r) There are no attachments, executions, assignments for the benefit of creditors, or voluntary or involuntary proceedings in bankruptcy or under any other debtor relief laws contemplated by or pending or, without independent inquiry, threatened against Seller or the Property. (s) The following definitions apply to this Section: (i) "Environmental Claim" means any written notice (or oral notice reduced to writing by Seller) by a Person alleging potential liability of Seller (including potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries or penalties) arising out of, based on or resulting from (1) the presence, or release into the environment, of any Materials of Environmental Concern (as defined below) at any location, whether or not owned by the Seller, or (2) circumstances forming the basis of any violation, or alleged violation, of any Environmental Laws; (ii) "Environmental Laws" means any and all federal, state, local and foreign-laws and regulations (including common law) relating to pollution or protection of human health or the environment (including ground water, land surface or subsurface strata), including laws and regulations relating to emissions, discharges, releases or threatened releases of Materials of Environmental Concern, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, recycling, reporting or handling of Materials of Environmental Concern; (iii) "Materials of Environmental Concern" means pollutants, contaminants, hazardous wastes, medical waste, toxic substances, petroleum and petroleum products; and (iv) "Environmental Reports" means (1) that certain Phase I Environmental Assessment, dated June 1994, including all appendices attached thereto, prepared for Guarantor by Gresham, Smith and Partners, and (2) that certain Preliminary Site Assessment dated May 17, 1989 (Job #18552-001-128) prepared by Dames & Moore, as amended; that certain Report Asbestos Consulting Services Bulk Sampling and Analysis for Drywall and Mud dated August 23, 1989 (Job No. 18552- 003-136) prepared by 15 19 Dames & Moore; that certain Underground Storage Tank Compliance Plan dated September 14, 1989 (Job No. 18552-004-015) prepared by Dames & Moore: that certain Report of Liquefaction Studies Proposed Hospital Addition dated July 11, 1978 (Job No. D-78214) prepared by LeRoy Crandall & Associates; that certain Letter dated June 15, 1993 re: Results of Supplemental Geotechnical Investigation (ESE Project No. 6-92-4839) prepared by Environmental Science & Engineering, Inc.; that certain Preliminary Geotechnical Investigation Proposed Emergency Room Expansion dated February 5, 1993 (Project No. 6-92-4042) prepared by Environmental Science & Engineering, Inc.; that certain undated Phase I Preliminary Site Assessment (HLA Project No. 22831-I) prepared by Harding Lawson Associates; that certain Report Engineering Review for Refinancing Medical Office Buildings dated February 9, 1993 (Job No. 08-19-92-48) prepared by Seismic Design Consultants, Inc.; and that certain Geotechnical Investigation Report Proposed Medical Office Building No. 5 by Environmental Science & Engineering, Inc., dated March 29, 1993 Project No. 6-92-4839; and all attachments and appendices and amendments to each of the above listed documents. Seller has delivered to Purchaser complete and genuine copies of the Environmental Reports and Purchaser acknowledges receipt of copies of the Environmental Reports, except for that certain Phase I Environmental Assessment, dated June 1994, prepared by Gresham, Smith and Partners. The Seller and the conduct of its business, is in compliance in all material respects with all applicable Environmental Laws. Except as described in the Environmental Report or on Schedule 5, the Seller has not received any written communication (or reduced to writing any oral communication), whether from a governmental authority, employee or other Person, that alleges that Seller is not in full compliance with all applicable Environmental Laws. Seller has all material permits, licenses and approvals required to own its properties and to conduct its business thereon. All permits and other governmental authorizations currently held by Seller pursuant to the Environmental Laws are identified in SCHEDULE 6. There is no Environmental Claim pending or, to Seller's knowledge, threatened against Seller, or without investigation, to Seller's knowledge, against any Person 16 20 whose liability for any Environmental Claim Seller has or may have retained or assumed either contractually or by operation of law. To Seller's knowledge, except as set forth in the Environmental Reports or on SCHEDULE 6, during the period Seller has operated its business on the Property, no actions, activities, circumstances, conditions, events or incidents, including the release, emission, discharge or disposal of any Materials of Environmental Concern, have occurred that could reasonably be expected to form the basis of any Environmental Claim against Seller. Without in any way limiting the generality of the foregoing, (i) all on-site and off-site locations where Seller currently stores, disposes or arranges for the disposal of Materials of Environmental Concern are identified in SCHEDULE 6, (ii) to Seller's knowledge, all Contracts dealing with the removal storage, disposal and handling of Materials of Environmental Concern are with properly licensed vendors, (iii) to Seller's knowledge, all underground storage tanks, and the capacity and contents of such tanks, located on the Property are identified in the Environmental Report or on SCHEDULE 7, (iv) to Seller's knowledge, except as set forth in the Environmental Reports or on SCHEDULE 8, there is no asbestos contained in or forming part of Property, (v) to Seller's knowledge, except as set forth on SCHEDULE 9, no polychlorinated biphenyls (PCBs) are used or stored at any Property, and (vi) to Seller's knowledge, all cleanup and disposal efforts undertaken by Seller as a result of the leaking underground storage tanks have been performed and completed in accordance with all applicable laws, rules, regulations and judgments in effect at the time of such cleanup. (t) All documents and information delivered by Seller to Purchaser pursuant to the provisions of this Agreement are true, correct and complete, and represent what they purport to be. 6.1.1 Indemnification by Seller. From and after the Closing, Seller shall indemnify, defend and hold harmless Purchaser's Assignee (as defined in Section 11.2 hereof) and each of Purchaser's Assignee's subsidiaries, stockholders, Affiliates, officers, directors, employees, successors and assigns after Closing (collec- 17 21 tively, "Assignee's Indemnified Persons"), from and against any damages, claims, costs, losses, liabilities, expenses or obligations (including interest, penalties, court costs, costs of preparation and investigation, reasonable attorneys', accountants and other professional advisors' fees and associated expenses) (collectively. "Losses") incurred or suffered by Assignee's Indemnified Persons, directly or indirectly, as a result of or arising from: (a) any breach of any representation or warranty of Seller contained herein, whether or not Assignee's Indemnified Persons relied thereon or had knowledge thereof, or the nonfulfillment of any covenant, agreement or other obligation of Seller, set forth in this Agreement, or any agreement, instrument, certificate or other document delivered or to be delivered pursuant hereto; (b) all Building Defects if Seller had knowledge of such Building Defects and failed to disclose such Building Defects in the Schedules hereto; (c) all liabilities arising out of litigation disclosed in the Schedules ("Disclosed Litigation); (d) all Environmental Claims relating to the ownership or the operation of the Property prior to the Closing Date if Seller had knowledge of such Environmental Claims (or facts which would form the basis of such a claim) and failed to disclose such Environmental Claims (or facts which would form the basis of such a claim) in the Schedules hereto or in the Environmental Reports; (e) all Health Law Violations if Seller had knowledge of such Health Law Violations and failed to disclose such Health Law Violations in the Schedules hereto; (f) all Health Law Violations which are not reasonably ascertainable from the terms of any Contract upon which liability is based; (g) all liabilities arising out of or in connection with litigation or other proceedings by third parties for acts or omissions relating to the ownership or operation of the Property prior to the Closing Date, 18 22 excluding Environmental Claims, claims relating to Building Defects and Health Law Violations, if Seller had knowledge of such acts or omissions and failed to disclose such acts or omissions in the Schedules; or h. all liabilities arising out of or in connection with litigation or other proceedings for acts or omissions relating to the ownership or operation of the Property prior to the Closing Date, excluding Environmental Claims, claims based on Building Defects and Health Law Violations. 6.1.2 Limitations/Seller. a. Seller shall have no liability under Section 6.1.1 and no claim under Section 6.1.1 of this Agreement shall: (i) accrue to any of Assignee's Indemnified Persons against Seller under Section 6.1.1(a) unless and until the total liability of Seller in respect of claims under Section 6.1.1(a) exceeds $150,000 in the aggregate; provided that there shall be no $150,000 minimum Loss requirement, and liability of Seller shall arise from and after $1.00 of Losses, in respect of Losses resulting from Seller's intentional, willful or reckless nonfulfillment or breach of any covenant in this Agreement or Seller's intentional misrepresentation or fraud; and (ii) be made unless notice thereof shall have been given by or on behalf of any of Assignee's Indemnified Persons to Seller in the manner provided herein. 6.1.3 Survival of Representations and Warranties: Indemnitv Period. The representations, warranties, covenants and agreements respectively made by Seller in this Agreement or in any certificate respectively delivered by Seller will survive the Closing (a) until sixty (60) calendar days after the expiration of all applicable statutes of limitations (including all periods of extension, whether automatic or permissive) with respect to matters covered by Sections 6.1.1(c), 6.1.1(e) and 6.1.1(g), and (b) until the second anniversary of the Closing Date in the case of Sections 6.1.1(b), 6.1.1(d), 19 23 6.1.1(f) and 6.1.1(h), and all other representations, warranties, covenants and agreements, provided that: (i) any representation, warranty, covenant or agreement that would otherwise terminate in accordance with clause (b) above shall survive if (and only with respect to the matters set forth in) a Claim Notice or an Indemnity Notice shall have been given on or prior to such termination date, until the related claim for indemnification has been satisfied or otherwise resolved in accordance herein; (ii) in the event of fraud in the making of any representation or warranty, or intentional, willful or reckless nonfulfillment or breach of any covenant in this Agreement, all representations, warranties, covenants and agreements that are the subject of the fraud, willful or reckless nonfulfillment or breach, shall survive until sixty (60) calendar days after the expiration of all applicable statutes of limitations (including all periods of extension, whether automatic or permissive) with respect to matters covered thereby; (iii) Covenants and agreements to be performed after the Closing Date will survive the Closing for the term specified therein, or, if no term is specified, indefinitely; and (iv) Rights to indemnification by Assignee's Indemnified Persons pursuant to Section 6.1.1(e) and (h) shall be limited to recovery against the Escrow Amount. 6.1.4 Notice and Procedure. All claims for indemnification by Assignee's Indemnified Persons against the Seller (an "Indemnifying Party") under any provision of Section 6 hereof shall be asserted and resolved as follows: a. (i) If any claim or demand for which an Indemnifying Party would be liable for Losses to a Person claiming indemnification (an "Indemnified Party") is asserted against or sought to be collected from the Indemnified Party by a Person other than Purchaser's Assignee or any Affiliate thereof (a 20 24 "Third Party Claim"), the Indemnified Party shall deliver a Claim Notice (as defined below) with reasonable promptness to the Indemnifying Party. If the Indemnified Party fails to deliver the Claim Notice to the Indemnifying Party within 30 days after the Indemnified Party receives notice of such Third Party Claim, the Indemnifying Party will not be obligated to indemnify the Indemnified Party with respect to such Third Party Claim if and only to the extent that the Indemnifying Party's ability to defend the third Party Claim has been irreparably prejudiced by such failure. The Indemnifying Party will notify the Indemnified Party within 11 days after receipt of the Claim Notice (the "Notice Period") whether the Indemnifying Party intends, at the sole cost and expense of the Indemnifying Party, to defend the indemnified Party against the Third Party Claim. The assumption by the Indemnifying Party of the defense of the Third Party Claim constitutes an admission by the Indemnifying Party that the claim is one for which the Indemnifying Party is ultimately liable under this Section 6. (ii) If the Indemnifying party notifies the Indemnified Party within the Notice Period that the Indemnifying Party intends to defend the Indemnified Party against the Third Party Claim, then the Indemnifying Party will have the right to defend, at its sole cost and expense, the Third Party Claim by all appropriate proceedings, which proceedings will be diligently prosecuted by the Indemnifying Party to a final conclusion or settled at the discretion of the Indemnifying Party (with the consent of the Indemnified Party, which consent will not be unreasonably withheld). The Indemnifying Party will have full control of such defense and proceedings; provided that the Indemnified Party may file during the Notice Period, at the sole cost and expense of the Indemnifying Party, any motion, answer or other pleading that the Indemnified Party may deem necessary or appropriate to protect its interests and not irrevocably prejudicial to the Indemnifying Party (it being understood and agreed that, except as provided in Section 6.1.4(a)(iii), if an Indemnified Party takes any such action that is irrevocably prejudicial and conclusively causes a final adjudication that is materially adverse to the 21 25 Indemnifying Party, the Indemnifying Party will be relieved of its obligations hereunder with respect to that portion of the Third Party Claim prejudiced by the Indemnified Party's action); and provided further that, if requested by the Indemnifying Party, the Indemnified Party shall cooperate, at the sole cost and expense of the Indemnifying Party, with the Indemnifying Party and its counsel in contesting any Third Party Claim that the Indemnifying Party elects to contest or, if appropriate in the judgment of the Indemnified Party and related to the Third Party Claim, in making any counterclaim or cross-claim against any Person (other than the Indemnified Party). The Indemnified Party may participate in, but not control, any defense or settlement of any Third Party Claim assumed by the Indemnifying Party pursuant to this Section 6.1.4(a)(ii) and, except as provided in the preceding sentence the Indemnified Party will bear its own costs and expenses with respect to such participation. Notwithstanding the foregoing, the Indemnifying Party may not assume the defense of the Third Party Claim if (1) the Persons against whom the claim is made, or any impleaded Persons, include both the Indemnifying Party and any Indemnified Party, and (2) representation of both such Persons by the same counsel would be inappropriate due to actual or potential differing interests between them, in which case any Indemnified Party shall have the right to defend the Third Party Claim and to employ counsel at the expense of the Indemnifying Party. (iii) If the Indemnifying Party fails to notify the Indemnified Party within the Notice Period that the Indemnifying Party intends to defend the Indemnified Party against the Third Party Claim or if the Indemnifying Party gives such notice but fails to diligently prosecute or settle the Third Party Claim, or if the Indemnifying Party fails to give any notice whatsoever within the Notice Period, then the Indemnified Party will have the right (but not the obligation) to defend, at the sole cost and expense of the Indemnifying Party, the Third Party Claim by all appropriate proceedings, which proceedings will be diligently prosecuted by the Indemnified Party to a final conclusion or settled at the discretion of the Indemnified Party. The Indemni- 22 26 fied Party will have full control of such defense and proceedings, including any compromise or settlement thereof; provided that, if requested by the Indemnified Party, the Indemnifying Party shall cooperate, at the sole cost and expense of the Indemnifying Party, with the Indemnified Party and its counsel in contesting the Third Party Claim which the Indemnified Party is contesting, or, if appropriate in the judgment of the Indemnified Party and related to the Third Party Claim, in making any counterclaim or cross claim against any Person (other than the Indemnifying party). (iv) Notwithstanding the foregoing provisions of Section 6.1.4(a)(iii), if the Indemnifying Party notifies the Indemnified Party within the Notice Period that the Indemnifying Party disputes its obligation to indemnify the Indemnified Party against the Third Party Claim, and if such dispute is resolved pursuant to Section 6.1.4(c) in favor of the Indemnifying Party, the Indemnifying Party will not be required to bear the costs and expenses of the Indemnified Party's defense pursuant to this Section 6.1.4(a)(iii) or of the Indemnifying Party's participation therein at the Indemnified Party's request, and the Indemnified Party will reimburse the Indemnifying Party in full for all such costs and expenses. The Indemnifying Party may participate in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to Section 6.I.4(a)(iii), but the Indemnifying Party will bear its own costs and expenses with respect thereto if such participation is not at the request of the Indemnifying Party. (b) In the event any Indemnified Party should have a claim against any Indemnifying Party hereunder that is not a Third Party Claim, the Indemnified Party shall deliver an Indemnity Notice (as defined below) with reasonable promptness to the Indemnifying Party. The failure by any Indemnified Party to give the notice referred to in the preceding sentence shall not impair such party's rights hereunder except to the extent that an Indemnifying Party demonstrates that it has been irreparably prejudiced thereby. If the Indemnifying Party fails to notify the Indemnified Party within ten (10) days following its receipt of the Indemnity Notice 23 27 that the Indemnifying Party disputes its obligation to indemnify the Indemnified Party hereunder, the claim will be conclusively deemed a liability of the Indemnifying Party hereunder. (c) If the Indemnifying Party timely disputes its liability with respect to claim described in a Claim Notice or an Indemnity Notice, the Indemnifying Party and the Indemnified Party shall proceed promptly and in good faith to negotiate a resolution of such dispute within sixty (60) days following receipt of a Claim Notice or an Indemnity Notice. (d) The Indemnifying Party shall pay the amount of any liability to the Indemnified Party within thirty (30) days following its receipt of a Claim Notice or an Indemnity Notice, or on such later date (i) in the case of a Third Party Claim, as the Indemnified Party suffers Losses in respect of the Third Party Claim, or (ii) in the case of an Indemnity Notice in which the amount of the claim is estimated, promptly after the amount of such claim becomes finally determined. In the event the Indemnified Party is not paid in full for its claim in a timely manner after the Indemnifying Party's obligation to indemnify and the amount thereof has been determined in accordance with this Section 6, the amount due shall bear interest from the date that the Indemnifying Party received this Claim Notice or the Indemnity Notice until paid at the interest rate provided in Section 1.8 of the Stock Purchase Agreement, and in addition to any other rights it may have against the Indemnifying Party, the Indemnified Party shall have the right to set-off the unpaid amount of such claim against any amount owed by it to the Indemnifying Party. (e) The term "Claim Notice" means written notification of a Third Party Claim by an Indemnified Party to an Indemnifying Party under Section 6 enclosing a copy of all papers served, if any, and specifying the nature of and alleged basis for the Third Party Claim and, to the extent then feasible, the alleged amount or the estimated amount of the Third Party Claim. (f) The term "Indemnity Notice" means written notification of a claim for indemnity under Section 6 hereof other than a Third Party Claim by an Indemnified Party to an Indemnifying Party pursuant to Section 24 28 6.1.4(b) hereof, specifying the nature of and specific basis for the claim and, to the extent then feasible the amount or the estimated amount of the claim. (g) Any estimated amount of a claim submitted in a Claim Notice or an Indemnity Notice shall not be conclusive of the final amount of such claim, and the giving of a Claim Notice when all Indemnity Notice is properly due, or the giving of an Indemnity Notice when a Claim Notice is properly due, shall not impair such Indemnified Party's rights hereunder except to the extent that an Indemnifying Party demonstrates that it has been irreparably prejudiced thereby. Notice of any claim comprised in part of Third Party Claims and claims that are not Third Party Claims may be given pursuant to either Section 6.1.4(a) or 6.1.4(b). (h) For purposes of this Section 6 and with respect to taxes, a Third Party Claim includes a Revenue Agent's Report, Statutory Notice of Deficiency, Notice of Proposed Assessment, or any other official written notice from a Taxing authority that Taxes are due or that a Tax audit will be conducted. 6.2 Covenants and Agreements of Seller. Seller covenants and agrees with Purchaser, from the Effective Date until the Closing or earlier termination of this Agreement: (a) Seller shall: (i) operate the Property in the ordinary course of business consistent with reasonable and prudent business practices; (ii) enter into no new Tenant Leases except as shall be approved in writing by Purchaser; (iii) grant no new rent concessions or special termination terms to any Tenants; (iv) not collect rents in advance for more than one (1) month; and (v) maintain, repair and replace the Property all Improvements, landscaping and other appurtenances in good condition and repair, ordinary wear and tear excepted. (b) During normal business hours, Purchaser shall be entitled to make all inspections or investigations desired by Purchaser with respect to the Property or any portion thereof, and shall have complete physical access to the Property and each of the leased premises located thereon, which access shall not unreasonably 25 29 interfere with the operations of the Tenants in possession. (c) Seller shall cause to be maintained in full force fire and extended coverage insurance upon the Property and public liability insurance with respect to damage or injury to persons or property occurring on or relating to operation of the Property in at least such amounts as are maintained by Seller on the date of this Agreement. (d) Seller shall pay when due all bills and expenses of the Property, except for the items to be paid out of the proceeds at Closing. Seller shall not voluntarily enter into or assume any new contracts or obligations with regard to the Property which are in addition to or different from those furnished and disclosed to Purchaser and reviewed and approved pursuant to Section 4.1. (e) Seller shall not create or voluntarily permit to be created any liens or easements affecting any portion of the Property or the uses thereof without the prior written consent of Purchaser. (f) Seller will pay, as and when due, all interest and principal and all other charges payable under any indebtedness of Seller from the date hereof until Closing and will not suffer or permit any default or amend or modify the documents evidencing or securing any such indebtedness without the prior consent of Purchaser. (g) Seller will: (i) give to Purchaser, its attorneys, accountants and other representatives, during normal business hours and as often as may be reasonably requested, full access to the Property and to all books, records and files relating to the Property; (ii) furnish to Purchaser all information concerning the Property (excluding medical records) which the Purchaser, its attorneys, accountants or other representatives will reasonably request; (iii) furnish to Purchaser, if Purchaser deems necessary, its attorneys, accountants and other representatives, all information necessary for an audit to be conducted at Purchaser's expense only with respect to the operations of the Property for the thirty-six (36) month period preceding the Closing, 26 30 including, without limitation, the general ledger, check register, cash receipts and disbursement journals, bank statements, rent rolls, Tenant Leases, invoices relating to direct operating expenses, ad valorem tax statements, payroll records, schedule of accounts payable, schedule of accounts receivable to the extent available; and (iv) cooperate with Purchaser, if Purchaser deems necessary, its attorneys, accountants and other representatives, in the conducting of such audit and will execute and deliver to the accountants conducting such audit such statement as may be reasonably required addressing, among other things, any irregularities or undisclosed claims or liabilities that could have a material effect on the results of the audit. 6.3 Representations and Warranties of Purchaser. Purchaser represents and warrants to Seller that: (a) Purchaser has duly and validly authorized and executed this Agreement, and has full right, power and authority to enter into this Agreement and to consummate the transactions provided for herein, and the joinder of no person or entity will be necessary to purchase the Property from Seller at Closing, and to lease the Property following Closing. (b) The execution by Purchaser of this Agreement and the consummation by Purchaser of the transactions contemplated herein do not, and at the Closing will not, result in any breach of any of the terms or provisions of or constitute a default or a condition which upon notice or lapse of time or both would ripen into a default under any indenture, agreement, instrument or obligation to which Purchaser is a party; and does not and at the Closing will not constitute a violation of any order, rule or regulation applicable to Purchaser or any portion of the Property of any court or of any federal or state or municipal regulatory body or administrative agency or other governmental body having jurisdiction over Purchaser. 27 31 ARTICLE VII. CONDITIONS TO THE PURCHASER'S AND SELLER'S OBLIGATIONS 7.1 Conditions to the Purchaser's Obligations. The obligations of Purchaser to purchase the Property from Seller and to consummate the transactions contemplated by this Agreement are subject to the satisfaction as of the Closing, of each of the following conditions: (a) All of the representations and warranties of Seller set forth in this Agreement shall be true at the Closing in all material respects. (b) Seller shall have materially delivered, performed, observed and complied with, all of the items, instruments, documents, covenants, agreements and conditions required by this Agreement to be delivered, performed, observed and complied with by it prior to, or as of, the Closing. (c) Neither Seller, any Guarantor, nor Lessee shall be in receivership or dissolution or have made any assignment for the benefit of creditors, or have been adjudicated a bankrupt, or have filed a petition in voluntary bankruptcy, a petition or answer seeking reorganization or an arrangement with creditors under the federal bankruptcy law or any other similar law or statute of the United States or any state and no such petition shall have been filed against it. (d) No material adverse change shall have occurred with respect to the condition, financial or otherwise, of the Property or the Seller. (e) Neither the Property nor any part thereof or interest therein shall have been taken by execution or other process of law in any action prior to Closing. (f) Guarantor shall have obtained at Guarantor's expense and delivered to Purchaser the Phase Environmental Assessment prepared by Gresham, Smith and Partners, dated June, 1994. (g) Purchaser shall have satisfactorily completed an inspection of the Property with respect to the 28 32 physical condition thereof by agents or contractors selected by Purchaser. (h) Lessee shall have executed and delivered to Purchaser the Leases and Lease Assignment and Guarantor shall have executed and delivered to the Purchaser the Guaranty. (i) Purchaser shall have received, in form acceptable to Purchaser, evidence of compliance by the Property with all building codes (certificates of occupancy), zoning ordinances and other governmental entitlements as necessary for the operation of the Property for the current and intended use. (j) All necessary approvals, consents, estoppel certificates and the like of third parties to the validity and effectiveness of the transactions contemplated hereby have been obtained. Seller shall provide estoppel certificates from tenants of the Land and/or Improvements in the form of EXHIBIT "J" and a Mortgagee Statement in the form of EXHIBIT "K". (k) Purchaser is reasonably satisfied that the Property is sufficient and adequate for Lessee to carry on the business now being conducted thereon and the Property is in good condition and repair as reasonably required for the proper operation and use thereof in compliance with applicable laws and the requirements of applicable accreditation and licensing authorities. (l) Purchaser shall have received from the Seller's counsel a legal opinion in a form acceptable to the parties. (m) No material portion of the Property shall have been destroyed by fire or casualty. (n) No condemnation, eminent domain or similar proceedings shall have been commenced or threatened with respect to any portion of the Property. (o) Purchaser shall have received from Guarantor's counsel a legal opinion generally in the form of EXHIBIT "I" attached hereto. 29 33 (p) Purchaser shall have received from Guarantor an origination fee in the amount of $35,000.00. (q) Purchaser shall have received from the Seller the Schedules referred to herein. (r) The transactions contemplated by the Stock Purchase Agreement among OrNda HealthCorp, Summit Health, Ltd. and Fountain Valley Medical Development Co., a California limited partnership, of even date herewith shall have been consummated. 7.2 Failure of Conditions to Purchaser's Obligations. In the event any one or more of the conditions to Purchaser's obligations are not satisfied in whole or in part as of the Closing, Purchaser, at Purchaser's option, shall be entitled to: (a) terminate this Agreement by giving written notice thereto to Seller, whereupon all moneys which have been delivered by Purchaser to Seller or the Title Company shall be immediately refunded to Purchaser and Purchaser shall have no further obligations or liabilities hereunder; or (b) proceed to Closing hereunder. 7.3 Conditions to Seller's Obligations. The obligations of Seller to sell the Property to Purchaser and to consummate the transactions contemplated by this Agreement are subject to the satisfaction as of the Closing, of each of the following conditions: (a) The transactions contemplated by the Stock Purchase Agreement among OrNda HealthCorp, Summit Health, Ltd. and Fountain Valley Medical Development Co., a California limited partnership, of even date herewith, shall have been consummated. ARTICLE VIII. PROVISIONS WITH RESPECT TO THE CLOSING 8.1 Seller's Closing Obligations. At the Closing, Seller shall furnish and deliver to the Title Company for delivery to Purchaser the following: (a) The Deed, Title Policy (with such endorsements as Purchaser reasonably requests or a binding 30 34 commitment to issue the same), Certificate of Non-Foreign Status, Closing Certificate, each duly executed and acknowledged by Seller. (b) An affidavit, agreement and indemnity executed by Seller and dated as of the Closing Date, stating that there are no debts for any work that has been done or materials furnished to the Property prior to and as of Closing which remain unpaid or for which no accruals have been made and stating that Seller shall indemnify, save and protect Purchaser and its assigns harmless from and against any and all claims, liabilities, losses, damages, causes of action and expenses (including courts costs and reasonable attorney's fees related thereto) arising out of, in connection with, or resulting from, the use, occupancy and operation, of the Property and the performance of such work up to and including the date of Closing, in form and substance mutually acceptable to counsel for Seller and Purchaser. (c) Search Reports, dated not more than fifteen (15) days prior to Closing, evidencing no UCC-I Financing Statements or other filings in the name of Seller with respect to the Property, or evidence that the same will be released at closing. (d) Such affidavits or letters of indemnify as the Title Company shall reasonably require in order to omit from its insurance policy all exceptions for unfiled mechanic's, materialman's or similar liens. (e) An opinion of Seller's counsel, dated as of the Closing Date, in a form mutually acceptable to Seller's counsel and the Purchaser. (f) Duplicates of keys, combinations, codes and security information to all locks on the Property in the possession of Seller. (g) Such instruments or documents as are necessary, or reasonably required by Purchaser or the Title Company, to evidence the status and capacity of Seller and the authority of the person or persons who are executing the various documents on behalf of Seller in connection with the purchase and sale transaction contemplated hereby. 31 35 (h) Such other documents, as are reasonably required by Purchaser to carry out the terms and provisions of this Agreement. 8.2 Purchaser's Closing Obligations. At the Closing, Purchaser shall deliver to the Title Company for delivery: (a) To Seller, by wire transfer, to the order of the Title Company representing the cash portion of the Purchase Price due in accordance with Section 3.1 herein. (b) To OrNda, the Leases and the Lease Assignment, duly executed and acknowledged by Purchaser. (c) To Seller, such instruments as are necessary, or reasonably required by Seller or the Title Company to evidence the authority of Purchaser to consummate the purchase and sale transaction contemplated hereby and to execute and deliver the closing documents on the Purchaser's part to be delivered and a certificate from Purchaser concerning post-Closing expenses. (d) To Seller, such other documents, including, without limitation, an indemnity from Purchaser relating to post-closing obligations, as are reasonably required by Seller to carry out the terms and provisions of this Agreement. 8.3 Guarantor's Closing Obligations. At the Closing, Guarantor shall furnish and deliver or cause to be delivered to the Title Company for delivery to Purchaser, the following: (a) The Guaranty, duly executed and acknowledged by Guarantor. (b) An opinion of Guarantor's counsel, dated as of the Closing Date, in a form mutually acceptable to Guarantor and the Purchaser. (c) The Leases, duly executed and acknowledged by Lessee. (d) Payment of $35,000.00 as an origination fee. 32 36 ARTICLE IX. EXPENSES OF CLOSING 9.1 Adjustments. There shall be an adjustment of taxes, assessments, water or sewer charges, gas, electric, telephone or other utilities, operating expenses, employment charges, premiums on insurance policies, rents and other normally proratable items. 9.2 Closing Costs. Seller shall pay: (a) any and all state, municipal or other documentary or transfer taxes payable in connection with the delivery of any instrument or document provided in or contemplated by this Agreement; (b) the charges for or in connection with the recording and/or filing of any instrument or document provided herein or contemplated by this Agreement; (c) any and all fees payable by Seller to any broker employed by Seller in connection with this transaction and hold Purchaser harmless therefrom including any of its reasonable costs and attorney fees arising therefrom; (d) Seller's legal, accounting and other professional fees and expenses and the cost of all opinions, certificates, instruments, documents and papers required to be delivered, or to cause to be delivered, by Seller hereunder, including without limitation, the cost of performance by Seller of its obligations hereunder; and (e) all other costs and expenses which are expressly required to be paid by Seller pursuant to other provisions of this Agreement. Guarantor and Seller shall each pay 50% of (a) all title examination fees and premiums for the Title Policy and (b) the cost of the Search Reports and (c) the cost of the Survey. In addition, Purchaser and Seller shall each be responsible for other costs in the usual and customary manner for this kind of transaction in the county where the Property is located. 9.3 Commissions/Broker's Fees. Seller shall pay any and all commissions/broker's fees due CitiBank Securities, Inc. or any other broker employed by Seller in connection with this transaction and hold Purchaser harmless therefrom including any of its reasonable costs and attorney fees arising therefrom. 33 37 ARTICLE X. DEFAULT AND REMEDIES 10.1 Seller's Default; Purchaser's Remedies. (a) Seller's Default. Seller shall be deemed to be in default hereunder upon the occurrence of any one or more of the following events: (i) any of Seller's warranties or representations set forth herein shall be materially untrue at Closing; or (ii) Seller shall fail to meet, comply with, or perform for any reason other than a default by Purchaser hereunder any covenant, agreement or obligation on its part required within the time limits and in the manner required in this Agreement for any reason other than a default by Purchaser hereunder. (b) Purchaser's Remedies. In the event Seller shall be deemed to be in default hereunder Purchaser may, at Purchaser's sole option, do any one or more of the following as its only remedies: (i) terminate this Agreement by written notice delivered to Seller on or before the Closing, in which event neither party shall have any further obligation hereunder; or (ii) enforce specific performance of this Agreement against Seller including Purchaser's reasonable costs and attorneys fees in connection therewith. (c) Return of Payments. Upon the occurrence of any event deemed to be a default by Seller hereunder, all payments previously made by Purchaser to Seller or the Title Company hereunder shall be forthwith returned to Purchaser by the Title Company on receipt of written certification from Purchaser that Seller has defaulted under this Agreement. If such sums are to be returned to Purchaser in accordance with this Section 10.1(c), Seller shall promptly, on written request from Purchaser, execute and deliver such documents as may be required to cause the Title Company to return such sums to Purchaser. 10.2 Purchaser's Default; Seller's Remedies. (a) Purchaser's Default. Purchaser shall be deemed to be in default hereunder if Purchaser shall fail to deliver, at the Closing, any of the items specified in Section 8.3 hereof for any reason other than a default by 34 38 Seller hereunder, the failure to satisfy or waive any condition to Purchaser's obligations hereunder or termination of this Agreement prior to Closing. (b) Seller's Remedy. In the event Purchaser shall be deemed to be in default hereunder, Seller, as Seller's sole and exclusive remedy for such default, shall be entitled (i) to terminate this Agreement and shall have no further obligations or liability hereunder or (ii) to require Guarantor to close upon the same terms as provided herein and as provided at Section 11.11, whereupon Purchaser shall be released of any and all obligations to Seller and/or Guarantor. ARTICLE XI. MISCELLANEOUS 11.1 Survival. All of the representations, warranties, covenants, agreements and indemnities of Seller and Purchaser contained in this Agreement, to the extent not performed at the Closing, shall survive the Closing for two (2) years only, and shall not be deemed to merge upon the acceptance of the Deed by Purchaser. 11.2 Assignment. On the Closing Date, pursuant to an Assignment of Rights in the form attached hereto as EXHIBIT "M", Purchaser shall assign this Agreement and all of its rights hereunder to Summit Health, Ltd., a California corporation (the "Assignee"). Lessee shall be entitled to all of the rights and powers of Purchaser hereunder. Purchaser shall have no rights or powers against the Seller after the Assignment. 11.3 Notices. All notices, requests and other communications under this Agreement shall be in writing and shall be delivered in person, sent by certified mail, return receipt requested or delivered by recognized expedited delivery service and addressed as follows: 35 39 If intended for Purchaser: David R. Emery Healthcare Realty Trust Incorporated 3310 West End Avenue Nashville, Tennessee 37203 Phone: (615) 269-8175 Fax: (615) 269-8122 With a copy to: John A. Gupton, III, Esq. Heiskell, Donelson, Bearman, et al. 511 Union Street - Suite 600 Nashville, Tennessee 37219-1745 Phone: (615) 256-0815 Fax: (615) 726-7378 If intended for Seller: Fountain Valley Medical Development Co., a California limited partnership Attention: Thomas M. Ways, CEO 11180 Warner Avenue Fountain Valley, California 92708-9927 Phone: (714) 966-7200 Fax: (714) 435-0465 With a copy to Guarantor: OrNda Health Corp 3401 West End Avenue, Suite 700 Nashville, Tennessee 37203 Attn: James H. Spalding Phone: (615) 383-8599 Fax: (615) 783-1232 With a copy to: Sherwin L. Memel, Esq. Manatt, Phelps & Phillips 11355 W. Olympic Boulevard Los Angeles, California 90064-1614 Phone: (310) 312-4000 Fax: (310) 312-4224 36 40 If intended for Seller after Closing: Fountain Valley Medical Development Co. c/o BDO Seidman 1900 Avenue of the Stars-11th Floor Los Angeles, California 90067 Attn: Arthur R. Nemiroff With a copy to Guarantor: OrNda HealthCorp 3401 West End Avenue, Suite 700 Nashville, Tennessee 37203 Attn: James H. Spalding Phone: (615) 383-8599 Fax: (615) 783-1232 or at such other address, and to the attention of such other person, as the parties shall give notice as herein provided. A notice, request and other communication shall be deemed to have been duly received if delivered in person or by a recognized delivery service, when left at the address of the recipient, provided that if a notice, request or other communication is served by hand or is received by facsimile on a day which is not a business day, or after 5:00 P.M. on any business day at the addressee's location, such notice or communication shall be deemed to be duly received by the recipient at 9:00 A.M. on the first business day thereafter. 11.4 Entire Agreement; Modifications. This Agreement embodies and constitutes the entire understanding between the parties with respect to the transactions contemplated herein, and all prior or contemporaneous agreements, understandings, representations and statements (oral or written) are merged into this Agreement. Neither this Agreement nor any provision hereof may be waived, modified, amended, discharged or terminated except by an instrument in writing signed by the Party against whom the enforcement of such waiver, modification, amendment, discharge or termination is sought, and then only to the extent set forth in such instrument. 11.5 Applicable Law. THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED. 37 41 11.6 Captions. The captions in this Agreement are inserted for convenience of reference only and in no way define, describe, or limit the scope or intent of this Agreement or any of the provisions hereof. 11.7 Binding Effect. This Agreement shall be binding-upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, legal representatives and permitted successors, and assigns. 11.8 Time is of the Essence. With respect to all provisions of this Agreement, time is of the essence. However, if the first date of any period which is set out in any provision of this Agreement falls on a day which is not a Business Day, then, in such event, the time of such period shall be extended to the next day which is a Business Day. 11.9 Waiver of Conditions. Any Party may at any time or times, at its election, waive any of the conditions to its obligations hereunder, but any such waiver shall be effective only if contained in a writing signed by such Party. No waiver by a Party of any breach of this Agreement or of any warranty or representation hereunder by the other Party shall be deemed to be a waiver of any other breach by such other Party (whether preceding or succeeding and whether or not of the same or similar nature), and no acceptance of payment or performance by a Party after any breach by the other Party shall be deemed to be a waiver of any breach of this Agreement or of any representation or warranty hereunder by such other Party, whether or not the first Party knows of such breach at the time it accepts such payment or performance. No failure or delay by a Party to exercise any right it may have by reason of the default of the other Party shall operate as a waiver of default or modification of this Agreement or shall prevent the exercise of any right by the first Party while the other Party continues to be so in default. 11.10 Guaranty of Purchaser's Obligations. In consideration of Seller entering into an agreement of even date herewith among Seller, Summit Health, Ltd. as buyer, and Guarantor, Guarantor as principal obligor and not merely as a surety, hereby unconditionally guarantees full, punctual and complete performance by Purchaser of 38 42 all Purchaser's obligations under or arising out of or in connection with this Agreement and so undertakes to Seller that, if and when Purchaser is in default, Guarantor: (a) will on demand duly and promptly perform or procure the performance of Purchaser's obligations; and (b) will indemnify and at all times hold harmless Seller against all costs, charges and expenses which it may sustain or incur by reason of the failure of Purchaser to perform any of its obligations in whole or in part. The foregoing guarantee: (a) is a continuing guarantee and will remain in full force and effect until the obligations and liabilities of Purchaser under or arising out of or in connection with the Agreement have been duly performed or been discharged; (b) will continue to be effective or will be reinstated as the case may be if at any time any sum which has become payable to Seller hereunder and has been paid has to be restored by it upon the bankruptcy, liquidation or reorganization of Purchaser or otherwise; and (c) will continue and survive any assignment of Purchaser's rights, duties or obligations. (SIGNATURES ON THE FOLLOWING PAGE] 39 43 EXECUTED to be effective as of the Effective Date. PURCHASER: Healthcare Realty Trust Incorporated, a Maryland corporation By: ----------------------------- Its: --------------------------- Date: --------------------------- Purchaer's Tax Identification Number: ------------------------ SELLER: Fountain Valley Medical Development Co., a California limited partnership By: ----------------------------- Its: --------------------------- Date: --------------------------- Seller's Tax Identification Number: ------------------------ GUARANTOR: OrNda Healthcorp, a Delaware corporation By: ----------------------------- Its: --------------------------- Date: --------------------------- Guarantor's Tax Identification Number: ------------------------ 40 44 LIST OF EXHIBITS Exhibit "A" - Real Property Description Exhibit "B" - Intentionally Deleted Exhibit "C" - Certificate of Non-Foreign Status Exhibit "D" - Closing Certificate Exhibit "E" - Guaranty Exhibit "F" - Leases (Form of Lease) Exhibit "G" - Certified Rent Roll Exhibit "H" - Assignment of Rents and Leases Exhibit "I" - Intentionally Deleted Exhibit "J" - Tenant Lease Estoppel Exhibit "K" - Mortgagee Statement Exhibit "L" - Surveyor's Certificate Exhibit "M" - Assignment of Rights Schedules 1-9 41 EX-12 4 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 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 $ 5,496 $ 2,850 $ 2,764 $ 4,036 Interest expenses... 104,378 80,815 59,167 40,229 68,661 108,269 49,948 59,331 81,941 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 $119,171 $56,127 $ 65,991 $ 90,581 ======== ========= ======== ======== ======= ========= ======= ======== ========= Earnings: Income (loss) before income taxes and extraordinary item.............. $(65,775) $(130,165) $(16,896) $(68,836) $14,768 $ 34,440 $11,695 $(21,929) $ 19,305 Fixed charges (excluding capitalized interest and preferred stock dividends)........ 115,702 85,897 62,713 44,910 75,991 118,238 55,446 64,809 89,399 -------- --------- -------- -------- ------- --------- ------- -------- --------- $ 49,927 $ (44,268) $ 45,817 $(23,926) $90,759 $152,678 $67,141 $ 42,880 $108,704 ======== ========= ======== ======== ======= ========= ======= ======== ========= Ratio of earnings to fixed charges..... (1) (1) (1) (1) 1.18 1.28 1.20 (1) 1.20 ======== ========= ======== ======== ======= ========= ======= ======== =========
- --------------- (1) Earnings were inadequate to cover fixed charges. EX-23.1 5 CONSENTS OF INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in Amendment No. 1 to the Registration Statement (Form S-3 No. 33-54651) and related Prospectus of OrNda HealthCorp/Summit Health Ltd. for the registration of $125,000,000 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 August 2, 1994 2 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 August 2, 1994 EX-24.3 6 CERTIFIED RESOLUTION OF BOARD 1 SUMMIT HEALTH LTD. SECRETARY'S CERTIFICATE I, Karen H. Abbott, Assistant Secretary of Summit Health Ltd., a California corporation ("the Company"), DO HEREBY CERTIFY that the following is a true and correct excerpt from the minutes of a Unanimous Written Consent of the Board of Directors of the Company dated July 18, 1994, and that the resolution therein contained is still in full force and as of the date hereof has not been in any respect altered, revised, or repealed, and that the resolution does not in any manner contravene the Articles of Incorporation or the ByLaws of the Company: RESOLVED, that each officer 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 or director might or could do in person; IN WITNESS WHEREOF, I have hereunto set my hand and the Seal of the Corporation this twenty sixth day of July, 1994. /s/ Karen H. Abbott ------------------- Karen H. Abbott Assistant Secretary EX-25 7 FORM T-1 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE ----------------------------- CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) ----------------------------- NATIONSBANK OF TENNESSEE, NATIONAL ASSOCIATION (Exact name of trustee as specified in its charter) 62-0167463 (I.R.S. employer identification no.) ONE NATIONSBANK PLAZA. NASHVILLE, TENNESSEE 37239-1697 (Address of principal executive offices) (Zip Code) ----------------------------- JOHN T. HENDERSON NATIONSBANK OF GEORGIA, NATIONAL ASSOCIATION AREA ADMINISTRATION 6000 FELDWOOD ROAD COLLEGE PARK, GEORGIA 30349 (404) 774-6074 (Name, Address and telephone number of agent for service) with a copy to: NATIONSBANK OF TENNESSEE, NATIONAL ASSOCIATION ONE NATIONSBANK PLAZA NASHVILLE, TN 37239-1697 ATTENTION: CORPORATE TRUST OrNda HealthCorp Summit Health Ltd. (Exact name of obligor as specified in its charter) DELAWARE 75-1776092 CALIFORNIA 95-3154694 (State or other jurisdiction (IRS employer of incorporation or organization) identification no.) 3401 WEST END AVENUE, SUITE 700 NASHVILLE, TN 37203-1042 (Name, address, including zip code, and telephone number, including area code, of principal executive office) ----------------------------- __% SENIOR SUBORDINATED NOTES DUE 2004 (Title of the indenture securities) ----------------------------- 2 1. General information. Furnish the following information as to the trustee-- (a) Name and address of each examining or supervising authority to which it is subject. THE COMPTROLLER OF THE CURRENCY, WASHINGTON, D.C. FEDERAL RESERVE BANK OF ATLANTA 104 MARIETTA STREET, N.W. ATLANTA, GEORGIA FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D.C. (b) Whether it is authorized to exercise corporate trust powers. YES. 2. Affiliations with obligor. If the obligor is an affiliate of the trustee, describe each such affiliation. NONE. 16. List of Exhibits. List below all exhibits filed as a part of this statement of eligibility. (1) A copy of the Articles of Association of the trustee as now in effect. (See Exhibit 1 to Form T-1, Exhibit 25 to Registration No. 33-67040, which is incorporated herein by reference.) (2) A copy of the certificate of authority of the trustee to commence business. (See Exhibit 2 to Form T-1, Exhibit 25 to Registration No. 33-67040, which is incorporated herein by reference.) (3) A copy of the authorization of the trustee to exercise corporate trust powers. (See Exhibit 3 to Form T-1, Exhibit 25 to Registration No. 33-67040, which is incorporated herein by reference.) (4) A copy of the existing by-laws of the trustee, as amended to date. (See Exhibit 4 to Form T-1, Exhibit 25 to Registration No. 33-67040, which is incorporated herein by reference.) (6) The consent of the trustee required by Section 321(b) of the Trust Indenture Act of 1939. (7) A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority. 3 SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939 the trustee, NationsBank of Tennessee, National Association, a corporation organized and existing under the laws of the United States of America, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Atlanta and the State of Georgia, on the 25th day of July, 1994. NATIONSBANK OF TENNESSEE, NATIONAL ASSOCIATION By: /s/ Esther Fannin . -------------------------- Esther Fannin Vice President 4 EXHIBIT 6 TO FORM T-1 CONSENT OF TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939 in connection with the proposed issuance of OrNda HealthCorp and Summit Health Ltd. __% Senior Subordinated Notes Due 2004, NationsBank ofTennessee, National Association hereby consents that reports of examinations by Federal, State, Territorial or District Authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. NATIONSBANK OF TENNESSEE, NATIONAL ASSOCIATION By: /s/ Esther Fannin . -------------------------- Esther Fannin Vice President 5 EXHIBIT 7 TO FORM T1 Comptroller of the Currency Administrator of National Banks REPORT OF CONDITION Consolidating domestic and foreign subsidiaries of the NATIONSBANK OF TENNESSEE, N.A. OF NASHVILLE, in the state of Tennessee, at the close of business on March 31, 1994 published in response to call made by Comptroller of the Currency, under Title 12, United States Code, Section 161. Charter Number 17561, Comptroller of the Currency, Third District.
Statement of Resources and Liabilities Dollar Amounts in Thousands ASSETS Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin 334,851. Securities Held-to-maturity securities 609,131. Available-for-sale securities 439,826. Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs: Federal funds sold 129,000. Loans and lease financing receivables: Loans and leases, net of unearned income 3,471,330. LESS: Allowance for loan and lease losses 47,266. Loans and leases, net of unearned income, allowance, and reserve 3,424,064. Premises and fixed assets (including capitalized leases) 62,192. Other real estate owned 12,178. Customers' liability to this bank on acceptances outstanding 34,881. Intangible assets 433. Other assets 57,191. Total assets 5,103,747.
6
LIABILITIES Deposits: In domestic offices 4,154,070. Noninterest-bearing 736,576 Interest-bearing 3,417,494 In foreign offices, Edge and Agreement subsidiaries, and IBFs 110,937. Interest-bearing 110,937 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs: Federal funds purchased 136,556. Securities sold under agreements to repurchase 177,099. Demand notes issued to the U.S. Treasury 45,501. Other borrowed money With original maturity of one year or less 183 With original maturity of more than one year 2,205 Bank's liability on acceptances executed and outstanding 34,881. Other liabilities 41,275. Total liabilities 4,702,707. EQUITY CAPITAL Common stock 55,583. Surplus 96,967. Undivided profits and capital reserves 247,886. Net unrealized holding gains (losses) on available-for-sale securities 604. Total equity capital 401,040. Total liabilities, limited-life preferred stock, and equity capital 5,103,747.
We, the undersigned directors (Trustees), attest to the correctness of this Report of Condition. We declare that it has been examined by us, and to the best of our knowledge and belief has been prepared in conformance with the instructions and is true and correct. James H. Hance, Jr. ) Jerry L. Benefield ) Directors Owen G. Shell, Jr. ) -----END PRIVACY-ENHANCED MESSAGE-----